<PAGE>
As filed with the Securities and Exchange Commission on October 20, 1999
Registration No. 333-83761
===============================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_____________________________________
PRE-EFFECTIVE AMENDMENT NO. 2 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)
<TABLE>
<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
<TABLE>
<CAPTION>
Maximum Maximum
Aggregate Aggregate Amount of
Title of Each Class of Amount to be Offering Offering Price Registration
Securities To Be Registered Registered (1) Price (1)(2) Fee (3)
- -----------------------------------------------------------------------------------------------------------------
<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 October 20, 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.
<TABLE>
<CAPTION>
Per Share Total
- ------------------------------------------------------------
<S> <C> <C>
Public offering price $ $
- ------------------------------------------------------------
Underwriting discount $ $
- ------------------------------------------------------------
Proceeds, before expenses, to HealthExtras $ $
- ------------------------------------------------------------
</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
PaineWebber Incorporated
Prudential Vector Healthcare
a unit of Prudential Securities
SG Cowen
___________________________________________________________________
<PAGE>
Description of Graphics
[Description of page folded under cover page]
Additional Financial Security is only HealthExtras.com away.
[Head Shot Photo of Christopher Reeve]
"In an instant your life can change...mine did." Christopher Reeve
[Description of Pullout Page from bottom of page and
then clockwise around the page]
HealthExtras Market 50 Million Visa and MasterCard Households
[Arrow icon leading to a chart on a computer screen showing
4 pages from HealthExtras' website, http://www.healthextras.com]
[Red Star] Customize your Benefit Program
[Arrow icon leading to a map of the United States]
Receive Discounts on Medical Services
[Map of the United States]
National network of 2,500 hospitals and 150,000 MD's
[Arrow icon stating you are covered leading to a box]
[box]
HealthExtras [logo]
Health and Disability Programs
[red star]
National TV and Radio
[Arrow leading to photo television screen with
Christopher Reeve and an interviewer]
Stimulating & Marketing
[Arrow leading to red star]
AOL, Yahoo!, drkoop.com, Excite and DoubleClick Banners
[Arrow leading to four colored boxes]
[box with Citibank logo, photo of Christopher Reeve]
Coverage is just healthextras.com away.
First USA
AT&T Universal
First Union
[HealthExtras Logo]
www.healthextras.com
<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
<TABLE>
<S> <C>
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>
<TABLE>
<S> <C>
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.
OUR BUSINESS
HealthExtras intends to be the leading Internet-based source for supplemental
health and disability benefit programs. We design and develop membership
programs which are marketed directly to consumers over the Internet at our
website, www.healthextras.com. At our website, customers can enroll as members
of HealthExtras and tailor their benefit packages to best suit their needs and
circumstances. By joining HealthExtras, members can address critical gaps in
their insurance protection. Those gaps have traditionally not been addressed by
insurance protection promoted by agents or brokers due to the low price point
of that protection and the high costs associated with that distribution
channel. We believe we are the first company to develop Internet-based
membership programs incorporating supplemental health and disability benefits.
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 features of membership include health related services
that can be utilized in the absence of a qualifying disability or medical
condition. All of the insurance and other service features included in our
membership programs are supplied by outside vendors. 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
membership features, 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 source 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 membership features providing health and
disability services 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 and our website.
1
<PAGE>
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. Most of our program enrollments to date were generated by
mailings to customers of these financial institutions.
. 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. 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
<TABLE>
<C> <S>
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
<PAGE>
Summary Financial Data
(In thousands, except per share data)
<TABLE>
<CAPTION>
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>
<TABLE>
<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
</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 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
<PAGE>
Risk Factors
- --------------------------------------------------------------------------------
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 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 membership
programs which include disability benefits. We believe our future profitability
is dependent upon achieving substantial increases in sales of our 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 membership programs over the Internet does not achieve
widespread consumer acceptance, we may never achieve profitability
To date, we primarily have promoted our membership programs through mailings
to credit card or other customers of banks. However, we intend to significantly
increase the distribution of our programs over the Internet. Thus, our future
profitability is dependent in large part on our ability to achieve widespread
consumer acceptance of purchasing our programs over the Internet. The
development of an online market for 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 products such as ours. If an online market for these products fails
to develop, or develops more slowly than we expect, or if our 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 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
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
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
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.
Because a portion of the proceeds of this offering will benefit affiliates of
ours, there will be less funds available to expand our sales and marketing
efforts.
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.
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> <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
membership programs which include supplemental health and disability benefits.
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 membership 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. The primary
determinant of HealthExtras' revenue recognition is monthly program enrollment.
In general, revenue is recognized based on the number of members enrolled in
each reporting period multiplied by the applicable monthly fee for their
specific membership program.
Direct expenses consist principally of bank marketing and processing fees and
the cost of benefits provided to program members. Direct expenses are a
function of the level of membership during the period and the specific set of
program features selected by members. The coverage obligations of our benefit
suppliers and the related expense are determined monthly, as are the remaining
direct expenses. HealthExtras has historically maintained a prepaid expense
balance with respect to the insurance features of its programs. Where amounts
are prepaid, direct expense is recognized based on the actual membership levels
in each program. The prepaid amount at the end of each quarter is adjusted to
reflect advances and other payments made, less actual expense incurred. These
deferred amounts were $879,300 and $492,935 at December 31, 1998 and June 30,
1999, respectively. 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.
The Company intends to enter into three-year employment agreements with five
of its executive officers. The annual base salaries under these arrangements
range from $120,000 to $210,000, and one executive will be entitled to a bonus
equal to one percent of the Company's after-tax profits. The Company's minimum
aggregate payments under these employment agreements are expected to be
$837,000 annually. The annualized increase in compensation expense resulting
from these agreements will be approximately $600,000 greater than historical
periods.
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.
15
<PAGE>
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. For the six months
ended June 30, 1999, HealthExtras incurred $3.2 million in product development
and marketing expenses, or 68% of total operating expenses, $1.6 million of
which was incurred for the continuing creative development of promotional and
sales materials, including television and print advertisements, and $505,000 of
which was product endorsement costs. Media production expenses totaled $783,000
for print advertisement production and distribution. Market research expenses
were $293,000. 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. For the six months ended June 30, 1998, HealthExtras incurred $4.3
million, 81% of total operating costs, in product development and marketing
expenses. Product and media development expenses totaled $2.9 million. These
expenses included $306,000 in costs related to the ongoing development of the
HealthExtras programs, $505,000 in product endorsement costs, $631,000 in
business partner marketing materials, $133,000 in test-marketing costs, and
$1.4 million for expenses incurred during the creative phases of television,
radio, and print advertisements. Production expenses of $924,000 for the same
period included post-creative production and distribution of print
advertisements, and direct distribution of television and radio promotions.
Market research expenses for the period were $377,000. 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.
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 and $976,000 in market
research and product development consulting. Other costs for 1997 totaled
approximately $1,730,000, of which $513,000 was in compensation expense,
$555,000 was in travel expenses and approximately $660,000 was in other product
and media development costs. In 1998, product development and marketing
expenses included $1.9 million for media development, consisting of $505,000 in
product endorsement costs, $631,000 in business partner marketing materials,
$133,000 in test-marketing costs and approximately $650,000 in pre-production
creative costs. Production-related expenses in 1998 totaled $1.6 million, of
which $765,000 was in print advertisements and fulfillment materials and
$835,000 was for the production of television and radio promotions. Also in
1998, $626,000 was devoted to market research and product development
consulting. Additional costs of $237,000 of compensation expense, $324,000 in
travel expense, and $220,000 of other costs were incurred as product
development and marketing 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
16
<PAGE>
- --------------------------------------------------------------------------------
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.
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,
- --------------------------------------------------------------------------------
17
<PAGE>
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.
18
<PAGE>
Business
- --------------------------------------------------------------------------------
OVERVIEW
HealthExtras intends to be the leading Internet-based source for supplemental
health and disability benefit programs. We design and develop membership
programs, which are marketed directly to consumers over the Internet at our
website, www.healthextras.com. At our website, consumers can enroll as members
of HealthExtras and tailor their benefit packages to best suit their needs and
circumstances. By joining HealthExtras, members can address critical gaps in
their insurance protection. Those gaps have traditionally not been addressed by
insurance protection promoted by agents or brokers due to the low price point
of that protection and the high costs associated with that distribution
channel. We believe we are the first company to develop Internet-based
membership programs incorporating supplemental health and disability benefits.
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. All of the
insurance and service features included in our membership programs are supplied
by outside vendors. Since launching our programs in January 1999, and through
June 30, 1999, we have enrolled over 45,000 program members.
The features of membership in HealthExtras include health related services
that can be utilized in the absence of a qualifying disability, medical
condition or organ transplant. These include unlimited access to a nurse-advice
line, air-evacuation in the event of qualifying emergency while traveling and
access to cost savings through the national health care provider network
maintained by United Payors & United Providers. In the event of a qualifying
disability, medical condition or organ transplant, HealthExtras offers
consultation services to ensure that the benefits payable under the insurance
features are used appropriately. Beyond these services, HealthExtras' members
may select travel related protection to cover deductibles and co-insurance for
medical expenses incurred while away from home.
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;
19
<PAGE>
. 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.
In response to these market opportunities, HealthExtras began to develop
membership program descriptions including coverage features, health services,
levels of benefits, exclusions and age parameters. HealthExtras sought out
insurers and reinsurers to underwrite specific features intended to be included
in its membership program. At its own expense, HealthExtras had group policies
filed in all fifty states and has continued to monitor progress and respond to
changes requested in the regulatory process. HealthExtras also established the
qualification provisions that allow cardholders of our participating financial
institutions to be group members through membership in HealthExtras.
BUSINESS STRATEGY
We are an Internet-based source for supplemental health and disability
benefit programs. The Internet represents a more cost-effective marketing and
operating platform for our business which can eliminate a significant
percentage of the costs associated with commission-driven distribution systems.
Accordingly, the Internet enhances our ability to provide access to affordable
supplemental health and disability benefit programs. Elements of our strategy
include:
. Become the Leading Online Source for Supplemental Health and Disability
Benefit Programs.
We are moving aggressively to capture a leading share of the Internet
segment of the supplemental health and disability market. We are positioned
to promote membership features of HealthExtras, including 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 benefits to members at a cost which we believe
is less than they would have to pay individually for comparable benefits.
20
<PAGE>
. 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 membership
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 and Arrange for Additional Innovative Health and
Disability Benefits to Offer to Members.
We are continuing to develop an expanded list of insurance and service
options for inclusion in our membership programs. These additional products
would provide flexibility in coverage amounts to our program members and
address additional insurance needs.
OUR WEBSITE
Our website is designed to make consumers aware of the need for supplemental
health and disability benefits and to promote online enrollment. 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 programs;
. Enroll in our programs and make payments online;
. Receive immediate confirmation of enrollment; and
. Enhance membership 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.
21
<PAGE>
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 entered into a sponsorship agreement with drkoop.com, Inc., the
operator of a leading health-oriented Internet content site. Under the
terms of our agreement, HealthExtras is defined as the "Premier Sponsor"
for insurance and/or health insurance related products in the e-commerce
area of the drkoop.com website. Our current sponsorship agreement extends
through May 2000, with the option to extend by mutual agreement.
. 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.
22
<PAGE>
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
Membership in HealthExtras offers access to various combinations of
supplemental health and disability benefits. Further, we seek to provide
flexibility for members to customize the package of benefits included in their
HealthExtras program to meet their individual needs. HealthExtras does not
assume any underwriting risks for the benefits included in its programs. The
current benefits which can be obtained through membership in HealthExtras
include:
. Catastrophic Disability. This 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 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. The 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 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 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 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 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.
23
<PAGE>
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.
HealthExtras believes that Reliance National is satisfied as to its ability to
obtain reinsurance; but it is not possible to provide a detailed description of
circumstances which might give rise to a termination of the agreement by
Reliance National based on an inability to obtain reinsurance. However,
Reliance National, also under the contract, could 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
24
<PAGE>
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
25
<PAGE>
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;
26
<PAGE>
. 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.
27
<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.
28
<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. Mr. Blair is also a
director of Coventry Health Care, Inc.
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.
29
<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.
30
<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
31
<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.
32
<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.
33
<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.
34
<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.
35
<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 offering our common stock for
sale 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.
36
<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.
37
<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.
38
<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.
39
<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.
40
<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."
41
<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.
42
<PAGE>
Underwriting
- --------------------------------------------------------------------------------
HealthExtras has entered into an underwriting agreement with the underwriters
named below. Warburg Dillon Read, PaineWebber Incorporated, 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........................................
PaineWebber Incorporated.......................................
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>
43
<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 during the three business days
following the date of this prospectus 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.
44
<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 by this prospectus. This prospectus does not contain all
of the information set forth in that registration statement and in the exhibits
to that registration statement. For further information with respect to our
business and the common stock offered by this prospectus, we refer you to the
registration statement and the exhibits to it. Statements contained in this
prospectus regarding the contents of any contract or any other document are not
necessarily complete, and, in each instance where we have filed a copy of that
contract or other document as an exhibit to the registration statement, we
refer you to the actual contract or document filed as an exhibit. The
statements in this prospectus regarding those contracts and documents should be
read in conjunction with the full document filed as an exhibit. A copy of the
registration statement and the exhibits to the registration statement 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,
and, will file with the Securities and Exchange Commission the periodic reports
and other information required by that Act.
45
<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
The primary determinant of revenue recognition is monthly program enrollment.
In general, revenue is recognized based on the number of members enrolled in
each reporting period multiplied by the applicable monthly fee for their
specific membership program. Direct expenses consist of the costs that are a
direct function of a period of membership and a specific set of program
features. The coverage obligations of our benefit suppliers and the related
expense are determined monthly, as are the remaining direct expenses.
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 refund. If a member requests a refund,
HealthExtras retains any interest earned on funds held during the refunded
membership period. 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.
HealthExtras' members always enroll for an annual period but may chose to pay
either annually or in monthly installments. There is no interest charged under
the monthly option but members who pay annually receive a reduced rate that
reflects lower administrative, transaction and maintenance costs.
Marketing agreements
The Company defers the amount of payments under marketing and similar
agreements. Expense is recognized straight-line over the term 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.
F-12
<PAGE>
HealthExtras, LLC
Notes to Combined Financial Statements
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.
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. The contribution commitment was made to support education and
research in the areas of paralysis and related rehabilitation efforts. The
contribution was made independent of any direct or indirect obligation on the
part of the recipient to further HealthExtras' business or program marketing.
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 in the amount of $1,260,900, whereby the Company has committed to
provide minimum enrollment in its programs. The Company has historically
maintained a prepaid expense balance with respect to benefit features of its
programs. Direct expense is recognized based on the actual membership levels in
each program. The deferred amount at the end of each quarter is adjusted to
reflect advances, if any, made during the period, expenses recognized and
remaining coverage periods and membership levels to which such advances can be
applied. 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.
F-13
<PAGE>
HealthExtras, LLC
Notes to Combined Financial Statements
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.
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.
F-14
<PAGE>
HealthExtras, LLC
Notes to Combined Financial Statements
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.
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>
[LOGO OF HEALTHEXTRAS APPEARS HERE]
www.healthextras.com
<PAGE>
- --------------------------------------------------------------------------------
- ------------
PROSPECTUS
- ------------
5,500,000 Shares
Common Stock
Warburg Dillon Read LLC
PaineWebber Incorporated
Prudential Vector Healthcare
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.
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
<PAGE>
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. 2 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 October 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. 2 to the Registration Statement has been signed below by the
following persons on October 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
---------------------- (Chief Accounting Officer)
Michael P. Donovan
II-4
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
No. Description
------- --------------------------------------------------------------------------------------------
<C> <S>
1.0 Form of Underwriting Agreement/(1)/
2.1 Form of Reorganization Agreement by and among HealthExtras, Inc., HealthExtras, LLC, and
Capital Z Healthcare Holding Corp. (filed herewith)
3.1(a) Certificate of Incorporation of HealthExtras, Inc./(2)/
3.1(b) Form of Amended and Restated Certificate of Incorporation/(2)/
3.2 Bylaws of HealthExtras, Inc./(2)/
4.1 Specimen Stock Certificate of HealthExtras, Inc./(2)/
4.2 Form of Stockholders' Agreement (filed herewith)
5.1 Opinion of Muldoon, Murphy & Faucette LLP re: legality (filed herewith)
10.1 Form of Employment Agreement between HealthExtras, Inc. and David T. Blair/(2)/
10.2 Form of Employment Agreement between HealthExtras, Inc. and certain Executive Officers/(2)/
10.3 Program Administrator's Agreement by and between HealthExtras LLC and Reliance National
Insurance Company (filed herewith)
10.4 Administrative Services Agreement by and between HealthExtras, LLC and United Payors &
United Providers, Inc./(2)/
10.5 Agreement by and between United Payors & United Providers, Inc. and HealthExtras, LLC re:
network access/(2)/
10.6 Agreement by and between Cambria Productions, Inc. f/s/o Christopher Reeve and HealthExtras,
Inc. (filed herewith)/(3)/
10.7 Indemnification Agreement/(2)/
10.8 Sublease Agreement by and between United Payors & United Providers, Inc. and
HealthExtras, LLC/(2)/
10.9 Form of HealthExtras, Inc. 1999 Stock Option Plan (filed herewith)
10.10 Form of Registration Rights Agreement (filed herewith)
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/(2)/
24.0 Powers of Attorney (included on signature page)
27.0 Financial Data Schedule/(2)/
99.1 Consent of Julian A.L. Allen to serve as a Director of the Company/(2)/
99.2 Consent of David T. Blair to serve as a Director of the Company/(2)/
99.3 Consent of Thomas J. Graf to serve as a Director of the Company/(2)/
99.4 Consent of Julia M. Lawler to serve as a Director of the Company/(2)/
99.5 Consent of Karen M. Shaff to serve as a Director of the Company/(2)/
99.6 Consent of Paul H. Warren to serve as a Director of the Company/(2)/
</TABLE>
- ----------------------------------
/(1)/ To be filed by amendment.
/(2)/ Previously filed.
/(3)/ Confidential treatment requested for portions of agreement pursuant to
Section 406 of Regulation C, promulgated under the Securities Act of
1933, as amended.
<PAGE>
Exhibit 2.1
FORM OF
AGREEMENT
AND
PLAN OF REORGANIZATION
Among
HEALTHEXTRAS, INC., HEALTHEXTRAS, LLC,
and
CAPITAL Z HEALTHCARE HOLDING CORP.
