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As filed with the Securities and Exchange Commission on July 26, 1999
Registration No. 333-
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_____________________________________
FORM S-1
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
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HEALTHEXTRAS, INC.
(Exact Name of Registrant as Specified in its Certificate of Incorporation)
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Delaware 8999 522181356
(State or Other Jurisdiction (Primary Standard Industrial (I.R.S. Employer Identification Number)
of Incorporation or Organization) Classification Code Number)
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2275 Research Boulevard, Seventh Floor
Rockville, Maryland 20850
(301) 548-2900
(Address, including Zip Code, and Telephone Number,
including Area Code, of Registrant's Principle Executive Offices)
David T. Blair
Chief Executive Officer
HealthExtras, Inc.
2275 Research Boulevard, Seventh Floor
Rockville, Maryland 20850
(301) 548-2900
(Name, Address, including Zip Code, and Telephone Number,
including Area Code, of Agent for Service)
__________________________________________
Copies to:
Douglas P. Faucette, Esq. Donald J. Murray, Esq.
Thomas J. Haggerty, Esq. Dewey Ballantine LLP
Muldoon, Murphy & Faucette LLP 1301 Avenue of the Americas
5101 Wisconsin Avenue, N.W. New York, New York 10019
Washington, D.C. 20016 (212) 259-8000
(202) 362-0840
___________________________________________
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the Prospectus is expected to be made pursuant to Rule 434,
check the following box. [ ]
___________________________________________
Calculation of Registration Fee
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Title of Each Class of Proposed Maximum Amount of
Securities To Be Registered Aggregate Offering Registration
Price(1) Fee
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Common Stock, $.01 par value $104,000,000 $28,912.00
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(1) Estimated solely for the purpose of calculating the registration fee.
______________________________________________
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.
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PRELIMINARY PROSPECTUS Subject to completion, dated July 26, 1999
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++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+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. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
_______ Shares
[HEALTHEXTRAS LOGO]
Common Stock
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We are offering ______ 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 $___ and $___
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 the common stock involves risks. See "Risk Factors" beginning on
page 4.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if
this prospectus is truthful or complete. Any representation to the contrary is
a criminal offense.
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Per Share Total
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Public offering price $ $
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Underwriting discount $ $
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Proceeds, before expenses, to HealthExtras $ $
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The underwriters may purchase up to _____ 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
The date of this prospectus is _________, 1999
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You should rely only on the information contained in this prospectus. We have
not authorized anyone to provide you with information different from that which
is contained in this prospectus. We are offering to sell and seeking offers to
buy shares of HealthExtras, Inc. common stock only in jurisdictions where
offers and sales are permitted. The information contained in this prospectus is
accurate only as of the date of this prospectus, regardless of the time of
delivery of this prospectus or of any sale of the HealthExtras, Inc. common
stock.
Through and including , 1999 (the 25th day after commencement of the
offering) all dealers effecting transactions in the common stock, whether or
not participating in this offering, may be required to deliver a prospectus.
This is in addition to the obligation of dealers to deliver a prospectus when
acting as underwriters and with respect to their unsold allotments or
subscriptions.
TABLE OF CONTENTS
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Prospectus Summary................... 1
The Offering......................... 2
Summary Financial Data............... 3
Risk Factors......................... 4
Special Note Regarding Forward-
looking Statements.................. 10
Our Company.......................... 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
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Business............................. 18
Regulation........................... 25
Management........................... 27
Certain Transactions................. 33
Principal Stockholders............... 36
Description of Capital Stock......... 37
Shares Eligible for Future Sale...... 41
Underwriting......................... 42
Legal Matters........................ 44
Experts.............................. 44
Where You Can Find More Information.. 44
Index to Consolidated Financial
Statements.......................... F-1
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Prospectus Summary
. This summary highlights selected information contained elsewhere in this
prospectus. This summary does not contain all of the information that you
should consider before investing in our common stock. You should read the
entire prospectus carefully, including the information under "Risk Factors"
beginning on page 4 and the financial statements beginning on page F-1,
before making an investment decision.
. Our business, as described in this prospectus, is currently operated through
HealthExtras, LLC, a Delaware limited liability company. Prior to the
completion of this offering, our business operations will be transferred to
HealthExtras, Inc., a Delaware corporation and the issuer of the stock being
sold in this offering. When we refer to "we," "our" or "HealthExtras," we are
referring to HealthExtras, Inc., as it will exist as of the completion of
this offering, or its predecessors, as the context may require.
OUR BUSINESS
HealthExtras intends to be the leading Internet-based provider of
supplemental health and disability benefit programs. We sell the HealthExtras
benefit programs directly to consumers over the Internet at our website
www.healthextras.com. At our website, our customers will be able to tailor
their benefit packages to best suit their needs and circumstances. Our programs
address a critical gap in our customers' insurance protection and have
traditionally not been promoted by agents or brokers due to their low price
point and high costs associated with that distribution channel. We believe we
are the first company to develop supplemental health and disability programs
designed specifically to be marketed over the Internet. We do not assume any
underwriting risk for the benefits included in our programs. Since launching
our programs in January 1999, we have enrolled over 45,000 program members.
OUR MARKET
According to Forrester Research, Internet-influenced sales of insurance will
grow from $1.5 billion in 1998 to $11.0 billion in 2003. Our programs address a
critical gap in our customers' insurance protection and have traditionally not
been promoted due to their low price point and the high cost associated with
their distribution. The information-based nature of our products, combined with
the broad reach and cost advantage of the Internet channel, creates a
significant opportunity for us. Booz, Allen & Hamilton, Inc. estimates this
cost advantage to be as high as 71% over the traditional broker and agent
channel.
BUSINESS STRATEGY
Our strategy is to:
. Become the leading online provider for supplemental health and disability
benefit programs;
. Promote HealthExtras as the national brand for supplemental health and
disability benefits;
. Develop strategic marketing relationships with selected Internet portals,
insurance-related websites and other websites with attractive demographic
profiles; and
. Continue to develop innovative health and disability programs responsive
to consumer needs.
STRATEGIC RELATIONSHIPS
In order to implement our strategy, we have established certain strategic
relationships, which include:
. Christopher Reeve. We have entered into an exclusive agreement with
Christopher Reeve for him to assist HealthExtras in developing products
and making consumers aware of various catastrophic events that could
threaten their families' security. Mr. Reeve appears in television, radio
and print ads to promote HealthExtras programs and our website.
Christopher Reeve joined the HealthExtras team
after he encountered 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 policy -- which he exceeded in twenty
months -- leaving him with major ongoing
medical bills and no insurance coverage.
. 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.
1
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. 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
Our corporate headquarters and business address is 2275 Research Boulevard,
7th Floor, Rockville, Maryland 20850 and our telephone number is 301-548-2900.
We maintain a website at www.healthextras.com. The reference to our website
does not constitute incorporation by reference into this prospectus.
HealthExtras and the HealthExtras logo are our service marks. All brand names
and trademarks appearing in this prospectus are the property of their
respective holders.
THE OFFERING
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Common stock offered by HealthExtras, Inc.......... shares
Common stock to be outstanding after the offering.. shares (1)
Use of Proceeds.................................... For general corporate
purposes, including
selling, marketing and
brand promotion
expenditures, repayment of
debt, and 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
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Unless otherwise indicated, all information in this prospectus assumes that the
underwriters' over-allotment option will not be exercised.
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(1) Excludes options to purchase 2,450,000 shares of our common stock,
exercisable at 120% of the public offering price, which are to be granted
to officers of HealthExtras prior to the completion of this offering.
2
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Summary Financial Data
(In thousands, except per share data)
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For the Period
October 23, For the
1996 (date of Year Ended For the Six Months
inception) to December 31, Ended June 30,
December 31, ---------------- --------------------
1996 1997 1998 1998 1999
-------------- ------- ------- --------- ---------
Statement of Operations Data:
- ----------------------------- (unaudited)
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Income Statement Data:
Revenue................. $ -- $ -- $ -- $ -- $ 1,021
Total operating
expenses.............. 956 7,461 6,303 4,738 3,740
Operating loss.......... (956) (7,461) (6,303) (4,738) (2,719)
Net loss................ (960) (6,945) (6,175) (4,631) (2,784)
Comprehensive loss...... (962) (6,874) (5,632) (4,355) (2,998)
Pro Forma Data: (/1/)
Pro forma basic and
diluted net loss per
share................. $(0.04) $(0.26) $ (0.23) $ (0.17) $ (.10)
Pro forma weighted
average shares
outstanding........... 26,520 26,520 26,520 26,520 28,220
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June 30, 1999
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Pro Forma(/1/) As Adjusted (/2/)
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Balance Sheet Data:
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Cash and cash equivalents..................... $5,221
Total assets.................................. 6,507
Total liabilities............................. 6,599
Total stockholders' deficit................... (92)
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(1) Reflects the formation of HealthExtras, Inc. and the reorganization as
discussed in "Certain Transactions --Reorganizations," as if those events
had taken place at the beginning of the period; except that no pro forma
effect is given to the investment by the 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 $ per share, and the receipt and application of the estimated
net proceeds therefrom as described under "Use of Proceeds."
3
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Risk Factors
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
Our limited operating history makes evaluating our business difficult
While our product development efforts have been ongoing for the past two
years, we only began revenue generating activities in January 1999.
Accordingly, we have a limited history of operating our business on which you
can evaluate us and our prospects. Our prospects must be considered in light of
the risks, uncertainties, expenses and difficulties frequently encountered by
companies in an early stage of development, particularly companies in new and
rapidly evolving markets, such as electronic commerce, using new and unproven
business models.
We have not been profitable and may not become profitable in the future
We incurred operating losses of approximately $7.5 million in 1997, $6.3
million in 1998 and $2.7 million for the six months ended June 30, 1999, and at
June 30, 1999, we had an accumulated deficit of $16.9 million. Because we plan
to continue to significantly increase our operating expenses in an attempt to
increase our member base, we will need to generate significantly higher
revenues to achieve profitability. Even if we achieve profitability, we may not
be able to maintain profitability in the future. In addition, as our business
model evolves, we expect to introduce a number of new products and services
that may or may not be profitable for us.
Our future profitability is dependent, to a significant extent, upon increased
consumer demand for additional benefit products, which we are in the process of
developing or may develop in the future
Most of our revenue currently is derived from members purchasing benefit
programs which include disability benefits. We believe our future profitability
is dependent upon achieving substantial increases in sales of our benefit
programs, including those providing excess health insurance coverage and other
benefits we are developing or may develop in the future. To the extent these
products include insurance features they generally will require regulatory
approvals. If we do not achieve these increased sales, we may never achieve
profitability.
If the sale of our benefit programs over the Internet does not achieve
widespread consumer acceptance, we may never achieve profitability
To date, we primarily have promoted our benefit programs through mailings to
credit card or other customers of banks. However, we intend to significantly
increase the distribution of our benefit programs over the Internet. Thus, our
future profitability is dependent in large part on our ability to achieve
widespread consumer acceptance of purchasing our benefit programs over the
Internet. The development of an online market for benefit programs, such as
those we offer, has only recently begun, is rapidly evolving and likely will be
characterized by an increasing number of market entrants. Therefore, there is
significant uncertainty with respect to the viability and growth potential of
this market. Our future growth, if any, will depend on, among other things, the
following critical factors:
. the growth of the Internet as a commerce medium generally, and as a market
for consumer financial and insurance products and services specifically;
. success in persuading consumers to purchase their own supplemental health
and disability benefits, rather than, or in addition to, group insurance
offered through their employer;
4
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. success in cost-effectively marketing our programs to a sufficiently large
number of consumers;
. our ability to fulfill coverage requests on an efficient and timely basis;
and
. assuring consumers that the benefits in our programs purchased online are
reliable.
There can be no assurance that an online market for our programs will develop
or that consumers will significantly increase their use of the Internet for
obtaining insurance products. If an online market for insurance products fails
to develop, or develops more slowly than we expect, or if our benefit programs
do not achieve widespread market acceptance, our business would be
significantly harmed.
Promotion of our programs to date primarily has been through mailings by banks
to their credit card and other customers; and the loss of one or more banks
with which we have participated could have a material adverse effect on our
business
A substantial majority of all programs sold to date have been sold through
mailings sent by banks to their credit card or other customers. The loss of one
or more of those bank distribution channels could have a material adverse
effect on our business.
If we are not able to achieve a high level of brand recognition and consumer
demand for our benefit programs, our business will suffer
There are a growing number of websites that offer consumers access to
information regarding insurance coverage alternatives and product pricing. Our
benefit programs may be considered to compete with these and other distribution
channels for insurance products. We believe that broader recognition and a
favorable consumer perception of the HealthExtras brand are essential to our
future success. To attempt to achieve that recognition, 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, our
business, results of operations and financial condition would be harmed. In
addition, we may expand our benefit programs to include additional types of
insurance and services. A portion of any increased selling and marketing
expenditures could be used to promote these new programs. We have no assurance
that there will be any market acceptance for new programs. Failure to generate
sufficient revenues to cover the related expenditures of new products would
harm our business, results of operations and financial condition.
The loss of our relationship with Christopher Reeve to promote our programs
could significantly impair our brand recognition and, thus, our business and
revenues
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
hinder our business operations.
Our business is dependent upon Reliance National Insurance Company and the
other providers of benefits included in our programs, and termination of our
arrangements with them could harm our business
Supplemental health and disability insurance are key components of our
benefit programs. These insurance coverages are provided by Reliance National
Insurance Company. Our contract with Reliance National expires in February 2002
and can be terminated by Reliance National prior to expiration if, among other
things, we breach the contract or are the subject of regulatory action or
excessive consumer complaints. If Reliance National suspended or terminated our
contract with them, we would not be able to offer our products 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. Further, an increase in the costs of the benefits provided by Reliance
National or a change in the coverage offered by them, or the failure to obtain
or maintain regulatory approvals for insurance products included in our
programs, could have a material adverse effect on our business.
