<PAGE>
As filed with the Securities and Exchange Commission on September 21, 1999
Registration No. 333-83761
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_____________________________________
PRE-EFFECTIVE AMENDMENT NO. 1 TO
FORM S-1
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
_____________________________________
HEALTHEXTRAS, INC.
(Exact Name of Registrant as Specified in its Certificate of Incorporation)
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<S> <C> <C>
Delaware 8999 52-2181356
(State or Other Jurisdiction (Primary Standard Industrial (I.R.S. Employer Identification Number)
of Incorporation or Organization) Classification Code Number)
</TABLE>
2275 Research Boulevard, Seventh Floor
Rockville, Maryland 20850
(301) 548-2900
(Address, including Zip Code, and Telephone Number,
including Area Code, of Registrant's Principle Executive Offices)
David T. Blair
Chief Executive Officer
HealthExtras, Inc.
2275 Research Boulevard, Seventh Floor
Rockville, Maryland 20850
(301) 548-2900
(Name, Address, including Zip Code, and Telephone Number,
including Area Code, of Agent for Service)
__________________________________________
Copies to:
Douglas P. Faucette, Esq. Donald J. Murray, Esq.
Thomas J. Haggerty, Esq. Dewey Ballantine LLP
Muldoon, Murphy & Faucette LLP 1301 Avenue of the Americas
5101 Wisconsin Avenue, N.W. New York, New York 10019
Washington, D.C. 20016 (212) 259-8000
(202) 362-0840
___________________________________________
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the Prospectus is expected to be made pursuant to Rule 434,
check the following box. [_]
___________________________________________
Calculation of Registration Fee
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Maximum
Maximum Aggregate
Aggregate Offering Amount of
Title of Each Class of Amount to be Offering Price Registration
Securities To Be Registered Registered (1) Price (1)(2) Fee (3)
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<S> <C> <C> <C> <C>
Common Stock, $.01 par value 6,325,000 $16.40 $103,730,000 $28,837
- --------------------------------------------------------------------------------------------
</TABLE>
(1) Includes shares to be sold upon exercise of the underwriters' overallotment
option. See "Underwriting."
(2) Estimated solely for purposes of calculating the registration fee pursuant
to Rule 457 of Regulation C under the Securities Act of 1933, as amended.
(3) A registration fee of $28,912 was previously paid.
______________________________________________
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant shall
file a further amendment that specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933, as amended, or until the Registration Statement
shall become effective on such date as the Securities and Exchange Commission,
acting pursuant to said Section 8(a), may determine.
<PAGE>
PRELIMINARY PROSPECTUS Subject to completion, dated September 21, 1999
- --------------------------------------------------------------------------------
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+The information in this prospectus is not complete and may be changed. We may +
+not sell these securities until the registration statement filed with the +
+Securities and Exchange Commission is effective. This prospectus is not an +
+offer to sell these securities and it is not soliciting an offer to buy these +
+securities in any state where the offer or sale is not permitted. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
5,500,000 Shares
[LOGO OF HEALTHEXTRAS APPEARS HERE]
Common Stock
- --------------------------------------------------------------------------------
We are offering 5,500,000 shares of our common stock.
This is an initial public offering of common stock. HealthExtras, Inc.
currently expects the initial public offering price to be between $10.00 and
$12.00 per share. The common stock has not been previously traded. We have
applied for our common stock to be quoted on the Nasdaq National Market under
the symbol "HLEX."
Investing in our common stock involves risks. See "Risk Factors" beginning on
page 4.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if
this prospectus is truthful or complete. Any representation to the contrary is
a criminal offense.
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Per Share Total
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<S> <C> <C>
Public offering price $ $
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Underwriting discount $ $
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Proceeds, before expenses, to HealthExtras $ $
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</TABLE>
The underwriters may purchase up to 825,000 additional shares of common stock
from us at the public offering price, less the underwriting discount, within 30
days from the date of this prospectus to cover over-allotments.
The underwriters are offering the shares subject to various conditions. The
underwriters expect to deliver the shares to purchasers on or about
, 1999.
Warburg Dillon Read LLC
Prudential Vector Healthcare Group
a unit of Prudential Securities
SG Cowen
<PAGE>
- --------------------------------------------------------------------------------
You should rely only on the information contained in this prospectus. We have
not authorized anyone to provide you with information different from that which
is contained in this prospectus. We are offering to sell and seeking offers to
buy shares of HealthExtras, Inc. common stock only in jurisdictions where
offers and sales are permitted. The information contained in this prospectus is
accurate only as of the date of this prospectus, regardless of the time of
delivery of this prospectus or of any sale of the HealthExtras, Inc. common
stock.
Through and including , 1999 (the 25th day after commencement of the
offering) all dealers effecting transactions in the common stock, whether or
not participating in this offering, may be required to deliver a prospectus.
This is in addition to the obligation of dealers to deliver a prospectus when
acting as underwriters and with respect to their unsold allotments or
subscriptions.
TABLE OF CONTENTS
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Prospectus Summary................... 1
The Offering......................... 2
Summary Financial Data............... 3
Risk Factors......................... 4
Special Note Regarding Forward-
looking Statements.................. 10
HealthExtras......................... 11
Use of Proceeds...................... 11
Dividend Policy...................... 11
Capitalization....................... 12
Dilution............................. 13
Selected Financial Data.............. 14
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 15
</TABLE>
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Business............................. 18
Regulation........................... 25
Management........................... 27
Certain Transactions................. 33
Principal Stockholders............... 37
Description of Capital Stock......... 38
Shares Eligible for Future Sale...... 42
Underwriting......................... 43
Legal Matters........................ 44
Experts.............................. 44
Where You Can Find More Information.. 44
Index to Consolidated Financial
Statements.......................... F-1
</TABLE>
<PAGE>
Prospectus Summary
. This summary highlights selected information contained elsewhere in this
prospectus. This summary does not contain all of the information that you
should consider before investing in our common stock. You should read the
entire prospectus carefully, including the information under "Risk Factors"
beginning on page 4 and the financial statements beginning on page F-1,
before making an investment decision.
. Our business, as described in this prospectus, is currently operated through
HealthExtras, LLC, a Delaware limited liability company. Prior to the
completion of this offering, our business operations will be transferred to
HealthExtras, Inc., a Delaware corporation and the issuer of the stock being
sold in this offering. When we refer to "we," "our" or "HealthExtras," we are
referring to HealthExtras, Inc., as it will exist as of the completion of
this offering, or its predecessors, as the context may require.
OUR BUSINESS
HealthExtras intends to be the leading Internet-based provider of
supplemental health and disability benefit programs. We design, develop and
market our programs directly to consumers over the Internet at our website,
www.healthextras.com. At our website, our customers can tailor their benefit
packages to best suit their needs and circumstances. Our programs address a
critical gap in our customers' insurance protection and have traditionally not
been promoted by agents or brokers due to their low price point and the high
costs associated with that distribution channel. We believe we are the first
company to develop supplemental health and disability programs designed
specifically to be marketed over the Internet. We have contracted with
insurance companies to underwrite the insurance components of our programs. As
a result, we do not assume any insurance underwriting risk. Since launching our
programs in January 1999, through June 30, 1999, we have enrolled over 45,000
program members.
OUR MARKET
According to Forrester Research, a leading e-commerce and technology research
firm, Internet-influenced sales of insurance will grow from $1.5 billion in
1998 to $11.0 billion in 2003. In addition, Booz, Allen & Hamilton, Inc. has
estimated that the cost of distribution of insurance products over the Internet
can be as much as 71% less than the distribution costs of products through
traditional brokers and agents. We believe the information-based nature of our
products, combined with the broad reach and cost of distribution advantages of
the Internet creates a significant opportunity for us to market our relatively
low-priced programs.
BUSINESS STRATEGY
Our strategy is to:
. Become the leading online provider for supplemental health and disability
benefit programs;
. Promote HealthExtras as the national brand for supplemental health and
disability benefits;
. Develop strategic marketing relationships with selected Internet portals,
insurance-related websites and other websites with attractive demographic
profiles; and
. Continue to develop innovative health and disability programs responsive
to consumer needs.
STRATEGIC RELATIONSHIPS
In order to implement our strategy, we have established certain strategic
relationships, which include:
. Christopher Reeve. We have entered into an exclusive agreement with
Christopher Reeve for him to assist HealthExtras in developing products
and making consumers aware of various catastrophic events that could
threaten their families' security. Mr. Reeve appears in television, radio
and print ads to promote HealthExtras programs and our website.
1
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Christopher Reeve joined the HealthExtras team
after he experienced one of the problems that
our programs are designed to address.
Specifically, when Mr. Reeve experienced his
tragic accident, he believed he had
comprehensive group health insurance coverage.
Unfortunately, as with the majority of group
health plans, there was a lifetime "cap" in
his primary policy -- which he exceeded in
twenty months -- leaving him with major
ongoing medical expenses.
. Internet Relationships. We have established relationships with selected
Internet content sites, electronic commerce sites and Internet portals.
These relationships drive traffic to our website and increase our brand
name recognition.
. Major Financial Institutions. We have established strategic marketing
relationships with six of the nation's largest VISA and Mastercard issuing
banks for access to their credit card and other customers. These banks are
assisting us in establishing brand name recognition with their installed
base of customers, which we estimate represents more than 50 million
households.
. Insurance Underwriter. We have entered into an arrangement with Reliance
National Insurance Company to provide the catastrophic disability, excess
medical and organ transplant coverage included in our programs; another
insurance company provides the out of area coverage. HealthExtras does not
assume any underwriting risk.
. National Provider Network. Our arrangement with United Payors & United
Providers, Inc. enables us to offer our program members access to the
price concessions for medical services available through the United Payors
& United Providers network of health care providers. This network consists
of over 2,500 hospitals and 150,000 physicians throughout the United
States.
HOW TO CONTACT US
Our corporate headquarters and business address is 2275 Research Boulevard,
7th Floor, Rockville, Maryland 20850 and our telephone number is 301-548-2900
and our website address is www.healthextras.com. Information contained on our
website is not part of this prospectus. HealthExtras and the HealthExtras logo
are our service marks. All brand names and trademarks appearing in this
prospectus are the property of their respective holders.
THE OFFERING
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Common stock offered by HealthExtras, Inc.......... 5,500,000 shares
Common stock to be outstanding after the offering.. 27,600,000 shares (1)
Use of Proceeds.................................... For the repayment of
approximately $3.8 million
of indebtedness to
affiliates, and general
corporate purposes,
including selling,
marketing and brand
promotion expenditures,
repayment of debt, and for
working capital purposes.
Risk Factors....................................... For a discussion of
certain risks you should
consider before investing
in HealthExtras, Inc.
common stock, see "Risk
Factors."
Proposed Nasdaq National Market symbol............. HLEX
</TABLE>
Unless otherwise indicated, all information in this prospectus assumes that the
underwriters' over-allotment option will not be exercised.
- ------
(1) Excludes options to purchase 3,615,000 shares of our common stock,
exercisable at 120% of the public offering price, which are to be granted
to officers and employees of and consultants to HealthExtras prior to the
completion of this offering, and 413,333 shares of common stock issuable
upon the vesting of rights to shares, which rights commence vesting in
February 2000.
2
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Summary Financial Data
(In thousands, except per share data)
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For the Period
October 23, For the
1996 (date of Year Ended For the Six Months
inception) to December 31, Ended June 30,
December 31, ---------------- --------------------
1996 1997 1998 1998 1999
-------------- ------- ------- --------- ---------
Statement of Operations Data:
- ----------------------------- (unaudited)
<S> <C> <C> <C> <C> <C>
Income Statement Data:
Revenue................. $ -- $ -- $ -- $ -- $ 1,021
Total operating
expenses.............. 956 4,686 6,533 5,293 4,682
Operating loss.......... (956) (4,686) (6,533) (5,293) (3,661)
Net loss................ (960) (4,653) (6,644) (5,315) (3,850)
Comprehensive loss...... (962) (4,582) (6,102) (5,038) (4,063)
Pro Forma Data: (/1/)
Pro forma basic and
diluted net loss per
share................. $ (0.05) $ (0.26) $ (0.38) $ (0.30) $ (0.21)
Pro forma weighted
average shares
outstanding........... 17,680 17,680 17,680 17,680 18,535
</TABLE>
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<CAPTION>
June 30, 1999
--------------------------------
Pro Forma(/1/) As Adjusted (/2/)
-------------- -----------------
Balance Sheet Data:
- ------------------- (unaudited)
<S> <C> <C>
Cash and cash equivalents..................... $5,221 $57,152
Total assets.................................. 8,109 60,040
Total liabilities............................. 7,933 4,199
Total stockholders' equity.................... 176 55,841
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(1) Reflects the formation of HealthExtras, Inc. and the reorganization as
discussed in "Certain Transactions--Reorganizations," as if those events
had taken place at the beginning of the period; except that no pro forma
effect is given to the investment by Capital Z Healthcare Holding Corp. in
HealthExtras prior to May 27, 1999.
(2) Reflects the pro forma adjustments described in note (1) above and the sale
of the shares of common stock offered hereby, at an assumed public offering
price of $11.00 per share, and the receipt and application of the estimated
net proceeds therefrom as described under "Use of Proceeds."
3
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Risk Factors
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You should consider carefully the following risk factors and all other
information contained in this prospectus before purchasing our common stock.
Investing in our common stock involves a high degree of risk. Any of the
following risks could materially harm our business, operating results and
financial condition and could result in a complete loss of your investment.
Additional risks and uncertainties that are not yet identified or that we
currently think are immaterial may also harm our business, operating results
and financial condition in the future.
RISKS RELATED TO OUR BUSINESS
Because we have a limited operating history, our business prospects are subject
to a great deal of uncertainty
While our product development efforts have been ongoing for the past two
years, we only began revenue generating activities in January 1999. This
limited history of operating our business means that you have little basis on
which to evaluate us and our prospects and that our business prospects are
subject to a great deal of uncertainty and risks.
We have not been profitable and may not become profitable in the future
We incurred operating losses of approximately $4.7 million in 1997, $6.5
million in 1998 and $3.7 million for the six months ended June 30, 1999, and at
June 30, 1999, we had an accumulated deficit of $16.1 million. Because we plan
to continue to significantly increase our operating expenses in an attempt to
increase our member base, we will need to generate significantly higher
revenues to achieve profitability. Even if we achieve profitability, we may not
be able to maintain profitability in the future. In addition, as our business
model evolves, we expect to introduce a number of new products and services
that may or may not be profitable for us.
Our future profitability is dependent, to a significant extent, upon increased
consumer demand for additional benefit products, which we are in the process of
developing or may develop in the future
Most of our revenue currently is derived from members purchasing benefit
programs which include disability benefits. We believe our future profitability
is dependent upon achieving substantial increases in sales of our benefit
programs, including those providing excess health insurance coverage and other
benefits we are developing or may develop in the future. To the extent these
products include insurance features they generally will require regulatory
approvals. If we do not achieve these increased sales, we may never achieve
profitability.
If the sale of our benefit programs over the Internet does not achieve
widespread consumer acceptance, we may never achieve profitability
To date, we primarily have promoted our benefit programs through mailings to
credit card or other customers of banks. However, we intend to significantly
increase the distribution of our benefit programs over the Internet. Thus, our
future profitability is dependent in large part on our ability to achieve
widespread consumer acceptance of purchasing our benefit programs over the
Internet. The development of an online market for benefit programs, such as
those we offer, has only recently begun, is rapidly evolving and likely will be
characterized by an increasing number of market entrants. Therefore, there is
significant uncertainty with respect to the viability and growth potential of
this market. Our future growth, if any, will depend on, among other things, the
following critical factors:
. the growth of the Internet as a commerce medium generally, and as a market
for consumer financial and insurance products and services specifically;
. success in persuading consumers to purchase their own supplemental health
and disability benefits, rather than, or in addition to, group insurance
offered through their employer;
4
<PAGE>
. success in cost-effectively marketing our programs to a sufficiently large
number of consumers;
. our ability to fulfill coverage requests on an efficient and timely basis;
and
. assuring consumers that the benefits in our programs purchased online are
reliable.
There can be no assurance that an online market for our programs will develop
or that consumers will significantly increase their use of the Internet for
obtaining insurance products. If an online market for insurance products fails
to develop, or develops more slowly than we expect, or if our benefit programs
do not achieve widespread market acceptance, the prospects for our achieving
profitable operations will be significantly reduced.
If we lose one or more of our marketing relationships, our access to potential
customers would decline and sales and revenues would suffer
A substantial majority of all of our programs sold to date have been through
mailings sent by banks to their credit card and other customers. If we lose one
or more of our marketing relationships with credit card issuers and are unable
to replace those relationships with other marketing outlets, our access to
potential customers would decline and sales and revenues would suffer.
If we are not able to achieve a high level of brand recognition and consumer
demand for our benefit programs, we will not achieve the level of revenues we
need to be profitable
There are a growing number of websites that offer consumers access to
information regarding insurance coverage alternatives and product pricing. Our
benefit programs may be considered to compete with these and other distribution
channels for insurance products. We believe that broader recognition of the
HealthExtras brand and increased consumer demand for our programs are essential
to our future success. To attempt to achieve that recognition and demand, we
intend to continue to pursue an aggressive brand-enhancement strategy
consisting of our traditional print advertising, as well as national radio and
television advertising, online marketing and promotional efforts. This effort
will require significantly greater expenditures than we have been able to make
to date. If these expenditures do not result in a sufficient increase in
revenues, we will not achieve profitability. In addition, we may expand our
benefit programs to include additional types of insurance and services. A
portion of any increased selling and marketing expenditures could be used to
promote these new programs. We have no assurance that there will be any market
acceptance for new programs. Failure to generate sufficient revenues to cover
the related expenditures of new products would reduce our chances to become
profitable.
The loss of our relationship with Christopher Reeve to promote our programs
could significantly impair our brand recognition and, thus, our ability to sell
our programs
Our agreement for Christopher Reeve to promote our programs currently expires
in July 2002. The loss of the Christopher Reeve identification with our
programs, upon termination of our contract or otherwise, could significantly
reduce our ability to sell our programs.
If we lose our relationships with our benefit providers, we could have
difficulty meeting demand for our products
Supplemental health and disability insurance are key components of our
benefit programs. These insurance coverages are provided by Reliance National
Insurance Company. Our contract with Reliance National expires in February 2002
and can be terminated by Reliance National prior to expiration if, among other
things, we breach the contract or are the subject of regulatory action or
excessive consumer complaints. In addition, Reliance National could decide to
stop issuing insurance for our programs at any time. If Reliance National
suspended or terminated our contract with them, or stopped issuing policies, we
would not be able to offer our programs for sale until we obtained another
insurance company to provide the insurance coverage. Any other insurance
company would have to obtain regulatory approval in the various states for
those insurance products. This could require an extended period of time.
We are also dependent on the other providers of benefits included in our
programs. These benefits are provided pursuant to arrangements that may be
terminated on relatively short notice. If we lose these relationships and are
unable to replace them quickly and cost effectively, we would not be able to
satisfy consumer demand for our programs.
5
<PAGE>
We may experience significant fluctuations in our quarterly results of
operations which will make it difficult for investors to make reliable period-
to-period comparisons and may contribute to volatility in our stock price
Our quarterly expenses have fluctuated significantly in the past, and we
expect our quarterly revenues and expenses to continue to fluctuate
significantly in the future. The causes for fluctuations could include, among
other factors:
. changes in acceptance levels for our benefit program by consumers;
. our levels of marketing expenditures;
. renewal rate experience for our benefit programs;
. the initiation of new or increased distribution methods, services and
products by our competitors;
. price competition by insurance companies in their sale of insurance
products; and
. the level of Internet use to purchase insurance or similar type products.
We believe that quarter-to-quarter comparisons of our operating results are
not necessarily meaningful and not good indicators of our future performance.
Due to the above-mentioned and other factors, it is possible that in one or
more future quarters our operating results will fall below the expectations of
securities analysts and investors. If this happens, the trading price of our
common stock would likely decrease.
If we do not manage our growth effectively we will not be able to operate
profitably
We only began offering our programs this year, and we have been expanding our
operations rapidly. Our growth strategy, if successful, will result in further
expansion. We can achieve profitable operation, however, only if we are able to
manage our growth effectively. Our growth in operations has placed significant
demands on our management and other resources, which is likely to continue. To
continue and manage our growth, it is important for us to retain our existing
management and to attract, hire and retain additional highly skilled and
motivated officers, managers and employees and improve existing systems and/or
implement new systems for:
. transaction processing;
. operational and financial management; and
. training, integrating and managing our growing employee base.
We may not be successful in managing or expanding our operations or
maintaining adequate management, financial and operating systems and controls.
If the providers of the benefits included in our programs fail to provide those
benefits, we could become subject to liability claims by our program members
We arrange for the provision by others of the benefits included in our member
programs. If the firms with which we have contracted to provide those benefits
fail to provide them as required, or are negligent or otherwise culpable in
providing them, we could become involved in any resulting claim or litigation.
Competition could hinder our ability to build our membership base and prevent
us from achieving profitable operations
The markets for the benefit products and services we offer are intensely
competitive and characterized by changing technology, evolving regulatory
requirements and changing consumer demands. If we are not able to compete in
those markets and under those circumstances, our ability to build our
membership base would be hindered and we would not be able to achieve
profitable operations. We compete with both traditional insurance distributions
channels, including insurance agents and brokers, new non-traditional channels
such as commercial banks and savings and loan associations, and a growing
number of distributors.
We also potentially face competition from a number of large online services
that have expertise in developing online commerce and in facilitating a high
volume of Internet traffic. Other large companies with strong brand
recognition, technical expertise and experience in online commerce and direct
marketing also
6
<PAGE>
could seek to compete in the online market for insurance and similar products.
Any of these firms could seek to compete against us through traditional
channels or by copying our products or business model.
There can be no assurance that we will be able to compete successfully with
any of these current or potential competitors.
RISKS RELATED TO REGULATION
If we fail to assure that all of the various and complex laws and regulations
governing benefits in our programs are satisfied, we could be subject to fines,
additional licensing requirements or the inability to market our programs in
particular jurisdictions
Complex laws, rules and regulations of each of the 50 states and the District
of Columbia pertaining to insurance impose strict and substantial requirements
on insurance coverage sold to consumers and businesses. Compliance with these
laws, rules and regulations can be arduous and imposes significant costs. The
underwriter of the insurance benefits included in HealthExtras programs is
responsible for obtaining and maintaining regulatory approvals for those
benefits. If the appropriate regulatory approvals for the insurance benefits
included in our programs are not maintained, we would have to stop including
those benefits. An independent insurance agency is responsible for the
solicitation of insurance benefits involved in HealthExtras programs. Each
jurisdiction's insurance regulator typically has the power, among other things,
to:
. administer and enforce the laws and promulgate rules and regulations
applicable to insurance, including the quotation of insurance premiums;
. approve policy forms and regulate premium rates;
. regulate how, by which personnel and under what circumstances, an
insurance premium can be quoted and published; and
. regulate the solicitation of insurance and license insurance companies,
agents and brokers who solicit insurance.
State insurance laws and regulations are complex and broad in scope and are
subject to periodic modification as well as differing interpretations. There
can be no assurance that insurance regulatory authorities in one or more states
will not determine that the nature of our business requires us to be licensed
under applicable insurance laws. A determination to that effect or that we or
our business partners are not in compliance with applicable regulations could
result in fines, additional licensing requirements or inability to market our
programs in particular jurisdictions. Such penalties could significantly
increase our general operating expenses and harm our business. In addition,
even if the allegations in any regulatory or legal action against us turn out
to be false, negative publicity relating to any such allegation could result in
a loss of consumer confidence and significant damage to our brand. We believe
that because many consumers and insurance companies are not yet comfortable
with the concept of purchasing insurance online, the publicity relating to any
such regulatory or legal issues could significantly reduce sales of our
programs.
Regulation of the sale of insurance over the Internet and of electronic
commerce generally is unsettled, and future laws, regulations and
interpretations could hinder our ability to offer our programs over the
Internet
The distribution of our programs including an insurance component over the
Internet subjects us to additional risk as most insurance laws and regulations
have not been modified to clarify or amend their application to Internet
transactions. Currently, many state insurance regulators and legislators are
exploring the need for specific regulation of insurance sales over the
Internet. Such regulation could dampen the growth of the Internet as a means of
providing insurance services. Moreover, the application of laws governing
general commerce on the Internet remains largely unsettled, even in areas where
there has been some legislative action. It may take years to determine whether
and how existing laws such as those governing insurance, intellectual property,
privacy and taxation apply to the Internet. In addition, the growth and
development of the market for electronic commerce may prompt calls for more
stringent consumer protection laws and regulations that may impose additional
burdens on companies conducting business over the Internet. Any new laws or
regulations or new interpretations of existing laws or regulations relating to
the Internet could hinder our ability to offer our programs over the Internet.
7
<PAGE>
We could be subject to legal liability based upon the information on our
website
Our members may rely upon the information published on our website regarding
insurance coverage, exclusions, limitations and ratings, and the other services
we provide. To the extent that the information we provide is not accurate, we
could be liable for damages. These types of claims could be time-consuming and
expensive to defend, divert management's attention, and could cause consumers
to lose confidence in our service. As a result, these types of claims, whether
or not successful, could harm our business.
RISKS RELATED TO THE INTERNET AND ELECTRONIC COMMERCE
If we experience failures of, or capacity constraints in, our systems or the
systems of third parties on which we rely, sales of our programs likely would
be reduced and our reputation could be damaged
We use both internally developed and third-party systems to operate the
Internet aspects of our business. If the number of users of our service
increases substantially, we will need to significantly expand and upgrade our
technology, transaction processing systems and network infrastructure. We do
not know whether we will be able to accurately project the rate or timing of
any increases, or expand and upgrade our systems and infrastructure to
accommodate any increases in a timely manner. Our ability to facilitate
transactions successfully and provide high quality customer service also
depends on the efficient and uninterrupted operation of our computer and
communications hardware systems. Our service has experienced periodic system
interruptions, and it is likely that these interruptions will continue to occur
from time to time. Additionally, our systems and operations are vulnerable to
damage or interruption from human error, natural disasters, power loss,
telecommunication failures, break-ins, sabotage, computer viruses, acts of
vandalism and similar events. We may not carry sufficient business interruption
insurance to compensate for losses that could occur. Any system failure that
causes an interruption in service or decreases the responsiveness of our
service would impair our revenue-generating capabilities, and could damage our
reputation and our brand name.
If we fail to adapt to rapid technological change, our ability to compete will
be significantly impeded
Our market is characterized by rapidly changing technologies, frequent new
product and service introductions and evolving industry standards. Our future
success will depend, in part, on our ability to adapt to rapidly changing
technologies by continually improving the features and reliability of our
service. We may experience difficulties that could delay or prevent the
successful introduction or marketing of new products and services. In addition,
new enhancements must meet the requirements of our current and prospective
subscribers and must achieve significant market acceptance. We could also incur
substantial costs if we need to modify our service or infrastructures or adapt
our technology to respond to these changes.
If we or our vendors experience Year 2000 problems, our ability to sell and
service our programs would be disrupted
The uncertainty posed by year 2000 issues could adversely affect our business
in a number of significant ways. Although we believe that our internally
developed systems and technology are year 2000 ready, our information
technology system nevertheless could be substantially impaired or cease to
operate due to year 2000 problems. Additionally, we rely on information
technology supplied by third parties. Year 2000 problems that any third parties
or we experience would disrupt our ability to sell and service our programs.
Additionally, the Internet could face serious disruptions arising from year
2000 problems.
If we are unable to safeguard the security and privacy of our program members'
information, our reputation would be damaged and we could be subject to
litigation and liability
A significant barrier to electronic commerce and online communications has
been the need for secure transmission of confidential information over the
Internet. Our ability to secure the transmission of confidential information
over the Internet is essential in maintaining consumer confidence in our
service. In addition, because we handle confidential and sensitive information
about our program members, any security breaches would damage our reputation
and could expose us to litigation and liability. We cannot guarantee that our
systems will prevent security breaches.
If the Internet does not continue to function to provide broad scale and
dependable service as a transaction medium, we might not be able to achieve the
substantial increases in sales of our programs which we believe are necessary
to achieve profitability
Our success will depend upon the maintenance of the Internet's infrastructure
and its ability to cope with its significant growth and increased traffic. This
will require a reliable network with the necessary
8
<PAGE>
speed, data capacity and security, and the timely development of complementary
products, such as high-speed modems, for providing reliable Internet access and
services. Users of the Internet have experienced a variety of outages and other
delays as a result of damage to portions of their infrastructure or that of
their service providers, and we could face such outages and delays in the
future. In addition, the Internet could lose its viability due to delays in the
development or adoption of new standards to handle increased levels of activity
or due to increased government regulation. The adoption of new standards or
government regulation may require us to incur substantial compliance costs.
RISKS RELATED TO THIS OFFERING AND OWNERSHIP OF OUR COMMON STOCK
Because our shares have not been publicly traded before this offering, the
public offering price may not accurately reflect the trading price of our
stock, and our stock price may be volatile
Prior to this offering, you could not buy or sell our common stock publicly.
An active public market for our common stock may not develop or be sustained
after this offering. Although the public offering price will be negotiated
between the underwriters and us based on several factors, the market price
after the offering may vary from the public offering price.
The market price of our common stock is likely to be highly volatile and
could be subject to wide fluctuations. Recently, the stock market has
experienced significant price and volume fluctuations, and the market prices of
securities of Internet-related companies in particular have been highly
volatile. Market fluctuations, as well as general political and economic
conditions, such as a recession or interest rate or currency rate fluctuations,
could adversely affect the market price of our common stock. In addition, the
market prices for stocks of Internet-related companies, particularly following
an initial public offering, have been known to reach levels that bear no
relationship to the operating performance of such companies. Such market prices
generally are not sustainable and are subject to wide variations. If our common
stock trades to such levels following this offering, it likely will thereafter
experience a material decline.
In the past, securities class action litigation has often been brought
against a company following periods of volatility in the market price of their
securities. We may in the future be the target of similar litigation.
Securities litigation could result in substantial costs, divert management's
attention and resources, and harm our financial condition and results of
operations.
Future sales of our common stock may cause our stock price to decline
Future sales of our common stock, or the availability of our common stock for
sale, may cause our stock price to decline. After this offering, we will have
27,600,000 shares of common stock outstanding. The federal securities laws
impose restrictions on the ability of stockholders who acquired their shares
prior to this offering to resell their shares. Also, our directors, officers
and all of our current stockholders have agreed, subject to certain limited
exceptions, not to sell their shares for a period of 180 days after the date of
this prospectus. After these restrictions lapse, the holders of these
restricted shares may choose to sell some or all of their holdings. In
addition, holders of substantially all of our shares of common stock
outstanding prior to this offering have registration rights with respect to
such shares.
Our existing shareholders will own a substantial majority of our stock and will
continue to control us after this offering; their interests may not be the same
as that of our public stockholders
Following this offering, Highland Investments, LLC and Health Partners will
control 80.1% of our outstanding common stock. For information regarding the
control of Highland Investments and Health Partners, see "Principal
Stockholders." As a result, if these stockholders act together, they will be
able to take any of the following actions without the approval of our public
stockholders:
. elect our directors;
. amend certain provisions of our charter;
. approve a merger, sale of assets or other major corporate transaction;
. defeat any takeover attempt, even if it would be beneficial to our public
stockholders; and
. otherwise control the outcome of all matters submitted for a stockholder
vote.
9
<PAGE>
This control could discourage others from initiating a merger, takeover or
another change of control transaction that could be beneficial to our public
stockholders. As a result, the market price of our common stock could be
harmed.
In addition, Principal Mutual controls a large insurance company. Our
business operations could conflict or compete with the business operations of
Principal Mutual and its affliates. Thus, Principal Mutual could have an
incentive to act contrary to the best interests of our stockholders.
Our charter documents and Delaware law contain provisions that may discourage
takeover attempts which could preclude our stockholders from receiving a change
of control premium
Our Certificate of Incorporation, Bylaws and Delaware law will contain anti-
takeover provisions that could have the effect of delaying or preventing
changes in control that a stockholder may consider favorable. The provisions in
our charter documents include the following:
. a classified board of directors with staggered three-year terms;
. the ability of our board of directors to issue shares of preferred stock
and to determine the price and other terms, including preferences and
voting rights, of those shares without stockholder approval; and
. advance notice procedures for nominating candidates to our board of
directors.
The foregoing could have the effect of delaying, deferring or preventing a
change in control, discourage bids for our common stock at a premium over the
market price, or harm the market price of, and the voting and other rights of
the holders of, our common stock. We also are subject to certain Delaware laws
that could have similar effects. One of these laws prohibits us from engaging
in a business combination with any significant stockholder for a period of
three years from the date the person became a significant stockholder unless
certain conditions are met.
If we do not successfully employ the proceeds of this offering in a manner
which promotes a significant increase in revenues, we may not achieve
profitability
We will retain broad discretion as to the allocation of the proceeds of this
offering, and we may not be able to use or invest these proceeds to yield a
significant return. As of the date of this prospectus, we intend to use a
significant portion of the proceeds from this offering for expansion of our
selling and marketing efforts. There can be no assurance that these efforts
will be successful.
You will experience immediate and substantial dilution
The public offering price is expected to be substantially higher than the net
tangible book value of each outstanding share of common stock. If you purchase
common stock in this offering, you will suffer immediate and substantial
dilution. The dilution will be $9.05 per share in the net tangible book value
of the common stock, assuming a public offering price of $11.00 per share.
A portion of the proceeds of this offering will benefit affiliates of ours
Proceeds of this offering will be used to repay approximately $1.3 million of
non-interest bearing debt owed to Thomas L. Blair, our Chairman, and to repay
outstanding borrowings under a $3 million line of credit from a bank, which
line of credit is guaranteed by United Payors & United Providers. Thomas L.
Blair is Chairman of the Board of Directors and a significant stockholder of
United Payors & United Providers. The Bank intends to release United Payors &
United Providers as a guarantor of that line of credit upon our receipt of the
proceeds of this offering and payment to them of outstanding borrowings.
Special Note Regarding Forward-looking Statements
- --------------------------------------------------------------------------------
This prospectus contains certain forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934, as amended.
Some of the statements under "Prospectus Summary," "Risk Factors,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," "Business" and elsewhere in this prospectus are "forward-looking
statements." These forward-looking statements involve known and unknown risks,
uncertainties and other factors that may cause our actual results, levels of
activity, performance, or
10
<PAGE>
achievements to be materially different from any future results, levels of
activity, performance, or achievements expressed or implied by such forward-
looking statements. Such factors include, among other things, those listed
under "Risk Factors" and elsewhere in this prospectus.
In some cases, you can identify forward-looking statements by terminology
such as "may," "will," "should," "could," "expects," "plans," "anticipates,"
"believes," "estimates," "predicts," "potential," "intends," "continue" or the
negative of such terms or other comparable terminology.
These risks and uncertainties should be considered in evaluating forward-
looking statements, and undue reliance should not be placed on such statements.
Although we believe that the expectations reflected in the forward-looking
statements are reasonable, we cannot guarantee future results, levels of
activity, performance, or achievements. Moreover, we do not assume
responsibility for the accuracy and completeness of such statements. We are
under no duty to update any of the forward-looking statements after the date of
this prospectus.
HealthExtras
- --------------------------------------------------------------------------------
Our business, as described in this prospectus, is currently operated through
HealthExtras, LLC, a Delaware limited liability company. HealthExtras, Inc. has
conducted no operations to date. Prior to the completion of this offering,
HealthExtras, LLC will merge into HealthExtras, Inc. Through this merger,
HealthExtras, Inc. will succeed to the assets, liabilities and business
operations of HealthExtras, LLC.
