PROMEDCO MANAGEMENT CO, 424A, 1998-04-23

PROMEDCO MANAGEMENT CO
424A, 1998-04-23
OFFICES & CLINICS OF DOCTORS OF MEDICINE

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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 APRIL 23, 1998

PROSPECTUS
dated , 1998

6,400,000 SHARES

[ProMedCo logo]

COMMON STOCK

Of the 6,400,000 shares of Common Stock offered hereby, 6,000,000 are being
issued and sold by ProMedCo Management Company ("ProMedCo" or the "Company") and
400,000 are being offered by a stockholder of the Company (the "Selling
Stockholder"). See "Principal and Selling Stockholders."

The Common Stock is traded on the Nasdaq National Market under the symbol
"PMCO." On April 21, 1998, the last reported sale price of the Common Stock was
$14.25 per share. See "Price Range of Common Stock and Dividend Policy."

SEE "RISK FACTORS" BEGINNING ON PAGE 6 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>
==================================================================================================================
PROCEEDS TO
PRICE TO UNDERWRITING PROCEEDS TO SELLING
PUBLIC DISCOUNT(1) COMPANY(2) STOCKHOLDER
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Per Share........................ $ $ $ $
- ------------------------------------------------------------------------------------------------------------------
Total(3)......................... $ $ $ $
==================================================================================================================
</TABLE>

(1) The Company and the Selling Stockholder have 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 $350,000.
(3) The Company has granted the Underwriters a 30-day option to purchase up to
an additional 960,000 shares of Common Stock 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, and Proceeds to Company 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 , 1998.

PIPER JAFFRAY INC.
BEAR, STEARNS & CO. INC.
COWEN & COMPANY
<PAGE> 2

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

CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS THAT
STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE SHARES OF COMMON STOCK.
SUCH TRANSACTIONS MAY INCLUDE STABILIZING, THE PURCHASE OF COMMON STOCK TO COVER
SYNDICATE SHORT POSITIONS AND THE IMPOSITION OF PENALTY BIDS. FOR A DESCRIPTION
OF THESE ACTIVITIES, SEE "UNDERWRITING."

IN CONNECTION WITH THIS OFFERING, CERTAIN UNDERWRITERS (AND SELLING GROUP
MEMBERS) MAY ENGAGE IN PASSIVE MARKET MAKING TRANSACTIONS IN THE COMMON STOCK ON
THE NASDAQ NATIONAL MARKET IN ACCORDANCE WITH RULE 103 OF REGULATION M. SEE
"UNDERWRITING."
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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 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 or adjacent to large metropolitan areas. The Company believes that the
primary care physician increasingly will be the principal point of access to the
healthcare delivery system and will, directly or indirectly, control 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.

The Company currently is affiliated with multi-specialty physician groups
in 11 states, comprised of 435 physicians and 115 mid-level providers (primarily
physician assistants and nurse practitioners), and is associated with 540
physicians in independent practice association ("IPA") networks. This includes
Berkshire Physicians & Surgeons, P.C. ("Berkshire"), a multi-specialty physician
group comprised of 79 physicians, 15 mid-level providers and 14 IPA physicians
with which the Company affiliated in April 1998. Since the Company's March 1997
initial public offering, the total number of ProMedCo's providers has grown to
1,090 from 192, its annual physician groups revenue has grown to $265 million
from $65 million (each on a pro forma basis), and the number of states in which
it operates has increased nearly threefold.

The Company has also significantly augmented its managed care contracting,
information systems, and clinical expertise through its December 1997
acquisition of Health Plans, Inc., since renamed PMC Medical Management, Inc.
("PMC"). PMC is a provider of medical management services to capitated physician
networks. Utilizing state-of-the-art information systems, PMC provides a full
range of managed care services to capitated providers, including clinical
quality assessment, credentialing, claims processing and payment, referral and
utilization management, and case management. PMC is currently providing such
services to the Company's associated IPAs and to those of its affiliated groups
that have entered into capitation arrangements, together covering over 100,000
managed care capitated lives. The Company believes that PMC's information
systems and physician network managed care expertise will enable the Company to
effectively manage the medical risk undertaken by the Company and its affiliated
groups under risk-sharing contracts.

When affiliating with a physician group, the Company generally 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 15-20%) of
the physician group's operating income (as defined) and shares between 25% and
50% of the group's surplus or deficit 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.

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The key elements of the Company's strategy are to (i) continue to penetrate
pre-managed-care markets; (ii) affiliate with primary-care-oriented
multi-specialty groups; (iii) expand its affiliated groups' market presence
through the addition of physicians and selected ancillary services; (iv)
optimize managed care opportunities for its groups; 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.

THE OFFERING

<TABLE>
<S> <C>
Common Stock offered by the Company......................... 6,000,000 shares
Common Stock offered by the Selling Stockholder............. 400,000 shares
Common Stock to be outstanding after the Offering........... 18,906,893 shares(1)
Use of proceeds to the Company.............................. Repayment of debt, acquisitions
and working capital
Nasdaq National Market symbol............................... PMCO
</TABLE>

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

(1) Based upon the number of shares outstanding as of December 31, 1997, as
adjusted to reflect the subsequent issuance of 2,220,126 shares in
connection with prior physician group affiliations. Does not include (i)
654,947 shares to be issued during 1998 in connection with prior physician
group affiliations and the acquisition of PMC, (ii) an estimated 394,444
shares to be issued in 1999 in connection with the Berkshire affiliation (as
defined herein), (iii) 4,366,074 shares reserved for issuance upon exercise
of outstanding options and warrants with a weighted average exercise price
of $3.50 per share, and (iv) 1,105,000 shares reserved for issuance upon
conversion of convertible subordinated notes and exercise of options to be
issued in payment of interest on certain notes.

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SUMMARY FINANCIAL DATA

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------------------
PRO FORMA
AS ADJUSTED
1995 1996 1997 1997(1)(2)
----------- ----------- ------------ ------------
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Physician groups revenue, net............. $13,188,405 $47,036,801 $127,716,775 $264,851,063
Less: amounts retained by physician
groups.................................. 5,344,688 20,791,605 47,075,240 83,559,854
----------- ----------- ------------ ------------
Management fee revenue.................... 7,843,717 26,245,196 80,641,535 181,291,209
Net income (loss)......................... $(1,251,514) $(1,570,853) $ 5,473,184 $ 8,619,152
=========== =========== ============ ============
Net earnings (loss) per share:
Basic................................ $ (0.16) $ (0.20) $ 0.48 $ 0.46
Diluted.............................. $ (0.16) $ (0.20) $ 0.38 $ 0.40
Weighted average number of common shares
outstanding:
Basic................................ 7,871,746 7,870,908 11,375,662 18,595,099
Diluted.............................. 7,871,746 7,870,908 14,224,198 21,443,635
OTHER DATA (AT END OF PERIOD)(3):
Affiliated physicians..................... 51 146 354 435
Mid-level providers....................... 17 46 100 115
IPA physicians............................ -- -- 528 540
----------- ----------- ------------ ------------
Total providers........................... 68 192 982 1,090
=========== =========== ============ ============
Number of states.......................... 2 4 10 11
</TABLE>

<TABLE>
<CAPTION>
DECEMBER 31, 1997
--------------------------------------------
PRO PRO FORMA AS
ACTUAL FORMA(4) ADJUSTED(5)
------------ ------------ ------------
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents........................ $ 15,760,920 $ 16,945,962 $ 50,207,962
Working capital.................................. 20,516,672 20,294,852 53,556,852
Total assets..................................... 162,966,150 199,665,255 232,927,255
Long-term debt, less current maturities.......... 49,845,795 73,488,313 24,450,313
Total stockholders' equity....................... 80,618,737 86,468,737 168,768,737
</TABLE>

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

(1) Gives effect to the 1997 Affiliations (as defined herein), the Christie
affiliation (as defined herein) and the Berkshire affiliation as if they had
been completed on January 1, 1997. See "Pro Forma Consolidated Financial
Statements."

(2) Adjusted to give effect to the sale of 6,000,000 shares of Common Stock
offered by the Company hereby, at an assumed offering price of $14.50 per
share, and the application of the estimated net proceeds therefrom, assuming
the Offering was completed on January 1, 1997. See "Use of Proceeds."

(3) Other data for 1995 and 1996 include one group which was acquired in 1997
and was accounted for as a pooling of interests.

(4) Gives effect to the Berkshire affiliation as if it had been completed on
December 31, 1997.

(5) Adjusted to give effect to the sale of 6,000,000 shares of Common Stock
offered by the Company hereby, at an assumed offering price of $14.50 per
share, and the application of the estimated net proceeds therefrom. See "Use
of Proceeds."

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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, including its
management information systems. 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."

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 this offering (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."

CONCENTRATION OF REVENUE

The Company's management fee revenue for the year ended December 31, 1997
was derived from 13 physician groups, of which four accounted for 10% or more of
such revenue. While the Company's service agreements are for terms of 40 years
and may be terminated only for cause, a termination or significant deterioration
of the Company's relationship with one or more 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 effect 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
billing for physician services. In addition, these laws impose restrictions on
physicians' referrals for certain designated health services to
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entities with which they have financial relationships. Violations of these laws
may result in substantial civil or criminal penalties to 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 those in which most
of the Company's affiliated physician groups are located, prohibit non-physician
entities from practicing medicine. In addition to prohibiting the practice of
medicine, numerous states limit the ability of non-physicians to receive
physician practice revenues. In most states, such so-called "fee-splitting" laws
provide that the laws are violated only if a physician shares fees with a
referral source. The Florida Board of Medicine, however, has recently
interpreted the Florida fee-splitting law very broadly so as arguably to include
the payment of any percentage-based management fee, even to a management company
that does not refer patients to the managed group. If not reversed, this
decision could require modification of the service agreements covering the
Company's affiliated groups in Florida. 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 changes in the healthcare regulatory
environment will not 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 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."

CHANGES IN BASIS OF PAYMENT FOR HEALTHCARE SERVICES

The Company derives most 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 25% 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. In

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some instances the Company itself enters into such contracts. Such capitated
managed care contracts typically are with health maintenance organizations
("HMOs"). Under such contracts the physician group or the Company accepts a
pre-determined amount per member per month, referred to as a "capitation"
payment, in exchange for providing all necessary covered services to the members
covered by the contract, thus shifting much of the risk of providing care from
the payor to the physician group or the Company. Such an arrangement results in
a greater predictability of revenue, but exposes the physician group or the
Company 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 distribution to the Company is increased or
decreased by a percentage of the groups' surplus or deficit under risk-sharing
arrangements pursuant to capitated managed care contracts, the Company assumes
some of the groups' risks under such contracts entered into by the groups.
Accordingly, any reduction of operating margins or incurrence of losses from
capitated managed care contracts could have a material adverse effect on the
Company. Although the Company maintains stop-loss insurance with respect to its
and its affiliated groups' risk-sharing contracts, there can be no assurance
that such insurance will cover all of the Company's risk under these contracts.

Recently, many providers have experienced pricing pressures in negotiating
with HMOs. In addition, employer groups are becoming increasingly successful in
negotiating reductions in the growth of premiums paid for their employees'
health insurance, which tends to depress the reimbursement for healthcare
services. At the same time, employer groups are demanding higher accountability
from payors and providers of healthcare services with respect to accessibility,
quality and service. If these trends continue, the cost of providing physician
services could increase while the level of reimbursement could grow at a lower
rate or even decrease. Although the Company has demonstrated experience in
negotiating managed care contracts and managing medical risk assumed under such
contracts, there can be no assurance that the Company will be able to negotiate
satisfactory risk-sharing or capitated arrangements or be able to manage such
medical risk successfully. See "Business."

RISK OF APPLICABILITY OF INSURANCE REGULATIONS

The Company and its affiliated groups intend to continue to enter into
contracts with managed care organizations ("MCOs"), such as HMOs, whereby the
Company and its affiliated groups 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.

LIMITED HISTORY OF PROFITABILITY

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 $1.3 million and
$1.6 million, respectively. Although it reported net income of $5.5 million for
the year ended December 31, 1997, there can be no assurance that the Company
will continue to be 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 Company is
increased or decreased by a percentage of the physician groups' surplus or
deficit 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."

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
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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 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 $77.2 million have
been recorded on the Company's balance sheet at December 31, 1997 ($105.6
million on a pro forma basis at December 31, 1997). Using a composite average
life of 30 years for the service agreements, amortization expense will be
approximately $1.7 million per year ($2.7 million 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, 1997, 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, MCOs 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.

POSSIBLE VOLATILITY OF PRICE

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 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."

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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, the Company
has a stockholder rights plan that could further discourage attempts to acquire
control of the Company. See "Management."

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 "Shares Eligible for Future Sale."

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 "Price Range of Common Stock and
Dividend Policy."

IMPACT OF YEAR 2000

The Company continues to assess the impact of the Year 2000 issue on its
information systems and operations. With disparate systems in place at the
Company's various affiliated groups, the assessment process also extends to each
new affiliation. Noncompliant practice management systems could be acquired in a
new affiliation, which would require system remediation or replacement. Given
these issues, the Company is unable to estimate the costs of the remediation or
replacements that may be required. With its current strategy of replacing
inadequate practice management systems, however, the Company does not believe
that Year 2000 issues will cause a conversion to be more difficult than a
typical system conversion. If the issues prove more significant than
anticipated, or if noncompliant third-party systems "reinfect" the Company's
Year 2000 compliant systems, there could be a material adverse impact on the
Company.

FORWARD-LOOKING STATEMENTS

This Prospectus includes certain forward-looking statements about
anticipated results, including statements as to operating results, liquidity and
capital resources, and negotiations with and acquisitions of additional
physician groups. Such forward-looking statements are based upon internal
estimates, which are subject to change because they reflect preliminary
information and management assumptions, and a variety of factors could cause the
Company's actual results and experience to differ materially from the
anticipated results or other expectations expressed in the forward-looking
statements. The factors that could cause actual results or outcomes to differ
from such expectations include the extent of the Company's success in (i)
consummating affiliations with additional physician groups, (ii) negotiating
managed care contracts and managing the medical risk assumed thereunder, (iii)
obtaining additional financing upon terms acceptable to the Company, and (iv)
negotiating favorable reimbursement rates with third-party payors, along with
the uncertainties and other factors described herein and in the Company's public
filings and reports.

10
<PAGE> 11

USE OF PROCEEDS

The net proceeds to the Company from the Offering, after deducting expenses
payable by the Company and assuming an offering price of $14.50 per share, will
be approximately $82.3 million ($95.5 million if the Underwriters'
over-allotment option is exercised). The Company intends to use approximately
$55.0 million of such proceeds to repay indebtedness under its revolving credit
agreement (the "Credit Facility") and the balance to finance future affiliations
with physician groups, for working capital and for other general corporate
purposes. Pending application of the net proceeds, 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."

While the Company is continually seeking additional physician groups with
which to affiliate and is currently engaged in negotiations with several such
groups, it currently has no agreement or understanding to affiliate with any
group. 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."

The Company will not receive any of the proceeds of the shares being sold
by the Selling Stockholder.

PRICE RANGE OF COMMON STOCK AND DIVIDEND POLICY

Since March 12, 1997, the Common Stock has been traded on the Nasdaq
National Market under the symbol "PMCO." The following table sets forth the high
and low sale prices per share of the Common Stock as reported by the Nasdaq
National Market for each calendar quarter since the commencement of trading.

<TABLE>
<CAPTION>
HIGH LOW
------ ------
<S> <C> <C>
1997
First Quarter (commencing March 12)....................... $ 9.25 $ 9.00
Second Quarter............................................ 9.25 6.00
Third Quarter............................................. 11.00 6.75
Fourth Quarter............................................ 11.63 8.00
1998
First Quarter............................................. 16.25 8.75
Second Quarter (through April 21)......................... 15.88 13.50
</TABLE>

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."

11
<PAGE> 12

CAPITALIZATION

The following table sets forth the capitalization of the Company at
December 31, 1997 (i) on a pro forma basis to give effect to the Berkshire
affiliation and (ii) as further adjusted to reflect the sale by the Company of
the Common Stock offered hereby, assuming a public offering price of $14.50 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, 1997
--------------------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
------------ ------------ ------------
<S> <C> <C> <C>
Current maturities of long-term debt(1).......... $ 9,551,669 $ 9,551,669 $ 9,551,669
============ ============ ============
Long-term debt, net of current maturities(1)..... $ 49,845,795 $ 73,488,313 $ 24,450,313
Stockholders' equity:
Preferred Stock, $0.01 par value; 20,000,000
shares authorized; no shares issued and
outstanding................................. -- -- --
Common Stock, $0.01 par value; 50,000,000
shares authorized; 10,686,767 shares issued
and outstanding; 11,081,211 shares issued
and outstanding pro forma and 17,081,211
shares issued and outstanding pro forma as
adjusted(2)................................. 106,868 110,812 170,812
Additional paid-in-capital..................... 58,946,838 64,792,894 147,032,894
Common Stock to be issued; 2,875,073 shares.... 20,121,059 20,121,059 20,121,059
Stockholder notes receivable................... (369,665) (369,665) (369,665)
Retained earnings.............................. 1,813,637 1,813,637 1,813,637
------------ ------------ ------------
Total stockholders' equity............. 80,618,737 86,468,737 168,768,737
------------ ------------ ------------
Total capitalization................... $130,464,532 $159,957,050 $193,219,050
============ ============ ============
</TABLE>

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

(1) See Note 7 to Consolidated Financial Statements for information concerning
long-term debt and capital lease obligations.

(2) Excludes 4,366,074 shares reserved for issuance upon exercise of outstanding
options and warrants, at a weighted average exercise price of $3.50 per
share, and 1,105,000 shares reserved for issuance upon conversion of
convertible subordinated notes and exercise of options to be issued in
payment of interest on certain notes.

12
<PAGE> 13

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
and, the financial statements and notes thereto of Southwest Clinic Practices,
IMG, Inc., Health Plans, Inc., Berkshire Physicians & Surgeons, P.C., Pro Forma
Consolidated Financial Statements and "Management's Discussion and Analysis of
Financial Condition and Results of Operations" included elsewhere in this
Prospectus or incorporated herein by reference. The selected unaudited pro forma
as adjusted statement of operations data for the year ended December 31, 1997
give effect to the affiliations with Naples Medical Center, Abilene Diagnostic
Clinic, Intercoastal Medical Group, Beacon Medical Group, Cowley Medical
Associates, Thomas-Spann Clinic, Healthstar, Inc. and Health Plans, Inc.
completed between March and December 1997 (the "1997 Affiliations"), the
affiliation with Christie Clinic Association (the "Christie affiliation"), the
affiliation with Berkshire Physicians & Surgeons, P.C. (the "Berkshire
affiliation") and the Offering as if they had been completed on January 1, 1997.
The selected unaudited pro forma balance sheet data as of December 31, 1997 give
effect to the Berkshire affiliation, and the selected unaudited pro forma as
adjusted balance sheet data as of December 31, 1997 give further effect to the
Offering, as if they had been completed on December 31, 1997. 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>
YEAR ENDED DECEMBER 31,
JULY 1, 1994 ------------------------------------------------------------
(INCEPTION) TO PRO FORMA
DECEMBER 31, AS ADJUSTED(1)(2)
1994 1995 1996 1997 1997
-------------- ----------- ----------- ------------ -----------------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Physician groups revenue, net..................... $4,040,924 $13,188,405 $47,036,801 $127,716,775 $264,851,063
Less: amounts retained by physician groups........ 1,781,775 5,344,688 20,791,605 47,075,240 83,559,854
---------- ----------- ----------- ------------ ------------
Management fee revenue............................ 2,259,149 7,843,717 26,245,196 80,641,535 181,291,209
Operating expenses:
Clinic salaries and benefits.................. 1,689,007 4,249,813 11,694,973 29,859,718 62,020,240
Clinic rent and lease expense................. 242,235 708,020 2,670,138 7,016,261 13,763,194
Clinic supplies............................... 261,811 624,370 3,213,443 9,667,085 19,625,269
Purchased medical services.................... 170,909 781,000 969,650 7,946,989 43,325,896
Other clinic costs............................ 183,158 1,759,013 5,018,876 10,883,588 19,905,051
General corporate expenses.................... 172,462 802,980 2,633,585 3,793,552 3,793,552
Depreciation and amortization................. 64,170 203,482 723,641 2,942,604 5,768,832
Interest expense.............................. 6,659 20,958 209,474 456,175 (812,684)
Merger costs.................................. -- -- 682,269 -- --
---------- ----------- ----------- ------------ ------------
2,790,411 9,149,636 27,816,049 72,565,972 167,389,350
---------- ----------- ----------- ------------ ------------
Income (loss) before provision for income taxes... (531,262) (1,305,919) (1,570,853) 8,075,563 13,901,859
Provision for income taxes........................ 12,566 (54,405) -- 2,602,379 5,282,707
---------- ----------- ----------- ------------ ------------
Net income (loss)................................. $ (543,828) $(1,251,514) $(1,570,853) $ 5,473,184 $ 8,619,152
========== =========== =========== ============ ============
Net earnings (loss) per share:
Basic......................................... $ (0.07) $ (0.16) $ (0.20) $ 0.48 $ 0.46
========== =========== =========== ============ ============
Diluted....................................... $ (0.07) $ (0.16) $ (0.20) $ 0.38 $ 0.40
========== =========== =========== ============ ============
Weighted average number of common shares
outstanding:
Basic......................................... 7,871,746 7,871,746 7,870,908 11,375,662 18,595,099
========== =========== =========== ============ ============
Diluted....................................... 7,871,746 7,871,746 7,870,908 14,224,198 21,443,635
========== =========== =========== ============ ============
</TABLE>

<TABLE>
<CAPTION>
DECEMBER 31, 1997
----------------------------------------------
PRO PRO FORMA
ACTUAL FORMA(3) AS ADJUSTED(4)
------------ ------------ --------------
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................................... $ 15,760,920 $ 16,945,962 $ 50,207,962
Working capital............................................. 20,516,672 20,294,852 53,556,852
Total assets................................................ 162,966,150 199,665,255 232,927,255
Long-term debt, less current maturities..................... 49,845,795 73,488,313 24,450,313
Total stockholders' equity.................................. 80,618,737 86,468,737 168,768,737
</TABLE>

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

(1) Gives effect to the 1997 Affiliations, the Christie affiliation and the
Berkshire affiliation as if they had been completed on January 1, 1997.

