PHYCOR INC/TN, DEF 14A, 1998-04-30

PHYCOR INC/TN
DEF 14A, 1998-04-30
OFFICES & CLINICS OF DOCTORS OF MEDICINE

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<PAGE> 1
[LOGO]

30 BURTON HILLS BOULEVARD
SUITE 400
NASHVILLE, TENNESSEE 37215

To Our Shareholders:

You are cordially invited to attend the Annual Meeting of
Shareholders, which is to be held on Tuesday, June 2, 1998, at 10:00 a.m. at the
First American Center Auditorium, Fifth Floor, 300 Union Street, Nashville,
Tennessee. The following pages contain the formal notice of the Annual Meeting
and our Proxy Statement, which describe the specific business to be considered
and voted upon at the Annual Meeting.

It is important that your shares be represented at the meeting.
Whether or not you expect to attend in person, we would greatly appreciate your
efforts to return the enclosed Proxy as soon as possible. If you decide to
attend the Annual Meeting, you may withdraw your Proxy should you wish to vote
in person.

We look forward to seeing you at the Annual Meeting.

Sincerely yours,

/s/ JOSEPH C. HUTTS

JOSEPH C. HUTTS
Chairman of the Board,
President and Chief Executive Officer

<PAGE> 2
PHYCOR, INC.
30 BURTON HILLS BOULEVARD
SUITE 400
NASHVILLE, TENNESSEE 37215
--------------------

NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD
TUESDAY, JUNE 2, 1998
--------------------

Notice is hereby given that the Annual Meeting of Shareholders
(the "Annual Meeting") of PhyCor, Inc. (the "Company") will be held on Tuesday,
June 2, 1998, at 10:00 a.m. at the First American Center Auditorium, Fifth
Floor, 300 Union Street, Nashville, Tennessee, for the following purposes:

(1) To approve the amendment and restatement of the
Company's Amended 1988 Incentive Stock Plan to (i) increase from
17,000,000 to 18,300,000 the number of shares of common stock of
the Company authorized thereunder, (ii) limit the number of
Awards that can be made to any employee during a calendar year,
(iii) modify the restriction on the transfer of Plan awards,
other than incentive options, to allow transfers approved by the
Compensation Committee of the Board of Directors, (iv) appoint
the Compensation Committee as administrator of the Plan, and (v)
make other administrative modifications with respect to the grant
of options;

(2) To approve the adoption of the Company's 1998 Incentive
Stock Plan;

(3) To elect four nominees as Class I directors of the
Company;

(4) To certify the appointment of KPMG Peat Marwick LLP as
independent public accountants to audit the consolidated
financial statements of the Company and its subsidiaries for the
year ending December 31, 1998; and

(5) To transact such other business as may properly come
before the meeting or any adjournments thereof.

Only shareholders of record at the close of business on April 6,
1998 will be entitled to vote at the Annual Meeting.

The enclosed Proxy Statement contains more information pertaining
to matters to be voted on at the Annual Meeting. Please read the Proxy Statement
carefully.

<PAGE> 3
Each shareholder who does not plan to attend the Annual Meeting
is requested to date, sign and return the accompanying Proxy in the enclosed,
postage-paid envelope.

By Order of the Board of Directors,

/s/ THOMPSON S. DENT
-----------------------------------
Thompson S. Dent
Secretary

Nashville, Tennessee
April 30, 1998

<PAGE> 4

PHYCOR, INC.
30 BURTON HILLS BOULEVARD
SUITE 400
NASHVILLE, TENNESSEE 37215
--------------------

PROXY STATEMENT
FOR THE
ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD JUNE 2, 1998
--------------------

This Proxy Statement is furnished to the holders of Common Stock,
no par value per share ("Common Stock"), of PhyCor, Inc. (the "Company") in
connection with the solicitation of proxies by the Board of Directors of the
Company (the "Board of Directors") to be voted at the annual meeting of
shareholders of the Company (the "Annual Meeting") to be held on Tuesday, June
2, 1998, at 10:00 a.m. at the First American Center Auditorium, Fifth Floor, 300
Union Street, Nashville, Tennessee, and at any adjournments or postponements
thereof.

Only the holders of Common Stock of record at the close of
business on April 6, 1998 will be entitled to vote at the Annual Meeting. On
such date, 65,354,338 shares of Common Stock were issued and outstanding. Each
shareholder is entitled to one vote per share held of record on the record date.
This Proxy Statement and the accompanying proxy are first being mailed on or
about April 30, 1998.

A majority of the shares of Common Stock entitled to vote,
represented in person or by proxy, is required to constitute a quorum. If a
quorum is not present at the time of the Annual Meeting, or if for any reason
the Company believes that additional time should be allowed for the solicitation
of proxies, the Company may adjourn or postpone the Annual Meeting with or
without a vote of the shareholders.

All shares of Common Stock represented at the Annual Meeting by
properly executed proxies received prior to or at the Annual Meeting and not
properly revoked will be voted at the Annual Meeting in accordance with the
instructions indicated thereon. If no specification is made, the proxies will be
voted in favor of the matters listed on the proxy card. Directors must be
elected by a plurality of votes cast (in person or by proxy) by the holders of
Common Stock entitled to vote at the Annual Meeting if a quorum is present. All
other matters shall be determined based upon the vote of the majority of votes
cast (in person or by proxy) by the holders of Common Stock entitled to vote at
the Annual Meeting if a quorum is present. Abstentions and broker non-votes will
be counted for purposes of constituting a quorum, but will not have the effect
of voting in opposition to a director or of a vote against the other proposals.

All expenses of the Annual Meeting, including the cost of
soliciting proxies, will be paid by the Company. The Company may reimburse
persons holding shares in their names for others, or holding shares for others
who have the right to give voting instructions, such as brokers, banks,
fiduciaries and nominees, for such persons' reasonable expenses in forwarding
the proxy materials to their principals.

<PAGE> 5
Any shareholder giving a proxy may revoke it by delivering a
written notice of such revocation to the Secretary of the Company at 30 Burton
Hills Boulevard, Suite 400, Nashville, Tennessee 37215 prior to the Annual
Meeting, by submitting to the Company a more recently dated proxy or by
attending the Annual Meeting and voting at any time before it is exercised.

In voting by proxy for the election of four nominees as Class I
directors to serve three year terms, shareholders may vote in favor of all four
nominees, withhold their votes as to all four nominees or withhold their votes
as to specific nominees. If no instructions are indicated, such proxies will be
voted FOR the election of all four nominees as directors.

2
<PAGE> 6
PROPOSAL 1: APPROVAL OF THE AMENDMENT TO THE COMPANY'S AMENDED 1988 INCENTIVE
STOCK PLAN

The Board of Directors adopted an amendment and restatement of
the Company's Amended 1988 Incentive Stock Plan (the "Incentive Plan"). The
following is a brief description of the material terms of the amendment and
restatement of the Incentive Plan. This description is qualified in its entirety
by reference to the full text of the Incentive Plan which is attached hereto as
Appendix A.

DESCRIPTION OF AMENDMENT TO THE INCENTIVE PLAN

Prior to the amendment of the Incentive Plan, 17,000,000 shares
of Common Stock had been reserved thereunder, all of which have been used in
connection with the granting of (i) "incentive stock options" ("ISOs") described
in Section 422 of the Internal Revenue Code of 1986, as amended (the "Code"),
(ii) options that are not ISOs ("non-qualified options" or "NSOs"), (iii)
restricted stock awards ("Restricted Stock") and (iv) bonus stock awards ("Bonus
Stock") (collectively, ISOs, NSOs, Bonus Stock and Restricted Stock are referred
to as "Awards"). The Incentive Plan was designed to qualify for the exemption
from the short-swing profit restrictions on directors and executive officers
provided by Rule 16b-3 ("Rule 16b-3") under the Securities Exchange Act of 1934,
as amended (the "Exchange Act").

The material terms of the changes effected by the amendment and
restatement of the Incentive Plan are as follows:

Increase in Shares. Under the amendment to the Incentive Plan, an
additional 1,300,000 shares are available for grant under the Incentive Plan,
1,235,000 of which have been granted to certain employees or committed to be
granted to employees of companies with which the Company has previously
announced its intention to merge. The Incentive Plan is an essential part of the
Company's compensation and reward program for its employees because Awards under
the Incentive Plan permit employees to benefit from the Company's growth and
financial performance. The Board of Directors believes that it is in the best
interest of the Company to authorize additional shares under the Incentive Plan
to continue to provide employees compensation and reward for their efforts to
accomplish the Company's long-term and short-term goals.

Limit on Individual Awards. The amendment provides that no
employee of the Company or its subsidiaries may receive Awards with respect to
more than 750,000 shares of Common Stock during any calendar year. Prior to its
amendment, the Incentive Plan contained no limits on individual Awards. The
modification was needed because of recent changes to the Code. Section 162(m) of
the Code limits the ability of the Company to deduct compensation expenses on
payments to certain officers. This deductibility limit does not apply to stock
options that qualify as "performance-based compensation" under Section 162(m).
The share limitation is required for compensation realized upon exercise of ISOs
and NSOs to qualify as performance-based compensation.

Award Transfer Restrictions. Prior to the amendment, a recipient
was not permitted to transfer Awards at any time prior to death. The amended
Incentive Plan retains this transfer restriction as a general rule, but allows
for transfers of Awards other than ISOs in individual situations that are
approved by the Compensation Committee. The Board of

3
<PAGE> 7

Directors believes that there are relatively few situations in which Award
transfers should be permitted, but recommends this change so that it may be
possible to provide Award recipients with flexibility in financial, estate and
tax planning. The restriction on transferring ISOs has been retained because it
is still required by the Code.

Compensation Committee as Administrator. Prior to the amendment,
the Incentive Plan was administered by disinterested directors as defined in
Rule 16b-3 prior to the recent amendments to such Rule. The amended Incentive
Plan is administered by the Compensation Committee of the Board of Directors
which is comprised solely of non-employee directors.

Termination of Plan. Prior to the amendment, the Incentive Plan
would have automatically terminated in 1999. The amended Incentive Plan has no
set termination date and will continue until it is terminated by the Board of
Directors. There currently is no legal requirement for a plan to terminate. The
prior practice of terminating an option plan and establishing a new plan every
ten years creates significant administrative complexities and does not protect
any significant shareholder interest. Therefore, the Company believes that this
change is an important enhancement to the administration of the Incentive Plan.

DESCRIPTION OF INCENTIVE PLAN

The Incentive Plan provides for the granting of (i) NSOs to
directors and employees of the Company, (ii) ISOs to employees of the Company,
(iii) Restricted Stock to employees of the Company and (iv) Bonus Stock to
employees of the Company. As of December 31, 1997, the Company employed
approximately 19,000 people, including 135 at its corporate offices.

As of March 31, 1998, the aggregate market value of the
15,588,031 shares of Common Stock underlying the options issued and outstanding
pursuant to the Incentive Plan was approximately $354.6 million. The stock
options are nontransferable options to purchase shares of Common Stock during
terms no longer than ten years at prices to be determined by the Board of
Directors or the Compensation Committee. With respect to ISOs, such price may
not be less than 100% of the fair market value of the Common Stock on the date
of grant (110% in the case of an individual who, at the time of the grant, owns
more than 10% of the total combined voting power of all classes of stock of the
Company). The exercise price of NSOs may not be less than 50% of the fair market
value of the Common Stock on the date of grant. Options granted under the
Incentive Plan may be exercisable in installments. All options to date have been
granted with exercise prices equal to the then fair market value.

The Incentive Plan also provides for the granting of Restricted
Stock to employees in such amounts as determined by the Compensation Committee
and approved by the Board of Directors. Certificates representing shares of
Restricted Stock awarded to the recipients are held by the Company on behalf of
the recipient until the applicable conditions to such award, including the
completion of an established period of service to the Company, are satisfied.
Failure by a recipient to satisfy the conditions of the award may result in such
recipient's forfeiture of some or all of the Restricted Stock. The Restricted
Stock is valued at the closing sale price of the Common Stock as reported on the
Nasdaq National Market on the date of grant.

4
<PAGE> 8

The Incentive Plan also provides for the issuance of Bonus Stock
to employees of the Company in payment of a portion of the bonus established by
the Compensation Committee otherwise payable to such recipient. Historically,
the Compensation Committee has permitted certain employees to elect to accept up
to 50% of his or her bonus amount in shares of Bonus Stock. The Bonus Stock is
held on behalf of the recipient by the Company for a period of two years from
the issuance of the Bonus Stock. The Compensation Committee may set other terms
and conditions on the grant of Bonus Stock. In the event a recipient is no
longer employed by the Company prior to the end of the two year period, the
recipient will forfeit all of the Bonus Stock. On the second anniversary of the
date of grant, a number of shares of Bonus Stock will be delivered to the
recipient to equal the elected bonus percentage based on a valuation of 80% of
the fair market value of the Common Stock as of the date of grant.

The Compensation Committee has the discretion to determine the
vesting schedules of the options granted pursuant to the Incentive Plan.
Historically, options granted under the Incentive Plan have provided that
one-third of such options become exercisable three years from the date of grant,
two-thirds become exercisable four years from the date of grant, and the
remainder become exercisable five years from the date of grant. Restrictions on
Restricted Stock lapse in three equal installments commencing on the third
anniversary of the issuance of such Restricted Stock. The restrictions with
respect to Bonus Stock lapse in full on the second anniversary after the date of
grant. The Incentive Plan, however, provides for the accelerated vesting of
options, Restricted Stock and Bonus Stock upon the occurrence of certain events.
Options, Restricted Stock and Bonus Stock awarded under the Incentive Plan
become exercisable without regard to the applicable vesting schedule in the
event of the death, permanent disability or retirement of the recipient or upon
a change in control of the Company.

5
<PAGE> 9
The amount of any award under the Incentive Plan is subject to
the discretion, within the terms of the Incentive Plan, of the Compensation
Committee and, therefore, cannot be determined in advance. Similarly, the dollar
value of such awards cannot be determined prior to their grant. The table below
provides information for 1997 regarding the dollar value and the number of
shares underlying awards granted under the Incentive Plan:

INCENTIVE PLAN BENEFITS

<TABLE>
<CAPTION>
DOLLAR VALUE NUMBER OF SHARES DOLLAR VALUE
OF 1997 UNDERLYING 1997 OF 1997 STOCK NUMBER OF SHARES
NAME AND POSITION STOCK OPTIONS STOCK OPTIONS AWARDS(1)(2) AWARDED IN 1997
----------------- ------------- ----------------- -------------- ---------------
<S> <C> <C> <C> <C>
Joseph C. Hutts........... $ -- (3) 275,259(4) $105,570 3,910
Chairman of the Board,
President and Chief
Executive Officer

Derril W. Reeves.......... $ -- (3) 204,576(5) $73,899 2,737
Executive Vice President
and Chief Development
Officer

Richard D. Wright......... $ -- (3) 204,576(5) $29,538 1,094
Executive Vice President,
Corporate Services

Thompson S. Dent.......... $ -- (3) 204,576(5) $73,899 2,737
Executive Vice President
and Chief Operating
Officer

John K. Crawford.......... $ -- (3) 150,914(6) $42,228 1,564
Executive Vice President
and Chief Financial
Officer

Executive Group........... $ -- (3) 1,039,901 $325,134 12,042

Non-Executive Director $ -- (3) -- $ -- --
Group.....................