HealthExtras, LLC and its predecessor companies, the first of which was
organized in October 1996, were development stage enterprises. Initially, the
predecessor companies sought to evaluate and develop healthcare service and
product opportunities. Commencing in April 1997, the predecessor companies
developed the supplemental catastrophic health benefit programs which are now
offered by HealthExtras, LLC. HealthExtras, LLC began revenue-generating
activities in January 1999. Therefore, it is no longer considered a development
stage enterprise.
Use of Proceeds
- --------------------------------------------------------------------------------
We will receive net proceeds of $55.7 million from the sale, at an assumed
public offering price of $11.00 per share, of the 5,500,000 shares of our
common stock in this offering, after deducting estimated offering expenses of
$600,000 and underwriting discounts and commissions. If the underwriters
exercise their over-allotment option in full, we will receive net proceeds of
$64.1 million after deducting estimated expenses and underwriting discounts and
commissions.
In the 12 months following this offering, we intend to use approximately $25
million of the net proceeds from this offering for expansion of our selling and
marketing efforts, including brand promotion. The amounts we actually expend
for that purpose may vary significantly and will depend on a number of factors,
including consumer response to our marketing efforts and the amount of our
future revenues. In addition, we intend to repay the $1.3 million, non-interest
bearing loan from Mr. Thomas L. Blair, and the $2.4 million of borrowings under
the line of credit, which is guaranteed by United Payors & United Providers.
We intend to use the remainder of the net proceeds, over time, for general
corporate purposes, including working capital to fund operating losses and
capital expenditures. We may also use a portion of the net proceeds currently
intended for general corporate purposes to acquire or invest in complementary
businesses, technologies, products or services, although no specific
acquisitions or investments are planned and no portion of the net proceeds has
to date been allocated for any such acquisition or investment. Pending such
uses, we intend to invest the net proceeds of this offering in investment-
grade, interest-bearing securities. Accordingly, we will have broad discretion
in the application of the net proceeds of this offering.
Dividend Policy
- --------------------------------------------------------------------------------
We have never declared or paid any cash dividends on our capital stock and
neither intend nor expect to pay any cash dividends in the foreseeable future.
We intend to retain future earnings, if any, to finance the expansion of our
business.
11
<PAGE>
Capitalization
- --------------------------------------------------------------------------------
The following table sets forth the capitalization, as of June 30, 1999, for
HealthExtras, Inc.:
. on an historical basis for HealthExtras, LLC;
. on a pro forma basis giving effect to the formation of HealthExtras,
Inc. and the reorganization as discussed in "Certain Transactions--
Reorganizations"; and
. on an as adjusted basis to reflect the pro forma adjustments described
above and the sale of the shares of common stock offered hereby, at an
assumed public offering price of $11.00 per share after deducting the
estimated offering expenses and underwriting discounts and commissions,
and the receipt and application of the net proceeds therefrom as
described under "Use of Proceeds."
This information is qualified by, and should be read in conjunction with, the
financial statements and related notes appearing at the end of this prospectus.
<TABLE>
<CAPTION>
As of June 30, 1999
---------------------------------
Historical Pro Forma As Adjusted
---------- --------- -----------
(In thousands)
<S> <C> <C> <C>
Cash and cash equivalents................... $5,221 $ 5,221 $57,152
====== ======= =======
Borrowings under line of credit............. $2,400 $ 2,400 --
Due to member............................... 1,334 1,334 --
------ -------
3,734 3,734
------ -------
Stockholders' equity:
Preferred stock, par value $0.01 per share;
5,000,000 shares authorized; no shares
issued or outstanding.................... -- -- --
Common stock, par value $0.01 per share;
100,000,000 shares authorized; 22,100,000
shares issued and outstanding, pro forma;
and 27,600,000 shares issued and
outstanding, as adjusted................. -- 221 276
Additional paid-in capital................. -- 16,092 71,702
Accumulated deficit........................ -- (16,107) (16,107)
Accumulated comprehensive income........... -- 399 399
Deferred compensation...................... -- (429) (429)
Members' equity............................ 176 -- --
------ ------- -------
Total stockholders' equity.............. 176 176 55,841
------ ------- -------
Total capitalization........................ $3,910 $ 3,910 $55,841
====== ======= =======
</TABLE>
12
<PAGE>
Dilution
- --------------------------------------------------------------------------------
Our pro forma net tangible book value (deficit), excluding deferred direct
marketing and promotion expenses of $2.0 million as of June 30, 1999, was
approximately $(1.8) million, or $(.08), per share. Pro forma net tangible book
value per share is determined by dividing our net tangible book value by the
number of shares of common stock outstanding, adjusted to give effect to the
formation of HealthExtras, Inc. and the reorganization as discussed in "Certain
Transactions--Reorganizations." Tangible book value is total tangible assets
less total tangible liabilities. Dilution in pro forma net tangible book value
per share represents the difference between the amount per share paid by
purchasers of shares of common stock in this offering and the net tangible book
value per share of common stock immediately after completion of this offering.
Giving effect to the sale of the shares of common stock being offered hereby at
an assumed public offering price of $11.00 per share, after deducting the
underwriting discounts and commissions and estimated offering expenses, our pro
forma net tangible book value, as of June 30, 1999, would have been
approximately $53.9 million, or $1.95 per share. This represents an immediate
increase in net tangible book value of $2.03 per pro forma share to existing
stockholders and an immediate and substantial dilution of $9.05 per share to
new investors purchasing shares at the public offering price. The following
table illustrates the per share dilution:
<TABLE>
<S> <C> <C>
Assumed public offering price per share.................... $11.00
Pro forma net tangible book value per share before the
offering................................................. $(.08)
Increase in net tangible book value attributable to new
investors................................................ 2.03
-----
Adjusted pro forma net tangible book value per share after
offering................................................. 1.95
------
Dilution in net tangible book value per share to new
investors................................................ $ 9.05
======
</TABLE>
The following table summarizes, on a pro forma basis as of June 30, 1999, the
differences between the number of shares of common stock purchased from us, the
total consideration paid to us and the average price per share paid by existing
stockholders for those shares and by investors for shares of common stock in
this offering at an assumed public offering price of $11.00, before deducting
the underwriting discounts and commissions and estimated offering expenses:
<TABLE>
<CAPTION>
Shares Purchased Total Consideration Average
Number Percent Amount Percent Per Share
---------- ------- ----------- ------- ---------
<S> <C> <C> <C> <C> <C>
Existing stockholders..... 22,100,000 80.1% $15,000,000(1) 19.9% $ .68
New investors............. 5,500,000 19.9 60,500,000 80.1 11.00
---------- ----- ----------- -----
Total.................... 27,600,000 100.0% $75,500,000 100.0%
========== ===== =========== =====
</TABLE>
(1) Reflects amounts invested in HealthExtras, LLC as of June 30, 1999 by its
members.
13
<PAGE>
Selected Financial Data
- --------------------------------------------------------------------------------
(In thousands, except per share amounts)
The following selected combined financial data for HealthExtras, LLC and its
predecessor companies should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
with the audited financial statements, related notes, and other financial
information beginning on page F-1. The unaudited financial information as of
June 30, 1998 and 1999 and for the six month periods then ended includes, in
the opinion of management, all adjustments, consisting only of normal recurring
adjustments, necessary for a fair presentation of our results of operations for
those periods. The results of operations for the six months ended June 30, 1999
are not necessarily indicative of the results that may be expected for the full
year ending December 31, 1999, or any other future period. The historical
results presented below are not necessarily indicative of the results to be
expected for any future period.
<TABLE>
<CAPTION>
For the Period
October 23, For the For the
1996 (date of Year Ended Six Months
inception) to December 31, Ended June 30,
December 31, ---------------- ---------------------------
1996 1997 1998 1998 1999
-------------- ------- ------- ------------------- -------
(Unaudited)
Statement of Operations Data:
<S> <C> <C> <C> <C> <C>
Revenue................. $ -- $ -- $ -- $ -- $ 1,021
Direct expenses......... -- -- -- -- 741
Product development and
marketing............. 810 3,380 4,936 4,280 3,184
General and
administrative........ 146 1,306 1,598 1,013 757
------- ------- ------- -------- -------
Operating loss.......... (956) (4,686) (6,534) (5,293) (3,661)
Interest income
(expense), net........ -- (556) (110) (22) (189)
Other income (expense),
net................... (5) 589 -- -- --
------- ------- ------- -------- -------
Net loss................ (961) (4,653) (6,644) (5,315) (3,850)
Unrealized holding gains
(losses) on marketable
securities arising
during the period..... (1) 71 542 276 (213)
------- ------- ------- -------- -------
Comprehensive loss...... $ (962) $(4,582) $(6,102) $(5,039) $(4,063)
======= ======= ======= ======== =======
Pro Forma Data: (/1/)
Pro forma basic and
diluted net loss per
share................. $ (.05) $ (.26) $ (.38) $ (.30) $ (.21)
Pro forma average shares
of common stock
outstanding........... 17,680 17,680 17,680 17,680 18,535
<CAPTION>
December 31, June 30, 1999 (/1/)
------------------------- -------------------
1996 1997 1998 (unaudited)
------- ------- -------
Balance Sheet Data:
<S> <C> <C> <C> <C>
Cash and cash
equivalents............ $3,526 $ 9,651 $ 220 $5,221
Total assets............ 4,226 12,710 4,608 8,109
Total liabilities....... 188 7,770 5,531 7,933
Total members' capital
(deficit).............. 4,038 4,940 (923) 176
</TABLE>
(1) Reflects the formation of HealthExtras, Inc. and the reorganization as
discussed in "Certain Transactions -- Reorganizations," as if those events
had taken place at the beginning of the period, except that no effect is
given to the investment by Capital Z Healthcare Holding Corp. in
HealthExtras prior to May 27, 1999.
14
<PAGE>
Management's Discussion and Analysis of Financial Condition and Results of
Operations
- --------------------------------------------------------------------------------
OVERVIEW
We expect to generate a significant portion of our revenue from the sale of
supplemental health and disability benefit programs. While product development
has been ongoing for the past two years, we only began revenue generating
activities in January 1999. Prior to that time, we were a development stage
enterprise, which designed and test marketed various benefit combinations. To
date, we have primarily focused on the distribution of our benefit programs to
bank customers and building recognition of our program brand. Christopher Reeve
is featured prominently in our online, television and print marketing campaigns
to build brand awareness. Our intent is to effect a substantial portion of our
program distributions over the Internet.
We believe our consumer research and marketing efforts have given us valuable
insight into the consumer perceptions and preferences regarding the value and
limitations of prevailing insurance products. Accordingly, we believe that our
programs are well positioned to address the needs of our targeted market
segments. As of June 30, 1999, more than 45,000 members had purchased our
programs.
Revenue is generated by payments for program benefits. Direct expenses
consist principally of bank marketing and processing fees and the cost of
benefits provided to program members. Revenue from program payments received,
and related direct expenses, are deferred to the extent that they are
applicable to future periods or to any refund guarantee we offer for an initial
90-day period. As of June 30, 1999, initial revenue recognition was deferred
for approximately 25,000 program members.
Our limited history makes it difficult to evaluate our business and
prospects. We have incurred substantial operating losses since our inception,
and we intend to incur significant marketing and brand development expenses
over the next several years. We anticipate that our operating losses will
continue in the near term. There can be no assurance that we will generate
significant revenues or profitability in the future.
RESULTS OF OPERATIONS -- SIX MONTHS ENDED JUNE 30, 1999 COMPARED TO SIX MONTHS
ENDED JUNE 30, 1998
HealthExtras incurred an operating loss of $3.7 million for the six months
ended June 30, 1999. Revenue of $1.0 million consisted of that portion of
annual program member payments earned during the period. Cash collections for
program subscriptions through June 30, 1999 totaled $2.5 million. There was no
revenue in 1998.
Operating expenses for the six months ended June 30, 1999 totaled $4.7
million. Direct expenses of $741,000 consisted of the cost of obtaining the
benefits included in our programs, which for non-insurance benefits generally
are based on monthly or per member fees, and marketing and other fees payable
to our distribution partners. These direct expenses represented 16% of
operating expenses for the six months ended June 30, 1999. Product development
and marketing expenses for the 1999 six-month period totaled $3.2 million or
68% of total operating expenses. These expenses included $1.5 million in media
development, $783,000 in production expenses and $293,000 in market research.
General and administrative expenses for that period totaled $757,000 or 16% of
total operating expenses. These expenses included $378,000 in salaries and
benefits and $127,000 in professional services. Interest expense for that
period was $213,000.
Operating expenses for the six months ended June 30, 1998 totaled $5.3
million. Product development and marketing expenses for that period totaled
$4.3 million, or 81% of total operating expenses. These expenses included $2.9
million in media development, $924,000 in production expenses and $377,000 in
market research. General and administrative expenses for that period totaled
$1.0 million, or 19% of total operating expenses. These expenses included
$463,000 for policy and manual development and $178,000 in salaries and
benefits. Interest expense for that period was $129,000.
15
<PAGE>
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997
Total operating expenses for the year ended December 31, 1998 were $6.5
million compared to $4.7 million for 1997. This difference was largely
attributable to a $1.6 million increase in product development and marketing
expenses, reflecting the implementation of marketing agreements, initial focus
groups and product evaluation. In 1997, product development and marketing
expenses included $674,000 for media development, $976,000 in market research
and product development consulting, and approximately $1,730,000 in
compensation and other expenses. In 1998, product development and marketing
expenses included $1.9 million for media development, $1.6 million in
production expenses, $626,000 in market research and product development
consulting, and approximately $781,000 in compensation, and other expenses.
General and administrative expenses were largely unchanged from year to year.
In 1997, these expenses included approximately $330,000 in compensation and
$541,000 in professional and consulting fees. In 1998, these expenses included
approximately $630,000 in compensation and $224,000 in professional and
consulting fees. Net other income decreased from $589,000 for the year ended
December 31, 1997 to a net expense of $100 for the year ended December 31,
1998. This decrease reflected a reduction in realized securities trading gains.
Interest expense decreased from a net expense of $555,000 for the year ended
December 31, 1997 to $110,000 for the year ended December 31, 1998, as more
liquid assets were invested in interest-bearing instruments.
YEAR ENDED DECEMBER 31, 1997 COMPARED TO PERIOD FROM INCEPTION TO DECEMBER 31,
1996
Total operating expenses for the year ended December 31, 1997 were $4.7
million compared to $956,000 for the prior period. This was largely
attributable to a $2.6 million increase in product development and marketing
expenses. Product development and marketing expenses increased from $810,000 in
the 1996 period to $3.4 million in 1997, reflecting the commencement of focus
group, brand development and product evaluation programs. The increase in
general and administrative expenses was also largely a function of 12 months of
business in 1997 compared to two months in the prior period.
LIQUIDITY AND CAPITAL RESOURCES
Our operations since inception have been funded primarily through capital
investments and borrowings under our line of credit. In addition, one of our
owners has advanced us, with no interest required, approximately $1.3 million.
As of June 30, 1999, we had $5.2 million in cash and cash equivalents.
Cash provided by (used in) investing activities was $700,000 for the six
months ended June 30, 1999, ($1.0 million) for the year ended December 31,
1998, and ($194,000) for the period from inception through December 31, 1997,
and related primarily to investments and deposits.
Cash provided by (used in) financing activities was $5.7 million for the six
months ended June 30, 1999, ($2.1 million) for the year ended December 31,
1998, and $15.2 million for the period from inception through December 31,
1997, and related primarily to capital investments in us and net borrowings
from the bank credit line described below and from one of our owners.
In addition, we have secured a line of credit in the amount of $3.0 million
from a commercial bank, which extends to February 2000. As of June 30, 1999,
$2.4 million had been drawn against the line. This line of credit calls for
interest at the prime rate and is collateralized by substantially all of our
assets.
We currently anticipate that the net proceeds from this offering together
with our available cash resources will be sufficient to meet our presently
anticipated working capital, capital expenditure and business expansion
requirements for approximately the next 24 months. There can be no assurance
that we will not require additional capital prior to the expiration of that 24
month period. Even if such funds are not required, we may seek additional
equity or debt financing. We cannot assure you that such financing will be
available on acceptable terms, if at all, or that such financing will not be
dilutive to our stockholders.
16
<PAGE>
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement on
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities." We will be required to adopt SFAS No. 133 for the year
ending 2001. Because we do not currently hold any derivative financial
instruments and do not expect to engage in hedging activities, adoption of SFAS
No. 133 is expected to have no material impact on our financial condition or
results of operations.
In March 1998, the American Institute of Certified Public Accountants issued
Statement of Position 98-1, "Software for Internal Use," which provides
guidance on accounting for the cost of computer software developed or obtained
for internal use. We have adopted this statement of position for the year
ending December 31, 1999. It did not have a material impact on our financial
statements for the six months ended June 30, 1999.
YEAR 2000 COMPLIANCE
Many existing computer programs use only two digits to identify a year. These
programs were designed and developed without addressing the impact of the
upcoming change in the century. If not corrected, many computer software
applications could fail or create erroneous results by, at or beyond the year
2000. We use internally developed software, as well as computer technology and
other services provided to us by third party vendors that may fail due to the
Year 2000 phenomenon. We are also dependent on telecommunications vendors to
maintain our network and a third party that hosts our servers.
Due to our recent founding, we developed our systems and technology in light
of the Year 2000 problem, as opposed to many older systems designed before this
problem was known. On June 15, 1999, we completed our review and testing of
Year 2000 compliance for all of our internally developed software, which
include substantially all of the systems for the operation of our website,
customer interaction and transaction systems and our security, monitoring and
back-up capabilities. Based on such testing, we believe our internally
developed software and systems are Year 2000 compliant, which means that all
date data will process without error, interruption or loss of functionality of
any software or system due to the change in century.
On May 31, 1999, we completed our assessment of the Year 2000 readiness of
our third party supplied software and hardware, and of our vendors. During the
assessment phase, we identified those vendors critical to us, and received
certifications of Year 2000 compliance or a readiness disclosure statement from
them. Based on the results of preliminary testing, we believe that the systems
of these vendors will be Year 2000 compliant. The Year 2000 readiness of the
general Internet infrastructure necessary to support our operations is
difficult to assess. For example, we depend on the integrity and stability of
the Internet to provide our services. We also depend on the Year 2000
compliance of the computer systems and financial services used by consumers. A
significant disruption in the ability of consumers to reliably access the
Internet or portions of it or to use their credit cards would have an adverse
effect on demand for our services and would have a material adverse effect on
us.
To date, we have incurred approximately $45,000 of expense relating to Year
2000 analysis, testing and remediation efforts. While there can be no
guarantee, we do not anticipate any substantial expenses relating to our Year
2000 compliance.
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Business
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OVERVIEW
HealthExtras intends to be the leading Internet-based provider of
supplemental health and disability benefit programs. We design, develop and
market our programs directly to consumers over the Internet at our website,
www.healthextras.com. At our website, our customers can tailor their benefit
packages to best suit their needs and circumstances. Our programs address a
critical gap in our customers' insurance protection and have traditionally not
been promoted by agents or brokers due to their low price point and the high
costs associated with that distribution channel. We believe we are the first
company to develop supplemental health and disability programs designed
specifically to be marketed over the Internet. We have contracted with
insurance companies to underwrite the insurance components of our programs. As
a result, we do not assume any insurance underwriting risk. The financial
responsibility for the payment of claims resulting from a qualifying
disability, or other event covered by the insurance features of our programs,
is borne by third-party insurers. Since launching our programs in January 1999,
and through June 30, 1999, we have enrolled over 45,000 program members.
The Internet is an increasingly significant medium for communication,
information and commerce. International Data Corporation, commonly referred to
as IDC, estimates that there were 97 million Internet users worldwide at the
end of 1998 and anticipates that number will grow to approximately 320 million
users by the end of 2002. In addition, IDC estimates that the worldwide
consumer electronic commerce market is expected to grow from approximately $11
billion in 1998 to approximately $94 billion in 2002. That growth is being
driven by a number of factors, including:
. A growing base of PCs in the home and workplace;
. Improvements in network security, infrastructure and bandwidth;
. Faster and less expensive Internet access;
. Increases in the quantity and quality of content available on the
Internet;
. The overall increase in public awareness of the Internet; and
. The convenience, timeliness and reduced costs of electronic commerce.
Over the last few years, consumers have significantly increased their usage
of the Internet and expanded the categories of products and services they
purchase over the Internet. A new class of Internet-based companies has emerged
to address these online opportunities. These companies are focusing on such
areas as books, CDs, videocassettes, airline tickets, online stock trading and,
increasingly, other consumer financial products and services.
OUR MARKET
According to Forrester Research, a leading e-commerce and technology research
firm, Internet-influenced sales of insurance will grow from $1.5 billion in
1998 to $11.0 billion in 2003. In addition, Booz, Allen & Hamilton, Inc. has
estimated that the cost of distribution of insurance products over the Internet
can be as much as 71% less than the distribution costs of products through
traditional brokers and agents. We believe our programs are well-suited for
delivery over the Internet because:
. health and disability benefits are information-based products that need
neither physical shipment nor warehousing of merchandise;
. the cost advantages and direct contact with customers afforded by the
Internet enable us to target and serve segments of the market which would
not be as profitable if they had to be accessed through large sales staffs
and costly local offices;
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. effective two-way communication flow via the Internet facilitates
interaction with consumers and rapidly delivers feedback on consumer
preferences; and
. the Internet provides customers with convenience, privacy and control over
the process of researching and pricing benefits, without the pressure of a
commissioned agent.
Further, we believe that the Internet provides us with significant
opportunities in the direct marketing of our benefit programs, including the
ability to:
. evaluate and respond rapidly to consumer reactions to marketing programs
and product offerings;
. target the most attractive customer segments and customize advertising to
them across different websites; and
. provide customers flexibility to customize benefit programs.
The market of supplemental health and disability insurance is large and
continues to grow. We believe that the demand for supplemental insurance
products will grow and be driven by:
. significant growth in Internet commerce, through which more consumers will
have access to alternatives to traditional insurance products and
distribution channels;
. a growing awareness by consumers of their financial exposure to
catastrophic events, due to limitations in their insurance coverage; and
. the growth in elective employee benefit plans which incorporate a variety
of insurance options.
THE HEALTHEXTRAS OPPORTUNITY
Many individuals and families are financially exposed to the costs of
catastrophic injuries and illnesses. According to Employee Benefit Research
Institute, more than 60% of insured Americans are covered by policies that
limit overall lifetime health benefits to $1.0 million or less. In addition,
according to Employee Benefit Research Institute, fewer than half of American
workers covered by group health insurance are covered by disability policies.
Most disability insurance is limited to short-term income replacement and does
not address longer-term financial security. Thus, individuals covered by
employer-sponsored health plans frequently have a significant amount of their
net worth exposed to loss through catastrophic illness or injury. In addition,
many uninsured Americans lack an effective means of accessing catastrophic
coverage because the comparatively low premiums associated with those products
make their commission yield unattractive to agents and brokers. As a result,
these products often are not actively marketed. HealthExtras benefit programs
are designed to meet this need.
BUSINESS STRATEGY
We are an Internet-based provider of supplemental health and disability
benefit programs. The Internet represents a more cost-effective marketing and
operating platform for our programs which can eliminate a significant
percentage of the costs associated with commission-driven distribution systems.
Accordingly, the Internet enhances our ability to offer affordable supplemental
health and disability benefit programs. Elements of our strategy include:
. Become the Leading Online Provider for Supplemental Health and Disability
Benefit Programs.
We are moving aggressively to capture a leading market share in the
Internet segment of the supplemental health and disability insurance
market. We are positioned to promote combinations of supplemental health
and disability benefits that historically have been relatively uneconomic
to offer to consumers through traditional, commission-driven distribution
channels. By leveraging our membership base to obtain group rates, we are
able to offer benefit programs at a cost to members which we believe is
less than they would have to pay individually for comparable benefits.
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. Promote HealthExtras as the National Brand for Supplemental Health and
Disability Benefits.
Through our exclusive association with Christopher Reeve, we have the
opportunity to achieve recognizable brand identity for our programs. We
intend to continue to expand our brand marketing aggressively through the
Internet, TV, radio and print activities.
. Develop Strategic Marketing Relationships.
We have entered into marketing programs with selected Internet portals,
insurance-related websites, and other websites with attractive demographic
profiles. We have established strategic marketing relationships with six of
the nation's largest VISA and Mastercard issuing banks for access to their
credit card and other customers.
.Continue to Develop Innovative Health and Disability Programs Responsive to
Consumer Needs.
We are continuing to develop an expanded list of insurance and service
options for inclusion in our programs. These additional products would
provide flexibility in coverage amounts to our program members and address
additional insurance needs of our program members.
OUR WEBSITE
Our website is designed to make consumers aware of the need for supplemental
health and disability benefits and to promote online enrollment in our
programs. Upon reaching our website, visitors may view a Christopher Reeve
testimonial followed by the arrival of our site map that provides point-and-
click access to all our website functions. These functions can be divided into
two categories: content and e-commerce.
Our content includes educating consumers on the need for supplemental health
and disability benefits through:
.Statistical data regarding supplemental health and disability topics;
.Answers to frequently asked questions about the need for our programs;
.An interactive question-and-answer challenge about supplemental health and
disability benefits;
.User-friendly descriptions of each of our programs and benefits; and
. Reference to a toll-free telephone number for visitors to contact customer
service representatives for additional information.
We also offer customers and prospective customers the opportunity to perform
the following e-commerce activities on our site:
.Customize unique HealthExtras benefit programs;
.Enroll in our programs and make payments online;
.Receive immediate confirmation of enrollment; and
.Update coverage by adding additional products.
In order to provide a personalized experience for each website visitor, a
relational database that stores customers' personal profiles and transaction
histories is integrated with the website.
We continue to revise and expand our website content and e-commerce
functionality to attract repeat visits from existing customers and to implement
new marketing opportunities.
BRAND DEVELOPMENT
Christopher Reeve
Christopher Reeve has entered into an exclusive agreement to assist
HealthExtras in developing products, making consumers aware of various
catastrophic events that could threaten their families' security and promoting
the HealthExtras brand. Mr. Reeve appears in a number of television, radio and
print advertisements to promote HealthExtras programs and our website.
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We have an agreement with Cambria Productions, Inc. f/s/o Christopher Reeve,
which had an initial three-year term from July 8, 1997. This agreement has been
extended for an additional two-year term, to July 8, 2002.
HealthExtras has exclusive rights to use the advertisements and promotional
materials involving Mr. Reeve that it develops for television, radio, Internet
and print, including newspapers, magazines, direct mail and other consumer
print materials, but excluding life-size cut-outs, billboards and shelf-facing
materials, during the term of the agreement and for a 10-year annuity period
thereafter, within the United States and its possessions, territories and
commonwealth. Further, under the agreement, Christopher Reeve shall not
promote, create commercials, or endorse any other product which combine credit
cards and health-related benefits; however, Mr. Reeve may perform in television
or productions sponsored by competitive companies and products and may appear
in promotions for such programs.
Mr. Reeve has the absolute right to approve all advertisements created under
the agreement, or to give a notice of disapproval. If Mr. Reeve gives proper
disapproval notice and the parties are unable to agree as to the advertisement
content, either party may terminate the agreement.
HealthExtras is required to make payments for Mr. Reeve's services based on
the number of persons who purchase a HealthExtras benefit program, subject to
the payment of guaranteed amounts. Mr. Reeve's representative has the right to
terminate the agreement immediately upon giving notice to HealthExtras if any
payment due under the agreement is not received within 30 days of its due date.
In such case, HealthExtras relinquishes any right to use any materials
previously created with Mr. Reeve's likeness.
STRATEGIC MARKETING RELATIONSHIPS
Internet Relationships
We have established marketing relationships with selected Internet content
sites, electronic commerce sites and Internet portals. These relationships
drive traffic to our website and increase our brand name recognition.
. We have purchased banner advertising on leading web portals, including
YAHOO!, Excite and America Online. We are able to measure the results of
our banner advertising in terms of "click-throughs" from specific websites
and for each type of content page within a website. We intend to adjust
the level of banner advertising overall and at specific sites based on the
frequency of "click-throughs" and the level of actual customer purchases
of our programs services resulting from these advertising campaigns.
. We have also purchased advertising through a leading online advertisement
placement agency, DoubleClick, including banner advertisements targeted to
Internet users who enter certain keywords on Altavista.com, a leading
Internet Search Engine.
. We are continuing to expand our Internet relationships with portals,
health care content providers and insurance-related websites.
Other Relationships
We have established strategic marketing relationships with six of the
nation's largest VISA and Mastercard issuing banks for access to their credit
card and other customers. These banks are assisting us in establishing brand
name recognition and driving traffic to our website with their installed base
of customers, which we estimate represents more than 50 million households.
These arrangements provide for statement inserts, statement messages and e-
mail to be sent to the credit card and other customers of those banks. These
communications feature Christopher Reeve, provide information about
HealthExtras benefit programs and promote our website. In addition, our bank
partners may establish links from their websites to the HealthExtras website.
HealthExtras compensates those banks based principally on the benefit programs
purchased in response to these communications.
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Under the contracts which govern our relationships with our bank partners,
the banks have the right to review and approve all marketing materials and to
determine whether to send those materials to customers. HealthExtras pays for
the marketing material used and primarily pays a fee to the banks based on the
purchases of HealthExtras benefit programs by bank customers.
The contracts are typically for a term of 12 months, with automatic annual
renewal unless cancelled upon written notice 30 or 90 days prior to an
anniversary date. Some contracts also provide for termination by either party
without cause upon 30 or 90 days prior written notice.
We expect that communications concerning our programs will be made to more
than 55 million households during 1999 based on agreements signed to date,
although there could be a degree of duplication among households which have
customer relationships with more than one of the banks involved.
OUR PRODUCTS
Our programs provide various combinations of supplemental health and
disability benefits to program members that enroll. Further, we seek to provide
program members flexibility to customize benefit packages to meet their needs.
HealthExtras does not assume any underwriting risks for the benefits included
in its programs. The current benefits which are included in our various
programs are:
. Catastrophic Disability. This benefit provides a $1 million cash payment
to members who become permanently disabled as the result of an accident.
We intend to expand this benefit to enable members to obtain different
coverage amounts, for example, $2 million or $3 million.
. Excess Medical. This benefit provides program members an additional $5
million in health insurance coverage after the exhaustion of the $1
million lifetime limit on a member's primary health insurance coverage. We
intend to expand this benefit to enable members to adjust the $5 million
excess coverage amount, and to adjust the $1 million amount to match the
limitation in their primary health insurance coverage.
. Organ Transplant. Many employer-sponsored health insurance plans contain
an embedded limitation on organ transplant coverage. Our organ transplant
benefit provides up to $250,000 to cover expenses for an organ transplant
in excess of a member's primary health insurance coverage.
. Out of Area Expense Reimbursement. This benefit provides up to $2,500 per
year in reimbursements for co-payments and deductibles for health services
furnished to members when they are over 100 miles from home.
. Emergency Evacuation and Repatriation. This benefit provides a member who
needs emergency medical treatment with up to $50,000 of coverage for air
ambulance transportation to an appropriate medical facility abroad or in
the United States.
. 24-Hour Nurse Consultation. This benefit provides access to general
medical information from a centralized nursing staff 24 hours per day, 7
days per week, through a toll-free telephone number. This service does not
provide any diagnosis of medical conditions, nor does it provide or
control medical services.
. Provider Network Access. This benefit allows members to receive the
discounts or the price concessions for medical services available through
the United Payors & United Providers nationwide network of medical care
providers. The United Payors & United Providers network includes over
2,500 hospitals and 150,000 physicians.
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These benefits currently may be offered in the number of states set forth in
the following table:
<TABLE>
<CAPTION>
Percent of
Number National Population
of States(/1/) in those States
-------------- -------------------
<S> <C> <C>
Catastrophic Disability..................... 35 77%
Excess Medical.............................. 25 52%
Organ Transplant............................ 35 77%
Out of Area................................. All 100%
Emergency Evacuation and Repatriation....... All 100%
24-Hour Nurse Consultation.................. All 100%
Provider Network Access..................... All 100%
</TABLE>
(1) and the District of Columbia and Puerto Rico
HealthExtras takes no insurance underwriting risks. The catastrophic
disability, excess medical and organ transplant benefits are underwritten by
Reliance National Insurance Company, and the out of area coverage is
underwritten by Fidelity Security Life Insurance Company. Those insurance
companies assume the financial responsibility for the payment of claims
resulting from a qualifying disability, or other even covered by the insurance
they underwrite. The 24-Hour Nurse Consultation and the Emergency Evacuation
and Repatriation benefits are provided by On Call International under an
arrangement with HealthExtras which can be terminated by either party on 120
days written notice. If this arrangement is terminated, On Call is not required
to provide any further benefits to our program members.
OTHER STRATEGIC RELATIONSHIPS
Reliance National Insurance Company
Our relationship with Reliance National is governed by a Program
Administrator's Agreement between HealthExtras and Reliance National. This
agreement runs through February 28, 2002. Under this agreement, Reliance
National agreed to file the underlying benefit insurance policies in all 50
states and to use its best efforts to obtain approvals from the various state
insurance departments. Reliance National identifies for HealthExtras the
regulatory status in the various states for the insurance coverage it provides.
Reliance National is not, however, obligated to issue insurance under this
agreement. Also, Reliance National provides marketing and sales expertise for
the HealthExtras benefits programs. HealthExtras is required to pay Reliance
National for the cost of the insurance coverage provided to HealthExtras
program members.
Under this agreement, Reliance National has appointed HealthExtras as
administrator and designated the Sklover Group, Inc. as the program manager.
The Sklover Group is an independent insurance agent. HealthExtras has no
authority to adjust, compromise, settle or pay any claim made on the insurance
policies. HealthExtras maintains a toll free telephone number to provide its
members convenient access to information; however, all inquiries regarding
policy certificate holder services, including claim inquiries, are referred to
the licensed program manager.
HealthExtras is required to give Reliance National a right of first refusal
to underwrite certain lines of insurance to be included in, and to develop
additional insurance programs for, the HealthExtras benefit programs.
HealthExtras is obligated under this agreement to obtain Reliance National's
consent before referring to Reliance National or its insurance products in any
of its advertisements or publications.
This agreement gives Reliance National the right to suspend HealthExtras as
administrator or terminate the agreement based on an inability to obtain and
maintain in force reinsurance satisfactory to Reliance National and in various
circumstances pertaining to HealthExtras, for example, an administrative
accusation against it for violation of insurance laws, a default in its duties
and responsibilities, excessive consumer complaints, or insolvency. In
addition, Reliance National could, under the contract, unilaterally decide to
stop issuing policies for our programs at any time. Either party can terminate
this agreement for other reasons, unless corrected, upon 365 days notice. In
the event of termination, HealthExtras is still bound to service existing
policies covered by the agreement.
United Payors & United Providers, Inc.
Network Access
Our relationship with United Payors & United Providers enables us to offer
our program members access to the price concessions for medical services
available through the United Payors & United Providers
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network of health care providers. This network consists of over 2,500 hospitals
and 150,000 physicians throughout the United States.
HealthExtras has entered into a contract with United Payors & United
Providers to allow HealthExtras program members to access, subject to various
criteria, the United Payors & United Providers network of health care
providers. United Payors & United Providers has the unilateral right to revise
the criteria for network access. In exchange, we have agreed to pay United
Payors and United Providers $1.00 per program member per month for the initial
year of membership, which amount escalates in stages for subsequent membership
years to a maximum of $1.50 per program member per month in the fourth year of
continued membership and thereafter. However, we can terminate these payments
by conveying $25 million in market value of our common stock to United Payors &
United Providers.
