PROMEDCO MANAGEMENT CO, S-1/A, 1997-03-11

PROMEDCO MANAGEMENT CO
S-1/A, 1997-03-11
OFFICES & CLINICS OF DOCTORS OF MEDICINE

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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 11, 1997

REGISTRATION NO. 333-10557
================================================================================

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------

AMENDMENT NO. 6

FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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PROMEDCO MANAGEMENT COMPANY
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

<TABLE>
<S> <C> <C>
DELAWARE 8011 75-2529809
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
</TABLE>

801 CHERRY STREET, SUITE 1450
FORT WORTH, TEXAS 76102
(817) 335-5035
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
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H. WAYNE POSEY
PRESIDENT AND CHIEF EXECUTIVE OFFICER
PROMEDCO MANAGEMENT COMPANY
801 CHERRY STREET, SUITE 1450
FORT WORTH, TEXAS 76102
(817) 335-5035
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
------------------
COPIES TO:

<TABLE>
<S> <C>
MICHAEL JOSEPH, ESQ. JEFFREY A. CHAPMAN, ESQ.
DYER ELLIS & JOSEPH, P.C. VINSON & ELKINS L.L.P.
600 NEW HAMPSHIRE AVE., N.W. 3700 TRAMMELL CROW CENTER
SUITE 1000 2001 ROSS AVENUE
WASHINGTON, D.C. 20037 DALLAS, TEXAS 75201
(202) 944-3000 (214) 220-7700
</TABLE>

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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after this Registration Statement becomes effective.

If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [ ]

If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]

If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]

If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [X]
------------------

THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
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<PAGE> 2

INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR
MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR
THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS
OF ANY SUCH STATE.

Subject to Completion, Dated March 11, 1997

PROSPECTUS
dated , 1997
4,000,000 SHARES

[ProMedCo LOGO]

COMMON STOCK

All of the 4,000,000 shares of Common Stock offered hereby are being issued and
sold by ProMedCo Management Company ("ProMedCo" or the "Company").

Prior to this offering (the "Offering"), there has been no public market for the
Common Stock of the Company. It is currently estimated that the initial public
offering price will be between $9.00 and $11.00 per share. See "Underwriting"
for a discussion of the factors to be considered in determining the initial
public offering price. The Common Stock has been approved for quotation on the
Nasdaq National Market under the symbol "PMCO" subject to official notice of
issuance.

SEE "RISK FACTORS" BEGINNING ON PAGE 5 FOR A DISCUSSION OF CERTAIN FACTORS THAT
SHOULD BE CONSIDERED BY PROSPECTIVE INVESTORS.

THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.

<TABLE>
<CAPTION>
================================================================================================
PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC DISCOUNT(1) COMPANY(2)
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share........................ $ $ $
- ------------------------------------------------------------------------------------------------
Total(3)......................... $ $ $
================================================================================================
</TABLE>

(1) The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended. See "Underwriting."
(2) Before deducting expenses payable by the Company estimated at $1,300,000.
(3) The Company and the Selling Stockholder (as defined herein) have granted the
Underwriters a 30-day option to purchase up to an additional 450,000 shares
of Common Stock from the Company and 150,000 shares of Common Stock from
the Selling Stockholder solely to cover over-allotments, if any, at the
Price to Public less the Underwriting Discount. If all such shares are
purchased, the total Price to Public, Underwriting Discount, Proceeds to
Company, and Proceeds to Selling Stockholder will be $ ,
$ , $ , and $ , respectively. See
"Underwriting."

The shares of Common Stock are offered by the Underwriters subject to prior sale
when, as, and if delivered to and accepted by the Underwriters and subject to
their right to reject orders in whole or in part. It is expected that
certificates for such shares will be available for delivery at the offices of
Piper Jaffray Inc. in Minneapolis, Minnesota on or about , 1997.

PIPER JAFFRAY INC.
ROBERTSON, STEPHENS & COMPANY
COWEN & COMPANY
<PAGE> 3

[Map of United States showing locations of affiliated physician groups]

CERTAIN PERSONS PARTICIPATING IN THE OFFERING MAY ENGAGE IN TRANSACTIONS THAT
STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK.
SPECIFICALLY, THE UNDERWRITERS MAY OVER-ALLOT IN CONNECTION WITH THE OFFERING,
AND MAY BID FOR AND PURCHASE, SHARES OF COMMON STOCK IN THE OPEN MARKET. FOR A
DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."

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<PAGE> 4

PROSPECTUS SUMMARY

The following summary is qualified in its entirety by the more detailed
information and financial statements, including the notes thereto, appearing
elsewhere in this Prospectus. As used herein, the terms "ProMedCo" and the
"Company" refer to ProMedCo Management Company and its consolidated
subsidiaries. Except as otherwise indicated, all information in this Prospectus
assumes (i) the conversion of all outstanding shares of Series A Redeemable
Convertible Preferred Stock and Class B Common Stock of the Company into Common
Stock and the termination of the Company's contingent obligation to repurchase
Redeemable Common Stock, and (ii) no exercise of the Underwriters'
over-allotment option.

THE COMPANY

ProMedCo is a physician practice management company that consolidates its
affiliated physician groups into primary-care-driven multi-specialty networks.
The Company focuses on pre-managed-care secondary markets located principally
outside of or adjacent to large metropolitan areas. The Company believes that
primary care physicians increasingly will be the principal point of access to
the healthcare delivery system and will control, directly or indirectly, a
growing percentage of healthcare expenditures, and it therefore affiliates with
physician groups having a primary care orientation. ProMedCo assists in
expanding and integrating the affiliated groups into comprehensive
multi-specialty networks to increase their market presence. The groups expand
through affiliations with additional primary care physicians and specialists and
selective additions of ancillary services. The groups are thus well positioned
to become the physician component of locally developing managed care delivery
systems. In addition to providing operating and expansion capital, the Company
provides its affiliated groups with a broad range of strategic and management
expertise and services.

ProMedCo commenced operations in December 1994 and has since affiliated
with seven physician groups aggregating 146 physicians and 46 physician
extenders (primarily physician assistants and nurse practitioners) at 24 sites
in Texas, Alabama, Kentucky, and Nevada. Currently, approximately 72% of the
Company's affiliated physicians are primary care providers. Following the
Offering, approximately 46% of ProMedCo's outstanding Common Stock will be owned
by the Company's officers, directors, and affiliated physicians.

When affiliating with a physician group, the Company typically purchases
the group's non-real estate operating assets and enters into a long-term service
agreement with the group in exchange for a combination of Common Stock, cash,
other securities of the Company, and/or assumption of liabilities. Under the
service agreement, the Company receives a fixed percentage (typically 15%) of
the physician group's operating income (as defined) plus a percentage (typically
a variable percentage ranging from 25% to 50%, depending upon the amount of
revenue) of any surpluses in the group's revenues under risk-sharing
arrangements pursuant to capitated managed care contracts. Although the group's
physicians retain full control over the practice of medicine, ProMedCo manages
all day-to-day operations other than the provision of medical services. Through
a policy council, the physicians set broad management and operational policy
jointly with Company representatives.

The key elements of the Company's strategy are to (i) affiliate with
primary-care-oriented multi-specialty groups; (ii) continue to penetrate
pre-managed-care markets; (iii) expand its affiliated groups' market presence
through addition of physicians and selected ancillary services; (iv) preserve
the local autonomy of the Company's affiliated physician groups and maintain
decentralized management; and (v) align the Company's economic interests with
those of its physician partners.

The Company was incorporated in Texas in 1993 and reincorporated in
Delaware in January 1997. Its executive offices are located at 801 Cherry
Street, Suite 1450, Fort Worth, Texas 76102, and its telephone number is (817)
335-5035.

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<PAGE> 5

THE OFFERING

<TABLE>
<S> <C>
Common Stock offered by the Company........................... 4,000,000 shares
Common Stock to be outstanding after the Offering............. 8,821,657 shares(1)
Use of proceeds............................................... Acquisitions and working capital,
including repayment of certain
indebtedness
Nasdaq National Market symbol................................. PMCO
</TABLE>

- ---------------
(1) Based upon the number of shares outstanding as of December 31, 1996. Does
not include (i) 2,033,333 shares to be issued on the first day of the
calendar month following the closing of the Offering in connection with the
acquisition of the assets of Abilene Diagnostic Clinic Practices
("Abilene"), (ii) 400,000 shares to be issued in connection with the merger
with Western Medical Management Corp., Inc. (the "Reno Merger") which is
expected to be consummated upon closing of the Offering, (iii) 4,030,525
shares reserved for issuance upon exercise of outstanding options and
warrants with a weighted average exercise price of $3.10 per share, and (iv)
200,030 shares reserved for conversion of outstanding convertible
subordinated notes issued in connection with acquisitions. See
"Business -- Affiliation Structure" and "Management -- Stock Option Plans,"
and "-- Employee Stock Purchase Plan."

SUMMARY FINANCIAL DATA

<TABLE>
<CAPTION>
DECEMBER 31, 1996
----------------------------------------------
PRO PRO FORMA
ACTUAL FORMA(5) AS ADJUSTED(6)
----------- ----------- --------------
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents........................... $ 1,633,534 $ 1,995,274 $34,302,674
Working capital..................................... 2,830,140 3,453,883 35,761,283
Total assets........................................ 28,470,335 42,759,774 74,502,747
Long-term debt, less current maturities............. 7,867,847 8,206,959 4,049,932
Redeemable equity securities........................ 3,949,417 -- --
Total stockholders' equity.......................... 11,177,764 26,673,389 62,573,389
</TABLE>

- ---------------
(1) Gives effect to the following transactions as if they had been completed on
January 1, 1996: (i) the affiliations with Cullman Primary Care, P.C.,
Morgan-Haugh, P.S.C., HealthFirst Medical Group, P.A., King's Daughters
Clinic, P.A., and Abilene (collectively, the "Acquisitions") and (ii) the
Reno Merger. The acquisition of the assets of Abilene by the Company will be
completed on the first day of the calendar month following the closing of
the Offering (the "Abilene Acquisition"). See "Pro Forma Consolidated
Financial Information."

(2) Adjusted to give effect to the sale of 4,000,000 shares of Common Stock
offered by the Company at an assumed public offering price of $10.00 per
share and the application of the estimated net proceeds therefrom, assuming
the Offering was completed January 1, 1996. See "Use of Proceeds."

(3) Includes merger costs of $682,269, recorded in the historical financial
statements of Reno, for expenses associated with the Reno Merger.

(4) Gives effect to the conversion into Common Stock of all outstanding shares
of Series A Redeemable Convertible Preferred Stock, and the termination of
the Company's contingent obligation to repurchase Redeemable Common Stock.

(5) Gives effect to the Abilene Acquisition and the Reno Merger as if they had
been completed on December 31, 1996.

(6) Adjusted to give effect to the sale of 4,000,000 shares of Common Stock
offered by the Company at an assumed public offering price of $10.00 per
share and the application of the estimated net proceeds therefrom. See "Use
of Proceeds."

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<PAGE> 6

RISK FACTORS

In addition to the other information contained in this Prospectus, the
following should be considered carefully in evaluating an investment in the
Common Stock offered hereby.

RISKS ASSOCIATED WITH GROWTH STRATEGY

The Company's strategy involves growth through affiliation with physician
groups and the expansion of their practices. The Company is subject to various
risks associated with this strategy, including the risks that the Company will
be unable to identify and recruit suitable affiliation candidates, successfully
expand and manage the practices of the groups with which it affiliates, or
successfully integrate such groups into its existing operations. The Company's
growth is dependent on its ability to affiliate with physicians, to manage and
control costs, and to realize economies of scale. There can be no assurance that
the Company will be able to achieve and manage its planned growth or that
suitable physician groups will continue to be available for affiliation upon
terms satisfactory to the Company, if at all. In addition, there can be no
assurance that the Company will be able to continue to attract and retain a
sufficient number of qualified physicians and other healthcare professionals to
continue to expand its operations or otherwise to maintain an adequate
infrastructure to support continued growth. See "Business."

The Company is in negotiations with two physician groups, each with between
40 and 50 physicians and having pro forma 1996 revenues of approximately $28
million and $26 million, respectively. Should these negotiations result in
definitive affiliation agreements, it is expected that the Company would provide
consideration in the form of combinations of cash and securities of
approximately $22 million and $15 million, respectively, for the assets and
related service agreements associated with each group. Although the Company has
entered into a letter of intent with one of these groups, there can be no
assurance that these negotiations will culminate in binding agreements.
Financial statements of these groups are not included in this Prospectus, as
management does not at this time consider their affiliation probable for
financial reporting purposes.

LIMITED CAPITAL; NEED FOR ADDITIONAL FINANCING

Implementation of the Company's growth strategy requires substantial
capital resources. Such resources will be needed to acquire the assets of
additional physician groups and for the effective integration, operation, and
expansion of affiliated groups. The Company expects that its capital
requirements over the next several years will substantially exceed capital
generated from operations, the net proceeds of the Offering, and borrowings
available under its current credit facility. To finance its capital
requirements, the Company intends from time to time to issue additional equity
securities and incur additional debt. A greater amount of debt or additional
equity financing could be required to the extent that the Company's Common Stock
fails to maintain a market value sufficient to warrant its use in future
affiliations or to the extent that physician groups are unwilling to accept
Common Stock in exchange for their operating assets. There can be no assurance
that the Company will be able to obtain additional required capital on
satisfactory terms. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital Resources."

LIMITED OPERATING HISTORY; LOSSES

The Company has operated only since December 1994. It has grown principally
through acquisitions and is pursuing a strategy of growth. For the years ended
December 31, 1995 and 1996, the Company incurred net losses of $697,342 and
$549,305, respectively. There can be no assurance that the Company will become
profitable. In addition, the Company may experience significant
quarter-to-quarter variations in operating results. The Company's management fee
revenue is dependent upon the physician groups' net medical revenues less
certain contractually agreed-upon clinic expenses, including non-physician
clinic salaries and benefits, rent, insurance, interest, and other direct clinic
expenses. In addition, the distribution to the groups for providing medical
services is increased or decreased by a percentage of the physician groups'
surplus or deficit, respectively, in net revenue under risk-sharing arrangements
pursuant to capitated managed care contracts. See "Selected Financial Data" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."

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CONCENTRATION OF REVENUE

The Company's management fee revenue is currently derived from seven
physician groups. King's Daughters Clinic, P.A. in Temple, Texas ("Temple")
accounted for approximately 33%, Abilene accounted for approximately 20%, and
Western Medical Management Corp., Inc. in Reno, Nevada ("Reno") accounted for
approximately 20% of the Company's management fee revenue on a pro forma basis
for the year ended December 31, 1996. While the Company's service agreements are
for terms of 40 years and may be terminated only for cause, any termination or
significant deterioration of the Company's relationship with any of its
affiliated physician groups could have a material adverse effect upon the
Company. In addition, each of the Company's affiliated physician groups operates
within a limited geographic area, and a deterioration of economic or other
conditions within such area could have a material adverse impact upon the group.
Such a result, as well as any other deterioration in the financial condition of
any of the affiliated physician groups, could also have a material adverse
effect on the Company. See "Business."

GOVERNMENT REGULATION

Federal and state laws regulate the healthcare industry and the
relationships among physicians and other providers of healthcare services.

Medicare and Medicaid Fraud and Abuse. The fraud and abuse provisions of
the Medicare and Medicaid statutes prohibit the payment or receipt of any
remuneration for the referral of Medicare or Medicaid patients or for
recommendations, leasing, arranging, ordering, or purchasing of Medicare- or
Medicaid-covered services and impose significant penalties for false or improper
billings for physician services. In addition, these laws impose restrictions on
physicians' referrals for certain designated health services to entities with
which they have financial relationships. Violations of these laws may result in
substantial civil or criminal penalties for individuals or entities, including
exclusion from participation in the Medicare and Medicaid programs. Such
exclusion or penalties, if applied to the Company's affiliated physicians, could
have a material adverse effect upon the Company. See "Business -- Government
Regulation."

State Regulation. The laws of many states, including Texas, from which a
significant portion of the Company's revenue is derived, prohibit non-physician
entities from practicing medicine and limit the ability of non-physicians to
receive physician practice revenues. These laws and their interpretations vary
from state to state and are enforced by the courts and by regulatory authorities
with broad discretion. Although the Company believes its operations as currently
conducted are in material compliance with existing applicable laws, there can be
no assurance that the Company's contractual arrangements with affiliated
physicians will not be successfully challenged as constituting fee splitting or
the unlicensed practice of medicine or that the enforceability of such
arrangements will not be limited. There can be no assurance that review of the
business of the Company and its affiliates by courts or regulatory authorities
will not result in a determination that could adversely affect their operations
or that the healthcare regulatory environment will not change so as to restrict
the Company's existing operations or expansion. In the event that any
legislature, regulatory authority, or court limits or prohibits the Company from
carrying on its business or from expanding the operations of the Company to
certain jurisdictions, structural and organizational modifications of the
Company's organization and arrangements may be required, which could have a
material adverse effect on the Company. See "Business -- Government Regulation."

Reform Initiatives. There have been numerous initiatives at the federal
and state levels for comprehensive reforms affecting the availability of and
payment for healthcare. The Company believes that such initiatives will continue
during the foreseeable future. Certain reforms previously proposed could, if
adopted, have a material adverse effect on the Company. See
"Business -- Government Regulation."

RELIANCE ON MEDICAL SERVICE PROVIDERS

Each of the Company's affiliated physician groups enters into employment
agreements with its physicians. Such agreements generally are for an initial
term of five years. Although the Company, in conjunction with the affiliated
physician groups, will endeavor to extend such contracts, in the event a
significant number of physicians terminate their relationships with the
Company's affiliated physician groups at the expiration of their employment
agreements or otherwise, the Company could be adversely affected. See
"Business -- Affiliation Structure."

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CHANGES IN BASIS OF PAYMENT FOR HEALTHCARE SERVICES

The Company derives all of its revenue from its affiliated physician
groups. Substantially all of the revenue of the affiliated groups is derived
from third-party payors. The Company estimates that approximately 30% of the net
physician groups revenue is currently derived from government-sponsored
healthcare programs (principally the Medicare and Medicaid programs). The
healthcare industry is experiencing a trend toward cost containment, as
government and other third-party payors seek to impose lower reimbursement and
utilization rates upon providers and negotiate reduced payment schedules with
them. The Company believes that this trend will continue to result in a
reduction in per-patient revenue from historical levels. Further reductions in
payments to physicians or other changes in reimbursement for healthcare services
could have a material adverse effect on the Company. See "Business -- Government
Regulation."

RISKS ASSOCIATED WITH MANAGED CARE CONTRACTS

A significant part of the Company's growth strategy involves assisting its
affiliated physician groups in obtaining capitated managed care contracts and
managing the medical risk associated with such contracts. Such capitated managed
care contracts typically are with health maintenance organizations ("HMOs").
Under such contracts the physician group accepts a pre-determined amount per
patient per month, referred to as a "capitation" payment, in exchange for
providing all necessary covered services to the patients covered by the
contract, thus shifting much of the risk of providing care from the payor to the
physician group. Such an arrangement results in a greater predictability of
revenue, but exposes the physician group to the risk of fluctuations in the
costs of providing the services. To the extent that patients covered by such
contracts require more frequent or extensive care than is anticipated, operating
margins may be reduced and the revenue derived from such contracts may be
insufficient to cover the costs of the services provided. Because the percentage
of physician group operating income received by the Company is increased or
decreased by a percentage of the group's surplus or deficit, respectively, in
revenue under risk-sharing arrangements pursuant to capitated managed care
contracts, the Company assumes some of the groups' risks under such contracts.
Accordingly, any reduction of operating margins or incurrence of losses from
these capitated managed care contracts could have a material adverse effect on
the Company. Although its management has substantial experience in managed care
contracting, the Company itself has had limited experience with such contracts.
There can be no assurance that the Company will be able to negotiate
satisfactory risk-sharing or capitated arrangements on behalf of its affiliated
physician groups. See "Business."

RISK OF APPLICABILITY OF INSURANCE REGULATIONS

The Company and its affiliated groups may in the future enter into
contracts with managed care organizations ("MCOs"), such as HMOs, whereby the
Company and its affiliated groups would assume risk in connection with providing
healthcare services under capitation arrangements. If the Company or its
affiliated groups are considered to be in the business of insurance as a result
of entering into such risk sharing arrangements, they could become subject to a
variety of regulatory and licensing requirements applicable to insurance
companies or HMOs, which could have a material adverse effect upon the Company.

POSSIBLE EXPOSURE TO PROFESSIONAL LIABILITY

In recent years, physicians, hospitals, and other participants in the
healthcare industry have become subject to an increasing number of lawsuits
alleging medical malpractice and related legal theories. Many of these lawsuits
involve large claims and substantial defense costs. In addition, through its
employment of non-physician healthcare personnel, the Company could be named in
actions involving care provided by the affiliated physician groups assisted by
such personnel. The Company maintains professional malpractice and general
liability insurance. In addition, the Company's service agreements require
affiliated physicians to maintain professional liability insurance coverage of
the practice and of each employee and agent of the practice. The Company
generally is a named insured under such policies and is indemnified under each
of the service agreements by the physician groups for liabilities resulting from
the performance of medical services. Certain types of risks and liabilities are
not covered by insurance, however, and there can be no assurance that coverage
will continue to be available upon terms satisfactory to the Company or that the
coverage will be

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<PAGE> 9

adequate to cover losses. Malpractice insurance, moreover, can be expensive and
varies from state to state. Successful malpractice claims asserted against the
physician groups or the Company could have a material adverse effect on the
Company. See "Business -- Insurance."

RISKS RELATED TO INTANGIBLE ASSETS

As a result of the Company's various acquisition transactions, intangible
assets, net of accumulated amortization, of approximately $14.9 million have
been recorded on the Company's balance sheet at December 31, 1996 ($26.3 million
on a pro forma basis at December 31, 1996). Using a composite average life of 30
years for the service agreements, amortization expense will be approximately
$505,000 per year ($896,000 per year on a pro forma basis). Acquisitions that
result in the recognition of intangible assets will cause amortization expense
further to increase. A substantial portion of the amortization generated by
these intangible assets is not deductible for tax purposes. Although the
Company's net unamortized balance of intangible assets acquired and anticipated
to be acquired was not considered to be impaired as of December 31, 1996, any
future determination that a significant impairment has occurred would require
the write-off of the impaired portion of unamortized intangible assets, which
could have a material adverse effect on the Company's results of operations. See
Note 2 of Notes to Consolidated Financial Statements.

COMPETITION

The physician practice management industry is highly competitive. The
Company is subject to significant competition both in affiliating with physician
groups and in seeking managed care contracts on behalf of its affiliated groups.
Its competitors include hospitals, managed care organizations, and other
physician practice management companies. In comparison with the Company, many of
its competitors are larger and have substantially greater resources, provide a
wider variety of services, and have longer established relationships with
purchasers of such services. There can be no assurance that the Company will be
able to compete effectively, that additional competitors will not enter the
market, or that such competition will not make it more difficult to enter into
affiliations with physician groups on terms beneficial to the Company.

The Company also experiences competition in the recruitment and retention
of qualified physicians and other healthcare professionals on behalf of its
affiliated physician groups. There can be no assurance that the Company will be
able to recruit or retain a sufficient number of qualified physicians and other
healthcare professionals to continue to expand its operations.

BROAD DISCRETION OF MANAGEMENT IN APPLYING PROCEEDS OF OFFERING

The Company intends to utilize the net proceeds of the Offering to finance
the purchase of operating assets in connection with future affiliations with
physician groups and expansions of such groups, for working capital, repayment
of amounts outstanding under its revolving credit agreement, and for other
general corporate purposes. Accordingly, the Company's management will have
broad discretion in applying the net proceeds of the Offering. See "Use of
Proceeds."

NO PRIOR PUBLIC MARKET; POSSIBLE VOLATILITY OF PRICE

Prior to the Offering there has been no public market for the Common Stock.
Accordingly, there can be no assurance that an active trading market will
develop or be sustained upon completion of the Offering or that the market price
of the Common Stock will not decline below the initial public offering price.
The initial public offering price of the Common Stock will be determined by
negotiations between the Company and the Representatives of the Underwriters and
may not be indicative of the prices that will prevail in the public market. The
trading prices of the Company's Common Stock could be subject to wide
fluctuations in response to quarter-to-quarter variations in the Company's
operating results, material announcements by the Company, governmental
regulatory action, general conditions in the healthcare industry, or other
events or factors, many of which are beyond the Company's control. In addition,
the stock market has experienced extreme price and volume fluctuations, which
have particularly affected the market prices of many healthcare services
companies and which have often been unrelated to the operating performance of
such companies. The Company's

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<PAGE> 10

operating results in future quarters may be below the expectations of securities
analysts and investors. In such event, the price of the Common Stock would
likely decline, perhaps substantially. See "Underwriting."

CONTROL BY MANAGEMENT

Upon completion of the Offering, the executive officers and Directors of
the Company will collectively own approximately 33% of the outstanding shares of
Common Stock. Accordingly, these persons may have the ability to control the
Company's Board of Directors and, therefore, the business, policies, and affairs
of the Company. Such control could preclude unsolicited acquisitions of the
Company and, consequently, adversely affect the market price of the Common
Stock. See "Principal and Selling Stockholders" and "Description of Capital
Stock."

ANTI-TAKEOVER PROVISIONS

Certain provisions of the Company's Certificate of Incorporation and
certain provisions of the Delaware General Corporation Law may make it difficult
to change control of the Company and replace incumbent management. For example,
the Certificate of Incorporation provides for a staggered Board of Directors and
permits the Board of Directors, without stockholder approval, to issue
additional shares of Common Stock or establish one or more classes or series of
Preferred Stock having such number of shares, designations, relative voting
rights, dividend rates, liquidation and other rights, preferences and
limitations as the Board of Directors may determine. In addition, prior to the
closing of the Offering the Company plans to adopt a stockholder rights plan
that could further discourage attempts to acquire control of the Company. See
"Management" and "Description of Capital Stock."

SHARES ELIGIBLE FOR FUTURE SALE

Sales of substantial amounts of Common Stock in the public market following
the Offering, or the perception that such sales could occur, could adversely
affect prevailing market prices of the Common Stock and could impair the future
ability of the Company to raise capital through the sale of its equity
securities. The Company is unable to predict the effect, if any, that future
sales of Common Stock or the availability of Common Stock for sale may have on
the market price of the Common Stock prevailing from time to time. Certain
existing stockholders have the right to require the Company to register their
Common Stock from time to time. See "Description of Capital Stock" and "Shares
Eligible for Future Sale."

DILUTION

Purchasers of the Common Stock offered hereby will incur immediate and
substantial dilution in pro forma net tangible book value from the initial
public offering price. See "Dilution."

DIVIDENDS

The Company has never paid cash dividends on its Common Stock and does not
currently intend to pay cash dividends. It is not likely that any cash dividends
will be paid in the foreseeable future. See "Dividend Policy."

9
<PAGE> 11

USE OF PROCEEDS

The net proceeds of the Offering, after deducting expenses payable by the
Company and assuming an initial offering price of $10.00 per share, will be
approximately $35,900,000 million ($40,085,000 million if the Underwriters'
over-allotment option is exercised). The Company intends to use such proceeds to
finance affiliations with physician groups, for working capital, for repayment
of $6,200,000 million currently outstanding under its revolving credit agreement
(the "Credit Facility"), and for other general corporate purposes. Pending
application of the net proceeds as described above, the Company intends to
invest the net proceeds in short-term, interest-bearing securities. For
information concerning the terms of the Credit Facility, see "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Liquidity and Capital Resources."

The Company is continually seeking additional physician groups with which
to affiliate and is currently engaged in negotiations with several such groups,
including two groups with which it is in advanced stages of its due diligence
investigations. There can be no assurance that these negotiations will culminate
in binding agreements or that these or any other such affiliations will occur.
See "Risk Factors -- Risks Associated with Growth Strategy."

DIVIDEND POLICY

The Company has never paid cash dividends on its Common Stock. The Company
currently intends to retain any earnings to finance the growth and development
of its business and does not anticipate paying cash dividends in the foreseeable
future. Any payment of cash dividends in the future will depend upon the
financial condition, capital requirements, and earnings of the Company, as well
as other factors the Board of Directors may deem relevant. In addition, the
Company is currently restricted under the terms of its Credit Facility from
paying any dividends to stockholders without the prior written consent of the
lenders. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Liquidity and Capital Resources."

10
<PAGE> 12

DILUTION

The Company's pro forma net tangible book value at December 31, 1996 was
$417,392 or approximately $0.06 per share. Pro forma net tangible book value per
share represents total assets, less intangible assets and total liabilities,
divided by the number of shares outstanding as of December 31, 1996 (assuming
the conversion into Common Stock of all outstanding Series A Redeemable
Convertible Preferred Stock and the exchange of all outstanding Redeemable
Common Stock and Class B Common Stock for Common Stock and including Common
Stock to be issued). After giving effect to the sale of the shares of Common
Stock offered hereby at an assumed initial offering price of $10.00 per share
and the application by the Company of the estimated net proceeds therefrom as
described in "Use of Proceeds," the pro forma net tangible book value of the
Company as of December 31, 1996 would have been $36,317,392, or $3.23 per share
of Common Stock. This represents an immediate increase in net tangible book
value of $3.17 per share to existing stockholders and an immediate dilution in
net tangible book value of $6.77 per share of Common Stock to purchasers of
Common Stock in the Offering. The following table illustrates this per share
dilution:

<TABLE>
<S> <C> <C>
Assumed initial public offering price per share...................... $10.00
Pro forma net tangible book value per share before the
Offering....................................................... $0.06
Increase in net tangible book value attributable to new
investors...................................................... 3.17
-----
Pro forma net tangible book value per share after the Offering....... 3.23
------
Dilution per share to new investors.................................. $ 6.77
======
</TABLE>

The following table summarizes, on a pro forma basis as of December 31,
1996, the total shares purchased and the total consideration and average price
per share paid by existing stockholders, and paid by the new investors
purchasing the shares offered hereby, assuming an initial public offering price
of $10.00 per share.

<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
--------------------- ---------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- ------- ----------- ------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders.......... 4,821,657 42.8% $16,663,718 22.9% $ 3.46
Abilene and Reno issuances..... 2,433,333 21.7 16,200,000 22.2 6.66
New investors.................. 4,000,000 35.5 40,000,000 54.9 10.00
---------- ----- ----------- -----
Total..................... 11,254,990 100.0% $72,863,718 100.0%
========== ===== =========== =====
</TABLE>

The above calculations do not give effect to the exercise of (i)
outstanding options and warrants to purchase 4,030,525 shares of Common Stock at
a weighted average exercise price of $3.10 per share outstanding at December 31,
1996, and (ii) 200,030 shares of Common Stock issuable upon conversion of
outstanding convertible subordinated notes issued in connection with
affiliations.

11
<PAGE> 13

CAPITALIZATION

The following table sets forth the capitalization of the Company at
December 31, 1996 (i) on a pro forma basis to give effect to the conversion of
all outstanding shares of Series A Redeemable Convertible Preferred Stock and
Class B Common Stock of the Company into Common Stock, the termination of the
Company's contingent obligation to repurchase Redeemable Common Stock, and the
issuance of shares of Common Stock in connection with the Reno Merger and the
Abilene Acquisition, and (ii) as adjusted to reflect the sale by the Company of
the Common Stock offered hereby, assuming an initial public offering price of
$10.00 per share and after deducting the applicable underwriting discount and
estimated expenses payable by the Company, and the application of the estimated
net proceeds therefrom as described under "Use of Proceeds." See "Pro Forma
Consolidated Financial Information."

<TABLE>
<CAPTION>
DECEMBER 31, 1996
-----------------------------------------
PRO PRO FORMA
ACTUAL FORMA AS ADJUSTED
----------- ----------- -----------
<S> <C> <C> <C>
Current maturities of long-term debt (1).............. $ 608,192 $ 1,355,443 $ 1,355,443
=========== =========== ===========
Long-term debt, net of current maturities (1)......... $ 7,867,847 $ 8,206,959 $ 4,049,932
Series A Redeemable Convertible Preferred Stock, $0.01
par value; 700,000 shares authorized, 500,000 shares
issued and outstanding; no shares issued and
outstanding pro forma and pro forma as adjusted..... 2,957,641 -- --
Redeemable Common Stock, no par value; 165,296 shares
issued and outstanding; no shares issued and
outstanding pro forma and pro forma as adjusted..... 991,776 -- --
Stockholders' equity:
Preferred Stock, $0.01 par value; 19,300,000
shares authorized; 20,000,000 shares authorized
pro forma as adjusted; no shares issued and
outstanding.................................... -- -- --
Class B Common Stock, $0.01 par value; 2,600,000
shares authorized; no shares authorized pro
forma as adjusted; 1,226,150 shares issued and
outstanding; no shares issued and outstanding
pro forma and pro forma as adjusted............ 12,262 -- --
Common Stock, $0.01 par value; 47,400,000 shares
authorized; 50,000,000 shares authorized pro
forma as adjusted; 2,742,729 shares issued and
outstanding; 6,457,508 shares issued and
outstanding pro forma and 10,457,508 shares
issued and outstanding pro forma as adjusted
(2)............................................ 27,427 64,575 104,575
Additional paid-in-capital....................... 10,371,400 24,456,455 60,316,455
Common Stock to be issued, 187,482, 797,482 and
797,482 shares, respectively................... 2,303,212 5,963,212 5,963,212
Stockholder notes receivable..................... (120,000) (151,306) (151,306)
Accumulated deficit.............................. (1,416,537) (3,659,547) (3,659,547)
----------- ----------- -----------
Total stockholders' equity.................. 11,177,764 26,673,389 62,573,389
Total capitalization........................ $22,995,028 $34,880,348 $66,623,321
=========== =========== ===========
</TABLE>

- ---------------
(1) See Note 6 to Consolidated Financial Statements for information concerning
long-term debt and capital lease obligations.

(2) Excludes 4,030,525 shares reserved for issuance upon exercise of outstanding
options and warrants, at a weighted average exercise price of $3.10 per
share, and 200,030 shares reserved for issuance upon conversion of
outstanding convertible subordinated notes issued in connection with
affiliations. See "Description of Capital Stock."

12
<PAGE> 14

PRO FORMA CONSOLIDATED FINANCIAL INFORMATION

The pro forma as adjusted consolidated balance sheet gives effect to the
Reno Merger and the Abilene Acquisition as if they had been completed on
December 31, 1996 and also reflects the Offering and the conversion of all
outstanding Series A Redeemable Convertible Preferred Stock and Class B Common
Stock of the Company into Common Stock and the termination of the Company's
contingent obligation to repurchase all outstanding Redeemable Common Stock, all
of which will occur simultaneously with the closing of the Offering, as if such
transactions had occurred on December 31, 1996. The pro forma as adjusted
consolidated statement of operations for the year ended December 31, 1996, gives
effect to the Reno Merger, the Acquisitions and the Offering as if they had been
completed on January 1, 1996. Abilene's operations are reflected in the
historical consolidated statement of operations for the year ended December 31,
1996, since Abilene (the assets of which will not be acquired by the Company
until the first day of the calendar month following the closing of the Offering)
has been operated by the Company under an interim service agreement since
December 1995. The Reno Merger will be accounted for as a pooling of interests,
and accordingly the historical operations and balance sheets of the Company and
Western Medical Management Corp., Inc. have been combined in these pro forma
consolidated financial statements. The pro forma consolidated financial
information is based on the combined financial statements of the Company and the
affiliated physician groups, giving effect to the Acquisitions under the
purchase method of accounting, and the assumptions and adjustments in the
accompanying notes to pro forma consolidated financial information.

The pro forma consolidated financial information has been prepared by
management based on the audited financial statements of the affiliated physician
groups, adjusted where necessary to reflect the acquisitions and related
operations as if the service agreements between the Company and such groups had
been in effect during the entire periods presented. This pro forma consolidated
financial information is presented for illustrative purposes only and is not
indicative of the results that would have occurred if the Reno Merger and the
Acquisitions had been completed on the dates indicated or that may be obtained
in the future. The pro forma consolidated financial information should be read
in conjunction with the audited consolidated financial statements and notes
thereto of the Company, Cullman Family Practice, P.C., Family Medical Clinic,
P.C., Morgan-Haugh, P.S.C., HealthFirst Services, Inc. and Tarrant Family
Practice, P.A., Abilene Diagnostic Clinic Practices, King's Daughters Clinic,
P.A., and Western Medical Management Corp., Inc. included elsewhere in this
Prospectus.

13
<PAGE> 15

PRO FORMA CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1996
(UNAUDITED)
<TABLE>
<CAPTION>
RENO
ABILENE ABILENE RENO ELIMINATING EQUITY
HISTORICAL HISTORICAL(a) ADJUSTMENTS HISTORICAL(f) ADJUSTMENTS(g) CONVERSIONS(h) PRO FORMA
----------- ------------- ----------- ------------- -------------- -------------- -----------
ASSETS
<S> <C> <C> <C> <C> <C> <C> <C>
Current assets:
Cash and cash
equivalents......... $ 1,633,534 $ 361,740 $ -- (e) $ -- $ -- $ -- $ 1,995,274
Accounts receivable,
net................. 4,272,021 1,609,780 -- 1,955,207 -- -- 7,837,008
Inventory............. 212,709 -- -- 12,503 -- -- 225,212
Management fees
receivable.......... 1,266,598 -- (1,200,000)(b) -- -- -- 66,598
Due from affiliated
physician groups.... 510,220 -- -- 150,058 -- -- 660,278
Prepaid expenses and
other current
assets.............. 410,365 143,778 (143,778)(c) 138,574 -- -- 548,939
----------- ------------- ----------- ------------- -------------- -------------- -----------
Total current
assets.......... 8,305,447 2,115,298 (1,343,778) 2,256,342 -- -- 11,333,309
Property and equipment,
net..................... 3,341,775 32,654 -- 588,416 -- -- 3,962,845
Intangible assets, net.... 14,860,171 -- 11,395,826 (a) -- -- -- 26,255,997
Other assets.............. 1,962,942 50,000 (50,000)(c) 19,681 (775,000) -- 1,207,623
----------- ------------- ----------- ------------- -------------- -------------- -----------
Total assets...... $28,470,335 $ 2,197,952 $10,002,048 $ 2,864,439 $ (775,000) $ -- $42,759,774
=========== ============ =========== ============= ============ ============= ===========
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
<S> <C> <C> <C> <C> <C> <C> <C>
Current liabilities:
Accounts payable...... $ 651,216 $ 459,941 $ (459,941)(c) $ 854,546 $ -- $ -- $ 1,505,762
Payable to affiliated
physician groups.... 1,341,876 -- -- -- -- -- 1,341,876
Management fees
payable............. -- 573,715 (573,715)(b) -- -- -- --
Accrued salaries,
wages and
benefits............ 1,153,558 -- -- -- -- -- 1,153,558
Accrued expenses and
other current
liabilities......... 1,551,057 48,667 (48,667)(c) 802,322 -- -- 2,353,379
Current maturities of
notes payable and
obligations under
capital leases...... 608,192 820,447 (820,447)(c) 1,522,251 (775,000) -- 1,355,443
Deferred purchase
price............... 169,408 -- -- -- -- 169,408
----------- ------------- ----------- ------------- -------------- -------------- -----------
Total current
liabilities..... 5,475,307 1,902,770 (1,902,770) 3,179,119 (775,000) -- 7,879,426
Notes payable, net........ 4,631,249 77,675 (77,675)(c) 339,112 -- -- 4,970,361
Obligations under capital
leases.................. 1,030,171 -- -- -- -- -- 1,030,171
Deferred purchase price... 12,578 -- -- -- -- -- 12,578
Convertible subordinated
notes payable........... 1,800,274 -- -- -- -- -- 1,800,274
Other long term
liabilities............. 393,575 -- -- -- -- -- 393,575
----------- ------------- ----------- ------------- -------------- -------------- -----------
Total
liabilities..... 13,343,154 1,980,445 (1,980,445) 3,518,231 (775,000) -- 16,086,385
----------- ------------- ----------- ------------- -------------- -------------- -----------
Series A Redeemable
convertible preferred
stock................... 2,957,641 -- -- -- -- (2,957,641) --
Redeemable common stock... 991,776 -- -- -- -- (991,776) --
Stockholders' equity:
Preferred stock....... -- -- -- 8,500 (8,500) -- --
Class B common stock.. 12,262 -- -- -- (12,262) --
Common stock.......... 27,427 217,507 (217,507)(d) 10,530 (10,530) 18,915 64,575
14,233 (e) 4,000
Additional paid-in
capital............. 10,371,400 -- 8,525,767 (e) 1,601,494 15,030 3,942,764 24,456,455
Common stock to be
issued.............. 2,303,212 -- 3,660,000 (e) -- -- -- 5,963,212
Stockholder notes
receivable.......... (120,000) -- -- (31,306) -- -- (151,306)
Accumulated deficit... (1,416,537) -- -- (2,243,010) -- -- (3,659,547)
----------- ------------- ----------- ------------- -------------- -------------- -----------
Total stockholders'
equity.............. 11,177,764 217,507 11,982,493 (653,792) -- 3,949,417 26,673,389
----------- ------------- ----------- ------------- -------------- -------------- -----------
Total liabilities
and
stockholders'
equity.......... $28,470,335 $ 2,197,952 $10,002,048 $ 2,864,439 $ (775,000) $ -- $42,759,774
=========== ============ =========== ============= ============ ============= ===========

OFFERING PRO FORMA
ADJUSTMENTS(i) AS ADJUSTED
-------------- -----------
<S> <C> <C>

Current assets:
Cash and cash
equivalents......... $ 32,307,400 $34,302,674
Accounts receivable,
net................. -- 7,837,008
Inventory............. -- 225,212
Management fees
receivable.......... -- 66,598
Due from affiliated
physician groups.... -- 660,278
Prepaid expenses and
other current
assets.............. -- 548,939
-------------- -----------
Total current
assets.......... 32,307,400 43,640,709
Property and equipment,
net..................... -- 3,962,845
Intangible assets, net.... -- 26,255,997
Other assets.............. (564,427) 643,196
-------------- -----------
Total assets...... $ 31,742,973 $74,502,747
============= ===========

Current liabilities:
Accounts payable...... $ -- $ 1,505,762
Payable to affiliated
physician groups.... -- 1,341,876
Management fees
payable............. -- --
Accrued salaries,
wages and
benefits............ -- 1,153,558
Accrued expenses and
other current
liabilities......... -- 2,353,379
Current maturities of
notes payable and
obligations under
capital leases...... -- 1,355,443
Deferred purchase
price............... -- 169,408
-------------- -----------
Total current
liabilities..... -- 7,879,426
Notes payable, net........ (4,157,027) 813,334
Obligations under capital
leases.................. -- 1,030,171
Deferred purchase price... -- 12,578
Convertible subordinated
notes payable........... -- 1,800,274
Other long term
liabilities............. -- 393,575
-------------- -----------
Total
liabilities..... (4,157,027) 11,929,358
-------------- -----------
Series A Redeemable
convertible preferred
stock................... -- --
Redeemable common stock... -- --
Stockholders' equity:
Preferred stock....... -- --
Class B common stock.. -- --
Common stock.......... 40,000 104,575

Additional paid-in
capital............. 35,860,000 60,316,455
Common stock to be
issued.............. -- 5,963,212
Stockholder notes
receivable.......... -- (151,306)
Accumulated deficit... -- (3,659,547)
-------------- -----------
Total stockholders'
equity.............. 35,900,000 62,573,389
-------------- -----------
Total liabilities
and
stockholders'
equity.......... $ 31,742,973 $74,502,747
============= ===========
</TABLE>

See accompanying notes to pro forma consolidated financial information.

