COASTAL PHYSICIAN GROUP INC, PRER14A, 1996-07-22

COASTAL PHYSICIAN GROUP INC
PRER14A, 1996-07-22
HELP SUPPLY SERVICES

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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

SCHEDULE 14A INFORMATION

Proxy Statement Pursuant to Section 14(a) of the
Securities Exchange Act of 1934

(X ) Filed by the Registrant
( ) Filed by a Party other than the Registrant

Check the appropriate box:

(X ) Preliminary Proxy Statement
( ) Confidential, for Use of the Commission Only (as permitted by
Rule 14a-b(e)(2))
( ) Definitive Proxy Statement
( ) Definitive Additional Materials
( ) Soliciting Material Pursuant to (section mark)240.14a-11(c) or
(section mark)240.14a-12

COASTAL HEALTHCARE GROUP, INC.

(Name of Registrant as Specified In Its Charter)

(Name of Person(s) Filing Proxy Statement If Other Than Registrant)

PAYMENT OF FILING FEE (Check the appropriate box):

( ) $125 per Exchange Act Rules 0-11(c)(1)(ii), 14a-6(i)(1), or 14a-6(i)(2).
( ) $500 per each party to the controversy pursuant to Exchange Act
Rule 14a-6(i)(3).
( ) Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.

1) Title of each class of securities to which transaction applies:

2) Aggregate number of securities to which transaction applies:

3) Per unit price or other underlying value of transaction
computed pursuant to Exchange Act Rule 0-11: *

4) Proposed maximum aggregate value of transaction:

5) Total fee paid:

(Set forth the amount on which the filing fee is calculated and state how
it was determined)

(X) Fee previously paid with preliminary materials.

( ) Check box if any part of the fee is offset as provided by Exchange
Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee
was paid previously. Identify the previous filing by registration
statement number, or the Form or Schedule and the date of its filing.

1) Amount Previously Paid: $

2) Form, Schedule or Registration Statement No.:

3) Filing Party:

4) Date Filed:

<PAGE>

PRELIMINARY PROXY STATEMENT
SUBJECT TO COMPLETION

COASTAL PHYSICIAN GROUP, INC.
2828 CROASDAILE DRIVE
DURHAM, NORTH CAROLINA 27705

(LOGO appears here)
, 1996
Dear Shareholder:

You are cordially invited to attend the 1996 Annual Meeting
of Shareholders of Coastal Physician Group, Inc. The meeting will
be held at 9:00 a.m., local time, on day, , 1996,
at .

At this year's annual meeting, you will be asked, in effect,
to vote for or against the continued implementation of the
Company's Comprehensive Business Plan, an aggressive recovery plan
that was approved and adopted by the Board of Directors to
revitalize the Company's operations, restore the Company's
profitability and maximize shareholder value. Your Board of
Directors believes that the Comprehensive Business Plan, rather
than returning control of the Company to Dr. Steven Scott, is the
best way to maximize the value of Coastal.

Specifically, you will be asked to choose between the
directors nominated by the Board of Directors of the Company and
individuals nominated by Dr. Scott, who until being placed on
sabbatical leave by the Board of Directors in May of this year was
the President and Chief Executive Officer of the Company. The
directors nominated by the Company are committed to the
implementation of the Comprehensive Business Plan.

WE URGE YOU TO VOTE FOR THE BOARD'S NOMINEES NAMED ON THE
ENCLOSED WHITE PROXY CARD, TO VOTE FOR THE CONTINUED
IMPLEMENTATION OF THE COMPREHENSIVE BUSINESS PLAN AND TO VOTE
AGAINST DR. SCOTT'S PROPOSAL TO FORM THE SCOTT COMMITTEE.

The Notice of Annual Meeting of Shareholders and Proxy
Statement are attached hereto. The matters to be acted upon by our
shareholders are set forth in the Notice of Annual Meeting of
Shareholders and discussed in the Proxy Statement.

We urge you to sign, date and return the enclosed White proxy
card in the envelope provided at your earliest convenience. If you
choose to attend the meeting, you may revoke your proxy and
personally cast your votes.

Thank you for your interest and support.

Sincerely yours,

<TABLE>
<S> <C>
Jacque J. Sokolov, M.D. Joseph G. Piemont
CHAIRMAN PRESIDENT AND CHIEF EXECUTIVE OFFICER
</TABLE>

YOUR VOTE IS IMPORTANT. ACCORDINGLY, YOU ARE URGED TO COMPLETE, SIGN, DATE AND
RETURN THE ACCOMPANYING WHITE PROXY CARD WHETHER OR NOT YOU PLAN TO ATTEND THE
MEETING.

<PAGE>

PRELIMINARY PROXY STATEMENT
SUBJECT TO COMPLETION

COASTAL PHYSICIAN GROUP, INC.
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD ON , 1996
TO THE SHAREHOLDERS
OF COASTAL PHYSICIAN GROUP, INC.

NOTICE IS HEREBY GIVEN that the 1996 Annual Meeting of Shareholders of
Coastal Physician Group, Inc., a Delaware corporation (the "Company"), will be
held at 9:00 a.m., local time, on day, 1996, at
for the following purposes:

(1) To elect three members to the Company's Board of Directors to hold
office until the 1999 Annual Meeting or until their successors are duly
elected and qualified;

(2) To approve the continued implementation of the Comprehensive
Business Plan, an aggressive recovery plan that was approved and adopted by
the Board of Directors to revitalize the Company's operations, restore the
Company's profitability and maximize shareholder value;

(3) To consider a proposed resolution of Dr. Steven M. Scott, a
shareholder and director of the Company, that the Board form an additional
committee composed in part, if elected, of certain individuals nominated by
Dr. Scott to serve as directors of the Company, which committee would
purportedly consider additional or alternative means of maximizing
shareholder value;

(4) To ratify the action of the Board of Directors in selecting KPMG
Peat Marwick LLP as independent certified public accountants of the Company
for the fiscal year ending December 31, 1996; and

(5) To transact such other business as may properly come before the
Annual Meeting.

The Board of Directors has fixed the close of business on ,
1996 as the record date for determining those shareholders entitled to notice
of, and to vote at, the Annual Meeting and any adjournments or postponements
thereof.

Whether or not you expect to be present, please sign, date and return the
enclosed White proxy card in the enclosed pre-addressed envelope as promptly as
possible. No postage is required if mailed in the United States.

Joseph G. Piemont
PRESIDENT AND CHIEF EXECUTIVE OFFICER

Durham, North Carolina
, 1996

YOUR VOTE IS IMPORTANT. ACCORDINGLY, YOU ARE URGED TO COMPLETE, SIGN, DATE AND
RETURN THE ACCOMPANYING WHITE PROXY CARD WHETHER OR NOT YOU PLAN TO ATTEND THE
MEETING.

<PAGE>

PRELIMINARY PROXY STATEMENT
SUBJECT TO COMPLETION

1996 ANNUAL MEETING OF SHAREHOLDERS
OF COASTAL PHYSICIAN GROUP, INC.

PROXY STATEMENT
This Proxy Statement and enclosed form of proxy are being furnished in
connection with the solicitation by the Board of Directors (the "Board") of
Coastal Physician Group, Inc., a Delaware corporation (the "Company"), of
proxies from the holders of the Company's Common Stock (the "Common Stock") for
use at the 1996 Annual Meeting of Shareholders of the Company to be held at 9:00
a.m., local time, on day, 1996, at
, or at any adjournments or postponements thereof
(the "Annual Meeting"). This Proxy Statement and the enclosed form of proxy are
first being sent or given to holders of Common Stock commencing on or about
, 1996. Shareholders should review the information provided
herein in conjunction with the Company's 1995 Annual Report to Shareholders. The
Company's principal executive offices are located at 2828 Croasdaile Drive,
Durham, North Carolina 27705, and its telephone number is (919) 383-0355.

At this year's annual meeting, you will be asked, in effect, to vote for or
against the continued implementation of the Comprehensive Business Plan, an
aggressive recovery plan that was approved and adopted by the Board of Directors
to revitalize the Company's operations, restore the Company's profitability and
maximize shareholder value. Your Board of Directors believes that the
Comprehensive Business Plan, rather than returning control of the Company to Dr.
Steven Scott, is the best way to maximize the value of Coastal.

Specifically, you will be asked to choose between the directors nominated
by the Board of Directors of the Company and directors nominated by Dr. Scott,
who until being placed on sabbatical leave by the Board of Directors in May of
this year was President and Chief Executive Officer of the Company. The
directors nominated by the Company are committed to the implementation of the
Comprehensive Business Plan.

YOUR BOARD URGES YOU TO VOTE FOR THE BOARD'S NOMINEES NAMED ON THE ENCLOSED
WHITE PROXY CARD, TO VOTE FOR THE CONTINUED IMPLEMENTATION OF THE COMPREHENSIVE
BUSINESS PLAN AND TO VOTE AGAINST DR. SCOTT'S PROPOSAL TO FORM THE SCOTT
COMMITTEE.

INFORMATION CONCERNING PROXIES

The enclosed proxy is solicited on behalf of the Board of Directors. The
giving of a proxy does not preclude the right to vote in person should any
shareholder giving the proxy so desire. THE BOARD URGES YOU TO COMPLETE, SIGN,
DATE AND RETURN THE WHITE PROXY CARD IN THE ENCLOSED ENVELOPE. Shareholders have
a right to revoke their proxy at any time prior to the exercise thereof, either
in person at the 1996 Annual Meeting or by filing with the Company's Secretary
at the Company's principal executive offices a written revocation or duly
executed proxy bearing a later date; however, no such revocation will be
effective until written notice of the revocation is received by the Company at
or prior to the 1996 Annual Meeting.

DO NOT SIGN ANY PROXY CARD SENT TO YOU BY DR. STEVEN SCOTT. IF YOU HAVE
ALREADY DONE SO, YOU MAY REVOKE YOUR PREVIOUSLY SIGNED PROXY BY DELIVERING A
WRITTEN NOTICE OF REVOCATION OR A LATER DATED PROXY CARD IN THE ENCLOSED
ENVELOPE.

IF YOUR SHARES ARE HELD IN THE NAME OF A BANK, BROKER OR OTHER NOMINEE,
ONLY YOUR BANK OR BROKER CAN VOTE YOUR SHARES AND ONLY UPON YOUR SPECIFIC
INSTRUCTIONS. PLEASE CONTACT THE PERSON RESPONSIBLE FOR YOUR ACCOUNT AND
INSTRUCT HIM OR HER TO VOTE THE WHITE PROXY CARD AS SOON AS POSSIBLE.

<PAGE>

REMEMBER, IT WILL NOT HELP TO RETURN A PROXY CARD TO DR. SCOTT MARKED
"WITHHOLD." DO NOT RETURN ANY BLUE CARD SENT TO YOU BY DR. SCOTT. THE ONLY WAY
TO SUPPORT YOUR BOARD'S NOMINEES IS TO VOTE FOR THOSE NOMINEES ON THE WHITE
PROXY CARD.

If you have any questions or need further assistance in voting your shares,
please call:
MACKENZIE PARTNERS, INC.
156 FIFTH AVENUE
NEW YORK, NY 10010
(212) 929-5500 (COLLECT)
OR
CALL TOLL FREE 1-800-322-2885
PURPOSES OF THE MEETING

At the 1996 Annual Meeting, the Company's shareholders will consider and
vote upon the following matters:

(1) The election of three members to the Board of Directors to serve
until the 1999 Annual Meeting or until their successors are duly elected
and qualified;

(2) The proposal to approve the continued implementation of the
Comprehensive Business Plan, an aggressive recovery plan that was approved
and adopted by the Board of Directors to revitalize the Company's
operations, restore the Company's profitability and maximize shareholder
value;

(3) A proposal of Dr. Steven M. Scott, a shareholder and director of
the Company, that shareholders adopt a resolution seeking the formation of
an additional committee of the Board of Directors composed in part, if
elected, of certain individuals nominated by Dr. Scott to serve as
directors of the Company, which committee would purportedly consider
additional or alternative means of maximizing shareholder value;

(4) The proposal to ratify the action of the Board of Directors in
selecting KPMG Peat Marwick LLP as independent certified public accountants
of the Company for the fiscal year ending December 31, 1996; and

(5) Such other business as may properly come before the Annual
Meeting.

Any proxy given pursuant to this solicitation and received in time for the
meeting will be voted as specified in such proxy. If the enclosed proxy is
executed and returned without instructions as to how it is to be voted, all
shares represented by valid proxies received pursuant to this solicitation will
be FOR the election of the Board's three nominees named herein, FOR the
continued implementation of the Comprehensive Business Plan, AGAINST Dr. Scott's
proposal to form the Scott Committee, FOR the appointment of KPMG Peat Marwick
LLP as independent auditors for the Company's 1996 fiscal year and in the
discretion of the proxies named on the proxy card with respect to any other
matters properly brought before the 1996 Annual Meeting and any adjournments
thereof. Any proxy may be revoked by written notice received by the Secretary of
the Company at any time prior to the voting thereof by submitting a subsequent
proxy or by attending the meeting and voting in person.

OUTSTANDING VOTING SECURITIES AND VOTING RIGHTS

The Board of Directors has set the close of business on ,
1996 as the record date (the "Record Date") for determining shareholders of the
Company entitled to notice of and to vote at the 1996 Annual Meeting. As of the
Record Date, there were shares of Common Stock outstanding, all
of which are entitled to one vote per share on all matters to be acted upon at
the 1996 Annual Meeting.

The representation in person or by proxy of a majority of the issued and
outstanding shares of Common Stock entitled to vote will constitute a quorum at
the 1996 Annual Meeting. Shares represented by proxies that are marked "abstain"
will be counted as shares present for purposes of determining the presence of a
quorum on all matters. Proxies relating to "street name" shares that are voted
by brokers on some but not all of the matters will be treated as shares present
for purposes of determining the presence of a quorum on all matters, but they
will not be treated as shares entitled to vote at the 1996 Annual Meeting on
those matters as to which authority to vote is withheld by the broker (the
"Broker Non-Votes"). Directors of the Company are elected by a plurality vote.
The three nominees receiving the highest vote totals will be elected as
Directors of the Company. With respect to the election of directors, votes may
be cast in favor of nominees or withheld. Accordingly,

<PAGE>

withheld votes and Broker Non-Votes will not affect the outcome of the election.
Proposals 2 through 4 require the affirmative vote of the holders of a majority
of the shares of Common Stock present in person or represented by proxy and
entitled to vote. Abstentions may be specified with respect to Proposals 2
through 4 and will be counted as present for purposes of such proposals. Since
Proposals 2 through 4 require the approval of a majority of the shares present
and entitled to vote, abstentions will have the practical effect of a negative
vote on such proposals. Pursuant to Delaware law, Broker Non-Votes are treated
as shares as to which voting power has been withheld by the beneficial owners
thereof and, therefore, as shares not entitled to vote. Thus, although Broker
Non-Votes on Proposals 2 through 4 will have no effect on the vote for such
proposals, they have the practical effect of reducing the number of affirmative
votes required to approve such proposals by reducing the total number of shares
entitled to vote thereon.

