<PAGE>   1
                                                                      EXHIBIT 13


                                                     FINANCIAL TABLE OF CONTENTS

<TABLE>
<S>                                                           <C>
Selected Financial Data                                                      18

Management's Discussion and Analysis
   of Financial Condition and Results of Operations                          19

Independent Auditors' Report                                                 24

Consolidated Balance Sheets                                                  25

Consolidated Statements of Income                                            26

Consolidated Statements of Shareholders' Equity                              27

Consolidated Statements of Cash Flows                                        28

Notes to Consolidated Financial Statements                                   30

Corporate and Investor Information - Common Stock                            43

</TABLE>




                                       17
<PAGE>   2
SELECTED FINANCIAL DATA

<TABLE>
<CAPTION>
Year ended December 31,                                         1996         1995         1994            1993            1992
------------------------------------------------------------------------------------------------------------------------------------
(In thousands, except per share data)
<S>                                                        <C>            <C>          <C>             <C>             <C>
Statement of Income Data:
Net revenue (note 2)                                       $   766,325    $ 441,596    $ 242,485       $ 167,381       $ 135,866
   Operating expenses (income):
   Clinic salaries, wages and benefits                         291,361      166,031       88,443          63,202          51,264
   Clinic supplies                                             119,081       67,596       37,136          25,031          19,265
   Purchased medical services                                   21,330       17,572       11,778           8,920          10,122
   Other clinic expenses                                       125,947       71,877       40,939          28,174          22,813
   General corporate expenses                                   21,115       14,191        9,417           5,418           3,717
   Rents and lease expense                                      65,577       36,740       23,413          16,441          13,210
   Depreciation and amortization                                40,182       21,445       12,229           8,394           6,397
   Interest income                                              (3,867)      (1,816)      (1,334)           (309)           (629)
   Interest expense                                             15,981        5,230        3,963           3,878           4,481
   Minority interest                                            10,463        6,933           --              --              --
   Provision for clinic restructuring(1)                            --           --           --              --          18,566
------------------------------------------------------------------------------------------------------------------------------------
      Net operating expenses                                   707,170      405,799      225,984         159,149         149,206
------------------------------------------------------------------------------------------------------------------------------------
      Earnings (loss) before income taxes                       59,155       35,797       16,501           8,232         (13,340)
Income tax expense                                              22,775       13,923        4,826           1,092             405
------------------------------------------------------------------------------------------------------------------------------------
      Net earnings (loss)                                  $    36,380    $  21,874    $  11,675(3)    $   7,140(3)    $ (13,745)(2)
====================================================================================================================================
Net earnings (loss) per share(4)
   Primary                                                 $       .60    $     .41    $     .32(3)    $     .28(3)    $    (.57)(2)
   Fully diluted                                                    --           --          .31(3)           --              --
====================================================================================================================================
Weighted average shares outstanding(4)
   Primary                                                      61,096       53,510       36,329          25,869          23,942
   Fully diluted                                                    --           --       43,427              --              --
====================================================================================================================================

December 31,                                                    1996         1995         1994            1993            1992
------------------------------------------------------------------------------------------------------------------------------------
Balance Sheet Data:
Working capital                                            $   212,946    $ 111,420    $  80,533       $  46,927       $  35,920
Total assets                                                 1,118,581      643,586      351,385         171,174         141,442
Long-term debt, capital leases, convertible notes
   and amounts due to physicians                               474,600      140,633       94,653          69,014          54,087
Total shareholders' equity                                     451,703      388,822      184,125          70,005          53,879
</TABLE>

(1)  Relates to the non-recurring pre-tax charge to earnings of $18.6
     million incurred in connection with the restructuring and sale of
     assets of the Miller Medical Clinic, which was formerly affiliated with
     the Company.
(2)  Excluding the effect of the restructuring charge described in Note 1
     and a net operating loss carryforward, the Company's net earnings and
     net earnings per share for 1992 would have been approximately $3.2
     million and $.14 per share, respectively.
(3)  Excluding the effect of the utilization of a net operating loss
     carryforward to reduce income taxes in 1993 and 1994, net earnings and
     net earnings per share would have been $5.1 million, or $.20 per share,
     and $10.2 million, or $.27 per share, in such years.
(4)  Per share amounts and weighted average shares outstanding have been
     adjusted for the three-for-two stock splits effected in June 1996,
     September 1995 and December 1994.


                                       18
<PAGE>   3
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

OVERVIEW

         The Company acquires and operates primary care-oriented multi-specialty
medical clinics and develops and manages IPAs. Most of the revenue in 1996 and
1995 was earned under clinic service agreements. Revenue earned under the
service agreements is equal to the net revenue of the clinics, less amounts
retained by physician groups. The service agreements contain financial
incentives for the Company to assist the physician groups in increasing clinic
revenues and controlling expenses.

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

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


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

<TABLE>
<CAPTION>
                                    1996       1995       1994       1993   1992
--------------------------------------------------------------------------------
<S>                               <C>        <C>        <C>           <C>    <C>
Clinic operations:
   Number of affiliated clinics        44         31         22        18     14
   Number of
      affiliated physicians         3,050      1,955      1,143       674    480
IPA operations:
   Number or markets                   17         13          7(1)     --     --
   Number of
      commercial members          306,000    180,000    105,000(1)     --     --
   Number of
   Medicare members                69,000     38,000     24,000(1)     --     --
</TABLE>

(1)  Information as of January 1, 1995

         The table below indicates the percentage of the aggregate net revenue
earned by the physician groups and IPA's currently affiliated with the Company
from various sources.

<TABLE>
<CAPTION>
Year ended December 31,              1996      1995      1994     1993     1992
--------------------------------------------------------------------------------
<S>                                  <C>       <C>       <C>      <C>       <C>
Medicare                              20%       20%       29%      32%       32%
Medicaid                               3%        3%        3%       4%        4%
Managed care(1)                       42%       37%       25%      24%       19%
Private payor and insurance           35%       40%       43%      40%       45%
--------------------------------------------------------------------------------
                                     100%      100%      100%     100%      100%
================================================================================
</TABLE>

(1)  Includes HMO, PPO, Medicare risk contracts and direct employer contracts,
     of which approximately two-thirds in 1996 is attributable to prepaid and
     capitated contracts.

                                       19
<PAGE>   4

         The payor mix varies from clinic to clinic and changes as acquisitions
are made. Over the past five years, managed care revenue as a percentage of all
revenue has increased with significant increases in 1995 and 1996 relating to
management of IPAs. PHYCOR believes that this trend will continue as a greater
portion of the population in the Company's markets joins managed care plans. The
Company also believes that the revenue received from managed care plans will
increasingly be in the form of capitation rather than fee-for-service. Other
changes in payor mix have resulted from the acquisition of clinics with payor
mixes different from historical payor mixes experienced by the Company's
affiliated groups.

         During 1996, PHYCOR affiliated with thirteen multi-specialty clinics
and numerous smaller medical practices, adding $357.5 million in assets. PHYCOR
also completed its acquisition of SPACO Management Company, Inc. (SPACO), an
IPA management company in Dallas, Texas, and certain assets of the 972-physician
IPA associated with SPACO. The principal assets acquired were accounts
receivable, property and equipment and service agreement costs, an intangible
asset. The consideration for the 1996 clinic acquisitions consisted of
approximately 67% cash, 21% liabilities assumed and 12% stock and convertible
notes. The cash portion of the purchase price was funded by a combination of
operating cash flow, the proceeds from the issuance of convertible subordinated
debentures and borrowings under the Company's bank credit facility. Property and
equipment acquired consists mostly of clinic operating equipment, although the
Company has purchased certain land and buildings. Service agreement costs are
amortized over the life of the related service agreement, with recoverability
assessed periodically.

         Since December 31, 1996, the Company has affiliated with three
multi-specialty clinics with an aggregate of 182 physicians. Additionally, in
January 1997, PHYCOR consummated its merger with Straub Clinic & Hospital,
Incorporated (Straub), an integrated health care system with a 152-physician
multi-specialty clinic and 159-bed acute care hospital located in Honolulu,
Hawaii. In connection with the merger, PHYCOR will also provide management
services to a related 35-physician group.

RESULTS OF OPERATIONS

         The following table shows the percentage of net revenue represented by
various expense categories reflected in the Company's Consolidated Statements of
Income.

