<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): September 29, 1997
COMMISSION FILE NUMBER 0-20905
UNITED PAYORS & UNITED PROVIDERS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 51-0374698
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
2275 RESEARCH BOULEVARD, 6TH FLOOR, ROCKVILLE, MARYLAND 20850
(Address of principal executive offices, Zip Code)
(301) 548-1000
(Registrant's phone number, including area code)
Not Applicable
--------------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
<PAGE>
ITEM 1. (Not Applicable)
ITEM 2. ACQUISITION
Effective December 31, 1995, United Payors & United Providers, Inc. (the
"Company") entered into an agreement with America's Health Plan, Inc., an
indirect wholly-owned subsidiary of Principal Mutual Life Insurance Company
("Principal Mutual"), whereby specified payor clients representing approximately
40% of America's Health Plan, Inc.'s revenues for the year ended December 31,
1995, were transferred to the Company. Principal Mutual owns approximately 38%
of the Company's Common Stock.
On September 29, 1997, the Company acquired the remaining operations of
America's Health Plan for a purchase price of approximately $14.8 million with
additional contingent purchase price payments through the year 2001 possible, if
revenues exceed pre-determined targets.
America's Health Plan, Inc. develops and markets it proprietary health care
provider network for access by payors of health care costs such as insurers,
third-party administrators and unions. The name of America's Health Plan, Inc.
was changed to UP&UP, Inc. immediately prior to the closing. In connection with
the acquisition, the Company was granted the right to operate the health care
provider network under the name AMERICA'S HEALTH PLAN.
ITEMS 3-6. (Not Applicable)
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS
The following financial statements, pro forma financial information and
exhibits are filed as part of this report.
(a) Financial Statements of the Business Acquired.
(1) UP&UP, Inc. (formerly America's Health Plan, Inc.) Balance Sheets as of
December 31, 1996 and 1995.
(2) UP&UP, Inc. (formerly America's Health Plan, Inc.) Statements of
Operations for the Years Ended December 31, 1996 and 1995.
(3) UP&UP, Inc. (formerly America's Health Plan, Inc.) Statements of
Stockholder's Equity for the Years Ended December 31, 1996 and 1995.
(4) UP&UP, Inc. (formerly America's Health Plan, Inc.) Statements of Cash
Flows for the Years Ended December 31, 1996 and 1995.
(5) Notes to Financial Statements.
(6) Report of Independent Auditors.
(7) UP&UP, Inc. (formerly America's Health Plan, Inc.) Unaudited June 30,
1997 Balance Sheet.
(8) UP&UP, Inc. (formerly America's Health Plan, Inc.) Unaudited Statements
of Operations and Cash Flows for the Six Months Ended June 30, 1997 and
1996.
(9) Notes to the Unaudited June 30, 1997 Financial Statements.
(b) Pro Forma Consolidated Financial Information.
(1) Introduction.
(2) Unaudited Pro Forma Consolidated Balance Sheet as of June 30, 1997.
1
<PAGE>
(3) Unaudited Pro Forma Consolidated Statements of Operations for the Six
Months Ended June 30, 1997 and the Year Ended December 31, 1996.
(4) Notes to Unaudited Pro Forma Consolidated Financial Statements.
(c) Exhibits.
Exhibit No. Description
----------- -----------
10.7 Stock Purchase Agreement between United Payors & United
Providers, Inc. and Principal Holding Company, a wholly-
owned subsidiary of Principal Mutual Life Insurance Company,
dated September 29, 1997.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
UNITED PAYORS & UNITED PROVIDERS, INC.
Date: October 13, 1997 By: /s/ EDUARDO V. FEITO
----------------------------------------
Eduardo V. Feito
Controller and Chief Accounting Officer
2
<PAGE>
(a) Financial Statements of the Business Acquired.
UP&UP, INC.
(formerly America's Health Plan, Inc.)
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------------------
1996 1995
------------------ ------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 6,769,899 $20,689,837
Short term investment (Note 2) -- 1,021,563
Accounts receivable - trade 2,100,608 6,974,152
Accounts receivable - Principal Mutual (Note 3) 1,300,999 1,724,400
Prepaid expenses 457,137 600,183
------------------ ------------------
Total current assets 10,628,643 31,010,135
------------------ ------------------
Fixed assets:
Leasehold improvements 77,584 25,286
Furniture and equipment 1,128,667 914,098
Data processing equipment 1,228,302 1,233,910
------------------ ------------------
2,434,553 2,173,294
Less accumulated depreciation (1,380,273) (956,799)
------------------ ------------------
1,054,280 1,216,495
------------------ ------------------
Goodwill, net of accumulated amortization of $9,015,567 in 11,019,016 13,022,476
1996 and $7,012,107 in 1995
Deposits and other assets 7,029 8,359
------------------ ------------------
Total assets $22,708,968 $45,257,465
================== ==================
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 947,861 $ 867,243
Due to Principal Mutual (Notes 3 and 5) 573,576 2,260,905
Obligations under capital leases - current portion (Note 4) 144,611 139,504
Other current liabilities 96,948 153,250
------------------ ------------------
Total current liabilities 1,762,996 3,420,902
------------------ ------------------
Deferred income taxes (Note 5) 167,995 117,537
Obligations under capital leases, less current portion (Note 4) 142,098 280,702
Stockholder's equity:
Common stock, $.01 par value, 100 shares authorized, 1 1
issued and outstanding
Additional paid in capital 19,999,999 19,999,999
Retained earnings 635,879 21,430,373
Unrealized gain on available-for-sale security (net of tax) -- 7,951
------------------ ------------------
Total stockholder's equity 20,635,879 41,438,324
------------------ ------------------
Total liabilities and stockholder's equity $22,708,968 $45,257,465
================== ==================
</TABLE>
See accompanying notes.
3
<PAGE>
UP&UP, INC.
(formerly America's Health Plan, Inc.)
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
-----------------------------------------
1996 1995
------------------ ------------------
<S> <C> <C>
Provider network revenue (Note 7) $ 9,963,416 $33,114,763
Provider network revenue - Principal Mutual (Note 3) 6,216,233 9,514,226
Other revenue (Note 7) 577,365 --
------------------ ------------------
Total revenues 16,757,014 42,628,989
------------------ ------------------
Operating expenses:
Direct contract expenses 8,000,367 16,778,156
General and administrative 1,586,977 1,428,247
Depreciation and amortization 2,446,816 2,387,587
------------------ ------------------
Total operating expenses 12,034,160 20,593,990
------------------ ------------------
Other income (expense):
Interest and other income, net 601,370 900,733
Interest expense (85,662) (69,713)
------------------ ------------------
Total other income, net 515,708 831,020
------------------ ------------------
Income before income taxes 5,238,562 22,866,019
Income tax provision (Notes 5) 3,033,056 9,848,011
------------------ ------------------
Net income $ 2,205,506 $13,018,008
================== ==================
</TABLE>
See accompanying notes.
4
<PAGE>
UP&UP, INC.
(formerly America's Health Plan, Inc.)
STATEMENTS OF STOCKHOLDER'S EQUITY
<TABLE>
<CAPTION>
Additional Unrealized
Common Paid-in Net Gain on Retained
Stock Capital Securities Earnings Total
------------- -------------- -------------- -------------- ---------------
<S> <C> <C> <C> <C> <C>
Balance at
December 31, 1994 $ 1 $ 19,999,999 -- $ 8,412,365 $ 28,412,365
Net income -- -- -- 13,018,008 13,018,008
Unrealized gain on
available-for-sale
security, net of
income taxes of
$4,282 -- -- $ 7,951 -- 7,951
------------- -------------- -------------- -------------- ---------------
Balance at
December 31, 1995 1 19,999,999 7,951 21,430,373 41,438,324
Net income -- -- -- 2,205,506 2,205,506
Dividends paid to Parent -- -- -- (23,000,000) (23,000,000)
Unrealized gain
adjustment associated
with maturity of the
available-for-sale
security -- -- $ (7,951) -- (7,951)
------------- -------------- -------------- -------------- ---------------
Balance at
December 31, 1996 $ 1 $ 19,999,999 -- $ 635,879 $ 20,635,879
============= ============== ============== ============== ===============
</TABLE>
See accompanying notes.
5
<PAGE>
UP&UP, INC.
(formerly America's Health Plan, Inc.)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
-----------------------------------------
1996 1995
------------------ ------------------
<S> <C> <C>
Operating activities
Net income $ 2,205,506 $13,018,008
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 2,446,816 2,387,587
Deferred taxes 54,740 (8,387)
Changes in operating assets and liabilities:
Accounts receivable 5,296,945 (1,214,795)
Prepaid expenses and other assets 144,376 93,154
Accounts payable and accrued expenses 80,618 (765,794)
Due to Principal Mutual (1,687,329) (558,982)
Other current liabilities (56,302) (49,434)
------------------ ------------------
Net cash provided by operating activities 8,485,370 12,901,357
INVESTING ACTIVITIES
Purchases of fixed assets (271,811) (636,290)
Maturity (purchase) of investment 1,000,000 (1,009,330)
------------------ ------------------
Net cash provided by (used in) investing activities 728,189 (1,645,620)
FINANCING ACTIVITIES
Principal payments on note payable to bank -- (600,000)
Principal payments on capital lease obligations (133,497) (146,947)
Dividends paid to Parent (23,000,000) --
------------------ ------------------
Net cash used in financing activities (23,133,497) (746,947)
------------------ ------------------
Net (decrease) increase in cash and cash equivalents (13,919,938) 10,508,790
Cash and cash equivalents at beginning of period 20,689,837 10,181,047
------------------ ------------------
Cash and cash equivalents at end of period $ 6,769,899 $20,689,837
================== ==================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid for interest during the period $ 81,683 $ 80,075
================== ==================
</TABLE>
See accompanying notes.
6
<PAGE>
UP&UP, INC.
(formerly America's Health Plan, Inc.)
Notes to Financial Statements
December 31, 1996 and 1995
1. ORGANIZATION
UP&UP, Inc. (formerly America's Health Plan, Inc.) (the "Company") is
a wholly owned subsidiary of Principal Holding Company, Inc. (the "Parent"),
which is wholly owned by Principal Mutual Life Insurance Company ("Principal
Mutual"). Effective December 1, 1995 the Parent transferred all of the
outstanding common stock (100 shares at $0.01 per share) of the Company to
Principal Health Care, Inc. ("PHC"), also a wholly owned subsidiary of the
Parent. The transfer of stock had no impact on the stockholder's equity or
financial position of the Company.
