MEDPARTNERS INC, S-1/A, 1996-09-27

MEDPARTNERS INC
S-1/A, 1996-09-27
SPECIALTY OUTPATIENT FACILITIES, NEC

Previous: EQUITABLE REAL ESTATE HYPERION HIGH YLD CMMERCL MORTG FD INC, NSAR-B, 1996-09-27

Next: NATIONAL SURGERY CENTERS INC DE, S-1, 1996-09-27

<PAGE> 1

AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 27, 1996

REGISTRATION STATEMENT NO. 333-12465

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

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

AMENDMENT NO. 1

FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------

MEDPARTNERS, INC.
(Exact Name of Registrant as Specified in its Charter)

<TABLE>
<S> <C> <C>
DELAWARE 8099 63-1151076
(State or Other Jurisdiction (Primary Standard (I.R.S. Employer
of Incorporation or Organization) Industrial Code Number) Identification Number)
</TABLE>

3000 GALLERIA TOWER, SUITE 1000
BIRMINGHAM, ALABAMA 35244
(205) 733-8996
(Address, including Zip Code, and Telephone Number,
including Area Code, of Registrant's Principal Executive Offices)
------------------
LARRY R. HOUSE
CHAIRMAN OF THE
BOARD, PRESIDENT AND CHIEF
EXECUTIVE OFFICER
3000 GALLERIA TOWER, SUITE 1000
BIRMINGHAM, ALABAMA 35244
TEL: (205) 733-8996
FAX: (205) 733-1568
(Name, Address, including Zip Code, and Telephone Number, including Area Code,
of Agent for Service)
------------------
COPIES OF COMMUNICATIONS TO:

<TABLE>
<S> <C> <C>
PHYLLIS G. KORFF, ESQ. J. BROOKE JOHNSTON, JR. ESQ. ROBERT E. LEE GARNER, ESQ.
SKADDEN, ARPS, SLATE, MEAGHER & FLOM SENIOR VICE PRESIDENT & GENERAL COUNSEL F. HAMPTON MCFADDEN, JR., ESQ.
919 THIRD AVENUE MEDPARTNERS, INC. HASKELL SLAUGHTER & YOUNG, L.L.C.
NEW YORK, NEW YORK 10022 3000 GALLERIA TOWER, SUITE 1000 1200 AMSOUTH/HARBERT PLAZA
TEL: (212) 735-3000 BIRMINGHAM, ALABAMA 35244-2331 1901 SIXTH AVENUE NORTH
FAX: (212) 735-2001 TEL: (205) 733-8996 BIRMINGHAM, ALABAMA 35203
FAX: (205) 982-7709 TEL: (205) 251-1000
FAX: (205) 324-1133
</TABLE>

APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box: / /
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
------------------

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

- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 2

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

SUBJECT TO COMPLETION, DATED SEPTEMBER 27, 1996

PROSPECTUS

$300,000,000

MEDPARTNERS(TM)

% SENIOR NOTES DUE 2006
INTEREST PAYABLE MARCH 15 AND SEPTEMBER 15
------------------
The % Senior Notes due 2006 (the "Notes") are being offered (the
"Offering") by MedPartners, Inc. (the "Company"). Interest on the Notes will be
payable semi-annually on March 15 and September 15 of each year, commencing
March 15, 1997, at the rate of % per annum. The Notes will mature on
September 15, 2006. The Notes will not be redeemable by the Company prior to
maturity and will not be entitled to the benefit of any mandatory sinking fund.

The Notes will be general unsecured obligations of the Company ranking
senior in right of payment to all existing and future subordinated indebtedness
of the Company and pari passu in right of payment with all existing and future
unsubordinated and unsecured obligations of the Company. The Notes will be
effectively subordinated to all existing and future secured indebtedness of the
Company and to all existing and future indebtedness and other liabilities of the
Company's subsidiaries. As of June 30, 1996, after giving effect to the Offering
and the use of proceeds therefrom and the Borrowings (as defined herein in "Use
of Proceeds") and assuming that all of the outstanding Caremark Notes are
purchased in the Debt Tender Offer, (as defined herein), the Company would have
had approximately $733.0 million of indebtedness outstanding, $161.9 million of
which would have effectively ranked senior in right of payment to the Notes and
$271.1 million of which would have ranked pari passu with the Notes. See
"Description of the Notes" and "Capitalization".

The Notes will be issued in fully registered form only in denominations of
$1,000 or integral multiples thereof. The Notes initially will be represented by
one or more Global Notes registered in the name of The Depository Trust Company
(the "Depositary") or its nominee. Beneficial interests in the Notes will be
shown on, and transfers thereof will be effected only through, records
maintained by the Depositary and its participants. Owners of beneficial
interests in the Notes will be entitled to physical delivery of Notes in
certificated form equal in principal amount to their respective beneficial
interests only under the limited circumstances described herein. Settlement for
the Notes will be made in immediately available funds. The Notes will trade in
the Depositary's Same-Day Funds Settlement System until maturity, and secondary
market trading activity for the Notes therefore will settle in immediately
available funds. All payments of principal and interest will be made by the
Company in immediately available funds. See "Description of the Notes -- Global
Notes: Form, Exchange and Transfer".
------------------

SEE "RISK FACTORS" BEGINNING ON PAGE 8 OF THIS PROSPECTUS FOR A DESCRIPTION
OF CERTAIN FACTORS TO BE CONSIDERED BY 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>
- -----------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC(1) COMMISSIONS(2) COMPANY(3)
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Note.................................... % % %
- -----------------------------------------------------------------------------------------------------------
Total....................................... $ $ $
- -----------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------
</TABLE>

(1) Plus accrued interest, if any, from the date of initial issuance.
(2) The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended. See "Underwriting".
(3) Before estimated expenses of $ payable by the Company.
------------------

The Notes are being offered by the Underwriters named herein, subject to
prior sale, when, as and if accepted by them and subject to certain conditions.
It is expected that the Notes will be available for delivery on or about October
, 1996 through the facilities of the Depositary.

------------------
SMITH BARNEY INC.
MERRILL LYNCH & CO.
J.P. MORGAN & CO.
MORGAN STANLEY & CO.
INCORPORATED
NATIONSBANC CAPITAL MARKETS, INC.

October , 1996

<PAGE> 3

AVAILABLE INFORMATION

The Company has filed a Registration Statement (the "Registration
Statement") on Form S-1 under the Securities Act of 1933, as amended (the
"Securities Act"), with the Securities and Exchange Commission (the
"Commission") with respect to the Notes offered hereby. This Prospectus does not
contain all of the information set forth in the Registration Statement which the
Company has filed with the Commission, certain portions of which have been
omitted pursuant to the rules and regulations of the Commission, and to which
portions reference is hereby made for further information with respect to the
Company and the Notes offered hereby. Statements contained herein concerning
certain documents are not necessarily complete, and in each instance, reference
is made to the copies of such documents filed as exhibits to the Registration
Statement. Each such statement is qualified in its entirety by such reference.

The Company is subject to the information requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act") (Commission File No.
0-27276), and in accordance therewith files periodic reports, proxy statements
and other information with the Commission relating to its business, financial
statements and other matters. The Registration Statement, as well as such
reports, proxy statements and other information, may be inspected and copied at
prescribed rates at the public reference facilities maintained by the Commission
at Room 1024, 450 Fifth Street, N.W., Judiciary Plaza, Washington, D.C. and
should be available for inspection and copying at the regional offices of the
Commission located at 7 World Trade Center, Suite 1300, New York, New York 10048
and at Citicorp Center, 500 West Madison Street, Chicago, Illinois. Copies of
such material can be obtained at prescribed rates by writing to the Commission,
Public Reference Section, 450 Fifth Street, N.W., Washington, D.C. 20549. The
Commission also maintains a Web site that contains reports, proxy and
information statements and other information regarding registrants that file
electronically with the Commission. The address of such site is
http://www.sec.gov. The Common Stock, par value $.001 per share (the "Common
Stock"), of the Company is listed on the New York Stock Exchange (the "NYSE").
The reports, proxy statements and certain other information of the Company can
be inspected at the office of the NYSE, 20 Broad Street, New York, New York.

FORWARD-LOOKING STATEMENTS

This Prospectus contains certain forward-looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995 with respect to
the financial condition, results of operations and business of the Company. The
words "estimate", "project", "intend", "expect" and similar expressions are
intended to identify forward-looking statements. These forward-looking
statements are subject to risks and uncertainties that could cause actual
results to differ materially from those contemplated in such forward looking-
statements. For a discussion of certain of such risks and uncertainties, see
"Risk Factors" and "Management's Discussion and Analysis of Financial Condition
and Results of Operations". Investors are cautioned not to place undue reliance
on these forward-looking statements, which speak only as of the date hereof. The
Company undertakes no obligation to publicly release any revisions to these
forward-looking statements to reflect events or circumstances after the date
hereof or to reflect the occurrence of unanticipated events.

IN CONNECTION WITH THE OFFERING, THE UNDERWRITERS MAY EFFECT TRANSACTIONS
WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE NOTES OFFERED HEREBY AT A
LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH
STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.

2
<PAGE> 4

PROSPECTUS SUMMARY

The following summary is qualified in its entirety by, and should be read
in conjunction with, the more detailed information and financial statements and
notes thereto appearing elsewhere in this Prospectus. Unless the context
otherwise requires, as used herein, the term "MedPartners" or the "Company"
refers collectively to MedPartners, Inc. and its predecessor, also named
MedPartners, Inc. (the "Original Predecessor"), and their respective
subsidiaries and affiliates. Unless otherwise indicated, the information
contained in this Prospectus gives effect to the consummation of the
acquisitions (collectively, the "Acquisitions") of Caremark International Inc.
("Caremark") and New Management. See "Business -- Acquisition Program". In
September 1996, the Company changed its name from MedPartners/Mullikin, Inc.
("MedPartners/Mullikin") to "MedPartners, Inc."

THE COMPANY

GENERAL

MedPartners, with annualized revenues of approximately $4.5 billion, is the
largest physician practice management ("PPM") company in the United States. The
Company develops, consolidates and manages integrated healthcare delivery
systems. Through its network of affiliated group and independent practice
association ("IPA") physicians, the Company provides primary and specialty
healthcare services to prepaid managed care enrollees and fee-for-service
patients. The Company also operates one of the largest independent prescription
benefit management ("PBM") programs in the United States and provides disease
management services and therapies for patients with certain chronic conditions.
As of June 30, 1996, the Company operated in 54 markets in 25 states through
affiliations with approximately 7,400 physicians, including approximately 2,470
in group practices, 4,180 through IPA relationships and 740 who were hospital-
based, providing healthcare to approximately 1.5 million prepaid enrollees.

The Company affiliates with physicians who are seeking the resources
necessary to function effectively in healthcare markets that are evolving from
fee-for-service to managed care payor systems. The Company enhances clinic
operations by centralizing administrative functions and introducing management
tools, such as clinical guidelines, utilization review and outcomes measurement.
The Company provides affiliated physicians with access to capital and advanced
management information systems. In addition, MedPartners contracts with health
maintenance organizations and other third-party payors that compensate the
Company and its affiliated physicians on a prepaid basis (collectively, "HMOs"),
hospitals and outside providers on behalf of its affiliated physicians. These
relationships provide physicians with the opportunity to operate under a variety
of payor arrangements and increase their patient flow.

The Company offers medical group practices and independent physicians a
range of affiliation models. These affiliations are carried out by the
acquisition of PPM entities or practice assets, either for cash or through an
equity exchange, or by affiliation on a contractual basis. In all instances, the
Company enters into long-term practice management agreements with the affiliated
physicians that provide for the management of their practices by the Company
while at the same time providing for the clinical independence of the
physicians.

The Company also manages outpatient prescription drug benefit programs for
more than 1,200 clients throughout the United States, including corporations,
insurance companies, unions, government employee groups and managed care
organizations. The Company dispenses 42,000 prescriptions daily through four
mail service pharmacies and manages patients' immediate prescription needs
through a network of approximately 53,000 retail pharmacies. The Company's
disease management services are intended to meet the healthcare needs of
individuals with chronic diseases or conditions. These services include the
design, development and management of comprehensive programs that comprise drug
therapies, physician support and patient education. The Company currently
provides therapies and services for individuals with such conditions as
hemophilia, growth disorders, immune deficiencies, genetic emphysema, cystic
fibrosis and multiple sclerosis. The Company is in the process of integrating
its PBM program with the PPM business by providing pharmaceutical services to
affiliated physicians, clinics and HMOs.

3
<PAGE> 5

ACQUISITION STRATEGY

The Company believes it is the leading consolidator in the PPM industry.
The Company's acquisition strategy is to develop locally prominent, integrated
healthcare delivery networks that provide high quality, cost-effective
healthcare in selected geographic markets. The Company implements this strategy
through growth in its existing markets, expansion into new markets through
acquisitions and affiliations and through the implementation of comprehensive
healthcare solutions for patients, physicians and payors. In pursuing its
acquisition strategy, the Company creates strategic alliances with hospital
partners and HMOs. As an integral element of these alliances, MedPartners
utilizes sophisticated information systems to improve the operational efficiency
of, and to reduce the costs associated with, operating the Company's network and
the practices of affiliated physicians. The Company's principal methods of
expansion are the acquisition of PPM businesses and affiliations with physician
and medical groups.

In September 1996, the Company acquired Caremark, a publicly traded PPM and
PBM company based in Northbrook, Illinois, in exchange for approximately 93.7
million shares of Common Stock having a total value of approximately $1.9
billion (the "Caremark Acquisition"), creating the largest PPM business in the
United States. Caremark provides PPM services to approximately 1,000 affiliated
physicians.

In November 1995, the Company acquired Mullikin Medical Enterprises, L.P.
("MME"), a privately held PPM entity based in Long Beach, California, in
exchange for approximately 13.5 million shares of Common Stock having a total
value of approximately $413.2 million. MME provided PPM services to
approximately 400 group and 2,600 IPA physicians. In February 1996, the Company
acquired Pacific Physician Services, Inc. ("PPSI"), a publicly traded PPM
company based in Redlands, California, in exchange for approximately 11.1
million shares of Common Stock having a total value of approximately $342.7
million. PPSI provided PPM services to approximately 710 group and 100 IPA
physicians. PPSI had acquired Team Health, Inc. ("Team Health"), based in
Knoxville, Tennessee in June 1995. Team Health primarily manages physicians and
other healthcare professionals engaged in the delivery of emergency medicine and
hospital-based primary care. In August 1996, the Company acquired New
Management, a California general partnership, in exchange for approximately
348,000 shares of Common Stock having a total value of $7.0 million. New
Management provided management and administrative services to West Hills
Hospital, based in Los Angeles, California.

The Company had affiliated with 190 physicians through December 31, 1994.
As of June 30, 1996, after giving effect to the Caremark Acquisition, the
Company had affiliated with approximately 7,400 physicians.

THE DEBT TENDER OFFER

On September 26, 1996, the Company commenced a cash tender offer (the
"Offer" and, together with the Solicitation (as defined below) , the "Debt
Tender Offer") for all of the $100 million aggregate principal amount of the
6 7/8% Notes due August 15, 2003 of Caremark (the "Caremark Notes"). The
purchase price to be paid for each Caremark Note tendered will be based upon a
fixed spread of 37.5 basis points over the yield on the 5 3/4% U.S. Treasury
Note due August 15, 2003. Using this formula, the purchase price for the Notes
will be set at 2:00 p.m., New York City time, on October 24, 1996, the third
business day prior to the scheduled expiration date of the Offer. For
illustration purposes only, if calculated based upon a yield on September 26,
1996 on the referenced U.S. Treasury Note, the tender offer yield and purchase
price per $1,000 principal amount of Caremark Note for settlement on September
26, 1996 would be 6.912% and $997.88, respectively. Such purchase price includes
a $5.00 consent payment per $1,000 principal amount of Note.

In conjunction with the Offer, the Company, on behalf of Caremark, is
soliciting (the "Solicitation") the consent ("Consents") of the holders of the
Caremark Notes to certain proposed amendments (the "Proposed Amendments") to the
indenture governing the Caremark Notes.

4
<PAGE> 6

is offering to pay each holder who consents to the Proposed Amendments an amount
in cash equal to 0.5% of the principal amount of the Caremark Notes ($5.00 per
$1,000 principal amount of Caremark Note).

Holders who tender their Caremark Notes will be required to consent to the
Proposed Amendments, however, holders of Caremark Notes may consent to the
Proposed Amendments without tendering their Caremark Notes. Caremark Notes that
are not purchased in the Debt Tender Offer will remain outstanding obligations
of Caremark, and, upon receiving Consents from holders of a majority in
aggregate principal amount of the Caremark Notes outstanding, such non-tendered
Caremark Notes will be subject to the Proposed Amendments. The principal purpose
of the Debt Tender Offer is to improve the operating and financial flexibility
of the Company.

The Debt Tender Offer will be funded by borrowings under the Credit
Facility (as defined herein).

THE OFFERING

Securities Offered......... $300,000,000 aggregate principal amount of %
Senior Notes due 2006 (the "Notes").

Maturity Date.............. September 15, 2006.

Interest Rate and Payment
Dates.................... The Notes will bear interest at a rate of %
per annum. Interest on the Notes will accrue from
the date of issuance and will be payable
semi-annually on March 15 and September 15 of
each year, commencing March 15, 1997.

Ranking.................... The Notes will be general unsecured obligations of
the Company ranking senior in right of payment to
all existing and future subordinated indebtedness
of the Company and pari passu in right of payment
with all existing and future unsubordinated and
unsecured obligations of the Company. The Notes
will be effectively subordinated to all existing
and future secured indebtedness of the Company
and to all existing and future indebtedness and
other liabilities of the Company's subsidiaries.
As of June 30, 1996, after giving effect to the
Offering and the use of proceeds therefrom and to
the Borrowings, and assuming that all of the
outstanding Caremark Notes are purchased in the
Debt Tender Offer, the Company would have had
approximately $733.0 million of indebtedness
outstanding, $161.9 million of which would have
effectively ranked senior in right of payment to
the Notes and $271.1 million of which would have
ranked pari passu with the Notes. See
"Capitalization" and "Description of the Notes".

Redemption................. The Notes will not be redeemable by the Company
prior to maturity.

Certain Covenants.......... The Indenture will contain certain covenants with
respect to, among others, the following matters:
(i) restrictions on additional indebtedness
secured by liens, (ii) restrictions on sale and
leaseback transactions, (iii) restrictions on
additional subsidiary indebtedness and (iv)
restrictions on consolidations, mergers and sales
of all or substantially all of the assets of the
Company. These covenants are subject to important
exceptions and qualifications. See "Description
of the Notes -- Certain Covenants" and
"-- Consolidation, Merger and Disposition of
Assets".

Use of Proceeds............ To repay indebtedness outstanding under the Credit
Facility (as defined herein). See "Use of
Proceeds".

RISK FACTORS

See "Risk Factors" beginning on page 8 of this Prospectus for a discussion
of certain factors related to the Company and the Notes offered hereby.

5
<PAGE> 7

SUMMARY PRO FORMA CONDENSED COMBINED FINANCIAL AND OPERATING DATA

The following summary pro forma condensed combined financial and operating
data is derived from the Pro Forma Condensed Combined Financial Statements found
elsewhere in this Prospectus. Such pro forma condensed combined financial data
is based upon the historical Consolidated Financial Statements of the Company,
Caremark and New Management included elsewhere in this Prospectus, adjusted to
reflect the Acquisitions as poolings of interests. The summary pro forma
condensed combined financial data does not purport to represent the results of
operations of the Company that actually would have occurred had the Acquisitions
been consummated on the dates indicated or that may be obtained in the future.
The summary pro forma condensed combined financial data should be read in
conjunction with the Pro Forma Condensed Combined Financial Statements and the
notes thereto included elsewhere in this Prospectus.

<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE
YEAR ENDED DECEMBER 31, 30,
------------------------------------ -----------------------
1993 1994 1995 1995 1996
---------- ---------- ---------- ---------- ----------
(IN THOUSANDS, EXCEPT SHARE DATA
AND OPERATING DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net revenue................................................ $1,756,762 $2,593,329 $3,530,768 $1,669,100 $2,273,270
Operating expenses:
Affiliated physician services............................ 272,128 412,075 631,407 292,505 422,943
Outside medical expenses................................. 70,427 102,496 149,185 64,556 156,506
Clinic expenses.......................................... 284,509 413,969 683,927 305,731 491,462
Non-clinic goods and services............................ 884,014 1,365,203 1,688,075 829,681 985,531
General and administrative expenses...................... 123,468 145,937 142,952 73,492 69,946
Depreciation and amortization............................ 25,464 40,816 57,643 26,875 41,182
Net interest expense..................................... 7,021 14,885 17,447 8,451 12,100
Merger expenses.......................................... -- -- 66,564 1,051 34,448
Loss on investments...................................... -- -- 86,600 -- --
Other, net............................................... (1,574) (143) (192) (401) (373)
-------- -------- ---------- ---------- ----------
Net operating expenses..................................... 1,665,457 2,495,238 3,523,608 1,601,941 2,213,745
Income before income taxes and discontinued operations..... 91,305 98,091 7,160 67,159 59,525
Income tax expense (benefit)............................... 43,126 44,022 (15,966) 24,713 23,348
Cumulative effect of change in method of accounting for
income taxes............................................. 298 -- -- -- --
-------- -------- ---------- ---------- ----------
Income from continuing operations.......................... 47,881 54,069 23,126 42,446 36,177
Loss (income) from discontinued operations................. (30,808) (25,902) 136,528 139,531 66,799
-------- -------- ---------- ---------- ----------
Net income (loss).......................................... $ 78,689 $ 79,971 $ (113,402) $ (97,085) $ (30,622)
======== ======== ========== ========== ==========
Net income (loss) per share(1)............................. $ 0.66 $ 0.63 $ (0.85) $ (0.73) $ (0.21)
======== ======== ========== ========== ==========
Number of shares used in net income (loss) per
share(1)(2).............................................. 119,380 127,409 133,939 132,723 144,036
======== ======== ========== ========== ==========
Income per share, excluding merger expenses, discontinued
operations and extraordinary item........................ $ 0.40 $ 0.42 $ 0.47 $ 0.32 $ .40
Ratio of earnings to fixed charges(3)...................... 5.59x 3.70x 2.38x 3.56x 3.85x
OTHER FINANCIAL DATA:
EBITDA(4).................................................. $ 123,736 $ 153,792 $ 82,250 $ 102,481 $ 112,807
Capital expenditures....................................... 65,927 102,282 122,794 48,571 70,233
CERTAIN OPERATING DATA (AT PERIOD END):
Group physicians......................................... 870 1,227 2,357 1,660 2,470
States................................................... 7 19 20 19 25
Prepaid enrollees........................................ 726,256 1,057,308 1,290,455 1,042,215 1,461,000
</TABLE>

<TABLE>
<CAPTION>
JUNE 30, 1996
----------------------------
PRO FORMA
PRO FORMA AS ADJUSTED(5)
---------- --------------
(IN THOUSANDS)
<S> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents.................................................. $ 119,396 $ 119,396
Working capital............................................................ (85,480 ) 169,520
Total assets............................................................... 1,987,262 1,987,262
Short-term debt and current portion of long-term debt...................... 297,377 42,377
Long-term debt, less current portion(6).................................... 197,022 452,210
Total stockholders' equity................................................. 643,395 643,395
</TABLE>

(footnotes on following page)

6
<PAGE> 8

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

(1) Net income (loss) per share is computed by dividing net income (loss) by the
number of common equivalent shares outstanding during the periods in
accordance with the applicable rules of the Commission. All stock options
issued have been considered as outstanding common equivalent shares for all
periods presented, even if anti-dilutive, under the treasury stock method.
Shares of common stock of the Original Predecessor issued in February 1995
upon conversion of the then outstanding convertible preferred stock are
assumed to be common equivalent shares for all periods presented.
(2) Number of shares used in net income (loss) per share gives effect to the
Caremark Acquisition by using the exchange ratio of 1.21.

(3) The ratio of earnings to fixed charges is computed by dividing fixed charges
into earnings from continuing operations before income taxes and
extraordinary items plus fixed charges. Fixed charges include interest,
expensed or capitalized, amortization of debt issuance costs and the
interest component of rent expense (approximately 1/3 of rental expense).

(4) EBITDA is defined as earnings before net interest expense, taxes,
extraordinary items, depreciation and amortization and minority interest.
The Company has presented EBITDA because it is commonly used by investors to
analyze and compare companies on the basis of operating performance. The
Company believes EBITDA is helpful in understanding cash flow generated from
operations that is available for debt service, taxes and capital
expenditures. EBITDA should not be considered in isolation or as substitute
for net income or other consolidated statement of operations or cash flow
data prepared in accordance with generally accepted accounting principles
("GAAP") as a measure of the profitability or liquidity of the Company.

(5) Adjusted to reflect the Offering and the application of the net proceeds
therefrom as set forth in "Use of Proceeds" and to give effect to the
consummation of the Debt Tender Offer assuming that all of the outstanding
Caremark Notes are purchased in the Debt Tender Offer.

(6) As of June 30, 1996, after giving effect to the Offering and the use of
proceeds therefrom as set forth in "Use of Proceeds" and to the Borrowings,
and assuming that all of the outstanding Caremark Notes are purchased in the
Debt Tender Offer, the Company would have had long-term debt, less current
portion, of $632.2 million.

7
<PAGE> 9

THE COMPANY

The Company was incorporated under the laws of Delaware in August 1995 as
"MedPartners/Mullikin, Inc." to be the surviving corporation in the combination
of the businesses of the Original Predecessor, incorporated under the laws of
Delaware in 1993, and MME, a California limited partnership which, directly or
through its predecessor entities, had operated since 1957. In September 1996,
the Company changed its name to "MedPartners, Inc." The executive offices of
MedPartners are located at 3000 Galleria Tower, Suite 1000, Birmingham, Alabama
35244, and its telephone number is (205) 733-8996. See "Business".

RISK FACTORS

In addition to the other information contained in this Prospectus,
prospective purchasers of the Notes should consider carefully the factors listed
below.

RISKS RELATING TO THE COMPANY'S GROWTH STRATEGY

The Company intends to continue to pursue an aggressive growth strategy for
the foreseeable future. The Company's strategy involves growth through
acquisitions and internal development. The Company's ability to pursue new
growth opportunities successfully will depend on many factors, including, among
others, the Company's ability to identify suitable growth opportunities and
successfully integrate acquired businesses and practices. There can be no
assurance that the Company will anticipate all of the changing demands that
expanding operations will impose on its management, management information
systems and physician network. Any failure by the Company to adapt its systems
and procedures to those changing demands could have a material adverse effect on
the operating results and financial condition of the Company.

Competition for Expansion Opportunities. The Company is subject to the
risk that it will be unable to identify and recruit suitable acquisition
candidates in the future. The Company competes for acquisition, affiliation and
other expansion opportunities with national, regional and local PPM companies
and other physician management entities. In addition, certain companies,
including hospitals and insurers, are expanding their presence in the PPM
market. The Company's failure to compete successfully for expansion
opportunities or to attract and recruit suitable acquisition candidates could
have a material adverse effect on the operating results and financial condition
of the Company. The Company is also subject to the risk that it will be unable
to recruit and retain qualified physicians and other healthcare professionals to
serve as employees or independent contractors of the Company and its affiliates.
See "Business -- Competition".

Integration Risks. Acquisitions of PPM companies and physician practices
entail the risk that such acquisitions will fail to perform in accordance with
expectations and that the Company will be unable to successfully integrate such
acquired businesses and physician practices into its operations. The
profitability of the Company is largely dependent on its ability to develop and
integrate networks of physicians, to manage and control costs and to realize
economies of scale from acquisitions of PPM companies and physician practices.
The histories, geographic location, business models, including emphasis on
managed care and fee-for-service, and cultures of acquired PPM businesses and
physician practices may differ from the Company's past experiences. Dedicating
management resources to the integration process may detract attention from the
day-to-day business of the Company. Moreover, the integration of the acquired
businesses and physician practices may require substantial capital and financial
investments. These, together with other risks described herein, could result in
the incurrence of substantial costs in connection with acquisitions that may
never achieve revenue and profitability levels comparable to the Company's
existing physician networks.

The major acquisitions carried out by the Company since January 1995, have
been structured as poolings of interests. As a result, the operating income of
the Company has been reduced by the merger expenses incurred in connection with
those acquisitions, resulting in a net loss for the six months ended June 30,
1996. The expenses of the Caremark Acquisition are expected to result in a net
loss for the year ended December 31, 1996. There can be no assurance that future
merger expenses will not result in further net losses. Nor can there be any
assurance that there will not be substantial future costs associated with
integrating acquired

8
<PAGE> 10

companies; that the Company will be successful in integrating such companies; or
that the anticipated benefits of such acquisitions will be realized fully. See
"-- Risks Relating to Capital Requirements".

Dependence on HMO Enrollee Growth. The Company is also largely dependent
on the continued increase in the number of HMO enrollees who use its physician
networks. This growth may come from development or acquisition of other PPM
entities, affiliation with additional physicians, increased enrollment in HMOs
currently contracting with the Company through its affiliated physicians and
additional agreements with HMOs. There can be no assurance that the Company will
be successful in identifying, acquiring and integrating additional medical
groups or other PPM companies or in increasing the number of enrollees. A
decline in enrollees in HMOs could have a material adverse effect on the
operating results and financial condition of the Company. Moreover, because the
Company is statutorily and contractually prohibited from controlling any medical
decisions made by a healthcare provider, affiliated physicians may decline to
enter into HMO agreements that are negotiated for them by the Company or may
enter into contracts for the provision of medical services or make other
financial commitments that are not intended to benefit the Company and which,
accordingly, could have a material adverse effect on the operating results and
financial condition of the Company. See "Business -- Operations".

Risks Relating to Capital Requirements. The Company's growth strategy
requires substantial capital for the acquisition of PPM businesses and assets of
physician practices, and for their effective integration, operation and
expansion. Affiliated physician practices may also require capital for
renovation, expansion and additional medical equipment and technology. The
Company believes that its existing cash resources, including the net proceeds
from the sale of the Notes, the use of Common Stock for selected practice and
other acquisitions, and available borrowings under the $1.0 billion credit
facility (the "Credit Facility") with NationsBank, National Association (South),
as administrative bank to a group of lenders, or any successor credit facility,
will be sufficient to meet the Company's anticipated acquisition, expansion and
working capital needs for the next twelve months. The Company expects from time
to time to raise additional capital through the issuance of long-term or
short-term indebtedness or the issuance of additional equity securities in
private or public transactions, at such times as management deems appropriate
and the market allows in order to meet the capital needs of the Company. There
can be no assurance that acceptable financing for future acquisitions or for the
integration and expansion of existing networks can be obtained, such financings
could result in increased interest and amortization expense, decreased income to
fund future expansion and dilution of existing equity positions.

RISKS RELATING TO CAPITATED NATURE OF REVENUES; CONTROL OF HEALTHCARE COSTS

A substantial portion of the Company's revenue is derived from agreements
with HMOs that provide for the receipt of capitated fees. Under these
agreements, the Company, through its affiliated physicians, is generally
responsible for the provision of all covered outpatient benefits, regardless of
whether the affiliated physicians directly provide the medical services
associated with the covered benefits. The Company is statutorily and
contractually prohibited from controlling any medical decisions made by any
healthcare provider. To the extent that enrollees require more care than is
anticipated or require supplemental medical care that is not otherwise
reimbursed by the HMO, aggregate capitation rates may be insufficient to cover
the costs associated with the treatment of enrollees. If revenue is insufficient
to cover costs, the operating results and financial condition of the Company
could be materially adversely affected. As a result, the Company's success will
depend in large part on the effective management of healthcare costs through
various methods, including utilization management, competitive pricing for
purchased services and favorable agreements with payors. Recently, many
providers, including the Company, have experienced pricing pressures with
respect to negotiations 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
measurable 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 could decrease. There can be no
assurance that these pricing pressures will not have a material adverse effect
on the operating results and financial condition of the

9
<PAGE> 11

Company. In addition, changes in healthcare practices, inflation, new
technologies, major epidemics, natural disasters and numerous other factors
affecting the delivery and cost of healthcare could have a material adverse
effect on the operating results and financial condition of the Company.

The Company's financial statements include estimates of costs for covered
medical benefits incurred by HMO enrollees, but not yet reported. While these
estimates are based on information available at the time of calculation, there
can be no assurance that actual costs will approximate the estimates of such
amounts. If the actual costs significantly exceed the amounts estimated and
accrued, such additional costs could have a material adverse effect on the
operating results and financial condition of the Company.

The HMO agreements often contain shared-risk provisions under which
additional revenue can be earned or economic penalties can be incurred based
upon the utilization of hospital and non-professional services by HMO enrollees.
The Company's financial statements contain accruals for estimates of shared-risk
amounts receivable from or payable to the HMOs that contract with their
affiliated physicians. These estimates are based upon inpatient utilization and
associated costs incurred by HMO enrollees compared to budgeted costs.
Differences between actual contract settlements and amounts estimated as
receivable or payable relating to HMO risk-sharing arrangements are generally
reconciled annually. This may cause fluctuations from amounts previously
accrued. To the extent that HMO enrollees require more care than is anticipated
or require supplemental care that is not otherwise reimbursed by the HMOs,
aggregate capitation rates may be insufficient to cover the costs associated
with the treatment of enrollees. Any such insufficiency could have a material
adverse effect on the operating results and financial condition of the Company.

Physician groups that render services on a fee-for-service basis (as
opposed to a capitated plan) typically bill various third-party payors, such as
governmental programs (e.g., Medicare and Medicaid), private insurance plans and
managed care plans, for the healthcare services provided to their patients. A
significant portion of the revenue of the Company is derived from payments made
by these third-party payors. There can be no assurance that payments under
governmental programs or from other third-party payors will remain at present
levels. In addition, third-party payors can deny reimbursement if they determine
that treatment was not performed in accordance with the cost-effective treatment
methods established by such payors or was experimental or for other reasons. Any
material decrease in payments received from such third-party payors could have a
material adverse effect on the operating results and financial condition of the
Company.

RISKS RELATING TO CERTAIN CAREMARK LEGAL MATTERS

OIG Settlement and Related Claims. Caremark agreed in June 1995, to settle
with the Office of the Inspector General (the "OIG") of the United States
Department of Health and Human Services (the "DHHS"), Department of Justice
("DOJ"), the Veteran's Administration, the Federal Employee Health Benefits
Program ("FEHBP"), the Civilian Health and Medical Program of the Uniformed
Services ("CHAMPUS") and related state investigative agencies in all 50 states
and the District of Columbia a four-year-long investigation of Caremark (the
"OIG Settlement"). Under the terms of the OIG Settlement, which covered
allegations dating back to 1986, a subsidiary of Caremark pled guilty to two
counts of mail fraud -- one each in Minnesota and Ohio -- resulting in the
payment of civil penalties and criminal fines. The basis of these guilty pleas
was Caremark's failure to provide certain information to CHAMPUS, FEHBP and
federally funded healthcare benefit programs, concerning financial relationships
between Caremark and a physician in each of Minnesota and Ohio. See
"Business -- Legal Proceedings".

In its agreement with the OIG and DOJ, Caremark agreed to continue to
maintain certain compliance-related oversight procedures. Should these oversight
procedures reveal credible evidence of legal or regulatory violations, Caremark
is required to report such violations to the OIG and DOJ. Caremark is,
therefore, subject to increased regulatory scrutiny and, in the event it commits
legal or regulatory violations, Caremark may be subject to an increased risk of
sanctions or penalties, including disqualification as a provider of Medicare or
Medicaid services, which would have a material adverse effect on the operating
results and financial condition of the Company.

In connection with the matters described above relating to the OIG
Settlement, Caremark is a party to various non-governmental claims and may in
the future become subject to additional OIG-related claims.

10
<PAGE> 12

Caremark is a party to, or the subject of, various private suits and claims
(including stockholder derivative actions and an alleged class action suit)
being asserted in connection with matters relating to the OIG Settlement by
Caremark's stockholders, patients who received healthcare services from Caremark
and such patients' insurers. See the discussion contained in Note 14 to the
Consolidated Financial Statements of Caremark included elsewhere in this
Prospectus. In May 1996, three pharmacies, purporting to represent a class
consisting of all of Caremark's competitors in the alternate site infusion
therapy industry, filed a complaint against Caremark, a subsidiary of Caremark,
and two other corporations in the United States District Court for the District
of Hawaii alleging violations of the federal conspiracy laws, the antitrust laws
and of California's unfair business practices statute. The complaint seeks
unspecified treble damages, and attorneys' fees and expenses. The Company
intends to defend this case vigorously. Although management believes, based on
information currently available, that the ultimate resolution of this matter is
not likely to have a material adverse effect on the operating results and
financial condition of the Company, there can be no assurance that the ultimate
resolution of this matter, if adversely determined, would not have a material
adverse effect on the operating results and financial condition of the Company.

Private Payor Settlements. In March 1996, Caremark agreed to settle all
disputes with a number of private payors. These disputes relate to businesses
that were covered by the OIG Settlement. The settlements resulted in an
after-tax charge of approximately $42.3 million. In addition, the Company will
pay $23.3 million after-tax to cover the private payors' pre-settlement and
settlement-related expenses. An after-tax charge for the above amounts was
recorded in first quarter 1996 discontinued operations. The Company paid the
settlement amounts in September 1996.

As of June 30, 1996, the pre-tax reserve for the costs of settlement of the
OIG Settlement and the settlement with the private payors referred to above and
related matters was approximately $110.0 million. This reserve represented
management's estimate of the ultimate costs relating to the disposition of these
matters. The Company cannot determine at this time what costs may be incurred in
connection with future disposition of non-governmental claims or litigation.
Therefore there can be no assurance that the ultimate costs of these matters
will not exceed such reserve or that additional costs, claims and damages will
not occur. Such additional costs, if incurred, could have a material adverse
effect on the operating results and financial condition of the Company. See Note
14 to the Consolidated Financial Statements of Caremark included elsewhere in
this Prospectus.

Coram Litigation. On September 11, 1995, Coram Healthcare Corporation
("Coram") filed a complaint in the San Francisco Superior Court against Caremark
and its subsidiary, Caremark Inc., and 50 unnamed individual defendants. The
complaint, which arises from Caremark's sale to Coram of Caremark's home
infusion therapy business in April 1995, for approximately $209.0 million in
cash and $100.0 million in securities, alleges breach of the Asset Sale and Note
Purchase Agreement, dated January 29, 1995, as amended April 1, 1995, between
Coram and Caremark, breach of related contracts, fraud, negligent
misrepresentation and a right to contractual indemnity. Requested relief in
Coram's amended complaint includes specific performance, declaratory relief,
injunctive relief and damages of $5.2 billion. Caremark filed counterclaims
against Coram in this lawsuit and also filed a lawsuit in the United States
District Court in Chicago claiming that Coram committed securities fraud in its
sale to Caremark of its securities in connection with the sale of Caremark's
home infusion business to Coram. The lawsuit filed in federal court in Chicago
has been dismissed, and Caremark's appeal of the dismissal was argued on May 10,
1996 and is now under submission. Coram's lawsuit is currently in the discovery
phase. Although management believes, based on information currently available,
that the ultimate resolution of this matter is not likely to have a material
adverse effect on the operating results and financial condition of the Company,
there can be no assurance, that the ultimate resolution of this matter, if
adversely determined, would not materially adversely affect the operating
results and financial condition of the Company.

Caremark Acquisition Litigation. In May 1996, two stockholders, each
purporting to represent a class, filed complaints against Caremark and each of
its directors in the Court of Chancery of the State of Delaware alleging
breaches of the directors' fiduciary duty in connection with Caremark's then
proposed merger with the Company. The complaints seek unspecified damages,
injunctive relief, and attorneys' fees and expenses. The

11
<PAGE> 13

Company believes these complaints will not have a material adverse effect on the
operating results and financial condition of the Company.

RISKS RELATING TO EXPOSURE TO PROFESSIONAL LIABILITY; LIABILITY INSURANCE

In recent years, physicians, hospitals and other participants in the
healthcare industry have become subject to an increasing number of lawsuits
alleging medical malpractice and related legal theories. Many of these lawsuits
involve large claims and substantial defense costs. Although the Company does
not engage in the practice of medicine or provide medical services, or control
the practice of medicine by its affiliated physicians or the compliance with
regulatory requirements directly applicable to the affiliated physicians and
physician groups, there can be no assurance that the Company will not become
involved in such litigation in the future. Through the Company's ownership and
operation of Pioneer Hospital ("Pioneer Hospital"), U.S. Family Care Medical
Center ("USFMC") and Friendly Hills Hospital ("Friendly Hills"), the Company
could be subject to allegations of negligence and wrongful acts arising out of
providing nursing care, emergency room services, credentialing of medical staff
members and other activities incident to the operation of acute care hospitals.
In addition, through its management of clinic locations and provision of
non-physician healthcare personnel, the Company could be named in actions
involving care rendered to patients by physicians employed by or contracting
with affiliated medical organizations and physician groups.

The Company maintains professional and general liability insurance.
Nevertheless, certain types of risks and liabilities are not covered by
insurance and there can be no assurance that the limits of coverage will be
adequate to cover losses in all instances. In addition, the Company's practice
management agreements require the affiliated physicians to maintain professional
liability insurance coverage on their practice and on each employee and agent of
the practice, and the Company generally is indemnified under each of the
practice management agreements by the affiliated physicians for liabilities
resulting from the performance of medical services. There can be no assurance
that a future claim or claims will not exceed the limits of available insurance
coverages or that indemnification will be available for all such claims. See
"Business -- Corporate Liability and Insurance".

GOVERNMENT REGULATION

Federal and state laws regulate the relationships among providers of
healthcare services, physicians and other clinicians. These laws include the
fraud and abuse provisions of the Medicare and Medicaid statutes, which prohibit
the solicitation, payment, receipt or offering of any direct or indirect
remuneration for the referral of Medicare or Medicaid patients or for
recommendation, leasing, arranging, ordering or purchasing of Medicare or
Medicaid covered services, as well as laws that impose significant penalties for
false or improper billings for physician services. These laws also impose
restrictions on physicians' referrals for designated health services to entities
with which they have financial relationships. Violations of these laws may
result in substantial civil or criminal penalties for individuals or entities,
including large civil monetary penalties and exclusion from participation in the
Medicare and Medicaid programs. Such exclusion and penalties, if applied to the
Company's affiliated physicians, could result in significant loss of
reimbursement.

Moreover, the laws of many states, including California (from which a
significant portion of the Company's revenues are derived), prohibit physicians
from splitting fees with non-physicians and prohibit non-physician entities from
practicing medicine. These laws and their interpretations vary from state to
state and are enforced by the courts and by regulatory authorities with broad
discretion. As stated in Note 1 to the Consolidated Financial Statements of the
Company included elsewhere in this Prospectus, the Company believes that it has
perpetual and unilateral control over the assets and operations of the various
affiliated professional corporations. There can be no assurance that regulatory
authorities will not take the position that such control conflicts with state
laws regarding the practice of medicine or other federal restrictions. Although
the Company believes its operations as currently conducted are in material
compliance with existing applicable laws, there can be no assurance that the
existing organization of the Company and its contractual arrangements with
affiliated physicians will not be successfully challenged as constituting the
unlicensed practice of medicine or that the enforceability of the provisions of
such arrangements, including non-competition agreements, will not be limited.
There can be no assurance that review of the business of the

12
<PAGE> 14

Company and its affiliates by courts or regulatory authorities will not result
in a determination that could adversely affect their operations or that the
healthcare regulatory environment will not change so as to restrict existing
operations or expansion thereof. In the event of action by any regulatory
authority limiting or prohibiting the Company or any affiliate from carrying on
its business or from expanding the operations of the Company and its affiliates
to certain jurisdictions, structural and organizational modifications of the
Company may be required, which could have a material adverse effect on the
operating results and financial condition of the Company.

In addition to the regulations referred to above, significant aspects of
the Company's operations are subject to state and federal statutes and
regulations governing workplace health and safety, the operation of pharmacies,
repackaging of drug products, dispensing of controlled substances and the
disposal of medical waste. The Company's operations may also be affected by
changes in ethical guidelines and operating standards of professional and trade
associations and private accreditation commissions such as the American Medical
Association and the Joint Commission on Accreditation of Healthcare
Organizations. Accordingly, changes in existing laws and regulations, adverse
judicial or administrative interpretations of such laws and regulations or
enactment of new legislation could have a material adverse effect on the results
of operations and financial condition of the Company. See "-- Risks Relating to
Pharmacy Licensing and Operation".

As of June 30, 1996, after giving effect to the Acquisitions, approximately
5% of the revenues of the Company's affiliated physician groups is derived from
payments made by government-sponsored healthcare programs (principally, Medicare
and state reimbursed programs). As a result, any change in reimbursement
regulations, policies, practices, interpretations or statutes could adversely
affect the operations of the Company. There are also state and federal civil and
criminal statutes imposing substantial penalties (including civil penalties and
criminal fines and imprisonment) on healthcare providers that fraudulently or
wrongfully bill governmental or other third-party payors for healthcare
services. The Company believes it is in material compliance with such laws, but
there can be no assurance that the Company's activities will not be challenged
or scrutinized by governmental authorities or that any such challenge or
scrutiny would not have a material adverse effect on the operating results and
financial condition of the Company.

Certain provisions of the Social Security Act, commonly referred to as the
"Anti-kickback Statute", prohibit the offer, payment, solicitation, or receipt
of any form of remuneration in return for the referral of Medicare or state
health program patients or patient care opportunities, or in return for the
recommendation, arrangement, purchase, lease or order of items or services that
are covered by Medicare or state health programs. Many states have adopted
similar prohibitions against payments intended to induce referrals of Medicaid
and other third-party payor patients. The Anti-Kickback Statute contains
provisions prescribing civil and criminal penalties to which individuals or
providers who violate such statute may be subjected. The criminal penalties
include fines up to $25,000 per violation and imprisonment for five years or
more. Additionally, the DHHS has the authority to exclude anyone, including
individuals or entities, who has committed any of the prohibited acts from
participation in the Medicare and Medicaid programs. If applied to the Company
or any of its subsidiaries or affiliated physicians, such exclusion could result
in a significant loss of reimbursement for the Company, up to a maximum of the
approximately 5% of revenues derived from such programs. Although the Company
believes that it is not in violation of the Anti-kickback Statute or similar
state statutes, its operations do not fit within any of the existing or proposed
federal safe harbors.

Significant prohibitions against physician referrals were enacted by the
federal Omnibus Budget Reconciliation Act of 1993. Subject to certain
exemptions, a physician or a member of his immediate family is prohibited from
referring Medicare or Medicaid patients to an entity providing "designated
health services" in which the physician has an ownership or investment interest
or with which the physician has entered into a compensation arrangement. While
the Company believes it is in compliance with such legislation, future
regulations could require the Company to modify the form of its relationships
with physician groups. Some states have also enacted similar self-referral laws,
and the Company believes it is likely that more states will 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

13
<PAGE> 15

statutes. Such structural and organizational modifications could materially
adversely affect the operating results and financial condition of the Company.

The Knox-Keene Health Care Service Plan Act of 1975 (the "Knox-Keene Act")
and the regulations promulgated thereunder subject entities which are licensed
as healthcare service plans in California to substantial regulation by the
California Department of Corporations (the "DOC"). In addition, licensees under
the Knox-Keene Act are required to file periodic financial data and other
information (which generally become available to the public), maintain
substantial tangible net equity on their balance sheets and maintain adequate
levels of medical, financial and operational personnel dedicated to fulfilling
the licensee's statutory and regulatory requirements. The DOC is empowered by
law to take enforcement actions against licensees that fail to comply with such
requirements. On March 5, 1996, the DOC issued to Pioneer Provider Network, Inc.
("PPN"), a wholly-owned subsidiary of the Company, a healthcare service plan
license (the "Restricted License"). PPN is a recently created organization
without an operating history, and there is no assurance that the DOC will view
PPN's operations to be fully in compliance with applicable laws, including the
Knox-Keene Act, and regulations. Any material non-compliance could have a
material adverse effect on the operating results and financial condition of the
Company.

RISKS RELATING TO PHARMACY LICENSING AND OPERATION

The Company is subject to federal and state laws and regulations governing
pharmacies. Federal controlled substance laws require the Company to register
its pharmacies with the United States Drug Enforcement Administration and comply
with security, record-keeping, inventory control and labeling standards in order
to dispense controlled substances. State controlled substance laws require
registration and compliance with the licensing, registration or permit standards
of the state pharmacy licensing authority. State pharmacy licensing,
registration and permit laws impose standards on the qualifications of the
applicant's personnel, the adequacy of its prescription fulfillment and
inventory control practices and the adequacy of its facilities. In general,
pharmacy licenses are renewed annually. Pharmacists must also satisfy state
licensing requirements. Any failure to satisfy such pharmacy licensing statutes
and regulations could have a material adverse effect on the operating results
and financial condition of the Company.

RISKS RELATING TO HEALTHCARE REFORM

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

RANKING

The Notes will be general unsecured obligations of the Company ranking
senior in right of payment to all existing and future subordinated indebtedness
of the Company and pari passu in right of payment with all existing and future
unsubordinated and unsecured obligations of the Company. The Notes will be
effectively subordinated to all existing and future secured indebtedness of the
Company and to all existing and future indebtedness and other liabilities of the
Company's subsidiaries. As of June 30, 1996, after giving effect to the Offering
and the use of proceeds therefrom and the Borrowings, and assuming that all of
the outstanding Caremark Notes are purchased in the Debt Tender Offer, the
Company would have had approximately $733.0 million of indebtedness outstanding,
$161.9 million of which would have effectively ranked senior in right of payment
to the Notes and $271.1 million of which would have ranked pari passu with the
Notes. See "Capitalization" and "Description of the Notes".

ABSENCE OF PUBLIC MARKET FOR THE NOTES

The Notes are a new issue of securities for which there is currently no
public market, and there can be no assurance as to the liquidity of any market
for the Notes that may develop, the ability of the holders to sell

14
<PAGE> 16

their Notes or the prices at which holders of the Notes would be able to sell
their Notes. The Company does not intend to list the Notes on any securities
exchange or to seek the admission thereof to trading on the NASDAQ. The Notes
will be tradable in the over-the-counter market, but any such trading may be
limited and sporadic. Each of the Underwriters has advised the Company that it
currently intends to make a market for the Notes, but the Underwriters are not
obligated to do so. Any such market-making may be discontinued by the
Underwriters at any time without notice in their sole discretion. If a market
for the Notes does develop, the Notes may trade at a discount from their initial
public offering price, depending on prevailing interest rates, the market for
similar securities, performance of the Company, performance of the PPM industry
and other factors. No assurance can be given that there will be a liquid trading
market for the Notes or that any trading market that does develop will continue.
See "Underwriting".

15
<PAGE> 17

USE OF PROCEEDS

The net proceeds from the Offering are expected to be approximately $297.3
million. The Company intends to apply the net proceeds of the Offering to
repayment of indebtedness then outstanding under the Credit Facility which is
expected to be approximately $435.0 million immediately prior to the
consummation of the Offering. Borrowings under the Credit Facility have been,
and will be, used to finance the acquisition of certain PPM companies and
physician and medical practices and for working capital and other general
corporate purposes, including the funding of the Debt Tender Offer.

Prior to the consummation of the Offering, the Company intends to borrow
$85.0 million in addition to the $350.0 million outstanding under the Credit
Facility as of September 10, 1996 (Such $85.0 million together with the
approximately $95.0 million that was borrowed under the Credit Facility from
June 30, 1996 to September 10, 1996 are referred to herein as the "Borrowings").
The Credit Facility bears interest at the rate of LIBOR plus 7/8%, which rate
was 6.375% as of September 10, 1996. See "Capitalization" and "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources".

Affiliates of J.P. Morgan & Co. Incorporated and NationsBanc Capital
Markets, Inc. are lenders under the Credit Facility. As of September 10, 1996,
$42.1 million was owed under the Credit Facility to Morgan Guaranty Trust
Company of New York, a wholly-owned subsidiary of J.P. Morgan & Co.
Incorporated, and $54.2 million was owed to NationsBank, National Association
(South), an affiliate of NationsBanc Capital Markets, Inc.

The Company will utilize future borrowings under the Credit Facility to
finance acquisitions of PPM businesses and physician and medical practices, to
fund deferred purchase price obligations and for working capital and other
general corporate purposes. The Company is continuously in discussions with
several potential acquisition candidates; however, there can be no assurance
that any pending acquisitions will be successfully concluded.

16
<PAGE> 18

CAPITALIZATION

The following table sets forth as of June 30, 1996, (i) the actual
capitalization of the Company, (ii) the pro forma capitalization that gives
effect to the Acquisitions (see "Pro Forma Condensed Combined Financial
Information" included elsewhere in this Prospectus), and (iii) the pro forma as
adjusted capitalization that gives effect to the Offering and the application of
the net proceeds therefrom as set forth in "Use of Proceeds".

<TABLE>
<CAPTION>
JUNE 30, 1996
-------------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
-------- ---------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Short-term debt and current portion of long-term debt..... $ 7,648 $ 297,377 $ 42,377
Long-term debt(1)......................................... 35,080 197,022 152,210(2)
% Senior Notes due 2006............................ -- -- 300,000
Stockholders' equity:
Preferred stock, $.001 par value, 9,500,000 shares
authorized; no shares issued and outstanding......... -- -- --
Series C Junior Participating Preferred Stock, $.001 par
value; 500,000 shares authorized; no shares issued
and outstanding...................................... -- -- --
Common Stock, $.001 par value; 200,000,000 shares
authorized; 52,311,000, 146,313,000 and 146,313,000
shares issued and outstanding, respectively(3)....... 52 146 146
Additional paid-in capital(3)........................... 435,618 567,124 567,124
Notes receivable from stockholders...................... (1,818) (1,818) (1,818)
Accumulated deficit..................................... (19,241) 77,943 77,943
-------- ---------- ----------
Total stockholders' equity...................... 414,611 643,395 643,395
-------- ---------- ----------
Total capitalization............................ $457,339 $1,137,794 $ 1,137,982
======== ========== ==========
</TABLE>

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

(1) Excludes approximately $95.0 million borrowed since June 30, 1996 under the
Credit Facility and the $85.0 million the Company intends to borrow under
the Credit Facility prior to the consummation of the Offering to fund
certain expenses relating to the Acquisitions. See "Use of Proceeds".

(2) Assumes that all of the outstanding Caremark Notes are purchased in the Debt
Tender Offer.

(3) Excludes 5,819,610 shares of Common Stock reserved for issuance pursuant to
outstanding stock options as of June 30, 1996. See "Management -- Stock
Option Plans".

17
<PAGE> 19

THE DEBT TENDER OFFER

On September 26, 1996, the Company commenced the Offer for all of the $100
million aggregate principal amount of the Caremark Notes. The purchase price to
be paid for each Caremark Note tendered will be based upon a fixed spread of
37.5 basis points over the yield on the 5 3/4% U.S. Treasury Note due August 15,
2003. Using this formula, the purchase price for the Notes will be set at 2:00
p.m., New York City time, on October 24, 1996, the third business day prior to
the scheduled expiration date of the Offer. For illustration purposes only, if
calculated based upon a yield on September 26, 1996 on the referenced U.S.
Treasury Note, the tender offer yield and purchase price per $1,000 principal
amount of Caremark Note for settlement on September 26, 1996 would be 6.912% and
$997.88, respectively. Such purchase price includes a $5.00 consent payment per
$1,000 principal amount of Note.

In conjunction with the Offer, the Company, on behalf of Caremark, is
soliciting the Consents of the holders of the Caremark Notes to the Proposed
Amendments to the indenture governing the Caremark Notes.

The Proposed Amendments to the Caremark Indenture will eliminate or modify
certain covenants contained in the Caremark Indenture, including, among other
things, the deletion of the limitations on (i) incurrence of indebtedness, (ii)
sale and leaseback transactions and (iii) transfers of properties and assets to
unrestricted subsidiaries of Caremark. Subject to the terms and conditions of
the Solicitation, the Company is offering to pay each holder who consents to the
Proposed Amendments an amount in cash equal to 0.5% of the principal amount of
the Caremark Notes ($5.00 per $1,000 principal amount of Caremark Note).

The Debt Tender Offer will be funded by borrowings under the Credit
Facility.

18
<PAGE> 20

SELECTED HISTORICAL FINANCIAL DATA

SELECTED FINANCIAL DATA

The selected historical financial data of the Company for, and as of the
end of, each of the periods indicated in the five-year period ended December 31,
1995, have been derived from the audited consolidated financial statements of
the Company. The selected historical financial data for each of the six months
ended June 30, 1995 and 1996, and as of June 30, 1996, have been derived from
the unaudited consolidated financial statements of the Company, which reflect,
in the opinion of management of the Company, all adjustments (which include only
normal recurring adjustments) necessary for the fair presentation of the
financial data for such periods. The results for such interim periods are not
necessarily indicative of the results for the full year. The selected financial
data should be read in conjunction with the Consolidated Financial Statements of
the Company and the notes thereto included elsewhere in this Prospectus.

<TABLE>
<CAPTION>
SIX MONTHS
ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------------------------------------ -------------------
1991 1992 1993 1994 1995 1995 1996
-------- -------- -------- -------- ---------- -------- --------
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net revenue........................................ $266,447 $394,878 $549,695 $815,041 $1,153,557 $547,450 $703,683
Operating expenses:
Cost of affiliated physician services............ 97,364 167,488 224,770 349,036 506,811 240,225 301,280
Clinic salaries, wages and benefits.............. 66,596 89,439 112,489 159,010 216,119 105,133 116,600
Outside hospitalization expense.................. 17,411 27,842 59,861 86,974 109,934 50,364 83,516
Clinic rent and lease expense.................... 9,467 11,970 18,832 27,515 41,825 19,744 23,814
Clinic supplies.................................. 15,552 17,996 24,529 34,453 47,744 22,519 30,953
Other clinic costs............................... 19,227 22,648 41,248 67,645 88,991 43,776 59,154
General corporate expenses....................... 18,060 38,099 42,196 56,653 64,713 32,167 39,540
Depreciation and amortization.................... 6,404 9,575 14,057 21,892 29,088 13,962 16,482
Net interest expense............................. 2,098 2,396 3,338 5,958 8,443 3,367 2,811
Merger expenses.................................. -- -- -- -- 66,564 1,051 34,448
Loss (gain) from disposal of assets.............. (3) -- 122 1,627 -- -- --
------- -------- -------- -------- ---------- ---------- ----------
Income (loss) from continuing operations before
pro forma income taxes and cumulative effect of
change in method of accounting................. 14,271 7,425 8,253 4,278 (26,675) 15,142 (4,915)
Pro forma income tax expense (benefit)(1)........ 2,190 7,703 9,723 7,350 (27,233) 4,411 360
------- -------- -------- -------- ---------- ---------- ----------
Pro forma income (loss) from continuing
operations before cumulative effect of change
in method of accounting........................ 12,081 (278) (1,470) (3,072) 558 10,731 (5,275)
Cumulative effect of change in method of
accounting for income taxes.................... (120) -- 298 -- -- -- --
------- -------- -------- -------- ---------- ---------- ----------
Pro forma income (loss) from continuing
operations..................................... 12,201 (278) (1,768) (3,072) 558 10,731 (5,275)
Loss from discontinued operations of clinics..... 279 702 -- -- -- -- --
------- -------- -------- -------- ---------- ---------- ----------
Pro forma net income (loss)...................... $ 11,922 $ (980) $ (1,768) $ (3,072) $ 558 $ 10,731 $ (5,275)
======= ======== ======== ======== ========== ========== ==========
Pro forma net income (loss) per share (1)(2)....... $ 0.97 $ (0.06) $ (0.06) $ (0.08) $ 0.01 $ 0.26 $ (0.11)
Number of shares used in pro forma net income
(loss) per share (2)............................. 12,249 15,308 28,403 36,553 42,720 41,867 50,034
Ratio of earnings to fixed charges(3).............. 3.72x 2.16x 1.70x 1.23x 2.44x 2.20x 3.33x
</TABLE>

<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
---------------------------------------------------- ---------
1991 1992 1993 1994 1995 1996
-------- -------- -------- -------- -------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents...................................... $ 23,677 $ 22,312 $ 43,367 $ 66,623 $ 55,328 $ 56,221
Working capital (deficit)...................................... 11,425 (3,358) 13,023 75,605 91,892 101,038
Total assets................................................... 111,478 181,032 243,758 417,974 576,733 618,184
Short-term debt and current portion of long-term debt.......... 3,741 9,209 11,641 12,656 9,149 7,648
Long-term debt, less current portion........................... 29,369 46,678 48,340 146,498 200,814 35,080
Total stockholders' equity..................................... 30,708 49,281 71,577 109,232 202,717 414,611
</TABLE>

(footnotes on following page)

19
<PAGE> 21

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

(1) Includes pro forma income tax provision giving effect to pooling with
non-taxable entities. See Note 1 to the Consolidated Financial Statements of
the Company.
(2) Pro forma net income (loss) per share is computed, after giving effect to
the pro forma tax provision described above, by dividing net income (loss)
by the number of common equivalent shares outstanding during the periods
presented in accordance with the applicable rules of the Commission. All
stock options issued have been considered as outstanding common equivalent
shares for all periods presented, even if anti-dilutive, under the treasury
stock method. Shares of the common stock of the Original Predecessor issued
in February 1995, upon conversion of the then outstanding convertible
preferred stock are assumed to be common equivalent shares for all periods
presented.

(3) The ratio of earnings to fixed charges is computed by dividing fixed charges
into earnings from continuing operations before income taxes and
extraordinary items, excluding non-recurring charges, plus fixed charges.
Fixed charges include interest, expensed or capitalized, amortization of
debt issuance costs and the interest component of rent expense
(approximately 1/3 of rental expense).

20
<PAGE> 22

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

The following discussion of the results of operations and financial
condition of the Company should be read in conjunction with the Consolidated
Financial Statements of the Company and the notes thereto included elsewhere in
this Prospectus.

GENERAL

The Original Predecessor was incorporated in January 1993, and affiliated
with its initial physician practice in November 1993. MME was formed by the
merger of several physician partnerships in 1994, and the original business was
organized in 1957. The Company is the result of the business combination between
the Original Predecessor and MME, which was consummated in November 1995. As
described in Note 1 to the Audited Consolidated Financial Statements of the
Company included elsewhere in this Prospectus, the financial information
referred to in this discussion reflects the combined operations of several
entities. The Company combined with MEDCTR, Inc., Vanguard Healthcare Group,
Inc., Texas Back Institute, Inc., MME, Cerritos Investment Group, Cerritos
Investment Group II, and 5000 Airport Plaza, L.P. in 1995 and with PPSI in
February 1996 in business combinations that were accounted for as poolings of
interests (collectively, the "Mergers"). Prior to its acquisition by the
Company, PPSI combined with Team Health in a business combination accounted for
as a pooling of interests. In August and September 1996, the Company consummated
the Acquisitions, which were also accounted for as poolings of interests.
Accordingly, the financial statements of the Company for the year ended December
31, 1995 will be restated to reflect the results of operations and financial
condition of Caremark and New Management.

As a result of MedPartners' limited operating history, the business
combinations described above and certain other factors, the Company does not
believe that the period-to-period comparisons, percentage relationships within
periods and apparent trends set forth below are meaningful. See "-- Factors that
May Affect Future Results".

The Company acquires existing medical practices and enters into long-term
contractual relationships pursuant to practice management agreements, for
periods ranging from 20 to 44 years, to provide management and administrative
services. The Company believes that the practice management agreements convey to
the Company perpetual, unilateral control over the assets and operations of the
various affiliated professional corporations. Notwithstanding the lack of
technical majority ownership of the stock of such entities, consolidation of the
professional corporations is necessary to present fairly the financial position
and results of operations of the Company because there exists a
parent-subsidiary relationship by means other than record ownership of a
majority of voting stock. Control by the Company is perpetual rather than
temporary because of (i) the length of the original term of the agreements, (ii)
the continuing investment of capital by the Company, (iii) the employment of the
majority of the non-physician personnel, and (iv) the nature of the services
provided to the professional corporations by the Company. The Company's
financial relationship with each practice offers the physicians access to
capital, management expertise, sophisticated information systems, and managed
care contracts. The Company's revenue is derived from medical services provided
by physicians under the practice management agreements, which revenue has been
assigned to the Company. Approximately 50% of this revenue is derived through
contracts for prepaid healthcare with HMOs. The Company contracts directly with
the HMOs to provide medical services to HMO enrollees who have chosen the
Company's affiliated physicians, or, in some cases, physicians who are members
of the Company's IPAs. The Company also contracts with hospitals to provide
medical staff for various hospital departments. The Company's profitability
depends on enhancing operating efficiency, expanding healthcare services
provided, increasing market share and assisting affiliated physicians in
managing the delivery of medical care.

The nature of the affiliated practices affects the cost of affiliated
physician services, clinic salaries, wages and benefits, clinic supplies and
depreciation and amortization. These expenses as a percentage of net revenue
will vary based on the mix of primary care and office-based (i.e., non-surgery)
practices to specialty care practices and the mix of capitated business. Primary
care includes family practice, internal medicine, pediatrics and
obstetrics/gynecology. Generally, primary care and office-based practices are
less capital

21
<PAGE> 23

intensive but require a higher number of employees per physician to operate and
maintain than specialty care practices. Typically, the Company endeavors to
achieve an equal number of primary care physicians and specialists in each
network. Institutional capitation increases revenues without a material impact
on many of the clinic expenses.

RESULTS OF OPERATIONS

The following table sets forth, for the periods indicated, the percentage
of net revenue represented by the following items:

<TABLE>
<CAPTION>
SIX MONTHS
ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------- ---------------
1993 1994 1995 1995 1996
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Net revenue(1)............................. 100.0% 100.0% 100.0% 100.0% 100.0%
Operating expenses:
Cost of affiliated physician
services(2)........................... 40.9 42.8 43.9 43.9 42.8
Clinic salaries, wages and benefits...... 20.5 19.5 18.7 19.2 16.6
Outside hospitalization expense.......... 10.9 10.7 9.5 9.2 11.9
Clinic rent and lease expense............ 3.4 3.4 3.6 3.6 3.4
Clinic supplies.......................... 4.5 4.2 4.1 4.1 4.4
Other clinic costs....................... 7.5 8.3 7.7 8.0 8.4
General corporate expenses............... 7.7 7.0 5.6 5.9 5.6
Depreciation and amortization............ 2.5 2.7 2.6 2.5 2.3
Net interest expense..................... 0.6 0.7 0.7 0.6 0.4
Merger expenses.......................... 0.0 0.0 5.9 0.2 4.9
Loss on disposal of assets............... 0.0 0.2 0.0 0.0 0.0
Pro forma income tax expense (benefit)... 1.8 0.9 (2.3) 0.8 0.0
----- ----- ----- ----- -----
Pro forma net (loss) income...... (0.3)% (0.4)% 0.0% 2.0% (0.7)%
===== ===== ===== ===== =====
</TABLE>

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

(1) "Net revenue" means gross clinic charges less allowances for contractual
adjustments.
(2) "Cost of affiliated physician services" consists solely of the total
payments made to each of the affiliated practices for medical services
rendered under its respective practice management agreement.

The following table sets forth the breakdown of net revenue for the periods
indicated:

<TABLE>
<CAPTION>
SIX MONTHS
ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------- ---------------
1993 1994 1995 1995 1996
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Prepaid healthcare......................... 66.7% 62.5% 53.8% 53.4% 48.5%
Fee-for-service............................ 31.4 36.1 44.7 45.3 50.5
Other...................................... 1.9 1.4 1.5 1.3 1.0
----- ----- ----- ----- -----
Net revenue...................... 100.0% 100.0% 100.0% 100.0% 100.0%
===== ===== ===== ===== =====
</TABLE>

Enrollment

The Company's prepaid healthcare revenue is reflective of the number of HMO
enrollees for whom it receives monthly capitation payments. Enrollment is
categorized as either "commercial enrollment" (enrollees generally under the age
of 65 whose health coverage is sponsored by employers) or "senior enrollment"
(enrollees over the age of 65 who are retired and whose coverage is sponsored by
Medicare). The Company receives professional capitation to provide physician
services and institutional capitation to provide hospital care and other
non-professional services. The table below sets forth the changes in enrollment
for professional and institutional capitation. Most of the enrollment growth is
related to acquisitions and increased enrollment in the northern California
operations.

<TABLE>
<CAPTION>
COMMERCIAL SENIOR TOTAL
ENROLLEES ENROLLEES OTHER ENROLLEES
---------- --------- ------ ---------
<S> <C> <C> <C> <C>
PROFESSIONAL CAPITATION:
December 31, 1995.................................. 607,772 60,345 14,427 682,544
December 31, 1994.................................. 550,672 50,330 3,374 604,376
December 31, 1993.................................. 500,229 44,563 1,239 546,031
</TABLE>

22
<PAGE> 24

<TABLE>
<CAPTION>
COMMERCIAL SENIOR TOTAL
ENROLLEES ENROLLEES OTHER ENROLLEES
---------- --------- ------ ---------
<S> <C> <C> <C> <C>
INSTITUTIONAL CAPITATION:
December 31, 1995.................................. 313,630 34,744 7,747 356,121
December 31, 1994.................................. 235,174 20,014 -- 255,188
December 31, 1993.................................. 227,561 11,431 -- 238,992
PROFESSIONAL CAPITATION:
June 30, 1996...................................... 694,093 66,457 37,715 798,265
June 30, 1995...................................... 551,176 56,133 55,194 662,503
INSTITUTIONAL CAPITATION:
June 30, 1996...................................... 318,331 36,345 11,636 366,312
June 30, 1995...................................... 258,305 32,681 7,223 298,209
</TABLE>

Six Months Ended June 30, 1996 and 1995

For the six months ended June 30, 1996, net revenue was $703.7 million,
compared to $547.5 million for the same period in 1995. The increase in net
revenue partially resulted from the affiliation with new physician practices and
the increase in prepaid enrollees, which accounted for $73.1 million and $48.7
million of the increase in net revenue, respectively. The remaining increase
primarily related to existing clinic growth.

Excluding non-recurring items related to the merger with PPSI, operating
expenses, at the clinic level were $615.3 million, or 87.4% of net revenue for
the six months ended June 30, 1996 compared to $481.8 million or 88.0% of net
revenue for the six months ended June 30, 1995. Clinic salaries, wages and
benefits decreased as a percentage of net revenue from the six months ended June
30, 1995 to the six months ended June 30, 1996 as certain operational
efficiencies were implemented and the IPA business, which requires a low support
staff ratio, continued to grow. Outside hospitalization expense increased from
$50.4 million for the six months ended June 30, 1995 to $83.5 million for the
six months ended June 30, 1996, and also increased as a percentage of net
revenue from 9.2% for the six months ended June 30, 1995 to 11.9% for the six
months ended June 30, 1996. This increase is directly related to the increase of
the Company's global capitation and increase in IPA business. General corporate
expenses increased from $32.2 million during the six months ended June 30, 1995
to $39.5 million during the six months ended June 30, 1996. As a percent of net
revenue, general corporate expenses decreased from 5.9% in the six months ended
June 30, 1995 to 5.6% in the six months ended June 30, 1996.

Included in pre-tax loss for the six months ended June 30, 1996 were merger
expenses totaling $34.4 million relating to the merger with PPSI. The major
components of the $34.4 million included: $13.7 million for restructuring of
operations, $6.6 million in brokerage fees, $5.9 million in severance costs,
$2.6 million in professional fees, $1.4 million for the impairment of assets and
$1.9 million in unamortized bond issue costs.

Years Ended December 31, 1995 and 1994

Net revenue for the year ended December 31, 1995 was $1,153.6 million, an
increase of $338.5 million, or 41.5%, over the year ended December 31, 1994. The
increase in net revenue primarily resulted from affiliation with physician
groups in nine new markets and the increase in prepaid enrollees, which
accounted for $75.6 million and $110.8 million of the increase in net revenue,
respectively. The remaining increase primarily related to existing clinic growth
and a full year of operations in 1995 for affiliations only in effect for a
portion of 1994.

Excluding nonrecurring items related to the Mergers, operating expenses at
the clinic level were $1,011.4 million, or 87.7% of net revenue for the year
ended December 31, 1995, compared to $724.6 million, or 88.9% of net revenue for
1994. Clinic salaries, wages and benefits decreased as a percentage of net
revenue during 1995 as certain operational efficiencies were implemented and the
IPA business, which requires a low support staff ratio, continued to grow.
Outside hospitalization expense increased from $87.0 million for the year ended
December 31, 1994 to $109.9 million for the year ended December 31, 1995, but
decreased as a percentage of net revenue from 10.7% for the year ended December
31, 1994 to 9.5% for the year ended December 31, 1995. This percentage decrease
related to the decline in the relationship of prepaid healthcare to total net
revenue. General corporate expenses increased from $56.7 million during the year
ended December 31, 1994 to $64.7 million during the year ended December 31,
1995. As a percentage of net revenue, however, general corporate expenses
decreased from 7.0% in 1994 to 5.6% in 1995. Net income (excluding merger
expenses) for the year ended December 31, 1995 was $25.3 million compared to a
loss of $3.1 million for 1994.

23
<PAGE> 25

Including merger expenses, net income for the year ended December 31, 1995
was $.6 million compared to a net loss of $3.1 million for 1994. Included in
operating expenses for 1995 are merger expenses totaling $66.6 million related
to business combinations accounted for as poolings of interests. Approximately
$55.6 million related to the business combination with MME and its real estate
partnerships. The components of the total $66.6 million charge included: $8.8
million in investment banking fees, $7.3 million in professional fees, $5.0
million in other transaction costs and $45.5 million in restructuring charges.
The major components of the restructuring charge included: $19.6 million in
severance for identified employees, $8.1 million for impairment of assets, $6.4
million for abandonment of facilities, $2.6 million in noncompatible technology,
$2.3 million in unamortized loan costs, $2.2 million related to conforming of
accounting policies and $1.9 million in restructuring of benefit packages.

As of December 31, 1995, the Company had a cumulative net operating loss
carryforward for federal income tax purposes of approximately $57.0 million
available to reduce future amounts of taxable income. If not utilized to offset
future taxable income, the net operating loss carryforwards will expire on
various dates through 2010. Approximately $1.0 million of the $57.0 million net
operating loss carryforward (which was generated in 1993) is available at a
reduced rate due to certain tax limitations.

In 1994, the Company established a valuation allowance of $14.6 million
because it was more likely than not that the deferred tax asset would not be
utilized in future periods. The valuation allowance was decreased by $14.2
million in 1995 because the realization of the deferred tax asset is now more
likely than not. The primary factor in the determination of the realization of
the deferred tax asset is the profitability of the ongoing business of the
Company ($25.3 million net income for 1995 excluding merger expenses).

Years Ended December 31, 1994 and 1993

For the year ended December 31, 1994, net revenue was $815.0 million
compared to $549.7 million for the year ended December 31, 1993. The increase in
net revenue resulted from the affiliation with 46 physician groups (representing
283 physicians) since December 31, 1993 and the enrollment growth of 58,000
lives under professional capitation and 16,000 lives under institutional
capitation.

The percentage increase in cost of affiliated physician services from 40.9%
of net revenues in 1993 to 42.8% in 1994 was a result of the commencement of
operations of the Company's clinics. The Company (exclusive of the Mergers) had
a comparable percentage of 62.2%. The decrease in clinic salaries, wages and
benefits from 20.5% of net revenues in 1993 to 19.5% in 1994 was also a result
of the commencement of operations of the Company's clinics. The Company
(exclusive of the Mergers) had a comparable percentage of 16.5%.

Clinic rent and lease expense was 3.4% of net revenue for the years ended
December 31, 1994 and December 31, 1993. Other clinic costs were 7.5% of net
revenue for 1993 and 8.3% for 1994.

Net interest expense (income) as a percentage of net revenue will vary
based on the purchase price for the assets of additional practices, the interest
rates for additional borrowings and the amount of excess cash available for
investment. The increase in net interest expense in 1994 was the result of
increased borrowings to fund acquisitions.

Due to the Company's limited operating history and cumulative operating
losses, a valuation allowance was established to eliminate deferred tax benefits
generated through December 31, 1994.

FACTORS THAT MAY AFFECT FUTURE RESULTS

The future operating results and financial condition of the Company are
dependent on the Company's ability to market its services profitably,
successfully increase market share and manage expense growth relative to revenue
growth. Additionally, the future operating results and financial condition of
the Company may be affected by a number of other factors including: the
Company's growth strategy which involves the ability to raise the capital
required to support growth, competition for expansion opportunities, integration
risks and dependence on HMO enrollee growth; the capitated nature of revenues
and control of healthcare costs; exposure to professional liability; and
pharmacy licensing, healthcare reform and government regulation. Changes in one
or more of these factors could have a material adverse effect on the operating
results and financial condition of the Company. See "Risk Factors".

The Company completed the Caremark Acquisition in early September 1996.
There are various Caremark legal matters which, if materially adversely
determined, could have a material adverse effect on the Company's operating
results and financial condition. See "Risk Factors -- Risks Relating to Certain
Caremark Legal Matters" and "Business -- Legal Proceedings".

24
<PAGE> 26

LIQUIDITY AND CAPITAL RESOURCES

As of June 30, 1996, the Company had working capital of $101.0 million,
including cash and cash equivalents of $56.2 million. For the first six months
of 1996, cash flow from operations, excluding $25.9 million cash paid during the
six months for merger expenses, was $6.0 million. For the year ended December
31, 1995, cash flow used in operations was $13.5 million. This included $28.0
million in cash paid for merger expenses. Net of these expenses, the Company
experienced cash flow from operations of $14.5 million. For the years ending
December 31, 1993 and 1994, cash flow provided by operations was $30.6 million
and $13.7 million, respectively. The Company has reduced the medical claims
outstanding to levels below that required in its agreements with HMOs, and it
does not expect this to have a negative impact on future cash flows from
operations. On a monthly basis, the Company's most significant expenditure is
for affiliated physician services. Payment is made on the fifteenth day of the
month following the month in which the services were provided.

For the six months ended June 30, 1996, the Company invested $29.7 million
in acquisitions of the assets of physician practices, $21.8 million in equipment
for the physician practices and the corporate office and $4.5 million in
intangible assets related to corporate name/trademarks and other intangible
assets. For the year ended December 31, 1995, the Company invested $61.5 million
in acquisitions of the assets of physician practices, $39.4 million in equipment
for the physician practices and the corporate office and $7.2 million in
intangible assets related to debt issue costs, corporate name/trademarks and
other intangible assets. For the year ended December 31, 1994, the Company's
investing activities totaled $108.5 million, which primarily was composed of
$57.6 million related to practice acquisitions and $32.1 million related to the
purchase of property and equipment. These expenditures were funded from
approximately $116.3 million from equity proceeds and $7.8 million in net
incremental borrowings. For the year ended December 31, 1993, the Company's
investing activities totaled $37.6 million of which $14.3 million related to
practice acquisitions and $15.6 million related to the purchase of property and
equipment. These expenditures were funded by $42.7 million derived from equity
proceeds.

In February 1995, the Original Predecessor completed a public offering of
5.1 million shares of its common stock. Net proceeds of the offering were
approximately $60.4 million, $30.4 million of which was applied to reduce the
indebtedness then outstanding under the Original Predecessor's credit facility.
In March 1996, the Company completed a public offering of 6.6 million shares of
Common Stock. Net proceeds of the offering were approximately $194.0 million,
$70.0 million of which was applied to reduce the indebtedness then outstanding
under the Company's then-existing credit facility and $69.0 million of which was
used to repay the outstanding convertible subordinated debentures of the
Company.

In September 1996, the Company replaced its $150.0 million credit facility
with the Credit Facility. Interest on outstanding borrowings under the Credit
Facility is initially paid quarterly based on LIBOR plus 7/8%. After December
31, 1996, interest on outstanding borrowings under the Credit Facility will be
based on the Company's debt to EBITDA (as defined in the Credit Facility) ratio
or the Company's public debt ratings, at the Company's option. Outstanding
principal under the Credit Facility is payable at maturity in September 2001. As
of September 10, 1996, after giving effect to the Acquisitions, approximately
$350.0 million in borrowings were outstanding under the Credit Facility.

The Credit Facility contains affirmative and negative covenants which,
among other things, require the Company to maintain certain financial ratios
(including minimum net worth, minimum fixed charge coverage ratio, maximum
indebtedness to cash flow), limit the amount of additional subsidiary
indebtedness, and set certain restrictions on investments, mergers and sales of
assets. The Company also provided a negative pledge on substantially all of its
assets under the Credit Facility.

The Company intends to acquire the assets of additional physician practices
and to fund this growth with existing cash and cash equivalents and borrowings
under the Credit Facility. The Company believes that its existing cash resources
(including the net proceeds from the Notes), the use of Common Stock for
selected practice and other acquisitions, and available borrowings under the
Credit Facility or any successor credit facility, will be sufficient to meet the
Company's anticipated acquisition, expansion and working capital needs for the
next twelve months. The Company expects from time to time to raise additional
capital through the issuance of long-term or short-term indebtedness or the
issuance of additional equity securities in private or public transactions, at
such times and terms as management deems appropriate and the market allows, in
order to meet the capital needs of the Company.