BACKGROUND

At this year's annual meeting, shareholders will be asked, in effect, to
vote for or against the continued implementation of the Company's Comprehensive
Business Plan, an aggressive recovery plan that was approved and adopted by the
Board of Directors to revitalize the Company's operations, restore the Company's
profitability and maximize shareholder value. Your Board of Directors believes
that the Comprehensive Business Plan, rather than returning control of the
Company to Dr. Steven Scott, is the best way to maximize the value of Coastal.

Specifically, you will be asked to choose between the directors nominated
by the Board and directors nominated by Dr. Scott, who until being placed on
sabbatical leave by the Board in May of this year was the Company's President
and Chief Executive Officer. The directors nominated by the Board are committed
to the implementation of the Comprehensive Business Plan.

You will also be asked to vote on two non-binding shareholder resolutions.
One of these resolutions, which has been proposed by the Company, seeks your
approval of the Company's continued implementation of the Comprehensive Business
Plan. The other resolution, proposed by Dr. Scott, seeks the appointment of a
new committee of purportedly "independent" directors (of which Dr. Scott's
nominees, if elected, would be members), which committee avowedly would pursue
an alternate course of action for the Company (the "Scott Committee"). The
Company believes that Dr. Scott's nomination of two persons to replace two of
the Company's current independent directors, and his proposal to form the Scott
Committee, constitute a transparent attempt by Dr. Scott to regain control of
the Board. For the reasons set forth below, your Board believes that returning
control of the Company to Dr. Scott would not be in the best interests of the
Company's shareholders and would jeopardize the Company's attempt to return to
profitability.

YOUR BOARD OF DIRECTORS URGES YOU TO VOTE FOR THE BOARD'S NOMINEES NAMED ON
THE ENCLOSED WHITE PROXY CARD, TO VOTE FOR CONTINUED IMPLEMENTATION OF THE
COMPREHENSIVE BUSINESS PLAN DESCRIBED BELOW AND TO VOTE AGAINST DR. SCOTT'S
PROPOSED RESOLUTION TO FORM THE SCOTT COMMITTEE.

DR. SCOTT PRESIDED OVER THE COMPANY'S DECLINE AND DID NOT RETURN THE COMPANY TO
PROFITABILITY

As noted above, Dr. Scott was the President and Chief Executive Officer of
the Company until he was placed on sabbatical leave by the Board on May 29,
1996. In July of 1993, under the leadership of Dr. Scott, the Company embarked
on an aggressive strategy of acquisitions outside its historical core
businesses, ultimately expending over $325 million in cash and stock in an
effort to diversify its businesses. At that time, the Board of Directors had
been led to believe that this strategy would strengthen the Company. However,
the Company was not able to integrate successfully the various acquired
businesses, and in many cases was not able to sustain the successes that such
businesses had experienced prior to their acquisition by the Company. Thus,
during the period from February of 1994 until he was placed on sabbatical
leave by the Board, Dr. Scott presided over a decline in market value of the
Company of over $575 million, and a decline in the Company's stock price in
excess of 80% from its peak of $40.25. During this period, the Company fell
out of compliance with, was required to obtain numerous waivers from lenders
under, and ultimately completely restructured the terms of its principal
credit agreements.

THE BOARD ENGAGED OUTSIDE TURNAROUND AND FINANCIAL EXPERTS AND IS IMPLEMENTING A
RECOVERY PLAN

In recognition of the contribution that Dr. Scott had made in founding and
building the Company, and in the hope that Dr. Scott would be able to apply his
knowledge and experience to reverse the Company's course, the Board of Directors
did not immediately remove Dr. Scott from his positions as President and Chief
Executive Officer at the time that the Company first suffered financial and
operational difficulties in 1995. Rather, in February 1996, after the Company
was required to seek waivers from its lenders in order to avoid defaults under
its credit agreements, the Company sought the assistance of the national

<PAGE>

business turnaround services unit of Price Waterhouse LLP ("Price Waterhouse")
to review the Company's operations, and shortly thereafter the financial
advisory services of Morgan Stanley and Co., Incorporated ("Morgan Stanley"), to
conduct, strategic and financial studies of the Company's businesses. Together
with the recommendations of senior management, Price Waterhouse and Morgan
Stanley, the Board approved and adopted a Comprehensive Business Plan, described
herein, designed to (i) improve and increase efficiency in the Company's
existing operations and businesses; (ii) divest its non-strategic operating
units, leaving in place the Company's core operations; and (iii) refinance and
ultimately pay down its debt, enabling the Company to concentrate on the
effective management of the Company's core operations. The Board believes that
the Comprehensive Business Plan is the best alternative available to maximize
the value of the Company.

Price Waterhouse began an intensive evaluation of the Company's problems in
February 1996, concentrating its review on the Company's cash flow, and later on
the operational aspects of the Company in order to streamline the operations and
increase efficiency in each of the Company's existing businesses operations.
Based in part on that review, the Board believes that Dr. Scott failed, as
President and Chief Executive Officer, to (i) put in place effective policies
and procedures for the successful integration of the various acquisitions
(undertaken by the Company at Dr. Scott's initiative) into the operations of the
Company, and (ii) implement effective measures for the control of the day-to-day
operations of the Company, including the establishment of appropriate cash flow,
accounts receivable and collections procedures, management information systems
and other operational arrangements. The Board believes these failures
contributed significantly to the decline in the Company's performance.

On March 19, 1996, based on the strong recommendations of senior management
(including Dr. Scott) and Price Waterhouse, the Board of Directors, including
Dr. Scott, unanimously approved the implementation of a management action plan
(the "Management Action Plan") that provided for (1) a continuing review of all
aspects of the Company's operations and business units and (2) the
implementation of actions to improve the cash flow and financial results of the
Company as a whole and to improve the contribution of each business unit to the
Company's overall financial and strategic objectives. The Board contemplated
that Price Waterhouse, its outside experts in the turnaround area, would
continue to have a significant role in implementing the Plan that it had helped
to devise, and would focus in particular on the operational arrangements that
the Board believed needed special attention. Thus, effective on April 4, 1996,
and with the unanimous approval of the Board (including the support of Dr.
Scott), the Company entered into a formal engagement letter with Price
Waterhouse (the "Engagement Letter") providing Price Waterhouse with the
authority that it believed it needed to implement the Management Action Plan.
At this time, also with the unanimous agreement of the Board (including the
support of Dr. Scott), the Board formed a committee of independent directors
(the "Independent Committee") chaired by the non-voting Dr. Sokolov, to
supervise the implementation of the Management Action Plan by representatives
of Price Waterhouse who would act as Plan Managers. See "Management Action
Plan."

After initiating the Company's operational improvements, management and the
Board turned their attention to developing an overall strategic and financial
plan to assist them in developing the most appropriate strategy to achieve both
the Company's near-term liquidity needs and increase shareholder value and
position the Company for the future. On July 8, 1996, complementing the
Management Action Plan, and following a study of alternatives available to the
Company undertaken in conjunction with Price Waterhouse and Morgan Stanley, the
Board of Directors approved a comprehensive strategic and financial plan (the
"Strategic and Financial Plan," and together with the Management Action Plan,
the "Comprehensive Business Plan") to refocus on its core operations and to
divest certain operating units to address its debt service requirements and
improve the enterprise value of the Company. This strategy includes (i) the
divestiture of certain clinical operations and other non-core businesses,
leaving the Company with the strategic hospital-based contract services and
billing businesses, and (ii) the refinancing and ultimate paydown of debt.

DR. SCOTT HINDERED IMPLEMENTATION OF THE COMPREHENSIVE BUSINESS PLAN, AND WAS
PLACED ON LEAVE

In the months immediately following the unanimous adoption of the
Management Action Plan, and while the Strategic and Financial Plan was being
developed, the Board formed the view that Dr. Scott was unwilling to work in a
productive manner with the Board, senior management and Price Waterhouse
to effect the Company's turnaround. In particular, Dr. Scott disagreed
with the Plan Managers over a variety of subjects, including the respective
roles of the Plan Managers and Dr. Scott; the relationship between the Company
and Dr. Scott's Century American Insurance Company ("Century Insurance") (see
"Certain Transactions"); the retention, dismissal and reassignment of employees;
the negotiation and execution of certain operational contracts; and other
matters. In April and May of 1996, Price Waterhouse indicated to the Independent
Committee and the Board that because of Dr. Scott's uncooperative approach it
would have to reconsider its role under the Management Action Plan if it were
required to continue to work under the supervision or control of Dr. Scott.

<PAGE>

On May 29, 1996, the Board determined that Dr. Scott's actions were not
compatible with the implementation of the Management Action Plan, and determined
to place Dr. Scott on sabbatical leave throughout the remainder of 1996. Joseph
G. Piemont, formerly Executive Vice President and General Counsel of the
Company, was elected President and Chief Executive Officer.

The placement of Dr. Scott on sabbatical leave was approved by a vote of
6-3, with Dr. Scott, Dr. Bertram E. Walls and Mr. John A. Hemingway voting
against. These three Directors also refused to approve the Strategic and
Financial Plan discussed above (Dr. Scott abstained, Dr. Walls and Mr. Hemingway
voted against). Dr. Walls is the trustee of certain trusts for the benefit of
Dr. Scott's children and is President of Dr. Scott's Century Insurance. Mr.
Hemingway is the Secretary and a longtime employee and director of the Company
who was removed by the Board from his position as President of one of the
Company's most important businesses at the recommendation of the Plan Manager
(and over the objection of Dr. Scott). For these reasons, the Board believes
that it is to be expected that Dr. Walls and Mr. Hemingway will support the
positions advocated by Dr. Scott.

DR. SCOTT'S ATTEMPT TO REGAIN CONTROL OF THE BOARD IS AGAINST THE ECONOMIC
INTERESTS OF SHAREHOLDERS

The Company believes that Dr. Scott's desire to replace Board members
serving on the Independent Committee and pass a resolution to form the Scott
Committee is a transparent attempt to regain control of a Company that Dr. Scott
built but could not effectively manage. Indeed, despite the fact that his
preliminary proxy statement states that he "does not intend . . . to personally
fill [the] position [of Chief Executive Officer]," Dr. Scott is currently suing
the Company in an attempt to be reinstated in that very position. See "Certain
Legal Proceedings."

Dr. Scott was the President and Chief Executive Officer and was charged
with operational control of the management of the Company during the period when
the Company lost in excess of 80% of its market price from its peak of $40.25.
The Board believes that his management practices contributed significantly to
the decline in the Company's performance. In addition, although outside experts
were retained, with the unanimous approval of the Board, including Dr. Scott, in
an attempt to address the Company's situation, Dr. Scott chose not to cooperate
with them. Only after he was rebuffed by the Board of Directors, which chose to
follow through with its commitment to restoring the Company to its former
health, did he begin his campaign to replace existing directors with so-called
"independent" directors and advocate other steps purportedly aimed primarily at
"maximizing shareholder value." Prior to his public announcement of his
intention to seek proxies, Dr. Scott had never suggested to the Board a sale of
the entire Company.

The identity of one of Dr. Scott's nominees -- attorney Mitchell W.
Berger -- belies any notion that the outside directors Dr. Scott is attempting
to add to the Board would be truly "independent." While Dr. Scott was acting as
President and Chief Executive Officer, he caused the Company to retain Mr.
Berger's firm to represent the Company. (The Company has not retained Mr. Berger
or his firm for any new matters since Dr. Scott was placed on leave.) In
addition, Mr. Berger's firm has represented Dr. Scott on numerous personal
matters, including certain real estate matters involving subsidiaries of the
Company and entities controlled by Dr. Scott. Dr. Scott's preliminary proxy
statement, which seeks Mr. Berger's appointment to a committee of "independent"
directors, does not disclose Dr. Scott's personal connection to Mr. Berger.
Tellingly, Dr. Scott rejected the Company's offer to expand the Board to add two
completely independent directors that would be recommended by an independent
director search firm.

According to Dr. Scott's preliminary proxy materials, his other
nominee -- Henry J. Murphy -- is a retired accountant who once specialized in
"corporate recovery" services. The Board has, by a unanimous vote, including the
support of Dr. Scott, already retained Price Waterhouse to provide such services
to the Company. Dr. Scott's demonstrated unwillingness or inability to cooperate
with Price Waterhouse's representatives surfaced only after Price Waterhouse's
representatives gained familiarity with the Company's operations and the sources
of its inefficiencies. Therefore, it is not clear that Dr. Scott would accept
the advice or recommendations of, or cooperate with, another independent or
objective party.

Dr. Scott's plan to regain control of the Board is transparent -- even if
the careful language of his preliminary proxy materials attempt to deny it. Dr.
Scott seeks to replace two truly independent directors who are members of the
existing Independent Committee with two individuals chosen by Dr. Scott. Dr.
Scott refused the Company's offer to retain an independent director search firm
to recommend truly independent nominees. If elected, the Scott Nominees,
together with Dr. Scott, Dr. Walls and Mr. Hemingway, would constitute a
majority of the nine-member Board, and would have the ability to control all
Board decisions (including the selection of all of the members of the Scott
Committee). Based on the Company's performance under Dr. Scott's control, the
Board believes that the Scott program would be a reversal of direction and a
return to the failed strategies and management style of the 1993 to early 1996
period.