Non-Executive Officer
Employee Group............ $557,498 2,377,726 $ 189,054 7,002
</TABLE>

- ----------

(1) Based upon the closing sales price of the Common Stock of $27.00 as
reported on the Nasdaq National Market on December 31, 1997.

(2) Messrs. Hutts, Reeves, Wright, Dent and Crawford elected to forego
$89,148, $62,404, $24,943, $62,404 and $35,249 of their 1996 bonuses in
exchange for 3,910, 2,737, 1,094, 2,737 and 1,564 shares of Bonus Stock,
respectively.

(3) The closing sales price of the Common Stock of $27.00 as reported on the
Nasdaq National Market on December 31, 1997 was less than the weighted
average of the exercise prices of the options granted.

(4) Includes options to purchase 237,259 shares of Common Stock with an
exercise price of $27.75 and options to purchase 38,000 shares of Common
Stock with an exercise price of $25.00. The option to purchase the
38,000 shares has been forfeited by the recipient as a result of the
recipient's election to forego any bonus for 1997.

(5) Includes options to purchase 177,909 shares of Common Stock with an
exercise price of $27.75 and options to purchase 26,667 shares of Common
Stock with an exercise price of $25.00. The option to purchase the
26,667 shares has been forfeited by the recipient as a result of the
recipient's election to forego any bonus for 1997.

(6) Includes options to purchase 133,414 shares of Common Stock with an
exercise price of $27.75 and options to purchase 17,500 shares of Common
Stock with an exercise price of $25.00. The option to purchase the
17,500 shares has been forfeited by the recipient as a result of the
recipient's election to forego any bonus for 1997.

6
<PAGE> 10

FEDERAL INCOME TAX CONSEQUENCES

Tax consequences to the Company and to individuals receiving
Awards will vary with the type of Award. Generally, a participant will not
recognize income, and the Company is not entitled to take a deduction, upon the
grant of an ISO, NSO, Restricted Stock or Bonus Stock under the Incentive Plan.
An individual who exercises an ISO will not recognize income on its exercise if
he or she does not sell the shares of Common Stock acquired thereby for at least
two years after the date of grant and one year after exercising the ISO. Any
gain or loss on the sale of the Common Stock after these statutory holding
periods will be subject to capital gains treatment. The exercise price of the
ISO is the basis for purposes of determining capital gains. Reduced capital
gains rates apply if the Common Stock is held for at least 18 months after the
date of exercise of the ISO.

An individual who disposes of the Common Stock before the
statutory holding periods are satisfied will have engaged in a "disqualifying
disposition" and will recognize ordinary compensation income on the difference
between the exercise price of the ISO and the fair market value of the Common
Stock at the time the ISO was exercised. The individual's basis in the Common
Stock after a disqualifying disposition is its fair market value at the time of
exercise. The individual will also be subject to tax on capital gain, if any,
upon the sale of the Common Stock on the amount realized in excess of the basis.

Generally, the Company is not entitled to a tax deduction upon
the grant of an option or the exercise of an ISO under the Incentive Plan.
However, if the individual is engaged in a disqualifying disposition, the
Company may take a tax deduction for the amount of ordinary income recognized by
the individual.

Upon exercise of a NSO, the individual recognizes ordinary income
on the difference between the fair market value of the Common Stock and the
exercise price paid under the NSO. Unless an individual makes an election under
Section 83(b) of the Code to be taxed at the time of grant, he or she will
recognize ordinary income on the fair market value of the Common Stock at the
time shares of Restricted Stock or Bonus Stock become vested. In either case,
the Company is generally entitled to deduct the amount recognized by the
individual for tax purposes. The individual is also subject to capital gains
treatment on the subsequent sale of the Common Stock acquired through an Award.
For this purpose, the individual's basis in the Common Stock is its fair market
value at the time the NSO is exercised or the Restricted Stock or Bonus Stock is
vested (or transferred, if an election under Section 83(b) is made).

REGISTRATION UNDER THE SECURITIES ACT OF 1933

The Company intends to register the additional shares of Common
Stock authorized for issuance under the Incentive Plan on a Registration
Statement on Form S-8 as soon as practicable after approval by the shareholders.

THE BOARD OF DIRECTORS RECOMMENDS THAT SHAREHOLDERS VOTE FOR
APPROVAL OF THE AMENDMENT AND RESTATEMENT OF THE AMENDED
1988 INCENTIVE STOCK PLAN.

7
<PAGE> 11
PROPOSAL 2: ADOPTION OF THE COMPANY'S 1998 INCENTIVE STOCK PLAN

The Company's Board of Directors has approved the establishment
of the Company's 1998 Incentive Stock Plan (the "1998 Plan"). The primary
purpose of the 1998 Plan is to provide a performance incentive to key employees
and executives of the Company. The description below is intended to be a summary
of the material provisions of the 1998 Plan. The description is qualified in its
entirety by reference to the full text of the 1998 Plan, which is attached
hereto as Appendix B.

DESCRIPTION OF THE 1998 PLAN

A total of 6,000,000 shares of Common Stock has been reserved for
issuance under the 1998 Plan, none of which have been issued. The purpose of the
1998 Plan is to provide a performance incentive to employees and others who
perform services that enhance the value of shareholders' equity. The
Compensation Committee is authorized to administer the 1998 Plan and to grant
awards to Company employees and to certain others who provide significant
services to the Company. The 1998 Plan is similar to the Incentive Plan and
provides for the award of (i) NSOs to directors and employees of the Company,
(ii) ISOs to employees of the Company, (iii) Restricted Stock to employees of
the Company and (iv) Bonus Stock to employees of the Company. The 1998 Plan will
continue indefinitely until terminated by the Board of Directors.

The Compensation Committee is authorized to determine which
individuals are to receive awards under the 1998 Plan, the type of award to be
granted (i.e., ISOs, NSOs, Restricted Stock or Bonus Stock) and the exercise
prices and vesting dates of each Award. The exercise price of ISOs may not be
less than 100% of the fair market value of the Common Stock on the date of grant
(110% for individuals who own more than 10% of the total outstanding Common
Stock). These and other terms are set forth in a written agreement between the
Company and the individual receiving the award. The aggregate fair market value
of Common Stock (determined at the time the option was granted) with regard to
which ISOs are exercisable by an individual for the first time during any
calendar year may not exceed $100,000. No award shall be exercisable after the
expiration of ten years from the date it is granted (five years for ISOs granted
to individuals who own more than 10% of the total outstanding shares of Common
Stock).

Once an option has become exercisable, the individual may
purchase shares of Common Stock from the Company by paying the exercise price in
cash, shares of Common Stock or in other consideration acceptable to the
Compensation Committee. Awards become fully vested upon the occurrence of a
merger or certain other corporate events in which the control of the Company is
changed.

The amount of any Award under the 1998 Plan is subject to the
discretion of the Compensation Committee and, therefore, cannot be determined in
advance. Similarly, the dollar value of such Awards cannot be determined prior
to their grant.

1998 PLAN BENEFITS

To date no Awards have been granted pursuant to the 1998 Plan.

8
<PAGE> 12

FEDERAL INCOME TAX CONSEQUENCES

Tax consequences to the Company and to individuals receiving
Awards will vary with the type of Award. Generally, a participant will not
recognize income, and the Company is not entitled to take a deduction, upon the
grant of an ISO, a NSO, Restricted Stock or Bonus Stock under the 1998 Plan. An
individual who exercises an ISO will not recognize income on its exercise if he
or she does not sell the shares of Common Stock acquired thereby for at least
two years after the date of grant and one year after exercising the ISO. Any
gain or loss on the sale of the Common Stock after these statutory holding
periods will be subject to capital gains treatment. The exercise price of the
ISO is the basis for purposes of determining capital gains. Reduced capital
gains rates apply if the Common Stock is held for at least 18 months after the
date of exercise of the ISO.

Generally, the Company is not entitled to a tax deduction upon
the grant of an option or the exercise of an ISO under the 1998 Plan. However,
if the individual engages in a disqualifying disposition, the Company may take a
tax deduction for the amount of ordinary income recognized by the individual.

REGISTRATION UNDER THE SECURITIES ACT OF 1933

The Company intends to register the shares of Common Stock
authorized for issuance under the 1998 Plan on a Registration Statement on Form
S-8 as soon as practicable after adoption of the 1998 Plan by the shareholders
of the Company.

THE BOARD OF DIRECTORS RECOMMENDS THAT THE SHAREHOLDERS
VOTE FOR APPROVAL OF THE ADOPTION OF THE 1998 INCENTIVE
STOCK PLAN.

9
<PAGE> 13
PROPOSAL 3: ELECTION OF DIRECTORS

The Company's Restated Charter provides that the Board of
Directors shall be divided into three classes of as nearly equal size as
possible. Approximately one-third of the directors are elected each year. The
Board of Directors has nominated the four individuals named below under the
caption "Class I Nominees" for election as directors to serve until the annual
meeting of shareholders in 2001 and until their successors have been elected and
qualified. All of the Class I nominees are currently serving on the Board of
Directors of the Company with terms expiring at this Annual Meeting.

The Company's Amended Bylaws provide that the Board of Directors
shall consist of not less than three nor more than 15 directors as established
by the Board of Directors. The size of the Board of Directors has been
established at, and currently consists of, 11 directors. Since the 1997 Annual
Meeting for Shareholders, Ms. Kay Coles James was appointed to fill a vacancy
resulting from the resignation of a board member in 1995.

CLASS I NOMINEES:

DR. WINFIELD DUNN
Age - 70
Director since 1988

Dr. Dunn is a former Governor of the State of Tennessee. From
1979 to 1985, Dr. Dunn served as Senior Vice President, Government Affairs, for
Hospital Corporation of America ("HCA"). From 1987 to 1991, Dr. Dunn served as
Chairman of the Board of First Cumberland Bank. In 1993, Dr. Dunn became
Chairman of the Board of MedShares Management Group, Incorporated, an owner and
manager of home health care agencies.

C. SAGE GIVENS
Age - 41
Director since 1989

Since 1995, Ms. Givens has served as the managing partner of
Acacia Venture Partners, L.P., a private venture fund specializing in health
care services. From 1987 to 1995, Ms. Givens served as a general partner of
First Century Management Company. Ms. Givens joined First Century in 1983. Ms.
Givens is a director of HEALTHSOUTH Corporation, a leading provider of
rehabilitation services and outpatient surgery centers, and UROHEALTH Systems,
Inc., a designer, manufacturer and marketer of urological medical products.

DR. JOSEPH A. HILL
Age - 57
Director since 1989

Dr. Hill is a physician specializing in family practice at
Doctors' Clinic in Vero Beach, Florida, a clinic operated by the Company. Dr.
Hill joined Doctors' Clinic in 1973 and served as its President from 1988 to
1991.

10
<PAGE> 14

RICHARD D. WRIGHT
Age - 52
Director since 1992

Mr. Wright has served as Executive Vice President, Corporate
Services since October 1997. Prior to such time, Mr. Wright served as Executive
Vice President, Operations since the inception of the Company in 1988. Mr.
Wright served in several international positions with HCA concluding in 1986
with the position of Chief Executive Officer of an 800,000 member health
maintenance organization in Brazil. He returned to the United States in 1986 to
assume the position of Senior Vice President, Development for EQUICOR-Equitable
HCA Corporation ("EQUICOR"), an employee benefit company, a position he held
from 1986 until 1987. Mr. Wright is a trustee of Helen Keller International.

CONTINUING DIRECTORS:

The persons named below will continue to serve as directors until
the annual meeting of shareholders in the year indicated and until their
successors are elected and take office. Shareholders are not voting at this
Annual Meeting on the election of Class II and Class III directors. The
following table shows the names, ages and principal occupations of each
continuing director and the year in which each was first elected to the Board of
Directors.

CLASS II DIRECTORS SERVING UNTIL 1999:

SAM A. BROOKS, JR.
Age - 59
Director since 1988

Mr. Brooks is President, Chief Executive Officer and a director
of Renal Care Group, Inc., a provider of nephrology services ("Renal Care"). He
is also President of MedCare Investments Corp., a health care investment
company, and is Chairman of National Imaging Affiliates, Inc., an owner of
outpatient diagnostic imaging centers. From 1986 to 1989, Mr. Brooks was
President of Nationwide Health Properties, a health care real estate investment
trust. From 1969 to 1986, Mr. Brooks served as the Chief Financial Officer of
HCA. Mr. Brooks is a director of Kinetic Concepts, Inc., a hospital bed
manufacturer, Nationwide Health Properties, a real estate investment trust, and
Quorum Health Group, Inc. ("Quorum"), an owner and operator of hospitals.

THOMPSON S. DENT
Age - 47
Director since 1992

Mr. Dent has served as Executive Vice President and Chief
Operating Officer since October 1997. Prior to such time, he served as Executive
Vice President, Corporate Services since the inception of the Company in 1988.
Mr. Dent was selected to serve as Secretary of the Company in 1991. Mr. Dent
served as Vice President of Development at EQUICOR from 1986 until 1988. Prior
to 1986, Mr. Dent served as Director of Mergers and Acquisitions for HCA. Mr.
Dent is a director of Healthcare Realty Trust Incorporated ("HRT"), a real
estate investment trust.

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<PAGE> 15

DR. JAMES A. MONCRIEF
Age - 62
Director since 1988

Dr. Moncrief is a physician specializing in pediatrics and
pediatric neurology at Green Clinic in Ruston, Louisiana, a clinic operated by
the Company. Dr. Moncrief joined Green Clinic in 1966 and serves as its Medical
Director.

KAY COLES JAMES
Age -- 48
Director since 1997

Ms. James is currently a dean of Regent University, Robertson
School of Government in Virginia Beach, Virginia. Ms. James also serves as
Chairperson of the National Gambling Impact Study Commission. From January 1994
to 1996, Ms. James served as Secretary of Health and Human Resources for the
Commonwealth of Virginia. From January 1993 to January 1994, she served as
Senior Vice President of the Family Research Council. From December 1991 to
January 1993, Ms. James served as Associate Director of the White House Office
of National Drug Control Policy.

