<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 2, 1996
REGISTRATION NO. 333-
- -------------------------------------------------------------------------------
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------
UNITED PAYORS & UNITED PROVIDERS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CERTIFICATE OF INCORPORATION)
---------------
DELAWARE 6411 51-0374698
(STATE OR OTHER (PRIMARY STANDARD (IRS EMPLOYER
JURISDICTION OF INDUSTRIAL IDENTIFICATION NO.)
INCORPORATION OR CLASSIFICATION CODE
ORGANIZATION) NUMBER)
2275 RESEARCH BOULEVARD, SIXTH FLOOR
ROCKVILLE, MARYLAND 20850
(301) 548-1000
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
THOMAS L. BLAIR
CHAIRMAN OF THE BOARD, PRESIDENT AND CHIEF EXECUTIVE OFFICER
UNITED PAYORS & UNITED PROVIDERS, INC.
2275 RESEARCH BOULEVARD, SIXTH FLOOR
ROCKVILLE, MARYLAND 20850
(301) 548-1000
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE OF AGENT FOR SERVICE)
COPIES TO:
DOUGLAS P. FAUCETTE, ESQUIRE PETER J. ROMEO, ESQUIRE
THOMAS J. HAGGERTY, ESQUIRE TAMARA L. ADLER, ESQUIRE
MARY M. SJOQUIST, ESQUIRE HOGAN & HARTSON L.L.P.
MULDOON, MURPHY & FAUCETTE 555 THIRTEENTH STREET, N.W.
5101 WISCONSIN AVENUE, N.W. WASHINGTON D.C. 20004-1109
WASHINGTON, D.C. 20016 (202) 637-5600
(202) 362-0840
---------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO PUBLIC: As soon as
practicable after this Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [X] File No. 333-3814
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [X] File No. 333-3814
If delivery of this Prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
<TABLE>
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<CAPTION>
PROPOSED MAXIMUM
PROPOSED MAXIMUM AGGREGATE AMOUNT OF
TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING PRICE OFFERING REGISTRATION
SECURITIES TO BE REGISTERED REGISTERED PER SHARE PRICE(1) FEE(2)
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock $0.01 par value:
Registered hereby............. 230,000
Registered by 333-3814......... 2,530,000
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Total.......................... 2,760,000 $11.00 $30,360,000 $100
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</TABLE>
(1) Estimated in accordance with Rule 457 solely for the purpose of
calculating the registration fee.
(2) Except for the minimum fee of $100, the registration fee is included in
the registration fee of $14,832 paid in connection with Registration
Statement No. 333-3814
---------------
THE REGISTRATION STATEMENT ALSO CONSTITUTES POST-EFFECTIVE AMENDMENT NO. 1
TO REGISTRATION STATEMENT NO. 333-3814. THE PROSPECTUS CONTAINED IN THIS
REGISTRATION STATEMENT SERVES AS A COMBINED PROSPECTUS IN ACCORDANCE WITH RULE
429 UNDER THE SECURITIES ACT WITH THE PROSPECTUS FOR REGISTRATION STATEMENT
NO. 333-3814.
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<PAGE>
UNITED PAYORS & UNITED PROVIDERS, INC.
Cross Reference Sheet Showing Location in the Prospectus ("Prospectus") of
Information Required by Items of Form S-l.
<TABLE>
<CAPTION>
REGISTRATION STATEMENT ITEM AND CAPTION PROSPECTUS HEADINGS
--------------------------------------- -------------------
<S> <C>
l. Forepart of the Registration
Statement and Outside Front Cover
Page of Prospectus.................. Front Cover Page
2. Inside Front and Outside Back Cover Inside Front and Outside Back Cover
Pages of Prospectus................. Pages
3. Summary Information, Risk Factors
and Ratio of Earnings to Fixed
Charges............................. Summary; Risk Factors
4. Use of Proceeds..................... Summary; Use of Proceeds
5. Determination of Offering Price..... Underwriting
6. Dilution............................ Dilution
7. Selling Security Holders............ Not Applicable
8. Plan of Distribution................ Front Cover Page; Underwriting
9. Description of Securities to be
Registered.......................... Description of the Capital Stock of
the Company; Shares Eligible for
Future Sale
10. Interests of Named Experts and
Counsel............................. Legal Matters
11. Information with Respect to the
Registrant.......................... Front Cover Page; Summary; The
Company; Dividend Policy; Selected
Combined Financial Data;
Management's Discussion and Analysis
of Financial Condition and Results
of Operation; Business; Management;
Principal Stockholders; Certain
Transactions; Description of Capital
Stock; Financial Statements
12. Disclosure of Commission Position on
Indemnification for Securities Act
Liabilities......................... Not Applicable
</TABLE>
<PAGE>
PROSPECTUS
2,400,000 SHARES
[LOGO OR UNITED PAYORS & UNITED PROVIDERS APPEARS HERE]
COMMON STOCK
----------------
All of the shares of common stock (the "Common Stock") of United Payors &
United Providers, Inc. (the "Company" or "UP&UP") offered hereby (the
"Offering") are being issued and sold by the Company. Prior to this Offering,
there has been no public market for the Common Stock of the Company. See
"Underwriting" for a discussion of the factors considered in determining the
initial public offering price. The Common Stock has been approved for trading
on the Nasdaq National Market under the symbol "UPUP."
----------------
THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK. SEE "RISK
FACTORS" BEGINNING ON PAGE 7.
----------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
<TABLE>
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<CAPTION>
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS(1) COMPANY(2)
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<S> <C> <C> <C>
Per Share................................ $11.00 $0.77 $10.23
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Total(3)................................. $26,400,000 $1,848,000 $24,552,000
- --------------------------------------------------------------------------------
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</TABLE>
(1) The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended. See "Underwriting."
(2) Before deducting expenses payable by the Company estimated at $1.1 million.
(3) The Company has granted to the Underwriters a 30-day option to purchase up
to 360,000 additional shares of Common Stock on the same terms and
conditions as set forth above to cover over-allotments, if any. If such
option is exercised in full, the total Price to Public, Underwriting
Discounts and Commissions and Proceeds to Company will be $30,360,000,
$2,125,200 and $28,234,800, respectively. See "Underwriting."
----------------
The shares of Common Stock are offered severally by the Underwriters named
herein, subject to prior sale, when, as and if issued to and accepted by them,
and subject to certain other conditions. The Underwriters reserve the right to
withdraw, cancel or modify said offers and to reject orders in whole or in
part. It is expected that delivery of certificates representing the shares of
Common Stock offered hereby will be made at the offices of Bear, Stearns & Co.
Inc., 245 Park Avenue, New York, New York 10167, on or about July 8, 1996.
BEAR, STEARNS & CO. INC. SCHRODER WERTHEIM & CO.
The date of this Prospectus is July 2, 1996
<PAGE>
United payors & United Providers Facility Types
[PIE CHART APPEARS HERE]
United Payors & United Providers
[MAP APPEARS HERE]
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK
AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH
TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ STOCK MARKET OR OTHERWISE. SUCH
STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
THE COMPANY INTENDS TO FURNISH ITS STOCKHOLDERS WITH ANNUAL REPORTS
CONTAINING AUDITED FINANCIAL STATEMENTS AND AN OPINION THEREIN EXPRESSED BY
INDEPENDENT ACCOUNTANTS, AND WITH QUARTERLY REPORTS FOR THE FIRST THREE
QUARTERS OF EACH FISCAL YEAR CONTAINING UNAUDITED FINANCIAL INFORMATION.
2
<PAGE>
SUMMARY
The following summary is qualified in its entirety by, and should be read in
conjunction with, the more detailed information and the financial statements
(including notes thereto) appearing elsewhere in the Prospectus. Unless
otherwise indicated or the context otherwise requires, all information in this
Prospectus with regard to the capital stock of the Company, including share and
per share data, (i) has been adjusted to give effect to the conversion of the
outstanding preferred stock of the Company (the "Principal Preferred Stock")
into shares of Common Stock immediately prior to the completion of this
Offering and (ii) assumes that the Underwriters' over-allotment option will not
be exercised.
THE COMPANY
BUSINESS OPERATIONS
United Payors & United Providers, Inc. (the "Company" or "UP&UP") serves as
an intermediary between health care payors, such as insurance companies, and
health care providers, such as hospitals, by entering into contractual
arrangements designed generally to produce cost savings and other benefits for
payors and increased liquidity and improved efficiency in claims submissions
for providers. The Company derives its revenues primarily from a portion of the
price concessions offered by the providers under such contractual arrangements.
The Company enters into contracts with both providers of medical services
("Contracting Providers") and payors of medical claims ("Payor Clients"). The
Company's contracts with Contracting Providers, consisting primarily of
hospitals and, to a lesser extent, other health care providers, establish price
concessions on the charges for medical services rendered by the Contracting
Providers to beneficiaries covered by medical plans of Payor Clients. These
Contracting Providers collectively constitute the "UP&UP Network." The
Contracting Providers are not prohibited by the Company's contracts from
entering into discounted service arrangements with others, but are subject to a
contract clause providing for automatic annual renewal of the contract for
successive one-year terms unless the Contracting Provider gives written notice
of termination, typically at least 90 days prior to the renewal date. In
partial consideration for the price concessions furnished by the Contracting
Providers, the Company offers these Contracting Providers the option of
receiving a prepayment of a portion of the annual claims volume that such
Contracting Providers have with Payor Clients (the "Prepayment Option"). The
Prepayment Option is typically equal to one-twelfth of a Contracting Provider's
claims volume for the preceding twelve-month period. As of June 1, 1996, the
UP&UP Network consisted of 1,288 Contracting Providers, of which 841 were
hospitals and 447 were other health care providers.
The Company's contracts with Payor Clients, such as insurance companies,
third party administrators ("TPAs") acting as agents for other payors, self-
insured employers and unions, and government health plans, provide for
specified reductions in the amounts ordinarily payable by the Payor Clients on
medical claims submitted by Contracting Providers. The Company believes that,
consistent with representations generally made by Payor Clients to their
respective state insurance commissioners, plan beneficiaries receive the same
proportionate reduction on any co-insurance portion of the medical claims
payable by such beneficiaries under the terms of those plans. As of June 1,
1996, the Company had 35 Payor Clients. Agreements with Payor Clients provide
for automatic annual renewals. Such contracts generally may be terminated by
either party upon 90 days' notice.
The Company has sophisticated information systems capabilities, which
facilitate claims data transmission and cost repricing pursuant to UP&UP
Network price concessions. In addition, the Company conducts extensive data
analyses of encounter and cost data by specific service areas for Payor
Clients. The Company also maintains an extensive, proprietary database of
provider charges for certain medical procedures by geographic area, which is
offered to both its Payor Clients and Contracting Providers. The Company's
systems also enable claims payments to be forwarded to certain Contracting
Providers by electronic funds transfer ("EFT") through an arrangement with The
Chase Manhattan Bank, N.A. ("Chase Manhattan Bank").
3
<PAGE>
STRATEGY
The Company's strategy is:
. To increase overall claims volume by expanding the UP&UP Network of
Contracting Providers and the number of Payor Clients;
. To develop new services which allow national and other large Payor
Clients to compete more effectively in the marketplace, including the
development of capitated networks for Payor Clients; and
. To establish a national clearinghouse for claims transmissions and
EFTs by building upon its existing capabilities to promote
efficiencies in the relationships between national and other large
payors and local and regional providers.
The Company intends to pursue this strategy by: (i) marketing the Prepayment
Option and enhanced ancillary services, including claims transmissions for
Contracting Providers; (ii) developing a national network of capitated
providers by pursuing strategic alliances with physician networks ("Physician
Networks") comprised of independent practice associations ("IPAs") and
physician hospital organizations ("PHOs"); (iii) offering capitated providers
sophisticated information systems that will permit them to manage and allocate
capitation payments from national payors among the various providers in a local
health care delivery system; (iv) expanding the Company's proprietary database
of provider charges and other encounter and cost data; and (v) promoting the
use of a multifunction co-branded card that serves as both a health insurance
identification card and a VISA credit card. The Company will also seek to
acquire businesses that offer services or technologies that would expand or
supplement the Company's current business.
ORGANIZATIONAL HISTORY
The Company is a Delaware corporation and the successor to an Iowa
corporation organized in January 1995. Its business operations include the
operations of Initial Managers and Investors, Inc. ("IM&I") and certain
operations (the "Transferred Client Group") transferred from America's Health
Plan, Inc. ("AHP"). AHP is an indirect wholly-owned subsidiary of Principal
Mutual Life Insurance Company ("Principal Mutual"), which will directly or
indirectly own approximately 39.3% of the Common Stock following the Offering.
IM&I was owned by Thomas L. Blair, the founder of the Company, who will own
approximately 19.9% of the Common Stock following the Offering. The Company
also has two subsidiaries: (i) IM&I-NEWCO, Inc., a Delaware corporation
("NEWCO"), which administers the Continued Health Care Benefit Program
("CHCBP") for the United States Department of Defense and (ii) America's Health
Card Services, Inc. ("AHCS"), an Iowa corporation, which is 90% owned by the
Company and promotes a multifunction co-branded health insurance identification
card and credit card for distribution by payors.
4
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Common Stock offered by the Company(1).. 2,400,000 shares
Common Stock to be outstanding after the
Offering(1)............................ 11,200,000 shares
Use of Proceeds......................... The net proceeds from the Offering
are expected to be used (i) to fund
payments due upon exercise of
Prepayment Options granted to
Contracting Providers, and (ii) for
general corporate purposes, including
possible acquisitions.
Nasdaq National Market symbol........... UPUP
</TABLE>
- --------
(1) Excludes (i) 360,000 shares of Common Stock that may be issued pursuant to
the Underwriters' over-allotment option. (See "Underwriting"), and (ii)
shares issuable to EDICOMM, Inc. ("EDICOMM") equal to $150,000 valued at
the initial offering price. See "Business--Strategy--Establish a National
Clearinghouse."
RISK FACTORS
Prospective purchasers of the Common Stock offered hereby should carefully
consider the matters set forth in "Risk Factors," as well as other information
set forth in this Prospectus before making an investment in the Common Stock.
5
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
The following summary consolidated financial data for 1995 have been derived
from the audited financial statements of the Company. The summary consolidated
financial data for the three months ended March 31, 1996 and March 31, 1995
have been derived from the unaudited consolidated financial statements of the
Company. The unaudited pro forma consolidated financial data for the year ended
December 31, 1995 and the three months ended March 31, 1995 have been derived
from the financial statements of the Transferred Client Group, IM&I, NEWCO and
the Company. The pro forma consolidated financial data and the consolidated
financial data for the three months ended March 31, 1996 have not been audited
but, in the opinion of management, include all adjustments (consisting only of
normal recurring accruals) necessary to present fairly the information set
forth therein. The summary consolidated financial data should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the respective financial statements of the
Transferred Client Group, IM&I, NEWCO and the Company, including notes thereto,
appearing elsewhere in this Prospectus. The pro forma consolidated financial
data are provided for comparative purposes only and may not be indicative of
the results that would have been achieved if the transactions reflected therein
had occurred at the beginning of the period for which the pro forma data is
presented or of future results. The results of operations for the three months
ended March 31, 1996 are not necessarily indicative of the results to be
expected for the full year or in the future.
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, THREE MONTHS ENDED MARCH 31,
------------------ ----------------------------------
PRO FORMA PRO FORMA
1995 1995 1995 1995 1996
------- --------- --------- ------------ ----------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA
Revenue:
Provider network....... $ 877 $26,326 $ -- $ 5,883 $ 7,410
Other.................. -- 255 -- 59 82
------- ------- --------- --------- ----------
Total revenue........ 877 26,581 -- 5,942 7,492
Operating expenses
Direct contract
expenses.............. 237 8,565 -- 1,811 1,805
General and
administrative........ 2,335 7,395 188 1,618 1,663
Depreciation and
amortization.......... 114 172 -- 56 77
------- ------- --------- --------- ----------
Total operating
expenses............ 2,686 16,132 188 3,485 3,545
Operating (loss) in-
come................... (1,809) 10,449 (188) 2,457 3,947
Other income (expense).. 699 764 63 104 136
------- ------- --------- --------- ----------
(Loss) income before
income taxes.......... (1,110) 11,213 (125) 2,561 4,083
Income tax benefit (ex-
pense)................. 399 (4,378) 45 (991) (1,633)
------- ------- --------- --------- ----------
Net (loss) income....... $ (711) $ 6,835 $ (80) $ 1,570 $ 2,450
======= ======= ========= ========= ==========
Distributions to stock-
holders(1)............. $ -- $ 8,379 $ -- $ 1,675 $ --
Pro forma (loss) net in-
come per share(2)...... $ (0.08) $ 0.78 $ (0.01) $ 0.18 $ 0.28
Weighted average common
shares outstanding..... 8,800 8,800 8,800 8,800 8,800
</TABLE>
<TABLE>
<CAPTION>
MARCH 31, 1996
---------------------
ACTUAL AS ADJUSTED(3)
------ --------------
<S> <C> <C>
BALANCE SHEET DATA
Working capital........................................... $5,410 $28,862
Total assets.............................................. 11,173 34,625
Long-term debt............................................ 180 180
Total stockholders' equity................................ 7,746 31,198
</TABLE>
- --------
(1) Represents distributions to the owner of the Transferred Client Group and
the stockholder of IM&I prior to the respective transfers to the Company.
(2) The pro forma information assumes the automatic mandatory conversion of the
Principal Preferred Stock into Common Stock pursuant to its terms
immediately prior to the sale of the Common Stock in this Offering. See
"Capital Stock--Principal Preferred Stock."
(3) Gives effect to the estimated net proceeds from the sale of the Common
Stock offered for sale in this Offering at a price of $11.00 per share.
Does not include up to 360,000 shares of Common Stock issuable upon
exercise of the Underwriters' overallotment option, or the shares issuable
to EDICOMM. See "Underwriting" and "Business--Strategy--Establishment of a
National Clearinghouse."
6
<PAGE>
RISK FACTORS
Prospective purchasers of the Common Stock offered hereby should carefully
consider the following risk factors as well as other information set forth in
this Prospectus before making an investment in the Common Stock.
POSSIBILITY OF CHANGES IN INDUSTRY PRACTICES ADVERSE TO COMPANY
The Company's business is dependent on a variety of factors, including its
ability to enter into contracts with payors and providers on terms attractive
to all parties and the absence of substantial changes in the health care
industry that would diminish the need for the services offered by the Company.
The Company's ability to continue conducting business in its current manner
could be seriously jeopardized if, among other things, a significant number of
payors, such as insurance companies, were to seek price concessions directly
from providers. In addition, substantial changes in the health care industry,
such as the widespread adoption of capitation payment systems, the enactment
of legislation or the adoption of regulations unfavorable to the Company
and/or its relationships with payors or providers, could limit the Company's
opportunities to maintain or expand its existing operations. Any of these
developments could have a material adverse effect on the Company's business,
financial condition or results of operations and could cause it to alter
substantially its business objectives and methods of operation. See
"Business--Industry Overview," and "Business--Government Regulation."
SIGNIFICANT RELIANCE UPON SMALL NUMBER OF PAYOR CLIENTS
A significant portion of the Company's revenue is derived from a small
number of Payor Clients. For 1995 (on a pro forma basis) and the three months
ended March 31, 1996, MetraHealth Insurance Company ("MetraHealth") and John
Hancock Mutual Life Insurance Company ("John Hancock") accounted for an
aggregate of approximately 57.4% and 44.6% of the Company's total revenue. In
addition, during the first quarter of 1996, Connecticut General Life Insurance
Company ("CIGNA") accounted for 11.8% of total revenues. The duration of the
Company's contracts with its Payor Clients is one year, with automatic
renewals on the anniversary date. However, such contracts may be terminated by
either party at any time generally upon 90 days' notice. Such contracts are
also subject to fee negotiations and revisions on an annual basis. There can
be no assurance that any of the Company's contracts with Payor Clients will
not be terminated early or will be renewed, and, if renewed, will contain
favorable terms. The loss of a contract with a major Payor Client and the
inability to replace any such client with significant new clients could have a
material adverse effect on the Company's business, financial condition or
results of operations. See "Business--UP&UP Network and Payor Clients--Payor
Clients."
DEPENDENCE ON CONTRACTING PROVIDERS
The hospitals and other health care providers which constitute the UP&UP
Network are integral to the Company's operations. The Company's growth depends
on its ability to retain existing Contracting Providers and to attract
additional providers for its network. The Company's standard contract with a
Contracting Provider includes a one-year term, renewable automatically for
successive one-year terms, unless the Contracting Provider gives written
notice of termination, typically at least 90 days prior to the renewal date.
These contracts are also subject to negotiation and revisions on an annual
basis with respect to the level and amount of price concessions for medical
services. Such contracts do not prohibit the Contracting Providers from also
entering into discounted arrangements with others. The Company's revenues
generally are based on a percentage of the price concessions from Contracting
Providers that apply to claims for its Payor Clients. The greater the price
concession, the greater the revenue to the Company. The termination of a
significant number of contracts with Contracting Providers having a high
volume of claims with the Company's Payor Clients, the inability to replace
such contracts with contracts with similar Contracting Providers and/or the
renegotiation of contracts resulting in reduced price concessions could have a
material adverse effect on the Company. See "Business--UP&UP Network and Payor
Clients--Provider Network and Prepayment Option."
7
<PAGE>
LIMITED OPERATING HISTORY AS A CONSOLIDATED ENTITY
The Company was formed in January 1995, although the Unaudited Pro Forma
Consolidated Financial Statements reflect predecessor business operations that
have been consolidated into the Company. There can be no assurance that the
Company will be able to integrate its predecessor operations efficiently or to
sustain profitability on a long-term basis. See "Management's Discussion and
Analysis of Financial Condition and Results of Operation" and "Certain
Transactions."
SUBSTANTIAL COMPETITION
The market in which the Company's services are utilized is highly
competitive. The Company's potential competitors for clients include national,
regional and local provider networks, managed care organizations and health
care information companies, including networks, organizations and companies
owned directly or indirectly by Principal Mutual. Most of the Company's
competitors have significantly greater financial, technical and marketing
resources than the Company. There can be no assurance that the Company will be
able to compete effectively with any of these parties in attracting and
retaining clients. See "Business--Competition."
DEPENDENCE ON KEY PERSONNEL
The Company depends to a significant extent on its Chairman, President and
Chief Executive Officer, Thomas L. Blair, and other key management, technical
and marketing personnel, and its growth and future success will depend in
large part on its ability to retain and attract highly qualified personnel.
The Company has entered into two-year employment agreements (the "Agreements")
with each of the four senior members of management. Among other things, these
Agreements provide that in the event of termination, the executives will not
compete with the business of the Company for a period of two years following
termination. In addition, the Company has obtained key man life insurance in
the amount of $4.0 million on Thomas L. Blair. The loss of any of the
Company's key personnel, particularly any of its executive officers, or the
inability to retain or hire qualified personnel could have a material adverse
effect on the Company's business, financial condition and results of
operations. See "Management" and "Certain Transactions."
ACQUISITION STRATEGY SUBJECT TO RISKS
Part of the Company's strategy for growth includes the possible acquisition
of companies offering complementary services, technologies or businesses that
would allow the Company to offer a set of integrated services. Consideration
is currently being given to the possibility of acquiring a complementary
provider network, a medical claims clearinghouse and a TPA. The Company's
ability to expand successfully through acquisitions depends on many factors,
including the successful identification and acquisition of suitable targets,
the availability of adequate capital resources and financing and management's
ability to effectively integrate and operate the acquired entities. There is
significant competition for acquisition opportunities with other companies
that have significantly greater financial and management resources. There can
be no assurance that the Company will be able to obtain the financing needed
for future acquisitions on terms acceptable to it, or that it will be
successful in acquiring or integrating any such services, technologies or
businesses. See "Business--Strategy" and "Certain Transactions."
NEED TO MANAGE GROWTH EFFECTIVELY
The Company is currently experiencing a period of rapid expansion which
could make it more difficult to manage the profitable operations of the
business and ensure the adequacy of the Company's financial resources. The
Company's expansion has resulted in an increase in the level of responsibility
for both existing and new management personnel. The Company has sought to
manage its current and anticipated growth through the recruitment of
additional management and technical personnel and the implementation of
internal systems and controls. However, the failure to manage growth
effectively could adversely affect the Company's results of operations,
financial condition and business. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
8
<PAGE>
CONTROL BY EXISTING STOCKHOLDERS
Following the completion of this Offering, the current stockholders and
directors of the Company and their affiliates will beneficially own
approximately 78.6% of the outstanding shares of the Common Stock of the
Company. Although these persons do not have any arrangements or understandings
among themselves with respect to the voting of the shares of Common Stock
beneficially owned by them after the Offering is completed, such persons, if
acting together, would be able to elect all of the members of the Board of
Directors and control the business policies and affairs of the Company. See
"Principal Stockholders."
POSSIBLE CHANGES IN GOVERNMENT HEALTH CARE REGULATION ADVERSE TO COMPANY
During the past several years, the United States health care industry has
been subject to changing and increasing government regulation. A number of
proposals for health care reform have been made at the federal and state
levels, including proposals to provide greater government control of health
care spending, to broaden access to health care services and to change the
operating environment for health care providers and payors. The Company cannot
predict what impact, if any, these activities, which include efforts to effect
reform through legislation and changes in the administration or interpretation
of government health care programs, laws, regulations or policies, might have
on it. Accordingly, there can be no assurance that such activities would not
have a material adverse effect on the Company's business, financial condition
or results of operations. See "Business--Government Regulation."
UNCERTAINTY REGARDING SILENT PREFERRED PROVIDER ORGANIZATIONS
Certain interest groups within the health care industry have expressed
concern with certain activities of entities that have been referred to as
"Silent PPOs." These concerns include the sale to payors of provider discounts
that may not have been contractually available to those payors or known to the
provider or beneficiary of the payor at the time medical services were
rendered. The Company understands that some provider-sponsored professional or
trade associations may be considering a legal challenge against one or more
such organizations, and that regulatory agencies in certain States may be
investigating the activities of such organizations. Although it is unclear
what legal theories would support such a challenge or warrant such an
investigation, there can be no assurance that the Company would not be a
target of such challenge or investigation. The Company, however, believes that
its operations do not involve any legally objectionable Silent PPO features
and believes that it would be able to assert strong defenses in the event of
such a challenge or investigation. See "Business--UP&UP Network and Payor
Clients--Provider Network and Prepayment Option."
CAPITATED NETWORK STRATEGY SUBJECT TO SIGNIFICANT UNCERTAINTIES
The Company's strategy includes a plan to develop a national network of
capitated providers by acting as a conduit between providers accepting
capitation and national payors. There can be no assurance that hospital and
physician groups will agree to participate in such a network or that the
Company's Payor Clients or other payors will seek to utilize this network. The
Company does not intend to incur risk that the capitation rate accepted by
providers will be sufficient to cover the medical benefits specified in the
capitation arrangements between Payor Clients and the contemplated network of
capitated providers. The providers accepting the risk involved in capitation
arrangements with Payor Clients must comply with all state legislation and
regulations regarding the acceptance of risk by providers. Such legislation
and regulations, if amended or modified, could preclude capitated providers
from utilizing the Company for access to Payor Clients. Similarly, such
legislation and regulations, if amended or modified, could subject the Company
to state regulatory approval and/or licensure to develop and operate the
Company's proposed network. There can be no assurance that such approvals or
licensure would be forthcoming. See "Business--Government Regulation."
POSSIBLE ADVERSE EFFECT ON TRADING MARKET OF SHARES ELIGIBLE FOR FUTURE SALE
Sales of substantial amounts of Common Stock in the public market after the
Offering could adversely affect prevailing market prices for the Common Stock.
A substantial number of shares of Common Stock will become
9
<PAGE>
eligible for future sale in a public market at varying times following the
Offering. Included among these shares are 8,036,650 shares held by
"affiliates" of the Company. An aggregate of 8,352,650 shares of Common Stock
(95% of the currently outstanding shares of Common Stock) owned by the
affiliates and certain existing stockholders will be subject to lock-up
agreements (the "Lock-Up Agreements") for a period of 180 days from the date
of this Prospectus. The Underwriters may, in their sole discretion and at any
time without notice, release all of or any portion of the securities subject
to the Lock-Up Agreements. See "Shares Eligible for Future Sale."
LACK OF PUBLIC MARKET; POSSIBLE VOLATILITY OF STOCK PRICE
Prior to this Offering, there has been no public trading market for the
Common Stock, and there can be no assurance that a public trading market will
develop or be sustained after this Offering. The initial public offering price
was determined by negotiations among the Company and the Representatives of
the Underwriters and is not necessarily indicative of future market prices.
After the Offering, the market price of the Common Stock could be subject to
significant fluctuations in response to changes in the Company's business,
results of operations, earnings estimates by securities analysts, general
economic and market conditions and other factors. See "Underwriting."
IMMEDIATE AND SUBSTANTIAL DILUTION TO NEW INVESTORS
Investors purchasing shares of Common Stock in this Offering will experience
an immediate and substantial dilution in net tangible book value of their
shares of Common Stock of approximately $8.21 per share from an initial public
offering price of $11.00 per share. In the event that the Company issues
additional Common Stock in connection with future acquisitions, purchasers of
Common Stock in this Offering may experience further dilution in the net
tangible book value of the Common Stock. See "Dilution."
LACK OF DIVIDENDS
The Company does not anticipate paying any dividends on its Common Stock in
the foreseeable future. See "Dividend Policy."
ANTI-TAKEOVER EFFECT OF CERTAIN CHARTER AND BYLAW PROVISIONS
The Company's certificate of incorporation and bylaws contain a number of
provisions that could inhibit a change of control of the Company by means of a
tender offer, merger, proxy contest or otherwise, including advance notice and
supermajority provisions, provisions that establish a classified board of
directors and provisions that enable the Company to issue "blank check"
preferred stock. See "Description of Capital Stock--Certain Anti-Takeover
Effects."
10
<PAGE>
THE COMPANY
The Company is a Delaware corporation which is the successor to an Iowa
corporation organized in January 1995, and its business operations include the
operations of IM&I and the Transferred Client Group. AHP is an indirect
wholly-owned subsidiary of Principal Mutual, which directly or indirectly will
own approximately 39.3% of the Common Stock following the Offering. IM&I was
owned by Thomas L. Blair, the founder of the Company, who will own
approximately 19.9% of the Common Stock following the Offering. The Company
also has two subsidiaries: (i) NEWCO, which administers CHCBP for the United
States Department of Defense, and (ii) AHCS, which is 90% owned by the Company
and promotes a multifunction co-branded health identification and credit card
for distribution by Payors.
The Company's headquarters are located at 2275 Research Boulevard,
Rockville, Maryland 20850, and its phone number is (301) 548-1000.
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 2,400,000 shares of
Common Stock in this Offering, at an initial public offering price of $11.00
per share, are estimated to be approximately $23.5 million (or approximately
$27.1 million if the Underwriters' over-allotment option is exercised in
full), after deducting the underwriting discounts and commissions and
estimated offering expenses.
The Company intends to use the net proceeds as needed to fund payments to
Contracting Providers pursuant to the Prepayment Options. The Company
estimates that for the second half of 1996, the Company will be required to
fund approximately $5.0 million of Prepayment Options. Depending on increases
in claims volume and in the number of Contracting Providers and Payor Clients,
the Company anticipates that an additional $25.0 million to $30.0 million
could be required to fund Prepayment Options in 1997. There can be no
assurance that the amount required for Prepayment Options will not
substantially either exceed or fall below these estimates.
The Company also expects to use a portion of the net proceeds of the
Offering for general corporate purposes, including, among other things, the
possible development and establishment of electronic clearinghouses for claims
submissions and payments not solely tied to the UP&UP Network and Payor
Clients. Also, the Company believes that expansion opportunities through
acquisitions could exist, particularly with respect to entities which have
established complementary provider networks, electronic clearing houses and
TPAs. The Company currently owns 6.0% of R.J. Associates, Inc. ("R.J.
Associates"), which owns 50.0% of Health Payors Organization, Ltd. ("Health
Payors"), which has organized and operates a provider network of approximately
2,050 hospitals and other health care providers. The Company has the option,
exercisable on or before December 31, 1996, to acquire the remaining 94.0% of
R.J. Associates for approximately $5.0 million. In connection with its
consideration as to whether to exercise such option, the Company could decide
to negotiate with the other 50% owner of Health Payors regarding the
acquisition of such entity's ownership interest in Health Payors so that the
Company could acquire 100% ownership of Health Payors. See "Certain
Transactions." In addition, in May 1996, the Company and EDICOMM, Inc.
("EDICOMM") entered into an agreement (the "EDICOMM Agreement") pursuant to
which EDICOMM has granted a one-year option to the Company to acquire EDICOMM
on terms to be negotiated and accepted by both parties. The Company cannot
make a decision whether to purchase EDICOMM until such time as an acceptable
purchase price is negotiated. See "Business--Strategy--Establish a National
Clearinghouse."
Other than as discussed above, the Company currently has no plans,
arrangements or understandings regarding any other acquisitions, although the
Company engages in evaluations of and discussions regarding acquisitions on an
ongoing basis. There can be no assurance that any acquisition would be
available in the future on terms favorable to the Company or that the Company
would possess adequate financial resources to make such an acquisition.
Pending such uses, as set forth above, the Company intends to invest the net
proceeds from the Offering in short-term, investment-grade, interest-bearing
securities.
11
<PAGE>
DIVIDEND POLICY
The Company has not declared or paid dividends on its Common Stock and does
not anticipate paying any cash dividends in the foreseeable future. Any
determination by the Company's Board of Directors, in its discretion, as to
the payment of dividends in the future will depend upon, among other things,
general business conditions, the Company's earnings, financial condition,
capital needs and other factors deemed pertinent by the Company's Board of
Directors, including the limitations, if any, on the payment of dividends
under state law and under any existing Company credit facility.
12
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company as of March
31, 1996, (i) on an historical basis, (ii) on a pro forma basis which shows
historical information after giving effect to the assumed conversion of the
Principal Preferred Stock owned by Principal Health Care, Inc., an indirect
wholly-owned subsidiary of Principal Mutual, into Common Stock on that date
and (iii) as adjusted for the estimated net proceeds from the sale of the
2,400,000 shares of Common Stock offered hereby at an initial offering price
of $11.00 per share, after deducting the underwriting discounts and
commissions and estimated offering expenses. This table should be read in
conjunction with the Company's Consolidated Financial Statements and notes
thereto appearing elsewhere in this Prospectus. See also "Use of Proceeds."
<TABLE>
<CAPTION>
MARCH 31, 1996
----------------------------------------
HISTORICAL(1) PROFORMA(2) AS ADJUSTED(3)
------------- ----------- --------------
(IN THOUSANDS)
<S> <C> <C> <C>
Cash and cash equivalents............. $3,887 $3,887 $27,339
====== ====== =======
Long-term debt(4)..................... $ 180 $180 $ 180
------ ------ -------
Stockholders' equity:
Preferred stock, $0.01 par value,
5,000,000 shares authorized, and 1
share issued and outstanding;
historical; and none issued or
outstanding pro forma and as
adjusted........................... -- -- --
Common stock, $.01 par value,
35,000,000 shares authorized;
4,400,000 shares issued and
outstanding, historical; 8,800,000
shares issued and outstanding, pro
forma; and 11,200,000 shares issued
and outstanding, as adjusted(1).... 44 88 112
Additional paid-in capital.......... 5,963 5,919 29,347
Retained earnings................... 1,739 1,739 1,739
------ ------ -------
Total stockholders' equity........ 7,746 7,746 31,198
------ ------ -------
Total capitalization.............. $7,926 $7,926 $31,378
====== ====== =======
</TABLE>
- --------
(1) The historical stockholders' equity reflects the Company's capitalization
giving effect to the merger of the Company's former parent into the
Company effective June 7, 1996.
(2) The pro forma information assumes the automatic mandatory conversion of
the Principal Preferred Stock into Common Stock pursuant to its terms
immediately prior to the sale of the Common Stock in this Offering. See
"Description of Capital Stock--Principal Preferred Stock."
(3) The as adjusted information (i) gives effect to the sale of 2,400,000
shares of Common Stock offered by the Company hereby (at a public offering
price of $11.00 per share) and receipt of the estimated net proceeds
therefrom, and (ii) does not give effect to shares issuable pursuant to
the EDICOMM Agreement. See "Business--Strategy--Establish a National
Clearinghouse."
(4) Includes capital lease of $130,000.
13
<PAGE>
DILUTION
The net tangible book value of the Common Stock at March 31, 1996, assuming
the Principal Preferred Stock had converted into 4,400,000 shares of Common
Stock on that day, was $0.88 per share. Net tangible book value per share
represents the amount of total tangible assets of the Company less total
liabilities, divided by the number of shares of Common Stock outstanding.
After giving effect to the sale of the shares of Common Stock in this
Offering, at an initial public offering price of $11.00 per share, and the
application of the net proceeds therefrom, the pro forma net tangible book
value of the Company at March 31, 1996 would have been $31,198,000 or $2.79
per share of Common Stock. This would represent an immediate increase in net
tangible book value per share of $1.91 to the existing stockholders and an
immediate dilution in net tangible book value per share of $8.21 to new
investors at the initial public offering price. The following illustrates this
dilution per share:
<TABLE>
<S> <C> <C>
Initial public offering price.................................. $11.00
Net tangible book value before the Offering.................. $0.88
Increase attributable to new investors....................... 1.91
-----
Net tangible book value after the Offering..................... 2.79
------
Dilution to new investors...................................... $ 8.21
======
</TABLE>
The following table summarizes as of March 31, 1996, assuming the Principal
Preferred Stock has converted into 4,400,000 shares of Common Stock on that
day, the relative investments of the existing stockholders and new investors,
after giving effect to the sale of the shares of Common Stock in this Offering
at an assumed price of $11.00 per share:
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
------------------ ------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- ------- ----------- ------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders.. 8,800,000 78.6% $ 6,000,000 18.5% $ 0.68
New investors.......... 2,400,000 21.4 26,400,000 81.5 11.00
---------- ----- ----------- -----
Total................ 11,200,000 100.0% $32,400,000 100.0%
========== ===== =========== =====
</TABLE>
The foregoing tables assume (i) the conversion of the Principal Preferred
Stock into 4,400,000 shares of Common Stock and (ii) no exercise of the
Underwriters' over-allotment option. If the Underwriters' over-allotment
option were exercised in full, the shares purchased from the Company would
increase to 2,760,000 shares (23.9% of the shares of Common Stock outstanding
after this Offering) and the total consideration paid to the Company by new
investors would increase to $30,360,000 (83.5% of the total consideration paid
to the Company by all stockholders).
