<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K/A
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
FOR THE 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 NO. 0-20905
UNITED PAYORS & UNITED PROVIDERS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 51-0374698
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
2275 RESEARCH BOULEVARD, 6TH FLOOR, ROCKVILLE, MARYLAND 20850
(Address of Principal Executive Offices)
(301) 548-1000
(Registrant's Telephone Number)
Securities Registered Pursuant to Section 12(b) of the Act: None
Securities Registered Pursuant to Section 12(g) of the Act: COMMON STOCK, PAR
VALUE $.01 PER SHARE
--------------------
(Title of Class)
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 twelve months (or for such shorter period that the
Registrant was required to file such reports) and (2) has been subject to such
requirements for the past 90 days.
YES X No
--- ---
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. [ ]
The number of shares of Common Stock, par value $.01 per share,
outstanding on April 28, 1999 was 18,820,257. As of April 28, 1999, assuming as
fair value the last sale price of $18.00 per share on the Nasdaq National
Market, the aggregate fair value of shares held by non-affiliates was
approximately $136,000,000.
DOCUMENTS INCORPORATED BY REFERENCE
None
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The Form 10-K filed by the Registrant on March 15, 1999 is hereby amended
to include the information required to be disclosed under Part III of the Form
10-K.
PART III
ITEM 10. DIRECTORS AND OFFICERS OF THE REGISTRANT
The following table sets forth certain information with respect to the
executive officers and directors of United Payors & United Providers, Inc. (the
"Company") as of April 29, 1999.
<TABLE>
<CAPTION>
Director
Name Age Position Since
---- --- -------- -----
<S> <C> <C>
DIRECTORS WHOSE TERMS EXPIRE IN 1999:
Thomas L. Blair...................... 54 Chairman of the Board and
Co-Chief Executive Officer................ 1996
Thomas J. Graf....................... 50 Director.................................. 1996
Frederick H. Graefe.................. 55 Director.................................. 1996
DIRECTORS WHOSE TERMS EXPIRE IN 2000:
William E. Brock..................... 68 Director.................................. 1996
David J. Drury ...................... 54 Director.................................. 1996
Edward S. Civera..................... 48 Co-Chief Executive Officer and President.. 1997
DIRECTOR WHOSE TERM EXPIRES IN 2001:
Bette B. Anderson.................... 70 Director.................................. 1996
Michael H. Gersie(1)................. 50 Director.................................. 1998
Kenneth J. Linde(1).................. 52 Director.................................. 1997
OFFICERS WHO ARE NOT DIRECTORS:
S. Joseph Bruno...................... 50 Vice President and Chief Financial Officer
Nancy I. Connaway.................... 50 President of ProAmerica Managed Care, Inc.
Barbara M. Freeman................... 50 President of National Health Services, Inc.
Spiro A. Karadimas................... 40 Vice President of Operations
Joseph M. Mott....................... 45 Secretary and General Counsel
</TABLE>
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(1)Messrs. Gersie and Linde each have resigned as directors effective April 30,
1999 and Steven M. Gluckstern and Paul H. Warren have been appointed by the
Board, effective April 30, 1999, to serve as directors until the Annual
Meeting of Stockholders scheduled for June 15, 1999 and have been nominated
for election by stockholders at that meeting to serve the remainder of the
terms expiring at the annual meeting of stockholders in 2001 and until their
successors are elected and qualified.
BETTE B. ANDERSON has served as Vice Chairman of Kelly, Anderson &
Patrick, management consultants, since 1995. She served as its President from
1989 through 1995. Ms. Anderson has served on the Board of Directors for ITT
Corporation, ITT Educational Services, ITT Hartford Insurance and American
Banknote Corp. She is Chairman of the United States Treasury Historical
Association and the Advisory Council of the Girl Scouts of the United States of
America. Previously, Ms. Anderson served as Under Secretary of the United States
Department of the Treasury and prior to that, she was Senior Vice President in
charge of credit administration for the Citizens and Southern National Bank of
Savannah, Georgia.
THOMAS L. BLAIR is the founder of the Company and served as its sole
director and controlling holder of its outstanding voting stock from its
formation in 1995 until its public offering in 1996. He was the founder of
America's Health Plan, Inc. ("AHP") in 1989 and served as its President and
Chief Executive Officer from 1989 to 1992. From 1992 to 1995, Mr. Blair was
President of Initial Managers & Investors, Inc. ("IM&I"), which business was
contributed to UP&UP. From 1977 until 1988, Mr. Blair was a principal of
Jurgovan & Blair, Inc. which developed and managed health maintenance
organizations.
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WILLIAM E. BROCK has served as Senior Counsel and Trustee of the Center
for Strategic and International Studies in Washington, D.C. since 1994. From
1988 to 1994, Mr. Brock served as Chairman of the Brock Group, a consulting
firm. From 1988 to 1991, he served as the Chairman of the National Endowment for
Democracy. From 1985 to 1987, he served as the United States Secretary of Labor
and from 1981 to 1985, he was a United States Trade Representative. Mr. Brock
has also served for eight years as a member of the United States House of
Representatives and for six years as a member of the United States Senate. Mr.
Brock is a director of Sinclair Broadcasting Corp. and On Assignment, Inc.
EDWARD S. CIVERA joined the Company on April 1, 1997 as its President and
Chief Operating Officer and became Co-Chief Executive Officer in March 1999.
Prior to joining the Company, Mr. Civera was a partner with
PricewaterhouseCoopers LLP, then Coopers & Lybrand L.L.P., where he had been
employed for 25 years.
DAVID J. DRURY joined an affiliate of Principal Mutual Holding Company
("Principal Mutual") in 1966 and currently serves as its Chairman of the Board
and Chief Executive Officer. Since 1970, Mr. Drury has served as an officer of
Principal Mutual or its affiliates in various other capacities. Mr. Drury also
is a director of Coventry Health Care, Inc.