<PAGE>

Moreover, the Board believes that it is of utmost importance to demonstrate
to the Company's stockholders, customers, employees, suppliers and creditors
that the Company is dedicated to restoring its success. In this regard, and
especially while the Company is attempting to regain credibility in the
financial markets, the Board believes that particular skepticism should be
applied to any proposed related party transaction of the nature described under
"Certain Transactions," which, even if disclosed, would tend to result in
substantial enrichment of Dr. Scott while an officer and director of the
Company. The Board questions the ability of a Board controlled by Dr. Scott to
apply appropriate scrutiny in that regard.

Your Board believes that Dr. Scott's attempt to bring in one of his close
associates and a retired accountant to "maximize the value" of the Company is
disingenuous and potentially disastrous. Dr. Scott led the Company into, and has
already demonstrated his inability to lead the Company out of, its current
situation. The Company regrets that Dr. Scott has elected to pursue this costly
and divisive effort to regain control of the Board, and believes that the best
strategy to return to profitability -- and truly maximize shareholder
value -- is to continue to implement the Comprehensive Business Plan adopted by
your Board. WE URGE YOU TO SHOW YOUR SUPPORT FOR THE BOARD'S PLAN BY SIGNING,
DATING AND RETURNING THE WHITE PROXY CARD.

PROPOSAL 1

ELECTION OF DIRECTORS
THE COMPANY'S NOMINEES

The Company's Certificate of Incorporation and Bylaws provide for nine
directors of whom one-third are elected each year to serve for three-year terms.
Each director elected at the 1996 Annual Meeting will serve for a term expiring
at the 1999 Annual Meeting of Shareholders, or until his successor has been duly
elected and qualified. The Company's Board of Directors has nominated Norman H.
Chenven, M.D., Robert V. Hatcher, Jr. and Richard Janeway, M.D. for election for
terms expiring in 1999.

THE BOARD OF DIRECTORS RECOMMENDS THAT STOCKHOLDERS VOTE FOR ALL OF THE ABOVE-
NAMED NOMINEES FOR ELECTION AS DIRECTORS.

Each of the Board's nominees is a current independent member of the Board
of Directors. See "Executive Officers and Directors." The Board of Directors has
no reason to believe that any of its nominees will refuse to act or be unable to
accept election; however, in the event that any such nominee is unable to accept
election or if any unforeseen contingencies should arise, it is intended that
proxies will be voted for the remaining nominees, if any, and for such other
person or persons as may be designated by the Board of Directors, unless
otherwise directed by a proxy.

OTHER NOMINEES

Any shareholder who is a shareholder on the Record Date and at the time of
giving the Notice (as defined below) may nominate a person or persons for
election to the Board of Directors provided that such shareholder complies with
the following procedures. Written notice of the shareholder's intent to submit a
nomination at the Annual Meeting must be delivered to the Secretary of the
Company not later than the close of business on (the "Notice").
The Notice must set forth (i) as to each proposed nominee, all information
relating to such person that is required under the Securities Exchange Act of
1934, as amended (the "Exchange Act"), to be disclosed in solicitations of
proxies for election of directors; (ii) each nominee's written consent to be
named as a nominee and to serve if elected; (iii) the name and address of the
nominating shareholder as they appear on the Company's books and records; (iv)
the number of shares of Common Stock owned by the nominating shareholder; (v) a
description of all arrangements or understandings between the nominating
shareholder and each nominee or any other person pursuant to which the
nomination is to be made by the nominating shareholder. Nominating shareholders
also must comply with all applicable requirements of the Exchange Act and the
regulations promulgated thereunder with respect to a nomination submitted
pursuant to the Notice. If the chairman of the Annual Meeting determines and
declares that the nominating shareholder has not complied with this procedure,
the nomination will not be accepted.

On July 9, 1996, Steven M. Scott, M.D., a director and shareholder of the
Company, announced his intention to solicit proxies in support of the election
of two new directors at the 1996 Annual Meeting and Dr. Scott has filed
preliminary proxy materials with the Securities and Exchange Commission. As of
July 19, 1996, however, the Company has not received the required Notice of such
nominations. See "Background."

<PAGE>

EXECUTIVE OFFICERS AND DIRECTORS

The following table sets forth certain information with respect to the
executive officers and directors of the Company and executive officers of
subsidiaries of the Company who have significant policy-making authority:

<TABLE>
<CAPTION>
NAME AGE POSITION
<S> <C> <C>
Joseph G. Piemont 41 President and Chief Executive Officer
Jacque J. Sokolov, M.D. (1)(2)(5) 41 Chairman of the Board; Chief Executive Officer, Advanced Health Plans, Inc.
Steven M. Scott, M.D. 48 Director
Stephen D. Corman (1) 53 Director, Executive Vice President and Chief Financial Officer
Robert V. Hatcher, Jr. (3)(4)(5) 65 Director
John A. Hemingway (1) 60 Vice Chairman of the Board, Senior Executive Vice President and Secretary;
Chairman of the Board, Coastal Physician Services, Inc.
Richard Janeway, M.D. (3)(4)(5) 63 Director
John P. Mahoney, M.D. (1)(2)(5) 47 Director
Bertram E. Walls, M.D. (2) 44 Director
Norman H. Chenven, M.D. (2)(5) 50 Director
John G. Ball 57 President, Coastal Physician Services, Inc.
Edward L. Suggs, Jr. 44 President and Chief Executive Officer, Healthcare Business Resources, Inc.
Eugene F. Dauchert, Jr. 42 President and Chief Executive Officer, Physician Care Networks, Inc.
Timothy W. Trost 38 Vice President, Corporate Controller and Chief Accounting Officer
</TABLE>

(1) Member of the Executive Committee of the Board of Directors.
(2) Member of the Nominating Committee of the Board of Directors.
(3) Member of the Audit Committee of the Board of Directors.
(4) Member of the Compensation Committee of the Board of Directors.

(5) Member of the Independent Committee of the Board of Directors. Dr. Sokolov
serves as chairman and a nonvoting member of this committee.

Mr. Piemont was appointed President and Chief Executive Officer on May 29,
1996 after serving as Senior Vice President and General Counsel of the Company
from August 1993 to May 1995, when he was promoted to Executive Vice President.
Mr. Piemont was General Counsel of Amresco Holdings, Inc. ("Amresco"), a
financial services company and former subsidiary of NationsBank Corporation,
from 1992 until joining the Company. Prior to his association with Amresco, Mr.
Piemont was Associate General Counsel of NationsBank of Texas, N.A. Mr. Piemont
is a member of the North Carolina and American Bar Associations and received a
B.A. degree in Economics from the University of North Carolina at Charlotte and
a J.D. degree from Emory University Law School.

Dr. Sokolov has been Chairman of the Board since December 1, 1994. He is
the founder and since 1992 has been the Chief Executive Officer of Advanced
Health Plans, Inc., which became a subsidiary of the Company in November 1994.
Dr. Sokolov received a B.A. degree in medicine from the University of Southern
California and an M.D. with honors from the University of Southern California
School of Medicine. He completed his internal medicine residency at the Mayo
Graduate School of Medicine and his fellowship in cardiovascular diseases from
the University of Texas -- Southwestern Medical School. Dr. Sokolov previously
held and currently holds academic appointments and advisory board
responsibilities, including positions in the Schools of Medicine, Management,
Public Health and Pharmacy at Harvard University, the Massachusetts Institute of
Technology, the University of Pennsylvania, the University of California at Los
Angeles, the University of Southern California and the Wharton School of the
University of Pennsylvania. He serves on the boards of the Washington Business
Group on Health, the National Fund for Medical Education, the National Health
Foundation and California Health Decisions. Dr. Sokolov also serves on the
advisory boards of the National Health Policy Council, the National Resource
Center on Worksite Promotion, the White House Health Project and the Health Care
Advisory Committee for California Insurance Commissioner John Garamedi.

Dr. Scott has been a director of the Company since its formation in 1977.
Dr. Scott served as Chairman of the Board of Directors from 1977 to December 1,
1994, and as President and Chief Executive Officer of the Company from 1977 to
May 29, 1996. As noted above, on May 29, 1996, Dr. Scott was placed on
sabbatical leave of absence from his positions as President and Chief Executive
Officer. Dr. Scott has obstetrics and gynecology practice experience and
clinical and administrative emergency department experience. He is
board-certified in obstetrics and gynecology and is a member of the clinical
7

<PAGE>
faculty at Duke University Medical Center. Dr. Scott received his undergraduate
degree and medical education from Indiana University. Dr. Scott completed his
residency in the Department of Obstetrics and Gynecology at Duke University
Medical Center.

Mr. Corman became Executive Vice President and Chief Financial Officer in
May 1995 and has been a director since 1991. He was a director and Vice
President of Finance of Burroughs Wellcome Co., a pharmaceutical company, from
1986 to 1995 and its Chief Financial Officer from 1989 to 1995. Mr. Corman
worked for Burroughs Wellcome Co. from 1975 to 1995 and, in addition to the
positions previously described, held positions as Assistant to the Controller,
Assistant to the Treasurer, Controller and Treasurer. Previously, he was
Treasurer and Chief Financial Officer of Cooper U.S.A., Inc., a pharmaceutical
company, and senior auditor for the accounting firm of Price Waterhouse LLP
("Price Waterhouse"). Mr. Corman received a B.S. degree in Accounting from
Indiana University and is a member of several professional associations,
including the American Institute of Certified Public Accountants, the North
Carolina Association of Certified Public Accountants, the Tax Executives
Institute and the Financial Executives Institute.

Mr. Hatcher has been a director since 1991. He was Chief Executive Officer
of Johnson & Higgins, a provider of insurance consulting and brokerage services,
from 1981 until his retirement in 1990, and its Chairman from 1982 until his
retirement. While with Johnson & Higgins from 1968 until 1981, Mr. Hatcher held
the positions of President and Chief Operating Officer. Mr. Hatcher received a
B.A. degree in Economics from the University of Virginia in 1953. He is
currently a director of Media General, Inc., a diversified media company.

Mr. Hemingway, a director since 1982, has been Vice Chairman of the Board
of Directors since 1987. Mr. Hemingway also serves as Senior Executive Vice
President of the Company and served as Chief Executive Officer of Coastal
Physician Services, Inc. ("CPS"), a subsidiary of the Company, from January 1996
to May 1996. He continues to serve as Chairman of the Board of CPS. From 1992
to 1993, Mr. Hemingway served as President of Coastal Physician Contract
Services Group, Inc. From 1990 to 1992, he served as President of Coastal
Emergency Services Management Group, Inc. From 1983 to 1990, he served as the
Company's Senior Vice President of New Business Development. Previously, he
was Executive Vice President and Chief Operating Officer of Liggett & Myers
International, Inc., where he worked for 19 years. Mr. Hemingway received a
B.A. degree from Duke University.

Dr. Janeway, a director since April 1994, has been a member of the faculty
since 1966 and a Professor of Neurology since 1971 of The Bowman Gray School of
Medicine of Wake Forest University. He served as Vice President for Health
Affairs of Wake Forest University from 1983 until 1990, Dean of the Bowman Gray
School from 1971 until 1994 and has served as Executive Vice President for
Health Affairs of Wake Forest University since 1990. He is a director of
Southern National Corporation, the bank holding company for Branch Banking and
Trust Company, which is a participating lender under the Company's senior credit
facility. Dr. Janeway received his undergraduate degree from Colgate University
and his medical degree from the University of Pennsylvania School of Medicine.
Dr. Mahoney, a director since December 1994, served as Chief Executive
Officer of Health Enterprises, Inc. from 1987 until it was acquired by the
Company in November 1994. Dr. Mahoney served as President and Chief Executive
Officer of Healthplan Southeast, Inc., a subsidiary of the Company, from
December 1994 through December 1995. In December 1995, he returned to private
practice as a board-certified pathologist. Through 1994, Dr. Mahoney was
employed on a part-time basis by Health Enterprises, Inc. while maintaining his
private practice as a board-certified pathologist with Ketchum, Wood, Burgert,
Chartered d/b/a Pathology Associates. In addition to his medical degree, Dr.
Mahoney holds a Masters of Business Administration degree from the University of
South Florida.

Dr. Walls, a director since 1991, was President of Coastal Physician
Contract Services Group, Inc. from January through December 1994. Effective
January 1, 1995, Dr. Walls became the President of Century American Insurance
Company ("Century Insurance"). See "Certain Transactions." From 1992 to 1993,
Dr. Walls was the President of Sunlife OB/GYN Services, Inc., a subsidiary of
the Company, as well as its Chief Medical Officer from 1991 to 1993. From 1981
through 1990, Dr. Walls was in the private practice of obstetrics and gynecology
with Valley Women's Center, P.A. in Fayetteville, North Carolina. He is board
certified in obstetrics and gynecology and is a member of the clinical faculty
at Duke University Medical Center. Dr. Walls received a B.S. degree in Science
from North Carolina A&T State University and his medical degree from Duke
University. He completed his residency in obstetrics and gynecology at Duke
University Medical Center.

Dr. Chenven became a director of the Company on September 1, 1995. Dr.
Chenven is the founder and since 1980 the President and Chief Executive Officer
of Austin Regional Clinic, P.A. Dr. Chenven is board-certified in family
practice and received his medical degree from State University of New York,
Brooklyn, New York. Dr. Chenven is active with the Travis

<PAGE>
County Medical Society and the Texas Medical Association ("TMA"). He has served
on TMA's Special Committee on Health System Reform and is currently an advisor
to TMA's Physician Service Organization.

Dr. Ball became President of CPS on May 22, 1996. Since 1989, Dr. Ball has
been a principal of High Performance Partners, a firm providing financial,
strategic planning, marketing and turnaround advisory services and interim
management to a variety of public and private companies. Dr. Ball received a
B.S. degree in chemical engineering from Louisiana Tech University, a Ph.D. in
chemical engineering from the University of Texas, a M.B.A. from the University
of Richmond, and a M.S. in organizational behavior from Carnegie Mellon
University.

Mr. Suggs has been with Healthcare Business Resources, Inc., a subsidiary
of the Company, since 1986 and its President since 1987. Previously, Mr. Suggs
was Assistant Controller of Oxford Development Company, a real property
development firm, and a tax manager for the accounting firm of Ernst & Young
LLP. He received a B.S. degree in Accounting from the University of North
Carolina at Charlotte. Mr. Suggs is a member of the American Institute of
Certified Public Accountants, the North Carolina Association of Certified Public
Accountants and the Healthcare Financial Management Association.