14
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
The following selected financial data for 1995 have been derived from the
audited financial statements of the Company. The Selected Consolidated
Financial Data for the three months ended March 31, 1996 and March 31, 1995
have been derived from the unaudited consolidated financial statements of the
Company. The unaudited pro forma consolidated financial data for the year
ended December 31, 1995 and the three months ended March 31, 1995 have been
derived from the financial statements of the Transferred Client Group, IM&I,
NEWCO and the Company. The pro forma consolidated financial data and the
consolidated financial data for the three months ended March 31, 1996 have not
been audited but, in the opinion of management, include all adjustments
(consisting only of normal recurring accruals) necessary to present fairly the
information set forth therein. The selected consolidated financial data should
be read in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the respective financial statements
of the Transferred Client Group, IM&I, NEWCO and the Company, including notes
thereto, appearing elsewhere in this Prospectus. The pro forma consolidated
financial data are provided for comparative purposes only and may not be
indicative of the results that would have been achieved if the transactions
reflected therein had occurred at the beginning of the period for which the
pro forma data is presented or of future results. The results of operations
for the three months ended March 31, 1996 are not necessarily indicative of
the results to be expected for the full year or in the future.
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, THREE MONTHS ENDED MARCH 31,
------------------ ----------------------------------
PRO FORMA PRO FORMA
1995 1995 1995 1995 1996
------- --------- --------- ------------ ----------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA
Revenue
Provider network...... $ 877 $26,326 $ -- $5,883 $ 7,410
Other................. -- 255 -- 59 82
------- ------- --------- --------- ----------
Total revenue....... 877 26,581 -- 5,942 7,492
Operating expenses
Direct contract
expenses............. 237 8,565 -- 1,811 1,805
General and
administrative....... 2,335 7,395 188 1,618 1,663
Depreciation and
amortization......... 114 172 -- 56 77
------- ------- --------- --------- ----------
Total operating
expenses........... 2,686 16,132 188 3,485 3,545
Operating (loss)
income................. (1,809) 10,449 (188) 2,457 3,947
Other income (expense).. 699 764 63 104 136
------- ------- --------- --------- ----------
(Loss) income before
income taxes......... (1,110) 11,213 (125) 2,561 4,083
Income tax benefit
(expense).............. 399 (4,378) 45 (991) (1,633)
------- ------- --------- --------- ----------
Net (loss) income....... $ (711) $ 6,835 $ (80) $ 1,570 $ 2,450
======= ======= ========= ========= ==========
Distributions to
stockholders(1)........ $ -- $ 8,379 $ -- $ 1,675 $ --
Pro forma (loss) net
income per share(2).... $ (0.08) $ 0.78 $ (0.01) $ 0.18 $ 0.28
Weighted average common
shares outstanding..... 8,800 8,800 8,800 8,800 8,800
</TABLE>
<TABLE>
<CAPTION>
MARCH 31, 1996
----------------------
DECEMBER 31,
1995 ACTUAL AS ADJUSTED(3)
------------ ------- --------------
<S> <C> <C> <C>
BALANCE SHEET DATA
Working capital............................. $ 3,384 $ 5,410 $28,862
Total assets................................ 12,763 11,173 34,625
Long-term debt.............................. 50 180 180
Note payable to stockholder................. 3,700 -- --
Total stockholders' equity.................. 5,296 7,746 31,198
</TABLE>
- --------
(1) Represents distributions to the owner of the Transferred Client Group and
the stockholder of IM&I prior to the respective transfers to the Company.
(2) The pro forma information assumes the automatic mandatory conversion of
the Principal Preferred Stock into Common Stock pursuant to its terms
immediately prior to the sale of the Common Stock in this Offering. See
"Capital Stock--Principal Preferred Stock."
(3) Gives effect to the estimated net proceeds from the sale of the Common
Stock offered for sale in this Offering at a price of $11.00 per share.
Does not include up to 360,000 shares of Common Stock issuable upon
exercise of the Underwriters' overallotment option and the shares issuable
to EDICOMM. See "Underwriting" and "Business--Strategy--Establishment of a
National Clearinghouse."
15
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The following discussion should be read in conjunction with the information
contained in the Selected Consolidated Financial Data, Consolidated Financial
Statements, including the notes thereto, the Pro Forma Consolidated Financial
Information and the other financial information appearing elsewhere in this
Prospectus.
GENERAL
UP&UP serves as an intermediary between health care payors (such as
insurance companies) and health care providers (such as hospitals) by entering
into contractual arrangements designed generally to produce cost savings and
other benefits for payors and increased liquidity and improved efficiency in
claims submissions for providers. The Company derives its revenue from a
portion of the price concessions offered by the providers under such
contractual arrangements.
UP&UP, a Delaware corporation, was originally incorporated in the State of
Iowa on January 3, 1995 as PB Newco, Inc. Effective June 7, 1996, PB Newco,
Inc. merged into UP&UP, with UP&UP being the surviving corporation. Effective
December 31, 1995, the Company's stockholders and a subsidiary of a
stockholder contributed to the Company certain complementary businesses (see
"Business--General" and "Business--Agreement with AHP") specifically the
Transferred Client Group, IM&I and NEWCO (collectively the "Contributed
Businesses"). Because the contributions were nonmonetary in nature and made by
existing stockholders of UP&UP, the assets and liabilities contributed have
been recorded at the transferor's historical cost as of December 31, 1995.
Since the contributions were effective December 31, 1995, the Selected
Consolidated Financial Data for the year ended December 31, 1995 and the three
months ended March 31, 1995 do not include the results of operations of the
Contributed Businesses. The results of operations of the Contributed
Businesses are included in the Selected Consolidated Financial Data for the
three months ended March 31, 1996.
REVENUE
Substantially all of the Company's revenues are based on a percentage of the
price concessions from the Contracting Providers on claims to its Payor
Clients.
The Company's revenues are influenced by, among other variables: (i) the
number of Contracting Providers and Payor Clients, (ii) the volume of claims
from the Contracting Providers to Payor Clients, (iii) the amount of price
concessions the Company negotiates with Contracting Providers and (iv) the
contractual price concession sharing arrangements negotiated by the Company
with Payor Clients. In effect, these variables correspond to breadth (number
of Contracting Providers and Payor Clients), volume (claims per period) and
depth (amount of price concession), all of which define savings and the
Company's resultant revenues.
Additionally, the Company generates revenue from the administration of the
CHCBP program. This program allows certain groups of military health service
beneficiaries to continue receiving benefits under the Civilian Health and
Medical Program of the Uniformed Services ("CHAMPUS") when they lose their
eligibility for military health care. The CHCBP program provides benefits for
a period of time, up to 36 months, to former U.S. Armed Forces service members
and their family members who enroll and pay their quarterly premiums.
DIRECT CONTRACT EXPENSES
Direct contract expenses include access fees paid by the Company for the
utilization of other provider networks and, to a limited extent, marketing
commissions incurred by the Contributed Businesses.
Currently, the Company accesses the network of medical providers organized
and maintained by Health Payors through its affiliation with R.J. Associates
and, to a lesser extent, another network organized by one of its Payor
Clients. See "Certain Transactions." During 1993, 1994 and 1995, the
Contributed Businesses utilized the AHP provider network and other non-
affiliated provider networks. The level of network access fees as a percentage
of network revenue is expected to decrease as a result of the continued
expansion of the Company's direct network. Other direct contract expenses
include marketing commissions to consultants who became
16
<PAGE>
entitled to such commissions for their role in obtaining contracts with
certain Payor Clients for the Contributed Businesses. Generally, these
marketing commissions are based on a percentage of the revenue generated by
the Payor Client.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses include compensation and related
benefits, sales and marketing, rent, professional services and general
overhead expenses.
HISTORICAL RESULTS OF OPERATIONS
The following table sets forth certain results of operations data for the
period ended December 31, 1995 and the three months ended March 31, 1995 and
1996.
<TABLE>
<CAPTION>
THREE MONTHS
PERIOD ENDED ENDED MARCH 31,
DECEMBER 31, ----------------
1995 1995 1996
------------ ------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Revenue
Provider network............................... $ 877 $ -- $ 7,410
Other.......................................... -- -- 82
------- ------ --------
Total revenue................................ 877 -- 7,492
------- ------ --------
Operating expenses
Direct contract expenses....................... 237 -- 1,805
General and administrative..................... 2,335 188 1,663
Depreciation and amortization.................. 114 -- 77
------- ------ --------
Total operating expenses..................... 2,686 188 3,545
------- ------ --------
Operating (loss) income.......................... (1,809) (188) 3,947
Other income..................................... 699 63 136
------- ------ --------
(Loss) income before income taxes................ (1,110) (125) 4,083
Income tax benefit (expense)..................... 399 45 (1,633)
------- ------ --------
Net (loss) income................................ $ (711) $ (80) $ 2,450
======= ====== ========
</TABLE>
Three Months Ended March 31, 1996 Compared to Three Months Ended March 31,
1995
The Company was incorporated and commenced operations on January 3, 1995 and
had no revenue for the three months ended March 31, 1995. Net loss for the
period was $80,000 after the tax benefit of the recognition of the period's
net operating loss carry forward in the amount of $45,000.
The results of operations for the three months ended March 31, 1996 include
the results of operations of the Contributed Business. As of March 31, 1996,
the Company had 34 Payor Clients and approximately 1,050 Contracting
Providers. Provider network revenue was $7.4 million. Other revenue of $82,000
relates to the administration of the CHCBP program.
Direct contract expenses primarily consisted of fees for the utilization of
other provider networks of $1.4 million, representing 18.9% of provider
network revenue, and marketing commissions of approximately $400,000.
General and administrative expenses of approximately $1.7 million
represented 22.2% of total revenue. Net income was $2.4 million or 32.7% of
total revenue.
Period Ended December 31, 1995
The Company was incorporated and commenced operations on January 3, 1995.
During 1995, the Company focused its efforts on the development of its
contracting provider network and marketing to prospects. At December 31, 1995,
the Network consisted of approximately 700 Contracting Providers and the
Company had contracts with eight Payor Clients. The Company entered into
contracts with such providers and payors primarily during the last six months
of 1995. As a result, the Company had an operating loss of $1.8 million for
the year. The operating loss was primarily offset by net realized gains of
$452,000 on the sale of marketable securities,
17
<PAGE>
$191,000 of interest income and $436,000 from the tax benefit from the
recognition of the year's net operating loss carry forward. Net loss for the
year was $711,000.
PRO FORMA RESULTS OF OPERATIONS
The following table sets forth certain unaudited pro forma consolidated
financial data of the Company and the Contributed Business and such data
expressed as a percentage of total consolidated revenue for the Company and
the Contributed Businesses for the years ended December 31, 1993, 1994 and
1995 and the three months ended March 31, 1995 as if the contributions had
been consummated as of January 1, 1993 for IM&I and the Transferred Client
Group, and August 1994 for NEWCO. The pro forma financial data have not been
audited but, in the opinion of management, include adjustments (consisting of
normal recurring accruals) necessary to present fairly the information set
forth therein. The pro forma financial data may not be indicative of the
results that would have been achieved if the transactions reflected therein
had occurred at the beginning of the period for which the pro forma data is
presented or of future results.
<TABLE>
<CAPTION>
PRO FORMA CONSOLIDATED FINANCIAL DATA HISTORICAL
-------------------------------------------------------- ------------
YEAR ENDED DECEMBER 31, THREE MONTHS ENDED
------------------------------------------ --------------------------
MARCH 31, MARCH 31,
1993 1994 1995 1995 1996
------------ ------------- ------------- ------------ ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue
Provider network....... $2,588 100.0% $13,924 99.4% $26,326 99.0% $5,883 99.0% $7,410 98.9%
Other.................. -- -- 81 0.6 255 1.0 59 1.0 82 1.1
------ ----- ------- ----- ------- ----- ------ ----- ------ -----
Total revenue........ $2,588 100.0% $14,005 100.0% $26,581 100.0% $5,942 100.0% $7,492 100.0%
====== ===== ======= ===== ======= ===== ====== ===== ====== =====
Operating expenses
Direct contract
expenses.............. $ 610 23.6% $ 4,139 29.6% $ 8,565 32.2% $1,811 30.5% $1,805 24.1%
General and
administrative........ 1,658 64.1 4,488 32.1 7,395 27.8 1,618 27.3 1,663 22.2
Depreciation and
amortization.......... -- -- 8 0.1 172 0.7 56 0.9 77 1.0
------ ----- ------- ----- ------- ----- ------ ----- ------ -----
Total operating
expenses............ $2,268 87.7% $ 8,635 61.8% $16,132 60.7% $3,485 58.7% $3,545 47.3%
====== ===== ======= ===== ======= ===== ====== ===== ====== =====
</TABLE>
Historical Three Months Ended March 31, 1996 Compared to Pro Forma Three
Months Ended March 31, 1995.
Revenue increased $1.6 million, from $5.9 million for the three months ended
March 31, 1995 to $7.5 million for the three months ended March 31, 1996. This
increase was attributable to the addition of eight new Payor Clients, the
growth in the claims volume from existing Payor Clients and the expansion of
the provider network.
Direct contract expenses remained approximately the same. Marketing
commissions of $102,000 paid to an affiliate of the Company by one of the
Contributed Businesses during the quarter ended March 31, 1995 were reduced to
zero during the corresponding quarter of 1996 because the agreement pursuant
to which such commissions were payable was terminated as of January 1, 1996.
Fees of $1.4 million in the 1995 first quarter and $1.4 million in the 1996
first quarter paid to other provider networks decreased from 23.8% of provider
network revenue in the first quarter of 1995 to 18.9% in the first quarter of
1996. This decrease was attributable to the growth in the number of providers
contracting directly with the Company and Payor Clients accessing more direct
contracts.
General and administrative expenses increased approximately $45,000. The
increase was directly attributable to the increase in revenue. Some of the
Company's clients process claims on their own, and, accordingly, the Company's
general and administrative expenses do not necessarily increase
proportionately with an increase in revenue.
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Pro Forma Year Ended December 31, 1995 Compared to Pro Forma Year Ended
December 31, 1994
Provider network revenue increased by $12.4 million in 1995 from $13.9
million in 1994 to $26.3 million in 1995. This was attributable to the
addition of 12 new Payor Clients in 1995, bringing the total number of Payor
Clients to 34, and the growth in the claims volume for existing Payor Clients.
Other revenue relates to the administration of the CHCBP program, which the
Company commenced in the second half of 1994. Such revenue totaled $81,000 in
1994 and $225,000 in 1995.
Direct contract expenses increased approximately $4.4 million in 1995 from
$4.1 million in 1994 to $8.5 million in 1995. Of this increase, $3.6 million
was for fees paid for the utilization of other provider networks and $800,000
was for marketing commissions incurred by the Contributed Businesses. Total
fees paid for the utilization of other provider networks approximated $6.4
million in 1995.
General and administrative expenses increased by $2.9 million in 1995 from
$4.5 million in 1994 to $7.4 million in 1995. This increase occurred primarily
because the 1995 pro forma consolidated results of operations included the
Company's general and administrative expenses, in addition to the general and
administrative expenses from the Contributed Businesses. General and
administrative expenses decreased as a percentage of revenue from 32.1% in
1994 to 27.8% in 1995.
Pro Forma Year Ended December 31, 1994 Compared to Pro Forma Year Ended
December 31, 1993
Total revenue increased by $11.4 million in 1994 from $2.6 million in 1993
to $14.0 million in 1994. Of this increase, $11.3 million or 99.1% was
attributable to the addition of 18 new Payor Clients and the expansion of the
provider network. The balance of the increase resulted from the commencement
of the CHCBP program.
Direct contract expenses increased by $3.5 million in 1994 from $610,000 in
1993 to $4.1 million in 1994, of which $2.1 million represented fees paid for
the utilization of other provider networks and $1.4 million represented
marketing commissions.
General and administrative expenses increased by $2.8 million from $1.7
million in 1993 to $4.5 million in 1994. This increase was due primarily to
the expansion of the operations of the Contributed Businesses, including the
continued hiring of staff in 1994 to coincide with the increased number of
clients. General and administrative expenses decreased as a percentage of
revenue from 64.1% in 1993 to 32.1% in 1994.
LIQUIDITY AND CAPITAL RESOURCES
Since its inception, the Company has financed its operations principally
through equity contributions. At December 31, 1995 and March 31, 1996, the
Company had working capital of approximately $3.4 million and $5.4 million,
respectively.
As of December 31, 1995, the Company had borrowed $3.7 million from an
officer and stockholder of the Company. This demand note was repaid on March
22, 1996 from the liquidation of a certificate of deposit.
The Company's primary capital resources commitment is to fund payments due
upon exercise of Prepayment Options granted to Contracting Providers. The
Company estimates that for the remainder of 1996, the Company will be required
to fund approximately $5.0 million of Prepayment Options. Depending on
increases in claims volume and in the number of Contracting Providers and
Payor Clients, the Company estimates that an additional $25.0 million to $30.0
million could be required to fund Prepayment Options in 1997.
The Company believes that the net proceeds from this Offering, together with
its existing liquidity sources and anticipated funds from operations, will
satisfy its cash requirements for the next 36 months. However, in the event
that the payment of Prepayment Options exceeds the Company's estimates and/or
other available sources of liquidity to fund such payments are not as great as
anticipated, the Company could seek to borrow funds or obtain additional
infusions of equity capital to fund the balance of such payments.
IMPACT OF INFLATION
Since the Company's revenues are based on medical costs, the impact of
inflation on operating costs and expenses should be offset by the impact of
inflation of medical costs.
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BUSINESS
GENERAL
The Company serves as an intermediary between health care payors, such as
insurance companies, and health care providers, such as hospitals, by entering
into contractual arrangements designed generally to produce cost savings and
other benefits for payors and increased liquidity and improved efficiency in
claims submissions for providers. The Company derives its revenues primarily
from a portion of the price concessions offered by Contracting Providers.
The Company enters into contracts with Contracting Providers and Payor
Clients. The Company's contracts with Contracting Providers establish price
concessions on the charges for medical services rendered by the Contracting
Providers to beneficiaries covered by medical plans of Payor Clients. In
partial consideration for the price concessions furnished by the Contracting
Providers, the Company offers the Contracting Providers the Prepayment Option.
As of June 1, 1996, the UP&UP Network consisted of 1,288 Contracting
Providers, of which 841 were hospitals and 447 were other health care
providers.
The Company's contracts with Payor Clients, such as insurance companies,
TPAs, self-insured employers and unions, and government health plans, provide
for specified reductions in the amounts ordinarily payable by the Payor
Clients on medical claims submitted by Contracting Providers. The Company
believes that, consistent with representations generally made by Payor Clients
to their respective state insurance commissioners, plan beneficiaries receive
the same proportionate reduction on the co-insurance portion of the medical
claims payable by such beneficiaries under the terms of those plans. As of
June 1, 1996, the Company had 35 Payor Clients.
The Company has sophisticated information systems capabilities, which
facilitate claims data transmission and cost repricing pursuant to UP&UP
Network price concessions. In addition, the Company conducts extensive data
analyses of encounter and cost data by specific service areas for Payor
Clients. The Company also maintains an extensive, proprietary database of
provider charges for certain medical procedures by geographic area, which is
offered to both its Payor Clients and Contracting Providers. The Company's
systems also enable claims payments to be forwarded to certain Contracting
Providers by EFT through an arrangement with Chase Manhattan Bank.
INDUSTRY OVERVIEW
The health care industry in the United States constitutes a substantial
portion of the Gross National Product, with in excess of $1 trillion estimated
to be spent annually for health care. Of this total, over $300 billion
annually of services is estimated to be provided by hospitals and
approximately $200 billion to be provided by physicians. Traditionally, health
care services have been provided on a fee-for-service basis through a
generally fragmented system of health care providers, which includes
approximately 6,000 hospitals as of December 31, 1994, as well as physicians,
other health care providers and pharmacies.
Payment for all or a portion of health care fees traditionally has been
assumed, in many instances, for recipients of the health care services by
indemnity insurance companies and large public or private sector employers or
unions, which offer, at their own risk, certain insurance coverage to their
beneficiaries, employees or members. It is estimated by Foster Higgins
National Survey of Employer Responsive Health Plans ("Foster Higgins") that,
as of December 31, 1995, approximately 29% of the insured population in the
United States were covered by such traditional, indemnity-type health
insurance plans. The Company's Payor Clients primarily are these traditional,
indemnity-type insurance companies, self-insured companies and unions,
government health plans and their agents.
As a result of escalating health care costs, various concepts of managed
care have evolved and are continuing to evolve. Managed care attempts to
influence and reduce the cost of health care by managing the two variables
that comprise the cost of health benefits. These variables are the frequency
of service (e.g., the number of laboratory tests that might be performed) and
the cost per service (e.g., the cost per laboratory test). Health maintenance
organizations ("HMOs") have emerged as integral components of the health care
system and there have been substantial increases in the population covered for
health insurance purposes by HMO-type
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organizations. It is estimated by Foster Higgins that, as of December 31,
1995, approximately 27% of the insured population received medical benefits
through HMOs. The ability of HMOs to direct their beneficiaries to specific
providers by their inherent constraints on the freedom of selection of
providers enables the HMOs to utilize their purchasing power with such
providers to obtain price concessions.
HMOs have in many instances evolved from paying providers on a fee-for-
service basis to paying on a "capitation" basis. Under a capitation
arrangement, a physician group and/or hospital group receives a prepaid fixed
monthly fee per HMO member (i.e., per capita) in consideration for providing
specified medical benefits to the member. The capitation payment mechanism has
the potential to shift the risk of the cost of medical service from the HMO to
the provider group accepting the capitation. In order to accept a capitation
arrangement, a physician group and/or hospital must have defined protocols to
allocate and disburse the capitation payment to all those providers (e.g.,
hospitals, primary care physicians, specialists, laboratories and pharmacies)
that are responsible for providing health benefits under the capitation
arrangement. Many physician groups and hospital groups do not have the
necessary protocols and information systems to manage the disbursement of a
capitation payment.
The search for ways to contain medical costs also has involved the
development by non-HMO health coverage insurers of various managed care
medical cost containment protocols and mechanisms for their insured
beneficiaries. Facilitating the migration of the non-HMO insured programs to
more of a managed care product, fifteen states have created exemptions to
state antitrust laws to permit physicians, hospitals and other providers to
participate in joint ventures such as PHOs, which have the potential to
provide comprehensive health coverage on a capitation basis. As a result,
various physicians and hospitals that do not presently contract with HMOs
and/or preferred provider organizations ("PPOs") are joining together to form
PHOs or other entities that may accept risk, in order to potentially
participate in capitated health care arrangements. However, there is still no
universal conduit between those payors wishing to access a national network of
"at-risk" providers and physician and hospital groups seeking to contract with
national payors on an at-risk basis.
STRATEGY
The Company's strategy is: (i) to increase overall claims volume by
expanding the UP&UP Network of Contracting Providers and the number of Payor
Clients, (ii) to develop new services which allow national and other large
Payor Clients to compete more effectively in the marketplace, including the
development of capitated networks for Payor Clients, and (iii) to establish a
national clearinghouse for claims transmissions and EFTs by building upon its
existing capabilities to promote efficiencies in the relationships between
national and other large payors and local and regional providers.
Increase Claims Volume
To expand the UP&UP Network, the Company intends to market the Prepayment
Option and enhanced ancillary services to new providers. The Company believes
that the Prepayment Option has been and will continue to be attractive to
providers. The Prepayment Option is intended to enable Contracting Providers
to increase their liquidity by receiving an upfront payment which may reduce
their carrying costs pending receipt of actual payment from payors for
services already rendered. The Prepayment Option and the ancillary information
systems services, such as claims data transmission and cost repricing, are
also expected to further solidify the business and financial relationship
between the Company and its Contracting Providers.
The Company also plans to develop a national network of capitated providers
through strategic alliances with Physician Networks which are forming in major
markets throughout the United States. The Company has established a capitated
network with a group of hospitals and physicians in California on behalf of a
Payor Client. To the extent desired by its Payor Clients, the Company plans to
expand this California network and to explore possible capitated network
arrangements in other states. The Company believes that as health care costs
continue to escalate, pressure from payors to enter into capitation
arrangements will increase. The Company plans to facilitate its development of
capitated networks by offering a sophisticated information system which will
enable capitated providers to manage and allocate capitation payments from
national payors among the various providers in a local health care delivery
system, such as hospitals, primary care physicians and specialists.
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Develop New Services
The Company has developed a multifunction co-branded card that serves as
both a health insurance card and a VISA credit card. This multifunction co-
branded card should generate ancillary revenues and, more importantly, should
promote communication and facilitate payments among the Contracting Providers,
Payor Clients and the beneficiaries of those Payor Clients. The Company
believes that the availability of the multifunction co-branded card will
enhance the Company's ability to attract and retain Contracting Providers.
The Company currently maintains an extensive, proprietary database of
provider charges and other encounter data by geographic areas. The Company
plans to continue to expand this database, which it offers to both Payor
Clients and Contracting Providers. The Company believes that the availability
of its constantly updated database that tracks various reimbursement rates and
other key indicators will assist it in maintaining its relationships with its
Payor Clients.
Establish a National Clearinghouse
The Company also intends to seek to acquire businesses that offer services
or technologies that would expand or supplement its current business. In this
regard and in order to increase its ability to facilitate the processing of
claims from Contracting Providers and the payment of claims by Payor Clients,
the Company may seek to acquire a claims processing clearinghouse. The Company
views its ability to act as a clearinghouse as a value-added service for its
Contracting Providers and Payor Clients that reduces their internal costs of
claims handling through an increase in efficiency and a possible reduction in
the price they pay for claims transmission service.
In May 1996, the Company entered into the EDICOMM Agreement whereby EDICOMM
agreed to assign to the Company its existing contracts (the "Assigned
Contracts") with 19 hospital or other medical care facilities. Under the
Assigned Contracts, EDICOMM acted as an agent for such hospitals or other
facilities to electronically transmit or distribute the claims of such
providers to appropriate payors. The EDICOMM Agreement provides that EDICOMM
will continue to administer the Assigned Contracts and provide the technical
assistance necessary to support the Assigned Contracts until both parties
mutually agree to discontinue such arrangements. For such services, UP&UP is
to pay EDICOMM a monthly fee, initially set at $12,500 and to be adjusted
quarterly, but which fee is not to exceed the revenue received from the
Assigned Contracts. The Company believes that the EDICOMM Agreement will
enable it to gain experience in the business of acting as an agent for the
provider in transmitting claims directly to payors. The EDICOMM Agreement also
granted the Company a one-year option to acquire EDICOMM on terms to be
negotiated and accepted by both parties. In consideration for the Assigned
Contracts and the one-year option, UP&UP paid EDICOMM $50,000 and agreed to
issue to EDICOMM, after completion of this Offering, shares of Common Stock
having a value, based on the initial public offering price, of $150,000. If
the public offering is not completed, and thus shares of Common Stock are not
issued to EDICOMM, EDICOMM has the right to terminate the EDICOMM Agreement
and have the Assigned Contracts reassigned to it. Under such circumstances,
EDICOMM would be entitled to keep the $50,000.
UP&UP NETWORK AND PAYOR CLIENTS
Provider Network and Prepayment Option
The UP&UP Network is a nationwide network of medical care providers which,
as of June 1, 1996, consisted of 1,288 Contracting Providers located in 46
states, of which 65% were hospitals and 35% were other health care providers.
The UP&UP Network was organized to meet the medical service, financial and
geographic needs of Payor Clients and their beneficiaries and to provide
health benefit services in a cost-effective manner to beneficiaries of such
Payor Clients. The Company intends to continue to concentrate on expanding the
number of Contracting Providers, including physician groups. In its marketing
to health care providers, the Company focuses on recruiting for the UP&UP
Network those providers who would generate a significant volume of claims for
Payor Clients.
The Company contracts directly with individual hospitals and groups of
hospitals and other health care providers for such providers to participate in
the UP&UP Network and to grant price concessions to the Payor Clients. Price
concessions are individually negotiated with each Contracting Provider and
generally consist of either discounts from billed charges or, in certain
cases, per diem rates. The Company's standard contract with a
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Contracting Provider includes a one-year term renewable automatically for
successive one-year terms, unless the Contracting Provider gives written
notice of termination, typically at least 90 days prior to the renewal date.
Contracting Providers potentially benefit from participation in the UP&UP
Network by any increased utilization of their services by beneficiaries of
Payor Clients as a result of the encouragement of such utilization by Payor
Clients. Payor Clients may encourage their beneficiaries to utilize
Contracting Providers by waiving a portion of the payments for those
beneficiaries. The Company operates a toll free telephone number which Payor
Clients may make available to beneficiaries in order that they may identify
local Contracting Providers.
Moreover, the Company believes that the attractiveness of the UP&UP Network
to Contracting Providers is significantly enhanced by the Prepayment Option, a
feature not currently offered by any of the Company's competitors. The
Prepayment Option is in partial consideration of the price concessions offered
to the Company and its Payor Clients by the Contracting Providers. Cash
payments to Contracting Providers pursuant to the Prepayment Option may
provide liquidity to Contracting Providers with respect to their provision of
services to beneficiaries prior to receiving payments from Payor Clients. The
Company believes that these cash payments have the potential to establish
long-term financial linkages between the Contracting Providers and the
Company.
Cash payments to Contracting Providers under the Prepayment Option are
computed for each Contracting Provider based upon annual claims volume for
beneficiaries of the Company's Payor Clients who utilize the services of such
Contracting Provider. The cash payments are made at the option of the
Contracting Provider, either at the end of the contract period based upon one-
twelfth of the actual claims presented for the preceding 12-month period or at
the beginning of the contract period based upon one-twelfth of the estimated
claims for the following 12-month period.
Also, the Company's computer systems provide benefits to the Contracting
Providers and promote the linkage and relationship between the Contracting
Providers and the Payor Clients. See "Business--Software Systems
Capabilities."
In addition to its direct network of Contracting Providers having the
Prepayment Option, through its affiliation with Health Payors, the Company
provides its Payor Clients with access to the price concessions from the
provider network organized and maintained by Health Payors. Payor Clients may
also have access through the Company to a provider network organized by one of
the Company's Payor Clients. In general, the providers in these other networks
are considered Contracting Providers to the extent they submit claims to Payor
Clients.
The Company believes its operations are distinguishable from the
objectionable operational characteristics some have attributed to purported
Silent PPOs. First, the Company's practices permit its Payor Clients to take
discounts from Contracting Providers only if both the Payor Client and
Contracting Provider have a signed contract with the Company (or with another
entity with which the Company has contracted for access to such entity's
provider network) at the time a medical service was rendered and Contracting
Providers are apprised of their contractual relationships with the Company's
Payor Clients through the receipt of a Payor Client Directory that lists each
Payor Client (or in some cases an affiliate of the Payor Client) and is
regularly updated. Second, the Company believes that, consistent with
representations generally made by its Payor Clients to their respective state
insurance commissioners, plan beneficiaries receive the same proportionate
reduction on any co-insurance portion of the medical claims payable by such
beneficiaries under the terms of those plans. This serves as a financial
incentive to the beneficiary to use the Company's Contracting Providers.
Third, the Company also offers Contracting Providers the Prepayment Option.
Payor Clients
In order to maximize its marketing efforts, the Company has focused on
establishing relationships with Payor Clients who have a nationwide presence
and who, therefore, insure in the aggregate large numbers of beneficiaries. As
of June 1, 1996, the Company had contracts with 35 Payor Clients, including
health insurance companies, TPAs, unions and self-insured entities. The
Company intends to continue to market to national payors because of the
significant claims volume which any single national payor represents. In
addition, as the Company expands its Payor Client base, it may enter into
contracts with regional and local payors. During 1995, two Payor Clients,
MetraHealth and John Hancock accounted for 35.7% and 21.7%, respectively, of
the Company's total revenue (pro forma). For the quarter ended March 31, 1996,
MetraHealth, John Hancock and CIGNA accounted
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for 28.1%, 16.5% and 11.8%, respectively, of total revenues. The loss of any
of these Payor Clients could have a material adverse effect on the Company.
The duration of the Company's contracts with its Payor Clients typically is
one year with automatic renewals on the anniversary date. However, such
contracts may be terminated by either party at any time, generally, upon 90
days' notice. The contracts do not preclude the Payor Clients from contracting
with other networks or developing or offering other products or services which
do not use the Company's services and/or Contracting Providers.
Payor Clients generally compensate the Company based on a percentage of the
price concessions from Contracting Providers on claims for such Payor Clients.
Such compensation generally is due to the Company by Payor Clients at the time
the Payor Client pays claims either directly to the Contracting Provider or
indirectly through the Company to the Contracting Provider. Compensation to
the Company varies depending upon the terms of individual contracts and the
aggregate amount of claims volume for the individual Payor Clients. Larger
claims volume can result in a decreased share of price concessions. Pursuant
to an agreement entered into between the Company and Chase Manhattan Bank, the
Company has arranged for EFT payments to certain Contracting Providers on
behalf of certain Payor Clients. This EFT arrangement facilitates the
administrative payment of claims for the benefit of both Contracting Providers
and Payor Clients.
Capitated Network
Under increasing pressure to contain health care costs, insurers are turning
to capitation to control their costs and to share the risk with providers. In
recognition of this, particularly in areas with heavy managed care penetration
rates, such as southern California, the Company is establishing a capitated
network of hospitals utilizing incentive-based reimbursement principles (the
"Capitated Network"). Using published "base line" age and sex-adjusted monthly
capitation rates for standard managed care programs, the Company and providers
in the Capitated Network share in savings when physician gatekeepers manage
health care expenditures below projected capitation levels.
At March 31, 1996, the Capitated Network established by the Company was
comprised of four California Foundations of Medical Care, representing 54
hospitals and 5,350 primary care physicians. This network is currently being
offered to those Payor Clients with a large number of insured beneficiaries in
California. The Company plans to expand its Capitated Network in future
periods by concentrating on those states with a high level of managed care
penetration rates and currently is negotiating in certain of those states for
capitated arrangements.
SOFTWARE SYSTEMS CAPABILITIES
Information Systems
In order to influence and control health care costs, payors and providers
must have the ability to monitor costs. Because of the number of variables
that may affect total health care-related expenses, effective monitoring of
medical costs is difficult. The Company utilizes a broad range of information
systems applications to support its business and to enhance its ability to
service its Payor Clients and Contracting Providers. The Company believes that
its systems provide for the high level of flexibility and functionality
necessary to service both its Payor Clients and Contracting Providers.
The systems are able to accommodate a variety of insurance products, changes
and modifications of contractual arrangements with Contracting Providers and
generate a range of encounter data reports. Such reports include both the cost
per service and the frequency of service by a Contracting Provider to a
beneficiary of a Payor Client. In the Capitated Network, sophisticated systems
capabilities are necessary to support physician and hospital groups in
administering the allocation and disbursement to all providers in the
Capitated Network. In addition to allocating risk and disbursing capitation
among providers, the systems have the capability to adjudicate claims and to
generate the encounter data necessary to support quality assurance programs.
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Claims Data Transmission and Repricing Systems
In order for the Company's Payor Clients to access the contractual
arrangements which the Company has with its Contracting Providers, the Company
has installed, in the facilities of its larger Payor Clients, the appropriate
hardware and software necessary to provide such Payor Clients with direct
access to the Company's provider database. To facilitate the repricing of
medical claims received by Payor Clients, the Company has developed a system
for the electronic transmission of claims and repricing data to such Payor
Clients. The Company has also installed the necessary software at these same
facilities to access the repricing database. All information in the provider
database and in the repricing database is updated monthly by electronic
interface between the Company and the Payor Clients. The Company believes that
the availability of these products and services to Payor Clients strengthens
the relationship between the Payor Clients and the Company and adds value to
the Company's contracts with such Payor Clients.
For Contracting Providers, the Company calculates the repricing of all
claims from such Contracting Providers to its Payor Clients in accordance with
the price concessions of the individual contract with that Contracting
Provider. This calculation is furnished to the Contracting Provider in the
form of a transmittal notice so that it can verify the accuracy of payments it
receives from Payor Clients.
Provider Database
A wide range of reimbursement rates exists among providers for the same
procedures and services. These variations are not based solely on geographic
location and there can be a wide variety of reimbursement rates within one
geographic area. The Company has developed a provider database that tracks
various reimbursement rates and other key indicators among provider hospitals.
These indicators include charges per day, occupancy rates and the volume of
medical claims being generated by each Contracting Provider for each of the
Payor Clients. This database is available to all Payor Clients to assist them
in evaluating which Providers may be cost effective.
OTHER ACTIVITIES
Multifunction Health and Credit Card
AHCS is negotiating with issuing banks, and selected Payor Clients to issue
a combined health insurance identification card and credit card ("Health
Card"). When implemented, the Health Card will combine the health benefit
information of a traditional health insurance identification card with the
credit facility of a VISA card. Recipients of the Health Card will receive the
traditional monthly statement issued to VISA credit card holders. This
statement may also include customized, by zip code clusters, messages to
health plan beneficiaries from their insurer. These messages may include
information relating to local providers who offer price concessions on medical
services. In addition to the foregoing, the Health Card potentially can
perform a wide range of functions including: (i) channelling beneficiaries to
specific providers; (ii) confirming to Contracting Providers that the Payor
Client is directing its beneficiaries to such providers; (iii) making the
beneficiaries of Payor Clients aware that they can receive discounts from
specific Contracting Providers; (iv) providing the beneficiaries of Payor
Clients with a line of credit for any purchase which utilizes the VISA card;
(v) accelerating payment to Contracting Providers for these expenses to the
extent that beneficiaries elect to charge the non-covered portions of their
medical expenses to the Health Card and (vi) assisting the Payor Clients to
establish a long-term relationship with individual beneficiaries by allowing
them to charge their medical insurance premiums to the Health Card, which
offers the potential to reduce the cost of premium collection to the Payor
Clients.
In each instance that a recipient of a Health Card uses the Health Card for
any charge, including charges for medical services or for insurance premiums,
the Company will receive a fee from the issuing bank based on the amount
charged. The Company has filed for issuance of a patent for the Health Card.
There can be no assurance, however, that a patent will be granted.
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Administration of CHCBP Program
NEWCO administers CHCBP which is a benefit program that allows certain
groups of military health service beneficiaries to continue receiving benefits
under CHAMPUS when they lose their eligibility for military health care. The
Company processes applications, tracks and maintains enrollment, and collects
premiums for individuals or families who enroll in the CHCBP program.