<TABLE>
<CAPTION>
Year ended December 31,                            1996        1995       1994
--------------------------------------------------------------------------------
<S>                                               <C>         <C>        <C>
Net revenue                                       100.0%      100.0%     100.0%
Operating expenses:
   Clinic salaries, wages and benefits             38.0        37.6       36.5
   Clinic supplies                                 15.5        15.3       15.3
   Purchased medical services                       2.8         4.0        4.8
   Other clinic expenses                           16.4        16.3       16.9
   General corporate expenses                       2.8         3.2        3.9
   Rents and lease expense                          8.6         8.3        9.7
   Depreciation and amortization                    5.2         4.8        5.0
   Interest income                                 (0.5)       (0.4)      (0.5)
   Interest expense                                 2.1         1.2        1.6
   Minority interest                                1.4         1.6         --
--------------------------------------------------------------------------------
Net operating expenses                             92.3        91.9       93.2
--------------------------------------------------------------------------------
   Earnings before income taxes                     7.7         8.1        6.8
Income tax expense                                  3.0         3.1        2.0
--------------------------------------------------------------------------------
   Net earnings                                     4.7%        5.0%       4.8%
================================================================================
</TABLE>

1996 Compared to 1995

         Net revenue increased from $441.6 million for 1995 to $766.3 million
for 1996, an increase of $324.7 million, or 73.5%. Net revenue from the 23
service agreements in effect as of January 1, 1995 increased 16.1% in 1996. Same
clinic growth resulted from the addition of new physicians, the expansion of
ancillary services, and increases in both patient volume and fees.

                                       20
<PAGE>   5

         During 1996, most categories of operating expenses were relatively
stable as a percentage of net revenue when compared to 1995, despite the large
increase in the dollar amounts resulting from acquisitions and clinic growth.
The increase in clinic salaries, wages and benefits resulted from the
acquisition of clinics with higher levels of these expenses compared to the
existing base of clinics and the addition of primary care physicians at existing
clinics. The ratio of staffing costs to net revenue is higher for primary care
practices than for specialty care. The reduction in purchased medical services
as a percentage of net revenue resulted from the Company's continuing efforts to
reduce clinic operating costs by improving the productivity of non-physician
personnel and limiting payments for outside medical services. While general
corporate expenses decreased as a percentage of net revenue, the dollar amount
of general corporate expenses increased as a result of the addition of corporate
personnel to accommodate increased acquisition activity and to respond to
increasing physician group needs for support in managed care negotiations,
information systems implementation and clinic outcomes management programs.

         Income tax expense increased from the prior year as a result of the
Company's increased profitability. The Company's effective tax rate was
approximately 38.5% in 1996.

1995 Compared to 1994

         Net revenue increased from $242.5 million for 1994 to $441.6 million
for 1995, an increase of 82.1%. Net revenue from the 17 service agreements in
effect January 1, 1994 increased 18.1% in 1995. Same clinic growth resulted
from the addition of new physicians, the expansion of ancillary services, and
increases in both patient volume and fees. The remaining increase was the
result of the acquisition of clinic assets and the acquisition of North
American Medical Management (North American).

         During 1995, most categories of operating expenses were relatively
stable as a percentage of net revenue when compared to 1994, despite the large
increase in the dollar amounts resulting from acquisitions and clinic growth.
The increase in clinic salaries, wages and benefits resulted from the
acquisition of clinics with higher levels of these expenses compared to the
existing base of clinics and the addition of primary care physicians at existing
clinics. The ratio of staffing costs to net revenue is higher for primary care
practices than for specialty care. The reductions in purchased medical services
as a percentage of net revenue resulted from the Company's continuing efforts to
reduce clinic operating costs by improving the productivity of non-physician
personnel and limiting payments for outside medical services. While general
corporate expenses decreased as a percentage of net revenue, the dollar amount
of general corporate expenses increased as a result of the addition of corporate
personnel to accommodate increased acquisition activity and to respond to
increasing physician group needs for support in managed care negotiations,
information systems implementation and clinic outcomes management programs. The
decease in other clinic expenses and rents and leases as a percentage of net
revenue resulted from the acquisition of clinics with lower levels of these
expenses compared to the existing base of clinics. Minority interest earnings of
consolidated partnerships relate to the IPA operations of North American.

         Income tax expense increased from the prior year as a result of the
Company's increased profitability and the fact that benefits relating to net
operating loss carry forwards were substantially consumed during 1994. The
Company's effective tax rate was approximately 39% in 1995.

Summary of Operations by Quarter

         The following table presents unaudited quarterly operating results for
1996 and 1995. The Company believes 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.

                                       21
<PAGE>   6

<TABLE>
<CAPTION>
                                                    1996 QUARTER ENDED                            1995 Quarter Ended
----------------------------------------------------------------------------------------------------------------------------------
                                       MARCH 31     JUNE 30    SEPT. 30     DEC. 31    March 31   June 30    Sept. 30     Dec. 31
----------------------------------------------------------------------------------------------------------------------------------
<S>                                    <C>         <C>         <C>         <C>         <C>        <C>        <C>         <C>
In thousands, except per share data
Net revenue                            $162,501    $176,643    $196,418    $230,763    $92,764    $99,146    $114,038    $135,648
Earnings before taxes                    12,504      13,690      14,753      18,208      6,845      7,508      10,024      11,420
Net earnings                              7,690       8,419       9,073      11,198      4,176      4,617       6,115       6,966
Net earnings per share(1)              $    .13    $    .14    $    .15    $    .18    $   .09    $   .09    $    .11    $    .12
</TABLE>

(1)  Adjusted to reflect the three-for-two stock splits effected June 1996 and
     September 1995.

LIQUIDITY AND CAPITAL RESOURCES

         At December 31, 1996, the Company had $212.9 million in working
capital, up from $111.4 million as of December 31, 1995. Also, the Company
generated $64.8 million of cash flow from operations in 1996 compared to $48.1
million in 1995. At December 31, 1996, net accounts receivable of $295.4 million
amounted to 73 days of net clinic revenue compared to $167.0 million and 68 days
at the end of the prior year. The increase is attributable to growth in revenues
at the Company's clinics and, to a lesser extent, the acquisition of clinic
assets with a higher number of days of net clinic revenue outstanding than the
existing base of affiliated physician groups.

         During February 1996, the Company completed a public offering of
convertible subordinated debentures, which mature in 2003. Gross and net
proceeds from the offering were $200.0 million and approximately $194.4 million,
respectively. The debentures were priced at par with a coupon rate of 4.5% and
are convertible into the Company's common stock at $38.67 per share. The
debentures may not be redeemed at the Company's option prior to February 15,
1998. From February 15, 1998 to February 15, 1999, the debentures may be
redeemed only if the price of the Company's common stock exceeds $54.13. From
February 15, 1999 to maturity, the debentures may be redeemed by the Company at
prices decreasing from 102.572% of face value to face value. As a result of
acquisitions and related debt incurred and the issuance of convertible
subordinated debentures during 1996, debt was 51.2% of total capitalization at
December 31, 1996, compared to 26.6% at the end of 1995.

         In 1996, $11.5 million of convertible subordinated notes previously
issued in connection with physician group asset acquisitions were converted into
common stock. These conversions, common stock and warrants issued in
acquisitions, option exercises and net earnings for 1996 resulted in an increase
of $62.9 million in shareholders' equity compared to December 31, 1995.

         Capital expenditures during 1996 totaled $50.1 million. The Company is
responsible for capital expenditures required at its affiliated clinics under
its service agreements. The Company expects to make approximately $60 million in
capital expenditures during 1997.

         Effective January 1, 1995, the Company completed its acquisition of
North American. The Company paid $20.0 million at closing and may make
additional future payments pursuant to an earn-out formula during 1996, 1997,
and 1998 of up to an aggregate of $70.0 million. The total acquisition
consideration may increase to a maximum of $130.0 million in the event of future
acquisitions by North American of additional interests in IPA management
entities. The first of such payments was made in the first quarter of 1996 and
totaled approximately $13.9 million in cash. The second cash payment totaling
approximately $21.1 million will be paid at the end of the first quarter of
1997. Of the future payments to be made, a portion may be payable in shares of
the Company's common stock.

         In addition, deferred acquisition payments are payable to physician
groups in the event such physician groups attain predetermined financial targets
during established periods of time following the acquisitions. If each group
satisfied their applicable financial targets for the periods covered, the
Company would

                                       22
<PAGE>   7

be required to pay an aggregate of approximately $64.0 million of additional
consideration over the next five years, of which $23.6 million would be payable
during 1997.

         The Company may exercise its option to acquire the outstanding Class B
Common Stock of PMC before the end of 1997. In accordance with the terms of the
options, the aggregate purchase price for these shares at that time would be
approximately $18 to $19 million.

