SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of Report (Date of earliest event reported) July 26, 1996
COASTAL PHYSICIAN GROUP, INC.
(Exact Name of Registrant as Specified in Charter)
DELAWARE 001-13460 56-1379244
(State or Other (Commission (IRS Employer
Jurisdiction of File Number) Identification
Incorporation) No.)
2828 CROASDAILE DRIVE, DURHAM, NC 27705
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number including area code (919) 383-0355
N/A
(Former name or former address, if changed since last report)<PAGE>
ITEM 5. - OTHER EVENTS
Filing of Answer and Counterclaims
On July 29, 1996, the Company filed, in the General Court of
Justice of the State of North Carolina in the County of Durham,
an answer and counterclaims in response to a complaint brought by
Drs. Steven M. Scott and Bertram E. Walls, on their own behalf
and derivatively on behalf of the Company, against the Company
and Dr. Jacque J. Sokolov and Messrs. Joseph G. Piemont and
Stephen D. Corman. The counterclaims allege, among other things,
that Dr. Scott breached his fiduciary duties to the Company and
engaged in a scheme to tortiously interfere with and damage the
business of Coastal.
Specifically, the counterclaims allege that Dr. Scott caused the
Company to pursue a series of acquisitions which, given to Dr.
Scott's lack of attention to both the successful integration of
these businesses and the implementation of measures to
effectively control pre-existing operations, led to a drop of
more than 80% in the value of the Company's stock from its peak
of $40.25 in February 1994 to approximately $8 when the Board of
Directors placed him on sabbatical leave in May 1996. The
counterclaims further allege that, after the Board (including Dr.
Scott) unanimously approved the engagement of Price Waterhouse
LLP (PW) and the Management Action Plan developed by the Company
with PW, Dr. Scott sought to frustrate the effective
implementation of the Management Action Plan, refused to
cooperate with PW, and undermined the efforts of PW and the
Company's management to successfully execute the Management
Action Plan.
The counterclaims further allege that Dr. Scott has long profited
from Coastal through his personal financial stake in his 100%-
owned Century American Insurance Company, which receives in
excess of $19 million per year in premiums from Coastal-related
business. Moreover, the counterclaims allege that Dr. Scott
caused Coastal to lease real estate properties in which Dr. Scott
has significant ownership interests.
The Company is seeking to enjoin Dr. Scott from further inter-
ference with the implementation of the Management Action Plan and
will seek monetary damages in excess of $25 million.
On July 26, 1996, the Company issued the news release attached as
Exhibit 99.2.<PAGE>
ITEM 7(C) - EXHIBITS
Exhibit 99.1 Coastal Physician Group, Inc.'s Answer (With
Motions to Dismiss) and Counterclaims, filed
on July 29, 1996, by the Company in response
to an action brought by Drs. Steven M. Scott
and Bertram E. Walls, on their own behalf and
derivatively on behalf of the Company,
against the Company and Dr. Jacque J. Sokolov
and Messrs. Joseph G. Piemont and Stephen D.
Corman
Exhibit 99.2 Press Release, dated July 26, 1996<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned hereunto duly authorized.
COASTAL PHYSICIAN GROUP, INC.
(Registrant)
Date: July 29, 1996 By: /s/ Joseph G. Piemont
Joseph G. Piemont
President and Chief Executive
Officer
STATE OF NORTH CAROLINA IN THE GENERAL COURT OF JUSTICE
SUPERIOR COURT DIVISION
COUNTY OF DURHAM 96 CvS 2748
STEVEN M. SCOTT, M.D., on his )
own behalf and on behalf of )
Coastal Physician Group, )
Inc., and BERTRAM E. WALLS, )
M.D., M.B.A., on his own )
behalf and on behalf of )
Coastal Physician Group, )
Inc., )
)
Plaintiffs, ) COASTAL PHYSICIAN GROUP,
) INC.'S ANSWER
vs. ) (WITH MOTIONS TO DISMISS)
) AND COUNTERCLAIMS
JACQUE JENNING SOKOLOV, )
JOSEPH G. PIEMONT, STEPHEN D. )
CORMAN and COASTAL PHYSICIAN )
GROUP, INC., )
)
Defendants. )
COMES NOW defendant Coastal Physician Group, Inc.
("Coastal"), by its undersigned attorneys, and makes and files
its Answer (with Motions to Dismiss) to plaintiffs' verified
complaint, as follows:
FIRST DEFENSE
For its First Defense, Coastal answers that this Court
lacks subject matter jurisdiction over one or more of the
claims asserted by the plaintiffs and, therefore, pursuant to
N.C.G.S. Section 1A-1, Rule 12(b)(1), such claim(s) should be
dismissed and Coastal so moves.
SECOND DEFENSE
For its Second Defense, Coastal answers that one or more of
the claims asserted by the plaintiffs has been brought in an
improper venue and, therefore, pursuant to N.C.G.S. Section 1A-
1, Rule<PAGE>
12(b)(3), such claim(s) should be dismissed and Coastal so
moves.
THIRD DEFENSE
For its Third Defense, Coastal answers that the plaintiffs'
complaint fails to state a claim upon which relief may be
granted and, therefore, pursuant to N.C.G.S. Section 1A-1, Rule
12(b)(6), the plaintiffs' complaint should be dismissed (in
whole or in part) and Coastal so moves.
FOURTH DEFENSE
For its Fourth Defense, Coastal answers that the plaintiffs
have failed to join a necessary party and, therefore, pursuant
to N.C.G.S. Section 1A-1, Rule 12(b)(7), the plaintiffs'
complaint should be dismissed and Coastal so moves.
FIFTH DEFENSE
For its Fifth Defense, Coastal answers the individually
numbered allegations of the plaintiffs' complaint as follows:
1. Denies the allegations of paragraph 1 of the
complaint, and avers that, by duly authorized action of a ma-
jority of Coastal's Board of Directors on May 29, 1996, Coastal
placed plaintiff Steven M. Scott ("Scott") on leave from his
position as an officer of Coastal because, in the Board's judg-
ment, Scott's continued dominance of Coastal was damaging
Coastal's business and operations and threatened Coastal's sur-
vival as a viable enterprise; that the Board restricted Scott's
contacts with Coastal employees as a countermeasure to Scott's
unjustified and harmful acts of intimidation of subordinates
and
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interference with the restructuring and turn-around of
Coastal's operations; that the Board elected Joseph G. Piemont
as acting President and Chief Executive Officer and subse-
quently, on June 20, 1996, approved employment arrangements for
Piemont that are lawful, appropriate and customary for compa-
nies of Coastal's condition, size and complexity and for compa-
nies in such a highly competitive industry; that the Board's
decision on July 8, 1996 to authorize Morgan, Stanley & Co.,
Inc. ("Morgan Stanley") to seek buyers for certain non-core
assets of Coastal was a reasonable exercise of the Board's
business judgment and reflected many hours of Board discussion
of and deliberation upon the various alternatives available to
Coastal to maximize shareholder value consistent with the de-
livery of quality services to Coastal's customers and the con-
suming public, including oral and written presentations by Mor-
gan Stanley at previous Board meetings; and that any decline in
the market value of Coastal's shares since May 29, 1996 has
been unrelated to Dr. Scott's leave and is minimal in compari-
son to the more-than-75% decline in market value experienced
under Scott's ineffective leadership of the company during the
period from December 1994 to May 1996 when Coastal lost more
than $500 million in market value. Except as has been herein-
above expressly admitted, the remaining allegations of para-
graph 1 of the complaint are denied.
-3-<PAGE>
2. Denies the allegations of paragraph 2 of the
complaint, except admits that plaintiffs purport to assert the
claims referred to therein.
3. Admits the allegations of paragraph 3 of the
complaint.
4. Admits the allegations of paragraph 4 of the
complaint.
5. Admits the allegations of paragraph 5 of the
complaint.
6. Admits the allegations of the first two sen-
tences of paragraph 6 of the complaint and denies the allega-
tions contained in the last sentence of said paragraph. An-
swering further, Coastal avers that Dr. Sokolov was invited to
become Chairman of the Board by plaintiff Scott; that Dr.
Sokolov spends the preponderance of his working hours on the
official business of Coastal; and that Coastal's acquisitions
of Advanced Health Plans, Inc. and Advanced Health Plans Devel-
opment, Inc. were arm's length transactions and proper in all
respects.
7. Admits the allegations of paragraph 7 of the
complaint.
8. Admits the allegations of paragraph 8 of the
complaint, except avers that Piemont has been designated as
acting President and Chief Executive Officer of Coastal.
9. Admits the allegations of paragraph 9 of the
complaint.