AGREEMENT WITH AHP
In December 1995, AHP transferred the Transferred Client Group to the
Company through the transfer of specified AHP payor clients (the "Transfer
Clients"). The Transferred Client Group represented approximately 45.0% of
AHP's revenues for the year ended December 31, 1995, and did not include the
business of Principal Mutual, a significant payor client of AHP. AHP is an
indirect wholly-owned subsidiary of Principal Mutual and thus Principal
Mutual, directly and indirectly, receives the full benefit of the price
concessions available through the AHP provider network. AHP's predecessor was
originally organized by Mr. Blair in December 1988. Mr. Blair was the primary
stockholder of AHP when Principal Mutual, through a subsidiary, acquired it in
June 1992. At the time of such acquisition, AHP technically was a subsidiary
of the acquired entity, Direct Health, Inc., which subsequently was merged
into AHP. This acquisition was finalized on May 3, 1993, upon the termination
of a put arrangement in favor of the Principal Mutual subsidiary, supported by
escrowed funds, which was part of the acquisition agreement in June 1992.
In addition, on December 31, 1995, AHP agreed to the termination of the
marketing arrangements IM&I had with AHP. Prior to its contribution by Mr.
Blair to the Company effective December 31, 1995, IM&I operated primarily as a
marketing agent for AHP to certain governmental and commercial payors, and
IM&I shared with AHP the fees earned from those payors. IM&I was organized by
Mr. Blair in May 1989 but did not conduct any significant operations until
July 1993. IM&I has been contributed to the Company. The Company now has both
the AHP and the IM&I rights with respect to Payor Clients who were obtained by
IM&I.
The transfer of the Transfer Clients from AHP to the Company has been
effected by the assignment by AHP of its contract rights with those Transfer
Clients to the Company, subject to any right of a Transfer Client to consent
to the assignment of the contract, combined with AHP's grant to the Company of
permission for the Company to contract separately with those Transfer Clients,
and thereby terminate the contractual arrangement of those Transfer Clients
with AHP. During the transition period between the transfer of the Transfer
Clients and any required consent to assignment of the contract or UP&UP
separately contracting with the Transfer Client, UP&UP is entitled to the
revenue under the Transfer Client contracts. To facilitate the transfer and
accommodate the needs of the Transfer Clients during the transitional period
needed to complete the transfer, AHP agreed that the Transfer Clients could
continue to access the AHP provider network through the Company without any
payment to AHP, except to the extent necessary to cover costs of AHP under
certain sharing arrangements it has with other provider networks. Because the
contracts in question generally require the consent of the Transfer Client for
the assignment of the contract and because of the Company's desire to promote
its unique contractual arrangements involving the Prepayment Option, the
Company has been negotiating new contracts with the Transfer Clients. As of
June 1, 1996, the Company had obtained new Payor Client contracts with
Transfer Clients, who represented approximately 96% of the 1995 Transfer
Clients' revenue.
COMPETITION
The health care industry is fragmented, competitive and evolving. The
traditional functions of payors and providers are beginning to overlap in
certain arenas and there is no consensus as to the ultimate structure of the
health care industry.
The Company potentially competes with any entity that contracts with payors
to offer them a means to contain or reduce the cost of their medical claims'
expenses. These groups of potential competitors could include HMOs, preferred
provider organizations, PHOs and other managed care providers, including
networks, organizations and companies owned directly or indirectly by
Principal Mutual.
26
<PAGE>
Payors could, to the detriment of the Company's business strategy, elect to
establish their own proprietary provider contractual relationships, thus
eliminating their need to access provider price concessions made available by
third parties such as the Company. Likewise, providers could elect to contract
directly with payors. Such action, if taken by the majority of providers,
could jeopardize the business of the Company.
Several potential competitors are significantly larger and better
capitalized than the Company. Many competitors have ongoing access to greater
resources, provide a more comprehensive range of services, and have greater
experience in providing those services offered by the Company. Furthermore,
various competitors have longer term business relationships with payors and
providers than does the Company.
The health care industry is considered to be a growing industry.
Accordingly, the industry may attract additional potential competitors to the
Company.
GOVERNMENT REGULATION
General
As an entity conducting business within the health care industry, the
Company's operations are potentially subject to extensive and increasing
regulation by a number of governmental entities at the federal, state and
local levels. The Company and its affiliates are also subject to laws and
regulations relating to business corporations in general. The Company believes
its operations are in material compliance with applicable laws as currently
interpreted. Nevertheless, because of the structure of the Company, certain
aspects of the Company's current or anticipated business operations could fall
within the regulatory oversight of federal or state authorities, and there can
be no assurance that a review of the Company's business by courts or
regulatory authorities will not result in a determination that could adversely
affect the operations of the Company. There also can be no assurance that the
regulatory environment in which the Company operates will not change
significantly in the future, which change could restrict the Company's
existing operations, expansion, financial condition or opportunities for
success. See "Business--UP&UP Network and Payor Clients--Provider Network and
Prepayment Option."
Health Care Reform
The agencies and legislative bodies of the states and federal government
recently have focused significant attention on reforming the health care
system in the United States. Within the past two years, a broad range of
health care reform measures have been introduced in Congress and in certain
state legislatures. Additional health care reform measures have been brought
before the public in state voter initiatives. These initiatives range from
those that would tend to encourage managed care, such as allowing physician
and hospital groups to accept risk, to those that would impede managed care,
such as mandating that any willing provider could participate in any health
plan. Among the proposals that have been considered are cost controls on
hospitals, insurance market reforms to increase the availability of group
health insurance to small businesses, requirements that all businesses offer
health insurance coverage to their employees and the creation of a single
government health insurance plan at the state or federal level that would
cover all citizens. Legislative interest recently has focused on the effect of
managed care reimbursement mechanisms on health care service utilization and
quality of service. It is not clear at this time what proposals, if any, will
be adopted or, if adopted what effect, if any, such proposals would have on
the Company. Certain proposals, such as containment of health care costs that
could include a freeze on prices charged by physicians, hospitals or other
health care providers, could adversely affect the Company. There can be no
assurance that currently proposed or future health care legislation or
policies or other changes in the administration or interpretation of
governmental health care programs, laws, regulations or policies will not have
a material adverse effect on the Company's business, financial condition or
results of operations.
State Licensure
The Company believes that its current business activities are not subject to
state licensure, other than such general business licensure as may be required
of all domestic or foreign business corporations in a jurisdiction. However,
it is possible that regulatory authorities in some states might conclude that
some of the Company's
27
<PAGE>
activities subject it to licensure as a PPO or similar entity. In some states,
such licensure may be conditioned on the licensed entity engaging in
practices, such as quality assurance or utilization review, that are beyond
the scope of the Company's current or anticipated operations. Although the
Company believes that, in general, it would be able to modify its operations
to obtain any licenses that were deemed to be required, there can be no
assurance that the Company would be able to modify its operations, or
otherwise to obtain or to maintain any such licenses.
ERISA Regulation
It is possible that in the usual course of its business the Company could be
deemed to provide services to employee benefit plans regulated under the
Employee Retirement Income Security Act of 1974, as amended ("ERISA"),
including self-insured health benefit plans. Recently, the U.S. Department of
Labor ("DOL"), the federal agency that administers ERISA, has been auditing
certain insurance companies in connection with their practices involving
medical provider discounts and the transfer of those discounts to self-insured
ERISA plans. In connection with these audits, DOL has indicated that the
negotiation and administration of provider discount arrangements by these
insurance companies for the benefit of ERISA plans could constitute the
activities of an ERISA fiduciary. The Company is not engaged in the business
of insurance under state law nor does it provide administrative services to
ERISA-regulated benefit plans. Although the Company believes that its
practices relating to provider discount arrangements are beyond the scope of
ERISA regulation, there can be no assurance that DOL or some other person
would not assert that the Company acts as an ERISA fiduciary with respect to
its limited activities for self-insured ERISA plans. In the unlikely event
that the Company were deemed to be an ERISA fiduciary, the Company believes
that it would be viewed as being in compliance with applicable ERISA rules.
Anti-Remuneration Laws
Medicare and Medicaid law provides civil and criminal penalties for paying
or receiving any remuneration to induce the referral of Medicare or Medicaid
patients, or to induce the purchase or the arranging for or recommending of
the purchase of items or services for which payment may be made under
Medicare, Medicaid or other federally-funded state health care programs.
Various exceptions and "safe harbors," including those applicable to certain
properly reported discounts, may be available in appropriate circumstances.
Several states also have similar laws which are not limited to services for
which Medicare or Medicaid payment may be made. State laws vary and have been
infrequently interpreted by courts or regulatory agencies. It is possible that
enforcement officials could seek to review the fees paid to or by the Company
to determine whether such fees should be deemed to be unlawful remuneration
given indirectly by providers in exchange for arranging for the referral of
patients from its Payor Clients. While there can be no assurance that the
Company's position would be upheld if challenged, the Company believes that
its fee arrangements represent reasonable compensation for legitimate services
actually provided to or by the Company and should not be deemed to be unlawful
remuneration under these anti-remuneration laws.
LEGAL PROCEEDINGS
Except as discussed below, the Company currently is not a party to any legal
proceedings, nor is it aware of any legal proceedings threatened against it.
On April 26, 1996, a civil complaint was filed against the Company in the
United States District Court for the Northern District of Illinois by
HealthCare Compare Corporation d/b/a The Affordable Medical Networks
("HealthCare Compare"). HealthCare Compare seeks injunctive and other relief,
including possible damages, based generally on allegations that
representatives of the Company, in at least four instances, made various
misrepresentations to prospective Contracting Providers, including to the
effect that the Company's provider network was affiliated with HealthCare
Compare's provider network or that HealthCare Compare had agreed to utilize
the Company's provider network. The Company denies the allegations in the
complaint and believes the complaint by HealthCare Compare is without merit.
The Company intends to vigorously defend against the complaint.
28
<PAGE>
EMPLOYEES
As of April 1, 1996, the Company employed 43 people on a full-time basis.
The Company believes that its relations with its employees are good.
PROPERTY
The Company leases approximately 22,500 square feet at 2275 Research
Boulevard, Rockville, Maryland. This space is provided under the terms of a
lease that expires in February 2001. The current cost is $29,000 per month,
with annual escalators. The Company believes that its current facilities are
adequate for its existing needs and that additional suitable space will be
available as required.
29
<PAGE>
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The Board of Directors of the Company will be divided into three classes,
each of which will contain at least two directors. The directors will be
elected by the stockholders of the Company for staggered three-year terms, or
until their successors are elected and qualified. Currently, Thomas L. Blair is
and has been the sole director of the Company since its incorporation in
January 1995. The other persons named below as directors have consented to
become directors of the Company and, prior to the completion of this Offering,
will be made directors for the terms specified below.
The directors and executive officers of the Company, and their respective
ages, expiration of term of office as director and positions with the Company
as of May 31, 1996, are as follows:
<TABLE>
<CAPTION>
EXPIRATION OF
NAME AGE TERM AS DIRECTOR POSITION
---- --- ---------------- --------
<S> <C> <C> <C>
Thomas L. Blair............ 51 1999 Chairman of the Board,
President and Chief Executive
Officer
S. Joseph Bruno............ 47 -- Chief Financial Officer and
Secretary
Spiro A. Karadimas......... 38 -- Vice President of Operations
Michael C. Miller.......... 47 -- Vice President for Marketing
Michael A. Smith........... 46 -- President of AHCS
David J. Drury(1).......... 51 1997 Director
Thomas J. Graf(1).......... 48 1999 Director
Julia Lawler(1)............ 36 1998 Director
Bette B. Anderson(1)....... 67 1998 Director
William E. Brock(1)........ 66 1997 Director
Frederick H. Graefe(1)..... 52 1999 Director
</TABLE>
- --------
(1) Has not yet been appointed to the Board of Directors but has consented to
serve as a Director.
Biographical Information
THOMAS L. BLAIR is the founder of UP&UP and has served since its formation in
January 1995 as its sole director and controlling holder of its outstanding
voting stock. He was the founder of AHP in 1989 and served as its President and
Chief Executive Officer from 1989 to 1992. From 1977 until 1988, Mr. Blair was
a Principal of Jurgovan & Blair, Inc. which developed and managed HMOs and
installed proprietary managed care systems in over sixty HMOs and other managed
care entities. Jurgovan & Blair, Inc. was acquired in 1986 by a major publicly-
traded insurer.
S. JOSEPH BRUNO has been the Chief Financial Officer and Secretary of the
Company since September 1995. Prior to joining the Company, Mr. Bruno was a
Partner at Coopers and Lybrand L.L.P. from 1989 to 1995. From 1986 to 1989, Mr.
Bruno was the Senior Vice President and Chief Financial Officer of Jurgovan &
Blair, Inc. From 1971 to 1986, Mr. Bruno worked at KPMG Peat Marwick L.L.P.,
where he served in various capacities, including Partner in both Washington,
D.C. and Rome, Italy.
SPIRO A. KARADIMAS has 18 years of information systems and operations
management experience in local government and private sector organizations. He
has been with the Company since March of 1995. Prior to that, Mr. Karadimas
headed the Information Systems and Operations departments at AHP. During the
period of 1992 through 1994, Mr. Karadimas designed and developed all in-house
and client support information systems and processes for AHP. During 1991 and
1992, Mr. Karadimas served as director of systems development for Columbia
Services Group, an Arlington, Virginia company.
30
<PAGE>
MICHAEL C. MILLER joined the Company in May 1996 as Vice President for
Marketing. Mr. Miller has 23 years of health care management, marketing and
operations experience. Prior to joining UP&UP, he was President and Chief
Executive Officer of Biotek Solutions, a pathology instrumentation technology
company, until its sale to Ventura Medical Systems in early 1995. He
previously served as Chief Operating Officer of Abbey Home HealthCare from
1992 to 1994. From 1991 to 1992, Mr. Miller was Senior Vice President for
CareLink Home Monitoring Corporation. From 1986 to 1991, Mr. Miller was
founder of Practicon Managed Care Systems, which was merged with Direct
Health, Inc. in 1988, where he held the position of Marketing Vice President.
From 1983 to 1986, Mr. Miller held positions of Marketing Vice President,
Corporate Director and Vice President of Strategic Planning for the St. Joseph
Health System.
MICHAEL A. SMITH joined the Company in August 1995, and is currently
President of AHCS. Prior to joining the Company, Mr. Smith was Executive Vice
President at Chevy Chase Bank, Chevy Chase, Maryland, with responsibility for
credit cards, consumer lending, marketing, branch administration and
operations. During his 13 years at Chevy Chase Bank, Mr. Smith had
responsibility for other areas from time to time, including human resources,
property management and branch acquisitions.
DAVID J. DRURY joined Principal Mutual in 1966 and currently serves as its
Chairman of the Board, President and Chief Executive Officer. Since 1970, Mr.
Drury has served as an officer of Principal Mutual in various other
capacities, including Executive Vice President and Chief Actuary.
THOMAS J. GRAF joined Principal Mutual in 1972 and, since 1994, has served
as Senior Vice President for Group Operation for the company. Since 1976, Mr.
Graf has served as an officer of Principal Mutual in various other capacities,
including Vice President, Chief Information Officer and Chief Actuary.
JULIA LAWLER joined Principal Mutual in 1984 and, since May 1995, has served
as Director, Capital Markets of the company. Since 1993, Ms. Lawler has served
as an officer of Principal Mutual in various other capacities, including
Executive Advisor to the President.
BETTE B. ANDERSON currently is Vice Chairman and from 1989 through 1995 was
President of Kelly Anderson & Pethick, management consultants. Ms. Anderson
serves on the Board of Directors for ITT Corporation, ITT Educational
Services, ITT Hartford Insurance and American Banknote Corp. She is Chairman
of the United States Treasury Historical Association and the Advisory Council
of the Girl Scouts of the United States of America. Previously, Ms. Anderson
served as Under Secretary of the United States Department of the Treasury and
prior to that was Senior Vice President in charge of credit administration for
the Citizens and Southern National Bank of Savannah, Georgia.
WILLIAM E. BROCK currently serves as Senior Counsel and Trustee of the
Center for Strategic and International Studies in Washington, D.C. From 1988
to 1994, Mr. Brock served as Chairman of the Brock Group, a consulting firm,
from 1988 to 1991 as the Chairman of the National Endowment for Democracy,
from 1985 to 1987 as the United States Secretary of Labor and from 1981 to
1985 as the United States Trade Representative. Mr. Brock has also served for
eight years as a member of the United States House of Representatives and for
six years as a member of the United States Senate. Mr. Brock is a director of
Sinclair Broadcasting Corp. and On Assignment, Inc.
FREDERICK H. GRAEFE has been a partner with the law firm of Baker &
Hostetler in Washington, D.C. since 1988, specializing in national health care
policy with an emphasis on comprehensive health care reform. He serves as
Washington counsel to several health care trade associations and coalitions of
hospitals and physicians, manufacturers, malpractice liability insurers and
health insurance companies.
31
<PAGE>
Compensation of Directors
Prior to the Offering, the Company's directors received no fees for their
services as directors. See "Management--Executive Compensation" and "Certain
Transactions" for compensation paid to Thomas L. Blair. Following the
Offering, the Company intends to pay directors who are not employees of the
Company or of Principal Mutual $1,000 for each Board meeting that they attend.
COMMITTEES OF THE BOARD OF DIRECTORS
After the completion of this Offering, the Board of Directors of the Company
will have three standing committees: the Executive Committee, the Audit
Committee and the Compensation Committee.
The Executive Committee will have the power to deal with important matters
which arise between meetings of the Board of Directors and upon which action
must be taken or attention given prior to the next scheduled meeting of the
Board of Directors.
The Audit Committee will have general responsibility for supervision of
financial controls, as well as for accounting and audit activities of the
Company. The Audit Committee will annually review the qualifications of the
Company's independent certified public accountants, make recommendations to
the Board of Directors as to their selection and review the planning, fees and
results of their audit. The members of the Audit Committee will consist solely
of certain non-employee directors as and when elected.
The Compensation Committee will have the responsibility of recommending
salary and incentive compensation for executive officers to the Board of
Directors.
EXECUTIVE COMPENSATION
The following table and accompanying footnotes provide certain summary
information concerning the compensation paid by the Company to the Chief
Executive Officer and the three other most highly compensated executive
officers of the Company (the "Named Officers"), in each case for services
rendered in all capacities to the Company and its subsidiaries for the year
ended December 31, 1995.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL LONG-TERM
COMPENSATION COMPENSATION
-------------------- ------------
NAME AND PRINCIPAL RESTRICTED ALL OTHER
POSITIONS YEAR SALARY($) BONUS($) STOCK AWARDS COMPENSATION
------------------ ---- --------- -------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Thomas L. Blair.......... 1995 -- (1) $603,345(2)
Chairman of the Board,
President and Chief
Executive Officer
Spiro A. Karadimas....... 1995 $83,333(3) $2,500 $55,000(4) 8,334(5)
Vice-President,
Operations
S. Joseph Bruno.......... 1995 70,000(6) 55,000(4) 35,000(7)
Chief Financial Officer
and Secretary
Michael A. Smith......... 1995 16,782(8) 14,000(9) 7,500(10)
President of AHCS
</TABLE>
- --------
(1) Mr. Blair neither requested nor accepted compensation from the Company
during 1995. For 1996 Mr. Blair received $66,000 in compensation from IM&I
while it was a subsidiary of the Company and prior to its merger into the
Company. In addition, it is expected that for 1996 the Company will pay
Mr. Blair $50,000 plus one percent of the Company's after-tax profits. See
"Management--Employment Agreements."
(2) Consists of payments from IM&I to Thomas L. Blair, the Chief Executive
Officer, President and sole stockholder of IM&I prior to his contribution
of IM&I to the Company.
(3) Represents salary for 1995. Mr. Karadimas' salary for 1996 is expected to
be $200,000.
32
<PAGE>
(4) Shortly after the formation of the Company, in January 1995, Mr. Blair gave
shares of Common Stock of the Company to approximately 40 individuals or
family groups. Such gifts included 490,000 shares each to Messrs. Bruno and
Karadimas, including other members of their immediate families, and were
considered by the parties as private and personal gifts based on their
long-term friendships and personal relationships. Subsequently Messrs.
Bruno and Karadimas joined the Company as executive officers. Therefore,
while the Company does not consider and has not treated, other than for
accounting purposes, such gifts to Messrs. Bruno and Karadimas as
compensation, the Company has treated such gifts, for accounting purposes,
as non-cash compensation expense and has reported an aggregate of $110,000
in 1995 for such expense.
(5) Consists of compensation paid to Mr. Karadimas from IM&I.
(6) Represents salary for 1995. Mr. Bruno's salary for 1996 is expected to be
$250,000.
(7) Consists of consulting fees paid by the Company to Mr. Bruno prior to his
becoming a salaried employee of the Company.
(8) Represents salary for 1995. Mr. Smith's salary for 1996 is expected to be
$200,000. In addition, Mr. Smith owns 10% of the outstanding common stock
of AHCS.
(9) Represents the non-cash compensation expense recorded by the Company, for
accounting purposes, for 128,000 shares of Common Stock given to Mr. Smith
by Mr. Blair as part of the inducement for Mr. Smith to become President
of AHCS.
(10) Consists of consulting fees paid by the Company to Mr. Smith prior to his
becoming a salaried employee of the Company.
EMPLOYMENT AGREEMENTS
The Company has entered into employment agreements, effective upon the
completion of the Offering, with Messrs. Blair, Karadimas, Bruno and Smith
(the "Executives.") The employment agreements are intended to ensure that the
Company will be able to maintain a stable and competent management base after
the Offering. The continued success of the Company depends to a significant
degree on the skills and competence of these Executives. See "Risk Factors--
Dependence on Key Personnel."
The employment agreements, which are substantially similar for each of the
four Executives, provide for two-year terms. Mr. Blair's salary, pursuant to
his employment agreement, will be $50,000 per year plus one percent of the
Company's annual after-tax profits. The base salaries will be $200,000,
$250,000 and $200,000, respectively, for Messrs. Karadimas, Bruno and Smith
for a one-year period following the completion of the Offering. Base salary
may be increased by the Company's Board of Directors, in the case of Mr.
Blair, and by the Company's President, in the case of Messrs. Karadimas, Bruno
and Smith. In addition to base salary, the employment agreements provide for,
among other things, participation by the Executives in employee benefit plans,
other fringe benefits applicable to executive personnel and reimbursement of
reasonable expenses incurred in promoting the business of the Company.
Upon the Executive's termination for cause, as defined in the employment
agreements, or upon the Executive's voluntary resignation, the Executive shall
be entitled only to such compensation and benefits as shall have accrued
through the date of the Executive's termination or resignation, as the case
may be. In the event that the Executive is terminated for any reason other
than cause or voluntary resignation, including termination by reason of death
or disability, the Executive shall receive payments under the employment
agreement due for the remaining term of the employment agreement, provided
that such payment shall not be less than the payment due for a twelve-month
period. Upon an Executive's voluntary resignation or termination for cause
during the term of the agreement, each employment agreement provides that, for
a period of two years from the date of termination, the Executive will not
compete directly or indirectly with the business of the Company, nor will the
Executive solicit or contract with any entity that is a Contracting Payor or
Contracting Provider of the Company.
KEY MAN INSURANCE
The Company maintains $4.0 million of key man life insurance on Mr. Blair.
The proceeds of this insurance policy are payable to the Company. See "Certain
Transactions."
33
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding beneficial
ownership of the Company's Common Stock as of June 1, 1996, as adjusted to
reflect the sale of shares offered hereby, by (i) each person who is known by
the Company to own beneficially more than five percent of the Company's Common
Stock, (ii) each of the Company's directors and Named Officers and (iii) all
executive officers and directors as a group. The table assumes the conversion
of the Principal Preferred Stock into shares of Common Stock, the sale by the
Company of 2,400,000 shares of Common Stock pursuant to this Offering and no
exercise of the Underwriters' over-allotment option. Unless indicated
otherwise, the address of each of these persons is c/o United Payors & United
Providers, Inc., 2275 Research Boulevard, 6th Floor, Rockville, Maryland 20850.
<TABLE>
<CAPTION>
SHARES
BENEFICIALLY OWNED
-----------------------
NAME OF BENEFICIAL OWNER NUMBER PERCENTAGE
- ------------------------ --------- ----------
<S> <C> <C>
Principal Mutual(1)..................................... 4,400,000(2) 39.3%
David J. Drury(3)....................................... 4,400,000(4) 39.3
Thomas J. Graf(3)....................................... 4,400,000(4) 39.3
Julia Lawler(3)......................................... 4,400,000(4) 39.3
Thomas L. Blair......................................... 2,224,900(5) 19.9
Spiro A. Karadimas...................................... 490,000(6) 4.4
S. Joseph Bruno......................................... 490,000(7) 4.4
Michael C. Miller....................................... 2,750 *
Michael A. Smith........................................ 128,000 1.1
Bette B. Anderson....................................... 6,000 *
William E. Brock........................................ 6,500 *
Frederick H. Graefe..................................... 32,000 *
All executive officers and directors as a group......... 7,780,150 69.5
</TABLE>
- --------
* Represents less than 1.0% of the Company's Common Stock.
(1) Principal Mutual's address is 711 High Street, Des Moines, Iowa 50392.
(2) Principal Mutual currently owns indirectly the Principal Preferred Stock
which has the right, subject to certain limitations, to convert into that
number of shares of Common Stock equal to 50% of the then-outstanding
shares of Common Stock. The Principal Preferred Stock is subject to
automatic mandatory conversion into Common Stock immediately prior to the
sale of the shares of Common Stock in this Offering. See "Description of
Capital Stock--Principal Preferred Stock."
(3) Messrs. Drury's and Graf's and Ms. Lawler's address is c/o Principal Mutual
at Principal Mutual's address.
(4) Represents shares held of record by Principal Mutual, of which Mr. Drury is
Chairman of the Board, President and Chief Executive Officer, Mr. Graf is
Senior Vice President and Ms. Lawler is Director of Capital Markets.
(5) Thomas Blair, upon the organization of the Company, acquired 100% of the
outstanding Common Stock. The other current stockholders received their
shares from Mr. Blair. Without giving effect to the conversion of the
Principal Preferred Stock or this Offering, Mr. Blair owns 50.6% of the
outstanding Common Stock. Of Mr. Blair's shares, 2,011,100 are held jointly
with his wife, 200,000 are held solely by Mr. Blair's wife and
13,800 shares are held by a company he controls.
(6) Of this number, 90,000 shares are held in trust under the Uniform Gift to
Minors Act for Mr. Karadimas' children and 100,000 are in Mr. Karadimas'
wife's name.
(7) Of this number, 200,000 shares are held in trust under the Uniform Gift to
Minors Act for Mr. Bruno's children and 100,000 shares are in Mr. Bruno's
wife's name.
34
<PAGE>
CERTAIN TRANSACTIONS
See "Business--Agreement With AHP" for information regarding the transfer of
the Transferred Client Group by AHP, an indirect, wholly-owned subsidiary of
Principal Mutual, to the Company, and the contribution to the Company by
Thomas L. Blair of IM&I, which, pursuant to contractual arrangements with AHP,
in effect, served as a marketing agent for AHP business transferred to the
Company. The Company now incorporates both the AHP aspect and the IM&I aspect
of their joint business operations.
The Company currently holds a 6.0% interest in R.J. Associates which in turn
has a 50.0% ownership in Health Payors. Health Payors maintains a provider
network consisting of approximately 2,050 hospitals and other health care
providers which the Company makes available to its Payor Clients through an
agreement with Health Payors. In 1995, the Company incurred $70,000 in fees to
Health Payors for access to its provider network. At December 31, 1995 the
Company had advanced to Health Payors approximately $43,900 which is to be
used to offset a portion of future access fees. In addition, the Company has
an option, exercisable on or before December 31, 1996, to purchase the
remaining equity interest in R.J. Associates for approximately $5.0 million.
If the Company exercises such option, the two owners of R.J. Associates can
elect to receive $2.0 million of the purchase price in shares of the Company's
Common Stock. The Company has not yet made a decision whether or not to
exercise this option. In addition to the foregoing, during 1995, an entity
controlled by the two owners of R.J. Associates, through a consulting
arrangement, assisted the Company in its marketing efforts for an aggregate
payment of $132,000.
During 1995, the Company borrowed $4.0 million from Thomas L. Blair. The
loan carried interest at 5.0% and was payable on demand. The balance at
December 31, 1995 was $3.7 million plus accrued interest which was repaid to
Mr. Blair by the Company on March 22, 1996.
During 1994, IM&I borrowed $961,074 from Thomas L. Blair. This amount was
repaid to Mr. Blair by IM&I in 1995, at which time IM&I was wholly-owned by
Mr. Blair. In addition, during 1995, IM&I paid $300,000 to Principal Mutual
for life insurance coverage for Thomas L. Blair. Such amount is included as
compensation to Mr. Blair from IM&I during 1995, prior to Mr. Blair's
contribution of IM&I to the Company. Principal Mutual had no ownership
interest in IM&I.
During 1995, Messrs. Blair and Karadimas received commissions from AHP on
certain contracts with payor clients brought to AHP by such persons prior to
the formation of the Company. Amounts paid to Messrs. Blair and Karadimas by
AHP during 1995 in this regard totalled $418,383 and $63,058, respectively.
Upon AHP's contribution of the Transferred Client Group to the Company, Mr.
Blair directed that the Company retain any such commissions due to him in the
future.
During 1995, the Company and IM&I utilized, for corporate business purposes,
the services of a corporate jet owned by a company owned by Mr. Blair. The
amount paid by the Company and IM&I, respectively, to this corporation in 1995
was approximately $70,000 and $12,000.
35
<PAGE>
DESCRIPTION OF CAPITAL STOCK
GENERAL
The Company's Certificate of Incorporation provides that the Company may
issue up to 35,000,000 shares of Common Stock, par value $.01 per share and
5,000,000 shares of preferred stock, par value $.01 per share (the "Preferred
Stock"). There are 4,400,000 shares of Common Stock issued and outstanding
which are held by 60 stockholders of record, and there is one share of
Principal Preferred Stock issued and outstanding.
COMMON STOCK
Holders of Common Stock are entitled to one vote for each share held of
record on all matters to be submitted to a vote of the stockholders and do not
have preemptive rights. Certain matters require an 80% stockholder vote for
approval. See "Description of Capital Stock--Certain Anti-Takeover Effects."
The Company's Certificate of Incorporation does not provide for cumulative
voting for the election of directors. Subject to preferences that may be
applicable to any outstanding shares of Preferred Stock, holders of Common
Stock are entitled to receive ratably such dividends, if any, as may be
declared from time to time by the Board of Directors of the Company out of
funds legally available therefor. See "Dividend Policy." All outstanding
shares of Common Stock are, and the Common Stock to be sold in the Offering,
when issued and paid for, will be, fully paid and nonassessable. In the event
of any liquidation, dissolution or winding-up of the affairs of the Company,
holders of Common Stock will be entitled to share ratably in the assets of the
Company remaining after payment or provision for payment of all of the
Company's debts and obligations and liquidation payments to holders of
outstanding shares of Preferred Stock.
PREFERRED STOCK
Shares of Preferred Stock may be issued by the Company in series with such
preferences and designations as the Board of Directors may from time to time
determine. The Board of Directors can, without stockholder approval, issue
Preferred Stock with voting, dividend, liquidation and conversion rights which
could dilute the voting strength of the holders of the Common Stock and may
assist management in impeding an unfriendly takeover or attempted change in
control.
PRINCIPAL PREFERRED STOCK
The Company was organized in January 1995 jointly by Thomas L. Blair, who
contributed $1.0 million in exchange for 100% of the Common Stock, and a
wholly-owned subsidiary of Principal Mutual, which contributed $5.0 million in
exchange for the one share of Principal Preferred Stock, which is convertible,
subject to certain limitations, into 50% of the then-outstanding shares of
Common Stock after giving effect to such conversion. Other than the adjustment
of the number of outstanding shares of Common Stock effected in connection
with the Company's change in its domicile from Iowa to Delaware through the
merger of the Iowa corporation into a Delaware subsidiary created solely for
the purpose of effecting such change in domicile, no other shares of capital
stock of the Company have been issued by the Company.
The Principal Preferred Stock, by its terms, is subject to automatic and
mandatory conversion into Common Stock of the Company immediately prior to the
closing of the sale of the shares of Common Stock in this Offering. Thus,
after the sale of the shares of Common Stock pursuant to this Offering, the
Principal Preferred Stock shall no longer exist and the Company will have no
outstanding shares of Preferred Stock. After this Offering, Principal Mutual
will own directly or indirectly, 4,400,000 shares of Common Stock. This number
of shares reflects the shares of Common Stock into which the Principal
Preferred Stock converts.
CERTAIN ANTI-TAKEOVER EFFECTS
Certain provisions of the Company's Certificate of Incorporation and Bylaws
summarized in the following paragraphs may be deemed to have anti-takeover
effects. These provisions may have the effect of discouraging a
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<PAGE>
future takeover attempt which is not approved by the Board of Directors but
which individual Company stockholders may deem to be in their best interests
or in which stockholders may receive a substantial premium for their shares
over then-current market prices. As a result, stockholders who might desire to
participate in such a transaction may not have an opportunity to do so. Such
provisions will also render the removal of the current Board of Directors or
management of the Company more difficult. The following description of certain
of the provisions of the Certificate of Incorporation and Bylaws of the
Company is necessarily general and reference should be made in each case to
such Certificate of Incorporation and Bylaws, which are incorporated herein by
reference. See "Additional Information" as to how to obtain a copy of these
documents.
Classified Board of Directors
The Certificate of Incorporation and Bylaws of the Company provide that, at
any time that the Company has more than two directors, the Board of Directors
will be divided into three classes of directors, as nearly equal in number as
is reasonably possible, serving staggered terms, so that directors' initial
terms will expire either at the 1997, 1998 or 1999 annual meeting of the
stockholders. Starting with the 1997 annual meeting of the stockholders, one
class of directors will be elected each year for a three-year term. See
"Management--Directors and Executive Officers."
The Company believes that a classified Board of Directors will help to
assure the continuity and stability of the Board of Directors and the
Company's business strategies and policies as determined by the Board of
Directors, since a majority of the directors at any given time will have had
prior experience as directors of the Company. The Company believes that this,
in turn, will permit the Board of Directors to more effectively represent the
interests of stockholders.
With a classified Board of Directors, at least two annual meetings of
stockholders, instead of one, will generally be required to effect a change in
the majority of the Board of Directors. As a result, a provision relating to a
classified Board of Directors may discourage proxy contests for the election
of directors or purchases of a substantial block of the Common Stock because
such provision could operate to prevent obtaining control of the Board of
Directors in a relatively short period of time. The classification provision
could also have the effect of discouraging a third party from making a tender
offer or otherwise attempt to obtain control of the Company. Under the
Delaware General Corporation Law (the "DGCL"), unless the certificate of
incorporation otherwise provides, a director on a classified board may be
removed by the stockholders of the corporation only for cause. The Company's
Certificate of Incorporation provides that a director may be removed by the
stockholders of the Company for cause and then only with the approval of the
holders of 80% of the Company's outstanding voting stock.
Cumulative Voting, Special Meetings and Action by Written Consent
The Certificate of Incorporation does not provide for cumulative voting for
any purpose. Moreover, special meetings of stockholders of the Company may be
called only by the Board of Directors of the Company. The Certificate of
Incorporation also provides that any action required or permitted to be taken
by the stockholders of the Company may be taken only at an annual or special
meeting and prohibits stockholder action by written consent in lieu of a
meeting. These provisions, either individually or collectively, could operate
to prevent obtaining control of the Board of Directors in a relatively short
time period.
Authorized Shares
The Certificate of Incorporation authorizes the issuance of 35,000,000
shares of Common Stock and 5,000,000 shares of Preferred Stock. The Board of
Directors has sole authority to determine the terms of any one or more series
of Preferred Stock, including voting rights, conversion rates and liquidation
preferences. As a result of the ability to fix voting rights for a series of
Preferred Stock, the Board has the power, consistent with its fiduciary duty,
to issue a series of Preferred Stock to persons friendly to management in
order to attempt to
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<PAGE>
block a post-tender offer merger or other transaction by which a third party
seeks control, and thereby assist management to retain its position. The
Company's Board of Directors currently has no plans for the issuance of
additional shares of Preferred Stock or Common Stock.
Stockholder Vote Required to Approve Business Combinations with Principal
Stockholders
The Certificate of Incorporation requires the approval of the holders of 80%
of the Company's outstanding shares of voting stock to approve certain
"Business Combinations," as defined therein, and related transactions. Absent
this provision, Business Combinations, including mergers, consolidations and
sales of all or substantially all of the assets of a corporation must, subject
to certain exceptions, be approved by the vote of the holders of only a
majority of the outstanding shares of Common Stock of the Company and any
other affected class of stock, except to the extent that a greater vote would
be prescribed under Section 203 of the DGCL. See "Description of Capital
Stock--Certain Anti-Takeover Effects--Delaware Takeover Statute." Under the
Certificate of Incorporation, 80% approval of stockholders is required in
connection with any transaction involving an Interested Stockholder, as
defined below, except (i) in cases where the proposed transaction has been
approved in advance by a majority of those members of the Company's Board of
Directors who are unaffiliated with the Interested Stockholder and were
directors prior to the time when the Interested Stockholder became an
Interested Stockholder or (ii) if the proposed transaction meets certain
conditions set forth therein which are designed to afford the stockholders a
fair price in consideration for their shares, in which case, if a stockholder
vote is required, approval of only a majority of the outstanding shares of
voting stock would be sufficient. The term "Interested Stockholder" is defined
to include any individual, corporation, partnership or other entity, other
than the Company or its subsidiaries, which owns beneficially or controls,
directly or indirectly, 10% or more of the outstanding shares of voting stock
of the Company. This provision of the Certificate of Incorporation applies to
any "Business Combination," which is defined to include: (i) any merger or
consolidation of the Company or any of its subsidiaries with or into any
Interested Stockholder or affiliate, as defined in the Certificate of
Incorporation, of an Interested Stockholder, (ii) any sale, lease, exchange,
mortgage, transfer or other disposition to or with any Interested Stockholder
or affiliate of 25% or more of the assets of the Company or combined assets of
the Company and its subsidiaries, (iii) the issuance or transfer to any
Interested Stockholder or its affiliates by the Company, or any of its
subsidiaries, of any securities of the Company in exchange for any assets,
cash or securities the value of which equals or exceeds 25% of the fair market
value of the Common Stock of the Company, (iv) the adoption of any plan for
the liquidation or dissolution of the Company proposed by or on behalf of any
Interested Stockholder or affiliate thereof and (v) any reclassification of
securities, recapitalization, merger or consolidation of the Company which has
the effect of increasing the proportional share of Common Stock or any class
of equity or convertible securities of the Company owned directly or
indirectly by an Interested Stockholder or affiliate thereof. The directors
and executive officers of the Company and their affiliates will control the
voting of approximately 80% of the Company's Common Stock following the
Offering, thereby enabling them to prevent the approval of the transactions
requiring the approval of at least 80% of the Company's outstanding shares of
voting stock described hereinabove.