WHEREAS, HealthExtras, LLC (the "LLC"), a Delaware limited liability
company, wishes to raise, through a public offering of securities, additional
capital to promote its business operations; and
WHEREAS, under LLC's Amended and Restated Limited Liability Company
Agreement it is necessary to make a public offering of securities through a
corporation, not a limited liability company; and
WHEREAS, LLC has caused HealthExtras, Inc. (the "Company"), a Delaware
corporation, to be formed in order to acquire the business operations of the LLC
and to effect a public offering of shares of the Company's common stock (the
"Shares"), as the mechanism for raising additional capital; and
WHEREAS, the Company has filed a registration statement under the
Securities Act of 1933 with the Securities and Exchange Commission (File No.
333-83761) regarding the proposed offering of the Shares.
NOW, THEREFORE, in consideration of the respective covenants,
representations and warranties contained herein, and intending to be legally
bound hereby, the parties hereto agree as follows:
ARTICLE I
The Merger
Section 1.1. Merger of CZHH into the Company. Subject to the
satisfaction of the conditions specified in Section 1.3, at the CZHH Merger
Effective Time, as defined in Section 1.4, Capital Z Healthcare Holding Corp., a
Delaware corporation ("CZHH"), shall merge (the "CZHH Merger") with and into the
Company, with the Company being the surviving entity in accordance with and
pursuant to the Agreement of Merger by and between CZHH and the Company attached
hereto as Exhibit A (the "CZHH Merger Agreement"). CZHH and the Company hereby
adopt and approve the CZHH Merger Agreement.
Section 1.2. Merger of LLC into the Company. Subject to the satisfaction
of the conditions specified in Section 1.3, at the LLC Merger Effective Time, as
defined in Section 1.4 , LLC shall merge (the "LLC Merger," and collectively
with the CZHH Merger, the "Mergers") with and into the Company, with the Company
being the surviving entity in accordance with and pursuant
<PAGE>
to the Agreement of Merger by and between LLC and the Company attached hereto as
Exhibit B (the "LLC Merger Agreement"). LLC and the Company hereby adopt and
approve the LLC Merger Agreement.
Section 1.3. Conditions to the Mergers. The Mergers are subject to the
prior satisfaction of the following conditions:
(i) The execution by the Company and a nationally recognized investment
banking firm, including possibly as representative of the several
underwriters (collectively, the "Underwriters") of a purchase
agreement (the "Purchase Agreement") whereby the Company agrees to
sell and the Underwriters agree to buy (the "Offering"), subject to
customary terms and conditions, shares of common stock of the
Company for an aggregate purchase price of at least $25 million,
minus usual and customary underwriters discounts and commissions;
and
(ii) the Company has been advised by the Nasdaq Stock Market that,
conditioned upon completion of the Offering, the Company's common
stock will be listed for trading on the Nasdaq National Market.
(iii) The Company shall cause to be executed a certificate on its behalf
by its Chief Executive Officer in the form attached as Exhibit C
hereto to the effect that the representations and warranties of the
Company set forth in Section 2.1 hereof are true and correct and
the Covenants set forth in Article III hereof have been satisfied,
as of the CZHH Merger Effective Time and the LLC Merger Effective
Time.
(iv) The LLC shall cause to be executed a certificate on its behalf by
its Chief Executive Officer in the form attached as Exhibit D
hereto to the effect that the representations and warranties of the
LLC set forth in Section 2.2 are true and correct as of the CZHH
Merger Effective Time and the LLC Merger Effective Time.
(v) An officer of CZHH shall have executed a certificate on behalf of
CZHH in the form attached as Exhibit E hereto to the effect that
the representations and warranties of CZHH set forth in Section 2.3
are true and correct as of the CZHH Merger Effective Time and the
LLC Merger Effective Time.
(vi) The Stockholders Agreement in the form attached hereto as Exhibit F
shall have been executed and delivered by the Company and the other
parties listed on the signature pages thereof.
(vii) The Registration Rights Agreement in the form attached hereto as
Exhibit G shall have been executed and delivered by the Company and
the other parties listed on the signature pages thereof.
2
<PAGE>
(viii) None of the parties hereto shall have any reason to believe that
the CZHH Merger and/or the LLC Merger will not qualify as a tax-
free reorganization under the Internal Revenue Code of 1986, as
amended.
Section 1.4. Effective Time. The effective time of the CZHH Merger (the
"CZHH Merger Effective Time") shall be the time specified in the Certificate of
Merger substantially in the form of Exhibit H attached hereto, which shall be
filed with the Secretary of State of Delaware and become effective. The
effective time of the LLC Merger (the "LLC Merger Effective Time") shall be
immediately following the CZHH Merger Effective Time, as shall be specified in
the Certificate of Merger, substantially in the form of Exhibit I attached
hereto, which shall be filed with the Secretary of State of Delaware. The CZHH
Merger Effective Time and the LLC Merger Effective Time shall be on the
scheduled closing date for the sale of the Company's common stock pursuant to
the Purchase Agreement. The Company agrees that prior to the Effective Time it
shall file with the Secretary of State of Delaware a Certificate of Termination
regarding the Agreement of Merger for the CZHH Merger and for the LLC Merger if
it does not reasonably believe that all of the conditions to the closing of the
Offering have been or will be satisfied or waived and that the Underwriters will
consummate the closing of the Offering on the same day as the CZHH Effective
Time and LLC Effective Time specified in the applicable Agreement of Merger
filed with the Secretary of State of Delaware.
Section 1.5 Effect of CZHH Merger. By virtue of the CZHH Merger,
automatically and without any action on the part of the holder thereof, all of
the issued and outstanding shares of the capital stock of CZHH outstanding at
the CZHH Merger Effective Time shall become and be converted into the right to
receive an aggregate of 4,420,000 shares of Company common stock (the "CZHH
Exchange Ratio").
Section 1.6. Effect of LLC Merger. (a) By virtue of the Merger,
automatically and without any action on the part of the holder thereof, each
Class A Common Unit of the LLC outstanding at the LLC Merger Effective Time
shall become and be converted into the right to receive 2,210 shares of Company
common stock (the "LLC Exchange Ratio") (and any fractional Class A Common Unit
shall be entitled to that whole number of shares of Company common stock which
represents, as nearly as possible, the same percentage of the LLC Exchange Ratio
as such fraction of a Class A Common Unit of the LLC represents of one Class A
Common Unit); provided, however, that notwithstanding any other provision
hereof, no fraction of a share of Company common stock and no certificates or
script for a fraction of a share therefor will be issued in the LLC Merger.
(b) Each right to receive a Class A Common Unit of the LLC which has
been granted by the LLC and which has not vested as of the LLC Effective Time
shall be extinguished and, in lieu thereof, the holder of such right shall be
entitled to the right to shares of Company common stock granted pursuant to
Section 1.8 hereof.
3
<PAGE>
Section 1.7. Adoption of Stock Option Plan and Grant of Options.
(a) Effective as of the LLC Merger Effective Time, there is hereby adopted
the HealthExtras, Inc. 1999 Stock Option Plan attached hereto as Exhibit J. This
stock option plan permits the grant of options to purchase up to 4,000,000
shares of Company common stock.
(b) Effective as of the LLC Merger Effective Time, there is hereby granted
options to the persons and relating to the number of shares of Company common
stock as set forth on Exhibit K hereto. The exercise price of such options shall
be 120% of the public offering price for the shares sold in the Offering. The
other terms and conditions of the options granted hereby shall be as set forth
in the form of option grant attached as Exhibit L hereto.
Section 1.8. Grant of Rights to Shares.
(a) Effective as of the LLC Merger Effective Time, there is hereby
granted, subject to the conditions set forth herein, rights to receive shares of
Company common stock to the persons and relating to the number of shares of
common stock set forth on Exhibit M hereto.
(b) Twenty-five percent of the shares granted to each of the persons named
on Exhibit G shall vest on February 29, 2000, provided that such person remains
at that time an employee of the Company or a successor to or affiliate of the
Company. The remaining shares granted to each such person shall vest in one-
third increments at the end of each of the next three twelve-month periods after
February 29, 2000, provided that such person remains at the time of vesting an
employee of the Company or a successor to or an affiliate of the Company. The
rights granted to a person by subsection (a) above terminate and are no longer
outstanding when a recipient no longer serves as an officer or employee of the
Company or a successor to or an affiliate of the Company (other than as a result
of death or permanent disability).
(c) Notwithstanding the vesting provisions in subsection (b) above, in the
event of a Change in Control, as defined in subsection (d) below, or the death
or permanent disability of the holder of an outstanding right, the vesting of
all of the rights granted to such person by subsection (a) above is accelerated
and all rights then held by such person become fully vested.
(d) For purposes of this Section, a Change in Control means:
(i) Any "person," other than Principal Mutual Holding Company or an
affiliate, United Payors & United Providers, Inc. or an
affiliate, Thomas L. Blair, and Health Partners or an affiliate,
(as such term is used in Sections 13(d) and 14(d) of the
Securities Exchange Act of 1934) is or becomes the beneficial
owner, directly or indirectly, of securities of the Company
representing 25% or more of the combined voting power of the
Company's then outstanding securities; or
4
<PAGE>
(ii) During any period of twenty-four consecutive months,
individuals who at the beginning of such period constitute the
Board cease for any reason to constitute at least a majority
thereof unless the election, or the nomination for election by
the Company's shareholders, of each new director was approved
by a vote of at least two-thirds of the directors then still in
office who were directors at the beginning of the period; or
(iii) The stockholders of the Company approve a definitive agreement
and the closing for such transaction is scheduled to occur
within twenty four hours regarding:
(1) the merger or other business combination of the Company
with or into another corporation pursuant to which the
Company will not survive or will survive only as a
subsidiary of another corporation;
(2) the sale or other disposition of all or substantially all
of the assets of the Company;
(3) the merger of another corporation into the Company which
survives if, as a result of such merger less than fifty
percent (50%) of the outstanding voting securities of the
Company shall be owned in the aggregate immediately after
such merger by the owners of the voting shares of the
Company outstanding immediately prior to such merger;
(4) the liquidation or dissolution of the Company; or
(5) any combination of the foregoing.
(e) Prior to vesting, the holder of a right granted pursuant to subsection
(a) above shall have no right to vote, receive any distributions with respect to
or be entitled to any other rights or benefits with respect to the shares which
are the subject of a right granted pursuant to subsection (a) above. Upon
vesting, there shall be delivered to the person granted the right to such shares
(or in the event of such persons death, his heir or legatees) the shares of
common stock or other stock, property or cash into which such shares have been
converted or given the right to receive. In addition, there shall be
distributed to such person any dividends or other distribution made with respect
to the same number of shares from the date of grant of the right under
subsection (a) hereof to the date of delivery of the shares upon vesting.
5
<PAGE>
ARTICLE II
Representations and Warranties
Section 2.1. Representations and Warranties of the Company. The Company
makes the following representations and warranties, each of which is true and
correct as of the CZHH and LLC Effective Times.
(a) Organization and Good Standing. The Company is duly organized,
validly existing and in good standing under the laws of the State of Delaware.
The Company has the requisite corporate power and authority to own, lease or
otherwise hold the assets to be owned, leased or otherwise held by it subsequent
to the Merger and to carry on the business subsequent to the Merger as presently
conducted by LLC.
(b) Capital Structure. As of the date hereof, there are no outstanding
shares of capital stock of the Company, and no outstanding rights or options to
acquire shares of capital stock of the Company.
(c) Authorization and Effect. The Company has the requisite corporate
power and authority to execute and to deliver this Agreement and to perform its
obligations hereunder. The execution and delivery by the Company of this
Agreement and the performance by it of its obligations hereunder have been duly
authorized by all necessary corporate action on the part of the Company. This
Agreement has been duly executed and delivered by the Company and, assuming the
due execution and delivery of this Agreement by the other parties hereto, this
Agreement constitutes the valid and binding obligation of the Company,
enforceable against it in accordance with its terms, except as may be limited by
bankruptcy, insolvency, reorganization, moratorium or other similar laws
affecting the enforcement of creditors' rights in general and subject to general
principles of equity (regardless of whether such enforceability is considered in
a proceeding in equity or at law).
(d) Subsidiaries. The Company has no Subsidiaries.
(e) No Restrictions; Required Consents. The execution and delivery of
this Agreement by the Company do not, and the performance by the Company of the
transactions contemplated hereby to be performed by the Company will not, (i)
conflict with the Certificate of Incorporation or Bylaws of the Company or the
Amended and Restated Certificate of Incorporation to be adopted pursuant to
Section 3.2 hereof, (ii) conflict with, or result in any violation of, or
constitute a default (with or without notice or lapse of time, or both) under,
or give rise to a right of termination, cancellation or acceleration of any debt
or obligation or constitute a breach of, create a loss of a material benefit
under, any contract, mortgage, indenture, lease, agreement or other instrument
or any permit, order, judgment or decree to which the Company is a party or by
which any of its properties are bound, (iii) constitute a violation of any
statute, law, rule or regulation ("Law") applicable to the Company, or (iv)
result in the creation of any lien upon any of its assets. No consent, approval,
order or authorization of, or registration, declaration or filing with, any
court, government, governmental agency, authority, entity or instrumentality (a
"Governmental Entity") is
6
<PAGE>
required to be obtained or made by or with respect to the Company in connection
with the execution and delivery of this Agreement by the Company or the
performance by the Company of the transactions contemplated hereby to be
performed by it, except for such of the foregoing as are listed or described on
Schedule 2.1(e).
(f) Financial Statements. Attached hereto as Schedule 2.1(f) is a true,
correct and complete copy of the audited balance sheet of the Company as of July
16, 1999, which has been prepared in accordance with generally accepted
accounting principles. Such balance sheet presents fairly, in all material
respects, the financial position of the Company at that date.
(g) Absence of Undisclosed Liabilities. The Company has not engaged in
business operations. The Company has no material liabilities except (i) those
reflected on the balance sheet at July 16, 1999, and (ii) those set forth on
Schedule 2.1(g) hereto.
(h) Litigation; Decrees. There are no judicial or administrative actions,
proceedings or investigations pending or, to the Company's knowledge, threatened
that question the validity or enforceability of this Plan of Reorganization, or
any action taken or to be taken by the Company in connection therewith. Except
as listed or described on Schedule 2.1.(h), there are no (i) lawsuits, claims,
administrative or other proceedings or investigations pending or, to the
Company's knowledge, threatened by, against or affecting the Company or (ii)
judgments, orders or decrees of any Governmental Entity binding on the Company
or any of its properties and assets.
(i) The Company knows of no reason or circumstances that could cause the
CZHH Merger to have a material adverse effect on the Company.
Section 2.2. Representations and Warranties of LLC. The LLC makes the
following representations and warranties, each of which is true and correct as
of the LLC Effective Time.
(a) Organization and Good Standing. The LLC is a limited liability
company duly organized, validly existing and in good standing under the laws of
the State of Delaware. The LLC has the requisite limited liability company power
and authority to own, lease or otherwise hold the assets owned, leased or
otherwise held by it and to carry on its business as presently conducted by it.
(b) Authorization and Effect. The LLC has the requisite limited liability
company power to execute and to deliver this Agreement and to perform its
obligations hereunder. The execution and delivery by the LLC of this Agreement
and the performance by it of its obligations hereunder have been duly authorized
by all necessary limited liability company action on the part of the LLC. This
Agreement has been duly executed and delivered by the LLC and, assuming the due
execution and delivery of this Agreement by the other parties hereto, this
Agreement constitutes the valid and binding obligation of the LLC, enforceable
against it in accordance with its terms, except as may be limited by bankruptcy,
insolvency, reorganization, moratorium or other similar laws affecting the
enforcement of creditors' rights in general and subject to general principles of
equity (regardless of whether such enforceability is considered in a proceeding
in equity or at law).
7
<PAGE>
(d) No Restrictions; Required Consents. The execution and delivery of
this Agreement by the LLC do not, and the performance by the LLC of the
transactions contemplated hereby to be performed by the LLC will not, (i)
conflict with the certificate of formation or limited liability company
agreement of the LLC, (ii) conflict with, or result in any violation of, or
constitute a default (with or without notice or lapse of time, or both) under,
or give rise to a right of termination, cancellation or acceleration of any debt
or obligation or constitute a breach of, create a loss of a material benefit
under, any contract, mortgage, indenture, lease, agreement or other instrument
or any permit, order, judgment or decree to which the LLC is a party or by which
any of its properties are bound, (iii) constitute a violation of any Law
applicable to the LLC, or (iv) result in the creation of any lien upon any of
its assets. No consent, approval, order or authorization of, or registration,
declaration or filing with, a Governmental Entity is required to be obtained or
made by or with respect to the LLC in connection with the execution and delivery
of this Agreement by the LLC or the performance by the LLC of the transactions
contemplated hereby to be performed by it, except for such of the foregoing as
are listed or described on Schedule 2.1(e).
Section 2.3. Representations and Warranties of CZHH. CZHH makes the
following representations and warranties, each of which is true and correct as
of the CZHH Effective Time.
(a) Organization and Good Standing. CZHH is a corporation duly organized,
validly existing and in good standing under the laws of the State of Delaware.
CZHH has the requisite corporate power and authority to own, lease or otherwise
hold the assets owned, leased or otherwise held by it and to carry on its
business as presently conducted by it.
(b) Capitalization.
(i) Schedule 2.2.(b)(ii) sets forth a true, correct and complete
description of the capitalization of CZHH. None of the classes of stock of CZHH
have been issued in violation of, and none of such membership interests are
subject to, any purchase option, call, right of first refusal, preemptive,
subscription or similar rights under any provisions of applicable law, CZHH's
bylaws or certificate of incorporation or any contract, agreement or instrument
to which CZHH is subject, bound or a party.
(ii) There are no options, warrants, calls, subscriptions, conversion
or other rights, agreements or commitments (i) obligating CZHH to issue, sell,
purchase, return or redeem any of its stock or any other securities convertible
into, exchangeable or exercisable for or evidencing the right to subscribe for
any of its stock or (ii) that give any person the right to receive any benefits
or rights similar to any rights enjoyed by or accruing to CZHH shareholders.
There are no outstanding bonds, debentures, notes or other indebtedness having
the right to vote on any matters on which CZHH's stockholders may vote.
(c) Authorization and Effect. CZHH has the requisite corporate power to
execute and to deliver this Agreement and to perform its obligations hereunder.
The execution and delivery by CZHH of this Agreement and the performance by it
of its obligations hereunder have been duly
8
<PAGE>
authorized by all necessary corporate action on the part of CZHH. This Agreement
has been duly executed and delivered by CZHH and, assuming the due execution and
delivery of this Agreement by the other parties hereto, this Agreement
constitutes the valid and binding obligation of CZHH, enforceable against it in
accordance with its terms, except as may be limited by bankruptcy, insolvency,
reorganization, moratorium or other similar laws affecting the enforcement of
creditors' rights in general and subject to general principles of equity
(regardless of whether such enforceability is considered in a proceeding in
equity or at law).