CLASS III DIRECTORS SERVING UNTIL 2000:

RONALD B. ASHWORTH
Age - 53
Director since 1992

Since 1991, Mr. Ashworth has served as Executive Vice President
and Chief Operating Officer of the Sisters of Mercy Health System, St. Louis,
Missouri ("SMHS"), a system consisting of hospitals and affiliated health care
entities serving a seven-state area in the central and southwestern United
States. Mr. Ashworth has been a director SMHS since its inception in 1986. From
1986 to 1990, Mr. Ashworth served as Vice Chairman of Specialized Industries and
Marketing for KPMG Peat Marwick LLP, the Company's independent public
accountants. From 1978 to 1985, Mr. Ashworth served as the National Director of
the health care practice of KPMG Peat Marwick LLP. Since 1995 Mr. Ashworth is a
director of the Benedictine Health System in Duluth, Minnesota.

JOSEPH C. HUTTS
Age - 56
Director since 1988

Mr. Hutts has served as Chairman of the Board, President and
Chief Executive Officer of the Company since the Company's inception. From 1977
to 1986, Mr. Hutts served in various positions with HCA, including Vice
President, Operations, Senior Vice President, Western Operations, and President
of HCA Health Plans, a managed care subsidiary of HCA. Mr. Hutts served as Vice
Chairman and Chief Operating Officer of EQUICOR from 1986 to 1987. Mr. Hutts
serves on the boards of directors of Renal Care and Quorum.

12
<PAGE> 16
DERRIL W. REEVES
Age - 54
Director since 1988

Mr. Reeves has served as Executive Vice President and Chief
Development Officer, of the Company since the Company's inception. Prior to
becoming an officer of the Company, Mr. Reeves served as Vice President of Sales
and Marketing with HCA Management Company from 1977 to 1986, at which time he
took the position of Senior Vice President, National Sales, with EQUICOR, a
position he held until 1987. Mr. Reeves is a director of American Dental
Partners, Inc.

INFORMATION REGARDING THE BOARD OF DIRECTORS

The Board of Directors held nine meetings during 1997, including
regular and special meetings. Each director attended at least 75% of the
meetings of the Board of Directors and committees thereof on which the director
serves.

The Committees of the Board of Directors consist of an Audit
Committee, on which Mr. Brooks and Ms. Givens serve, and a Compensation
Committee, on which Mr. Ashworth and Drs. Dunn, Hill and Moncrief serve. During
1997, the Audit Committee met two times, and the Compensation Committee met two
times. The Audit Committee is responsible for recommending the independent
public accountants to the Board of Directors, reviewing audit fees and
supervising matters relating to audit functions and other financial controls.
The Compensation Committee is responsible for approving compensation
arrangements for executive officers of the Company, reviewing compensation
plans, granting stock options and Restricted Stock and Bonus Stock awards and
reviewing employee compensation policies. The Board of Directors has no standing
nominating committee.

COMPENSATION OF DIRECTORS

Directors who are employees of the Company receive no additional
compensation for serving on the Board of Directors. Non-Employee Directors are
entitled to receive (i) a retainer equal to $7,000 times the number of years for
which the Non-Employee Director is elected payable in restricted shares of the
Common Stock at a price per share equal to the closing sales price of the Common
Stock as of the date of the annual meeting of shareholders at which the director
is elected to serve and (ii) options for the purchase of 6,750 shares of Common
Stock automatically issued as of January 1 of each year during which the
Non-Employee Director serves the Company at a per share price equal to the
closing sales price of the Common Stock on the date of grant. Such newly granted
options are immediately exercisable for all shares subject to such options. In
addition, Non-Employee Directors receive $2,500 in cash per regular and special
meeting of the Board of Directors and $1,000 per committee meeting. The shares
of restricted stock are held by the Company, and Non-Employee Directors receive
one-third of the shares representing the retainer amount referenced above at the
completion of each year of service during the three year term for which they
were elected. Board members are reimbursed for their expenses for each meeting
attended. In addition, in the first quarter of 1998, each of the Non-Employee
Directors received a one-time option grant under the Incentive Plan of 15,000
shares with a per share exercise price equal to the then fair market value of
the Common Stock.

THE BOARD OF DIRECTORS RECOMMENDS THAT THE SHAREHOLDERS VOTE
FOR THE ELECTION OF ALL OF THE PROPOSED CLASS I NOMINEES
TO THE BOARD OF DIRECTORS.

13
<PAGE> 17
PROPOSAL 4: SELECTION OF AUDITORS

Upon the recommendation of the Audit Committee, the Board of
Directors of the Company has appointed, subject to the approval of the
shareholders, the firm of KPMG Peat Marwick LLP as independent public
accountants to audit the Company's consolidated financial statements for the
year ending December 31, 1998. If the appointment of KPMG Peat Marwick LLP is
not approved by the shareholders, the matter will be referred to the Audit
Committee for further review.

It is anticipated that representatives of KPMG Peat Marwick LLP
will attend the Annual Meeting and will have an opportunity to make a statement,
if they determine to do so, and will be available to respond to questions at
that time.

THE BOARD OF DIRECTORS RECOMMENDS THAT THE SHAREHOLDERS VOTE FOR
THE SELECTION OF KPMG PEAT MARWICK LLP AS THE COMPANY'S
INDEPENDENT PUBLIC ACCOUNTANTS TO AUDIT THE COMPANY'S
CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDING DECEMBER 31, 1998.

14
<PAGE> 18
VOTING SECURITIES AND PRINCIPAL HOLDERS THEREOF

The following table sets forth certain information regarding
beneficial ownership as of March 31, 1998 (unless otherwise indicated) by (i)
all directors, nominees for directors and executive officers, (ii) each person
known by the Company to be the beneficial owner of more than 5% of the Common
Stock of the Company and (iii) all directors and officers as a group. Except as
otherwise indicated, the beneficial owners listed below have sole voting and
investment power with respect to all shares owned by them, except to the extent
such power is shared by a spouse under applicable law.

<TABLE>
<CAPTION>
SHARES PERCENTAGE OF
BENEFICIALLY OUTSTANDING
NAME AND ADDRESS OF BENEFICIAL OWNER OWNED(1) SHARES
------------------------------------ ------------ -------------
<S> <C> <C>
Joseph C. Hutts(2)......................................... 1,408,885 2.1%
Derril W. Reeves(3)........................................ 1,255,954 1.9
Thompson S. Dent(4)........................................ 1,243,669 1.9
Richard D. Wright(5)....................................... 1,066,780 1.6
John K. Crawford(6)........................................ 570,014 *
Ronald B. Ashworth(7)...................................... 36,087 *
Sam A. Brooks, Jr.(8)...................................... 49,949 *
Winfield Dunn(9)........................................... 56,796 *
C. Sage Givens(10)......................................... 60,145 *
Joseph A. Hill, M.D.(11)................................... 65,232 *
Kay Coles James (12)....................................... 7,258 *
James A. Moncrief, M.D.(13)................................ 65,135 *
AIM Management Group, Inc. (14)............................ 6,582,830 10.1
Dresdner RCM Global Investors, LLC (15).................... 4,179,537 6.4
All directors and officers as a group (12 persons)(16)..... 5,885,904 8.3
</TABLE>

- ----------

* Less than 1%.

(1) Includes shares of Common Stock subject to options which may be
exercised within 60 days of March 31, 1998. Such shares are deemed to be
outstanding for the purposes of computing the percentage ownership of
the individual holding such shares, but are not deemed outstanding for
purposes of computing the percentage of any other person shown in the
table.

(2) Includes options to purchase 1,367,692 shares of Common Stock.

(3) Includes options to purchase 1,079,267 shares of Common Stock.

(4) Includes options to purchase 1,079,267 shares of Common Stock. Of these
shares, 130,179 shares are held in four trusts by Mr. Dent for the
benefit of members of his immediate family.

(5) Includes options to purchase 1,037,079 shares of Common Stock. Of these
shares, 5,972 shares are held by Mr. Wright for the benefit of his minor
daughter.

(6) Includes options to purchase 552,171 shares of Common Stock. Of these
shares, 4,628 shares are held in trust by Mr. Crawford for the benefit
of his two minor daughters.

(7) Includes options to purchase 33,750 shares of Common Stock and 762
shares of restricted Common Stock.

(8) Includes options to purchase 30,375 shares of Common Stock and 412
shares of restricted Common Stock.

(9) Includes options to purchase 52,314 shares of Common Stock and 499
shares of restricted Common Stock.

(10) Includes options to purchase 35,438 shares of Common Stock and 499
shares of restricted Common Stock.

(11) Includes options to purchase 35,438 shares of Common Stock and 499
shares of restricted Common Stock.

15
<PAGE> 19
(12) Includes options to purchase 6,750 shares of Common Stock and 508 shares
of restricted Common Stock.

(13) Includes options to purchase 35,438 shares of Common Stock and 412
shares of restricted Common Stock.

(14) AIM Management Group, Inc. ("AIM") has shared voting power as to
6,582,830 shares. AIM's address is 11 Devonshire Square, London EC2M 4YR
England. Information is as of December 31, 1997 and is derived from
filings with the Securities and Exchange Commission (the "Commission").

(15) Dresdner RCM Global Investors, LLC ("Dresdner RCM"), a registered
investment adviser, is a wholly-owned subsidiary of Dresdner Bank AG.
Dresdner RCM's address is Four Embarcadero Center, San Francisco,
California 94111. Information is as of December 31, 1997 and is derived
from Commission filings.

(16) Includes options to purchase 5,327,479 shares of Common Stock and 3,591
shares of restricted Common Stock.

SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

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

Based solely on a review of copies of reports filed with the
Commission and written representations from certain of the Company's directors
and executive officers that no other reports were required, the Company notes
that Kay Coles James inadvertently failed to file an initial report on Form 3 in
a timely manner after being appointed to the Board of Directors.

16
<PAGE> 20
EXECUTIVE COMPENSATION

The following table sets forth summary information concerning
compensation paid or accrued by or on behalf of the Company's Chief Executive
Officer and the four other most highly compensated executive officers of the
Company whose total annual salary and bonus exceeded $100,000 (hereinafter,
collectively referred to as the "Named Executive Officers") for services
rendered in all capacities to the Company for the years ended December 31, 1995,
1996 and 1997:

SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
Annual Compensation(1) Long-Term Compensation
------------------------------------ -----------------------------
Name and Securities
Principal Underlying All Other
Position Year Salary($) Bonus($) Options(#)(2) Compensation($)
-------- ---- --------- -------- ------------- ---------------
<S> <C> <C> <C> <C> <C>
Joseph C. Hutts 1997 $586,000 $ --(3) 275,259(4) $ 8,000(5)
Chairman of the Board, 1996 508,000 178,300(6) 226,593 7,500(7)
President and Chief 1995 396,000 188,100(8) 206,004 13,836(9)
Executive Officer

Derril W. Reeves 1997 $416,000 $ --(3) 204,576(4) $ 8,000(5)
Executive 1996 358,000 124,810(6) 170,113 7,500(7)
Vice President 1995 278,000 132,050(8) 150,874 13,490(9)
and Chief Development
Officer

Richard D. Wright 1997 $416,000 $ --(3) 204,576(4) $ 8,000(5)
Executive Vice President, 1996 358,000 124,810(6) 170,113 7,500(7)
Corporate Services 1995 278,000 132,050(8) 150,874 11,293(9)

Thompson S. Dent 1997 $416,000 $ --(3) 204,576(4) $ 8,000(5)
Executive Vice President, 1996 358,000 124,810(6) 170,113 7,500(7)
Chief Operating 1995 278,000 132,050(8) 150,874 10,806(9)
Officer and Secretary

John K. Crawford 1997 $316,000 $ --(3) 150,914(4) $ 8,952(5)
Executive Vice President 1996 258,000 71,325(6) 127,568 8,155(7)
and Chief Financial Officer 1995 175,000 63,175(8) 113,155 7,731(9)
</TABLE>

- ----------

(1) In 1997, the Company did not pay any perquisites or other personal
benefits to the Named Executive Officers. For each of 1995 and 1996 the
perquisites and personal benefits paid to each of the Named Executive
Officers was less than $50,000 or 10% of the total salary and bonus
reported for the Named Executive Officers, and, therefore, the amount of
such other annual compensation is not reported.

(2) Reflects the three-for-two stock splits of the Common Stock effected in
September 1995 and June 1996.

(3) Options to purchase shares have been forfeited by the recipient as a
result of the recipient's election to forego any bonus for 1997.

(4) Of these options, Messrs. Hutts, Reeves, Wright, Dent and Crawford
subsequently elected to forfeit options to purchase 38,000, 26,667,
26,667, 26,667 and 17,500 shares of Common Stock, respectively.

(5) Includes the 1997 contributions by the Company to a defined contribution
plan of $8,000 for each Named Executive Officer and includes excess
premiums paid by the Company in 1997 on term life insurance policies of
$952 paid on behalf of Mr. Crawford.

(6) Of these amounts, Messrs. Hutts, Reeves, Wright, Dent and Crawford
elected to forego $89,148, $62,404, $24,943, $62,404 and $35,249 in
exchange for 3,910, 2,737, 1,094, 2,737 and 1,564 shares of Bonus Stock,
respectively. These shares of Bonus Stock vested on May 16, 1997. The
shares of Bonus Stock were issued on January 3, 1997 at a per share
price of $22.80.

17
<PAGE> 21

(7) Includes the 1996 contributions by the Company to a defined contribution
plan of $7,500 for each Named Executive Officer and includes excess
premiums paid by the Company in 1996 on group term life insurance of
$655 on behalf of Mr. Crawford.

(8) Of these amounts, Messrs. Hutts, Reeves, Wright, Dent and Crawford
elected to forego $94,046, $65,999, $52,807, $65,999 and $31,563 in
exchange for 3,732, 2,619, 2,095, 2,619 and 1,252 shares of Bonus Stock,
respectively. These shares of Bonus Stock vested on May 16, 1997. The
shares of Bonus Stock were issued on January 3, 1996 at a per share
price of $25.20.

(9) Includes the 1995 contributions by the Company to a defined contribution
plan of $7,500 for each Named Executive Officer and includes excess
premiums paid by the Company in 1995 on term life insurance policies of
$6,336, $5,990, $3,793, $3,306 and $231 paid on behalf of Messrs. Hutts,
Reeves, Wright, Dent and Crawford, respectively.