MICHAEL H. GERSIE joined an affiliate of Principal Mutual in 1970 and has
served as Senior Vice President since 1996. Mr. Gersie has served as an officer
of affiliates of Principal Mutual since 1974.
FREDERICK H. GRAEFE has been a partner with the law firm of Baker &
Hostetler in Washington, D.C. since 1988, specializing in national health care
policy with an emphasis on comprehensive health care reform. He serves as
Washington counsel to several health care trade associations and coalitions of
hospitals and physicians, manufacturers, malpractice liability insurers and
health insurance companies.
THOMAS J. GRAF joined an affiliate of Principal Mutual in 1972 and, since
1994, has served as Senior Vice President. Since 1976, Mr. Graf has served as an
officer of affiliates of Principal Mutual. Mr. Graf also is a director of
Coventry Health Care, Inc.
KENNETH J. LINDE was the founder, President and Chief Executive Officer of
Principal Health Care, Inc., an affiliate of Principal Mutual. Mr. Linde joined
Principal Mutual in 1987. In 1998, Principal Health Care, Inc. was merged with
Coventry Health Care, Inc., a subsidiary of Coventry Corporation. Mr. Linde
presently is the Chief Executive Officer and President of Discovery Health,
North America.
S. JOSEPH BRUNO has been Vice President and Chief Financial Officer of the
Company since September 1995 and its Corporate Secretary from September 1995 to
March 1997. Prior to joining the Company, Mr. Bruno was a partner with
PricewaterhouseCoopers LLP, then Coopers & Lybrand L.L.P., from 1989 to 1995.
From 1986 to 1989, Mr. Bruno was the Senior Vice President and Chief Financial
Officer of Jurgovan & Blair, Inc. From 1971 to 1986, Mr. Bruno worked at KPMG
Peat Marwick L.L.P., where he served in various capacities, including partner in
both the Washington D.C. and Rome, Italy offices.
NANCY I. CONNAWAY has been President of ProAmerica Managed Care, Inc.
since 1992. Prior to that, Ms. Connaway was employed by the John Hancock Mutual
Life Insurance Company, directing its preferred provider organization activities
in a 12 state region as Southern Regional Director, Hancock Preferred Health
Plans. From 1981 until 1986, she served as Vice President and General Counsel
for the Nursefinders Corporation. Ms. Connaway is a registered nurse and a
member of the Texas State Bar Association.
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BARBARA M. FREEMAN, M.D., joined NHS in 1993 as its Executive Vice
President and Chief Medical Officer and has been the President of NHS since
April 1998. From 1986 to 1993, Dr. Freeman was the Medical Director of the
Healthcare Review Corporation, currently a subsidiary of NHS. From 1984 to 1986,
Dr. Freeman was the Medical Director for the Kentucky Peer Review Organization
("PRO"), the federal contracted PRO for the State of Kentucky. She has been a
practicing physician specializing in family practice since 1975.
SPIRO A. KARADIMAS joined the Company in March 1995. He has 18 years of
information systems and operations management experience in local government and
the private sector. Prior to joining the Company, Mr. Karadimas designed and
developed all in-house and client support information systems and processes for
AHP, from 1992 to 1994. From 1991 to 1992, Mr. Karadimas served as Director of
Systems Development for Columbia Services Group, an Arlington, Virginia company.
JOSEPH M. MOTT joined the Company in January 1997 as the Company's General
Counsel. He was appointed the Company's Corporate Secretary in March 1997. Prior
to joining the Company, Mr. Mott was a principal with the law firm of Miles &
Stockbridge, P.C. in Rockville, Maryland, which he joined in 1988.
The following persons have been appointed directors by the Board of
Directors, effective April 30, 1999, in light of the resignations, effective
that same date, of Messrs. Gersie and Linde.
STEVEN M. GLUCKSTERN is a co-founder and Chairman of the Boards of Cap Z
Management, Inc. and Capital Z Partners, Ltd ("Cap Z Ltd."). Cap Z Ltd is the
sole general partner of Capital Z Financial Services Fund II, L.P. ("Capital
Z"). Prior to co-founding Cap Z Ltd in July 1998. Mr. Gluckstern was a member of
the Corporate Executive Board of Zurich Group ("Zurich") and served as Chairman
and Chief Executive Officer of Zurich Re, the global reinsurance network of
Zurich. Mr. Gluckstern also held the position of Chief Executive Officer of
Zurich Centre Investments, Inc. the private equity arm of Zurich, as well as
Chairman and Chief Executive Officer of Zurich Centre Group, the holding company
for Zurich's "strategic financial" business. Mr. Gluckstern is the co-owner of
the New York Islanders Hockey Club and a member of the National Hockey League
Board of Governors.
PAUL H. WARREN is a co-founder Cap Z, Ltd. Prior to co-founding Cap Z
Ltd., Mr. Warren was a Partner in Insurance Partners, L.P. ("IPI"), a limited
partnership organized in 1994 to make investments in property and casualty
insurers, life and health insurers, healthcare services firms and related
insurance businesses. In connection with IPI, he serves as a director of Tarquin
plc, Corporate Health Dimension, Provincia Salud, Provincia ART and Annuity &
Life Re. Prior to the formation of IPI, Mr. Warren was a Managing Director of
International Insurance Advisors, Inc. and a Vice President in the insurance
group at J.P. Morgan & Co. Before that, Mr. Warren was an Assistant Secretary in
the Hong Kong Government.
MEETINGS AND COMMITTEES OF THE BOARD OF DIRECTORS
The Board of Directors generally meets on a quarterly basis and may have
additional meetings as needed. During 1998, the Board of Directors held seven
meetings. The only director who attended fewer than 75% in the aggregate of the
total number of meetings of the Board was William E. Brock, who missed two Board
meetings.