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10. Admits the allegations of paragraph 10 of the
complaint, except to the extent the plaintiffs' purported sum-
marization of the terms of the Scott Agreement are at a vari-
ance with its provisions, to which the Court is respectfully
referred for the provisions thereof.
11. Admits that some of the language quoted in para-
graph 11 of the complaint appears in the Scott Agreement but
denies that the parties' agreement-in-fact or contract consists
solely of such provisions; Coastal respectfully refers the
Court to the terms of the referenced Scott Agreement for the
provisions thereof.
12. Admits that some of the language quoted in para-
graph 12 of the complaint appears in the Scott Agreement but
denies that the parties' agreement-in-fact or contract consists
solely of such provisions; Coastal respectfully refers the
Court to the terms of the referenced Scott Agreement for the
provisions thereof.
13. Admits that some of the language quoted in para-
graph 13 of the complaint appears in the amendment to the Scott
Agreement, and Coastal respectfully refers the Court to the
terms of the referenced Scott Agreement for the provisions
thereof (and, hence, the legal consequences); except as has
been hereinabove expressly admitted, the remaining allegations
of paragraph 13 are denied.
14. Admits the allegations of paragraph 14 of the
complaint.
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15. Admits the allegations of the first sentence of
paragraph 15 of the complaint and denies the allegations of the
second and third sentences of such paragraph. Answering fur-
ther, Coastal avers that Dr. Scott at no time gave good faith
cooperation to Coastal's turnaround efforts but instead sought
to undermine and frustrate those efforts.
16. Admits the allegations of the first sentence of
paragraph 16 of the complaint and denies the allegations of the
remainder of such paragraph. Answering further, Coastal avers
that, after discussion, Dr. Sokolov was unanimously elected
chairman of the Special Committee by the Board itself, and
that the provision of minutes of Board meetings has (until June
20, 1996) been entrusted to Coastal's outside counsel.
17. Denies the allegations of paragraph 17 of the
complaint, except admits that Drs. Sokolov and Scott have dif-
fered, and that Scott and the Board have differed, with respect
to certain business matters at Coastal.
18. Admits that Sokolov is a resident of Malibu,
California and denies the remaining allegations of paragraph 18
of the complaint. Answering further, Coastal avers that, upon
Dr. Sokolov's recommendation, the Special Committee retained
the law firm of Quinn, Kully & Morrow, based in Los Angeles,
California, to advise it, which law firm had previously repre-
sented Dr. Sokolov and companies with which Dr. Sokolov was
associated, and that Dr. Sokolov fully and appropriately dis-
closed these
-6-<PAGE>
facts to the Special Committee before the Committee decided to
retain such firm.
19. Denies the allegations of paragraph 19 of the
complaint. Answering further, Coastal avers that Dr. Sokolov,
in consultation with other members of the Special Committee,
asked the Special Committee's counsel to prepare certain reso-
lutions for consideration and possible adoption at the May 29,
1996 meeting of the Committee, and respectfully refers the
Court to the text of said resolutions for the contents thereof.
20. Admits that some of the language quoted in para-
graph 20 of the complaint appears in the Resolutions but denies
that the selective quotations constitute the entirety of the
Resolutions. Coastal respectfully refers the Court to the text
of the Resolutions for the contents thereof.
21. Admits that the words and phrases quoted in
paragraph 21 of the plaintiffs' complaint appear in the Resolu-
tions, admits that Piemont had not had prior experience as a
CEO, and admits Piemont is not a physician. Except as has been
hereinabove expressly admitted, the remaining allegations of
paragraph 21 of the complaint are denied. Answering further,
Coastal avers that the Board was well aware of Piemont's abili-
ties and background when it chose him to serve as acting Presi-
dent and CEO, and that Dr. Scott previously recommended that
Mr. Piemont be appointed President in Dr. Scott's stead, and
respectfully refers the Court to the text of the Resolutions
for the contents thereof.
-7-<PAGE>
22. Admits that the referenced resolutions were
first discussed at committee and Board meetings on May 29,
1995; that the Board adopted the resolutions by votes of 6 to
3, and 6 to 2 with one abstention; that Dr. Scott and Dr. Walls
voted against adoption of each of the resolutions; and that Mr.
Hemingway voted against each of the resolutions except that
respecting the appointment of Mr. Piemont as acting President
and CEO, as to which he abstained. Except as has been herein-
above expressly admitted, the remaining allegations of para-
graph 22 of the complaint are denied.
23. Admits that the Board approved the Resolutions
and that this approval had certain lawful consequences and was
in the best interests of Coastal. Except as has been herein-
above expressly admitted, the remaining allegations of para-
graph 23 of the complaint are denied. Answering further,
Coastal avers that the directors were aware of the existence of
Dr. Scott's employment agreement; that the Board did not under-
take to terminate Dr. Scott; and that Dr. Scott continues to
receive the salary and other financial benefits provided by his
employment agreement.
24. Admits that the Board was never advised that any
of the resolutions violated Delaware law. Except as has been
hereinabove expressly admitted, the remaining allegations of
paragraph 24 of the complaint are denied. Answering further,
Coastal avers that the reason that the Board was not so advised
-8-<PAGE>
is that the resolutions are valid in all respects under Dela-
ware law.
25. Denies the allegations of paragraph 25 of the
complaint.
26. Admits that some of the language quoted in para-
graph 26 of the complaint appeared in the referenced Form 10-K
and news release. Except as has been hereinabove expressly
admitted, the remaining allegations of paragraph 26 of the com-
plaint are denied. Answering further, Coastal respectfully re-
fers the Court to the full text of the public filings refer-
enced therein for the contents thereof.
27. Admits that the Board has lawfully and ap-
propriately determined to alter Mr. Hemingway's job responsi-
bilities. Except as has been hereinabove expressly admitted,
the remaining allegations of paragraph 27 of the complaint are
denied.
28. Admits the allegations of paragraph 28 of the
complaint.
29. Admits the allegations of the first and second
sentences of paragraph 29 of the complaint. Except as has been
hereinabove expressly admitted, the remaining allegations of
paragraph 29 of the complaint are denied.
30. Admits that some of the language quoted in para-
graph 30 of the complaint appeared in the referenced memoran-
dum. Answering further, Coastal respectfully refers the Court
to the referenced memorandum for the contents thereof.
-9-<PAGE>
31. Admits the allegations of paragraph 31 of the
complaint.
32. Admits the allegations of paragraph 32 of the
complaint.
33. Admits that some of the language quoted in para-
graph 33 of the complaint appeared in the referenced letter.
Except as has been hereinabove expressly admitted, the remain-
ing allegations of paragraph 33 of the complaint are denied.
Answering further, Coastal respectfully refers the Court to the
referenced letter for the contents thereof.
34. Admits that on or about June 18, 1996, Dr. Scott
and Coastal entered into a "Moratorium" agreement and that some
of the quoted language appears therein. Except as has been
hereinabove expressly admitted, the remaining allegations of
paragraph 34 of the complaint are denied. Answering further,
Coastal respectfully refers the Court to the text of the Mora-
torium agreement for the contents thereof.
35. Admits that Coastal sent notice of a June 20,
1996 special meeting of the Board to Scott two weeks in advance
thereof, and that Scott received such notice no later than June
10, 1996. Except as has been hereinabove expressly admitted,
the remaining allegations of paragraph 35 of the complaint are
denied. Answering further, Coastal avers that the terms of the
notice speak for themselves.
36. Admits that Scott and Walls sought to obtain an
agenda and materials with respect to the June 20 Board meeting.
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Answering further, Coastal avers that such materials were pro-
vided to them on the same day they were provided to the other
directors. Except as has been hereinabove expressly admitted,
the remaining allegations of paragraph 36 of the complaint are
denied.
37. Admits that Scott and Walls were provided with
an agenda for the special Board meeting on June 18, 1996. An-
swering further, Coastal avers that such agenda was provided to
them on the same day it was provided to the other directors,
and respectfully refers the Court to the agenda for the June
20, 1996 meeting for the contents thereof. Except as has been
hereinabove expressly admitted, the remaining allegations of
paragraph 37 of the complaint are denied.
38. Admits the allegations of paragraph 38 of the
complaint. Answering further, Coastal avers that copies of the
referenced employment agreements were not enclosed with the
agenda for the June 20, 1996 meeting because all the terms of
Mr. Piemont's proposed new agreement were not negotiated until
late in the evening of June 19, 1996, and because, as of June
20, 1996, there had been no agreement reached with respect to
amendment of Dr. Sokolov's employment agreement. Coastal re-
spectfully refers the Court to the June 20, 1996 agenda for the
contents thereof.
