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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ______________ TO _______________
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
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(Former name, former address and former fiscal year,
if changed since last report)
Securities registered pursuant to 12(b) of the Act: None
Securities registered pursuant to 12(g) of the Act: Common Stock,$0.01 par value
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K: ( X )
The number of shares of Common Stock, par value $.01 per share, outstanding on
March 1, 1999 was 17,553,803. As of March 5, 1999, assuming as fair value the
last sale price of $24.50 per share on The Nasdaq Stock Market, the aggregate
fair value of shares held by non-affiliates was approximately $124,000,000.
DOCUMENTS INCORPORATED BY REFERENCE:
The Company's Proxy Statement for its annual meeting of stockholders to be held
in June 1999, a definitive copy of which will be filed within 120 days of
December 31, 1998, is incorporated by reference in Part III of this Report on
Form 10-K.
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TABLE OF CONTENTS
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Page
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PART I
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Item 1. Business........................................... 3
Item 2. Properties......................................... 14
Item 3. Legal Proceedings.................................. 14
Item 4. Submission of Matters for a Vote of Security
Holders............................................ 14
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters................................ 14
Item 6. Selected Consolidated Financial Data............... 15
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations................ 16
Item 7A. Quantitative and Qualitative Disclosures About
Market Risk (Included in Item 7)
Item 8. Financial Statements and Supplementary Data........ 23
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure................ 23
PART III
Item 10. Directors and Executive Officers of the Registrant. 23
Item 11. Executive Compensation............................. 24
Item 12. Security Ownership of Certain Beneficial Owners
and Management..................................... 24
Item 13. Certain Relationships and Related Transactions..... 24
PART IV
Item 14. Exhibits, Financial Statement Schedules, and
Reports on Form 8-K................................ 24
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SIGNATURES
THIS FORM 10-K, INCLUDING THE DOCUMENTS INCORPORATED BY REFERENCE, CONTAINS
CERTAIN FORWARD-LOOKING STATEMENTS, INCLUDING WITHOUT LIMITATION, STATEMENTS
CONCERNING THE COMPANY'S OPERATIONS, ECONOMIC PERFORMANCE AND FINANCIAL
CONDITION. THESE FORWARD-LOOKING STATEMENTS ARE MADE PURSUANT TO THE SAFE HARBOR
PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995. THE WORDS
"BELIEVE," "EXPECT," "ANTICIPATE" AND OTHER SIMILAR EXPRESSIONS GENERALLY
IDENTIFY FORWARD-LOOKING STATEMENTS. READERS ARE CAUTIONED NOT TO PLACE UNDUE
RELIANCE ON THESE FORWARD-LOOKING STATEMENTS, WHICH SPEAK ONLY AS OF THEIR
DATES. THESE FORWARD-LOOKING STATEMENTS ARE BASED LARGELY ON THE COMPANY'S
CURRENT EXPECTATIONS AND ARE SUBJECT TO A NUMBER OF RISKS AND UNCERTAINTIES,
INCLUDING, WITHOUT LIMITATION, THOSE IDENTIFIED UNDER "MANAGEMENT'S DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" AND ELSEWHERE IN
THIS FORM 10-K, INCLUDING THE DOCUMENTS INCORPORATED BY REFERENCE. ACTUAL
RESULTS COULD DIFFER MATERIALLY FROM RESULTS REFERRED TO IN THE FORWARD-LOOKING
STATEMENTS. IN ADDITION, IMPORTANT FACTORS TO CONSIDER IN EVALUATING SUCH
FORWARD-LOOKING STATEMENTS INCLUDE CHANGES IN EXTERNAL MARKET FACTORS, CHANGES
IN THE COMPANY'S BUSINESS OR GROWTH STRATEGY OR AN INABILITY TO EXECUTE ITS
STRATEGY DUE TO CHANGES IN ITS INDUSTRY OR THE ECONOMY GENERALLY. IN LIGHT OF
THESE RISKS AND UNCERTAINTIES, THERE CAN BE NO ASSURANCES THAT THE RESULTS
REFERRED TO IN THE FORWARD-LOOKING STATEMENTS CONTAINED IN THIS FORM 10-K WILL
IN FACT OCCUR. THE COMPANY UNDERTAKES NO OBLIGATION TO PUBLICLY REVISE THESE
FORWARD-LOOKING STATEMENTS TO REFLECT ANY FUTURE EVENTS OR CIRCUMSTANCES.
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PART I
ITEM 1. BUSINESS
GENERAL
United Payors & United Providers, Inc. ("UP&UP" or the "Company") is a
Delaware corporation which is the successor to an Iowa corporation organized in
February 1995 by its Chairman and Chief Executive Officer, Thomas L. Blair, and
an affiliate of Principal Mutual Holding Company ("Principal Mutual"). Effective
December 31, 1995, the Company's original stockholders and a subsidiary of a
stockholder contributed to the Company certain complementary businesses,
including certain payor client contracts transferred to UP&UP under an agreement
with America's Health Plan, Inc. ("AHP"), an indirect wholly owned subsidiary of
Principal Mutual. Effective September 1997, the Company acquired the remaining
operations of AHP from an affiliate of Principal Mutual. In October 1996, the
Company acquired National Health Services, Inc. ("NHS"), a national health care
utilization and case management services subsidiary; and in December 1998, the
Company acquired ProAmerica Managed Care, Inc. ("ProAmerica"), which operates a
national network of health care providers.
UP&UP has developed a network of providers ("Provider Network") offering
nationwide access to discounted health care services for payors of health care
services who contract with the Company ("Payor Clients"). UP&UP enters into
contractual arrangements with providers such as hospitals, ancillary facilities
and physicians ("Contracting Providers") who agree to provide services on a
discounted basis to its Payor Clients. These Payor Clients include traditional
indemnity insurance companies, self-insured entities, unions and federal
government health plans. UP&UP's Provider Network consisted of approximately
2,900 hospitals, 14,500 ancillary medical facilities and 153,000 physicians
located in all 50 states and the District of Columbia as of December 31, 1998.
In addition, as of that date, UP&UP had contracts with other local or regional
Provider Networks which furnish Payor Clients with access to an additional 3,600
facilities (including approximately 475 hospitals) and 62,000 physicians. In
1998, approximately $2.4 billion of medical claims were processed utilizing
UP&UP's Provider Network (and other local and regional networks accessed through
UP&UP). UP&UP also provides management and administrative outsourcing services
for Payor Clients with respect to their relationships with provider networks. In
addition, UP&UP offers a broad array of utilization review and case management
services through its subsidiary, NHS. NHS is the third largest independent
utilization management company in the United States, based on annual acute in-
patient admission volume.
UP&UP derives its revenues primarily from the receipt of a percentage of the
price concessions that its Payor Clients receive from the Contracting Providers
in the UP&UP Provider Network, a percentage of cost savings realized by its
Payor Clients using its network management services, monthly membership-based
fees for utilization review services, and hourly fees for case management
services. UP&UP's contracts do not assume obligations to Contracting Providers
for payment of medical claims or to beneficiaries of Payor Clients for health
care services. Consequently, UP&UP is not subject to health care underwriting
risks.
UP&UP's proprietary information systems capabilities and expertise are
designed to facilitate the repricing of claims under its Provider Network
contracts and promote the efficient transmission and processing of claims. UP&UP
offers its Payor Clients and Contracting Providers access to an extensive,
proprietary database of provider charges and other information regarding certain
medical procedures by geographic area. In addition, certain Payor Clients are
provided with an analysis of encounter and cost data for specific service areas.
UP&UP has focused its marketing efforts on establishing relationships with
Payor Clients who have a nationwide presence and represent, in the aggregate,
large numbers of beneficiaries. As of December 31, 1998, UP&UP had contracts
with approximately 500 Payor Clients, including health insurance companies,
third party administrators, unions, self-insured entities and governmental
agencies. UP&UP intends to continue to market to national payors because of the
associated significant claims volume.
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UP&UP believes Contracting Providers participate in its Provider Network
because:
. Payor Clients include a significant number of major health care
insurance companies, which collectively represent substantial claims
volume to many Contracting Providers;
. UP&UP offers a prepayment option (the "Prepayment Option") to certain
Contracting Provider hospitals that can enhance their cash flow and
liquidity;
. Payor Clients are required to provide incentives, including shared cost
savings or a reduction in deductibles, to encourage their beneficiaries
to use Contracting Providers;
. UP&UP's consistent and reliable communications contribute to the prompt
processing of claims for Contracting Providers by Payor Clients,
increase information flow to Contracting Providers and enable more
accurate accounting by Contracting Providers; and
. Contract terms generally require timely payment of claims.
UP&UP believes that its Payor Clients subscribe to its Provider Network
because:
. Individual Payor Clients recognize the value of UP&UP's ability to focus
the combined purchasing power of all of its Payor Clients in negotiating
discounts with Contracting Providers, which generate substantial cost
savings for the Payor Clients, and thereby enhance the ability of Payor
Clients to offer competitively-priced health insurance products;
. UP&UP has a national Provider Network which can service national clients
having multi-site accounts;
. Some Payor Clients lack either the critical mass, knowledge or
technology needed to effectively contract with providers on a national
basis and build a national network;
. Some Payor Clients determine it is more cost effective to contract with
UP&UP rather than develop their own national or local provider network;
and
. Payor clients are able to reprice efficiently a large volume of medical
claims for the discounts offered by the Provider Network with the
assistance provided by UP&UP's database management and information
systems.
UP&UP believes that its Payor Clients contract for its utilization and network
management services because:
. Payor Clients determine they can more efficiently manage costs through
the clinical oversight performed by NHS' expert staff of nurses and
physicians using its medical protocols and information systems;
. NHS has demonstrated its ability to improve clinical outcomes and reduce
costs for Payor Clients and their insured beneficiaries under its case
management programs; and
. Payor Clients can reduce certain of their management functions regarding
their relationships with multiple provider networks by outsourcing these
functions to UP&UP.
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INDUSTRY OVERVIEW
General
The health care industry in the United States constitutes a substantial
portion of the Gross National Product, with 1996 expenditures exceeding $1
trillion, according to the United States Health Care Financing Administration
("HCFA"). Of this total, hospital charges represented approximately $360
billion, and physician charges represented approximately $200 billion. HCFA
estimates that annual United States health care expenses will grow to more than
$2.1 trillion, or approximately 7% per year, by 2007.
The health care industry is rapidly changing. Traditionally, health care
services have been provided on a fee-for-service basis through a generally
fragmented system of health care providers. As of January 1, 1996, there were
approximately 6,400 hospitals, over 780,000 physicians and over 200,000
ancillary medical facilities according to HCFA. Historically, health insurers
offering traditional indemnity fee-for-service insurance were the principal
payors of health care benefits for employers and individuals. In response to
escalating health care costs, managed care plans, such as health maintenance
organizations ("HMOs"), have developed and expanded during the past two decades.
More recently there has been a shift in health care insurance towards managed
care products which provide more consumer choice than traditional, closed plan
HMOs. According to a 1998 William M. Mercer report, approximately 29% of the
health insured population in the United States is covered by traditional, closed
plan HMOs, 58% is covered by more flexible managed care systems, such as
preferred provider organizations ("PPO"), and similar plans, including point-of-
service products, and 13% continues to be covered by traditional indemnity
insurance plans.
Trends
Underlying the rapid changes which the health care industry has been
undergoing are the following trends:
Demand for More Flexible Health Care Insurance. Employers and beneficiaries of
health plans are demanding lower cost health insurance plans with greater
patient flexibility (e.g., fewer provider restrictions) than is provided by
traditional HMOs. Employers and beneficiaries of health plans also are seeking
the ability to access providers across wider geographic areas in response to
decentralization and other trends in the workplace. As a result, there has been
a series of innovations that combine the aspects of both the cost savings'
benefits of managed care insurance with the provider choices afforded by
traditional indemnity insurance. Managed care companies now offer PPOs and
similar plans, including point-of-service plans and open-access plans that allow
out-of-network usage, often at substantially higher out-of-pocket costs to the
insured. A national network of health care providers offering services on a
discounted basis promotes the ability of health care payors to offer cost
effective flexible insurance plans which enable their health care beneficiaries
significant flexibility in choosing their own health care providers.
Continued Cost Containment Pressures. From 1994 to 1998, the average medical
cost increase has exceeded the average premium increase. The reasons for
increased medical costs are numerous and include an increased number of
procedures, and an increased use and cost of pharmaceuticals and medical
supplies. Demographic changes resulting in an increasingly larger percentage of
the population being represented by the elderly have magnified these increases.
These cost increases have occurred despite significant cost containment efforts
through expansion of traditional, closed plan HMOs and other managed care
arrangements. Recently, demand for more flexible insurance plans has limited the
further expansion of HMOs and the ability to control costs through stringent
managed care structures. As a result, payors of medical claims continue to seek
cost savings opportunities.
Emergence of Nationwide Service in Response to Customer Needs. Health care
payors are seeking to offer insurance plans that address customer needs on a
nationwide basis. In addition, payors are seeking to generate greater revenues
and profits from existing client relationships, especially large employers, by
capturing additional employees who are outside of the payors' traditional core
marketplace. As a result, payors are finding it increasingly important to have
an established national provider network through direct contracting or through
establishing a relationship with provider networks. National payors are
increasingly relying on contractual arrangements with other companies to: (i)
produce meaningful cost savings on medical claims; (ii) expand the provider
network available to their health care beneficiaries to a larger number of
geographic regions; and (iii) reduce their administrative costs.
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Information Technology-Driven Efficiencies. In order to influence and control
health care costs, payors and providers need the ability, either directly or
through a third party, to monitor health care encounters and corresponding costs
and process their claim volume in a cost-efficient manner. Thus, there is a need
for information technology systems that have the ability to: (i) interface with
a wide variety of medical claims processing systems; (ii) track provider cost
and clinical outcome data; (iii) analyze the tracked data; and (iv) process high
volumes of medical claims.
STRATEGY
UP&UP's strategic objective is to enhance its position as a leading contractor
with health care payors by offering a comprehensive array of services which can
be customized to address specific Payor Client needs to maximize their cost
savings. To achieve this objective, the Company seeks to: (i) increase Provider
Network claims volume; (ii) establish relationships with new Payor Clients;
(iii) expand its utilization and network management services business; and (iv)
broaden its portfolio of complementary services. The Company intends to pursue
these objectives through internal means as well as through acquisitions.
Increase Provider Network Claims Volume
Existing Payor Clients. The Company believes significant growth opportunities
exist to capture greater claims volume from its existing base of Payor Clients,
which includes many of the leading indemnity insurers in the United States.
UP&UP plans to achieve this by expanding its Provider Network to increase the
number of claims covered by its Payor Clients eligible for the Company's
discount. The Company uses its information systems capability to identify those
providers which represent the highest claims volumes for the Company's Payor
Clients, but which do not have contracts with the Company. UP&UP then uses its
base of high volume Payor Clients, its Prepayment Option and its other services
to market to those providers.
The Company also seeks to increase claim volumes with existing Payor Clients
by: (i) increasing utilization of the Provider Network by a greater variety of
insurance plans offered by the Payor Client; (ii) persuading Payor Clients to
use a greater portion of the Provider Network, particularly the 153,000
physician network primarily obtained in the Company's acquisition of AHP; (iii)
maintaining competitive discounts with Contracting Providers by leveraging its
Payor Client-base; (iv) continuing to provide high quality service to both Payor
Clients and Contracting Providers, and minimizing complexity and errors in
billing, while maximizing efficiency; and (v) providing incremental high quality
services, such as electronic claims transmission and customized provider
database analysis utilizing its information systems.
New Payor Clients. The Company actively markets its Provider Network and
technological expertise to attract new Payor Clients. The Company's marketing
efforts target large payors who could achieve significant cost savings from the
Provider Network based on their volume of claims. In 1998, the Company added 381
Payor Clients, including 335 Payor Clients through the acquisition of
ProAmerica.
Expand Utilization and Network Management Services Business
The Company also markets NHS's existing utilization management services to
existing and potential Payor Clients. The Company considers mid-tier insurance
companies and insurance plan administrators as its primary market for these
utilization management services. In addition, NHS continues to develop new case
management services. During 1998, NHS added one Payor Client. Also, the Company
intends to continue to market its Provider Network management services, which
are designed to address the preference of Payor Clients to deal with as few
intermediaries as possible in their provider network arrangements. The Company
believes that its network management services are
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complementary to its Provider Network and furnish an opportunity for the Company
to sell its array of services and establish multiple links with its existing
Payor Clients.
Acquire Complementary Services
The Company continues to pursue possible acquisition opportunities which would
supplement its own expansion of services or would complement its existing array
of services. For example, UP&UP entered into an agreement to acquire a savings
bank and most recently acquired ProAmerica in December. In particular, the
Company intends to consider possible acquisitions of other local provider
networks, which would increase its core business, and to expand its utilization
review and case management services.
SERVICES PROVIDED
National Provider Network
General. As of December 31, 1998, UP&UP's Provider Network consisted of
approximately 2,900 hospitals, 14,500 ancillary health care facilities, and
153,000 physicians located in all 50 states and the District of Columbia. In
addition, as of that date, the Company had contracts with other local or
regional provider networks which furnish Payor Clients with access to an
additional 3,600 facilities (including approximately 475 hospitals) and 62,000
physicians. The Provider Network is designed to meet the medical, financial and
geographic needs of Payor Clients by enabling the health care beneficiaries of
such Payor Clients to access cost effective health care services nationwide or
in particular geographic regions. Price concessions are individually negotiated
with each Contracting Provider (or Contracting Provider group) and generally
consist of discounts from billed charges or per-diem rates. The Company believes
its ability to obtain price concessions for its Payor Clients results from its
ability to focus the aggregate claims volume of its Payor Clients and, with
respect to Contracting Provider hospitals, from the Prepayment Option. The
Provider Network accounted for approximately 74% of the Company's total revenue
for 1998.
Prepayment Option Program for Hospitals. UP&UP offers Contracting Provider
hospitals interest-free cash advances through the Prepayment Option. The
Prepayment Option provides tangible benefits to hospitals in the form of
increased liquidity, and helps establish long-term financial linkages between
Contracting Provider hospitals and the Company. The Prepayment Option
demonstrates the financial commitment UP&UP makes to its Contracting Provider
hospitals. The Company's payment under a Prepayment Option is made at the option
of the Contracting Provider hospital, either at the beginning of a contract
period based on an estimate of claims volume or at the end of the contract
period based typically upon one-twelfth of the hospital's actual claims volume
with health care beneficiaries of the Company's Payor Clients in the preceding
12-month period. Hospitals exercising a Prepayment Option are obligated to
repay the amount of the advance, without interest, within 30 days of the
termination by either party of the contractual relationship. This repayment
obligation creates a cash flow consideration for those hospitals which decide to
leave the Provider Network. In many cases, UP&UP retains the right to reconcile
claims due to a Contracting Provider against such Contracting Provider's
obligation to repay the Prepayment Option.
Automated Claims Repricing. UP&UP has developed a proprietary information
system that allows each Payor Client to automatically reprice a high volume of
claims. The Company has installed its proprietary software and related business
processes in the facilities of most of its large Payor Clients to allow those
clients to perform their own claims repricing. UP&UP also offers each Payor
Client the option of electronically transmitting claims to the Company's
information systems, for the Company to reprice those claims, and then transmit
the repriced claims back to the Payor Client. The Company's repricing system is
continually updated to ensure that Payor Clients realize the maximum amount of
savings to which they are entitled. Currently, the Company's software systems
interfaces have been installed in 20 Payor Clients and an additional 20 Payor
Clients reprice their claims through a remote dial-up with UP&UP's systems.
These Payor Clients represented approximately 72% and 8%, respectively, of the
Provider Network's annualized claims volume for 1998. In addition to these
claims repricing services, UP&UP can also serve as a payment agent on behalf of
the Payor Client and send payments to Contracting Providers, for which
additional service UP&UP typically receives a larger percentage of the savings
generated.
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Single-Source Interface. The Company also has the systems capabilities to
allow a Payor Client to utilize the Company as a single source interface with
all of its provider networks. The Company also can incorporate PPOs into its
Provider Network to enable a Payor Client to create health insurance plans that
utilize a network of providers tailored specifically for specific health
insurance plans.
Provider Database. The Company maintains and updates a provider database that
tracks reimbursement rates, charges per day, occupancy rates, and the volume of
medical claims being generated by each Contracting Provider for each Payor
Client. This database is available to all Payor Clients to assist them in
evaluating which providers may be most cost effective for various geographic
areas, medical procedures, and types of care. This provider database also
assists the Company in the performance of its network management services.
Network Management Services. The Company offers network management services
whereby it assumes all or a portion of the administration of a Payor Client's
relationships with provider networks, including evaluating prospective provider
organizations, negotiating access agreements with provider organizations and
providing day-to-day support in billing and dispute resolution. Services offered
by the Company include: (i) access analysis services, which include identifying
which provider organization should be used and the repricing of claims pursuant
to the applicable contractual arrangements; (ii) network development services,
which include identifying cost saving opportunities obtainable from alternative
provider organizations and negotiating arrangements with those organizations;
(iii) database management services, which include developing and updating
tracking processes to ensure timely claims flow and payments; and (iv) directory
management services, which include arranging production and distribution of
provider directories to be used by the Payor Client's insured population and
providing toll-free locator services which provide comprehensive listings of all
participant providers, differentiated by product, geography and coverage.
Utilization Management Services
The Company, through NHS, provides health care utilization review and case
management services for Payor Clients. Payor Clients can outsource their
utilization review and/or case management services in whole or in part to NHS.
NHS clinical personnel perform prospective and concurrent utilization reviews of
medical cases in order to ensure that appropriate medical care is provided while
avoiding unnecessary procedures or hospitalizations. The Company also provides
catastrophic case management, professional clinical opinions, ancillary therapy
review and physician consultations. These utilization review and case management
services are provided by a staff which includes 138 full-time registered nurses,
a full-time medical panel of 11 physicians and an 81 member sub-specialty
consulting physician panel. The NHS staff also analyzes and interprets
utilization data in order to identify and recommend the implementation of
treatment strategies that are designed to maximize the effectiveness of health
care dollars spent. The Company utilizes proprietary software, CareReview(R),
which integrates three critical modules: hospital admission pre-certification,
triage and medical case management. In 1998, the Company performed over 710,000
utilization reviews and provided specialized management for 18,000 cases on
behalf of 19 Payor Clients. NHS accounted for approximately 26% of UP&UP's
revenues for 1998.
The Company considers its primary market for outsourced utilization review and
case management services to be mid-tier insurance companies. NHS promotes a
"center of excellence concept" whereby it customizes its services to the needs
and standards of a particular client, including the applicable medical protocols
and software, and dedicates staff to a particular client to promote
understanding and application of the client's specific requirements. The
Company offers sub-specialty case management programs in the areas of high risk
pregnancies, cardiovascular problems and asthma and intends to develop and
market other disease management programs for such problems as diabetes. The
Company may seek to pursue acquisitions or alliances with other companies that
provide similar services, for example, a pharmacy management program.
FEDERAL SAVINGS BANK
The Company on October 6, 1998 entered into an agreement to acquire for $2.5
million, Baltimore American Savings Bank, a federal savings bank (the "Bank"),
and Quantum Financial Holdings, Inc., its parent holding company, having total
assets of approximately $27 million, subject to the approval of shareholders of
the holding company and federal banking regulators. The holding company had a
net income of $18,000 for 1997 and a net loss of $189,000 for
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the first nine months of 1998. This acquisition would promote the Company's
strategy to develop an accounts receivable financing product for hospitals that
would complement the Company's Prepayment Option. After its acquisition, the
Company intends that the Bank would continue its traditional community oriented
lending activities. In addition, however, the Bank would serve as an incubator
to develop hospital accounts receivable financing business. The Bank initially
would focus on the financing of claims to be reimbursed by commercial insurance
companies. These insurance companies could be Payor Clients.
The Bank is subject to extensive regulations, supervision and examination by
the Office of Thrift Supervision (the "OTS") and the Federal Deposit Insurance
Corporation (the "FDIC"). Upon acquisition of the Bank, the Company would become
a savings and loan holding company, subject to supervision and examination by
the OTS. UP&UP would be a unitary savings and loan holding company, if the
current control of UP&UP by Principal Mutual is divested, as proposed. As a
unitary savings and loan holding company, UP&UP generally will not be restricted
under existing laws as to the type of business activities in which it may
engage, provided the Bank continues to meet the standards as a qualified thrift
lender. Nevertheless, the OTS will have enforcement authority over the Company
and its non-savings association subsidiaries. Among other things, this authority
permits the OTS to restrict or prohibit activities that are determined to be a
serious risk to the subsidiary savings bank.
There can be no assurance that the Company's acquisition of the Bank will be
approved by the OTS. The Company believes such approval will be given only,
among other things, if the OTS is satisfied as to the arrangements by Principal
Mutual to divest control of the Company within the meaning of the Holding
Company Act. Principal Mutual already is a unitary savings and loan holding
company.
In connection with the Company's proposed acquisition of the Bank and its
parent holding company, Principal Mutual, which, at December 31, 1998 owned
6,600,000 shares or approximately 38.6% of the Company's outstanding common
stock, proposes to divest control of the Company within the meaning of the
Savings and Loan Holding Company Act, and the four directors of the Company who
may be considered to be affiliated with or nominated by Principal Mutual, will
resign from the Board of Directors of the Company. To accomplish, in part, such
divestiture of control, on February 25, 1999, Principal Mutual, sold 4,500,000
shares (the "Principal Shares") of common stock of the Company, or approximately
25.6% of the outstanding shares, to a trust (the "Trust"). Principal Mutual
received from the Trust $13,225,000 in cash and trust certificates entitling it
to the proceeds from the sale of the Principal Shares. At the same time, the
Trust agreed to sell the Principal Shares to Thomas L. Blair, the Chairman and
Chief Executive Officer of the Company, on or before four years from the date of
the transfer of the Principal Shares to the Trust.
HEALTH EXTRAS
HealthExtras LLC ("HealthExtras") is a company that was founded by Thomas L.
Blair and Principal Mutual. UP&UP has no ownership interest in HealthExtras.
HealthExtras provides catastrophic benefits to plan members related to permanent
disability. HealthExtras intends to develop additional products that supplement
an individual's primary health coverage.
UP&UP has a royalty agreement with HealthExtras that was effective January 1,
1999. The royalty agreement provides UP&UP with a per member/per month ("PMPM")
royalty fee in exchange for UP&UP granting HealthExtras members access to its
Provider Network at no fee over a four-year period. The royalty fee initially
starts at $1.00 PMPM in year one and increases to $1.50 PMPM in year four. The
royalty fee is based upon the tenure of each member participating in the
HealthExtras program. It is likely that any future HealthExtras product
development will integrate the use of the Provider Network.
UP&UP also provides administrative services to HealthExtras at cost. These
services relate to operating, marketing and financial staff, as well as office
space and telecommunication services.
CONTRACTS WITH PAYORS AND PROVIDERS
The following discussion summarizes certain provisions typically included in
the various contractual arrangements of the Company.
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Provider Network
Payors. UP&UP enters into contracts with Payor Clients, including indemnity
insurance companies, government health plans and self-insured companies and
unions. Under these contracts, the discounted rates negotiated by UP&UP with its
Contracting Providers may be applied to medical services rendered to persons
eligible under a Payor Client's health insurance plan. Frequently, the contracts
obligate Payor Clients to make all reasonable efforts to promptly reimburse
(generally within 30 days of receipt of a clean claim) Contracting Providers for
such claims. Some contracts also require Payor Clients to provide to UP&UP
documentation regarding their insurance plan features, methods of identifying
covered persons, service relationships and other information relevant to the
processing of those claims which take advantage of discounts from Contracting
Providers.
Under its Payor Client contracts, UP&UP is entitled to fees which are usually
derived from a percentage of the Payor Clients' savings (i.e., the difference
between the Payor Clients' payment obligations prior to receipt of discounts
through the Provider Network and the Payor Clients' payment obligations after
such application.) Frequently, UP&UP commits to target and attempt to contract
with additional providers identified by Payor Clients and to use its best
efforts to maintain its Provider Network. Frequently, the contracts require
UP&UP to obtain confirmation from, or contractually require that, Contracting
Providers meet appropriate accreditation and state licensing requirements. These
contracts also set forth the respective obligations of UP&UP and the Payor
Clients with regard to the repricing of claims, particularly identifying
detailed delivery schedules for repriced claims data depending on whether the
Payor Client or UP&UP has assumed primary responsibility under the contract for
such repricing.
Payor contracts typically include a cross-indemnity provision for losses,
damages and expenses incurred as a result of acts or omissions related to duties
performed under the agreements. The contracts frequently require UP&UP to
maintain liability insurance for claims that may arise from performance of its
obligations under the agreements. In addition, the contracts also contain mutual
confidentiality undertakings. Payor Client contracts typically have a one-year
term and renew automatically for an additional one-year term on each anniversary
date unless either party gives notice of termination by a specified date
(usually 30 or 90 days) prior to any such anniversary date. Either party may
terminate the contract for material breach and, in most instances, for any
reason upon expiration of a specified notice period (usually 30 or 90 days).
A significant portion of UP&UP's revenues are derived from a small number of
payor clients. In 1998, Conseco, Inc. accounted for approximately 16% of
revenues, the Department of Health and Human Services of the State of Kentucky
accounted for approximately 11% of revenues and, an affiliate of Principal
Mutual accounted for approximately 10% of revenues. The loss of a contract with
a major Payor Client and the inability to replace any such client with
significant new clients could have a material adverse effect on UP&UP.
Providers. UP&UP enters into contracts with those providers of medical
services, including hospitals, physicians and physician groups, that participate
in its Provider Network. Under these contracts, Contracting Providers agree to
render services to persons eligible under UP&UP's Payor Clients' health benefit
programs, subject to the availability of facilities and services, and to accept
as payment for these services an amount equal to the negotiated discounted fees.
The discount typically ranges from 5% to 30% of billed charges. In instances in
which a Contracting Provider hospital has elected to exercise the Prepayment
Option, the contracts require UP&UP to establish a prepaid balance with the
hospital in an amount equal to the monthly average of the previous 12 months'
charges for covered services on covered persons or to a mutually agreed-upon
one-month estimate. The agreements obligate the hospital to repay to UP&UP the
prepaid balance within 30 days of termination of the agreement. Many Contracting
Provider hospital contracts also provide that "clean claims" not paid within 30
days of receipt must be paid at the hospital's non-discounted rate.
The contracts also require Contracting Providers to meet applicable licensing
and certification requirements and accreditation standards. Generally, the
contracts require Contracting Providers to use their best efforts to participate
in the utilization review and necessity of care evaluation programs,
coordination of benefit activities and other cost containment activities
provided for under each Payor Clients' health benefit program. The contracts
also generally obligate UP&UP to use its best efforts in encouraging each Payor
Client to create incentives for covered persons to use Contracting Providers.
The contracts typically require Contracting Providers, and in some cases UP&UP,
to maintain
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<PAGE>
liability insurance in specified minimum amounts or in amounts required by
applicable state law. In addition, the contracts often mandate both Contracting
Providers and UP&UP to maintain the confidentiality of the medical records of
persons covered under the Payor Clients' benefit plans. The contracts typically
include a cross-indemnity provision for losses, damages and expenses incurred as
a result of acts or omissions related to duties performed under the contracts.
The contracts typically have a one-year term and renew automatically for an
additional one-year term on each anniversary date unless either party gives
notice of termination by a specified date (usually 90 days) prior to any such
anniversary date. Either party may terminate the contract for material breach
and, in most instances, for any reason upon expiration of a specified notice
period (usually 30 or 90 days).
Other Provider Networks. UP&UP enters into contracts with other provider
networks ("Other Provider Networks"). UP&UP's contracts with Other Provider
Networks provide UP&UP's Payor Clients access to the providers covered by such
Other Provider Networks at the discounted rates available from such Other
Provider Networks. Under these contracts, UP&UP agrees to pay the Other Provider
Networks either a percentage of the fees to which UP&UP is entitled to be paid
by its Payor Clients from claims processed through the Other Provider Networks
or a percentage of savings realized by the Payor Client from claims processed
through the Other Provider Networks. Pursuant to these contracts, UP&UP,
generally, is prohibited from soliciting any Payor Client with whom an Other
Provider Network currently has contractual relationships during the term of the
contract and for one year thereafter and from soliciting certain providers
identified by an Other Provider Network. The contracts with Other Provider
Networks prohibit UP&UP from providing access to those networks to payors who
are not Payor Clients of UP&UP covered by the contract with the Other Provider
Network. These contracts generally provide that the failure by an UP&UP Payor
Client to promptly reimburse an Other Provider Network medical provider may
result in the loss of contractual fee discounts.
The contracts with Other Provider Networks typically include a cross-indemnity
provision for losses, damages and expenses incurred as a result of acts or
omissions related to duties performed under the agreements and in some instances
require both the Other Provider Network and UP&UP to maintain liability
insurance in specified minimum amounts. In addition, the contracts also require
both the Other Provider Network and UP&UP to maintain the confidentiality of the
medical records of persons covered under Payor Client benefit plans and any
proprietary information of the other party. These contracts typically have
initial terms of one to three years and renew automatically for an additional
one-year term on each anniversary date unless either party gives notice of
termination by a specified date (usually 90 days) prior to any such anniversary
date. Either party may terminate the contract for material breach and, in most
instances, without cause upon expiration of a specified notice period (usually
30 or 90 days).
Network Management
Under its network management contracts, UP&UP is entitled to fees which may
consist of a percentage of savings realized by the Payor Client due to UP&UP's
management services and/or fixed monthly payments. Fees for the production and
distribution of provider directories are based on cost plus a fixed margin.
These contracts typically include a cross-indemnity provision for losses,
damages and expenses incurred as a result of acts or omissions related to duties
performed under the agreements and, in some instances, require both the network
management client and UP&UP to maintain liability insurance in certain specified
minimum amounts. In addition, these contracts include mutual confidentiality
undertakings.
Utilization Management
The Company's utilization management contracts typically identify (a) the
types of services to be provided, (b) a schedule for the delivery of reports, in
form and detail determined by the client, (c) detailed performance targets and
(d) the fees to be paid to UP&UP for such services. The Company's utilization
review contracts pertaining to the review of medical necessity and
appropriateness of the allocation of health care resources establish fees for
UP&UP on the basis of number of contacts, time expended or number of covered
persons. On a limited basis, the Company has contracted for its utilization
review services under terms that impose fee reduction penalties for failure to
meet negotiated savings targets and fee incentives for exceeding such targets.
Case management revenues is generally based on fee for service or hourly rates
over the term of the contractual agreements.
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These contracts typically include a cross-indemnity provision for losses,
damages and expenses incurred as a result of acts or omissions related to duties
performed under the agreements. The contracts typically require both the Payor
Client and UP&UP to maintain certain liability insurance in specified minimum
amounts. In addition, these contracts also include mutual confidentiality
undertakings.
COMPETITION
The health care industry is fragmented, competitive and evolving. The Company
potentially competes with any entity that contracts with Payor Clients to offer
them a means to contain or reduce the cost of their medical claims expenses.
Existing or potential competitors include HMOs, PPOs, physician hospital
organizations and other managed care providers.