         PHYCOR has been the subject of an audit by the IRS since 1991. The IRS
has proposed adjustments relating to the timing of recognition for tax purposes
of certain revenue and deductions relating to uncollectible accounts. PHYCOR
disagrees with the positions asserted by the IRS and is vigorously contesting
these proposed adjustments. The Company believes that any adjustments resulting
from resolution of this disagreement would not affect reported net earnings of
PHYCOR but would defer tax benefits and change the levels of current and
deferred tax assets and liabilities. For the years under audit, and
potentially, for subsequent years, any such adjustments could result in
material cash payments by the Company. PHYCOR does not believe the resolution
of this matter will have a material adverse effect on its financial condition
or results of operations, although there can be no assurance as to the outcome
of this matter.

         In July 1996, the Company completed modifications to its bank credit
facility which included the revision of certain terms and conditions and the
addition of six participating financial institutions. The Company's bank credit
facility provides for a five-year, $200.0 million revolving line of credit and a
$100 million 364-day facility for use by the Company prior to July 2001 for
acquisitions, working capital, capital expenditures and general corporate
purposes. The Company's bank credit facility provides that borrowings under the
facility bear interest at either the agent's base rate or between .25% to .55%
above the applicable eurodollar rate. The Company is required to pay a facility
fee of between .10% to .25% per annum on the commitments, payable quarterly in
arrears, until the commitments are terminated. The total drawn cost under the
facility ranges from .375% to .75% above the applicable eurodollar rate.

         The Company's bank credit facility contains covenants which, among
other things, require the Company to maintain certain financial ratios and
impose certain limitations or prohibitions on the Company with respect to (i)
the incurring of certain indebtedness, (ii) the creation of a security interest
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 is required to obtain bank consent for an acquisition
with an aggregate purchase price of $50.0 million or more. The Company was in
compliance with such covenants at December 31, 1996.

         In the first quarter of 1997, the Company completed a public offering
of 7,295,000 shares of its common stock at a price of $30.00 per share. Net
proceeds from the offering of approximately $210.5 million were used to repay
bank debt.

         At March 21, 1997, the Company had cash and cash equivalents of
approximately $30.0 million and $254.2 million available under its bank credit
facility. The Company believes that the combination of funds available under the
Company's bank credit facility, together with cash reserves and cash flow from
operations, should be sufficient to meet the Company's current planned
acquisition, expansion, capital expenditures and working capital needs through
1997. In addition, in order to provide the funds necessary for the continued
pursuit of the Company's long-term expansion strategy, the Company expects to
continue to incur, from time to time, additional short-term and long-term
indebtedness and to issue equity and debt securities, the availability and terms
of which will depend upon market and other conditions. There can be no assurance
that such additional financing will be available on terms acceptable to the
Company.

                                       23
<PAGE>   8
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, 1996 and 1995 and the related consolidated
statements of income, shareholders' equity and cash flows for each of the years
in the three-year period ended December 31, 1996. 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 generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

         In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of PHYCOR, Inc.
and subsidiaries as of December 31, 1996 and 1995, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 1996, in conformity with generally accepted accounting
principles.


                                               KPMG PEAT MARWICK LLP

Nashville, Tennessee

February 4, 1997, except for note 12(a)
which is as of March 7, 1997


                                       24
<PAGE>   9
                        PHYCOR, INC. AND SUBSIDIARIES

                         CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
December 31, 1996 and 1995                                                                                 1996           1995
-------------------------------------------------------------------------------------------------------------------------------
(All amounts are expressed in thousands)
<S>                                                                                                   <C>            <C>
ASSETS (NOTE 10)
Current assets:
   Cash and cash equivalents                                                                          $   30,530     $   18,827
   Accounts receivable, less allowances of $134,556 in 1996 and $82,205 in 1995                          295,437        167,028
   Inventories                                                                                            15,185          8,939
   Prepaid expenses and other assets (note 15)                                                            42,275         22,727
-------------------------------------------------------------------------------------------------------------------------------
         Total current assets                                                                            383,427        217,521
Property and equipment, net (notes 4, 10, and 11)                                                        160,228        108,813
Intangible assets (note 6)                                                                               559,705        308,963
Other assets (notes 5 and 15)                                                                             15,221          8,289
-------------------------------------------------------------------------------------------------------------------------------
         Total assets                                                                                 $1,118,581     $  643,586
===============================================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
   Current installments of long-term debt (note 10)                                                   $      424     $      587
   Current installments of obligations under capital leases (note 11)                                      1,237          1,799
   Accounts payable                                                                                       24,103         20,020
   Income taxes payable                                                                                       --          2,714
   Due to physician groups (notes 2 and 3)                                                                75,340         48,917
   Salaries and benefits payable                                                                          23,120         11,381
   Other accrued expenses and liabilities                                                                 46,257         20,683
-------------------------------------------------------------------------------------------------------------------------------
         Total current liabilities                                                                       170,481        106,101
Long-term debt, excluding current installments (note 10)                                                 123,112         65,905
Obligations under capital leases, excluding current installments (note 11)                                 1,467          1,637
Purchase price payable (note 3)                                                                           66,103         13,722
Deferred tax credits and other liabilities (note 13)                                                      21,797          8,030
Convertible subordinated notes payable to physician groups (notes 7 and 8)                                83,918         59,369
Convertible subordinated debentures (notes 7 and 9)                                                      200,000             --
-------------------------------------------------------------------------------------------------------------------------------
         Total liabilities                                                                               666,878        254,764
-------------------------------------------------------------------------------------------------------------------------------
Shareholders' equity (notes 8, 9, and 12):
   Preferred stock, no par value, 10,000 shares authorized                                                    --             --
   Common stock, no par value; 250,000 shares authorized in 1996 and 100,000 shares in 1995;
      issued and outstanding, 54,831 shares in 1996 and 53,399 shares in 1995                            389,712        363,211
   Retained earnings                                                                                      61,991         25,611
-------------------------------------------------------------------------------------------------------------------------------
         Total shareholders' equity                                                                      451,703        388,822
-------------------------------------------------------------------------------------------------------------------------------
Commitments, contingencies and subsequent events (notes 3, 11, 12, and 14)
         Total liabilities and shareholders' equity                                                   $1,118,581     $  643,586
===============================================================================================================================
</TABLE>

See accompanying notes to consolidated financial statements.

                                       25
<PAGE>   10

                        PHYCOR, INC. AND SUBSIDIARIES

                      CONSOLIDATED STATEMENTS OF INCOME

<TABLE>
<CAPTION>
Years ended December 31, 1996, 1995, and 1994                                           1996           1995            1994
----------------------------------------------------------------------------------------------------------------------------
(All amounts are expressed in thousands, except for earnings per share)

<S>               <C>                                                               <C>            <C>            <C>
Net revenue (note 2)                                                                $ 766,325      $ 441,596      $ 242,485
   Operating expenses (income):
   Clinic salaries, wages and benefits                                                291,361        166,031         88,443
   Clinic supplies                                                                    119,081         67,596         37,136
   Purchased medical services                                                          21,330         17,572         11,778
   Other clinic expenses                                                              125,947         71,877         40,939
   General corporate expenses                                                          21,115         14,191          9,417
   Rents and lease expense                                                             65,577         36,740         23,413
   Depreciation and amortization                                                       40,182         21,445         12,229
   Interest income                                                                     (3,867)        (1,816)        (1,334)
   Interest expense                                                                    15,981          5,230          3,963
   Minority interest in earnings of consolidated partnerships                          10,463          6,933             --
----------------------------------------------------------------------------------------------------------------------------
      Net operating expenses                                                          707,170        405,799        225,984
----------------------------------------------------------------------------------------------------------------------------
      Earnings before income taxes                                                     59,155         35,797         16,501
Income tax expense (note 13)                                                           22,775         13,923          4,826
----------------------------------------------------------------------------------------------------------------------------
      Net earnings                                                                  $  36,380      $  21,874      $  11,675
============================================================================================================================
Earnings per common share:
   Primary                                                                          $     .60      $     .41      $     .32
   Fully diluted                                                                           --             --            .31
============================================================================================================================
Weighted average number of shares and share equivalents outstanding (note 12):
   Primary                                                                             61,096         53,510         36,329
   Fully diluted                                                                           --             --         43,427
============================================================================================================================
</TABLE>

See accompanying notes to consolidated financial statements.