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, our business could be
harmed.
5
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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 our business could be harmed
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. 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.
The market for insurance products is intensely competitive, and if we fail to
compete successfully in marketing our programs, our business will be harmed
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. We compete with both traditional
insurance distribution 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 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.
We could become subject to liability claims based on a failure to perform by
the providers of the benefits included in our programs
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.
Any liability, settlement or adverse publicity resulting from any such
circumstance could have an adverse effect on us.
6
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RISKS RELATED TO REGULATION
The insurance components of our programs and their distribution are subject to
numerous and complex laws and regulations in each separate state; our business
could be substantially harmed if we fail to assure that all of the various
requirements are satisfied
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 regulatory approvals for 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
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.
Regulation of the sale of insurance over the Internet and of electronic
commerce generally is unsettled, and future laws, regulations and
interpretations could harm our business
Our distribution of 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 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.
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RISKS RELATED TO THE INTERNET AND ELECTRONIC COMMERCE
Any failures of, or capacity constraints in, our systems or the systems of
third parties on which we rely could harm our business
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.
Our success depends, in part, on our ability to protect our proprietary
technology
We believe that our success depends, in part, on protecting our intellectual
property. Other than our trademarks, most of our intellectual property consists
of proprietary or confidential information that is not subject to patent or
similar protection. Competitors may independently develop similar or superior
products, software or business models.
We cannot guarantee that we will be able to protect our intellectual
property. There is no way to assure that unauthorized third parties will not
try to copy our products or business model or use our confidential information
to develop competing products. Legal standards relating to the validity,
enforceability and scope of protection of proprietary rights in Internet-
related businesses are uncertain and still evolving. As a result, we cannot
predict the future viability or value of our proprietary rights. We also cannot
guarantee that our business activities and products will not infringe upon the
proprietary rights of others, or that other parties will not assert
infringement claims against us. Any infringement claims and resulting
litigation, should it occur, could subject us to significant liability for
damages and could result in invalidation of our proprietary rights. Even if we
eventually won, any resulting litigation could be time-consuming and expensive
to defend and could divert our management's attention.
We need to adapt to rapid technological change to remain competitive
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.
Year 2000 problems may harm our business
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 could harm our business. Additionally, the Internet could face
serious disruptions arising from year 2000 problems.
Our business may be harmed if we are unable to safeguard the security and
privacy of our program members' information
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
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<PAGE>
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.
Our business assumes the continued dependability of the Internet infrastructure
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 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
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, which is controlled by
Thomas L. Blair, our Chairman, and Principal Mutual Holding Company, and the
two current stockholders of Capital Z Healthcare Holding Corp. will control %
of our outstanding common stock. 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;
9
<PAGE>
. 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.
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;
. stockholder action to be taken only at a special or regular meeting; 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 of our company, 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.
We will have broad discretion over the use of proceeds from this offering
The net proceeds of this offering are estimated to be approximately $
million, assuming a public offering price of $ per share and after deducting
the underwriting discount and estimated offering expenses. 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 $ per share in the net tangible book value of
the common stock, assuming a public offering price of $ per share.
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, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended.
Some of the statements under "Prospectus Summary," "Risk Factors,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," "Business" and elsewhere in this prospectus are "forward-looking
statements." These forward-looking statements involve known and unknown risks,
uncertainties and other factors that may cause our actual results, levels of
activity, performance, or
10
<PAGE>
achievements to be materially different from any future results, levels of
activity, performance, or achievements expressed or implied by such forward-
looking statements. Such factors include, among other things, those listed
under "Risk Factors" and elsewhere in this prospectus.
In some cases, you can identify forward-looking statements by terminology
such as "may," "will," "should," "could," "expects," "plans," "anticipates,"
"believes," "estimates," "predicts," "potential," "intends," "continue" or the
negative of such terms or other comparable terminology.
These risks and uncertainties should be considered in evaluating forward-
looking statements, and undue reliance should not be placed on such statements.
Although we believe that the expectations reflected in the forward-looking
statements are reasonable, we cannot guarantee future results, levels of
activity, performance, or achievements. Moreover, we do not assume
responsibility for the accuracy and completeness of such statements. We are
under no duty to update any of the forward-looking statements after the date of
this prospectus.
Our Company
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 $ million from the sale, at an assumed
public offering price of $ per share, of the shares of our common stock
in this offering, after deducting estimated offering expense of $ and
underwriting discounts and commissions. If the underwriters exercise their
over-allotment option in full, we will receive net proceeds of $ 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 drawings 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.
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<PAGE>
Capitalization
The following table sets forth the capitalization, as of June 30, 1999, for
HealthExtras, Inc.:
. 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 $ 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
----------------------
Pro Forma As Adjusted
--------- -----------
(In thousands)
<S> <C> <C>
Cash and cash equivalents............................... $ 5,221 $
======= ===
Borrowings under line of credit......................... $ 2,400 $
------- ---
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; 33,770,000 shares issued and
outstanding, pro forma; and shares issued and
outstanding, as adjusted............................. 338
Additional paid-in capital............................. 14,701
Accumulated deficit.................................... (16,864)
Accumulated comprehensive income....................... 399
Due to stockholder..................................... 1,334
------- ---
Total stockholders' equity (deficit)................ (92)
------- ---
Total capitalization.................................... $ 2,308 $
======= ===
</TABLE>
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<PAGE>
Dilution
Our pro forma net tangible book value, as of June 30, 1999, was approximately
$ million, or $ , 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 $ 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 $ million, or $ per share. This represents an immediate
increase in net tangible book value of $ per pro forma share to existing
stockholders and an immediate dilution of $ 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......................... $
Pro forma net tangible book value per share before the
offering...................................................... $
Increase in net tangible book value attributable to new
investors.....................................................
----
Adjusted pro forma net tangible book value per share after
offering......................................................
---
Dilution in net tangible book value per share to new investors.. $
===
</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 $ , 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... % $15,000,000(1) % $
New investors...........
------- --------- ----------- -----
Total.................. 100.0% $ 100.0%
======= ========= =========== =====
</TABLE>
(1) Reflects amounts invested in HealthExtras, LLC as of June 30, 1999 by its
members.
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<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......... -- -- -- -- 354
Product development and
marketing............. 810 5,905 4,805 3,775 2,679
General and
administrative........ 146 1,556 1,498 963 707
------- ------- ------- -------- -------
Operating loss.......... (956) (7,461) (6,303) (4,738) (2,719)
Interest income
(expense), net........ -- (73) 128 107 (65)
Other income (expense),
net................... (5) 589 -- -- --
------- ------- ------- -------- -------
Net loss................ (961) (6,945) (6,175) (4,631) (2,784)
Unrealized holding gains
(losses) on marketable
securities arising
during the period..... (1) 71 542 276 (213)
-------- -------
------- ------- -------
Comprehensive loss...... $ (962) $(6,874) $(5,633) $(4,355) $(2,997)
======= ======= ======= ======== =======
Pro Forma Data: (/1/)
Pro forma basic and
diluted net loss per
share................. $ (.04) $ (.26) $ (.23) $ (.17) $ (.10)
Pro forma average shares
of common stock
outstanding........... 26,520 26,520 26,520 26,520 28,220
<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 9,935 2,064 6,507
Total liabilities....... 151 2,575 4,197 6,599
Total members' capital
(deficit).............. 4,075 7,360 (2,133) (92)
</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.
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<PAGE>
Management's Discussion and Analysis of Financial Condition and Results of
Operations
OVERVIEW
We expect to generate a significant portion of our revenue from the sale of
supplemental health and disability benefit programs. While product development
has been ongoing for the past two years, we only began revenue generating
activities in January 1999. Prior to that time, we were a development stage
enterprise, which designed and test marketed various benefit combinations. To
date, we have primarily focused on the distribution of our benefit programs to
bank customers and building recognition of our program brand. Christopher Reeve
is featured prominently in our online, television and print marketing campaigns
to build brand awareness. Our intent is to effect a substantial portion of our
program distributions over the Internet.
We believe our consumer research and marketing efforts have given us valuable
insight into the consumer perceptions and preferences regarding the value and
limitations of prevailing insurance products. Accordingly, we believe that our
programs are well positioned to address the needs of our targeted market
segments. As of June 30, 1999, more than 45,000 members had purchased our
programs.
Revenue is generated by payments for program benefits. Direct expenses
consist principally of bank marketing and processing fees and the cost of
benefits provided to program members. Revenue from program payments received,
and related direct expenses, are deferred to the extent that they are
applicable to future periods or to any refund guarantee we offer for an initial
90 day period.
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 $2.7 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 $2.6 million. There was no
revenue in 1998.
Operating expenses for the six months ended June 30, 1999 totaled $3.7
million. Direct expenses of $354,000 consisted of the cost of obtaining the
benefits included in our programs, which for non-insurance benefits generally
is based on monthly or per member fees, and marketing and other fees payable to
our distribution partners. These direct expenses represented 9% of operating
expenses for the six months ended June 30, 1999. Product development and
marketing expenses for the 1999 six month period totaled $2.7 million or 72% of
total operating expenses. General and administrative expenses for that period
totaled $707,000 or 19% of total operating expenses. Interest expense for that
period was $89,000.
Operating expenses for the six months ended June 30, 1998, totaled $4.7
million. Product development and marketing expenses for that period totaled
$3.8 million or 80% of total operating expenses. General and administrative
expenses for that period totaled $963,000 or 20% of total operating expenses.
There was no interest expense for that period.
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997
Total operating expenses for the year ended December 31, 1998 were $6.3
million compared to $7.5 million for 1997. This difference was largely
attributable to a $1.1 million decrease in product development and marketing
expenses, reflecting the completion of our initial focus group and product
evaluation cycle.
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<PAGE>
General and administrative expenses were largely unchanged from year to year.
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 income
increased from a net expense of $73,000 for the year ended December 31, 1997 to
income of $128,000 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 $7.5
million compared to $956,000 for the prior period. This was largely
attributable to a $5.1 million increase in product development and marketing
expenses. Product development and marketing expenses increased from $810,000 in
the 1996 period to $5.9 million in 1997, reflecting the commencement of focus
group, brand development and product evaluation programs. The increase in
general and administrative expenses was also largely a function of 12 months of
business in 1997 compared to two months in the prior period.
LIQUIDITY AND CAPITAL RESOURCES
Our operations since inception have been funded primarily through capital
investments and borrowings under our line of credit. In addition, one of our
owners has advanced us, with no interest required, approximately $1.3 million.
As of June 30, 1999, we had $5.2 million in cash and cash equivalents.
Cash provided by (used in) investing activities was $700,000 for the six
months ended June 30, 1999, ($1.0 million) for the year ended December 31,
1998, and ($194,000) for the period from inception through December 31, 1997,
and related primarily to investments and deposits.
Cash provided by (used in) financing activities was $5.7 million for the six
months ended June 30, 1999, ($2.1 million) for the year ended December 31,
1998, and $15.2 million for the period from inception through December 31,
1997, and related primarily to capital investments in us and net borrowings
from the bank credit line described below and from one of our owners.
In addition, we have secured a line of credit in the amount of $3.0 million
from a commercial bank, which extends to February 2000. As of June 30, 1999,
$2.4 million had been drawn against the line. This line of credit calls for
interest at the prime rate and is collateralized by substantially all of our
assets.
We currently anticipate that the net proceeds from this offering together
with our available cash resources will be sufficient to meet our presently
anticipated working capital, capital expenditure and business expansion
requirements for approximately the next 24 months. There can be no assurance
that we will not require additional capital prior to the expiration of that 24
month period. Even if such funds are not required, we may seek additional
equity or debt financing. We cannot assure you that such financing will be
available on acceptable terms, if at all, or that such financing will not be
dilutive to our stockholders.
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
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<PAGE>
developed or obtained for internal use. We have adopted this statement of
position for the year ending December 31, 1999. It did not have a material
impact on our financial statements for the six months ended June 30, 1999.
YEAR 2000 COMPLIANCE
Many existing computer programs use only two digits to identify a year. These
programs were designed and developed without addressing the impact of the
upcoming change in the century. If not corrected, many computer software
applications could fail or create erroneous results by, at or beyond the year
2000. We use internally developed software, as well as computer technology and
other services provided to us by third party vendors that may fail due to the
Year 2000 phenomenon. We are also dependent on telecommunications vendors to
maintain our network and a third party that hosts our servers.
Due to our recent founding, we developed our systems and technology in light
of the Year 2000 problem, as opposed to many older systems designed before this
problem was known. On June 15, 1999, we completed our review and testing of
Year 2000 compliance for all of our internally developed software, which
include substantially all of the systems for the operation of our website,
customer interaction and transaction systems and our security, monitoring and
back-up capabilities. Based on such testing, we believe our internally
developed software and systems are Year 2000 compliant, which means that all
date data will process without error, interruption or loss of functionality of
any software or system due to the change in century.
On May 31, 1999, we completed our assessment of the Year 2000 readiness of
our third party supplied software and hardware, and of our vendors. During the
assessment phase, we identified those vendors critical to us, and received
certifications of Year 2000 compliance or a readiness disclosure statement from
them. Based on the results of preliminary testing, we believe that the systems
of these vendors will be Year 2000 compliant. The Year 2000 readiness of the
general Internet infrastructure necessary to support our operations is
difficult to assess. For instance, we depend on the integrity and stability of
the Internet to provide our services. We also depend on the Year 2000
compliance of the computer systems and financial services used by consumers. A
significant disruption in the ability of consumers to reliably access the
Internet or portions of it or to use their credit cards would have an adverse
effect on demand for our services and would have a material adverse effect on
us.