25
<PAGE> 27

QUARTERLY RESULTS (UNAUDITED)

The following table sets forth certain unaudited quarterly financial data
for 1994, 1995 and 1996. In the opinion of the Company's management, this
unaudited information has been prepared on the same basis as the audited
information and includes all adjustments (consisting of normal recurring items)
necessary to present fairly the information set forth therein. The operating
results for any quarter are not necessarily indicative of results for any future
period.

<TABLE>
<CAPTION>
QUARTER ENDED
---------------------------------------------------------------------------------------------------------
SEPTEMBER 30, DECEMBER 31, MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, MARCH 31, JUNE 30,
1994 1994 1995 1995 1995 1995 1996 1996
------------- ------------ --------- -------- ------------- ------------ --------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net revenue........... $ 210,189 $234,422 $259,750 $287,700 $ 299,272 $306,835 $343,285 $360,398
Operating expenses:
Cost of affiliated
physician
services.......... 91,791 97,001 114,272 125,953 132,631 133,955 148,662 152,618
Clinic salaries,
wages and
benefits.......... 38,862 43,889 50,570 54,563 53,760 57,226 56,762 59,838
Outside
hospitalization
expense........... 20,436 26,435 22,193 28,171 30,796 28,774 35,668 47,849
Clinic rent and
lease
expense........... 7,094 8,370 9,717 10,027 10,518 11,563 11,693 12,121
Clinic supplies..... 8,002 10,568 10,983 11,536 11,704 13,521 15,014 15,938
Other clinic
costs............. 15,953 21,005 20,711 23,065 23,661 21,554 31,285 27,868
General corporate
expenses.......... 15,808 13,809 15,703 16,464 15,697 16,849 19,414 20,126
Depreciation and
amortization...... 5,631 6,448 6,605 7,357 7,384 7,742 8,174 8,308
Net interest
expense........... 1,654 1,903 1,885 1,482 2,042 3,034 3,232 (421)
Merger expenses..... -- -- -- 1,051 3,473 62,040 34,448 --
Loss on disposal of
assets............ 412 413 -- -- -- -- -- --
-------- -------- -------- -------- -------- -------- -------- --------
Income (loss) before
taxes............... 4,546 4,581 7,111 8,031 7,606 (49,423) (21,067 ) 16,153
Pro forma income tax
expense (benefit)... 2,363 2,764 2,176 2,235 2,427 (34,071) (5,769 ) 6,129
-------- -------- -------- -------- -------- -------- -------- --------
Pro forma net income
(loss).............. $ 2,183 $ 1,817 $ 4,935 $ 5,796 $ 5,179 $(15,352) $(15,298 ) $ 10,024
======== ======== ======== ======== ======== ======== ======== ========
</TABLE>

The Company's historical unaudited quarterly financial data have been
restated to include the results of all businesses acquired prior to June 30,
1996, that were accounted for as poolings of interests. The Company's Quarterly
Reports on Form 10-Q were filed prior to the Mergers and thus, differ from the
amounts for the quarters included herein. The differences caused solely by the
operation of the merged companies are summarized as follows:

<TABLE>
<CAPTION>
QUARTER ENDED
-----------------------------------------------------------------------------------------
MARCH 31, 1995 JUNE 30, 1995 SEPTEMBER 30, 1995 MARCH 31, 1996
-------------------- -------------------- -------------------- --------------------
AS AS AS AS
FORM 10-Q RESTATED FORM 10-Q RESTATED FORM 10-Q RESTATED FORM 10-Q RESTATED
--------- -------- --------- -------- --------- -------- --------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net revenue................ $45,667 $259,750 $57,272 $287,700 $76,019 $299,272 $332,549 $343,285
Income (loss) before income
taxes.................... 765 7,111 820 8,031 2,265 7,606 (21,435 ) (21,067)
Income tax expense
(benefit)................ 291 2,176 260 2,235 770 2,427 (5,935 ) (5,769)
Net income (loss).......... 474 4,935 560 5,796 1,495 5,179 (15,500 ) (15,298)
</TABLE>

26
<PAGE> 28

PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION

The following Pro Forma Condensed Combined Financial Information reflects
the Acquisitions and are based upon the historical Consolidated Financial
Statements of the Company, Caremark and New Management included elsewhere in
this Prospectus. The Pro Forma Condensed Combined Statements of Operations
assume that the Acquisitions were consummated at the beginning of the earliest
period presented. The Pro Forma Condensed Combined Balance Sheet assumes that
the transactions were consummated on June 30, 1996.

The Pro Forma Condensed Combined Financial Information contains no
adjustments to conform the accounting policies of these companies because any
such adjustments have been determined to be immaterial. The Pro Forma Condensed
Combined Financial Information is presented for information purposes only and
does not purport to represent the results of operations of the Company that
actually would have occurred had the Acquisitions been consummated on the dates
indicated or that may be obtained in the future.

SELECTED PRO FORMA FINANCIAL INFORMATION
(UNAUDITED)

<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE
YEAR ENDED DECEMBER 31, 30,
------------------------------------ -----------------------
1993 1994 1995 1995 1996
---------- ---------- ---------- ---------- ----------
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net revenue................................................ $1,756,762 $2,593,329 $3,530,768 $1,669,100 $2,273,270
Operating expenses:
Affiliated physician services............................ 272,128 412,075 631,407 292,505 422,943
Outside medical expenses................................. 70,427 102,496 149,185 64,556 156,506
Clinic expenses.......................................... 284,509 413,969 683,927 305,731 491,462
Non-clinic goods and services............................ 884,014 1,365,203 1,688,075 829,681 985,531
General and administrative expenses...................... 123,468 145,937 142,952 73,492 69,946
Depreciation and amortization............................ 25,464 40,816 57,643 26,875 41,182
Net interest expense..................................... 7,021 14,885 17,447 8,451 12,100
Merger expenses.......................................... -- -- 66,564 1,051 34,448
Loss on investments...................................... -- -- 86,600 -- --
Other, net............................................... (1,574) (143) (192) (401) (373)
---------- ---------- ---------- ---------- ----------
Net operating expenses..................................... 1,665,457 2,495,238 3,523,608 1,601,941 2,213,745
Income before income taxes and discontinued operations..... 91,305 98,091 7,160 67,159 59,525
Income tax expense (benefit)............................... 43,126 44,022 (15,966) 24,713 23,348
Cumulative effect of change in method of accounting for
income taxes............................................. 298 -- -- -- --
---------- ---------- ---------- ---------- ----------
Income from continuing operations.......................... 47,881 54,069 23,126 42,446 36,177
Loss (income) from discontinued operations................. (30,808) (25,902) 136,528 139,531 66,799
---------- ---------- ---------- ---------- ----------
Net income (loss).......................................... $ 78,689 $ 79,971 $ (113,402) $ (97,085) $ (30,622)
========== ========== ========== ========== ==========
Net income (loss) per share(1)............................. $ 0.66 $ 0.63 $ (0.85) $ (0.73) $ (0.21)
========== ========== ========== ========== ==========
Number of shares used in net income (loss) per share
calculations(1)(2)....................................... 119,380 127,409 133,939 132,723 144,036
========== ========== ========== ========== ==========
Income per share, excluding merger expenses, discontinued
operations and extraordinary item........................ $ 0.40 $ 0.42 $ 0.47 $ 0.32 $ 0.40
</TABLE>

<TABLE>
<CAPTION>
JUNE 30,
1996
--------------
(IN THOUSANDS)
<S> <C>
BALANCE SHEET DATA:
Cash and cash equivalents....................................................................... $ 119,396
Working capital (deficit)....................................................................... (85,480)
Total assets.................................................................................... 1,987,262
Short-term debt and current portion of long-term debt........................................... 297,377
Long-term debt, less current portion............................................................ 197,022
Total stockholders' equity...................................................................... 643,395
</TABLE>

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

27
<PAGE> 29

PRO FORMA CONDENSED COMBINED BALANCE SHEET
(UNAUDITED)
JUNE 30, 1996

<TABLE>
<CAPTION>
HISTORICAL
-------------------------------------
NEW PRO FORMA PRO FORMA
MEDPARTNERS CAREMARK MANAGEMENT ADJUSTMENTS COMBINED
----------- ---------- ---------- ----------- ----------
(A) (IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents......................... $ 56,221 $ 63,000 $ 175 $ -- $ 119,396
Accounts receivable less allowance for bad
debts........................................... 165,105 376,300 -- -- 541,405
Inventories....................................... 11,087 99,600 -- -- 110,687
Prepaid expenses and other current assets......... 23,839 23,800 59 -- 47,698
Deferred tax assets............................... 4,139 64,200 -- 92,800(C) 161,139
-------- ---------- ------- --------- ----------
Total current assets........................ 260,391 626,900 234 92,800 980,325
Property and equipment, net......................... 167,502 366,700 -- (128,100)(C) 406,102
Intangible assets, net.............................. 139,169 320,500 -- -- 459,669
Deferred tax assets................................. 34,285 -- -- -- 34,285
Other assets........................................ 16,837 89,500 544 -- 106,881
-------- ---------- ------- --------- ----------
Total assets................................ $ 618,184 $1,403,600 $ 778 $ (35,300) $1,987,262
======== ========== ======= ========= ==========
LIABILITIES AND STOCKHOLDERS'
EQUITY (DEFICIT)
Current liabilities:
Accounts payable.................................. $ 29,084 $ 357,000 $ 5 $ 92,800(C) $ 478,889
Payable to physician groups....................... 28,616 -- -- -- 28,616
Accrued medical claims payable.................... 44,235 29,700 -- -- 73,935
Other accrued expenses and liabilities............ 49,770 137,200 18 -- 186,988
Short-term debt and current portion of long-term
debt............................................ 7,648 289,600 129 -- 297,377
-------- ---------- ------- --------- ----------
Total current liabilities................... 159,353 813,500 152 92,800 1,065,805
Long-term debt, net of current portion.............. 35,080 130,200 2,642 29,100(C) 197,022
Other long-term liabilities......................... 9,140 71,900 -- -- 81,040
Stockholders' equity (deficit):
Common stock...................................... 52 82,200 -- (82,106)(D) 146
Additional paid-in capital........................ 435,618 199,600 -- 82,106(D) 717,324
Shares held in trust.............................. -- (150,200) -- -- (150,200)
Notes receivable from shareholders................ (1,818) -- -- -- (1,818)
Unrealized loss on marketable equity securities... -- -- -- -- --
Accumulated earnings (deficit).................... (19,241) 256,400 (2,016) (157,200)(C) 77,943
-------- ---------- ------- --------- ----------
Total stockholders' equity (deficit)........ 414,611 388,000 (2,016) (157,200) 643,395
-------- ---------- ------- --------- ----------
Total liabilities and stockholders' equity
(deficit)................................. $ 618,184 $1,403,600 $ 778 $ (35,300) $1,987,262
======== ========== ======= ========= ==========
</TABLE>

28
<PAGE> 30

PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
(UNAUDITED)
SIX MONTHS ENDED JUNE 30, 1996

<TABLE>
<CAPTION>
HISTORICAL
-------------------------------------- PRO PRO
NEW FORMA FORMA
MEDPARTNERS CAREMARK MANAGEMENT ADJUSTMENTS COMBINED
------------ ---------- ---------- ----------- ----------
(A) (IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C> <C> <C>
Net revenue.............................. $703,683 $1,569,587 $1,314 $(1,314)(B) $2,273,270
Operating expenses:
Affiliated physician services.......... 301,280 121,663 -- -- 422,943
Outside medical expenses............... 83,516 72,990 -- -- 156,506
Clinic expenses........................ 252,765 238,697 -- -- 491,462
Non-clinic goods and services.......... -- 985,531 -- -- 985,531
General and administrative expenses.... 17,296 52,650 207 (207)(B) 69,946
Depreciation and amortization.......... 16,482 24,700 -- -- 41,182
Net interest expense................... 2,811 9,289 108 (108)(B) 12,100
Merger expenses........................ 34,448 -- -- -- 34,448
Other, net............................. -- (373) -- -- (373)
-------- -------- ------- ----- -------
Net operating expenses.......... 708,598 1,505,147 315 (315) 2,213,745
-------- -------- ------- ----- -------
Income (loss) before income taxes and
discontinued operations................ (4,915) 64,440 999 (999) 59,525
Income tax expense....................... 360 22,988 -- -- 23,348
-------- -------- ------- ----- -------
Income (loss) from continuing
operations............................. (5,275) 41,452 999 (999) 36,177
Loss from discontinued operations........ -- 66,799 -- -- 66,799
-------- -------- ------- ----- -------
Net income (loss)........................ $ (5,275) $ (25,347) $ 999 $ (999) $ (30,622)
======== ======== ======= ===== =======
Net income (loss) per share.............. $ (0.11) $ (0.33) $ 2.87 $ (0.21)
======== ======== ======= =======
Number of shares used in net income
(loss) per share calculations.......... 50,034 77,400 348(E) 16,254(F) 144,036
======== ======== ======= ===== =======
</TABLE>

29
<PAGE> 31

PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
(UNAUDITED)
SIX MONTHS ENDED JUNE 30, 1995

<TABLE>
<CAPTION>
HISTORICAL
------------------------------------- PRO PRO
NEW FORMA FORMA
MEDPARTNERS CAREMARK MANAGEMENT ADJUSTMENTS COMBINED
----------- ---------- ---------- ----------- ----------
(A) (IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C> <C> <C>
Net revenue............................... $ 547,450 $1,120,126 $1,524 $ -- $1,669,100
Operating expenses:
Affiliated physician services........... 240,225 52,280 -- -- 292,505
Outside medical expenses................ 50,364 14,192 -- -- 64,556
Clinic expenses......................... 209,885 95,846 -- -- 305,731
Non-clinic goods and services........... -- 829,681 -- -- 829,681
General and administrative expenses..... 13,454 59,890 148 -- 73,492
Depreciation and amortization........... 13,962 12,913 -- -- 26,875
Net interest expense.................... 3,367 4,971 113 -- 8,451
Merger expenses......................... 1,051 -- -- -- 1,051
Other, net.............................. -- (401) -- -- (401)
----------- ---------- ---------- ----------- ----------
Net operating expenses........... 532,308 1,069,372 261 -- 1,601,941
----------- ---------- ---------- ----------- ----------
Income before income taxes and
discontinued
operations.............................. 15,142 50,754 1,263 -- 67,159
Income tax expense........................ 4,411 20,302 -- -- 24,713
----------- ---------- ---------- ----------- ----------
Income from continuing operations......... 10,731 30,452 1,263 -- 42,446
Loss from discontinued operations......... -- 139,531 -- -- 139,531
----------- ---------- ---------- ----------- ----------
Net income (loss)......................... $ 10,731 $ (109,079) $1,263 $ -- $ (97,085)
=========== ========== =========== =========== ==========
Net income (loss) per share............... $ 0.26 $ (1.47) $ 3.63 $ (0.73)
=========== ========== =========== ==========
Number of shares used in net income (loss)
per share calculations.................. 41,867 74,800 348(E) 15,708(F) 132,723
=========== ========== =========== =========== ==========
</TABLE>

30
<PAGE> 32

PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
(UNAUDITED)
YEAR ENDED DECEMBER 31, 1995

<TABLE>
<CAPTION>
HISTORICAL
------------------------------------- PRO PRO
NEW FORMA FORMA
MEDPARTNERS CAREMARK MANAGEMENT ADJUSTMENTS COMBINED
----------- ---------- ---------- ----------- ----------
(A) (IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C> <C> <C>
Net revenue.............................. $1,153,557 $2,374,263 $2,948 $ -- $3,530,768
Operating expenses:
Affiliated physician services.......... 506,811 124,596 -- -- 631,407
Outside medical expenses............... 109,934 39,251 -- -- 149,185
Clinic expenses........................ 433,092 250,835 -- -- 683,927
Non-clinic goods and services.......... -- 1,688,075 -- -- 1,688,075
General and administrative expenses.... 26,300 116,338 314 -- 142,952
Depreciation and amortization.......... 29,088 28,555 -- -- 57,643
Net interest expense................... 8,443 8,780 224 -- 17,447
Merger expenses........................ 66,564 -- -- -- 66,564
Loss on investments.................... -- 86,600 -- -- 86,600
Other, net............................. -- (192) -- -- (192)
----------- ---------- ---------- ----------- ----------
Net operating expenses.......... 1,180,232 2,342,838 538 -- 3,523,608
----------- ---------- ---------- ----------- ----------
Income (loss) before income taxes and
discontinued operations................ (26,675 ) 31,425 2,410 -- 7,160
Income tax expense (benefit)............. (27,233 ) 11,267 -- -- (15,966)
----------- ---------- ---------- ----------- ----------
Income from continuing operations........ 558 20,158 2,410 -- 23,126
Loss from discontinued operations........ -- 136,528 -- -- 136,528
----------- ---------- ---------- ----------- ----------
Net income (loss)........................ $ 558 $ (116,370) $2,410 $ -- $ (113,402)
=========== ========== =========== =========== ==========
Net income (loss) per share.............. $ 0.01 $ (1.55) $ 6.93 $ (0.85)
=========== ========== =========== =========== ==========
Number of shares used in net income
(loss) per share calculations.......... 42,720 75,100 348(E) 15,771(F) 133,939
=========== ========== =========== =========== ==========
</TABLE>

31
<PAGE> 33

PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
(UNAUDITED)
YEAR ENDED DECEMBER 31, 1994

<TABLE>
<CAPTION>
HISTORICAL
-------------------------------------- PRO PRO
NEW FORMA FORMA
MEDPARTNERS CAREMARK MANAGEMENT ADJUSTMENTS COMBINED
------------ ---------- ---------- ----------- ----------
(A) (IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C> <C> <C>
Net revenue................................. $815,041 $1,775,203 $3,085 $ -- $2,593,329
Operating expenses:
Affiliated physician services............. 349,036 63,039 -- -- 412,075
Outside medical expenses.................. 86,974 15,522 -- -- 102,496
Clinic expenses........................... 321,360 92,609 -- -- 413,969
Non-clinic goods and services............. -- 1,365,203 -- -- 1,365,203
General and administrative expenses....... 25,543 120,174 220 -- 145,937
Depreciation and amortization............. 21,892 18,924 -- -- 40,816
Net interest expense...................... 5,958 8,695 232 -- 14,885
Merger expenses........................... -- -- -- -- --
Other, net................................ -- (143) -- -- (143)
-------- ---------- ------ ------- -------
Net operating expenses............. 810,763 1,684,023 452 -- 2,495,238
-------- ---------- ------ ------- -------
Income before income taxes and discontinued
operations................................ 4,278 91,180 2,633 -- 98,091
Income tax expense.......................... 7,350 36,672 -- -- 44,022
-------- ---------- ------ ------- -------
Income (loss) from continuing operations.... (3,072) 54,508 2,633 -- 54,069
Income from discontinued operations......... -- (25,902) -- -- (25,902)
-------- ---------- ------ ------- -------
Net income (loss)........................... $ (3,072) $ 80,410 $2,633 $ -- $ 79,971
======== ========== ====== ======= =======
Net income (loss) per share................. $ (0.08) $ 1.08 $ 7.57 $ 0.63
======== ========== ====== =======
Number of shares used in net income (loss)
per share calculations.................... 36,553 74,800 348(E) 15,708(F) 127,409
======== ========== ====== ======= =======
</TABLE>

32
<PAGE> 34

PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
(UNAUDITED)
YEAR ENDED DECEMBER 31, 1993

<TABLE>
<CAPTION>
HISTORICAL
------------------------------------- PRO PRO
NEW FORMA FORMA
MEDPARTNERS CAREMARK MANAGEMENT ADJUSTMENTS COMBINED
----------- ---------- ---------- ----------- ----------
(A) (IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C> <C> <C>
Net revenue................................ $ 549,695 $1,203,957 $3,110 $ -- $1,756,762
Operating expenses:
Affiliated physician services............ 224,770 47,358 -- -- 272,128
Outside medical expenses................. 59,861 10,566 -- -- 70,427
Clinic expenses.......................... 217,306 67,203 -- -- 284,509
Non-clinic goods and services............ -- 884,014 -- -- 884,014
General and administrative expenses...... 21,988 101,395 85 -- 123,468
Depreciation and amortization............ 14,057 11,407 -- -- 25,464
Net interest expense..................... 3,338 3,444 239 -- 7,021
Merger expenses.......................... -- -- -- -- --
Other, net............................... 122 (1,696) -- -- (1,574)
-------- ---------- ------ --------- ----------
Net operating expenses............ 541,442 1,123,691 324 -- 1,665,457
-------- ---------- ------ --------- ----------
Income before income taxes and discontinued
operations............................... 8,253 80,266 2,786 -- 91,305
Income tax expense......................... 9,723 33,403 -- -- 43,126
Cumulative effect of change in method of
accounting for income taxes.............. 298 -- -- -- 298
-------- ---------- ------ --------- ----------
Income (loss) from continuing operations... (1,768) 46,863 2,786 -- 47,881
Income from discontinued operations........ -- (30,808) -- -- (30,808)
-------- ---------- ------ --------- ----------
Net income (loss).......................... $ (1,768) $ 77,671 $2,786 $ -- $ 78,689
======== ========== ====== ========= ==========
Net income (loss) per share................ $ (0.06) $ 1.04 $ 8.01 $ 0.66
======== ========== ====== ==========
Number of shares used in net income (loss)
per share calculations................... 28,403 74,900 348(E) 15,729(F) 119,380
======== ========== ====== ========= ==========
</TABLE>

33
<PAGE> 35

NOTES TO PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION

The following adjustments are necessary to reflect the Acquisitions:

A. These historical amounts for MedPartners for the years ended December
31, 1993, 1994 and 1995 do not agree with the full legal Form 10-K for the year
ended December 31, 1995 filed with the Commission because the amounts have been
restated to reflect the merger with PPSI, which was accounted for as a pooling
of interests.

B. To eliminate certain management fee revenue and expense.

C. The pro forma combined statements of operations do not reflect
nonrecurring costs and charges resulting directly from the Acquisitions. These
costs and charges are estimated as follows:

<TABLE>
<CAPTION>
PROPERTY LONG-TERM TOTAL
DEFERRED AND ACCOUNTS DEBT, ACCUMULATED MERGER
TAX ASSET EQUIPMENT PAYABLE NET EARNINGS CHARGE
--------- --------- -------- --------- ----------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Caremark.................. $92,800 $(128,100) $ 92,800 $29,100 $(157,200) $250,000
</TABLE>

The following is a detail of the estimated merger expenses related to the
Caremark Acquisition:

<TABLE>
<CAPTION>
(In thousands)
<S> <C>
Severance and related benefits.............................. $ 62,700
Operational restructuring................................... 47,000
Lease abandonment........................................... 30,500
Non-compatible technology................................... 27,000
Brokerage fees.............................................. 25,300
Professional fees........................................... 24,900
Other transaction related costs............................. 20,600
Transition costs............................................ 6,000
Debt restructuring costs.................................... 5,000
Filing fees................................................. 1,000
--------
$ 250,000
========
</TABLE>

The excess capacity, restructuring and market rationalization expenses
primarily relate to computer hardware and software and leases that will be
abandoned after the Caremark Acquisition. These assets are currently being
utilized in the operations of Caremark but are not compatible with the planned
operations for MedPartners. Severance and related benefits represent anticipated
payments to identified employees, as required by their respective employment
agreements, who will be terminated after the merger.

D. To reflect the approximate number of shares of Common Stock exchanged
for the stock or assets of the proposed acquirees as follows:

<TABLE>
<S> <C>
Caremark.................................................... 93,654,000
New Management.............................................. 348,000
-----------
94,002,000
===========
</TABLE>

E. Represents the approximate number of shares of Common Stock distributed
in exchange for the partnership interests of New Management based on a trading
price of $20.11 per share, $(7,000,000/$20.11) 348,000.

F. To adjust pro forma amounts based on historical share amounts,
converting each outstanding share of the acquiree's stock into shares of Common
Stock based on a fixed exchange ratio of 1.21.

34
<PAGE> 36

BUSINESS

GENERAL

The Company, with annualized revenues of approximately $4.5 billion, is the
largest PPM company in the United States. The Company develops, consolidates and
manages integrated healthcare delivery systems. Through its network of
affiliated group and IPA physicians, the Company provides primary and specialty
healthcare services to prepaid managed care enrollees and fee-for-service
patients. The Company also operates one of the largest independent PBM programs
in the United States and provides disease management services and therapies for
patients with certain chronic conditions. As of June 30, 1996, MedPartners
operated in 54 markets in 25 states and was affiliated with approximately 7,400
physicians, including approximately 2,470 in group practices, 4,180 through IPA
relationships and 740 who were hospital-based, providing healthcare to
approximately 1.5 million prepaid enrollees.

The Company affiliates with physicians who are seeking the resources
necessary to function effectively in healthcare markets that are evolving from
fee-for-service to managed care payor systems. The Company enhances clinic
operations by centralizing administrative functions and introducing management
tools, such as clinical guidelines, utilization review and outcomes measurement.
The Company provides affiliated physicians with access to capital and to
advanced management information systems. In addition, MedPartners contracts with
HMOs, hospitals and outside providers on behalf of its affiliated physicians.
These relationships provide physicians with the opportunity to operate under a
variety of payor arrangements and to increase their patient flow.

The Company's PPM revenue is derived from the provision of fee-for-service
medical services and from contracts with HMOs that compensate the Company and
its affiliated physicians on a prepaid basis. In the prepaid arrangements, the
Company, through its affiliated physicians, typically is paid by the HMO a fixed
amount per member ("enrollee") per month ("professional capitation") or a
percentage of the premium per member per month ("percent of premium") paid by
employer groups and other purchasers of healthcare coverage to the HMOs. In
return, the Company, through its affiliated physicians, is responsible for
substantially all of the medical services required by enrollees. In many
instances, the Company and its affiliated physicians accept financial
responsibility for hospital and ancillary healthcare services in return for
payment from HMOs on a capitated or percent of premium basis ("institutional
capitation"). In exchange for these payments (collectively, "global
capitation"), the Company, through its affiliated physicians, provides the
majority of covered healthcare services to enrollees and contracts with
hospitals and other healthcare providers for the balance of the covered
services.

The Company offers medical group practices and independent physicians a
range of affiliation models. These affiliations are carried out by the
acquisition of PPM entities or practice assets, either for cash or through an
equity exchange, or by affiliation on a contractual basis. In all instances, the
Company enters into long-term practice management agreements with the affiliated
physicians that provide for the management of the practices by the Company while
at the same time providing for the clinical independence of the physicians.

The Company also manages outpatient prescription drug benefit programs for
more than 1,300 clients throughout the United States, including corporations,
insurance companies, unions, government employee groups and managed care
organizations. The Company dispenses 42,000 prescriptions daily through four
mail service pharmacies and manages patients' immediate prescription needs
through a network of approximately 53,000 retail pharmacies. The Company's
disease management services are intended to meet the healthcare needs of
individuals with chronic diseases or conditions. These services include the
design, development and management of comprehensive programs that comprise drug
therapies, physician support and patient education. The Company currently
provides therapies and services for individuals with such conditions as
hemophilia, growth disorders, immune deficiencies, genetic emphysema, cystic
fibrosis and multiple sclerosis. The Company is in the process of integrating
the PBM program with the PPM business by providing pharmaceutical services to
affiliated physicians, clinics and HMOs.

35
<PAGE> 37

ACQUISITION PROGRAM

The Company believes it is the leading consolidator in the PPM industry.
The Company's strategy is to develop locally prominent, integrated healthcare
delivery networks that provide high quality, cost-effective healthcare in
selected geographic markets. The Company implements this strategy through growth
in its existing markets, expansion into new markets through acquisitions and
affiliations and through the implementation of comprehensive healthcare
solutions for patients, physicians and payors. In pursuing its acquisition
strategy, the Company creates strategic alliances with hospital partners and
HMOs. As an integral element of these alliances, MedPartners utilizes
sophisticated information systems to improve the operational efficiency of, and
reduce the costs associated with, operating the Company's network and the
practices of the affiliated physicians. The Company's principal methods of
expansion are the acquisition of PPM businesses and affiliations with physician
and medical groups.

In September 1996, the Company acquired Caremark, a publicly traded PPM and
PBM company based in Northbrook, Illinois, in exchange for approximately 93.7
million shares of Common Stock having a total value of approximately $1.9
billion, creating the largest PPM company in the United States. Caremark
provides PPM services to approximately 1,000 affiliated physicians.

In November 1995, the Company acquired MME, a privately held PPM entity
based in Long Beach, California, in exchange for approximately 13.5 million
shares of Common Stock having a total value of approximately $413.2 million. MME
provides PPM services to approximately 400 group and 3,100 IPA physicians. In
February 1996, the Company acquired PPSI, a publicly traded PPM company based in
Redlands, California, in exchange for approximately 11.1 million shares of
Common Stock having a total value of approximately $342.7 million. PPSI provided
PPM services to approximately 710 group and 100 IPA physicians. PPSI acquired
Team Health, based in Knoxville, Tennessee, in June 1995. Team Health primarily
manages physicians and other healthcare professionals engaged in the delivery of
emergency medicine and hospital based primary care. In August 1996, the Company
acquired New Management, a California general partnership, in exchange for
approximately 348,000 shares of Common Stock having a total value of $7.0
million. New Management provided management and administrative services to West
Hills Hospital, based in Los Angeles, California.

INDUSTRY

The Health Care Financing Administration ("HCFA") estimates that national
healthcare spending in 1995 was in excess of $1 trillion, with physicians
controlling more than 80% of the overall expenditures. The American Medical
Association reports that approximately 565,000 physicians are actively involved
in patient care in the United States, with a growing number participating in
multi-specialty or single-specialty groups. Expenditures directly attributable
to physicians is estimated at $200.0 billion.

Concerns over the cost of healthcare have resulted in the increasing
prominence of managed care. As markets evolve from traditional fee-for-service
medicine to managed care, HMOs and healthcare providers confront market
pressures to provide high quality healthcare in a cost-effective manner.
Employer groups have begun to bargain collectively in an effort to reduce
premiums and to bring about greater accountability of HMOs and providers with
respect to accessibility, choice of provider, quality of care and other
indicators of consumer satisfaction. The focus on cost-containment has placed
small to mid-sized physician groups and solo practices at a disadvantage because
they typically have higher operating costs and little purchasing power with
suppliers, they often lack the capital to purchase new technologies that can
improve quality and reduce costs and they do not have the cost accounting and
quality management systems necessary for entry into sophisticated risk-sharing
contracts with payors.

Industry experts expect that the medical delivery system may evolve into a
system where the primary care physician manages and directs healthcare
expenditures. As a result of these developments, primary care physicians have
increasingly become the conduit for the delivery of medical care by acting as
"case managers" and directing referrals to certain specialists, hospitals,
alternate-site facilities and diagnostic facilities. By

36
<PAGE> 38

contracting directly with payors, organizations that control primary care
physicians are able to reduce the administrative overhead expenses incurred by
HMOs and insurers and thereby reduce the cost of delivering medical services.

As a result of the trends toward increased HMO enrollment and physician
membership in group medical practices, healthcare providers have sought to
reorganize themselves into healthcare delivery systems that are better suited to
the managed care environment. Physician groups and IPAs are joining with
hospitals, pharmacies and other institutional providers in various ways to
create vertically integrated delivery systems that provide medical and hospital
services ranging from community-based primary medical care to specialized
inpatient services. These healthcare delivery systems agree with HMOs to provide
hospital and medical services to enrollees pursuant to full risk contracts.
Under these contracts, providers assume the obligation to provide both the
professional and institutional components of covered healthcare services to the
HMO enrollees.

In order to compete effectively in such an emerging environment, the
Company believes many physicians are concluding that they must obtain control
over the delivery and financial impact of a broader range of healthcare services
through global capitation. To this end, groups of independent physicians and
medium to large medical groups are taking steps to assume responsibility and
risk for healthcare services that they do not provide, such as hospitalization
and pharmacy services. Physicians are increasingly abandoning traditional
private practice in favor of affiliations with larger organizations, such as the
Company, that offer skilled and innovative management, sophisticated information
systems and capital resources. Many payors and their intermediaries, including
governmental entities and HMOs, are increasingly looking to outside providers of
physician and pharmacy services to develop and maintain quality outcomes,
management programs and patient care data. In addition, such payors and
intermediaries look to share the risk of providing healthcare services through
capitation arrangements that provide for fixed payments for patient care over a
specified period of time. While the acceptance of greater responsibility and
risk provides the opportunity to retain and enhance market share and operate at
a higher level of profitability, medical groups and independent physicians are
concluding that the acceptance of global capitation carries with it significant
requirements for infrastructure, information systems, capital, network resources
and financial and medical management. Physicians are increasingly turning to
organizations such as the Company to provide the resources necessary to function
effectively in a managed care environment.

STRATEGY

The Company's strategy is to develop locally prominent, integrated
healthcare delivery networks that provide high quality, cost-effective
healthcare in selected geographic markets. The key elements of this strategy are
as follows:

Expansion of Existing Markets. The Company's principal strategy for
expanding its existing markets is through the acquisition of, or
affiliation with, physicians and medical groups within those markets. The
Company seeks to acquire or otherwise affiliate with physician groups, IPAs
and other providers with significant market shares in their local markets
and established reputations for providing quality medical care. The Company
also develops multi-specialty physician networks that are designed to meet
the specific medical needs of a targeted geographic market. The Company
seeks to further enhance its existing market share by increasing enrollment
and fee-for-service business in its existing affiliated practices and IPAs.
The Company anticipates further internal growth by expanding more of its
payor contracts to global capitation through PPN. Additionally, the Company
believes that increasing marketing activities, enhancing patient service
and improving the accessibility of care will also increase the Company's
market share.

Expansion into New Markets. The Company expands into new markets
through the acquisition of or affiliation with other PPM entities and
medical groups. The Company believes it is a leading consolidator in the
PPM industry and that the MME acquisition was the first major consolidation
in the industry, followed by the merger with PPSI and the Caremark
Acquisition. As a result of the consolidation of physician practices and
the entry of other PPM companies into the market, the Company's management
has determined that it is important for the Company to continue its rate of

37
<PAGE> 39

expansion through acquisitions and mergers. The Company believes that by
concentrating on larger acquisitions and continuing to expand its core of
physician groups and IPAs, as well as its network of hospital affiliations,
it will create vertically integrated healthcare delivery systems and
enhance its competitive position. The Company continually reviews potential
acquisitions and physician affiliations and is currently in preliminary
negotiations with various candidates.

Integration of PPM and PBM Services. The Company believes that there
is significant opportunity for growth through the integration of the PBM
program and the PPM business. The Company expects PBM activity to increase
as payors seek to shift the responsibility of pharmacy services to PPM
entities and physician groups, and such entities turn to prescription
benefit managers to control pharmaceutical costs. The Company expects its
PBM program to grow as enrollees and fee-for-service patients use the
Company's mail-order and retail pharmacy networks. In addition, the Company
expects to expand its PBM contracts with managed care organizations for
capitated pharmaceutical services for its prepaid enrollees.

Strategic Alliances. The Company believes that strategic alliances
with hospitals and health plans improve the delivery of managed healthcare.
The Company has entered into arrangements with various hospitals under
which a portion of the capitation revenue received from HMOs for
institutional care of enrollees assigned to designated Company clinics and
IPA physicians is deposited into "subcapitated risk pools" managed by the
Company. The Company believes that such arrangements can be enhanced
through the implementation of the Restricted License held by PPN. Under
these arrangements, the hospital is at risk in the event that the costs of
institutional care exceed the available funds and the Company shares in
cost savings and revenue enhancements. The Company believes that through
these and other similar alliances, the providers will devote greater
resources to ensuring the wellness of HMO enrollees, provide high-quality
and cost-effective care and seek to retain and expand their respective
market shares. As a result, it is anticipated that the overall cost of
providing care will be contained, rendering both the Company and the
participating providers more appealing to both HMOs and medical care
consumers. The Company and its affiliated physicians have also established
relationships with HMOs pursuant to which the Company and the HMOs share
proportionately in the risks and rewards of market trends.

Sophisticated Information Systems. The Company believes that
information technology is critical to the growth of integrated healthcare
delivery systems and that the availability of detailed clinical data is
fundamental to quality control and cost containment. The Company develops
and maintains sophisticated management information systems that collect and
analyze clinical and administrative data. These systems allow the Company
to effectively control overhead expenses, maximize reimbursement and
provide effective utilization management. The Company evaluates the
administrative and clinical functions of affiliated practices and
re-engineers these functions as appropriate in conjunction with the
implementation of the Company's management information systems to maximize
the benefits of those systems.

The Company also utilizes a sophisticated database to provide
pharmaceutical-related information to participating physicians, payors,
affiliated physician practices and other specialty service entities. The
database is designed to provide a safe and effective method for
distributing and administering drugs and drug therapies.

Increased Operational Efficiencies and Cost Reductions. The Company
is seeking to increase its operating efficiency through expansion of its
market area and number of HMO enrollees, refinement of its utilization
management programs that deliver information used by participating
physicians to monitor and improve their practice patterns, increased
specialization, development of additional in-house services and increased
emphasis on outpatient care. The Company's physician networks attempt to
achieve economies of scale through centralizing billing, scheduling,
information management and other functions.

OPERATIONS

Prior to affiliation with MME in November 1995, MedPartners concentrated
its PPM development efforts in the southeastern United States, affiliating
primarily with physician groups that practice on a fee-for-

38
<PAGE> 40

service basis. With the MME, PPSI and Caremark organizations, the Company
acquired additional business models, specifically designed to operate
efficiently in the capitated managed care environment. These business models,
which are replicable and flexible, allow the Company to capitalize on the full
range of market opportunities in the PPM industry and enable the Company to
build integrated physician networks attractive to payors of all types. The
Company has networks currently under development in 25 states.

To meet payor demand for price competitive, quality services, the Company
utilizes a market-based approach that incorporates primary care and specialty
physicians into a network of providers serving a targeted geographic area. The
Company engages in research activities and market analysis to determine the
network configuration for a particular market. Primary care includes family
practice, internal medicine, pediatrics and obstetrics/gynecology. Key
specialties include orthopedics, cardiology, oncology, radiology, neurosciences,
urology, surgery, ear, nose and throat and ophthalmology. At certain locations,
affiliated physicians and support personnel operate centers for diagnostic
imaging, urgent care, cancer management, mental health treatment and health
education. Network physicians also treat fee-for-service patients on a
per-occurrence basis. After-hours care is available in several of the Company's
clinics. Each network is configured to contain, when complete, the physician
services necessary to capture at least 20% of market share and to provide at
least 90% of the physician services required by payors. The Company markets its
networks to managed care and third-party payors, referring physicians and
hospitals.

Affiliated Physicians. The relationship between the Company and its
affiliated physicians is set forth in asset purchase and practice management
agreements. Through the asset purchase agreement, the Company acquires the
assets utilized in the practice and may also assume certain leases and other
contracts of the physician group. Under a practice management agreement, a
physician group delegates to the Company administrative, management and support
functions required in connection with its medical practice. The Company provides
the physician group with the equipment and facilities used in its medical
practice, manages practice operations and employs substantially all of the
practice's non-physician personnel, except certain allied health professionals,
such as nurses and physical therapists. See also Notes 1 and 10 to Consolidated
Financial Statements of the Company included elsewhere in this Prospectus.

Pursuant to the practice management agreement, the affiliated professional
corporation assigns to the Company, or otherwise grants control over, all or
substantially all its rights and interest in the revenue it receives. In return
for providing services pursuant to such agreement, the physicians receive
compensation, as negotiated, either as a fixed percentage of net revenues, a
pre-determined salary and incentive arrangement, or an arrangement based
directly on the profitability of the practice. The Company works closely with
affiliated physicians in targeting and recruiting physicians and in merging sole
practice or single specialty groups into the affiliated physician groups. The
Company seeks to recognize and develop opportunities to provide services
throughout a market by positioning its practices so that the entire market is
covered geographically. This approach provides patients with convenient medical
facilities and services and responds to coverage criteria essential to payors.
See Note 1 to Consolidated Financial Statements of the Company included
elsewhere in this Prospectus.

IPAs. The Company's networks include approximately 4,180 primary care and
specialist IPA physicians serving approximately 185,000 HMO enrollees. An IPA
allows individual practitioners to access patients in their area through
contracts with HMOs without having to join a group practice or sign exclusive
contracts and also coordinates utilization review and quality assurance programs
for its affiliated physicians. In addition to providing access to HMO contracts,
an IPA offers other benefits to physicians seeking to remain independent,
including economies of scale in the marketplace, enhanced risk-sharing
arrangements and access to other strategic alliances. The Company identifies
IPAs that need access to capitated HMO contracts, and such IPA organizations
typically agree to assign their existing HMO contracts to the Company. The
Company believes that the expansion of its IPAs will enable it to increase its
market share with relatively low risk because of the low incremental investment
required to recruit additional physicians.

HMOs. The Company, through its affiliated physicians, began contracting
with HMOs to provide healthcare on a capitated reimbursement basis in 1975
(through predecessors). Under these contracts, which typically are automatically
renewed on an annual basis, the Company provides virtually all covered medical

39
<PAGE> 41

services and receives a fixed monthly capitation payment from HMOs for each
member who chooses an affiliated physician as his or her primary care physician.
The capitation amount may be fixed, based upon a percentage of premium, or
adjusted based on the age and sex of the HMO enrollee. Contracts for prepaid
healthcare with HMOs accounted for approximately 30.6% of the Company's pro
forma combined net revenue for the six months ended June 30, 1996.

To the extent that enrollees require more care than is anticipated or
require supplemental medical care that is not otherwise reimbursed by HMOs or
other payors, aggregate capitation payments may be insufficient to cover the
costs associated with the treatment of enrollees. Stop-loss coverage is
maintained, which mitigates the effect of occasional high utilization of
healthcare services. As of June 30, 1996, after giving effect to the
Acquisitions, over 1.5 million prepaid HMO enrollees were covered beneficiaries
for professional services in the Company's network. These patients are covered
under either commercial (typically employer-sponsored) or senior
(Medicare-funded) HMOs. Higher capitation rates are typically received for
senior patients because their medical needs are generally greater. Consequently,
the cost of their covered care is higher. As of June 30, 1996, the Company's HMO
enrollees comprised approximately 1.2 million commercial enrollees and
approximately 107,000 senior (over age 65) enrollees. As of June 30, 1996, the
Company was receiving institutional capitation payments for approximately
773,000 enrollees.

Hospitals. The Company operates Pioneer Hospital, a 99-bed acute care
hospital located in Artesia, California, USFMC, a 102-bed acute care hospital in
Montclair, California, and Friendly Hills, a 274-bed acute care hospital in La
Habra, California. Many of the physicians on professional staff rosters of these
hospitals are either employed by an affiliated professional corporation or under
contract with MedPartners' IPAs. The traditional hospital-based physicians, such
as emergency room physicians, anesthesiologists, pathologists, radiologists and
cardiologists provide services through contractual arrangements. Several of the
Company's medical clinics are located sufficiently close to these hospitals to
allow enrollees who utilize these clinics to also use these hospitals. Under the
HMO contracts, MedPartners, through its affiliated medical groups or Knox-Keene
licensee, is obligated to pay for inpatient hospitalization and related
services. Over 50% of Pioneer Hospital's and approximately 85% of USFMC's daily
census is made up of MedPartners' affiliated medical group enrollees.
Approximately 87% of Friendly Hills' daily census is comprised of MedPartners'
affiliated medical group enrollees. MedPartners, through its Knox-Keene licensee
or affiliated medical groups, has entered into agreements with other hospitals
in California for the delivery of hospital services to the remainder of its
enrollees. In each instance, the institutional capitation payments received from
HMOs are placed at risk for the benefit of the applicable hospital, MedPartners
and its affiliated physicians, to the extent such services have not reached a
stop-loss threshold. MedPartners and these providers split any savings realized
if hospital utilization declines due to the success of MedPartners' programs for
early intervention, wellness and outpatient treatment.

Pharmaceutical Services. The Company manages outpatient PBM programs
throughout the United States for corporations, insurance companies, unions,
government employee groups and managed care organizations. Prescription drug
benefit management involves the design and administration of programs for
reducing the costs and improving the safety, effectiveness and convenience of
prescription drugs. The Company has one of the largest independent PBM programs,
dispensing 42,000 prescriptions daily from four mail service pharmacies. The
Company also manages patients' immediate prescription needs through a network of
approximately 53,000 retail pharmacies. Under the Company's PBM quality
assurance program, the Company maintains rigorous quality assurance and
regulatory policies and procedures. A computerized order processing system
reviews each prescription order for a variety of potential concerns, including
reactions with other drugs known to be prescribed to that patient, reactions
with a patient's known allergies, duplication of therapies, appropriateness of
dosage and early refill requests that may indicate overutilization or fraud.
Each prescription is verified by a licensed pharmacist before shipment. The
Company has retained the services of an independent national advisory panel of
physician specialists that advises it on the clinical analysis of its
intervention strategies and on cost-effective clinical procedures. The Company
offers a full range of drug cost and clinical management services, including
clinical case management, drug utilization review, formulary management and
customized prescription programs for senior citizens.

40
<PAGE> 42

Disease Management. The Company delivers comprehensive long-term support
for high-cost, chronic illnesses in an effort to improve outcomes for patients
and to lower costs. The Company believes that these programs efficiently provide
for a patient's entire healthcare needs. The programs utilize advanced protocols
and eliminate unnecessary procedural steps. The Company provides therapies and
services to individuals with such conditions as hemophilia, growth disorders,
immune deficiencies, genetic emphysema, cystic fibrosis and multiple sclerosis.
The Company estimates that there are over 200,000 patients in the United States
suffering from these diseases. The Company's disease management services utilize
the Company's integrated health data to develop therapies to manage the high
cost of treating these patients.

Hospital-Based Physician Operations. The Company's Hospital-Based
Physician ("HBP") operations organize and manage physicians and other healthcare
professionals engaged in the delivery of emergency, radiology and teleradiology
services, hospital-based primary care and temporary staffing and support
services to hospitals, clinics, managed care organizations and physician groups.
NorthWest Emergency Physicians ("NEP"), is the largest provider of emergency
physician contract management services to hospital-based emergency departments
in the Pacific Northwest (Washington, Oregon and Alaska). NEP's emergency
department contracts provide physician coverage for 15 hospital emergency
departments, 24 hours-a-day throughout the year. Team Health operates primarily
in the southeastern United States and currently serves 57 hospital emergency
departments in Tennessee, Kentucky, Alabama, Arkansas, Virginia, Florida, New
Jersey, Pennsylvania and Ohio, and 15 hospital radiology departments. Under
contracts with hospitals and other clients, the Company's HBP operations
identify and recruit physicians and other healthcare professionals for admission
to a client's medical staff, monitor the quality of care and proper utilization
of services and coordinate the ongoing scheduling of staff physicians who
provide clinical coverage in designated areas of care. Hospitals have found it
increasingly difficult to recruit, schedule, retain and appropriately compensate
hospital-based physician specialists required to operate hospital emergency,
radiology and other departments. As a consequence, a large number of hospitals
have turned to contract management firms as a more cost-effective and reliable
alternative to the development of in-house physician staffing.

INFORMATION SYSTEMS

The Company develops and maintains integrated information systems to
support its growth and acquisition plans. The Company's overall information
systems design is open, modular and flexible. The Company has implemented a
flexible individual patient electronic medical record ("EMR") that is
continually updated to complement primary practice management and billing
functions. The Company has configured its systems to give affiliated physicians
and their staff efficient and rapid access to complex clinical data. The
Company's use of the EMR enhances operational efficiencies through automation of
many routine clinical functions, as well as the capacity to link
"physician-specific" treatment protocols by diagnosis. This allows physicians to
have treatments checked against pre-defined protocols at the time of service.
The Company also utilizes a sophisticated database to provide
pharmaceutical-related information to participating physicians, payors,
affiliated physician practices and other specialty service entities. The
database is designed to provide a safe and effective method for distributing and
administering drugs and drug therapies.

Effective and efficient access to key clinical patient and pharmaceutical
data is critical in obtaining quality outcomes and improving costs as the
Company enters into more capitation contracts. The Company utilizes its existing
information systems to measure patient care satisfaction and outcomes of care,
improve productivity, manage complex reimbursement procedures and integrate
information from multiple facilities throughout the care spectrum. These systems
allow the Company to analyze clinical and cost data to determine thresholds of
profitability under various capitation arrangements.

INTERNATIONAL

The Company has minimal operations in several European countries and Japan.
The Company believes increasing healthcare costs, an expanding population base
over age 65, advances in medical technology and the ability to provide improved
quality of life while managing the cost of care will foster growth of healthcare
services internationally as well as domestically. Accordingly, the Company is
considering whether to expand its efforts in offering new approaches to
healthcare delivery and management around the world.

41
<PAGE> 43

COMPETITION

The PPM industry is highly competitive and is subject to continuing changes
in the provision of services and the selection and compensation of providers.
The Company competes for acquisition, affiliation and other expansion
opportunities with national, regional and local PPM companies and other PPM
entities. In addition, certain companies, including hospitals and insurers, are
expanding their presence in the PPM market. The Company also competes with
prescription drug benefit programs, prescription drug claims processors,
regional claims processors, providers of disease management services and
insurance companies.

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, state and local levels. The Company
believes its operations are in material compliance with applicable laws.
Nevertheless, because the structure of the relationship with the physician
groups is unique, many aspects of the Company's business operations have not
been the subject of state or federal regulatory interpretation. Thus, there can
be no assurance that a review of the Company's or the affiliated physicians'
businesses by courts or regulatory authorities will not result in a
determination that could adversely affect the operations of the Company or of
the affiliated physicians. Nor can there be any assurance that the healthcare
regulatory environment will not change so as to restrict the Company's or the
affiliated physicians' existing operations or their expansion. Any significant
restriction could materially adversely affect the operating results and
financial condition of the Company.

Approximately 5% of the revenues of the Company's affiliated physician
groups is derived from payments made by government-sponsored healthcare programs
(principally, Medicare and state reimbursed programs). As a result, any change
in reimbursement regulations, policies, practices, interpretations or statutes
could adversely affect the operations of the Company. There are also state and
federal civil and criminal statutes imposing substantial penalties, including
civil and criminal fines and imprisonment, on healthcare providers that
fraudulently or wrongfully bill governmental or other third-party payors for
healthcare services. While the Company believes it is in material compliance
with such laws, there can be no assurance that the Company's activities will not
be challenged or scrutinized by governmental authorities.

The laws of many states prohibit business corporations such as the Company
from practicing medicine and employing physicians to practice medicine. The
Company performs only non-medical administrative services. It does not represent
to the public or its clients that it offers medical services, and the Company
does not exercise influence or control over the practice of medicine by the
physicians with whom it contracts. Accordingly, the Company believes that it is
not in violation of applicable state laws relating to the practice of medicine.
Numerous states also prohibit entities such as the Company from engaging in
certain healthcare-related activities, such as fee-splitting with physicians.

Certain provisions of the Social Security Act, commonly referred to as the
"Anti-kickback Statute", prohibit the offer, payment, solicitation or receipt of
any form of remuneration in return for the referral of Medicare or state health
program patients or patient care opportunities, or in return for the
recommendation, arrangement, purchase, lease or order of items or services that
are covered by Medicare or state health programs. Many states have adopted
similar prohibitions against payments intended to induce referrals of Medicaid
and other third-party payor patients. Although the Company believes that it is
in material compliance with the Anti-kickback Statute and similar state
statutes, the Company's operations do not fit specifically within any of the
existing or proposed federal safe harbors.

Federal Referral Laws. Significant prohibitions against physician
referrals were enacted by the United States Congress in the Omnibus Budget
Reconciliation Act of 1993. Subject to certain exemptions, a physician or a
member of his immediate family is prohibited from referring Medicare or Medicaid
patients to an entity providing "designated health services" in which the
physician has an ownership or investment interest or with which the physician
has entered into a compensation arrangement. While the Company believes it is in
compliance with such legislation, future regulations could require the Company
to modify the form of its relationships with physician groups. Some states have
also enacted similar self-referral laws, and

42
<PAGE> 44

the Company believes it is likely that more states will follow. The Company
believes that its practices fit within exemptions contained in such statutes.
Nevertheless, expansion of the Company's operations to new jurisdictions could
require structural and organizational modifications of the Company's
relationships with physician groups in order to comply with new or revised state
statutes.

The Company is subject to the laws and regulations that govern
reimbursement under Medicare and Medicaid. Federal law prohibits, with some
exceptions, an entity from filing a claim for reimbursement under the Medicare
or Medicaid programs for certain designated services if the entity has a
financial relationship with the referring physician. Federal law (the "Medicare
Referral Payments Law") also prohibits the solicitation or receipt of
remuneration in exchange for, or the offer or payment of remuneration to induce,
the referral of Medicare or Medicaid beneficiaries. The OIG has promulgated
regulatory "safe harbors" under the Medicare Referral Payments Law that describe
payment practices between healthcare providers and referral sources that will
not be subject to criminal prosecution and that will not provide the basis for
exclusion from the Medicare and Medicaid programs. The Company retains
healthcare professionals to provide advice and non-medical services to the
Company in return for compensation pursuant to employment, consulting or service
contracts. In addition, the Company manages physician practices in return for a
management fee. The Company also enters into contracts with hospitals under
which the Company provides products and administrative services for a fee. Many
of the parties with whom the Company contracts refer or are in a position to
refer patients to the Company. The breadth of these federal laws, the paucity of
court decisions interpreting these laws, the limited nature of regulatory
interpretations and the absence of court decisions interpreting the safe harbor
regulations have resulted in ambiguous and varying interpretations of these
federal laws and regulations. The OIG or the DOJ could seek a determination that
the Company's past or current policies and practices regarding contracts and
relationships with healthcare providers violate federal law. In such event, no
assurance can be given that the Company's interpretation of these laws will
prevail, except with respect to those matters that were the subject of the OIG
investigation. See "Legal Proceedings". The failure of the Company's
interpretation of these laws to prevail could materially adversely affect the
operating results and financial condition of the Company.

Caremark agreed, in its settlement agreement with the OIG and DOJ prior to
the Caremark Acquisition, to continue to enforce certain compliance-related
oversight procedures. Should the oversight procedures reveal violations of
federal law, Caremark would be required to report such violations to the OIG and
DOJ. Caremark is therefore subject to increased regulatory scrutiny and, in the
event that Caremark commits legal or regulatory violations, it may be subject to
an increased risk of sanctions or penalties, including disqualification as a
provider of Medicare or Medicaid services which could materially adversely
affect the operating results and financial condition of the Company.

State Referral Payment Laws. The Company is also subject to state statutes
and regulations that prohibit payments for referral of patients, splitting of
professional fees by physicians and referrals by physicians to healthcare
providers with whom the physicians have a financial relationship. State statutes
and regulations generally apply to services reimbursed by both governmental and
private payors. Violations of these laws may result in prohibition of payment
for services rendered, loss of pharmacy or health provider licenses as well as
fines and criminal penalties. State statutes and regulations that may affect the
referral of patients to healthcare providers range from statutes and regulations
that are substantially the same as the federal laws and the safe harbor
regulations to a simple requirement that physicians or other healthcare
professionals disclose to patients any financial relationship the physicians or
healthcare professionals have with a healthcare provider that is being
recommended to the patients. These laws and regulations vary significantly from
state to state, are often vague, and, in many cases, have not been interpreted
by courts or regulatory agencies. The Company is not materially dependent upon
revenues derived from any single state. Adverse judicial or administrative
interpretations of such laws in several states, taken together, could, however,
materially adversely affect the operating results and financial condition of the
Company.

On March 5, 1996, the DOC issued the Restricted License to PPN in
accordance with the requirements of the Knox-Keene Act. The Restricted License
authorizes PPN to operate as a healthcare service plan in the State of
California. The Company, through PPN, intends to utilize the Restricted License
for purposes of contracting with HMOs for a broad range of healthcare services,
including both institutional and professional

43
<PAGE> 45

medical services, through a consolidated contract with the HMO. The Knox-Keene
Act and the regulations promulgated thereunder subject entities that are
licensed as healthcare service plans in California to substantial regulation by
the DOC. In addition, licensees under the Knox-Keene Act must file periodic
financial data and other information (that generally become available to the
public), maintain substantial tangible net equity on their balance sheets and
maintain adequate levels of medical, financial and operational personnel
dedicated to fulfilling the licensee's statutory and regulatory requirements.
The DOC is empowered to take enforcement actions against licensees that fail to
comply with such requirements. PPN is a recently created organization without an
operating history, and there is no assurance that the DOC will view PPN's
operations as being fully in compliance with applicable laws and regulations.

The operation of Pioneer Hospital, USFMC and Friendly Hills is highly
regulated, and each is accredited by the Joint Commission on Accreditation of
Healthcare Organizations. Accreditation from the Joint Commission on
Accreditation of Healthcare Organizations allows Pioneer Hospital to serve
Medicare patients and provides authorization from the California Department of
Health Services and the Los Angeles County Department of Health to operate as a
licensed hospital facility. Each of Pioneer Hospital, USFMC and Friendly Hills
is licensed and regulated as a general acute care hospital by the State of
California Department of Health Services. Additionally, each of Pioneer
Hospital, USFMC and Friendly Hills has a clinical laboratory license from the
State of California Department of Health Services, a clinical laboratory license
for its cardio-pulmonary laboratory and a pharmacy license for its inpatient
pharmacy.

Corporate Practice of Medicine Laws. The laws of many states prohibit
corporations other than professional corporations or associations from
practicing medicine and prohibit physicians from practicing medicine in
partnership with, or as employees of, any person not licensed to practice
medicine. These laws and their interpretations vary from state to state, and
they are enforced by regulatory authorities that have broad discretionary
authority. The Company does not employ physicians to practice medicine, does not
represent to the public that it offers medical services and does not control the
practice of medicine by its affiliated physician groups. There can, however, be
no assurance that the Company's arrangements will not be successfully challenged
as constituting the unauthorized practice of medicine.

Antitrust Laws. In connection with the corporate practice of medicine laws
referred to above, the physician practices with whom the Company is affiliated
necessarily are organized as separate legal entities. As such, the physician
practice entities may be deemed to be persons separate both from the Company and
from each other under the antitrust laws and, accordingly, subject to a wide
range of laws that prohibit anticompetitive conduct among separate legal
entities. The Company believes it is in compliance with these laws and intends
to comply with any state and federal laws that may affect its development of
integrated healthcare delivery networks. There can be no assurance, however,
that a review of the Company's business by courts or regulatory authorities
would not adversely affect the operation of the Company and its affiliated
physician groups.

Insurance Laws. The assumption of risk on a prepaid basis by health
provider networks is occurring with increasing frequency, and the practice is
being reviewed by various state insurance commissioners as well as the National
Association of Insurance Commissioners to determine whether the practice
constitutes the business of insurance. The Company believes that it is currently
in material compliance with the insurance laws in the states where it is
operating and it intends to comply with interpretative and legislative changes
as they may develop. There can be no assurance, however, that the Company's
activities will not be challenged or scrutinized by governmental authorities.

Pharmacy Licensing and Operation. The Company is subject to federal and
state laws and regulations governing pharmacies. Federal controlled substance
laws require the Company to register its pharmacies with the United States Drug
Enforcement Administration and comply with security, record-keeping, inventory
control and labeling standards in order to dispense controlled substances. State
controlled substance laws require registration and compliance with the
licensing, registration or permit standards of the state pharmacy licensing
authority. State pharmacy licensing, registration and permit laws impose
standards on the qualifications of the applicant's personnel, the adequacy of
its prescription fulfillment and inventory control practices

44
<PAGE> 46

and the adequacy of its facilities. In general, pharmacy licenses are renewed
annually. Pharmacists employed by each branch must also satisfy state licensing
requirements.

Several states have enacted legislation that requires mail service
pharmacies located elsewhere to register with the state board of pharmacy prior
to mailing drugs into the state and to meet certain operating and disclosure
requirements. These statutes generally permit a mail service pharmacy to operate
in accordance with the laws of the state in which it is located. In addition,
various pharmacy associations and state boards of pharmacy have promoted
enactment of laws and regulations directed at restricting or prohibiting the
operation of out-of-state mail service pharmacies by, among other things,
requiring compliance with all laws of certain states into which the mail service
pharmacy dispenses medications whether or not those laws conflict with the laws
of the state in which the pharmacy is located. To the extent that such laws or
regulations are found to be applicable to the Company's operations, the Company
would be required to comply with them. Some states have enacted laws and
regulations which, if successfully enforced, would effectively limit some of the
financial incentives available to plan sponsors that offer mail service
prescription programs. With respect to self-insured plans, the United States
Department of Labor has commented that such laws and regulations are pre-empted
by the Employee Retirement Income Security Act of 1974, as amended. The Attorney
General in one state has reached a similar conclusion and has raised additional
constitutional issues. Finally, the Federal Trade Commission's ("FTC") Bureau of
Competition has concluded that such laws and regulations may be anticompetitive
and not in the best interests of consumers. To date, there have been no formal
administrative or judicial efforts to enforce any of such laws against the
Company. To the extent that any of the foregoing laws or regulations prohibit or
restrict the operation of mail service pharmacies and are found to be applicable
to the Company, they could have an adverse effect on the Company's prescription
mail service operations. United States Postal Service regulations expressly
permit the transmission of prescription drugs through the postal system. The
United States Postal Service has authority to restrict such transmission.

The PBM and disease management services of the Company are subject to state
and federal statutes and regulations governing the operation of pharmacies,
repackaging of drug products, dispensing of controlled substances, reimbursement
under federal and state medical assistance programs, financial relationships
between healthcare providers and potential referral sources, medical waste
disposal, risk sharing by non-insurance companies and workplace health and
safety. The Company's operations may also be affected by changes in ethical
guidelines and operating standards of professional and trade associations and
private accreditation commissions such as the American Medical Association, the
National Committee for Quality Assurance and the Joint Commission on
Accreditation of Healthcare Organizations.

Future Legislation and Regulation. 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 United
States Congress and state legislatures relating to healthcare reform. There can
be no assurance as to the ultimate content, timing or effect of any healthcare
reform legislation, nor is it possible at this time to estimate the impact of
potential legislation, which may be material, on the Company.

LEGAL PROCEEDINGS

The Company is named as a defendant in various legal actions arising
primarily out of services rendered by physicians employed by its affiliated
physician entities and Pioneer Hospital and USFMC, personal injury and
employment disputes. In addition, certain of its affiliated medical groups are
named as defendants in numerous actions alleging medical negligence on the part
of their physicians. In certain of these actions, the Company's and the medical
group's insurance carrier has either declined to provide coverage or has
provided a defense subject to a reservation of rights. Management does not view
any of these actions as likely to result in an uninsured award which would have
a material adverse effect on the Company's financial condition, results of
operations or liquidity.

In May 1996, two stockholders, each purporting to represent a class, filed
complaints against Caremark and each of its directors in the Court of Chancery
of the State of Delaware alleging breaches of the directors' fiduciary duty in
connection with Caremark's then proposed merger with the Company. The complaints
seek unspecified damages, injunctive relief, and attorneys' fees and expenses.
The Company intends to defend these

45
<PAGE> 47

cases vigorously. Although the ultimate outcome of such litigation cannot be
predicted, the Company does not believe such litigation, if adversely
determined, would have a material adverse effect on the operating results and
financial condition of the Company.

In May 1996, three pharmacies, purporting to represent a class consisting
of all of Caremark's competitors in the alternate site infusion therapy
industry, filed a complaint against Caremark, a subsidiary of Caremark, and two
other corporations in the United States District Court for the District of
Hawaii alleging violations of the federal conspiracy laws, the antitrust laws
and of California's unfair business practices statute. The complaint seeks
unspecified treble damages and attorneys' fees and expenses. The Company intends
to defend this case vigorously. Although management believes, based on
information currently available, that the ultimate resolution of this matter is
not likely to have a material adverse effect on the operating results and
financial condition of the Company, there can be no assurance that the ultimate
resolution of this matter, if adversely determined, would not have a material
adverse effect on the operating results and financial condition of the Company.

In June 1995, Caremark agreed to settle a nearly four year long
investigation with the DOJ, OIG, the Veterans Administration, the FEHBP, the
CHAMPUS and related state investigative agencies in all 50 states and the
District of Columbia. Under the terms of the OIG Settlement, which covered
allegations dating back to 1986, a subsidiary of Caremark pled guilty to two
counts of mail fraud -- one each in Minnesota and Ohio. The basis of these
guilty pleas was Caremark's failure to provide certain information to CHAMPUS
and FEHBP, federally funded healthcare benefit programs, concerning financial
relationships between Caremark and a physician in each of Minnesota and Ohio.
The OIG Settlement allows Caremark to continue participating in Medicare,
Medicaid and other government healthcare programs.

Under the OIG Settlement, Caremark agreed to make civil payments of $85.3
million to the federal government in installments and $44.6 million to the
states. The plea agreement imposed $29.0 million in federal criminal fines. All
of these fines and payments have been fully paid. In addition, Caremark has
contributed $2.0 million to a grant program set up under the Ryan White
Comprehensive AIDS Resources Emergency (CARE) Act. Caremark took an after-tax
charge of $154.8 million in 1995 for these settlement payments, costs to defend
ongoing derivative, security and other lawsuits, and other related costs. This
charge has been reflected in Caremark's discontinued operations and will not
materially affect the Company's ability to pursue its long-term business
strategy. There can be no assurance, however, that the ultimate costs related to
the OIG Settlement will not exceed these estimates or that additional costs,
claims and damages will not occur, or if they occur, will not have a material
adverse effect on the operating results and financial condition of the Company.

In August and September 1994, stockholders, each purporting to represent a
class, filed complaints against Caremark and certain officers and employees of
Caremark in the United States District Court for the Northern District of
Illinois, alleging violations of the Securities Act and the Exchange Act, and
fraud and negligence and various state law claims in connection with public
disclosures by Caremark regarding Caremark's business practices and the status
of the OIG investigation. The complaints seek unspecified damages, declaratory
and equitable relief, and attorneys fees and expenses. In June 1996, the
complaint filed by one group of stockholders alleging violations of the Exchange
Act only, was certified as a class. The parties to all of the complaints
continue to engage in discovery proceedings. The Company intends to defend these
cases vigorously. Although management believes, based on information currently
available, that the ultimate resolution of this matter is not likely to have a
material adverse effect on the operating results and financial condition of the
Company, there can be no assurance that the ultimate resolution of this matter,
if adversely determined, would not have a material adverse effect on the
operating results and financial condition of the Company.

In August 1994 and July 1995, stockholders filed derivative actions on
behalf of Caremark against Caremark, its directors and certain employees of
Caremark in the Court of Chancery of the State of Delaware, the United States
District Court for the Northern District of Illinois and the Circuit Court of
Cook County in Chicago, Illinois, alleging breaches of fiduciary duty,
negligence in connection with Caremark's conduct of the business and lack of
corporate controls, and seeking unspecified damages and attorneys fees and
expenses. In June 1996, the parties entered into a Stipulation and Agreement of
Compromise and Settlement which established proposed terms for the settlement of
the case. The Delaware court conducted a hearing on August 16, 1996 to consider
the proposed settlement and has taken the matter under advisement. Although

46
<PAGE> 48

the proposed settlement does not contemplate the payment of any damages by any
defendant, plaintiffs are expected to seek an award of attorneys fees and
expenses not in excess of $1.025 million in conjunction with any approval of the
settlement. The Illinois and Cook County courts have entered stays of all
proceedings in those actions pending resolution of the Delaware derivative
action. In the event the proposed settlement of the Delaware derivative action
is approved by the Delaware court, the Company anticipates that the Illinois
derivative actions will be dismissed. In the event the proposed settlement is
not approved by the Delaware court, the Company intends to defend these cases
vigorously. Although management believes, based on information currently
available, that the ultimate resolution of this matter is not likely to have a
material adverse effect on the operating results and financial condition of the
Company, there can be no assurance that the ultimate resolution of this matter,
if adversely determined, would not have a material adverse effect on the
operating results and financial condition of the Company.

In late August 1994, certain patients of a physician who prescribed human
growth hormone distributed by Caremark and the sponsor of the health insurance
plan of one of those patients filed complaints against Caremark, employees of
Caremark and others in the United States District Court for the District of
Minnesota. Each complaint purported to be on behalf of a class and alleged
violations of the federal mail and wire fraud statutes, the federal conspiracy
statute and the state consumer fraud statute, as well as conspiracy to breach a
fiduciary duty, negligence and fraud. Each complaint sought unspecified treble
damages, and attorneys fees and expenses. In July 1996, these plaintiffs also
filed a separate lawsuit in the Minnesota State Court in the County of Hennepin
against a subsidiary of Caremark purporting to be on behalf of a class and
alleging all of the claims contained in the complaint filed with the Minnesota
federal court other than the federal claims contained therein. The complaint
seeks unspecified damages, attorneys' fees and expenses and an award of punitive
damages. In July 1995, another patient of this same physician filed a separate
complaint in the District Court of South Dakota against the physician, Caremark
and another corporation alleging violations of the federal laws prohibiting
payment of remuneration to induce referral of Medicare and Medicaid
beneficiaries, and the federal mail fraud and conspiracy statutes. The complaint
also alleges the intentional infliction of emotional distress and seeks trebling
of at least $15.9 million in general damages, attorneys fees and costs, and an
award of punitive damages. In August 1995, the parties to the case filed in
South Dakota agreed to a stay of all proceedings until final judgment has been
entered in a criminal case that is presently pending against this physician. The
Company intends to defend these cases vigorously. Although management believes,
based on information currently available, that the ultimate resolution of this
matter is not likely to have a material adverse effect on the operating results
and financial condition of the Company, there can be no assurance that the
ultimate resolution of this matter, if adversely determined, would not have a
material adverse effect on the operating results and financial condition of the
Company.

In September 1995, Coram filed a complaint in the San Francisco Superior
Court against Caremark and its subsidiary, Caremark Inc. and 50 unnamed
individual defendants. The complaint, which arises from Caremark's sale to Coram
of Caremark's home infusion therapy business in April 1995 for approximately
$209.0 million in cash and $100.0 million in securities, alleges breach of the
Asset Sale and Note Purchase Agreement, dated January 29, 1995, as amended April
1, 1995, between Coram and Caremark, breach of related contracts, fraud,
negligent misrepresentation and a right to contractual indemnity. Requested
relief in Coram's amended complaint includes specific performance, declaratory
relief, injunctive relief, and damages of $5.2 billion. Caremark filed
counterclaims against Coram in this lawsuit and also filed a lawsuit in the U.S.
District Court in Chicago claiming that Coram committed securities fraud in its
sale to Caremark of its securities in connection with the sale of the company's
home infusion business to Coram. The lawsuit filed in federal court in Chicago
has been dismissed, and Caremark's appeal of the dismissal was argued on May 10,
1996 and is now under submission. Coram's lawsuit is currently in the discovery
phase. Although management believes, based on information currently available,
that the ultimate resolution of this matter is not likely to have a material
adverse effect on the operating results and financial condition of the Company,
there can be no assurance, that the ultimate resolution of this matter, if
adversely determined, would not have a material adverse effect on the operating
results and financial condition of the Company.

Beginning in September 1994, Caremark was named as a defendant in a series
of new lawsuits added to a pending group of actions (including a class action)
brought in 1993 under the antitrust laws by local and chain retail pharmacies
against brand name pharmaceutical manufacturers, wholesalers and prescription
benefit

47
<PAGE> 49

managers other than Caremark. The new lawsuits, filed in federal district courts
in at least 38 states (including the United States District Court for the
Northern District of Illinois), allege that at least 24 pharmaceutical
manufacturers provided unlawful price and service discounts to certain favored
buyers and conspired among themselves to deny similar discounts to the
complaining retail pharmacies (approximately 3,900 in number). The complaints
charge that certain defendant prescription benefit managers, including Caremark,
were favored buyers who knowingly induced or received discriminatory prices from
the manufacturers in violation of the Robinson-Patman Act. Each complaint seeks
unspecified treble damages, declaratory and equitable relief, and attorneys fees
and expenses. All of these actions have been transferred by the Judicial Panel
for Multidistrict Litigation to the United States District Court for the
Northern District of Illinois for coordinated pretrial procedures. Caremark was
not named in the class action. In April 1995, the Court entered a stay of
pretrial proceedings as to certain Robinson-Patman Act claims in this
litigation, including the Robinson-Patman Act claims brought against Caremark,
pending the conclusion of a first trial of certain of such claims brought by a
limited number of plaintiffs against five defendants not including Caremark. On
July 1, 1996, the district court directed entry of a partial final order in the
class action approving an amended settlement with certain of pharmaceutical
manufacturers. The amended settlement provides for a cash payment of
approximately $351.0 million to class members in settlement of conspiracy claims
as well as a commitment from the settling manufacturers to abide by certain
injunctive provisions. All class action claims against non-settling
manufacturers as well as all opt out and other claims generally, including all
Robinson-Patman Act claims against Caremark, remain unaffected by the
settlement. The district court also certified to the court of appeals for
interlocutory review certain orders relating to non-settled conspiracy claims
against the pharmaceutical manufacturers and wholesalers. These interlocutory
orders do not relate to any of the claims brought against Caremark. The Company
intends to defend these cases vigorously. Although management believes, based on
information currently available, that the ultimate resolution of this matter is
not likely to have a material adverse effect on the operating results and
financial condition of the Company, there can be no assurance that the ultimate
resolution of this matter, if adversely determined, would not have a material
adverse effect on the operating results and financial condition of the Company.

In December 1994, Caremark was notified by the FTC that it was conducting a
civil investigation of the industry concerning whether acquisitions, alliances,
agreements or activities between prescription benefit managers and
pharmaceutical manufacturers, including Caremark's alliance agreements with
certain drug manufacturers, violate Sections 3 or 7 of the Clayton Act or
Section 5 of the Federal Trade Commission Act. The specific nature, scope,
timing and outcome of the investigation are not currently determinable. Under
the statutes, if violations are found, the FTC could seek remedies in the form
of injunctive relief to set aside or modify Caremark's alliance agreements and
an order to cease and desist from certain marketing practices and from entering
into or continuing with certain types of agreements. The Company intends to
defend these cases vigorously. Although management believes, based on
information currently available, that the ultimate resolution of this matter is
not likely to have a material adverse effect on the operating results and
financial condition of the Company, there can be no assurance that the ultimate
resolution of this matter, if adversely determined, would not have a material
adverse effect on the operating results and financial condition of the Company.

EMPLOYEES

As of June 30, 1996, the Company, including its affiliated professional
entities, employed approximately 20,000 people on a full-time equivalent basis.

CORPORATE LIABILITY AND INSURANCE

The Company's business entails an inherent risk of claims of physician
professional liability. To protect its overall operations from such potential
liabilities, the Company has a multi-tiered corporate structure and preserves
the operational integrity of each of its operating subsidiaries. In addition,
the Company maintains professional liability insurance, general liability and
other customary insurance on a claims-made and modified occurrence basis, in
amounts deemed appropriate by management based upon historical claims and the
nature and risks of the business, for all of the affiliated physicians,
practices and operations. This insurance includes "tail" coverage for claims
against the Company's affiliated medical organizations, including those acquired
from Caremark, to cover incidents which were or are incurred but not reported
during the periods for which

48
<PAGE> 50

the related risk was covered by "claims made" insurance. There can be no
assurance that a future claim will not exceed the limits of available insurance
coverage or that such coverage will continue to be available.

Moreover, the Company requires each physician group with which it
affiliates to obtain and maintain professional liability insurance coverage.
Such insurance would provide coverage, subject to policy limits, in the event
the Company were held liable as a co-defendant in a lawsuit for professional
malpractice against a physician. In addition, generally, the Company is
indemnified under the practice management agreements by the affiliated physician
groups for liabilities resulting from the performance of medical services.

PROPERTIES

The Company's corporate headquarters is located at 3000 Galleria Tower in
Birmingham, Alabama and houses approximately 440 employees. Additionally, the
Company has corporate offices in Long Beach, California and Northbrook,
Illinois. The Company currently owns or leases facilities providing medical
services in 25 states, Puerto Rico and six countries. The Company also leases,
subleases or occupies, pursuant to certain acquisition agreements, the clinic
facilities of the affiliated physician groups. The Company anticipates that, as
the affiliated practices continue to grow and add new services, expanded
facilities will be required.

49
<PAGE> 51

MANAGEMENT

DIRECTORS AND EXECUTIVE OFFICERS

The following table sets forth certain information about the executive
officers and directors of the Company as of September 15, 1996:

<TABLE>
<CAPTION>
NAME AGE POSITION WITH THE COMPANY
-------------------------------------------- --- --------------------------------------------
<S> <C> <C>
Larry R. House(1)........................... 53 Chairman of Board, President and Chief
Executive Officer and Director
Mark L. Wagar............................... 45 President -- Western Operations
John J. Gannon.............................. 58 President -- Eastern Operations
James G. Connelly, III...................... 50 President -- Caremark
H. Lynn Massingale, M.D..................... 43 President -- Team Health
Harold O. Knight, Jr........................ 38 Executive Vice President and Chief Financial
Officer
Tracy P. Thrasher........................... 33 Executive Vice President of Administration
and Secretary
William R. Dexheimer........................ 39 Executive Vice President and Chief Operating
Officer -- East
J. Rodney Seay.............................. 49 Executive Vice President of Mergers and
Acquisitions
J. Brooke Johnston, Jr...................... 56 Senior Vice President and General Counsel
Peter J. Clemens, IV........................ 31 Vice President of Finance and Treasurer
Richard M. Scrushy.......................... 44 Director
Larry D. Striplin, Jr.(2)................... 66 Director
Charles W. Newhall III(1)................... 51 Director
Ted H. McCourtney, Jr.(1)................... 57 Director
Walter T. Mullikin, M.D..................... 78 Director
John S. McDonald, J.D.(1)................... 63 Director
Rosalio J. Lopez, M.D.(2)................... 43 Director
Richard J. Kramer........................... 53 Director
C.A. Lance Piccolo.......................... 56 Director
Roger L. Headrick........................... 60 Director
Thomas W. Hodson(2)......................... 49 Director
Harry M. Jansen Kraemer, Jr.(1)............. 41 Director
</TABLE>

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

(1) Member of the Compensation Committee
(2) Member of the Audit Committee

Larry R. House has been President and Chief Executive Officer of the
Company since August 1993, and has been Chairman of the Board since January
1993. From 1985 to 1992, he was Chief Operating Officer of HEALTHSOUTH
Rehabilitation Corporation, now HEALTHSOUTH Corporation, a publicly traded
provider of rehabilitative healthcare services ("HEALTHSOUTH"). From 1992 to
1993, Mr. House was President of HEALTHSOUTH International, Inc. Mr. House is a
member of the Board of Directors of each of HEALTHSOUTH, Capstone Capital
Corporation ("Capstone"), a publicly traded real estate investment trust, and
the American Sports Medicine Institute.

Mark L. Wagar has been President-Western Operations of the Company since
January 1996. From January 1995 through December 1995, Mr. Wagar was Chief
Operating Officer of MME. From March 1994 to December 1994, he was the President
of CIGNA HealthCare of California, a healthcare plan serving enrollees in
California, Oregon and Washington, from January 1993 through February 1994, was
a Vice President of CIGNA HealthCare of California, an HMO. From November 1989
to December 1992, he was the President of Managed Care Partners, Inc., a private
consulting management company specializing in

50
<PAGE> 52

managed care services. He has been involved in healthcare management for over 20
years, including 10 years in managed care companies.

John J. Gannon has been President-Eastern Operations of the Company since
July 1996. For 23 years, Mr. Gannon was a Partner with KPMG Peat Marwick. His
most recent position with KPMG was that of National Partner-in-Charge of
Strategy and Marketing, Healthcare and Life Sciences. He served as one of the
firm's designated industry review specialists for healthcare financial
feasibility studies.

James G. Connelly, III has been President and Chief Operating Officer of
Caremark since August 1992. Mr. Connelly was the President of a subsidiary of
Caremark from April 1992 to November 1992. From May 1990 to November 1992, Mr.
Connelly was a Group Vice President of Baxter International, Inc., a publicly
traded company that is a leading manufacturer and marketer of healthcare
products and services ("Baxter"). Prior to 1990, he was a Corporate Vice
President of Baxter, responsible for its hospital supply business group. Mr.
Connelly also serves as a director of Boise Cascade Office Products Corporation,
a publicly traded company.

H. Lynn Massingale, M.D. has been President and Chief Executive Officer of
Team Health since its formation in March 1994. Dr. Massingale has served as
President of Southeastern Emergency Physicians, Inc., a subsidiary of Team
Health, since 1981. A graduate of the University of Tennessee Center for Health
Sciences in Memphis, Dr. Massingale is certified by the National Board of
Medical Examiners, Tennessee Board of Medical Examiners and American Board of
Emergency Medicine. Dr. Massingale's professional memberships include the
Knoxville Academy of Medicine, Tennessee Medical Association, American Medical
Association and American College of Emergency Physicians.

Harold O. Knight, Jr. has been Executive Vice President and Chief Financial
Officer of the Company since November 1994. Mr. Knight was Senior Vice President
of Finance and Treasurer of the Company from August 1993 to November 1994, and
from March 1993 to August 1993, Mr. Knight served as Vice President of Finance
of the Company. From 1980 to 1993, Mr. Knight was with Ernst & Young LLP, most
recently as Senior Manager. Mr. Knight is a member of the Alabama Society of
Certified Public Accountants and the American Institute of Certified Public
Accountants.