                                       26
<PAGE>   11
                        PHYCOR, INC. AND SUBSIDIARIES

               CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

<TABLE>
<CAPTION>
                                                                                                          Retained
                                                                                    Common Stock          earnings
                                                                                 -------------------    (accumulated
Years ended December 31, 1996, 1995, and 1994                                    Shares      Amount       deficit)       Total
-------------------------------------------------------------------------------------------------------------------------------
(All amounts are expressed in thousands)

<S>                                                                              <C>        <C>          <C>           <C>
Balances at December 31, 1993                                                    24,197     $ 77,943     $ (7,938)     $ 70,005
   Issuance of common stock, net of placement commissions and
      offering expenses totaling $3,590                                           8,978       76,726           --        76,726
   Conversion of subordinated debentures to common stock                          4,113       23,129           --        23,129
   Conversion of notes payable to common stock                                      589        2,498           --         2,498
   Stock options exercised                                                           22           92           --            92
   Net earnings for the year ended December 31, 1994                                 --           --       11,675        11,675
-------------------------------------------------------------------------------------------------------------------------------
Balances at December 31, 1994                                                    37,899      180,388        3,737       184,125
   Issuance of common stock and warrants, net of placement commissions
      and offering expenses totaling $5,760                                       7,835      127,773           --       127,773
   Conversion of subordinated debentures to common stock                          4,882       27,566           --        27,566
   Conversion of notes payable to common stock                                    2,670       26,405           --        26,405
   Stock options exercised and related tax benefits                                 113        1,079           --         1,079
   Net earnings for the year ended December 31, 1995                                 --           --       21,874        21,874
-------------------------------------------------------------------------------------------------------------------------------
Balances at December 31, 1995                                                    53,399      363,211       25,611       388,822
   Issuance of common stock and warrants, net of placement commissions
      and offering expenses totaling $192                                           261       10,312           --        10,312
   Conversion of notes payable to common stock                                      859       11,450           --        11,450
   Stock options exercised and related tax benefits                                 312        4,739           --         4,739
   Net earnings for the year ended December 31, 1996                                 --           --       36,380        36,380
-------------------------------------------------------------------------------------------------------------------------------
Balances at December 31, 1996                                                    54,831     $389,712     $ 61,991      $451,703
===============================================================================================================================
</TABLE>

See accompanying notes to consolidated financial statements.


                                       27
<PAGE>   12
                        PHYCOR, INC. AND SUBSIDIARIES

                    CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
Years ended December 31, 1996, 1995, and 1994                                                    1996         1995         1994
---------------------------------------------------------------------------------------------------------------------------------
(All amounts are expressed in thousands)

<S>                                                                                          <C>          <C>          <C>
Cash flows from operating activities:
   Net earnings                                                                              $  36,380    $  21,874    $  11,675
   Adjustments to reconcile net earnings to net cash provided by operating activities:
      Depreciation and amortization                                                             40,182       21,445       12,229
      Deferred income taxes                                                                      9,616        2,948        1,566
      Minority interests                                                                           172          729           --
      Increase (decrease) in cash, net of effects of acquisitions, due to changes in:
         Accounts receivable, net                                                              (36,376)     (12,179)      (9,496)
         Inventories                                                                            (1,880)      (1,280)        (576)
         Prepaid expenses and other assets                                                     (16,481)      (1,749)      (2,046)
         Accounts payable                                                                       (3,291)       5,474        1,646
         Due to physician groups                                                                13,489        8,595           29
         Other accrued expenses and liabilities                                                 23,006        2,204       (1,527)
---------------------------------------------------------------------------------------------------------------------------------
            Net adjustments                                                                     28,437       26,187        1,825
---------------------------------------------------------------------------------------------------------------------------------
            Net cash provided by operating activities                                           64,817       48,061       13,500
---------------------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
   Payments for acquisitions, net                                                             (252,270)    (145,075)     (69,164)
   Purchase of property and equipment                                                          (50,053)     (29,292)     (17,496)
   Payments to acquire other assets                                                             (4,719)      (2,943)      (4,488)
---------------------------------------------------------------------------------------------------------------------------------
            Net cash used by investing activities                                             (307,042)    (177,310)     (91,148)
---------------------------------------------------------------------------------------------------------------------------------
Cash from financing activities:
   Net proceeds from issuance of stock and warrants                                              4,975      113,594       59,131
   Net proceeds from issuance of convertible debentures                                        194,395           --           --
   Proceeds from long-term borrowings                                                          161,000      130,400       42,100
   Repayment of long-term borrowings                                                          (104,546)    (100,144)     (17,115)
   Repayment of obligations under capital leases                                                (1,811)      (1,965)      (3,170)
   Loan costs incurred                                                                             (85)        (269)         (38)
---------------------------------------------------------------------------------------------------------------------------------
            Net cash provided by financing activities                                          253,928      141,616       80,908
---------------------------------------------------------------------------------------------------------------------------------
Net increase in cash and cash equivalents                                                       11,703       12,367        3,260
Cash and cash equivalents--beginning of year                                                    18,827        6,460        3,200
---------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents--end of year                                                       $  30,530    $  18,827    $   6,460
=================================================================================================================================
</TABLE>


                                       28
<PAGE>   13
                        PHYCOR, INC. AND SUBSIDIARIES

               CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED

<TABLE>
<CAPTION>
Years ended December 31, 1996, 1995, and 1994                                          1996            1995            1994
-----------------------------------------------------------------------------------------------------------------------------
(All amounts are expressed in thousands)

<S>                                                                                <C>             <C>             <C>
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the period for:
   Interest                                                                        $  13,745       $   4,674       $   5,092
   Income taxes, net of refunds                                                       13,991          10,760           2,828
=============================================================================================================================
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES
Effects of acquisitions (note 3):
   Assets acquired, net of cash                                                    $ 384,807       $ 270,925       $ 172,441
   Liabilities assumed                                                               (89,326)        (50,015)        (64,577)
   Issuance of convertible subordinated notes payable                                (36,084)        (62,942)        (16,931)
   Issuance of common stock and warrants                                              (7,127)        (12,893)        (17,438)
   Cash received from disposition of clinic assets                                        --              --          (4,331)
-----------------------------------------------------------------------------------------------------------------------------
      Payment for assets acquired                                                  $ 252,270       $ 145,075       $  69,164
=============================================================================================================================
Capital lease obligations incurred to acquire equipment                            $     471       $     173       $     466
Conversion of subordinated debentures and notes payable to common stock               11,450          53,971          25,627
=============================================================================================================================
</TABLE>

See accompanying notes to consolidated financial statements.


                                       29
<PAGE>   14
                        PHYCOR, INC. AND SUBSIDIARIES

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 1996, 1995, and 1994

(1) SIGNIFICANT ACCOUNTING POLICIES AND PRACTICES

         (a) Description of Business

         PHYCOR, Inc. (Company) is a physician practice management company that
acquires and operates multi-specialty medical clinics and develops and manages
independent practice associations (IPAs). PHYCOR's objective is to organize
physicians into professionally managed networks that assist physicians in
assuming increased responsibility for delivering cost-effective medical care
while attaining high-quality clinical outcomes and patient satisfaction. The
Company, through wholly-owned subsidiaries, acquires certain assets of and
operates clinics under long-term service agreements with affiliated physician
groups that practice exclusively through such clinics. The Company provides
administrative and technical support for professional services rendered by the
physician groups under service agreements. Under most service agreements, the
Company is reimbursed for all clinic expenses, as defined in the agreement, and
participates at varying levels in the excess of net clinic revenue over clinic
expenses. As of December 31, 1996, the Company operated 44 clinics in 25 states.

         The Company also manages IPAs which are networks of independent
physicians. At December 31, 1996, these IPAs include over 9,200 physicians in 17
markets which provide capitated medical services to approximately 375,000
members, including approximately 69,000 Medicare members.

         (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 50% ownership interest or exercises control.

All significant intercompany balances and transactions are eliminated in
consolidation.

         (c) 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, 1996 include approximately $2,936,000 of
consolidated partnership cash. These balances may only be used for the
operations of the respective partnerships.

         (d) Accounts Receivable

         Accounts receivable principally represent receivables from patients and
third-party payors for medical services provided by physician groups. 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 2).

         (e) 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. The Company values inventories at the
lower of cost or market with cost determined using the first-in, first-out
(FIFO) method.

         (f) 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.

         (g) Intangible Assets

                  Clinic Service Agreements

         Costs of obtaining clinic service agreements are amortized using the
straight-line method over the periods during which the agreements are effective,
currently twenty-five to forty years. Clinic service agreements represent 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 is required to purchase all
clinic assets, including the unamortized portion of intangible assets, generally
at then current net book value.

                                       30
<PAGE>   15
                        PHYCOR, INC. AND SUBSIDIARIES

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                  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 thirty years.

                  Other Intangible Assets

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

                  Amortization and Recoverability

         The Company periodically reviews its intangible assets to assess
recoverability and impairments would be recognized in the statement of
operations if a permanent impairment were 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.The
assessment of the recoverability of intangible assets will be impacted if
estimated future operating cash flows are not achieved.Amortization of
intangibles amounted to $15,150,000, $7,441,000, and $3,518,000 for 1996, 1995
and 1994, respectively.