To date, we have incurred approximately $45,000 of expense relating to Year
2000 analysis, testing and remediation efforts. While there can be no
guarantee, we do not anticipate any substantial expenses relating to our Year
2000 compliance.
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<PAGE>
Business
OVERVIEW
HealthExtras intends to be the leading Internet-based provider of
supplemental health and disability benefit programs. We sell the HealthExtras
benefit programs directly to consumers over the Internet at our website
www.healthextras.com. At our website, our customers will be able to tailor
their benefit packages to best suit their needs and circumstances. Our programs
address a critical gap in our customers' insurance protection and have
traditionally not been promoted by agents or brokers due to their low price
point and high costs associated with that distribution channel. We believe we
are the first company to develop supplemental health and disability programs
designed specifically to be marketed over the Internet. We do not assume any
underwriting risk for the benefits included in our programs. Since launching
our programs in January 1999, we have enrolled over 45,000 program members.
The Internet is an increasingly significant medium for communication,
information and commerce. International Data Corporation, commonly referred to
as IDC, estimates that there were 97 million Internet users worldwide at the
end of 1998 and anticipates that number will grow to approximately 320 million
users by the end of 2002. In addition, IDC estimates that the worldwide
consumer electronic commerce market is expected to grow from approximately $11
billion in 1998 to approximately $94 billion in 2002. That growth is being
driven by a number of factors, including:
. A growing base of PCs in the home and workplace;
. Improvements in network security, infrastructure and bandwidth;
. Faster and less expensive Internet access;
. Increases in the quantity and quality of content available on the
Internet;
. The overall increase in public awareness of the Internet; and
. The convenience, timeliness and reduced costs of electronic commerce.
Over the last few years, consumers have significantly increased their usage
of the Internet and expanded the categories of products and services they
purchase over the Internet. A new class of Internet-based companies has emerged
to address these on-line opportunities. These companies are focusing on such
areas as books, CDs, videocassettes, airline tickets, on-line stock trading
and, increasingly, other consumer financial products and services.
OUR MARKET
According to Forrester Research, Internet-influenced sales of insurance will
grow from $1.5 billion in 1998 to $11.0 billion in 2003. Moreover, the Internet
as a distribution channel provides a cost advantage of as high as 71% over the
traditional brokerage and agent channel, as estimated by Booz, Allen &
Hamilton, Inc. 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;
. effective two-way communication flow via the Internet facilitates
interaction with consumers and rapidly delivers feedback on consumer
preferences; and
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. 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, where 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. More than 60% of insured Americans are
covered by policies that limit overall lifetime health benefits to $1.0 million
or less. In addition, fewer than half of American workers covered by group
health insurance are covered by disability policies. Most disability insurance
is limited to short-term income replacement and does not address longer-term
financial security. Thus, individuals covered by employer-sponsored health
plans frequently have a significant amount of their net worth exposed to loss
through catastrophic illness or injury. In addition, many uninsured Americans
lack an effective means of accessing catastrophic coverage because the
comparatively low premiums associated with those products make their commission
yield unattractive to agents and brokers. As a result, these products often are
not actively marketed. HealthExtras benefit programs are designed to meet this
need.
BUSINESS STRATEGY
We intend to be the leading Internet-based provider of a broad range of
supplemental health and disability benefit programs. HealthExtras has
positioned itself to offer combinations of supplemental health and disability
benefits that historically have been relatively uneconomic to offer to
consumers through traditional, commission-driven distribution channels. By
leveraging our membership base to obtain group rates, we are able to offer
benefit programs at a cost to members which we believe is less than they would
have to pay individually for comparable benefits. Elements of our strategy
include:
. Become the Leading Online Provider for Supplemental Health and Disability
Benefit Programs.
The Internet represents a cost-effective marketing and operating platform
for our programs which can
eliminate a significant percentage of the costs associated with commission-
driven distribution systems. This should enhance our ability to offer
affordable supplemental health and disability benefit programs. We are
moving aggressively to capture a leading market share in the Internet
segment of the insurance market.
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- --------------------------------------------------------------------------------
. Promote HealthExtras as the National Brand for Supplemental Health and
Disability Benefits.
Through our exclusive association with Christopher Reeve, we have the
opportunity to achieve recognizable brand identity for our programs. We
intend to continue to expand our brand marketing aggressively through the
Internet, TV, radio and print activities.
. Develop Strategic Marketing Relationships.
We intend to enter into marketing programs with selected Internet portals,
insurance-related websites, and other websites with attractive demographic
profiles. We have established strategic marketing relationships with six of
the nation's largest VISA and Mastercard issuing banks for access to their
credit card and other customers.
.Continue to Develop Innovative Health and Disability Programs Responsive to
Consumer Needs.
We are continuing to develop an expanded list of insurance and service
options for inclusion in our programs. These additional products would
provide flexibility in coverage amounts to our members and address
additional insurance needs of our program members.
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 ads to promote HealthExtras programs and our website.
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 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 combines 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
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.
- --------------------------------------------------------------------------------
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These arrangements provide for the mailing of our statement inserts to the
credit card and other customers of those banks. These mailings feature
Christopher Reeve, provide information about HealthExtras benefit programs and
promote our website. In addition, our bank partners may in the future establish
links from their websites to the HealthExtras website. HealthExtras compensates
those banks based principally on the benefit programs purchased in response to
these mailings.
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. Typically, the contracts may also be cancelled immediately
upon a breach, provided written notice is given of the breach and such breach
is not cured within a set time, typically 30 or 60 days after the notice is
given. Some contracts also provide for termination by either party without
cause upon 30 or 90 days prior written notice.
We expect that program mailings will be made to more than 55 million
households during 1999 based on agreements signed to date, although there could
be a degree of duplication among households which have customer relationships
with more than one of the banks involved.
OUR PRODUCTS
Our programs provide various combinations of supplemental health and
disability benefits to program members that enroll. Further, we seek to provide
program members flexibility to customize benefit packages to meet their needs.
HealthExtras does not assume any underwriting risks for the benefits included
in its programs. The current benefits which are included in our various
programs are:
. Catastrophic Disability. This benefit provides a $1 million cash payment
to members who become permanently disabled as the result of an accident.
We intend to expand this benefit to enable members to obtain different
coverage amounts, for example, $2 million or $3 million.
. Excess Medical. This benefit provides program members an additional $5
million in health insurance coverage after the exhaustion of the $1
million lifetime limit on a member's primary health insurance coverage. We
intend to expand this benefit to enable members to adjust the $5 million
excess coverage amount, and to adjust the $1 million amount to match the
limitation in their primary health insurance coverage.
. Organ Transplant. Many employer-sponsored health insurance plans contain
an embedded limitation on organ transplant coverage. This benefit provides
up to $250,000 to cover expenses for an organ transplant in excess of a
member's primary health insurance coverage.
. Out of Area Expense Reimbursement. This benefit provides up to $2,500 per
year in reimbursements for co-payments and deductibles for health services
furnished to members when they are over 100 miles from home.
. Emergency Evacuation and Repatriation. This benefit provides a member who
needs emergency medical treatment with up to $50,000 of coverage for air
ambulance transportation to an appropriate medical facility abroad or in
the United States.
. 24 Hour Nurse Consultation. This benefit provides access to general
medical information from a centralized nursing staff 24 hours per day, 7
days per week, through a toll-free telephone number. This service does not
provide any diagnosis of medical conditions, nor does it provide, or
control, medical services.
. Provider Network Access. This benefit allows members to receive the
discounts or the price concessions for medical services available through
the United Payors & United Providers nationwide network of medical care
providers. The United Payors & United Providers network includes over
2,500 hospitals and 150,000 physicians.
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These benefits currently are available as 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................................. 51 100%
Emergency Evacuation and Repatriation....... 51 100%
24 Hour Nurse Consultation.................. 51 100%
Provider Network Access..................... 51 100%
</TABLE>
(1) and the District of Columbia
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. 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'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. Either
party can terminate this agreement for other reasons, unless corrected, upon
365 days notice. In the event of termination, HealthExtras is still bound to
service existing policies covered by the agreement.
United Payors & United Providers, Inc.
Network Access
Our relationship with United Payors & United Providers enables us to offer
our program members access to the price concessions for medical services
available through the United Payors & United Providers
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network of health care providers. This network consists of over 2,500 hospitals
and 150,000 physicians throughout the United States.
HealthExtras has entered into a contract with United Payors & United
Providers to allow HealthExtras program members to access, subject to various
criteria, the United Payors & United Providers network of health care
providers. United Payors & United Providers has the unilateral right to revise
the criteria for network access. In exchange, we have agreed to pay United
Payors and United Providers $1.00 per program member per month for the initial
year of membership, which amount escalates in stages for subsequent membership
years to a maximum of $1.50 per program member per month in the fourth year of
continued membership and thereafter. However, we can terminate these payments
by conveying $25 million in market value of our common stock to United Payors
and United Providers.
HealthExtras must receive United Payors & United Providers' written consent
to use marketing materials that reference the United Payors & United Providers'
network, and United Payors & United Providers must receive 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 gave 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 and 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.
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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 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.
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;
. 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
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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.
Our distribution of 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 -- Strategic Relationships --
United Payors & United Providers," 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.
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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
Michael P. Donovan.................... 41 Chief Financial Officer
Rhona L. Leffler...................... 43 Operations Manager
Michael C. Miller..................... 50 Marketing Manager
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 a predecessor of HealthExtras in July 1997 as the
equivalent of Chief Executive Officer. In 1994, Mr. Blair co-founded and was
President of Continued Health Care Benefit Program, which offers healthcare
benefits to individuals leaving the United States armed forces. In 1996, this
program was merged into United Payors & United Providers. From 1992 to 1994 Mr.
Blair was the Financial Manager for Kelly, Anderson, Pethick and Associates.
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 Client Services
Director. 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.
Michael C. Miller joined a predecessor of HealthExtras in May 1997 as
Marketing Manager. Mr. Miller has 23 years of marketing and operations
experience. Prior to joining HealthExtras, Mr. Miller was Vice President of
Marketing for United Payors & United Providers from May 1996 to May 1997. Prior
to joining United Payors & United Providers, Mr. Miller was President and Chief
Executive Officer of Biotek Solutions. Mr. Miller previously served as Chief
Operating Officer of Abbey Home HealthCare from 1992 to 1994.
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.
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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 was the founder of America's Health Plan, Inc. in
1989 and served as its President and Chief Executive Officer from 1989 to 1992.
From 1992 to 1995, Mr. Blair was President of Initial Managers & Investors,
Inc., which business was contributed to United Payors & United Providers. From
1977 until 1988, Mr. Blair was a principal of Jurgovan & Blair, Inc., which
developed and managed health maintenance organizations.
Julian A. L. Allen is a Principal and Vice President of Capital Z Management,
LLC, the management affiliate of Capital Z Partners. Prior to joining Capital Z
Management in July 1998, Mr. Allen was a Vice President of Zurich Centre
Investments, the strategic private equity investing arm of Zurich Financial
Services, which he joined in September 1997, and an Associate of Patricof & Co.
Ventures, Inc. from September 1995. Prior to such time, Mr. Allen worked as a
financial analyst at Wasserstein Perella & Co. Mr. Allen currently serves as a
director of Emergent Advisors, Inc.
Thomas J. Graf joined Principal Life Insurance Company, the operating, wholly
owned subsidiary of Principal Mutual Holding Company, in 1972, and since 1994
has served as Senior Vice President of Principal Life Insurance Company. Mr.
Graf is also a director of Coventry Health Care, Inc. and United Payors &
United Providers.
Julia M. Lawler joined Principal Life Insurance Company in 1984 and, since
May 1995, has served as Director, Capital Markets. Since 1993, Ms. Lawler
served as an officer of Principal Life Insurance Company in various other
capacities, including Executive Advisor to the President.
Karen E. Shaff became Senior Vice President and Deputy General Counsel for
Principal Life Insurance Company in 1999. Ms. Shaff joined Principal Life
Insurance Company in 1982 and held several positions within its law department
until being named Vice President and Associate General Counsel in 1995.
Paul H. Warren is a Director and Senior Vice President of Capital Z
Management, LLC and Capital Z Partners. Mr. Warren was a partner in Insurance
Partners, L.P., a limited partnership organized in 1994 to make investments in
property and casualty insurers, life and health insurers, health care services
firms and related insurance businesses. In connection with Insurance Partners,
L.P., Mr. Warren serves as a director of Corporate Health Dimensions, Provincia
Salud, Provincia ART and Annuity& Life Re. In addition, Mr. Warren serves as a
director of Brookdale Living Communities, Inc. and United Payors & United
Providers. Prior to the formation of Insurance Partners, L.P., Mr. Warren was a
Managing Director of International Insurance Advisors, Inc. and a Vice
President in the insurance group at J.P. Morgan & Co. Before that, Mr. Warren
was an Assistant Secretary in the Hong Kong Government.
Terms of office
The Board of Directors of HealthExtras will be divided into three classes
having staggered three-year terms, each of which will contain at least two
directors. Officers serve at the discretion of the Board of Directors.
Compensation of directors
Prior to this offering, no fees have been paid by HealthExtras for the
service as a director or its equivalent. Following the offering, HealthExtras
intends to pay directors who are not employees of it or of Principal Mutual or
its affiliates $1,500 for each Board meeting they attend.
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 .