(d) No Restrictions; Required Consents. The execution and delivery of
this Agreement by CZHH do not, and the performance by CZHH of the transactions
contemplated hereby to be performed by CZHH will not, (i) conflict with the
Certificate of Incorporation or Bylaws of CZHH, (ii) conflict with, or result in
any violation of, or constitute a default (with or without notice or lapse of
time, or both) under, or give rise to a right of termination, cancellation or
acceleration of any debt or obligation or constitute a breach of, create a loss
of a material benefit under, any contract, mortgage, indenture, lease, agreement
or other instrument or any permit, order, judgment or decree to which CZHH is a
party or by which any of its properties are bound, (iii) constitute a violation
of any Law applicable to CZHH, or (iv) result in the creation of any lien upon
any of its assets. No consent, approval, order or authorization of, or
registration, declaration or filing with, a Governmental Entity is required to
be obtained or made by or with respect to CZHH in connection with the execution
and delivery of this Agreement by CZHH or the performance by CZHH of the
transactions contemplated hereby to be performed by it, except for such of the
foregoing as are listed or described on Schedule 2.3.(e).
(e) Financial Condition. CZHH has no assets, other than its membership
interest in LLC and de minimis assets, and no liabilities, other than de minimis
liabilities, either direct or indirect, matured or unmatured or absolute,
contingent or otherwise. For purposes of this Section 2.3(f), the term
"liabilities" shall include, without limitation, any direct or indirect
indebtedness, guaranty, endorsement, claim, loss, damage, deficiency, cost
expense or obligation, whether fixed or contingent, known or unknown, asserted
or unasserted, choate or inchoate, liquidated or unliquidated, secured or
unsecured.
(f) CZHH knows of no reason or circumstances that could cause the CZHH
Merger to have a material adverse effect on the Company.
(g) Litigation; Decrees. There are no judicial or administrative actions,
proceedings or investigations pending or, to CZHH's knowledge, threatened that
question the validity or enforceability of this Plan of Reorganization or any
action taken or to be taken by CZHH in connection herewith or therewith. Except
as listed or described on Schedule 2.3.(h), there are no (i) lawsuits, claims,
administrative or other proceedings or investigations pending or, to CZHH's
knowledge, threatened by, against or affecting CZHH or any of its Affiliates or
(ii) judgments, orders or decrees of any Governmental Entity binding on CZHH or
any of its properties and assets.
9
<PAGE>
ARTICLE III
Covenants
Section 3.1. Conduct of the Company. Prior to the Merger, the Company
shall not conduct any business operations, and shall engage only in activities
necessary or appropriate to effect the Offering and organize its corporate
structure and management as contemplated in the draft Prospectus dated [July
26], 1999 attached hereto as Exhibit N.
Section 3.2. Amended and Restated Certificate of Incorporation. Prior to
the Merger, the Company shall adopt and file with the Secretary of State of
Delaware an Amended and Restated Certificate of Incorporation substantially in
the form attached as Exhibit O hereto.
Section 3.3. Outstanding Shares of Capital Stock. Prior to the Merger,
the Company shall not have any outstanding shares of capital stock, or except as
provided in Sections 1.7 and 1.8 hereof, rights or options to acquire shares of
the capital stock.
ARTICLE IV
Authority to Effectuate the Merger
Section 4.1. Designation of Responsible Persons.
(a) It is hereby authorized and directed that David T. Blair, Chief
Executive Officer of the Company, has the authority to complete, execute,
deliver and file on behalf of the Company the Agreement of Merger and take all
the appropriate actions consistent with this Agreement.
(b) It is hereby authorized and directed that Thomas L. Blair, a
representative of LLC, has the authority to complete, execute, deliver and file
on behalf of LLC the Agreement of Merger and take all other appropriate actions
consistent with this Agreement.
ARTICLE V
Certain Other Matters
Section 5.1. Waiver; Amendment. Prior to the Effective Time, any
provision of this Agreement may be: (i) waived in writing by the party
benefitted by the provision or (ii) amended or modified at any time (including
the structure of the transaction) by an agreement in writing between the parties
hereto.
Section 5.2. Counterparts. This Agreement may be executed in
counterparts each of which shall be deemed to constitute an original, but all of
which together shall constitute one and the same instrument.
Section 5.3. Right to Terminate. If the Mergers have not occurred by the
date that is 180 days following the date hereof, then any party hereto shall
have the right, by the delivery of written notice to the other parties, to
terminate this Agreement. Following such termination, this Agreement shall be
of no further force or effect.
10
<PAGE>
Section 5.4 Governing Law. This Agreement shall be governed by, and
interpreted in accordance with, the laws of the State of Delaware without regard
to conflicts of laws principles.
Section 5.5 Notices. All notices, requests, acknowledgments and other
communications hereunder to a party shall be in writing and shall be deemed to
have been fully given when delivered by hand, overnight courier or facsimile
transmission (confirmed in writing) to such party at its address or facsimile
number set forth below or such other address or facsimile transmission as such
party may specify by notice to the other party hereto.
If to the Company:
HealthExtras, Inc.
2275 Research Boulevard, 7th Floor
Rockville, Maryland 20850
Tel.: (301) 548-2900
Attn: David T. Blair
Chief Executive Officer
with a copy to:
Muldoon, Murphy & Faucette LLP
5101 Wisconsin Avenue, N.W.
Washington, DC 20016
Tel.: (202) 362-0840
Attn: Thomas J. Haggerty, Esq.
If to the LLC:
HealthExtras, LLC
2275 Research Boulevard, 7th Floor
Rockville, Maryland 20850
Tel.: (301) 548-2900
Attn: Thomas L. Blair
Representative
with a copy to:
Muldoon, Murphy & Faucette LLP
5101 Wisconsin Avenue, N.W.
Washington, DC 20016
Tel.: (202) 362-0840
Attn: Thomas J. Haggerty, Esq.
11
<PAGE>
If to CZHH:
Capital Z Healthcare Holding Corp.
c/o Capital Z Partners, Ltd.
54 Thompson Street
New York, New York 10012
Attn: Paul H. Warren
David A. Spuria, Esq.
with a copy to:
Weil, Gotshal & Manges LLP
767 Fifth Avenue
New York, New York 10153
Attn: Thomas A. Roberts, Esq.
12
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement and Plan
of Reorganization to be executed by their duly authorized representatives as of
this __ day of _____, 1999.
HEALTHEXTRAS, INC.
by: _____________________________
David T. Blair
Chief Executive Officer
HEALTHEXTRAS, LLC
by: _____________________________
Thomas L. Blair
Representative
CAPITAL Z HEALTHCARE
HOLDING COMPANY
by: _____________________________
13
<PAGE>
Exhibit 4.2
FORM OF
STOCKHOLDERS AGREEMENT
HEALTHEXTRAS, INC.
Dated as of _____________, 1999
<PAGE>
STOCKHOLDERS AGREEMENT
This Stockholders Agreement ("Stockholders Agreement"), dated as of
__________, 1999, is entered into by and among the parties (the "Parties")
listed on the signature pages hereof.
In consideration of the premises, mutual covenants and agreements
hereinafter contained and for other good and valuable consideration, the receipt
and adequacy of which are hereby acknowledged, and intending to be legally bound
hereby, the Parties agree as follows:
TABLE OF CONTENTS
<TABLE>
<S> <C>
ARTICLE I - Definitions.................................................... 2
ARTICLE II - Plan of Reorganization........................................ 4
ARTICLE III - Management of the Company.................................... 4
Section 3.1 Board of Directors...................................... 4
Section 3.2 Obligations of Parties to Vote for Directors............ 5
Section 3.3. Vacancies............................................... 6
Section 3.4. Service on Committees of the Board...................... 6
ARTICLE IV - Certain Covenants............................................. 6
Section 4.1 Covenants............................................... 6
ARTICLE V - Certain Rights With Respect to Transfers....................... 7
Section 5.1 Certain Rights.......................................... 7
Section 5.2 Legend.................................................. 8
Section 5.3. Preemptive Rights....................................... 9
ARTICLE VI - Registration Rights........................................... 9
Section 6.1........................................................... 9
ARTICLE VII - Termination.................................................. 9
Section 7.1 Termination............................................. 9
ARTICLE VIII - Miscellaneous............................................... 9
Section 8.1 Notices................................................. 9
Section 8.2 Governing Law........................................... 10
Section 8.3 Successors and Assigns.................................. 10
Section 8.4 Duplicate Originals..................................... 10
Section 8.5 Severability............................................ 11
Section 8.6 No Waivers; Amendments.................................. 11
</TABLE>
Exhibits
Exhibit I Plan of Reorganization
Exhibit II Registration Rights Agreement
<PAGE>
ARTICLE I
Definitions
"Affiliate" means, with respect to any Person, any Person who, directly or
indirectly controls, is controlled by or is under common control with that
Person. For purposes of this definition, "control" when used with respect to
any Person means the power to direct the management and policies of such Person,
directly or indirectly, whether through the ownership of Voting Securities, by
contract or otherwise.
"CZHH" means Capital Z Healthcare Holding Corp., a Delaware corporation.
"CZHH Merger Agreement" shall mean the meaning given to such term in
Section 2.1 hereof.
"Capital Z Group" means Capital Z Partners, Ltd., a Bermuda exempt company,
and its Affiliates and its and their respective officers, directors, and
employees (and members of their respective families and trusts for the primary
benefit of such family members). Without limiting the foregoing, the Capital Z
Group shall be deemed to include CZHH, Capital Z Management, LLC, Capital Z
Financial Services Fund II, L.P., Capital Z Financial Services Private Fund II,
L.P., Health Partners, International Managed Care Advisors, Julian A.L. Allen,
Steven M. Gluckstern, Robert Spass, and Paul H. Warren.
"Capital Z Group Designees" means those directors of the Company who were
designated by the Capital Z Group pursuant to Section 3.1(c) and (d), and
initially are Julian A.L. Allen and Paul H. Warren.
"Common Stock" means shares of the Common Stock, $.01 par value per share,
of the Company, and any capital stock of the Company into which such Common
Stock thereafter may be changed.
"Company" means HealthExtras, Inc., a Delaware corporation, and its
successors.
"Electing Holder" shall have the meaning assigned to such term in Section
5.1(a) hereof.
"First Offer Notice" shall have the meaning assigned to such term in
Section 5.1(b) hereof.
"Highland Group" means Highland Investments, LLC, a Maryland limited
liability company, and its Affiliates and its and their respective executive
officers and directors. Without limiting the foregoing, the Highland Group
shall be deemed to include Principal Holding Company, Principal Mutual Holding
Company and its Affiliates, United Payors & United Providers, Inc., Thomas L.
Blair and David T. Blair.
"Highland Group Designees" means those Directors of the Company who were
designated by the Highland Group pursuant to Section 3.1(b) and (d), and
initially are Thomas L. Blair, David T. Blair, Thomas J. Graf, Julia M. Lawler
and Karen E. Shaff.
2
<PAGE>
"Holder" means (i) a securityholder listed on the signature page hereof,
and (ii) any direct or indirect transferee of any such securityholder who is an
affiliate of such securityholder.
"Holder Offerees" shall have the meaning assigned to such term in Section
5.1(b) hereof.
"LLC" means HealthExtras, LLC, a Delaware limited liability company.
"LLC Merger" means the merger of LLC into the Company in accordance with
the Plan of Reorganization.
"LLC Merger Agreement" shall have the meaning given to such term in Section
2.1 hereof.
"Offering Holder" shall have the meaning assigned to such term in Section
5.1(a) hereof.
"Parties" shall have the meaning set forth in the introductory paragraph
hereof.
"Permitted Transfer" shall have the meaning assigned to it in Section
5.1(c) hereof.
"Person" or "person" means any individual, corporation, partnership,
limited liability company, joint venture, association, joint stock company,
trust, unincorporated organization, or government or other agency or political
subdivision thereof.
"Plan of Reorganization" shall have the meaning set forth in Section 2.1
hereof.
"Purchase Agreement" shall have the meaning set forth in Section 4.1(c)
hereof.
"Required Holders" means Holders who then own beneficially 85% or more of
the aggregate number of Voting Securities subject to this Stockholders
Agreement.
"Securities Act" means the Securities Act of 1933, as amended.
"Transfer" means any disposition of any Voting Security or any interest
thereon that would constitute a "sale" thereof within the meaning of Section
2(3) of the Securities Act.
"Transfer Notice" shall have the meaning assigned to it in Section 5.1(a)
hereof.
"Transferring Holder" shall have the meaning assigned to such term in
Section 5.1(a) hereof.
"Voting Securities" means the Common Stock and any other shares of capital
stock of the Company which is entitled to vote generally for the election of
directors and on matters submitted for stockholder vote.
3
<PAGE>
ARTICLE II
Plan of Reorganization
Section 2.1. The Parties (i) to the extent they are a signatory to the
Agreement and Plan of Reorganization (the "Plan of Reorganization") for the
Company attached as Exhibit I hereto, hereby agree to execute the Plan of
Reorganization; (ii) to the extent they are members of the LLC hereby approve
and consent in writing to the approval, adoption and execution by the LLC of the
Plan of Reorganization and the Agreement of Merger by and between the LLC and
the Company attached as Exhibit B to the Plan of Reorganization (the "LLC Merger
Agreement"); iii) to the extent that they are to become stockholders of the
Company, hereby authorize and consent in writing as stockholders of the Company
to the approval, adoption and execution by the Company of the Plan of
Reorganization, to the LLC Merger Agreement and the Agreement of Merger by and
between CZHH and the Company attached as Exhibit A to the Plan of Reorganization
(the "CZHH Merger Agreement") and to the transactions contemplated therein,
specifically including the adoption of the Amended and Restated Certificate of
Incorporation, the adoption of the HealthExtras, Inc. 1999 Stock Option Plan,
the grant of options thereunder, and the grant of rights to receive shares of
common stock; and (iv) to the extent they are stockholders of CZHH hereby
approve, authorize and consent in writing to the actions taken by CZHH with
respect to the Plan of Reorganization and to the CZHH Merger Agreement.
ARTICLE III
Management of the Company
Section 3.1. Board of Directors.
(a) Initial Directors. The parties agree that the initial Board
of Directors of the Company shall consent of:
(i) Thomas L. Blair, David T. Blair, Thomas J. Graf, Julia
M. Lawler, and Karen E. Shaff (who are the "Highland Group Designees");
(ii) Julian A.L. Allen and Paul H. Warren (who are the
"Capital Z Group Designees"); and
(iii) Two independent directors to be selected by the Board
of Directors of the Company.
(b) Highland Group Designees. (i) Until such time as the
Highland Group ceases to beneficially own, in the aggregate, at least 40% of the
outstanding voting securities, the Highland Group shall have the right to
designate five (5) persons for election as Directors of the Company; (ii) after
such time and until such time as the Highland Group ceases to beneficially own
in the aggregate at least 25% of outstanding voting securities, the Highland
Group shall have the right to designate three (3) persons for election as
Directors of the Company; (iii) after such time and until
4
<PAGE>
such time as the Highland Group ceases to beneficially own, in the aggregate, at
least 10% of outstanding voting securities, the Highland Group shall have the
right to designate two (2) persons for election as directors; and (iv) after
such time and until such time as the Highland Group ceases to beneficially own,
in the aggregate, at least 5% of outstanding voting securities, the Highland
Group shall have the right to designate one (1) person for election as a
Director.
(c) Capital Z Group Designees. (i) until such time as the Capital Z
Group ceases to beneficially own, in the aggregate, at least 10% of outstanding
voting securities, the Capital Z Group shall have the right to designate two (2)
persons for election as Directors; and (ii) after such time and until such time
as the Capital Z Group ceases to beneficially own, in the aggregate, at least 5%
of outstanding voting securities, the Capital Z Group shall have the right to
designate one (1) person for election as a Director.
(d) Increase in the number of Directors. To the extent that the
number of Directors shall be increased to greater than seven (7) plus that
number of Directors, not greater than three (3), who are not affiliated with
either the Highland Group or the Capital Z Group (in the aggregate the "base
number of Directors"), the number of Directors which the Highland Group and the
Capital Z Group shall be entitled to designate pursuant to paragraphs (b) and
(c) above, respectively, shall be adjusted to the extent that the adjusted
number of Directors to be designated by the Highland Group and the Capital Z
Group, respectively, as a percentage of the increased number of Directors, would
more closely approximate the percentage of the base number of Directors which
such Group is entitled to designate under paragraphs (b) or (c) above, than
would any other number of Directors.
Section 3.2. Obligations of Parties to Nominate and Vote for Directors.
The Company, from time to time at each appropriate time, will cause each of the
persons theretofore serving as Highland Group Designees or Capital Z Designees
(or other persons designated by the Highland Group as new Highland Group
Designees, or designated by the Capital Z Group as new Capital Z Designees, in
replacement of such persons) to be nominated and recommended by the Board of
Directors of the Company for reelection to the Board of Directors of the Company
by the stockholders of the Company upon any expiration of their respective terms
of office. Each Holder shall vote his or its shares of Common Stock at any
regular or special meeting of stockholders of the Company or in any written
consent executed in lieu of such a meeting of stockholders and shall take all
other lawful actions necessary to give effect to the agreements contained in
this Stockholders Agreement (including without limitation the election of the
Highland Group Designees and Capital Z Designees as described herein) and to
attempt to ensure that the certificate of incorporation and bylaws of the
Company do not, at any time hereafter during the term of this Stockholders
Agreement, conflict in any respect with the provisions of this Stockholders
Agreement.
Section 3.3. Vacancies. If, prior to his election to the Board of
Directors of the Company pursuant hereto, any Highland Group Designee or Capital
Z Group Designee shall be unable or unwilling to serve as a director of the
Company, then the Highland Group or Capital Z Group, as applicable, shall be
entitled to designate a replacement designee. If, following an election to the
Board of Directors of the Company pursuant hereto, any Highland Group Designee
or Capital Z Group Designee shall resign or be removed or be unable to serve for
any reason prior to the
5
<PAGE>
expiration of his term as a director of the Company, then the Highland Group or
Capital Z Group, as applicable shall, within thirty (30) days of such event,
notify the Board of Directors of the Company in writing of a replacement
designee. Unless inconsistent with its fiduciary obligations, the Board of
Directors, as applicable, shall nominate for election by stockholders or appoint
as a Director to fill the unexpired term of the designee who such new designee
is replacing, of any such replacement designee.