The health care industry is considered to be a growing industry and may
attract additional competitors of the Company. In addition, many Payor Clients
have developed or may in the future develop their own provider networks,
utilization and management services, and other services similar to those offered
by the Company. Alternatively, Payor Clients are seeking to develop or expand
managed care type insurance which eliminate or reduce the need for access to the
Company's provider network. Likewise, Contracting Providers could elect to
contract directly with Payor Clients. These actions could have an adverse effect
on the business of the Company. With respect to utilization review and case
management services, NHS competes principally with national and regional
utilization review and case management providers and with internal departments
of large payors that provide these services.
Several potential competitors are significantly larger and better capitalized
than the Company. Many competitors and potential competitors have ongoing access
to greater resources, provide a more comprehensive range of services, and have
greater experience in providing those services than the Company. Furthermore,
various competitors and potential competitors have longer term business
relationships with payors and providers than does the Company.
GOVERNMENT REGULATION
General. As an entity conducting business within the health care industry, the
Company's operations are potentially subject to extensive and increasing
regulation by a number of governmental entities at the federal, state and local
levels. The Company and its affiliates are also subject to laws and regulations
relating to business corporations in general. The Company believes its
operations are in material compliance with applicable laws as currently
interpreted. Nevertheless, because of the structure of the Company, certain
aspects of the Company's current or anticipated business operations could fall
within the regulatory oversight of federal or state authorities, and there can
be no assurances that a review of the Company's business by courts or regulatory
authorities will not result in a determination that could have a material
adverse effect on the Company's business, financial condition, or results of
operations. There also can be no assurances that the regulatory environment in
which the Company operates will not change significantly in the future, which
change could restrict the Company's existing operations, expansion, financial
condition or opportunities for success.
Health Care Reform. The agencies and legislative bodies of states and the
federal government recently have focused significant attention on reforming the
health care system in the United States. Within the past several years, a broad
range of health care reform measures have been introduced in Congress and in
certain state legislatures. Additional health care reform measures have been
brought before the public in state voter initiatives. These initiatives range
from those that would tend to encourage managed care, such as allowing physician
and hospital groups to accept risk, to those that would impede managed care,
such as mandating that any willing provider could participate in any health
plan. Among the proposals that have been considered are cost controls on
hospitals, insurance market reforms to increase the availability of group health
insurance to small businesses, requirements that all businesses offer health
insurance coverage to their employees and the creation of a single government
health insurance plan at the state or federal level that would cover all
citizens. Legislative interest recently has focused on the effect of managed
care reimbursement mechanisms on health care service utilization and quality of
service. It is not clear at this time what proposals, if any, will be adopted
or, if adopted, what effect, if any, such proposals would have on the Company.
Certain proposals, such as containment of health care costs that could include a
freeze on prices charged by physicians, hospitals or other health care
providers, could have a material adverse effect on the Company's business,
financial condition or results of operations. There can be no assurances that
currently proposed or future health care legislation or policies or other
changes in the administration or interpretation of governmental health care
programs, laws,
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<PAGE>
regulations or policies will not have a material adverse effect on the Company's
business, financial condition or results of operations.
State Licensure. The Company's subsidiary, NHS, maintains utilization
management certification in all states in which it is required to do so and
monitors state legislation on a regular basis to ensure ongoing compliance.
The Company believes that its other current business activities are not
subject to state licensure, other than such general business licensure as may be
required of all domestic or foreign business corporations in a jurisdiction.
However, it is possible that regulatory authorities in some states might
conclude that some of the Company's activities subject it to licensure as a PPO
or similar entity. In some states, such licensure may be conditioned on the
licensed entity engaging in practices, such as quality assurance or utilization
review, that are beyond the scope of the Company's current or anticipated
operations. Although the Company believes that, in general, it would be able to
modify its operations to obtain any licenses that were deemed to be required,
there can be no assurances that the Company would be able to modify its
operations, or otherwise obtain or maintain any such licenses.
ERISA Regulation. It is possible that in the usual course of its business the
Company could be deemed to provide services to employee benefit plans regulated
under the Employee Retirement Income Security Act of 1974, as amended ("ERISA"),
including self-insured health benefit plans. Recently, the United States
Department of Labor ("DOL"), the federal agency that administers ERISA, has been
auditing certain insurance companies in connection with their practices
involving medical provider discounts and the transfer of those discounts to
self-insured ERISA plans. In connection with these audits, DOL has indicated
that the negotiation and administration of provider discount arrangements by
these insurance companies for the benefit of ERISA plans could constitute the
activities of an ERISA fiduciary. Although the Company believes that its
practices relating to provider discount arrangements are beyond the scope of
ERISA regulation, there can be no assurances that DOL or some other person would
not assert that the Company acts as an ERISA fiduciary with respect to its
limited activities for self-insured ERISA plans. In the event that the Company
were deemed to be an ERISA fiduciary, the Company believes that it would be
viewed as being in compliance with applicable ERISA rules.
In a recent decision interpreting a health insurance policy under ERISA, a
federal district court invalidated a PPO discount taken by an insurance company
where the applicable insurance policy did not provide for the utilization by the
insured of the PPO in question. HCA Health Services of Georgia, Ins. Co., 22
F. Supp.2d 1390 (N.D.Ga. 1998). The Company does not believe that this case
will have any material impact on its business operations. The Company believes
that the contractual arrangements between Payor Clients and their insureds
permit the discounts taken through the Provider Network.
Anti-Remuneration Laws. Medicare and Medicaid law provides civil and criminal
penalties for paying or receiving any remuneration to induce the referral of
Medicare or Medicaid patients, or to induce the purchase or the arranging for,
or recommending of, the purchase of items or services for which payment may be
made under Medicare, Medicaid or other federally-funded state health care
programs. None of the Company's contracts with Payor Clients provide for access
to Contracting Providers by Medicaid or Medicare beneficiaries. Several states
also have similar laws which are not limited to services for which Medicare or
Medicaid payment may be made. State laws vary and have been infrequently
interpreted by courts or regulatory agencies. It is possible that enforcement
officials could seek to review the fees paid to or by the Company to determine
whether such fees should be deemed to be unlawful remuneration given indirectly
by Contracting Providers in exchange for arranging for the referral of patients
from their Payor Clients. While there can be no assurances that the Company's
position would be upheld if challenged, the Company believes that their fee
arrangements represent reasonable compensation for legitimate services actually
provided to or by the Company and should not be deemed to be unlawful
remuneration under these anti-remuneration laws.
EMPLOYEES
As of January 31, 1999, the Company employed 486 people on a full-time basis.
The Company believes that its relations with its employees are good. None of the
Company's employees are represented by a union.
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ITEM 2. PROPERTIES
The Company's principal executive office is located in Rockville, Maryland in
approximately 22,000 square feet of leased space. The Company also leases
approximately 29,300 square feet of office space in Louisville, Kentucky,
approximately 19,217 square feet of office space in Bethesda, Maryland and
approximately 22,000 square feet in Arlington, Texas. The Rockville, Maryland
and the Louisville, Kentucky leases expire in 2001. The Bethesda, Maryland lease
expires in 2007. The Arlington, Texas lease expires in 2003. The Company
believes that its current facilities are adequate for its existing needs and
that suitable additional space will be available as required.
ITEM 3. LEGAL PROCEEDINGS
On April 26, 1996, First Health Group (formerly known as HealthCARE COMPARE),
a Delaware corporation and competitor of the Company, filed a civil complaint
against the Company in the United States District Court for the Northern
District of Illinois. The complaint, in its present amended form, is seeking
permanent injunctive relief, as well as an unspecified amount of damages, and
alleges violations of the Lanham Act, 15 U.S.C. Sections 1125(a)(1)(A) and
(a)(1(B), as well as common law claims of deceptive trade practices, fraud,
interference with contract, interference with prospective economic relations and
unfair competition. The complaint also seeks treble damages pursuant to the
Lanham Act. The complaint is based upon allegations that representatives of the
Company made false and misleading statements during contract negotiations with
providers in order to cause them to join the UP&UP Network. In response to
written requests and in depositions, the Plaintiff has alleged that it has
suffered actual damages of approximately $41 million. The Company denies the
allegations in the complaint and believes them to be without merit. The Company
has asserted a counterclaim against the Plaintiff for violations of the Lanham
Act, as well as common law claims for unfair competition, commercial
disparagement and service mark cancellation. Fact discovery in the action is
ongoing and the trial date has not yet been set by the Court. Based upon the
available information, management believes that its potential liability, if any,
arising from such litigation will not be material to the consolidated financial
statements of the Company.
The Company is also a party to other legal actions arising in the ordinary
course of business. Management believes that damages arising from these actions,
if any, will not be material to the consolidated financial statements of the
Company. Nevertheless, there can be no assurance that any pending or future
litigation to which the Company is or becomes a party, including the litigation
involving First Health Group, will not have a material adverse effect on the
Company.
ITEM 4. SUBMISSION OF MATTERS FOR A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders during the
quarter ended December 31, 1998.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
The common stock has been quoted on the Nasdaq National Market under the
symbol "UPUP" since the Company's initial public offering in July 1996. The
following table sets forth, for the periods indicated, the high and low sale
prices for the common stock:
<TABLE>
<CAPTION>
High Low
------ ------
<S> <C> <C>
1997
- ----
First quarter.......................... $ 9.50 $ 6.92
Second quarter......................... 9.50 7.83
Third quarter.......................... 12.33 8.33
Fourth quarter......................... 14.25 11.33
</TABLE>
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<TABLE>
<CAPTION>
1998
- ----
<S> <C> <C>
First quarter............................... 22.69 11.50
Second quarter.............................. 24.38 19.00
Third quarter............................... 29.75 14.00
Fourth quarter.............................. 29.63 14.25
1999
- ----
First quarter (through March 5, 1999)....... 29.25 20.88
</TABLE>
On March 5, 1999, the last closing sale price of the common stock, as reported
by the Nasdaq National Market, was $24.50 per share. As of March 5, 1999, the
Company had approximately 1,050 stockholders of record. The Company did not pay
any cash dividends in 1996, 1997 or 1998 and has no plans to do so in the
foreseeable future.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
(In thousands, except per share data)/(1)/
The following selected consolidated financial data as of and for the years
ended December 31, 1998, 1997, 1996 and 1995 have been derived from the audited
financial statements of the Company. The selected consolidated financial data
should be read in conjunction with "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the consolidated financial
statements of the Company, including notes thereto.
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------------------------
1998 1997 1996 1995
-------- -------- ------- --------
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA
Revenue
Provider network............................. $ 57,952 41,195 $31,259 $ 877
Utilization management services.............. 20,497 19,833 4,190 --
-------- -------- ------- -------
Total revenue............................. 78,449 61,028 35,449 877
-------- -------- ------- -------
Operating expenses
Direct contract expenses..................... 33,524 29,173 15,295 2,238
General and administrative................... 8,365 6,221 2,783 334
Depreciation and amortization................ 4,028 1,695 538 114
-------- -------- ------- -------
Total operating expenses.................. 45,917 37,089 18,616 2,686
-------- -------- ------- -------
Operating income (loss)......................... 32,532 23,939 16,833 (1,809)
Other income, net............................... 729 1,426 971 699
-------- -------- ------- -------
Income (loss) before income taxes............ 33,261 25,365 17,804 (1,110)
Income taxes.................................... (13,682) (10,388) (7,158) 399
-------- -------- ------- -------
Net income (loss)............................... $ 19,579 $ 14,977 $10,646 $ (711)
======== ======== ======= =======
Net income (loss) per share - basic............. $ 1.15 $ 0.87 $ 0.70 $ (0.05)
Weighted average common shares - basic.......... 17,065 17,239 15,189 13,200
Net income (loss) per share - diluted........... $ 1.09 $ 0.86 $ 0.70 $ (0.05)
Weighted average common shares - diluted........ 17,981 17,486 15,193 13,200
1998 1997 1996 1995
-------- -------- ------- -------
BALANCE SHEET DATA
Working capital................................. $ 27,147 $ 24,513 $28,113 $ 3,384
Total assets.................................... 115,945 82,515 53,248 12,763
Long-term debt, including current portion....... 22,064 15,241 655 160
Total stockholders' equity...................... 78,458 58,297 45,176 5,296
</TABLE>
- ---------------
(1) All periods reflect the effect of the three-for-two stock split in the form
of a stock dividend paid on May 4, 1998.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
This Form 10-K may contain forward-looking statements (see "Certain Factors
That May Affect Future Operating Results or Stock Prices") within the meaning of
Section 21E of the Securities Exchange Act of 1934, as amended. These forward-
looking statements involve a number of risks and uncertainties. The Company
undertakes no obligation to revise any forward-looking statements in order to
reflect events or circumstances that may arise after the date of this report.
Readers are urged to carefully review and consider the various disclosures made
by the Company in this report and in the Company's other filings with the
Securities and Exchange Commission that attempt to advise interested parties of
the risks and factors that may affect the Company's business.
GENERAL
UP&UP is a Delaware corporation which is the successor to an Iowa corporation
organized in February 1995 by its Chairman and Chief Executive Officer, Thomas
L. Blair, and an affiliate of Principal Mutual. Effective December 31, 1995, the
Company's original stockholders and a subsidiary of a stockholder contributed to
the Company certain complementary businesses, including certain Payor Client
contracts transferred to UP&UP under an agreement with AHP, an indirect wholly
owned subsidiary of Principal Mutual.
In October 1996, the Company acquired NHS, the Company's national health care
utilization and network management services subsidiary. Effective September 1,
1997, the Company acquired the remaining operations of AHP from an affiliate of
Principal Mutual. Effective December 1, 1998, the Company acquired ProAmerica, a
national preferred provider network that operates a network of health care
providers. The acquisitions of AHP, NHS and ProAmerica have been accounted for
as purchases and, accordingly, the results of operations for AHP, NHS and
ProAmerica have been included in the Selected Consolidated Financial Data since
the effective date of the respective acquisitions.
UP&UP has developed a network of providers offering nationwide access to
discounted health care services for payors of health care services who contract
with it. UP&UP enters into contractual arrangements with providers such as
hospitals, ancillary facilities and physicians who agree to provide services on
a discounted basis to its Payor Clients. The Payor Clients include traditional
indemnity insurance companies, self-insured entities, unions and federal
government health plans. UP&UP also provides management and administrative
outsourcing services for Payor Clients with respect to their relationships with
provider networks. In addition, UP&UP offers a broad array of utilization review
and case management services through its subsidiary, NHS, the third largest
independent utilization management company in the United States, based on an
annual acute in-patient admission volume.
UP&UP derives its revenues primarily from the receipt of a percentage of the
price concessions that Payor Clients receive from the Contracting Providers in
the Provider Network, a percentage of cost savings realized by Payor Clients
using its network management services, monthly membership-based fees for
utilization review services, and hourly fees for case management services.
UP&UP's contracts do not assume obligations to Contracting Providers for payment
of medical claims or to beneficiaries of Payor Clients for health care services.
Consequently, UP&UP is not subject to health care underwriting risks.
Effective January 1, 1998, the operating infrastructures of UP&UP and AHP were
fully integrated into a single business, administrative and financial reporting
unit. During the second quarter of 1998, the Company completed the merger of the
UP&UP and AHP individual provider networks into a single, fully integrated
provider network.
Period-to-period comparisons are not necessarily meaningful due to the impact
of acquisitions and formation transactions completed during the periods.
DIRECT CONTRACT EXPENSES
Direct contract expenses include access fees paid by the Company for the
utilization of other provider networks, marketing commissions, and other direct
costs of services, such as personnel, related to repricing of claims, client
services, and other costs incurred in connection with the generation of revenues
and the development of the Company's
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Provider Network. Direct contract expenses also include the costs of medical
personnel (nurses and doctors) and other expenses related to utilization review
and case management services. Marketing commissions are payable to consultants
and marketing organizations who became entitled to such commissions for their
role in obtaining contracts with certain Payor Clients.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses include salaries and related costs for
personnel involved in the administration of the Company and other costs, such as
professional services and general overhead expenses.
RESULTS OF OPERATIONS
Year Ended December 31, 1998 Compared to Year Ended December 31, 1997
Total revenues increased by $17.4 million, from $61.0 million in 1997 to $78.4
million in 1998. Provider network revenues increased by $16.7 million, from
$41.2 million in 1997 to $57.9 million in 1998. This increase was attributable
to the acquisitions of AHP and ProAmerica, the addition of new Payor Clients,
the growth in the overall claims volume from existing Payor Clients and the
expansion of the Company's Provider Network. Because of the merger of the UP&UP
and AHP provider networks, the Company is not able to quantify the portion of
the increase attributable to the acquisition of AHP. At December 31, 1998, the
Provider Network consisted of direct contracts with approximately 17,400 medical
facilities and approximately 153,000 physicians compared to approximately 14,700
medical facilities and approximately 125,000 physicians at December 31, 1997.
Utilization management services revenues increased by approximately $0.7
million, from $19.8 million in 1997 to $20.5 million in 1998.
Direct contract expenses increased by $4.3 million, from $29.2 million in 1997
to $33.5 million in 1998. Access fees to other provider networks as a percentage
of Provider Network revenues decreased by 3.7%, from 11.8% ($4.9 million) in
1997 to 8.1% ($4.7 million) in 1998. This percentage decrease was attributable
to the growth in the number of providers contracting directly with UP&UP and
Payor Clients accessing more direct contracts. Other direct costs of services
increased by approximately $4.5 million, from $24.3 million in 1997 to $28.8
million in 1998. The increase was primarily attributable to the acquisitions of
AHP and ProAmerica and an overall increase in expenses of UP&UP resulting
primarily from an increase in the number of employees to accommodate growth in
the provider network business, increased provider network development activities
and the continued development of new products and services. Because of the
integration of the operations of UP&UP and AHP, the Company is not able to
quantify the portion of the increase in expenses attributable to each of the
components.
General and administrative expenses increased by approximately $2.1 million,
from approximately $6.2 million in 1997 to approximately $8.3 million in 1998.
The increase was primarily attributable to the acquisitions of AHP and
ProAmerica and an overall increase in expenses of UP&UP resulting from an
increase in the number of employees in the administrative and executive areas
and an increase in professional fees for accounting and legal services. Because
of the integration of the operations of UP&UP and AHP, the Company is not able
to quantify the portion of the overall increase in expenses attributable to each
of the components.
Depreciation and amortization increased by approximately $2.3 million, from
approximately $1.7 million in 1997 to approximately $4.0 million in 1998. The
increase was primarily attributable to the amortization of goodwill of AHP and
other intangible assets and the depreciation of investments made to achieve the
consolidation of the UP&UP and AHP operations and to enhance the information
technology infrastructure in order to allow for future growth and capabilities.
Year Ended December 31, 1997 Compared to Year Ended December 31, 1996
Total revenues increased by $25.6 million, from $35.4 million in 1996 to $61.0
million in 1997. Provider Network revenues increased by $9.9 million, from $31.3
million in 1997 to $41.2 million in 1997. Of this increase, $5.8 million was
attributable to the addition of new Payor Clients, the growth in the overall
claims volume from existing Payor Clients and the expansion of the Company's
Provider Network. The remainder of the increase was attributable to the
acquisition of AHP. At December 31, 1997, the Provider Network consisted of
approximately 14,700 medical facilities
17
<PAGE>
and approximately 125,000 physicians compared to approximately 6,000 medical
facilities and 12,000 physicians at December 31, 1996. Utilization management
services revenues increased $15.6 million, from $4.2 million in 1996 to $19.8
million in 1997. The increase was attributable primarily to the inclusion of the
operations of NHS for a full year in 1997 as compared to three months in 1996.
Direct contract expenses increased by $13.9 million, from $15.3 million in
1996 to $29.2 million in 1997. Access fees to other provider networks as a
percentage of Provider Network revenues decreased by 6.2%, from 18.0% ($5.6
million) in 1996 to 11.8% ($4.9 million) in 1997. This percentage decrease was
attributable to the growth in the number of providers contracting directly with
the Company, Payor Clients accessing more direct contracts and the negotiation
of lower rates in agreements with other provider networks. Other direct costs of
services increased by approximately $14.6 million, from $9.7 million in 1996 to
$24.3 million in 1997. Of this increase, approximately $11.2 million was
attributable to the acquisitions of NHS and AHP, which were acquired effective
October 1, 1996 and September 1, 1997, respectively. The remainder of the
increase was attributable to an overall increase in expenses resulting primarily
from a significant increase in the number of employees to accommodate growth in
the provider network business, increased provider network development activities
and the continued development of new products and services.
General and administrative expenses increased approximately $3.4 million, from
approximately $2.8 million in 1996 to approximately $6.2 million in 1997. Of
this increase, approximately $1.6 million represented expenses of NHS and AHP.
The remainder of the increase was attributable to an overall increase in
expenses resulting from the addition of employees in the administrative and
executive areas, expenses related to bonus and other benefit programs which
became effective subsequent to the initial public offering and an increase in
professional fees for accounting and legal services.
Depreciation and amortization increased by approximately $1.2 million, from
approximately $0.5 million in 1996 to approximately $1.7 million in 1997. The
increase was primarily attributable to the depreciation expense and amortization
of goodwill of NHS and AHP, as well as depreciation on increased capital
expenditures to accommodate growth.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1998 and December 31, 1997, the Company had working capital of
approximately $27.1 million and $24.5 million, respectively. Net cash provided
by operating activities increased by $9.2 million, from $13.3 million in 1997 to
$22.5 million in 1998. In December 1998, the Company utilized the proceeds from
a $10 million line of credit with a bank as part of the consideration paid for
the acquisition of ProAmerica. In February 1999, the Company entered into a
five-year $10 million term loan with the same bank and utilized the proceeds
from the term loan to replenish the amount drawn under the line of credit.
The Company's primary capital resources commitment is to fund advances to
contracting providers upon exercise of Prepayment Options granted to contracting
providers. Depending on increases in claims volume and in the number of Payor
Clients and contracting provider hospitals electing to accept the Prepayment
Option, the Company estimates that $15 million to $20 million could be required
to fund the Prepayment Options during 1999. In 1997, the Board of Directors of
the Company approved a common stock repurchase program of up to $5 million. The
Company canceled the common stock repurchase program as of February 1, 1998. As
of December 31, 1998, the Company had repurchased 389,625 shares of its
outstanding common stock under the program, at an aggregate purchase price of
$3.5 million, and reissued 116,474 of the shares for an aggregate consideration
of $0.9 million.
The Company believes that its existing liquidity sources, anticipated funds
from operations, and credit arrangements will satisfy cash requirements for its
operations for the next twenty-four months. However, in the event of additional
acquisitions and/or in the event that the advances for Prepayment Options exceed
the Company's currently anticipated estimates and/or other available sources of
liquidity to fund such payments are not as great as anticipated, or in the event
that, if acquired the Bank requires funding to maintain its capital requirements
or to expand its business, the Company could be required to borrow additional
funds or issue additional equity securities to fund the balance of such
advances. There can be no assurances that the Company will be able to effect any
such additional borrowings or issue additional equity securities on acceptable
terms.
INTEREST RATE SENSITIVITY
The Company is subject to interest rate risk on its short-term investments
portfolio and its outstanding bank loans. The Company has determined that a 10%
move in the current weighted average interest rates of its short-term
investments and its outstanding bank loans would not have a material effect on
the Company's financial position, results of operations and cash flows over the
next fiscal year.
18
<PAGE>
IMPACT OF INFLATION
Since the Company's revenues are based on medical costs, the impact of
inflation on operating costs and expenses should be offset by the impact of
inflation of medical costs.
CERTAIN FACTORS THAT MAY AFFECT FUTURE OPERATING RESULTS OR STOCK PRICES
A significant portion of UP&UP's revenues are derived from a small number of
payor clients. In 1998, three payor clients accounted for approximately 37% of
revenues. The loss of a contract with a major payor client and the inability to
replace any such client with significant new clients could have a material
adverse effect on UP&UP.
UP&UP's contracts with its Payor Clients for access to the provider network
generally permits the annual renegotiation of terms and permits either party to
terminate the contract at any time upon satisfaction of notice requirements.
Also, those contracts do not prohibit Payor Clients from entering into contracts
with or utilizing other provider networks or developing their own provider
networks. Therefore, even if a Payor Client does not terminate its contract with
UP&UP, UP&UP could experience a decrease in claims from that Payor Client as a
result of the use of their own provider networks, other provider networks, or
other managed care systems. UP&UP's contract with the State of Kentucky is
terminable for the convenience of the government.
Furthermore, the health insurance industry has been experiencing significant
consolidation, particularly consolidation designed to promote an increase in
managed health care insurance programs, as opposed to the indemnity style
programs for which the UP&UP provider network is most attractive. UP&UP believes
these consolidation trends have in the past reduced utilization of the UP&UP
provider network by particular health insurance programs, and, in the future,
could further reduce utilization of the UP&UP provider network, as a result of
both a decrease in the number of Payor Clients and a decrease in the need for
payor clients to utilize the UP&UP provider network.
YEAR 2000 READINESS DISCLOSURE
The Company is aware of the issues associated with the programming code in
existing computer and software systems regarding the Year 2000. The Company,
like other organizations, is in the process of assessing and modifying or
replacing its information technology and non-information technology to ensure,
to the extent within the control of the Company, their functionality with
respect to the "Year 2000" millennium change and to identify and evaluate
potential risks to the Company to the extent that Year 2000 problems not within
the Company's control could impact the Company. The Company's primary computer
systems operate from an IBM platform and were designed in the 1990's, generally
with four digit year capability. With respect to non-information technology, all
of the Company's facilities are relatively modern, post-1990, and are believed,
based on the evaluation to date, not to have any significant Year 2000 problems.
The Company has budgeted $1 million, as a conservative estimate of the maximum
cost to it, to address "Year 2000 problems," and has presently spent
approximately $300,000. The Company anticipates that it will be Year 2000
compliant by July 1, 1999 and will spend the remainder of 1999 testing. While
there can be no guarantee, the Company believes that Year 2000 issues with
respect to both the information technology and non-information technology
systems within its control will be adequately addressed by it and will not cause
material disruption to the Company's operations. The Company intends to monitor
its progress towards addressing its Year 2000 issues successfully and intends to
develop contingency plans if necessary.
However, the Company's operations are dependent to a substantial extent on the
ability of its Payor Clients, and to a lesser extent, possibly its Contracting
Providers, to address successfully their Year 2000 issues in connection with
their claims processing. The Company has no guarantee, however, that its Payor
Clients or Contracting Providers will be able to resolve all of their own Year
2000 problems in a timely manner. The Company has had discussions with its major
Payor Clients and the Company believes, based on the discussions and other
information available to it, that all of its major Payor Clients are aware of
the Year 2000 issue and are expending significant resources to identify and
resolve all of their Year 2000 problems. The Company could be materially and
adversely affected as a result of Year 2000 problems incurred by Payor Clients
or Contracting Providers or their inability to interface with the Company's
systems, or as a result of unforeseen problems regarding the Company's own
system. The Company intends to continue to monitor to the best of its ability
the likelihood of significant problems experienced by such entities which could
materially affect the Company or its operations.
19
<PAGE>
DEPENDENCE ON CONTRACTING PROVIDERS
UP&UP's growth depends on its ability to retain existing contracting
providers, to attract additional contracting providers, and to retain or improve
the price concessions granted by contracting providers. The termination of a
significant number of contracts with contracting providers having a high volume
of claims with UP&UP's payor clients, the inability to replace those contracts
with similar contracting providers and/or the renegotiation of contracts
resulting in reduced price concessions could have a material adverse effect on
UP&UP. UP&UP's contracts with contracting providers typically have a one-year
term, renewable automatically for successive one-year terms unless either party
gives notice of intent not to renew, and may be terminated at any time, for any
reason, upon satisfaction of the notification requirements. Also the contracts
do not prohibit the contracting providers from entering into discounted
arrangements with others.
POSSIBILITY OF CHANGES IN INDUSTRY PRACTICES AND GOVERNMENT REGULATION ADVERSE
TO UP&UP
UP&UP's business is dependent in significant part on its ability to enter into
contracts with payors and providers on terms attractive to all parties and the
absence of substantial changes in the health care industry that would decrease
the need for the services offered by it. UP&UP's ability to continue conducting
business in its current manner could be seriously jeopardized if, among other
things, a significant number of payors, such as insurance companies, were to
seek price concessions directly from providers. In addition, UP&UP's
opportunities to maintain or expand its existing operations could be limited by
substantial changes in the health care industry, such as further adoption of
capitation payment systems, which have become more prevalent in recent years, or
the enactment of legislation or the adoption of regulations unfavorable to UP&UP
and/or its relationships with payors or providers. Any of these developments
could have a material adverse effect on UP&UP and could cause it to alter
substantially its business objectives and methods of operation.
During the past several years, the United States health care industry has been
subject to changing and increasing government regulation. A number of proposals
for health care reform have been made at the federal and state levels, including
proposals to provide greater government control of health care spending, to
reduce fraud and abuse, to broaden access to health care services and to change
the operating environment for health care providers and payors. UP&UP cannot
predict what impact, if any, these activities, which include efforts to effect
reform through legislation and changes in the administration or interpretation
of government health care programs, laws, regulations or policies, might have on
it. Any of these activities could have a material adverse effect on UP&UP.
RISKS RELATED TO GROWTH
UP&UP's strategy is to continue to grow aggressively, both internally and
through acquisitions. Since its initial Public Offering in July 1996, UP&UP has
made three acquisitions, most recently the ProAmerica acquisition in December
1998. This strategy is likely to place significant demands on UP&UP's financial,
operational and management resources, and to expose it to a variety of risks,
including the risk that UP&UP will be unable to attract and retain the personnel
or obtain the financial and other resources necessary to pursue and manage its
growth. UP&UP's growth makes for greater demands on the time and attention of
its key personnel. Expenses arising from UP&UP's efforts to complete
acquisitions, develop new products or increase its existing market penetration
could have an material adverse effect on it. Furthermore, UP&UP may not be able
to identify, acquire or integrate acquisition candidates successfully or manage
profitably any additional products and services resulting from acquisitions.
Acquired businesses, products and services may not contribute to UP&UP's overall
strategy or produce returns that justify the related investment or
implementation by UP&UP. In addition, UP&UP may acquire companies or seek to
develop products or services in areas in which it does not currently operate or
have meaningful experience. For example, UP&UP has recently entered into an
agreement to acquire a federal savings bank. These acquisitions or developments
may require UP&UP's management to develop expertise in new areas and to attract
a new customer base and could have a material adverse effect on UP&UP. UP&UP may
not be able to implement its growth strategy successfully or, if successful in
consummating acquisitions, be able to manage its expanded operations effectively
and profitably.
20
<PAGE>
RISKS OF INTEGRATING ACQUIRED OPERATIONS
UP&UP must successfully combine and integrate the operations of acquired
entities in order to realize the anticipated benefits of acquisitions.
Integrating management services, administrative organizations, facilities,
management information systems and other operational aspects of acquired
businesses, products or services can be time consuming and costly and may
distract management from day-to-day operations. Challenges in coordinating
geographically separated organizations, integrating personnel with disparate
business backgrounds and combining different corporate cultures could magnify
integration problems. UP&UP cannot guarantee that its integration processes will
be successful or that the anticipated benefits of any past or future
acquisitions will be realized. Furthermore, UP&UP may experience substantial
unanticipated costs or liabilities or other material adverse effects associated
with past or future acquisitions and integration activities conducted by it.
SUBSTANTIAL COMPETITION
The market for UP&UP's services is highly competitive. UP&UP competes (or may
in the future have to compete) for clients with national, regional and local
provider networks, managed care organizations and health care information
companies. Several of UP&UP's competitors have significantly greater financial,
technical and marketing resources than UP&UP, which could put UP&UP at a
significant competitive disadvantage. UP&UP may not be able to compete
effectively with any of these parties in attracting and retaining clients.
EXPOSURE TO PROFESSIONAL LIABILITY
UP&UP, through its subsidiary, National Health Services, applies medical
treatment guidelines in its utilization review and case management services. As
a result, National Health Services could become subject to claims related to
adverse medical consequences as a result of, or for the costs of, services
denied, and claims, such as malpractice, arising from the errors or omissions of
health care professionals. A successful claim against UP&UP or a subsidiary
could have a material adverse effect on it. Furthermore, UP&UP may incur
substantial costs in defending against claims, regardless of their merit or
eventual outcome. Procedures implemented by UP&UP may not limit its liability or
be effective, and litigation to which UP&UP is or may become subject could have
a material adverse effect on it. UP&UP maintains insurance coverage that it
believes is reasonable in light of its experience to date. However, this
insurance may be insufficient to protect UP&UP from liability and may not
continue to be available to it at reasonable cost or at all.
SIGNIFICANT UNCERTAINTY REGARDING POSSIBLE FUTURE SALES OF SIGNIFICANT BLOCKS OF
UP&UP COMMON STOCK; POSSIBLE EFFECT ON THE TRADING MARKET FOR UP&UP COMMON STOCK
AND THE CONTROL OF UP&UP
Thomas L. Blair, Chairman of the Board and Chief Executive Officer of UP&UP
beneficially owns an aggregate of 7,183,150 shares, or approximately 40.9% of
UP&UP's common stock. This beneficial ownership includes 4,500,000 shares, or
approximately 25.6% of outstanding shares, which Mr. Blair has committed to
purchase on or prior to February 25, 2003. These 4,500,000 shares currently are
held by Independent Divestment Trust, which acquired them from Principal Mutual
Holding Company. In addition, Capital Z Financial Services Fund II, L.P.
recently purchased 1,750,000 shares from officers and employees of UP&UP and an
option to purchase from Mr. Blair an additional 2,250,000 shares of common stock
on or prior to February 25, 2003.
Effect on Trading Market For UP&UP Common Stock. If the 4,500,000 shares of
UP&UP common stock are not purchased by February 25, 2003 by Mr. Blair, as he is
obligated to do, those shares would have to be sold by the trust in which they
have been placed. Further, Mr. Blair likely would seek to sell shares to pay the
purchase price of at least some of the shares he purchases from the trust. Also,
Capital Z Financial Services Fund II could seek to sell shares it has purchased,
and/or shares it purchases from Mr. Blair upon the exercise of the option.
Registration rights held by Capital Z Financial Services Fund II would
facilitate public resales of its shares of UP&UP common stock. Thus, it is
likely that a significant number of shares of UP&UP common stock would be resold
during the next four years. The possibility of a sale of those shares could have
an adverse effect on the trading market for UP&UP's common stock. A private sale
of a significant number of shares could effect a change in control of UP&UP.
Effect on Control of UP&UP. The controlling influence Mr. Blair has with
respect to UP&UP is enhanced by his agreement to purchase the 4,500,000 shares
of common stock. However, Mr. Blair has no right to vote those 4,500,000
21
<PAGE>
shares until he actually purchases them from the trust. The trust is required to
vote the UP&UP shares it holds in the same proportion as all other UP&UP
stockholders vote their shares. In effect, the voting power held by all other
stockholders is increased while the trust holds these shares. Mr. Blair's power
to vote 2,683,150 shares, giving effect to the trust voting arrangement, would
mean that he has approximately 20.6% of the voting power.
In addition, UP&UP has agreed to nominate two designees of Capital Z Financial
Services Fund II for election as directors. Thus, Capital Z Financial Services
Fund II could gain a significant influence in the business of UP&UP.