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<PAGE>
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 and certified public accountants, make recommendations
to the Board of Directors as to their selection and review of the planning,
fees and results of their audit. The members of 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 it 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........................... 220,000 -- -- --
Rhona L. Leffler
Operations Manager.......................... 100,000 -- -- --
</TABLE>
Employment agreements
HealthExtras intends to enter into employment agreements, effective upon the
completion of the offering, with David T. Blair, Michael P. Donovan, Michael C.
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
four executives, except for the bonus arrangement for Mr. Blair, provide for
three-year terms. 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 agreements are $210,000, $240,000 and $150,000
respectively for Messrs. 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. 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,
other fringe benefits applicable to executive personnel and reimbursement of
reasonable expenses incurred in promoting the business of the company.
Upon an executive's termination for cause, as defined in the employment
agreements, 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 any entity that is a client of HealthExtras.
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<PAGE>
Stock-based benefits
Stock Grants
HealthExtras has granted ownership rights to five executive officers and
employees, which upon the reorganization discussed under "Certain
Transactions--Reorganizations," will involve their receipt of an aggregate of
620,000 shares of its common stock. These grants include 400,000 shares for Mr.
Donovan and 90,000 shares each for Ms. Leffler and Mr. Miller. 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.
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 2,450,000
shares of its common stock to executive officers and employees. These options
will be granted pursuant to the stock option plan described below, which will
relate to an aggregate of 3,063,333 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 or 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 61%
Michael P. Donovan................................ 600,000 25%
Rhona L. Leffler.................................. 100,000 4%
Michael C. Miller................................. 100,000 4%
</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 3,063,333 shares
of our common stock. Options to purchase an aggregate or 2,450,000 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 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 key 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, the compensation committee may provide that options
granted under the plan will become exercisable in whole or in part, whether or
not the options are otherwise exercisable. 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) 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
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<PAGE>
(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 for:
. 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 intend to obtain and maintain $1.5 million of key man life insurance on
David T. Blair. We expect that the proceeds of this insurance policy will be
payable to HealthExtras.
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.
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<PAGE>
Further, as permitted by Delaware law, our Bylaws provide that we are
required to indemnify our directors and officers to the fullest extent
permitted by Delaware law. In addition, our Bylaws provide that:
. we are permitted to indemnify our other employees and agents to the
fullest extent permitted by Delaware law;
. we may advance expenses, as incurred, to our directors and officers in
connection with a legal proceeding; and
. the rights conferred in the Certificate of Incorporation and Bylaws as to
indemnification of officers and directors are not exclusive.
We have 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 our company 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.
31
<PAGE>
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. 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.
Thomas L. Blair, Chairman of the Board of HealthExtras, Inc. and the owner of
50% of Highland Investments, LLC, which will own % of HealthExtras, Inc.'s
outstanding common stock after this offering, is the Chairman of the Board of
Directors, Co-Chief Executive Officer and beneficially owns an aggregate of
approximately 38.2% of United Payors & United Providers' common stock. Health
Partners, an affiliate of Capital Z Partners, will beneficially own % 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. Thomas L. Blair. United Payors &
United Providers is a public company.
Mr. 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.
As of June 30, 1999, we owed Mr. Thomas L. Blair $1.3 million, which he
loaned to us to cover operating expenses. 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
32
<PAGE>
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, 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 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.
Registration Rights
Health Partners and Highland Investments will be granted certain registration
rights with respect to their shares of our common stock. The Stockholders'
Agreement will provide for an aggregate of four demand registration rights
under the Securities Act beginning six months after completion of this
offering. Health Partners or Highland Investments each may require that we file
two registration statements, subject to certain conditions. If Health Partners
or Highland Investments exercises a registration right, the other also can
participate in the offering; on a proportionate basis to their respective
ownership positions. 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. 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. However,
holders of these shares will be restricted from exercising such rights until
six months after the date of this prospectus, and under certain circumstances
for agreed-upon periods after the filing of subsequent registration statements.
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 such shares becoming freely tradable without restriction
under the Securities Act immediately upon the effectiveness of such
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, two representatives of Health Partners
will become directors of ours upon completion of this offering. These directors
initially will be Messrs. Warren and Allen. To the extent we increase the
number of our directors, we will be obligated to increase the number of Health
Partners representatives on our Board if such addition can be made without
increasing the percentage of directors which are representatives of Health
Partners to greater than 29%. Reductions by Health Partners of its percentage
ownership of our common stock below certain specified percentages will reduce
the number of director positions it is entitled to fill.
Rights of First Offer and Tag-along Rights
The Stockholders' Agreement also will provide that Health Partners and
Highland Investments will have a right of first offer to purchase shares of our
common stock, aggregating more than 10% of outstanding
33
<PAGE>
shares, which the other party proposes to sell, in a single transaction or
series of related transactions, to a person or group of affiliated persons,
other than transfers to affiliates of the transferor. Alternatively, under
those circumstances, the other party would have the right to participate pro
rata in the proposed sale based on relative share ownership. These first offer
and tag-along rights and obligations would apply also to controlling persons of
Health Partners and Highland Investments to whom shares of our common stock
might be distributed by those entities.
Preemptive Rights
The Stockholders' Agreement will provide, subject to certain exceptions,
preemptive rights to enable Health Partners and Highland Investments, and their
controlling owners to the extent shares of our common stock are distributed to
them, to retain their proportionate ownership interest in our stock by
purchasing additional shares of our stock in connection with certain non-public
offerings of that stock.
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.
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<PAGE>
Principal Stockholders
The following table sets forth certain information regarding beneficial
ownership of our common stock as of July 26, 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 hereby, and as
adjusted to reflect the sale of shares offered hereby, by: (i) each person who
to our knowledge will own beneficially more than five percent of our common
stock prior to this offering, (ii) each of our directors, or persons to become
directors, and executive officers and (iii) 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/)............. 26,520,000 78.5% 26,520,000 %
Thomas L Blair (/2/).... 26,520,000 78.5 26,520,000
Principal Mutual Holding
Company (/3/)......... 26,520,000 78.5 26,520,000
Health
Partners (/4/)(/5/)... 6,630,000 19.6 6,630,000
Julian A. L.
Allen (/5/)(/6/)...... -- -- -- --
David T. Blair.......... -- -- -- --
Michael P.
Donovan (/7/)......... 400,000 1.2 400,000
Thomas J. Graf (/8/).... -- -- -- --
Julia M. Lawler (/8/)... -- -- -- --
Rhona L. Leffler (/7/).. 90,000 * 90,000
Michael C.
Miller (/7/).......... 90,000 * 90,000
Brian L.
Moffitt (/7/)......... 30,000 *
Karen E. Shaff (/8/).... -- -- -- --
Paul H.
Warren (/5/)(/9/)..... -- -- -- --
All Directors and
Executive Officers as
a group
(11 persons).......... 33,760,000 100% 33,760,000
</TABLE>
* Less than one percent.
(1) Highland Investments, LLC is controlled 44% 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
Investment, 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 address for Messrs. Allen and Warren and all of the Capital Z entities
is One Chase Manhattan Plaza, 44th Floor, New York, New York 10005.
(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) The shares beneficially owned by these persons vest 25% on February 29,
2000 and the remaining shares in one-third increments at the end of each of
the next three years after that initial 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 (i) 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 (ii) 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.
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<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 shares of common stock outstanding held by
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. Our
Certificate of Incorporation does not provide 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 ratably such dividends, if any, as may be declared from time to time by
the Board of Directors out of funds legally available therefor. 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 ratably 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. Such 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 reference should be made in each case to
our Certificate of Incorporation and Bylaws, which are incorporated herein by
reference. See "Additional 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.
36
<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 directors of the
company. 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 attempt to obtain control of us. Under the Delaware General Corporate
Law, unless the certificate of incorporation otherwise provides, and ours does
not, a director on a classified board may be removed by the stockholders of the
corporation 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
provisions relating to calling special meetings, the number and classification
of directors, director and officer indemnification by the company 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, such 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 (i) 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 or (ii) 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.
37
<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, unless: (i) prior to
such date, our Board of Directors of the corporation approved either the
business combination or the transaction which resulted in the stockholder
becoming an interested stockholder; (ii) upon consummation of the transaction
which resulted in the stockholder becoming an interested stockholder, the
interested stockholder owned at least 85% of the voting stock of the
corporation outstanding at the time the transaction commenced, excluding for
purposes of determining the number of shares outstanding those shares owned (a)
by persons who are directors and officers and (b) 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 (iii) on or after such date, the business combination is
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 is not owned by the
interested stockholder. An "interested stockholder" is defined as any person
that is (a) the owner of 15% or more of the outstanding voting stock of the
corporation or (b) an affiliate or associate of the corporation and was the
owner of 15% or more of the outstanding voting stock of the corporation 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 Health Partners, United Payors
and 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 (i) for
any breach of such director's duty of loyalty to us or our stockholders, (ii)
for acts or omissions not in good faith or which involve intentional misconduct
or a knowing violation of law, (iii) under the Delaware statutory provision
making directors personally liable, under a negligence standard, for unlawful
dividends or unlawful stock purchases or redemptions, or (iv) 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.
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 or she 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 our
directors and executive officers. Each indemnification agreement provides for,
among other things, (i) 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
(ii) prompt advancement of expenses to any indemnitee in connection with his
other defense against any claim.
We also maintain directors' and officers' liability insurance.
38
<PAGE>
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."
Shares Eligible for Future Sale
Upon completion of this offering, we will have outstanding shares of
common stock. The 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 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 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,
of these restricted shares will become eligible for sale in the public
market, also subject to the volume limitations under Rule 144 described below.
The remaining restricted shares will become eligible for sale pursuant to Rule
144 from time to time thereafter. 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
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.
39
<PAGE>
Underwriting
HealthExtras has entered into an underwriting agreement with the underwriters
named below. Warburg Dillon Read is acting as the representative 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........................................
------
Total..........................................................
======
</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.
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 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 the Company
-------------------------
No Exercise Full Exercise
----------- -------------
<S> <C> <C>
Per Share............................................. $ $
Total................................................. $ $
</TABLE>
HealthExtras estimates that the total expenses of the offering, excluding the
underwriting discount, will be approximately $ .
HealthExtras has agreed to indemnify the underwriters against certain
liabilities, including liabilities under the Securities Act of 1933.
40
<PAGE>
HealthExtras' officers, directors, director nominees and other stockholders
have agreed to a 180-day lock up with respect to 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 has been determined by
negotiations between HealthExtras and the underwriters and is not necessarily
related to HealthExtras' asset value, net worth or other established criteria
of value. The factors considered in such negotiations, in addition to
prevailing market conditions, included the history of and prospects for the
industry in which HealthExtras competes, an assessment of HealthExtras'
management, HealthExtras' prospects, its capital structure and certain other
factors as were deemed relevant.
Rules of the Securities and Exchange Commission may limit the ability of the
underwriters to bid for or purchase shares before the distribution of the
shares is completed. However, the underwriters may engage in the following
activities in accordance with the rules:
. Stabilizing transactions--The representatives may make bids or purchases
for the purpose of pegging, fixing or maintaining the price of the shares,
so long as stabilizing bids do not exceed a specified maximum.
. Over-allotments and syndicate covering transactions--The underwriters may
create a short position in the shares by selling more shares than are set
forth on the cover page of this prospectus. If a short position is created
in connection with the offering, the representatives may engage in
syndicate covering transactions by purchasing shares in the open market.
The representatives may also elect to reduce any short position by
exercising all or part of the over-allotment option.
. Penalty bids--If the representatives purchase shares in the open market in
a stabilizing transaction or syndicate covering transaction, they may
reclaim a selling concession from the underwriters and selling group
members who sold those shares as part of this offering.
Stabilization and syndicate covering transactions may cause the price of the
shares to be higher than it would be in the absence of such transactions. The
imposition of a penalty bid might also have an effect on the price of the
shares if it discourages resales of the shares.
Neither HealthExtras nor the underwriters makes any representation or
prediction as to the effect that the transactions described above may have on
the price of the shares. These transactions may occur on the Nasdaq National
Market or otherwise. If such transactions are commenced, they may be
discontinued without notice at any time.
HealthExtras and the underwriters expect that the shares will be ready for
delivery on the fourth business day following the date of this prospectus.
Under Securities and Exchange Commission regulations, secondary market trades
are required to settle in three business days following the trade date
(commonly referred to as "T-3"), unless the parties to the trade agree to a
different settlement cycle. As noted above, the shares will settle in T-3.
Therefore, purchasers who wish to trade on the date of this prospectus or
during the next three succeeding business days must specify an alternate
settlement cycle at the time of the trade to prevent a failed settlement.
Purchasers of the shares who wish to trade shares on the date of this
prospectus or during the next three succeeding business days should consult
their own advisors.
41
<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
PricewaterhouseCoopers LLP, independent accountants, have audited the balance
sheet of HealthExtras, Inc. at July 16, 1999 and the combined balance sheets of
HealthExtras, LLC, at December 31, 1998 and 1997, and the related combined
statements of operations and comprehensive loss, members capital (deficit) and
cash flows for the period October 23, 1996, the date of inception, to December
31, 1996, and for the years ended December 31, 1997 and 1998, as set forth in
their reports. We have included these financial statements in the prospectus in
reliance on PricewaterhouseCoopers LLP's reports, given on their authority as
experts in accounting and auditing.
Where You Can Find More Information
We have filed with the Securities and Exchange Commission a registration
statement on Form S-1 under the Securities Act with respect to the shares of
common stock offered hereby. This prospectus does not contain all of the
information set forth in the registration statement and the exhibits thereto.