Mr. Dauchert has been President and Chief Executive Officer of Physician
Care Networks, Inc., a subsidiary of the Company, since 1994. Prior to joining
the Company, Mr. Dauchert was a partner in the law firm of Moore & Van Allen,
PLLC where he focused his practice on health care, corporate and tax matters for
16 years. Mr. Dauchert received a B.A. from the University of North Carolina
at Chapel Hill and a J.D. degree with honors from the University of North
Carolina School of Law. He is a member of the North Carolina and American Bar
Associations, and is active in numerous health care sections of those
organizations.

Mr. Trost joined the Company as Vice President of Corporate Development in
March 1994 and was named Vice President, Corporate Controller and Chief
Accounting Officer in January 1996. Prior to joining the Company, Mr. Trost
served since 1992 as Vice President of Finance/Controller for Morganite North
America Inc., the U.S. holding company of The Morgan Crucible Company plc, a
manufacturer of specialized materials and components. Prior to that, Mr. Trost
spent a total of 12 years (in four offices) with the accounting firm of Price
Waterhouse. Mr. Trost received a B.S. degree in Accounting from the University
of Illinois at Urbana-Champaign, is a certified public accountant, and is a
member of the American Institute of Certified Public Accountants and the North
Carolina Association of Certified Public Accountants.
MEETINGS AND COMMITTEES OF THE BOARD OF DIRECTORS

During 1995, the Company's Board of Directors held 11 meetings and took
certain actions by unanimous written consent. Dr. Chenven, who became a director
during the third quarter of 1995, Dr. Walls and Mr. Hatcher were the only
incumbent directors who attended fewer than 75% of the Board of Directors and
assigned committee meetings held during 1995.

Dr. Scott, Mr. Hemingway and Dr. Walls served as members of the Executive
Committee during 1995. The Executive Committee is authorized to exercise the
authority of the Board of Directors. The Executive Committee did not meet during
1995 but took action by unanimous written consent eight times during the year.
On May 29, 1996, the Executive Committee was expanded to four members and Drs.
Sokolov and Mahoney and Messrs. Hemingway and Corman were appointed to the
committee.

Mr. Hatcher and Dr. Janeway served as members of the Audit Committee during
1995. Until becoming Executive Vice President and Chief Financial Officer in May
1995, Mr. Corman also served as a member of this committee. The principal
functions of this committee are to make recommendations to the Board of
Directors with respect to the selection of the Company's independent certified
public accountants, to review the Company's internal controls and confer with
and make recommendations to the Company's independent certified public
accountants concerning the scope and results of their audit. The Audit Committee
met five times during 1995.

Mr. Hatcher and Dr. Janeway also served as members of the Compensation
Committee during 1995. Until becoming Executive Vice President and Chief
Financial Officer of the Company in May 1995, Mr. Corman also served as a
member of this committee. The principal functions of this committee are to
review and make recommendations to the Board of Directors with respect to the
compensation of the executive officers of the Company. The Compensation
Committee met twice during 1995.
Mr. Hemingway and Dr. Walls served as members of the Nominating Committee
during 1995. The Nominating Committee did not meet during 1995 but took action
by unanimous written consent twice during the year. On May 29, 1996, the
Nominating Committee was increased to four members and Drs. Sokolov, Mahoney,
Walls and Chenven were named to the committee. The principal functions of this
committee are to recommend to the Board of Directors nominees for election as
directors at the Company's annual meetings of shareholders and to recommend
nominees to fill any vacancies occurring between such meetings.
9

<PAGE>
MANAGEMENT ACTION PLAN

On March 19, 1996, the Board of Directors approved the implementation of
the Management Action Plan. See "Background". Effective April 4, the Board of
Directors approved the Engagement Letter pursuant to which the Company engaged
Price Waterhouse to implement the Plan and appointed Dennis I. Simon and Bettina
M. Whyte of Price Waterhouse as plan managers (the "Plan Managers"). The
Engagement Letter provides that the Plan Managers will at all times be under the
supervision, control and direction of a special committee of the Board of
Directors composed of directors who are not employed by or affiliated with the
Company (the "Independent Committee"). The Independent Committee was formed by
resolutions also adopted by the Board on April 4, 1996 and consists of Drs.
Janeway, Chenven and Mahoney and Mr. Hatcher, with Dr. Sokolov serving as
chairman and a nonvoting member. (Dr. Scott seeks to replace as members of the
Board of Directors Dr. Chenven and Mr. Hatcher, both of whom are truly
independent directors, with his own hand-picked nominees -- one of whom is his
personal lawyer whose firm has previously represented Dr. Scott in negotiations
against the Company.) The Independent Committee is authorized to (i) supervise,
control and direct implementation of the Management Action Plan, (ii) meet and
consult with the Plan Managers, other members of the Board of Directors, and the
officers of the Company and its subsidiaries regarding implementation of the
Management Action Plan and (iii) take any and all further actions deemed
appropriate and in the best interests of the Company relating to the Management
Action Plan and its implementation by the Plan Managers. The Engagement Letter
will remain in effect, unless sooner terminated by the Company or Price
Waterhouse, for a period of twelve months or the repayment of the Company's
outstanding obligations under its bank credit facilities or any amendment or
restructuring thereof.

Pursuant to the Engagement Letter, 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. In addition, the Company granted Price Waterhouse
an option, granted in consideration of a credit of $250,000 against fees payable
by the Company to Price Waterhouse in the eleventh and twelve months of their
engagement, to purchase 50,000 shares of common stock of the Company at a price
of $7 7/8, which option is not yet vested, and a separate option to purchase up
to 50,000 shares of common stock of the Company, which option shall vest at the
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.

In performing their duties under the Engagement Letter, the Plan Managers
have broad authority to conduct the day-to-day operations of the Company,
including making operational decisions relevant to cash flows, implementing cost
containment measures, hiring and terminating nonexecutive employees, making
recommendations to the Special Committee regarding asset dispositions and
related matters, managing and controlling cash outflows and commitments,
including those related to contractual obligations and employee compensation
plans, and submitting recommendations regarding the retention of investment
bankers and other professional advisors to the Company. Set forth below are
descriptions of the business experience of each of the Plan Managers during the
past five years.

Mr. Simon, age 54, currently serves as a Senior Managing Director of
Business Turnaround Services for Price Waterhouse. He has been associated with
Price Waterhouse since 1993. Mr. Simon served as Executive Vice President and
Western Managing Director of Buccino & Associates from October 1990 through
January 1993. He currently serves on the Board of Directors for the Turnaround
Management Association. Mr. Simon received a B.A. in economics from American
International College and a M.B.A. with distinction from Harvard University.

Ms. Whyte, age 47, currently serves as a Partner and a National Director of
Business Turnaround Services for Price Waterhouse. She has been associated with
Price Waterhouse since 1990. Ms. Whyte is a member of the Certification
Committee for the Association of Turnaround Professionals, the National
Association of Bankruptcy Trustees, the American Bankruptcy Institute, and the
American Institute of Insolvency Accountants. She is a Certified Insolvency and
Restructuring Accountant and serves on the Board of the Association of
Insolvency Accountants and on the Advisory Board of the Commercial Finance
Association. Ms. Whyte graduated Phi Beta Kappa with a B.S. in Economics from
Purdue University and received a M.B.A. from Northwestern University where she
was named the Cunningham Scholar.

<PAGE>

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS

Except as indicated under "Security Ownership of Management," the following
is the only shareholder known to the Company to be the beneficial owner of more
than five percent of the Common Stock as of May 31, 1996:

<TABLE>
<CAPTION>
NAME AND ADDRESS OF AMOUNT AND NATURE PERCENT OF
BENEFICIAL OWNER OF BENEFICIAL OWNERSHIP COMMON STOCK
<S> <C> <C>
Heartland Advisors, Inc................................................... 2,567,050(1) 10.67%
790 North Milwaukee Street
Milwaukee, Wisconsin 53202
</TABLE>

(1) Includes 2,319,450 shares with respect to which the shareholder has voting
and investment power and 247,600 shares with respect to which the
shareholder has investment power only.

SECURITY OWNERSHIP OF MANAGEMENT

The following table sets forth certain information with respect to
beneficial ownership of the Common Stock as of May 31, 1996 by: (i) each
director and nominee for director of the Company; (ii) each executive officer
named in the Summary Compensation Table; and (iii) all directors and executive
officers of the Company as a group. Except as otherwise indicated, each
shareholder named has sole voting and investment power with respect to such
shareholder's shares.

<TABLE>
<CAPTION>
AMOUNT AND
NATURE OF BENEFICIAL PERCENT OF
NAME OWNERSHIP COMMON STOCK(1)
<S> <C> <C>
Steven M. Scott, M.D................................................................... 7,146,193(2) 29.70%
Bertram E. Walls, M.D.................................................................. 404,235(3) 1.68
Jacque J. Sokolov, M.D................................................................. 263,423(4) 1.09
John A. Hemingway...................................................................... 79,903(5) *
David W. Singley, Jr................................................................... 5,775(6) *
Robert V. Hatcher, Jr.................................................................. 16,808(7) *
Stephen D. Corman...................................................................... 10,138(8) *
John P. Mahoney, M.D................................................................... 4,090(9) *
Richard Janeway, M.D................................................................... 11,451(10) *
Norman H. Chenven, M.D................................................................. -- *
All directors and executive officers as a group (14 persons)........................... 7,983,460(11) 33.18%
</TABLE>

(1) An asterisk (*) indicates less than one percent.

(2) Includes 6,342,318 shares held by Scott Medical Partners, L.P., of which
Dr. Scott is the sole general partner. Also includes 556,061 shares held by
two partnerships, the partners of which are Dr. Scott and certain trusts
established for the benefit of Dr. Scott's children. Dr. Scott has sole
investment power with respect to these shares, but has sole voting power
with respect to only 410,961 shares. Voting power with respect to the
remaining 145,100 shares is held by Dr. Walls, as trustee of the trusts.
Also includes 66,000 shares held by a foundation and 61,714 shares held by
two charitable remainder unitrusts with respect to which Dr. Scott shares
voting and investment power. Also includes 120,000 shares held by Century
Insurance over which Dr. Scott may be deemed to share voting and investment
power. Dr. Scott disclaims beneficial ownership of the shares held by
Century Insurance. The remaining 100 shares are held directly by Dr. Scott.
Dr. Scott's address is 3711 Stoneybrook Drive, Durham, North Carolina
27705. The foregoing information is taken from preliminary proxy materials
filed with the Securities and Exchange Commission by Dr. Scott.

(3) Includes 145,100 shares with respect to which Dr. Walls has voting power
and Dr. Scott has investment power. Such shares also are included under the
beneficial ownership of Dr. Scott. Also includes 248,915 shares held by
certain trusts established for the benefit of Dr. Scott's children with
respect to which Dr. Walls, as trustee, holds voting and investment power.
Includes 4,000 shares subject to presently exercisable stock options and
4,220 shares reserved for issuance under the Deferred Compensation Plan for
Outside Directors (the "Deferred Compensation Plan").

(4) Includes 183,000 shares subject to presently exercisable stock options and
696 shares reserved for issuance under the Deferred Compensation Plan.

(5) Includes 20,345 shares subject to presently exercisable stock options.

(6) Includes 665 shares owned by Mr. Singley's wife.

<PAGE>

(7) Includes 8,000 shares subject to presently exercisable stock options, 5,608
shares reserved for issuance under the Deferred Compensation Plan and 300
shares owned by Mr. Hatcher's wife. Mr. Hatcher disclaims beneficial
ownership of the shares held by his wife.

(8) Includes 5,000 shares subject to presently exercisable stock options and
2,438 shares reserved for issuance under the Deferred Compensation Plan.

(9) Includes 4,090 shares reserved for issuance under the Deferred Compensation
Plan.

(10) Includes 6,000 shares subject to presently exercisable stock options and
4,251 shares reserved for issuance under the Deferred Compensation Plan.

(11) Includes 66,690 shares subject to presently exercisable stock options and
21,303 shares reserved for issuance under the Deferred Compensation Plan.

EXECUTIVE COMPENSATION

The following table sets forth the compensation received by the President
and Chief Executive Officer of the Company and its four other most highly
compensated executive officers (collectively, the "Named Executive Officers")
for services rendered to the Company or its subsidiaries during the years ended
December 31, 1995, 1994 and 1993:
SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
LONG TERM
COMPENSATION
AWARDS
ANNUAL COMPENSATION NUMBER OF
OTHER ANNUAL SECURITIES ALL OTHER
SALARY BONUS COMPENSATION UNDERLYING COMPENSATION (1)
NAME AND PRINCIPAL POSITION YEAR ($) ($) ($) OPTIONS/SARS (#) ($)
<S> <C> <C> <C> <C> <C> <C>
Jacque J. Sokolov, M.D. 1995 400,000 150,000 -- 3,883 4,215
Chairman of the Board of 1994 33,333 12,500 -- 903,000 --
the Company and
Chief Executive Officer,
Advanced Health Plans, Inc. (2)
Steven M. Scott, M.D. 1995 333,333 -- 51,492(4) 103,529 165,818
President and Chief Executive Officer of 1994 357,290 120,000 -- 28,588 193,730
the Company (3) 1993 362,500 180,000 -- -- 3,368
John A. Hemingway 1995 200,000 -- -- 33,883 5,175
Vice Chairman of the Board, 1994 183,330 19,500 -- 93,947 5,250
Senior Executive Vice President 1993 191,500 36,000 -- 6,250 5,050
and Secretary of the Company
and President and Chief
Executive Officer, Coastal
Physician Services, Inc. (5)
John P. Mahoney, M.D. 1995 244,294 -- -- -- 1,826
President and Chief Executive Officer, 1994 14,802 8,881 -- -- --
Healthplan Southeast, Inc. (6)
David W. Singley, Jr. 1995 243,897 -- -- 63,883 45,040
Executive Vice President 1994 181,670 35,000 -- 153,947 3,844
of the Company and Chief Executive 1993 166,100 53,000 -- 6,250 2,157
Officer, Coastal Physician Group of
Florida, Inc. (7)
</TABLE>

(1) Includes for 1995: (i) contributions made under the Company's 401(k) plan of
$3,620, $4,000, $1,125, $1,763 and $3,721, for Dr. Sokolov, Dr. Scott, Mr.
Hemingway, Dr. Mahoney and Mr. Singley, respectively, and (ii) premiums paid
for term life insurance policies of $595, $1,566, $4,050, $63 and $522, for
Dr. Sokolov, Dr. Scott, Mr. Hemingway, Dr. Mahoney and Mr. Singley,
respectively. In addition, the 1995 amount for Dr. Scott includes $160,252
which represents the present value of the imputed interest for premiums paid
by the Company under a split dollar life insurance arrangement. The
arrangement is designed so that, if the assumptions made under the policy
are realized, the Company will recover all of its insurance premium
payments. The 1995 amount for Mr. Singley also includes $40,797 of
relocation expenses paid by the Company.