(2) Adjusted to give effect to the sale of 6,000,000 shares of Common Stock
offered hereby, at an assumed offering price of $14.50 per share, and the
application of the estimated net proceeds therefrom, assuming the Offering
was completed on January 1, 1997. See "Use of Proceeds."

(3) Gives effect to the Berkshire affiliation as if it had been completed on
December 31, 1997.

(4) Adjusted to give effect to the sale of 6,000,000 shares of Common Stock
offered hereby, at an assumed offering price of $14.50 per share, and the
application of the estimated net proceeds therefrom. See "Use of Proceeds."

13
<PAGE> 14

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.
ProMedCo commenced operations in December 1994 and affiliated with its initial
physician group in June 1995. The Company's rapid growth during 1996 and 1997
has resulted primarily from its affiliation with additional physician groups.
The Company also contracts with HMOs and other third-party payors to arrange for
the provision of comprehensive health services to their members on a capitation
basis.

When affiliating with a physician group, the Company generally 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 is continually seeking additional physician groups with
which to affiliate and at any time is typically engaged in negotiations with
several such groups.

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, and
under capitated managed care contracts. Management fee revenue represents
physician groups revenue less amounts retained by physician groups. The amounts
retained by physician groups (typically 80-85% 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 15-20%) and an amount equal to 100% of the clinic expenses are
reflected as management fee revenue earned by the Company. The distribution to
the Company is increased or decreased by a percentage (typically ranging from
25% to 50%) of the groups' surplus or deficit under capitated managed care
contracts.

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, purchased medical services, building rent, equipment leases,
malpractice insurance premiums, management information systems, and other
expenses related to clinic operations.

Because of the significance of individual group affiliations and the level
of capitation and other revenues, clinic cost expense ratios and operating
margins will vary with each new affiliation. The mix of physician specialties
and ancillary services affects the level of clinic salaries and benefits and
clinic supplies, and the margins on capitated revenues generally are lower than
those on fee-for-service revenues (although capitated revenues can provide
incremental profit with little or no additional capital investment). Generally,
primary care and office-based physician practices require a higher number of
support staff than specialty care or hospital-based practices. Clinic rent and
lease expense as a percentage of physician groups revenue will vary based on the
size of each affiliated group's offices and the current market rental rate for
medical office space in the particular geographic markets. Capitation
arrangements may require the purchase of medical services that are not provided
by the group accepting capitation. These purchased medical services may include
hospitalization, emergency room care and other technical or specialty services.
The ratio of purchased medical services to associated capitation revenues will
vary depending upon the terms of the individual contracts and

14
<PAGE> 15

the amount of services that can be provided by the particular group. 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.

In addition to the clinic expenses discussed above, the Company 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.

For the year ended December 31, 1997, four of the Company's affiliated
physician groups each contributed 10% or more of the Company's management fee
revenue. Clinics in Champaign, Illinois; Temple, Texas; Naples, Florida; and
Abilene, Texas represented approximately 18%, 16%, 14%, and 11% of management
fee revenue, respectively.

In addition to managing its affiliated physician groups, the Company,
through PMC, manages an IPA in Maine and New Hampshire. Revenues from this IPA
consist of capitation and risk pool payments under managed care contracts with
HMOs. Such revenues are currently included in physician groups revenue. Related
operating expenses consist of the cost of providing the medical services
required by the HMO members covered by the contracts, and are reflected
primarily as purchased medical services.

RESULTS OF OPERATIONS

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 and
seven additional groups during 1997. Changes in results of operations were
caused primarily by affiliations with these additional 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,
-----------------------
1995 1996 1997
----- ----- -----
<S> <C> <C> <C>
Physician groups revenue, net............................... 100.0% 100.0% 100.0%
Less: amount retained by physician groups................... 40.5 44.2 36.9
----- ----- -----
Management fee revenue...................................... 59.5 55.8 63.1
Operating expenses:
Clinic salaries and benefits........................... 32.3 24.8 23.3
Clinic rent and lease expense.......................... 5.4 5.7 5.5
Clinic supplies........................................ 4.7 6.8 7.6
Purchased medical services............................. 5.9 2.1 6.2
Other clinic costs..................................... 13.3 10.7 8.5
General corporate expenses............................. 6.1 5.6 3.0
Depreciation and amortization.......................... 1.5 1.5 2.3
Interest expense (revenue)............................. 0.2 0.4 0.4
Merger costs........................................... 0.0 1.5 0.0
----- ----- -----
69.4% 59.1% 56.8%
----- ----- -----
Income (loss) before provision for income taxes............. (9.9) (3.3) 6.3
Provision for income taxes.................................. (0.4) 0.0 2.0
----- ----- -----
Net income (loss)........................................... (9.5)% (3.3)% 4.3%
===== ===== =====
</TABLE>

15
<PAGE> 16

YEAR ENDED DECEMBER 31, 1997 COMPARED WITH YEAR ENDED DECEMBER 31, 1996

Physician groups revenue increased by 172% to $127.7 million for the year
ended December 31, 1997 from $47.0 million for the year ended December 31, 1996.
New affiliations in 1997 produced $48.8 million of this increase, including
$10.4 million of revenues from full professional and global capitation
contracts, with $27.2 million resulting growth in revenues from affiliations
completed prior to 1996 and from a full year of revenue production from
affiliations completed in 1996. Another $4.7 million of other revenues from
consulting and transitional services contributed to this increase in 1997.

Amounts retained by physician groups increased by 126% to $47.1 million for
the year ended December 31, 1997 from $20.8 million for the year ended December
31, 1996. This increase resulted primarily from new affiliations in 1997 and a
full year of operations from affiliations completed in 1996. As a percentage of
physician groups revenue, amounts retained by physician groups declined to 36.9%
for the year ended December 31, 1997, compared to 44.2% for the year ended
December 31, 1996. This decline resulted primarily from an increase in revenues
from capitation contracts, which generate more aggregate dollars to the
affiliated physician groups, but less as a percentage of physician groups
revenue, and from the increase in other revenues noted above.

Overall clinic costs, including purchased medical services, as a percentage
of physician groups revenue increased to 51.1% for the year ended December 31,
1997, compared to 50.1% for the year ended December 31, 1996. Purchased medical
services created the largest increase as a percentage of physician groups
revenue, increasing to 6.2% in 1997 compared to 2.1% in 1996. This increase is
directly related to the increase in full professional and global capitation
revenues.

General corporate expenses as a percentage of physician groups revenue
declined to 3.0% for the year ended December 31, 1997, compared to 5.6% for the
year ended December 31, 1996. While these costs declined as a percentage of
physician groups revenue, the amount of general corporate expenses increased 44%
to $3.8 million for the year ended December 31, 1997 from $2.6 million for the
year ended December 31, 1996. This increase in expenses was expected as the
Company continued to add management and technology infrastructure. While
management expects these increases in amounts to continue as the Company
increases the number of affiliated physician groups, it believes that these
expenses will continue to decline as a percentage of physician groups revenue.

Depreciation and amortization as a percentage of physician groups revenue
increased to 2.3% for the year ended December 31, 1997, compared to 1.5% for the
year ended December 31, 1996. This increase resulted primarily from increased
amortization of service agreement rights obtained in the new affiliations in
1997, as well as differences in the mix of assets acquired in connection with
these affiliations.

Net interest expense as a percentage of physician groups revenue remained
consistent at 0.4% for both the years ended December 31, 1997 and 1996. Although
long term debt levels increased in the latter part of 1997, the resulting
interest expense was offset by interest income earned in the earlier part of
1997 on unused proceeds from the Company's initial public offering.

Provision for income taxes reflects an effective rate of 32.2%. This
effective rate is lower than the expected Federal statutory rate due to the
realization of net operating loss carryforwards, which had been previously
reserved. At December 31, 1997, all net operating loss carryforwards had been
utilized and recognized.

YEAR ENDED DECEMBER 31, 1996 COMPARED WITH YEAR ENDED DECEMBER 31, 1995

Physician groups revenue increased to $47.0 million for the year ended
December 31, 1996 from $13.2 million for the year ended December 31, 1995. The
increase in physician groups revenue resulted primarily from the various
affiliations with physician groups in 1996.

Amounts retained by physician groups as a percentage of physician groups
revenue increased to 44.2% for the year ended December 31, 1996, compared with
40.5% for the year ended December 31, 1995. Overall clinic costs as a percentage
of physician groups revenue declined to 50.1% for the year ended December 31,

16
<PAGE> 17

1996, compared with 61.6% for the year ended December 31, 1995. The mix of
physician specialties and ancillary services affects the cost of affiliated
physician services, clinic salaries and benefits and clinic supplies. Because of
the significance of individual group affiliations and the level of other revenue
to the Company as a whole, these expense ratios will vary with each new
acquisition. Generally, primary care and office-based physician practices
require a higher number of support staff than specialty care or hospital-based
practices. Clinic rent and lease expense as percentage of physician groups
revenue will vary based on the size of each of the affiliated group's 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.

General corporate expenses as a percentage of physician groups revenue
declined to 5.6% for the year ended December 31, 1996, compared with 6.1% for
the year ended December 31, 1995. The amount of these expenses increased during
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 physician groups revenue.

Depreciation and amortization as a percentage of physician groups revenue
remained constant at 1.5% for the year ended December 31, 1996, compared with
the year ended December 31, 1995.

Net interest expense as a percentage of physician groups revenue increased
to 0.4% for the year ended December 31, 1996, compared with net interest income
of 0.2% for the year ended December 31, 1995, primarily due to increased debt
associated with the acquisition of physician practices.

Provision for income taxes reflects no income tax expense for the year
ended December 31, 1996. This resulted from fully reserving for the tax effects
of the net operating loss generated during the year.

17
<PAGE> 18

SUMMARY OF OPERATIONS BY QUARTER

The following table presents unaudited quarterly operating results for the
preceding eight 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 THREE MONTHS ENDED
------------------------------------------------------- -------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, MARCH 31, JUNE 30,
1996 1996 1996 1996 1997 1997
---------- ----------- ------------- ------------ ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Physician groups revenue,
net......................... $7,091,429 $10,041,414 $12,672,590 $17,231,368 $20,725,577 $25,732,048
Less: amounts retained by
physician groups............ 3,428,089 4,712,459 5,332,128 7,318,929 9,008,171 10,532,177
---------- ----------- ----------- ----------- ----------- -----------
Management fee revenue....... 3,663,340 5,328,955 7,340,462 9,912,439 11,717,406 15,199,871
Operating expenses:
Clinic salaries and
benefits.................. 1,741,516 2,483,746 3,301,399 4,168,312 4,639,895 5,926,457
Clinic rent and lease
expense................... 411,372 549,656 727,252 981,858 1,079,862 1,429,063
Clinic supplies............. 404,298 639,858 972,824 1,196,463 1,513,716 1,962,366
Purchased medical
services.................. 134,815 157,306 289,116 388,413 685,158 780,510
Other clinic costs.......... 801,206 1,196,244 1,342,318 1,679,108 1,778,472 2,154,875
General corporate
expenses.................. 581,596 676,099 643,704 732,186 818,772 823,533
Depreciation and
amortization.............. 51,564 67,068 204,369 400,640 435,875 602,552
Interest expense
(revenue)................. (19,625) 33,071 59,024 137,004 115,949 1,148
Merger costs................ -- -- 139,501 542,768 -- --
---------- ----------- ----------- ----------- ----------- -----------
Income (loss) before
provision for income
taxes....................... (443,402) (474,093) (339,045) (314,313) 649,707 1,519,367
Provision for income
taxes..................... -- -- -- -- 194,912 412,429
---------- ----------- ----------- ----------- ----------- -----------
Net income (loss)............ $ (443,402) $ (474,093) $ (339,045) $ (314,313) $ 454,795 $ 1,106,938
========== =========== =========== =========== =========== ===========
NET EARNINGS (LOSS) PER
SHARE:
Basic....................... $ (0.06) $ (0.06) $ (0.04) $ (0.04) $ 0.05 $ 0.09
========== =========== =========== =========== =========== ===========
Diluted..................... $ (0.06) $ (0.06) $ (0.04) $ (0.04) $ 0.04 $ 0.07
========== =========== =========== =========== =========== ===========
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING:
Basic....................... 7,871,406 7,870,746 7,870,746 7,870,746 8,669,343 12,031,726
========== =========== =========== =========== =========== ===========
Diluted..................... 7,871,406 7,870,746 7,870,746 7,870,746 11,617,229 14,904,451
========== =========== =========== =========== =========== ===========
OTHER DATA (AT END OF
PERIOD):
Affiliated physicians........ 51 72 118 146 180 186
Mid-level providers.......... 9 16 27 46 53 52
IPA physicians............... -- -- -- -- -- --
---------- ----------- ----------- ----------- ----------- -----------
Total providers.............. 60 88 145 192 233 238
========== =========== =========== =========== =========== ===========
Number of states............. 2 3 3 4 5 5

<CAPTION>
THREE MONTHS ENDED
----------------------------
SEPTEMBER 30, DECEMBER 31,
1997 1997
------------- ------------
<S> <C> <C>
STATEMENT OF OPERATIONS DATA:
Physician groups revenue,
net......................... $29,302,573 $51,956,577
Less: amounts retained by
physician groups............ 11,496,972 16,037,920
----------- -----------
Management fee revenue....... 17,805,601 35,918,657
Operating expenses:
Clinic salaries and
benefits.................. 6,795,818 12,497,548
Clinic rent and lease
expense................... 1,620,677 2,886,659
Clinic supplies............. 2,034,422 4,156,581
Purchased medical
services.................. 725,486 5,755,835
Other clinic costs.......... 2,100,817 4,849,424
General corporate
expenses.................. 1,113,978 1,037,269
Depreciation and
amortization.............. 923,093 981,084
Interest expense
(revenue)................. 110,468 228,610
Merger costs................ -- --
----------- -----------
Income (loss) before
provision for income
taxes....................... 2,380,842 3,525,647
Provision for income
taxes..................... 778,494 1,216,544
----------- -----------
Net income (loss)............ $ 1,602,348 $ 2,309,103
=========== ===========
NET EARNINGS (LOSS) PER
SHARE:
Basic....................... $ 0.13 $ 0.18
=========== ===========
Diluted..................... $ 0.11 $ 0.15
=========== ===========
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING:
Basic....................... 12,042,769 12,507,883
=========== ===========
Diluted..................... 15,260,449 15,355,033
=========== ===========
OTHER DATA (AT END OF
PERIOD):
Affiliated physicians........ 224 354
Mid-level providers.......... 56 100
IPA physicians............... -- 528
----------- -----------
Total providers.............. 280 982
=========== ===========
Number of states............. 6 10
</TABLE>

LIQUIDITY AND CAPITAL RESOURCES

At December 31, 1997, the Company had working capital of $20.5 million,
compared to $2.3 million at December 31, 1996. This increase resulted primarily
from the acquisition of current assets (primarily accounts receivable) in excess
of current liabilities assumed in new affiliations. Although each new
affiliation will have its own specific structure, the Company typically acquires
current assets well in excess of the current liabilities it assumes.

Cash from operations for the year ended December 31, 1997 amounted to $1.3
million. Net income, combined with depreciation and amortization, deferred
taxes, and increases in accounts payable and amounts

18
<PAGE> 19

payable to affiliated physician groups provided $16.4 million in cash flows.
This was offset by increases in accounts receivable, management fees receivable,
due from affiliated physician groups, prepaid and other current assets and other
assets and decreases in accrued expenses and other current liabilities totaling
$15.1 million. This positive cash flow from operations in 1997 marked an
improvement over 1996 and 1995, in which the Company experienced usage of cash
in operations of $1.2 million and $0.9 million, respectively.

The Company had aggregate cash expenditures of $22.4 million and issued or
committed to issue an aggregate of 3.5 million shares of its common stock for
the acquisition of clinic assets during the year ended December 31, 1997. Of the
cash expenditures, $1.0 million was for additional physicians at existing
clinics and deferred payments associated with previously completed acquisitions.
Capital expenditures amounted to $2.8 million for the year ended December 31,
1997. 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
amounts have 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.

In November 1997, the Company completed an expansion of its Credit Facility
from $25 million to $50 million. The Credit Facility provides for working
capital and acquisition financing, subject to certain restrictions. The interest
rate is, at the Company's option, either the adjusted 30-day commercial paper
rate or one month LIBOR plus 2.70% to 3.25%, or the bank's base rate plus 0.35%
to 0.88%, depending on certain debt levels. The Credit Facility, which expires
January 2, 2004, contains certain restrictive covenants, including prohibitions
on paying dividends, limitations on capital expenditures and maintenance of
minimum net worth and certain financial ratios. At December 31, 1997,
outstanding borrowings against the Credit Facility were $33.0 million and the
effective interest rate was 8.5%. In April 1998 the Credit Facility was expanded
to $70 million.

In connection with the August 1997 Christie Clinic affiliation, the Company
agreed to lend the physician group a total of $42.7 million, the proceeds of
which are being utilized by the group's physicians. An initial loan of $3.0
million was funded in November 1997 and $16.4 million in December 1997, with
additional loans of $5.825 million to be funded each December through 2001. This
note receivable is recorded in long term receivables in the Company's
consolidated balance sheet. The note receivable earns interest at 8% and is an
interest-only loan, payable monthly, through November 2007, after which the
balance is to be repaid in annual installments through December 2022. After
December 2007, an amount equal to one twelfth of the annual amortization is
required to be set aside by the physician group each month to fund each upcoming
annual installment.

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

The Company had cash and cash equivalents of $15.8 million at December 31,
1997. In addition to cash, the Company's principal sources of liquidity were
accounts receivable of $24.4 million at December 31, 1997 and availability under
the working capital portion of the Credit Facility of $7.3 million. The Company
believes that the combination of these sources, together with the proceeds of
the Offering, will be sufficient to meet its working capital needs for the next
twelve months. The Company's future acquisition, expansion and capital
expenditure programs will require substantial amounts of capital resources. To
meet the capital needs of these programs, the Company will continue to evaluate
alternative sources of financing, including short- and long-term bank
indebtedness, additional equity and other forms of financing, the availability
and terms of which will depend upon market and other conditions. There can be no
assurance that additional financing will be available on terms acceptable to the
Company.

19
<PAGE> 20

BERKSHIRE AFFILIATION

During the year ended December 31, 1997, Berkshire generated total net
revenue of $42.1 million (net of contractual and bad debt allowances) and
incurred a net loss of $6.7 million. See Consolidated Financial Statements of
Berkshire Physicians & Surgeons, P.C. The Company believes that Berkshire's loss
was largely the result of expenses associated with changing the strategic
direction of Berkshire to managed care, high outside provider costs, and
distributions to newly employed physicians under guaranteed-compensation
arrangements not yet commensurate with physician productivity. Under the
Company's service agreement with Berkshire, all physician distributions are
based upon productivity. The Company estimates that annual physician
distributions would have been reduced by $7.2 million had the service agreement
been effective throughout 1997. The Company also believes that it can, through
PMC, substantially improve Berkshire's managed care operations. See Pro Forma
Consolidated Financial Statements.