14
<PAGE> 16

PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1996
(UNAUDITED)

<TABLE>
<CAPTION>
1996 TRANS- ACQUISITION OFFERING PRO FORMA
HISTORICAL ACTIONS (j) ADJUSTMENTS ADJUSTMENTS(u) AS ADJUSTED
----------- ----------- ------------ -------------- --------------
<S> <C> <C> <C> <C> <C>
Physician groups revenue, net......... $34,641,222 $29,744,560 $ -- $ -- $ 64,385,782
Less: amounts retained by physician
groups.............................. 15,322,220 12,093,378 (12,093,378)(k) -- 26,525,100
11,202,880 (l)
----------- ----------- ------------ -----------
Management fee revenue................ 19,319,002 17,651,182 890,498 -- 37,860,682
Operating expenses:
Clinic salaries and benefits..... 7,586,966 8,767,279 (603,070)(m) -- 15,751,175
Clinic rent and lease expense.... 2,027,539 1,976,273 17,630 (n) -- 4,021,442
Clinic supplies.................. 2,419,495 1,661,973 -- -- 4,081,468
Other clinic costs............... 4,426,181 4,763,323 (476,277)(o) -- 8,713,227
General corporate expenses....... 2,633,585 -- -- -- 2,633,585
Depreciation and amortization.... 610,827 401,298 (29,365)(p) -- 1,698,781
716,021 (q)
Merger costs..................... -- 682,269 -- -- 682,269
Interest expense................. 163,714 155,565 (25,441)(r) (208,468) 144,574
59,204 (s)
----------- ----------- ------------ -----------
19,868,307 18,407,980 (341,298) (208,468) 37,726,521
----------- ----------- ------------ -----------
Income (loss) before provision for
income taxes........................ (549,305) (756,798) 1,231,796 208,468 134,161
Provision (benefit) for income
taxes............................... -- (93,974) 93,974 (t) 50,981 50,981
----------- ----------- ------------ -----------
Net income (loss)..................... $ (549,305) $ (662,824) $ 1,137,822 $ 157,487 $ 83,180
=========== =========== ============ =========== =============
Net income (loss) per share........... $ (0.07) $ 0.01
=========== =============
Weighted average number of common
shares outstanding.................. 7,914,560 14,841,889
=========== =============
</TABLE>

See accompanying notes to pro forma consolidated financial information.

15
<PAGE> 17

NOTES TO PRO FORMA CONSOLIDATED FINANCIAL INFORMATION

During the year ended December 31, 1996, the Company, through its wholly
owned subsidiaries, acquired certain operating assets and assumed certain
operating liabilities of four physician groups located in Alabama, Kentucky, and
Texas. The Company has also entered into an agreement to acquire the operating
assets and assume certain operating liabilities of Abilene, which is currently
operated under an interim service agreement with the closing to occur on the
first day of the month following closing of the Offering. In addition, the Reno
Merger will be consummated simultaneously with the closing of the Offering.

PHYSICIAN GROUPS REVENUE, NET

Physician groups revenue represents the revenue of the affiliated physician
groups reported at the estimated realizable amounts from patients, third-party
payors, and others for services rendered, net of contractual and other
adjustments.

MANAGEMENT FEE REVENUE

Management fee revenue represents physician groups revenue less amounts
retained by physician groups. The amounts retained by physician groups
(typically 85% of the physician group operating income) represent amounts paid
to the physicians pursuant to the service agreements between the Company and the
physician groups. Under the service agreements, the Company provides each
physician group with the facilities and equipment used in its medical practice,
assumes responsibility for the management of the operations of the practice, and
employs substantially all of the non-physician personnel utilized by the group.

The Company's management fee revenue is dependent upon the operating income
of the physician groups. Physician group operating income is defined in the
service agreements as the physician group's net medical revenue less certain
contractually agreed-upon clinic expenses, including non-physician clinic
salaries and benefits, rent, insurance, interest, and other direct clinic
expenses. The amount of the physician groups revenue retained and paid to the
physician groups primarily consists of the cost of the affiliated physicians'
services. The remaining amount of the physician group operating income
(typically 15%) and an amount equal to 100% of the clinic expenses are reflected
as management fee revenue earned by the Company.

PRO FORMA CONSOLIDATED BALANCE SHEET

The adjustments reflected in the pro forma consolidated balance sheet are
as follows:

(a) To record the assets acquired and liabilities assumed by ProMedCo
in the Abilene Acquisition. This acquisition has been accounted for by the
purchase method of accounting and, accordingly, the purchase price has been
allocated to the assets acquired and liabilities assumed based on the
estimated fair values as of December 31, 1996. Common Stock issued and to
be issued in connection with the acquisition totaled 2,033,333 shares. The
number of shares issued and to be issued in connection with the acquisition
is based upon the estimated fair value of the clinic assets acquired and
liabilities assumed, divided by $6.00. In addition to the issuance of
shares, the Company will pay approximately $1.2 million in cash. The fair
value of the clinic net assets was determined based on an analysis of
estimated future clinic operating results. The $6.00 value per share was
based upon arm's length negotiations between the Company and the sellers.
All negotiations were completed and agreements entered into in December
1995.

The following methods and assumptions were used to estimate fair
value:

Cash and cash equivalents -- The historical carrying amount
approximates fair value.

Accounts receivable, net -- The Company reviewed receivable
balances and determined that their historical carrying amount
approximates their fair value.

Property and equipment, net -- The Company performed an asset by
asset review and determined that the historical carrying amount
approximates fair value.

16
<PAGE> 18

NOTES TO PRO FORMA CONSOLIDATED FINANCIAL INFORMATION -- (CONTINUED)

Liabilities assumed -- Given the short term nature of the
liabilities assumed, the historical carrying amount approximates their
fair value.

Intangible assets -- In connection with the allocation of the
purchase price to identifiable intangible assets, the Company analyzes
the nature of each group with which a service agreement is entered into,
including the number of physicians in each group, number of service
sites and ability to recruit additional physicians, the group's relative
market position, the length of time each group has been in existence,
and the term and enforceability of the service agreement. Because the
Company does not practice medicine, maintain patient relationships, hire
physicians, enter into employment and noncompetition agreements with the
physicians, or directly contract with payors, the intangible asset
created in the purchase allocation process is associated solely with the
service agreement with the physician group. The service agreements are
for a term of 40 years and cannot be terminated by either party without
cause, consisting primarily of bankruptcy or material default.

The Company believes that there is no material value allocable to
the employment and noncompetition agreements entered into between the
physician group and the individual physicians. The primary economic
beneficiary of these agreements is the physician group, an entity that
the Company does not legally control. In addition, any damages under the
agreements are paid solely to the physician group for purposes of
replacing departing physicians. Generally, due to low expected physician
turnover in the industry and the ability of the physician group to
replace departing physicians, the Company believes there would be no
significant economic loss to either the physician group or the Company
due to physician departure. The physician groups continually recruit
physicians and, as appropriate and necessary, subsequently add qualified
physicians to the group. This manner of operations allows the physician
group to perpetuate itself as individual physicians retire or are
otherwise replaced. The Company believes that the physician groups with
which it has service agreements thus are long-lived entities with an
indeterminable life, and that the physicians, customer demographics, and
various contracts will be continuously replaced. The service agreement
intangible is being amortized on a straight-line method over a composite
average life of 30 years.

The Company anticipates that the Emerging Issues Task Force of the
Financial Accounting Standards Board will be evaluating certain matters
relating to the physician practice management industry, which the
Company expects to include a review of accounting for businesses
combinations. The Company is unable to predict the impact, if any, that
this review may have on the Company's acquisition strategy, allocation
of purchase price related to acquisitions, and amortization life
assigned to intangible assets.

(b) To eliminate the Abilene portion of management fees receivable and
due from affiliated physician groups on ProMedCo's historical balance sheet
and the related payables on Abilene's historical balance sheet.
Approximately $1,200,000 of cash to be paid in connection with the purchase
has been reflected as a reduction of the Company's management fees
receivable under the terms of the interim service agreement.

(c) To eliminate assets not acquired and liabilities not assumed by
ProMedCo in the Abilene Acquisition as stated in the purchase agreement.

(d) To eliminate the owner's equity of Abilene in connection with the
purchase accounting for the acquisition.

(e) To record the Common Stock issued and issuable and cash in
exchange for the assets acquired and liabilities assumed in connection with
the Abilene Acquisition. Cash paid will be netted against the management
fee receivable from Abilene. The purchase agreement requires 70% of the
purchase price to be paid at closing, with the remaining 30% payable at
future dates.

(f) To record the Reno Merger using pooling of interests accounting.
Accordingly, the historical balance sheet of Reno as of December 31, 1996
has been combined with the ProMedCo balance sheet.

17
<PAGE> 19

NOTES TO PRO FORMA CONSOLIDATED FINANCIAL INFORMATION -- (CONTINUED)

Reno has incurred $682,269 of non-recurring costs (primarily severance and
professional service costs) related to the merger, which are reflected as
merger costs in the pro forma consolidated statement of operations.

(g) To record eliminating adjustments to Reno's historical financial
statements: (i) to eliminate the note payable to the Company and related
note receivable on the Company's and Reno's historical financial
statements, and (ii) to record common stock at $0.01 par value.

(h) To reflect the conversion of all Series A Redeemable Convertible
Preferred Stock and Class B Common Stock into Common Stock and the
termination of the Company's contingent obligation to repurchase Redeemable
Common Stock. The equity conversions assume that all stock was converted
using a one-for-one conversion ratio, as provided in the Company's
Certificate of Incorporation.

(i) To reflect effects of the Offering.

PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS

The adjustments reflected in the pro forma consolidated statement of
operations for the year ended December 31, 1996 are as follows:

(j) The 1996 Transactions column represents the historical revenues
and expenses of the physician groups for that portion of the year preceding
the groups' affiliation with the Company. The 1996 transactions include
additional physicians who joined the Abilene Diagnostic Clinic Practices
during 1996, Cullman Family Practice, P.C., Family Medical Clinic, P.C.,
Morgan-Haugh, P.S.C., HealthFirst Services, Inc. and Tarrant Family
Practice, P.A., King's Daughters Clinic, P.A., and Western Medical
Management Corp., Inc.

(k) To eliminate the historical amounts retained by physician groups
for each acquired physician group.

(l) To record the amounts retained by physician groups to the
percentage specified in the service agreement (typically 85% of each of the
physician group's operating income) entered into with each affiliated
physician group. The adjustment is for the periods the physician groups
were not managed under the service agreements.

(m) To eliminate the salaries of nurses and physician extenders at
historical levels for the periods not covered by the service agreements.
The service agreements provide that these costs are for the account of the
physician groups.

(n) To record additional rental expense related to the rental of
clinic space from the physician groups.

(o) To eliminate physician benefits and other physician-related costs,
such as club dues and subscriptions, that will not be paid by the Company.

(p) To eliminate the depreciation and amortization expense recorded by
the physician groups at historical values.

(q) To adjust depreciation expense by $85,637 and amortization expense
by $630,384. The adjustment for depreciation expense is computed by
dividing total fixed assets acquired by the weighted average life of the
fixed assets acquired (approximately seven years), less depreciation
expense recorded on an historical basis. The adjustment for amortization
expense is computed by dividing total service agreement rights acquired by
a composite average life of 30 years, less agreement amortization expense
recorded on an historical basis. The adjustments assume the acquired assets
were held for the entire period presented.

(r) To eliminate interest expense related to liabilities not assumed
in connection with acquisitions.

18
<PAGE> 20

NOTES TO PRO FORMA CONSOLIDATED FINANCIAL INFORMATION -- (CONTINUED)

(s) To record interest expense on debt issued in connection with
acquisitions.

(t) To eliminate estimated federal and state income taxes.

(u) To reduce interest expense assuming repayment of the Company's
Credit Facility borrowings with a portion of the proceeds of the Offering
received by the Company as of January 1, 1996, net of estimated federal and
state income taxes at a combined rate of 38%.

19
<PAGE> 21

SELECTED FINANCIAL DATA

The selected financial data presented below should be read in conjunction
with the consolidated financial statements and the notes thereto of the Company,
the financial statements and the notes thereto of North Texas Medical Surgical,
P.A., Cullman Family Practice, P.C., Family Medical Clinic, P.C., Morgan-Haugh,
P.S.C., HealthFirst Services, Inc. and Tarrant Family Practice, P.A., Abilene
Diagnostic Clinic Practices, King's Daughters Clinic, P.A., and Western Medical
Management Corp., Inc., "Pro Forma Consolidated Financial Information," and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" included elsewhere in this Prospectus. The selected unaudited pro
forma as adjusted consolidated statement of operations data for the year ended
December 31, 1996 give effect to the Acquisitions, the Reno Merger and the
Offering as if they had been completed on January 1, 1996. The selected
unaudited pro forma as adjusted consolidated balance sheet data as of December
31, 1996 give effect to the Abilene Acquisition, the Reno Merger and the
Offering as if they had been completed on December 31, 1996. Such pro forma data
are presented for illustrative purposes only and do not purport to represent
what the Company's results would have been if such events had occurred at the
dates indicated, nor do such data purport to project the financial position or
results of operations for any future period or as of any future date.

<TABLE>
<CAPTION>
JULY 1, 1994 YEAR ENDED
(INCEPTION) TO DECEMBER 31, PRO FORMA
DECEMBER 31, -------------------------------- AS ADJUSTED
1994 1995 1996 1996(1)(2)(3)
-------------- -------------- -------------- -------------
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Physician groups revenue, net............................. $ -- $ 1,918,029 $ 34,641,222 $64,385,782
Less: amounts retained by physician groups................ -- 759,513 15,322,220 26,525,100
-------------- -------------- -------------- -------------
Management fee revenue.................................... -- 1,158,516 19,319,002 37,860,682
Operating expenses:
Clinic salaries and benefits.......................... -- 554,384 7,586,966 15,751,175
Clinic rent and lease expense......................... -- 115,028 2,027,539 4,021,442
Clinic supplies....................................... -- 111,703 2,419,495 4,081,468
Other clinic costs.................................... -- 242,491 4,426,181 8,713,227
General corporate expenses............................ 172,462 802,980 2,633,585 2,633,585
Depreciation and amortization......................... 1,182 34,302 610,827 1,698,781
Merger costs.......................................... -- -- -- 682,269
Interest expense (income)............................. (3,754) (5,030) 163,714 144,574
-------------- -------------- -------------- -------------
169,890 1,855,858 19,868,307 37,726,521
-------------- -------------- -------------- -------------
Income (loss) before provision for income taxes........... (169,890) (697,342) (549,305) 134,161
Income tax................................................ -- -- -- 50,981
-------------- -------------- -------------- -------------
Net income (loss)......................................... $ (169,890) $ (697,342) $ (549,305) $ 83,180
============= ============== ============== =============
Net income (loss) per share............................... $ (0.03) $ (0.09) $ (0.07) $ 0.01
============= ============== ============== =============
Weighted average number of common shares outstanding...... 6,522,237 7,857,308 7,914,560 14,841,889(4)
============= ============== ============== =============
</TABLE>

<TABLE>
<CAPTION>
DECEMBER 31, 1996
------------------------------------------------
PRO FORMA
ACTUAL PRO FORMA(5) AS ADJUSTED(6)
----------- --------------- --------------
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents.......................................... $ 1,633,534 $ 1,995,274 $34,302,674
Working capital.................................................... 2,830,140 3,453,883 35,761,283
Total assets....................................................... 28,470,335 42,759,774 74,502,747
Long-term debt, less current maturities............................ 7,867,847 8,206,959 4,049,932
Redeemable equity securities....................................... 3,949,417 -- --
Total stockholders' equity......................................... 11,177,764 26,673,389 62,573,389
</TABLE>

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

(1) Gives effect to (i) the Acquisitions as if they had been completed on
January 1, 1996, and (ii) the Reno Merger. The Abilene Acquisition will be
completed on the first day of the calendar month following the closing of
the Offering. See "Pro Forma Consolidated Financial Information."

(3) Includes merger costs of $682,269, recorded in the historical financial
statements of Reno, for expenses associated with the Reno Merger.

(5) Gives effect to the Abilene Acquisition and the Reno Merger as if they had
been completed on December 31, 1996.

20
<PAGE> 22

MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

OVERVIEW

ProMedCo is a physician practice management company that consolidates its
affiliated physician groups into primary-care-driven multi-specialty networks.
The Company was incorporated in Texas in 1993 and was reincorporated in Delaware
in January 1997. ProMedCo commenced operations in December 1994 and affiliated
with its initial physician group in June 1995. The Company's rapid growth in
1995 and 1996 has resulted primarily from its affiliation with additional
physician groups. The Company is affiliated with seven physician groups in four
states representing 146 physicians and 46 physician extenders practicing at 24
service sites. When affiliating with a physician group, the Company typically
acquires at fair market value the group's non-real estate operating assets and
enters into a 40-year service agreement with the group in exchange for a
combination of Common Stock, cash, other securities of the Company, and/or the
assumption of certain liabilities. The Company has also entered into a merger
agreement with Reno, a physician management company. Reno commenced operations
in 1988 and provides physician management services similar to those provided by
the Company. Under the terms of the agreement, Reno will exchange its common
stock for Common Stock of the Company. The business combination is expected to
be consummated upon the closing of the Offering and will be accounted for as a
pooling of interests, as defined by APB No. 16, "Business Combinations." The
Company is continually seeking additional physician groups with which to
affiliate and is currently engaged in negotiations with several such groups,
including two groups with which it is in advanced stages of its due diligence
investigations.

Physician groups revenue represents the revenue of the physician groups,
reported at the estimated realizable amounts from patients, third-party payors
and others for services rendered, net of contractual and other adjustments.
Management fee revenue represents physician groups revenue less amounts retained
by physician groups. The amounts retained by physician groups (typically 85% of
the physician group operating income) represent amounts paid to the physicians
pursuant to the service agreements between the Company and the physician groups.
Under the service agreements, the Company provides each physician group with the
facilities and equipment used in its medical practice, assumes responsibility
for the management of the non-medical operations of the practice, and employs
substantially all of the non-physician personnel utilized by the group. The
Company's management fee revenue is dependent upon the operating income of the
physician groups. Physician group operating income is defined in the service
agreements as the physician group's net medical revenues less certain
contractually agreed-upon clinic expenses, including non-physician clinic
salaries and benefits, rent, insurance, interest, and other direct clinic
expenses. The amount of the physician groups' revenue retained and paid to the
physician groups primarily consists of the cost of the affiliated physicians'
services. The remaining amount of the physician group operating income
(typically 15%) and an amount equal to 100% of the clinic expenses are reflected
as management fee revenue earned by the Company.

Operating expenses consist of the expenses incurred by the Company in
fulfilling its obligations under the service agreements. These expenses are the
same as the operating costs and expenses that would have been incurred by the
affiliated groups, including non-physician salaries, employee benefits, medical
supplies, building rent, equipment leases, malpractice insurance premiums,
management information systems, and other expenses related to clinic operations.
The distribution to the group for providing medical services is increased or
decreased by a percentage of the physician group's surplus or deficit,
respectively, in net revenue under risk-sharing arrangements pursuant to
capitated managed care contracts.

In addition to the clinic expenses discussed above, the Company also incurs
personnel and administrative expenses in connection with maintaining a corporate
office function that provides management, administrative, marketing and
acquisition services to the affiliated groups. The Company's profitability
depends on, among other things, increasing market share, expanding healthcare
services, enhancing operating efficiencies, and developing favorable contractual
relationships with payors.

21
<PAGE> 23

Management believes that industry trends toward cost containment and lower
reimbursement rates will continue to result in a reduction from historical
levels in per patient revenue. Further reductions in reimbursement rates could
have an adverse effect on the Company's operations unless the Company is
otherwise able to offset such payment reductions.

For the year ended December 31, 1996, three of the Company's affiliated
physician groups each contributed 10% or more of the Company's pro forma
management fee revenue. Temple, Abilene, and Reno represented approximately 33%,
20%, and 20% of the pro forma management fee revenue, respectively.

RESULTS OF OPERATIONS

As a result of the Company's rapid growth and limited period of affiliation
with its affiliated physician groups, the Company does not believe that the
period-to-period comparisons and percentage relationships within periods set
forth below are meaningful. The Company commenced operations in December 1994
and affiliated with its first physician group in June 1995 and its second group
in December 1995. The Company entered into affiliations with five additional
groups during 1996. Changes in results of operations for the year ended December
31, 1996 as compared to the year ended December 31, 1995 were caused primarily
by affiliations with these five physician groups.

The following table sets forth the percentages of physician groups revenue
represented by certain items reflected in the Company's consolidated statements
of operations.

<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
-----------------------------
PRO FORMA
AS ADJUSTED
1995 1996 1996
----- ----- -----------
<S> <C> <C> <C>
Physician groups revenue, net................................... 100.0% 100.0% 100.0%
Less: amounts retained by physician groups...................... 39.6 44.2 41.2
----- ----- -----------
Management fee revenue.......................................... 60.4 55.8 58.8
Operating expenses:
Clinic salaries and benefits............................... 28.9 21.9 24.5
Clinic rent and lease expense.............................. 6.0 5.9 6.3
Clinic supplies............................................ 5.8 6.9 6.3
Other clinic costs......................................... 12.6 12.8 13.5
General corporate expenses................................. 41.9 7.6 4.1
Depreciation and amortization.............................. 1.8 1.8 2.6
Merger costs............................................... -- -- 1.1
Interest expense (income).................................. (0.3) 0.5 0.2
----- ----- -----------
Income (loss) before provision for income taxes................. (36.3)% (1.6)% 0.2%
Provision for income taxes...................................... -- -- 0.1
----- ----- -----------
Net income (loss)............................................... (36.3)% (1.6)% 0.1%
===== ===== =========
</TABLE>

For the year ended December 31, 1996, physician groups revenue was
$34,641,222, compared with $1,918,029 for the year ended December 31, 1995, an
increase of $32,723,193. For the year ended December 31, 1996, pro forma
physician groups revenue was $64,385,782. For the year ended December 31, 1996,
amounts retained by physician groups was $15,322,220, compared with $759,513 for
the year ended December 31, 1995. For the year ended December 31, 1996,
management fee revenue was $19,319,002, compared with $1,158,516 for the year
ended December 31, 1995, an increase of $18,160,486. For the year ended December
31, 1996, pro forma management fee revenue was $37,860,682. The increase in net
physician groups revenue, amounts retained by physician groups, and management
fee revenue resulted from the affiliation with six physician groups since
December 1995.

For the period from July 1, 1994 (inception) to December 31, 1994, general
corporate expenses exceeded management fee revenue due to the start-up nature of
the Company. While declining as a percentage of

22
<PAGE> 24

management fee revenue, the level of these expenses continued to increase during
1995 and 1996, as the Company continued to add to its management infrastructure.
While the Company expects that these expenses will continue to increase as the
Company increases the number of affiliated physician groups, it believes that
these expenses will continue to decline as a percentage of management fee
revenue.

Pro forma as adjusted net income for the year ended December 31, 1996 was
$83,180. This pro forma as adjusted net income is net of merger costs of
$682,269 recorded in the historical financial statements of Reno for expenses
associated with the Reno Merger.

The mix of physician specialities and ancillary services affects clinic
salaries and benefits, clinic supplies, and depreciation and amortization.
Generally, primary care and office-based physician practices are less capital
intensive, but require a higher number of support staff, than specialty care or
hospital-based practices. The percentage of primary care physicians to total
physicians affiliated with the Company was 84% and 68% (72% on a pro forma
basis) at December 31, 1995 and 1996, respectively.

Clinic rent and lease expense as a percentage of physician groups revenue
will vary based on the size of each of the affiliated group offices and the
current market rental rate for medical office space in the particular geographic
markets. Other clinic costs will vary as a percentage of physician groups
revenue based on regional cost differences and the Company's ability to
implement operational efficiencies and negotiate more favorable purchasing
arrangements.

SUMMARY OF OPERATIONS BY QUARTER (UNAUDITED)

The following table presents unaudited quarterly operating results for the
preceding five quarters. The Company believes that all necessary adjustments,
consisting only of normal, recurring adjustments, have been included in the
amounts stated below to present fairly the quarterly results when read in
conjunction with the Company's consolidated financial statements and notes
thereto included elsewhere in this Prospectus. Future quarterly results may
fluctuate depending on, among other things, the timing and number of
affiliations with physician groups. Results of operations for any particular
quarter are not necessarily indicative of results of operations for a full year
or for future periods.

<TABLE>
<CAPTION>
THREE MONTHS ENDED
-------------------------------------------------------------------------
DECEMBER 31, MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
1995 1996 1996 1996 1996
------------ ---------- ---------- ------------- ------------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Physician groups revenue, net.... $1,227,919 $4,139,217 $6,981,105 $ 9,659,391 $ 13,861,509
Less: amounts retained by
physician groups............... 512,410 2,010,147 3,286,250 3,953,024 6,072,799
------------ ---------- ---------- ------------- ------------
Management fee revenue........... 715,509 2,129,070 3,694,855 5,706,367 7,788,710
Operating expenses:
Clinic salaries and
benefits.................. 322,374 778,356 1,434,784 2,270,801 3,103,025
Clinic rent and lease
expense................... 77,070 262,838 395,255 563,913 805,532
Clinic supplies............. 69,570 241,329 417,935 752,208 1,008,023
Other clinic costs.......... 155,119 492,078 855,919 1,296,616 1,781,568
General corporate
expenses.................. 264,947 581,596 676,099 643,705 732,186
Depreciation and
amortization.............. 13,062 31,591 50,611 179,295 349,330
Interest expense (income)... 7,907 (28,768) 27,618 51,505 113,359
----------- ---------- ---------- ------------ ------------
Net loss......................... $ (194,540) $ (229,950) $ (163,366) $ (51,676) $ (104,313)
========== ========== ========== =========== ============
OTHER DATA (AT END OF PERIOD):
Affiliated physicians............ 32 51 72 118 146
Affiliated physician groups...... 2 3 5 6 7
Number of service sites.......... 4 6 15 19 24
Number of states................. 1 2 3 3 4
</TABLE>

23
<PAGE> 25

LIQUIDITY AND CAPITAL RESOURCES

At December 31, 1996, the Company had $2,830,140 in working capital, a
decrease of $162,468 from December 31, 1995. The Company's principal sources of
liquidity as of December 31, 1996 consisted of cash and cash equivalents of
$1,633,534 and net accounts receivable of $4,272,021. In addition, effective
July 15, 1996 the Company entered into the Credit Facility, providing a $25.0
million revolving working capital loan.

The Company has financed its acquisitions, capital expenditures, and
working capital needs since inception through a combination of (i) private
placements of capital stock and (ii) issuances of Common Stock, debt, and
convertible subordinated notes and assumption of equipment financing and other
debt in the Acquisitions. Through December 31, 1996, the Company paid or
committed to pay consideration in the following amounts in connection with the
Acquisitions: North Texas Medical Surgical, P.A., $1,088,000, consisting of
$992,000 of issuances or committed issuances of Common Stock and $96,000 of cash
paid; Cullman Primary Care, P.C., $2,458,000, consisting of $204,000 of
issuances or committed issuances of Common Stock, $1,800,000 of debt assumed and
$454,000 of cash paid; Morgan-Haugh, P.S.C., $1,317,000, consisting of $909,000
of debt assumed and $408,000 of cash paid; HealthFirst Medical Group, P.A.,
$4,788,000, consisting of $3,119,000 of issuances or committed issuances of
Common Stock, $888,000 of debt assumed and $781,000 of cash paid; and King's
Daughters Clinic, P.A., $8,210,000, consisting of $8,046,000 of issuances or
committed issuances of Common Stock and $164,000 of cash paid. Additionally, the
Company has committed to pay approximately $13,400,000, consisting of
$12,200,000 of committed issuances of Common Stock and $1,200,000 of cash in
connection with the Abilene Acquisition and $4,000,000, consisting of committed
issuances of Common Stock in connection with the Reno Merger.

For the years ended December 31, 1995 and 1996, cash used by operations was
$642,196 and provided by operations was $86,187, respectively. During 1995, the
Company incurred a loss of $697,342, and increases in non-cash current assets
were offset by increases in current liabilities. During 1996, the Company's net
loss of $549,305 was reduced primarily as the result of noncash expenses.

Cash used in investing activities was $2,091,349 in 1995 and $2,263,846 in
1996. In 1995, the Company purchased government-sponsored agency debt securities
with maturities of less than six months. During 1996, proceeds from the maturity
of these debt securities were offset primarily by purchases of clinic assets and
property and equipment.

Cash provided by financing activities (primarily related to the issuance of
the Company's Series A Redeemable Convertible Preferred Stock) for the year
ended December 31, 1995 totaled $3,319,990. Cash provided by financing
activities for the year ended December 31, 1996 totaled $2,734,357 and related
primarily to borrowings under the Credit Facility.

Under the terms of the Credit Facility, the Company paid a commitment fee
in July 1996 of $500,000, which was capitalized and is being amortized as an
adjustment to interest expense using the effective interest method. The interest
rate under the Credit Facility is, at the Company's option, (i) the 30-day
commercial paper rate of issuers whose corporate bonds are rated "AA" plus
3.25%, (ii) reserve adjusted LIBOR plus 3.25%, or (iii) the prime rate plus
0.5%. The Credit Facility, which expires July 15, 1999, includes certain
restrictive covenants including prohibitions on the payment of dividends,
limitations on capital expenditures, and the maintenance of minimum net worth
and certain financial ratios (including minimum interest-expense and
debt-service coverage, maximum debt-to-capitalization, and maximum senior
debt-to-EBITDA, as defined). At December 31, 1996, borrowings under the Credit
Facility were $4,157,027 and the interest rate in effect was 8.75%. Subsequent
to year end, the Company borrowed an additional $1,980,832 under the Credit
Facility. Approximately $1,200,000 of this amount was used to fund consideration
due in connection with the Abilene Acquisition, and the remainder was used to
fund capital and operating expenditures of affiliated physician groups.

Although each of the Company's service agreements with its affiliated
physician groups requires the Company to provide capital for equipment,
expansion, additional physicians, and other major expenditures, no specific
amount has been committed in advance. Capital expenditures are made based
partially upon the availability of funds, the sources of funds, alternative
projects, and an acceptable repayment period.

24
<PAGE> 26

The Company's acquisition and expansion programs will require substantial
capital resources. In addition, the operation and expansion of physician groups
will require ongoing capital expenditures. The financing of future acquisitions
and business expansion is anticipated to be provided by a combination of the
proceeds of this Offering, the Credit Facility, and cash flows from operations.
The Company believes that the combination of these sources will be sufficient to
meet the Company's currently anticipated acquisition, expansion, and working
capital needs through 1997. In addition, in order to meet its long-term
liquidity needs, ProMedCo expects to incur, from time to time, additional short-
and long-term bank indebtedness and to issue additional equity and debt
securities, the availability and terms of which will depend upon market and
other conditions. There can be no assurance that such additional financing will
be available on terms acceptable to the Company. The failure to raise the funds
necessary to finance its future cash requirements could adversely affect the
Company's ability to pursue its strategy and could adversely affect its results
of operations for future periods.

25
<PAGE> 27

BUSINESS

GENERAL

ProMedCo commenced operations in December 1994 and has since affiliated
with seven physician groups aggregating 146 physicians and 46 physician
extenders (primarily physician assistants and nurse practitioners) at 24 sites
in Texas, Alabama, Kentucky, and Nevada. Currently, approximately 72% of the
Company's affiliated physicians, on a pro forma basis, are primary care
providers. Following the Offering, approximately 46% of ProMedCo's outstanding
Common Stock will be owned by the Company's officers, directors and affiliated
physicians.

INDUSTRY OVERVIEW

The healthcare delivery system in the United States has been undergoing
substantial change, largely in response to concerns over the quality and
escalating cost of healthcare. National expenditures for healthcare grew from
$250 billion in 1980 to an estimated $1 trillion in 1995. Of the total estimated
1995 expenditures, physicians received approximately $200 billion for their own
services and controlled an additional $600 billion through the referral of
patients for additional care and services provided by others.

The substantial increase in healthcare expenditures has led to the
widespread establishment and growth of MCOs, consisting primarily of HMOs and
preferred provider organizations ("PPOs"). As MCO enrollment has grown, so has
MCO influence over physicians and other healthcare providers. MCOs have
increased their efforts to reduce costs and bring about greater accountability
with respect to the quality and appropriateness of care.

As a result of increased enrollment in managed care health plans,
physicians and other healthcare providers, in order to retain broad access to
patients, are seeking to become components of vertically integrated healthcare
delivery systems that provide a full range of services for the MCOs that operate
those plans. Typically, the physician and hospital components of these
integrated systems contract with MCOs to provide medical and hospital services
to MCO enrollees pursuant to risk-sharing and other arrangements. Such
risk-sharing arrangements commonly consist of "capitated" risk contracts, under
which providers undertake to provide a specified range of services for a
predetermined fixed fee per enrollee. Such an arrangement results in a greater
predictability of revenues, but exposes the provider to the risk of fluctuations
in the costs of providing the services. To the extent that patients or enrollees
covered by such contracts require more frequent or extensive care than is
anticipated, operating margins may be reduced and the revenues derived from such
contracts may be insufficient to cover the costs of the services provided. Many
physician groups are concluding that, in order to compete effectively in the
managed care environment, they need to have greater control over the delivery of
a wider range of healthcare services and expenditures. Accordingly, an
increasing number of physician groups are entering into capitation arrangements
under which they assume contractual risk and responsibility for healthcare
provided by others.

The private practice of medicine remains a largely fragmented market. The
American Medical Association reports that, of the approximately 613,000
physicians actively involved in patient care in the United States, only 34% are
currently practicing in groups. Many of these are small to mid-sized physician

26
<PAGE> 28

groups, which are at a competitive disadvantage in the managed care environment.
They generally do not have the market presence, expertise, or sophisticated cost
accounting and quality management systems required for capitated risk-sharing
arrangements. In addition, they often lack the capital required to purchase new
medical equipment and information systems to enhance the efficiency and quality
of their practices.

Physician groups are increasingly turning to physician-driven organizations
such as ProMedCo to provide the professional management expertise and capital
required to compete in the managed care environment and otherwise to assist them
with the increasingly complex management of physician practices. ProMedCo
believes that this has resulted in a need for management organizations committed
to preserving the professional autonomy of physician groups and whose economic
incentives are fully aligned with those of physicians. Because of the unique
position of primary care physicians in managing the delivery of healthcare by
both providing primary care and controlling patient referrals, ProMedCo further
believes that multi-specialty groups with a substantial primary care orientation
are likely to be best positioned to succeed in the emerging managed care
environment.

STRATEGY

The Company's strategy is to affiliate with leading physician groups in
pre-managed-care markets and expand and integrate them into comprehensive
multi-specialty networks to increase their market presence and position them to
become the physician component of managed care delivery systems as they develop
in their local markets. The key elements of the Company's strategy are as
follows:

Affiliate with Primary-Care-Oriented Multi-Speciality Groups. ProMedCo
believes that the primary care physician increasingly will manage the delivery
of healthcare services to patients by providing primary care and controlling
patient referrals for specialist, hospital, and other healthcare services.
Because of this central role, the Company believes that multi-specialty
physician groups with a primary care orientation can more effectively manage
capitated risk than other participants in the healthcare delivery system. The
Company also believes that primary care physicians and specialists organized
within a single multispecialty network provide a comprehensive range of services
that is attractive to MCOs.

Continue to Penetrate Pre-Managed-Care Markets. Notwithstanding the
increasing presence of MCOs, managed care is just beginning to reach many
communities, principally located outside of or adjacent to large metropolitan
areas. ProMedCo seeks to affiliate in such markets with high quality physician
groups that recognize the need for outside managerial, financial, and business
expertise, that are committed to expanding their practices, and that are, or
have the potential to be, the leading multi-specialty groups within their
markets.

Expand Existing Groups. ProMedCo seeks to increase the market presence of
each of its affiliated groups within the group's local market. The Company
facilitates expansion of the groups through affiliations with and recruitment of
other primary care physicians and selected specialists, recruitment of physician
extenders, and expansion of selected ancillary services.

Preserve Local Autonomy. While the Company provides management expertise
to a newly affiliated group, it believes that each physician group presents
unique management issues and therefore is best served by decentralized
management. The Company generally retains the group's existing administrative
staff, adding additional management personnel as the group expands. Each group's
physicians continue to maintain full professional control of the practice of
medicine. The Company establishes for each group a policy council, comprised
equally of physicians and ProMedCo representatives, to determine the broad
strategic and operational policies of the group.

Align Economic Interests. ProMedCo believes that affiliations with
practice management organizations whose incentives are fully aligned with the
interests of physicians are more attractive to physicians than affiliations with
hospitals or MCOs. Accordingly, ProMedCo employs an affiliation structure under
which the income of both the Company and the physicians within each group
depends upon the operating income of the group, providing a common incentive to
expand the group and increase its efficiency. In conjunction with the

27
<PAGE> 29

group's affiliation with the Company, the affiliated physicians generally
receive ProMedCo Common Stock, which further aligns their interests with those
of the Company.

DEVELOPMENT AND OPERATIONS

Market Development

ProMedCo's development objective is to affiliate with leading primary care
groups or primary-care-oriented multi-specialty groups within pre-managed-care
secondary markets. The Company performs research and market analyses to identify
priority markets, which generally are communities that have populations of at
least 30,000, have less than 20% HMO penetration, and meet other market
criteria. Such criteria relate to, among other things, the number of primary
care physicians relative to demand, Medicare payment rates, physician group
competition, the number of hospitals, demographics, population growth, and the
likelihood of significant future HMO growth. The Company estimates that there
are approximately 490 markets in 33 states, with an average population of
69,000, that currently satisfy its priority market criteria. The Company ranks
these markets based upon the degree to which they satisfy its criteria, enabling
the Company further to prioritize its development efforts. While the Company
identifies its priority markets in this manner, it expects to pursue development
opportunities in other markets as well.