39. Admits the allegations of paragraph 39 of the
complaint. Answering further, Coastal respectfully refers the
-11-<PAGE>
Court to the June 20, 1996 agenda for the Plan Management Com-
mittee meeting for the contents thereof.
40. Admits the allegations of paragraph 40 of the
complaint, except denies that the reference to "agreement with
Dr. Scott" in the agenda was to Dr. Scott's employment agree-
ment and that Dr. Sokolov informed the Board that Dr. Scott's
employment agreement would be discussed last (or at all) and
denies that the "Los Angeles counsel" was Dr. Sokolov's. An-
swering further, Coastal avers that the Los Angeles counsel
present at the Board meeting was counsel to the Special Commit-
tee.
41. Admits the allegations of the first sentence of
paragraph 41. Except as has been hereinabove expressly admit-
ted, the remaining allegations of paragraph 41 of the complaint
are denied. Answering further, Coastal avers that the Board
was provided with a detailed oral presentation of the terms of
the proposed Piemont employment agreement by attorney Barney
Stewart III of the firm of Moore & Van Allen, PLLC, Coastal's
long-standing outside counsel chosen by Scott, and that such
agreement had previously been approved by both the Compensation
Committee and the Plan Committee, which had been intimately
involved in the negotiations concerning such agreement.
42. Admits that Piemont was personally represented
in connection with his employment agreement by a law firm based
in Los Angeles, that Coastal's corporate headquarters are in
North
-12-<PAGE>
Carolina and that Piemont is an attorney licensed in North
Carolina. Except as has been hereinabove expressly admitted,
the remaining allegations of paragraph 42 of the complaint are
denied. Answering further, Coastal avers that discussions
concerning the terms of such agreement occurred by telephone
while participants in such conversations were located in North
Carolina, California and elsewhere.
43. Admits that some of the topics referenced in
paragraph 43 appear in the Piemont Agreement but denies that
such summary references constitute the parties' agreement-in-
fact and contract. Except as has been hereinabove expressly
admitted, the remaining allegations of paragraph 43 of the com-
plaint are denied. Answering further, Coastal respectfully
refers the Court to the text of the referenced Piemont Agree-
ment for the terms thereof.
44. Admits that some of the topics referenced in
paragraph 44 appear in the Piemont Agreement but denies that
such summary references constitute the parties' agreement-in-
fact and contract. Except as has been hereinabove expressly
admitted, the remaining allegations of paragraph 44 of the com-
plaint are denied. Answering further, Coastal respectfully
refers the Court to the text of the referenced Piemont Agree-
ment for the terms thereof.
45. Admits that some of the topics referenced in
paragraph 45 appear in the Piemont Agreement but denies that
such summary references constitute the parties' agreement-in-
-13-<PAGE>
fact and contract. Except as has been hereinabove expressly
admitted, the remaining allegations of paragraph 45 of the com-
plaint are denied. Answering further, Coastal respectfully
refers the Court to the text of the referenced Piemont Agree-
ment for the terms thereof.
46. Admits that the language quoted in paragraph 46
of the complaint appears in the Piemont Agreement. Except as
has been hereinabove expressly admitted, the remaining allega-
tions of paragraph 46 of the complaint are denied. Answering
further, Coastal respectfully refers the Court to the text of
the referenced Piemont Agreement for the terms thereof.
47. Admits that some of the topics referenced in
paragraph 47 appear in the Piemont Agreement but denies that
such summary references constitute the parties' agreement-in-
fact and contract. Except as has been hereinabove expressly
admitted, the remaining allegations of paragraph 47 of the com-
plaint are denied. Answering further, Coastal respectfully
refers the Court to the text of he referenced Piemont Agreement
for the terms thereof.
48. Admits that the Board approved the Piemont
Agreement by a vote of 6 to 2. Except as has been hereinabove
expressly admitted, the remaining allegations of paragraph 48
of the complaint are denied. Answering further, Coastal avers
that the Board was specifically informed by Barney Stewart of
the Moore & Van Allen firm of the potential cost to the Company
of the employment agreement and that the maximum cost in the
event
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Mr. Piemont was involuntarily terminated before 1997 within the
meaning of the contract was estimated to be less than one mil-
lion dollars.
49. Admits the allegations of paragraph 49 of the
complaint, but denies that the paperwork was, in fact, "over
whelming." Answering further, Coastal avers that Scott's re-
quest to postpone a vote on the agreement was turned down by
the Board in light of the prior approval and recommendation of
the agreement by the Compensation Committee and approval by the
Plan Committee.
50. Admits that certain Board members were required
by their professional commitments to leave the Board meeting by
3:00 p.m. in order to meet airline schedules. Except as has
been hereinabove expressly admitted, the remaining allegations
of paragraph 50 of the complaint are denied. Answering fur-
ther, Coastal avers that Dr. Mahoney, who was present at the
meeting via telephone in Ireland, was sent an agenda in ad-
vance.
51. Admits that Dr. Sokolov favored approval of the
Piemont Agreement and that Scott opposed approval. Except as
has been hereinabove expressly admitted, the remaining allega-
tions of paragraph 51 of the complaint are denied.
52. Denies the allegations of paragraph 52 of the
complaint. Answering further, Coastal avers that director
Hatcher, and Robert O. Elder, Coastal's senior vice president
for human resources, expressed their views concerning the Pi-
emont Agreement to the Board.
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53. Denies the allegations of paragraph 53 of the
complaint, except admits that Dr. Sokolov expressed the opinion
that the Piemont Agreement was reasonable.
54. Admits the allegations of paragraph 54 of the
complaint. Answering further, Coastal avers that the Board was
informed that the Compensation Committee had negotiated cer-
tain terms in the proposed agreement to reflect comments from
the Towers, Perrin firm.
55. Admits the allegations of paragraph 55 of the
complaint. Answering further, Coastal avers that the state-
ments attributed therein to Mr. Elder were premised on
Coastal's expectation that Towers Perrin would confirm its pre-
vious advice.
56. Admits that Sokolov advised the Board that Tow-
ers Perrin had assured Mr. Elder that the Piemont Agreement was
fair. Except as has been hereinabove expressly admitted, the
remaining allegations of paragraph 56 of the complaint are de-
nied.
57. Admits that the Board as a whole was not for-
mally informed on June 20, 1996 of any purported reservations
expressed by any customers of Coastal concerning Piemont's fit-
ness to serve as President and CEO of Coastal. Except as has
been hereinabove expressly admitted, the remaining allegations
of paragraph 57 of the complaint are denied. Answering fur-
ther, Coastal avers that at least directors Hemingway and
Sokolov were aware that the North Broward Hospital District had
sent a letter
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to Coastal expressing concerns about, among other things, the
management changes at Coastal, specifically raising questions
whether the appointment of Mr. Piemont indicated that Coastal
was winding down its business; that North Broward Hospital
District was not urgently concerned about these matters since
it did not wish to schedule a meeting concerning them prior to
July 11, 1996, at which time North Broward Hospital District
informed representatives of Coastal that it was comfortable
with Coastal's current management and with the services being
provided by Coastal, and that it did not favor one side or the
other in the dispute over Coastal's management; and that if
Scott was aware of any such customer reservations he had ample
opportunity to bring them to the Board's attention before any
vote was taken on June 20, which he did not.
58. Denies the allegations of paragraph 58 of the
complaint. Answering further, Coastal avers that at numerous
and various times since May 29, 1996, Dr. Scott has called Mr.
Piemont; that at no time prior to June 20 did Scott indicate,
through an oral statement, a message or a letter, that any of
Coastal's clients had expressed reservations about Mr. Piemont;
that Scott's counsel, although it wrote a letter to Coastal's
counsel about Scott's contacts with Mr. Piemont, also failed to
identify the subject matter Scott wished to discuss with Mr.
Piemont as customer concerns about Mr. Piemont's suitability;
that Coastal, Mr. Piemont and Coastal's counsel have responded
to Dr. Scott's repetitive requests for meetings and information
-17-<PAGE>
in as timely a fashion as their responsibilities permit at a
difficult time in Coastal's history; that Dr. Scott's contacts
and demands for meetings have been part of his efforts to re-
verse decisions already made by the Board and have been in the
nature of harassment rather than good faith inquiries; and that
at no time prior to July 9, 1996 did Scott ever express to Mr.
Piemont or the Board anything but personal good wishes towards
Mr. Piemont and confidence in Mr. Piemont's good faith, and,
according to one director, Scott recommended Mr. Piemont as an
appropriate choice as President.
59. Admits that the Coastal Board approved the adop-
tion of the Piemont Agreement by a vote of 6-2, with one ab-
stention, and that Scott and Walls represented the only dis-
senting votes. Except as has been hereinabove expressly admit-
ted, the remaining allegations of paragraph 59 of the complaint
are denied.