20
<PAGE> 21

BUSINESS

GENERAL

The Company currently is affiliated with multi-specialty physician groups
in 11 states, comprised of 435 physicians and 115 mid-level providers (primarily
physician assistants and nurse practitioners), and is associated with 540
physicians in associated IPA networks. This includes Berkshire, a
multi-specialty physician group comprised of 79 physicians, 15 mid-level
providers and 14 IPA physicians with which the Company affiliated in April 1998.
Since the Company's March 1997 initial public offering, the total number of
ProMedCo's providers has grown to 1,090 from 192, its annual physician groups
revenue has grown to $265 million from $65 million (each on a pro forma basis),
and the number of states in which it operates has increased nearly threefold.

The Company has also significantly augmented its managed care contracting,
information systems, and clinical expertise through its December 1997
acquisition of Health Plans, Inc., since renamed PMC. PMC is a provider of
medical management services to capitated physician networks. Utilizing
state-of-the-art information systems, PMC provides a full range of managed care
services to capitated providers, including clinical quality assessment,
credentialing, claims processing and payment, referral and utilization
management, and case management. PMC is currently providing such services to the
Company's associated IPAs and to those of its affiliated groups that have
entered into capitation arrangements, together covering over 100,000 managed
care capitated lives.

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 $1,035 billion in 1996. Of the total estimated 1996
expenditures, physicians received approximately $202 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 members 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 member. Such an arrangement results in a greater
predictability of revenues, but exposes the provider to the risk of fluctuations
21
<PAGE> 22

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
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 secondary 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. Management believes that it has
consistently demonstrated its discipline to follow this strategy by declining to
pursue affiliation opportunities that have significantly deviated from it. The
key elements of the Company's strategy are as follows:

Continue to Penetrate Pre-Managed-Care Markets. Notwithstanding the
increasing presence of MCOs, managed care is just beginning to reach many
communities, located outside 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.

Affiliate with Primary-Care-Oriented Multi-Specialty 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 believes that a single multi-specialty network of primary care
physicians and specialists not only provides a comprehensive range of services
that is attractive to MCOs, but also offers flexibility to MCOs to contract for
a broad or narrow range of physician services.

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.

22
<PAGE> 23

Optimize Managed Care Opportunities. ProMedCo seeks to optimize managed
care contracting opportunities initially by affiliating with physician groups
having a strong local market presence. At the appropriate time in each market,
the Company establishes local systems and programs for the medical management of
capitated risk and, as MCOs move into the market, seeks to negotiate favorable
managed care contracts. ProMedCo believes that the strong market positions of
its affiliated groups, combined with PMC's demonstrated medical management
expertise, will enable its affiliated groups to manage such risk effectively
while generating new sources of revenue.

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.

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 and less than 500,000, typically have less than 20% HMO
penetration, and meet other market criteria. Such market criteria relate to,
among other things, the number of primary care physicians relative to demand,
Medicare payment rates, physician group competition, proximity to other ProMedCo
groups, the number of hospitals, demographics, population growth, and the
likelihood of significant future HMO growth. The Company estimates that there
are over 1,200 markets representing a total population of approximately 120
million, and containing an estimated 144,000 physicians generating $50 - 60
billion in revenues, 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.

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
prepares a comprehensive business plan for presentation to the group and
proposes to purchase the group's operating assets and enter into a long-term
service agreement. 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, addition of physician extenders and expansion of ancillary services
such as radiology and laboratory services. The Company will also seek to improve
the group's profitability through management of expenses and strengthening of
existing managed care contracts and conversion to capitation.

Current Operations

The Company currently provides medical management expertise to 1,090
providers in 11 states, consisting of approximately 435 physicians and 115
mid-level providers in affiliated physician groups and 540 physicians in
associated IPA networks.

23
<PAGE> 24

Approximately 60% of the physicians in ProMedCo's affiliated physician
groups are primary care providers. The primary care physicians consist of family
practitioners, general internists, pediatricians, obstetrician/gynecologists,
and urgent-care physicians. Increasingly, these physicians are augmented by mid-
level providers, primarily consisting of physician assistants and nurse
practitioners, 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 specialties 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
specialties. The physician groups offer, to varying degrees, a range of
ancillary services such as audiology, clinical laboratories, diagnostic imaging,
and stress testing. 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 IPAs are organizations of independent primary care providers and
specialists that contract to provide physician and other healthcare services to
HMOs and other MCOs. The members maintain their individual practices and,
through the IPA organization, share information and managed care systems,
actuarial and financial analysis, medical management and managed care contract
services provided by the Company through PMC.

The following table sets forth information concerning the Company's
providers.

<TABLE>
<CAPTION>
BEGINNING OF
PROMEDCO MID-LEVEL MEDICAL
LOCATION AFFILIATION PHYSICIANS PROVIDERS SPECIALTIES
------------------ -------------- ---------- --------- -----------
<S> <C> <C> <C> <C> <C>
AFFILIATED PHYSICIAN GROUPS:
North Texas Medical Surgical,
P.A............................... Denton, TX June 1995 8 -- 3
Abilene Diagnostic Clinic
Practices......................... Abilene, TX December 1995 36 11 9
Cullman Primary Care, P.C........... Cullman, AL March 1996 11 3 1
Morgan-Haugh, P.S.C................. Mayfield, KY April 1996 13 2 6
HealthFirst Medical Group, P.A...... Lake Worth, TX June 1996 14 7 4
King's Daughters Clinic, P.A........ Temple, TX September 1996 44 13 17
The Medical Group of Northern
Nevada............................ Reno, NV October 1996 17 11 7
Naples Medical Center, P.A.......... Naples, FL March 1997 38 4 18
Beacon Medical Group, P.C.(1)....... Harrisburg, PA April 1997 37 3 7
Intercoastal Medical Group, Inc..... Sarasota, FL August 1997 24 2 4
Christie Clinic Association......... Champaign, IL August 1997 87 39 44
Thomas-Spann Clinic, P.A............ Corpus Christi, TX December 1997 12 1 3
HealthStar Physicians, P.C.......... Knoxville, TN December 1997 13 4 6
Berkshire Physicians & Surgeons, February
P.C............................... Pittsfield, MA 1998(2) 79 15 14
--- ---
433 115
IPA PHYSICIANS:
PMC Medical Management IPA.......... Maine and New June 1997 510
Hampshire
Christie Clinic IPA................. Champaign, IL August 1997 18
Berkshire Physicians & Surgeons February
IPA............................... Pittsfield, MA 1998(2) 14
---
542
Total Providers.............. 1,090
</TABLE>

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

(1) In December 1997 Beacon Medical Group combined with Cowley Medical
Associates, which had become affiliated with ProMedCo effective November
1997.

(2) Operated under an interim service agreement pending the April 1998
affiliation.

24
<PAGE> 25

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, four of the Company's affiliated groups derive a
significant portion of their 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 patient scheduling and
registration, billing, and collections. In the future, the integration of
financial practice, 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 increasing 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 is yet available that, in the Company's opinion,
effectively addresses all of the evolving needs of physician groups. 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. It has made substantial progress toward
that end, having selected its preferred practice management system vendors and
having installed a new general ledger software package that it expects to extend
to all of its affiliated groups by year end.

Additionally, the Company significantly augmented its managed care
contracting, information systems, and clinical expertise through the acquisition
of PMC, a provider of medical management services to capitated providers of
physician services. Utilizing state-of-the-art information systems, including
some proprietary systems, PMC provides a full range of managed care services to
capitated providers, including clinical quality assessment, credentialing,
claims processing and payment, referral and utilization management and case
management. PMC is currently providing such services, covering over 100,000 MCO
members, to the Company's affiliated physician groups that have entered into
risk-sharing contracts with MCOs and to the

25
<PAGE> 26

Company's three associated IPAs, the largest of which was being managed by PMC
at the time of the acquisition. The Company believes that PMC's information
systems and physician network managed care expertise will enable the Company to
effectively manage the medical risk undertaken by the Company and its affiliated
groups under risk-sharing contracts.

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
generally 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 may continue to
utilize, Common Stock in payment of a portion of its consideration for the
assets of affiliated physician groups.

The service agreements between the Company and the physician groups are for
a term of 40 years and cannot be terminated by either party without cause,
consisting primarily of bankruptcy or material default. Under the service
agreement, 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. Upon expiration of the term
of a service agreement or in the event of termination, the physician group is
required to purchase the assets 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. In those affiliations involving the Company's
purchase of the group's operating assets, the employment contract provides for
the repayment by the physician of all or a portion of the physician's share of
the consideration paid by ProMedCo for such 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's
employment contract includes an agreement not to compete with the physician
group during the period of his or her employment and for a period of time
thereafter, typically two years. The employment contract also provides that the
Company is a third-party beneficiary entitled to enforce the repayment provision
and the agreement not to compete.

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 15-20%) 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 Company typically receives
implementation and transitional fees in return for significant up-front services
required in the first one to three months of the affiliation. The distribution
to the Company is increased or decreased by a percentage (typically ranging from
25% to 50%) of the group's surplus or deficit 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 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 did not have a material effect upon the
Company's operating income through 1997, the Company expects such provisions to
become significant as managed care emerges in its groups' local markets and its
groups increase their participation in risk-sharing arrangements. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."

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

26
<PAGE> 27

operations. This ensures that the physicians within each group retain a
significant voice in the expansion and operation on their group, while
benefiting 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 or require modification of the
Company's or its affiliated physician groups' operations or limit their
liability to expand.

The Company estimates that approximately 25% of the net physician groups
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 status imposing substantial penalties,
including civil and criminal fines and imprisonment, on healthcare providers
that fraudulently or wrongfully bill governmental or other third-part payors for
healthcare services.

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 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. In most
states, such so-called "fee-splitting" laws provide that the laws are violated
only if a physician shares fees with a referral source. The Florida Board of
Medicine, however, has recently interpreted the Florida fee-splitting law very
broadly so as arguably to include the payment of any percentage-based management
fee, even to a management company that does not refer patients to the managed
group. The interpretation of the Florida Board of Medicine has been appealed. If
it is not reversed, the decision could require modification of the service
agreements covering the Company's affiliated groups in Florida. There can be no
assurance that further action by government authorities regarding the structure
of the Company's relationship with its affiliated physician groups and managed
IPAs, in Florida or elsewhere, will not have an adverse effect upon the Company.

27
<PAGE> 28

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 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. 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.

Several states regulate the managed care support activities of
organizations other than insurers. In particular, claims administration and
utilization review functions may require licensure and the various elements of
the operations of the Company may be subject to regulation. The Company believes
that PMC holds all necessary licenses for its business activities. However, it
cannot be assured that it will receive necessary regulatory approvals for all
states in which it intends to conduct business, nor that the applicable
operational requirements will not adversely affect the profitability of the
Company.

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 legislators
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 $10
million per occurrence and $10 million in the aggregate. The cost and
availability of such coverage has varied widely in recent years. The Company
maintains individual and aggregate stop-loss insurance coverage with respect to
its and its affiliated groups' risk-sharing contracts. While the Company
believes its insurance coverage is adequate 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

The Company currently employs approximately 2,300 people including those
employed in its corporate office. The Company is not party to any collective
bargaining agreement with a labor union and considers its

28
<PAGE> 29

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 5,500 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 and its affiliated physician groups are from time to time
subject to medical malpractice claims and other various claims and legal actions
that arise in the ordinary course of business. Such claims, if successful, could
result in substantial damage awards that may exceed the limits of 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.

29
<PAGE> 30

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>
H. Wayne Posey(1)(2).................. 59 President, Chief Executive Officer, and Director
Dale K. Edwards....................... 35 Senior Vice President -- Development
Deborah A. Johnson.................... 45 Senior Vice President -- Administration and Secretary
Charles W. McQueary................... 45 Senior Vice President -- Operations
Robert M. Sontheimer.................. 57 Senior Vice President -- Managed Care
Robert D. Smith....................... 37 Vice President -- Finance
Gregory A. Wagoner, M.D............... 51 Vice President -- Medical Affairs
Richard E. Ragsdale(1)(2)(3).......... 54 Chairman and Director
David T. Bailey, M.D.(4).............. 52 Director
Charles J. Buysse, M.D................ 57 Director
E. Thomas Chaney(1)(2)(3)............. 55 Director
James F. Herd, M.D.................... 62 Director
Jack W. McCaslin(4)................... 58 Director
</TABLE>

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

(1) Member of Executive Committee

(2) Member of Compensation Committee

(3) Member of Option Committee

(4) Member of Audit Committee

H. WAYNE POSEY, a co-founder of the Company, has been the President, Chief
Executive Officer, and a Director 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 Hospital Affiliates International, Inc., a publicly owned hospital management
company, from 1970 until 1975, holding the positions of Controller, Vice
President and Controller, and Senior Vice President of Operations, and he also
served on the company's Board of Directors and Executive Committee. He serves as
a director of Gentle Dental Services Corporation, a publicly held dental
practice management company.

DALE K. EDWARDS has served as a Vice President of the Company with primary
responsibility for developing affiliations with physician groups since November
1994 and as Senior Vice President since July 1997. From November 1993 to
November 1994, Mr. Edwards was Vice President of Physician Network Development
with Columbia/HCA Healthcare Corporation, an integrated healthcare delivery
company, and with Medical Care America, Inc., a publicly owned operator of
outpatient surgical centers, 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.

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
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. Her positions have included Legal Counsel,
Director of Strategic Planning, Vice President -- Information Systems, and Vice
President -- Internal Audit.

CHARLES W. MCQUEARY has served as Senior Vice President -- Operations of
the Company since December 1997. Prior to joining the Company in May 1997, he
was Regional Vice President for MedPartners,

30
<PAGE> 31

Inc., a publicly traded physician practice management company, from November
1995 to May 1997. He served as Chief Operating Officer and Chief Financial
Officer of Asthma and Allergy Care America, Inc., a physician practice
management company, from September 1993 to November 1995. From October 1987 to
September 1993, Mr. McQueary was president of his own privately held consulting
firm, specializing in healthcare acquisitions and physician practice management.

ROBERT M. SONTHEIMER has served as Senior Vice President with primary
responsibility for managed care services to affiliated physicians and formation
and management of IPA networks since December 1997. He was the founder of PMC,
the capitation management services provider acquired by the Company in December
1997, and has served as its president and chief executive officer since
September 1992.

ROBERT D. SMITH served as Vice President and Controller of the Company
since January 1997 and Vice President -- Finance since April 1, 1998. 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.

GREGORY A. WAGONER, M.D., who also holds an M.B.A. degree, has been Vice
President -- Medical Affairs of the Company since December 1997. He also serves
as Medical Director of PMC, a position he has held since April 1997. From 1995
to March 1997 he served as Vice President of Medical Affairs of FHP
International Corporation, an HMO that was publicly held until its acquisition
in February 1997. From 1991 to 1994, he served as Regional Medical Director with
Cigna HealthCare of California.

RICHARD E. RAGSDALE, a co-founder of the Company, has served as the
Chairman of its Board of Directors since its inception. He was also a co-founder
and has served as the Chairman of the Board of Directors of Community Health
Systems, Inc., a non-urban hospital management company, since its inception in
1985, and has been a director of The RehabCare Group, Inc., a publicly owned
rehabilitation services management company, since 1993.

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.

CHARLES J. BUYSSE, M.D. has been in the private practice of medicine in
Naples, Florida, since 1975. He is President of Naples Medical Center, P.A., a
ProMedCo affiliated physician group, and has been a Director of the Company
since November 1997.

E. THOMAS CHANEY has served as President, Chief Executive Officer, and as
director of Community Health Systems, Inc., which he co-founded in 1985, since
its inception. A co-founder of the Company, he has served as a Director 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 of Harris Methodist Hospital in Fort Worth. He has served as
a Director of the Company since its inception.

JACK W. MCCASLIN has been the managing principal of McCaslin & Company,
P.C. and its predecessor, McCaslin, Wright & Greenwood, P.C. since 1983. He has
served as a Director of the Company since its inception.

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
31
<PAGE> 32

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 and determines the compensation of executive officers. The
Option Committee administers the Company's option plan and determines 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.

32
<PAGE> 33

PRINCIPAL AND SELLING STOCKHOLDERS

The following table sets forth certain information regarding beneficial
ownership of the Company's Common Stock as of April 13, 1998 by (i) each person
who is known by the Company to be the beneficial owner of more than five percent
of the Company's outstanding Common Stock, (ii) each Director of the Company,
(iii) certain executive officers of the Company, (iv) the Selling Stockholder,
and (v) all Directors and executive officers of the Company as a group, together
with their respective percentage ownership of such shares before the Offering
and as adjusted to reflect the sale of Common Stock offered hereby. Except as
otherwise indicated, the Company believes that the beneficial owners of the
Common Stock listed, based on information furnished by such owners, have sole
investment and voting power with respect to such shares, subject to community
property laws where applicable. Unless otherwise indicated, the address of each
stockholder is: c/o ProMedCo Management Company, 801 Cherry Street, Suite 1450,
Fort Worth, Texas 76102.

<TABLE>
<CAPTION>
SHARES BENEFICIALLY SHARES BENEFICIALLY
OWNED OWNED AFTER
BEFORE THE OFFERING(1) THE OFFERING
NUMBER AND ADDRESS ----------------------- SHARES -------------------
OF BENEFICIAL OWNER NUMBER PERCENT BEING SOLD NUMBER PERCENT
- ------------------- ----------- --------- ---------- --------- -------
<S> <C> <C> <C> <C> <C>
H. Wayne Posey.............................. 1,544,665 11.2% 400,000 1,144,665 5.8%
Richard E. Ragsdale......................... 2,021,540 14.6% -- 2,021,540 10.7%
David T. Bailey, M.D.(2).................... 2,350 * -- 2,350 *
Charles J. Buysse, M.D. .................... 2,200 * -- 2,200 *
E. Thomas Chaney............................ 1,114,780 8.3% -- 1,114,780 5.7%
James F. Herd, M.D. ........................ 155,020 1.2% -- 155,020 *
Jack W. McCaslin............................ 377,952 2.9% -- 377,952 2.0%
Robert D. Smith............................. 11,500 * -- 11,500 *
Robert M. Sontheimer........................ 348,242 2.7% -- 348,242 1.8%
Charles W. McQueary......................... 8,000 * -- 8,000 *
Richard D'Antoni(3)......................... 321,000 2.4% -- 321,000 1.7%
Dale K. Edwards............................. 104,000 * -- 104,000 *
R. Alan Gleghorn............................ 69,400 * -- 69,400 *
Deborah A. Johnson.......................... 31,666 * -- 31,666 *
Abilene Diagnostic Clinic, P.L.L.C. ........ 1,994,250 15.4% -- 1,994,250 10.5%
T. Rowe Price Associates(4)................. 844,900 6.5% -- 844,900 4.5%
Bessemer Venture Partners III L.P.(5)....... 691,528 5.3% -- 691,528 3.6%
All Directors and executive officers as a
group (14 persons)........................ 6,112,315 38.2% 400,000 5,712,315 26.0%
</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 of any other person.

(2) Excludes 1,994,250 shares held by Abilene Diagnostic Clinic, P.L.L.C., of
which Dr. Bailey is President.

(3) Mr. D'Antoni resigned as an officer of the Company in November 1997.

(4) Based upon a Schedule 13G filed with the Securities and Exchange Commission
(the "Commission") on February 10, 1998. The stockholder has sole investment
power with respect to all of such shares and sole voting power with respect
to 362,300 of such shares. These securities are owned by various individual
and institutional investors for which T. Rowe Price Associates, Inc. serves
as investment adviser with power to direct investments and/or sole power to
vote the securities. For purposes of the reporting requirements of the
Securities Exchange Act of 1934, T. Rowe Price Associates is deemed to be a
beneficial owner of such securities; however, T. Rowe Price Associates
expressly disclaims that it is in fact, the beneficial owner of such
securities. The address of T. Rowe Price Associates is 100 East Pratt
Street, Baltimore, Maryland 21202.

(5) Based upon a Schedule 13G filed with the Commission on February 12, 1998.
Comprised of 655,310 shares as to which the owner has sole investment and
voting power and 36,218 shares as to which it has shared investment and
voting power. The address of Bessemer Venture Partners is 1025 Old Country
Road, Suite 205, Westbury, New York 11590.

33
<PAGE> 34

SHARES ELIGIBLE FOR FUTURE SALE

As of December 31, 1997, on a pro forma basis after giving effect to the
subsequent issuance of shares in connection with certain prior physician group
affiliations and the Offering, 18,906,893 shares of Common Stock (19,866,893 if
the Underwriters' over-allotment option is exercised in full) were outstanding.
Upon completion of the Offering, approximately 10.7 million or 56.6%, of such
shares may be sold without restriction under the Securities Act. The remaining
shares are "restricted securities" within the meaning of Rule 144 promulgated
under the Securities Act (the "Restricted Shares"), and may be publicly resold
only if registered under the Securities Act or sold in accordance with an
applicable exemption from registration, such as Rule 144.