REGULATION OF UP&UP AS A SAVINGS AND LOAN HOLDING COMPANY
UP&UP has entered into an agreement to acquire for $2.5 million a savings and
loan holding company and its wholly owned, federal savings bank subsidiary,
subject to the approval of shareholders of the holding company and federal
banking regulators. The bank is subject to extensive regulation, supervision and
examination by the Office of Thrift Supervision and the Federal Deposit
Insurance Corporation. If this acquisition is completed, UP&UP would become a
savings and loan holding company, subject to supervision and examination by the
Office of Thrift Supervision of the U.S. Department of Treasury. UP&UP would be
a unitary savings and loan holding company, if the current control of UP&UP by
Principal Mutual Holding Company is divested, as proposed. As a unitary savings
and loan holding company, UP&UP generally will not be restricted under existing
laws as to the type of business activities in which it may engage, provided the
bank continues to meet the standards as a qualified thrift lender. Nevertheless,
the Office of Thrift Supervision will have enforcement authority over UP&UP and
its non-savings association subsidiaries. Among other things, this authority
permits the Office of Thrift Supervision to restrict or prohibit activities that
are determined to be a serious risk to the subsidiary savings bank.
DEPENDENCE ON KEY PERSONNEL
UP&UP depends to a significant extent on its Chairman and Chief Executive
Officer, Thomas L. Blair, its President and Chief Operating Officer, Edward S.
Civera, its Vice President of Operations, Spiro A. Karadimas and its Vice
President and Chief Financial Officer, S. Joseph Bruno. UP&UP's growth and
future success will depend in large part on its ability to retain and attract
highly qualified personnel. UP&UP has entered into a five-year employment
agreement with Mr. Civera extending to January, 2004, and has entered into two-
year employment agreements with Messrs. Karadimas, Blair and Bruno, extending to
January, 2001. If UP&UP were to lose any of its key personnel, particularly any
of its executive officers, or be unable to retain or hire qualified personnel,
then it could be potentially and adversely affected.
POTENTIAL IMPEDIMENTS TO TAKEOVER
The concentration of ownership of its common stock could also impede any
effort by a third party to effect a change of control of UP&UP. In addition,
UP&UP's certificate of incorporation and bylaws contain a number of provisions
that could inhibit a change of control by means of a tender offer, merger, proxy
contest or otherwise, including advance notice and supermajority provisions,
provisions that establish a classified board of directors and provisions that
enable UP&UP to issue "blank check" preferred stock. These provision could
reduce or eliminate any takeover premium in the market price for UP&UP 's common
stock or otherwise limit the price certain investors might be willing to pay for
UP&UP's common stock.
Also, if UP&UP acquires the federal savings bank as it proposes, UP&UP would
be subject to regulation by the Office of Thrift Supervision as a savings and
loan holding company. The regulatory approval or notice requirements applicable
to persons seeking to acquire control of a savings and loan holding company
could inhibit or delay possible acquisition of UP&UP, even acquisitions desired
by UP&UP's stockholders. For regulatory purposes, presumptions of control can
arise once a person's beneficial ownership, together with that of persons acting
in concert, of outstanding voting stock exceeds 10%.
22
<PAGE>
UP&UP'S ANNUAL AND QUARTERLY OPERATING RESULTS ARE SUBJECT TO FLUCTUATION
UP&UP's annual and quarterly operating results could fluctuate in the future
as a result of a number of factors, including:
. the expiration or termination of contracts with significant payor
clients or contracting providers;
. the timing of new product and service introductions;
. changes in pricing;
. increases in operating expenses;
. increases in selling, general and administrative expenses;
. increased competition;
. the impact of acquisitions;
. regulatory changes; and
. conditions in the healthcare industry and the economy generally.
Historical annual or quarter-to-quarter comparisons of UP&UP's results of
operations may not be an indication of future performance. It is possible that
in some future periods UP&UP's results of operations may be below the
expectations of public market analysts and investors. If this were to occur, the
price of UP&UP's common stock may decline.
LACK OF DIVIDENDS
UP&UP does not plan to pay any dividends on its common stock for the
foreseeable future.
THE MARKET PRICE OF UP&UP'S COMMON STOCK COULD BE ADVERSELY AFFECTED BY THE
RISKS TO UP&UP AND OTHER FACTORS
The potential impact of all of the above risk factors is difficult for UP&UP
to forecast. Nevertheless, these or other factors, such as fluctuations in
UP&UP's earnings, changes in estimates of those earnings by security analysts
and sales of substantial amounts of UP&UP's common stock in the public market,
may materially adversely affect UP&UP's operating results and/or the trading
price of the common stock. Recently, the stock market has experienced extreme
price and volume fluctuations that have particularly affected the market prices
of securities of many companies, for reasons frequently unrelated to the
performance of the specific companies. These fluctuations, as well as general
economic, political and market conditions, may materially adversely affect the
market price of UP&UP's common stock. UP&UP does not guarantee that the trading
price for the common stock will remain at or above the public offering price in
this offering.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Company's Audited Consolidated Financial Statements are contained in a
separate section of this Annual Report on Form 10-K on pages F-1 through F-18,
attached hereto.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information required under this item is contained in the section entitled
"Executive Officers and Directors" in the Company's 1999 Proxy Statement and is
incorporated herein by reference.
23
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION
Information required under this item is contained in the sections entitled
"Directors Compensation" and "Executive Compensation" in the Company's 1999
Proxy Statement and is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information required under this item is contained in the section entitled
"Stock Ownership" in the Company's 1999 Proxy Statement and is incorporated
herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information required under this item is contained in the section entitled
"Certain Transactions" on the Company's 1999 Proxy Statement and is incorporated
herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) Documents filed as part of this report
(1) Financial Statements
Report of Independent Accountants
Consolidated Balance Sheets as of December 31, 1998 and 1997
Consolidated Statements of Operations for the Years Ended December
31, 1998, 1997 and 1996
Consolidated Statements of Stockholders' Equity for the Years Ended
December 31, 1998, 1997 and 1996
Consolidated Statements of Cash Flows for the Years Ended December
31, 1998, 1997 and 1996
Notes to Consolidated Financial Statements
(2) All schedules have been omitted because they are not applicable, not
required or the information is included elsewhere in the Company's
consolidated financial statements or notes thereto.
(b) Reports on Form 8-K
The Company filed a Current Report on Form 8-K for December 31, 1998 on
January 4, 1999 reporting Item 2 in connection with the Company's acquisition of
ProAmerica Managed Care, Inc.
(c) Exhibits
The following exhibits are filed as part of this report unless noted
otherwise:
<TABLE>
<CAPTION>
Exhibit No. Description
- ----------- -----------
<S> <C>
2.1 Agreement with America's Health Plan, Inc. (1)
2.2 Plan and Agreement of Merger of IM&I, Inc. into PB Newco (1)
2.3 Plan and Agreement of Merger of PB Newco, Inc. into United Payors
& United Providers, Inc. (1)
3.1 Certificate of Incorporation of United Payors & United Providers,
Inc. (1)
3.2 Bylaws of United Payors & United Providers, Inc. (1)
4.1 Specimen Stock Certificate of United Payors & United Providers,
Inc. (1)
4.2 Shareholder Agreement (1)
10.1 Form of Indemnification Agreement (1)
</TABLE>
24
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
10.2 Stock Purchase Agreement between Preferred Health Choice and
United Payors & United Providers, Inc., dated October 22,
1996 (2)
10.3 Warrants to Purchase 150,000 Shares of Common Stock of United
Payors & United Providers, Inc. Issued to Preferred Health
Choice, Inc., dated October 23, 1996 (3)
10.4 Warrants to Purchase 168,000 Shares of Common Stock of United
Payors & United Providers, Inc. Issued to Preferred Health
Choice, Inc., dated October 27, 1996 (3)
10.5 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 (4)
10.6 Stock Purchase Agreement by and between United Payors & United
Providers, Inc. and The MetraHealth Employee Benefits Company,
Inc., dated December 17, 1998(5)
10.7 Employment Agreement by and among United Payors & United
Providers, Inc., Thomas L. Blair, Chairman of the Board and Chief
Executive Officer of United Payors & United Providers, Inc., and
Edward S. Civera (6)
10.8 First Amendment to the Employment Agreement by and between United
Payors & United Providers, Inc., Thomas L. Blair, Chairman of the
Board and Chief Executive Officer of United Payors & United
Providers, Inc., and Edward S. Civera (filed herewith)
10.9 Employment Agreement by and between United Payors & United
Providers, Inc. and Thomas L. Blair (filed herewith)
10.10 Employment Agreement by and between United Payors & United
Providers, Inc. and S. Joseph Bruno (filed herewith)
10.11 Employment Agreement by and between United Payors & United
Providers, Inc. and Spiro A. Karadimas (filed herewith)
10.12 Registration Rights Agreement by and among Capital Z Financial
Services Fund II, L.P. and United Payors & United Providers,
Inc., dated February 25, 1999 (filed herewith)
10.13 Registration Rights Agreement by and among Thomas L. Blair and
United Payors & United Providers, Inc., dated February 25, 1999
(filed herewith)
10.14 Stockholders Agreement by and between Capital Z Financial
Services Fund II, L.P., Thomas L. Blair and United Payors &
United Providers, Inc., dated February 25, 1999 (filed herewith)
10.15 Royalty Agreement between United Payors & United Providers, Inc.
and HealthExtras LLC (filed herewith)
21.1 Subsidiaries of United Payors & United Providers, Inc. (filed
herewith)
23.1 Consent of Independent Accountants (filed herewith)
27.1 Financial Data Schedule (filed herewith)
</TABLE>
- ---------------------
(1) Incorporated herein by reference into this document from the Exhibits to the
Form S-1 Registration Statement, as amended, Registration No. 333-3814,
initially filed on April 19, 1996.
(2) Incorporated herein by reference into this document from the Exhibits to the
Form 10-Q for the quarter ended September 30, 1996.
(3) Incorporated herein by reference into this document from the Exhibits A-1
and A-2 to the Stock Purchase Agreement filed as Exhibit 10.4 to the Form
10-Q for the quarter ended September 30, 1996.
(4) Incorporated herein by reference into this document from the Exhibits to the
Form 8-K dated October 13, 1997.
(5) Incorporated herein by reference into this document from the Exhibits to the
Form 8-K dated December 31, 1998.
(6) Incorporated here in by reference into this document from Exhibit 10.8 to
the Form 10-K dated December 31, 1997.
25
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities 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: March 15, 1999 By: /s/ Thomas L. Blair
--------------------------------------------
Thomas L. Blair
Chairman of the Board, President and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Date: March 15, 1999 By: /s/ Thomas L. Blair
--------------------------------------------
Thomas L. Blair
Chairman of the Board and
Chief Executive Officer
Date: March 15, 1999 By: /s/ Edward S. Civera
--------------------------------------------
Edward S. Civera
President and Chief Operating Officer
Date: March 15, 1999 By: /s/ S. Joseph Bruno
--------------------------------------------
S. Joseph Bruno
Chief Financial Officer
Date: March 15, 1999 By: /s/ Eduardo V. Feito
--------------------------------------------
Eduardo V. Feito
Chief Accounting Officer
Date: March 15, 1999 By: /s/ Bette B. Anderson
--------------------------------------------
Bette B. Anderson
Director
Date: March 15, 1999 By: /s/ William E. Brock
--------------------------------------------
William E. Brock
Director
Date: March 15, 1999 By: /s/ David J. Drury
--------------------------------------------
David J. Drury
Director
Date: March 15, 1999 By: /s/ Michael H. Gersie
--------------------------------------------
Michael H. Gersie
Director
Date: March 15, 1999 By: /s/ Thomas J. Graf
--------------------------------------------
Thomas J. Graf
Director
26
<PAGE>
Date: March 15, 1999 By: /s/ Frederick H. Graefe
--------------------------------------------
Frederick H. Graefe
Director
Date: March 15, 1999 By: /s/ Kenneth J. Linde
--------------------------------------------
Kenneth J. Linde
Director
<PAGE>
UNITED PAYORS & UNITED PROVIDERS, INC.
CONSOLIDATED FINANCIAL STATEMENTS
INDEX
<TABLE>
<S> <C>
Report of Independent Accountants......................................... F-1
Consolidated Balance Sheets as of December 31, 1998 and 1997.............. F-2
Consolidated Statements of Operations for the Years Ended December 31,
1998, 1997 and 1996...................................................... F-3
Consolidated Statements of Stockholders' Equity for the Years Ended
December 31, 1998, 1997 and 1996......................................... F-4
Consolidated Statements of Cash Flows for the Years Ended December 31,
1998, 1997 and 1996...................................................... F-5
Notes to the Consolidated Financial Statements............................ F-6
</TABLE>
47
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
United Payors & United Provides, Inc.
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, stockholders' equity and cash flows
present fairly, in all material respects, the financial position of United
Payors & United Providers, Inc. and subsidiaries (the "Company") as of
December 31, 1998 and 1997, and the results of their operations and their cash
flows for each of the three years in the period ended December 31, 1998, in
conformity with generally accepted accounting principles. 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 of these statements in accordance with
generally accepted auditing standards which 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, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for the
opinion expressed above.
PricewaterhouseCoopers LLP
Washington, D.C.
February 12, 1999, except for Note 12,
as to which the date is February 25, 1999
F-1
<PAGE>
UNITED PAYORS & UNITED PROVIDERS, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, December 31,
1998 1997
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents......................... $ 27,510,647 $14,456,069
Short-term investments............................ 3,855,195 8,366,547
Accounts receivable............................... 12,729,631 11,233,277
Deferred income taxes............................. 1,332,491 811,059
Other current assets.............................. 1,109,584 441,343
------------ -----------
Total current assets............................ 46,537,548 35,308,295
Fixed assets, net................................... 4,301,944 3,858,532
Advances to contracting providers, net.............. 24,414,030 17,265,730
Intangible and other assets, net.................... 40,691,477 26,082,296
------------ -----------
Total assets.................................... $115,944,999 $82,514,853
============ ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses............. $ 11,487,823 $ 5,791,505
Income and other taxes payable.................... 2,861,841 1,871,934
Notes payable and capital leases, current
portion.......................................... 5,040,951 3,131,772
------------ -----------
Total current liabilities....................... 19,390,615 10,795,211
Other accrued expenses.............................. 1,073,333 1,313,333
Notes payable and capital leases, less current
portion............................................ 17,022,738 12,109,606
------------ -----------
Total liabilities............................... 37,486,686 24,218,150
Commitments and contingencies
Stockholders' equity:
Preferred stock, $0.01 par value, 5,000,000 shares
authorized, none issued and outstanding at
December 31, 1998 and 1997....................... -- --
Common stock, $0.01 par value, 35,000,000 shares
authorized, 17,360,454 shares issued at December
31, 1998 and 1997................................ 173,605 173,605
Additional paid-in capital........................ 37,123,886 37,123,886
Treasury stock, 273,151 and 307,725 shares at
December 31, 1998 and 1997, respectively, at
cost............................................. (2,634,490) (3,029,450)
Retained earnings................................. 44,491,012 24,911,862
Deferred compensation............................. (695,700) (883,200)
------------ -----------
Total stockholders' equity...................... 78,458,313 58,296,703
------------ -----------
Total liabilities and stockholders' equity...... $115,944,999 $82,514,853
============ ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-2
<PAGE>
UNITED PAYORS & UNITED PROVIDERS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended December 31, 1998, 1997 and 1996,
<TABLE>
<CAPTION>
1998 1997 1996
------------ ------------ -----------
<S> <C> <C> <C>
Revenue
Provider network revenue............ $ 57,951,926 $ 41,195,238 $31,258,853
Utilization management services..... 20,497,393 19,832,853 4,190,476
------------ ------------ -----------
Total revenue..................... 78,449,319 61,028,091 35,449,329
------------ ------------ -----------
Operating expenses
Direct contract expenses............ 33,524,429 29,173,204 15,294,892
General and administrative.......... 8,364,594 6,221,269 2,783,212
Depreciation and amortization....... 4,028,416 1,695,142 538,593
------------ ------------ -----------
Total operating expenses.......... 45,917,439 37,089,615 18,616,697
------------ ------------ -----------
Other income
Realized gain on sale of marketable
securities......................... 419,060 355,325 149,383
Interest income, net of interest
expense............................ 155,966 1,045,350 693,003
Other income, net................... 154,244 25,553 128,781
------------ ------------ -----------
Total other income, net........... 729,270 1,426,228 971,167
------------ ------------ -----------
Income before income taxes............ 33,261,150 25,364,704 17,803,799
Income tax provision.................. (13,682,000) (10,388,000) (7,158,000)
------------ ------------ -----------
Net income............................ $ 19,579,150 $ 14,976,704 $10,645,799
============ ============ ===========
Net income per share--basic........... $ 1.15 $ 0.87 $ 0.70
============ ============ ===========
Weighted average shares outstanding--
basic................................ 17,064,954 17,239,065 15,188,938
============ ============ ===========
Net income per share--diluted......... $ 1.09 $ 0.86 $ 0.70
============ ============ ===========
Weighted average shares--diluted...... 17,981,445 17,486,467 15,192,585
============ ============ ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE>
UNITED PAYORS & UNITED PROVIDERS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For the Years Ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
Convertible
Preferred Stock Common Stock Additional Retained
------------------- -------------------- Paid-in Treasury Earnings Deferred
Shares Amount Shares Amount Capital Stock (Deficit) Compensation Total
------- -------- ---------- -------- ----------- ----------- ----------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December
31, 1995........... 1 $ -- 6,600,000 $ 66,000 $ 5,941,099 $ -- $ (710,641) $ -- $ 5,296,458
Conversion of
preferred stock.... (1) -- 6,600,000 66,000 (66,000) -- -- -- --
Shares issued in
public offering.... -- -- 4,140,000 41,400 26,834,057 -- -- -- 26,875,457
Shares issued in
connection with
investment......... -- -- 20,454 205 149,795 -- -- -- 150,000
Warrants issued in
connection with
acquisition........ -- -- -- -- 1,088,000 -- -- -- 1,088,000
Stock options issued
in connection with
non-compete and
restructuring of
marketing
agreement.......... -- -- -- -- 1,150,000 -- -- -- 1,150,000
Acquisition of
treasury stock..... -- -- (33,750) -- -- (30,000) -- -- (30,000)
Net income.......... -- -- -- -- -- -- 10,645,799 -- 10,645,799
------- -------- ---------- -------- ----------- ----------- ----------- --------- -----------
Balance at December
31, 1996........... -- -- 17,326,704 173,605 35,096,951 (30,000) 9,935,158 -- 45,175,714
Acquisition of
treasury stock..... -- -- (339,375) -- -- (3,299,450) -- -- (3,299,450)
Treasury shares
reissued in
connection with
acquisition........ -- -- 37,500 300,000 -- -- 300,000
Stock options
issued............. -- -- -- -- 1,643,350 -- -- -- 1,643,350
Treasury shares
reissued........... -- -- 27,900 -- 233,585 -- -- -- 233,585
Options issued in
connection with
network management
agreement.......... -- -- -- -- 150,000 -- -- -- 150,000
Deferred
compensation, net.. -- -- -- -- -- -- -- (883,200) (883,200)
Net income.......... -- -- -- -- -- -- 14,976,704 -- 14,976,704
------- -------- ---------- -------- ----------- ----------- ----------- --------- -----------
Balance at December
31, 1997........... -- -- 17,052,729 173,605 37,123,886 (3,029,450) 24,911,862 (883,200) 58,296,703
Acquisition of
treasury stock..... -- -- (16,500) -- -- (207,574) -- -- (207,574)
Treasury shares
reissued under the
Employee Stock
Purchase Plan...... -- -- 25,574 -- -- 370,524 -- -- 370,524
Treasury shares
reissued upon
exercise of stock
options............ -- -- 24,000 -- -- 205,760 -- -- 205,760
Other treasury
shares reissued.... 1,500 26,250 26,250
Compensation
expense, net....... -- -- -- -- -- -- -- 187,500 187,500
Net income.......... -- -- -- -- -- 19,579,150 -- 19,579,150
------- -------- ---------- -------- ----------- ----------- ----------- --------- -----------
Balance at December
31, 1998........... -- $ -- 17,087,303 $173,605 $37,123,886 $(2,634,490) $44,491,012 $(695,700) $78,458,313
======= ======== ========== ======== =========== =========== =========== ========= ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
UNITED PAYORS & UNITED PROVIDERS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Operating activities
Net income.......................... $ 19,579,150 $ 14,976,704 $ 10,645,799
Adjustment to reconcile net income
to net cash provided by operations
Realized gain on sale of marketable
securities........................ (419,060) (355,325) (149,383)
Depreciation and amortization...... 4,028,416 1,695,142 538,593
Loss on sale of assets............. -- 143,138 --
Amortization of deferred costs..... 384,000 384,000 --
Noncash compensation expense....... 187,500 705,435 --
Deferred income taxes.............. (521,432) (180,459) 274,700
Changes in reserves and
allowances........................ 1,287,646 148,000 115,000
Changes in assets and liabilities,
net of effects of acquisitions:
Accounts receivable............... (1,114,948) (6,912,399) (4,998,837)
Accounts payable and accrued
expenses......................... (759,095) 1,944,024 (1,324,495)
Current and other assets.......... (674,337) (10,622) (1,307)
Income and other taxes payable.... 520,987 787,981 730,691
------------ ------------ ------------
Net cash provided by operating
activities.......................... 22,498,827 13,325,619 5,830,761
------------ ------------ ------------
Investing activities
Purchases of fixed assets........... (1,386,465) (1,495,599) (865,827)
Purchases of marketable securities.. (5,245,401) (4,989,131) (5,958,812)
Proceeds from sale of marketable
securities......................... 5,650,291 5,307,940 6,108,195
Purchases of short-term
investments........................ (3,803,609) (8,330,031) (10,448,564)
Proceeds from sale of short-term
investments........................ 8,329,131 10,448,564 --
Advances to contracting providers... (7,564,300) (13,113,000) (4,290,730)
Payments for acquisitions, net of
cash acquired...................... (11,689,432) (13,447,439) (5,304,221)
Other, net.......................... (1,000,415) (379,392) (629,354)
------------ ------------ ------------
Net cash used in investing
activities.......................... (16,710,200) (25,998,088) (21,389,313)
------------ ------------ ------------
Financing activities
Proceeds from initial public
offering........................... -- -- 26,875,457
Proceeds from bank borrowings....... 10,000,000 15,000,000 --
Purchase of treasury stock.......... (207,574) (3,299,450) (30,000)
Reissuance of treasury stock to
employees and upon exercise of
stock options...................... 602,534 -- --
Repayment of loan from stockholder.. -- -- (3,700,000)
Repayment of notes payable.......... (3,129,009) (606,196) (253,856)
------------ ------------ ------------
Net cash provided by financing
activities.......................... 7,265,951 11,094,354 22,891,601
------------ ------------ ------------
Increase (decrease) in cash and cash
equivalents......................... 13,054,578 (1,578,115) 7,333,049
Cash and cash equivalents
Beginning of the period............. 14,456,069 16,034,184 8,701,135
------------ ------------ ------------
End of the period................... $ 27,510,647 $ 14,456,069 $ 16,034,184
============ ============ ============
Supplemental disclosures of cash flow
information
Interest paid during the year....... $ 1,137,323 $ 194,044 $ 85,497
Taxes paid during the year.......... $ 14,315,610 $ 10,183,484 $ 6,509,000
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE>
UNITED PAYORS & UNITED PROVIDERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Business, Organization and Basis of Presentation
United Payors & United Providers, Inc. ("UP&UP" or the "Company"), a
Delaware corporation, serves as an intermediary between health care payors
(e.g., insurance companies) and health care providers (e.g., hospitals) by
entering into contractual arrangements designed generally to produce cost
savings and other benefits for payors and increased liquidity and improved
efficiency in claims submissions for providers. UP&UP derives its revenue
primarily from a portion of the price concessions offered by the providers
under such contractual arrangements. Effective October 1, 1996, UP&UP acquired
National Health Services, Inc. ("NHS"), a national health care utilization
management services company. NHS offers medical utilization management
services to insurance underwriters, self-insured businesses, provider
organizations, and others. Such services include pre-certification of in-
patient and out-patient medical care, and case management.
Effective December 31, 1995, UP&UP entered into an agreement with America's
Health Plan, Inc., an indirect wholly-owned subsidiary of Principal Mutual
Holding Company (Principal Mutual Holding Company and its affiliated entities
collectively are referred to as "Principal Mutual"), whereby specified payor
clients of America's Health Plan, Inc. ("AHP") were transferred to UP&UP.
Principal Mutual beneficially owns approximately 38% of the Company's common
stock. Effective September 1, 1997, UP&UP acquired the remaining operations of
AHP. AHP 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. The name of America's Health Plan, Inc. was changed
to UP&UP, Inc. immediately prior to the acquisition. 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.
Effective December 1, 1998, the Company acquired ProAmerica Managed Care,
Inc. ("ProAmerica"), a national preferred provider organization that operates
a network of health care providers.
On April 13, 1998, the Company's Board of Directors approved a three-for-two
stock split in the form of a stock dividend payable on May 4, 1998, to
stockholders of record on April 24, 1998. The stock split resulted in the
issuance of a total of 5,786,818 additional shares of common stock. The par
value of the common stock was not changed. Accordingly, the issuance of the
additional shares resulted in the transfer of $57,869 from additional paid-in
capital to common stock to reflect the aggregate par value of the shares
issued. The effect of the stock split has been retroactively reflected in the
consolidated balance sheets and the consolidated statements of stockholders'
equity for all periods prior to the date of the stock split. All references in
the financial statements to number of shares, related prices and per share
amounts have also been restated to reflect the stock split.
2. Initial Public Offering
The Company filed a Registration Statement on Form S-1 with the Securities
and Exchange Commission which offered to the public 3,600,000 shares at $7.33
per share (4,140,000 shares, including the over-allotment) of the Company's
common stock. This registration statement was declared effective on June 28,
1996.
The closings of the sale of stock for an aggregate of 4,140,000 shares were
effected on July 8, 1996 and July 15, 1996 for which the Company received
proceeds (net of underwriters' commissions and expenses) of $23.4 million and
$3.5 million, respectively.
3. Summary of Significant Accounting Policies
Principles of consolidation
The accompanying consolidated financial statements have been prepared in
conformity with generally accepted accounting principles and include the
accounts and operations, after intercompany eliminations, of the Company and
its subsidiaries.
F-6
<PAGE>
UNITED PAYORS & UNITED PROVIDERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Revenue recognition
The Company recognizes provider network revenue, under the accrual method,
based on a contracted percentage of the amount of cost savings realized by
payor clients which access the Company's contracting provider network. Revenue
is recorded in the period in which claims are repriced.
For medical utilization management services revenue is recorded based on the
contractual arrangements. Contracts may reflect a capitated rate, fee for
service or hourly rate. Pre-certification revenue is generally based on
monthly capitation calculations and is earned during the month for which the
services are provided. Case management revenue is generally based on fee for
service or hourly rates over the term of the contractual agreements.
Use of estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the period.
Actual results could differ from those estimates.
Fair value information
The carrying amounts of financial instruments, principally notes payable,
approximate their fair values.
Cash equivalents
The Company considers all highly liquid instruments with original maturities
of three months or less to be cash equivalents. The Company maintains its cash
and cash equivalents in bank accounts which, at times, may exceed federally
insured amounts. The Company has not experienced any losses in such accounts
and believes it is not exposed to any significant credit risk on cash and cash
equivalents. At December 31, 1998 and 1997, the Company had approximately
$15,865,387 and $4,257,200, respectively, of cash and cash equivalents on
deposit with commercial banks in excess of insured amounts.
Short-term investments
From time to time, the Company invests in various marketable securities. The
sales of marketable securities resulted in realized gains of $808,919 and
realized losses of $389,859 in 1998, realized gains of $602,012 and realized
losses of $246,687 in 1997, and realized gains of $402,197 and realized losses
of $252,814 in 1996. Cost was determined using the specific identification
method. Short-term investments in 1998 and 1997 consist of $1,895,215 and
$5,489,368, respectively, of securities backed by the United States
Government; $1,632,849 and $997,524, respectively, of other debt securities;
and certificates of deposit of $327,131 and $1,879,655, respectively. These
investments are reflected at fair value which approximates the respective
amortized cost. There were no unrealized gains or losses on these investments
in 1998 or 1997.
Advances to contracting providers
The Company enters into contracts directly with providers of medical
services ("contracting providers"). The Company's contracts with contracting
providers prescribe specific fee concessions on medical services rendered by
the contracting providers to patients covered by medical plans of payor
clients. In partial consideration for the price concessions furnished by them,
contracting hospitals are offered the option by the Company of receiving an
advance (prepayment) of a portion of the estimated annual claims volume that
such
F-7
<PAGE>
UNITED PAYORS & UNITED PROVIDERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
contracting hospitals have with payor clients. As of December 31, 1998 and
1997 the amount of advances (prepayments) was $25,093,030 and $17,528,730,
respectively. Upon termination of a provider contract by either party, the
amount of advances (prepayments) through the date of termination becomes fully
due and payable to the Company. The Company considers deposits with
contracting providers recoverable. Allowances of $679,000 and $263,000 have
been established for these deposits as of December 31, 1998 and 1997,
respectively.
Fixed assets
Fixed assets are stated at cost. Depreciation is computed using the
straight-line method over the estimated useful lives of the various assets
which range from five to seven years. Leasehold improvements are amortized
using the straight-line method over the shorter of the estimated useful lives
of the assets or the lease term.
Intangible assets
Intangible assets represent the cost in excess of net assets of businesses
acquired (goodwill) and the value of options to purchase an aggregate of
273,000 shares of the Company's common stock issued in connection with the
Company obtaining a covenant not to compete upon the restructuring of a
marketing agreement. These intangibles are amortized on a straight-line basis
over 3 to 20 years. Accumulated amortization at December 31, 1998 and 1997
amounted to $4,359,783 and $1,278,167, respectively. Amortization expense for
the years ended December 31, 1998, 1997 and 1996 amounted to $2,702,464,
$773,726 and $120,411, respectively. The Company annually evaluates the
recoverability of intangible assets utilizing qualitative factors. At such
time as an impairment in value is identified, the impairment will be
quantitatively measured using a discounted cash flow methodology and charged
to expense.
Income taxes
Income taxes have been recorded using the liability method. The income tax
provision includes federal and state income taxes both currently payable and
changes in deferred taxes due to differences between financial reporting and
tax bases of assets and liabilities. Deferred tax assets and liabilities are
measured using the enacted tax rates and laws that will be in effect when the
differences are expected to reverse.
Net income per common share
Basic net income per share is based on the weighted average number of common
stock outstanding during the period. Diluted income per share is based on the
weighted average number of common stock and common stock equivalent shares
outstanding during the year.
Concentration of payor clients
A significant portion of the Company's revenue is derived from a small
number of payor clients. The inability to replace any such clients with
significant new payor clients would have a material adverse effect on the
Company's business. The Company's revenue was concentrated (as a percentage of
total revenue) in the following payor clients during 1998, 1997 and 1996:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Payor client A............................................ 16% 20% --
Payor client B............................................ 11% 13% --
Payor client C............................................ -- -- 22%
Payor client D............................................ -- -- 13%
Payor client E............................................ -- -- 12%
Payor client F............................................ 10% -- --
</TABLE>
F-8
<PAGE>
UNITED PAYORS & UNITED PROVIDERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
No other payor client accounted for 10% or more of the Company's revenue.
At December 31, 1998, payor clients A, B and F represented 16%, 6% and 7%,
respectively, of the Company's accounts receivable. At December 31, 1997,
payor clients A and B represented 16% and 13%, respectively, of the Company's
accounts receivable.
Comprehensive Income
The Company had no other comprehensive income items during the years ended
December 31, 1998, 1997 and 1996.
Reclassifications
Certain amounts in the 1997 and 1996 financial statements have been
reclassified to conform to the 1998 presentation.
4. Business Combinations
Effective October 1, 1996, the Company acquired NHS for a purchase price of
approximately $11.0 million, consisting of $5.9 million in cash, warrants to
purchase an aggregate of 477,000 shares of the Company's common stock valued
at $1.1 million and the assumption of approximately $4.0 million in
liabilities. NHS is a national health care management services company. The
acquisition has been accounted for as a purchase and, accordingly, the results
of operations of NHS have been included in the accompanying consolidated
statements of operations since the effective date of the acquisition. The
acquisition resulted in goodwill of $7.2 million which is being amortized over
15 years.
Effective September 1, 1997, the Company acquired AHP for a purchase price
of approximately $19.9 million, consisting of $15.1 million in cash and the
assumption of approximately $4.8 million in liabilities. The acquisition has
been accounted for as a purchase and, accordingly, the results of operations
of AHP have been included in the accompanying consolidated statements of
operations since the effective date of the acquisition. The acquisition
resulted in goodwill of approximately $15.5 million which is being amortized
over 20 years. Under the terms of the acquisition agreement, the purchase
price of AHP was subject to adjustment through the year 2000, if AHP revenues
exceeded pre-determined targets. In August, 1998, the Company and the seller
entered into an agreement to set the purchase price of AHP and eliminate the
contingent consideration provisions in the original acquisition agreement.
Under the terms of the August 1998 agreement, the Company agreed to pay the
seller $4.0 million in twelve equal monthly installments commencing November
1, 1998. The $4.0 million has been recorded as additional goodwill and is
being amortized over the remaining amortization period of the original
goodwill. The unpaid balance of the $4.0 million at December 31, 1998 is
included in accounts payable and accrued expenses in the accompanying
consolidated balance sheet.
Effective December 1, 1998, the Company acquired ProAmerica for a purchase
price of approximately $14.3 million, consisting of $11.7 million in cash and
the assumption of approximately $2.6 million in liabilities based on a
preliminary determination of the liabilities assumed. The acquisition has been
accounted for as a purchase and accordingly, the results of operations of
ProAmerica have been included in the accompanying consolidated statements of
operations since the effective date of the acquisition. A preliminary
allocation of the purchase price resulted in goodwill of $12.6 million which
is being amortized over 15 years.
F-9
<PAGE>
UNITED PAYORS & UNITED PROVIDERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following unaudited pro forma consolidated results of operations for the
years ended December 31, 1998 and 1997 are presented as though AHP and
ProAmerica had been acquired at the beginning of 1997, after giving effect to
purchase accounting adjustments relating to interest, the amortization of
goodwill and income taxes.
<TABLE>
<CAPTION>
1998 1997
----------- -----------
(In thousands,
except per share data)
<S> <C> <C>
Revenue.......................................... $ 92,054 $ 86,507
Net income....................................... $ 19,735 $ 16,643
Net income per share--basic...................... $ 1.16 $ 0.97
Weighted average shares--basic................... 17,065 17,239
Net income per share--diluted.................... $ 1.10 $ 0.95
Weighted average shares--diluted................. 17,981 17,486
</TABLE>
The pro forma results of operations are not necessarily indicative of the
results that would have occurred had the AHP and ProAmerica acquisitions been
consummated as of January 1, 1997, nor are they necessarily indicative of
future operating results.
5. Fixed Assets
Fixed assets consist of the following:
<TABLE>
<CAPTION>
December 31,
------------------------ Depreciable
1998 1997 Lives
----------- ----------- -----------
<S> <C> <C> <C>
Computer equipment................... $ 3,062,223 $ 2,170,494 5 years
Furniture, fixtures, and office
equipment........................... 2,796,787 2,165,105 5-7 years
Leasehold improvements............... 1,113,965 912,054 5 years
Vehicles............................. 62,772 21,426 5 years
----------- -----------
Total fixed assets................. 7,035,747 5,269,079
Accumulated depreciation and
amortization........................ (2,733,803) (1,410,547)
----------- -----------
Fixed assets, net.................. $ 4,301,944 $ 3,858,532
=========== ===========
</TABLE>
Depreciation expense for the years ended December 31, 1998, 1997 and 1996
approximated $1,326,000, $915,000, and $412,000, respectively.