The committees of the Board of Directors consist of an Audit Committee and
a Compensation Committee.
AUDIT COMMITTEE. The Audit Committee recommends to the Board of Directors
the annual appointment of independent certified public accountants with whom the
committee reviews the audit fees,
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scope, and timing of the audit, the adequacy of internal controls, and any other
services rendered. The Audit Committee was comprised of Messrs. Graefe, Gersie
and Brock and held one meeting during fiscal year 1998.
COMPENSATION COMMITTEE. The Compensation Committee reviews and recommends
the compensation and bonuses of the executives of the Company. The Compensation
Committee also administers the Company's (i) 1996 Stock Option Plan, and (ii)
the 1996 Employee Stock Purchase Plan. The Compensation Committee is comprised
of Ms. Anderson and Messrs. Graefe and Graf, and held one meeting during fiscal
year 1998.
NOMINATING COMMITTEE. The Company does not currently have a Nominating
Committee. The Company's Board of Directors or any nominating committee
appointed by the Board of Directors will consider all suggestions for nominees
to the Board of Directors that are timely received in proper written form. To be
in proper written form, a stockholder's notice shall set forth in writing (i) as
to each person whom the stockholder proposes to nominate for election as a
director, all information relating to such person that is required to be
included in a proxy statement filed pursuant to the proxy rules of the
Securities and Exchange Commission ("SEC"), including such person's written
consent to being named in the proxy statement as a nominee and to serving as a
director if elected and (ii) as to the stockholder giving the notice (x) the
name and address, as they appear on the Company's books, of such stockholder and
(y) the class and number of shares of the Company that are beneficially owned by
such stockholder.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Pursuant to Section 16(a) of the Securities Exchange Act of 1934 (the
"Exchange Act") and the rules issued thereunder, the Company's executive
officers and directors are required to file with the SEC reports of ownership
and changes in ownership of Common Stock. Except as discussed below, based on
copies of such reports furnished to the Company, or written representation that
no other reports were required, the Company believes that, during 1998, all of
its executive officers and directors complied with the requirements of Section
16(a). Mr. Blair disclaims beneficial ownership of shares of the Company common
stock acquired by a company that he may be considered to control. Nevertheless,
he has included those shares on a Form 5 report of beneficial ownership he filed
for 1998. Mr. Blair did not timely file seven Form 4 reports of beneficial
ownership for 1998 relating to purchases of an aggregate of 16,700 shares of
common stock, (less than 1/10 of 1% of outstanding shares). Of those 16,700
shares, 11,400 shares were acquired by the company referenced above.
ITEM 11. EXECUTIVE COMPENSATION
DIRECTORS' COMPENSATION
Directors who are not affiliated with the Company each receive a fee of
$2,500 for each Board of Directors meeting and $500 for each committee meeting
attended, plus travel and incidental expenses incurred in attending meetings and
carrying out their duties as directors. The directors from Principal Mutual
receive no fees and are reimbursed only for their travel and incidental
expenses.
In January 1998, each of the non-affiliated directors received a stock
option grant of 4,500 shares of Common Stock. One-third of these stock options
vested immediately, one-third vested in January 1999, and the other one-third
will vest in January 2000. The options have a ten-year life and permit the
holder to purchase shares at their fair market value on the date of grant.
On January 1, 1999, each non-affiliated director also received a stock
option grant of 1,500 shares of Common Stock which vested at the date of grant,
is exercisable for a ten-year period and permits the holder to purchase shares
at the fair market value on the date of grant.
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EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table sets forth the cash and non-cash compensation for each
of the last three fiscal years ended December 31, 1998 awarded to or earned by
the Chief Executive Officer and each of the other four most highly compensated
executive officers of the Company.
<TABLE>
<CAPTION>
Other Securities
Annual Restricted Underlying All Other
Name and Compen- Stock Options/ LTIP Compen-
Principal Position Year Salary Bonus sation Award(s) SARs Payouts sation
------------------ ---- ------ ----- ------ -------- ---- ------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Thomas L. Blair............. 1998 $350,000 $196,000(1) -- -- -- -- $ 81,286(2)
Chairman of the Board 1997 93,469 149,767(1) -- -- -- -- 86,790(2)
and Chief Executive 1996 115,998(1) 106,457(1) -- -- -- -- 46,546(2)
Officer(3)
Edward S. Civera ........... 1998 350,000 196,000(4) -- -- -- 231,180(5)
President and Chief 1997 253,294 100,000(4) -- -- 1,125,000 -- 224,930(5)
Operating Officer(3)
S. Joseph Bruno............. 1998 280,000 49,000(6) -- -- -- -- 28,290(7)
Vice President and 1997 255,794 25,000(6) -- -- -- -- 35,610(7)
Chief Financial Officer 1996 240,000 -- -- -- -- -- 58,619(7)
Spiro A. Karadimas.......... 1998 240,000 49,000(8) -- -- -- -- 28,250(9)
Vice President of 1997 210,794 25,000(8) -- -- -- -- 29,868(9)
Operations 1996 150,000 -- -- -- -- -- 45,911(9)
Barbara Freeman
President of National 1998 215,500 -- -- -- 22,500 -- 14,600(10)
Health Services, Inc. 1997 211,823 15,000 -- -- -- -- 5,250(10)
1996 51,375 -- -- -- -- -- --
</TABLE>
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(1) For 1996, Mr. Blair received a total of $115,998 as compensation; $49,998
from the Company; and $66,000 from IM&I, an entity owned by Mr. Blair
which was contributed to and then merged with the Company. In addition,
the bonuses for 1996 and 1997 reflect Mr. Blair's receipt in April 1997
and March 1998, respectively, of 1% of the Company's after-tax profit for
the respective year pursuant to the terms of his employment agreement. The
bonus for 1998 reflects the amount accrued for 1998 and paid in March
1999.