In general, under Rule 144 as currently in effect, a person who has
beneficially owned Restricted Shares for at least one year, including an
"affiliate" of the Company, is entitled to sell within any three-month period a
number of shares of Common Stock that does not exceed the greater of 1% of the
then outstanding shares of Common Stock of the Company or the average weekly
trading volume of Common Stock on the open market during the four calendar weeks
preceding the date of which notice of the sale is filed with the Commission.
Sales under Rule 144 are subject to certain restrictions relating to manner of
sale, notice and availability of current public information about the Company. A
person who has not been an "affiliate" at any time during the 90 days preceding
a sale, and who has beneficially owned shares for at least two years, is
entitled to sell such shares free of certain of these restrictions.

The shares of Common Stock offered hereby may be resold without restriction
under the Securities Act except for any such shares acquired by an "affiliate"
of the Company, which shares will be subject to the resale limitations of Rule
144. The Company is unable to make any prediction as to the effect, if any, that
the availability of Common Stock for sale, or the future sales of Common Stock,
under Rule 144 or otherwise, will have on the prevailing market price of Common
Stock. Sales of substantial amounts of Common Stock in the public market, or the
perception of the availability of shares for sale, could adversely affect the
prevailing market price of the Common Stock.

The Company's directors and officers have agreed not to dispose of any
shares of Common Stock for a period of 90 days from the date of this Prospectus,
other than pursuant to the Offering, without the prior written consent of Piper
Jaffray Inc., as representative of the Underwriters. See "Underwriting."

Certain holders have demand and "piggyback" registration rights with
respect to 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. In addition, the
Company has filed a registration statement covering 3,100,000 shares of Common
Stock reserved for issuance under the Company's stock option plans.

34
<PAGE> 35

UNDERWRITING

The Underwriters named below have agreed, subject to the terms of a
Purchase Agreement, to purchase from the Company and the Selling Stockholder the
number of shares of Common Stock set forth opposite their names below. The
Underwriters are committed to purchase and pay for all such shares if any are
purchased.

<TABLE>
<CAPTION>
NUMBER
NAME OF SHARES
- ---- -----------
<S> <C>
Piper Jaffray Inc. .........................................
Bear, Stearns & Co. Inc. ...................................
Cowen & Company.............................................
-----------
Total..................................................
===========
</TABLE>

The Underwriters have advised the Company and the Selling Stockholder that
they propose to offer the shares directly to the public at the public offering
price set forth on the cover page of this Prospectus and to selected dealers at
such price less a concession not in excess of $ per share. The
Underwriters may allow and such dealers may reallow a concession not in excess
of $ per share to certain other brokers and dealers. After the public
offering, the public offering price, concession and reallowance, and other
selling terms may be changed by the Underwriters.

The Company has granted to the Underwriters an option, exercisable during
the 30-day period after the date of this Prospectus, under which the
Underwriters may purchase up to an additional 960,000 shares of Common Stock
from the Company at the Price to Public less the Underwriting Discount set forth
on the cover page of the Prospectus. The Underwriters may exercise the option
only to cover over-allotments, if any. To the extent such option is exercised,
each Underwriter will become obligated, subject to certain conditions, to
purchase approximately the same percentage of such additional shares as it was
obligated to purchase under the Purchase Agreement.

The officers and directors of the Company, who will beneficially own in the
aggregate 5,391,315 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 90 days after the
date of this Prospectus, without the prior written consent of Piper Jaffray Inc.
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 90-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 affiliations with new physician groups.

The Company and the Selling Stockholder have agreed to indemnify the
Underwriters against certain liabilities, including civil liabilities under the
Securities Act, or to contribute to payments that 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 during and after the Offering. Specifically, the Underwriters may
over-allot or otherwise create a short position in the Common Stock for their
own account by selling more shares of Common Stock than have been sold to them
by the Company. The Underwriters may elect to cover any such short position by
purchasing shares of Common Stock in the open market or by exercising the over-
allotment option granted to the Underwriters. In addition, the Underwriters may
stabilize or maintain the price of the Common Stock by bidding for or purchasing
shares of Common Stock in the open market and may impose penalty bids, under
which selling concessions allowed to syndicate members or other broker-dealers
participating in the Offering are reclaimed if shares of Common Stock previously
distributed in the Offering are repurchased in connection with stabilization
transactions or otherwise. The effect of these transactions may be to stabilize
or maintain the market price of the Common Stock at a level above that

35
<PAGE> 36

which might otherwise prevail in the open market. The imposition of a penalty
bid may also affect the price of the Common Stock to the extent that it
discourages resales thereof. No representations are made as to the magnitude or
effect of any such stabilization or other transactions. Such transactions may be
effected on the Nasdaq National Market or otherwise and, if commenced, may be
discontinued at any time.

In connection with this Offering, certain Underwriters (and selling group
members) may also engage in passive market making transactions in the Common
Stock on the Nasdaq National Market. Passive market making consists of
displaying bids on the Nasdaq National Market limited by the prices of
independent market makers and effecting purchases limited by such prices and in
response to order flow. Rule 103 of Regulation M promulgated by the Commission
limits the amount of net purchases that each passive market maker may make and
the displayed size of each bid. Passive market making may stabilize the market
price of the Common Stock at a level above that which might otherwise prevail in
the open market and, if commenced, may be discontinued at any time.

LEGAL MATTERS

The validity of the issuance of the Common Stock offered hereby will be
passed upon for the Company by Dyer Ellis & Joseph P.C., Washington, D.C.
Certain legal matters with respect to such securities will be passed upon for
the Underwriters by Vinson & Elkins L.L.P., Dallas, Texas.

EXPERTS

The consolidated financial statements of the Company as of December 31,
1996 and 1997 and for the years ended December 31, 1995, 1996, and 1997 included
in this Prospectus and elsewhere in the Registration Statement (as defined
herein) 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 Southwest Florida Clinical Practices and IMG,
Inc. incorporated by reference 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.

The financial statements of Health Plans, Inc. appearing in the Company's
Current Report on Form 8-K dated February 17, 1998 for the year ended December
31, 1996, have been audited by Ernst & Young LLP, independent auditors, as set
forth in their report thereon included therein and incorporated herein by
reference. Such financial statements referred to above are incorporated herein
by reference in reliance upon such reports given upon the authority of such firm
as experts in accounting and auditing.

The consolidated financial statements of Berkshire Physicians & Surgeons,
P.C. as of December 31, 1996 and 1997 and for the years ended December 31, 1996
and 1997 included in this Prospectus have been audited by Coopers & Lybrand
L.L.P., independent accountants, as indicated in their reports with respect
thereto, and are included herein in reliance upon the authority of said firm as
experts in accounting and auditing.

36
<PAGE> 37

AVAILABLE INFORMATION

The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"). In accordance with the
Exchange Act, the Company files reports, proxy and information statements and
other information with the Commission. The reports, proxy and information
statements and other information can be inspected and copied at the public
reference facilities that the Commission maintains at Room 1024, 450 Fifth
Street, N.W., Washington, D.C. 20549, and at the Commission's regional offices
located at 7 World Trade Center, 13th Floor, New York, New York 10048, and 500
West Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of these
materials can be obtained at prescribed rates from the Public Reference Section
of the Commission at the principal offices of the Commission, 450 Fifth Street,
N.W., Washington, D.C. 20549. In addition, the Commission maintains a site on
the World Wide Web at http://www.sec.gov that contains reports, proxy and
information statements and other information regarding registrants that file
electronically with the Commission.

The Company has filed with the Commission a registration statement on Form
S-3 (the "Registration Statement") under the Securities Act, with respect to the
Common Stock. This Prospectus, which constitutes a part of the Registration
Statement, does not contain all the information set forth in the Registration
Statement, certain items of which are contained in schedules and exhibits to the
Registration Statement as permitted by the rules and regulations of the
Commission. Statements made in this Prospectus concerning the contents of any
documents referred to herein are not necessarily complete. With respect to each
such document filed with the Commission as an exhibit to the Registration
Statement, reference is made to the exhibit for a more complete description, and
each such statement shall be deemed qualified in its entirety by such reference.

The Common Stock is quoted on the Nasdaq National Market under the symbol
"PMCO." Reports, proxy and information statements and other information
concerning the Company may be inspected at the offices of the Nasdaq National
Market, 1735 K Street, N.W., Washington, D.C. 20006.

INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE

The following documents filed by the Company with the Commission under the
Exchange Act are hereby incorporated by reference into this Prospectus:

(a) the Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1997;

(b) the description of the Common Stock contained in the Company's
Form 8-A Registration Statement filed with the Commission on March 3, 1997
(File No. 0-21373);

(c) the Company's definitive proxy statement for its 1998 Annual
Meeting of Stockholders filed with the Commission on April 23, 1998;

(d) the financial statements of Southwest Florida Clinic Practices,
included in the Company's Amendment to Report on Form 8-K filed with the
Commission on July 7, 1997;

(e) the financial statements of IMG, Inc. (formerly known as
Intercoastal Medical Group, Inc.), included in the Company's Amendment to
Report on Form 8-K filed with the Commission on December 22, 1997; and

(f) the financial statements of Health Plans, Inc., included in the
Company's Amendment to Report on Form 8-K filed with the Commission on
February 17, 1998.

All documents filed by the Company pursuant to Sections 13(a), 13(c), 14 or
15(d) of the Exchange Act subsequent to the date of this Prospectus and prior to
the termination of the Offering shall be deemed to be incorporated by reference
into this Prospectus and to be a part hereof from the respective dates of filing
of such documents.

Any statement or information contained herein or in any document all or
part of which is incorporated or deemed to be incorporated by reference herein
shall be deemed to be modified or superseded for purposes of
37
<PAGE> 38

this Prospectus to the extent that a statement or information contained herein
or in any other subsequently filed document which also is or is deemed to be
incorporated by reference herein modifies or supersedes such statement or
information. Any such statement or information so modified or superseded shall
not be deemed, except as so modified or superseded, to constitute a part of this
Prospectus.

The Company will provide without charge to any person to whom this
Prospectus is delivered, upon the written or oral request of such person, a copy
of any or all of the foregoing documents incorporated herein by reference (other
than certain exhibits to such documents). Requests for such copies should be
directed to Investor Relations, ProMedCo Management Company, 801 Cherry Street,
Suite 1450, Fort Worth, Texas 76102.

38
<PAGE> 39

INDEX TO FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
<S> <C>
PROMEDCO MANAGEMENT COMPANY
Pro Forma Consolidated Financial Statements (Unaudited)..... F-2
Pro Forma Consolidated Balance Sheet as of December 31,
1997 (Unaudited)...................................... F-3
Pro Forma Consolidated Statement of Operations for the
Year Ended December 31, 1997 (Unaudited).............. F-4
Notes to Pro Forma Consolidated Financial Statements
(Unaudited)........................................... F-5
Consolidated Financial Statements:
Report of Independent Public Accountants............... F-9
Consolidated Balance Sheets as of December 31, 1996 and
1997.................................................. F-10
Consolidated Statements of Operations for the Three
Years Ended December 31, 1997......................... F-12
Consolidated Statements of Stockholders' Equity for the
Three Years Ended December 31, 1997................... F-13
Consolidated Statements of Cash Flows for the Three
Years Ended December 31, 1997......................... F-14
Notes to Consolidated Financial Statements............. F-15

BERKSHIRE PHYSICIANS & SURGEONS, P.C.
Consolidated Financial Statements:
Report of Independent Accountants...................... F-31
Consolidated Balance Sheets as of December 31, 1996 and
1997.................................................. F-32
Consolidated Statements of Operations for the years
ended December 31, 1996 and 1997...................... F-33
Consolidated Statements of Changes in Shareholders'
Equity (Deficit) for the years ended December 31, 1996
and 1997.............................................. F-34
Consolidated Statements of Cash Flows for the years
ended December 31, 1996 and 1997...................... F-35
Notes to Consolidated Financial Statements............. F-36
</TABLE>

F-1
<PAGE> 40

PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS

The pro forma consolidated balance sheet presented below gives effect to
the Berkshire affiliation and the Offering as if such transactions had occurred
on December 31, 1997.

The pro forma consolidated statement of operations for the year ended
December 31, 1997, gives effect to the 1997 Affiliations and the Christie
affiliation (the "1997 Transactions"), the Berkshire affiliation and the
Offering as if such transactions had been completed on January 1, 1997. The pro
forma consolidated statement of operations is based on the financial statements
of the Company and the affiliated physician groups, giving effect to the
Berkshire affiliation and the 1997 Affiliations 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 statements have been prepared by
management based on the audited financial statements of the affiliated physician
groups, adjusted where necessary to reflect the affiliations and related
operations as if the service agreements between the Company and such groups had
been in effect during the entire periods presented. These pro forma consolidated
financial statements are presented for illustrative purposes only and are not
indicative of the results that would have occurred if the Berkshire affiliation
and the 1997 Transactions had been completed on January 1, 1997 or that may be
obtained in the future. The pro forma consolidated financial statements should
be read in conjunction with the audited consolidated financial statements and
notes thereto of the Company and Berkshire Physicians & Surgeons, P.C. included
elsewhere in this Prospectus and for, Abilene Diagnostic Clinic, P.L.L.C.
included in the Company's registration statement on Form S-1 and related
prospectus dated March 12, 1997, the Southwest Florida Clinic Practices included
in the Company's Current Report on Form 8-K dated April 23, 1997, IMG, Inc.
included in the Company's Current Report on Form 8-K dated October 8, 1997 and
Health Plans, Inc., included in the Company's Current Report on Form 8-K dated
December 2, 1997.

F-2
<PAGE> 41

PRO FORMA CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1997
(UNAUDITED)

<TABLE>
<CAPTION>
BERKSHIRE BERKSHIRE OFFERING PRO FORMA
HISTORICAL HISTORICAL(a) ADJUSTMENTS PRO FORMA ADJUSTMENTS(e) AS ADJUSTED
------------ ------------- ----------- ------------ -------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Cash............................ $15,760,920.. $ 1,185,042 $ -- $ 16,945,962 $ 33,262,000 $ 50,207,962
Accounts receivable............. 24,420,979 4,402,454 -- 28,823,433 -- 28,823,433
Management fee receivable....... 1,938,464 -- -- 1,938,464 -- 1,938,464
Due from affiliated physician
groups........................ 2,870,607 -- -- 2,870,607 -- 2,870,607
Prepaid expense and other
current assets................ 4,960,385 1,397,271 -- 6,357,656 -- 6,357,656
------------ ----------- ----------- ------------ ------------ ------------
Total current assets... 49,951,355 6,984,767 -- 56,936,122 33,262,000 90,198,122
Property and equipment.......... 10,590,561 4,649,052 (3,577,791)(b) 11,661,822 -- 11,661,822
Intangible assets............... 77,195,351.. -- 28,422,994(a) 105,618,345 -- 105,618,345
Long term receivables........... 23,915,884 -- -- 23,915,884 -- 23,915,884
Other assets.................... 1,312,999 220,083 -- 1,533,082 -- 1,533,082
------------ ----------- ----------- ------------ ------------ ------------
Total assets........... $162,966,150 $11,853,902 $24,845,203 $199,665,255 $ 33,262,000 $232,927,255
============ =========== =========== ============ ============ ============
Accounts payable................ $6,687,168... $ 3,774,701 $ -- $ 10,461,869 $ -- $ 10,461,869
Payable to affiliated physician
groups........................ 6,562,903 -- -- 6,562,903 -- 6,562,903
Accrued physician
compensation.................. -- 1,879,175 -- 1,879,175 -- 1,879,175
Accrued salaries, wages and
benefits...................... 2,895,023 1,552,711 -- 4,447,734 -- 4,447,734
Accrued expenses and other
current liabilities........... 2,512,769 -- -- 2,512,769 -- 2,512,769
Deferred income tax liability... 174,101 -- -- 174,101 -- 174,101
Current maturities of notes
payable....................... 3,676,365 7,569,132 (7,569,132)(b) 3,676,365 -- 3,676,365
Current portion of obligations
under capital leases.......... 609,591 644,665 (644,665)(b) 609,591 -- 609,591
Current portion of deferred
purchase price................ 5,265,713 -- -- 5,265,713 -- 5,265,713
Income taxes payable............ 1,051,050 -- -- 1,051,050 -- 1,051,050
------------ ----------- ----------- ------------ ------------ ------------
Total current
liabilities.......... 29,434,683 15,420,384 (8,213,797) 36,641,270 -- 36,641,270
Notes payable, net of current
maturities.................... 39,688,325 339,172 (339,172)(b) 55,758,325 (49,038,000) 6,720,325
16,070,000(d)
Obligations under capital
leases, net of current
portion....................... 1,073,886 2,014,670 (2,014,670)(b) 1,073,886 -- 1,073,886
Deferred purchase price, net of
current portion............... 7,318,526 -- -- 7,318,526 -- 7,318,526
Convertible subordinated notes
payable....................... 1,765,058 -- 7,572,518(d) 9,337,576 -- 9,337,576
Deferred income tax liability... 1,103,876 -- -- 1,103,876 -- 1,103,876
Other long term liabilities..... 1,963,059 -- -- 1,963,059 -- 1,963,059
------------ ----------- ----------- ------------ ------------ ------------
Total liabilities...... 82,347,413 17,774,226 13,074,879 113,196,518 (49,038,000) 64,158,518
Common stock.................... 106,868 334 (334)(c) 110,812 60,000 170,812
3,944(d)
Additional paid in capital...... 58,946,838 593,052 (593,052)(c) 64,792,894 82,240,000 147,032,894
5,846,056(d)
Common stock to be issued....... 20,121,059 -- -- 20,121,059 -- 20,121,059
Stockholder notes receivable.... (369,665) (335,204) 335,204(c) (369,665) -- (369,665)
Accumulated earnings
(deficit)..................... 1,813,637 (6,178,506) 6,178,506(c) 1,813,637 -- 1,813,637
------------ ----------- ----------- ------------ ------------ ------------
Total stockholders'
equity............... 80,618,737 (5,920,324) 11,770,324 86,468,737 82,300,000 168,768,737
------------ ----------- ----------- ------------ ------------ ------------
Total liabilities and
stockholders'
equity............... $162,966,150 $11,853,902 $24,845,203 $199,665,255 $ 33,262,000 $232,927,255
============ =========== =========== ============ ============ ============
</TABLE>

F-3
<PAGE> 42

PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
1997 1997 BERKSHIRE BERKSHIRE
HISTORICAL(f) TRANSACTIONS(g) ADJUSTMENTS AFFILIATION(o) ADJUSTMENTS
------------- --------------- ------------ -------------- ------------
<S> <C> <C> <C> <C> <C>
Physician groups revenue,
net........................... $127,716,775 $95,005,638 $ -- $ 42,128,650 $ --
Less: Amounts retained by
physician group............... 47,075,240 28,631,514 (28,631,514)(h) 14,877,480 (14,877,480)(p)
28,819,657(h) 7,664,957(p)
------------ ----------- ------------ ------------ ------------
Management fee revenue......... 80,641,535 66,374,124 (188,143) 27,251,170 7,212,523
Operating expenses
Clinic salaries and
benefits.................... 29,859,718 23,616,700 (2,799,907)(i) 12,035,052 (691,323)(q)
Clinic rent and lease
expense..................... 7,016,261 4,428,419 -- 2,173,514 145,000(r)
Clinic supplies............... 9,667,085 6,638,431 -- 3,319,753 --
Purchased medical services.... 7,946,989 25,647,017 -- 9,731,890 --
Other clinic costs............ 10,883,588 5,365,285 (24,322)(j) 4,435,660 (755,160)(s)
General corporate expenses.... 3,793,552 -- -- -- --
Depreciation and
amortization................ 2,942,604 932,151 (223,318)(k) 1,218,025 (359,301)(t)
311,238(l) 947,433(u)
Interest expense (revenue),
net......................... 456,175 312,285 (242,295)(m) 949,683 (949,683)(v)
(1,026,889)(g)(m) 359,695(v)
------------ ----------- ------------ ------------ ------------
72,565,972 66,940,288 (4,005,493) 33,863,577 (1,303,339)
------------ ----------- ------------ ------------ ------------
Income (loss) before provision
for income taxes.............. 8,075,563 (566,164) 3,817,350 (6,612,407) 8,515,862
Provision for income taxes..... 2,602,379 (87,406) 1,789,192(n) 58,569 664,744(w)
------------ ----------- ------------ ------------ ------------
Net income (loss).............. $ 5,473,184 $ (478,758) $ 2,028,158 $ (6,670,976) $ 7,851,118
============ =========== ============ ============ ============
Net income (loss) per share
outstanding
Basic....................... $ 0.48
Diluted..................... $ 0.38
Weighted average number of
common shares outstanding
Basic....................... 11,375,662
Diluted..................... 14,224,198

<CAPTION>
OFFERING PRO FORMA
PRO FORMA ADJUSTMENTS(x) AS ADJUSTED
------------ -------------- ------------
<S> <C> <C> <C>
Physician groups revenue,
net........................... $264,851,063 $ -- $264,851,063
Less: Amounts retained by
physician group............... 83,559,854 -- 83,559,854
------------ --------- ------------
Management fee revenue......... 181,291,209 -- 181,291,209
Operating expenses
Clinic salaries and
benefits.................... 62,020,240 -- 62,020,240
Clinic rent and lease
expense..................... 13,763,194 -- 13,763,194
Clinic supplies............... 19,625,269 -- 19,625,269
Purchased medical services.... 43,325,896 -- 43,325,896
Other clinic costs............ 19,905,051 -- 19,905,051
General corporate expenses.... 3,793,552 -- 3,793,552
Depreciation and
amortization................ 5,768,832 -- 5,768,832
Interest expense (revenue),
net......................... (141,029) (671,655) (812,684)
------------ --------- ------------
168,061,005 (671,655) 167,389,350
------------ --------- ------------
Income (loss) before provision
for income taxes.............. 13,230,204 671,655 13,901,859
Provision for income taxes..... 5,027,478 255,229 5,282,707
------------ --------- ------------
Net income (loss).............. $8,202,726... $ 416,426 $ 8,619,152
============ ========= ============
Net income (loss) per share
outstanding
Basic....................... $ 0.46
Diluted..................... $ 0.40
Weighted average number of
common shares outstanding
Basic....................... 18,595,099
Diluted..................... 21,443,635
</TABLE>

F-4
<PAGE> 43

NOTES TO PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS

During 1997 and through the date of this Prospectus, the Company acquired
certain operating assets and assumed certain operating liabilities of physician
groups located in Florida, Massachusetts, Pennsylvania, Tennessee and Texas. The
Company also entered into a long term service agreement with a physician group
in Illinois. In addition, the Company acquired all of the outstanding stock of
Health Plans, Inc., since renamed PMC, which provides a full range of managed
care services to capitated providers.