6. Notes Payable
In connection with the acquisition of AHP, the Company entered into a loan
agreement with a bank for an aggregate amount of $15 million. The loan balance
outstanding at December 31, 1998 and 1997 was $12 million and $15 million,
respectively. The loan bears interest at the London Interbank Offered Rate
("LIBOR") plus 1 1/8% (approximately 6.8% at December 31, 1998). The principal
amount of the loan is to be repaid in equal quarterly installments over a
period of five years, commencing March 31, 1998. Interest is payable in
arrears on the last business day of each quarter, commencing December 31,
1997.
In December 1998, the Company utilized the proceeds from a $10 million line
of credit with a bank, bearing interest at LIBOR plus 1 1/8%, as part of the
consideration paid for the acquisition of ProAmerica. In February 1999, the
Company entered into a $10 million term loan with the same bank and utilized
the proceeds to replenish the amount drawn under the line of credit. The term
loan bears interest at the rate of LIBOR plus 1 1/8% (approximately 6.8% at
December 31, 1998). The principal amount of the loan is to be repaid in equal
quarterly installments over a period of five years, commencing March 31, 1999.
Interest is payable in arrears on the last business day of each quarter,
commencing March 31, 1999.
F-10
<PAGE>
UNITED PAYORS & UNITED PROVIDERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Both term loans contain restrictive covenants, the most restrictive of which
require the Company to maintain certain financial ratios above stated levels,
restrict the Company from incurring additional debt, other than with the bank,
in excess of $10 million and restrict the Company from paying dividends in
excess of 50% of consolidated net income, as defined in the loan agreement.
7. Income Taxes
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
1998 1997 1996
----------- ----------- ----------
<S> <C> <C> <C>
Current provision...................... $14,203,400 $10,568,500 $6,883,300
Deferred provision (benefit)........... (521,400) (180,500) 274,700
----------- ----------- ----------
Total provision...................... $13,682,000 $10,388,000 $7,158,000
=========== =========== ==========
</TABLE>
The provision for income taxes varies from the amount of income tax
determined by applying the applicable United States statutory tax rate to pre-
tax income as follows:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Statutory United States tax rate.............................. 35% 35% 34%
State taxes, net of Federal benefit........................... 6 6 6
--- --- ---
Effective tax rate.......................................... 41% 41% 40%
=== === ===
</TABLE>
A summary of the tax effect of the significant components of deferred income
tax assets follows:
<TABLE>
<CAPTION>
1998 1997
---------- --------
<S> <C> <C>
Deferred compensation.................................. $ 488,000 $411,000
Depreciation and amortization.......................... (426,000) 66,000
Reserves and allowances................................ 1,068,000 88,000
Accrual versus cash method of accounting............... -- 60,000
Other accrued expenses................................. 202,000 186,000
---------- --------
Net deferred tax assets.............................. $1,332,000 $811,000
========== ========
</TABLE>
8. Stockholders' Equity
Stock option and employee stock purchase plans
In October, 1996, the Company adopted the United Payors & United Providers,
Inc. Stock Option Plan ("SOP"). Stock options may be granted under the plan as
either incentive stock options or non-qualified stock options. The maximum
number of shares of the Company's common stock reserved for purchase pursuant
to the exercise of options granted under the SOP is 2,325,000 shares. All
Company employees, outside directors and consultants are eligible to receive
option awards. A Committee of the Board of Directors determines award amounts,
exercise prices, terms and vesting periods. The maximum term over which
incentive stock options and non-qualified stock options may be exercised may
not exceed 10 years and 12 years, respectively. The following table summarizes
information regarding transactions under the SOP:
F-11
<PAGE>
UNITED PAYORS & UNITED PROVIDERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
<TABLE>
<CAPTION>
1998 1997 1996
------------------- ------------------ ---------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
--------- -------- --------- -------- ------ --------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at January
1,..................... 1,800,000 $ 7.90 86,250 $7.43 -- $ --
Granted................. 168,000 16.50 1,713,750 7.92 86,250 7.43
Exercised............... (24,000) (8.58) -- -- -- --
Canceled................ -- -- -- -- -- --
--------- ------ --------- ----- ------ -----
Outstanding at December
31,.................... 1,944,000 $ 8.64 1,800,000 $7.90 86,250 $7.43
========= ====== ========= ===== ====== =====
Exercisable at December
31,.................... 1,185,250 $ 9.03 1,048,125 $9.19 36,250 $7.57
========= ====== ========= ===== ====== =====
</TABLE>
The following table summarizes information about stock options outstanding
at December 31, 1998:
<TABLE>
<CAPTION>
Weighted
Weighted Average
Range of Average Remaining
Exercise Price Shares Exercise Price Contractual Life
-------------- ------- -------------- ----------------
<S> <C> <C> <C>
$ 4.00 - 7.34........................ 855,000 $ 5.88 8.8 years
7.35 - 9.34........................ 534,750 8.19 8.2 years
9.35 - 12.00....................... 401,250 11.94 9.8 years
12.01 - 21.59....................... 153,000 16.99 5.0 years
</TABLE>
Information regarding stock options exercisable at December 31, 1998 is
summarized as follows:
<TABLE>
<CAPTION>
Weighted
Range of Average
Exercise Price Shares Exercise Price
-------------- ------- --------------
<S> <C> <C>
$ 4.00 - 7.34......................................... 330,000 $ 6.39
7.35 - 9.34......................................... 437,250 8.10
9.35 - 12.00........................................ 390,000 11.95
12.01 - 21.59........................................ 28,000 14.04
</TABLE>
Effective January 1, 1998, the Company implemented the Employee Stock
Purchase Plan ("ESPP") approved by the Company's stockholders on June 3, 1997.
The maximum number of shares reserved for purchase by employees under the ESPP
is 525,000 shares. The ESPP is administered over consecutive quarterly
offering periods commencing on the first trading day of January, April, July
and October of each year. Under the ESPP eligible employees may purchase
shares of common stock through payroll deductions up to an annual amount of
shares having a market value of $25,000 at the date of grant. Shares are
purchased on the last trading day of each offering period at 85% of the market
price of the common stock at the beginning of the offering period or the end
of the offering period, whichever is lower. Shares issuable to employees may
be purchased in the open market or issued from treasury shares held by the
Company. During 1998, 25,574 shares were issued under the ESPP at an average
purchase price of $14.49 per share.
During 1995, the Financial Accounting Standards Board issued Financial
Accounting Standard No. 123 ("FAS 123"), Accounting for Stock-Based
Compensation. This pronouncement requires that the Company calculate the fair
value of stock options and shares issued under employee stock purchase plans
at the date of grant using an option pricing model. The Company has elected
the "pro forma, disclosure only" option permitted under FAS 123, instead of
recording a charge to operations. The following table reflects pro forma net
income and net income per share had the Company elected to adopt the fair
value approach of FAS 123:
F-12
<PAGE>
UNITED PAYORS & UNITED PROVIDERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
<TABLE>
<CAPTION>
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Net income
As reported......................... $19,579,150 $14,976,704 $10,645,799
Pro forma........................... 18,658,341 14,466,736 10,597,438
Net income per share
As reported--basic.................. $ 1.15 $ 0.87 $ 0.70
As reported--diluted................ 1.09 0.86 0.70
Pro forma--basic.................... 1.09 0.84 0.70
Pro forma--diluted.................. 1.04 0.83 0.70
</TABLE>
The weighted-average exercise price and the weighted-average grant date fair
value of options granted whose exercise price equals, exceeds or is less than
the market price of the stock at the date of grant is as follows:
<TABLE>
<CAPTION>
1998 1997 1996
----------------- ----------------- -----------------
Weighted Weighted Weighted Weighted Weighted Weighted
Average Average Average Average Average Average
Exercise Fair Exercise Fair Exercise Fair
Exercise Price Price Value Price Value Price Value
-------------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Equals............... $13.43 $5.69 $7.66 $5.60 $ -- $ --
Exceeds.............. 14.67 7.09 11.07 5.15 -- --
Less................. 19.70 8.41 4.51 6.84 7.43 2.73
</TABLE>
The estimated fair value of each option was calculated using the Black-
Scholes option-pricing model. The following table summarizes the weighted-
average of the assumptions used for stock options granted during 1998, 1997
and 1996:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Risk-free interest rate................................. 5.4% 6.9% 6.3%
Expected years until exercise........................... 3.2 9.5 2.0
Expected volatility..................................... 55.7% 45.0% 34.0%
Dividend yield.......................................... -- -- --
</TABLE>
The weighted average fair value per share common stock purchased under the
ESPP during 1998 was $5.70 per share. The weighted average of the assumption
used to calculate the fair value of the shares was as follows:
<TABLE>
<S> <C>
Risk-free interest rate......................................... 5.0%
Expected life................................................... 3 months
Expected volatility............................................. 55.7%
Dividend yield.................................................. --
</TABLE>
Other stock options and warrants
In connection with certain business transactions during 1996, the Company
granted options and warrants as follows: (a) 273,000 shares of its common
stock (at $8.33 per share) pursuant to a non-compete agreement related to a
marketing commission restructuring; (b) 75,000 shares of its common stock (at
$11.33 per share) pursuant to a contractual arrangement with a client; and (c)
477,000 shares of its common stock (at $10.67 per share) in the form of stock
warrants pursuant to the acquisition of NHS. These options and warrants expire
from 3 to 10 years from the date of the respective agreements. The weighted
average exercise price of the options or warrants granted during 1996 was
$9.95. At December 31, 1998, all these options and warrants were exercisable.
F-13
<PAGE>
UNITED PAYORS & UNITED PROVIDERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The options related to the above transactions have been valued using the
modified American Black Scholes economic model. The resultant valuation is
reflected in the accompanying financial statements.
Treasury stock
On June 3, 1997, the Board of Directors authorized the Company to repurchase
such number of shares of its common stock that have an aggregate purchase
price not in excess of $5,000,000. Pursuant to this authorization, the Company
began repurchasing on the open market or in negotiated transactions at prices
deemed appropriate by the Company. Purchased shares are deposited in the
Company's treasury and are to be used principally for its employee stock
purchase and stock option plans and for general corporate purposes. As of
December 31, 1998, the Company had repurchased 389,625 shares having an
aggregate purchase price of $3,537,024 and reissued 116,474 of the shares for
an aggregate consideration of $902,534. The Company canceled the common stock
repurchase program as of February 1, 1998.
9. 401(k) Savings Plan
In October 1996, the Company authorized the establishment of an employee
401(k) Savings Plan. The 401(k) Savings Plan, which became effective in 1997,
is available to all of its employees subject to certain service requirements.
For 1998 and 1997, the Company matched the first $1,000 of the employee's
contribution and 50% thereafter. The Company's contribution vests after the
employee has participated in the 401(k) Savings Plan for five years. For 1998
and 1997, the amounts of the Company's contribution were $445,000 and
$404,000, respectively.
10. Related Party Transactions
The Company utilizes, for corporate business purposes, the services of an
aircraft owned by a corporation of Thomas L. Blair, Chairman and Chief
Executive Officer of the Company. The amount paid by the Company to this
corporation in 1998, 1997, and 1996 was approximately $445,000, $263,000, and
$153,000, respectively.
During 1996, Principal Mutual became a payor client of the Company.
Principal Mutual has also been a payor client of AHP since 1992. Approximately
$7,376,000, $2,342,000 and $80,000 of the Company's provider network revenue
for 1998, 1997 and 1996, respectively, was derived from its contract with
Principal Mutual. At December 31, 1998 and 1997, approximately, $904,000 and
$341,000, respectively, is due from Principal Mutual and is included in
accounts receivable.
During 1997, the Company purchased medical and life insurance from Principal
Mutual. The Company did not purchase health insurance from Principal Mutual
during 1998. Principal Mutual has also administered the Company's 401(k) plan
since 1997. Amounts paid to Principal Mutual in 1998 and 1997 for these
insurance products and services approximated $159,000 and $386,000,
respectively.
The Company performs certain administrative services for HealthExtras LLC
("HealthExtras"), an entity formed by Principal Mutual and Thomas L. Blair,
that markets such products as catastrophic and supplemental health benefits.
During 1998, HealthExtras reimbursed the Company approximately $839,000 for
staffing and other costs incurred by the Company, in the performance of
services, on behalf of HealthExtras. The Company has also entered into a
royalty arrangement with HealthExtras effective January 1, 1999. The royalty
arrangement provides the Company with a per member/per month ("PMPM") royalty
fee. The royalty fee initially starts at $1.00 PMPM in year one and increases
to $1.50 PMPM in year four. The royalty fee is based upon the tenure of each
member participating in the HealthExtras program. The royalty arrangement was
entered into in exchange for the Company granting HealthExtras' members access
to its national network of health care providers at no fee over a four-year
period. It is likely that HealthExtras' future product development will
integrate the use of the provider network. The Company has guaranteed a credit
facility of HealthExtras in the amount of $3.0 million.
F-14
<PAGE>
UNITED PAYORS & UNITED PROVIDERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
11. Lease Commitments
The Company leases office space under non-cancelable operating leases. The
agreements provide for annual escalations and for the payment by the Company
of a proportionate share of the increase in the costs of operating the
building. For financial reporting purposes, the Company recognizes rent
expense on a straight-line basis over the term of the lease. The Company has
also entered into various operating lease agreements for office equipment.
Rent expense under the Company's non-cancelable operating leases aggregated
$1,496,000, $1,137,000, and $470,000 in 1998, 1997, and 1996, respectively.
Future minimum lease payments under non-cancelable operating leases are as
follows:
<TABLE>
<CAPTION>
Operating
Leases
----------
<S> <C>
1999........................................................... $1,703,251
2000........................................................... 1,740,783
2001........................................................... 1,276,984
2002........................................................... 852,569
2003........................................................... 861,669
Thereafter..................................................... 1,414,408
----------
Total........................................................ $7,849,664
==========
</TABLE>
12. Commitments and Contingencies
Effective April 1, 1997, the Company entered into a five-year employment
agreement with its President and Chief Operating Officer. The agreement
provides for, among other things, options to purchase 1,125,000 shares of the
Company's common stock that will vest over an eight-year period (with
acceleration provision based on performance) and a retirement benefit
(approximately $1 million) in the form of vested trust arrangements that is
earned over a five-year period. A portion of the stock options have an
exercise price which is lower than the market price of the Company's common
stock at the date of grant ("in the money"). The compensation element of these
"in the money" options, net of the related tax effect, has been recorded as
deferred compensation and is being amortized as compensation expense over a
period of eight years. The unamortized portion of the deferred compensation at
December 31, 1998 and 1997 is included in stockholders' equity. In December
1997, the Company accelerated the vesting on 750,000 stock options which had
an exercise price at the date of grant equal to or above the market price.
The Company offers its contracting providers an advance (prepayment) option
based on the percentage of claims volume for the preceding year. The advance
(prepayment) option may be requested at the execution of a contract between
the Company and contracting provider, or at the anniversary date. The Company
estimates that the amount of prepayment options that may be requested in 1999
should not exceed $20 million.
During 1996, the Company restructured a 1994 marketing commission agreement
with Direct Resource Managers ("DRM"). The restructured agreement contains
provisions for: (a) payment to DRM of $50,000 per month for 26 months
commencing January, 1997 and (b) options to purchase 273,000 shares of the
Company's common stock at $8.33 per share (or alternatively receive cash
consideration in lieu of the options under certain conditions) in exchange for
consulting and marketing assistance and a covenant not to compete for three
years. Amounts paid to DRM in 1998, 1997, and 1996 by the Company approximated
$600,000, $600,000, and $1,425,000, respectively.
The Company on October 6, 1998 entered into an agreement to acquire for $2.5
million a federal savings bank (the "Bank") and its parent holding company,
having total assets of approximately $27 million, subject to
F-15
<PAGE>
UNITED PAYORS & UNITED PROVIDERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
the approval of shareholders of the holding company and federal banking
regulators. Upon acquisition of the Bank, the Company would become a savings
and loan holding company, subject to supervision and examination by the Office
of Thrift Supervision (the "OTS"). The Bank is subject to extensive
regulations, supervision and examination by the OTS and the Federal Deposit
Insurance Corporation (the "FDIC"). In connection with the Company's proposed
acquisition of the Bank and its parent holding company, Principal Mutual,
which, at December 31, 1998 owned 6,600,000 shares or approximately 38.6% of
the Company's outstanding common stock, proposes to divest control of the
Company within the meaning of the Savings and Loan Holding Company Act
("Holding Company Act"), and the four directors of the Company who may be
considered to be affiliated with or nominated by Principal Mutual, will resign
from the Board of Directors of the Company. To accomplish such divestiture of
control, on February 25, 1999, Principal Mutual, sold 4,500,000 shares (the
"Principal Shares") of common stock of the Company, or approximately 25.6% of
the outstanding shares, to a trust (the "Trust"). Principal Mutual received
from the Trust $13,225,000 in cash and trust certificates entitling it to the
proceeds from the sale of the Principal Shares. At the same time, the Trust
agreed to sell the Principal Shares to Thomas L. Blair, the Chairman and Chief
Executive Officer of the Company, on or before four years from the date of the
transfer of the Principal Shares to the Trust. UP&UP would be a unitary
savings and loan holding company, if the current control of UP&UP by Principal
Mutual is divested, as proposed. As a unitary savings and loan company, UP&UP
generally will not be restricted under existing laws as to the type of
business activities in which it may engage, provided the Bank continues to
meet the standards as a qualified thrift leader. There can be no assurance
that the Company's acquisition of the Bank will be approved by the OTS. The
Company believes such approval will be given only, among other things, if the
OTS is satisfied as to the arrangements by Principal Mutual to divest control
of the Company within the meaning of the Holding Company Act. Principal Mutual
already is a savings and loan holding company. In light of the regulatory
uncertainty regarding the proposed acquisition of the Bank, the Company is not
treating the acquisition as probable for financial reporting purposes.
On April 26, 1996, First Health Group (formerly known as HealthCARE
COMPARE), a Delaware corporation and competitor of the Company, filed a civil
complaint against the Company in the United States District Court for the
Northern District of Illinois. The complaint, in its present amended form, is
seeking permanent injunctive relief, as well as an unspecified amount of
damages, and alleges violations of the Lanham Act, 15 U.S.C. (S)(S)
1125(a)(1)(A) and (a)(1)(B), as well as common law claims of deceptive trade
practices, fraud, interference with contract, interference with prospective
economic relations and unfair competition. The complaint also seeks treble
damages pursuant to the Lanham Act. The complaint is based upon allegations
that representatives of the Company made false and misleading statements
during contract negotiations with providers in order to cause them to join the
UP&UP Network. In response to written requests and in depositions, Plaintiff
has alleged that it has suffered actual damages of approximately $41 million.
The Company denies the allegations in the Complaint and believes them to be
without merit. The Company has asserted a counterclaim against the Plaintiff
for violations of the Lanham Act, as well as common law claims for unfair
competition, commercial disparagement and service mark cancellation. Fact
discovery in the action is ongoing and the trial date has not yet been set by
the Court. Based upon the available information, management believes that it's
potential liability, if any, arising from such litigation will not be material
to the consolidated financial statements of the Company.
The Company is also a party to other legal actions arising in the ordinary
course of business. Management believes that damages arising from these
actions, if any, will not be material to the consolidated financial statements
of the Company.
F-16
<PAGE>
UNITED PAYORS & UNITED PROVIDERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
13. Earnings Per Share
A reconciliation of the numerators and denominators of the basic earnings
per share computations for the years ended December 31, 1998, 1997 and 1996 to
the numerators and denominators of the diluted earnings per share computations
for the respective periods follows:
<TABLE>
<CAPTION>
1998 1997 1996
---------------------------- ---------------------------- ----------------------------
Per Per Per
Net Income Shares Share Net Income Shares Share Net Income Shares Share
----------- ---------- ----- ----------- ---------- ----- ----------- ---------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Basic................... $19,579,150 17,064,954 $1.15 $14,976,704 17,239,065 $0.87 $10,645,799 15,188,398 $0.70
Effect of Dilutive
Options and Warrants... -- 916,491 (0.06) -- 247,402 (0.01) -- 4,187 --
----------- ---------- ----- ----------- ---------- ----- ----------- ---------- -----
Diluted................. $19,579,150 17,981,445 $1.09 $14,976,704 17,486,467 $0.86 $10,645,799 15,192,585 $0.70
=========== ========== ===== =========== ========== ===== =========== ========== =====
</TABLE>
Stock options to purchase 4,500 shares of common stock at an exercise price
of $21.59 per share were outstanding during 1998 but were not included in the
computation of diluted earnings per share because the exercise price of the
stock options was greater than the average market price of the common shares
and, therefore, were antidilutive. These stock options expire in April 2008.
Stock options to purchase 461,250 shares of common stock at a weighted
average exercise price of $11.85 per share and warrants to purchase 477,000
shares of common stock at $10.67 per share were outstanding during 1997 but
were not included in the computation of diluted earnings per share because the
exercise prices of the stock options and warrants were greater than the
average market price of the common shares and, therefore, were antidilutive.
These stock options and warrants have expiration dates ranging from October,
1999 to March, 2009.
14. Selected Quarterly Financial Data (Unaudited)
<TABLE>
<CAPTION>
Quarter Ended Quarter Ended Quarter Ended Quarter Ended
March 31 June 30 September 30 December 31
------------- ------------- ------------- -------------
(in thousands, except per share data)
<S> <C> <C> <C> <C>
1998:
Revenue................. $18,598 $19,097 $19,516 $21,238
Operating profit........ 7,558 8,168 8,954 9,044
Net income.............. 4,396 4,812 5,037 5,334
Net income per share--
basic.................. 0.26 0.28 0.29 0.31
Net income per share--
diluted................ 0.25 0.27 0.28 0.30
1997:
Revenue................. $13,598 $13,726 $15,256 $18,448
Operating profit........ 4,971 5,761 5,886 7,320
Net income.............. 3,150 3,661 3,979 4,187
Net income per share--
basic.................. 0.18 0.21 0.23 0.25
Net income per share--
diluted................ 0.18 0.21 0.23 0.24
</TABLE>
F-17
<PAGE>
UNITED PAYORS & UNITED PROVIDERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Concluded)
15. Supplemental Disclosure of Non-Cash Investing and Financing Activities
1998
The Company entered into an agreement with the seller of AHP to set the
purchase price of AHP for an amount of $4.0 million, payable in twelve monthly
installments commencing November 1, 1998.
The Company assumed liabilities of approximately $2.6 million in connection
with the acquisition of ProAmerica.
1997
The Company assumed liabilities of approximately $4.8 million in connection
with the acquisition of AHP.
The Company issued 37,500 shares from treasury stock valued at $300,000 in
connection with an acquisition.
The Company issued 27,900 shares valued at approximately $200,000 from
treasury stock to its employees.
1996
In connection with the acquisition of NHS, the Company assumed liabilities
in the amount of approximately $4.0 million and issued warrants to purchase
common stock of the Company valued at approximately $1.1 million.
A capital lease obligation was incurred when the Company entered into a
lease for new equipment.
Shares of common stock were issued in connection with the investment in
EDIComm.
Options to purchase shares of common stock were issued in connection with
obtaining a covenant not to compete upon the restructuring of a marketing
agreement.
Shares of common stock were issued in connection with the conversion of
preferred stock.
F-18
<PAGE>
EXHIBIT 10.8
First Amendment to the
Employment Agreement
By and Between
United Payors & United Providers, Inc., Thomas L. Blair,
Chairman of the Board and Chief Executive Officer
of United Payors and United Providers, Inc., and Edward S. Civera
-----------------------------------------------------------------
This First Amendment to the Employment Agreement, dated as of January 29, 1999,
by and between United Payors & United Providers, Inc., a Delaware Corporation
("UP&UP" or the "Company"), Thomas L. Blair, Chairman of the Board ("Chairman")
and Chief Executive Officer ("CEO") of UP&UP ("Blair") and Edward S. Civera
(the "Employee").
The Employee, the Chairman and Chief Executive Officer, and UP&UP desire to
amend certain provisions of the Agreement dated January 31, 1997. The
amendments to the Agreement are identified by paragraph number in this
Amendment and all other provisions of the Agreement dated January 31, 1997
are in effect.
For and in consideration of the premises hereof and the mutual covenants
contained herein, the parties hereto covenant and agree as follows:
1. The Employee will serve as the President and Chief Operating Officer (or
Chief Executive Officer if applicable) of UP&UP and will report to the
Chairman of UP&UP. The Employee will be responsible for all the
operations of UP&UP currently owned or subsequently acquired. These
operations consist of Finance, Marketing, Information Technology, Legal,
Operating Units and Networks.
2. The Employee currently serves as a member of the Board of Directors of
UP&UP and Blair will vote the shares of common stock he controls for the
election of the Employee to the Board of UP&UP for subsequent terms.
3. The Employee is currently the President and Chief Operating Officer of
UP&UP and if the Employee is promoted to Chief Executive Officer of UP&UP,
the provisions of this Agreement will reflect the Employee's position as a
Chief Executive Officer and Chief Operating Officer.
4. The term of the Employee's employment under the Agreement (the "Term")
shall be for a five-year period commencing on April 1, 1999 and extending
to March 31, 2004.
5. The provisions of Paragraph 6 in the original Agreement are still in
effect and such Incentive and Bonus Payment will operate in the same
manner as provided in Paragraph 5 with respect to Salary.
Page 2
<PAGE>
8. Paragraph 8 of the Agreement is amended to give the Employee the option of
having certain amounts of the Advance Benefit Payment contributed to a
Rabbi Trust. The Employee will direct the investment of the Advance
Benefit Payment included in the Rabbi Trust. Advance Benefit Payments
made to the Employee may be accelerated to December 31 of each year in
order to coincide with UP&UP's tax treatment for federal income tax
purposes. The Employee will earn interest at the rate of 6% per annum
for Advance Benefit Payments not made to the Employee. The amount of the
Advance Benefit Payments that the Employee will forfeit if he voluntarily
leaves the employment of UP&UP is based upon the following revised
vesting schedule:
4/1/97 80%
4/1/98 60%
4/1/99 40%
4/1/00 20%
4/1/01 0%
All other provisions of Paragraph 8 in the original Agreement are in
effect, including the monthly Pro-Rated concept with the aforementioned
revised vesting schedule.
10. The exercise prices referred to in Paragraph 10 of the original Agreement
are sub-paragraph (a) $4.00; sub-paragraph (b) $8.00; and sub-paragraph
(c) $12.00 reflecting a 3 for 2 stock split of the UP&UP common stock.
12. The Options to purchase 750,000 shares (reflecting a 3 for 2 stock split
of the UP&UP common stock), at the exercise prices described in sub-
paragraph (b ) and (c) of Paragraph 10 of the original Agreement (the
Option Plan Shares) are vested as of December 31, 1997. The options to
purchase 375,000 shares (reflecting a 3 for 2 stock split of the UP&UP
common stock), at the exercise price described in sub-paragraph (a) of
Paragraph 10 of the original Agreement (the Option Plan Shares) will
vest ratably over an 8 year period at 12.5% per year with each 12.5%
vesting on the first day of each quarterly period commencing April 1,
1997. All other provisions of Paragraph 12 in the original Agreement
are in effect.
21. Paragraph 21 in the original Agreement is eliminated.
NEW PARAGRAPH REFERENCE
28. In the event of the death of the Employee, the Employee's beneficiaries
will enjoy the benefits of the Agreement, including the ability to
exercise the Option Plan Shares.
Page 3
<PAGE>
NEW PARAGRAPH REFERENCE
29. For purposes of defining a "change in control of the Company", the
Employee recognizes that the consummation of a transaction involving the
transfer of 4,500,000 shares of UP&UP common stock into a Delaware
Divestment Trust resulting in the beneficial ownership of such shares by
Thomas L. Blair will not result in a "change in control of the Company".
Further, the Employee recognizes that the Capital Z transaction with
selling shareholders including the purchase of 1,750,000 shares of UP&UP
common stock and the option to purchase 2,250,000 shares of UP&UP common
stock does not constitute a "change in control of the Company". The
provisions of Paragraph 20 in the original Agreement are not modified in
any way by this waiver. Specifically, future transactions involving
Capital Z's common stock ownership position in UP&UP or sales of UP&UP
common stock from the Independent Divestment Trust will be subject to
the provisions of Paragraph 20 of the original Agreement.
IN WITNESS WHEREOF, and intending to be legally bound, the parties have caused
this Agreement to be duly executed as of the day and year first above written.
/s/ Edward S. Civera /s/ Thomas L. Blair
- -------------------------------------- ---------------------------------------
Edward S. Civera Thomas L. Blair
President and COO of UP&UP Chairman and CEO of UP&UP and as an
Individual Stockholder of UP&UP
<PAGE>
EXHIBIT 10.9
EMPLOYMENT AGREEMENT
THIS AGREEMENT is entered into on the 29th day of January, 1999 by and
between UNITED PAYORS & UNITED PROVIDERS, INC. ("UP&UP" or the "Company") and
THOMAS L. BLAIR ("Employee") residing at 11610 Highland Farm Road, Potomac, MD
20854. This Agreement shall become effective on January 1, 1999 ("Effective
Date").
WHEREAS, UP&UP desires to employ Employee to devote full-time to the
business of UP&UP, and Employee desires to be so employed.
NOW, THEREFORE, in consideration of the mutual covenants and promises of
the parties hereto, UP&UP and Employee agree as follows:
1. Employment. UP&UP agrees to employ Employee and Employee agrees to be
----------
so employed in the capacity of Chairman of the Board. The term of this
Agreement shall be a two year period subsequent to the Effective Date. The
Agreement shall be automatically renewed for an additional two-year period if
the company does not give the Employee a notice of non-renewal six months prior
to the expiration of the Agreement.
2. Time and Efforts. Employee shall diligently and conscientiously devote
----------------
his full and exclusive time and attention, and his best efforts to the discharge
of his duties as Chairman of the Board of UP&UP. Employee shall at all times
discharge his duties, which shall be those normally performed by a Chairman of
the Board, in the best interest of UP&UP. In the performance of his duties,
Employee shall make his principal office at 2275 Research Boulevard, Rockville,
MD 20850, or other office location within the Washington, DC Metropolitan Area
that may be next occupied by UP&UP, unless mutually agreed otherwise in writing
by UP&UP and Employee.
3. Compensation. During the term of this Agreement UP&UP shall pay to
------------
Employee as compensation ("Compensation") for his services a base salary in the
amount of three hundred fifty thousand dollars ($350,000) per year. This salary
is guaranteed by UP&UP through the term of this Agreement and is subject to
periodic increases as recommended by the Compensation Committee to the Board of
Directors of UP&UP. Additionally, Employee shall be paid an annual incentive
bonus ("Bonus") amount equal to one percent (1%) of UP&UP's annual after tax
earnings.
4. Expenses Reimbursement. UP&UP shall reimburse Employee for all
----------------------
reasonable and necessary expenses incurred by him in carrying out his duties
under this Agreement. Employee shall present to UP&UP from time to time an
itemized account of such expenses in forms as may be required by UP&UP and upon
acceptance and payment of expenses, expenses shall be considered reasonable and
necessary.
5. Automobile. In recognition of Employee's need for an automobile for
----------
business and other purposes, UP&UP will provide Employee with an automobile
allowance which will be payable quarterly.
1
<PAGE>
6. Employee Benefits. Employee shall be eligible to participate in the
-----------------
various employee benefits plans that may be offered by UP&UP, including but not
limited to a stock purchase plan, stock option plan, medical and hospitalization
plan, life insurance, long term disability, incentive savings plan, and pension
plan, made available in the ordinary course of business to similarly situated
executive employees of UP&UP and its subsidiaries. Additionally, UP&UP shall
seek to obtain a term life insurance policy, in an amount established and agreed
to by the Compensation Committee of the Board of Directors of UP&UP, on Employee
to be paid to beneficiary named by Employee.
7. Obligation of UP&UP on Termination of Employment by UP&UP. Except for
---------------------------------------------------------
cause, if during the term of this Agreement, UP&UP shall terminate the services
of Employee, or if during the term of this Agreement Employee is permanently
disabled or deceased, UP&UP shall nevertheless cause UP&UP to continue the
payments provided for herein for the term of the contract, but not less than
twelve (12) months, to Employee or his heirs or estate, as the case may be.
8. Obligations of UP&UP and Employee on Termination of Employee by UP&UP
---------------------------------------------------------------------
for Cause or Resignation by Employee. If during any time of employment, (1)
- ------------------------------------
Employee should be terminated for cause; or (2) Employee should resign, then
UP&UP shall have no obligation to pay Employee any form of compensation defined
in this Agreement. In the event Employee resigns, for a period of two years
subsequent to the date of such resignation, Employee shall not solicit or
contract with, either directly or through third parties, entities contracting
with UP&UP, including UP&UP payor clients and contracting providers. For a
period of two years from the date Employee resigns, Employee shall not assist,
in any manner, any individual or entity that may be, or seek to become, a
competitor of UP&UP.
9. Change in Control. In the event that there is a change in control of
-----------------
UP&UP, Employee shall receive the Compensation and Bonus payments for a period
of two (2) years. Change in control of UP&UP shall be deemed to have occurred
if:
(a) Any "person" (as such term is used in Sections 13(d) and 14(d) of
the Securities Exchange Act of 1934) is or becomes the beneficial owner,
directly or indirectly, of securities of the Company representing 20% or more of
the combined voting power of the Company's then outstanding securities; or
(b) During any period of twenty-four consecutive months, individuals
who at the beginning of such period constitute the Board cease for any reason to
constitute at least a majority thereof unless the election, or the nomination
for election by the Company's shareholders, of each new director was approved by
a vote of at least two-thirds of the directors then still in office who were
directors at the beginning of the period; or
(c) The Stockholders of the Company approve a definitive agreement
(i) for the merger or other business combination of the Company
with or into another corporation pursuant to which the Company will not survive
or will survive only as a subsidiary of another corporation;
2
<PAGE>
(ii) for the sale or other disposition of all or substantially
all of the assets of the Company;
(iii) for the merger of another corporation into the Company which
survives if, as a result of such merger less than fifty percent (50%) of the
outstanding voting securities of the Company shall be owned in the aggregate
immediately after such merger by the owners of the voting shares of the Company
outstanding immediately prior to such merger;
(iv) for the liquidation or dissolution of the Company; or
(v) any combination of the foregoing.
(d) For purposes of defining a "change in control of the Company,"
Employee recognizes that the consummation of a transaction involving the
transfer of 4,500,000 shares of UP&UP common stock into a Delaware Divestment
Trust resulting in the beneficial ownership of such shares by Employee will not
result in a "change in control of the Company." Further, Employee recognizes
that the Capital Z transaction with selling shareholders, including the purchase
of 1,750,000 shares of UP&UP common stock and the option to purchase 2,250,000
shares of UP&UP common stock, does not constitute a "change in control of the
Company." However, further transactions involving Capital Z's common stock
ownership position in the Company or sales of UP&UP common stock from the
Independent Divestment Trust will be subject to the provisions of this
paragraph 9.
10. Notices. All notices required or permitted to be given under this
-------
Agreement shall be given by certified mail, return receipt requested, to the
parties at the following addresses as either may be designated in writing to the
other party:
If to UP&UP: Edward S. Civera and/or Board of Directors
United Payors & United Providers, Inc.
2275 Research Boulevard, 6th Floor
Rockville, MD 20850
If to Employee: Thomas L. Blair
11610 Highland Farm Road
Potomac, MD 20854
11. Governing Law. This Agreement shall be construed and enforced in
-------------
accordance with the laws of Maryland.