Evaluation of Offers
The Certificate of Incorporation of the Company further provides that the
Board of Directors of the Company, when evaluating any offer of another
"Person," as defined therein, to: (i) make a tender or exchange offer for any
equity security of the Company, (ii) merge or consolidate the Company with
another corporation or entity or (iii) purchase or otherwise acquire all or
substantially all of the properties and assets of the Company, may, in
connection with the exercise of its judgment in determining what is in the
best interest of the Company and the stockholders of the Company, give due
consideration to all relevant factors, including, without limitation, the
social and economic effects of acceptance of such offer on the Company's
customers and employees. By having these standards in the Certificate of
Incorporation of the Company, the Board of Directors may be in a stronger
position to oppose such a transaction if the Board concludes that the
transaction would not be in the best interest of the Company, even if the
price offered is significantly greater than the then-market price of any
equity security of the Company.
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Amendment of Certificate of Incorporation and Bylaws
Amendments to the Company's Certificate of Incorporation must be approved by
a majority vote of its Board of Directors and also by a majority of the
outstanding shares of its voting stock; provided, however, that an affirmative
vote of at least 80% of the outstanding voting stock entitled to vote is
required to amend or to repeal certain provisions of the Certificate of
Incorporation, including the provisions relating to approval of certain
business combinations, calling special meetings, the number and classification
of directors, director and officer indemnification by the Company and certain
amendments of the Company Certificate of Incorporation. The Company's Bylaws
may be amended by its Board of Directors, or by a vote of 80% of the total
votes eligible to be voted at a duly constituted meeting of stockholders.
Advance Notice Provisions for Stockholder Proposals and Stockholder
Nominations of Directors
The Bylaws establish an advance notice procedure with regard to the
nomination, other than by or at the direction of the Board or a committee
thereof, of candidates for election as directors (the "Nomination Procedure")
and with regard to other matters to be brought by stockholders before an
annual meeting of stockholders of the Company (the "Business Procedure"). The
Nomination Procedure requires that a stockholder give 90 days' advance written
notice, in proper form, of a planned nomination for the Board of Directors to
the Secretary of the Company. The requirements as to the form and timing of
that notice are specified in the Bylaws. If the Chairman of the Board of
Directors determines that a person was not nominated in accordance with the
Nomination Procedure, such person will not be eligible for election as a
director. Under the Business Procedure, a stockholder seeking to have any
business conducted at an annual meeting must give 90 days' advance written
notice, in proper form, to the Secretary of the Company. The requirements as
to the form and timing of that notice are specified in the Bylaws. If the
Chairman of the Board of Directors determines that the other business was not
properly brought before such meeting in accordance with the Business
Procedure, such business will not be conducted at such meeting.
Although the Bylaws do not give the Board of Directors any power to approve
or disapprove stockholder nominations for the election of directors or of any
other business desired by stockholders to be conducted at an annual or any
other meeting, the Bylaws (i) may have the effect of precluding a nomination
for the election of directors or precluding the conduct of business at a
particular annual meeting if the proper procedures are not followed or (ii)
may discourage or deter a third party from conducting a solicitation of
proxies to elect its own slate of directors or otherwise attempting to obtain
control of the Company, even if the conduct of such solicitation or such
attempt might be beneficial to the Company and its stockholders.
Delaware Takeover Statute
The Company is subject to Section 203 of the DGCL which, subject to certain
exceptions, prohibits a Delaware corporation from engaging in any of a broad
range of business combinations with any interested stockholder, as defined
below, for a period of three years following the date that such stockholder
became an interested stockholder, unless: (i) prior to such date, the Board of
Directors of the corporation approved either the business combination or the
transaction which resulted in the stockholder becoming an interested
stockholder; (ii) upon consummation of the transaction which resulted in the
stockholder becoming an interested stockholder, the interested stockholder
owned at least 85% of the voting stock of the corporation outstanding at the
time the transaction commenced, excluding for purposes of determining the
number of shares outstanding those shares owned (a) by persons who are
directors and officers and (b) by employee stock plans in which employee
participants do not have the right to determine confidentially whether shares
held subject to the plan will be tendered in a tender or exchange offer, or
(iii) on or after such date, the business combination is approved by the Board
of Directors and authorized at an annual or special meeting of stockholders,
and not by written consent, by the affirmative vote of at least 66 2/3% of the
outstanding voting stock which is not owned by the interested stockholder. An
"interested stockholder" is defined as any person that is (a) the owner of 15%
or more of the outstanding voting stock of the corporation or (b) an affiliate
or associate of the corporation and was the owner of 15% or more of the
outstanding voting stock of the corporation at any time within the three-year
period
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<PAGE>
immediately prior to the date on which it is sought to be determined whether
such person is an interested stockholder. The Company's Certificate of
Incorporation also contains a provision relating to Business Combinations with
an Interested Stockholder, which is defined to include persons who
beneficially own 10% or more of the outstanding shares of voting stock of the
Company (compared to 15% of the outstanding voting stock under Section 203 of
the DGCL). Such provision of the Certificate of Incorporation requires the
approval of 80% of the Company's outstanding shares of voting stock to approve
certain Business Combinations (compared to 66 2/3% of the outstanding voting
stock under Section 203 of the DGCL). See "Description of Capital Stock--
Certain Anti-Takeover Effects--Stockholder Vote Required to Approve Business
Combinations with Principal Stockholders."
LIMITATIONS ON LIABILITY AND INDEMNIFICATION OF DIRECTORS AND OFFICERS
Limitations on Liabilities
The Company's Certificate of Incorporation contains a provision eliminating
or limiting director liability to the Company and its stockholders for
monetary damages arising from acts or omissions in the director's capacity as
a director. The provision does not, however, eliminate or limit the personal
liability of a director (i) for any breach of such director's duty of loyalty
to the Company or its stockholders, (ii) for acts or omissions not in good
faith or which involve intentional misconduct or a knowing violation of law,
(iii) under the Delaware statutory provision making directors personally
liable, under a negligence standard, for unlawful dividends or unlawful stock
purchases or redemptions or (iv) for any transaction from which the director
derived an improper personal benefit. This provision offers persons who serve
on the Board of Directors of the Company protection against awards of monetary
damages resulting from breaches of their duty of care, except as indicated
above. As a result of this provision, the ability of the Company or a
stockholder thereof to successfully prosecute an action against a director for
a breach of his duty of care is limited. However, the provision does not
affect the availability of equitable remedies such as an injunction or
rescission based upon a director's breach of his duty of care. The Securities
and Exchange Commission (the "Commission") has taken the position that the
provision will have no effect on claims arising under the federal securities
laws.
Indemnification
The Company's Certificate of Incorporation and Bylaws provide for mandatory
indemnification rights to the maximum extent permitted by applicable law,
subject to limited exceptions, to any director or officer of the Company who,
by reason of the fact that he or she is a director or officer of the Company,
is involved in a legal proceeding of any nature. Such indemnification rights
include reimbursement for expenses incurred by such director or officer in
advance of the final disposition of such proceeding in accordance with the
applicable provisions of the DGCL. The Company may from time to time agree to
provide similar indemnifications to certain employees and other agents.
The Company has entered into separate indemnification agreements with its
directors and executive officers. Each indemnification agreement provides for,
among other things: (i) indemnification against any and all expenses,
judgments, fines, penalties and amounts paid in settlement of any claim
against an indemnified party unless it is determined, as provided in the
indemnification agreement, that indemnification is not permitted under law and
(ii) prompt advancement of expenses to any indemnitee in connection with his
other defense against any claim.
The Company may also maintain directors' and officers' liability insurance.
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for the Common Stock is American Stock
Transfer & Trust Company.
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SHARES ELIGIBLE FOR FUTURE SALE
Prior to this Offering, there has been no public market for the Common Stock
and there can be no assurance that a significant public market for the Common
Stock will develop or be sustained after the Offering. Sales of a substantial
number of shares of Common Stock in the public market after this Offering, or
the perception that such sales could occur, could adversely affect the market
price of the Common Stock and the Company's ability to raise capital through a
subsequent offering of securities. In connection with the Offering, certain
existing stockholders, officers and directors of the Company holding in the
aggregate 8,352,650 shares of Common Stock and certain persons allocated
shares for purchase have agreed not to offer, sell or otherwise dispose of
shares of Common Stock for a period of 180 days from the effective date of the
Offering without the prior written consent of Bear, Stearns & Co. Inc. as
Representative, as defined below, of the Underwriters. See "Underwriting" and
"Legal Matters."
Of the 11,200,000 shares of Common Stock to be outstanding after the
Offering, approximately 2,400,000 shares (2,760,000 shares if the
Underwriters' over-allotment option is exercised in full) are expected to be
available for resale in the public market without restriction immediately
following the Offering if held by holders who are not "affiliates" of the
Company, as defined in the Securities Act of 1933, as amended (the "Securities
Act"). The remaining shares are "restricted securities" within the meaning of
Rule 144 adopted under the Securities Act. These restricted shares were issued
and sold by the Company to Thomas L. Blair in a private transaction in
reliance upon an exemption from registration under the Securities Act. Mr.
Blair subsequently distributed certain of his shares to an aggregate of 45
individuals or family groups. Subject to the 180-day lock-up period pursuant
to agreements with the Underwriters, an, aggregate of 8,800,000 shares, which
are held by existing stockholders and are restricted securities, will be
available for resale subject, in the case of all of such shares, to the
holding period, quantity and manner of sale limitations of Rule 144. See
"Description of Capital Stock" and "Underwriting." Also see "Business--
Strategy--Establish a National Clearinghouse" regarding the proposed issuance
after this Offering of additional shares of Common Stock having a value based
on the initial public offering price in this Offering of $150,000 as part of
the EDICOMM Agreement. Such shares will be restricted securities.
In general, under Rule 144 as currently in effect, an "affiliate" of the
Company or any other person, or persons whose shares are aggregated, who has
beneficially owned restricted securities for at least two years will be
entitled to sell in any three-month period a number of shares that does not
exceed the greater of (i) 1% of the then-outstanding shares of Common Stock or
(ii) the average weekly trading volume of the then-outstanding shares during
the four calendar weeks immediately preceding the date on which notice of the
sale is filed with the Commission. Sales pursuant to Rule 144 are subject to
certain requirements relating to manner of sale, notice and availability of
current public information about the Company. A person, or persons whose
shares are aggregated, who is not deemed to have been an affiliate of the
Company at any time during the 90 days immediately preceding the sale and who
has beneficially owned his or her shares for at least three years is entitled
to sell such shares pursuant to Rule 144(k) without regard to the limitations
described above. On June 27, 1995, the Commission proposed to amend Rule 144
to reduce (i) the holding period from two years to one year for persons
wishing to sell restricted securities within the limits permitted under such
rule and (ii) the holding period from three years to two years for non-
affiliates after which the limitations under Rule 144 would not apply to the
resale of restricted securities.
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UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement between
the Company and Bear, Stearns & Co. Inc. ("Bear, Stearns") and Schroder
Wertheim & Co. Incorporated as the representatives (the "Representatives") of
the Underwriters named below (the "Underwriters"), each of the Underwriters
named below has severally agreed to purchase from the Company, and the Company
has agreed to sell to the Underwriters, the respective number of shares of
Common Stock set forth opposite each Underwriter's name below:
<TABLE>
<CAPTION>
NUMBER
UNDERWRITERS OF SHARES
------------ ---------
<S> <C>
Bear, Stearns & Co. Inc. ............................................. 617,500
Schroder Wertheim & Co. Incorporated.................................. 617,500
Alex. Brown & Sons Incorporated....................................... 45,000
Cowen & Company....................................................... 45,000
Deutsche Morgan Grenfell/C.J. Lawrence Inc............................ 45,000
Donaldson, Lufkin & Jenrette Securities Corporation................... 45,000
Goldman, Sachs & Co................................................... 45,000
Hambrecht & Quist LLC................................................. 45,000
Lehman Brothers Inc................................................... 45,000
Merrill Lynch, Pierce, Fenner & Smith Incorporated.................... 45,000
Montgomery Securities................................................. 45,000
J.P. Morgan Securities Inc............................................ 45,000
Morgan Stanley & Co. Incorporated..................................... 45,000
Oppenheimer & Co., Inc................................................ 45,000
Paine Webber Incorporated............................................. 45,000
Prudential Securities Incorporated.................................... 45,000
Robertson, Stephens & Company LLC..................................... 45,000
Salomon Brothers Inc.................................................. 45,000
Smith Barney Inc...................................................... 45,000
Allen & Company Incorporated.......................................... 25,000
The Chicago Corporation............................................... 25,000
Furman Selz LLC....................................................... 25,000
Interstate/Johnson Lane Corporation................................... 25,000
Josephthal Lyon & Ross Incorporated................................... 25,000
Legg Mason Wood Walker, Incorporated.................................. 25,000
McDonald & Company Securities, Inc.................................... 25,000
Needham & Company, Inc. .............................................. 25,000
Piper Jaffray Inc..................................................... 25,000
Principal Financial Securities, Inc................................... 25,000
The Robinson-Humphrey Company, Inc.................................... 25,000
Scott & Stringfellow, Inc............................................. 25,000
Southcoast Capital Corporation........................................ 25,000
Stephens Inc.......................................................... 25,000
Tucker Anthony Incorporated........................................... 25,000
Vector Securities International, Inc.................................. 25,000
---------
Total............................................................. 2,400,000
=========
</TABLE>
The Underwriting Agreement provides that the obligations of the several
Underwriters thereunder are subject to approval of certain legal matters by
counsel and to various other conditions. The nature of the Underwriters'
obligations is such that they are committed to purchase and pay for all of the
above shares of Common Stock if any are purchased.
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<PAGE>
Principal Financial Securities, Inc., a subsidiary of Principal Mutual, is
participating in the distribution of the shares as a member of the underwriting
syndicate. Because Principal Mutual beneficially owns more than ten percent of
the equity of the Company, the Offering is being conducted in accordance with
the applicable provisions of Rule 2720 of the Rules of Conduct of the National
Association of Securities Dealers, Inc. In accordance with these requirements,
Bear, Stearns has assumed the responsibilities of acting as "qualified
independent underwriter" and has recommended the maximum public offering price
for the shares of Common Stock in compliance with the requirements of Rule
2720. In connection with the Offering, Bear, Stearns has performed due
diligence investigations and has reviewed and participated in the preparation
of this Prospectus and the Registration Statement of which this Prospectus
forms a part. The initial public offering price of the Common Stock is no
higher than the price recommended by Bear, Stearns.
The Underwriters propose to offer the shares of Common Stock directly to the
public at the public offering price set forth on the cover page of this
Prospectus, and at such price less a concession not in excess of $.46 per share
of Common Stock to certain other dealers who are members of the National
Association of Securities Dealers, Inc. The Underwriters may allow, and such
dealers may reallow, concessions not in excess of $.10 per share to certain
other dealers. After the Offering, the offering price, concessions and other
selling terms may be changed by the Underwriters. The Common Stock is offered
subject to receipt and acceptance by the Underwriters and to certain other
conditions, including the right to reject orders in whole or in part.
The Company has granted a 30-day over-allotment option to the Underwriters to
purchase up to 360,000 additional shares of Common Stock of the Company
exercisable at the public offering price less the underwriting discount. If the
Underwriters exercise such over-allotment option, then each of the Underwriters
will be committed, subject to certain conditions, to purchase such additional
shares in approximately the same proportion as set forth in the above table.
All Common Stock sold to the Underwriters upon exercise of their over-allotment
option will be sold by the Company. The Underwriters may exercise such option
only to cover over-allotments made in connection with the sale of the shares of
Common Stock offered hereby. The underwriting agreement provides that the
Company will indemnify the Underwriters against certain liabilities under the
Securities Act or will contribute to payments that the Underwriters may be
required to make in respect thereof.
Certain of the Company's stockholders holding an aggregate of 8,352,650
shares of Common Stock (95% of the currently outstanding shares of Common
Stock) have agreed that they will not sell, grant any option for the sale of,
exercise any demand registration right with respect to, or otherwise dispose
of, any shares of Common Stock or any other equity securities of the Company
(including options or warrants) for a period of 180 days after the date hereof
without the prior written consent of the Representatives, subject to certain
limited exceptions. See "Business--Strategy--Establish a National
Clearinghouse" and "Shares Eligible for Future Sale."
Prior to the Offering, there has been no public market for the Common Stock
of the Company. Consequently, the initial offering price for the Common Stock
will be determined by negotiations between the Company and the Representatives
of the Underwriters. Among the factors to be considered in such negotiations
are the results of operations of the Company in recent periods, estimates of
the prospects of the Company and the industry in which the Company competes, an
assessment of the Company's management, the general state of the securities
markets at the time of the Offering and the prices of similar securities of
generally comparable companies. The Company has submitted an application for
approval of its Common Stock for quotation on the Nasdaq National Market under
the symbol "UPUP." There can be no assurance, however, that an active or
orderly trading market will develop for the Common Stock or that the Common
Stock will trade in the public markets subsequent to the Offering at or above
the initial offering price.
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<PAGE>
LEGAL MATTERS
Certain matters with respect to the validity of the issuance of the Common
Stock offered hereby are being passed upon for the Company by Muldoon, Murphy
& Faucette, Washington, D.C. The Company and the Underwriters have agreed to
allocate $700,000 of Common Stock for purchase in this Offering at the initial
public offering price by Douglas P. Faucette, a partner in Muldoon, Murphy &
Faucette. Certain legal matters relating to the Offering will be passed upon
for the Underwriters by Hogan & Hartson L.L.P., Washington, D.C. Mr. Faucette
has agreed that he will not sell, grant any option for sale of, or otherwise
dispose of, any shares of Common Stock or any other equity securities of the
Company, including options or warrants, for a period of 180 days after the
date thereof without the prior written consent of the Representatives subject
to certain limited exceptions. See "Shares Eligible for Future Sale."
EXPERTS
The consolidated balance sheet of United Payors & United Providers Inc., as
of December 31, 1995 and the related statements of operations, stockholders'
equity and cash flows for the period January 3, 1995 (date of incorporation)
to December 31, 1995, the balance sheets of the Transferred Client Group as of
December 31, 1993, 1994 and 1995 and the related statements of operations,
stockholder's equity and cash flows for each of the three years in the period
ended December 31, 1995, the balance sheets of Initial Managers and Investors,
Inc. as of December 31, 1993, 1994 and 1995 and the related statements of
operations, stockholders' equity and cash flows for each of the three years in
the period ended December 31, 1995, and the balance sheets of IM&I-NEWCO, Inc.
as of December 31, 1994 and 1995 and the statements of operations,
stockholder's equity and cash flows for the period from August 12, 1994 (the
date of incorporation) to December 31, 1994 and the year ended December 31,
1995, included in this Prospectus, have been included herein in reliance upon
the reports of Coopers & Lybrand L.L.P., independent accountants, given on the
authority of that firm as experts in accounting and auditing.
ADDITIONAL INFORMATION
The Company has filed with the Commission a registration statement on Form
S-1 (the "Registration Statement," which term encompasses all amendments,
exhibits and schedules thereto) under the Securities Act, with respect to the
Common Stock offered hereby. This Prospectus, which constitutes a part of the
Registration Statement, does not contain all of the information set forth in
the Registration Statement, certain parts of which have been omitted in
accordance with the rules and regulations of the Commission. Statements made
in this Prospectus as to the contents of any contract, agreement or other
document referred to are not necessarily complete. With respect to each such
contract, agreement or other document filed as an exhibit to the Registration
Statement, reference hereby is made to the exhibit for a more complete
description of the matter involved, and each such statement shall be deemed
qualified in its entirety by such reference. The Registration Statement filed
by the Company with the Commission, as well as such reports and other
information filed by the Company with the Commission, may be inspected and
copied at the public reference facilities maintained by the Commission at Room
1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549 and at
the regional offices of the Commission located at 7 World Trade Center, 13th
Floor, New York, New York 10048, and at Northwestern Atrium Center, 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of such material,
when filed, may also be obtained from the Public Reference Section of the
Commission at 450 Fifth Street, N.W., Washington, D.C. 20549 at prescribed
rates.
Upon consummation of the Offering, the Company will become subject to the
informational requirements of the Securities Exchange Act of 1934, as amended,
and, in accordance therewith, will file reports and other information with the
Commission in accordance with the Commission's rules. Such reports and other
information concerning the Company may be inspected and copied at the public
reference facilities and regional offices of the Commission referred to above.
44
<PAGE>
INDEX TO FINANCIAL STATEMENTS
UNITED PAYORS & UNITED PROVIDERS, INC. UNAUDITED PRO FORMA CONSOLIDATED
FINANCIAL INFORMATION
<TABLE>
<S> <C>
. Introduction........................................................... F-2
. Unaudited Pro Forma Consolidated Statement of Operation for the Year
Ended December 31, 1995................................................ F-3
. Notes to Unaudited Pro Forma Consolidated Financial Information........ F-4
UNITED PAYORS & UNITED PROVIDERS, INC.
. Report of Independent Accountants...................................... F-5
. Consolidated Balance Sheets as of December 31, 1995 and March 31, 1996
(Unaudited)............................................................ F-6
. Consolidated Statements of Operations for the Period from January 3,
1995 (Date of Incorporation) to December 31, 1995, for the Three Months
Ended March 31, 1995 and 1996 (Unaudited) and for the Three Months
Ended March 31, 1995 Pro Forma (Unaudited)............................. F-7
. Consolidated Statements of Stockholders' Equity for the Period from
January 3, 1995 (Date of Incorporation) to December 31, 1995 and for
the Three Months Ended March 31, 1996 (Unaudited)...................... F-8
. Consolidated Statements of Cash Flows for the Period from January 3,
1995 (Date of Incorporation) to December 31, 1995 and for the Three
Months Ended March 31, 1995 and 1996 (Unaudited)....................... F-9
. Notes to the Consolidated Financial Statements......................... F-10
THE TRANSFERRED CLIENT GROUP
. Report of Independent Accountants...................................... F-16
. Balance Sheets as of December 31, 1993, 1994 and 1995.................. F-17
. Statements of Operations for the Years Ended December 31, 1993, 1994
and 1995............................................................... F-18
. Statements of Stockholder's Equity (Deficit) for the Years Ended
December 31, 1993, 1994 and 1995....................................... F-19
. Statements of Cash Flows for the Years Ended December 31, 1993, 1994
and 1995............................................................... F-20
. Notes to the Financial Statements...................................... F-21
INITIAL MANAGERS AND INVESTORS, INC.
. Report of Independent Accountants...................................... F-23
. Balance Sheets as of December 31, 1993, 1994 and 1995.................. F-24
. Statements of Operations for the Years Ended December 31, 1993, 1994
and 1995............................................................... F-25
. Statements of Stockholder's Equity (Deficit) for the Years Ended
December 31, 1993, 1994 and 1995....................................... F-26
. Statements of Cash Flows for the Years Ended December 31, 1993, 1994
and 1995............................................................... F-27
. Notes to the Financial Statements...................................... F-28
IM&I-NEWCO, INC.
. Report of Independent Accountants...................................... F-32
. Balance Sheets as of December 31, 1994 and 1995........................ F-33
. Statements of Operations for the Period from August 12, 1994 (Date of
Incorporation) to December 31, 1994 and the Year Ended December 31,
1995................................................................... F-34
. Statements of Stockholders' Equity (Deficit) for the Period from August
12, 1994 (Date of Incorporation) to December 31, 1994 and the Year
Ended December 31, 1995................................................ F-35
. Statements of Cash Flows for the Period from August 12, 1994 (Date of
Incorporation) to December 31, 1994 and the Year Ended December 31,
1995................................................................... F-36
. Notes to the Financial Statements...................................... F-37
</TABLE>
F-1
<PAGE>
UNITED PAYORS & UNITED PROVIDERS, INC.
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL INFORMATION
The Unaudited Pro Forma Consolidated Statement of Operations for the year
ended December 31, 1995 presents, on a pro forma basis, the results of
operations of United Payors & United Providers, Inc. (the "Company"), Initial
Managers and Investors, Inc. (IM&I), IM&I-NEWCO, Inc., and The Transferred
Client Group, assuming that the contributions, as discussed in Note 1 to the
Company's historical financial statements, had been consummated on January 1,
1995. Because these contributions were nonmonetary in nature and made by the
existing stockholders, the Company has recorded these transactions at the
transferor's historical cost basis as determined by generally accepted
accounting principles.
The pro forma operating results are not necessarily indicative of the
results of operations that would have been attained had the contributions
taken place earlier or of future results of the consolidated company. The pro
forma adjustments reflect the elimination of transactions between the
consolidating entities.
The Pro Forma Consolidated Statement of Operations and the related Notes
should be read in conjunction with the United Payors & United Providers, Inc.
Consolidated Financial Statements and Notes thereto, the IM&I Financial
Statements and Notes thereto, the IM&I-NEWCO, Inc. Financial Statements and
Notes thereto and The Transferred Client Group Financial Statements and Notes
thereto and the unaudited interim financial statements of the Company
contained elsewhere in this Prospectus.
F-2
<PAGE>
UNITED PAYORS & UNITED PROVIDERS, INC.
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1995
<TABLE>
<CAPTION>
UNITED
PAYORS & THE INITIAL
UNITED TRANSFERRED MANAGERS & IM&I-NEWCO, PRO FORMA PRO FORMA
PROVIDERS, INC. CLIENT GROUP INVESTORS, INC. INC. ADJUSTMENT CONSOLIDATED
--------------- ------------ --------------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
Revenue
Provider network....... $ 877,423 $21,966,859 $6,107,695 $ -- $(2,626,629)(a) $26,325,348
Other revenue.......... -- -- -- 255,204 -- 255,204
----------- ----------- ---------- -------- ----------- -----------
Total revenue.......... 877,423 21,966,859 6,107,695 255,204 (2,626,629) 26,580,552
----------- ----------- ---------- -------- ----------- -----------
Operating expenses:
Direct contract
expenses.............. 237,303 6,778,177 4,175,856 -- (2,626,629)(a) 8,564,707
General and
administrative........ 2,335,246 3,185,393 1,653,437 220,884 -- 7,394,960
Depreciation and
amortization.......... 113,514 -- 43,037 15,428 -- 171,979
----------- ----------- ---------- -------- ----------- -----------
Total operating
expenses.............. 2,686,063 9,963,570 5,872,330 236,312 (2,626,629) 16,131,646
----------- ----------- ---------- -------- ----------- -----------
Other income (expense):
Realized gain on sale
of marketable
securities............ 452,327 -- -- -- -- 452,327
Interest income........ 191,136 -- 29,285 -- -- 220,421
Interest expense....... (28,009) -- (58,097) (16,316) -- (102,422)
Other income, net...... 83,545 -- 97,370 13,079 -- 193,994
----------- ----------- ---------- -------- ----------- -----------
Total other income
(expense), net........ 698,999 -- 68,558 (3,237) -- 764,320
----------- ----------- ---------- -------- ----------- -----------
Income (loss) before
income taxes........... (1,109,641) 12,003,289 303,923 15,655 -- 11,213,226
Income tax benefit
(expense).............. 399,000 (4,639,300) (132,000) (6,300) -- (4,378,600)
----------- ----------- ---------- -------- ----------- -----------
Net income (loss)....... ($710,641) $ 7,363,989 $ 171,923 $ 9,355 $ -- $ 6,834,626
=========== =========== ========== ======== =========== ===========
Historical net loss per
common share
outstanding............ ($0.08)
===========
Pro forma net income per
common share
outstanding............ $ 0.78
===========
Shares used in computing
historical and pro
forma net income (loss)
per common share
outstanding............ 8,800,000 8,800,000
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE>
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL INFORMATION
1. BASIS OF PRESENTATION
The Unaudited Pro Forma Consolidated Statements of Operations for the year
ended December 31, 1995 reflect the results of operations of United Payors &
United Providers, Inc., Initial Managers and Investors, Inc., IM&I-NEWCO, Inc.
and The Transferred Client Group assuming the contribution of these businesses
had occurred on January 1, 1995. The financial information was obtained from
audited financial statements contained elsewhere in this Prospectus.
Management believes that the assumptions used in preparing the Unaudited Pro
Forma Consolidated Statements of Operations provide a reasonable basis for
presenting the operations of the consolidated businesses, and that the pro
forma adjustments are properly applied in the Unaudited Pro Forma Consolidated
Statements of Operations.
2. PRO FORMA ADJUSTMENT
Pro forma adjustment (a) reflects the elimination of the fees paid by IM&I
to The Transferred Client Group for the use of the provider network.
3. PRO FORMA NET INCOME PER SHARE
The shares used in computing pro forma net income per share assume the
automatic mandatory conversion of the preferred stock into an amount equal to
the number of shares of common stock outstanding immediately prior to the sale
of the common stock in this Offering.
F-4
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
The Stockholders
United Payors & United Providers, Inc.
We have audited the accompanying consolidated balance sheet of United Payors
& United Providers, Inc. (the "Company"), as of December 31, 1995, and the
related consolidated statements of operations, stockholders' equity and cash
flows for the period from January 3, 1995 (date of incorporation) to December
31, 1995. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of United Payors
& United Providers, Inc. as of December 31, 1995, and the consolidated results
of their operations and their cash flows for the period from January 3, 1995
(date of incorporation) to December 31, 1995 in conformity with generally
accepted accounting principles.
Coopers & Lybrand L.L.P.
Rockville, Maryland
April 2, 1996, except as to the information in Note 1
for which the date is June 7, 1996
F-5
<PAGE>
UNITED PAYORS & UNITED PROVIDERS, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1995 AND MARCH 31, 1996
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1995 1996
------------ -----------
(UNAUDITED)
<S> <C> <C>
Current assets:
Cash and cash equivalents........................... $ 8,701,135 $ 3,886,565
Accounts receivable................................. 1,254,844 4,352,727
Advance to stockholder.............................. -- 265,663
Other current assets................................ 153,899 114,487
Deferred income taxes............................... 654,000 --
----------- -----------
Total current assets.............................. 10,763,878 8,619,442
Fixed assets, net..................................... 1,199,785 1,379,432
Investment............................................ 300,000 300,000
Due from contracting providers........................ 125,000 195,000
Other assets.......................................... 374,824 679,537
----------- -----------
Total assets...................................... $12,763,487 $11,173,411
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses............... $ 2,559,025 $ 1,947,515
Due to affiliate.................................... 819,477 737,094
Income taxes payable................................ 191,300 397,760
Advances/notes to stockholders...................... 3,700,000 --
Note payable, current portion....................... 15,000 12,051
Capital lease, current portion...................... -- 20,502
Line of credit with bank............................ 95,000 95,000
----------- -----------
Total current liabilities......................... 7,379,802 3,209,922
Deferred income taxes................................. 37,000 37,000
Note payable less current portion..................... 50,227 50,227
Capital lease, less current portion................... -- 130,192
----------- -----------
Total liabilities................................. 7,467,029 3,427,341
----------- -----------
Commitments and contingencies
Stockholders' equity:
Convertible preferred stock, $0.01 par value,
5,000,000 shares authorized, 1 share issued and
outstanding convertible into 4,400,000 shares of
common stock (liquidation preference $5,000,000)... -- --
Common stock, $0.01 par value, 35,000,000 shares
authorized, 4,400,000 shares issued and
outstanding........................................ 44,000 44,000
Additional paid-in capital.......................... 5,963,099 5,963,099
Accumulated deficit................................. (710,641) 1,738,971
----------- -----------
Total stockholders' equity........................ 5,296,458 7,746,070
----------- -----------
Total liabilities and stockholders' equity........ $12,763,487 $11,173,411
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE>
UNITED PAYORS & UNITED PROVIDERS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE PERIOD FROM JANUARY 3, 1995 (DATE OF INCORPORATION)
TO DECEMBER 31, 1995 AND FOR THE THREE MONTHS ENDED MARCH 31, 1995 AND 1996
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
PERIOD ENDED -------------------------------
DECEMBER 31, 1995 1995 1996
----------------- --------------------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
Provider network
revenue................. $ 877,423 $ -- $ 7,410,197
Other revenue............ -- -- 81,427
----------- ---------- ------------
Total revenue........ 877,423 -- 7,491,624
----------- ---------- ------------
Operating expenses:
Direct contract
expenses.............. 237,303 -- 1,804,935
General and
administrative........ 2,335,246 187,678 1,662,943
Depreciation and
amortization.......... 113,514 -- 77,038
----------- ---------- ------------
Total operating
expenses............ 2,686,063 187,678 3,544,916
----------- ---------- ------------
Other income (expense):
Realized gain on sale
of marketable
securities............ 452,327 -- --
Interest income........ 191,136 50,215 92,698
Interest expense....... (28,009) -- (46,583)
Other income, net...... 83,545 12,000 89,789
----------- ---------- ------------
Total other income,
net................. 698,999 62,215 135,904
----------- ---------- ------------
(Loss) income before
income taxes............ (1,109,641) (125,463) 4,082,612
Income tax benefit
(provision)............. 399,000 45,123 (1,633,000)
----------- ---------- ------------
Net (loss) income........ $ (710,641) $ (80,340) $ 2,449,612
=========== ========== ============
Net (loss) income per
share................... $ (0.08) $ (0.01) $ 0.28
=========== ========== ============
Shares used in computing
net (loss) income per
common share
outstanding............. 8,800,000 8,800,000 8,800,000
=========== ========== ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-7
<PAGE>
UNITED PAYORS & UNITED PROVIDERS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE PERIOD FROM JANUARY 3, 1995 (DATE OF INCORPORATION)
TO DECEMBER 31, 1995 AND FOR THE
THREE MONTHS ENDED MARCH 31, 1996 (UNAUDITED)
<TABLE>
<CAPTION>
CONVERTIBLE
PREFERRED STOCK COMMON STOCK ADDITIONAL
----------------- ----------------- PAID-IN ACCUMULATED
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT TOTAL
------- -------- --------- ------- ---------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Issuance of stock at
incorporation.......... 1 $ -- 4,400,000 $44,000 $5,956,000 $ -- $6,000,000
Transfer of stock from
existing stockholder to
employees.............. -- -- -- -- 126,109 -- 126,109
Net deficit at December
31, 1995 of contributed
companies.............. -- -- -- -- (119,010) -- (119,010)
Net loss................ -- -- -- -- -- (710,641) (710,641)
------ -------- --------- ------- ---------- ---------- ----------
Balance at December 31,
1995................... 1 -- 4,400,000 44,000 5,963,099 (710,641) 5,296,458
Net income (unaudited).. -- -- -- -- -- 2,449,612 2,449,612
------ -------- --------- ------- ---------- ---------- ----------
Balance at March 31,
1996 (unaudited)....... 1 $ -- 4,400,000 $44,000 $5,963,099 $1,738,971 $7,746,070
====== ======== ========= ======= ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-8
<PAGE>
UNITED PAYORS & UNITED PROVIDERS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
PERIOD FROM JANUARY 3, 1995 (DATE OF INCORPORATION) TO DECEMBER 31, 1995 AND
FOR THE THREE MONTHS ENDED MARCH 31, 1995 AND 1996 (UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
-------------------------------
PERIOD ENDED
DECEMBER 31, 1995 1995 1996
----------------- ------------ ------------
(UNAUDITED)
<S> <C> <C> <C>
OPERATING ACTIVITIES
NET (LOSS) INCOME.......... $ (710,641) $ (80,340) $ 2,449,612
ADJUSTMENT TO RECONCILE
NET (LOSS) INCOME TO NET
CASH USED IN OPERATIONS
Realized gain on
marketable
securities............ (452,327) -- --
Depreciation and
amortization.......... 113,514 -- 77,038
Noncash compensation
expense............... 126,109 -- --
Deferred income taxes.. (399,000) (45,123) 654,000
Change in accounts
receivable............ (503,970) (212,000) (3,097,883)
Change in advance to
stockholder........... -- -- (265,663)
Change in other current
assets................ (153,889) (4,025,000) 39,412
Change in due from
affiliate............. (124,238) -- --
Change in due from
contracting
providers............. (125,000) -- (70,000)
Change in other
assets................ (391,879) (55,372) (317,708)
Change in accounts
payable and accrued
expenses.............. 1,357,592 20,451 (611,510)
Change in due to
affiliates............ 7,000 -- (82,383)
Change in income taxes
payable............... -- -- 206,460
----------- ------------ ------------
NET CASH USED IN
OPERATING ACTIVITIES.... (1,256,739) (4,397,384) (1,018,625)
----------- ------------ ------------
INVESTING ACTIVITIES
Purchase of fixed
assets................ (1,082,420) -- (92,996)
Purchases of marketable
securities............ (3,994,993) -- --
Cash acquired from
Contributed Businesses
...................... 1,187,967 -- --
Proceeds from sale of
marketable
securities............ 4,447,320 -- --
Payment for
investment............ (300,000) -- --
----------- ------------ ------------
NET CASH PROVIDED BY
(USED IN) INVESTING
ACTIVITIES.............. 257,874 -- (92,996)
----------- ------------ ------------
FINANCING ACTIVITIES
Issuance of capital
stock................. 6,000,000 6,000,000 --
Advances/loan from
stockholders.......... 4,000,000 -- --
Repayment of
advances/loan from
stockholders.......... (300,000) -- (3,700,000)
Repayment of note...... -- -- (2,949)
----------- ------------ ------------
NET CASH PROVIDED BY
(USED IN) FINANCING
ACTIVITIES.............. 9,700,000 6,000,000 (3,702,949)
----------- ------------ ------------
INCREASE IN CASH AND CASH
EQUIVALENTS............... 8,701,135 1,602,616 (4,814,570)
CASH AND CASH EQUIVALENTS
Beginning of the
period................ -- -- 8,701,135
----------- ------------ ------------
End of the period...... $ 8,701,135 $ 1,602,616 $ 3,886,565
=========== ============ ============
SUPPLEMENTAL DISCLOSURES OF
CASH FLOW INFORMATION
Interest paid during
the year.............. $ 14,009 $ -- $ --
SUPPLEMENTAL NONCASH
DISCLOSURE
Fixed assets financed
with capital lease.... $ -- $ -- $ 150,696
</TABLE>
F-9
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BUSINESS, ORGANIZATION AND BASIS OF PRESENTATION
United Payors & United Providers, Inc. ("UP&UP"), a Delaware corporation,
was originally incorporated in the State of Iowa on January 3, 1995 as PB
Newco, Inc. Effective June 7, 1996, PB Newco, Inc. was merged into UP&UP with
UP&UP being the surviving corporation. UP&UP serves as an intermediary between
health care payors (such as insurance companies) and health care providers
(such as hospitals) by entering into contractual arrangements designed
generally to produce cost savings and other benefits for payors and increased
liquidity and improved efficiency in claims submissions for providers. UP&UP
derives its revenue primarily from a portion of the price concessions offered
by the providers under such contractual arrangements.