Within its priority markets, ProMedCo seeks to affiliate either with
primary care groups or with multi-specialty groups that are committed to the
importance of primary care physicians. The Company seeks to affiliate with
groups that have a reputation for providing high quality care and have a
substantial share of their local markets or the potential to acquire such share.
These groups are frequently the largest groups in their markets.

Once ProMedCo has identified a group meeting its criteria, the Company
conducts preliminary discussions to ascertain the group's interest in an
affiliation. If such interest is established, the Company conducts site visits,
analyzes financial and other data, and conducts an extensive due diligence
investigation into the group's operations, leadership, and commitment to
long-term growth. Assuming a favorable outcome of the investigation, the Company
proposes to purchase the group's operating assets and enter into a long-term
service agreement with the group. See "-- Affiliation Structure."

Upon affiliation with a group, the Company immediately begins to facilitate
expansion of the group within its local market. Group expansion may be
accomplished through affiliations with additional primary-care and specialty
physicians in the community, recruitment of physicians from outside the
community, and addition of physician extenders to the group. One of the
Company's affiliated groups, for example, consisted of 24 physicians when it
entered into an agreement in principle with the Company and, during the ensuing
ten months, has been expanded to 36 physicians, including four new specialities.

Current Operations

Since commencing operations in December 1994, ProMedCo has affiliated with
seven groups currently aggregating 146 physicians and 46 physician extenders at
24 sites in Texas, Alabama, Kentucky, and Nevada. Approximately 72% of
ProMedCo's affiliated physicians are primary care providers. The primary care
physicians generally consist of family practitioners, general internists,
pediatricians, obstetrician/gynecologists, and urgent-care physicians.
Increasingly, these physicians are augmented by physician extenders, primarily
consisting of physician assistants and nurse practitioners, whom the Company
believes significantly increase the efficiency of delivery of a group's primary
care services. Each of the physician groups also provides, to varying degrees,
medical specialty services and ancillary services. Medical specialities
currently include anesthesiology, endocrinology, gastroenterology, general
surgery, infectious diseases, nephrology, neurology, occupational medicine,
orthopedic surgery, otolaryngology, pulmonology, rheumatology, and urology. Each
of the physician groups is continually seeking to expand its practice through
the addition of primary care physicians and specialists.

The physician groups offer, to varying degrees, a range of ancillary
services such as audiology, clinical laboratories, diagnostic imaging (which may
include CAT scanning, gastrointestinal laboratories, mam-

28
<PAGE> 30

mography, nuclear medicine, ultrasound, and x-ray), stress testing, and
outpatient surgical facilities. The Company and each of its affiliated groups
continually evaluate the addition of ancillary services to enhance the growth
and profitability of such group.

The following table sets forth information concerning the Company's
affiliated physician groups.

<TABLE>
<CAPTION>
BEGINNING OF
MEDICAL PROMEDCO PHYSICIAN MEDICAL SITES OF
GROUP LOCATION AFFILIATION PHYSICIANS EXTENDERS SPECIALTIES SERVICE
- ------------------------ ---------------- --------------- ---------- --------- ----------- --------
<S> <C> <C> <C> <C> <C> <C>
North Texas
Medical Surgical,
P.A................... Denton, TX June 1995 8 -- 3 1
Abilene Diagnostic
Clinic Practices...... Abilene, TX December 1995 36 8 9 3
Cullman Primary
Care, P.C............. Cullman, AL March 1996 11 1 1 4
Morgan-Haugh,
P.S.C................. Mayfield, KY April 1996 12 1 6 2
HealthFirst Medical
Group, P.A............ Lake Worth, TX June 1996 12 6 4 6
King's Daughters
Clinic, P.A........... Temple, TX September 1996 41 11 17 3
The Medical Group of
Northern Nevada....... Reno, NV October 1996 26 19 7 5
--- -- --
TOTAL................... 146 46 24
</TABLE>

The Abilene and Reno groups are currently operated under interim service
agreements. The Reno Merger will be consummated simultaneously with the closing
of the Offering. The acquisition of the Abilene group's operating assets will be
consummated on the first day of the calendar month following the closing of the
Offering and is subject only to the delivery of customary closing documents.
Following the merger and the asset acquisition, each group will be operated
under a long-term service agreement.

Management Services

Upon affiliating with a physician group, ProMedCo immediately assumes the
management of all aspects of the group's operations other than the provision of
medical services. The operating assets acquired by the Company are provided for
the exclusive use of the group, and substantially all non-physician personnel
utilized in the group's practice become employees of the Company. ProMedCo
provides the full range of administrative services required for the group's
operations, including facilities management and the purchase of medical
malpractice insurance, supplies, and equipment, and a broad spectrum of
financial and accounting services, including budgeting, billing and third-party
reimbursement services. The Company also provides each group with operating
capital and expansion capital for affiliations with other physicians, additions
of ancillary services, and improvements of existing facilities and equipment. As
MCOs expand their presence into the local market, the Company provides expertise
in the negotiation of managed care contracts and the management of risk-sharing
arrangements. Currently, only one of the Company's affiliated groups derives a
significant portion of its revenues from managed care contracts.

While the Company provides a centralized source of expertise in all aspects
of management, it believes that each physician group presents different
operational issues and challenges and therefore employs a system of
decentralized local management of each group. The Company generally retains the
group's existing administrative staff as ProMedCo employees, adding additional
management personnel as the group expands. The physicians in the group continue
to maintain full professional control of the practice of medicine, including the
hiring and termination of physicians and the setting of practice guidelines and
standards. The Company establishes for each group a policy council comprised
equally of physicians and ProMedCo representatives to determine the broad
strategic and operational policies of the group. See "-- Affiliation Structure."

The Company believes that sophisticated information systems are essential
to reducing the cost and improving the quality of healthcare. Basic practice
management systems have long been necessary for efficient

29
<PAGE> 31

patient scheduling and registration, billing, and collections. In the future,
the integration of financial, practice management, managed care, and clinical
systems is expected to be imperative for physician groups to remain competitive.
Clinical systems will provide information in the physician's workplace -- such
as case management, practice guidelines, and clinical pathways -- that will
facilitate the improvement of patient care. Electronic medical records will
automate the clinical workflow and allow access to patient records from multiple
sites, thus providing more effective clinical decision support and increasing
the quality of care. Systems that effectively measure clinical outcomes and
patient satisfaction are likely to become increasingly important as quality
becomes a more significant factor in maintaining and growing market share.

Rather than attempting to develop its own proprietary information systems,
ProMedCo believes it is more cost-effective, in light of the rapidly changing
healthcare and information technology environments, to utilize systems developed
and proven by independent companies. Although there are many systems currently
under development, none are yet available that, in the Company's opinion,
effectively address all of the evolving needs of physicians. The Company
initially works with its affiliated physician groups to maximize the performance
of the groups' existing systems. As MCOs increase their penetration of each
group's market, new or enhanced information systems will be implemented as
required. Ultimately, the Company expects to interface all of its affiliated
clinics with a central data repository for consolidation and evaluation of
operating, clinical, and financial data.

AFFILIATION STRUCTURE

ProMedCo utilizes an affiliation structure that fully aligns the interests
of the Company with those of its physician partners. Moreover, each physician
group retains professional autonomy and control over its medical practices
through continued ownership and governance of its professional corporation or
similar organization.

When a physician group has agreed to affiliate with ProMedCo, the Company
purchases the group's operating assets, excluding real estate, and the group
enters into a long-term service agreement with the Company in exchange for a
combination of Common Stock, cash, other securities of the Company, and/or
assumption of certain liabilities. The Company has utilized, and intends to
continue to utilize, Common Stock in payment of a significant portion of its
consideration for affiliated physician groups. The Company also grants stock
options to certain affiliated physicians and physician extenders, including
those subsequently recruited by the group. See "Management -- Stock Option
Plans."

The service agreement between the Company and the physician group typically
becomes effective at the beginning of the month of the acquisition of the
group's operating assets. Under the service agreement, the Company provides the
physician group with the facilities and equipment used in the group's medical
practice, assumes responsibility for the management of the operations of the
practice, and employs substantially all of the non-physician personnel utilized
by the group.

The income of both the Company and the physicians within each group is
dependent upon the operating income of the group. Under its service agreement,
the Company receives a fixed percentage (typically 15%) of group operating
income, which is defined as the group's net revenue less certain contractually
agreed-upon clinic expenses before physician salaries and other
physician-related expenses. In addition, the distribution to the Company is
increased or decreased by a percentage (typically a variable percentage ranging
from 25% to 50%, depending upon the amount of revenue) of the group's surplus or
deficit, respectively, in revenues under risk-sharing arrangements pursuant to
capitated managed care contracts. Thus, both the Company and the physicians have
incentives to improve the group's operating income and revenue surplus under
risk-sharing arrangements, and both share the risk that the group may have
limited or no operating income or a deficit under its risk-sharing arrangements.
Although the risk-sharing provisions currently do not have a material effect
upon any affiliated group's operating income, the Company expects such
provisions to become significant as managed care emerges in its groups' local
markets and its groups enter into managed care contracts. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."

The Company's service agreements are for a term of 40 years and generally
cannot be terminated by either party without cause, consisting primarily of
bankruptcy or material default. Upon expiration of the term of a service
agreement or in the event of termination, the physician group is required to
purchase the assets

30
<PAGE> 32

related to the practice, including intangible assets, then owned by the Company
at their current book value. Concurrently with the execution of a service
agreement, the physician group is required to enter into an employment contract
with each of its physicians, typically for an initial term of five years. The
employment contract provides for the repayment to ProMedCo of all or a portion
of the physician's share of the consideration paid by ProMedCo for the group's
operating assets and service agreement in the event of the physician's breach of
the contract. Each physician group also enters into an agreement not to compete
with the Company, and each physician within the group enters into an agreement
not to compete with the physician group during the period of his employment and
for a period of time thereafter, typically two years.

The policy council established for each group is comprised equally of
physicians and ProMedCo representatives. The council meets periodically to
consider and determine broad policies regarding strategic and operational
planning, marketing, arrangements with MCOs, and other major issues involved in
the group's operations. This ensures that the physicians within each group
retain a significant voice in the expansion and operation of their group, while
benefitting from ProMedCo's management experience and expertise.

COMPETITION

The physician practice management industry is highly competitive. The
Company is subject to significant competition both in affiliating with physician
groups and in seeking managed care contracts on behalf of its affiliated groups.
Its competitors include hospitals, managed care organizations, other physician
groups, and other physician practice management companies. Many of the Company's
competitors are larger, have substantially greater resources, and have longer
established relationships with purchasers of healthcare services than the
Company. There can be no assurance that the Company will be able to compete
effectively, that additional competitors will not enter the market, or that such
competition will not make it more difficult to enter into affiliations with
physician groups on terms beneficial to the Company.

GOVERNMENT REGULATION

As a participant in the healthcare industry, the Company's operations and
relationships are subject to extensive and increasing regulation by a number of
governmental entities at the federal and state levels. The Company believes its
operations are in material compliance with applicable laws. Because the
structure of its relationship with physician groups is relatively new, however,
many aspects of the Company's business operations have not been the subject of
state or federal regulatory interpretation. There can therefore be no assurance
that a review of the Company's or the affiliated physicians' business by courts
or regulatory authorities will not result in a determination that could
adversely affect the operations of the Company or that the healthcare regulatory
environment will not change so as to restrict the Company's or its affiliated
physician groups' existing operations or expansion.

The Company estimates that approximately 30% of the net physician group
revenue of the Company is derived from payments made by government-sponsored
healthcare programs (principally Medicare and Medicaid). As a result, any change
in government reimbursement regulations, policies, practices, interpretations,
or statutes could adversely affect the operations of the Company. There are also
state and federal civil and criminal statutes imposing substantial penalties,
including civil and criminal fines and imprisonment, on healthcare providers
that fraudulently or wrongfully bill governmental or other third-party payors
for healthcare services. Although the Company believes it is in material
compliance with such laws, there can be no assurance that its activities will
not be challenged or scrutinized by governmental authorities.

The laws of many states prohibit business corporations such as the Company
from practicing medicine and employing physicians to practice medicine. The
Company performs only non-medical administrative services, does not hold itself
out as a provider of medical services, and does not exercise influence or
control over the practice of medicine by the physicians with whom it is
affiliated. Accordingly, the Company believes

31
<PAGE> 33

it is not in violation of applicable state laws relating to the practice of
medicine. In addition to prohibiting the practice of medicine, numerous states
limit the ability of entities such as the Company to control physician revenues
or to receive portions of such revenues in excess of the value of services
provided. The Company believes that it is not in violation of applicable state
laws relating to the corporate practice of medicine or sharing of physician
revenues.

Certain provisions of the Social Security Act, commonly referred to as the
fraud and abuse provisions, prohibit the payment or receipt of any form of
remuneration in return for the referral of Medicare or Medicaid patients or
patient care opportunities, or in return for the recommendation, arrangement,
purchase, lease, or order of items or services that are covered by Medicare or
Medicaid programs. Many states have adopted similar prohibitions against
payments that are intended to induce referrals of Medicaid and other third-party
payor patients. Although the Company believes that neither it nor any of its
affiliated physician groups is in violation of any such prohibitions, its
operations do not fit within any of the existing or proposed federal safe
harbors and may therefore be subject to challenge.

Significant prohibitions against physician referrals were enacted by
Congress in the Omnibus Budget Reconciliation Act of 1993. Subject to certain
exemptions, a physician or a member of his or her immediate family is prohibited
by this legislation from referring Medicare or Medicaid patients to an entity
providing "designated health services" in which the physician has an ownership
or investment interest or with which the physician has entered into a
compensation arrangement. While the Company believes it and its affiliated
physician groups are in compliance with such legislation, future regulations
could require the Company to modify the form of its relationships with physician
groups. Some states have also enacted similar so-called "physician
self-referral" laws, and additional states may follow. The Company believes that
its practices fit within exemptions contained in such statutes. Nevertheless,
expansion of the operations of the Company to certain jurisdictions may require
structural and organizational modifications of the Company's relationships with
physician groups to comply with new or revised state statutes.

Because the Company's affiliated physician groups remain separate legal
entities, they may be deemed competitors subject to a range of antitrust laws
that prohibit anti-competitive conduct, including price fixing, concerted
refusals to deal, and division of market. The Company intends to comply with
such state and federal laws in its development of integrated healthcare delivery
networks, but there can be no assurance that a review of the Company's business
by courts or regulatory authorities will not result in a determination that
could adversely affect the operation of the Company and its affiliated physician
groups.

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

INSURANCE

The Company's affiliated physician groups maintain medical malpractice
liability insurance in the amount of $1 million per occurrence and $3 million in
the aggregate. The Company is named as the additional insured on the policies
maintained by each of its affiliated groups. The Company also maintains general
liability and umbrella coverage, including excess malpractice coverage of $5
million per occurrence and $5 million in the aggregate. The cost and
availability of such coverage has varied widely in recent years. While the
Company believes its insurance policies are adequate in amount and coverage for
its current operations, there can be no assurance that the coverage maintained
by the Company will be sufficient to cover all future claims or will continue to
be available in adequate amounts or at a reasonable cost.

EMPLOYEES

As of December 31, 1996, the Company employed approximately 475 people,
including those employed in its corporate office. The Company is not party to
any collective bargaining agreement with a labor union and

32
<PAGE> 34

considers its relations with its employees to be good. The Company does not
employ any of the physicians practicing in its affiliated groups.

PROPERTIES

The Company currently leases approximately 5,000 square feet of space at
801 Cherry Street in Fort Worth, Texas, where its headquarters are located,
under a lease terminable upon 60 days' notice by either party. The Company
believes these facilities are adequate for its current uses and that additional
space is available to accommodate its anticipated growth.

The Company leases, subleases, or occupies pursuant to its service
agreements the clinic facilities at which its affiliated physician groups
conduct their practices. The leases have varying terms ranging from
month-to-month to ten years. The Company anticipates that as the affiliated
practices continue to grow and add new services, expanded facilities will be
required.

LEGAL PROCEEDINGS

The Company is not a party to any pending legal proceeding. The Company's
affiliated physician groups are from time to time subject to medical malpractice
claims. Such claims, if successful, could result in substantial damage awards
that may exceed the limits of insurance coverage. The Company does not engage in
the practice of medicine or provide medical services, nor does it control the
practice of medicine by its affiliated physician groups or the compliance with
regulatory requirements directly applicable to such groups. Nevertheless, there
can be no assurance that the Company will not become subject to such claims in
the future.

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<PAGE> 35

MANAGEMENT

The following table sets forth certain information regarding the directors
and executive officers of the Company:

<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------------------------------- --- -------------------------------------------------
<S> <C> <C>
Richard E. Ragsdale(1)(2)(3)............... 53 Chairman and Director
H. Wayne Posey(1)(2)....................... 58 President, Chief Executive Officer, and Director
Richard R. D'Antoni........................ 49 Executive Vice President, Chief Operating
Officer, and Director
Deborah A. Johnson......................... 44 Senior Vice President -- Administration and
Secretary
Dale K. Edwards............................ 34 Vice President -- Development
R. Alan Gleghorn........................... 35 Vice President -- Operations
Robert D. Smith............................ 36 Vice President and Controller
Rick E. Weymier............................ 40 Vice President -- Managed Care
David T. Bailey, M.D.(4)................... 51 Director
E. Thomas Chaney(1)(2)(3).................. 54 Director
James F. Herd, M.D......................... 60 Director
Jack W. McCaslin(4)........................ 57 Director
</TABLE>

- ---------------
(1) Member of Executive Committee

(2) Member of Compensation Committee

(3) Member of Option Committee

(4) Member of Audit Committee

RICHARD E. RAGSDALE, a co-founder of the Company, has served as the
Chairman of its Board of Directors since its inception. He also has served as
the Chairman of the Board of Directors of Community Health Systems, Inc.
("CHS"), a non-urban hospital management company that he co-founded, since its
inception in 1985, and a director of The RehabCare Group, Inc., a publicly owned
rehabilitation services management company, since 1993. Prior to 1985, Mr.
Ragsdale was Senior Executive Vice President, Chief Financial Officer, and a
director of Republic Health Corporation, a hospital management company that he
co-founded in 1981. During 1980 and 1981, he was Vice President and Chief
Financial Officer of INA Healthcare Group, a wholly owned subsidiary of INA
Corporation, and from 1973 to 1980 he was a Vice President of Hospital
Affiliates International, Inc. ("HAI"), a publicly owned hospital management
company.

H. WAYNE POSEY, a co-founder of the Company, has been the President, Chief
Executive Officer, and a Director of the Company since its inception. Mr. Posey
was a healthcare consultant from 1975 until 1994, most recently as the principal
in charge of the healthcare services division of McCaslin & Company, P.C., a
public accounting and consulting company in Fort Worth, Texas. Mr. Posey was
employed by HAI from 1970 until 1975, holding the positions of Controller, Vice
President and Controller, and Senior Vice President of Operations, and he also
served on HAI's Board of Directors and Executive Committee. He serves as a
director of GMS Dental Group, Inc., a dental practice management company.

RICHARD R. D'ANTONI has served as Executive Vice President, Chief Operating
Officer, and a Director of the Company since February 1996. From 1990 to 1995,
Mr. D'Antoni served as President and Chief Executive Officer of Cellcor, Inc., a
publicly owned biotechnology company. Previously, he served as Executive Vice
President of Medical Care International, Inc., predecessor of Medical Care
America, Inc., a publicly owned operator of outpatient surgical centers, and
also was employed by Medical Networks, Inc., a physician practice management
company, where he was responsible for development and operations.

DEBORAH A. JOHNSON has served as Senior Vice President-Administration of
the Company since October 1996 and as Secretary since February 1997. From
February 1995 to October 1996 Ms. Johnson was, successively, Senior Vice
President -- Operations and Senior Vice President -- Administration of

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<PAGE> 36

MedPartners, Inc., a physician practice management company. From 1978 to 1994
Ms. Johnson served in various executive capacities with Humana Inc., an
integrated healthcare delivery company, Galen Health Care Inc., a hospital
management company, and Columbia/HCA Healthcare Corporation, an integrated
healthcare delivery company ("Columbia/HCA"). Her positions have included Legal
Counsel, Director of Strategic Planning, Vice President-Information Systems, and
Vice President-Internal Audit.

DALE K. EDWARDS has served as a Vice President of the Company with primary
responsibility for developing affiliations with physician groups since November
1994. From November 1993 to November 1994, Mr. Edwards was Vice President of
Physician Network Development with Columbia/HCA, and with Medical Care America,
Inc., prior to its acquisition by Columbia/HCA. From 1991 to 1993, Mr. Edwards
was Vice President of Managed Care and Regional Vice President of Sales of
Medical Care America. Previously, he was employed by HealthPlus, a regional HMO
in the State of Washington, as an Account Executive.

R. ALAN GLEGHORN has served as a Vice President of the Company with primary
responsibility for operations since January 1995. From 1993 to January 1995, Mr.
Gleghorn was Administrator and Chief Operating Officer of Family Healthcare
Associates, a 52-member physician medical group practice with nine locations in
the Dallas Fort Worth Metroplex. From September 1984 to August 1993, Mr.
Gleghorn served as Associate Administrator of a 56-member physician medical
group in Wichita Falls, Texas. During 1995, he was the President of the Texas
Medical Group Management Association. He is certified as a Medical Practice
Executive by the American College of Medical Practice Executives.

ROBERT D. SMITH has served as Vice President and Controller of the Company
since January 1997. From September 1996 to January 1997, Mr. Smith was
Controller of Rykoff-Sexton, Inc., a publicly owned foodservice distribution
company. He was Controller of US Foodservice, a privately owned foodservice
distribution company, from November 1993 until its merger with Rykoff-Sexton in
1996. Mr. Smith was employed by White Swan, Inc., a privately owned foodservice
distribution company, from July 1992 until it was acquired by US Foodservice in
1993. He joined White Swan as its Controller and subsequently served as Chief
Financial Officer and was a member of its board of directors. Prior to joining
White Swan, Mr. Smith was a Senior Manager with Ernst & Young.

RICK E. WEYMIER has served as Vice President of Managed Care of the Company
since March 1996. From April 1994 to March 1996, he was Chief Operating Officer
of Morgan Health Group, Inc., a 270-member primary care physician network. From
July 1993 until he joined Morgan, Mr. Weymier was Chief Operating Officer of
Southwest Orthopedic Institute, a 24-member physician orthopedic group. From May
1991 to July 1993, he served as Vice President-Finance of MH Healthcare, Inc., a
hospital-owned 60,000-member prepaid health plan. Mr. Weymier is certified as a
Medical Practice Executive by the American College of Medical Practice
Executives.

DAVID T. BAILEY, M.D. has served as a Director of the Company since January
1996. Dr. Bailey also serves as President of Abilene Diagnostic Clinic,
P.L.L.C., a ProMedCo affiliated physician group. Dr. Bailey is Board Certified
with the American Board of Family Practice and has been a full-time practicing
family physician since 1973. He has served as Chairman of the Department of
Family Practice both at Hendrick Medical Center and Abilene Regional Hospital in
Abilene. He also served as Chairman of the Board of Trustees at Abilene
Christian Schools from 1983 to 1994.

E. THOMAS CHANEY has served as President, Chief Executive Officer, and a
director of CHS, which he co-founded in 1985, since its inception. From 1981 to
1985, Mr. Chaney was Vice President of Finance of ARA Living Centers, an
operator of nursing homes. From 1978 to 1981, he was national director of the
U.S. healthcare practice of the accounting and consulting firm of KMG Main
Hurdman, and from 1971 to 1978, he held the positions of Controller and Chief
Accounting Officer with HAI. A co-founder of the Company, he has served as a
Director of the Company since its inception.

JAMES F. HERD, M.D. has been in private practice in obstetrics and
gynecology in Fort Worth, Texas since 1968. During 1994, he was the President of
the Tarrant County Medical Society. From 1986 to 1990, he served as Chief and
Vice Chief of Staff at Harris Methodist Hospital in Fort Worth. He has been a
Director of the Company since its inception.

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<PAGE> 37

JACK W. MCCASLIN has been the managing principal of McCaslin & Company,
P.C. and its predecessor, McCaslin, Wright & Greenwood, P.C. since 1983. From
1980 to 1982, he was Secretary and Treasurer of Burnett Oil Company, Inc. Prior
to joining Burnett Oil, he was a partner of the public accounting firm of
Deloitte Haskins & Sells in its Fort Worth office. Mr. McCaslin was the
President of the Fort Worth Chapter of Certified Public Accountants in 1993. He
has served as a Director of the Company since its inception.

The Company's Certificate of Incorporation and By-Laws provide that the
Board of Directors is divided into three classes of directors serving staggered
terms. The three classes of the Board of Directors are as follows: Class I,
comprised of Messrs. D'Antoni and Herd, who will serve until 1998; Class II,
comprised of Messrs. Bailey and McCaslin, who will serve until 1999; and Class
III, comprised of Messrs. Chaney, Posey, and Ragsdale, who will serve until
2000.

The Board of Directors has established an Executive Committee, a
Compensation Committee, an Option Committee, and an Audit Committee. The
Executive Committee exercises the powers of the Board of Directors in the
management of the business and affairs of the Company between Board meetings to
the extent permitted by applicable law. The Compensation Committee reviews on
behalf of, and makes recommendations to, the Board of Directors with respect to
the compensation of executive officers. The Option Committee administers the
Company's option plans and makes recommendations to the Board of Directors with
respect to the plans and the grant of options to persons eligible under the
plans. The Audit Committee's functions include recommending to the Board of
Directors the engagement of the Company's independent public accountants,
reviewing with such accountants the plans for and the results and scope of their
auditing engagement, and certain other matters relating to their services
provided to the Company, including the independence of such accountants.

EXECUTIVE COMPENSATION

The following table sets forth the compensation earned in the year ended
December 31, 1996 by the Chief Executive Officer and each of the most highly
compensated executive officers whose individual remuneration exceeded $100,000
for the fiscal year (the "Named Executive Officers").

SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
LONG TERM
COMPENSATION
ANNUAL COMPENSATION AWARDS
------------------------------------------ ------------
OTHER SECURITIES
NAME AND PRINCIPAL ANNUAL UNDERLYING ALL OTHER
POSITION SALARY($) BONUSES($) COMPENSATION($) OPTIONS COMPENSATION
- ------------------------------------- --------- ---------- --------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
H. Wayne Posey....................... $243,750 $62,218 $-- -- $23,668
President and CEO
Richard R. D'Antoni.................. 181,314 47,000 -- 480,000 89,918
Executive Vice President and COO
Dale K. Edwards...................... 148,333 43,176 -- -- 0
Vice President--Development
R. Alan Gleghorn..................... 120,000 35,700 -- -- 0
Vice President--Operations
</TABLE>

36
<PAGE> 38

OPTION GRANTS IN FISCAL YEAR 1996

<TABLE>
<CAPTION>
INDIVIDUAL GRANTS POTENTIAL REALIZABLE
------------------------------------------------------- VALUE AT ASSUMED
PERCENT OF ANNUAL RATES OF
NUMBER OF TOTAL OPTIONS STOCK PRICE
SHARES GRANTED TO APPRECIATION FOR
UNDERLYING EMPLOYEES EXERCISE OPTION TERM(2)
OPTIONS IN FISCAL YEAR PRICE EXPIRATION ------------------------
NAME GRANTED(1) 1996 PER SHARE DATE 5% 10%
- --------------------------------- ---------- -------------- --------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
H. Wayne Posey................... -- -- -- -- -- --
Richard R. D'Antoni.............. 480,000 52.4% $6.00 7/1/04 $4,359,532 $7,837,944
Dale K. Edwards.................. -- -- -- -- -- --
R. Alan Gleghorn................. -- -- -- -- -- --
</TABLE>

- ---------------
(1) Represents options to purchase Common Stock granted pursuant to the 1994
Stock Option Plan. Options generally are exercisable in 20% increments,
commencing one year after the date of grant.

(2) Based upon the estimated initial public offering price and on annual
appreciation of such value, through the expiration date of such options, at
the stated rates. These amounts represent assumed rates of appreciation only
and may not necessarily be achieved. Actual gains, if any, depend on the
future performance of the Common Stock, as well as the continued employment
of the Named Executive Officers for the full term of the options.

AGGREGATED OPTION EXERCISES IN 1996
AND OPTION VALUES AS OF DECEMBER 31, 1996

<TABLE>
<CAPTION>
NUMBER OF VALUE OF UNEXERCISED
NUMBER OF UNDERLYING UNEXERCISED IN-THE-MONEY
SHARES WARRANTS/OPTIONS AT WARRANTS/OPTIONS AT
ACQUIRED DECEMBER 31, 1996 DECEMBER 31, 1996(1)
ON VALUE ----------------------------- -----------------------------
NAME EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ----------------------------- --------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
H. Wayne Posey............... -- -- 277,109(2) 40,000 $ 2,540,954 $ 300,000
Richard R. D'Antoni.......... 20,000 $80,000 76,667 383,333 $ 306,668 $ 1,533,332
Dale K. Edwards.............. -- -- 32,000 88,000 $ 216,000 $ 484,000
R. Alan Gleghorn............. -- -- 20,800 83,200 $ 109,600 $ 438,400
</TABLE>

- ---------------
(1) Represents an amount equal to the difference between the estimated initial
public offering price of the Company's Common Stock minus the option
exercise price, multiplied by the number of unexercised options at December
31, 1996.

(2) Represents an option to purchase 155,000 Units, each consisting of one share
of Common Stock and a warrant to purchase .7878 of a share of Common Stock.

EMPLOYMENT AGREEMENTS

The Company has entered into employment agreements with Messrs. Posey,
D'Antoni, Edwards, Gleghorn, Smith, and Weymier and Ms. Johnson to serve in
their respective current positions. The agreement with Mr. Posey, which expires
June 30, 2001, provides for an initial annual base salary of $325,000, plus an
annual bonus based upon the achievement of certain operating goals. In the event
Mr. Posey's employment is terminated without cause or there is a "change in
control" of the Company (as defined in his employment agreement), Mr. Posey is
entitled to receive severance benefits equal to the present value of 36 months
of his salary, bonus, and certain other benefits.

Mr. D'Antoni's agreement, which expires February 9, 1998, currently
provides for a base salary of $260,000, subject to a minimum of 80% of the base
salary of the Chief Executive Officer of the Company. The agreement also
provides that Mr. D'Antoni may receive an annual bonus based upon the
achievement of certain operating goals. The Company has agreed to lend Mr.
D'Antoni up to $500,000 to finance the exercise of options held by him and, in
the event the Company's taxes are reduced because the options do not qualify as
incentive stock options, the amount of such reduction will be applied to the
repayment of any such loan and any excess will be paid to Mr. D'Antoni. In the
event Mr. D'Antoni's employment is terminated without cause or there is a change
in control of the Company, Mr. D'Antoni is entitled to receive his salary and
bonus through the later of February 9, 1998 or one year following such
termination or change in control.

37
<PAGE> 39

Ms. Johnson's agreement, which expires October 18, 1998, provides for an
initial annual base salary of $150,000 and an annual bonus based upon the
achievement of certain operating goals. In the event Ms. Johnson's employment is
terminated without cause or there is a change in control of the Company, Ms.
Johnson is entitled to receive her salary and bonus through the later of October
18, 1998 or one year following such termination or change in control.

The employment agreements with Mr. Edwards and Mr. Gleghorn automatically
renew in November of each year and provide for annual salaries of $160,000 and
$130,000, respectively. Messrs. Edwards' and Gleghorn's agreements provide for
the payment of the purchase price of shares of Common Stock (see "Certain
Transactions") over a two-year period under promissory notes that bear interest
at annual rates of 5.71% and 6.2%, respectively. The Company is entitled to
repurchase all or a portion of Mr. Edwards' and Mr. Gleghorn's stock for its
purchase price less any amounts paid to the Company in the event their
employment is terminated prior to certain specified dates. Mr. Smith's agreement
expires December 31, 1998 and provides for an annual salary of $120,000. Mr.
Weymier's agreement expires March 4, 1997 and provides for an annual salary of
$100,000. In addition to the provisions described above, the agreements with
Messrs. Edwards, Gleghorn, Smith, and Weymier provide for an annual bonus based
upon the achievement of certain operating goals. In addition, all of the
above-referenced agreements provide for an annual increase in salary at least
equal to the increase in the Consumer Price Index.

The Company has established the level of potential bonuses and related
operating goals for its officers for the six months ending December 31, 1996.
Depending upon whether the Company meets or the extent to which it exceeds
certain levels of net income, Messrs. Posey, D'Antoni, and Edwards and Ms.
Johnson will be entitled to receive bonuses of up to 60% of their base salaries
to be paid during the current year, and up to an additional 60% of their base
salaries to be paid in equal installments in January of each of the next three
years, and Messrs. Gleghorn and Weymier will be entitled to receive bonuses of
up to 45% of their base salaries to be paid during the current year, and up to
an additional 40% of their base salaries to be paid in equal installments in
January of each of the next three years.

DIRECTOR COMPENSATION

Members of the Board of Directors receive no cash compensation in their
capacities as Directors. Beginning January 1997, each Director not employed by
the Company will be granted options annually to purchase 2,000 shares of Common
Stock at an exercise price equal to the fair market value of such stock on the
date of grant, exercisable in annual increments of 20%. Each such Director who
is newly appointed or newly elected to the Board of Directors will in addition
be granted options to purchase 5,000 shares of Common Stock upon the same terms.
See "-- Stock Option Plans." All Directors are reimbursed for out-of-pocket
expenses incurred in attending meetings of the Board of Directors or committees
thereof and for other expenses incurred in their capacity as Directors.

The Company has entered into five-year consulting agreements with Messrs.
Ragsdale and Chaney, providing for annual compensation of $60,000 and $36,000,
respectively, under which Messrs. Ragsdale and Chaney provide strategic and
financial advisory services to the Company. Compensation under such agreements
is paid to Messrs. Ragsdale and Chaney in their capacities as consultants to the
Company and not as Directors. The Company believes that the terms of the
arrangements, which were determined through negotiation among the Company's
founders, are as favorable as might have been obtained from non-affiliated
persons.

CERTAIN TRANSACTIONS

In connection with its organization and initial funding, the Company issued
securities to certain of its officers and directors in private transactions. In
July 1994, the Company issued 80,000, 214,068, and 690,000 shares of Common
Stock at a purchase price of $0.05 per share to Messrs. Herd, McCaslin, and
Ragsdale, respectively, and 690,000 shares of Common Stock at a purchase price
of $0.03 to Mr. Posey. In connection with such issuances, the Company also
granted such persons warrants to purchase 63,020, 168,634, 543,556, and 543,556
shares of Common Stock, respectively, at an exercise price of $1.25 per share.
In

38
<PAGE> 40

October 1994, the Company issued 500,000, 76,000, and 500,000 shares of Common
Stock at a purchase price of $0.50 per share to Messrs. Chaney, McCaslin, and
Ragsdale, respectively. In connection with such issuances, the Company also
granted such persons warrants to purchase 393,882, 59,870, and 393,882 shares of
Common Stock, respectively, at an exercise price of $1.25 per share. In November
1994, the Company issued 40,000 shares of Common Stock at a purchase price of
$0.50 per share to Mr. Edwards. In January 1995, the Company issued 20,000
shares of Common Stock at a purchase price of $0.50 per share to Mr. Gleghorn.
In June 1995 the Company granted warrants in connection with the issuance of
notes payable to purchase 60,000 shares of Common Stock at an exercise price of
$2.50 per share to each of Messrs. Chaney and Ragsdale. The purchase prices for
the shares issued in July 1994 in connection with the initial capitalization of
the Company were determined by negotiation; those for the shares issued
subsequently were based upon estimates of the Company's value and prospects in
light of its development as of the date of each respective transaction. The
amounts and exercise prices of the warrants were determined by negotiations.

In December 1995 the Company issued an aggregate of 500,000 shares of
Series A Redeemable Convertible Preferred Stock at a purchase price of $6.00 per
share to Bessemer Venture Partners, a venture capital firm, and certain related
persons (collectively, "Bessemer"). In addition, the Company issued Bessemer
warrants to purchase 200,000 shares of Series A Redeemable Convertible Preferred
Stock at an exercise price of $6.00 per share for no additional consideration.
Upon consummation of the Offering, all of such shares of Series A Redeemable
Convertible Preferred Stock will be converted into shares of Common Stock on a
share-for-share basis, and such warrants will be converted into warrants to
purchase 200,000 shares of Common Stock.

Following the Company's affiliation with the Abilene group, David T.
Bailey, M.D., the president of the group, became a member of the Company's Board
of Directors. The Company and the group are parties to an asset purchase
agreement, an interim service agreement, and a service agreement. See
"Business -- Development and Operations -- Current Operations" and
"Business -- Affiliation Structure."

In June 1995, Messrs. Ragsdale and Chaney each advanced the Company
$150,000. The loans, which bore interest at an annual rate of 7.2%, were
forgiven in June 1996 in consideration of the exercise of warrants to purchase
60,000 shares of Common Stock at $2.50 per share. See Note 6 of Notes to
Consolidated Financial Statements.

In March 1996, the Company loaned $120,000 to Mr. D'Antoni for him to use
in consideration of his exercise of options to purchase 20,000 shares of Common
Stock at an exercise price of $6.00 per share. The loan bears interest at an
annual rate of 5.71% and matures on March 1, 2000.

STOCK OPTION PLANS

The Company has reserved 1,500,000 shares of Common Stock for issuance
under its 1994 Stock Option Plan and 2,100,000 shares of Common Stock for
issuance under its 1996 Stock Option Plan. Under the plans, which are
administered by the Option Committee of the Board of Directors, key employees,
including executive officers, may be granted incentive or non-qualified stock
options. In addition, under the 1996 Stock Option Plan, directors not employed
by the Company, physicians and physician extenders employed by the Company's
affiliated physician groups, and consultants and advisors to the Company may be
granted stock options. Options granted under the plans may not be exercised
until vested. Upon a change in control, the Option Committee has the authority
to accelerate the vesting of options granted under the 1996 Stock Option Plan.
The Option Committee is empowered under the plans to determine all terms and
provisions under which options are granted, including (i) the number of shares
subject to each option, (ii) when the option becomes exercisable, (iii) the
exercise price, and (iv) the duration of the option, which cannot exceed ten
years.

The Company has reserved 100,000 shares of Common Stock for issuance to
Directors. Beginning in January 1997, each Director not employed by the Company
will annually be granted options to purchase 2,000 shares of the Company's
Common Stock at an exercise price equal to the fair market value of such stock
on the date of grant, exercisable in annual increments of 20%. Each such
Director who is newly appointed or newly elected to the Board of Directors will
in addition be granted options to purchase 5,000 shares of Common Stock upon the
same terms.

39
<PAGE> 41

The Company has reserved 1,000,000 shares of Common Stock for issuance to
physicians and physician extenders employed by the Company's affiliated
physician groups who may be granted non-qualified options to purchase shares of
Common Stock.

As of December 31, 1996, options to purchase 1,064,400 shares of Common
Stock had been granted under the 1994 Stock Option Plan and none had been
granted under the 1996 Stock Option Plan.

EMPLOYEE STOCK PURCHASE PLAN

The Company has reserved 500,000 shares of Common Stock for purchase over
the next five years under its 1996 Employee Stock Purchase Plan. This plan
permits employees to purchase shares of Common Stock at a discount to market
value and be eligible to receive favorable income tax treatment of the discount
under section 423 of the Internal Revenue Code of 1986, as amended. Under this
plan, all employees working more than 20 hours weekly are eligible to purchase
reserved shares at a discount equal to 15% of market price. The market cost of
shares purchased by an employee under this plan may not exceed $25,000 annually.
As of December 31, 1996, no shares had been purchased under the Employee Stock
Purchase Plan.

40
<PAGE> 42

PRINCIPAL AND SELLING STOCKHOLDERS

The following table sets forth certain information regarding beneficial
ownership of the Common Stock as of December 31, 1996, and as adjusted to
reflect the sale of the shares offered hereby, by (i) each person who is known
by the Company to be the beneficial owner of more than 5% of the outstanding
Common Stock, (ii) each Director, (iii) each Named Executive Officer, and (iv)
all Directors and executive officers as a group. The Company believes that the
individuals listed below each have sole voting and investment power with respect
to such shares, except as otherwise indicated in the footnotes to the table.
Unless otherwise indicated below, the business address of each person listed is:
c/o ProMedCo Management Company 801 Cherry Street, Suite 1450, Fort Worth, Texas
76102.