The following table sets forth information concerning the stock
options granted to the Named Executive Officers in 1997:

OPTION GRANTS IN LAST FISCAL YEAR

<TABLE>
<CAPTION>
Individual Grants
-------------------------------------------------
Potential Realizable
Number of Percent of Value at Assumed Annual
Securities Total Rates of Stock Price
Underlying Options Exercise Appreciation for Option
Options Granted to or Base Term(3)
Granted Employees in Price Expiration -----------------------
Name (#) (1) Fiscal Year ($/Sh) (2) Date 5% ($) 10% ($)
---- ------- ----------- ---------- ---- ------ -------
<S> <C> <C> <C> <C> <C> <C>
Joseph C. Hutts...... 237,259 6.9% $27.75 5/16/07 $4,140,603 $10,493,100
38,000(4) 1.1 25.00 4/14/00 -- --

Derril W. Reeves..... 177,909 5.1 27.75 5/16/07 3,104,837 7,868,266
26,667(4) 0.8 25.00 4/14/00 -- --

Richard D. Wright.... 177,909 5.1 27.75 5/16/07 3,104,837 7,868,266
26,667(4) 0.8 25.00 4/14/00 -- --

Thompson S. Dent..... 177,909 5.1 27.75 5/16/07 3,104,837 7,868,266
26,667(4) 0.8 25.00 4/14/00 -- --

John K. Crawford..... 133,414 3.9 27.75 5/16/07 2,328,318 5,900,415
17,500(4) 0.5 25.00 4/14/00 -- --
</TABLE>

- ----------
(1) All options granted to the Named Executive Officers, including the
options described above, are immediately exercisable. Options listed in
the table were granted under the Company's Amended 1988 Incentive Stock
Plan.

(2) Represents the fair market value per share of the Common Stock on the
date of the grant of the option.

(3) Amounts represent hypothetical gains that could be achieved for the
respective options if exercised at the end of the option term and based
upon assumed rates of appreciation in the market price of the Common
Stock of 5% and 10% compounded annually from the date of grant to the
expiration date. Actual gains, if any, upon the exercise of stock
options will depend on the future performance of the Common Stock and
the date on which the options are exercised.

(4) Options to purchase these shares of Common Stock have been forfeited by
the recipient as a result of the recipient's election to forego any
bonus for 1997.

18
<PAGE> 22

The following table sets forth information with respect to the
exercise of options during the last fiscal year and unexercised options held as
of the end of the fiscal year by the Named Executive Officers:

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

<TABLE>
<CAPTION>
Number of Securities
Underlying Unexercised Value of Unexercised
Shares Options at Fiscal In-the-Money Options
Acquired Year-End(#) at Fiscal Year-End($)(1)
on Value ---------------------------- -----------------------------
Name Exercise(#) Realized($) Exercisable Unexercisable Exercisable Unexercisable
---- ----------- ----------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Joseph C. Hutts -- $ -- 1,130,604 -- $10,017,286 --
Derril W. Reeves -- -- 889,123 -- 8,604,135 --
Richard D. Wright -- -- 889,123 -- 8,604,135 --
Thompson S. Dent -- -- 889,123 -- 8,604,135 --
John K. Crawford 25,000 616,419 517,021 -- 3,100,609 --
</TABLE>

- ----------
(1) Based upon the closing sales price of the Common Stock of $27.00 per
share as reported on the Nasdaq National Market on December 31, 1997,
less the exercise price for the options.

The Company has not awarded stock appreciation rights to any
employee of the Company and has no long-term incentive plans, as such term is
defined in Commission regulations.

RETIREMENT PLAN

The Company developed a supplemental, non-qualified retirement
plan (the "Retirement Plan") for certain of the Company's executive officers
effective as of January 1, 1997. As of December 31, 1997, under the terms of the
Retirement Plan, Messrs. Hutts, Reeves, Wright and Dent (the "Eligible
Officers") were eligible to participate. The Company has acquired certain
insurance policies with respect to each of the Eligible Officers and funds the
Retirement Plan through the development of cash surrender values and death
benefits on such policies. The Company may elect to terminate the Retirement
Plan at any time.

The Retirement Plan also provides a death benefit for Eligible
Officers while they are employees of the Company. Pursuant to the Retirement
Plan, the estate of an Eligible Officer who dies while an employee of the
Company will be entitled to receive a taxable death benefit from one to three
times the Eligible Officer's salary.

Retirement Plan benefits are limited to the amount that the
Company has paid to fund these policies or any other funding device established
by the Company. After the occurrence of a change of corporate control, however,
the benefit payable is a straight life annuity (with a ten-year certain period)
with annual payments equal to 55% (or, if greater, 2.5% for each year of
service) of the Eligible Officer's compensation at the time of the change in
control, offset by the actual value of the benefit payable under the PhyCor,
Inc. Savings and Profit Sharing Plan (the "401(k) Plan"). In addition, the
Retirement Plan provides for additional payments by the Company to offset the
effects of excise taxes for which the Eligible Officer may become liable under
Section 4999 of the Code upon a change of corporate control.

19
<PAGE> 23

Benefits payable under the Retirement Plan are based upon the
average rate of compensation for the three calendar years immediately preceding
the Eligible Officer's retirement plus the Company's contribution to the
Eligible Officer's account in the 401(k) Plan. Benefits under the Retirement
Plan are not subject to offset for Social Security benefits.

The following table illustrates the total combined estimated
annual pension benefits payable to an Eligible Officer at normal retirement age
(age 60 under the Retirement Plan) after a change of control based on
compensation that is covered under the plans and years of service with the
Company and its subsidiaries:

RETIREMENT PLAN

<TABLE>
<CAPTION>
Average Annual Remuneration
Plus Company Contributions to Years of Service at Retirement
the Company's Qualified ------------------------------------------------------------
Retirement Plan (401(k)) 15 20 25 30 35
------------------------ -- -- -- -- --
<S> <C> <C> <C> <C> <C>
$ 200,000 $110,000 $110,000 $125,000 $150,000 $175,000
300,000 165,000 165,000 187,500 235,000 262,500
400,000 220,000 220,000 250,000 300,000 350,000
500,000 275,000 275,000 312,500 375,000 437,500
600,000 330,000 330,000 375,000 450,000 525,000
700,000 385,000 385,000 437,500 525,000 612,500
800,000 440,000 440,000 500,000 600,000 700,000
900,000 495,000 495,000 562,500 675,000 787,500
1,000,000 550,000 550,000 625,000 750,000 875,000
1,100,000 605,000 605,000 687,000 825,000 962,500
1,200,000 660,000 660,000 750,000 900,000 1,050,000
</TABLE>

As of December 31, 1997, the average three-year compensation, as
defined in the Retirement Plan, of the Eligible Officers was: (i) Mr. Hutts,
$963,953; (ii) Mr. Reeves, $714,941; (iii) Mr. Wright, $700,444; and (iv) Mr.
Dent, $726,726. The estimated credited years of service for the Eligible
Officers were: (i) Mr. Hutts, ten years; (ii) Mr. Reeves, ten years; (iii) Mr.
Wright, ten years; and (iv) Mr. Dent, ten years.

EMPLOYMENT CONTRACTS AND TERMINATION AND CHANGE-OF-CONTROL ARRANGEMENTS

Messrs. Hutts, Reeves, Dent and Wright, entered into Amended and
Restated Employment Agreements with the Company which were effective August 1,
1997 (the "Amended Agreements"). The Amended Agreements supersede the employment
agreements entered into by each of Messrs. Hutts, Reeves, Dent and Wright as of
March 25, 1994 and extend the employment of the Named Executive Officers for an
initial period of five years from the date of the execution of the Amended
Agreements, unless earlier terminated. Effective as of August 13, 1997, Mr.
Crawford entered into an employment agreement with the Company which supersedes
Mr. Crawford's employment agreement dated as of January 1, 1995, and extends his
employment for an initial period of five years (the "Employment Agreement").
Each Named Executive Officer and the Company will begin to negotiate in good
faith for the renewal of the Amended Agreements and the Employment Agreement,
commencing 30 months prior to the expiration of the term of the Amended
Agreements or Employment Agreement. Failure by the Company and the Named
Executive Officer to reach agreement as to the renewal of the Amended Agreement
or Employment Agreement by 24 months prior to the expiration of the term, to
extend the negotiation period of such Amended Agreement or Employment Agreement,
or to reach agreement as to renewal by the end of the

20
<PAGE> 24
extended negotiation period will result in the Amended Agreement or Employment
Agreement being terminated without cause.

Each of the Amended Agreements provides that the Named Executive
Officer may terminate his agreement upon giving 90 days prior written notice of
termination to the Company; the Employment Agreement provides for 60 days prior
written notice of termination. The Amended Agreements and the Employment
Agreement also provide that the Company may terminate the Named Executive
Officer at any time for cause, which includes a violation by the Named Executive
Officer of any material term of the agreement or if the Named Executive Officer
is convicted of a felony or commits an act of dishonesty, fraud or embezzlement
against the Company or its affiliates.

In the event the Company terminates a Named Executive Officer
without cause, the Company is obligated to pay to such Named Executive Officer
all bonuses and unreimbursed expenses owed that have accrued. The Company will
also (i) continue to pay the Named Executive Officer's salary for the longer of
the remaining term of the Amended Agreement or Employment Agreement or 24
months, (ii) continue to provide insurance and other benefits for the period the
salary is paid, (iii) provide that all grants of outstanding options, Restricted
Stock, Bonus Stock and any other incentive stock awards become fully vested and
(iv) cause all deferred compensation, supplemental retirement programs and
similar programs to become fully funded. In addition, the Employment Agreement
provides that if Mr. Crawford's duties or services are materially increased or
altered in a manner inconsistent with his position, such action would be deemed
a termination without cause and entitle Mr. Crawford to the benefits described
above.

In the event of a merger or consolidation of the Company where
the Company does not survive, or survives only as a subsidiary of another
company or in the event any person becomes the holder of 50% or more of the
Company's outstanding voting securities or has the power, directly or
indirectly, to designate a majority of the members of the Board of Directors
("Change of Control") and any of Messrs. Hutts, Dent, Reeves or Wright
terminates his Amended Agreement within two years of such event, he will be
entitled to the benefits described immediately above. In the event Messrs.
Hutts, Dent, Reeves or Wright becomes subject to an excise tax under Section
4999 of the Code as a result of such payments, the Company will provide
additional payments to such executive officer to avoid any adverse economic
impact from such excise tax.

In the event Messrs. Hutts, Dent, Reeves or Wright becomes
disabled and his disability continues for a period of 60 consecutive days, the
Company will pay the disabled executive officer's insurance, bonus and other
benefits for a period of six months from the date of the beginning of the
disability. The executive officer's salary would be reduced by any disability
income paid pursuant to any disability insurance policy maintained under the
terms of his Amended Agreement. Messrs. Hutts, Reeves, Dent and Wright have
individual disability insurance policies, the premiums for which are paid by the
Company. All other officers and employees of the Company, including Mr.
Crawford, have disability insurance through a group policy, the premiums for
which are also paid by the Company.

Each of the Named Executive Officer's compensation shall consist
of an annual salary determined by the Compensation Committee, vacation, bonuses
and reimbursement for all reasonable expenses incurred in the performance of his
duties. For 1998, the base cash salary for each of the Named Executive Officers
remains at the 1997 levels. Each of Messrs.

21
<PAGE> 25

Hutts, Reeves, Dent, and Wright and Crawford elected to receive an option grant
to purchase 12,030, 11,278, 11,278, 11,278 and 7,519 shares, respectively, at an
exercise price per share equal to the then fair market value of the Company's
Common Stock in lieu of any cash increase to base salaries. The base salary of
the Named Executive Officers may be adjusted each year by the Compensation
Committee.

Under the Amended Agreements and the Employment Agreement, each
Named Executive Officer agrees that during the term of the applicable agreement
and for a period of 24 months following the expiration or termination of the
applicable agreement, the Named Executive Officer will not (i) operate, develop
or own any interest in, other than the ownership of less than 5% of the equity
securities of a publicly-traded company, any business which has significant
(viewed in relation to the business of the Company) activities or has announced
an intention to focus significant resources, relating to the ownership,
management or operation of multi-specialty medical clinics, physician group
practices, independent practice associations, or other similar entities (a
"Business"), (ii) compete with the Company or any of its subsidiaries and
affiliates in the operation or development of any Business within the United
States, (iii) be employed by any business which owns, manages or operates a
Business, (iv) interfere with, solicit, disrupt or attempt to disrupt any past,
present or prospective relationship, contractual or otherwise, between the
Company, its subsidiaries or affiliates and any customer, client, supplier or
employee of the Company, its subsidiaries or affiliates, or (v) solicit any
employee of the Company, its subsidiaries or affiliates to leave their
employment with the Company, its subsidiaries or affiliates, or hire any such
employee to work for a Business. In the event the Named Executive Officer is
terminated without cause, the above provisions are applicable only for so long
as the Company is obligated to pay the Named Executive Officer's compensation.

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

The Compensation Committee of the Board of Directors during 1997
consisted of Mr. Ashworth and Drs. Dunn, Hill and Moncrief. None of the members
of the Compensation Committee has at any time been an officer or employee of the
Company or any of its subsidiaries, nor have any of the members had any
relationship with the Company requiring disclosure by the Company, except for
Drs. Hill and Moncrief, whose relationships are described hereinafter under the
caption "Certain Relationships and Related Transactions."

22
<PAGE> 26
EXECUTIVE OFFICERS OF THE COMPANY

The executive officers of the Company are as follows:

<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Joseph C. Hutts............... 56 Chairman of the Board, President and Chief Executive Officer
Derril W. Reeves.............. 54 Executive Vice President and Chief Development Officer
Richard D. Wright............. 52 Executive Vice President, Corporate Services
Thompson S. Dent.............. 47 Executive Vice President, Chief Operating Officer and Secretary
John K. Crawford.............. 39 Executive Vice President and Chief Financial Officer
</TABLE>

See "Proposal 3: Election of Directors" for information regarding
the backgrounds of Messrs. Hutts, Reeves, Wright and Dent.

Mr. Crawford has served as Executive Vice President since
February, 1998, Chief Financial Officer since 1995 and as a Vice President of
the Company since 1993. From 1991 to 1993, Mr. Crawford served as Director of
Clinic Financial Operations for the Company. Prior to joining the Company, from
1987 to 1991, Mr. Crawford served as a Senior Manager for KPMG Peat Marwick LLP,
in Nashville, Tennessee, the Company's independent public accountants.

COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION

This report is submitted by the Compensation Committee of the
Company at the direction of the Board of Directors pursuant to rules established
by the Commission. This report provides certain data and information regarding
the compensation and benefits provided to Mr. Hutts, the Company's Chief
Executive Officer, as well as to Messrs. Reeves, Dent, Wright and Crawford.