12. Entire Contract. This Agreement constitutes the entire understanding
---------------
and agreement between UP&UP and Employee with regard to all matters herein up to
the date of this Agreement. This Agreement may be amended only in writing,
signed by both parties hereto.
3
<PAGE>
IN WITNESS WHEREOF, the undersigned have executed this Agreement.
EMPLOYEE
January 29, 1999 /s/ Thomas L. Blair
- ------------------------ -------------------------------------
Date Thomas L. Blair
UNITED PAYORS & UNITED PROVIDERS, INC.
January 29, 1999 By: /s/ Edward S. Civera
- ------------------------ ----------------------------------
Date Edward S. Civera
President and Chief Operating Officer
4
<PAGE>
EXHIBIT 10.10
EMPLOYMENT AGREEMENT
THIS AGREEMENT is entered into on the 29th day of January, 1999 by and
between UNITED PAYORS & UNITED PROVIDERS, INC. ("UP&UP" or the "Company") and S.
JOSEPH BRUNO ("Employee") residing at 11408 Highland Farm Court, Potomac,
Maryland 20854. This Agreement shall become effective on January 1, 1999
("Effective Date").
WHEREAS, UP&UP desires to employ Employee to devote full-time to the
business of UP&UP, and Employee desires to be so employed.
NOW, THEREFORE, in consideration of the mutual covenants and promises of
the parties hereto, UP&UP and Employee agree as follows:
1. Employment. UP&UP agrees to employ Employee and Employee agrees to be
----------
so employed in the capacity of Vice President and Chief Financial Officer. The
term of this Agreement shall be a two year period subsequent to the Effective
Date. The Agreement shall be automatically renewed for an additional two-year
period if the Company does not give the Employee a notice of non-renewal six
months prior to the expiration date of the Agreement.
2. Time and Efforts. Employee shall diligently and conscientiously devote
----------------
his full and exclusive time and attention, and his best efforts to the discharge
of his duties as Vice President and Chief Financial Officer of UP&UP. Employee
shall at all times discharge his duties, which shall be those normally performed
by a Vice President and Chief Financial Officer, in the best interest of UP&UP.
In the performance of his duties, Employee shall make his principal office at
2275 Research Boulevard, Rockville, MD 20850, or other office location within
the Washington, DC Metropolitan Area that may be next occupied by UP&UP, unless
mutually agreed otherwise in writing by UP&UP and Employee.
3. Compensation. During the term of this Agreement UP&UP shall pay to
------------
Employee as compensation ("Compensation") for his services a base salary in the
amount of two hundred eighty thousand dollars ($280,000) per year. This salary
is guaranteed by UP&UP through the term of this Agreement and is subject to
periodic increases as recommended by the Compensation Committee to the Board of
Directors of UP&UP. Additionally, Employee shall be paid an annual incentive
bonus ("Bonus") amount equal to one-quarter of one percent (0.25%) of UP&UP's
annual after tax earnings.
4. Expenses Reimbursement. UP&UP shall reimburse Employee for all
----------------------
reasonable and necessary expenses incurred by him in carrying out his duties
under this Agreement. Employee shall present to UP&UP from time to time an
itemized account of such expenses in forms as may be required by UP&UP and upon
acceptance and payment of expenses, expenses shall be considered reasonable and
necessary.
5. Automobile. In recognition of Employee's need for an automobile for
----------
business and other purposes, UP&UP will provide Employee with an automobile
allowance which will be payable quarterly.
1
<PAGE>
6. Employee Benefits. Employee shall be eligible to participate in the
-----------------
various employee benefits plans that may be offered by UP&UP, including but not
limited to a stock purchase plan, stock option plan, medical and hospitalization
plan, life insurance, long term disability, incentive savings plan, and pension
plan, made available in the ordinary course of business to similarly situated
executive employees of UP&UP and its subsidiaries. Additionally, UP&UP shall
seek to obtain a term life insurance policy, in an amount established and agreed
to by the Compensation Committee of the Board of Directors of UP&UP, on Employee
to be paid to beneficiary named by Employee.
7. Obligation of UP&UP on Termination of Employment by UP&UP. Except for
---------------------------------------------------------
cause, if during the term of this Agreement, UP&UP shall terminate the services
of Employee, or if during the term of this Agreement Employee is permanently
disabled or deceased, UP&UP shall nevertheless cause UP&UP to continue the
payments provided for herein for the term of the contract, but not less than
twelve (12) months, to Employee or his heirs or estate, as the case may be.
8. Obligations of UP&UP and Employee on Termination of Employee by UP&UP
---------------------------------------------------------------------
for Cause or Resignation by Employee. If during any time of employment, (1)
- ------------------------------------
Employee should be terminated for cause; or (2) Employee should resign, then
UP&UP shall have no obligation to pay Employee any form of compensation defined
in this Agreement. In the event Employee resigns, for a period of two years
subsequent to the date of such resignation, Employee shall not solicit or
contract with, either directly or through third parties, entities contracting
with UP&UP, including UP&UP payor clients and contracting providers. For a
period of two years from the date Employee resigns, Employee shall not assist,
in any manner, any individual or entity that may be, or seek to become, a
competitor of UP&UP.
9. Change in Control. In the event that there is a change in control of
-----------------
UP&UP, Employee shall receive the Compensation and Bonus payments for a period
of two (2) years. Change in control of UP&UP shall be deemed to have occurred
if:
(a) Any "person" (as such term is used in Sections 13(d) and 14(d) of
the Securities Exchange Act of 1934) is or becomes the beneficial owner,
directly or indirectly, of securities of the Company representing 20% or more of
the combined voting power of the Company's then outstanding securities; or
(b) During any period of twenty-four consecutive months, individuals
who at the beginning of such period constitute the Board cease for any reason to
constitute at least a majority thereof unless the election, or the nomination
for election by the Company's shareholders, of each new director was approved by
a vote of at least two-thirds of the directors then still in office who were
directors at the beginning of the period; or
(c) The Stockholders of the Company approve a definitive agreement
(i) for the merger or other business combination of the Company
with or into another corporation pursuant to which the Company will not survive
or will survive only as a subsidiary of another corporation;
2
<PAGE>
(ii) for the sale or other disposition of all or substantially
all of the assets of the Company;
(iii) for the merger of another corporation into the Company which
survives if, as a result of such merger less than fifty percent (50%) of the
outstanding voting securities of the Company shall be owned in the aggregate
immediately after such merger by the owners of the voting shares of the Company
outstanding immediately prior to such merger;
(iv) for the liquidation or dissolution of the Company; or
(v) any combination of the foregoing.
(d) For purposes of defining a "change in control of the Company,"
Employee recognizes that the consummation of a transaction involving the
transfer of 4,500,000 shares of UP&UP common stock into a Delaware Divestment
Trust resulting in the beneficial ownership of such shares by Thomas L. Blair
will not result in a "change in control of the Company." Further, Employee
recognizes that the Capital Z transaction with selling shareholders, including
the purchase of 1,750,000 shares of UP&UP common stock and the option to
purchase 2,250,000 shares of UP&UP common stock, does not constitute a "change
in control of the Company." However, further transactions involving Capital
Z's common stock ownership position in the Company or sales of UP&UP common
stock from the Independent Divestment Trust will be subject to the provisions of
this paragraph 9.
10. Notices. All notices required or permitted to be given under this
-------
Agreement shall be given by certified mail, return receipt requested, to the
parties at the following addresses as either may be designated in writing to the
other party:
If to UP&UP: Edward S. Civera and/or Board of Directors
United Payors & United Providers, Inc.
2275 Research Boulevard, 6th Floor
Rockville, MD 20850
If to Employee: S. Joseph Bruno
11408 Highland Farm Court
Potomac, MD 20854
11. Governing Law. This Agreement shall be construed and enforced in
-------------
accordance with the laws of Maryland.
12. Entire Contract. This Agreement constitutes the entire understanding
---------------
and agreement between UP&UP and Employee with regard to all matters herein up to
the date of this Agreement. This Agreement may be amended only in writing,
signed by both parties hereto.
3
<PAGE>
IN WITNESS WHEREOF, the undersigned have executed this Agreement.
EMPLOYEE
January 29, 1999 /s/ S. Joseph Bruno
- ----------------------- ---------------------------------
Date S. Joseph Bruno
UNITED PAYORS & UNITED PROVIDERS, INC.
January 29, 1999 By: /s/ Edward S. Civera
- ----------------------- --------------------------------------
Date Edward S. Civera
President and Chief Operating Officer
4
<PAGE>
EXHIBIT 10.11
EMPLOYMENT AGREEMENT
THIS AGREEMENT is entered into on the 29th day of January, 1999 by and
between UNITED PAYORS & UNITED PROVIDERS, INC. ("UP&UP" or the "Company") and
SPIRO KARADIMAS ("Employee") residing at 15500 Fellowship Way, North Potomac,
Maryland 20878. This Agreement shall become effective on January 1, 1999
("Effective Date").
WHEREAS, UP&UP desires to employ Employee to devote full-time to the
business of UP&UP, and Employee desires to be so employed.
NOW, THEREFORE, in consideration of the mutual covenants and promises of
the parties hereto, UP&UP and Employee agree as follows:
1. Employment. UP&UP agrees to employ Employee and Employee agrees to be
----------
so employed in the capacity of Vice President of Operations. The term of this
Agreement shall be a two year period subsequent to the Effective Date. The
Agreement shall be automatically renewed for an additional two-year period if
the Company does not give the Employee a notice of non-renewal six months prior
to the expiration date of the Agreement.
2. Time and Efforts. Employee shall diligently and conscientiously devote
----------------
his full and exclusive time and attention, and his best efforts to the discharge
of his duties as Vice President of Operations of UP&UP. Employee shall at all
times discharge his duties, which shall be those normally performed by a Vice
President of Operations, in the best interest of UP&UP. In the performance of
his duties, Employee shall make his principal office at 2275 Research Boulevard,
Rockville, MD 20850, or other office location within the Washington, DC
Metropolitan Area that may be next occupied by UP&UP, unless mutually agreed
otherwise in writing by UP&UP and Employee.
3. Compensation. During the term of this Agreement UP&UP shall pay to
------------
Employee as compensation ("Compensation") for his services a base salary in the
amount of two hundred forty thousand dollars ($240,000) per year. This salary is
guaranteed by UP&UP through the term of this Agreement and is subject to
periodic increases as recommended by the Compensation Committee to the Board of
Directors of UP&UP. Additionally, Employee shall be paid an annual incentive
bonus ("Bonus") amount equal to one-quarter of one percent (0.25%) of UP&UP's
annual after tax earnings.
4. Expenses Reimbursement. UP&UP shall reimburse Employee for all
----------------------
reasonable and necessary expenses incurred by him in carrying out his duties
under this Agreement. Employee shall present to UP&UP from time to time an
itemized account of such expenses in forms as may be required by UP&UP and upon
acceptance and payment of expenses, expenses shall be considered reasonable and
necessary.
5. Automobile. In recognition of Employee's need for an automobile for
----------
business and other purposes, UP&UP will provide Employee with an automobile
allowance which will be payable quarterly.
1
<PAGE>
6. Employee Benefits. Employee shall be eligible to participate in the
-----------------
various employee benefits plans that may be offered by UP&UP, including but not
limited to a stock purchase plan, stock option plan, medical and hospitalization
plan, life insurance, long term disability, incentive savings plan, and pension
plan, made available in the ordinary course of business to similarly situated
executive employees of UP&UP and its subsidiaries. Additionally, UP&UP shall
seek to obtain a term life insurance policy, in an amount established and agreed
to by the Compensation Committee of the Board of Directors of UP&UP, on Employee
to be paid to beneficiary named by Employee.
7. Obligation of UP&UP on Termination of Employment by UP&UP. Except for
---------------------------------------------------------
cause, if during the term of this Agreement, UP&UP shall terminate the services
of Employee, or if during the term of this Agreement Employee is permanently
disabled or deceased, UP&UP shall nevertheless cause UP&UP to continue the
payments provided for herein for the term of the contract, but not less than
twelve (12) months, to Employee or his heirs or estate, as the case may be.
8. Obligations of UP&UP and Employee on Termination of Employee by UP&UP
---------------------------------------------------------------------
for Cause or Resignation by Employee. If during any time of employment, (1)
- ------------------------------------
Employee should be terminated for cause; or (2) Employee should resign, then
UP&UP shall have no obligation to pay Employee any form of compensation defined
in this Agreement. In the event Employee resigns, for a period of two years
subsequent to the date of such resignation, Employee shall not solicit or
contract with, either directly or through third parties, entities contracting
with UP&UP, including UP&UP payor clients and contracting providers. For a
period of two years from the date Employee resigns, Employee shall not assist,
in any manner, any individual or entity that may be, or seek to become, a
competitor of UP&UP.
9. Change in Control. In the event that there is a change in control of
-----------------
UP&UP, Employee shall receive the Compensation and Bonus payments for a period
of two (2) years. Change in control of UP&UP shall be deemed to have occurred
if:
(a) Any "person" (as such term is used in Sections 13(d) and 14(d) of
the Securities Exchange Act of 1934) is or becomes the beneficial owner,
directly or indirectly, of securities of the Company representing 20% or more of
the combined voting power of the Company's then outstanding securities; or
(b) During any period of twenty-four consecutive months, individuals
who at the beginning of such period constitute the Board cease for any reason to
constitute at least a majority thereof unless the election, or the nomination
for election by the Company's shareholders, of each new director was approved by
a vote of at least two-thirds of the directors then still in office who were
directors at the beginning of the period; or
(c) The Stockholders of the Company approve a definitive agreement
(i) for the merger or other business combination of the Company
with or into another corporation pursuant to which the Company will not survive
or will survive only as a subsidiary of another corporation;
2
<PAGE>
(ii) for the sale or other disposition of all or substantially
all of the assets of the Company;
(iii) for the merger of another corporation into the Company which
survives if, as a result of such merger less than fifty percent (50%) of the
outstanding voting securities of the Company shall be owned in the aggregate
immediately after such merger by the owners of the voting shares of the Company
outstanding immediately prior to such merger;
(iv) for the liquidation or dissolution of the Company; or
(v) any combination of the foregoing.
(d) For purposes of defining a "change in control of the Company,"
Employee recognizes that the consummation of a transaction involving the
transfer of 4,500,000 shares of UP&UP common stock into a Delaware Divestment
Trust resulting in the beneficial ownership of such shares by Thomas L. Blair
will not result in a "change in control of the Company." Further, Employee
recognizes that the Capital Z transaction with selling shareholders, including
the purchase of 1,750,000 shares of UP&UP common stock and the option to
purchase 2,250,000 shares of UP&UP common stock, does not constitute a "change
in control of the Company." However, further transactions involving Capital Z's
common stock ownership position in the Company or sales of UP&UP common stock
from the Independent Divestment Trust will be subject to the provisions of this
paragraph 9.
10. Notices. All notices required or permitted to be given under this
-------
Agreement shall be given by certified mail, return receipt requested, to the
parties at the following addresses as either may be designated in writing to the
other party:
If to UP&UP: Edward S. Civera and/or Board of Directors
United Payors & United Providers, Inc.
2275 Research Boulevard, 6th Floor
Rockville, MD 20850
If to Employee: Spiro Karadimas
15500 Fellowship Way
North Potomac, MD 20878
11. Governing Law. This Agreement shall be construed and enforced in
-------------
accordance with the laws of Maryland.
12. Entire Contract. This Agreement constitutes the entire understanding
---------------
and agreement between UP&UP and Employee with regard to all matters herein up to
the date of this Agreement. This Agreement may be amended only in writing,
signed by both parties hereto.
3
<PAGE>
IN WITNESS WHEREOF, the undersigned have executed this Agreement.
EMPLOYEE
January 29, 1999 /s/ Spiro Karadimas
- ------------------- -------------------------------------
Date Spiro Karadimas
UNITED PAYORS & UNITED PROVIDERS, INC.
January 29, 1999 By: /s/ Edward S. Civera
- ------------------- -------------------------------------
Date Edward S. Civera
President and Chief Operating Officer
4
<PAGE>
EXHIBIT 10.12
REGISTRATION RIGHTS AGREEMENT
-----------------------------
THIS REGISTRATION RIGHTS AGREEMENT (this "Agreement") is made and effective
----------------------------------
as of February 25, 1999, by and among Capital Z Financial Services Fund II,
L.P., a Bermuda limited partnership and exempted partnership (the "Investor"),
and United Payors & United Providers, Inc., a Delaware corporation (the
"Company").
RECITALS
A. Upon the terms and subject to the conditions of a Securities Purchase
Agreement, dated as of February 2, 1999 (the "Securities Purchase Agreement"),
by and among Thomas L. Blair (the "Seller") and the Investor, the Investor has
agreed to purchase from the Seller an aggregate of 1,750,000 shares of the
common stock, $0.01 par value ("Common Stock"), of the Company (the "Purchase").
B. The Purchase facilitates an acquisition by the Seller of Common Stock,
which acquisition is a prerequisite to the Company's acquisition of a financial
institution;
C. The execution of this Agreement by the Company is a prerequisite to
the Purchase.
D. The Company considers this Agreement to be in the best interests of
the Company and its stockholders.
AGREEMENT
NOW, THEREFORE, in consideration of the premises and the mutual covenants
and agreements of the parties contained herein, and for other good and valuable
consideration, the receipt of which is hereby acknowledged, the parties agree as
follows:
1. Definitions. As used herein, the terms below shall have the following
------------
meanings. Any such term, unless the context otherwise requires, may be used in
the singular or plural, depending upon the reference.
"Affiliate" shall have the meaning provided in the Exchange Act.
"Agreement" shall mean this Registration Rights Agreement.
"Closing Date" shall have the meaning provided in the Securities
Purchase Agreement.
"Commission" shall mean the United States Securities and Exchange
Commission.
<PAGE>
"Common Stock" shall have the meaning provided in Recital A.
"Common Stock Equivalents" means, without duplication with any other
Common Stock or Common Stock Equivalents, any warrants, options, convertible
securities or indebtedness, exchangeable securities or indebtedness, or other
rights exercisable for or convertible or exchangeable into, directly or
indirectly, Common Stock, whether at the time of issuance or upon the passage of
time or the occurrence of some future event.
"Company" shall mean United Payors & United Providers, Inc., a
Delaware corporation, and any successor thereto.
"Demand Registration" shall mean a registration effected pursuant to
Section 2(a).
"Exchange Act" shall mean the Securities Exchange Act of 1934, as
amended, or any successor law, and the rules and regulations issued pursuant to
that Act or any successor law.
"Holder" shall mean any holder of Shares listed on the signature pages
hereof and any direct or indirect transferee of any such holder that becomes a
party hereto by executing and delivering a Registration Rights Agreement Joinder
in the form attached hereto as Exhibit A.
"Initiating Holders" shall have the meaning provided in Section 2(b).
"Investor" shall have the meaning provided in the preamble of this
Agreement.
"Person" shall mean an individual, partnership, limited liability
company, joint venture, corporation, trust or unincorporated organization or any
other similar entity.
"Register," "registered" and "registration" shall refer to a
registration effected by preparing and filing a registration statement or
similar document in compliance with the Securities Act, and the declaration or
ordering of effectiveness of such registration statement or document by the
Commission.
"Registrable Shares" shall mean (a) the Shares owned by any Holder and
(b) any shares of Common Stock or other securities of the Company issued or
distributed to a Holder with respect to, in exchange for or in replacement of,
any of the Shares; provided, however, that such shares of Common Stock and other
securities shall be treated as Registrable Shares only if and so long as (i)
they have not been sold by the Investor pursuant to an effective Registration
Statement under the Securities Act, (ii) they have not been sold to the public
in a transaction exempt from the registration and prospectus delivery
requirements of the Securities Act under Section 4(1) thereof or pursuant to
Rule 144 under the Securities Act or any similar provision), or (iii) they may
not immediately be resold by a Holder pursuant to Rule 144 (k) under the
Securities Act without any volume limitation.
-2-
<PAGE>
"Securities Act" shall mean the Securities Act of 1933, as amended, or
any successor law, and the rules and regulations issued pursuant to that Act or
any successor law.
"Securities Purchase Agreement" shall have the meaning provided in
Recital A.
"Shares" shall mean the shares of Common Stock agreed to be sold on
the Closing Date to the Investor pursuant to the Securities Purchase Agreement.
"Violation" shall have the meaning provided in Section 7(a).
2. Demand Registration.
--------------------
(a) General. If the Company shall receive, at any time after 180
--------
days after the Closing Date (subject to Section 10 of this Agreement), a
written request from Holders that the Company file a registration statement
under the Securities Act covering the registration of at least 750,000
Registrable Shares (adjusted for all stock splits or similar transactions),
then the Company shall, within ten (10) days of the receipt thereof, give
written notice of such request to all Holders and shall, subject to the
limitations of this Section 2 file a registration statement with respect to
that number of Registrable Shares specified in such written request (and
such Registrable Shares as may be specified in the written notice of any
other Holder delivered to the Company within twenty (20) days after the
date on which the Company mailed notice of the initiating written request
to such other Holder) within 90 days of its receipt of such written request
(the "Required Filing Date") and use all commercially reasonable efforts to
cause such registration statement to be declared effective by the
Commission as promptly thereafter as is practicable.
(b) Underwriters Cut-back. If the Holders initiating the
----------------------
registration request under Section 2(a) (the "Initiating Holders") intend
to distribute the Registrable Shares covered by their request by means of
an underwritten offering, they shall so advise the Company as a part of
their request made pursuant to Section 2(a), and the Company shall include
in the applicable registration statement such information with respect
thereto as may be required or advisable. The selection of the managing
underwriter of any underwritten offering under this Section 2 shall be made
by a majority in interest of the Initiating Holders, with the consent of
the Company (such consent not to be unreasonably withheld). In the case of
an underwritten offering, the right of any Holder to include Registrable
Shares in the related registration shall be conditioned upon the inclusion
of such Holder's Registrable Shares in the underwritten offering (unless
otherwise mutually agreed by a majority in interest of the Initiating
Holders and such Holder). All Holders proposing to distribute their
securities through such underwritten offering shall (together with the
Company as provided in Section 4(e)) enter into an underwriting agreement
with customary terms with the underwriter or underwriters selected for such
underwritten offering. Notwithstanding any other provision of this
Agreement, if the managing underwriter advises the Initiating Holders that
marketing factors require or make advisable a limitation of the number of
shares to be included in the underwritten offering, then the Initiating
Holders shall so advise all other
-3-
<PAGE>
participating Holders, and the number of Registrable Shares that may be
included in the underwritten offering shall be allocated among all
participating Holders, including the Initiating Holders, in proportion (as
nearly as practicable) to the amount of Registrable Shares owned by each
Holder; provided, however, that the number of Registrable Shares to be
included in such underwritten offering shall not be reduced unless and
--
until all other securities shall have been excluded from the underwritten
---
offering.
(c) Limit on Demand Registrations. The Company is obligated to effect
------------------------------
only two (2) Demand Registrations pursuant to Section 2 for an aggregate of
up to 1,750,000 shares of Common Stock (as adjusted for all stock splits or
similar transactions). For purposes of this Section 2(c), no such
registration shall be deemed a Demand Registration unless and until the
registration statement filed pursuant thereto has been declared effective
by the Commission.
(d) Deferral of Filing. The Company may defer the filing (but not the
-------------------
preparation) of any registration statement required by Section 2 for a
period of up to: (i) forty-five (45) days in the event that the Company or
any of its Subsidiaries is engaged in confidential negotiations or other
confidential business activities, disclosure of which would be required in
such registration statement (but would not be required if such registration
statement were not filed), and the Board of Directors of the Company
determines in good faith that such disclosure would be materially
detrimental to the Company and its stockholders or would have a material
adverse effect on any such confidential negotiations or other confidential
business activities, or (ii) 120 days in the event that the Board of
Directors of the Company determined to effect a registered underwritten
public offering of the Company's securities for the Company's account and
the Company takes substantial steps (including, but not limited to,
selecting a managing underwriter for such offering) and proceeds with
reasonable diligence to effect such offering; provided that if such
determination is made by the Board of Directors after receipt of a Demand
Registration request, the Board prior to such request shall have commenced
negotiations with an underwriter with respect to such offering; and
provided, further, however, that during any period of 360 consecutive days,
Holders shall not be subject to deferrals pursuant to the Company's
exercise of deferral rights for a period of at least 180 consecutive days.
A deferral of the filing of a registration statement pursuant to this
Section 2(d) shall be lifted, and the requested registration statement
shall be filed forthwith, if, in the case of a deferral pursuant to clause
(i) of the preceding sentence, the negotiations or other activities are
terminated or the transaction contemplated by such negotiations or other
activities are consummated, or, in the case of a deferral pursuant to
clause (ii) of the preceding sentence, the proposed registration for the
Company's account is abandoned. In order to defer the filing of a
registration statement pursuant to this Section 2(d), the Company shall
promptly (but in any event within 10 days), upon determining to seek such
deferral, deliver to each Initiating Holder a certificate signed by an
executive officer of the Company stating that the Company is deferring such
filing pursuant to this Section 2(d) and a general statement of the reason
for such deferral and an approximation of the anticipated delay. Within 20
days after
-4-
<PAGE>
receiving such certificate, the holders of a majority in interest of the
Registrable Shares held by the Requesting Holders and for which
registration was previously requested may withdraw their request by giving
notice to the Company. If withdrawn, the such request shall be deemed not
to have been made for all purposes of this Agreement.
(e) Expenses of Demand Registration. All expenses of Demand
--------------------------------
Registrations shall be paid by the selling Holders; provided, however, that
if any securities other than the Shares are included in a Demand
Registration, any person on whose behalf such securities have been included
shall pay that percentage of the total expenses which equals the percentage
of the total proceeds received by such person, and the selling Holders
shall have no responsibility for any such expenses.
3. Piggy-Back Registration.
------------------------
(a) General. If at any time after 180 days after the Closing Date,
--------
the Company proposes to register (including for this purpose a registration
effected by the Company pursuant to Section 2 of this Agreement) any shares
of its Common Stock under the Securities Act in connection with the public
offering of such securities (other than a registration on Form S-4 or Form
S-8 (or any successor forms)), the Company shall, at such time, promptly
give each Holder written notice of such registration. Upon the written
request of each Holder given within fifteen (15) days after mailing of such
notice by the Company in accordance with Section 18 hereof, the Company
shall cause to be registered under the Securities Act all of the
Registrable Shares that each such Holder has requested to be registered,
subject to the underwriter cutback and other provisions of Section 3(b)
hereof.
(b) Underwriting Requirements. In connection with any underwritten
--------------------------
offering, the Company shall not be required under this Section 3 to include
any Holder's Registrable Shares in such underwritten offering unless such
Holder shall have agreed in writing to the terms of the underwriting as
agreed upon among the Company and the underwriters selected by the Company
or by selling stockholders, as the case may be, and then only in such
quantity as the underwriters determine in their sole discretion will not
materially and adversely affect the distribution of securities to be
covered by such registration statement, such determination to be confirmed
in writing upon the request of any Holder. If the total amount of
Registrable Shares requested by Holders to be included in such offering
pursuant to Section 3(a) exceeds the amount of securities that the
underwriters determine in their sole discretion is compatible with the
success of the offering, then the Company shall be required to include in
the offering only that number of Registrable Shares and shares of Common
Stock offered by other selling shareholders which the underwriters
determine in their sole
-5-
<PAGE>
discretion will not have a material adverse effect on the offering (the
securities so included to be apportioned among all selling Holders and
other selling shareholders pro rata according to the total amount of shares
of Common Stock proposed to the be sold by each selling holder.
(c) Expenses of Company Registration. The Company shall bear and pay
---------------------------------
all expenses incurred in connection with any registration, filing,
qualification or sale of Registrable Shares pursuant to this Section 3,
including (without limitation) all registration, filing, and qualification
fees, and printers' fees, accounting fees and the fees and disbursements of
counsel for the Company relating or apportionable thereto, but excluding
underwriting discounts and commissions, stock transfer taxes and the fees
and expenses of separate counsel, if any, retained by the selling Holders.
4. Obligations of the Company. Whenever required under this Agreement
---------------------------
to effect the registration of any Registrable Shares, the Company shall, as
expeditiously as reasonably possible, use reasonable commercial efforts to
do the following:
(a) Commission Filing. Prepare and file with the Commission
------------------
a registration statement with respect to such Registrable Shares and
to cause such registration statement to become effective, and, upon
the request of the Holders of a majority of the Registrable Shares
registered thereunder, keep such registration statement effective for
up to 180 days or until all of the Shares registered thereunder are
sold, whichever occurs sooner.
(b) Amendments. Prepare and file with the Commission such
-----------
amendments and supplements to such registration statement and the
prospectus used in connection with such registration statement as may
be necessary to comply with the provisions of the Securities Act with
respect to the disposition of all securities covered by such
registration statement, and furnish such copies thereof to the Holders
and any underwriters as they may reasonably request.
(c) Prospectus. Furnish to the Holders and any underwriters
-----------
such numbers of copies of a prospectus, including a preliminary
prospectus, in conformity with the requirements of the Securities Act,
and such other documents as they may reasonably request in order to
facilitate the disposition of Registrable Shares owned by them, and
cause all related filings to be made with the Commission as required
by Rule 424 under the Securities Act.
(d) Blue Sky Qualification. Register and qualify the
-----------------------
Registrable Shares covered by such registration statement under such
other securities or Blue Sky laws of such jurisdictions as shall be
reasonably requested by the Holders and any underwriters; provided,
however, that the Company shall not be required in connection
therewith or as a condition thereto to qualify to do business or to
file a
-6-
<PAGE>
general consent to service of process in any such states or
jurisdictions.
(e) Underwriting Agreement. In the event of any underwritten
-----------------------
public offering, enter into and perform its obligations under an
underwriting agreement, in usual and customary form, with the managing
underwriter of such offering, including, without limitation,
delivering opinions of counsel and "comfort letters" of accountants.
Each Holder participating in such underwriting shall also enter into
and perform its obligations under such an agreement.
(f) Prospectus Delivery. Promptly notify each Holder of
--------------------
Registrable Shares covered by the registration statement at any time
when the Company becomes aware of the happening of any event as a
result of which the registration statement or the prospectus included
in such registration statement or any supplement to the prospectus (as
then in effect) contains any untrue statement of a material fact or
omits to state a material fact necessary to make the statements
therein (in the case of the prospectus, in light of the circumstances
under which they were made) not misleading or, if for any other reason
it shall be necessary during such time period to amend or supplement
the registration statement or the prospectus in order to comply with
the Securities Act, whereupon, in either case, each Holder shall
immediately cease to use such registration statement or prospectus for
any purpose and, as promptly as practicable thereafter, the Company
shall prepare and file with the Commission, and furnish without charge
to the appropriate Holders and managing underwriters, if any, a
supplement or amendment to such registration statement or prospectus
which will correct such statement or omission or effect such
compliance and provide such copies thereof as the Holders and any
underwriters may reasonably request.
(g) Make generally available to the Company's
securityholders an earnings statement satisfying the provisions of
Section 11(a) of the Securities Act no later than 30 days after the
end of the 12-month period beginning with the first day of the
Company's first fiscal quarter commencing after the effective date of
a registration statement, which earnings statement shall cover said
12-month period, and which requirement will be deemed to be satisfied
if the Company timely files complete and accurate information on Forms
10-Q, 10-K and 8-K under the Exchange Act and otherwise complies with
Rule 158 under the Securities Act;
(h) If requested by the managing underwriter or any seller,
promptly incorporate in a prospectus supplement or post-effective
amendment such information as the managing underwriter or any seller
reasonably requests to be included therein, including, without
limitation, with respect to the Registrable Shares being sold by such
seller, the purchase price being paid therefor by the underwriters
-7-
<PAGE>
and with respect to any other terms of the underwritten offering of
the Registrable Shares to be sold in such offering, and promptly make
all required filings of such prospectus supplement or post-effective
amendment;
(i) As promptly as practicable after filing with the
Commission of any document which is incorporated by reference into a
registration statement, deliver a copy of each such document (in the
form in which it was incorporated) to each seller;
(j) Cooperate with the sellers and the managing underwriter
to facilitate the timely preparation and delivery of certificates
(which shall not bear any restrictive legends unless required under
applicable law) representing securities sold under any registration
statement, to enable such securities to be in such denominations and
registered in such names as the managing underwriter or such sellers
may request and to make available to the Company's transfer agent
prior to the effectiveness of such registration statement a
satisfactory supply of such certificates;
(k) Promptly make available for inspection by any seller,
any underwriter participating in any disposition pursuant to any
registration statement, and any attorney, accountant or other agent or
representative retained by any such seller or underwriter
(collectively, the "Inspectors"), all financial and other records,
pertinent corporate documents and properties of the Company
(collectively, the "Records"), as shall be reasonably necessary to
enable them to fulfill their due diligence responsibilities, and cause
the Company's officers, directors and employees to supply all
information requested by any such Inspector in connection with such
registration statement; provided, however, that unless the disclosure
of such Records is necessary to avoid or correct a misstatement or
omission in the registration statement or the release of such Records
is ordered pursuant to a subpoena or other order from a court of
competent jurisdiction, the Company shall not be required to provide
any information under this subparagraph (x) if (A) the Company's Board
of Directors determines in good faith, after consultation with counsel
for the Company, that to do so would cause the Company to forfeit an
attorney-client privilege that was applicable to such information or
(B) if either (1) the Company has requested and been granted from the
SEC confidential treatment of such information contained in any filing
with the SEC or documents provided supplementally or otherwise or (2)
the Company reasonably determines in good faith that such Records are
confidential and so notifies the Inspectors in writing unless prior to
furnishing any such information with respect to (A) and (B) such
Holder of Registrable Shares requesting such information agrees to
enter into a confidentiality agreement in customary form and subject
to customary exceptions; and provided further, however, that each
Holder of Registrable Shares agrees that it will, upon learning that
disclosure of such Records is sought in a court of competent
jurisdiction, give notice to the Company
-8-
<PAGE>
and allow the Company at its expense, to undertake appropriate action
to prevent disclosure of the Records deemed confidential;
(l) Furnish to each seller and underwriter a signed
counterpart of (A) an opinion or opinions of counsel to the Company
and (B) a comfort letter or comfort letters from the Company's
independent public accountants, each in customary form and covering
such matters as are customarily covered by such opinions or comfort
letters, as the case may be, as the sellers or managing underwriter
reasonably requests;
(m) Cause the Registrable Shares included in any
registration statement to be (A) listed on each securities exchange,
if any, on which similar securities issued by the Company are then
listed, or (B) authorized to be quoted and/or listed (to the extent
applicable) on the National Association of Securities Dealers, Inc.