Section 3.4. Service on Committees of the Board. The Company agrees that
a Highland Group Designee and a Capital Z Group Designee shall be entitled to
serve on each of the Board's committees.
ARTICLE IV
Certain Covenants
Section 4.1 Covenants.
(a) Transactions With Affiliates. The Company shall not enter into
any transaction, including, without limitation, any purchase, sale, exchange or
other transfer of property or any provision or receipt of services, with any
Affiliate of the Company (including, without limitation, United Payors & United
Providers, Inc. and any of its Affiliates) other than upon terms (i) no less
favorable to the Company than could be obtained by the Company in a comparable
arm's length transaction with a Person that is not an Affiliate of the Company
or (ii) approved by a majority of the Directors independent of such Affiliate.
The Administrative and Technical Services Agreement and the Provider Network
Access Agreement with United Payors & United Providers, Inc. are deemed approved
in accordance with this provision.
(b) Mergers, Acquisitions and Divestitures. The Company shall not
merge with, acquire stock or assets from, sell stock or assets to, or engage in
any similar business combination transaction with, an Affiliate of the Company
(including, without limitation, United Payors & United Providers, Inc.) if the
value of such transaction exceeds one million dollars ($1,000,000) unless the
Company first shall have obtained an opinion from a nationally recognized
investment banking firm to the effect that such transaction is fair to the
Company or its stockholders, as the case may be, from a financial point of view.
(c) Sale of Company. If the LLC Merger becomes effective, but the
Company does not complete its sale of common stock pursuant to the Purchase
Agreement discussed in Section 2.1(i) of this Plan of Reorganization, then if
the Company shall not have consummated a public offering of securities
substantially equivalent to the sale contemplated by that Purchase Agreement, a
merger or consolidation of the Company with or into any other entity in which
the Company will not be the surviving entity or a sale of all or substantially
all of the assets of the Company on or prior to May 21, 2004, the Company shall,
at the request of Health Partners, use its best efforts to sell the Company at a
price equal to the Fair Market Value within 180 days after the date of such
written request. For purposes hereof, "Fair Market Value" shall mean a value
agreed
6
<PAGE>
upon by Health Partners and the Company. If Health Partners and the Company are
unable to agree upon a value, they shall jointly retain an independent,
nationally-recognized investment banking firm, accounting firm or other firm
providing similar valuation services (which firm shall not be a firm having a
continuing relationship with either the Company or Health Partners) (a
"Valuation Firm") satisfactory to each of them. If the Company and Health
Partners are unable to agree upon the selection of a Valuation Firm within five
(5) days, then the Company and Health Partners shall each retain a separate
Valuation Firm within twenty (20) days after the expiration of such five (5) day
period. If either the Company or Health Partners fails to retain a Valuation
Firm within such twenty (20) day period, then the Valuation Firm retained by the
Company or Health Partners, as the case may be, shall alone take the actions
described below. Such Valuation Firm(s) shall determine the Fair Market Value of
the Company and deliver its written opinion thereon to the Company and Health
Partners within thirty (3) days of being retained. If such Valuation Firms are
unable to agree on the Fair Market Value of the Company, then unless otherwise
directed in writing by the Company and Health Partners, such Valuation Firms, in
their sole discretion, shall select another Valuation Firm, which Valuation Firm
shall make such determination and render such an opinion as soon as practicable.
In either case, the determination so made will be conclusive and binding on the
Company and Health partners. The fees and expenses for such determination made
by any and all such Valuation firms shall be paid by the Company.
ARTICLE V
Certain Rights With Respect to Transfers
Section 5.1 Certain Rights.
(a) Tag-Along Rights.
(i) Subject to Section 5.1(b) and other than in connection with
a Permitted Transfer, as defined in Section 5.1(c), in the event that a Holder
proposes to transfer (in a single transaction or series of related transactions)
Voting Securities aggregating more than 10% of the outstanding Voting Securities
to a Person or group of affiliated Persons, (such Holder proposing such
Transfer, a "Transferring Holder") shall deliver a notice (a "Transfer Notice")
to the Company and the other Holders at least 30 days prior to any such
Transfer. The other Holders may elect to participate in the contemplated
Transfer by delivering written notice to the Transferring Holder within 15 days
after delivery by the Transferring Holder of such Transfer Notice. If any other
Holder has elected to participate in such Transfer (such other Holder so
electing, an "Electing Holder"), the Transferring Holder and any such Electing
Holder shall be entitled to Transfer in the contemplated Transfer, on the same
contract terms, the number of Voting Securities at the price determined under
(ii) below.
(ii) It is the intent of the Parties that, in a transaction in
which the tag-along rights provided for in Section 5.1(a)(i) apply, the
aggregate sale proceeds shall be divided proportionately with respect to all
Electing Holders and the Transferring Holder based on each
7
<PAGE>
Electing Holder's and the Transferring Holder's respective shares of the
liquidation proceeds that all such Electing Holders and the Transferring Holder
would receive, respectively, in the event of a hypothetical liquidation of the
Company at the enterprise value implied by the proposed sales price.
(b) First Offer Rights. Prior to a Transfer (in a single transaction
or series of related transactions) of Voting Securities aggregating more than
10% of outstanding Voting Securities to a Person or group of affiliated Persons,
by a Holder (other than a Permitted Transfer), the Holder proposing to make such
Transfer (the "Offering Holder"), shall deliver a written notice to the Company
and to the other Holders (such other Holders the "Holder Offerees"), which
notice specifies in reasonable detail the number of Voting Securities to be so
transferred, the proposed purchase price therefor and the other terms and
conditions of such proposed Transfer (a "First Offer Notice"). The Company may
elect to purchase all (but not less than all) of the Voting Securities to be
transferred, upon the same terms and conditions as those set forth in the First
Offer Notice and other reasonable customary terms and conditions by delivering a
written notice of such election to the Offering Holder within 15 days after the
First Offer Notice has been delivered to the Company. If the Company has not
elected to purchase all of the Voting Securities to be Transferred, the Holder
Offerees may elect to purchase all (but not less than all) of the Voting
Securities to be Transferred, on a pro rata basis (based on the percentage
ownership of Voting Securities by a Holder Offerees compared to such ownership
by all Holder Offerees), upon the same terms and conditions as those set forth
in the First Offer Notice, by giving written notice of such election to the
Offering Holder within 15 days after the First Offer Notice was delivered to the
Company; provided, that if any Holder Offeree elects not to purchase its pro
rata share of the Voting Securities to be Transferred, the remaining Holder
Offerees that have so elected may purchase their pro rata share of such
unpurchased Voting Securities (based on the percentage ownership of Voting
Securities of a Holder Offerees electing to purchase such Voting Securities
compared to stock ownership by all Holder Offerees election to purchase such
Voting Securities). If neither the Company nor the Holder Offerees elect to
purchase all of the Voting Securities specified in the First Offer Notice, then
the Offering Holder may Transfer to any Person the Voting Securities
contemplated to be Transferred at a price and on terms and conditions in the
aggregate no more favorable to the Transferee than those specified in the First
Offer Notice during the 90-day period immediately following the date on which
the First Offer Notice was delivered to the Company and the Holder Offerees.
Any Voting Securities not Transferred within such 90-day period will be subject
to the provisions of this Section 5.2(b) upon subsequent Transfer.
(c) Permitted Transfers. The restrictions on Transfer contained in
Sections 5.1(a) and (b) shall not apply with respect to any Transfer of Voting
Securities (A) in the case of a Holder which is a natural Person, pursuant to
applicable laws of descent and distribution or to any member of such Holder's
Family Group who agrees to be subject to the Stockholder Agreement, (B) in the
case of a Holder other than a natural person, among its Affiliates who agree to
be subject to this Stockholder Agreement, or (C) to employees or management of
the Company.
Section 5.2 Legend. To the extent the Voting Securities have not been
registered under the Securities Act in addition to the other restrictions on
Transfer contained in this Agreement, such Voting Securities cannot be sold
unless subsequently registered under the Securities Act or an
8
<PAGE>
exemption from such registration is then available. Each certificate for any
unregistered Voting Securities shall be stamped or otherwise imprinted with a
legend in substantially the following form:
"THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE
"ACT"). THE SECURITIES REPRESENTED BY THIS CERTIFICATE MAY NOT BE
SOLD OR TRANSFERRED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION
STATEMENT UNDER THE ACT OR IN THE ABSENCE OF AN EXEMPTION FROM
REGISTRATION THEREUNDER. THE SECURITIES REPRESENTED BY THIS
CERTIFICATE ARE ALSO SUBJECT TO ADDITIONAL RESTRICTIONS ON
TRANSFER SPECIFIED IN A STOCKHOLDERS' AGREEMENT. THE COMPANY
RESERVES THE RIGHT TO REFUSE THE TRANSFER OF SUCH SECURITIES
UNTIL SUCH CONDITIONS HAVE BEEN FULFILLED WITH RESPECT TO SUCH
TRANSFER. A COPY OF SUCH CONDITIONS SHALL BE FURNISHED BY THE
COMPANY TO THE HOLDER HEREOF UPON WRITTEN REQUEST AND WITHOUT
CHARGE."
The Company may imprint such legend on certificates (if any) evidencing
Voting Securities held by a Holder. The legend set forth above shall be removed
from the certificates (if any) evidencing any Voting Securities only in
accordance with the terms and conditions hereof.
Section 5.3. Preemptive Rights. The Company will not make any offer for
sale of its Voting Securities other than in a public offer, in connection with
an acquisition or pursuant to employee benefit plan or arrangement, unless it
first offers in writing to sell to each Holder, on the same terms and conditions
and at the equivalent price, a number of shares of Voting Securities which would
enable the Holder to retain the same proportionate ownership of Voting
Securities that it holds prior to such offering.
ARTICLE VI
Registration Rights
Section 6.1 The Company agrees to execute the registration rights
agreement attached hereto as Exhibit II.
ARTICLE VII
Termination
Section 7.1 Termination. The provisions of this Agreement shall
terminate and be of no force and effect if the LLC Merger does not become
effective. In addition, the provisions of this Agreement shall terminate on the
tenth anniversary of the date of this Agreement.
9
<PAGE>
ARTICLE VIII
Miscellaneous
Section 8.1 Notices. Any notices or other communications required or
permitted hereunder shall be in writing, and shall be sufficiently given if made
by hand delivery, by telex, by telecopier or registered or certified mail,
postage prepaid, return receipt requested, addressed as follows (or at such
other address as may be substituted by notice given as herein provided):
If to the Company:
HealthExtras, Inc.
2275 Research Boulevard, 7th Floor
Rockville, Maryland 20850
Facsimile: (301) 921-2400
Attention: David T. Blair
With copies to:
Muldoon, Murphy & Faucette LLP
5101 Wisconsin Avenue, N.W.
Washington, D.C. 20016
Facsimile: 202-966-9409
Attention: Thomas Haggerty, Esq.
If to any Holder, at its address listed on the signature pages hereof.
Any notice or communication hereunder shall be deemed to have been given or
made as of the date so delivered if personally delivered; when answered back, if
telexed; when receipt is acknowledged, if telecopied; and five (5) calendar days
after mailing if sent by registered or certified mail (except that a notice of
change of address shall not be deemed to have been given until actually received
by the addressee).
Failure to mail a notice or communication to a Holder or any defect in it
shall not affect its sufficiency with respect to other Holders. If a notice or
communication is mailed in the manner provided above, it is duly given, whether
or not the addressee receives it.
Section 8.2 Governing Law. THIS STOCKHOLDERS AGREEMENT SHALL BE
GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF DELAWARE,
WITHOUT REGARD TO PRINCIPLES OF CONFLICTS OF LAW.
Section 8.3 Successors and Assigns. Whether or not an express
assignment has been made pursuant to the provisions of this Stockholders
Agreement, provisions of this Stockholders Agreement that are for the Holders'
benefit as the holders of any Voting Securities are also for the
10
<PAGE>
benefit of, and enforceable by, all subsequent holders of Voting Securities who
become Holders, except as otherwise expressly provided herein. This Stockholders
Agreement shall be binding upon the Company, each Holder, and their respective
successors and assigns.
Section 8.4 Duplicate Originals. All Parties may sign any number of
copies of this Stockholders Agreement. Each signed copy shall be an original,
but all of them together shall represent the same agreement.
Section 8.5 Severability. In case any provision in this Stockholders
Agreement shall be held invalid, illegal or unenforceable in any respect for any
reason, the validity, legality and enforceability of any such provision in every
other respect and the remaining provisions shall not in any way be affected or
impaired thereby.
Section 8.6 No Waivers; Amendments.
(a) No failure or delay on the part of the Company or any Holder in
exercising any right, power or remedy hereunder shall operate as a waiver
thereof, nor shall any single or partial exercise of any such right, power or
remedy preclude any other or further exercise thereof or the exercise of any
other right, power or remedy. The remedies provided for herein are cumulative
and are not exclusive of any remedies that may be available to the Company or
any Holder at law or in equity or otherwise.
(b) Any provision of this Stockholders Agreement may be amended or
waived if, but only if, such amendment or waiver is in writing and is signed by
the Company and the Required Holders; provided, however, that no such amendment
or waiver shall, (i) unless signed by all of the Holders, amend the provisions
of Section 2.1, (ii) (A) unless signed by the Holders of a majority of the
Common Stock held by the Capital Z Group, adversely affect the rights of the
Capital Z Group or the Capital Z Group Designees under Article III, IV or V or
(B) unless signed by the Holders of a majority of the Common Stock held by the
Highland Group, adversely affect the rights of the Highland Group or the
Highland Group Designees under Article III, IV or V (iii) unless signed by all
of the Holders affected, (A) amend the provisions of this Section 8.6(b) or (B)
change the number of Holders which shall be required for the Holders or any of
them to take any action under this Section 8.6(b) or any other provision of this
Stockholders Agreement, and (iv) unless signed by a majority of the Holders
affected adversely amend any provision of Article IV, Article V, or Article VI,
or grant a waiver thereunder.
[THE REMAINDER OF THIS PAGE IS INTENTIONALLY LEFT BLANK]
11
<PAGE>
IN WITNESS WHEREOF, the Parties hereto have caused this Stockholders
Agreement to be executed by their duly authorized representatives on this __ day
of _______, 1999.
HIGHLAND INVESTMENTS, LLC
By: ____________________________________
Thomas L. Blair
Representative
2275 Research Boulevard
Sixth Floor
Rockville, MD 20850
Facsimile: (301) 921-2400
HEALTHEXTRAS, LLC
By: ____________________________________
David T. Blair
Chief Executive Officer
2275 Research Boulevard
Seventh Floor
Rockville, MD 20850
Facsimile: (301) 548-8844
HEALTHEXTRAS, INC.
By: ____________________________________
David T. Blair
Chief Executive Officer
2275 Research Boulevard
Seventh Floor
Rockville, MD 20850
Facsimile: (301) 548-8844
With a copy to:
Muldoon, Murphy & Faucette LLP
5101 Wisconsin Avenue
Suite 500
Washington, DC 20116
Attention: Thomas J. Haggerty, Esq.
12
<PAGE>
PRINCIPAL HOLDING COMPANY
By: ____________________________________
Thomas J. Graf
Senior Vice President
711 High Street
Des Moines, IA 50392
Facsimile: (515) 248-3079
With a copy to:
Julia M. Lawler
711 High Street
Des Moines, IA 50392
Facsimile: (515) 248-3079
THOMAS L. BLAIR
By: ____________________________________
Thomas L. Blair
11610 Highland Farm Rd.
Potomac, MD 20854
Facsimile: (301) 299-1045
HEALTH PARTNERS
By: ____________________________________
___________________
54 Thompson St.
New York, NY 10012
Facsimile: (212) 965-2411
With a copy to:
Weil, Gotshal & Manges LLP
767 Fifth Avenue
New York, NY 10153
Attention: Thomas A. Roberts, Esq.
Facsimile: (212) 310-8007
13
<PAGE>
CAPITAL Z FINANCIAL SERVICES FUND II, L.P.
and
CAPITAL Z FINANCIAL SERVICES PRIVATE
FUND II, L.P.
By: ______________________________________
CAPITAL Z PARTNERS, LTD. their ultimate
general partner
By: _____________________________________
___________________
54 Thompson St.
New York, NY 10012
Facsimile: (212) 965-2411
CAPITAL Z MANAGEMENT, LLC
By: ____________________________________
___________________
54 Thompson St.
New York, NY 10012
Facsimile: (212) 965-2411
14
<PAGE>
Exhibit 5.1
October 20, 1999
HealthExtras, Inc.
2275 Research Boulevard, Seventh Floor
Rockville, Maryland 20850
Re: The offering of up to 5,500,000 shares of
HealthExtras, Inc. Common Stock
Ladies and Gentlemen:
You have requested our opinion concerning certain matters of Delaware law
in connection with the offering (the "Offering") by HealthExtras, Inc., a
Delaware corporation (the "Company"), of up to 5,500,000 shares (6,325,000
shares in the event that the underwriters' over-allotment option is exercised)
of its common stock, par value $.01 per share, ("Common Stock").
In connection with your request for our opinion, you have provided us and
we have reviewed the Company's certificate of incorporation filed with the
Delaware Secretary of State on July 9, 1999 (the "Certificate of
Incorporation"); the Company's Bylaws; the Company's Registration Statement on
Form S-1, as filed with the Securities and Exchange Commission initially on July
26, 1999, and as amended on September 21, 1999 (the "Registration Statement");
resolutions of the Board of Directors of the Company (the "Board") concerning
the organization of the Company, the Offerings and designation of the Pricing
Committee, and the form of stock certificate approved by the Board to represent
shares of Common Stock. We have also been furnished a certificate of the
Delaware Secretary of State certifying the Company's good standing as a Delaware
corporation. Capitalized terms used but not defined herein shall have the
meaning given them in the Certificate of Incorporation.
<PAGE>
HealthExtras, Inc.
October 20, 1999
Page 2
Based upon and subject to the foregoing, and limited in all respects to
matters of Delaware law, it is our opinion that:
1. The Company has been duly organized and is validly existing in good
standing as a corporation under the laws of the State of Delaware.
2. Upon the due adoption by the Pricing Committee or Board of Directors
of a resolution fixing the number of shares of Common Stock to be sold in the
Offering which number is in accordance with the terms set forth in the
Prospectus, the Common Stock to be issued in the Offering will be duly
authorized and, when such shares are sold and paid for in accordance with the
terms set forth in the Prospectus and such resolution of the Board of Directors,
and certificates representing such shares in the form provided to us are duly
and properly issued, will be validly issued, fully paid and nonassessable.
We consent to the filing of this opinion as an exhibit to the Registration
Statement on Form S-1 and to the use of the name of our firm where it appears in
the Registration Statement and in the Prospectus.