(2) For 1996, consists of payments from IM&I to Thomas L. Blair, the Chief
Executive Officer, President and sole stockholder of IM&I prior to his
contribution of IM&I to the Company, and includes premiums for life
insurance of $24,297 and automobile allowance of $22,249. For 1997,
consists of payments from the Company of premiums for life insurance of
$45,973, matching 401(k) contribution of $4,817 and automobile allowance
of $36,000. For 1998, consists of payments from the Company of premiums
for life insurance of $39,786, matching 401(k) contribution of $5,500 and
$36,000 of automobile allowance.
(3) In March 1999, Edward S. Civera was elected by the board to serve as Co-
Chief Executive Officer along with Thomas L. Blair.
(4) Reflects Mr. Civera's receipt in March 1998 of the 1997 bonus and receipt
in March 1999 of the 1998 bonus pursuant to his employment agreement.
(5) Includes for 1997 and 1998, respectively, $200,000 and $200,000, net of
income tax, representing a funded retirement benefit (see "Compensation
Committee Report on Executive Compensation-Employment Agreements"),
premiums for life insurance of $1,680, and $1,680, matching 401(k)
contributions of $5,250 and $5,500 and automobile allowance of $18,000 and
$24,000.
(6) Reflects Mr. Bruno's receipt in March 1998 of the 1997 bonus and receipt
in March 1999 of the 1998 bonus.
(7) In 1996, includes payment from the Company of premiums for life insurance
of $12,710, automobile allowance of $9,523, and $36,386 deferred
compensation from 1995. In 1997 and 1998 respectively, includes payment
from the Company of premiums for life insurance of $10,360 and $2,790
respectively, matching 401(k) contributions of $5,250 and $5,500,
respectively, and automobile allowances of $20,000 for both years.
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(8) Reflects Mr. Karadimas' receipt in March 1998 of the 1997 bonus and
receipt in March 1999 of the 1998 bonus.
(9) For 1997 and 1998 includes payment from the Company of premiums for life
insurance of $4,618 and $2,750, respectively, matching 401(k)
contributions of $5,250 and $5,500, respectively and automobile allowances
of $20,000 and $20,000, respectively. For 1996, includes payment by the
Company of premiums for life insurance of $7,666 and automobile allowances
of $11,643 and payment by IM&I of $26,602.
(10) Consists of matching 401(k) contributions of $5,250 and $5,500 for 1997
and 1998, respectively and automobile allowance for 1998 of $9,100.
STOCK OPTION PLAN
All executive officers, with the exception of Thomas L. Blair, Chief
Executive Officer, may participate in the Company's 1996 Stock Option Plan.
During the fiscal year ended December 31, 1998, stock options were awarded to
certain named executive officers.
OPTIONS GRANTED IN LAST FISCAL YEAR
The following table sets forth certain information with respect to stock
options granted to named executive officers during 1998 under the Company's 1996
Stock Option Plan:
<TABLE>
<CAPTION>
% of
Number Total Options Potential
of Securities Granted to Grant- Realizable Value at Assumed
Underlying Employees Date Annual Rates of Stock Price
Options in Fiscal Market Exercise Expiration Appreciation for Option Term (1)
--------------------------------
Name Granted Year Price Price Date 5% 10%
---- ------- ----------- ------- --------- ----------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Barbara M. Freeman..... 22,500 13.4% $12.94 $14.67 Jan. 2003 $371,700 $468,700
</TABLE>
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(1) These potential realizable values are based on assumed rates of appreciation
required by applicable regulations of the SEC.
AGGREGATED OPTION EXERCISES DURING FISCAL 1998
AND OPTION VALUES ON DECEMBER 31, 1998
The following table sets forth information concerning stock option
exercises and stock option values for the named executive officers at December
31, 1998.
<TABLE>
<CAPTION>
Number of
of Shares Value Value
Acquired Upon Realized Number of Unexercised of Unexercised In-The-
Exercise Upon Options 12/31/98 Money Options 12/31/98(1)
-------------------------- --------------------------
of Option Exercise Exercisable Unexercisable Exercisable Unexercisable
--------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Edward S. Civera..... -- -- 843,750(2) 281,250 $16,171,875 $6,890,625
Barbara Freemen...... -- -- -- 22,500 -- 311,175
</TABLE>
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(1) In accordance with the SEC's rules, values are calculated by subtracting
the exercise price from the fair market value of the underlying Common
Stock. For purposes of this table, fair market value is deemed to be
$28.50, the closing price of the stock reported by the Nasdaq National
Market as of December 31, 1998.
(2) In February 1999, Mr. Civera exercised options to purchase an aggregate of
375,000 shares of common stock.
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COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
Under rules established by the SEC, United Payors & United Providers, Inc.
(the "Company") is required to provide certain data and information in regard to
the compensation and benefits provided to the Company's Chief Executive Officer
("CEO") and other executive officers. The disclosure requirements for the CEO
and the other executive officers include the use of tables and a report
explaining the rationale and considerations that led to fundamental compensation
decisions affecting those individuals. In fulfillment of this requirement, the
Compensation Committee of the Board of Directors (the "Committee") has prepared
the following report for inclusion in this proxy statement.
GENERAL
Under the supervision of the Committee, the Company has developed and
implemented compensation policies, plans and programs which seek to enhance the
profitability of the Company and thus stockholder value by aligning the
financial interests of the Company's executive officers with those of the
stockholders.
The Compensation Committee of the Board of Directors of the Company is
directly responsible for establishing the compensation levels and benefits for
the CEO of the Company. With respect to the other officers, the CEO of the
Company recommends compensation levels and other incentives to the Committee.