The Company is a Maryland Corporation which develops and markets its
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
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
effect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
Cash Equivalents
The Company considers all highly liquid investments with a maturity of three
months or less when purchased to be cash equivalents. The carrying amounts
reported in the accompanying balance sheets for these financial instruments
approximate fair values.
Short Term Investment
During 1995, the Company purchased a bond with a par value of $1,000,000. The
investment was classified as available-for-sale and is stated at fair value,
with the unrealized gains and losses, net of tax, reported as a separate
component of stockholders equity. The bond matured on December 16, 1996.
Fixed Assets
Fixed assets are stated at cost. Depreciation is provided by the straight-
line method over the estimated useful lives of the various assets which range
from three to ten years. Leased equipment and leasehold improvements are
amortized using the straight-line method over the economic life of the asset.
Goodwill
Goodwill, which resulted from the acquisition of the Company in 1992, is
amortized using the straight-line method over a period of ten years.
7
<PAGE>
Income Recognition
The Company recognizes revenues based on contracted percentage rates of the
amount of cost savings realized by payor clients which access the Company's
health care provider network.
Income Taxes
The Company is taxed at corporate rates based on existing tax laws and
included in the consolidated federal and state returns filed by its Parent. The
income tax 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 income tax assets or liabilities are
measured based on enacted tax rates and laws that will be in effect when the
differences are expected to reverse.
Reclassifications
Certain amounts for 1995 have been reclassified to conform with the 1996
presentation.
3. RELATED PARTY TRANSACTIONS
Approximately 38% and 23% of contract revenue was derived from contracts with
Principal Mutual or its subsidiaries during the years ended December 31, 1996
and 1995, respectively.
The Company periodically invests available cash in a demand deposit pooled
investment fund maintained by Principal Mutual. There was $720,544 and
$3,150,930 in this fund at December 31, 1996 and 1995, respectively. The
Company earned approximately $70,000 and $151,000 on amounts invested in this
fund during 1996 and 1995, respectively.
Principal Mutual charges the Company for certain allocated administrative
services provided to the Company including tax, payroll processing, financial
management, and other similar services. Total allocated expenses charged were
approximately $444,000 and $224,000 in 1996 and 1995, respectively.
4. LEASE COMMITMENTS
The Company leases office space under cancelable and noncancelable operating
leases. A noncancelable agreement for office space which expires in 1997 will
not be renewed. The Company is moving to a new site in 1997 under the terms of a
ten-year operating lease agreement. The terms of the lease provide for rent-free
periods. For financial reporting purposes, the Company recognizes rent expense
on a straight-line basis over the term of the lease. Rent expense for all
operating leases for the years ending December 31, 1996 and 1995, was $434,004
and $367,190, respectively.
The Company has entered into various capital lease agreements for office
equipment with a total cost and accumulated amortization of $913,389 and
$699,354 respectively, at December 31, 1996.
8
<PAGE>
Future minimum lease payments under noncancelable operating leases and capital
leases at December 31, 1996, together with the present value of the minimum
lease payments for capital leases, are as follows:
<TABLE>
<CAPTION>
CAPITAL LEASES OPERATING LEASES
---------------------- ----------------------
<S> <C> <C>
1997 $167,259 $ 182,649
1998 146,338 493,357
1999 500,682
2000 508,216
2001 and thereafter 3,207,317
---------------------- ----------------------
313,597 $4,892,221
======================
Less amount representing interest 26,888
----------------------
Present value of net minimum lease payments $286,709
======================
</TABLE>
5. INCOME TAXES
The Company is taxed at corporate rates based on existing tax laws. The
Company's taxable income is included in the consolidated federal income and
state tax returns filed by Principal Mutual. Due to the inherent differences
between income for financial reporting purposes and income tax purposes, the
Company's provision for income taxes may not have the customary relationship of
taxes to income.
Principal Mutual has adopted the policy of allocating current income tax
expense to members of the consolidated group based upon their pro-rata
contribution of taxable income or taxable losses. As of December 31, 1996 and
1995, net current federal and state taxes payable of $155,296 and $1,893,543 are
included in the balance due to Principal Mutual. Taxes paid during 1996 and
1995 were approximately $4,717,000 and $10,708,000 respectively.
Deferred income taxes reflect the net income tax effects of temporary
differences between the carrying amounts of fixed assets for financial reporting
purposes and the amounts used for income tax purposes. Significant components
of the Company's income taxes as of December 31 are as follows:
<TABLE>
<CAPTION>
1996 1995
----------------- ------------------
<S> <C> <C>
Current:
Federal $2,453,291 $8,105,926
State 525,025 1,750,472
----------------- ------------------
2,978,316 9,856,398
Deferred:
Federal 49,126 (4,797)
State 5,614 (3,590)
----------------- ------------------
54,740 (8,387)
----------------- ------------------
Total income tax expense $3,033,056 $9,848,011
================= ==================
</TABLE>
9
<PAGE>
Significant differences between income tax expense as included in the
financial statements versus income tax calculated at the federal statutory rate
are as follows:
<TABLE>
<CAPTION>
1996 1995
----------------- ------------------
<S> <C> <C>
Tax on income at statutory Federal
rate $1,833,497 $8,003,106
State taxes, net of Federal benefit 507,461 1,137,807
Tax effect of non-deductible
amortization of goodwill 701,211 701,211
Other, net (9,113) 5,887
----------------- ------------------
$3,033,056 $9,848,011
================= ==================
</TABLE>
6. EMPLOYEE BENEFIT PLANS
All employees who have attained the age of twenty-one and have completed one
year of service are eligible to participate in the Principal Mutual savings
plan. Upon eligibility, employees may contribute up to 15% of their
compensation up to certain limits. The Company matches 50% of the employee
contribution up to 4% of the employee compensation. The Company contributed
$36,682 and $38,632 to the 401(k) savings plan in 1996 and 1995, respectively.
All employer and employee contributions are vested.
Commencing January 1, 1995, employees of the Company were also eligible to
participate in the defined benefit plans of Principal Mutual. The plans cover
substantially all of the Company's employees. The amount charged to pension
costs and contributed to the plan during 1996 and 1995 totaled approximately
$130,521 and $119,000, respectively.
7. UNITED PAYORS & UNITED PROVIDERS TRANSACTION
During 1995, the Company entered into an agreement with an affiliate,
United Payors & United Providers, Inc. ("UP&UP") which is 38.1% owned by PHC,
to transfer approximately 40% of the Company's client base to UP&UP. The
Company received a management fee and was reimbursed by UP&UP for expenses
incurred in administering clients up to the date when clients effectively
transferred. The total management fee earned under this agreement during 1996
was $577,365.
8. SUBSEQUENT EVENT
On September 29, 1997, UP&UP acquired all of the outstanding stock of the
Company for a purchase price of approximately $14.8 million, with the potential
of additional contingent consideration through 2001.
9. CONTINGENCIES
The Company is being sued for breach of contract and fraud by a health care
provider organization. The suit seeks $10 million in damages for breach of a
contract that the Company believes was never formed. The suit also seeks
punitive damages. The suit is being contested vigorously. Management believes
the action is without merit and that the plaintiff's loss calculation is flawed.
However, the Company is currently unable to estimate the likelihood of success
of the suit or any potential damages.
10
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors
UP&UP, Inc.
We have audited the accompanying balance sheets of UP&UP, Inc. (formerly
America's Health Plan, Inc.) as of December 31, 1996 and 1995, and the related
statements of operations, stockholder's equity, and cash flows for the years
then ended. 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 UP&UP, Inc. at December 31,
1996 and 1995, and the results of its operations and its cash flows for the
years then ended in conformity with generally accepted accounting principles.
ERNST & YOUNG, LLP
Washington, D.C.
February 21, 1997, except for
Note 8 as to which the date is
September 29, 1997
11
<PAGE>
UP&UP, INC.
(formerly America's Health Plan, Inc.)
UNAUDITED BALANCE SHEET
June 30, 1997
<TABLE>
<CAPTION>
ASSETS
<S> <C>
Current assets:
Cash and cash equivalents $ 8,725,864
Accounts receivable 3,424,519
Other current assets 148,910
------------
Total current assets 12,299,293
------------
Fixed assets, net 1,130,097
Intangible and other assets, net 10,023,836
------------
Total assets $ 23,453,226
============
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 1,470,693
Income and other taxes payable 293,912
Notes payable and capital lease 154,216
------------
Total current liabilities 1,918,821
Deferred income taxes 227,092
Notes payable and capital leases, less current portion 62,509
------------
Total liabilities 2,208,422
------------
Stockholder's equity:
Common stock, $0.01 par value, 100 shares authorized,
issued and outstanding 1
Additional paid-in capital 19,999,999
Retained earnings 1,244,804
------------
Total stockholder's equity 21,244,804
------------
Total liabilities and stockholder's equity $ 23,453,226
============
</TABLE>
See accompanying notes.
12
<PAGE>
UP&UP, INC.
(formerly America's Health Plan, Inc.)
UNAUDITED STATEMENTS OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Provider network revenue $ 7,324,022 $ 8,452,579
Other revenue 36,650 375,324
----------- -----------
Total revenue 7,360,672 8,827,903
----------- -----------
Operating expenses:
Direct contract expenses 3,761,863 3,976,018
General and administrative 776,008 773,330
Depreciation and amortization 1,219,868 1,220,341
----------- -----------
Total operating expenses 5,757,739 5,969,689
----------- -----------
Other income (expense):
Interest and other income, net 177,149 383,450
Interest expense (13,657) (22,393)
----------- -----------
Total other income, net 163,492 361,057
----------- -----------
Income before income taxes 1,766,425 3,219,271
Income tax provision 1,157,500 1,827,680
----------- -----------
Net income $ 608,925 $ 1,391,591
=========== ===========
</TABLE>
See accompanying notes.
13
<PAGE>
UP&UP, INC.
(formerly America's Health Plan, Inc.)