The Compensation Committee is responsible for establishing and
administering the Company's executive compensation policies and programs within
the guidelines of the Company's compensation philosophy. Recommendations
relating to the compensation of the Named Executive Officers are made by the
Compensation Committee to the Board of Directors, which makes the final
decisions as to compensation. Employees serving on the Board of Directors do not
participate in the determination of their own compensation.

COMPENSATION PHILOSOPHY

The Compensation Committee's philosophy is to provide significant
ownership opportunity to the Named Executive Officers so that they will continue
to be motivated to enhance shareholder return and increase shareholder value.
The compensation policies and programs utilized by the Compensation Committee
and endorsed by the Board of Directors generally consist of the following:

o Recommend the Named Executive Officers' total
compensation in relation to Company performance;

o Support the team concept among the Named Executive
Officers by providing comparable base compensation
amounts;

23
<PAGE> 27

o Align base salary and bonus amounts for the Named
Executive Officers with annual compensation levels paid
to executive officers of companies comparable in size
and performance to the Company; and

o Provide long-term incentive compensation in the form of
stock options and Restricted Stock awards based upon a
percentage of annual salary to motivate and retain high
quality executive officers.

The compensation program of the Company generally consists of (i)
base salary and annual incentive compensation in the form of cash bonuses and/or
Bonus Stock awards and (ii) long-term incentive compensation in the form of
stock options and Restricted Stock awards.

COMPENSATION

The Compensation Committee in 1997 utilized the services of an
independent compensation consulting firm to further develop the compensation
program for the Named Executive Officers. At the suggestion of the consulting
firm, the Compensation Committee adopted certain refinements to the Company's
compensation and benefit program. The 1997 compensation package for the Named
Executive Officers continued to include annual compensation in the form of base
salary, but the cash bonus and/or Bonus Stock was replaced with a one-time
option grant, as well as long-term compensation in the form of stock options.

The following briefly describes the sources of compensation:

Base Compensation

The Company's annual salary levels are intended to reflect the
level of responsibility of the particular executive officer, with increases in
salary resulting from the individual performance of the executive officer and
the financial results of the Company, as measured by increases over prior year
levels of the Company's pre-tax earnings, pre-tax profit margin, return on
capital, earnings per share and cash flow from operations. No specific weighting
was assigned to any of these factors. In determining the levels of annual
compensation payable to the Named Executive Officers, the Company used
comparisons to compensation paid to executive officers in companies in the
health care industry with comparable operating histories. The companies utilized
in the comparison were located throughout the United States and many, but not
all, of such companies are included in the peer group indices used in the
performance graph included elsewhere in this Proxy Statement.

Annual Incentives

Actual bonus opportunities are established in recognition of the
bonuses paid in the health care industry and in consideration of the level of
the position in the Company and resulting impact on business success. The bonus
is stated as a percentage of annual salary of the Named Executive Officers and
it is paid at the end of the fiscal year. In establishing the level of bonuses
actually paid, the Compensation Committee utilizes a formula based upon a
comparison of actual earnings per share and return on capital achieved during
the year as compared to budgeted amounts for such results. Each of these factors
is weighted equally in

24
<PAGE> 28

application of the bonus formula. The Named Executive Officers can make an
election to receive their bonus in cash, stock options or Restricted Stock.

Long-Term Compensation

The Company's long-term compensation strategy includes the grant
of stock options and Restricted Stock awards. The Company grants stock options
and shares of Restricted Stock to provide a total compensation package that
rewards contributions by the executive officers to the Company's long-term stock
performance. These grants are intended not only to motivate and retain the Named
Executive Officers in the service of the Company, but also to more closely align
the Named Executive Officers' interests with those of the Company's
shareholders.

The amount of long-term compensation granted to the Named
Executive Officers in 1997 was based upon a consideration of the value of
long-term compensation paid by both a broad-based group of 18 similarly sized
health care management companies who have been publicly held for several years.
In response to the recommendations of the consulting firm, the Compensation
Committee targeted the Company's long-term compensation paid to its Named
Executive Officers to place the Company at the 75th percentile of the 18
similarly sized companies used in the study.

The Compensation Committee provided the Named Executive Officers
the flexibility to determine the percentage of their long-term compensation to
be paid in stock options and in Restricted Stock. In 1997, each of the Named
Executive Officers opted to receive stock options rather than Restricted Stock.

COMPENSATION PAID IN 1997 TO THE CHIEF EXECUTIVE OFFICER

Base Salary

The independent compensation consulting firm retained by the
Compensation Committee continued to evaluate compensation levels paid to the
Chief Executive Officer. Based upon an analysis of 18 similarly sized health
care management companies to which the Company was compared, as well as a
broader health care management market as indicated by compensation surveys, the
consulting firm recommended a salary increase for the Chief Executive Officer
over 1996 levels.

In response to the recommendations of the consulting firm and in
recognition of the performance of Mr. Hutts and the financial results of the
Company, the Compensation Committee determined to increase the base salary of
Mr. Hutts by 15% over 1996 levels. That salary was based upon the consulting
firm's recommendation to target the Company's compensation paid to its Chief
Executive Officer to place the Company in the top 25% of the 18 similarly sized
companies used in the study. The salary levels were also based upon the
Company's improved business results, including, but not limited to,
considerations of earnings per share, return on capital, pre-tax earnings,
pre-tax profit margin and cash flow from operations over. No specific weighting
was assigned by the Compensation Committee or the Board of Directors to any of
the factors considered in determining the salary amount for Mr. Hutts.

25
<PAGE> 29

Annual Incentive for 1997

The target bonus established for Mr. Hutts for 1997 reflected the
continued growth and success of the Company. The Compensation Committee utilized
the criteria referenced above under the caption "Annual Incentives" to establish
the bonus actually paid up to the target opportunity amount. The percentage
bonus opportunity for Mr. Hutts was established at 40% of base salary.

As with the other Named Executive Officers, the Compensation
Committee determined that, for the 1997 fiscal year only, the bonus for the
Chief Executive Officer was to be converted to stock options equal to 125% of
the target bonus (increased to reflect market and forfeiture risk) divided by
the value of the option on January 1, 1998 as determined by the Company. The
option for such shares granted to Mr. Hutts was to be earned as of January 1,
1998 and exercisable on March 1, 1998. On January 1, 1998, 38,000 options were
accordingly awarded to Mr. Hutts. In February 1998, the Chief Executive Officer,
like the other Named Executive Officers, elected to forfeit the bonuses granted
to him as of January 1, 1998 for 1997 services to acknowledge the challenges
faced by the Company in 1997. Accordingly, the 38,000 options granted to Mr.
Hutts were canceled.

Long-Term Incentives

The Compensation Committee determined to issue to Mr. Hutts
options for the purchase of 237,259 shares of Common Stock. The amount was
determined based on the continued improved pre-tax margins, earnings and cash
flow of the Company and in order to provide the Chief Executive Officer with a
percentage of the outstanding shares of the Common Stock in accordance with the
consulting firm's target 75th percentile level of comparable companies
referenced above

COMPENSATION PAID IN 1997 TO OTHER NAMED EXECUTIVE OFFICERS

Base Salaries

In 1997 the independent compensation consulting firm retained by
the Compensation Committee continued to evaluate compensation levels paid to the
Named Executive Officers. Based upon an analysis of 18 similarly sized health
care management companies to which the Company was compared, as well as a
broader health care management market as indicated by compensation surveys, the
consulting firm recommended a salary increase for the Named Executive Officers
over 1996 levels.

In response to the recommendations of the consulting firm and in
recognition of the performance of Messrs. Reeves, Dent and Wright and the
financial results of the Company, the Compensation Committee determined to
increase the base salaries of each of these Named Executive Officers by 16% over
1996 levels. The amount of salary payable to these Named Executive Officers was
based upon the consulting firm's recommendation to target the Company's
compensation paid to its Named Executive Officers to place the Company in the
top 25% of the 18 similarly sized companies used in the study. The salary levels
were also based upon the Company's improved business results, including, but not
limited to, considerations of earnings per share, return on capital, pre-tax
earnings, pre-tax profit margin and cash flow from operations. No specific
weighting was assigned by the

26
<PAGE> 30

Compensation Committee or the Board of Directors to any of the factors
considered in determining salary amounts for Messrs. Reeves, Dent and Wright.
The amounts payable to Messrs. Reeves, Dent and Wright remained equal in amount
in order to promote the Company's team approach to compensation and the
understanding that these individuals perform equally vital roles in different
aspects of the Company's business.

The base salary payable to Mr. Crawford was increased by 22% over
his 1996 salary in recognition of Mr. Crawford's contributions to the continued
success of the Company. Mr. Crawford's salary increase, while influenced by the
recommendations of the consulting firm, was based on an assessment of Mr.
Crawford's performance and on the Company's improved business results including
but not limited to considerations of earnings per share, return on capital,
pre-tax earnings, pre-tax profit margin and cash flow from operations. No
specific weighting was assigned by the Compensation Committee or the Board of
Directors to any of the factors considered in determining salary amounts for Mr.
Crawford.

Annual Incentives for 1997

The target bonuses established for Messrs. Reeves, Dent and
Wright for 1997 reflected the continued growth and success of the Company and
the goal of providing comparable compensation to these Named Executive Officers
in recognition of the team approach to compensation. The Compensation Committee
utilized the criteria referenced above under the caption "Annual Incentives" to
establish the bonuses actually paid up to the target opportunity amounts. The
percentage bonus opportunity for Messrs. Reeves, Dent and Wright was established
at 40% of base salary. The criteria utilized to determine Mr. Crawford's bonus
included the same financial criteria utilized in establishing the bonus amounts
payable to Messrs. Reeves, Dent and Wright. The bonus opportunity for Mr.
Crawford was established at 35% of base salary.

The Compensation Committee determined that, for the 1997 fiscal
year only, the bonuses for the Named Executive Officers (and certain other
employees who work at corporate headquarters) were to be converted to stock
options equal to 125% of the target bonus (increased to reflect market and
forfeiture risk) divided by the value of the option on January 1, 1998 as
determined by the Company. The option for such shares granted to the employee
was to be earned as of January 1, 1998 and exercisable on March 1, 1998.
Accordingly, on January 1, 1998, options to purchase 26,667 shares of Common
Stock were awarded to each of Messrs. Reeves, Dent and Wright, and an option to
purchase 17,500 shares of Common Stock was granted to Mr. Crawford. In February
1998, as an acknowledgment of the challenges the Company faced in 1997, the
Named Executive Officers elected to forfeit the bonuses granted to them as of
January 1, 1998 for 1997 services. Accordingly, the 26,667 options granted to
each of Messrs. Reeves, Dent and Wright and the 17,500 options granted to Mr.
Crawford were canceled.

Long-Term Incentives

The Compensation Committee determined to issue to each of Messrs.
Reeves, Dent and Wright options to purchase 177,909 shares of Common Stock. The
amounts awarded to each of these Named Executive Officers reflect the team
approach to compensation for these individuals, as well as the Committee's
perception of their equally vital roles with the Company during 1997 and in
recognition of continued improved pre-tax margins, earnings and cash flow of the
Company and in order to provide the Named Executive Officers with a

27
<PAGE> 31

percentage of the outstanding shares of the Common Stock in accordance with the
consulting firm's target 75th percentile level of comparable companies
referenced above. The awards to Mr. Crawford of options to purchase 133,414
shares of Common Stock during 1997 were determined in a similar fashion and in
recognition of his service to the Company.

With the assistance of the independent consulting firm, the
Compensation Committee will continue to monitor the financial performance of the
Company and its executive officers in reassessing executive compensation.

COMPENSATION COMMITTEE

Dr. Winfield Dunn, Chairman
Ronald B. Ashworth
Dr. Joseph A. Hill
Dr. James A. Moncrief

28
<PAGE> 32
COMPARATIVE PERFORMANCE GRAPH

The following is a comparative performance graph which compares
the percentage change of cumulative total shareholder return on the Common Stock
with (a) the performance of a broad equity market indicator, the CRSP Index for
Nasdaq Stock Market (US Companies) (the "Broad Index"), and (b) the performance
of a published industry index, the CRSP Index for Nasdaq Health Services Stocks
(the "Industry Index"). The graph begins on January 1, 1993, and assumes the
investment on such date of $100 in the Common Stock, the Broad Index and the
Industry Index and assumes that all dividends, if any, were reinvested at the
time they were paid.

<TABLE>
<CAPTION>
12/31/92 12/31/93 12/30/94 12/29/95 12/31/96 12/31/97
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
PHYCOR, INC......................... 100.0 185.5 258.9 734.0 617.8 587.9
Nasdaq Stock Market (US Companies... 100.0 114.8 112.2 158.7 195.2 239.6
Nasdaq Health Services Stocks
SIC 8000-8099 US & Foreign.......... 100.0 115.4 123.8 157.2 157.3 160.3
</TABLE>

29
<PAGE> 33
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Dr. James A. Moncrief, a director of the Company, is Medical
Director of the Green Clinic and a partner of The Green Clinic Partnership, with
which the Company has entered into a 30-year service agreement in connection
with the operation of the Green Clinic. Under the service agreement, the Company
receives a management fee equal to clinic expenses incurred by the Company plus
a percentage of operating income of the clinic. Dr. Moncrief is also a partner
of Medical Clinical Properties Company, an affiliate of The Green Clinic
Partnership, which has leased the clinic facility to The Green Clinic
Partnership. Such partnership has subleased the facility to the Company for an
annual rental of approximately $852,000.

Dr. Joseph A. Hill, a director of the Company, is a shareholder
of Gold, Vann & White, P.A., with which the Company has entered into a 40-year
service agreement in connection with the operation of the Doctors' Clinic. Under
the service agreement, the Company receives a management fee equal to clinic
expenses incurred by the Company plus a percentage of operating income of the
clinic.

Mr. Dent, an executive officer and director of the Company, is a
director and shareholder of HRT. The Company's Vero Beach property is leased
from HRT by PhyCor of Vero Beach, Inc., a wholly-owned subsidiary of the
Company, at a base rental of approximately $1.1 million per year for a term of
15 years. The affiliated physician group in Harlingen, Texas sold its property
to HRT, which it then leased from HRT at a base rental of approximately $520,000
per year for a term of 15 years. PhyCor of Harlingen, Inc., a wholly-owned
subsidiary of the Company, subleases the Harlingen, Texas property from the
affiliated physician group for the same base rental amount. The Company's
affiliated Roanoke, Virginia physician group leases properties under a 15-year
agreement which includes rent and certain operating expenses. Such payments
totaled approximately $6.4 million in 1997. The Company has guaranteed the lease
obligations of the physician group to HRT.