Automated Quotation System or the National Market System of Nasdaq
Stock Market if the Registrable Shares so qualify;
(n) Provide a CUSIP number for the Registrable Shares
included in any registration statement not later than the effective
date of such registration statement;
(o) Cooperate with each seller and each underwriter
participating in the disposition of such Registrable Shares and their
respective counsel in connection with any filings required to be made
with the National Association of Securities Dealers, Inc.;
(p) During the period when a prospectus is required to be
delivered under the Securities Act, promptly file all documents
required to be filed with the Commission pursuant to Sections 13(a),
13(c), 14 or 15(d) of the Exchange Act;
(q) Notify each seller of Registrable Shares promptly of any
request by the Commission for the amending or supplementing of such
registration statement or prospectus or for additional information;
(r) Prepare and file with the Commission promptly any
amendments or supplements to such registration statement or prospectus
which, in the opinion of counsel for the Company or the managing
underwriter, is required in connection with the distribution of the
Registrable Shares;
(s) Enter into such agreements (including underwriting
agreements in the managing underwriter's customary form) as are
customary in
-9-
<PAGE>
connection with an underwritten offering;
(t) Advise each seller of such Registrable Shares, promptly
after it shall receive notice or obtain knowledge thereof, of the
issuance of any stop order issued by the Commission suspending the
effectiveness of such registration statement or the initiation or
threatening of any proceeding for such purpose and promptly use its
best efforts to prevent the issuance of any stop order or to obtain
its withdrawal at the earliest possible moment if such stop order
should be issued;
(u) Cooperate in a reasonable manner, considering among
other things operating responsibilities to the Company, with each
seller and each underwriter participating in the disposition of
Registrable Shares in connection with their selling efforts,
including, without limitation, by making its officers and employees
reasonably available for roadshow or other presentations; and
(v) Subsequent to the date hereof, not grant rights to more
than four (4) Demand Registrations to any Person in connection with
any transaction or series of related transactions, or Piggy-Back
Registration rights having a priority over the Piggy-Back Registration
rights granted under this Agreement.
5. Furnish Information. It shall be a condition precedent to the
--------------------
obligations of the Company to take any action pursuant to this Agreement
with respect to the Registrable Shares of any selling Holder that such
Holder shall furnish to the Company such information regarding itself, the
Registrable Shares held by it, and the intended method of disposition of
such securities as shall be required to effect the registration of such
Holder's Registrable Shares.
6. Delay of Registration. No Holder shall have any right to obtain or
----------------------
seek an injunction restraining or otherwise delaying any registration as
the result of any controversy that might arise with respect to the
interpretation or implementation of this Agreement.
7. Indemnification. In the event (i) any Registrable Shares are
----------------
included in a registration statement under this Agreement or (ii) any other
shares of Common Stock held by the Investor are included in any
registration statement:
(a) Indemnification by the Company. To the fullest extent
-------------------------------
permitted by law, the Company will indemnify and hold harmless each
Holder, each of its directors, officers, partners, employees,
advisors, agents and representatives, and each person, if any, who
controls such Holder within the meaning of the Securities Act or the
Exchange Act and any agent or investment advisor thereof, against any
and all losses, claims, damages, expenses (including, without
limitation, attorneys' fees and disbursements) and liabilities (joint
or several) to which they may become subject, insofar as such losses,
claims, damages, expenses (including, without
-10-
<PAGE>
limitation, attorneys' fees and disbursements) and liabilities (or
actions in respect thereof) arise out of, relate to, result from or
are based upon any of the following (each a "Violation"): (i) any
untrue statement or alleged untrue statement of a material fact
contained in such registration statement, including any preliminary
prospectus or final prospectus contained therein, or any amendments or
supplements thereto, (ii) the omission or alleged omission to state
therein a material fact required to be stated therein, or necessary to
make the statements therein not misleading, or (iii) any violation or
alleged violation by the Company of the Securities Act, the Exchange
Act, or any state securities law or any rule or regulation promulgated
under the Securities Act, the Exchange Act, or any state securities
law, and the Company will pay to each such Holder or other person, as
incurred, any legal or other expenses reasonably incurred by one law
firm retained by them, plus appropriate local counsel in connection
with investigating or defending any such loss, claim, damage, expense,
liability, or action; provided, however, that the indemnity agreement
contained in this Section 7(a) shall not apply to amounts paid in
settlement of any such loss, claim, damage, expense, liability, or
action if such settlement is effected without the consent of the
Company, nor shall the Company be liable in any such case for any such
loss, claim, damage, expense, liability, or action to which any Holder
or other indemnifiable person may become subject to the extent that it
arises out of or is based upon a Violation which occurs in reliance
upon and in conformity with written information furnished expressly
for use in connection with such registration by such Holder or other
indemnifiable person. This right to indemnification shall remain in
full force and effect notwithstanding any investigation made by or on
behalf of such Holder or other indemnifiable person and shall survive
the transfer of such securities by such Holder.
(b) Indemnification by Selling Holder. To the fullest extent
----------------------------------
permitted by law, each selling Holder severally, but not jointly, will
indemnify and hold harmless the Company, each of its directors, each
of its officers, partners, employees, advisors, agents and
representatives, who has signed the registration statement, each
person, if any, who controls the Company within the meaning of the
Securities Act or the Exchange Act, and any agent or investment
advisor thereof, any other Holder selling securities registered in
such registration statement and any controlling person of any such
underwriter or other Holder against any and all losses, claims,
damages, expenses (including, without limitation, attorney's fees and
disbursements) and liabilities (joint or several) to which any of the
foregoing persons may become subject, insofar as such losses, claims,
damages, expenses (including, without limitation, attorney's fees and
disbursements) and liabilities (or actions in respect thereto) arise
out of, relate to, result from or are based upon any Violation, in
each case to the extent (and only to the extent) that such Violation
occurs in reliance upon and in conformity with written information
furnished by such Holder expressly for use in connection with such
registration; provided, however, that the indemnity agreement
contained in this Section 7(b) shall not apply to amounts paid in
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<PAGE>
settlement of any such loss, claim, damage, liability or action if
such settlement is effected without the consent of the Holder (which
consent shall not be withheld unreasonably); provided, further, that
in no event shall any indemnity under this Section 7 (b) exceed the
net proceeds from the offering received by such Holder.
(c) Procedures. Promptly after receipt by an indemnified party
-----------
under this Section 7 of notice of the commencement of any action
(including any governmental action), such indemnified party will, if a
claim in respect thereof is to be made against any indemnifying party
under this Section 7, deliver to the indemnifying party a written
notice of the commencement thereof in accordance with Section 18
hereof and the indemnifying party shall have the right to participate
in, and, to the extent the indemnifying party so desires, jointly with
any other indemnifying party similarly noticed, to assume the defense
thereof with counsel mutually satisfactory to the parties; provided,
however, that an indemnified party (together with all other
indemnified parties which may be represented without conflict by one
counsel) shall have the right to retain one separate counsel (plus
appropriate local counsel), with the reasonable fees and expenses to
be paid by the indemnifying party, if representation of such
indemnified party by the counsel retained by the indemnifying party
would be inappropriate due to actual or potential differing interests
between such indemnified party and any other party represented by such
counsel in such proceeding. The failure to deliver written notice to
the indemnifying party within a reasonable time of the commencement of
any such action, if prejudicial in any material respect to its ability
to defend such action, shall to the extent prejudicial relieve such
indemnifying party of any liability to the indemnified party under
this Section 7, but the omission so to deliver written notice to the
indemnifying party will not relieve it of any liability that it may
have to any indemnified party otherwise than under this Section 7.
(d) Contribution. If the indemnification provided for in this
-------------
Section 7 from the indemnifying party is unavailable to an indemnified
party hereunder in respect of any losses, claims, damages, liabilities
or expenses referred to therein, then the indemnifying party, in lieu
of indemnifying such indemnified party, shall contribute to the amount
paid or payable by such indemnified party as a result of such losses,
claims, damages, liabilities or expenses in such proportion as is
appropriate to reflect the relative fault of the indemnifying party on
the one hand and the indemnified parties on the other in connection
with the actions which resulted in such losses, claims, damages,
liabilities or expenses, as well as any other relevant equitable
considerations. The relative fault of such indemnifying party and
indemnified parties shall be determined by reference to, among other
things, whether any action in question, including any untrue or
alleged untrue statement of a material fact or omission or alleged
omission to state a material fact, has been made by, or related to
information supplied by, such indemnifying party or indemnified
parties, and the parties' relative intent, knowledge, access to
information and opportunity to
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<PAGE>
correct or prevent such action; provided, however, that in no event
shall the liability of any selling Holder hereunder be greater in
amount than the difference between the dollar amount of the proceeds
received by such Holder upon the sale of the Registrable Shares giving
rise to such contribution obligation and all amounts previously
contributed by such Holder with respect to such losses, claims,
damages, liabilities and expenses. The amount paid or payable to a
party as a result of the losses, claims damages, liabilities and
expenses referred to above shall be deemed to include any legal or
other fees or expenses reasonably incurred by such party in connection
with any investigation or proceeding.
The parties hereto agree that it would not be just and equitable if
contribution pursuant to this Section 7(d) were determined by pro rata
allocation or by any other method of allocation which does not take into account
the equitable considerations referred to in the immediately preceding paragraph.
No person guilty of fraudulent misrepresentation (within the meaning of Section
11(f) of the Securities Act) shall be entitled to contribution from any Person
who was not guilty of such fraudulent misrepresentation.
(e) Survival. The obligations of the Company and Holders under
---------
this Section 7 shall survive the completion of any offering of
Registrable Shares in a registration statement under this Agreement,
and otherwise.
8. Reports Under Exchange Act. With a view to making available
---------------------------
to the Holders the benefits of Rule 144 promulgated under the Securities
Act and any other rule or regulation of the Commission that may at any time
permit a Holder to sell securities of the Company to the public without
registration, the Company agrees to use commercially reasonable efforts to:
(a) make and keep public information available, as those terms
are defined in Rule 144;
(b) file with the Commission in a timely manner all reports and
other documents required to be filed by the Company under the Securities
Act and the Exchange Act; and
(c) furnish to any Holder, so long as the Holder owns any
Registrable Shares, promptly upon request (i) a written statement by the
Company that it has complied with the reporting requirements of Rule 144,
the Securities Act and the Exchange Act, (ii) a copy of the most recent
annual and/or quarterly report of the Company and such other reports and
documents so filed by the Company, and (iii) such other information as may
be reasonably requested in availing any Holder of any rule or regulation of
the Commission which permits the selling of any Registrable Shares without
registration.
9. "Market Stand-Off" Agreement. Each Holder hereby agrees that
-----------------------------
for a period of 180 days, or such shorter period required by the
underwriters, following the effective date of any registration effected
pursuant to Section 2, or if Holders participate in the sale of securities
effected pursuant to Section 3 hereof, such Holder, if requested by the
managing underwriter, shall not, directly or indirectly sell, offer to
sell, contract to sell
-13-
<PAGE>
(including, without limitation, any short sale), grant any option to
purchase or otherwise transfer or dispose of (other than to donees and
Affiliates who agree to be similarly bound) any securities of the Company
held by it at any time during such period, except shares of Common Stock
included in such registration. In addition, each Holder agrees, if
applicable, to acknowledge the undertaking provided for in this Section 9
by entering into customary written "lock-up" agreements with the managers
of the relevant underwriting. The requirements of this Section 9 shall not
apply to any Holder that (together with its Affiliates), at the time of
receipt of the referenced notice from the Company, (i) beneficially owns
less than 5% of the outstanding shares of Common Stock, (ii) is not an
Affiliate or an employee of the Company and (iii) waives any further
benefits of this Agreement for it or any subsequent assignee or transferee
of its Registrable Shares.
In order to enforce the foregoing covenant, the Company may
impose stop transfer instructions with respect to the Registrable Shares of
each Holder (and the shares or securities of every other person subject to
the foregoing restriction) until the end of such period.
10. "Lock-up" Agreements. Each Holder agrees to enter into a
---------------------
customary written "lock-up" agreement with respect to the Registrable
Shares with the managers of any underwritten public offering by the Company
of shares of its equity securities for cash, which offering is completed on
or before August 31, 1999; provided, however, that the aggregate of such
"lock-up" period together with any deferral period pursuant to Section 2(d)
shall not exceed the deferral period permitted under Section 2(d).
11. Right of First Offer.
---------------------
(a) Notice of Proposed Transaction; Election. In the event that
-----------------------------------------
the Investor, any Holder or any holder of Common Stock Equivalents or
shares of common stock received upon exercise of such Common Stock
Equivalents who is a direct or indirect transferee of the Investor (the
"Selling Holder") desires to effect a sale, within the meaning of Section
2(3) of the Securities Act of 1933 , as amended, of any or all of its
shares of Common Stock or any Common Stock Equivalents (collectively, the
"Subject Shares"), the Selling Holder shall first give written notice (a
"Right of First Offer Notice") of such desire to the Company setting forth
the terms and conditions of sale and the price at which the Selling Holder
desires to sell. The Company shall thereupon, within twenty (20) business
days following its receipt of the Right of First Offer Notice (the "Right
of First Offer Election Period"), notify the Selling Holder in writing of
the number, if any, of Subject Shares that the Company or its designee, as
the case may be, desires to subscribe to purchase (the "Right of First
Offer Subscription"). Failure to respond to the Selling Holder with regard
to the Right of First Offer Notice prior to the expiration of the Right of
First Offer Election Period shall be deemed to be an election not to
subscribe for any of the Subject Shares. If the Selling Holder satisfies
all of the foregoing conditions and the Company and its designees, as the
case may be, do not collectively subscribe for all of the Subject Shares,
then the Selling Holder may, upon the expiration of the Right of First
Offer Election Period, sell the Subject Shares not subscribed for by the
Company or its designees, as the case may be, to any other person at a
purchase price equal to or higher than the price set forth in the Right of
First Offer Notice; provided, however, that the Selling Holder shall again
-------- -------
become
-14-
<PAGE>
subject to the above restrictions on transfer if a definitive agreement for
the proposed transfer is not entered into within ninety (90) days after the
expiration of Right of First Offer Election Period. This Section 11(a)
shall not apply to any Transfer by any Holder to any Affiliate of such
Holder.
(b) Procedure for Sale. If all the Subject Shares are subscribed
-------------------
for by the Company or its designees, as the case may be, the closing of the
purchase of the Subject Shares shall take place at the principal offices of
the Company no later than thirty (30) days after the date of the expiration
of the Right of First Offer Election Period (subject to the last sentence
of this Section 11(b)). At the closing, the Company or its designees, as
the case may be, will pay the purchase price for the Subject Shares to be
purchased by it to the Selling Holder by wire transfer of immediately
available funds upon the Selling Holder's delivery of valid certificates
evidencing the Subject Shares. Such certificates will be duly endorsed
(with signatures guaranteed, if appropriate) for transfer to the Company or
its designees, as the case may be, and upon delivery of such certificates
to the Company or its designees, as the case may be, the Selling Holder
will be deemed to represent and warrant to the Company or its designees, as
the case may be, that the Subject Shares are owned by the Selling Holder
free and clear of all liens, adverse claims and other encumbrances (other
than as provided in this Registration Rights Agreement), and that the
Selling Holder has all requisite power and authority to sell the Subject
Shares. The parties shall take all such actions as may be necessary to
comply as promptly as practicable with the Hart-Scott-Rodino Antitrust
Improvements Act of 1976, as amended, in connection with the sale of the
Subject Shares.
12. Amendment. This Agreement may be amended and the
----------
observance of any provision of this Agreement may be waived (either
generally or in a particular instance and either retroactively or
prospectively) only with the written consent of the Company and Holders of
at least sixty-six percent (66%) of the Registrable Shares. Any amendment
or waiver effected in accordance with this Section 12 shall be binding upon
each Holder, each transferee thereof and the Company.
13. Termination. The rights provided in this Agreement shall
------------
terminate on the tenth anniversary of the effective date of this Agreement.
14. Governing Law. THIS AGREEMENT SHALL BE CONSTRUED,
--------------
INTERPRETED AND THE RIGHTS OF THE PARTIES DETERMINED IN ACCORDANCE WITH THE
LAWS OF THE STATE OF NEW YORK (WITHOUT REGARD TO THE CONFLICT OF LAWS
PROVISIONS THEREOF).
15. Counterparts. This Agreement may be executed in two or more
-------------
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
-15-
<PAGE>
16. Titles and Subtitles. The titles and subtitles used in this
---------------------
Agreement are used for convenience only and are not to be considered in
construing or interpreting this Agreement.
17. Negotiation of Agreement. Each of the parties acknowledges
-------------------------
that it has been represented by independent counsel of its choice
throughout all negotiations that have preceded the execution of this
Agreement and that it has executed the same with consent and upon the
advice of said independent counsel. Each party and its counsel cooperated
in the drafting and preparation of this Agreement and the documents
referred to herein, and any and all drafts relating thereto shall be deemed
the work product of the parties and may not be construed against any party
by reason of its preparation. Accordingly, any rule of law or any legal
decision that would require interpretation of any ambiguities in this
Agreement against the party that drafted it is of no application and is
hereby expressly waived. The provisions of this Agreement shall be
interpreted in a reasonable manner to effect the intentions of the parties
and this Agreement.
18. Notices. Any notice, request, instruction or other document
--------
to be given hereunder by any party hereto to another party hereto shall be
in writing, shall be deemed to have been duly given or delivered when
delivered personally or telecopied (receipt confirmed, with a copy sent by
reputable overnight courier), or one business day after delivery to a
reputable overnight courier, postage prepaid, to the address of the party
set forth below such party's signature on this Agreement or to such address
as the party to whom notice is to be given may provide in a written notice
to each of the other parties to this Agreement, a copy of which written
notice shall be on file with the Secretary of the Company.
19. Severability. If one or more provisions of this Agreement
-------------
are held to be unenforceable under applicable law, such provision shall be
excluded from this Agreement and the balance of the Agreement shall be
interpreted as if such provision were so excluded and shall be enforceable
in accordance with its terms to the fullest extent permitted by law.
20. Further Assurances. Each of the parties shall, without
-------------------
further consideration, execute and deliver such additional documents and
take such other action as the other parties, or any of them, may reasonably
request to carry out the intent of this Agreement and the transactions
contemplated hereby.
21. Successors and Assigns. This Agreement shall be binding
-----------------------
upon, and all rights hereto shall inure to the benefit of, the parties
hereto, and their respective successors and assigns.
22. Entire Agreement. This Agreement embodies the entire
-----------------
agreement and understanding of the parties hereto in respect of the actions
and transactions contemplated by this Agreement. There are no restrictions
promises, inducements, representations, warranties, covenants or
undertakings with regard to the registration of the Shares pursuant to the
Securities Act, other than those expressly set forth or referred to in this
Agreement.
-16-
<PAGE>
23. Recapitalization, etc. The provisions of this Agreement
----------------------
(including any calculation of share ownership) shall apply, to the full
extent set forth herein with respect to the Registrable Shares, to any and
all shares of capital stock of the Company or any capital stock,
partnership units or, any other security evidencing ownership interests in
any successor or assign of the Company (whether by merger, consolidation,
sale of assets or otherwise) that may be issued in respect of, in exchange
for, or in substitution of the Registrable Shares by reason of any stock
dividend, split, combination, recapitalization, liquidation,
reclassification, merger, consolidation or otherwise.
UNITED PAYORS & UNITED PROVIDERS, INC.
/s/ Edward S. Civera
By: ____________________________________
Edward S. Civera
President and Chief Operating Officer
Address:
2275 Research Boulevard, Sixth Floor
Rockville, Maryland 20850
Attention: Edward S. Civera
Telecopier: (301) 548-8828
CAPITAL Z FINANCIAL SERVICES FUND II, L.P.
/s/ Paul H. Warren
By: _________________________________
Address:
c/o Capital Z Partners, Ltd.
One Chase Manhattan Plaza, 44th Floor
New York, New York 10005
Attention: Paul Warren
David Spuria
Telecopier: (212) 898-8720
-17-
<PAGE>
EXHIBIT A
REGISTRATION RIGHTS AGREEMENT JOINDER
The undersigned, a Bermuda exempt and limited partnership, joins in the
execution of that certain Registration Rights Agreement ("Agreement"), dated
February 25, 1999, by and between Capital Z Financial Services Fund II, L.P., a
Bermuda exempt and limited partnership, and United Payors & United Providers,
Inc., a Delaware corporation, for the purpose of accepting the benefits
conferred, and assuming the obligations and liabilities imposed, upon Holders
(as such term is defined in the Agreement) pursuant to the Agreement, with
respect to 7,518 of the Shares (as such term is defined in the Agreement).
CAPITAL Z FINANCIAL SERVICES
PRIVATE FUND II, L.P.
February 25, 1999 By: Capital Z Partners, L.P.,
___________________ its General Partner
Date
By: Capital Z Partners, Ltd.,
its General Partner
By: /s/ Paul H. Warren
----------------------------
Name: Paul H. Warren
Title: Senior Vice President
-18-
<PAGE>
EXHIBIT 10.13
REGISTRATION RIGHTS AGREEMENT
-----------------------------
THIS REGISTRATION RIGHTS AGREEMENT (this "Agreement") is made and effective
----------------------------------
as of February 25, 1999, by and among Thomas L. Blair (the "Investor") and
United Payors & United Providers, Inc., a Delaware corporation (the "Company").
RECITALS
A. Upon the terms and subject to the conditions of a Purchase Agreement,
dated as of February 2, 1999 (the "Purchase Agreement"), by and among the
Investor and the Independent Divestment Trust (the "Trust"), the Investor has
agreed to purchase from the Trust shares of the common stock, $0.01 par value
("Common Stock"), of the Company ("Purchase Agreement").
B. Such Purchase Agreement used by the Investor is a prerequisite to the
Company's acquisition of a financial institution;
C. The Company considers this Agreement to be in the best interests of
the Company and its stockholders.
AGREEMENT
NOW, THEREFORE, in consideration of the premises and the mutual covenants
and agreements of the parties contained herein, and for other good and valuable
consideration, the receipt of which is hereby acknowledged, the parties agree as
follows:
1. Definitions. As used herein, the terms below shall have the following
-----------
meanings. Any such term, unless the context otherwise requires, may be used in
the singular or plural, depending upon the reference.
"Affiliate" shall have the meaning provided in the Exchange Act.
"Agreement" shall mean this Registration Rights Agreement.
"Closing Date" shall have the meaning provided in the Securities
Purchase Agreement dated as of February 2, 1999 by and between Capital Z
Financial Services Fund II, L.P. and the Investor.
"Commission" shall mean the United States Securities and Exchange
Commission.
"Common Stock" shall have the meaning provided in Recital A.
<PAGE>
"Common Stock Equivalents" means, without duplication with any other
Common Stock or Common Stock Equivalents, any warrants, options, convertible
securities or indebtedness, exchangeable securities or indebtedness, or other
rights exercisable for or convertible or exchangeable into, directly or
indirectly, Common Stock, whether at the time of issuance or upon the passage of
time or the occurrence of some future event.
"Company" shall mean United Payors & United Providers, Inc., a
Delaware corporation, and any successor thereto.
"Demand Registration" shall mean a registration effected pursuant to
Section 2(a).
"Exchange Act" shall mean the Securities Exchange Act of 1934, as
amended, or any successor law, and the rules and regulations issued pursuant to
that Act or any successor law.
"Holder" shall mean any holder of Shares listed on the signature pages
hereof and any direct or indirect transferee of any such holder that becomes a
party hereto by executing and delivering a Registration Rights Agreement Joinder
in the form attached hereto as Exhibit A.
"Initiating Holders" shall have the meaning provided in Section 2(b).
"Investor" shall have the meaning provided in the preamble of this
Agreement.
"Person" shall mean an individual, partnership, limited liability
company, joint venture, corporation, trust or unincorporated organization or any
other similar entity.
"Register," "registered" and "registration" shall refer to a
registration effected by preparing and filing a registration statement or
similar document in compliance with the Securities Act, and the declaration or
ordering of effectiveness of such registration statement or document by the
Commission.
"Registrable Shares" shall mean (a) the Shares beneficially owned by
any Holder and (b) any shares of Common Stock or other securities of the Company
issued or distributed to a Holder with respect to, in exchange for or in
replacement of, any of the Shares; provided, however, that such shares of Common
Stock and other securities shall be treated as Registrable Shares only if and so
long as (i) they have not been sold by the Investor pursuant to an effective
Registration Statement under the Securities Act, (ii) they have not been sold to
the public in a transaction exempt from the registration and prospectus delivery
requirements of the Securities Act under Section 4(1) thereof or pursuant to
Rule 144 under the Securities Act or any similar provision), or (iii) they may
not immediately be resold by a Holder pursuant to Rule 144 (k) under the
Securities Act without any volume limitation.
"Securities Act" shall mean the Securities Act of 1933, as amended, or
any successor law, and the rules and regulations issued pursuant to that Act or
any successor law.
-2-
<PAGE>
"Purchase Agreement" shall have the meaning provided in Recital A.
"Shares" shall mean 2,250,000 outstanding shares of Common Stock.
"Violation" shall have the meaning provided in Section 7(a).
2. Demand Registration.
--------------------
(a) General. If the Company shall receive, at any time after 365
--------
days after the Closing Date (subject to Section 10 of this Agreement), a
written request from Holders that the Company file a registration statement
under the Securities Act covering the registration of at least 750,000
Registrable Shares (adjusted for all stock splits or similar transactions),
then the Company shall, within ten (10) days of the receipt thereof, give
written notice of such request to all Holders and shall, subject to the
limitations of this Section 2 file a registration statement with respect to
that number of Registrable Shares specified in such written request (and
such Registrable Shares as may be specified in the written notice of any
other Holder delivered to the Company within twenty (20) days after the
date on which the Company mailed notice of the initiating written request
to such other Holder) within 90 days of its receipt of such written request
(the "Required Filing Date") and use all commercially reasonable efforts to
cause such registration statement to be declared effective by the
Commission as promptly thereafter as is practicable.
(b) Underwriters Cut-back. If the Holders initiating the
----------------------
registration request under Section 2(a) (the "Initiating Holders") intend
to distribute the Registrable Shares covered by their request by means of
an underwritten offering, they shall so advise the Company as a part of
their request made pursuant to Section 2(a), and the Company shall include
in the applicable registration statement such information with respect
thereto as may be required or advisable. The selection of the managing
underwriter of any underwritten offering under this Section 2 shall be made
by a majority in interest of the Initiating Holders, with the consent of
the Company (such consent not to be unreasonably withheld) . In the case of
an underwritten offering, the right of any Holder to include Registrable
Shares in the related registration shall be conditioned upon the inclusion
of such Holder's Registrable Shares in the underwritten offering (unless
otherwise mutually agreed by a majority in interest of the Initiating
Holders and such Holder). All Holders proposing to distribute their
securities through such underwritten offering shall (together with the
Company as provided in Section 4(e)) enter into an underwriting agreement
with customary terms with the underwriter or underwriters selected for such
underwritten offering. Notwithstanding any other provision of this
Agreement, if the managing underwriter advises the Initiating Holders that
marketing factors require or make advisable a limitation of the number of
shares to be included in the underwritten offering, then the Initiating
Holders shall so advise all other participating Holders, and the number of
Registrable Shares that may be included in the underwritten offering shall
be allocated among all participating Holders, including the Initiating
Holders, in proportion (as nearly as practicable) to the amount of
Registrable Shares owned by each
-3-
<PAGE>
Holder; provided, however, that the number of Registrable Shares to be
included in such underwritten offering shall not be reduced unless and
until all other securities shall have been excluded from the underwritten
offering.
(c) Limit on Demand Registrations. The Company is obligated to
------------------------------
effect only two (2) Demand Registrations pursuant to Section 2 for an
aggregate of up to 2,250,000 shares of Common Stock (as adjusted for all
stock splits or similar transactions). For purposes of this Section 2(c),
no such registration shall be deemed a Demand Registration unless and until
the registration statement filed pursuant thereto has been declared
effective by the Commission.
(d) Deferral of Filing. The Company may defer the filing (but not
-------------------
the preparation) of any registration statement required by Section 2 for a
period of up to: (i) 45 days in the event that the Company or any of its
Subsidiaries is engaged in confidential negotiations or other confidential
business activities, disclosure of which would be required in such
registration statement (but would not be required if such registration
statement were not filed), and the Board of Directors of the Company
determines in good faith that such disclosure would be materially
detrimental to the Company and its stockholders or would have a material
adverse effect on any such confidential negotiations or other confidential
business activities, or (ii) 120 days in the event that the Board of
Directors of the Company determined to effect a registered underwritten
public offering of the Company's securities for the Company's account and
the Company takes substantial steps (including, but not limited to,
selecting a managing underwriter for such offering) and proceeds with
reasonable diligence to effect such offering; provided that if such
determination is made by the Board of Directors after receipt of a Demand
Registration request, the Board prior to such request shall have commenced
negotiations with an underwriter with respect to such offering; and
provided further, however, that during any period of 360 consecutive days,
Holders shall not be subject to deferrals pursuant to the Company's
exercise of deferral rights for a period of at least 180 consecutive days
(which deferral period shall coincide with the deferral period permitted
under Section 2(d) of that certain Registration Rights Agreement, dated the
date hereof, between the Company and CapZ Fund). A deferral of the filing
of a registration statement pursuant to this Section 2(d) shall be lifted,
and the requested registration statement shall be filed forthwith, if, in
the case of a deferral pursuant to clause (i) of the preceding sentence,
the negotiations or other activities are terminated or the transaction
contemplated by such negotiations or other activities are consummated, or,
in the case of a deferral pursuant to clause (ii) of the preceding
sentence, the proposed registration for the Company's account is abandoned.
In order to defer the filing of a registration statement pursuant to this
Section 2(d), the Company shall promptly (but in any event within 10 days),
upon determining to seek such deferral, deliver to each Initiating Holder a
certificate signed by an executive officer of the Company stating that the
Company is deferring such filing pursuant to this Section 2(d) and a
general statement of the reason for such deferral and an approximation of
the anticipated delay. Within 20 days after receiving such certificate, the
-4-
<PAGE>
holders of a majority in interest of the Registrable Shares held by the
Requesting Holders and for which registration was previously requested may
withdraw their request by giving notice to the Company. If withdrawn, the
such request shall be deemed not to have been made for all purposes of this
Agreement.
(e) Expenses of Demand Registration. All expenses of Demand
--------------------------------
Registrations shall be paid by the selling Holders; provided, however, that
if any securities other than the Shares are included in a Demand
Registration, any person on whose behalf such securities have been included
shall pay that percentage of the total expenses which equals the percentage
of the total proceeds received by such person, and the selling Holders
shall have no responsibility for any such expenses.
3. Piggy-Back Registration.
------------------------
(a) General. If at any time after 180 days after the Closing Date,
--------
the Company proposes to register (including for this purpose a registration
effected by the Company pursuant to Section 2 of this Agreement) any shares
of its Common Stock under the Securities Act in connection with the public
offering of such securities (other than a registration on Form S-4 or Form
S-8 (or any successor forms)), the Company shall, at such time, promptly
give each Holder written notice of such registration. Upon the written
request of each Holder given within fifteen (15) days after mailing of such
notice by the Company in accordance with Section 18 hereof, the Company
shall cause to be registered under the Securities Act all of the
Registrable Shares that each such Holder has requested to be registered,
subject to the underwriter cutback and other provisions of Section 3(b)
hereof.
(b) Underwriting Requirements. In connection with any underwritten
--------------------------
offering, the Company shall not be required under this Section 3 to include
any Holder's Registrable Shares in such underwritten offering unless such
Holder shall have agreed in writing to the terms of the underwriting as
agreed upon among the Company and the underwriters selected by the
Company or by selling stockholders, as the case may be, and then only in
such quantity as the underwriters determine in their sole discretion will
not materially and adversely affect the distribution of securities to be
covered by such registration statement such determination to be confirmed
in writing upon the request of any Holder. If the total amount of
Registrable Shares requested by Holders to be included in such offering
pursuant to Section 3(a) exceeds the amount of securities that the
underwriters determine in their sole discretion is compatible with the
success of the offering, then the Company shall be required to include in
the offering only that number of Registrable Shares and shares of Common
Stock offered by other selling shareholders which the underwriters
determine in their sole discretion will not have a material adverse effect
on the offering (the securities so included to be apportioned among all
selling Holders and other selling shareholders pro rata according to the
total amount of shares of Common Stock proposed to the be sold by each
selling holder.
(c) Expenses of Company Registration. The Company shall bear and pay
---------------------------------
all expenses incurred in connection with any registration, filing,
qualification or sale of
-5-
<PAGE>
Registrable Shares pursuant to this Section 3, including (without
limitation) all registration, filing, and qualification fees, and printers'
fees, accounting fees and the fees and disbursements of counsel for the
Company relating or apportionable thereto, but excluding underwriting
discounts and commissions, stock transfer taxes and the fees and expenses
of separate counsel, if any, retained by the selling Holders.
4. Obligations of the Company. Whenever required under this Agreement
---------------------------
to effect the registration of any Registrable Shares, the Company shall, as
expeditiously as reasonably possible, use reasonable commercial efforts to
do the following:
(a) Commission Filing. Prepare and file with the Commission
------------------
a registration statement with respect to such Registrable Shares and
to cause such registration statement to become effective, and, upon
the request of the Holders of a majority of the Registrable Shares
registered thereunder, keep such registration statement effective for
up to 180 days or until all of the Shares registered thereunder are
sold, whichever occurs sooner.
(b) Amendments. Prepare and file with the Commission such
-----------
amendments and supplements to such registration statement and the
prospectus used in connection with such registration statement as may
be necessary to comply with the provisions of the Securities Act with
respect to the disposition of all securities covered by such
registration statement, and furnish such copies thereof to the Holders
and any underwriters as they may reasonably request.
(c) Prospectus. Furnish to the Holders and any underwriters
-----------
such numbers of copies of a prospectus, including a preliminary
prospectus, in conformity with the requirements of the Securities Act,
and such other documents as they may reasonably request in order to
facilitate the disposition of Registrable Shares owned by them, and
cause all related filings to be made with the Commission as required
by Rule 424 under the Securities Act.
(d) Blue Sky Qualification. Register and qualify the
-----------------------
Registrable Shares covered by such registration statement under such
other securities or Blue Sky laws of such jurisdictions as shall be
reasonably requested by the Holders and any underwriters; provided,
however, that the Company shall not be required in connection
therewith or as a condition thereto to qualify to do business or to
file a general consent to service of process in any such states or
jurisdictions.
(e) Underwriting Agreement. In the event of any underwritten
-----------------------
public offering, enter into and perform its obligations under an
underwriting agreement, in usual and customary form, with the managing
underwriter of such offering, including, without limitation,
delivering opinions of counsel and "comfort letters" of accountants.
Each Holder participating in such underwriting shall also
-6-
<PAGE>
enter into and perform its obligations under such an agreement.
(f) Prospectus Delivery. Promptly notify each Holder of
--------------------
Registrable Shares covered by the registration statement at any time
when the Company becomes aware of the happening of any event as a
result of which the registration statement or the prospectus included
in such registration statement or any supplement to the prospectus (as
then in effect) contains any untrue statement of a material fact or
omits to state a material fact necessary to make the statements
therein (in the case of the prospectus, in light of the circumstances
under which they were made) not misleading or, if for any other reason
it shall be necessary during such time period to amend or supplement
the registration statement or the prospectus in order to comply with
the Securities Act, whereupon, in either case, each Holder shall
immediately cease to use such registration statement or prospectus for
any purpose and, as promptly as practicable thereafter, the Company
shall prepare and file with the Commission, and furnish without charge
to the appropriate Holders and managing underwriters, if any, a
supplement or amendment to such registration statement or prospectus
which will correct such statement or omission or effect such
compliance and provide such copies thereof as the Holders and any
underwriters may reasonably request.