UNAUDITED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Operating activities:
Net income $ 608,925 $ 1,391,591
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 1,219,868 1,220,341
Deferred taxes 59,097 1,975
(Gain)/loss on disposal of fixed assets 1,309 (315)
Changes in operating assets and liabilities:
Accounts receivable (22,938) 3,955,398
Other current assets 607,067 (280,461)
Accounts payable and accrued expenses 7,603 (503,565)
Income taxes payable (159,719) (1,894,157)
----------- -----------
Net cash provided by operating activites 2,321,212 3,890,807
----------- -----------
Investing activities:
Proceeds from disposal of fixed assets 8,731 6,300
Purchases of fixed assets (303,995) (144,649)
----------- -----------
Net cash used in investing activities (295,264) (138,349)
----------- -----------
Financing activities:
Principal payments on capital lease obligations (69,983) (65,166)
Dividends to parent - (17,000,000)
----------- -----------
Net cash used in financing activities (69,983) (17,065,166)
----------- -----------
Net increase (decrease) in cash and cash equivalents 1,955,965 (13,312,708)
Cash and cash equivalents at beginning of period 6,769,899 20,689,837
----------- -----------
Cash and cash equivalents at end of period $ 8,725,864 $ 7,377,129
=========== ===========
</TABLE>
See accompanying notes.
14
<PAGE>
UP&UP, INC.
(formerly America's Health Plan, Inc.)
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
1. NATURE OF OPERATIONS AND ORGANIZATION
UP&UP, Inc. (formerly America's Health Plan, Inc.) is an indirect wholly-
owned subsidiary of Principal Mutual Life Insurance Company. UP&UP, Inc. is a
Maryland Corporation which develops and markets its proprietary health care
provider network for access by payors of health care costs such as insurers,
third-party administrators and unions.
2. UNAUDITED INFORMATION
The financial statements for the six months ended June 30, 1997 and 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 results of operations for the six months
ended June 30, 1997 and 1996 are not necessarily indicative of the results to be
expected for the full year or in the future.
3. SUBSEQUENT EVENT
On September 29, 1997, all of the Company's outstanding common stock was
acquired by United Payors & United Providers, Inc. for a purchase price of
approximately $14.8 million with additional contingent purchase price payments
through the year 2001 possible, if revenues exceed pre-determined targets.
15
<PAGE>
(b) Pro Forma Consolidated Financial Information.
UNITED PAYORS & UNITED PROVIDERS, INC.
PRO FORMA CONSOLIDATED INFORMATION
(UNAUDITED)
INTRODUCTION
The following unaudited pro forma consolidated financial statements are based
on the historical consolidated financial statements of United Payors & United
Providers, Inc. (the "Company") and the historical results of operations of
UP&UP, Inc. (formerly America's Health Plan, Inc.) The unaudited pro forma
adjustments are based upon available information and certain assumptions that
management of the Company believes are reasonable. These pro forma financial
statements have been prepared to illustrate the effects of the consummation of
the acquisition of UP&UP, Inc. by the Company. The pro forma financial
information and accompanying notes thereto should be read in conjunction with
the historical consolidated financial statements of the Company and other
information contained in this Form 8-K, including the historical financial
statements of UP&UP, Inc .
The Unaudited Pro Forma Consolidated Balance Sheet as of June 30, 1997
presents, on a pro forma basis, the balance sheet of the Company and UP&UP, Inc.
assuming that the acquisition of UP&UP, Inc. had been consummated on June 30,
1997.
The Unaudited Pro Forma Consolidated Statement of Operations for the six
months ended June 30, 1997 presents, on a pro forma basis, the results of
operations of the Company and the results of operations of UP&UP, Inc. assuming
that the acquisition of UP&UP, Inc. had been consummated on January 1, 1996.
The Unaudited Pro Forma Consolidated Statement of Operations for the year
ended December 31, 1996 presents, on a pro forma basis, the results of
operations of the Company and the results of operations of UP&UP, Inc. assuming
that the acquisition of UP&UP, Inc. had been consummated on January 1, 1996.
The unaudited pro forma condensed consolidated financial statements do not
purport to be indicative of what the Company's consolidated financial position
or consolidated results of operations would actually have been had the
acquisition been completed on such dates, or to project the Company's
consolidated financial position for any future period or the Company's
consolidated results of operations for any future period.
16
<PAGE>
UNITED PAYORS & UNITED PROVIDERS, INC.
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
JUNE 30, 1997
<TABLE>
<CAPTION>
UNITED PAYORS UP&UP, INC.
& UNITED (FORMERLY AMERICA'S PRO FORMA PRO FORMA
PROVIDERS, INC. HEALTH PLAN, INC.) ADJUSTMENTS CONSOLIDATED
--------------- ------------------- --------------- ---------------
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 11,219,418 $ 8,725,864 $ (12,803,622)(a) $ 7,141,660
Short-term investments 11,695,919 - - 11,695,919
Accounts receivable 9,679,016 3,424,519 (1,553,820)(b) 11,549,715
Deferred income taxes 260,300 - - 260,300
Other current assets 297,288 148,910 - 446,198
--------------- --------------- --------------- ---------------
Total current assets 33,151,941 12,299,293 (14,357,442) 31,093,792
--------------- --------------- --------------- ---------------
Fixed assets, net 3,261,817 1,130,097 (200,000)(c) 4,191,914
Advances to contracting providers, net 11,933,009 - - 11,933,009
Investments 1,811,406 - - 1,811,406
Intangible and other assets, net 9,659,215 10,023,836 5,360,546 (d) 25,043,597
--------------- --------------- --------------- ---------------
Total assets $ 59,817,388 $ 23,453,226 $ (9,196,896) $ 74,073,718
=============== =============== =============== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 6,140,096 $ 1,470,693 $ 2,275,000 (e) $ 9,885,789
Income and other taxes payable 1,016,571 293,912 - 1,310,483
Notes payable and capital lease 15,994 154,216 10,000,000 (f) 10,170,210
--------------- --------------- --------------- ---------------
Total current liabilities 7,172,661 1,918,821 12,275,000 21,366,482
Deferred income taxes - 227,092 (227,092)(g) -
Non-current accrued expense 400,000 - - 400,000
Notes payable and capital leases,
less current portion 99,281 62,509 - 161,790
--------------- --------------- --------------- ---------------
Total liabilities 7,671,942 2,208,422 12,047,908 21,928,272
--------------- --------------- --------------- ---------------
Stockholders' equity:
Convertible preferred stock, $0.01 par
value, 5,000,000 shares authorized,
none issued and outstanding - - - -
Common stock, $0.01 par value,
35,000,000 shares authorized,
11,573,636 shares issued 115,736 1 (1)(h) 115,736
Additional paid-in capital 37,086,505 19,999,999 (19,999,999)(h) 37,086,505
Deferred compensation (1,265,500) - - (1,265,500)
Retained earnings 16,746,070 1,244,804 (1,244,804)(h) 16,746,070
Less treasury stock, 47,050 shares, at cost (537,365) - - (537,365)
--------------- --------------- --------------- ---------------
Total stockholders' equity 52,145,446 21,244,804 (21,244,804) 52,145,446
--------------- --------------- --------------- ---------------
Total liabilities and stockholders' equity $ 59,817,388 $ 23,453,226 $ (9,196,896) $ 74,073,718
=============== =============== =============== ===============
</TABLE>
See accompanying notes
17
<PAGE>
UNITED PAYORS & UNITED PROVIDERS, INC.
UNAUDITED PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1997
<TABLE>
<CAPTION>
UP&UP, Inc.
United Payors (Formerly
& United America's Pro Forma Pro Forma
Providers, Inc. Health Plan, Inc.) Adjustments Combined
--------------- ----------------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Provider network revenue $17,299,034 $ 7,324,022 $ (160,415) (b) 24,462,641
Utilization management services 9,777,315 - - 9,777,315
Other revenue 202,066 36,650 - 238,716
----------- ----------- ----------- -----------
Total revenue 27,278,415 7,360,672 (160,415) 34,478,672
----------- ----------- ----------- -----------
Operating expenses:
Direct contract expenses 12,915,916 3,761,863 468,750 (i) 17,146,529
General and administrative 3,019,511 776,008 - 3,795,519
Depreciation and amortization 655,797 1,219,868 (612,284) (j) 1,263,381
----------- ----------- ----------- -----------
Total operating expenses 16,591,224 5,757,739 (143,534) 22,205,429
----------- ----------- ----------- -----------
Other income (expense):
Interest and other income, net 752,058 177,149 (706,371) (k) 222,836
Interest expense (8,764) (13,657) (400,000) (l) (422,421)
----------- ----------- ----------- -----------
Total other income (expense), net 743,294 163,492 (1,106,371) (199,585)
----------- ----------- ----------- -----------
Income before income taxes 11,430,485 1,766,425 (1,123,252) 12,073,658
Income tax (provision) benefit (4,619,573) (1,157,500) 887,242 (m) (4,889,831)
----------- ----------- ----------- -----------
Net income $ 6,810,912 $ 608,925 $ (236,010) $ 7,183,827
=========== =========== =========== ===========
Net income per share $ 0.58 $ 0.61
=========== ===========
Weighted average shares
outstanding 11,682,098 11,682,098
=========== ===========
</TABLE>
See accompanying notes.
18
<PAGE>
UNITED PAYORS & UNITED PROVIDERS, INC.
UNAUDITED PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
UP&UP, Inc.
United Payors (Formerly
& United America's Pro Forma Pro Forma
Providers, Inc. Health Plan, Inc.) Adjustments Combined
--------------- ----------------- --------------- ---------------
<S> <C> <C> <C> <C>
Provider network revenue $ 30,992,191 $ 16,179,649 $ 150,413 (b) 47,322,253
Utilization management services 4,190,476 - - 4,190,476
Other revenue 266,662 577,365 - 844,027
--------------- --------------- --------------- ---------------
Total revenue 35,449,329 16,757,014 150,413 52,356,756
--------------- --------------- --------------- ---------------
Operating expenses:
Direct contract expenses 15,294,892 8,000,367 962,500 (i) 24,257,759
General and administrative 2,783,212 1,586,977 - 4,370,189
Depreciation and amortization 538,593 2,446,816 (1,224,568) (j) 1,760,841
--------------- --------------- --------------- ---------------
Total operating expenses 18,616,697 12,034,160 (262,068) 30,388,789
--------------- --------------- --------------- ---------------
Other income (expense):
Interest and other income, net 1,034,034 601,370 (1,359,047) (k) 276,357
Interest expense (62,867) (85,662) (800,000) (l) (948,529)
--------------- --------------- --------------- ---------------
Total other income (expense), net 971,167 515,708 (2,159,047) (672,172)
--------------- --------------- --------------- ---------------
Income before income taxes 17,803,799 5,238,562 (1,746,566) 21,295,795
Income tax (provision) benefit (7,158,000) (3,033,056) 1,566,259 (m) (8,624,797)
--------------- --------------- --------------- ---------------
Net income $ 10,645,799 $ 2,205,506 $ (180,307) $12,670,998
=============== =============== =============== ===============
Net income per share $ 1.05 $ 1.25
=============== ===============
Weighted average shares
outstanding 10,125,699 10,125,699
=============== ===============
</TABLE>
See accompanying notes.