60. Denies the allegations of paragraph 60 of the
complaint. Answering further, Coastal avers that Dr. Mahoney's
telephone connection to Ireland was disconnected during the
brief luncheon recess and reconnected after; that Morgan Stan-
ley made a presentation after lunch; and that Dr. Sokolov
stated that the Board was not being asked to reach any conclu-
sions or take any action that day with respect to the Morgan
Stanley presentation.
61. Admits that Scott made the statements to the
effect of what is stated in paragraph 61 of the Complaint and
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that Mr. Corman did not make a presentation. Except as has
been hereinabove expressly admitted, the remaining allegations
of paragraph 61 of the complaint are denied.
62. Admits the allegations of paragraph 62 of the
complaint, except denies any discussion about Scott's employ-
ment agreement was "delineated on the agenda." Answering fur-
ther, Coastal avers that no discussion of Scott's employment
agreement took place at the June 20 Board meeting, since the
"Scott Agreement" referenced in the Agenda was the "Moratorium
Agreement" between Scott and Coastal, and not Scott's employ-
ment agreement.
63. Admits that Century American Insurance Company
("Century") is a corporation of which Walls is President and
CEO and Scott is the 100% stockholder. Except as has been
hereinabove expressly admitted, the remaining allegations of
paragraph 63 of the complaint are denied. Answering further,
Coastal avers that Mr. Piemont, along with a majority of the
Board, agreed in March of 1996 that Coastal should not take
final action with respect to a new, unprecedented, five-year
contract between Coastal and Century (a contract estimated to
cost Coastal and its independent contractor physicians more
than $100 million over its term) without further study and ne-
gotiation.
64. Admits the allegations of paragraph 64 of the
complaint, except does not have knowledge or information suf-
ficient to form a belief as to the truth of the allegations
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concerning A.M. Best's contacts with Century or what A. M. Best
required of Century and, therefore, denies the same.
65. Admits that the proposed Century contract was
first presented to the Coastal Board on March 19, 1996. Except
as has been hereinabove expressly admitted, the remaining al-
legations of paragraph 65 of the complaint are denied. Answer-
ing further, Coastal avers that the Board specifically and in-
tentionally did not approve the proposed contract at that time
and instructed management to conduct further review and analy-
sis of the proposed terms.
66. Denies the allegations of paragraph 66 of the
complaint, except does not have knowledge or information suffi-
cient to form a belief about any contacts between Dr. Walls and
A.M. Best, and, therefore, the same are denied. Answering fur-
ther, Coastal avers that, because of pressing business engage-
ments and the fact that Coastal's study of the Century contract
had not been completed to the satisfaction of Coastal or its
representatives, Mr. Piemont did not meet with Dr. Walls on
June 14 or June 18.
67. Admits that, during the Board meeting on June
20, Dr. Walls requested that the Century contract be considered
by the Board. Except as has been hereinabove expressly admit-
ted, the remaining allegations of paragraph 67 of the complaint
are denied. Answering further, Coastal avers that the Board on
June 20 determined to postpone final action on the Century con-
tract because it did not believe it was prudent to approve a
contract
-20-<PAGE>
calling for more than $100 million in payments to a company
100% owned by Scott without further study of the alternatives
to such an arrangement, especially in light of the fact that
the insurance consulting subsidiary of Johnson & Higgins (one
of the nation's largest insurance brokerages) had concluded in
a preliminary analysis of the Coastal/Century relationship that
there were serious questions concerning whether the Century
relationship was in the best interests of Coastal, its contrac-
tor physicians and its shareholders, and that further assess-
ment of the financial viability of Century during the five-year
term of the proposed contract was necessary.
68. Admits the allegations of paragraph 68 of the
complaint, except denies that Mr. Piemont had negotiated the
contract on behalf of Coastal or disregarded an instruction of
a disinterested Coastal Board.
69. Denies the allegations of paragraph 69 of the
complaint. Answering further, Coastal avers that Mr. Piemont
told Dr. Walls that Coastal's obligations were to its own
shareholders and not to Century, which was 100% owned by Scott.
70. Denies the allegations of paragraph 70 of the
complaint.
71. Denies the allegations of paragraph 71 of the
complaint.
72. Admits that by notice dated July 3, 1996, a
telephonic Board meeting was scheduled for July 8, 1996 at 6:30
p.m.
-21-<PAGE>
Except as has been hereinabove expressly admitted, the
remaining allegations of paragraph 72 of the complaint are de-
nied.
73. Admits that the Special Committee voted to ap-
prove the asset sale strategy after hearing, on more than one
occasion, the strong recommendations of Morgan Stanley and
Price Waterhouse in favor of such a strategy. Denies knowledge
or information sufficient to form a belief as to when Scott,
Walls and Hemingway received their copies of the Asset Sale
Resolutions and, therefore, the truth of those allegations is
denied. Except as has been hereinabove expressly admitted, the
remaining allegations of paragraph 73 of the complaint are de-
nied. Answering further, Coastal avers that diligent efforts
were made to send them copies so that they would have them in
advance of the meeting; that the Morgan Stanley written presen-
tation to the Special Committee refers to alternatives to the
asset sale strategy, which were considered by the Special Com-
mittee; that the full Board rejected Scott's efforts to post-
pone action on the asset sale strategy in light of the clear
difference of opinion between Scott and his supporters on the
one hand, and the Board majority, on the other; and that, while
the Board was told there might be minor, non-material correc-
tions required to the list of subsidiaries annexed to the Asset
Sale Resolutions, the required corrections were not material
and that the Exhibit was not "wrong."
74. Admits the allegations of paragraph 74 of the
complaint, except does not have knowledge or information
-22-<PAGE>
sufficient to form a belief as to Scott's reason for abstaining
and, therefore, the same is denied.
75. Admits the allegations of the first sentence of
said paragraph and that Scott terminated the Moratorium agree-
ment and has taken steps to solicit proxies to replace certain
Board members. Except as has been hereinabove expressly admit-
ted, the remaining allegations of paragraph 75 of the complaint
are denied.
76. Admits that Scott and Walls have not made a de-
mand on the Coastal Board to initiate this litigation on behalf
of Coastal. Except as has been hereinabove expressly admitted,
the remaining allegations of paragraph 76 of the complaint are
denied.
77. In response to paragraph 77 of the complaint,
repeats and realleges its responses to the preceding paragraphs
thereof with the same force and effect as if fully set forth
herein.
78. With respect to paragraph 78 of the complaint,
states that no response is required thereto since such para-
graph alleges a legal conclusion instead of facts.
79. Denies the allegations of paragraph 79 of the
complaint.
80. Denies the allegations of paragraph 80 of the
complaint.
81. Denies the allegations of paragraph 81 of the
complaint.
-23-<PAGE>
82. Denies the allegations of paragraph 82 of the
complaint.
83. In response to paragraph 83 of the complaint,
repeats and realleges its responses to the preceding paragraphs
thereof as if fully set forth herein.
84. With respect to paragraph 84 of the complaint,
states that no response is required thereto since such para-
graph alleges a legal conclusion instead of facts.
85. Denies the allegations of paragraph 85 of the
complaint.
86. Denies the allegations of paragraph 86 of the
complaint.
87. Denies the allegations of paragraph 87 of the
complaint.
88. Denies the allegations of paragraph 88 of the
complaint.
89. In response to paragraph 89 of the complaint,
repeats and realleges its responses to the preceding paragraphs
thereof as if fully set forth herein.
90. With respect to paragraph 90 of the complaint,
states that no response is required thereto since such para-
graph alleges a legal conclusion instead of facts.
91. Denies the allegations of paragraph 91 of the
complaint.
92. Denies the allegations of paragraph 92 of the
complaint.
-24-<PAGE>
93. Denies the allegations of paragraph 93 of the
complaint.
94. In response to paragraph 94 of the complaint,
repeats and realleges its responses to the preceding paragraphs
thereof as if fully set forth herein.
95. With respect to paragraph 95 of the complaint,
states that no response is required thereto since such para-
graph alleges a legal conclusion instead of facts.
96. Denies the allegations of paragraph 96 of the
complaint.
97. Denies the allegations of paragraph 97 of the
complaint.
98. Denies the allegations of paragraph 98 of the
complaint.
99. In response to paragraph 99 of the complaint,
repeats and realleges its responses to the preceding paragraphs
thereof as if fully set forth herein.
100. With respect to paragraph 100 of the complaint,
states that no response is required thereto since such
paragraph alleges a legal conclusion instead of facts.