(g) Make generally available to the Company's
securityholders an earnings statement satisfying the provisions of
Section 11(a) of the Securities Act no later than 30 days after the
end of the 12-month period beginning with the first day of the
Company's first fiscal quarter commencing after the effective date of
a registration statement, which earnings statement shall cover said
12-month period, and which requirement will be deemed to be satisfied
if the Company timely files complete and accurate information on Forms
10-Q, 10-K and 8-K under the Exchange Act and otherwise complies with
Rule 158 under the Securities Act;
(h) If requested by the managing underwriter or any seller,
promptly incorporate in a prospectus supplement or post-effective
amendment such information as the managing underwriter or any seller
reasonably requests to be included therein, including, without
limitation, with respect to the Registrable Shares being sold by such
seller, the purchase price being paid therefor by the underwriters
and with respect to any other terms of the underwritten offering of
the Registrable Shares to be sold in such offering, and promptly make
all required filings of such prospectus supplement or post-effective
amendment;
(i) As promptly as practicable after filing with the
Commission of any document which is incorporated by reference into a
registration statement, deliver a copy of each such document (in the
form in which it was incorporated) to each seller;
-7-
<PAGE>
(j) Cooperate with the sellers and the managing underwriter
to facilitate the timely preparation and delivery of certificates
(which shall not bear any restrictive legends unless required under
applicable law) representing securities sold under any registration
statement, to enable such securities to be in such denominations and
registered in such names as the managing underwriter or such sellers
may request and to make available to the Company's transfer agent
prior to the effectiveness of such registration statement a
satisfactory supply of such certificates;
(k) Promptly make available for inspection by any seller,
any underwriter participating in any disposition pursuant to any
registration statement, and any attorney, accountant or other agent or
representative retained by any such seller or underwriter
(collectively, the "Inspectors"), all financial and other records,
pertinent corporate documents and properties of the Company
(collectively, the "Records"), as shall be reasonably necessary to
enable them to fulfill their due diligence responsibilities, and cause
the Company's officers, directors and employees to supply all
information requested by any such Inspector in connection with such
registration statement; provided, however, that unless the disclosure
of such Records is necessary to avoid or correct a misstatement or
omission in the registration statement or the release of such Records
is ordered pursuant to a subpoena or other order from a court of
competent jurisdiction, the Company shall not be required to provide
any information under this subparagraph (x) if (A) the Company's Board
of Directors determines in good faith, after consultation with counsel
for the Company, that to do so would cause the Company to forfeit an
attorney-client privilege that was applicable to such information or
(B) if either (1) the Company has requested and been granted from the
SEC confidential treatment of such information contained in any filing
with the SEC or documents provided supplementally or otherwise or (2)
the Company reasonably determines in good faith that such Records are
confidential and so notifies the Inspectors in writing unless prior to
furnishing any such information with respect to (A) and (B) such
Holder of Registrable Shares requesting such information agrees to
enter into a confidentiality agreement in customary form and subject
to customary exceptions; and provided further, however, that each
Holder of Registrable Shares agrees that it will, upon learning that
disclosure of such Records is sought in a court of competent
jurisdiction, give notice to the Company and allow the Company at its
expense, to undertake appropriate action to prevent disclosure of the
Records deemed confidential;
(l) Furnish to each seller and underwriter a signed
counterpart of (A) an opinion or opinions of counsel to the Company
and (B) a comfort letter or comfort letters from the Company's
independent public accountants, each in customary form and covering
such matters as are customarily covered by such opinions or comfort
letters, as the case may be, as the sellers or managing underwriter
reasonably requests;
-8-
<PAGE>
(m) Cause the Registrable Shares included in any
registration statement to be (A) listed on each securities exchange,
if any, on which similar securities issued by the Company are then
listed, or (B) authorized to be quoted and/or listed (to the extent
applicable) on the National Association of Securities Dealers, Inc.
Automated Quotation System or the National Market System of Nasdaq
Stock Market if the Registrable Shares so qualify;
(n) Provide a CUSIP number for the Registrable Shares
included in any registration statement not later than the effective
date of such registration statement;
(o) Cooperate with each seller and each underwriter
participating in the disposition of such Registrable Shares and their
respective counsel in connection with any filings required to be made
with the National Association of Securities Dealers, Inc.;
(p) During the period when a prospectus is required to be
delivered under the Securities Act, promptly file all documents
required to be filed with the Commission pursuant to Sections 13(a),
13(c), 14 or 15(d) of the Exchange Act;
(q) Notify each seller of Registrable Shares promptly of any
request by the Commission for the amending or supplementing of such
registration statement or prospectus or for additional information;
(r) Prepare and file with the Commission promptly any
amendments or supplements to such registration statement or prospectus
which, in the opinion of counsel for the Company or the managing
underwriter, is required in connection with the distribution of the
Registrable Shares;
(s) Enter into such agreements (including underwriting
agreements in the managing underwriter's customary form) as are
customary in connection with an underwritten offering;
(t) Advise each seller of such Registrable Shares, promptly
after it shall receive notice or obtain knowledge thereof, of the
issuance of any stop order issued by the Commission suspending the
effectiveness of such registration statement or the initiation or
threatening of any proceeding for such purpose and promptly use its
best efforts to prevent the issuance of any stop order or to obtain
its withdrawal at the earliest possible moment if such stop order
should be issued;
(u) Cooperate in a reasonable manner, considering among
other
-9-
<PAGE>
things operating responsibilities to the Company, with each seller and
each underwriter participating in the disposition of Registrable
Shares in connection with their selling efforts, including, without
limitation, by making its officers and employees reasonably available
for road show or other presentations; and
(v) Subsequent to the date hereof, not grant rights to more
than four (4) Demand Registrations to any Person in connection with
any transaction or series of related transactions, or Piggy-Back
Registration rights having a priority over the Piggy-Back Registration
rights granted under this Agreement.
5. Furnish Information. It shall be a condition precedent to the
--------------------
obligations of the Company to take any action pursuant to this Agreement
with respect to the Registrable Shares of any selling Holder that such
Holder shall furnish to the Company such information regarding itself, the
Registrable Shares held by it, and the intended method of disposition of
such securities as shall be required to effect the registration of such
Holder's Registrable Shares.
6. Delay of Registration. No Holder shall have any right to obtain or
----------------------
seek an injunction restraining or otherwise delaying any registration as
the result of any controversy that might arise with respect to the
interpretation or implementation of this Agreement.
7. Indemnification. In the event (i) any Registrable Shares are
----------------
included in a registration statement under this Agreement or (ii) any other
shares of Common Stock held by the Investor are included in any
registration statement:
(a) Indemnification by the Company. To the fullest extent
-------------------------------
permitted by law, the Company will indemnify and hold harmless each
Holder, each of its directors, officers, partners, employees,
advisors, agents and representatives, and each person, if any, who
controls such Holder within the meaning of the Securities Act or the
Exchange Act and any agent or investment advisor thereof, against any
and all losses, claims, damages, expenses (including, without
limitation, attorneys' fees and disbursements) and liabilities (joint
or several) to which they may become subject, insofar as such losses,
claims, damages, expenses (including, without limitation, attorneys'
fees and disbursements) and liabilities (or actions in respect
thereof) arise out of, relate to, result from or are based upon any of
the following (each a "Violation"): (i) any untrue statement or
alleged untrue statement of a material fact contained in such
registration statement, including any preliminary prospectus or final
prospectus contained therein, or any amendments or supplements
thereto, (ii) the omission or alleged omission to state therein a
material fact required to be stated therein, or necessary to make the
statements therein not misleading, or (iii) any violation or alleged
violation by the Company of the Securities Act, the Exchange Act, or
any state securities law or any rule or regulation promulgated under
the Securities Act, the Exchange Act, or any state securities law, and
the Company
-10-
<PAGE>
will pay to each such Holder or other person, as incurred, any legal
or other expenses reasonably incurred by one law firm retained by
them, plus appropriate local counsel in connection with investigating
or defending any such loss, claim, damage, expense, liability, or
action; provided, however, that the indemnity agreement contained in
this Section 7(a) shall not apply to amounts paid in settlement of any
such loss, claim, damage, expense, liability, or action if such
settlement is effected without the consent of the Company, nor shall
the Company be liable in any such case for any such loss, claim,
damage, expense, liability, or action to which any Holder or other
indemnifiable person may become subject to the extent that it arises
out of or is based upon a Violation which occurs in reliance upon and
in conformity with written information furnished expressly for use in
connection with such registration by such Holder or other
indemnifiable person. This right to indemnification shall remain in
full force and effect notwithstanding any investigation made by or on
behalf of such Holder or other indemnifiable person and shall survive
the transfer of such securities by such Holder.
(b) Indemnification by Selling Holder. To the fullest extent
----------------------------------
permitted by law, each selling Holder severally, but not jointly, will
indemnify and hold harmless the Company, each of its directors, each
of its officers, partners, employees, advisors, agents and
representatives, who has signed the registration statement, each
person, if any, who controls the Company within the meaning of the
Securities Act or the Exchange Act, and any agent or investment
advisor thereof, any other Holder selling securities registered in
such registration statement and any controlling person of any such
underwriter or other Holder against any and all losses, claims,
damages, expenses (including, without limitation, attorney's fees and
disbursements) and liabilities (joint or several) to which any of the
foregoing persons may become subject, insofar as such losses, claims,
damages, expenses (including, without limitation, attorney's fees and
disbursements) and liabilities (or actions in respect thereto) arise
out of, relate to, result from or are based upon any Violation, in
each case to the extent (and only to the extent) that such Violation
occurs in reliance upon and in conformity with written information
furnished by such Holder expressly for use in connection with such
registration; provided, however, that the indemnity agreement
contained in this Section 7(b) shall not apply to amounts paid in
settlement of any such loss, claim, damage, liability or action if
such settlement is effected without the consent of the Holder (which
consent shall not be unreasonably withheld); provided, further, that
in no event shall any indemnity under this Section 7 (b) exceed the
net proceeds from the offering received by such Holder.
(c) Procedures. Promptly after receipt by an indemnified party
-----------
under this Section 7 of notice of the commencement of any action
(including any governmental action), such indemnified party will, if a
claim in respect thereof is to be made against any indemnifying party
under this Section 7, deliver to the indemnifying party a written
notice of the commencement thereof in accordance with Section 18
hereof
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<PAGE>
and the indemnifying party shall have the right to participate in,
and, to the extent the indemnifying party so desires, jointly with any
other indemnifying party similarly noticed, to assume the defense
thereof with counsel mutually satisfactory to the parties; provided,
however, that an indemnified party (together with all other
indemnified parties which may be represented without conflict by one
counsel) shall have the right to retain one separate counsel (plus
appropriate local counsel), with the reasonable fees and expenses to
be paid by the indemnifying party, if representation of such
indemnified party by the counsel retained by the indemnifying party
would be inappropriate due to actual or potential differing interests
between such indemnified party and any other party represented by such
counsel in such proceeding. The failure to deliver written notice to
the indemnifying party within a reasonable time of the commencement of
any such action, if prejudicial in any material respect to its ability
to defend such action, shall to the extent prejudicial relieve such
indemnifying party of any liability to the indemnified party under
this Section 7, but the omission so to deliver written notice to the
indemnifying party will not relieve it of any liability that it may
have to any indemnified party otherwise than under this Section 7.
(d) Contribution. If the indemnification provided for in this
-------------
Section 7 from the indemnifying party is unavailable to an indemnified
party hereunder in respect of any losses, claims, damages, liabilities
or expenses referred to therein, then the indemnifying party, in lieu
of indemnifying such indemnified party, shall contribute to the amount
paid or payable by such indemnified party as a result of such losses,
claims, damages, liabilities or expenses in such proportion as is
appropriate to reflect the relative fault of the indemnifying party on
the one hand and the indemnified parties on the other in connection
with the actions which resulted in such losses, claims, damages,
liabilities or expenses, as well as any other relevant equitable
considerations. The relative fault of such indemnifying party and
indemnified parties shall be determined by reference to, among other
things, whether any action in question, including any untrue or
alleged untrue statement of a material fact or omission or alleged
omission to state a material fact, has been made by, or related to
information supplied by, such indemnifying party or indemnified
parties, and the parties' relative intent, knowledge, access to
information and opportunity to correct or prevent such action;
provided, however, that in no event shall the liability of any selling
Holder hereunder be greater in amount than the difference between the
dollar amount of the proceeds received by such Holder upon the sale of
the Registrable Shares giving rise to such contribution obligation and
all amounts previously contributed by such Holder with respect to such
losses, claims, damages, liabilities and expenses. The amount paid or
payable to a party as a result of the losses, claims damages,
liabilities and expenses referred to above shall be deemed to include
any legal or other fees or expenses reasonably incurred by such party
in connection with any investigation or proceeding.
-12-
<PAGE>
The parties hereto agree that it would not be just and equitable if
contribution pursuant to this Section 7(d) were determined by pro rata
allocation or by any other method of allocation which does not take into account
the equitable considerations referred to in the immediately preceding paragraph.
No person guilty of fraudulent misrepresentation (within the meaning of Section
11(f) of the Securities Act) shall be entitled to contribution from any Person
who was not guilty of such fraudulent misrepresentation.
(e) Survival. The obligations of the Company and Holders under
---------
this Section 7 shall survive the completion of any offering of
Registrable Shares in a registration statement under this Agreement,
and otherwise.
8. Reports Under Exchange Act. With a view to making available
---------------------------
to the Holders the benefits of Rule 144 promulgated under the Securities
Act and any other rule or regulation of the Commission that may at any time
permit a Holder to sell securities of the Company to the public without
registration, the Company agrees to use commercially reasonable efforts to:
(a) make and keep public information available, as those terms are
defined in Rule 144;
(b) file with the Commission in a timely manner all reports and
other documents required to be filed by the Company under the Securities
Act and the Exchange Act; and
(c) furnish to any Holder, so long as the Holder owns any
Registrable Shares, promptly upon request (i) a written statement by the
Company that it has complied with the reporting requirements of Rule 144,
the Securities Act and the Exchange Act, (ii) a copy of the most recent
annual and/or quarterly report of the Company and such other reports and
documents so filed by the Company, and (iii) such other information as may
be reasonably requested in availing any Holder of any rule or regulation of
the Commission which permits the selling of any Registrable Shares without
registration.
9. "Market Stand-Off" Agreement. Each Holder hereby agrees that
-----------------------------
for a period of 180 days, or such shorter period required by the
underwriters, following the effective date of any registration effected
pursuant to Section 2, or if Holders participate in the sale of securities
effected pursuant to Section 3 hereof, such Holder, if requested by the
managing underwriter, shall not, directly or indirectly sell, offer to
sell, contract to sell (including, without limitation, any short sale),
grant any option to purchase or otherwise transfer or dispose of (other
than to donees and Affiliates who agree to be similarly bound) any
securities of the Company held by it at any time during such period, except
shares of Common Stock included in such registration. In addition, each
Holder agrees, if applicable, to acknowledge the undertaking provided for
in this Section 9 by entering into customary written "lock-up" agreements
with the managers of the relevant underwriting. The requirements of this
Section 9 shall not apply to any Holder that (together with its
Affiliates), at the time of receipt of the referenced notice from the
Company, (i) beneficially owns less than 5% of the outstanding shares of
Common Stock, (ii) is not an Affiliate or an employee of the Company and
(iii) waives any further benefits of this Agreement for it or any
-13-
<PAGE>
subsequent assignee or transferee of its Registrable Shares.
In order to enforce the foregoing covenant, the Company may
impose stop transfer instructions with respect to the Registrable Shares of
each Holder (and the shares or securities of every other person subject to
the foregoing restriction) until the end of such period.
10. "Lock-up" Agreements. Each Holder agrees to enter into a
---------------------
customary written "lock-up" agreement with respect to the Registrable
Shares with the managers of any underwritten public offering by the Company
of shares of its equity securities for cash, which offering is completed on
or before August 31, 1999; provided, however, that the aggregate of such
"lock-up" period together with any deferral period pursuant to Section 2(d)
shall not exceed the deferral period permitted under Section 2(d).
11. Right of First Offer.
---------------------
(a) Notice of Proposed Transaction; Election. In the event that
-----------------------------------------
any Holder or any holder of Common Stock Equivalents or shares of common
stock received upon exercise of such Common Stock Equivalents who is a
direct or indirect transferee of the Investor (the "Selling Holder")
desires to effect a sale, within the meaning of Section 2(3) of the
Securities Act of 1933, as amended, of any or all of its shares of Common
Stock or any Common Stock Equivalents (collectively, the "Subject Shares"),
the Selling Holder shall first give written notice (a "Right of First Offer
Notice") of such desire to the Company setting forth the terms and
conditions of sale and the price at which the Selling Holder desires to
sell. The Company shall thereupon, within twenty (20) business days
following its receipt of the Right of First Offer Notice (the "Right of
First Offer Election Period"), notify the Selling Holder in writing of the
number, if any, of Subject Shares that the Company or its designee, as the
case may be, desires to subscribe to purchase (the "Right of First Offer
Subscription"). Failure to respond to the Selling Holder with regard to
the Right of First Offer Notice prior to the expiration of the Right of
First Offer Election Period shall be deemed to be an election not to
subscribe for any of the Subject Shares. If the Selling Holder satisfies
all of the foregoing conditions and the Company and its designees, as the
case may be, do not collectively subscribe for all of the Subject Shares,
then the Selling Holder may, upon the expiration of the Right of First
Offer Election Period, sell the Subject Shares not subscribed for by the
Company or its designees, as the case may be, to any other person at a
purchase price equal to or higher than the price set forth in the Right of
First Offer Notice; provided, however, that the Selling Holder shall again
become subject to the above restrictions on transfer if a definitive
agreement for the proposed transfer is not entered into within ninety (90)
days after the expiration of Right of First Offer Election Period. This
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<PAGE>
Section 11(a) shall not apply to any Transfer by any Holder to any
Affiliate of such Holder.
(b) Procedure for Sale. If all the Subject Shares are subscribed
-------------------
for by the Company or its designees, as the case may be, the closing of the
purchase of the Subject Shares shall take place at the principal offices of
the Company no later than thirty (30) days after the date of the expiration
of the Right of First Offer Election Period (subject to the last sentence
of this Section 11(b)). At the closing, the Company or its designees, as
the case may be, will pay the purchase price for the Subject Shares to be
purchased by it to the Selling Holder by wire transfer of immediately
available funds upon the Selling Holder's delivery of valid certificates
evidencing the Subject Shares. Such certificates will be duly endorsed
(with signatures guaranteed, if appropriate) for transfer to the Company or
its designees, as the case may be, and upon delivery of such certificates
to the Company or its designees, as the case may be, the Selling Holder
will be deemed to represent and warrant to the Company or its designees, as
the case may be, that the Subject Shares are owned by the Selling Holder
free and clear of all liens, adverse claims and other encumbrances (other
than as provided in this Registration Rights Agreement), and that the
Selling Holder has all requisite power and authority to sell the Subject
Shares. The parties shall take all such actions as may be necessary to
comply as promptly as practicable with the Hart-Scott-Rodino Antitrust
Improvements Act of 1976, as amended, in connection with the sale of the
Subject Shares.
12. Amendment. This Agreement may be amended and the
----------
observance of any provision of this Agreement may be waived (either
generally or in a particular instance and either retroactively or
prospectively) only with the written consent of the Company and Holders of
at least sixty-six percent (66%) of the Registrable Shares. Any amendment
or waiver effected in accordance with this Section 12 shall be binding upon
each Holder, each transferee thereof and the Company.
13. Termination. The rights provided in this Agreement shall
------------
terminate on the tenth anniversary of the effective date of this Agreement.
14. Governing Law. THIS AGREEMENT SHALL BE CONSTRUED,
--------------
INTERPRETED AND THE RIGHTS OF THE PARTIES DETERMINED IN ACCORDANCE WITH THE
LAWS OF THE STATE OF NEW YORK (WITHOUT REGARD TO THE CONFLICT OF LAWS
PROVISIONS THEREOF).
15. Counterparts. This Agreement may be executed in two or more
-------------
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
-15-
<PAGE>
16. Titles and Subtitles. The titles and subtitles used in this
---------------------
Agreement are used for convenience only and are not to be considered in
construing or interpreting this Agreement.
17. Negotiation of Agreement. Each of the parties acknowledges
-------------------------
that it has been represented by independent counsel of its choice
throughout all negotiations that have preceded the execution of this
Agreement and that it has executed the same with consent and upon the
advice of said independent counsel. Each party and its counsel cooperated
in the drafting and preparation of this Agreement and the documents
referred to herein, and any and all drafts relating thereto shall be deemed
the work product of the parties and may not be construed against any party
by reason of its preparation. Accordingly, any rule of law or any legal
decision that would require interpretation of any ambiguities in this
Agreement against the party that drafted it is of no application and is
hereby expressly waived. The provisions of this Agreement shall be
interpreted in a reasonable manner to effect the intentions of the parties
and this Agreement.
18. Notices. Any notice, request, instruction or other document
--------
to be given hereunder by any party hereto to another party hereto shall be
in writing, shall be deemed to have been duly given or delivered when
delivered personally or telecopied (receipt confirmed, with a copy sent by
reputable overnight courier), or one business day after delivery to a
reputable overnight courier, postage prepaid, to the address of the party
set forth below such party's signature on this Agreement or to such address
as the party to whom notice is to be given may provide in a written notice
to each of the other parties to this Agreement, a copy of which written
notice shall be on file with the Secretary of the Company.
19. Severability. If one or more provisions of this Agreement
-------------
are held to be unenforceable under applicable law, such provision shall be
excluded from this Agreement and the balance of the Agreement shall be
interpreted as if such provision were so excluded and shall be enforceable
in accordance with its terms to the fullest extent permitted by law.
20. Further Assurances. Each of the parties shall, without
-------------------
further consideration, execute and deliver such additional documents and
take such other action as the other parties, or any of them, may reasonably
request to carry out the intent of this Agreement and the transactions
contemplated hereby.
21. Successors and Assigns. This Agreement shall be binding
-----------------------
upon, and all rights hereto shall inure to the benefit of, the parties
hereto, and their respective successors and assigns that execute and
deliver a Registration Rights Agreement Joinder in the form attached hereto
as Exhibit A.
22. Entire Agreement. This Agreement embodies the entire
-----------------
agreement and understanding of the parties hereto in respect of the actions
and transactions contemplated by this Agreement. There are no restrictions
promises, inducements, representations, warranties, covenants or
undertakings with regard to the registration of the Shares pursuant to the
Securities Act, other than those expressly set forth or referred to in this
Agreement.
-16-
<PAGE>
23. Recapitalization, etc. The provisions of this Agreement
----------------------
(including any calculation of share ownership) shall apply, to the full
extent set forth herein with respect to the Registrable Shares, to any and
all shares of capital stock of the Company or any capital stock,
partnership units or, any other security evidencing ownership interests in
any successor or assign of the Company (whether by merger, consolidation,
sale of assets or otherwise) that may be issued in respect of, in exchange
for, or in substitution of the Registrable Shares by reason of any stock
dividend, split, combination, recapitalization, liquidation,
reclassification, merger, consolidation or otherwise.
-17-
<PAGE>
UNITED PAYORS & UNITED PROVIDERS, INC.
/s/ Edward S. Civera
By: ____________________________________
Edward S. Civera
President and Chief Operating Officer
Address:
2275 Research Boulevard, Sixth Floor
Rockville, Maryland 20850
Attention: Edward S. Civera
Telecopier: (301) 548-8828
/s/ Thomas L. Blair
____________________________________
Thomas L. Blair
Address:
-18-
<PAGE>
EXHIBIT A
REGISTRATION RIGHTS AGREEMENT JOINDER
-------------------------------------
The undersigned, a Bermuda exempt and limited partnership, joins in the
execution of that certain Registration Rights Agreement ("Agreement"), dated
February 25, 1999, by and between Thomas L. Blair and United Payors & United
Providers, Inc., a Delaware corporation, for the purpose of accepting the
benefits conferred, and assuming the obligations and liabilities imposed, upon
Holders (as such term is defined in the Agreement) pursuant to the terms of the
Agreement, with respect to 2,240,334 of the Shares (as such term is defined in
the Agreement).
CAPITAL Z FINANCIAL SERVICES
FUND II, L.P.
February 25, 1999 By: Capital Z Partners, L.P.,
___________________ its General Partner
Date
By: Capital Z Partners, Ltd.,
its General Partner
By: /s/ Steven M. Gluckstern
----------------------------
Name: Steven M. Gluckstern
Title: Chairman of the Board
-19-
<PAGE>
EXHIBIT 10.14
EXECUTION COPY
================================================================================
STOCKHOLDERS AGREEMENT
UNITED PAYORS & UNITED PROVIDERS, INC.
____________________
Dated as of February 25, 1999
____________________
================================================================================
<PAGE>
Table of Contents
-----------------
Article 1
DEFINITIONS
Section 1.1 Definitions............................................. 1
Section 1.2 Rules of Construction................................... 4
Article 2
MANAGEMENT OF THE COMPANY AND CERTAIN ACTIVITIES
Section 2.1 Board of Directors...................................... 4
2.1.1 Board Representation.................................... 4
2.1.2 Vacancies............................................... 5
2.1.3 Committees.............................................. 5
2.1.4 Modification of Rights.................................. 5
2.1.5 Costs and Expenses...................................... 6
Section 2.2 Voting of Capital Stock................................. 6
Section 2.3 Other Activities of the Holders; Fiduciary Duties...... 7
2.3.1 CapZ Group.............................................. 7
2.3.2 TLB..................................................... 7
2.3.3 Fiduciary Duties........................................ 7
Article 3
TRANSFERS OF SECURITIES
Section 3.1 Tag Along Rights........................................ 7
3.1.1 Applicability........................................... 7
3.1.2 Exempt Transfers........................................ 8
3.1.3 Terms of Participation Offer............................ 8
Section 3.2 Right of First Offer.................................... 9
3.2.1 Notice of Proposed Transaction; Election............... 9
3.2.2 Exempt Transfers........................................10
3.2.3 Procedure for Sale......................................10
Section 3.3 Transfer and Exchange...................................10
Section 3.4 Replacement Securities..................................11
Article 4
LIMITATION ON TRANSFERS
Section 4.1 Notice of Proposed Transfers............................11
i
<PAGE>
Article 5
COMPANY COVENANTS
Section 5.1 General.........................................12
Section 5.2 Mergers, Acquisitions and Divestitures..........12
Section 5.3 Share Acquisitions..............................12
Section 5.4 OTS Approvals and Determinations................13
Section 5.5 Charter and Bylaws Amendments...................13
Article 6
TERMINATION
Section 6.1 Termination.....................................13
Article 7
MISCELLANEOUS
Section 7.1 Notices.........................................14
Section 7.2 Governing Law...................................15
Section 7.3 Successors and Assigns..........................15
Section 7.4 Duplicate Originals.............................15
Section 7.5 Severability....................................15
Section 7.6 No Waivers; Amendments..........................15
ii
<PAGE>
STOCKHOLDERS AGREEMENT
----------------------
THIS STOCKHOLDERS AGREEMENT (this "Stockholders Agreement"), dated as of
----------------------
February 25, 1999, is entered into by and among the securityholders from time to
time listed on the signature pages hereof and, as to all provisions herein other
than Article 3, United Payors & United Providers, Inc., a Delaware corporation
(including any successors thereto, the "Company").
-------
In consideration of the premises, mutual covenants and agreements
hereinafter contained and for other good and valuable consideration, the receipt
and adequacy of which are hereby acknowledged, the parties hereto agree as
follows:
Article 1
DEFINITIONS
-----------
Section 1.1 Definitions.
-----------
"Accredited Investor" means an "Accredited Investor," as defined in
Regulation D, or any successor rule then in effect.
"Accredited Offeree" shall have the meaning provided in Section 3.1
hereof.
"Acquired Blair Option Shares" means Blair Option Shares which have
been acquired upon exercise of the Blair Option.
"Affiliate" means, with respect to any Person, any Person who,
directly or indirectly, controls, is controlled by or is under common
control with that Person. For purposes of this definition, "control" when
used with respect to any Person means the power to direct the management
and policies of such Person, directly or indirectly, whether through the
ownership of voting securities, by contract or otherwise.
"Blair Option" means the option to purchase up to 2,250,000 shares of
Common Stock granted by TLB to Capital Z Financial Services Fund II, L.P.
<PAGE>
"Blair Option Shares" means the shares of Common Stock which may be or
have been acquired upon exercise of the Blair Option.
"CapZ" means Capital Z Partners, Ltd., a Bermuda exempt company.
"CapZ Group" means CapZ and its Affiliates and its and their
respective officers, directors, and employees (and members of their
respective families and trusts for the primary benefit of such family
members).
"CapZ Group Designee" shall have the meaning set forth in Section
2.1.1.
"Common Stock" means shares of the Common Stock, $.01 par value per
share, of the Company, and any capital stock of the Company into which such
Common Stock thereafter may be changed.
"Company" shall have the meaning set forth in the introductory
paragraph hereof.
"Exchange Act" means the Securities Exchange Act of 1934, as amended,
and the rules and regulations promulgated by the SEC thereunder.
"Holder" means (i) a securityholder listed on the signature page
hereof and (ii) any direct or indirect transferee of any such
securityholder who shall become a party to this Stockholders Agreement.
"Offer Notice" shall have the meaning provided in Section 3.1 hereof.
"Offered Securities" shall have the meaning provided in Section 3.1
hereof.
"Participation Offer" shall have the meaning provided in Section 3.2
hereof.
"Person" or "person" means any individual, corporation, partnership,
limited liability company, joint venture, association, joint-stock company,
trust,
2
<PAGE>
unincorporated organization or government or other agency or political
subdivision thereof.
"Regulation D" means Regulation D promulgated under the Securities Act
by the SEC.
"Required Holders" means Holders who then own beneficially more than
66-2/3% of the aggregate number of shares of Common Stock subject to this
Stockholders Agreement.
"SEC" means the Securities and Exchange Commission.
"Securities" means the Common Stock.
"Securities Act" means the Securities Act of 1933, as amended, and the
rules and regulations promulgated by the SEC thereunder.
"Securities Purchase Agreement" means the Securities Purchase
Agreement, dated February 2, 1999, between TLB and Capital Z Financial
Services Fund II, L.P.
"Shares" shall have the meaning provided in the Securities Purchase
Agreement.
"Stockholders Agreement" means this Stockholders Agreement, as may be
amended from time to time.
"Subsidiary" of any Person means (i) a corporation a majority of whose
outstanding shares of capital stock or other equity interests with voting
power, under ordinary circumstances, to elect directors, is at the time,
directly or indirectly, owned by such Person, by one or more subsidiaries
of such Person or by such Person and one or more subsidiaries of such
Person, and (ii) any other Person (other than a corporation) in which such
Person, a subsidiary of such Person or such Person and one or more
subsidiaries of such Person, directly or indirectly, at the date of
determination thereof, has (x) at least a majority ownership interest or
(y) the power to elect or direct the election of the directors or other
governing body of such Person.
3
<PAGE>
"Tag Sale" shall have the meaning provided in Section 3.1.1 hereof.
"TLB" means Thomas L. Blair.
"Transfer" means any disposition of any Security or any interest
therein that would constitute a "sale" thereof within the meaning of
Section 2(3) of the Securities Act.
"Transfer Notice" shall have the meaning provided in Section 4.1
hereof.
Section 1.2 Rules of Construction. Unless the context otherwise requires
---------------------
(1) a term has the meaning assigned to it;
(2) "or" is not exclusive;
(3) words in the singular include the plural and words in the plural
include the singular;
(4) provisions apply to successive events and transactions; and
(5) "herein," "hereof" and other words of similar import refer to
this Stockholders Agreement as a whole and not to any particular Article,
Section or other subdivision.
Article 2
MANAGEMENT OF THE COMPANY AND CERTAIN ACTIVITIES
------------------------------------------------
Section 2.1 Board of Directors.
------------------
2.1 Board Representation. Subject to Section 2.1.4, the CapZ Group
--------------------
shall be entitled to designate two individuals who are reasonably acceptable to
the Company as members of the Board of Directors of the Company (the "CapZ Group
----------
Designees"). The Company shall duly nominate the CapZ Group Designees for
- ---------
election to its Board of Directors and shall include in any proxy solicitation
materials related to the election of members of the Company's Board of Directors
all such information and
4
<PAGE>
recommendations of the Company's Board of Directors as may be necessary or
advisable to cause the election of the CapZ Group Designees to the Company's
Board of Directors. Each Holder shall vote such Holder's shares of Common Stock
at any regular or special meeting of stockholders of the Company or in any
written consent executed in lieu of such a meeting of stockholders for the
election of the CapZ Group Designees. The Company and each Holder shall take all
other actions necessary to ensure that the certificate of incorporation and
bylaws of the Company as in effect immediately following the date hereof do not,
at any time thereafter, conflict in any respect with the provisions of this
Agreement.
2.1.2. Vacancies. If, prior to his or her election to the Board of
---------
Directors of the Company pursuant to Section 2.1.1 hereof, any CapZ Group
Designee shall be unable or unwilling to serve as a director of the Company, the
CapZ Group shall be entitled to nominate a replacement (who is reasonably
acceptable to the Company) who shall then be a CapZ Group Designee for purposes
of this Article 2. If, following an election to the Board of Directors of the
Company pursuant to Section 2.1.1 hereof, any CapZ Group Designee shall resign
or be removed or be unable to serve for any reason prior to the expiration of
his term as a director of the Company, the CapZ Group shall, within thirty (30)
days of such event, notify the Board of Directors of the Company in writing of a
replacement CapZ Group Designee (who must be reasonably acceptable to the
Company), and either (i) the Holders shall vote their shares of Common Stock, at
any regular or special meeting called for the purpose of filling positions on
the Board of Directors of the Company or in any written consent executed in lieu
of such a meeting of stockholders, and shall take all such other actions
necessary to ensure the election to the Board of Directors of the Company of
such replacement CapZ Group Designee to fill the unexpired term of the CapZ
Group Designee who such new CapZ Group Designee is replacing or (ii) the Board
of Directors shall elect such replacement CapZ Group Designee to fill the
unexpired term of the CapZ Group Designee who such new Designee is replacing.
2.1.3. Committees. The Company and the Holders shall cause each
----------
committee of the Board of Directors of the Company to include as a member at
least one of the CapZ Group Designees, except where such inclusion would give
rise to a conflict of interest.
5
<PAGE>
2.1.4 Modification of Rights. For every four board seats added
----------------------
to the nine board seats comprising the Company's Board of Directors on the date
hereof, the CapZ Group shall be entitled to designate one additional CapZ Group
Designee to the Company's Board of Directors. If at any time members of the CapZ
Group shall own beneficially less than 900,000 of the Shares (adjusted for any
stock splits, stock dividends or similar events) in the aggregate, the CapZ
Group thereafter shall be entitled to designate only one CapZ Group Designee. If
at any time members of the CapZ Group shall own beneficially less than 100,000
of the Shares (adjusted for any stock splits, stock dividends or similar events)
in the aggregate, the CapZ Group thereafter shall not be entitled to designate a
CapZ Group Designee.
2.1.5 Costs and Expenses. The Company shall reimburse each CapZ
------------------
Group Designee for out-of-pocket expenses incurred by such CapZ Group Designee
in connection with such CapZ Group Designee's participation in meetings of the
Board of Directors of the Company (and committees thereof) and, if applicable,
the Boards of Directors of the Subsidiaries of the Company (and committees
thereof) at least to the same extent that the Company reimburses the independent
members of its Board of Directors.