Mr. Hutts, President, Chief Executive Officer and Chairman of the
Board of the Company, and Mr. Brooks, a director of the Company, are directors
of Quorum. The Company has entered into an agreement with Quorum to obtain
access to volume purchasing agreements, materials management support and other
services. Total payments by the Company to Quorum for such services during 1997
were approximately $58,000.

During 1997, the Company owned a minority interest in PhyCor
Management Corporation ("PMC) and an option to purchase the remaining interests.
Effective March 31, 1998, the Company completed the acquisition of the remaining
interests and PMC is now a wholly-owned subsidiary of the Company. In 1997, the
Company provided management services to PMC pursuant to an Administrative
Services Agreement. For services rendered pursuant to the Administrative
Services Agreement, the Company received a fee equal to the costs incurred from
providing services plus a fee of 10% of such costs. Mr. Hutts, a director and
executive officer of the Company, is a director of PMC. The Company received
total payments of approximately $1.0 million in 1997 pursuant to the
Administrative Services Agreement, including reimbursement of costs incurred
equal to approximately $949,000.

30
<PAGE> 34
SHAREHOLDER PROPOSALS

If a shareholder wishes to have a proposal considered for
inclusion in the Company's proxy materials for the 1999 annual meeting of
shareholders, the proposal must comply with the Commission's proxy rules, be
stated in writing and be submitted on or before November 30, 1998. Any proposals
should be mailed to the Company at 30 Burton Hills Boulevard, Suite 400,
Nashville, Tennessee 37215, Attention: Thompson S. Dent, Secretary.

OTHER MATTERS

The Board of Directors is not aware of any other matters to be
brought before the Annual Meeting. If any other matters, however, are properly
brought before the Annual Meeting, the persons named in the enclosed form of
proxy will have discretionary authority to vote all proxies with respect to such
matters in accordance with their best judgment.

UPON THE WRITTEN REQUEST OF ANY HOLDER OF THE COMMON STOCK
ENTITLED TO VOTE AT THE ANNUAL MEETING, THE COMPANY WILL FURNISH, WITHOUT
CHARGE, A COPY OF THE COMPANY'S ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED
DECEMBER 31, 1997, AS FILED WITH THE COMMISSION. REQUESTS SHOULD BE DIRECTED TO
JOHN K. CRAWFORD, EXECUTIVE VICE PRESIDENT AND CHIEF FINANCIAL OFFICER, PHYCOR,
INC., 30 BURTON HILLS BOULEVARD, SUITE 400, NASHVILLE, TENNESSEE 37215.

By Order of the Board of Directors,

/s/ THOMPSON S. DENT

Thompson S. Dent
Secretary

31
<PAGE> 35
APPENDIX A

PHYCOR, INC.
AMENDED 1988 INCENTIVE STOCK PLAN

1. Name of the Plan. This incentive stock plan has been amended by
action of the board of directors of PhyCor, Inc. (the "Board") on April 21,
1998, as the PhyCor, Inc. Amended 1988 Incentive Stock Plan.

3. Stock Subject to the Plan. The maximum numbers of shares of Common
Stock which may be issued under Awards granted under the Plan is 18,300,000
(subject to adjustments pursuant to Section 11), which may be either authorized
and unissued shares or shares that are held in the treasury of the

A-1

<PAGE> 36

Corporation, as shall be determined by the Board. If an Option expires or
terminates for any reason without being exercised in full, or an Award of
Restricted Stock or Bonus Stock is forfeited hereunder, the shares of Common
Stock represented by such Option or Award shall again be available for purposes
of the Plan.

4. Administration of the Plan. This Plan shall be administered by a
committee composed of at least two individuals (or such number that satisfies
section 162(m)(4)(C) of the Code and Rule 16b-3 of the Securities Exchange Act
of 1934) who are members of the Board and are not employees of the Company or an
Affiliate, and who are designated by the Board as the "compensation committee"
or are otherwise designated to administer the Plan (the "Committee"). The
Committee shall have full authority in its discretion to determine the eligible
persons to whom Options shall be granted and the terms and provisions of Awards
and the eligible persons to whom Restricted Stock and Bonus Stock shall be
issued and the terms and restrictions of such issuances of Restricted Stock and
Bonus Stock, each subject to the Plan. In making such determinations, the
Committee may take into account the nature of the services rendered and to be
rendered by such persons, their present and potential contributions to the
Corporation and any other factors which the Committee deems relevant. Subject to
the provisions of the Plan, the Committee shall have full and conclusive
authority to interpret the Plan; to prescribe, amend and rescind rules and
regulations relating to the Plan; to determine the terms and provisions of the
respective agreements which represent each Award (hereinafter, an "Agreement"),
which need not be identical; to determine the restrictions on transferability of
Common Stock acquired upon exercise of Options and the restrictions, conditions,
terms of forfeiture and vesting applicable to the issuance of Restricted Stock
and Bonus Stock (which restrictions need not be identical); and to make all
other determinations necessary or advisable for the proper administration of the
Plan.

The Committee may delegate authority to the president or chief executive
officer of the Corporation to amend any Agreement except those relating to
officers

A-2

<PAGE> 37

and directors of the Corporation, in the manner specified in a written
delegation to modify the exercisability or vesting of the Award or in any other
manner that is specified in a written delegation by the Committee.

5. Eligibility and Limits. Awards may be granted to employees and
directors as are selected by the Committee. Incentive Stock Options may,
however, only be granted to employees of the Corporation and its present or
future Subsidiaries. The aggregate fair market value (determined as of the time
an Incentive Stock Option is granted) of the Common Stock with respect to which
Incentive Stock Options are exercisable by an individual for the first time
during any calendar year, taking into account Incentive Stock Options granted
under this Plan and under all other plans of the Corporation or Subsidiary
corporations shall not exceed $100,000. No employee of the Company or a
Subsidiary may receive Options with respect to more than 750,000 shares of
Common Stock (which number of shares shall be subject to adjustments pursuant to
Section 11 herein) during any calendar year

6. Incentive Stock Options and Non-Qualified Stock Options. At the time
any Option is granted under this Plan, the Committee shall determine whether
said Option is to be an Incentive Stock Option or a Non-Qualified Stock Option,
and the Option shall be clearly identified to designate its status as an
Incentive Stock Option or a Non-Qualified Stock Option. The number of shares as
to which Incentive Stock Options and Non-Qualified Stock Options shall be
granted shall be determined by the Committee in its sole discretion, subject to
the limitations of Section 3 and Section 5. At the time any Incentive Stock
Option granted under this Plan is exercised, the certificates representing the
shares of Common Stock purchased pursuant to said Option shall be clearly
identified by legend as representing shares purchased upon exercise of an
Incentive Stock Option.

7. Terms and Conditions of Awards. Subject to the following provisions,
all Awards shall be in such form and upon such terms and conditions as the
Committee, in its discretion, may from time to time determine.

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<PAGE> 38

(a) Option Price.

(i) Incentive Stock Options. The Option price per share shall in
no event be less than 100% of the fair market value per share of the
Common Stock on the date the Option is granted as described in (b)
below. If the employee owns (as defined in Code section 424) more than
10% of the total combined voting power of all classes of the
Corporation's stock or of the stock of its parent or Subsidiary, the
Option price per share shall not be less than 110% of the fair market
value per share of the Common Stock on the date the Option is granted as
described in (b) below.

(ii) Non-Qualified Options. The Option price per share shall not
be less than 50% of the fair market value per share of the Common Stock
on the date the Option is granted as described in (b) below.

(iii) Fair Market Value. For purposes of this Plan, and as used
herein, the "fair market value" of a share of Common Stock is the
closing sales price on the date in question (or, if there was no
reported sale on such date, on the last preceding day on which any
reported sale occurred) of the Common Stock as reported on the Nasdaq
National Market System (or such other exchange that is at the time, the
primary exchange on which the Common Stock is traded).

(iv) If the Common Stock is not publicly traded, Fair Market
Value shall be the value determined in good faith by the Committee.
However, such determination shall not take into account any restriction
on the stock, except for a restriction which by its terms will never
lapse.

(b) Date of Grant. The date the Award is granted shall be the date on
which the Committee has determined the recipient of the Award, the number of
shares covered by the Award and has taken all such other action as is necessary
to complete the grant of the Award, or such prospective date thereafter that is
specified in the Award. Accordingly, the date an Award is granted may be deemed

A-4
<PAGE> 39

to be prior to the approval of this Plan or an amendment by the shareholders of
the Corporation and prior to the time that an Agreement is executed by a
Participant and the Company.

(c) Option Term. No Option shall be exercisable after the expiration of
ten years from the date the Option is granted, unless provided otherwise in an
Agreement that covers a Non-Qualified Stock Option. No Incentive Stock Option
granted to an employee who at the time of grant owns (as defined in Code section
424) more than 10% of the total combined voting power of all classes of the
Corporation's stock or of the stock of its parent or Subsidiary shall be
exercisable after the expiration of five years from the date it is granted.

(d) Payment. Unless otherwise provided by the Agreement, payment of the
exercise price of an Option shall be made in cash (including an exercise
involving the pledge of shares and a loan through a broker described in
Securities Exchange Commission Regulation T), Common Stock that was acquired at
least six months prior to the exercise of the Award, other consideration
acceptable to the Committee, or a combination thereof. Such payment shall be
made at the time that the Option or any part thereof is exercised, and no shares
shall be issued until full payment therefor has been made.

(e) Status of Option Holder. The holder of an Option shall, as such,
have none of the rights of a stockholder.

(f) Nontransferability of Awards. In general, Awards shall not be
transferable or assignable except by will or by the laws of descent and
distribution and shall be exercisable, during the holder's lifetime, only by
him. Provided, however, that a Participant may transfer a Non-Qualified Stock
Option or Restricted Stock or Bonus Stock to the extent permitted by the
Committee and set forth in the Agreement evidencing the Award.

A-5
<PAGE> 40

be exercised by a legatee or legatees of the holder under his last will, or
by his personal representative or distributee, at any time during the
twelve-month period following his death. If a holder is discharged as an
employee, or removed as a director, for cause, as determined by the Committee,
Options held by him shall not be exercisable after such discharge or removal. If
a holder ceases to be an employee by reason of permanent disability, within the
meaning of section 22(e)(3) of the Code ("Disability"), all Options held by the
holder may be exercised at any time during the twelve-month period following the
Disability. Upon a holder's Retirement (as defined below), Disability or Death,
all Options held by the holder shall become fully exercisable as to the full
number of shares covered thereby notwithstanding any vesting schedule
contemplated in the Option. As used herein, "retirement" shall mean (i) the
holder is at least 60 years old and has continuously been employed by the
Corporation or a subsidiary for a period of at least five years, or is at least
55 years old and has continuously been employed by the Corporation or a
subsidiary for a period of at least twenty years, and (ii) the holder has given
written notice in a form satisfactory to the Committee of his permanent
retirement. Notwithstanding this subparagraph (f), no Incentive Stock Option may
be exercised more than ten years after the date on which it was granted. For
purposes of this subparagraph (f), a holder shall be deemed to be an employee or
director so long as the holder is an employee or director of a parent or
Subsidiary of the Corporation or by another corporation (or a parent or
subsidiary corporation of such other corporation) which has assumed the Option
of the holder in a transaction to which section 424(a) of the Code is
applicable. The provisions of this Section 7(g) shall be deemed to apply to any
outstanding Option without regard to when such Option was granted by the
Committee.

A-6

<PAGE> 41

provided that the corporation, person or other entity making such offer
purchases or otherwise acquires shares of Common Stock pursuant to such offer;
(2) the stockholders of the Corporation have approved a definitive agreement (a
"Merger Agreement") to merge or consolidate with or into another corporation
pursuant to which the Corporation will not survive or will survive only as a
subsidiary of another corporation (the "Transaction"), or to sell or otherwise
dispose of all or substantially all of its assets, (3) any person or group (as
such terms are defined in section 13(d) of the Securities Exchange Act of 1934,
as amended (the "Act")), becomes the beneficial owner (as such term is defined
in Rule 13(d) pursuant to the Act) of 50% or more of the outstanding shares of
Common Stock. If any of the events specified in this subparagraph (g) (a "Change
in Control") have occurred, the Option shall be fully exercisable: (x) in the
event of a tender offer or exchange offer as described in clause (1) above,
during the term of the tender or exchange offer and for a period of 30 days
thereafter; (y) in the event of execution of a Merger Agreement as defined in
clause (2) above, within a 30-day period commencing on the date of execution of
a Merger Agreement, and the Option holder may condition such exercise upon the
consummation of the Transaction; or (z) in the event of an event described in
clause (3) above, within a 30-day period commencing on the date upon which the
Corporation is provided a copy of Schedule 13D or 13G (filed pursuant to section
13(d) or 13(g) of the Act and the rules and regulations promulgated thereunder)
indicating that any person or group has become the beneficial owner of 50% or
more of the outstanding shares of Common Stock or, if the Corporation is not
subject to section 13(d) of the Act, within a 30-day period commencing on the
date upon which the Corporation receives written notice that any person or group
has become the beneficial owner of 50% or more of the outstanding shares of
Common Stock. The provisions of this Section 7(h) shall be deemed to apply to
any outstanding Option without regard to when such Option was granted by the
Committee. Moreover, unless the Option holder specifically elects otherwise, if
the Option holder exercises less than all the Options as to which

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vesting is accelerated pursuant to this Section 7(h), the Options exercised
shall be deemed to be those which had the latest vesting date.

(i) Upon exercise of a Nonqualified Stock Option by, or upon the vesting
of Restricted Stock or Bonus Stock with respect to a Participant who is an
employee of the Corporation or a Subsidiary, the Participant shall, upon
notification of the amount due and prior to or concurrently with the delivery of
the certificates representing the shares, pay to the Corporation amounts
necessary to satisfy applicable federal, state and local withholding tax
requirements or shall otherwise make arrangements satisfactory to the
Corporation for such requirements. Such withholding requirements shall not apply
to the exercise of an Incentive Stock Option, or to a disqualifying disposition
of Common Stock that is acquired with an Incentive Stock Option, unless the
Committee gives the Participant notice that withholding described in this
Section is required. In addition, an employee who files an election with the
Internal Revenue Service under section 83(b) of the Code to include the fair
market value of any Award of Restricted Stock in gross income while such
Restricted Stock is still subject to restrictions shall promptly furnish the
Corporation with a copy of such election together with the amount of any
federal, state, local or other taxes required to be withheld to enable the
Corporation to claim an income tax deduction with respect to such election.