The Committee ultimately has the final decision. For 1998, the Committee
consisted of Bette B. Anderson and Frederick H. Graefe, who are outside
directors, and Thomas J. Graf, who is Senior Vice President of Principal Mutual.
COMPENSATION POLICIES
In furtherance of the Company's goals, and to attract and retain corporate
officers and other key employees with outstanding abilities and to motivate them
to perform to the full extent of their abilities, compensation for the executive
officers, as well as other management employees consist primarily of three major
components: base salary, bonus awards, and long-term incentive compensation in
the form of discretionary stock options. In addition, executive officers may
receive other compensation in the form of various fringe benefits.
BASE SALARIES
In determining salary levels, the Committee considers the entire
compensation package plans of the executive officers, including the equity
compensation provided under the Company's stock plans. Salary levels are
intended to be consistent with industry standards and each executive's level of
responsibility. Although the Committee's decisions are discretionary and no
specific formula is used for decision making, salary increases are aimed at
reflecting the overall performance of the Company and the performance of the
individual executive officer.
BONUS AWARDS
In determining bonus awards, the Committee considers the entire
compensation package of the executive officers. As discussed under BASE
SALARIES, bonus awards are intended to be consistent with other companies in the
industry and each executive officer's level of responsibility. Although the
Committee's
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policy is subjective and no specific formula is used for decision making, the
bonus awards are aimed to reflect the overall financial performance of the
Company including the achievement of the revenues and net income goals and the
performance of the individual executive officer. The only bonus awards made for
the year ended December 31, 1998 were to Mr. Thomas L. Blair, the CEO (refer to
COMPENSATION OF THE CHIEF EXECUTIVE OFFICER below); Mr. Edward S. Civera, the
Chief Executive Officer and President; Mr. S. Joseph Bruno, Vice President and
Chief Financial Officer; and Mr. Spiro Karadimas, Vice President of Operations.
LONG-TERM INCENTIVE COMPENSATION
In 1997, the stockholders approved the United Payors & United Providers,
Inc. 1996 Stock Option Plan (the "Stock Option Plan"), under which executive
officers and other employees may receive grants of Stock Options and Stock
Awards. The Compensation Committee believes that stock ownership is a
significant incentive in building stockholder wealth and aligning the interests
of employees and stockholders. Mr. Blair, the Chief Executive Officer of the
Company, has excluded himself from participation in the Company's plan. During
1998, the Committee granted stock options to Mrs. Freeman and to Mr. Mott.
COMPENSATION OF THE CHIEF EXECUTIVE OFFICER
Thomas L. Blair, for 1996, received a total of $115,998 as base salary;
$49,998 from the Company; and $66,000 from Initial Managers & Investors, Inc.
("IM&I"), an entity owned by Mr. Blair which was contributed to and then merged
with the Company. During 1997 and 1998 Mr. Blair received a base salary of
$93,469 and $350,000. In addition, in accordance with Mr. Blair's employment
contract, he also receives 1% of the Company's after-tax profit, which is
reflected as a bonus in the compensation table (see EXECUTIVE COMPENSATION
section), and which amounted to $106,457 for 1996, $149,767 for 1997, and
$196,000 for 1998, and other compensation in the form of fringe benefits.
EMPLOYMENT AGREEMENTS
The Company has entered into employment agreements with Thomas L. Blair,
Chairman of the Board and Chief Executive Officer, Edward S. Civera, Chief
Executive Officer and President, S. Joseph Bruno, Vice President and Chief
Financial Officer, and Spiro A. Karadimas, Vice President of Operations. The
employment agreements, for Messrs. Blair, Bruno and Karadimas are substantially
similar and provide for two-year terms (initially effective July, 1996, and as
amended, from January, 1999), covenants not to compete, and severance
arrangements. Mr. Blair's base salary, pursuant to his employment agreement, is
$350,000 per year plus one percent of the Company's annual after-tax profits.
The base salaries currently are $240,000 and $280,000, respectively, for Messrs.
Karadimas and Bruno. Base salary may be increased by the Company's Board of
Directors, in the case of Mr. Blair, and by the Company's President, in the case
of Messrs. Karadimas and Bruno. In addition to base salary, the employment
agreements provide for, among other things, participation by the executives in
employee benefit plans, other fringe benefits applicable to executive personnel
and reimbursement of reasonable expenses incurred in promoting the business of
the Company. As of January 1998, Mr. Bruno and Mr. Karadimas began participating
in a bonus arrangement entitling each of them to one-quarter of one percent of
the Company's net income. In addition, in 1998 the Board approved and the
Company paid an aggregate of $700,000 for variable- and fixed-rate annuity
policies for Mr. Blair. Mr. Blair has reimbursed the Company $250,000 of that
amount and currently is the owner of one-third of the policy. The remainder of
the policy vests to Mr. Blair over the
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next two years, subject to his reimbursement to the Company for the remainder of
the cost. Until it is reimbursed in full, the Company has a proportionate
ownership interest in the policy.
Mr. Civera's agreement, initially effective January, 1997, and, as
amended, from January, 1999, provides for, among other things, an annual base
salary of $350,000, a bonus arrangement of one percent of the Company's
after-tax profit, options to purchase 1,125,000 shares of the Company's Common
Stock (750,000 shares exercisable at or above the market price at the date of
grant and 375,000 shares exercisable at $4.00 below the market price at the date
of grant) that vest over an eight-year period (with an acceleration provision
based on performance) and a net of income tax retirement benefit (approximately
$1.0 million) in the form of vested trust arrangements that is earned over a
five-year period. In December 1997, the Company accelerated the vesting of the
750,000 stock options which had an exercise price equal to or above the market
price at the date of grant. Mr. Civera's agreement also contains benefit
provisions related to a change in control of the Company. On February 25, 1999,
Mr. Civera exercised options to purchase 375,000 shares of Common Stock at a
weighted average exercise price of $6.50. These shares were sold by Mr. Civera
to Capital Z. Mr. Blair agreed, in Mr. Civera's employment contract, to vote the
shares of Common Stock he controls for the election of Mr. Civera to the Board
of Directors.