19
<PAGE>
UNITED PAYORS & UNITED PROVIDERS, INC.
NOTES TO PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(a) Adjustment reflects the net effect on cash of the following:
<TABLE>
<CAPTION>
<S> <C>
Borrowing from line of credit with NationsBank, N.A. $ 10,000,000
Payment of purchase price and transaction expenses
of $325,000 (15,075,000)
Dividend by UP&UP, Inc. to its former parent
immediately prior to closing (7,728,622)
------------
($12,803,622)
============
</TABLE>
(b) Adjustment to conform revenue recognition method of UP&UP, Inc. to that of
the Company.
(c) Adjustment to provide for the disposal of fixed assets of UP&UP, Inc.
(d) Adjustment reflects the net effect of the elimination of existing UP&UP,
Inc. goodwill ($10,017,286) and the excess cost of the acquisition over the
fair value of the assets acquired determined as follows:
<TABLE>
<CAPTION>
<S> <C>
Cash paid, including transaction expenses $15,075,000
Liabilities assumed in excess of fair value of
tangible assets 302,832
-----------
Excess cost over fair value $15,377,832
===========
</TABLE>
(e) Adjustment reflects the accrual of costs related to the acquisition
including the assumption of an unfavorable lease, severance and transition
costs of certain UP&UP, Inc. employees and a provision for an ongoing legal
matter involving UP&UP, Inc.
(f) Adjustment reflects the borrowing from line of credit.
(g) Adjustment to eliminate deferred taxes of UP&UP, Inc.
(h) Adjustment to eliminate the equity and retained earnings of UP&UP, Inc.
(i) Adjustment reflects the effect of provider credentialing expense.
(j) Adjustment to reflect the amortization of goodwill arising from the
acquisition of UP&UP, Inc.
(k) Adjustment to reflect the reduction of interest income as a result of the
cash payment of the purchase price, acquisition costs and the dividend by
UP&UP, Inc. to its former parent immediately prior to closing.
(l) Adjustment to reflect interest expense on borrowing from the existing line
of credit.
(m) Adjustment to reflect income tax effect of adjustments relating to the
acquisition, including the net effect of the deductibility of the
amortization of goodwill arising from the acquisition by the Company for
income tax purposes versus the non-deductibility of the amortization of
goodwill of UP&UP, Inc.
20
<PAGE>
Exhibit 10.7
STOCK PURCHASE AGREEMENT
<PAGE>
STOCK PURCHASE AGREEMENT
THIS STOCK PURCHASE AGREEMENT (this "Agreement") is made as of the 29th
day of September, 1997, by and between United Payors & United Providers, Inc., a
Delaware corporation ("Buyer") and Principal Holding Company, an Iowa
corporation ("Seller"), a wholly owned subsidiary of Principal Mutual Life
Insurance Company, an Iowa mutual insurance company ("Principal Mutual").
WHEREAS, Seller owns all of the issued and outstanding shares of common
stock, par value $0.01 per share (the "Shares") of UP&UP, Inc., formerly known
as America's Health Plan, Inc., a Maryland corporation (the "Company"); and
WHEREAS, Seller wishes to sell, transfer, and assign to Buyer and Buyer
wishes to purchase from Seller, all of the issued and outstanding Shares; and
WHEREAS, in connection with Buyer's acquisition of the Shares, Seller,
Principal Mutual and certain of their Affiliates wish to enter into certain
agreements identified on Schedule 1 attached hereto and by reference
incorporated herein (the "Other Agreements") pursuant to which, among other
things, Buyer and the Company will provide a national network of health care
providers for the benefit of Seller, Principal Mutual and such Affiliates as set
forth therein.
1
<PAGE>
NOW, THEREFORE, in consideration of the premises and the mutual
covenants, representations and warranties contained herein, the parties agree as
follows:
1. Definitions.
1.1. Certain Defined Terms.
For purposes of this Agreement, certain capitalized
terms used in this Agreement shall have the meanings
set forth in Addendum I attached hereto and by
reference incorporated herein, except as otherwise
expressly provided herein.
2. Sale and Transfer of Shares; Closing.
2.1. Shares.
Subject to the terms and conditions of this
Agreement, at the Closing Seller will sell and
transfer the Shares to Buyer and Buyer will purchase
the Shares from Seller.
2.2. Purchase Price.
The Purchase Price (the "Purchase Price") for the
Shares will be fourteen million seven hundred and
fifty thousand dollars ($14,750,000) plus the
Adjustment Amount. The Purchase Price shall be paid
in cash or immediately available funds at Closing.
The Purchase Price shall be increased after Closing
by the Adjustment Amount as set forth in Section 2.5.
below, which Adjustment Amount is based on a
third-party valuation of the Company.
2.3. Closing.
2
<PAGE>
The Closing of the sale and purchase of the Shares
(the "Closing") shall take place at the office of the
Seller at 711 High Street, Des Moines, Iowa 50392, on
September 29, 1997, (the "Closing Date") at 10:00
a.m., or at such other time or place as may be
mutually agreed upon by the parties.
2.4. Closing Obligations.
At the Closing,
(a) Seller will deliver to Buyer:
(i) certificates representing the
Shares, duly endorsed to Buyer or
with assignments of stock attached
thereto duly endorsed to Buyer, with
all necessary transfer taxes affixed
or provided for;
(ii) a certificate executed by Seller to
the effect that each of Seller's
representations and warranties in
this Agreement was accurate in all
respects as of the date of this
Agreement and, except as otherwise
stated in such certificate, is
accurate in all respects as of the
Closing Date as if made on the
Closing Date;
(iii) the opinion of counsel to Seller,
dated the Closing Date,
substantially in the form of
Addendum II;
(iv) the Principal Mutual Service
Agreement, executed by Principal
Mutual; and
3
<PAGE>
(v) the AHP License Agreement, executed
by Principal Mutual.
(b) Buyer will deliver to Seller:
(i) the Purchase Price;
(ii) a certificate executed by Buyer to
the effect that each of Buyer's
representations and warranties in
this Agreement was accurate in all
respects as of the date of this
Agreement and, except as otherwise
stated in such certificate, is
accurate in all respects as of the
Closing Date as if made on the
Closing Date; and
(iii) the opinion of counsel to Buyer,
dated the Closing Date,
substantially in the form of
Addendum III.
(c) Buyer shall execute the Principal Mutual
Service Agreement and the AHP License
Agreement.
2.5. Adjustment Amount.
Buyer shall pay to Seller an amount determined for
the period July 1, 1997, to December 31, 1997, and
thereafter annually through calendar year-end 2001
based on variances from expected revenue targets set
forth below (the "Targeted Revenue"). Within ninety
(90) days of the end of each of the calendar years
1997 through and including 2001, Buyer shall pay to
Seller in cash an amount equal to forty percent (40%)
of the amount by which Actual Revenues exceed
Targeted Revenue for the immediately preceding year
or portion thereof (such amount in
4
<PAGE>
aggregate referred to herein as the "Adjustment
Amount").
<TABLE>
<CAPTION>
Year Targeted Revenue (millions)
---- ----------------
<S> <C>
1997 (7/1 - 12/31) $ 5
1998 14
1999 16
2000 18
2001 20
</TABLE>
In no event shall the Adjustment Amount exceed
thirteen million dollars ($13,000,000). Actual
Revenues for the period July 1, 1997, to December 31,
1997, and thereafter for calendar years 1998 through
and including 2001 shall be audited annually by an
independent auditor (which may be Buyer's independent
auditor provided the same is a nationally recognized
accounting firm).
2.6. Effective Date.
Notwithstanding the Closing Date, the Closing shall
be effective as of July 1, 1997 (the "Effective
Date").
2.7. Company Cash.
All cash of the Company (net of taxes payable on the
Effective Date) as of the Effective Date shall be
delivered to and become the property of Seller as of
Closing.
3. Representations and Warranties of Seller.
Seller represents and warrants to Buyer as follows:
5
<PAGE>
3.1. Organization.
Seller is a corporation duly organized, validly
existing and in good standing under the laws of the
State of Iowa.
3.2. Corporate Authority.
The execution, delivery and performance of this
Agreement has been duly authorized and this Agreement
constitutes the valid and binding obligation of the
Seller and is enforceable in accordance with its
terms and conditions. The execution, delivery and
performance of the Other Agreements to which Seller
is a party will, prior to the Closing Date, be duly
authorized and will when executed constitute the
valid and binding obligations of Seller enforceable
in accordance with their terms. The execution,
delivery and performance of the Other Agreements to
which an Affiliate is a party will, prior to the
Closing Date, be duly authorized and will when
executed constitute the valid and binding obligations
of the Affiliate enforceable in accordance with their
terms.
3.3. Non-Contravention.
This Agreement and all transactions contemplated
hereby will not result in a violation of the Articles
of Incorporation or By-Laws of the Seller or the
Affiliates or conflict with, or result in a breach of
any provision of, or constitute a default (or an
event which, with notice or lapse of time or both,
would constitute a default) under any of the terms or
provisions of any material agreement to which the
Seller or the Affiliates is a party or by which it
may otherwise be bound or of any law, rule, license,
6
<PAGE>
regulation, judgment, order or decree governing or
affecting the operation of the business of Seller or
the Affiliates.
3.4. Ownership of the Shares.
Seller owns the Shares free and clear of all
mortgages, pledges, liens, claims, charges, security
interests, options, restrictions on transfer or other
legal and equitable encumbrances of any nature
whatsoever.