101. Denies the allegations of paragraph 101 of the
complaint.
102. Denies the allegations of paragraph 102 of the
complaint.
-25-<PAGE>
103. In response to paragraph 103 of the complaint,
repeats and realleges its responses to the preceding paragraphs
thereof as if fully set forth herein.
104. With respect to paragraph 104 of the complaint,
states that no response is required thereto since such para-
graph alleges a legal conclusion instead of facts.
105. Denies the allegations of paragraph 105 of the
complaint.
106. Denies the allegations of paragraph 106 of the
complaint.
107. In response to the allegations of paragraph 107
of the complaint, repeats and realleges its responses to the
preceding paragraphs thereof as if fully set forth herein.
108. Denies the allegations of paragraph 108 of the
complaint.
109. Denies the allegations of paragraph 109 of the
complaint.
110. Denies the allegations of paragraph 110 of the
complaint.
111. In response to paragraph 111 of the complaint,
repeats and realleges its responses to the preceding paragraphs
thereof as if fully set forth herein.
112. With respect to paragraph 112 of the complaint,
states that no response is required thereto since such para-
graph alleges a legal conclusion instead of facts.
-26-<PAGE>
113. Denies the allegations of paragraph 113 of the
complaint.
114. Denies the allegations of paragraph 114 of the
complaint.
115. Denies the allegations of paragraph 115 of the
complaint.
SIXTH DEFENSE
For its Sixth Defense, Coastal answers that plain-
tiffs have failed to make a pre-suit demand upon the Board of
Directors of Coastal as required by applicable Delaware law,
and are accordingly barred from maintaining the purported de-
rivative claims alleged in the complaint.
SEVENTH DEFENSE
For its Seventh Defense, Coastal answers that plain-
tiffs Scott and Walls are disqualified from serving as the
named representative plaintiffs in a derivative action main-
tained in the right of Coastal, since both Scott and Walls have
direct personal pecuniary interests adverse to Coastal. Both
Scott and Walls, through Scott's 100% ownership of Century and
Walls' position as Century's Chairman and President, have con-
flicting economic interests with Coastal in that Century is
Coastal's principal corporate malpractice insurance carrier,
and particularly in that the complaint seeks to require Coastal
to proceed with approval of a five-year contract between
Coastal and Century worth more than $100 million in revenue to
Century. In addition, the complaint seeks a determination that
Scott's
-27-<PAGE>
employment agreement was breached by Coastal, a claim which if
accepted could entitle Scott to payments worth several million
dollars. By virtue of these and other circumstances
(including Scott's ownership and other interests in real estate
leased by Coastal), Scott and Walls have material economic in-
terests antagonistic both to Coastal and to Coastal's public
shareholders, and are therefore barred from maintaining a de-
rivative suit in the right of the corporation under applicable
Delaware law.
EIGHTH DEFENSE
For its Eighth Defense, Coastal answers that plain-
tiffs have failed to state a claim to recover damages from de-
fendants Sokolov and Corman, since the certificate of incorpo-
ration of Coastal provides full exculpation from liability in
damages for directors with respect to negligence or gross neg-
ligence in the performance of their duties, and exempts from
such exculpation only breaches of the duty of loyalty, which
plaintiffs have failed to plead adequately in their complaint.
NINTH DEFENSE
For its Ninth Defense, Coastal answers that the Pi-
emont employment contract was negotiated by and approved by the
duly constituted Compensation Committee of the Coastal Board of
Directors. The two members of the Compensation Committee (Rob-
ert V. Hatcher and Richard M. Janeway, M.D.) are independent
directors of Coastal who are not named as defendants in this
-28-<PAGE>
action and who are not charged with any wrongdoing in the com-
plaint. The action of the Compensation Committee in approving
the Piemont Agreement constitutes sufficient corporate authori-
zation to bind the corporation. Accordingly, the complaint
fails to state a claim that the Piemont Agreement is unenforce-
able (even if for some reason the ratification of the Piemont
Agreement by the Plan Committee and by the Board were to be
found to have been defective).
TENTH DEFENSE
For its Tenth Defense, Coastal answers that plain-
tiffs have failed to join necessary and proper parties in this
action, since (a) the relief sought includes injunctive relief
requiring the Board of Directors of Coastal to take certain
actions, and refrain from taking certain actions, and the
plaintiffs have failed to join as defendants a majority of the
Board of Directors, and since (b) any right of action to con-
tend that its prospective economic advantage is being inter-
fered with lies with Century American, not the plaintiffs.
ELEVENTH DEFENSE
For its Eleventh Defense, Coastal answers that al-
though plaintiff Scott seeks in this action certain determina-
tions as to the effect of defendants' conduct on his rights
under his employment contract with Coastal, that contract con-
tains an exclusive choice of forum clause that binds Scott (and
Coastal) to litigate any such claims in a state or federal
court located in Palm Beach County, Florida, a provision placed
-29-<PAGE>
in the contract at the instance of Scott himself. Accordingly,
this action may not be maintained by Scott insofar as it seeks
any relief relating to his employment contract.
TWELFTH DEFENSE
116. For its Twelfth Defense, Coastal answers that,
to the extent plaintiffs seek equitable relief, they are barred
by the equitable doctrine of "unclean hands" from obtaining any
such relief in that plaintiffs have breached their fiduciary
duties to Coastal and its public stockholders by, inter alia,
frustrating implementation of the Management Action Plan and
other efforts to improve Coastal's operations and finances, and
by placing their personal interests in the success of Century
ahead of their responsibilities to Coastal, all as more par-
ticularly alleged below.
THIRTEENTH DEFENSE
For its Thirteenth Defense, Coastal answers that nei-
ther plaintiff has standing to complain about any alleged in-
terference with a prospective contract opportunity of Century
American.
FOURTEENTH DEFENSE
For its Fourteenth Defense, Coastal answers that many of
the plaintiffs' contended grounds for relief are based upon
events that are apprehended, have not yet occurred, are uncer-
tain to occur and are speculative matters at this point. These
contended claims are not ripe for adjudication and a justi-
ciable controversy has not yet arisen.
-30-<PAGE>
FIFTEENTH DEFENSE
For its Fifteenth Defense, Coastal answers that the plain-
tiffs are improperly and without justification seeking to en-
tice this Honorable Court to become involved in the governance
of a corporation which is currently directed by a lawfully
elected Board of Directors whose incumbency is not challenged.
This Court should abstain from displacing the business judgment
of such a Board unless and until a justiciable controversy is
pleaded.
COUNTERCLAIMS
1. Coastal Physician Group, Inc. ("Coastal") brings
these Counterclaims for damages, declaratory and injunctive
relief against counterclaim-defendant Steven M. Scott, M.D.
("Scott"). As set forth in detail below, motivated by finan-
cial interests adverse to those of Coastal and its public
stockholders, Scott has breached his fiduciary duties to
Coastal and its public stockholders, and has engaged in conduct
evidencing a pattern and practice of unlawful and actionable
interference with and damage to the business of Coastal.
Background of Scott's Unlawful and
Actionable Conduct
2. Coastal is a physician management and services
company founded by Scott in 1977. Its stock is traded on The
New York Stock Exchange, Inc. Approximately 23.5 million
shares of Coastal are outstanding. Since 1991, Coastal has
experienced tremendous growth in size, revenue and complexity,
with net operating revenues growing from $425 million in 1991
to $810
-31-<PAGE>
million in 1995. Starting from a core business supplying
hospitals with the services of emergency room physicians,
Coastal by late 1995 was also in the business of managed health
care (HMO's), clinics, prepaid health services and other health
care management endeavors.
3. Scott's efforts to build a health care conglom-
erate were expensive. Beginning in July 1993, Scott caused
Coastal to spend approximately $325 million in cash and stock
in the aggressive pursuit of a strategy of making acquisitions
largely outside its historical core businesses. The financial
results were disastrous: net income (profit) declined from $20
million in 1994 to a loss of $47 million in 1995, while long-
term debt rose from only $4 million in 1991 to $77 million in
1995.
4. Scott's acquisition program took an enormous
toll on the value of Coastal's stock. The market price of
Coastal stock declined over 80% from a peak of $40.25 in 1994
to $8 per share by May 1996. These figures represented a de-
cline in total market value of the company of over $575 million
in only fifteen months.
5. By early 1996, change was needed to deal with
Coastal's deteriorating financial situation. While Scott was
in control of management, Coastal had failed to run its various
subsidiaries efficiently and had also failed to mesh them into
a well-integrated organization. Scott's management style was
to acquire companies and rely on the existing management of
those
-32-<PAGE>
companies to continue running them, which tended to prevent the
newly acquired companies from functioning together as a unit
and realizing economies of scale and reducing redundant costs.