8. Restricted Stock Awards. (a) Subject to the provisions of Section 9
below, awards of Restricted Stock may be granted under the Plan to employees in
such form and on such terms and conditions, including, without limitation,
restrictions on the sale, assignment, transfer or other disposition or
encumbrance of such shares during the Restricted Period (as defined in Section
8(b) below) and the requirement that the employee receiving the award of
Restricted Stock forfeit such shares back to the Corporation upon termination of
employment within the Restricted Period, and in such amounts as the Committee
may from time to time approve. Restricted Stock awards may be granted alone, in
addition to or in tandem with other awards under this Plan.

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(b) At the time the award of Restricted Stock is made to an employee of
the Corporation, the Restricted Stock shall be issued in the name of the
employee but held by the Corporation during the period of time such Restricted
Stock is subject to forfeiture (the "Restricted Period"). During the Restricted
Period, the Restricted Stock may not be sold, assigned, transferred, made
subject to a gift or otherwise disposed of, mortgaged, pledged or encumbered.
The restrictions will lapse, and the Restricted Stock will be delivered to an
employee, in three equal installments commencing on the third anniversary of
issuance or upon such other times or upon the occurrence of such other
conditions as the Committee may provide at the time of the award.

(c) Employees awarded Restricted Stock shall be the owners of the
Restricted Stock and shall have all the rights of a shareholder, including the
right to receive dividends paid on such Restricted Stock, the right to receive
consideration in exchange for such Restricted Stock in a merger, consolidation,
share exchange, tender or exchange offer, or other business combination
involving the Corporation and the right to vote such Restricted Stock.

(d) Restricted Stock awards issued to an employee of the Corporation
shall be issued in the name of such employee and held by and deposited with the
Corporation on behalf of such employee, with a stock power endorsed in blank,
and shall bear an appropriate legend restricting the transferability of such
Restricted Stock. An employee shall be entitled to delivery of stock
certificates representing the Restricted Stock only when and as they become
vested.

(e) Restricted Stock awarded to such employee shall be forfeited if and
when such employee ceases to be an employee of the Corporation or a subsidiary
or parent corporation during the Restricted Period or when any prescribed
condition for the lapse or termination of restrictions is not satisfied. The
restrictions will lapse and the Restricted Stock will be immediately delivered
to (i) an employee upon his Retirement, Disability or a Change in Control and
(ii) an employee's legatee or personal representative upon an employee's death.
If forfeited, such Restricted Stock shall become the property of the Corporation
and shall again

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immediately become available for award under the Plan and all of
the rights of the employee in such Restricted Stock shall terminate without
further obligation on the part of the Corporation.

9. Bonus Stock. (a) Subject to the provisions of Section 9(f) and
Section 10 hereof, the Committee may determine that portions of the bonus of
certain employees designated by the Committee may be paid through awards of
Bonus Stock valued at 80% of the fair market value of the Common Stock on the
date of grant and may be granted under the Plan in such form and on such terms
and conditions and in such amounts as the Committee may from time to time
approve. Bonus Stock awards may be granted alone, in addition to or in tandem
with other awards under this Plan.

(b) At the time the award of Bonus Stock is made to an employee of
the Corporation, the Bonus Stock shall be issued but held by the Corporation
during the period of time such Bonus Stock is subject to forfeiture (the "Bonus
Stock Restricted Period"). During the Bonus Stock Restricted Period, such Bonus
Stock may not be sold, assigned, transferred, made subject to a gift or
otherwise disposed of, mortgaged, pledged or encumbered. The restrictions will
lapse, and the Bonus Stock will be delivered to the employee, on the second
anniversary after the date of grant or upon such other times or upon the
occurrence of such other conditions as the Committee may provide at the time of
the award.

(c) Employees awarded Bonus Stock shall be the owners of the Bonus
Stock and shall have all the rights of a shareholder, including the right to
receive dividends paid on such Bonus Stock, the right to receive consideration
in an acquisition of the Corporation and the right to vote such Bonus Stock,
during the Bonus Stock Restricted Period.

(d) Bonus Stock awards issued to an employee of the Corporation shall
be issued in the name of such employee and held by and deposited with the
Corporation on behalf of such employee, with a stock power endorsed in blank,
and shall bear an appropriate legend restricting the transferability of such
Bonus Stock.

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An employee shall be entitled to delivery of stock certificates representing the
Bonus Stock only when shares become vested.

(e) Each employee's right to receive Bonus Stock awarded to such
employee shall be forfeited if and when such employee ceases to be an employee
of the Corporation or a subsidiary or parent corporation during the Bonus Stock
Restricted Period or when any prescribed condition for the lapse or termination
of restrictions is not satisfied. Bonus Stock shall become vested and be
immediately delivered to (i) an employee upon his Disability, Retirement or a
Change in Control and (ii) an employee's legatee or personal representative upon
an employee's death. If forfeited, such Bonus Stock shall become the property of
the Corporation and shall again immediately become available for award under the
Plan and all of the rights of the employee in such Bonus Stock shall terminate
without further obligation on the part of the Corporation.

(f) An employee who files an election with the Internal Revenue
Service to include the fair market value of any Bonus Stock in gross income
while such Bonus Stock is still subject to restrictions shall promptly furnish
the Corporation with a copy of such election together with the amount of any
federal, state, local or other taxes required to be withheld to enable the
Corporation to claim an income tax deduction with respect to such election.

(g) Notwithstanding the foregoing provisions of this Section 8, no
more than 50% of an employee's annual bonus may be payable in shares of Bonus
Stock. If an employee desires his bonus be paid in shares of Bonus Stock, such
employee must submit in writing to the Committee the percentage of such
officer's annual bonus the officer requests to be paid in Bonus Stock. The
Committee may, in its sole discretion, issue Bonus Stock in the amount requested
by the employee or issue fewer shares of Bonus Stock than requested by the
employee.

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award of Restricted Stock or Bonus Stock pursuant to Sections 8 and 9 is
encouraged to maintain an ownership interest in the Common Stock of the
Corporation at least two times the employee's annual salary. For all other
employees of the Corporation who receive grants of Restricted Stock or Bonus
Stock, such employees are encouraged to maintain upon the consummation of any
sale of Restricted Stock and/or Bonus Stock, Common Stock equal to at least the
employee's annual salary. The provisions of this Section 10 shall not apply to
employees of the Corporation until five years following the date of the
employee's first award of Restricted Stock or Bonus Stock, whichever is earlier.

11. Changes in Capitalization; Merger: Liquidation. The number of shares
of Common Stock subject to Restricted Stock and Bonus Stock awards, the number
of shares of Common Stock as to which Options may be granted, the number of
shares covered by each outstanding Option, and the price per share in each
outstanding Option, shall be proportionately adjusted for (i) any increase or
decrease in the number of issued shares of Common Stock resulting from a
subdivision or combination of shares, (ii) the payment of a stock dividend in
shares of Common Stock to holders of outstanding shares of Common Stock or (iii)
any other increase or decrease in the number of such shares effected without
receipt of consideration by the Corporation.

If the Corporation shall be the surviving corporation in any merger,
share exchange or consolidation, recapitalization, reclassification of shares or
similar reorganization, the recipient of each award of Restricted Stock and
Bonus Stock and the holder of each outstanding Option shall be entitled to
receive or purchase, as applicable, at the same times and upon the same terms
and conditions as are then provided in the relevant Agreement, the number and
class of shares of Common Stock or other securities to which a holder of the
number of options or shares of Common Stock at the time of such transaction
would have been entitled to receive as a result of such transaction.

In the event of any such changes in capitalization of the Corporation,
the Committee may make such additional adjustments in the number and class of

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shares of Common Stock or other securities with respect to which outstanding
Options are exercisable and with respect to which future Options may be granted
and with respect to outstanding awards of Restricted Stock and Bonus Stock and
with respect to future grants of Restricted Stock and Bonus Stock as the
Committee in its sole discretion shall deem equitable or appropriate, subject to
the provisions of this Section 11.

A dissolution or liquidation of the Corporation shall cause each
outstanding Award to terminate.

Upon a merger, share exchange, consolidation or other business
combination in which the Corporation is not the surviving corporation, the
surviving corporation shall substitute another award of restricted stock and/or
options with equivalent value as to an outstanding Award in a transaction to
which section 424(a) of the Code is applicable. In the event of a change of the
Corporation's shares of Common Stock with par value in or the same number of
shares with a different par value or without par value, the shares resulting
from any such change shall be deemed to be the Common Stock within the meaning
of the Plan. Except as expressly provided in this Section 11, the holder of a
Option shall have no rights by reason of any subdivision or combination of
shares of Common Stock of any class or the payment of any stock dividend or any
other increase or decrease in the number of shares of Common Stock of any class
or by reason of any dissolution, liquidation, merger, share exchange or
consolidation or distribution to the Corporation's stockholders of assets of
stock of another corporation, and any issue by the Corporation of shares of
Common Stock of any class, or securities convertible into shares of Common Stock
of any class, shall not affect, and no adjustment by reasons thereof shall be
made with respect to, the number or price of shares of Common Stock subject to
the Option. The existence of the Plan and the Awards granted pursuant to the
Plan shall not affect in any way the right or power of the Corporation to make
or authorize any adjustment, reclassification, reorganization or other change in
its capital or business structure, any merger, share exchange or consolidation
of the Corporation, any issue of debt or equity securities having preferences or
priorities

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as to the Common Stock or the rights thereof, the dissolution or
liquidation of the Corporation, any sale or transfer of all or any part of its
business or assets, or any other corporate act or proceeding.

(a) No such termination, modification or amendment without the consent
of the holder of an Award shall adversely affect his rights under such Award;
and

(b) Any modification or amendment which would increase the aggregate
number of shares of PhyCor Common Stock which may be issued under the Plan
(other than a change pursuant to Section 11 hereof) must be approved by the
shareholders of the Corporation before such shares of PhyCor Common Stock are
issued. Any modification or amendment which would (1) modify the designation of
the persons eligible to receive Options under the Plan, or (2) materially
increase the benefits accruing to holders of Options granted or to be granted
under the Plan, within the meaning of Rule 16b-3 issued by the Securities and
Exchange Commission under the Act, as amended, shall be effective only if it is
approved by the shareholders of the Corporation at the next annual meeting of
shareholders after the date of adoption by the Board of Directors of such
modification or amendment.

13. Effective Date of Plan and Amendments. This Plan is effective upon
its adoption by the Board; provided that any Awards granted with respect to
shares of Common Stock that were reserved for the Plan on the date of Board
adoption shall become void if this Plan is not approved by a majority vote of
the shareholders of Common Stock voting at a meeting of shareholders within 12
months of the date of the adoption of the Plan by the Board. Any Incentive Stock
Options granted

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pursuant to an increase in the number of shares authorized for
issuance under Section 3 hereof shall become void if the increase in such shares
is not approved by a majority vote of the shareholders of Common Stock voting at
a meeting of shareholders within 12 months of the date of the adoption of the
increase by the Board. No Incentive Stock Option may be granted under this Plan
with respect to the shares of Common Stock identified in Section 3 more than ten
years after (i) the date that such shares were authorized by the Board for
issuance under the Plan at the time this Plan was adopted or, (ii) if the number
of shares available under the Plan are increased by an amendment to Section 3,
the date that such amendment was adopted by the Board or, if sooner, the date
the amendment is approved by the shareholders of the Company. Incentive Stock
Options granted before such respective dates shall remain valid in accordance
with their terms.

14. Incentive Stock Option Plan. All Incentive Stock Options to be
granted hereunder are intended to comply with sections 421 and 422 of the Code,
and all provisions of this Plan and all Incentive Stock Options granted
hereunder shall be construed in such manner as to effectuate that intent.

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APPENDIX B

PHYCOR, INC.
1998 INCENTIVE STOCK PLAN

1. Name of the Plan. This incentive stock plan has been established by
action of the board of directors of PhyCor, Inc. (the "Board") on April 21,
1998, as the PhyCor, Inc. 1998 Incentive Stock Plan.

2. The Purpose of the Plan. The Plan is intended to provide an
opportunity for individuals performing services to PhyCor, Inc., a Tennessee
corporation (the "Corporation"), including officers, directors and key employees
of the Corporation and its subsidiaries ("Subsidiaries"), as subsidiaries are
defined in Section 424(f) of the Internal Revenue Code of 1986 (the "Code"), to
acquire shares of the Corporation's common stock, no par value per share
("Common Stock") and to provide for additional compensation based on
appreciation of the Corporation's stock. The Plan provides for the (i) grant of
incentive stock options, as defined in section 422 of the Code, ("Incentive
Stock Options") (ii) stock options not qualifying as Incentive Stock Options
("Non-Qualified Stock Options"), (iii) issuances of restricted shares of Common
Stock, no par value per share (the "Restricted Stock") to key employees and (iv)
shares of Common Stock issuable to key employees of the Company as part of such
employee's bonus for the applicable year (the "Bonus Stock"), each providing an
equity interest in the Corporation's business as an incentive for service or
continued service with the Corporation and to aid the Corporation in retaining
and obtaining key personnel of outstanding ability. As used herein, "Option"
refers to an Incentive Stock Option or a Non-Qualified Stock Option. The term
"Award" means the award pursuant to the terms of this Plan of an Option,
Restricted Stock or Bonus Stock.

3. Stock Subject to the Plan. The maximum numbers of shares of Common
Stock which may be issued under Awards granted under the Plan is 6,000,000
(subject to adjustments pursuant to Section 11), which may be either authorized
and unissued shares or shares that are held in the treasury of the

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The Committee may delegate authority to the president or chief executive
officer of the Corporation to amend any Agreement in the manner specified in a

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written delegation to modify the exercisability or vesting of the Award or in
any other manner that is specified in a written delegation by the Committee.

5. Eligibility and Limits. Awards may be granted to employees and
directors as are selected by the Committee. Incentive Stock Options may,
however, only be granted to employees of the Corporation and its present or
future Subsidiaries. The aggregate fair market value (determined as of the time
an Incentive Stock Option is granted) of the Common Stock with respect to which
Incentive Stock Options are exercisable by an individual for the first time
during any calendar year, taking into account Incentive Stock Options granted
under this Plan and under all other plans of the Corporation or Subsidiary
corporations shall not exceed $100,000. No employee of the Company or a
Subsidiary may receive Options with respect to more than 750,000 shares of
Common Stock during any calendar year (which number of shares shall be subject
to adjustments pursuant to Section 11 herein).

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(a) Option Price.

(i) Incentive Stock Options. The Option price per share shall in
no event be less than 100% of the fair market value per share of the
Common Stock on the date the Option is granted. If the employee owns (as
defined in Code section 424) more than 10% of the total combined voting
power of all classes of the Corporation's stock or of the stock of its
parent or Subsidiary, the Option price per share shall not be less than
110% of the fair market value per share of the Common Stock on the date
the Option is granted.