<TABLE>
<CAPTION>
SHARES BENEFICIALLY
OWNED SHARES BENEFICIALLY
PRIOR TO OFFERING(1) OWNED AFTER OFFERING(1)
NUMBER AND ADDRESS ----------------------- -----------------------
OF BENEFICIAL OWNER NUMBER PERCENT NUMBER PERCENT
- -------------------------------------------- --------- ------- --------- -------
<S> <C> <C> <C> <C>
Richard E. Ragsdale......................... 2,026,540 35.6 2,026,540 20.9
H. Wayne Posey(2)........................... 1,510,665 26.8 1,510,665 15.7
E. Thomas Chaney............................ 1,114,780 21.1 1,114,780 12.0
Jack W. McCaslin............................ 518,572 10.3 518,572 5.7
Richard R. D'Antoni......................... 127,333 2.6 127,333 1.4
Dale K. Edwards............................. 72,000 1.5 72,000 *
R. Alan Gleghorn............................ 45,600 * 45,600 *
David T. Bailey, M.D........................ 1,000 * 1,000 *
James F. Herd, M.D.......................... 143,020 2.9 143,020 1.6
Bessemer Venture Partners III L.P.(3)....... 653,667 13.0 653,667 7.2
All Directors and executive officers
as a group (12 persons)................... 5,574,177 74.9 5,574,177 48.7
</TABLE>

- ---------------
* Less than 1%.

(1) Includes shares issuable upon the exercise of options that are exercisable
within 60 days of the date of this Prospectus. The shares underlying such
options are deemed to be outstanding for the purpose of computing the
percentage of outstanding stock owned by such persons individually and by
each group of which they are a member, but are not deemed to be outstanding
for the purpose of computing the percentage ownership of any other person.

(2) The Company and Mr. Posey, the Company's chief executive officer (the
"Selling Stockholder"), have granted to the Underwriters an over-allotment
option to purchase up to an additional 600,000 shares of Common Stock. To
the extent that the Underwriters exercise this option, the first 150,000
shares of Common Stock will be sold by the Selling Stockholder (in which
case he will own 1,360,665 shares, or 11.9% of the outstanding Common Stock
assuming the over-allotment option is exercised in full, after the
Offering) and the balance will be sold by the Company. See "Underwriting."

(3) This number includes (1) 18,837 shares held by a limited partnership of
which Deer III & Co., the general partner of Bessemer, is the general
partner and (2) 17,381 shares held by six individuals employed by, and two
subchapter S corporations affiliated with, employees of Bessemer Securities
Corporation, whose wholly-owned subsidiary is the limited partner of
Bessemer. Each of these individuals and S corporations is obligated to vote
his or its shares as directed by Bessemer. This number does not include
50,162 shares owned or controlled by partners of Deer III & Co., nor does
it include 3,500 shares owned by associates of Deer III & Co. Included in
the foregoing numbers are shares issuable upon conversion of Series A
Redeemable Convertible Preferred Stock which are issuable upon the exercise
of warrants that are presently exercisable at $6.00 per share in the
following amounts: Bessemer -- 173,654, the limited partnership -- 5,382,
the eight individuals -- 4,966, the partners of Deer III & Co., -- 14,332
and associates of Deer III & Co. -- 1,000. The Series A Redeemable
Convertible Preferred Stock will be converted into an equal number of
shares of Common Stock upon consummation of the Offering numbers of common
shares. The voting partners of the general partner of Bessemer, who may be
deemed the beneficial owners of the securities held by Bessemer, are
William T. Burgin, Robert H. Buescher, David J. Cowan, G. Felda Hardymon,
and Christopher F. O. Gabrieli. This number also includes options
exercisable within 60 days at $6.00 per share, expiring July 1, 2004, to
purchase the following shares: Bessemer, 9,117; the limited partnership of
which Deer III & Co. is the general partner, 283; and the six individuals
and two subchapter S corporations, 260. This number does not include 682 of
such shares issuable to partners of Deer III & Co. or to entities
controlled by such partners or 52 of such option shares issuable to
associates of Deer III & Co. These individuals disclaim beneficial
ownership of such shares except to the extent of their partnership
interest. The address of Bessemer Venture Partners is 1025 Old Country
Road, Suite 205, Westbury, New York 11590.

41
<PAGE> 43

DESCRIPTION OF CAPITAL STOCK

The following summary description is qualified by reference to the
Company's Certificate of Incorporation, which is filed as an exhibit to the
registration statement of which this Prospectus is a part (the "Registration
Statement"). Upon consummation of the Offering, the authorized capital stock of
the Company will consist of 50,000,000 shares of Common Stock, $0.01 par value
per share, of which 8,821,657 shares will be issued and outstanding, and
20,000,000 shares of Preferred Stock, $0.01 par value per share, none of which
will be issued and outstanding.

COMMON STOCK

Holders of Common Stock are entitled to one vote for each share held of
record on all matters to be voted on by the stockholders. There is no cumulative
voting with respect to the election of Directors, with the result that the
holders of a majority of the shares of Common Stock voting for the election of
Directors can elect all of the Directors then up for election. The holders of
Common Stock are entitled to receive dividends when, as, and if declared by the
Board of Directors out of funds legally available therefor. In the event of
liquidation, dissolution, or winding up of the Company, the holders of Common
Stock are entitled to share ratably in all assets remaining which are available
for distribution to them after payment of liabilities and after provision has
been made for each class of stock having preference over the Common Stock.
Holders of shares of Common Stock, as such, have no conversion, preemptive, or
other subscription rights, and there are no redemption provisions applicable to
the Common Stock. All of the outstanding shares of Common Stock are fully paid
and nonassessable.

PREFERRED STOCK

The Board of Directors is authorized, without further approval or action by
the stockholders, to issue shares of Preferred Stock in one or more series and
to determine the rights, preferences, privileges, and restrictions thereof,
including dividend rights, conversion rights, voting rights, terms of
redemption, liquidation preferences, sinking fund terms, and number of shares
constituting any series of Preferred Stock or the designation of such series.

The rights of the holders of Common Stock will generally be subject to the
prior rights of the holders of any outstanding shares of Preferred Stock with
respect to dividends, liquidation preferences, and other matters. Among other
things, the Preferred Stock could be issued by the Company to raise capital or
finance acquisitions. The Preferred Stock could have certain anti-takeover
effects under certain circumstances. The issuance of shares of Preferred Stock
could enable the Board of Directors to render more difficult or discourage an
attempt to obtain control of the Company by means of a merger, tender offer, or
other business combination transaction directed at the Company by, among other
things, placing shares of Preferred Stock with investors who might align
themselves with the Board of Directors, issuing new shares to dilute stock
ownership of a person or entity seeking control of the Company, or creating a
class or series of Preferred Stock with class voting rights.

The Company has no current plans to issue any shares of its Preferred
Stock.

DELAWARE ANTI-TAKEOVER LAW

The Company is subject to the provisions of Section 203 of the Delaware
General Corporation Law (the "DGCL"). Section 203 provides, with certain
exceptions, that a Delaware corporation may not engage in certain business
combinations with a person or affiliate or associate of such person who is an
"interested stockholder" for a period of three years from the date such person
became an interested stockholder unless: (i) the transaction resulting in the
acquiring person's becoming an interested stockholder, or the business
combination, is approved by the board of directors of the corporation before the
person becomes an interested stockholder; (ii) the interested stockholder
acquires 85% or more of the outstanding voting stock of the corporation in the
same transaction that makes it an interested stockholder (excluding shares owned
by directors who are also officers, and excluding certain employee stock option
plans); and (iii) on or after the date the person becomes an interested
stockholder, the business combination is approved by the corporation's

42
<PAGE> 44

board of directors and by the holders of at least two-thirds of the
corporation's outstanding voting stock at an annual or special meeting,
excluding shares owned by the interested stockholder. Except as otherwise
specified in Section 203, an "interested stockholder" is defined as (a) any
person that is the owner of 15% or more of the outstanding voting stock of the
corporation, (b) any person that is an affiliate or associate of the corporation
and was the owner of 15% or more of the outstanding voting stock of the
corporation at any time within the three-year period immediately prior to the
date on which it is sought to be determined whether such person is an interested
stockholder, or (c) the affiliates and associates of any such person. By
restricting the ability of the Company to engage in business combinations with
an interested person, the application of Section 203 to the Company may provide
a barrier to hostile or unwanted takeovers. Under Delaware law, the Company
could have opted out of Section 203 but elected to be subject to its provisions.

CERTAIN PROVISIONS OF THE COMPANY'S CERTIFICATE OF INCORPORATION AND BY-LAWS

Business Combinations. In addition to the requirements of Section 203, the
Company's Certificate of Incorporation requires the affirmative vote of at least
75% of the outstanding shares of Common Stock held by stockholders other than a
beneficial owner of 10% or more of the Common Stock (a "Related Person") for any
merger or certain other business combinations (a "Business Combination") with a
Related Person unless the Business Combination is approved by at least 75% of
the Company's Board of Directors. If the requisite approval of the Board is
obtained with respect to a Business Combination, only a majority vote of the
Common Stock is required, or, for certain transactions, no stockholder vote is
necessary unless the Business Combination is subject to Section 203 as described
above. Therefore, depending upon the circumstances, this provision will require
a 75% stockholder vote for a Business Combination in cases in which either a
majority vote or no vote of stockholders is otherwise required under Delaware
law.

Classified Board of Directors. The Company's Certificate of Incorporation
and By-Laws provide that the Board is to be divided into three classes of
directors serving staggered terms. One class of directors will be elected at
each annual meeting of stockholders for a three-year term. See
"Management -- Directors and Executive Officers." Thus, at least two annual
meetings of stockholders, instead of one, generally will be required to change
the majority of the Board of Directors. Directors can be removed from office
only for cause and only by the affirmative vote of at least 75% of the then
outstanding shares of capital stock entitled to vote generally in the election
of Directors, voting as a single class. Vacancies on the Board of Directors may
be filled only by the remaining Directors and not the stockholders. The
foregoing provisions may have the effect of making it more difficult to acquire
control of the Company by means of a hostile tender offer, open market
purchases, a proxy contest, or otherwise. See "Management."

Requirements for Advance Notification of Stockholder Nominations and
Proposals. The Company's By-Laws require 60 to 90 days' notice to the Company
with regard to stockholder proposals and the nomination, other than by or at the
direction of the Board of Directors or a committee thereof, of candidates for
election as directors. Such notice must provide specified information, including
information regarding the ownership of Common Stock by the person giving the
notice, information regarding the proposal or the nominees, and information
regarding the interest of the proponent in the proposal or the nominations.

Special Meetings of Stockholders; Actions by Written Consent. The
Company's Certificate of Incorporation and By-Laws provide that special meetings
of stockholders of the Company may only be called by a majority of the then
authorized number of Directors. This provision precludes stockholders from
calling a special meeting and taking actions opposed by the Board of Directors.
The Certificate of Incorporation also provides that stockholder action cannot be
taken by written consent in lieu of a meeting.

Limitation of Director Liability. The Company's Certificate of
Incorporation limits the liability of Directors to the Company and its
stockholders to the fullest extent permitted by Delaware law. Specifically,
under current Delaware law, a director will not be personally liable for
monetary damages for breach of the director's fiduciary duty as a director,
except liability (i) for a breach of the director's duty of loyalty to the
Company or its stockholders, (ii) for acts or omissions by a director not in
good faith or which involve intentional misconduct or a knowing violation of
law, (iii) for liability arising under Section 174 of the DGCL (relating to the
declaration of dividends and purchase or redemption of shares in violation of
the DGCL) or

43
<PAGE> 45

(iv) for any transaction from which the director derived an improper personal
benefit. The inclusion of this provision in the Company's Certificate of
Incorporation may have the effect of reducing the likelihood of derivative
litigation against directors and may discourage or deter stockholders or
management from bringing a lawsuit against directors for breach of their duty of
care. This limitation on monetary liability does not alter the duties of
Directors, affect the availability of equitable relief, or affect the
availability of monetary relief predicated on claims based upon federal law,
including the federal securities laws.

Supermajority Provisions. The Company's Certificate of Incorporation
provides that the vote of the Board of Directors or the affirmative vote of at
least 75% of the then outstanding shares of capital stock entitled to vote
generally in the election of Directors, voting as a single class, is required to
amend, repeal, or alter any of the Company's By-Laws or the foregoing provisions
contained in the Company's Certificate of Incorporation.

RIGHTS PLAN

Prior to the consummation of the Offering, there will be a dividend
distribution of one right (a "Right") for each outstanding share of Common Stock
of the Company to stockholders of record at the close of business on the date
that the Offering is completed (the "Record Date"). The Board of Directors will
further authorize the issuance of one right for each share of Common Stock that
shall become outstanding between the Record Date and the earlier of the Final
Expiration Date (as defined herein) and the date the Rights are redeemed. Except
as described below, each Right, when exercisable, entitles the registered holder
thereof to purchase from the Company one one-thousandth of a share of Series B
Junior Participating Preferred Stock, par value $0.01 per share (the "Junior
Preferred Shares"), at a price to be approved by the Board of Directors (the
"Purchase Price"), subject to adjustment. Therefore, the dividend will have no
initial value and no impact on the financial statements of the Company. The
description and terms of the Rights are set forth in the Rights Agreement (the
"Rights Agreement") between the Company and Harris Trust and Savings Bank, as
Rights Agent. A copy of a form of the Rights Agreement has been filed with the
Commission as an exhibit to the registration statement of which this Prospectus
is a part. This summary of certain provisions of the Rights Agreement and the
Rights does not purport to be complete and is qualified in its entirety by
reference to the Rights Agreement.

Initially, the Rights will be evidenced by Common Stock certificates
representing shares then outstanding, and no separate certificates evidencing
the Rights will be distributed. Until the earlier to occur of (i) 10 days
following a public announcement that a person or group of affiliated or
associated persons, with certain limited exceptions (an "Acquiring Person"), has
acquired, or obtained the right to acquire, beneficial ownership of capital
stock of the Company representing 15% or more of the voting power of the Company
(the "Shares Acquisition Date") or (ii) 10 business days (or such later date as
may be determined by action of the Board of Directors prior to the time that any
person becomes an Acquiring Person) following the commencement of (or a public
announcement of an intention to make) a tender or exchange offer if, upon
consummation thereof, such person or group would be the beneficial owner of
capital stock of the Company representing 15% or more of the voting power of the
Company (such date being called the "Distribution Date"), the Rights will be
evidenced by the Common Stock certificates and not by separate certificates.

The Rights Agreement provides that, until the Distribution Date, the Rights
will be transferred with, and only with, the Common Stock. Until the
Distribution Date (or earlier redemption, expiration, or termination of the
Rights), the transfer of any Common Stock certificates will also constitute the
transfer of the Rights associated with the Common Stock represented by such
certificates. As soon as practicable following the Distribution Date, separate
certificates evidencing the Rights ("Right Certificates") will be mailed to
holders of record of the Common Stock as of the close of business on the
Distribution Date and, thereafter, such separate Right Certificates alone will
evidence the Rights.

The Rights are not exercisable until the Distribution Date, and will expire
upon the earliest of (i) the close of business on the tenth anniversary of the
date of the Rights Agreement (the "Final Expiration Date"), (ii) the redemption
of the Rights by the Company as described below or (iii) the exchange of all
Rights for Junior Preferred Shares as described below.

44
<PAGE> 46

A person will not become an Acquiring Person under the Rights Agreement if
such person is the Company or an affiliate of the Company or obtained 15% or
more of the voting power of the Company through (i) an issuance of Common Stock
by the Company directly to such person (for example, in a private placement or
an acquisition by the Company in which Common Stock is used as consideration) or
(ii) a repurchase by the Company of Common Stock.

In the event that any person or group becomes an Acquiring Person, each
holder of a Right will thereafter have the right to receive, upon exercise at
the then current exercise price of the Right, shares of Common Stock (or, in
certain circumstances, cash, property, or other securities of the Company)
having a value equal to two times the exercise price of the Right.

In the event that, at any time following a Shares Acquisition Date, the
Company is acquired by the Acquiring Person in a merger or other business
combination transaction or 50% or more of the Company's assets or earning power
are sold to the Acquiring Person, proper provision will be made so that each
holder of a Right will thereafter have the right to receive, upon exercise at
the then current exercise price of the Right, common stock of the acquiring or
surviving company having a value equal to two times the exercise price of the
Right.

Notwithstanding the foregoing, following the occurrence of any of the
events set forth in the preceding two paragraphs (the "Triggering Events"), any
Rights that are, or (under certain circumstances specified in the Rights
Agreement) were, beneficially owned by any Acquiring Person will immediately
become null and void.

The Purchase Price payable, the number of Junior Preferred Shares, shares
of Common Stock or other securities or property issuable upon exercise of the
Rights, and the number of Rights outstanding, are subject to adjustment from
time to time to prevent dilution, among other circumstances, in the event of a
stock dividend on, or a subdivision, split, reverse split, combination,
consolidation, or reclassification of, the Junior Preferred Shares or the Common
Stock.

With certain exceptions, no adjustment to the Purchase Price will be
required until cumulative adjustments require an adjustment of at least 1% to
the Purchase Price. Upon the exercise of a Right, the Company will not be
required to issue fractional Junior Preferred Shares or fractional shares of
Common Stock (other than fractions in multiples of one one-hundredth of a Junior
Preferred Share) and, in lieu thereof, an adjustment in cash may be made based
on the market price of the Junior Preferred Shares or Common Stock on the last
trading date prior to the date of exercise.

At any time after a person or group becomes an Acquiring Person and prior
to the acquisition by such person or group of capital stock of the Company
representing 50% or more of the voting power of the Company, the Board of
Directors may exchange the Rights (other than Rights owned by such person or
group, which will become void), in whole or in part, at an exchange ratio of one
share of Common Stock per Right (subject to adjustment).

At any time after the date of the Rights Agreement until the earlier of the
time that a person becomes an Acquiring Person or the Final Expiration Date, the
Board of Directors may redeem the Rights in whole, but not in part, at a price
of $.01 per Right (the "Redemption Price"), which may (at the option of the
Company) be paid in cash, shares of Common Stock, or other consideration deemed
appropriate by the Board of Directors. Upon the effectiveness of any action of
the Board of Directors ordering redemption of the Rights, the Rights will
terminate and the only right of the holders of Rights will be to receive the
Redemption Price.

Until a Right is exercised, the holder thereof, as such, will have no
rights as a stockholder of the Company, including, without limitation, the right
to vote or to receive dividends.

The provisions of the Rights Agreement may be amended by the Company,
except that any amendment adopted after the time that a person becomes an
Acquiring Person may not adversely affect the interests of holders of Rights.

Upon consummation of the Offering, each outstanding share of Common Stock
will receive one Right.

The Rights have certain anti-takeover effects. The Rights will cause
substantial dilution to a person or group that attempts to acquire the Company
without conditioning the offer on the Rights being redeemed or a substantial
number of Rights being acquired by the Acquiring Person. Under certain
circumstances the Rights

45
<PAGE> 47

beneficially owned by such a person or group may become void. The Rights should
not interfere with any merger or other business combination approved by the
Board of Directors because, if the Rights would become exercisable as a result
of such merger or business combination, the Board of Directors may, at its
option, at any time prior to the time that any person or entity becomes an
Acquiring Person, redeem all (but not less than all) of the then outstanding
Rights at the Redemption Price.

TRANSFER AGENT AND REGISTRAR

The transfer agent and registrar for the Common Stock is Harris Trust and
Savings Bank, Chicago, Illinois.

46
<PAGE> 48

SHARES ELIGIBLE FOR FUTURE SALE

Prior to this Offering, there has been no public market for the Common
Stock. Sales of substantial amounts of shares of Common Stock in the public
market could adversely affect market prices of the shares and make it more
difficult for the Company to sell equity securities in the future at a time and
price that it deems appropriate.

The 4,000,000 shares sold in this Offering (4,600,000 shares if the
Underwriters' over-allotment option is exercised in full) will be freely
tradeable without restriction or further registration under the Securities Act
of 1933, as amended (the "Securities Act"), except for shares purchased by
"affiliates" of the Company, which will be subject to the resale limitations of
Rule 144 under the Securities Act. As defined in Rule 144, an affiliate of an
issuer is a person who, directly or indirectly, through one or more
intermediaries, controls, is controlled by, or is under common control with,
such issuer, and generally includes members of the Board of Directors and senior
management. The remaining 4,821,657 shares of Common Stock that will be
outstanding immediately following this Offering consist of shares issued in
private transactions (the "Restricted Shares").

The Restricted Shares, together with 4,030,525 shares of Common Stock that
may be acquired upon exercise of presently outstanding options and warrants and
200,030 shares of Common Stock that may be issued upon conversion of presently
outstanding convertible subordinated notes, may not be sold except in compliance
with the registration requirements of the Securities Act or pursuant to an
exemption from registration, such as the exemption provided by Rule 144. The
Restricted Shares held by current stockholders will become eligible for sale,
subject to the restrictions of Rule 144, commencing 90 days after the date of
this Prospectus. In general, Rule 144 allows a stockholder (including persons
who may be deemed "affiliates" of the Company under Rule 144) who has
beneficially owned Restricted Shares for at least two years (one year beginning
April 29, 1997) to sell a number of shares within any three-month period that
does not exceed the greater of (i) 1% of the then outstanding shares of Common
Stock (approximately 88,217 shares after giving effect to this Offering) or (ii)
the average weekly trading volume in the Common Stock during the four calendar
weeks immediately preceding such sale. Sales under Rule 144 are also subject to
certain requirements as to the manner and notice of sale and the availability of
public information concerning the Company. A stockholder who is not an
"affiliate" of the Company at any time during the 90 days immediately preceding
a sale, and who has beneficially owned his or her shares for at least three
years (as computed under Rule 144), is entitled to sell such shares under Rule
144 without regard to the volume and manner of sale limitations described above.

The Company and its Directors, officers, and certain stockholders, who
beneficially own in the aggregate 6,705,293 shares of Common Stock, have agreed
not to offer, sell, or otherwise dispose of any of their Common Stock for a
period of 180 days after the date of this Prospectus without prior written
consent of Piper Jaffray Inc. See "Underwriting."

Certain holders have demand and "piggyback" registration rights with
respect to 1,238,394 shares of Common Stock held by them or issuable to them,
which rights allow them to require the Company, subject to certain conditions,
to file a registration statement covering the sale of such shares after the
expiration of the 180-day lock up period. In addition, the Company intends to
file a registration statement covering approximately 3,600,000 shares of Common
Stock reserved for issuance under the Company's stock option plans.

47
<PAGE> 49

UNDERWRITING

The Company has entered into a Purchase Agreement (the "Purchase
Agreement") with the underwriters listed in the table below (the
"Underwriters"), for whom Piper Jaffray Inc., Robertson, Stephens & Company LLC,
and Cowen & Company are acting as representatives (the "Representatives").
Subject to the terms and conditions set forth in the Purchase Agreement, the
Company has agreed to sell to the Underwriters, and each of the Underwriters has
severally agreed to purchase, the number of shares of Common Stock set forth
opposite each Underwriter's name in the table below:

<TABLE>
<CAPTION>
NUMBER OF
NAME SHARES
------------------------------------------------------------------ ---------
<S> <C>
Piper Jaffray Inc.................................................
Robertson, Stephens & Company LLC.................................
Cowen & Company...................................................

---------
Total........................................................
=========
</TABLE>

Subject to the terms and conditions of the Purchase Agreement, the
Underwriters have agreed to purchase all of the Common Stock being sold pursuant
to the Purchase Agreement, if any is purchased (excluding shares covered by the
over-allotment option granted therein). In the event of a default by any
Underwriter, the Purchase Agreement provides that in certain circumstances
purchase commitments of the nondefaulting Underwriters may be increased or the
Purchase Agreement may be terminated.

The Representatives have advised the Company that the Underwriters propose
to offer Common Stock directly to the public at the initial public offering
price set forth on the cover page of this Prospectus and to certain dealers at
such price less a concession of not more than $ per share. Additionally, the
Underwriters may allow, and such dealers may reallow, a concession not in excess
of $ per share to certain other dealers. After the Offering, the initial
public offering price and other selling terms may be changed by the
Underwriters.

The Company and the Selling Stockholder have granted to the Underwriters an
option, exercisable by the Representatives within 30 days after the date of the
Purchase Agreement, to purchase up to an additional 600,000 shares of Common
Stock at the same price per share to be paid by the Underwriters for the other
shares offered hereby. If the Underwriters purchase any of such additional
shares pursuant to this option, each Underwriter will be committed to purchase
such additional shares in approximately the same proportion as set forth in the
table above. The Underwriters may exercise the option only for the purpose of
covering over-allotments, if any, made in connection with the distribution of
the Common Stock offered hereby. To the extent that the Underwriters exercise
this option, the first 150,000 shares of Common Stock will be sold by the
Selling Stockholder and the balance will be sold by the Company.

The Representatives have informed the Company that neither they, nor any
other member of the National Association of Securities Dealers, Inc. (the
"NASD") participating in the Offering, will make sales of shares of Common Stock
offered hereby to accounts over which they exercise discretionary authority
without the prior specific written approval of the customer.

48
<PAGE> 50

The Offering of the shares of Common Stock is made for delivery when, as,
and if accepted by the Underwriters and subject to prior sale and to withdrawal,
cancellation, or modification of the Offering without notice. The Underwriters
reserve the right to reject an order for the purchase of shares in whole or in
part.

The officers and Directors of the Company and certain other stockholders
designated by the Representatives, who will beneficially own in the aggregate
6,705,293 shares of Common Stock upon completion of the Offering, have agreed
that they will not sell, offer to sell, distribute, or otherwise dispose of any
shares of Common Stock owned by them for a period of 180 days after the date of
this Prospectus, without the prior written consent of Piper Jaffray Inc. See
"Shares Eligible For Future Sale." The Company has agreed that it will not,
without the prior written consent of Piper Jaffray Inc., offer, sell, issue, or
otherwise dispose of any shares of Common Stock, options, or warrants to acquire
shares of Common Stock or securities exchangeable for or convertible into shares
of Common Stock during the 180-day period following the date of this Prospectus,
except that the Company may issue shares upon the exercise of options and
warrants granted prior to the date hereof, may grant additional options under
its stock option plans, and may issue Common Stock in connection with
affiliation with new physician groups.

Prior to the Offering, there has been no public market for the Common
Stock. The initial public offering price for the Common Stock has been
determined by negotiation among the Company and the Representatives. Among the
factors considered in determining the initial public offering price were
prevailing market and economic conditions, estimates of the business potential
and prospects of the Company, the present state of the Company's business
operations, an assessment of the Company's management, and the consideration of
the above factors in relation to the market valuation of companies in related
businesses. See "Risk Factors -- No Prior Public Market; Possible Volatility of
Price."

The Company has agreed to indemnify the Underwriters and their controlling
persons against certain liabilities, including liabilities under the Securities
Act, and to contribute to payments the Underwriters may be required to make in
respect thereof.

In order to facilitate the Offering, the Underwriters may engage in
transactions that stabilize, maintain or otherwise affect the price of the
Common Stock. Specifically, the Underwriters may over-allot in connection with
the Offering, creating a short position in the Common Stock for their own
account. In addition, to cover over-allotments or to stabilize the price of the
Common Stock, the Underwriters may bid for, and purchase, shares of Common Stock
in the open market. Finally, the underwriting syndicate may reclaim selling
concessions allowed to an underwriter or a dealer for distributing the Common
Stock in the Offering, if the syndicate purchases previously distributed Common
Stock in transactions to cover syndicate short positions, in stabilization
transactions or otherwise. Any of these activities may stabilize the market
price of the Common Stock above independent market levels. The Underwriters are
not required to engage in these activities, and may end any of these activities
at any time.

LEGAL MATTERS

Certain legal matters in connection with the Offering are being passed upon
by Dyer Ellis & Joseph PC, Washington, D.C., special counsel to the Company, and
for the Underwriters by Vinson & Elkins L.L.P., Dallas, Texas.

EXPERTS

The consolidated financial statements and schedule of the Company as of
December 31, 1995 and 1996, and for the period from inception (July 1, 1994) to
December 31, 1994, and for the years ended December 31, 1995 and 1996, included
in this Prospectus and elsewhere in the Registration Statement have been audited
by Arthur Andersen LLP, independent public accountants, as indicated in their
reports with respect thereto, and are included herein in reliance upon the
authority of said firm as experts in giving said reports.

The financial statements of North Texas Medical Surgical, P.A., Cullman
Family Practice, P.C., Family Medical Clinic, P.C., Morgan-Haugh, P.S.C., King's
Daughters Clinic P.A., Western Medical Management,

49
<PAGE> 51

Inc., and the combined financial statements of HealthFirst Services, Inc. and
Tarrant Family Practice, P.A. and Abilene Diagnostic Clinic Practices included
in this Prospectus have been audited by Arthur Andersen LLP, independent public
accountants, as indicated in their reports with respect thereto, and are
included herein in reliance upon the authority of said firm as experts in giving
said reports.

ADDITIONAL INFORMATION

A Registration Statement on Form S-1 including amendments thereto relating
to the Common Stock offered hereby has been filed by the Company with the
Securities and Exchange Commission, Washington, D.C. This Prospectus does not
contain all of the information set forth in the Registration Statement and the
exhibits and schedules thereto. Statements contained in this Prospectus as to
the contents of any contract or other document referred to are not necessarily
complete and in each instance reference is made to the copy of such contract or
other document filed as an exhibit to the Registration Statement, each such
statement being qualified by such reference. For further information with
respect to the Company and the Common Stock offered hereby, reference is made to
the Registration Statement, exhibits, and schedules. A copy of the Registration
Statement may be inspected without charge at the Securities and Exchange
Commission's principal office located at 450 Fifth Street, N.W., Room 1024,
Washington, D.C. 20549, the New York Regional Office located at 7 World Trade
Center, Suite 1300, New York, New York 10048, and the Chicago Regional Office
located at Northwestern Atrium Center, 500 West Madison Street, Chicago,
Illinois 60661-2511 and copies of all or any part thereof may be obtained from
the Public Reference Section of the Securities and Exchange Commission upon the
payment of certain fees prescribed by the Securities and Exchange Commission.
The Registration Statement may also be obtained from the Web site that the
Commission maintains at http:/www.sec.gov.

The Company intends to furnish its stockholders with annual reports
containing audited financial statements certified by an independent public
accounting firm and quarterly reports for each of the first three quarters of
each fiscal year containing unaudited financial information.

50
<PAGE> 52

INDEX TO FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PROMEDCO MANAGEMENT COMPANY AND SUBSIDIARIES
Report of Independent Public Accountants........................................ F-3
Consolidated Balance Sheets as of December 31, 1995 and 1996.................... F-4
Consolidated Statements of Operations for the period from inception (July 1,
1994) to December 31, 1994, and the years ended December 31, 1995, and 1996.... F-6
Consolidated Statements of Stockholders' Equity for the period from inception
(July 1, 1994) to December 31, 1994, and the years ended December 31, 1995, and
1996........................................................................... F-7
Consolidated Statements of Cash Flows for the period from inception (July 1,
1994) to December 31, 1994, and the years ended December 31, 1995, and 1996.... F- 8
Notes to Consolidated Financial Statements...................................... F-9
NORTH TEXAS MEDICAL SURGICAL, P.A.
Report of Independent Public Accountants........................................ F-21
Balance Sheets as of December 31, 1994, and June 30, 1995....................... F-22
Statements of Operations for the years ended December 31, 1993 and 1994, and the
six months ended June 30, 1995................................................. F-23
Statements of Stockholders' Equity for the years ended December 31, 1993 and
1994, and the six months ended June 30, 1995................................... F-24
Statements of Cash Flows for the years ended December 31, 1993 and 1994, and the
six months ended June 30, 1995................................................. F-25
Notes to Financial Statements................................................... F-26

CULLMAN FAMILY PRACTICE, P.C.
Report of Independent Public Accountants........................................ F-28
Balance Sheets as of December 31, 1994 and 1995................................. F-29
Statements of Operations for the years ended December 31, 1994 and 1995, the
period from January 1, 1995 to February 28, 1995 (unaudited), and the period
from January 1, 1996 to March 6, 1996 (unaudited).............................. F-30
Statements of Stockholders' Equity for the years ended December 31, 1994 and
1995........................................................................... F-31
Statements of Cash Flows for the years ended December 31, 1994 and 1995......... F-32
Notes to Financial Statements................................................... F-33

FAMILY MEDICAL CLINIC, P.C.
Report of Independent Public Accountants........................................ F-36
Balance Sheets as of December 31, 1994 and 1995................................. F-37
Statements of Operations for the years ended December 31, 1994 and 1995, the
period from January 1, 1995, to February 28, 1995 (unaudited), and the period
from January 1, 1996 to March 6, 1996 (unaudited).............................. F-38
Statements of Stockholders' Equity for the years ended December 31, 1994 and
1995........................................................................... F-39
Statements of Cash Flows for the years ended December 31, 1994 and 1995......... F-40
Notes to Financial Statements................................................... F-41

MORGAN-HAUGH, P.S.C.
Report of Independent Public Accountants........................................ F-44
Balance Sheets as of December 31, 1994 and 1995................................. F-45
Statement of Operations for the years ended December 31, 1993, 1994, and 1995,
the period from January 1, 1995 to March 31, 1995 (unaudited), and the period
from January 1, 1996 to March 31, 1996 (unaudited)............................. F-46
Statements of Stockholders' Equity for the years ended December 31, 1993, 1994,
and 1995....................................................................... F-47
Statements of Cash Flows for the years ended December 31, 1993, 1994, and
1995........................................................................... F-48
Notes to Financial Statements................................................... F-49
</TABLE>

F-1
<PAGE> 53

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
HEALTHFIRST SERVICES, INC. AND TARRANT FAMILY PRACTICE, P.A.
Report of Independent Public Accountants........................................ F-54
Combined Balance Sheets as of December 31, 1994 and 1995........................ F-55
Combined Statements of Operations for the years ended December 31, 1993, 1994,
and 1995, the period from January 1, 1995 to May 31, 1995 (unaudited), and the
period from January 1, 1996 to May 31, 1996 (unaudited)........................ F-56
Combined Statements of Owners' Equity for the years ended December 31, 1993,
1994,
and 1995...................................................................... F-57
Combined Statements of Cash Flows for the years ended December 31, 1993, 1994,
and 1995...................................................................... F-58
Notes to Combined Financial Statements.......................................... F-59

ABILENE DIAGNOSTIC CLINIC PRACTICES
Report of Independent Public Accountants........................................ F-62
Combined Balance Sheets as of December 31, 1995 and 1996........................ F-63
Combined Statements of Operations for the years ended December 31, 1994, 1995,
and 1996....................................................................... F-64
Combined Statements of Owners' Equity for the years ended December 31, 1994,
1995, and 1996................................................................. F-65
Combined Statements of Cash Flows for the years ended December 31, 1994, 1995,
and 1996....................................................................... F-66
Notes to Combined Financial Statements.......................................... F-67

KING'S DAUGHTERS CLINIC, P.A.
Report of Independent Public Accountants........................................ F-70
Balance Sheets as of December 31, 1994 and 1995, and August 31, 1996
(unaudited).................................................................... F-71
Statements of Operations for the years ended December 31, 1993, 1994, and 1995,
and the eight months ended August 31, 1995 and 1996 (unaudited)................ F-72
Statements of Stockholders' Equity for the years ended December 31, 1993, 1994,
and 1995, and the eight months ended August 31, 1996 (unaudited)............... F-73
Statements of Cash Flows for the years ended December 31, 1993, 1994, and 1995,
and the eight months ended August 31, 1995 and 1996 (unaudited)................ F-74
Notes to Financial Statements................................................... F-75

WESTERN MEDICAL MANAGEMENT CORP., INC.
Report of Independent Public Accountants........................................ F-79
Balance Sheets as of December 31, 1995 and 1996................................. F-80
Statements of Operations for the years ended December 31, 1994, 1995, and
1996........................................................................... F-81
Statements of Stockholders' Equity for the years ended December 31, 1994, 1995,
and 1996....................................................................... F-82
Statements of Cash Flows for the years ended December 31, 1994, 1995, and
1996........................................................................... F-83
Notes to Financial Statements................................................... F-84
</TABLE>

F-2
<PAGE> 54

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To the Board of Directors of
ProMedCo Management Company:

We have audited the accompanying consolidated balance sheets of ProMedCo
Management Company (a Delaware corporation) and subsidiaries as of December 31,
1995 and 1996 and the related consolidated statements of operations,
stockholders' equity, and cash flows for the period from inception (July 1,
1994) to December 31, 1994, and the years ended December 31, 1995 and 1996.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.

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

In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of ProMedCo Management Company
and subsidiaries as of December 31, 1995 and 1996, and the results of their
operations and their cash flows for the period from inception (July 1, 1994) to
December 31, 1994, and the years ended December 31, 1995 and 1996, in conformity
with generally accepted accounting principles.