         (h) Impairment of Long-Lived Assets

         The Company adopted the provisions of SFAS No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, on
January 1, 1996. This Statement requires that long-lived assets and certain
identifiable intangibles be reviewed 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 exceeded the fair value of the assets. Adoption of this
Statement did not have a material impact on the Company's financial position,
results of operations, or liquidity.

         (i) 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 tax rates is recognized in income in the
period that includes the enactment date.

         (j) Stock Option Plans

         Prior to January 1, 1996, the Company accounted for its 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. On January 1, 1996, the Company adopted SFAS No. 123, Accounting
for Stock-Based Compensation, which permits entities to recognize as expense
over the vesting period the fair value of all stock-based awards on the date of
grant. Alternatively, SFAS No. 123 also allows entities to continue to apply the
provisions of APB Opinion No. 25 and provide pro forma net income and pro forma
earnings per share disclosures for employee stock option grants made in 1995 and
future years as if the fair-value-based method defined in SFAS No. 123 had been
applied. The Company has elected to continue to apply the provisions of APB
Opinion No. 25 and provide the pro forma disclosure provisions of SFAS No. 123.

         (k) Earnings Per Share

         Primary earnings per share have been computed by dividing net earnings
by the weighted average number of common shares and common share equivalents
outstanding during the periods. Common share equivalents included in determining
earnings per share include shares issuable upon exercise of warrants and stock
options and shares issuable upon conversion of certain debentures and notes
payable, if dilutive.

                                       31
<PAGE>   16
                        PHYCOR, INC. AND SUBSIDIARIES

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

         Fully diluted earnings per share have been computed by dividing net
earnings plus convertible subordinated debenture and note interest and
amortization expense (net of income taxes) by the weighted average number of
common shares and common share equivalents after giving effect to the common
stock equivalents noted above and those arising from the conversion of the
convertible subordinated debentures.

         (l) 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 financial statements in
conformity with generally accepted accounting principles. Actual results could
differ from those estimates.

         (m) Reclassifications

         Certain prior year amounts have been reclassified to conform to the
1996 presentation.

         (n) New Accounting Standards

         The Financial Accounting Standards Board has issued Statement of
Financial Accounting Standards No. 128 (SFAS 128), Earnings per Share and
Statement of Financial Accounting Standards No. 129 (SFAS 129), Disclosure of
Information about Capital Structure. SFAS 128 establishes standards for
computing and presenting earnings per share and applies to entities with
publicly held common stock. SFAS 129 establishes standards for disclosing
information about an entity's capital structure and applies to all entities.
Management believes that the Company's adoption of these standards, when
effective, will not have a significant impact on the Company's financial
statements.

(2) NET REVENUE

         Clinic service agreement revenue is equal to the net revenue of the
clinics, less amounts retained by physician groups. Net clinic revenue is
recorded by the physician groups at established rates reduced by provisions
for doubtful accounts and contractual adjustments. Contractual adjustments
arise due to 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.

         IPA management revenue is equal to the difference between the amount of
capitation and risk pool payments due to the IPA's managed by the Company less
amounts retained by the IPA.

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

<TABLE>
<CAPTION>
                                                1996         1995         1994
--------------------------------------------------------------------------------
<S>                                         <C>          <C>          <C>
Gross physician group revenue               $1,926,505   $1,069,033   $  581,156
Less:
   Provisions for doubtful accounts
      and contractual adjustments              699,186      359,653      175,120
--------------------------------------------------------------------------------
         Net physician group revenue         1,227,319      709,380      406,036
IPA revenue                                    302,928      146,975           --
--------------------------------------------------------------------------------
   Net physician group and
      IPA revenue                            1,530,247      856,355      406,036
Less amounts retained by
   physician groups and IPAs:
      Physician groups                         459,179      266,725      148,983
      Clinic technical employee
         compensation                           50,395       29,435       14,568
      IPAs                                     254,348      118,599           --
--------------------------------------------------------------------------------
         Net revenue                        $  766,325   $  441,596   $  242,485
================================================================================
</TABLE>

         The Company derives most of its net revenue from 44 physician groups
located in 25 states at December 31, 1996 with which it has service agreements.
The Company's affiliated physician groups derived approximately 20% of
their net revenues from services provided under the Medicare program for the
years ended December 31, 1996 and 1995. Other than the Medicare program,
the physician groups have no customers which represent more than 10% of
aggregate net clinic revenue or 5% of accounts receivables at December 31, 1996.

                                       32
<PAGE>   17
                        PHYCOR, INC. AND SUBSIDIARIES

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(3) ACQUISITIONS

         (a) Multispecialty Medical Clinics

         During 1996, 1995, and 1994, the Company, through wholly-owned
subsidiaries, acquired certain operating assets of the following clinics:

<TABLE>
<CAPTION>
Clinic                         Effective Date        Location
--------------------------------------------------------------------------------
<S>                            <C>                   <C>
1996:
Arizona Physicians Center      January 1, 1996       Phoenix, Arizona
Clinics of North Texas         March 1, 1996         Wichita Falls, Texas
Carolina Primary Care          May 1, 1996           Columbia, South Carolina
Harbin Clinic                  May 1, 1996           Rome, Georgia
Focus Health Services          July 1, 1996          Denver, Colorado
Clark-Holder Clinic            July 1, 1996          LaGrange, Georgia
Medical Arts Clinic            August 1, 1996        Minot, North Dakota
Wilmington
   Health Associates           August 1, 1996        Wilmington, North Carolina
Gulf Coast Medical Group       August 1, 1996        Galveston, Texas
Hattiesburg Clinic             October 1, 1996       Hattiesburg, Mississippi
Straub Clinic & Hospital (A)   October 1, 1996       Honolulu, Hawaii
Toledo Clinic                  November 1, 1996      Toledo, Ohio
Lewis-Gale Clinic              November 1, 1996      Roanoke, Virginia

1995:
Tidewater Physicians
   Multispecialty Group        January 1, 1995       Newport News, Virginia
Northeast Arkansas Clinic      March 1, 1995         Jonesboro, Arkansas
PAPP Clinic                    May 1, 1995           Newnan, Georgia
Ogden Clinic                   June 1, 1995          Ogden, Utah
Arnett Clinic                  August 1, 1995        Lafayette, Indiana
Casa Blanca Clinic             September 1, 1995     Mesa, Arizona
South Texas Medical Clinics    November 1, 1995      Wharton, Texas
South Bend Clinic (B)          November 1, 1995      South Bend, Indiana
Guthrie Clinic (C)             November 17, 1995     Sayre, Pennsylvania

1994:
Medical Arts Clinic            January 1, 1994       Corsicana, Texas
Lexington Clinic (D)           August 1, 1994        Lexington, Kentucky
Southern Plains
   Medical Center              August 1, 1994        Chickasha, Oklahoma
Holt-Krock Clinic              September 1, 1994     Fort Smith, Arkansas
Burns Clinic                   October 1, 1994       Petoskey, Michigan
Boulder Medical Center         October 1, 1994       Boulder, Colorado
</TABLE>

(A)      Straub Clinic & Hospital (Straub) was operated under an administrative
         services agreement effective October 1, 1996. The Company completed its
         merger and entered into a long-term service agreement with Straub
         effective January 17, 1997.
(B)      The South Bend Clinic was operated by the Company under a management
         agreement between November 1, 1995 and December 31, 1995. Effective
         January 1, 1996 the Company completed the purchase of certain clinic
         operating assets and entered into a 40-year service agreement with the
         affiliated physician group.
(C)      The Company has entered into a series of agreements with Guthrie Clinic
         whereby the Company agreed to provide management services for up to
         five years and agreed, pending satisfaction of certain conditions, to
         acquire certain assets of the clinic prior to the termination or
         expiration of the interim management agreement.
(D)      The Lexington Clinic was operated by the Company under a management
         agreement between February 15, 1994 and July 31, 1994.

         In addition, 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.

         The Company acquires operating assets and liabilities in exchange for
cash, convertible debentures, common stock or a combination thereof. Such
consideration for the above clinic acquisitions and single specialty mergers was
$357,458,000 for 1996, $239,620,000 for 1995, and $172,441,000 for 1994. The
acquisitions were accounted for as purchases, and the accompanying consolidated
financial statements include the results of their operations from the dates of
acquisition. Simultaneous with each acquisition, the Company

                                       33
<PAGE>   18
                        PHYCOR, INC. AND SUBSIDIARIES

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

         entered into a long-term service agreement with each physician group.
In conjunction with certain acquisitions, the Company is obligated to make
deferred payments to physician groups. Such payments are included in due to
physician groups and purchase price payable in the accompanying balance sheets.