HealthExtras must obtain United Payors & United Providers' written consent to
use marketing materials that reference the United Payors & United Providers'
network, and United Payors & United Providers must obtain HealthExtras'
approval to use marketing materials that reference HealthExtras benefit
programs. HealthExtras has agreed to certain exclusivity provisions with United
Payors & United Providers. During the term of the contract, HealthExtras will
not allow any other individual or entity to use Christopher Reeve, through
HealthExtras's contract with Mr. Reeve, to promote products competitive to
United Payors & United Providers. In particular, HealthExtras will not,
directly or indirectly, market, promote or sell any products or services, other
than the United Payors & United Providers network, that offer discounts or
price concessions from doctors, hospitals or other medical providers, without
United Payors & United Providers' approval.
The contract contains mutual confidentiality and indemnification provisions.
The contract terminates on December 31, 2003, but may be terminated prior to
that time by either party upon breach of a provision of the contract, provided
the party gives the breaching party 30 days written notice of the breach and
the breaching party fails to correct the breach.
Administrative services
HealthExtras has relied on United Payors & United Providers to furnish
operating and administrative services and facilities necessary to its business,
which include furnishing personnel, office space, furniture and equipment,
telephone service, both voice and facsimile, and computer capabilities.
HealthExtras reimburses United Payors & United Providers on a cost basis for
these services. The contract governing this arrangement terminates on December
31, 2001. The contract may be terminated prior to that time by HealthExtras
upon 90 days written notice and by either party upon a breach by the other
party, which is not corrected after 30 days written notice. HealthExtras has
entered into a sublease for office space with United Payors and United
Providers which replaces the provisions of the Administrative Services
Agreement regarding office space. This administrative services arrangement is
expected to continue in the immediate future to the extent it is convenient to
us; but, as a practical matter, we anticipate using this arrangement only for
limited possible future services. An exception is that until we establish our
employment structure and benefits, most of our personnel will be employees of
United Payors & United Providers, who devote all of their time to us.
HealthExtras and United Payors & United Providers are under common control.
For additional information, see "Certain Transactions."
COMPETITION
Since HealthExtras programs incorporate insurance benefits, we consider that
our programs compete with those of online and traditional providers of
insurance products. The market for selling insurance products over the Internet
is new, rapidly evolving and intensely competitive. Current and new competitors
may be able to launch new websites at a relatively low cost.
We also face competition from the traditional distributors of insurance, such
as captive agents, independent brokers and agents, and direct distributors of
insurance. Insurance companies and distributors of insurance products are
increasingly competing with banks, securities firms and mutual fund companies
that sell insurance or alternative products to similar consumers.
Traditionally, regulation separated much of the activity in the financial
services industry. However, recent regulatory changes have begun to permit
other financial institutions also to sell insurance.
We potentially face competition from unanticipated alternatives to our
benefit programs from a number of large Internet companies and services that
have expertise in developing online commerce and in facilitating Internet
traffic, including America Online, Microsoft and Yahoo!. These potential
competitors could choose to compete with us directly or indirectly through
affiliations with insurers, insurance agents and brokers and
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other electronic commerce companies. Other large companies with strong brand
recognition, technical expertise and experience in Internet commerce could also
seek to compete with us. Competition from these and other sources could harm
our business, results of operations and financial condition.
We believe that the principal competitive factors in our markets are price,
brand recognition, marketing expertise, website accessibility, ability to
fulfill customer purchase requests, customer service, reliability of delivery,
ease of use, and technical expertise and capabilities. Many of our current and
potential competitors, including Internet directories and search engines and
traditional insurance agents and brokers, have longer operating histories,
larger consumer bases, greater brand recognition and significantly greater
financial, marketing, technical and other resources than we. Certain of these
competitors may be able to secure products and services on more favorable terms
than we can obtain. In addition, many of these competitors may be able to
devote significantly greater resources than we for developing websites and
systems, marketing and promotional campaigns, attracting traffic to their
websites and attracting and retaining key employees.
Any of the firms described above could seek to compete against us through
traditional channels or by copying our products or business model. Increased
competition may result in reduced operating margins, loss of market share and
damage to our brand. We cannot assure you that we will be able to compete
successfully against current and future competitors or that competition will
not harm our business, results of operations and financial condition.
TECHNOLOGY PLATFORM
We have deployed an Internet-centered technology infrastructure that
integrates software, hardware and networking from leading vendors to provide a
secure solution for our application requirements.
. Our dedicated servers are collocated at UUNET, whose U.S. network consists
of DS-3, OC-12 and OC-48 trunks reinforced with 622 Mbps ATM in 10
metropolitan multi-hub areas. UUNET, a subsidiary of MCI-WorldCom,
maintains a rigorously engineered TCP/IP network backbone with redundant
links to eliminate any single point of failure. Collocation of our servers
at UUNET provides a data center complete with uninterruptible power
supply, climate control and extensive disaster recovery provisions.
. Our web application uses Microsoft software, including Site Server
Commerce(TM), MS SQL 7.0 and IIS to provide the browser-based interface
for visitors to our website. Using OLE and ODBC, the web application
connects to our back office AS/400 system which uses DB-2 as its SQL
database.
. To protect the privacy of customer data and maintain system integrity, all
of our web pages that potentially contain sensitive data such as credit
card information or personal health profiles use Secure Socket Layer (SSL)
technology and public key cryptography.
. To complement and extend the resources of our internal staff, we maintain
outsourcing relationships with selected web professional services firms,
including Logical Design Solutions located in Morristown, N.J.
REGULATION
Since the HealthExtras programs include insurance benefits, distribution of
our programs must satisfy applicable legal requirements relating, among other
things, to policy form and rate approvals, the licensing laws for insurance
agents and insurance brokers, and the satisfaction by a HealthExtras member who
receives the insurance benefit of requisite criteria, for example being a
resident of a state which has approved the insurance policy. We believe we
satisfy applicable requirements. The underwriter of the insurance benefits
included in HealthExtras programs is responsible for obtaining regulatory
approvals for those benefits. An independent insurance agency is responsible
for the solicitation of insurance benefits involved in HealthExtras programs.
Complex laws, rules and regulations of each of the 50 states and the District
of Columbia pertaining to insurance impose strict and substantial requirements
on insurance coverage sold to consumers and businesses. Compliance with these
laws, rules and regulations can be arduous and imposes significant costs. Each
jurisdiction's insurance regulator typically has the power, among other things,
to:
. administer and enforce the laws and promulgate rules and regulations
applicable to insurance, including the quotation of insurance premiums;
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. approve policy forms and regulate premium rates;
. regulate how, by which personnel and under what circumstances an insurance
premium can be quoted and published; and
. regulate the solicitation of insurance and license insurance companies,
agents and brokers who solicit insurance.
State insurance laws and regulations are complex and broad in scope and are
subject to periodic modification as well as differing interpretations. There
can be no assurance that insurance regulatory authorities in one or more states
will not determine that the nature of our business requires us to be licensed
under applicable insurance laws. A determination to that effect or that we or
our business partners are otherwise not in compliance with applicable
regulations could result in fines, additional licensing requirements or
inability to market our products in particular jurisdictions. Such penalties
could significantly increase our general operating expenses and harm our
business. In addition, even if the allegations in any regulatory or legal
action against us turn out to be false, negative publicity relating to any such
allegation could result in a loss of consumer confidence and significant damage
to our brand. We believe that because many consumers and insurance companies
are not yet comfortable with the concept of purchasing insurance online, the
publicity relating to any such regulatory or legal issues could significantly
harm our business.
The distribution of our programs including an insurance component over the
Internet subjects us to additional risk as most insurance laws and regulations
have not been modified to clarify or amend their application to Internet
transactions. Currently, many state insurance regulators and legislators are
exploring the need for specific regulation of insurance sales over the
Internet. Such regulation could dampen the growth of the Internet as a means of
providing insurance services. Moreover, the application of laws governing
general commerce on the Internet remains largely unsettled, even in areas where
there has been some legislative action. It may take years to determine whether
and how existing laws such as those governing insurance, intellectual property,
privacy and taxation apply to the Internet. In addition, the growth and
development of the market for electronic commerce may prompt calls for more
stringent consumer protection laws and regulations that may impose additional
burdens on companies conducting business over the Internet. Any new laws or
regulations or new interpretations of existing laws or regulations relating to
the Internet could harm our business.
We believe that we are currently in compliance with applicable legal
requirements. However, the future regulation of insurance sales via the
Internet as a part of the new and rapidly growing electronic commerce business
sector is unclear. If additional state or federal laws or regulations are
adopted, they may have an adverse impact on us.
LEGAL PROCEEDINGS
From time to time we may become subject to legal proceedings and claims in
the ordinary course of business. Such legal proceedings and claims could
include claims of alleged infringement of third party intellectual property
rights and notices from state regulators that we may have violated state
regulations. Such claims, even if without merit, could result in the
significant expenditure of our financial and managerial resources. We are not
aware of any legal proceedings or claims that we believe will, individually or
in the aggregate, harm our business, financial condition or results of
operations in any material respect.
EMPLOYEES
As of June 30, 1999, we had 42 personnel whose services are devoted full time
to HealthExtras. As discussed under "Business -- Other Strategic
Relationships -- United Payors & United Providers, Inc." our personnel
currently are employees of United Payors & United Providers. This arrangement
is for our convenience. We plan in the near future to establish employee
benefits similar to the benefits these personnel currently receive. At that
time, they will become direct employees of ours. We have never had a work
stoppage. A collective bargaining unit does not represent our personnel. We
consider our relations with our personnel to be good. Our future success will
depend, in part, on our ability to continue to attract, integrate, retain and
motivate highly qualified technical and managerial personnel, for whom
competition is intense.
FACILITIES
Our executive, administrative and operating offices are located in
approximately 2,473 square feet of office space in Rockville, Maryland under a
sublease with United Payors & United Providers that expires on July 1, 2000. We
anticipate that we may require additional space within the next three months to
accommodate our anticipated growth and that suitable office space will be
available on commercially reasonable terms.
26
<PAGE>
Management
- --------------------------------------------------------------------------------
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth certain information with respect to the
persons who are or are to become directors and executive officers of
HealthExtras, Inc. prior to the sale of the common stock offered hereby.
<TABLE>
<CAPTION>
Name Age Position
- -------------------------------------------------------------------------------
<S> <C> <C>
David T. Blair (/1/)...... 30 Chief Executive Officer and Director
Marshall J. Coleman....... 43 Vice President of Marketing
Michael P. Donovan........ 41 Chief Financial Officer
Rhona L. Leffler.......... 43 Operations Manager
Michael G. Miller......... 43 Vice President of Internet Business Development
Brian L. Moffitt.......... 30 Manager, Program Analytics
Thomas L. Blair (/2/)..... 55 Chairman of the Board
Julian A. L.
Allen (/3/)(/4/)........ 30 Director
Thomas J. Graf (/4/)...... 50 Director
Julia M. Lawler (/4/)..... 39 Director
Karen E. Shaff (/4/)...... 44 Director
Paul H.
Warren (/3/)(/4/)....... 43 Director
</TABLE>
(1) David T. Blair is the son of Thomas L. Blair, Chairman of the Board. He
will become a director prior to the completion of this offering.
(2) Currently the sole director of HealthExtras, Inc. and serves HealthExtras,
LLC in a position equivalent to that of a director.
(3) These persons will serve as directors in accordance with an agreement with
Capital Z Healthcare Holding Corp.
(4) Currently serves with HealthExtras, LLC in a position equivalent to that of
a director and will become a director of HealthExtras, Inc. prior to the
completion of this offering.
Biographical information
David T. Blair joined HealthExtras in July 1997 as the Chief Executive
Officer. From 1995 to 1997, prior to joining HealthExtras, Mr. Blair was the
Financial Manager for United Payors & United Providers. At United Payors &
United Providers, Mr. Blair focused his efforts on United Payors & United
Providers' initial public offering and several strategic acquisitions. In 1994,
Mr. Blair co-founded and was President of Continued Health Care Benefit
Program, which markets healthcare benefits to individuals leaving the United
States armed forces. In 1995, this program was merged into United Payors &
United Providers. From 1991 to 1994, Mr. Blair worked in corporate finance and
new business development for Kelly, Anderson, Pethick and Associates, a
management consulting firm.
Marshall J. Coleman joined HealthExtras in 1999 as Vice President of
Marketing. Mr. Coleman has over fifteen years experience in marketing
communications, brand and business development. From 1994 to 1999, Mr. Coleman
worked for America Online as Senior Manager of Marketing Communication, Manager
of Programming and Promotions and Manager of Business Development.
Michael P. Donovan joined HealthExtras in April 1999 as the Chief Financial
Officer. From early 1998 until early 1999, Mr. Donovan was engaged in a variety
of technology and business development activities for HealthExtras. From 1992
to 1997, Mr. Donovan served as Senior Vice President of Business and Technology
Development for PHP Healthcare Corporation. From 1989 to 1992, Mr. Donovan
served as Chief Financial Officer of Direct Health, Inc. Prior to that, Mr.
Donovan was a Senior Manager for KPMG LLP, then KPMG Peat Marwick, responsible
for a variety of technology and health care clients.
Rhona L. Leffler joined HealthExtras in February 1999 as Operations Manager.
Ms. Leffler has 20 years experience in healthcare-related marketing, client
services and operations. In 1995, Ms. Leffler became Chief Operating Officer of
R J Associates, Inc., which developed preferred provider networks and performed
claims repricing for third party payors. Previously, Ms. Leffler served as
Client Services Director for America's Health Plan, a predecessor organization
to United Payors & United Providers.
27
<PAGE>
Michael G. Miller joined HealthExtras in 1999 as Vice President of Internet
Business Development. During 1999 and 1998, prior to joining HealthExtras, Mr.
Miller was Director of e-commerce at BlazeNet, an Internet service provider.
From 1994 to 1998, Mr. Miller was an independent consultant focusing on
Internet solutions. Specifically, Mr. Miller implemented various database and
website applications for retail businesses and non-profit organizations. Mr.
Miller has twenty years of business experience, including employment in various
finance and strategic management positions at International Business Machines
Corporation and PepsiCo, Inc.
Brian L. Moffitt joined HealthExtras in early 1998 to perform economic
analysis of prospective programs. Prior to joining HealthExtras, Mr. Moffitt
was a Senior Healthcare Analyst for Aetna/NYLCare Health Plans from 1996 to
1998. Mr. Moffitt also worked at the Health Care Financing Administration from
1993 to 1996 developing payment rates for medical benefits based on the
measurement of the health costs for over 30 million beneficiaries.
Thomas L. Blair is the founder of HealthExtras, LLC and its predecessors.
Since January 1995, Mr. Blair has been Chairman and Chief Executive Officer or
Co-Chief Executive Officer of United Payors & United Providers, a publicly
traded company. Mr. Blair founded of America's Health Plan, Inc. 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.,
which business was contributed to United Payors & United Providers. From 1977
until 1988, Mr. Blair was a principal of Jurgovan & Blair, Inc., which
developed and managed health maintenance organizations.
Julian A. L. Allen is a Principal and Vice President of Capital Z Management,
LLC, the management affiliate of Capital Z Partners. Prior to joining Capital Z
Management in July 1998, Mr. Allen was a Vice President of Zurich Centre
Investments, the strategic private equity investing arm of Zurich Financial
Services, which he joined in September 1997, and an Associate of Patricof & Co.
Ventures, Inc. from September 1995. Prior to such time, Mr. Allen worked as a
financial analyst at Wasserstein Perella & Co. Mr. Allen currently serves as a
director of Emergent Advisors, Inc.
Thomas J. Graf joined Principal Life Insurance Company, the operating, wholly
owned subsidiary of Principal Mutual Holding Company, in 1972, and since 1994
has served as Senior Vice President of Principal Life Insurance Company. Mr.
Graf is also a director of Coventry Health Care, Inc. and United Payors &
United Providers.
Julia M. Lawler joined Principal Life Insurance Company in 1984 and, since
May 1995, has served as Director, Capital Markets. Since 1993, Ms. Lawler
served as an officer of Principal Life Insurance Company in various other
capacities, including Executive Advisor to the President.
Karen E. Shaff became Senior Vice President and Deputy General Counsel for
Principal Life Insurance Company in 1999. Ms. Shaff joined Principal Life
Insurance Company in 1982 and held several positions within its law department
until being named Vice President and Associate General Counsel in 1995.
Paul H. Warren is a Director and Senior Vice President of Capital Z
Management, LLC and Capital Z Partners. Mr. Warren was a partner in Insurance
Partners, L.P., a limited partnership organized in 1994 to make investments in
property and casualty insurers, life and health insurers, health care services
firms and related insurance businesses. In connection with Insurance Partners,
L.P., Mr. Warren serves as a director of Corporate Health Dimensions, Provincia
Salud, Provincia ART and Annuity & Life Re. In addition, Mr. Warren serves as a
director of Brookdale Living Communities, Inc. and United Payors & United
Providers. Prior to the formation of Insurance Partners, L.P., 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.
Terms of office
The Board of Directors of HealthExtras will be divided into three classes
having staggered three-year terms, each of which will contain at least two
directors. Officers serve at the discretion of the Board of Directors.
Compensation of directors
Prior to this offering, no fees have been paid by HealthExtras for the
service as a director or its equivalent. Following the offering, HealthExtras
intends to pay directors who are not employees of it or of Principal Mutual or
its affiliates $1,500 for each Board meeting they attend.
28
<PAGE>
Committees of the board of directors
After the completion of this offering, the Board of Directors of HealthExtras
will have three standing committees: the Executive Committee, the Audit
Committee and the Compensation Committee.
The Executive Committee will have the power to address and dispose of
important matters which arise between meetings of the Board of Directors and
upon which action must be taken or attention given prior to the next scheduled
meeting of the Board of Directors. The Executive Committee will consist of
Thomas L. Blair, and .
The Audit Committee will have general responsibility for supervision of
financial controls, as well as for accounting and audit activities of
HealthExtras. The Audit Committee will annually review the qualifications of
HealthExtras independent certified public accountants, make recommendations to
the Board of Directors as to their selection and review the planning, fees and
results of their audit. The Audit Committee will consist of , and ,
all of whom will be non-employee directors of HealthExtras.
The Compensation Committee will have the responsibility of recommending
salary and incentive compensation for executive officers to the Board of
Directors. The Compensation Committee will consist of , and .
EXECUTIVE COMPENSATION
The following table provides certain summary information concerning the
compensation paid by HealthExtras to its Chief Executive Officer and the other
most highly compensated executive officers whose compensation was $100,000 or
greater, in each case for services rendered in all capacities to HealthExtras
for the year ended December 31, 1998.
Summary compensation table
<TABLE>
<CAPTION>
Long-Term All
Name Salary Bonus Compensation Other
- ---- -------- ----- ------------ ------
<S> <C> <C> <C> <C>
David T. Blair
Chief Executive Officer..................... $ 94,850 -- -- $2,160
Michael C. Miller
Marketing Manager(/1/)...................... 220,000 -- -- --
Rhona L. Leffler
Operations Manager.......................... 100,000 -- -- --
</TABLE>
- ------
(/1/)Michael C. Miller is not related to Michael G. Miller.
Employment agreements
HealthExtras intends to enter into employment agreements, effective upon the
completion of the offering, with David T. Blair, Marshall J. Coleman, Michael
P. Donovan, Michael G. Miller and Rhona L. Leffler. The employment agreements
are intended to ensure that HealthExtras will be able to maintain a stable and
competent management base after the offering. The continued success of
HealthExtras depends to a significant degree on the skills and competence of
these executives.
The employment agreements, which are substantially similar for each of the
five executives, except for the bonus arrangement for Mr. Blair, provide for
three-year terms and automatically renew for an additional two years unless a
notice of non-renewal is given six months prior to the expiration date. Mr.
Blair's base salary, pursuant to his employment agreement, will be $165,000 per
year. In addition, Mr. Blair is entitled to a bonus equal to one percent of
HealthExtras annual after-tax profits. The base salaries under these other
agreements are $192,000, $210,000, $120,000 and $150,000, respectively, for
Messrs. Coleman, Donovan and Miller, and Ms. Leffler. Base salary may be
increased by the Board of Directors, in the case of Mr. David Blair, and by the
Chief Executive Officer, in the case of Messrs. Coleman, Donovan and Miller and
Ms. Leffler. In addition to base salary, the employment agreements provide for,
among other things, participation by the executives in employee benefit plans,
an automobile allowance and other fringe benefits applicable to executive
personnel and reimbursement of reasonable expenses incurred in promoting our
business.
29
<PAGE>
Upon an executive's termination for cause, or upon an executive's voluntary
resignation, that executive shall be entitled only to such compensation and
benefits as shall have accrued through the date of the executive's termination
or resignation, as the case may be. In the event that an executive is
terminated for any reason other than cause or voluntary resignation, including
termination by reason of death or disability, that executive shall receive
payments under the employment agreement due for the remaining term of the
employment agreement, provided that such payment shall not be less than the
payment due for a 12 month period. Upon an executive's voluntary resignation or
termination for cause during the term of the agreement, each employment
agreement provides that, for a period of two years from the date of
termination, the executive will not compete directly or indirectly with
HealthExtras' business, nor will the executive solicit or contract with
entities contracting with HealthExtras, including bank clients.
Stock-based benefits
Stock Grants
HealthExtras has granted ownership rights to five executive officers,
employees and consultants, which upon the reorganization discussed under
"Certain Transactions--Reorganizations," will involve their receipt of an
aggregate of 413,333 shares of its common stock. These grants include 266,667
shares for Mr. Donovan, 60,000 shares for Ms. Leffler and 20,000 shares for Mr.
Moffitt. Twenty-five percent of the shares granted to each of these officers
will vest on February 29, 2000; the remaining shares granted to each of these
officers will vest in one-third increments at the end of each of the next three
years after that initial vesting date. In the event of a change in control of
the nature discussed below under "Stock Options," or the death or disability of
the holder of the non-vested rights to receive shares of stock, those rights
shall vest.
Stock Options
In addition, HealthExtras intends to grant options to purchase, at an
exercise price of 120% of the public offering price, an aggregate of 3,615,000
shares of its common stock to executive officers, employees and consultants.
These options will be granted pursuant to the stock option plan described
below, which will relate to an aggregate of 4,000,000 shares of common stock.
This stock option plan is intended to be adopted as part of the reorganization
discussed under "Certain Transactions--Reorganizations." The following table
sets forth information regarding these stock options to be granted to our chief
executive officer and our other executive officers. Twenty-five percent of the
options to be granted to such persons will vest at the end of a twelve month
period from the date of the grant, and the remainder will vest in pro rata
increments at the end of each of the next three subsequent twelve-month
periods, with the options being fully vested forty-eight months from the date
of grant. The options will have a term of ten years.
<TABLE>
<CAPTION>
Number of
Shares Percentage
Underlying of Total
Options to Options to
Name be Granted be Granted
---- ---------- ----------
<S> <C> <C>
David T. Blair.................................... 1,500,000 42.3%
Michael P. Donovan................................ 600,000 17.1%
Marshall J. Coleman............................... 400,000 11.4%
Michael G. Miller................................. 150,000 4.3%
Rhona L. Leffler.................................. 100,000 2.8%
Brian L. Moffitt.................................. 100,000 2.8%
</TABLE>
In connection with the reorganization discussed under "Certain Transactions--
Reorganizations", we intend to adopt, with stockholder approval, a stock option
plan permitting grants of options to purchase an aggregate of 4,000,000 shares
of our common stock. Options to purchase an aggregate or 3,615,000 of those
shares at an exercise price equal to 120% of the public offering price are
intended to be granted prior to the completion of this offering. If any
previously granted options are forfeited, then the shares of stock underlying
those options will be available for new grants under the plan. The following
description of the plan is qualified in its entirety by the full text of the
plan which is set forth as an exhibit to this registration statement. Our
compensation committee will administer the plan except as described below,
provided that under certain circumstances the compensation committee may,
subject to certain conditions, delegate authority under our stock option plan
to certain designated officers. The compensation committee will have
30
<PAGE>
the authority, within plan limitations, to determine the persons to whom
options may be granted, the number of shares of common stock to be covered by
each option, the time or times at which the options may be granted or exercised
and the terms and provisions of the options to be granted. Eligibility for the
grant of options under our stock option plan is limited to officers, employees
and certain consultants, agents and key contractors, so long as they continue
to perform services for us, including any subsidiaries we may have in the
future. Options granted under the plan may be either incentive stock options
within the meaning of Section 422 of the Internal Revenue Code of 1986, as
amended, or non-qualified stock options, as determined by the compensation
committee. The exercise price for an incentive stock option may not be less
than 100%, or 110% if the optionee owns or is deemed to own more than 10% of
the total combined voting power of all classes of stock of HealthExtras or a
subsidiary or the parent, of the fair market value of common stock on the date
of grant, as determined in accordance with the plan. If there is a change in
control, as defined in the plan, options granted under the plan will become
exercisable in whole whether or not the options are otherwise exercisable,
unless at the time of grant the compensation committee specifies other
provisions relating to vesting. A change in control is generally defined as the
occurrence of:
(a) Any "person" (as such term is used in Sections 13(d) and 14(d) of the
Securities Exchange Act of 1934), other than Principal Mutual Holding
Company, or an affiliate, United Payors & United Providers, or an affiliate,
Thomas L. Blair, or Capital Z Healthcare Holding Corp. or Health Partners,
or an affiliate of either of them is or becomes the beneficial owner,
directly or indirectly, of securities of HealthExtras representing 20% or
more of the combined voting power of HealthExtras' 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 HealthExtras' 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 HealthExtras approve a definitive agreement, and
the closing for such transaction is scheduled to occur within twenty four-
hours, regarding:
. the merger or other business combination of HealthExtras with or into
another corporation pursuant to which HealthExtras will not survive or
will survive only as a subsidiary of another corporation;
. the sale or other disposition of all or substantially all of the
assets of HealthExtras;
. the merger of another corporation into HealthExtras which survives
if, as a result of such merger, less than fifty percent (50%) of the
outstanding voting securities of HealthExtras shall be owned in the
aggregate immediately after such merger by the owners of the voting
shares of HealthExtras outstanding immediately prior to such merger;
. the liquidation or dissolution of HealthExtras; or
. any combination of the foregoing.
In addition, the compensation committee may determine at the time of grant or
thereafter that an option shall become exercisable in full or in part upon the
occurrence of such circumstances or events as the compensation committee
determines merit special consideration. In addition, the committee will
determine, in accordance with the terms of the plan, the length of time an
individual may exercise an option following termination of employment. Each of
the plans may be terminated and may be modified or amended by our board of
directors or compensation committee at any time; provided, however, that no
modification or amendment will be effective without stockholder approval if
such approval is required by law or under the rules of the Nasdaq National
Market or any stock exchange on which our common stock is listed; and no such
termination, modification or amendment may adversely alter or affect the terms
of any then outstanding options previously granted without the consent of the
affected optionee.
Key man insurance
We maintain $1.5 million of key man life insurance on David T. Blair. The
proceeds of this insurance policy are payable to HealthExtras.
31
<PAGE>
Indemnification of directors and executive officers and limitation of liability
Our Certificate of Incorporation permits us to indemnify our directors and
officers to the fullest extent permitted under Delaware General Corporation
Law. As permitted by Delaware law, our Certificate of Incorporation includes a
provision that eliminates the personal liability of our directors for monetary
damages for breach of fiduciary duty as a director, except for liability:
. for any breach of the director's duty of loyalty to HealthExtras or our
stockholders;
. for acts or omissions not in good faith or that involve intentional
misconduct or a knowing violation of law;
. for liability under section 174 of the Delaware General Corporation Law
regarding unlawful dividends and stock purchases; or
. for any transaction from which the director derived an improper personal
benefit.
Such limitation of liability does not apply to liabilities arising under the
federal securities laws and does not affect the availability of equitable
remedies such as injunctive relief or recission.
We have entered or will enter into agreements to indemnify our directors and
executive officers, in addition to indemnification provided for in our
Certificate of Incorporation and Bylaws. These agreements, among other things,
provide for indemnification of our directors and executive officers for certain
expenses, including attorneys fees, judgments, fines and settlement amounts
incurred by such person in any action or proceeding, including any action by or
in the right of HealthExtras or any other company or enterprise to which the
person provides services at our request. We are also required to advance
expenses in certain circumstances. We believe that these provisions and
agreements are necessary to attract and retain qualified persons as directors
and officers.
Certain Transactions
Relationship with United Payors & United Providers
We have relied on United Payors & United Providers to furnish administrative
services and facilities necessary to our business operations, which include
office space, furniture and equipment, telephone service, both voice and
facsimile, and computer capabilities. We reimburse United Payors & United
Providers on a cost basis for these services. The amount paid to United Payors
& United Providers by us for services was $0, $76,661 and $866,385,
respectively, for the period October 23, 1996 (date of inception) to
December 31, 1996 and for the years ended December 31, 1997 and 1998. As of
June 30, 1999, we owed $1.5 million to United Payors & United Providers. On
July 26, 1999, we formalized our office space lease arrangements with United
Payors & United Providers by entering into a written sublease agreement. The
amounts paid by us to United Payors & United Providers in 1997 and 1998 for
office space are included in the overall reimbursements set forth above.
We have entered into a line of credit in the amount of $3.0 million from a
commercial bank which extends to February 2000. This line of credit calls for
interest at the prime rate and is collateralized by substantially all of our
assets and has been guaranteed by United Payors & United Providers. As of June
30, 1999, $2.4 million was outstanding under this line of credit.
Effective January 1, 1999, we obtained from United Payors & United Providers
the ability, through December 31, 2003, to provide our members access to the
discounts or price concessions for medical services available from the United
Payors & United Providers nationwide network of providers. In exchange, we
agreed to pay United Payors & United Providers $1.00 per member per month for
the initial year of membership, which amount escalates in stages for subsequent
membership years to a maximum of $1.50 per member per month in the fourth year
of continued membership and thereafter. However, we can terminate these
payments by conveying $25 million in market value of our common stock to United
Payors & United Providers.
As of June 30, 1999, we owned 40,150 shares of common stock, or 0.2% of the
outstanding common stock, of United Payors & United Providers.
32
<PAGE>
Thomas L. Blair, Chairman of the Board of HealthExtras, Inc., is the Chairman
of the Board of Directors, Co-Chief Executive Officer and beneficial owner of
an aggregate of approximately 38.2% of United Payors & United Providers' common
stock. Mr. Blair also controls 49.5% of Highland Investments, which will own
64.1% of HealthExtras, Inc.'s outstanding common stock after this offering.
Health Partners, an affiliate of Capital Z Partners, will beneficially own
16.0% of HealthExtras, Inc.'s outstanding common stock after this offering.
Paul H. Warren and Julian A. L. Allen, who will be directors of HealthExtras,
are affiliated with Capital Z Partners. Health Partners also owns approximately
9.3% of United Payors & United Providers' outstanding shares of common stock
and has the right to acquire an additional approximately 12.0% of United Payors
& United Providers' common stock from Mr. Blair. HealthExtras has been informed
that United Payors & United Providers intends to purchase a portion of Highland
Investments. United Payors & United Providers is a public company.
Thomas L. Blair has agreed to provide sufficient additional funding to enable
HealthExtras to continue operations through December 2000. This commitment will
terminate upon the completion of this offering. Mr. Blair has advanced funds to
us to cover operating expenses. Advances from Mr. Blair were $5.2 million at
December 31, 1997. We repaid Mr. Blair $3.9 million during 1998. As of June 30,
1999, we owed Mr. Blair $1.3 million. This loan does not bear interest.
For corporate business purposes, we utilize the services of an aircraft owned
by a company owned by Mr. Thomas L. Blair, for which we pay prevailing market
rates. For the period October 23, 1996 (date of inception) to December 31, 1996
and for the years ended December 31, 1997 and 1998, we paid $0, $105,703 and
$97,638, respectively, for utilizing the services of the aircraft.
Reorganizations
As discussed in Note 1 to the Financial Statements, HealthExtras is the
successor of various entities, all of which were formed and controlled by Mr.
Thomas L. Blair and/or Principal Mutual Holding Company, or its affiliates.
On May 27, 1999, HealthExtras, which was then a Maryland limited liability
company, contributed substantially all of its assets to HealthExtras, LLC, a
Delaware limited liability company, and Capital Z Healthcare Holding Corp.
invested $5 million in that entity in exchange for a 20% ownership interest. In
connection with this transaction, HealthExtras agreed to indemnify Capital Z
Healthcare Holding Corp. for any losses arising from any breach of
HealthExtras' representations or warranties or its failure to give effect to
the restructuring as contemplated by its Amended and Restated Limited Liability
Company Agreement. Capital Z Healthcare Holding Corp. serves only as a vehicle
for its sole stockholder, Health Partners, to invest in HealthExtras and does
not conduct any other operations. We refer to these transactions as the Capital
Z transactions.
In order to effect this offering, HealthExtras, Inc. has agreed in principal
with HealthExtras, LLC and Capital Z Healthcare Holding Corp. to enter into a
Reorganization Agreement pursuant to which, prior to the sale of the common
stock in this offering, Capital Z Healthcare Holding Corp. will merge into
HealthExtras, LLC. Immediately after that merger, HealthExtras, LCC will merge
into HealthExtras, Inc. As a result of these mergers, Health Partners, the sole
stockholder of Capital Z Healthcare Holding Corp., will receive common stock in
HealthExtras, Inc. representing the same proportionate ownership position which
Capital Z Healthcare Holding Corp. has in HealthExtras, LLC and Highland
Investments will receive common stock in HealthExtras, Inc. representing the
same proportionate ownership position which it has in HealthExtras, LCC. The
Reorganization Agreement also will provide for the amendment of HealthExtras,
Inc.'s Certificate of Incorporation, anticipated provisions of which are
discussed under "Description of Capital Stock." We refer to the matters covered
by this Reorganization Agreement as the reorganization.
The Reorganization Agreement also will require execution of a Stockholders'
Agreement by HealthExtras, Inc., Highland Investments, LLC and Health Partners.
This Stockholders' Agreement will contain provisions regarding registration
rights, the composition of the Board of Directors, and tag-along rights, rights
of first offer and preemptive rights with respect to certain sales of our
common stock.
33
<PAGE>
Registration Rights
Health Partners and Highland Investments will be granted certain registration
rights with respect to shares of our common stock held by them and their
assigns. The Stockholders' Agreement will provide for an aggregate of four
demand registration statements under the Securities Act beginning 180 days
after completion of this offering. Health Partners or Highland Investments each
may require that we file two of those demand registration statements, subject
to certain conditions. If Health Partners or Highland Investments exercises a
demand registration right, the other also can participate in the offering on a
proportionate basis to their respective ownership positions. These stockholders
are also entitled to require us to register their shares of our common stock on
a registration statement on Form S-3 once we are eligible to use a Form S-3 in
connection with such registrations. In addition, these stockholders are
entitled to require us to include their shares of our common stock in future
registration statements we file under the Securities Act, often referred to as
"piggyback" registration rights. However, holders of these registration rights
will be restricted from exercising those rights until 180 days after the date
of this prospectus and, under certain circumstances, for agreed-upon periods
after the filing of subsequent registration statements. Also, the shares
required to be included in a registration relating to an underwritten offering
generally are subject to underwriter cut back provisions. Registration of
shares of common stock pursuant to the exercise of demand registration rights,
piggyback registration rights or Form S-3 registration rights would result in
the shares covered by those registrations becoming freely tradable without
restriction under the Securities Act immediately upon the effectiveness of the
registration, subject to any lock-up agreements we have with these
stockholders. We are required to bear substantially all registration expenses
in connection with the above-described registrations, except for underwriting
discounts, income and transfer taxes, if any, selling expenses and the fees and
expenses of counsel representing the holders of the registrable securities.
These registration rights are transferable in certain circumstances and may be
amended or waived only with the consent of the affected party.