ARTHUR ANDERSEN LLP

Fort Worth, Texas,
February 10, 1997

F-3
<PAGE> 55

PROMEDCO MANAGEMENT COMPANY AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
DECEMBER 31, PRO FORMA
------------------------- FOR EQUITY
1995 1996 CONVERSIONS
---------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents......................... $1,076,836 $ 1,633,534 $ 1,633,534
Short-term investments............................ 1,970,530 -- --
Accounts receivable, net of allowances of
approximately $135,000 and $2,732,000,
respectively.................................... 168,177 4,272,021 4,272,021
Inventory......................................... 13,035 212,709 212,709
Management fees receivable........................ 116,968 1,266,598 1,266,598
Due from affiliated physician groups.............. -- 510,220 510,220
Prepaid expenses and other current assets......... 17,559 410,365 410,365
---------- ----------- -----------
Total current assets......................... 3,363,105 8,305,447 8,305,447
Property and equipment, net of accumulated depreciation
and amortization of $22,907 and $302,819,
respectively......................................... 96,035 3,341,775 3,341,775
Intangible assets, net of accumulated amortization of
$11,515 and $288,695, respectively................... 976,025 14,860,171 14,860,171
Other assets........................................... 16,182 1,962,942 1,962,942
---------- ----------- -----------
Total assets................................. $4,451,347 $28,470,335 $28,470,335
========== =========== ===========
</TABLE>

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

F-4
<PAGE> 56

PROMEDCO MANAGEMENT COMPANY AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS -- (CONTINUED)

<TABLE>
<CAPTION>
DECEMBER 31, PRO FORMA
------------------------ FOR EQUITY
1995 1996 CONVERSIONS
---------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable....................................... $ 94,174 $ 651,216 $ 651,216
Payable to affiliated physician groups................. -- 1,341,876 1,341,876
Accrued salaries, wages and benefits................... 24,079 1,153,558 1,153,558
Accrued expenses and other current liabilities......... 185,346 1,551,057 1,551,057
Current maturities of notes payable and obligations
under capital leases................................ 66,898 608,192 608,192
Deferred purchase price................................ -- 169,408 169,408
---------- ----------- -----------
Total current liabilities......................... 370,497 5,475,307 5,475,307
Notes payable, net of current maturities................. 1,429 4,631,249 4,631,249
Notes payable to stockholders............................ 261,604 -- --
Obligations under capital leases......................... -- 1,030,171 1,030,171
Deferred purchase price.................................. -- 12,578 12,578
Convertible subordinated notes payable................... -- 1,800,274 1,800,274
Other long term liabilities.............................. -- 393,575 393,575
---------- ----------- -----------
Total liabilities................................. 633,530 13,343,154 13,343,154
---------- ----------- -----------
Commitments and contingencies
Series A redeemable convertible preferred stock, 700,000
shares authorized; 500,000 shares issued and
outstanding (liquidation preference of $6,000,000)..... 2,953,358 2,957,641 --
Redeemable common stock, 165,296 shares issued and
outstanding............................................ 991,776 991,776 --
Stockholders' equity:
Preferred stock, $0.01 par value, 19,300,000 shares
authorized, no shares issued and outstanding........ -- -- --
Class B Common Stock, $0.01 par value; 2,600,000 shares
authorized; 1,226,150 shares issued and outstanding
(liquidation preference of $1,226,150).............. 12,262 12,262 --
Common stock, $0.01 par value; 47,400,000 shares
authorized; 1,899,000 and 2,742,729 shares issued
and outstanding at December 31, 1995 and 1996,
respectively........................................ 18,990 27,427 46,342
Additional paid-in-capital............................. 736,497 10,371,400 14,314,164
Common stock to be issued, 667 and 187,482 shares, at
December 31, 1995 and 1996, respectively............ 4,000 2,303,212 2,303,212
Stockholder notes receivable........................... (31,834) (120,000) (120,000)
Accumulated deficit.................................... (867,232) (1,416,537) (1,416,537)
---------- ----------- -----------
Total stockholders' equity........................ (127,317) 11,177,764 15,127,181
---------- ----------- -----------
Total liabilities and stockholders' equity........ $4,451,347 $28,470,335 $28,470,335
========== =========== ===========
</TABLE>

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

F-5
<PAGE> 57

PROMEDCO MANAGEMENT COMPANY AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
PERIOD FROM
INCEPTION
(JULY 1, 1994)
TO YEAR ENDED DECEMBER 31,
DECEMBER 31, ---------------------------
1994 1995 1996
---------- ------------ -----------
<S> <C> <C> <C>
Physician groups revenue, net.......................... $ -- $1,918,029 $34,641,222
Less: amounts retained by physician groups............. -- 759,513 15,322,220
---------- ---------- -----------
Management fee revenue................................. -- 1,158,516 19,319,002
Operating expenses:
Clinic salaries and benefits...................... -- 554,384 7,586,966
Clinic rent and lease expense..................... -- 115,028 2,027,539
Clinic supplies................................... -- 111,703 2,419,495
Other clinic costs................................ -- 242,491 4,426,181
General corporate expenses........................ 172,462 802,980 2,633,585
Depreciation and amortization..................... 1,182 34,302 610,827
Interest expense (income)......................... (3,754) (5,030) 163,714
------------ ---------- -----------
169,890 1,855,858 19,868,307
------------ ---------- -----------
Loss before provision for income taxes................. (169,890) (697,342) (549,305)
Provision for income taxes............................. -- -- --
------------ ---------- -----------
Net loss............................................... $ (169,890) $ (697,342) $ (549,305)
========== ========== ===========
Net loss per share..................................... $ (0.03) $ (0.09) $ (0.07)
========== ========== ===========
Weighted average number of common shares outstanding... 6,522,237 7,857,308 7,914,560
========== ========== ===========
</TABLE>

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

F-6
<PAGE> 58

PROMEDCO MANAGEMENT COMPANY AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

<TABLE>
<CAPTION>
CLASS B
COMMON STOCK COMMON STOCK ADDITIONAL COMMON STOCKHOLDER
------------------- ------------------- PAID-IN STOCK NOTES ACCUMULATED
SHARES AMOUNT SHARES AMOUNT CAPITAL TO BE ISSUED RECEIVABLE DEFICIT TOTAL
--------- ------- --------- ------- ----------- ------------ ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, July
1, 1994,
(inception).. -- $ -- -- $ -- $ -- $ -- $ -- $ -- $ --
Issuance of
common
stock.... -- -- 1,878,000 18,780 83,930 -- (34,750) -- 67,960
Issuance of
Class B
common
stock.... 1,226,150 12,262 -- -- 589,631 -- -- -- 601,893
Payments on
stockholder
notes.... -- -- -- -- -- -- 1,250 -- 1,250
Net loss... -- -- -- -- -- -- -- (169,890) (169,890)
--------- ------- --------- ------- ----------- ------------ ----------- ----------- -----------
Balance,
December 31,
1994......... 1,226,150 12,262 1,878,000 18,780 673,561 -- (33,500) (169,890) 501,213
Common
stock
subscribed... -- -- -- -- -- 4,000 (4,000) -- --
Issuance of
common
stock and
warrants... -- -- 21,000 210 62,936 -- (10,000) -- 53,146
Payments on
stockholder
notes.... -- -- -- -- -- -- 15,666 -- 15,666
Net loss... -- -- -- -- -- -- -- (697,342) (697,342)
--------- ------- --------- ------- ----------- ------------ ----------- ----------- -----------
Balance,
December 31,
1995......... 1,226,150 12,262 1,899,000 18,990 736,497 4,000 (31,834) (867,232) (127,317)
Issuance of
common
stock.... -- -- 843,729 8,437 9,634,903 -- -- -- 9,643,340
Stock
subscription
canceled... -- -- -- -- -- (4,000) 4,000 -- --
Common
stock to
be issued
in
connection
with
acquisitions.. -- -- -- -- -- 2,303,212 -- -- 2,303,212
Issuance of
stockholder
note..... -- -- -- -- -- -- (120,000) -- (120,000)
Payments on
stockholder
notes.... -- -- -- -- -- -- 27,834 -- 27,834
Net loss... -- -- -- -- -- -- -- (549,305) (549,305)
--------- ------- --------- ------- ----------- ------------ ----------- ----------- -----------
Balance,
December 31,
1996......... 1,226,150 $12,262 2,742,729 $27,427 $10,371,400 $2,303,212 $(120,000) $(1,416,537) $11,177,764
========= ======= ========= ======= =========== ========== ========= =========== ===========
</TABLE>

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

F-7
<PAGE> 59

PROMEDCO MANAGEMENT COMPANY AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
PERIOD FROM
INCEPTION
(JULY 1, 1994) YEAR ENDED
TO DECEMBER 31,
DECEMBER 31, ---------------------------
1994 1995 1996
------------ ----------- ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss......................................... $ (169,890) $ (697,342) $ (549,305)
Adjustments to reconcile net loss to net cash
used in operating activities (net of effects of
purchase transactions):
Depreciation and amortization............... 1,182 34,302 610,827
Noncash compensation........................ -- -- 14,750
Changes in assets and liabilities:
Accounts receivable.................... (200) (45,791) (310,647)
Inventory.............................. -- (13,035) (134,315)
Management fees receivable............. -- (116,968) (1,149,630)
Due from affiliated physician groups... -- -- (272,681)
Prepaid expenses and other current
assets............................... (62) 11,914 (67,119)
Other assets........................... (2,366) (13,949) (79,212)
Accounts payable....................... 19,794 55,048 (243,290)
Accrued expenses and other current
liabilities.......................... 359 143,625 2,266,809
---------- ----------- ------------
Net cash provided by (used in)
operating activities............ (151,183) (642,196) 86,187
---------- ----------- ------------
Cash flows from investing activities:
Purchases of property and equipment.............. (32,604) (30,395) (1,023,471)
Purchases of clinic assets, net of cash.......... -- (90,424) (2,435,905)
Purchases of short-term investments.............. -- (1,970,530) --
Proceeds from short-term investments............. -- -- 1,970,530
Issuance of note receivable to Reno.............. -- -- (775,000)
---------- ----------- ------------
Net cash used in investing
activities...................... (32,604) (2,091,349) (2,263,846)
---------- ----------- ------------
Cash flows from financing activities:
Borrowings under notes payable................... 3,075 297,820 3,742,557
Payment of deferred financing costs.............. -- -- (565,137)
Payment of deferred offering costs............... -- -- (564,427)
Proceeds from issuance of Series A redeemable
convertible preferred stock.................... -- 2,953,358 --
Proceeds from issuance of common stock........... 704,603 63,146 125,000
Issuance (payments) of stockholder notes
receivable,
net............................................ (33,500) 5,666 (3,636)
---------- ----------- ------------
Net cash provided by financing
activities...................... 674,178 3,319,990 2,734,357
---------- ----------- ------------
Increase in cash...................................... 490,391 586,445 556,698
Cash and cash equivalents, beginning of period........ -- 490,391 1,076,836
---------- ----------- ------------
Cash and cash equivalents, end of period.............. $ 490,391 $ 1,076,836 $ 1,633,534
========== =========== ============
Supplemental disclosure of cash flow information (See
also Notes 3 and 6):
Cash paid during the year --
Interest expense............................ $ -- $ 14,391 $ 90,722
Income taxes................................ $ -- $ -- $ --
</TABLE>

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

F-8
<PAGE> 60

PROMEDCO MANAGEMENT COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 1994, 1995 AND 1996

1. DESCRIPTION OF BUSINESS:

ProMedCo Management Company and subsidiaries ("ProMedCo" or the "Company"),
a Delaware corporation is engaged in operating and managing physician groups.
The Company, through its wholly owned subsidiaries, acquires certain net assets
of and manages physician groups under long-term service agreements with
affiliated physician groups. The Company was originally incorporated in Texas in
December 1993, commenced operations in December 1994, and completed its first
acquisition in June 1995. Therefore, the Company has a limited operating
history.

2. SIGNIFICANT ACCOUNTING POLICIES:

Basis of Presentation/Basis of Consolidation

The consolidated financial statements have been prepared on the accrual
basis of accounting and include the accounts of the Company and its wholly owned
subsidiaries. The Company's subsidiaries acquire the operating assets and assume
certain liabilities of the physician groups and account for the Company's
management activities with the physician groups under the Company's long-term
service agreements. The Company does not consolidate the operating results and
accounts of the physician groups. For display purposes, the Company has
presented the physician groups revenues and amounts retained by the physician
groups (which consists of 85% of the physician groups' operating income and is
paid to the affiliated physicians in accordance with the service agreements), in
the accompanying consolidated statements of operations to arrive at the
Company's gross management fee revenue. See further discussion below. All
intercompany accounts and transactions have been eliminated in the
consolidation.

The Company's financial statements have been prepared in anticipation of an
initial public offering (the "Offering").

Physician Groups Revenue, Net

Physician groups revenue represents the revenue of the physician groups
reported at the estimated realizable amounts from patients, third-party payors
and others for services rendered, net of contractual and other adjustments.

Revenue under certain third-party payor agreements is subject to audit and
retroactive adjustments. Provisions for estimated third-party payor settlements
and adjustments are estimated in the period the related services are rendered
and adjusted in future periods as final settlements are determined. There are no
material claims, disputes, or other unsettled matters that exist to management's
knowledge concerning third-party reimbursements. In addition, management
believes there are no retroactive adjustments that would be material to the
Company's financial statements. During 1995 and 1996, the Company estimates that
approximately 60% and 30%, respectively, of physician groups revenue, net was
received under government-sponsored healthcare programs (principally, the
Medicare and Medicaid programs). The physician groups have numerous agreements
with managed care organizations to provide physician services based on
negotiated fee schedules. No individual managed care organization is material to
the Company.

Management Fee Revenue

Management fee revenue represents physician groups revenue less amounts
retained by physician groups. The amounts retained by physician groups (85% of
the physician groups' operating income) represents amounts paid to the
physicians pursuant to the service agreements between the Company and the
physician groups. Under the service agreements, the Company provides each
physician group with the facilities and equipment used in its medical practice,
assumes responsibility for the management of the operations of the practice, and
employs substantially all of the non-physician personnel utilized by the group.

F-9
<PAGE> 61

PROMEDCO MANAGEMENT COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

2. SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)

The Company's management fee revenues are dependent upon the operating
income of the physician groups. As discussed previously, the physician groups
retain a fixed percentage (typically 85%) of physician group operating income.
Physician group operating income is defined in the service agreements as the
physician group's net medical revenue less certain contractually agreed-upon
clinic expenses, including non-physician clinic salaries and benefits, rent,
insurance, interest and other direct clinic expenses. The amount of the
physician groups revenue retained and paid to the physician group primarily
consists of the cost of the affiliated physician services. The remaining amount
of the physician group operating income (typically 15%) and an amount equal to
100% of the clinic expenses are reflected as management fee revenue earned by
the Company and is detailed as follows:

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
INCEPTION TO --------------------------
DECEMBER 31, 1994 1995 1996
----------------- ---------- -----------
<S> <C> <C> <C>
Component based upon percentage of physician
groups operating income......................... $ -- $ 134,031 $ 2,703,921
Reimbursement of clinic expenses.................. -- 1,024,485 16,615,081
----------- ---------- -----------
Management fee revenue............................ $ -- $1,158,516 $19,319,002
=========== ========== ===========
</TABLE>

Clinic Expenses and General Corporate Expenses

Clinic expenses represent substantially all clinic operating expenses,
including clinic salaries and benefits, rent, supplies, maintenance and repairs,
insurance, utilities, and other direct clinic expenses. Other clinic costs of
$4,426,181 for the year ended December 31, 1996 included $2,091,930, $377,668
and $1,956,583 of purchased services, insurance, and other clinic expenses,
respectively. General corporate expenses represent primarily the salaries and
benefits of corporate headquarters personnel, rent, travel, and other
administrative expenses.

Net Loss Per Share

In September 1995, the Company's Board of Directors declared a two-for-one
split of the Company's Common Stock including the Class B Common Stock. All
share and per share amounts have been restated to reflect the stock split. Net
loss per share is computed by dividing net loss by the number of common and
common equivalent shares outstanding during the periods in accordance with the
applicable rules of the Securities and Exchange Commission ("SEC"). All Common
Stock and Common Stock options and warrants issued or contingently issuable in
the year prior to the Offering have been considered as outstanding Common Stock
equivalents for all periods presented under the treasury stock method, based on
an estimate of the initial public offering price. Shares of Common Stock
issuable upon conversion of the Series A Redeemable Convertible Preferred Stock
are assumed to be Common Stock equivalent shares for all periods presented.
Fully diluted net loss per share is not presented because the effect would be
antidilutive.

Unaudited Pro Forma Information at December 31, 1996

Upon completion of the Offering, all outstanding Series A Redeemable
Convertible Preferred Stock and Class B Common Stock will be exchanged for
Common Stock and the Company's contingent obligation to repurchase certain
shares of Common Stock will terminate (see Note 7). The unaudited pro forma
balance sheet information is presented as if such conversions and termination
had occurred as of December 31, 1996.

Cash and Cash Equivalents

The Company considers all highly liquid investments with maturities of
three months or less when purchased to be cash equivalents.

F-10
<PAGE> 62

PROMEDCO MANAGEMENT COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

2. SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)

Short-Term Investments

In 1995, the Company had government-sponsored agency debt securities which
were classified as "held-to-maturity." These securities matured in February and
May 1996.

Accounts Receivable

Accounts receivable principally represent receivables from patients and
other third party payors for medical services provided by the Physician Groups.
Such amounts are recorded net of contractual allowances and estimated bad debts.

Property and Equipment

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

Intangible Assets

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

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

The Company believes that there is no material value allocable to the
employment and noncompete agreements entered into between the physician group
and the individual physicians. The primary economic beneficiary of these
agreements is the physician group, an entity that the Company does not legally
control. In addition, any damages under the agreements are paid solely to the
physician group for purposes of replacing departing physicians. Generally, due
to low expected physician turnover in the industry and the ability of the
physician group to actively replace departing physicians, there would be no
significant economic loss to either the physician group nor the Company due to
physician departure. The physician groups continually recruit physicians and, as
appropriate and necessary, subsequently add qualified physicians to the group.
This manner of operations allows the physician group to perpetuate itself as
individual physicians retire or are otherwise replaced. The Company believes
that the physician groups with which it has service agreements thus are long-
lived entities with an indeterminable life, and that the physicians, customer
demographics, and various contracts will be continuously replaced. The service
agreement intangible is being amortized on a straight-line method over a
composite average life of 30 years.

F-11
<PAGE> 63

PROMEDCO MANAGEMENT COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

2. SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)

predict the impact, if any, that this review may have on the Company's
acquisition strategy, allocation of purchase price related to acquisitions, and
amortization life assigned to intangible assets.

On January 1, 1996, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 121, "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to be Disposed Of." Under SFAS No. 121, intangibles
are reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount of the asset may not be recoverable. If this review
indicates that the carrying amount of the asset may not be recoverable, as
determined based on the undiscounted cash flows of the operations acquired over
the remaining amortization period, the carrying value of the asset is reduced to
fair value. Among the factors that the Company will continually evaluate are
unfavorable changes in each physician group's relative market share and local
market competitive environment, current period and forecasted operating and cash
flow levels of the physician group and its impact on the management fee earned
by the Company, and legal factors governing the practice of medicine.

Payable to Physician Groups

Amounts payable to physician groups primarily represent monthly
compensation to physicians which, based on the service agreements, are generally
payable to physicians by the 15th day following the end of each month.

Deferred Purchase Price

Deferred purchase price represents cash consideration due to physician
groups payable in January 1997.

Income Taxes

The Company and its subsidiaries file a consolidated tax return. The
Company's year-end for tax reporting purposes is June 30. The Company accounts
for income taxes under the liability method which states that deferred taxes are
to be determined based on the estimated future tax effects of differences
between the financial statement and tax bases of assets and liabilities given
the provisions of enacted tax laws. Deferred income tax provisions and benefits
are based on the changes to the asset or liability from period to period.

Use of Estimates

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

New Accounting Pronouncement

In October 1995, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 123, "Accounting for Stock-Based Compensation," which requires entities
to measure compensation costs related to awards of stock-based compensation
using either the fair value method or the intrinsic value method. Under the fair
value method, compensation expense is measured at the grant date based on the
fair value of the award. Under the intrinsic value method, compensation expense
is equal to the excess, if any, of the quoted market price of the stock at the
grant date over the amount the employee must pay to acquire the stock. Entities
electing to measure compensation costs using the intrinsic value method must
make pro forma disclosures for fiscal years beginning after January 1, 1996, of
net income and earnings per share as if the fair value method had been applied.
The Company has elected to account for stock-based compensation programs

F-12
<PAGE> 64

PROMEDCO MANAGEMENT COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

2. SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)

using the intrinsic value method. The following pro forma disclosures are
presented to reflect amounts as if the fair value method were applied:

YEAR ENDED DECEMBER 31,
---------------------------
1995 1996
----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
Net loss................................................. $ (697,342) $(1,023,907)
========== ===========
Net loss per share....................................... $ (0.09) $ (0.13)
========== ===========
</TABLE>

The Company used the minimum value method to estimate the fair values of
options for the above pro forma information. For purposes of the minimum value
method, the Company used U.S. Treasury strip rates for its risk-free interest
rates, assumed no volatility or future dividends, and assumed the expected life
of the options through the applicable expiration dates. Also see Note 7 -- Stock
Option Plans.

3. ACQUISITIONS:

During the year ended December 31, 1995, the Company, through its wholly
owned subsidiary, acquired in an asset purchase transaction, certain operating
assets and assumed certain operating liabilities of a physician group located in
Texas. During the year ended December 31, 1996, the Company, through its wholly
owned subsidiaries, acquired certain operating assets and assumed certain
operating liabilities of five additional physician groups, two located in
Alabama, one in Kentucky, and two in Texas. The two acquisitions located in
Alabama were both acquired in stock purchase transactions and the other three
acquisitions were asset purchase transactions. In addition, the Company has
entered into an asset purchase agreement to acquire the operating assets and
liabilities of a group that is currently operated under an interim service
agreement. The closing of this acquisition will occur on the first day of the
calendar month following the Offering.

The acquisitions of the operating assets and liabilities have been
accounted for by the purchase method of accounting and, accordingly, the
purchase price has been allocated to the tangible assets acquired and
liabilities assumed based on the estimated fair values at the dates of
acquisition. The accounts receivable was valued at net collectible values based
upon analyses by the Company. The estimated fair values of assets acquired and
liabilities assumed during 1995 and 1996 are summarized as follows:

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------
1995 1996
------------ -----------
<S> <C> <C>
Cash and cash equivalents................................... $ 2,360 $ 172,677
Accounts receivable, net.................................... 90,222 3,793,198
Prepaid expenses and other current assets................... 15,649 628,585
Property and equipment...................................... 66,529 2,502,181
Liabilities assumed......................................... (74,097) (4,448,018)
Intangible assets........................................... 987,540 14,124,683
----------- -----------
1,088,203 16,773,306
Less -- fair value of common stock issued and to be
issued.................................................... 991,776 11,368,856
Less -- notes and convertible subordinated notes issued..... -- 2,613,882
Less -- deferred purchase price (payable in cash)........... -- 181,986
----------- -----------
Cash purchase price......................................... $ 96,427 $ 2,608,582
========== ===========
</TABLE>

The fair value of common stock issued and to be issued for each acquisition
is determined by the Company based upon an analysis of the value of the
operating assets and liabilities being acquired using projected discounted cash
flows and the negotiation process between the Company and the sellers. For
certain acquisitions occurring close to or at the end of the period, the
estimated fair values are preliminary, and

F-13
<PAGE> 65

PROMEDCO MANAGEMENT COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

3. ACQUISITIONS -- (CONTINUED)

therefore are subject to change. Under the purchase agreements, the purchase
price is adjustable by the Company for a period between 60 to 120 days after the
closing of the transaction in order to finalize the fair values of the assets
acquired and liabilities assumed.

In connection with the acquisition of a physician group, the Company is
contingently obligated to pay additional consideration, depending on the
achievement of certain financial results, as defined by the purchase agreement.
The Company is contingently obligated until the earlier of the Offering or June
1997. Such liability, if any, will be recorded in the period in which the
outcome of the contingency becomes known. Any payment made will be accounted for
as additional consideration and will not be immediately charged to expense.
Based on the operations of the physician group to date, the Company does not
believe any obligation arising from the arrangement will have a material effect
on the Company's financial position or results of operations.

In connection with the acquisition of a physician group, the Company has
issued Common Stock to the sellers as consideration for the purchase. The
purchase agreement requires the Company to issue additional shares based on the
Offering price, net of certain adjustments as defined by the purchase agreement.
Based upon the estimated Offering price, an additional 521,000 shares would be
issued in connection with this acquisition.

In addition, the Company has entered into an agreement to acquire the
operating assets and liabilities of a physician group which is currently
operated under an interim service agreement. The closing of this acquisition
will occur on the first day of the calendar month following the Offering. The
Company will issue approximately 2,033,333 common shares as consideration
related to the acquisition, adjustable as defined by the purchase agreement.

The following unaudited pro forma information reflects the effect of
acquisitions on the consolidated results of operations of the Company had the
acquisitions occurred at January 1, 1995. Future results may differ
substantially from pro forma results and cannot be considered indicative of
future results.

YEAR ENDED DECEMBER 31,
-----------------------------
1995 1996
------------ -------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
Physician Groups revenue, net.............................. $ 47,808,484 $ 52,261,857
Less: amounts retained by Physician Groups................. 20,424,715 21,913,815
------------ ------------
Management fee revenue..................................... $ 27,383,769 $ 30,348,042
============ ============
Net income (loss).......................................... $ 157,149 $ (159,274)
============ ============
Net income (loss) per share................................ $ 0.02 $ (0.02)
============ ============
</TABLE>

4. PROPERTY AND EQUIPMENT:

Property and equipment is summarized as follows:

<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------
1994 1995 1996
------- -------- ----------
<S> <C> <C> <C>
Furniture, fixtures, and equipment................... $32,604 $108,942 $3,145,848
Leasehold improvements............................... -- 10,000 498,746
Less -- accumulated depreciation and amortization.... (1,049) (22,907) (302,819)
------- -------- ----------
Property and equipment, net.......................... $31,555 $ 96,035 $3,341,775
======= ======== ==========
</TABLE>

F-14
<PAGE> 66

PROMEDCO MANAGEMENT COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

5. INTANGIBLE ASSETS:

Intangible assets are summarized as follows:

<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------
1995 1996
------------ -----------
<S> <C> <C>
Service agreement rights.................................... $987,540 $15,148,866
Less -- accumulated amortization............................ (11,515) (288,695)
---------- -----------
Intangible assets, net...................................... $976,025 $14,860,171
========== ===========
</TABLE>

6. NOTES PAYABLE, OTHER LONG-TERM DEBT AND OBLIGATIONS UNDER CAPITAL LEASES:

Notes Payable are summarized as follows:

<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------
1994 1995 1996
------- -------- ----------
<S> <C> <C> <C>
Notes payable issued to stockholders................. $ -- $261,604 $ --
======= ======== ==========
Note payable issued to a physician group............. $ -- $ -- $ 851,549
Borrowings under Credit Facility..................... -- -- 4,157,027
Other notes payable.................................. 3,075 68,327 47,547
------- -------- ----------
3,075 68,327 5,056,123
Less -- current portion.............................. (1,025) (66,898) (424,874)
------- -------- ----------
Notes payable, net................................... $ 2,050 $ 1,429 $4,631,249
======= ======== ==========
</TABLE>

The maturities of notes payable at December 31, 1996, are as follows:

<TABLE>
<S> <C>
1997.................................................................... $ 424,874
1998.................................................................... 862,205
1999.................................................................... 841,778
2000.................................................................... 842,667
2001.................................................................... 2,084,599
Thereafter.............................................................. --
----------
$5,056,123
==========
</TABLE>

In connection with the issuance of notes payable to stockholders and one
other party in 1995, the Company issued 150,000 warrants to purchase common
stock at $2.50 per share. On June 30, 1996, the warrants were exercised in
exchange for forgiveness of the notes payable.

The interest rates on the notes payable ranges from 7.0% to 8.75% and
mature from 1998 to 2001.

Convertible Subordinated Notes Payable

On March 29, 1996, in connection with the affiliation of two physician
groups, the Company issued $1,800,274 in convertible subordinated notes. The
notes bear interest at 7.0% and mature in March 2003. The notes may, at the
election of the noteholders, be converted into shares of Common Stock at a
conversion price of $9.00 per share, subject to certain limitations as defined
in the note agreement. In addition, upon the effective date of the Offering, 20%
of the notes will, at the option of the holder, convert into shares of Common
Stock.

F-15
<PAGE> 67

PROMEDCO MANAGEMENT COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

6. NOTES PAYABLE, OTHER LONG-TERM DEBT AND OBLIGATIONS UNDER CAPITAL
LEASES -- (CONTINUED)

Revolving Credit Agreement

Effective July 15, 1996, the Company entered into a revolving credit
agreement (the "Credit Facility"). The Credit Facility provides for a three-year
commitment to fund revolving credit borrowings of up to $25.0 million for
acquisitions and general working capital purposes. Under the terms of the Credit
Facility, the Company paid a commitment fee of approximately $500,000 which has
been capitalized in other assets in the accompanying December 31, 1996
consolidated balance sheet and amortized as an adjustment to interest expense
using the effective interest method. In July, the Company granted options to the
lender exercisable for 62,500 shares of Common Stock. In August, options to
purchase 15,625 shares were exercised at $8.00 per share. The remaining options
to purchase 46,875 shares at an exercise price of $10.00 per share were
outstanding as of December 31, 1996. The interest rate under the Credit Facility
will be set at the Company's option as follows: (i) 30-day commercial paper rate
of an issuer whose corporate bonds are rated "AA," plus 3.25%; (ii) reserve
adjusted LIBOR, as defined, plus 3.25%; or (iii) prime rate plus 0.5%. The
Credit Facility includes certain restrictive covenants including limitations on
the payment of dividends as well as the maintenance of certain financial ratios.
The Credit Facility is secured by substantially all the assets of the Company.
At December 31, 1996, the Company had $1,713,941 million available under the
working capital portion of the Credit Facility and $19,129,032 million was
available for acquisition purposes, subject to certain conditions as defined by
the agreement.

Obligations Under Capital Leases

In connection with an acquisition, the Company assumed the obligation of
various equipment under capital leases. At December 31, 1996, future minimum
lease payments under capital leases are as follows:

<TABLE>
<S> <C>
1997.................................................................... $ 455,256
1998.................................................................... 408,457
1999.................................................................... 264,662
2000.................................................................... 205,236
2001.................................................................... 87,501
----------
1,421,112
Less portion attributable to interest................................... (207,623)
----------
Obligations under capital leases........................................ $1,213,489
Less -- current portion................................................. (183,318)
----------
$1,030,171
==========
</TABLE>

7. REDEEMABLE CONVERTIBLE PREFERRED STOCK, COMMON STOCK, AND
STOCKHOLDERS' EQUITY:

The Company has authorized the issuance of 70,000,000 shares of stock, of
which (a) 20,000,000 shares, par value $0.01 per share, are to be designated
Preferred Stock (of which 700,000 shares are to be designated Series A
Redeemable Convertible Preferred Stock), (b) 47,400,000 shares, par value $0.01
per share, are to be of a class designated Common Stock and (c) 2,600,000
shares, par value $0.01 per share, are to be of a class designated Class B
Common Stock.

Series A Redeemable Convertible Preferred Stock

The Company has issued and outstanding 500,000 shares, and warrants to
purchase an additional 200,000 shares, of Preferred Stock as of December 31,
1996. The warrants are exercisable at an amount per share equal to the lesser of
$6.00 or one-half the price per share issued in the Offering. The warrants
expire on

F-16
<PAGE> 68

PROMEDCO MANAGEMENT COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

7. REDEEMABLE CONVERTIBLE PREFERRED STOCK, COMMON STOCK, AND STOCKHOLDERS'
EQUITY -- (CONTINUED)

December 6, 2000. Shares of Preferred Stock may, at the option of the holder, be
converted at any time into Common Stock, on a one-for-one basis as adjusted for
certain events. All outstanding shares of Preferred Stock will be automatically
converted into Common Stock upon an offering of Common Stock. In absence of an
offering, the Preferred Stock is subject to mandatory redemption by the Company
at $6.00 per share in equal amounts on December 6, 2000, and December 6, 2001.

The Company is required for all shares or share equivalents of Common Stock
issued subsequent to December 6, 1995, excluding shares and share equivalents
issued in connection with an acquisition or shares issued in connection with a
redemption or conversion when the share equivalent was issued prior to December
6, 1995, to grant options to purchase shares of Common Stock to Preferred
Stockholders in an amount equal to their percentage ownership of the Company
prior to the issuance. During 1996, options to purchase 47,230 shares of Common
Stock were granted to Preferred Stockholders, of which 7,743 were exercisable at
prices ranging from $6.00 to $10.20 per share as of December 31, 1996.

Redeemable Common Stock

In connection with an acquisition in 1995, the Company issued 165,296
shares of Common Stock for $991,776. The stockholders have the right to require
the Company to repurchase the shares for cash, if the Company does not complete
a public offering by June 30, 2000.

Class B Common Stock

During 1994, the Company issued 613,075 Class B units, each consisting of
two shares of Class B Common Stock and a warrant to purchase 1.5756 shares of
Class B Common Stock at an exercise price of $1.25 per share. The warrants are
exercisable on or before June 30, 2004. The Company also granted an option to
purchase 77,500 Class B units at an exercise price of $0.50 per unit. The
options are fully vested and may be exercised until September 30, 2004. As of
December 31, 1996, no warrants or options have been exercised. The Class B
Common Stock has a liquidation preference, subordinate to the Preferred Stock,
at an amount equal to $1.00 per share. Each share of Class B Common Stock may,
at the option of the holder, be converted at any time into Common Stock on a
one-for-one basis and will automatically convert to Common Stock at the
Offering.

Common Stock

During 1994, the Company issued 907,000 Common Stock units, each consisting
of two shares of Common Stock and a warrant to purchase 1.5756 shares of Common
Stock at an exercise price of $1.25 per share. The warrants are exercisable on
or before June 30, 2003. As of December 31, 1996, no warrants have been
exercised.

Common Stock To Be Issued

In connection with an acquisition in May 1996, common shares valued at
$1,970,960 will be issued in early 1997. The number of common shares to be
issued and the price per share was fixed as of the consummation date of the
acquisition in May 1996.

Stock Option Plans

The Company has reserved 1,500,000 shares of Common Stock for issuance
under its 1994 Stock Option Plan and 2,100,000 shares of Common Stock for
issuance under its 1996 Employee Stock Option Plan. Options granted under the
Plans may be either incentive stock options ("ISO") or non-qualified stock
options

F-17
<PAGE> 69

PROMEDCO MANAGEMENT COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

7. REDEEMABLE CONVERTIBLE PREFERRED STOCK, COMMON STOCK, AND STOCKHOLDERS'
EQUITY -- (CONTINUED)

("NQSO"). The option price per share shall not be less than the fair market
value of the Company's Common Stock at the date of grant. Generally, options
vest over a five-year period and expire in 2004. As of December 31, 1996,
options to purchase 68,000 shares remain available for grant under the Plans.
There were no options issued under the 1996 Stock Option Plan.

The following table summarizes the activity in the 1994 Stock Option Plan:

<TABLE>
<CAPTION>
WEIGHTED-AVERAGE
OUTSTANDING PRICE PER SHARE EXERCISE PRICE
----------- ---------------- ----------------
<S> <C> <C> <C>
July 1, 1994 (inception)................... -- -- --
Granted............................... 80,000 $ 0.50 - $ 2.50 $ 1.50
Exercised............................. -- -- --
Canceled.............................. -- -- --
---------
December 31, 1994.......................... 80,000 $ 0.50 - $ 2.50 $ 1.50
Granted............................... 546,200 $ 0.50 - $ 6.00 $ 4.99
Exercised............................. -- -- --
Canceled.............................. (121,000) $ 3.00 - $ 6.00 $ 3.36
---------
December 31, 1995.......................... 505,200 $ 0.50 - $ 6.00 $ 4.83
Granted............................... 805,800 $ 6.00 - $14.00 $ 7.81
Exercised............................. (23,200) $ 0.50 - $ 6.00 $ 5.24
Canceled.............................. (223,400) $ 0.50 - $ 9.00 $ 5.89
---------
December 31, 1996.......................... 1,064,400 $ 0.50 - $14.00 $ 6.85
=========
</TABLE>

Stock options available for exercise under the 1994 Stock Option Plan as of
December 31, 1994, 1995, and 1996, totaled 0, 8,000, and 170,720, respectively.
Upon completion of the Offering, the vesting period accelerates for options to
purchase approximately 45,000 shares.

8. INCOME TAXES:

At December 31, 1996, the Company had a cumulative net operating loss
carryforward for income tax purposes of approximately $2.3 million available to
reduce future amounts of taxable income. If not utilized to offset future
taxable income, the net operating loss carryforwards will begin to expire in
2010.

The net deferred tax assets generated during 1995 and 1996, respectively,
have been offset by provisions of equal amounts to establish a valuation
allowance. The valuation allowance will be maintained until it is more likely
than not that some portion or all of the deferred tax assets will be realized.

Deferred income taxes reflect the net operating loss carry forward of the
Company and the net tax effects of temporary differences between the amounts of
assets and liabilities for financial reporting purposes and the

F-18
<PAGE> 70

PROMEDCO MANAGEMENT COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

8. INCOME TAXES -- (CONTINUED)

amounts used for income tax purposes. Significant components of the Company's
net deferred tax assets are as follows:

<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1995 1996
--------- ---------
<S> <C> <C>
Deferred tax assets:
Net operating losses..................................... $ 295,472 $ 493,153
Other.................................................... 1,429 29,240
--------- ---------
Net deferred tax assets....................................... 296,901 522,393
Valuation allowance........................................... (296,901) (522,393)
--------- ---------
$ -- $ --
========= =========
</TABLE>

The differences between the provision (benefit) for income taxes and the
amount computed by applying the statutory Federal income tax rate to loss before
income taxes were as follows:

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER
PERIOD ENDED 31,
DECEMBER 31, ----------------------
1994 1995 1996
------------- --------- ---------
<S> <C> <C> <C>
Federal tax at statutory rate............................. $ (57,763) $(237,096) $(186,764)
State income tax, net of federal tax effect............... (3,397) (13,947) (10,986)
Increase in valuation allowance........................... 61,160 235,741 225,492
Other..................................................... -- 15,302 (27,742)
--------- --------- ---------
$ -- $ -- $ --
========= ========= =========
</TABLE>

9. DISCLOSURES ABOUT THE FAIR VALUE OF FINANCIAL INSTRUMENTS:

SFAS No. 107, "Disclosures About Fair Value of Financial Instruments,"
requires disclosure about the fair value of financial instruments for which it
is practicable to estimate fair value. The carrying amounts of financial
instruments included in current assets and current liabilities approximate fair
values because of the short maturity of those instruments. The fair values of
the Company's notes payable and convertible subordinated notes payable are based
on similar issues or on the current rates available to the Company for debt with
similar terms. The carrying values and estimated fair values of the Company's
outstanding debt were estimated to be the same as of December 31, 1995 and 1996.

10. COMMITMENTS AND CONTINGENCIES:

Leases

Operating leases generally consist of short-term leases for the office
space where the Physician Groups are located. Lease expense of $1,588, $122,594,
and $2,083,674 for the period ended December 31, 1994 and the years ended 1995
and 1996, respectively, reflect lease commitments for medical practice office
space, medical practice equipment, corporate office space, and corporate
equipment.

F-19
<PAGE> 71

PROMEDCO MANAGEMENT COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

10. COMMITMENTS AND CONTINGENCIES -- (CONTINUED)

The following is a schedule of future minimum lease payments under
noncancelable operating leases as of December 31, 1996.

<TABLE>
<S> <C>
1997.................................................................... $1,342,262
1998.................................................................... 1,137,549
1999.................................................................... 849,053
2000.................................................................... 697,427
2001.................................................................... 474,132
Thereafter.............................................................. 1,581,660
----------
$6,082,083
==========
</TABLE>

Litigation

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

Insurance

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

11. MERGER:

In November 1996, the Company entered into a definitive agreement with
Western Medical Management Corp., Inc. ("Reno"), a physician management company.
Under the terms of the agreement, Reno will exchange its common stock for common
stock of the Company. The business combination is expected to be consummated at
the closing of the Offering. The transaction is anticipated to be accounted for
as a pooling of interests, as defined by APB No. 16, "Business Combinations."

In anticipation of the merger, the Company entered into an interim services
agreement with Reno. The Company has also provided Reno with a line of credit of
up to $2.5 million at market terms for working capital purposes. As of December
31, 1996, $775,000 is outstanding from Reno under these arrangements. The note
receivable has been recorded in other assets in the accompanying consolidated
balance sheets.

F-20
<PAGE> 72

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To the Stockholders of
North Texas Medical Surgical, P.A.:

We have audited the accompanying balance sheets of North Texas Medical
Surgical, P.A. (a Texas professional association) as of December 31, 1994, and
June 30, 1995, and the related statements of operations, stockholders' equity,
and cash flows for the years ended December 31, 1993 and 1994, and for the six
months ended June 30, 1995. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.

In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of North Texas Medical
Surgical, P.A. as of December 31, 1994, and June 30, 1995, and the results of
its operations and its cash flows for the years ended December 31, 1993 and
1994, and for the six months ended June 30, 1995, in conformity with generally
accepted accounting principles.

ARTHUR ANDERSEN LLP

Fort Worth, Texas,
July 22, 1996

F-21
<PAGE> 73

NORTH TEXAS MEDICAL SURGICAL, P.A.

BALANCE SHEETS

<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1994 1995
------------ ----------
<S> <C> <C>
ASSETS
Current assets:
Cash........................................................... $ 17,096 $ 2,563
Accounts receivable, net of allowances of $55,000 in 1994 and
1995.......................................................... 192,664 185,891
Prepaid expenses and other current assets...................... -- 6,000
-------- --------
Total current assets...................................... 209,760 194,454

Property and equipment, net of accumulated depreciation and
amortization of $118,043 and $125,211, respectively............... 79,826 72,658
-------- --------
Total assets.............................................. $289,586 $267,112
======== ========

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable............................................... $ 23,693 $ 6,218
Accrued salaries and benefits.................................. 22,400 22,400
Note payable................................................... 54,652 29,782
-------- --------
Total current liabilities................................. 100,745 58,400
-------- --------

Commitments and contingencies

Stockholders' equity:
Common stock, $100 par value; 500 shares authorized, 8 shares
issued and outstanding........................................ 800 800
Retained income................................................ 188,041 207,912
-------- --------
Total stockholders' equity................................ 188,841 208,712
-------- --------
Total liabilities and stockholders' equity................ $289,586 $267,112
======== ========
</TABLE>

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

F-22
<PAGE> 74

NORTH TEXAS MEDICAL SURGICAL, P.A.

STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31, SIX MONTHS ENDED
-------------------------- JUNE 30,
1993 1994 1995
---------- ---------- ----------------
<S> <C> <C> <C>
Net revenue........................................ $2,417,428 $2,275,585 $1,091,147

Costs and expenses:
Cost of affiliated physician services......... 1,042,575 1,062,748 434,244
Clinic salaries and benefits.................. 592,336 612,736 315,211
Clinic rent and lease expenses................ 109,921 109,637 56,587
Clinic pharmaceuticals and supplies........... 108,003 83,269 38,921
Other clinic costs............................ 557,406 422,184 219,145
Depreciation and amortization................. 21,441 33,868 7,168
Interest expense.............................. 1,961 64 --
---------- ---------- ----------
Total costs and expenses................. 2,433,643 2,324,506 1,071,276
---------- ---------- ----------

Net income (loss).................................. $ (16,215) $ (48,921) $ 19,871
========== ========== ==========
</TABLE>

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

F-23
<PAGE> 75

NORTH TEXAS MEDICAL SURGICAL, P.A.