For further information with respect to our business and the common stock
offered by this prospectus, reference is made to the registration statement and
the exhibits thereto. Statements contained in this prospectus regarding the
contents of any contract or any other document to which reference is made are
not necessarily complete, and, in each instance where a copy of such contract
or other document has been filed as an exhibit to the registration statement,
reference is made to the copy so filed, each such statement being qualified in
all respects by such reference. A copy of the registration statement and the
exhibits thereto may be inspected without charge at the offices of the
Securities and Exchange Commission at Judiciary Plaza, 450 Fifth Street,
Washington, D.C. 20549, and copies of all or any part of the registration
statement may be obtained from the Public Reference Section of the Securities
and Exchange Commission, Washington, D.C. 20549 upon the payment of the fees
prescribed by the Securities and Exchange Commission. Please call the
Securities and Exchange Commission at 1-800-SEC-0330 for further information
about the public reference rooms. The Securities and Exchange Commission
maintains a website, http://www.sec.gov, that contains reports, proxy and
information statements and other information regarding registrants, such as us,
that file electronically with the Securities and Exchange Commission.
Upon completion of this offering, we will become subject to the information
and periodic reporting requirements of the Securities Exchange Act of 1934, as
amended, and, in accordance therewith, will file periodic reports, proxy
statements and other information with the Securities and Exchange Commission.
42
<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 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
February 19, 1999, except
for Note 1, as to which
the date is May 27, 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................. 263,725 1,144,255 930,978
Prepaid expenses and other assets..... 20,000 -- 354,592
---------- ---------- ----------
Total assets........................ $9,934,731 $2,063,540 $6,506,696
========== ========== ==========
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 related party.................. -- -- 1,478,704
---------- ---------- ----------
Total current liabilities........... 1,461,662 2,446,704 6,598,579
---------- ---------- ----------
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................... 2,575,117 4,196,704 6,598,579
---------- ---------- ----------
Commitments
Members' capital (deficit)............ 7,289,864 (2,745,103) (490,545)
Accumulated comprehensive income
(loss).............................. 69,750 611,939 398,662
---------- ---------- ----------
Total members' capital (deficit).... 7,359,614 (2,133,164) (91,883)
---------- ---------- ----------
Total liabilities and members'
capital (deficit)................. $9,934,731 $2,063,540 $6,506,696
========== ========== ==========
</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 5,904,770 4,805,131
General and administrative........ 146,076 1,556,519 1,497,660
--------- ----------- -----------
Total operating expenses........ 955,881 7,461,289 6,302,791
--------- ----------- -----------
Operating loss.................. (955,881) (7,461,289) (6,302,791)
Interest income (expense), net.... 385 (72,460) 128,206
Other income (expense), net....... (4,830) 589,228 (100)
--------- ----------- -----------
Net loss........................ (960,326) (6,944,521) (6,174,685)
Unrealized holding gains (losses)
on marketable securities arising
during the period............... (1,250) 71,000 542,189
--------- ----------- -----------
Comprehensive loss.............. $(961,576) $(6,873,521) $(5,632,496)
========= =========== ===========
Pro forma data (unaudited):
Basic and diluted net loss per
share......................... $ (.04) $ (.26) $ (.23)
Average shares of common stock
outstanding (in thousands).... 26,520 26,520 26,520
</TABLE>
<TABLE>
<CAPTION>
For the six months
ended June 30,
1998 1999
(unaudited)
- -------------------------------------------------------------------------------
<S> <C> <C>
Revenue............................................. $ -- $ 1,021,238
----------- -----------
Direct expenses..................................... -- 354,350
Product development and marketing................... 3,774,610 2,678,705
General and administrative.......................... 963,214 707,002
----------- -----------
Total operating expenses.......................... 4,737,824 3,740,057
----------- -----------
Operating loss.................................... (4,737,824) (2,718,819)
Interest income (expense), net...................... 106,799 (65,248)
Other income (expense), net......................... (100) (300)
----------- -----------
Net loss.......................................... (4,631,125) (2,784,367)
Unrealized holding gains (losses) on marketable
securities arising during the period.............. 276,547 (213,277)
----------- -----------
Comprehensive loss................................ $(4,354,578) $(2,997,644)
=========== ===========
Pro forma data (unaudited):
Basic and diluted net loss per share.............. $ (0.17) $ (.10)
Average shares of common stock outstanding (in
thousands)...................................... 26,520 28,220
</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)
Advances from member.................... 36,250 -- 36,250
Net loss................................ (960,326) -- (960,326)
---------- -------- ----------
Balance, December 31, 1996.............. 4,075,924 (1,250) 4,074,674
Additional capital contribution by
members............................... 5,000,000 -- 5,000,000
Unrealized gain on marketable
securities............................ -- 71,000 71,000
Advances from member, net............... 5,158,461 -- 5,158,461
Net loss................................ (6,944,521) -- (6,944,521)
---------- -------- ----------
Balance, December 31, 1997.............. 7,289,864 69,750 7,359,614
Unrealized gain on marketable
securities............................ -- 542,189 542,189
Repayments to member, net............... (3,860,282) -- (3,860,282)
Net loss................................ (6,174,685) -- (6,174,685)
---------- -------- ----------
Balance, December 31, 1998.............. (2,745,103) 611,939 (2,133,164)
---------- -------- ----------
Grant of effective member interests to
management, net of deferred
compensation of $428,648.............. 38,925 -- 38,925
Capital contribution ................... 5,000,000 -- 5,000,000
Unrealized loss on marketable
securities............................ -- (213,277) (213,277)
Net loss ............................... (2,784,367) -- (2,784,367)
---------- -------- ----------
Balance, June 30, 1999 (unaudited)...... $ (490,545) $398,662 $ (91,883)
========== ======== ==========
</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) $(6,944,521) $(6,174,685) $(4,631,125) $(2,784,367)
Non cash compensation
expense............. -- -- -- -- 38,925
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 (354,592)
Accounts payable and
accrued expenses... 150,860 201,635 73,901 273,159 195,856
Due to related
party.............. -- -- -- 891,581 1,478,704
Accrued benefit
expense............ -- -- 546,562 (770,813) (16,705)
Marketing expenses
payable............ -- 2,031,713 (1,015,713) 2,030,000 (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) (2,157,623) (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) (6,042,760) --
---------- ----------- ----------- ----------- -----------
Net cash provided by
(used in) financing
activities........... 5,036,250 10,158,461 (2,110,282) (6,042,760) 5,650,000
---------- ----------- ----------- ----------- -----------
Net decrease in net
cash and cash
equivalents......... 3,526,221 6,124,785 (9,431,721) (8,488,483) 5,001,841
Cash and cash
equivalents at the
beginning of
period.............. -- 3,526,221 9,651,006 9,651,006 219,285
---------- ----------- ----------- ----------- -----------
Cash and cash
equivalents at the
end of period....... $3,526,221 $ 9,651,006 $ 219,285 1,162,523 $ 5,221,126
========== =========== =========== =========== ===========
Supplemental
disclosure:
Cash paid for
interest............ $ -- $ 131,515 $ 3,248
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-9
<PAGE>
HealthExtras, LLC
Notes to combined financial statements
1. Organization
The combined statements as of December 31, 1997 and 1998, and for the period
ended December 31, 1996 and the years ended December 31, 1997 and 1998 reflect
the results of operations of HealthExtras, LLC (the "Company"), a Maryland
limited liability company, and certain predecessor companies (the Predecessor
Companies). The Predecessor Companies include: Sequel Newco, Inc., Sequel Newco
Joint Venture (the Joint Venture), Health Extras, Partnership (HEP) and Sequel
Newco, LLP (SN LLP). Through December 31, 1998, the Company was considered to
be a development stage enterprise. The Company commenced business operations
with its health benefits program on November 1, 1998; however, all operating
revenues have been deferred and will be recognized in 1999 in order to coincide
with the program member benefits.
Sequel Newco, Inc. (Sequel), an Iowa Corporation, was originally incorporated
on October 23, 1996 as PB Newco II, Inc. Sequel had an operating loss of
$960,326 for the period October 23, 1996 (date of inception) to December 31,
1996, which is reflected in the combined statement of operations. The loss
consisted primarily of consulting fees and travel expenses. Sequel's business,
which consisted of developing and evaluating international and domestic
healthcare management service opportunities, was contributed to the Joint
Venture as of January 1, 1997.
The Joint Venture was originally formed on December 1, 1996 and its business
involved the development of provider software applications and the development
of international healthcare management opportunities. Effective April 7, 1997,
the Joint Venture was merged into a limited liability partnership, SN LLP. SN
LLP continued the business of the Joint Venture, i.e., the development of
provider software applications and the development of international healthcare
management opportunities.
HEP was originally formed on April 7, 1997 and its business involved the
development of supplemental catastrophic health benefit programs. Effective
August 1, 1998, SN LLP and HEP were merged into Health Extras LLC, a Maryland
limited liability company, with HealthExtras, LLC being the surviving business
entity.
On May 27, 1999, HealthExtras, LLC, which was then a Maryland limited
liability company, contributed substantially all of its assets to HealthExtras,
LLC, a Delaware limited liability company, and Capital Z Healthcare Holding
Corp. invested $5 million in that entity in exchange for a 20% ownership
interest. Accordingly, the accompanying financial statements reflect the
Company's operations as successor to HealthExtras, LLC, the Maryland limited
liability company, and its predecessor companies.
2. Summary of significant accounting policies
Basis of presentation
The combined financial statements include the accounts of the Company and the
Predecessor Companies. The accounts of the Company and the Predecessor
Companies have been combined since these entities are under the common control
of two investors, who own 50% of each entity and who constituted all of the
members of the Company through December 31, 1998.
Cash and cash equivalents
Cash and cash equivalents consist of cash and investments in money market
funds with original maturities of three months or less.
Marketable securities
During 1996, 1997 and 1998, the Company purchased certain marketable
securities. Management considers all of the common stock purchased of a certain
related entity to be available for sale as defined by SFAS No. 115, "Accounting
for Certain Investments in Debt and Equity Securities." Available for sale
securities are reported at fair value, with net unrealized gains and losses
reported in members' capital.
F-10
<PAGE>
HealthExtras, LLC
Notes to Combined Financial Statements
During 1996 and 1997, the Company engaged in the trading of marketable
securities. Trading securities are reported at fair value, with net unrealized
gains and losses reported in the statement of operations and comprehensive
loss. Realized gains and losses on the sale of trading securities are
determined using the specific identification method. For the period ended
December 31, 1996, no realized gains or losses were recorded. For the year
ended December 31, 1997, net realized gains of $732,977 were recorded. All
trading securities were sold prior to December 31, 1997.
The historical cost, gross unrealized holding gains and losses and fair value
of marketable securities as of December 31, 1996, 1997, 1998, and as of June
30, 1999 are as follows:
<TABLE>
<CAPTION>
June 30, 1999
1996 1997 1998 (unaudited)
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Available for sale
Historical cost.................... $ 35,625 $193,975 $ 532,316 $532,316
Gross unrealized holding gains..... -- 69,750 611,939 398,662
Gross unrealized holding losses.... (1,250) -- -- --
-------- -------- ---------- --------
Fair value......................... 34,375 263,725 1,144,255 930,978
-------- -------- ---------- --------
Trading
Historical cost.................... 494,375 -- -- --
Gross unrealized holding gains..... -- -- -- --
Gross unrealized holding losses.... -- -- -- --
-------- -------- ---------- --------
Fair value......................... 494,375 -- -- --
-------- -------- ---------- --------
Total marketable securities........ $528,750 $263,725 $1,144,255 $930,978
======== ======== ========== ========
</TABLE>
Concentration of credit risk
Financial instruments that potentially subject the Company to significant
concentrations of credit risk consist principally of cash, cash equivalents,
and certificate of deposit. The Company maintains such amounts in bank accounts
which, at times, may exceed federally insured amounts. The Company has not
experienced any losses related to its cash, cash equivalents, or certificate of
deposit and believes it is not exposed to any significant credit risk on cash,
cash equivalents, or certificate of deposit.
Use of estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Contributions
Contributions made, including unconditional promises to give, are recognized
as expenses in the period made or promised.
Start-up costs
Start-up costs are expensed as incurred.
Income taxes
No provision for federal or state income taxes has been made in the
accompanying combined financial statements since the Company is treated as a
partnership in which the profits and losses are reported on the members' tax
returns.
The Company's tax returns and the amounts of the Company's allocable profits
and losses are subject to examination by federal and state authorities. If such
examinations result in changes to the Company's profits or loss, the tax
liability of the members would be changed accordingly.
Comprehensive income (loss)
The Financial Accounting Standards Board ("FASB") issued SFAS No. 130,
"Reporting Comprehensive Income" which became effective for reporting periods
beginning after December 15, 1997. As of
F-11
<PAGE>
HealthExtras, LLC
Notes to Combined Financial Statements
December 31, 1998, the Company has adopted SFAS No. 130. SFAS No. 130 requires
additional reporting with respect to certain changes in assets and liabilities
that previously were not required to be reported as results of operations for
the period.
Revenue and direct expense recognition
Revenue from program benefits and related direct expenses (principally bank
marketing and processing fees and the cost of the benefits provided to program
members) is initially deferred for 90 days, the period during which a program
member is generally entitled to obtain a full refund. Revenue and direct
expenses attributable to the initial deferral are recognized in the subsequent
month. After the initial deferral period, revenue is recognized as earned and
direct expenses as incurred.
Interim financial statements
The results of operations for the six months ended June 30, 1998 and 1999,
are not necessarily indicative of the results to be expected for the full
fiscal year. All information as of June 30, 1999, and for the six months ended
June 30, 1998 and 1999 is unaudited but, in the opinion of management, contains
all adjustments, consisting only of normal recurring adjustments, necessary to
present fairly the combined financial position, results of operations and cash
flows of the Company.