Section 2.2 Voting of Capital Stock. To the extent any Holder owns
-----------------------
shares of any class or series of capital stock of the Company which such Holder
may vote on any particular matter which comes before the Company's stockholders
as a class or series separate from the Common Stock, such Holder shall vote all
such shares on such matter in such separate class or series vote as holders of a
majority of the outstanding shares of Common Stock vote thereon; provided,
--------
however, that such Holder may nevertheless vote such shares as a separate class
- -------
or series without regard to the provisions of this Section 2.2 in respect of (a)
amendments to the certificate of incorporation of the Company, or the
certificate of designation which created such class or series, which change the
provisions thereof expressly applicable to such separate class or series, and
(b) any matter as to which such class or series is expressly entitled to vote as
a separate class or series pursuant to the Company's certificate of
incorporation or the certificate of designation which created such class or
series; provided further, however, that no statement in such certificate of
-------- ------- -------
incorporation or certificate of designation that such class or series may vote
as a separate class or series "as required by law" or
6
<PAGE>
any similar language shall permit such class or series to be voted without
regard to the provisions of this Section 2.2.
7
<PAGE>
Section 2.3 Other Activities of the Holders; Fiduciary Duties.
-------------------------------------------------
2.3.1 CapZ Group. It is understood and accepted that the members
----------
of the CapZ Group have interests in other business ventures which may be in
conflict with the activities of the Company and its Subsidiaries and that,
subject to applicable law, nothing in this Stockholders Agreement shall limit
the current or future business activities of any member of the CapZ Group
whether or not such activities are competitive with those of the Company and its
Subsidiaries.
2.3.2 TLB. TLB agrees that any business opportunity in the
---
healthcare industry (or any industry reasonably related thereto) that is
presented to or otherwise becomes known or available to him shall be directed by
him to the Company. If the Company declines to pursue such business opportunity,
TLB shall give CapZ an opportunity to participate in such business opportunity
(either directly or indirectly through an Affiliate, at CapZ's discretion) on
terms acceptable to CapZ.
2.3.3 Fiduciary Duties. Nothing in this Agreement, express or
----------------
implied, shall relieve any officer or director of the Company or any of its
Subsidiaries, or any Holder, of any fiduciary or other duties or obligations
they may have to the Company or its stockholders.
Article 3
TRANSFERS OF SECURITIES
-----------------------
Section 3.1 Tag Along Rights.
----------------
3.1.1 Applicability. Subject to Section 3.1.2, in the event that
-------------
TLB desires to effect a Transfer of shares of Common Stock (a "Tag Sale"),
--------
either directly or indirectly pursuant to an assignment of TLB's right to
purchase Trust Shares (as defined in the Securities Purchase Agreement), TLB
shall make an offer (a "Participation Offer") to the CapZ Group to include in
-------------------
the proposed Tag Sale (i) any all Shares which have not been transferred or
otherwise disposed of by the CapZ Group, up to that number of Shares which is
equal to the number of shares of Common Stock that TLB desires to sell pursuant
to the Tag Sale and (ii) after all Shares have been transferred or otherwise
8
<PAGE>
disposed of by the CapZ Group, up to that number of Acquired Blair Option Shares
which is equal to (A) one-half multiplied by (B) difference between the number
of shares of Common Stock that TLB desires to sell pursuant to the Tag Sale and
the number of Shares, if any, to be included in the Tag Sale pursuant to clause
(i). For purposes of this Section 3.1, the number "Shares" and "Blair Option
Shares" shall be deemed to have been adjusted to give effect to any stock
splits, stock dividends, and similar events.
3.1.2 Exempt Transfers. Notwithstanding Section 3.1.1, TLB shall
----------------
be entitled to Transfer free of any tag-along rights up to (i) 12,500 shares of
Common Stock per fiscal quarter to any person and (ii) 1,000,000 shares of
Common Stock in the aggregate to executive officers of the Company, including in
either case indirect Transfers to other executive officers of the Company
pursuant to an assignment of TLB's right to purchase Trust Shares (such sales
being referred to herein as "Exempt Transfers").
----------------
3.1.3 Terms of Participation Offer. The Participation Offer shall
----------------------------
describe the terms and conditions of the proposed Tag Sale and shall be
conditioned upon (i) the consummation of the transactions contemplated in the
Participation Offer with the transferee named therein, and (ii) the execution
and delivery by each participating member of the CapZ Group of all agreements
and other documents as TLB is required to execute and deliver in connection with
such Tag Sale (provided that no member of the CapZ Group shall be required to
make any representations or warranties in connection with such Tag Sale other
than representations and warranties as to (A) such member's ownership of such
member's shares of Common Stock to be sold or transferred free and clear of all
liens, claims, and encumbrances, (B) such member's power and authority to effect
such transfer and (C) such matters pertaining to compliance with securities laws
as the transferee may reasonably require). If any member of the CapZ Group shall
accept the Participation Offer, TLB shall reduce, to the extent necessary, the
number of shares of Common Stock that TLB otherwise would have sold in the
proposed Tag Sale so as to permit those members of the CapZ Group who have
accepted the Participation Offer to sell the number of shares of Common Stock
that they are entitled to sell pursuant to this Section 3.1, and TLB and such
members of the CapZ Group shall transfer the number of shares of Common Stock
specified in the Participation Offer to the proposed transferee in accordance
with the terms and conditions of
9
<PAGE>
such Tag Sale as set forth in the Participation Offer. CapZ shall be empowered
to allocate the tag-along rights under Section 3.1.1 among the members of the
CapZ Group as CapZ determines in its sole discretion.
Section 3.2 Right of First Offer.
--------------------
3.2.1 Notice of Proposed Transaction; Election. Subject to Section
----------------------------------------
3.2.2, in the event that TLB desires to effect a Transfer of any or all of his
shares of Common Stock, either directly or indirectly pursuant to an assignment
of TLB's right to purchase Trust Shares (collectively, the "Subject Shares"), he
--------------
shall first give written notice (a "Right of First Offer Notice") of such desire
---------------------------
to the CapZ Group setting forth the terms and conditions of sale and the price
at which TLB desires to sell. The CapZ Group shall thereupon, within ten (10)
business days following its receipt of the Right of First Offer Notice (the
"Right of First Offer Election Period"), notify TLB in writing of the number, if
- -------------------------------------
any, of Subject Shares that the CapZ Group desires to subscribe to purchase (the
"Right of First Offer Subscription"). Subject to the immediately following
---------------------------------
sentence, the number of shares of Common Stock for which the CapZ Group may
subscribe to purchase shall not exceed (i) the number of Shares less (ii) the
----
aggregate number of shares of Common Stock previously (A) purchased by members
of the CapZ Group pursuant to this Section 3.2 or (B) Transferred to Persons who
are not members of the CapZ Group. In addition, to the extent that the CapZ
Group no longer has or would have any right of first offer pursuant to the
preceding provisions of this Section 3.2.1, and to the extent that TLB proposes
to sell Subject Shares at a price less than 90% of the Market Price, the CapZ
Group shall be entitled to subscribe to purchase an additional number of Subject
Shares not to exceed (i) the number of Acquired Blair Option Shares less (ii)
the aggregate of (A) the number of Blair Option Shares Transferred to Persons
other than members of the CapZ Group and (B) the number of Subject Shares
previously purchased by the CapZ Group pursuant to this sentence. For purposes
hereof, "Market Price" shall mean the average of the daily averages of the last
quoted bid and offer price per share of Common on the Nasdaq Stock Market for
each of the ten Nasdaq Stock Market trading days immediately preceding the date
on which the relevant Right of First Offer Notice was sent to the CapZ Group.
Failure to respond to TLB with regard to the Right of First Offer Notice prior
to the expiration of the Right of First Offer Election Period shall be deemed to
10
<PAGE>
be an election not to subscribe for any of the Subject Shares. If TLB satisfies
all of the foregoing conditions and the CapZ Group does not subscribe for all of
the Subject Shares, then TLB may, upon the expiration of the Right of First
Offer Election Period, sell the Subject Shares not subscribed for by the CapZ
Group to any other person at a purchase price equal to or higher than the price
set forth in the Right of First Offer Notice; provided, however, that TLB shall
-------- -------
again become subject to the above restrictions on transfer if a definitive
agreement for the proposed Transfer is not entered into within ninety (90) days
after the expiration of Right of First Offer Election Period. CapZ shall be
empowered to allocate the rights of first offer under this Section 3.2.1 among
the members of the CapZ Group as it determines in its sole discretion.
3.2.2 Exempt Transfers. The CapZ Group's rights of first offer
----------------
under Section 3.2.1 shall not apply to Exempt Transfers.
3.2.3 Procedure for Sale. If all of the Subject Shares are
------------------
subscribed for by members of the CapZ Group, the closing of the purchase of the
Subject Shares shall take place at the principal offices of the Company no later
than thirty (30) days after the date of the expiration of the Right of First
Offer Election Period (subject to the last sentence of this Section). At the
closing, the CapZ Group will pay the purchase price for the Subject Shares to
TLB by wire transfer of immediately available funds upon TLB's delivery of valid
certificates evidencing the Subject Shares. Such certificates will be duly
endorsed (with signatures guaranteed, if appropriate) for transfer to applicable
members of the CapZ Group, and upon delivery of such certificates to such
members of the CapZ Group, TLB will be deemed to represent and warrant to each
such member of the CapZ Group that the Subject Shares are owned and being
transferred by TLB free and clear of all liens, adverse claims and other
encumbrances (other than as provided in this Stockholders Agreement), and that
TLB has all requisite power and authority to sell the Subject Shares. The
parties shall take all such actions as may be necessary to comply as promptly as
practicable with the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as
amended, in connection with the sale of the Subject Shares.
Section 3.3 Transfer and Exchange. When Securities are presented to the
---------------------
Company with a request to register the transfer of such Securities or to
exchange such Securities
11
<PAGE>
for Securities of other authorized denominations, the Company shall register the
transfer or make the exchange as requested if the requirements of this
Stockholders Agreement for such transaction are met; provided, however, that the
-------- -------
Securities surrendered for transfer or exchange shall be duly endorsed or
accompanied by a written instrument of transfer in form satisfactory to the
Company, duly executed by the Holder thereof or its attorney and duly authorized
in writing. No service charge shall be made for any registration of transfer or
exchange, but the Company may require payment of a sum sufficient to cover any
transfer tax or similar governmental charge payable in connection therewith.
Section 3.4 Replacement Securities. If a mutilated Security is
----------------------
surrendered to the Company or if the Holder of a Security claims and submits an
affidavit or other evidence, satisfactory to the Company, to the effect that the
Security has been lost, destroyed or wrongfully taken, the Company shall issue a
replacement Security if the Company's requirements are met. If required by the
Company, such Holder must provide an indemnity bond, or other form of indemnity,
sufficient in the judgment of the Company to protect the Company against any
loss which may be suffered. The Company may charge such Holder for its
reasonable out-of-pocket expenses in replacing a Security which has been
mutilated, lost, destroyed, or wrongfully taken.
Article 4
LIMITATION ON TRANSFERS
-----------------------
Section 4.1 Notice of Proposed Transfers. Prior to any Transfer or
----------------------------
attempted Transfer of any Security, the Holder of such Security shall (i) give
twenty (20) days' prior written notice (a "Transfer Notice") to the Company and
---------------
each other Holder of such Holder's intention to effect such Transfer, describing
the manner, circumstances and material terms of the proposed Transfer, (ii)
certify to the Company and each other Holder that such Holder has complied with
its obligations under Article 3 and (iii) provide to the Company an opinion
reasonably satisfactory to the Company from counsel who shall be reasonably
satisfactory to the Company (or supply such other evidence reasonably
satisfactory to the Company) that the proposed Transfer of such Security may be
effected without registration under the Securities Act. After receipt of the
Transfer Notice and
12
<PAGE>
opinion (if required), the Company shall within three (3) days notify each other
Holder of its receipt of the Transfer Notice (which notice shall be accompanied
by a copy of the Transfer Notice). Within ten (10) days after the Company's
delivery of such notice, the Company shall notify the Holder of such Security
and such Holder shall thereupon be entitled to Transfer such Security in
accordance with the terms of the Transfer Notice; provided, however, that no
-------- -------
Transfer shall be effected unless such Holder has in fact complied with such
Holder's obligations under Article 3.
Article 5
COMPANY COVENANTS
-----------------
Section 5.1 General. The Company shall not enter into any transaction,
-------
including, without limitation, any purchase, sale, exchange or other transfer of
property or any provision or receipt of services, with any Affiliate of the
Company other than upon terms (i) no less favorable to the Company than could be
obtained by the Company in a comparable arm's length transaction with a Person
that is not an Affiliate of the Company or (ii) approved by the Company's
independent directors and the CapZ Group Designees.
Section 5.2 Mergers, Acquisitions and Divestitures. In addition to, and
--------------------------------------
not in limitation of, the requirements of Section 5.1, the Company shall not
merge with, acquire stock or assets from, sell stock or assets to, or engage in
any similar business combination transaction with, an Affiliate of the Company
if the value of such transaction exceeds ten million dollars ($10,000,000)
unless the Company first shall have obtained an opinion from a nationally-
recognized investment bank to the effect that such transaction is fair to the
Company or its stockholders, as the case may be, from a financial point of view.
Section 5.3 Share Acquisitions. At any time the Company is a "savings
------------------
and loan holding company" (as defined in 12 C.F.R. (S)574.2(q)), the Company
shall not redeem, purchase or otherwise acquire or agree to redeem, purchase or
otherwise acquire any shares of its capital stock or any option, warrant or
other similar right to acquire, or any security convertible into or exchangeable
or exercisable for, any shares of its capital stock, if such redemption,
13
<PAGE>
purchase or other acquisition would cause the Shares and any Acquired Blair
Option Shares to constitute 10% or more of the outstanding shares of voting
capital stock of the Company.
Section 5.4 OTS Approvals and Determinations. The Company shall
--------------------------------
reasonably cooperate with the CapZ Group from time to time in obtaining any
necessary approvals, determinations or other authorizations from the United
States Office of Thrift Supervision in connection with the CapZ Group's
acquisition, ownership, or disposition of the Shares and the Blair Option
Shares.
Section 5.5 Charter and Bylaws Amendments. The Company shall use its
-----------------------------
best efforts to (i) delete from its certificate of incorporation Article Fifth,
Section C (which prohibits stockholder action by written consent), Article
Eighth (which imposes restrictions on transactions with "interested
stockholders") and Article Ninth (which allows the Company's Board of Directors
to consider non-stockholder constituencies in evaluating certain business
transactions) and (ii) amend Article 6, Section D (which specifies the
conditions for removal of directors), Article Seventh (which specifies the
methods for amending the Company's bylaws), and Article Twelfth (which specifies
the methods for amending the company's certificate of incorporation) to require
in each case a 66-2/3% stockholder vote rather than the 80% stockholder vote
presently specified therein. Without limiting the foregoing, the Company's Board
of Directors shall approve such amendments, submit such amendments to a vote of
the Company's stockholders at the Company's next annual meeting and cause the
Company to solicit proxies to vote the requisite number shares of Common Stock
in favor of such amendments at the Company's next annual meeting. In addition,
the Company's Board of Directors shall approve such corresponding amendments to
the Company's bylaws as may be necessary to eliminate any conflicts between the
Company's bylaws, on the one hand, and the Company's certificate of
incorporation, as amended in accordance herewith, on the other hand.
Article 6
TERMINATION
-----------
Section 6.1 Termination. The provisions of this Agreement shall
-----------
terminate on the seventh anniversary of the
14
<PAGE>
date of this Agreement or, if later, the second anniversary of the date on which
TLB notifies the Company and each Holder in writing of his intention to
terminate this Stockholders Agreement.
Article 7
MISCELLANEOUS
-------------
Section 7.1 Notices. Any notices or other communications required or
-------
permitted hereunder shall be in writing, and shall be sufficiently given if made
by hand delivery, by telex, by telecopier or registered or certified mail,
postage prepaid, return receipt requested, addressed as follows (or at such
other address as may be substituted by notice given as herein provided):
If to the Company:
-----------------
United Payors & United Providers, Inc.
2275 Research Boulevard, 6th Floor
Rockville, Maryland 20850
Facsimile: (301) 921-2400
Attention: Edward S. Civera
With copies to:
--------------
Muldoon, Murphy & Faucette
5101 Wisconsin Avenue, N.W.
Washington, D.C. 20016
Facsimile: 202-966-9409
Attention: Thomas Haggerty, Esq.
If to any Holder, at its address listed on the signature pages hereof.
Any notice or communication hereunder shall be deemed to have been given or
made as of the date so delivered if personally delivered; when answered back, if
telexed; when receipt is acknowledged, if telecopied; and five (5) calendar days
after mailing if sent by registered or certified mail (except that a notice of
change of address shall not be deemed to have been given until actually received
by the addressee).
Failure to mail a notice or communication to a Holder or any defect in it
shall not affect its sufficiency with
15
<PAGE>
respect to other Holders. If a notice or communication is mailed in the manner
provided above, it is duly given, whether or not the addressee receives it.
Section 7.2 Governing Law. THIS STOCKHOLDERS AGREEMENT SHALL BE
-------------
GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF DELAWARE,
WITHOUT REGARD TO PRINCIPLES OF CONFLICTS OF LAW.
Section 7.3 Successors and Assigns. Whether or not an express
----------------------
assignment has been made pursuant to the provisions of this Stockholders
Agreement, provisions of this Stockholders Agreement that are for the Holders'
benefit as the holders of any Securities are also for the benefit of, and
enforceable by, all subsequent holders of Securities, except as otherwise
expressly provided herein. This Stockholders Agreement shall be binding upon the
Company, each Holder, and their respective successors and assigns.
Notwithstanding the foregoing, the rights and obligations of members of the CapZ
Group under Article 3 may not be assigned to any Person who is not a member of
the CapZ Group.
Section 7.4 Duplicate Originals. All parties may sign any number of
-------------------
copies of this Stockholders Agreement. Each signed copy shall be an original,
but all of them together shall represent the same agreement.
Section 7.5 Severability. In case any provision in this Stockholders
------------
Agreement shall be held invalid, illegal or unenforceable in any respect for any
reason, the validity, legality and enforceability of any such provision in every
other respect and the remaining provisions shall not in any way be affected or
impaired thereby
Section 7.6 No Waivers; Amendments.
----------------------
7.6.1 No failure or delay on the part of the Company or any Holder
in exercising any right, power or remedy hereunder shall operate as a waiver
thereof, nor shall any single or partial exercise of any such right, power or
remedy preclude any other or further exercise thereof or the exercise of any
other right, power or remedy. The remedies provided for herein are cumulative
and are not exclusive of any remedies that may be available to the Company or
any Holder at law or in equity or otherwise.
16
<PAGE>
7.6.2 Any provision of this Stockholders Agreement may be amended
or waived if, but only if, such amendment or waiver is in writing and is signed
by the Company and the Required Holders; provided, however, that no such
-------- -------
amendment or waiver shall, (i) unless signed by all of the Holders, amend the
provisions of Section 2.1, (ii) unless signed by all of the Holders affected,
(A) amend the provisions of this Section 7.6.2 or (B) change the number of
Holders which shall be required for the Holders or any of them to take any
action under this Section 7.6.2 or any other provision of this Stockholders
Agreement, and (iii) unless signed by a majority of the Holders who are members
of the CapZ Group, amend Section 3.1, Section 3.2, Article 4, or Article 5, or
grant a waiver thereunder, so as to (A) impose additional obligations on members
of the CapZ Group that are not imposed on other Holders or (B) adversely affect
the rights granted to the members of CapZ Group where such amendment or waiver
does not apply to the same extent to the rights granted to other Holders.
[THE REMAINDER OF THIS PAGE IS INTENTIONALLY LEFT BLANK]
17
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Stockholders
Agreement to be duly executed as of the date first written above.
NAME OF HOLDER:
CAPITAL Z FINANCIAL SERVICES
FUND II, L.P.
By: Capital Z Partners, L.P.,
its General Partner
By: Capital Z Partners, Ltd.,
its General Partner
By: /s/ Steven M. Gluckstern
-------------------------------
Name: Steven M. Gluckstern
Title: Chairman of the Board
Address:
c/o Capital Z Partners, Ltd.
One Chase Manhattan Plaza
44th Floor
New York, New York 10005
Facsimile: (212) 898-8720
Attention: Paul H. Warren
David A. Spuria, Esq.
Copy to:
Weil, Gotshal & Manges LLP
767 Fifth Avenue
New York, New York 10153
Facsimile: (212) 310-8007
Attention: Thomas A. Roberts, Esq.
SIGNATURE PAGE TO STOCKHOLDERS AGREEMENT
<PAGE>
NAME OF HOLDER:
THOMAS L. BLAIR
By: /s/ Thomas L. Blair
----------------------------
Address:
United Payors & United
Providers, Inc.
2275 Research Boulevard
6th Floor
Rockville, Maryland 20850
Facsimile No.: (310) 921-2400
Copy to:
Muldoon, Murphy & Faucette LLP
5101 Wisconsin Avenue, N.W.
Washington, D.C. 20016
Facsimile No.: (202) 966-9409
Attention: Thomas Haggerty
SIGNATURE PAGE TO STOCKHOLDERS AGREEMENT
<PAGE>
THE COMPANY:
UNITED PAYORS & UNITED PROVIDERS, INC.
By: /s/ Edward S. Civera
----------------------------------------------
Name: Edward S. Civera
Title: President and Chief Operating Officer
SIGNATURE PAGE TO STOCKHOLDERS AGREEMENT
<PAGE>
EXHIBIT 10.15
AGREEMENT BETWEEN
UNITED PAYORS & UNITED PROVIDERS, INC.
AND
HEALTHEXTRAS, L.L.C.
This Agreement is made this 23rd day of December, 1998 by and between
United Payors & United Providers, Inc. ("UP&UP"), a Delaware Corporation, and
HealthExtras, L.L.C. ("HE").
Whereas, UP&UP has proprietary contracts with a national network of
physicians and hospitals ("Network");
Whereas, HE has developed a unique set of reinsurance benefits ("Benefits")
that may be utilized to supplement and augment disability and health insurance
programs;
Whereas, HE has a contract with Christopher Reeve ("CR"), via the William
Morris Agency, that stipulates CR will assist in the marketing of HE products
and services;
Whereas, HE wishes to market Network to selected populations as an HE
product on behalf of UP&UP; and
Whereas, HE may wish to market Benefits in conjunction with Network;
Now, Therefore, in consideration of the mutual agreements and covenants
herein contained, UP&UP and HE agree as follows:
A. GENERAL UNDERSTANDINGS
----------------------
1. UP&UP has developed various criteria ("Criteria") that those entities
and/or individuals wishing to utilize the Network must comply with in
order to access the Network. Such Criteria may be revised
unilaterally by UP&UP.
2. The Network developed by UP&UP consists of several thousand hospitals
and in excess of one hundred thousand physicians. UP&UP may
unilaterally add or delete individual hospitals and physicians to, or
from, the Network.
3. Those hospitals and physicians which comprise the Network offer price
concessions to those clients of UP&UP that meet the Criteria.
4. HE is prepared to utilize CR in various advertising campaigns
("Campaigns") promoting Network and/or Benefits.
5. All products marketed and sold by HE as the result of Campaigns shall
conform with Criteria.
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6. In consideration of the Royalty Fee described in Section D. of this
Agreement, HE may utilize the Network in any of its product offerings
for the term of this Agreement and there shall be no access fee
charged to HE or its plan members for utilization of the Network.
B. APPROVALS
---------
1. Any marketing and promotional materials developed by HE that
references the Network may only be utilized by HE after receiving
written approval by UP&UP that such marketing and promotional
materials are acceptable to UP&UP.
2. Any marketing and promotional materials developed by UP&UP that
references the Benefits may only be utilized by UP&UP after receiving
written approval by HE that such marketing and promotional materials
are acceptable to HE.
3. It is understood by UP&UP that any Campaign utilizing CR for the
marketing of the Network and/or other products may be subject to the
approval of the representatives of CR.
C. CAMPAIGNS AND EXCLUSIVITY
-------------------------
1. HE shall develop and implement various Campaigns to sell products to
individuals and families. Such Campaigns may utilize the distribution
channels of third parties including, but not limited to, insurance
companies, credit card issuing banks and other financial institutions.
2. All costs incurred in developing and implementing Campaigns shall be
the responsibility of HE unless UP&UP agrees, in writing, to incur
all, or a portion of, such costs.
3. It is recognized that any Campaigns performed by HE to market products
may be in conjunction with HE marketing Benefits.
4. During the term of the Agreement HE shall not allow any entity or
individual to utilize CR, via the HE contract with the William Morris
Agency, for the promotion of products or services competitive to
products or services offered by UP&UP.
5. During the term of this Agreement HE shall not, directly or
indirectly, market, promote and/or sell any products or services other
than Network, that offer discounts or price concessions from
physicians, hospitals or other medical providers, other than products
or services approved by UP&UP.
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D. COMPENSATION AND PAYMENT
------------------------
1. HE shall charge an annual fee ("Annual Fee") to all those individuals
and families that elect to purchase Benefits as a result of Campaign.
HE shall have the sole right to establish the level of Annual Fee for
those individuals and families purchasing products or services as the
result of the various Campaigns developed and implemented by HE.
2. UP&UP shall be paid a portion of all Annual Fees earned and collected
by HE.
3. Those UP&UP portions ("Royalty Fee") of Annual Fees paid to UP&UP for
each individual and family shall be based on the following schedule:
Royalty Fee Paid UP&UP For Each
Individual or Family Based Upon the
Annual Period Membership Computed on a Monthly Basis
--------------------------- --------------------------------------
Initial Year $12.00 ($1.00 per member per month)
First Subsequent Year $14.00 ($1.17 per member per month)
Second Subsequent Year $16.00 ($1.33 per member per month)
Additional Subsequent Years $18.00 ($1.50 per member per month)
E. PAYMENTS AND AUDIT
------------------
1. All monies due UP&UP from HE as the result of this Agreement shall be
paid within sixty (60) days of each calendar year-end.
2. UP&UP and its affiliated companies and/or its agents may audit all HE
source documents and other records that may form the basis of payments
of UP&UP Royalty Fee by HE under this Agreement.
F. TERM
----
1. This Agreement shall terminate on December 31, 2003. Any payments due
UP&UP under the terms of this Agreement shall survive the termination
of this Agreement.
2. If during the term of this Agreement HE causes UP&UP to receive $25
million market value of HE common stock, then the fees described in
Paragraph D.3. will be eliminated.
G. NON-SOLICITATION
----------------
1. During the term of this Agreement, and for a period of one year from
the date of termination of this Agreement, HE shall not solicit, hire,
contract with or otherwise utilize, or attempt to utilize UP&UP
employees or consultants, unless otherwise mutually agreed upon.
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2. During the term of this Agreement, UP&UP shall not solicit, hire,
contract with or otherwise utilize, or attempt to utilize, HE
employees or consultants unless otherwise mutually agreed upon.
H. CONFIDENTIALITY
---------------
1. HE and UP&UP acknowledge that in fulfilling the responsibilities set
forth in this Agreement, HE and UP&UP shall exchange confidential and
proprietary information concerning business and financial affairs of
HE and UP&UP, their subsidiaries and other affiliated companies. HE
and UP&UP agree not to disclose any such information at any time,
except as necessary to employees or agents of the parties or as
required by law.
2. HE and UP&UP agree that at any time, upon the request of the other,
each will promptly return any and all written or magnetic media
material containing, or reflecting, any confidential or proprietary
business or financial information and will not retain any copies,
extracts, or other reproductions in whole or in part of such material.
I. ARBITRATION
-----------
1. HE and UP&UP shall attempt to resolve any controversy or claim arising
out of, or relating to, this Agreement by mutual cooperation. Any
controversy or claim arising out of, or relating to, this Agreement
which cannot be settled by the mutual cooperation of the parties shall
be settled by binding arbitration rendered by the American Arbitration
Association standard commercial rules of arbitration.
2. In all cases submitted to arbitration, HE and UP&UP agree to share
equally the administrative fee, as well as the Arbitrator's fees, if
any, unless otherwise assessed by the Arbitrator. The Arbitrator's fee
shall be advanced by the initiating party subject to final
apportionment by the Arbitrator in his or her award.
J. INDEMNIFICATION
---------------
1. HE shall indemnify and hold harmless UP&UP and its officers,
employees, agents and affiliates against any and all claims, actions,
expenses and liabilities (including reasonable attorneys fees) related
to any breach of HE's obligations unless the claim, action, expense or
liability is found in a final judgement by a court of competent
jurisdiction (not subject to further appeal) to have resulted directly
and solely of UP&UP's performance under this Agreement.
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2. UP&UP shall indemnify and hold harmless HE and its officers,
employees, agents and affiliates against any and all claims, actions,
expenses and liabilities (including reasonable attorneys fees) related
to or arising from any breach of UP&UP's obligations unless the claim,
action, expense or liability is found in a final judgement by a court
of competent jurisdiction (not subject to further appeal) to have
resulted directly and solely of HE's performance under this Agreement.
K. MODIFICATIONS
-------------
1. All amendments or modifications to this Agreement shall be mutually
agreed to in writing by HE and UP&UP.
L. GOVERNING LAW
-------------
1. This Agreement shall be governed in all respects by the laws of the
State of Delaware.
M. SEVERABILITY OF INVALID PROVISIONS
----------------------------------
1. If any provision of this Agreement is held to be illegal, invalid or
unenforceable under any state or federal laws effective during this
term, such provision shall be fully severable. The Agreement shall be
construed and enforced as if such illegal, invalid or unenforceable
provision had never comprised a part hereof, and the remaining
provisions shall remain in full force and effect despite such
severance, unless this Agreement is terminated by either party in
accordance with the terms of this Agreement, provided that the invalid
provision is not material to the overall purpose and operation of this
Agreement.
N. WAIVER
------
1. The waiver by HE or UP&UP of any breach of any provision of this
Agreement or warranty or representation herein set forth shall not be
construed as a waiver of any subsequent breach of the same or any
other provision.
2. The failure to exercise any right under this Agreement shall not
operate as a waiver of such right. All rights and remedies provided
for under this Agreement are cumulative.
O. HEADINGS
--------
1. The headings in this Agreement are for convenience of reference only
and shall not be considered in construing the provisions hereof.
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P. ENTIRE AGREEMENT
----------------
1. This Agreement contains all of the terms and conditions agreed upon by
HE and UP&UP regarding the subject matter of this Agreement. Any prior
agreements, promises, negotiations, or representations, either oral or
written, relating to the subject matter of this Agreement that are not
expressly set forth in this Agreement are of no force and effect.
Q. EMPLOYEES ON OTHER PARTY'S PREMISES
-----------------------------------
1. The employees or authorized agents of HE and UP&UP shall comply with
the other party's working rules and security regulations at such time
as one party's employees may be on the premises of the other party.
R. NOTICE OF DEFICIENCY
--------------------
1. If either HE or UP&UP, in the opinion of the other, fails to comply
with one or more terms and conditions of this Agreement, the aggrieved
party shall give written notice of deficiency to the other party. The
party receiving such notice shall have thirty (30) days from the
receipt thereof to remedy the deficiency in order to comply with the
terms and conditions of this Agreement. In the event said default is
not cured within the 30 day period, the non-defaulting party may
terminate the Agreement immediately.
S. NOTICES
-------
1. All notices provided by this Agreement shall be in writing and shall
be sent by United States certified mail, postage prepaid, to the
address of the other party which is set forth in this Agreement, or to
such other address as the party shall designate in writing. Any
notice shall be deemed to be effective upon mailing.
If to HE, attention of: David T. Blair
Chief Financial Officer
HealthExtras, L.L.C.
2275 Research Boulevard
Seventh Floor
Rockville, MD 20850
If to UP&UP, attention of: Spiro Karadimas
Vice President of Operations
United Payors & United Providers, Inc.
2275 Research Boulevard
Sixth Floor
Rockville, MD 20850
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T. BINDING ON SUCCESSORS
---------------------
1. This Agreement shall be binding upon and inure to the benefit of HE
and UP&UP and their respective successors and permitted assigns.
U. ASSIGNMENT
----------
1. This Agreement may not be assigned by either party without the prior
written approval of the other party.
V. INDEPENDENT RELATIONSHIP
------------------------
1. None of the provisions of this Agreement are intended to create, nor
shall be deemed or construed to create, any relationship between HE
and UP&UP other than that of independent entities contracting with
each other solely for the purposes of effecting the provisions of this
Agreement.
2. The parties to this Agreement, and their respective officers,
directors, or employees, shall not be construed to be joint ventures,
or the agent, employee, or representative of the other, except as
specifically provided in this Agreement.
IN WITNESS WHEREOF, the undersigned have executed this Agreement.
HE: HEALTHEXTRAS, L.L.C.
December 23, 1998 By: David T. Blair
- ----------------- --------------
Date
Signature: /s/ David T. Blair
-----------------------
Title: Chief Financial Officer
-----------------------
UP&UP: UNITED PAYORS & UNITED PROVIDERS, INC.
12/23/98 By: Spiro Karadimas
- ----------------- ---------------
Date
Signature: /s/ Spiro Karadimas
-----------------------------
Title: Vice President of Operations
-----------------------------
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EXHIBIT 21.1
UNITED PAYORS & UNITED PROVIDERS, INC.
LIST OF SUBSIDIARIES
The Company directly or indirectly owns the following subsidiaries:
National Health Services, Inc. (a Wisconsin corporation)
National Health Services of Mississippi, Inc. (a Mississippi corporation)
Healthcare Review Corporation (a Kentucky corporation)
Healthcare Review Corporation of Missouri, Inc. (a Missouri corporation)
Healthcare Review Corporation of New York, Inc. (a New York corporation)
Medical Network, Inc. (a Delaware corporation)
NHS Coordinated Care, Inc. (a Nevada corporation)
NHS Coordinated Care of Texas, Inc. (a Texas corporation)
IM&I-NEWCO, Inc. (a Delaware corporation)
America's Health Card Services, Inc. (an Iowa corporation)
UP&UP, Inc. (a Maryland corporation)
The Nation's Health Plan, Inc. (a Florida corporation)
Health Plans of America, Inc. (a Maryland corporation)
ProAmerica Managed Care, Inc. (a Texas corporation)
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the registration statements
of United Payors & United Providers, Inc. on Form S-8 (File No. 333-48321 and
333-48323) of our report dated February 12, 1999, except for Note 12, as to
which the date is February 25, 1999, on our audits of the consolidated financial
statements of United Payors & United Providers, Inc. as of December 31, 1998 and
1997 and for the years ended December 31, 1998, 1997 and 1996, which report is
included in the United Payors & United Providers, Inc. Annual Report on
Form 10-K.
/s/ PricewaterhouseCoopers LLP
------------------------------
PricewaterhouseCoopers LLP
Washington, D.C.
March 11, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND> This schedule contains summary financial information extracted from the
Consolidated Balance Sheets and Statements of Operations of United Payors &
United Providers, Inc. as of and for the year ended December 31, 1998 and is
qualified in its entirety by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 27,510,647
<SECURITIES> 3,855,195
<RECEIVABLES> 12,729,631
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 46,537,548
<PP&E> 7,035,747
<DEPRECIATION> (2,733,803)
<TOTAL-ASSETS> 115,944,999
<CURRENT-LIABILITIES> 19,390,615
<BONDS> 17,022,738
0
0
<COMMON> 34,663,001
<OTHER-SE> 43,795,312
<TOTAL-LIABILITY-AND-EQUITY> 115,944,999
<SALES> 0
<TOTAL-REVENUES> 78,449,319
<CGS> 0
<TOTAL-COSTS> 45,917,439
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,105,375
<INCOME-PRETAX> 33,261,150
<INCOME-TAX> 13,682,000
<INCOME-CONTINUING> 19,579,150
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 19,579,150
<EPS-PRIMARY> 1.15
<EPS-DILUTED> 1.09
</TABLE>