STATEMENTS OF STOCKHOLDERS' EQUITY

<TABLE>
<CAPTION>
COMMON STOCK
---------------- RETAINED
SHARES AMOUNT EARNINGS TOTAL
------ ------ -------- --------
<S> <C> <C> <C> <C>

Balance, December 31, 1992............................... 8 $800 $253,177 $253,977
Net loss............................................ -- -- (16,215) (16,215)
------ ------ -------- --------

Balance, December 31, 1993............................... 8 800 236,962 237,762
Net loss............................................ -- -- (48,921) (48,921)
------ ------ -------- --------

Balance, December 31, 1994............................... 8 800 188,041 188,841
Net income.......................................... -- -- 19,871 19,871
------ ------ -------- --------

Balance, June 30, 1995................................... 8 $800 $207,912 $208,712
======= ====== ======== ========
</TABLE>

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

F-24
<PAGE> 76

NORTH TEXAS MEDICAL SURGICAL, P.A.

STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31, SIX MONTHS ENDED
---------------------- JUNE 30,
1993 1994 1995
-------- -------- ----------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)................................ $(16,215) $(48,921) $ 19,871
Adjustments to reconcile net income (loss) to net
cash provided by operating activities --
Depreciation and amortization............... 21,441 33,868 7,168
Changes in assets and liabilities --
Accounts receivable.................... 24,439 92,545 6,773
Other current assets................... 4,938 -- (6,000)
Accounts payable....................... 6,069 (4,515) (17,475)
-------- -------- --------
Net cash provided by operating
activities...................... 40,672 72,977 10,337
-------- -------- --------

Cash flows from investing activities:
Purchases of property and equipment.............. -- (21,174) --
Proceeds from sale of property and equipment..... 1,522 -- --
-------- -------- --------
Net cash provided by (used in)
investing activities............ 1,522 (21,174) --
-------- -------- --------

Cash flows from financing activities:
Proceeds from note payable....................... 21,969 -- --
Payments on note payable......................... (59,564) (64,118) (24,870)
-------- -------- --------
Net cash used in financing
activities...................... (37,595) (64,118) (24,870)
-------- -------- --------
Net increase (decrease) in cash....................... 4,599 (12,315) (14,533)
Cash, beginning of the year........................... 24,812 29,411 17,096
-------- -------- --------
Cash, end of the year................................. $ 29,411 $ 17,096 $ 2,563
======== ======== ========
Supplemental disclosure of cash flow information:
Cash paid during the year --
Interest.................................... $ 1,961 $ 64 $ --
</TABLE>

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

F-25
<PAGE> 77

NORTH TEXAS MEDICAL SURGICAL, P.A.

NOTES TO FINANCIAL STATEMENTS

DECEMBER 31, 1994 AND JUNE 30, 1995

1. DESCRIPTION OF BUSINESS:

North Texas Medical Surgical, P.A. (the "Company") is a Texas professional
association owned by eight physicians which practice in the Denton, Texas area.
The Company was purchased by ProMedCo of Denton, Inc. effective June 30, 1995
(see Note 8).

2. SIGNIFICANT ACCOUNTING POLICIES:

Basis of Presentation

The accompanying financial statements have been prepared on the accrual
basis of accounting.

Revenue Recognition

Revenue is recorded at estimated net amounts to be received from
third-party payors and others for services rendered.

Property and Equipment

Property and equipment are stated at cost, net of accumulated depreciation
and amortization. Property and equipment is depreciated using the straight-line
method over the following useful lives:

<TABLE>
<CAPTION>
YEARS
------------------------
<S> <C>
Furniture and fixtures........................................ 7
Equipment..................................................... 5
Leasehold improvements........................................ Estimated life of lease
</TABLE>

Income Taxes

The Company has historically not incurred significant tax liabilities for
federal or state income taxes. Compensation to physician owners has
traditionally reduced taxable income to nominal levels. This relationship would
be expected to continue in the future. Because of this practice, provisions for
income taxes and deferred tax assets and liabilities are not material and have
not been reflected in the financial statements.

Use of Estimates

F-26
<PAGE> 78

NORTH TEXAS MEDICAL SURGICAL, P.A.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

3. PROPERTY AND EQUIPMENT:

Property and equipment consists of the following:

<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1994 1995
------------ ---------
<S> <C> <C>
Furniture, fixtures, and equipment........................... $ 134,310 $ 134,310
Leasehold improvements....................................... 63,559 63,559
Less -- Accumulated depreciation and amortization............ (118,043) (125,211)
---------- ---------
Property and equipment, net.................................. $ 79,826 $ 72,658
========== =========
</TABLE>

4. NOTE PAYABLE:

At December 31, 1994 and June 30, 1995, the Company had a note payable for
$54,652 and $29,782, respectively. This note is payable in monthly installments
of $4,964 and was paid in its entirety in December 1995.

5. COMMITMENTS AND CONTINGENCIES:

The Company has operating leases for administrative equipment and
facilities expiring at various dates through April 1997. Rent expense totaled
$109,921, and $109,637 for the years ended December 31, 1993 and 1994,
respectively, and $56,587 for the six months ended June 30, 1995.

Future lease commitments under the operating leases are as follows:

6. RELATED-PARTY TRANSACTIONS:

The Company currently leases its facilities from First Texas Medical, Inc.,
an affiliated company which shares certain common ownership with the Company.

7. DISCLOSURES ABOUT THE FAIR VALUE OF FINANCIAL INSTRUMENTS:

SFAS No. 107, "Disclosures About Fair Value of Financial Instruments,"
requires disclosure about the fair value of financial instruments. Carrying
amounts for all financial instruments approximate fair value as of June 30,
1995.

8. SUBSEQUENT EVENT:

Effective June 30, 1995, the Company was acquired by ProMedCo of Denton,
Inc., a wholly owned subsidiary of ProMedCo Management Company, in an asset
purchase transaction whereby ProMedCo of Denton, Inc. agreed to acquire
substantially all the operations and certain assets and certain liabilities of
the Company.

F-27
<PAGE> 79

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To the Stockholders of
Cullman Family Practice, P.C.:

We have audited the accompanying balance sheets of Cullman Family Practice,
P.C. (an Alabama professional corporation) as of December 31, 1994 and 1995, and
the related statements of operations, stockholders' equity, and cash flows for
the years then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.

In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Cullman Family Practice,
P.C. as of December 31, 1994 and 1995, and the results of its operations and its
cash flows for the years then ended in conformity with generally accepted
accounting principles.

ARTHUR ANDERSEN LLP

Fort Worth, Texas,
July 20, 1996

F-28
<PAGE> 80

CULLMAN FAMILY PRACTICE, P.C.

BALANCE SHEETS

<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1994 1995
-------- --------
<S> <C> <C>
ASSETS

Current assets:
Cash............................................................... $ 3,832 $ 5,585
Accounts receivable, net of allowances of $113,970 and $72,521,
respectively...................................................... 157,392 100,165
Prepaid expenses and other current assets.......................... 16,790 30,464
-------- --------
Total current assets.......................................... 178,014 136,214
-------- --------
Property and equipment, net of accumulated depreciation and amortization
of $58,243 and $66,197, respectively.................................. 6,053 4,145
-------- --------
Total assets.................................................. $184,067 $140,359
======== ========

LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
Accounts payable................................................... $ 8,003 $ 11,951
Accrued expenses and other current liabilities..................... 20,274 20,497
-------- --------
Total current liabilities..................................... 28,277 32,448
-------- --------

Commitments and contingencies

Stockholders' equity:
Common stock, $1 par value; 10,000 shares authorized, 2,500 shares
issued and outstanding............................................ 2,500 2,500
Additional paid-in capital......................................... 5,692 5,692
Retained income.................................................... 147,598 99,719
-------- --------
Total stockholders' equity.................................... 155,790 107,911
-------- --------
Total liabilities and stockholders' equity.................... $184,067 $140,359
======== ========
</TABLE>

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

F-29
<PAGE> 81

CULLMAN FAMILY PRACTICE, P.C.

STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
PERIOD FROM
JANUARY 1, PERIOD FROM
1995 JANUARY 1,
YEARS ENDED TO 1996
DECEMBER 31, FEBRUARY TO
------------------------ 28, MARCH 6,
1994 1995 1995 1996
---------- ---------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Net revenue.................................... $1,872,444 $2,199,025 $ 372,019 $ 364,266

Costs and expenses:
Cost of affiliated physician services..... 709,496 966,557 110,210 117,860
Clinic salaries and benefits.............. 565,416 642,975 79,586 83,698
Clinic rent and lease expenses............ 195,912 249,385 43,344 32,407
Clinic pharmaceuticals and supplies....... 132,102 132,812 15,079 19,093
Other clinic costs........................ 277,697 251,575 46,308 53,652
Depreciation and amortization............. 4,200 3,600 600 643
Interest expense.......................... 259 -- -- --
---------- ---------- --------- ---------
Total costs and expenses............. 1,885,082 2,246,904 295,127 307,353
---------- ---------- --------- ---------
Net income (loss).............................. $ (12,638) $ (47,879) $ 76,892 $ 56,913
========== ========== ========= =========
</TABLE>

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

F-30
<PAGE> 82

CULLMAN FAMILY PRACTICE, P.C.

STATEMENTS OF STOCKHOLDERS' EQUITY

<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL
---------------- PAID-IN RETAINED
SHARES AMOUNT CAPITAL EARNINGS TOTAL
------ ------ ---------- -------- --------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1993..................... 2,500 $2,500 $5,692 $160,236 $168,428
Net loss.................................. -- -- -- (12,638) (12,638)
----- ------ ------ -------- --------
Balance, December 31, 1994..................... 2,500 2,500 5,692 147,598 155,790
Net loss.................................. -- -- -- (47,879) (47,879)
----- ------ ------ -------- --------
Balance, December 31, 1995..................... 2,500 $2,500 $5,692 $ 99,719 $107,911
===== ====== ====== ======== ========
</TABLE>

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

F-31
<PAGE> 83

CULLMAN FAMILY PRACTICE, P.C.

STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
--------------------
1994 1995
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net loss........................................................... $(12,638) $(47,879)
Adjustments to reconcile net loss to net cash provided by operating
activities --
Depreciation and amortization................................. 4,200 3,600
Changes in assets and liabilities --
Accounts receivable...................................... 32,977 57,227
Other current assets..................................... (543) (13,674)
Accounts payable......................................... 8,003 3,948
Accrued expenses and other current liabilities........... 5,690 223
-------- --------
Net cash provided by operating activities........... 37,689 3,445
-------- --------

Cash flows from investing activities:
Purchases of property and equipment................................ (383) (1,692)
-------- --------
Net cash used in investing activities............... (383) (1,692)
-------- --------

Cash flows from financing activities:
Payments on long-term debt......................................... (40,000) --
-------- --------
Net cash used in financing activities............... (40,000) --
-------- --------

Net increase (decrease) in cash......................................... (2,694) 1,753
Cash, beginning of year................................................. 6,526 3,832
-------- --------
Cash, end of year....................................................... $ 3,832 $ 5,585
======== ========
</TABLE>

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

F-32
<PAGE> 84

CULLMAN FAMILY PRACTICE, P.C.

NOTES TO FINANCIAL STATEMENTS

DECEMBER 31, 1994 AND 1995

1. DESCRIPTION OF BUSINESS:

Cullman Family Practice, P.C. (the "Company") is an Alabama professional
corporation owned by five physicians which practice in the Cullman, Alabama
area. The Company was purchased by ProMedCo of Cullman, Inc. effective March 12,
1996 (see Note 8).

2. SIGNIFICANT ACCOUNTING POLICIES:

Basis of Presentation -- Audited Financial Statements

The accompanying financial statements have been prepared on the accrual
basis of accounting.

Basis of Presentation -- Interim Financial Statements

The interim financial statements have been prepared by the Company without
audit, pursuant to Accounting Principles Board ("APB") Opinion No. 28, "Interim
Financial Reporting." Certain information and footnote disclosures normally
included in the financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted pursuant to APB
Opinion No. 28; nevertheless, management of the Company believes that the
disclosures herein are adequate to prevent the information presented from being
misleading. In the opinion of management, all adjustments, consisting only of
normal recurring adjustments, necessary to present fairly the financial position
of the Company with respect to the results of its operations for the interim
periods from January 1, 1995 to February 28, 1995, and from January 1, 1996 to
March 6, 1996, have been included herein. The results of operations for the
interim periods are not necessarily indicative of the results for the full year.

Revenue Recognition

Revenue is recorded at estimated net amounts to be received from
third-party payors and others for services rendered.

Property and Equipment

Property and equipment is stated at cost, net of accumulated depreciation
and amortization. Property and equipment is depreciated using the straight-line
method over the following useful lives:

Income Taxes

F-33
<PAGE> 85

CULLMAN FAMILY PRACTICE, P.C.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

2. SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)

Use of Estimates

3. PROPERTY AND EQUIPMENT:

Property and equipment consists of the following:

<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1994 1995
-------- --------
<S> <C> <C>
Furniture and fixtures.......................................... $ 26,961 $ 28,652
Equipment....................................................... 30,695 35,050
Leasehold improvements.......................................... 6,640 6,640
Less accumulated depreciation and amortization.................. (58,243) (66,197)
-------- --------
Property and equipment, net..................................... $ 6,053 $ 4,145
======== ========
</TABLE>

4. COMMITMENTS AND CONTINGENCIES:

The Company leases a building and equipment under operating leases which
expire in 1999. Rent expense totaled $195,912 and $249,385 for the years ended
December 31, 1994 and 1995, respectively.

Future minimum lease commitments under operating leases are as follows:

5. RELATED-PARTY TRANSACTIONS:

The Company currently leases its building and equipment from MMB
Partnership, an entity owned by the Company's stockholders. The building lease
expires in 1999 and the equipment lease is cancelable on the yearly anniversary
of the lease by either party given 60 days notice. Amounts paid under the
building lease were approximately $103,000 and $138,000 in 1994 and 1995,
respectively. Amounts paid under the equipment lease were approximately $91,000
and $111,000 in 1994 and 1995, respectively.

6. BENEFIT PLAN:

The Company maintains a defined contribution plan for those employees who
meet the minimum length of service and age requirements. The Company contributed
$17,563 and $22,368 in 1994 and 1995, respectively.

F-34
<PAGE> 86

CULLMAN FAMILY PRACTICE, P.C.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

7. DISCLOSURES ABOUT THE FAIR VALUE OF FINANCIAL INSTRUMENTS:

8. SUBSEQUENT EVENT:

Effective March 12, 1996, the Company was acquired by ProMedCo of Cullman,
Inc., a wholly owned subsidiary of ProMedCo Management Company, in a stock
purchase transaction whereby ProMedCo of Cullman, Inc. agreed to acquire
substantially all the operations and certain assets and certain liabilities of
the Company, excluding, among other things, requirements under the Company's
benefit plan.

F-35
<PAGE> 87

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To the Stockholders of
Family Medical Clinic, P.C.:

We have audited the accompanying balance sheets of Family Medical Clinic,
P.C. (an Alabama professional corporation) as of December 31, 1994 and 1995, and
the related statements of operations, stockholders' equity, and cash flows for
the years then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.

In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Family Medical Clinic, P.C.
as of December 31, 1994 and 1995, and the results of its operations and its cash
flows for the years then ended in conformity with generally accepted accounting
principles.

ARTHUR ANDERSEN LLP
Fort Worth, Texas,
July 20, 1996

F-36
<PAGE> 88

FAMILY MEDICAL CLINIC, P.C.
BALANCE SHEETS

<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1994 1995
-------- --------
<S> <C> <C>
ASSETS
Current assets:
Cash............................................................... $ 37,220 $ 72,873
Accounts receivable, net of allowances of $127,409 and $150,904,
respectively..................................................... 130,302 145,397
-------- --------
Total current assets.......................................... 167,522 218,270
Property and equipment, net of accumulated depreciation of $87,731 and
$114,582, respectively................................................ 63,538 94,576
-------- --------
Total assets.................................................. $231,060 $312,846
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable................................................... $ 2,630 $ 2,942
Current maturities of notes payable................................ 40,751 39,886
Accrued expenses and other current liabilities..................... 41,646 44,793
-------- --------
Total current liabilities..................................... 85,027 87,621
Notes payable, net of current maturities................................ 29,017 99,974
-------- --------
Total liabilities............................................. 114,044 187,595
-------- --------
Commitments and contingencies
Stockholders' equity:
Common stock, $10 par value; 200 shares authorized, 150 shares
issued and outstanding............................................ 1,500 1,500
Additional paid-in capital......................................... 5,300 5,300
Retained income.................................................... 110,216 118,451
-------- --------
Total stockholders' equity.................................... 117,016 125,251
-------- --------
Total liabilities and stockholders' equity.................... $231,060 $312,846
======== ========
</TABLE>

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

F-37
<PAGE> 89

FAMILY MEDICAL CLINIC, P.C.
STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
PERIOD FROM PERIOD FROM
JANUARY 1, JANUARY 1,
YEARS ENDED 1995 1996
DECEMBER 31, TO TO
------------------------ FEBRUARY 28, MARCH 6,
1994 1995 1995 1996
---------- ---------- ------------ -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Net revenue.................................... $1,951,683 $2,113,442 $330,603 $ 394,259
---------- ---------- -------- ---------
Costs and expenses:
Cost of affiliated physician services..... 1,211,088 1,218,585 137,414 169,808
Clinic salaries and benefits.............. 315,974 369,304 51,797 64,657
Clinic rent and lease expenses............ 18,704 87,356 2,372 8,403
Clinic pharmaceuticals and supplies....... 101,930 108,380 15,014 15,772
Other clinic costs........................ 283,050 264,646 46,886 65,845
Depreciation.............................. 18,306 41,295 4,614 4,734
Interest expense.......................... 1,544 14,891 -- 385
---------- ---------- -------- ---------
Total costs and expenses............. 1,950,596 2,104,457 258,097 329,604
---------- ---------- -------- ---------
Net income..................................... $ 1,087 $ 8,985 $ 72,506 $ 64,655
========== ========== ======== =========
</TABLE>

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

F-38
<PAGE> 90

FAMILY MEDICAL CLINIC, P.C.
STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1994
AND DECEMBER 31, 1995

<TABLE>
<CAPTION>
COMMON STOCK
---------------- ADDITIONAL RETAINED
SHARES AMOUNT PAID-IN CAPITAL EARNINGS TOTAL
------ ------ --------------- -------- --------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1993.................. 150 $1,500 $ 5,300 $109,879 $116,679
Net income............................. -- -- -- 1,087 1,087
Dividends.............................. -- -- -- (750) (750)
--- ------ ------- -------- --------
Balance, December 31, 1994.................. 150 1,500 5,300 110,216 117,016
Net income............................. -- -- -- 8,985 8,985
Dividends.............................. -- -- -- (750) (750)
--- ------ ------- -------- --------
Balance, December 31, 1995.................. 150 $1,500 $ 5,300 $118,451 $125,251
=== ====== ======= ======== ========
</TABLE>

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

F-39
<PAGE> 91

FAMILY MEDICAL CLINIC, P.C.
STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
------------------
1994 1995
------- -------
<S> <C> <C>
Cash flows from operating activities:
Net income........................................................... $ 1,087 $ 8,985
Adjustments to reconcile net income to net cash provided by operating
activities --
Depreciation.................................................... 18,306 41,295
Changes in assets and liabilities --
Accounts receivable........................................ (9,740) (15,095)
Other current assets....................................... 1,333 --
Accounts payable........................................... (1,966) 312
Accrued expenses and other current liabilities............. 4,870 3,147
------- -------
Net cash provided by operating activities.................. 13,890 38,644
------- -------
Cash flows from investing activities:
Purchases of property and equipment.................................. (7,690) (72,333)
------- -------
Net cash used in investing activities...................... (7,690) (72,333)
------- -------
Cash flows from financing activities:
Proceeds from notes payable.......................................... 34,511 107,324
Payments on notes payable............................................ (40,769) (37,232)
Payment of dividends................................................. (750) (750)
------- -------
Net cash provided by (used in) financing activities........ (7,008) 69,342
------- -------
Net increase (decrease) in cash........................................... (808) 35,653
Cash, beginning of year................................................... 38,028 37,220
------- -------
Cash, end of year......................................................... $37,220 $72,873
======= =======
Supplemental disclosure of cash flow information:
Cash paid during the year --
Interest........................................................ $ 1,544 $14,891
</TABLE>

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

F-40
<PAGE> 92

FAMILY MEDICAL CLINIC, P.C.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1994 AND 1995

1. DESCRIPTION OF BUSINESS:

Family Medical Clinic, P.C. (the "Company") is an Alabama professional
corporation owned by three physicians which practice in Cullman, Alabama. The
Company was purchased by ProMedCo of Cullman, Inc. effective March 12, 1996 (see
Note 9).

2. SIGNIFICANT ACCOUNTING POLICIES:

Basis of Presentation -- Audited Financial Statements

The accompanying financial statements have been prepared on the accrual
basis of accounting.

Basis of Presentation -- Interim Financial Statements

The interim financial statements have been prepared by the Company without
audit, pursuant to the rules and regulations of Accounting Principles Board
("APB") Opinion No. 28, "Interim Financial Reporting." Certain information and
footnote disclosures normally included in the financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted pursuant to APB Opinion No. 28; nevertheless, management of the Company
believes that the disclosures herein are adequate to prevent the information
presented from being misleading. In the opinion of management, all adjustments,
consisting only of normal recurring adjustments, necessary to present fairly the
financial position of the Company with respect to the results of its operations
for the interim periods from January 1, 1995 to February 28, 1995, and from
January 1, 1996 to March 6, 1996, have been included herein. The results of
operations for the interim periods are not necessarily indicative of the results
for the full year.

Revenue Recognition

Revenue is recorded at estimated net amounts to be received from
third-party payors and others for services rendered.

Property and Equipment

Property and equipment is stated at cost, net of accumulated depreciation.
Property and equipment is depreciated using the straight-line method over the
following useful lives:

<TABLE>
<CAPTION>
YEARS
-----
<S> <C>
Furniture and fixtures............................................... 7
Equipment............................................................ 5
</TABLE>

Income Taxes

Use of Estimates

F-41
<PAGE> 93

FAMILY MEDICAL CLINIC, P.C.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

2. SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)

reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.

3. PROPERTY AND EQUIPMENT:

Property and equipment consists of the following:

<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1994 1995
-------- ---------
<S> <C> <C>
Furniture and fixtures......................................... $ 92,816 $ 147,483
Equipment...................................................... 58,453 61,675
Less -- Accumulated depreciation............................... (87,731) (114,582)
-------- ---------
Property and equipment, net.................................... $ 63,538 $ 94,576
======== =========
</TABLE>

4. NOTES PAYABLE:

Notes payable consisted of the following:

<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1994 1995
-------- --------
<S> <C> <C>
Line of credit with a bank, due August 2000, principal and
interest payable monthly, annual interest rate equal to the
Bank's commercial base rate ranging between 7.75%-9.75% and
5.9% for the years 1994 and 1995, respectively, secured by all
assets of the Company and guaranteed by its stockholders...... $ 42,279 $113,609
Other notes payable due April 1997, principal and interest
payable monthly, annual interest rates of 7.75% and 9.5%,
secured by automobiles........................................ 27,489 26,251
-------- --------
Total...................................................... 69,768 139,860
Less current maturities......................................... (40,751) (39,886)
-------- --------
Notes payable, net......................................... $ 29,017 $ 99,974
======== ========
</TABLE>

The maturities of notes payable at December 31, 1995, are as follows:

F-42
<PAGE> 94

FAMILY MEDICAL CLINIC, P.C.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

5. COMMITMENTS AND CONTINGENCIES:

The Company has entered into an operating lease for a building which
expires in 2005. The future minimum lease commitments under the operating leases
are as follows:

<TABLE>
<S> <C>
1996...................................................................... $ 90,248
1997...................................................................... 92,954
1998...................................................................... 95,743
1999...................................................................... 98,616
2000...................................................................... 101,573
Thereafter................................................................ 565,297
</TABLE>

Rent expense totaled $18,704 and $87,536 for the years ended December 31,
1994 and 1995, respectively.

6. RELATED-PARTY TRANSACTIONS:

During 1994, the Company paid approximately $4,500 to Family Medical Clinic
Association, an entity owned by two of the Company's stockholders, for building
rental. In addition, the Company paid this same entity approximately $14,000 and
$4,000 for equipment in 1994 and 1995, respectively.

7. BENEFIT PLAN:

The Company maintains a defined contribution plan for employees who meet
the minimum length of service and age requirements. Under the plan, the Company
makes contributions of 11% of all plan participants' compensation, plus 5.7% of
each of the participant's excess compensation, as defined. The Company is
responsible for the administration of the plan as the plan administrator and
trustee. The Company's contributions totaled $113,648 and $113,700 in 1994 and
1995, respectively, including $90,000 contributed for a stockholder in 1994 and
1995.

8. DISCLOSURES ABOUT THE FAIR VALUE OF FINANCIAL INSTRUMENTS:

9. SUBSEQUENT EVENT:

F-43
<PAGE> 95

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To the Stockholders of
Morgan-Haugh, P.S.C.:

We have audited the accompanying balance sheets of Morgan-Haugh, P.S.C. (a
Kentucky professional services corporation) as of December 31, 1994 and 1995,
and the related statements of operations, stockholders' equity, and cash flows
for each of the three years in the period ended December 31, 1995. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.

In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Morgan-Haugh, P.S.C. as of
December 31, 1994 and 1995, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 1995, in conformity
with generally accepted accounting principles.

ARTHUR ANDERSEN LLP

Fort Worth, Texas,
July 16, 1996

F-44
<PAGE> 96

MORGAN-HAUGH, P.S.C.

BALANCE SHEETS

<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1994 1995
---------- ----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents....................................... $ 113,132 $ 188,346
Accounts receivable, net of allowances of $407,000 and $432,000,
respectively................................................... 582,597 584,636
Stockholder notes receivable.................................... 23,935 --
Prepaid expenses and other current assets....................... 29,002 8,423
---------- ----------
Total current assets....................................... 748,666 781,405
Property and equipment, net of accumulated depreciation of $836,689
and $929,949, respectively......................................... 1,158,393 1,072,726
Other assets......................................................... 50,261 42,529
---------- ----------
Total assets............................................... $1,957,320 $1,896,660
========== ==========

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable................................................ $ 70,041 $ 55,988
Notes payable................................................... 203,032 130,049
Accrued expenses and other current liabilities.................. 290,018 345,555
Deferred income taxes........................................... 83,891 116,909
---------- ----------
Total current liabilities.................................. 646,982 648,501
Notes payable, net of current maturities............................. 983,017 864,811
---------- ----------
Total liabilities.......................................... 1,629,999 1,513,312
---------- ----------
Commitments and contingencies
Stockholders' equity:
Common stock, no par value, 4,000 shares authorized; 3,000
shares issued and 2,200 shares outstanding..................... 505,069 446,566
Treasury stock.................................................. (340,097) (271,186)
Stockholders notes receivable................................... (174,472) (191,277)
Retained income................................................. 336,821 399,245
---------- ----------
Total stockholders' equity................................. 327,321 383,348
---------- ----------
Total liabilities and stockholders' equity................. $1,957,320 $1,896,660
========== ==========
</TABLE>

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

F-45
<PAGE> 97

MORGAN-HAUGH, P.S.C.

STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
PERIOD FROM PERIOD FROM
JANUARY 1, JANUARY 1,
YEARS ENDED 1995 1996
DECEMBER 31, TO TO
------------------------------------ MARCH 31, MARCH 31,
1993 1994 1995 1995 1996
---------- ---------- ---------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net revenue:
Patient service revenue......... $4,879,771 $4,519,251 $4,403,055 $1,301,949 $1,091,091
Other revenue................... 167,541 146,713 48,373 36,822 36,049
---------- ---------- ---------- ---------- ----------
Total net revenue ......... 5,047,312 4,665,964 4,451,428 1,338,771 1,127,140
---------- ---------- ---------- ---------- ----------
Costs and expenses:
Cost of affiliated physician
services...................... 1,749,511 1,767,328 1,636,120 495,297 404,988
Clinic salaries and benefits.... 1,827,385 1,547,205 1,412,101 222,664 197,644
Rent expense.................... 25,633 24,575 33,547 7,685 7,911
Clinic pharmaceuticals and
supplies...................... 385,466 376,986 304,183 47,298 45,777
Other clinic costs.............. 1,021,745 894,142 761,402 355,236 322,369
Depreciation.................... 123,406 115,350 111,266 27,189 23,556
Interest expense................ 100,471 88,775 87,465 23,673 19,887
---------- ---------- ---------- ---------- ----------
Total costs and expenses... 5,233,617 4,814,361 4,346,084 1,179,042 1,022,132
---------- ---------- ---------- ---------- ----------
Income (loss) before provision for
income taxes....................... (186,305) (148,397) 105,344 159,729 105,008
Provision (credit) for income
taxes.............................. (73,317) (59,617) 42,920 60,696 39,903
---------- ---------- ---------- ---------- ----------
Net income (loss).................... $ (112,988) $ (88,780) $ 62,424 $ 99,033 $ 65,105
========== ========== ========== ========== ==========
</TABLE>

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

F-46
<PAGE> 98

MORGAN-HAUGH, P.S.C.

STATEMENTS OF STOCKHOLDERS' EQUITY

<TABLE>
<CAPTION>
COMMON STOCK STOCKHOLDER
------------------ TREASURY NOTES RETAINED
SHARES AMOUNT STOCK RECEIVABLE EARNINGS TOTAL
------ -------- --------- ----------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1992............... 2,200 $570,465 $(286,635) $(277,017) $ 538,589 $ 545,402
Stock purchased..................... (200) -- (96,713) -- -- (96,713)
Payments on stockholders notes,
net............................... -- -- -- 144,025 -- 144,025
Net loss............................ -- -- -- -- (112,988) (112,988)
----- -------- --------- --------- --------- ---------
Balance, December 31, 1993............... 2,000 570,465 (383,348) (132,992) 425,601 479,726
Stock purchased..................... (200) -- (87,558) -- -- (87,558)
Stock issued........................ 400 (65,396) 130,809 -- -- 65,413
Payments on stockholders notes,
net............................... -- -- -- (41,480) -- (41,480)
Net loss............................ -- -- -- -- (88,780) (88,780)
----- -------- --------- --------- --------- ---------
Balance, December 31, 1994............... 2,200 505,069 (340,097) (174,472) 336,821 327,321
Stock purchased..................... (200) -- (18,889) -- -- (18,889)
Stock issued........................ 200 (58,503) 87,800 -- -- 29,297
Payments on stockholders notes,
net............................... -- -- -- (16,805) -- (16,805)
Net income.......................... -- -- -- -- 62,424 62,424
----- -------- --------- --------- --------- ---------
Balance, December 31, 1995............... 2,200 $446,566 $(271,186) $(191,277) $ 399,245 $ 383,348
===== ======== ========= ========= ========= =========
</TABLE>

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

F-47
<PAGE> 99

MORGAN-HAUGH, P.S.C.

STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------
1993 1994 1995
--------- --------- ---------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)..................................... $(112,988) $ (88,780) $ 62,424
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities --
Depreciation..................................... 123,406 115,350 111,266
(Gain) loss on sale of property.................. (585) (2,904) 183
Changes in assets and liabilities --
Accounts receivable......................... (17,637) (24,392) (2,039)
Prepaid expenses and other current assets... 77,658 5,218 20,579
Accounts payable............................ 22,361 (2,691) (14,053)
Accrued expenses and other current
liabilities............................... (18,499) 35,323 55,537
Deferred income taxes....................... (62,492) (59,617) 33,018
--------- --------- ---------
Net cash provided by (used in)
operating activities................. 11,224 (22,493) 266,915
--------- --------- ---------
Cash flows from investing activities:
Purchases of property and equipment................... (60,542) (53,841) (25,787)
Proceeds from sales of property and equipment......... 5,710 19,622 5
Other assets.......................................... (2,510) (2,855) 7,732
--------- --------- ---------
Net cash used in investing
activities........................... (57,342) (37,074) (18,050)
--------- --------- ---------
Cash flows from financing activities:
Payments on stockholders notes receivable............. 99,120 44,043 23,935
Proceeds from notes payable........................... -- 283,289 76,889
Payments on notes payable............................. (122,928) (214,840) (255,586)
Purchase of treasury stock............................ (96,713) (87,558) (18,889)
--------- --------- ---------
Net cash provided by (used in)
financing activities................. (120,521) 24,934 (173,651)
--------- --------- ---------
Net increase (decrease) in cash............................ (166,639) (34,633) 75,214
Cash and cash equivalents, beginning of year............... 314,404 147,765 113,132
--------- --------- ---------
Cash and cash equivalents, end of year..................... $ 147,765 $ 113,132 $ 188,346
========= ========= =========
Supplemental disclosure of cash flow information:
Cash paid during the year --
Interest......................................... $ 100,471 $ 88,775 $ 87,465
</TABLE>

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

F-48
<PAGE> 100

MORGAN-HAUGH, P.S.C.

NOTES TO FINANCIAL STATEMENTS

DECEMBER 31, 1994 AND 1995

1. DESCRIPTION OF BUSINESS:

Morgan-Haugh, P.S.C. (the "Company") is a Kentucky professional corporation
that provides medical services. The principal stockholders of the Company are
the physicians who provide healthcare services. The Company was purchased by
ProMedCo of Mayfield, Inc. effective April 25, 1996 (see Note 10).

2. SIGNIFICANT ACCOUNTING POLICIES:

Basis of Presentation -- Audited Financial Statements

The accompanying financial statements have been prepared on the accrual
basis of accounting.

Basis of Presentation -- Interim Financial Statements

The interim financial statements have been prepared by the Company without
audit, pursuant to the rules and regulations of Accounting Principles Board
("APB") Opinion No. 28, "Interim Financial Reporting." Certain information and
footnote disclosures normally included in the financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted pursuant to APB Opinion No. 28; nevertheless, management of the Company
believes that the disclosures herein are adequate to prevent the information
presented from being misleading. In the opinion of management, all adjustments,
consisting only of normal recurring adjustments, necessary to present fairly the
financial position of the Company with respect to the results of its operations
for the interim periods from January 1, 1995 to March 31, 1995, and from January
1, 1996 to March 31, 1996, have been included herein. The results of operations
for the interim periods are not necessarily indicative of the results for the
full year.

Revenue Recognition

Revenue is recorded at estimated net amounts to be received from
third-party payors and others for services rendered.

Cash and Cash Equivalents

The Company includes all cash accounts, which are not subject to withdrawal
restrictions or penalties, and all highly liquid debt instruments, with original
maturities of three months or less, as cash and cash equivalents.

Property and Equipment

Property and equipment is stated at cost, net of accumulated depreciation.
Depreciation is computed on a straight-line method over the following useful
lives:

<TABLE>
<CAPTION>
YEARS
-----
<S> <C>
Furniture, fixtures, and equipment........................................... 5-10
Building and improvements.................................................... 15-30
</TABLE>

Use of Estimates

F-49
<PAGE> 101

MORGAN-HAUGH, P.S.C.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

2. SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)

reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.

3. PROPERTY AND EQUIPMENT:

Property and equipment consists of the following:

<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1994 1995
---------- ----------
<S> <C> <C>
Land......................................................... $ 161,852 $ 161,852
Furniture, fixtures, and equipment........................... 679,851 684,844
Building and improvements.................................... 1,153,379 1,155,979
Less -- Accumulated depreciation............................. (836,689) (929,949)
---------- ----------
Property and equipment, net.................................. $1,158,393 $1,072,726
========== ==========
</TABLE>

4. NOTES PAYABLE:

Notes payable consists of the following:

<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1994 1995
---------- ---------
<S> <C> <C>
7.5% note payable to a bank, due in monthly installments of
$1,439, including interest, through April 2005, secured by
property and equipment..................................... $ 123,677 $ 115,432
7.5% note payable to a bank, due in monthly installments of
$7,279, including interest, through May 2003, secured by
property and equipment..................................... 540,002 491,565
9.0% note payable to a bank, due in monthly installments of
$2,283, including interest, through January 2011, secured
by property and equipment.................................. 233,109 225,058
6.56% note payable to a related party, due in monthly
installments of $215, including interest, through July
2005, unsecured............................................ -- 18,324
8.75% note payable to a bank, due in monthly installments of
$407, including interest, through May 2003, unsecured...... -- 26,558
5.9% note payable to a related party, due in monthly
installments of $249, including interest, through December
2003, unsecured............................................ 20,943 19,145
9.0% note payable to a bank, due in monthly installments of
$747, including interest, through September 1999,
unsecured.................................................. -- 28,362
9.0% note payable to a bank, due in monthly installments of
$4,428, including interest, through May 1997, secured by
equipment.................................................. 115,279 70,416
8.26% note payable to a related party, due in monthly
installments of $863, including interest, through January
1999, unsecured............................................ 35,808 --
</TABLE>

F-50
<PAGE> 102

MORGAN-HAUGH, P.S.C.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

4. NOTES PAYABLE -- (CONTINUED)

<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1994 1995
---------- ---------
<S> <C> <C>
5.9% note payable to a related party, due in monthly
installments of $442, including interest, through December
2003, unsecured............................................ 37,231 --
8.5% note payable to a bank, due August 1995, unsecured...... 80,000 --
---------- ---------
Total................................................... 1,186,049 994,860
Less current maturities................................. (203,032) (130,049)
---------- ---------
Notes payable, net...................................... $ 983,017 $ 864,811
========== =========
</TABLE>

The maturities of notes payable as of December 31, 1995, are as follows:

<TABLE>
<S> <C>
1996...................................................................... $130,049
1997...................................................................... 109,436
1998...................................................................... 94,853
1999...................................................................... 100,130
2000...................................................................... 101,166
Thereafter................................................................ 459,226
--------
$994,860
========
</TABLE>

5. STOCKHOLDER NOTES RECEIVABLE:

At December 31, 1994 and 1995, the Company had the following non-interest
bearing notes due from stockholders. Each of the notes was received in exchange
for shares of the Company's common stock. As these notes are
noninterest-bearing, interest has been imputed and is recognized as interest
income in the statements of operations. As these notes relate to equity
contributions, the outstanding receivables as of December 31, 1994, have been
shown as a reduction of stockholders' equity.

The maturities of stockholder notes receivable at December 31, 1995, are as
follows:

<TABLE>
<S> <C>
Note receivable, $601 per month, through March 1998....................... $ 16,219
Note receivable, $677 per month, through May 1999......................... 29,798
Note receivable, $403 per month, through May 2010......................... 69,714
Note receivable, $411 per month, through August 2004...................... 30,021
Note receivable, $411 per month, through July 2004........................ 29,425
Note receivable, $215 per month, through April 2005....................... 16,100
--------
$191,277
========
</TABLE>

6. COMMITMENTS AND CONTINGENCIES:

The Company leases various equipment on a month-to-month basis; total rent
expense charged to operations aggregated $25,633, $24,575, and $33,547 in 1993,
1994, and 1995, respectively.

The Company leases office space and examination rooms to several physicians
under one-year renewable lease agreements. The Company is responsible for
repairs, maintenance, and utilities; the lessee is responsible for insurance
coverage during the term of the lease. Rental income under these operating
leases aggregated $20,070, $29,760, and $37,550 in 1993, 1994, and 1995,
respectively, and is included in other revenues in the accompanying statements
of operations.

F-51
<PAGE> 103

MORGAN-HAUGH, P.S.C.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

7. INCOME TAXES:

Deferred income taxes are attributable primarily to timing differences
between income tax reporting and financial reporting related to revenues and
expenses.

The following table summarizes the composition of the deferred tax assets
and liabilities.

<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1994 1995
-------- --------
<S> <C> <C>
Deferred tax assets --
Accounts payable................................................... $ 29,093 $ 18,834
Accrued expenses and other current liabilities..................... 104,048 100,912
Operating loss carryforwards....................................... 23,601 --
-------- --------
Total deferred tax assets..................................... 156,742 119,746
-------- --------
Deferred tax liabilities --
Accounts receivable................................................ 233,039 233,855
Other.............................................................. 7,594 2,800
-------- --------
Total deferred tax liabilities................................ 240,633 236,655
-------- --------
Net current deferred taxes.............................................. $ 83,891 $116,909
======== ========
</TABLE>

The following table summarizes the significant components of income tax
expense (benefit):

<TABLE>
<CAPTION>
1993 1994 1995
-------- -------- -------
<S> <C> <C> <C>
Current tax provision (benefit)........................ $(10,825) $ -- $ 9,902
Deferred tax provision (benefit)....................... (62,492) (59,617) 33,018
-------- -------- -------
Provision (credit) for income taxes.................... $(73,317) $(59,617) $42,920
======== ======== =======
</TABLE>

A reconciliation of the statutory federal income tax rate to the Company's
effective income tax rate follows:

<TABLE>
<CAPTION>
1993 1994 1995
---- ---- ----
<S> <C> <C> <C>
Statutory federal income tax rate.................................. 34% 34% 34%
State income taxes, net of federal income taxes.................... 4 4 4
Other.............................................................. 1 2 3
---- ---- ----
39% 40% 41%
==== ==== ====
</TABLE>

8. PROFIT SHARING PLAN:

The Company has a qualified profit sharing plan (the "Plan") that includes
a 401(k) provision. The profit sharing component covers substantially all
full-time employees and provides for contributions in such amounts as the Board
of Directors may annually determine. The 401(k) component permits eligible
employees, at their discretion, to invest up to 15% of their salary in the Plan.
Under the Plan agreement, the Company must match the employees' discretionary
investment in the Plan up to 3% of employees' compensation. Total expenses for
the Plan for the years ended December 31, 1993, 1994, and 1995, aggregated
$258,596, $130,199, and $153,752, respectively.