Tracy P. Thrasher has been Executive Vice President of Administration of
the Company since November 1994 and has been Secretary since March 1994. Ms.
Thrasher was Senior Vice President of Administration from March 1994 to November
1994, and from January 1993 to March 1994, she served as Corporate Comptroller
and Vice President of Development. From 1990 to 1993, Ms. Thrasher was the Audit
and Health Care Management Advisory Service Manager with Burton, Canady, Moore &
Carr, P.C., independent public accountants. Ms. Thrasher began her career with
Ernst & Young LLP in 1985, and became a certified public accountant in 1986.

William R. Dexheimer has been Executive Vice President and Chief Operating
Officer-East of the Company since August 1993. From 1989 to 1993, Mr. Dexheimer
was a principal stockholder and Chief Executive Officer of Strategic Health
Resources of the South, Inc., a healthcare development and consulting firm. From
1986 to 1989, Mr. Dexheimer was employed by AMI Brookwood Medical Center as
Senior Vice President of Development and Chief Executive Officer of AMI
Brookwood Primary Care Centers, Inc.

J. Rodney Seay has been Executive Vice President of Mergers and
Acquisitions of the Company since April 1995. From August 1993 to April 1995, he
served as Executive Vice President of Development of the Company. Mr. Seay was
also Secretary of the Company from August 1993 to March 1994. From 1992 to 1993,
he was Vice President of Finance of HEALTHSOUTH. From 1988 to 1992, Mr. Seay was
a Senior Manager with KPMG Peat Marwick. From 1982 to 1988, he served as Chief
Executive Officer of Medical Data Services, a physician practice management
company with over 650 employees and over 1,500 physician clients.

J. Brooke Johnston, Jr. has been Senior Vice President and General Counsel
of the Company since April 1996. Prior to that, Mr. Johnston was a senior
principal of the law firm of Haskell Slaughter Young & Johnston, Professional
Association, Birmingham, Alabama where he practiced corporate and securities law
for over seventeen years. Prior to that Mr. Johnston was engaged in the practice
of law in New York, New York

51
<PAGE> 53

and at another firm in Birmingham. Mr. Johnston is a member of the Alabama State
Bar and the New York and American Bar Associations. Mr. Johnston is a member of
the Board of Directors of United Leisure Corporation, a publicly traded leisure
time company.

Peter J. Clemens, IV has been Vice President of Finance and Treasurer of
the Company since April 1995. From 1991 to 1995, Mr. Clemens worked in Corporate
Banking with Wachovia Bank of Georgia, N.A. Mr. Clemens began his career with
AmSouth Bank, N.A. in 1987, and received a Masters Degree in Business
Administration from Vanderbilt University in 1991.

Richard M. Scrushy has been a member of the Company's Board of Directors
since January 1993. Since 1984, Mr. Scrushy has been Chairman of the Board and
Chief Executive Officer of HEALTHSOUTH. Mr. Scrushy is also a member of the
Board of Directors of Capstone.

Larry D. Striplin, Jr. has been a member of the Company's Board of
Directors since January 1993. Since December 1995, Mr. Striplin has been the
Chairman and Chief Executive Officer of Nelson-Brantley Glass Contractors, Inc.
and Chairman and Chief Executive Officer of Clearview Properties, Inc. Until
December 1995, Mr. Striplin had been Chairman of the Board and Chief Executive
Officer of Circle "S" Industries, Inc., a privately owned bonding wire
manufacturer. Mr. Striplin is a member of the Board of Directors of Kulicke &
Suffa, Inc. a publicly traded manufacturer of electronic equipment, and of
Capstone.

Charles W. Newhall III has been a member of the Company's Board of
Directors since September 1993. He has been a general partner of New Enterprise
Associates, a venture capital firm, since 1978. Mr. Newhall is a member of the
Board of Directors of HEALTHSOUTH, Integrated Health Services, Inc. and OPTA
Food Ingredients, Inc., all publicly traded companies. He is founder and
Chairman of the Mid-Atlantic Venture Association, which was organized in 1988.

Ted H. McCourtney, Jr. has been a member of the Company's Board of
Directors since September 1993. He has been a general partner of Venrock
Associates, a venture capital firm, since 1970. Mr. McCourtney is a member of
the Board of Directors of Cellular Communications, Inc., Cellular Communications
of Puerto Rico, Inc., Cellular Communications International, Inc., International
CabelTel Incorporated, SBSF, Inc. and Structural Dynamics Research Corporation,
all publicly traded companies.

Walter T. Mullikin, M.D., a surgeon, has been a member of the Company's
Board of Directors since November 1995. Dr. Mullikin was Chairman of the Board
of the general partner of MME from 1989 to 1995. He founded Pioneer Hospital and
the predecessors to MME's principal professional corporation in 1957. He was
also the Chairman of the Board, President and a shareholder of Mullikin
Independent Practice Association ("MIPA"), until November 1995. Dr. Mullikin is
a member of the Board of Directors of Health Net, a publicly traded HMO, and was
one of the founders and a past chairman of the Unified Medical Group
Association.

John S. McDonald, J.D. has been a member of the Company's Board of
Directors since November 1995. Mr. McDonald was the Chief Executive Officer of
the general partner of MME from March 1994 to 1995, and he was an executive of
Pioneer Hospital and their related entities since 1967. Mr. McDonald was also a
director, the Secretary and a shareholder of MME's general partner. Mr. McDonald
is on the Board of Directors of the Truck Insurance Exchange and is a past
president of the Unified Medical Group Association.

Rosalio J. Lopez, M.D. has been a member of the Company's Board of
Directors since November 1995. Mr. Lopez had been a director of the general
partner of MME since 1989. Dr. Lopez joined MME's principal professional
corporation in 1984 and serves as the Chairman of its Medical Council and Family
Practice and Managed Care committees. He also acted as a director and a Vice
President of MME's principal professional corporation. He is also a director and
shareholder of MIPA.

Richard J. Kramer has been a member of the Company's Board of Directors
since November 1995. Mr. Kramer is President/Chief Executive Officer and a
director of Catholic Healthcare West ("CHW"). Before joining CHW in September
1989, Mr. Kramer served as the Executive Vice President of LifeSpan, Inc., a
multi-hospital/healthcare system headquartered in Minneapolis, which he joined
in 1971, serving in a variety of capacities, including Vice President of
Planning and Marketing and administrator for Abbott-Northwestern Hospital. Mr.
Kramer is currently a member of the Board of Directors of the California

52
<PAGE> 54

Association of Hospitals and Health Systems and the Hospital Council of Northern
and Central California, the Board of Directors of the California Chamber of
Commerce, the Governing Council of the American Hospital Association Section on
Health Systems and the House of Delegates of the American Hospital Association,
the Advisory Council for the Center for Clinical Integration and the Board of
Directors of the Alumni Association of the University of Minnesota Program in
Health Care Administration.

C.A. Lance Piccolo has been Vice Chairman of the Company's Board of
Directors since September 1996. From August 1992 to September 1996, he was
Chairman of the Board of Directors and Chief Executive Officer of Caremark. From
1987 until November 1992, Mr. Piccolo was an Executive Vice President of Baxter
and from 1988 until November 1992, he served as a director of Baxter. Mr.
Piccolo also serves as a director of Crompton & Knowles Corporation ("Crompton")
and Baxter, each of which is publicly traded.

Roger L. Headrick has been a member of the Company's Board of Directors
since September 1996 and has been President and Chief Executive Officer of the
Minnesota Vikings Football Club since 1991. Additionally, since June 1989, Mr.
Headrick has been president and chief executive officer of ProtaTek
International, Inc., a bio-process and biotechnology company that develops and
manufactures animal vaccines. Prior to 1989, he was Executive Vice President and
Chief Financial Officer of The Pillsbury Company, a food manufacturing and
processing company. Mr. Headrick also serves as a director of Crompton.

Thomas W. Hodson has been a member of the Company's Board of Directors
since September 1996, and was the Senior Vice President and Chief Financial
Officer of Caremark from August 1992 until September 1996. Mr. Hodson was a
Group Vice President of Baxter, from April 1992 to November 30, 1992, and from
1990 to 1992 he was a Senior Vice President of Baxter responsible for financial
relations, strategic planning, acquisitions and divestitures and corporate
communications. From 1988 to 1990, Mr. Hodson was a corporate vice president of
Baxter.

Harry M. Jansen Kraemer, Jr. has been a member of the Company's Board of
Directors since September 1996, and is a Vice President and Chief Financial
Officer of Baxter, having served in that capacity since November 1993. He was
promoted to Baxter's three-member Office of the Chief Executive in June 1995,
and appointed to Baxter's Board of Directors in November 1995. In addition to
his duties as its chief financial officer he is responsible for Baxter's Global
Hospital Business, Global Renal Business, and the Baxter Japan subsidiary. Mr.
Kraemer has been an employee of Baxter since 1982 serving in a variety of
positions, including Vice President, Group Controller for Baxter's hospital and
alternate-site businesses, president of Baxter's Hospitex Division and Vice
President Finance and Operations for Baxter's global-business group.

CLASSIFIED BOARD OF DIRECTORS

Pursuant to the terms of the Certificate of Incorporation and the By-laws
of the Company, the Board of Directors is divided into three classes, with each
class being as nearly equal in number as reasonably possible. One class holds
office for a term that will expire at the Annual Meeting of Stockholders to be
held in 1997, a second class holds office for a term that will expire at the
Annual Meeting of Stockholders to be held in 1998 and a third class holds office
for a term that will expire at the Annual Meeting of Stockholders to be held in
1999. Each director holds office for the term to which he is elected and until
his successor is duly elected and qualified. At each annual meeting of
stockholders of the Company, the successors to the class of directors whose
terms expire at such meeting are elected to hold office for a term expiring at
the annual meeting of stockholders held in the third year following the year of
their election. Messrs. Scrushy, McCourtney and Piccolo and Dr. Lopez have terms
expiring in 1997, Messrs. House, McDonald, Kramer, Newhall and Headrick have
terms expiring in 1998, and Messrs. Striplin, Kraemer and Hodson and Dr.
Mullikin have terms expiring in 1999. The Company's Board of Directors elects
officers annually and such officers serve at the discretion of the Board of
Directors.

COMMITTEES OF THE BOARD OF DIRECTORS

The Company's Board of Directors currently has two committees: the Audit
Committee and the Compensation Committee.

53
<PAGE> 55

The Audit Committee has the responsibility for reviewing and supervising
the financial controls of the Company. The Audit Committee makes recommendations
to the Company's Board of Directors with respect to the Company's financial
statements and the appointment of independent auditors, reviews significant
audit and accounting policies and practices, meets with the Company's
independent public accountants concerning, among other things, the scope of
audits and reports, and reviews the performance of overall accounting and
financial controls of the Company. The Audit Committee consists of Messrs.
Striplin and Hodson and Dr. Lopez.

The Compensation Committee has the responsibility for reviewing the
performance of the officers of the Company and recommending to the Company's
Board of Directors annual salary and bonus amounts for all officers of the
Company. The Compensation Committee consists of Messrs. House, Newhall,
McCourtney, McDonald and Headrick.

EXECUTIVE OFFICER COMPENSATION

Executive Officer Compensation. The following table presents certain
information concerning compensation paid or accrued for services rendered to the
Company in all capacities during the years ended December 31, 1995 and 1994, for
the chief executive officer and the four other most highly compensated executive
officers of the Company whose total annual salary and bonus in the last fiscal
year exceeded $100,000 (collectively, the "Named Executive Officers").

SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
AWARDS
ANNUAL COMPENSATION(1) ------------
SECURITIES ALL OTHER
---------------------- UNDERLYING COMPENSATION
NAME AND PRINCIPAL POSITION HELD YEAR SALARY ($) BONUS ($) OPTIONS (#) ($)
- ------------------------------------------- ----- ---------- --------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Larry R. House(2).......................... 1995 $ 349,908 $ 600,000 828,000 $ 28,335(3)
Chairman of the Board, President and 1994 335,000 -- 457,000 25,474(4)
Chief Executive Officer
Harold O. Knight, Jr....................... 1995 132,920 102,230 200,000 12,227(5)
Executive Vice President and Chief 1994 90,000 -- 30,000 3,541(6)
Financial Officer
William R. Dexheimer....................... 1995 172,996 2,196 55,000 12,254(7)
Executive Vice President and Chief 1994 162,940 -- 15,000 6,596(8)
Operating Officer -- East
Mark L. Wagar(9)........................... 1995 346,601 -- 250,000 30,485(10)
President -- Western Operations
Tracy P. Thrasher.......................... 1995 115,250 42,240 185,000 12,145(11)
Executive Vice President of 1994 83,000 -- 50,000 3,510(12)
Administration and Secretary
</TABLE>

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

(1) Dollar value of perquisites and other benefits were less than the lesser of
$50,000 or 10% of total salary and bonus for each Named Executive Officer.
(2) Pursuant to a reimbursement agreement, the Company paid HEALTHSOUTH the sum
of $150,195 as reimbursement for services rendered by Mr. House from
January 1, 1994 to August 31, 1994, when the agreement terminated. See
"-- Compensation Committee Interlocks and Insider Participation".
(3) Represents $585 that was paid with respect to life, long-term disability,
health, dental and accidental death insurance; $2,750 that was paid with
respect to automobile allowance; and $25,000 that was paid with respect to
split premium life insurance for Mr. House for 1995.
(4) Represents $434 that was paid with respect to life, long-term disability,
health, dental and accidental death insurance; $2,200 that was paid with
respect to automobile allowance; and $22,840 that was paid with respect to
split premium life insurance for Mr. House for 1994.
(5) Represents $477 that was paid with respect to life, long-term disability,
health, dental and accidental death insurance; $1,750 that was paid with
respect to automobile allowance; and $10,000 that was paid with respect to
split premium life insurance for Mr. Knight for 1995.

54
<PAGE> 56

(6) Represents $391 that was paid with respect to life, long-term disability,
health, dental and accidental death insurance; and $3,150 that was paid
with respect to automobile allowance for Mr. Knight for 1994.
(7) Represents $504 that was paid with respect to life, long-term disability,
health, dental and accidental death insurance; $1,750 that was paid with
respect to automobile allowance; and $10,000 that was paid with respect to
split premium life insurance for Mr. Dexheimer for 1995.
(8) Represents $2,396 that was paid with respect to life, long-term disability,
health, dental and accidental death insurance; and $4,200 that was paid
with respect to automobile allowance for Mr. Dexheimer for 1994.
(9) Mr. Wagar commenced employment in January 1995.
(10) Represents $5,084 that was paid with respect to life, long-term disability,
health, dental and accidental death insurance; $1,548 that was paid as a
flex allowance; and $23,853 that was paid as an executive life insurance
benefit for Mr. Wagar for 1995.
(11) Represents $395 that was paid with respect to life, long-term disability,
health, dental and accidental death insurance; $1,750 that was paid for
automobile allowance; and $10,000 that was paid with respect to split
premium life insurance for Ms. Thrasher for 1995.
(12) Represents $360 that was paid with respect to life, long-term disability,
health, dental and accidental death insurance; and $3,150 that was paid
with respect to automobile allowance for Ms. Thrasher for 1994.

Option Grants in 1995. The following table contains information concerning
the grant of stock options under the Option Plans (as defined herein) to the
Named Executive Officers in 1995:

OPTION GRANTS IN LAST FISCAL YEAR

<TABLE>
<CAPTION>
INDIVIDUALS GRANTS(1) POTENTIAL REALIZABLE
-------------------------------------------------------- VALUE AT ASSUMED ANNUAL
NUMBER OF PERCENT OF RATES OF STOCK PRICE
SECURITIES TOTAL OPTIONS APPRECIATION FOR OPTION
UNDERLYING GRANTED TO EXERCISE OR TERM(1)
OPTIONS EMPLOYEES IN BASE PRICE EXPIRATION -----------------------
NAME GRANTED(#)(2) FISCAL YEAR ($/SH) DATE 5%($) 10%($)
- -------------------------- ------------- ------------- ----------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Larry R. House............ 328,000(3) 11.9% $ 12.00 2005 $2,475,329 $6,272,970
500,000(3) 18.1 27.25 2005 8,568,689 21,714,741
Harold O. Knight, Jr. .... 50,000 1.8 12.00 2005 377,337 956,245
150,000 5.4 27.25 2005 2,570,607 6,514,422
William R. Dexheimer...... 15,000 0.5 12.00 2005 113,201 286,874
40,000 1.4 27.25 2005 685,495 1,737,179
Mark L. Wagar............. 150,000 5.4 28.25 2005 2,664,941 6,753,484
100,000(3) 3.6 28.25 2005 1,776,627 4,502,322
Tracy P. Thrasher......... 85,000 3.1 12.00 2005 641,473 1,625,617
100,000 3.6 27.25 2005 1,713,738 4,342,948
</TABLE>

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

(1) The potential realizable value is calculated based on the term of the option
at its time of grant (10 years). It is calculated by assuming that the
stock price on the date of grant appreciates at the indicated annual rate
compounded annually for the entire term of the option and that the option
is exercised and sold on the last day of its term for the appreciated stock
price. No gain to the optionee is possible unless the stock price increases
over the option term, which will benefit all stockholders.
(2) The vesting of each option is cumulative and no vested portion expires until
the expiration of the option. Unless otherwise noted, options vest at the
rate of 20% per year over a five-year period beginning on the date of
grant.
(3) These options are 100% vested.

55
<PAGE> 57

Aggregated Option Exercises in Last Fiscal Year and Fiscal Year-End Option
Values. The following table provides information with respect to options
exercised by the Named Executive Officers during 1995 and the number and value
of securities underlying unexercised options held by the Named Executive
Officers as of December 31, 1995.

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

<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS
SHARES ACQUIRED VALUE OPTIONS AT FY-END(#) AT FY-END($)(1)
NAME ON EXERCISE(#) REALIZED($) EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
- -------------------------- --------------- ----------- ------------------------- -------------------------
<S> <C> <C> <C> <C>
Larry House............... 402,000 $ 5,226,000 883,000/0 $11,567,000/$0
Harold O. Knight, Jr. .... 72,000 1,417,000 40,000/218,000 382,500/3,432,400
William R. Dexheimer...... 3,000 39,000 14,000/53,000 207,400/731,200
Mark L. Wagar............. -- -- 130,000/120,000 747,528/570,000
Tracy P. Thrasher......... 32,000 567,500 37,000/186,000 472,000/3,134,400
</TABLE>

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

(1) Based on the $33.00 per share closing sale price of the Common Stock on
December 29, 1995.

DIRECTOR COMPENSATION

Directors of the Company who are not also employed by the Company are paid
directors' fees of $2,500 for each meeting of the Company's Board of Directors
attended in person, $500 for each meeting of the Company's Board of Directors
attended by phone, and $1,000 for each meeting of the Audit Committee or the
Compensation Committee attended in person. In addition, directors are reimbursed
for travel costs and other out-of-pocket expenses incurred in attending each
directors' meeting and committee meeting. Outside directors are eligible to
receive the grant of stock options under the Company's Option Plans. In November
1995, each of Messrs. Scrushy, Striplin, Newhall, Meadow, McCourtney, McDonald
and Kramer and Dr. Mullikin were granted ten-year options to purchase 10,000
shares of Common Stock and Dr. Lopez was granted a ten-year option to purchase
20,000 shares, all at an exercise price of $28.25 per share, the market price on
the date of grant. See " -- Executive Officer Compensation -- Option Grants in
Last Fiscal Year" and "Principal Stockholders".

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

Messrs. House, Newhall and McCourtney served on the Compensation Committee
of the Company's Board of Directors during 1995, joined by Mr. McDonald in
November 1995 and Mr. Headrick in September 1996. Mr. House also served as
Chairman of the Board, President and Chief Executive Officer of the Company
while serving on the Compensation Committee.

On August 31, 1993, MedPartners entered into a Reimbursement Agreement with
HEALTHSOUTH to allow Mr. House to serve as President of HEALTHSOUTH
International, Inc. (the "Reimbursement Agreement"). The Reimbursement Agreement
provided for the reimbursement by MedPartners to HEALTHSOUTH of one-half of Mr.
House's compensation and benefits. Under the Reimbursement Agreement,
MedPartners paid HEALTHSOUTH the sum of $150,195 for the period from January 1,
1994 to August 31, 1994, when the Reimbursement Agreement terminated. On
September 1, 1994, MedPartners entered into a consulting agreement, terminated
in February 1995, with HEALTHSOUTH, under which MedPartners agreed to make
available to HEALTHSOUTH from time to time at reasonable times and upon
reasonable requests the services of Mr. House as a consultant in connection with
the activities of HEALTHSOUTH International, Inc. In exchange for such services,
HEALTHSOUTH paid MedPartners a consulting fee equal to one-half of Mr. House's
compensation and benefits.

In connection with the sale of the convertible preferred stock described
below, the Company entered into a non-competition and severance agreement with
Mr. House. Mr. House's agreement was terminated upon his entry into the
employment agreement described below.

In September 1993 and March 1994, the Original Predecessor issued shares of
Series A and Series B Convertible Preferred Stock in private transactions.
Entities affiliated with Messrs. House, Newhall and McCourtney purchased shares
in each transaction. See "Certain Transactions -- Financings".

56
<PAGE> 58

In connection with the acquisition of MME described under
"Business -- Acquisition Program", the Company entered into Termination and
Consulting Agreements with Mr. McDonald. Under the Termination Agreement, Mr.
McDonald's employment agreement with MME was terminated in consideration of
which Mr. McDonald received a lump sum payment of $796,000, continuation of
certain fringe benefits and perquisites under the former employment agreement
for 36 months, access to an office and support staff until death or disability,
payments from the Company and a trust set up by the Company to fund the
remainder of MME's pension obligations to Mr. McDonald, and payment of all
health and medical care (including prescriptions) for Mr. McDonald for the
remainder of his life through a Company-sponsored health insurance plan. The
Company and Mr. McDonald entered into a five-year Consulting Agreement whereby
Mr. McDonald will receive in consideration for his services a consulting fee of
$2,230,000, to be paid over five years with an initial payment of $669,000 in
November 1995 and equal payments of $390,250 on each anniversary of such date,
access to an office and support staff and certain other benefits. See "Certain
Transactions -- Acquisition-Related Agreements". See also "Certain
Transactions".

EMPLOYMENT AGREEMENTS

The Company has employment agreements with Messrs. House, Wagar and Knight
and Ms. Thrasher (individually, the "Executive" and collectively, the
"Executives"). Mr. House's employment agreement, which has a term of five years,
provides that Mr. House shall be employed as the Chairman of the Board,
President and Chief Executive Officer and shall be nominated as a director of
the Company during such term. The agreement provides for a base salary of
$935,700, an annual incentive bonus of up to $776,700, based on the achievement
of certain performance standards established by the Compensation Committee, and
eligibility for other benefits normally found in executive employment
agreements. The employment agreements for each of Messrs. Wagar and Knight and
Ms. Thrasher provide for base salaries of $350,000, $250,000 and $235,000,
respectively, and for annual incentive and performance bonuses of up to 75% of
base salary in addition to employee benefits similar to those provided in Mr.
House's agreement. Each of the employment agreements is automatically extended
for an additional year on the anniversary thereof unless MedPartners shall give
prior notice of non-extension.

The Executives are entitled to certain compensation upon termination of
their employment agreement prior to its expiration. If the Company terminates
the agreement for "Cause" (as defined) or if the Executive terminates without
"Good Reason" (as defined), the Executive will receive a lump sum payment of six
months base salary (12 months in the case of Mr. House) plus certain employment
benefits. If the agreement terminates due to the Executive's death, disability
or retirement, the Executive will receive a lump sum payment of six months base
salary (12 months in the case of Mr. House), accrued bonus and immediate vesting
of all stock options. If the Executive terminates the agreement for "Good
Reason" and no "Change in Control" (as defined) of the Company has occurred, the
Executive will receive continued salary and bonus payments for three years (or,
if greater, for the remainder of the contract term in the case of Mr. House),
continued participation in employee benefit plans for such period and immediate
vesting of all stock options. If the Company terminates the agreement without
Cause after a Change in Control or if the Executive terminates after a Change in
Control for Good Reason, the Executive shall receive a lump sum payment equal to
three times the Executive's base salary and bonus at the time of termination,
continued benefits for a term of three years and immediate vesting of all stock
options. The agreements provide that any payment by the Company to the Executive
which is subject to the excise tax imposed by Section 4999 of the Internal
Revenue Code of 1986, as amended (the "Code"), shall be "grossed up" such that
the Executive retains an amount of the "gross up" payment equal to the excise
tax imposed on the original payment.

NON-COMPETITION AND SEVERANCE AGREEMENTS

In September 1993, the Company entered into non-competition and severance
agreements with Mr. House and Mr. Dexheimer, each of which contains the terms
described above under "-- Compensation Committee Interlocks and Insider
Participation" related to the agreement with Mr. House. The Company also entered
into non-competition, nondisclosure and development agreements with each of
Messrs. Knight, Seay and Dexheimer and Ms. Thrasher pursuant to which each has
agreed not to disclose any of the Company's confidential information or assist
or work for any of the Company's competitors for a period of one year after
termination of employment. In addition, each of such executive officers agreed
to assign any rights in any

57
<PAGE> 59

design, invention, software, process, trade secret or intellectual property that
relates to or resulted from work performed at the Company.

STOCK OPTION PLANS

The Company has a 1993 Stock Option Plan (the "1993 Option Plan") and a
1995 Stock Option Plan (the "1995 Option Plan", together with the 1993 Option
Plan, the "Option Plans"). The objectives of Option Plans are to attract and
retain qualified personnel, to provide incentives to employees, officers and
directors of the Company and to promote the success of the Company. A total of
1,555,000 shares of Common Stock, including 1,055,000 shares of Common Stock for
issuance upon the exercise of options granted to officers, directors,
consultants and employees of the Company and 500,000 shares of Common Stock for
issuance upon the exercise of options issued in connection with the acquisition
of the assets of physician practices, are covered by the 1993 Option Plan. A
total of 7,099,150 shares of Common Stock are covered by the 1995 Option Plan.
Additionally, the 1995 Option Plan contains a provision whereby the number of
shares of Common Stock for which options may be granted under the 1995 Option
Plan shall automatically increase on the first trading day of each calendar year
during the term of the 1995 Option Plan by an amount equal to 1% of the shares
of Common Stock outstanding on December 31 of the immediately preceding year.
However, such additional shares shall be available only for the grant of
non-qualified stock options and not for the grant of incentive options. The
Option Plans authorize the grant of options to purchase Common Stock intended to
qualify as incentive stock options ("Incentive Options") under Section 422 of
the Code and the grant of options that do not qualify as Incentive Options
("Non-Qualified Options") under Section 422 of the Code.

The Option Plans are administered by the Compensation Committee. The
Compensation Committee, subject to the approval of the Company's Board of
Directors and the provisions of the Option Plans, has full power to select the
individuals to whom awards will be granted, to fix the number of shares that
each optionee may purchase, to set the terms and conditions of each option, and
to determine all other matters relating to the Option Plans. The Option Plans
provide that the Compensation Committee will select grantees from among
full-time employees, officers, directors and consultants of the Company or its
subsidiaries, and individuals or entities subject to an acquisition or
management agreement with the Company.

The option exercise price of each option shall be determined by the
Compensation Committee, but shall not be less than 100% of the fair market value
of the shares on the date of grant in the case of Incentive Options and not less
than 85% of the fair market value of the shares on the date of grant in the case
of Non-Qualified Options granted to employees. No Incentive Option may be
granted to any employee who owns at the date of grant stock representing in
excess of 10% of the combined voting power of all classes of stock of the
Company or a parent or a subsidiary unless the exercise price for stock subject
to such options is at least 110% of the fair market value of such stock at the
time of grant and the option term does not exceed five years. The aggregate fair
market value of stock with regard to which Incentive Options are exercisable by
an individual for the first time during any calendar year may not exceed
$100,000.

The term of each option shall be fixed by the Committee and may not exceed
ten years from the date of grant. If a participant who holds options ceases to
be an employee, consultant or director or otherwise affiliated with the Company
(the "Termination"), for cause (as defined in the Option Plans), and such person
shall not have fully exercised any option granted under the Option Plans, the
option or the remaining portion thereof will expire on the date of Termination.
Any option or portion thereof which has not expired or been exercised on or
before the date of Termination, without cause, expires 90 days after the date of
Termination. Notwithstanding the foregoing, in the event of Termination due to
the optionee's death or incapacity, the option will terminate 12 months
following the date of such optionee's death or incapacity. Options granted under
the Option Plans may be exercisable in installments.

Upon the exercise of options, the option exercise price must be paid in
full, either in cash or other form acceptable to the Committee, including
delivery of a full recourse promissory note, delivery of shares of Common Stock
already owned by the optionee or delivery of other property. Unless terminated
earlier, the 1993 Option Plan will terminate in 2003 and the 1995 Option Plan
will terminate in 2005.

As of June 30, 1996, the Company had outstanding options at exercise prices
ranging from $0.20 to $19.25 to acquire 647,170 shares of Common Stock under the
1993 Option Plan. At the same date, there were outstanding options under the
1995 Option Plan to acquire 5,172,440 shares of Common Stock at exercise prices
ranging from $12.00 to $33.00 per share.

In connection with the Caremark Acquisition, the Company assumed and
adopted the Caremark International Inc. 1992 Incentive Compensation Plan (the
"Caremark Incentive Plan"), renaming it the

58
<PAGE> 60

"MedPartners Incentive Compensation Plan" (the "Incentive Plan"). The purpose of
the Incentive Plan is to increase stockholder value and to advance the interests
of the Company by awarding equity and performance-based incentives designed to
attract, retain and motivate employees. A total of 13,253,789 shares of Common
Stock are covered by the Incentive Plan. The Incentive Plan is administered by
the Board of Directors of the Company, which has the authority to manage the
operation of the Incentive Plan, prescribe rules relating to the Incentive Plan,
make awards under the Incentive Plan as it deems appropriate, modify the terms
of outstanding awards and take all other actions as it deems necessary or
desirable for the implementation and administration of the Incentive Plan.

The Incentive Plan authorizes the grant of options to purchase Common
Stock. The term of each option is fixed by the terms of its grant and may not
exceed ten years from the date of grant. Under the Incentive Plan, the price of
each option shall not be less than the fair market value of the Common Stock on
the date of the grant. The Incentive Plan also authorizes the grant of stock
appreciation rights, restricted stock and performance shares. Immediately prior
to consummation of the Caremark Acquisition, giving effect to the conversion of
the options and restricted shares outstanding immediately prior to the Caremark
Acquisition, there were options to purchase 8,294,019 shares of Common Stock and
69,766 shares of restricted stock outstanding under the Incentive Plan, leaving
4,890,004 shares available for future grant. No stock appreciation rights or
performance shares are outstanding under the Incentive Plan.

CERTAIN TRANSACTIONS

ACQUISITION AGREEMENTS

In connection with the acquisition of MME and the Caremark Acquisition, the
Company entered into certain termination and consulting agreements with Dr.
Mullikin and Messrs. McDonald, Piccolo and Hodson.

Termination Agreements. In November 1995, the Company and each of Dr.
Mullikin and Mr. McDonald entered into a Termination Agreement that terminated
their previous employment agreements with MME, in consideration of which they
received, or shall receive, a lump sum payment of $1,064,000, in the case of Dr.
Mullikin, and $796,000 in the case of Mr. McDonald, continuation of certain
fringe benefits and perquisites for 36 months, payments from the Company and a
trust set up by the Company to fund the remainder of MME's pension obligations
to Dr. Mullikin or to Dr. Mullikin's spouse, should she survive him, and Mr.
McDonald, payment of all health and medical care (including prescriptions) for
Dr. Mullikin and his spouse and Mr. McDonald for the remainder of their lives
through the Company sponsored health insurance plan, a death payment benefit to
be paid to Dr. Mullikin's designated beneficiary or estate of $2,700,000, and
certain other benefits. See "Management -- Compensation Committee Interlocks and
Insider Participation".

Consulting Agreements. In November 1995, the Company and each of Dr.
Mullikin and Mr. McDonald entered into a five-year Consulting Agreement whereby
each will receive in consideration for his services: consulting fees of
$2,480,000 to Dr. Mullikin, to be paid over five years with an initial payment
of $744,000 in November, 1995, and equal payments of $434,000 on each
anniversary of such date, and $2,230,000 to Mr. McDonald, to be paid over five
years with an initial payment of $669,000 in November 1995, and equal payments
of $390,250 on each anniversary thereof, access to an office and support staff
and certain other benefits.

In September 1996, the Company and each of Messrs. Piccolo and Hodson
entered into a consulting agreement (the "Piccolo Agreement" and "Hodson
Agreement", respectively). The term of the Piccolo Agreement is ten years,
unless terminated sooner. Over the course of such ten- year period, Mr. Piccolo
will be paid consulting fees totaling approximately $5.4 million. Upon
commencement of the term of the Piccolo Agreement, Mr. Piccolo's employment with
Caremark was terminated entitling him to a severance payment of $2,805,426 and
the other benefits provided for in his severance agreement and the "gross up"
provisions of that agreement will apply to payments made pursuant to the Piccolo
Agreement in the event such consulting payments are determined to be "excess
parachute" payments. Mr. Piccolo will be eligible to participate in all health
and medical employee benefit plans and programs available, from time to time, to
employees of the

59
<PAGE> 61

Company and Caremark until he reaches the age of 65. In the event Mr. Piccolo
dies prior to age 65, his spouse will be entitled to receive these benefits
until she reaches the age of 65. After age 65, Mr. Piccolo and his spouse will
be provided with a prescription drug program comparable to that provided
Caremark employees through Caremark's prescription drug benefit program. Mr.
Piccolo will be provided with an adequate office and secretarial support, as
well as reimbursement of reasonable expenses, and will be subject to certain
non-compete and confidentiality restrictions.

The term of the Hodson Agreement is one year, unless terminated sooner.
Over the term, Mr. Hodson will be paid consulting fees of $318,856. The Hodson
Agreement may be extended on the same terms for an additional one-year period.
Upon commencement of the term of the Hodson Agreement, Mr. Hodson's employment
with Caremark was terminated, entitling him to a severance payment of
$1,052,138, and the other benefits provided for in his severance agreement. The
"gross up" provisions of that severance agreement will apply to payments made
pursuant to the Hodson Agreement in the event such consulting payments are
determined to be "excess parachute" payments.

FINANCINGS

In September 1993 and February 1994, the Original Predecessor issued an
aggregate of 4,000,562 shares of Series A Convertible Preferred Stock in a
private placement transaction for aggregate consideration of $8,001,124. Certain
directors and officers of the Company, or entities affiliated with such
individuals, purchased shares of Series A Convertible Preferred Stock as
follows: New Enterprise Associates VI, L.P. -- 875,000 shares; New Venture
Partners III, L.P. -- 125,000 shares; Venrock Associates -- 750,000 shares;
Frontenac Venture VI, L.P. -- 1,000,000 shares; HEALTHSOUTH -- 157,500 shares;
and Ms. Thrasher -- 11,250 shares.

In March 1994 and May 1994, the Original Predecessor issued an aggregate of
3,000,000 shares of Series B Convertible Preferred Stock in a private placement
transaction for aggregate consideration of $12,000,000. Certain directors and
officers of the Original Predecessor, or entities affiliated with such
individuals, purchased shares of Series B Convertible Preferred Stock as
follows: New Enterprise Associates, VI, L.P. -- 625,000 shares; New Venture
Partners III, L.P. -- 37,500 shares; Venrock Associates -- 500,000 shares;
Frontenac Venture VI, L.P. -- 625,000 shares; HEALTHSOUTH -- 250,000 shares; Mr.
Scrushy -- 100,000 shares; Mr. Striplin -- 25,000 shares; and Ms.
Thrasher -- 10,000 shares.

All the shares of convertible preferred stock were automatically converted
into shares of the Original Predecessor's common stock upon the consummation of
its initial public offering in February 1995. See "Principal Stockholders" for
information about affiliations between directors and executive officers of the
Company and certain of the entities who purchased shares of the convertible
preferred stock.

The Mullikin Family Trust, a trust formed for the benefit of Dr. Mullikin
and his spouse, was the holder of two notes issued in November 1992 by 5000
Airport Plaza, a California limited partnership which is controlled by the
Company, one in the principal amount of $2,975,000, having a 20-year term and
bearing an interest rate of 10% per annum, and the other in the principal amount
of $850,000, having a 10-year term and bearing an interest rate of 10% per
annum, each secured by the 5000 Airport Plaza building, where the Company's
western executive offices are located. These notes were paid in full in April
1996.

60
<PAGE> 62

PRINCIPAL STOCKHOLDERS

The following table sets forth certain information regarding beneficial
stock ownership of the Company as of September 15, 1996: (i) each director and
Named Executive Officer of the Company, (ii) all directors and executive
officers as a group, and (iii) each stockholder known by the Company to be the
beneficial owner of more than 5% of the outstanding Common Stock. Except as
otherwise indicated, each person or entity listed below has sole voting and
investment power with respect to all shares shown to be beneficially owned by
him or it except to the extent such power is shared by a spouse under applicable
law. Shares of Common Stock subject to options held by directors and executive
officers that are exercisable within 60 days of September 15, 1996, are deemed
outstanding for the purpose of computing such director's or executive officer's
beneficial ownership and the beneficial ownership of all directors and executive
officers as a group.

<TABLE>
<CAPTION>
NUMBER OF SHARES OF PERCENTAGE
THE COMPANY'S OF COMMON
NAME POSITION HELD COMMON STOCK STOCK OWNED
- ------------------------------- ------------------------------- -------------------- -----------
<S> <C> <C> <C>
Larry R. House................. Chairman, President and Chief 3,605,000(1) 2.42%
Executive Officer and
Director
Mark L. Wagar.................. President -- Western Operations 233,005(2) *
Harold O. Knight, Jr........... Executive Vice President and 198,000(3) *
Chief Financial Officer
William R. Dexheimer........... Executive Vice President and 258,000(4) *
Chief Operating
Officer -- East
Tracy P. Thrasher.............. Executive Vice President and 173,800(5) *
Corporate Secretary
Larry D. Striplin, Jr.......... Director 99,100(6) *
Richard M. Scrushy............. Director 1,915,500(7) 1.31
Charles W. Newhall III......... Director 1,502,000(8) 1.03
Ted H. McCourtney, Jr.......... Director 56,841(9) *
Walter T. Mullikin, M.D........ Director 432,424(10) *
John S. McDonald............... Director 303,281(11) *
Richard J. Kramer.............. Director 1,869,674(12) 1.28
Rosalio J. Lopez, M.D.......... Director 99,069(13) *
C.A. Lance Piccolo............. Director 1,422,611(14) *
Roger L. Headrick.............. Director 86,938(15) *
Thomas W. Hodson............... Director 707,910(16) *
Harry M. Jansen Kraemer, Jr. Director 565(17) *
All executive officers and
directors as a group (23
persons)..................... 14,253,929(18) 9.36
</TABLE>

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

* Less than 1%.
(1) Includes options to purchase 2,428,000 shares.
(2) Includes options to purchase 230,000 shares.
(3) Includes options to purchase 136,000 shares.
(4) Includes options to purchase 44,000 shares and 1,000 shares held in trust.
(5) Includes options to purchase 118,000 shares, 2,000 shares held in trust for
a minor child, and 11,250 shares held jointly with spouse.
(6) Includes options to purchase 2,000 shares.
(7) Includes options to purchase 17,000 shares, 250,000 shares held in trust
for minor children, and 1,098,500 shares owned by HEALTHSOUTH. Mr. Scrushy
is Chairman of the Board, President and Chief Executive Officer of
HEALTHSOUTH and disclaims beneficial ownership of the shares owned by
HEALTHSOUTH.

61
<PAGE> 63

(8) Includes options to purchase 2,000 shares, and 1,500,000 shares owned of
record by New Enterprise Associates VI, Limited Partnership ("NEA"), of
which Mr. Newhall is the general partner. Mr. Newhall shares voting and
investment power with respect to such shares owned by NEA.
(9) Includes options to purchase 2,000 shares.
(10) Includes options to purchase 2,000 shares and 430,424 shares held by the
Mullikin Family Trust U/D/T, dated February 10, 1976.
(11) Includes options to purchase 2,000 shares and 301,281 shares held by
certain trusts for the benefit of Mr. McDonald.
(12) Includes options to purchase 2,000 shares and 1,867,674 shares owned of
record by DCNHS-West Partnership, L.P. ("DCNHS"). Mr. Kramer is the
President and Chief Executive Officer of CHW, which is the sole general
partner of DCNHS. Mr. Kramer disclaims beneficial ownership of the shares
owned by DCNHS.
(13) Includes options to purchase 10,000 shares and 89,069 shares held by
certain trusts for the benefit of Dr. Lopez and members of his family.

(14) Includes options to purchase 1,422,611 shares, 10,399 shares held as joint
tenants with spouse, and 26,511 shares held in the Company's 401(k) plan.

(15) Includes options to purchase 54,208 shares and 1,210 held by spouse.

(16) Includes options to purchase 648,635 shares and 18,534 shares held in the
Company's 401(k) plan.

(17) Includes 50 shares held in spouse's individual retirement account.

(18) Includes options to purchase a total of 5,884,034 shares.

62
<PAGE> 64

DESCRIPTION OF THE NOTES

The Notes will be issued under an indenture to be dated as of October ,
1996 (the "Indenture") between the Company and First Chicago Trust Company of
New York, as trustee (the "Trustee"). The following summary of certain
provisions of the Indenture does not purport to be complete and is subject to,
and qualified in its entirety by reference to, the provisions of the Indenture
(the form of which has been filed as an exhibit to the Registration Statement of
which this Prospectus is a part), including the definitions of certain terms
contained therein and those terms made part of the Indenture by reference to the
Trust Indenture Act of 1939, as amended, as in effect on the date of the
Indenture.

GENERAL

The Notes will be general unsecured obligations of the Company limited to
$300,000,000 aggregate principal amount. The Notes will mature on September 15,
2006. Interest on the Notes will accrue at the rate of % per annum and will
be payable semi-annually on March 15 and September 15 of each year, commencing
March 15, 1997, to the Holders of record of Notes at the close of business on
the February 28 and August 31 immediately preceding such interest payment date.
Interest on the Notes will accrue from the most recent date to which interest
has been paid or, if no interest has been paid, from the original date of
issuance of the Notes. Interest will be computed on the basis of a 360-day year
of twelve 30-day months.

The Notes are not redeemable prior to maturity and will not be entitled to
the benefit of any mandatory sinking fund.

The Notes will be issued only in registered form without coupons, in
denominations of $1,000 and integral multiples thereof. The Notes will be
initially issued in the form of one or more book-entry notes (each, a "Global
Note"). Principal of and interest on the Global Notes will be payable, and the
Global Notes will be transferable and exchangeable, only as provided for below
under the caption "-- Global Notes: Form, Exchange and Transfer". Principal of
and interest on Notes subsequently issued in a form other than as a Global Note
will be payable, and such Notes will be transferable and exchangeable, at the
corporate trust office of the Trustee. In addition, interest payable with
respect to Notes subsequently issued in a form other than as a Global Note may
be paid, at the option of the Company, by check mailed to the Person entitled
thereto as shown on the security register of the Notes. No service charge will
be made for any transfer or exchange of Notes, except in certain circumstances
for any tax or other governmental charge that may be imposed in connection
therewith.

RANKING

The Notes will be general unsecured obligations of the Company ranking
senior in right of payment to all existing and future subordinated indebtedness
of the Company and pari passu in right of payment with all existing and future
unsubordinated and unsecured obligations of the Company. The Notes will be
effectively subordinated to all existing and future secured indebtedness of the
Company and to all existing and future indebtedness and other liabilities of the
Company's subsidiaries. As of June 30, 1996, after giving effect to the Offering
and the use of proceeds therefrom and the Borrowings, and assuming that all of
the outstanding Caremark Notes are purchased in the Debt Tender Offer, the
Company would have had approximately $733.0 million of indebtedness outstanding,
$161.9 million of which would have effectively ranked senior in right of payment
to the Notes and $271.1 million of which would have ranked pari passu with the
Notes.

Except as set forth under "Restrictions on Subsidiary Indebtedness" below,
the Indenture does not contain any restrictions on the incurrence of unsecured
indebtedness by the Company or its Subsidiaries or the payment of dividends or
any financial covenants. The Indenture does not contain provisions which would
afford the Holders of Notes protection in the event of a decline in the
Company's credit quality resulting from highly leveraged or other similar
transactions involving the Company.

63
<PAGE> 65

GLOBAL NOTES: FORM, EXCHANGE AND TRANSFER

The Notes will be initially issued in the form of fully registered Global
Notes deposited with or on behalf of, and registered in the name of, The
Depository Trust Company (the "Depositary") or a nominee thereof. Unless and
until it is exchanged in whole or in part for Notes in definitive registered
form, a Global Note may not be transferred, except as a whole: (i) by the
Depositary to a nominee of such Depositary, or (ii) by a nominee of such
Depositary to such Depositary or another nominee of such Depositary or (iii) by
such Depositary or any such nominee to a successor of such Depositary or a
nominee of such successor.

Ownership of beneficial interests in a Global Note will be limited to
Persons that have accounts with the Depositary ("participants") or Persons that
may hold interests through participants. Upon the issuance of a Global Note, the
Depositary will credit, on its book-entry registration and transfer system, the
participants' accounts with the respective principal amounts of the Notes
represented by such Global Note beneficially owned by such participants. The
accounts to be credited will initially be designated by the Underwriters.
Ownership of beneficial interests in such Global Note will be shown on, and the
transfer of such ownership interests will be effected only through, records
maintained by the Depositary or its nominee (with respect to interests of
participants) and on the records of participants (with respect to interests of
Persons holding through participants). The laws of some jurisdictions require
that certain purchasers of securities take physical delivery of such securities
in definitive form. Such limits and such laws may impair the ability to own,
transfer or pledge beneficial interests in Global Notes.

So long as the Depositary, or its nominee, is the owner of record of a
Global Note, the Depositary or such nominee, as the case may be, will be
considered the sole owner or holder of Notes represented by such Global Note for
all purposes under the Indenture. Except as set forth below, owners of
beneficial interests in a Global Note will not be entitled to have Notes
represented by such Global Note registered in their names, and will not receive
or be entitled to receive physical delivery of such Notes in definitive form and
will not be considered the owners or holders thereof under the Indenture.
Accordingly, each Person owning a beneficial interest in a Global Note must rely
on the procedures of the Depositary and, if such Person is not a participant, on
the procedures of the participant through which such Person owns its interest,
to exercise any rights of a Holder of record under the Indenture. The Company
understands that under existing industry practices, if the Company requests any
action of Holders, or if any owner of a beneficial interest in a Global Note
desires to give or take any action which a Holder is entitled to give or take
under the Indenture, the Depositary would authorize the participants holding the
relevant beneficial interests to give or take such action, and such participants
would authorize beneficial owners owning through such participants to give or
take such action or would otherwise act upon the instruction of beneficial
owners holding through them. No beneficial owner of an interest in a Global Note
will be able to transfer that interest except in accordance with the
Depositary's applicable procedures, in addition to those provided for in the
Indenture.

Payments of principal and interest on Notes represented by a Global Note
registered in the name of the Depositary or its nominee will be made to the
Depositary or its nominee, as the case may be, as the registered owner of such
Global Note. None of the Company, the Trustee or any other agent of the Company
or agent of the Trustee will have any responsibility or liability for any aspect
of the records relating to or payments made on account of beneficial ownership
interests in such Global Note or for maintaining, supervising or reviewing any
records relating to such beneficial ownership interests.

The Company expects that the Depositary or its nominee, upon receipt of any
payment of principal or interest in respect of a Global Note, will immediately
credit participants' accounts with payments in amounts proportionate to their
respective beneficial interests in such Global Note as shown on the records of
the Depositary or its nominee. The Company also expects that payments by
participants to owners of beneficial interests in such Global Note held through
such participants will be governed by standing customer instructions and
customary practices, as is now the case with securities held for the accounts of
customers in bearer form or registered in "street name", and will be the
responsibility of such participants.

If the Depositary notifies the Company that it is at any time unwilling or
unable to continue as Depositary or ceases to be eligible under applicable law,
and a successor Depositary eligible under applicable law is not appointed by the
Company within 90 days, the Company will issue Notes in definitive form in
exchange for

64
<PAGE> 66

Global Notes representing such Notes. In addition, the Company may at any time
and in its sole discretion determine not to have any of the Notes represented by
one or more Global Notes and, in such event, will issue Notes in definitive form
in exchange for Global Notes representing such Notes. Any Notes issued in
definitive form in exchange for any Global Notes will be registered in such name
or names as the Depositary shall instruct the Trustee. It is expected that such
instructions will be based upon directions received by the Depositary from
participants with respect to ownership of beneficial interests in such Global
Note.

The Depositary has advised the Company as follows: the Depositary is a
limited-purpose trust company organized under the Banking Law of the State of
New York, a "banking organization" within the meaning of the Banking Law of the
State of New York, a member of the Federal Reserve System, a "clearing
corporation" within the meaning of the New York Uniform Commercial Code, and a
"clearing agency" registered pursuant to the provisions of Section 17A of the
Exchange Act. The Depositary holds securities that its participants deposit with
the Depositary. The Depositary also facilitates the settlement among
participants of securities transactions, such as transfers and pledges, in
deposited securities through electronic computerized book-entry changes in
participants' accounts, thereby eliminating the need for physical movement of
securities certificates. Participants include securities brokers and dealers,
banks, trust companies, clearing corporations and certain other organizations.
The Depositary is owned by a number of its participants and by the New York
Stock Exchange, Inc., the American Stock Exchange Inc. and the National
Association of Securities Dealers, Inc. Access to the Depositary's system is
also available to others such as securities brokers and dealers, banks and trust
companies that clear through or maintain a custodial relationship with a
participant, either directly or indirectly. The rules applicable to the
Depositary and its participants are on file with the Commission.

Although the Depositary and its participants are expected to follow the
foregoing procedures in order to facilitate transfers of interests in a Global
Note among participants, they are under no obligation to perform or continue to
perform such procedures, and such procedures may be discontinued at any time.
Neither the Company nor the Trustee will have any responsibility for the
performance by the Depositary or the participants of their respective
obligations under the rules and procedures governing their operations.

SAME-DAY SETTLEMENT IN RESPECT OF GLOBAL NOTES

So long as any Notes are represented by Global Notes registered in the name
of the Depositary or its nominee, such Notes will trade in the Depositary's
Same-Day Funds Settlement System, and secondary market trading activity in such
Notes will therefore be required by the Depositary to settle in immediately
available funds.

CERTAIN COVENANTS

Restrictions on Liens

The Indenture will contain a covenant providing that so long as any of the
Notes are outstanding, the Company will not, and will not permit any Subsidiary
to, issue, assume, incur or guarantee any Indebtedness secured by a Lien on or
with respect to any property or assets of the Company or any Subsidiary, or upon
any shares of capital stock, Indebtedness or other obligations of any
Subsidiary, whether now owned or leased or hereafter acquired, without in any
such case effectively providing that the Notes shall be secured equally and
ratably with (or prior to) such Indebtedness for so long as such Indebtedness
shall be so secured, except that the foregoing restrictions shall not apply to:

(a) Liens existing as of the date of the Indenture;

(b) Liens created solely to secure the payment of Purchase Money
Indebtedness incurred by the Company or a Subsidiary; provided that any
such Lien shall not secure Indebtedness in excess of the amount expended in
the acquisition of, or construction of improvements on, the property or
assets and shall not extend to or cover any property or assets other than
the property or assets so acquired or the improvements thereon;

65
<PAGE> 67

(c) Liens upon any property or assets owned or leased by any
Subsidiary when it becomes a Subsidiary and not incurred as a result of, or
in connection with or in anticipation of, such Subsidiary becoming a
Subsidiary (except to the extent otherwise permitted by (b) above);

(d) Liens existing on any property or assets at the time of its
acquisition by the Company or a Subsidiary (including acquisition through
merger or consolidation) and not incurred as a result of, or in connection
with or in anticipation of, such acquisition (except to the extent
otherwise permitted by (b) above);

(e) Liens securing Indebtedness of a Subsidiary to the Company or to
another Subsidiary;

(f) Liens imposed by law for taxes, assessments or charges of any
Governmental Authority for claims not yet delinquent or which are being
contested in good faith by appropriate proceedings diligently conducted and
with respect to which adequate reserves or other appropriate provisions are
being maintained in accordance with GAAP and which Liens are not yet
enforceable against other creditors;

(g) statutory Liens of landlords and Liens of carriers, warehousemen,
mechanics, materialmen and other Liens imposed by law or created in the
ordinary course of business and in existence less than 90 days from the
date of creation thereof for amounts not yet due or which are being
contested in good faith by appropriate proceedings diligently conducted and
with respect to which adequate reserves or other appropriate provisions are
being maintained in accordance with GAAP and which Liens are not yet
enforceable against other creditors;

(h) Liens incurred or deposits made in the ordinary course of business
(including, without limitation, surety bonds and appeal bonds) in
connection with workers' compensation, unemployment insurance and other
types of social security benefits or to secure the performance of tenders,
bids, leases, contracts (other than for the repayment of Indebtedness),
statutory obligations and other similar obligations or arising as a result
of progress payments under government contracts;

(i) easements (including reciprocal easement agreements and utility
agreements), rights-of-way, covenants, consents, reservations,
encroachments, variations and zoning and other restrictions, charges or
encumbrances (whether or not recorded), which do not interfere materially
with the ordinary conduct of the business of the Company or any Subsidiary
and which do not materially detract from the value of the property to which
they attach or materially impair the use thereof to the Company or any
Subsidiary;

(j) Liens arising in connection with Capital Leases otherwise
permitted or not prohibited by the terms of the Indenture; provided that no
such Lien shall extend to any property other than the assets subject to
such Capital Leases;

(k) Liens securing Off-Balance Sheet Liabilities otherwise permitted
or not prohibited by the terms of the Indenture;

(l) Permitted Receivables Securitization; and

(m) the extension, renewal or replacement (or successive extensions,
renewals or replacements), in whole or in part, of any Lien referred to in
the foregoing clauses (a) through (l), or of any Indebtedness secured
thereby, provided, however, that (i) such extension, renewal, refunding or
replacement Lien shall be limited to all or a part of the same property,
shares of stock or Indebtedness that were encumbered by the Lien extended,
renewed, refunded or replaced (plus improvements on such property) and (ii)
the Indebtedness secured by such Lien at such time is not increased.

Notwithstanding the foregoing, the Company or any Subsidiary may issue, assume,
incur or guarantee Indebtedness secured by Liens which otherwise would be
subject to the foregoing restrictions in an aggregate amount which, together
with (i) all other such Indebtedness of the Company and its Subsidiaries
outstanding which would otherwise be subject to the foregoing restrictions (not
including Indebtedness permitted to be secured under clauses (a) through (m)
above), (ii) all Indebtedness of the Subsidiaries (not including Indebtedness
permitted to be issued, assumed, incurred or guaranteed under clauses (a)
through (j) under "Restrictions on Subsidiary Indebtedness" below) and (iii) all
Attributable Debt in respect of Sale and

66
<PAGE> 68

Leaseback Transactions permitted under "Restrictions on Sale and Leaseback
Transactions" below, does not exceed 15% of Consolidated Net Worth of the
Company.

Restrictions on Sale and Leaseback Transactions

The Indenture will contain a covenant providing that so long as any of the
Notes are outstanding, the Company will not, nor will it permit any Subsidiary
to, enter into any arrangement with any Person (other than the Company or a
Subsidiary) providing for the leasing by the Company or any Subsidiary of any
property or assets, whether now owned or hereafter acquired, which has been or
is to be sold or transferred by the Company or such Subsidiary to such Person
with the intention of taking back a lease on such property or assets and which
arrangement would be characterized or qualified as either a Capital Lease or
Off-Balance Sheet Liability (a "Sale and Leaseback Transaction"), if, at the
time of entering into such Sale and Leaseback Transaction, and after giving
effect thereto, the amount of Attributable Debt in respect of such Sale and
Leaseback Transaction, together with all such other Attributable Debt
outstanding exceeds the greater of (i) $25,000,000 or (ii) together with (A) all
Indebtedness outstanding secured by Liens (not including Indebtedness permitted
to be secured under clauses (a) through (m) under "Restrictions on Liens" above)
and (B) all Indebtedness of Subsidiaries (not including Indebtedness permitted
to be issued, assumed, incurred or guaranteed under clauses (a) through (j)
under "Restrictions on Subsidiary Indebtedness" below), 15% of Consolidated Net
Worth of the Company.

Restrictions on Subsidiary Indebtedness

The Indenture will provide that so long as any of the Notes are
outstanding, the Company will not permit any of its Subsidiaries to issue,
assume, incur or guarantee any Indebtedness, except that the foregoing
restrictions shall not apply to:

(a) Indebtedness existing as of the date of the Indenture, including
all existing or available borrowings under the Bank Credit Agreement;

(b) Indebtedness of a corporation or other entity existing at the time
it becomes a Subsidiary and not incurred as a result of, or in connection
with or in anticipation of, such Subsidiary becoming a Subsidiary;

(c) Indebtedness of a corporation or other entity assumed at the time
of its acquisition by a Subsidiary (including acquisition through merger or
consolidation) and not incurred as a result of, or in connection with or in
anticipation of, such acquisition;

(d) unsecured intercompany Indebtedness of a Subsidiary for loans or
advances made to such Subsidiary by the Company or another Subsidiary;
provided that upon either (i) the transfer or other disposition by the
Company or a Subsidiary of any Indebtedness so permitted to a Person other
than the Company or another Subsidiary or (ii) the issuance, sale, transfer
or other disposition (other than a pledge of the shares of such Subsidiary
permitted under "Restrictions on Liens" above) of shares of capital stock
(including acquisition through merger or consolidation) of such Subsidiary
to a Person other than the Company or another Subsidiary which, after
giving effect thereto, results in such Subsidiary ceasing to be a
Subsidiary of the Company, the provisions of this clause (d) shall no
longer be applicable to such Indebtedness and such Indebtedness shall be
deemed to have been issued, assumed, incurred or guaranteed at the time of
such transfer or other disposition;

(e) the endorsement of negotiable instruments for deposit or
collection or similar transactions in the ordinary course of business;

(f) Purchase Money Indebtedness and Capital Leases incurred or entered
into by a Subsidiary not to exceed an aggregate outstanding principal
amount at any time of $25,000,000; provided, however, that the aggregate
outstanding principal amount of Purchase Money Indebtedness and Capital
Leases permissible under this clause (f) shall be increased or decreased to
such amount as is permissible under the Bank Credit Agreement;

(g) Permitted Receivables Securitizations;

67
<PAGE> 69

(h) Off-Balance Sheet Liabilities (other than Permitted Receivables
Securitizations) and other secured Indebtedness of a Subsidiary not to
exceed an aggregate outstanding principal amount of $25,000,000; provided,
however, that the aggregate outstanding principal amount of Off-Balance
Sheet Liabilities and other secured Indebtedness permissible under this
clause (h) shall be increased or decreased to such amount as is permissible
under the Bank Credit Agreement;

(i) Indebtedness arising from Rate Hedging Obligations incurred to
limit risks of currency or interest rate fluctuations to which a Subsidiary
is otherwise subject by virtue of the operations of its business, and not
for speculative purposes; provided , however, that the aggregate notional
amount of all such Rate Hedging Obligations shall not exceed at any time
$500,000,000; and provided, further, that the aggregate outstanding
principal amount of Indebtedness arising from Rate Hedging Obligations
under this clause (i) shall be increased or decreased to such amount as is
permissible under the Bank Credit Agreement;

(j) the extension, renewal, refinancing or replacement (or successive
extensions, renewals, refinancings or replacements), in whole or in part,
of any Indebtedness referred to in the foregoing clauses (a) through (i);
provided, however, (i) that the Indebtedness so issued has (A) a principal
amount not in excess of the principal amount of the Indebtedness being
extended, renewed refinanced or replaced (which amount shall be deemed to
include the amount of any undrawn or available amounts under any committed
credit or lease facility to be so extended, renewed, refinanced or
replaced), (B) a final redemption date later than the final stated maturity
or final redemption date, if any, of the Indebtedness being extended,
renewed refinanced or replaced and (C) an Average Life at the time of
issuance of such Indebtedness that is greater than the Average Life of the
Indebtedness being extended, renewed refinanced or replaced; (ii) the group
of direct or contingent obligors on such Indebtedness shall not be expanded
as a result of any such action; and (iii) immediately prior to and
immediately after giving effect to any such extension, renewal or
replacement, no Event of Default shall have occurred and be continuing.

Notwithstanding the foregoing, any Subsidiary may issue, assume, incur or
guarantee Indebtedness which otherwise would be subject to the foregoing
restrictions in an aggregate amount, that together with all other such
Indebtedness of any Subsidiaries outstanding which would otherwise be subject to
the foregoing restrictions (not including Indebtedness permitted to be issued,
assumed, incurred or guaranteed under clauses (a) through (j) above), that does
not exceed 15% of Consolidated Net Worth of the Company.

Certain Definitions

"Attributable Debt" in respect of a Sale and Leaseback Transaction means,
at the time of determination, the then present value (discounted at the actual
rate of interest of such transaction) of the obligation of the lessee for net
rental payments during the remaining term of the lease included in such Sale and
Leaseback Transaction (including any period for which such lease has been
extended or may, at the option of the lessor, be extended).

"Average Life" means, as of the date of determination, with respect to any
Indebtedness, the quotient obtained by dividing (i) the sum of the products of
the numbers of years from the date of determination to the dates of each
successive scheduled principal payment of such Indebtedness multiplied by the
amount of such principal payment by (ii) the sum of all such principal payments.

"Bank Credit Agreement" means the Credit Agreement, dated as of September
5, 1996, by and among MedPartners, Inc. and NationsBank, National Association
(South), as administrative agent for a group of lenders, as such agreement may
be amended, renewed, extended, substituted, refinanced, restructured, replaced
or supplemented or otherwise modified from time to time (including without
limitation, any successive renewals, extensions, substitutions, refinancings,
restructurings, replacements or supplementations or other modifications of the
foregoing).

"Capital Leases" means all leases which have been or should be capitalized
in accordance with GAAP as in effect from time to time including the provisions
of FAS No. 13 and any successor thereof.

68
<PAGE> 70

"Consolidated Net Worth" means the excess of (i) the consolidated net book
value of the assets of the Company and its subsidiaries after all appropriate
deductions in accordance with GAAP as in effect on the date of the Indenture
(including without limitation, reserves for doubtful receivables, obsolescence,
depreciation and amortization) less (ii) the consolidated liabilities (including
tax and other proper accruals, but excluding, if applicable, the accumulated
postretirement benefit obligation resulting from the application of the
provisions of FAS No. 106 "Employers' Accounting for Postretirement Benefits
Other than Pensions") of the Company and its Subsidiaries, in each case computed
and consolidated in accordance with GAAP in effect on the date of the Indenture.

"Funded Debt" means Indebtedness of the Company and its Subsidiaries,
whether incurred, assumed or guaranteed, which by its terms matures more than
one year from the date of creation thereof, or which is extendable or renewable
at the sole option of the obligor so that it may become payable more than one
year from such date.

"GAAP" means, unless otherwise specified in the Indenture, such accounting
principles as are generally accepted in the United States as of the date of the
relevant calculation.

"Governmental Authority" shall mean any Federal, state, municipal, national
or other governmental department, commission, board, bureau, court, agency or
instrumentality or political subdivision thereof or any entity or officer
exercising executive, legislative, judicial, regulatory or administrative
functions of or pertaining to any government or any court, in each case whether
associated with a state of the United States, the United States, or a foreign
governmental entity.

"Indebtedness" with respect to any Person is defined to mean, at any time,
without duplication, (i) any debt (a) for money borrowed, or (b) evidenced by a
bond, note, debenture, or similar instrument for the payment of which such
Person is responsible or liable, or (c) which is a direct or indirect obligation
which arises as a result of banker's acceptances; (ii) any Off-Balance Sheet
Liability; (iii) any debt of others described in the preceding clause (i) which
such Person has guaranteed or for which it is otherwise directly liable; (iv)
the obligation of such Person as lessee under any lease of property which is
reflected on such Person's balance sheet as a capitalized lease; (v) to the
extent not otherwise included in this definition, net obligations under any Rate
Hedging Obligations; and (vi) any deferral, amendment, renewal, extension,
supplement or refunding of any liability of the kind described in any of the
preceding clauses (i), (ii), (iii), (iv) and (v); provided, however, that, in
computing the Indebtedness of any Person, there shall be excluded any particular
Indebtedness if, upon or prior to the maturity thereof, there shall have been
deposited with a depository in trust money (or evidence of Indebtedness if
permitted by the instrument creating such Indebtedness) in the necessary amount
to pay, redeem or satisfy such Indebtedness as it becomes due, and the amount so
deposited shall not be included in any computation of the assets of such Person.

"Lien" means any mortgage, pledge, hypothecation, charge, assignment,
deposit arrangement, encumbrance, security interest, lien (statutory or other),
or preference, priority, or other security or similar agreement or preferential
arrangement of any kind or nature whatsoever (including, without limitation, any
agreement to give or grant a Lien or any lease, conditional sale or other title
retention agreement having substantially the same economic effect as any of the
foregoing).

"Off-Balance Sheet Liabilities" means, with respect to any Person, (i) any
repurchase obligation or liability of such Person with respect to accounts or
notes receivable sold by such Person, (ii) the face amount of accounts
receivable pursuant to a Permitted Receivables Securitization, (iii) any
repurchase obligation or liability of such Person with respect to property
leased by such Person as lessee, (iv) obligations arising with respect to any
other transaction which is the functional equivalent of or takes the place of
borrowing but which does not constitute a liability on the consolidated balance
sheets of such Person excluding therefrom operating leases which do not require
payment by or due from such Person: (a) at the scheduled termination of such
operating lease, (b) pursuant to a required purchase by such Person of the
leased property, or (c) under any guaranty by such Person of the value of the
leased property, or (v) net liabilities under any Rate Hedging Obligations.

69
<PAGE> 71

"Permitted Receivables Securitization" means limited recourse or
non-recourse sales and assignments of accounts receivable of a Person to one or
more entities, the proceeds of which shall be made available to such Person;
provided, however, that the maximum face amount of accounts receivable which may
be sold is $100,000,000 and the minimum price which shall be paid for
receivables is 70% of the face amount thereof; provided, further that
notwithstanding the immediately preceding proviso the maximum face amount of
accounts receivable which may be sold and the minimum price which shall be paid
for receivables shall be increased or decreased to such amount and percentages
as is permissible under the Bank Credit Agreement.

"Purchase Money Indebtedness" means Indebtedness incurred to finance all or
any part of the purchase price or cost of construction of improvements in
respect of property or assets acquired by a Person after the date of the
Indenture and incurred prior to, at the time of, or within 90 days after, the
acquisition of any such property or assets or the completion of any such
construction or improvements.

"Rate Hedging Obligations" means any and all obligations of any Person,
whether absolute or contingent and howsoever and whensoever created, arising,
evidenced or acquired (including all renewals, extensions and modifications
thereof and substitutions therefor), under (i) any and all agreements, devices
or arrangements designed to protect at least one of the parties thereto from the
fluctuations of interest rates, exchange rates or forward rates applicable to
such party's assets, liabilities or exchange transactions, including, but not
limited to, Dollar-denominated or cross-currency interest rate exchange
agreements, forward currency exchange agreements, interest rate cap or collar
protection agreements, forward rate currency or interest rate options, puts,
warrants and those commonly known as interest rate "swap" agreements; and (ii)
any and all cancellations, buybacks, reversals, terminations or assignments of
any of the foregoing.

"Senior Funded Debt" means all Funded Debt, including the Notes, except
Funded Debt, the payment of which is subordinated to the payment of the Notes.

"Subsidiary" means any corporation, partnership, association or other
business entity of which more than 50% of the outstanding voting stock is owned,
directly or indirectly, by the Company or by one or more other Subsidiaries, or
by the Company and one or more other Subsidiaries. For the purposes of this
definition, "voting stock" means stock (or a similar interest) which ordinarily
has voting power for the election of directors, managers or trustees, whether at
all times or only so long as no senior class of stock (or similar interest) has
such voting power by reason of any contingency.

CONSOLIDATION, MERGER AND DISPOSITION OF ASSETS

The Company may not consolidate with or merge into, or convey, transfer or
lease its properties and assets substantially as an entirety to, any Person, and
may not permit any Person, to consolidate with or merge into, or convey,
transfer or lease its properties and assets substantially as an entirety to, the
Company, unless (a) the successor, if other than the Company, is a Person
organized and validly existing under the laws of the United States of America or
any jurisdiction thereof and such successor, if other than the Company,
expressly assumes the Company's obligations under the Indenture and the Notes,
(b) immediately after giving effect to such transaction, no Event of Default
under the Indenture or event which, after notice or lapse of time or both, would
become an Event of Default thereunder would exist and be continuing, (c) if as a
result of any such consolidation or merger or such conveyance, transfer or
lease, properties or assets of the Company would become subject to a mortgage,
pledge, lien, security interest or other encumbrance which would not be
permitted as described under "Certain Covenants -- Restrictions on Liens", the
Company or such successor Person, as the case may be, shall take such steps as
shall be necessary to effectively secure the Notes equally and ratably with (or
prior to) all indebtedness secured thereby, and (d) the Company has delivered to
the Trustee an Officers' Certificate and an Opinion of Counsel, each stating
that such transaction complies with the Indenture. Upon compliance with these
provisions, the successor Person will succeed to, and be substituted for, the
Company under the Indenture, and the Company will be relieved (except in the
case of a lease) of its obligations under the Indenture and the Notes.

70
<PAGE> 72

EVENTS OF DEFAULT

Each of the following will constitute an "Event of Default" under the
Indenture with respect to the Notes: (a) default in the payment of principal of
any Note, (b) default in the payment of any interest upon any Note when due,
which default continues for 30 days, (c) default in the performance, or breach,
of any other covenant or warranty contained in the Indenture, which default
continues for 60 days after written notice to the Company by the Trustee or to
the Company and the Trustee by the Holders of at least 25% in principal amount
of the Outstanding Notes, (d) default in the payment of principal at maturity
(subject to any applicable grace period) of any Indebtedness for money borrowed
by the Company or any Subsidiary in an aggregate principal amount of $25 million
or more or the acceleration of such indebtedness, if such acceleration is not
rescinded or annulled within 30 days after written notice as specified in clause
(c) and requiring the Company to cause such indebtedness to be discharged or
cause such acceleration to be rescinded or annulled, and (e) certain events of
bankruptcy, insolvency or reorganization.

If an Event of Default (other than an Event of Default described in clause
(e) above) with respect to the Outstanding Notes shall occur and be continuing,
either the Trustee or the Holders of not less than 25% in aggregate principal
amount of the Outstanding Notes may, by notice in writing to the Company (and to
the Trustee if given by Holders), declare the principal amount of all Notes to
be due and payable immediately. If an Event of Default described in clause (e)
above with respect to the Notes shall occur, the principal amount of all the
Notes will automatically, and without any action by the Trustee or any Holder,
become immediately due and payable. After any such acceleration, but before a
judgment or decree for payment of the money due has been obtained by the
Trustee, the Holders of a majority in aggregate principal amount of the
Outstanding Notes may, under certain circumstances, rescind and annul such
acceleration if all Events of Default, other than the non-payment of accelerated
principal, have been cured or waived as provided in the Indenture.

The Indenture will provide that the Trustee shall, within 90 days after the
occurrence of a default with respect to the Notes, give to the Holders of the
Notes notice of such default known to it, unless such default shall have been
cured or waived; provided, however, that, except in the case of a default in the
payment of the principal of or interest on any of the Notes, the Trustee shall
be protected in withholding such notice if in good faith it determines that the
withholding of such notice is in the interest of such Holders. The Indenture
provides that, subject to the duty of the Trustee during a default to act with
the required standard of care, the Trustee will not be under an obligation to
exercise any right or power under the Indenture at the request or direction of
any of the Holders, unless the Holders shall have offered to the Trustee
reasonable security or indemnity. The Indenture provides that the Holders of a
majority in aggregate principal amount of the Outstanding Notes may direct the
time, method and place of conducting proceedings for remedies available to the
Trustee or exercising any trust or power conferred on the Trustee with respect
to the Notes.

No Holder of any Note will have any right to institute any proceeding with
respect to the Indenture, or for the appointment of a receiver or a trustee, or
for any other remedy thereunder, unless (a) such Holder shall have previously
given to the Trustee written notice of a continuing Event of Default with
respect to the Notes, (b) the Holders of not less than 25% in aggregate
principal amount of the Outstanding Notes shall have made written request to the
Trustee to institute proceedings as Trustee, (c) such Holder or Holders shall
have offered to the Trustee reasonable security or indemnity, (d) the Trustee
shall have failed to institute such proceeding within 60 days thereafter and (e)
the Trustee shall not have received from the Holders of a majority in aggregate
principal amount of the Outstanding Notes a direction inconsistent with such
request. However, such limitations do not apply to a suit instituted by a Holder
of a Note for the enforcement of payment of the principal of or interest on such
Note on or after the applicable due date specified in such Note.

The Company will be required to furnish to the Trustee annually a statement
as to the performance by the Company of its obligations under the Indenture and
as to any default in such performance.

MODIFICATION AND WAIVERS

Modifications and amendments of the Indenture may be made by the Company
and the Trustee without the consent of the Holders to: (a) evidence the
succession of another Person to the Company and the assumption by any such
successor of the covenants of the Company herein and in the Notes; (b) add to
the

71
<PAGE> 73

covenants of the Company for the benefit of the Holders or an additional Event
of Default or surrender any right or power conferred upon the Company; (c)
secure the Notes; (d) cause the Notes to comply with applicable law; (e)
evidence and provide for the acceptance of appointment by a successor Trustee
with respect to the Notes; and (f) cure any defect or ambiguity or correct or
supplement any provision which may be defective or inconsistent with any other
provision, or make any other provisions with respect to matters or questions
arising under the Indenture which shall not be inconsistent with the provisions
of the Indenture, provided, however, that no such modification or amendment may
adversely affect the interest of the Holders in any material respect.

Modifications and amendments of the Indenture may be made by the Company
and the Trustee, with the consent of the Holders of at least a majority in
aggregate principal amount of the Outstanding Notes, by executing supplemental
indentures for the purpose of adding any provisions to, or changing in any
manner or eliminating any of the provisions of, the Indenture or modifying in
any manner the rights of the Holders of the Outstanding Notes; provided, that no
such modification or amendment may, without the consent of the Holders of each
Outstanding Note affected thereby, (a) change the Stated Maturity of the
principal of, or any installment of interest on, any Note, (b) reduce the
principal amount of or interest on, any Note, (c) change the place or currency
of payment of principal of, or any interest on, any Note, (d) impair the right
to institute suit for the enforcement of any payment on or with respect to any
Note when due, (e) reduce the percentage of aggregate principal amount of
Outstanding Notes necessary to modify or amend the Indenture or for waiver of
compliance with certain provisions of the Indenture or for waiver of certain
defaults, or (f) modify certain provisions of the Indenture with respect to
modification and waiver.

The Holders of at least a majority in aggregate principal amount of the
Outstanding Notes may waive compliance by the Company with certain restrictive
provisions of the Indenture. The Holders of at least a majority in aggregate
principal amount of the Outstanding Notes may waive any past default under the
Indenture, except a default in the payment of the principal of or interest on
any Note and certain covenants and provisions of the Indenture which cannot be
modified or amended without the consent of the Holder of each Outstanding Note.

SATISFACTION AND DISCHARGE; DEFEASANCE AND COVENANT DEFEASANCE

The Indenture will provide that the Company may discharge its obligations
under the Indenture while Notes remain Outstanding if all Outstanding Notes will
become due and payable at their scheduled maturity within one year and the
Company has deposited with the Trustee an amount sufficient to pay and discharge
all Outstanding Notes on the date of their scheduled maturity. The Indenture
will further provide that the Company, at its option, (a) will be discharged
from any and all obligations with respect to the Notes (except for certain
obligations which include exchanging or registering the transfer of the Notes,
replacing stolen, lost or mutilated Notes, maintaining paying agencies and
holding monies for payment in trust) ("defeasance"), or (b) need not comply with
certain restrictive covenants of the Indenture ("covenant defeasance"), and the
occurrence of certain events which would otherwise be or result in an Event of
Default will be deemed not to be or result in an Event of Default with respect
to the Notes, upon the deposit with the Trustee, in trust for the benefit of the
Holders of the Notes, of money or U.S. Government Obligations, or both, which
through the payment of principal of and interest in respect thereof in
accordance with their terms will provide money in an amount sufficient to pay
principal of and interest on the Notes on the dates such payments are due in
accordance with the terms of the Indenture. To establish such defeasance or
covenant defeasance, the Company will be required to meet certain conditions,
including delivery to the Trustee of an Opinion of Counsel to the effect that
the Holders of the Notes will not recognize income, gain or loss for federal
income tax purposes as a result of such defeasance or covenant defeasance and
will be subject to federal income tax on the same amounts, in the same manner
and at the same times as would have been the case if such defeasance or covenant
defeasance had not occurred. In the case of defeasance pursuant to clause (a),
such Opinion of Counsel must refer to and be based upon either (i) a ruling
received by the Company from, or published by, the Internal Revenue Service or
(ii) a change in applicable federal income tax law after the date of the
Indenture.

72
<PAGE> 74

INFORMATION CONCERNING THE TRUSTEE

The Indenture will provide that, except during the continuance of an Event
of Default, the Trustee thereunder will perform only such duties as are
specifically set forth in the Indenture. If an Event of Default has occurred and
is continuing, the Trustee will exercise such rights and powers vested in it
under the Indenture and use the same degree of care and skill in its exercise as
a prudent Person would exercise under the circumstances in the conduct of such
Person's own affairs.

The Indenture and provisions of the Trust Indenture Act of 1939, as
amended, incorporated by reference therein, contain limitations on the rights of
the Trustee thereunder, should it become a creditor of the Company, to obtain
payment of claims in certain cases or to realize on certain property received by
it in respect of any such claims, as security or otherwise. The Trustee is
permitted to engage in other transactions with the Company; provided, however,
that if it acquires any conflicting interest (as defined in the Trust Indenture
Act of 1939, as amended) it must eliminate such conflict or resign. The Company
and its subsidiaries may maintain deposit accounts and conduct other banking
transactions with the Trustee in the ordinary course of business.

First Chicago Trust Company of New York, a banking
corporation with its principal offices at will act as
Trustee for the benefit of the Holders of the Notes under the Indenture. First
Chicago Trust of New York is the Transfer Agent and Registrar for the Common
Stock.

GOVERNING LAW

The Indenture and the Notes will be governed by the laws of the State of
New York, without regard to principles of conflicts of law.

73
<PAGE> 75

UNDERWRITING

Under the terms and subject to the conditions of the Underwriting
Agreement, each Underwriter named below has severally agreed to purchase, and
the Company has agreed to sell to each Underwriter, the principal amount of
Notes set forth opposite the name of such Underwriter below:

<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT
NAME OF NOTES
----------------------------------------------------------------------- ------------
<S> <C>
Smith Barney Inc....................................................... $
Merrill Lynch, Pierce, Fenner & Smith
Incorporated..............................................
J.P. Morgan Securities Inc.............................................
Morgan Stanley & Co. Incorporated......................................
NationsBanc Capital Markets, Inc.......................................
-----------
Total........................................................ $300,000,000
===========
</TABLE>

The Underwriting Agreement provides that the obligations of the several
Underwriters to pay for and accept delivery of the Notes are subject to approval
of certain legal matters by counsel and to certain other conditions. The
Underwriters are obligated to take and pay for all of the Notes offered hereby
if any such Notes are taken.

The Underwriters have advised the Company that they propose initially to
offer part of the Notes directly to the public at the public offering price set
forth on the cover page of this Prospectus and part to certain dealers at a
price that represents a concession not in excess of % of the public
offering price of the Notes. The Underwriters may allow, and such dealers may
reallow, a concession not in excess of % of the public offering price of
the Notes to certain other dealers. After the Offering, the public offering
price and such concessions may be changed from time to time by the Underwriters.

The Company has agreed to indemnify the Underwriters, and the Underwriters
have agreed to indemnify the Company, against certain liabilities, including
liabilities under the Securities Act.

The Underwriters have informed the Company that the Underwriters intend to
make a market in the Notes, as permitted by applicable laws and regulations;
however, the Underwriters are not obligated to do so, and any such market
activity may be terminated at any time without notice to the Holders. No
assurance can be given as to the liquidity of or the trading market for the
Notes. See "Risk Factors -- Absence of Public Market for the Notes".

The net proceeds from the Offering are expected to be used to repay
outstanding indebtedness under the Credit Facility under which affiliates of
J.P. Morgan Securities, Inc. and NationsBanc Capital Markets, Inc. are lenders.
See "Use of Proceeds".

In the ordinary course of their respective businesses, the Underwriters or
their affiliates have engaged and may in the future engage, in commercial
banking or investment banking transactions with the Company and its affiliates.

74
<PAGE> 76

EXPERTS

The consolidated financial statements of MedPartners/Mullikin, Inc. and the
financial statements of New Management for the indicated periods detailed in the
Index to Financial Statements appearing in this Prospectus and Registration
Statement have been audited by Ernst & Young LLP, independent auditors, as set
forth in their reports thereon appearing elsewhere herein, and are included in
reliance upon such reports given upon the authority of such firm as experts in
accounting and auditing.