(ii) Non-Qualified Options. The Option price per share shall not
be less than 50% of the fair market value per share of the Common Stock
on the date the Option is granted.

(b) Date of Grant. The date the Award is granted shall be the date on
which the Committee has determined the recipient of the Award, the number of
shares covered by the Award and has taken all such other action as is necessary
to complete the grant of the Award. Accordingly, the date an Award is granted
may be deemed to be prior to the approval of this Plan or an amendment by the
shareholders of the Corporation and prior to the time that an Agreement is
executed by a Participant and the Company.

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Code section 424) more than 10% of the total combined voting power of all
classes of the Corporation's stock or of the stock of its parent or Subsidiary
shall be exercisable after the expiration of five years from the date it is
granted.

(d) Payment. Unless otherwise provided by the Agreement, payment of the
exercise price of an Option shall be made in cash, Common Stock that was
acquired at least six months prior to the exercise of the Award, other
consideration acceptable to the Committee, or a combination thereof. Such
payment shall be made at the time that the Option or any part thereof is
exercised, and no shares shall be issued until full payment therefor has been
made.

(e) Status of Option Holder. The holder of an Option shall, as such,
have none of the rights of a stockholder.

(g) Termination of Employment; Disability; Retirement or Death. Except
as provided below, an Option may not be exercised by a holder unless he has been
an employee continually from the date of the grant until the date ending three
months before the date of exercise. If the holder of an Option dies, such Option
may be exercised by a legatee or legatees of the holder under his last will, or
by his personal representative or distributee, at any time during the
twelve-month period following his death. If a holder is discharged as an
employee, or removed as a director, for cause, as determined by the Committee,
Options held by him shall not be exercisable after such discharge or removal,
unless otherwise provided herein. If a holder ceases to be an employee by reason
of permanent disability, within the meaning of section 22(e)(3) of the Code
("Disability"), all Options held by the holder may be exercised at any time
during the twelve-month period following the Disability. Upon a holder's
Retirement (as defined below), Disability or Death, all

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Options held by the holder shall become fully exercisable as to the full number
of shares covered thereby notwithstanding any vesting schedule contemplated in
the Option. As used herein, "retirement" shall mean (i) the holder is at least
60 years old and has continuously been employed by the Corporation or a
subsidiary for a period of at least five years, or is at least 55 years old and
has continuously been employed by the Corporation or a subsidiary for a period
of at least twenty years, and (ii) the holder has given written notice in a form
satisfactory to the Committee of his permanent retirement. Notwithstanding this
subparagraph (f), no Incentive Stock Option may be exercised more than ten years
after the date on which it was granted. For purposes of this subparagraph (f), a
holder shall be deemed to be an employee or director so long as the holder is an
employee or director of a parent or Subsidiary of the Corporation or by another
corporation (or a parent or subsidiary corporation of such other corporation)
which has assumed the Option of the holder in a transaction to which section
424(a) of the Code is applicable. The provisions of this Section 7(g) shall be
deemed to apply to any outstanding Option without regard to when such Option was
granted by the Committee.

(h) Limited Rights of Exercise. Notwithstanding any vesting schedule
contained in an Agreement, an Option may be exercised during the Option term as
to the full number of shares covered by the Option, and all restrictions and
risks of forfeiture with respect to Restricted Stock and Bonus Stock shall
lapse, if: (1) a tender offer or exchange offer has been made for shares of
Common Stock, provided that the corporation, person or other entity making such
offer purchases or otherwise acquires shares of Common Stock pursuant to such
offer; (2) the stockholders of the Corporation have approved a definitive
agreement (a "Merger Agreement") to merge or consolidate with or into another
corporation pursuant to which the Corporation will not survive or will survive
only as a subsidiary of another corporation (the "Transaction"), or to sell or
otherwise dispose of all or substantially all of its assets, (3) any person or
group (as such terms are defined in section 13(d) of the Securities Exchange Act
of 1934, as amended (the "Act")), becomes the beneficial owner (as such term is
defined in Rule 13(d) pursuant to the

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Act) of 50% or more of the outstanding shares of Common Stock, or (4) the
individuals who, as of the date of this Plan, are members of the Board (the
"Incumbent Board"), cease for any reason to constitute at least a majority of
the members of the Board; provided, however, that if the election, or nomination
for election by PhyCor's stockholders, of any new director was approved by a
vote of at least a majority of the Incumbent Board, such new director shall, for
purposes of this Plan, be considered as a member of the Incumbent Board;
provided, further, however, that no individual shall be considered a member of
the Incumbent Board if such individual initially assumed office as a result of
either an actual or threatened "Election Contest" (as described in Rule 14a-11
promulgated under the Exchange Act) or other actual or threatened solicitation
of proxies or consents by or on behalf of a Person other than the Board (a
"Proxy Contest") including by reason of any agreement intended to avoid or
settle any Election Contest or Proxy Contest. If any of the events specified in
this subparagraph (g) (a "Change in Control") have occurred, the Option shall be
fully exercisable: (x) in the event of a tender offer or exchange offer as
described in clause (1) above, during the term of the tender or exchange offer
and for a period of 30 days thereafter; (y) in the event of execution of a
Merger Agreement as defined in clause (2) above, within a 30-day period
commencing on the date of execution of a Merger Agreement, and the Option holder
may condition such exercise upon the consummation of the Transaction; (z) in the
event of an event described in clause (3) above, within a 30-day period
commencing on the date upon which the Corporation is provided a copy of Schedule
13D or 13G (filed pursuant to section 13(d) or 13(g) of the Act and the rules
and regulations promulgated thereunder) indicating that any person or group has
become the beneficial owner of 50% or more of the outstanding shares of Common
Stock or, if the Corporation is not subject to section 13(d) of the Act, within
a 30-day period commencing on the date upon which the Corporation receives
written notice that any person or group has become the beneficial owner of 50%
or more of the outstanding shares of Common Stock or (a) if a change in the
Incumbent Board occurs pursuant to clause (4) above, within a 30 day period
commencing upon the

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date the Option holder was given notice of the change in the Board composition.
The provisions of this Section 7(h) shall be deemed to apply to any outstanding
Option without regard to when such Option was granted by the Committee.
Moreover, unless the Option holder specifically elects otherwise, if the Option
holder exercises less than all the Options as to which vesting is accelerated
pursuant to this Section 7(h), the Options exercised shall be deemed to be those
which had the latest vesting date.

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shares back to the Corporation upon termination of employment within the
Restricted Period, and in such amounts as the Committee may from time to time
approve. Restricted Stock awards may be granted alone, in addition to or in
tandem with other awards under this Plan.

(b) At the time the award of Restricted Stock is made to an employee
of the Corporation, the Restricted Stock shall be issued in the name of the
employee but held by the Corporation during the period of time such Restricted
Stock is subject to forfeiture (the "Restricted Period"). During the Restricted
Period, the Restricted Stock may not be sold, assigned, transferred, made
subject to a gift or otherwise disposed of, mortgaged, pledged or encumbered.
The restrictions will lapse, and the Restricted Stock will be delivered to an
employee, in three equal installments commencing on the third anniversary of
issuance or upon such other times or upon the occurrence of such other
conditions as the Committee may provide at the time of the award.

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restrictions will lapse and the Restricted Stock will be immediately delivered
to (i) an employee upon his Retirement, Disability or a Change in Control and
(ii) an employee's legatee or personal representative upon an employee's death.
If forfeited, such Restricted Stock shall become the property of the Corporation
and shall again immediately become available for award under the Plan and all of
the rights of the employee in such Restricted Stock shall terminate without
further obligation on the part of the Corporation.

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<PAGE> 61

10. Ownership of Stock by Employees. In granting awards of Restricted
Stock and issuing shares of Bonus Stock, the Committee desires for the employees
of the Corporation to maintain their ownership interest in the Corporation. Each
employee of the Corporation, as designated by the Committee, who receives an
award of Restricted Stock or Bonus Stock pursuant to Sections 8 and 9 is
encouraged to maintain an ownership interest in the Common Stock of the
Corporation at least two times the employee's annual salary. For all other
employees of the Corporation who receive grants of Restricted Stock or Bonus
Stock, such employees are encouraged to maintain upon the consummation of any
sale of Restricted Stock and/or Bonus Stock, Common Stock equal to at least the
employee's annual salary. The provisions of this Section 10 shall not apply to
employees of the Corporation until five years following the date of the
employee's first award of Restricted Stock or Bonus Stock, whichever is earlier.

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Common Stock or other securities to which a holder of the number of options or
shares of Common Stock at the time of such transaction would have been entitled
to receive as a result of such transaction.

In the event of any such changes in capitalization of the Corporation,
the Committee may make such additional adjustments in the number and class of
shares of Common Stock or other securities with respect to which outstanding
Options are exercisable and with respect to which future Options may be granted
and with respect to outstanding awards of Restricted Stock and Bonus Stock and
with respect to future grants of Restricted Stock and Bonus Stock as the
Committee in its sole discretion shall deem equitable or appropriate, subject to
the provisions of this Section 11.

A dissolution or liquidation of the Corporation shall cause each
outstanding Award to terminate.

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shall not affect in any way the right or power of the Corporation to make
or authorize any adjustment, reclassification, reorganization or other change in
its capital or business structure, any merger, share exchange or consolidation
of the Corporation, any issue of debt or equity securities having preferences or
priorities as to the Common Stock or the rights thereof, the dissolution or
liquidation of the Corporation, any sale or transfer of all or any part of its
business or assets, or any other corporate act or proceeding.

12. Termination and Amendment of the Plan. The Plan shall remain in
effect until terminated by the Board. Upon termination of the Plan, no Awards
shall be granted under the Plan after that date, but any Awards granted before
termination of the Plan shall remain exercisable thereafter until they expire or
lapse according to their terms. The Board may amend or terminate this Plan at
any time; provided, however, an amendment that would have a material adverse
effect on the rights of a Participant under an outstanding Award is not valid
with respect to such Award without the Participant's consent, except as
necessary for Incentive Stock Options to maintain qualification under the Code;
and provided, further, that the shareholders of the Corporation must approve, in
general meeting:

(a) within 12 months before or after the date of adoption, any amendment
that increases the aggregate number of shares of Stock that may be
issued pursuant to Incentive Options or changes the employees (or class
of employees) eligible to receive Incentive Options;

(b) before the effective date thereof, any amendment that changes the number
of shares which may be issued in the aggregate pursuant to Awards
granted under the Plan;

(c) before the effective date thereof, any amendment that increases the
period during which Awards may be granted or exercised; and

(d) before the date that compensation is paid with respect thereto, any
amendment that changes the number of Options which may be granted to an

B-14
<PAGE> 64

employee of the Corporation or a Subsidiary under the Plan during a
specified period.

Generally, shareholder approval shall not be required for minor
amendments to the Plan intended to benefit the administration of the Plan, for
amendments necessitated by changes in legislation or administrative rules
governing the Plan, or for amendments that the Board deems necessary to obtain
or maintain favorable tax, securities exchange or regulatory treatment of the
Plan for future Participants.

13. Effective Date of Plan. This Plan is effective upon its adoption by
the Board; provided that any Awards granted with respect to shares of Common
Stock that were reserved for the Plan on the date of Board adoption shall become
void if this Plan is not approved by a majority vote of the shareholders of
Common Stock voting at a meeting of shareholders within 12 months of the date of
the adoption of the Plan by the Board. No Incentive Stock Option may be granted
under this Plan with respect to the shares of Common Stock identified in Section
3 more than ten years after the date that this Plan was adopted by the Board.
Incentive Stock Options granted before such date shall remain valid in
accordance with their terms.

B-15
<PAGE> 65
Appendix C

PHYCOR, INC.
ANNUAL MEETING OF SHAREHOLDERS
JUNE 2, 1998

The undersigned hereby appoints Joseph C. Hutts and John K. Crawford, or
either of them, with power of substitution, as proxies to vote all stock of
PhyCor, Inc. (the "Company") owned by the undersigned at the Annual Meeting of
Shareholders to be held at the First American Center Auditorium, Fifth Floor,
300 Union Street, Nashville, Tennessee, at 10:00 a.m. on June 2, 1998, on the
following matters as indicated below and such other business as may properly
come before the meeting.

1. Proposal to amend and restate the Company's Amended 1988 Incentive Stock
Plan.

[ ] FOR [ ] AGAINST [ ] ABSTAIN

2. Proposal to adopt the Company's 1998 Incentive Stock Plan.

[ ] FOR [ ] AGAINST [ ] ABSTAIN

3. [ ] FOR the election as director of all nominees listed: Dr. Winfield Dunn,
C. Sage Givens, Dr. Joseph A. Hill and Richard D. Wright (except as
marked to the contrary below).

[ ] WITHHOLD AUTHORITY to vote for all nominees listed: Dr. Winfield Dunn, C.
Sage Givens, Dr. Joseph A. Hill and Richard D. Wright.

INSTRUCTION: TO WITHHOLD AUTHORITY TO VOTE FOR INDIVIDUAL NOMINEES, WRITE THEIR
NAMES IN THE SPACE PROVIDED BELOW:

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

4. Proposal to ratify the appointment of KPMG Peat Marwick LLP as the
independent public accountants of the Company for the year ending December
31, 1998.

[ ] FOR [ ] AGAINST [ ] ABSTAIN

In their discretion, the proxies named above may vote upon such other matters as
may properly come before the meeting or any adjournment thereof.

THIS PROXY MUST BE DATED AND SIGNED ON THE REVERSE SIDE

THIS PROXY IS SOLICITED ON BEHALF OF THE COMPANY'S BOARD OF DIRECTORS.

This Proxy, when properly executed, will be voted in the manner directed
herein by the undersigned shareholder. A vote against any of the proposals will
not count as a vote for adjournment of the Annual Meeting. If no direction is
made, this Proxy will be voted (i) FOR the amendment and restatement of the
Company's Amended 1988 Incentive Stock Plan; (ii) FOR the adoption of the
Company's 1998 Incentive Stock Plan; (iii) FOR the four nominees as Class I
directors of the Company; and (iv) FOR the proposal to ratify the appointment of
KPMG Peat Marwick LLP as the independent public accountants of the Company for
1998.
Please sign exactly as your name
appears on this Proxy Card. When
signing as attorney, executor,
administrator, trustee or
guardian, please give full title
as such. If a corporation, please
sign in full corporate name by
President or other authorized
officer. If a partnership or
limited liability entity, please
sign in full name of such entity
by authorized person.

Dated: , 1998
---------------------

---------------------------------
Signature of Shareholder

---------------------------------
Signature if held jointly

PLEASE MARK, SIGN, DATE AND RETURN THE PROXY CARD PROMPTLY USING
THE ENCLOSED ENVELOPE