Very truly yours,
/s/
MULDOON, MURPHY & FAUCETTE LLP
TJH/gmg
<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
VISA/MasterCard, American Express and Discover cardholders and VISA/MasterCard
merchants, mortgagors and other mutually agreed upon groups ("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 national roll-out of the Program ("National
Marketing Strategy") 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.
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 it's 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.
E. 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 [30 days]* as to the acceptability to Reliance National
of any such insurance programs presented in writing to Reliance National.
2
<PAGE>
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 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:
A. Solicitation To solicit Benefits authorized in Exhibit A, whose
------------
pricing and insurability meet or exceed the underwriting and pricing
standards that from time to time are established by Reliance National.
B. Servicing Business To establish and maintain at all times a toll free
------------------
800 telephone number. To provide customary services on all inquiries from
Program members and potential Program members on the HealthExtras Program.
To promptly forward all inquiries concerning policy owner services
including claim inquiries to the Program Manager designated by Reliance
National.
C. Binding of Risks Administrator has no authority to bind any risk on
----------------
behalf of Reliance National. The Administrator may make the Program
Benefits available to the Target Market in accordance with III.A. above.
D. Fulfillment Materials To timely and properly issue and deliver
---------------------
fulfillment materials for the Business described in Exhibit A.
E. Premium Fees To pay accurate and adequate premiums for the Reliance
------------
National insurance components of the HealthExtras Program described under
this Agreement in compliance with the approved policy forms liste din
Exhibit A.
F. Compliance with Manuals To comply fully, timely and promptly with all
-----------------------
written manuals, rules, regulations, guidelines, instructions and
directions issued to Administrator by Reliance National relating to the
Business covered by this Agreement.
G. Premiums To collect, receive and receipt as part of Program member
--------
fees all premiums, including premium surcharges, fire district and other
taxes or assessments levied by any jurisdiction and required to be
collected in addition to stated premiums, due on all Policies written under
this Agreement, and pay Reliance National in accordance with III.H.
3
<PAGE>
H. Accounting To timely account for the Business to Reliance National in
----------
any form or manner as determined by the Program Manager and or Reliance
National within twenty (20) days of the end of each calendar month.
I. Fiduciary Capacity - Premium Trust Funds To hold all premiums
----------------------------------------
collected as part of Program member fees and received on Policies for
Reliance National and forward all premiums to Reliance National within
twenty (20) days after the end of the month.
J. Reliance National Property To safeguard, maintain and account for all
--------------------------
Policies, forms, manuals, equipment, supplies or anything else furnished
Administrator by Reliance National, all of which shall remain the property
of Reliance National. Administrator will return all property to Reliance
National promptly upon demand.
K. Administrator Expenses To pay, assume the obligation for and to be
----------------------
fully responsible for all costs and expenses associated with the
Administrator's performance under this Agreement. Administrator is
responsible for all marketing expenses, except as mutually agreed to by the
parties in writing. Administrator agrees to participate in additional
filing and compliance expenses resulting from mutually agreed upon
expediting strategies in connection with the 50 state filings. Any
participation by Administrator shall be mutually agreed upon in writing
before any such expenses are incurred.
L. Legal Compliance To keep fully informed of and comply fully with all
----------------
applicable laws and regulations.
M. Governmental Contacts To promptly notify Reliance National of all
---------------------
contacts and correspondence received from insurance regulatory or other
governmental authorities, to forward promptly upon receipt all summonses,
complaints, subpoenas or other court documents, and to cooperate fully with
Reliance National in making any responses.
N. Competent Staff To maintain sufficient supplies and equipment and a
---------------
staff of competent and trained personnel, to produce, develop, and
supervise the Business covered by this Agreement.
O. Reliance National Interests To promote and safeguard the best
---------------------------
interests and good name of Reliance National.
P. Accurate Records To keep and maintain separate, identifiable, orderly,
----------------
accurate, complete and timely records and accounts of all business and
transactions pertaining to Benefits sold under this Agreement. Such
records and files shall be the joint property of Reliance National and
Administrator. Reliance National may make copies and extracts as may be
necessary.
4
<PAGE>
Q. Audit To permit Reliance National during the term of this Agreement
-----
and as long as Reliance National considers necessary, to visit, inspect,
examine, audit and verify, at Administrator's offices or elsewhere, at such
times and as often as Reliance National may deem appropriate, with or
without prior notice any of the properties, accounts, files, documents,
books, reports, work papers and other records belonging to or in the
possession or control of Administrator or of any other person relating to
the Business covered by this Agreement. Reliance National may make copies
and extracts as may be reasonably necessary. Reliance National may conduct
any audit through any person or persons it may designate.
R. Due Diligence To provide Reliance National, upon request, with copies
-------------
of all necessary information and documentation required to complete
Reliance National's due diligence.
S. Trust Participation Agreement When required, Administrator shall
-----------------------------
obtain signed Trust Participation Agreements from each financial
institution or group participating in trusted group insurance products.
Administrator may also obtain written authorization from each financial
institution or group allowing Administrator to execute required sign in
documents.
T. Minimum Premium Guarantee By the end of the first year of this
-------------------------
Agreement, Administrator guarantees a minimum of 30,000 Program Members for
each insured benefit available as described in the following schedule:
The cash payments to Reliance National related to the Program Member
guarantee is as follows (Premium measurement related to the Business will
be based upon actual Program Member participation):
1. $1 Million Disability: $1.99/month x 30,000 = $716,400.
Cash payment as follows:
50% of guaranteed minimum due by December 15, 1998.
Balance of guaranteed minimum due by March 15, 1999.
2. $250,000 Organ Transplant: $1.06/month x 30,000 = $381,600.
Cash payment as follows:
50% of guaranteed minimum due by December 15, 1998.
Balance of guaranteed minimum due by March 15, 1999.
3. $5 Million Excess Medical: $.83/month x 30,000 = $300,000.
5
<PAGE>
Cash payment to be mutually determined prior to September 1, 1999.
The aforementioned payment is based upon a commitment of HealthExtras to
enroll 30,000 Program Members by February 28, 1999. Program Members are
measured on the basis of the initiation of coverage. Premiums due going
forward from February 28, 1999 would be for renewals of initial
participants and for new participants (not covered by the Minimum Premium
Guarantee described in Article VI, paragraph T). The HealthExtras
commitment is also based upon Reliance's good faith to continue its filing
of the HealthExtras' "Health" and "Disability" products to satisfy the
National Marketing Strategy.
Program participants as of March 1, 1999 are guaranteed the existing
program rates until at least February 28, 2001.
Program participants who newly enroll between March 1, 1999 and February
28, 2000 are guaranteed the existing rates for at least two (2) years from
the date of their enrollment.
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, it is anticipated that Reliance National will:
A. Respond to insurance department requests and interrogatories in a
timely manner;
B. Utilize third party consulting and legal firms to file insurance
policies, and "walk" insurance policies through state insurance
departments;
C. Consider both groups and individual filing strategies;
D. Conduct bi-weekly conference calls with all parties working on state
insurance filings including Administrator to review filing status and
strategies; and
E. Obtain Benefit approval in at least forty (40) states prior to July 1,
1999.
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:
A. Give immediate notice upon receiving notice or knowledge of any claim
or loss to Reliance National of all claims, suits and losses and to
cooperate fully with Reliance
6
<PAGE>
National to facilitate the investigation, adjustment, settlement and
payment of each and all claims, and assign such claim or loss for handling
as may be directed by Reliance National.
B. Give immediate notice of any claim or suit brought against Reliance
National where Reliance National or any of its affiliated companies is
named as defendant, to Reliance National and Reliance National shall assume
sole and full control of the defense of that claim or suit.
The Administrator will not be reimbursed by Reliance National for the
salaries, office expenses or any other expenses incurred in the handling of
claims unless otherwise expressly agreed to in writing by Reliance National.
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.
Whether or not Reliance National gives its consent Reliance National will not
be responsible for any advertising expense.
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 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:
A. Professional errors and omissions policy in an amount of $1,000,000;
and
B. Blanket employee dishonesty bond covering all employees in an amount
of $250,000.
7
<PAGE>
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:
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 the timely remitting of
accounts and monies to Reliance National, or Program Members and timely and
full compliance with Reliance National directives, rules, regulations or
manuals; or
8
<PAGE>
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
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:
a. Excessive Complaints The number of complaints received by
--------------------
Reliance National relating to Administrator's performance and
service to Program Members, policyholders or members of the
public is excessive, as may be determined by Reliance National in
its sole discretion; or
9
<PAGE>
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 the timely
remitting of accounts and monies to Reliance National, Program
Members or policyholders and timely and full compliance with
Reliance National directives, rules, regulations or manuals; or
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.
B. 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 authority in
accordance with Article X.
3. In the event Administrator terminates this agreement any Benefits
that are in force at the date of such termination shall remain
written, at Reliance National's sole discretion, on Reliance National
paper for a period of 3 years from the date of such termination so
long as the Benefits are provided at rates which are no greater than
the rates listed in Article III, paragraph T.
Article XII. Continuing Duties of Administrator after Termination
A. If Reliance National elects upon termination of this Agreement, and
for as long as Reliance National continues to desire the services of
Administrator, Administrator will perform all of the duties necessary for
the proper servicing of all Business bound or written under this Agreement
until all business shall have expired or been terminated. These services
shall include canceling, issuing mandatory endorsements, and collecting
10
<PAGE>
and returning premiums.
B. If this Agreement is terminated by Reliance National for any reason
under Article XI, and Reliance National is required to renew any Policies
under the law of any jurisdiction the Administrator will not be entitled to
any additional compensation.
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 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.
11
<PAGE>
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.
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
12
<PAGE>
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:
1. If to Reliance National:
------------------------
Robert Gonor
Senior Vice President
Reliance Integramark
1145 Sanctuary Parkway, Suite 300
Alphraretta, Georgia 30004
2. If to Administrator:
--------------------
David T. Blair
Chief Financial Officer
HealthExtras, LLC
2275 Research Boulevard
Rockville, MD 20850
13
<PAGE>
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.
2. Manuals, rules, regulations, guidelines, instructions and
directions issued in writing by Reliance National from time to time as
provided in this Agreement, shall bind the Administrator as though a
part of this Agreement.
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.
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:
/s/ David T. Blair /s/ Robert Gonor
- -------------------------------- ------------------------------
By: David T. Blair By: Robert Gonor
Title: Chief Financial Officer Title: Senior Vice President
14
<PAGE>
Exhibit 10.6
HEALTHEXTRAS INC.
July 8, 1997
Mr. Peter R. Hess
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 Peter:
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: All HealthExtras, Inc. Cards
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 five business days 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 ten working days 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>
Mr. Peter Hess
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 up to three service
days, with up to two of these three days to fall within the
period of July 5, 1997 to August 5, 1997 (currently
scheduled for July 24th) to record one sixty-second on-
camera television commercial and one sixty-second radio
commercial and participate in a photography session to shoot
print. Scheduling for remaining day(s) will be mutually
agreed upon. Each day shall last no more than eight hours
including a two hour meal break. Artist's appearance on the
on-camera commercial shall last no more than twenty seconds.
Company shall have the right to create one additional
television and radio commercial per year as well as
additional print material. One additional day of Artist's
services will be made available to Company by Lender in each
of years two and three, with all new materials subject to
Artist's approval prior to usage thereof. In any case, no
more than two new T.V. commercials will be broadcast in any
year of this Agreement or renewals.
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. Upon
execution of this Agreement, [$ ]* will be paid to
Lender on behalf of Artist. On completion of the first T.V.
and Radio commercials and Print-ad photo session, that is on
or about August 1, 1997, Lender on behalf of Artist shall
receive [$ ]*. Thereafter, Lender on behalf of Artist
shall receive [$ ]* on January 15, 1998; [$ ]*
on July 15, 1998; and, a final payment under the initial
Term of the Agreement of [$ ]* paid to Lender on
behalf of Artist on January 15, 1999. The portion of the
guarantee associated with payments for television and radio
commercials shall applied against any and all payments due
under the applicable union agreement including, without
limitation, double scale session use and holding fees.
*Removed pursuant to a confidentiality request.
<PAGE>
Mr. Peter Hess
July 8, 1997
Page 3
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 any 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.
Company shall pay Lender on behalf of Artist [$ ]* per
card, per year, for all dual purpose health benefits and
credit cards, to include any cards that may be promoted by
Artist and issued through HealthExtras, Inc. to cardholders
that subscribe to the card benefits to be promoted
hereunder. A synopsis of those benefits that may be
initially promoted by Artist are attached as Exhibit A to
the Agreement and made a part thereof. Such payments to
Lender on behalf of Artist shall continue for a ten year
period commencing upon completion of the initial three year
Term. If the Two Year Option hereunder is exercised, such
[$ ]* per card, per year payments shall commence upon
completion of the Two Year Option. Payments shall be made
within sixty days of the end of each year, accompanied by a
detailed accounting.
In the event that the amount of [$ ]* per card, per
year, for all cards issued through HeathExtras, Inc.
programs (as referenced above) to cardholders that subscribe
to the benefits promoted by Artist hereunder exceeds the sum
of [$ ]* for any year of the Term, or any year of the
Two Year Option if exercised, then Lender on behalf of
Artist shall receive the amount in excess of [$ ]*,
within sixty days of the end of such year. Company shall
provide Lender with a detailed accounting of number of
subscribers enlisted yearly along with such payment, if any.
*Removed pursuant to a confidentiality request.
<PAGE>
Mr. Peter Hess
July 8, 1997
Page 4
Lender's authorized representatives may, upon reasonable
notice, audit Company's relevant books and records to verify
the number of cards issued and such payments.
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 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: A guarantee of [$ ]*, payable to Lender on behalf of
Artist in increments of [$ ]* per year at the
commencement of each year. Lender on behalf of Artist, shall
continue to be eligible to receive the [$ ]* per
card, per year, payments as described in paragraph three of
the "Compensation" section of this Agreement. 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.
*Removed pursuant to a confidentiality request.
<PAGE>
Mr. Peter Hess
July 8, 1997
Page 5
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 one additional day per
year during the Term, and Two Year Option if exercised.
Payment shall be made upon completion of services. Each such
day shall not exceed eight hours each in duration, including
a two hour meal break.
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
contributions on behalf of Artist directly to the union and
will send the William Morris Agency office verification that
the payments have been made.
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: Peter R. Hess.
*Removed pursuant to a confidentiality request.
<PAGE>
Mr. Peter Hess
July 8, 1997
Page 6
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: Peter R. Hess. Notices for Company
will be sent to HealthExtras, Inc., 2275 Research Boulevard,
Rockville, MD 20850, Attn: Joseph Mott.
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/ Michael C. Miller /s/ Joel Faden
- --------------------- -----------------------------
Title: President Title: Assistant Secretary
*Removed pursuant to a confidentiality request.
<PAGE>
EXHIBIT A
Synopsis of Health Benefit Descriptions
Additional Lifetime Coverage: When the cardholders exhausts his/her lifetime
limit of at least $1,000,000, then he/she will receive an additional $5,000,000
in health plan coverage.
Catastrophic Injury and Disability: If the cardholder becomes totally and
permanently disabled, by accident, wherein he/she is prevented from attending to
their business or occupation, he/she will receive $1,000,000 lump sum payment
after twelve months of continuing disability.
Job Loss Coverage: If the cardholder losses his/her job (either fired or laid
off), then they will receive $400 per month for up to 6 months, while they seek
employment. Cardholder, over 18 years old, must be employed for 9 consecutive
months by the same employer to be eligible.
Organ Transplant: The cardholder and family are eligible receive $250,000 for
those expenses for Organ Transplants that exceed their base plan coverage of
$250,000.
Out of Area Coverage: Provides cardholder and his/her family with $2,500 per
year in additional coverage, over and above their standard health plan coverage,
for reimbursement of co-pay and deductibles when over 100 miles from home.
Nurse-On-Call: General health care advocacy and medical information and
referral recommendations (where appropriate to UP&UP Network providers) provided
to cardholder and family 24 hours per day, 7 days per week by telephone from
centralized nursing staff.
Emergency Evacuation, Repatriation and Return of Mortal Remains: Provides
cardholder and his/her family with access to worldwide emergency care,
relocating cardholder and/or their family to closest provider or facility
appropriate to deliver emergency care required. Coverage provides return of
cardholder and his/her family to home by way of emergency medical transport if
required. Provides for return of mortal remains to home upon death. Benefit
provides for a $50,000 cap.
Worldwide Travel and Emergency Assistance: Provides cardholders and his/her
family with access to emergency travel assistance including: credit card
replacement, worldwide legal assistance, lost document assistance, emergency
travel arrangements, return of minor children, Embassy and Consular assistance.
<PAGE>
HEALTHEXTRAS
2275 Research Boulevard
Sixth Floor
Rockville, MD 20850
Telephone: (301) 548-2900
Facsimile: (301) 548-8844
May 27, 1999
Mr. Joel Faden By Facsimile to: 212.903.1489
Cambria Productions, Inc. and by Federal Express
f/s/o Christopher Reeve
1775 Broadway, Suite 708
New York, NY 10019
Mr. Peter Hess
William Morris Agency, Inc.
1325 Avenue of the Americas
New York, NY 100 19
Dear Joel and Peter:
The terms of the July 8, 1997 Agreement ("Agreement") by and between Cambria
Productions, Inc. f/s/o, Christopher Reeve and HealthExtras contains an Option
for Additional Two Year Term ("Two Year Option"). This Two Year Option states
that the terms and conditions of that Agreement will be extended for an
additional two years, commencing July 9, 2000.
This letter shall serve as written notification of HealthExtras intent to
exercise this Two Year Option under the terms contained in the Agreement and
when signed below by Cambria Productions, Inc., will indicate Cambria's approval
of the exercise of the option period.
Concurrently, the Agreement shall be amended such that compensation to Lender on
behalf of Artist will be changed from "[$ ]* per card" to "[$ ]*
per enrollee" per year for all customers subscribing to the insurance benefits
promoted by the artist and issued through HealthExtras, Inc. 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 two per year through the term of the Two Year Option.
*Removed pursuant to a confidentiality request.
<PAGE>
Mr. Joel Faden
Mr. Peter Hess
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: "A guarantee of
[$ ]* payable to Lender in increments of [$ ]* per year, shall be
payable at the commencement of each year (July 2000 and July 2001). 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, Company shall continue to be
responsible for the deferred compensation of [$ ]* per enrollee per year
as described above." The balance of that paragraph shall be unchanged.
Sincerely,
/s/ Michael C. Miller
- --------------------------
Michael C. Miller
MCM/dw
The undersigned agree to exercise the terms of the Two Year Option as contained
in the Agreement.