3.5. Broker's Fees.
Seller has no liability or obligation to pay any fees
or commissions to any broker, finder or agent with
respect to the transactions contemplated by this
Agreement for which the Buyer could become liable or
obligated.
3.6. Transaction.
Seller shall use Best Efforts to effect a smooth
transition from current ownership of the Company
Cooperating Provider Network ("Network") for current
Company Network clients to ownership by Buyer.
4. Representations and Warranties of Buyer.
Buyer hereby represents and warrants to Seller as follows:
4.1. Buyer is a corporation duly organized, validly
existing and in good standing under the laws of the
State of Delaware and is duly authorized to do
business in the State of Maryland.
4.2. Corporate Authority.
The execution, delivery and performance of this
Agreement has been duly authorized and this Agreement
constitutes the valid and binding obligation of Buyer
enforceable in accordance with its terms and
7
<PAGE>
conditions. The execution, delivery and performance
of the Other Agreements will, prior to the Closing
Date, be duly authorized and will when executed
constitute the valid and binding obligations of Buyer
enforceable in accordance with their terms.
4.3. Non-Contravention.
This Agreement and all transactions contemplated
hereby will not result in a violation of the
Certificate of Incorporation or By-Laws of Buyer or
conflict with, or result in a breach of any provision
of, or constitute a default (or an event which, with
notice or lapse of time or both, would constitute a
default) under any of the terms or provisions of any
material agreement to which Buyer is a party or by
which it may otherwise be bound or of any law, rule,
license, regulation, judgment, order or decree
governing or affecting the operation of the business
of Buyer.
4.4. Broker's Fees.
Buyer has no liability or obligation to pay any fees
or commissions to any broker, finder or agent with
respect to the transactions contemplated by this
Agreement for which Seller could become liable or
obligated.
4.5. Purchase Price.
Buyer has, and at the Closing will have, sources of
funds in an amount and available on terms sufficient
to enable Buyer to pay the Purchase Price due at
Closing in accordance with the terms of this
Agreement.
4.6. Best Efforts.
8
<PAGE>
Through December 31, 2001, Buyer shall use Best
Efforts, including, but not limited to, effecting a
smooth transition from current ownership of the
Network for current Company Network clients to
ownership by Buyer, maintaining current Company
Network clients, increasing revenues from current
Company Network clients, adding new clients and
developing utilization of the Network in connection
with the PIP (personal injury protection) auto
coverage and workers' compensation coverage, to
increase Actual Revenues. Buyer may use the
Healthcare Network Sales Specialists of Seller's
Affiliate, Principal Health Care, Inc. ("PHC") to
develop Network utilization in connection with the
PIP auto coverage and workers' compensation coverage.
5. Representations and Warranties concerning the Company.
Seller hereby further represents and warrants to Buyer as
follows:
5.1. Organization and Qualification of the Company.
The Company is a corporation duly organized, validly
existing and in good standing under the laws of the
State of Maryland and has all necessary corporate
powers to own its properties and carry on its
business as now owned and operated. To Seller's
knowledge except as set forth in the following
sentence, the Company is in good standing and is duly
qualified to do business in each jurisdiction where
such qualification is required, except where such
lack of qualification would not have a material
adverse effect on the financial condition of the
Company. The Company prior to Closing changed its
name and Seller
9
<PAGE>
makes no representation regarding the impact of the
Company's name change on its standing or
qualification to do business in any state.
5.2. Capitalization.
The authorized capital stock of the Company consists
of 100 shares of common stock, with $0.01 par value
per share, of which 100 shares are issued and
outstanding. Such common stock is the only class of
capital stock authorized by the Company's Articles of
Incorporation. Each issued and outstanding share of
capital stock of the Company is duly authorized,
validly issued, fully paid and non-assessable and is
owned beneficially and of record by Seller.
5.3. Non-Contravention.
This Agreement and all transactions contemplated
hereby will not result in a violation of the Articles
of Incorporation or By-Laws of the Company or
conflict with, or result in a breach of any provision
of, or constitute a default (or an event which, with
notice of lapse of time or both, would constitute a
default) under any of the terms or provisions of any
material agreement to which the Company is a party or
by which it may otherwise be bound or of any law,
rule, license, regulation, judgment, order or decree
governing or affecting the operation of the business
of the Company. Notwithstanding anything to the
contrary set forth in this Agreement, Seller makes no
representation regarding the impact of this Agreement
and the transactions contemplated hereby on any
agreements to which the Company is a party and which
contain
10
<PAGE>
provisions limiting assignment of such agreements by
either party without the consent of the other party
thereto.
5.4. Books and Records.
The minute books and stock record books of the
Company are complete and correct in all material
respects.
5.5. Subsidiaries.
The Company does not beneficially own any securities
of any issuer or any interest in any other business
enterprise.
5.6. Financial Statements.
Seller and the Company have heretofore delivered or
made available to Buyer audited balance sheets,
statements of income and cash flow of the Company for
the years ended December 31, 1995 and 1996,
respectively, and an internal unaudited balance sheet
and statement of income and cash flow of the Company
as of August 31, 1997, and the period ended August 31,
1997 ("Financial Statements"). The Financial
Statements present fairly the financial position of
the Company as of the respective dates of the balance
sheets included in the Financial Statements and the
results of operations and cash flow for the periods
then ended, subject to normal year-end adjustments.
5.7. Operations in the Ordinary Course; No Material
Adverse Change.
Since December 31, 1996, the Company has conducted its
business in the ordinary course, except as set forth
in Schedule 5.7. Since December 31, 1996, except as
set forth in Schedule 5.7., there has not
11
<PAGE>
been any material adverse change in the financial
condition or results of operations of the Company.
Without limiting the generality of the foregoing and
except as otherwise disclosed on Schedule 5.7., since
that date, to the knowledge of Seller, the Company has
not engaged in any practice, taken any action or
entered into any transaction outside the ordinary
course of its business.
5.8. Legal Compliance.
To Seller's knowledge, except as otherwise disclosed
to Buyer, the Company has complied with all
applicable laws of federal, state and local
governments (and all agencies thereof), except where
the failure to comply would not have a material
adverse effect upon the financial condition of the
Company.
5.9. Assets.
To Seller's knowledge, the Company has good title to,
or a valid leasehold interest in or license right to,
the computers, phones, furniture and workstations it
uses regularly in the conduct of its business.
5.10. Real Property.
The Company is the sublessee under that certain
sublease dated as of August 15, 1997, by and between
the Company as sublessee and Principal Health Care,
Inc., as sublessor, (the "Sublease") a copy of which
Sublease has been provided to Buyer. To the knowledge
of Seller, the Sublease is legal, valid, binding,
enforceable and in full force and effect, except
where the illegality, invalidity, non-binding nature,
12
<PAGE>
unenforceability or ineffectiveness would not have a
material adverse effect on the financial condition or
results of operations of the Company.
5.11. Contracts.
Schedule 5.11. lists the ten (10) largest written
contracts or the written agreements with payors to
which the Company is a party. Seller or the Company
has delivered or made available to Buyer a correct
and complete copy of each contract listed on Schedule
5.11. To Seller's knowledge, all contracts of the
Company with Network providers are in full force and
effect subject to the rights to terminate contained
therein. Seller makes no representation with respect
to the assignability of any contracts of the Company
without the consent of other parties to such
contracts.
5.12. Litigation.
Except as listed on Schedule 5.12. or otherwise
disclosed to Buyer, there is:
(a) no suit, action, arbitration or other legal
proceeding pending or to Seller's knowledge
threatened against the Company;
(b) no final judgment, decree, injunction or similar
order outstanding against the Company or any of
its property or assets; and
(c) no lawsuit, proceeding, or investigation
pending or to Seller's knowledge threatened
against the Company or the Seller which questions
the validity of this Agreement or the
consummation of the transactions contemplated
hereby.
13
<PAGE>
5.13. Articles of Incorporation and By-Laws.
The Seller has delivered to Buyer a true and complete
copy of the Company's Articles of Incorporation and
By-Laws.
5.14. Taxes.
(a) The Company has completed and filed or will
complete and file on or before the due dates
thereof (with applicable grace periods available
without financial penalty or obligation) all tax
returns and filings required by applicable law to
be filed by the Company for all taxable periods
ended or ending on or before the Effective Date,
and has paid, or where payment is not yet
required to be made, has set up an adequate
accrual in accordance with generally accepted
accounting principles for the payment of all
taxes required to be paid in respect of the
periods covered by such returns and filings. To
the extent any accrual for the taxes referenced
herein is inadequate, Seller shall be responsible
for any deficiency.
(b) The Company is not delinquent in the payment
of any tax, assessment or governmental charge
required to be paid by it and:
(i) no deficiencies for any tax, assessment or
governmental charge have been proposed
(tentatively or definitively), asserted or
assessed against the Company and to Seller's
knowledge there is no basis for any such
deficiency, assessment or charge; and
14
<PAGE>
(ii) The Company has not executed any request for
a waiver or extension of the time to assess
any tax except for tax year 1993,
responsibility for which shall be Seller's
after Closing.
(c) For purposes of this Agreement, the term Tax
shall include all taxes, deficiencies, levies or
like assessments, charges or fees, including,
without limitation, income, profits, gains, gross
receipts, excise, property (tangible and
intangible), sales, use, occupation, ad valorem,
license, payroll and franchise or other
governmental taxes, imposed by the United States,
or any state, county, local or foreign government
or subdivision or agency thereof on the Company
and/or any of its business activities and any
interest, penalties, fines or additions to tax
attributable to such assessments. To the
knowledge of Seller, the Company is not a party
to nor expected to become a party to any pending
or threatened action or proceeding, assessment or
collection of taxes by any governmental authority
relating to the business and operations of the
Company.
5.15. Employees of the Company.
Buyer has been provided a list of all current
employees of the Company, showing each person's name,
position with the Company and cash compensation
payable by the Company for the current calendar year
(including any bonus plan such employees may be
eligible for). Buyer
15
<PAGE>
acknowledges that certain employees will become
employees of PHC. Unless agreed to by PHC and Buyer,
PHC and Buyer will not recruit employees of each
other for a period of eighteen (18) months from the
Closing Date. Seller shall be responsible for
reimbursement to Buyer for payment to the Company
employees of any bonus earned by such employees under
the Company bonus plan as it exists on the date of
this Agreement through the Closing Date.