Pro forma information (unaudited)
In connection with the formation of HealthExtras, Inc. (the Company) and its
merger with HealthExtras, LLC, the operations of the Company will be subject to
federal and state income taxes and it will recognize deferred taxes in
accordance with Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes" ("SFAS No. 109"). SFAS No. 109 requires companies
subject to income taxes to adjust their deferred tax assets and liabilities
based on temporary differences between financial statement and tax bases of
assets and liabilities using enacted tax rules in effect in the year in which
the differences are expected to reverse.
On a pro forma basis as of June 30, 1999, giving effect to the merger of
HealthExtras, LLC and HealthExtras, Inc., deferred income taxes would be
comprised of the following, computed at a combined effective rate of 39%:
<TABLE>
<S> <C>
Deferred tax assets (liabilities):
Accrued expenses...................................................... $ 42,482
Prepaid expenses...................................................... (136,943)
Deferred revenue...................................................... 562,965
Unrealized holding gains on marketable securities..................... (82,367)
Valuation allowance................................................... (386,137)
--------
Net deferred tax asset............................................... $ --
========
</TABLE>
Pro forma basic and diluted net loss per share and weighted average shares
outstanding reflect the formation of HealthExtras, Inc. and merger with
HealthExtras, LLC in exchange for Company common stock as if the merger was
effective October 23, 1996.
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.
F-12
<PAGE>
HealthExtras, LLC
Notes to Combined Financial Statements
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.
Through December 31, 1997, the entire $3,030,000 commitment was expensed
because the payments were non-refundable and the Company was unable to
determine if such payments would benefit future periods. In connection with
both agreements, as of December 31, 1998 the Company's minimum future payments
are as follows:
<TABLE>
<S> <C>
1999................................................................. $1,016,000
</TABLE>
Under both marketing agreements, the Company has the option to extend and
renew the agreements for an additional two-year period which would result in
additional guaranteed minimum payments by the Company of approximately
$2,034,000.
Under the marketing agreements, the Company must pay $1.00 and $0.10,
respectively, per program member that subscribes to the benefits promoted by
the individuals. Such payments are for the initial three year term of the
marketing agreements and shall continue for a 10 year period thereafter.
Additionally, during 1997, the Company pledged to contribute $300,000 to a
charitable foundation payable in equal installments of $100,000 commencing on
August 1, 1997. Through December 31, 1998, the Company paid $100,000 to the
charitable foundation. As of December 31, 1998, the remaining amount of
$200,000 is reflected in the balance sheet.
During 1998, the Company entered into various agreements with participating
companies whereby the Company has committed to provide minimum enrollment in
its programs. The Company is committed to pay certain companies a minimum of
$1,260,900 which is included in direct operating expenses in 1998. A liability
of $546,562 is included in accrued benefit expense on the balance sheet as of
December 31, 1998 for the unpaid amount.
During July 1998, the Company entered into an agreement for a mass marketing
campaign requiring a minimum payment of $100,000 which is included in sales and
marketing expense for the year ended December 31, 1998. A liability of $100,000
for such payment is included in accrued expenses on the balance sheet as of
December 31, 1998.
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 leases office space from and, pays fees for professional and
communication services to a corporation for which a member of the Company is
the Chairman of the Board and Co-Chief Executive Officer. The amount paid by
the Company 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.
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.
F-13
<PAGE>
HealthExtras, LLC
Notes to Combined Financial Statements
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. This additional loaned capital, amounting to $1,334,429 as of
December 31, 1998, was reclassified to members' capital (deficit) since the
Company may not have sufficient funds available to repay the member.
The Company has entered into an agreement with United Payors & United
Providers, Inc. (UP&UP), whereby UP&UP provides administrative services for the
Company and is reimbursed for the costs incurred. The Company also signed a
royalty agreement relating to the Company's 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 a royalty based on
the number of individuals participating in the Company's products. These
agreements are effective January 1, 1999.
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.
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% 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 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-14
<PAGE>
www.healthextras.com
<PAGE>
- --------------------------------------------------------------------------------
- ------------
PROSPECTUS
- ------------
Shares
[HealthExtras Logo]
Common Stock
Warburg Dillon Read LLC
, 1999
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
SEC Registration Fee ...................................... $28,912
NASD Filing Fee ........................................... 10,900
NASDAQ Stock Market National Listing Fee .................. 95,000
Printing, engraving, postage and mailing .................. *
Legal fees and expenses ................................... *
Accounting fees and expenses .............................. *
Transfer agent fees and expenses .......................... *
Blue Sky fees and expenses ................................ *
Miscellaneous ............................................. *
-------
TOTAL .................................................. $
=======
* To be furnished by amendment.
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's fees, judgments, fines, ERISA excise taxes or penalties
and amounts paid in settlement) reasonably incurred or suffered by such
indemnitee in connection therewith; provided, however, that, except as provided
in Section C hereof with respect to proceedings to enforce rights to
indemnification, the Corporation shall indemnify any such indemnitee in
connection with a proceeding (or part thereof) initiated by such indemnitee only
if such proceeding (or part thereof) was authorized by the Board of Directors of
the Corporation.
B. The right to indemnification conferred in Section A of this Article
EIGHTH shall include the right to be paid by the Corporation the expenses
incurred in defending any such proceeding in advance of its final disposition
(hereinafter an "advancement of expenses"); provided, however, that, if the
Delaware General Corporation Law requires, an advancement of expenses incurred
by an indemnitee in his or her capacity as a Director or Officer (and not in any
other capacity in which service was or is rendered by such indemnitee,
including, without limitation, services to an employee benefit plan) shall be
made only upon delivery to the Corporation of an undertaking (hereinafter an
"undertaking"), by or on behalf of such indemnitee, to repay all amounts so
advanced if it shall ultimately be determined by final judicial decision from
which there is no further right to appeal (hereinafter a "final adjudication")
that such indemnitee is not entitled to be indemnified for such expenses under
this Section or otherwise. The rights to indemnification and to the advancement
of expenses conferred in Sections A and B of this Article EIGHTH shall be
contract rights and such rights shall continue as to an indemnitee who has
ceased to be a Director, Officer, employee or agent and shall inure to the
benefit of the indemnitee's heirs, executors and administrators.
<PAGE>
C. If a claim under Section A or B of this Article EIGHTH is not paid in
full by the Corporation within sixty days after a written claim has been
received by the Corporation, except in the case of a claim for an advancement of
expenses, in which case the applicable period shall be twenty days, the
indemnitee may at any time thereafter bring suit against the Corporation to
recover the unpaid amount of the claim. If successful in whole or in part in
any such suit, or in a suit brought by the Corporation to recover an advancement
of expenses pursuant to the terms of an undertaking, the indemnitee shall be
entitled to be paid also the expenses of prosecuting or defending such suit. In
(1) any suit brought by the indemnitee to enforce a right to indemnification
hereunder (but not in a suit brought by the indemnitee to enforce a right to an
advancement of expenses) it shall be a defense that, and (2) in any suit by the
Corporation to recover an advancement of expenses pursuant to the terms of an
undertaking, the Corporation shall be entitled to recover such expenses upon a
final adjudication that, the indemnitee has not met any applicable standard for
indemnification set forth in the Delaware General Corporation Law. Neither the
failure of the Corporation (including its Board of Directors, independent legal
counsel, or its stockholders) to have made a determination prior to the
commencement of such suit that indemnification of the indemnitee is proper in
the circumstances because the indemnitee has met the applicable standard of
conduct set forth in the Delaware General Corporation Law, nor an actual
determination by the Corporation (including its Board of Directors, independent
legal counsel, or its stockholders) that the indemnitee has not met such
applicable standard of conduct, shall create a presumption that the indemnitee
has not met the applicable standard of conduct or, in the case of such a suit
brought by the indemnitee, be a defense to such suit. In any suit brought by
the indemnitee to enforce a right to indemnification or to an advancement of
expenses hereunder, or by the Corporation to recover an advancement of expenses
pursuant to the terms of an undertaking, the burden of proving that the
indemnitee is not entitled to be indemnified, or to such advancement of
expenses, under this Article EIGHTH or otherwise shall be on the Corporation.
D. The rights to indemnification and to the advancement of expenses
conferred in this Article EIGHTH shall not be exclusive of any other right which
any person may have or hereafter acquire under any statute, the Corporation's
Certificate of Incorporation, Bylaws, agreement, vote of stockholders or
Disinterested Directors or otherwise.
E. The Corporation may maintain insurance, at its expense, to protect
itself and any Director, Officer, employee or agent of the Corporation or
subsidiary or Affiliate or another corporation, partnership, joint venture,
trust or other enterprise against any expense, liability or loss, whether or not
the Corporation would have the power to indemnify such person against such
expense, liability or loss under the Delaware General Corporation Law.
F. The Corporation may, to the extent authorized from time to time by the
Board of Directors, grant rights to indemnification and to the advancement of
expenses to any employee or agent of the Corporation to the fullest extent of
the provisions of this Article EIGHTH with respect to the indemnification and
advancement of expenses of Directors and Officers of the Corporation.
NINTH:
A Director of this Corporation shall not be personally liable to the
Corporation or its stockholders for monetary damages for breach of fiduciary
duty as a Director, except for liability (1) for any breach of the Director's
duty of loyalty to the Corporation or its stockholders; (2) for acts or
omissions not in good faith or which involve intentional misconduct or a knowing
violation of law; (3) under Section 174 of the Delaware General Corporation Law;
or (4) for any transaction from which the Director derived an improper personal
benefit. If the Delaware General Corporation Law is amended to authorize
corporate action further eliminating or limiting the personal liability of
Directors, then the liability of a Director of the Corporation shall be
eliminated or limited to the fullest extent permitted by the Delaware General
Corporation Law, as so amended.
Any repeal or modification of the foregoing paragraph by the stockholders
of the Corporation shall not adversely affect any right or protection of a
Director of the Corporation existing at the time of such repeal or modification.
II-2
<PAGE>
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
The registrant, HealthExtras, Inc., a Delaware corporation, was formed on
July 12, 1999. HealthExtras has, to date, not issued any shares of its common
stock.
Pursuant to a commitment made in February 1999, on May 27, 1999,
HealthExtras, which was then a Maryland limited liability company, contributed
substantially all of its assets to HealthExtras, LLC, a Delaware limited
liability company, and Capital Z Healthcare Holding Corp., invested $5 million
in that entity in exchange for a 20% ownership interest. Capital Z Healthcare
Holding Corp. serves only as a vehicle for its sole stockholder, Health
Partners, to invest in HealthExtras and does not conduct any other operations.
In addition, pursuant to commitments 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 years.
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 Registration Statement
to be signed on its behalf by the undersigned, thereunto duly authorized, in the
City of Rockville, State of Maryland on the 26th day of July, 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 Registration
Statement has been signed below by the following persons on July 26, 1999 in the
capacities indicated:
By: /s/ Thomas L. Blair Sole Director
----------------------------------
Thomas L. Blair
By: /s/ David T. Blair Chief Executive Officer
----------------------------------
David T. Blair
By: /s/ Michael P. Donovan
---------------------------------- Chief Financial Officer
Michael P. Donovan (Chief Accounting Officer)
II-4
<PAGE>
EXHIBIT INDEX
Exhibit
No. Description
- --------------------------------------------------------------------------------
1.0 Form of Underwriting Agreement (1)
2.1 Reorganization Agreement by and among HealthExtras, Inc.,
HealthExtras, LLC, and Capital Z Healthcare Holding Corp.(1)
3.1(a) Certificate of Incorporation of HealthExtras, Inc. (filed herewith)
3.1(b) Amended and Restated Certificate of Incorporation (1)
3.2 Bylaws of HealthExtras, Inc.(1)
4.1 Specimen Stock Certificate of HealthExtras, Inc.(1)
4.2 Stockholders' Agreement (1)
5.1 Opinion of Muldoon, Murphy & Faucette LLP re: legality (1)
10.1 Form of Employment Agreement between HealthExtras, Inc. and David
T. Blair(1)
10.2 Form of Employment Agreement between HealthExtras, Inc. and certain
Executive Officers(1)
10.3 Program Administrator's Agreement by and between HealthExtras LLC
and Reliance National Insurance Company(2)
10.4 Administrative Services Agreement by and between HealthExtras, LLC
and United Payors & United Providers, Inc. (filed herewith)
10.5 Agreement by and between United Payors & United Providers, Inc. and
HealthExtras, LLC re: network access (filed herewith)
10.6 Agreement by and between Cambria Productions, Inc. f/s/o
Christopher Reeve and HealthExtras, Inc.(2)
10.7 Indemnity Agreement(1)
10.8 Sublease Agreement by and between United Payors & United Providers,
Inc. and HealthExtras, LLC(1)
10.9 Stock Option Plan(1)
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 (filed herewith)
24.0 Powers of Attorney (included on signature page)
27.0 Financial Data Schedule (filed herewith)
99.1 Consent of Julian A.L. Allen to serve as a Director of
the Company (1)
99.2 Consent of David Blair to serve as a Director of the Company (filed
herewith)
99.3 Consent of Thomas J. Graf to serve as a Director of
the Company (1)
99.4 Consent of Julia M. Lawler to serve as a Director of
the Company (1)
99.5 Consent of Karen M. Shaff to serve as a Director of the Company
(filed herewith)
99.6 Consent of Paul H. Warren to serve as a Director of
the Company (1)
- -------------------------------------------------
(1) To be filed by amendment.