Directors
Under the Stockholders' Agreement, Highland Investments and Health Partners,
the sole stockholder of Capital Z Healthcare Holding Corp., are granted certain
rights to designate persons for election as our Directors. The Stockholders'
Agreement provides that:
Highland Investments may designate
. five people for election as our Directors if Highland Investments owns at
least 40% of our outstanding common stock;
. three people for election as our Directors if Highland Investments owns at
least 25% of our outstanding common stock;
. two people for election as our Directors if Highland Investments owns at
least 10% of our outstanding common stock; and
. one person for election as our Director if Highland Investments owns at
least 5% of our outstanding common stock.
Health Partners may designate
. two people for election as our Directors if Health Partners owns at least
10% of our outstanding common stock; and
. one person for election as our Director if Health Partners owns at least
5% of our outstanding common stock.
Highland Investments and Health Partners also may be entitled to increase the
number of Directors that they may designate for election if the total number of
directors is increased. This would maintain Highland Investments' and Health
Partners' control of our Board of Directors, even if the total number of
directors increases.
Under the Stockholders' Agreement, five representatives of Highland
Investments, initially Thomas L. Blair, David T. Blair, Thomas J. Graf, Julia
M. Lawler, and Karen E. Shaff, and two representatives of Health Partners,
Julian A.L. Allen and Paul H. Warren, will be our Directors upon completion of
this offering.
34
<PAGE>
Rights of First Offer and Tag-along Rights
The Stockholders' Agreement provides that Highland Investments and Health
Partners must give notice to us and to each other if either proposes to
transfer common stock aggregating more than 10% of our outstanding common stock
to a single person or group who is not a family member (if a natural person),
an affiliate (if an entity), or an employee or manager of HealthExtras.
Upon receipt of notice, the non-transferring stockholder (either Highland
Investments or Health Partners) may elect to participate in the transfer by
delivering written notice to the transferring stockholder. This right to
participate in the transfer is called "tag-along" rights. If a stockholder
elects to participate in the transfer, the aggregate sales proceeds shall be
divided proportionally according to the electing stockholder's and the
transferring stockholder's respective shares of the proceeds of a hypothetical
liquidation. In order to calculate the proceeds of a hypothetical liquidation,
the value of HealthExtras will be implied by the transferring stockholder's
proposed sales price.
Alternately, upon receipt of notice we may elect to purchase all of the
shares that the transferring shareholder proposes to sell. If we do not elect
to purchase the shares, the non-transferring shareholder (either Highland
Investments or Health Partners) may elect to purchase all of the shares
offered. This right to preempt a sale, and therefore a possible change in
control, by purchasing the shares offered is called "first offer right." If we
exercise our first offer rights, we must purchase all of the shares offered
upon the same terms and conditions as originally offered. If the non-
transferring shareholder exercises its first offer rights, it may purchase a
pro rata portion of the shares offered upon the same terms and conditions as
originally offered.
These tag-along and first offer rights and obligations would apply also to
controlling persons of Health Partners and Highland Investments, to whom those
entities might distribute shares of our common stock.
Preemptive Rights
The Stockholders' Agreement prohibits us from making an offering for sale of
our common stock other than in a public offering, in connection with an
acquisition or pursuant to employee benefit plan or arrangement, unless we
first offer such shares to Highland Investments and Health Partners. The
preemptive offer must be in writing, on the same terms and conditions as the
offering and at the equivalent price, and must enable Highland Investments and
Health Partners to retain the same proportionate ownership of common stock that
it holds prior to the offering. This provision allows Highland Investments and
Health Partners to retain control of us even if we decide to privately issue
additional common stock at a later date.
Affiliate Transactions
The Stockholders' Agreement also will provide that HealthExtras will not
engage in transactions with affiliates other than on terms no less favorable
than could be obtained on an arms-length basis or which are approved by a
majority of directors who are independent of the affiliate. Further, the
Stockholders' Agreement will require that prior to any merger or purchase or
sale of stock transaction with an affiliate, where the value of such
transaction exceeds $1 million, HealthExtras must obtain a fairness opinion
from a nationally recognized investment bank.
35
<PAGE>
Principal Stockholders
- --------------------------------------------------------------------------------
The following table sets forth certain information regarding beneficial
ownership of our common stock as of September 16, 1999, on a pro forma basis
giving effect to the reorganization described under "Certain Transactions --
Reorganizations" prior to the sale of the common stock offered for sale by this
prospectus, and as adjusted to reflect the sale of shares offered for sale by
this prospectus. The information is presented for each person who to our
knowledge will own beneficially more than five percent of our common stock
prior to this offering, each of our directors, or persons to become directors,
and executive officers and all executive officers and directors as a group. The
table assumes no exercise of the Underwriters' over-allotment option. Unless
indicated otherwise, the address of each of these persons is c/o HealthExtras,
Inc., 2275 Research Boulevard, 7th Floor, Rockville, Maryland 20850.
<TABLE>
<CAPTION>
Pro Forma Shares
Beneficially Owned Prior to Shares Beneficially Owned
the Offering After the Offering
-------------------------------------------------------------
Number Percentage Number Percentage
---------------- ----------------------------- --------------
<S> <C> <C> <C> <C>
Highland Investments,
LLC (/1/)............. 17,680,000 80.0% 17,680,000 64.1%
Thomas L Blair (/2/).... 17,680,000 80.0 17,680,000 64.1
Principal Mutual Holding
Company (/3/)......... 17,680,000 80.0 17,680,000 64.1
Health
Partners (/4/)(/5/)... 4,420,000 20.0 4,420,000 16.0
Julian A. L.
Allen (/5/)(/6/)...... -- -- -- --
David T. Blair.......... -- -- -- --
Michael P.
Donovan (/7/)(/8/).... -- -- -- --
Marshall J.
Coleman(/8/).......... -- -- -- --
Thomas J. Graf (/9/).... -- -- -- --
Julia M. Lawler (/9/)... -- -- -- --
Rhona L.
Leffler (/7/)(/8/).... -- -- --
Michael G. Miller(/8/).. -- -- -- --
Brian L.
Moffitt (/7/)(/8/).... -- --
Karen E. Shaff (/9/).... -- -- -- --
Paul H.
Warren (/5/)(/10/).... -- -- -- --
All Directors and
Executive Officers as
a group
(11 persons).......... 22,100,000 100% 22,100,000 80.1%
</TABLE>
(1) Highland Investments, LLC is controlled 49.5% by Mr. Thomas L. Blair and
50% by a subsidiary of Principal Mutual. Thomas J. Graf, Julia M. Lawler
and Karen E. Shaff, who will become directors of HealthExtras, Inc., are
employed by Principal Mutual or an affiliate of that company. The address
of Principal Mutual is 711 High Street, Des Moines, Iowa 50392.
(2) Thomas L. Blair does not hold any shares of HealthExtras common stock; but
he may be deemed the beneficial owner of the shares held by Highland
Investments, LLC by virtue of his controlling relationship with that
entity.
(3) Principal Mutual does not own any shares of HealthExtras common stock; but
it may be deemed the beneficial owner of the shares held by Highland
Investments, LLC by virtue of its indirect controlling relationship with
that entity.
(4) Health Partners is a general partnership whose general partners are Capital
Z Financial Services Fund II, L.P., Capital Z Financial Services Private
Fund II, L.P., and International Managed Care Advisors. Steven M.
Gluckstern, who is the Chairman of the Board, and Robert Spass, who is the
Deputy Chairman of the Board of Capital Z Partners, Ltd., the ultimate
general partner of Capital Z Financial Services Fund II, L.P. and Capital Z
Financial Service Private Fund II, L.P., may be deemed to be beneficial
owners of the shares held by Health Partners. Messrs. Gluckstern and Spass
disclaim any such beneficial ownership.
(5) The addresses for Messrs. Allen and Warren and all of the Capital Z
entities are 54 Thompson Street, New York, New York 10012.
(6) Mr. Allen, who will become a director of HealthExtras, is an officer of
Capital Z Management, LLC, which manages Capital Z Financial Services Fund
II, L.P. and Capital Z Financial Services Private Fund II, L.P. These
persons are affiliated with Health Partners. They disclaim, however, any
beneficial ownership of the shares of HealthExtras owned by Health
Partners.
(7) Does not include rights to receive 266,667, 20,000 and 60,000 shares of our
common stock granted to Messrs. Donovan and Moffitt and Ms. Leffler,
respectively. The shares subject to those rights vest 25% on February 29,
2000, and the remaining shares vest in one-third increments at the end of
each of the next three years after February 29, 2000.
(8) Does not include options to purchase, at an exercise price of 120% of the
public offering price, 1,500,000, 600,000, 400,000, 150,000, 100,000 and
100,000 shares of common stock, respectively, to be granted to Messrs.
David T. Blair, Donovan, Coleman, Michael G. Miller, and Moffitt and Ms.
Leffler. These options will vest 25% at the end of twelve months from the
date of grant and the remaining options will vest in one-third increments
at the end of each of the next three years after the first vesting date.
(8) These persons, who will become directors of HealthExtras, are affiliated
with Principal Mutual. They disclaim, however, any beneficial ownership of
the shares of HealthExtras beneficially owned by Principal Mutual.
(9) Mr. Warren, who will become a director of HealthExtras, is a director,
officer and member or shareholder, as the case may be, of Capital Z
Management, LLC, which manages Capital Z Financial Services Fund II, L.P.
and Capital Z Financial Services Private Fund II, L.P. and Capital Z
Partners, Ltd., the ultimate general partner of Capital Z Financial
Services Fund II, L.P. and Capital Z Financial Services Private Fund II,
L.P. Mr. Warren disclaims any beneficial ownership of the shares of
HealthExtras owned by Health Partners.
36
<PAGE>
Description of Capital Stock
- --------------------------------------------------------------------------------
GENERAL
Our Certificate of Incorporation is to be amended and restated, as part of
the reorganization discussed under "Certain Transactions -- Reorganizations."
It is currently intended that the amended and restated Certificate of
Incorporation will contain the provisions discussed under this "Description of
Capital Stock." There currently are no shares of common stock or preferred
stock issued and outstanding. Prior to the sale of the common stock in this
offering, there will be 22,100,000 shares of common stock outstanding held by
two stockholders of record. There will be no shares of preferred stock issued
and outstanding at that date. The amended and restated Certificate of
Incorporation will provide for us to issue up to 100,000,000 shares of common
stock, par value $.01 per share, and 5,000,000 shares of preferred stock, par
value $.01 per share.
COMMON STOCK
Holders of common stock are entitled to one vote for each share held of
record on all matters to be submitted for a vote of the stockholders. Our
Certificate of Incorporation does not provide preemptive rights or for
cumulative voting for the election of directors. Subject to preferences that
may be applicable to any outstanding shares of preferred stock, holders of
common stock are entitled to receive dividends, if any, as may be declared from
time to time by the Board of Directors out of legally available funds. All
outstanding shares of common stock are, and the shares to be sold in this
offering when issued and paid for will be, fully paid and nonassessable. In the
event of any liquidation, dissolution or winding-up of the affairs of
HealthExtras, holders of common stock will be entitled to share equally in our
assets remaining after payment or provision for payment of all of our debts and
obligations and liquidation payments to holders of outstanding shares of
preferred stock.
PREFERRED STOCK
Shares of preferred stock may be issued by HealthExtras in series with such
preferences and designations as the Board of Directors may from time to time
determine. The Board of Directors can, without stockholder approval, issue
preferred stock with voting, dividend, liquidation and conversion rights which
could dilute the voting strength of the holders of the common stock and may
assist management in impeding an unfriendly takeover or attempted change in
control.
ANTI-TAKEOVER EFFECTS
Provisions of the Certificate of Incorporation and Bylaws summarized in the
following paragraphs may be deemed to have anti-takeover effects. These
provisions may have the effect of discouraging a future takeover attempt which
is not approved by the Board of Directors but which individual stockholders may
deem to be in their best interests or in which stockholders may receive a
substantial premium for their shares over then current market prices. As a
result, stockholders who might desire to participate in such a transaction may
not have an opportunity to do so. Those provisions will also render the removal
of the current Board of Directors or management more difficult. The following
description of certain of the provisions of our Certificate of Incorporation
and Bylaws is necessarily general, and you should review our Certificate of
Incorporation and Bylaws for complete details regarding their provisions. See
"Where You Can Find More Information" as to how to obtain a copy of these
documents.
Classified board of directors
The Certificate of Incorporation and Bylaws provide that, at any time that we
have more than two directors, the Board of Directors will be divided into three
classes of directors, as nearly equal in number as is reasonably possible,
serving staggered terms, so that directors' initial terms will expire either at
the 2000, 2001 or 2002 annual meeting of the stockholders. Starting with the
2000 annual meeting of the stockholders, one class of directors will be elected
each year for a three-year term. Our Certificate of Incorporation does not
provide for cumulative voting for the election of directors.
37
<PAGE>
We believe that a classified Board of Directors will help to assure the
continuity and stability of our Board of Directors and business strategies and
policies as determined by our Board of Directors, since a majority of the
directors at any given time will have had prior experience as a HealthExtras'
director. We believe that this, in turn, will permit our Board of Directors to
more effectively represent the interests of stockholders.
With a classified Board of Directors, at least two annual meetings of
stockholders, instead of one, will generally be required to effect a change in
the majority of the Board of Directors. As a result, a classified Board of
Directors may discourage proxy contests for the election of directors or
purchases of a substantial block of the common stock because such provision
could operate to prevent obtaining control of the Board of Directors in a
relatively short period of time. The classification provision could also have
the effect of discouraging a third party from making a tender offer or
otherwise attempting to obtain control of us. Under the Delaware General
Corporation Law, unless the certificate of incorporation otherwise provides,
and ours does not, a director on a classified board may be removed by
stockholders only for cause.
Authorized shares
Our Certificate of Incorporation authorizes the issuance of 100,000,000
shares of common stock and 5,000,000 shares of preferred stock. Our Board of
Directors has sole authority to determine the terms of any one or more series
of preferred stock, including voting rights, conversion rates, and liquidation
preferences. As a result of the ability to fix voting rights for a series of
preferred stock, our Board has the power, consistent with its fiduciary duty,
to issue a series of preferred stock to persons friendly to management in order
to attempt to block a post-tender offer merger or other transaction by which a
third party seeks control, and thereby assist management to retain its
position. Our Board of Directors currently has no plans for the issuance of
shares of preferred stock or additional shares of common stock.
Amendment of Certificate of Incorporation and Bylaws
Amendments to our Certificate of Incorporation must be approved by a majority
vote of our Board of Directors and also by a majority of our outstanding shares
of voting stock; provided, however, that an affirmative vote of at least 66
2/3% of our outstanding voting stock entitled to vote is required to amend or
to repeal certain provisions of our Certificate of Incorporation, including the
number and classification of directors, director and officer indemnification
and certain amendments of our Certificate of Incorporation. Our Bylaws may be
amended by our Board of Directors, or by a vote of 66 2/3% of the total votes
eligible to be voted by our stockholders at a duly constituted meeting of
stockholders.
Advance notice provisions for stockholder proposals and stockholder nominations
of directors
Our Bylaws establish an advance notice procedure with regard to the
nomination, other than by or at the direction of our Board or a committee
thereof, of candidates for election as directors and with regard to other
matters to be brought by stockholders before an annual meeting of our
stockholders. The nomination procedure requires that a stockholder give 90 days
advance written notice, in proper form, of a planned nomination for our Board
of Directors to our Secretary. The requirements as to the form and timing of
that notice are specified in our Bylaws. If the Chairman of our Board of
Directors determines that a person was not nominated in accordance with the
nomination procedure, that person will not be eligible for election as a
director. Also, a stockholder seeking to have any business conducted at an
annual meeting must give 90 days advance written notice, in proper form, to our
Secretary. The requirements as to the form and timing of that notice are
specified in our Bylaws. If the Chairman of our Board of Directors determines
that the other business was not properly brought before such meeting in
accordance with this procedure, that business will not be conducted at that
meeting.
Although our Bylaws do not give our Board of Directors any power to approve
or disapprove stockholder nominations for the election of directors or of any
other business desired by stockholders to be conducted at an annual or any
other meeting, our Bylaws may have the effect of precluding a nomination for
the election of directors or precluding the conduct of business at a particular
annual meeting if the proper procedures are not followed. Those procedures may
discourage or deter a third party from conducting a solicitation of proxies to
elect its own slate of directors or otherwise attempting to obtain control of
us, even if the conduct of such solicitation or such attempt might be
beneficial to us and our stockholders.
38
<PAGE>
Delaware takeover statute
We are subject to Section 203 of the Delaware General Corporation Law which,
subject to certain exceptions, prohibits a Delaware corporation from engaging
in any of a broad range of business combinations with any interested
stockholder, as defined below, for a period of three years following the date
that such stockholder became an interested stockholder. The prohibitions under
Section 203 do not apply, however, if:
. our Board of Directors approved either the business combination or the
transaction which resulted in the stockholder becoming an interested
stockholder, prior to the date the interested stockholder became an
interested stockholder;
. upon consummation of the transaction which resulted in the stockholder
becoming an interested stockholder, the interested stockholder owned at
least 85% of our voting stock outstanding at the time the transaction
commenced, excluding for purposes of determining the number of shares
outstanding those shares owned by persons who are directors and officers
and by employee stock plans in which employee participants do not have
the right to determine confidentially whether shares held subject to the
plan will be tendered in a tender or exchange offer; or
. on or after the date the interested stockholder became an interested
stockholder, the business combination was approved by our Board of
Directors and authorized at an annual or special meeting of stockholders,
and not by written consent, by the affirmative vote of at least 66 2/3%
of the outstanding voting stock which was not owned by the interested
stockholder.
An "interested stockholder" is defined as any person that is the owner of 15%
or more of our outstanding voting stock or is an affiliate or associate of ours
and was the owner of 15% or more of our outstanding voting stock at any time
within the three-year period immediately prior to the date on which it is
sought to be determined whether such person is an interested stockholder.
The Stockholders' Agreement discussed under "Certain Transactions--
Reorganizations" will provide that the Board of Directors will waive the
provisions of Section 203 as they might apply to Capital Z Healthcare Holding
Corp., Health Partners, United Payors & United Providers, Principal Mutual or
Mr. Thomas L. Blair.
LIMITATIONS ON LIABILITY AND INDEMNIFICATION OF DIRECTORS AND OFFICERS
Limitations on liabilities
Our Certificate of Incorporation contains a provision eliminating or limiting
director liability to us and our stockholders for monetary damages arising from
acts or omissions in the director's capacity as a director. The provision does
not, however, eliminate or limit the personal liability of a director:
. for any breach of such director's duty of loyalty to us or our
stockholders,
. for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law,
. under the Delaware statutory provision making directors personally
liable, under a negligence standard, for unlawful dividends or unlawful
stock purchases or redemptions, or
. for any transaction from which the director derived an improper personal
benefit.
This provision offers persons who serve on our Board of Directors protection
against awards of monetary damages resulting from breaches of their duty of
care, except as indicated above. As a result of this provision, our ability or
that of one of our stockholders to successfully prosecute an action against a
director for a breach of his duty of care is limited. However, the provision
does not affect the availability of equitable remedies such as an injunction or
rescission based upon a director's breach of his duty of care. The Securities
and Exchange Commission has taken the position that this provision will have no
effect on claims arising under the federal securities laws.
39
<PAGE>
Indemnification
Our Certificate of Incorporation and our Bylaws provide for mandatory
indemnification rights to the maximum extent permitted by applicable law,
subject to limited exceptions, to any of our directors or officers who, by
reason of the fact that he is a director or officer, is involved in a legal
proceeding of any nature. Such indemnification rights include reimbursement for
expenses incurred by such director or officer in advance of the final
disposition of such proceeding in accordance with the applicable provisions of
Delaware General Corporation Law. We may from time to time agree to provide
similar indemnifications to certain employees and other agents.
We intend to enter into separate indemnification agreements with each of our
directors and executive officers. Each indemnification agreement provides for,
among other things, indemnification against any and all expenses, judgments,
fines, penalties, and amounts paid in settlement of any claim against an
indemnified party unless it is determined, as provided in the indemnification
agreement, that indemnification is not permitted under law, and prompt
advancement of expenses to any indemnitee in connection with his other defense
against any claim.
We also maintain directors' and officers' liability insurance.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the common stock will be American Stock
Transfer & Trust Company, New York, New York.
LISTING
We have applied for quotation of the common stock on the Nasdaq National
Market under the trading symbol "HLEX."
40
<PAGE>
Shares Eligible for Future Sale
- --------------------------------------------------------------------------------
Upon completion of this offering, we will have 27,600,000 outstanding shares
of common stock. The 5,500,000 shares sold in this offering will be freely
tradable without restriction under the Securities Act except for any shares
purchased by our affiliates. The remaining 22,100,000 shares of common stock
held by existing stockholders are "restricted securities" as that term is
defined in Rule 144.
Beginning 90 days after the date of this prospectus, approximately 17,680,000
of these restricted shares will become eligible for sale in the public market,
subject to the volume limitations under Rule 144 described below. In May 2000,
an additional 4,420,000 of these restricted shares will become eligible for
sale in the public market, also subject to the volume limitations under Rule
144 described below. All of these restricted shares are subject to the
contractual restrictions on sale described below under the caption "Lock-up
Agreements."
Following this offering, the holders of substantially all of the shares of
our common stock outstanding prior to the completion of this offering will have
rights to have their shares of common stock registered for resale under the
Securities Act, subject to the contractual restrictions described below under
the caption "Lock-Up Agreements." For more information on these rights, see
"Certain Transactions--Reorganizations--Registration Rights." The exercise of
these rights and the sale of shares covered by any such registration could
adversely affect our stock price.
Rule 144 makes available an exemption from the registration requirements of
the Securities Act. In general, under Rule 144, a person, including an
affiliate, who has beneficially owned restricted shares for at least one year
will be entitled to sell in any three-month period a number of shares that does
not exceed the greater of:
. 1% of the then outstanding shares of the common stock (approximately
276,000 shares immediately after this offering); or
. the average weekly trading volume during the four calendar weeks preceding
the date on which notice of the sale is filed with the Securities and
Exchange Commission.
Sales pursuant to Rule 144 are subject to certain requirements relating to
manner of sale, notice and availability of current public information about us.
A person (or persons whose shares are aggregated) who is not deemed to have
been an affiliate of ours at any time during the 90 days immediately preceding
the sale and who has beneficially owned his or her shares for at least two
years is entitled to sell such shares pursuant to Rule 144(k) without regard to
the limitations described above.
LOCK-UP AGREEMENTS
All holders of common stock and securities convertible into or exercisable or
exchangeable for common stock issued prior to this offering have agreed
pursuant to certain "lock-up" agreements that they will not offer, sell,
contract to sell, pledge, grant any option to sell, or otherwise dispose of,
directly or indirectly, any shares of common stock or securities convertible
into or exercisable or exchangeable for common stock for a period of 180 days
after the date of this prospectus. Warburg Dillon Read LLC may release the
shares subject to the lock-up agreements in whole or in part at any time with
or without notice. However, Warburg Dillon Read LLC has no current plans to do
so.
41
<PAGE>
Underwriting
- --------------------------------------------------------------------------------
HealthExtras has entered into an underwriting agreement with the underwriters
named below. Warburg Dillon Read, Prudential Securities Incorporated, and SG
Cowen Securities Corporation are acting as the representatives of the
underwriters.
The underwriting agreement provides for the purchase of a specific number of
shares of common stock by each of the underwriters. The underwriters'
obligations are several, which means that each underwriter is required to
purchase a specified number of shares, but is not responsible for the
commitment of any other underwriter to purchase shares. Subject to the terms
and conditions of the underwriting agreement, each underwriter has severally
agreed to purchase the number of shares of common stock set forth opposite its
name below.
<TABLE>
<CAPTION>
Name Number of Shares
- ---- ----------------
<S> <C>
Warburg Dillon Read LLC........................................
Prudential Securities Incorporated.............................
SG Cowen Securities Corporation................................
---------
Total.......................................................... 5,500,000
=========
</TABLE>
This is a firm commitment underwriting. This means that the underwriters have
agreed to purchase all of the shares offered by this prospectus, other than
those covered by the over-allotment option described below, if any are
purchased. Under the underwriting agreement, if an underwriter defaults in its
commitment to purchase shares, the commitments of non-defaulting underwriters
may be increased or the underwriting agreement may be terminated, depending on
the circumstances.
The representatives have advised HealthExtras that the underwriters propose
to offer the shares directly to the public at the public offering price that
appears on the cover page of this prospectus. In addition, the representatives
may offer some of the shares to certain securities dealers at such price less a
concession of $ per share. The underwriters may also allow to dealers, and
such dealers may allow, a concession not in excess of $ per share to certain
other dealers. After the shares are released for sale to the public, the
representatives may change the offering price and other selling terms at
various times. The underwriters have informed us that they do not intend to
confirm sales to accounts over which they exercise discretionary authority.
HealthExtras has granted the underwriters an over-allotment option. This
option, which is exercisable for up to 30 days after the date of this
prospectus, permits the underwriters to purchase a maximum of 825,000
additional shares from HealthExtras to cover over-allotments. If the
underwriters exercise all or part of this option, they will purchase shares
covered by the option at the public offering price that appears on the cover
page of this prospectus, less the underwriting discount. If this option is
exercised in full, the total price to public will be $ million and the total
proceeds to HealthExtras will be approximately $ million. The underwriters
have severally agreed that, to the extent the over-allotment option is
exercised, they will each purchase a number of additional shares proportionate
to the underwriter's initial amount reflected in the above table.
The following table provides information regarding the amount of the discount
to be paid to the underwriters by HealthExtras:
Underwriting discounts and commissions payable by HealthExtras
<TABLE>
<CAPTION>
Paid by HealthExtras
-------------------------
No Exercise Full Exercise
----------- -------------
<S> <C> <C>
Per Share............................................. $ $
Total................................................. $ $
</TABLE>
42
<PAGE>
HealthExtras estimates that the total expenses of the offering, excluding the
underwriting discount, will be approximately $600,000.
HealthExtras has agreed to indemnify the underwriters against certain
liabilities, including liabilities under the Securities Act of 1933.
HealthExtras' officers, directors, director nominees and other stockholders
have agreed to a 180-day lock up with respect to 22,100,000 shares of common
stock and certain other HealthExtras securities that they beneficially own,
including securities that are convertible into shares of common stock and
securities that are exchangeable or exercisable for shares of common stock.
This means that, subject to certain exceptions, for a period of 180 days
following the date of this prospectus, HealthExtras and such persons may not
offer, sell, pledge or otherwise dispose of these HealthExtras securities
without the prior written consent of Warburg Dillon Read LLC.
Prior to this offering, there has been no public market for the common stock.
Consequently, the offering price for the common stock will be determined by
negotiations between HealthExtras and the representatives of the underwriters
and is not necessarily related to HealthExtras' asset value, net worth or other
established criteria of value. The factors considered in such negotiations, in
addition to prevailing market conditions, included the history of and prospects
for the industry in which HealthExtras competes, an assessment of HealthExtras'
management, HealthExtras' prospects, its capital structure and certain other
factors as were deemed relevant.
Rules of the Securities and Exchange Commission may limit the ability of the
underwriters to bid for or purchase shares before the distribution of the
shares is completed. However, the underwriters may engage in the following
activities in accordance with the rules:
. Stabilizing transactions--The representatives may make bids or purchases
for the purpose of pegging, fixing or maintaining the price of the shares,
so long as stabilizing bids do not exceed a specified maximum.
. Over-allotments and syndicate covering transactions--The underwriters may
create a short position in the shares by selling more shares than are set
forth on the cover page of this prospectus. If a short position is created
in connection with the offering, the representatives may engage in
syndicate covering transactions by purchasing shares in the open market.
The representatives may also elect to reduce any short position by
exercising all or part of the over-allotment option.
. Penalty bids--If the representatives purchase shares in the open market in
a stabilizing transaction or syndicate covering transaction, they may
reclaim a selling concession from the underwriters and selling group
members who sold those shares as part of this offering.
Stabilization and syndicate covering transactions may cause the price of the
shares to be higher than it would be in the absence of such transactions. The
imposition of a penalty bid might also have an effect on the price of the
shares if it discourages resales of the shares.
Neither HealthExtras nor the underwriters makes any representation or
prediction as to the effect that the transactions described above may have on
the price of the shares. These transactions may occur on the Nasdaq National
Market or otherwise. If such transactions are commenced, they may be
discontinued without notice at any time.
HealthExtras and the underwriters expect that the shares will be ready for
delivery on the fourth business day following the date of this prospectus.
Under Securities and Exchange Commission regulations, secondary market trades
are required to settle in three business days following the trade date
(commonly referred to as "T-3"), unless the parties to the trade agree to a
different settlement cycle. As noted above, the shares will settle in T-3.
Therefore, purchasers who wish to trade on the date of this prospectus or
during the next three succeeding business days must specify an alternate
settlement cycle at the time of the trade to prevent a failed settlement.
Purchasers of the shares who wish to trade shares on the date of this
prospectus or during the next three succeeding business days should consult
their own advisors.
43
<PAGE>
Legal Matters
- --------------------------------------------------------------------------------
The validity of the issuance of the shares of common stock offered hereby
will be passed upon for us by Muldoon, Murphy & Faucette LLP, Washington, D.C.
Certain legal matters will be passed upon for the underwriters by Dewey
Ballantine LLP, New York, New York.
Experts
- --------------------------------------------------------------------------------
The balance sheet of HealthExtras, Inc. at July 16, 1999 and the combined
financial statements of HealthExtras, LLC as of December 31, 1997 and 1998, and
for the period from October 23, 1996, date of inception, to December 31, 1996,
and for each of the two years in the period ended December 31, 1998 included in
this Prospectus, have been so included in reliance upon the reports of
PricewaterhouseCoopers LLP, independent accountants, given on the authority of
said firm as experts in auditing and accounting.
Where You Can Find More Information
- --------------------------------------------------------------------------------
We have filed with the Securities and Exchange Commission a registration
statement on Form S-1 under the Securities Act with respect to the shares of
common stock offered hereby. This prospectus does not contain all of the
information set forth in the registration statement and the exhibits thereto.
For further information with respect to our business and the common stock
offered by this prospectus, reference is made to the registration statement and
the exhibits thereto. Statements contained in this prospectus regarding the
contents of any contract or any other document to which reference is made are
not necessarily complete, and, in each instance where a copy of such contract
or other document has been filed as an exhibit to the registration statement,
reference is made to the copy so filed, each such statement being qualified in
all respects by such reference. A copy of the registration statement and the
exhibits thereto may be inspected without charge at the offices of the
Securities and Exchange Commission at Judiciary Plaza, 450 Fifth Street,
Washington, D.C. 20549, and copies of all or any part of the registration
statement may be obtained from the Public Reference Section of the Securities
and Exchange Commission, Washington, D.C. 20549 upon the payment of the fees
prescribed by the Securities and Exchange Commission. Please call the
Securities and Exchange Commission at 1-800-SEC-0330 for further information
about the public reference rooms. The Securities and Exchange Commission
maintains a website, http://www.sec.gov, that contains reports, proxy and
information statements and other information regarding registrants, such as us,
that file electronically with the Securities and Exchange Commission.
Upon completion of this offering, we will become subject to the information
and periodic reporting requirements of the Securities Exchange Act of 1934, as
amended, and, in accordance therewith, will file periodic reports, proxy
statements and other information with the Securities and Exchange Commission.
44
<PAGE>
Index to Financial Statements
<TABLE>
<S> <C>
HealthExtras, Inc.
Report of Independent Accountants.......................................... F-2
Balance Sheet as of July 16, 1999.......................................... F-3
Notes to Financial Statements.............................................. F-4
HealthExtras, LLC
Report of Independent Accountants.......................................... F-5
Combined Balance Sheets.................................................... F-6
Combined Statements of Operations And Comprehensive Loss................... F-7
Combined Statements of Members' Capital (Deficit).......................... F-8
Combined Statements of Cash Flows.......................................... F-9
Notes to Combined Financial Statements..................................... F-10
</TABLE>
F-1
<PAGE>
Report of Independent Accountants
To the Board of Directors
HealthExtras, Inc.
In our opinion, the accompanying balance sheet presents fairly, in all
material respects, the financial position of HealthExtras, Inc. (the "Company")
at July 16, 1999, in conformity with generally accepted accounting principles.
This balance sheet is the responsibility of the Company's management; our
responsibility is to express an opinion on this balance sheet based on our
audit. We conducted our audit of this statement in accordance with generally
accepted auditing standards which require that we plan and perform the audit to
obtain reasonable assurance about whether the balance sheet is free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the balance sheet, assessing the accounting
principles used and significant estimates made by management, and evaluating
the overall balance sheet presentation. We believe that our audit provides a
reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
McLean, Virginia
July 16, 1999
F-2
<PAGE>
HealthExtras, Inc.
Balance sheet
July 16, 1999
Assets
<TABLE>
<S> <C>
Cash...................................................................... $100
----
Total assets............................................................ $100
====
Stockholders' Equity
Stockholders' equity:
Common stock, par value $.01, 100,000,000 shares authorized, no shares
issued and outstanding................................................. $ --
Paid-in capital.......................................................... 100
----
Total stockholders' equity.............................................. $100
====
</TABLE>
The accompanying notes are an integral part of this statement.
F-3
<PAGE>
HealthExtras, Inc.
Notes to Financial Statements
1. ORGANIZATION
HealthExtras, Inc. (the "Company") was formed on July 9, 1999, as a Delaware
corporation. The Company has not yet commenced operations.
2. INITIAL PUBLIC OFFERING AND PENDING ACQUISITION
The Company is currently undertaking an initial public offering of its common
stock. Pursuant to the offering, the Company will offer 5,500,000 shares of its
common stock for sale to the public. Prior to the closing of the offering, the
Company will enter into a Reorganization Agreement, whereby HealthExtras, LLC
will merge into the Company. Under generally accepted accounting principles,
HealthExtras, LLC's basis in its assets and liabilities will be carried over to
the Company and the operations of HealthExtras, LLC and the Company will be
retroactively combined in a manner similar to a pooling of interests, because
this acquisition will be a combination of entities under common control.