6. Scott's inability to manage Coastal, in combina-
tion with his ill-advised acquisition program, effectively pro-
duced a liquidity crisis in early 1996. The losses and charges
incurred in the fourth quarter of 1995 caused in Coastal to
violate its loan covenants, resulting in a denial of access to
its lines of credit. Coastal's systems and operations were
inadequate to generate the cash needed to run the business, and
Coastal faced a deterioration in its ability to collect amounts
due it. As a condition to continuing to finance Coastal's op-
erations, Coastal's lenders insisted in early 1996 that Coastal
adopt a plan to improve its operations and reverse its deterio-
rating financial results. With the lenders' approval, Coastal
retained the business turnaround unit of Price Waterhouse LLP
("Price Waterhouse") to assist in the implementation of a Man-
agement Action Plan (the "Action Plan") to reverse the decline
in Coastal's profitability and financial well-being. This Ac-
tion Plan was unanimously adopted by the Board on March 19,
1996, with Scott voting in favor, as an essential step in re-
storing Coastal to financial health.
7. To implement the Management Action Plan, on
April 4, 1996, the Board of Directors voted unanimously, again
with Scott's affirmative vote, to approve a contract with Price
Waterhouse, which delegated to Price Waterhouse (and the Price
-33-<PAGE>
Waterhouse representatives employed by Coastal as "Plan Manag-
ers" pursuant to the agreement) broad authority to implement
the Action Plan and to affect operation of Coastal's busi-
nesses. Under the Price Waterhouse contract, the Plan Managers
have operational authority over cash outflows and commitments,
cost containment measures and hiring and termination of employ-
ees. At this same time, also with the unanimous agreement of
the Board, the Board formed a committee of independent direc-
tors (the "Independent Committee"), chaired by Coastal's Chief
Executive Officer (Dr. Jacque J. Sokolov) as a non-voting mem-
ber, to supervise the implementation of the Action Plan by
Price Waterhouse.
8. Although Scott voted in favor of the adoption of
the Action Plan and the retention of Price Waterhouse, the Plan
was fundamentally unacceptable to Scott because it required him
to give up some measure of the total control he had exercised
over Coastal and its officers since its founding. Accordingly,
throughout the Spring of 1996, Scott worked to frustrate effec-
tive implementation of the Action Plan, refused to cooperate
with Price Waterhouse and undermined the efforts of Price Wa-
terhouse and other members of Coastal management (such as
Coastal's chief financial officer Stephen Corman) to make the
Action Plan work. Among other things, Scott disparaged the
efforts of the Plan Managers in meetings with Coastal officers
and countermanded critical personnel and operational decisions
made by the Plan Managers. In addition, Scott made incessant
-34-<PAGE>
and unreasonable demands upon the Plan Managers' time, often
insisting that they call or meet with him numerous times per
day such that the Plan Managers were unable to spend their time
in a productive fashion. As a result, the ability of the Plan
Managers to implement the Action Plan was substantially im-
peded.
9. Scott also sought to undermine Coastal's efforts
to restore its credibility with its lenders, and with the in-
vestment community, by providing more reliable financial re-
porting. Scott personally attempted to intimidate the account-
ing personnel of Coastal into reconsidering certain accounting
matters. Despite the unfair pressure Scott placed on his long-
time subordinates to alter their good faith, professional de-
terminations, the accounting staff held their ground.
10. Scott has long profited from Coastal by means
other than his ownership of approximately 30% of its common
stock. Specifically:
A. Scott owns 100% of Century American
Insurance Company ("Century Insurance"), the corporate
malpractice insurer for Coastal and the overwhelming
majority of Coastal's physicians. Century American
collects approximately $19 million per year in premi-
ums from Coastal-related business.
B. Scott has pursued a pattern, for more than a
decade, of owning real estate interests of various
types in properties leased -- at Scott's insistence --
-35-<PAGE>
by Coastal. Many of these transactions are structured to
contain terms favorable to Scott. For example, Scott in-
sisted that a Coastal subsidiary lease an office in a
South Florida building owned by a partnership in which
Scott is the majority investor for a seven year term at a
minimum rental of approximately $669,000 per year at the
beginning of the term and $776,000 per year at the end,
despite the availability of suitable, less expensive
space. Scott has also structured other leases involving
Coastal subsidiaries such that he personally has what is
in effect an option to buy the premises Coastal leases if
conditions in the real estate market make that advanta-
geous, but Scott has no downside risk on such arrangements
if the real estate market declines. In addition, Scott
has pursued a pattern of first causing Coastal to enter
into a long-term lease of space in a building owned by
Scott, and then selling the building to a third party; in
effect, using the value of Coastal's long term lease
commitment to enhance the sales price and thus to benefit
personally therefrom.
11. For these financial reasons -- as well as Scott's
inability (or refusal) to conform his management activities to
standards appropriate for a publicly traded company of
Coastal's size and complexity -- Scott intentionally and with-
out justification resisted the efforts of the Board, other se-
nior
-36-<PAGE>
management and Price Waterhouse to implement the Action Plan
effectively.
The Board's Decision To Place Scott on Leave
12. By the end of May 1996, when Coastal's need to final-
ize its new credit agreement with its lenders reached critical
levels, Scott's interference with the Action Plan caused Price
Waterhouse to question whether the Action Plan could be suc-
cessfully executed while Scott remained in a position to frus-
trate the Plan. Price Waterhouse informed the Independent Com-
mittee and the Board that, because of Scott's uncooperative
approach, Price Waterhouse would have to reconsider its role
under the Action Plan if it were required to continue to work
under Scott's supervision or control. The Board was aware of
the need to execute a new credit agreement and that, because of
the confidence the lenders had in Price Waterhouse's ability to
aid management in the improvement of Coastal's operations, the
loss of Price Waterhouse's services would likely result in the
lenders demanding more costly and restrictive terms or with-
drawing their financial support altogether. Accordingly, on
May 29, 1996, after asking Scott if he had formulated any al-
ternative to proceeding with the new credit agreement and with
the Action Plan with Price Waterhouse's participation, and re-
ceiving a negative reply from Scott, the Board determined that
Scott's actions were not compatible with the implementation of
the Action Plan and, by a vote of 6 to 3, determined to place
Scott on a seven-month
-37-<PAGE>
sabbatical leave from his posts as President and Chief
Executive Officer. The Board appointed Joseph G. Piemont,
Coastal's Executive Vice President and General Counsel, to
serve as President and Chief Executive Officer while Scott was
on leave. The Board then approved a new credit agreement that
had been negotiated with the lenders.
13. The Board chose not to terminate Scott on May
29. The Board at that time believed Scott's cooperation could
be achieved once he realized how serious Coastal's situation
was and after a "cooling off" period.
14. As part of the resolutions adopted on May 29,
1996, the Board also directed Scott to refrain from direct,
personal contact with Coastal officers and employees. This
resolution in no way restricted his participation in Board of
Directors' meetings or restricted his access to written infor-
mation of the type customarily made available to Coastal's
Board. Scott is currently receiving more information as a
Board member than Scott supplied to independent directors when
he was Chairman of the Board and Chief Executive Officer. The
purpose and effect of the May 29 resolution was to prevent
Scott from talking directly to employees of the Company and to
require that his contacts (if he felt he needed to have them)
occur through executives such as Piemont and Corman. The Board
adopted this restriction because Scott's interference with the
execution of the Action Plan involved Scott's direct contact
with employees who had previously acted at his direction when
he was President
-38-<PAGE>
and Chief Executive Officer. The Board apprehended that
effective execution of the Action Plan would continue to be
frustrated if, in effect, employees were receiving two
messages -- one from the Board (to pursue the Action Plan and
to support the new management and Price Waterhouse) and one
from Scott (to do the opposite).
15. The Board was also concerned that Scott's inter-
ference with orderly execution of the Action Plan was endanger-
ing its efforts to return to profitability by creating doubt
about the future direction of Coastal, which resulted in sev-
eral valued employees leaving Coastal for jobs at other compa-
nies, as well as difficulty in recruiting new hires. Permit-
ting Scott to have a roving commission to meddle in the day-to-
day affairs of Coastal was inconsistent with Coastal's efforts,
in this critical period, to retain valuable employees and
(where necessary) recruit replacements.
16. Since May 29, 1996, the response of Coastal's
various constituencies to the management changes (including
Scott's being placed on leave) has been generally positive.
While it is understood that Coastal's situation is still criti-
cal, its employees, lenders, shareholders, physicians and cus-
tomers have, in preponderant measure, reacted positively.