(2) Confidential treatment requested pursuant to Section 406 of Regulation C,
promulgated under the Securities Act of 1933.
II-5
<PAGE>
Exhibit 3.1(A)
CERTIFICATE OF INCORPORATION
OF
HEALTHEXTRAS, INC.
FIRST: The name of the Corporation is HealthExtras, Inc. (hereinafter
-----
sometimes referred to as the "Corporation").
SECOND: The address of the registered office of the Corporation in the
------
State of Delaware is Corporation Trust Center, 1209 Orange Street, in the City
of Wilmington, County of New Castle. The name of the registered agent at that
address is The Corporation Trust Company.
THIRD: The purpose of the Corporation is to engage in any lawful act or
-----
activity for which a corporation may be organized under the General Corporation
Law of the State of Delaware.
FOURTH: The total number of shares of all classes of stock which the
------
Corporation shall have authority to issue is one hundred million (100,000,000)
shares of common stock, par value of ($.01) per share (the "Common Stock").
FIFTH:
-----
A. The number of Directors shall be fixed from time to time
exclusively by the Board of Directors pursuant to a resolution adopted by a
majority of the Board.
B. Newly created directorships resulting from any increase in the
authorized number of Directors or any vacancies in the Board of Directors
resulting from death, resignation, retirement, disqualification, removal
from office or other cause may be filled by a majority vote of the
Directors then in office, though less than a quorum, and Directors so
chosen shall hold office for a term expiring at the next annual meeting of
stockholders and until their successor has been elected and qualified. No
decrease in the number of Directors constituting the Board of Directors
shall shorten the term of any incumbent Director.
C. Elections of directors need not be by written ballot except and to
the extent provided in the Bylaws of the Corporation.
SIXTH: The Board of Directors is expressly empowered to adopt, amend or
-----
repeal the Bylaws of the Corporation. Any adoption, amendment or repeal of the
Bylaws of the Corporation by the Board of Directors shall require the approval
of a majority of the Board. The stockholders shall also have power to adopt,
amend or repeal the Bylaws of the Corporation.
<PAGE>
SEVENTH: Upon filing the Certificate of Incorporation, the name and
-------
mailing address of the person who is to serve as the sole director until the
first annual meeting of stockholders or until his successors are elected and
qualified is:
Thomas L. Blair
2275 Research Boulevard, Seventh Floor
Rockville, MD 20850
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
2
<PAGE>
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 suit against
the Corporation to recover the unpaid amount of the claim. If successful
in whole or in part in any such suit, or in a suit brought by the
Corporation to recover an advancement of expenses pursuant to the terms of
an undertaking, the indemnitee shall be entitled to be paid also the
expenses of prosecuting or defending such suit. In (i) any suit brought by
the indemnitee to enforce a right to indemnification hereunder (but not in
a suit brought by the indemnitee to enforce a right to an advancement of
expenses) it shall be a defense that, and (ii) in any suit by the
Corporation to recover an 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.
3
<PAGE>
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: (i) for any breach of the Director's
duty of loyalty to the Corporation or its stockholders; (ii) for acts or
omissions not in good faith or which involve intentional misconduct or a knowing
violation of law; (iii) under Section 174 of the Delaware General Corporation
Law; or (iv) for any transaction from which the Director derived an improper
personal benefit. If the Delaware General Corporation Law is amended to
authorize corporate action further eliminating or limiting the personal
liability of Directors, then the liability of a Director of the Corporation
shall be eliminated or limited to the fullest extent permitted by the Delaware
General Corporation Law, as so amended.
Any repeal or modification of the foregoing paragraph by the stockholders
of the Corporation shall not adversely affect any right or protection of a
Director of the Corporation existing at the time of such repeal or modification.
TENTH: The Corporation reserves the right to amend or repeal any provision
-----
contained in this Certificate of Incorporation in the manner prescribed by the
laws of the State of Delaware and all rights conferred upon stockholders are
granted subject to this reservation.
ELEVENTH: The name and mailing address of the sole incorporator is as
--------
follows:
Name Mailing Address
---- --------------------------------
Mia S. Kim Muldoon, Murphy & Faucette LLP
5101 Wisconsin Avenue, N.W.
Washington, D.C. 20016
I, THE UNDERSIGNED, being the incorporator, for the purpose of forming a
corporation under the laws of the State of Delaware, do make, file and record
this Certificate of Incorporation and do certify that the facts herein stated
are true, and accordingly, have hereto set my hand this 9th day of July, 1999.
/s/ Mia S. Kim
--------------
Mia S. Kim
Incorporator
4
<PAGE>
Exhibit 10.4
AGREEMENT BETWEEN
UNITED PAYORS & UNITED PROVIDERS, INC.
AND
HEALTHEXTRAS, L.L.C.
This Agreement is made this 23rd day of December, 1998 by and between
United Payors & United Providers, Inc. ("UP&UP"), a Delaware Corporation, and
HealthExtras, L.L.C. ("HE"), and shall be deemed effective as of January 1,
1999.
Whereas, UP&UP has various administrative and technical capabilities that
may be used to support HE operations, and
Whereas, HE wishes to utilize UP&UP administrative and technical services
in the development and operation of HE businesses;
Now, Therefore, in consideration of the mutual agreements and covenants
herein contained, UP&UP and HE agree as follows:
A. GENERAL UNDERSTANDINGS
----------------------
1. UP&UP has a full span of administrative and technical services
("Services") that include computer systems, infrastructure,
telecommunications, employee benefits, finance, accounting, legal,
marketing, claims processing, insurance analysis, human resources,
client services and general business skills.
2. HE, in order to avoid the fixed cost of acquiring administrative and
technical services, shall utilize UP&UP's Services.
B. APPROVALS
---------
1. All administrative protocols and procedures developed by UP&UP for the
support and administration of HE businesses shall only be utilized by
UP&UP after receiving approval by HE.
2. Any marketing and promotional materials developed by HE that
references a business relationship with UP&UP may only be utilized by
HE after receiving written approval by UP&UP that such marketing and
promotional materials are acceptable to UP&UP.
3. Any marketing and promotional materials developed by UP&UP that
references a business relationship with HE may only be utilized by
UP&UP after receiving written approval by HE that such marketing
materials are acceptable to HE.
<PAGE>
C. UP&UP RESPONSIBILITIES
----------------------
1. UP&UP shall make available all appropriate staff ("Staff') as may be
necessary to support HE business operations. These shall include the
scope of services described in A. 1. above.
2. UP&UP shall provide all administrative and facilities support
("Support") as may be necessary for Staff to meet their obligations
under the terms of this Agreement. Such Support shall include, but
shall not be limited to, office space, furniture and equipment,
reproduction, phone (both voice and fax), and computing capabilities.
D. COMPENSATION AND PAYMENT
------------------------
1. UP&UP shall be reimbursed for all Services, Staff and Support provided
to HE under the terms of this Agreement. Such reimbursement shall be
calculated on a "cost" basis by UP&UP and be agreed to by HE.
E. PAYMENTS AND AUDIT
------------------
1. UP&UP shall invoice ("Invoice") HE on a quarterly basis for all
Services, Staff and Support. Such Invoice shall list, by name, all
UP&UP employees assigned to support HE under the terms of this
Agreement and the accounting details supporting Services and Support
provided by UP&UP.
2. All reimbursement due UP&UP for Services, Staff and Support shall be
payable within sixty (60) days after the end of each quarter.
3. HE and its affiliated companies and/or its agents may audit all UP&UP
source documents supporting the invoice for Services, Staff and
Support.
F. TERM
----
1 . During the term of this Agreement HE may unilaterally terminate this
Agreement at any time by providing UP&UP ninety (90) days written
notice of such termination.
2. This Agreement shall terminate on December 31, 2001. Any payments due
UP&UP under the terms of this Agreement shall survive the termination
of this Agreement.
2
<PAGE>
G. NON-SOLICITATION
----------------
1. During the term of this Agreement, and for a period of one year
from the date of termination of this Agreement, HE shall not solicit,
hire, contract with or otherwise utilize, or attempt to utilize UP&UP
employees or consultants, unless otherwise mutually agreed upon .
2. During the term of this Agreement, UP&UP shall not solicit, hire,
contract with or otherwise utilize, or attempt to utilize, HE
employees or consultants unless otherwise mutually agreed upon.
H. CONFIDENTIALITY
---------------
1. HE and UP&UP acknowledge that in fulfilling the responsibilities set
forth in this Agreement, HE and UP&UP shall exchange confidential and
proprietary information concerning business and financial affairs of
HE and UP&UP, their subsidiaries and other affiliated companies. HE
and UP&UP agree not to disclose any such information at any time,
except as necessary to employees or agents of the parties or as
required by law.
2. HE and UP&UP agree that at any time, upon the request of the other,
each will promptly return any and all written or magnetic media
material containing, or reflecting, any confidential or proprietary
business or financial information and will not retain any copies,
extracts, or other reproductions in whole or in part of such material.
I. ARBITRATION
-----------
1. HE and UP&UP shall attempt to resolve any controversy or claim arising
out of, or relating to, this Agreement by mutual cooperation. Any
controversy or claim arising out of, or relating to, this Agreement
which cannot be settled by the mutual cooperation of the parties shall
be settled by binding arbitration rendered by the American Arbitration
Association standard commercial rules of arbitration.
2. In all cases submitted to arbitration, HE and UP&UP agree
to share equally the administrative fee, as well as the Arbitrator's
fees, if any, unless otherwise assessed by the Arbitrator. The
Arbitrator's fee shall be advanced by the initiating party subject to
final apportionment by the Arbitrator in his or her award.
J. INDEMNIFICATION
---------------
1. HE shall indemnify and hold harmless UP&UP and its officers,
employees, agents and affiliates against any and all claims, actions,
expenses and liabilities
3
<PAGE>
(including reasonable attorneys fees) related to any breach of HE's
obligations unless the claim, action, expense or liability is found in
a final judgement by a court of competent jurisdiction (not subject to
further appeal) to have resulted directly and solely of UP&UP's
performance under this Agreement.
2. UP&UP shall indemnify and hold harmless HE and its officers,
employees, agents and affiliates against any and all claims, actions,
expenses and liabilities (including reasonable attorneys fees) related
to or arising from any breach of UP&UP's obligations unless the claim,
action, expense or liability is found in a final judgement by a court
of competent jurisdiction (not subject to further appeal) to have
resulted directly and solely of HE's performance under this Agreement.
K. MODIFICATIONS
-------------
1. All amendments or modifications to this Agreement shall be mutually
agreed to in writing by HE and UP&UP.
L. GOVERNING LAW
-------------
1. This Agreement shall be governed in all respects by the laws of the
State of Delaware.
M. SEVERABILITY OF INVALID PROVISIONS
----------------------------------
1. If any provision of this Agreement is held to be illegal, invalid or
unenforceable under any state or federal laws effective during this
term, such provision shall be fully severable. The Agreement shall be
construed and enforced as if such illegal, invalid or unenforceable
provision had never comprised a part hereof, and the remaining
provisions shall remain in full force and effect despite such
severance, unless this Agreement is terminated by either party in
accordance with the terms of this Agreement, provided that the invalid
provision is not material to the overall purpose and operation of this
Agreement.
N. WAIVER
------
1. The waiver by HE or UP&UP of any breach of any provision of this
Agreement or warranty or representation herein set forth shall not be
construed as a waiver of any subsequent breach of the same or any
other provision.
2. The failure to exercise any right under this Agreement shall not
operate as a waiver of such right. All rights and remedies provided
for under this Agreement are cumulative.
4
<PAGE>
O. HEADINGS
--------
1. The headings in this Agreement are for convenience of reference only
and shall not be considered in construing the provisions hereof.
P. ENTIRE AGREEMENT
----------------
1. This Agreement contains all of the terms and conditions agreed upon by
HE and UP&UP regarding the subject matter of this Agreement. Any prior
agreements, promises, negotiations, or representations, either oral or
written, relating to the subject matter of this Agreement that are not
expressly set forth in this Agreement are of no force and effect.
Q. EMPLOYEES ON OTHER PARTY'S PREMISES
-----------------------------------
1 . The employees or authorized agents of HE and UP&UP shall comply with
the other party's working rules and security regulations at such time
as one party's employees may be on the premises of the other party.
R. NOTICE OF DEFICIENCY
--------------------
1. If either HE or UP&UP, in the opinion of the other, fails to comply
with one or more terms and conditions of this Agreement, the aggrieved
party shall give written notice of deficiency to the other party. The
party receiving such notice shall have thirty (30) days from the
receipt thereof to remedy the deficiency in order to comply with the
terms and conditions of this Agreement. In the event said default is
not cured within the 30 day period, the non-defaulting party may
terminate the Agreement immediately.
S. NOTICES
-------
1. All notices provided by this Agreement shall be in writing and shall
be sent by United States certified mail, postage prepaid, to the
address of the other party which is set forth in this Agreement, or to
such other address as the party shall designate in writing. Any notice
shall be deemed to be effective upon mailing.
If to HE, attention of: David T. Blair
Chief Financial Officer
HealthExtras, L.L.C.
2275 Research Boulevard
Seventh Floor
Rockville, MD 20850
5
<PAGE>
If to UP&UP, attention of: Spiro Karadimas
Vice President of Operations
2275 Research Boulevard
Sixth Floor
Rockville, MD 20850
T. BINDING ON SUCCESSORS
---------------------
1. This Agreement shall be binding upon and inure to the benefit of HE and
UP&UP and their respective successors and permitted assigns.
U. ASSIGNMENT
----------
1. This Agreement may not be assigned by either party without the prior
written approval of the other party.