F-4
<PAGE>
Report of Independent Accountants
To the Board of Directors and Members of HealthExtras, LLC:
In our opinion, the accompanying combined balance sheets, the related
combined statements of operations and comprehensive loss, members' capital
(deficit), and of cash flows, present fairly, in all material respects, the
financial position of HealthExtras, LLC and predecessor companies at December
31, 1997 and 1998, and the results of their operations and their cash flows for
the period October 23, 1996 (date of inception) to December 31, 1996, and for
the years ended December 31, 1997 and 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
McLean, Virginia
August 30, 1999
F-5
<PAGE>
HealthExtras, LLC
Combined balance sheets
<TABLE>
<CAPTION>
December 31, December 31, June 30,
1997 1998 1999
(unaudited)
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Assets
Current assets:
Cash and cash equivalents............. $ 9,651,006 $ 219,285 $5,221,126
Certificate of deposit................ -- 700,000 --
Marketable securities of a related
party............................... 263,725 1,144,255 930,978
Deferred charges:
Direct............................... -- 879,300 847,027
Marketing and promotion.............. 1,110,000 1,110,000 1,110,000
Other assets.......................... 20,000 -- --
----------- ---------- ----------
Total current assets................ 11,044,731 4,052,840 8,109,131
Deferred marketing and promotion
charges............................. 1,665,000 555,000 --
----------- ---------- ----------
Total assets........................ $12,709,731 $4,607,840 $8,109,131
=========== ========== ==========
Liabilities and members' capital (deficit)
Current liabilities:
Line of credit........................ $ -- $ -- $2,400,000
Accounts payable and accrued
expenses............................ 352,495 426,396 622,252
Accrued benefit expense............... -- 546,562 529,857
Marketing expenses payable............ 1,013,713 1,016,000 10,000
Contribution payable.................. 95,454 200,000 100,000
Deferred revenue...................... -- 257,746 1,457,766
Due to member......................... 5,194,711 1,334,429 1,334,429
Due to related party.................. -- -- 1,478,704
----------- ---------- ----------
Total current liabilities........... 6,656,373 3,781,133 7,933,008
----------- ---------- ----------
Long-term liabilities:
Line of credit........................ -- 1,750,000 --
Marketing expense payable............. 1,018,000 -- --
Contribution payable.................. 95,455 -- --
----------- ---------- ----------
Total long-term liabilities......... 1,113,455 1,750,000 --
----------- ---------- ----------
Total liabilities................... 7,769,828 5,531,133 7,933,008
----------- ---------- ----------
Commitments
Members' capital (deficit)............ 4,870,153 (1,535,232) (222,539)
Accumulated comprehensive income ..... 69,750 611,939 398,662
----------- ---------- ----------
Total members' capital (deficit).... 4,939,903 (923,293) 176,123
----------- ---------- ----------
Total liabilities and members'
capital (deficit)................. $12,709,731 $4,607,840 $8,109,131
=========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-6
<PAGE>
HealthExtras, LLC
Combined statements of operations and comprehensive loss
<TABLE>
<CAPTION>
For the period
October 23,
1996 (date of For the year For the year
inception) to ended ended
December 31, December 31, December 31,
1996 1997 1998
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenue........................... $ -- $ -- $ --
--------- ----------- -----------
Product development and
marketing....................... 809,805 3,379,770 4,935,831
General and administrative
(includes expenses from related
parties of $0, $182,364, and
$964,023 for the period October
23, 1996 to December 31, 1996
and the years ended December 31,
1997 and 1998, respectively).... 146,076 1,306,519 1,597,660
--------- ----------- -----------
Total operating expenses........ 955,881 4,686,289 6,533,491
--------- ----------- -----------
Operating loss.................. (955,881) (4,686,289) (6,533,491)
Interest income (expense), net
(includes imputed interest
applicable to related-party
transactions of $0, $483,191,
and $238,479 for the period
October 23, 1996 to December 31,
1996, and the years ended
December 31, 1997 and 1998,
respectively) .................. 385 (555,651) (110,273)
Other income (expense), net....... (4,830) 589,228 (100)
--------- ----------- -----------
Net loss........................ (960,326) (4,652,712) (6,643,864)
Unrealized holding gains (losses)
on marketable securities arising
during the period............... (1,250) 71,000 542,189
--------- ----------- -----------
Comprehensive loss.............. $(961,576) $(4,581,712) $(6,101,675)
========= =========== ===========
Pro forma data (unaudited):
Basic and diluted net loss per
share......................... $ (.05) $ (.26) $ (.38)
Average shares of common stock
outstanding (in thousands).... 17,680 17,680 17,680
</TABLE>
<TABLE>
<CAPTION>
For the six months
ended June 30,
1998 1999
(unaudited)
- -------------------------------------------------------------------------------
<S> <C> <C>
Revenue............................................. $ -- $ 1,021,238
----------- -----------
Direct expenses..................................... -- 741,215
Product development and marketing................... 4,279,610 3,183,705
General and administrative (includes expenses from
related parties of $217,753 and $644,276 for the
six months ended June 30, 1998 and 1999,
respectively) 1,013,214 757,002
----------- -----------
Total operating expenses.......................... 5,292,824 4,681,922
----------- -----------
Operating loss.................................... (5,292,824) (3,660,684)
Interest income (expense), net (includes imputed
interest and loan guarantee fees applicable to
related-party transactions of $128,880 and
$123,871 for the six month periods ended June 30,
1998 and 1999, respectively)...................... (22,081) (189,119)
Other income (expense), net......................... (100) (300)
----------- -----------
Net loss.......................................... (5,315,005) (3,850,103)
Unrealized holding gains (losses) on marketable
securities arising during the period.............. 276,547 (213,277)
----------- -----------
Comprehensive loss................................ $(5,038,458) $(4,063,380)
=========== ===========
Pro forma data (unaudited):
Basic and diluted net loss per share.............. $ (.30) $ (.21)
Average shares of common stock outstanding (in
thousands)...................................... 17,680 18,535
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-7
<PAGE>
HealthExtras, LLC
Combined statements of members' capital (deficit)
<TABLE>
<CAPTION>
Members' Accumulated
capital comprehensive
(deficit) income (loss) Total
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Capital contribution by members......... $5,000,000 $ -- $5,000,000
Unrealized loss on marketable
securities............................ -- (1,250) (1,250)
Net loss................................ (960,326) -- (960,326)
---------- -------- ----------
Balance, December 31, 1996.............. 4,039,674 (1,250) 4,038,424
Additional capital contribution by
members............................... 5,000,000 -- 5,000,000
Unrealized gain on marketable
securities............................ -- 71,000 71,000
Non cash interest expense............... 483,191 -- 483,191
Net loss................................ (4,652,712) -- (4,652,712)
---------- -------- ----------
Balance, December 31, 1997.............. 4,870,153 69,750 4,939,903
Unrealized gain on marketable
securities............................ -- 542,189 542,189
Non cash interest expense............... 238,479 -- 238,479
Net loss................................ (6,643,864) -- (6,643,864)
---------- -------- ----------
Balance, December 31, 1998.............. (1,535,232) 611,939 (923,293)
---------- -------- ----------
Grant of effective member interests to
management, net of deferred
compensation of $428,648.............. 38,925 -- 38,925
Capital contribution by new member ..... 5,000,000 -- 5,000,000
Unrealized loss on marketable
securities............................ -- (213,277) (213,277)
Non cash interest expense and loan
guarantee fees........................ 123,871 -- 123,871
Net loss ............................... (3,850,103) -- (3,850,103)
---------- -------- ----------
Balance, June 30, 1999 (unaudited)...... $ (222,539) $398,662 $ 176,123
========== ======== ==========
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-8
<PAGE>
HealthExtras, LLC
Combined statements of cash flows
<TABLE>
<CAPTION>
For the
period
October 23,
1996 (date of For the year For the year
inception) to ended ended Six months ended
December 31, December 31, December 31, June 30,
1996 1997 1998 1998 1999
(unaudited)
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Cash flows from
operating activites:
Net loss.............. $ (960,326) $(4,652,712) $(6,643,864) $(5,315,005) $(3,850,103)
Non cash compensation
expense............. -- -- -- -- 38,925
Change in deferred
charges............. -- (2,775,000) 230,700 (705,900) 587,273
Non cash interest
expense............. -- 483,191 238,479 128,880 123,871
Changes in assets and
liabilities:
Trading securities,
net................ (494,375) 494,375 -- -- --
Prepaid expenses and
other assets....... (18,563) (1,437) 20,000 20,000 --
Accounts payable and
accrued expenses... 150,860 201,635 73,901 95,997 195,856
Due to related
party.............. -- -- -- 891,581 1,478,704
Accrued benefit
expense............ -- -- 546,562 1,260,900 (16,705)
Marketing expenses
payable............ -- 2,031,713 (1,015,713) -- (1,006,000)
Contribution
payable............ -- 190,909 9,091 -- (100,000)
Deferred revenue..... -- -- 257,746 29,575 1,200,020
---------- ----------- ----------- ----------- -----------
Net cash used in
operating
activities..... (1,322,404) (4,027,326) (6,283,098) (3,593,972) (1,348,159)
---------- ----------- ----------- ----------- -----------
Cash flows from
investing
activities:
Deposits.............. (152,000) 152,000 -- -- --
Maturity (purchase) of
certificate of
deposit............. -- -- (700,000) -- 700,000
Purchases of available
for sale
securities.......... (35,625) (179,100) (338,341) (288,100) --
Sales of available for
sale securities..... -- 20,750 -- -- --
---------- ----------- ----------- ----------- -----------
Net cash provided
by (used in)
investing
activities..... (187,625) (6,350) (1,038,341) (288,100) 700,000
---------- ----------- ----------- ----------- -----------
Cash flows from
financing
activities:
Proceeds from line of
credit.............. -- -- 1,750,000 -- 650,000
Capital
contributions....... 5,000,000 5,000,000 -- -- 5,000,000
Borrowings (repayment)
from member, net.... 36,250 5,158,461 (3,860,282) (4,606,411) --
---------- ----------- ----------- ----------- -----------
Net cash provided
by (used in)
financing
activities..... 5,036,250 10,158,461 (2,110,282) (4,606,411) 5,650,000
---------- ----------- ----------- ----------- -----------
Net increase
(decrease) in cash
and cash
equivalents......... 3,526,221 6,124,785 (9,431,721) (8,488,483) 5,001,841
Cash and cash
equivalents at the
beginning of
period.............. -- 3,526,221 9,651,006 9,651,006 219,285
---------- ----------- ----------- ----------- -----------
Cash and cash
equivalents at the
end of period....... $3,526,221 $ 9,651,006 $ 219,285 $ 1,162,523 $ 5,221,126
========== =========== =========== =========== ===========
Supplemental
disclosure:
Cash paid for
interest............ $ -- $ 131,515 $ 3,248
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-9
<PAGE>
HealthExtras, LLC
Notes to combined financial statements
1. Organization
The combined statements as of December 31, 1997 and 1998, and for the period
ended December 31, 1996 and the years ended December 31, 1997 and 1998 reflect
the results of operations of HealthExtras, LLC (the "Company"), a Maryland
limited liability company, and certain predecessor companies (the Predecessor
Companies). The Predecessor Companies include: Sequel Newco, Inc., Sequel Newco
Joint Venture (the Joint Venture), Health Extras, Partnership (HEP) and Sequel
Newco, LLP (SN LLP). Through December 31, 1998, the Company was considered to
be a development stage enterprise. The Company commenced business operations
with its health benefits program on November 1, 1998; however, all operating
revenues have been deferred and will be recognized in 1999 in order to coincide
with the program member benefits.
Sequel Newco, Inc. (Sequel), an Iowa Corporation, was originally incorporated
on October 23, 1996 as PB Newco II, Inc. Sequel had an operating loss of
$960,326 for the period October 23, 1996 (date of inception) to December 31,
1996, which is reflected in the combined statement of operations. The loss
consisted primarily of consulting fees and travel expenses. Sequel's business,
which consisted of developing and evaluating international and domestic
healthcare management service opportunities, was contributed to the Joint
Venture as of January 1, 1997.
The Joint Venture was originally formed on December 1, 1996 and its business
involved the development of provider software applications and the development
of international healthcare management opportunities. Effective April 7, 1997,
the Joint Venture was merged into a limited liability partnership, SN LLP. SN
LLP continued the business of the Joint Venture, i.e., the development of
provider software applications and the development of international healthcare
management opportunities.
HEP was originally formed on April 7, 1997 and its business involved the
development of supplemental catastrophic health benefit programs. Effective
August 1, 1998, SN LLP and HEP were merged into Health Extras LLC, a Maryland
limited liability company, with HealthExtras, LLC being the surviving business
entity.
On May 27, 1999, HealthExtras, LLC, which was then a Maryland limited
liability company, contributed substantially all of its assets to HealthExtras,
LLC, a Delaware limited liability company, and Capital Z Healthcare Holding
Corp. invested $5 million in that entity in exchange for a 20% ownership
interest. Accordingly, the accompanying financial statements reflect the
Company's operations as successor to HealthExtras, LLC, the Maryland limited
liability company, and its predecessor companies.
2. Summary of significant accounting policies
Basis of presentation
The combined financial statements include the accounts of the Company and the
Predecessor Companies. The accounts of the Company and the Predecessor
Companies have been combined since these entities are under the common control
of two investors, who own 50% of each entity and who constituted all of the
members of the Company through December 31, 1998.
Cash and cash equivalents
Cash and cash equivalents consist of cash and investments in money market
funds with original maturities of three months or less.
Marketable securities
During 1996, 1997 and 1998, the Company purchased certain marketable
securities. Management considers all of the common stock purchased of a certain
related entity to be available for sale as defined by SFAS No. 115, "Accounting
for Certain Investments in Debt and Equity Securities." Available for sale
securities are reported at fair value, with net unrealized gains and losses
reported in members' capital.
F-10
<PAGE>
HealthExtras, LLC
Notes to Combined Financial Statements
During 1996 and 1997, the Company engaged in the trading of marketable
securities. Trading securities are reported at fair value, with net unrealized
gains and losses reported in the statement of operations and comprehensive
loss. Realized gains and losses on the sale of trading securities are
determined using the specific identification method. For the period ended
December 31, 1996, no realized gains or losses were recorded. For the year
ended December 31, 1997, net realized gains of $732,977 were recorded. All
trading securities were sold prior to December 31, 1997.
The historical cost, gross unrealized holding gains and losses and fair value
of marketable securities as of December 31, 1996, 1997, 1998, and as of June
30, 1999 are as follows:
<TABLE>
<CAPTION>
June 30, 1999
1996 1997 1998 (unaudited)
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Available for sale
Historical cost.................... $ 35,625 $193,975 $ 532,316 $532,316
Gross unrealized holding gains..... -- 69,750 611,939 398,662
Gross unrealized holding losses.... (1,250) -- -- --
-------- -------- ---------- --------
Fair value......................... 34,375 263,725 1,144,255 930,978
-------- -------- ---------- --------
Trading
Historical cost.................... 494,375 -- -- --
Gross unrealized holding gains..... -- -- -- --
Gross unrealized holding losses.... -- -- -- --
-------- -------- ---------- --------
Fair value......................... 494,375 -- -- --
-------- -------- ---------- --------
Total marketable securities........ $528,750 $263,725 $1,144,255 $930,978
======== ======== ========== ========
</TABLE>
Concentration of credit risk
Financial instruments that potentially subject the Company to significant
concentrations of credit risk consist principally of cash, cash equivalents,
and certificate of deposit. The Company maintains such amounts in bank accounts
which, at times, may exceed federally insured amounts. The Company has not
experienced any losses related to its cash, cash equivalents, or certificate of
deposit and believes it is not exposed to any significant credit risk on cash,
cash equivalents, or certificate of deposit.
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 disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Contributions
Contributions made, including unconditional promises to give, are recognized
as expenses in the period made or promised.
Start-up costs
Start-up costs are expensed as incurred.
Income taxes
No provision for federal or state income taxes has been made in the
accompanying combined financial statements since the Company is treated as a
partnership in which the profits and losses are reported on the members' tax
returns.
The Company's tax returns and the amounts of the Company's allocable profits
and losses are subject to examination by federal and state authorities. If such
examinations result in changes to the Company's profits or loss, the tax
liability of the members would be changed accordingly.
Comprehensive income (loss)
The Financial Accounting Standards Board ("FASB") issued SFAS No. 130,
"Reporting Comprehensive Income" which became effective for reporting periods
beginning after December 15, 1997. As of
F-11
<PAGE>
HealthExtras, LLC
Notes to Combined Financial Statements
December 31, 1998, the Company has adopted SFAS No. 130. SFAS No. 130 requires
additional reporting with respect to certain changes in assets and liabilities
that previously were not required to be reported as results of operations for
the period.
Revenue and direct expense recognition
Revenue from program benefits and related direct expenses (principally bank
marketing and processing fees and the cost of the benefits provided to program
members) is initially deferred for 90 days, the period during which a program
member is generally entitled to obtain a full refund. Revenue and direct
expenses attributable to the initial deferral are recognized in the subsequent
month. After the initial deferral period, revenue is recognized as earned and
direct expenses as incurred.
Marketing agreements
The Company defers the amount of payments under marketing and similar
agreements and amortizes such amounts over the respective terms of the
agreements.
Segment reporting
The Company operates in only one market segment as a provider of supplemental
health and disability benefit programs to individuals. The Company has no major
customers and operates only in the United States.
Interim financial statements
The results of operations for the six months ended June 30, 1998 and 1999,
are not necessarily indicative of the results to be expected for the full
fiscal year. All information as of June 30, 1999, and for the six months ended
June 30, 1998 and 1999 is unaudited but, in the opinion of management, contains
all adjustments, consisting only of normal recurring adjustments, necessary to
present fairly the combined financial position, results of operations and cash
flows of the Company.
Pro forma information (unaudited)
In connection with the formation of HealthExtras, Inc. (the Company) and its
merger with HealthExtras, LLC, the operations of the Company will be subject to
federal and state income taxes and it will recognize deferred taxes in
accordance with Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes" ("SFAS No. 109"). SFAS No. 109 requires companies
subject to income taxes to adjust their deferred tax assets and liabilities
based on temporary differences between financial statement and tax bases of
assets and liabilities using enacted tax rules in effect in the year in which
the differences are expected to reverse.
On a pro forma basis as of June 30, 1999, giving effect to the merger of
HealthExtras, LLC and HealthExtras, Inc., deferred income taxes would be
comprised of the following, computed at a combined effective rate of 39%:
<TABLE>
<S> <C>
Deferred tax assets (liabilities):
Accrued expenses...................................................... $ 42,482
Prepaid expenses...................................................... (136,943)
Deferred revenue...................................................... 562,965
Unrealized holding gains on marketable securities..................... (82,367)
Valuation allowance................................................... (386,137)
--------
Net deferred tax asset............................................... $ --
========
</TABLE>
Pro forma basic and diluted net loss per share and weighted average shares
outstanding reflect the formation of HealthExtras, Inc. and merger with
HealthExtras, LLC in exchange for Company common stock as if the merger was
effective October 23, 1996.
F-12
<PAGE>
HealthExtras, LLC
Notes to Combined Financial Statements
Pro forma weighted average basic net loss per share is computed based on the
number of outstanding shares of common stock. Pro forma diluted net loss per
share adjusts the pro forma basic shares weighted average for the potential
dilution that could occur if stock options or warrants, if any, were exercised.
Pro forma diluted net loss per share is the same as pro forma basic net loss
per share because there were no dilutive securities outstanding at June 30,
1999.
3. Commitments
During 1997, the Company entered into two marketing agreements each with an
initial three year term whereby the Company committed to make $3,030,000 of
non-refundable payments, payable in three equal installments, to certain
individuals in exchange for their participation in various marketing campaigns.
Under both marketing agreements, the Company has the option to extend and renew
the agreements for an additional two-year period which would result in
additional guaranteed minimum payments by the Company of approximately
$2,034,000.
Under the marketing agreements, the Company must pay $1.00 and $0.10,
respectively, per program member that subscribes to the benefits promoted by
the individuals. Such payments are for the initial three- year term of the
marketing agreements and shall continue for a 10 year period thereafter.
Additionally, during 1997, the Company pledged to contribute $300,000 to a
charitable foundation payable in equal installments of $100,000 commencing on
August 1, 1997. Through December 31, 1998, the Company paid $100,000 to the
charitable foundation. As of December 31, 1998, the remaining amount of
$200,000 is reflected as a liability in the balance sheet.
During 1998, the Company entered into various agreements with participating
companies whereby the Company has committed to provide minimum enrollment in
its programs. The Company has deferred expense recognition for $879,300 and
$492,435 in minimum payments at December 31, 1998 and June 30, 1999,
respectively, with respect to these minimum enrollment commitments in order to
match related future revenue recognition. A liability of $546,562 is included
in accrued benefit expense on the balance sheet as of December 31, 1998 for the
unpaid amount.
During July 1998, the Company entered into an agreement for a mass marketing
campaign requiring a minimum payment of $100,000 which is included in sales and
marketing expense for the year ended December 31, 1998. A liability of $100,000
for such payment is included in accrued expenses on the balance sheet as of
December 31, 1998.
The Company intends to enter into three-year employment agreements with five
of its executive officers. The annual base salaries under these agreements
range from $120,000 to $210,000, and one executive will be entitled to a bonus
equal to one percent of the Company's annual after-tax profits. The Company's
minimum aggregate payments under these employment agreements are expected to be
$837,000 annually.
4. Related party transactions
For corporate business purposes, the Company utilizes the services of an
aircraft owned by Southern Aircraft Leasing, which is owned by a member of the
Company. For the period October 23, 1996 (date of inception) to December 31,
1996 and for the years ended December 31, 1997 and 1998, the Company paid $0,
$105,703 and $97,638, respectively, for utilizing the services of the aircraft.
F-13
<PAGE>
HealthExtras, LLC
Notes to Combined Financial Statements
The Company holds available for sale securities in a corporation for which a
member of the Company is the Chairman of the Board and Co-Chief Executive
Officer. Investments held were $34,375, $263,725, and $1,144,255 as of December
31, 1996, 1997 and 1998, respectively.
A member of the Company agreed to lend the Company funds, in excess of his
pro-rata share of capital contributions, in order to underwrite operating
expenses. These loans amounted to $5,194,711 and $1,334,429 at December 31,
1997 and 1998, respectively. Interest has been imputed on the monthly
outstanding balance of the loan at an annual rate of 10%. The imputed interest
has been recorded as interest expense in the statement of operations and as
members' capital. Imputed interest expense amounted to $476,346, $173,868, and
$66,721 for the years ended December 31, 1997 and 1998, and the six months
ended June 30, 1999, respectively.
Effective January 1, 1999, the Company entered into an agreement with United
Payors & United Providers, Inc. (UP&UP), a corporation for which a member of
the Company is Chairman of the Board and Co-Chief Executive Officer, whereby
UP&UP provides administrative services for the Company and is reimbursed for
the costs incurred. Prior to January 1, 1999, the Company had an unwritten
arrangement with UP&UP to provide similar services. The amount paid by the
Company for such services was $0, $76,661, and $866,385, respectively, for the
period October 23, 1996 (date of inception) to December 31, 1996, and for the
years ended December 31, 1997 and 1998.
From time to time the Company owes UP&UP for the costs of administrative
services. Such amounts payable do not bear interest. Interest on amounts due
UP&UP has been imputed at an annual rate of 10% and has been recorded as
interest expense and members' capital. Such expense amounted to $6,845,
$64,611, and $36,233 for the years ended December 31, 1997 and 1998, and six
months ended June 30, 1999, respectively.
The Company also signed a five-year royalty agreement effective January 1,
1999 relating to the Company's program members accessing the UP&UP provider
network. In return for providing network access to UP&UP's national network of
healthcare providers, the Company will pay UP&UP $1.00 per member per month for
the initial year of membership, which amount escalates in stages for subsequent
membership years to a maximum of $1.50 per member per month in the fourth year
of continued membership and thereafter. However, the Company can terminate
these payments by conveying $25 million in market value of the Company's common
stock to UP&UP.
5. Bank line of credit
The Company entered into a credit facility with a bank totaling $2,000,000.
The credit facility bears interest at the prime rate (7.75% as of December 31,
1998) and the facility extends to December 1999. This credit facility is
collateralized by substantially all the Company's assets and has been
guaranteed by UP&UP. As of December 31, 1998, the Company has borrowed
$1,750,000 under this credit facility.
Loan guarantee fees have been imputed based on the monthly amounts
outstanding and the credit line at an annual rate of 2%. The imputed loan
guarantee fees have been recorded as interest expense in the statement of
operations and as members' capital. Such fees amounted to $0, and $20,917 for
the year ended December 31, 1998 and the six months ended June 30, 1999,
respectively.
6. Subsequent events
Subsequent to December 31, 1998, a member of the Company agreed to provide
sufficient additional funding to enable the Company to continue in operation
through December 2000.
F-14
<PAGE>
HealthExtras, LLC
Notes to Combined Financial Statements
Subsequent to December 31, 1998, the Company increased their credit facility
$1,000,000 to a total principal amount available under the credit facility of
$3,000,000 due in February 2000.
7. Members capital (unaudited)
In February 1999, the Company granted certain management employees effective
member interests aggregating 1.87% (equivalent to 413,333 common shares, post
reorganization) of the Company, after giving effect to an existing commitment
to sell a 20% interest in the Company to a third party for $5,000,000 cash.
Such grants vest over a four year period commencing March 1, 1999. The Company
has recorded the estimated fair value of such interests of $467,573 ($1.13 per
post reorganization common share) as members capital and deferred compensation
expense. During the six months ended June 30, 1999, amortization of deferred
compensation expensed amounted to $38,925. The remainder of the deferred
compensation expense will be amortized over the vesting period for the
interests.
F-15
<PAGE>
www.healthextras.com
<PAGE>
- --------------------------------------------------------------------------------
- ------------
PROSPECTUS
- ------------
5,500,000 Shares
Common Stock
Warburg Dillon Read LLC
Prudential Vector Healthcare Group
a unit of Prudential Securities
SG Cowen
- --------------------------------------------------------------------------------
, 1999
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
SEC Registration Fee................................... $ 28,000
NASD Filing Fee........................................ 10,900
NASDAQ Stock Market National Listing Fee............... 95,000
Printing, engraving, postage and mailing............... 100,000
Legal fees and expenses................................ 250,000
Accounting fees and expenses........................... 100,000
Transfer agent fees and expenses....................... 2,500
Blue Sky fees and expenses............................. 10,000
Miscellaneous.......................................... 3,600
--------
TOTAL............................................ $600,000
========
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
As permitted by Section 145 of the Delaware General Corporation Law,
Articles 8 and 9 of the Registrant's Certificate of Incorporation provide, as
follows, the Corporation shall, to the fullest extent permitted by Delaware law,
as amended from time to time, indemnify its directors and officers:
EIGHTH:
A. Each person who was or is made a party or is threatened to be made a
party to or is otherwise involved in any action, suit or proceeding, whether
civil, criminal, administrative or investigative (hereinafter a "proceeding"),
by reason of the fact that he or she is or was a Director or an Officer of the
Corporation or is or was serving at the request of the Corporation as a
Director, Officer, employee or agent of another corporation or of a partnership,
joint venture, trust or other enterprise, including service with respect to an
employee benefit plan (hereinafter an "indemnitee"), whether the basis of such
proceeding is alleged action in an official capacity as a Director, Officer,
employee or agent or in any other capacity while serving as a Director, Officer,
employee or agent, shall be indemnified and held harmless by the Corporation to
the fullest extent authorized by the Delaware General Corporation Law, as the
same exists or may hereafter be amended (but, in the case of any such amendment,
only to the extent that such amendment permits the Corporation to provide
broader indemnification rights than such law permitted the Corporation to
provide prior to such amendment), against all expense, liability and loss
(including attorneys' fees, judgments, fines, ERISA excise taxes or penalties
and amounts paid in settlement) reasonably incurred or suffered by such
indemnitee in connection therewith; provided, however, that, except as provided
in Section C hereof with respect to proceedings to enforce rights to
indemnification, the Corporation shall indemnify any such indemnitee in
connection with a proceeding (or part thereof) initiated by such indemnitee only
if such proceeding (or part thereof) was authorized by the Board of Directors of
the Corporation.
B. The right to indemnification conferred in Section A of this Article
EIGHTH shall include the right to be paid by the Corporation the expenses
incurred in defending any such proceeding in advance of its final disposition
(hereinafter an "advancement of expenses"); provided, however, that, if the
Delaware General Corporation Law requires, an advancement of expenses incurred
by an indemnitee in his or her capacity as a Director or Officer (and not in any
other capacity in which service was or is rendered by such indemnitee,
including, without limitation, services to an employee benefit plan) shall be
made only upon delivery to the Corporation of an undertaking (hereinafter an
"undertaking"), by or on behalf of such indemnitee, to repay all amounts so
advanced if it shall ultimately be determined by final judicial decision from
which there is no further right to appeal (hereinafter a "final adjudication")
that such indemnitee is not entitled to be indemnified for such expenses under
this Section or otherwise. The rights to indemnification and to the advancement
of expenses conferred in Sections A and B of this Article EIGHTH shall be
contract rights and such rights shall continue as to an indemnitee who has
ceased to be a Director, Officer, employee or agent and shall inure to the
benefit of the indemnitee's heirs, executors and administrators.
<PAGE>
C. If a claim under Section A or B of this Article EIGHTH is not paid in
full by the Corporation within sixty days after a written claim has been
received by the Corporation, except in the case of a claim for an advancement of
expenses, in which case the applicable period shall be twenty days, the
indemnitee may at any time thereafter bring suit against the Corporation to
recover the unpaid amount of the claim. If successful in whole or in part in
any such suit, or in a suit brought by the Corporation to recover an advancement
of expenses pursuant to the terms of an undertaking, the indemnitee shall be
entitled to be paid also the expenses of prosecuting or defending such suit. In
(1) any suit brought by the indemnitee to enforce a right to indemnification
hereunder (but not in a suit brought by the indemnitee to enforce a right to an
advancement of expenses) it shall be a defense that, and (2) in any suit by the
Corporation to recover an advancement of expenses pursuant to the terms of an
undertaking, the Corporation shall be entitled to recover such expenses upon a
final adjudication that, the indemnitee has not met any applicable standard for
indemnification set forth in the Delaware General Corporation Law. Neither the
failure of the Corporation (including its Board of Directors, independent legal
counsel, or its stockholders) to have made a determination prior to the
commencement of such suit that indemnification of the indemnitee is proper in
the circumstances because the indemnitee has met the applicable standard of
conduct set forth in the Delaware General Corporation Law, nor an actual
determination by the Corporation (including its Board of Directors, independent
legal counsel, or its stockholders) that the indemnitee has not met such
applicable standard of conduct, shall create a presumption that the indemnitee
has not met the applicable standard of conduct or, in the case of such a suit
brought by the indemnitee, be a defense to such suit. In any suit brought by
the indemnitee to enforce a right to indemnification or to an advancement of
expenses hereunder, or by the Corporation to recover an advancement of expenses
pursuant to the terms of an undertaking, the burden of proving that the
indemnitee is not entitled to be indemnified, or to such advancement of
expenses, under this Article EIGHTH or otherwise shall be on the Corporation.
D. The rights to indemnification and to the advancement of expenses
conferred in this Article EIGHTH shall not be exclusive of any other right which
any person may have or hereafter acquire under any statute, the Corporation's
Certificate of Incorporation, Bylaws, agreement, vote of stockholders or
Disinterested Directors or otherwise.
E. The Corporation may maintain insurance, at its expense, to protect
itself and any Director, Officer, employee or agent of the Corporation or
subsidiary or Affiliate or another corporation, partnership, joint venture,
trust or other enterprise against any expense, liability or loss, whether or not
the Corporation would have the power to indemnify such person against such
expense, liability or loss under the Delaware General Corporation Law.
F. The Corporation may, to the extent authorized from time to time by the
Board of Directors, grant rights to indemnification and to the advancement of
expenses to any employee or agent of the Corporation to the fullest extent of
the provisions of this Article EIGHTH with respect to the indemnification and
advancement of expenses of Directors and Officers of the Corporation.
NINTH:
A Director of this Corporation shall not be personally liable to the
Corporation or its stockholders for monetary damages for breach of fiduciary
duty as a Director, except for liability (1) for any breach of the Director's
duty of loyalty to the Corporation or its stockholders; (2) for acts or
omissions not in good faith or which involve intentional misconduct or a knowing
violation of law; (3) under Section 174 of the Delaware General Corporation Law;
or (4) for any transaction from which the Director derived an improper personal
benefit. If the Delaware General Corporation Law is amended to authorize
corporate action further eliminating or limiting the personal liability of
Directors, then the liability of a Director of the Corporation shall be
eliminated or limited to the fullest extent permitted by the Delaware General
Corporation Law, as so amended.
Any repeal or modification of the foregoing paragraph by the stockholders
of the Corporation shall not adversely affect any right or protection of a
Director of the Corporation existing at the time of such repeal or modification.
II-2
<PAGE>
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
The registrant, HealthExtras, Inc., a Delaware corporation, was formed on
July 12, 1999. HealthExtras has, to date, not issued any shares of its common
stock.
Pursuant to a commitment made in February 1999, on May 27, 1999,
HealthExtras, which was then a Maryland limited liability company, contributed
substantially all of its assets to HealthExtras, LLC, a Delaware limited
liability company, and Capital Z Healthcare Holding Corp., invested $5 million
in that entity in exchange for a 20% ownership interest. Capital Z Healthcare
Holding Corp. serves only as a vehicle for its sole stockholder, Health
Partners, to invest in HealthExtras and does not conduct any other operations.
In addition, pursuant to a commitment made March 1, 1999 and affirmed by the May
27, 1999 transactions, HealthExtras, LLC granted compensatory effective member
interests aggregating 1.87% to members of its management. These management
interests vest over four year.
In order to effect this offering, HealthExtras, Inc. has agreed in
principal with HealthExtras, LLC and Capital Z Healthcare Holding Corp. to enter
into a Reorganization Agreement pursuant to which, prior to the sale of the
common stock in this offering, HealthExtras, LLC will merge into HealthExtras,
Inc. and Capital Z Healthcare Holding Corp. will effect a merger, share exchange
or similar transaction whereby its sole stockholder, Health Partners, will
receive common stock in HealthExtras, Inc. representing the same proportionate
ownership position which Capital Z Healthcare Holding Corp. has in HealthExtras,
LLC. The distribution of these shares of common stock by HealthExtras, Inc.
will be effected in reliance upon the exemption from the registration
requirements of the Securities Act of 1933, as amended, afforded by Section 4(2)
thereof.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
See the Exhibit Index filed as a part of this Registration Statement.
ITEM 17. UNDERTAKINGS
(a) The undersigned registrant hereby undertakes to provide to the
underwriter at the closing specified in the underwriting agreements certificates
in such denominations and registered in such names as required by the
underwriter to permit prompt delivery to each purchaser.
(b) Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers and controlling persons
of the Registrant pursuant to the provisions described under Item 14 above, or
otherwise, the Registrant has been advised that in the opinion of the Securities
and Exchange Commission such indemnification is against public policy as
expressed in the Securities Act and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other than the
payment by the Registrant of expenses incurred or paid by a director, officer or
controlling person of the Registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered, the Registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
(c) The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities
Act of 1933, the information omitted from the form of prospectus filed
as part of this registration statement in reliance upon Rule 430A and
contained in a form of prospectus filed by the registrant pursuant to
Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be
deemed to be part of this registration statement as of the time it was
declared effective.
(2) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating
to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering
thereof.
II-3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended,
HealthExtras, Inc., the Registrant, has duly caused this Pre-Effective Amendment
No. 1 to the Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Rockville, State of
Maryland on the 20th day of September, 1999.
HEALTHEXTRAS, INC.
By: /s/ David T. Blair
-----------------------------
David T. Blair
Chief Executive Officer
POWER OF ATTORNEY
The undersigned sole director and officers of HealthExtras, Inc. do hereby
constitute and appoint Thomas L. Blair, David T. Blair and Michael P. Donovan,
and each of them, with full power of substitution, our true and lawful
attorneys-in-fact and agents to do any and all acts and things in our name and
behalf in our capacities as directors and officers, and to execute any and all
instruments for us and in our names in the capacities indicated below which such
person may deem necessary or advisable to enable HealthExtras, Inc. to comply
with the Securities Act of 1933, as amended (the "Securities Act"), and any
rules, regulations and requirements of the Securities and Exchange Commission,
in connection with this Registration Statement, including specifically, but not
limited to, power and authority to sign for us, or any of us, in the capacities
indicated below and any and all amendments (including pre-effective and post-
effective amendments or any other registration statement filed pursuant to the
provisions of Rule 462(b) under the Securities Act) hereto; and we do hereby
ratify and confirm all that such person or persons shall do or cause to be done
by virtue hereof.