F-52
<PAGE> 104

MORGAN-HAUGH, P.S.C.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

9. DISCLOSURES ABOUT THE FAIR VALUE OF FINANCIAL INSTRUMENTS:

10. SUBSEQUENT EVENT:

Effective April 25, 1996, the Company was acquired by ProMedCo of Mayfield,
Inc., a wholly owned subsidiary of ProMedCo Management Company, in an asset
purchase transaction whereby ProMedCo of Mayfield, Inc. agreed to acquire
substantially all the operations and certain assets and liabilities of the
Company, excluding, among other things, requirements under the Company's profit
sharing plan.

F-53
<PAGE> 105

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To the Stockholders of
HealthFirst Services, Inc. and
Tarrant Family Practice, P.A.:

We have audited the accompanying combined balance sheets of HealthFirst
Services, Inc. and Tarrant Family Practice, P.A. (a Texas corporation and a
Texas association, respectively -- see Note 1) as of December 31, 1994 and 1995,
and the related combined statements of operations, owners' equity, and cash
flows for each of the three years in the period ended December 31, 1995. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.

In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of HealthFirst Services, Inc.
and Tarrant Family Practice, P.A. as of December 31, 1994 and 1995, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1995, in conformity with generally accepted
accounting principles.

ARTHUR ANDERSEN LLP

Fort Worth, Texas,
July 18, 1996

F-54
<PAGE> 106

HEALTHFIRST SERVICES, INC. AND TARRANT FAMILY PRACTICE, P.A.
COMBINED BALANCE SHEETS

<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1994 1995
---------- ----------
<S> <C> <C>
ASSETS
Current assets:
Cash............................................................ $ 164,675 $ 121,538
Accounts receivable -- net of allowances of $200,000 and
$360,000, respectively......................................... 493,000 836,270
---------- ----------
Total current assets....................................... 657,675 957,808
Property and equipment, net of accumulated depreciation and
amortization of $200,895 and $260,479, respectively................ 423,384 544,646
Other assets......................................................... 41,954 31,543
---------- ----------
Total assets............................................... $1,123,013 $1,533,997
========== ==========
LIABILITIES AND OWNERS' EQUITY
Current liabilities:
Accounts payable................................................ $ 109,412 $ 180,120
Notes payable................................................... 83,757 144,303
Accrued expenses and other current liabilities.................. 308,905 131,530
---------- ----------
Total current liabilities.................................. 502,074 455,953
Notes payable, net of current maturities............................. 221,909 117,867
Other liabilities.................................................... -- 101,180
---------- ----------
Total liabilities.......................................... 723,983 675,000
Commitments and contingencies (Note 6)
Owners' equity....................................................... 399,030 858,997
---------- ----------
Total liabilities and owners' equity....................... $1,123,013 $1,533,997
========== ==========
</TABLE>

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

F-55
<PAGE> 107

HEALTHFIRST SERVICES, INC. AND TARRANT FAMILY PRACTICE, P.A.
COMBINED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
PERIOD FROM PERIOD FROM
JANUARY 1, JANUARY 1,
1995 1996
YEARS ENDED DECEMBER 31, TO TO
-------------------------------------- MAY 31, MAY 31,
1993 1994 1995 1995 1996
---------- ---------- ---------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net revenue...................... $2,155,948 $3,024,119 $4,828,924 $1,658,933 $2,590,608
---------- ---------- ---------- ---------- ----------
Costs and expenses:
Cost of affiliated physician
services.................. 591,966 878,875 1,287,409 405,035 876,457
Clinic salaries and
benefits.................. 627,205 821,329 1,093,392 441,476 162,484
Clinic rent and lease
expenses.................. 61,802 98,851 169,737 38,152 94,070
Clinic pharmaceuticals and
supplies.................. 172,851 200,978 304,644 115,659 101,764
Other clinic costs.......... 662,255 872,805 1,428,685 466,999 918,210
Depreciation and
amortization.............. 32,705 62,113 70,116 11,300 --
Interest expense............ 36,922 25,257 22,532 4,103 5,170
---------- ---------- ---------- ---------- ----------
Total costs and
expenses............. 2,185,706 2,960,208 4,376,515 1,482,724 2,158,155
---------- ---------- ---------- ---------- ----------
Net income (loss)................ $ (29,758) $ 63,911 $ 452,409 $ 176,209 $ 432,453
========== ========== ========== ========== ==========
</TABLE>

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

F-56
<PAGE> 108

HEALTHFIRST SERVICES, INC. AND TARRANT FAMILY PRACTICE, P.A.
COMBINED STATEMENTS OF OPERATIONS

<TABLE>
<S> <C>
Balance, December 31, 1992........................................................ $342,473
Net loss..................................................................... (29,758)
--------
Balance, December 31, 1993........................................................ 312,715
Net income................................................................... 63,911
Capital contributions........................................................ 22,404
--------
Balance, December 31, 1994........................................................ 399,030
Net income................................................................... 452,409
Capital contributions........................................................ 7,558
--------
Balance, December 31, 1995........................................................ $858,997
========
</TABLE>

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

F-57
<PAGE> 109

HEALTHFIRST SERVICES, INC. AND TARRANT FAMILY PRACTICE, P.A.
COMBINED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------
1993 1994 1995
--------- --------- ---------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)..................................... $ (29,758) $ 63,911 $ 452,409
Adjustments to reconcile net income (loss) to net cash
provided by operating activities --
Depreciation and amortization.................... 32,705 62,113 70,116
Changes in assets and liabilities --
Accounts receivable, net.................... (40,300) (126,766) (343,270)
Other current assets........................ 40,315 -- --
Other noncurrent assets..................... (24,006) (8,159) --
Accounts payable............................ 25,163 79,592 70,708
Accrued expenses and other current
liabilities............................... 49,321 220,292 (177,375)
--------- --------- ---------
Net cash provided by operating
activities........................... 53,440 290,983 72,588
--------- --------- ---------
Cash flows from investing activities:
Purchase of property and equipment.................... (126,931) (72,041) (173,409)
--------- --------- ---------
Net cash used in investing
activities........................... (126,931) (72,041) (173,409)
--------- --------- ---------
Cash flows from financing activities:
Proceeds from notes payable........................... 167,197 14,785 46,121
Payments on notes payable............................. (50,186) (125,072) (89,617)
Proceeds from managed care contract................... -- -- 101,180
Proceeds from capital contributions................... -- 12,500 --
--------- --------- ---------
Net cash provided by (used in)
financing activities................. 117,011 (97,787) 57,684
--------- --------- ---------
Net increase (decrease) in cash............................ 43,520 121,155 (43,137)
Cash, beginning of year.................................... -- 43,520 164,675
--------- --------- ---------
Cash, end of year.......................................... $ 43,520 $ 164,675 $ 121,538
========= ========= =========
Supplemental disclosure of cash flow information:
Cash paid during the year for interest................ $ 36,922 $ 25,257 $ 22,532
Noncash capital contributions......................... $ -- $ 9,904 $ 7,558
</TABLE>

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

F-58
<PAGE> 110

HEALTHFIRST SERVICES, INC. AND TARRANT FAMILY PRACTICE, P.A.
NOTES TO COMBINED FINANCIAL STATEMENTS
DECEMBER 31, 1994 AND 1995

1. DESCRIPTION OF BUSINESS:

HealthFirst Services, Inc. and Tarrant Family Practice, P.A. (collectively,
the "Company") operate five medical clinics in Fort Worth, Texas and surrounding
areas. HealthFirst Services, Inc. and Tarrant Family Practice. P.A. were formed
under the applicable laws of Texas on June 23, 1994 and January 28, 1987,
respectively. The Companies are affiliated entities and have four common
shareholders that own 70% of HealthFirst Services Inc. and 100% of Tarrant
Family Practice, P.A. Accordingly, their financial position and results of
operation have been combined for financial reporting purposes.

2. SIGNIFICANT ACCOUNTING POLICIES:

Basis of Presentation -- Audited Financial Statements

The accompanying combined financial statements have been prepared on the
accrual basis of accounting.

Basis of Presentation -- Interim Financial Statements

The interim financial statements have been prepared by the Company without
audit, pursuant to Accounting Principles Board ("APB") Opinion No. 28, "Interim
Financial Reporting." Certain information and footnote disclosures normally
included in the financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted pursuant to APB
Opinion No. 28; nevertheless, management of the Company believes that the
disclosures herein are adequate to prevent the information presented from being
misleading. In the opinion of management, all adjustments, consisting only of
normal recurring adjustments, necessary to present fairly the financial position
of the Company with respect to the results of its operations for the interim
periods from January 1, 1995 to May 31, 1995, and from January 1, 1996 to May
31, 1996, have been included herein. The results of operations for the interim
periods are not necessarily indicative of the results for the full year.

Revenue Recognition

Revenue is recorded at estimated net amounts to be received from
third-party payers and others for services rendered.

Property and Equipment

Property and equipment are stated at cost, net of accumulated depreciation
and amortization. Property and equipment are depreciated using the straight-line
method over the following useful lives:

<TABLE>
<CAPTION>
YEARS
------------------------
<S> <C>
Furniture and fixtures........................................ 10
Equipment..................................................... 5-10
Leasehold improvements........................................ Remaining life of lease
</TABLE>

Income Taxes

HealthFirst Services, Inc. and Tarrant Family Practice, P.A. are both S
Corporations. Accordingly, income tax liabilities are the responsibility of the
respective owners.

Owners' Equity

Owners' equity includes the respective capital stock, additional paid-in
capital and retained earnings of the legal entities described in Note 1.

F-59
<PAGE> 111

HEALTHFIRST SERVICES, INC. AND TARRANT FAMILY PRACTICE, P.A.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)

2. SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)

The practices were purchased by ProMedCo of Lake Worth, Inc. subsequent to
year-end 1995 (see Note 9).

Use of Estimates

3. PROPERTY AND EQUIPMENT:

Property and equipment consists of the following:

<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1994 1995
--------- ---------
<S> <C> <C>
Furniture, fixtures, and equipment............................ $ 370,059 $ 527,317
Leasehold improvements........................................ 254,220 277,808
Less -- Accumulated depreciation and amortization............. (200,895) (260,479)
--------- ---------
Property and equipment, net................................... $ 423,384 $ 544,646
========= =========
</TABLE>

4. NOTES PAYABLE:

Notes payable consists of the following:

<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1994 1995
-------- --------
<S> <C> <C>
Note payable to bank, due in 1997, payable in monthly
installments, bearing interest at 8.75%, secured by property
and equipment................................................. $120,399 $ 77,981
Note payable to a health maintenance organization, for which the
Company will provide clinic services to its members; due in
1998, payable in monthly installments beginning in 1995,
bearing interest at prime, secured by operating assets........ 142,000 131,679
Other notes payable, due from 1996 to 1998, bearing interest at
rates from 5.85% to 9.75%..................................... 43,267 52,510
-------- --------
Total...................................................... 305,666 262,170
Less current maturities.................................... (83,757) (144,303)
-------- --------
Notes payable, net......................................... $221,909 $117,867
======== ========
</TABLE>

The maturities of notes payable at December 31, 1995 are as follows:

<TABLE>
<S> <C>
1996...................................................................... $144,303
1997...................................................................... 76,938
1998...................................................................... 40,929
--------
Total................................................................ $262,170
========
</TABLE>

F-60
<PAGE> 112

HEALTHFIRST SERVICES, INC. AND TARRANT FAMILY PRACTICE, P.A.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)

5. OTHER LIABILITIES:

During 1995, the Company received cash from a health maintenance
organization in return for agreeing to provide clinic services to its members in
a certain area, for a three-year period. The amount will be earned over the
three year term, beginning in 1996. However, upon the Company's termination of
clinic services in the area, the unearned balance becomes due.

6. COMMITMENTS AND CONTINGENCIES:

The Company has operating leases for all of its facilities including the
clinics and the business office, extending through 2011. Rent expense totaled
$60,778, $97,714, and $169,411 for the years ended December 31, 1993, 1994, and
1995, respectively (see Note 7).

Future lease commitments under the operating leases are as follows:

<TABLE>
<S> <C>
1996.................................................................... $ 264,342
1997.................................................................... 307,854
1998.................................................................... 271,285
1999.................................................................... 221,088
2000.................................................................... 198,848
Thereafter.............................................................. 1,260,000
</TABLE>

Subsequent to December 31, 1995, the Company entered into a lease agreement
with an affiliated company for a new facility. The commitments related to this
agreement have been included in the above future lease commitments.

7. RELATED-PARTY TRANSACTIONS:

The Company leases several of its facilities from affiliated companies with
common owners. Total rent expense to related parties for the years ended
December 31, 1993, 1994, and 1995 was $45,779, $60,102, and $112,021,
respectively.

8. BENEFIT PLAN:

The Company maintains a defined contribution plan for employees who meet
the minimum length of service and age requirements. Under the plan, the Company
makes contributions of 5.7% of all plan participants' compensation. The
Company's contributions totaled $51,887, $65,984, and $90,261 in 1993, 1994, and
1995, respectively.

9. DISCLOSURES ABOUT THE FAIR VALUE OF FINANCIAL INSTRUMENTS:

10. SUBSEQUENT EVENT:

Effective May 29, 1996, the Company was acquired by ProMedCo of Lake Worth,
Inc., a wholly owned subsidiary of ProMedCo Management Company, in an asset
purchase transaction whereby ProMedCo of Lake Worth, Inc. agreed to acquire
substantially all the operations and certain assets and certain liabilities of
the Company, excluding, among other things, requirements under the Company's
benefit plan.

F-61
<PAGE> 113

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To the Stockholders of
Abilene Diagnostic Clinic, P.L.L.C.:

We have audited the accompanying combined balance sheets of the Abilene
Diagnostic Clinic Practices (see Note 1) as of December 31, 1995 and 1996, and
the related combined statements of operations, owners' equity, and cash flows
for each of the three years in the period ended December 31, 1996. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.

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

ARTHUR ANDERSEN LLP

Fort Worth, Texas,
January 31, 1997

F-62
<PAGE> 114

ABILENE DIAGNOSTIC CLINIC PRACTICES (NOTE 1)

COMBINED BALANCE SHEETS

<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1995 1996
---------- ----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents....................................... $ 369,717 $ 361,740
Accounts receivable -- net of allowances of $783,991 and
$2,623,757, respectively....................................... 1,478,283 1,609,780
Prepaid expenses and other current assets....................... 146,050 143,778
---------- ----------
Total current assets....................................... 1,994,050 2,115,298
Property and equipment, net of accumulated depreciation of $110,543
and $135,113, respectively......................................... 57,224 32,654
Other assets......................................................... 50,000 50,000
---------- ----------
Total assets............................................... $2,101,274 $2,197,952
========== ==========

LIABILITIES AND OWNERS' EQUITY
Current liabilities:
Accounts payable................................................ $ 583,331 $ 459,941
Management fees payable......................................... 113,047 573,715
Notes payable................................................... 198,163 820,447
Accrued expenses and other current liabilities.................. 65,693 48,667
---------- ----------
Total current liabilities.................................. 960,234 1,902,770
Notes payable, net of current maturities............................. -- 77,675
---------- ----------
Total liabilities.......................................... 960,234 1,980,445
Commitments and contingencies
Owners' equity....................................................... 1,141,040 217,507
---------- ----------
Total liabilities and owners' equity....................... $2,101,274 $2,197,952
========== ==========
</TABLE>

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

F-63
<PAGE> 115

ABILENE DIAGNOSTIC CLINIC PRACTICES (NOTE 1)

COMBINED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------------
1994 1995 1996
---------- ---------- -----------
<S> <C> <C> <C>
Net revenue............................................ $7,114,567 $9,536,623 $15,790,742
---------- ---------- -----------

Cost of affiliated physician services............. 3,730,554 4,939,683 7,462,546
Clinic salaries and benefits...................... 1,336,463 1,424,891 2,332,584
Clinic rent and lease expense..................... 322,711 477,923 800,711
Clinic pharmaceuticals and supplies............... 335,317 354,161 859,649
Other clinic costs................................ 1,382,539 1,799,974 4,348,486
Management fees................................... -- 113,047 700,896
Depreciation...................................... 31,795 29,190 24,572
Interest expense.................................. 25,963 23,620 13,528
Other (income) expense............................ 4,137 27,221 (8,426)
---------- ---------- -----------
Total costs and expenses..................... 7,169,479 9,189,710 16,534,546
---------- ---------- -----------
Net income (loss)...................................... $ (54,912) $ 346,913 $ (743,804)
========== ========== ===========
</TABLE>

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

F-64
<PAGE> 116

ABILENE DIAGNOSTIC CLINIC PRACTICES (NOTE 1)

COMBINED STATEMENTS OF OWNERS' EQUITY

<TABLE>
<S> <C>
Balance, December 31, 1993...................................................... $ 929,114
Net loss................................................................... (54,912)
Capital distributions...................................................... (39,025)
----------
Balance, December 31, 1994...................................................... 835,177
Net income................................................................. 346,913
Capital distributions...................................................... (41,050)
----------
Balance, December 31, 1995...................................................... 1,141,040
Net loss................................................................... (743,804)
Capital contributions...................................................... 300,584
Capital distributions...................................................... (480,313)
----------
Balance, December 31, 1996...................................................... $ 217,507
==========
</TABLE>

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

F-65
<PAGE> 117

ABILENE DIAGNOSTIC CLINIC PRACTICES (NOTE 1)

COMBINED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------
1994 1995 1996
--------- --------- ---------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)..................................... $ (54,912) $ 346,913 $(743,804)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities --
Depreciation..................................... 31,795 29,190 24,572
(Gain) loss on sale of equipment................. (424) -- --
Changes in assets and liabilities --
Accounts receivable, net.................... (116,684) (213,476) (131,497)
Other current assets........................ 5,595 (30,849) 2,272
Other assets................................ -- (50,000) --
Accounts payable............................ (2,631) 407,225 (123,390)
Management fees payable..................... -- 113,047 460,668
Accrued expenses and other current
liabilities............................... 452,145 (743,452) (17,028)
--------- --------- ---------
Net cash provided by (used in)
operating activities................. 314,884 (141,402) (528,207)
--------- --------- ---------
Cash flows from investing activities:
Purchases of property and equipment................... (27,490) (64,100) --
Proceeds from sale of property and equipment.......... 140,246 -- --
--------- --------- ---------
Net cash provided by (used in)
investing activities................. 112,756 (64,100) --
--------- --------- ---------
Cash flows from financing activities:
Payments on notes payable............................. (81,518) (72,547) (50,041)
Proceeds from notes payable........................... 750,000
Proceeds from capital contributions .................. -- -- 300,584
Capital owner distributions........................... (39,025) (41,050) (480,313)
--------- --------- ---------
Net cash provided by (used in)
financing activities................. (120,543) (113,597) 520,230
--------- --------- ---------
Net increase (decrease) in cash and cash equivalents....... 307,097 (319,099) (7,977)
Cash and cash equivalents, beginning of year............... 381,719 688,816 369,717
--------- --------- ---------
Cash and cash equivalents, end of year..................... $ 688,816 $ 369,717 $ 361,740
========= ========= =========
Supplemental disclosure of cash flow information:
Cash paid during the year for interest................ $ 25,963 $ 23,620 $ 13,528
========= ========= =========
</TABLE>

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

F-66
<PAGE> 118

ABILENE DIAGNOSTIC CLINIC PRACTICES (NOTE 1)

NOTES TO COMBINED FINANCIAL STATEMENTS

DECEMBER 31, 1995 AND 1996

1. DESCRIPTION OF BUSINESS:

Abilene Diagnostic Clinic, P.L.L.C. ("ADC"), a Texas professional limited
liability company, operates a group medical practice in Taylor County, Texas.
ADC has entered into an interim service agreement with ProMedCo of Abilene,
Inc., a wholly owned subsidiary of ProMedCo Management Company, to manage all
day-to-day operations other than the provision of medical services. ADC has also
entered into an asset purchase agreement with ProMedCo Management Company for
certain assets and certain liabilities (excluding, among other things,
requirements under benefit plans) of ADC in exchange for common stock of
ProMedCo Management Company effective the later of February 16, 1997 or the
first day of the month following the date of the initial public offering.

The combined financial statements of Abilene Diagnostic Clinic Practices
include ADC and the historical financial statements of Abilene Association of
Anesthesiology, P.A. This practice was purchased by ADC subsequent to December
31, 1995, and is included as part of the ProMedCo Management Company purchase of
ADC. The accompanying financial statements of the Abilene Diagnostic Clinic
Practices ("Combined Entities") have been prepared on a combined basis since the
proposed business combination will be accounted for as a single transaction and
it is more meaningful to present the combined financial position and results of
operations of the acquired entities.

2. SIGNIFICANT ACCOUNTING POLICIES:

Basis of Presentation -- Audited Financial Statements

The accompanying combined financial statements have been prepared on the
accrual basis of accounting.

Revenue Recognition

Revenue is recorded at estimated net amounts to be received from third
party payors and others for services rendered.

Cash and Cash Equivalents

The Combined Entities include all cash accounts, and all highly liquid debt
instruments, with original maturities of three months or less, as cash and cash
equivalents.

Accounts Receivable

Accounts receivable primarily consists of receivables from patients,
insurers, government programs and other third-party payors for medical services
provided by physicians. Such amounts are reduced by an allowance for
uncollectible amounts in certain entities.

Property and Equipment

Property and equipment is stated at cost, net of accumulated depreciation
and amortization. Property and equipment are depreciated using the straight-line
method over the following useful lives:

F-67
<PAGE> 119

ABILENE DIAGNOSTIC CLINIC PRACTICES (NOTE 1)

NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)

2. SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)

Income Taxes

The Combined Entities have historically not incurred significant tax
liabilities for federal or state income taxes. Compensation to physician owners
has traditionally reduced taxable income to nominal levels. This relationship
would be expected to continue in the future. Because of this practice,
provisions for income taxes and deferred tax assets and liabilities of the
taxable entities have not been reflected in the combined financial statements.

Owners' Equity

Owners' equity includes the combined respective capital stock, additional
paid-in capital, and retained earnings of the various legal entities reflected
herein as the Combined Entities.

Use of Estimates

3. PROPERTY AND EQUIPMENT:

Property and equipment consists of the following:

<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1995 1996
-------- ---------
<S> <C> <C>
Equipment...................................................... $167,767 $ 167,767
Less accumulated depreciation.................................. (110,543) (135,113)
-------- ---------
Property and equipment, net.................................... $ 57,224 $ 32,654
======== =========
</TABLE>

4. NOTES PAYABLE:

Notes payable consists of the following:

<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1995 1996
--------- ---------
<S> <C> <C>
Note payable to a bank, due in 1998, payable in monthly
installments with the balance due at maturity, bearing
interest at the bank base rate plus 0.5%, unsecured......... $ 198,163 $ 148,122
Note payable to a bank, due in 1997, payable in monthly
installments with the balance due at maturity, bearing
interest at the bank base rate plus 1.0%, secured........... -- 750,000
--------- ---------
Total.................................................... 198,163 898,122
Less current maturities.................................. (198,163) (820,447)
--------- ---------
Notes payable, net....................................... $ -- $ 77,675
========= =========
</TABLE>

F-68
<PAGE> 120

ABILENE DIAGNOSTIC CLINIC PRACTICES (NOTE 1)

NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)

5. COMMITMENTS AND CONTINGENCIES:

The Combined Entities have operating leases for all of its facilities. Rent
expense totaled $322,711, $477,923, and $800,711 for the years ended December
31, 1994, 1995, and 1996, respectively.

Future lease commitments under the operating leases are as follows:

6. BENEFIT PLANS:

The Combined Entities have several defined contribution plans.
Contributions were $418,529 and $61,466 for 1994 and 1995, respectively. No
contributions were made in 1996.

7. DISCLOSURES ABOUT THE FAIR VALUE OF FINANCIAL INSTRUMENTS:

8. SALE OF THE COMBINED ENTITIES:

In December, 1995, the Combined Entities entered into an interim management
services agreement with ProMedCo of Abilene, Inc., a wholly owned subsidiary of
ProMedCo Management Company. As part of this transaction, the Combined Entities
agreed to be acquired by ProMedCo of Abilene, Inc., on the later of February 16,
1997 or the first day of the month following the date of the initial public
offering of ProMedCo Management Company's common stock, excluding, among other
things, requirements under the Combined Entities' benefit plan.

F-69
<PAGE> 121

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To the Stockholders of
King's Daughters Clinic, P.A.:

We have audited the accompanying balance sheets of King's Daughters Clinic,
P.A. (a Texas professional association) as of December 31, 1994 and 1995, and
the related statements of operations, stockholders' equity, and cash flows for
each of the three years in the period ended December 31, 1995. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.

In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of King's Daughters Clinic,
P.A. as of December 31, 1994 and 1995, and the results of its operations and its
cash flows for each of the three years in the period ended December 31, 1995, in
conformity with generally accepted accounting principles.

ARTHUR ANDERSEN LLP

Fort Worth, Texas,
August 30, 1996

F-70
<PAGE> 122

KING'S DAUGHTERS CLINIC, P.A.
BALANCE SHEETS

<TABLE>
<CAPTION>
DECEMBER 31,
------------------------ AUGUST 31,
1994 1995 1996
---------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents........................... $ 41,583 $ 64,756 $ 301,706
Accounts receivable, net of allowances of $850,000,
$2,312,000, and $2,397,000 at December 31, 1994
and 1995, and August 31, 1996, respectively....... 1,080,764 2,651,078 2,762,001
Inventories......................................... 84,753 123,607 84,967
Prepaid expenses and other current assets........... 118,772 263,260 126,491
---------- ---------- ----------
Total current assets........................... 1,325,872 3,102,701 3,275,165
Property and equipment, net.............................. 920,931 1,219,271 1,597,639
---------- ---------- ----------
Total assets................................... $2,246,803 $4,321,972 $4,872,804
========== ========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Line of credit...................................... $ -- $ 275,000 $ 225,000
Accounts payable.................................... 384,716 1,010,801 745,709
Accrued expenses and other current liabilities...... 617,789 524,820 1,481,362
Current portion of notes payable.................... 83,996 69,996 69,996
Current portion of capital lease obligations........ 201,851 279,160 294,216
Deferred income taxes............................... -- 302,913 182,939
---------- ---------- ----------
Total current liabilities...................... 1,288,352 2,462,690 2,999,222
Long-Term liabilities:
Notes payable....................................... 180,843 110,847 64,183
Capital lease obligations........................... 530,862 668,759 1,030,171
Deferred income taxes............................... 50,146 72,755 --
Other long-term liabilities......................... -- 349,845 393,575
---------- ---------- ----------
Total long-term liabilities.................... 761,851 1,202,206 1,487,929
---------- ---------- ----------
Total liabilities.............................. 2,050,203 3,664,896 4,487,151
Commitments and contingencies
Stockholders' equity:
Common stock, $100 par value, 1,000,000 shares
authorized; 27, 29 and 30 shares outstanding at
December 31, 1994 and 1995, and August 31, 1996,
respectively, after deducting 1, 0, and 0 shares
held in treasury at December 31, 1994 and 1995 and
August 31, 1996................................... 2,700 2,900 3,000
Retained earnings................................... 193,900 654,176 382,653
---------- ---------- ----------
Total stockholders' equity..................... 196,600 657,076 385,653
---------- ---------- ----------
Total liabilities and stockholders' equity..... $2,246,803 $4,321,972 $4,872,804
========== ========== ==========
</TABLE>

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

F-71
<PAGE> 123

KING'S DAUGHTERS CLINIC, P.A.
STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
FOR THE FOR THE
EIGHT MONTHS EIGHT MONTHS
YEARS ENDED DECEMBER 31, ENDED ENDED
----------------------------------------- AUGUST 31, AUGUST 31,
1993 1994 1995 1995 1996
----------- ----------- ----------- ------------ ------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues:
Net patient service revenues..... $13,612,086 $15,509,447 $18,757,164 $12,480,170 $12,448,700
Other revenues................... 714,884 774,250 814,429 463,290 553,460
----------- ----------- ----------- ----------- -----------
Total net revenues.......... 14,326,970 16,283,697 19,571,593 12,943,460 13,002,160
----------- ----------- ----------- ----------- -----------
Costs and expenses:
Cost of affiliated physician
services....................... 5,478,326 5,980,131 7,427,766 5,179,604 5,012,422
Clinic salaries and benefits..... 4,559,211 5,653,364 5,010,994 3,335,680 4,015,320
Rent expense..................... 1,405,316 1,679,774 1,724,425 1,229,919 1,175,969
Clinic pharmaceuticals and
supplies....................... 1,281,654 1,310,088 1,451,689 972,672 1,038,608
Other clinic costs............... 1,301,134 1,652,023 2,863,294 1,837,771 1,828,518
Depreciation..................... 84,796 166,781 294,960 189,044 259,119
Interest expense................. 19,029 31,293 101,077 71,724 83,603
----------- ----------- ----------- ----------- -----------
Total costs and expenses.... 14,129,466 16,473,454 18,874,205 12,816,414 13,413,559
----------- ----------- ----------- ----------- -----------
Income (loss) before provision for
income taxes....................... 197,504 (189,757) 697,388 127,046 (411,399)
Provision (benefit) for income
taxes.............................. 67,151 (64,517) 237,112 43,196 (139,876)
----------- ----------- ----------- ----------- -----------
Net income (loss).................... $ 130,353 $ (125,240) $ 460,276 $ 83,850 $ (271,523)
=========== =========== =========== =========== ===========
</TABLE>

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

F-72
<PAGE> 124

KING'S DAUGHTERS CLINIC, P.A.
STATEMENTS OF STOCKHOLDERS' EQUITY

<TABLE>
<CAPTION>
COMMON STOCK TREASURY STOCK
---------------- RETAINED ----------------
SHARES AMOUNT EARNINGS SHARES AMOUNT TOTAL
------ ------ --------- ------ ------ ---------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1992............. 28 $2,800 $ 188,787 -- $ -- $ 191,587
Purchase of treasury stock........ -- -- -- (4) (400) (400)
Net income........................ -- -- 130,353 -- -- 130,353
---- ------ --------- ---- ----- ---------
Balance, December 31, 1993............. 28 2,800 319,140 (4) (400) 321,540
Purchase of treasury stock........ -- -- -- (1) (100) (100)
Reissuance of treasury stock...... -- -- -- 4 400 400
Net loss.......................... -- -- (125,240) -- -- (125,240)
---- ------ --------- ---- ----- ---------
Balance, December 31, 1994............. 28 2,800 193,900 (1) (100) 196,600
Purchase of treasury stock........ -- -- -- (1) (100) (100)
Reissuance of treasury stock...... -- -- -- 2 200 200
Issuance of common stock.......... 1 100 -- -- -- 100
Net income........................ -- -- 460,276 -- -- 460,276
---- ------ --------- ---- ----- ---------
Balance, December 31, 1995............. 29 2,900 654,176 -- -- 657,076
Issuance of common stock
(unaudited)..................... 1 100 -- -- -- 100
Net loss (unaudited).............. -- -- (271,523) -- -- (271,523)
---- ------ --------- ---- ----- ---------
Balance, August 31, 1996 (unaudited)... 30 $3,000 $ 382,653 -- $ -- $ 385,653
==== ====== ========= ==== ===== =========
</TABLE>

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

F-73
<PAGE> 125

KING'S DAUGHTERS CLINIC, P.A.
STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
FOR THE FOR THE
YEARS ENDED DECEMBER 31, EIGHT MONTHS EIGHT MONTHS
------------------------------------- ENDED ENDED
1993 1994 1995 AUGUST 31, AUGUST 31,
--------- --------- ----------- 1995 1996
------------ ------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)........................... $ 130,353 $(125,240) $ 460,276 $ (146,932) $ (467,143)
Adjustments to reconcile net income (loss)
to net cash provided by (used in)
operating activities --
Depreciation............................ 84,796 166,781 294,960 139,550 194,452
Changes in assets and liabilities --
Accounts receivable................. (545,775) (5,000) (1,570,314) (497,908) (64,179)
Inventories......................... (4,000) (4,253) (38,854) (2,830) 28,476
Prepaid expenses and other current
assets............................ (96,711) 152,285 (144,288) (10,479) 74,775
Accounts payable.................... 8,643 176,073 626,085 352,539 (138,504)
Accrued expenses and other current
liabilities....................... 114,055 37,143 256,876 854,944 932,870
Deferred income taxes............... 127,462 (77,316) 325,522 (25,886) (254,448)
--------- --------- ----------- ------------ ------------
Net cash provided by (used in)
operating activities.......... (181,177) 320,473 210,263 662,998 306,299
--------- --------- ----------- ------------ ------------
Cash flows from investing activities:
Purchase of property and equipment.......... (8,273) (152,550) (174,443) (70,065) (78,670)
--------- --------- ----------- ------------ ------------
Net cash used in investing activities... (8,273) (152,550) (174,443) (70,065) (78,670)
--------- --------- ----------- ------------ ------------
Cash flows from financing activities:
Borrowing (repayments) under line of
credit.................................... -- -- 275,000 -- (50,000)
Payments on capital leases.................. (101,310) (109,681) (203,651) (105,932) (130,246)
Proceeds from notes payable................. 350,000 -- -- -- --
Payments on notes payable................... (43,165) (83,996) (83,996) (34,998) (29,185)
--------- --------- ----------- ------------ ------------
Net cash provided by (used in)
financing activities.......... 205,525 (193,677) (12,647) (140,930) (209,431)
--------- --------- ----------- ------------ ------------
Net increase (decrease) in cash................. 16,075 (25,754) 23,173 452,003 18,198
Cash and cash equivalents, beginning of year.... 51,262 67,337 41,583 41,583 64,756
--------- --------- ----------- ------------ ------------
Cash and cash equivalents, end of year.......... $ 67,337 $ 41,583 $ 64,756 $ 493,586 $ 82,954
========= ========= ========== ============ ============
Supplemental disclosure of cash flow
information:
Cash paid during the period --
Interest................................ $ 19,029 $ 31,293 $ 101,077 $ 56,757 $ 58,813
Income taxes............................ $ -- $ -- $ -- $ -- $ --
Noncash financing activities:
Equipment acquired under capital lease...... $ 65,757 $ 617,038 $ 523,209 $ 187,582 $ 557,657
</TABLE>

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

F-74
<PAGE> 126

KING'S DAUGHTERS CLINIC, P.A.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1994 AND 1995

1. DESCRIPTION OF BUSINESS:

King's Daughters Clinic, P.A. (the "Clinic") is a Texas professional
association that provides medical services. The principal stockholders of the
Clinic are the physicians who provide healthcare services. The Clinic was
purchased by ProMedCo of Temple, Inc. effective September 1, 1996 (see Note 9).

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

Basis of Presentation -- Interim Financial Statements

The financial statements for the eight months ended August 31, 1995 and
1996, have been prepared by the Clinic, without audit, pursuant to Accounting
Principles Board (APB) Opinion No. 28, "Interim Financial Reporting." Certain
information and footnote disclosures normally included in the financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted pursuant to the APB Opinion No. 28; nevertheless,
management of the Clinic believes that the disclosures herein are adequate to
prevent the information presented from being misleading. In the opinion of
management, all adjustments, consisting only of normal recurring adjustments,
necessary to present fairly the financial position of the Clinic with respect to
the results of its operations for the eight months ended August 31, 1995 and
1996, have been included herein. The results of operations for the eight-month
period is not necessarily indicative of the results for the full year.

Use of Estimates

Cash and Cash Equivalents

The Clinic includes all cash accounts, which are not subject to withdrawal
restrictions or penalties, and all highly liquid debt instruments, with original
maturities of three months or less, as cash and cash equivalents.

Inventories

Inventories are stated at the lower of cost or market and consist primarily
of radiology, laboratory, and office supplies.

Property and Equipment

Property and equipment are stated at cost, net of accumulated depreciation.
Depreciation is computed based on the straight-line method over the following
useful lives:

<TABLE>
<CAPTION>
YEARS
------
<S> <C>
Leasehold improvements............................................. 5-31.5
Furniture, fixtures, and equipment................................. 3-7
</TABLE>

Revenue Recognition

Revenue is recorded at estimated net amounts to be received from
third-party payors and others for services rendered.

F-75
<PAGE> 127

KING'S DAUGHTERS CLINIC, P.A.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

3. PROPERTY AND EQUIPMENT:

At December 31, 1994 and 1995, property and equipment consisted of the
following:

<TABLE>
<CAPTION>
1994 1995
---------- ----------
<S> <C> <C>
Leasehold improvements....................................... $ 29,386 $ 79,479
Furniture, fixtures, and equipment........................... 1,225,101 1,685,414
Less -- Accumulated depreciation............................. (333,556) (545,622)
---------- ----------
Property and equipment, net............................. $ 920,931 $1,219,271
========= =========
</TABLE>

4. NOTES PAYABLE:

At December 31, 1994 and 1995, notes payable consisted of the following:

<TABLE>
<CAPTION>
1994 1995
-------- --------
<S> <C> <C>
Note payable from a bank bearing interest at prime plus 1%
(8.5%, 8.5% and 8.25%, respectively), due in monthly
installments of $5,833, plus interest, through, July 15, 1998,
guaranteed by a related party................................. $250,839 $180,843
Note payable from a bank bearing interest at prime plus .5%
(8.5% in 1994), principle due in annual installments of
$14,000 through September 10, 1995, interest due quarterly.... 14,000 --
Less -- Current maturities...................................... (83,996) (69,996)
-------- --------
Notes payable, net......................................... $180,843 $110,847
======== ========
</TABLE>

The maturities of notes payable as of December 31, 1995, are as follows:

<TABLE>
<S> <C>
1996...................................................................... $ 69,996
1997...................................................................... 69,996
1998...................................................................... 40,851
1999...................................................................... --
2000...................................................................... --
Thereafter................................................................ --
--------
$180,843
========
</TABLE>

The Clinic also has a revolving line of credit with a bank in the amount of
$300,000, which accrues interest at the prime rate (8.5% at December 31, 1995).
At December 31, 1995, the outstanding balance on this line of credit was
$275,000.

5. LEASE COMMITMENTS:

The Clinic leases various equipment and office buildings under operating
leases. Rent expense charged to operations totaled approximately $907,000,
$990,000, and $1,200,000 during the years ended December 31, 1993, 1994, and
1995, respectively.

F-76
<PAGE> 128

KING'S DAUGHTERS CLINIC, P.A.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

5. LEASE COMMITMENTS -- CONTINUED

The Clinic also leases various equipment under capital leases. At December
31, 1995, future minimum lease payments under capital and operating leases are
as follows:

<TABLE>
<CAPTION>
CAPITAL OPERATING TOTAL
--------- --------- -----------
<S> <C> <C> <C>
1996............................................... $ 356,136 $ 88,776 $ 444,912
1997............................................... 300,053 76,560 376,613
1998............................................... 261,955 -- 261,955
1999............................................... 136,933 -- 136,933
2000............................................... 68,641 -- 68,641
Thereafter......................................... -- -- --
--------- -------- ----------
Less -- Portion attributable to interest........... (175,799) -- (175,799)
--------- -------- ----------
Net obligations.................................... $ 947,919 $165,336 $1,113,255
========= ======== ==========
</TABLE>

Rent paid to related parties totaled approximately $877,000, $919,000, and
$983,000 during the years ended December 31, 1993, 1994, and 1995, respectively.

6. INCOME TAXES:

Deferred income taxes reflect net operating loss carryforwards and the
impact of temporary differences between the amount of asset and liabilities for
financial reporting purposes and such amounts as measured by tax laws and
regulations. These differences related primarily to provisions for doubtful
accounts, book versus tax depreciation differences, and accrued revenues and
expenses recorded for book purposes but not yet recorded for tax purposes.