Coastal has been informed by its largest institutional share-
holder that it understands the reasons for Scott's being placed
on leave; many Coastal employees have expressed their relief
that Scott is no longer in sole control; Coastal's
-39-<PAGE>
lenders have been very supportive because they are relying on
Coastal's commitment to implement the Action Plan and expect
the continuation of Price Waterhouse's efforts; and, with one
exception, none of Coastal's larger customers has expressed
disagreement over the May 29 management changes.
17. The one possible exception may have been North
Broward Hospital District (the "District"), which sent a letter
to Coastal on June 12, 1996 expressing concerns about Coastal's
services and management. However, when Coastal met with the
District's representatives on July 11, 1996, the District indi-
cated that it is now satisfied with respect to the issues
raised in its June 12 letter. Based on the District's comments
at the July 11 meeting, Coastal believes its relationship with
the District, which it values highly, is currently viewed sat-
isfactorily by the District in all material respects and has
not been adversely affected by the May 29 management changes.
18. Since May 29, 1996, Coastal has made substantial
progress towards improving its operations and stabilizing its
financial situation, although there is much unfinished work.
Coastal has, since May 29, 1996, (a) finalized a new credit
agreement with a syndicate of lenders led by First Union, pro-
viding for an additional $40 million in working capital borrow-
ing capacity; (b) reorganized the management of several of its
subsidiaries; (c) achieved recurring operating efficiencies to
help it begin generating positive cash flow; (d) terminated
several unprofitable contracts and renegotiated several of its
-40-<PAGE>
contracts with customers, and is in the process of renegotiat-
ing others, to improve their profitability; and (e) put in
place the beginning of a financial and performance measurement
system that provides more reliable and significant information
than was available under Scott's leadership.
19. While the investment community is still waiting
to be convinced that Coastal's operations will improve over a
period of months, the calamitous decline in Coastal's stock
price -- from $32 in early December 1995 to approximately $8
per share by late May 1996 -- has largely ended. This is par-
ticularly noteworthy since part of the effect of the Action
Plan has been to recognize that certain accounts receivable and
assets should be written off. Indeed, Coastal's largest insti-
tutional shareholder has increased its holdings of Coastal
shares since the May 29 management changes. Currently, Coastal
has started the process of divesting itself of certain non-core
assets in order to provide greater financial flexibility and to
focus on Coastal's areas where Coastal is most competitive.
This program was approved by the Board on July 8, 1996, follow-
ing discussion at the board meeting on June 20, and was recom-
mended by Morgan Stanley and Price Waterhouse.
20. Before and since May 29, 1996, Scott has engaged
in a course of conduct intentionally aimed at frustrating the
Action Plan and debilitating the ability of Coastal to turn
itself around. Scott's conduct in this regard is in violation
of his fiduciary duties, is bound up with his personal
-41-<PAGE>
considerations and threatens serious harm to Coastal, its
employees, its customers and the many persons who rely upon
Coastal. Scott's unlawful and actionable conduct in this
regard has included:
a. Scott's refusal to cooperate with members of
senior management and Price Waterhouse in
implementing the Action Plan, despite the fact
that Scott himself recognized that the Plan was
essential to Coastal's viability by supporting
its adoption at the Board's March 19, 1996 and
April 4, 1996 meetings;
b. Scott's affirmative acts to frustrate the
objectives of the Action Plan by, for example,
pressuring mid-level financial executives of the
company to change their views on accounting
decisions to fit Scott's views;
c. The repeated and persistent efforts of Scott
(and another in complicity with him) to cause
Coastal to enter into an unprecedented five-
year, $100 million insurance contract with
Scott's 100%-owned company, Century American,
despite the Board's insistence that more time be
spent to study the implications of such a long--
term contract, compare its provisions to the
terms of coverage available from other carriers,
and obtain the advice of nationally prominent
-42-<PAGE>
independent coverage consultants at Johnson &
Higgins;
d. Scott's course of conduct in opposing and seek-
ing to invalidate compensation arrangements for
Piemont, although Scott's own threats to change
the composition of the Board and regain control
of Coastal created the situation where any
prudent executive under the same or similar
circumstances would insist on similar provisions
in an employment agreement in the event that
Scott were successful;
e. Scott's course of conduct in opposing and seek-
ing to invalidate compensation arrangements for
Piemont in an amount and on terms duly approved
by the Compensation Committee of two independent
directors (Messrs. Hatcher and Janeway) who are
not alleged to have engaged in any wrongdoing or
to have had any conflict of interest with
respect thereto;
f. Scott's course of conduct in seeking to regain
control of Coastal through the filing of this
action (which contains a prayer for relief
negating the May 29 resolution placing Scott on
leave) and the announcement that Scott will seek
to elect two nominees to increase his support on
the Board from three of nine directors to five
-43-<PAGE>
of nine directors, despite the fact that Scott
knows that, if he is successful, the Action Plan
will never be implemented, Price Waterhouse will
likely cease acting as Plan Manager, and Coastal
will fall out of compliance with its loan
covenants. These events will have significant
negative consequences for Coastal's business,
shareholders, employees, customers and the
communities in which Coastal operates.
g. Scott's course of conduct in announcing, on July
9, 1996, that he would seek to have new Board
members elected who would serve on a committee
to evaluate, among other things, the potential
sale of Coastal as a whole. By promoting the
sale of Coastal in this fashion, Scott is acting
irresponsibly and in breach of his duties as a
director since he is adding substantially to
what is already a public perception that Coastal
is a troubled company. This perception damages
Coastal's ability to obtain new business and
retain existing customers and personnel. Scott
is engaging in this damaging conduct despite the
fact that he knows that Coastal's Board, to-
gether with its strategic financial advisors
Morgan Stanley & Co., Incorporated, was already
considering all future strategic options for the
-44-<PAGE>
company, and concluded that a sale of the com-
pany at this time is unlikely to lead to share-
holders receiving the full value of their
investment. In any event, Scott has no bona
fide wish to pursue a sale of Coastal but is
simply using his purported backing for such an
outcome as a means of attempting to force his
way back to control. Thus, Scott never sug-
gested or supported selling the Company in any
of the more than a dozen board meetings in 1996
when Coastal's strategic future was discussed.
h. Finally, Scott is breaching his fiduciary duties
by deliberately and systematically burdening
Coastal with expensive and distracting disputes
(including this litigation) at a time when it is
vitally important that the time available to
Coastal's senior management be directed to fix-
ing the business that deteriorated under Scott's
leadership. Scott's continuing harassment of
directors, advisors and senior management is
part of a calculated effort to divert the atten-
tion and resources of Coastal to non-essential
matters.
FIRST CLAIM FOR RELIEF
21. Coastal repeats and realleges paragraphs 1
through 20 contained above.
-45-<PAGE>
22. By virtue of the foregoing, Scott has breached
and continue to breach his fiduciary duty of loyalty to Coastal
and its public shareholders.
23. As a result of such breach, Coastal has sus-
tained and will continue to sustain financial injury.
24. Coastal has no adequate remedy at law.
SECOND CLAIM FOR RELIEF
25. Coastal repeats and realleges paragraphs 1
through 24 contained above.
26. By virtue of the foregoing, Coastal has been and
continues to be damaged in that Coastal's business has suffered
as a result of Scott's interference with the implementation of
the Action Plan and the efforts of Coastal to restore its prof-
itability and financial health.
THIRD CLAIM FOR RELIEF
27. Coastal repeats and realleges paragraphs 1
through 26 contained above.
28. Scott has commenced a derivative proceeding
against Coastal without reasonable cause and for an improper
purpose.
29. Scott has maintained a derivative proceeding
against Coastal without reasonable cause and for an improper
purpose.
30. In defending against the derivative action
brought by Scott, Coastal has incurred, and will continue to
incur until the derivative proceeding is terminated, expenses
-46-<PAGE>
associated with its defense, including its attorneys fees and
indemnity obligations.
FOURTH CLAIM FOR RELIEF
31. Coastal repeats and realleges paragraphs 1
through 30 contained above.
32. Scott authorized and directed the filing of the
complaint in this derivative proceeding.
33. Such complaint is not well grounded in fact, is
unwarranted by existing law or a good faith argument for the
extension, modification or reversal of existing law, and is
interposed for an improper purpose.
34. In defending against the complaint, Coastal has
incurred, and will continue to incur until the complaint is
dismissed, expenses associated with its defense, including its
attorneys fees and indemnity obligations.