/s/ Michael C. Miller /s/ Joel Faden
------------------------------ ------------------------------------
Michael C. Miller Joel Faden
For: HealthExtras, LLC For: Cambria Productions, Inc.
f/s/o Christopher Reeve
*Removed pursuant to a confidentiality request.
<PAGE>
Exhibit 10.9
Form of
HealthExtras, Inc.
1999 STOCK OPTION PLAN
1. Purpose of the Plan and Types of Awards
HealthExtras, Inc., a Delaware corporation, intends for the HealthExtras, Inc.
1999 Stock Option Plan (the "Plan") to provide additional incentive to certain
valued and trusted officers, employees, and other individuals who perform
services for HealthExtras, Inc. and its subsidiaries or other affiliates
(HealthExtras, Inc. and/or its subsidiaries and other affiliates, as the context
may require, is/are referred to herein as the "Company"), by encouraging them to
acquire shares of common stock of the Company (the "Stock") through options to
purchase Stock granted pursuant to the Plan ("Options"), thereby increasing each
individual's proprietary interest in the business of the Company and providing
them with an increased personal interest in the continued success and progress
of the Company, the result of which will promote both the interests of the
Company and its shareholders.
The Committee (as described below) will grant Options under the Plan either
intended to qualify as incentive stock options ("ISOs") within the meaning of
Section 422 of the Internal Revenue Code of 1986, as amended (the "Code"), or
non-qualified options ("NQOs"). Each individual granted an Option (an
"Optionee") under the Plan shall enter into an agreement with the Company (an
"Option Agreement") setting forth the terms and conditions of the Option, as
determined in accordance with the Plan.
2. Administration of Plan
A committee of the Board of Directors of the Company (the "Committee"), composed
of two (2) or more members of the Board of Directors of the Company (the "Board
of Directors") who shall be appointed from time to time by the Board of
Directors, shall administer this Plan. The Committee shall have the sole and
absolute power:
a. subject to the provisions of the Plan, to determine the terms and
conditions of all Options; to construe and interpret the Plan and any
Option Agreement; to determine the time or times an Option may be
exercised, the number of shares as to which an Option may be exercised at
any one time, and when an Option may terminate; to establish, amend and
revoke rules and regulations relating to the Plan and its administration;
and to correct any defect, supply any omission, or reconcile any
inconsistency in the Plan, or in any Option Agreement, in a manner and to
the extent it shall deem necessary, all of which determinations and
interpretations made by the Committee shall be conclusive and binding on
all Optionees, any other holders of Options and on their legal
representatives and beneficiaries;
b. to determine all questions of policy and expediency that may arise in the
administration of the Plan and generally exercise such powers and perform
such acts as are deemed necessary or expedient to promote the best
interests of the Company; and
<PAGE>
c. except to the extent prohibited by, or impermissible in order to obtain
treatment desired by the Committee under, applicable law or rule, to
allocate or delegate all or any portion of its powers and responsibilities
to any one or more of its members or to any person(s) selected by it,
subject to revocation or modification by the Committee of such allocation
or delegation.
3. Shares Subject to the Plan
Subject to the provisions of Paragraph 13 of the Plan, the Stock which may be
issued pursuant to Options granted under the Plan shall not exceed in the
aggregate 4,000,000 shares. If any Options granted under the Plan terminate,
expire or are surrendered without having been exercised in full, the number of
shares of Stock not purchased under such Options shall be available again for
the purpose of the Plan.
4. Persons Eligible for Options
a. All officers, employees and independent contractors of the Company shall be
eligible to receive Options under the Plan. The Committee, or the Board,
shall determine the individuals to whom Options shall be granted, the time
or times such Options shall be granted, the type of Option to be granted,
the number of shares to be subject to each Option, the times when each
Option may be exercised, and any other terms and conditions associated with
the Option. The Committee may grant an employee ISOs or NQOs or both under
the Plan.
b. With respect to the granting of ISOs only, no ISO will be granted to an
employee, and an attempted grant of such an ISO will be void, if the
aggregate Fair Market Value Per Share (as defined below), determined by the
Committee at the time an ISO is granted, of the Stock with respect to which
the ISO and previously granted ISOs are exercisable for the first time by
such employee during any calendar year (under all such plans of the
Company) exceeds $100,000 or such other amount as may be specified in
Section 422(d) of the Code.
5. Purchase Price
The purchase price of each share of Stock covered by each ISO shall not be less
than 100% of the Fair Market Value Per Share (as defined below) of the Stock on
the date the ISO is granted; provided, however, if when an ISO is granted the
Optionee receiving the ISO owns, or will be considered to own by reason of
Section 424(d) of the Code, more than 10% of the total combined voting power of
all classes of stock of the Company, the purchase price of the Stock covered by
such ISO shall not be less than 110% of the Fair Market Value Per Share of the
Stock on the date the ISO is granted. The purchase price of each share of Stock
covered by each NQO shall be set from time to time by the Committee; provided,
however, that the Committee shall set the purchase price for each share of Stock
covered by an Option at the time of the grant of the Option.
2
<PAGE>
For purposes of this Plan, "Fair Market Value Per Share" of the Stock shall
mean: (i) if the Stock is not publicly traded, the amount determined by the
Committee in good faith on the date of the grant of the Option; (ii) if the
Stock is traded only otherwise than on a securities exchange and is not reported
on The Nasdaq National Market ("Nasdaq"), the closing quoted selling price of
the Stock on the date of grant of the Option as quoted in "Pink Sheets"
published by the National Daily Quotation Bureau; (iii) if the Stock is traded
only otherwise than on a securities exchange and is reported on Nasdaq, the
closing Nasdaq reported sales price of the Stock on the date of grant of the
Option, as reported in The Wall Street Journal; or (iv) if the Stock is admitted
to trading on a securities exchange, the closing quoted selling price of the
Stock on the date of grant of the Option, as reported in The Wall Street
Journal.
6. Duration of Options
a. Non-Qualified Options
---------------------
Termination of Employment or Service (General). Unless otherwise
determined by the Committee, upon the termination of an Optionee's
employment or other service for any reason other than retirement,
disability or death, or Termination for Cause, the Optionee may exercise
only those NQOs that were immediately exercisable by the Optionee at the
date of such termination and only for a period of three (3) months
following the date of such termination, or, if sooner, until the expiration
term of the NQOs.
Termination of Employment or Service (Retirement). Unless otherwise
determined by the Committee, in the event of an Optionee's retirement (as
described in the Optionee's Option Agreement), the Optionee may exercise
only those NQOs that were immediately exercisable by the Optionee at the
date of retirement and only for a period of one (1) year following the date
of retirement, or, if sooner, until the expiration term of the NQOs.
Termination of Employment or Service (Disability or Death). Unless
otherwise determined by the Committee, in the event of the termination of
an Optionee's employment or other service due to disability (as described
in the Optionee's Option Agreement) or death, all NQOs held by such
Optionee shall immediately become exercisable and remain exercisable for a
period two (2) years following the date of such termination, or, if sooner,
until the expiration term of the NQOs.
Termination of Employment or Service (Termination for Cause). In the event
of an Optionee's Termination for Cause, all rights with respect to the
Optionee's NQOs shall expire immediately upon the effective date of such
Termination for Cause. For purposes of this Plan, "Termination for Cause"
shall include termination because of an Optionee's personal dishonesty,
incompetence, willful misconduct, breach of fiduciary duty involving
personal profit, intentional failure to perform stated duties, willful
violation of any law, rule, or regulation (other than traffic violations or
similar infractions).
3
<PAGE>
b. Incentive Stock Options
-----------------------
Termination of Employment or Service (General). Unless otherwise
determined by the Committee, upon the termination of an Optionee's
employment or other service for any reason other than retirement,
disability or death, or Termination for Cause, the Optionee may exercise
only those ISOs that were immediately exercisable by the Optionee at the
date of such termination and only for a period of three (3) months
following the date of such termination. Any option originally designated
as an ISO shall be treated as an NQO if exercised more than one (1) year
following the date of the Optionee's cessation of employment, or, if
sooner, until the expiration term of the ISOs.
Termination of Employment (Retirement). Unless otherwise determined by
the Committee, in the event of an Optionee's retirement (as described in
the Optionee's Option Agreement), the Optionee may exercise only those ISOs
that were immediately exercisable by the Optionee at the date of retirement
and only for a period of one (1) year following the date of cessation of
employment by reason of retirement. Any Option originally designated as an
ISO shall be treated as a NQO to the extent the Optionee exercises such
Option more than three (3) months following the Date of the Optionee's
cessation of employment by reason of retirement, or, if sooner, until the
expiration term of the ISOs.
Termination of Employment (Disability or Death). Unless otherwise
determined by the Committee, in the event of the termination of an
Optionee's employment or other service due to disability (as described in
the Optionee's Option Agreement) or death, all ISOs held by such Optionee
shall immediately become exercisable and remain exercisable for a period
one (1) year following the date of such termination, or, if sooner, until
the expiration term of the ISOs.
Termination of Employment (Termination for Cause). In the event of an
Optionee's Termination for Cause, all rights under such Optionee's ISOs
shall expire immediately upon the effective date of such Termination for
Cause. For purposes of this provision, "Termination for Cause" shall have
the same meaning as when applied to NQOs, or, if sooner, until the
expiration term of the ISOs.
c. Change in Control Provisions
----------------------------
Unless otherwise determined by the Committee at the time of grant and
notwithstanding anything in this Plan to the contrary, in the event of a Change
in Control, all outstanding Options shall be vested as of the effective date of
the Change in Control. If, in connection with or as a consequence of a Change
in Control, the Company is merged into or consolidated with another corporation,
if the Company becomes a subsidiary of another corporation or if the Company
sells or otherwise disposes of substantially all of its assets to another
corporation, then unless provisions are made in connection with such
transactions for the continuance of the Plan and/or the assumption or
substitution of then outstanding Options with new options covering the stock of
the successor
4
<PAGE>
corporation, or parent or subsidiary thereof, with appropriate adjustments as to
the number and kind of shares and prices, such Options shall be canceled as of
the effective date of the merger, consolidation, or sale and the Optionee shall
be paid in cash an amount equal to the difference between the Fair Market Value
of the Stock subject to the Options on the effective date of such corporate
event and the exercise price of the Options. Notwithstanding anything in this
Section 6(c) or any Option agreement to the contrary, in the event that the
consummation of a Change in Control is contingent on using pooling of interests
accounting methodology, the Board may, in its discretion, take any action
necessary to preserve the use of pooling of interests accounting. For purposes
of this Plan, a Change in Control is 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, as amended), 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 the Company representing
20% or more of the combined voting power of the Company's then outstanding
securities; or
(b) during any period of 24 consecutive months, individuals who at the
beginning of such period constitute the Board cease for any reason to
constitute at least a majority thereof unless the election, or the
nomination for election by the Company's shareholders, of each new director
was approved by a vote of at least two-thirds of the directors then still
in office who were directors at the beginning of the period; or
(c) The Stockholders of the Company approve a definitive agreement, and the
closing for such transaction is scheduled to occur within 24 hours,
regarding:
(i) for the merger or other business combination of the Company with
or into another corporation pursuant to which the Company
will not survive or will survive only as a subsidiary of another
corporation;
(ii) for the sale or other disposition of all or substantially all of
the assets of the Company;
(iii) for the merger of another corporation into the Company which
survives if, as a result of such merger less than 50% of the
outstanding voting securities of the Company shall be owned in
the aggregate immediately after such merger by the owners of the
voting shares of the Company outstanding immediately prior to
such merger;
(iv) for the liquidation or dissolution of the Company; or
(v) any combination of the foregoing.
5
<PAGE>
7. Exercise of Options
An Option may be exercisable in installments or otherwise upon such terms as the
Committee shall determine when the Option is granted. As a condition of the
exercise, in whole or in part, of any Option, the Committee may require the
Optionee to pay, in addition to the purchase price of the Stock covered by the
Option, an amount equal to any Federal, state, local and foreign taxes that may
be required to be withheld in connection with the exercise of such Option.
Notwithstanding the foregoing, the Committee may authorize the Company's
officers to establish procedures for the satisfaction of an Optionee's
withholding tax liability incurred upon exercise of an Option by enabling the
Optionee to authorize the Company to retain from the total number of shares to
be issued pursuant to such Option exercise that number of shares (based on the
then Fair Market Value Per Share as determined by the Committee) that will
satisfy the withholding tax due.
8. Method of Exercise
a. When the right to purchase shares accrues, Options may be exercised by
giving written notice to the Company stating the number of shares for which
the Option is being exercised, accompanied by payment in full by cash, or
its equivalent, acceptable to the Company, of the purchase price for the
shares being purchased and, if applicable, any Federal, state, local or
foreign taxes required to be withheld in accordance with the provisions of
Paragraph 7 of the Plan. The Committee may establish or direct such
additional or different procedures or requirements for the exercise of
Options from time to time.
b. In the Committee's discretion, payment of the purchase price for the shares
may be made in whole or in part with other shares of Stock of the Company
which are free and clear of all liens and encumbrances. The value of the
shares of Stock tendered in payment for the shares being purchased shall be
the Fair Market Value Per Share on the date of the Optionee's notice of
exercise.
c. Notwithstanding the foregoing, the Company shall have the right to postpone
the time of delivery of the shares for such period as may be required for
the Company, with reasonable diligence, to comply with any applicable
listing requirements of any national securities exchange or Nasdaq or any
Federal, state, local or foreign law. If the Optionee, or other person
entitled to exercise the Option, fails to timely accept delivery of and pay
for the shares specified in such notice, the Committee shall have the right
to terminate the Option with respect to such shares.
d. Each Option Agreement with respect to an ISO shall require the Optionee to
notify the Committee of any disposition of Stock issued pursuant to the
exercise of such Option under the circumstances described in Section 421(b)
of the Code (relating to certain disqualifying dispositions), within 10
days of such disposition.
6
<PAGE>
9. Transferability of Options
Except as otherwise determined by the Committee, no Option granted under the
Plan shall be assignable or transferable by the Optionee, either voluntarily or
by operation of law, other than by will or the laws of descent and distribution,
and, during the lifetime of the Optionee, shall be exercisable only by the
Optionee.
10. Continuance of Employment or Service
Nothing contained in the Plan or in any Option Agreement shall confer upon any
Optionee any rights with respect to the continuation of employment by, or
service with, the Company or interfere in any way with the right of the Company
(subject to the terms of any separate employment agreement to the contrary) at
any time to terminate such employment or service or to increase or decrease the
compensation of the Optionee from the rate in existence at the time of the
granting of any Option.
11. Restrictions on Shares
If the Company shall be advised by counsel that certain requirements under the
Federal, state or foreign securities laws must be met before Stock may be issued
under this Plan, the Company shall notify all persons who have been issued
Options, and the Company shall have no liability for failure to issue Stock
under any exercise of Options because of delay while such requirements are being
met or the inability of the Company to comply with such requirements.
12. Privilege of Stock Ownership
No person entitled to exercise any Option granted under the Plan shall have the
rights or privileges of a shareholder of the Company for any shares of Stock
issuable upon exercise of such Option until such person has become the holder of
record of such shares. No adjustment shall be made for dividends or other rights
for which the record date is prior to the date on which such person becomes the
holder of record, except as provided in Paragraph 13 of the Plan.
13. Adjustment
a. If the number of outstanding shares of Stock are increased or decreased, or
such shares are exchanged for a different number or kind of shares or
securities of the Company through reorganization, merger, recapitalization,
reclassification, stock dividend, stock split, reverse stock split,
combination of shares, or other similar transaction, the aggregate number
of shares of Stock subject to the Plan as provided in paragraph 3 above,
the maximum number of shares under Options that may be granted to an
Optionee during any calendar year specified in paragraph 4(a) above, and
the shares subject to issued and outstanding Options under the Plan shall
be appropriately and proportionately adjusted by the Committee. Any such
adjustment in an outstanding Option shall be made without change in the
aggregate purchase price applicable to the unexercised portion of the
Option but with an appropriate
7
<PAGE>
adjustment in the price for each share or other unit of any security
covered by the Option. In the event the Committee determines that any
dividend or other distribution (whether in the form of cash, shares of
Stock, other securities, or other property), recapitalization, stock split,
reverse stock split, reorganization, merger, consolidation, split-up, spin-
off, combination, repurchase, or exchange of shares of Stock or other
securities of the Company, issuance of warrants or other rights to purchase
shares of Stock or other securities of the Company, or other similar
transaction or event affects the shares of Stock or other securities or
property then covered by Options such that an adjustment other than as
provided in the foregoing portion of this subparagraph (a) is appropriate
in order to prevent dilution or enlargement of the benefits or potential
benefits intended to be made available under the Plan and Options granted
thereunder, then the Committee shall, in such manner as it may deem
equitable, adjust any or all of (i) the number and kind of shares of stock
(or other securities or property) which thereafter may be made the subject
of Options, (ii) the number and kind of shares of stock (or other
securities or property) subject to outstanding Options, (iii) the purchase
price with respect to any outstanding Options, or, if deemed appropriate,
make provision for a cash payment to the holders of outstanding Options,
and (iv) the aggregate number of shares of Stock or number and kind of
other securities or property subject to the Plan and the maximum number of
shares or other securities or property under Options that may be granted to
an Optionee during any calendar year specified in Paragraph 4(a) of the
Plan.
b. Notwithstanding subparagraph (a) of this Paragraph 13, upon the dissolution
or liquidation of the Company, or upon a reorganization, merger or
consolidation of the Company with one or more entities as a result of which
the Company is not the surviving or resulting entity, or upon a sale of
substantially all of the assets of the Company or the transfer of more than
80% of the then outstanding Stock of the Company to another entity or
person, the Plan and any Options granted under the Plan shall terminate
upon the consummation of the transaction (provided, such Options may be
exercised effective simultaneously with such consummation to the extent
otherwise exercisable, giving effect to any acceleration thereof by reason
of such consummation), unless provision shall be made in writing in
connection with such transaction for the continuance of the Plan, for the
assumption of Options previously granted or the substitution for such
Options of new options to purchase the stock of a successor or resulting
entity, or parent or subsidiary thereof, with appropriate adjustments as to
number and kind of shares and the option price, in which event the Plan and
Options previously granted shall continue in the manner and under the terms
so provided; provided, however, that the Committee or the Board of
Directors shall have the authority to amend this paragraph to provide for a
requirement that a successor or resulting entity assume any outstanding
Options. Notwithstanding the foregoing, this provision shall have no
effect as a result of the initial public offering of the stock of
HealthExtras, Inc.
c. Adjustments under this Paragraph 13 shall be made by the Committee whose
determination as to what adjustments shall be made, and the extent thereof,
shall be final, binding and conclusive. No fractional shares of Stock shall
be issued under the Plan or in connection with any such adjustment.