         On September 30, 1994, the Company completed the sale of the assets of
the Winter Haven, Florida clinic back to the affiliated physician group and
ended its service agreement with the physician group. No gain or loss was
realized by the Company in connection with the transaction.

         (b) North American Medical Management, Inc. (North American)

         Effective January 1, 1995, the Company completed its acquisition of
North American, an operator and manager of IPAs. The Company paid $20.0 million
at closing and committed to make additional future payments pursuant to an
earn-out formula during 1997 and 1998 of up to an aggregate of $70.0 million.
The total acquisition consideration may increase to a maximum of $130.0 million
in the event of future acquisitions by North American of additional interest in
IPA management entities. The first of such payments was made in 1996 and totaled
approximately $13.9 million in cash. The second payment totaling approximately
$21.1 million will be paid in cash at the end of the first quarter of 1997. Of
the future payments to be made, a portion may be paid in shares of the Company's
common stock.

         (c) Pro Forma Information and Subsequent Events

         The unaudited consolidated pro forma results of all current, continuing
operations, assuming all 1996 and 1995 acquisitions, excluding the Guthrie
Clinic which is operated under a management agreement, had been consummated on
January 1, 1995, are as follows (in thousands except for earnings per share):

<TABLE>
<CAPTION>
                                                      1996            1995
----------------------------------------------------------------------------
<S>                                                 <C>             <C>
Net revenue                                         $905,135        $748,310
Earnings before income taxes                          68,854          58,701
Net earnings                                          42,303          35,845
Earnings per common share                                .67             .64
Weighted average number of shares
   and share equivalents outstanding                  62,946          56,252
----------------------------------------------------------------------------
</TABLE>

         Since December 31, 1996, the Company has completed the purchase of
certain operating assets of First Physicians Medical Group, a 21-physician
clinic based in Palm Springs, California, The Vancouver Clinic, a 66-physician
clinic based in Vancouver, Washington, and St. Petersburg Medical Clinic and
Suncoast Medical Clinic which formed the 95-physician St. Petersburg-Suncoast
Medical Group based in St. Petersburg, Florida. The Company has also entered
into a 40-year service agreement with each of these multi-specialty physician
groups.

         In January 1997, PHYCOR consummated its merger with Straub Clinic &
Hospital, Incorporated, an integrated health care system with a 152-physician
multi-specialty clinic and 159-bed acute care hospital located in Honolulu,
Hawaii. In connection with the merger, PHYCOR will also provide management
services to a related 35-physician group.

(4) PROPERTY AND EQUIPMENT

         Property and equipment at December 31, are summarized as follows (in
thousands):

<TABLE>
<CAPTION>
                                                           1996         1995
-----------------------------------------------------------------------------
<S>                                                     <C>          <C>
Land and improvements                                   $  3,326     $  3,677
Buildings and leasehold improvements                      50,154       42,779
Equipment                                                142,745       83,786
Equipment under capital leases                             9,571        8,300
Construction in progress                                  10,470        4,666
-----------------------------------------------------------------------------
                                                         216,266      143,208
Less accumulated depreciation and amortization            56,038       34,395
-----------------------------------------------------------------------------
Net property and equipment                              $160,228     $108,813
=============================================================================
</TABLE>

(5) INVESTMENT IN PHYCOR MANAGEMENT CORPORATION (PMC)

         In June 1995, the Company purchased a minority interest of
approximately 9% in PMC and manages PMC pursuant to a 10-year administrative
services agreement. PMC develops and manages IPA's and provides other services
to physician organizations. PHYCOR has an option to purchase the remaining
equity interest of PMC prior to the end of May 2005 at increasing prices based
on the issuance price of the stock plus a fixed annual return. In connection
with the PMC transaction, the Company committed to

                                       34
<PAGE>   19
                        PHYCOR, INC. AND SUBSIDIARIES

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

establish a revolving line of credit of $2.0 million for PMC for a period of
five years of which no amounts were outstanding as of December 31, 1996.

(6) INTANGIBLE ASSETS

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

<TABLE>
<CAPTION>
                                                         1996          1995
-----------------------------------------------------------------------------
<S>                                                    <C>           <C>
Clinic service agreements                              $508,869      $288,787
Excess of cost of acquired assets over fair value        42,571        16,583
Franchise rights                                          2,219         2,366
Other                                                     6,046         1,227
-----------------------------------------------------------------------------
                                                       $559,705      $308,963
=============================================================================
</TABLE>

(7) FAIR VALUE OF FINANCIAL INSTRUMENTS

         As of December 31, 1996 and 1995, the fair value of the Company's cash
and cash equivalents, accounts receivable, accounts payable, due to physician
groups, and accrued expenses approximated their carrying value because of the
short maturities of those financial instruments. The fair value of the Company's
long-term debt 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 $89,635,000 and $99,293,000 as of December
31, 1996 and 1995, respectively. The carrying value of these notes was
approximately $83,918,000 and $59,369,000 at December 31, 1996 and 1995,
respectively. The estimated fair value of the Company's convertible subordinated
debentures as of December 31, 1996 was $198,000,000, compared to a carrying
value of $200,000,000. The estimated fair value of these convertible securities
is based on the greater of their face value and the closing market value of the
common shares into which they could have been converted at the respective
balance sheet date.

(8) CONVERTIBLE SUBORDINATED NOTES PAYABLE TO PHYSICIAN GROUPS

         At December 31, 1996 and 1995, the Company had outstanding subordinated
convertible notes payable to affiliated physician groups in the aggregate
principal amount of approximately $83,918,000 and $59,369,000, respectively.
These notes bear interest at rates of 6.0% to 7.0% and are convertible into
shares of the Company's common stock at conversion prices ranging from $9.59 to
$57.78 per share. A convertible subordinated note of $33,295,000 issued in
connection with the Guthrie Clinic transaction will be convertible into
approximately 903,000 shares of common stock upon the Company's acquisition of
the clinic's assets. If the then current price of the common stock is less than
the conversion price, PHYCOR will pay the clinic the principal amount of the
note. The remaining convertible notes may be converted into approximately
2,527,000 shares of common stock commencing on varying dates in 1996 and 1997 at
the option of the holders.

(9) CONVERTIBLE SUBORDINATED DEBENTURES

         At December 31, 1994, the Company had $28,655,000 of convertible
subordinated debentures outstanding. The debentures had a coupon rate of 6.5%
and were convertible into the Company's common stock at $5.87 per share. The
Company called for redemption effective January 20, 1995, all outstanding
debentures at a redemption price of 105.2% of par value plus accrued interest.
In January 1995, prior to the redemption date, the debentures were converted
into common stock of the Company.

         During February 1996, the Company completed a public offering of
convertible subordinated debentures, which mature in 2003. Gross and net
proceeds from the offering were $200,000,000 and approximately $194,395,000,
respectively. The debentures were priced at par with a coupon rate of 4.5% and
are convertible into the Company's common stock at $38.67 per share. The
debentures may not be redeemed at the Company's option prior to February 15,
1998. From February 15, 1998 to February 15, 1999, the bonds may be redeemed
only if the price of the Company's common stock exceeds $54.13. From February
15, 1999 to maturity, the bonds may be redeemed at prices decreasing from
102.572% of face value to face value.

                                       35
<PAGE>   20
                        PHYCOR, INC. AND SUBSIDIARIES

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(10) LONG-TERM DEBT

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

<TABLE>
<CAPTION>
                                                            1996         1995
------------------------------------------------------------------------------
<S>                                                      <C>           <C>
Term loan and revolving credit agreement,
   bearing interest at rates of 6.19% to 6.31%
   at December 31, 1996                                  $119,000      $58,300
Mortgages payable, bearing interest at rates
   ranging from 8.00% to 10.5%, secured by land,
   building, and certain equipment                          3,899        7,767
Other notes payable                                           637          425
------------------------------------------------------------------------------
   Total long-term debt                                   123,536       66,492
Less current installments                                     424          587
------------------------------------------------------------------------------
Long-term debt, excluding current installments           $123,112      $65,905
==============================================================================
</TABLE>

         In July 1996, the Company completed modifications to its bank credit
facility (Bank Credit Facility), which included the revision of certain terms
and conditions and the addition of six participating financial institutions. The
revised Bank Credit Facility provides for a five-year, $200,000,000 revolving
line of credit and a $100,000,000 364-day facility for use by the Company prior
to July 2001, for acquisitions, working capital, capital expenditures and
general corporate purposes. The Bank Credit Facility provides that borrowings
under the facility bear interest at either the Agent's base rate or .25% to .55%
above the applicable eurodollar rate. The Company is required to pay a facility
fee of between .10% to .25% per annum on the commitments, payable quarterly in
arrears, until the commitments are terminated. The total drawn cost of
borrowings under the Bank Credit Facility ranges from .375% to .75% above the
applicable eurodollar rates.