WHEREFORE, Coastal demands judgment against Scott as
follows:
(1) Declaring and decreeing that Scott has breached
his fiduciary duties to Coastal and its shareholders with re-
spect to the matters pleaded herein;
(2) Enjoining Scott from further interfering, or
attempting to interfere, with the implementation of the Action
Plan, the restructuring of Coastal, and/or efforts to sell non-
core businesses owned by Coastal in order to realize the great-
est value available to shareholders;
-47-<PAGE>
(3) Awarding Coastal such damages as it has sus-
tained in an amount to be proved at trial.
(4) Awarding Coastal its reasonable expenses, in-
cluding attorneys fees, as permitted by N.C.G.S. Sections 55-7-46(2)
and (3).
(5) Granting Coastal such other and further relief
as the Court may deem just and proper.
This 26th day of July, 1996.
BROWN & BUNCH, Counsel to Coastal
Physician Group, Inc.
By:/s/ Charles Gordon Brown
Charles Gordon Brown
101 N. Columbia Street
Chapel Hill, NC 27514
(919) 968-1111
OF COUNSEL:
Steven M. Barna
Eric M. Roth
Paul K. Rowe
WACHTELL, LIPTON, ROSEN & KATZ
51 West 52nd Street
New York, New York 10019
(212) 403-1000
-48-
NEWS RELEASE COASTAL
PHYSICIAN
GROUP, INC.
Its Subsidiaries and
Affiliates
FOR IMMEDIATE RELEASE CONTACT: Robert P. Borchert
Senior Vice President
919-383-0355
COASTAL PHYSICIAN GROUP, INC. ANNOUNCES DATE
OF ITS 1996 ANNUAL MEETING OF SHAREHOLDERS
- Company Files Response and Counterclaim Against Former CEO Steven
Scott -
- Scott Rejected Offer to Expand Board by Adding Two Truly Independent
Directors -
DURHAM, NC, JULY 26, 1996 -- The Board of Directors of Coastal
Physician Group, Inc. (NYSE: DR) today announced that the 1996
Annual Meeting of Shareholders will be held on Friday, Septem-
ber 27, 1996, at 9:00 a.m. local time, at the Durham Hilton,
located at 3800 Hillsborough Road, Durham, North Carolina. The
Board of Directors has fixed the close of business on August
21, 1996 as the record date for determining those shareholders
entitled to notice of, and to vote at, the 1996 Annual Meeting.
Coastal announced in early July a comprehensive business plan
designed to re-focus the Company's core business units, restore
its profitability and thereby build shareholder value. Commenting
on this plan, Joseph G. Piemont, President and Chief Executive
Officer of Coastal Physician Group, said: "Through the diligent
efforts of our managers, employees and advisors, we have begun to
achieve meaningful, measurable improvements in our operations,
including the development and implementation of improved cash flow
management practices. In addition, Morgan Stanley and other
investment banking firms have begun actively marketing our non-core
assets, including our clinical operations in Florida, Maryland, New
Jersey and North Carolina, our Preferred Provider Organization (PPO)
in North Carolina, and our New York-based prepaid health services
plan for Medicaid recipients.
"The strategic and orderly sale of selected non-core assets, in
combination with the operational improvements currently under
way, will enable Coastal to satisfy its near-term debt require-
ments and position us for the future. This process will also
allow the Company to concentrate on the effective management of
its core operations, where we have historically demonstrated<PAGE>
expertise and can deliver added value for customers. The Board
believes that this is the best strategy to restore profitabil-
ity and truly maximize shareholder value," Mr. Piemont con-
cluded.
Separately, Coastal announced that it has responded to a law-
suit brought by Steven Scott and Bertram Walls, directors and
shareholders of the Company, and commenced counterclaims
against Dr. Scott. The counterclaims, which were served today,
allege that Dr. Scott breached his fiduciary duties to the Com-
pany and engaged in a scheme to tortiously interfere with and
damage Coastal's business.
Specifically, the counterclaims allege that Dr. Scott caused
the Company to pursue a series of acquisitions which, given
Dr. Scott's lack of attention to both the successful integra-
tion of these businesses and the implementation of measures to
effectively control pre-existing operations, led to a drop of
more than 80% in the value of the Company's stock from its peak
of $40.25 in February 1994 to approximately $8 when the Board
of Directors placed him on sabbatical leave in May 1996. The
counterclaims further allege that, after the Board (including
Dr. Scott) unanimously approved the engagement of Price
Waterhouse LLP (PW) and the Management Action Plan developed by
the Company with PW, Dr. Scott sought to frustrate the effec-
tive implementation of the Management Action Plan, refused to
cooperate with PW, and undermined the efforts of PW and the
Company's management to successfully execute the Management
Action Plan.
The counterclaims further allege that Dr. Scott has long prof-
ited from Coastal through his personal financial stake in his
100%-owned Century American Insurance Company, which receives
in excess of $19 million per year in premiums from Coastal-
related business. Moreover, the counterclaims allege that Dr.
Scott caused Coastal to lease real estate properties in which
Dr. Scott has significant ownership interests.
The Company is seeking to enjoin Dr. Scott from further inter-
ference with the implementation of the Management Action Plan
and will seek monetary damages in excess of $25 million.
"The Company regrets that Dr. Scott rejected our offer to
expand the Board by adding two mutually agreeable and truly
independent directors, " said Jacque J. Sokolov, M.D.,
Coastal's Chairman of the Board. "Instead, Dr. Scott has com-
menced a proxy fight in which he seeks to regain effective con-
trol of the Company, including the election of his own lawyer
to the board. Coastal and its shareholders would have been
much better served if Dr. Scott had not elected to pursue this
costly and distracting course of action. Nevertheless, we have
absolutely no intention of letting Dr. Scott's actions impede<PAGE>
our progress in successfully executing the comprehensive
business plan and achieving our objectives of continuing to
deliver superior service for our customers and enhancing share-
holder value."
Coastal Physician Group, Inc. is a diversified physician man-
agement company providing a broad range of health care and ad-
ministrative services to physicians, hospitals, employers, man-
aged care programs and other health care providers.
Forward-looking Information or Statements: Except for state-
ments of historical fact, statements made herein are forward-
looking in nature, and are inherently subject to uncertainties.
The actual results of the company may differ materially from
those reflected by the forward-looking statements based on a
number of important risk factors, including, but not limited
to: receipt of sufficient proceeds from divested assets and
the timing of any divestitures; the level and timing of im-
provements in the operational efforts; the possibility of poor
accounts receivable collection and/or reimbursement experience;
the possibility of increased medical expenses due to increased
utilization; the possibility that the Company is not able to
improve operations or execute its divestiture strategy as
planned; and other important factors disclosed from time to
time in the Company's Form 10-K, Form 10-Q and other Securities
and Exchange Commission filings.
Certain Additional Information: Coastal Physician Group, Inc.
will be soliciting proxies to elect directors at its 1996
Annual Meeting of Stockholders. The following individuals may
be deemed to be participants in such solicitations of proxies:
Jacque J. Sokolov, M.D.; Robert V. Hatcher, Jr.; Stephen D.
Corman; John P. Mahoney, M.D.; Richard Janeway, M.D.; Norman H.
Chenven, M.D.; Joseph G. Piemont; Robert P. Borchert; Dennis I.
Simon; and Bettina M. Whyte. As of May 31, 1996, Dr. Sokolov
is the beneficial owner of 263,423 shares of the Company's com-
mon stock; Mr. Hatcher is the beneficial owner of 16,808 shares
of the Company's common stock; Mr. Corman is the beneficial
owner of 10,138 shares of the Company's common stock; Dr.
Mahoney is the beneficial owner of 4,090 shares of the Com-
pany's common stock; Dr. Janeway is the beneficial owner of
11,451 shares of the Company's common stock; and Mr. Borchert
is the beneficial owner of less than 100 shares of the Com-
pany's common stock. Mr. Simon and Ms. Whyte are employees of
Price Waterhouse LLP and have been appointed by agreement of
Price Waterhouse and Coastal to be Plan Managers of the Com-
pany's revitalization plan. In connection with such agreement,
the Company has agreed to pay Price Waterhouse $70,000 per
month for the services of the Plan Managers, and $46,400 per
month for any additional Price Waterhouse personnel that may
provide services under the agreement. The Company also granted
Price Waterhouse an option to purchase 50,000 shares of Company<PAGE>
common stock at a price of $7 7/8, which has not yet vested,
and a separate option to purchase up to 50,000 shares of Com-
pany common stock, which will vest at a rate of 10,000 shares
each month for five months commencing May 15, 1996, at a strike
price equal to the average closing price of the common stock on
the New York Stock Exchange for the first ten trading days of
each month prior to the vesting date.
Steven M. Scott, M.D., Bertram E. Walls, M.D., and John A.
Hemingway are also directors of Coastal, but are not expected
to solicit proxies on behalf of the Company.
# # #