5.16. Employee Benefits.
(a) The Company has made all contributions and
other payments required by and due under
each Employee Benefit Plan (the "Benefit
Plans") maintained by the Company and
identified in Schedule 5.16.
(b) To the knowledge of Seller, each Benefit
Plan complies in form and operation in all
respects with the applicable requirements of
the Internal Revenue Code of 1986, as
amended, and the Employee Retirement Income
Security Act of 1974 ("ERISA"), except where
the failure to comply would not have a
material adverse effect on the financial
condition of the Company.
(c) The Benefit Plans will not be transferred to
Buyer after Closing and Seller shall retain
all rights and responsibilities of the
Benefit Plans after Closing.
5.17. Disclosure.
16
<PAGE>
No representation or warranty of Seller in this
Agreement omits to state a material fact necessary to
make the statements herein, in light of the
circumstances in which they were made, not
misleading.
5.18. Disclaimer of Other Representations and Warranties.
Except as expressly set forth in Section 3 and this
Section 5, Seller makes no representation or
warranty, express or implied, at law or in equity, in
respect of the Company or any of its assets,
liabilities or operations, and any such other
representations or warranties are hereby expressly
disclaimed.
6. Covenants of Buyer and Seller.
6.1. Compliance with Conditions Precedent.
Each of the parties shall use its commercially
reasonable efforts to cause the conditions precedent
for which such party is responsible to be fulfilled.
6.2. Further Acts.
Each of the parties will, at any time, and from time
to time, after the Closing Date, upon the request of
the appropriate party, do, execute, acknowledge and
deliver, or will cause to be done, executed,
acknowledged and delivered, all such further acts,
deeds, assignments, transfers, conveyances, powers of
attorney and assurances as may be required to
complete the transactions contemplated by this
Agreement.
6.3. Access to Information.
17
<PAGE>
Seller has caused the Company to permit
representatives of Buyer to have full access at
reasonable times, and in any manner so as not to
interfere with the normal business operations of the
Company, to all premises, properties, personnel,
books, records, contracts and documents of or
pertaining to the Company since May of 1997. Since
May of 1997 Buyer has and will treat and hold as
confidential any information concerning the
businesses and affairs of the Company that is not
already generally available to the public
("Confidential Information") it received or will
receive from Seller or the Company in the course of
the reviews contemplated by this Section 6.3., will
not use any of the Confidential Information except in
connection with this Agreement and that certain
Confidentiality Agreement between Buyer and Seller
dated September 8, 1997, and if this Agreement is
terminated for any reason whatsoever, will return to
Seller all tangible embodiments (and all copies) of
the Confidential Information which are in its
possession. The confidentiality provisions contained
in this Section 6.3. shall survive termination of
this Agreement.
6.4. Public Announcements.
Through October 31, 1997, Buyer and Seller will
consult with each other before issuing any press
releases or otherwise making any public statements
with respect to the transactions contemplated herein
and shall not issue any press release or make any
such public statement without
18
<PAGE>
the approval of the other, except as may be required
by law, and then only after consultation with each
other.
6.5. Company Name.
Seller caused the name of the Company to be changed
to UP&UP, Inc., prior to the date of this Agreement.
Seller shall assist Buyer with state filings required
by the change of name.
6.6. Computer Access Agreement.
Within thirty (30) days after the Closing Date, PHC
and Buyer shall in good faith negotiate and execute
an agreement allowing continuation of PHC's access to
the Company software system for claims repricing and
other purposes as desired for a reasonable fee.
6.7. HNS Agreement.
Within thirty (30) days after the Closing Date, PHC
and Buyer shall in good faith negotiate and execute
an agreement for a minimum term of one (1) year
providing for the marketing by PHC's Healthcare
Network Sales Specialists ("HNS") of products of
Buyer. Buyer hereby agrees that as a part of such
agreement it shall pay one-third of the HNS overhead
costs, not to exceed one hundred and twenty-five
thousand dollars ($125,000) per year, and commissions
to HNS in accordance with the HNS Sales Compensation
Plan.
7. Conditions Precedent.
19
<PAGE>
The obligation of the parties to consummate the transactions
contemplated by this Agreement is subject to the satisfaction
on or before the Closing Date of the following:
7.1. Conditions to Obligations of Buyer.
The obligation of the Buyer to consummate the
transactions to be performed by it in connection with
the Closing is subject to the satisfaction of the
following conditions:
(a) the representations and warranties set forth in
Sections 3 and 5 above shall be true and correct
in all material respects at and as of the
Closing;
(b) Seller shall have performed and complied with all
of its covenants hereunder in all material
respects;
(c) there shall not be any injunction, judgment,
order, decree, ruling or charge in effect
preventing consummation of any of the
transactions contemplated by this Agreement;
(d) if requested by Buyer, Seller shall deliver
to the Buyer a certificate to the effect that
each of the conditions specified above in this
Section 7.1. are satisfied in all material
respects;
(e) there shall have been delivered to Buyer as of
the Closing Date, signed resignations of the
Company directors;
(f) Buyer's board of directors shall have approved
the acquisition and other agreements set forth
herein; and
20
<PAGE>
(g) if required, all applicable waiting periods (and
any extensions thereto) under the
Hart-Scott-Rodino Act shall have expired or
otherwise been terminated and the parties shall
have received all other authorizations, consents
and approvals required to consummate this
transaction.
Buyer may waive any condition specified in this
Section 7.1. if it executes a writing so stating at
or prior to the Closing.
7.2. Conditions to Obligations of Seller.
The obligation of Seller to consummate the
transactions to be performed by it in connection with
the Closing is subject to satisfaction of the
following conditions:
(a) the representations and warranties set forth in
Section 4 above shall be true and correct in all
material respects at and as of the Closing;
(b) Buyer shall have performed and complied with all
of its covenants hereunder in all material
respects;
(c) there shall not be any injunction, judgment,
order, decree, ruling or charge in effect
preventing the consummation of any of the
transactions contemplated by this Agreement;
(d) if requested by Seller, Buyer shall have
delivered to Seller a certificate to the effect
that each of the conditions specified above in
this Section 7.2. is satisfied in all material
respects;
21
<PAGE>
(e) Seller's board of directors shall have approved
the disposition and other agreements set forth
herein; and
(f) if required, all applicable waiting periods (and
any extensions thereof) under the Hart-Scott-
Rodino Act shall have expired or otherwise been
terminated and the parties shall have received
all other authorizations, consents and approvals
required.
Seller may waive any condition specified in this
Section 7.2. if it executes a writing so stating at
or prior to the Closing.
8. Indemnifications; Remedies.
8.1. Survival.
The representations, warranties, covenants and
obligations in this Agreement, the certificates
delivered pursuant to Section 2.4. and any other
certificate or document delivered pursuant to this
Agreement shall survive for a period of twelve (12)
months following the Closing (unless the damaged
party knew or had reason to know of any
misrepresentation or breach of warranty at the time
of Closing in which case the misrepresentation or
breach of warranty shall not survive Closing);
provided, however, that the representations and
warranties set forth in Section 4.6. shall survive
through and including December 31, 2001, the
representations and warranties set forth in Sections
5.1. and 5.2. shall survive the Closing forever
thereafter, subject to any applicable statute of
limitations and the obligations of Buyer set forth in
Section 2.5. shall survive the Closing until
satisfied in whole.
22
<PAGE>
8.2. Indemnification by Seller.
Seller hereby indemnifies and holds Buyer harmless
for any and all loss, cost, liability, claim, damage
and expense (including reasonable attorneys' fees)
arising from:
(a) any breach of any misrepresentation or warranty
made by Seller in this Agreement, the certificate
delivered by Seller pursuant to Section 2.4., or
any other certificate or document delivered by
Seller pursuant to this Agreement; and
(b) any breach by Seller of any covenant or
obligation of Seller in this Agreement.
8.3. Indemnification by Buyer.
Buyer hereby indemnifies and holds Seller harmless
for any and all loss, cost, liability, claim, damage
and expense (including reasonable attorneys' fees)
arising from:
(a) any breach of any representation or warranty made
by Buyer in this Agreement, the certificate
delivered by Buyer pursuant to Section 2.4., or
any other certificate or document delivered by
Buyer pursuant to this Agreement; and
(b) any breach by Buyer of any covenant or obligation
of Buyer in this Agreement.
8.4. Procedure for Indemnification - Third-Party Claims.
In the event that any claim shall be asserted against
a party entitled to indemnification under this
Section 8, such party will, if a claim is to be
23
<PAGE>
made against the other party for indemnification,
give notice in writing to the other party of the
commencement of such claim. The indemnifying party
will have the right to assume and conduct the defense
of the claim with counsel of its choice (subject to
the reasonable approval of the indemnified party);
provided, however, that the indemnifying party shall
not consent to the entry of any judgment or enter
into any settlement without the prior written consent
of the indemnified party (which consent shall not be
unreasonably withheld or delayed). Unless and until
the indemnifying party assumes the defense of a
claim, the indemnified party shall defend against the
claim. In no event will the indemnified party consent
to the entry of any judgment or enter into any
settlement with respect to the claim without the
prior written consent of the indemnifying party.
8.5. Procedure for Indemnification - Other Claims.
A claim for indemnification for any matter not
involving a third-party claim may be asserted by
notice to the indemnifying party from the party
seeking indemnification.
8.6. Exclusive Remedy.
Buyer and Seller acknowledge and agree that the
foregoing indemnification provisions in this Section
8 shall be the exclusive remedy of the Buyer and
Seller with respect to this Agreement and the
transactions contemplated by this Agreement.
9. Termination.
24
<PAGE>
9.1. Buyer and Seller may terminate this Agreement by
mutual written consent at any time prior to
Closing.
9.2. Buyer may terminate this Agreement by giving written
notice to the Seller at any time prior to Closing:
(a) in the event Seller has breached any
material representation, warranty or covenant
contained in this Agreement in any material
respect, Buyer has notified Seller of the breach
and the breach is continued without the
commencement of attempts by Seller to cure such
breach prior to Closing; or
(b) if Closing shall not have occurred on or
before the Closing Date by reason of a failure of
any condition precedent under Section 7.1.