8
<PAGE>
14. Amendment and Termination of Plan
a. The Board of Directors, may, from time to time, suspend or terminate the
Plan or amend or revise the terms of the Plan or any Option Agreement;
provided that if and to the extent required by applicable law or rule, any
such amendment to the Plan shall be subject to approval by a majority of
votes cast at a meeting of shareholders at which a quorum representing a
majority of the Stock is present in person or by proxy or such other vote
as may be required by such law or rule.
b. Subject to the provisions in Paragraph 13 of the Plan, the Plan shall
terminate on the date which is ten years after its effective date.
c. Subject to the provisions in Paragraph 13 of the Plan, no amendment,
suspension or termination of this Plan or any Option Agreement shall,
without the consent of the Optionee, adversely affect the rights of such
Optionee under any Option previously granted to such Optionee under the
Plan.
15. Effective Date of Plan
The Plan shall become effective upon the merger HealthExtras, LLC with and into
HealthExtras, Inc. as provided in the Agreement and Plan of Reorganization
between those parties.
16. Term of Plan
No Option shall be granted pursuant to the Plan after 10 years after the
effective date of the Plan.
9
<PAGE>
Exhibit 10.10
FORM OF
REGISTRATION RIGHTS AGREEMENT
-----------------------------
THIS REGISTRATION RIGHTS AGREEMENT (this "Agreement") is made and effective
----------------------------------
as of __________, 1999, by and among Health Partners, a general partnership,
Highland Investments, LLC, a Maryland limited liability company (individually,
an "Investor" and collectively, the "Investors"), and HealthExtras, Inc., a
Delaware corporation (the "Company").
In consideration of the promises and the mutual covenants and agreements of
the parties contained herein, and for other good and valuable consideration, the
receipt of which is hereby acknowledged, the parties agree as follows:
1. Definitions. As used herein, the terms below shall have the following
-----------
meanings. Any such term, unless the context otherwise requires, may be used in
the singular or plural, depending upon the reference.
"Affiliate" shall have the meaning provided in the Exchange Act.
"Agreement" shall mean this Registration Rights Agreement.
"Closing Date" means the closing date for the sale of Common Stock
pursuant to an initial public offering by HealthExtras, Inc.
"Commission" shall mean the United States Securities and Exchange
Commission.
"Common Stock" shall mean shares of common stock, par value $0.01 per
share, of the Company.
"Company" shall mean HealthExtras, Inc., a Delaware corporation, and
any successor thereto.
"Demand Registration" shall mean a registration effected pursuant to
Section 2(a).
"Exchange Act" shall mean the Securities Exchange Act of 1934, as
amended, or any successor law, and the rules and regulations issued pursuant to
that Act or any successor law.
"Holder" shall mean any Person who is the record owner of Registrable
Shares on behalf of an Investor or other beneficial owner which is a direct or
indirect permitted assignee of an Investor, or the Investors, or any direct or
indirect permitted assignee of an Investor, which is the beneficial owner of
Registrable Shares.
"Initiating Holders" shall have the meaning provided in Section 5(a).
"Investor" and Investors" shall have the meaning provided in the
preamble of this Agreement.
<PAGE>
"Person" shall mean an individual, partnership, limited liability
company, joint venture, corporation, trust or unincorporated organization or any
other similar entity.
"Plan of Reorganization" means the Agreement and Plan of
Reorganization among HealthExtras, Inc. and HealthExtras LLC dated ____________,
1999.
"Register," "registered" and "registration" shall refer to a
registration effected by preparing and filing a registration statement or
similar document in compliance with the Securities Act, and the declaration or
ordering of effectiveness of such registration statement or document by the
Commission.
"Registrable Shares" shall mean (a) the Shares and (b) any shares of
Common Stock or other securities of the Company issued or distributed with
respect to, in exchange for or in replacement of, any of the Shares; provided,
however, that shares of Common Stock and other securities shall be treated as
Registrable Shares only if and so long as (i) they have not been sold by a
Holder pursuant to an effective Registration Statement under the Securities Act,
or (ii) they have not been publicly sold in a transaction exempt from the
registration and prospectus delivery requirements of the Securities Act pursuant
to Rule 144 under the Securities Act or any similar provision).
"Securities Act" shall mean the Securities Act of 1933, as amended, or
any successor law, and the rules and regulations issued pursuant to that Act or
any successor law.
"Shares" shall mean the shares of Common Stock acquired by the
Investor or Investors pursuant to the Plan of Reorganization.
2. Demand Registration.
-------------------
(a) General. (i) If the Company shall receive, at any time after 180
-------
days after the Closing Date (subject to Section 10 of this Agreement), a written
request from the Holders of at least 1,000,000 Registrable Shares (adjusted for
all stock splits or similar transactions) that the Company file a registration
statement under the Securities Act covering the registration of at least
1,000,000 Registrable Shares (adjusted for all stock splits or similar
transactions), then the Company shall, within ten (10) days of the receipt
thereof, give written notice of such request to all Holders and shall, subject
to the limitations of this Section 7 and to the extent required under Section 4
of this Agreement, use all reasonable commercial efforts to effect as soon as
practicable the registration under the Securities Act for resale of the
Registrable Shares which the Holders request be included in such registration
statement (a "Demand Registration"). The written request for a demand
Registration shall specify whether it is made by Highland Investments (or its
permitted assignees) (a "Highland Demand") or by Health Partners (or its
permitted assignees) ("a Health Partners Demand").
-2-
<PAGE>
(b) Limit on Demand Registrations. The Company is obligated to
-----------------------------
effect a maximum of four (4) Demand Registrations pursuant to Section 2(a). Of
those Demand Registrations, only two may be required by a Highland Demand and
only two may be required by a Health Partners Demand. For purposes of this
Section 2(b), no such registration shall be deemed a Demand Registration unless
and until the registration statement filed pursuant thereto has been declared
effective by the Commission and sales of the securities have been permitted
consistent with the plan of distribution described in the registration statement
3. Piggy-Back Registrations.
------------------------
(a) General. If at any time after 180 days after the Closing Date,
-------
the Company proposes to register (including for this purpose a registration
effected by the Company pursuant to Section 2 of this Agreement) any shares of
its Common Stock under the Securities Act in connection with the public offering
of such securities (other than a registration on Form S-4 or Form S-8 or any
successor forms), the Company shall, at such time, promptly give each Holder
written notice of such registration. Upon the written request of each Holder
given within fifteen (15) days after mailing of such notice by the Company in
accordance with Section 18 hereof, the Company shall cause to be registered
under the Securities Act all of the Registrable Shares that each such Holder has
requested to be registered subject to the limitations set forth in Section 5(b)
hereof.
(b) Underwriting Requirements. In connection with any underwritten
-------------------------
offering, the Company shall not be required under this Section 3 to include any
of the Holders' Registrable Shares in such underwriting unless they accept the
terms of the underwriting as agreed upon between the Company and the
underwriters selected by the Company, and then only in such quantity as
determined in accordance with Section 5(b) hereof.
4. Form S-3 Registration. If the Company shall receive, at any time
---------------------
after 180 days after the Closing Date (subject to Section 10 of this Agreement)
and at a time when the Company is entitled to file a registration statement on
Form S-3 covering an offering of the nature as requested by the Holder under
this Section 4, a written request from Holders of Registrable Shares that the
Company file a registration statement on Form S-3 under the Securities Act
covering the registration of at least 1,000,000 Registrable Shares (adjusted for
all stock splits or similar transactions), then the Company shall, within ten
(10) days of receipt thereof, give written notice of such request to all Holders
and shall, subject to the limitations of this Section 4 and Section 5 and to the
extent required under Section 7 of this Agreement, use all reasonable commercial
efforts to effect as soon as practicable the registration under the Securities
Act for resale the Registrable Shares which the Holders request be included in
such registration statement (a "Form S-3 Registration").
5. Limitations on Registration.
---------------------------
(a) Underwriters Cut-back. If the Holders initiating the
---------------------
registration request under Section 2(a) or Section 4 (the "Initiating Holders")
intend to distribute the Registrable Shares covered by their request by means of
an underwritten offering, they shall so advise the
-3-
<PAGE>
Company as a part of their request made pursuant to Section 2(a) or Section 4,
and the Company shall include in the applicable registration statement such
information with respect thereto as may be set forth in such written request.
The selection of the managing underwriter of any underwritten offering under
Section 2 or Section 4 shall be made by a majority in interest of the Initiating
Holders, with the consent of the Company (such consent not to be unreasonably
withheld). In the case of an underwritten offering, the right of any Holder to
include Registrable Shares in the related registration shall be conditioned upon
the inclusion of such Holder's Registrable Shares in the underwritten offering
(unless otherwise mutually agreed by a majority in interest of the Initiating
Holders and such Holder). All Holders proposing to distribute their securities
through such underwritten offering shall (together with the Company as provided
in Section 7(e)) enter into an underwriting agreement with customary terms with
the underwriter or underwriters selected for such underwritten offering.
Notwithstanding any other provision of this Agreement, if the managing
underwriter advises the Initiating Holders in writing that the number of
Registrable Shares to be included in such registration by the Holders exceeds
the number of Registrable Shares which can be sold in such offering without
having an adverse effect on such offering, including the price at which such
Registrable Shares can be sold, then the Initiating Holders shall so advise all
other participating Holders, and the number of Registrable Shares that may be
included in the underwritten offering shall be allocated among all participating
Holders, including the Initiating Holders, in proportion (as nearly as
practicable) to the amount of Registrable Shares owned by each Holder; provided,
however, that the number of Registrable Shares to be included in such
underwritten offering shall not be reduced unless and until all other securities
shall have been excluded from the underwritten offering.
(b) Underwriters Cut-back in the Case of a Piggy-Back Registration.
--------------------------------------------------------------
If, in the case of a registration pursuant to Section 3, the managing
underwriter advises the Company in writing that the number of Registrable Shares
requested to be included in the registration by all Persons (including the
Company) exceeds the number of Registrable Shares which can be sold in such
offering without having an adverse effect on such offering, including without
limitation, the price at which such securities can be sold (the "Maximum
Offering Size"), the Company will be obligated to include in such registration
only (i) first, (x) if such registration was initiated by the Company for the
sale of shares for its own account, any and all shares for sale by the Company,
or (y) if such registration was initiated by any Holder or Holders pursuant to
Section 2(a), any and all Registrable Shares included for sale by the Holders
pursuant to such Section 2(a), (ii) second, to the extent of any remaining
shares which may be sold in such offering without exceeding the Maximum Offering
Size, each Holder shall be entitled to include any and all Registrable Shares
held by such Holder in the registration (pro rata based on the total number of
such Registrable Shares held by the Holder compared to the shares of common
stock of the Company covered by piggy-back registration rights held by other
persons exercising such registration rights in the registration); and (iii)
third, if such registration was not initiated by the Company for the sale of
shares for its own account, to the extent of any remaining shares which may be
sold in such offering, without exceeding the Maximum Offering Size, any shares
for sale by the Company.
(c) Deferral of Filing. The Company may defer the filing (but not
------------------
the preparation) of a registration statement required by Section 2 or Section 4
until a date not later than
-4-
<PAGE>
120 days after the Required Filing Date if (i) the Company or any of its
subsidiaries is engaged in confidential negotiations or other confidential
business activities, disclosure of which would be required in such registration
statement (but would not be required if such registration statement were not
filed), and the Board of Directors of the Company determines in good faith that
such disclosure would be materially detrimental to the Company and its
stockholders or would have a material adverse effect on any such confidential
negotiations or other confidential business is actively considering activities,
or (ii) the Board of Directors of the Company, at time of the receipt of a
request for registration, effecting a registered underwritten public offering of
the Company's securities for the Company's account and proceeds with reasonable
diligence to effect such offering. A deferral of the filing of a registration
statement pursuant to this Section 5(b) shall be lifted, and the requested
registration statement shall be filed forthwith, if, in the case of a deferral
pursuant to clause (i) of the preceding sentence, the negotiations or other
activities are terminated or the transaction contemplated by such negotiations
or other activities are consummated, or, in the case of a deferral pursuant to
clause (ii) of the preceding sentence, the proposed registration for the
Company's account is abandoned. In order to defer the filing of a registration
statement pursuant to this Section 5(b), the Company shall promptly (but in any
event within 10 days), upon determining to seek such deferral, deliver to each
Initiating Holder a certificate signed by an executive officer of the Company
stating that the Company is deferring such filing pursuant to this Section 5(b)
and a general statement of the reason for such deferral and an approximation of
the anticipated delay. Within 20 days after receiving such certificate, the
holders of a majority in interest of the Registrable Shares held by the
Requesting Holders and for which registration was previously requested may
withdraw their request by giving notice to the Company. If withdrawn, the such
request shall be deemed not to have been made for all purposes of this
Agreement.
6. Expenses of Registrations. The Company shall bear and pay all
-------------------------
expenses incurred in connection with any registration, filing, qualification or
sale of Registrable Shares pursuant to Section 2, 3 or 4, including (without
limitation) all registration, filing, and qualification fees, and printers'
fees, accounting fees (including the expenses of any "cold comfort" letters
required by or incident to such registration), the fees and expenses of a
separate counsel retained by the selling Holders, the fees and disbursements of
counsel for the Company relating or apportionable thereto, all fees and expenses
associated with filings required to be made with the National Association of
Securities Dealers, Inc. ("NASD") (including, if applicable, the fees and
expenses of any "qualified independent underwriter" as such term is defined in
Schedule E of the By-laws of the NASD, and of its counsel), as may be required
by the rules and regulations of the NASD, fees and expenses of compliance with
securities or "blue sky" laws (including reasonable fees and disbursements of
counsel in connection with "blue sky" qualifications of the Registrable Shares),
internal expenses of the Company, rating agency fees, messenger and delivery
expenses, and road show expenses of the Company, but excluding underwriting
discounts and commissions and stock transfer taxes; provided, however, that if
any securities other than the Shares are included in a Demand Registration or a
Form S-3 Registration, any person on whose behalf such securities have been
included shall pay that percentage of the total expenses which equals the
percentage of the total
-5-
<PAGE>
proceeds received by such person, and the selling Holders shall have no
responsibility for any such expenses.
7. Obligations of the Company. Whenever required under this
--------------------------
Agreement to effect the registration of any Registrable Shares, the Company
shall, as expeditiously as reasonably possible, use reasonable commercial
efforts to do the following:
(a) Commission Filing. Prepare and file with the
-----------------
Commission a registration statement with respect to such Registrable
Shares and to cause such registration statement to become effective,
and, upon the request of the Holders of a majority of the Registrable
Shares registered thereunder, keep such registration statement
effective for up to 180 days or until all of the Shares registered
thereunder are sold, whichever occurs sooner.
(b) Amendments. Prepare and file with the Commission such
----------
amendments and supplements to such registration statement and the
prospectus used in connection with such registration statement as may
be necessary to comply with the provisions of the Securities Act with
respect to the disposition of all securities covered by such
registration statement, and furnish such copies thereof to the Holders
and any underwriters as they may reasonably request.
(c) Prospectus. Furnish to the Holders and any
----------
underwriters such numbers of copies of a prospectus, including a
preliminary prospectus, in conformity with the requirements of the
Securities Act, and such other documents as they may reasonably
request in order to facilitate the disposition of Registrable Shares
owned by them, and cause all related filings to be made with the
Commission as required by Rule 424 under the Securities Act.
(d) Blue Sky Qualification. Register and qualify the
----------------------
Registrable Shares covered by such registration statement under such
other securities or Blue Sky laws of such jurisdictions as shall be
reasonably requested by the Holders and any underwriters; provided,
however, that the Company shall not be required in connection
therewith or as a condition thereto to qualify to do business or to
file a general consent to service of process in any such states or
jurisdictions.
(e) Underwriting Agreement. In the event of any
----------------------
underwritten public offering, enter into and perform its obligations
under an underwriting agreement, in usual and customary form, with the
managing underwriter of such offering, including, without limitation,
delivering opinions of counsel and "comfort letters" of accountants;
provided, however, that such managing underwriter has been selected
consistent with the provisions of Section 2(b). Each Holder
participating in such underwriting shall also enter into and perform
its obligations under such an agreement.
-6-
<PAGE>
(f) Prospectus Delivery. Promptly notify each Holder of
-------------------
Registrable Shares covered by the registration statement at any time
when the Company becomes aware of the happening of any event as a
result of which the registration statement or the prospectus included
in such registration statement or any supplement to the prospectus (as
then in effect) contains any untrue statement of a material fact or
omits to state a material fact necessary to make the statements
therein (in the case of the prospectus, in light of the circumstances
under which they were made) not misleading or, if for any other reason
it shall be necessary during such time period to amend or supplement
the registration statement or the prospectus in order to comply with
the Securities Act, whereupon, in either case, each Holder shall
immediately cease to use such registration statement or prospectus for
any purpose and, as promptly as practicable thereafter, the Company
shall prepare and file with the Commission, and furnish without charge
to the appropriate Holders and managing underwriters, if any, a
supplement or amendment to such registration statement or prospectus
which will correct such statement or omission or effect such
compliance and provide such copies thereof as the Holders and any
underwriters may reasonably request.