Effective December 31, 1995, the stockholder of Initial Managers and
Investors, Inc. ("IM&I") and the stockholders of IM&I-NEWCO, Inc., all of whom
were stockholders of UP&UP, contributed 100% of the issued and outstanding
shares of each of those entities to UP&UP. IM&I, IM&I-NEWCO, Inc. and UP&UP
were affiliated entities. Effective December 31, 1995, UP&UP entered into an
agreement with America's Health Plan, Inc. ("AHP"), an indirect, wholly-owned
subsidiary of Principal Mutual Life Insurance Company ("Principal Mutual"), an
affiliated entity, whereby AHP contributed a certain group of contracts
constituting "The Transferred Client Group" of AHP to UP&UP (UP&UP, IM&I, and
IM&I-NEWCO, Inc. and The Transferred Client Group are hereafter referred to as
the "Company".) Because the contributions were nonmonetary in nature and made
by the existing stockholders of UP&UP, the assets and liabilities contributed
have been reflected at the transferors' historical cost in the accompanying
consolidated balance sheet as of December 31, 1995. Since the contributions
were effective December 31, 1995, the accompanying consolidated statement of
operations for the period ended December 31, 1995 does not include the 1995
results of operations of IM&I, IM&I-NEWCO, Inc. or The Transferred Client
Group.
In connection with the June 7, 1996 merger, the Company effected a 10:1
exchange of common stock and an increase in authorized shares of capital stock
to 40,000,000 shares, of which 35,000,000 shares are common stock and
5,000,000 shares are preferred stock. These events have been reflected in the
December 31, 1995 consolidated balance sheet.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Revenue recognition
The Company recognizes revenue, under the accrual method, based on a
contracted percentage of the amount of cost savings realized by payor clients
which access the Company's contracting provider network. Revenue is recorded
in the period in which claims are repriced.
Cash equivalents
The Company considers all highly liquid instruments with original maturities
of three months or less to be cash equivalents. The Company maintains its cash
in bank deposit accounts which, at times, may exceed federally insured
amounts. The Company has not experienced any losses in such accounts. The
Company believes it is not exposed to any significant credit risk on cash and
cash equivalents. At December 31, 1995 and March 31, 1996, the Company had
approximately $8,524,000 and $2,671,000, respectively, of cash and cash
equivalents on deposit with commercial banks in excess of insured amounts.
Use of estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
F-10
<PAGE>
disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the period.
Actual results could differ from those estimates.
Due from contracting providers
The Company enters into contracts directly with providers of medical
services ("contracting providers"). The Company's contracts with providers
prescribe specific fee concessions on medical services rendered by the
providers to patients covered by medical plans of payor clients. In partial
consideration for the price concessions furnished by them, the contracting
providers are offered the option by the Company of receiving a prepayment of a
portion of the estimated annual claims volume that such providers have with
payor clients. As of December 31, 1995 and March 31, 1996, the amount of
prepayments was $125,000 and $195,000, respectively. Upon termination of a
provider contract by either party, the amount of prepayments through the date
of termination becomes fully due and payable to the Company. The Company has
deposited $1,000,000 at The Chase Manhattan Bank, N.A. which is intended for
funding of future prepayment options, if any.
The Company considers all deposits with contracting providers recoverable
and no reserve has been established for these deposits. As the amount of the
deposits increase, the Company will evaluate the credit worthiness of
contracting providers on a periodic basis and consider the need to establish a
reserve.
Marketable securities
During 1995, the Company purchased certain marketable securities. Management
considers all marketable securities to be available for sale as defined by
Statement of Financial Accounting Standards No. 115, "Accounting for Certain
Investments in debt and Equity Securities." Available for sale securities are
reported at fair value with net unrealized gains and losses reported in
stockholders' equity. All marketable securities were sold prior to December
31, 1995. Cost was determined using the specific identification method, which
resulted in realized gains of $564,988 and realized losses of $112,661 in
1995.
Fixed assets
Fixed assets are stated at cost. Depreciation is computed using the
straight-line method over the estimated useful lives of the various assets
which range from five to seven years. Leasehold improvements are amortized
using the straight-line method over the shorter of the estimated useful lives
of the assets or the lease term.
Income taxes
Income taxes have been recorded using the liability method in accordance
with Statement of Financial Accounting Standards No. 109, "Accounting for
Income Taxes."
The income tax benefit or provision includes federal and state income taxes
both currently payable and deferred because of differences between financial
reporting and tax bases of assets and liabilities. Deferred tax assets and
liabilities are measured using the enacted tax rates and laws that will be in
effect when the differences are expected to reverse.
Interim financial information
The interim financial data is unaudited. However, in the opinion of the
Company, the interim financial data includes all adjustments, consisting only
of normal recurring adjustments, necessary for a fair statement of the results
for the interim period.
Net income (loss) per common share
Since all of the Company's common and convertible preferred shares were
issued during 1995, pursuant to Securities and Exchange Commission
requirements, those shares are reflected as if they were outstanding for all
periods in determining the Company's net income (loss) per share.
Concentration of payor clients
A significant portion of the Company's provider network revenue is derived
from a small number of payor clients. The inability to replace any such
clients with significant new payor clients would have a material adverse
effect on the Company's business. The Company's provider network revenue was
concentrated (as a percentage
F-11
<PAGE>
of total provider network revenue) in the following contracting payor clients
at December 31, 1995 and March 31, 1996:
<TABLE>
<CAPTION>
UP&UP THE COMPANY
1995 1996
----- -----------
<S> <C> <C>
Payor client A........................................... 26% --
Payor client B........................................... 12% --
Payor client C........................................... -- 28%
Payor client D........................................... -- 16%
Payor client E........................................... -- 12%
</TABLE>
No other contracting payor accounted for 10% or more of the Company's
provider network revenue. Revenue from Payor Clients A and B was less than 10%
for the three months ended March 31, 1996.
3. CONTRIBUTIONS BY STOCKHOLDERS
As discussed in Note 1, effective December 31, 1995, the stockholder of IM&I
and the stockholders of IM&I-NEWCO, Inc., all of whom were stockholders of
UP&UP, contributed 100% of the issued and outstanding shares of each of those
entities to UP&UP. IM&I, IM&I-NEWCO, Inc. and UP&UP are affiliated entities.
Effective December 31, 1995, UP&UP entered into an agreement with AHP, an
indirect, wholly-owned subsidiary of Principal Mutual, an affiliated entity,
whereby AHP agreed to contribute a certain group of contracts constituting
"The Transferred Client Group" of AHP to UP&UP. Because the contributions were
nonmonetary in nature and made by the existing shareholders of UP&UP, the
assets and liabilities contributed have been reflected at the transferor's
historical cost in the accompanying consolidated balance sheet as of December
31, 1995. Such assets and liabilities approximated $2,400,000 and $2,500,000,
respectively. Since the contributions and transfers were effective December
31, 1995, the accompanying consolidated statement of operations for the period
ended December 31, 1995 does not include the 1995 results of operations of
IM&I, IM&I-NEWCO, Inc. or The Transferred Client Group.
4. FIXED ASSETS
Fixed assets consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31, DEPRECIABLE
1995 1996 LIVES
------------ ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Computer equipment................... $ 214,806 $ 416,106 5 years
Furniture and fixtures and office
equipment........................... 522,933 549,784 5-7 years
Leasehold improvements............... 504,920 517,645 5 years
Vehicles............................. 95,609 95,609 5 years
---------- ----------
Total fixed assets................. 1,338,268 1,579,144
Accumulated depreciation and
amortization........................ (138,483) (199,712)
---------- ----------
Fixed assets, net.................. $1,199,785 $1,379,432
========== ==========
</TABLE>
5. STOCKHOLDERS' EQUITY
The stockholders of the Company consist primarily of two groups, Principal
Holding Company, Inc. ("Principal Holding"), a wholly-owned subsidiary of
Principal Mutual, and management. Principal Holding holds 100% of the
outstanding convertible preferred stock and management holds approximately 77%
of the outstanding common stock. The common stock is the sole voting stock
with one vote per share. The preferred stock has the option to convert to
common stock after January 10, 1997. The preferred stock automatically
converts to common stock immediately preceding the time of a merger, sale or
initial public offering. Upon conversion, the holder of the preferred stock
shall be entitled to receive the number of shares equal to fifty percent (50%)
of the then outstanding shares of common stock. In the event of liquidation or
dissolution of the
F-12
<PAGE>
Company, the holder of the preferred stock shall be entitled to be paid first
out of the Company's assets available for distribution to holders of common
stock an amount equal to $5,000,000.
During 1995, the principal owner of the common stock transferred shares of
common stock to certain employees of the Company. The Company recognized
$126,109 of noncash compensation expense and contributed capital related to
these common stock transactions.
6. RELATED PARTY TRANSACTIONS
The note payable to a stockholder at December 31, 1995 consists of a demand
note in the amount of $3,700,000 payable to the principal owner of the common
stock with interest of 5%. The note is collateralized by the Company's assets.
The original note in the amount of $4,000,000 was entered into in December
1995. The Company repaid this note on March 22, 1996. At March 31, 1996, the
Company had advanced $265,663 to the principal owner of the common stock. This
advance was repaid on May 31, 1996.
7. INCOME TAXES
The provision (benefit) for income taxes consists of the following:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
PERIOD ENDED ---------------------
DECEMBER 31, MARCH 31, MARCH 31,
1995 1995 1996
------------ --------- ----------
(UNAUDITED)
<S> <C> <C> <C>
Current provision...................... $ -- $ -- $1,633,000
Deferred benefit....................... (399,000) (45,123) --
--------- -------- ----------
Total provision (benefit)............ $(399,000) $(45,123) $1,633,000
========= ======== ==========
</TABLE>
The provision for income taxes varies from the amount of income tax
determined by applying the applicable U.S. statutory tax rate to pre-tax
income as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
PERIOD ENDED -------------------
DECEMBER 31, MARCH 31, MARCH 31,
1995 1995 1996
------------ --------- ---------
(UNAUDITED)
<S> <C> <C> <C>
Statutory U.S. tax rate.................. (34.0)% (34.0)% 34.0%
State taxes, net of Federal benefit...... (2.0)% (2.0)% 6.0%
----- ----- -----
Effective tax rate..................... (36.0)% (36.0)% 40.0%
===== ===== =====
</TABLE>
A summary of the tax effect of the significant components of deferred income
taxes follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
PERIOD ENDED -------------------
DECEMBER 31, MARCH 31, MARCH 31,
1995 1995 1996
------------ --------- ---------
(UNAUDITED)
<S> <C> <C> <C>
Property and equipment.................. $ 37,000 $37,000 $37,000
Net operating loss carry forwards....... (436,000) -- --
Accrual versus cash method of
accounting............................. (218,000) -- --
--------- ------- -------
Net deferred tax liability (asset).... $(617,000) $37,000 $37,000
========= ======= =======
</TABLE>
The deferred tax asset at December 31, 1995 of $654,000 results from
recording the tax benefit of the period's net operating loss carry forward of
$436,000, and the timing differences between the accrual versus cash methods
of accounting for income taxes for IM&I prior to being contributed to the
Company. Realization of the deferred tax asset is contingent on future taxable
earnings. In accordance with the provisions of Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes," a valuation
allowance was not
F-13
<PAGE>
established since the Company believed that it was more likely than not that
these assets would realized. The net operating loss carryforward was realized
during the three months ended March 31, 1996.
8. INVESTMENT IN AND TRANSACTIONS WITH INVESTEE
The Company currently holds a 6% interest in R.J. Associates, Inc., which is
recorded at cost and included in the consolidated balance sheet under the
caption Investment, and has an option, exercisable on or before December 31,
1996, to purchase the remaining equity interest for approximately $5,000,000.
If the Company exercises this option, the owners of R.J. Associates, Inc. can
elect to receive $2,000,000 of the purchase price in shares of the Company's
common stock at fair value on date of exercise. R.J. Associates, Inc. has a
50% ownership interest in Health Payors Organization, Ltd. ("HPO"), which
organized and maintains a network of medical care providers, primarily
consisting of hospitals. During 1995 an entity controlled by the owners of
R.J. Associates, Inc., through a consulting arrangement, assisted the Company
in its marketing effort for an aggregate payment of $132,000.
In June 1995, the Company entered into a contractual arrangement with HPO
whereby plan beneficiaries of payor clients can access medical providers in
HPO's provider network. For this, the Company pays HPO an access fee. In 1995,
the Company paid HPO $50,000 in prepaid access fees. Each month, as the
Company incurs an access fee liability to HPO, it reduces the liability by 25%
and applies this amount against the prepaid balance until the entire balance
is depleted. The prepaid balance at December 31, 1995 and March 31, 1996 was
$43,872 and $32,415, respectively, and is included in other noncurrent assets.
Included in direct contract expenses for the period ended December 31, 1995
and the three month period ended March 31, 1996 is approximately $70,000 and
$34,000 respectively, related to activity with HPO.
9. LEASE COMMITMENTS
The Company leases office space under a noncancelable operating lease. The
agreement provides for annual escalations of approximately 2% per annum and
for the payment by the Company of a proportionate share of the increase in the
costs of operating the building. For financial reporting purposes, the Company
recognizes rent expense on a straight-line basis over the term of the lease.
The Company has also entered into various operating lease agreements for
office equipment.
The Company entered into a capital lease for computer equipment effective
March 31, 1996 for approximately $150,000. The capitalized lease obligation is
payable through June 2000 and bears interest at approximately 14%.
Future minimum lease payments under noncancelable leases are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1995 MARCH 31, 1996
OPERATING LEASES CAPITAL LEASES
----------------- --------------
<S> <C> <C>
1996.......................................... $ 234,850 $ 35,523
1997.......................................... 241,950 47,364
1998.......................................... 249,200 47,364
1999.......................................... 256,650 47,364
2000.......................................... 264,350 23,682
Thereafter.................................... 44,925 --
---------- --------
Total....................................... $1,291,925 201,297
==========
Less amount representing interest............. 50,601
--------
Present value of minimum lease payments....... $150,696
========
</TABLE>
10. BANK LINE OF CREDIT
IM&I-NEWCO, Inc. has a line of credit with a bank, with provision for
advances up to a maximum of $200,000. Any principal balance outstanding on
December 31, 1996 is due and payable. The balance outstanding on the line of
credit amounted to $95,000 on December 31, 1995. The line of credit is
collateralized by the assets
F-14
<PAGE>
of IM&I-NEWCO, Inc. Interest, at prime rate, accrues on the outstanding
balance and is payable monthly. Interest expense incurred by IM&I-NEWCO, Inc.
in 1995 was $16,316 and is reflected in the operations of IM&I-NEWCO, Inc.
prior to being contributed to the Company. Interest expense incurred for the
three months ended March 31, 1996 of approximately $2,100 is reflected in the
accompanying consolidated statement of operations.
11. NOTE PAYABLE
IM&I has a note payable with an automobile finance company. The note is due
on April 1, 1999 and has monthly payments of $2,006 with interest of 9.9%.
Interest incurred by IM&I during 1995 amounted to $6,141 and is reflected in
the operations of IM&I prior to being contributed to the Company. Interest
incurred for the three months ended March 31, 1996 of approximately $3,100 is
reflected in the accompanying consolidated statement of operations. The note
is collateralized by the automobile. Approximate note maturities are as
follows:
<TABLE>
<S> <C>
1996................................. $15,000
1997................................. 23,799
1998................................. 22,464
1999................................. 3,964
-------
Total.............................. $65,227
=======
</TABLE>
12. COMMITMENTS AND CONTINGENT LIABILITIES
The Company offers its contracting providers a prepayment option based on
the percentage of claims volume for the preceding year. The prepayment option
may be requested at the execution of a contract between the Company and
contracting provider, or at the anniversary date. The Company estimates that
the amount of prepayment options that may be requested in 1996 should not
exceed $5,000,000.
In 1994, the stockholder of IM&I executed an agreement with Direct Resource
Managers to remit 25% of IM&I's monthly revenue (less $30,000) from certain
payor clients for past assistance in negotiations and marketing related to
such payor clients. The contractual arrangement has no expiration date. The
arrangement is in effect until such time that the revenue from these certain
payor clients is terminated. Amounts due under the agreement are accrued at
the time the related revenue is recognized. Amounts paid by IM&I pursuant to
this agreement amounted to approximately $1,412,000 in 1995, and are reflected
in the operations of IM&I prior to being contributed to the Company. For the
three months ended March 31, 1996, approximately $400,000 due under this
arrangement is reflected as direct contract expenses in the accompanying
consolidated statement of operations.
On April 26, 1996, a civil complaint was filed against the Company in the
United States District Court for the Northern District of Illinois. The
Plaintiff seeks injunctive and other relief, including possible damages, based
generally on allegations that representatives of the Company, in at least four
instances, made various misrepresentations to prospective Contracting
Providers, including to the effect that the Company's provider network was
affiliated with the Plaintiff's provider network or that the Plaintiff had
agreed to utilize the Company's provider network. The Company denies the
allegations in the complaint and believes the complaint is without basis.
After consultation with counsel and review of available facts, management
believes that damages, if any, arising from litigation will not be material to
the consolidated financial statements of the Company.
13. SUBSEQUENT EVENTS
In February 1996, the Company formed a majority (90%) owned subsidiary,
America's Health Card Services, Inc. ("AHCS"). The minority (10%) stockholder
is also a stockholder of the Company. AHCS will coordinate and establish a
relationship with credit card issuing banks on behalf of certain payor clients
to issue a combined health insurance identification card and credit card. AHCS
will receive a fee from the issuing bank based on the utilization of the
credit card. AHCS will not bear any financial liability related to the credit
card activity.
In May 1996, the Company and EDICOMM, Inc. ("EDICOMM") entered into an
agreement pursuant to which EDICOMM has granted a one-year option to the
Company to acquire EDICOMM on terms to be negotiated and accepted by both
parties.
F-15
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
The Stockholder
The Transferred Client Group of
America's Health Plan, Inc.
We have audited the accompanying balance sheets of The Transferred Client
Group (the "Group"), successor to a portion of the business operations of
America's Health Plan, Inc. (a Maryland corporation), as of December 31, 1993,
1994, and 1995, and the related statements of operations, stockholder's equity
(deficit) and cash flows for each of the three years in the period ended
December 31, 1995. These financial statements are the responsibility of the
Group's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of The Transferred Client
Group as of December 31, 1993, 1994, and 1995 and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1995 in conformity with generally accepted accounting principles.
Coopers & Lybrand L.L.P.
Rockville, Maryland
April 2, 1996
F-16
<PAGE>
THE TRANSFERRED CLIENT GROUP
BALANCE SHEETS
DECEMBER 31, 1993, 1994 AND 1995
<TABLE>
<CAPTION>
ASSETS
1993 1994 1995
-------- ---------- ----------
<S> <C> <C> <C>
Current assets:
Accounts receivable............................ $113,543 $2,353,803 $3,892,354
Due from affiliate, net........................ 251,518 402,012 786,477
-------- ---------- ----------
Total current assets......................... 365,061 2,755,815 4,678,831
-------- ---------- ----------
Total assets................................. $365,061 $2,755,815 $4,678,831
======== ========== ==========
</TABLE>
<TABLE>
LIABILITIES AND STOCKHOLDER'S EQUITY (DEFICIT)
<S> <C> <C> <C>
Current liabilities:
Accounts payable and accrued expenses........ $ 11,588 $ 503,015 $ 563,288
Due to stockholder........................... 369,869 2,252,800 4,115,543
-------- ---------- ----------
Total current liabilities.................. 381,457 2,755,815 4,678,831
-------- ---------- ----------
Stockholder's equity (deficit)................. (16,396) -- --
-------- ---------- ----------
Total liabilities and stockholder's equity
(deficit)................................. $365,061 $2,755,815 $4,678,831
======== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-17
<PAGE>
THE TRANSFERRED CLIENT GROUP
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
<TABLE>
<CAPTION>
1993 1994 1995
---------- ----------- -----------
<S> <C> <C> <C>
Provider network revenue................. $1,923,859 $ 9,708,490 $21,966,859
---------- ----------- -----------
Operating expenses:
Direct contract expenses............... 510,960 2,138,840 6,778,177
General and administrative............. 1,429,295 2,990,254 3,185,393
---------- ----------- -----------
Total operating expenses............. 1,940,255 5,129,094 9,963,570
---------- ----------- -----------
Income (loss) before income taxes........ (16,396) 4,579,396 12,003,289
Income tax expense....................... -- 1,764,700 4,639,300
---------- ----------- -----------
Net income (loss)........................ $ (16,396) $ 2,814,696 $ 7,363,989
========== =========== ===========
Amount of distributions to stockholder... $ -- $(2,798,300) $(7,363,989)
========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-18
<PAGE>
THE TRANSFERRED CLIENT GROUP
STATEMENTS OF STOCKHOLDER'S EQUITY (DEFICIT)
FOR THE YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
<TABLE>
<CAPTION>
TOTAL
----------
<S> <C>
BALANCE AT JANUARY 1, 1993.......................................... $ --
Net loss............................................................ (16,396)
----------
BALANCE AT DECEMBER 31, 1993........................................ (16,396)
Net income.......................................................... 2,814,696
Distributions to stockholder........................................ (2,798,300)
----------
BALANCE AT DECEMBER 31, 1994........................................ --
Net income.......................................................... 7,363,989
Distributions to stockholder........................................ (7,363,989)
----------
BALANCE AT DECEMBER 31, 1995........................................ $ --
==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-19
<PAGE>
THE TRANSFERRED CLIENT GROUP
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
<TABLE>
<CAPTION>
1993 1994 1995
--------- ----------- -----------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss)......................... $ (16,396) $ 2,814,696 $ 7,363,989
Adjustments to reconcile net income
(loss) to net cash provided by
operations
Change in accounts receivable......... (113,543) (2,240,260) (1,538,551)
Change in accounts payable and accrued
expenses............................. 11,588 491,427 60,273
Change in due from affiliate.......... (251,518) (150,494) (384,465)
Change in due to stockholder.......... 369,869 1,882,931 1,862,743
--------- ----------- -----------
Net cash provided by operating
activities............................. -- 2,798,300 7,363,989
--------- ----------- -----------
FINANCING ACTIVITIES
Distribution to stockholder........... -- (2,798,300) (7,363,989)
--------- ----------- -----------
Net cash used in financing activities... -- (2,798,300) (7,363,989)
--------- ----------- -----------
NET CHANGE IN CASH........................ -- -- --
CASH
Beginning of the year................... -- -- --
--------- ----------- -----------
End of the year......................... $ -- $ -- $ --
========= =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-20
<PAGE>
NOTES TO FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION AND ORGANIZATION
The accompanying financial statements of the The Transferred Client Group
(the "Group") present the historical financial position, results of operations
and cash flows of the Group as successor to a portion of the business
operations of America's Health Plan, Inc. ("AHP"), an affiliate of PB Newco,
Inc. ("Newco"). AHP is indirectly wholly-owned by Principal Mutual Life
Insurance Company ("Principal Mutual"). A subsidiary of Principal Mutual has a
preferred stock ownership interest in Newco which is convertible into a 50%
common stock ownership interest in Newco, subject to certain limitations.
Effective December 31, 1995, Newco entered into an arrangement with AHP
whereby AHP agreed to contribute certain contracts, "The Transferred Client
Group," to Newco. Operations of the Group prior to 1993 were negligible. AHP's
business consists of the development and marketing of a proprietary health
care provider network for access by payors of health care costs, such as
insurers, third party administrators and unions.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Revenue recognition
Revenue is recognized on the accrual method based on contracted percentage
rates of the amount of cost savings realized by payor clients which access the
Group's health care contracting provider network. Revenue is recorded in the
period in which claims are repriced.
Use of estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the period.
Actual results could differ from those estimates.
Concentration of payor clients
A significant portion of the Group's provider network revenue is derived
from a small number of payor clients. The inability to replace any such
clients with significant new payor clients would have a material adverse
effect on the Group's business. The Group's provider network revenue was
concentrated (as a percentage of total provider network revenue) in the
following contracting payor clients:
<TABLE>
<CAPTION>
PERCENTAGE OF PROVIDER NETWORK REVENUE
------------------------------------------
1993 1994 1995
------------ ------------ ------------
<S> <C> <C> <C>
Payor client A............... --% 58% 43%
Payor client B............... -- 16 26
Payor client C............... 50 -- --
Payor client D............... 24 -- --
</TABLE>
No other contracting payor accounted for 10% or more of the Group's provider
network revenue. Revenue from Payor Clients C and D was less than 10% for 1994
and 1995.
Direct contract costs
Direct contract expenses consist of network access fees paid by the Group to
nonaffiliated parties for the utilization of their provider network and broker
commission fees related to acquisition of payor contracts.
Income taxes
Income taxes are computed using enacted federal and state tax rates and
laws. The operating results of The Transferred Client Group were included in
the income tax returns filed by AHP. However, income tax expense
F-21
<PAGE>
is included in these financial statements as if The Transferred Client Group
filed a separate tax return. There are no differences between the financial
statement and tax bases of assets and liabilities.
3. DUE TO STOCKHOLDER
The amounts due to stockholder represent the difference between accounts
receivable and accounts payable and accrued expenses related to The
Transferred Client Group for the respective years. These amounts are due to
AHP.
4. INCOME TAXES
The provision for income taxes consisted of the following:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1994 1995
----------- -----------
<S> <C> <C>
Federal taxes (U.S.).............................. $ 1,557,000 $ 4,081,100
State taxes....................................... 207,700 558,200
----------- -----------
Total........................................... $ 1,764,700 $ 4,639,300
=========== ===========
</TABLE>
The effective tax rate of approximately 39% reflects the combined state and
federal statutory tax rates for both 1994 and 1995.
5. RELATED PARTY TRANSACTIONS
Based on a contractual agreement between AHP and Initial Managers and
Investors, Inc. ("IM&I"), certain payor contracts included in The Transferred
Client Group were administered by AHP on behalf of IM&I for the years ended
December 31, 1993, 1994 and 1995. IM&I is an affiliate of PB Newco. Included
in the Group's network contract revenues are $252,000, $1,192,000 and
$2,627,000 for the years ended December 31, 1993, 1994 and 1995, respectively,
for providing network access and claims repricing services for these
contracts. As of December 31, 1993, 1994 and 1995, the Group had receivable
balances from IM&I of approximately $252,000, $409,000 and $964,000,
respectively, which are included in due from affiliate.
In addition, The Transferred Client Group recorded approximately $19,000 and
$404,000 in commission expenses for the years ended December 31, 1994 and
1995, respectively, to IM&I in recognition of its marketing efforts in
acquiring certain payor clients. As of December 31, 1994 and 1995, commissions
payable in the amount of $7,762 and $177,411, respectively, were netted
against the receivable balance in the due from affiliate.
The Transferred Client Group also paid approximately $186,000 and $418,000
in marketing commissions for the years ended December 31, 1994 and 1995,
respectively, to the stockholder of IM&I. In addition, the Group paid
approximately $64,000 in marketing commissions for the year ended December 31,
1995 to a stockholder of Newco. As of December 31, 1994 and 1995, the Group
accrued $137,000 and $113,688, respectively, related to these fees, which are
included in accrued expenses.
6. GENERAL AND ADMINISTRATIVE EXPENSE ALLOCATIONS
General and administrative expenses consist of those expenses specifically
attributable to individual payor clients and allocated expenses. The
allocation of expenses was based on the level of effort required to service
each payor client as evidenced by the relationship of payroll costs directly
charged a payor client as a percent of total payroll costs. Management
believes that the method used to allocate expenses is reasonable. These
general and administrative expenses do not purport to represent future results
of The Transferred Client Group, as the operations of The Transferred Client
Group will be part of Newco.
F-22
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
The Stockholder
Initial Managers and Investors, Inc.
We have audited the accompanying balance sheets of Initial Managers and
Investors, Inc. (the "Company") (a Maryland corporation) as of December 31,
1993, 1994 and 1995, and the related statements of operations, stockholder's
equity (deficit) and cash flows for each of the three years in the period
ended December 31, 1995. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Initial Managers and
Investors, Inc. as of December 31, 1993, 1994 and 1995, and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1995 in conformity with generally accepted accounting principles.
Coopers & Lybrand L.L.P.
Rockville, Maryland
April 2, 1996
F-23
<PAGE>
INITIAL MANAGERS AND INVESTORS, INC.
BALANCE SHEETS
DECEMBER 31, 1993, 1994 AND 1995
<TABLE>
<CAPTION>
1993 1994 1995
-------- ---------- ----------
ASSETS
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents.................... $ 27,446 $1,128,659 $ 330,961
Accounts receivable.......................... 662,452 1,314,176 706,846
Due from affiliate........................... -- 73,067 --
Deferred income taxes........................ -- 70,000 218,000
-------- ---------- ----------
Total current assets....................... 689,898 2,585,902 1,255,807
Fixed assets, net.............................. -- 67,079 184,757
-------- ---------- ----------
Total assets............................... $689,898 $2,652,981 $1,440,564
======== ========== ==========
LIABILITIES AND STOCKHOLDER'S EQUITY (DEFICIT)
Current liabilities:
Accounts payable............................. $ 53,206 $ 263,199 $ 366,695
Due to affiliates............................ 251,518 402,012 943,715
Income taxes payable......................... -- -- 185,000
Advance from stockholder..................... 48,250 1,009,324 --
Current portion of note payable.............. -- -- 15,000
Deferred income taxes........................ 135,000 255,000 --
-------- ---------- ----------
Total current liabilities.................. 487,974 1,929,535 1,510,410
Note payable, excluding current portion........ -- -- 50,227
-------- ---------- ----------
Total liabilities.......................... 487,974 1,929,535 1,560,637
-------- ---------- ----------
Stockholder's equity (deficit):
Preferred stock, par value $0.005; 5,000,000
shares authorized; no shares issued and
outstanding................................. -- -- --
Common stock, par value $0.005; 50,000,000
shares authorized; 100 shares issued and
outstanding................................. 1 1 1
Additional paid-in capital................... 999 999 999
Retained earnings (deficit).................. 200,924 722,446 (121,073)
-------- ---------- ----------
Total stockholder's equity (deficit)....... 201,924 723,446 (120,073)
-------- ---------- ----------
Total liabilities and stockholder's equity
(deficit)................................. $689,898 $2,652,981 $1,440,564
======== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-24
<PAGE>
INITIAL MANAGERS AND INVESTORS, INC.
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
<TABLE>
<CAPTION>
1993 1994 1995
-------- ---------- ----------
<S> <C> <C> <C>
Provider network revenue........................ $915,597 $5,407,043 $6,107,695
-------- ---------- ----------
Operating expenses:
Direct contract expenses...................... 351,125 3,191,563 4,175,856
General and administrative.................... 228,548 1,408,631 1,653,437
Depreciation.................................. -- 6,649 43,037
-------- ---------- ----------
Total operating expenses.................... 579,673 4,606,843 5,872,330
-------- ---------- ----------
Other income (expense), net:
Interest income............................... -- 8,196 29,285
Interest expense.............................. -- -- (58,097)
Other income, net............................. -- 63,126 97,370
-------- ---------- ----------
Total other income (expense), net........... -- 71,322 68,558
-------- ---------- ----------
Income before income taxes...................... 335,924 871,522 303,923
Income tax expense.............................. 135,000 350,000 132,000
-------- ---------- ----------
Net income.................................. $200,924 $ 521,522 $ 171,923
======== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-25
<PAGE>
INITIAL MANAGERS AND INVESTORS, INC.
STATEMENTS OF STOCKHOLDER'S EQUITY (DEFICIT) FOR THE YEARS ENDED DECEMBER 31,
1993, 1994 AND 1995
<TABLE>
<CAPTION>
CONVERTIBLE
PREFERRED STOCK COMMON STOCK
---------------- -------------
ADDITIONAL RETAINED
PAID-IN EARNINGS
SHARES AMOUNT SHARES AMOUNT CAPITAL (DEFICIT) TOTAL
------- -------- ------ ------ ---------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at January 1,
1993................... -- $ -- 100 $ 1 $999 $ -- $ 1,000
Net income.............. -- -- -- -- -- 200,924 200,924
------ -------- --- ---- ---- ----------- -----------
Balance at December 31,
1993................... -- -- 100 1 999 200,924 201,924
Net income.............. -- -- -- -- -- 521,522 521,522
------ -------- --- ---- ---- ----------- -----------
Balance at December 31,
1994................... -- -- 100 1 999 722,446 723,446
Net income.............. -- -- -- -- -- 171,923 171,923
Distribution to stock-
holder................. -- -- -- -- -- (1,015,442) (1,015,442)
------ -------- --- ---- ---- ----------- -----------
Balance at December 31,
1995................... -- $ -- 100 $ 1 $999 $ (121,073) $ (120,073)
====== ======== === ==== ==== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-26
<PAGE>
INITIAL MANAGERS AND INVESTORS, INC.
STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
<TABLE>
<CAPTION>
1993 1994 1995
--------- ---------- -----------
<S> <C> <C> <C>
OPERATING ACTIVITIES
NET INCOME................................. $ 200,924 $ 521,522 $ 171,923
Adjustments to reconcile net income to
net cash (used in) provided by
operations
Depreciation........................... -- 6,649 43,037
Deferred income taxes.................. 135,000 50,000 (403,000)
Change in accounts receivable.......... (662,452) (651,724) 607,330
Change in due from affiliate........... -- (73,067) 73,067
Change in accounts payable............. 53,206 209,993 103,496
Change in due to affiliates............ 251,518 150,494 541,703
Change in income taxes payable......... -- -- 185,000
--------- ---------- -----------
NET CASH (USED IN) PROVIDED BY OPERATING
ACTIVITIES.............................. (21,804) 213,867 1,322,556
--------- ---------- -----------
INVESTING ACTIVITIES
Purchase of fixed assets............... -- (73,728) (65,107)
--------- ---------- -----------
NET CASH USED IN INVESTING ACTIVITIES.... -- (73,728) (65,107)
--------- ---------- -----------
FINANCING ACTIVITIES
Repayment of note...................... -- -- (30,381)
Advance from stockholder............... 48,250 961,074 --
Repayment of advance from stockholder.. -- -- (1,009,324)
Distribution to stockholder............ -- -- (1,015,442)
--------- ---------- -----------
NET CASH PROVIDED BY (USED IN) FINANCING
ACTIVITIES................................ 48,250 961,074 (2,055,147)
--------- ---------- -----------
INCREASE (DECREASE) IN CASH AND CASH EQUIV-
ALENTS.................................... 26,446 1,101,213 (797,698)
CASH AND CASH EQUIVALENTS
Beginning of the year.................. 1,000 27,446 1,128,659
--------- ---------- -----------
End of the year........................ $ 27,446 $1,128,659 $ 330,961
========= ========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW IN-
FORMATION
Interest paid during the year.......... $ -- $ -- $ 58,097
Taxes paid during the year............. -- 19,100 44,681
SUPPLEMENTAL NONCASH DISCLOSURE
Fixed assets financed with note........ -- -- 95,609
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-27
<PAGE>
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION
Initial Managers and Investors, Inc. (the "Company"), was incorporated in
the State of Maryland in May 1989. Operations of the Company commenced in
1993. The Company is engaged in marketing to federal employee benefit plans
and commercial payors access to medical price concessions through a national
provider network.
Effective December 31, 1995, the stockholder, also a stockholder of PB
Newco, Inc., contributed 100% of the common stock of the Company to PB Newco,
Inc. Prior to a proposed initial public offering, the Company will be merged
into PB Newco, Inc.
2. ACCOUNTING POLICIES
Cash and cash equivalents
The Company considers all highly liquid instruments with original maturities
of three months or less to be cash equivalents. The Company maintains its cash
in bank deposit accounts. The Company has not experienced any losses in such
accounts. The Company believes it is not exposed to any significant credit
risk on cash and cash equivalents. At December 31, 1994 and 1995, the Company
had approximately $1,481,000 and $507,000, respectively, of cash and cash
equivalents on deposit with commercial banks in excess of insured amounts.
Revenue recognition
Revenue is recognized on the accrual method based on contracted percentage
rates of the amount of cost savings realized by payor clients which access the
contracting provider network, administered through America's Health Plan, Inc.
("AHP"), an affiliated entity. Revenue is recorded in the period in which
claims are repriced.
Direct contract costs
Direct contract expenses consist of network access fees paid to AHP for the
utilization of its provider network and broker commission fees related to
acquisition of payor clients.
Use of estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the period.
Actual results could differ from those estimates.
Income taxes
The Company initially elected to file its income taxes as an S corporation.
In 1993, the Company commenced operations and voluntarily revoked its S
corporation election. Income taxes have been recorded using the liability
method in accordance with Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes." Deferred income taxes reflect the impact of
temporary differences between assets and liabilities recognized for financial
reporting purposes and such amounts recognized for tax purposes.
Fixed assets
Fixed assets are stated at cost. Depreciation is provided for on a straight-
line method over the estimated useful lives of assets as follows: computer
equipment, 5 years; furniture and fixtures, 7 years; vehicles, 5 years; and
office equipment, 5 years.
F-28
<PAGE>
Concentration of payor clients
A significant portion of the Company's provider network revenue is derived
from a small number of payor clients. The inability to replace any such
clients with significant new payor clients would have a material adverse
effect on the Company's business. The Company's provider network revenue was
concentrated (as a percentage of total provider network revenue) in the
following contracting payor clients:
<TABLE>
<CAPTION>
PERCENTAGE OF PROVIDER NETWORK REVENUE
------------------------------------------
1993 1994 1995
------------ ------------ ------------
<S> <C> <C> <C>
Payor client A............... 76% 30% 26%
Payor client B............... 20 15 20
Payor client C............... -- 21 21
Payor client D............... -- 11 11
</TABLE>
No other contracting payor accounted for 10% or more of the Company's
provider network revenue.
3. FIXED ASSETS
Fixed assets consist of the following at December 31:
<TABLE>
<CAPTION>
DEPRECIABLE
1994 1995 LIVES
------- -------- -----------
<S> <C> <C> <C>
Computer equipment................ $48,396 $ 48,396 5-Years
Furniture and fixtures and office
equipment........................ 25,332 73,716 5-7 Years
Vehicles.......................... -- 95,609 5 Years
------- --------
Total fixed assets.............. 73,728 217,721
Accumulated depreciation.......... (6,649) (32,964)
------- --------
Fixed assets, net............... $67,079 $184,757
======= ========
</TABLE>
4. DIVESTITURE OF SUBSIDIARY
The Company was the parent of Southern Aircraft Leasing, Inc., a company
incorporated in 1994 to lease and operate a transportation business. Effective
December 31, 1995, the Company declared a dividend to its stockholder of the
leasing subsidiary. The results of operations and balance sheets of the
leasing subsidiary are not included in these financial statements.