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 80-85% of the physician group operating income) represent amounts
paid to the physician groups 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 15-20%) 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 December 31, 1997 pro forma consolidated
balance sheet are as follows:

(a) To record the assets acquired and liabilities assumed by ProMedCo
(to be adjusted for assets not acquired and liabilities not assumed, as
noted in note (b)) in the Berkshire affiliation. This acquisition has been
accounted for by the purchase method of accounting and, accordingly, the
purchase price has been preliminarily allocated to the assets acquired and
liabilities assumed based on the estimated fair values as of December 31,
1997. Certain balances have been reclassified from the historical audited
financial statements of Berkshire to conform with the Company's
presentation. The total consideration of the transaction is approximately
$29.5 million, consisting of $16.1 million cash, $5.8 million of the
Company's Common Stock, and $7.6 million of convertible subordinated notes.
The cash portion of the consideration was funded through additional
borrowings under the Company's Credit Facility. The fair value of the
clinic net assets was determined based on an analysis of estimated future
clinic operating results. 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 the specific
receivable balances and determined that their historical carrying amount
approximates their fair value.

Property and equipment, net -- The Company acquires only specific
non-real estate assets. The Company performed an asset review and
determined that the historical carrying amount approximates fair value.

Liabilities assumed -- Given the short term nature of the
liabilities assumed, the historical carrying amount approximates their
fair value.
F-5
<PAGE> 44
NOTES TO PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Intangible assets -- In connection with the allocation of the
purchase price to identifiable intangible assets, the Company analyzes
the nature of each group, the number of service sites and ability to
recruit addition 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 non-competition 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 of 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 to the Company
allocable to the employment and non-competition 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.

(b) To eliminate assets not acquired and liabilities not assumed by
ProMedCo in the Berkshire affiliation as stated in the purchase agreement.

(d) To record borrowings under the Company's Credit Facility for the
cash payment, stock issued and subordinated notes payable issued at closing
in exchange for assets acquired and liabilities assumed in connection with
the Berkshire affiliation. The subordinated notes payable bear interest at
4.75% and are convertible at a 20% premium to the Closing Price of the
Company's Common Stock, as defined in the purchase agreement for the
Berkshire affiliation.

(e) To reflect the effects of the Offering (at an assumed offering
price of $14.50).

PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS

The adjustments reflected in the pro forma consolidated statement of
operations for the year ended December 31, 1997 are as follows:

(f) The historical consolidated statement of operations includes the
combined results of operations of the Company and Western Medical
Management Corp., Inc. ("Reno"). The Reno business combination (the "Reno
merger") was completed on March 17, 1997, and was accounted for as a
pooling of interests.

(g) The 1997 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 1997 Transactions include
Abilene Diagnostic Clinic, P.L.L.C.; Naples Medical Center, P.A.; Naples
Obstetrics & Gynecology, M.D., P.A.; IMG, Inc.; Cowley Medical Associates,
P.C.; Health Plans, Inc.; HealthStar, Inc.; Thomas-Spann Clinic, P.A.; and
the Christie affiliation.
F-6
<PAGE> 45
NOTES TO PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

In connection with the August 1997 Christie affiliation, the Company
agreed to lend the physician group a total of $42.7 million. An initial
loan of $3.0 million was funded in November 1997 and an additional $16.4
million was funded in December 1997, with additional loans of $5.825
million to be funded each December through 2001. The note receivable earns
interest at an annual rate of 8% and is an interest only loan, payable
monthly, through November 2007, after which the balance is to be repaid in
annual installments through December 2022.

(h) To eliminate the historical amounts retained by physician groups,
physician benefits and other physician-related costs and to record the
amounts retained by physician groups to the percentage specified in the
service agreement (typically 80-85% of each of the physician group's
operating income) for each affiliated physician group in the 1997
Affiliations, the Christie affiliation and the Reno merger. The adjustment
is for the periods that the physician groups were not managed under the
service agreements.

(i) To eliminate the salaries and benefits of mid-level providers at
historical levels in the 1997 Transactions for the periods not covered by
the service agreements. The service agreements provide that these costs are
the responsibility of the physician groups and thus are included in the
amounts retained by physician groups. The adjustment is for the periods the
physician groups were not managed under the service agreements.

(j) To eliminate physician benefits and other physician related costs,
such as professional licenses, continuing education and subscriptions that
will not be paid by the Company.

(k) To eliminate the depreciation and amortization expense recorded by
the physician groups associated with assets not acquired in the 1997
Transactions at historical values. The adjustment is for the periods the
physician groups were not managed under the service agreements.

(l) To adjust depreciation expense and amortization expense in the
1997 Transactions. For service agreement rights, 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.

(m) To eliminate interest expense related to liabilities not assumed
and record interest on debt issued in connection with the 1997
Transactions. Additional interest income is recorded on the loan to
Christie Clinic Association based on the outstanding balance as of December
31, 1997 as if the amount had been outstanding as of January 1, 1997.

(n) To record an estimate of the overall provision for income taxes
for the consolidated operations of the historical results of the Company
plus the 1997 Transactions at an estimated effective rate of 38%.

(o) The Berkshire affiliation represents the historical consolidated
revenues and expenses of Berkshire Physicians & Surgeons, P.C. for the year
ended December 31, 1997. Certain balances have been reclassified from the
historical financial statements to conform with the Company's presentation.

(p) To eliminate the historical amounts retained by the physician
group and record the amounts retained by the physician group based on the
percentage specified in the service agreement entered into with the
physician group.

(q) To eliminate the salaries and benefits of mid-level providers at
historical levels for the periods not covered by the service agreements.
The service agreement provides that these costs are the responsibility of
the physician group and thus are included in the amounts retained by
physician groups.

(r) To record additional rent expense related to the rental of clinic
space from the physician group.

(s) To eliminate physician related costs, such as professional
licenses, continuing education and subscriptions, that will not be paid by
the Company.
F-7
<PAGE> 46
NOTES TO PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

(t) To eliminate the depreciation and amortization expense associated
with assets not acquired, at historical values.

(u) To adjust depreciation and amortization expense. For service
agreement rights, 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.

(v) To eliminate interest expense related to liabilities not assumed
and record interest on debt issued in connection with the Berkshire
affiliation.

(w) To record an estimate of the provision for income taxes for the
pro forma results of operations from the Berkshire affiliation at an
estimated effective rate of 38%.

(x) To reduce interest expense assuming repayment of outstanding
borrowings under the Credit Facility with a portion of the proceeds of the
Offering received as of January 1, 1997, net of estimated federal and state
income taxes at a combined rate of 38%.

F-8
<PAGE> 47

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,
1996 and 1997, and the related consolidated statements of operations,
stockholders' equity, and cash flows for each of the three years in the period
ended December 31, 1997. 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, 1996 and 1997, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1997, in conformity with generally accepted accounting principles.

ARTHUR ANDERSEN LLP

Fort Worth, Texas,
March 3, 1998

F-9
<PAGE> 48

PROMEDCO MANAGEMENT COMPANY AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------
1996 1997
----------- ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.............................. $ 1,633,534 $ 15,760,920
Accounts receivable, net of allowances of approximately
$4,035,000 and $19,281,000, respectively............. 6,227,228 24,420,979
Management fees receivable............................. 1,266,598 1,938,464
Due from affiliated physician groups................... 660,278 2,870,607
Prepaid expenses and other current assets.............. 742,845 4,960,385
----------- ------------
Total current assets.............................. 10,530,483 49,951,355
Property and equipment, net of accumulated depreciation of
approximately $865,000 and $2,630,000, respectively.... 3,930,191 10,590,561
Intangible assets, net of accumulated amortization of
$289,000 and $1,775,000, respectively.................. 14,860,171 77,195,351
Long term receivables....................................... -- 23,915,884
Other assets................................................ 1,238,929 1,312,999
----------- ------------
Total assets...................................... $30,559,774 $162,966,150
=========== ============
</TABLE>

The accompanying notes are an integral part of these financial statements.
F-10
<PAGE> 49

PROMEDCO MANAGEMENT COMPANY AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS -- (CONTINUED)

<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------
1996 1997
----------- ------------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 1,505,762 $ 6,687,168
Payable to affiliated physician groups.................... 1,341,876 6,562,903
Accrued salaries, wages and benefits...................... 1,153,558 2,895,023
Accrued expenses and other current liabilities............ 2,353,381 2,512,769
Deferred income tax liability............................. -- 174,101
Current maturities of notes payable....................... 1,151,191 3,676,365
Current portion of obligations under capital leases....... 589,438 609,591
Current portion of deferred purchase price................ 181,986 5,265,713
Income taxes payable...................................... -- 1,051,050
----------- ------------
Total current liabilities............................ 8,277,192 29,434,683
Notes payable, net of current maturities.................... 4,585,173 39,688,325
Obligations under capital leases, net of current portion.... 1,030,171 1,073,886
Deferred purchase price, net of current portion............. -- 7,318,526
Convertible subordinated notes payable...................... 1,800,274 1,765,058
Deferred income tax liability............................... -- 1,103,876
Other long term liabilities................................. 393,575 1,963,059
----------- ------------
Total liabilities.................................... 16,086,385 82,347,413
----------- ------------
Commitments and contingencies
Series A redeemable convertible preferred stock, 700,000 and
0 shares authorized; 500,000 and 0 shares issued and
outstanding in 1996 and 1997, respectively................ 2,957,641 --
Redeemable common stock, 165,296 and 0 shares issued and
outstanding in 1996 and 1997, respectively................ 991,776 --
Stockholders' equity:
Preferred stock, $0.01 par value, 19,300,000 and
20,000,000 shares authorized, 0 shares issued and
outstanding in 1996 and 1997, respectively............. -- --
Class B Common Stock, $0.01 par value; 2,600,000 and 0
shares authorized; 1,226,150 and 0 shares issued and
outstanding in 1996 and 1997, respectively............. 12,262 --
Common stock, $0.01 par value; 47,400,000 and 50,000,000
shares authorized; 3,187,129 and 10,686,767 shares
issued and outstanding in 1996 and 1997,
respectively........................................... 31,871 106,868
Additional paid-in-capital................................ 11,987,480 58,946,838
Common stock to be issued, 187,482 and 2,875,073 shares,
in 1996 and 1997, respectively......................... 2,303,212 20,121,059
Stockholder notes receivable.............................. (151,306) (369,665)
Accumulated earnings (deficit)............................ (3,659,547) 1,813,637
----------- ------------
Total stockholders' equity........................... 10,523,972 80,618,737
----------- ------------
Total liabilities and stockholders' equity........... $30,559,774 $162,966,150
=========== ============
</TABLE>

The accompanying notes are an integral part of these financial statements.
F-11
<PAGE> 50

PROMEDCO MANAGEMENT COMPANY AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------
1995 1996 1997
----------- ----------- ------------
<S> <C> <C> <C>
Physician groups revenue, net....................... $13,188,405 $47,036,801 $127,716,775
Less -- Amounts retained by physician groups........ 5,344,688 20,791,605 47,075,240
----------- ----------- ------------
Management fee revenue.............................. 7,843,717 26,245,196 80,641,535
Operating expenses:
Clinic salaries and benefits................... 4,249,813 11,694,973 29,859,718
Clinic rent and lease expense.................. 708,020 2,670,138 7,016,261
Clinic supplies................................ 624,370 3,213,443 9,667,085
Purchased medical services..................... 781,000 969,650 7,946,989
Other clinic costs............................. 1,759,013 5,018,876 10,883,588
General corporate expenses..................... 802,980 2,633,585 3,793,552
Depreciation and amortization.................. 203,482 723,641 2,942,604
Interest expense............................... 20,958 209,474 456,175
Merger costs................................... -- 682,269 --
----------- ----------- ------------
Total operating expenses.................. 9,149,636 27,816,049 72,565,972
----------- ----------- ------------
Income (loss) before provision (benefit) for income
taxes............................................. (1,305,919) (1,570,853) 8,075,563
Provision (benefit) for income taxes................ (54,405) -- 2,602,379
----------- ----------- ------------
Net income (loss)................................... $(1,251,514) $(1,570,853) $ 5,473,184
=========== =========== ============
Net earnings (loss) per share
Basic.......................................... $ (0.16) $ (0.20) $ 0.48
Diluted........................................ $ (0.16) $ (0.20) $ 0.38
Weighted average number of common shares outstanding
Basic.......................................... 7,871,746 7,870,908 11,375,662
Diluted........................................ 7,871,746 7,870,908 14,224,198
</TABLE>

The accompanying notes are an integral part of these financial statements.
F-12
<PAGE> 51

PROMEDCO MANAGEMENT COMPANY AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
CLASS B
COMMON STOCK COMMON STOCK ADDITIONAL COMMON STOCKHOLDER
--------------------- --------------------- PAID-IN STOCK TO NOTES
SHARES AMOUNT SHARES AMOUNT CAPITAL BE ISSUED RECEIVABLE
---------- -------- ---------- -------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1994, as
previously reported............. 1,226,150 $ 12,262 1,878,000 $ 18,780 $ 673,561 $ -- $ (33,500)
Adjustments for pooling of
interest (Note 3)........... -- -- 421,549 4,215 1,585,003 -- --
---------- -------- ---------- -------- ----------- ----------- ---------
Balance, December 31, 1994, as
restated........................ 1,226,150 12,262 2,299,549 22,995 2,258,564 -- (33,500)
Common stock subscribed....... -- -- -- -- -- 4,000 (4,000)
Common stock and warrants
issued...................... -- -- 21,000 210 62,936 -- (10,000)
Stockholder notes payments.... -- -- -- -- -- -- 15,666
Net loss...................... -- -- -- -- -- -- --
---------- -------- ---------- -------- ----------- ----------- ---------
Balance, December 31, 1995....... 1,226,150 12,262 2,320,549 23,205 2,321,500 4,000 (31,834)
Common stock issued........... -- -- 843,729 8,437 9,634,903 -- (120,000)
Stock options exercised....... -- -- 22,851 229 31,077 -- (31,306)
Stock subscription canceled... -- -- -- -- -- (4,000) 4,000
Common stock to be issued..... -- -- -- -- -- 2,303,212 --
Stockholder notes payments.... -- -- -- -- -- -- 27,834
Net loss...................... -- -- -- -- -- -- --
---------- -------- ---------- -------- ----------- ----------- ---------
Balance, December 31, 1996....... 1,226,150 12,262 3,187,129 31,871 11,987,480 2,303,212 (151,306)
Common stock issued in initial
public offering, net........ -- -- 4,000,000 40,000 31,705,000 -- --
Redeemable preferred shares
converted................... -- -- 500,000 5,000 2,952,641 -- --
Redeemable common shares
converted................... -- -- 165,296 1,653 990,123 -- --
Class B common converted...... (1,226,150) (12,262) 1,226,150 12,262 -- -- --
Warrants and options
exercised................... -- -- 59,786 597 92,142 -- --
Subordinated notes payable
converted................... -- -- 3,912 39 35,177 -- --
Common stock issued and to be
issued, net................. -- -- 1,608,656 16,087 11,565,716 17,817,847 (249,671)
Treasury stock purchased and
retired..................... -- -- (64,162) (641) (381,441) -- --
Stockholder notes payments.... -- -- -- -- -- -- 31,312
Net income.................... -- -- -- -- -- -- --
---------- -------- ---------- -------- ----------- ----------- ---------
Balance, December 31, 1997....... -- $ -- 10,686,767 $106,868 $58,946,838 $20,121,059 $(369,665)
========== ======== ========== ======== =========== =========== =========

ACCUMULATED
EARNINGS
(DEFICIT) TOTAL
----------- -----------
<S> <C> <C>
Balance, December 31, 1994, as
previously reported............. $ (169,890) $ 501,213
Adjustments for pooling of
interest (Note 3)........... (667,290) 921,928
----------- -----------
Balance, December 31, 1994, as
restated........................ (837,180) 1,423,141
Common stock subscribed....... -- --
Common stock and warrants
issued...................... -- 53,146
Stockholder notes payments.... -- 15,666
Net loss...................... (1,251,514) (1,251,514)
----------- -----------
Balance, December 31, 1995....... (2,088,694) 240,439
Common stock issued........... -- 9,523,340
Stock options exercised....... -- --
Stock subscription canceled... -- --
Common stock to be issued..... -- 2,303,212
Stockholder notes payments.... -- 27,834
Net loss...................... (1,570,853) (1,570,853)
----------- -----------
Balance, December 31, 1996....... (3,659,547) 10,523,972
Common stock issued in initial
public offering, net........ -- 31,745,000
Redeemable preferred shares
converted................... -- 2,957,641
Redeemable common shares
converted................... -- 991,776
Class B common converted...... -- --
Warrants and options
exercised................... -- 92,739
Subordinated notes payable
converted................... -- 35,216
Common stock issued and to be
issued, net................. -- 29,149,979
Treasury stock purchased and
retired..................... -- (382,082)
Stockholder notes payments.... -- 31,312
Net income.................... 5,473,184 5,473,184
----------- -----------
Balance, December 31, 1997....... $1,813,637 $80,618,737
=========== ===========
</TABLE>

The accompanying notes are an integral part of these financial statements.
F-13
<PAGE> 52

PROMEDCO MANAGEMENT COMPANY AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------
1995 1996 1997
----------- ----------- -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss).............................. $(1,251,514) $(1,570,853) $ 5,473,184
Adjustments to reconcile net income (loss) to
net cash provided by (used in) operating
activities (net of effects of purchase
transactions)
Depreciation and amortization............. 203,482 723,641 2,942,604
Deferred provision for income taxes....... -- -- 329,840
Net gain on sale of fixed assets.......... (53,370) (229,251) --
Noncash compensation...................... -- 14,750 --
Changes in assets and liabilities
Accounts receivable.................. (345,472) (785,773) (7,179,281)
Management fees receivable........... (116,968) (1,149,630) (592,551)
Due from affiliated physician
groups............................. -- (428,830) (1,972,295)
Prepaid expenses and other current
assets............................. 63,216 (205,401) (2,574,430)
Other assets......................... (13,949) (172,985) (402,298)
Accounts payable..................... 459,442 (96,932) 2,459,925
Payable to affiliated physician
groups............................. (402) 1,242,641 5,191,027
Accrued expenses and other current
liabilities........................ 155,381 1,468,040 (2,401,270)
----------- ----------- -----------
Net cash provided by (used in)
operating activities.......... (900,154) (1,190,583) 1,274,455
----------- ----------- -----------
Cash flows from investing activities:
Purchases of property and equipment............ (88,234) (1,102,029) (2,817,907)
Proceeds from sale of equipment................ 218,890 242,175 --
Purchases of clinic assets, net of cash........ (90,424) (2,435,905) (22,391,718)
Increase in long term receivables (net of
effects of purchase transactions)............ -- -- (20,024,375)
----------- ----------- -----------
Net cash provided by (used in)
investing activities.......... 40,232 (3,295,759) (45,234,000)
----------- ----------- -----------
Cash flows from financing activities:
Borrowings under notes payable................. 623,740 4,482,557 30,550,891
Payments on notes payable...................... (146,118) (331,715) (2,838,760)
Payments on capital leases..................... (82,895) (70,132) (561,998)
Payment of deferred financing costs............ -- (565,137) (300,500)
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......... 63,146 125,000 31,837,739
Purchase and retirement of treasury shares..... -- -- (382,082)
Issuance (payments) of stockholder notes
receivable, net.............................. 5,666 (3,636) (218,359)
----------- ----------- -----------
Net cash provided by financing
activities.................... 3,416,897 3,072,510 58,086,931
----------- ----------- -----------
Increase (decrease) in cash and cash equivalents.... 2,556,975 (1,413,832) 14,127,386
Cash and cash equivalents, beginning of period...... 490,391 3,047,366 1,633,534
----------- ----------- -----------
Cash and cash equivalents, end of period............ $ 3,047,366 $ 1,633,534 $15,760,920
=========== =========== ===========
Supplemental disclosure of cash flow information
(See Notes 3 and 7):
Cash paid during the year
Interest expense.......................... $ 37,320 $ 137,242 $ 689,199
Income taxes.............................. $ 67,420 $ -- $ 1,299,118
</TABLE>

The accompanying notes are an integral part of these financial statements.
F-14
<PAGE> 53

PROMEDCO MANAGEMENT COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 1995, 1996 AND 1997

1. DESCRIPTION OF BUSINESS

ProMedCo Management Company and subsidiaries ("ProMedCo" or the "Company"),
a Delaware corporation, is engaged in operating and managing physician groups.
ProMedCo commenced operations in 1994 and has since affiliated with
approximately 980 providers in 10 states consisting of approximately 350
physicians and 100 mid-level providers (primarily physician assistants and nurse
practitioners) in affiliated physician groups and approximately 530 physicians
in associated IPA networks. During 1997, the Company expanded the scope of its
services by acquiring a provider of capitation management services. These
services include clinical quality assessment, enrollment and patient
registration, capitation processing and payment, utilization management and case
management. Through this wholly-owned subsidiary, the Company contracts with
health maintenance organizations ("HMOs") and other third-party payors to
arrange for the provision of comprehensive health services to their members on a
capitation basis. Currently, the Company provides such services covering
approximately 100,000 capitated lives through its affiliated groups, as well as
through associated IPA networks.