(unless the failure results primarily from Buyer
itself, breaching any representation, warranty or
covenant contained in this Agreement).
9.3. Seller may terminate this Agreement by giving written
notice to the Buyer at any time prior to Closing:
(a) in the event Buyer has breached any material
representation, warranty or covenant contained in
this Agreement in any material respect, Seller
has notified Buyer of the breach and the breach
has continued without the commencement of
attempts by Buyer to cure such breach prior to
Closing; or
(b) if Closing shall not have occurred on or before
the Closing Date by reason of a failure of any
condition precedent under Section
25
<PAGE>
7.2. (unless the failure results primarily from
Seller itself, breaching any representation,
warranty or covenant contained in this
Agreement).
10. Miscellaneous.
10.1. Expenses.
Buyer agrees that all fees incurred by it in
connection with this Agreement shall be borne by
Buyer, including, without limitation, all fees of
counsel and accountants for Buyer, and Seller agrees
that all fees and expenses incurred by Seller shall
be borne by Seller, including, without limitation,
all fees of counsel and accountants for Seller. Buyer
shall pay all costs incurred in connection with any
Hart-Scott-Rodino Act filing. Seller shall pay all
sales, use, stamp, transfer and like taxes, if any,
imposed by the United States or any state or
political subdivision thereof, required to be paid in
connection with the transfer of the Shares.
10.2. No Third-Party Beneficiary.
This Agreement shall not confer any rights or
remedies upon any person other than the parties and
their respective successors and permitted assigns.
10.3. Notices.
All notices, requests, demands and other
communications required or permitted hereunder shall
be in writing and delivered personally or by
overnight courier or registered mail, return receipt
requested:
(a) If to Seller:
26
<PAGE>
Principal Holding Company, Inc.
711 High Street
Des Moines, Iowa 50392
Attn: Mary L. Bricker
copy to:
Principal Mutual Life Insurance Company
711 High Street
Des Moines, Iowa 50392
Attn: Karen E. Shaff
(b) If to Buyer:
United Payors & United Providers, Inc.
2275 Research Boulevard, 6th Floor
Rockville, Maryland 20850
Attn: Edward S. Civera
or to such other person or address as any party shall
furnish to the other parties in writing.
10.4. Tax Election.
Buyer reserves the right to make a timely election
under Section 338 of the Internal Revenue Code of
1986, as amended. At the request of Buyer, Buyer and
Seller shall jointly make an election under Section
338(h)(10) of the Code (collectively, a "Section
338(h)(10) election"). Buyer and Seller shall:
27
<PAGE>
(a) take, and cooperate with each other to take, all
actions necessary and appropriate (including such
forms, returns, elections, schedules and other
documents as may be required to affect and
preserve a timely Section 338(h)(10) election) in
accordance with Section 338 of the Code and any
Treasury regulations thereunder, or any successor
provisions as soon as practicable following the
Closing Date, but not later than the date which
is the latest date for making such election, and
from time to time thereafter; and
(b) Buyer and Seller shall report the sale of
the Shares pursuant to this Agreement consistent
with the Section 338(h)(10) election and shall
take no position contrary thereto or inconsistent
therewith in any tax return, any discussion with,
or proceeding before, any tax authority, or
otherwise.
10.5. Governing Law.
This Agreement shall be governed by and construed in
accordance with the laws of the State of Delaware
without regard to principles of conflict of laws.
10.6. Amendments and Waivers.
No amendment of any provision of this Agreement shall
be valid unless the same shall be in writing and
signed by Buyer and Seller. No waiver by any party of
any default, misrepresentation or breach of warranty
or covenant hereunder, whether intentional or not,
shall be deemed to extend to any prior or subsequent
default, misrepresentation, or breach
28
<PAGE>
of warranty or covenant hereunder or affect in any
way rights arising by virtue of any prior or
subsequent such occurrence.
10.7. Severability.
Any term or provision of this Agreement that is
invalid or unenforceable in any situation in any
jurisdiction shall not affect the validity or
enforceability of the remaining terms and provisions
hereof or the validity or enforceability of the
offering term or provision in any other situation or
jurisdiction.
10.8. Entire Agreement.
This Agreement constitutes the entire agreement
between the parties hereto and supersedes all prior
agreements, understandings, negotiations and
discussions, both written and oral, of the parties
hereto, with respect to the subjects hereof.
10.9. Binding Effect; No Assignment.
This Agreement shall be binding upon and inure to the
benefit of the parties and their successors and their
permitted assigns. This Agreement is not assignable
by either party without the prior written consent of
the other party except Seller may assign this
Agreement to Principal Mutual or an Affiliate of
Seller.
10.10. Counterparts.
This Agreement may be executed simultaneously in
two or more counterparts, each of which shall be
deemed an original but all of which shall
together constitute one and the same instrument.
29
<PAGE>
10.11. Approvals.
This Agreement is subject to and conditioned upon
the approvals of Buyer's and Seller's boards of
directors and the Corporate Finance Committee of
Principal Mutual.
IN WITNESS WHEREOF, the parties have caused this Agreement to be
executed as of the day and year first above written.
UNITED PAYORS & UNITED PRINCIPAL HOLDING COMPANY
PROVIDERS, INC.
By: /s/ Edward S. Civera By: /s/ Michael H. Gersie
---------------------------- --------------------------------
Name: Edward S. Civera Name: Michael H. Gersie
-------------------------- ------------------------------
Title: President & C.O.O. Title: Senior Vice President
------------------------- -----------------------------
By: /s/ Mary L. Bricker
--------------------------------
Name: Mary L. Bricker
------------------------------
Title: Assistant Corporate Secretary
-----------------------------
30
<PAGE>
ADDENDUM I
Definitions
-----------
Actual Revenues shall be defined as follows:
(i) Listed as Attachment A to this Addendum are those entities
that have entered into existing payor contracts ("Existing
Payor Contracts") with the Company to access medial provider
contracts that comprise the Network. For purposes of this
definition, the Network shall include medical providers that
are currently under contract with the Company and/or Buyer,
directly or indirectly, and medical providers that may
contract at a future date with the Company and/or Buyer,
directly or indirectly. For Existing Payor Contracts, the
Company is presently paid a monthly fee by each existing payor
client ("Existing Payor Client"). Such fee, net of any client
remittances and/or rebates ("Net Fee") paid pursuant to
Existing Payor Contracts, is based on a percent of savings or
on a capitated basis. Actual Revenue shall be computed as the
total Net Fee paid by Existing Payor Clients or new Company
Network clients as a result of such clients assessing the
Network.
(ii) Actual Revenue shall also include revenue collected by the
Company and/or Buyer from the following product lines:
Personal Injury Protection (PIP), and workers' compensation.
These two product lines are currently in the development stage
and had no revenue through July, 1997.
Affiliate shall mean any wholly owned subsidiary (or subsidiary of such
subsidiary) of Seller.
31
<PAGE>
AHP License Agreement shall mean that certain agreement dated as of the Closing
Date by and between Principal Mutual and Buyer.
Best Efforts shall mean pursuing a business course of action that is consistent
with maximizing the Adjustment Amount using good business judgment.
Material. For purposes of this Agreement, where the term "material" is used, an
item shall be considered material if it involves in excess of $100,000 in which
case the parties agree to discuss the issue in good faith.
Principal Mutual Services Agreement shall mean that certain agreement dated as
of the Closing Date by and between Principal Mutual and Buyer.
32
<PAGE>
Attachment A
Affiliated
Amalgamated Life Insurance Co.
American Service Life Insurance Co.
AmeriHealth Administrators
Baird, Kurtz & Dobsen
Beech Street
Benefit Claims Payors, Inc.
Brown Foreman Co.
Capital Health Care, Inc.
Central States Health & Life
Christian Brothers Services
City of Mountain View
Community Medical Management Service
Continental General Insurance Co.
Continental Life & Accident Co.
Contract Freightors, Inc.
Core Source, Susquehanna Administrators, Inc.
County of Reno
Development Center of the Ozarks
Employee Benefit Service, Inc.
Employer Alternative
Employers Mutual, Inc.
Georgia Pacific
Golden Rule
Grand Valley Health Plan
Group Benefit Services
Healthy Benefit Alliance, Inc.
Insurance and Risk Management, Inc.
Inter-County Hospitalization Plan, Inc.
J.F. Molloy
Kepple & Co.
MAPA/ACMG
MedPlans 2000, Inc.
Midland Group, Inc.
Montana Medical Benefit Plan
Mountain State Administration Company
Mutual Of Omaha
National Benefit Plans, Inc.
National Claims Administration Services
Nippon Life Insurance Co. of America
Pioneer (excludes Washington National Insurance Co.)
Poe & Brown Benefits, Inc.
Principal Mutual
Principal Health Care
Professional Services Industries, Inc.
PSATS Trustees Insurance Fund
The Benefit Group, Inc.
The Araz Group
UIS, Inc./Champion Laboratories, Inc.
United Group Insurance Co.
York Public Schools
<PAGE>
ADDENDUM II
Form of Seller Legal Opinion
----------------------------
Attached
33
<PAGE>
[LETTERHEAD OF THE PRINCIPAL FINANCIAL GROUP APPEARS HERE]
September 29, 1997
United Payors & United Providers, Inc.
2275 Research Boulevard, 6th Floor
Rockville, Maryland 20850
RE: Stock Purchase Agreement dated as of September 29, 1997, by and
between Principal Holding Company, Inc., and United Payors &
United Providers, Inc.
Ladies and Gentlemen:
I am Senior Vice President and General Counsel of Principal Holding
Company, Inc., an Iowa stock corporation ("PHC"), in connection with the
transactions contemplated by that certain Stock Purchase Agreement (the
"Agreement") made as of September 29, 1997, among United Payors & United
Providers, Inc. ("UP&UP") and PHC whereby, among other things, UP&UP is
acquiring ownership of the stock of UP&UP, Inc., formerly known as America's
Health Plan, Inc., a Maryland corporation ("AHP"). This Opinion Letter is
provided to you pursuant to Section 2.4. of the Agreement. All capitalized terms
used in this Opinion Letter and not otherwise defined herein have the meanings
set forth in the Agreement.