Transactions between the companies are reflected in the accounts due to/from
affiliates. To the extent the Company received the benefit of operating losses
from the subsidiary by filing consolidated tax returns, the amount of the tax
benefit was credited to the subsidiary. (See Note 6.) Included in due to
affiliates at December 31, 1995 is $33,000 due to Southern Aircraft Leasing,
Inc.
5. NOTE PAYABLE
The Company has a note payable with an automobile finance company. The note
is due on April 1, 1999 and has monthly payments of $2,006 with an interest
rate of 9.9%. Interest paid during 1995 amounted to $6,141. The note is
collateralized by the automobile. Approximate note maturities are as follows:
<TABLE>
<S> <C>
1996............................. $15,000
1997............................. 23,799
1998............................. 22,464
1999............................. 3,964
-------
Total.......................... $65,227
=======
</TABLE>
6. INCOME TAXES
The Company filed a consolidated income tax return for the years 1994 and
1995. The financial statements do not include the accounts of the subsidiary,
Southern Aircraft Leasing, Inc. (incorporated in 1994). However,
F-29
<PAGE>
through a tax sharing arrangement, the Company has credited the subsidiary for
an amount reflective of the tax benefit received from utilization of the
subsidiary's operating losses. The operating losses of the subsidiary resulted
in tax benefits to the Company of $286,000 and $100,000 in 1994 and 1995,
respectively.
The provision (benefit) for income taxes was as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------
1993 1994 1995
-------- -------- ---------
<S> <C> <C> <C>
Current provision............................... $ -- $300,000 $ 535,000
Deferred provision (benefit).................... 135,000 50,000 (403,000)
-------- -------- ---------
Total provision................................. $135,000 $350,000 $ 132,000
======== ======== =========
</TABLE>
The provision for income taxes differed from the amount of income tax
determined by applying the applicable U.S. statutory tax rate to pre-tax
income as a result of the following:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------
1993 1994 1995
------- ------- -------
<S> <C> <C> <C>
Statutory U.S. tax rate........................... 34.0% 33.0% 39.0%
State taxes, net of Federal benefit............... 6.2 7.2 4.4
------- ------- -------
Effective tax rate................................ 40.2% 40.2% 43.4%
======= ======= =======
</TABLE>
A summary of the tax effect of the significant components of deferred income
taxes follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------
1993 1994 1995
-------- -------- ---------
<S> <C> <C> <C>
Net operating loss carryforwards.............. $ -- $(70,000) $ --
Accrual versus cash method of accounting...... 135,000 255,000 (218,000)
-------- -------- ---------
Deferred tax liability (asset)................ $135,000 $185,000 $(218,000)
======== ======== =========
</TABLE>
In accordance with the provisions of Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes," a valuation allowance was
not established against the Company's deferred tax assets since the Company
believes that it is more likely than not that these assets will be realized.
7. RELATED PARTY TRANSACTIONS
Based on a contractual agreement, AHP provided administrative services for
the Company's clients. For these services, the Company recorded an expense to
AHP amounting to $252,000, $1,192,000 and $2,627,000 for the years ended
December 31, 1993, 1994 and 1995, respectively. Alternatively, as a result of
marketing that the Company performed on behalf of AHP, the Company received
from AHP approximately $150,000 and $517,000 for the years ended December 31,
1994 and 1995, respectively. As of December 31, 1993, 1994 and 1995, the
Company had a net liability to AHP of approximately $252,000, $402,000 and
$786,000, respectively, which amounts are included in due to affiliates.
The Company has agreed to pay the 1995 office rent totaling approximately
$109,000 for PB Newco, Inc., an affiliate. This amount is included in the
Company's due to affiliates balance at December 31, 1995.
On December 31, 1993, the Company received an advance from the stockholder
of $48,250. During 1994, the Company received an additional $961,074. This
stockholder advance was paid off in full during 1995.
During 1995, the Company paid $300,000 to Principal Mutual Life Insurance
Company ("Principal Mutual") for life insurance benefits on behalf of the
Company's stockholder. AHP is an indirect, wholly-owned subsidiary of
Principal Mutual.
F-30
<PAGE>
8. COMMITMENTS AND CONTINGENT LIABILITIES
In 1994, the stockholder of the Company executed an agreement with Direct
Resource Managers to remit 25% of the Company's monthly revenue from certain
payor clients (less $30,000) for past assistance in negotiations and marketing
related to such payor clients. The contractual arrangement has no expiration
date. The arrangement is in effect until such time that the revenue from these
certain payor clients is terminated. Amounts due under the agreement are
accrued at the time the related revenue is recognized. Amounts paid pursuant
to this agreement amounted to approximately $1,440,000 and $1,412,000 in 1994
and 1995, respectively.
F-31
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
The Stockholders
IM&I-NEWCO, Inc.
We have audited the accompanying balance sheets of IM&I-NEWCO, Inc. (the
"Company") (a Delaware corporation) as of December 31, 1994 and 1995, and the
related statements of operations, stockholders' equity (deficit) and cash
flows for the period from August 12, 1994 (date of incorporation) to December
31, 1994 and the year ended December 31, 1995. These financial statements are
the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of IM&I-NEWCO, Inc. as of
December 31, 1994 and 1995, and the results of its operations and its cash
flows for the period from August 12, 1994 (date of incorporation) to December
31, 1994 and the year ended December 31, 1995 in conformity with generally
accepted accounting principles.
Coopers & Lybrand L.L.P.
Rockville, Maryland
April 2, 1996
F-32
<PAGE>
IM&I-NEWCO, INC.
BALANCE SHEETS
DECEMBER 31, 1994 AND 1995
ASSETS
<TABLE>
<CAPTION>
1994 1995
-------- --------
<S> <C> <C>
Current assets:
Cash and cash equivalents.................................. $271,381 $857,006
Accounts receivable........................................ 185,077 51,028
-------- --------
Total current assets..................................... 456,458 908,034
Fixed assets, net............................................ 37,548 28,380
Other noncurrent assets...................................... 11,047 687
-------- --------
Total assets............................................. $505,053 $937,101
======== ========
</TABLE>
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<S> <C> <C>
Current liabilities:
Accounts payable......................................... $ 46,076 $ 48,532
Income taxes payable..................................... -- 6,300
Collected premiums....................................... 292,269 786,206
Line of credit with bank................................. 175,000 95,000
-------- --------
Total current liabilities.............................. 513,345 936,038
-------- --------
Stockholders' equity (deficit):
Common stock, $0.10 par value,
3,000 shares authorized, 430 shares issued and outstand-
ing..................................................... 43 43
Additional paid-in capital............................... 4,257 (8,335)
Retained earnings (deficit).............................. (12,592) 9,355
-------- --------
Total stockholders' equity (deficit)................... (8,292) 1,063
-------- --------
Total liabilities and stockholders' equity (deficit)... $505,053 $937,101
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-33
<PAGE>
IM&I-NEWCO, INC.
STATEMENTS OF OPERATIONS
FOR THE PERIOD FROM AUGUST 12, 1994 (DATE OF INCORPORATION)
TO DECEMBER 31, 1994 AND THE YEAR ENDED DECEMBER 31, 1995
<TABLE>
<CAPTION>
1994 1995
-------- --------
<S> <C> <C>
Revenue.................................................. $ 80,977 $255,204
-------- --------
Operating expenses:
General and administrative............................. 89,238 220,884
Depreciation and amortization.......................... 1,482 15,428
-------- --------
Total operating expenses............................. 90,720 236,312
-------- --------
Other income (expense), net:
Interest expense....................................... (2,599) (16,316)
Other income (expense), net ........................... (250) 13,079
-------- --------
Total other income (expense), net.................... (2,849) (3,237)
-------- --------
Income (loss) before income taxes........................ (12,592) 15,655
Income tax expense....................................... -- 6,300
-------- --------
Net income (loss)........................................ $(12,592) $ 9,355
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-34
<PAGE>
IM&I-NEWCO, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE PERIOD FROM AUGUST 12, 1994 (DATE OF INCORPORATION)
TO DECEMBER 31, 1994 AND THE YEAR ENDED DECEMBER 31, 1995
<TABLE>
<CAPTION>
COMMON STOCK
-------------
ADDITIONAL RETAINED
PAID-IN EARNINGS
SHARES AMOUNT CAPITAL (DEFICIT) TOTAL
------ ------ ---------- --------- --------
<S> <C> <C> <C> <C> <C>
Issuance of stock at incorpo-
ration...................... 430 $ 43 $ 4,257 $ -- $ 4,300
Net loss..................... -- -- -- (12,592) (12,592)
--- ---- -------- -------- --------
Balance at December 31,
1994........................ 430 43 4,257 (12,592) (8,292)
Election of Subchapter C cor-
poration status............. -- -- (12,592) 12,592 --
Net income................... -- -- -- 9,355 9,355
--- ---- -------- -------- --------
Balance at December 31,
1995........................ 430 $ 43 $ (8,335) $ 9,355 $ 1,063
=== ==== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-35
<PAGE>
IM&I-NEWCO, INC.
STATEMENTS OF CASH FLOWS
FOR THE PERIOD FROM AUGUST 12, 1994 (DATE OF INCORPORATION)
TO DECEMBER 31, 1994 AND THE YEAR ENDED DECEMBER 31, 1995
<TABLE>
<CAPTION>
1994 1995
--------- ---------
<S> <C> <C>
NET INCOME (LOSS)........................................ $ (12,592) $ 9,355
Adjustments to reconcile net income (loss) to net cash
provided by operations
Depreciation and amortization........................ 1,482 15,428
Write-off of fixed assets............................ -- 9,900
Change in accounts receivable and other.............. (185,077) 134,049
Change in other noncurrent assets.................... (11,110) 10,360
Change in accounts payable........................... 46,076 2,456
Change in income taxes payable....................... -- 6,300
Change in collected premiums......................... 292,269 493,937
--------- ---------
Net cash provided by operating activities.............. 131,048 681,785
--------- ---------
INVESTING ACTIVITIES
Purchase of fixed assets............................. (38,967) (16,160)
--------- ---------
Net cash used in investing activities.................. (38,967) (16,160)
--------- ---------
FINANCING ACTIVITIES
Issuance of common stock............................. 4,300 --
Advances from line of credit with bank............... 175,000 25,000
Repayment of line of credit with bank................ -- (105,000)
--------- ---------
Net cash provided by (used in) financing activities.... 179,300 (80,000)
--------- ---------
INCREASE IN CASH AND CASH EQUIVALENTS.................... 271,381 585,625
CASH AND CASH EQUIVALENTS
Beginning of the period.............................. -- 271,381
--------- ---------
End of the period.................................... $ 271,381 $ 857,006
========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Interest paid during the period...................... $ 2,599 $ 16,316
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-36
<PAGE>
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION
IM&I-NEWCO, Inc. (the "Company") d/b/a "CHCBP Administrator" was
incorporated in the State of Delaware in August 1994. The Company, under a
U.S. Department of Defense cost-plus-fixed-fee ("CPFF") contract, is engaged
in processing applications, tracking and maintaining enrollment, marketing,
and collecting premiums from individuals or families who enroll in the
Department of Defense's Continued Health Care Benefit Program ("CHCBP"). This
COBRA-type benefit program allows certain groups of military health service
beneficiaries to continue receiving benefits under CHAMPUS when they lose
their eligibility for military health care. This contract is subject to
renewal every year through 1999. Should the contract not be renewed and
replaced with other contracts, the operations of the Company would be
materially impacted.
In December 1995, the stockholders, all of whom were stockholders in PB
Newco, Inc., contributed 100% of the common stock of the Company to PB Newco,
Inc., effective as of December 31, 1995.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Revenue recognition
The Company, under a U.S. Department of Defense cost-plus-fixed-fee
contract, is engaged in processing applications, tracking and maintaining
enrollment, marketing and collecting premiums for individuals or families who
enroll in the Department of Defense's Continued Health Care Benefit Program.
The contract is subject to renewal every year through 1999. The CHCBP revenue
recognized for the period includes total costs incurred by the Company which
are allowable under the terms of the CPFF contract and reimbursable by the
Department of Defense and a fee equal to a percentage of the total costs
incurred by the Company.
Use of estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the period.
Actual results could differ from those estimates.
Income taxes
The Company initially elected to file its income taxes as an S corporation
and, as such, no federal income taxes were provided in 1994 in the
accompanying financial statements since the Company's income or loss was
included in the stockholders' individual income tax returns. For 1995, the
Company voluntarily revoked its S corporation election and has recorded income
taxes using the liability method in accordance with Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes." As a result of
this change, the deficit balance in retained earnings was transferred to
additional paid-in capital, effective January 1995.
Cash and cash equivalents
The Company considers all highly liquid instruments with original maturities
of three months or less to be cash equivalents. Included in cash are funds
collected from CHCBP beneficiaries for insurance premiums due to the
Department of Defense for which the Company is acting in a fiduciary capacity.
Concentration of credit risk
The Company maintains cash in bank deposit accounts which, at times, may
exceed federally insured amounts. The Company has not experienced any losses
in such accounts and believes it is not exposed to any
F-37
<PAGE>
significant credit risk. As of December 31, 1994 and 1995, the Company had
approximately $186,000 and $742,000, respectively, of cash on deposit with
commercial banks in excess of insured amounts.
Fixed assets
Fixed assets are stated as cost. Depreciation is provided for on a straight-
line method over the estimated useful lives of assets as follows: computer
equipment, 5 years; furniture and fixtures, 7 years; and office equipment, 5
years.
3. FIXED ASSETS
Fixed assets consisted of the following at December 31:
<TABLE>
<CAPTION>
DEPRECIABLE
1994 1995 LIVES
------- ------- -----------
<S> <C> <C> <C>
Computer equipment............................ $28,307 $25,320 5 years
Furniture and fixtures and office equipment... 10,660 12,807 5-7 years
------- ------- ---------
Total fixed assets.......................... 38,967 38,127
Accumulated depreciation...................... (1,419) (9,747)
------- -------
Fixed assets, net........................... $37,548 $28,380
======= =======
</TABLE>
During 1995, the Company relocated its offices and expensed $2,900 of
furniture and fixtures. Also during 1995, the Company transferred $7,000 in
computer equipment to an affiliated company at cost.
4. BANK LINE OF CREDIT
The Company has a line of credit with a bank, with provision for advances up
to a maximum of $200,000. Any principal balance outstanding on December 31,
1996 is due and payable. The balance outstanding on the line of credit
amounted to $175,000 and $95,000 on December 31, 1994 and 1995, respectively.
The line of credit is collateralized by the assets of the Company. In 1994, an
affiliated company provided collateral in the form of a $100,000 certificate
of deposit. Interest, at prime rate, accrues on the outstanding balance and is
payable monthly. Interest expense was $2,599 and $16,316 in 1994 and 1995,
respectively.
5. RELATED PARTY TRANSACTIONS
In December 1995, the Company signed a general service agreement with an
affiliated company, whereby it is obligated to pay $1,300 per month for use of
office space and administrative services for the year ended December 31, 1996.
The Company's commitment under this agreement is $15,600 in 1996. The
agreement is subject to review for any appropriate amendments in December
1996.
6. INCOME TAXES
The provision for income taxes for 1995 consisted of the following taxes
currently payable:
<TABLE>
<S> <C>
Federal taxes (U.S.)............................................... $5,300
State taxes........................................................ 1,000
------
$6,300
======
</TABLE>
Prior to December 31, 1994, the Company was an S corporation, and the losses
that were incurred by the Company were passed through to the individual
stockholders.
F-38
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NO DEALER, SALES REPRESENTATIVE OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO
GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS IN CONNECTION WITH THIS OF-
FERING OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS AND, IF GIVEN OR MADE,
SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AU-
THORIZED BY THE COMPANY OR ANY UNDERWRITER. THIS PROSPECTUS DOES NOT CONSTITUTE
AN OFFER OR A SOLICITATION OF AN OFFER TO PURCHASE ANY SECURITIES OTHER THAN
THE SECURITIES TO WHICH IT RELATES OR AN OFFER TO OR A SOLICITATION OF ANY PER-
SON IN ANY JURISDICTION WHERE SUCH AN OFFER OR SOLICITATION WOULD BE UNLAWFUL.
NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UN-
DER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN
THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE INFORMATION WHICH
IS FURNISHED HEREIN IS CORRECT AS OF THE DATE HEREOF.
----------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Summary.................................................................. 3
Risk Factors............................................................. 7
The Company.............................................................. 11
Use of Proceeds.......................................................... 11
Dividend Policy.......................................................... 12
Capitalization........................................................... 13
Dilution................................................................. 14
Selected Consolidated Financial Data..................................... 15
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 16
Business................................................................. 20
Management............................................................... 30
Principal Stockholders................................................... 34
Certain Transactions..................................................... 35
Description of Capital Stock............................................. 36
Shares Eligible for Future Sale.......................................... 41
Underwriting............................................................. 42
Legal Matters............................................................ 44
Experts.................................................................. 44
Additional Information................................................... 44
Index to Financial Statements............................................ F-1
</TABLE>
UNTIL JULY 27, 1996 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS
EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN
ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
2,400,000 SHARES
[LOGO OF UNITED PAYORS & UNITED PROVIDERS APPEARS HERE]
COMMON STOCK
----------------
PROSPECTUS
----------------
BEAR, STEARNS & CO. INC.
SCHRODER WERTHEIM & CO.
JULY 2, 1996
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
The following table sets forth the estimated expenses to be borne by the
Company in connection with the issuance and distribution of the securities
being registered hereby, other than underwriting discounts and commissions.
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.(1)
<TABLE>
<S> <C>
SEC registration fee................................................... $100
NASD filing fee........................................................ --
NASDAQ Stock Market National Market listing fee........................ --
Printing, engraving, postage and mailing............................... --
Legal fees and expenses................................................ --
Accounting fees and expenses........................................... --
Transfer agent fees and expenses....................................... --
Blue Sky fees and expenses............................................. --
Miscellaneous.......................................................... --
----
TOTAL................................................................ $100
====
</TABLE>
- --------
(1) Other expenses are attributable to Registration Statement No. 333-3814.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
In accordance with Section 145 of the Delaware General Corporation Law,
Articles 10 and 11 of the Registrant's Certificate of Incorporation provide,
as follows, that the Company shall, to the fullest extent permitted by
Delaware law, as amended from time to time, indemnify its directors and
officers:
TENTH:
A. Each person who was or is made a party or is threatened to be made a
party to or is otherwise involved in any action, suit or proceeding, whether
civil, criminal, administrative or investigative (hereinafter a "proceeding"),
by reason of the fact that he or she is or was a Director or an Officer of the
Corporation or is or was serving at the request of the Corporation as a
Director, Officer, employee or agent of another corporation or of a
partnership, joint venture, trust or other enterprise, including service with
respect to an employee benefit plan (hereinafter an "indemnitee"), whether the
basis of such proceeding is alleged action in an official capacity as a
Director, Officer, employee or agent, or in any other capacity while serving
as a Director, Officer, employee or agent, shall be indemnified and held
harmless by the Corporation to the fullest extent authorized by the Delaware
General Corporation Law, as the same exists or may hereafter be amended (but,
in the case of any such amendment, only to the extent that such amendment
permits the Corporation to provide broader indemnification rights than such
law permitted the Corporation to provide prior to such amendment), against all
expense, liability and loss (including attorneys' fees, judgments, fines,
ERISA excise taxes or penalties and amounts paid in settlement) reasonably
incurred or suffered by such indemnitee in connection therewith; provided,
however, that, except as provided in Section C hereof with respect to
proceedings to enforce rights to indemnification, the Corporation shall
indemnify any such indemnitee in connection with a proceeding (or part
thereof) initiated by such indemnitee only if such proceeding (or part
thereof) was authorized by the Board of Directors of the Corporation.
B. The right to indemnification conferred in Section A of this Article TENTH
shall include the right to be paid by the Corporation the expenses incurred in
defending any such proceeding in advance of its final disposition (hereinafter
an "advancement of expenses"); provided, however, that, if the Delaware
General Corporation Law requires, an advancement of expenses incurred by an
indemnitee in his or her capacity as a
II-1
<PAGE>
Director or Officer (and not in any other capacity in which service was or is
rendered by such indemnitee, including, without limitation, services to an
employee benefit plan) shall be made only upon delivery to the Corporation of
an undertaking (hereinafter an "undertaking"), by or on behalf of such
indemnitee, to repay all amounts so advanced if it shall ultimately be
determined by final judicial decision from which there is no further right to
appeal (hereinafter a "final adjudication") that such indemnitee is not
entitled to be indemnified for such expenses under this Section or otherwise.
The rights to indemnification and to the advancement of expenses conferred in
Sections A and B of this Article TENTH shall be contract rights and such
rights shall continue as to an indemnitee who has ceased to be a Director,
Officer, employee or agent and shall inure to the benefit of the indemnitee's
heirs, executors and administrators.
C. If a claim under Section A or B of this Article TENTH is not paid in full
by the Corporation within sixty days after a written claim has been received
by the Corporation, except in the case of a claim for an advancement of
expenses, in which case the applicable period shall be twenty days, the
indemnitee may at any time thereafter bring suit against the Corporation to
recover the unpaid amount of the claim. If successful in whole or in part in
any such suit, or in a suit brought by the Corporation to recover an
advancement of expenses pursuant to the terms of an undertaking, the
indemnitee shall be entitled to be paid also the expenses of prosecuting or
defending such suit. In (i) any suit brought by the indemnitee to enforce a
right to indemnification hereunder (but not in a suit brought by the
indemnitee to enforce a right to an advancement of expenses) it shall be a
defense that, and (ii) in any suit by the Corporation to recover an
advancement of expenses pursuant to the terms of an undertaking the
Corporation shall be entitled to recover such expenses upon a final
adjudication that, the indemnitee has not met any applicable standard for
indemnification set forth in the Delaware General Corporation Law. Neither the
failure of the Corporation (including its Board of Directors, independent
legal counsel, or its stockholders) to have made a determination prior to the
commencement of such suit that indemnification of the indemnitee is proper in
the circumstances because the indemnitee has met the applicable standard of
conduct set forth in the Delaware General Corporation Law, nor an actual
determination by the Corporation (including its Board of Directors,
independent legal counsel, or its stockholders) that the indemnitee has not
met such applicable standard of conduct, shall create a presumption that the
indemnitee has not met the applicable standard of conduct or, in the case of
such a suit brought by the indemnitee, be a defense to such suit. In any suit
brought by the indemnitee to enforce a right to indemnification or to an
advancement of expenses hereunder, or by the Corporation to recover an
advancement of expenses pursuant to the terms of an undertaking, the burden of
proving that the indemnitee is not entitled to be indemnified, or to such
advancement of expenses under this Article TENTH, or otherwise shall be on the
Corporation.
D. The rights to indemnification and to the advancement of expenses
conferred in this Article TENTH shall not be exclusive of any other right
which any person may have or hereafter acquire under any statute, the
Corporation's Certificate of Incorporation, Bylaws, agreement, vote of
stockholders or Disinterested Directors or otherwise.
E. The Corporation may maintain insurance, at its expense, to protect itself
and any Director, Officer, employee or agent of the Corporation or subsidiary
or Affiliate or another corporation, partnership, joint venture, trust or
other enterprise against any expense, liability or loss, whether or not the
Corporation would have the power to indemnify such person against such
expense, liability or loss under the Delaware General Corporation Law.
F. The Corporation may, to the extent authorized from time to time by the
Board of Directors, grant rights to indemnification and to the advancement of
expenses to any employee or agent of the Corporation to the fullest extent of
the provisions of this Article TENTH with respect to the indemnification and
advancement of expenses of Directors and Officers of the Corporation.
ELEVENTH:
A Director of this Corporation shall not be personally liable to the
Corporation or its stockholders for monetary damages for breach of fiduciary
duty as a Director, except for liability (i) for any breach of the Director's
duty of loyalty to the Corporation or its stockholders, (ii) for acts or
omissions not in good faith or
II-2
<PAGE>
which involve intentional misconduct or a knowing violation of law, (iii)
under Section 174 of the Delaware General Corporation Law, or (iv) for any
transaction from which the Director derived an improper personal benefit. If
the Delaware General Corporation Law is amended to authorize corporate action
further eliminating or limiting the personal liability of Directors, then the
liability of a Director of the Corporation shall be eliminated or limited to
the fullest extent permitted by the Delaware General Corporation Law, as so
amended.
Any repeal or modification of the foregoing paragraph by the stockholders of
the Corporation shall not adversely affect any right or protection of a
Director of the Corporation existing at the time of such repeal or
modification.
Reference is also made to Section 7 of the Underwriting Agreement, the form
of which is filed as Exhibit 1.1 hereto, in which the Company agrees to
indemnify the Underwriters and certain other persons against certain civil
liabilities.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
The registrant, United Payors & United Providers, Inc. ("UP&UP"), a Delaware
corporation, was incorporated on April 15, 1996, as a wholly-owned subsidiary
of PB Newco, Inc. ("PB Newco"). UP&UP has sold one share of Common Stock to PB
Newco.
PB Newco merged into UP&UP effective June 7, 1996. In such merger (the
"Merger"), each outstanding share of common stock of PB Newco was converted
into 10 shares of common stock of UP&UP, and the one outstanding share of
preferred stock of PB Newco was converted into one share of Preferred Stock of
UP&UP having substantially equivalent terms and conditions. In such Merger,
the Delaware Certificate of Incorporation of UP&UP became the Certificate of
Incorporation of the surviving entity and, thus, replaced the Iowa Articles of
Incorporation of PB Newco. The UP&UP Certificate of Incorporation also
reflected an increase in the authorized capital of the surviving company.
PB Newco and UP&UP consider that the merger involved a mere change in
corporate domicile from Iowa to Delaware, and, therefore, did not involve an
offer for sale of securities within the meaning of Section 2(3) of the
Securities Act, and the provisions of Rule 145 thereunder.
In addition, in May 1996, the Company entered into a contract with EDICOMM,
Inc. ("EDICOMM") whereby EDICOMM agreed to assign to the Company its existing
contracts with 19 hospital or other medical care facilities ("Assigned
Contracts"). In return, UP&UP is to pay EDICOMM an amount not to exceed the
revenue received from those assigned contracts. In addition to the assigned
contracts, EDICOMM also granted the Company a one-year option to acquire
EDICOMM on terms to be negotiated and accepted by both parties and EDICOMM has
agreed not to take action to preclude a takeover by UP&UP. In consideration
for the assigned contracts and EDICOMM's agreement with UP&UP, UP&UP paid
EDICOMM $50,000 and agreed to issue, after completion of the Offering, shares
of Common Stock having a value, based on the initial public offering price, of
$150,000. EDICOMM is a privately held company and the shares to be issued to
EDICOMM will bear a restricted legend to the effect that such shares are
restricted securities. The Company considers that the shares to be delivered
to EDICOMM will have been offered and sold in reliance upon the private
offering exemption from the registration requirements of the Securities Act
set forth in Section 4(2) of the Securities Act.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
The exhibits and financial statement schedules filed as a part of this
Registration Statement are as follows:
(a) List of Exhibits (filed herewith unless otherwise noted)
<TABLE>
<C> <S>
1.1 Form of Underwriting Agreement among the Company and Bear, Stearns & Co.
Inc. and Schroder Wertheim & Co.*
2.1 Agreement with America's Health Plan, Inc.**
2.2 Plan and Agreement of Merger of IM&I, Inc. into PB Newco**
</TABLE>
II-3
<PAGE>
<TABLE>
<C> <S>
2.3 Plan and Agreement of Merger of PB Newco, Inc. into United Payors &
United Providers, Inc.**
3.1 Certificate of Incorporation of United Payors & United Providers, Inc.**
3.2 Bylaws of United Payors & United Providers, Inc.**
4.1 Specimen Stock Certificate of United Payors & United Providers, Inc.*
4.2 Shareholder Agreement**
5.1 Opinion of Muldoon, Murphy & Faucette*
10.1 Employment Agreement between United Payors & United Providers, Inc. and
Thomas L. Blair**
10.2 Employment Agreements between United Payors & United Providers, Inc. and
each of Spiro A. Karadimas, S. Joseph Bruno and Michael A. Smith**
10.3 Form of Indemnification Agreement**
11.1 Statement Regarding Computation of Earnings Per Share*
21.1 Subsidiaries of United Payors & United Providers, Inc.**
23.1 Consent of Coopers & Lybrand L.L.P.*
23.2 Consent of Muldoon, Murphy & Faucette (See Exhibit 5.1)
27.1 Financial Data Schedule*
99.1 Consent of David J. Drury to Serve as a Director of the Company**
99.2 Consent of Thomas J. Graf to Serve as a Director of the Company**
99.3 Consent of Julia Lawler to Serve as a Director of the Company**
99.4 Consent of Bette B. Anderson to Serve as a Director of the Company**
99.5 Consent of William E. Brock to Serve as a Director of the Company**
99.6 Consent of Frederick H. Graefe to Serve as a Director of the Company**
</TABLE>
- --------
* Filed herewith.
** Filed as an Exhibit having the same Exhibit Number to Registration
Statement, as amended, on Form S-1 under the Securities Act of 1933, as
amended, File No. 333-3814, filed on April 19, 1996 and effective June 28,
1996.
(b) Financial Statement Schedules
All schedules have been omitted as not applicable or not required under the
rules of Regulation S-X.
ITEM 17. UNDERTAKINGS.
The undersigned Registrant hereby undertakes:
The Company hereby undertakes to provide to the Representatives of the
Underwriters at the closing specified in the underwriting agreements
certificates in such denominations and registered in such names as required by
the Representatives of the Underwriters to permit prompt delivery to each
purchaser.
The Company hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of prospectus filed as part of
this Registration Statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act of 1933 shall be deemed to be part
of this Registration Statement as of the time it was declared effective.
II-4
<PAGE>
(2) For the purpose of determining any liability under the Securities Act
of 1933, each post-effective amendment that contains a form of prospectus
shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer or controlling person of the
Registrant in the successful defense of any action, suit or proceeding) is
asserted by such director, officer or controlling person in connection with
the securities being registered, the Registrant will, unless in the opinion of
its counsel the matter has been settled by controlling precedent, submit to a
court of appropriate jurisdiction the question whether such indemnification by
it is against public policy as expressed in the Act and will be governed by
the final adjudication of such issue.
II-5
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT
HAS DULY CAUSED THIS REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF BY THE
UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF ROCKVILLE, STATE OF
MARYLAND ON JULY 2, 1996.
United Payors & United Providers,
Inc.
By: /s/ Thomas L. Blair
---------------------------------
PRESIDENT, CHIEF EXECUTIVE
OFFICER, CHAIRMAN OF THE BOARD AND
SOLE DIRECTOR
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS REGISTRATION
STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE CAPACITIES AND ON THE
DATES INDICATED.
<TABLE>
<CAPTION>
NAME TITLE DATE
---- ----- ----
<S> <C> <C>
/s/ Thomas L. Blair President, Chief July 2, 1996
- ------------------------------------- Executive Officer,
THOMAS L. BLAIR Chairman of the
Board and Sole
Director (principal
executive officer)
/s/ S. Joseph Bruno Chief Financial July 2, 1996
- ------------------------------------- Officer and
S. JOSEPH BRUNO Secretary
(principal
accounting and
financial officer)
</TABLE>
II-6
<PAGE>
EXHIBIT INDEX
LIST OF EXHIBITS (FILED HEREWITH UNLESS OTHERWISE NOTED)
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION PAGE
------- ----------- ----
<C> <S> <C>
1.1 Form of Underwriting Agreement among the Company and Bear,
Stearns & Co. Inc. and Schroder Wertheim & Co.*
2.1 Agreement with America's Health Plan, Inc.**
2.2 Plan and Agreement of Merger of IM&I, Inc. into PB Newco**
2.3 Plan and Agreement of Merger of PB Newco, Inc. into United
Payors & United
Providers, Inc.**
3.1 Certificate of Incorporation of United Payors & United
Providers, Inc.**
3.2 Bylaws of United Payors & United Providers, Inc.**
4.1 Speciman Stock Certificate of United Payors & United Providers,
Inc.*
4.2 Shareholder Agreement**
5.1 Opinion of Muldoon, Murphy & Faucette*
10.1 Employment Agreement between United Payors & United Providers,
Inc. and Thomas L. Blair**
10.2 Employment Agreements between United Payors & United Providers,
Inc. and each of Spiro A. Karadimas, S. Joseph Bruno and
Michael A. Smith**
10.3 Form of Indemnification Agreement**
11.1 Statement Regarding Computation of Earnings Per Share*
21.1 Subsidiaries of United Payors & United Providers, Inc.**
23.1 Consent of Coopers & Lybrand L.L.P.*
23.2 Consent of Muldoon, Murphy & Faucette (See Exhibit 5.1)
27.1 Financial Data Schedule*
99.1 Consent of David J. Drury to Serve as a Director of the
Company**
99.2 Consent of Thomas J. Graf to Serve as a Director of the
Company**
99.3 Consent of Julia Lawler to Serve as a Director of the Company**
99.4 Consent of Bette B. Anderson to Serve as a Director of the
Company**
99.5 Consent of William E. Brock to Serve as a Director of the
Company**
99.6 Consent of Frederick H. Graefe to Serve as a Director of the
Company**
</TABLE>
- --------
* Filed herewith.
** Filed as an Exhibit having the same Exhibit Number to Registration
Statement, as amended, on Form S-1 under the Securities Act of 1933, as
amended, File No. 333-3814, filed on April 19, 1996 and effective June 28,
1996.
<PAGE>
Exhibit 1.1
2,400,000 Shares of Common Stock
United Payors & United Providers, Inc.
UNDERWRITING AGREEMENT
----------------------
July ____, 1996
BEAR, STEARNS & CO. INC.
SCHRODER WERTHEIM & CO. INCORPORATED
as Representatives of the
several Underwriters named in
Schedule I attached hereto
c/o Bear, Stearns & Co. Inc.
245 Park Avenue
New York, New York 10167
Dear Sirs:
United Payors & United Providers, Inc., a corporation organized and
existing under the laws of Delaware (the "Company"), proposes, subject to the
terms and conditions stated herein, to issue and sell to the several
underwriters named in Schedule I hereto (the "Underwriters") for whom you are
acting as representatives (the "Representatives") an aggregate of 2,400,000
shares (the "Firm Shares") of its common stock, par value $.01 per share (the
"Common Stock") and, for the sole purpose of covering over-allotments in
connection with the sale of the Firm Shares, at the option of the Underwriters,
up to an additional 360,000 shares (the "Additional Shares") of Common Stock.
The respective amounts of the Firm Shares to be purchased by the several
Underwriters are set forth opposite their names in Schedule I hereto.
As the Representatives, you have advised the Company (a) that you are
authorized to enter into this Agreement on behalf of the several Underwriters,
<PAGE>
and (b) that the several Underwriters are willing, acting severally and not
jointly, to purchase the numbers of Firm Shares set forth opposite their
respective names in Schedule I, plus their pro rata portion of the Additional
Shares if you elect to exercise the over-allotment option in whole or in part
for the accounts of the several Underwriters. The Firm Shares and any
Additional Shares purchased by the Underwriters are referred to herein as the
"Shares." The Shares are more fully described in the Registration Statement
referred to below.
In consideration of the mutual agreements contained herein and of the
interests of the parties in the transactions contemplated hereby, the parties
hereto agree as follows:
1. Representations and Warranties of the Company. The Company
---------------------------------------------
represents and warrants as follows:
(a) The Company has filed with the Securities and Exchange
Commission (the "Commission") a registration statement, and may have filed an
amendment or amendments thereto, on Form S-1 (No. 333-3814), for the
registration of the Shares under the Securities Act of 1933, as amended (the
"Act"). Such registration statement, including the prospectus, financial
statements and schedules, exhibits and all other documents filed as a part
thereof, as amended at the time of effectiveness of the registration statement,
including any information deemed to be a part thereof as of the time of
effectiveness pursuant to paragraph (b) of Rule 430A of the Rules and
Regulations of the Commission under the Act (the "Regulations"), is herein
called the "Registration Statement" and the prospectus, in the form first filed
with the Commission pursuant to Rule 424(b) of the Regulations or filed as part
of the Registration Statement at the time of effectiveness if no Rule 424(b)
filing is required, is herein called the "Prospectus." The term "preliminary
prospectus" as used herein means a preliminary prospectus as described in Rule
430 of the Regulations. The Company has complied with the conditions for the use
of Form S-1. Copies of the Registration Statement, including any amendments
thereto, any Preliminary Prospectuses contained therein and the exhibits,
financial statements and schedules, as finally amended and revised, have
heretofore been delivered by the Company to you.
(b) The Commission has not issued an order preventing or
suspending the use of any Preliminary Prospectus or Prospectus relating to the
proposed offering of the Shares nor instituted proceedings for that purpose. At
the time of the effectiveness of the Registration Statement or the effectiveness
of any post-effective amendment to the Registration Statement, when the
Prospectus is first filed with the Commission pursuant to Rule 424(b) of the
Regulations, when any supplement to or amendment of the Prospectus is filed with
the Commission and at the Closing Date and the Additional Closing Date, if any
(as hereinafter respectively defined), the Registration Statement and the
Prospectus and any amendments thereof and supplements thereto complied or will
comply in all
- 2 -
<PAGE>
material respects with the applicable provisions of the Act and the Regulations
and does not or will not contain an untrue statement of a material fact and does
not or will not omit to state any material fact required to be stated therein or
necessary in order to make the statements therein (i) in the case of the
Registration Statement, not misleading and (ii) in the case of the Prospectus,
in light of the circumstances under which they were made, not misleading. When
any related preliminary prospectus was first filed with the Commission (whether
filed as part of the Registration Statement for the registration of the Shares
or any amendment thereto or pursuant to Rule 424(a) of the Regulations) and when
any amendment thereof or supplement thereto was first filed with the Commission,
such preliminary prospectus and any amendments thereof and supplements thereto
complied in all material respects with the applicable provisions of the Act and
the Regulations and did not contain an untrue statement of a material fact and
did not omit to state any material fact required to be stated therein or
necessary in order to make the statements therein in light of the circumstances
under which they were made not misleading. No representation and warranty is
made in this subsection (b), however, with respect to any information contained
in or omitted from the Registration Statement or the Prospectus or any related
preliminary prospectus or any amendment thereof or supplement thereto in
reliance upon and in conformity with information furnished in writing to the
Company by or on behalf of any Underwriter through you as herein stated
expressly for use in connection with the preparation thereof.