Each of the employment agreements contains benefit provisions related to a
change in control of the Company's ownership. In the event of a change in
control, Mr. Civera will be entitled to: (i) his annual base salary and
incentive bonus for the remaining term of his employment agreement; (ii) the
remainder of his advance benefit payment; and (iii) immediately accelerate the
vesting of all of his unvested stock options. In the event of a change in
control, Messrs. Blair, Bruno and Karadimas will each receive his respective
base salary and incentive bonus payment for a period of time which is the
greater of the remaining unexpired term of his respective employment agreement
or for one year.
For purposes of each of the employment agreements, a "change in control"
has occurred if: (i) a person becomes the beneficial owner of at least 20% of
the Company's outstanding securities; (ii) in any 24 month period, a majority of
the Board is replaced, unless the election of each new director was approved by
a vote of 2/3 of the directors in office who were also directors at the
beginning of the period; or (iii) the stockholders of the Company approve a
definitive merger agreement, sale of asset agreement, or an agreement to
liquidate or dissolve the Company.
Notwithstanding the definition of "a change in control," (a) the recent
transfer of 4,500,000 shares of Common Stock into the Trust by Principal Mutual,
and (b) the recent acquisition by Capital Z of 1,750,000 shares of Common Stock
and the option to purchase 2,250,000 shares of Common Stock does not constitute
a "change in control of the Company" for purposes of these employment agreements
since the holder of each agreement has waived his rights to a "change in
control" under those circumstances. The waiver was accomplished through the
amendment of each employment contract in January, 1999.
COMPENSATION COMMITTEE OF
THE BOARD OF DIRECTORS
April 22, 1999 Bette B. Anderson, Chairperson
Thomas J. Graf
Frederick H. Graefe
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<PAGE> 11
STOCK PERFORMANCE GRAPH
The following graph compares the cumulative total stockholder return on
the Company's Common Stock with the cumulative total return of the index for
companies whose equity securities are traded on the Nasdaq National Market and
the index for the Nasdaq Health Services Stocks, commencing July 2, 1996 (the
date of the Company's initial public offering), and as of December 31, 1996,
June 30, 1997, December 31, 1997, June 30, 1998, and December 31, 1998. The
graph was derived from data for only a limited period of time and, as a result,
may not be indicative of possible future performance of the Company's Common
Stock.
[GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
Summary
-------
7/2/96 12/31/96 6/30/97 12/31/97 6/30/98 12/31/98
------ -------- ------- -------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
United Payors & United Providers, Inc. 100.00 125.01 120.46 175.00 308.54 388.65
Nasdaq National Market 100.00 108.63 121.57 133.27 160.45 187.34
Nasdaq Health Service Stock 100.00 88.08 91.79 89.76 89.47 76.97
</TABLE>
Notes:
------
A. The lines represent six-month index levels.
B. If the six-month interval, based on the fiscal year-end, is not a
trading day, the preceding trading day is used.
C. The index level for all series was set to $100.00 on July 2, 1996.
11
<PAGE> 12
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding the
beneficial ownership of Common Stock of the Company as of April 28, 1999, by (a)
each person known by the Company to be the beneficial owner of more than 5% of
the outstanding shares of Common Stock (b) each executive officer identified in
the Summary Compensation Table above, (c) each director and nominee for
director, and (d) all executive officers and directors as a group. Except as
otherwise noted, the named stockholders had sole voting and investment power
with respect to such securities. Unless indicated otherwise, the address of each
of these persons is c/o United Payors & United Providers, Inc., 2275 Research
Boulevard, Rockville, Maryland 20850.
<TABLE>
<CAPTION>
Shares Beneficially Owned
Name of Beneficial Owner Number Percentage
------------------------ ------ ----------
<S> <C> <C>
Thomas L. Blair(1)............................................. 7,183,150 38.2%
Principal Mutual Holding Company ("Principal Mutual") (2)(3)... 850,000 4.5
Independent Divestment Trust (the "Trust")..................... 4,500,000 (4) 23.9
Capital Z Financial Services Fund II, L.P. ("Capital Z") (5)... 4,000,000 21.3
OTHER DIRECTORS AND NAMED EXECUTIVE OFFICERS
Edward S. Civera(6) ........................................... 530,994 2.7%
Spiro A. Karadimas(7).......................................... 500,943 2.7
S. Joseph Bruno(8)............................................. 440,339 2.3
Bette B. Anderson.............................................. 13,500 (9)
William E. Brock............................................... 14,250 (9)
Frederick H. Graefe............................................ 34,120 (9)
All executive officers and directors as a group(10)............ 11,468,595 59.4
</TABLE>
---------------
(1) Represents 2,424,500 shares owned by Mr. Blair jointly with his wife,
200,000 shares owned solely by his wife, 58,650 shares owned by companies
Mr. Blair may be deemed to control and 4,500,000 shares that Mr. Blair has
agreed to purchase from Independent Divestment Trust. Mr. Blair has granted
an option to purchase 2,250,000 shares of Common Stock. See "-- Recent
Changes in Ownership by Principal Stockholders."
(2) These shares are held through Principal Health Care, Inc. an indirect
wholly owned subsidiary of Principal Mutual. The address of Principal
Mutual and Principal Health Care is 711 High Street, Des Moines, Iowa
50392. Two current Directors of the Company are executive officers of
Principal Mutual. Mr. Drury is Chairman of the Board and Chief Executive
Officer and Mr. Graf is Senior Vice President. These persons do not
individually own any shares of Company stock but may be considered
beneficial owners with respect to the shares owned by Principal Mutual by
virtue of their positions with Principal Mutual. The respective addresses
of these persons are care of Principal Mutual at Principal Mutual's
address.