The consolidated financial statements of Caremark International Inc. as of
December 31, 1994 and 1995 and for each of the three years in the period ended
December 31, 1995 included in this Prospectus and Registration Statement have
been so included in reliance on the report of Price Waterhouse LLP, independent
accountants, given on the authority of said firm as experts in auditing and
accounting.

LEGAL MATTERS

Certain legal matters with respect to the issuance of the Notes hereby will
be passed upon for the Company by Haskell Slaughter & Young, L.L.C., Birmingham,
Alabama, and for the Underwriters by Skadden, Arps, Slate Meagher & Flom, New
York, New York.

75
<PAGE> 77

INDEX TO FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
PAGE
NUMBER
------
<S> <C>
MEDPARTNERS/MULLIKIN, INC.
Report of Independent Auditors...................................................... F-3
Consolidated Balance Sheets as of December 31, 1994 and 1995........................ F-4
Consolidated Statements of Operations for the years ended December 31, 1993, 1994
and 1995.......................................................................... F-5
Consolidated Statements of Stockholders' Equity for the years ended December 31,
1993, 1994 and 1995............................................................... F-6
Consolidated Statements of Cash Flows for the years ended December 31, 1993, 1994
and 1995.......................................................................... F-7
Notes to Consolidated Financial Statements.......................................... F-8
MEDPARTNERS/MULLIKIN, INC. (UNAUDITED)
Consolidated Balance Sheet as of June 30, 1996 (unaudited).......................... F-22
Consolidated Statements of Operations for the six months ended June 30, 1995 and
1996 (unaudited).................................................................. F-23
Consolidated Statements of Cash Flows for the six months ended June 30, 1995 and
1996 (unaudited).................................................................. F-24
Notes to Unaudited Consolidated Financial Statements................................ F-25
CAREMARK INTERNATIONAL INC.(1)
Report of Independent Accountants................................................... F-29
Consolidated Balance Sheets as of December 31, 1994 and 1995........................ F-30
Consolidated Statements of Operations for the years ended December 31, 1993, 1994
and 1995.......................................................................... F-31
Consolidated Statements of Stockholders' Equity for the years ended December 31,
1993, 1994,
and 1995.......................................................................... F-32
Consolidated Statements of Cash Flows for the years ended December 31, 1993, 1994,
and 1995.......................................................................... F-33
Notes to Consolidated Financial Statements.......................................... F-34
CAREMARK INTERNATIONAL INC. (UNAUDITED)(1)
Consolidated Balance Sheet as of June 30, 1996 (unaudited).......................... F-50
Consolidated Statements of Operations for the six months ended June 30, 1995 and
1996 (unaudited).................................................................. F-51
Consolidated Statements of Cash Flows for the six months ended June 30, 1995 and
1996 (unaudited).................................................................. F-52
Notes to Consolidated Financial Statements (unaudited).............................. F-53
</TABLE>

F-1
<PAGE> 78

<TABLE>
<CAPTION>
PAGE
NUMBER
------
<S> <C>
NEW MANAGEMENT(1)
Report of Independent Auditors...................................................... F-57
Balance Sheets as of December 31, 1994 and 1995..................................... F-58
Statements of Income for the years ended December 31, 1994 and 1995................. F-59
Statements of Partners' Deficiency for the years ended December 31, 1994 and 1995... F-60
Statements of Cash Flows for the years ended December 31, 1994 and 1995............. F-61
Notes to Financial Statements....................................................... F-62
NEW MANAGEMENT (UNAUDITED)(1)
Balance Sheet as of December 31, 1993 (unaudited)................................... F-64
Statement of Income for the year ended December 31, 1993 (unaudited)................ F-65
Statement of Cash Flows for the year ended December 31, 1993 (unaudited)............ F-66
Notes to Unaudited Financial Statements............................................. F-67
Condensed Balance Sheet as of June 30, 1996 (unaudited)............................. F-69
Condensed Statements of Income for the six months ended June 30, 1995 and 1996
(unaudited)....................................................................... F-70
Condensed Statements of Cash Flows for the six months ended June 30, 1995 and 1996
(unaudited)....................................................................... F-71
Note to Unaudited Condensed Financial Statements.................................... F-72
</TABLE>

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

(1) These entities were combined with MedPartners, Inc. prior to September 20,
1996.

F-2
<PAGE> 79

REPORT OF INDEPENDENT AUDITORS

Board of Directors
MedPartners/Mullikin, Inc.

We have audited the accompanying consolidated balance sheets of
MedPartners/Mullikin, Inc. as of December 31, 1994 and 1995, and the related
consolidated statements of operations, stockholders' equity and cash flows for
each of the three years in the period ended December 31, 1995. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.

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 opinions.

In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of
MedPartners/Mullikin, Inc. at December 31, 1994 and 1995, and the consolidated
results of its operations and its cash flows for each of the three years in the
period ended December 31, 1995, in conformity with generally accepted accounting
principles.

ERNST & YOUNG LLP

Birmingham, Alabama
February 22, 1996

F-3
<PAGE> 80

MEDPARTNERS/MULLIKIN, INC.

CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1994 1995
-------- --------
(IN THOUSANDS)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.............................................. $ 66,623 $ 55,328
Marketable equity securities........................................... 37,689 35,567
Accounts receivable, less allowances for bad debts of
$21,504,000 and $29,777,000......................................... 88,340 135,176
Inventories............................................................ 5,543 9,779
Income taxes........................................................... -- 977
Prepaid expenses and other current assets.............................. 8,759 19,214
-------- --------
Total current assets........................................... 206,954 256,041
Property and equipment, net.............................................. 122,023 155,376
Intangible assets, net................................................... 74,933 111,971
Deferred tax asset....................................................... 1,267 35,002
Other assets............................................................. 12,797 18,343
-------- --------
Total assets................................................... $417,974 $576,733
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable....................................................... $ 21,980 $ 32,158
Payable to physician groups............................................ 24,669 31,810
Accrued compensation................................................... 15,557 15,949
Other accrued expenses and liabilities................................. 9,834 31,650
Accrued medical claims payable......................................... 44,924 43,433
Income taxes payable................................................... 1,729 --
Current portion of long-term liabilities............................... 12,656 9,149
-------- --------
Total current liabilities...................................... 131,349 164,149
Long-term debt, net of current portion................................... 146,498 200,814
Other long-term liabilities.............................................. 5,936 6,272
Estimated malpractice liability.......................................... 4,958 2,781
Redeemable convertible preferred stock:
Series A $.001 par value; 4,500,000 shares authorized; 4,001,000 shares
issued.............................................................. 8,001 --
Series B $.001 par value; 3,500,000 shares authorized; 3,000,000 shares
issued.............................................................. 12,000 --
Stockholders' equity:
Common stock, $.001 par value; 75,000,000 shares authorized; issued --
28,123,000 in 1994 and 42,508,000 in 1995........................... 28 42
Additional paid-in capital............................................. 116,240 214,422
Notes receivable from stockholders..................................... (2,349) (1,930)
Unrealized gain (loss) on marketable equity securities, net of deferred
taxes............................................................... 14 (7)
Unamortized deferred compensation...................................... (3,552) (2,682)
Accumulated deficit.................................................... (1,149) (7,128)
-------- --------
Total stockholders' equity..................................... 109,232 202,717
-------- --------
Total liabilities and stockholders' equity..................... $417,974 $576,733
======== ========
</TABLE>

See accompanying notes to consolidated financial statements.

F-4
<PAGE> 81

MEDPARTNERS/MULLIKIN, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------
1993 1994 1995
-------- -------- ----------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C>
Net revenue........................................... $549,695 $815,041 $1,153,557
Operating expenses:
Cost of affiliated physician services............... 224,770 349,036 506,811
Clinic salaries, wages and benefits................. 112,489 159,010 216,119
Outside hospitalization expense..................... 59,861 86,974 109,934
Clinic rent and lease expense....................... 18,832 27,515 41,825
Clinic supplies..................................... 24,529 34,453 47,744
Other clinic costs.................................. 41,248 67,645 88,991
General corporate expenses.......................... 42,196 56,653 64,713
Depreciation and amortization....................... 14,057 21,892 29,088
Net interest expense................................ 3,338 5,958 8,443
Merger expenses..................................... -- -- 66,564
Loss on disposal of assets.......................... 122 1,627 --
-------- -------- ----------
Net operating expenses...................... 541,442 810,763 1,180,232
-------- -------- ----------
Income (loss) before income taxes and cumulative
effect of change in method of accounting............ 8,253 4,278 (26,675)
Income tax expense (benefit).......................... 4,685 5,071 (27,233)
-------- -------- ----------
Income (loss) before cumulative effect of change in
method of accounting................................ 3,568 (793) 558
Cumulative effect of change in method of accounting
for income taxes.................................... 298 -- --
-------- -------- ----------
Net income (loss)..................................... 3,270 (793) 558
Pro forma income taxes................................ 5,038 2,279 --
-------- -------- ----------
Pro forma net income (loss)........................... $ (1,768) $ (3,072) $ 558
======== ======== =========
Pro forma net income (loss) per share................. $ (0.06) $ (0.08) $ 0.01
======== ======== =========
Number of shares used in pro forma net income (loss)
per share........................................... 28,403 36,553 42,720
======== ======== =========
</TABLE>

See accompanying notes to consolidated financial statements.

F-5
<PAGE> 82

MEDPARTNERS/MULLIKIN, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

<TABLE>
<CAPTION>
UNREALIZED
NOTES GAIN/(LOSS)
COMMON STOCK ADDITIONAL RECEIVABLE ON MARKETABLE UNAMORTIZED RETAINED TOTAL
--------------- PAID-IN FROM EQUITY DEFERRED EARNINGS STOCKHOLDERS'
SHARES AMOUNT CAPITAL STOCKHOLDERS SECURITIES COMP. (DEFICIT) EQUITY
------ ------ ---------- ------------ ------------- ----------- -------- -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balances at December 31,
1992..................... 15,709 $ 16 $ 33,466 $ (2,042) $ -- $ (11) $ 14,166 $ 45,595
Capital contributions.... 5,219 5 32,326 -- -- -- -- 32,331
Capital distributions.... (76) -- (389) -- -- -- -- (389)
Dividends and
distributions
paid................... -- -- -- -- -- -- (13,114) (13,114)
Net change in notes
receivable from
stockholders........... -- -- -- (354) -- -- -- (354)
Unrealized loss on
marketable equity
securities, net of
deferred taxes......... -- -- -- -- (166) -- -- (166)
Expenses related to
offering............... -- -- (71) -- -- -- -- (71)
Purchase of Medical
Business Solutions,
Inc.................... 60 -- 60 -- -- -- -- 60
Redemption of shares at
par on September 1,
1993................... (675) (1) -- -- -- -- -- (1)
Pro forma tax provision
of pooled entities..... -- -- -- -- -- -- 5,038 5,038
Stock options............ 251 -- 2,287 -- -- -- -- 2,287
Amortization of deferred
compensation........... -- -- -- -- -- 11 -- 11
Pro forma net loss....... -- -- -- -- -- -- (1,768) (1,768)
------ ------ ---------- ------------ ------ ----------- -------- -------------
Balances at December 31,
1993..................... 20,488 20 67,679 (2,396) (166) -- 4,322 69,459
Capital contributions.... 7,605 8 47,052 -- -- -- -- 47,060
Capital distributions.... (42) -- (3,594) -- -- -- -- (3,594)
Dividends and
distributions
paid................... -- -- -- -- -- -- (4,678) (4,678)
Net change in notes
receivable from
stockholders........... -- -- -- 47 -- -- -- 47
Unrealized gain on
marketable equity
securities, net of
deferred taxes......... -- -- -- -- 180 -- -- 180
Expenses related to
redeemable convertible
preferred stock........ -- -- (49) -- -- -- -- (49)
Pro forma tax provision
of pooled entities..... -- -- -- -- -- -- 2,279 2,279
Deferred compensation on
issuance of options.... -- -- 4,350 -- -- (4,350) -- --
Stock options............ 72 -- 802 -- -- -- -- 802
Amortization of deferred
compensation........... -- -- -- -- -- 798 -- 798
Pro forma net loss....... -- -- -- -- -- -- (3,072) (3,072)
------ ------ ---------- ------------ ------ ----------- -------- -------------
Balances at December 31,
1994..................... 28,123 28 116,240 (2,349) 14 (3,552) (1,149) 109,232
Balance for immaterial
pooling-of-interests
entities................. -- -- 2 -- -- -- (308) (306)
Capital contributions.... 6,605 6 77,532 -- -- -- -- 77,538
Capital distributions.... (26) -- (470) -- -- -- -- (470)
Dividends and
distributions
paid................... -- -- -- -- -- -- (6,229) (6,229)
Net change in notes
receivable from
stockholders........... -- -- -- 419 -- -- -- 419
Unrealized loss on
marketable equity
securities, net of
deferred taxes......... -- -- -- -- (21) -- -- (21)
Conversion of preferred
stock.................. 7,001 7 19,994 -- -- -- -- 20,001
Stock options............ 805 1 1,124 -- -- -- -- 1,125
Amortization of deferred
compensation........... -- -- -- -- -- 870 -- 870
Pro forma net income..... -- -- -- -- -- -- 558 558
------ ------ ---------- ------------ ------ ----------- -------- -------------
Balances at December 31,
1995..................... 42,508 $ 42 $214,422 $ (1,930) $ (7) $(2,682) $ (7,128) $ 202,717
====== ====== ======== ========== =========== ========== ======== ===========
</TABLE>

See accompanying notes to consolidated financial statements.

F-6
<PAGE> 83

MEDPARTNERS/MULLIKIN, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1993 1994 1995
------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Operating activities:
Pro forma net income (loss)................................. $(1,768) $ (3,072) $ 558
Adjustments to reconcile pro forma net income (loss) to net
cash and cash equivalents provided by (used in) operating
activities:
Depreciation and amortization............................ 14,057 21,892 29,088
Provision for deferred taxes............................. (371) (1,564) (33,171)
Merger expenses.......................................... -- -- 66,564
Loss on disposal of assets............................... 122 1,627 --
Amortization of premium on marketable securities......... 67 1,111 1,218
Pro forma tax provision of pooled entities............... 5,038 2,279 --
Other.................................................... (316) 349 (617)
Changes in operating assets and liabilities, net of effects
of acquisitions.......................................... 13,819 (8,896) (77,099)
------- --------- ---------
Net cash and cash equivalents provided by (used in)
operating activities.............................. 30,648 13,726 (13,459)
Investing activities:
Net cash used to fund acquisitions.......................... (14,313) (57,597) (61,531)
Additions to intangible assets, net of effects of
acquisitions............................................. (745) (1,728) (7,235)
Purchase of property and equipment.......................... (15,627) (32,082) (39,394)
Proceeds from sale of property and equipment................ 961 2,124 --
Net proceeds (purchases) of marketable securities........... (8,212) (17,560) 1,636
Other....................................................... 379 (1,701) 546
------- --------- ---------
Net cash and cash equivalents used in investing
activities........................................ (37,557) (108,544) (105,978)
Financing activities:
Capital contributions....................................... 42,713 116,298 65,764
Capital distributions....................................... (389) (3,625) (7,650)
Net proceeds from debt...................................... 16,334 35,075 139,496
Repayment of debt........................................... (17,940) (27,319) (83,011)
Dividends and distributions paid............................ (13,114) (4,453) (6,455)
Other....................................................... (188) 67 (2)
------- --------- ---------
Net cash and cash equivalents provided by financing
activities........................................ 27,416 116,043 108,142
------- --------- ---------
Net increase (decrease) in cash and cash equivalents.......... 20,507 21,225 (11,295)
Cash and cash equivalents at beginning of year................ 24,891 45,398 66,623
------- --------- ---------
Cash and cash equivalents at end of year...................... $45,398 $ 66,623 $ 55,328
======= ========= =========
Supplemental Disclosure of Cash Flow Information
Cash paid during the period for:
Interest................................................. $ 5,223 $ 7,809 $ 12,226
======= ========= =========
Income taxes............................................. $ 3,027 $ 6,036 $ 8,014
======= ========= =========
</TABLE>

See accompanying notes to consolidated financial statements.

F-7
<PAGE> 84

MEDPARTNERS/MULLIKIN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995

1. ACCOUNTING POLICIES

Description of Business

MedPartners, Inc. (MedPartners) and Mullikin Medical Enterprises, L.P.
(MME) merged on November 29, 1995 to form MedPartners/Mullikin, Inc. (the
Company). MedPartners was incorporated in January 1993 in Delaware. MedPartners'
business is to operate and/or manage physician practices. MedPartners, through
wholly owned subsidiaries, acquires certain assets of and manages physician
practices under long-term practice management agreements with affiliated
physician groups that practice through such practices. MME was formed on March
26, 1994 through the merger of Mullikin Management Partnership, L.P. (MMP) and
the limited partners of Pioneer Hospital. The Company operates a 99-bed acute
care hospital (Pioneer) and a 102-bed acute care hospital (U.S. Family Care
Medical Center) and provides management systems and services, nonphysician
healthcare personnel, facilities and equipment to affiliated medical
organizations and independent hospitals. The affiliated medical organizations
employ and contract with physicians and health maintenance organizations (HMOs)
to provide professional healthcare services to members of HMOs. The Company also
contracts with the HMOs to provide institutional (hospital) services to a
majority of the same members. In addition, through its wholly owned
subsidiaries, the Company contracts with hospitals to provide Medical Staff for
various hospital departments.

Basis of Presentation

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. Through the 20 to 44-year practice management agreements between
the Company's wholly owned subsidiaries and the various professional
corporations, the Company has assumed full responsibility for the operating
expenses in return for the assignment of the revenue of the professional
corporations. The Company believes it has, as opposed to affiliates of the
Company, perpetual, unilateral control over the assets and operations of the
various professional corporations, and notwithstanding the lack of technical
majority ownership of the stock of such entities, consolidation of the various
professional corporations is necessary to present fairly the financial position
and results of operations of the Company because there exists a
parent-subsidiary relationship by means other than record ownership of a
majority of voting stock. Control by the Company is perpetual rather than
temporary because of (i) the length of the original terms of the agreements,
(ii) the successive extension periods provided by the agreements, (iii) the
continuing investment of capital by the Company, (iv) the employment of the
majority of the nonphysician personnel, and (v) the nature of the services
provided to the professional corporations by the Company. Two affiliated medical
organizations, Mullikin Medical Center, a Medical Group, Inc., and Moore-White
Medical Group have been treated as special purpose entities and consolidated
with the Company by virtue of the fact that these entities have nominal capital
and their activities and resulting substantive risks and rewards rest directly
or indirectly with the Company. On January 1, 1995, MMP entered into a long-term
management agreement with Mullikin Independent Physician Association, a Medical
Corporation (MIPA). This agreement expires in the year 2038 and provides for the
assignment of virtually all of MIPA's revenue to MMP. Accordingly, beginning
January 1, 1994, the revenues and expenses of MIPA are reflected in the
Company's consolidated statements of operations. All intercompany accounts and
transactions have been eliminated in the consolidation.

Nature of Physician Compensation Arrangements

MedPartners compensates PCs with which it has contracted to provide
healthcare services to MedPartners' clinics under four basic arrangements. In
all circumstances, MedPartners is responsible for the billing and collection of
the revenue related to services provided at MedPartners' clinics as well as for
paying all expenses of the clinic including physician compensation. In the
Company's financial statements, MedPartners records all such revenue for
services performed by the physicians at the clinics. In no instance is

F-8
<PAGE> 85

MEDPARTNERS/MULLIKIN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

MedPartners paid a fixed fee to cover clinic operating expenses. MedPartners
always remains at risk for the expenses of the clinics. In all four types of
arrangements described below, the Company is not sharing revenue with the PCs or
its physician owners.

Over one half of MedPartners' revenue (approximately 53.0% at December 31,
1995) is received under capitation arrangements. Under these arrangements,
MedPartners contracts with licensed HMOs for a broad range of healthcare
services and in turn subcontracts for the delivery of healthcare with hospitals,
ancillary providers, and professional medical organizations, including PC's that
are affiliated with MedPartners through management agreements. Pursuant to these
arrangements the PC is paid on a per member per month basis by MedPartners. From
this amount, the PC pays liability insurance premiums and compensates its
physician owners. The PCs do not have the authority to participate in the
negotiations of contracts with HMOs.

Under the second type of arrangement, which represents approximately 23.1%
of MedPartners' revenue at December 31, 1995, MedPartners pays the PC for the
healthcare services provided at MedPartners' clinics a negotiated fixed dollar
amount. At MedPartners' sole discretion, the physicians are eligible to receive
a bonus based on performance criteria and goals. The amount of the discretionary
bonus is determined solely by MedPartners management and is not directly
correlated to clinic revenue and gross profit. In these arrangements,
MedPartners is responsible for the billing and collection of all revenues for
the services provided at its clinics as well as paying all expenses, including
physicians compensation.

Under the third type of arrangement, which represents approximately 23.2%
of MedPartners' revenue at December 31, 1995, the PC is compensated on a
negotiated fee-for-service basis for healthcare services performed at
MedPartners' clinics. In these arrangements MedPartners bills and collects for
all services rendered at its clinics and pays all expenses of the clinics,
including physicians' compensation, which is based on the fee for service
revenue generated at the clinics (which typically represents between 40 to 70
percent of the clinic's net revenues). Again, the Company is not reimbursed for
the clinic expenses, rather it is responsible and at risk for all such expenses.

Under the fourth type of arrangement, representing approximately 0.7% of
MedPartners' revenue at December 31, 1995, MedPartners pays the PC a negotiated
percentage (typically 75 to 88 percent) of the gross profits of the clinic.
Gross profit represents net clinic revenues less operating expenses of the
clinic. In these arrangement, MedPartners is responsible for the billing and
collection for the services rendered at its clinics and the payment of the
clinic expenses, including physicians' compensation. In some instances under
these types of arrangements, the physicians are guaranteed a minimum salary.

The fee retained by MedPartners includes direct management expenses of
operating the clinics plus additional amounts which reflect a portion or all of
the residual equity interest in the clinics after payment of physician
compensation (including discretionary bonuses, if any), other medical costs and
management expenses. Under the four basic arrangements discussed above, these
additional amounts (representing clinic earnings) retained by MedPartners take
the following forms: (1) 100% of clinic earnings (as defined above); (2) 100% of
clinic earnings; (3) 100% of clinic earnings and (4) a variable percentage of
the clinic's gross profits (as defined above).

Use of Estimates

The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the accompanying consolidated
financial statements and notes. Actual results could differ from those
estimates.

F-9
<PAGE> 86

MEDPARTNERS/MULLIKIN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Cash Equivalents

The Company considers all highly liquid investments with a maturity of
three months or less when purchased to be cash equivalents. The carrying amounts
of all cash and cash equivalents approximates fair value.

Marketable Securities

Effective August 1, 1994, the Company adopted Financial Accounting
Standards Board (FASB) Statement No. 115, "Accounting for Certain Investments in
Debt and Equity Securities," which requires that investments in equity
securities that have readily determinable fair values and investments in debt
securities be classified in three categories: held-to-maturity, trading and
available-for-sale. Based on the nature of the assets held by the Company and
management's investment strategy, the Company's investments have been classified
as available-for-sale.

Available-for-sale securities are carried at fair value, with the
unrealized gains and losses, net of tax, reported in a separate component of
stockholders' equity. The amortized cost of debt securities in this category is
adjusted for amortization of premiums and accretion of discounts to maturity.
Such amortization is included in interest income. The cost of securities sold is
based on the specific identification method.

Inventories

Inventories are stated at the lower of cost (first-in, first-out method) or
market.

Property and Equipment

Property and equipment are stated at cost, which for the used assets being
acquired is usually determined by an independent appraisal. Depreciation of
property and equipment is calculated using either the declining balance or the
straight-line method over the shorter of the estimated useful lives of the
assets or the term of the underlying leases. Estimated useful lives range from 3
to 10 years for equipment, 5 to 20 years for leasehold improvements and 5 to 40
years for buildings and improvements based on type and condition of assets.
Routine maintenance and repairs are charged to expense as incurred, while costs
of betterments and renewals are capitalized.

Intangible Assets

Excess of cost over fair value of assets acquired (goodwill) is being
amortized using the straight-line method over terms of the related practice
management agreements, generally 20 to 40 years. As of December 31, 1995, the
Company had entered into practice management agreements with 14 physician groups
which contain a voluntary termination clause granting the affiliated physician
group the right to terminate the agreement after a specified time, typically on
the fifth anniversary of the agreement, these physician groups account for
approximately 6% of net revenue as of December 31, 1995, and the original
goodwill recorded related to the acquisition of these physician groups was
approximately $6,000,000. The Company believes that amortizing the related
goodwill over 20 years rather than the noncancellable term of the practice
management agreements generally is appropriate considering (i) termination
options are exercisable only during restrictive windows and (ii) the physician
groups exercising such option are required to purchase substantially all of the
assets used in the practice, which would make the termination of the practice
management agreements not probable. The goodwill that was previously on the
books of MME is generally being amortized over 30 years and that previously on
the books of PPSI over periods ranging from 5 to 25 years. The carrying value of
goodwill is reviewed if the facts and circumstances suggest that it may be
impaired. If this review indicates that goodwill will not be recoverable, as
determined based on the undiscounted cash flows of the entity acquired over the
remaining amortization period, the carrying value of the goodwill is reduced by
the estimated shortfall of cash flows. Costs of obtaining practice management
agreements are capitalized as incurred and are amortized using the straight-line
method. These costs include all direct costs of obtaining such agreements, which
include such items as filing fees, legal fees and travel and related costs. The
Company has elected to amortize these costs over a shorter period than the term
of the

F-10
<PAGE> 87

MEDPARTNERS/MULLIKIN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

related practice management agreements. Currently, these costs are being
amortized over three years. Other intangible assets include costs associated
with obtaining long-term financing, which are being amortized, and included in
interest expense, systematically over the terms of the related debt agreements.

Payable to Physician Groups

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

Net Revenue

Net revenue is reported at the estimated realizable amounts from patients,
third-party payors and others for services rendered. Revenue under certain
third-party payor agreements is subject to audit and retroactive adjustments.
Provisions for estimated third-party payor settlements and adjustments are
estimated in the period the related services are rendered and are adjusted in
future periods as final settlements are determined.

During 1993, 1994 and 1995, approximately 5% of net revenue was received
under the Medicare program and approximately 4% was received under state
reimbursement programs. The Medicare program and state reimbursement programs
pay physician services based on fee schedules which are determined by the
related government agency.

The Company has contracts with various managed care organizations to
provide physician services based on negotiated fee schedules. Under various
contracts with HMOs, capitation is received to cover all physicians and hospital
services needed by the HMO members. Capitation payments are recognized as
revenue on the accrual basis, and represents approximately 67%, 62% and 54% of
the Company's net revenue in 1993, 1994 and 1995, respectively. Liabilities for
physician services provided and hospital services incurred are accrued in the
month services are rendered. The provision for accrued claims payable which
represents the amount payable for services incurred by patients not yet paid is
validated by actuarial review. Management believes that the provision at
December 31, 1995 is adequate to cover claims which will ultimately be paid.

Income Taxes

The Company is a corporation subject to federal and state income taxes.
Deferred income taxes are provided for temporary differences between financial
and income tax reporting relating primarily to net operating losses which must
be carried forward to future periods for income tax reporting purposes.

Unamortized Deferred Compensation

Unamortized deferred compensation represents the difference between the
grant price and the market price on the date that stock options were granted to
the physicians at Riverside Medical Clinic, Inc. This cost is being amortized
over the five year vesting period.

Reinsurance

The Company cedes reinsurance to allow management to control exposure to
potential losses arising from large risks. Reinsurance expense is estimated
based on the terms of the respective reinsurance agreements. The estimated
expense is continually reviewed and any adjustments which become necessary are
included in current operations. Amounts recoverable from reinsurers are
estimated in a manner consistent with the claim liability associated with the
reinsured policies.

F-11
<PAGE> 88

MEDPARTNERS/MULLIKIN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Restatement of Financial Statements

The Company has merged with the following entities during 1995 and in the
first quarter of 1996 in transactions that were accounted for as poolings of
interests. Accordingly, the financial statements for all periods prior to the
effective dates of these mergers have been restated to include the results of
these entities. The Company issued 27,819,000 shares of its common stock in
these and other immaterial transactions.

<TABLE>
<CAPTION>
EFFECTIVE DATE OF
ENTITY NAME MERGER
- ------------------------------------------------------------------------ -------------------
<S> <C>
MEDCTR, Inc. (MEDCTR)................................................... June 20, 1995
Team Health............................................................. June 30, 1995
Texas Back Institute, Inc. (TBI)........................................ November 2, 1995
Vanguard Healthcare Group, Inc. (Vanguard).............................. November 13, 1995
Mullikin Medical Enterprises, L.P. (MME) and related real estate
partnerships.......................................................... November 29, 1995
Pacific Physician Services, Inc. (PPSI)................................. February 22, 1996
</TABLE>

Prior to the pooling, MEDCTR, TBI and RVAA were S Corporations and MME and
related real estate entities were partnerships and were therefore not subject to
federal and state income taxes. Proforma income tax provisions are reflected in
the consolidated statements of operations to provide for additional federal and
state income taxes which would have been incurred had these entities been taxed
as C Corporations.

Fiscal Year

At December 31, 1993, MME changed its fiscal year-end from January 31 to
December 31. As a result, the consolidated financial statements for the year
ended December 31, 1993 contain only eleven months of operations for MME. PPSI's
financial statements are for twelve month periods ending October 31.

Pro Forma Net Income (Loss) Per Share

Pro forma net income (loss) per share is computed, after adjusting
historical net income for the estimated tax provisions applicable to the pooled
companies described above, by dividing net income (loss) by the number of common
and common equivalent shares outstanding during the periods in accordance with
the applicable rules of the Securities and Exchange Commission. All stock
options issued have been considered as outstanding common stock equivalents for
all periods presented, even if anti-dilutive, under the treasury stock method
(based on initial public offering price). Shares of common stock issuable upon
conversion of the Series A and Series B Convertible Preferred Stock of
MedPartners are assumed to be common share equivalents for all periods
presented.

Stock Option Plans

The Company has elected to follow Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" (APB 25) and related
Interpretations in accounting for its employee stock options because the
alternative fair value accounting provided for under FASB Statement No. 123,
"Accounting for Stock-Based Compensation," requires use of option valuation
models that were not developed for use in valuing employee stock options. Under
APB 25, because the exercise price of the Company's employee stock options
equals the market price of the underlying stock on the date of grant, no
compensation expense is recognized.

Impairment of Long-Lived Assets

Effective December 31, 1995, the Company adopted FASB Statement 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of. Statement 121 requires impairment losses to be recorded on
long-lived assets used in operations when indicators of impairment are present
and the undiscounted cash flows estimated to be generated by those assets are
less than the assets' carrying amount. The Statement also addresses the
accounting for long-lived assets that are expected to be disposed of. Statement
121 is applicable for most long-lived assets, identifiable intangibles, and
goodwill related to those assets; it does not apply to financial instruments and
deferred taxes. Management has

F-12
<PAGE> 89

MEDPARTNERS/MULLIKIN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

determined that long-lived assets are fairly stated in the accompanying balance
sheet, and that no indicators of impairment are present. In accordance with the
new rules, the Company's prior year financial statements have not been restated
to reflect the change in accounting principle.

2. CASH AND CASH EQUIVALENTS

Cash and cash equivalents consisted of the following:

<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1994 1995
------- -------
(IN THOUSANDS)
<S> <C> <C>
Cash......................................................................... $ 6,467 $14,118
Certificates of deposit...................................................... 14,783 15,780
Commercial paper............................................................. 4,994 --
Money market accounts........................................................ 37,560 15,437
Repurchase agreements........................................................ 2,819 9,993
------- -------
$66,623 $55,328
======== ========
</TABLE>

The amounts above approximate the fair value of the respective cash
equivalents.

The repurchase agreements represent overnight funds purchased through a
bank and are secured by Treasury Bills held in the bank's name.

Interest income, including interest income from marketable debt securities,
was $2,150,000, $3,489,000 and $5,353,000 for the years ended December 31, 1993,
1994 and 1995, respectively.

3. MARKETABLE SECURITIES

The following is a summary of available-for-sale securities at December 31,
1995:

<TABLE>
<CAPTION>
GROSS GROSS
UNREALIZED UNREALIZED ESTIMATED
GROSS COST GAINS LOSSES FAIR VALUE
---------- ---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Debt securities issued by:
Federal government..................................... $ 7,799 $ -- $ -- $ 7,799
State and state agencies............................... 13,884 3 (19) 13,868
Political subdivision of state......................... 13,895 38 (33) 13,900
---------- --- ----- ----------
$ 35,578 $ 41 $(52) $ 35,567
========= ======== ======== ========
</TABLE>

The amortized cost and estimated fair value of marketable securities
classified as available-for-sale at December 31, 1995, by contractual maturity,
are as follows:

<TABLE>
<CAPTION>
ESTIMATED
COST FAIR VALUE
------- ----------
(IN THOUSANDS)
<S> <C> <C>
Debt securities:
Due in one year or less................................................... $19,180 $ 19,163
Due after one year through two years...................................... 13,506 13,480
Due after two years through three years................................... 1,007 1,004
Due after three years..................................................... 1,885 1,920
------- ----------
$35,578 $ 35,567
======== ========
</TABLE>

F-13
<PAGE> 90

MEDPARTNERS/MULLIKIN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The following is a summary of available-for-sale securities at December 31,
1994:

<TABLE>
<CAPTION>
GROSS GROSS
UNREALIZED UNREALIZED ESTIMATED
GROSS COST GAINS LOSSES FAIR VALUE
---------- ---------- ---------------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Debt securities issued by:
Federal government................................. $ 5,890 $-- $ -- $ 5,890
State and state agencies........................... 15,108 -- (351) 14,757
Political subdivision of state..................... 14,855 -- (323) 14,532
Equity securities.................................... 2,510 -- -- 2,510
---------- --- ------ ----------
$ 38,363 $-- $ (674) $ 37,689
========= ======== ============= ========
</TABLE>

4. INTANGIBLE ASSETS

Intangible assets consisted of the following:

<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1994 1995
------- --------
(IN THOUSANDS)
<S> <C> <C>
Excess of cost over fair value of assets acquired........................... $59,471 $ 99,683
Noncompetition agreements................................................... 8,370 3,771
Medical records............................................................. 6,387 2,257
Favorable lease rate on facilities.......................................... 2,740 2,740
Organizational costs........................................................ 845 1,075
Clinic service agreements................................................... 2,554 7,879
Other intangible assets..................................................... 6,986 7,169
------- --------
87,353 124,574
Less accumulated amortization............................................... 12,420 12,603
------- --------
$74,933 $111,971
======== =========
</TABLE>

Amortization expense was $3,642,000, $6,820,000 and $9,040,000 for the
years ended December 31, 1993, 1994 and 1995, respectively.

5. PROPERTY AND EQUIPMENT

Property and equipment consists of the following:

<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1994 1995
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Land....................................................................... $ 11,937 $ 12,798
Buildings and improvements................................................. 54,953 49,358
Equipment.................................................................. 82,014 117,165
Equipment under capital leases............................................. 10,790 5,855
Leasehold improvements..................................................... 22,185 43,269
Construction in progress................................................... 1,305 3,079
-------- --------
183,184 231,524
Less accumulated depreciation and amortization............................. 61,161 76,148
-------- --------
$122,023 $155,376
========= =========
</TABLE>

Depreciation and amortization expense was $10,415,000, $15,072,000 and
$20,048,000 for the years ended December 31, 1993, 1994 and 1995, respectively.

F-14
<PAGE> 91

MEDPARTNERS/MULLIKIN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

6. LONG-TERM DEBT

Long-term debt consisted of the following:

<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1994 1995
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Advances under Bank Credit Facility........................................ $ 17,900 $ 90,000
Convertible subordinated debentures with interest at 5.50%, interest only
paid semi-annually, due in 2003.......................................... 69,000 69,000
Notes payable to banks, collateralized by deeds of trust including
interest, at rates ranging from 6.5% to 10.5%, payable in monthly
installments through 2002................................................ 12,595 10,611
Notes payable to lenders secured by deeds of trust payable in monthly
installments, bearing interest at rates ranging from 8.75% to 10.25%..... 10,271 7,778
Notes payable to physicians and shareholders in annual installments through
2001, interest rates ranging from 7.0% to 12.0%.......................... 3,000 2,332
Notes payable to medical groups in annual installments through 1998,
interest rates ranging from 5.0% to 9.0%................................. 5,080 3,996
Notes payable to former partners for buyout of partnership interests,
unsecured, maturing through 1999, interest rates at 7.0% and 10.0%....... 3,165 4,456
10.0% note payable to Walter T. Mullikin and Kathryn D. Mullikin as
trustees of the Mullikin Family Trust, collateralized by deed of trust on
partnership property..................................................... 3,706 3,477
Notes payable to stockholders.............................................. 7,180 --
Other long-term notes payable.............................................. 22,318 13,066
Capital lease obligations.................................................. 4,939 5,247
-------- --------
159,154 209,963
Less amounts due within one year........................................... (12,656) (9,149)
-------- --------
$146,498 $200,814
========= =========
</TABLE>

The amounts recorded above approximate the fair value of the obligations.

On November 29, 1995, the Company entered into a Revolving Credit and
Reimbursement Agreement with a syndicate of banks which provides a revolving
credit facility (the Bank Credit Facility) of up to $150 million. Advances under
the Bank Credit Facility initially bear interest at the London Interbank Offered
Rate (LIBOR) plus 2.0% which approximates 7.9% at December 31, 1995. The Bank
Credit Facility has an expiration date of May 10, 1998 and is renewable for two
additional one-year periods. In conjunction with the Bank Credit Facility, the
Company granted the banks a first priority security interest in all shares of
stock of its subsidiaries and provided a negative pledge on substantially all
assets.

The Bank Credit Facility contains affirmative and negative covenants which,
among other things, require the Company to maintain certain financial ratios
(including maintain net worth, minimum fixed charge overage ratio, maximum
indebtedness to cash flow), limit the amount of additional indebtedness, and set
certain restrictions on investments, mergers and sales of assets. As of December
31, 1995, the Company was in compliance with the covenants in the Bank Credit
Facility. Additionally, the Company is required to obtain bank consent for
acquisitions with an aggregate purchase price in excess of $15 million.

In December 1993, PPSI issued $69 million of convertible subordinated
debentures for net proceeds of approximately $66,547,000. The debentures are
convertible into common stock of PPSI at the option of the holder at a
conversion price of $29 per share. Interest on the debentures at 5 1/2% is
payable semi-annually on June 15 and December 15. The debentures are redeemable
for cash at any time, at the option of PPSI and are subordinated to all senior
indebtedness, as defined in the Indenture Agreement. The Indenture Agreement
governing the debentures provides that upon a change in control over PPSI, the
holders of the debentures have the right to require PPSI to purchase all or part
of the debentures at 100% of the principal amount plus accrued interest. There
are no restrictions on the incurrence of additional indebtedness by PPSI or any
subsidiary. At December 31, 1995, the fair value of the convertible subordinated
debentures, based on quoted

F-15
<PAGE> 92

MEDPARTNERS/MULLIKIN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

market price, was approximately $57,788,000. Subsequent to the acquisition of
PPSI in February of 1996, the Company paid off these debentures.

The following is a schedule of principal maturities of long-term debt as of
December 31, 1995.

<TABLE>
<CAPTION>
(IN THOUSANDS)
--------------
<S> <C>
1996........................................................ $ 9,215
1997........................................................ 8,577
1998........................................................ 96,967
1999........................................................ 4,962
2000........................................................ 2,266
Thereafter.................................................. 87,976
--------------
Total............................................. $209,963
===========
</TABLE>

Operating Leases: Operating leases generally consist of short-term lease
agreements for professional office space where the medical practices are
located. These leases generally have five-year terms with renewal options.

The following is a schedule of future minimum lease payments under
noncancelable operating leases as of December 31, 1995.

<TABLE>
<CAPTION>
(IN THOUSANDS)
--------------
<S> <C>
1996........................................................ $ 36,426
1997........................................................ 32,286
1998........................................................ 28,776
1999........................................................ 24,934
2000........................................................ 21,411
Thereafter.................................................. 111,110
--------------
$254,943
===========
</TABLE>

Interest expense was $5,488,000, $9,447,000 and $13,796,000 for the years
ended December 31, 1993, 1994 and 1995, respectively.

7. INCOME TAX EXPENSE

At December 31, 1995, the Company had a cumulative net operating loss
carryforward for federal income tax purposes of approximately $57 million
available to reduce future amounts of taxable income. If not utilized to offset
future taxable income, the net operating loss carryforwards will expire on
various dates through 2010. Approximately $1 million of the total $57 million
net operating loss carryforward (which was generated in 1993), is available at a
reduced rate due to certain tax limitations.

In 1994, the Company established a valuation allowance of $14,571,000
because it was more likely than not that the deferred tax asset would not be
utilized in future periods. The valuation allowance has been decreased by
$14,240,000 in 1995 because the realization of the deferred tax asset is now
more likely than not.

F-16
<PAGE> 93

MEDPARTNERS/MULLIKIN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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

<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1994 1995
-------- -------
<S> <C> <C>
(IN THOUSANDS)
Deferred tax assets:
Net operating losses............................................ $ 8,419 $22,992
Purchase reserves and restructuring............................. -- 14,724
Accrued payroll and vacation.................................... 2,129 3,383
Accrued and deferred compensation benefits...................... 2,464 3,375
Bad debts....................................................... 6,210 9,474
Other........................................................... 4,463 3,270
-------- -------
Gross deferred tax assets......................................... 23,685 57,218
Valuation allowance for deferred tax assets....................... (14,571) (331)
Deferred tax liabilities
Goodwill........................................................ -- 8,590
Excess tax depreciation......................................... 1,193 2,463
Prepaid expenses................................................ 504 2,419
Accrual to cash adjustment...................................... 1,863 273
Shared risk receivable.......................................... 4,041 7,182
Other........................................................... 246 958
-------- -------
Gross deferred tax liabilities.................................... 7,847 21,885
-------- -------
Net deferred tax asset............................................ $ 1,267 $35,002
======== =======
</TABLE>

Income tax expense (benefit) for the years ended December 31, 1993, 1994
and 1995 is as follows:

<TABLE>
<CAPTION>
1993 1994 1995
------ ------ --------
(IN THOUSANDS)
<S> <C> <C> <C>
Current:
Federal.................................................. $4,109 $5,454 $ 5,414
State.................................................... 1,068 1,417 1,323
------ ------ --------
5,177 6,871 6,737
Deferred:
Federal.................................................. (466) (1,629) (29,793)
State.................................................... (26) (171) (4,177)
------ ------ --------
(492) (1,800) (33,970)
------ ------ --------
$4,685 $5,071 $(27,233)
====== ====== ========
</TABLE>

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

<TABLE>
<CAPTION>
1993 1994 1995
------ ------ --------
(IN THOUSANDS)
<S> <C> <C> <C>
Federal tax at statutory rate.............................. $3,944 $4,216 $ (8,484)
Add (deduct):
State income tax, net of federal tax benefit............. 608 684 (3,355)
Decrease in valuation allowance.......................... -- -- (14,240)
Other.................................................... 133 171 (1,154)
------ ------ --------
$4,685 $5,071 $(27,233)
====== ====== ========
</TABLE>

F-17
<PAGE> 94

MEDPARTNERS/MULLIKIN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

8. CAPITALIZATION

The Company's Restated Certificate of Incorporation provides that the
Company may issue 9,500,000 shares of Preferred Stock, par value $0.001 per
share, 500,000 shares of Series C Junior Participating Preferred Stock, par
value $0.001 per share, and 75,000,000 shares of Common Stock.

On September 1, 1993, the Company committed to sell 4,001,000 shares of
Series A Convertible Preferred Stock at $2.00 per share. The Company received,
net of expenses, $7,230,000 in 1993 and $698,000 on February 1, 1994. During
1994, the Company sold 3,000,000 shares of Series B Convertible Preferred Stock
at $4.00 per share. The Company received, net of expenses, $11,958,000. Upon
consummation of the Company's initial public offering on February 28, 1995, all
of the issued and outstanding shares of Series A and Series B Convertible
Preferred Stock were converted into 7,001,000 shares of the Company's Common
Stock.

On February 28, 1995, the Company completed an initial public offering of
5,060,000 shares of its common stock. Gross and net proceeds of the offering
were $65,780,000 and $60,417,000, respectively. Proceeds of the offering were
used to pay all outstanding indebtedness under the bank credit facility of
$30,400,000. The remainder of the net proceeds were used to fund acquisitions of
certain assets of physician practices, expansion of physician services, working
capital and other general corporate purposes.

In March of 1996, 6,632,800 shares of the Company's Common Stock were sold
in a secondary offering. The net proceeds from this offering were approximately
$194 million. The offering provided for over-allotments of 1,237,500 shares
which have not yet been exercised. If exercised, the Company would receive an
additional $36 million from the over-allotments. These proceeds were used to
pay-off the line of credit and the debentures discussed in Note 6.

9. STOCK OPTIONS

The Company's Board of Directors adopted and a majority of the Company's
stockholders approved the 1993 and 1995 Stock Option Plans (the Plans), covering
a maximum of 1,555,000 and 5,899,150 shares of Common Stock, respectively. The
number of shares covered under the 1995 Stock Option Plan is subject to
expansion to 7,099,150 at the Annual Shareholders' Meeting on April 25, 1996.
The Plans, under which both incentive stock options and non-qualified stock
options may be issued, provide that options may be granted to officers,
directors, consultants and employees of the Company. Options granted under the
Plans generally vest equally over five years from the date of grant and
terminate ten years from the date of grant. All stock options were granted prior
to the initial public offering of the Company at estimated fair market value. As
of December 31, 1995, the Company had granted options to acquire 4,426,750
shares of its Common Stock under the Plans at option prices ranging from $.20 to
$28.25. All stock options granted in 1995 were granted at fair market value.
During 1995 options to acquire 702,380 shares of the Company's Common Stock were
exercised at prices ranging from $.20 to $22.00 per share. Gross proceeds from
the exercise of these options totaled $377,000.

10. ACQUISITIONS

During the year ended December 31, 1995, the Company, through its
wholly-owned subsidiaries, acquired certain operating assets of various medical
practices. Simultaneously with each medical practice acquisition, the Company
entered into practice management agreements which generally have a 20-year term.
Pursuant to the practice management agreements, the Company manages all aspects
of the affiliated practice other than the provision of medical services, which
is controlled by the physician groups. For providing services under the practice
management agreement, the physicians receive a fixed percentage of the accrual
net revenue of the practice. The percentage varies from practice to practice and
is based upon the overhead structure of the practice at the time of affiliation.
Generally, the practice management agreements cannot be terminated by the
physician group or Company without cause, which includes material default or
bankruptcy. Upon termination for cause or expiration of the clinic services
agreement, the physician group has the option to purchase some or all of the
assets owned by the Company, generally at current book values.

F-18
<PAGE> 95

MEDPARTNERS/MULLIKIN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The acquisitions have been accounted for by the purchase method of
accounting and, accordingly, the purchase price has been allocated to the net
assets based on the estimated fair values at the date of acquisition. The
accounts receivable were valued at net collective value based upon detailed
analyses by the Company and the property and equipment values were based upon
independent appraisals. The estimated fair value of assets acquired is
summarized as follows:

<TABLE>
<CAPTION>
DECEMBER 31,
1995
--------------
(IN THOUSANDS)
<S> <C>
Accounts receivable, net............................................... $ 22,117
Prepaid expenses and other current assets.............................. 2,100
Property and equipment................................................. 15,128
Liabilities assumed.................................................... (9,888)
Excess of costs over fair value of assets acquired..................... 45,521
-------
74,978
Less value of stock issued............................................. 13,447
-------
Cash purchase price, net of cash received.............................. $ 61,531
=======
</TABLE>

11. RETIREMENT SAVINGS PLAN

Effective April 4, 1994, the Company adopted the MedPartners, Inc. and
Subsidiaries Employee Retirement Savings Plan (the "Plan"). The Plan is a Code
Section 401(k) Plan which requires the attainment of age 21 and one year of
service, with a minimum of 1,000 hours worked, to become a participant in the
Plan. Service for a predecessor employer will be considered for participation
requirements in the Plan for all employees employed through acquisition
activities. The Company, at its sole discretion, may contribute an amount which
it designates as a qualified nonelective contribution. The Company anticipates a
required contribution of three percent of non-key employee salaries for the Plan
year ended December 31, 1995, however, no additional contributions are
anticipated at this time. Company contributions are gradually vested over a
six-year service period. The various entities that were acquired or merged into
the Company during 1995 also had varying employee retirement plans, which may be
incorporated into the Company's plan during 1995 and 1996. The expenses related
to all plans during the years ended December 31, 1993, 1994 and 1995 were
approximately $1,464,000, $1,858,000 and $3,195,000, respectively.

F-19
<PAGE> 96

MEDPARTNERS/MULLIKIN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

12. MERGERS

The Company merged with the following entities in transactions that were
accounted for as pooling of interests. Accordingly, the Company's historical
financial statements for all periods have been restated to include the results
of all transactions accounted for as pooling of interests.

<TABLE>
<CAPTION>
MME AND
RELATED PPSI
REAL OTHER AND
ESTATE IMMATERIAL TEAM
MEDPARTNERS PARTNERSHIPS MEDCTR TBI VANGUARD POOLINGS HEALTH COMBINED
----------- ------------ ------- ------- -------- ---------- -------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Year ended December 31,
1993
Net revenue.......... $ 1,277 $298,415 $11,410 $25,881 $17,128 $7,972 $187,612 $ 549,695
Net (loss) income.... (1,206) (1,495) (369) (177) (873 ) 276 7,114 3,270
Year ended December 31,
1994
Net revenue.......... 77,432 370,798 10,963 20,816 18,493 8,313 308,226 815,041
Net (loss) income.... (1,601) (4,647) 76 (1,346) (847 ) (26) 7,598 (793)
Year ended December 31,
1995
Net revenue.......... 238,887 431,875 11,343 23,679 28,684 7,957 411,132 1,153,557
Net (loss) income.... 3,022 (9,412) (11) (453) (2,905 ) 112 10,205 558
</TABLE>

Included in pre-tax loss for the year ended December 31, 1995 are merger
costs totaling $66.6 million. Approximately $55.6 million relates to the merger
with MME and related real estate partnerships. The components of this cost are
as follows:

<TABLE>
<S> <C>
Investment banking fees............................................... $ 8,771,200
Professional fees..................................................... 7,267,075
Other transaction costs............................................... 5,028,820
Restructuring charges:
Severance costs for identified employees............................ 19,625,728
Impairment of assets................................................ 8,095,411
Abandonment of facilities........................................... 6,401,246
Noncompatible technology............................................ 2,601,578
Unamortized loan costs.............................................. 2,323,667
Conforming of accounting policies................................... 2,248,810
Restructuring of benefits........................................... 1,888,749
Other restructuring charges......................................... 2,311,654
-----------
Total................................................................. $66,563,938
==========
</TABLE>

The PPSI merger was effective February 22, 1996, therefore, the merger
costs related to this transaction are not included in the amounts above. They
will be included in the results of operations for 1996.

13. CONTINGENCIES

In addition to the general liability and malpractice insurance carried by
the individual physicians, the Company is insured with respect to general
liability and medical malpractice risks on a claims made basis. Management is
not aware of any claims against the Company which might have a material impact
on the Company's consolidated financial position.

F-20
<PAGE> 97

MEDPARTNERS/MULLIKIN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

opinion of management that the ultimate resolution of any asserted or unasserted
claims will not have a material adverse effect on the financial position or
operating results of the Company.

PPSI, through its wholly-owned captive insurance company, Pacific
Indemnity, Ltd., has provided for an estimate of the cost of the incurred but
not reported claims and deductible amounts for the employed physicians servicing
emergency departments. At July 31, 1995, Pacific Indemnity, Ltd. purchased
insurance to cover all claims for incidents occurring through July 31, 1995
("tail coverage") for all employee physicians of the affiliated medical
organizations. Team Health has an agreement with its insurance carrier to
purchase insurance associated with claims incurred and not yet reported.
Management believes that the recorded accruals for such losses and deductibles
related to malpractice claims for the hospital-based contracting physicians and
the hospital are sufficient to cover incidents occurring prior to December 31,
1995.

PPSI is self-insured for employee and dependent health insurance costs and
certain workers' compensation costs. Reinsurance of defined excess cost has been
purchased from an outside insurance company. Management believes that amounts
accrued are sufficient to cover claims and costs incurred through December 31,
1995.

14. MAJOR PAYORS

Two payors represented individually more than 10% of the Company's net
revenue as follows:

<TABLE>
<CAPTION>
PERCENTAGE OF
NET REVENUE
----------------------
YEAR ENDED DECEMBER
31,
----------------------
CUSTOMER 1993 1994 1995
---------------------------------------------------------------- ---- ---- ----
<S> <C> <C> <C>
Pacificare...................................................... 17% 19% 18%
Health Net...................................................... 13 11 9
</TABLE>

F-21
<PAGE> 98

MEDPARTNERS/MULLIKIN, INC.

CONSOLIDATED BALANCE SHEET

<TABLE>
<CAPTION>
JUNE 30,
1996
---------------
(UNAUDITED)
(IN THOUSANDS)
<S> <C>
ASSETS
Current assets:
Cash and cash equivalents.................................................... $ 56,221
Accounts receivable, less allowances for bad debts of $39,574,000............ 165,105
Inventories.................................................................. 11,087
Income tax receivable........................................................ 4,139
Prepaid expenses and other current assets.................................... 23,839
---------------
Total current assets................................................. 260,391
Property and equipment, net.................................................... 167,502
Intangible assets, net......................................................... 139,169
Deferred tax asset............................................................. 34,285
Other assets................................................................... 16,837
---------------
Total assets......................................................... $ 618,184
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable............................................................. $ 29,084
Payable to physician groups.................................................. 28,616
Accrued compensation......................................................... 19,165
Accrued medical claims payable............................................... 44,235
Other accrued expenses and liabilities....................................... 30,605
Current portion of long-term liabilities..................................... 7,648
---------------
Total current liabilities............................................ 159,353
Long-term debt, net of current portion......................................... 35,080
Other long-term liabilities.................................................... 9,140
Stockholders' equity:
Common stock, $.001 par value; 200,000,000 shares authorized; 52,311,000
shares issued............................................................. 52
Additional paid-in capital................................................... 435,618
Notes receivable from stockholders........................................... (1,818)
Accumulated deficit.......................................................... (19,241)
---------------
Total stockholders' equity........................................... 414,611
---------------
Total liabilities and stockholders' equity........................... $ 618,184
===========
</TABLE>

See accompanying notes to unaudited consolidated financial statements.

F-22
<PAGE> 99

MEDPARTNERS/MULLIKIN, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE
30,
---------------------
1995 1996
-------- --------
(IN THOUSANDS, EXCEPT
PER SHARE AMOUNTS)
<S> <C> <C>
Net revenue............................................................ $547,450 $703,683
Operating expenses:
Cost of affiliated physician services................................ 240,225 301,280
Clinic salaries, wages and benefits.................................. 105,133 116,600
Outside hospitalization expense...................................... 50,364 83,516
Clinic rent and lease expense........................................ 19,744 23,814
Clinic supplies...................................................... 22,519 30,953
Other clinic costs................................................... 43,776 59,154
General corporate expenses........................................... 32,167 39,540
Depreciation and amortization........................................ 13,962 16,482
Net interest expense................................................. 3,367 2,811
Merger expenses...................................................... 1,051 34,448
-------- --------
Net operating expenses....................................... 532,308 708,598
-------- --------
Income (loss) before income taxes...................................... 15,142 (4,915)
Income tax expense (benefit)........................................... 4,411 360
-------- --------
Net income (loss)...................................................... $ 10,731 $ (5,275)
======== ========
Pro forma net income (loss) per share.................................. $ 0.26 $ (0.11)
======== ========
Number of shares used in pro forma net income (loss) per share......... 41,867 50,034
======== ========
</TABLE>

See accompanying notes to unaudited consolidated financial statements.

F-23
<PAGE> 100

MEDPARTNERS/MULLIKIN, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
-------------------
1995 1996
-------- --------
(IN THOUSANDS)
<S> <C> <C>
OPERATING ACTIVITIES:
Pro forma net income (loss)............................................ $ 10,731 $ (5,275)
Adjustments to reconcile pro forma net income (loss) to net cash and
cash provided by (used in) operating activities:
Depreciation and amortization....................................... 13,962 16,482
Provision for deferred taxes........................................ (1,425) (5,848)
Merger expenses..................................................... 1,051 34,448
Other............................................................... 129 --
Changes in operating assets and liabilities, net of effects of
acquisitions........................................................ (11,288) (33,762)
-------- --------
Net cash and cash equivalents provided by operating
activities.................................................... 13,160 6,045
INVESTING ACTIVITIES:
Cash paid for merger charges........................................... (541) (25,932)
Net cash used to fund acquisitions..................................... (27,237) (29,671)
Additions of intangible assets, net of effects of acquisitions......... (3,440) (4,478)
Purchase of property and equipment..................................... (15,571) (21,833)
Net proceeds (purchases) of marketable securities...................... (12,132) 27,482
Other.................................................................. (959) 5
-------- --------
Net cash and cash equivalents used in investing activities..... (59,880) (54,427)
FINANCING ACTIVITIES:
Capital contributions.................................................. 62,231 214,656
Capital distributions.................................................. (3,259) --
Net proceeds from debt................................................. 43,262 --
Repayment of debt...................................................... (46,256) (167,453)
Other.................................................................. (3,492) 105
-------- --------
Net cash and cash equivalents provided by financing
activities.................................................... 52,486 47,308
-------- --------
Net increase (decrease) in cash and cash equivalents........... 5,766 (1,074)
Cash and cash equivalents at beginning of period....................... 66,623 56,133
Beginning cash and cash equivalents of immaterial pooling-of-interests
entities............................................................ -- 1,162
-------- --------
Cash and cash equivalents at end of period............................. $ 72,389 $ 56,221
======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest....................................................... $ 5,975 $ 4,252
======== ========
Income taxes................................................... $ 3,752 $ 476
======== ========
Issuance of 316,000 common shares as consideration for
acquisitions accounted for as purchases....................... $ -- $ 5,920
======== ========
</TABLE>

See accompanying notes to unaudited consolidated financial statements.

F-24
<PAGE> 101

MEDPARTNERS/MULLIKIN, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1996

1. BASIS OF PRESENTATION

The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiaries and have been prepared in accordance with
generally accepted accounting principles for interim financial reporting and in
accordance with Rule 10-01 of Regulation S-X. Accordingly, they do not include
all of the information and notes required by generally accepted accounting
principles for complete financial statements. As a result of the merger with
Pacific Physician Services, Inc. (PPSI) in February 1996, certain
reclassifications have been made to the financial statements.

In the opinion of management, the accompanying unaudited consolidated
financial statements contain all adjustments (consisting of normal recurring
items) necessary for a fair presentation of results for the interim periods
presented. The results of operations for any interim period are not necessarily
indicative of results for the full year. These financial statements and footnote
disclosures should be read in conjunction with the December 31, 1995 audited
consolidated financial statements and the notes thereto.

Restatement of Financial Statements

During the first quarter of 1996 the Company combined with PPSI in a
business combination that was accounted for as a pooling of interests.
Accordingly, the financial statements for all periods prior to February 22,
1996, the effective date of the merger, have been restated to include the
results of PPSI (Note 3).

Pro Forma Net Income (Loss) Per Share

Pro forma net income (loss) per share is computed by dividing net income
(loss) by the number of common and common equivalent shares outstanding during
the periods in accordance with the applicable rules of the Securities and
Exchange Commission. All stock options issued have been considered as
outstanding common stock equivalents for all periods presented, even if
anti-dilutive, under the treasury stock method. Shares of common stock issuable
upon conversion of the Series A and Series B Convertible Preferred Stock of
MedPartners in February 1995 are assumed to be common share equivalents for all
periods presented.

Stock Option Plan

The Company has elected to follow Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" (ABP 25) and related
Interpretations in accounting for its employee stock options because the
alternative fair value accounting provided for under FASB Statement No. 123,
"Accounting for Stock-Based Compensation," requires use of option valuation
models that were not developed for use in valuing employee stock options. Under
APB 25, because the exercise price of the Company's employee stock option equals
the market price of the underlying stock on the date of grant, no compensation
expense is recognized.

2. CAPITALIZATION

The Company's Second Amended and Restated Certificate of Incorporation
provides that the Company may issue 9,500,000 shares of Preferred Stock, par
value $0.001 per share, 500,000 shares of Series C Junior Participating
Preferred Stock, par value $0.001 per share, and 200,000,000 shares of Common
Stock, par value $0.001 per share. As of December 31, 1995 and June 30, 1996 no
shares of the preferred stock were outstanding.

On March 13, 1996, the Company completed a secondary public offering of
6,632,800 shares of its Common Stock. The net proceeds of the offering were $194
million. Proceeds of the offering were used to pay all outstanding indebtedness
under the bank credit facility of $70 million. In April 1996, $69 million of the
proceeds were used to pay-off the Company's convertible subordinated debentures.
The remainder of the net proceeds will be used to fund acquisitions of certain
assets of physician practices, expansion of physician services, working capital
and other general corporate purposes.

F-25
<PAGE> 102

MEDPARTNERS/MULLIKIN, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

During 1996 the number of shares covered under the 1995 Stock Option Plan
(the Plan) was increased on two occasions. At a special meeting of the
stockholders on February 22, 1996, the Plan was increased by 1,325,000 shares
and on April 25, 1996 at the Annual Meeting of Stockholders it was increased by
1,200,000 shares. As of April 25, 1996 a maximum of 7,099,150 shares of Common
Stock were covered by the Plan.

3. ACQUISITIONS

During the six months ended June 30, 1996, the Company, through its
wholly-owned subsidiaries, acquired certain operating assets of various medical
practices. Simultaneously with each medical practice acquisition, the Company
entered into practice management agreements which generally have 20 to 44 year
terms. Pursuant to the practice management agreements, the Company manages all
aspects of the affiliated practice other than the provision of medical services,
which is controlled by the physician groups. Generally, the practice management
agreements cannot be terminated by the physician group or Company without cause,
which includes material default or bankruptcy. Upon termination for cause or
expiration of the clinic services agreement, the physician group has the option
to purchase some or all of the assets owned by the Company, generally at current
book values. The acquisitions have been accounted for by the purchase method of
accounting and, accordingly, the purchase price has been allocated to the net
assets based on the estimated fair values at the date of acquisition. The
estimated fair value of assets acquired is $35,593,000. A total of $29,671,000
in cash and 316,000 shares of stock valued at $5,920,000 were given in exchange
for these assets during the six months ended June 30, 1996.

Effective February 22, 1996, the Company merged with PPSI in a transaction
that was accounted for as a pooling of interests. Accordingly, the Company's
historical statements for all periods prior to the effective date of the merger
have been restated to include the results of PPSI. The Company exchanged
10,983,346 shares of its common stock in exchange for all of the outstanding
common stock of PPSI.

Prior to its merger with the Company, PPSI reported on a fiscal year ending
on July 31. The restated financial statements for all periods prior to and
including December 31, 1995 are based on a combination of the Company's results
for its December 31 fiscal year and an October 31 fiscal year for PPSI.
Beginning January 1, 1996, PPSI adopted a December 31 fiscal year end;
accordingly, all consolidated financial statements for periods after December
31, 1995 are based on a consolidation of all of the Company's subsidiaries on a
December 31 year end. PPSI's historical results of operations for the two months
ended December 31, 1995 are not included in the Company's consolidated
statements of operations or cash flows. An adjustment has been made to
stockholders' equity as of January 1, 1996 to adjust for PPSI's results of

F-26
<PAGE> 103

MEDPARTNERS/MULLIKIN, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

operations for the two months ended December 31, 1995. The following is a
summary of operations and cash flows for the two months ended December 31, 1995:

STATEMENT OF OPERATIONS DATA:

<TABLE>
<CAPTION>
(IN THOUSANDS)
--------------
<S> <C>
Net revenue............................................................ $ 69,850
Operating expenses:
Cost of affiliated physician services................................ 32,600
Clinic salaries, wages and benefits.................................. 13,142
Outside hospitalization expenses..................................... 14,861
Clinic rent and lease expense........................................ 1,963
Clinic supplies...................................................... 3,556
Other clinic costs................................................... 7,373
General corporate expenses........................................... 5,235
Depreciation and amortization........................................ 2,371
Net interest expense................................................. 426
Loss on disposal of assets........................................... 41
--------------
Net operating expenses....................................... 81,568
--------------
Loss before taxes...................................................... (11,718)
Income tax benefit..................................................... (3,661)
--------------
Net loss..................................................... $ (8,057)
===========
STATEMENT OF CASH FLOW DATA:
Net cash and cash equivalents used in operating activities........... $ (3,569)
Net cash and cash equivalents provided by investing activities....... 4,455
Net cash and cash equivalents used in financing activities........... (81)
--------------
Net increase in cash and cash equivalents.................... $ 805
===========
</TABLE>

Included in pre-tax loss for the six months ended June 30, 1996 are merger
costs totaling $34.4 million. The components of this cost are as follows:

<TABLE>
<S> <C>
Investment banking fees................................................. $ 6,624,920
Professional fees....................................................... 2,616,356
Other transaction costs................................................. 1,098,444
Restructuring charges:
Abandonment of facilities............................................. 10,767,562
Severance costs for identified employees.............................. 5,865,295
Restructuring of benefits............................................. 2,392,431
Unamortized bond issue costs.......................................... 1,921,661
Noncompatible technology.............................................. 1,700,000
Impairment of assets.................................................. 1,361,004
Other restructuring charges........................................... 100,000
-----------
Total................................................................... $34,447,673
==========
</TABLE>

4. CONTINGENCIES

F-27
<PAGE> 104

MEDPARTNERS/MULLIKIN, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Employed physicians are also covered by a general liability and malpractice
insurance policy. The Company has not accrued a loss for reported or unreported
incidents, as the amount, if any, cannot be reasonably estimated and the
probability of an adverse outcome cannot be determined at this time. It is the
opinion of management that the ultimate resolution of any asserted or unasserted
claims will not have a material adverse effect on the financial position or
operating results of the Company.

5. SUBSEQUENT EVENTS

On March 11, 1996, the Company agreed to acquire CHS Management, Inc., a
healthcare management service organization that provides management services to
an IPA of 325 primary care and specialist physicians and a medical group of 43
primary care physicians. The consideration for this transaction is expected to
be approximately $47 million of the Company's Common Stock. The transaction is
expected to be accounted for as a pooling of interests and is expected to close
prior to September 30, 1996.

On May 14, 1996, the Company agreed to merge with Caremark International
Inc., a leading provider of healthcare services in the United States and
overseas. Caremark, through its large, multi-specialty group practices, is
affiliated with 1,604 physicians and provides care to more than one million
people, 663,000 of whom are in prepaid health plans. Caremark also provides
pharmaceutical services, disease management, and international services. The
consideration for this transaction is expected to be approximately $2.5 billion
of the Company's Common Stock. The transaction is expected to be accounted for
as a pooling of interests and is expected to close prior to September 30, 1996.

F-28
<PAGE> 105

REPORT OF INDEPENDENT ACCOUNTANTS

Board of Directors and Stockholders
Caremark International Inc.

In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of operations, cash flows and stockholders'
equity, present fairly, in all material respects, the financial position of
Caremark International Inc. and its subsidiaries at December 31, 1994 and 1995,
and the results of their operations and their cash flows for each of the three
years in the period ended December 31, 1995, in conformity with generally
accepted accounting principles. 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 of these statements in accordance with generally accepted auditing
standards which 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, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.

Price Waterhouse LLP
Chicago, Illinois
January 24, 1996, except as to
the third paragraph of Note 14,
which is as of March 19, 1996

F-29
<PAGE> 106

CAREMARK INTERNATIONAL INC.

CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
DECEMBER 31
-----------------------
1994 1995
---------- ----------
(IN THOUSANDS)
<S> <C> <C>
Current assets:
Cash and equivalents.............................................. $ 32,100 $ 28,400
Accounts receivable, net.......................................... 311,600 365,400
Inventories....................................................... 92,700 112,500
Short-term deferred income taxes.................................. 33,300 41,100
Prepaid expenses and other current assets......................... 12,400 18,600
---------- ----------
Total current assets...................................... 482,100 566,000
---------- ----------
Property and equipment, net......................................... 168,300 299,200
Goodwill and other intangible assets................................ 105,300 259,300
Investments and other noncurrent assets............................. 38,600 69,700
Long-term deferred income tax asset................................. -- 33,700
Net assets of discontinued operations............................... 399,900 36,300
---------- ----------
Total assets.............................................. $1,194,200 $1,264,200
========= =========
Current liabilities:
Notes payable..................................................... $ 109,300 $ 81,900
Current maturities of long-term debt and lease obligations........ 2,600 3,900
Accounts payable, trade and other................................. 195,400 253,900
Accrued liabilities............................................... 92,600 135,000
---------- ----------
Total current liabilities................................. 399,900 474,700
---------- ----------
Long-term debt and lease obligations................................ 233,500 325,400
Long-term deferred income tax liability............................. 42,700 37,700
Other noncurrent liabilities........................................ 31,400 33,000
Commitments and contingent liabilities (Note 14)
Stockholders' equity:
Preferred stock, $.01 par value, authorized 20,000,000 shares,
none issued.................................................... -- --
Common stock, $1 par value, authorized 200,000,000 shares, issued
71,898,166 shares in 1994 and 81,497,489 shares in 1995........ 71,900 81,500
Additional contributed capital.................................... 18,400 188,200
Shares held in trust, 7,700,000 shares in 1995.................... -- (150,200)
Retained earnings................................................. 400,900 281,700
Common stock in treasury, at cost, 259,300 shares in 1994 and
406,136 shares in 1995......................................... (4,500) (7,800)
---------- ----------
Total stockholders' equity.......................................... 486,700 393,400
---------- ----------
Total liabilities and stockholders' equity.......................... $1,194,200 $1,264,200
========= =========
</TABLE>

See accompanying notes to consolidated financial statements.

F-30
<PAGE> 107

CAREMARK INTERNATIONAL INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------
1993 1994 1995
---------- ---------- ----------
(IN THOUSANDS, EXCEPT PER SHARE
DATA)
<S> <C> <C> <C>
Net revenues............................................... $1,204,000 $1,775,200 $2,374,300
Cost of goods and services sold............................ 1,001,100 1,520,600 2,016,400
Marketing and administrative expenses...................... 107,600 138,000 207,100
Provision for doubtful accounts............................ 13,300 16,900 24,200
---------- ---------- ----------
Operating income from continuing operations................ 82,000 99,700 126,600
Non-operating expense (income):
Losses on investments.................................... -- -- 86,600
Interest expense, net.................................... 3,400 8,700 8,700
Other.................................................... (1,700) (200) (200)
---------- ---------- ----------
Income from continuing operations before income taxes...... 80,300 91,200 31,500
Income tax expense......................................... 33,400 36,700 11,300
---------- ---------- ----------
Income from continuing operations.......................... 46,900 54,500 20,200
Discontinued operations:
Income (loss) from discontinued operations, net of income
taxes of $20,700, $18,000 and $(72,100) in 1993, 1994
and 1995, respectively................................ 30,800 25,900 (168,300)
Net gains on sales of discontinued operations, net of
income taxes of $21,200............................... -- -- 31,800
---------- ---------- ----------
Income (loss) from discontinued operations............... 30,800 25,900 (136,500)
---------- ---------- ----------
Net income (loss).......................................... $ 77,700 80,400 $ (116,300)
========= ========= =========
Earnings (loss) per common and common equivalent share:
Primary
Income from continuing operations..................... $ 0.64 $ 0.73 $ 0.27
Operating income (loss) from discontinued
operations.......................................... $ 0.42 0.35 $ (2.24)
Net gains on sales of discontinued operations......... -- -- $ 0.42
Net income (loss)..................................... $ 1.06 $ 1.08 $ (1.55)
Fully Diluted
Income from continuing operations..................... $ 0.63 $ 0.73 $ 0.27
Operating income (loss) from discontinued
operations.......................................... $ 0.41 $ 0.35 $ (2.24)
Net gains on sales of discontinued operations......... -- -- $ 0.42
Net income (loss)..................................... $ 1.04 $ 1.08 $ (1.55)
Weighted average common and common equivalent shares
outstanding:
Primary.................................................. 73,300 74,800 75,100
Fully diluted............................................ 74,900 74,800 75,100
</TABLE>

See accompanying notes to consolidated financial statements.

F-31
<PAGE> 108

CAREMARK INTERNATIONAL INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------
1993 1994 1995
--------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Common stock:
Balance, beginning of year................................ $ 71,100 $ 71,800 $ 71,900
Stock issued under employee benefit plans................. 700 100 100
Stock issued in connection with acquisitions.............. -- -- 1,800
Contribution to employee benefit trust.................... -- -- 7,700
--------- --------- ---------
Balance, end of year...................................... 71,800 71,900 81,500
--------- --------- ---------
Additional contributed capital:
Balance, beginning of year................................ 12,300 19,000 18,400
Stock issued under employee benefit plans................. 6,700 (600) (3,400)
Stock issued in connection with acquisitions.............. -- -- 30,700
Contribution to employee benefit trust.................... -- -- 142,500
--------- --------- ---------
Balance, end of year...................................... 19,000 18,400 188,200
--------- --------- ---------
Shares held in trust:
Balance, beginning of year................................ -- -- --
Contribution to employee benefit trust.................... -- -- (150,200)
--------- --------- ---------
Balance, end of year...................................... -- -- (150,200)
--------- --------- ---------
Retained earnings:
Balance, beginning of year................................ 248,800 323,500 400,900
Net income (loss)......................................... 77,700 80,400 (116,300)
Common stock dividends.................................... (3,000) (3,000) (2,900)
--------- --------- ---------
Balance, end of year...................................... 323,500 400,900 281,700
--------- --------- ---------
Common stock in treasury:
Balance, beginning of year................................ -- (4,700) (4,500)
Purchases................................................. (7,600) (14,600) (27,200)
Stock issued under employee benefit plans................. 2,900 14,800 20,800
Stock issued in connection with acquisitions.............. -- -- 3,100
--------- --------- ---------
Balance, end of year...................................... (4,700) (4,500) (7,800)
--------- --------- ---------
Total stockholders' equity................................ $ 409,600 $ 486,700 $ 393,400
========= ========= =========
</TABLE>

See accompanying notes to consolidated financial statements.

F-32
<PAGE> 109

CAREMARK INTERNATIONAL, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------
1993 1994 1995
--------- --------- --------
(IN THOUSANDS)
(BRACKETS DENOTE CASH OUTFLOWS)
<S> <C> <C> <C>
Cash flows from continuing operations:
Income from continuing operations.......................... $ 46,900 $ 54,500 $ 20,200
Adjustments for non-cash items:
Losses on investments...................................... -- -- 86,600
Provision for doubtful accounts............................ 13,300 16,900 24,200
Depreciation and amortization.............................. 11,400 18,900 28,600
Deferred income taxes...................................... 25,100 9,800 (14,400)
Other...................................................... 1,600 3,700 1,000
Changes in balance sheet items:
Accounts receivable........................................ (61,800) (95,500) (79,300)
Inventories................................................ (8,700) (4,200) (17,600)
Payables and accrued liabilities........................... 21,300 23,300 84,000
Prepaids and other......................................... (9,600) (600) (21,800)
--------- --------- --------
Cash flows from continuing operations........................ 39,500 26,800 111,500
--------- --------- --------
Cash flows from investing activities:
Capital expenditures....................................... (50,300) (70,200) (83,400)
Acquisitions, net of cash received......................... (3,100) (69,100) (143,500)
--------- --------- --------
Cash flows from investing activities......................... (53,400) (139,300) (226,900)
--------- --------- --------
Cash flows from financing activities:
Net change in short-term debt and credit facility
borrowings.............................................. (26,100) 230,900 7,500
Issuances of other long-term debt and lease obligations.... 112,100 400 5,000
Redemptions of other long-term debt and lease
obligations............................................. (19,300) (6,700) (1,500)
Stock issued under employee benefit plans.................. 9,100 11,800 16,300
Purchases of treasury stock................................ (7,600) (14,600) (27,200)
Common stock cash dividends................................ (3,000) (3,000) (2,900)
--------- --------- --------
Cash flows from financing activities......................... 65,200 218,800 (2,800)
--------- --------- --------
Cash flows from discontinued operations, net of divestiture
proceeds................................................... 25,500 (180,000) 114,500
--------- --------- --------
Increase (decrease) in cash and equivalents.................. 76,800 (73,700) (3,700)
Cash and equivalents, beginning of year...................... 29,000 105,800 32,100
--------- --------- --------
Cash and equivalents, end of year............................ $ 105,800 $ 32,100 $ 28,400
========= ========= ========
</TABLE>

SUPPLEMENTAL CASH FLOW INFORMATION:

Cash and equivalents include cash, cash investments and marketable
securities with original maturities of three months or less. Income taxes
paid, net of refunds, were $24.0, $22.4 and $6.7 million in 1993, 1994 and
1995, respectively. Interest payments, net of amounts capitalized,
approximated $1.8, $10.2 and $20.7 million in 1993, 1994 and 1995,
respectively.

Non-cash investing activities include notes and other obligations issued
for acquisitions of $5.8, $1.2 and $30.8 million in 1993, 1994 and 1995,
respectively, and $123.6 million in notes and other securities received from
divestitures in 1995. Non-cash financing activities include the issuance of
$35.6 million of stock for acquisitions in 1995 and capital lease
obligations of $0.7, $0.4 and $3.9 million in 1993, 1994 and 1995,
respectively.

See accompanying notes to consolidated financial statements.

F-33
<PAGE> 110

CAREMARK INTERNATIONAL INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1994 AND 1995

NOTE 1: NATURE OF OPERATIONS

Caremark International Inc. (the "company" or "Caremark") is a leading
provider of healthcare services in the United States and overseas, serving
millions of people through its Physician Practice Management, Pharmaceutical
Services, Disease Management and International businesses. The Physician
Practice Management business provides comprehensive management services to
physician groups, primarily multi-specialty physician practices located in major
metropolitan areas. The Pharmaceutical Services business manages outpatient
prescription drug benefit programs for corporations, insurance companies,
unions, government employee groups, and managed care organizations throughout
the United States. The Disease Management business provides therapies and
services to individuals suffering from hemophilia, immune system deficiencies
and other blood disorders characterized by protein deficiencies. In addition,
this business distributes recombinant growth hormone. In its International
business, the company offers selected healthcare services outside hospitals in
Canada, France, Germany, Japan, the Netherlands, the United Kingdom and Puerto
Rico.

INDUSTRY SEGMENTS

Caremark operates in four industry segments: Physician Practice Management,
Pharmaceutical Services, Disease Management and International.

NET REVENUES FROM CONTINUING OPERATIONS

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------
1993 1994 1995
---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
Physician Practice Management.............................. $ 135,600 $ 190,100 $ 454,600
Pharmaceutical Services.................................... 631,200 1,097,300 1,432,300
Disease Management......................................... 389,800 422,300 408,000
International.............................................. 47,400 65,500 79,400
---------- ---------- ----------
Totals from continuing operations.......................... $1,204,000 $1,775,200 $2,374,300
========= ========= =========
</TABLE>

OPERATING INCOME FROM CONTINUING OPERATIONS

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
1993 1994 1995
-------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Physician Practice Management.............................. $ (1,400) $ 4,100 $ 16,100
% of segment revenues.................................... (1.0)% 2.2% 3.5%
Pharmaceutical Services.................................... $ 31,600 $ 46,200 $ 56,000
% of segment revenues.................................... 5.0% 4.2% 3.9%
Disease Management......................................... $ 76,000 $ 76,600 $ 69,500
% of segment revenues.................................... 19.5% 18.1% 17.0%
International.............................................. $ (2,400) $ (1,500) $ 1,300
% of segment revenues.................................... (5.1)% (2.3)% 1.6%
General Corporate.......................................... $(21,800) $(25,700) $(16,300)
-------- -------- --------
Totals from continuing operations.......................... $ 82,000 $ 99,700 $126,600
======== ======== ========
</TABLE>

F-34
<PAGE> 111

CAREMARK INTERNATIONAL INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

IDENTIFIABLE ASSETS FROM CONTINUING OPERATIONS

<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------
1993 1994 1995
-------- -------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
Physician Practice Management................................. $ 90,400 $183,900 $ 482,500
Pharmaceutical Services....................................... 212,300 300,300 371,300
Disease Management............................................ 124,900 142,400 144,400
International................................................. 29,600 38,600 49,900
General Corporate............................................. 179,000 129,100 179,800
-------- -------- ----------
Totals from continuing operations............................. $636,200 $794,300 $1,227,900
======== ======== =========
</TABLE>

CAPITAL EXPENDITURES FROM CONTINUING OPERATIONS

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------
1993 1994 1995
------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Physician Practice Management..................................... $ 8,400 $17,100 $42,500
Pharmaceutical Services........................................... 24,700 37,000 30,700
Disease Management................................................ 900 1,200 3,200
International..................................................... 6,100 4,500 4,800
General Corporate................................................. 10,200 10,400 2,200
------- ------- -------
Totals from continuing operations................................. $50,300 $70,200 $83,400
======= ======= =======
</TABLE>

DEPRECIATION AND AMORTIZATION FROM CONTINUING OPERATIONS

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------
1993 1994 1995
------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Physician Practice Management..................................... $ 4,200 $ 6,500 $14,300
Pharmaceutical Services........................................... 5,500 8,400 9,200
Disease Management................................................ 200 400 800
International..................................................... 900 1,700 2,300
General Corporate................................................. 600 1,900 2,000
------- ------- -------
Totals from continuing operations................................. $11,400 $18,900 $28,600
======= ======= =======
</TABLE>

NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

This summary of significant accounting policies is presented to assist the
reader in understanding and evaluating the company's Consolidated Financial
Statements. These policies are in conformity with generally accepted accounting
principles, and have been consistently applied in all material respects. The
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amount of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenue and expenses during the reporting period. Actual
results could differ from those estimates.