Pursuant to the requirements of the Securities Act, this Pre-Effective
Amendment No. 1 to the Registration Statement has been signed below by the
following persons on September 20, 1999 in the capacities indicated:
By: /s/ Thomas L. Blair Sole Director
-------------------------------
Thomas L. Blair
By: /s/ David T. Blair Chief Executive Officer
-------------------------------
David T. Blair
By: /s/ Michael P. Donovan Chief Financial Officer
-------------------------------
Michael P. Donovan (Chief Accounting Officer)
II-4
<PAGE>
EXHIBIT INDEX
EXHIBIT
NO. DESCRIPTION
- ------- --------------------------------------------------------------------
1.0 Form of Underwriting Agreement (3)
2.1 Reorganization Agreement by and among HealthExtras, Inc.,
HealthExtras, LLC, and Capital Z Healthcare Holding Corp. (3)
3.1(a) Certificate of Incorporation of HealthExtras, Inc. (1)
3.1(b) Form of Amended and Restated Certificate of Incorporation (filed
herewith)
3.2 Bylaws of HealthExtras, Inc. (filed herewith)
4.1 Specimen Stock Certificate of HealthExtras, Inc. (filed herewith)
4.2 Stockholders' Agreement (3)
5.1 Opinion of Muldoon, Murphy & Faucette LLP re: legality (3)
10.1 Form of Employment Agreement between HealthExtras, Inc. and David T.
Blair (filed herewith)
10.2 Form of Employment Agreement between HealthExtras, Inc. and certain
Executive Officers (filed herewith)
10.3 Program Administrator's Agreement by and between HealthExtras LLC
and Reliance National Insurance Company (2) (filed herewith)
10.4 Administrative Services Agreement by and between HealthExtras, LLC
and United Payors & United Providers, Inc. (1)
10.5 Agreement by and between United Payors & United Providers, Inc. and
HealthExtras, LLC re: network access (1)
10.6 Agreement by and between Cambria Productions, Inc. f/s/o Christopher
Reeve and HealthExtras, Inc.(2) (filed herewith)
10.7 Indemnification Agreement (filed herewith)
10.8 Sublease Agreement by and between United Payors & United Providers,
Inc. and HealthExtras, LLC (filed herewith)
10.9 Form of HealthExtras, Inc. 1999 Stock Option Plan (3)
10.10 Registration Rights Agreement (3)
23.1 Consent of Independent Accountants for HealthExtras, LLC (filed
herewith)
23.2 Consent of Independent Accountants for HealthExtras, Inc. (filed
herewith)
23.3 Consent of Muldoon, Murphy & Faucette LLP (1)
24.0 Powers of Attorney (included on signature page)
27.0 Financial Data Schedule (1)
99.1 Consent of Julian A.L. Allen to serve as a Director of the Company
(filed herewith)
99.2 Consent of David T. Blair to serve as a Director of the Company (1)
99.3 Consent of Thomas J. Graf to serve as a Director of the Company (1)
99.4 Consent of Julia M. Lawler to serve as a Director of the Company
(filed herewith)
99.5 Consent of Karen M. Shaff to serve as a Director of the Company (1)
99.6 Consent of Paul H. Warren to serve as a Director of the Company
(filed herewith)
- --------------------------
(1) Previously filed.
(2) Confidential treatment requested for portions of agreement pursuant to
Section 406 of Regulation C, promulgated under the Securities Act of 1933,
as amended.
(3) To be filed by amendment.
II-5
<PAGE>
EXHIBIT 3.1(b)
AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
OF
HEALTHEXTRAS, INC.
FIRST: The name of the Corporation is HealthExtras, Inc. (hereinafter
-----
sometimes referred to as the "Corporation").
SECOND: The address of the registered office of the Corporation in the
------
State of Delaware is Corporation Trust Center, 1209 Orange Street, in the City
of Wilmington, County of New Castle. The name of the registered agent at that
address is The Corporation Trust Company.
THIRD: The purpose of the Corporation is to engage in any lawful act or
-----
activity for which a corporation may be organized under the General Corporation
Law of the State of Delaware.
FOURTH:
------
A. The total number of shares of all classes of stock which the
Corporation shall have authority to issue is one hundred and five million
(105,000,000) consisting of:
1. Five million (5,000,000) shares of Preferred Stock, par
value one cent ($.01) per share (the "Preferred Stock"); and
<PAGE>
2. One hundred million (100,000,000) shares of Common Stock,
par value one cent ($.01) per share (the "Common Stock").
B. The Board of Directors is authorized, subject to any limitations
prescribed by law, to provide for the issuance of the shares of Preferred
Stock in series, and by filing a certificate pursuant to the applicable law
of the State of Delaware (such certificate being hereinafter referred to as
a "Preferred Stock Designation"), to establish from time to time the number
of shares to be included in each such series, and to fix the designation,
powers, preferences, and rights of the shares of each such series and any
qualifications, limitations or restrictions thereof. The number of
authorized shares of Preferred Stock may be increased or decreased (but not
below the number of shares thereof then outstanding) by the affirmative
vote of the holders of a majority of the Common Stock, without a vote of
the holders of the Preferred Stock, or of any series thereof, unless a vote
of any such holders is required pursuant to the terms of any Preferred
Stock Designation.
FIFTH: The following provisions are inserted for the management of the
-----
business and the conduct of the affairs of the Corporation, and for further
definition, limitation and regulation of the powers of the Corporation and of
its Directors and stockholders:
A. The business and affairs of the Corporation shall be managed by
or under the direction of the Board of Directors. In addition to the powers
and authority expressly conferred upon them by statute or by this
Certificate of Incorporation or the Bylaws of the Corporation, the
Directors are hereby empowered to exercise all such powers and do all such
acts and things as may be exercised or done by the Corporation.
B. The Directors of the Corporation need not be elected by written
ballot unless the Bylaws so provide.
SIXTH:
-----
A. The number of Directors shall be fixed from time to time
exclusively by the Board of Directors pursuant to a resolution adopted by a
majority of the Whole Board. At such time as there is more than one
director of the Corporation, the terms of such Directors shall be divided
into two or three classes as determined by the Board of Directors, as
nearly equal in number as reasonably possible, with the term of office of
the first class to expire at the first annual meeting of stockholders, the
term of office of the second class to expire at the annual meeting of
stockholders one year thereafter and the term of office of the third class,
if any, to expire at the annual meeting of stockholders two years
thereafter with each Director to hold office until his or her successor
shall have been duly elected and qualified. At each annual meeting of
stockholders following such initial classification and election, Directors
elected to succeed those Directors whose terms expire shall be elected for
a term of office to expire at the second or third succeeding annual meeting
of stockholders after their election, as the case may be, with each
Director to hold office until his or her successor shall have been duly
elected and qualified.
<PAGE>
B. Subject to the rights of holders of any series of Preferred Stock
outstanding, the newly created directorships resulting from any increase in
the authorized number of Directors or any vacancies in the Board of
Directors resulting from death, resignation, retirement, disqualification,
removal from office or other cause may be filled only by a majority vote of
the Directors then in office, though less than a quorum, and Directors so
chosen shall hold office for a term expiring at the annual meeting of
stockholders at which the term of office of the class to which they have
been chosen expires. No decrease in the number of Directors constituting
the Board of Directors shall shorten the term of any incumbent Director.
C. Advance notice of stockholder nominations for the election of
Directors and of business to be brought by stockholders before any meeting
of the stockholders of the Corporation shall be given in the manner
provided in the Bylaws of the Corporation.
D. Subject to the rights of holders of the Convertible Stock then
outstanding, any Director, or the entire Board of Directors, may be removed
from office at any time, but only for cause and only by the affirmative
vote of the holders of at least 50 percent of the voting power of all of
then-outstanding shares of capital stock of the Corporation entitled to
vote generally in the election of Directors, voting together as a single
class.
SEVENTH: The Board of Directors is expressly empowered to adopt, amend or
-------
repeal the Bylaws of the Corporation. Any adoption, amendment or repeal of the
Bylaws of the Corporation by the Board of Directors shall require the approval
of a majority of the Whole Board. The stockholders shall also have power to
adopt, amend or repeal the Bylaws of the Corporation; provided, however, that,
in addition to any vote of the holders of any class or series of stock of this
Corporation required by law or by this Certificate of Incorporation, the
affirmative vote of the holders of at least sixty-six and two thirds percent
(66 2/3%) of the voting power of all of the then-outstanding shares of the
capital stock of the Corporation entitled to vote generally in the election of
Directors (after giving effect to the provisions of Article FOURTH), voting
together as a single class, shall be required for the stockholders to adopt,
amend or repeal any provisions of the Bylaws of the Corporation.
EIGHTH: The names and mailing address of the person who is to serve as
------
director until the first annual meeting of stockholders and until his successors
is elected and qualified is:
Thomas L. Blair
2275 Research Boulevard
Seventh Floor
Rockville, MD 20850
NINTH: Each person who was or is made a party or is threatened to be
-----
made a party to or is otherwise involved in any action, suit or proceeding,
whether civil, criminal, administrative or investigative (hereinafter a
"proceeding"), by reason of the fact that he or she is or was a Director or an
Officer of the Corporation or is or was serving at the request of the
Corporation as a Director, Officer, employee or agent of another corporation or
of a partnership, joint venture,
3
<PAGE>
trust or other enterprise, including service with respect to an employee benefit
plan (hereinafter an "indemnitee"), whether the basis of such proceeding is
alleged action in an official capacity as a Director, Officer, employee or agent
or in any other capacity while serving as a Director, Officer, employee or
agent, shall be indemnified and held harmless by the Corporation to the fullest
extent authorized by the Delaware General Corporation Law, as the same exists or
may hereafter be amended (but, in the case of any such amendment, only to the
extent that such amendment permits the Corporation to provide broader
indemnification rights than such law permitted the Corporation to provide prior
to such amendment), against all expense, liability and loss (including
attorneys' fees, judgments, fines, ERISA excise taxes or penalties and amounts
paid in settlement) reasonably incurred or suffered by such indemnitee in
connection therewith; provided, however, that, except as provide din Section C
hereof with respect to proceedings to enforce rights to indemnification, the
Corporation shall indemnify any such indemnitee in connection with a proceeding
(or part thereof) initiated by such indemnitee only if such proceeding (or part
thereof) was authorized by the Board of Directors of the Corporation.
B. The right to indemnification conferred in Section A of this Article
NINTH shall include the right to be paid by the Corporation the expenses
incurred in defending any such proceeding in advance of its final disposition
(hereinafter and "advancement of expenses"); provided, however, that, if the
Delaware General Corporation Law requires, an advancement of expenses incurred
by an indemnitee in his or her capacity as a Director or Officer (and not in any
other capacity in which service was or is rendered by such indemnitee,
including, without limitation, services to an employee benefit plan) shall be
made only upon delivery to the Corporation of an undertaking (hereinafter an
"undertaking"), by or on behalf of such indemnitee, to repay all amounts so
advanced if it shall ultimately be determined by final judicial decision from
which there is no further right to appeal (hereinafter a "final adjudication")
that such indemnitee is not entitled to be indemnified for such expenses under
this Section or otherwise. The rights to indemnification and to the advance of
expenses conferred in Sections A and B of this Article NINTH shall be contract
rights and such rights shall continue as to an indemnitee who has ceased to be a
Director, Officer, employee or agent and shall inure to the benefit of the
indemnitee's heirs, executors and administrators.
C. If a claim under Section A or B of this Article NINTH is not paid in
full by the Corporation within sixty day after a written claim has been received
by the Corporation, except in the case of a claim for an advancement of
expenses, in which case the applicable period shall be twenty days, the
indemnitee may at any time thereafter bring suit against the Corporation to
recover the unpaid amount of the claim. If successful in whole or in part in
any such suit, or in a suit brought by the Corporation to recover an advancement
of expenses pursuant to the terms of an undertaking, the indemnitee shall be
entitled to be paid also the expenses of prosecuting or defending such suit. In
(i) any suit brought by the indemnitee to enforce a right to indemnification
hereunder (but not in a suit brought by the indemnitee to enforce a right to an
advancement of expenses) it shall be a defense that, and (ii) in any suit by the
Corporation to recover an advance of expenses pursuant to the terms of an
undertaking the Corporation shall be entitled to recover such expenses upon a
final adjudication that, the indemnitee has not met any applicable standard for
indemnification set forth in the Delaware General Corporation Law. Neither the
failure of the Corporation (including its Board of Directors, independent legal
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counsel, or its stockholders) to have made a determination prior to the
commencement of such suit that indemnification of the indemnitee is proper in
the circumstances because the indemnitee has met the applicable standard of
conduct set forth in the Delaware General Corporation Law, nor an actual
determination by the Corporation (including its Board of Directors, independent
legal counsel, or its stockholders) that the indemnitee has not met such
applicable standard of conduct, shall create a presumption that the indemnitee
has not met the applicable standard of conduct, shall create a presumption that
the indemnitee has not met the applicable standard of conduct or, in the case of
such a suit brought by the indemnitee to enforce a right to indemnification or
to an advancement of expenses hereunder, or by the Corporation to recover an
advancement of expenses pursuant to the terms of an undertaking, the burden of
proving that the indemnitee is not entitled to be indemnified, or to such
advance of expenses, under this Article NINTH or otherwise shall be on the
Corporation.
D. The rights to indemnification and to the advancement of expenses
conferred in this Article NINTH shall not be exclusive of any other right which
any person may have or thereafter acquire under any statute, the Corporation's
Certificate of Incorporation, Bylaws, agreement, vote of stockholders or
Disinterested Directors or otherwise.
E. The Corporation may maintain insurance, at its expense, to protect
itself and any Director, Officer, employee or agent of the Corporation or
subsidiary or Affiliate or another corporation, partnership, joint venture,
trust or other enterprise against any expense, liability or loss, whether or
note the Corporation would have the power to indemnify such person against such
expense, liability or loss under the Delaware General Corporation Law.
F. The Corporation may, to the extent authorized from time to time by the
Board of Directors, grant rights to indemnification and to the advancement of
expenses to any employee or agent of the Corporation to the fullest extent of
the provisions of this Article NINTH with respect to the indemnification and
advancement of expenses of Directors and Officers of the Corporation.
TENTH: A Director of this Corporation shall not be personally liable to
-----
the Corporation or its stockholders for monetary damages for breach of fiduciary
duty as a Director, except for liability: (i) for any breach of the Director's
duty of loyalty to the Corporation or its stockholders; (ii) for acts or
omissions not in good faith or which involve intentional misconduct or a knowing
violation of law; (iii) under Section 174 of the Delaware General Corporation
Law; or (iv) for any transaction from which the Director derived an improper
personal benefit. If the Delaware General Corporation Law is amended to
authorize corporate action further eliminating or limiting the personal
liability of Directors, then the liability of a Director of the Corporation
shall be eliminated or limited to the fullest extent permitted by the Delaware
General Corporation Law, as so amended.
Any repeal or modification of the foregoing paragraph by the stockholders
of the Corporation shall not adversely affect any right or protection of a
Director of the Corporation existing at the time of such repeal or modification.
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ELEVENTH: The Corporation reserves the right to amend or repeal any
--------
provision contained in this Certificate of Incorporation in the manner
prescribed by the laws of the State of Delaware and all rights conferred upon
stockholders are granted subject to this reservation; provided, however, that,
notwithstanding any other provision of this Certificate of Incorporation or any
provision of law which might otherwise permit a lesser vote or no vote, but in
addition to any vote of the holders of any class or series of the stock of this
Corporation required by law or by this Certificate of Incorporation, the
affirmative vote of the holders of at least sixty-six and two-thirds percent
(66 2/3/%) of the voting power of all of the then-outstanding shares of the
capital stock of the Corporation entitled to vote generally in the election of
Directors, voting together as a single class, shall be required to amend or
repeal this ARTICLE ELEVENTH, ARTICLE SIXTH, ARTICLE SEVENTH, or ARTICLE NINTH.
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EXHIBIT 3.2
HEALTHEXTRAS, INC.
BYLAWS
ARTICLE I - STOCKHOLDERS
Section 1. Annual Meeting.
--------- --------------
An annual meeting of the stockholders, for the election of Directors to
succeed those whose terms expire and for the transaction of such other business
as may properly come before the meeting, shall be held at such place, on such
date, and at such time as the Board of Directors shall each year fix, which date
shall be within thirteen (13) months subsequent to the later of the date of
incorporation or the last annual meeting of stockholders.
Section 2. Special Meetings.
--------- ----------------
Special meetings of the stockholders may be called as provided by Delaware
law.
Section 3. Notice of Meetings.
--------- ------------------
Written notice of the place, date, and time of all meetings of the
stockholders shall be given, not less than ten (10) nor more than sixty (60)
days before the date on which the meeting is to be held, to each stockholder
entitled to vote at such meeting, except as otherwise provided herein or
required by law (meaning, here and hereinafter, as required from time to time by
the Delaware General Corporation Law or the Certificate of Incorporation of the
Corporation).
When a meeting is adjourned to another place, date or time, written notice
need not be given of the adjourned meeting if the place, date and time thereof
are announced at the meeting at which the adjournment is taken; provided,
however, that if the date of any adjourned meeting is more than thirty (30) days
after the date for which the meeting was originally noticed, or if a new record
date is fixed for the adjourned meeting, written notice of the place, date, and
time of the adjourned meeting shall be given in conformity herewith. At any
adjourned meeting, any business may be transacted which might have been
transacted at the original meeting.
Section 4. Quorum.
--------- ------
At any meeting of the stockholders, the holders of a majority of all of the
shares of the stock entitled to vote at the meeting, present in person or by
proxy, shall constitute a quorum for all purposes, unless or except to the
extent that the presence of a larger number may be required by law. Where a
separate vote by a class or classes is required, a majority of the shares of
such class or classes present in person or represented by proxy shall constitute
a quorum entitled to take action with respect to that vote on that matter.
<PAGE>
If a quorum shall fail to attend any meeting, the chairman of the meeting or
the holders of a majority of the shares of stock entitled to vote who are
present, in person or by proxy, may adjourn the meeting to another place, date,
or time.
If a notice of any adjourned special meeting of stockholders is sent to all
stockholders entitled to vote thereat, stating that it will be held with those
present in person or by proxy constituting a quorum, then except as otherwise
required by law, those present in person or by proxy at such adjourned meeting
shall constitute a quorum, and all matters shall be determined by a majority of
the votes cast at such meeting.
Section 5. Conduct of Business.
--------- -------------------
(a) The Board of Directors may appoint the Chairman for any meeting
of stockholders; and if the Board shall not appoint the Chairman for any such
meeting, the Chief Executive Officer of the Corporation or his designee shall
act as Chairman for such meeting. The chairman of any meeting of stockholders
shall determine the order of business and the procedures at the meeting,
including such regulation of the manner of voting and the conduct of discussion
as seem to him or her in order. The date and time of the opening and closing of
the polls for each matter upon which the stockholders will vote at the meeting
shall be announced at the meeting. The Secretary of the meeting shall be the
secretary of the Corporation, or in his absence, the Secretary of the meeting
shall be such person as the Chairman of the meeting appoints.
(b) At any annual meeting of the stockholders, only such business
shall be conducted as shall have been brought before the meeting: (i) by or at
the direction of the Board of Directors or (ii) by any stockholder of the
Corporation who is entitled to vote with respect thereto and who complies with
the notice procedures set forth in this Section 6(b). For business to be
properly brought before an annual meeting by a stockholder, the business must
relate to a proper subject matter for stockholder action and the stockholder
must have given timely notice thereof in writing to the Secretary of the
Corporation. To be timely, a stockholder's notice must be delivered or mailed
to and received at the principal executive offices of the Corporation not less
than ninety (90) days prior to the date of the annual meeting; provided,
however, that in the event that less than one hundred (100) days' notice or
prior public disclosure of the date of the meeting is given or made to
stockholders, notice by the stockholder to be timely must be received not later
than the close of business on the 10th day following the day on which such
notice of the date of the annual meeting was mailed or such public disclosure
was made. A stockholder's notice to the Secretary shall set forth as to each
matter such stockholder proposes to bring before the annual meeting: (i) a
brief description of the business desired to be brought before the annual
meeting and the reasons for conducting such business at the annual meeting; (ii)
the name and address, as they appear on the Corporation's books, of the
stockholder proposing such business; (iii) the class and number of shares of the
Corporation's capital stock that are beneficially owned by such stockholder; and
(iv) any material interest of such stockholder in such business.
Notwithstanding anything in these Bylaws to the contrary, no business shall be
brought before or conducted at an annual meeting except in accordance with the
provisions of this Section 6(b). The Officer of the Corporation or other person
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presiding over the annual meeting shall, if the facts so warrant, determine and
declare to the meeting that business was not properly brought before the meeting
in accordance with the provisions of this Section 6(b) and, if he should so
determine, he shall so declare to the meeting and any such business so
determined to be not properly brought before the meeting shall not be
transacted.
(c) Only persons who are nominated in accordance with the procedures
set forth in these Bylaws shall be eligible for election as Directors.
Nominations of persons for election to the Board of Directors of the Corporation
may be made at a meeting of stockholders at which directors are to be elected
only: (i) by or at the direction of the Board of Directors; or (ii) by any
stockholder of the Corporation entitled to vote for the election of Directors at
the meeting who complies with the notice procedures set forth in this Section
6(c). Such nominations, other than those made by or at the direction of the
Board of Directors, shall be made by timely notice in writing to the Secretary
of the Corporation. To be timely, a stockholder's notice shall be delivered or
mailed to and received at the principal executive offices of the Corporation not
less than ninety (90) days prior to the date of the meeting; provided, however,
that in the event that less than one hundred (100) days' notice or prior
disclosure of the date of the meeting is given or made to stockholders, notice
by the stockholder to be timely must be so received not later than the close of
business on the 10th day following the day on which such notice of the date of
the meeting was mailed or such public disclosure was made. Such stockholder's
notice shall set forth: (i) as to each person whom such stockholder proposes to
nominate for election or re-election as a Director, all information relating to
such person that is required to be disclosed in solicitations of proxies for
election of directors, or is otherwise required, in each case pursuant to
Regulation 14A under the Securities Exchange Act of 1934, as amended (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 Corporation's books,
of such stockholder and (y) the class and number of shares of the Corporation's
capital stock that are beneficially owned by such stockholder. At the request
of the Board of Directors, any person nominated by the Board of Directors for
election as a Director shall furnish to the Secretary of the Corporation that
information required to be set forth in a stockholder's notice of nomination
which pertains to the nominee. No person shall be eligible for election as a
Director of the Corporation unless nominated in accordance with the provisions
of this Section 6(c). The Officer of the Corporation or other person presiding
at the meeting shall, if the facts so warrant, determine that a nomination was
not made in accordance with such provisions and, if he or she shall so
determine, he or she shall so declare to the meeting and the defective
nomination shall be disregarded.
Section 6. Proxies and Voting.
--------- ------------------
At any meeting of the stockholders, every stockholder entitled to vote may
vote in person or by proxy authorized by an instrument in writing filed in
accordance with the procedure established for the meeting. Any facsimile
telecommunication or other reliable reproduction of the writing or transmission
created pursuant to this paragraph may be substituted or used in lieu of the
original writing or transmission for any and all purposes for which the original
writing or transmission could
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be used, provided that such copy, facsimile telecommunication or other
reproduction shall be a complete reproduction of the entire original writing or
transmission.
All voting, including on the election of Directors but excepting where
otherwise required by law or by the governing documents of the Corporation, may
be made by a voice vote; provided, however, that upon demand therefor by a
stockholder entitled to vote or his or her proxy, a stock vote shall be taken.
Every stock vote shall be taken by ballot, each of which shall state the name of
the stockholder or proxy voting and such other information as may be required
under the procedures established for the meeting. The Corporation shall, in
advance of any meeting of stockholders, appoint one or more inspectors to act at
the meeting and make a written report thereof. The Corporation may designate one
or more persons as alternate inspectors to replace any inspector who fails to
act. If no inspector or alternate is able to act at a meeting of stockholders,
the person presiding at the meeting shall appoint one or more inspectors to act
at the meeting. Each inspector, before entering upon the discharge of his
duties, shall take and sign an oath faithfully to execute the duties of
inspector with strict impartiality and according to the best of his ability.
All elections shall be determined by a plurality of the votes cast, and
except as otherwise required by law or the Certificate of Incorporation, all
other matters shall be determined by a majority of the votes cast on the matter
at the meeting.
Section 7. Stock List.
--------- ----------
A complete list of stockholders entitled to vote at any meeting of
stockholders, arranged in alphabetical order for each class of stock and showing
the address of each such stockholder and the number of shares registered in his
or her name, shall be open to the examination of any such stockholder, for any
purpose germane to the meeting, during ordinary business hours for a period of
at least ten (10) days prior to the meeting, either at a place within the city
where the meeting is to be held, which place shall be specified in the notice of
the meeting, or if not so specified, at the place where the meeting is to be
held.
The stock list shall also be kept at the place of the meeting during the
whole time thereof and shall be open to the examination of any such stockholder
who is present. This list shall presumptively determine the identity of the
stockholders entitled to vote at the meeting and the number of shares held by
each of them.
Section 8. Consent of Stockholders in Lieu of Meeting.
--------- ------------------------------------------
Any action required or permitted to be taken by the stockholders of the
Corporation at an annual or special meeting of stockholders of the Corporation
may be taken without a meeting, without prior notice and without a vote, if a
consent or consents in writing, setting forth the action so taken, shall be
signed by the holders of outstanding stock having not less than the minimum
number of votes that would be necessary to authorize or take such action at a
meeting at which all shares entitled to vote thereon were present and voted and
shall be delivered to the Corporation by
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delivery to its registered office in Delaware, its principal place of business,
or an officer or agent of the Corporation having custody of the book in which
proceedings of meetings of shareholders are recorded. Delivery made to the
Corporation's registered office in Delaware shall be by hand or by certified or
registered mail, return receipt requested.
ARTICLE II - BOARD OF DIRECTORS
Section 1. General Powers, Number, Term of Office and Limitations.
--------- ------------------------------------------------------
The business and affairs of the Corporation shall be under the direction of
its Board of Directors. The number of Directors who shall constitute the Whole
Board shall be such number as the Board of Directors shall from time to time
have designated, except that in the absence of such designation shall be one.
The Board of Directors shall annually elect a Chairman of the Board from among
its members who shall, when present, preside at its meetings.
If there are more than two Directors, the Directors, other than those who
may be elected by the holders of any class or series of Preferred Stock, shall
be divided, with respect to the time for which they severally hold office, into
three classes, with the term of office of the first class to expire at the first
annual meeting of stockholders, the term of office of the second class to expire
at the annual meeting of stockholders one year thereafter and the term of office
of the third class to expire at the annual meeting of stockholders two years
thereafter, with each Director to hold office until his or her successor shall
have been duly elected and qualified. At each annual meeting of stockholders,
Directors elected to succeed those Directors whose terms then expire shall be
elected for a term of office to expire at the third succeeding annual meeting of
stockholders after their election, with each Director to hold office until his
or her successor shall have been duly elected and qualified.
Section 2. Vacancies and Newly Created Directorships.
--------- -----------------------------------------
Subject to the rights of the holders of any class or series of Preferred
Stock, and unless the Board of Directors otherwise determines, newly created
directorships resulting from any increase in the authorized number of directors
or any vacancies in the Board of Directors resulting from death, resignation,
retirement, disqualification, removal from office or other cause may be filled
only by a majority vote of the Directors then in office, though less than a
quorum, and Directors so chosen shall hold office for a term expiring at the
annual meeting of stockholders at which the term of office of the class to which
they have been elected expires and until such Director's successor shall have
been duly elected and qualified. No decrease in the number of authorized
directors constituting the Board shall shorten the term of any incumbent
Director.
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Section 3. Regular Meetings.
--------- ----------------
Regular meetings of the Board of Directors shall be held at such place or
places, on such date or dates, and at such time or times as shall have been
established by the Board of Directors and publicized among all Directors. A
notice of each regular meeting shall not be required.
Section 4. Special Meetings.
--------- ----------------
Special meetings of the Board of Directors may be called by one-third (1/3)
of the Directors then in office (rounded up to the nearest whole number), by the
Chairman of the Board or the Chief Executive Officer or, in the event that the
Chairman of the Board or President are incapacitated or otherwise unable to call
such meeting, by the Secretary, and shall be held at such place, on such date,
and at such time as they, or he or she, shall fix. Notice of the place, date,
and time of each such special meeting shall be given each Director by whom it is
not waived by mailing written notice not less than five (5) days before the
meeting or by telegraphing or telexing or by facsimile transmission of the same
not less than twenty-four (24) hours before the meeting. Unless otherwise
indicated in the notice thereof, any and all business may be transacted at a
special meeting.
Section 5. Quorum.
--------- ------
At any meeting of the Board of Directors, a majority of the Whole Board
shall constitute a quorum for all purposes. If a quorum shall fail to attend
any meeting, a majority of those present may adjourn the meeting to another
place, date, or time, without further notice or waiver thereof.
Section 6. Participation in Meetings By Conference Telephone.
--------- -------------------------------------------------
Members of the Board of Directors, or of any committee thereof, may
participate in a meeting of such Board or committee by means of conference
telephone or similar communications equipment by means of which all persons
participating in the meeting can hear each other and such participation shall
constitute presence in person at such meeting.
Section 7. Conduct of Business.
--------- -------------------
At any meeting of the Board of Directors, business shall be transacted in
such order and manner as the Board may from time to time determine, and all
matters shall be determined by the vote of a majority of the Directors present,
except as otherwise provided herein or required by law. Action may be taken by
the Board of Directors without a meeting if all members thereof consent thereto
in writing, and the writing or writings are filed with the minutes of
proceedings of the Board of Directors.
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Section 8. Powers.
--------- ------
The Board of Directors may, except as otherwise required by law, exercise
all such powers and do all such acts and things as may be exercised or done by
the Corporation, including, without limiting the generality of the foregoing,
the unqualified power:
(1) To declare dividends from time to time in accordance with law;
(2) To purchase or otherwise acquire any property, rights or
privileges on such terms as it shall determine;
(3) To authorize the creation, making and issuance, in such form as
it may determine, of written obligations of every kind, negotiable or non-
negotiable, secured or unsecured, and to do all things necessary in
connection therewith;
(4) To remove any Officer of the Corporation with or without cause,
and from time to time to devolve the powers and duties of any Officer upon
any other person for the time being;
(5) To confer upon any Officer of the Corporation the power to
appoint, remove and suspend subordinate Officers, employees and agents;
(6) To adopt from time to time such stock, option, stock purchase,
bonus or other compensation plans for Directors, Officers, employees and
agents of the Corporation and its subsidiaries as it may determine;
(7) To adopt from time to time such insurance, retirement, and other
benefit plans for Directors, Officers, employees and agents of the
Corporation and its subsidiaries as it may determine; and
(8) To adopt from time to time regulations, not inconsistent with
these Bylaws, for the management of the Corporation's business and affairs.
Section 9. Compensation of Directors.
--------- -------------------------
Directors, as such, may receive, pursuant to resolution of the Board of
Directors, fixed fees and other compensation for their services as Directors,
including, without limitation, their services as members of committees of the
Board of Directors.
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ARTICLE III - COMMITTEES
Section 1. Committees of the Board of Directors.
--------- ------------------------------------
The Board of Directors, by a vote of a majority of the Board of Directors,
may from time to time designate committees of the Board, with such lawfully
delegable powers and duties as it thereby confers, to serve at the pleasure of
the Board and shall, for these committees and any others provided for herein,
elect a Director or Directors to serve as the member or members, designating, if
it desires, other Directors as alternate members who may replace any absent or
disqualified member at any meeting of the committee. Any committee so
designated, however, may not exercise the power and authority of the Board of
Directors to declare a dividend or to authorize the issuance of stock unless the
resolution which designates the committee or a supplemental resolution of the
Board of Directors shall specifically grant such authorization to the committee.
In the absence or disqualification of any member of any committee and any
alternate member in his or her place, the member or members of the committee
present at the meeting and not disqualified from voting, whether or not he or
she or they constitute a quorum, may by unanimous vote appoint another member of
the Board of Directors to act at the meeting in the place of the absent or
disqualified member.
Section 2. Conduct of Business.
--------- -------------------
Each committee may determine the procedural rules for meeting and
conducting its business and shall act in accordance therewith, except as
otherwise provided herein or required by law. Adequate provision shall be made
for notice to members of all meetings. The quorum requirements for each such
committee shall be a majority of the members of such committee unless otherwise
determined by the Board of Directors by a majority vote of the Board of
Directors which such quorum determined by a majority of the Board may be one-
third of such members and all matters considered by such committees shall be
determined by a majority vote of the members present. Action may be taken by any
committee without a meeting if all members thereof consent thereto in writing,
and the writing or writings are filed with the minutes of the proceedings of
such committee.
ARTICLE IV - OFFICERS
Section 1. Generally.
--------- ---------
(a) The Board of Directors as soon as may be practicable after the
annual meeting of stockholders shall choose a Chairman of the Board. The
Chairman of the Board shall be chosen from among the Directors.
(b) The Board shall appoint the Chief Executive Officer. The Board
or Chief Executive Officer shall appoint a Secretary and Treasurer and from time
to time may choose such other officers as it or he deems proper. The Board or
Chief Executive Officer may remove Officers. Any number of offices may be held
by the same person.
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(c) All Officers of the Corporation shall have such powers and
duties as generally pertain to their respective Offices, subject to the specific
provisions of this ARTICLE IV. Such officers shall also have such powers and
duties as from time to time may be conferred by the Chief Executive Officer or
the Board of Directors or by any committee thereof.
Section 2. Chairman of the Board of Directors.
--------- ----------------------------------
The Chairman of the Board shall, subject to the provisions of these Bylaws
and to the direction of the Board of Directors, serve in a general executive
capacity and unless the Board has designated another person, when present, shall
preside at all meetings of the stockholders of the Corporation. The Chairman of
the Board shall perform all duties and have all powers which are commonly
incident to the office of Chairman of the Board or which are delegated to him or
her by the Board of Directors. He or she shall have power to sign all stock
certificates, contracts and other instruments of the Corporation which are
authorized.
Section 3. Chief Executive Officer and President.
--------- -------------------------------------
The Chief Executive Officer ("CEO") shall have general responsibility for
the management and control of the business and affairs of the Corporation and
shall perform all duties and have all powers which are commonly incident to the
offices of CEO or which are delegated to him or her by the Board of Directors.
Subject to the direction of the Board of Directors, CEO shall have power to sign
all stock certificates, contracts and other instruments of the Corporation which
are authorized and shall have general supervision of all of the other Officers
(other than the Chairman of the Board), employees and agents of the Corporation.
The CEO may also be designated as President or a separate office of
President may be created having the power and responsibilities designated to
such office by the Board of Directors.
Section 4. Vice President.
---------- --------------
The Vice President or Vice Presidents shall perform the duties of CEO in his
absence or during his inability to act. In addition, the Vice Presidents shall
perform the duties and exercise the powers usually incident to their respective
offices and/or such other duties and powers as may be properly assigned to them
by the Board of Directors, the Chairman of the Board or CEO. A Vice President
or Vice Presidents may be designated as Executive Vice President or Senior Vice
President.
Section 5. Secretary.
--------- ---------
The Secretary or Assistant Secretary shall issue notices of meetings, shall
keep their minutes, shall have charge of the seal and the corporate books, shall
perform such other duties and exercise such other powers as are usually incident
to such office and/or such other duties and powers as are properly assigned
thereto by the Board of Directors, the Chairman of the Board or CEO. Subject to
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the direction of the Board of Directors, the Secretary shall have the power to
sign all stock certificates.
Section 6. Treasurer.
--------- ---------
The Treasurer shall be the Comptroller of the Corporation and shall have the
responsibility for maintaining the financial records of the Corporation. He or
she shall make such disbursements of the funds of the Corporation as are
authorized and shall render from time to time an account of all such
transactions and of the financial condition of the Corporation. The Treasurer
shall also perform such other duties as the Board of Directors may from time to
time prescribe. Subject to the direction of the Board of Directors, the
Treasurer shall have the power to sign all stock certificates.
Section 7. Assistant Secretaries and Other Officers.
--------- ----------------------------------------
The Board of Directors may appoint one or more Assistant Secretaries and
such other Officers who shall have such powers and shall perform such duties as
are provided in these Bylaws or as may be assigned to them by the Board of
Directors, the Chairman of the Board or CEO.
Section 8. Action with Respect to Securities of Other Corporations.