(3) In connection with the proposed acquisition by the Company of Baltimore
American Savings Bank (the "Bank") and its parent holding company,
Principal Mutual is divesting its control of the Company within the meaning
of the Savings and Loan Holding Company Act. Such divestiture has involved
Principal Mutual's sale of 4,500,000 shares of Common Stock of the Company
to the Trust and 1,250,000 shares in a public offering. In addition,
Messrs. Michael H. Gersie and Kenneth J. Linde, who were nominated as
directors of the Company by Principal Mutual, resigned from the Board
effective April 30, 1999, and Messrs. Drury and Graf intend to resign as
Directors of the Company prior to its acquisition of Baltimore American
Savings Bank.
(4) The Trust is obligated to sell these shares to Mr. Blair and he is a
beneficial owner of these shares. The Trust is required to vote these
shares in the same proportion as other stockholders vote their shares,
except for a vote on the amendment of the Certificate of Incorporation
presented to stockholders at this Meeting. See "--Recent Changes in
Ownership by Principal Stockholders."
(5) Includes 2,250,000 shares which Capital Z has the right to acquire upon the
exercise of an option granted to it by Mr. Blair. Also, includes shares
beneficially owned by an affiliate of Capital Z. Steven M. Gluckstern and
Paul H. Warren are affiliates of Capital Z and have been appointed to the
Board and nominated to fill the remaining term of the term as
12
<PAGE> 13
director which expires at the annual meeting of stockholders in 2001 at the
request of Capital Z. These persons may be deemed to beneficially own the
shares reported as beneficially owned by Capital Z. The address of Capital
Z and Messrs. Gluckstern and Warren is One Chase Manhattan Plaza, 44th
Floor, New York, New York 10005.
(6) Includes options to purchase 515,625 shares which are presently
exercisable. Of the 530,994 shares beneficially owned by Mr. Civera, 10,000
shares are held in trust under the Uniform Gift to Minors Act for Mr.
Civera's children.
(7) Of this number, 105,000 shares are held in trust under the Uniform Gift to
Minors Act for Mr. Karadimas' children and 120,000 are in Mr. Karadimas'
wife's name.
(8) Of this number, 230,000 shares are held in trust under the Uniform Gift to
Minors Act for Mr. Bruno's children and 25,750 shares are in Mr. Bruno's
wife's name.
(9) Represents less than 1.0% of the Company's Common Stock.
(10) Includes shares owned by Principal Mutual and Capital Z.
RECENT CHANGES IN OWNERSHIP BY PRINCIPAL STOCKHOLDERS
In 1999, certain principal stockholders of the Company engaged in
transactions that have resulted in significant changes in their ownership of the
Company's Common Stock. As a result, Principal Mutual has reduced its beneficial
ownership of Common Stock from 6,600,000 shares to 850,000 shares. Mr. Blair has
increased his beneficial ownership from 3,383,150 shares to 7,183,150 shares and
Capital Z has purchased 1,750,000 shares of Common Stock from management and
employees of UP&UP and an option to purchase from Mr. Blair an additional
2,250,000 shares of Common Stock. These transactions are described below.
SALE OF SHARES BY PRINCIPAL MUTUAL
In light of the proposed acquisition by the Company of Baltimore American
Savings Bank, a federal savings bank (the "Bank"), Principal Mutual is divesting
its control (for purposes of the Savings and Loan Holding Company Act) of the
Company. In February 1999, Principal Mutual sold 4,500,000 shares of the
Company's Common Stock (the "Principal Shares"), representing 25.6% of the
then-outstanding shares of Common Stock and 68.2% of Principal Mutual's
holdings, to the Trust, a Delaware business trust formed for that purpose.
Principal Mutual received from the Trust $13,225,000 in cash and trust
certificates entitling it to the additional proceeds to be received by the Trust
from the sale of the Principal Shares as described below. In addition, in April
1999, Principal Mutual sold 1,250,000 shares in a public offering.
As a result of these divestitures, Principal Mutual beneficially owns
850,000 shares of Common Stock, or approximately 4.5% of the outstanding shares.
In addition, two directors of the Company who were nominated as directors by
Principal Mutual have resigned. The remaining two directors of UP&UP who were
nominated by Principal Mutual would resign prior to acquisition of the Bank.
AGREEMENT OF MR. BLAIR TO PURCHASE SHARES FROM THE TRUST
At the same time that Principal Mutual sold its shares to the Trust, Mr.
Blair agreed to purchase the Principal Shares from the Trust. Mr. Blair paid the
Trust $13,225,000 towards the purchase and committed to pay the additional
amount owed on or before February 25, 2003 (the "Settlement Date"). The purchase
price per share is a maximum of $27.60 per share (less $2.94 per share
representing the allocable per share portion of the $13,225,000 already paid by
Mr. Blair). Mr. Blair may purchase the shares in whole or in part prior to the
Settlement Date and must purchase all of the shares by the Settlement Date. In
the event of a default by Mr. Blair on the Settlement Date with respect to the
purchase of any of the Principal Shares, the Trust is required to sell those
shares.
13
<PAGE> 14
As a result of his agreement with the Trust, Mr. Blair is considered under
the rules of the SEC to beneficially own the Principal Shares. Such ownership,
together with Mr. Blair's existing ownership of Common Stock means that Mr.
Blair beneficially owns 7,183,150 shares, or approximately 38.2% of outstanding
shares of Common Stock as of April 30, 1999. However, 2,250,000 of these shares
are subject to the option granted by Mr. Blair to Capital Z, which is discussed
below.