BASIS OF CONSOLIDATION

The Consolidated Financial Statements include the accounts of Caremark and
its majority-owned subsidiaries. All material intercompany accounts and
transactions are eliminated in consolidation.

The company has acquired certain assets of and operates clinics under 33-40
year management service agreements with affiliated physician groups that
maintain separate legal entities within which they practice medicine. These
groups have no other operations or rights to practice except to conduct such
practices exclusively in company clinics. Under these agreements, the physician
groups have responsibility for all medical-related decisions, enter into payor
contracts and provide Caremark input on the management of the

F-35
<PAGE> 112

CAREMARK INTERNATIONAL INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

practice. Caremark compensates the physicians for their services under these
affiliations using four general models: (a) approximately 28% of clinic revenues
and 5% of total revenues in 1995 were generated by clinics whose physicians were
compensated on a capitated, per-member, per-month arrangement; (b) approximately
10% of clinic revenues and 2% of total revenues in 1995 were generated by
clinics whose physicians received a salary plus a bonus; (c) approximately 56%
of clinic revenues and 11% of total revenues in 1995 were generated by clinics
whose physicians received a salary plus bonus and receive a profit sharing
payment of 50% of consolidated clinic earnings before taxes ("clinic earnings").
Clinic earnings in these arrangements include all expenses, management fees paid
to the company and physician compensation; (d) approximately 6% of clinic
revenues and 1% of total revenues in 1995 were generated by clinics whose
physicians received 85% of a defined amount (generally, revenues less management
expenses paid to the company) to cover all medical costs including physician
compensation, outside referral expenses, allied healthcare expenses and
professional liability insurance. Any amounts remaining after paying these
expenses represented additional incentive compensation to the physicians.

Caremark is responsible for providing all non-medical personnel, premises,
equipment, and supplies necessary to operate the clinics, providing financial,
accounting and administrative services, negotiating all payor and vendor
contracts on behalf of the clinics, billing and collecting fees, paying clinic
expenses, and performing marketing and public relations services. Caremark also
has the right to utilize the cash in the physician group bank accounts and is
required to fund future capital expenditures as well as working capital needs.
The fee paid to Caremark includes Caremark's direct management expenses of
operating the clinics, plus incentive payments which reflect a portion or all of
the residual equity interest in the clinics after payment of physician
compensation, other medical costs and management expenses. Under the four
general models discussed above, these incentive payments take the following
forms: (a) a variable percentage of the clinic's managed capital; (b) a variable
percentage of the clinic's managed capital plus 100% of clinic earnings; (c) a
variable percentage of the clinic's managed capital or net revenues plus 50% of
clinic earnings; and (d) 15% of the defined amount described above.

Based on the legal structures in place, the physician groups record all
revenues from the payor contracts and related medical expenses including
physician compensation, allied health professional costs, professional liability
insurance costs and Caremark's management fee. However, Caremark believes it has
essentially all of the risks and rewards of ownership and perpetual and
unilateral control over the assets and operations of the various physician
groups. Therefore, notwithstanding the lack of ownership of the stock of the
legal entities in which the physicians practice, consolidation of the revenues
and expenses of the various physician groups is necessary to present fairly the
financial position and results of operations of the company because there exists
a parent-subsidiary relationship by means other than record ownership of a
majority of voting stock. Under consolidation, the company reports all the
revenues and operating expenses of the clinics as its own, eliminating the
management fees paid by the physician groups to the company, recording all
revenue initially reflected as physician revenue as company revenue and
reflecting physician earnings as compensation expense.

The company believes that this control over the assets and operations is
perpetual rather than temporary because of (i) the length of the original terms
of the agreements, (ii) the likelihood of successive extension periods of the
agreements, (iii) the continuing investment of capital by the company, (iv) the
control by the company of the assets necessary to operate the clinics, (v) the
employment of all non-medical personnel, (vi) the nature of the services
provided by the company to and the delegation of authority to the company from
the physician groups to carry out all of the critical revenue generating
responsibilities of the business other than the actual treating of patients, and
(vii) the nominal capital investments of the physician groups.

REVENUES

The company records revenues net of estimated contractual allowances.
Revenue is deferred related to cash payments received for which the company is
obligated to perform future services.

F-36
<PAGE> 113

CAREMARK INTERNATIONAL INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

INVENTORIES

Inventories, which are primarily finished goods, consist of pharmaceutical
drugs, medical equipment and supplies and are valued at the lower of cost
(first-in, first-out method) or market.

MARKETABLE SECURITIES

Investments in marketable securities with readily determinable fair values
have been classified as available-for-sale. Available-for-sale securities are
carried at fair value, with the unrealized gains and losses, net of tax,
reported in a separate component of stockholders' equity unless a decline in
value is judged other than temporary. When this is the case, unrealized losses
are reflected in income. The company owns no investments that are considered to
be trading or held-to-maturity securities.

PROPERTY AND EQUIPMENT

Property and equipment are stated at cost, net of accumulated depreciation.
Assets purchased in acquisitions are recorded at their respective fair values.
Expenditures that extend the useful life of property and equipment or that
increase productivity are capitalized, whereas maintenance and repairs are
charged to expense in the year incurred.

Interest costs associated with the construction of certain capital assets
are capitalized as part of the cost of those assets. Interest costs
approximating $5.1 million were capitalized in 1995. The company also
capitalizes purchased and internally developed software costs to the extent they
are expected to benefit future operations. Capitalized software costs included
in construction in progress approximated $67.8 million at December 31, 1995.

Depreciation and amortization are provided for financial reporting purposes
principally on the straight-line method over the estimated useful lives of the
assets or, for leasehold improvements, over the terms of related leases if
shorter. Both straight-line and accelerated methods of depreciation are used for
income tax purposes.

GOODWILL AND OTHER INTANGIBLE ASSETS

Goodwill, which totaled $86.3 and $227.3 million at December 31, 1994 and
1995, respectively, represents the excess of consideration paid for companies
acquired in purchase transactions over the fair value of net assets acquired. It
is amortized on a straight-line basis over estimated useful lives not exceeding
40 years. Other intangible assets include management service agreements and
other identified rights that are amortized on a straight-line basis over the
lesser of their legal or estimated useful lives. As of December 31, 1994 and
1995, intangible assets, including goodwill, are stated net of accumulated
amortization of $8.9 and $14.2 million, respectively. The company reviews the
carrying value of intangibles and other long-lived assets for impairment when
events or changes in circumstances indicate that the carrying amount of the
asset may not be recoverable. This review is performed by comparing estimated
undiscounted future cash flows from use of the asset to the recorded value of
the asset.

INCOME TAXES

Income tax expense is based on pre-tax income for financial reporting
purposes, adjusted for the effects of permanent differences between such income
and that reported for tax return purposes. Deferred tax assets and liabilities
are recognized for expected future tax consequences of temporary differences
between the carrying amounts and tax bases of the underlying assets and
liabilities.

EARNINGS PER SHARE

Earnings per share is computed by dividing net income by the weighted
average number of common and common equivalent shares outstanding during the
period. Common equivalent shares represent the potential dilutive impact of
stock options, employee stock purchase plan subscriptions and contingent stock
rights.

F-37
<PAGE> 114

CAREMARK INTERNATIONAL INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

RECLASSIFICATIONS

Certain prior-year balances have been reclassified to conform with the
current year's presentation.

NOTE 3: ACQUISITIONS

In May 1995, Caremark entered into a long-term affiliation agreement with
Friendly Hills HealthCare Network ("Friendly Hills"), an integrated healthcare
delivery system headquartered in La Habra, California. Friendly Hills operates
18 medical offices and an acute care hospital. Caremark acquired substantially
all of the assets of Friendly Hills for approximately $140 million and agreed to
provide various management and administrative services. The transaction has been
accounted for by the purchase method of accounting. The following summary,
prepared on a pro forma basis, combines the results of operations of Caremark
and Friendly Hills as if the Friendly Hills transaction had been consummated as
of the beginning of the periods presented after including the impact of certain
adjustments such as amortization of intangibles, interest expense on debt
assumed to have been incurred to complete the transaction and the related income
tax effects.

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-----------------------
1994 1995
---------- ----------
(IN THOUSANDS, EXCEPT
PER SHARE DATA)
(UNAUDITED)
<S> <C> <C>
Net revenues.......................................................... $1,950,200 $2,437,400
Income before income taxes from continuing operations................. $ 90,500 $ 28,900
Income from continuing operations..................................... $ 54,100 $ 18,600
Earnings from continuing operations per common and common equivalent
share:
Primary............................................................. $ .72 $ .25
Fully diluted....................................................... $ .72 $ .25
</TABLE>

These pro forma results are not necessarily indicative of what actually
would have occurred if the acquisition had been in effect for the entire periods
presented and are not intended to project future results.

The company invested approximately $68.2 million in cash, stock and notes
for other acquisitions in 1995 involving the Physician Practice Management
business. Consideration paid in connection with 1993 and 1994 acquisitions
approximated $9.4 and $69.1 million, respectively. Results of operations would
not have been materially different in 1993, 1994 and 1995 had these other
transactions occurred as of the beginning of the respective years.

In September 1995, Caremark entered into a definitive agreement with CIGNA
Healthcare of California, a managed healthcare subsidiary of CIGNA Corporation,
to acquire substantially all of the assets of CIGNA Medical Group, CIGNA
Healthcare's Los Angeles-area staff model delivery system. In 1994 net revenues
from these operations were in excess of $400 million. The transaction was
completed effective January 1, 1996 and will be accounted for using the purchase
method of accounting.

All of the aforementioned acquisitions have been (or will be) accounted for
by the purchase method of accounting. As such, operating results of acquired
businesses are included in Caremark's Consolidated Financial Statements as of
their respective dates of acquisition.

NOTE 4: DISCONTINUED OPERATIONS

During 1995, Caremark divested of several non-strategic businesses as part
of the company's transformation to four business lines -- Physician Practice
Management, Pharmaceutical Services, Disease Management and International. In
accordance with APB 30, which addresses the reporting for disposition of
business segments, the company's Consolidated Financial Statements present the
operating results and net assets of discontinued operations separately from
continuing operations. Prior periods have been restated to conform with this
presentation.

Effective March 31, 1995, the company sold its Clozaril(R) Patient
Management System to Health Management, Inc. for $23.3 million in cash and
notes. This business involved managing the care of schizophrenia patients
nationwide through the distribution of the Clozaril drug and related testing
services to

F-38
<PAGE> 115

CAREMARK INTERNATIONAL INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

monitor patients for potentially serious side effects. Net revenues of this
business for the three months ended March 31, 1995 were $12.3 million and were
$78.5 and $84.0 million for the years 1993 and 1994, respectively. The after-tax
gain on disposition of this business was $11.1 million.

Effective April 1, 1995, the company sold its Home Infusion business to
Coram Healthcare Corporation ("Coram") for $309 million in cash and securities,
subject to post-closing adjustments based on the net assets transferred. The
sale included Caremark's home intravenous infusion therapy, women's health
services and the Home Care Management System. Certain severance and legal
obligations remained with Caremark (see Note 14 -- Commitments and Contingent
Liabilities). Net revenues of this business for the period ended April 1, 1995
were $96.1 million and were $420.5 and $441.9 million for the years 1993 and
1994, respectively. The after-tax loss on disposition of this business was $4.0
million. In 1995 net losses from this business reflected in discontinued
operations include $154.8 million related to the legal settlement discussed in
Note 14.

Effective September 15, 1995, the company sold its Oncology Management
Services business to Preferred Oncology Networks of America, Inc. for securities
valued at $3.6 million. The business provides management services to
single-specialty oncology practices. Net revenues of this business for the 1995
period up to the date of sale were $8.9 million and were $30.6 and $29.4 million
for the years 1993 and 1994, respectively. There was no after-tax gain or loss
on the disposition.

Effective December 1, 1995 the company sold its Caremark Orthopedic
Services, Inc. subsidiary to HealthSouth Corporation for $127.0 million in cash,
subject to post-closing adjustments. This business provides outpatient physical
therapy and rehabilitation services. Net revenues of this business for the 1995
period up to the date of sale were $69.1 million and were $47.0 and $55.8
million for the years 1993 and 1994, respectively. The after-tax gain on
disposition of this business was $24.7 million.

In September 1995, the company adopted a formal plan to dispose of its
Nephrology Services division by sale to a third party. This business provides a
wide range of nephrology support services, including dialysis services and
supplies, transplant and laboratory services. Net revenues of this business were
$2.7, $39.7 and $46.6 million for the years 1993, 1994, and 1995, respectively.
Any gain or loss from this planned disposal is not expected to be material.

NOTE 5: FINANCIAL INSTRUMENTS

The company's financial instruments include cash and equivalents,
investments in marketable and non-marketable securities, and debt obligations.
The carrying value of marketable and non-marketable securities, which
approximated fair value, was $27.4 and $48.5 million at December 31, 1994 and
1995, respectively. The carrying value of debt obligations was $99.5 and $99.6
million at December 31, 1994 and 1995, respectively. The fair value of these
obligations approximated $83.8 and $98.6 million at December 31, 1994 and 1995,
respectively. The fair value of marketable securities is determined using market
quotes and rates. The fair value of nonmarketable securities, which are made up
primarily of investments in and notes from non-public companies, are estimated
based on information provided by these companies. The fair value of long-term
debt has been estimated using market quotes.

During 1995, the company recorded a pre-tax charge to income of $86.6
million ($52.0 million after tax) to reflect unrealized losses on investments
that were judged other than temporary.

Interest expense totaled $4.1, $11.8 and $16.7 million in 1993, 1994 and
1995, respectively. Interest income totaled $0.7, $3.1 and $8.0 million in 1993,
1994 and 1995, respectively.

NOTE 6: TRADE RECEIVABLES

The company provides credit, in the normal course of business, to
third-party payors (such as private insurers, Medicare and Medicaid), patients
and private enterprises. The company performs ongoing credit evaluations of its
customers and maintains an allowance for doubtful accounts based on the
collectibility of trade receivables. Credit losses have historically coincided
with management's expectations.

F-39
<PAGE> 116

CAREMARK INTERNATIONAL INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

A summary of the activity in the allowance for doubtful accounts is
presented below:

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1993 1994 1995
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Balance, beginning of year............................. $ 14,700 $ 20,100 $ 28,700
Provision for doubtful accounts........................ 13,300 16,900 24,200
Write-offs, net of recoveries.......................... (9,200) (15,600) (24,200)
Other(1)............................................... 1,300 7,300 21,600
-------- -------- --------
Balance, end of year................................... $ 20,100 $ 28,700 $ 50,300
======== ======== ========
</TABLE>

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

(1) Represents valuation accounts of acquired or divested companies, account
transfers and foreign currency translation adjustments.

NOTE 7: OTHER BALANCE SHEET DATA

<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1994 1995
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Property and equipment, net:
Land................................................................. $ 15,800 $ 25,700
Buildings and leasehold improvements................................. 45,000 97,200
Machinery and other equipment........................................ 88,200 137,700
Software systems..................................................... 14,300 36,500
Construction in progress............................................. 60,000 78,800
-------- --------
Property and equipment, at cost...................................... 223,300 375,900
Accumulated depreciation and amortization............................ (55,000) (76,700)
-------- --------
Property and equipment, net.......................................... $168,300 $299,200
======== ========
</TABLE>

Accrued liabilities include employee compensation and related taxes of
$31.0 and $25.8 million at December 31, 1994 and 1995, respectively.

NOTE 8: CREDIT FACILITIES

During 1995, Caremark entered into revised credit facilities aggregating
$380 million as of December 31, 1995 ($135 million expiring September 1996, $225
million expiring September 1998 and a $20 million letter of credit agreement),
enabling the company to borrow funds on an unsecured basis at variable interest
rates, typically determined by reference to the corporate base rate announced by
First National Bank of Chicago or the Eurodollar interbank rate. The modified
credit facilities contain maximum EBITDA, minimum interest coverage and
debt-to-total-capital ratio requirements, as well as certain restrictions
regarding compliance with the company's integrity program and litigation. The
company was in compliance with the debt covenants at year-end. Borrowings under
these facilities were $200.0 million at December 31, 1995, all of which was
classified as long-term debt. As of December 31, 1994, $210.0 million was
borrowed, of which $125.0 million was classified as long-term.

The company also has a $25 million uncommitted line of credit that offers
more flexible overnight borrowing capabilities to accommodate daily cash flow
needs. $25.0 million was outstanding under this facility at December 31, 1995.
The average annual interest rate for the aforementioned credit facilities
approximated 6.6% in 1995. The company also maintains short-term credit
arrangements approximating $20.4 million in support of international operations.
Borrowings under these arrangements were $6.4 and $14.5 million at December 31,
1994 and 1995, respectively.

F-40
<PAGE> 117

CAREMARK INTERNATIONAL INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

NOTE 9: LONG-TERM DEBT AND LEASE OBLIGATIONS

Long-term debt and lease obligations consist of the following:

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER
31,
---------------------
1994 1995
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Long-term credit facility borrowings........................... $125,000 $200,000
6 7/8% notes, due 2003, less unamortized discount of $0.4
million...................................................... 99,500 99,600
Long-term notes due 1996 through 2011, at various rates........ 9,200 24,400
Capitalized lease obligations due 1996 through 2000............ 2,400 5,300
-------- --------
Total long-term debt and lease obligations..................... 236,100 329,300
Current portion................................................ (2,600) (3,900)
-------- --------
Long-term portion.............................................. $233,500 $325,400
======== ========
</TABLE>

During 1993, the company issued $100 million of 6 7/8% senior notes
maturing in August 2003. The net proceeds, $98.8 million after discount and
underwriting fees, were used to repay credit facility borrowings and to fund
acquisitions, as well as for other general corporate purposes. Debt issuance
costs of $1.3 million were capitalized in connection with this offering and are
being amortized over the term of the debt. Other long-term notes relate
primarily to business acquisitions. The company has guaranteed secured loans
totaling $20.7 million on behalf of unconsolidated affiliates. The underlying
loans mature in 1996 through 1999. The affiliates have complied with related
debt service requirements.

The company leases certain facilities and equipment under operating and
capital leases expiring at various dates. Most of the operating leases contain
renewal options. Total rent expense under operating leases approximated $12.1,
$17.9 and $26.7 million in 1993, 1994 and 1995, respectively.

Future minimum lease payments (including interest) under capital and
noncancelable operating leases and aggregate long-term debt maturities are
summarized as follows:

<TABLE>
<CAPTION>
OPERATING CAPITAL DEBT
LEASES LEASES MATURITIES
--------- ------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
1996.................................................... $ 26,300 $ 2,500 $ 1,900
1997.................................................... 22,700 1,700 8,400
1998.................................................... 20,200 1,100 203,600
1999.................................................... 15,800 600 3,000
2000.................................................... 11,000 200 2,400
Thereafter.............................................. 55,700 -- 105,100
--------- ------- ----------
Total obligations and commitments....................... $ 151,700 $ 6,100 $ 324,400
========
Amounts representing interest and discounts............. (800) (400)
------- ----------
Carrying value of long-term debt and lease
obligations........................................... $ 5,300 $ 324,000
======= ========
</TABLE>

The net book value of capitalized lease property approximated $2.3 and $3.9
million at December 31, 1994 and 1995, respectively.

NOTE 10: PREFERRED STOCK AND PREFERRED SHARE PURCHASE RIGHTS

No shares of preferred stock are currently outstanding. The company's Board
of Directors is authorized to issue up to 20,000,000 shares of preferred stock
without further stockholder approval. The Board of Directors of the company is
also authorized to determine the voting powers, designations, preferences and
relative, participating, optional or other special rights, with respect to any
series of preferred stock.

Should the Board of Directors elect to exercise its authority to issue any
additional series of preferred stock, the rights, preferences and privileges of
holders of the company's common stock would be made subject to the rights,
preferences and privileges of such additional series.

F-41
<PAGE> 118

CAREMARK INTERNATIONAL INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

In connection with the adoption of its Preferred Share Purchase Rights Plan
(the "Rights Plan"), the company has designated and reserved for issuance upon
exercise of such rights 2,000,000 shares of Series A Junior Participating
Preferred Stock.

The Board of Directors has authorized a Rights Plan in which common
stockholders received a dividend of one preferred share purchase right
(collectively, the "Rights") for each share of common stock held of record. Each
Right entitles the registered holder to purchase from the company one
one-hundredth of a share of Series A Junior Participating Preferred Stock for
$85, subject to adjustment. The Rights will become exercisable (and transferable
apart from the common stock) on the earlier of (1) 10 days following a public
announcement that a person or group has acquired 15% or more of the common stock
or (2) 10 business days following the commencement or announcement of an offer
to acquire 15% or more of the common stock.

If, after the Rights become exercisable, any person or group (the
"Acquirer") acquires 15% or more of the common stock (except pursuant to an
offer for all outstanding shares of common stock that the independent directors
determine to be fair and otherwise in the best interests of the company and its
stockholders), each Right may be exercised for common stock having a value of
$170. In specified circumstances, each Right may be exercised for common stock
of an acquiring entity having a value of $170. All Rights held by the Acquirer
will be null and void. The company may generally redeem the Rights at a price of
$.01 per Right at any time until 10 days following a public announcement that a
person or group has acquired 15% or more of the common stock. The Rights will
expire on November 30, 2002.

NOTE 11: COMMON STOCK

The company sponsors employee stock purchase plans that promote the sale of
its common stock to employees. The purchase price to employees is the lower of
85% of the closing market price on the date of subscription or 85% of the
closing market price on the date funds are actually used to purchase stock for
employees. Stock purchase plan transactions for the indicated years are
summarized below:

<TABLE>
<CAPTION>
1994 1995
------------- -------------
<S> <C> <C>
Shares subscribed:
Beginning of year........................................... 744,805 642,028
Subscriptions............................................... 664,035 414,662
Purchases................................................... (614,290) (481,101)
Cancellations............................................... (152,522) (239,207)
------------- -------------
End of year................................................. 642,028 336,382
============= =============
Subscription price per share at end of year................. $10.74-$22.10 $13.80-$22.10
</TABLE>

Expiration dates for outstanding subscriptions extend through 1997. The
weighted average subscription price was $15.90 at December 31, 1995.

The company offers participation in stock option plans to certain employees
and individuals. All of the outstanding options under these plans were granted
at 100% of market value of the stock on the dates of grant. The following table
summarizes stock option transactions for the indicated years:

<TABLE>
<CAPTION>
1994 1995
------------ ------------
<S> <C> <C>
Options outstanding:
Beginning of year............................................. 9,754,915 9,561,416
Granted....................................................... 805,500 1,849,800
Exercised..................................................... (344,271) (811,981)
Cancelled/expired............................................. (654,728) (1,949,075)
------------ ------------
End of year................................................... 9,561,416 8,650,160
============ ============
Option price per share:
Exercised..................................................... $7.71-$17.25 $6.45-$18.88
Outstanding at end of year.................................... $6.45-$21.88 $6.45-$21.88
</TABLE>

Awarded options typically vest and become exercisable in incremental
installments over five years and expire no later than 10 years and one day from
the date of grant. There were 3,271,574 options exercisable at

F-42
<PAGE> 119

CAREMARK INTERNATIONAL INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

December 31, 1995. Expiration dates for outstanding options range from 1996 to
2005. The weighted average option price was $14.99 at December 31, 1995. The
company expects to adopt, in 1996, the disclosure requirements of Statement of
Financial Accounting Standards No. 123 -- Accounting for Stock-Based
Compensation.

Under various plans, Caremark has made grants of restricted common stock to
provide incentive compensation to key employees and to provide incentives
related to acquisitions. Restricted stock transactions for the indicated years
are summarized below:

<TABLE>
<CAPTION>
1994 1995
---------- --------
<S> <C> <C>
Restricted stock outstanding:
Beginning of year.................................................. 1,268,319 265,037
Granted............................................................ 14,800 280,784
Cancelled.......................................................... -- (22,167)
Vested (free of restrictions)...................................... (1,018,082) (293,644)
---------- --------
End of year........................................................ 265,037 230,010
========== =========
</TABLE>

The company issued contingent stock rights in connection with a 1992
acquisition that permit holders to receive, upon exercise, a number of shares of
company common stock determined by reference to appreciation in excess of $16.56
in the per share market value of the company common stock. The contingent stock
rights became exercisable on December 31, 1994. As of December 31, 1995, 789,303
rights were outstanding.

In June 1995, Caremark issued 7.7 million common shares (at $19.50 per
share) into a trust established to fund employee benefits over the next 10
years, including pension plan contributions, 401(k) matching contributions, and
stock issued under option and employee purchase plans. The value of the common
stock contributed has been reflected in the Balance Sheet in "common stock"
($7.7 million) and "additional contributed capital" ($142.5 million), with a
corresponding offset of these amounts in the "shares held in trust" component of
stockholders' equity. These shares will be issued from the trust over time as
necessary to meet the company's benefit obligations and will have no impact on
the weighted average common and common equivalent shares outstanding for
earnings per share purposes until they are issued from the trust.

The company's Board of Directors has authorized the purchase of common
stock to fund various stock-based compensation programs and for acquisitions.
The company purchased 1,496,666 shares of common stock for $27.2 million in 1995
and has been authorized to purchase up to an additional 1,400,000 shares through
July 31, 1996.

The company's common stock was reserved for issuance as follows at December
31:

<TABLE>
<CAPTION>
1995
----------
<S> <C>
Reserved common stock:
Acquisitions..................................................................... 4,091,505
Stock option plans............................................................... 11,416,270
Stock purchase plans............................................................. 200,474
----------
Total shares reserved..................................................... 15,708,249
==========
</TABLE>

Stockholders of record totaled 54,849 at December 31, 1994, versus 49,003
at the end of 1995.

On October 31, 1995, the company's Board of Directors declared a third
annual dividend of four cents per share on all outstanding common stock to
stockholders of record on November 30, 1995. The dividend was paid on December
15, 1995.

NOTE 12: RETIREMENT PROGRAMS

The company sponsors retirement plans for all qualifying domestic employees
and certain employees in other countries. Benefits are typically based on years
of service and the employee's compensation during five of the last 10 years of
employment as defined by the plans. The company's funding policy is to make
contributions that meet or exceed the minimum requirements of the Employee
Retirement Income Security Act of 1974, based on the projected unit credit
actuarial cost method, and to limit such contributions to amounts currently
deductible for tax reporting purposes.

F-43
<PAGE> 120

CAREMARK INTERNATIONAL INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The following table summarizes the components of net pension expense and
related actuarial assumptions used at the January 1 valuation date for the
respective years:

<TABLE>
<CAPTION>
1993 1994 1995
------- ------- -------
<S> <C> <C> <C>
Assumptions:
Discount rate................................................. 8.0% 7.25% 8.75%
Increase in compensation levels(1)............................ 6.5% 5.0% 5.0%
Expected long-term return on assets........................... 10.5% 10.5% 9.5%
Components (in thousands):
Service cost-benefits earned.................................. $ 3,800 $ 4,600 $ 2,100
Interest cost on projected obligation......................... 1,600 2,300 2,200
Actual return on assets....................................... (,900) (1,300) (1,700)
Net amortizations............................................. 500 700 100
------- ------- -------
Net pension expense........................................... $ 5,000 $ 6,300 $ 2,700
======== ======== ========
</TABLE>

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

(1) The assumed annual rate of increase in compensation levels for 1993 was 4.0%
for the Puerto Rico plans, which were merged into the U.S. plan as of
December 31, 1993.

As a result of the disposal of the Home Infusion business (see Note
4 -- Discontinued Operations), the company realized a curtailment gain of $0.9
million related to its pension plan. This gain has been included in the net
gains on sales of discontinued operations in the Consolidated Statements of
Operations.

The following table presents the funded status of the plans, the net
pension liability recognized in the consolidated balance sheets and related
actuarial assumptions as of December 31:

<TABLE>
<CAPTION>
1994 1995
------- -------
<S> <C> <C>
Assumptions:
Discount rate.................................................... 8.75% 7.25%
Increase in compensation levels.................................. 5.0% 5.0%
Funded status and net pension liability (in thousands):
Actuarial present value of benefit obligations:
Vested benefits............................................... $15,000 $22,200
Accumulated benefits.......................................... 17,000 25,000
Effect of future salary increases............................. 6,600 7,200
------- -------
Projected benefits............................................ 23,600 32,200
Less: plan assets at fair value(1)................................. 15,000 20,900
------- -------
Projected benefit obligations in excess of plan assets............. 8,600 11,300
Less: unrecognized net loss........................................ 1,700 4,800
------- -------
Net pension liability.............................................. $ 6,900 $ 6,500
======= =======
</TABLE>

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

(1) Primarily equity and fixed income securities.

Pension expense under non-U.S. pension plans sponsored by the company for
the benefit of foreign employees has not been significant.

Most U.S. employees are eligible to participate in a qualified 401(k) plan.
Participants may contribute up to 12% of their annual compensation (limited in
1995 to $9,240 per individual) to the plan and the company matches the
participants' contributions up to 3% of compensation. Matching contributions
made by the company were $5.7, $6.0 and $2.8 million in 1993, 1994 and 1995,
respectively.

The company has provided post-retirement health benefits to qualified
employees and accrued for those costs over the service years of the employees in
accordance with Statement of Financial Accounting Standards No. 106, "Employers'
Accounting for Postretirement Benefits Other Than Pensions." The cost of this
plan and related liability have not been significant to Caremark. As a result of
the disposal of the Home Infusion business (see Note 4 -- Discontinued
Operations), the company realized a curtailment gain of $1.2 million.

F-44
<PAGE> 121

CAREMARK INTERNATIONAL INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

This gain has been included in the net gains on sales of discontinued operations
in the Consolidated Statements of Income. In addition, during 1995, Caremark
terminated this plan, resulting in a reduction of the related liability of $2.2
million.

In 1994, the company adopted Statement of Financial Accounting Standards
No. 112 ("FAS 112"), "Employers' Accounting for Postemployment Benefits," which
requires employers to accrue the cost of postemployment benefits (including
salary continuation, severance and disability benefits, job training and
counseling and continuation of benefits such as healthcare and life insurance
coverage) to former or inactive employees. The adoption and ongoing impact of
FAS 112 have not been material to the company's financial statements.

NOTE 13: INCOME TAXES

Income tax expense from continuing operations for the indicated years
consists of:

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------
1993 1994 1995
------- ------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Current:
Federal................................................ $15,800 $19,100 $ 39,100
State and local........................................ 5,200 5,600 7,500
------- ------- --------
Current income tax expense............................... 21,000 24,700 46,600
------- ------- --------
Deferred:
Federal................................................ 10,600 10,100 (29,800)
State and local........................................ 1,800 1,900 (5,500)
------- ------- --------
Deferred income tax expense (benefit).................... 12,400 12,000 (35,300)
------- ------- --------
Income tax expense from continuing operations............ $33,400 $36,700 $ 11,300
======= ======= ========
</TABLE>

Foreign income was not significant in 1993, 1994 and 1995.

Deferred tax assets (liabilities) under FAS 109 are composed of the
following:

<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1994 1995
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Bad debt and sales allowances $ 11,800 $ 5,500
Legal settlement costs........................................... -- 26,800
Loss on investments.............................................. -- 33,700
Accrued compensation............................................. 10,100 6,300
Other accrued expenses........................................... 11,400 2,500
Net operating loss carryforwards................................. 2,900 3,300
Valuation allowances............................................. (2,900) (3,300)
-------- --------
Deferred tax assets, net of valuation allowances................. 33,300 74,800
-------- --------
Accelerated depreciation and amortization........................ (23,400) (33,100)
Goodwill......................................................... (16,900) --
Other timing..................................................... (2,400) (4,600)
-------- --------
Deferred tax liabilities......................................... (42,700) (37,700)
-------- --------
Net deferred tax assets (liabilities)............................ $ (9,400) $ 37,100
======== ========
</TABLE>

The company has established valuation allowances for foreign net operating
loss carryforwards. The $0.4 million net change in valuation allowances for 1995
is primarily attributable to the net change in these foreign net operating
losses in the current year.

F-45
<PAGE> 122

CAREMARK INTERNATIONAL INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Income tax expense from continuing operations applicable to pre-tax income
for financial reporting purposes differs from that calculated using the U.S.
federal income tax rate for the following reasons:

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------
1993 1994 1995
------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Income tax expense at statutory rate...................... $28,100 $31,900 $11,000
State and local taxes, net of federal tax benefit......... 4,200 4,600 $ 1,300
Tax rate changes.......................................... (1,000) -- --
Other..................................................... 2,100 200 (1,000)
------- ------- -------
Income tax expense from continuing operations $33,400 $36,700 $11,300
======= ======= =======
</TABLE>

In connection with its 1992 distribution from Baxter International Inc.
("Baxter"), Caremark entered into a tax-sharing agreement with Baxter under
which the company retained responsibility for its portion of federal income tax
returns filed by Baxter for the years after 1987.

Undistributed earnings of certain foreign subsidiaries that the company
expects to be permanently reinvested totaled $6.1 million as of December 31,
1995.

NOTE 14: COMMITMENTS AND CONTINGENT LIABILITIES

In June 1995, Caremark agreed to settle the investigation of the company
with the U.S. Department of Justice, the Office of the Inspector General of the
U.S. Department of Health and Human Services (the "OIG"), the Veterans
Administration, the Federal Employee Health Benefits Program, the Civilian
Health and Medical Program of the Uniformed Services and related state
investigative agencies in all 50 states and the District of Columbia. Under the
terms of the settlement, which covered allegations dating back to 1986, a
subsidiary of Caremark pled guilty to two counts of mail fraud -- one each in
Minnesota and Ohio. The settlement allows Caremark to continue participating in
Medicare, Medicaid and other government healthcare programs.

Under the settlement, Caremark agreed to make civil payments of $85.3
million to the federal government in installments, $20.0 million of which
remains payable in June 1996, and $44.6 million to the states. The plea
agreement imposed $29.0 million in federal criminal fines. In addition, Caremark
contributed $2.0 million to a grant program set up under the Ryan White
Comprehensive AIDS Resources Emergency (CARE) Act. The company took an after-tax
charge to discontinued operations of $154.8 million in 1995 for these settlement
payments, costs to defend ongoing derivative, security and related lawsuits, and
other associated costs. There can be no assurance that the ultimate costs
related to this settlement will not exceed these estimates.

In March 1996, the company agreed to settle all disputes with a number of
private payors. The settlements will result in an after-tax cost of
approximately $42.3 million. These disputes relate to businesses that were
covered by Caremark's settlement with federal and state agencies in June 1995.
In addition, Caremark will pay $23.3 million after-tax to cover the private
payors' pre-settlement and settlement-related expenses. An after-tax charge for
the above amounts will be recorded in first quarter 1996 discontinued
operations. Caremark may pay the settlement amounts in 1996 and 1997 or, under
certain circumstances, in semi-annual installments, including interest through
1999. No agreement, contract or other business relationship in existence at the
time of the settlements will be terminated or negatively affected by the
settlement agreements. The parties have also agreed to negotiate in good faith
to maintain or enhance ongoing business relationships. The company's lenders
have waived the impact of these settlements on the financial covenants under its
existing credit facility through September 15, 1996. The company currently
expects to enter into revised credit facilities prior to this date.

The company does not believe that the above-referenced settlements will
materially affect its ability to pursue its long-term business strategy. There
can be no assurances, however, that additional costs, claims and damages will
not occur.

F-46
<PAGE> 123

CAREMARK INTERNATIONAL INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

In August 1994 and July 1995, stockholders filed derivative actions on
behalf of Caremark against the company, its directors and certain employees of
Caremark in the Court of Chancery of the State of Delaware, the United States
District Court for the Northern District of Illinois and the Circuit Court of
Cook County in Chicago, Illinois alleging breaches of fiduciary duty, negligence
in connection with Caremark's conduct of the business and lack of corporate
controls, and seeking unspecified damages, and attorneys' fees and expenses. In
June 1995, the parties to the Delaware derivative action entered into a
memorandum of understanding providing for the terms of settlement of all claims
asserted in that case. Although the proposed settlement does not contemplate the
payment of any damages by any defendant, plaintiffs are expected to seek an
award of attorneys' fees and expenses in conjunction with any approval of the
settlement. The proposed settlement of the Delaware derivative action is subject
to a number of conditions and the Delaware court is expected to consider the
proposed settlement in mid-1996. The Illinois and Cook County courts have
entered stays of all proceedings in those actions pending resolution of the
Delaware derivative action. In the event the proposed settlement of the Delaware
derivative action is approved by the Delaware court, Caremark anticipates that
the Illinois and Cook County derivative actions will be dismissed. If the
proposed settlement is not approved, Caremark intends to defend these cases
vigorously. Management is unable at this time to estimate the impact, if any, of
the ultimate resolutions of these matters.

In late August 1994, certain patients of a physician who prescribed human
growth hormone distributed by Caremark and the sponsor of health insurance plan
of one of those patients filed complaints against Caremark, employees of
Caremark and others in the United States District Court for the District of
Minnesota. Each complaint purported to be on behalf of a class and alleged
violations of the federal mail and wire fraud statutes, the federal conspiracy
statute and the state consumer fraud statute, as well as conspiracy to breach a
fiduciary duty, negligence and fraud. Each complaint sought unspecified treble
damages, and attorneys' fees and expenses. In July 1995, another patient of the
same physician filed a separate complaint in the District of South Dakota
against the physician, Caremark and another corporation alleging violations of
the federal laws prohibiting payment of remuneration to induce referral of
Medicare and Medicaid beneficiaries, and the federal mail fraud and conspiracy
statutes. The complaint also alleges the intentional infliction of emotional
distress and seeks trebling of at least $15.9 million in general damages,
attorneys' fees and costs, and an award of punitive damages. In August 1995, the
parties to the case filed in South Dakota agreed to a stay of all proceedings
until final judgment has been entered in a criminal case that is presently
pending against this physician. Caremark intends to defend these cases
vigorously. Management is unable at this time to estimate the impact, if any, of
the ultimate resolution of these matters.

In September 1995, Coram filed a complaint against Caremark International
Inc. and its subsidiary, Caremark Inc., and 50 unnamed individual defendants in
the Superior Court of California in San Francisco. The complaint, which arises
from Caremark's sale to Coram of Caremark's Home Infusion business (see Note
4 -- Discontinued Operations), alleges breach of the Asset Sale and Note
Purchase Agreement and related contracts for the transaction, fraud, negligent
misrepresentation and a right to contractual indemnity. Requested relief
includes specific performance, declaratory and injunctive relief, and damages of
$5.2 billion. In November 1995, Coram also stated that if they prevail in this
litigation, they will cancel any debt it owes the company with respect to the
securities issued for the sale. Although the company cannot predict with
certainty the outcome of these proceedings, based on information currently
available, management believes that the ultimate resolution of this matter is
not likely to have a material adverse effect on Caremark's results of
operations, cash flows or financial position.

F-47
<PAGE> 124

CAREMARK INTERNATIONAL INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The company intends to defend vigorously the Coram lawsuit. In October
1995, Caremark filed motions in California Superior Court in San Francisco
seeking dismissal of this lawsuit. The San Francisco court subsequently
dismissed the case against Caremark (but not against Caremark Inc.) on the basis
of lack of jurisdiction. Caremark also filed a lawsuit in the U.S. District
Court in Chicago claiming Coram committed securities fraud in its sale of
Caremark's Home Infusion business to Coram. This case, which has been dismissed,
is on appeal and Caremark has filed counterclaims to the suit pending in San
Francisco against Caremark Inc.

Beginning in September 1994, Caremark was named as a defendant in a series
of new lawsuits added to a pending group of actions brought in 1993 under the
antitrust laws by local and chain retail pharmacies against brand name
pharmaceutical manufacturers, wholesalers and prescription benefit managers
other than Caremark. The new lawsuits, filed in federal district courts in at
least 38 states (including the United States District Court for the Northern
District of Illinois), allege that at least 24 pharmaceutical manufacturers
provided unlawful price and service discounts to certain favored buyers and
conspired among themselves to deny similar discounts to the complaining retail
pharmacies (approximately 3,900 in number). The complaints charge that certain
defendant prescription benefit managers, including Caremark, were favored buyers
who knowingly induced or received discriminatory prices from the manufacturers,
in violation of the Robinson-Patman Act. Each complaint seeks unspecified treble
damages, declaratory and equitable relief, and attorneys' fees and expenses. On
April 21, 1995, the Court entered a stay of pretrial proceedings as to certain
Robinson-Patman Act claims in this litigation, including the Robinson-Patman Act
claims brought against Caremark, pending the conclusion of a first trial of
certain of such claims brought by a limited number of plaintiffs against five
defendants not including Caremark. The company intends to defend these cases
vigorously. Management is unable at this time to estimate the impact, if any, of
the ultimate resolution of this matter.

In December 1994, Caremark was notified by the Federal Trade Commission
(the "FTC") that it was conducting a civil investigation of the industry
concerning whether acquisitions, alliances, agreements or activities between
pharmacy benefit managers and pharmaceutical manufacturers, including Caremark's
alliance agreements with certain drug manufacturers, violate Sections 3 or 7 or
the Clayton Act or Section 5 of the Federal Trade Commission Act. The specific
nature, scope, timing and outcome of the investigation are not currently
determinable. Under the statutes, if violations are found, the FTC could seek
remedies in the form of injunctive relief to set aside or modify Caremark's
alliance agreements and an order to cease and desist from certain marketing
practices and from entering into or continuing with certain types of agreements.
Management is unable at this time to estimate the impact, if any, of the
ultimate resolution of this matter.

Caremark is party to various other commitments, claims and routine
litigation arising in the ordinary course of business. Based on the advice of
counsel, management does not believe that the result of such other commitments,
claims and litigation, individually or in the aggregate, will have a material
effect on the company's business or its results of operations, cash flows or
financial position.

F-48
<PAGE> 125

CAREMARK INTERNATIONAL INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

NOTE 15: QUARTERLY FINANCIAL RESULTS (UNAUDITED)

Presented below is a summary of the unaudited consolidated quarterly
financial information for the years ended December 31, 1994 and 1995.

<TABLE>
<CAPTION>
QUARTER
-------------------------------------------
FIRST SECOND(2) THIRD FOURTH(3)
-------- --------- -------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
1994
Net revenues........................................ $370,200 $ 457,500 $460,400 $ 487,100
Gross profit........................................ $ 59,300 $ 59,500 $ 62,500 $ 73,300
Operating income from continuing operations......... $ 21,300 $ 20,900 $ 24,400 $ 33,100
Income from continuing operations................... $ 11,300 $ 10,400 $ 13,800 $ 19,000
Net income.......................................... $ 4,300 $ 23,200 $ 25,700 $ 27,100
Earnings per share from continuing operations(1)
Primary........................................... $ 0.15 $ 0.14 $ 0.18 $ 0.25
Fully diluted..................................... $ 0.15 $ 0.14 $ 0.18 $ 0.25
Net earnings per share(1)
Primary........................................... $ 0.06 $ 0.32 $ 0.34 $ 0.36
Fully diluted..................................... $ 0.06 $ 0.32 $ 0.34 $ 0.36
Common stock prices:
High.............................................. $ 22.88 $ 20.25 $ 26.75 $ 25.00
Low............................................... $ 17.50 $ 15.75 $ 16.75 $ 16.63
1995
Net revenues........................................ $534,100 $ 586,000 $606,400 $ 647,800
Gross profit........................................ $ 70,700 $ 87,700 $ 97,600 $ 101,900
Operating income from continuing operations......... $ 25,700 $ 29,600 $ 35,300 $ 36,000
Income (loss) from continuing operations............ $ 13,100 $ 17,400 $19 ,400 $ (29,700)
Net income (loss)................................... $ 21,400 $(130,400) $ 13,600 $ (20,900)
Earnings (loss) per share from continuing
operations(1)
Primary........................................... $ 0.18 $ 0.23 $ 0.26 $ (0.39)
Fully diluted..................................... $ 0.18 $ 0.23 $ 0.26 $ (0.39)
Net earnings (loss) per share(1)
Primary........................................... $ 0.29 $ (1.75) $ 0.18 $ (0.28)
Fully diluted..................................... $ 0.29 $ (1.75) $ 0.18 $ (0.28)
Common stock prices:
High.............................................. $ 19.88 $ 21.88 $ 22.75 $ 21.13
Low............................................... $ 16.25 $ 16.88 $ 19.00 $ 17.88
</TABLE>

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

(1) The sum of quarterly earnings per share amounts may not equal full-year
amounts due to differences in average common and common equivalent shares
outstanding for the respective periods.
(2) Second quarter 1995 net loss reflects a $145.0 million ($1.94 per share)
after-tax charge related to the settlement of the government investigation
described in Note 14.
(3) Fourth quarter 1995 loss from continuing operations includes a special
after-tax charge of $52.0 million ($0.69 per share) to reflect a decline in
value of investments.

F-49
<PAGE> 126

CAREMARK INTERNATIONAL INC.

CONSOLIDATED BALANCE SHEET (UNAUDITED)

<TABLE>
<CAPTION>
JUNE 30,
1996
--------------
(IN THOUSANDS)
<S> <C>
Current assets:
Cash and equivalents....................................................... $ 49,000
Restricted cash............................................................ 14,000
Accounts receivable, net................................................... 376,300
Inventories................................................................ 99,600
Short-term deferred income taxes........................................... 64,200
Prepaid expenses and other current assets.................................. 23,800
----------
Total current assets............................................... 626,900
----------
Property and equipment, net.................................................. 366,700
Goodwill and other intangible assets......................................... 320,500
Other noncurrent assets...................................................... 89,500
Long-term deferred income tax asset.......................................... --
----------
Total assets....................................................... $1,403,600
==========
Current liabilities:
Short-term debt............................................................ $ 289,600
Accounts payable, trade and other.......................................... 377,200
Accrued liabilities........................................................ 146,700
----------
Total current liabilities.......................................... 813,500
----------
Long-term debt and lease obligations......................................... 130,200
Long-term deferred income tax liability...................................... 42,200
Other noncurrent liabilities................................................. 29,700
Contingent liabilities (Note 5)
Stockholders' equity:
Preferred stock, $.01 par value, authorized 20,000,000 shares, none
issued.................................................................. --
Common stock, $1 par value, authorized 200,000,000 shares, issued
82,269,462 shares in 1996............................................... 82,200
Additional contributed capital............................................. 199,600
Shares held in trust, 7,700,000 shares..................................... (150,200)
Retained earnings.......................................................... 256,400
----------
Total stockholders' equity................................................... 388,000
----------
Total liabilities and stockholders' equity................................... $1,403,600
==========
</TABLE>

See accompanying notes to consolidated financial statements.

F-50
<PAGE> 127

CAREMARK INTERNATIONAL INC.

CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

<TABLE>
<CAPTION>
SIX MONTHS
ENDED JUNE 30,
-----------------------
1995 1996
---------- ----------
(IN THOUSANDS, EXCEPT
PER SHARE DATA)
<S> <C> <C>
Net revenues.......................................................... $1,120,100 $1,569,600
Cost of goods and services sold....................................... 961,800 1,349,600
Marketing and administrative expenses................................. 93,000 132,100
Provision for doubtful accounts....................................... 10,000 14,600
---------- ----------
Operating income from continuing operations........................... 55,300 73,300
Non-operating expense (income):
Interest expense, net............................................... 4,900 9,300
Other............................................................... (400) (400)
---------- ----------
Income from continuing operations before income taxes................. 50,800 64,400
Income tax expense.................................................... 20,300 22,900
---------- ----------
Income from continuing operations..................................... 30,500 41,500
Discontinued operations:
Operating loss from discontinued operations, net of income taxes of
$(57,500) and $(39,500) in 1995 and 1996, respectively........... (146,600) (68,900)
Gain on sale of discontinued operations, net of income taxes of
$4,700 and $1,400 in 1995 and 1996, respectively................. 7,100 2,100
---------- ----------
Income (loss) from discontinued operations.......................... (139,500) (66,800)
---------- ----------
Net income (loss)..................................................... $ (109,000) $ (25,300)
========= =========
Earnings (loss) per common and common equivalent share:
Primary
Income from continuing operations................................ $ 0.41 $ 0.54
Operating income (loss) from discontinued operations............. $ (1.98) $ (0.89)
Gain on sale of discontinued operations.......................... $ 0.10 $ 0.03
Net income (loss)................................................ $ (1.47) $ (0.33)
Fully Diluted
Income from continuing operations................................ $ 0.41 $ 0.54
Operating income (loss) from discontinued operations............. $ (1.98) $ (0.89)
Gain on sale of discontinued operations.......................... $ 0.09 $ 0.03
Net income (loss)................................................ $ (1.47) $ (0.33)
Weighted average common and common equivalent shares outstanding:
Primary............................................................. 74,200 77,400
Fully diluted....................................................... 74,800 77,400
</TABLE>

See accompanying notes to consolidated financial statements.

F-51
<PAGE> 128

CAREMARK INTERNATIONAL INC.

CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)

<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
---------------------
1995 1996
--------- ---------
(IN THOUSANDS)
BRACKETS DENOTES CASH
OUTFLOWS
<S> <C> <C>
Cash flows from continuing operations:
Income from continuing operations.................................... $ 30,500 $ 41,500
Adjustments for non-cash items:
Provision for doubtful accounts...................................... 10,000 14,600
Depreciation and amortization........................................ 14,400 25,000
Deferred income taxes................................................ 6,500 38,000
Changes in balance sheet items:
Accounts receivable.................................................. (54,500) (26,100)
Inventories.......................................................... 500 14,800
Payables and accrued liabilities..................................... 56,500 (16,100)
Prepaids and other................................................... 1,900 (6,500)
--------- ---------
Cash flows from continuing operations.................................. 65,800 85,200
--------- ---------
Cash flows from investing activities:
Capital expenditures................................................. (33,000) (48,400)
Acquisitions, net of cash received................................... (141,000) (71,600)
--------- ---------
Cash flows from investing activities................................... (174,000) (120,000)
--------- ---------
Cash flows from financing activities:
Net issuances of debt and lease obligations.......................... (52,200) 27,500
Stock issued under employee benefit plans............................ 11,700 19,800
Purchases of treasury stock.......................................... (19,900) --
--------- ---------
Cash flows from financing activities................................... (60,400) 47,300
--------- ---------
Cash flows from discontinued operations, net of divestiture proceeds... 158,000 22,100
--------- ---------
Increase (decrease) in cash and equivalents............................ (10,600) 34,600
Cash and equivalents, beginning of period.............................. 32,100 28,400
--------- ---------
Cash and equivalents, end of period.................................... $ 21,500 $ 63,000
========= =========
</TABLE>

See accompanying notes to consolidated financial statements.

F-52
<PAGE> 129

CAREMARK INTERNATIONAL INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
JUNE 30, 1996

NOTE 1: FINANCIAL INFORMATION

The unaudited interim consolidated financial statements of Caremark
International Inc. and its subsidiaries (the "company" or "Caremark") have been
prepared pursuant to the rules and regulations of the Securities and Exchange
Commission. Accordingly, certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted. These unaudited interim
consolidated financial statements should be read in conjunction with the
consolidated financial statements and notes included in the company's 1995
Annual Report to Stockholders.

In the opinion of management, the unaudited interim consolidated financial
statements reflect all normal and recurring adjustments necessary for a fair
presentation of the interim periods. The results of operations for the interim
periods are not necessarily indicative of the results of operations for the full
year.

NOTE 2: INVENTORIES

Inventories of $99.6 million at June 30, 1996 consist primarily of finished
goods.

NOTE 3: DISCONTINUED OPERATIONS

During 1995 Caremark divested its Clozaril Patient Management System, Home
Infusion business, Oncology Management Services business and Caremark Orthopedic
Services, Inc. subsidiary. Effective February 29, 1996, the company sold its
Nephrology Services business to Total Renal Care, Inc. for $49.0 million in
cash, subject to certain post-closing adjustments. The after-tax gain on
disposition of this business, net of disposal costs, was $2.1 million.

In accordance with APB 30, which addresses the reporting for disposition of
business segments, the company's consolidated financial statements present the
operating income and net assets of these discontinued operations separately from
continuing operations. Prior periods have been restated to conform with this
presentation.

First quarter 1996 discontinued operations also reflects a $65.6 million
after-tax charge related to the settlements with private payors discussed in
Note 5 and a $3.3 million charge for a reduction in the amount expected to be
realized for deferred state income tax net operating loss benefits related to
discontinued operations.

NOTE 4: ACQUISITIONS

In January 1996, Caremark completed its agreement with CIGNA Healthcare of
California, a managed healthcare subsidiary of CIGNA Corporation, to acquire
substantially all of the assets of CIGNA Medical Group, CIGNA Healthcare's Los
Angeles area staff model delivery system ("CIGNA"). The transaction has been
accounted for by the purchase method of accounting. The accounting related to
this transaction remains subject to purchase accounting adjustments pending
completion of valuations and analysis to determine the respective fair values of
assets received and liabilities assumed. These valuations are expected to be
completed no later than the fourth quarter of 1996.

NOTE 5: CONTINGENT LIABILITIES

In May 1996, two stockholders, each purporting to represent a class, filed
(but have not yet served) complaints against Caremark and each of its directors
in the Court of Chancery of the State of Delaware alleging breached of the
directors' fiduciary duty in connection with Caremark's proposed merger with
Medpartners/Mullikin, Inc. The complaints seek unspecified damages, injunctive
relief, and attorneys' fees

F-53
<PAGE> 130

CAREMARK INTERNATIONAL INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)

and expenses. The Company intends, if served, to defend these cases vigorously.
Management is unable at this time to estimate the impact, if any, of the
ultimate resolution of these matters.

On September 11, 1995, Coram Healthcare Company ("Coram") filed a complaint
in the San Francisco Superior Court against Caremark International Inc. and its
subsidiary, Caremark Inc., and 50 unnamed individual defendants. The complaint,
which arises from Caremark's sale to Coram of Caremark's Home Infusion business
in April 1995 for approximately $209.0 million in cash and $100.0 million in
securities, alleges breach of the Asset Sale and Note Purchase Agreement dated
January 29, 1995 as amended on April 1, 1995 between Coram and the company,
breach of related contracts, fraud, negligent misrepresentation and a right to
contractual indemnity. Requested relief in Coram's amended complaint includes
specific performance, declaratory relief, injunctive relief, and damages of $5.2
billion. The company filed motions in October 1995 in the Superior Court of
California seeking (i) to strike certain causes of action due to the speculative
nature of the claims and damages asserted and (ii) dismissal of Coram's lawsuit
on grounds of lack of jurisdiction over Illinois-based Caremark. The Superior
Court of California subsequently dismissed the case against the company (but not
against Caremark Inc.) on the basis of lack of jurisdiction. Caremark also filed
a lawsuit in the U.S. District Court in Chicago claiming that Coram committed
securities fraud in its sale to the company of its securities in connection with
the sale of the company's Home Infusion business to Coram. This case, which has
been dismissed, is on appeal and the company has filed counterclaims to the
lawsuit pending in San Francisco. Coram's lawsuit is currently in the discovery
phase.

Although the company cannot predict with certainty the outcome of these
proceedings, based on information currently available, management believes that
the ultimate resolution of this matter is not likely to have a material adverse
effect on Caremark's results of operations, cash flows or financial position.
The company intends to defend these cases vigorously.

In August and September 1994, stockholders, each purporting to represent a
class, filed complaints against Caremark and certain officers and employees of
Caremark in the United States District Court for the Northern District of
Illinois, alleging violations of the Securities Act of 1933 and the Securities
Exchange Act of 1934, and fraud and negligence in connection with public
disclosures by Caremark regarding Caremark's business practices and the status
of the OIG investigation discussed below. The complaints seek unspecified
damages, declaratory and equitable relief, and attorneys' fees and expenses. In
June 1996, the complaint filed by one group of stockholders alleging violations
of the Securities Exchange Act of 1934 only, was certified as a class. The
parties to all of the complaints continue to engage in discovery proceedings.
The company intends to defend these cases vigorously. Management is unable at
this time to estimate the impact, if any, of the ultimate resolution of these
matters.

In August 1994 and July 1995, stockholders filed derivative actions on
behalf of Caremark in the Court of Chancery of the State of Delaware, the United
States District Court for the Northern District of Illinois and the Circuit
Court of Cook County in Chicago, Illinois alleging breaches of fiduciary duty,
negligence in connection with Caremark's conduct of the business and lack of
corporate controls, and seeking unspecified damages, attorneys' fees and
expenses. In June 1996, the parties entered into a Stipulation and Agreement of
Compromise and Settlement which established proposed terms for the settlement of
the case. The Delaware court will conduct a hearing on August 16, 1996 to
consider the proposed settlement. Although the proposed settlement does not
contemplate the payment of any damages by any defendant, plaintiffs are expected
to seek

F-54
<PAGE> 131

CAREMARK INTERNATIONAL INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)

an award of attorneys' fees and expenses not in excess of $1.025 million in
conjunction with any approval of the settlement. The Illinois and Cook County
Courts have entered stays of all proceedings in those actions pending resolution
of the Delaware derivative action. In the event the proposed settlement of the
Delaware derivative action is approved by the Delaware court, Caremark
anticipates that the Illinois and Cook County derivative actions will be
dismissed. If the proposed settlement is not approved, Caremark intends to
defend these cases vigorously. Management is unable at this time to estimate the
impact, if any, of the ultimate resolution of these matters.

In late August 1994, certain patients of a physician who prescribed human
growth hormone distributed by Caremark and the sponsor of a health insurance
plan of one of those patients filed complaints against Caremark, employees of
Caremark and others in the United States District Court for the District of
Minnesota. Each complaint purported to be on behalf of a class and alleged
violations of the federal mail and wire fraud statutes, the federal conspiracy
statute and the state consumer fraud statute, as well as conspiracy to breach a
fiduciary duty, negligence and fraud. Each complaint sought unspecified treble
damages, and attorneys' fees and expenses. In July 1996, these plaintiffs also
served (but have not yet filed) a separate lawsuit in the Minnesota State Court
in the County of Hennepin against a subsidiary of Caremark purporting to be on
behalf of a class and alleging all of the claims contained in the complaint
filed with the Minnesota federal court other than the federal claims contained
therein. The complaint seeks unspecified damages, attorneys' fees and expenses
and an award of punitive damages. In July 1995, another patient of the same
physician filed a separate complaint in the District of South Dakota against the
physician, Caremark and another corporation alleging violations of the federal
laws prohibiting payment of remuneration to induce referral of Medicare and
Medicaid beneficiaries, and the federal mail fraud and conspiracy statutes. The
complaint also alleges the intentional infliction of emotional distress and
seeks trebling of at least $15.9 million in general damages, attorneys' fees and
costs, and an award of punitive damages. In August 1995, the parties to the case
filed in South Dakota agreed to a stay of all proceedings until final judgment
has been entered in a criminal case that is presently pending against this
physician. Caremark intends to defend these cases vigorously. Management is
unable at this time to estimate the impact, if any, of the ultimate resolution
of these matters.

Beginning in September 1994, Caremark was named as a defendant in a series
of new lawsuits added to a pending group of actions brought in 1993 under the
antitrust laws by local and chain retail pharmacies against brand name
pharmaceutical manufacturers, wholesalers and prescription benefit managers
other than Caremark. The new lawsuits, filed in federal district courts in at
least 38 states (including the United States District Court for the Northern
District of Illinois), allege that at least 24 pharmaceutical manufacturers
provided unlawful price and service discounts to certain favored buyers and
conspired among themselves to deny similar discounts to the complaining retail
pharmacies (approximately 3,900 in number). The complaints charge that certain
defendant prescription benefit managers, including Caremark, were favored buyers
who knowingly induced or received discriminatory prices from the manufacturers,
in violation of the Robinson-Patman Act. Each complaint seeks unspecified treble
damages, declaratory and equitable relief, and attorneys' fees and expenses. On
April 21, 1995, the Court entered a stay of pre-trial proceedings as to certain
Robinson-Patman Act claims in this litigation, including the Robinson-Patman Act
claims brought against Caremark, pending the conclusion of a first trial of
certain of such claims brought by a limited number of plaintiffs against five
defendants not including Caremark. The company intends to defend these cases
vigorously. Management is unable to estimate at this time the impact, if any, of
the ultimate resolution of this matter.

F-55
<PAGE> 132

CAREMARK INTERNATIONAL INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)

form of injunctive relief to set aside or modify Caremark's alliance agreements
and an order to cease and desist from certain marketing practices and from
entering into or continuing with certain types of agreements. Management is
unable at this time to estimate the impact, if any, of the ultimate resolution
of this matter.

In March 1996, the company agreed to settle all disputes with a number of
private payors. The settlements resulted in an after-tax charge of $42.3
million. These disputes relate to businesses that were covered by Caremark's
settlement with federal and state agencies in June 1995 discussed below. In
addition, Caremark will pay $23.3 million after-tax to cover the private payors'
pre-settlement and settlement-related expenses. An after-tax charge for the
above amounts has been recorded in first quarter 1996 discontinued operations.
Caremark may pay the settlement amounts in 1996 and 1997 or, under certain
circumstances, in semi-annual installments, including interest, through 1999. No
agreement, contract or other business relationship in existence at the time of
the settlements will be terminated or negatively affected by the settlement
agreements. The parties have also agreed to negotiate in good faith to maintain
or enhance ongoing business relationships. The company's lenders have waived the
impact of these settlements on the financial covenants under its existing credit
facility through September 15, 1996. The company currently expects to enter into
revised credit facilities prior to this date.

In June 1995, Caremark agreed to settle an investigation of the company
with the U.S. Department of Justice, the Office of the Inspector General of the
U.S. Department of Health and Human Services, the Veterans Administration, the
Federal Employees Health Benefits Program, the Civilian Health and Medical
Program of the Uniformed Services and related state investigative agencies in
all 50 states and the District of Columbia (the "OIG investigation"). The
company took an after-tax charge to discontinued operations of $154.8 million in
1995 for these settlement payments, costs to defend ongoing derivative, security
and related lawsuits, and other associated costs.

Caremark is party to various other commitments, claims and routine
litigation arising in the ordinary course of business. Management does not
believe that the result of such commitments, claims and litigation, individually
or in the aggregate, will have a material effect on the company's business or
its income, cash flows or financial condition.

NOTE 6: MERGER

On May 13, 1996, Caremark and MedPartners/Mullikin, Inc. ("MedPartners")
signed a definitive agreement to merge. Under the terms of the agreement, which
has been approved by the Boards of Directors of both companies, each Caremark
share will be converted into MedPartners common stock at a fixed ratio of 1.21
shares of MedPartners per Caremark share. The merger is expected to close in the
third quarter of 1996 and is subject to stockholder and regulatory approval.

F-56
<PAGE> 133

REPORT OF INDEPENDENT AUDITORS

The Partners
New Management

We have audited the accompanying balance sheets of New Management (a
California general partnership) (the Partnership) as of December 31, 1994 and
1995, and the related statements of income, partners' deficiency and cash flows
for the years then ended. These financial statements are the responsibility of
the Partnership's management. Our responsibility is to express an opinion on
these financial statements based on our audits.

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

ERNST & YOUNG LLP

Birmingham, Alabama
July 26, 1996

F-57
<PAGE> 134

NEW MANAGEMENT
(A CALIFORNIA GENERAL PARTNERSHIP)

BALANCE SHEETS

<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------
1994 1995
----------- -----------
<S> <C> <C>
ASSETS
Current assets:
Cash............................................................ $ 55,197 $ 13,445
Administrative capitation fee receivable........................ 267,277 --
Other receivables............................................... 162 162
Due from related parties........................................ 56,827 58,976
----------- -----------
Total assets............................................ $ 379,463 $ 72,583
========== ==========
LIABILITIES AND PARTNERS' DEFICIENCY
Current liabilities:
Current portion of long term debt............................... $ 114,590 $ 123,793
Accounts payable................................................ 4,900 1,113
Due to affiliate................................................ -- 15,577
Deferred income................................................. -- 1,593
Accrued interest payable........................................ 19,023 18,283
----------- -----------
Total current liabilities............................... 138,513 160,359
Long-term debt, net of current portion............................ 2,831,001 2,707,208
Partners' deficiency.............................................. (2,590,051) (2,794,984)
----------- -----------
Total liabilities and partners' deficiency.............. $ 379,463 $ 72,583
========== ==========
</TABLE>

See accompanying notes.

F-58
<PAGE> 135

NEW MANAGEMENT
(A CALIFORNIA GENERAL PARTNERSHIP)

STATEMENTS OF INCOME

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------
1994 1995
---------- ----------
<S> <C> <C>
Net revenue......................................................... $3,084,648 $2,947,577
---------- ----------
Expenses:
Administrative and executive fees................................. 163,808 189,300
Management fee.................................................... -- 15,577
Accounting and legal.............................................. 55,655 109,042
Interest.......................................................... 232,170 223,590
---------- ----------
Total expenses............................................ 451,633 537,509
---------- ----------
Net income.......................................................... $2,633,015 $2,410,068
========= =========
</TABLE>

See accompanying notes.

F-59
<PAGE> 136

NEW MANAGEMENT
(A CALIFORNIA GENERAL PARTNERSHIP)

STATEMENTS OF PARTNERS' DEFICIENCY

<TABLE>
<S> <C>
Balance at December 31, 1993.................................................... $(2,902,752)
Net income.................................................................... 2,633,015
Contributions................................................................. 87
Distributions................................................................. (2,320,401)
-----------
Balance at December 31, 1994.................................................... (2,590,051)
Net income.................................................................... 2,410,068
Distributions................................................................. (2,615,001)
-----------
Balance at December 31, 1995.................................................... $(2,794,984)
==========
</TABLE>

See accompanying notes.

F-60
<PAGE> 137

NEW MANAGEMENT
(A CALIFORNIA GENERAL PARTNERSHIP)

STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------
1994 1995
----------- -----------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income........................................................ $ 2,633,015 $ 2,410,068
Adjustments to reconcile net income to net cash provided by
operating activities:
Changes in assets and liabilities:
(Increase) decrease in capitation fee receivable............. (150,510) 267,277
(Increase) decrease in due from related parties.............. 439,999 (2,149)
Increase in other receivables................................ (77) --
Increase (decrease) in accounts payable...................... 4,900 (3,787)
Increase in due to affiliate................................. -- 15,577
Increase in deferred income.................................. -- 1,593
Decrease in accrued interest payable......................... (686) (740)
----------- -----------
Net cash provided by operating activities................. 2,926,641 2,687,839
----------- -----------
FINANCING ACTIVITIES:
Principal payments on long-term debt.............................. (106,070) (114,590)
Additional partner contributions.................................. 87 --
Distributions to partners......................................... (2,320,401) (2,615,001)
Decrease in distributions payable................................. (500,000) --
----------- -----------
Net cash used in financing activities..................... (2,926,384) (2,729,591)
----------- -----------
Net increase (decrease) in cash........................... 257 (41,752)
Cash at beginning of year........................................... 54,940 55,197
----------- -----------
Cash at end of year................................................. $ 55,197 $ 13,445
========== ==========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid on borrowings....................................... $ 232,855 $ 224,330
========== ==========
</TABLE>

See accompanying notes.

F-61
<PAGE> 138

NEW MANAGEMENT
(A CALIFORNIA GENERAL PARTNERSHIP)

NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1995

1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES

Organization

New Management (NM), a California general partnership, was formed and
commenced operations on July 31, 1992. The partnership was formed for the
purpose of providing management services in connection with the delivery of
healthcare services to patients who are enrollees of certain health maintenance
organizations which have contracted with West Hills Hospital (Hospital) located
in West Hills, California. Approximately 100% of the organization's revenue was
provided under contract with the hospital.

Partnership income and losses are allocated to the respective partners
based on percentage ownership subject to certain provisions as defined in the
partnership agreement.

Basis of Presentation

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

Management Estimates

The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the accompanying financial
statements and notes. Actual results could differ from those estimates.

Administrative Capitation Fee

NM contracts with West Hills Hospital under a Managed Care Agreement. Under
the terms of the agreement, NM provides certain administrative services to
enrollees in various health plans that have contracted with West Hills Hospital
in exchange for an administrative fee based upon various components including a
percentage of capitation revenue and utilization results. The contract which
commenced August 10, 1992 has a term of ten years with an automatic five year
renewal. Premiums are due monthly and are recognized as revenue by NM during the
period in which Community Medical Group (CMG), under a management agreement with
NM, and NM are obligated to provide services to the enrollees.

Income Taxes

As a partnership, the income and expenses of the partnership are allocated
to the respective partners; as such, the partnership does not pay federal or
state income taxes. Accordingly, no provision for income taxes has been included
in the accompanying financial statements.

2. ADMINISTRATIVE CAPITATION FEE RECEIVABLE

The capitation fee receivable represents amounts owed to NM from the
Hospital under the terms of the management agreement. The amount, which relates
to the period January 1, 1994 through August 31, 1994, was received in February
1995.

3. LONG-TERM DEBT

Long-term debt is summarized as follows:

<TABLE>
<CAPTION>
1994 1995
---------- ----------
<S> <C> <C>
Note payable to Hospital, monthly payments of principal and
interest (7.75%) of $28,238 due through July 1, 1999,
balloon payment of $2,354,530 due on August 1, 1999....... $2,945,591 $2,831,001
Less current portion...................................... 114,590 123,793
---------- ----------
Long-term debt, net of current portion............ $2,831,001 $2,707,208
========= =========
</TABLE>

The amounts recorded above approximate the fair value of the obligation.

On July 7, 1992, NM entered into a managed care agreement with the Hospital
that included the issuance of a $3,000,000 loan to New Management from the
Hospital. The loan is secured by payments owed to NM by the Hospital for
capitation revenue received directly by the Hospital. The individual partners
have

F-62
<PAGE> 139

NEW MANAGEMENT
(A CALIFORNIA GENERAL PARTNERSHIP)

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

guaranteed the loan pro rata to the extent of two times each partner's
percentage ownership interest in NM at the date of the loan.

As of December 31, 1995, aggregate principal maturities of long-term debt
are as follows:

4. TRANSACTIONS WITH AFFILIATES AND RELATED PARTIES

Advances

NM advanced amounts to CMG to cover working capital requirements and tenant
improvements. The balance of these advances is $56,827 as of December 31, 1994
and 1995. The advances are due on demand and do not bear interest.

NM advanced $2,149 to a physician who is also a partner in NM. The advance
is due upon demand and does not bear interest.

General and Administrative Services

NM, in performing its responsibilities under the managed care agreement
with the Hospital, receives certain employee services and facilities usage
without cost from CMG.

CMG's partners are substantially identical to the partners of NM as
required under the terms of both partnership agreements. CMG provides medical
services for enrollees of certain health maintenance organizations.

Management Services

Under an agreement effective September 1, 1995, CHS Management, Inc. (CHS),
an affiliate incorporated in 1995 to perform management services for CMG and
Health Source Medical Group (HSMG), performed certain management services on
behalf of NM. The agreement provides that CHS will receive a monthly management
fee based upon 12% per dollar per enrolled life under the capitation agreement
between NM, CMG and West Hills Hospital. The amount of the management fee
totaled $15,577 for the period from September 1 through December 31, 1995 and
has been accrued on the balance sheet as due to affiliate.

Professional Services

Accounting services are performed for NM by a partnership of which one
partner acts as a financial advisor to the Executive Committee of CMG and also
serves as a board member of CHS Management, Inc. Charges for services rendered
to NM by the partnership amounted to $35,655 and $94,025 for the years ended
December 31, 1994 and 1995, respectively.

5. FAIR VALUE OF FINANCIAL INSTRUMENTS

All current assets and current liabilities, are carried at cost, which
approximates fair value due to the short maturity of those instruments.

6. SUBSEQUENT EVENT

On March 11, 1996, NM entered into a letter of intent to be acquired by
MedPartners/Mullikin, Inc., a publicly held physicians practice management
company, in exchange for shares of MedPartners/Mullikin, Inc. common stock.

F-63
<PAGE> 140

NEW MANAGEMENT
(A CALIFORNIA GENERAL PARTNERSHIP)

BALANCE SHEET
(UNAUDITED)

<TABLE>
<CAPTION>
DECEMBER 31,
1993
------------
<S> <C>
ASSETS
Cash............................................................................ $ 54,940
Administrative capitation fee receivable........................................ 116,767
Due from affiliates............................................................. 496,826
Capital contributions receivable from partners.................................. 85
------------
Total assets.......................................................... $ 668,618
==========
LIABILITIES AND PARTNERS' DEFICIENCY
Current liabilities
Distribution payable.......................................................... $ 500,000
Accrued interest payable...................................................... 19,709
Current portion of long-term debt............................................. 106,070
------------
Total current liabilities............................................. 625,779
Long-term debt, net of current portion........................................ 2,945,591
------------
Partners' deficiency............................................................ (2,902,752)
------------
Total liabilities and partners' deficiency............................ $ 668,618
==========
</TABLE>

See accompanying notes.

F-64
<PAGE> 141

NEW MANAGEMENT
(A CALIFORNIA GENERAL PARTNERSHIP)

STATEMENT OF INCOME
(UNAUDITED)

<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1993
------------
<S> <C>
Net revenue..................................................................... $3,109,869
Expenses
Accounting.................................................................... 18,663
Interest expense.............................................................. 238,711
Administrative fee............................................................ 42,000
Executive committee fees...................................................... 24,000
------------
Total expenses........................................................ 323,374
------------
Net income...................................................................... $2,786,495
==========
</TABLE>

See accompanying notes.

F-65
<PAGE> 142

NEW MANAGEMENT
(A CALIFORNIA GENERAL PARTNERSHIP)

STATEMENT OF CASH FLOWS
(UNAUDITED)

<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1993
------------
<S> <C>
OPERATING ACTIVITIES:
Net Income.................................................................... $ 2,786,495
Adjustments to reconcile net income to net cash provided by operating
activities:
Changes in assets and liabilities:
(Increase) decrease in capitation fee receivable......................... (116,767)
(Increase) decrease in due from related parties.......................... (496,827)
(Increase) decrease in other receivables................................. (85)
(Increase (decrease) in accrued interest payable......................... (74,041)
------------
Net cash provided by operating activities............................. 2,098,775
------------
FINANCING ACTIVITIES:
Increase in long-term debt.................................................... 51,661
Additional partner contributions.............................................. 85
Distributions to partners..................................................... (2,600,037)
Increase in distributions payable............................................. 500,000
------------
Net cash used in financing activities................................. (2,048,291)
------------
Net increase in cash.................................................. 50,484
Cash at beginning of year....................................................... 4,456
------------
Cash at end of year............................................................. $ 54,940
==========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid on borrowing...................................................... $ 238,711
==========
</TABLE>

See accompanying notes.

F-66
<PAGE> 143

NEW MANAGEMENT
(A CALIFORNIA GENERAL PARTNERSHIP)

NOTES TO UNAUDITED FINANCIAL STATEMENTS
DECEMBER 31, 1993

1. ORGANIZATION

New Management, a California general partnership (the Partnership), was
formed and commenced operations on July 31, 1992. The Partnership was formed for
the purpose of providing management services in connection with the delivery of
hospital healthcare services to patients who are enrollees of certain health
maintenance organizations which have contracted with West Hills Hospital and the
Partnership.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Accounting Policy

The financial statements have been prepared using the accrual method of
accounting.

Income Taxes

Income and expenses represent only the operations of the Partnership and do
not include other activity to be reflected on the individual partners' federal
and state income tax returns. As such, no provision has been made for income
taxes.

3. MANAGED CARE AGREEMENT

The Partnership receives an administrative capitation fee under the terms
of a Managed Care Agreement with West Hills Hospital. Under the terms of the
agreement, New Management has capitated West Hills to provide hospital care
under five contracts with health maintenance organizations. The Partnership
receives income based upon the spread between the average per member per month
capitation received from the HMO's and the contracted sub-capitation rate paid
to West Hills Hospital for providing the hospital services. Under the terms of
the Managed Care Agreement the Partnership is obligated to provide certain
administrative and management services to administer the HMO contracts. The
Managed Care Agreement was entered into in July, 1992 and is effective through
July, 2002.

4. ADMINISTRATIVE CAPITATION FEE RECEIVABLE

The Partnership is owed additional revenue under the terms of the Managed
Care Agreement for 1993 based on a calculation adjustment which has been agreed
on with West Hills Hospital.

5. ADVANCES TO COMMUNITY MEDICAL GROUP (CMG)

The Partnership advanced $455,026 to Community Medical Group of the West
Valley (CMG) (a related party) to be used for working capital. The advance does
not bear interest and is due on demand. The Partnership advanced $41,800 for
tenant improvements at CMG's Simi Valley facility. The advance does not bear
interest and is due on demand.

F-67
<PAGE> 144

NEW MANAGEMENT
(A CALIFORNIA GENERAL PARTNERSHIP)

NOTES TO UNAUDITED FINANCIAL STATEMENTS -- (CONTINUED)

6. LOAN PAYABLE

The Partnership received a $3,000,000 loan from West Hills Hospital on
August 7, 1992. The loan is payable in monthly installments bearing interest at
7.75% as follows:

<TABLE>
<CAPTION>
TIME PERIOD PAYMENTS
---------------------------------------- ----------------------------------------
<S> <C>
September 1, 1992 -- January 31, 1993 Interest Accrued -- No Payments
February 1, 1993 -- July 1, 1993 Interest Only Payments of $19,973
August 1, 1993 -- July 1, 1999 Monthly Payments of $28,238 consisting
of principal and interest, based on a
fifteen year amortization.
</TABLE>

There is a balloon payment of $2,354,529 due on July 1, 1999.

<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER 31, AMOUNT
----------------------------------------------------------------------- ----------
<S> <C>
1994............................................................ $ 100,071
1995............................................................ 114,590
1996............................................................ 123.792
1997............................................................ 139,735
1998............................................................ 144,475
1999............................................................ 2,428,998
----------
$3,051,661
=========
</TABLE>

7. RELATED PARTY TRANSACTIONS

The Partnership is receiving employee services and facilities in order to
perform their obligations under the Managed Care Agreement (Note 3) without cost
from Community Medical Group of the West Valley, a California general
partnership (CMG). CMG's partners are substantially identical to the partners of
New Management as required under the terms of both partnership agreements. CMG
provides medical services to enrollees of prepaid health plans.

F-68
<PAGE> 145

NEW MANAGEMENT
(A CALIFORNIA PARTNERSHIP)

CONDENSED BALANCE SHEET
(UNAUDITED)

<TABLE>
<CAPTION>
JUNE 30,
1996
-----------
<S> <C>
ASSETS
Current assets
Cash.......................................................................... $ 175,331
Other receivables............................................................. --
Due from related parties...................................................... 58,976
-----------
Total current assets.................................................. 234,307
Other assets.......................................................... 543,467
-----------
Total assets.......................................................... $ 777,774
===========
LIABILITIES AND PARTNERS' DEFICIENCY
Current liabilities
Current portion of long-term debt............................................. $ 128,668
Accounts payable.............................................................. 4,849
Deferred income............................................................... 439
Accrued interest payable...................................................... 17,891
-----------
Total current liabilities............................................. 151,847
Long-term debt, net of current portion.......................................... 2,641,633
Partners' deficiency............................................................ (2,015,706)
-----------
Total liabilities and partners' deficiency............................ $ 777,774
===========
</TABLE>

See accompanying note.

F-69
<PAGE> 146

NEW MANAGEMENT
(A CALIFORNIA PARTNERSHIP)

CONDENSED STATEMENTS OF INCOME
(UNAUDITED)

<TABLE>
<CAPTION>
SIX MONTHS
ENDED JUNE 30,
-------------------------
1995 1996
---------- ----------
<S> <C> <C>
Net revenue......................................................... $1,524,490 $1,313,931
Expenses
Administrative and executive fees................................. 95,000 87,260
Management fee.................................................... -- 22,625
Accounting and legal.............................................. 53,495 96,872
Interest.......................................................... 112,908 108,362
---------- ----------
Total expenses............................................ 261,403 315,119
---------- ----------
Net income.......................................................... $1,263,087 $ 998,812
========== ==========
</TABLE>

See accompanying note.