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 provides administrative and technical
support for professional services rendered by the physician groups under service
agreements. Under the service agreements, the Company is reimbursed for all
clinic expenses, as defined in the agreement, and participates at varying levels
in the excess of net clinic revenue over clinic expenses.

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 affiliated physician groups. For display purposes, the Company
has presented the physician groups revenues and amounts retained by the
physician groups (typically 80-85% 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 management fee revenue. (See further discussion below.) All
significant intercompany accounts and transactions have been eliminated.

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 exchanged its common stock for common
stock of the Company upon consummation of the Offering (see Notes 3 and 8). This
transaction has been accounted for as a pooling of interests, as defined by APB
No. 16, "Business Combinations." The accompanying financial statements are based
on the assumption that the companies were combined for the full periods
presented and prior financial statements have been restated to give effect to
the combination.

Certain prior year balances have been reclassified to conform to the 1997
presentation.

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.

F-15
<PAGE> 54
PROMEDCO MANAGEMENT COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

2. SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
Revenue under certain third-party payor agreements is subject to audit and
retroactive adjustments. Provisions for 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 1996 and 1997, the Company estimates that
approximately 30% and 25%, respectively, of net physician groups revenue, was
received under government-sponsored healthcare programs (principally, the
Medicare and Medicaid programs). The physician groups have numerous agreements
with managed care organizations and other payors to provide physician services
based on negotiated fee schedules. No individual managed care organization or
other payor 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
(typically 80-85% 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.

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 80-85%) 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, depreciation, 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 groups operating income (typically 15-20%) and
an amount equal to 100% of the clinic expenses are reflected as management fee
revenue earned by the Company. Other revenue represents fees from management
consulting, supplemental implementation services, and other miscellaneous
revenues.

Management fee revenue is detailed as follows:

<TABLE>
<CAPTION>
1995 1996 1997
---------- ----------- -----------
<S> <C> <C> <C>
Component based upon percentage of physician
groups operating income.................... $ 943,180 $ 2,378,966 $ 9,043,126
Reimbursement of clinic expenses............. 6,900,537 23,866,230 65,626,945
Revenue from non-affiliated physician
groups..................................... -- -- 1,317,179
Other revenue.............................. -- -- 4,654,285
---------- ----------- -----------
Management fee revenue....................... $7,843,717 $26,245,196 $80,641,535
========== =========== ===========
</TABLE>

Concentration of Risk

F-16
<PAGE> 55
PROMEDCO MANAGEMENT COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

2. SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
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, depreciation, interest and other direct clinic expenses.
General corporate expenses represent primarily the salaries and benefits of
corporate headquarters personnel, rent, travel, and other administrative
expenses.

Net Earnings (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.

The Company adopted the Statement of Financial Accounting Standards
("SFAS") No. 128, "Earnings per Share" effective December 31, 1997. SFAS No. 128
simplifies the computation of EPS by replacing the presentation of primary EPS
with a presentation of basic EPS. Basic EPS is calculated by dividing income
(loss) available to common shareholders by the weighted average number of common
shares outstanding during the period. Common stock to be issued is assumed to be
common stock outstanding and is included in the weighted average number of
common shares outstanding for the basic EPS calculation. Options, warrants, and
other potentially dilutive securities are excluded from the calculation of basic
EPS. Diluted EPS includes the options, warrants, and other potentially dilutive
securities that are excluded from basic EPS using the treasury method to the
extent that these securities are not anti-dilutive.

There is no difference between basic and diluted EPS for the years ended
December 31, 1995 and 1996 because options, warrants and convertible
subordinated notes payable have an anti-dilutive effect. Similarly, the
convertible subordinated notes payable have been excluded from diluted EPS in
the year ended December 31, 1997 because they are considered to be
anti-dilutive. The following is a reconciliation of basic and diluted EPS for
the year ended December 31, 1997:

<TABLE>
<CAPTION>
INCOME SHARES PER-SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
----------- ------------- ---------
<S> <C> <C> <C>
Basic EPS...................................... $5,473,184 11,375,662 $0.48
=====
Effect of dilutive securities
Options................................... -- 657,273
Warrants.................................. -- 2,191,263
---------- ----------
Diluted EPS.................................... $5,473,184 14,224,198 $0.38
========== ========== =====
</TABLE>

In accordance with SFAS No. 128, the net earnings (loss) per share for all
prior periods have been restated.

Cash and Cash Equivalents

The Company considers all highly liquid investments with maturities of
three months or less when purchased to be cash equivalents. Cash and cash
equivalents as of December 31, 1997, include approximately $6,317,000 of cash
held in escrow accounts for the payment of premiums under split-dollar life
insurance contracts. (See Note 6.)

F-17
<PAGE> 56
PROMEDCO MANAGEMENT COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

2. SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
Accounts Receivable

Accounts receivable principally represents 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 are 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

Service Agreement Rights

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 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.

F-18
<PAGE> 57
PROMEDCO MANAGEMENT COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

2. SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
Excess of Cost of Acquired Assets Over Fair Value

Excess of cost of acquired assets over fair value (goodwill) is amortized
using the straight-line method over thirty years.

Impairment of Long-Lived Assets

In accordance with 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," the Company periodically reviews its intangible
assets for impairment whenever events or changes in circumstances indicate that
the carrying amount of the asset may not be recoverable. If this review
indicates that the carrying amount of the asset may not be recoverable, based on
the undiscounted cash flows of the operations over the remaining amortization
period, then the carrying value of the asset is reduced to 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.

Income Taxes

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

Use of Estimates

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

F-19
<PAGE> 58
PROMEDCO MANAGEMENT COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

2. SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
Stock-Based Compensation

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

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------
1995 1996 1997
----------- ----------- -----------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
Net income (loss).................................... $(1,251,514) $(2,045,455) $3,921,296
=========== =========== ==========
Basic net earnings (loss) per share.................. $ (0.16) $ (0.26) $ 0.34
=========== =========== ==========
</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 future dividends and assumed the expected life of the options
through the applicable expiration dates. For 1995 and 1996, the years prior to
the Offering, the Company assumed no volatility, and assumed a volatility rate
of 58% in 1997. Also see Note 8 -- Stock Option Plans.

New Accounting Pronouncement

The Financial Accounting Standards Board's Emerging Issues Task Force has
issued its abstract, Issue 97-2, "Application of FASB Statement No. 94 and APB
Opinion No. 16 to Physician Practice Management Entities and Certain Other
Entities with Contractual Arrangements" ("EITF 97-2"). EITF 97-2 addresses
issues relating to (1) whether a "controlling financial interest" can be
established through a contractual management agreement under FASB Statement No.
94, (2) whether a transaction between a physician practice management entity
("PPM") and a physician practice in which the PPM enters into a management
agreement with the physician practice should be considered a business
combination and thus accounted for under APB No. 16, (3) whether the
pooling-of-interests method of accounting may be followed in certain
circumstances, (4) what are the common types of intangibles that should be
considered in performing the purchase price allocation and (5) whether an
employee of the physician practice should be considered an employee of the PPM
for purposes of accounting for that individual's stock-based compensation.

The primary effect of this pronouncement on the Company will be the
presentation of revenues. The Company currently presents net physician groups
revenues in its statement of operations. The Company expects to adopt this
pronouncement in the fourth quarter of 1998 and, with such, will no longer
present net physician groups revenue in its consolidated statement of
operations.

F-20
<PAGE> 59
PROMEDCO MANAGEMENT COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

3. ACQUISITIONS

Medical Clinics

During 1997, 1996, and 1995, the Company, through its wholly-owned
subsidiaries, acquired certain operating assets or all of the outstanding stock
of the following physician groups:

<TABLE>
<CAPTION>
PHYSICIAN GROUP EFFECTIVE DATE LOCATION
--------------- ------------------ ------------------
<S> <C> <C> <C>
1997: Naples Medical Center March 1, 1997 Naples, FL
Abilene Diagnostic Clinic June 1, 1997(a) Abilene, TX
Intercoastal Medical Group August 1, 1997 Sarasota, FL
Beacon Medical Group October 1, 1997(b) Harrisburg, PA
Cowley Medical Associates(c) November 1, 1997 Harrisburg, PA
Thomas-Spann Clinic December 1, 1997 Corpus Christi, TX
HealthStar, Inc. December 1, 1997 Knoxville, TN
1996: Cullman Primary Care March 6, 1996 Cullman, AL
Morgan-Haugh April 1, 1996 Mayfield, KY
HealthFirst Medical Group June 1, 1996 Lake Worth, TX
King's Daughters Clinic September 1, 1996 Temple, TX
1995: North Texas Medical Surgical June 1, 1995 Denton, TX
</TABLE>

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

(a) Abilene Diagnostic Clinic was operated by the Company under an interim
service agreement effective December 1, 1995. The Company completed its
acquisition of certain operating assets on June 5, 1997, and entered into a
long term service agreement with the physician group effective June 1,
1997.

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

The acquisitions of the operating assets and liabilities have been
accounted for by the purchase method of accounting and, accordingly, the
purchase price has been allocated to the tangible assets acquired and
liabilities assumed based on the estimated fair values at the dates of
acquisition. Simultaneous with each acquisition, the Company entered into a long
term service agreement with each physician group. In conjunction with certain
acquisitions, the Company is obligated to make deferred payments to physician
groups. Such amounts are included in deferred purchase price in the accompanying
consolidated balance sheets. The following is the preliminary allocation of
purchase price for the acquisitions completed during the year ended December 31,
1997.

<TABLE>
<S> <C>
Fair value of assets acquired............................... $ 33,468,257
Liabilities assumed......................................... (11,296,484)
Intangible assets........................................... 63,821,926
------------
85,993,699
Less -- Fair value of common stock issued and to be
issued.................................................... 29,964,077
Less -- Notes issued........................................ 9,780,602
Less -- Deferred purchase price (payable in cash)........... 12,402,253
------------
Cash purchase price......................................... $ 33,846,767
============
</TABLE>

For certain acquisitions occurring close to or at the end of the period,
the estimated fair values are preliminary and, therefore, are subject to change.
Under the purchase agreements, the purchase price is

F-21
<PAGE> 60
PROMEDCO MANAGEMENT COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

3. ACQUISITIONS -- (CONTINUED)
adjustable by the Company for a period between 90 to 120 days after the closing
of the transaction in order to finalize the fair values of the assets acquired
and liabilities assumed.

Health Plans, Inc.

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

Pro Forma Information

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, 1996. Future results may differ
substantially from pro forma results and cannot be considered indicative of
future results.

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------
1996 1997
------------ ------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
Physician groups revenue, net.......................... $122,605,838 $171,827,614
Less -- Amounts retained by physician groups........... 43,701,877 58,001,796
------------ ------------
Management fee revenue................................. $ 78,903,961 $113,825,818
============ ============
Net income............................................. $ 2,525,608 $ 5,372,738
============ ============
Basic net earnings per share........................... $ 0.29 $ 0.44
============ ============
Weighted average number of shares outstanding.......... 8,757,139 12,200,655
============ ============
</TABLE>

Pro forma net income and pro forma net income per share for the year ended
December 31, 1997 are lower than historical net income and net earnings per
share for the same period primarily due to a higher pro forma tax rate, which
assumes that all net operating loss carryforwards would have been recognized
prior to 1997.

F-22
<PAGE> 61
PROMEDCO MANAGEMENT COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

3. ACQUISITIONS -- (CONTINUED)
Western Medical Management Corp. Inc.

As discussed in Note 1, the Company completed its merger with Reno in March
1997, the date of the Offering. The accompanying condensed consolidated
financial statements are based on the assumption that the companies were
combined for the full periods presented and prior financial statements have been
restated to give effect to the combination. The following unaudited information
reflects the separate results of the combined entities for periods prior to the
combination:

<TABLE>
<CAPTION>
TWELVE MONTHS ENDING TWELVE MONTHS ENDING THREE MONTHS ENDING
DECEMBER 31, 1995 DECEMBER 31, 1996 MARCH 31, 1997
------------------------ ------------------------- ------------------------
PROMEDCO RENO PROMEDCO RENO PROMEDCO RENO
---------- ----------- ----------- ----------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
Physician groups revenue, net......... $1,918,029... $11,270,376 $34,641,222 $12,395,579 $17,343,665 $3,381,912
Less: amounts retained by physician
groups.............................. 759,513 4,585,175 15,322,220 5,469,385 7,669,484 1,338,687
---------- ----------- ----------- ----------- ----------- ----------
Management fee revenue................ 1,158,516... 6,685,201 19,319,002 6,926,194 9,674,181 2,043,225
---------- ----------- ----------- ----------- ----------- ----------
Operating expenses
Clinic expenses................... 1,023,606 7,098,610 16,460,181 7,106,899 8,025,524 1,671,579
General corporate expenses........ 802,980 -- 2,633,585 -- 818,772 --
Depreciation and amortization..... 34,302... 169,180 610,827 112,814 391,507 44,368
Interest expense.................. (5,030) 25,988 163,714 45,760 112,666 3,283
Merger costs...................... -- -- -- 682,269 -- --
---------- ----------- ----------- ----------- ----------- ----------
1,855,858... 7,293,778 19,868,307 7,947,742 9,348,469 1,719,230
---------- ----------- ----------- ----------- ----------- ----------
Income (loss) before provision for
income taxes........................ (697,342) (608,577) (549,305) (1,021,548) 325,712 323,995
Provision for income taxes............ -- (54,405) -- -- 97,714 97,198
---------- ----------- ----------- ----------- ----------- ----------
Net income (loss)..................... $(697,342) $ (554,172) $ (549,305) $(1,021,548) $ 227,998 $ 226,797
========== =========== =========== =========== =========== ==========
</TABLE>

4. PROPERTY AND EQUIPMENT

Property and equipment is summarized as follows:

<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1996 1997
---------- -----------
<S> <C> <C>
Furniture, fixtures, and equipment........................ $4,193,498 $12,212,561
Leasehold improvements.................................... 601,241 1,008,421
---------- -----------
4,794,739 13,220,982
Less -- Accumulated depreciation.......................... (864,548) (2,630,421)
---------- -----------
Property and equipment, net............................... $3,930,191 $10,590,561
========== ===========
</TABLE>

5. INTANGIBLE ASSETS

Intangible assets are summarized as follows:

<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1996 1997
----------- -----------
<S> <C> <C>
Service agreement rights.................................. $15,148,866 $73,200,258
Excess of cost of acquired assets over fair value......... -- 5,770,534
----------- -----------
15,148,866 78,970,792
Less -- Accumulated amortization.......................... (288,695) (1,775,441)
----------- -----------
Intangible assets, net.................................... $14,860,171 $77,195,351
=========== ===========
</TABLE>

F-23
<PAGE> 62
PROMEDCO MANAGEMENT COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

6. LONG TERM RECEIVABLES

During 1997, the Company entered into an agreement to lend up to $42.7
million to an affiliated physician group. The loan will be funded in six
advances. The first advance was made on November 15, 1997 in the amount of $3
million. The second advance was made on December 1, 1997 in the amount of $16.4
million. The next four advances of $5.825 million each will be made annually on
December 1, beginning in 1998. Interest is payable to the Company monthly at an
annual rate of 8.0%. The loan will be repaid in fifteen annual payments
beginning on November 30, 2008. Certain assets of the affiliated physician group
have been pledged as security under the loan, and the loan provides certain
rights to offset against distributions under the service agreement in the event
of default under the loan agreement. As of December 31, 1997, the outstanding
loan totaled $19.4 million, and the Company estimates that the carrying value of
this receivable approximates fair value.

During 1997 and in connection with the certain acquisitions, the Company
entered into split-dollar life insurance agreements with the physicians and
prior owners of the physician groups. Under these agreements, the Company
purchases life insurance in the name of the individual seller. Upon the death of
the individual seller, the amount of the premiums paid by the Company will be
returned. In addition, these receivables are guaranteed by the individual policy
holders. The total of the premiums that will be returned to the Company is $25.0
million. The $3.9 million carrying value of these receivables as of December 31,
1997, represents the present value of the premiums that will be returned to the
Company based on the estimated actuarial life of the policy holders and an
implied interest rate of 6.75%. The accretion of this receivable from the
initial carrying value to the full premium amount is recorded as a reduction to
amortization expense in the accompanying consolidated statements of operations.

In May 1997, the Company loaned $600,000 to an officer of the Company.
Beginning in May 2001, the loan will be repaid in five equal annual payments
plus accrued interest of 6.5%.

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

Notes payable are summarized as follows:

<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1996 1997
----------- -----------
<S> <C> <C>
Borrowings under Revolving Credit Facility.................. $ 4,157,027 $32,968,000
Notes payable to physician group; unsecured; due in three
annual installments in April 1998, 1999, and 2000; 9%
interest payable in cash or options to purchase the
Company's common stock.................................... -- 8,608,602
Notes payable to physician group; unsecured; due in four
annual installments in December 1998, 1999, 2000, and
2001; 5% interest payable annually........................ -- 1,172,000
Note payable to physician group; unsecured; due in two equal
installments of principal and 7% interest in April 1997
and 1998.................................................. 851,549 440,173
Note payable to a bank, interest at prime plus 1.5%, paid in
February 1997............................................. 300,000 --
Other notes payable......................................... 427,788 175,915
----------- -----------
5,736,364 43,364,690
Less -- Current portion..................................... (1,151,191) (3,676,365)
----------- -----------
Notes payable, net.......................................... $ 4,585,173 $39,688,325
=========== ===========
</TABLE>

F-24
<PAGE> 63
PROMEDCO MANAGEMENT COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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

The maturities of notes payable at December 31, 1997, are as follows:

<TABLE>
<S> <C>
1998........................................................ $ 3,676,365
1999........................................................ 8,210,199
2000........................................................ 9,755,926
2001........................................................ 6,886,600
2002........................................................ 6,593,600
Thereafter.................................................. 8,242,000
-----------
$43,364,690
===========
</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.