Prior to Mr. Blair's purchase of the Principal Shares from the Trust, the
Trust would be the legal owner of those shares. However, the Trust is required
to vote the Principal Shares on any matter in the same proportion as the votes
on such matter by the other Company stockholders; except that the Trust is
required to vote for the amendment of the Company's Certificate of Incorporation
presented to stockholders for their approval at the Company's 1999 Annual
Meeting of Stockholders (the "Annual Meeting"), to be held on June 15, 1999.
CAPITAL Z'S PURCHASE OF SHARES FROM MANAGEMENT
Also in February 1999, Capital Z purchased from Mr. Blair and certain other
management and employee holders of Common Stock an aggregate of 1,750,000 shares
of Common Stock for $35 million. Mr. Blair sold 700,000 of those shares. Also,
Mr. Blair granted options to Capital Z to purchase from him an additional
2,250,000 shares of Common Stock for $27.60 per share, including a $6.00 per
share non-refundable deposit. Mr. Blair used most of the proceeds from this
transaction, after giving effect to his federal and state income tax
obligations, to make the $13,225,000 payment to the Trust. As a result, Capital
Z owns 9.3% of the Company's Common Stock outstanding. Capital Z beneficially
owns 21.3% of the Common Stock when the option is considered. Mr. Blair's
beneficial ownership would be reduced to 26.2% if the option is exercised.
For the purposes of the SEC's rules (and the foregoing table), the
2,250,000 shares subject to an option from Mr. Blair to Capital Z are considered
to be beneficially owned by both of those persons.
RELATED ARRANGEMENTS
In connection with the Capital Z transaction described above, Mr. Blair and
the Company agreed to certain related arrangements, which are described below.
NOMINATION OF DIRECTORS. The Company agreed to nominate to its Board of
Directors two individuals designated by Capital Z. Those persons have been
appointed to the Board and are presented for election by stockholders at the
Annual Meeting. Certain increases in the number of directors could require an
increase in the number of directors to be designated by Capital Z. Capital Z's
rights to board nominees are subject to its maintaining specified levels of
Common Stock ownership.
REGISTRATION RIGHTS. In addition, the Company granted certain registration
rights which permit Capital Z to have the Company file registration statements
with the SEC to cover sales of the 1,750,000 shares acquired by Capital Z and
the 2,250,000 shares that Capital Z would acquire upon exercise of the option
grated to Capital Z by Mr. Blair. These registration rights are not exercisable
until at least August 1999. Capital Z may assign these rights. The Company is
entitled to buy the shares covered by these registration rights before they are
sold by Capital Z.
14
<PAGE> 15
AMENDMENT OF CERTIFICATE OF INCORPORATION. The Company agreed to submit to
stockholders at the Annual Meeting a proposal to amend its Certificate of
Incorporation to eliminate or reduce requirements imposed by certain provisions
which may be considered to have an anti-takeover effect.
Thomas L. Blair has agreed to vote his shares in favor of that amendment,
and the Trust is directed to vote its shares in favor of that amendment.
OTHER MATTERS. In addition, Mr. Blair granted Capital Z certain rights to
buy shares of Common Stock if Mr. Blair proposes to sell those shares and
certain rights to participate in a sale by Mr. Blair of shares of Common Stock.
The Company has also agreed not to repurchase shares of its stock to the extent
that such repurchases would subject Capital Z to a possible presumption of
control under the Home Owners Loan Act, as amended, based on the 1,750,000
shares Capital Z currently owns and shares that it acquires upon exercise of the
option granted by Mr. Blair, so long as the Company is a savings and loan
holding company.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The following are transactions involving Thomas L. Blair, the Chairman of
the Board and Co-Chief Executive Officer of the Company and/or Principal Mutual
and the Company:
The Company utilizes, for corporate business purposes, the services of an
aircraft owned by a corporation that is owned by Thomas L. Blair. 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, an affiliate of Principal Mutual that is a payor for health
care services contracted with the Company for access to a network of health care
providers developed by the Company (the "Provider Network"). Principal Mutual's
affiliate has also been a payor client of an affiliate of the Company since
1992. Approximately, $7,376,000, $2,342,000 and $80,000 of Provider Network
revenue for 1988, 1997 and 1996, respectively, was derived from its contract
with the Principal Mutual affiliate. At December 31, 1998 and 1997,
approximately $904,000 and $341,000, respectively, was due from a Principal
Mutual affiliate and was included in accounts receivable.
During 1997, the Company purchased medical and life insurance from a
Principal Mutual affiliate. The Company did not purchase health insurance from
that Principal Mutual affiliate during 1998. A Principal Mutual affiliate has
also administered the Company's 401(k) plan since 1997. Amounts paid to
Principal Mutual affiliates 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, an
entity formed by Principal Mutual and Thomas L. Blair, that markets catastrophic
and supplemental health insurance. 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 agreement with HealthExtras effective January 1,
1999. The royalty agreement provides the Company with a per member/per month
royalty fee in exchange for the Company granting HealthExtras' members access to
its Provider Network at no fee over a four-year period. The royalty fee
initially starts at $1.00 per member/per month in year one and increases to
$1.50 per member/per month in year four. The royalty fee is based upon the
tenure of each member participating in the HealthExtras program. 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.
15
<PAGE> 17
See Item 12 for a discussion of proposed arrangements relating to the
divestiture by Principal Mutual of a controlling relationship with respect to
the Company and related possible transactions, which, among other things, could
involve transactions between the Company and Mr. Blair or Principal Mutual,
including its affiliates.
16
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly cause this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
UNITED PAYORS & UNITED PROVIDERS, INC.
Date: April 29, 1999 By: /s/ S. Joseph Bruno
------------------------------------------
S. Joseph Bruno
Vice President and Chief Financial Officer