F-70
<PAGE> 147

NEW MANAGEMENT
(A CALIFORNIA GENERAL PARTNERSHIP)

CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)

<TABLE>
<CAPTION>
SIX MONTHS
ENDED JUNE 30,
-----------------------
1995 1996
----------- ---------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income......................................................... $ 1,263,087 $ 998,812
Adjustments to reconcile net income to net cash provided by
operating activities:
Decrease in administrative capitation fee receivable............ 267,277 --
Decrease in other receivables................................... -- 162
Increase in other assets........................................ -- (543,467)
Increase in accounts payable.................................... -- 3,736
Decrease in due to affiliate.................................... -- (15,577)
Decrease in deferred income..................................... -- (1,154)
Decrease in accrued interest payable............................ (362) (392)
----------- ---------
Net cash provided by operating activities.................. 1,530,002 442,120
----------- ---------
FINANCING ACTIVITIES:
Principal payments on long-term debt............................... (56,189) (60,700)
Increase in distributions payable.................................. 17,580 --
Distributions to partners.......................................... (1,500,001) (219,534)
----------- ---------
Net cash used in financing activities...................... (1,538,610) (280,234)
----------- ---------
Net increase (decrease) in cash............................ (8,608) 161,886
Cash at beginning of period.......................................... 55,197 13,445
----------- ---------
Cash at end of period................................................ $ 46,589 $ 175,331
========== =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid on borrowings.......................................... $ 112,417 $ 109,112
========== =========
</TABLE>

See accompanying note.

F-71
<PAGE> 148

NEW MANAGEMENT
(A CALIFORNIA GENERAL PARTNERSHIP)

NOTE TO UNAUDITED CONDENSED FINANCIAL STATEMENTS

1. CONDENSED FINANCIAL STATEMENTS

The Condensed Balance Sheet as of June 30, 1996, the Condensed Statements
of Income and the Condensed Statements of Cash Flows for the six months ended
June 30, 1996 and 1995 have been prepared by New Management (the Partnership)
without audits. In the opinion of management, all adjustments (which include
only normal recurring adjustments) necessary to present fairly the financial
position, results of operations and cash flows at June 30, 1996 and 1995 have
been made.

Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been omitted. It is suggested that these condensed financial statements be
read in conjunction with the financial statements and notes thereto included in
the Partnership's December 31, 1995 audited financial statements. The results of
operations for the period ended June 30, 1996 are not necessarily indicative of
the operation results for the year.

F-72
<PAGE> 149

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

NO PERSON IS AUTHORIZED IN CONNECTION WITH ANY OFFERING MADE HEREBY TO GIVE
ANY INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS,
AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION 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 SECURITY OTHER THAN THE NOTES OFFERED HEREBY, NOR DOES IT CONSTITUTE AN
OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY OF THE SECURITIES OFFERED
HEREBY TO ANY PERSON IN ANY JURISDICTION IN WHICH 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
INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY DATE SUBSEQUENT TO THE DATE
HEREOF.

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

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Available Information................. 2
Forward-Looking Statements............ 2
Prospectus Summary.................... 3
The Company........................... 8
Risk Factors.......................... 8
Use of Proceeds....................... 16
Capitalization........................ 17
The Debt Tender Offer................. 18
Selected Historical Financial Data.... 19
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 21
Pro Forma Condensed Combined Financial
Information......................... 27
Business.............................. 35
Management............................ 50
Certain Transactions.................. 59
Principal Stockholders................ 61
Description of the Notes.............. 63
Underwriting.......................... 74
Experts............................... 75
Legal Matters......................... 75
Index to Financial Statements......... F-1
</TABLE>

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

$300,000,000

% SENIOR
NOTES DUE 2006

(LOGO) MedPartners(TM)

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

PROSPECTUS

OCTOBER , 1996

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

SMITH BARNEY INC.

MERRILL LYNCH & CO.

J.P. MORGAN & CO.

MORGAN STANLEY & CO.
INCORPORATED

NATIONSBANC CAPITAL
MARKETS, INC.
------------------------------------------------------
------------------------------------------------------
<PAGE> 150

PART II

INFORMATION NOT REQUIRED IN PROSPECTUS

ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION

Set forth below is an estimate of the fees and expenses to be incurred in
connection with the issuance and distribution of the Notes, offered hereby other
than underwriting discounts and commissions.

<TABLE>
<S> <C>
Securities and Exchange Commission Registration Fee............................... $103,449*
Trustee's Fees.................................................................... 50,000
Blue Sky Fees and Expenses........................................................ 15,000
Legal Fees and Expenses........................................................... 75,000
Rating Agency Fees................................................................ 60,000
Accounting Fees................................................................... 75,000
Printing Costs.................................................................... 250,000
Miscellaneous Expenses............................................................ 121,551
--------
Total................................................................... $750,000
========
</TABLE>

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

* Actual amount.

ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.

Section 102(b)(7) of the General Corporation Law of Delaware ("DGCL")
grants corporations the right to limit or eliminate the personal liability of
their directors in certain circumstances in accordance with provisions therein
set forth. The Company's Second Amended and Restated Certificate of
Incorporation, as amended, contains a provision eliminating or limiting director
liability to the Company and its stockholders for monetary damages arising from
acts or omissions in the director's capacity as a director. The provision does
not, however, eliminate or limit the personal liability of a director (i) for
any breach of such director's duty of loyalty to the Company or its
stockholders, (ii) for acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law, (iii) under the Delaware
statutory provision making directors personally liable, under a negligence
standard, for unlawful dividends or unlawful stock purchases or redemptions, or
(iv) for any transaction from which the director derived an improper personal
benefit. This provision offers persons who serve on the Board of Directors of
the Company protection against awards of monetary damages resulting from
breaches of their duty of care (except as indicated above). As a result of this
provision, the ability of the Company or a stockholder thereof to successfully
prosecute an action against a director for a breach of his duty of care is
limited. However, the provision does not affect the availability of equitable
remedies such as an injunction or rescission based upon a director's breach of
his duty of care. The Commission has taken the position that the provision will
have no effect on claims arising under the federal securities laws.

Section 145 of the DGCL grants corporations the right to indemnify their
directors, officers, employees and agents in accordance with the provisions
therein set forth. The Company's Second Amended and Restated By-laws provide for
mandatory indemnification rights, subject to limited exceptions, to any
director, officer, employee, or agent of the Company who, by reason of the fact
that he or she is a director, officer, employee, or agent of the Company, is
involved in a legal proceeding of any nature. Such indemnification rights
include reimbursement for expenses incurred by such director, officer, employee,
or agent in advance of the final disposition of such proceeding in accordance
with the applicable provisions of the DGCL.

The Company has agreed to indemnify all of its directors and executive
officers against liability incurred by them by reason of their services as a
director to the fullest extent allowable under applicable law. In addition, the
Company has purchased insurance containing customary terms and conditions as
permitted by Delaware law on behalf of its directors and officers, which may
cover liabilities under the Securities Act of 1933, as amended.

II-1
<PAGE> 151

ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES

Set forth below are all sales of unregistered securities by the Registrant
within the past three years.

In August 1995, in connection with its incorporation, the Company sold and
issued 100 shares of its Common Stock to Larry R. House for $1.00 per share.
Those shares of Common Stock were subsequently cancelled in connection with the
consummation of the business combination between the Original Predecessor and
Mullikin Medical Enterprises, L.P.

In December 1995, the Company sold and issued an aggregate of 860,068
shares of its Common Stock to Retina and Vitreous Associates of Alabama, Inc.
("RVAA"), in return for substantially all of the assets of RVAA. As of the
closing date, the shares of Common Stock had a value of approximately
$28,400,000.*

In March 1996, the Company sold and issued an aggregate of 82,954 shares of
its Common Stock to Eaton Medical Group in return for substantially all of the
assets of Eaton Medical Group. As of the closing date, the shares of Common
Stock had a value of approximately $2,364,000.*

In March 1996, the Company sold and issued an aggregate of 444,091 shares
of its Common Stock to the Atlanta Allergy Clinic, PA ("Atlanta Allergy"), in
return for substantially all of the assets of Atlanta Allergy. As of the closing
date, the shares of Common Stock had a value of approximately $12,657,000.*

In April 1996, the Company sold and issued an aggregate of 70,174 shares of
its Common Stock to Dwight W. Clark, M.D. and H. Frank Martin, M.D. in return
for the termination of certain Medical Director Agreements. As of the closing
date, the shares of Common Stock had a value of approximately $2,026,000.*

In May 1996, the Company sold and issued 116,452 shares to East Bay
Fertility OB-GYN-Medical Group, Inc. ("East Bay") in exchange for substantially
all of the assets of East Bay. As of the closing date, the shares of Common
Stock had a value of approximately $2,737,000.*

In June 1996, the Company sold and issued an aggregate of 1,218,441 shares
of its Common Stock to the sole shareholder of Emergency Physician Associates,
Inc. ("EPA") as consideration for the merger of a wholly-owned subsidiary of the
Company with and into EPA whereby EPA became a wholly-owned subsidiary of the
Company. As of the closing date, the shares of Common Stock had a value of
approximately $25,892,000.*

In June 1996, the Company sold and issued an aggregate of 76,633 shares of
its Common Stock to Global Care, Inc. in return for substantially all of the
assets of Global Care, Inc. As of the closing date, the shares of Common Stock
had a value of approximately $1,628,000.*

In June 1996, the Company sold and issued an aggregate of 85,827 shares of
its Common Stock to Brevard OB/GYN Specialists, P.A. in return for substantially
all of the assets of Brevard OB/GYN Specialists, P.A. As of the closing date,
the shares of Common Stock had a value of approximately $1,792,000.*

In July 1996, the Company sold and issued an aggregate of 190,762 shares of
its Common Stock to Southwest Healthcare Network, Inc. in return for
substantially all of the assets of Southwest Healthcare Network, Inc. As of the
closing date, the shares of Common Stock had a value of approximately
$4,030,000.*

In July 1996, the Company sold and issued an aggregate of 172,752 shares of
its Common Stock to Cleveland Ear, Nose, Throat and Facial Surgery Group, Inc.
in return for substantially all of the assets of Cleveland Ear, Nose, Throat and
Facial Surgery Group, Inc. As of the closing date, the shares of Common Stock
had a value of approximately $3,347,000.*

In July 1996, the Company sold and issued an aggregate of 164,085 shares of
its Common Stock to The Emergency Associates for Medicine, Inc. ("TEAM"), in
return for substantially all of the outstanding capital stock of TEAM. As of the
closing date, the shares of Common Stock had a value of approximately
$3,077,000.*

In August 1996, the Company sold and issued 51,417 shares of its Common
Stock to Bay Area Primary Care as a result of the Company's earn-out obligations
in accordance with the terms and conditions of the

II-2
<PAGE> 152

Company's purchase of substantially all of the assets of Bay Area Primary Care.
As of the closing date, the shares of Common Stock had a value of approximately
$1,016,000.*

In August 1996, the Company sold and issued an aggregate of 182,366 shares
of its Common Stock to Georgia Urology Management Associates, Inc. in return for
substantially all of the assets of Georgia Urology Management Associates, Inc.
As of the closing date, the shares of Common Stock had a value of approximately
$3,784,000.*

None of the transactions described above was underwritten and there were no
underwriting discounts or commissions. All of the above shares were taken for
investment by the entity or individuals to whom they were issued. The Company
believes that all securities issued in connection with the transactions
described above were exempt from registration under Section 4(2) of the
Securities Act as transactions not involving a public offering.
- ---------------

* Based on the closing price of Common Stock on the Nasdaq National Market
System or the New York Stock Exchange, as applicable, on the closing date of
such transaction, which is given solely for the purpose of calculating the
aggregate consideration for such transaction, pursuant to Item 701 of
Regulation S-K.

ITEM 16. FINANCIAL STATEMENTS AND EXHIBITS

(a) Exhibits:

<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- -------- ---------------------------------------------------------------------------------
<C> <S> <C>
(1) -- Form of Underwriting Agreement.
(2)-1 -- Plan and Agreement of Merger, dated as of August 14, 1995, among MedPartners,
Inc., Mullikin Medical Enterprises, L.P., MedPartners/Mullikin, Inc. and MPI
Merger Corporation, filed as Exhibit (2)-1 to the Company's Registration
Statement on Form S-4 (Registration No. 33-96978) is hereby incorporated
herein by reference.
(2)-2 -- Plan and Agreement of Merger and Reorganization, dated as December 11, 1995,
among MedPartners/Mullikin, Inc., PPS Merger Corporation and Pacific Physician
Services, Inc., filed as Exhibit (2)-1 to the Company's Registration Statement
on Form S-4 (Registration No. 333-00774) is hereby incorporated herein by
reference.
(2)-3 -- Amended and Restated Agreement to Purchase Assets, dated as of March 11, 1996, as
amended by Amendment No. 1 dated June 28, 1996, by and among
MedPartners/Mullikin, Inc., MedPartners, Inc. and New Management filed as
Exhibit (2)-2 to the Company's Registration Statement on Form S-4
(Registration No. 333-4348), is hereby incorporated herein by reference.
(2)-4 -- Plan and Agreement of Merger, dated as of May 13, 1996, among
MedPartners/Mullikin, Inc., PPM Merger Corporation and Caremark International
Inc., filed as Exhibit (2)-1 to the Company's Registration Statement on Form
S-4 (Registration No. 333-09767) is hereby incorporated herein by reference.
* (3)-1 -- MedPartners, Inc. Second Amended and Restated Certificate of Incorporation, as
amended.
* (3)-2 -- MedPartners, Inc. Second Amended and Restated By-laws.
(4) -- Form of Indenture dated as of , with respect to the Notes.
* (5) -- Opinion of Haskell Slaughter & Young L.L.C., as to the legality of the Notes of
MedPartners, Inc.
(10)-1 -- Consulting Agreement, dated as of August 7, 1996, by and among Caremark
International Inc., MedPartners, Inc. and C. A. Lance Piccolo filed as Exhibit
(10)-1 to the Company's Registration Statement on Form S-4 (Registration No.
333-09767) is hereby incorporated herein by reference.
</TABLE>

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

* To be filed by amendment.

+ Previously filed.

II-3
<PAGE> 153

<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- -------- ---------------------------------------------------------------------------------
<C> <S> <C>
(10)-2 -- Consulting Agreement, dated as of August 7, 1996, by and among Caremark
International Inc., MedPartners, Inc. and Thomas W. Hodson filed as Exhibit
(10)-2 to the Company's Registration Statement on Form S-4 (Registration No.
333-09767) is hereby incorporated herein by reference.
(10)-3 -- Consulting Agreement, dated as of November 29, 1995, by and between MedPartners
and Walter T. Mullikin, M.D. filed as Exhibit (10)-1 to the Company's
Registration Statement on Form S-1 (Registration No. 333-1130) is hereby
incorporated herein by reference.
(10)-4 -- Termination Agreement, dated as of November 29, 1995, by and between MedPartners/
Mullikin, Inc. and Walter T. Mullikin filed as Exhibit (10)-2 to the Company's
Registration Statement on Form S-1 (Registration No. 333-1130) is hereby
incorporated herein by reference.
(10)-5 -- Consulting Agreement, dated as of November 29, 1995, by and between MedPartners/
Mullikin, Inc. and John S. McDonald filed as Exhibit (10)-3 to the Company's
Registration Statement on Form S-1 (Registration No. 333-1130) is hereby
incorporated herein by reference.
(10)-6 -- Termination Agreement, dated as of November 29, 1995, by and between MedPartners/
Mullikin, Inc. and John S. McDonald filed as Exhibit (10)-4 to the Company's
Registration Statement on Form S-1 (Registration No. 333-1130) is hereby
incorporated herein by reference.
*(10)-7 -- Employment Agreement, dated July 24, 1996, by and between MedPartners, Inc. and
Larry R. House.
*(10)-8 -- Employment Agreement, dated July 24, 1996, by and between MedPartners, Inc. and
Mark L. Wagar.
*(10)-9 -- Employment Agreement, dated July 24, 1996, by and between MedPartners, Inc. and
Harold O. Knight, Jr.
*(10)-10 -- Employment Agreement, dated July 24, 1996, by and between MedPartners, Inc. and
Tracy P. Thrasher.
(10)-11 -- Registration Rights Agreement, dated as of November 29, 1995, among
MedPartners/Mullikin, Inc. and certain of its securityholders, filed as
Exhibit (4)-2 to the Company's Registration Statement on Form S-1
(Registration No. 333-1130) is hereby incorporated herein by reference.
(10)-12 -- MedPartners/Mullikin, Inc. 1993 Stock Option Plan, filed as Exhibit (4)-1 to the
Company's Registration Statement on Form S-8 (Registration No. 333-00234) is
hereby incorporated herein by reference.
(10)-13 -- MedPartners/Mullikin, Inc. 1995 Stock Option Plan, as amended, filed as Exhibit
(4)-2 to the Company's Registration Statement on Form S-4 (Registration No.
333-00774) is hereby incorporated herein by reference.
(10)-14 -- MedPartners, Inc., MedPartners Incentive Compensation Plan, filed as Exhibit
(4)-2 to the Company's Registration Statement on Form S-8 (Registration No.
333-11875) is hereby incorporated herein by reference.
(10)-15 -- Non-Competition and Severance Agreement by and between MedPartners, Inc. and
William R. Dexheimer, dated August 31, 1993, filed as Exhibit (10)-23 to
MedPartners' Registration Statement on Form S-1 (Registration Statement No.
33-86806) is hereby incorporated by reference.
*(10)-16 -- Credit Agreement, dated September 5, 1996, by and among MedPartners, Inc.,
NationsBank, National Association (South), as administrative agent for the
Lenders, The First National Bank of Chicago, as Documentation Agent for the
Lenders, and the Lenders thereto.
</TABLE>

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

* To be filed by amendment.

+ Previously filed.

II-4
<PAGE> 154

<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- -------- ---------------------------------------------------------------------------------
<C> <S> <C>
*(10)-17 -- Amendment No. 1 to Credit Agreement and Consent, dated September 5, 1996, by and
among MedPartners, Inc., NationsBank, National Association (South), as
administrative agent for the Lenders, The First National Bank of Chicago, as
Documentation Agent for the Lenders, and the Lenders thereto.
(12) -- Statement re: Computation of Ratios.
(21) -- Subsidiaries of MedPartners, Inc.
(23)-1 -- Consent of Ernst & Young LLP. See pages immediately following signature pages to
the Registration Statement.
(23)-2 -- Consent of Price Waterhouse LLP. See pages immediately following signature pages
to the Registration Statement.
(23)-3 -- Consent of Haskell Slaughter & Young L.L.C. (included in the opinion filed as
Exhibit (5)).
+(24) -- Powers of Attorney. See the signature page to original filing of this
Registration Statement on Form S-1.
</TABLE>

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

* To be filed by amendment.

+ Previously filed.

(b) Financial Statements Schedule:

None are applicable.

ITEM 17. UNDERTAKINGS.

The undersigned Registrant further undertakes that:

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

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

Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to Item 14 hereof, or otherwise, the Registrant has been
advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Securities Act and
is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer or controlling person of the Registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question of whether such indemnification by it is against
public policy as expressed in the Securities Act and will be governed by the
final adjudication of such issue.

II-5
<PAGE> 155

SIGNATURES

Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Amendment No. 1 to this Registration Statement to be signed
on its behalf by the undersigned, thereunto duly authorized, in the City of
Birmingham, State of Alabama on September 27, 1996.

MEDPARTNERS, INC.

By /s/ LARRY R. HOUSE
------------------------------------
Larry R. House
Chairman of the Board, President and
Chief Executive Officer

Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 1 to this Registration Statement has been signed below by the following
persons in the capacities and on the dates indicated.

<TABLE>
<CAPTION>
SIGNATURE CAPACITY DATE
- --------------------------------------------- ---------------------------- -------------------
<C> <S> <C>
/s/ LARRY R. HOUSE Chairman of the Board, September 27, 1996
- --------------------------------------------- President and Chief
Larry R. House Executive Officer and
Director

* Executive Vice President and September 27, 1996
- --------------------------------------------- Chief Financial Officer
Harold O. Knight, Jr. (Principal Financial and
Accounting Officer)

* Director September 27, 1996
- ---------------------------------------------
Richard M. Scrushy

* Director September 27, 1996
- ---------------------------------------------
Larry D. Striplin, Jr.

* Director September 27, 1996
- ---------------------------------------------
Charles W. Newhall III

* Director September 27, 1996
- ---------------------------------------------
Ted H. McCourtney, Jr.

* Director September 27, 1996
- ---------------------------------------------
Walter T. Mullikin, M.D.

* Director September 27, 1996
- ---------------------------------------------
John S. McDonald, J.D.

* Director September 27, 1996
- ---------------------------------------------
Richard J. Kramer

* Director September 27, 1996
- ---------------------------------------------
Rosalio J. Lopez, M.D.

* Director September 27, 1996
- ---------------------------------------------
C.A. Lance Piccolo
</TABLE>

II-6
<PAGE> 156

<TABLE>
<CAPTION>
SIGNATURE CAPACITY DATE
- --------------------------------------------- ---------------------------- -------------------
<C> <S> <C>
* Director September 27, 1996
- ---------------------------------------------
Thomas W. Hodson

* Director September 27, 1996
- ---------------------------------------------
Roger L. Headrick

* Director September 27, 1996
- ---------------------------------------------
Harry M. Jansen Kraemer, Jr.

* /s/ LARRY R. HOUSE
- ---------------------------------------------
Larry R. House
Attorney-in-Fact
</TABLE>

II-7
<PAGE> 157

EXHIBIT (23)-1

CONSENT OF INDEPENDENT AUDITORS

We consent to the reference to our firm under the captions "Experts" and to
the use of our reports on the entities and dated as listed below in the
Registration Statement (Form S-1, No. 333-12465) and the related Prospectus of
MedPartners, Inc. for the registration of its % Senior Notes due 2006:

<TABLE>
<S> <C>
MedPartners/Mullikin, Inc. ....................................... February 22, 1996
New Management.................................................... July 26, 1996
</TABLE>

ERNST & YOUNG LLP

Birmingham, Alabama

September 26, 1996

<PAGE> 158

EXHIBIT (23)-2

CONSENT OF INDEPENDENT ACCOUNTANTS

We hereby consent to the use in the Prospectus constituting part of this
Registration Statement on Form S-1 of MedPartners, Inc. of our report dated
January 24, 1996, except as to the third paragraph of Note 14, which is dated as
of March 19, 1996, relating to the financial statements of Caremark
International Inc., which appears in such Prospectus. We also consent to the
references to us under the headings "Experts" in such Prospectus.

PRICE WATERHOUSE LLP

Chicago, IL

September 20, 1996

<PAGE> 159

EXHIBIT INDEX

<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NO. DESCRIPTION PAGE
- -------- ----------------------------------------------------------------------- ------------
<C> <S> <C> <C>
(1) -- Form of Underwriting Agreement.
(2)-1 -- Plan and Agreement of Merger, dated as of August 14, 1995, among
MedPartners, Inc., Mullikin Medical Enterprises, L.P.,
MedPartners/Mullikin, Inc. and MPI Merger Corporation, filed as
Exhibit (2)-1 to the Company's Registration Statement on Form S-4
(Registration No. 33-96978) is hereby incorporated herein by
reference.
(2)-2 -- Plan and Agreement of Merger and Reorganization, dated as December 11,
1995, among MedPartners/Mullikin, Inc., PPS Merger Corporation and
Pacific Physician Services, Inc., filed as Exhibit (2)-1 to the
Company's Registration Statement on Form S-4 (Registration No.
333-00774) is hereby incorporated herein by reference.
(2)-3 -- Amended and Restated Agreement to Purchase Assets, dated as of March
11, 1996, as amended by Amendment No. 1 dated June 28, 1996, by and
among MedPartners/Mullikin, Inc., MedPartners, Inc. and New
Management filed as Exhibit (2)-2 to the Company's Registration
Statement on Form S-4 (Registration No. 333-4348), is hereby
incorporated herein by reference.
(2)-4 -- Plan and Agreement of Merger, dated as of May 13, 1996, among
MedPartners/Mullikin, Inc., PPM Merger Corporation and Caremark
International Inc., filed as Exhibit (2)-1 to the Company's
Registration Statement on Form S-4 (Registration No. 333-09767) is
hereby incorporated herein by reference.
*(3)-1 -- MedPartners, Inc. Second Amended and Restated Certificate of
Incorporation, as amended.
*(3)-2 -- MedPartners, Inc. Second Amended and Restated By-laws.
(4) -- Form of Indenture dated as of , with respect to the
Notes.
*(5) -- Opinion of Haskell Slaughter & Young L.L.C., as to the legality of the
Notes of MedPartners, Inc.
(10)-1 -- Consulting Agreement, dated as of August 7, 1996, by and among Caremark
International Inc., MedPartners, Inc. and C. A. Lance Piccolo filed
as Exhibit (10)-1 to the Company's Registration Statement on Form
S-4 (Registration No. 333-09767) is hereby incorporated herein by
reference.
(10)-2 -- Consulting Agreement, dated as of August 7, 1996, by and among Caremark
International Inc., MedPartners, Inc. and Thomas W. Hodson filed as
Exhibit (10)-2 to the Company's Registration Statement on Form S-4
(Registration No. 333-09767) is hereby incorporated herein by
reference.
(10)-3 -- Consulting Agreement, dated as of November 29, 1995, by and between
MedPartners and Walter T. Mullikin, M.D. filed as Exhibit (10)-1 to
the Company's Registration Statement on Form S-1 (Registration No.
333-1130) is hereby incorporated herein by reference.
(10)-4 -- Termination Agreement, dated as of November 29, 1995, by and between
MedPartners/Mullikin, Inc. and Walter T. Mullikin filed as Exhibit
(10)-2 to the Company's Registration Statement on Form S-1
(Registration No. 333-1130) is hereby incorporated herein by
reference.
(10)-5 -- Consulting Agreement, dated as of November 29, 1995, by and between
MedPartners/Mullikin, Inc. and John S. McDonald filed as Exhibit
(10)-3 to the Company's Registration Statement on Form S-1
(Registration No. 333-1130) is hereby incorporated herein by
reference.
</TABLE>

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

* To be filed by amendment.

+ Previously filed.

<PAGE> 160

<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NO. DESCRIPTION PAGE
- -------- ----------------------------------------------------------------------- ------------
<C> <S> <C> <C>
(10)-6 -- Termination Agreement, dated as of November 29, 1995, by and between
MedPartners/Mullikin, Inc. and John S. McDonald filed as Exhibit
(10)-4 to the Company's Registration Statement on Form S-1
(Registration No. 333-1130) is hereby incorporated herein by
reference.
*(10)-7 -- Employment Agreement, dated July 24, 1996, by and between MedPartners,
Inc. and Larry R. House.
*(10)-8 -- Employment Agreement, dated July 24, 1996, by and between MedPartners,
Inc. and Mark L. Wagar.
*(10)-9 -- Employment Agreement, dated July 24, 1996, by and between MedPartners,
Inc. and Harold O. Knight, Jr.
*(10)-10 -- Employment Agreement, dated July 24, 1996, by and between MedPartners,
Inc. and Tracy P. Thrasher.
(10)-11 -- Registration Rights Agreement, dated as of November 29, 1995, among
MedPartners/Mullikin, Inc. and certain of its securityholders, filed
as Exhibit (4)-2 to the Company's Registration Statement on Form S-1
(Registration No. 333-1130) is hereby incorporated herein by
reference.
(10)-12 -- MedPartners/Mullikin, Inc. 1993 Stock Option Plan, filed as Exhibit
(4)-1 to the Company's Registration Statement on Form S-8
(Registration No. 333-00234) is hereby incorporated herein by
reference.
(10)-13 -- MedPartners/Mullikin, Inc. 1995 Stock Option Plan, as amended, filed as
Exhibit (4)-2 to the Company's Registration Statement on Form S-4
(Registration No. 333-00774) is hereby incorporated herein by
reference.
(10)-14 -- MedPartners, Inc., MedPartners Incentive Compensation Plan, filed as
Exhibit (4)-2 to the Company's Registration Statement on Form S-8
(Registration No. 333-11875) is hereby incorporated herein by
reference.
(10)-15 -- Non-Competition and Severance Agreement by and between MedPartners,
Inc. and William R. Dexheimer, dated August 31, 1993, filed as
Exhibit (10)-23 to MedPartners' Registration Statement on Form S-1
(Registration Statement No. 33-86806) is hereby incorporated by
reference.
*(10)-16 -- Credit Agreement, dated September 5, 1996, by and among MedPartners,
Inc., NationsBank, National Association (South), as administrative
agent for the Lenders, The First National Bank of Chicago, as
Documentation Agent for the Lenders, and the Lenders thereto.
*(10)-17 -- Amendment No. 1 to Credit Agreement and Consent, dated September 5,
1996, by and among MedPartners, Inc., NationsBank, National
Association (South), as administrative agent for the Lenders, The
First National Bank of Chicago, as Documentation Agent for the
Lenders, and the Lenders thereto.
(12) -- Statement re: Computation of Ratios.
(21) -- Subsidiaries of MedPartners, Inc.
(23)-1 -- Consent of Ernst & Young LLP. See pages immediately following signature
pages to the Registration Statement.
(23)-2 -- Consent of Price Waterhouse LLP. See pages immediately following
signature pages to the Registration Statement.
(23)-3 -- Consent of Haskell Slaughter & Young L.L.C. (included in the opinion
filed as Exhibit (5)).
+(24) -- Powers of Attorney. See the signature page to original filing of this
Registration Statement on Form S-1.
</TABLE>

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

* To be filed by amendment.

+ Previously filed.

<PAGE> 1

$300,000,000

MEDPARTNERS, INC.

___% SENIOR NOTES DUE 2006

UNDERWRITING AGREEMENT

September __, 1996

SMITH BARNEY INC.
MERRILL LYNCH, PIERCE, FENNER & SMITH
INCORPORATED
J.P. MORGAN SECURITIES INC.
MORGAN STANLEY & CO. INCORPORATED
NATIONSBANC CAPITAL MARKETS, INC.

c/o SMITH BARNEY INC.
388 Greenwich Street
New York, New York 10013

Dear Sirs:

MedPartners, Inc., a Delaware corporation (the "Company"), proposes,
upon the terms and conditions set forth herein, to issue and sell $300,000,000
aggregate principal amount of its ___% Senior Notes due 2006 (the "Notes") to
Smith Barney Inc., Merrill Lynch, Pierce, Fenner & Smith Incorporated, J.P.
Morgan Securities Inc., Morgan Stanley & Co. Incorporated and NationsBanc
Capital Markets, Inc. (collectively, the "Underwriters"). The
<PAGE> 2

Notes will be issued pursuant to the provisions of an Indenture to be dated as
of September __, 1996 (the "Indenture") between the Company and ______________,
as Trustee (the "Trustee").

The Company wishes to confirm as follows its agreement with the
Underwriters, in connection with the several purchases by the Underwriters of
the Notes.

1. Registration Statement and Prospectus.

The Company has prepared and filed with the Securities and Exchange
Commission (the "Commission") in accordance with the provisions of the
Securities Act of 1933, as amended, and the rules and regulations of the
Commission thereunder (collectively, the "Act"), a registration statement on
Form S-1 (File No. 333-_______) under the Act (the "registration statement"),
including a prospectus subject to completion relating to the Notes. The term
"Registration Statement" as used in this Agreement means the registration
statement (including all financial schedules and exhibits), as amended at the
time it becomes effective, or, if the registration statement became effective
prior to the execution of this Agreement, as supplemented or amended prior to
the execution of this Agreement. If it is contemplated, at the time this
Agreement is executed, that a post-effective amendment to the registration
statement will be filed and must be declared effective before the offering of
the Notes may commence, the term "Registration Statement" as used in this
Agreement means the registration statement as amended by said post-effective
amendment. If an additional registration statement is prepared and filed with
the Commission in accordance with Rule 462(b) under the Act (an "Additional
Registration Statement"), the term "Registration Statement" as used in this
Agreement includes the Additional Registration Statement.

2
<PAGE> 3

The term "Prospectus" as used in this Agreement means the
prospectus in the form included in the Registration Statement, or, if the
prospectus included in the Registration Statement omits information in reliance
on Rule 430A under the Act and such information is included in a prospectus
filed with the Commission pursuant to Rule 424(b) under the Act, the term
"Prospectus" as used in this Agreement means the prospectus in the form
included in the Registration Statement as supplemented by the addition of the
Rule 430A information contained in the prospectus filed with the Commission
pursuant to Rule 424(b). The term "Prepricing Prospectus" as used in this
Agreement means the prospectus subject to completion in the form included in
the registration statement at the time of the initial filing of the
registration statement with the Commission, and as such prospectus shall have
been amended from time to time prior to the date of the Prospectus.

2. Agreements to Sell and Purchase. The Company hereby agrees,
subject to all the terms and conditions set forth herein, to issue and sell to
the Underwriters and, upon the basis of the representations, warranties and
agreements of the Company herein contained and subject to all the terms and
conditions set forth herein, each of the Underwriters agrees, severally and not
jointly, to purchase from the Company, at a purchase price of ____% of the
principal amount thereof, the principal amount of the Notes set forth opposite
the name of such Underwriter in Schedule I hereto (or such principal amount of
Notes increased as set forth in Section 10 hereof).

3. Terms of Public Offering. The Company has been advised by the
Underwriters that the Underwriters propose to make a public offering of their
respective portions of the Notes as soon after the Registration Statement and
this Agreement have become effective as in their judgment

3
<PAGE> 4

is advisable and initially to offer the Notes upon the terms set forth in the
Prospectus.

4. Delivery of the Notes and Payment Therefor. Delivery to the
Underwriters of and payment for the Notes shall be made at the office of
Skadden, Arps, Slate Meagher & Flom, 919 Third Avenue, New York, NY 10022, at
10:00 A.M., New York City time, on September __, 1996 (the "Closing Date").
The place of closing for the Notes and the Closing Date may be varied by
agreement between the Underwriters and the Company.

The Notes will be delivered to the Underwriters against payment of the
purchase price therefor specified in Section 2 hereof by wire transfer to an
account previously designated to Smith Barney Inc. by the Company of Federal
(same day) funds and registered in such names and in such denominations as the
Underwriters shall request prior to 1:00 P.M., New York City time, on the
second business day preceding the Closing Date. The Notes to be delivered to
the Underwriters shall be made available to the Underwriters in New York City
for inspection and packaging not later than 9:30 A.M., New York City time, on
the business day next preceding the Closing Date.

5. Agreements of the Company. The Company agrees with the
several Underwriters as follows:

(a) If, at the time this Agreement is executed and
delivered, it is necessary for the Registration Statement or a post-effective
amendment thereto or any Additional Registration Statement to be declared
effective before the offering of the Notes may commence, the Company will
endeavor to cause the Registration Statement or such post-effective amendment
to become effective as soon as possible and will advise the Underwriters
promptly and, if requested by the Underwriters, will confirm such advice in
writing, when

4
<PAGE> 5

the Registration Statement or such post-effective amendment has become
effective.

(b) The Company will advise the Underwriters promptly
and, if requested by the Underwriters, will confirm such advice in writing: (A)
of any request by the Commission for amendment of or a supplement to the
Registration Statement, any Prepricing Prospectus or the Prospectus or for
additional information; (B) of the issuance by the Commission of any stop order
suspending the effectiveness of the Registration Statement or of the suspension
of qualification of the Notes for offering or sale in any jurisdiction or the
initiation of any proceeding for such purpose; and (C) within the period of
time referred to in paragraph (f) below, of any change in the Company's
condition (financial or other), business, prospects, properties, net worth or
results of operations, or of the happening of any event, including the filing
of any information, documents or reports pursuant to the Securities Exchange
Act of 1934, as amended (the "Exchange Act"), that makes any statement of a
material fact made in the Registration Statement or the Prospectus (as then
amended or supplemented) untrue or which requires the making of any additions
to or changes in the Registration Statement or the Prospectus (as then amended
or supplemented) in order to state a material fact required by the Act or the
regulations thereunder to be stated therein or necessary in order to make the
statements therein not misleading, or of the necessity to amend or supplement
the Prospectus (as then amended or supplemented) to comply with the Act or any
other law. If at any time the Commission shall issue any stop order suspending
the effectiveness of the Registration Statement, the Company will make every
reasonable effort to obtain the withdrawal of such order at the earliest
possible time.

5
<PAGE> 6

registration statement as originally filed with the Commission and of each
amendment thereto, including financial statements and all schedules and
exhibits to the registration statement, (B) such number of conformed copies of
the registration statement as originally filed and of each amendment thereto,
but without exhibits, as the Underwriters may request and (C) such number of
copies of the Indenture as the Underwriters may request.

(d) The Company will not (A) file any amendment to the
Registration Statement or make any amendment or supplement to the Prospectus of
which the Underwriters shall not previously have been advised or to which the
Underwriters shall object after being so advised or (B) so long as, in the
opinion of counsel for the Underwriters, a Prospectus is required to be
delivered in connection with sales by any Underwriter or dealer, file any
information, documents or reports pursuant to the Exchange Act, without
delivering a copy of such information, documents or reports to the
Underwriters, prior to or concurrently with such filing.

(e) Prior to the execution and delivery of this
Agreement, the Company has delivered to the Underwriters, without charge, in
such quantities as the Underwriters have requested, copies of each form of the
Prepricing Prospectus. The Company consents to the use, in accordance with the
provisions of the Act and with the securities or Blue Sky laws of the
jurisdictions in which the Notes are offered by the several Underwriters and by
dealers, prior to the date of the Prospectus, of each Prepricing Prospectus so
furnished by the Company.

(f) As soon after the execution and delivery of this
Agreement as possible and thereafter from time to time for such period as in
the opinion of counsel for the Underwriters a prospectus is required by the Act
to be delivered in connection with sales by any Underwriter or dealer, the
Company will expeditiously deliver to each

6
<PAGE> 7

Underwriter and each dealer, without charge, as many copies of the Prospectus
(and of any amendment or supplement thereto) as the Underwriters may request.
The Company consents to the use of the Prospectus (and of any amendment or
supplement thereto) in accordance with the provisions of the Act and with the
securities or Blue Sky laws of the jurisdictions in which the Notes are offered
by the several Underwriters and by all dealers to whom the Notes may be sold,
both in connection with the offering and sale of the Notes and for such period
of time thereafter as the Prospectus is required by the Act to be delivered in
connection with sales by any Underwriter or dealer. If during such period of
time any event shall occur that in the judgment of the Company or in the
opinion of counsel for the Underwriters is required to be set forth in the
Prospectus (as then amended or supplemented) or should be set forth therein in
order to make the statements therein, in the light of the circumstances under
which they were made, not misleading, or if it is necessary to supplement or
amend the Prospectus to comply with the Act or any other law, the Company will
forthwith prepare and, subject to the provisions of paragraph (d) above, file
with the Commission an appropriate supplement or amendment thereto, and will
expeditiously furnish to the Underwriters and dealers a reasonable number of
copies thereof. In the event that the Company and the Underwriters agree that
the Prospectus should be amended or supplemented, the Company, if requested by
the Underwriters, will promptly issue a press release announcing or disclosing
the matters to be covered by the proposed amendment or supplement.

(g) The Company will cooperate with the Underwriters and
with counsel for the Underwriters in connection with the registration or
qualification of the Notes for offering and sale by the several Underwriters
and by dealers under the securities or Blue Sky laws of such jurisdictions as
the Underwriters may designate and

7
<PAGE> 8

will file such consents to service of process or other documents necessary or
appropriate in order to effect such registration or qualification; provided
that in no event shall the Company be obligated to qualify to do business in
any jurisdiction where it is not now otherwise required to be so qualified or
to take any action which would subject it to service of process in suits, other
than those arising out of the offering or sale of the Notes, in any
jurisdiction where it is not now so subject.

(h) The Company will make generally available to its
securityholders a consolidated earnings statement, which need not be audited,
covering a twelve-month period commencing after the effective date of the
Registration Statement and ending not later than 15 months thereafter, as soon
as practicable after the end of such period, which consolidated earnings
statement shall satisfy the provisions of Section 11(a) of the Act.

(i) So long as any of the Notes are outstanding, the
Company will furnish to the Underwriters (A) as soon as available, a copy of
each report of the Company mailed to stockholders or Noteholders or filed with
the Commission or the New York Stock Exchange and (B) from time to time such
other information concerning the Company as the Underwriters may request.

(j) If this Agreement shall terminate or shall be
terminated after execution pursuant to any provisions hereof (otherwise than
pursuant to the second paragraph of Section 10 hereof or by notice given by the
Underwriters terminating this Agreement pursuant to Section 10 or Section 11
hereof) or if this Agreement shall be terminated by the Underwriters because of
any failure or refusal on the part of the Company to comply with the terms or
fulfill any of the conditions of this Agreement, the Company agrees to
reimburse the Underwriters for all out-of-pocket expenses (including

8
<PAGE> 9

fees and expenses of counsel for the Underwriters) incurred by the Underwriters
in connection herewith.

(k) The Company will apply the net proceeds from the sale
of the Notes in accordance with the description set forth in "Use of Proceeds"
in the Prospectus.

(l) If Rule 430A of the Act is employed, the Company will
timely file the Prospectus pursuant to Rule 424(b) under the Act and will
advise the Underwriters of the time and manner of such filing.

(m) Except as stated in this Agreement and in the
Prepricing Prospectus and Prospectus, the Company has not taken, nor will it
take, directly or indirectly, any action designed to or that might reasonably
be expected to cause or result in stabilization or manipulation of the price of
the Notes to facilitate the sale or resale of the Notes.

6. Representations and Warranties of the Company. The Company
represents and warrants to each Underwriter that:

(a) The execution and delivery of, and the performance by
the Company of its obligations under, this Agreement have been duly and validly
authorized by the Company, and this Agreement has been duly executed and
delivered by the Company and constitutes the valid and legally binding
agreement of the Company, enforceable against the Company in accordance with
its terms, except as enforcement of rights to indemnity and contribution
hereunder may be limited by federal or state securities laws or principles of
public policy and subject to the qualification that the enforceability of the
Company's obligations hereunder may be limited by bankruptcy, insolvency,
reorganization, moratorium and other laws

9
<PAGE> 10

relating to or affecting creditors' rights generally, and by general equitable
principles.

(b) Each Prepricing Prospectus included as part of the
registration statement as originally filed or as part of any amendment or
supplement thereto, or filed pursuant to Rule 424 under the Act, complied when
so filed in all material respects with the provisions of the Act. The
Commission has not issued any order preventing or suspending the use of any
Prepricing Prospectus.

(c) The registration statement in the form in which it
became or becomes effective and also in such form as it may be when any
post-effective amendment thereto or any Additional Registration Statement shall
become effective, and the Prospectus and any supplement or amendment thereto
when filed with the Commission under Rule 424(b) under the Act, complied or
will comply in all material respects with the provisions of the Act and did not
or will not at any such times contain an untrue statement of a material fact or
omit to state a material fact required to be stated therein or necessary to
make the statements therein not misleading, except that this representation and
warranty does not apply to statements in or omissions from the registration
statement or the Prospectus made in reliance upon and in conformity with (A)
information relating to any Underwriter furnished to the Company in writing by
or on behalf of any Underwriter expressly for use therein or (B) the Trustee's
Statement of Eligibility and Qualification (Form T-1) under the Trust Indenture
Act of 1939, as amended (the "1939 Act").

(d) The Company has not distributed and, prior to the
later to occur of (A) the Closing Date and (B) completion of the distribution
of the Notes, will not distribute any offering material in connection with the
offering and sale of the Notes other than the Registration Statement, the
Prepricing Prospectus, the

10
<PAGE> 11

Prospectus or other materials, if any, permitted by the Act.

(e) The Company is a corporation duly organized and
validly existing in good standing under the laws of the State of Delaware with
full corporate power and authority to own, lease and operate its properties and
to conduct its business as presently conducted and as disclosed in the
Registration Statement and the Prospectus, and is duly registered and qualified
to conduct its business and is in good standing in each jurisdiction or place
where the nature of its properties or the conduct of its business requires such
registration or qualification, except where the failure so to register or
qualify does not and will not have a material adverse effect on the condition
(financial or other), business, prospects, properties, net worth or results of
operations of the Company and the Subsidiaries (as hereinafter defined) taken
as a whole (a "Material Adverse Effect").

(f) All the Company's subsidiaries (collectively, the
"Subsidiaries") are listed in Exhibit 21 to the Registration Statement. Each
Subsidiary that is a corporation is duly organized, validly existing and in
good standing in the jurisdiction of its incorporation, and each Subsidiary
that is a partnership, limited liability company, association or business
organization is legally formed and validly existing under the laws of the
jurisdiction of its organization. Each Subsidiary has full corporate or
organizational power and authority to own, lease and operate its properties and
to conduct its business as presently conducted. Each Subsidiary is duly
registered and qualified to conduct its business (and, if a corporation, is in
good standing) in each jurisdiction or place where the nature of its properties
or the conduct of its business requires such registration or qualification,
except where the failure so to register or qualify does not and will not have a
Material Adverse Effect; all the outstanding shares of

11
<PAGE> 12

capital stock of each Subsidiary that is a corporation have been duly
authorized and validly issued, are fully paid and nonassessable, and all
ownership interests in each Subsidiary that is not a corporation have been
validly created pursuant to the partnership or other agreements or
organizational documents of each such Subsidiary, and, except as disclosed in
the Prospectus, the shares or other interests owned by the Company are owned by
the Company directly, or indirectly through one of the other Subsidiaries, free
and clear of any lien, adverse claim, security interest, equity or other
encumbrance.

(g) The Indenture has been duly and validly authorized
and, upon its execution and delivery by the Company and assuming due execution
and delivery by the Trustee, will be a valid and binding agreement of the
Company, enforceable in accordance with its terms, except to the extent that
enforcement may be limited by bankruptcy, insolvency, reorganization,
moratorium and other laws relating to or affecting creditors' rights generally,
and by general equitable principles; and the Indenture has been duly qualified
under the 1939 Act and conforms to the description thereof in the Registration
Statement and the Prospectus.

(h) The Notes have been duly authorized and, when
executed by the Company and authenticated by the Trustee in accordance with the
Indenture and delivered to the Underwriters against payment therefor in
accordance with the terms hereof, will have been validly issued and delivered,
and will constitute valid and binding obligations of the Company entitled to
the benefits of the Indenture and enforceable in accordance with their terms,
except to the extent that enforcement may be limited by bankruptcy, insolvency,
reorganization, moratorium and other laws relating to or affecting creditors'
rights generally, and by general equitable

12
<PAGE> 13

principles; and the Notes will conform to the description thereof in the
Registration Statement and the Prospectus.

(i) The authorized and outstanding capital stock of the
Company is as set forth under the caption "Capitalization" in the Prospectus
and all the outstanding shares of Common Stock, par value $.001 per share, of
the Company (A) have been duly authorized and validly issued, (B) are fully
paid and nonassessable, (C) are free of any preemptive or similar rights and
(D) have been issued and sold in compliance with all applicable federal and
state securities laws.

(j) Except as disclosed in the Prospectus, there are no
outstanding options, warrants or other rights calling for the issuance of, nor
any commitment, plan or arrangement to issue, any shares of capital stock of
the Company or any security convertible into or exchangeable or exercisable for
capital stock of the Company.

(k) No holder of any security of the Company or any other
person has the right, contractual or otherwise, which right has not been fully
complied with or waived in writing by the holder thereof with evidence of such
waiver heretofore delivered to the Underwriters, (A) to cause the Company to
sell or otherwise issue to them, or to permit them to underwrite the sale of,
the Notes, (B) to have any securities of the Company included in the
registration statement or (C) as a result of the filing of the registration
statement or consummation of the transactions contemplated by this Agreement,
to require registration under the Act of any securities of the Company.

(l) There are no legal or governmental proceedings
pending or, to the knowledge of the Company, threatened, against the Company or
any of the Subsidiaries, or to which the Company or any of the

13
<PAGE> 14

Subsidiaries, or to which any of their respective properties is subject, that
are required to be disclosed in the Registration Statement or the Prospectus
but are not disclosed as required, and there are no agreements, indentures,
leases or other instruments that are required to be disclosed in the
Registration Statement or the Prospectus or to be filed as an exhibit to the
Registration Statement that are not disclosed or filed as required by the Act.

(m) Neither the Company nor any of the Subsidiaries is
(A) in violation of its respective certificate or articles of incorporation or
by-laws, or other organizational documents; (B) in violation of any statute,
law, regulation, ordinance, administrative or governmental rule or regulation
applicable to the Company or any of the Subsidiaries or of any order, ruling,
judgment, injunction, order or decree of any court or governmental agency or
body having jurisdiction over the Company or any of the Subsidiaries or any of
their respective properties; or (C) in default in any material respect in the
performance of any obligation, agreement or condition contained in any bond,
debenture, note or any other evidence of indebtedness or in any material
agreement, indenture, lease or other instrument to which the Company or any of
the Subsidiaries is a party or by which any of them or any of their respective
properties may be bound, and no condition or state of facts exists, which with
the passage of time or the giving of notice or both, would constitute such a
default, except in the case of (B) and (C) above, for such violations or
defaults which, individually or in the aggregate, would not have a Material
Adverse Effect.

(n) None of the issuance, offer, sale or delivery of the
Notes, the execution, delivery or performance of this Agreement and the
Indenture by the Company, the compliance by the Company with the provisions
hereof and thereof or the consummation by the

14
<PAGE> 15

Company of the transactions contemplated hereby and thereby (A) requires any
consent, approval, authorization or other order of, or registration or filing
with, any court, regulatory body, administrative agency or other governmental
body, agency or official (except such as may be required for the registration
of the Notes under the Act, the qualification of the Indenture under the 1939
Act and compliance with the securities or Blue Sky laws of various
jurisdictions, all of which have been or will be effected in accordance with
this Agreement); (B) conflicts or will conflict with or constitutes or will
constitute a breach or violation of, or a default under, the certificate or
articles of incorporation or by-laws, or other organizational documents, of the
Company or any of the Subsidiaries; (C) conflicts or will conflict with or
constitutes or will constitute a breach or violation of, or a default under,
any agreement, indenture, lease or other instrument to which the Company or any
of the Subsidiaries is a party or by which any of them or any of their
respective properties may be bound; (D) violates or will violate any statute,
law, regulation, ordinance, administrative or governmental rule or regulation
applicable to the Company or any of the Subsidiaries or of any order, ruling,
judgment, injunction, order or decree of any court or governmental agency or
body having jurisdiction over the Company or any of the Subsidiaries or any of
their respective properties; or (E) will result in the creation or imposition
of any lien, charge or encumbrance upon any property or assets of the Company
or any of the Subsidiaries pursuant to the terms of any agreement or instrument
to which any of them is a party or by which any of them may be bound or to
which any of the property or assets of any of them is subject.

(o) The conduct of the business of the Company and each
of the Subsidiaries as presently conducted and as disclosed in the Prospectus
complies with all applicable laws, ordinances and administrative or
governmental rules or regulations applicable to the

15
<PAGE> 16

Company and each Subsidiary and with all orders, rulings, judgments or decrees
of any courts or governmental agencies or bodies having jurisdiction over the
Company and each Subsidiary. To the Company's knowledge, each affiliated
physician group, affiliated medical group and independent practice association
(as such terms are used in the Prospectus and hereinafter referred to
collectively, as the "Affiliated Groups") is operating in material compliance
with all applicable health care laws, rules and regulations, including, without
limitation, those relating to reimbursement by government agencies and
fraudulent or wrongful billings, and no physician in an Affiliated Group is
practicing in conflict with or violation of any such laws, rules or
regulations.

(p) Except as disclosed in the Prospectus, to the
Company's knowledge, none of the Company, any of the Subsidiaries, any employee
or agent of the Company or any Subsidiary or any physician in an Affiliated
Group has made any payment of funds or received or retained any funds in
violation of any law, rule or regulation, including laws and regulations
prohibiting fee-splitting or fees for the referral of patients.

(q) Except as disclosed in the Prospectus, there are no
material Medicare, Medicaid, or any other managed care recoupment or
recoupments of any third-party payor being sought, threatened, requested or
claimed against the Company, any of the Subsidiaries or to the Company's
knowledge, any Affiliated Group or any physician in any Affiliated Group.

(r) No labor dispute with the employees of the Company or
any of the Subsidiaries exists or, to the knowledge of the Company, is
imminent.

(s) All employee benefit plans (as defined in Section
3(3) of the Employee Retirement Income Security Act of 1974, as amended
("ERISA")) established,

16
<PAGE> 17

maintained or contributed to by the Company or any of the Subsidiaries (the
"Plans") comply in all material respects with requirements of ERISA and the
Internal Revenue Code of 1986, as amended (the "Code"). With respect to the
Plans, neither the Company nor any of the Subsidiaries has any liability,
contingent or otherwise, under ERISA or the Code, nor does the Company expect
that any such liability will be incurred, that could, singly or in the
aggregate, have a Material Adverse Effect and no employee pension benefit plan
(as defined in Section 3(2) of ERISA) has incurred or assumed an "accumulated
funding deficiency" within the meaning of Section 302 of ERISA or has incurred
or assumed any material liability (other than for the payment of premiums) to
the Pension Benefit Guaranty Corporation.

(t) The Company and each of the Subsidiaries has good and
marketable title to all property (real and personal) disclosed in the
Prospectus as being owned by it, free and clear of all liens, claims, security
interests or other encumbrances, except such as are disclosed in the
Registration Statement and the Prospectus or in a document filed as an exhibit
to the Registration Statement and all the property disclosed in the Prospectus
as being held under lease by the Company and each of the Subsidiaries is held
by it under valid, subsisting and enforceable leases.

(u) The Company and each of the Subsidiaries, and to the
Company's knowledge, each Affiliated Group has such consents, approvals,
permits, licenses, franchises and authorizations of governmental or regulatory
authorities ("permits") as are necessary to own its respective properties and
to conduct its business as presently conducted, subject to such qualifications
as may be set forth in the Prospectus; the Company and each of the
Subsidiaries, and to the Company's knowledge, each Affiliated Group has
fulfilled and performed all of its material obligations with respect to such
permits and no

17
<PAGE> 18

event has occurred which allows, or after notice or lapse of time would allow,
revocation or termination thereof or result in any other material impairment of
the rights of the holder of any such permit, subject in each case to such
qualification as may be set forth in the Prospectus; and, except as disclosed
in the Prospectus, none of such permits contains any restriction that is
materially burdensome to the Company, any of the Subsidiaries or any Affiliated
Group.

(v) The Company and the Subsidiaries own or possess all
patents, trademarks, trademark registrations, service marks, service mark
registrations, trade names, copyrights, licenses, inventions, trade secrets and
rights disclosed in the Prospectus as being owned by them or any of them or
necessary for the conduct of their respective businesses, and the Company is
not aware of any claim to the contrary or any challenge by any other person to
the rights of the Company and the Subsidiaries with respect to the foregoing.

(w) The Company and each of the Subsidiaries, and to the
Company's knowledge, each of the Affiliated Groups is insured by insurers of
recognized financial responsibility against such losses and risks and in such
amounts as are customary in the businesses or professions in which they are
engaged; all policies of insurance insuring the Company and/or the Subsidiaries
or their respective businesses, assets, employees, officers and directors and
to the Company's knowledge, the Affiliated Groups are in full force and effect;
the Company and each of the Subsidiaries, and to the Company's knowledge, each
of the Affiliated Groups are in compliance with the terms of such policies and
instruments in all material respects; and there are no claims by the Company or
any of the Subsidiaries, or to the Company's knowledge, any of the Affiliated
Groups under any such policy or instrument as to which any insurance company is
denying

18
<PAGE> 19

liability or defending under a reservation of rights clause.

(x) Except as disclosed in the Registration Statement and
the Prospectus (or any amendment or supplement thereto), subsequent to the
respective dates as of which such information is given in the Registration
Statement and the Prospectus (or any amendment or supplement thereto), neither
the Company nor any of the Subsidiaries has incurred any liability or
obligation, direct or contingent, or entered into any transaction, not in the
ordinary course of business, that is material to the Company and the
Subsidiaries taken as a whole, and there has not been any change in the capital
stock, or material increase in the short-term debt or long-term debt, of the
Company or any of the Subsidiaries, or any material adverse change, or any
development having or which may reasonably be expected to have a Material
Adverse Effect.

(y) The Company maintains a system of internal accounting
controls sufficient to provide reasonable assurances that (A) transactions are
executed in accordance with management's general or specific authorization; (B)
transactions are recorded as necessary to permit preparation of financial
statements in conformity with generally accepted accounting principles and to
maintain accountability for assets; (C) access to assets is permitted only in
accordance with management's general or specific authorization; and (D) the
recorded accountability for assets is compared with existing assets at
reasonable intervals and appropriate action is taken with respect to any
differences.

(z) The Company and each of the Subsidiaries have duly
filed with appropriate governmental authorities all tax returns required to be
filed, which returns are complete and correct, and neither the Company nor any
Subsidiary is in default in the payment of any taxes

19
<PAGE> 20

which were payable pursuant to said returns or any assessments with respect
thereto and there is no tax deficiency that has been asserted against the
Company or any Subsidiary that would, if adversely determined, have a Material
Adverse Effect.

(aa) The financial statements, together with related
schedules and notes included in the Registration Statement and the Prospectus
(and any amendment or supplement thereto), present fairly the consolidated
financial position, results of operations and changes in financial position of
the Company and the Subsidiaries on the basis stated in the Registration
Statement at the respective dates or for the respective periods to which they
apply; such statements and related schedules and notes have been prepared in
accordance with generally accepted accounting principles consistently applied
throughout the periods involved, except as disclosed therein; the pro forma
financial statements and other pro forma financial information included in the
Registration Statement and the Prospectus (and any amendment or supplement
thereto) present fairly the information shown therein, have been prepared in
accordance with the Commission's rules and guidelines with respect to pro forma
financial statements and have been properly compiled on the pro forma bases
described therein and the assumptions used in the preparation thereof are
reasonable and the adjustments used therein are appropriate to give effect to
the transactions or circumstances referred to therein; and the other financial
and statistical information and data included in the Registration Statement and
the Prospectus (and any amendment or supplement thereto) are accurately
presented and prepared on a basis consistent with such financial statements and
the books and records of the Company and the Subsidiaries.

(bb) The financial statements together with related
schedules and notes included in the Registration

20
<PAGE> 21

Statement and the Prospectus (and any amendment or supplement thereto), present
fairly the consolidated financial position, results of operations and changes
in financial position of Caremark International Inc., a Delaware corporation
("Caremark"), and New Management, a California general partnership ("New
Management"), on the basis stated in the Registration Statement at the
respective dates or for the respective periods to which they apply; such
statements and related schedules and notes have been prepared in accordance
with generally accepted accounting principles consistently applied throughout
the periods involved, except as disclosed therein.

(cc) The accountants Ernst & Young LLP who have certified
the consolidated financial statements of the Company included in the
Registration Statement and the Prospectus (or any amendment or supplement
thereto) are independent public accountants as required by the Act.

(dd) The accountants Price Waterhouse LLP who have
certified the consolidated financial statements of Caremark and New Management
included in the Registration Statement and the Prospectus (or any amendment or
supplement thereto) are independent public accountants as required by the Act.

(ee) There has been no storage, disposal, generation,
manufacture, refinement, transportation, handling or treatment of medical
wastes or hazardous substances by the Company or any of the Subsidiaries (or,
to the knowledge of the Company, any of its predecessors in interest) at, upon
or from any of the property now or previously owned or leased by the Company or
any of the Subsidiaries, in violation of any applicable law, ordinance, rule,
regulation, order, judgment, decree or permit or which would require remedial
action under any applicable law, ordinance, rule, regulation, order,
judgment, decree or permit, except for any violation or

21
<PAGE> 22

remedial action which would not have, or could not be reasonably likely to
have, singularly or in the aggregate with all such violations and remedial
actions, a Material Adverse Effect; there has been no material spill,
discharge, leak, emission, injection, escape, dumping or release of any kind
onto such property or of any medical wastes or hazardous substances due to or
caused by the Company or any of the Subsidiaries or with respect to which the
Company or any of the Subsidiaries had knowledge, except for any such spill,
discharge, leak, emission, injection, escapes, dumpings or releases which would
not have or would not be reasonably likely to have, singularly or in the
aggregate with all such spills, discharges, leaks, emissions, injections,
escapes, dumpings or releases, a Material Adverse Effect; and the terms
"hazardous substances" and "medical wastes" shall have the meanings specified
in any applicable local, state, federal and foreign laws or regulations with
respect to environmental protection.

(ff) The Company is not now, and after sale of the Notes
to be sold by it hereunder and application of the net proceeds from such sale
as disclosed in the Prospectus under the caption "Use of Proceeds" will not be,
an "investment company" within the meaning of the Investment Company Act of
1940, as amended (the "1940 Act").

(gg) The Company has complied with all provisions of
Florida Statutes, Section 517.075, relating to issuers doing business with
Cuba.

(hh) The Company has filed all reports and other documents
required to be filed by it under the Exchange Act and each such report or
document when so filed complied in all material respects with the provisions of
the Exchange Act and the rules and regulations of the Commission thereunder.

22
<PAGE> 23

(ii) Neither the Company nor any of the Subsidiaries (A)
employs any of the physicians in any Affiliated Group, (B) exercises any
influence or control over the practice of medicine by such physicians, or (C)
represents to the public that it offers medical services; and the Company and
each of the Subsidiaries contracts with the physicians or Affiliated Groups as
independent contractors to provide medical services and is not engaged in the
practice of medicine.

(jj) Each of the practice management agreements, currently
in effect, copies of which have been delivered to the Underwriters, has been
duly authorized, executed and delivered by the Company and each Subsidiary
which is a party to said agreement and is a valid, legal and binding agreement
of the Company and each such Subsidiary enforceable against the Company and
such Subsidiary in accordance with its terms; and the business of the Company
and the Subsidiaries as presently conducted, and the terms of each of the
Practice Management Agreements and the performance thereof by the Company and
the Subsidiaries which are party thereto, do not violate any statute,
administrative or governmental rule or regulation applicable to the Company or
such Subsidiaries or laws prohibiting the corporate practice of medicine,
fee-splitting or fees for the referral of patients, or any orders, rulings,
judgments or decrees of any courts or governmental agencies or bodies having
jurisdiction over the Company and/or the Subsidiaries.

7. Indemnification and Contribution.

(a) The Company agrees to indemnify and hold harmless
each Underwriter and each Underwriter and each person, if any, who controls any
Underwriter within the meaning of Section 15 of the Act or Section 20(a) of the
Exchange Act, and the agents, employees, officers and directors of each
Underwriter and each such controlling person, from and against any and all
losses, claims,

23
<PAGE> 24

damages, liabilities and expenses (including reasonable costs of investigation)
arising out of or based upon any untrue statement or alleged untrue statement
of a material fact contained in any Prepricing Prospectus or in the
Registration Statement or the Prospectus or in any amendment or supplement
thereto, or arising out of or based upon any omission or alleged omission to
state therein a material fact required to be stated therein or necessary to
make the statements therein not misleading, except insofar as such losses,
claims, damages, liabilities or expenses arise out of or are based upon any
untrue statement or omission or alleged untrue statement or omission which has
been made therein or omitted therefrom in reliance upon and in conformity with
the information relating to such Underwriter furnished in writing to the
Company by or on behalf of any Underwriter through the Underwriters expressly
for use in connection therewith; provided, however, that the indemnification
contained in this paragraph (a) with respect to any Prepricing Prospectus shall
not inure to the benefit of any Underwriter (or to the benefit of any person
controlling such Underwriter or any agent, employee, officer or director of
such Underwriter or such controlling person) on account of any such loss,
claim, damage, liability or expense arising from the sale of the Notes by such
Underwriter to any person if a copy of the Prospectus shall not have been
delivered or sent to such person within the time required by the Act and the
regulations thereunder, and the untrue statement or alleged untrue statement or
omission or alleged omission of a material fact contained in such Prepricing
Prospectus was corrected in the Prospectus, provided that the Company has
delivered the Prospectus to the several Underwriters in requisite quantity on a
timely basis to permit such delivery or sending. The foregoing indemnity
agreement shall be in addition to any liability which the Company may otherwise
have.

24
<PAGE> 25

(b) If any action, suit or proceeding shall be brought
against any person (the "indemnified party") entitled to indemnification
pursuant to the preceding paragraph in respect of which indemnity may be sought
against the Company pursuant to the provisions of the preceding paragraph, such
indemnified party shall promptly notify the party or parties against whom
indemnification is being sought (the "indemnifying parties"), and such
indemnifying parties shall assume the defense thereof, including the employment
of counsel and payment of all fees and expenses. Such indemnified party shall
have the right to employ separate counsel in any such action, suit or
proceeding and to participate in the defense thereof, but the fees and expenses
of such counsel shall be at the expense of such indemnified party unless (A)
the indemnifying parties have agreed in writing to pay such fees and expenses,
(B) the indemnifying parties have failed to assume the defense and employ
counsel, or (C) the named parties to any such action, suit or proceeding
(including any impleaded parties) include both such indemnified party and the
indemnifying parties and such indemnified party shall have been advised by its
counsel that representation of such indemnified party and any indemnifying
party by the same counsel would be inappropriate under applicable standards of
professional conduct (whether or not such representation by the same counsel
has been proposed) due to actual or potential differing interests between them
(in which case the indemnifying party shall not have the right to assume the
defense of such action, suit or proceeding on behalf of such indemnified
party). It is understood, however, that the indemnifying parties shall, in
connection with any one such action, suit or proceeding or separate but
substantially similar or related actions, suits or proceedings in the same
jurisdiction arising out of the same general allegations or circumstances, be
liable for the reasonable fees and expenses of only one separate firm of
attorneys (in addition to any local counsel) at any time for all such

25
<PAGE> 26

indemnified parties not having actual or potential differing interests with the
Underwriters or among themselves, which firm shall be designated in writing by
Smith Barney Inc., and that all such fees and expenses shall be reimbursed as
they are incurred. The indemnifying parties shall not be liable for any
settlement of any such action, suit or proceeding effected without their
written consent, but if settled with such written consent, or if there be a
final judgment for the plaintiff in any such action, suit or proceeding, the
indemnifying parties agree to indemnify and hold harmless any indemnified
party, to the extent provided in the preceding paragraph, from and against any
loss, claim, damage, liability or expense by reason of such settlement or
judgment.

(c) Each Underwriter agrees, severally and not jointly,
to indemnify and hold harmless the Company, its directors, its officers who
sign the Registration Statement, and any person who controls the Company within
the meaning of Section 15 of the Act or Section 20(a) of the Exchange Act, and
the agents and employees of the Company and each such controlling person, to
the same extent as the foregoing indemnity from the Company to each
Underwriter, but only with respect to information relating to such Underwriter
furnished in writing by or on behalf of such Underwriter through the
Underwriters expressly for use in the Registration Statement, the Prospectus or
any Prepricing Prospectus, or any amendment or supplement thereto. If any
action, suit or proceeding shall be brought against the Company, any of its
directors, any such officer, or any such controlling person or any agent or
employee of the Company or any such controlling person, based on the Prospectus
or any Prepricing Prospectus, or any amendment or supplement thereto, and in
respect of which indemnity may be sought against any Underwriter pursuant to
this paragraph (c), such Underwriter shall have the rights and duties given to
the Company by paragraph (b) above (except that if the

26
<PAGE> 27

Company shall have assumed the defense thereof such Underwriter shall not be
required to do so, but may employ separate counsel therein and participate in
the defense thereof, but the fees and expenses of such counsel shall be at such
Underwriter's expense), and the Company, any of its directors, any such
officer, and any such controlling person, and any agents and employees of the
Company and each such controlling person, shall have the rights and duties
given to the Underwriters by paragraph (b) above.

(d) If the indemnification provided for in this Section 7
is unavailable to a party entitled to indemnification under paragraphs (a) or
(c) hereof in respect of any losses, claims, damages, liabilities or expenses
referred to therein, then an indemnifying party, in lieu of indemnifying such
indemnified party, shall contribute to the amount paid or payable by such
indemnified party as a result of such losses, claims, damages, liabilities or
expenses (A) in such proportion as is appropriate to reflect the relative
benefits received by the Company on the one hand and the Underwriters on the
other hand from the offering of the Notes, or (B) if the allocation provided by
clause (A) above is not permitted by applicable law, in such proportion as is
appropriate to reflect not only the relative benefits referred to in clause (A)
above but also the relative fault of the Company on the one hand and the
Underwriters on the other hand in connection with the statements or omissions
that resulted in such losses, claims, damages, liabilities or expenses, as well
as any other relevant equitable considerations. The relative benefits received
by the Company on the one hand and the Underwriters on the other hand shall be
deemed to be in the same proportion as the total net proceeds from the offering
(before deducting expenses) received by the Company bear to the total
underwriting discounts and commissions received by the Underwriters, in each
case as set forth in the table on the cover page of the

27
<PAGE> 28

Prospectus. The relative fault of the Company on the one hand and the
Underwriters on the other hand shall be determined by reference to, among other
things, whether the untrue or alleged untrue statement of a material fact or
the omission or alleged omission to state a material fact relates to
information supplied by the Company on the one hand or by the Underwriters on
the other hand and the parties' relative intent, knowledge, access to
information and opportunity to correct or prevent such statement or omission.

(e) The Company and the Underwriters agree that it would
not be just and equitable if contribution pursuant to this Section 7 were
determined by a pro rata allocation (even if the Underwriters were treated as
one entity for such purpose) or by any other method of allocation that does not
take account of the equitable considerations referred to in paragraph (d)
above. The amount paid or payable by an indemnified party as a result of the
losses, claims, damages, liabilities and expenses referred to in paragraph (d)
above shall be deemed to include, subject to the limitations set forth above,
any legal or other expenses reasonably incurred by such indemnified party in
connection with investigating any claim or defending any such action, suit or
proceeding. Notwithstanding the provisions of this Section 7, no Underwriter
shall be required to contribute any amount in excess of the amount by which the
total principal amount of the Notes underwritten by it and distributed to the
public exceeds the amount of any damages which such Underwriter has otherwise
been required to pay by reason of such untrue or alleged untrue statement or
omission or alleged omission. No person guilty of fraudulent misrepresentation
(within the meaning of Section 11(f) of the Act) shall be entitled to
contribution from any person who was not guilty of such fraudulent
misrepresentation. The Underwriters' obligations to contribute pursuant to
this Section 7 are several in proportion to the respective principal amounts

28
<PAGE> 29

of Notes set forth opposite their names in Schedule I hereto (or such principal
amounts of Notes increased as set forth in Section 10 hereof) and not joint.

(f) No indemnifying party shall, without the prior
written consent of the indemnified party, effect any settlement of any pending
or threatened action, suit or proceeding in respect of which any indemnified
party is or could have been a party and indemnity could have been sought
hereunder by such indemnified party, unless such settlement includes an
unconditional release of such indemnified party from all liability on claims
that are the subject matter of such action, suit or proceeding.

(g) Any losses, claims, damages, liabilities or expenses
for which an indemnified party is entitled to indemnification or contribution
under this Section 7 shall be paid by the indemnifying party to the indemnified
party as such losses, claims, damages, liabilities or expenses are incurred.
The indemnity and contribution agreements contained in this Section 7 and the
representations and warranties of the Company set forth in this Agreement shall
remain operative and in full force and effect, regardless of (A) any
investigation made by or on behalf of any indemnified party, the Company, its
directors and officers, and any person who controls the Company, and the agents
and employees of the Company and each such controlling person, (B) acceptance
of any Notes and payment therefor hereunder, and (C) any termination of this
Agreement. A successor to any indemnified party, or to the Company, its
directors and officers, and any person who controls the Company, and the agents
and employees of the Company and each such controlling person shall be entitled
to the benefits of the indemnity, contribution and reimbursement agreements
contained in this Section 7.

29
<PAGE> 30
8. Conditions of Underwriters' Obligations. The several
obligations of the Underwriters to purchase the Notes hereunder are subject to
the following conditions:

(a) If, at the time this Agreement is executed and
delivered, it is necessary for the registration statement or a post-effective
amendment thereto or an Additional Registration Statement to be declared
effective before the offering of the Notes may commence, the registration
statement or such post-effective amendment or Additional Registration Statement
shall have become effective not later than 5:30 P.M., New York City time, on
the date hereof, or at such later date and time as shall be consented to in
writing by the Underwriters, and all filings, if any, required by Rules 424 and
430A under the Act shall have been timely made; no stop order suspending the
effectiveness of the registration statement shall have been issued and no
proceeding for that purpose shall have been instituted or, to the knowledge of
the Company or any Underwriter, threatened by the Commission, and any request
of the Commission for additional information (to be included in the
registration statement or the prospectus or otherwise) shall have been complied
with to the Underwriters satisfaction.

(b) Subsequent to the effective date of this Agreement,
there shall not have occurred (A) any change, or any development involving a
prospective change, in or affecting the condition (financial or other),
business, prospects, properties, net worth or results of operations of the
Company or the Subsidiaries not contemplated by the Prospectus, which in the
Underwriters' opinion would materially adversely affect the market for the
Notes, or (B) any event or development relating to or involving the Company or
any officer or director of the Company which makes any statement made in the
Prospectus untrue or which, in the opinion of the Company and its counsel or
the Underwriters and their counsel, requires the making

30
<PAGE> 31

of any addition to or change in the Prospectus in order to state a material
fact required by the Act or any other law to be stated therein or necessary in
order to make the statements therein not misleading, if amending or
supplementing the Prospectus to reflect such event or development would, in the
opinion of the Underwriters materially adversely affect the market for the
Notes.

(c) The Underwriters shall have received on the Closing
Date an opinion of Haskell Slaughter & Young, LLC, special counsel for the
Company, dated the Closing Date and addressed to the Underwriters to the effect
that:

(i) The Company is a corporation duly
incorporated and validly existing in good standing under the laws of the State
of Delaware with full corporate power and authority to own, lease and operate
its properties and to conduct its business as presently conducted and as
disclosed in the Registration Statement and the Prospectus, and is duly
registered and qualified to conduct its business and is in good standing in
each jurisdiction or place where the nature of its properties or the conduct of
its business requires such registration or qualification, except where the
failure so to register or qualify does not and will not have a Material Adverse
Effect;

(ii) To the best knowledge of such counsel,
after reasonable inquiry, the Company has no subsidiaries other than the
Subsidiaries. Each Significant Subsidiary (as defined in Schedule II hereto)
is duly organized, validly existing and in good standing in the jurisdiction of
its incorporation, if a corporation, and is legally formed and validly existing
under the laws of the jurisdiction of its organization, if a partnership,
limited liability company, association or business organization, with full
corporate or organizational power and authority to own, lease and

31
<PAGE> 32

operate its properties and to conduct its business as presently conducted.
Each Significant Subsidiary is duly registered and qualified to conduct its
business (and, if a corporation, is in good standing) in each jurisdiction or
place where the nature of its properties or the conduct of its business
requires such registration or qualification, except where the failure so to
register or qualify does not and will not have a Material Adverse Effect; all
the outstanding shares of capital stock of each Significant Subsidiary that is
a corporation have been duly authorized and validly issued, are fully paid and
nonassessable, and all ownership interests in each Significant Subsidiary that
is not a corporation have been validly created pursuant to the partnership or
other agreements or organizational documents of each such Significant
Subsidiary, and, except as disclosed in the Prospectus, the shares or other
interests owned by the Company are owned by the Company directly, or indirectly
through one of the other Subsidiaries, free and clear of any lien, adverse
claim, security interest, equity or other encumbrances;

(iii) The authorized and outstanding capital
stock of the Company is as set forth under the caption "Capitalization" in the
Prospectus;

(iv) All the outstanding shares of capital stock
of the Company (A) have been duly authorized and validly issued, (B) are fully
paid and nonassessable, (C) are free of any preemptive or similar rights and
(D) have been issued and sold in compliance with all applicable federal and
state securities laws;

(v) The Indenture has been duly and validly
authorized, executed and delivered by the Company and assuming due execution
and delivery by the Trustee, is a valid and binding agreement of the Company,
enforceable in accordance with its terms, except to the extent that enforcement
may be limited by bankruptcy,

32
<PAGE> 33

insolvency, reorganization, moratorium and other laws relating to or affecting
creditors' rights generally, and by general equitable principles; and the
Indenture has been duly qualified under the 1939 Act and conforms in all
material respects to the description thereof in the Registration Statement and
the Prospectus;

(vi) The Notes have been duly authorized and
executed by the Company and, assuming due authentication of the Notes by the
Trustee in accordance with the Indenture, upon delivery to the Underwriters
against payment therefor in accordance with the terms hereof, have been validly
issued and delivered, and will constitute valid and binding obligations of the
Company entitled to the benefits of the Indenture and enforceable in accordance
with their terms, except to the extent that enforcement may be limited by
bankruptcy, insolvency, reorganization, moratorium and other laws relating to
or affecting creditors' rights generally, and by general equitable principles;
and the Notes conform in all material respects to the description thereof in
the Registration Statement and the Prospectus;

(vii) Except as disclosed in the Prospectus,
there are no outstanding options, warrants or other rights calling for the
issuance of, and such counsel does not know of any commitment, plan or
arrangement, to issue, any shares of capital stock of the Company or any
security convertible into or exchangeable or exercisable for capital stock of
the Company;

(viii) No holder of any security of the Company or
any other person has the right, contractual or otherwise, which right has not
been fully complied with or waived in writing by the holder thereof, (A) to
cause the Company to sell or otherwise issue to them, or to permit them to
underwrite the sale of, the Notes, (B) to have any securities of the Company
included in the registration statement or (C) as a result of the filing

33
<PAGE> 34

of the registration statement, to require registration under the Act of any
securities of the Company;

(ix) The Company has full corporate power and
authority to enter into this Agreement and to perform its obligations
hereunder, including to issue, sell and deliver the Notes to be sold by it to
the Underwriters as provided herein, and this Agreement has been duly and
validly authorized, executed and delivered by the Company and is a legal, valid
and binding agreement of the Company, enforceable against the Company in
accordance with its terms, except as enforcement of rights to indemnity and
contribution hereunder may be limited by federal or state securities laws or
principles of public policy and subject to the qualification that the
enforceability of the Company's obligations hereunder may be limited by
bankruptcy, insolvency, reorganization, moratorium and other laws relating to
or affecting creditors' rights generally, and by general equitable principles;

(x) No consent, approval, authorization or
other order of, or registration or filing with, any court, regulatory body,
administrative agency or other governmental body, agency or official is
required on the part of the Company (except as have been obtained under the
Act, the Exchange Act or the 1939 Act, and such as may be required under state
securities or Blue Sky laws governing the purchase and distribution of the
Notes) for the valid issuance and sale of the Notes to the Underwriters as
contemplated by this Agreement or the performance by the Company of its other
obligations hereunder;

(xi) None of the issuance, offer, sale or
delivery of the Notes, the execution, delivery or performance of this Agreement
or the Indenture by the Company, the compliance by the Company with the
provisions hereof and thereof or the consummation by the

34
<PAGE> 35

Company of the transactions contemplated hereby and thereby (A) conflicts or
will conflict with, or constitutes or will constitute a breach or violation of,
or a default under, the certificate or articles of incorporation or by-laws, or
other organizational documents, of the Company or any of the Significant
Subsidiaries; (B) conflicts or will conflict with or constitutes or will
constitute a breach or violation of, or a default under, any agreement,
indenture, lease or other instrument to which the Company or any of the
Significant Subsidiaries is a party or by which any of them or any of their
respective properties is bound that is an exhibit to the Registration
Statement, or is known to such counsel after reasonable inquiry; (C) violates
or will violate any statute, law, regulation, ordinance, administrative or
governmental rule or regulation applicable to the Company or any of the
Significant Subsidiaries (assuming compliance with all applicable state
securities and Blue Sky laws) or of any order, ruling, judgment, injunction,
order or decree of any court or governmental agency or body having jurisdiction
over the Company or any of the Significant Subsidiaries or any of their
respective properties; or (D) will result in the creation or imposition of any
lien, charge or encumbrance upon any property or assets of the Company or any
of the Significant Subsidiaries pursuant to the terms of any agreement or
instrument that is an exhibit to the Registration Statement, or is known to
such counsel after reasonable inquiry;

(xii) To the best knowledge of such counsel after
reasonable inquiry, neither the Company nor any of the Significant Subsidiaries
is (A) in violation of its respective certificate or articles of incorporation
or by-laws, or other organizational documents; (B) in violation of any statute,
law, regulation, ordinance, administrative or governmental rule or regulation
applicable to the Company or any of the Significant Subsidiaries or of any
order, ruling,

35
<PAGE> 36

judgment, injunction, order or decree of any court or governmental agency or
body having jurisdiction over the Company or any of the Significant
Subsidiaries or any of their respective properties; or (C) in default in any
material respect in the performance of any obligation, agreement or condition
contained in any bond, debenture, note or any other evidence of indebtedness or
in any material agreement, indenture, lease or other instrument to which the
Company or any of the Significant Subsidiaries is a party or by which any of
them or any of their respective properties may be bound, and no condition or
state of facts exists, which with the passage of time or the giving of notice
or both, would constitute such a default, except in the case of (B) and (C)
above, for such violations or defaults which, individually or in the aggregate,
would not have a Material Adverse Effect;

(xiii) (A) The business of the Company as
disclosed in the Prospectus, and the terms of each Practice Management
Agreement and the consummation thereof by the Company and the Significant
Subsidiaries who are parties thereto do not violate, and (B) to the best
knowledge of such counsel after reasonable inquiry, neither the Company nor the
Significant Subsidiaries is in violation of, any health care statute,
administrative or governmental rule or regulation of the United States of
America applicable to the Company or any of the Significant Subsidiaries,
including, but not limited to 42 U.S.C. Section 1395nn; 42 U.S.C. Section
1396b(s); 42 U.S.C. Section 1320a-7b(b), or any health care judgment,
injunction, order or decree of any court or government entity or
instrumentality of the United States of America having jurisdiction over the
Company or any of the Significant Subsidiaries;

(xiv) To the best knowledge of such counsel after
reasonable inquiry, neither the Company nor any of the Significant Subsidiaries
is in violation of

36
<PAGE> 37

any health care statute, law, ordinance, decree, administrative or governmental
rule or regulation applicable to the Company or any of the Significant
Subsidiaries, including, without limitation, those relating to reimbursement by
government agencies and fraudulent or wrongful billings;

(xv) To the best knowledge of such counsel after
reasonable inquiry, except as disclosed in the Prospectus, neither the Company
nor any of the Significant Subsidiaries nor any employee or agent of the
Company or any Significant Subsidiary has made any payment of funds or received
or retained any funds in violation of any law, rule or regulation, including,
without limitation, any law, rule or regulation prohibiting fee-splitting or
fees for the referral of patients;

(xvi) To the best knowledge of such counsel after
reasonable inquiry, neither the Company nor any of the Significant Subsidiaries
(A) employs any of the physicians in any Affiliated Group, (B) exercises any
influence or control over the practice of medicine by such physicians, or (C)
represents to the public that it offers medical services; and the Company and
each of the Significant Subsidiaries contracts with the physicians or
Affiliated Groups as independent contractors to provide medical services and is
not engaged in the practice of medicine;

(xvii) Each practice management agreement has been
duly authorized, executed and delivered by the Company and each Significant
Subsidiary which is a party thereto and is a valid, legal and binding agreement
of the Company and each such Significant Subsidiary, enforceable against the
Company and such Significant Subsidiary in accordance with its terms, subject
to the qualification that the enforceability thereof may be limited by
bankruptcy,

37
<PAGE> 38

insolvency, reorganization, moratorium, and other laws relating to or affecting
creditors' rights generally and by general equitable principles; and the
business of the Company and the Significant Subsidiaries as presently
conducted, and the terms of each Practice Management Agreement and the
performance thereof by the Company and the Significant Subsidiaries which are
party thereto, do not violate any statute, administrative or governmental rule
or regulation applicable to the Company or such Significant Subsidiaries or
laws prohibiting the corporate practice of medicine, fee-splitting or fees for
the referral of patients, or any ruling, judgment, injunction, order or decree
of any court or government entity or instrumentality having jurisdiction over
the Company and/or the Significant Subsidiaries;

(xviii) To the best knowledge of such counsel,
there are no legal or governmental proceedings pending or threatened, against
the Company or any of the Significant Subsidiaries, or to which the Company or
any of the Significant Subsidiaries, or to which any of their respective
properties is subject, that are required to be disclosed in the Registration
Statement or the Prospectus but are not disclosed as required;

(xix) The Company and each of the Significant
Subsidiaries is duly licensed or authorized in each jurisdiction where it is
required to be so licensed or authorized to conduct its respective businesses;
the Company and each of the Significant Subsidiaries has all other necessary
consents, approvals, permits, licenses, franchises and authorizations of and
from all regulatory authorities to conduct its respective businesses as
presently conducted and to perform its respective obligations under each
Practice Management Agreement, and, to the best of such counsel's knowledge
after reasonable inquiry, neither the Company nor any of the Significant
Subsidiaries has received any notification from any regulatory authority,
including,

38
<PAGE> 39

without limitation, any health care regulatory authority, to the effect that
any additional approval is required to be obtained by the Company or any of the
Significant Subsidiaries;

(xx) Except as disclosed in the Prospectus, the
Company and the Significant Subsidiaries own all patents, trademarks, trademark
registrations, service marks, service mark registrations, trade names,
copyrights, licenses, inventions, trade secrets and rights disclosed in the
Prospectus as being owned by them or any of them or necessary for the conduct
of their respective businesses, and such counsel is not aware of any claim to
the contrary or any challenge by any other person to the rights of the Company
and the Significant Subsidiaries with respect to the foregoing;

(xxi) The statements in the Registration
Statement and Prospectus insofar as such statements constitute summaries of the
legal matters, documents or proceedings referred to therein, fairly present the
information called for with respect to such legal matters, documents and
proceedings and fairly summarize the matters referred to therein;

(xxii) Such counsel does not know of any
agreements, indentures, leases or other instruments required to be disclosed in
the Registration Statement or the Prospectus (or any amendment or supplement
thereto) or to be filed as an exhibit to the Registration Statement that are
not so disclosed or filed as required by the Act, and such agreements,
indentures, leases or other instruments as are summarized in the Registration
Statement or the Prospectus are fairly summarized in all material respects;

(xxiii) The Registration Statement and the
Prospectus and any supplements or amendments thereto (except for the financial
statements and the notes

39
<PAGE> 40

thereto and the schedules and other financial and statistical data included
therein and the Statement of Eligibility on Form T-1, as to which such counsel
need not express any opinion) comply as to form in all material respects with
the requirements of the Act;

(xxiv) The Registration Statement and all
post-effective amendments and Additional Registration Statements, if any, have
become effective under the Act and, to the best knowledge of such counsel after
reasonable inquiry, no stop order suspending the effectiveness of the
Registration Statement has been issued and no proceedings for that purpose are
pending before or contemplated by the Commission; and any required filing of
the Prospectus pursuant to Rule 424(b) has been made in accordance with Rule
424(b);

(xxv) The Company has filed all reports and other
documents required to be filed by it under the Exchange Act and each such
report or document when so filed complied in all material respects with the
provisions of the Exchange Act and the rules and regulations of the Commission
thereunder; and

(xxvi) The Company is not, and after the sale of
the Notes and the application of the net proceeds therefrom as disclosed in the
Prospectus under the caption "Use of Proceeds" will not be, an "investment
company" within the meaning of the 1940 Act.