Revolving Credit Facility

Effective July 15, 1996, the Company entered into a revolving credit
agreement which was subsequently amended and restated November 13, 1997 (the
"Credit Facility"). The Credit Facility provides for a six-year commitment to
fund revolving credit borrowings of up to $50.0 million for acquisitions and
general working capital purposes. Beginning on April 1, 1999, the Credit
Facility converts to a term loan with twenty quarterly payments equal to 5% of
the outstanding balance on January 1, 1999. Under the terms of the Credit
Facility, the Company paid a commitment fee of approximately $780,000 which has
been capitalized in other assets in the accompanying consolidated balance sheets
and amortized as an adjustment to interest expense using the effective interest
method. The interest rate under the Credit Facility will be set at the Company's
option and varies based on selected financial ratios, as defined, as follows:
(i) 30-day commercial paper rate of an issuer whose corporate bonds are rated
"AA," plus 2.70% to 3.25%; (ii) reserve adjusted LIBOR, as defined, plus 2.70%
to 3.25%; or (iii) prime rate plus 0.35% to 0.88% depending on certain debt
levels. As of December 31, 1997, the effective interest rate on the Credit
Facility was 8.5% based on the 30-day commercial paper rate as adjusted. 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.
As of December 31, 1997, the Company had $17.0 million available for acquisition
purposes under the Credit Facility of which $7.3 million was also available for
working capital, subject to certain conditions as defined by the agreement.

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 and
automatic conversions as defined in the note agreements. During 1997, one
noteholder converted $35,216 of notes into 3,912 shares of the Company's common
stock.

F-25
<PAGE> 64
PROMEDCO MANAGEMENT COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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

Obligations Under Capital Leases

In connection with affiliations with physician groups and in the ordinary
course of business, the Company assumed the obligation of various equipment
under capital leases. As of December 31, 1997, future minimum lease payments
under capital leases are as follows:

<TABLE>
<S> <C>
1998........................................................ $ 749,017
1999........................................................ 582,706
2000........................................................ 424,458
2001........................................................ 198,685
----------
1,954,866
Less -- Portion attributable to interest.................... (271,389)
----------
Obligations under capital leases............................ 1,683,477
Less -- Current portion..................................... (609,591)
----------
$1,073,886
==========
</TABLE>

8. 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.

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

Series A Redeemable Convertible Preferred Stock

During 1996, the Company issued 500,000 shares of Series A Redeemable
Convertible Preferred Stock and warrants to purchase an additional 200,000
shares of Preferred Stock. The warrants are exercisable at $4.50 per share and
expire on December 6, 2000. Upon the completion of the Offering, the 500,000
shares of Series A Redeemable Convertible Preferred Stock were automatically
converted into Common stock.

Between December 6, 1995 and the completion of the Offering, the Company
was required for all shares or share equivalents of Common stock issued,
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. During 1997 and prior to the completion of the Offering,
additional options to purchase 294 shares of Common stock were granted to
Preferred Stockholders with an exercise price of $12.00.

F-26
<PAGE> 65
PROMEDCO MANAGEMENT COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

8. REDEEMABLE CONVERTIBLE PREFERRED STOCK, COMMON STOCK,
AND STOCKHOLDERS' EQUITY -- (CONTINUED)
Redeemable Common Stock

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

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, 1997, no warrants or options have been exercised. The Class B
Common Stock had a liquidation preference, subordinate to the Preferred Stock,
at an amount equal to $1.00 per share. Each share of Class B Common Stock was
automatically converted into Common stock on the completion of 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, 1997, 56,686 warrants have been
exercised.

Common Stock To Be Issued

In connection with acquisitions completed in 1997, common shares valued at
$20,121,059 will be issued in 1998. The number of common shares to be issued and
the price per share was fixed at the consummation date of the specific
acquisitions in 1997.

In connection with acquisitions completed in 1996, common shares valued at
$2,303,212 were issued in 1997. The number of shares to be issued and the price
per share was fixed at the consummation date of the specific acquisitions in
1996 and 1995.

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 (collectively the "Stock Option
Plans"). Options granted under the Plans may be either incentive stock options
("ISO") or nonqualified stock options ("NQSO"). The option price per share shall
not be less than the fair market value of the Company's Common stock at the date
of grant. Generally, options vest over a five-year period and expire in either
2004 or 2006. As of December 31, 1997, options to purchase 1,947,729 shares
remain available for grant under the Stock Option Plans.

F-27
<PAGE> 66
PROMEDCO MANAGEMENT COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

8. REDEEMABLE CONVERTIBLE PREFERRED STOCK, COMMON STOCK,
AND STOCKHOLDERS' EQUITY -- (CONTINUED)
The following table summarizes the activity in the Stock Option Plans:

<TABLE>
<CAPTION>
WEIGHTED-AVERAGE
OUTSTANDING PRICE PER SHARE EXERCISE PRICE
----------- --------------- ----------------
<S> <C> <C> <C>
December 31, 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
Granted............................. 626,071 $6.00 - $12.00 $7.88
Exercised........................... (3,100) $6.00 $6.00
Canceled............................ (61,400) $6.00 - $ 9.00 $6.67
----------
December 31, 1997........................ 1,625,971 $0.50 - $14.00 $6.71
==========
</TABLE>

Stock options available for exercise under the Stock Option Plans as of
December 31, 1995, 1996, and 1997, totaled 8,000, 170,720, and 653,464,
respectively.

When the Company entered into the Credit Facility in 1996 (see Note 7), the
Company issued 46,875 options to purchase the Company's Common stock at $10.00
per share. These options are outstanding and exercisable.

9. INCOME TAXES

The provision for income tax expenses for the years ended December 31,
1995, 1996 and 1997 consists of:

<TABLE>
<CAPTION>
1995 1996 1997
--------- --------- ----------
<S> <C> <C> <C>
Current
Federal....................................... $ 1,731 $ -- $2,146,759
State......................................... -- -- 125,780
Deferred
Federal....................................... (56,136) -- 306,510
State......................................... -- -- 23,330
--------- --------- ----------
$ (54,405) $ -- $2,602,379
========= ========= ==========
</TABLE>

F-28
<PAGE> 67
PROMEDCO MANAGEMENT COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

9. INCOME TAXES -- (CONTINUED)
Total provision for income taxes differed from the amount computed by
applying the U.S. Federal income tax rate of 35% to earnings before taxes as a
result of the following:

<TABLE>
<CAPTION>
1995 1996 1997
--------- --------- ----------
<S> <C> <C> <C>
Federal tax (benefit) at statutory rate............ $(365,441) $(534,090) $2,826,447
State income taxes, net of federal income tax
benefit.......................................... (13,947) (10,986) 422,352
Change in valuation allowance...................... 360,023 571,118 (992,301)
Amortization of nondeductible goodwill............. -- -- 209,234
Other.............................................. (35,040) (26,042) 136,647
--------- --------- ----------
Total provision for income taxes......... $ (54,405) $ -- $2,602,379
========= ========= ==========
</TABLE>

Deferred income tax assets (liabilities) reflect net tax effects of
temporary differences between the amounts of assets and liabilities for
financial reporting purposes and the amounts used for income tax purposes.
Significant components of the Company's net deferred tax liability are as
follows:

<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1996 1997
-------- -----------
<S> <C> <C>
Current deferred tax assets (liabilities)
Operating loss carryforwards......................... $493,153 $ --
Unrealized gains on security investments............. -- (381,323)
Non-deductible accrued expenses...................... 346,637 207,222
-------- -----------
839,790 (174,101)
-------- -----------
Non-current deferred tax liabilities
Property and equipment, principally due to
differences in depreciation........................ -- (299,838)
Clinic service agreements............................ -- (729,896)
Other................................................ 152,511 (74,142)
-------- -----------
152,511 (1,103,876)
-------- -----------
Net deferred tax asset (liability)........................ 992,301 (1,277,977)
Valuation allowance....................................... (992,301) --
-------- -----------
$ -- $(1,277,977)
======== ===========
</TABLE>

10. 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. As of December 31, 1996 and 1997, the
fair value of the Company's cash and cash equivalents, accounts receivable,
accounts payable, due to physician groups and accrued expenses approximated
their carrying value because of the short maturities of those financial
instruments. The fair value of the Company's long term debt also approximates
its carrying value since the related notes bear interest at current market
rates.

The estimated fair value of the convertible subordinated notes payable to
physician groups was approximately $1,800,274 and $1,985,690 as of December 31,
1996 and 1997, respectively. The carrying value of these notes was $1,800,274
and $1,765,058 as of December 31, 1996 and 1997, respectively. The estimated
fair value of these convertible subordinated notes payable is based on the
greater of their face value and the closing market value of the common shares
into which they could have been converted at the respective balance sheet date.

F-29
<PAGE> 68
PROMEDCO MANAGEMENT COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

11. 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 approximately
$716,000, $2,740,000, and $7,086,000 for the years ended 1995, 1996 and 1997,
respectively, reflect lease commitments for medical practice office space,
medical practice equipment, corporate office space, and corporate equipment.

The following is a schedule of future minimum lease payments under
noncancelable operating leases as of December 31, 1997.

<TABLE>
<S> <C>
1998........................................................ $ 5,929,466
1999........................................................ 5,428,666
2000........................................................ 4,906,781
2001........................................................ 4,150,848
2002........................................................ 3,649,947
Thereafter.................................................. 20,952,100
-----------
$45,017,808
===========
</TABLE>

Litigation

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

Insurance

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

Year 2000

The Company continues to assess the impact of the Year 2000 Issue on its
information systems and operations. With disparate systems in place at the
Company's various affiliated groups, the assessment process also extends to each
new affiliation. Noncompliant practice management systems could be acquired in a
new affiliation, which would require system remediation or replacement. Given
these issues, the Company is unable to estimate the costs of remediation or
replacements that may be required. With its current strategy of replacing
inadequate practice management systems, however, the Company does not believe
that Year 2000 issues will cause a conversion to be any more difficult than a
typical system conversion. If the issues prove more significant than
anticipated, or if noncompliant third-party systems "re-infect" the Company's
Year 2000 compliant systems, there could be a material adverse impact on the
Company.

F-30
<PAGE> 69

REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors of
Berkshire Physicians & Surgeons, P.C.:

We have audited the accompanying consolidated balance sheets of Berkshire
Physicians & Surgeons, P.C. and subsidiaries (the "Corporation") as of December
31, 1996 and 1997, and the related consolidated statements of operations,
changes in shareholders' equity (deficit) and cash flows for the years then
ended. These financial statements are the responsibility of the Corporation'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 consolidated financial position of Berkshire
Physicians & Surgeons, P.C. and subsidiaries as of December 31, 1996 and 1997,
and the consolidated results of their operations and their cash flows for the
years then ended in conformity with generally accepted accounting principles.

Boston, Massachusetts
March 31, 1998, except
for Notes 1 and 14,
as to which the date
is April 14, 1998

F-31
<PAGE> 70

BERKSHIRE PHYSICIANS & SURGEONS, P.C.

CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1996 AND 1997

ASSETS

<TABLE>
<CAPTION>
1996 1997
----------- -----------
<S> <C> <C>
Current assets:
Cash and cash equivalents.............................. $ 822,190 $ 1,185,042
Patient accounts receivable (net of allowance for
doubtful accounts of $873,000 and $1,165,000 in 1996
and 1997, respectively)............................... 4,798,917 4,402,454
Other receivables...................................... 1,256,889 886,484
Inventories............................................ 324,153 439,846
Prepaid and other current assets....................... 213,270 70,941
----------- -----------
Total current assets.............................. 7,415,419 6,984,767
Property and equipment, net................................. 4,411,680 4,649,052
Other assets................................................ 453,858 220,083
----------- -----------
Total assets...................................... $12,280,957 $11,853,902
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Note payable -- line of credit......................... $ 3,062,781 $ 6,755,136
Accounts payable and accrued expenses.................. 2,640,575 3,774,701
Accrued pension plan contribution...................... 1,256,710 1,552,711
Accrued physician compensation......................... 753,819 1,879,175
Current portion of long-term debt...................... 220,980 813,996
Current portion of obligations under capital leases.... 510,451 644,665
----------- -----------
Total current liabilities......................... 8,445,316 15,420,384
Long-term debt, net of current installments................. 789,014 339,172
Obligations under capital leases, net of current
installments.............................................. 1,927,432 2,014,670
----------- -----------
Total liabilities................................. 11,161,762 17,774,226
----------- -----------
Commitments and contingencies (Notes 1, 2, 5, 6, 9, 10, 11,
12 and 14)
Shareholders' equity (deficit):
Common stock, $1 par value, 1,000 shares authorized;
334 and 352 shares issued and outstanding at December
31, 1997 and 1996, respectively....................... 352 334
Paid-in capital........................................ 728,034 593,052
Advances to shareholders............................... (101,661) (335,204)
Retained earnings (deficit)............................ 492,470 (6,178,506)
----------- -----------
Total shareholders' equity (deficit).............. 1,119,195 (5,920,324)
----------- -----------
Total liabilities and shareholders' equity
(deficit)...................................... $12,280,957 $11,853,902
=========== ===========
</TABLE>

The accompanying notes are an integral part of the consolidated financial
statements.
F-32
<PAGE> 71

BERKSHIRE PHYSICIANS & SURGEONS, P.C.

CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1997

<TABLE>
<CAPTION>
1996 1997
----------- -----------
<S> <C> <C>
Net patient service revenue................................. $30,326,902 $32,698,750
Risk contract revenue....................................... 10,676,064 10,026,491
Other revenue............................................... 722,857 957,409
----------- -----------
Total revenue..................................... 41,725,823 43,682,650
----------- -----------
Operating expenses:
Physicians' salaries and wages......................... 11,208,235 12,354,057
Other salaries and wages............................... 7,993,601 9,246,413
Physician benefits..................................... 2,096,542 2,523,423
Employee benefits...................................... 2,417,907 2,788,639
Referral services...................................... 9,600,821 9,731,890
Supplies and other expenses............................ 6,348,943 6,915,722
Rent................................................... 1,639,834 2,173,514
Professional liability insurance....................... 817,949 803,917
Interest............................................... 367,525 949,683
Depreciation and amortization.......................... 1,239,214 1,218,025
Provision for doubtful accounts........................ 796,000 1,554,000
----------- -----------
Total operating expenses.......................... 44,526,571 50,259,283
----------- -----------
Loss from operations.............................. (2,800,748) (6,576,633)
Other expense............................................... (4,443) (35,774)
----------- -----------
Loss before income taxes.......................... (2,805,191) (6,612,407)
Income tax expense (benefit)................................ (1,400,684) 58,569
----------- -----------
Net loss.......................................... $(1,404,507) $(6,670,976)
=========== ===========
</TABLE>

The accompanying notes are an integral part of the consolidated financial
statements.
F-33
<PAGE> 72

BERKSHIRE PHYSICIANS & SURGEONS, P.C.

CONSOLIDATED STATEMENTS OF CHANGES IN
SHAREHOLDERS' EQUITY (DEFICIT)
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1997

<TABLE>
<CAPTION>
TOTAL
COMMON STOCK ADDITIONAL RETAINED SHAREHOLDERS'
--------------- PAID-IN ADVANCES TO EARNINGS EQUITY
SHARES AMOUNT CAPITAL SHAREHOLDERS (DEFICIT) (DEFICIT)
------ ------ ---------- ------------ ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1996...... 364 $364 $ 817,670 $(159,408) $ 1,896,977 $ 2,555,603
Issuance of additional shares to
physicians.................... 4 4 29,996 -- -- 30,000
Cancellation of shares due to
physician retirement or
termination................... (16) (16) (119,632) -- -- (119,648)
Payments received on advances to
shareholders.................. -- -- -- 57,747 -- 57,747
Net loss........................ -- -- -- -- (1,404,507) (1,404,507)
--- ---- --------- --------- ----------- -----------
Balance at December 31, 1996.... 352 352 728,034 (101,661) 492,470 1,119,195
Cancellation of shares due to
physician retirement or
termination................... (18) (18) (134,982) -- -- (135,000)
Advances to shareholders........ -- -- -- (268,427) -- (268,427)
Payments received on advances to
shareholders.................. -- -- -- 34,884 -- 34,884
Net loss........................ -- -- -- -- (6,670,976) (6,670,976)
--- ---- --------- --------- ----------- -----------
Balance at December 31, 1997.... 334 $334 $ 593,052 $(335,204) $(6,178,506) $(5,920,324)
=== ==== ========= ========= =========== ===========
</TABLE>

The accompanying notes are an integral part of the consolidated financial
statements.
F-34
<PAGE> 73

BERKSHIRE PHYSICIANS & SURGEONS, P.C.

CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1997

<TABLE>
<CAPTION>
1996 1997
----------- ------------
<S> <C> <C>
Cash flows from operating activities:
Net loss............................................... $(1,404,507) $ (6,670,976)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization..................... 1,239,214 1,218,025
Provision for doubtful accounts................... 796,000 1,554,000
Loss on disposal of property and equipment........ -- 35,774
Deferred income taxes............................. (1,445,616) --
Changes in operating assets and liabilities:
Patient accounts receivable.................. (219,531) (1,157,537)
Other receivables............................ (1,105,166) 370,405
Inventories.................................. (79,341) (115,693)
Prepaid and other current assets............. 75,245 142,329
Accounts payable and accrued expenses........ 729,313 1,134,126
Accrued pension plan contribution............ 47,766 296,001
Accrued physician compensation............... 145,163 1,125,356
----------- ------------
Net cash used in operating activities... (1,221,460) (2,068,190)
----------- ------------
Cash flows from investing activities:
Additions to property, plant and equipment............. (1,699,303) (1,233,504)
Decreases in other assets.............................. 15,459 (23,892)
----------- ------------
Net cash used in investing activities... (1,683,844) (1,257,396)
----------- ------------
Cash flows from financing activities:
Proceeds from note payable -- line of credit........... 10,902,781 24,292,701
Proceeds from equipment loans.......................... 270,000 --
Proceeds from capital lease financing.................. 2,011,633 770,597
Proceeds from mortgage................................. -- 600,000
Principal payments on note payable -- line of credit... (9,790,000) (20,600,346)
Principal payments under capital lease obligations..... (261,985) (549,145)
Principal payments on mortgage payable................. (6,075) (242,826)
Principal payments on equipment loan................... (209,500) (214,000)
Additional advances to shareholders.................... -- (268,427)
Principal payments on notes from shareholders.......... 57,747 34,884
Cash received from issuance of common stock............ 30,000 --
Cash paid to terminated physicians for common stock.... (119,648) (135,000)
----------- ------------
Net cash provided by financing
activities............................ 2,884,953 3,688,438
----------- ------------
Net increase (decrease) in cash and cash equivalents........ (20,351) 362,852
Cash and cash equivalents, at beginning of year............. 842,541 822,190
----------- ------------
Cash and cash equivalents, at end of year................... $ 822,190 $ 1,185,042
=========== ============
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest.......................................... $ 358,501 $ 754,238
Income taxes...................................... 12,300 63,769
Supplemental disclosure of noncash financing activities:
In 1997, the Corporation refinanced an equipment lease obligation totaling $786,233
with another lessor who directly repaid the outstanding balance on the refinanced
lease.
</TABLE>

The accompanying notes are an integral part of the consolidated financial
statements.
F-35
<PAGE> 74

BERKSHIRE PHYSICIANS & SURGEONS, P.C.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES:

Organization

Berkshire Physicians & Surgeons, P.C. (the "Corporation" or "BP&S") is a 81
physician, primary care, multi-specialty and multiple location professional
services corporation. The Corporation's service areas include central and
southern Berkshire County, Hampden County, and Hampshire County, Massachusetts,
and adjacent areas of Litchfield County, Connecticut, and Columbia County, New
York.

Its principal services include primary, specialty and urgent care,
surgical, laboratory, mammography and radiological services.

The Corporation has three wholly owned subsidiaries, Commonwealth Health
Management Services, Inc. ("CHMS"), Commonwealth Independent Practice
Association, Inc. ("CIPA") and Great Barrington Medical Realty, LLC (GBMR). CHMS
is a management services organization formed in 1994. The purpose of CHMS is to
provide the necessary administrative and medical management structure to enable
the physicians within the Corporation's network to collectively enter into
health service contracts. CIPA was established as an independent practice
membership association to organize physicians to provide services to the
Corporation's members. CHMS is the only member of the association. During 1997,
the Corporation established GBMR, a limited liability company whose sole purpose
is to develop, own and operate a medical office building. This building will be
leased to the Corporation as general medical office space.