This Opinion Letter is governed by, and shall be interpreted in
accordance with, the Legal Opinion Accord (the "Accord") of the ABA Section of
Business Law (1991). As a consequence, it is subject to a number of
qualifications, exceptions, definitions, limitations on coverage and other
limitations, all as more particularly described in the Accord, and this Opinion
Letter should be read in conjunction therewith.
For purposes of this Opinion, the "Documents" refer to the Agreement,
the AHP License Agreement and the Principal Mutual Services Agreement.
In conjunction with the delivery of this Opinion, I have examined
originals, or copies certified or otherwise identified to our satisfaction, of
the following documents:
A. The Documents; and
B. The Articles of Incorporation and By-Laws of PHC.
The foregoing are collectively referred to herein as the "Documents."
<PAGE>
United Payors & United Providers, Inc.
September 29, 1997
Page 2
I have also examined originals, executed counterparts or copies of such
other agreements, corporate records, instruments and certificates, certificates
of public authorities and such matters of law as I have deemed necessary for
purposes of this Opinion. To the extent that I deemed necessary for purposes of
this Opinion, I have relied upon (i) the statements and representations of
officers of PHC as to factual matters, and (ii) certificates and other documents
obtained from public officials. I have further relied as to factual matters on
the representations and warranties contained in the Documents and I have assumed
the completeness and accuracy of all such representations and warranties as to
factual matters.
I have assumed the genuineness of all signatures, the legal capacity of
all individuals who have executed the Documents and all other documents I have
reviewed, the authenticity of all documents submitted to me as originals and the
conformity to original documents of all documents submitted to me as certified,
photostatic, reproduced or conformed copies. I have also assumed that the
Documents have been duly authorized, executed and delivered by UP&UP and are
enforceable in accordance with their terms against UP&UP and that the execution,
delivery and performance of the Documents by UP&UP do not and will not result in
a breach of, or constitute a default under, any agreement, instrument or other
document to which UP&UP is a party or any judgment, writ or decree applicable to
UP&UP or to which UP&UP's property is subject.
Based upon and subject to my examination as aforesaid and subject to
the qualifications set forth herein, I am of the opinion that:
1. PHC is a corporation duly incorporated, validly existing and in good
standing under the laws of the State of Iowa and has the requisite corporate
power and authority to own and lease its properties, to lease any properties, to
lease any properties it operates under lease and to conduct its business, and to
enter into and perform all of its obligations under the Documents.
2. The execution, delivery and performance by PHC of the Documents have
been duly authorized by all necessary corporate action on the part of PHC, are
not in contravention of any provision of the Certificates of Incorporation or
By-Laws of PHC.
3. The Documents have been duly executed and delivered by PHC and
constitute the valid and binding obligation of PHC enforceable against PHC in
accordance with their terms, except to the extent that enforcement thereof may
be limited by applicable bankruptcy, insolvency, fraudulent conveyance,
reorganization, moratorium or similar laws of general application relating to or
affecting the enforcement of the rights of creditors and the application of
general principles of equity (regardless of whether enforcement is sought in a
proceeding at law or in equity) and further subject to any
<PAGE>
United Payors & United Providers, Inc.
September 29, 1997
Page 3
provision of the Documents to the extent that such provision purports to waive
any rights, remedies or defenses or of any provision for contribution or
indemnification.
4. The shares of capital stock of AHP, consisting of one hundred (100)
shares of common stock, $0.01 par value (the "Shares"), are the only outstanding
shares of AHP capital stock, have been duly authorized and validly issued, and
are fully paid and non-assessable under the General Business Law of the State of
Maryland.
The foregoing opinions are limited to the laws and regulations of the
United States and the State of Iowa, where the undersigned is admitted to
practice. I have not considered and express no opinion on the laws or
regulations of any other jurisdiction. This Opinion is rendered only with
respect to the laws and the regulations thereunder which are in effect as of the
date hereof. I assume no responsibility for updating this Opinion to take into
account any event, action, interpretation or change or law occurring subsequent
to the date hereof that may affect the validity of any of the opinions expressed
herein.
This Opinion is furnished solely for your benefit for use in connection
with the Documents and the transactions contemplated thereby, and it may not be
furnished or quoted to, or relied upon by, any other person, without my prior
written consent.
Very truly yours,
By:
-------------------------
<PAGE>
ADDENDUM III
Form of Buyer Legal Opinion
---------------------------
Attached
34
<PAGE>
[LETTERHEAD OF UNITED PAYORS & UNITED PROVIDERS, INC. APPEARS HERE]
September 29, 1997
Principal Holding Company, Inc.
711 High Street
Des Moines, IA 50392
Re: Acquisition of UP&UP, Inc., formerly known as America's Health Plan, Inc.
("AHP") by United Payors & United Providers, Inc.
To Whom It May Concern:
This opinion is given in connection with the Stock Purchase Agreement dated
September 29, 1997, but effective July 1, 1997 (the "Purchase Agreement") by and
between Principal Holding Company, Inc. ("PHC") and United Payors & United
Providers, Inc. ("UP&UP"). Terms not otherwise defined herein shall have the
meanings assigned to them in the Purchase Agreement.
In the course of my legal review relating to the opinions expressed herein I
have examined: (1) the Purchase Agreement; (2) the Principal Mutual Services
Agreement; (3) the America's Health Plan License Agreement; (4) the articles of
Incorporation and bylaws of AHP in effect on the date hereof; (5) the
resolutions adopted by the Board of Directors of UP&UP approving the execution
and delivery of the Purchase Agreement in consummation of the related
transaction; and (6) such other documents, communications, certificates or
statements, and matters of law and fact that I determined to be relevant and
necessary with respect to the opinions expressed herein.
I have relied upon all of the above documents, communications, certificates and
statements with respect to the accuracy of factual matters contained herein. I
have not independently verified the accuracy of such factual matters and assume
the genuiness of all signatures, the authenticity of all documents submitted to
me as originals and the conformity to original documents of all documents
submitted to me as copies.
Based upon, and subject to the foregoing, I am of the opinion that as of the
date hereof:
(1) UP&UP is a corporation duly organized, valid and existing in good
standing as a domestic corporation under the laws of the State of
Delaware;
(2) The Purchase Agreement and the ancillary agreements, when executed and
delivered by UP&UP as contemplated in the Purchase Agreement, will
have been duly authorized, executed and delivered by UP&UP, and,
assuming those same agreements constitute binding obligations of the
other party, will constitute, valid and binding obligations of UP&UP
enforceable against it in
<PAGE>
Principal Holding Company, Inc.
September 29, 1997
Page 2
accordance with the respective terms of such agreements except that:
(a) such enforcement may be subject to bankruptcy, insolvency
reorganization, moratorium, or other similar laws now or hereafter in
effect relating to creditors' rights; (b) to the extent the remedies
of specific performance, injunctive relief and other forms of
equitable relief are subject to any equitable defenses that may be
asserted as well as the discretion of the court before which any
proceeding relating to this agreement may be brought; and (c) insofar
as the enforceability of the indemnifications contained in the
agreements may be limited by public policy considerations.
(3) The execution and delivery of the Purchase Agreement, Principal Mutual
Services Agreement, America's Health Plan License Agreement, by UP&UP
and the performance of their respective obligations thereunder have
been duly and validly authorized by all requisite corporate action on
the part of UP&UP;
(4) UP&UP has complied with the conditions precedent to the obligations of
the Seller to consummate the transaction as set forth in Section 7.2
of the Purchase Agreement.
In rendering the opinions expressed herein, I do not purport to have reviewed
any laws, rules or regulations other than the laws, rules and regulations
governing the corporate existence of UP&UP. I express no opinion as to the laws
and regulations of any other jurisdiction.
My opinion is given pursuant to paragraph 2.4(b)(iii) of the Purchase Agreement
and is solely for the benefit of PHC and its affiliates. Further, and unless I
give my prior written consent, this opinion may not be quoted in whole or in
part or otherwise referred to in any document or instrument, or be furnished or
relied upon by any person or entity other than PHC and its affiliates.
Sincerely,
UNITED PAYORS & UNITED PROVIDERS, INC.
/s/ Joseph M. Mott
Joseph M. Mott
General Counsel
<PAGE>
SCHEDULE 1
Other Agreements
----------------
AHP License Agreement
Principal Mutual Services Agreement
35
<PAGE>
SCHEDULE 5.7.
Ordinary Course
---------------
Revenues of the Company have declined over the past two (2) years due in part to
the transfer of certain payor clients of the Company to Buyer, and due to the
decline in volume of claims of Principal Mutual Life Insurance Company and other
payor clients through the Network, the termination of a large payor client and
the termination of two networks.
36
<PAGE>
SCHEDULE 5.11.
Contracts
---------
Contracts between the Company and each of the following:
Principal Mutual Life Insurance Company
Mutual of Omaha Insurance Company, United of Omaha Life Insurance Company and
United World Life Insurance Company
Golden Rule Insurance Company
Pioneer Life Insurance Company of Illinois, National Group Life Insurance
Company, Continental Life and Accident Company
Affiliated Healthcare, Inc.
Christian Brothers Services, Inc.
Principal Health Care, Inc. and its HMO subsidiaries
Georgia-Pacific Corporation
37
<PAGE>
Continental General Insurance Company
Central States Health & Life Co. of Omaha
38
<PAGE>
SCHEDULE 5.12.
Litigation
----------
1. AmeriCare Health Alliance of Georgia LLC v. America's Health Plan, Inc.
Northern District of Georgia, Civil Action No. 1-97CV242-CC.
2. Dianah Butler v. America's Health Plan, Inc. Missouri State Court action, in
Cass County, Division III, Case No. CV397-225AC.
3. Daniel J. Stypula v. Primary Health Services, Inc., et al. Court of Common
Pleas, Cuyahoga County, Ohio, Case No. 315802.
39
<PAGE>
SCHEDULE 5.16.
Employee Benefit Plans
----------------------
Medical: The Principal Welfare Benefit Plan for Select Subsidiaries
Dental: The Principal Welfare Benefit Plan for Select Subsidiaries
Life Insurance: The Principal Welfare Benefit Plan for Select Subsidiaries
Select Savings: The Principal Select Savings Plan for Employees
Pension Plan: The Principal Pension Plan for Employees
Flex 2: Section 125 Cafeteria Plan Coverage
LTD: The Principal Long-Term Disability Plan for Employees
40