At December 31, 1994 and 1995, the Clinic had the following deferred tax
assets and liabilities recorded:

<TABLE>
<CAPTION>
1994 1995
-------- ----------
<S> <C> <C>
Deferred tax assets --
Allowances on accounts receivable........................ $289,009 $ 786,153
Accounts payable......................................... 130,803 343,672
Accrued expenses and other current liabilities........... 210,048 297,386
Operating loss carryforwards............................. 23,106 24,549
-------- ----------
Total deferred tax assets........................... 652,966 1,451,760
-------- ----------
Deferred tax liabilities --
Accounts receivable...................................... 656,468 1,687,520
Depreciation............................................. 23,105 97,304
Other.................................................... 23,539 42,604
-------- ----------
Total deferred tax liabilities...................... 703,112 1,827,428
-------- ----------
Net deferred tax liabilities.................................. $ 50,146 $ 375,668
======== ==========
</TABLE>

The following table summarizes the significant components of the income tax
provision (benefit):

<TABLE>
<CAPTION>
1993 1994 1995
-------- -------- --------
<S> <C> <C> <C>
Current tax provision (benefit)....................... $(60,311) $ 12,799 $(88,410)
Deferred tax provision (benefit)...................... 127,462 (77,316) 325,522
-------- -------- --------
Total income tax provision (benefit).................. $ 67,151 $(64,517) $237,112
======== ======== ========
</TABLE>

F-77
<PAGE> 129

KING'S DAUGHTERS CLINIC, P.A.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

6. INCOME TAXES -- CONTINUED

The Clinic has no significant permanent tax differences and therefore its
effective tax rate equals its statutory tax rate.

7. PROFIT SHARING PLAN:

The Clinic has a qualified profit sharing plan (the "Plan") that includes a
401(k) provision. The profit sharing component covers substantially all
full-time employees and provides for contributions in such amounts as the Board
of Directors may annually determine. The 401(k) component permits eligible
employees, at their discretion, to contribute a percentage of their salary into
the Plan. The maximum contribution percentage was 10% until December 31, 1995,
at which time the Plan was amended to increase the contribution percentage to
15% of the employees' salary. Under the Plan agreement, the Company must match
the employees' discretionary investment in the Plan up to 1% of the employees'
compensation. The Clinic may also elect to contribute up to 5% of eligible
employees compensation to the profit sharing portion of the Plan. Total
contributions by the Clinic aggregated approximately $224,000, $300,000, and
$326,000 for the years ended December 31, 1993, 1994, and 1995, respectively.

8. DISCLOSURES ABOUT THE FAIR VALUE OF FINANCIAL INSTRUMENTS:

9. SUBSEQUENT EVENT:

The Clinic has entered into a transaction whereby ProMedCo of Temple, a
wholly owned subsidiary of ProMedCo Management Company, will acquire
substantially all the operations and certain assets and liabilities of the
Clinic on September 1, 1996.

10. CONTINGENCIES:

The Clinic is involved in various legal proceedings in the ordinary course
of business. The Clinic does not believe that the disposition of such legal
proceedings and disputes will have a material adverse effect on the financial
position and results of operations of the Clinic.

F-78
<PAGE> 130

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To the Stockholders of
Western Medical Management Corp., Inc.:

We have audited the accompanying balance sheets of Western Medical
Management Corp., Inc. (a Nevada corporation) as of December 31, 1995 and 1996,
and the related statements of operations, stockholders' equity, and cash flows
for each of the three years in the period ended December 31, 1996. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.

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

In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Western Medical Management
Corp., Inc. as of December 31, 1995 and 1996, and the results of its operations
and its cash flows for each of the three years in the period ended December 31,
1996, in conformity with generally accepted accounting principles.

ARTHUR ANDERSEN LLP

Fort Worth, Texas,
January 24, 1997

F-79
<PAGE> 131

WESTERN MEDICAL MANAGEMENT CORP., INC.
BALANCE SHEETS

<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1995 1996
---------- -----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents...................................... $ -- $ --
Accounts receivable, net of allowances of $1,065,033 and
$1,303,472, respectively...................................... 1,480,081 1,955,207
Due from affiliated physician group............................ -- 150,058
Inventory...................................................... 12,948 12,503
Prepaid expenses and other current assets...................... 40,389 138,574
---------- -----------
Total current assets...................................... 1,533,418 2,256,342
Property and equipment, net of accumulated depreciation of $561,847
and $561,729, respectively........................................ 190,465 588,416
Other assets........................................................ 28,110 19,681
---------- -----------
Total assets.............................................. $1,751,993 $ 2,864,439
========== ===========

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable............................................... $ 708,188 $ 854,546
Due to affiliated physician group.............................. 6,093 --
Notes payable and current portion of capital lease
obligations................................................... 17,705 375,166
Notes payable to affiliates.................................... 52,871 137,085
Note payable to ProMedCo....................................... -- 775,000
Line of credit................................................. 225,000 235,000
Accrued expenses and other current liabilities................. 358,451 371,385
Merger reserve................................................. -- 430,937
---------- -----------
Total current liabilities................................. 1,368,308 3,179,119
Notes payable and capital lease obligations, net of current
maturities........................................................ 15,929 339,112
---------- -----------
Total liabilities......................................... 1,384,237 3,518,231
Commitments and contingencies
Stockholders' equity (deficit):
Preferred stock, $1 par value, 25,000 shares authorized, 8,500
shares issued and outstanding (liquidation preference of $5
per share).................................................... $ 8,500 $ 8,500
Common stock, $1 par value, 50,000 shares authorized, 9,906 and
10,530 shares issued and outstanding, respectively............ 9,906 10,530
Paid in capital................................................ 1,570,812 1,601,494
Shareholder notes receivable................................... -- (31,306)
Retained deficit............................................... (1,221,462) (2,243,010)
---------- -----------
Total stockholders' equity (deficit)...................... 367,756 (653,792)
---------- -----------
Total liabilities and stockholders' equity (deficit)...... $1,751,993 $ 2,864,439
========== ===========
</TABLE>

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

F-80
<PAGE> 132

WESTERN MEDICAL MANAGEMENT CORP., INC.
STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------
1994 1995 1996
---------- ----------- -----------
<S> <C> <C> <C>
Physician group revenue, net........................... $9,542,857 $11,212,067 $12,123,925
Less: amounts retained by physician group.............. 3,576,330 4,585,175 5,469,387
---------- ----------- -----------
Management fee revenue................................. 5,966,527 6,626,892 6,654,538
Costs and expenses:
Clinic salaries and benefits...................... 3,048,528 3,695,429 4,191,597
Rent expense...................................... 484,508 592,992 656,463
Clinic pharmaceuticals and supplies............... 482,400 512,667 440,959
Other clinic costs................................ 1,802,206 2,297,522 1,776,579
Depreciation and amortization..................... 152,904 169,180 112,814
Interest expense.................................. 15,999 25,988 46,520
Merger costs...................................... -- -- 682,269
---------- ----------- -----------
Total costs and expenses..................... 5,986,545 7,293,778 7,907,201
Other income........................................... -- 58,309 231,115
---------- ----------- -----------
Loss before provision for income taxes................. (20,018) (608,577) (1,021,548)
Provision (benefit) for income taxes................... 12,566 (54,405) --
---------- ----------- -----------
Net loss............................................... $ (32,584) $ (554,172) $(1,021,548)
========== =========== ===========
</TABLE>

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

F-81
<PAGE> 133

WESTERN MEDICAL MANAGEMENT CORP., INC.
STATEMENTS OF STOCKHOLDERS' EQUITY

<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK STOCKHOLDER
---------------- ----------------- PAID IN NOTES RETAINED
SHARES AMOUNT SHARES AMOUNT CAPITAL RECEIVABLE EARNINGS TOTAL
------ ------ ------ ------- ---------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31,
1993................. 8,500 $8,500 9,906 $ 9,906 $1,570,812 $ -- $ (634,706) $ 954,512
Net loss.......... -- -- -- -- -- -- (32,584) (32,584)
----- ------ ------ ------- ---------- --------- ----------- -----------
Balance, December 31,
1994................. 8,500 8,500 9,906 9,906 1,570,812 -- (667,290) 921,928
Net loss.......... -- -- -- -- -- -- (554,172) (554,172)
----- ------ ------ ------- ---------- --------- ----------- -----------
Balance, December 31,
1995................. 8,500 8,500 9,906 9,906 1,570,812 -- (1,221,462) 367,756
Exercise of stock
options......... -- -- 624 624 30,682 (31,306) -- --
Net loss.......... -- -- -- -- -- -- (1,021,548) (1,021,548)
----- ------ ------ ------- ---------- --------- ----------- -----------
Balance, December 31,
1996................. 8,500 $8,500 10,530 $10,530 $1,601,494 $ (31,306) $(2,243,010) $ (653,792)
===== ====== ====== ======= ========== ========= =========== ===========
</TABLE>

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

F-82
<PAGE> 134

WESTERN MEDICAL MANAGEMENT CORP., INC.
STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------------
1994 1995 1996
-------- --------- -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss............................................. $(32,584) $(554,172) $(1,021,548)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities --
Depreciation and amortization................... 152,904 169,180 112,814
(Gain) loss on sale of equipment................ 263 (53,370) (229,251)
Changes in assets and liabilities --
Accounts receivable........................ (33,952) (299,681) (475,126)
Inventory.................................. 2,119 4,343 445
Prepaid expenses and other current
assets................................... 81,945 59,994 (98,185)
Accounts payable........................... 44,971 404,394 146,358
Due to affiliated physician group.......... (11,122) (402) (156,149)
Accrued expenses and other current
liabilities.............................. (31,057) 67,892 12,935
Merger reserve............................. -- -- 430,937
Deferred income taxes...................... (82,812) (56,136) --
-------- --------- -----------
Net cash provided by (used in)
operating activities................ 90,675 (257,958) (1,276,770)
-------- --------- -----------
Cash flows from investing activities:
Purchases of property and equipment.................. (61,730) (57,839) (78,558)
Proceeds from sale of property and equipment......... 750 218,890 242,175
-------- --------- -----------
Net cash provided by (used in)
investing activities................ (60,980) 161,051 163,617
-------- --------- -----------
Cash flows from financing activities:
Proceeds from line of credit......................... -- 250,000 265,000
Payments on line of credit........................... -- (25,000) (255,000)
Proceeds from note payable to ProMedCo............... -- -- 775,000
Proceeds from notes payable.......................... 23,000 -- 330,000
Payments on notes payable and capital lease
obligations........................................ (91,693) (82,895) (70,132)
Proceeds from notes payable to affiliates............ 113,998 75,920 145,000
Payments on notes payable to affiliates.............. (75,000) (121,118) (76,715)
-------- --------- -----------
Net cash provided by (used in)
financing activities................ (29,695) 96,907 1,113,153
-------- --------- -----------
Net increase in cash...................................... -- -- --
Cash and cash equivalents beginning of year............... -- -- --
-------- --------- -----------
Cash and cash equivalents, end of year.................... $ -- $ -- $ --
======== ========= ==========
Supplemental disclosure of cash flow information:
Cash paid during the year --
Interest........................................ $ 10,850 $ 22,929 $ 46,520
Taxes........................................... $120,886 $ 67,420 $ --
</TABLE>

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

F-83
<PAGE> 135

WESTERN MEDICAL MANAGEMENT CORP., INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1994, 1995 AND 1996

1. DESCRIPTION OF BUSINESS:

Western Medical Management Corp., Inc. ("WMM" or the "Company") a Nevada
corporation is engaged in operating and managing a physician group. The Company
operates the physician group under a long-term service agreement. The principal
stockholders of the Company are physicians who also own stock and are employees
of the physician group (the "Affiliated Physician Group"). The Company has
entered into a merger agreement with ProMedCo Management Company ("ProMedCo")
which is to be consummated at the initial public offering ("IPO") of ProMedCo's
common stock. The business combination is expected to be accounted for as a
pooling-of-interests (see Note 10).

The accompanying financial statements have been prepared on a going concern
basis. At December 31, 1996, the Company had negative working capital and
stockholder's equity. In addition, the Company incurred net losses of $1,021,548
for the year ended December 31, 1996. As discussed in Note 10, the Company has
borrowed $775,000 from ProMedCo for working capital purposes, and is currently
negotiating amounts due under its loan agreements with other third parties.

The accompanying financial statements do not include any adjustments
relating to the carrying amounts of assets or liabilities should the Company be
unable to operate as a going concern.

2. SIGNIFICANT ACCOUNTING POLICIES:

Basis of Presentation

The financial statements have been prepared on the accrual basis of
accounting. Certain 1995 amounts have been reclassified to conform with the 1996
presentation.

Management Fee Revenue

Revenue for the physician group is reported at the estimated realizable
amounts from patients, third-party payors, and others for services rendered and
reduced by the cost of affiliated physician services. The amounts retained by
physician group represents amounts paid to the physicians under a management
service agreement. Management fee revenue represents WMM's proportionate share
of medical revenues under the agreement. Revenue under certain third-party payor
agreements is subject to audit and retroactive adjustments. Provisions for
estimated third-party payor settlements and adjustments are estimated in the
period the related services are rendered and adjusted in future periods as final
settlements are determined. There are no material claims, disputes, or other
unsettled matters that exist to management's knowledge concerning third-party
reimbursements. In addition, management believes there are no retroactive
adjustments that would be material to the Company's financial statements.

Cash and Cash Equivalents

Inventory

Inventories are stated at lower of cost or market and consist primarily of
pharmaceuticals and office supplies.

F-84
<PAGE> 136

WESTERN MEDICAL MANAGEMENT CORP., INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

2. SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)

Property and Equipment

Property and equipment are stated at cost, net of accumulated depreciation.
Depreciation is computed on a straight-line method over the following useful
lives:

<TABLE>
<CAPTION>
YEARS
------------------------
<S> <C>
Leasehold improvements........................................ Estimated life of lease
Furniture, fixtures, and equipment............................ 5-7
</TABLE>

Due from/to Affiliated Physician Group, net

Amounts included in Due to Affiliated Physician Group represent amounts
payable to the Affiliated Physician Group based on the service agreement.
Amounts included in Due from Affiliated Physician Group represent amounts
receivable from the Affiliated Physician Group for expenses paid on its behalf.

Use of Estimates

3. PROPERTY AND EQUIPMENT:

Property and equipment consists of the following:

<TABLE>
<CAPTION>
1995 1996
--------- ----------
<S> <C> <C>
Leasehold improvements........................................ $ 107,147 $ 102,495
Furniture, fixtures, and equipment............................ 645,165 1,047,650
Less-Accumulated depreciation................................. (561,847) (561,729)
--------- ----------
Property and equipment, net................................... $ 190,465 $ 588,416
========= ==========
</TABLE>

F-85
<PAGE> 137

WESTERN MEDICAL MANAGEMENT CORP., INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

4. NOTES PAYABLE:

Notes payable consists of the following:

<TABLE>
<CAPTION>
1995 1996
---------- --------
<S> <C> <C>
8% unsecured note payable, due in monthly installments of
$5,771, including interest, through February 1996........... $ 11,428 $ --
8% unsecured note payable, due in monthly installments of
$1,177, including interest, through February 1996........... 2,331 --
Note payable to a bank, interest at prime plus 1.5% (9.75% at
December 31, 1996), due in February 1997, personally
guaranteed by affiliated physician group.................... -- 300,000
7% unsecured note payable to a bank, due in monthly
installments of $225, including interest, through June
1997........................................................ -- 1,337
Note payable to an affiliate, due in monthly installments of
$4,167 through December 1995, renegotiated to pay remaining
balance in 1996............................................. 15,000 --
Note payable to an affiliate, due in monthly installments of
$498, through August 1999................................... 15,929 9,956
8% unsecured note payable to an affiliate, due in monthly
installments of $1339, through September 1998............... -- 27,129
8% unsecured note payable to an affiliate, interest and
principal due on March 31, 1997............................. -- 100,000
8% unsecured note payable to an affiliate, due in monthly
installments of $4,235, including interest, through
September 1996.............................................. 41,817 --
Capital lease obligation, due in monthly installments of $335,
including interest, through February 2000................... -- 10,314
Capital lease obligation, due in monthly installments of
$6,350, including interest, through August 2001............. -- 291,358
Capital lease obligation, due in monthly installments of
$2,530, including interest, through November 2001........... -- 111,269
---------- --------
Total notes payable and capital lease obligations............. $ 86,505 $851,363
Less-current maturities....................................... (70,576) (512,251)
---------- --------
Notes payable and capital lease obligations, net.............. $ 15,929 $339,112
========== ========
</TABLE>

The maturities of notes payable as of December 31, 1996, are as follows:

During 1995, the Company obtained a $225,000 revolving line of credit with
a bank. This line of credit accrues interest at the prime rate plus 1.5%. During
1996, the line of credit was increased to $250,000 and expires in February 1997.

F-86
<PAGE> 138

WESTERN MEDICAL MANAGEMENT CORP., INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

4. NOTES PAYABLE -- (CONTINUED)

During 1996, the Company borrowed $775,000 from ProMedCo for working
capital purposes. See Note 10.

5. COMMITMENTS:

The Company leases various equipment and office buildings under operating
leases; rent expense charged to operations totaled approximately $485,000,
$593,000 and $656,000 in 1994, 1995, and 1996, respectively.

The Company also leases various equipment under capital leases. Future
minimum lease payments under capital and operating leases as of December 31,
1996 are as follows:

<TABLE>
<CAPTION>
CAPITAL OPERATING TOTAL
--------- ---------- ----------
<S> <C> <C> <C>
1997.............................................. $ 110,577 $ 849,547 $ 960,124
1998.............................................. 110,577 415,077 525,654
1999.............................................. 110,577 304,058 414,635
2000.............................................. 107,231 181,149 288,380
2001.............................................. 76,101 134,259 210,360
Thereafter........................................ -- 5,537 5,537
--------- ---------- ----------
515,063 1,889,627 2,404,690
Less portion attributable to interest............. (102,122) -- (102,122)
--------- ---------- ----------
Net obligations................................... $ 412,941 $1,889,627 $2,302,568
========= ========== ==========
</TABLE>

6. INCOME TAXES:

Deferred income taxes are attributable primarily to timing differences
between income tax reporting and financial reporting related to revenues and
expenses.

The following table summarizes the composition of the deferred tax assets
and liabilities.

<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1995 1996
--------- ---------
<S> <C> <C>
Deferred tax assets --
Allowance for accounts receivable................................ $ 227,701 $ 346,637
NOL carryforward................................................. -- 123,271
--------- ---------
Total deferred tax assets................................... 227,701 469,908
--------- ---------
Deferred tax liabilities --
Section 481 adjustment........................................... (103,419) --
--------- ---------
Total deferred tax liabilities.............................. (103,419) --
--------- ---------
124,282 469,908
--------- ---------
Valuation allowance................................................... (124,282) (469,908)
--------- ---------
Net deferred tax asset (liability).................................... $ -- $ --
========= =========
</TABLE>

F-87
<PAGE> 139

WESTERN MEDICAL MANAGEMENT CORP., INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

6. INCOME TAXES -- (CONTINUED)

The following table summarizes the significant components of income tax
expense (benefit):

<TABLE>
<CAPTION>
1994 1995 1996
--------- -------- --------
<S> <C> <C> <C>
Current tax provision................................ $ 95,378 $ 1,731 $ --
Deferred tax benefit................................. (82,812) (56,136) --
-------- -------- --------
Provision (benefit) for income taxes................. $ 12,566 $(54,405) $ --
======== ======== ========
</TABLE>

A reconciliation of the statutory federal income tax rate to the Company's
effective income tax rate follows:

<TABLE>
<CAPTION>
1994 1995 1996
------- --------- ---------
<S> <C> <C> <C>
Federal tax at statutory rate........................ $(6,806) $(128,345) $(347,326)
Increase in valuation allowance...................... -- 124,282 345,626
Other................................................ 19,372 (50,342) 1,700
------- --------- ---------
$12,566 $ (54,405) $ --
======= ========= =========
</TABLE>

Effective January 1, 1993, the Company changed from a cash-basis taxpayer
filing status to an accrual-basis taxpayer. In accordance with Internal Revenue
Service guidelines, the additional taxable income is treated as a section 481
adjustment and is recognized ratably over four years. A deferred tax liability
has been recognized for the effect of this adjustment.

7. PROFIT SHARING PLAN:

The Company has a qualified profit sharing plan (the "Plan") that includes
a 401(k) provision. The profit sharing component covers substantially all
full-time employees and provides for contributions in such amounts as the Board
of Directors may annually determine. The 401(k) component permits eligible
employees, at their discretion, to invest up to 10% of their salary in the Plan.
Under the Plan agreement, the Company's matching of the employees' contribution
is discretionary at a rate of $.25 for each $1 and employees may contribute up
to $500. Total expenses for the Plan for the years ended December 31, 1994,
1995, and 1996, aggregated approximately $173,794, $190,797 and $27,000,
respectively.

8. DISCLOSURES ABOUT THE FAIR VALUE OF FINANCIAL INSTRUMENTS:

9. STOCK OPTIONS:

In 1994, an employee was granted options to receive 5% of the stock of the
Company. The options were granted at net book value, which approximated fair
market value, and were exercised in 1996.

In 1995, an employee was granted options to purchase 1% of the stock of the
Company. The options were granted at net book value, which approximated fair
market value, and were exercised in 1996.

In 1995, the Company also entered into an agreement with a consultant for
financial advisory services in which the consultant was awarded warrants to
purchase up to 10% of the fully diluted equity of the Company. The exercise
price for the options will be determined based on the average selling price of
the first 10% of the

F-88
<PAGE> 140

WESTERN MEDICAL MANAGEMENT CORP., INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

9. STOCK OPTIONS -- (CONTINUED)

equity shares sold by the Company. The exercise price will be equal to 70% of
such average purchase price paid and will expire in 2005.

10. MERGER WITH PROMEDCO:

On November 7, 1996, the Company entered into a definitive agreement to
merge with ProMedCo in a combination accounted for as a pooling-of-interests.
The combination is to be consummated upon the closing of the initial public
offering of ProMedCo's common stock.

As part of the agreement, the Company has entered into an interim services
agreement whereby ProMedCo will provide management services to the Company. In
addition, ProMedCo has provided the Company with a line of credit of up to $2.5
million at market terms for working capital purposes. As of December 31, 1996,
the Company has borrowed $775,000. Concurrent with the funding of the loan, the
Company has also entered into a new service agreement with the Affiliated
Physician Group.

Included in the net loss for the year ended December 31, 1996, are merger
costs totaling $682,269 related to the merger with ProMedCo. The major
components of these costs are as follows:

<TABLE>
<S> <C>
Restructuring of operations............................................... $103,990
Severance and other personnel costs....................................... 377,901
Professional fees......................................................... 200,378
--------
$682,269
========
</TABLE>

The merger costs related to restructuring of operations relates primarily
to the write-off of costs associated with a new clinic location which management
no longer plans to open and the write-off and reserve for lease losses related
to the abandonment of leased space and the related leasehold improvements.
Severance and other personnel costs relate primarily to personnel changes as a
result of the merger. Professional fees relate directly to the merger
transaction and include legal and other requirements of the merger. At December
31, 1996, the $430,937 in merger accruals related to the above merger costs.
Management has no further plans for restructuring that will impact the results
of operations.

F-89
<PAGE> 141

NO DEALER, SALESPERSON, OR OTHER PERSON IS AUTHORIZED TO GIVE ANY
INFORMATION OR MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS IN
CONNECTION WITH THE OFFER MADE BY THIS PROSPECTUS, AND, IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED
BY THE COMPANY OR THE UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER
TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY OF THE SECURITIES OFFERED
HEREBY BY ANYONE IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS NOT
AUTHORIZED OR IN WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT
QUALIFIED TO DO SO OR TO ANYONE TO WHOM IT IS UNLAWFUL TO MAKE SUCH AN OFFER OR
SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE
HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE
AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THE INFORMATION CONTAINED HEREIN
IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE OF THIS PROSPECTUS.

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

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary....................... 3
Risk Factors............................. 5
Use of Proceeds.......................... 10
Dividend Policy.......................... 10
Dilution................................. 11
Capitalization........................... 12
Pro Forma Consolidated Financial
Information............................ 13
Selected Financial Data.................. 20
Management's Discussion and Analysis of
Financial Condition and Results of
Operations............................. 21
Business................................. 26
Management............................... 34
Principal and Selling Stockholders....... 41
Description of Capital Stock............. 42
Shares Eligible for Future Sale.......... 47
Underwriting............................. 48
Legal Matters............................ 49
Experts.................................. 49
Additional Information................... 50
Index to Financial Statements............ F-1
</TABLE>

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

UNTIL , 1997 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK OFFERED HEREBY, WHETHER OR
NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A
PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A
PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD
ALLOTMENTS OR SUBSCRIPTIONS.

4,000,000 SHARES

[PROMEDCO LOGO]

COMMON STOCK
--------------------------------
PROSPECTUS
--------------------------------
PIPER JAFFRAY INC.

ROBERTSON, STEPHENS &
COMPANY

COWEN & COMPANY
, 1997
<PAGE> 142

PART II.

INFORMATION NOT REQUIRED IN PROSPECTUS

ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.

The following table sets forth all expenses payable in connection with the
registration of the Common Stock that is the subject of this Registration
Statement, all of which shall be borne by the Company. All the amounts shown are
estimates except for the registration fee, the Nasdaq listing fee, and the NASD
filing fee.

<TABLE>
<CAPTION>
TO BE PAID BY
REGISTRANT
-------------
<S> <C>
Securities and Exchange Commission registration fee.................... $ 17,423
Nasdaq listing fee..................................................... 43,500
National Association of Securities Dealers filing fee.................. 5,500
Printing and engraving expenses........................................ 75,000
Legal fees and expenses................................................ 175,000
Accounting fees and expenses........................................... 850,000
Blue sky filing fees................................................... 10,000
Miscellaneous.......................................................... 123,577
----------
Total............................................................. $1,300,000
==========
</TABLE>

ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.

The Company's Certificate of Incorporation and By-Laws provide for
indemnification of directors, officers, agents, and employees of the Company to
the fullest extent permitted by law. Under Delaware law, a corporation may
indemnify any person who was or is a party or is threatened to be made a party
to an action (other than an action by or in the right of the corporation) by
reason of his service as a director or officer of the corporation, or his
service, at the corporation's request, as a director, officer, employee, or
agent of another corporation or other enterprise, against expenses (including
attorneys' fees) that are actually and reasonably incurred by him ("Expenses"),
and judgments, fines and amounts paid in settlement that are actually and
reasonably incurred by him, in connection with the defense or settlement of such
action, provided that he acted in good faith and in a manner he reasonably
believed to be in or not opposed to the corporation's best interests and, with
respect to any criminal action or proceeding, had no reasonable cause to believe
that his conduct was unlawful. Although Delaware law permits a corporation to
indemnify any person referred to above against Expenses in connection with the
defense or settlement of an action by or in the right of the corporation,
provided that he acted in good faith and in a manner he reasonably believed to
be in or not opposed to the corporation's best interests, if such person has
been judged liable to the corporation, indemnification is only permitted to the
extent that the Court of Chancery (or the court in which the action was brought)
determines that, despite the adjudication of liability, such person is entitled
to indemnity for such Expenses as the court deems proper. The determination as
to whether a person seeking indemnification has met the required standard of
conduct is to be made (1) by a majority vote of a quorum of disinterested
members of the board of directors, or (2) by independent legal counsel in a
written opinion, if such a quorum does not exist or if the disinterested
directors so direct, or (3) by the stockholders. The General Corporation Law of
the State of Delaware also provides for mandatory indemnification of any
director, officer, employee, or agent against Expenses to the extent such person
has been successful in any proceeding covered by the statute. In addition, the
General Corporation Law of the State of Delaware provides the general
authorization of advancement of a director's or officer's litigation expenses in
lieu of requiring the authorization of such advancement by the board of
directors in specific cases, and that indemnification and advancement of
expenses provided by the statute shall not be deemed exclusive of any other
rights to which those seeking indemnification or advancement of expenses may be
entitled under any by-law, agreement, or otherwise.

II-1
<PAGE> 143

ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.

Since its inception, the Registrant has sold or issued the following
unregistered securities:

(1) In July and August 1994, the Registrant issued an aggregate of
1,148,000 shares of Common Stock at a purchase price of $0.045 per share and
warrants to purchase an aggregate of 885,442 shares of Common Stock at an
exercise price of $1.25 per share to certain of its officers, directors,
employees, its counsel, and certain private investors.

(2) In October and November 1994 the Registrant issued an aggregate of
1,226,150 shares of Class B Common Stock at a purchase price of $0.50 and
warrants to purchase an aggregate of 966,456 shares of Class B Common Stock at
an exercise price of $1.25 per share to certain directors of the Registrant, its
counsel, and a private investor.

(3) In October 1994 the Registrant issued 690,000 shares of Common Stock at
a purchase price of
$0.045 per share and warrants to purchase 543,556 shares of Common Stock at an
exercise price of $1.25 per share to an individual who is an officer and
director of the Registrant.

(4) In November 1994 the Registrant issued 40,000 shares of Common Stock at
a purchase price of $0.50 per share to an officer of the Registrant.

(5) In January 1995 the Registrant issued an aggregate of 20,000 shares of
Common Stock at a purchase price of $0.50 per share to an officer of the
Registrant.

(6) On June 15, 1995 the Registrant issued warrants to purchase an
aggregate of 150,000 shares of Common Stock at an exercise price of $2.50 per
share at a purchase price of $2.50 per warrant to two directors of the
Registrant and a private investor.

(7) On June 30, 1995 the Registrant issued, in connection with the
acquisition of a physician group, an aggregate of 138,672 shares of redeemable
Common Stock to the physicians in the group.

(8) In August 1995 the Registrant issued, in connection with the
acquisition of a physician group, an aggregate of 26,624 shares of redeemable
Common Stock to the physicians in the group.

(9) In December 1995 the Registrant issued an aggregate of 500,000 shares
of Redeemable Convertible Preferred Stock and warrants to purchase 200,000
shares of Redeemable Convertible Preferred Stock at an exercise price of $6.00
per share for aggregate net consideration of $2,953,358 to private investors.

(10) In February 1996 the Registrant issued to a former employee 3,200
shares of Common Stock upon the exercise of options at an exercise price of
$0.50 per share.

(11) In February 1996 the Registrant issued 20,000 shares of Common Stock
upon the exercise of options at an exercise price of $6.00 per share by an
individual who is an officer and director of the Registrant.

(12) In March 1996 the Registrant issued, in connection with the
acquisition of two physician groups, $1,800,274 in convertible subordinated
notes to the physicians in the groups.

(13) In June 1996, in connection with the acquisition of two physician
groups, the Registrant issued 38,027 and 13,600 shares of Common Stock to the
physicians in the groups.

(14) On June 30, 1996, the Registrant issued to two directors of the
Registrant and a private investor 150,000 shares of Common Stock upon the
exercise of warrants at an exercise price of $2.50 per share.

(15) In August 1996, in connection with the acquisition of a physician
group, the Registrant issued 13,714 shares of Common Stock to the physicians in
the group.

(16) In September 1996, the Registrant issued 15,625 shares of Common Stock
upon the exercise of options at an exercise price of $8.00 per share by the bank
with which the Registrant has a line of credit.

(17) In September 1996, in connection with the acquisition of a physician
group, the Registrant issued 547,970 shares of Common Stock to the physicians in
the group.

II-2
<PAGE> 144

(18) In October 1996, in connection with the acquisition of a physician
group, the Registrant issued 42,593 shares of Common Stock to the physicians in
the group.

The issuances of securities in the above transactions were deemed to be
exempt from registration under the Act in reliance on Section 4(2) thereof as
transactions not involving a public offering.

ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.

(a) The following is a list of exhibits furnished:

<TABLE>
<S> <C>
1+ Form of Purchase Agreement
2+ Asset Purchase Agreement dated as of January 19, 1996 by and among ProMedCo, Inc.,
ProMedCo Of Abilene, Inc. and Abilene Diagnostic Clinic, P.L.L.C.
2(a)+ First Amendment to Asset Purchase Agreement dated as of January 19, 1996 by and
among ProMedCo, Inc., ProMedCo of Abilene, Inc., and Abilene Diagnostic Clinic,
P.L.L.C.
2.1+ Plan and Agreement for Reorganization dated as of September 13, 1996 by and
between ProMedCo, Inc., ProMedCo of Temple, Inc., and King's Daughters Clinics,
P.A.
2.2+ Agreement for Statutory Merger dated as of November 7, 1996 by and between
ProMedCo, Inc., ProMedCo of Northern Nevada, Inc. and Western Medical Management
Corporation, Inc.
3.1+ Form of Restated Certificate of Incorporation of ProMedCo Management Company.
3.2+ By-laws of ProMedCo Management Company.
4+ Form of Rights Agreement
5+ Opinion of Counsel
10.1#+ Interim Service Agreement dated as of January 19, 1996 by and between ProMedCo of
Abilene, Inc. and Abilene Diagnostic Clinic, P.L.L.C.
10.1(a)+ First Amendment to Service Agreement and Interim Service Agreement dated as of
January 19, 1996 by and between ProMedCo of Abilene, Inc. and Abilene Diagnostic
Clinic, P.L.L.C.
10.2#+ Service Agreement dated as of January 19, 1996 by and between ProMedCo of Abilene,
Inc. and Abilene Diagnostic Clinic, P.L.L.C.
10.3#+ Service Agreement dated as of March 12, 1996 by and between ProMedCo, Inc. of
Cullman, Inc. and Cullman Primary Care, P.C.
10.4#+ Service Agreement dated as of April 1, 1996 by and between ProMedCo of Mayfield,
Inc. and Morgan-Haugh, P.S.C.
10.5#+ Amended and Restated Service Agreement dated as of June 24, 1996 by and between
ProMedCo of Lake Worth, Inc. and Tarrant Family Practice, P.A.
10.6#+ Service Agreement dated as of June 30, 1995 by and between ProMedCo of Denton,
Inc. and North Texas Medical Surgical Clinic, P.A.
10.7+ Credit Agreement dated as of June 12, 1996 among ProMedCo, Inc., the Lenders
referred to therein, and Nationscredit Commercial Corporation, as Agent
10.8+ 1996 Stock Option Plan
10.9+ Employee Stock Purchase Plan
10.12+ Employment Agreement with H. Wayne Posey
10.13+ Employment Agreement with Richard R. D'Antoni
10.14+ Amended and Restated Employment Agreement with Dale K. Edwards
10.15+ Employment Agreement with R. Alan Gleghorn
10.16+ Employment Agreement with Rick E. Weymier
</TABLE>

II-3
<PAGE> 145

<TABLE>
<S> <C>
10.17+ Employment Agreement with Deborah A. Johnson
10.18+ Service Agreement dated as of September 1, 1996 by and between ProMedCo of Temple,
Inc. and Physicians of King's Daughters, P.A.
10.19+ Employment Agreement with Robert D. Smith
10.20#+ Form of Service Agreement by and between ProMedCo of Northern Nevada, Inc. and
Knutzen Goring Medical Group, Ltd. DBA The Northern Nevada Medical Group
10.21+ 1994 Stock Option Plan
11+ Computation of Net Income Per Share
22+ List of Subsidiaries
23.1 Consent of Independent Accountants
23.2+ Consent of Counsel (included as part of Exhibit 5)
24+ Powers of Attorney
27+ Financial Data Schedule
</TABLE>

- ---------------
+ Previously Filed
# Confidential Treatment Requested

II-4
<PAGE> 146

(b) The following is a list of financial statement schedules furnished:

Schedule II Valuation and qualifying accounts for the period from inception
(July 1, 1994) to December 31, 1994, the years ended December 31,
1995 and 1996.

Schedules not listed above have been omitted because they are not
applicable or because required information is included in the financial
statements or notes thereto.

ITEM 17. UNDERTAKINGS.

The undersigned Registrant hereby undertakes:

(1) To provide to the Underwriters at the closing specified in the Purchase
Agreement certificates in such denominations and registered in such names as
required by the Underwriters to permit prompt delivery to each purchaser.

(2) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the registrant pursuant to the foregoing provisions, or otherwise, the
registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the registrant of expenses
incurred or paid by a director, officer, or controlling person of the registrant
in the successful defense of any action, suit, or proceeding) is asserted by
such director, officer, or controlling person in connection with the securities
being registered, the registrant will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Act and will be governed by the final
adjudication of such issue.

(3) For purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of prospectus filed as part of a
registration statement in reliance upon Rule 430A and contained in the form of
prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Securities Act shall be deemed to be part of the registration
statement as of the time it was declared effective.

(4) For the purpose of determining any liability under the Securities Act
of 1933, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.

II-5
<PAGE> 147

SIGNATURES

Pursuant to the requirements of the Securities Act of 1933, this registrant
has duly caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Fort Worth and State of
Texas on the 11th day of March, 1997.

PROMEDCO MANAGEMENT COMPANY

By: *

---------------------------------------
H. WAYNE POSEY
PRESIDENT AND CHIEF EXECUTIVE OFFICER

Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated.

<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------------- ---------------------------------- ------------------
<C> <S> <C>
* President, Chief Executive March 11, 1997
- ------------------------------------- Officer, and Director (Principal
H. WAYNE POSEY Executive, Financial and
Accounting Officer)

* Chairman March 11, 1997
- -------------------------------------
RICHARD E. RAGSDALE

* Director March 11, 1997
- -------------------------------------
E. THOMAS CHANEY

* Director March 11, 1997
- -------------------------------------
DAVID T. BAILEY, M.D.

* Director March 11, 1997
- -------------------------------------
RICHARD R. D'ANTONI

* Director March 11, 1997
- -------------------------------------
JAMES F. HERD, M.D.

* Director March 11, 1997
- -------------------------------------
JACK W. MCCASLIN

By: /s/ MICHAEL JOSEPH
- -------------------------------------
MICHAEL JOSEPH
ATTORNEY-IN-FACT
</TABLE>

II-6
<PAGE> 148

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To ProMedCo Management Company:

We have audited, in accordance with generally accepted auditing standards,
the consolidated financial statements of Professional Medical Management
Company, a Delaware corporation, and subsidiaries included in this registration
statement and have issued our report thereon dated February 10, 1997. Our audit
was made for the purpose of forming an opinion on the basic financial statements
taken as a whole. Schedule II, Valuation and Qualifying Accounts, is the
responsibility of the Company's management and is presented for purposes of
complying with the Securities and Exchange Commission rules and is not part of
the basic financial statements. This schedule has been subjected to the auditing
procedures applied in the audit of the basic financial statements and, in our
opinion, fairly states in all material respects the financial data required to
be set forth therein in relation to the basic financial statements taken as a
whole.

ARTHUR ANDERSEN LLP

Fort Worth, Texas
February 10, 1997

S-1
<PAGE> 149

SCHEDULE II

PROMEDCO MANAGEMENT COMPANY AND SUBSIDIARIES

VALUATION AND QUALIFYING ACCOUNTS

FOR THE PERIOD FROM INCEPTION (JULY 1, 1994) TO
DECEMBER 31, 1994, AND FOR THE YEARS ENDED DECEMBER 31, 1995, AND 1996

<TABLE>
<CAPTION>
BALANCE AT ADDITIONS ADDITIONS BALANCE AT
BEGINNING CHARGED TO CHARGED TO END OF
OF PERIOD INCOME/EXPENSE OTHER ACCOUNTS WRITE-OFFS PERIOD
---------- -------------- -------------- ----------- ----------
<S> <C> <C> <C> <C> <C>
December 31, 1994:
Accounts receivable
allowances............ $ -- $ -- $ -- $ -- $ --
========= ========== ========== =========== ==========
December 31, 1995:
Accounts receivable
allowances............ $ -- $ 156,000 $ 49,000(a) $ (70,000) $ 135,000
========= ========== ========== =========== ==========
December 31, 1996:
Accounts receivable
allowances............ $ 135,000 $1,989,000 $3,913,000(a) $(3,305,000) $2,732,000
========= ========== ========== =========== ==========
</TABLE>

- ---------------
(a) Allowances against accounts receivable acquired in acquisitions and
established in purchase accounting.

S-2
<PAGE> 150

EXHIBIT INDEX

<PAGE> 151

<TABLE>
<S> <C>
10.21+ 1994 Stock Option Plan
11+ Computation of Net Income Per Share
22+ List of Subsidiaries
23.1 Consent of Independent Accountants
23.2+ Consent of Counsel (included as part of Exhibit 5)
24+ Powers of Attorney
27+ Financial Data Schedule
</TABLE>

- ---------------
+ Previously Filed.
# Confidential treatment has been requested and an application has been
separately filed with the Commission.

<PAGE> 1
EXHIBIT 23.1

CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS

As independent public accountants, we hereby consent to the use of our
reports (and to all references to our firm) included in or made a part of this
registration statement.

/s/ ARTHUR ANDERSEN LLP

Fort Worth, Texas
March 11, 1997