(c) Coopers & Lybrand L.L.P., who have certified the
financial statements included in the Registration Statement, are independent
public accountants as required by the Act and the Regulations.
(d) Subsequent to the respective dates as of which
information is given in the Registration Statement and the Prospectus, except as
set forth in the Registration Statement and the Prospectus, there has been no
material adverse change or any development involving a prospective material
adverse change in the business, properties, results of operations or financial
condition of the Company and its subsidiaries taken as a whole, whether or not
arising from transactions in the ordinary course of business, and since the date
of the latest balance sheet presented in the Registration Statement and the
Prospectus, neither the Company nor any of its subsidiaries has incurred or
undertaken any liabilities or obligations, direct or contingent, which are
material to the Company and its subsidiaries taken as a whole, except for
liabilities or obligations which are reflected in the Registration Statement and
the Prospectus. There has not been any material transaction entered into by the
Company or its subsidiaries other than transactions in the ordinary course of
business and changes and transactions contemplated by the Registration
Statement, as it may be amended or supplemented.
- 3 -
<PAGE>
(e) This Agreement and the transactions contemplated herein
have been duly and validly authorized by the Company, and this Agreement has
been duly and validly executed and delivered by the Company.
(f) The execution, delivery, and performance of this
Agreement and the consummation of the transactions contemplated hereby do not
and will not (i) conflict with or result in a breach of any of the terms and
provisions of, or constitute a default (or an event which with notice or lapse
of time, or both, would constitute a default) under, or result in the creation
or imposition of any lien, charge or encumbrance upon any property or assets of
the Company or any of its subsidiaries pursuant to, any agreement, instrument,
franchise, license or permit to which the Company or any of its subsidiaries is
a party or by which any of such corporations or their respective properties or
assets may be bound, except for such breaches or defaults, none of which the
Company is currently aware, that would not, individually or in the aggregate,
have a material adverse effect on the business, properties, results of
operations or financial condition of the Company and its subsidiaries taken as a
whole or (ii) violate or conflict with any provision of the certificate of
incorporation or by-laws of the Company or any of its subsidiaries or any
judgment, decree, order, statute, rule or regulation of any court or any public,
governmental or regulatory agency or body having jurisdiction over the Company
or any of its subsidiaries or any of their respective properties or assets. No
consent, approval, authorization, order, registration, filing, qualification,
license or permit of or with any court or any public, governmental or regulatory
agency or body having jurisdiction over the Company or any of its subsidiaries
or any of their respective properties or assets is required for the execution,
delivery and performance of this Agreement or the consummation of the
transactions contemplated hereby, including the issuance, sale and delivery of
the Shares to be issued, sold and delivered by the Company hereunder, except the
registration under the Act of the Shares and such consents, approvals,
authorizations, orders, registrations, filings, qualifications, licenses and
permits as may be required under state securities or Blue Sky laws in connection
with the purchase and distribution of the Shares by the Underwriters.
(g) All of the outstanding shares of Common Stock of the
Company are duly and validly authorized and issued, fully paid and nonassessable
and were not issued and are not now in violation of or subject to any preemptive
rights or other right of participation or first refusal, other than the rights
described in the Shareholders' Agreement between Principal Holding Company and
Thomas L. Blair, dated June 7, 1996, that will terminate upon the sale of Common
Stock pursuant to the Registration Statement. The Shares, when issued, delivered
and sold in accordance with this Agreement, will be duly and validly issued and
outstanding, fully paid and nonassessable, and will not have been issued in
violation of or be subject to any preemptive rights or other right of
participation or first refusal. The Company had, at __________________, 1996, an
authorized and outstanding capitalization as set forth in the Prospectus under
the caption "Capitalization." The Common Stock, the Firm Shares and the
Additional Shares
- 4 -
<PAGE>
conform to the descriptions thereof contained in the Prospectus under the
caption "Description of Capital Stock."
(h) The outstanding shares of capital stock of each of the
Company's subsidiaries are duly authorized, validly issued, fully paid and non-
assessable. With the exception of America's Health Card Services, Inc. ("AHCS"),
whose capital stock is 90% owned by the Company, such shares of capital stock in
each subsidiary are wholly owned by the Company, and all capital stock owned by
the Company is owned free and clear of all liens, encumbrances and security
interests. No options, warrants or other rights to purchase, agreements or other
obligations to issue or other rights to convert any obligations into shares of
capital stock or ownership interests in the subsidiaries are outstanding, except
to the extent set forth in the Registration Statement, including the exhibits
thereto.
(i) Each of the Company and its subsidiaries has been duly
organized and is validly existing as a corporation in good standing under the
laws of its jurisdiction of incorporation. Each of the Company and its
subsidiaries is duly qualified and in good standing as a foreign corporation in
each jurisdiction in which the character or location of its properties (owned,
leased or licensed) or the nature or conduct of its business makes such
qualification necessary, except for those failures to be so qualified or in good
standing which will not in the aggregate have a material adverse effect on the
Company and its subsidiaries taken as a whole. Each of the Company and its
subsidiaries has full corporate power and authority, and all necessary consents,
approvals, authorizations, orders, registrations, qualifications, licenses and
permits of and from all public, regulatory or governmental agencies and bodies,
to own, lease and operate its properties and conduct its business as now being
conducted and as described in the Registration Statement and the Prospectus, the
absence of which will not have a material adverse effect on the Company and its
subsidiaries taken as a whole, and no such consent, approval, authorization,
order, registration, qualification, license or permit contains a materially
burdensome restriction, the substance of which is not disclosed in all material
respects in the Registration Statement and the Prospectus.
(j) Except as described in the Prospectus, there is no
litigation or governmental proceeding or, to the knowledge of the Company,
third-party payor audit, investigation or other proceeding to which the Company
or any of its subsidiaries is a party or to which any property of the Company or
any of its subsidiaries is subject or which is pending or, to the knowledge of
the Company, threatened against the Company or any of its subsidiaries which the
Company has reason to believe is likely to result in any material adverse change
in the business, properties, results of operations, or financial condition of
the Company and its subsidiaries taken as a whole or which is required to be
disclosed in the Registration Statement and the Prospectus.
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<PAGE>
(k) Neither the Company nor any of its subsidiaries nor any
of their respective directors, officers or controlling persons has taken or will
take, directly or indirectly, any action designed to cause or result in, or
which constitutes or which might reasonably be expected to constitute, the
stabilization or manipulation of the price of the shares of Common Stock to
facilitate the sale or resale of the Shares.
(l) The historical financial statements, including the notes
thereto, included in the Registration Statement and the Prospectus present
fairly the financial position of the Company and its subsidiaries as of the
dates indicated and the results of its operations and cash flows for the periods
specified; except as otherwise stated in the Registration Statement, said
financial statements have been prepared in conformity with generally accepted
accounting principles applied on a consistent basis; and present fairly the
information required to be stated therein. The pro forma combining financial
statements set forth in the Registration Statement fairly present the
information required to be presented therein, and such statements meet the
requirements of the Act. No other financial statements or schedules of the
Company or its subsidiaries are required by the Act or the Rules and Regulations
to be included in the Registration Statement or the Prospectus. The summary
financial and statistical data included in the Registration Statement present
fairly the information shown therein and have been compiled on a basis
consistent with the financial statements presented therein.
(m) The Company and its subsidiaries have good and
marketable title to all of the properties and assets reflected as owned by them
in the financial statements (or as described in the Registration Statement)
hereinabove described, subject to no lien, mortgage, pledge, charge or
encumbrance of any kind except those reflected in such financial statements (or
as described in the Registration Statement) or which are not material in amount
to the Company and its subsidiaries taken as a whole. The Company and its
subsidiaries occupy leased property under valid and binding leases, except where
the failure to have such leases would not have a material adverse effect on the
Company and its subsidiaries taken as a whole.
(n) The Company and its subsidiaries have filed all federal,
state and foreign income tax returns which have been required to be filed and
have paid all taxes indicated by said returns and all assessments received by
them or any of them to the extent that such taxes have become due, except where
the failure to do so would not have a material adverse effect on the Company and
its subsidiaries taken as a whole.
(o) Except as described in the Prospectus, no holder of
securities of the Company has any rights to the registration of securities of
the Company because of the filing of the Registration Statement or otherwise in
connection with the sale of the Shares contemplated hereby.
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<PAGE>
(p) Except as disclosed in the Registration Statement, there
are no business relationships or related party transactions required to be
disclosed therein by Item 404 of Regulation S-K of the Regulations.
(q) No labor dispute with the employees of the Company or
any of its subsidiaries exists or is threatened or imminent that could result in
a material adverse change in or affecting the condition, financial or otherwise,
of the Company and its subsidiaries taken as a whole, except as described in or
contemplated by the Prospectus.
(r) The Company and its subsidiaries are, and will be at the
time of effectiveness of the Registration Statement or any post-effective
amendment thereto, insured by insurers of recognized financial responsibility
against such losses and risks and in such amounts as are prudent and customary
in the businesses in which they are engaged; neither the Company nor any of its
subsidiaries has been refused any insurance coverage sought or applied for; and
neither the Company nor any of its subsidiaries has any reason to believe that
it will not be able to renew its existing insurance coverage as and when such
coverage expires or to obtain similar coverage from similar insurers as may be
necessary to continue its business at a cost that would not materially and
adversely change or affect the business, properties, results of operations or
financial condition of the Company and its subsidiaries taken as a whole, except
as described in or contemplated by the Prospectus.
(s) No subsidiary of the Company is currently prohibited,
directly or indirectly, and it is the Company's intent that no subsidiary of the
Company will be prohibited, directly or indirectly, from paying any legally
permissible dividends to the Company, from making any other legally permissible
distribution on such subsidiary's capital stock, from repaying to the Company
any loans or advances to such subsidiary from the Company or from transferring
any of such subsidiary's property or assets to the Company or any other
subsidiary of the Company, except as described in or contemplated by the
Prospectus.
(t) Neither the Company nor any of its subsidiaries is or
intends to be in violation of any federal or state law or regulation relating to
occupational safety and health or to the storage, handling or transportation of
hazardous or toxic material or medical or other wastes, and the Company and each
of its subsidiaries have received all permits, licenses or other approvals
required of them under applicable federal and state occupational safety and
health and environmental laws and regulations to conduct their respective
businesses, and the Company and each of its subsidiaries are and intend to be in
compliance with all the terms and conditions of any such permit, license or
approval, except any such violation of law or regulation, failure to receive
required permits, licenses or other approvals or failure to comply with the
terms and conditions of such permits, licenses or
- 7 -
<PAGE>
approvals which would not, singly or in the aggregate, result in a material
adverse change in or affecting the condition, financial or otherwise, of the
Company and its subsidiaries taken as a whole, except as described in or
contemplated by the Prospectus.
(u) Each certificate signed by any officer of the Company
and delivered at the Closing for the offering covered by the Registration
Statement to the Representatives or counsel for the Underwriters shall be deemed
to be a representation and warranty by the Company to each Underwriter as to the
matters covered thereby.
(v) The Company and each of its subsidiaries maintains and
intends to continue to maintain a system of internal accounting controls
sufficient to provide reasonable assurance that (A) transactions are executed in
accordance with management's general or specific authorizations; (B)
transactions are recorded as necessary to permit preparation of financial
statements in conformity with generally accepted accounting principles and to
maintain assets accountability; (C) access to assets is permitted only in
accordance with management's general or specific authorization; and (D) the
recorded accountability for assets is compared with the existing assets at
reasonable intervals and appropriate action is taken with respect to any
differences.
(w) The Company has obtained from each of the persons listed
on Schedule II an enforceable written lockup agreement that provides, among
other things, that, for a period of 180 days from the date of this Agreement
they will not, without the prior consent of the Representatives, offer, sell or
dispose of any shares of Common Stock of the Company, or any securities
convertible into, exercisable for, or exchangeable for any shares of Common
Stock or derivative therefrom owned by them.
(x) All offers and sales of shares of the Company's capital
stock (including securities convertible into, or exercisable or exchangeable
for, shares of the Company's capital stock) prior to the date hereof were at all
relevant times exempt from the registration requirements of the Act, and were
the subject of an available exemption from the requirements of all applicable
state securities or Blue Sky laws.
(y) Each provider (including without limitation individual
hospitals that are members of hospital systems or networks) whose services have
been made available to any payor through the Company, a subsidiary, or any
entity that has entered into contractual arrangements or other understandings
with the Company for such purpose (A) have received adequate notice, as required
by the Company's contract with such provider, of each payor entitled to access
the discounts offered by such provider, and (B) have consented, as required by
such contract, to the access by each such payor to the discounts offered by such
provider,
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<PAGE>
except where the failure to provide adequate notice or receive consents in a
particular instance would not have a material adverse effect on the Company and
its subsidiaries taken as a whole. It is the Company's ntent that each such
provider (including without limitation individual hospitals that are members of
hospital systems or networks) whose services will be made available to any payor
through the Company, a subsidiary, or any entity that will enter into
contractual arrangements or other understandings with the Company for such
purpose (A) shall receive adequate notice, as required by the Company's contract
with such provider, of each payor entitled to access the discounts offered by
such provider, and (B) shall consent, as required by such contract, to the
access by each such payor to the discounts offered by such provider, except
where the failure to provide adequate notice or receive consents in a particular
instance would not have a material adverse effect on the Company and its
subsidiaries taken as a whole.
(z) The Company reasonable believes that each contract
entered into by the Company with a hospital system, hospital network or similar
provider organization is a valid, binding and enforceable obligation of both the
contracting entity and of the individual hospitals which are members of such
contracting entity.
(aa) The agreement between the Company and America's Health
Plan, Inc. described in the Prospectus has been duly executed and delivered by
each of the parties to the agreement and constitutes a valid, binding and
enforceable obligation of each such party.
(bb) With respect to each of the payors in the Transferred
Client Group described in the Prospectus and which are listed on Schedule III
------------
attached hereto, the Company (A) has duly executed and delivered a contract that
constitutes a valid, binding and enforceable obligation of each of the Company
and such payor; or (B) has received a valid, binding and enforceable assignment
from America's Health Plan, Inc. ("AHP") of AHP's contract with such payor and
such contract, as assigned, constitutes a valid, binding and enforceable
obligation of each of the Company and such payor, subject to any rights of such
payor to consent to such assignment; or (C) prior to execution of any such
contract or receipt of any such consent referred to in the immediately preceding
clauses (A) and (B), shall jointly administer with AHP the contract between AHP
and such payor and the Company shall be entitled to all of AHP's benefits under
such contract.
(cc) The Company believes reasonably and in good faith,
after appropriate review, that it is not required to obtain licensure or other
regulatory approval as a third party administrator, preferred provider
organization or risk-bearing entity (including, but not limited to, licensure as
an HMO) with respect to any of its contractual arrangements as currently in
existence or contemplated at this time, including without limitation current or
contemplated arrangements with the Foundations of Medical Care ("Foundation") or
Pioneer Financial Group
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<PAGE>
("Pioneer"), which are described in the Prospectus or which have been disclosed
to the Underwriters.
(dd) The Company and each of its subsidiaries has in the
past and intends in the future to conduct its business in compliance with all
the laws, rules and regulations of the jurisdictions in which each such entity
is conducting business, except where the failure to comply, individually or in
the aggregate, would not have a material adverse effect on the Company and its
subsidiaries, taken as a whole. Without limiting the foregoing, the Company and
each of its subsidiaries, and each of the employees and agents of the Company
and each of its subsidiaries, have obtained and in the future intend to obtain,
and are and intend to be in compliance with the terms, provisions and conditions
of, all permits, licenses, franchises, operating certificates, orders,
authorizations, registrations, qualifications, consents or approvals, of any
court, arbitrator or arbitral body, or any federal, state or local governmental
agency or self-regulatory authority, department or commission, or any other
board, bureau, review board, instrumentality or similar organization, domestic
or foreign, necessary to own and use the properties and assets of the Company
and its subsidiaries at that time and to conduct their respective businesses,
except where the failure to comply, individually or in the aggregate, would not
have a material adverse effect on the Company and its subsidiaries, taken as a
whole; as to the Company and each of its subsidiaries, each such permit is valid
and in full force and effect and there is no proceeding pending or, to the
Company's knowledge, threatened (or any basis therefor) which may cause any such
permit to be revoked, withdrawn, canceled, suspended or not renewed.
(ee) To the best knowledge of the Company, no payor or
provider is seeking, or has sought, threatened, requested or claimed against the
Company or any of its subsidiaries repayment of any amounts previously paid to
the Company, or recoupment of any discounts previously provided to the Company
or its payor clients, except to the extent that such repayment or recoupment
would not have a material adverse effect on the Company and its subsidiaries,
taken as a whole.
2. Purchase, Sale and Delivery of the Shares.
-----------------------------------------
(a) On the basis of the representations, warranties,
covenants and agreements herein contained, but subject to the terms and
conditions herein set forth, the Company agrees to sell to the Underwriters and
the Underwriters, severally and not jointly, agree to purchase from the Company,
at a purchase price per share of $_______, the number of Firm Shares set forth
opposite the respective names of the Underwriters in Schedule I hereto plus any
additional number of Shares which such Underwriter may become obligated to
purchase pursuant to the provisions of Section 9 hereof.
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<PAGE>
(b) Payment of the purchase price for, and delivery of
certificates for, the Shares shall be made at the offices of Bear, Stearns & Co.
Inc., 245 Park Avenue, New York, New York 10167, or at such other place as shall
be agreed upon by you and the Company, at 10:00 A.M. on the third business day
(unless postponed in accordance with the provisions of Section 9 hereof)
following the date of effectiveness of the Registration Statement (or, if the
Company has elected to rely upon Rule 430A of the Regulations, the third
business day after the date of determination of the initial public offering
price of the Shares), or such other time not later than ten business days after
such date as shall be agreed upon by you and the Company (such time and date of
payment and delivery being herein called the "Closing Date"). (As used herein,
"business day" means a day on which the New York Stock Exchange is open for
trading and on which banks in New York are open for business and not permitted
by law or executive order to be closed.) Payment shall be made to the Company by
wire transfer of same day funds, to the order of the Company, against delivery
to you for the respective accounts of the Underwriters of certificates for the
Shares to be purchased by them. Certificates for the Shares shall be registered
in such name or names and in such authorized denominations as you may request in
writing at least two full business days prior to the Closing Date. The Company
will permit you to examine and package such certificates for delivery at least
one full business day prior to the Closing Date.
(c) In addition, the Company hereby grants to the
Underwriters the option to purchase up to 360,000 Additional Shares at the same
purchase price per share to be paid by the Underwriters to the Company for the
Firm Shares as set forth in this Section 2, for the sole purpose of covering
over-allotments in the sale of Firm Shares by the Underwriters. This option may
be exercised at any time, in whole or in part, on or before the thirtieth day
following the date of the Prospectus, by written notice by you to the Company.
Such notice shall set forth the aggregate number of Additional Shares as to
which the option is being exercised and the date and time, as reasonably
determined by you, when the Additional Shares are to be delivered (such date and
time being herein sometimes referred to as the "Additional Closing Date");
provided, however, that the Additional Closing Date shall not be earlier than
- -------- -------
the Closing Date or earlier than the second full business day after the date on
which the option shall have been exercised nor later than the eighth full
business day after the date on which the option shall have been exercised
(unless such time and date are postponed in accordance with the provisions of
Section 9 hereof). Certificates for the Additional Shares shall be registered in
such name or names and in such authorized denominations as you may request in
writing at least two full business days prior to the Additional Closing Date.
The Company will permit you to examine and package such certificates for
delivery at least one full business day prior to the Additional Closing Date.
The number of Additional Shares to be sold to each Underwriter shall
be the number which bears the same ratio to the aggregate number of Additional
Shares being purchased as the number of Firm Shares set forth opposite the name
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<PAGE>
of such Underwriter in Schedule I hereto (or such number increased as set forth
in Section 9 hereof) bears to 2,400,000, subject, however, to such adjustments
to eliminate any fractional shares as you in your sole discretion shall make.
Payment for the Additional Shares shall be made by wire transfer of
same day funds, to the order of the Company, at the offices of Bear, Stearns &
Co. Inc., 245 Park Avenue, New York, New York 10167, or such other location as
may be mutually acceptable, upon delivery of the certificates for the Additional
Shares to you for the respective accounts of the Underwriters.
3. Offering. Upon your authorization of the release of the Firm
--------
Shares, the Underwriters propose to offer the Shares for sale to the public upon
the terms set forth in the Prospectus. The Representatives may from time to
time thereafter change the public offering price and other selling terms. To
the extent, if at all, that any Additional Shares are purchased pursuant to
Section 2 hereof, the Underwriters will offer them to the public on the
foregoing terms.
It is further understood that you will act as the Representatives for
the Underwriters in the offering and sale of the Shares and any Additional
Shares in accordance with an Agreement Among Underwriters entered into by you
and the several other Underwriters.
4. Covenants of the Company. The Company covenants and agrees with
------------------------
the Underwriters that:
(a) If the Registration Statement has not yet been declared
effective the Company will use its best efforts to cause the Registration
Statement and any amendments thereto to become effective as promptly as
possible, and if Rule 430A is used or the filing of the Prospectus is otherwise
required under Rule 424(b), the Company will file the Prospectus (properly
completed if Rule 430A has been used) pursuant to Rule 424(b) within the
prescribed time period and will provide evidence satisfactory to you of such
timely filing.
(b) The Company will notify you immediately (and, if
requested by you, will confirm such notice in writing) (i) when the Registration
Statement and any amendments thereto become effective, (ii) of any request by
the Commission for any amendment of or supplement to the Registration Statement
or the Prospectus or for any additional information, (iii) of the mailing or the
delivery to the Commission for filing of any amendment of or supplement to the
Registration Statement or the Prospectus, (iv) of the issuance by the Commission
of any stop order suspending the effectiveness of the Registration Statement or
any post-effective amendment thereto or of the initiation, or the threatening,
of any proceedings therefor, (v) of the receipt of any comments from the
Commission, and (vi) of the receipt by the Company of any notification with
respect to the suspension of the qualification of the Shares for sale in any
jurisdiction or the initiation or
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<PAGE>
threatening of any proceeding for that purpose. If the Commission shall propose
or enter a stop order at any time, the Company will make every reasonable effort
to prevent the issuance of any such stop order and, if issued, to obtain the
lifting of such order as soon as possible. The Company will not file any
amendment to the Registration Statement or any amendment of or supplement to the
Prospectus (including the prospectus required to be filed pursuant to Rule
424(b)) that differs from the prospectus on file at the time of the
effectiveness of the Registration Statement before or after the effective date
of the Registration Statement to which you shall reasonably object in writing
after being timely furnished in advance a copy thereof.
(c) The Company will comply to the best of its ability with
the Act and the Regulations, and the Securities Exchange Act of 1934, as amended
(the "Exchange Act") and the rules and regulations of the Commission thereunder,
so as to permit the completion of the distribution of the Shares as contemplated
in this Agreement and the Prospectus. If at any time when a prospectus relating
to the Shares is required to be delivered under the Act any event shall have
occurred as a result of which the Prospectus as then amended or supplemented
includes an untrue statement of a material fact or omits to state any material
fact required to be stated therein or necessary to make the statements therein,
in the light of the circumstances under which they were made, not misleading, or
if it shall be necessary at any time to amend or supplement the Prospectus or
Registration Statement to comply with the Act or the Regulations, the Company
will notify you promptly and prepare and file with the Commission an appropriate
amendment or supplement (in form and substance satisfactory to you) which will
correct such statement or omission and will use its best efforts to have any
amendment to the Registration Statement declared effective as soon as possible.
(d) The Company will promptly deliver to you [two] signed
copies of the Registration Statement, including exhibits and all amendments
thereto, and the Company will promptly deliver to each of the Underwriters such
number of copies of any preliminary prospectus, the Prospectus, the Registration
Statement, and all amendments of and supplements to such documents, if any, as
you may reasonably request.
(e) The Company will endeavor in good faith, in cooperation
with you, at or prior to the time of effectiveness of the Registration
Statement, to qualify the Shares for offering and sale under the securities laws
relating to the offering or sale of the Shares of such jurisdictions as you may
designate and to maintain such qualification in effect for so long as required
for the distribution thereof; except that in no event shall the Company be
obligated in connection therewith to qualify as a foreign corporation or to
execute a general consent to service of process. The Company will, from time to
time, prepare and file such statements, reports, and other documents, as are or
may be required to continue
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<PAGE>
such qualifications in effect for so long a period as the Representatives may
reasonably request for distribution of the Shares.
(f) The Company will make generally available (within the
meaning of Section 11(a) of the Act) to its security holders and to you as soon
as practicable, but not later than 45 days after the end of its fiscal quarter
in which the first anniversary date of the effective date of the Registration
Statement occurs, an earnings statement (in form complying with the provisions
of Rule 158 of the Regulations) covering a period of at least twelve consecutive
months beginning after the effective date of the Registration Statement.
(g) Except with respect to stock issuable pursuant to
agreements with EDICOMM, Inc. and R.J. Associates, Inc., during the period of
180 days from the date of the Prospectus, the Company will not, without your
prior written consent, issue, sell, offer or agree to sell, grant any option for
the sale of, or otherwise dispose of, directly or indirectly, any Common Stock
(or any securities convertible into, exercisable for or exchangeable for Common
Stock).
(h) During a period of five years from the effective date of
the Registration Statement, or such lesser period during which the Company
continues to be subject to the reporting requirements of Section 13 or 15(d) of
the Securities Exchange Act or 1934, the Company will furnish to you copies of
(i) all reports to its shareholders and (ii) all reports, financial statements
and proxy or information statements filed by the Company with the Commission or
any national securities exchange or furnished by the Company to its stockholders
generally.
(i) The Company will apply the proceeds from the sale of the
Shares as set forth under "Use of Proceeds" in the Prospectus.
(j) The Company will use its best efforts to cause the
Shares to be authorized for quotation on the National Association of Securities
Dealers Automated Quotation National Market System.
(k) The Company will file with the Commission such reports
on Form SR as may be required pursuant to Rule 463 of the Regulations.
(l) In case any Underwriter is required to deliver a
Prospectus in connection with sales of any of the shares at any time nine months
or more after the effective date of the Registration Statement, the Company will
prepare and deliver to such Underwriter as many copies as such Underwriter
reasonably requests of an amended or supplemented Prospectus complying with
Section 10(a)(3) of the Act.
(m) The Company is familiar with the Investment Company Act
of 1940, as amended, and the rules and regulations thereunder and has in the
past
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<PAGE>
conducted and will in the future conduct its affairs in such a manner as to
ensure that the Company has not and will not be an "investment company" within
the meaning of said Act and such rules and regulations.
5. Payment of Expenses. Whether or not the transactions contemplated
-------------------
in this Agreement are consummated or this Agreement is terminated, the Company
hereby agrees to pay all costs and expenses incident to the performance of the
obligations of the Company hereunder, including those in connection with (i)
preparing, printing, duplicating, filing and distributing the Registration
Statement, as originally filed and all amendments thereof (including all
exhibits thereto), any preliminary prospectus, the Prospectus and any amendments
or supplements thereto (including, without limitation, fees and expenses of the
Company's accountants and counsel), the underwriting documents (including this
Agreement and the agreement among underwriters and all other documents related
to the public offering of the Shares (including those supplied to the
Underwriters in quantities as hereinabove stated), (ii) the issuance, transfer
and delivery of the Shares to the Underwriters, including any transfer or other
taxes payable thereon, (iii) the qualification of the Shares under state or
foreign securities or Blue Sky laws, including the costs of printing and mailing
a preliminary and final "Blue Sky Survey" and the fees of counsel for the
Underwriters and such counsel's disbursements in relation thereto, (iv)
quotation of the Shares on the National Association of Securities Dealers
Automated Quotation National Market System, (v) filing fees of the Commission
and the National Association of Securities Dealers, Inc., (vi) the cost of
printing certificates representing the Shares and (vii) the cost and charges of
any transfer agent or registrar.
6. Conditions of Underwriters' Obligations. The obligations of the
---------------------------------------
Underwriters to purchase and pay for the Firm Shares and the Additional Shares,
as provided herein, shall be subject to the accuracy of the representations and
warranties of the Company herein contained, as of the date hereof and as of the
Closing Date (for purposes of this Section 6 "Closing Date" shall refer not only
to the Closing Date for the Firm Shares but also to the "Additional Closing
Date" relating to the closing date for the Additional Shares), to the absence
from any certificates, opinions, written statements or letters furnished to you
or to Hogan & Hartson L.L.P. ("Underwriters' Counsel") pursuant to this Section
6 of any misstatement or omission, to the performance by the Company of its
obligations hereunder, and to the following additional conditions:
(a) The Registration Statement shall have become effective
not later than 5:30 P.M., New York time, on the date of this Agreement, or at
such later time and date as shall have been consented to in writing by you; any
and all filings required by Rule 424 and Rule 430A of the Regulations shall have
been made; and, at or prior to the Closing Date no stop order suspending the
effectiveness of the Registration Statement or any post-effective amendment
thereof shall have been
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<PAGE>
issued and no proceedings therefor shall have been initiated or threatened by
the Commission, and any request of the Commission for additional information (to
be included in the Registration Statement or otherwise) shall have been
disclosed to the Representatives and complied with to their reasonable request.
(b) At the Closing Date you shall have received the opinion of
Muldoon, Murphy & Faucette, counsel for the Company, dated the Closing Date,
addressed to the Underwriters and in form and substance satisfactory to
Underwriters' Counsel, to the effect that:
(i) Each of the Company and its subsidiaries has been duly
organized and is validly existing as a corporation in good standing under
the laws of its jurisdiction of incorporation. Each of the Company and its
subsidiaries is duly qualified and in good standing as a foreign
corporation in each jurisdiction in which the character or location of its
properties (owned, leased or licensed) or the nature or conduct of its
business makes such qualification necessary, except for those failures to
be so qualified or in good standing which will not in the aggregate have a
material adverse effect on the Company and its subsidiaries taken as a
whole. Each of the Company and its subsidiaries has full corporate
authority to own, lease and license its properties and conduct its business
as now being conducted and as described in the Registration Statement and
the Prospectus. All of the issued and outstanding capital stock of each
subsidiary of the Company has been duly and validly issued and is fully
paid and nonassessable and was not issued in violation of preemptive rights
and, is owned directly or indirectly by the Company, with the exception of
America's Health Card Services, Inc., whose capital stock is 90% owned by
the Company, and to the best knowledge of such counsel after reasonable
investigation, all of such capital stock is owned free and clear of any
lien, encumbrance, claim, security interest, restriction on transfer,
shareholders' agreement, voting trust or other defect of title whatsoever,
and no options, warrants or other rights to purchase, agreements or other
obligations to issue or other rights to convert any obligations into any
shares of capital stock of the subsidiaries of the Company are or will be
outstanding, except as described in or contemplated by the Registration
Statement, including the exhibits thereto.
(ii) The Company has authorized and outstanding capital stock as
set forth in the Prospectus under the caption "Capitalization." All of the
outstanding shares of Common Stock are duly and validly authorized and
issued, are fully paid and nonassessable and were not issued in violation
of or subject to any preemptive rights. The Shares to be delivered on the
Closing Date have been duly and validly authorized and, when delivered by
the Company against payment therefor in accordance with this Agreement,
will be duly and validly issued, fully paid and nonassessable and will not
have been issued in violation of or subject to any preemptive rights. The
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Common Stock, the Firm Shares and the Additional Shares conform to the
descriptions thereof contained in the Prospectus under the caption
"Description of Capital Stock." The certificates for the Shares are in
due and proper form.
(iii) The Shares to be sold under this Agreement to the
Underwriters are duly authorized for quotation on the National Association
of Securities Dealers Automated Quotation National Market System.
(iv) This Agreement has been duly and validly authorized,
executed and delivered by the Company.
(v) To the best of such counsel's knowledge, after reasonable
investigation, there is no litigation or governmental or third-party payor
audit or other action, suit, proceeding or investigation before any court
or before or by any public, regulatory or governmental agency or body
pending or threatened against, or involving the properties or business of,
the Company or any of its subsidiaries, which is of a character required to
be disclosed in the Registration Statement and the Prospectus which has not
been properly disclosed therein.
(vi) The execution, delivery, and performance of this Agreement
and the consummation of the transactions contemplated hereby by the Company
do not and will not (A) to the best knowledge of such counsel, after
reasonable investigation, conflict with or result in a breach of any of the
terms and provisions of, or constitute a default (or an event which with
notice or lapse of time, or both, would constitute a default) under, or
result in the creation or imposition of any lien, charge or encumbrance
upon any property or assets of the Company or any of its subsidiaries
pursuant to, any agreement, instrument, franchise, license or permit to
which the Company or any of its subsidiaries is a party or by which any of
such corporations or their respective properties or assets may be bound or
(B) violate or conflict with any provision of the certificate of
incorporation or by-laws of the Company or any of its subsidiaries, or, to
the best knowledge of such counsel, any judgment, decree, order, statute,
rule or regulation of any court or any public, governmental or regulatory
agency or body having jurisdiction over the Company or any of its
subsidiaries or any of their respective properties or assets. To the best
knowledge of such counsel, after reasonable investigation, no consent,
approval, authorization, order, registration, filing, qualification,
license or permit of or with any court or any public, governmental, or
regulatory agency or body having jurisdiction over the Company or any of
its subsidiaries or any of their respective properties or assets is
required for the execution, delivery and performance of this Agreement or
the consummation of the transactions contemplated hereby, except for
(1) such as may be required under state securities or Blue Sky
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<PAGE>
laws in connection with the purchase and distribution of the Shares by the
Underwriters (as to which such counsel need express no opinion) and
(2) such as have been made or obtained under the Act. No consents or
waivers from any other person are required in connection with the execution
and delivery of this Agreement and the consummation of the transactions
contemplated herein, except such as have been obtained or made.
(vii) The Registration Statement and the Prospectus and any
amendments thereof or supplements thereto (other than the financial
statements and other financial and statistical data included or
incorporated by reference therein, as to which no opinion need be rendered)
comply as to form in all material respects with the requirements of the Act
and the Regulations.
(viii) The statements under the captions "Risk Factors--
Uncertainty Regarding Silent Preferred Provider Organizations," "Risk
Factors--Antitakeover Effects of Certain Charter and Bylaw Provisions,"
"Business -- Government Regulation," "Business--UP&UP Network and Payor
Clients," "Business--Agreement with AHP," "Business -- Legal Proceedings,"
"Certain Transactions," "Description of Capital Stock," and "Shares
Eligible for Future Sale" in the Prospectus, and Items 14 and 15 of Part II
of the Registration Statement, insofar as such statements constitute a
summary of legal matters, documents or proceedings referred to therein,
fairly present the information called for with respect to such legal
matters, documents and proceedings. Such counsel does not know of any
laws, rules or regulations or legal or governmental proceedings applicable
to the business of the Company and its subsidiaries required to be
described in the Registration Statement or the Prospectus that are not
described as required.
(ix) The Registration Statement is effective under the Act and,
to the best of such counsel's knowledge after reasonable investigation, no
stop order suspending the effectiveness of the Registration Statement or
any post-effective amendment thereof has been issued and no proceedings
therefor have been initiated or threatened by the Commission and all
filings required by Rule 424(b) of the Regulations have been made.
(x) Delivery of certificates for the Shares will transfer
valid and marketable title thereto to each Underwriter that has purchased
such Shares in good faith and such counsel is not aware, after due inquiry,
of any adverse claim with respect thereto, and, to the best of such
counsel's knowledge after reasonable investigation, such Shares are free
and clear of all liens, encumbrances and claims.
(xi) To the best of such counsel's knowledge after reasonable
investigation, there are no contracts, instruments or other
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documents required to be described or referred to in the Prospectus or
filed as Exhibits to the Registration Statement, other than those described
or referred to therein or filed as Exhibits thereto, and the description
thereof and references thereto are fairly described therein or referred to.
(xii) To the best knowledge of such counsel, after reasonable
investigation, no holder of any security of the Company has or will have
any right to require registration of any security of the Company by virtue
of the transactions contemplated by this Agreement. Except as described in
or contemplated by the Prospectus, to the best knowledge of such counsel
after reasonable investigation, there are no outstanding securities of the
Company convertible or exchangeable into or evidencing the right to
purchase or subscribe for any shares of capital stock of the Company and
there are no outstanding or authorized options, warrants or rights of any
character obligating the Company to issue any shares of its capital stock
or any securities convertible or exchangeable into or evidencing the right
to purchase or subscribe for any shares of such stock; and except as
described in the Prospectus, to the best knowledge of such counsel after
reasonable investigation, there is no holder of any securities of the
Company or any other person who has the right, contractual or otherwise, to
cause the Company to sell or otherwise issue to them, or to permit them to
underwrite the sale of, any of the Shares or the right to have any Common
Stock or other securities of the Company included in the Registration
Statement.
(xiii) Neither the Company nor any of its subsidiaries is and,
upon consummation of the transactions contemplated hereby, will be subject
to registration as an "investment company" under the Investment Company Act
of 1940, as amended.
(xiv) All offers and sales of shares by the Company of the
Company's capital stock (including securities convertible into, or
exchangeable or exercisable for, shares of the Company's capital stock)
prior to the date of this Agreement were at all relevant times exempt from
the registration requirements of the Act, and to such counsel's best
knowledge after reasonable investigation, were the subject of an available
exemption from the requirements of all applicable state securities or Blue
Sky laws.
(xv) The agreement between the Company and AHP described in the
Prospectus has been duly executed and delivered by each of the parties to
the agreement and constitutes a valid, binding and enforceable obligation
of each such party.
(xvi) With respect to each of the payors in the Transferred
Client Group described in the Prospectus and which are listed on Schedule
--------
III attached hereto, the Company has (i) duly executed and
---
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<PAGE>
delivered a valid, binding and enforceable contract with such payor; or
(ii) has received a valid, binding and enforceable assignment from AHP of
all contractual rights between AHP and such payor, subject to any rights of
such payor to consent to such assignment; or (iii) prior to execution of
any such contract or receipt of any such consent referred to in the
immediately preceding clauses (i) and (ii) shall jointly administer with
AHP the contract between AHP and such payor and the Company shall be
entitled to all of AHP's benefits under such contract.
(xvii) To the best knowledge of such counsel after reasonable
investigation, the Company and each of its subsidiaries holds all permits,
licenses, franchises, operating certificates, orders, authorizations,
registrations, qualifications, consents or approvals, of any court,
arbitrator or arbitral body, or any federal, state, local or foreign
governmental agency or self-regulatory authority, department or commission,
or any other board, bureau, review board, instrumentality or similar
organization, domestic or foreign, necessary to own and use the properties
and assets of the Company and its subsidiaries and to conduct their
respective businesses, except where the failure to comply, individually or
in the aggregate, would not have a material adverse effect on the Company
and its subsidiaries, taken as a whole.