--------- -------------------------------------------------------
Unless otherwise directed by the Board of Directors, CEO or any Officer of
the Corporation authorized by CEO shall have power to vote and otherwise act on
behalf of the Corporation, in person or by proxy, at any meeting of stockholders
of or with respect to any action of stockholders of any other corporation in
which this Corporation may hold securities and otherwise to exercise any and all
rights and powers which this Corporation may possess by reason of its ownership
of securities in such other corporation.
ARTICLE V - STOCK
Section 1. Certificates of Stock.
--------- ---------------------
Each stockholder shall be entitled to a certificate signed by, or in the
name of the Corporation by, the Chairman of the Board or CEO, and by the
Secretary or an Assistant Secretary, or the Treasurer or an Assistant Treasurer,
certifying the number of shares owned by him or her. Any or all of the
signatures on the certificate may be by facsimile.
Section 2. Transfers of Stock.
--------- ------------------
Transfers of stock shall be made only upon the transfer books of the
Corporation kept at an office of the Corporation or by transfer agents
designated to transfer shares of the stock of the Corporation. Except where a
certificate is issued in accordance with Section 4 of Article V of these Bylaws,
an outstanding certificate for the number of shares involved shall be
surrendered for cancellation before a new certificate is issued therefor.
10
<PAGE>
Section 3. Record Date.
--------- -----------
In order that the Corporation may determine the stockholders entitled to
notice of or to vote at any meeting of stockholders, or to receive payment of
any dividend or other distribution or allotment of any rights or to exercise any
rights in respect of any change, conversion or exchange of stock or for the
purpose of any other lawful action, the Board of Directors may fix a record
date, which record date shall not precede the date on which the resolution
fixing the record date is adopted and which record date shall not be more than
sixty (60) nor less than ten (10) days before the date of any meeting of
stockholders, nor more than sixty (60) days prior to the time for such other
action as hereinbefore described; provided, however, that if no record date is
fixed by the Board of Directors, the record date for determining stockholders
entitled to notice of or to vote at a meeting of stockholders shall be at the
close of business on the day next preceding the day on which notice is given or,
if notice is waived, at the close of business on the next day preceding the day
on which the meeting is held, and, for determining stockholders entitled to
receive payment of any dividend or other distribution or allotment or rights or
to exercise any rights of change, conversion or exchange of stock or for any
other purpose, the record date shall be at the close of business on the day on
which the Board of Directors adopts a resolution relating thereto.
A determination of stockholders of record entitled to notice of or to vote
at a meeting of stockholders shall apply to any adjournment of the meeting;
provided, however, that the Board of Directors may fix a new record date for the
adjourned meeting.
Section 4. Lost, Stolen or Destroyed Certificates.
--------- --------------------------------------
In the event of the loss, theft or destruction of any certificate of stock,
another may be issued in its place pursuant to such regulations as the Board of
Directors may establish concerning proof of such loss, theft or destruction and
concerning the giving of a satisfactory bond or bonds of indemnity.
Section 5. Regulations.
--------- -----------
The issue, transfer, conversion and registration of certificates of stock
shall be governed by such other regulations as the Board of Directors may
establish.
ARTICLE VI - NOTICES
Section 1. Notices.
--------- -------
Except as otherwise specifically provided herein or required by law, all
notices required to be given to any stockholder, Director, Officer, employee or
agent shall be in writing and may in every instance be effectively given by hand
delivery to the recipient thereof, by depositing such notice in the mails,
postage paid, or by sending such notice by prepaid telegram or mailgram or other
courier.
11
<PAGE>
Any such notice shall be addressed to such stockholder, Director, Officer,
employee or agent at his or her last known address as the same appears on the
books of the Corporation. The time when such notice is received, if hand
delivered, or dispatched, if delivered through the mails or by telegram or
mailgram or other courier, shall be the time of the giving of the notice.
Section 2. Waivers.
--------- -------
A written waiver of any notice, signed by a stockholder, Director, Officer,
employee or agent, whether before or after the time of the event for which
notice is to be given, shall be deemed equivalent to the notice required to be
given to such stockholder, Director, Officer, employee or agent. Neither the
business nor the purpose of any meeting need be specified in such a waiver.
ARTICLE VII - MISCELLANEOUS
Section 1. Facsimile Signatures.
--------- --------------------
In addition to the provisions for use of facsimile signatures elsewhere
specifically authorized in these Bylaws, facsimile signatures of any officer or
officers of the Corporation may be used whenever and as authorized by the Board
of Directors or a committee thereof.
Section 2. Corporate Seal.
--------- --------------
The Board of Directors may provide a suitable seal, containing the name of
the Corporation, which seal shall be in the charge of the Secretary. If and
when so directed by the Board of Directors or a committee thereof, duplicates of
the seal may be kept and used by the Treasurer or by an Assistant Secretary or
an assistant to the Treasurer.
Section 3. Reliance Upon Books, Reports and Records.
--------- ----------------------------------------
Each Director, each member of any committee designated by the Board of
Directors, and each Officer of the Corporation shall, in the performance of his
or her duties, be fully protected in relying in good faith upon the books of
account or other records of the Corporation and upon such information, opinions,
reports or statements presented to the Corporation by any of its Officers or
employees, or committees of the Board of Directors so designated, or by any
other person as to matters which such Director or committee member reasonably
believes are within such other person's professional or expert competence and
who has been selected with reasonable care by or on behalf of the Corporation.
Section 4. Fiscal Year.
--------- -----------
The fiscal year of the Corporation shall be as fixed by the Board of
Directors and initially shall be a calendar year.
12
<PAGE>
Section 5. Time Periods.
--------- ------------
In applying any provision of these Bylaws which requires that an act be done
or not be done a specified number of days prior to an event or that an act be
done during a period of a specified number of days prior to an event, calendar
days shall be used, the day of the doing of the act shall be excluded, and the
day of the event shall be included.
ARTICLE VIII - AMENDMENTS
The Board of Directors may amend, alter or repeal these Bylaws at any
meeting of the Board, provided notice of the proposed change was given not less
than two (2) days prior to the meeting. The stockholders shall also have power
to amend, alter or repeal these Bylaws at any meeting of stockholders provided
notice of the proposed change was given in the notice of the meeting; provided,
however, that, notwithstanding any other provisions of the Bylaws or any
provision of law which might otherwise permit a lesser vote or no vote, but in
addition to any affirmative vote of the holders of any particular class or
series of the voting stock required by law, the Certificate of Incorporation,
any Preferred Stock Designation or these Bylaws, the affirmative votes of the
holders of at least 66 2/3% of the voting power of all the then-outstanding
shares of the Voting Stock, voting together as a single class, shall be required
for the stockholders to alter, amend or repeal any provisions of these Bylaws.
The above Bylaws are effective as of July 9, 1999, the date of incorporation of
HealthExtras, Inc.
13
<PAGE>
EXHIBIT 4.1
-----------
[CERTIFICATE OF STOCK ART APPEARS HERE]
[LOGO OF HEALTHEXTRAS, INC. APPEARS HERE]
COMMON STOCK
INCORPORATED UNDER THE LAWS OF THE STATE OF DELAWARE
SEE REVERSE FOR CERTAIN DEFINITIONS
CUSIP ________________
THIS CERTIFIES THAT
is the registered holder of _____________________ shares of the common stock of
the above named corporation, fully paid and non-assessable, transferrable only
on the books of the Corporation by the holder hereof in person or by attorney
upon surrender of this certificate properly endorsed.
IN WITNESS WHEREOF, the said Corporation has caused this Certificate to be
signed by its duly authorized officers and its Corporate Seal to be hereunto
affixed
this ___________ day of _________________ A.D. 19____
/s/ Michael P. Donovan [CORPORATE SEAL OF /s/ David T. Blair
CHIEF FINANCIAL OFFICER HEALTHEXTRAS, INC. PRESIDENT
APPEARS HERE]
The following abbreviations, when used in the inscription on the face of
this certificate, shall
<PAGE>
be construed as though they were written out in full according to applicable
laws or regulations:
TEN COM - as tenants in common UNIF GIFT MIN ACT - ______ Custodian______
(Cust) (Minor)
TEN ENT - as tenants by the entireties under Uniform Gifts to Minors
JT TEN - as joint tenants with right Act ____________________
of survivorship and not as (State)
tenants in common
Additional abbreviations may also be used though not in the above list.
For value received, hereby sell, assign and transfer unto
Shares represented by the within Certificate, and do hereby irrevocably
constitute and appoint
Attorney to transfer the said Shares on the books of the within named
Corporation with full power of substitution in the premises.
DATED ______________________, 19________
In presence of ___________________________________________________________
_____________________________________________________________________________
NOTICE: THE SIGNATURE OF THIS
ASSIGNMENT MUST CORRESPOND WITH THE
NAME AS WRITTEN UPON THE FACE OF THE
CERTIFICATE IN EVERY PARTICULAR,
WITHOUT ALTERATION OR ENLARGEMENT OF
ANY CHANGE WHATEVER.
<PAGE>
EXHIBIT 10.1
EMPLOYMENT AGREEMENT
--------------------
THIS AGREEMENT is entered into on the _____th day of August 1999 by and
between HEALTHEXTRAS, INC. ("HE" or the "Company") and DAVID T. BLAIR
("Employee") residing at 13238 Maplecrest Drive, Potomac, Maryland 20854. This
Agreement shall become effective on August ___, 1999 ("Effective Date").
WHEREAS, HE desires to employ Employee to devote full-time to the business
of HE, and Employee desires to be so employed.
NOW, THEREFORE, in consideration of the mutual covenants and promises of
the parties hereto, HE and Employee agree as follows:
1. Employment. HE agrees to employ Employee and Employee agrees to be so
----------
employed in the capacity of Chief Executive Officer. The term of this Agreement
shall be a three-year period subsequent to the Effective Date. The Agreement
shall be automatically renewed for an additional two (2) year period if the
Company does not give Employee a notice of non-renewal six (6) 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 Chief Executive Officer of HE. Employee shall at all
times discharge his duties, which shall be those normally performed by a Chief
Executive Officer, in the best interests of HE. In the performance of his
duties, Employee shall make his principal office at 2275 Research Boulevard,
Seventh Floor, Rockville, Maryland 20850, or other office location within the
Washington, DC metropolitan area that may be next occupied by HE, unless
otherwise mutually agreed upon in writing by HE and Employee.
3. Compensation. During the term of this Agreement, HE shall pay to
------------
Employee as compensation ("Compensation") for his services a base salary in the
amount of one hundred sixty-five thousand dollars ($165,000) per year and a
bonus equal to one percent (1%) of HE's annual after-tax profits. The salary is
guaranteed by HE through the term of this Agreement and is subject to periodic
increases as recommended by the Board of Directors of HE.
4. Expenses Reimbursement. HE shall reimburse Employee for all
----------------------
reasonable and necessary expenses incurred by him in carrying out his duties
under this Agreement. Employee shall present to HE from time to time an
itemized account of such expenses in forms as may be required by HE 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, HE 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 HE, 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 HE and its subsidiaries. Additionally, HE shall seek to
obtain a term life insurance policy on Employee, in an amount established and
agreed to by the Compensation Committee of the Board of Directors of HE, to be
paid to a beneficiary named by Employee.
7. Obligation of HE on Termination of Employment by HE. Except for cause
---------------------------------------------------
or voluntary resignation, if during the term of this Agreement, HE shall
terminate the services of Employee, or if during the term of this Agreement,
Employee is permanently disabled or deceased, HE shall nevertheless cause HE 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 HE and Employee on Termination of Employee by HE 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 HE
shall have no obligation to pay Employee any form of compensation defined in
this Agreement apart from compensation and benefits as have accrued from the
date of the Employee's termination or resignation, as the case may be. In the
event Employee resigns or is terminated for cause, for a period of two (2) years
subsequent to the date of such resignation, Employee shall not solicit or
contract with, either directly or through third parties, entities contracting
with HE, including HE bank clients. For a period of two (2) years from the date
Employee resigns, Employee shall not compete directly or indirectly with HE's
business nor shall the Employee assist, in any manner, any individual or entity
that may be, or seek to become, a competitor of HE.
9. 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 HE: Board of Directors
HealthExtras, Inc.
2275 Research Boulevard, 6th Floor
Rockville, Maryland 20850
If to Employee: David T. Blair
13238 Maplecrest Drive
Potomac, Maryland 20854
10. Governing Law. This Agreement shall be construed and enforced in
-------------
accordance with the laws of the State of Maryland.
2
<PAGE>
11. Entire Contract. This Agreement constitutes the entire understanding
---------------
and agreement between HE 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.
IN WITNESS WHEREOF, the undersigned have executed this Agreement.
EMPLOYEE
Date: August ___, 1999 By: _____________________________________________
David T. Blair
HEALTHEXTRAS, INC.
Date: August ___, 1999 By: _____________________________________________
3
<PAGE>
EXHIBIT 10.2
EMPLOYMENT AGREEMENT
--------------------
THIS AGREEMENT is entered into on the _____th day of August 1999 by and
between HEALTHEXTRAS, INC. ("HE" or the "Company") and MICHAEL P. DONOVAN
("Employee") residing at 3089 Savoy Drive, Fairfax, Virginia 22031. This
Agreement shall become effective on _______ __, 1999 ("Effective Date").
WHEREAS, HE desires to employ Employee to devote full-time to the business
of HE, and Employee desires to be so employed.
NOW, THEREFORE, in consideration of the mutual covenants and promises of
the parties hereto, HE and Employee agree as follows:
1. Employment. HE agrees to employ Employee and Employee agrees to be so
----------
employed in the capacity of Chief Financial Officer. The term of this Agreement
shall be a three-year period subsequent to the Effective Date. The Agreement
shall be automatically renewed for an additional two (2) year period if the
Company does not give Employee a notice of non-renewal six (6) 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 Chief Financial Officer of HE. Employee shall at all
times discharge his duties, which shall be those normally performed by a Chief
Financial Officer, in the best interests of HE. In the performance of his
duties, Employee shall make his principal office at 2275 Research Boulevard,
Seventh Floor, Rockville, Maryland 20850, or other office location within the
Washington, DC metropolitan area that may be next occupied by HE, unless
otherwise mutually agreed upon in writing by HE and Employee.
3. Compensation. During the term of this Agreement, HE shall pay to
------------
Employee as compensation ("Compensation") for his services a base salary in the
amount of two hundred ten thousand dollars ($210,000) per year. The salary is
guaranteed by HE through the term of this Agreement and is subject to periodic
increases as approved by the Board of Directors or the Chief Executive Officer
of HE.
4. Expenses Reimbursement. HE shall reimburse Employee for all
----------------------
reasonable and necessary expenses incurred by him in carrying out his duties
under this Agreement. Employee shall present to HE from time to time an
itemized account of such expenses in forms as may be required by HE 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, HE 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 HE, 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 HE and its subsidiaries. Additionally, HE shall seek to
obtain a term life insurance policy on Employee, in an amount established and
agreed to by the Compensation Committee of the Board of Directors of HE, to be
paid to a beneficiary named by Employee.
7. Obligation of HE on Termination of Employment by HE. Except for cause
---------------------------------------------------
or voluntary resignation, if during the term of this Agreement, HE shall
terminate the services of Employee, or if during the term of this Agreement
Employee is permanently disabled or deceased, HE shall nevertheless cause HE 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 HE and Employee on Termination of Employee by HE 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 HE
shall have no obligation to pay Employee any form of compensation defined in
this Agreement apart from compensation and benefits as have accrued from the
date of the Employee's termination or resignation as the case may be. In the
event Employee resigns or is terminated for cause, for a period of two (2) years
subsequent to the date of such resignation, Employee shall not solicit or
contract with, either directly or through third parties, entities contracting
with HE, including HE bank clients. For a period of two (2) years from the date
Employee resigns, Employee shall not compete directly or indirectly with HE's
business nor shall the Employee assist, in any manner, any individual or entity
that may be, or seek to become, a competitor of HE.
9. 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 HE: Board of Directors
HealthExtras, Inc.
2275 Research Boulevard, 6th Floor
Rockville, Maryland 20850
If to Employee: Michael P. Donovan
3089 Savoy Drive
Fairfax, Virginia 22031
10. Governing Law. This Agreement shall be construed and enforced in
-------------
accordance with the laws of the State of Maryland.
2
<PAGE>
11. Entire Contract. This Agreement constitutes the entire understanding
---------------
and agreement between HE 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.
IN WITNESS WHEREOF, the undersigned have executed this Agreement.
EMPLOYEE
Date: August ___, 1999 By: __________________________________________
Michael P. Donovan
HEALTHEXTRAS, INC.
Date: August ___, 1999 By: __________________________________________
3
<PAGE>
EXHIBIT 10.3
PROGRAM ADMINISTRATOR'S AGREEMENT
AGREEMENT between HealthExtras, LLC at 2275 Research Boulevard, Rockville,
Maryland ("Administrator"), and Reliance National Insurance Company ("Reliance
National"), a division of Reliance Insurance Company, on behalf of the following
insurance companies:
Reliance Insurance Company
Reliance National Insurance Company
with offices located at:
77 Water Street
New York City, New York
(all referred to as Reliance National)
Whereas, Administrator has developed a unique program of insurance benefits and
medical benefits ("Program") and such Program may be marketed to [
]* ("Target Market");
Whereas, Administrator has an exclusive contract with Christopher Reeve, via the
William Morris Agency to represent Administrator in the promotion and marketing
of Program;
Whereas, the Parties contemplate a [ ]*
based upon the Benefits available; and
Whereas, Reliance National desires to underwrite the insurance benefits
("Benefits") of the Program, file the underlying Benefit insurance policies in
all fifty (50) United States, use best efforts to obtain state approvals, and
provide marketing and sales expertise.
Administrator and Reliance National agree as follows:
ARTICLE I. Term of Agreement
This Agreement begins on March 1, 1998 and shall continue until February
28, 2002 unless terminated under the provisions of Article XI.
*Removed pursuant to a confidentiality request.
1
<PAGE>
ARTICLE II. Appointment of Administrator; Lines of Authority
Reliance National appoints Administrator for Reliance National for the
Program as follows:
A. Lines of Authority Administrator's appointment and authority extends
------------------
to the classes of business, policies of insurance, including all
endorsements, (the "Policies"); and lines and limits of insurance described
in Exhibit A attached to this Agreement (the "Business").
B. Territory Administrator's appointment and authority extends to risks
---------
principally located in the following territory:
The United States and its territories.
C. Restrictions Administrator's appointment and authority is subject to
------------
any restrictions set forth in Exhibit A.
D. Reinsurance Availability Administrator's appointment and authority
------------------------
for Business written under this Agreement is subject to the following:
1. Reliance National is able to obtain and maintain in force at all
times reinsurance satisfactory to Reliance National for the Business.
2. Obtaining reinsurance is the sole responsibility of Reliance
National. Reliance National will notify Administrator that it has
obtained satisfactory reinsurance for all or some of the Business.
Reliance National will give Administrator notice that Administrator
may offer those classes of business, policies, and lines and limits of
insurance for which reinsurance has been obtained in the national
roll-out of the Program.
3. If reinsurance is terminated or no longer in full force and
effect for all or any part of the Business, Administrator's authority
for the Business affected shall be suspended, or limited immediately
upon notice to Administrator from Reliance National, until further
notice.
5. Right of First Refusal for New Products Administrator shall give
---------------------------------------
Reliance National the right to accept any and all Business. Administrator
shall give Reliance National the first right of refusal to develop
additional insurance programs. Reliance National agrees to respond in
writing within [ ]* as to the acceptability to Reliance National of
any such insurance programs presented in writing to Reliance National.
F. Program Manager Reliance National and Administrator designate the
---------------
Sklover Group, Inc. as the Program Manager for all Business written under
this Agreement. Reliance National and Administrator may mutually agree to
replace the Sklover
2
<PAGE>
Group as Program Manager at any time by giving notice to the Sklover Group.
ARTICLE III. Administrator's Duties and Responsibilities
Administrator will faithfully perform all of its duties to the best of its
professional knowledge, skill and judgement. The Administrator's duties include
the following:
[ ]*
[ ]*
[ ]*.
Article IV. Insurance Policy Filings and Reliance National's Duties and
Responsibilities
Reliance National shall file the underlying Benefit insurance policies in
all fifty (50) United States and Reliance National shall use best efforts to
obtain Benefit approval from state insurance departments. In using their best
efforts, [
]*.
ARTICLE V. Claims Settlement
Administrator has no authority to adjust, compromise, settle or pay any
claim made on the Policies written or bound under this Agreement. Administrator
shall:
[ ]*
[ ]*
[ ]*.
ARTICLE VI. Advertising
Administrator will not refer to Reliance National or the Business covered
by this Agreement in any advertisement, letter, circular, pamphlet or other
publication or statement without the prior consent of Reliance National.
[ ]*
Article VII. Representation With Respect to Policies
Administrator will not make nor allow any other person to make any
representation to applicants, insureds, policyholders or claimants as to the
existence or extent of coverage either available from Reliance National or under
a Policy that is not consistent with the terms and conditions of coverages
available from Reliance National or of a Policy. Administrator shall establish
procedures to ensure that Administrator and Administrator's employees will make
known to any applicant, insured or policyholder the full scope and effect of all
exclusions and
3
<PAGE>
limitations upon or under coverage provided under the Policy.
ARTICLE VIII. Insurance of Administrator
Administrator shall require the Program Manager, call center and claims
administrator to each maintain for as long as this Agreement remains in force
and on forms with insurers and on forms acceptable to Reliance National:
[ ]*
[ ]*
[ ]*.
Reliance National may require certificates of insurance or other evidence
that the insurance required by this Article is and remains in force.
ARTICLE IX. Indemnification
A. Administrator shall be responsible to Reliance National and shall
indemnify, save, defend and hold Reliance National, including its
affiliates, and all officers, directors and employees harmless against any
and all claims, suits, hearings, actions, damages of any kind, liability,
fines, penalties, loss or expense, including attorney's fees caused by or
resulting from any allegation of any direct misconduct, error, omission or
other act; or breach of this Agreement by Administrator, or Administrator's
employees, or representatives, unless the conduct giving rise to the
allegation was performed at the specific direction of Reliance National and
provided Reliance National has not contributed to or compounded the act
alleged.
B. Reliance National shall be responsible to Administrator and shall
indemnify, save, defend and hold Administrator harmless against any and all
claims, suits, hearings, actions, damages of any kind, liability, fines,
penalties, loss or expense, including attorney's fees caused by or
resulting from any allegation of an direct misconduct, error, omission, or
other act by Reliance National, provided Administrator has not contributed
to or compounded the act alleged.
ARTICLE X. Suspension of Administrator's Authority
Reliance National may, by immediate notice to Administrator, suspend any
part or all of Administrator's authority under this Agreement for such time as
Reliance National may deem necessary to protect its interests or reputation if
any of the following occur:
4
<PAGE>
A. Loss of Reinsurance In accordance with Article II.D.3; or
-------------------
B. Administrative Action An administrative accusation of violation of
---------------------
insurance law or regulation against Administrator or any of Administrator's
executive officers by an insurance regulatory agency; or
C. Grounds for Immediate Termination For any reason that would permit
---------------------------------
termination of Administrator under this Agreement under Article XI.A.1; or
D. Default The failure of Administrator to perform its duties and
-------
responsibilities under this Agreement including
[ ]*
[ ]*.
E. Termination by Administrator If the Administrator gives notice of
----------------------------
termination under Article XI; or
F. Dispute Over Termination In the event of a dispute over the reason for
------------------------
termination of the Agreement.
ARTICLE XI. Termination of Agreement
A. Reliance National may terminate this Agreement as follows:
1. Immediately upon notice to Administrator in the event of:
a. Suspension or Revocation An order of suspension or
------------------------
revocation of Administrator's authority to do business; or
b. Misapplication of Funds A misapplication, misdirection or
-----------------------
misappropriation by Administrator of funds or property of
Reliance National or funds received for it or Program Members by
Administrator, or in the event of failure by Administrator to
remit to Reliance National or the Program Members, funds due
promptly after written demand therefore by Reliance National; or
c. Violation of Law A charge brought against Administrator or
----------------
any of Administrator's executive officers of violation of the
insurance laws or regulations of any jurisdiction, or of any law
constituting a felony in the jurisdiction in which committed, or
of any law whose violation reflects adversely upon the honesty or
integrity of Administrator or any of Administrator's executive
officers whether or not classified as a felony; or
5
<PAGE>
d. Insolvency The Administrator shall become insolvent or
----------
make a general assignment for the benefit of creditors; if a
petition is filed for bankruptcy or other law providing for its
reorganization, dissolution or liquidation; or a trustee or
receiver is appointed for the Administrator, its assets or a
substantial part thereof.
2. Upon Thirty (30) days notice to Administrator in the event of:
[ ]*
[ ]*.
b. Adverse Legislation Enactment of legislation which in
-------------------
the opinion of Reliance National would adversely affect
Reliance National's rights under this Agreement or
liabilities under the Policies; or
c. Conflict with Law As provided for in Article XV.B;or
-----------------
d. Default The failure of Administrator to perform its
-------
duties and responsibilities under this Agreement including
[ ]*
[ ]*.
3. Upon 365 days notice to Administrator for any reason after such
reason(s)have been communicated to Administrator in writing and a
reasonable period allowed to cure any deficiencies enumerated in such
written communication. Cure shall be subject to the approval of
Reliance National, which shall not be unreasonably withheld. Such
reasons shall not be arbitrary or frivolous.
2. Administrator may terminate this Agreement as follows:
1. Upon 365 days notice to Reliance National for any reason after
such reason(s) have been communicated to Reliance National in
writing and a reasonable period allowed to cure any deficiencies
enumerated in such written communication. Cure shall be subject
to the approval of Administrator, which shall not be unreasonably
withheld. Such reasons shall not be arbitrary or frivolous; or
2. Upon 30 days notice to Reliance National in the event Reliance
National suspends any or all of Administrator's
6
<PAGE>
authority in accordance with Article X.
3. In the event Administrator terminates this Agreement [
]*.
ARTICLE XII. Continuing Duties of Administrator after Termination
[ ]*
[ ]*
[ ]*.
ARTICLE XIII. Offset
All amounts due Administrator or Reliance National under this or any other
agreement between the parties shall be subject to the right of offset.
ARTICLE XIV Arbitration
A. Submission to Arbitration As a condition precedent to any right of
-------------------------
action hereunder, any dispute arising out of this Agreement, including its
formation of validity, during or after termination of this Agreement, shall
be submitted to the decision of a board of arbitration composed of two
arbitrators and an umpire meeting in New York unless otherwise mutually
agreed.
B. Notice The notice requesting arbitration shall state in particulars all
------
principal issues to be resolved and shall set a date for the hearing, which
date shall be no sooner than 120 days and no later that 150 days from the
date that the notice requesting arbitration is mailed. The other party may
submit additional issues for resolution by giving notice to the party
requesting arbitration within 10 days of receipt of the notice of
arbitration.
C. Arbitration Board Membership The members of the board of arbitration
----------------------------
shall be disinterested, impartial, active or retired officials within the
insurance industry, with insurance experience. Each party shall appoint
its own arbitrator and the two arbitrators shall choose a third arbitrator
as umpire before the date set for the hearing. If a party fails to appoint
its arbitrator within 30 days after having either received or given the
notice requesting arbitration, the other shall appoint the second
arbitrator. If the two arbitrators fail to appoint the umpire within 30
days after their appointments, either party may apply to the United States
District Court for the Southern District of New York to appoint an umpire
possessing the qualifications set forth above. The umpire shall promptly
notify all parties to the
7
<PAGE>
arbitration of his selection.
D. Submission of Briefs The parties shall submit their initial briefs
--------------------
within 20 days from appointment of the umpire. Each may submit reply
briefs within 10 days after filing the initial briefs.
E. Arbitration Award The board shall make an award of compensatory
-----------------
monetary damages, but not of punitive or exemplary damages. The award
shall be made with due regard to the custom and usage of the insurance
business and shall be in writing stating the factual and legal basis for
the award. The award shall be based upon a hearing in which evidence may
be introduced without following strict rules of evidence but in which cross
examination and rebuttal shall be allowed. At its own election or at the
request of the board, either party may submit a post-hearing brief for
consideration of the board within 20 days of the close of the hearing. The
board shall make its award within 30 days following the close of the
hearing or the submission of post-hearing briefs, whichever is longer,
unless the parties consent to an extension. A decision by the majority of
the members of the board shall become the award of the board and shall be
final and binding upon all parties to the proceeding. Either party may
apply to the United States District Court for the Southern District of New
York or to a State Court of competent jurisdiction for an order confirming
the award; a judgement of such Court shall thereupon be entered on the
award. If such an order is issued, the attorneys, fees of the party so
applying and court costs will be paid by the party against whom
confirmation is sought.
F. Arbitration Expense Each party shall bear the expense of its own
-------------------
arbitrator and shall jointly and equally bear with the other party the
expense of the umpire. The remaining costs of the arbitration proceedings
shall be allocated by the board.
G. Survival This Article shall survive the termination of this Agreement.
--------
8
<PAGE>
ARTICLE XV. Other Terms and Conditions
A. Waiver The failure of Reliance National or Administrator to insist on
------
strict compliance with this Agreement, or to exercise any right or remedy
shall not constitute a waiver of any rights provided under this Agreement,
nor stop the parties from thereafter demanding full and complete compliance
nor prevent the parties from exercising such a remedy in the future.
B. Conflict with Law If any provision of this Agreement should be
-----------------
declared invalid by a court of general jurisdiction and superseded by
specific law or regulation, such law or regulation shall control to the
extent of such conflict without affecting the remaining provisions of this
Agreement. However, if either party believes that the voiding of any
provision hereof materially affects the whole Agreement or the relationship
of the parties under this Agreement, that party by notice may terminate
this Agreement by giving thirty (30) days notice to the other.
C. Assignment Neither this Agreement nor any rights or obligations under
----------
this Agreement may be assigned or delegated by Administrator without the
prior written consent of Reliance National except for assignments among
related parties of the Administrator.
D. Authority of Reliance National Reliance National is authorized by the
------------------------------
Companies listed above to act on their behalf in all matters in connection
with this Agreement and the Business.
E. Headings The headings preceding the text of the articles and
--------
paragraphs of this Agreement are intended and inserted solely for the
convenience of reference and shall not affect the meaning, construction or
effect of this Agreement.
F. Governing Law This Agreement shall be governed as to performance,
-------------
administration and interpretation by the laws of the State of New York.
G. Honorable Undertaking This Agreement shall be considered an honorable
---------------------
undertaking made in good faith and shall be subject to a liberal
construction for the purpose of giving effect to the good faith and
honorable intentions of Administrator and Reliance National.
H. Promptly Unless the context and circumstances require action sooner,
--------
the term "promptly" in this Agreement shall be defined to mean "within five
(5) working days".
I. Notices Wherever notice is required under this Agreement, it shall be
-------
in writing, and deemed to have been received either when actually received
or 3 days after having been sent by certified mail, and addressed:
9
<PAGE>
1. If to Reliance National:
------------------------
[ ]*
Reliance Integramark
1145 Sanctuary Parkway, Suite 300
Alphraretta, Georgia 30004
2. If to Administrator:
--------------------
[ ]*
HealthExtras, LLC
2275 Research Boulevard
Rockville, MD 20850
J. Independent Contractor This Agreement is not a contract of employment
----------------------
and nothing contained in this Agreement shall be construed to create the
relationship of joint venture, partnership, or employer and employee
between Reliance National and Administrator.
Administrator is an independent contractor and shall be free, subject to
the terms and conditions of this Agreement, to exercise judgement and
discretion with regard to the conduct of business.
K. Negotiated Agreement This Agreement has been negotiated by the parties
--------------------
and the fact that the initial and final draft shall have been prepared by
Reliance National shall not be used in any forum in the construction or
interpretation of this Agreement or any of its provisions.
L. Entire Agreement This Agreement supersedes all previous agreements,
----------------
whether written or oral, between Reliance National and Administrator, or
their predecessors with respect to the Business to be written under this
Agreement.
1. This Agreement may be amended, altered or modified only in writing
signed by both parties.
[ ]*.
M. Counterparts This Agreement may be executed in duplicate counterparts
------------
each of which shall be deemed an original but both of which when taken
together shall be deemed one and the same document.
10
<PAGE>
The Administrator and Reliance National, intending to be bound, have
executed this Agreement in duplicate, each of which shall serve as an original:
FOR Administrator: FOR Reliance National:
[___________________________ [______________________
By: ________________________ By: ___________________
Title: _____________________]* Title: ________________]*
11
<PAGE>
HEALTHEXTRAS INC. EXHIBIT 10.6
July 8, 1997
[ ]*
William Morris Agency, Inc.
1325 Avenue of the Americas
New York, NY 10019
Re: Final Terms And Conditions of the Agreement ("Agreement") Between
Cambria Productions, Inc. f/s/o Christopher Reeve and HealthExtras,
-------------------------------------------------------------------
Inc.
---
Dear [ ]*:
This shall serve as the terms and conditions of the Agreement executed this
8th day of July, 1997, by and between, Cambria Productions, Inc., hereinafter
referred to as "Lender", f/s/o Christopher Reeve, hereinafter referred to as
"Artist," and HealthExtras, Inc., hereinafter referred to as "Company", a
Delaware Corporation and affiliated company of United Payors & United Providers,
Inc. Execution by the parties shall constitute a binding Agreement.
PRODUCT: [ ]*.
APPROVAL.: Artist shall have complete and absolute approval of production
and/or distribution of all scripts, storyboards, still
photography and other materials produced hereunder. Artist
shall have complete and absolute approval of advertising usage
of Artist's name, likeness and/or image. Such approvals of
materials and use of Artist's name or likeness as recommended
by Company shall be provided by Artist's Company no later than
[ ]*
after Artist's receipt of recommended materials to be
approved. If disapproval is not communicated to Company within
this time frame, then Company shall deem materials to be
approved. If Company and Artist fail to agree on content of
materials referenced above within [
]* after disapproval by Artist, then either
party may terminate the Agreement. The terms and conditions of
this Agreement shall remain confidential for the duration of
the Agreement and any renewals except as required to
authorized agents and representatives who, upon receipt of
such information, shall also keep the same terms and
conditions confidential. The parties, their agents and
representatives, further agree that the existence of this
Agreement shall not be disclosed to anyone prior to September
2, 1997.
*Removed pursuant to a confidentiality request.
<PAGE>
[ ]*
July 8, 1997
Page 2
TERM: The initial term ("Term") of the Agreement shall be three
years commencing upon execution of this Agreement.
SERVICES: Lender shall make Artist available for [ ]*
Company shall have the right to use Artist's name, testimony
and public statements in creating additional advertising
materials, but subject to Artist's approval of all materials
prior to usage thereof. All service days, other than those
referenced in the time frame indicated above in year one,
shall be at mutually agreeable dates, times and locations.
TERRITORY: United States, its possessions, territories and commonwealths.
COMPENSATION: A guarantee of $____________ payable as follows.
[
]*.
In the event that any portion of the guaranteed payment or
other payments due under this Agreement are not received
within thirty days of its due date, Lender shall have the
absolute right to terminate this Agreement immediately upon
giving notice to Company. In the event of such termination for
non-payment, Company and its agents and employers, agree that
it will not use any materials previously created, which
includes any name, likeness or endorsement by Artist to
promote HealthExtras, Inc. products. In addition, Lender
and/or Artist shall be entitled to injunctive relief to
prevent the use of any such material. Any cost and/or legal
fees incurred by Lender or Artist in effecting such injunctive
relief, shall be repaid in their entirety by Company to Artist
and/or Lender.
USE: During the Term or Two Year Option, and within the Territory
only, the Company shall have the exclusive right to use
broadcast television and radio, Internet and print, including
newspapers, magazines, direct mail and other consumer print
materials but excluding life-size cut-outs, billboards and
shelf or aisle-facing packaging. Company shall have the usage
right of all materials produced hereunder for the Term of this
Agreement plus the Two Year Option period, if applicable, and
ten year annuity period thereafter.