(g) Make generally available to the Company's
securityholders an earnings statement satisfying the provisions of
Section 11(a) of the Securities Act no later than 30 days after the
end of the 12-month period beginning with the first day of the
Company's first fiscal quarter commencing after the effective date of
a registration statement, which earnings statement shall cover said
12-month period, and which requirement will be deemed to be satisfied
if the Company timely files complete and accurate information on Forms
10-Q, 10-K and 8-K under the Exchange Act and otherwise complies with
Rule 158 under the Securities Act;
(h) If requested by the managing underwriter or any seller,
promptly incorporate in a prospectus supplement or post-effective
amendment such information as the managing underwriter or any seller
reasonably requests to be included therein, including, without
limitation, with respect to the Registrable Shares being sold by such
seller, the purchase price being paid therefor by the underwriters and
with respect to any other terms of the underwritten offering of the
Registrable Shares to be sold in such offering, and promptly make all
required filings of such prospectus supplement or post-effective
amendment;
(i) As promptly as practicable after filing with the
Commission of any document which is incorporated by reference into a
registration statement, deliver a copy of each such document (in the
form in which it was incorporated) to each seller;
(j) Cooperate with the sellers and the managing underwriter
to facilitate the timely preparation and delivery of certificates
(which shall not bear any
-7-
<PAGE>
restrictive legends unless required under applicable law) representing
securities sold under any registration statement, to enable such
securities to be in such denominations and registered in such names as
the managing underwriter or such sellers may request and to make
available to the Company's transfer agent prior to the effectiveness
of such registration statement a satisfactory supply of such
certificates;
(k) Promptly make available for inspection by any seller,
any underwriter participating in any disposition pursuant to any
registration statement, and any attorney, accountant or other agent or
representative retained by any such seller or underwriter
(collectively, the "Inspectors"), all financial and other records,
pertinent corporate documents and properties of the Company
(collectively, the "Records"), as shall be reasonably necessary to
enable them to fulfill their due diligence responsibilities, and cause
the Company's officers, directors and employees to supply all
information requested by any such Inspector in connection with such
registration statement; provided, however, that unless the disclosure
of such Records is necessary to avoid or correct a misstatement or
omission in the registration statement or the release of such Records
is ordered pursuant to a subpoena or other order from a court of
competent jurisdiction, the Company shall not be required to provide
any information under this subparagraph (x) if (A) the Company's Board
of Directors determines in good faith, after consultation with counsel
for the Company, that to do so would cause the Company to forfeit an
attorney-client privilege that was applicable to such information or
(B) if either (1) the Company has requested and been granted from the
SEC confidential treatment of such information contained in any filing
with the SEC or documents provided supplementally or otherwise or (2)
the Company reasonably determines in good faith that such Records are
confidential and so notifies the Inspectors in writing unless prior to
furnishing any such information with respect to (A) and (B) such
Holder of Registrable Shares requesting such information agrees to
enter into a confidentiality agreement in customary form and subject
to customary exceptions; and provided further, however, that each
Holder of Registrable Shares agrees that it will, upon learning that
disclosure of such Records is sought in a court of competent
jurisdiction, give notice to the Company and allow the Company at its
expense, to undertake appropriate action to prevent disclosure of the
Records deemed confidential;
(l) Furnish to each seller and underwriter a signed
counterpart of (A) an opinion or opinions of counsel to the Company
and (B) a comfort letter or comfort letters from the Company's
independent public accountants, each in customary form and covering
such matters as are customarily covered by such opinions or comfort
letters, as the case may be, as the sellers or managing underwriter
reasonably requests;
(m) Cause the Registrable Shares included in any
registration statement to be (A) listed on each securities exchange,
if any, on which similar
-8-
<PAGE>
securities issued by the Company are then listed, or (B) authorized to
be quoted and/or listed (to the extent applicable) on the National
Association of Securities Dealers, Inc. Automated Quotation ("Nasdaq")
or the National Market System of Nasdaq if the Registrable Shares so
qualify;
(n) Provide a CUSIP number for the Registrable Shares
included in any registration statement not later than the effective
date of such registration statement;
(o) Cooperate with each seller and each underwriter
participating in the disposition of such Registrable Shares and their
respective counsel in connection with any filings required to be made
with the National Association of Securities Dealers, Inc.;
(p) During the period when a prospectus is required to be
delivered under the Securities Act, promptly file all documents
required to be filed with the Commission pursuant to Sections 13(a),
13(c), 14 or 15(d) of the Exchange Act;
(q) Notify each seller of Registrable Shares promptly of
any request by the Commission for the amending or supplementing of
such registration statement or prospectus or for additional
information;
(r) Prepare and file with the Commission promptly any
amendments or supplements to such registration statement or prospectus
which, in the opinion of counsel for the Company or the managing
underwriter, is required in connection with the distribution of the
Registrable Shares;
(s) Enter into such agreements (including underwriting
agreements in the managing underwriter's customary form) as are
customary in connection with an underwritten offering; and
(t) Advise each seller of such Registrable Shares, promptly
after it shall receive notice or obtain knowledge thereof, of the
issuance of any stop order issued by the Commission suspending the
effectiveness of such registration statement or the initiation or
threatening of any proceeding for such purpose and promptly use its
best efforts to prevent the issuance of any stop order or to obtain
its withdrawal at the earliest possible moment if such stop order
should be issued.
8. Furnish Information. It shall be a condition precedent to the
-------------------
obligations of the Company to take any action pursuant to this Agreement with
respect to the Registrable Shares of any selling Holder that such Holder shall
furnish to the Company such information regarding itself, the
-9-
<PAGE>
Registrable Shares held by it, and the intended method of disposition of such
securities as shall be required to effect the registration of such Holder's
Registrable Shares.
9. Delay of Registration. No Holder shall have any right to obtain
---------------------
or seek an injunction restraining or otherwise delaying any registration as the
result of any controversy that might arise with respect to the interpretation or
implementation of this Agreement.
10. Indemnification. In the event (i) any Registrable Shares are
---------------
included in a registration statement under this Agreement or (ii) any other
shares of Common Stock held by the Investor are included in any registration
statement:
(a) Indemnification by the Company. To the fullest extent
------------------------------
permitted by law, the Company will indemnify and hold harmless each
Holder, each of its directors, officers, partners, employees,
advisors, agents and representatives, and each person, if any, who
controls such Holder within the meaning of the Securities Act or the
Exchange Act and any agent or investment advisor thereof, against any
and all losses, claims, damages, expenses (including, without
limitation, attorneys' fees and disbursements) and liabilities (joint
or several) to which they may become subject, insofar as such losses,
claims, damages, expenses (including, without limitation, attorneys'
fees and disbursements) and liabilities (or actions in respect
thereof) arise out of, relate to, result from or are based upon any of
the following (each a "Violation"): (i) any untrue statement or
alleged untrue statement of a material fact contained in such
registration statement, including any preliminary prospectus or final
prospectus contained therein, or any amendments or supplements
thereto, (ii) the omission or alleged omission to state therein a
material fact required to be stated therein, or necessary to make the
statements therein not misleading, or (iii) any violation or alleged
violation by the Company of the Securities Act, the Exchange Act, or
any state securities law or any rule or regulation promulgated under
the Securities Act, the Exchange Act, or any state securities law,
subject to Section 10(c) hereof and the Company will pay to each such
Holder or other person, as incurred, any legal or other expenses
reasonably incurred by such Holder for the services of one law firm
retained by all of the indemnified parties, plus appropriate local
counsel, in connection with investigating or defending any such loss,
claim, damage, expense, liability, or action; provided, however, that
the indemnity agreement contained in this Section 7(a) shall not apply
to amounts paid in settlement of any such loss, claim, damage,
expense, liability, or action if such settlement is effected without
the consent of the Company (which shall not be unreasonably withheld),
nor shall the Company be liable in any such case for any such loss,
claim, damage, expense, liability, or action to which any Holder or
other indemnifiable person may become subject to the extent that it
arises out of or is based upon a Violation which occurs in reliance
upon and in conformity with written information furnished expressly
for use in connection with such registration by such Holder or other
indemnifiable person. This right to indemnification shall remain in
full force
-10-
<PAGE>
and effect notwithstanding any investigation made by or on behalf of
such Holder or other indemnifiable person and shall survive the
transfer of such securities by such Holder.
(b) Indemnification by Selling Holder. To the fullest extent
---------------------------------
permitted by law, each selling Holder severally, but not jointly, will
indemnify and hold harmless the Company, each of its directors, each
of its officers, partners, employees, advisors, agents and
representatives, who has signed the registration statement, each
person, if any, who controls the Company within the meaning of the
Securities Act or the Exchange Act, and any agent or investment
advisor thereof, any other Holder selling securities registered in
such registration statement and any controlling person of any such
underwriter or other Holder against any and all losses, claims,
damages, expenses (including, without limitation, attorney's fees and
disbursements) and liabilities (joint or several) to which any of the
foregoing persons may become subject, insofar as such losses, claims,
damages, expenses (including, without limitation, attorney's fees and
disbursements) and liabilities (or actions in respect thereto) arise
out of, relate to, result from or are based upon any Violation, in
each case to the extent (and only to the extent) that such Violation
occurs in reliance upon and in conformity with written information
furnished by such Holder expressly for use in connection with such
registration; provided, however, that the indemnity agreement
contained in this Section 7(b) shall not apply to amounts paid in
settlement of any such loss, claim, damage, liability or action if
such settlement is effected without the consent of the Holder;
provided, further, that in no event shall any indemnity under this
Section 7 (b) exceed the net proceeds from the offering received by
such Holder.
(c) Procedures. Promptly after receipt by an indemnified party
----------
under this Section 7 of notice of the commencement of any action
(including any governmental action), such indemnified party will, if a
claim in respect thereof is to be made against any indemnifying party
under this Section 7, deliver to the indemnifying party a written
notice of the commencement thereof in accordance with Section 18
hereof and the indemnifying party shall have the right to participate
in, and, to the extent the indemnifying party so desires, jointly with
any other indemnifying party similarly noticed, to assume the defense
thereof with counsel mutually satisfactory to the parties; provided,
however, that the indemnified parties shall have the right to retain
one separate counsel (plus appropriate local counsel), with the
reasonable fees and expenses to be paid by the indemnifying party, if
an indemnified party shall have one or more defenses available to it
which is not available to the Company or representation of the
indemnified parties by the counsel retained by the indemnifying party
otherwise would be inappropriate due to actual or potential differing
interests between such indemnified party and any other party
represented by such counsel in such proceeding. The failure to deliver
written notice to the indemnifying party within a reasonable time of
the commencement of any such action, if prejudicial in
-11-
<PAGE>
any material respect to its ability to defend such action, shall to
the extent prejudicial relieve such indemnifying party of any
liability to the indemnified party under this Section 7, but the
omission so to deliver written notice to the indemnifying party will
not relieve it of any liability that it may have to any indemnified
party otherwise than under this Section 7.
(d) Contribution. If the indemnification provided for in this
------------
Section 7 from the indemnifying party is unavailable to an indemnified
party hereunder in respect of any losses, claims, damages, liabilities
or expenses referred to therein, then the indemnifying party, in lieu
of indemnifying such indemnified party, shall contribute to the amount
paid or payable by such indemnified party as a result of such losses,
claims, damages, liabilities or expenses in such proportion as is
appropriate to reflect the relative fault of the indemnifying party on
the one hand and the indemnified parties on the other in connection
with the actions which resulted in such losses, claims, damages,
liabilities or expenses, as well as any other relevant equitable
considerations. The relative fault of such indemnifying party and
indemnified parties shall be determined by reference to, among other
things, whether any action in question, including any untrue or
alleged untrue statement of a material fact or omission or alleged
omission to state a material fact, has been made by, or related to
information supplied by, such indemnifying party or indemnified
parties, and the parties' relative intent, knowledge, access to
information and opportunity to correct or prevent such action;
provided, however, that in no event shall the liability of any selling
Holder hereunder be greater in amount than the difference between the
dollar amount of the proceeds received by such Holder upon the sale of
the Registrable Shares giving rise to such contribution obligation and
all amounts previously contributed by such Holder with respect to such
losses, claims, damages, liabilities and expenses. The amount paid or
payable to a party as a result of the losses, claims damages,
liabilities and expenses referred to above shall be deemed to include
any legal or other fees or expenses reasonably incurred by such party
in connection with any investigation or proceeding.
The parties hereto agree that it would not be just and equitable if
contribution pursuant to this Section 7(d) were determined by pro rata
allocation or by any other method of allocation which does not take into account
the equitable considerations referred to in the immediately preceding paragraph.
No person guilty of fraudulent misrepresentation (within the meaning of Section
11(f) of the Securities Act) shall be entitled to contribution from any Person
who was not guilty of such fraudulent misrepresentation.
(e) Survival. The obligations of the Company and Holders under
--------
this Section 7 shall survive the completion of any offering of
Registrable Shares in a registration statement under this Agreement,
and otherwise.
-12-
<PAGE>
11. Reports Under Exchange Act. With a view to making available to
--------------------------
the Holders the benefits of Rule 144 promulgated under the Securities Act and
any other rule or regulation of the Commission that may at any time permit a
Holder to sell securities of the Company to the public without registration, the
Company agrees to use commercially reasonable efforts to:
(a) make and keep public information available, as those terms
are defined in Rule 144;
(b) file with the Commission in a timely manner all reports and
other documents required to be filed by the Company under the Securities
Act and the Exchange Act; and
(c) furnish to any Holder, so long as the Holder owns any
Registrable Shares, promptly upon request (i) a written statement by the
Company that it has complied with the reporting requirements of Rule 144,
the Securities Act and the Exchange Act, (ii) a copy of the most recent
annual and/or quarterly report of the Company and such other reports and
documents so filed by the Company, and (iii) such other information as may
be reasonably requested in availing any Holder of any rule or regulation of
the Commission which permits the selling of any Registrable Shares without
registration.
12. "Market Stand-Off" Agreement. Each Holder hereby agrees that for
---------------------------
a period of 180 days, or such shorter period required by the underwriters,
following the effective date of any registration effected pursuant to Sections
2, 3 or 4 hereof (provided the Holders are given written notice of the offering
and the right to participate therein as provided for in this Agreement), such
Holder, if requested by the managing underwriter, shall not, directly or
indirectly sell, offer to sell, contract to sell (including, without limitation,
any short sale), grant any option to purchase or otherwise transfer or dispose
of (other than to donees and Affiliates who agree to be similarly bound) any
securities of the Company held by it at any time during such period, except
shares of Common Stock included in such registration. In addition, each Holder
agrees, if applicable, to acknowledge the undertaking provided for in this
Section 9 by entering into customary written "lock-up" agreements with the
managers of the relevant underwriting. The requirements of this Section 12 shall
not apply to any Holder that (together with its Affiliates), at the time of
receipt of the referenced notice from the Company, (i) beneficially owns less
than 5% of the outstanding shares of common stock, (ii) is not an Affiliate or
an employee of the Company and (iii) waives any further benefits of this
Agreement for it or any subsequent assignee or transferee of its Registrable
Shares.
In order to enforce the foregoing covenant, the Company may impose stop
transfer instructions with respect to the Registrable Shares of each Holder (and
the shares or securities of every other person subject to the foregoing
restriction) until the end of such period.
13. "Lock-up" Agreement. Each Holder agrees to enter into a
------------------
customary written "lock-up" agreement with respect to the Registrable Shares
with the managers of an underwritten
-13-
<PAGE>
public offering by the Company of shares of its equity securities for cash,
which offering establishes the Closing Date.
14. Amendment. This Agreement may be amended and the observance of
---------
any provision of this Agreement may be waived (either generally or in a
particular instance and either retroactively or prospectively) only with the
written consent of the Company and Holders of at least eighty-five percent (85%)
of the Registrable Shares. Any amendment or waiver effected in accordance with
this Section 12 shall be binding upon each Holder, each transferee thereof and
the Company.
15. Termination. The rights provided in this Agreement shall
-----------
terminate on the tenth anniversary of the effective date of this Agreement.
16. Governing Law. THIS AGREEMENT SHALL BE CONSTRUED, INTERPRETED
-------------
AND THE RIGHTS OF THE PARTIES DETERMINED IN ACCORDANCE WITH THE LAWS OF THE
STATE OF DELAWARE (WITHOUT REGARD TO THE CONFLICT OF LAWS PROVISIONS THEREOF).
17. Counterparts. This Agreement may be executed in two or more
------------
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
18. Titles and Subtitles. The titles and subtitles used in this
--------------------
Agreement are used for convenience only and are not to be considered in
construing or interpreting this Agreement.
19. Negotiation of Agreement. Each of the parties acknowledges that
------------------------
it has been represented by independent counsel of its choice throughout all
negotiations that have preceded the execution of this Agreement and that it has
executed the same with consent and upon the advice of said independent counsel.
Each party and its counsel cooperated in the drafting and preparation of this
Agreement and the documents referred to herein, and any and all drafts relating
thereto shall be deemed the work product of the parties and may not be construed
against any party by reason of its preparation. Accordingly, any rule of law or
any legal decision that would require interpretation of any ambiguities in this
Agreement against the party that drafted it is of no application and is hereby
expressly waived. The provisions of this Agreement shall be interpreted in a
reasonable manner to effect the intentions of the parties and this Agreement.
20. Notices. Any notice, request, instruction or other document to
-------
be given hereunder by any party hereto to another party hereto shall be in
writing, shall be deemed to have been duly given or delivered when delivered
personally or telecopied (receipt confirmed, with a copy sent by reputable
overnight courier), or one business day after delivery to a reputable overnight
courier, postage prepaid, to the address of the party set forth below such
party's signature on this Agreement or to such address as the party to whom
notice is to be given may provide in a written
-14-
<PAGE>
notice to each of the other parties to this Agreement, a copy of which written
notice shall be on file with the Secretary of the Company.
21. Severability. If one or more provisions of this Agreement are
------------
held to be unenforceable under applicable law, such provision shall be excluded
from this Agreement and the balance of the Agreement shall be interpreted as if
such provision were so excluded and shall be enforceable in accordance with its
terms to the fullest extent permitted by law.
22. Further Assurances. Each of the parties shall, without further
------------------
consideration, execute and deliver such additional documents and take such other
action as the other parties, or any of them, may reasonably request to carry out
the intent of this Agreement and the transactions contemplated hereby.
23. Successors and Assigns. This Agreement shall be binding upon,
----------------------
and all rights hereto shall inure to the benefit of, the parties hereto, and
their respective successors and permitted assigns.
24. Entire Agreement. This Agreement embodies the entire agreement
----------------
and understanding of the parties hereto in respect of the actions and
transactions contemplated by this Agreement. There are no restrictions promises,
inducements, representations, warranties, covenants or undertakings with regard
to the registration of the Company's capital stock pursuant to the Securities
Act, other than those expressly set forth or referred to in this Agreement.
25. Recapitalization, etc. The provisions of this Agreement
---------------------
(including any calculation of share ownership) shall apply, to the full extent
set forth herein with respect to the Registrable Shares, to any and all shares
of capital stock of the Company or any capital stock, partnership units or, any
other security evidencing ownership interests in any successor or assign of the
Company (whether by merger, consolidation, sale of assets or otherwise) that may
be issued in respect of, in exchange for, or in substitution of the Registrable
Shares by reason of any stock dividend, split, combination, recapitalization,
liquidation, reclassification, merger, consolidation or otherwise.
-15-
<PAGE>
HEALTHEXTRAS, INC.
By: ______________________________________
David T. Blair
Chief Executive Officer
Address:
2275 Research Boulevard, Seventh Floor
Rockville, Maryland 20850
Attention: David T. Blair
Telecopier: (301) 548-8828
HEALTH PARTNERS
By: ______________________________________
Attention:________________________
By: ______________________________________
Address:
HIGHLAND INVESTMENTS
By: ______________________________________
Attention:________________________
By: ______________________________________
Address:
-16-
<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
October 20, 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
October 20, 1999