<PAGE>

(2) Advanced Health Plans, Inc. is a subsidiary of the Company. See "Agreements
with Certain Officers" below.

(3) As noted above, Dr. Scott was placed on sabbatical leave of absence from his
positions as President and Chief Executive Officer on May 29, 1996. See
"Agreements with Certain Officers" below.

(4) Reflects amount allocated for personal use of the Company's aircraft.

(5) Coastal Physician Services, Inc. is a subsidiary of the Company. Mr.
Hemingway was removed as President and Chief Executive Officer of Coastal
Physician Services, Inc. in May of 1996. Mr. Hemingway now serves as
Chairman of the Board of Coastal Physician Services, Inc.

(6) Healthplan Southeast, Inc. is a subsidiary of the Company. Dr. Mahoney's
employment with the Company terminated on January 1, 1996. See "Agreements
with Certain Officers" below.

(7) Coastal Physician Group of Florida, Inc. is a subsidiary of the Company. Mr.
Singley's employment with the Company terminated on April 30, 1996. See
"Agreements with Certain Officers" below.

STOCK OPTION GRANTS
The following table provides certain information with respect to stock
options granted during 1995 to the Named Executive Officers:
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
POTENTIAL REALIZABLE
NUMBER OF VALUE AT ASSUMED
SECURITIES PERCENT OF TOTAL ANNUAL RATES OF STOCK
UNDERLYING OPTIONS GRANTED PRICE APPRECIATION
OPTIONS TO EMPLOYEES IN EXERCISE EXPIRATION FOR OPTION TERM
NAME GRANTED(#) FISCAL YEAR(%) PRICE($/SH) DATE 5%($) 10%($)
<S> <C> <C> <C> <C> <C> <C>
Jacque J. Sokolov, M.D. 3,883(1) 0.2 25.75 03/03/05 62,882 159,350
Steven M. Scott, M.D. 100,000(2) 4.6 25.75 03/03/05 1,619,418 4,103,778
3,529(1) 0.2 28.33 03/03/05 62,875 159,333
John A. Hemingway 10,000(2) 0.5 25.75 03/03/05 161,942 410,378
20,000(2) 0.9 13.88 11/17/05 174,583 442,411
3,883(1) 0.2 25.75 03/03/05 62,882 159,350
David W. Singley, Jr. 10,000(2) 0.5 25.75 03/03/05 161,942 410,378
50,000(2) 2.3 14.50 05/08/05 455,953 1,155,433
3,883(1) 0.2 25.75 03/03/05 62,882 159,350
</TABLE>

(1) Option vests and becomes fully exercisable on the third anniversary of the
date of grant.
(2) Option vests and becomes fully exercisable on the fifth anniversary of the
date of grant.
AGGREGATED OPTION EXERCISES AND OPTION VALUES
The following table provides certain information concerning the number of
securities underlying unexercised options held by each of the Named Executive
Officers and the value of such officers' unexercised options at December 31,
1995:
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUES

<TABLE>
<CAPTION>
VALUE OF
UNEXERCISED
IN-
THE-MONEY
NUMBER OF SECURITIES OPTIONS AT
UNDERLYING UNEXERCISED FISCAL
SHARES OPTIONS AT FISCAL YEAR-END YEAR-END
ACQUIRED ON VALUE (#) ($)
NAME EXERCISE (#) REALIZED ($) EXERCISABLE UNEXERCISABLE EXERCISABLE
<S> <C> <C> <C> <C> <C>
Jacque J. Sokolov, M.D. -- -- 183,000 723,883 --
Steven M. Scott, M.D. -- -- -- 132,117 --
John A. Hemingway -- -- 20,345 127,830 18,477
John P. Mahoney, M.D. 10,000 113,928 -- -- --
David W. Singley, Jr. -- -- 20,345 217,830 18,477
<CAPTION>

NAME UNEXERCISABLE
<S> <C>
Jacque J. Sokolov, M.D. --
Steven M. Scott, M.D. --
John A. Hemingway --
John P. Mahoney, M.D. --
David W. Singley, Jr. --
</TABLE>

<PAGE>
401(K) PLAN
The Company maintains a defined contribution retirement and savings plan
for all employees who have reached the age of twenty-one and who have completed
one year of service with the Company. The plan is intended to qualify under
Sections 401(a) and 401(k) of the Internal Revenue Code of 1986, as amended (the
"Code"). Under the plan, a participant may contribute from one to twelve percent
of his or her base compensation, not to exceed an amount which would cause the
plan to violate Section 401(k) or other applicable sections of the Code. The
Company matches contributions in amounts equal to 50% of the first 3% and 25% of
the next 3% of each participant's contribution, not to exceed 2.25% of the
participant's compensation. All contributions are invested, in accordance with
the participant's election, in various investment funds managed by the plan
trustee. The Company also may make discretionary contributions from its current
or accumulated net earnings which are allocated among all eligible participants'
accounts, regardless of whether they currently contribute to the plan, based on
a formula which takes into account participants' compensation and allocates a
portion of such contribution on the basis of compensation in excess of the
Social Security taxable wage base. The Company pays all costs of administering
the plan.
Participants in the plan are fully vested in their own contributions and in
the earnings attributable to their contributions. A participant becomes 50%
vested in the remainder of the participant's account after two years of
continuous service, 75% vested after three years and 100% vested after four
years of continuous service. The plan permits withdrawals in the event of
disability, death, attainment of age 59 1/2, termination of employment or proven
financial hardship. In the case of termination of service, a participant's
vested account balance is distributed to the participant in a lump sum,
installment or annuity form of payment, as described in the plan.
COMPENSATION OF DIRECTORS
Each director who is not an officer or employee of the Company (an
"Independent Director") receives $20,000 annually for serving as a director plus
$1,200 for each meeting of the Board of Directors attended. The respective
Chairmen of the Audit and Compensation Committees receive an additional $1,200
annually for services rendered in that capacity. At each director's election,
compensation may be paid either currently, in cash, or deferred and paid in cash
or in shares of Common Stock at the distribution date of the deferred
compensation. Pursuant to the Company's 1994 Independent Directors' Stock Option
Plan, an Independent Director who is elected to the Board of Directors
automatically receives an option to purchase 3,000 shares of Common Stock and
any Independent Director who continues to serve as a director following an
annual meeting of shareholders automatically receives an option for 1,000 shares
of Common Stock. The respective Chairmen of the Audit and Compensation
Committees automatically receive an additional option to purchase 2,000 shares
of Common Stock as of the first committee meeting following an annual meeting of
shareholders. The exercise price of these options is the fair market value of
the underlying shares on the date of grant. The options become exercisable one
year from the date of grant and have a ten year term.
AGREEMENTS WITH CERTAIN OFFICERS
In April 1991, Dr. Scott and the Company entered into a five-year
employment agreement which renews automatically each year, unless either party
gives notice of nonrenewal, and terminates in any event when Dr. Scott reaches
age 70. The employment agreement provides for an annual base salary of $400,000,
which is to be reviewed annually by, and can be increased at the discretion of,
the Compensation Committee. Dr. Scott is also entitled to incentive compensation
in an amount determined at the discretion of the Compensation Committee, based
on its consideration of the Company's financial results, the development,
implementation and attainment of strategic business planning goals and
objectives, increases in the Company's revenues and operating profits, and other
factors deemed relevant by the Compensation Committee in evaluating Dr. Scott's
performance. Although not a requirement, the target for Dr. Scott's incentive
compensation is two percent of the Company's earnings before interest and taxes,
not to exceed his annual base salary. In addition, the Compensation Committee
may grant Dr. Scott discretionary bonuses from time to time.
In its discretion, the Compensation Committee may award any incentive or
discretionary bonus compensation payable to Dr. Scott as an immediately payable
cash payment, a deferred cash payment or in nonqualified stock options. A range
of valuation for any such options will be established by the Compensation
Committee using the Black-Scholes or binomial pricing model, or other recognized
pricing model, or using the assumptions and specifications adopted by the
Securities and Exchange Commission (the "Commission") which govern the
disclosure of executive compensation in proxy statements and other Commission
filings. Any such options will expire after the earlier to occur of the tenth
anniversary of the termination of Dr. Scott's employment, the date of Dr.
Scott's 70th birthday or the expiration of the maximum term of such options set
forth in the stock option plan pursuant to which such options are granted.
14

<PAGE>
In the event of Dr. Scott's disability prior to the age of 70, he would be
entitled to base compensation, incentive compensation and bonus compensation for
twelve months. The bonus compensation would equal the average of the bonus
compensation paid or payable to Dr. Scott during the thirty-six months preceding
the disability. The incentive compensation would equal the greater of (i) the
average of the incentive compensation paid or payable to Dr. Scott during the
thirty-six months preceding the disability or (ii) an amount equal to (x) 50% of
Dr. Scott's base salary for any year in which the Company's revenues and
operating profits increased 12% over the prior year, (y) 75% of Dr. Scott's base
salary if the Company's annual revenues and operating profits increased 17% over
the prior year or (z) 100% of Dr. Scott's base salary if the Company's annual
revenues and operating profits increased 22% over the prior year. If the
disability is continuous for a period of twelve consecutive months, Dr. Scott
would be entitled to receive 75% of his base salary and the averages of both
incentive compensation and bonus compensation paid or payable during the
thirty-six months preceding the disability, which amount shall be increased by
five percent annually. In the event of Dr. Scott's death prior to the age of 70,
his surviving spouse (or his estate in the event of her death or remarriage)
would be entitled to receive for ten years an amount equal to Dr. Scott's base
salary and the average of both incentive compensation and bonus compensation
paid or payable during the thirty-six months preceding his death, which amount
shall be increased by five percent annually.
If the Company terminates Dr. Scott without cause, Dr. Scott would be
entitled to receive for the remainder of the then existing five-year term of the
agreement his base salary and the averages of both incentive compensation and
bonus compensation paid or payable during the thirty-six months preceding
termination, which amount shall be increased by five percent annually. In the
event that Dr. Scott terminates his employment agreement as a result of the
Company's material breach thereof, which breach remains uncured for 60 days
after written notice, Dr. Scott would be entitled to receive compensation equal
to that payable to him upon termination by the Company without cause.

Effective June 1, 1996, the Company entered into an employment agreement
with Mr. Piemont pursuant to which Mr. Piemont became employed as Chief
Executive Officer and President of the Company and will be nominated for
election to the Board of Directors at such time as a directorship is available
and, if so elected to the Board of Directors, to the Executive Committee. The
agreement provides for an initial term through December 31, 1996, which, in the
event of extension and renewal, would extend through May 31, 1999, and
automatically renew annually thereafter. Pursuant to the employment agreement,
Mr. Piemont is entitled to receive an initial base salary of $350,000, which may
be increased on the basis of criteria established by the Compensation Committee,
and a bonus not to exceed 50% of base salary based on the attainment of
specified performance criteria. Pursuant to the agreement, the Company also
granted to Mr. Piemont options under the Company's 1987 Non-qualified Stock
Option Plan to purchase 200,000 shares of Common Stock at an exercise price
equal to the fair market value of the shares of Common Stock on the date of
grant. The options are exercisable for 10 years from the date of grant and vest
at a rate of 5,555 a month over 36 months. In the event that Mr. Piemont's
employment is extended beyond December 31, 1996, each year during the term he
will be granted additional options to purchase up to 50,000 shares exercisable
for ten years at the market price on the grant date, such number of options to
be determined by the Compensation Committee based on performance criteria
established in advance.

The employment agreement provides that if the Company terminates Mr.
Piemont's employment without "cause" or if Mr. Piemont terminates his employment
for "good reason," or if the Company fails to exercise its right to renew the
agreement through May 31, 1999, then Mr. Piemont will receive a lump sum payment
equal to, (i) in the event of termination on or before May 31, 1997, an amount
equal to his then current base salary, and last incentive compensation, payable
for the period through May 31, 1999, and (ii) in the event of termination after
May 31, 1997, an amount equal to two times his then current base salary and
incentive compensation paid in the prior year. In addition, all options held by
Mr. Piemont would immediately vest and Mr. Piemont would continue to receive
benefits until May 31, 1999. "Cause" includes fraud, dishonesty, substantial and
continuing nonperformance by Mr. Piemont of assigned duties, certain criminal
conduct and a material breach of the employment agreement. "Good reason"
includes the assignment of duties inconsistent with his position or the
reduction in his duties or positions, relocation, a breach or noncompliance of
the agreement by the Company not immediately remedied and certain changes in the
composition of the Board of Directors such that independent members of the Board
of Directors on April 4, 1996 do not continue to serve as members of the Board
of Directors or any new member is elected or appointed to be Board of Directors
who was not approved by a majority of such independent directors. In the event
that a "parachute" excise tax would be imposed on any payments to Mr. Piemont,
Mr. Piemont would also be entitled to tax reimbursement payments.

In connection with its acquisition of Advanced Health Plans, Inc. in
November 1994, the Company entered into an employment agreement with Dr.
Sokolov. During the five year term of the agreement, the Company is obligated to
use its best efforts to cause Dr. Sokolov to be elected Chairman of the Board of
Directors. In addition to serving as Chairman, Dr. Sokolov will serve in other
appropriate management positions with the Company or its subsidiaries and report
directly to
15

<PAGE>

the Chief Executive Officer. Dr. Sokolov's base salary under the agreement is
$400,000 per year. He also is entitled to receive incentive cash compensation in
the amount of not less than $150,000 per year. In addition, in the event the
compensation paid to Dr. Sokolov by third parties for speaking and consulting
engagements is less than $450,000 per year, Dr. Sokolov will receive from the
Company the difference between the amount actually paid as a result of such
engagements and $450,000. The employment agreement imposes certain
confidentiality obligations upon Dr. Sokolov and contains a covenant not to
compete with the Company or solicit its employees for a specified period of
time. Under the agreement, Dr. Sokolov is entitled to participate in the
employee benefit programs available to other senior executive officers of the
Company. The agreement is terminable by either party upon 90 days' notice. If
Dr. Sokolov is terminated without cause, he is entitled to receive an ongoing
payment of base salary, minimum incentive bonus and speaking and consulting
guarantees for the remainder of the unexpired term.