EXCLUSIVITY: During the Term and within the Territory, Lender shall insure
that Artist shall not promote, render services in commercials,
or endorse any other
<PAGE>
[ ]*
July 8, 1997
Page 3
product that combines credit cards and health related
benefits. Notwithstanding the foregoing, Artist may render
services during the Term in the entertainment portions of any
program, theatrical production, television presentation,
motion picture, etc. even if said performance is sponsored by
competitive products, companies and/or services, and Artist
may record and/or appear in network and cable promotions
featuring appearances by Artist.
EXPENSES: The rider attached hereto is by this reference made part
hereof.
NOTIFICATION: Option for additional Two Year Term shall be exercised in
writing and received by the William Morris Agency offices no
later than sixty days prior to the expiration of the third
year of the Term.
TWO YEAR
OPTION: [ ]*.
All other terms and conditions shall remain the same as in the
initial Term including services. If the Two Year Option is
exercised by the Company, Lender on behalf of Artist shall
have the right to disapprove such exercise and the Two Year
Option shall be deemed not to have been exercised.
ADDITIONAL
DAYS: Lender on behalf of Artist shall receive a guarantee of
$______ for each additional day of service requested by
Company. Company shall be entitled to [
]*.
Payment shall be made upon completion of services. [ ]*.
SIGNATORY: Company is and will remain during the Term(s) a signatory to
the applicable union(s) having jurisdiction over Artist's
services hereunder.
PENSION
& WELFARE: Company will pay applicable union Pension & Welfare on behalf
of Artist directly to the union and will send the William
Morris Agency office verification that the payments have been
made.
<PAGE>
[ ]*
July 8, 1997
Page 4
INDEMNITY
& INSURANCE: Company shall indemnify Lender and Artist and his agents,
affiliates, subsidiaries and related entities, against any and
all claims, settlements, penalties, damages, expenses,
attorney's fees, costs, and judgments obtained against,
imposed upon or suffered by Lender and/or Artist by reason of
this Agreement, including but not limited to a breach or
alleged breach by Company and/or their obligations hereunder
and the use and/or content of the materials produced hereunder
and the products and services advertised therein and thereby.
In addition, Company shall name Lender and Artist as
additional insureds under Company's comprehensive general
liability insurance policies, including but not limited to
products liability, errors and omissions, and an extended
liability endorsement (including advertising liability), and
shall provide Lender and Artist with certificates of insurance
evidencing such coverage, and prior written notice of any
termination thereof. Such insurance shall be maintained for
the length of the Term, Two Year Option if applicable, Annuity
Period, and one year thereafter.
PAYMENT: All payments will be made to and in the name of WILLIAM MORRIS
AGENCY, INC. as agent for Artist and remitted to William
Morris Agency, 1325 Avenue of the Americas, New York, NY 10019
Attn:
[ ]*.
NOTICES: Notices for Lender and Artist will be sent to: Artist c/o
William Morris Agency, Inc., 1325 Avenue of the Americas, New
York, NY 10019, Attn: [ ]*.
Notices for Company will be sent to HealthExtras, Inc., 2275
Research Boulevard, Rockville, MD 20850, Attn: [ ]*.
This Agreement supersedes and replaces any prior negotiations
or Agreements either written or verbal. In executing this
Agreement through their authorized signatories as indicated
below, the parties agree to the terms and conditions as stated
herein.
For: HealthExtras, Inc. For: Cambria Productions, Inc.
f/s/o Christopher Reeve
[/s/ [/s/
- -------------------- --------------------------
Title: ]* Title: ]*
<PAGE>
HEALTHEXTRAS
2275 Research Boulevard
Sixth Floor
May 27, 1999 Rockville, MD 20850
Telephone: (301) 548-2900
Facsimile: (301) 548-8844
[ ]* By Facsimile to: 212.903.1489
Cambria Productions, Inc. and by Federal Express
f/s/o Christopher Reeve
1775 Broadway, Suite 708
New York, NY 10019
[ ]*
William Morris Agency, Inc.
1325 Avenue of the Americas
New York, NY 10019
Dear [ ]*:
The terms of the July 8, 1997 Agreement ("Agreement") by and between Cambria
Productions, Inc. f/s/o, Christopher Reeve and HealthExtras contains an Option
for Additional Two Year Term ("Two Year Option"). This Two Year Option states
that the terms and conditions of that Agreement will be extended for an
additional two years, commencing July 9, 2000.
This letter shall serve as written notification of HealthExtras intent to
exercise this Two Year Option under the terms contained in the Agreement and
when signed below by Cambria Productions, Inc., will indicate Cambria's approval
of the exercise of the option period.
Concurrently, the Agreement shall be amended such that compensation to Lender on
behalf of Artist will be changed from [
]*. This Amendment to the Agreement is retroactive to July
8, 1997 and prospective through the remaining term of the Agreement and the Two
Year Option.
Additionally, the Agreement shall be amended to increase the number of radio
recording spots to [ ]* through the term of the Two Year Option.
*Removed pursuant to a confidentiality request.
<PAGE>
[ ]*
[ ]*
May 27, 1999
Page 2 of 2
The following wording of the first sentence under the two year option clause of
the original agreement shall be changed to read as follows:[
]*. The payments shall be due no later than July 15 of
each option year. If a payment is not received in a timely manner, Lender on
behalf of the artist reserves the right to terminate the contract immediately
and in addition to its other rights pursuant to the contract, Lender may cancel
the approval of the remaining option period. In the event of such a
cancellation, [
]*. The balance of that paragraph shall be
unchanged.
Sincerely,
[ ]*
[ ]*
[ ]*
The undersigned agree to exercise the terms of the Two Year Option as contained
in the Agreement.
[ ]* [ ]*
[ ]* [ ]*
For: HealthExtras, LLC For: Cambria Productions, Inc.
f/s/o Christopher Reeve
* Removed pursuant to a confidentiality request.
<PAGE>
EXHIBIT 10.7
INDEMNIFICATION AGREEMENT
--------------------------
THIS INDEMNIFICATION AGREEMENT ("Agreement") IS MADE AS OF THIS _______________
DAY OF _____________ 1999 BY AND BETWEEN HEALTHEXTRAS, INC., A DELAWARE
CORPORATION (the "Company"), and _______________, ("Indemnitee").
WHEREAS, the Company and Indemnitee recognize the increasing difficulty in
obtaining directors' and officers' liability insurance, the significant
increases in the cost of such insurance and the general reductions in the
coverage of such insurance.
WHEREAS, the Company and Indemnitee further recognize the substantial
increase in corporate litigation in general, subjecting officers and directors
to expensive litigation risks at the same time as the availability and coverage
of liability insurance has been severely limited;
WHEREAS, Indemnitee does not regard the current protection available as
adequate under the present circumstances, and Indemnitee and other officers and
directors of the Company may not be willing to continue to serve as officers and
directors without additional protection; and
WHEREAS, the Company desires to attract and retain the services of highly
qualified individuals, such as Indemnitee, to serve as officers and directors of
the Company and to indemnify its officers and directors so as to provide them
with the maximum protection permitted by law.
NOW, THEREFORE, the Company and Indemnitee hereby agree as follows:
1. Indemnification.
---------------
(a) Third Party Proceedings. The Company shall indemnify Indemnitee if
-----------------------
Indemnitee is or was a party or is threatened to be made a party to any
threatened, pending or completed action or proceeding, whether civil,
criminal, administrative or investigative (other than an action by or in
the right of the Company) by reason of the fact that Indemnitee is or was a
director, officer, employee or agent of the Company, or any subsidiary of
the Company, by reason of any action or inaction on the part of Indemnitee
while an officer or director or employee or agent of the Company or any
subsidiary of the Company, or by reason of the fact that Indemnitee is or
was serving at the request of the Company as a director, officer, employee
or agent of another corporation, partnership, joint venture, trust or other
enterprises against expenses (including attorneys' fees), judgments, fines
and amounts paid in settlement (if such settlement is approved in advance
by the Company, which approval shall not be unreasonably withheld) actually
and reasonably incurred by Indemnitee in connection with such action or
proceeding reasonably believed to be in the best interests of the Company,
and, with respect to any criminal action or proceeding, had no reasonable
cause to believe Indemnitee's conduct was unlawful. The termination of any
action or proceeding by judgment, order, settlement, conviction, or upon a
plea of nolo contendere or its equivalent, shall not, of itself, create a
---- ----------
presumption that (i) Indemnitee did not act in good faith and in a manner
which Indemnitee reasonably believed to be in the best interests of the
Company,
<PAGE>
or (ii) with respect to any criminal action of proceeding, Indemnitee had
reasonable cause to believe that Indemnitee's conduct was unlawful.
(b) Proceeding By or in the Right of the Company. The Company shall
--------------------------------------------
indemnify Indemnitee if Indemnitee was or is a party or is threatened to be
made a party to any threatened, pending or completed action or proceeding
by or in the right of the Company or any subsidiary of the Company to
procure a judgment in its favor by reason of the fact that Indemnitee is or
was a director, officer, employee or agent of the Company, or any
subsidiary of the Company, by reason of any action or inaction on the part
of Indemnitee while an officer, director, employee or agent of the Company
or any subsidiary of the Company or by reason of the fact that Indemnitee
is or was serving at the request of the Company as a director, officer,
employee or agent of another corporation, partnership, joint venture, trust
or other enterprise, against expenses (including attorneys' fees) and, to
the fullest extent permitted by law, amounts paid in settlement, in each
case to the extent actually and reasonably incurred by Indemnitee in
connection with the defense or settlement of such action or proceeding if
Indemnitee acted in good faith and in a manner Indemnitee reasonably
believed to be in the best interests of the Company and its shareholders,
except that no indemnification shall be made in respect of any claim, issue
or matter as to which Indemnitee shall have been adjudged to be liable to
the Company and its shareholders unless and only to the extent that the
court in which such action or proceeding is or was pending shall determine
upon application that, in view of all the circumstances of the case,
Indemnitee is fairly and reasonably entitled to indemnity for expenses and
then only to the extent that the court shall determine.
2. Expenses: Indemnification Procedure.
------------------------------------
(a) Advancement of Expenses. The Company shall advance all expenses
-----------------------
incurred by Indemnitee in connection with the investigation, defense,
settlement or appeal of any civil or criminal action or proceeding
referenced in Section 1(a) or (b) hereof (but not amounts actually paid in
settlement of any such action or proceeding). Indemnitee hereby undertakes
to repay such amounts advanced only if, and to the extent that, it shall
ultimately be determined that Indemnitee is not entitled to be indemnified
by the Company as authorized hereby. The advances to be made hereunder
shall be paid by the Company to Indemnitee within twenty (20) days
following delivery of a written request therefor by Indemnitee to the
Company.
(b) Notice/Cooperation by Indemnitee. Indemnitee shall, as a condition
--------------------------------
precedent to his right to be indemnified under this Agreement, give the
Company notice in writing as soon as practicable of any claims made against
Indemnitee for which indemnification will or could be sought under this
Agreement. Notice to the Company shall be directed to the Chief Executive
Officer of the Company at the address shown on the signature page of this
Agreement (or such other address as the Company shall designate in writing
to Indemnitee). Notice shall be deemed received by the Company. In
addition, Indemnitee shall give the Company such information and
cooperation as it may reasonably require and as shall be within
Indemnitee's power.
2
<PAGE>
(c) Procedure. Any indemnification provided for in Section 1 shall be
---------
made no later than forty-five (45) days after receipt of the written
request of Indemnity. If a claim under this Agreement, under any statute,
or under any provision of the Company's Certificate of Incorporation or
Bylaws providing for indemnification, is not paid in full by the Company
within forty-five (45) days after a written request for payment thereof has
first been received by the Company, Indemnitee may, but need not, at any
time thereafter bring an action against the Company to recover the unpaid
amount of the claim and, subject to Section 13 of this Agreement.
Indemnitee shall also be entitled to be paid for the expenses (including
attorneys' fees) of bringing such action. It shall be a defense to any such
action (other than an action brought to enforce a claim for expenses
incurred in connection with any action or preceding in advance of its final
disposition) that Indemnitee has not met the standards of conduct which
make it permissible under applicable law for the Company to indemnify
Indemnitee for the amount claimed, but the burden of proving such defense
shall be on the Company, and Indemnitee shall be entitled to receive
interim payments of expenses pursuant to Subsection 2(a) unless and until
which no further right of appeal exists. It is the parties' intention that
if the Company contests Indemnitee's right to indemnification, the question
of Indemnitee's right to indemnification shall be for the court to decide,
and neither the failure of the Company (including its Board of Directors,
counsel or its shareholders) to have made a determination that
indemnification of Indemnitee is proper in the circumstances because
Indemnitee has met the applicable standard of conduct required by
applicable law, nor an actual determination by the Company (including its
Board of Directors, any committee or subgroup of the Board of Directors,
independent legal counsel or its shareholders) that Indemnitee has not met
such applicable standard of conduct, shall create a presumption that
Indemnitee has or has not met the applicable standard of conduct.
(d) Notice to Insurers. If, at the time of the receipt of a notice of a
------------------
claim pursuant to Section 2(b) hereof, the Company has director and officer
liability insurance in effect, the Company shall give prompt notice of the
commencement of such proceeding to the insurers in accordance with the
procedures set forth in the respective policies. The Company shall
thereafter take all necessary or desirable action to causes such insurers
to pay, on behalf of the Indemnitee, all amounts payable as a result of
such proceeding in accordance with the terms of such policies.
(e) Selection of Counsel. In the event the Company shall be obligated
--------------------
under Section 2(a) hereof to pay the expenses of any proceeding against
Indemnitee, the Company, if appropriate, shall be entitled to assume the
defense of such proceeding, with counsel approved by Indemnitee, which
approval shall not be unreasonably withheld, upon the delivery to
Indemnitee of written notice of its election so to do. After delivery of
such notice, approval of such counsel by Indemnitee and the retention of
such counsel by the Company, the Company will not be liable to Indemnitee
under this Agreement for any fees of counsel subsequently incurred by
Indemnitee with respect to the same proceeding, provided that (i)
Indemnitee shall have the right to employ his counsel in any such
proceeding at Indemnitee's expense; and (ii) if (A) the employment of
counsel by Indemnitee has been previously authorized by the Company, (B)
Indemnitee shall have reasonably concluded that there may be a conflict of
interest between the Company and Indemnitee in the conduct of any such
3
<PAGE>
defense or (C) the Company shall not, in fact, have employed counsel to
assume the defense of such proceeding, then the fees and expenses of
Indemnitee's counsel shall be at the expense of the Company.
3. Additional Indemnification Rights: Nonexclusivity.
--------------------------------------------------
(a) Scope. Notwithstanding any other provision of this Agreement, the
-----
Company hereby agrees to indemnify the Indemnitee to the fullest extent
permitted by law, notwithstanding that such indemnification is not
specifically authorized by the other provisions of this Agreement, the
Company's Certificate of Incorporation, the Company's Bylaws or by statute.
In the event of any change, after the date of this Agreement, in any
applicable law, statute or rule which expands the right of a Delaware
corporation to indemnify a member of its Board of Directors or an officer,
such changes shall be, ipso facto, within the purview of Indemnitee's
---- -----
rights and Company's obligations, under this Agreement. In the event of
any change in any applicable law, statute or rule which narrows the right
of a Delaware corporation to indemnify a member of its Board of Directors
or an officer, such changes, to the extent not otherwise required by such
law, statute or rule to be applied to this Agreement shall have no effect
on this Agreement or the parties' rights and obligations hereunder.
(b) Nonexclusivity. The indemnification provided by this Agreement shall
--------------
not be deemed exclusive of any rights to which Indemnitee may be entitled
under the Company's Certificate of Incorporation, its Bylaws, any
agreement, any vote of shareholders or disinterested directors, the
Delaware General Corporation Law, or otherwise, both as to action in
Indemnitee's official capacity and as to action in another capacity while
holding such office. However, the indemnitee shall not be entitled to
receive from all sources of indemnification, amounts in excess of the
amounts of indemnification to which he is entitled. The indemnification
provided under this Agreement shall continue when Indemnitee resigns from
his position for any action taken or not taken while serving in his
capacity as agent of the Company at the time of any action or other covered
proceeding.
4. Partial Indemnification. If Indemnitee is entitled under any provision of
-----------------------
this Agreement to indemnification by the Company for some or a portion of
the expenses, judgments, fines or penalties actually or reasonably incurred
by him in the investigation, defense, appeal or settlement of any civil or
criminal action or proceeding, but not, however, for the total amount
thereof, the Company shall nevertheless indemnify Indemnitee for the
portion of such expenses, judgments, fines or penalties to which Indemnitee
is entitled.
5. Mutual Acknowledgment. Both the Company and Indemnitee acknowledge that in
---------------------
certain instances, Federal law or applicable public policy may prohibit the
Company from indemnifying its directors and officers under this Agreement
or otherwise. Indemnitee understands and acknowledges that the Company has
undertaken or may be required in the future to undertake with the
Securities and Exchange Commission to submit the question of
indemnification to a court in certain circumstances for a determination of
the Company's rights under public policy to indemnify Indemnitee.
4
<PAGE>
6. Directors' and Officers' Liability Insurance. The Company shall, from time
--------------------------------------------
to time, make a good faith determination whether or not it is practicable
for the Company to obtain and maintain a policy or policies of insurance
with reputable insurance companies providing the officers and directors of
the Company with coverage for losses from wrongful acts, or to ensure the
Company's performance of its indemnification obligations under this
Agreement. Among other considerations, the Company will weigh the costs of
obtaining such insurance coverage against the protection afforded by such
coverage. In all policies of directors' and officers' liability insurance,
Indemnitee shall be named as an insured in such a manner as to provide
Indemnitee the same rights and benefits as are accorded to the most
favorably insured of the Company's directors, if Indemnitee is a director;
or of the Company's officers, if Indemnitee is not a director of the
Company but is an officer; or of the Company's key employees, if Indemnitee
is not an officer or director but is a key employee. Notwithstanding the
foregoing, the Company shall have no obligation to obtain or maintain such
insurance if the Company determines in good faith that such insurance is
not reasonably available, if the premium costs for such insurance is not
reasonably available, if the premium costs for such insurance are
disproportionate to the amount of coverage provided, if the coverage
provided by such insurance is limited by exclusions so as to provide an
insufficient benefit, or if Indemnitee is covered by similar insurance
maintained by a subsidiary or parent of the Company.
7. Severability. Nothing in this Agreement is intended to require or shall be
------------
construed as requiring the Company to do or fail to do any act in violation
of applicable law. The Company's inability, pursuant to court order, to
perform its obligations under this Agreement shall not constitute a breach
of this Agreement. The provisions of this Agreement shall be severable as
provided in this Section 7. If this Agreement or any portion hereof shall
be invalidated on any ground by any court of competent jurisdiction, then
the Company shall nevertheless indemnify Indemnitee to the full extent
permitted by any applicable portion of this Agreement that shall not have
been invalidated, and the balance of this Agreement not so invalidated
shall be enforceable in accordance with its terms.
8. Exceptions. Any other provision herein to the contrary notwithstanding,
----------
the Company shall not be obligated pursuant to the terms of this Agreement:
(a) Excluded Acts. To indemnify Indemnitee for any act or omissions or
-------------
transactions from which a director may not be relieved of liability under
the Delaware General Corporation Law; or
(b) Claims Initiated by Indemnitee. To indemnify or advance expenses to
------------------------------
Indemnitee with respect to proceedings or claims initiated or brought
voluntarily by Indemnitee and not by way of defense, except with respect to
proceedings brought to establish or enforce a right to indemnification
under this Agreement or any other statute or law or otherwise as required
under the Delaware General Corporation Law, but such indemnification or
advancement of expenses may be provided by the Company in specific cases if
the Board of Directors has approved the initiation or bringing of such
suit; or
5
<PAGE>
(c) Lack of Good Faith. To indemnify Indemnitee for any expenses incurred
------------------
by the Indemnitee with respect to any proceeding instituted by Indemnitee
to enforce or interpret this Agreement, if a court of competent
jurisdiction determines that each of the material assertions made by the
Indemnitee in such proceeding was not made in good faith or was frivolous;
or
(d) Insured Claims. To indemnify Indemnitee for expenses or liabilities of
--------------
any type whatsoever (including, but not limited to, judgments, fines, ERISA
excise taxes or penalties, and amounts paid in settlement) which have been
paid directly to Indemnitee by an insurance carrier under a policy of
directors' and officers' liability insurance maintained by the Company; or
(e) Claims Under Section 16(b). To indemnify Indemnitee for expenses and
--------------------------
the payment of profits arising from the purchase and sale by Indemnitee of
securities in violation of Section 16(b) of the Securities Exchange Act of
1934, as amended, or any similar successor statute.
9. Effectiveness of Agreement. To the extent that the indemnification
--------------------------
permitted under the terms of certain provisions of this Agreement exceeds
the scope of the indemnification provided for in the Delaware General
Corporation Law, such provisions shall not be effective unless and until
the Company's Certificate of Incorporation authorize such additional rights
of indemnification. In all other respects, the balance of this Agreement
shall be effective as of the date set forth on the first page and may apply
to acts or omissions of Indemnitee which occurred prior to such date if
Indemnitee was an officer, director, employee or other agent of the
Company, or was serving at the request of the Company as a director,
officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise, at the time such act or omission
occurred.
10. Construction of Certain Phrases.
-------------------------------
(a) For purposes of this Agreement, references to the "Company" shall
include, in addition to the resulting corporation, any constituent
corporation (including any constituent of a constituent) absorbed in a
consolidation of merger which, if its separate existence had continued,
would have had power and authority to indemnify its directors, officers,
employees or agents, so that if Indemnitee is or was a director, officer,
employee or agent of such constituent corporation, or is or was serving at
the request of such constituent corporation as a director, officer,
employee or agent of another corporation, partnership, joint venture, trust
or other enterprise, Indemnitee shall stand in the same position under the
provisions of this Agreement with respect to the resulting or surviving
corporation as Indemnitee would have with respect to such constituent
corporation if its separate existence had continued.
(b) For purposes of this Agreement, references to "other enterprises" shall
include employee benefit plans; references to "fines" shall include any
excise taxes assessed on Indemnitee with respect to an employee benefit
plan; and references to "serving at the request
6
<PAGE>
of the Company" shall include any service as a director, officer, employee
or agent of the Company which imposes duties on, or involves services by,
such director, officer, employee or agent with respect to an employee
benefit plan, its participants or beneficiaries.
(c) For purposes of this Agreement, "agent" means any person who is or was
a director, officer, employee or other agent of the corporation, or is or
was serving at the request of the corporation as a director, officer,
employee or agent of another foreign or domestic corporation, partnership,
joint venture, trust or other enterprise, or was a director, officer,
employee or agent of a foreign or domestic corporation which was a
predecessor corporation of the corporation or of another enterprise at the
request of the predecessor corporation; "proceeding" means any threatened,
pending or completed action or proceeding, whether civil, criminal,
administrative or investigative; and "expenses" includes without limitation
attorneys' fees and any expenses of establishing a right to Indemnification
pursuant to the Delaware General Corporation Law.
11. Counterparts. This Agreement may be executed in one or more counterparts,
------------
each of which shall constitute an original.
12. Successors and Assigns. This Agreement shall be binding upon the Company
----------------------
and its successors and assigns, and shall inure to the benefit of
Indemnitee and Indemnitee's estate, heirs, legal representatives and
assigns.
13. Attorneys' Fees. In the event that any action is instituted by Indemnitee
---------------
under this Agreement to enforce or interpret any of the terms hereof,
Indemnitee shall be entitled to be paid all court costs and expenses,
including reasonable attorneys' fees, incurred by Indemnitee with respect
to such action, unless as a part of such action, the court of competent
jurisdiction determines that each of the material assertions made by
Indemnitee as a basis for such action were not made in good faith or were
frivolous. In the event of an action instituted by or in the name of the
Company under this Agreement or to enforce or interpret any of the terms of
this Agreement, Indemnitee shall be entitled to be paid all court costs and
expenses, including attorneys' fees, incurred by Indemnitee in defense of
such action (including with respect to Indemnitee's counterclaims and
cross-claims made in such action), unless as a part of such action the
court determines that each of Indemnitee's material defenses to such action
were made in bad faith or were frivolous.
14. Notice. All notices, requests, demands and other communications with
------
respect to this Agreement shall be in writing and shall be deemed duly
given (i) if delivered by hand and receipted for by the party addressee, on
the date of such receipt, or (ii) if mailed by domestic certified or
registered mail with postage prepaid, on the third business day after the
date postmarked. Addresses for notice to either party are as shown on the
signature page of this Agreement, or as subsequently modified by written
notice.
15. Consent to Jurisdiction. The Company and Indemnitee each hereby
-----------------------
irrevocably consent to the jurisdiction of the courts of the State of
Delaware for all purposes in connection with any action or proceeding which
arises out of or relates to this Agreement and agree that any
7
<PAGE>
action instituted under this Agreement shall be brought only in the state
courts of the State of Delaware.
16. Choice of Law. This Agreement shall be governed by and its provisions
-------------
construed in accordance with the laws of the State of Delaware as applied
to contracts between Delaware residents entered into and to be performed
entirely within Delaware.
8
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date first above written.
HEALTHEXTRAS, INC.
By: David T. Blair
-----------------------------
Title: Chief Executive Officer
-----------------------------
Address: 2275 Research Boulevard
-----------------------------
Rockville, Maryland 20850
-----------------------------
AGREED TO AND ACCEPTED:
Indemnitee:
_________________________________
(type name)
_________________________________
(signature)
_________________________________
_________________________________
(address)
9
<PAGE>
EXHIBIT 10.8
SUBLEASE AGREEMENT
------------------
THIS SUBLEASE AGREEMENT (the "Sublease") is made as of this 26th day
of July 1999, between United Payors and United Providers, Inc., a Delaware
corporation ("Sublessor"), and HealthExtras, LLC, a Delaware limited liability
company ("Sublessee"), with reference to the following recitals of fact.
R E C I T A L S :
---------------
A. WHEREAS, Sublessor is the tenant under that certain Assignment of
Lease and Second Amendment to Lease (the "Master Lease") dated as of April 4,
1997 by and between PRUBETA 2, as lessor (the "Lessor"), and Sublessor, as
tenant, for the lease of that certain real and personal property, located at
2275 Research Boulevard, Rockville, Maryland 20850, more particularly described
in said Master Lease (the "Subleased Premises"), including those certain
premises (the "Additional Space") consisting of approximately 2,473 square feet
of rentable area on the seventh (7th) floor of the building.
B. WHEREAS, Sublessor has entered into an administrative services
contract with Sublessee, which terms include the use of office space.
C. WHEREAS, Sublessor desires to sublease to Sublessee, and
Sublessee desires to sublease from Sublessor, the Additional Space on the terms
and conditions set forth below.
NOW, THEREFORE, in consideration of the mutual agreements herein
contained, and for other valuable consideration, the receipt and sufficiency of
which are hereby acknowledged, the parties hereto agree as follows:
A G R E E M E N T :
-----------------
1. Premises; Term. Sublessor does hereby sublease to Sublessee the
--------------
Additional Space, at the rental and upon the terms and conditions herein stated,
for a term commencing on the date hereof and ending February 28, 2001.
2. Master Lease. Sublessor hereby represents and warrants that the
------------
form of lease attached hereto as Exhibit A is a true and complete copy of the
Master Lease and that there are no oral or written modifications or amendments
thereto not attached hereto as part of Exhibit A. Sublessor further represents
and warrants that there is no uncured default by Sublessor (or, to the best of
Sublessor's knowledge, by Master Lessor) outstanding under the Master Lease and
Sublessor is entitled to all the rights and benefits provided for in the Master
Lease.
<PAGE>
3. Rent; Renewal. Sublessee does hereby agree to pay to Sublessor
-------------
rent for the Subleased Premises in the full amount and subject to all other
terms and conditions as Sublessor is obligated to pay to the Lessor under the
Master Lease.
4. Master Lease. This Sublease is subject to all of the terms and
------------
provisions of the Master Lease and Sublessee agrees to be bound thereby. Except
as otherwise provided herein, the terms and provisions of the Master Lease are
hereby incorporated by reference, provided that wherever the words "Lessor" or
"Landlord" (hereinafter referred to as "Lessor") appear in the Master Lease, the
words shall be deemed to refer to Sublessor, and wherever the words "Lessee" or
"New Tenant" (hereinafter, referred to as "Lessee") appear in the Master Lease,
the words shall be deemed to refer to Sublessee. Except as otherwise provided
herein, all of the rights and obligations contained in the Master Lease
conferred and imposed upon the Lessee thereunder are hereby conferred and
imposed upon Sublessee with respect to the Subleased Premises and all of the
rights and remedies conferred upon the Lessor are hereby conferred upon
Sublessor. Sublessee acknowledges receipt of a copy of the Master Lease in the
form attached hereto as Exhibit A and agrees that during the term of this
Sublease, Sublessee will not violate any of the terms and conditions of the
Master Lease. In the event Sublessee receives notice of Sublessor's breach of
the Master Lease, Sublessee shall have the right, but not the obligation, to
cure such breach. Sublessee's right to cure shall include, without limitation,
Sublessee's right to make any payment required under the Master Lease directly
to the Master Lessor and to deduct such payment from Sublessee's obligation
under this Sublease.
5. Quiet Enjoyment. Upon Sublessee's faithfully performing the
---------------
terms, conditions and covenants hereof, Sublessee may quietly and peaceably
enjoy the Subleased Premises during the term hereof.
6. Indemnification. Sublessor agrees to indemnify, defend and save
---------------
Sublessee harmless from any and all liability, damage, expense, cause of action,
suits, claims or judgments, including, without limitation reasonable attorneys'
fees and expenses arising out of or relating to (i) Sublessor's breach of the
Master Lease or occupation of the premises prior to the date hereof and (ii)
arising out of or relating to Sublessor's breach of any provision contained in
this Sublease. Sublessee agrees to indemnify Sublessee from any and all
expenses associated with any damage to the Subleased Premises which is caused by
the wilful action or gross negligence of any employee of Sublessee; provided,
however, that the amount of any indemnification to be afforded by Sublessee
under this Section 6 shall be limited to the amount of any deductible applicable
under an insurance policy covering such damage.
2
<PAGE>
7. Notices. All notices shall be given in writing by registered or
-------
certified mail, postage prepaid, or by Federal Express or similar courier to the
parties as follows:
To Sublessor:
United Payors & United Providers, Inc.
2275 Research Boulevard
Sixth Floor
Rockville, Maryland 20850
Attention: Edward S. Civera, Co-Chief Executive Officer
To Sublessee:
HealthExtras, LLC
2275 Research Boulevard
Seventh Floor
Rockville, Maryland 20850
Attention: David T. Blair, Chief Executive Officer
Notices shall be deemed given on the earlier of: (a) receipt, if delivered by
Federal Express or other courier to the addressee or an officer of the
addressee, or (b) forty-eight (48) hours following deposit in the United States
mail, postage prepaid, registered or certified mail, return receipt requested.
Any party may change the address to which such notices shall be given by written
notice to the other party or provided herein.
8. Remedies Cumulative. No remedy herein conferred upon or reserved
-------------------
to Sublessor or to Sublessee is intended to be exclusive of any other remedy
herein or by law provided, but each shall be cumulative and shall be in addition
to every other remedy given hereunder now or hereinafter existing at law or in
equity or by statute.
9. Miscellaneous. This Sublease shall not be modified, changed or
-------------
altered in any respect except by a writing executed and delivered by the parties
hereto. All covenants, agreements and conditions shall apply to and bind and
inure to the benefit of the successors and/or assigns of Sublessor and
Sublessee. As used herein, the singular includes the plural and one gender
includes the other gender. The paragraph headings of this Sublease are inserted
only for reference and in no way define, limit, or describe the scope or intent
of this Sublease nor affect its terms or provisions.
10. Attorneys' Fees. If either party brings an action to enforce the
---------------
terms hereof or declare rights hereunder, the prevailing party in any such
action, on trial or appeal, shall be entitled to recover their reasonable
attorneys' fees and expenses.
11. Amendment and Waiver. This Sublease may be amended, modified,
--------------------
supplemented or changed in whole or in part only by an agreement in writing
making specific
3
<PAGE>
reference to this Sublease and executed by each of the parties hereto.
Compliance with any of the terms and conditions of this Sublease may be waived
in whole or in part, but only by an agreement in writing making express
reference to this Sublease and executed by the party that is entitled to the
benefit thereof, and no such waiver shall be deemed a waiver of any subsequent
breach or default of the same or similar nature except as stated expressly
therein. All remedies stated in this Sublease shall be cumulative to every other
remedy provided herein or at law or equity, except as expressly provided
otherwise in this Sublease.
12. Governing Law. This Sublease and all questions relating to its
-------------
validity, interpretation, performance and enforcement shall be governed by and
construed, interpreted and enforced in accordance with the laws of the State of
Maryland.
13. Counterparts. This Sublease may be executed in counterparts,
------------
each of which shall be deemed an original, but all of which taken together shall
constitute one and the same instrument.
14. Binding on Successors. This Agreement shall be binding upon and
---------------------
inure to the benefit of Sublessee and Sublessor and their successors and
permitted assigns.
15. As modified hereby, the Lease continues in full force and effect.
IN WITNESS WHEREOF, the parties hereto have executed this Sublease as
of the day and year first above written.
SUBLESSEE: SUBLESSOR:
HEALTHEXTRAS, LLC UNITED PAYORS & UNITED PROVIDERS, INC.
By: /s/ Michael P. Donovan By: /s/ S. Joseph Bruno
-------------------------- ----------------------------
Title: Chief Financial Officer Title: Chief Financial Officer
----------------------- -------------------------
4
<PAGE>
Exhibit 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
----------------------------------
We hereby consent to the use in this Registration Statement on Form S-1 of our
report dated August 30, 1999, relating to the financial statements of
HealthExtras, LLC, which appears in such Registration Statement. We also consent
to the reference to us under the heading "Experts" in such Registration
Statement.
/s/
PricewaterhouseCoopers LLP
McLean, Virginia
September 17, 1999
<PAGE>
Exhibit 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
----------------------------------
We hereby consent to the use in this Registration Statement on Form S-1 of our
report dated July 16, 1999, relating to the financial statement of HealthExtras,
Inc. which appears in such Registration Statement. We also consent to the
reference to us under the heading "Experts" in such Registration Statement.
/s/
PricewaterhouseCoopers LLP
McLean, Virginia
September 17, 1999
<PAGE>
EXHIBIT 99.1
CONSENT
In accordance with Item 401 of Regulation S-K, I do hereby consent to
being named in the Registration Statement to be filed with the Securities and
Exchange Commission by HealthExtras, Inc. as a person who is to become a
director of HealthExtras, Inc., and the disclosure of that fact in the
Registration Statement.
By: /s/ Julian A.L. Allen
----------------------------
Julian A.L. Allen
Dated this 16th day of
September 1999
<PAGE>
EXHIBIT 99.4
CONSENT
In accordance with Item 401 of Regulation S-K, I, do hereby consent to
being named in the Registration Statement to be filed with the Securities and
Exchange Commission by HealthExtras, Inc. as a person who is to become a
director of HealthExtras, Inc., and the disclosure of that fact in the
Registration Statement.
By: /s/ Julia M. Lawler
-------------------
Julia M. Lawler
Dated this 26th day of
July 1999
<PAGE>
EXHIBIT 99.6
CONSENT
In accordance with Item 401 of Regulation S-K, I do hereby consent to
being named in the Registration Statement to be filed with the Securities and
Exchange Commission by HealthExtras, Inc. as a person who is to become a
director of HealthExtras, Inc., and the disclosure of that fact in the
Registration Statement.
By: /s/ Paul H. Warren
-------------------------
Paul H. Warren
Dated this 16th day of
September 1999