Basis of Presentation

The accompanying financial statements have been prepared assuming that the
Corporation will continue as a going concern. The Corporation has suffered
recurring operating losses from operations, has a significant amount of debt
which is currently payable and has a net capital deficiency, however, on April
14, 1998, the Corporation executed an irrevocable merger agreement with ProMedCo
Management Company (PMCO) (Note 14), which should provide the Corporation with
adequate financial support on an ongoing basis.

Basis of Accounting

The financial statements are prepared on the accrual basis of accounting.

Principles of Consolidation

The consolidated financial statements include the accounts of the
Corporation and its wholly-owned subsidiaries CHMS, CIPA and GBMR. All
significant intercompany transactions have been eliminated in consolidation.

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. Estimates
are used when accounting for the collectibility of patient accounts receivable
and other receivables, depreciation and amortization, accrued expenses and
taxes.

Cash and Cash Equivalents

The Corporation considers all highly liquid debt instruments with a
maturity at date purchased of three months or less to be cash equivalents.

F-36
<PAGE> 75
BERKSHIRE PHYSICIANS & SURGEONS, P.C.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
Net Patient Service Revenue and Patient Accounts Receivable

Net patient service revenue is reported at the established net realizable
amounts from patients, third party payors and others for services rendered,
including estimated retroactive adjustments under reimbursement agreements with
third party payors. Net patient service revenue and accounts receivable are
recorded when patient services are performed. Adjustments and settlements under
reimbursement agreements with third party payors are accrued on an estimated
basis in the period the related services are rendered and adjusted in future
periods as final settlements are determined. Such adjustments and final
settlements with third-party payors, which could materially and adversely affect
the Corporation, are reflected in operations at the time of the adjustment or
settlement.

Inventories

Inventories which consist of pharmaceuticals, and medical and office
supplies are recorded at the lower of cost, determined by the first-in,
first-out method, or market.

Property and Equipment

Property and equipment are recorded at cost. Expenditures for renewals and
betterments are capitalized and maintenance and repairs are expensed. The
Corporation provides for depreciation of property and equipment for financial
statement reporting purposes using the straight-line method over the estimated
useful lives of the various assets. Capital leases are recorded at the lower of
the fair market value of the asset or the present value of the minimum lease
payments. Assets recorded under capital leases are amortized using the
straight-line method over the life of the related lease or the life of the
asset, whichever is shorter. The carrying amounts of assets sold or otherwise
disposed of and the related allowance for depreciation are eliminated from the
accounts in the period of disposal, with the resulting gain or loss reflected in
operations.

Impairment of Long-Lived Assets

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

Other Assets

Other assets, which primarily consist of costs incurred in connection with
the organization and start-up of the Corporation, as well as costs and
intangible assets resulting from the acquisition of physician groups, have been
capitalized and are being amortized over three years. Amortization expense of
other assets amounted to $257,621 and $257,667 for the years ended December 31,
1996 and 1997, respectively. Accumulated amortization amounted to $380,187 and
$637,854 at December 31, 1996 and 1997, respectively.

Risk Contract Revenue and Referral Services

The Corporation has entered into risk sharing agreements with health
maintenance organizations (HMOs). Under these agreements, the Corporation earns
revenue based on the number of members to which it provides services to,
regardless of the amount of services actually performed. Throughout the year,
cash is distributed by the HMO's on a capitated and fee-for-service basis to the
Corporation for services provided by the Corporation. The HMO's also distribute
cash on a fee-for-service basis to other providers. The
F-37
<PAGE> 76
BERKSHIRE PHYSICIANS & SURGEONS, P.C.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
Corporation records payments to other providers under these agreements as risk
referral services expenses. The amount of revenues earned is subject to a
settlement calculation performed subsequent to year-end based on actual
performance under the agreements. Total revenue recorded on these contracts for
1996 and 1997 amounted to $13.4 million and $13.3 million, respectively, of
which $2.7 million and $3.3 million have been recorded as net patient service
revenue representing medical services provided by the Corporation's physicians.
As of December 31, 1996 and 1997, amounts due to BP&S from the HMOs were
approximately $1.1 million and $497,000, respectively. Settlements with the
HMOs, which could materially and adversely affect the Corporation, are reflected
in operations at the time of the settlement.

Income Taxes

The Corporation uses the liability method of accounting for income taxes as
set forth in Statement of Financial Accounting Standards No. 109, "Accounting
for Income Taxes".

Deferred income taxes are recognized for the tax consequences in future
years of differences between the tax bases of assets and liabilities and their
financial reporting amounts at each year-end based on enacted tax laws and
statutory tax rates applicable to the periods in which the differences are
expected to affect taxable income. Valuation allowances are established when
necessary to reduce deferred tax assets to the amount expected to be realized.
Income tax expense is the tax payable for the period and the change during the
period in deferred tax assets and liabilities.

Reclassifications

Certain amounts in the 1996 financial statements have been reclassified to
conform with the 1997 presentation.

2. NET PATIENT SERVICE REVENUE:

The Corporation has agreements with Medicare, Medicaid, Blue Cross, and
various other commercial insurance companies, preferred provider organizations
and health maintenance organizations that provide for payments to the
Corporation at amounts different from its established rates. The basis of these
payments include discounts from established charges, capitated rates, and fee
screens. Differences between established rates and agreed-upon payments are
included as a reduction to net patient service revenue or risk contract revenue.
A significant portion of the Corporation's revenue is derived through
arrangements with these third-party payors. As such, the Corporation is
dependent on these payors to carry out its operating activities.

3. PROPERTY AND EQUIPMENT:

Property and equipment consist of the following:

<TABLE>
<CAPTION>
1996 1997
----------- -----------
<S> <C> <C>
Land and buildings......................................... $ 325,000 $ 1,420,661
Equipment, furniture and fixtures.......................... 6,778,464 7,141,644
Leasehold improvements..................................... 1,142,715 1,175,930
Construction in progress................................... 754,283 446,174
----------- -----------
9,000,462 10,184,409
Accumulated depreciation and amortization.................. (4,588,782) (5,535,357)
----------- -----------
Property and equipment, net................................ $ 4,411,680 $ 4,649,052
=========== ===========
</TABLE>

F-38
<PAGE> 77
BERKSHIRE PHYSICIANS & SURGEONS, P.C.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

3. PROPERTY AND EQUIPMENT -- (CONTINUED)
Depreciation and amortization expense for the years ended December 31, 1996
and 1997 was $981,593 and $960,358, respectively.

4. ADVANCES TO SHAREHOLDERS:

The Corporation provides financing to shareholder physicians to enable them
to purchase shares of stock from the Corporation. Interest is accrued at market
interest rates on outstanding amounts. Total principal outstanding at December
31, 1996 and 1997 was $101,661 and $66,777, respectively. The Corporation
accrued approximately $5,182 and $4,799 of interest income from advances to
shareholders for the year ended December 31, 1996 and 1997, respectively. In
addition, during 1997, the Corporation advanced $268,427 to shareholder
physicians in compensation beyond their earned compensation for 1997. The
Corporation expects the advances to be collected or netted against compensation
in 1998.

5. INSURANCE:

The Corporation is insured with respect to professional liability insurance
on a claims made basis up to $1,000,000 per individual claim and $3,000,000 in
the aggregate. The policies are subject to annual renewal and cover only those
claims made during the term of the policy but not for occurrences for which
claims made after expiration of the policy. The Corporation is self insured for
claims exceeding the insured amounts. The physicians also have professional
liability insurance, primarily on an occurrence basis, up to $1,000,000 or
$2,000,000 per individual claim and $3,000,000 or $6,000,000 in the aggregate.
The Corporation intends to renew its present insurance coverage. Management was
not aware of any claims against it or its providers which are estimated to
exceed their insurance limits.

The Corporation is self insured for the majority of employee health
insurance up to $65,000 per participant and approximately $1,620,000 in the
aggregate. Management has recorded an estimated liability of its exposure under
the plan as of December 31, 1996 and 1997.

6. NOTE PAYABLE AND LONG-TERM DEBT:

Note Payable

The Corporation maintains a demand bank line of credit collateralized by
certain of the Corporation's assets in the amount of $7,500,000 ($3,500,000 at
December 31, 1996). The loan agreement stipulates interest at the bank's base
rate plus 1% in 1996 (9.25% at December 31, 1996) and 3% in 1997 (11.50% at
December 31, 1997) and the line expires on May 31, 1998. Total outstanding on
the line of credit was $3,062,781 and $6,755,136 at December 31, 1996 and 1997,
respectively. The loan agreement also stipulates that the Corporation will have
to pay additional interest when the line is repaid equal to .8125% of the
greater of the assumed value of the Corporation in cash or equivalents in a
Capital Placement, as defined or $25,000,000 if repaid on or before April 15,
1998. The rate to calculate the additional interest increases to .875% if the
line is repaid between April 16, 1998 and May 31, 1998 and increases to 1.625%
if the line is repaid after May 31, 1998. The Corporation estimated and accrued
additional interest of $146,000 payable through December 31, 1997 in accounts
payable and accrued expenses. This estimate was based on a pro-rata share of the
additional interest, assuming a repayment date of April 15, 1998, for the period
from May 30, 1997 (the date of the loan agreement) through April 15, 1998.

F-39
<PAGE> 78
BERKSHIRE PHYSICIANS & SURGEONS, P.C.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

6. NOTE PAYABLE AND LONG-TERM DEBT -- (CONTINUED)
Long-Term Debt

Long-term debt consists of the following:

<TABLE>
<CAPTION>
1996 1997
---------- ----------
<S> <C> <C>
Variable rate equipment loan, at bank's base rate plus 1%
(9.50% at December 31, 1997), payable in monthly
installments of variable amounts, with a fixed principal
portion of $13,333 per month through May 2000,
collateralized by certain of the Corporation's assets..... $ 546,667 $ 386,608
Variable rate equipment loan, at bank's base rate plus 1%
(9.50% at December 31, 1997), payable in monthly
installments of variable amounts, with a fixed principal
portion of $4,500 through January 2001, collateralized by
certain of the Corporation's assets....................... 220,500 166,560
Fixed rate, 8.0% mortgage payable to a bank, collateralized
by a building............................................. 242,827
Fixed rate, 16% mortgage payable to a group of investors,
interest payable monthly and principal payable in full on
April 3, 1998, collateralized by a building............... 600,000
---------- ----------
1,009,994 1,153,168
Less current portion................................... 220,980 813,996
---------- ----------
$ 789,014 $ 339,172
========== ==========
</TABLE>

Maturities of long-term debt as follows:

<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31, AMOUNT
- ------------------------ ----------
<S> <C>
1998................................................... $ 813,996
1999................................................... 214,065
2000................................................... 120,607
2001................................................... 4,500
----------
$1,153,168
==========
</TABLE>

The variable note equipment loans were paid in full subsequent to year-end
as part of a lease refinancing (Note 14). The Corporation is currently in
negotiations to extend the maturity of the $600,000 mortgage to April 3, 1999.

F-40
<PAGE> 79
BERKSHIRE PHYSICIANS & SURGEONS, P.C.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

7. INCOME TAXES:

The income tax expense (benefit) included in the statement of operations
for the years ended December 31, 1996 and 1997 is as follows:

<TABLE>
<CAPTION>
1996 1997
----------- -------
<S> <C> <C>
Currently payable:
Federal................................................... $ 44,932 $58,569
State..................................................... -- --
----------- -------
$ 44,932 $58,569
=========== =======
Deferred:
Federal................................................... (1,104,301) --
State..................................................... (341,315) --
----------- -------
(1,445,616) --
----------- -------
Income tax expense (benefit)................................ $(1,400,684) $58,569
----------- -------
</TABLE>

The Corporation's income tax expense (benefit) differs from the statutory
benefit as follows:

<TABLE>
<CAPTION>
1996 1997
----------- -----------
<S> <C> <C>
Expected federal benefit at statutory rate................ $ (953,764) $(2,248,218)
State taxes, net of federal income tax benefit............ (382,233) (396,744)
Meals and entertainment disallowance...................... 17,675 18,293
Valuation allowance on deferred tax assets................ 280,090 2,626,669
Other, net................................................ (362,452) 58,569
----------- -----------
$(1,400,684) $ 58,569
=========== ===========
</TABLE>

Significant components of net deferred tax liabilities, which are primarily
the result of the Corporation recording amounts for financial statements
purposes using the accrual method and for tax reporting purposes using the cash
basis, are as follows:

<TABLE>
<CAPTION>
1996 1997
----------- -----------
<S> <C> <C>
Deferred tax liabilities:
Patient accounts receivable.......................... $ 1,932,464 $ 1,772,868
Depreciation......................................... 188,676 232,716
Other accrued assets................................. 715,917 556,779
----------- -----------
Total deferred tax liabilities.................. 2,837,057 2,562,363
----------- -----------
Deferred tax assets:
Accounts payable and accrued expenses................ 1,366,922 2,276,815
Operating loss carryforwards......................... 1,750,225 3,095,410
----------- -----------
Total deferred tax assets....................... 3,117,147 5,372,225
----------- -----------
Net deferred tax asset before valuation allowance.... 280,090 2,809,862
Valuation allowance.................................. (280,090) (2,809,862)
----------- -----------
Net deferred tax liabilities.................... $ -- $ --
=========== ===========
</TABLE>

At December 31, 1997, the Corporation has net operating loss carryforwards
of approximately $7.1 million for federal and state income tax reporting
purposes. These net operating loss carryforwards expire in 2013 for federal
income taxes and 2003 for state income taxes. As required by SFAS No. 109,
management of the Corporation has evaluated the positive and negative evidence
bearing on the realizability of its deferred tax
F-41
<PAGE> 80
BERKSHIRE PHYSICIANS & SURGEONS, P.C.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

7. INCOME TAXES -- (CONTINUED)
assets. Management has considered the Corporation's earnings history and
established the above valuation allowance due to the uncertainty associated with
the future utilization of operating loss carryforwards above existing net
deferred tax liabilities.

8. EMPLOYEE BENEFIT PLANS:

The Corporation has a defined contribution 401(k) and Retirement Plan that
covers substantially all shareholders and employees. The Corporation, at the
Board of Directors' election, provides a base contribution and matches
shareholder and employee contributions up to approved levels of eligible
compensation. The Corporation has expensed contributions to the 401(k) and
Retirement Plan for 1996 and 1997 of $1,256,710 and $1,552,711, respectively.

9. LEASES:

The Corporation has entered into various operating leases for office and
clinical space, and medical equipment. These leases are classified as operating
leases with the rental expense charged to operations as incurred. Rental expense
under all leases was $1,639,834 and $2,173,514 for 1996 and 1997, respectively.

Included in property, plant and equipment are assets, primarily computer,
medical equipment and office equipment, held under capital leases. Assets held
under capital leases at gross amounted to approximately $3.1 million (net book
value of $1.6 million) and $3.9 million (net book value of $1.9 million) at
December 31, 1996 and 1997, respectively.

The following is a schedule by year of future minimum lease payments under
operating and capital leases as of December 31, 1997 (Note 14):

<TABLE>
<CAPTION>
OPERATING CAPITAL
----------- ----------
<S> <C> <C>
Year ending December 31,
1998................................................ $ 1,916,468 $ 886,484
1999................................................ 1,843,966 872,093
2000................................................ 1,885,110 680,676
2001................................................ 1,695,197 564,817
2002................................................ 1,536,998 227,246
Thereafter.......................................... 6,049,536 4,649
----------- ----------
Total minimum lease payments............................. $14,927,275 3,235,965
===========
Less amounts representing interest....................... 576,630
----------
2,659,335
Less current portion..................................... 644,665
----------
Long-term portion........................................ $2,014,670
==========
</TABLE>

10. CONCENTRATION OF CREDIT RISK:

Financial instruments which potentially subject the Corporation to
concentrations of credit risk consist primarily of cash and cash equivalents,
accounts receivable, other receivables and advances to shareholders. The
Corporation places its cash and cash equivalents with an institution who
management believes is of high quality. At times, such amounts may be in excess
of the Federal Deposit Insurance Corporation insurance limits. However,
management believes that credit risk related to these deposits is minimal.
Advances to shareholders are due from practicing physicians only (see Note 4).
The Corporation has the ability to retain bonus payments and final termination
benefits to settle outstanding advances.

F-42
<PAGE> 81
BERKSHIRE PHYSICIANS & SURGEONS, P.C.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

10. CONCENTRATION OF CREDIT RISK -- (CONTINUED)
The primary business of the Corporation is to provide health care services
to its patients. The Corporation grants credit without collateral to its
patients, many of whom are local residents and are insured under various third
party agreements. The Corporation is dependent upon these payors. As of December
31, 1996 and 1997, the composition of accounts receivable from patients and
third party payors, was as follows:

<TABLE>
<CAPTION>
1996 1997
---- ----
<S> <C> <C>
Medicare and Medicaid....................................... 30% 32%
HMO Blue.................................................... 15 14
Blue Shield................................................. 5 7
Commercial and managed care................................. 29 33
Self-pay and other.......................................... 21 14
--- ---
100% 100%
=== ===
</TABLE>

At December 31, 1996 and 1997, other receivables primarily consist of
settlements from HMOs related to risk sharing agreements and receivables for
contractual services.

11. RELATED PARTY TRANSACTIONS:

In addition to advances to shareholders (see Note 4), the Corporation rents
office space from certain physicians which have ownership in the Corporation.
Total rental payments made to these physicians were $63,729 and $78,129 in 1996
and 1997, respectively. These lease agreements extend through 2001.

12. CONTINGENCIES:

General

The Corporation is subject to complaints, claims and litigation which have
arisen in the normal course of business, including professional liability claims
(Note 5) and several asserted and unasserted litigation cases. It is
management's and legal counsel's belief that the outcome of these matters will
not have a material adverse effect on the Corporation's financial position,
results of operations or cash flows.

Regulatory

The Corporation is subject to compliance with laws and regulations of
various governmental agencies. Recently, governmental review of compliance with
these laws and regulations has increased, resulting in fines and penalties for
noncompliance by individual health care providers. While no regulatory inquiries
have been made at the Corporation, compliance with these laws and regulations is
subject to future government review, interpretation or actions which are unknown
and unasserted at this time.

13. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENT:

The methods and assumptions used to estimate the fair value of each class
of financial instruments, for those instruments for which it is practicable to
estimate that value, and the estimated fair values of the financial instruments
are as follows:

Cash and Cash Equivalents

The carrying amount approximates fair value because of the short effective
maturity of these instruments.

F-43
<PAGE> 82
BERKSHIRE PHYSICIANS & SURGEONS, P.C.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

13. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENT -- (CONTINUED)
Notes Payable and Long-term Debt

The fair value of the Corporation's notes payable and long-term debt is
estimated based on the current rates offered to the Corporation for similar
debt. The carrying value of the Corporation's long-term debt approximates its
fair value as of December 31, 1997.

14. SUBSEQUENT EVENTS:

Merger

On April 14, 1998, the Corporation executed a merger agreement with
ProMedCo Management Company (PMCO), a physician practice management company
based in Fort Worth, Texas, wherein the Corporation will become a wholly-owned
subsidiary of PMCO. The merger agreement was signed in contemplation of a
closing within a few days and PMCO waived all conditions thereto precedent to a
closing. The merger agreement requires PMCO to discharge all debt as of the
closing date.

Lease Agreement

On March 30, 1998, the Corporation entered into a noncancelable sale
leaseback agreement in which it agreed to refinance or sell furniture and
equipment with a net book value of approximately $1.8 million to the
Corporation's current equipment leasing vendor. As part of the agreement, the
leasing company refinanced or paid the outstanding balances on all of the
capital leases and the outstanding balances of the two equipment loans owed to a
bank which totaled $3.2 million. The new lease specifies that the Corporation
will make 57 monthly payments of $67,032 beginning on April 1, 1998. At the end
of the lease, the Corporation has the option of purchasing the equipment from
the leasing company at a fixed price of $550,000, to extend the term of the
lease or to procure a replacement lease or purchase by an unrelated party.

F-44
<PAGE> 83

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............................. 6
Use of Proceeds.......................... 11
Price Range of Common Stock and Dividend
Policy................................. 11
Capitalization........................... 12
Selected Financial Data.................. 13
Management's Discussion and Analysis of
Financial Condition and Results of
Operations............................. 14
Business................................. 21
Management............................... 30
Principal and Selling Stockholders....... 33
Shares Eligible for Future Sale.......... 34
Underwriting............................. 35
Legal Matters............................ 36
Experts.................................. 36
Available Information.................... 37
Incorporation of Certain Documents by
Reference.............................. 37
Index to Financial Statements............ F-1
</TABLE>

6,400,000 SHARES

[PROMEDCO LOGO]

COMMON STOCK

--------------------------------
PROSPECTUS
--------------------------------

PIPER JAFFRAY INC.

BEAR, STEARNS & CO. INC.

COWEN & COMPANY

, 1998