In April 1995, Mr. Corman entered into an employment agreement with the
Company pursuant to which Mr. Corman became employed as Executive Vice President
and Chief Financial Officer of the Company. The effective date of the agreement
was May 1, 1995, with an initial term continuing through April 30, 1998. Under
the agreement, Mr. Corman is entitled to receive an annual base salary of
$300,000 and is eligible for an annual incentive bonus to be recommended to the
Compensation Committee by the Company's Chief Executive Officer. In addition,
pursuant to the agreement, Mr. Corman received options under the Company's 1987
Non-qualified Stock Option Plan to acquire 100,000 shares of Common Stock at an
exercise price equal the closing price on the day immediately preceding the date
of grant and which vests ratably upon the completion of each year of service
during the initial term. The employment agreement imposes certain
confidentiality obligations upon Mr. Corman and contains a covenant not to
compete with the Company or solicit its employees for a specified period of
time. Under the agreement, Mr. Corman is entitled to participate in the employee
benefit programs available to other executive officers of the Company. The
agreement is terminable by either party upon 90 days' notice. If Mr. Corman's
employment is terminated without cause or Mr. Corman ceases to be a member of
the Board of Directors for other than (i) Mr. Corman's resignation, (ii) a
change in control (defined to mean the acquisition of 51% or more of the
Company's voting stock by a person or persons acting in concert), or (iii) a
determination that Mr. Corman is not capable or fit to serve, Mr. Corman would
be entitled to receive a lump sum payment equal to the greater of his base
salary for the remainder of the initial term or an amount equal to his annual
base salary.

In December 1994, in connection with the Company's acquisition of Health
Enterprises, Inc. ("Health Enterprises"), the Company entered into an employment
agreement with Dr. Mahoney pursuant to which Dr. Mahoney became employed as
President of Health Enterprises. The effective date of the agreement was January
1, 1995, with an initial term continuing through December 31, 1995 and, if not
terminated earlier, for successive years through December 31, 1997. Mr.
Mahoney's base salary under the agreement was $250,000 per year, subject to
annual review and adjustment by Health Enterprises' Board of Directors. The
agreement also provided for an annual bonus, of up to $40,000 in 1995, upon
attainment of certain mutually agreed upon objectives. The employment agreement
imposed certain confidentiality obligations upon Dr. Mahoney and contained a
covenant not to compete with the Company or solicit its employees for a
specified period of time. The parties to the agreement mutually agreed to
terminate the agreement as of January 1, 1996.

In June 1995, the Company entered into an employment agreement with Mr.
Singley. The effective date of the agreement was May 15, 1995, with an initial
term continuing through May 14, 1998. Under the agreement, Mr. Singley had
primary responsibility for the Company's interests in Florida and reported
directly to the Chief Executive Officer. Mr. Singley's base salary under the
agreement was $280,000 per year. He also received certain benefits associated
with his relocation from North Carolina to Florida. The employment agreement
imposed certain confidentiality obligations upon Mr. Singley and contained a
covenant by Mr. Singley not to compete with the Company or solicit its employees
for a specified period of time. The Company and Mr. Singley mutually agreed to
terminate this agreement as of April 30, 1996.

Pursuant to the 1987 Non-qualified Stock Option Plan of the Company (the
"NSO Plan"), all stock options granted to employees under the NSO Plan will
become fully vested in the event of a change of control (as defined in the NSO
Plan) if and when an optionholder's (i) employment is terminated for any reason
other than death, disability, retirement or cause, (ii) duties and
responsibilities are materially changed or decreased without his consent, (iii)
compensation is materially reduced or adversely restructured without his
consent, or (iv) compensation is not maintained at a level commensurate with
similarly situated executives of the Company. For purposes of the NSO Plan,
cause means an optionholder's total failure to perform any of the normal duties
of employment, conviction of any crime relating to misuse of funds or assets of
the Company, or fraud or embezzlement of the funds or assets of the Company.

<PAGE>

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

Mr. Hatcher and Dr. Janeway served as members of the Compensation Committee
during 1995. From January through April 1995, Mr. Corman also served as a member
of the Compensation Committee. Neither Mr. Hatcher nor Dr. Janeway has ever
served as an officer or employee of the Company or any of its subsidiaries.
Prior to his appointment as Executive Vice President and Chief Financial Officer
in May 1995, Mr. Corman had not served as an officer or employee of the Company
or any of its subsidiaries.

COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
GENERAL

The goals of the Company's compensation program for executive officers are
to pay competitively, to base compensation on the attainment of performance
objectives and to establish compensation levels that will enable the Company to
attract and retain physicians and other persons as key executives. To achieve
these goals, the Company has established a compensation program consisting of
three principal components. The components are base salary, cash incentive bonus
awards and discretionary bonuses in the form of equity-based compensation
consisting primarily of qualified (i.e., incentive) and nonqualified stock
options. The Company strives to structure its compensation program to enable it
to attract, retain and reward executive officers whose contributions are
critical to the long-term success of the Company.

To ensure that compensation is competitive, the Company subscribes to two
nationally recognized data bases which compile executive compensation data with
respect to publicly-traded nonmanufacturing companies (including some healthcare
organizations) having revenues comparable to the Company's. Of these two data
bases, one consists of 394 companies and the other consists of 232 companies.
Although the companies included in these data bases are not identical to the
companies included in the Managed Care/Health Care Services Composite Index used
in the Corporate Performance Graph, the Company believes that the data base
companies more accurately reflect the market in which the Company competes for
executive talent. The base salaries and incentive bonus award programs for
presidents of the Company's subsidiaries and divisional managers are generally
targeted to be not less than the 50th percentile nor more than the 75th
percentile in the data base surveys.
The Company pays a premium for physicians that are key executives. In order
to recruit and retain physicians as executive officers, it is necessary to pay
competitively in the market compared to what such a physician could earn in
private professional practice. This necessitates an adjustment to compensation
that places the physician executives near the upper ranges of the parameters as
determined in the executive compensation surveys.

The following discussion regarding the base salaries and incentive bonus
awards for the Company's executive officers excludes Drs. Scott, Sokolov and
Mahoney and Messrs. Piemont, Corman and Singley, whose base salaries and
incentive bonuses are governed by the terms of employment agreements with the
Company. The employment agreements entered into with Drs. Sokolov and Mahoney
were negotiated in connection with acquisitions effected by the Company in 1994.
See "Executive Compensation -- Agreements with Certain Officers."

BASE SALARY
In addition to competitive compensation data gathered from the database
surveys, the Company considers the sustained performance of its executives in
establishing base salaries, which involves length of service with the Company,
individual performance, scope of responsibilities and successful management of
operating subsidiaries or divisions. Determining successful management is based
on both qualitative factors, such as leadership qualities, and quantitative
factors, such as growth of revenues and operating earnings and management of
expenses.

Historically, including in 1995, the Chief Executive Officer would evaluate
the overall performance of the other executives named in the Summary
Compensation Table as well as the performance of other key executives. Financial
and business goals and objectives would be discussed with key executives and
regular meetings of key executives would be held to discuss business strategies,
financial and business performance, budgeting matters and strategic planning
matters. An executive's overall evaluation would be a combination of a
qualitative review by fellow executives and the Chief Executive Officer and the
attainment of established business and financial objectives. Pursuant to the
Engagement Letter with Price Waterhouse, during the term of the Engagement
Letter, the Plan Managers will recommend certain compensation decisions to the
Compensation Committee.

<PAGE>

The recommendation for a particular base salary level would be determined
primarily by the Chief Executive Officer based on the above factors, with no
specified weight being given to any particular performance factor or business or
financial objective. The recommendations, together with statistical data from
the executive compensation data bases subscribed to by the Company, would be
presented to the Compensation Committee for review and approval. Because the
financial goals established for determining adjustments to base salary were not
met in 1995, the only adjustments in base salaries for executive officers made
in 1995 were related to promotions or changes in responsibility.

INCENTIVE BONUS AWARDS
Early in each fiscal year, the Chief Executive Officer determines the
potential incentive bonus available for each executive and submits his
recommendations to the Compensation Committee for approval. The potential
incentive bonus generally falls between 10% and 35% of the executive's annual
base salary and is based upon the achievement by the executive's business unit
or subsidiary of specified financial performance goals. Incentive awards
generally are paid in cash on a quarterly basis if the relevant business unit or
subsidiary meets or exceeds financial performance goals set for the quarter.
None of the factors considered in determining an executive's incentive bonus is
assigned a specific weight. Incentive bonuses are generally awarded to all
executives if substantially all operating subsidiaries and business units meet
or exceed the established goals. Because the financial goals established for the
payment of incentive compensation were not met in 1995, no incentive bonuses
were awarded to executive officers during the year except where required by
contract.
DISCRETIONARY BONUS AWARDS/EQUITY BASED COMPENSATION

The Company also has rewarded its executives with discretionary
compensation awards. These discretionary compensation awards generally take the
form of incentive stock options and nonqualified stock options. Through the
granting of stock options, the Company seeks to align the interests of key
employees more closely with those of the Company's shareholders by motivating
and rewarding actions which lead to long-term value creation for shareholders.
In addition, the Company recognizes that stock options are a necessary part of
its competitive compensation program which, as discussed above, is designed to
attract and retain qualified executives. As previously mentioned, the companies
included in the data bases used for compensation comparisons are not identical
to those included in the indexes used in the Corporate Performance Graph because
the Company believes that the data base companies more accurately reflect the
market in which the Company competes for executives. The discretionary bonus
awards are generally targeted to be in the median range of such data base
surveys. Generally, options granted to executives and other employees do not
vest for at least three years in order to encourage executives and other key
employees to remain in the employ of the Company and to encourage a medium-term
perspective.

In 1995, the Company used incentive and nonqualified stock options to
achieve the competitive compensation levels it determined to be necessary for a
number of key executives, including four of the Named Executive Officers. The
options granted to executive officers in 1995 vest over three to five years and,
accordingly, are a form of medium-term compensation. The options were granted by
the Compensation Committee acting as the stock option committee under the
Company's 1991 Stock Option Plan and the Company's 1987 Stock Option Plan. In
determining the number of options granted, the Compensation Committee received a
recommended list of key employees that was compiled by the Chief Executive
Officer and the operating subsidiary presidents. In determining the size of the
individual option awards, the number of outstanding unvested options held and
the size of previous option awards were not considered.
In addition, the Company implemented an option replacement program in 1995
for key employees who were not then executive officers. Under this program,
selected employees received one option for every two options surrendered. The
exercise price of the newly issued options was the market price of the Common
Stock on the date of grant. The exercise dates of the replacement options are
the same as the dates provided in the original grants.

CHIEF EXECUTIVE OFFICER'S COMPENSATION

Dr. Scott served as the Company's Chief Executive Officer throughout 1995.
The compensation of Dr. Scott is determined pursuant to the terms of his
employment agreement with the Company. See "Executive Compensation -- Employment
Agreements." Dr. Scott's employment agreement provides for an annual base salary
of $400,000 and a cash incentive bonus based on a percentage of the Company's
earnings before taxes. The agreement also authorizes the Compensation Committee,
in its discretion, to adjust Dr. Scott's annual base salary and to award
additional bonus compensation. Due to the failure of the Company to meet
financial performance goals set for the second quarter of 1995, the Company and
Dr. Scott, at Dr. Scott's initiative, mutually agreed to reduce Dr. Scott's
annual base salary under his employment agreement to $240,000 for the remainder
of 1995. This arrangement became effective on August 1, 1995. Dr. Scott did not
receive an incentive bonus for 1995. He was, however, awarded a discretionary
bonus in the form of nonqualifed stock options which vest on the

<PAGE>
third and fifth anniversaries of the date of grant. The award of stock options
to Dr. Scott was motivated by a desire to better align all executive officers'
compensation with the long-term financial performance of the Company. The number
of stock options awarded to Dr. Scott was deemed appropriate relative to the
option grants made to other executive officers.

As noted above, on May 29, 1996, Dr. Scott was placed on sabbatical leave
from his positions as President and Chief Executive Officer of the Company.
Joseph G. Piemont, formerly Executive Vice President and General Counsel of the
Company, has been appointed by the Board to serve as President and Chief
Executive Officer. Mr. Piemont's employment agreement is described above under
"Agreements With Certain Officers."

SECTION 162(M) OF THE INTERNAL REVENUE CODE
The Company does not expect Section 162(m) of the Code and the proposed
regulations thereunder (collectively, "Section 162(m)") to affect the
deductibility for federal income tax purposes of the compensation of the
Company's five highest paid executive officers in 1995. If and when the
deductibility of the compensation of such officers may be impacted by Section
162(m), the Company intends to review the applicability of Section 162(m) to the
Company's compensation programs, including its potential impact on stock options
awarded under the Company's stock option plans, and to determine the Company's
policy with respect to its compliance with Section 162(m).
COMPENSATION COMMITTEE
Robert V. Hatcher, Jr., Chairman
Richard Janeway, M.D.
19

<PAGE>
CORPORATE PERFORMANCE GRAPH
The following graph compares the yearly percentage change in the Company's
cumulative total shareholder return on the Common Stock for each of the last
three fiscal years with the cumulative total return of (i) the S & P 500 Index
and (ii) a composite of eight managed care/health care services companies. This
composite consists of: Phycor, Inc.; Pacific Physicians Services, Inc.; Medaphis
Corporation; Humana Inc.; Healthsource, Inc.; U.S. Healthcare, Inc.; Coventry
Corporation; and Physicians Corporation of America. The Company has selected
these peer issuers based on the greater similarity of their businesses to the
Company's business than those companies included in the S & P Health Care
Composite Index.