In addition, such counsel shall state that they have participated in
the preparation of the Registration Statement and the Prospectus, including
review and discussion of the contents thereof, and nothing has come to the
attention of such counsel that has caused them to believe that the Registration
Statement at the time the Registration Statement became or becomes effective
contained or contains an untrue statement of a material fact or omitted or
omits to state a material fact

40
<PAGE> 41

required to be stated therein or necessary to make the statements therein not
misleading or that the Prospectus or any amendment or supplement to the
Prospectus, as of their respective dates, and as of the Closing Date contained
or contains any untrue statement of a material fact or omitted or omits to
state a material fact necessary in order to make the statements therein, in the
light of the circumstances under which they were or are made, not misleading
(it being understood that such counsel need express no opinion with respect to
the financial statements and the notes thereto and the schedules and other
financial and statistical data included in the Registration Statement or the
Prospectus or with respect to the Statement of Eligibility on Form T-1).

In rendering their opinion as aforesaid, such counsel may rely upon an
opinion or opinions, each dated the Closing Date, of other counsel retained by
them or the Company as to laws of any jurisdiction other than the United States
and the States of Delaware and Alabama, provided that (A) each such local
counsel is acceptable to the Underwriters, (B) such reliance is expressly
authorized by each opinion so relied upon and a copy of each such opinion is
delivered to the Underwriters and is in form and substance satisfactory to them
and their counsel, and (C) counsel shall state in their opinion that they
believe that they and the Underwriters are justified in relying thereon.

(d) The Underwriters shall have received on the Closing
Date an opinion of Skadden, Arps, Slate, Meagher & Flom, counsel for the
Underwriters, dated the Closing Date and addressed to the Underwriters with
respect to certain of the matters referred to in clauses (v), (vi), (ix),
(xxiii) and (xxiv) of paragraph (c) of this Section 8 and the penultimate
paragraph of paragraph (c) of this Section 8 and such other related matters as
the Underwriters may request.

41
<PAGE> 42

(e) The Underwriters shall have received letters
addressed to the Underwriters and dated the date hereof and the Closing Date
from Ernst & Young LLP and Price Waterhouse LLP, independent certified public
accountants, substantially in the forms heretofore approved by the
Underwriters.

(f)(A) No stop order suspending the effectiveness of the
Registration Statement shall have been issued and no proceedings for that
purpose shall have been taken or, to the knowledge of the Company, shall be
contemplated by the Commission at or prior to the Closing Date; (B) there shall
not have been any change in the capital stock of the Company or any material
increase in the short-term or long-term debt of the Company (other than in the
ordinary course of business) from that set forth or contemplated in the
Registration Statement or the Prospectus (or any amendment or supplement
thereto); (C) there shall not have been, since the respective dates as of which
information is given in the Registration Statement and the Prospectus (or any
amendment or supplement thereto), except as may otherwise be stated in the
Registration Statement and the Prospectus (or any amendment or supplement
thereto), any material adverse change in the condition (financial or other),
business, prospects, properties, net worth or results of operations of the
Company and the Subsidiaries taken as a whole; (D) the Company and the
Subsidiaries shall not have any liabilities or obligations, direct or
contingent (whether or not in the ordinary course of business), that are
material to the Company and the Subsidiaries, taken as a whole, other than
those reflected in the Registration Statement or the Prospectus (or any
amendment or supplement thereto); and (E) all the representations and
warranties of the Company contained in this Agreement shall be true and correct
on and as of the date hereof and on and as of the Closing Date as if made on
and as of the Closing Date, and the Underwriters shall have

42
<PAGE> 43

received a certificate, dated the Closing Date and signed by the chief
executive officer and the chief financial officer of the Company (or such other
officers as are acceptable to the Underwriters), to the effect set forth in
this Section 8(f) and in Section 8(g) hereof.

(g) There shall not have been any announcement by any
"nationally recognized statistical rating organization", as defined for
purposes of Rule 436(g) under the Act, that (A) it is downgrading its rating
assigned to any class of securities of the Company, or (B) it is reviewing its
rating assigned to any class of securities of the Company with a view to
possible downgrading, or with negative implications, or direction not
determined.

(h) The Company shall not have failed at or prior to the
Closing Date to have performed or complied with any of its agreements herein
contained and required to be performed or complied with by it hereunder at or
prior to the Closing Date.

(i) The Company shall have furnished or caused to be
furnished to the Underwriters such further certificates and documents as the
Underwriters shall have reasonably requested.

All such opinions, certificates, letters and other documents will be
in compliance with the provisions hereof only if they are satisfactory in form
and substance to the Underwriters and counsel to the Underwriters.

Any certificate or document signed by any officer of the Company and
delivered to the Underwriters, or to counsel for the Underwriters, shall be
deemed a representation and warranty by the Company to each Underwriter as to
the statements made therein.

43
<PAGE> 44

9. Expenses. The Company agrees to pay the following costs and
expenses and all other costs and expenses incident to the performance by it of
its obligations hereunder: (A) the preparation, printing (or reproduction), and
filing with the Commission of the registration statement (including the
financial statements and exhibits thereto), each Prepricing Prospectus, the
Prospectus, and each amendment or supplement to any of them, this Agreement,
the Indenture and the Statement of Eligibility and Qualification of the
Trustee; (B) the printing (or reproduction) and delivery (including postage,
air freight charges and charges for counting and packaging) of such copies of
the Registration Statement, each Prepricing Prospectus, the Prospectus, and all
amendments or supplements to any of them as may be reasonably requested for use
in connection with the offering and sale of the Notes; (C) the preparation,
printing, authentication, issuance and delivery of certificates for the Notes,
including any stamp taxes in connection with the original issuance and sale of
the Notes; (D) the printing (or reproduction) and delivery of this Agreement,
the preliminary and supplemental Blue Sky Memoranda and all other agreements or
documents printed (or reproduced) and delivered in connection with the offering
of the Notes; (E) the registration or qualification of the Notes for offer and
sale under the securities or Blue Sky laws of the several states as provided in
Section 5(g) hereof (including the reasonable fees, expenses and disbursements
of counsel for the Underwriters relating to the preparation, printing (or
reproduction), and delivery of the preliminary and supplemental Blue Sky
Memoranda and such registration and qualification); (F) the filing fees and the
fees and expenses of counsel for the Underwriters in connection with any
filings required to be made with the National Association of Securities
Dealers, Inc.; (G) the transportation and other expenses incurred by or on
behalf of representatives of the Company and its representatives in connection
with presentations to

44
<PAGE> 45

prospective purchasers of the Notes; (H) the fees and expenses of the Trustee;
(I) the fees and expenses associated with obtaining ratings for the Notes from
nationally recognized statistical rating organizations; (J) the fees and
expenses of the Company's accountants; and (K) the fees and expenses of counsel
(including local and special counsel) for the Company.

10. Effective Date of Agreement. This Agreement shall become
effective: (A) upon the execution and delivery hereof by the parties hereto; or
(B) if, at the time this Agreement is executed and delivered, it is necessary
for the registration statement or a post-effective amendment thereto to be
declared effective before the offering of the Notes may commence, when
notification of the effectiveness of the registration statement or such
post-effective amendment has been released by the Commission. Until such time
as this Agreement shall have become effective, it may be terminated by the
Company, by notifying the Underwriters, or by the Underwriters by notifying the
Company.

If any one or more of the Underwriters shall fail or refuse to
purchase Notes which it or they have agreed to purchase hereunder, and the
aggregate principal amount of the Notes which such defaulting Underwriter or
Underwriters agreed but failed or refused to purchase is not more than
one-tenth of the aggregate principal amount of Notes, each non-defaulting
Underwriter shall be obligated, severally, in the proportion which the
aggregate principal amount of Notes set forth opposite its name in Schedule I
hereto bears to the aggregate principal amount of Notes set forth opposite the
names of all non-defaulting Underwriters or in such other proportion as the
Underwriters may specify in accordance with Section 20 of the Master Agreement
Among Underwriters of Smith Barney, Harris Upham & Co. Incorporated
(predecessor to Smith Barney Inc.), to purchase the Notes which such defaulting
Underwriter or

45
<PAGE> 46

Underwriters agreed, but failed or refused, to purchase. If any Underwriter or
Underwriters shall fail or refuse to purchase Notes and the aggregate principal
amount of Notes with respect to which such default occurs is more than
one-tenth of the aggregate principal amount of Notes and arrangements
satisfactory to the Underwriters and the Company for the purchase of such Notes
are not made within 36 hours after such default, this Agreement will terminate
without liability on the part of any non-defaulting Underwriter or the Company.
In any such case which does not result in termination of this Agreement, either
the Underwriters or the Company shall have the right to postpone the Closing
Date, but in no event for longer than seven days, in order that the required
changes, if any, in the Registration Statement and the Prospectus or any other
documents or arrangements may be effected. Any action taken under this
paragraph shall not relieve any defaulting Underwriter from liability in
respect of any such default of any such Underwriter under this Agreement.

Any notice under this Section 10 may be given by telegram, telecopy or
telephone but shall be subsequently confirmed by letter.

11. Termination of Agreement. This Agreement shall be subject to
termination in absolute discretion of the Underwriters, without liability on
the part of any Underwriter to the Company, by notice to the Company, if prior
to the Closing Date (A) trading in securities generally on the New York Stock
Exchange, the American Stock Exchange or the Nasdaq National Market shall have
been suspended or materially limited, (B) a general moratorium on commercial
banking activities in New York shall have been declared by either Federal or
state authorities, or (C) there shall have occurred any outbreak or escalation
of hostilities or other international or domestic calamity, crisis or change in
political, financial or economic conditions, the effect

46
<PAGE> 47

of which on the financial markets of the United States is such as to make it,
in the Underwriters' judgment, impracticable or inadvisable to commence or
continue the offering of the Notes at the offering price to the public set
forth on the cover page of the Prospectus or to enforce contracts for the
resale of the Notes by the Underwriters. Notice of such termination may be
given to the Company by telegram, telecopy or telephone and shall be
subsequently confirmed by letter.

12. Information Furnished by the Underwriters. The statements set
forth in the last paragraph on the cover page, the stabilization legend on the
inside cover page, and the statements in the first and third paragraphs under
the caption "Underwriting" in any Prepricing Prospectus and in the Prospectus,
constitute the only information furnished by or on behalf of any Underwriter
through the Underwriters as such information is referred to in Sections 6(b)
and 7 hereof.

13. Miscellaneous. Except as otherwise provided in Sections 5, 10
and 11 hereof, notice given pursuant to any provision of this Agreement shall
be in writing and shall be delivered (A) if to the Company, at the office of
the Company at 3000 Galleria Tower, Suite 1000, Birmingham, AL 35244,
Attention: Larry R. House and J. Brooke Johnston, Jr., Esq., with a copy to
Haskell Slaughter & Young, LLC, 1200 AmSouth/Harbert Plaza, 1901 Sixth Avenue
North, Birmingham, AL 35203, Attention: Robert E. Lee Gardner, Esq. and F.
Hampton McFadden, Jr., Esq. and (B) if to the Underwriters, care of Smith
Barney Inc., 388 Greenwich Street, New York, NY 10013, Attention: Manager,
Investment Banking Division, with a copy to Skadden, Arps, Slate, Meagher &
Flom, 919 Third Avenue, New York, NY 10022, Attention: Phyllis G. Korff, Esq.

This Agreement has been and is made solely for the benefit of the
several Underwriters, the Company, its

47
<PAGE> 48

directors and officers, and the other controlling persons referred to in
Section 7 hereof and their respective successors and assigns, to the extent
provided herein, and no other person shall acquire or have any right under or
by virtue of this Agreement. Neither the term "successor" nor the term
"successors and assigns" as used in this Agreement shall include a purchaser
from any Underwriter of any of the Notes in his status as such purchaser.

14. Applicable Law; Counterparts. This Agreement shall be
governed by and construed in accordance with the laws of the State of New York
applicable to contracts made and to be performed within the State of New York.

This Agreement may be signed in various counterparts which together
constitute one and the same instrument. If signed in counterparts, this
Agreement shall not become effective unless at least one counterpart hereof
shall have been executed and delivered on behalf of each party hereto.

48
<PAGE> 49

Please confirm that the foregoing correctly sets forth the agreement
among the Company and the several Underwriters.

Very truly yours,

MEDPARTNERS, INC.

By:
------------------------
President and Chief
Executive Officer

Confirmed as of the date first
above mentioned.

SMITH BARNEY INC.
MERRILL LYNCH, PIERCE, FENNER & SMITH
INCORPORATED
J.P. MORGAN SECURITIES INC.
MORGAN STANLEY & CO. INCORPORATED
NATIONSBANC CAPITAL MARKETS, INC.

By SMITH BARNEY INC.

By:
------------------------
Managing Director

49
<PAGE> 50

SCHEDULE I

MEDPARTNERS, INC.

<TABLE>
<CAPTION>
Principal Amount
Underwriter of Notes
- ----------- ----------------
<S> <C>
Smith Barney Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Merrill Lynch, Pierce, Fenner & Smith
Incorporated . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
J.P. Morgan Securities Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Morgan Stanley & Co. Incorporated . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
NationsBanc Capital Markets, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $300,000,000
============
</TABLE>

<PAGE> 51

SCHEDULE II

MEDPARTNERS, INC.

SIGNIFICANT SUBSIDIARIES

[TO COME]

<PAGE> 1

================================================================================

MEDPARTNERS, INC., as Issuer

and

First Chicago Trust Company of New York, as Trustee

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

INDENTURE

Dated as of October [__], 1996

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

$300,000,000

[____]% Senior Notes due 2006
<PAGE> 2

TABLE OF CONTENTS

Page

<TABLE>
<S> <C>
RECITALS OF THE COMPANY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1

ARTICLE I DEFINITIONS AND OTHER PROVISIONS OF
GENERAL APPLICATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
SECTION 101. Definitions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
SECTION 102. Compliance Certificates and
Opinions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
SECTION 103. Form of Documents Delivered to
Trustee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
SECTION 104. Acts of Holders; Record Dates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
SECTION 105. Notices, Etc., to Trustee and
Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
SECTION 106. Notice to Holders; Waiver. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
SECTION 107. Conflict with Trust Indenture
Act. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
SECTION 108. Effect of Headings and Table of
Contents. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
SECTION 109. Successors and Assigns. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
SECTION 110. Separability Clause. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
SECTION 111. Benefits of Indenture. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
SECTION 112. Governing Law. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
SECTION 113. Legal Holidays. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
SECTION 114. No Security Interest Created. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
SECTION 115. Limitation on Individual Liabil-
ity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17

ARTICLE II SECURITY FORMS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
SECTION 201. Forms Generally. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
SECTION 202. Form of Face of Security. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
SECTION 203. Form of Reverse of Security. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
SECTION 204. Form of Trustee's Certificate of
Authentication. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
SECTION 205. Global Securities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24

ARTICLE III THE SECURITIES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
</TABLE>

i
<PAGE> 3
<TABLE>

Page
----
<S> <C>
SECTION 301. Title and Terms. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
SECTION 302. Denominations. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
SECTION 303. Execution, Authentication, Delivery and Dating. . . . . . . . . . . . . . . . . . . . . . . . 26
SECTION 304. Temporary Securities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
SECTION 305. Registration, Registration of Transfer and Exchange. . . . . . . . . . . . . . . . . . . . . . 28
SECTION 306. Mutilated, Destroyed, Lost and Stolen Securities. . . . . . . . . . . . . . . . . . . . . . . 30
SECTION 307. Payment of Interest; Interest Rights Preserved. . . . . . . . . . . . . . . . . . . . . . . . 31
SECTION 308. Persons Deemed Owners. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
SECTION 309. Cancellation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
SECTION 310. Computation of Interest. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33

ARTICLE IV SATISFACTION AND DISCHARGE. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
SECTION 401. Satisfaction and Discharge of Indenture. . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
SECTION 402. Application of Trust Money. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35

ARTICLE V REMEDIES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
SECTION 501. Events of Default. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
SECTION 502. Acceleration of Maturity; Rescission and Annulment. . . . . . . . . . . . . . . . . . . . . . 38
SECTION 503. Collection of Indebtedness and Suits for Enforcement by Trustee. . . . . . . . . . . . . . . . 39
SECTION 504. Trustee May File Proofs of Claim. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
SECTION 505. Trustee May Enforce Claims Without Possession of Securities. . . . . . . . . . . . . . . . . . 41
SECTION 506. Application of Money Collected. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
SECTION 507. Limitation on Suits. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
SECTION 508. Unconditional Right of Holders to Receive Principal and Interest. . . . . . . . . . . . . . . 42
</TABLE>

ii
<PAGE> 4
<TABLE>
Page
----
<S> <C>
SECTION 509. Restoration of Rights and Remedies. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
SECTION 510. Rights and Remedies Cumulative. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
SECTION 511. Delay or Omission Not Waiver. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
SECTION 512. Control by Holders. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44
SECTION 513. Waiver of Past Defaults. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44
SECTION 514. Undertaking for Costs. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44
SECTION 515. Waiver of Stay or Extension Laws. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45

ARTICLE VI THE TRUSTEE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
SECTION 601. Certain Duties and Responsibilities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
SECTION 602. Notice of Defaults. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46
SECTION 603. Certain Rights of Trustee. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46
SECTION 604. Not Responsible for Recitals or Issuance of Securities. . . . . . . . . . . . . . . . . . . . 48
SECTION 605. May Hold Securities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48
SECTION 606. Money Held in Trust. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48
SECTION 607. Compensation and Reimbursement. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48
SECTION 608. Disqualification; Conflicting Interests. . . . . . . . . . . . . . . . . . . . . . . . . . . . 50
SECTION 609. Corporate Trustee Required; Eligibility. . . . . . . . . . . . . . . . . . . . . . . . . . . . 50
SECTION 610. Resignation and Removal; Appointment of Successor. . . . . . . . . . . . . . . . . . . . . . . 50
SECTION 611. Acceptance of Appointment by Successor. . . . . . . . . . . . . . . . . . . . . . . . . . . . 52
SECTION 612. Merger, Conversion, Consolidation or Succession to Business. . . . . . . . . . . . . . . . . . 53
SECTION 613. Preferential Collection of Claims Against Company. . . . . . . . . . . . . . . . . . . . . . . 53
SECTION 614. Appointment of Authenticating Agent. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53

ARTICLE VII HOLDERS' LISTS AND REPORTS BY TRUSTEE AND COMPANY . . . . . . . . . . . . . . . . . . . . . . . . . 56
</TABLE>

iii
<PAGE> 5
<TABLE>
Page
----
<S> <C>
SECTION 701. Company to Furnish Trustee Names and Addresses of Holders. . . . . . . . . . . . . . . . . . 56
SECTION 702. Preservation of Information; Communications to Holders. . . . . . . . . . . . . . . . . . . . 57
SECTION 703. Reports by Trustee. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57
SECTION 704. Reports by Company. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57

ARTICLE VIII CONSOLIDATION, MERGER, CONVEYANCE, TRANSFER OR LEASE. . . . . . . . . . . . . . . . . . . . . . . . 58
SECTION 801. Company May Consolidate, Etc., Only on Certain Terms. . . . . . . . . . . . . . . . . . . . . 58
SECTION 802. Successor Substituted. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59

ARTICLE IX SUPPLEMENTAL INDENTURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59
SECTION 901. Supplemental Indentures Without Consent of Holders. . . . . . . . . . . . . . . . . . . . . . 59
SECTION 902. Supplemental Indentures with Consent of Holders. . . . . . . . . . . . . . . . . . . . . . . . 60
SECTION 903. Execution of Supplemental Indentures. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61
SECTION 904. Effect of Supplemental Indentures. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62
SECTION 905. Conformity with Trust Indenture Act. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62
SECTION 906. Reference in Securities to Supplemental Indentures. . . . . . . . . . . . . . . . . . . . . . 62
SECTION 907. Notice of Supplemental Indenture. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62

ARTICLE X COVENANTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63
SECTION 1001.Payment of Principal and Interest. . . . .. . . . . . . . . . . . . . . . . . . . . . . . . . . 63
SECTION 1002.Maintenance of Office or Agency. . . . . .. . . . . . . . . . . . . . . . . . . . . . . . . . . 63
SECTION 1003.Money for Security Payments to Be Held in Trust. . . . . .. . . . . . . . . . . . . . . . . . . 64
SECTION 1004.Statement by Officers as to Default. . . . . .. . . . . . . . . . . . . . . . . . . . . . . . . 65
</TABLE>

iv
<PAGE> 6
<TABLE>
Page
----
<S> <C>
SECTION 1005. Existence. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66
SECTION 1006. Maintenance of Properties. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66
SECTION 1007. Payment of Taxes and Other Claims. . . . . . . . . . . . . . . . . . . . . . . . . . 66
SECTION 1008. Maintenance of Insurance. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67
SECTION 1009. Restrictions on Liens. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67
SECTION 1010. Restrictions on Sale and Leaseback Transactions. . . . . . . . . . . . . . . . . . . 70
SECTION 1011. Restrictions on Subsidiary In debtedness 70
SECTION 1012. Waiver of Certain Covenants. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73

ARTICLE XI DEFEASANCE AND COVENANT DEFEASANCE. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73
SECTION 1101. Company's Option to Effect Defeasance or Covenant Defeasance. . . . . . . . . . . . 73
SECTION 1102. Defeasance and Discharge. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 74
SECTION 1103. Covenant Defeasance. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 74
SECTION 1104. Conditions to Defeasance or Covenant Defeasance. . . . . . . . . . . . . . . . . . . 75
SECTION 1105. Deposited Money and U.S. Government Obligations to Be Held in Trust; Miscella-
neous Provisions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 78
SECTION 1106. Reinstatement. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 78
</TABLE>

v
<PAGE> 7

MEDPARTNERS, INC.

Certain Sections of this Indenture relating to
Sections 310 through 318 of the
Trust Indenture Act of 1939:

<TABLE>
<CAPTION>
Trust Indenture Indenture
Act Section Section
- ----------------- -----------
<S> <C> <C>
310 (a)(1) . . . . . . . . . . . . . . . . . . . . . . . 609
(a)(2) . . . . . . . . . . . . . . . . . . . . . . . 609
(a)(3) . . . . . . . . . . . . . . . . . . . . . . . Not Applicable
(a)(4) . . . . . . . . . . . . . . . . . . . . . . . Not Applicable
(b) . . . . . . . . . . . . . . . . . . . . . . . . 608, 610
311 (a) . . . . . . . . . . . . . . . . . . . . . . . . 613
(b) . . . . . . . . . . . . . . . . . . . . . . . . 613
312 (a) . . . . . . . . . . . . . . . . . . . . . . . . 701, 702(1)
(b) . . . . . . . . . . . . . . . . . . . . . . . . 702(2)
(c) . . . . . . . . . . . . . . . . . . . . . . . . 702(3)
313 (a) . . . . . . . . . . . . . . . . . . . . . . . . 703
(b) . . . . . . . . . . . . . . . . . . . . . . . . 703
(c) . . . . . . . . . . . . . . . . . . . . . . . . 703
(d) . . . . . . . . . . . . . . . . . . . . . . . . 703
314 (a) . . . . . . . . . . . . . . . . . . . . . . . . 704
(a)(4) . . . . . . . . . . . . . . . . . . . . . . . 1004
(b) . . . . . . . . . . . . . . . . . . . . . . . . Not Applicable
(c)(1) . . . . . . . . . . . . . . . . . . . . . . . 102
(c)(2) . . . . . . . . . . . . . . . . . . . . . . . 102
(c)(3) . . . . . . . . . . . . . . . . . . . . . . . Not Applicable
(d) . . . . . . . . . . . . . . . . . . . . . . . . Not Applicable
(e) . . . . . . . . . . . . . . . . . . . . . . . . 102
315 (a) . . . . . . . . . . . . . . . . . . . . . . . . 601
(b) . . . . . . . . . . . . . . . . . . . . . . . . 602
(c) . . . . . . . . . . . . . . . . . . . . . . . . 601
(d) . . . . . . . . . . . . . . . . . . . . . . . . 601
(e) . . . . . . . . . . . . . . . . . . . . . . . . 514
316 (a)(1)(A) . . . . . . . . . . . . . . . . . . . . . 502, 512
(a)(1)(B) . . . . . . . . . . . . . . . . . . . . . 513
(a)(2) . . . . . . . . . . . . . . . . . . . . . . . Not Applicable
(b) . . . . . . . . . . . . . . . . . . . . . . . . 508
(c) . . . . . . . . . . . . . . . . . . . . . . . . 104(3)
317 (a)(1) . . . . . . . . . . . . . . . . . . . . . . . 503
(a)(2) . . . . . . . . . . . . . . . . . . . . . . . 504

</TABLE>
<PAGE> 8

Note: This reconciliation and tie shall not, for any purpose, be deemed to
be a part of the Indenture.
<PAGE> 9

INDENTURE, dated as of October [__], 1996, between
MEDPARTNERS, INC., a corporation duly organized and existing under the laws of
the State of Delaware (the "Company"), having its principal office at 3000
Galleria Tower, Suite 1000, Birmingham, AL 35244 and First Chicago Trust
Company of New York, a [_________] banking corporation, as Trustee, having its
principal office at [______________________] (herein called the "Trustee").

RECITALS OF THE COMPANY

The Company has duly authorized the creation of an issue of
its [___]% Senior Notes due 2006 (the "Securities") of substantially the tenor
and amount hereinafter set forth, and to provide therefor the Company has duly
authorized the execution and delivery of this Indenture.

All things necessary to make the Securities, when executed by
the Company and authenticated and delivered hereunder and duly issued by the
Company, the valid obligations of the Company, and to make this Indenture a
valid agreement of the Company, in accordance with their and its terms, have
been done.

NOW, THEREFORE, THIS INDENTURE WITNESSETH:

For and in consideration of the premises and the purchase of
the Securities by the Holders thereof, it is mutually agreed, for the equal and
proportionate benefit of all Holders of the Securities, as follows:
<PAGE> 10

ARTICLE I

DEFINITIONS AND OTHER PROVISIONS OF GENERAL APPLICATION

SECTION 101. Definitions.

For all purposes of this Indenture, except as otherwise
expressly provided or unless the context otherwise requires:

(1) the terms defined in this Article have the meanings
assigned to them in this Article and include the plural as well as the
singular;

(2) all other terms used herein which are defined in the
Trust Indenture Act, either directly or by reference therein, have the meanings
assigned to them therein;

(3) all accounting terms not otherwise defined herein
have the meanings assigned to them in accordance with GAAP; and

(4) the words "herein," "hereof" and "hereunder" and
other words of similar import refer to this Indenture as a whole and not to any
particular Article, Section or other subdivision.

"Act" when used with respect to any Holder, has the meaning
specified in Section 104.

"Affiliate" of any specified Person means any other Person
directly or indirectly controlling or controlled by or under direct or indirect
common control with such specified Person. For the purposes of this definition,
"control" when used with respect to any specified Person means the power to
direct the management and policies of such Person, directly or indirectly,
whether through the ownership of voting securities, by

2
<PAGE> 11

contract or otherwise; and the terms "controlling" and "controlled" have
meanings correlative to the foregoing.

"Attributable Debt" in respect of a Sale and Leaseback
Transaction means, at the time of determination, the then present value
(discounted at the actual rate of interest of such transaction) of the
obligation of the lessee for net rental payments during the remaining term of
the lease included in such Sale and Leaseback Transaction (including any period
for which such lease has been extended or may, at the option of the lessor, be
extended).

"Authenticating Agent" means any Person authorized by the
Trustee pursuant to Section 614 to act on behalf of the Trustee to authenticate
Securities.

"Average Life" means, as of the date of determination, with
respect to any Indebtedness, the quotient obtained by dividing (i) the sum of
the products of the numbers of years from the date of determination to the
dates of each successive scheduled principal payment of such Indebtedness
multiplied by the amount of such principal payment by (ii) the sum of all such
principal payments.

"Bank Credit Agreement" means the Credit Agreement, dated as
of September 5, 1996, by and among MedPartners, Inc. and Nationsbank, National
Association (South), as administrative agent for a group of lenders, as such
agreement may be amended, renewed, extended, substituted, refinanced,
restructured, replaced or supplemented or otherwise modified from time to time
(including without limitation, any successive renewals, extensions,
substitutions, refinancings, restructurings, replacements or supplementations
or other modifications of the foregoing).

3
<PAGE> 12

"Board of Directors" means either the board of directors of
the Company or any duly authorized committee of that board to which the powers
of that board have been lawfully delegated.

"Board Resolution" means a copy of a resolution certified by
the Secretary or an Assistant Secretary of the Company to have been duly
adopted by the Board of Directors and to be in full force and effect on the
date of such certification.

"Business Day" means each Monday, Tuesday, Wednesday, Thursday
and Friday which is not a day on which banking institutions in The City of New
York or the State of Alabama are authorized or obligated by law, regulation or
executive order to close.

"Capital Leases" means all leases which have been or should be
capitalized in accordance with GAAP as in effect from time to time including
the provisions of FAS No. 13 and any successor thereof.

"Commission" means the Securities and Exchange Commission, as
from time to time constituted, created under the Exchange Act, or, if at any
time after the execution of this instrument such Commission is not existing and
performing the duties now assigned to it under the Trust Indenture Act, then
the body performing such duties at such time.

"Company" means the Person named as the "Company" in the first
paragraph of this instrument until a successor Person shall have become such
pursuant to the applicable provisions of this Indenture, and thereafter
"Company" shall mean such successor Person.

"Company Request" or "Company Order" means a written request
or order signed in the name of the Company by its Chairman of the Board, its
Vice Chairman of the

4
<PAGE> 13

Board, its President or a Vice President, and by its Treasurer, an Assistant
Treasurer, its Secretary or an Assistant Secretary.

"Consolidated Net Worth" means the excess of (i) the
consolidated net book value of the assets of the Company and its subsidiaries
after all appropriate deductions in accordance with GAAP as in effect on the
date of the Indenture (including without limitation, reserves for doubtful
receivables, obsolescence, depreciation and amortization) over (ii) the
consolidated liabilities (including tax and other proper accruals, but
excluding, if applicable, the accumulated postretirement benefit obligation
resulting from the application of the provisions of FAS No. 106 "Employer's
Accounting for Postretirement Benefits Other than Pensions") of the Company and
its Subsidiaries, in each case computed and consolidated in accordance with
GAAP in effect on the date of the Indenture.

"Corporate Trust Office" means the office of the Trustee
located at (i) 525 Washington Boulevard, Suite 4660, Jersey City, New Jersey,
with respect to payment transactions and registration of transfer or exchange
of Securities, and (ii) 525 Washington Boulevard, Suite 4660, Jersey City, New
Jersey, with respect to notices to the Trustee.

"Corporation" means a corporation, association, company,
joint-stock company, limited liability company or business trust.

"Covenant Defeasance" has the meaning specified in Section
1103.

"Defaulted Interest" has the meaning specified in Section 307.

5
<PAGE> 14

"Defeasance" has the meaning specified in Section 1102.

"Depositary" means, with respect to Securities issuable or
issued in whole or in part in the form of one or more Global Securities, a
clearing agency registered under the Exchange Act that is designated to act as
Depositary for such Securities, which Depositary initially shall be The
Depository Trust Company, a limited-purpose trust company organized under the
Banking Law of the State of New York ("DTC").

"Event of Default" has the meaning specified in Section 501.

"Exchange Act" means the United States Securities Exchange Act
of 1934, as amended, and the rules and regulations promulgated thereunder.

"Funded Debt" means Indebtedness of the Company and its
Subsidiaries, whether incurred, assumed or guaranteed, which by its terms
matures more than one year from the date of creation thereof, or which is
extendable or renewable at the sole option of the obligor so that it may become
payable more than one year from such date.

"GAAP" means, unless otherwise specified in this Indenture,
such accounting principles as are generally accepted in the United States as of
the date of the relevant calculation.

"Global Security" means a Security that evidences all or part
of the Securities, is registered in the name of the Depositary or its nominee
and bears the legend set forth in Section 205.

"Governmental Authority" shall mean any Federal, state,
municipal, national or other governmental department, commission, board,
bureau, court, agency or

6
<PAGE> 15

instrumentality or political subdivision thereof or any entity or officer
exercising executive, legislative, judicial, regulatory or administrative
functions of or pertaining to any government or any court, in each case whether
associated with a state of the United States, the United States, or a foreign
governmental entity.

"Holder" means a Person in whose name a Security is registered
in the Security Register.

"Indebtedness" with respect to any Person is defined to mean,
at any time, without duplication, (i) any debt (a) for money borrowed, or (b)
evidenced by a bond, note, debenture, or similar instrument for the payment of
which such Person is responsible or liable, or (c) which is a direct or
indirect obligation which arises as a result of banker's acceptances; (ii) any
Off-Balance Sheet Liability; (iii) any debt of others described in the
preceding clause (i) which such Person has guaranteed or for which it is
otherwise directly liable; (iv) the obligation of such Person as lessee under
any lease of property which is reflected on such Person's balance sheet as a
capitalized lease; (v) to the extent not otherwise included in this definition,
net obligations under any Rate Hedging Obligations; and (vi) any deferral,
amendment, renewal, extension, supplement or refunding of any liability of the
kind described in any of the preceding clauses (i) through (v); provided,
however, that, in computing the Indebtedness of any Person, there shall be
excluded any particular Indebtedness if, upon or prior to the maturity thereof,
there shall have been deposited with a depository in trust money (or evidence
of Indebtedness if permitted by the instrument creating such Indebtedness) in
the necessary amount to pay, redeem or satisfy such Indebtedness as it becomes
due, and the amount so deposited shall not be included in any computation of
the assets of such Person.

7
<PAGE> 16

"Indenture" means this instrument as originally executed or as
it may from time to time be supplemented or amended by one or more indentures
supplemental hereto entered into pursuant to the applicable provisions hereof,
including, for all purposes of this instrument and any such supplemental
indenture, the provisions of the Trust Indenture Act that are deemed to be a
part of and govern this instrument and any such supplemental indenture,
respectively.

"Interest Payment Date" means the Stated Maturity of an
installment of interest on the Securities.

"Lien" means any mortgage, pledge, hypothecation, charge,
assignment, deposit arrangement, encumbrance, security interest, lien
(statutory or other), or preference, priority, or other security or similar
agreement or preferential arrangement of any kind or nature whatsoever
(including, without limitation, any agreement to give or grant a Lien or any
lease, conditional sale or other title retention agreement having substantially
the same economic effect as any of the foregoing).

"Maturity," when used with respect to any Security, means the
date on which the principal of such Security becomes due and payable as therein
or herein provided, whether at the Stated Maturity or by declaration of
acceleration, or otherwise.

8
<PAGE> 17

which does not constitute a liability on the consolidated balance sheets of
such Person excluding therefrom operating leases which do not require payment
by or due from such Person: (a) at the scheduled termination of such operating
lease, (b) pursuant to a required purchase by such Person of the leased
property, or (c) under any guarantee by such person of the value of the leased
property, or (v) net liabilities under any Rate Hedging Obligations.

"Officers' Certificate" means a certificate signed by the
Chairman of the Board, a Vice Chairman of the Board, the President or a Vice
President, and by the Treasurer, an Assistant Treasurer, the Secretary or an
Assistant Secretary, of the Company. One of the officers signing an Officers'
Certificate given pursuant to Section 1004 shall be the principal executive,
financial or accounting officer of the Company.

"Opinion of Counsel" means a written opinion of counsel, who
may be counsel for the Company, and who shall be acceptable to the Trustee.

"Outstanding," when used with respect to Securities, means, as
of the date of determination, all Securities theretofore authenticated and
delivered under this Indenture, except:

(a) Securities theretofore cancelled by the Trustee or
delivered to the Trustee for cancellation:

(b) Securities for whose payment money in the necessary
amount has been theretofore deposited with the Trustee or any Paying Agent
(other than the Company) in trust or set aside and segregated in trust by the
Company (if the Company shall act as its own Paying Agent) for the Holders of
such Securities;

9
<PAGE> 18

(d) Securities which have been paid pursuant to Section
306 or in exchange for or in lieu of which other Securities have been
authenticated and delivered pursuant to this Indenture, other than any such
Securities in respect of which there shall have been presented to the Trustee
proof satisfactory to it that such Securities are held by a bona fide purchaser
in whose hands such Securities are valid obligations of the Company;

provided, however, that in determining whether the Holders of the requisite
principal amount of the Outstanding Securities have given any request, demand,
authorization, direction, notice, consent or waiver hereunder, Securities owned
by the Company or any other obligor upon the Securities or any Affiliate of the
Company or of such other obligor shall be disregarded and deemed not to be
Outstanding, except that, in determining whether the Trustee shall be protected
in relying upon any such request, demand, authorization, direction, notice,
consent or waiver, only Securities which a Responsible Officer of the Trustee
knows to be so owned shall be so disregarded. Securities so owned which have
been pledged in good faith may be regarded as Outstanding if the pledgee
establishes to the satisfaction of the Trustee the pledgee's right so to act
with respect to such Securities and that the pledgee is not the Company or any
other obligor upon the Securities or any Affiliate of the Company or of such
other obligor.

"Paying Agent" means any Person authorized by the Company to
pay the principal of or interest on any Securities on behalf of the Company.

"Permitted Receivables Securitization" means limited recourse
or non-recourse sales and assignments of accounts receivable of a Person to one
or more entities,

10
<PAGE> 19

the proceeds of which shall be made available to such Person; provided,
however, that the maximum face amount of accounts receivable which may be sold
is $100,000,000 and the minimum price which shall be paid for receivables is
70% of the face amount thereof; provided, further that notwithstanding the
immediately preceding proviso the maximum face amount of accounts receivable
which may be sold and the minimum price which shall be paid for receivables
shall be increased or decreased to such amount and percentage as is permissible
under the Bank Credit Agreement.

"Person" means any individual, corporation, partnership,
limited liability company, joint venture, association, joint-stock company,
trust, unincorporated organization or government or any agency or political
subdivision thereof.

"Predecessor Security" of any particular Security means every
previous Security evidencing all or a portion of the same debt as that
evidenced by such particular Security; and, for the purposes of this
definition, any Security authenticated and delivered under Section 306 in
exchange for or in lieu of a mutilated, destroyed, lost or stolen Security
shall be deemed to evidence the same debt as the mutilated, destroyed, lost or
stolen Security.

"Purchase Money Indebtedness" means Indebtedness incurred to
finance all or any part of the purchase price or cost of construction of
improvements in respect of property or assets acquired by a Person after the
date of the Indenture and incurred prior to, at the time of, or within 90 days
after, the acquisition of any such property or assets or the completion of any
such construction or improvements.

"Rate Hedging Obligations" means any and all obligations of
any Person, whether absolute or contingent

11
<PAGE> 20

and howsoever and whensoever created, arising, evidenced or acquired (including
all renewals, extensions and modifications thereof and substitutions therefor),
under (i) any and all agreements, devices or arrangements designed to protect
at least one of the parties thereto from the fluctuations of interest rates,
exchange rates or forward rates applicable to such party's assets, liabilities
or exchange transactions, including, but not limited to, Dollar- denominated or
cross-currency protection agreements, forward rate currency exchange
agreements, interest rate cap or collar protection agreements, forward rate
currency or interest rate options, puts, warrants and those commonly known as
interest rate "swap" agreements; and (ii) any and all cancellations, buybacks,
reversals, terminations or assignments of any of the foregoing.

"Regular Record Date" for the interest payable on any Interest
Payment Date means the February 28 (or, in a leap year, February 29) or August
31 (whether or not a Business Day), as the case may be, next preceding such
Interest Payment Date.

"Responsible Officer" when used with respect to the Trustee,
means any officer of the Trustee with direct responsibility for the
administration of this Indenture and also means, with respect to a particular
corporate trust matter, any other officer to whom such matter is referred
because of his knowledge of and familiarity with the particular subject.

"Sale and Leaseback Transaction" has the meaning specified in
Section 1010.

"Securities" means the [__]% Senior Notes due 2006 of the
Company authenticated and delivered under this Indenture.

12
<PAGE> 21

"Security Register" and "Security Registrar" have the
respective meanings specified in Section 305.

"Senior Funded Debt" means all Funded Debt, including the
Securities, except Funded Debt the payment of which is subordinated to the
payment of the Securities.

"Significant Subsidiary" has the meaning ascribed to it under
Regulation C promulgated under the Securities Act of 1933, as amended.

"Special Record Date" for the payment of any Defaulted
Interest means a date fixed by the Trustee pursuant to Section 307.

"Stated Maturity," when used with respect to any Security or
any installment of interest thereon, means the date specified in such Security
as the fixed date on which the principal of such Security or such installment
of interest is due and payable.

"Subsidiary" means any corporation, partnership, association
or other business entity of which more than 50% of the outstanding voting stock
is owned, directly or indirectly, by the Company or by one or more other
Subsidiaries, or by the Company and one or more other Subsidiaries. For the
purposes of this definition, "voting stock" means stock (or a similar interest)
which ordinarily has voting power for the election of directors, managers or
trustees, whether at all times or only so long as no senior class of stock (or
similar interest) has such voting power by reason of any contingency.

"Trustee" means the Person named as such in the first
paragraph of this instrument until a successor Trustee shall have become such
pursuant to the applicable provisions of this Indenture, and thereafter
"Trustee" shall mean such successor Trustee.

13
<PAGE> 22

"Trust Indenture Act" means the Trust Indenture Act of 1939 as
in force at the date as of which this instrument was executed; provided,
however, that in the event the Trust Indenture Act of 1939 is amended after
such date, "Trust Indenture Act" means, to the extent required by any such
amendment, the Trust Indenture Act of 1939 as so amended.

"U.S. Government Obligation" has the meaning specified in
Section 1104.

"Vice President," when used with respect to the Company or the
Trustee, means any vice president, whether or not designated by a number or a
word or words added before or after the title "vice president."

SECTION 102. Compliance Certificates and Opinions.

Upon any application or request by the Company to the Trustee
to take any action under any provision of this Indenture, the Company shall
furnish to the Trustee such certificates and opinions as may be required under
the Trust Indenture Act. Each such certificate or opinion shall be given in the
form of an Officers' Certificate, if to be given by an officer of the Company,
or an Opinion of Counsel, if to be given by counsel, and shall comply with the
requirements of the Trust Indenture Act and any other requirement set forth in
this Indenture.

Every certificate or opinion with respect to compliance with a
condition or covenant provided for in this Indenture shall include:

(1) a statement that each individual signing such
certificate or opinion has read such covenant or condition and the definitions
herein relating thereto;

14
<PAGE> 23

(2) a brief statement as to the nature and scope of the
examination or investigation upon which the statements or opinions contained in
such certificate or opinion are based;

(3) a statement that, in the opinion of each such
individual, he has made such examination or investigation as is necessary to
enable him to express an informed opinion as to whether or not such covenant or
condition has been complied with; and

(4) a statement as to whether, in the opinion of each
such individual, such condition or covenant has been complied with.

SECTION 103. Form of Documents Delivered to Trustee.

In any case where several matters are required to be certified
by, or covered by an opinion of, any specified Person, it is not necessary that
all such matters be certified by, or covered by the opinion of, only one such
Person, or that they be so certified or covered by only one document, but one
such Person may certify or give an opinion with respect to some matters and one
or more other such Persons as to other matters, and any such Person may certify
or give an opinion as to such matters in one or several documents.

Any certificate or opinion of an officer of the Company may be
based, insofar as it relates to legal matters, upon a certificate or opinion
of, or representations by, counsel, unless such officer knows, or in the
exercise of reasonable care should know, that the certificate or opinion or
representa-

15
<PAGE> 24

tions with respect to the matters upon which his certificate or opinion is
based are erroneous. Any such certificate or opinion of counsel may be based,
insofar as it relates to factual matters, upon a certificate or opinion of, or
representations by, an officer or officers of the Company stating that the
information with respect to such factual matters is in the possession of the
Company, unless such counsel knows, or in the exercise of reasonable care
should know, that the certificate or opinion or representations with respect to
such matters are erroneous.

Where any Person is required to make, give or execute two or
more applications, requests, consents, certificates, statements, opinions or
other instruments under this Indenture, they may, but need not, be consolidated
and form one instrument.

SECTION 104. Acts of Holders; Record Dates.

(1) Any request, demand, authorization, direction,
notice, consent, waiver or other action provided by this Indenture to be given
or taken by Holders may be embodied in and evidenced by one or more instruments
of substantially similar tenor signed by such Holders in person or by agent
duly appointed in writing; and, except as herein otherwise expressly provided,
such action shall become effective when such instrument or instruments are
delivered to the Trustee and, where it is hereby expressly required, to the
Company. Such instrument or instruments (and the action embodied therein and
evidenced thereby) are herein sometimes referred to as the "Act" of the Holders
signing such instrument or instruments. Proof of execution of any such
instrument or of a writing appointing any such agent shall be sufficient for
any purpose of this Indenture and (subject to Section 601) conclusive in favor
of the Trustee and the Company, if made in the manner provided in this Section.

(2) The fact and date of the execution of any such
instrument or writing, or the authority of the Person executing the same, may
be proved in any manner which the Trustee deems sufficient.

16
<PAGE> 25

(3) The Company may, in the circumstances permitted by
the Trust Indenture Act, fix any day as the record date for the purpose of
determining the Holders entitled to give or take any request, demand,
authorization, direction, notice, consent, waiver or other Act, or to vote on
any Act, authorized or permitted to be given or taken by Holders. If not set by
the Company prior to the first solicitation of a Holder made by any Person in
respect of any such action, or, in the case of any such vote, prior to such
vote, the record date for any such action or vote shall be the 30th day (or, if
later, the date of the most recent list of Holders required to be provided
pursuant to Section 701) prior to such first solicitation or vote, as the case
may be. With regard to any record date, only the Holders on such date (or their
duly designated proxies) shall be entitled to give or take, or vote on, the
relevant action.

(4) The ownership of Securities shall be proved by the
Security Register.

(5) Any request, demand, authorization, direction,
notice, consent, waiver or other Act of the Holder of any Security shall bind
every future Holder of the same Security and the Holder of every Security
issued upon the registration of transfer thereof or in exchange therefor or in
lieu thereof in respect of anything done, omitted or suffered to be done by the
Trustee or the Company in reliance thereon, whether or not notation of such
action is made upon such Security.

SECTION 105. Notices, Etc., to Trustee and Company.

Any request, demand, authorization, direction, notice,
consent, waiver or other Act of Holders or other document provided or permitted
by this Indenture to be made upon, given or furnished to, or filed with,

17
<PAGE> 26

(1) the Trustee by any Holder or by the Company shall be
sufficient for every purpose hereunder (unless otherwise herein expressly
provided) if in writing and mailed, first-class postage prepaid, to the Trustee
addressed to it at the address of its principal office specified in the first
paragraph of this instrument or at any other address previously furnished in
writing to the Holders and the Company by the Trustee, or

(2) the Company by the Trustee or by any Holder shall be
sufficient for every purpose hereunder (unless otherwise herein expressly
provided) if in writing and mailed, first-class postage prepaid, to the Company
addressed to it at the address of its principal office specified in the first
paragraph of this instrument or at any other address previously furnished in
writing to the Trustee by the Company.

SECTION 106. Notice to Holders; Waiver.

Where this Indenture provides for notice to Holders of any
event, such notice shall be sufficiently given (unless otherwise herein
expressly provided) if in writing and mailed, first-class postage prepaid, to
each Holder affected by such event, at his address as it appears in the
Security Register, not later than the latest date (if any), and not earlier
than the earliest date (if any), prescribed for the giving of such notice. In
any case where notice to Holders is given by mail, neither the failure to mail
such notice, nor any defect in any notice so mailed, to any particular Holder
shall affect the sufficiency of such notice with respect to other Holders.
Where this Indenture provides for notice in any manner, such notice may be
waived in writing by the Person entitled to receive such notice, either before
or after the event, and such waiver shall be the equivalent of such notice.
Waivers of notice by Holders shall be filed with the Trustee, but such filing
shall not be a

18
<PAGE> 27

condition precedent to the validity of any action taken in reliance upon such
waiver.

In case by reason of the suspension of regular mail service or
by reason of any other cause it shall be impracticable to give such notice by
mail, then such notification as shall be made with the approval of the Trustee
shall constitute a sufficient notification for every purpose hereunder.

SECTION 107. Conflict with Trust Indenture Act.

If any provision hereof limits, qualifies or conflicts with a
provision of the Trust Indenture Act that is required under the Trust Indenture
Act to be a part of and govern this Indenture, the latter provision shall
control. If any provision of this Indenture modifies or excludes any provision
of the Trust Indenture Act that may be so modified or excluded, the latter
provision shall be deemed to apply to this Indenture as so modified or to be
excluded, as the case may be.

SECTION 108. Effect of Headings and Table of Contents.

The Article and Section headings herein and the Table of
Contents are for convenience only and shall not affect the construction hereof.

SECTION 109. Successors and Assigns.

All covenants and agreements in this Indenture by the Company
shall bind its successors and assigns, whether so expressed or not.

19
<PAGE> 28

SECTION 110. Separability Clause.

In case any provision in this Indenture or in the Securities
shall be invalid, illegal or unenforce- able, the validity, legality and
enforceability of the remaining provisions shall not in any way be affected or
impaired thereby.

SECTION 111. Benefits of Indenture.

Nothing in this Indenture or in the Securities, express or
implied, shall give to any Person, other than the parties hereto and their
successors hereunder and the Holders of Securities, any benefit or any legal or
equitable right, remedy or claim under this Indenture.

SECTION 112. Governing Law.

This Indenture and the Securities shall be governed by and
construed in accordance with the laws of the State of New York, without regard
to principles of conflicts of laws as applied in such state.

SECTION 113. Legal Holidays.

In any case where any Interest Payment Date or Stated Maturity
of any Security shall not be a Business Day, then (notwithstanding any other
provision of this Indenture or of the Securities) payment of interest or
principal need not be made on such date, but may be made on the next succeeding
Business Day with the same force and effect as if made on the Interest Payment
Date or at the Stated Maturity; provided that no interest shall accrue for the
period from and after such Interest Payment Date or Stated Maturity, as the
case may be.

20
<PAGE> 29

SECTION 114. No Security Interest Created.

Except as provided in Section 607, nothing in this Indenture
or in the Securities, express or implied, shall be construed to create or
constitute a security interest under the Uniform Commercial Code or similar
legislation, as now or hereafter enacted and in effect in any jurisdiction
where property of the Company or its Subsidiaries is or may be located.

SECTION 115. Limitation on Individual Liability.

No recourse under or upon any obligation, covenant or
agreement contained in this Indenture or in any Security, or for any claim
based thereon or otherwise in respect thereof, shall be had against any
incorporator, stockholder, officer or director, as such, past, present or
future, of the Company or any successor Person, either directly or through the
Company, whether by virtue of any constitution, statute or rule of law, or by
the enforcement of any assessment or penalty or otherwise; it being expressly
understood that this Indenture and the obligations issued hereunder are solely
corporate obligations, and that no such personal liability whatever shall
attach to, or is or shall be incurred by, the incorporators, stockholders,
officers or directors, as such, of the Company or any successor Person, or any
of them, because of the creation of the indebtedness hereby authorized, or
under or by reason of the obligations, covenants or agreements contained in
this Indenture or in any Security or implied therefrom; and that any and all
such personal liability of every name and nature, either at common law or in
equity or by constitution or statute, of, and any and all such rights and
claims against, every such incorporator, stockholder, officer or director, as
such, because of the creation of the indebtedness hereby authorized, or under
or by reason of the obligations, covenants or agreements contained in this
Indenture or in

21
<PAGE> 30

any Security or implied therefrom, are hereby expressly waived and released as
a condition of, and as a consideration for, the execution of this Indenture and
the issuance of such Security.

ARTICLE II

SECURITY FORMS

SECTION 201. Forms Generally.

The Securities and the Trustee's certificates of
authentication shall be in substantially the forms set forth in this Article,
with such appropriate insertions, omissions, substitutions and other variations
as are required or permitted by this Indenture, and may have such letters,
numbers or other marks of identification and such legends or endorsements
placed thereon as may be required to comply with the rules of any securities
exchange or as may, consistently herewith, be determined by the officers
executing such Securities, as evidenced by their execution of the Securities.

The definitive Securities shall be printed, lithographed or
engraved or produced by any combination of these methods on steel engraved
borders or may be produced in any other manner permitted by the rules of any
securities exchange on which the Securities may be listed, all as determined by
the officers executing such Securities, as evidenced by their execution of such
Securities. Unless required by the Depositary, any securities exchange on which
the Securities may be listed or any rule, regulation or law, Securities issued
in the form of Global Securities need not be printed, lithographed or engraved
on steel engraved borders, but shall be in such form as is acceptable to the
Depositary.

22
<PAGE> 31

SECTION 202. Form of Face of Security.

The form of the face of the Global Securities shall be as set
forth below and include the legend(s) set forth in Section 205 (if a Security
is issued in definitive form, the form of such definitive security will be in
substantially the form of the face of the Global Security, except that the
legend(s) set forth in Section 205 shall be omitted):

MEDPARTNERS, INC.

[___]% Senior Notes due 2006

No. $
CUSIP No.

MEDPARTNERS, INC., a corporation duly organized and existing
under the laws of the State of Delaware (herein called the "Company", which
term includes any successor Person under the Indenture hereinafter referred
to), for value received, hereby promises to pay to ___________, or registered
assigns, the principal sum of __________________ Dollars ($___________) on
September 15, 2006 and to pay interest thereon from the date of original
issuance of Securities pursuant to the Indenture or from the most recent
Interest Payment Date to which interest has been paid or duly provided for,
semi-annually on March 15 and September 15 in each year, commencing March 15,
1997, at the rate of [___]% per annum, until the principal hereof is paid or
made available for payment. The interest so payable, and punctually paid or
duly provided for, on any Interest Payment Date will, as provided in the
Indenture, be paid to the Person in whose name this Security (or one or more
Predecessor Securities) is registered at the close of business on the Regular
Record Date for such interest, which shall be the February 28 (or, in a leap
year, February 29) or August 31 (whether or not a Business Day), as the case

23
<PAGE> 32

may be, next preceding such Interest Payment Date. Any such interest not so
punctually paid or duly provided for will forthwith cease to be payable to the
Holder on such Regular Record Date and may either be paid to the Person in
whose name this Security (or one or more Predecessor Securities) is registered
at the close of business on a Special Record Date for the payment of such
Defaulted Interest to be fixed by the Trustee, notice whereof shall be given to
Holders of Securities not less than 10 days prior to such Special Record Date,
or be paid at any time in any other lawful manner not inconsistent with the
requirements of any securities exchange on which the Securities may be listed,
and upon such notice as may be required by such exchange, all as more fully
provided in the Indenture.

Payment of the principal of and interest on this Security will
be made (i) in respect of Securities held of record by the Depositary or its
nominee in same day funds and (ii) in respect of Securities held of record by
Holders other than the Depositary or its nominee at the Corporate Trust Office
or at such other office or agency of the Company maintained for that purpose
pursuant to the Indenture, in each case, in such coin or currency of the United
States of America as at the time of payment is legal tender for payment of
public and private debts; provided, however, that at the option of the Company
payment of interest in respect of Securities held of record by Holders other
than the Depositary or its nominee may be made by check mailed to the address
of the Person entitled thereto as such address shall appear in the Security
Register.

Reference is hereby made to the further provisions of this
Security set forth on the reverse hereof, which further provisions shall for
all purposes have the same effect as if set forth at this place.

24
<PAGE> 33

Unless the certificate of authentication hereon has been
executed by the Trustee referred to on the reverse hereof by manual signature,
this Security shall not be entitled to any benefit under the Indenture or be
valid or obligatory for any purpose.

25
<PAGE> 34

IN WITNESS WHEREOF, the Company has caused this instrument to
be duly executed under its corporate seal.

Dated:

MEDPARTNERS, INC.

By:
-------------------------

Attest:

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

SECTION 203. Form of Reverse of Security.

The form of the reverse of the Securities shall be as set
forth below:

This Security is one of a duly authorized issue of securities
of the Company designated as its [___]% Senior Notes due 2006 (herein called
the "Securities"), limited in aggregate principal amount to $300,000,000,
issued and to be issued under an Indenture, dated as of September [___], 1996
(herein called the "Indenture"), between the Company and
[_________________________], as Trustee (herein called the "Trustee", which
term includes any successor trustee under the Indenture), to which Indenture
and all indentures supplemental thereto reference is hereby made for a
statement of the respective rights, limitations of rights, duties and
immunities thereunder of the Company, the Trustee and the Holders of the
Securities and of the terms upon which the Securities are, and are to be,
authenticated and delivered.

<PAGE> 35

This Security is not redeemable in whole or in part at any
time prior to the Stated Maturity of its principal amount.

The Indenture contains provisions for defeasance of (i) the
entire indebtedness of this Security or (ii) certain restrictive covenants and
Events of Default with respect to this Security, in each case upon compliance
by the Company with certain conditions set forth in the Indenture.

The Indenture contains certain covenants with respect to,
among other things, the following matters: (i) restrictions on additional
indebtedness secured by liens, (ii) restrictions on sale and leaseback
transactions, (iii) restrictions on additional subsidiary indebtedness, and
(iv) restrictions on consolidatations, mergers and sales of all or
substantially all of the assets of the Company. These covenants are subject to
important exceptions and qualifications.

If an Event of Default shall occur and be continuing, the
principal of all the Securities may be declared due and payable in the manner
and with the effect provided in the Indenture.

The Indenture permits, with certain exceptions as therein
provided, the amendment thereof and the modification of the rights and
obligations of the Company and the rights of the Holders of the Securities
under the Indenture at any time by the Company and the Trustee with the consent
of the Holders of at least 50% in aggregate principal amount of the Securities
at the time Outstanding, and, under certain limited circumstances, by the
Company and the Trustee without the consent of the Holders. The Indenture also
contains provisions permitting the Holders of specified percentages in
aggregate principal amount of the Securities at the time Outstanding, on behalf
of the Holders of all the Securities, to waive

27
<PAGE> 36

compliance by the Company with certain provisions of the Indenture and certain
past defaults under the Indenture and their consequences. Any such consent or
waiver by the Holder of this Security shall be conclusive and binding upon such
Holder and upon all future Holders of this Security and of any Security issued
upon the registration of transfer hereof or in exchange herefor or in lieu
hereof, whether or not notation of such consent or waiver is made upon this
Security.

No reference herein to the Indenture and no provision of this
Security or of the Indenture shall alter or impair the obligation of the
Company, which is absolute and unconditional, to pay the principal of and
interest on this Security at the times, place and rate, and in the coin or
currency, herein prescribed.

As provided in the Indenture and subject to certain
limitations therein set forth, the transfer of this Security is registrable in
the Security Register, upon surrender of this Security for registration of
transfer at the Corporate Trust Office or at such other office or agency of the
Company maintained for that purpose pursuant to the Indenture duly endorsed by,
or accompanied by a written instrument of transfer in form satisfactory to the
Company and the Security Registrar duly executed by, the Holder hereof or his
attorney duly authorized in writing, and thereupon one or more new Securities,
of authorized denominations and for the same aggregate principal amount, will
be issued to the designated transferee or transferees.

The Securities are issuable only in registered form without
coupons in denominations of $1,000 and any integral multiple thereof. As
provided in the Indenture and subject to certain limitations therein set forth,
Securities are exchangeable for a like aggregate principal amount of Securities
of a different authorized denom-

28
<PAGE> 37

ination, as requested by the Holder surrendering the same.

No service charge shall be made for any such registration of
transfer or exchange, but the Company may require payment of a sum sufficient
to cover any tax or other governmental charge payable in connection therewith.

Prior to due presentment of this Security for registration of
transfer, the Company, the Trustee and any agent of the Company or the Trustee
may treat the Person in whose name this Security is registered as the owner
hereof for all purposes, whether or not this Security be overdue, and neither
the Company, the Trustee nor any such agent shall be affected by notice to the
contrary.

All terms used in this Security which are defined in the
Indenture shall have the meanings assigned to them in the Indenture. The
Company will furnish to any Holder upon written request and without charge a
copy of the Indenture.

SECTION 204. Form of Trustee's Certificate of Authentication.

The Trustee's certificate of authentication shall be in
substantially the following form:

This is one of the Securities referred to in the
within-mentioned Indenture.

--------------------------,
as Trustee

By:
-----------------------
Authorized Officer

29
<PAGE> 38

SECTION 205. Global Securities.

Except as provided in Section 305, the Securities shall be
issued in the form of one or more Global Securities. Every Global Security
authenticated and delivered hereunder shall bear a legend in substantially the
following form, in capital letters and bold-face type:

THIS SECURITY IS A GLOBAL SECURITY WITHIN THE MEANING OF THE
INDENTURE HEREINAFTER REFERRED TO AND IS REGISTERED IN THE NAME OF A DEPOSITARY
OR A NOMINEE THEREOF. THIS SECURITY MAY NOT BE EXCHANGED IN WHOLE OR IN PART
FOR A SECURITY REGISTERED, AND NO TRANSFER OF THIS SECURITY IN WHOLE OR IN PART
MAY BE REGISTERED, IN THE NAME OF ANY PERSON OTHER THAN SUCH DEPOSITARY OR A
NOMINEE THEREOF, EXCEPT IN THE LIMITED CIRCUMSTANCES DESCRIBED IN THE
INDENTURE.

If the Depositary is the Depository Trust Company, the Global
Security authenticated and delivered hereunder shall also bear a legend in
substantially the following form, in capital letters and bold-face type:

UNLESS THIS CERTIFICATE IS PRESENTED BY AN AUTHORIZED
SIGNATORY OF THE DEPOSITORY TRUST COMPANY ("DTC") TO THE COMPANY OR ITS AGENT
FOR REGISTRATION OF TRANSFER, EXCHANGE, OR PAYMENT, AND ANY CERTIFICATE ISSUED
IS REGISTERED IN THE NAME OF CEDE & CO. OR IN SUCH OTHER NAME AS IS REQUESTED
BY AN AUTHORIZED REPRESENTATIVE OF DTC (AND ANY PAYMENT IS MADE TO CEDE & CO.
OR TO SUCH OTHER ENTITY AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF
DTC), ANY TRANSFER, PLEDGE OR OTHER USE HEREOF FOR VALUE OR OTHERWISE BY OR TO
ANY PERSON IS WRONGFUL INASMUCH AS THE REGISTERED OWNER HEREOF, CEDE & CO., HAS
AN INTEREST HEREIN.

30
<PAGE> 39

ARTICLE III

THE SECURITIES

SECTION 301. Title and Terms.

The aggregate principal amount of Securities which may be
authenticated and delivered under this Indenture is limited to $300,000,000,
except for Securities authenticated and delivered upon registration of transfer
of, or in exchange for, or in lieu of, other Securities pursuant to Section
304, 305, 306 or 906.

The Securities shall be known and designated as the "[____]%
Senior Notes due 2006" of the Company. Their Stated Maturity shall be
September 15, 2006 and they shall bear interest at the rate of [___]% per
annum, from the date of original issuance of Securities pursuant to this
Indenture or from the most recent Interest Payment Date to which interest has
been paid or duly provided for, as the case may be, payable semi-annually on
March 15 and September 15, commencing March 15, 1997, to the Person in whose
name the Security or any Predecessor Security is registered at the close of
business on the February 28 (or, in a leap year, February 29) or the August 31
next preceding such Interest Payment Date, until the principal thereof is paid
or made available for payment.

The principal of and interest on the Securities shall be
payable (i) in respect of Securities held of record by the Depositary or its
nominee in same day funds and (ii) in respect of Securities held of record by
Holders other than the Depositary or its nominee at the Corporate Trust Office
or at such other office or agency maintained by the Company for such purpose
pursuant to this Indenture; provided, however, that at the option of the
Company, payment of interest to Holders of record other than the Depositary or
its nominee may be made by

31
<PAGE> 40

check mailed to the address of the Person entitled thereto as such address
shall appear in the Security Register.

The Securities, in whole or any specified part, shall be
defeasible pursuant to Section 1102 or Section 1103 or both such Sections.

Except as may be otherwise provided for by Section 305, the
Securities shall be issuable in the form of one or more Global Securities,
shall bear the legend specified in Section 205 and shall be registered in the
name of The Depository Trust Company or its nominee, as Depositary.

SECTION 302. Denominations.

The Securities shall be issuable only in fully registered form
without coupons and only in denomina- tions of $1,000 and any integral multiple
thereof.

SECTION 303. Execution, Authentication, Delivery and Dating.

The Securities shall be executed on behalf of the Company by
its Chairman of the Board, one of its Vice Chairmen, its President or one of
its Vice Presidents, under its corporate seal reproduced thereon attested by
its Secretary or one of its Assistant Secretaries. The signature of any of
these officers on the Securities may be manual or facsimile.

Securities bearing the manual or facsimile signatures of
individuals who were at any time the proper officers of the Company shall bind
the Company, notwithstanding that such individuals or any of them have ceased
to hold such offices prior to the authentication and delivery of such
Securities or did not hold such offices at the date of such Securities.

32
<PAGE> 41

At any time and from time to time after the execution and
delivery of this Indenture, the Company may deliver Securities executed by the
Company to the Trustee for authentication, together with a Company Order for
the authentication and delivery of such Securities; and the Trustee in
accordance with such Company Order shall authenticate and deliver such
Securities as provided in this Indenture and not otherwise. The aggregate
principal amount of Securities Outstanding at any time may not exceed
$300,000,000 except for Securities authenticated and delivered upon
registration of transfer of, or in exchange for, or in lieu of, other
Securities pursuant to Section 304, 305, 306 or 906.

Each Security shall be dated the date of its authentication.

No Security shall be entitled to any benefit under this
Indenture or be valid or obligatory for any purpose unless there appears on
such Security a certificate of authentication substantially in the form
provided for herein executed by the Trustee by manual signature, and such
certificate upon any Security shall be conclusive evidence, and the only
evidence, that such Security has been duly authenticated and delivered
hereunder. The Trustee may appoint an Authenticating Agent pursuant to the
terms of Section 614.

SECTION 304. Temporary Securities.

Pending the preparation of definitive Securities, the Company
may execute, and upon Company Order the Trustee shall authenticate and deliver,
temporary Securities which are printed, lithographed, typewritten, mimeographed
or otherwise produced, in any authorized denomination, substantially of the
tenor of the definitive Securities in lieu of which they are issued and with
such appropriate insertions, omissions, substitutions and other variations as
the officers executing such Securi-

33
<PAGE> 42

ties may determine, as evidenced by their execution of such Securities. Every
such temporary Security shall be executed by the Company and shall be
authenticated and delivered by the Trustee upon the same conditions and in
substantially the same manner, and with the same effect, as the definitive
Security in lieu of which it is issued.

If temporary Securities are issued, the Company will cause
definitive Securities to be prepared without unreasonable delay. After the
preparation of definitive Securities, the temporary Securities may be
exchangeable for definitive Securities upon surrender of the temporary
Securities at any office or agency of the Company designated pursuant to
Section 1002, without charge to the Holder. Upon surrender for cancellation of
any one or more temporary Securities the Company shall execute and the Trustee
shall authenticate and deliver in exchange therefor a like principal amount of
definitive Securities of authorized denominations. Until so exchanged the
temporary Securities shall in all respects be entitled to the same benefits
under this Indenture as definitive Securities.

SECTION 305. Registration, Registration of Transfer and
Exchange.

The Company shall cause to be kept at the Corporate Trust
Office of the Trustee a register (the register maintained in such office and in
any other office or agency designated pursuant to Section 1002 being herein
sometimes collectively referred to as the "Security Register") in which,
subject to such reasonable regulations as it may prescribe, the Company shall
provide for the registration of Securities and of transfers of Securities. The
Trustee is hereby appointed "Security Registrar" for the purpose of registering
Securities and transfers of Securities as herein provided.

34
<PAGE> 43

Upon surrender for registration of transfer of any Security at
an office or agency of the Company designated pursuant to Section 1002 for such
purpose, the Company shall execute, and the Trustee shall authenticate and
deliver, in the name of the designated transferee or transferees, one or more
new Securities of any authorized denominations and of a like aggregate
principal amount.

At the option of the Holder, Securities may be exchanged for
other Securities of any authorized denominations and of a like aggregate
principal amount and of a like Stated Maturity and with like terms and
conditions, upon surrender of the Securities to be exchanged at such office or
agency. Whenever any Securities are so surrendered for exchange, the Company
shall execute, and the Trustee shall authenticate and deliver, the Securities
which the Holder making the exchange is entitled to receive.

All Securities issued upon any registration of transfer or
exchange of Securities shall be the valid obligations of the Company,
evidencing the same debt, and entitled to the same benefits under this
Indenture, as the Securities surrendered upon such registration of transfer or
exchange.

Every Security presented or surrendered for registration of
transfer or for exchange shall (if so required by the Company or the Trustee)
be duly endorsed, or be accompanied by a written instrument of transfer in form
satisfactory to the Company and the Security Registrar duly executed, by the
Holder thereof or his attorney duly authorized in writing.

No service charge shall be made for any registration of
transfer or exchange of Securities, but the Company may require payment of a
sum sufficient to cover any tax or other governmental charge that may be
imposed in connection with any registration of transfer or ex-

35
<PAGE> 44

change of Securities, other than exchanges pursuant to Section 304 or 906 not
involving any transfer.

The provisions of clauses (1), (2), (3) and (4) below shall
apply only to Global Securities:

(1) Each Global Security authenticated under this
Indenture shall be registered in the name of the Depositary designated for such
Global Security or a nominee thereof and delivered to such Depositary or a
nominee thereof or custodian therefor, and each such Global Security shall
constitute a single Security for all purposes of this Indenture.

(2) Notwithstanding any other provision in this
Indenture, no Global Security may be exchanged in whole or in part for
Securities registered, and no transfer of a Global Security in whole or in part
may be registered, in the name of any Person other than the Depositary for such
Global Security or a nominee thereof unless (A) such Depositary (i) has
notified the Company that it is unwilling or unable to continue as Depositary
for such Global Security and is not replaced by a successor Depositary approved
by the Trustee within 90 days or (ii) at any time has ceased to be a clearing
agency registered under the Exchange Act, or (B) the Company in its sole
discretion determines not to have all of the Securities represented by a Global
Security and notifies the Trustee thereof.

(3) Subject to clause (2) above, any exchange of a Global
Security for other Securities may be made in whole or in part, and all
Securities issued in exchange for a Global Security or any portion thereof
shall be registered in such names as the Depositary for such Global Security
shall direct.

36
<PAGE> 45

(4) Every Security authenticated and delivered upon
registration of transfer of, or in exchange for or in lieu of, a Global
Security or any portion thereof, whether pursuant to this Section, Section 304,
306 or 906 or otherwise, shall be authenticated and delivered in the form of,
and shall be, a Global Security, unless such Security is registered in the name
of a Person other than the Depositary for such Global Security or a nominee
thereof.

SECTION 306. Mutilated, Destroyed, Lost and Stolen Securities.

If any mutilated Security is surrendered to the Trustee, the
Company shall execute and the Trustee shall authenticate and deliver in
exchange therefor a new Security of like tenor and principal amount and bearing
a number not contemporaneously outstanding.

If there shall be delivered to the Company and the Trustee (i)
evidence to their satisfaction of the destruction, loss or theft of any
Security and (ii) such security or indemnity as may be required by them to save
each of them and any agent of either of them harmless, then, in the absence of
notice to the Company or the Trustee that such Security has been acquired by a
bona fide purchaser, the Company shall execute and the Trustee shall
authenticate and deliver, in lieu of any such destroyed, lost or stolen
Security, a new Security of like tenor and principal amount and bearing a
number not contemporaneously outstanding.

In case any such mutilated, destroyed, lost or stolen Security
has become or is about to become due and payable, the Company in its discretion
may, instead of issuing a new Security, pay such Security.

Upon the issuance of any new Security under this Section, the
Company may require the payment of a

37
<PAGE> 46

sum sufficient to cover any tax or other governmental charge that may be
imposed in relation thereto and any other expenses (including the fees and
expenses of the Trustee) connected therewith.

Every new Security issued pursuant to this Section in lieu of
any destroyed, lost or stolen Security shall constitute an original additional
contractual obligation of the Company, whether or not the destroyed, lost or
stolen Security shall be at any time enforceable by anyone, and shall be
entitled to all the benefits of this Indenture equally and proportionately with
any and all other Securities duly issued hereunder.

The provisions of this Section are exclusive and shall
preclude (to the extent lawful) all other rights and remedies with respect to
the replacement or payment of mutilated, destroyed, lost or stolen Securities.

SECTION 307. Payment of Interest; Interest Rights Preserved.

Interest on any Security which is payable, and is punctually
paid or duly provided for, on any Interest Payment Date shall be paid to the
Person in whose name that Security (or one or more Predecessor Securities) is
registered at the close of business on the Regular Record Date for such
interest. Payment of interest will be made (i) in respect of Securities held by
the Depositary or its nominee in same day funds and (ii) in respect of
Securities held of record by Holders other than the Depositary or its nominee
at the Corporate Trust Office or at such other office or agency of the Company
as it shall maintain for that purpose pursuant to Section 1002, provided,
however, that, at the option of the Company, interest on any Security held of
record by Holders other than the Depositary or its nominee may be paid by
mailing

38
<PAGE> 47

checks to the addresses of the Holders thereof as such addresses appear in the
Securities Register.

Any interest on any Security which is payable, but is not
punctually paid or duly provided for, on any Interest Payment Date (herein
called "Defaulted Interest") shall forthwith cease to be payable to the Holder
on the relevant Regular Record Date by virtue of having been such Holder, and
such Defaulted Interest may be paid by the Company, at its election in each
case, as provided in clause (1) or (2) below:

(1) The Company may elect to make payment of any
Defaulted Interest to the Persons in whose names the Securities (or their
respective Predecessor Securities) are registered at the close of business on a
Special Record Date for the payment of such Defaulted Interest, which shall be
fixed in the following manner. The Company shall notify the Trustee in writing
of the amount of Defaulted Interest proposed to be paid on each Security and
the date of the proposed payment, and at the same time the Company shall
deposit with the Trustee an amount of money equal to the aggregate amount
proposed to be paid in respect of such Defaulted Interest or shall make
arrangements satisfactory to the Trustee for such deposit prior to the date of
the proposed payment, such money when deposited to be held in trust for the
benefit of the Persons entitled to such Defaulted Interest as in this clause
provided. Thereupon the Trustee shall fix a Special Record Date for the payment
of such Defaulted Interest which shall be not more than 15 days and not less
than 10 days prior to the date of the proposed payment and not less than 10
days after the receipt by the Trustee of the notice of the proposed payment.
The Trustee shall promptly notify the Company of such Special Record Date and,
in the name and at the expense of the Company, shall cause notice of the
proposed payment of such Defaulted Interest and the Special Record Date
therefor to be mailed, first-class postage prepaid, to each Holder at

39
<PAGE> 48

his address as it appears in the Security Register, not less than 10 days prior
to such Special Record Date. Notice of the proposed payment of such Defaulted
Interest and the Special Record Date therefor having been so mailed, such
Defaulted Interest shall be paid to the Persons in whose names the Securities
(or their respective Predecessor Securities) are registered at the close of
business on such Special Record Date and shall no longer be payable pursuant to
the following clause (2).

(2) The Company may make payment of any Defaulted
Interest in any other lawful manner not inconsistent with the requirements of
any securities exchange on which the Securities may be listed, and upon such
notice as may be required by such exchange, if, after notice given by the
Company to the Trustee of the proposed payment pursuant to this clause, such
manner of payment shall be deemed practicable by the Trustee.

Subject to the foregoing provisions of this Section, each
Security delivered under this Indenture upon registration of transfer of or in
exchange for or in lieu of any other Security shall carry the rights to
interest accrued and unpaid, and to accrue, which were carried by such other
Security.

SECTION 308. Persons Deemed Owners.

Prior to due presentment of a Security for registration of
transfer, the Company, the Trustee and any agent of the Company or the Trustee
may treat the Person in whose name such Security is registered as the owner of
such Security for the purpose of receiving payment of principal of and (subject
to Section 307) interest on such Security and for all other purposes
whatsoever, whether or not such Security be overdue, and neither the Company,
the Trustee nor any agent of the Company or the Trustee shall be affected by
notice to the contrary.