(xviii) To the best knowledge of such counsel after reasonable
investigation, the Company and each of its subsidiaries are in material
compliance with all the laws, rules and regulations applicable to the
conduct of their respective businesses.
(xix) In addition, such opinion shall also contain a statement
that such counsel has participated in conferences with officers and
representatives of the Company, representatives of the independent public
accountants for the Company and the Underwriters at which the contents and
the Prospectus and related matters were discussed and, no facts have come
to the attention of such counsel which would lead such counsel to believe
that either the Registration Statement at the time it became effective
(including the information deemed to be part of the Registration Statement
at the time of effectiveness pursuant to Rule 430A(b), if applicable), or
any amendment thereof made prior to the Closing Date as of the date of such
amendment, contained an untrue statement of a material fact or omitted to
state any material fact required to be stated therein or necessary to make
the statements therein not misleading or that the Prospectus as of its date
(or any amendment thereof or supplement thereto made prior to the Closing
Date as of the date of such amendment or supplement) and as of the Closing
Date contained or contains an untrue statement of a material fact or
omitted or omits to state any material fact required to be stated therein
or necessary to make the statements therein, in light of the circumstances
under which
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<PAGE>
they were made, not misleading (it being understood that such counsel need
express no belief or opinion with respect to the financial statements and
other financial and statistical data included or incorporated by reference
therein).
In rendering such opinion, such counsel may rely (A) as to matters
involving the application of laws other than the laws of the United States and
jurisdictions in which they are admitted, to the extent such counsel deems
proper and to the extent specified in such opinion, if at all, upon an opinion
or opinions (in form and substance reasonably satisfactory to Underwriters'
Counsel) of other counsel reasonably acceptable to Underwriters' Counsel,
familiar with the applicable laws; (B) as to matters of fact, to the extent such
counsel deems proper, on certificates of responsible officers of the Company and
certificates or other written statements of officers of departments of various
jurisdictions having custody of documents respecting the corporate existence or
good standing of the Company and its subsidiaries, provided that copies of any
such statements or certificates shall be delivered to Underwriters' Counsel; and
(C) as to matters regarding regulation of the health care industry, to the
extent such counsel deems proper, upon an opinion provided by Epstein Becker &
Green, P.C. (in form and substance reasonably satisfactory to Underwriters'
Counsel). The opinion of such counsel for the Company shall state that the
opinion of any such other counsel is in form satisfactory to such counsel and,
in their opinion, you and they are justified in relying thereon.
(c) All proceedings taken in connection with the sale of the Firm
Shares and the Additional Shares as herein contemplated shall be satisfactory in
form and substance to you and to Underwriters' Counsel, and the Underwriters
shall have received from said Underwriters' Counsel a favorable opinion, dated
as of the Closing Date with respect to the issuance and sale of the Shares, the
Registration Statement and the Prospectus and such other related matters as you
may reasonably require, and the Company shall have furnished to Underwriters'
Counsel such documents as they request for the purpose of enabling them to pass
upon such matters.
(d) At or prior to the Closing Date, you and the Company shall have
received from counsel for the Underwriters a memorandum or summary, in form and
substance satisfactory to you, with respect to the qualification for offering
and sale by the Underwriters of the Shares under the state securities or Blue
Sky laws of such jurisdictions as the Representatives may reasonably have
designated to the Company.
(e) At the Closing Date you shall have received a certificate of the
Chief Executive Officer and Chief Financial Officer of the Company, dated the
Closing Date to the effect that (i) the condition set forth in subsection (a) of
this Section 6 has been satisfied, (ii) as of the date hereof and as of the
Closing Date the
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<PAGE>
representations and warranties of the Company set forth in Section 1 hereof are
accurate, (iii) as of the Closing Date the obligations of the Company to be
performed hereunder on or prior thereto have been duly performed and
(iv) subsequent to the respective dates as of which information is given in the
Registration Statement and the Prospectus, the Company and its subsidiaries have
not sustained any material loss or interference with their respective businesses
or properties from fire, flood, hurricane, accident or other calamity, whether
or not covered by insurance, or from any labor dispute or any legal or
governmental proceeding, and there has not been any material adverse change, or
any development involving a material adverse change, in the business,
properties, results of operations, or financial condition of the Company and its
subsidiaries taken as a whole, except in each case as described in or
contemplated by the Prospectus.
(f) At the time this Agreement is executed and at the Closing Date,
you shall have received a letter, from Coopers & Lybrand L.L.P., independent
public accountants for the Company, dated, respectively, as of the date of this
Agreement and as of the Closing Date addressed to the Underwriters and in form
and substance satisfactory to you, to the effect that: (i) they are independent
certified public accountants with respect to the Company within the meaning of
the Act and the Regulations and stating that the answer to Item 10 of the
Registration Statement is correct insofar as it relates to them; (ii) stating
that, in their opinion, the financial statements of the Company, and notes
thereto, included in the Registration Statement and the Prospectus and covered
by their opinion therein comply as to form in all material respects with the
applicable accounting requirements of the Act and the applicable published rules
and regulations of the Commission thereunder; (iii) on the basis of procedures
consisting of a reading of the latest available unaudited interim consolidated
financial statements of the Company and its subsidiaries, a reading of the
minutes of meetings and consents of the shareholders and boards of directors of
the Company and its subsidiaries and the committees of such boards subsequent to
March 31, 1996, inquiries of officers and other employees of the Company and its
subsidiaries who have responsibility for financial and accounting matters of the
Company and its subsidiaries with respect to transactions and events subsequent
to March 31, 1996 and other specified procedures and inquiries to a date not
more than five days prior to the date of such letter, nothing has come to their
attention that would cause them to believe that: (A) the unaudited consolidated
financial statements of the Company presented in the Registration Statement and
the Prospectus do not comply as to form in all material respects with the
applicable accounting requirements of the Act and the applicable published rules
and regulations of the Commission thereunder or that such unaudited financial
statements are not fairly presented in conformity with generally accepted
accounting principles applied on a basis substantially consistent with that of
the audited financial statements included in the Registration Statement and the
Prospectus; (B) with respect to the period subsequent to December 31, 1995,
there were, as of the date of the most recent available monthly consolidated
financial statements of the Company and its
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<PAGE>
subsidiaries, if any, and as of a specified date not more than five days prior
to the date of such letter, any changes in the capital stock or long-term
indebtedness of the Company or any decrease in the net current assets or
stockholders' equity of the Company, in each case as compared with the amounts
shown in the most recent balance sheet presented in the Registration Statement
and the Prospectus, except for changes or decreases which the Registration
Statement and the Prospectus disclose have occurred or may occur or which are
set forth in such letter; or (C) that during the period from December 31, 1995
to the date of the most recent available monthly consolidated financial
statements of the Company and its subsidiaries, if any, and to a specified date
not more than five days prior to the date of such letter, there was any
decrease, as compared with the corresponding period in the prior fiscal year, in
total revenues, or total or per share net income, except for decreases which the
Registration Statement and the Prospectus disclose have occurred or may occur or
which are set forth in such letter; (iv) stating that they have compared
specific dollar amounts, numbers of shares, percentages of revenues and
earnings, and other financial information pertaining to the Company and its
subsidiaries set forth in the Registration Statement and the Prospectus, which
have been specified by you prior to the date of this Agreement, to the extent
that such amounts, numbers, percentages, and information may be derived from the
general accounting and financial records of the Company and its subsidiaries or
from schedules furnished by the Company, and excluding any questions requiring
an interpretation by legal counsel, with the results obtained from the
application of specified readings, inquiries, and other appropriate procedures
specified by you set forth in such letter, and found them to be in agreement;
and (v) on the basis of a reading of the pro forma consolidated financial
information included in the Registration Statement and the Prospectus, carrying
out certain specified procedures that would not necessarily reveal matters of
significance with respect to the comments set forth in this clause (v),
inquiries of certain officials of the Company who have responsibility for
financial and accounting matters and proving the arithmetic accuracy of the
application of the pro forma adjustments to the historical amounts in the pro
forma consolidated financial information, nothing came to their attention that
caused them to believe that the pro forma combined financial information does
not comply in form in all material respects with the applicable accounting
requirements of Rule 11-02 of Regulation S-X or that the pro forma adjustments
have not been properly applied to the historical amounts in the compilation of
such statements.
(g) Prior to the Closing Date the Company shall have furnished to you
such further information, certificates and documents as you may reasonably
request.
(h) You shall have received from each person who is a director or
officer of the Company or such shareholder as have been heretofore designated by
you and listed on Schedule II hereto an agreement to the effect that such person
will not, directly or indirectly, without your prior written consent, offer,
sell, agree
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<PAGE>
to sell, grant any option to purchase or otherwise dispose (or announce any
offer, sale, grant of an option to purchase or other disposition) of any shares
of Common Stock (or any securities convertible into, exercisable for or
exchangeable or exercisable for shares of Common Stock) for a period of 180 days
after the date of the Prospectus.
(i) At the Closing Date, the Shares shall have been approved for
quotation on the National Association of Securities Dealers Automated Quotation
National Market System.
(j) Since the respective dates as of which information is given
in the Registration Statement and Prospectus, there shall not have been any
material adverse change or any development involving a prospective adverse
change in or affecting the condition, financial or otherwise, of the Company
or the earnings, business affairs, management or business prospects of the
Company whether or not arising in the ordinary course of business.
If any of the conditions specified in this Section 6 shall not have
been fulfilled when and as required by this Agreement, or if any of the
certificates, opinions, written statements or letters furnished to you or to
Underwriters' Counsel pursuant to this Section 6 shall not be in all material
respects reasonably satisfactory in form and substance to you and to
Underwriters' Counsel, all obligations of the Underwriters hereunder may be
canceled by you at, or at any time prior to, the Closing Date and the
obligations of the Underwriters to purchase the Additional Shares may be
canceled by you at, or at any time prior to, the Additional Closing Date.
Notice of such cancellation shall be given to the Company in writing, or by
telephone, telex or telegraph, confirmed in writing.
7. Indemnification.
---------------
(a) The Company agrees to indemnify and hold harmless each
Underwriter and each person, if any, who controls any Underwriter within the
meaning of Section 15 of the Act or Section 20(a) of the Securities Exchange Act
of 1934, as amended (the "Exchange Act"), against any and all losses,
liabilities, claims, damages and expenses whatsoever as incurred (including but
not limited to attorneys' fees and any and all expenses whatsoever incurred in
investigating, preparing or defending against any litigation, commenced or
threatened, or any claim whatsoever, and any and all amounts paid in settlement
with the written consent of the indemnifying parties, which consent shall not be
unreasonably withheld, of any claim or litigation), joint or several, to which
they or any of them may become subject under the Act, the Exchange Act or
otherwise, insofar as such losses, liabilities, claims, damages or expenses (or
actions in respect thereof) arise out of or are based upon any untrue statement
or alleged untrue statement of a material fact contained in the registration
statement for the registration of the Shares, as originally filed or any
amendment thereof, or any related preliminary
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<PAGE>
prospectus or the Prospectus, or in any supplement thereto or amendment thereof,
or arise out of or are based upon the omission or alleged omission to state
therein a material fact required to be stated therein or necessary to make the
statements therein not misleading; provided, however, that the Company will not
-------- -------
be liable in any such case to the extent but only to the extent that any such
loss, liability, claim, damage or expense arises out of or is based upon any
such untrue statement or alleged untrue statement or omission or alleged
omission made therein in reliance upon and in conformity with written
information furnished to the Company by or on behalf of any Underwriter through
you expressly for use therein. This indemnity agreement will be in addition to
any liability which the Company may otherwise have including under this
Agreement and provided further that this Section 7(a) shall not apply to the
Company in the event any loss, liability, claim, damage or expense is found in a
final judgment by a court of competent jurisdiction to have resulted primarily
from the bad faith, willful misconduct or gross negligence of the Underwriters
asking for indemnification hereunder.
(b) Each Underwriter severally, and not jointly, agrees to indemnify
and hold harmless the Company, each of the directors of the Company, each of the
officers of the Company who shall have signed the Registration Statement, and
each other person, if any, who controls the Company within the meaning of
Section 15 of the Act or Section 20(a) of the Exchange Act, against any losses,
liabilities, claims, damages and expenses whatsoever as incurred (including but
not limited to attorneys' fees and any and all expenses whatsoever incurred in
investigating, preparing or defending against any litigation, commenced or
threatened, or any claim whatsoever, and any and all amounts paid in settlement
with the written consent of the indemnifying parties, which consent shall not be
unreasonably withheld, of any claim or litigation), jointly or several, to which
they or any of them may become subject under the Act, the Exchange Act or
otherwise, insofar as such losses, liabilities, claims, damages or expenses (or
actions in respect thereof) arise out of or are based upon any untrue statement
or alleged untrue statement of a material fact contained in the Registration
Statement for the registration of the Shares, as originally filed or any
amendment thereof, or any related preliminary prospectus or the Prospectus, or
in any amendment thereof or supplement thereto, or arise out of or are based
upon the omission or alleged omission to state therein a material fact required
to be stated therein or necessary to make the statements therein not misleading,
in each case to the extent, but only to the extent, that any such loss,
liability, claim, damage or expense arises out of or is based upon any such
untrue statement or alleged untrue statement or omission or alleged omission
made therein in reliance upon and in conformity with written information
furnished to the Company by or on behalf of any Underwriter through you
expressly for use therein; provided, however, that in no case shall any
-------- -------
Underwriter be liable or responsible for any amount in excess of the
underwriting discount applicable to the Shares purchased by such Underwriter
hereunder. This indemnity will be in addition to any liability which any
Underwriter may otherwise have including under this Agreement. The Company
acknowledges that the
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<PAGE>
statements set forth in the last paragraph of the cover page and in the
paragraphs under the caption "Underwriting" in the Prospectus constitute the
only information furnished in writing by or on behalf of any Underwriter
expressly for use in the registration statement relating to the Shares as
originally filed or in any amendment thereof, any related preliminary prospectus
or the Prospectus or in any amendment thereof or supplement thereto, as the case
may be.
(c) Promptly after receipt by an indemnified party under subsection
(a) or (b) above of notice of the commencement of any action, such indemnified
party shall, if a claim in respect thereof is to be made against the
indemnifying party under such subsection, notify each party against whom
indemnification is to be sought in writing of the commencement thereof (but the
failure so to notify an indemnifying party shall not relieve it from any
liability which it may have under this Section 7). In case any such action is
brought against any indemnified party, and it notifies an indemnifying party of
the commencement thereof, the indemnifying party will be entitled to participate
therein, and to the extent it may elect by written notice delivered to the
indemnified party promptly after receiving the aforesaid notice from such
indemnified party, to assume the defense thereof with counsel satisfactory to
such indemnified party. Notwithstanding the foregoing, the indemnified party or
parties shall have the right to employ its or their own counsel in any such
case, but the fees and expenses of such counsel shall be at the expense of such
indemnified party or parties unless (i) the employment of such counsel shall
have been authorized in writing by one of the indemnifying parties in connection
with the defense of such action, (ii) the indemnifying parties shall not have
employed counsel to have charge of the defense of such action within a
reasonable time after notice of commencement of the action or (iii) such
indemnified party or parties shall have reasonably concluded that there may be
defenses available to it or them which are different from or additional to those
available to one or all of the indemnifying parties (in which case the
indemnifying parties shall not have the right to direct the defense of such
action on behalf of the indemnified party or parties), in any of which events
such fees and expenses shall be borne by the indemnifying parties. Anything in
this subsection to the contrary notwithstanding, an indemnifying party shall not
be liable for any settlement of any claim or action effected without its written
consent; provided, however, that such consent was not unreasonably withheld.
-------- -------
8. Contribution. In order to provide for contribution in circumstances
------------
in which the indemnification provided for in Section 7 hereof is for any reason
held to be unavailable from any indemnifying party or is insufficient to hold
harmless a party indemnified thereunder, the Company and the Underwriters shall
contribute to the aggregate losses, claims, damages, liabilities and expenses of
the nature contemplated by such indemnification provision (including any
investigation, legal and other expenses incurred in connection with, and any
amount paid in settlement of, any action, suit or proceeding or any claims
asserted, but after deducting in the case of losses, claims, damages,
liabilities and expenses suffered by the Company
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<PAGE>
any contribution received by the Company from persons, other than the
Underwriters, who may also be liable for contribution, including persons who
control the Company within the meaning of Section 15 of the Act or Section 20(a)
of the Exchange Act, officers of the Company who signed the Registration
Statement and directors of the Company) as incurred to which the Company and one
or more of the Underwriters may be subject, in such proportions as is
appropriate to reflect the relative benefits received by the Company and the
Underwriters from the offering of the Shares or, if such allocation is not
permitted by applicable law or indemnification is not available as a result of
the indemnifying party not having received notice as provided in Section 7
hereof, in such proportion as is appropriate to reflect not only the relative
benefits referred to above but also the relative fault of the Company and the
Underwriters in connection with the statements or omissions which resulted in
such losses, claims, damages, liabilities or expenses, as well as any other
relevant equitable considerations. The relative benefits received by the Company
and the Underwriters shall be deemed to be in the same proportion as (x) the
total proceeds from the offering (net of underwriting discounts and commissions
but before deducting expenses) received by the Company and (y) the underwriting
discounts and commissions received by the Underwriters, respectively, in each
case as set forth in the table on the cover page of the Prospectus. The relative
fault of the Company and of the Underwriters shall be determined by reference
to, among other things, whether the untrue or alleged untrue statement of a
material fact or the omission or alleged omission to state a material fact
relates to information supplied by the Company or the Underwriters and the
parties' relative intent, knowledge, access to information and opportunity to
correct or prevent such statement or omission. The Company and the Underwriters
agree that it would not be just and equitable if contribution pursuant to this
Section 8 were determined by pro rata allocation (even if the Underwriters were
treated as one entity for such purpose) or by any other method of allocation
which does not take account of the equitable considerations referred to above.
Notwithstanding the provisions of this Section 8, (i) in no case shall any
Underwriter be liable or responsible for any amount in excess of the
underwriting discount applicable to the Shares purchased by such Underwriter
hereunder and (ii) no person guilty of fraudulent misrepresentation (within the
meaning of Section 11(f) of the Act) shall be entitled to contribution from any
person who was not guilty of such fraudulent misrepresentation. Notwithstanding
the provisions of this Section 8, no Underwriter shall be required to contribute
any amount in excess of the amount by which the total price at which the Shares
underwritten by it and distributed to the public were offered to the public
exceeds the amount of any damages that such Underwriter has otherwise been
required to pay by reason of such untrue or alleged untrue statement or omission
or alleged omission. For purposes of this Section 8, each person, if any, who
controls an Underwriter within the meaning of Section 15 of the Act or
Section 20(a) of the Exchange Act shall have the same rights to contribution as
such Underwriter, and each person, if any, who controls the Company within the
meaning of Section 15 of the Act or Section 20(a) of the Exchange Act, each
officer of the Company who shall have signed the
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<PAGE>
Registration Statement and each director of the Company shall have the same
rights to contribution as the Company, subject in each case to clauses (i) and
(ii) of this Section 8. Any party entitled to contribution will, promptly after
receipt of notice of commencement of any action, suit or proceeding against such
party in respect of which a claim for contribution may be made against another
party or parties, notify each party or parties from whom contribution may be
sought, but the omission to so notify such party or parties shall not relieve
the party or parties from whom contribution may be sought from any obligation it
or they may have under this Section 8 or otherwise. No party shall be liable for
contribution with respect to any action or claim settled without its consent;
provided, however, that such consent was not unreasonably withheld.
- -------- -------
9. Default by an Underwriter.
-------------------------
(a) If any Underwriter or Underwriters shall default in its or
their obligation to purchase Firm Shares or Additional Shares hereunder, and if
the Firm Shares or Additional Shares with respect to which such default relates
do not (after giving effect to arrangements, if any, made by you pursuant to
subsection (b) below) exceed in the aggregate 10% of the number of Firm Shares
or Additional Shares, to which the default relates shall be purchased by the
non-defaulting Underwriters in proportion to the respective proportions which
the numbers of Firm Shares set forth opposite their respective names in Schedule
I hereto bear to the aggregate number of Firm Shares set forth opposite the
names of the non-defaulting Underwriters.
(b) In the event that such default relates to more than 10% of
the Firm Shares or Additional Shares, as the case may be, you may in your
discretion arrange for yourself or for another party or parties (including any
non-defaulting Underwriter or Underwriters who so agree) to purchase such Firm
Shares or Additional Shares, as the case may be, to which such default relates
on the terms contained herein. In the event that within 5 calendar days after
such a default you do not arrange for the purchase of the Firm Shares or
Additional Shares, as the case may be, to which such default relates as provided
in this Section 9, this Agreement or, in the case of a default with respect to
the Additional Shares, the obligations of the Underwriters to purchase and of
the Company to sell the Additional Shares shall thereupon terminate, without
liability on the part of the Company with respect thereto (except in each case
as provided in Section 5, 7(a) and 8 hereof) or the Underwriters, but nothing in
this Agreement shall relieve a defaulting Underwriter or Underwriters of its or
their liability, if any, to the other Underwriters and the Company for damages
occasioned by its or their default hereunder.
(c) In the event that the Firm Shares or Additional Shares to
which the default relates are to be purchased by the non-defaulting
Underwriters, or are to be purchased by another party or parties as aforesaid,
you or the Company
- 28 -
<PAGE>
shall have the right to postpone the Closing Date or Additional Closing Date, as
the case may be for a period, not exceeding five business days, in order to
effect whatever changes may thereby be made necessary in the Registration
Statement or the Prospectus or in any other documents and arrangements, and the
Company agrees to file promptly any amendment or supplement to the Registration
Statement or the Prospectus which, in the opinion of Underwriters' Counsel, may
thereby be made necessary or advisable. The term "Underwriter" as used in this
Agreement shall include any party substituted under this Section 9 with like
effect as if it had originally been a party to this Agreement with respect to
such Firm Shares and Additional Shares.
10. Survival of Representations and Agreements. All representations
------------------------------------------
and warranties, covenants and agreements of the Underwriters and the Company
contained in this Agreement, including the agreements contained in Section 5,
the indemnity agreements contained in Section 7 and the contribution agreements
contained in Section 8, shall remain operative and in full force and effect
regardless of any investigation made by or on behalf of any Underwriter or any
controlling person thereof or by or on behalf of the Company, any of its
officers and directors or any controlling person thereof, and shall survive
delivery of and payment for the Shares to and by the Underwriters. The accuracy
of the representations contained in Section 1, determined as of the Closing
Date, and the agreements contained in Sections 5, 7, 8 and 11(d) hereof shall
survive the termination of this Agreement, including termination pursuant to
Section 9 or 11 hereof.
11. Effective Date of Agreement; Termination.
----------------------------------------
(a) This Agreement shall become effective, upon the later of
when (i) you and the Company shall have received notification of the
effectiveness of the Registration Statement or (ii) the execution of this
Agreement. If either the initial public offering price or the purchase price per
Share has not been agreed upon prior to 5:00 P.M., New York time, on the third
full business day after the date on which the Registration Statement shall have
become effective, this Agreement shall thereupon terminate without liability to
the Company or the Underwriters except as herein expressly provided. Until this
Agreement becomes effective as aforesaid, it may be terminated by the Company by
notifying you or by you notifying the Company. Notwithstanding the foregoing,
the provisions of this Section 11, the accuracy of the representations contained
in Section 1 determined as of the Closing Date, and the provisions of Sections
1, 5, 7 and 8 hereof shall at all times be in full force and effect.
(b) You shall have the right to terminate this Agreement at any
time prior to the Closing Date or the obligations of the Underwriters to
purchase the Additional Shares at any time prior to the Additional Closing Date,
as the case may be, if (A) any domestic or international event or act or
occurrence has materially disrupted, or in your opinion will in the immediate
future materially
- 29 -
<PAGE>
disrupt, the market for the Company's securities or securities in general; or
(B) if trading on the New York or American Stock Exchanges shall have been
suspended, or minimum or maximum prices for trading shall have been fixed, or
maximum ranges for prices for securities shall have been required, on the New
York or American Stock Exchanges by the New York or American Stock Exchanges or
by order of the Commission or any other governmental authority having
jurisdiction; or (C) if a banking moratorium has been declared by a state or
federal authority or if any new restriction materially adversely affecting the
distribution of the Firm Shares or the Additional Shares, as the case may be,
shall have become effective; or (D) (i) if the United States becomes engaged in
hostilities or there is an escalation of hostilities involving the United States
or there is a declaration of a national emergency or war by the United States or
(ii) if there shall have been such change in political, financial or economic
conditions if the effect of any such event in clause (b)(D)(i) or (b)(D)(ii) as
in your judgment makes it impracticable or inadvisable to proceed with the
offering, sale and delivery of the Firm Shares or the Additional Shares, as the
case may be, on the terms contemplated by the Prospectus.
(c) Any notice of termination pursuant to this Section 11 shall be
by telephone, telex, or telegraph, confirmed in writing by letter.
(d) If this Agreement shall be terminated pursuant to any of the
provisions hereof (otherwise than pursuant to (i) notification by you as
provided in Section 11(a) hereof or (ii) Section 9(b) or 11(b) hereof), or if
the sale of the Shares provided for herein is not consummated because any
condition to the obligations of the Underwriters set forth herein is not
satisfied or because of any refusal, inability or failure on the part of the
Company to perform any agreement herein or comply with any provision hereof, the
Company will, subject to demand by you, reimburse the Underwriters for all out-
of-pocket expenses (including the fees and expenses of their counsel), incurred
by the Underwriters in connection herewith.
12. Notice. All communications hereunder, except as may be otherwise
------
specifically provided herein, shall be in writing and , if sent to any
Underwriter, shall be mailed, delivered, or telexed or telegraphed and confirmed
in writing, to such Underwriter c/o Bear, Stearns & Co. Inc., 245 Park Avenue,
New York, New York 10167, Attention: Curtis Lane; if sent to the Company, shall
be mailed, delivered, or telegraphed and confirmed in writing to the Company,
2275 Research Boulevard, Rockville, Maryland 20850, Attention: Thomas L. Blair.
13. Parties. This Agreement shall inure solely to the benefit of,
-------
and shall be binding upon, the Underwriters and the Company and the controlling
persons, directors, officers, employees and agents referred to in Section 7 and
8, and their respective successors and assigns, and no other person shall have
or be construed to have any legal or equitable right, remedy or claim under or
in respect of or by virtue of this Agreement or any provision herein contained.
The term
- 30 -
<PAGE>
"successors and assigns" shall not include a purchaser, in its capacity as such,
of Shares from any of the Underwriters.
14. Governing Law. This Agreement shall be governed by and construed
-------------
in accordance with the laws of the State of New York, but without regard to
principles of conflicts of law.
15. Miscellaneous. The Company and the Underwriters acknowledge and
-------------
agree that the only information furnished or to be furnished by any Underwriter
to the Company for inclusion in any Prospectus or the Registration Statement
consists of the information set forth in the last paragraph on the front cover
page (insofar as such information relates to the Underwriters), information
provided in connection with Item 502(d) of Regulation S-K under the Act and
information under the caption "Underwriting" in the Prospectus.
This Agreement may be executed in two or more counterparts, each of
which shall be deemed an original, but all of which together shall constitute
one and the same instrument.
- 31 -
<PAGE>
If the foregoing correctly sets forth the understanding between you
and the Company, please so indicate in the space provided below for that
purpose, whereupon this letter shall constitute a binding agreement among us.
It is understood that your acceptance of this letter on behalf of
each of the Underwriters is pursuant to the authority set forth in a form of
Agreement Among Underwriters, the form of which shall be submitted to the
Company for examination, upon request, but without warranty on your part as to
the authority of the signers thereof.
Very truly yours,
UNITED PAYORS & UNITED
PROVIDERS, INC.
By:
-----------------------------
Name:
Title:
Accepted as of the date first above written
BEAR, STEARNS & CO. INC.
SCHRODER WERTHEIM & CO. INCORPORATED
By:
------------------------------
Name:
Title:
On behalf of themselves and the other
Underwriters named in Schedule I hereto.
- 32 -
<PAGE>
EXHIBIT 4.1
-----------
[CERTIFICATE OF STOCK ART APPEARS HERE]
[LOGO OF UNITED PAYORS & PROVIDERS, INC. APPEARS HERE]
COMMON STOCK
INCORPORATED UNDER THE LAWS OF THE STATE OF DELAWARE
SEE REVERSE FOR CERTAIN DEFINITIONS
CUSIP 911319 10 1
THIS CERTIFIES THAT
is the owner of
FULLY PAID AND NON-ASSESSABLE SHARES, OF THE PAR VALUE OF $.01 EACH, OF THE
COMMON STOCK OF
UNITED PAYORS & UNITED PROVIDERS, INC.
transferable on the books of the Corporation in person or by duly authorized
attorney upon surrender of this certificate properly endorsed. This certificate
shall not be valid until countersigned and registered by the Transfer Agency and
Registrar.
WITNESS the facsimile seal of the Corporation and the facsimile signatures
of its dully authorized officers.
Dated
/s/ S.J. Bruno [CORPORATE SEAL OF UNITED PAYORS & /s/ Thomas L. Blair
SECRETARY PROVIDERS, INC. APPEARS HERE] PRESIDENT
COUNTERSIGNED AND REGISTERED:
AMERICAN STOCK TRANSFER & TRUST COMPANY
(NEW YORK, NEW YORK) TRANSFER AGENT AND REGISTRAR
BY
AUTHORIZED SIGNATURE
The Board of Directors of the Corporation is authorized by resolution(s), from
time to time adopted, to provided for the issuance of serial preferred stock
<PAGE>
in series and to fix and state the voting powers, designations, preferences and
relative, participating, optional, or other special rights of the shares of each
such series and the qualifications, limitations and restrictions thereof. The
Corporation will furnish to any shareholder upon request and without charge a
full description of each class of stock and any series thereof.
The shares represented by this certificate may not be cumulatively voted
on any matter. The affirmative vote of the holders of at least 80% of the voting
stock of the Corporation, voting together as a single class, shall be required
to approve certain business combinations and other transactions, pursuant to the
Certificate of Incorporation or to amend certain provisions of the Certificate
of Incorporation.
The following abbreviations, when used in the inscription on the face of
this certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
TEN COM - as tenants is common UNIFGIFTMIN ACT - Custodian
---- ------
(Cust) (Minor)
TEN ENT - as tenants by the entireties under Uniform Gifts of Minors
IT TEN - as joint tenants with right
of survivorship and not as
tenants in common Act
---------------------------
(State)
Additional abbreviations may also be used though not in the above list.
For value received, hereby sell, assign and transfer unto
------------------
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFICATION NUMBER OF ASSIGNEE
- -------------------------------------------------
- -------------------------------------------------
- --------------------------------------------------------------------------------
Please print or typewrite name and address including postal zip code of
assignee
shares
- -------------------------------------------------------------------------
of the common stock represented by the within Certificate, and do hereby
irrevocably constitute and appoint
Attorney
- --------------------------------------------------------------------
to transfer the said stock on the books of the within-named Corporation with
full power of substitution in the premises.
DATED
------------------------------ ---------------------------------------
NOTICE: THE SIGNATURE OF THIS
ASSIGNMENT MUST CORRESPOND WITH THE
NAME AS WRITTEN UPON THE FACE OF THE
CERTIFICATE IN EVERY PARTICULAR
WITHOUT ALTERATION OR ENLARGEMENT OF
ANY CHANGE WHATEVER.
<PAGE>
SIGNATURE(S) GUARANTEED:-----------------------------------------
THE SIGNATURE(S) SHOULD BE GUARANTEED BY AN ELIGIBLE
GUARANTOR INSTITUTION (BANKS, STOCKBROKERS, SAVINGS AND
LOAN ASSOCIATIONS AND CREDIT UNIONS WITH MEMBERSHIP IN
AN APPROVED SIGNATURE GUARANTEE MEDALLION PROGRAM),
PURSUANT TO S.E.C. RULE 17Ad-15.
<PAGE>
EX 5.1
July 2, 1996
United Payors & United Providers, Inc.
2275 Research Boulevard, Sixth Floor
Rockville, Maryland 20850
Re: The offering of up to 2,400,000 Shares of
United Payors & United Providers, Inc. Common Stock
Ladies and Gentlemen:
You have requested our opinion concerning certain matters of Delaware law
in connection with the offering (the "Offering") by United Payors & United
Providers, Inc., a Delaware corporation (the "Company"), of up to 2,400,000
Shares of its common stock, par value $.01 per share, ("Common Stock"),
(2,760,000 Shares in the event that the underwriters' over-allotment option is
exercised).
In connection with your request for our opinion, you have provided us and
we have reviewed the Company's certificate of incorporation filed with the
Delaware Secretary of State of April 15, 1996 (the "Certificate of
Incorporation"); the Company's Bylaws; the Company's Registration Statement on
Form S-1, as filed with the Securities and Exchange Commission initially on
April 19, 1996, and as amended on June 11, 1996, June 24, 1996 and July 2, 1996
and the Company's Registration Statement on Form S-1, and filed with the
Securities and Exchange Commission under Rule 462(b) under the Securities Act of
1933, as amended. (both such Registration Statements, the "Registration
Statement"); resolutions of the Board of Directors of the Company (the "Board")
concerning the organization of the Company, the Offerings and designation of the
Pricing Committee, and the form of stock certificate approved by the Board to
represent shares of Common Stock. We have also been furnished a certificate of
the Delaware Secretary of State certifying the Company's good standing as a
Delaware corporation. Capitalized terms used but not defined herein shall have
the meaning given them in the Certificate of Incorporation.
<PAGE>
UNITED PAYORS & UNITED PROVIDERS, INC.
June 11, 1996
Page 2
Based upon and subject to the foregoing, and limited in all respects to
matters of Delaware law, it is our opinion that:
1. The Company has been duly organized and is validly existing in good
standing as a corporation under the laws of the State of Delaware.
2. Upon the due adoption by the Pricing Committee or Board of Directors of
a resolution fixing the number of shares of Common Stock to be sold in the
Offering which number is in accordance with the terms set forth in the
Prospectus, the Common Stock to be issued in the Offering will be duly
authorized and, when such shares are sold and paid for in accordance with the
terms set forth in the Prospectus and such resolution of the Board of Directors,
and certificates representing such shares in the form provided to us are duly
and properly issued, will be validly issued, fully paid and nonassessable.
The following provisions of the Certificate of Incorporation may not be
given effect by a court applying Delaware law, but in our opinion the failure to
give effect to such provisions will not affect the duly authorized, validly
issued, fully paid and nonassessable status of the Common Stock:
1. (a) The provision of Subsection C.7 of Article EIGHTH empowering the
Board to determine the Fair Market Value of property offered or paid
for the Company's stock by an Interested Stockholder, to the extent, if
any, that a court applying Delaware law were to impose equitable
limitations upon such authority; and
(b) Article NINTH of the Certificate of Incorporation, which authorizes
the Board to consider the effect of any offer to acquire the Company on
constituencies other than stockholders in evaluating any such offer.
We consent to the filing of this opinion as an exhibit to the Registration
Statement on Form S-1 and to the use of the name of our firm where it appears in
the Registration Statement and in the Prospectus.
Very truly yours,
/s/ Muldoon, Murphy & Faucette
MULDOON, MURPHY & FAUCETTE
<PAGE>
EXHIBIT 11.1
UNITED PAYORS & PROVIDERS, INC.
COMPUTATION OF EARNINGS PER SHARE
YEAR ENDED DECEMBER 31, 1995 AND THE THREE MONTHS ENDED MARCH 31, 1995 AND
1996
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
PERIOD ENDED ----------------------
DECEMBER 31, 1995 1995 1996
----------------- ---------- ----------
<S> <C> <C> <C>
Net income (loss)..................... $ (710,641) $ (80,340) $2,449,612
========== ========== ==========
Common Stock Outstanding(1)........... 8,800,000 8,800,000 8,800,000
========== ========== ==========
Earnings (loss) per share............. $ (0.08) $ (0.01) $ 0.28
========== ========== ==========
</TABLE>
- --------
(1) All common and convertible preferred shares were issued during 1995 and
are reflected as if they were outstanding for all periods presented. The
common stock outstanding assumes the conversion of the preferred stock
into 4,400,000 shares of common stock.
<PAGE>
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in this registration statement of Form S-1 and
post-effective amendment to the registration statement on Form S-1
(Registration No 333-3814) of our report dated April 2, 1996, except as to the
information in Note 1 for which the date is June 7, 1996, on our audit of the
consolidated financial statements of United Payors & United Providers, Inc.,
and our reports dated April 2, 1996 on our audits of The Transferred Client
Group, Initial Managers and Investors, Inc., and IM&I-NEWCO, Inc. We also
consent to the reference to our firm under the caption "Experts."
Coopers & Lybrand L.L.P.
Rockville, Maryland
July 1, 1996
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Consolidated Balance Sheets and Statements of Operations of United Payors and
United Providers, Inc. as of and for period ended December 31, 1995 and as of
and for the quarter ended March 31, 1996 and is qualified in its entirety by
reference to such financial statements.
</LEGEND>
<S> <C> <C>
<PERIOD-TYPE> YEAR 3-MOS
<FISCAL-YEAR-END> DEC-31-1995 DEC-31-1996
<PERIOD-START> JAN-01-1995 JAN-01-1996
<PERIOD-END> DEC-31-1995 MAR-31-1996
<CASH> 8,701,135 3,886,565
<SECURITIES> 0 0
<RECEIVABLES> 1,254,844 4,352,727
<ALLOWANCES> 0 0
<INVENTORY> 0 0
<CURRENT-ASSETS> 10,763,878 8,619,442
<PP&E> 1,338,268 1,579,144
<DEPRECIATION> (138,483) (199,712)
<TOTAL-ASSETS> 12,763,487 11,173,411
<CURRENT-LIABILITIES> 7,379,802 3,209,922
<BONDS> 0 0
0 0
5,000,000 5,000,000
<COMMON> 1,007,099 1,007,099
<OTHER-SE> 0 0
<TOTAL-LIABILITY-AND-EQUITY> 12,763,487 11,173,411
<SALES> 0 0
<TOTAL-REVENUES> 877,423 7,491,624
<CGS> 0 0
<TOTAL-COSTS> 2,686,063 3,544,916
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 28,009 46,583
<INCOME-PRETAX> (1,109,641) 4,082,612
<INCOME-TAX> 399,000 (1,633,000)
<INCOME-CONTINUING> (710,641) 2,449,612
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (710,641) 2,449,612
<EPS-PRIMARY> (0.08) 0.28
<EPS-DILUTED> 0 0
</TABLE>