COMPARISON OF FIVE YEAR CUMULATIVE RETURN
AMONG COASTAL PHYSICIAN GROUP, INC., S&P 500 INDEX
AND MANAGED CARE/HEALTH CARE SERVICES COMPOSITE INDEX

(Graph appears here)

(plot points appear here customer to fill in)

<PAGE>
CERTAIN TRANSACTIONS

The Company has entered into various transactions and has continuing
relationships with American Alliance Holding Company ("Alliance") and its
affiliates, Century Insurance and Medical Risk Prevention Consultants, Inc.
("MRPC") and affiliates thereof. Dr. Scott is the beneficial owner of all of the
outstanding shares of common stock of Alliance and, as reported in Dr. Scott's
preliminary proxy, may be deemed to share voting and investment power of shares
of Common Stock held by Century Insurance. These transactions and relationships
are described below.

The Company and certain of its subsidiaries sublease office space in
Durham, North Carolina, consisting of approximately 49,000 square feet, from
Alliance under sublease agreements which are generally renewed annually in July.
The building is owned by Century Insurance which leases the building to
Alliance. During the year ended December 31, 1995, the Company paid Alliance
approximately $745,000 under these sublease agreements. Under the sublease
agreements, the Company is contingently liable to the holder of a first mortgage
on the property for the total rentals specified in the prime lease. The prime
lease commenced in August 1988 and has a fifteen-year term requiring minimum
lease payments of approximately $788,000 per year for years one through five,
$959,000 for years six through ten and $1,166,000 per year for years eleven
through fifteen.

The Company paid approximately $2,330,000 in insurance premiums to Century
Insurance for professional liability insurance for itself and its subsidiaries
for the year ended December 31, 1995. The Company paid MRPC approximately
$387,000 for consulting services related to risk management assistance provided
by the Company to certain of its hospital clients for the year ended December
31, 1995. The Company received approximately $1,222,000 for certain computer,
financial, statistical and other advice and services provided to Alliance and
its subsidiaries for the year ended December 31, 1995.

The Company leases an office facility in Durham, North Carolina, consisting
of approximately 27,000 square feet from Chateau LLC, which is controlled by Dr.
Scott. The Company paid approximately $258,000 to Chateau LLC for this space
during 1995. The Company also leases 3,600 square feet of space in Rocky Mount,
North Carolina from Durham Investment Corp. and 43,852 square feet of space in
Ft. Lauderdale, Florida from Coral Ridge LP, which entities are also controlled
by Dr. Scott. During 1995, the Company paid approximately $90,000 for the Rocky
Mount space and $157,000 for the Ft. Lauderdale space. In addition, the Company
leases a clinical facility in Fayetteville, North Carolina, consisting of
approximately 5,000 square feet, from Sunco Properties, a general partnership in
which Drs. Scott and Walls each have a 50% interest. During 1995, the Company
paid Sunco Properties approximately $68,000.

From time to time during 1995, the Company chartered two airplanes owned by
Alliance Aviation, Inc. ("Alliance Aviation"), a wholly-owned subsidiary of
Alliance. Charter fees paid by the Company to Alliance Aviation during 1995
totaled approximately $848,000. On March 31, 1995, the Company purchased one of
these airplanes from Alliance Aviation. The $6,600,000 purchase price was based
upon a third-party appraisal performed on March 6, 1995. The Board of Directors
authorized the purchase of the airplane on March 28, 1995. The Company sold the
airplane in May 1996 for $6,200,000.

In connection with the relocation of his family from North Carolina to
Florida, Mr. Singley received advances during 1995 from the Company in the
amount of $145,147. Under the promissory note issued to the Company by Mr.
Singley and his wife for such advances, the principal amount advanced bears
interest at an annual rate of three percent. Interest under the note is payable
monthly. The principal amount is to be repaid on the earlier of (i) the sale of
Mr. Singley's principal residence in Florida, (ii) the date which is 180 days
subsequent to the termination of Mr. Singley's employment for any reason or
(iii) August 1, 1998.
21

<PAGE>

PROPOSAL 2

APPROVAL OF CONTINUED IMPLEMENTATION OF THE COMPREHENSIVE BUSINESS PLAN

To enable shareholders to demonstrate their support for the continued
implementation of the Comprehensive Business Plan, an aggressive recovery
approach that the Board approved and adopted to revitalize the Company's
operations, restore profitability and maximize shareholder value of the Company,
the Board urges shareholders to adopt the following resolution:

RESOLVED, that the shareholders of Coastal Physician Group, Inc.
("Coastal"), believing that the most effective way to restore the
profitability of, and maximize the value of their investment in, Coastal is
to follow the Comprehensive Business Plan approved and adopted by the Board
of Directors, hereby approve the continued implementation of the
Comprehensive Business Plan.

As more fully described above under "Background," Dr. Scott presided as
President and Chief Executive Officer over a sharp decline in the Company's
profitability and market value. To reverse this decline, the Board of Directors
first retained Price Waterhouse's national business turnaround services unit to
conduct an intensive evaluation of the Company's operations and help return the
Company to profitability. In March of this year, based on recommendations of
senior management and Price Waterhouse, the Board approved the implementation of
the Management Action Plan that provided for (1) a review of all aspects of the
Company's operations and business units and (2) the implementation of actions to
improve the cash flow and financial results of the Company as a whole and to
improve the contribution of each business unit to the Company's overall
financial and strategic objectives. In April of this year, the Board further
unanimously voted to engage Price Waterhouse to implement the Management Action
Plan and formed the Independent Committee to supervise the Price Waterhouse Plan
Managers.

Shortly after engaging the assistance of Price Waterhouse, the Company
retained the services of Morgan Stanley to assist the Company and Price
Waterhouse in developing an overall and comprehensive strategic and financial
plan to complement the Company's operational improvements. Following a study of
alternatives available to the Company undertaken in conjunction with Price
Waterhouse and Morgan Stanley, and based on the strong recommendations of senior
management, the Board, in July of this year, approved the Strategic and
Financial Plan, which will focus on (i) the divestiture of certain clinical
operations and other non-core businesses leaving the Company with the strategic
hospital-based contract services and billing businesses, and (ii) the
refinancing and ultimate paydown of debt.

Specifically, the first step of the Strategic and Financial Plan calls for
the exit of the Company from clinical operations and non-strategic assets,
leaving in place the core hospital-based contract services and billing
businesses. Morgan Stanley and other investment banking firms have already begun
to actively market selected assets, including the Company's clinical operations
in Florida, Maryland, New Jersey and North Carolina, its Preferred Provider
Organization (PPO) in North Carolina, and its New York-based prepaid health
services plan for Medicaid recipients. Thus, the Company will concentrate its
efforts on its hospital-based and other contract services (Coastal Physician
Services, Coastal Emergency Services, MedStaff, Coastal Government Services and
Coastal Correctional Healthcare), business management services (Healthcare
Business Resources and FirstCollect) and its Southeastern managed care
operations (Doctors Health Plan and Healthplan Southeast).

The second step of the Strategic and Financial Plan calls for the
refinancing or paydown of debt. Upon realization of the benefits of operational
improvements of the Management Action Plan and the proceeds of the sales of the
divested assets, the Company will consider alternative strategies for
refinancing the Company's debt arrangements. The Board believes that the
Strategic and Financial Plan and the Management Action Plan together enable
the Company to concentrate on the effective management of the Company's core
operations.

Each of the actions described above was the result of intensive studies
undertaken by Price Waterhouse, Morgan Stanley and management for the Board of
Directors. The Board believes that the Comprehensive Business Plan is the best
available alternative to restore the Company's profitability and truly maximize
the value of shareholders' investment in the Company.

THE BOARD OF DIRECTORS URGES YOU TO VOTE FOR THE CONTINUED IMPLEMENTATION
OF THE COMPREHENSIVE BUSINESS PLAN.

<PAGE>

PROPOSAL 3

CONSIDERATION OF RESOLUTION TO FORM THE SCOTT COMMITTEE

Dr. Scott has announced that he intends to bring before the 1996 Annual
Meeting a non-binding resolution of shareholders seeking the appointment by the
Board of Directors of a new committee consisting of purported "independent" non-
management directors -- of which any persons nominated for election by Dr. Scott
would, if elected, be members -- to consider and recommend to the full Board the
best available means by which shareholder value may be maximized (the "Scott
Committee").

THE BOARD RECOMMENDS A VOTE AGAINST THIS PROPOSAL.

The Board believes that the resolution proposed by Dr. Scott is a
transparent endeavor to regain control of the Board -- and the Company -- under
the guise of "value maximization." As noted above, Dr. Scott presided over a
decline in excess of 80% in the market value of the Company during the period
from February of 1994 until he was placed on sabbatical leave by the Board in
May of this year. In the Board's view, a principal factor behind the decline in
the Company's performance was Dr. Scott's failure, as President and Chief
Executive Officer, to successfully integrate new businesses undertaken by the
Company (at Dr. Scott's behest) into the operations of the Company and implement
effective management procedures to control the Company's existing businesses.

Moreover, Dr. Scott's decision to seek a new committee is completely
contrary to his earlier decisions. As a Director, Dr. Scott himself voted in
favor of the Management Action Plan, and voted in favor of creating the existing
Independent Committee that supervises the implementation of the Management
Action Plan and that approved and recommended to the full Board the Strategic
and Financial Plan. Notably, prior to announcing his proxy fight, Dr. Scott
never suggested to the Board that the entire Company be sold.

Dr. Scott further purports to seek an "independent" committee of directors.
Dr. Scott's proposal, however, would define as "independent" one of his own
lawyers, whose firm has previously represented Dr. Scott's interests against the
interests of the Company. Moreover, Dr. Scott fails to specifically exclude
himself from being able to serve on such committee, stating in his preliminary
proxy statement only that he "does not intend" to serve on such committee.
Unlike Dr. Scott's proposed committee and proposed committee members, the voting
members of the existing Independent Committee are all truly independent
directors.

The Board believes that Dr. Scott's resolution is simply a ploy by which
Dr. Scott would be enabled to choose which Directors will sit on the committee
charged with the future of the Company. Your Board has already committed to and
commenced a plan -- the Comprehensive Business Plan -- to maximizing shareholder
value of the Company. It has already (with the support of Dr. Scott) formed the
Independent Committee to direct the Company's pursuit of the Management Action
Plan. And it has followed through on the initial action by retaining independent
experts and adopting -- upon the recommendation of the Independent Committee and
despite Dr. Scott's vote against -- a comprehensive Strategic and Financial
Plan.

Moreover, Dr. Scott's plan would return control of the Company to Dr. Scott
and his supporters. Dr. Scott's preliminary proxy materials indicate that if his
nominees are elected Dr. Scott and his nominees will constitute only a minority
of the Board and will not be able to cause any action to be taken or not taken
by the Board. Dr. Scott did not tell shareholders that if his nominees are
elected, they, together with Dr. Scott and his two supporters that are already
on the Board (Dr. Walls and Mr. Hemingway), would constitute a majority of the
Board, and a quorum, and could cause the Board to take action without consent of
any other director or stockholder. Your Board believes that shareholders should
be aware of Dr. Scott's disingenuous attempt to distance himself from control of
the Board, and should consider his resolution in that context.

THE BOARD OF DIRECTORS URGES YOU TO VOTE AGAINST THE RESOLUTION SEEKING
FORMATION OF THE SCOTT COMMITTEE.

PROPOSAL 4

RATIFICATION OF SELECTION OF INDEPENDENT PUBLIC ACCOUNTANTS
The firm of KPMG Peat Marwick LLP, independent certified public
accountants, has been the Company's auditor since 1987 and has advised the
Company that it does not have any direct financial interest or indirect
financial interest in the Company. The Board of Directors, on the recommendation
of the Audit Committee, has selected KPMG Peat Marwick LLP
23

<PAGE>
as the Company's independent certified public accountants for the year ending
December 31, 1996, subject to the approval of the shareholders. One or more
representatives of KPMG Peat Marwick LLP will be present at the Annual Meeting,
will have the opportunity to make a statement if they desire to do so and are
expected to be available to respond to appropriate questions from shareholders.
THE BOARD OF DIRECTORS RECOMMENDS THAT SHAREHOLDERS VOTE "FOR" THE PROPOSAL TO
RATIFY THE SELECTION OF KPMG PEAT MARWICK LLP AS THE COMPANY'S INDEPENDENT
CERTIFIED PUBLIC ACCOUNTANTS FOR THE YEAR ENDING DECEMBER 31, 1996.
CERTAIN LEGAL PROCEEDINGS

On July 9, 1996, Dr. Scott and Bertram E. Walls, M.D., filed, on their own
behalf and derivatively on behalf of the Company, an action in the General Court
of Justice of the State of North Carolina in the County of Durham against the
Company and Dr. Sokolov and Messrs. Piemont and Corman. The plaintiffs allege,
among other things, that certain members of the Board of Directors breached
their fiduciary duties and wasted corporate assets by removing Dr. Scott from
his position as President and Chief Executive Officer of the Company and by
approving the entry by the Company into an employment agreement with Mr.
Piemont. The plaintiffs allege that these actions were taken to wrongfully
remove Scott and to enrich the defendants at the expense of the Company and its
stockholders, and that these and other recent actions of the Board of Directors,
including the approval of efforts to sell certain corporate assets, were taken
in breach of the Board of Directors' duty of care. The complaint seeks as
relief, among other things, an order of the court enjoining the Board of
Directors from proceeding with potential asset sales, declaring the Piemont
employment agreement unenforceable, declaring the Board of Directors' conduct in
placing Dr. Scott on leave to be contrary to Delaware law and requiring the
Board of Directors to consider ratifying a five-year contract for insurance to
be provided by Century Insurance, an entity affiliated with Dr. Scott. In
addition, the complaint seeks damages in an unspecified amount in excess of
$10,000.00 against the individual defendants. The Company believes that these
allegations are without merit and intends to defend the actions vigorously.

COST AND METHOD OF SOLICITATION

The cost of preparing and mailing this Proxy Statement, the Notice of
Annual Meeting of Shareholders and the enclosed proxy will be borne by the
Company. In addition to the use of mail, directors, officers and employees of
the Company may solicit proxies personally and by telephone or telecopy. The
Company will pay for the cost of these solicitations, but these individuals will
receive no compensation for soliciting proxies other than their regular
salaries. The Company may request banks, brokers and other custodians, nominees
and fiduciaries to forward copies of the proxy material to their principals and
to request authority for the execution of proxies. MacKenzie Partners, Inc.
("MacKenzie") has been retained by the Company to assist in the solicitation of
proxies. The fee for such services will be approximately $ , plus
reimbursement of reasonable out-of-pocket expenses. The Company estimates that
approximately employees of MacKenzie will be involved in the solicitation
of proxies on behalf of the Company. The Company will also reimburse brokers,
fiduciaries, custodians and other nominees, as well as persons holding stock for
others who have the right to give voting instructions, for out-of-pocket
expenses incurred in forwarding this proxy statement and related materials to,
and obtaining instructions or authorizations relating to such materials from,
beneficial owners of the Company's Common Stock.