         The Bank Credit Facility contains covenants which, among other things,
require the Company to maintain certain financial ratios and impose certain
limitations or prohibitions on the Company with respect to (i) the incurrence of
certain indebtedness, (ii) the creation of security interest on the assets of
the Company, and (iii) the payment of cash dividends on, and the redemption or
repurchase of, securities of the Company, investments and acquisitions. The
Company is required to obtain bank consent for acquisitions with an aggregate
purchase price of $50.0 million or more. The Company was in compliance with such
covenants at December 31, 1996.

         The aggregate maturities of long-term debt at December 31, 1996, are as
follows (in thousands):

<TABLE>
                <S>                                   <C>
                   1997                               $    424
                   1998                                    245
                   1999                                    264
                   2000                                    285
                   2001                                119,302
                Thereafter                               3,016
--------------------------------------------------------------------------------
                                                      $123,536
================================================================================
</TABLE>

(11) LEASES

         The Company has entered into operating leases of commercial property
and clinic equipment with affiliated physician groups and third parties.
Commercial properties under operating leases include clinic buildings, satellite
operations, and administrative facilities. Capital leases relating to clinic
equipment expire at various dates during the next five years.


                                       36
<PAGE>   21
                        PHYCOR, INC. AND SUBSIDIARIES

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

         The future minimum lease payments under noncancelable operating leases
and the present value of future minimum capital lease payments at December 31,
1996, are as follows (in thousands):

<TABLE>
<CAPTION>
                                                                        Net
                                                       Capital       operating
                                                       leases         leases
------------------------------------------------------------------------------
<S>                                                    <C>            <C>
1997                                                   $1,491          4,189
1998                                                      924          3,331
1999                                                      362          2,779
2000                                                      209          2,198
2001                                                       84          2,025
Thereafter                                                 71          8,699
------------------------------------------------------------------------------
   Total minimum lease payments                        $3,141         23,221
                                                                      ======
Less amount representing interest
   (at rates ranging from 10% to 13%)                     437
-------------------------------------------------------------
Present value of net minimum capital lease
   payments                                             2,704
Less current installments of obligations
   under capital leases                                 1,237
-------------------------------------------------------------
   Obligations under capital leases,
      excluding current installments                   $1,467
=============================================================
</TABLE>

         At December 31, 1996, equipment with a cost of approximately $9,571,000
and accumulated depreciation of approximately $6,054,000 was held under capital
leases.

         Net payments under operating leases include total commitments of
$539,682,000 reduced by amounts to be reimbursed under clinic service agreements
of $516,461,000. Payments due under operating leases include $231,139,000
payable to physician groups and their affiliates. In the event of a service
agreement termination, any related lease obligations are also terminated. Total
rental expense for operating leases in 1996, 1995, and 1994 was approximately
$65,577,000, $37,920,000, and $22,961,000, respectively.

(12) SHAREHOLDERS' EQUITY

         (a) Common Stock

         On April 15, 1994, the Company completed a public offering of 6,885,000
shares of its common stock. Net proceeds from the offering were approximately
$58,700,000. On June 23, 1995, the Company completed an additional public
offering of 6,955,000 shares of its common stock. Net proceeds from the offering
were approximately $110,900,000.

         On November 18, 1994, the Company declared a three-for-two stock split
effected in the form of a 50% stock dividend on outstanding shares distributed
December 15, 1994 to shareholders of record on December 1, 1994. A second
three-for-two stock split was declared on August 18, 1995 to shareholders of
record on September 1, 1995. A third three-for-two stock split was declared on
May 17, 1996 to shareholders of record on May 31, 1996. All common share and per
share data included in the accompanying consolidated financial statements and
footnotes thereto have been restated to reflect these stock splits.

         On February 27, 1997, the Company completed a public offering of
6,400,000 shares of its common stock at a price of $30.00 per share. On March 7,
1997, the Companyu sold 895,000 additional shares. Net proceeds to the Company
from the offering totaled approximately $210,500,000 and were used to repay bank
debt.

         (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.

                                       37
<PAGE>   22
                        PHYCOR, INC. AND SUBSIDIARIES

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

         (c) Warrants

         In February 1992, the Company issued a warrant to purchase 42,188
shares of common stock at an exercise price of $4.74 per share of which the
right to purchase 15,000 shares has been exercised.

         In June 1995, the Company issued warrants for the purchase of 348,001
shares of common stock in connection with the PMC offering, which consisted of
the warrants and shares of PMC's Class B common stock. The exercise price of the
warrants is $15.40. The warrants are exercisable at any time prior to May 2005.
In connection with certain clinic transactions, the Company has issued warrants
for the purchase of a total of 506,010 shares of common stock. The following
represents a summary of warrants outstanding at December 31, 1996:

<TABLE>
<CAPTION>
                                                             Exercisable at
Grant                 Expiration      Number       Exercise   December 31,
date                     date        of shares       price        1996
---------------------------------------------------------------------------
<S>                      <C>           <C>          <C>           <C>
February 1992            1998          27,188       $ 4.74        27,188
June 1995                2005         348,001        15.40       348,001
November 1995            2003         387,967        25.78            --
April 1996               2002          50,208        29.87            --
July 1996                2002          67,835        44.23            --
---------------------------------------------------------------------------
                                      881,199                    375,189
===========================================================================
</TABLE>

         (d) 1988 Stock Incentive Plan and Other Stock Plans

         The Company has two stock option plans. Under the Amended 1988
Incentive Stock Plan ("Incentive Plan"), the Company has reserved 13,500,000
shares of it common stock for issuance pursuant to option and stock grants to
employees and directors. Under the Amended 1992 Directors Stock Plan ("
Directors Plan"), 337,500 shares of common stock are reserved. Under both 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. All options
have a term of ten years and become exercisable in installments over periods
ranging up to five years. In addition to options granted under the two plans,
the Company has granted options for the purchase of 25,313 shares of its common
stock to a director of the Company and a consultant.

         At December 31, 1996, there were approximately 2,476,000 and 166,000
additional shares available for grant under the Incentive Plan and the Directors
Plan, respectively.

         The per share weighted-average fair value of stock options granted
during 1996 and 1995 was $16.97 and $9.25 on the date of grant using the Black
Scholes option-pricing model with the following weighted-average assumptions:
expected dividend yield of 0.0% for both 1996 and 1995, expected volatility of
56% in 1996 and 43% in 1995, risk-free interest rate ranging from 5.25% to 6.63%
in 1996 and 5.50% to 7.75% in 1995, and an expected life of five years for both
1996 and 1995.

         The Company applies APB Opinion No. 25 in accounting for its Plan and,
accordingly, no compensation cost has been recognized for its stock options in
the 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 income would have been reduced to the pro forma amounts indicated
below (in thousands except for earnings per share):

<TABLE>
<CAPTION>
                                                        1996            1995
------------------------------------------------------------------------------
<S>                             <C>                   <C>             <C>
Net income                      As reported           $36,380         $21,874
                                  Pro forma            31,427          20,673
Earnings per share              As reported           $   .60         $   .41
                                  Pro forma               .51             .39
</TABLE>

         Pro forma net income reflects only options granted in 1996 and 1995.
Therefore, the full impact of calculating compensation cost for stock options
under SFAS No. 123 is not reflected in the pro forma net income amounts
presented above because compensation cost is reflected over the options' vesting
period and compensation cost for options granted prior to January 1, 1995 is not
considered.

                                       38
<PAGE>   23
                        PHYCOR, INC. AND SUBSIDIARIES

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

         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, 1994                 4,870                    7.13
   Granted                                   2,924                   19.81
   Exercised                                  (113)                   4.27
   Forfeited                                  (127)                   9.36
--------------------------------------------------------------------------------
Balance at December 31, 1995                 7,554                   11.93
   Granted                                   3,164                   30.55
   Exercised                                  (297)                   5.25
   Forfeited                                  (134)                  19.49
--------------------------------------------------------------------------------
Balance at December 31, 1996                10,287                   17.84
================================================================================
</TABLE>

         At December 31, 1996, the range of exercise prices and weighted-average
remaining contractual life of outstanding options was $2.97 - $38.33 and 8.16
years, respectively.

         At December 31, 1996 and 1995, the number of options exercisable was
1,392,000 and 854,000, respectively, and the weighted-average exercise price of
those options was $5.23 and $4.15, respectively.

         (e) Stock Purchase Plans

         The Company has reserved 843,750 common shares for issuance pursuant to
its employee stock purchase plan. During 1996 and 1995, approximately 110,000
and 66,000 shares were issued relative to the plan. Shares issued under the
employee stock purchase plan will generally be 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.