40
<PAGE> 49

SECTION 309. Cancellation.

All Securities surrendered for payment, registration of
transfer or exchange shall, if surrendered to any Person other than the
Trustee, be delivered to the Trustee and shall be promptly cancelled by it. The
Company may at any time deliver to the Trustee for cancellation any Securities
previously authenticated and delivered hereunder which the Company may have
acquired in any manner whatsoever, and all Securities so delivered shall be
promptly cancelled by the Trustee. No Securities shall be authenticated in lieu
of or in exchange for any Securities cancelled as provided in this Section,
except as expressly permitted by this Indenture. All cancelled Securities held
by the Trustee shall be destroyed by the Trustee and a certificate of such
destruction delivered to the Company unless the Trustee is otherwise directed
by a Company Order.

SECTION 310. Computation of Interest.

Interest on the Securities shall be computed on the basis of a
360-day year of twelve 30-day months.

ARTICLE IV

SATISFACTION AND DISCHARGE

SECTION 401. Satisfaction and Discharge of Indenture.

This Indenture shall cease to be of further effect (except as
to any surviving rights of registration of transfer or exchange of Securities
herein expressly provided for), and the Trustee, on demand of and at the
expense of the Company, shall execute proper instruments acknowledging
satisfaction and discharge of this Indenture, when

41
<PAGE> 50

(1) either

(A) all Securities theretofore authenticated and
delivered (other than (i) Securities which have been destroyed, lost or stolen
and which have been replaced or paid as provided in Section 306 and (ii)
Securities for whose payment money has theretofore been deposited in trust or
segregated and held in trust by the Company and thereafter repaid to the
Company or discharged from such trust, as provided in Section 1003) have been
delivered to the Trustee for cancellation; or

(B) all such Securities not theretofore delivered to the
Trustee for cancellation

(i) have become due and payable, or

(ii) will become due and payable at their Stated
Maturity within one year, and the Company, in the case of (i) or (ii), has
deposited or caused to be deposited with the Trustee as trust funds in trust
for the purpose an amount sufficient to pay and discharge the entire
indebtedness on such Securities not theretofore delivered to the Trustee for
cancellation, for principal and interest to the date of such deposit (in the
case of Securities which have become due and payable) or to the Stated
Maturity, as the case may be;

(2) the Company has paid or caused to be paid all other
sums payable hereunder by the Company; and

(3) the Company has delivered to the Trustee an Officers'
Certificate and an Opinion of Counsel, each stating that all conditions
precedent herein provided for relating to the satisfaction and discharge of
this Indenture have been complied with.

Notwithstanding the satisfaction and discharge of this
Indenture, the obligations of the Company to the

42
<PAGE> 51

Trustee under Section 607, the obligations of the Company to any Authenticating
Agent under Section 614 and, if money shall have been deposited with the
Trustee pursuant to subclause (B) of clause (1) of this Section or if money or
U.S. Government Obligations have been deposited with the Trustee pursuant to
Section 1104, the obligations of the Trustee under Section 402 and the last
paragraph of Section 1003 shall survive.

SECTION 402. Application of Trust Money.

Subject to the provisions of the last paragraph of Section
1003, all money deposited with the Trustee pursuant to Section 401, all money
and U.S. Government Obligations deposited with the Trustee pursuant to Section
1102 or 1103 and all money received by the Trustee in respect of U.S.
Government Obligations deposited with the Trustee pursuant to Section 1102 or
1103, shall be held in trust and applied by it, in accordance with the
provisions of the Securities and this Indenture, to the payment, either
directly or through any Paying Agent (including the Company acting as its own
Paying Agent) as the Trustee may determine, to the Persons entitled thereto, of
the principal and interest for whose payment such money has been deposited with
or received by the Trustee.

ARTICLE V

REMEDIES

SECTION 501. Events of Default.

"Event of Default," wherever used herein, means any one of the
following events (whatever the reason for such Event of Default and whether it
shall be voluntary or involuntary or be effected by operation of law or
pursuant to any judgment, decree or order of any court or

43
<PAGE> 52

any order, rule or regulation of any administrative or governmental body):

(1) default in the payment of the principal of any
Security at its Stated Maturity; or

(2) default in the payment of any interest upon any
Security when it becomes due and payable, and continuance of such default for a
period of 30 days; or

(3) default in the performance, or breach, of any
covenant or warranty of the Company in this Indenture (other than a covenant or
warranty a default in whose performance or whose breach is elsewhere in this
Section specifically dealt with), and continuance of such default or breach for
a period of 60 days after there has been given, by registered or certified
mail, to the Company by the Trustee or to the Company and the Trustee by the
Holders of at least 25% in principal amount of the Outstanding Securities a
written notice specifying such default or breach and requiring it to be
remedied and stating that such notice is a "Notice of Default" hereunder; or

(4) a default in the payment of principal at maturity
(subject to any applicable grace period) of any Indebtedness for money borrowed
by the Company or any Subsidiary in an aggregate principal amount of
$25,000,000 or the acceleration of such Indebtedness without such acceleration
having been rescinded or annulled within a period of 30 days after there shall
have been given, by registered or certified mail, to the Company by the Trustee
or to the Company and the Trustee by the Holders of at least 25% in principal
amount of the Outstanding Securities a written notice specifying such default
and requiring the Company to cause such acceleration to be rescinded or
annulled and stating that such notice is a "Notice of Default" hereunder;
provided, however, that, subject to the provisions of Sections 601

44
<PAGE> 53

and 602, the Trustee shall not be deemed to have knowledge of such default
unless either (A) a Responsible Officer of the Trustee shall have actual
knowledge of such default or (B) the Trustee shall have received written notice
thereof from the Company, from any Holder, from the holder of any such
indebtedness or from the trustee under any such mortgage, indenture or other
instrument; or

(5) the entry by a court having jurisdiction in the
premises of (A) a decree or order for relief in respect of the Company or any
Significant Subsidiary in an involuntary case or proceeding under any
applicable federal or state bankruptcy, insolvency, reorganization or other
similar law or (B) a decree or order adjudging the Company or any Significant
Subsidiary a bankrupt or insolvent, or approving as properly filed a petition
seeking reorganization, arrangement, adjustment or composition of or in respect
of the Company or any Significant Subsidiary under any applicable federal or
state law, or appointing a custodian, receiver, liquidator, assignee, trustee,
sequestrator or other similar official of the Company or any Significant
Subsidiary or of any substantial part of its property, or ordering the winding
up or liquidation of its affairs, and the continuance of any such decree or
order for relief or any such other decree or order unstayed and in effect for a
period of 90 consecutive days; or

(6) the commencement by the Company or any Significant
Subsidiary of a voluntary case or proceeding under any applicable federal or
state bankruptcy, insolvency, reorganization or other similar law or of any
other case or proceeding to be adjudicated a bankrupt or insolvent, or the
consent by it to the entry of a decree or order for relief in respect of the
Company or any Significant Subsidiary in an involuntary case or proceeding
under any applicable federal or state bankruptcy, insolvency, reorganization or
other similar law or to the

45
<PAGE> 54

commencement of any bankruptcy or insolvency case or proceeding against it, or
the filing by it of a petition or answer or consent seeking reorganization or
relief under any applicable federal or state law, or the consent by it to the
filing of such petition or to the appointment of or taking possession by a
custodian, receiver, liquidator, assignee, trustee, sequestrator or other
similar official of the Company or any Significant Subsidiary or of any
substantial part of its property, or the making by it of an assignment for the
benefit of creditors, or the admission by it in writing of its inability to pay
its debts generally as they become due, or the taking of corporate action by
the Company or any Significant Subsidiary in furtherance of any such action.

SECTION 502. Acceleration of Maturity; Rescission and
Annulment.

If an Event of Default (other than an Event of Default
specified in Section 501(5) or 501(6)) occurs and is continuing, then and in
every such case the Trustee or the Holders of not less than 25% in aggregate
principal amount of the Outstanding Securities may declare the principal of all
the Securities to be due and payable immediately, by a notice in writing to the
Company (and to the Trustee if given by Holders), and upon any such declaration
such principal plus any interest accrued on the Securities to the date of
declaration shall become immediately due and payable. If an Event of Default
specified in Section 501(5) or 501(6) occurs, the principal amount of all the
Securities shall automatically, and without any declaration or other action on
the part of the Trustee or any Holder, become immediately due and payable.

At any time after such a declaration of acceleration has been
made and before a judgment or decree for payment of the money due has been
obtained by the Trustee as hereinafter in this Article provided, the Holders of
at least 50% in principal amount of the Outstanding

46
<PAGE> 55

Securities, by written notice to the Company and the Trustee, may rescind and
annul such declaration and its consequences if:

(1) the Company has paid or deposited with the Trustee a
sum sufficient to pay

(A) all overdue interest on all Securities,

(B) the principal of any Securities which have become due
otherwise than by such declaration of acceleration and interest
thereon at the rate borne by the Securities,

(C) to the extent that payment of such interest is lawful,
interest upon overdue interest at the rate borne by the Securities,
and

(D) all sums paid or advanced by the Trustee hereunder and the
reasonable compensation, expenses, disbursements and advances of the
Trustee, its agents and counsel and all other amounts due the Trustee
under Section 607;

and

(2) all Events of Default, other than the non-payment of
the principal of Securities which have become due solely by such declaration of
acceleration, have been cured or waived as provided in Section 513.

No such rescission shall affect any subsequent default or
impair any right consequent thereon.

47
<PAGE> 56

SECTION 503. Collection of Indebtedness and Suits for
Enforcement by Trustee.

The Company covenants that if:

(1) default is made in the payment of any interest on any
Security when such interest becomes due and payable and such default continues
for a period of 30 days, or

(2) default is made in the payment of the principal of
any Security at the Stated Maturity thereof, the Company will, upon demand of
the Trustee, pay to it, for the benefit of the Holders of such Securities, the
whole amount then due and payable on such Securities for principal and
interest, and, to the extent that payment of such interest shall be legally
enforceable, interest on any overdue principal and on any overdue interest, at
the rate borne by the Securities, and, in addition thereto, such further amount
as shall be sufficient to cover the costs and expenses of collection, including
the reasonable compensation, expenses, disbursements and advances of the
Trustee, its agents and counsel.

If the Company fails to pay such amounts forthwith upon such
demand, the Trustee, in its own name and as trustee of an express trust, may
institute a judicial proceeding for the collection of the sums so due and
unpaid and may prosecute any such proceeding to judgment or final decree, and
may enforce the same against the Company (or any other obligor upon the
Securities) and collect the moneys adjudged or decreed to be payable in the
manner provided by law out of the property of the Company (or any other obligor
upon the Securities), wherever situated.

If an Event of Default occurs and is continuing, the Trustee
may in its discretion proceed to protect and enforce its rights and the rights
of the Holders by

48
<PAGE> 57

such appropriate judicial proceedings as the Trustee shall deem most effectual
to protect and enforce any such rights, whether for the specific enforcement of
any covenant or agreement in this Indenture or in aid of the exercise of any
power granted herein, or to enforce any other proper remedy.

SECTION 504. Trustee May File Proofs of Claim.

In case of any judicial proceeding relative to the Company (or
any other obligor upon the Securities), its property or its creditors, the
Trustee shall be entitled and empowered, by intervention in such proceeding or
otherwise, to take any and all actions authorized under the Trust Indenture Act
in order to have claims of the Holders and the Trustee allowed in any such
proceeding. In particular, the Trustee shall be authorized to collect and
receive any moneys or other property payable or deliverable on any such claims
and to distribute the same; and any custodian, receiver, assignee, trustee,
liquidator, sequestrator or other similar official in any such judicial
proceeding is hereby authorized by each Holder to make such payments to the
Trustee and, in the event that the Trustee shall consent to the making of such
payments directly to the Holders, to pay to the Trustee any amount due it for
the reasonable compensation, expenses, disbursements and advances of the
Trustee, its agents and counsel, and any other amounts due the Trustee under
Section 607.

No provision of this Indenture shall be deemed to authorize
the Trustee to authorize or consent to or accept or adopt on behalf of any
Holder any plan of reorganization, arrangement, adjustment or composition
affecting the Securities or the rights of any Holder thereof or to authorize
the Trustee to vote in respect of the claim of any Holder in any such
proceeding; provided, however, that the Trustee may, on behalf of the Holders,
vote for the election of a trustee in bankruptcy or

49
<PAGE> 58

similar official and may be a member of the Creditors' Committee.

SECTION 505. Trustee May Enforce Claims Without Possession of
Securities.

All rights of action and claims under this Indenture or the
Securities may be prosecuted and enforced by the Trustee without the possession
of any of the Securities or the production thereof in any proceeding relating
thereto, and any such proceeding instituted by the Trustee shall be brought in
its own name as trustee of an express trust, and any recovery of judgment
shall, after provision for the payment of the reasonable compensation,
expenses, disbursements and advances of the Trustee, its agents and counsel,
and all other amounts due the Trustee under Section 607, be for the ratable
benefit of the Holders of the Securities in respect of which such judgment has
been recovered.

SECTION 506. Application of Money Collected.

Any money collected by the Trustee pursuant to this Article
shall be applied in the following order, at the date or dates fixed by the
Trustee and, in case of the distribution of such money on account of principal
or interest, upon presentation of the Securities and the notation thereon of
the payment if only partially paid and upon surrender thereof if fully paid:

FIRST: To the payment of all amounts due the Trustee under
Section 607; and

SECOND: To the payment of the amounts then due and unpaid for
principal of and interest on the Securities in respect of which or for the
benefit of which such money has been collected, ratably, without preference or
priority of any kind, according to the amounts due and

50
<PAGE> 59

payable on such Securities for principal and interest, respectively; and

THIRD: The balance, if any, to the Company or any other Person
or Persons determined to be entitled thereto.

SECTION 507. Limitation on Suits.

No Holder of any Security shall have any right to institute
any proceeding, judicial or otherwise, with respect to this Indenture, or for
the appointment of a receiver or trustee, or for any other remedy hereunder,
unless

(1) such Holder has previously given written notice to
the Trustee of a continuing Event of Default;

(2) the Holders of not less than 25% in principal amount
of the Outstanding Securities shall have made written request to the Trustee to
institute proceedings in respect of such Event of Default in its own name as
Trustee hereunder;

(3) such Holder or Holders have offered to the Trustee
reasonable indemnity against the costs, expenses and liabilities to be incurred
in compliance with such request;

(4) the Trustee for 60 days after its receipt of such
notice, request and offer of indemnity has failed to institute any such
proceeding; and

(5) no direction inconsistent with such written request
has been given to the Trustee during such 60-day period by the Holders of 50%
or more in principal amount of the Outstanding Securities; it being understood
and intended that no one or more Holders shall have any right in any manner
whatever by virtue of, or by availing

51
<PAGE> 60

of, any provision of this Indenture to affect, disturb or prejudice the rights
of any other Holders, or to obtain or to seek to obtain priority or preference
over any other Holders or to enforce any right under this Indenture, except in
the manner herein provided and for the equal and ratable benefit of all the
Holders.

SECTION 508. Unconditional Right of Holders to Receive
Principal and Interest.

Notwithstanding any other provision in this Indenture, the
Holder of any Security shall have the right, which is absolute and
unconditional, to receive payment of the principal of and (subject to Section
307) interest on such Security on the respective Stated Maturities expressed in
such Security and to institute suit for the enforcement of any such payment on
or after such Stated Maturities, and such rights shall not be impaired without
the consent of such Holder.

SECTION 509. Restoration of Rights and Remedies.

If the Trustee or any Holder has instituted any proceeding to
enforce any right or remedy under this Indenture and such proceeding has been
discontinued or abandoned for any reason, or has been determined adversely to
the Trustee or to such Holder, then and in every such case, subject to any
determination in such proceeding, the Company, the Trustee and the Holders
shall be restored severally and respectively to their former positions
hereunder and thereafter all rights and remedies of the Trustee and the Holders
shall continue as though no such proceeding had been instituted.

52
<PAGE> 61

SECTION 510. Rights and Remedies Cumulative.

Except as otherwise provided with respect to the replacement
or payment of mutilated, destroyed, lost or stolen Securities in the last
paragraph of Section 306, no right or remedy herein conferred upon or reserved
to the Trustee or to the Holders is intended to be exclusive of any other right
or remedy, and every right and remedy shall, to the extent permitted by law, be
cumulative and in addition to every other right and remedy given hereunder or
now or hereafter existing at law or in equity or otherwise. The assertion or
employment of any right or remedy hereunder, or otherwise, shall not prevent
the concurrent assertion or employment of any other appropriate right or
remedy.

SECTION 511. Delay or Omission Not Waiver.

No delay or omission of the Trustee or of any Holder of any
Security to exercise any right or remedy accruing upon any Event of Default
shall impair any such right or remedy or constitute a waiver of any such Event
of Default or an acquiescence therein. Every right and remedy given by this
Article or by law to the Trustee or to the Holders may be exercised from time
to time, and as often as may be deemed expedient, by the Trustee or by the
Holders, as the case may be.

SECTION 512. Control by Holders.

The Holders of 50% or more in principal amount of the
Outstanding Securities shall have the right to direct the time, method and
place of conducting any proceeding for any remedy available to the Trustee or
exercising any trust or power conferred on the Trustee; provided that

(1) such direction shall not be in conflict with any rule
of law or with this Indenture, and

53
<PAGE> 62

(2) the Trustee may take any other action deemed proper
by the Trustee which is not inconsistent with such direction.

SECTION 513. Waiver of Past Defaults.

The Holders of at least 50% in principal amount of the
Outstanding Securities may on behalf of the Holders of all the Securities waive
any past default hereunder and its consequences, except a default

(1) in the payment of the principal of or interest on any
Security, or

(2) in respect of a covenant or provision hereof which
under Article Nine cannot be modified or amended without the consent of the
Holder of each Outstanding Security affected.

Upon any such waiver, such default shall cease to exist, and
any Event of Default arising therefrom shall be deemed to have been cured, for
every purpose of this Indenture; but no such waiver shall extend to any
subsequent or other default or impair any right consequent thereon.

SECTION 514. Undertaking for Costs.

In any suit for the enforcement of any right or remedy under
this Indenture, or in any suit against the Trustee for any action taken,
suffered or omitted by it as Trustee, a court may require any party litigant in
such suit to file an undertaking to pay the costs of such suit, and may assess
costs against any such party litigant, in the manner and to the extent provided
in the Trust Indenture Act; provided, that neither this Section nor the Trust
Indenture Act shall be deemed to authorize any court to require such an
undertaking or to make such an assessment in any suit instituted by the
Company; and

54
<PAGE> 63

provided, further, that the provisions of this Section shall not apply to any
suit instituted by the Trustee, to any suit instituted by any Holder, or group
of Holders, holding in the aggregate more than 10% in principal amount of the
Outstanding Securities, or to any suit instituted by any Holder for the
enforcement of the payment of the principal of or interest on any Security on
or after the Stated Maturities expressed in such Security.

SECTION 515. Waiver of Stay or Extension Laws.

The Company covenants (to the extent that it may lawfully do
so) that it will not at any time insist upon, or plead, or in any manner
whatsoever claim or take the benefit or advantage of, any stay or extension law
wherever enacted, now or at any time hereafter in force, which may affect the
covenants or the performance of this Indenture; and the Company (to the extent
that it may lawfully do so) hereby expressly waives all benefit or advantage of
any such law and covenants that it will not hinder, delay or impede the
execution of any power herein granted to the Trustee, but will suffer and
permit the execution of every such power as though no such law had been
enacted.

ARTICLE VI

THE TRUSTEE

SECTION 601. Certain Duties and Responsibilities.

The duties and responsibilities of the Trustee shall be as
provided by the Trust Indenture Act. Notwithstanding the foregoing, no
provision of this Indenture shall require the Trustee to expend or risk its own
funds or otherwise incur any financial liability in the

55
<PAGE> 64

performance of any of its duties hereunder, or in the exercise of any of its
rights or powers, if it shall have reasonable grounds for believing that
repayment of such funds or adequate indemnity against such risk or liability is
not reasonably assured to it. Whether or not herein expressly so provided,
every provision of this Indenture relating to the conduct or affecting the
liability of or affording protection to the Trustee shall be subject to the
provisions of this Section.

SECTION 602. Notice of Defaults.

The Trustee shall give the Holders notice of any default
hereunder as and to the extent provided by the Trust Indenture Act; provided,
however, that in the case of any default of the character specified in Section
501(3), no such notice to Holders shall be given until at least 30 days after
the occurrence thereof. For the purpose of this Section, the term "default"
means any event which is, or after notice or lapse of time or both would
become, an Event of Default.

SECTION 603. Certain Rights of Trustee.

Subject to the provisions of Section 601:

(1) the Trustee may rely and shall be protected in acting
or refraining from acting upon any resolution, certificate, statement,
instrument, opinion, report, notice, request, direction, consent, order, bond,
debenture, note, other evidence of indebtedness or other paper or document
believed by it to be genuine and to have been signed or presented by the proper
party or parties;

(2) any request or direction of the Company mentioned
herein shall be sufficiently evidenced by a Company Request or Company Order
and any resolution of

56
<PAGE> 65

the Board of Directors may be sufficiently evidenced by a Board Resolution;

(3) whenever in the administration of this Indenture the
Trustee shall deem it desirable that a matter be proved or established prior to
taking, suffering or omitting any action hereunder, the Trustee (unless other
evidence be herein specifically prescribed) may, in the absence of bad faith on
its part, rely upon an Officers' Certificate;

(4) the Trustee may consult with counsel and the written
advice of such counsel or any Opinion of Counsel shall be full and complete
authorization and protection in respect of any action taken, suffered or
omitted by it hereunder in good faith and in reliance thereon;

(5) the Trustee shall be under no obligation to exercise
any of the rights or powers vested in it by this Indenture at the request or
direction of any of the Holders pursuant to this Indenture, unless such Holders
shall have offered to the Trustee reasonable security or indemnity against the
costs, expenses and liabilities which might be incurred by it in compliance
with such request or direction;

(6) the Trustee shall not be bound to make any
investigation into the facts or matters stated in any resolution, certificate,
statement, instrument, opinion, report, notice, request, direction, consent,
order, bond, debenture, note, other evidence of indebtedness or other paper or
document, but the Trustee, in its discretion, may make such further inquiry or
investigation into such facts or matters as it may see fit, and, if the Trustee
shall determine to make such further inquiry or investigation, it shall be
entitled to examine the books, records and premises of the Company, personally
or by agent or attorney;

57
<PAGE> 66

(7) The Trustee shall not be liable for errors of
judgment made in good faith unless it was negligent in ascertaining the
pertinent facts;

(8) the Trustee shall not be liable with respect to any
action taken or omitted to be taken by it in good faith in accordance with the
direction of the Holders of at least 50% in principal amount of the Outstanding
Securities relating to the time, method and place of conducting any proceeding
for any remedy available to the Trustee, or exercising any trust or power
conferred upon the Trustee, under this Indenture; and

(9) the Trustee may execute any of the trusts or powers
hereunder or perform any duties hereunder either directly or by or through
agents or attorneys and the Trustee shall not be responsible for any misconduct
or negligence on the part of any agent or attorney appointed with due care by
it hereunder.

SECTION 604. Not Responsible for Recitals or Issuance of
Securities.

The recitals contained herein and in the Securities, except
the Trustee's certificates of authentica- tion, shall be taken as the
statements of the Company, and the Trustee or any Authenticating Agent assumes
no responsibility for their correctness. The Trustee makes no representations
as to the validity or sufficiency of this Indenture or of the Securities. The
Trustee or any Authenticating Agent shall not be accountable for the use or
application by the Company of Securities or the proceeds thereof.

58
<PAGE> 67

SECTION 605. May Hold Securities.

The Trustee, any Authenticating Agent, any Paying Agent, any
Security Registrar or any other agent of the Company, in its individual or any
other capacity, may become the owner or pledgee of Securities and, subject to
Sections 608 and 613, may otherwise deal with the Company with the same rights
it would have if it were not Trustee, Authenticating Agent, Paying Agent,
Security Registrar or such other agent.

SECTION 606. Money Held in Trust.

Money held by the Trustee or any Paying Agent in trust
hereunder need not be segregated from other funds except to the extent required
by law. The Trustee or any Paying Agent shall be under no liability for
interest on any money received by it hereunder except as otherwise agreed in
writing with the Company.

SECTION 607. Compensation and Reimbursement.

The Company agrees:

(1) to pay to the Trustee from time to time reasonable
compensation for all services rendered by it hereunder as may be mutually
agreed upon in writing by the Company and the Trustee (which compensation shall
not be limited by any provision of law in regard to the compensation of a
trustee of an express trust);

(2) except as otherwise expressly provided herein, to
reimburse the Trustee upon its request for all reasonable expenses,
disbursements and advances incurred or made by the Trustee in accordance with
the performance of its duties under this Indenture (including the reasonable
compensation and the expenses and disbursements of its agents and counsel),
except any such expense, dis-

59
<PAGE> 68

bursement or advance as may be attributable to its negligence or bad faith; and

(3) to indemnify the Trustee for, and to hold it harmless
against, any loss, liability or expense (other than any income or franchise tax
attributable to compensation payable to the Trustee hereunder) incurred without
negligence or bad faith on its part, arising out of or in connection with the
acceptance or administration of this trust, including the costs and expenses of
defending itself against any claim or liability in connection with the exercise
or performance of any of its powers or duties hereunder. The Trustee shall
notify the Company promptly of any action, suit or proceeding for which it may
seek indemnity. The Company shall defend such action, suit or proceeding and
the Trustee may have separate counsel, and, if the Company has failed to assume
the defense and employ counsel, or if the named parties to any such action,
suit or proceeding (including any impleaded parties) include both the Trustee
and the Company and the Trustee shall have been advised by its counsel that
representation of the Trustee and the Company by the same counsel would be
inappropriate under applicable standards of professional conduct due to actual
or potential differing interests between them, the Company shall pay the
reasonable fees and expenses of such counsel. The Company need not pay for any
settlement made without its consent, which shall not be unreasonably withheld.

The indemnity provided for in this Section 607 shall survive
the resignation or removal of any Trustee under this Indenture.

As security for the performance of the obligations of the
Company under this Section the Trustee shall have a lien prior to the
Securities upon all property and funds held or collected by the Trustee as
such, except

60
<PAGE> 69

funds held in trust for the payment of principal of or interest on particular
Securities.

When the Trustee incurs expenses or renders services in
connection with an Event of Default specified in Section 501(5) or (6), the
expenses and the compensation for the services are intended to constitute
expenses of administration under any bankruptcy law.

SECTION 608. Disqualification; Conflicting Interests.

If the Trustee has or shall acquire a conflicting interest
within the meaning of the Trust Indenture Act, the Trustee shall either
eliminate such interest or resign, to the extent and in the manner provided by,
and subject to the provisions of, the Trust Indenture Act and this Indenture.

SECTION 609. Corporate Trustee Required; Eligibility.

There shall at all times be a Trustee hereunder which shall be
a Person that is eligible pursuant to the Trust Indenture Act to act as such
and has a combined capital and surplus of at least $50,000,000. If such Person
publishes reports of condition at least annually, pursuant to law or to the
requirements of said supervising or examining authority, then for the purposes
of this Section, the combined capital and surplus of such Person shall be
deemed to be its combined capital and surplus as set forth in its most recent
report of condition so published. If at any time the Trustee shall cease to be
eligible in accordance with the provisions of this Section, it shall resign
immediately in the manner and with the effect hereinafter specified in this
Article.

61
<PAGE> 70

SECTION 610. Resignation and Removal; Appointment of
Successor.

(1) No resignation or removal of the Trustee and no
appointment of a successor Trustee pursuant to this Article shall become
effective until the acceptance of appointment by the successor Trustee in
accordance with the applicable requirements of Section 611.

(2) The Trustee may resign at any time by giving written
notice thereof to the Company. If an instrument of acceptance by a successor
Trustee shall not have been delivered to the Trustee within 30 days after the
giving of such notice of resignation, the resigning Trustee may petition any
court of competent jurisdiction for the appointment of a successor Trustee.

(3) The Trustee may be removed at any time by Act of the
Holders of 50% or more in principal amount of the Outstanding Securities,
delivered to the Trustee and to the Company.

(4) If at any time:

(A) the Trustee shall fail to comply with Section 608
after written request therefor by the Company or by any Holder who has
been a bona fide Holder of a Security for at least six months, or

(B) the Trustee shall cease to be eligible under Section
609 and shall fail to resign after written request therefor by the
Company or by any such Holder, or

(C) the Trustee shall become incapable of acting or shall
be adjudged a bankrupt or insolvent or a receiver of the Trustee or of
its property shall be appointed or any public officer shall take
charge or control of the Trustee or of its property

62
<PAGE> 71

or affairs for the purpose of rehabilitation, conservation or
liquidation, then, in any such case, (i) the Company by a Board
Resolution may remove the Trustee, or (ii) subject to Section 514, any
Holder who has been a bona fide Holder of a Security for at least six
months may, on behalf of himself and all others similarly situated,
petition any court of competent jurisdiction for the removal of the
Trustee and the appointment of a successor Trustee.

(5) If the Trustee shall resign, be removed or become
incapable of acting, or if a vacancy shall occur in the office of Trustee for
any cause, the Company, by a Board Resolution, shall promptly appoint a
successor Trustee and shall comply with the applicable requirements of Section
611. If, within one year after such resignation, removal or incapability, or
the occurrence of such vacancy, a successor Trustee shall be appointed by Act
of the Holders of at least 50% in principal amount of the Outstanding
Securities delivered to the Company and the retiring Trustee, the successor
Trustee so appointed shall, forthwith upon its acceptance of such appointment
in accordance with the appli- cable requirements of Section 611, become the
successor Trustee and supersede the successor Trustee appointed by the Company.
If no successor Trustee shall have been so appointed by the Company or the
Holders and accepted appointment in the manner required by Section 611, any
Holder who has been a bona fide Holder of a Security for at least six months
may, on behalf of himself and all others similarly situated, petition any court
of competent jurisdiction for the appointment of a successor Trustee.

(6) The Company shall give notice of each resignation and
each removal of the Trustee and each appointment of a successor Trustee to all
Holders in the manner provided in Section 106. Each notice shall include the
name of the successor Trustee and the address of its Corporate Trust Office.

63
<PAGE> 72

SECTION 611. Acceptance of Appointment by Successor.

Every successor Trustee appointed hereunder shall execute,
acknowledge and deliver to the Company and to the retiring Trustee an
instrument accepting such appointment, and thereupon the resignation or removal
of the retiring Trustee shall become effective and such successor Trustee,
without any further act, deed or conveyance, shall become vested with all the
rights, powers, trusts and duties of the retiring Trustee; provided, however,
on request of the Company or the successor Trustee, such retiring Trustee
shall, upon payment of its charges, execute and deliver an instrument
transferring to such successor Trustee all the rights, powers and trusts of the
retiring Trustee and shall duly assign, transfer and deliver to such successor
Trustee all property and money held by such retiring Trustee hereunder. Upon
request of any such successor Trustee, the Company shall execute any and all
instruments for more fully and certainly vesting in and confirming to such
successor Trustee all such rights, powers and trusts.

No successor Trustee shall accept its appointment unless at
the time of such acceptance such successor Trustee shall be qualified and
eligible under this Article.

SECTION 612. Merger, Conversion, Consolidation or Succession
to Business.

Any corporation into which the Trustee may be merged or
converted or with which it may be consolidated, or any corporation resulting
from any merger, conversion or consolidation to which the Trustee shall be a
party, or any corporation succeeding to all or substantially all the corporate
trust business of the Trustee, shall be the successor of the Trustee hereunder,
provided such corporation shall be otherwise qualified and eligible under

64
<PAGE> 73

this Article, without the execution or filing of any paper or any further act
on the part of any of the parties hereto. In case any Securities shall have
been authenticated, but not delivered, by the Trustee then in office, any
successor by merger, conversion or consolidation to such authenticating Trustee
may adopt such authentication and deliver the Securities so authenticated with
the same effect as if such successor Trustee had itself authenticated such
Securities.

SECTION 613. Preferential Collection of Claims Against
Company.

If and when the Trustee shall be or become a creditor of the
Company (or any other obligor upon the Securities), the Trustee shall be
subject to the provisions of the Trust Indenture Act regarding the collection
of claims against the Company (or any such other obligor).

SECTION 614. Appointment of Authenticating Agent.

The Trustee may appoint an Authenticating Agent or Agents
which shall be authorized to act on behalf of the Trustee to authenticate
Securities issued upon original issue and upon exchange, registration of
transfer or pursuant to Section 306, and Securities so authenticated shall be
entitled to the benefits of this Indenture and shall be valid and obligatory
for all purposes as if authenticated by the Trustee hereunder. Wherever
reference is made in this Indenture to the authentication and delivery of
Securities by the Trustee or the Trustee's certificate of authentication, such
reference shall be deemed to include authentication and delivery on behalf of
the Trustee by an Authenticating Agent and a certificate of authentication
executed on behalf of the Trustee by an Authenticating Agent. Each
Authenticating Agent shall be acceptable to the Company and shall at all times

65
<PAGE> 74

be a corporation organized and doing business under the laws of the United
States of America, any state thereof or the District of Columbia, authorized
under such laws to act as Authenticating Agent, having a combined capital and
surplus of not less than $50,000,000 and subject to supervision or examination
by federal or state authority. If such Authenticating Agent publishes reports
of condition at least annually, pursuant to law or to the requirements of said
supervising or examining authority, then for the purposes of this Section, the
combined capital and surplus of such Authenticating Agent shall be deemed to be
its combined capital and surplus as set forth in its most recent report of
condition so published. If at any time an Authenticating Agent shall cease to
be eligible in accordance with the provisions of this Section, such
Authenticating Agent shall resign immediately in the manner and with the effect
specified in this Section.

Any corporation into which an Authenticating Agent may be
merged or converted or with which it may be consolidated, or any corporation
resulting from any merger, conversion or consolidation to which such
Authenticating Agent shall be a party, or any corporation succeeding to the
corporate agency or corporate trust business of an Authenticating Agent, shall
continue to be an Authenticating Agent, provided such corporation shall be
otherwise eligible under this Section, without the execution or filing of any
paper or any further act on the part of the Trustee or the Authenticating
Agent.

An Authenticating Agent may resign at any time by giving
written notice thereof to the Trustee and to the Company. The Trustee may at
any time terminate the agency of an Authenticating Agent by giving written
notice thereof to such Authenticating Agent and to the Company. Upon receiving
such a notice of resignation or upon such a termination, or in case at any time
such Authenticating Agent shall cease to be eligible in accor-

66
<PAGE> 75

dance with the provisions of this Section, the Trustee may appoint a successor
Authenticating Agent which shall be acceptable to the Company and shall mail
written notice of such appointment by first-class mail, postage prepaid, to all
Holders as their names and addresses appear in the Security Register. Any
successor Authenticating Agent upon acceptance of its appointment hereunder
shall become vested with all the rights, powers and duties of its predecessor
hereunder, with like effect as if originally named as an Authenticating Agent.
No successor Authenticating Agent shall be appointed unless eligible under the
provisions of this Section.

Any Authenticating Agent by the acceptance of its appointment
shall be deemed to have represented to the Trustee that it is eligible for
appointment as Authenticating Agent under this Section and to have agreed with
the Trustee that it will (i) perform and carry out the duties of an
Authenticating Agent as herein set forth, including among other things the
duties to authenticate Securities when presented to it in connection with the
original issuance and with exchanges, registrations of transfer or pursuant to
Section 306; (ii) keep and maintain, and furnish to the Trustee from time to
time as requested by the Trustee, appropriate records of all transactions
carried out by it as Authenticating Agent; (iii) furnish the Trustee such other
information and reports as the Trustee may reasonably require; and (iv) notify
the Trustee promptly if it shall cease to be eligible to act as Authenticating
Agent in accordance with the provisions of this Section. Any Authenticating
Agent by the acceptance of its appointment shall be deemed to have agreed with
the Trustee to indemnify the Trustee against any loss, liability or expense
incurred by the Trustee and to defend any claim asserted against the Trustee by
reason of any acts or failures to act of such Authenticating Agent, but such
Authenticating Agent shall have no liability for any action taken by it in

67
<PAGE> 76

accordance with the specific written direction of the Trustee.

The Company agrees to pay to each Authenticating Agent from
time to time reasonable compensation for its services under this Section.

If an appointment is made pursuant to this Section, the
Securities may have endorsed thereon, in addition to the Trustee's certificate
of authentication, an alternative certificate of authentication in the
following form:

This is one of the Securities described in the
within-mentioned Indenture

----------------------------
As Trustee

By:
-------------------------
As Authenticating Agent

By:
-------------------------
By Authorized Signatory

ARTICLE VII

HOLDERS' LISTS AND REPORTS BY TRUSTEE AND COMPANY

SECTION 701. Company to Furnish Trustee Names and Addresses of
Holders.

The Company will furnish or cause to be furnished to the
Trustee

68
<PAGE> 77

(1) semi-annually, not more than 15 days after each
Regular Record Date, a list, in such form as the Trustee may reasonably
require, of the names and addresses of the Holders as of such Regular Record
Date, and

(2) at such other times as the Trustee may request in
writing, within 30 days (15 days with respect to any Special Record Date) after
the receipt by the Company of any such request, a list of similar form and
content as of a date not more than 15 days prior to the time such list is
furnished.

Notwithstanding the foregoing, so long as the Trustee shall be the Security
Registrar for the Securities, no such list need be furnished.

SECTION 702. Preservation of Information; Communications to
Holders.

(1) The Trustee shall preserve, in as current a form as
is reasonably practicable, the names and addresses of Holders contained in the
most recent list furnished to the Trustee as provided in Section 701 and the
names and addresses of Holders received by the Trustee in its capacity as
Security Registrar. The Trustee may destroy any list furnished to it as
provided in Section 701 upon receipt of a new list so furnished.

(2) The rights of Holders to communicate with other
Holders with respect to their rights under this Indenture or under the
Securities, and the corresponding rights and duties of the Trustee, shall be as
provided by the Trust Indenture Act.

(3) Every Holder of Securities, by receiving and holding
the same, agrees with the Company and the Trustee that neither the Company nor
the Trustee nor any agent of either of them shall be held accountable by reason
of any disclosure of information as to names and

69
<PAGE> 78

addresses of Holders made pursuant to the Trust Indenture Act.

SECTION 703. Reports by Trustee.

Within 60 days following each May 15, the Trustee shall
transmit to Holders such reports concerning the Trustee and its actions under
this Indenture as may be required pursuant to the Trust Indenture Act, if any,
at the times and in the manner provided pursuant thereto.

A copy of each such report shall, at the time of such
transmission to Holders, be filed by the Trustee with each stock exchange upon
which the Securities are listed, with the Commission and with the Company. The
Company will notify the Trustee when the Securities are listed on any stock
exchange.

SECTION 704. Reports by Company.

The Company shall file with the Trustee and the Commission,
and transmit to Holders, such information, documents and other reports, and
such summaries thereof, as may be required pursuant to the Trust Indenture Act
at the times and in the manner provided pursuant to the Trust Indenture Act;
provided that any such information, documents or reports required to be filed
with the Commission pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 shall be filed with the Trustee within 15 days after the same is so
required to be filed with the Commission.

ARTICLE VIII

CONSOLIDATION, MERGER, CONVEYANCE, TRANSFER OR LEASE

SECTION 801. Company May Consolidate, Etc., Only on Certain
Terms.

70
<PAGE> 79

The Company shall not consolidate with or merge into any other
Person or convey, transfer or lease its properties and assets substantially as
an entirety to any Person, and the Company shall not permit any Person to
consolidate with or merge into the Company or convey, transfer or lease its
properties and assets substantially as an entirety to the Company, unless:

(1) in case the Company shall consolidate with or merge
into another Person or convey, transfer or lease its properties and assets
substantially as an entirety to any Person, the Person formed by such
consolidation or into which the Company is merged or the Person which acquires
by conveyance or transfer, or which leases, the properties and assets of the
Company substantially as an entirety shall be a corporation, partnership or
trust, shall be organized and validly existing under the laws of the United
States of America, any state thereof or the District of Columbia and shall
expressly assume, by an indenture supplemental hereto, executed and delivered
to the Trustee, in form satisfactory to the Trustee, the due and punctual
payment of the principal of and interest on all the Securities and the
performance or observance of every covenant of this Indenture on the part of
the Company to be performed or observed;

(2) immediately after giving effect to such transaction,
no Event of Default, and no event which, after notice or lapse of time or both,
would become an Event of Default, shall have happened and be continuing;

(3) if, as a result of any such consolidation or merger
or such conveyance, transfer or lease, properties or assets of the Company
would become subject to a mortgage, pledge, lien, security interest or other
encumbrance which would not be permitted by Section 1009, the Company or such
successor Person, as the case may be, shall take such steps as shall be
necessary effectively

71
<PAGE> 80

to secure the Securities equally and ratably with (or prior to) all
Indebtedness secured thereby; and

(4) the Company has delivered to the Trustee an Officers'
Certificate and an Opinion of Counsel, each stating that such consolidation,
merger, conveyance, transfer or lease and, if a supplemental indenture is
required in connection with such transaction, such supplemental indenture
comply with this Article and that all conditions precedent herein provided for
relating to such transaction have been complied with.

SECTION 802. Successor Substituted.

Upon any consolidation of the Company with, or merger of the
Company into, any other Person or any conveyance, transfer or lease of the
properties and assets of the Company substantially as an entirety in accordance
with Section 801, the successor Person formed by such consolidation or into
which the Company is merged or to which such conveyance, transfer or lease is
made shall succeed to, and be substituted for, and may exercise every right and
power of, the Company under this Indenture with the same effect as if such
successor Person had been named as the Company herein, and thereafter, except
in the case of a lease, the predecessor Person shall be relieved of all
obligations and covenants under this Indenture and the Securities.

ARTICLE IX

SUPPLEMENTAL INDENTURES

SECTION 901. Supplemental Indentures Without Consent of
Holders.

Without the consent of any Holders, the Company, when
authorized by a Board Resolution, and the Trust-

72
<PAGE> 81

ee, at any time and from time to time, may enter into one or more indentures
supplemental hereto, in form satisfactory to the Trustee, for any of the
following purposes:

(1) to evidence the succession of another Person to the
Company and the assumption by any such successor of the covenants of the
Company herein and in the Securities; or

(2) to add to the covenants of the Company for the
benefit of the Holders or an additional Event of Default, or to surrender any
right or power herein conferred upon the Company; or

(3) to secure the Securities; or

(4) to evidence and provide for the acceptance of
appointment hereunder by a successor Trustee with respect to the Securities; or

(5) to cause the Indenture and the Securities to comply
with applicable law, including the Trust Indenture Act; or

(6) to cure any defect or ambiguity, to correct or
supplement any provision herein which may be defective or inconsistent with any
other provision herein, or to make any other provisions with respect to matters
or questions arising under this Indenture which shall not be inconsistent with
the provisions of this Indenture; provided, however, that such action pursuant
to this clause (6) shall not adversely affect the interests of the Holders in
any material respect.

73
<PAGE> 82

SECTION 902. Supplemental Indentures with Consent of Holders.

With the consent of the Holders of at least 50% in principal
amount of the Outstanding Securities, by Act of said Holders delivered to the
Company and the Trustee, the Company, when authorized by a Board Resolution,
and the Trustee may enter into an indenture or indentures supplemental hereto
for the purpose of adding any provisions to or changing in any manner or
eliminating any of the provisions of this Indenture or of modifying in any
manner the rights of the Holders under this Indenture; provided, however, that
no such supplemental indenture shall, without the consent of the Holder of each
Outstanding Security affected thereby,

(1) change the Stated Maturity of the principal of, or
any installment of interest on, any Security, or reduce the principal amount
thereof or the rate of interest thereon, or change the place of payment where,
or the coin or currency in which, any Security or interest thereon is payable,
or impair the right to institute suit for the enforcement of any such payment
on or after the Stated Maturity thereof, or

(2) reduce the percentage in principal amount of the
Outstanding Securities, the consent of whose Holders is required for any such
supplemental indenture, or the consent of whose Holders is required for any
waiver of compliance with certain provisions of this Indenture or certain
defaults hereunder and their consequences provided for in this Indenture, or

(3) modify any of the provisions of this Section, Section
513 or Section 1012, except to increase any such percentage or to provide that
certain other provisions of this Indenture cannot be modified or waived without
the consent of the Holder of each Outstanding Security affected thereby.

74
<PAGE> 83

It shall not be necessary for any Act of Holders under this
Section to approve the particular form of any proposed supplemental indenture,
but it shall be sufficient if such Act shall approve the substance thereof.

SECTION 903. Execution of Supplemental Indentures.

In executing, or accepting the additional trusts created by,
any supplemental indenture permitted by this Article or the modifications
thereby of the trusts created by this Indenture, the Trustee shall be entitled
to receive, and (subject to Section 601) shall be fully protected in relying
upon, in addition to the Officer's Certificate and Opinion of Counsel required
by Section 102, an Opinion of Counsel stating that the execution of such
supplemental indenture is authorized or permitted by this Indenture. The
Trustee may, but shall not be obligated to, enter into any such supplemental
indenture which affects the Trustee's own rights, duties or immunities under
this Indenture or otherwise.

SECTION 904. Effect of Supplemental Indentures.

Upon the execution of any supplemental indenture under this
Article, this Indenture shall be modified in accordance therewith, and such
supplemental indenture shall form a part of this Indenture for all purposes;
and every Holder of Securities theretofore or thereafter authenticated and
delivered hereunder shall be bound thereby.

75
<PAGE> 84

SECTION 905. Conformity with Trust Indenture Act.

Every supplemental indenture executed pursuant to this Article
shall conform to the requirements of the Trust Indenture Act.

SECTION 906. Reference in Securities to Supplemental
Indentures.

Securities authenticated and delivered after the execution of
any supplemental indenture pursuant to this Article may, and shall if required
by the Trustee, bear a notation in form approved by the Trustee as to any
matter provided for in such supplemental indenture. If the Company shall so
determine, new Securities so modified as to conform, in the opinion of the
Trustee and the Company, to any such supplemental indenture may be prepared and
executed by the Company and authenticated and delivered by the Trustee in
exchange for Outstanding Securities.

SECTION 907. Notice of Supplemental Indenture.

Promptly after the execution by the Company and the Trustee of
any supplemental indenture pursuant to Section 902, the Company shall transmit
to the Holders a notice setting forth the substance of such supplemental
indenture.

76
<PAGE> 85

ARTICLE X

COVENANTS

SECTION 1001. Payment of Principal and Interest.

The Company will duly and punctually pay the principal of and
interest on the Securities in accordance with the terms of the Securities and
this Indenture.

SECTION 1002. Maintenance of Office or Agency.

The Company will maintain an office or agency (which may be
the Corporate Trust Office of the Trustee and which in any event shall not be
located outside the contiguous United States of America) where Securities may
be presented or surrendered for payment, where Securities may be surrendered
for registration of transfer or exchange and where notices and demands to or
upon the Company in respect of the Securities and this Indenture may be served.
The Company will give prompt written notice to the Trustee of the location, and
any change in the location, of such office or agency. If at any time the
Company shall fail to maintain any such required office or agency or shall fail
to furnish the Trustee with the address thereof, such presentations,
surrenders, notices and demands may be made or served at the Corporate Trust
Office of the Trustee, and the Company hereby appoints the Trustee as its agent
to receive all such presentations, surrenders, notices and demands.

The Company hereby appoints the Corporate Trust Office as its
agent where Securities may be presented or surrendered for payment, whereby
Securities may be surrendered for registration of transfer or exchange and the
Corporate Trust Office as its agent where notices and demands to or upon the
Company in respect of the Securities and this Indenture may be served. The
Company may also

77
<PAGE> 86

from time to time designate one or more other offices or agencies where the
Securities may be presented or surrendered for any or all such purposes and may
from time to time rescind such designations. The Company will give prompt
written notice to the Trustee of any such designation or rescission and of any
change in the location of any such other office or agency.

SECTION 1003. Money for Security Payments to Be Held in Trust.

If the Company shall at any time act as its own Paying Agent,
it will, on or before each due date of the principal of or interest on any of
the Securities, segregate and hold in trust for the benefit of the Persons
entitled thereto a sum sufficient to pay the principal or interest so becoming
due until such sums shall be paid to such Persons or otherwise disposed of as
herein provided and will promptly notify the Trustee of its action or failure
so to act.

Whenever the Company shall have one or more Paying Agents, it
will, prior to each due date of the principal of or interest on any Securities,
deposit with a Paying Agent a sum sufficient to pay such amount, such sum to be
held as provided by the Trust Indenture Act, and (unless such Paying Agent is
the Trustee) the Company will promptly notify the Trustee of its action or
failure so to act.

The Company will cause each Paying Agent other than the
Trustee to execute and deliver to the Trustee an instrument in which such
Paying Agent shall agree with the Trustee, subject to the provisions of this
Section, that such Paying Agent will (i) comply with the provisions of the
Trust Indenture Act applicable to it as a Paying Agent and (ii) during the
continuance of any default by the Company (or any other obligor upon the
Securities) in the making of any payment in respect of

78
<PAGE> 87
the Securities, upon the written request of the Trustee, forthwith pay to the
Trustee all sums held in trust by such Paying Agent for payment in respect of
the Securities.

The Company may at any time, for the purpose of obtaining the
satisfaction and discharge of this Indenture or for any other purpose, pay, or
by Company Order direct any Paying Agent to pay, to the Trustee all sums held
in trust by the Company or such Paying Agent, such sums to be held by the
Trustee upon the same trusts as those upon which such sums were held by the
Company or such Paying Agent; and, upon such payment by any Paying Agent to the
Trustee, such Paying Agent shall be released from all further liability with
respect to such money.

Any money deposited with the Trustee or any Paying Agent, or
then held by the Company, in trust for the payment of the principal of or
interest on any Security and remaining unclaimed for two years after such
principal or interest has become due and payable shall be paid to the Company
on Company Request, or (if then held by the Company) shall be discharged from
such trust; and the Holder of such Security shall thereafter, as an unsecured
general creditor, look only to the Company for payment thereof, and all
liability of the Trustee or such Paying Agent with respect to such trust money,
and all liability of the Company as trustee thereof, shall thereupon cease;
provided, however, that the Trustee or such Paying Agent, before being required
to make any such repayment, may at the expense of the Company cause to be
published once, in a newspaper published in the English language, customarily
published on each Business Day and of general circulation in the City of New
York, notice that such money remains unclaimed and that, after a date specified
therein, which shall not be less than 30 days from the date of such
publication, any unclaimed balance of such money then remaining will be repaid
to the Company.

79
<PAGE> 88

SECTION 1004. Statement by Officers as to Default.

The Company will deliver to the Trustee, within 120 days after
the end of each fiscal year of the Company ending after the date hereof, an
Officers' Certificate stating whether or not to the best knowledge of the
signers thereof the Company is in default in the performance and observance of
any of the terms, provisions and conditions of this Indenture (without regard
to any period of grace or requirement of notice provided hereunder) and, if the
Company shall be in default, specifying all such defaults and the nature and
status thereof of which they may have knowledge.

The Company shall promptly, and in any event within 10 days of
the occurrence thereof, give notice to the Trustee of any default or Event of
Default hereunder.

SECTION 1005. Existence.

Subject to Article Eight, the Company will do or cause to be
done all things necessary to preserve and keep in full force and effect its
existence, rights (charter and statutory) and franchises and the existence,
rights (charter and statutory) and franchises of each Subsidiary; provided,
however, that the Company shall not be required to preserve any such right or
franchise, whether relating to the Company or any Subsidiary, if the Board of
Directors shall determine that the preservation thereof is no longer desirable
in the conduct of the business of the Company and that the loss thereof is not
disadvantageous in any material respect to the Holders.

80
<PAGE> 89

SECTION 1006. Maintenance of Properties.

The Company will cause all properties used or useful in the
conduct of its business or the business of any Subsidiary to be maintained and
kept in good condition, repair and working order and supplied with all
necessary equipment and will cause to be made all necessary repairs, renewals,
replacements, betterments and improvements thereof, all as in the judgment of
the Company may be necessary so that the business carried on in connection
therewith may be properly and advantageously conducted at all times; provided,
however, that nothing in this Section shall prevent the Company from
discontinuing the operation or maintenance of any of such properties if such
discontinuance is, in the judgment of the Company, desirable in the conduct of
its business or the business of any Subsidiary and not disad- vantageous in any
material respect to the Holders.

SECTION 1007. Payment of Taxes and Other Claims.

The Company will pay or discharge or cause to be paid or
discharged, before the same shall become delinquent, (i) all taxes, assessments
and governmental charges levied or imposed upon the Company or any Subsidiary
or upon the income, profits or property of the Company or any Subsidiary, and
(ii) all lawful claims for labor, materials and supplies which, if unpaid,
might by law become a lien upon the property of the Company or any Subsidiary;
provided, however, that the Company shall not be required to pay or discharge
or cause to be paid or discharged any such tax, assessment, charge or claim
whose amount, applicability or validity is being contested in good faith by
appropriate proceedings.

81
<PAGE> 90

SECTION 1008. Maintenance of Insurance.

The Company will maintain, and will cause each of its
Subsidiaries to maintain, with insurers the Company reasonably believes to be
financially sound and reputable, insurance deemed adequate by the Company with
respect to its properties and business and the properties and business of its
Subsidiaries against loss or damage of the kinds customarily insured against by
corporations in the same or similar business. Such insurance may be subject to
co-insurance, deductibility or similar clauses which, in effect, result in
self-insurance of certain losses, provided that such self-insurance is in
accord with the practices of corporations in the same or similar business and
adequate insurance reserves are maintained in connection with such
self-insurance.

SECTION 1009. Restrictions on Liens.

So long as any of the Notes are outstanding, the Company will
not, and will not permit any Subsidiary to, issue, assume, incur or guarantee
any Indebtedness secured by a Lien on or with respect to any property or assets
of the Company or any Subsidiary, or upon any shares of capital stock,
Indebtedness or other obligations of any Subsidiary, whether now owned or
leased or hereafter acquired, without in any such case effectively providing
that the Notes shall be secured equally and ratably with (or prior to) such
Indebtedness for so long as such Indebtedness shall be so secured, except that
the foregoing restrictions shall not apply to:

(1) Liens existing as of the date of the Indenture;

(2) Liens created solely to secure the payment of Purchase
Money Indebtedness incurred by the Company or a Subsidiary, provided that any
such Lien shall not secure Indebtedness in excess of the amount expended in

82
<PAGE> 91

the acquisition of, or construction of improvements on, the property or assets
and shall not extend to or cover any property or assets other than the property
or assets so acquired or the improvements thereon;

(3) Liens upon any property or assets owned or leased by
any Subsidiary when it becomes a Subsidiary and not incurred as a result of, or
in connection with or in anticipation of, such Subsidiary becoming a Subsidiary
(except to the extent otherwise permitted by (2) above);

(4) Liens existing on any property or assets at the time
of its acquisition by the Company or a Subsidiary (including acquisition
through merger or consolidation) and not incurred as a result of, or in
connection with or in anticipation of, such acquisition (except to the extent
otherwise permitted by (2) above);

(5) Liens securing Indebtedness of a Subsidiary to the
Company or to another Subsidiary;

(6) Liens imposed by law for taxes, assessments or
charges of any Governmental Authority for claims not yet delinquent or which
are being contested in good faith by appropriate proceedings diligently
conducted and with respect to which adequate reserves or other appropriate
provisions are being maintained in accordance with GAAP and which liens are not
yet enforceable against other creditors;

(7) Statutory Liens of landlords and Liens of carriers,
warehousemen, mechanics, materialmen and other Liens imposed by law or created
in the ordinary course of business and in existence less than 90 days from the
date of creation thereof for amounts not yet due or which are being contested
in good faith by appropriate proceedings diligently conducted and with respect
to which adequate reserves or other appropriate provisions are being main-

83
<PAGE> 92

tained in accordance with GAAP and which Liens are not yet enforceable against
other creditors;

(8) Liens incurred or deposits made in the ordinary
course of business (including, without limitation, surety bonds and appeal
bonds) in connection with workers' compensation, unemployment insurance and
other types of social security benefits or to secure the performance of
tenders, bids, leases, contracts (other than for the repayment of
Indebtedness), statutory obligations and other similar obligations or arising
as a result of progress payments under government contracts;

(9) easements (including reciprocal easement agreements
and utility agreements), rights-of-way, covenants, consents, reservations,
encroachments, variations and zoning and other restrictions, charges or
encumbrances (whether or not recorded), which do not interfere materially with
the ordinary conduct of the business of the Company or any Subsidiary and which
do not materially detract from the value of the business of the Company or any
Subsidiary and which do not materially detract from the value of the property
to which they attach or materially impair the use thereof to the Company or any
Subsidiary;

(10) Liens arising in connection with Capital Leases
otherwise permitted or not prohibited by the terms of the Indenture; provided
that no such Lien shall extend to any property other than the assets subject to
such Capital Leases;

(11) Liens securing Off-Balance Sheet Liabilities
otherwise permitted or not prohibited by the terms of the Indenture;

(12) Permitted Receivables Securitization; and

84
<PAGE> 93

(13) the extension, renewal or replacement (or successive
extensions, renewals or replacements), in whole or in part, of any Lien
referred to in the foregoing clauses (1) through (12), or of any Indebtedness
secured thereby, provided, however, that (i) such extension, renewal, refunding
or replacement Lien shall be limited to all or a part of the same property,
shares of stock or Indebtedness that were encumbered by the Lien extended,
renewed, refunded or replaced (plus improvements on such property) and (ii) the
Indebtedness secured by such Lien at such time is not increased.

Notwithstanding the foregoing, the Company or any Subsidiary may issue, assume,
incur or guarantee Indebtedness secured by Liens which otherwise would be
subject to the foregoing restrictions in an aggregate amount which, together
with (i) all other such Indebtedness of the Company and its Subsidiaries
outstanding which would otherwise be subject to the foregoing restrictions (not
including Indebtedness permitted to be secured under clauses (1) through (13)
above), (ii) all Indebtedness of the Subsidiaries (not including Indebtedness
permitted to be issued, assumed, incurred or guaranteed under clauses (1)
through (10) under "Restrictions on Subsidiary Indebtedness" below) and (iii)
all Attributable Debt in respect of Sale and Leaseback Transactions permitted
under "Restrictions on Sale and Leaseback Transactions" below, does not exceed
15% of Consolidated Net Worth of the Company.

SECTION 1010. Restrictions on Sale and Leaseback Transactions.

So long as any of the Notes are outstanding, the Company will not, nor
will it permit any Subsidiary to, enter into any arrangement with any Person
(other than the Company or a Subsidiary) providing for the leasing by the
Company or any Subsidiary of any property or assets, whether now owned or
hereafter acquired, which has been

85
<PAGE> 94

or is to be sold or transferred by the Company or such Subsidiary to such
Person with the intention of taking back a lease on such property or assets and
which arrangement would be characterized or qualified as either a Capital Lease
or Off-Balance Sheet Liability (a "Sale and Leaseback Transaction"), if, at the
time of entering into such Sale and Leaseback Transaction, and after giving
effect thereto, the amount of Attributable Debt in respect of such Sale and
Leaseback Transaction, together with all such other Attributable Debt
outstanding exceeds the greater of (i) $25,000,000 or (ii) together with (A)
all Indebtedness outstanding secured by Liens (not including Indebtedness
permitted to be secured under clauses (1) through (13) under "Restrictions on
Liens" above) and (B) all Indebtedness of Subsidiaries (not including
Indebtedness permitted to be issued, assumed, incurred or guaranteed under
clauses (1) through (10) under "Restrictions on Subsidiary Indebtedness"
below), 15% of Consolidated Net Worth of the Company.

SECTION 1011. Restrictions on Subsidiary Indebtedness

So long as any of the Notes are outstanding, the Company will
not permit any of its Subsidiaries to issue, assume, incur or guarantee any
Indebtedness, except that the foregoing restrictions shall not apply to:

(1) Indebtedness existing as of the date of the
Indenture, including all existing or available borrowings under the Bank Credit
Agreement;

(2) Indebtedness of a corporation or other entity
existing at the time it becomes a Subsidiary and not incurred as a result of,
or in connection with or in anticipation of, such Subsidiary becoming a
Subsidiary;

86
<PAGE> 95

(3) Indebtedness of a corporation or other entity assumed
at the time of its acquisition by a Subsidiary (including acquisition through
merger or consolidation) and not incurred as a result of, or in connection with
or in anticipation of, such acquisition;

(4) unsecured intercompany Indebtedness of a Subsidiary
for loans or advances made to such Subsidiary by the Company or another
Subsidiary; provided that upon either (i) the transfer or other disposition by
the Company or a Subsidiary of any Indebtedness so permitted to a Person other
than the Company or another Subsidiary or (ii) the issuance, sale, transfer or
other disposition (other than a pledge of the shares of such Subsidiary
permitted under "Restrictions on Liens" above) of shares of capital stock
(including acquisition through merger or consolidation) of such Subsidiary to a
Person other than the Company or another Subsidiary which, after giving effect
thereto, results in such Subsidiary ceasing to be a Subsidiary of the Company,
the provisions of this clause (4) shall no longer be applicable to such
Indebtedness and such indebtedness shall be deemed to have been issued,
assumed, incurred or guaranteed at the time of such transfer or other
disposition;

(5) the endorsement of negotiable instruments for deposit
or collection or similar transactions in the ordinary course of business;

(6) Purchase Money Indebtedness and Capital Leases
incurred or entered into by a Subsidiary not to exceed an aggregate outstanding
principal amount at any time of $25,000,000; provided, however, that the
aggregate outstanding principal amount of Purchase Money Indebtedness and
Capital Leases permissible under this clause (6) shall be increased or
decreased to such amount as is permissible under the Bank Credit Agreement;

(7) Permitted Receivables Securitizations;

87
<PAGE> 96

(8) Off-Balance Sheet Liabilities (other than Permitted
Receivables Securitizations) and other secured Indebtedness of a Subsidiary not
to exceed an aggregate outstanding principal amount of $25,000,000; provided,
however, that the aggregate outstanding principal amount of Off-Balance Sheet
Liabilities and other secured Indebtedness permissible under this clause (8)
shall be increased or decreased to such amount as is permissible under the Bank
Credit Agreement;

(9) Indebtedness arising from Rate Hedging Obligations
incurred to limit risks of currency or interest rate fluctuations to which a
Subsidiary is otherwise subject by virtue of the operations of its business,
and not for speculative purposes; provided, however, that the aggregate
notional amount of all such Rate Hedging Obligations shall not exceed at any
time $500,000,000; and provided, further, that the aggregate outstanding
principal amount of Indebtedness arising from Rate Hedging Obligations under
this clause (9) shall be increased or decreased to such amount as is
permissible under the Bank Credit Agreement;

(10) the extension, renewal, refinancing or replacement
(or successive extensions, renewals, refinancings or replacements), in whole or
in part, of any Indebtedness referred to in the foregoing clauses (1) through
(9); provided, however, (i) that the Indebtedness so issued has (A) a principal
amount not in excess of the principal amount of the Indebtedness being
extended, renewed, refinanced or replaced (which amount shall be deemed to
include the amount of any undrawn or available amounts under any committed
credit or lease facility to be so extended, renewed, refinanced or replaced,
(B) a final redemption date later than the final stated maturity or final
redemption date, if any, of the Indebtedness being extended, renewed,
refinanced or replaced and (C) an Average Life at the time of issuance of such
Indebtedness that is greater than the Average Life of the Indebt-

88
<PAGE> 97

edness being extended, renewed, refinanced or replaced; (ii) the group of
direct or contingent obligors on such Indebtedness shall not be expanded as a
result of any such action; and (iii) immediately prior to and immediately after
giving effect to any such extension, renewal or replacement, no Event of
Default shall have occurred and be continuing.

Notwithstanding the foregoing, any Subsidiary may issue, assume, incur or
guarantee Indebtedness which otherwise would be subject to the foregoing
restrictions in an aggregate amount, that together with all other such
Indebtedness of any Subsidiaries outstanding which would otherwise be subject
to the foregoing restrictions (not including Indebtedness permitted to be
issued, assumed, incurred or guaranteed under clauses (1) through (10) above,
that does not exceed 15% of Consolidated Net Worth of the Company.

SECTION 1012. Waiver of Certain Covenants.

The Company may omit in any particular instance to comply with
any covenant or condition set forth in Sections 1009, 1010 and 1011, if before
the time for such compliance the Holders of at least 50% in principal amount of
the Outstanding Securities shall, by Act of such Holders, either waive such
compliance in such instance or generally waive compliance with such covenant or
condition, but no such waiver shall extend to or affect such covenant or
condition except to the extent so expressly waived, and, until such waiver
shall become effective, the obligations of the Company and the duties of the
Trustee in respect of any such covenant or condition shall remain in full force
and effect.

89
<PAGE> 98

ARTICLE XI

DEFEASANCE AND COVENANT DEFEASANCE

SECTION 1101. Company's Option to Effect Defeasance or
Covenant Defeasance.

The Company may elect, at its option at any time, to have
Section 1102 or Section 1103 applied to any Securities designated pursuant to
Section 301 as being defeasible pursuant to such Section 1102 or 1103, in
accordance with any applicable requirements provided pursuant to Section 301
and upon compliance with the conditions set forth below in this Article. Any
such election shall be evidenced by a Board Resolution or in another manner
specified as contemplated by Section 301 for such Securities.

SECTION 1102. Defeasance and Discharge.

Upon the Company's exercise of its option (if any) to have
this Section applied to any Securities the Company shall be deemed to have been
discharged from its obligations with respect to such Securities as provided in
this Section on and after the date the conditions set forth in Section 1104 are
satisfied (hereinafter called "Defeasance"). For this purpose, such Defeasance
means that the Company shall be deemed to have paid and discharged the entire
indebtedness represented by such Securities and to have satisfied all its other
obligations under such Securities and this Indenture insofar as such Securities
are concerned (and the Trustee, at the expense of the Company, shall execute
proper instruments acknowledging the same), subject to the following which
shall survive until otherwise terminated or discharged hereunder: (1) the
rights of Holders of such Securities to receive, solely from the trust fund
described in Section 1104 and as more fully set forth in such Section, payments
in respect of the principal and interest on such

90
<PAGE> 99

Securities when payments are due, (2) the Company's obligations with respect to
such Securities under Sections 304, 305, 306, 1002 and 1003, (3) the rights,
powers, trusts, duties and immunities of the Trustee hereunder and (4) this
Article. Subject to compliance with this Article, the Company may exercise its
option (if any) to have this Section applied to any Securities notwithstanding
the prior exercise of its option (if any) to have Section 1103 applied to such
Securities.

SECTION 1103. Covenant Defeasance.

Upon the Company's exercise of its option (if any) to have
this Section applied to any Securities (1) the Company shall be released from
its obligations under Section 801(3), Sections 1006 through 1011, inclusive,
and any covenant provided pursuant to Section 901(2) for the benefit of the
Holders of such Securities and (2) the occurrence of any event specified in
Sections 501(3) (with respect to any of Section 801(3), Sections 1006 through
1011, inclusive, and any such covenants provided pursuant to Section 901(2) and
501(4) shall be deemed not to be or result in an Event of Default, in each case
with respect to such Securities as provided in this Section on and after the
date the conditions set forth in Section 1104 are satisfied (hereinafter called
"Covenant Defeasance"). For this purpose, such Covenant Defeasance means that,
with respect to such Securities, the Company may omit to comply with and shall
have no liability in respect of any term, condition or limitation set forth in
any such specified Section (to the extent so specified in the case of Section
501(3)), whether directly or indirectly by reason of any reference elsewhere
herein to any such Section or by reason of any reference in any such Section to
any other provision herein or in any other document, but the remainder of this
Indenture and such Securities shall be unaffected thereby.

91
<PAGE> 100

SECTION 1104. Conditions to Defeasance or Covenant Defeasance.

The following shall be the conditions to the application of
Section 1102 or Section 1103 to any Securities:

(1) The Company shall irrevocably have deposited or
caused to be deposited with the Trustee (or another trustee which satisfies the
requirements contemplated by Section 609 and agrees to comply with the
provisions of this Article applicable to it) as trust funds in trust for the
purpose of making the following payments, specifically pledged as security for,
and dedicated solely to, the benefit of the Holders of such Securities, (A)
money in an amount, or (B) U.S. Government Obligations which through the
scheduled payment of principal and interest in respect thereof in accordance
with their terms will provide, not later than one day before the due date of
any payment, money in an amount, or (C) a combination thereof, in each case
sufficient, in the opinion of a nationally recognized firm of independent
public accountants expressed in a written certification thereof delivered to
the Trustee, to pay and discharge, and which shall be applied by the Trustee
(or any such other qualifying trustee) to pay and discharge, the principal and
interest on such Securities on the respective Stated Maturities, in accordance
with the terms of this Indenture and such Securities. As used herein, "U.S.
Government Obligation" means (x) any security which is (i) a direct obligation
of the United States of America for the payment of which the full faith and
credit of the United States of America is pledged or (ii) an obligation of a
Person controlled or supervised by and acting as an agency or instrumentality
of the United States of America the payment of which is unconditionally
guaranteed as a full faith and credit obligation by the United States of
America, which, in either case (i) or (ii), is not callable or redeemable at
the option of the issuer

92
<PAGE> 101

thereof, and (y) any depositary receipt issued by a bank (as defined in Section
3(a)(2) of the Securities Act of 1933, as amended) as custodian with respect to
any U.S. Government Obligation which is specified in clause (x) above and held
by such bank for the account of the holder of such depositary receipt, or with
respect to any specific payment of principal of or interest on any U.S.
Government Obligation which is so specified and held; provided that (except as
required by law) such custodian is not authorized to make any deduction from
the amount payable to the holder of such depositary receipt from any amount
received by the custodian in respect of the U.S. Government Obligation or the
specific payment of principal or interest evidenced by such depositary receipt.

(2) In the event of an election to have Section 1102
apply to any Securities the Company shall have delivered to the Trustee an
Opinion of Counsel stating that (A) the Company has received from, or there has
been published by, the Internal Revenue Service a ruling or (B) since the date
of this instrument, there has been a change in the applicable federal income
tax law, in either case (A) or (B) to the effect that, and based thereon such
opinion shall confirm that, the Holders of such Securities will not recognize
gain or loss for federal income tax purposes as a result of the deposit,
Defeasance and discharge to be effected with respect to such Securities and
will be subject to federal income tax on the same amount, in the same manner
and at the same times as would be the case if such deposit, Defeasance and
discharge were not to occur.

(3) In the event of an election to have Section 1103
apply to any Securities the Company shall have delivered to the Trustee an
Opinion of Counsel to the effect that the Holders of such Securities will not
recognize gain or loss for federal income tax purposes as a result of the
deposit and Covenant Defeasance to be effected with respect to such Securities
and will be sub-

93
<PAGE> 102

ject to federal income tax on the same amount, in the same manner and at the
same times as would be the case if such deposit and Covenant Defeasance were
not to occur.

(4) The Company shall have delivered to the Trustee an
Officers' Certificate to the effect that such Securities, if then listed on any
securities exchange, will not be delisted as a result of such deposit.

(5) No event which is, or after notice or lapse of time
or both would become, an Event of Default with respect to such Securities or
any other Securities shall have occurred and be continuing at the time of such
deposit or, with regard to any such event specified in Sections 501(5) and (6),
at any time on or prior to the 90th day after the date of such deposit (it
being understood that this condition shall not be deemed satisfied until after
such 90th day).

(6) Such Defeasance or Covenant Defeasance shall not
cause the Trustee to have a conflicting interest within the meaning of the
Trust Indenture Act (assuming all Securities are in default within the meaning
of the Trust Indenture Act).

(7) Such Defeasance or Covenant Defeasance shall not
result in a breach or violation of, or constitute a default under, any other
agreement or instrument to which the Company is a party or by which it is
bound.

(8) Such Defeasance or Covenant Defeasance shall not
result in the trust arising from such deposit constituting an investment
company within the meaning of the Investment Company Act unless such trust
shall be registered under such Act or exempt from registration thereunder.

(9) The Company shall have delivered to the Trustee an
Officer's Certificate and an Opinion of Coun-

94
<PAGE> 103

sel, each stating that all conditions precedent with respect to such Defeasance
or Covenant Defeasance have been complied with.

SECTION 1105. Deposited Money and U.S. Government Obligations
to Be Held in Trust; Miscellaneous Provisions.

Subject to the provisions of the last paragraph of Section
1003, all money and U.S. Government Obligations (including the proceeds
thereof) deposited with the Trustee or other qualifying trustee (solely for
purposes of this Section and Section 1106, the Trustee and any such other
trustee are referred to collectively as the "Trustee") pursuant to Section 1104
in respect of any Securities shall be held in trust and applied by the Trustee,
in accordance with the provisions of such Securities and this Indenture, to the
payment, either directly or through any such Paying Agent (including the
Company acting as its own Paying Agent) as the Trustee may determine, to the
Holders of such Securities, of all sums due and to become due thereon in
respect of principal and interest, but money so held in trust need not be
segregated from other funds except to the extent required by law.

The Company shall pay and indemnify the Trustee against any
tax, fee or other charge imposed on or assessed against the U.S. Government
Obligations deposited pursuant to Section 1104 or the principal and interest
received in respect thereof other than any such tax, fee or other charge which
by law is for the account of the Holders of Outstanding Securities.

Anything in this Article to the contrary notwithstanding, the
Trustee shall deliver or pay to the Company from time to time upon Company
Request any money or U.S. Government Obligations held by it as provided in
Section 1104 with respect to any Securities which, in the

95
<PAGE> 104

opinion of a nationally recognized firm of independent public accountants
expressed in a written certification thereof delivered to the Trustee, are in
excess of the amount which would then be required to be deposited to effect the
Defeasance or Covenant Defeasance, as the case may be, with respect to such
Securities.

SECTION 1106. Reinstatement.

If the Trustee or the Paying Agent is unable to apply any
money in accordance with this Article with respect to any Securities by reason
of any order or judgment of any court or governmental authority enjoining,
restraining or otherwise prohibiting such application, then the obligations
under this Indenture and such Securities from which the Company has been
discharged or released pursuant to Section 1102 or 1103 shall be revived and
reinstated as though no deposit had occurred pursuant to this Article with
respect to such Securities, until such time as the Trustee or Paying Agent is
permitted to apply all money held in trust pursuant to Section 1105 with
respect to such Securities in accordance with this Article; provided, however,
that if the Company makes any payment of principal of or interest on any such
Security following such reinstatement of its obligations, the Company shall be
subrogated to the rights (if any) of the Holders of such Securities to receive
such payment from the money so held in trust.

* * *

This instrument may be executed in any number of counterparts,
each of which so executed shall be deemed to be an original, but all such
counterparts shall together constitute but one and the same instrument.

96
<PAGE> 105

IN WITNESS WHEREOF, the parties hereto have caused this
Indenture to be duly executed, and their respective corporate seals to be
hereunto affixed and attested, all as of the day and year first above written.

MEDPARTNERS, INC.

By:
------------------------------
Name: Harold O. Knight, Jr.
Title: Executive Vice
President Finance

Attest:

By:
----------------------------
Name: Tracy P. Thrasher
Title: Secretary

[ ],
------------------------------
as Trustee

By:
---------------------------
Name:
Title:

Attest:

By:
--------------------------
Name:
Title:

<PAGE> 1

EXHIBIT 12

COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES

<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
-------------------------------------------------- ------------------
1991 1992 1993 1994 1995 1995 1996
------- ------- -------- -------- -------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
HISTORICAL
Income (loss) from continuing
operations before income taxes and
cumulative effect of change in
method of accounting.............. $14,271 $ 7,425 $ 8,253 $ 4,278 $(26,675) $15,142 $ (4,915)
Non recurring charges(1)............ -- -- -- -- 66,564 1,051 34,448
------- ------- -------- -------- -------- ------- --------
Income (loss) from continuing
operations before income taxes and
cumulative effect of change in
method of accounting and non
recurring charges................. 14,271 7,425 8,253 4,278 39,889 16,193 29,533
Fixed Charges:
Interest expense.................. 2,098 2,396 5,488 9,447 13,796 6,898 4,746
Interest factor of rental
expense......................... 3,154 3,992 6,279 9,171 13,942 6,583 7,938
------- ------- -------- -------- -------- ------- --------
Total fixed charges........ 5,252 6,388 11,767 18,618 27,738 13,481 12,684
------- ------- -------- -------- -------- ------- --------
Income (loss) from continuing
operations before income taxes and
cumulative effect of change in
method of accounting, non
recurring charges and fixed
charges........................... $19,523 $13,813 $ 20,020 $ 22,896 $ 67,627 $29,674 $ 42,217
======== ======== ========= ========= ========= ======== =========
Ratio of earnings to fixed
charges........................... 3.72 2.16 1.70 1.23 2.44 2.20 3.33
======== ======== ========= ========= ========= ======== =========
PRO FORMA
Income (loss) from continuing
operations before income taxes and
cumulative effect of change in
method of accounting.............. $ 91,305 $ 98,091 $ 7,160 $67,159 $ 59,525
Non recurring charges(1)............ -- -- 66,564 1,051 34,448
-------- -------- -------- ------- --------
Income (loss) from continuing
operations before income taxes and
cumulative effect of change in
method of accounting and non
recurring charges................. 91,305 98,091 73,724 68,210 93,973
Fixed Charges:
Interest expense.................. 9,588 21,247 30,496 15,248 17,981
Interest factor of rental
expense......................... 10,313 15,138 22,842 11,421 14,979
-------- -------- -------- ------- --------
Total fixed charges........ 19,901 36,385 53,338 26,669 32,960
-------- -------- -------- ------- --------
Income (loss) from continuing
operations before income taxes and
cumulative effect of change in
method of accounting, non
recurring charges and fixed
charges........................... $111,206 $134,476 $127,062 $94,879 $126,933
========= ========= ========= ======== =========
Ratio of earnings to fixed
charges........................... 5.59 3.70 2.38 3.56 3.85
========= ========= ========= ======== =========
</TABLE>

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

(1) In connection with various acquisitions, the Company has incurred one-time
pretax charges against earnings which are reflected in the historical and
proforma financial statements.

<PAGE> 1

EXHIBIT 21

SUBSIDIARIES
OF

MEDPARTNERS, INC.

<TABLE>
<CAPTION>
NAME OF SUBSIDIARY STATE OF ORGANIZATION
- ------------------------------------------------------------------------ -----------------------
<S> <C>
Caremark International Inc.............................................. Delaware
EPA Inc................................................................. Delaware
Emergency Professional Services, Inc.................................... Ohio
CHS Management Corporation.............................................. Delaware
MedPartners, Inc........................................................ Delaware
MedPartners Acquisition Corporation..................................... Delaware
MedPartners of Florida, Inc. ........................................... Florida
MedPartners Aviation, Inc. ............................................. Delaware
Bay Area Practice Management Group, Inc. ............................... California
Greeley Clinic, Inc. ................................................... Oregon
LFMG, Inc. ............................................................. California
MMC (BAFP), Inc. ....................................................... California
MME (Center), Inc. ..................................................... California
Pacific Medical Group, Inc. ............................................ Oregon
St. Johns Clinic, Inc. ................................................. Oregon
The Tigard Clinic, Inc. ................................................ Oregon
MME (WCMG), Inc. ....................................................... California
MME (WCPCMG), Inc. ..................................................... California
Cerritos Investment Group............................................... California
Family Medical Center................................................... Oregon
5000 Airport Plaza, L.P. ............................................... California
Surgical Partners of Plano I, L.P. ..................................... Texas
Surgical Partners of Plano, L.L.C. ..................................... Oregon
CareSelect Group, Inc. ................................................. Texas
Pacific Physician Services, Inc. ....................................... Delaware
Reliant Healthcare Systems, Inc. ....................................... California
Hauch, Incorporated..................................................... California
PPS Valley Management, Inc. ............................................ California
Physicians' Hospital Management Corporation............................. Delaware
Pacific Physician Services Arizona, Inc. ............................... Delaware
Pacific Physicians Services Nevada, Inc. ............................... Delaware
Sierra Meadows Associates (Partnership)................................. Nevada
PPS Riverside Division Acquisition and Management Corporation I......... Delaware
PPS Nevada Corporation Investment....................................... Nevada
PPS East, Inc. ......................................................... Delaware
PPS North Carolina Medical Management Inc. ............................. North Carolina
Pacific Indemnity, Ltd. ................................................ British Virgin Islands
PPS Medical Management and Consulting, L.L.C. ..........................
Team Health Group, Inc. ................................................ Tennessee
Southeastern Emergency Physicians, Inc. ................................ Tennessee
Southeastern Emergency Physicians of Memphis, Inc. ..................... Tennessee
Emergency Coverage Corporation.......................................... Tennessee
Americare Medical Services, Inc. ....................................... Tennessee
Med. Assure Systems, Inc. .............................................. Tennessee
Clinic Management Services, Inc. ....................................... Tennessee
Hospital Based Physician Services, Inc. ................................ Tennessee
Daniel & Yeager, Inc. .................................................. Alabama
Teleradiology Associates, Inc. ......................................... North Carolina
Team Radiology, Inc. ................................................... Tennessee
Emergicare Management, Inc. ............................................ Tennessee
</TABLE>