OTHER BUSINESS
Any shareholder who is a shareholder on the Record Date and at the time of
the notice described below may bring business before the Annual Meeting. Written
notice of the shareholder's intent to bring such business before the Annual
Meeting must be delivered to the Secretary of the Company not later than the
close of business on [INSERT DATE]. Such notice must set forth (i) a brief
description of the business desired to be brought before the meeting and the
reasons for considering the business, and (ii) the name and address of the
shareholder, the class and number of shares of capital stock of the Company
owned by such shareholder and any material interest of such shareholder in the
proposed business. Shareholders proposing such business must also comply with
all applicable requirements of the Exchange Act and the regulations promulgated
thereunder with respect to business proposed pursuant to such notice. If the
chairman of the meeting determines and declares that the proposing shareholder
has not complied with this procedure, the business shall not be considered.

In the press release announcing his intention to nominate two directors for
election at the 1996 Annual Meeting and in preliminary proxy materials filed
with the Securities and Exchange Commission, Dr. Scott announced his intention
to seek

<PAGE>

approval of the non-binding resolution described in Proposal 3 above. As of July
19, 1996, the Company has not received the required notice of such proposed
business as discussed above.

Except as described above, the Board of Directors knows of no other
business to be brought before the Annual Meeting. If, however, any other
business should properly come before the Annual Meeting, the persons named in
the accompanying proxy will vote proxies as in their discretion they may deem
appropriate, unless they are directed by a proxy to do otherwise.
COMPLIANCE WITH SECTION 16(A) OF THE
SECURITIES EXCHANGE ACT OF 1934
Section 16(a) of the Exchange Act requires the Company's officers and
directors, and persons who own more than ten percent of the Common Stock, to
file initial reports of ownership and reports of changes in ownership of the
Common Stock with the Commission. Officers, directors and greater than ten
percent shareholders are required by Commission regulations to furnish the
Company with copies of all such Section 16(a) reports they file.
To the Company's knowledge, based solely on its review of the copies of
such reports received by the Company and written representations from certain
reporting persons that no other reports were required for those persons, during
fiscal 1995, all Section 16(a) filing requirements applicable to the Company's
officers, directors and greater than ten percent shareholders were complied
with, except that Jonathan E. Kennedy's initial Form 3 after he became Vice
President, Corporate Controller and Chief Accounting Officer of the Company on
June 15, 1995 was filed late.
INFORMATION CONCERNING SHAREHOLDER PROPOSALS

Pursuant to Rule 14a-8 promulgated under the Exchange Act, any shareholder
proposal intended for inclusion in the Company's proxy statement and form of
proxy relating to the Company's 1997 Annual Meeting of Shareholders must be
received in writing by the Secretary of the Company at the Company's principal
executive offices on or before [DATE]. Pursuant to the Company's Bylaws, notice
of any business to be brought by shareholders before a meeting of shareholders
must be received by the Secretary of the Company not less than 45 days nor more
than 60 days prior to the date of the meeting; provided, however, that in the
event that less than 45 days' notice or prior public disclosure of the date of
the meeting is given, such notice must be received not later than the close of
business on the tenth day following the day notice of the meeting date is mailed
or public disclosure is made and provided further that such notice must be
received not later than the close of business on the seventh day preceding the
day on which the meeting is to be held.

By Order of the Board of Directors,
<TABLE>
<S> <C>
Jacque J. Sokolov, M.D. Joseph G. Piemont
CHAIRMAN PRESIDENT AND CHIEF EXECUTIVE OFFICER
</TABLE>
Durham, North Carolina
, 1996

If you have any questions or need assistance in voting your shares, please
contact MacKenzie Partners, Inc. at its toll free number: 1-800-322-2885.

<PAGE>
APPENDIX I

SUPPLEMENTAL PARTICIPANT INFORMATION

Set forth below is (a) the name and business address of each of the
participants and their associates (except the Company) in the solicitation made
pursuant to this Proxy Statement, and (b) the dates, types and amounts of each
participant's purchases and sales of the Company's debt and equity securities
within the past two years.

<TABLE>
<CAPTION>
NAME AND DATE OF PURCHASE (P) TYPE AND
BUSINESS ADDRESS (1) TRANSACTION OR SALE (S) AMOUNT (2)
<S> <C> <C> <C>
Jacque J. Sokolov, M.D.................................................
Advanced Health Plans, Inc.
9000 Sunset Blvd., Suite 800
Los Angeles, California 90069
Robert V. Hatcher, Jr..................................................
8401 Patterson Avenue
Suite 106
Richmond, Virginia 23229
Stephen D. Corman...................................................... May 9, 1995 P 1,700 shares
Executive Vice President and Chief Financial Officer
Coastal Physician Group, Inc.
2828 Croasdaile Drive
Durham, North Carolina 27705
John P. Mahoney, M.D................................................... April 3, 1995 P 11,000 shares(3)
Pathology Associates April 3, 1995 S 11,000 shares
1899 Eider Court April 6, 1995 P 11,940 shares(3)
Tallahassee, Florida 32308 April 6, 1995 S 11,940 shares
December 6, 1995 P 10,000 shares(3)
December 6, 1995 S 10,000 shares
December 8, 1995 S 35,000 shares
December 26, 1995 S 1,900 shares
December 6, 1995 S 400 shares
February 22, 1996 S 7,295 shares
March 26, 1996 S 1,000 shares
Richard Janeway, M.D................................................... December 14, 1994 P 300 shares
EVP for Health Affairs January 31, 1995 P 300 shares
Bowman Gray Medical Center March, 1995 P 100 shares
Medical Center Boulevard April 30, 1995 P 200 shares
Winston-Salem, North Carolina 27157-1003
Norman H. Chenven, M.D.................................................
Chairman and Chief Executive Officer
Austin Regional Clinic
8240 N. MoPac Expressway, St. 300
Austin, Texas 78759
Joseph G. Piemont......................................................
President and Chief Executive Officer
Coastal Physician Group, Inc.
2828 Croasdaile Drive
Durham, North Carolina 27705
Robert P. Borchert (4).................................................
Senior Vice President
Investor Relations and Corporate
Communications
Coastal Physician Group, Inc.
2828 Croasdaile Drive
Durham, North Carolina 27705
Dennis I. Simon........................................................
Senior Managing Director of
Business Turnaround Services
Price Waterhouse
400 South Hope Street
Los Angeles, California 90071-2889
Bettina M. Whyte.......................................................
Partner and National Director of
Business Turnaround Services
Price Waterhouse
1201 Louisiana, Suite 2900
Houston, Texas 77002
</TABLE>

<PAGE>

(1) The companies named in the table above, to the extent that the participants
are officers of such companies, are deemed to be associates of such
participants. The addresses of such associates are as given below.

(2) Except as noted, all of the Company's securities purchased and sold were
shares of Common Stock.

(3) Shares of Common Stock were acquired pursuant to the exercise of stock
options.

(4) As of May 31, 1996, Mr. Borchert beneficially owns less than 100 shares of
Common Stock.

In addition to the persons set forth above, Steven M. Scott, M.D., Bertram
E. Walls, M.D. and John A. Hemingway are directors of the Company, but are not
expected to solicit proxies on behalf of the Company. To the Company's
knowledge, the dates, types and amounts of each of such person's purchases and
sales of the Company's debt and equity securities within the past two years are
set forth below:

<TABLE>
<CAPTION>
NAME AND DATE OF PURCHASE (P) TYPE AND
BUSINESS ADDRESS (5) TRANSACTION OR SALE (S) AMOUNT (6)
<S> <C> <C> <C>
Steven M. Scott, M.D.................................................... November 30, 1994 P 100 shares
3711 Stoneybrook Drive
Durham, North Carolina 27705
Bertram E. Walls, M.D................................................... March 17, 1995 P 8,000 shares(7)
President and Chief Executive Officer March 17, 1995 S 8,000 shares
Century American Insurance Company
2828 Croasdaile Drive
Durham, North Carolina 27705
John A. Hemingway....................................................... May 4, 1995 P 1,000 shares
Senior Executive Vice President and
Secretary of the Company and
Chairman of the Board of
Coastal Physician Services, Inc.
2828 Croasdaile Drive
Durham, North Carolina 27705
</TABLE>

(5) The companies named in the table above, to the extent that the participants
are officers of such companies, are deemed to be associates of such
participants. The addresses of such associates are as given above.

(6) Except as noted, all of the Company's securities purchased and sold were
shares of Common Stock.

(7) Shares of Common Stock were acquired pursuant to the exercise of stock
options.

Except as set forth in the Proxy Statement or this Appendix, to the best of
the Company's knowledge, none of the participants or, in the case of clause (a)
only, any of their associates (a) owns of record or has direct or indirect
beneficial ownership of any securities issued by the Company or any of its
subsidiaries; (b) has purchased or sold any securities issued by the Company
within the past two years; (c) has incurred any outstanding indebtedness to
acquire or hold securities issued by the Company; or (d) has been a party to any
contract, arrangement or understanding with respect to any securities of the
Company during the past year.

Except as set forth in the Proxy Statement or this Appendix, to the best of
the Company's knowledge, (a) none of the participants or any of their associates
has any arrangement or understanding with respect to any future employment or
any future transactions with the Company or any of its affiliates, and (b) none
of the participants, executive officers of the Company, any person known to the
Company to own beneficially or of record more than five percent of any class of
Company voting securities, or any of their associates has entered into any
transaction or series of similar transactions with the Company or any of its
subsidiaries since the beginning of the Company's last fiscal year in which such
person had or will have a direct or indirect material interest, and no such
transactions are currently proposed.

<PAGE>

********************************************************************************

APPENDIX

PRELIMINARY PROXY MATERIALS WHITE
SUBJECT TO COMPLETION PROXY

COASTAL PHYSICIAN GROUP, INC.

PROXY SOLICITED ON BEHALF OF
THE BOARD OF DIRECTORS OF COASTAL PHYSICIAN GROUP, INC.

THE BOARD RECOMMENDS THAT YOU VOTE (1) FOR THE NOMINEES FOR DIRECTOR NAMED
BELOW, (2) FOR THE RESOLUTION APPROVING CONTINUED IMPLEMENTATION OF THE
COMPREHENSIVE BUSINESS PLAN, (3) AGAINST THE RESOLUTION SEEKING FORMATION OF THE
SCOTT COMMITTEE AND (4) FOR THE APPOINTMENT OF KPMG PEAT MARWICK LLP.

The undersigned hereby appoints Jacque J. Sokolov, M.D., Stephen D. Corman
and Joseph G. Piemont, and each of them, proxies, with power of substitution, to
represent the undersigned at the Annual Meeting of Shareholders of Coastal
Physician Group, Inc. (the "Company"), to be held at 9:00 a.m., local time, on
, 1996, at and at any adjournments
thereof, to vote all shares of common stock which the undersigned would be
entitled to vote if present in person in such manner as such proxies may
determine, and to vote on the following proposals as specified below by the
undersigned.

(1) Election of Directors: NORMAN H. CHENVEN, M.D., ROBERT V. HATCHER, JR. AND
RICHARD JANEWAY, M.D.

<TABLE>
<S> <C> <C>
[ ] VOTE FOR ALL NOMINEES LISTED ABOVE [ ] WITHHOLD AUTHORITY to vote for all (INSTRUCTION: TO WITHHOLD AUTHORITY
(except as marked to the contrary nominees listed above. TO VOTE FOR ANY INDIVIDUAL NOMINEE,
below). PRINT ONLY THE NAME(S) OF THE
PERSON(S) FOR WHOM YOU WISH TO
WITHHOLD AUTHORITY IN THE SPACE
PROVIDED BELOW)
____________________________________
</TABLE>

(2) Resolution Approving Continued Implementation of the Comprehensive Business
Plan (The Board recommends a vote FOR)

[ ] FOR [ ] AGAINST [ ] ABSTAIN

(3) Resolution Seeking Formation of the Scott Committee (The Board recommends a
vote AGAINST)

[ ] FOR [ ] AGAINST [ ] ABSTAIN

(4) Proposal to approve the appointment of KPMG Peat Marwick LLP as the
Company's independent certified public accountants for the fiscal year ending
December 31, 1996

[ ] FOR [ ] AGAINST [ ] ABSTAIN

(PLEASE SIGN AND DATE ON THE OTHER SIDE)

<PAGE>

Annual Meeting of Shareholders This proxy when properly
of executed will be voted in the
COASTAL PHYSICIAN GROUP, INC. manner directed herein by the
2828 Croasdaile Drive undersigned shareholder. IN THE
Durham, NC 27705 ABSENCE OF SPECIFIED DIRECTIONS,
THIS PROXY WILL BE VOTED IN FAVOR
OF THE ELECTION OF ALL NOMINEES
NAMED IN THIS PROXY FOR WHOM
AUTHORITY IS NOT SPECIFICALLY
WITHHELD, FOR THE RESOLUTION
APPROVING CONTINUED
IMPLEMENTATION OF THE
COMPREHENSIVE BUSINESS PLAN,
AGAINST THE RESOLUTION SEEKING
FORMATION OF THE SCOTT COMMITTEE
AND FOR APPROVAL OF THE
APPOINTMENT OF KPMG PEAT MARWICK
LLP. The proxies are also
authorized to vote in their
discretion upon such other
matters as may properly come
before the meeting or any
adjournment thereof.

If signing as attorney,
administrator, executor,
guardian, trustee or as a
custodian for a minor, please
add your title as such. If a
corporation, please sign in full
corporate name and indicate the
signer's office. If a partner,
please sign in the partnership's
name.
X
X
Dated , 1996

PLEASE SIGN EXACTLY AS NAME(S) APPEAR ABOVE, DATE AND RETURN PROMPTLY IN THE
ENCLOSED ENVELOPE.