         The Company also established the 1996 Affiliate Stock Purchase Plan and
has reserved 2,250,000 common shares for this plan. Eligible participants
generally include physicians and other employees of medical clinics with which
the Company has a management or service agreement and employees of limited
liability companies and partnerships in which the Company has an equity interest
of at least 50%. Shares issued under the plan will be priced using a similar
method as that of the employee stock purchase plan. To date, no shares have been
issued under this plan.

(13) INCOME TAX EXPENSE

         Current income tax expense for the years ended December 31, 1996, 1995,
and 1994, consists of (in thousands):

<TABLE>
<CAPTION>
                                                1996         1995       1994
-----------------------------------------------------------------------------
<S>                                           <C>           <C>        <C>
Current:
   Federal                                    $10,935       $9,476     $2,199
   State                                        2,224        1,499      1,061
Deferred:
   Federal                                      9,354        2,564      1,302
   State                                          262          384        264
-----------------------------------------------------------------------------
                                              $22,775      $13,923     $4,826
=============================================================================
</TABLE>

                                       39
<PAGE>   24
                        PHYCOR, INC. AND SUBSIDIARIES

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

         Total income tax expense differed from the amount computed by applying
the U.S. Federal income tax rate of 34 percent in 1994 and 35 percent in 1995
and 1996 to earnings before income taxes as a result of the following (in
thousands):

<TABLE>
<CAPTION>
                                                 1996        1995       1994
------------------------------------------------------------------------------
<S>                                            <C>         <C>        <C>
Computed "expected" tax expense                $20,704     $12,529    $ 5,610
Increase (reduction) in income
   taxes resulting from:
   Net operating loss carryforwards utilized        --          --     (3,662)
   State income taxes,
      net of federal income tax benefit          1,616       1,224        875
   Reduction of goodwill of acquired entity         --          --      1,951
   Increase in deferred tax rate                    --         160         --
   Amortization of nondeductible goodwill          499          --         --
   Other                                           (44)         10         52
------------------------------------------------------------------------------
      Total income tax expense                 $22,775     $13,923    $ 4,826
==============================================================================
</TABLE>

         The tax effects of temporary differences that give rise to significant
portions of the deferred tax asset and deferred tax liability are presented
below (in thousands):

<TABLE>
<CAPTION>
                                               DECEMBER 31,        December 31,
                                                   1996               1995
-------------------------------------------------------------------------------
<S>                                              <C>                <C>
Deferred tax assets:
   Reserves for incurred but not
      reported self-insurance claims             $ 3,013            $   555
   Operating loss carryforwards                    4,921              4,208
   Deferred gain on sale and leaseback                --                304
   Other                                           1,427              1,288
-------------------------------------------------------------------------------
         Total gross deferred tax asset            9,361              6,355
   Less valuation allowance                       (3,441)            (2,520)
-------------------------------------------------------------------------------
         Net deferred tax asset                    5,920              3,835
-------------------------------------------------------------------------------
Deferred tax liability:
   Plant and equipment, principally due to
      differences in depreciation                  6,968              3,463
   Capital leases                                  2,347              1,814
   Clinic service agreements                      10,265              4,658
   Prepaid expenses                                1,726              1,293
   Income from partnerships                        1,506                 --
   Other                                             382                265
-------------------------------------------------------------------------------
         Total gross deferred tax liability       23,194             11,493
-------------------------------------------------------------------------------
         Net deferred tax liability              $17,274            $ 7,658
===============================================================================
</TABLE>

                                       40
<PAGE>   25
                        PHYCOR, INC. AND SUBSIDIARIES

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

         The significant components of the deferred tax expense as of December
31, 1996 and 1995 are as follows (in thousands):

<TABLE>
<CAPTION>
                                                             1996       1995
-----------------------------------------------------------------------------
<S>                                                         <C>        <C>
Change in net deferred tax liability                        $9,616     $1,669
Deferred taxes of acquired entities                            --       1,279
-----------------------------------------------------------------------------
   Deferred tax expense                                     $9,616     $2,948
=============================================================================
</TABLE>

         The valuation allowance for deferred tax assets as of December 31, 1996
was $3,441,000. The net change in the total valuation allowance, which primarily
relates to federal and state net operating loss carryforwards, for the year
ended December 31, 1996 was an increase of $921,000. The increase in the
valuation reserve relates to deferred tax assets of entities acquired during
1996. As of December 31, 1996, the Company had approximately $3,650,000 of
federal and $56,000,000 of state net operating loss carryforwards which begin to
expire in 2003. The utilization of these carryforwards is subject to the future
level of taxable income of the applicable subsidiaries.

         The Company has been the subject of an audit by the IRS since 1991, and
the IRS has proposed adjustments relating to the timing of recognition for tax
purposes of certain revenue and deductions relating to uncollectable accounts.
PHYCOR disagrees with the positions asserted by the IRS and is vigorously
contesting these proposed adjustments. The Company believes that any
adjustments resulting from resolution of this disagreement would not affect
reported net earnings of PHYCOR but would defer tax benefits and change the
levels of current and deferred tax assets and liabilities.

(14) 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
substantially all employees. Company contributions are based on specified
percentages of employee compensation. The Company funds contributions as
accrued. The contributions for 1996, 1995, and 1994 amounted to $7,803,000,
$3,976,000, and $2,265,000, respectively.

         In connection with certain of the Company's acquisitions, the Company
adopted 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 $3,174,000, $1,248,000, and $1,016,000
relative to its employees for 1996, 1995 and 1994, respectively.

(15) COMMITMENTS AND CONTINGENCIES

         (a) Employment Agreements

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

         (b) Commitments to Physician Groups

         Under terms of certain of its service agreements, the Company is
committed to provide capital for the improvement and expansion of clinic
facilities. The commitments vary depending on such factors as total capital
expenditures, the number of physicians practicing at each clinic, and the cost
of specific planned projects. All projects funded under these commitments must
be approved by the Company before they commence.

                                       41
<PAGE>   26
                        PHYCOR, INC. AND SUBSIDIARIES

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

         The Company is also committed to provide, under certain circumstances,
advances to physician groups to principally finance the recruitment of new
physicians. These advances will be repaid out of the physician groups' share of
future clinic revenue. At December 31, 1996 and 1995, $2,230,000, and $672,000,
respectively, of such advances were outstanding.

         (c) Litigation

         The Company is subject to various claims and legal actions which arise
in the ordinary course of business. The Company has malpractice and other
insurance to protect against such claims or legal actions. In the opinion of
management, the ultimate resolution of such matters will be adequately covered
by the insurance and will not have a material adverse effect on the Company's
financial position, results of operation or liquidity.

         (d) 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.

         (e) Contingent Consideration

         In connection with the acquisition of clinic operating assets, the
Company is contingently obligated to pay an estimated additional $64,000,000 in
future years, depending on the achievement of certain financial and operational
objectives by the related physician groups. Such liability, if any, will be
recorded in the period in which the outcome of the contingency becomes known.
Any payment made will be allocated among the assets acquired and will not
immediately be charged to expense.

                                       42
<PAGE>   27


COMMON STOCK

         PHYCOR, Inc. Common Stock is traded on the Nasdaq Stock Market under
the symbol PHYC. The Company's 4.5% convertible subordinated debentures due
2003, are traded on the Nasdaq Stock Market under the symbol PHYCH. The
Company's initial public offering took place on January 22, 1992. The high and
low sale prices have been adjusted to reflect the three-for-two stock splits
effected in December 1994, September 1995, and June 1996.

<TABLE>
<CAPTION>
1995                    High        Low
-----------------------------------------
<S>                    <C>        <C>
First Quarter          $15.89     $10.89
Second Quarter          17.05      12.00
Third Quarter           23.05      15.22
Fourth Quarter          34.00      20.50
-----------------------------------------
1996
-----------------------------------------
First Quarter          $37.00     $25.50
Second Quarter          41.63      26.67
Third Quarter           39.25      26.75
Fourth Quarter          41.50      25.63
-----------------------------------------
1997
-----------------------------------------
First Quarter          $35.38     $26.75
-----------------------------------------
</TABLE>

         As of March 31, 1997, the Company had approximately 20,600
shareholders, including approximately 2,300 shareholders of record and
approximately 18,300 persons or entities holding Common Stock in nominee name.

         The Company has never declared or paid a dividend on its Common Stock,
except for the three-for-two stock splits referred to above, each of which was
paid in the form of a 50% stock dividend. The Company intends to retain its
earnings to finance the growth of its businesses. The declaration of dividends
is currently prohibited by the Company's bank credit facility, and it is
anticipated that loan agreements which the Company may enter into in the future
will also contain restrictions on the payment of dividends by the Company.

                                       43