V. INDEPENDENT RELATIONSHIP
------------------------
1. None of the provisions of this Agreement are intended to create, nor
shall be deemed or construed to create, any relationship between HE
and UP&UP other than that of independent entities contracting with
each other solely for the purposes of effecting the provisions of this
Agreement.
2. The parties to this Agreement, and their respective officers,
directors, or employees, shall not be construed to be joint ventures,
or the agent, employee, or representative of the other, except as
specifically provided in this Agreement.
IN WITNESS WHEREOF, the undersigned have executed this Agreement.
HE: HEALTHEXTRAS, L.L.C.
December 23, 1998 By: David T. Blair
- ----------------- -------------------------------
Date Signature: /s/ David T. Blair
------------------------
Title: Chief Financial Officer
-----------------------------
UP&UP : UNITED PAYORS & UNITED PROVIDERS, INC.
December 23, 1998 By: Spiro Karadimas
- ----------------- -------------------------------
Date: Signature: /s/ Spiro Karadimas
------------------------
Title: Vice President of Operation
-----------------------------
6
<PAGE>
Exhibit 10.5
AGREEMENT BETWEEN
UNITED PAYORS & UNITED PROVIDERS, INC.
AND
HEALTHEXTRAS, L.L.C.
This Agreement is made this 23rd day of December, 1998 by and between
United Payors & United Providers, Inc. ("UP&UP"), a Delaware Corporation, and
HealthExtras, L.L.C. ("HE").
Whereas, UP&UP has proprietary contracts with a national network of
physicians and hospitals ("Network");
Whereas, HE has developed a unique set of reinsurance benefits
("Benefits") that may be utilized to supplement and augment disability and
health insurance programs;
Whereas, HE has a contract with Christopher Reeve ("CR"), via the
William Morris Agency, that stipulates CR will assist in the marketing of HE
products and services;
Whereas, HE wishes to market Network to selected populations as an HE
product on behalf of UP&UP; and
Whereas, HE may wish to market Benefits in conjunction with Network;
Now, Therefore, in consideration of the mutual agreements and covenants
herein contained, UP&UP and HE agree as follows:
A. GENERAL UNDERSTANDINGS
----------------------
1. UP&UP has developed various criteria ("Criteria") that those
entities and/or individuals wishing to utilize the Network
must comply with in order to access the Network. Such Criteria
may be revised unilaterally by UP&UP.
2. The Network developed by UP&UP consists of several thousand
hospitals and in excess of one hundred thousand physicians.
UP&UP may unilaterally add or delete individual hospitals and
physicians to, or from, the Network.
3. Those hospitals and physicians which comprise the Network
offer price concessions to those clients of UP&UP that meet
the Criteria.
4. HE is prepared to utilize CR in various advertising campaigns
("Campaigns") promoting Network and/or Benefits.
5. All products marketed and sold by HE as the result of
Campaigns shall conform with Criteria.
1
<PAGE>
6. In consideration of the Royalty Fee described in Section D. of
this Agreement, HE may utilize the Network in any of its
product offerings for the term of this Agreement and there
shall be no access fee charged to HE or its plan members for
utilization of the Network.
B. APPROVALS
---------
1. Any marketing and promotional materials developed by HE that
references the Network may only be utilized by HE after
receiving written approval by UP&UP that such marketing and
promotional materials are acceptable to UP&UP.
2. Any marketing and promotional materials developed by UP&UP
that references the Benefits may only be utilized by UP&UP
after receiving written approval by HE that such marketing and
promotional materials are acceptable to HE.
3. It is understood by UP&UP that any Campaign utilizing CR for
the marketing of the Network and/or other products may be
subject to the approval of the representatives of CR.
C. CAMPAIGNS AND EXCLUSIVITY
-------------------------
1. HE shall develop and implement various Campaigns to sell
products to individuals and families. Such Campaigns may
utilize the distribution channels of third parties including,
but not limited to, insurance companies, credit card issuing
banks and other financial institutions.
2. All costs incurred in developing and implementing Campaigns
shall be the responsibility of HE unless UP&UP agrees, in
writing, to incur all, or a portion of, such costs.
3. It is recognized that any Campaigns performed by HE to market
products may be in conjunction with HE marketing Benefits.
4. During the term of the Agreement HE shall not allow any entity
or individual to utilize CR, via the HE contract with the
William Morris Agency, for the promotion of products or
services competitive to products or services offered by UP&UP.
5. During the term of this Agreement HE shall not, directly or
indirectly, market, promote and/or sell any products or
services other than Network, that offer discounts or price
concessions from physicians, hospitals or other medical
providers, other than products or services approved by UP&UP.
2
<PAGE>
D. COMPENSATION AND PAYMENT
------------------------
1. HE shall charge an annual fee ("Annual Fee") to all those
individuals and families that elect to purchase Benefits as a
result of Campaign. HE shall have the sole right to establish
the level of Annual Fee for those individuals and families
purchasing products or services as the result of the various
Campaigns developed and implemented by HE.
2. UP&UP shall be paid a portion of all Annual Fees earned and
collected by HE.
3. Those UP&UP portions ("Royalty Fee") of Annual Fees paid to
UP&UP for each individual and family shall be based on the
following schedule:
Royalty Fee Paid UP&UP For Each
Individual or Family Based Upon the
Annual Period Membership Computed on a Monthly Basis
----------------------------- --------------------------------------
Initial Year $12.00 ($1.00 per member per month)
First Subsequent Year $14.00 ($1.17 per member per month)
Second Subsequent Year $16.00 ($1.33 per member per month)
Additional Subsequent Years $18.00 ($1.50 per member per month)
E. PAYMENTS AND AUDIT
------------------
1. All monies due UP&UP from HE as the result of this Agreement
shall be paid within sixty (60) days of each calendar
year-end.
2. UP&UP and its affiliated companies and/or its agents may audit
all HE source documents and other records that may form the
basis of payments of UP&UP Royalty Fee by HE under this
Agreement.
F. TERM
----
1. This Agreement shall terminate on December 31, 2003. Any
payments due UP&UP under the terms of this Agreement shall
survive the termination of this Agreement.
2. If during the term of this Agreement HE causes UP&UP to
receive $25 million market value of HE common stock, then the
fees described in Paragraph D.3. will be eliminated.
G. NON-SOLICITATION
----------------
1. During the term of this Agreement, and for a period of one
year from the date of termination of this Agreement, HE shall
not solicit, hire, contract with or otherwise utilize, or
attempt to utilize UP&UP employees or consultants, unless
otherwise mutually agreed upon.
3
<PAGE>
2. During the term of this Agreement, UP&UP shall not solicit,
hire, contract with or otherwise utilize, or attempt to
utilize, HE employees or consultants unless otherwise mutually
agreed upon.
H. CONFIDENTIALITY
---------------
1. HE and UP&UP acknowledge that in fulfilling the
responsibilities set forth in this Agreement, HE and UP&UP
shall exchange confidential and proprietary information
concerning business and financial affairs of HE and UP&UP,
their subsidiaries and other affiliated companies. HE and
UP&UP agree not to disclose any such information at any time,
except as necessary to employees or agents of the parties or
as required by law.
2. HE and UP&UP agree that at any time, upon the request of the
other, each will promptly return any and all written or
magnetic media material containing, or reflecting, any
confidential or proprietary business or financial information
and will not retain any copies, extracts, or other
reproductions in whole or in part of such material.
I. ARBITRATION
-----------
1. HE and UP&UP shall attempt to resolve any controversy or claim
arising out of, or relating to, this Agreement by mutual
cooperation. Any controversy or claim arising out of, or
relating to, this Agreement which cannot be settled by the
mutual cooperation of the parties shall be settled by binding
arbitration rendered by the American Arbitration Association
standard commercial rules of arbitration.
2. In all cases submitted to arbitration, HE and UP&UP agree to
share equally the administrative fee, as well as the
Arbitrator's fees, if any, unless otherwise assessed by the
Arbitrator. The Arbitrator's fee shall be advanced by the
initiating party subject to final apportionment by the
Arbitrator in his or her award.
J. INDEMNIFICATION
---------------
1. HE shall indemnify and hold harmless UP&UP and its officers,
employees, agents and affiliates against any and all claims,
actions, expenses and liabilities (including reasonable
attorneys fees) related to any breach of HE's obligations
unless the claim, action, expense or liability is found in a
final judgement by a court of competent jurisdiction (not
subject to further appeal) to have resulted directly and
solely of UP&UP's performance under this Agreement.
4
<PAGE>
2. UP&UP shall indemnify and hold harmless HE and its officers,
employees, agents and affiliates against any and all claims,
actions, expenses and liabilities (including reasonable
attorneys fees) related to or arising from any breach of
UP&UP's obligations unless the claim, action, expense or
liability is found in a final judgement by a court of
competent jurisdiction (not subject to further appeal) to have
resulted directly and solely of HE's performance under this
Agreement.
K. MODIFICATIONS
-------------
1. All amendments or modifications to this Agreement shall be
mutually agreed to in writing by HE and UP&UP.
L. GOVERNING LAW
-------------
1. This Agreement shall be governed in all respects by the laws
of the State of Delaware.
M. SEVERABILITY OF INVALID PROVISIONS
----------------------------------
1. If any provision of this Agreement is held to be illegal,
invalid or unenforceable under any state or federal laws
effective during this term, such provision shall be fully
severable. The Agreement shall be construed and enforced as if
such illegal, invalid or unenforceable provision had never
comprised a part hereof, and the remaining provisions shall
remain in full force and effect despite such severance, unless
this Agreement is terminated by either party in accordance
with the terms of this Agreement, provided that the invalid
provision is not material to the overall purpose and operation
of this Agreement.
N. WAIVER
------
1. The waiver by HE or UP&UP of any breach of any provision of
this Agreement or warranty or representation herein set forth
shall not be construed as a waiver of any subsequent breach of
the same or any other provision.
2. The failure to exercise any right under this Agreement shall
not operate as a waiver of such right. All rights and remedies
provided for under this Agreement are cumulative.
O. HEADINGS
--------
1. The headings in this Agreement are for convenience of
reference only and shall not be considered in construing the
provisions hereof.
5
<PAGE>
P. ENTIRE AGREEMENT
----------------
1. This Agreement contains all of the terms and conditions agreed
upon by HE and UP&UP regarding the subject matter of this
Agreement. Any prior agreements, promises, negotiations, or
representations, either oral or written, relating to the
subject matter of this Agreement that are not expressly set
forth in this Agreement are of no force and effect.
Q. EMPLOYEES ON OTHER PARTY'S PREMISES
-----------------------------------
1. The employees or authorized agents of HE and UP&UP shall
comply with the other party's working rules and security
regulations at such time as one party's employees may be on
the premises of the other party.
R. NOTICE OF DEFICIENCY
--------------------
1. If either HE or UP&UP, in the opinion of the other, fails to
comply with one or more terms and conditions of this
Agreement, the aggrieved party shall give written notice of
deficiency to the other party. The party receiving such notice
shall have thirty (30) days from the receipt thereof to remedy
the deficiency in order to comply with the terms and
conditions of this Agreement. In the event said default is not
cured within the 30 day period, the non-defaulting party may
terminate the Agreement immediately.
S. NOTICES
-------
1. All notices provided by this Agreement shall be in writing and
shall be sent by United States certified mail, postage
prepaid, to the address of the other party which is set forth
in this Agreement, or to such other address as the party shall
designate in writing. Any notice shall be deemed to be
effective upon mailing.
If to HE, attention of: David T. Blair
Chief Financial Officer
HealthExtras, L.L.C.
2275 Research Boulevard
Seventh Floor
Rockville, MD 20850
If to UP&UP, attention of: Spiro Karadimas
Vice President of Operations
United Payors & United
Providers, Inc.
2275 Research Boulevard
Sixth Floor
Rockville, MD 20850
6
<PAGE>
T. BINDING ON SUCCESSORS
---------------------
1. This Agreement shall be binding upon and inure to the benefit
of HE and UP&UP and their respective successors and permitted
assigns.
U. ASSIGNMENT
----------
1. This Agreement may not be assigned by either party without the
prior written approval of the other party.
V. INDEPENDENT RELATIONSHIP
------------------------
1. None of the provisions of this Agreement are intended to
create, nor shall be deemed or construed to create, any
relationship between HE and UP&UP other than that of
independent entities contracting with each other solely for
the purposes of effecting the provisions of this Agreement.
2. The parties to this Agreement, and their respective officers,
directors, or employees, shall not be construed to be joint
ventures, or the agent, employee, or representative of the
other, except as specifically provided in this Agreement.
IN WITNESS WHEREOF, the undersigned have executed this Agreement.
HE: HEALTHEXTRAS, L.L.C.
December 23, 1998 By: David T. Blair
- ----------------- -----------------------------------
Date Signature: /s/ David T. Blair
----------------------------
Title: Chief Financial Officer
--------------------------------
UP&UP: UNITED PAYORS & UNITED PROVIDERS, INC.
December 23, 1998 By: Spiro Karadimas
- ----------------- -----------------------------------
Date Signature: /s/ Spiro Karadimas
----------------------------
Title: Vice President of Operations
--------------------------------
7
<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 February 19, 1999, except for Note 1, as to which the date is May
27, 1999, relating to the financial statement of Health Extras, LLC, which
appears in such Registration Statement. We also consent to the references to us
under the heading "Experts" in such Registration Statement.
PricewaterhouseCoopers LLP
McLean, Virginia
July 26, 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
references to us under the heading "Experts" in such Registration Statement.
PricewaterhouseCoopers LLP
McLean, Virginia
July 26, 1999
<PAGE>
Exhibit 23.3
CONSENT
We hereby consent to the references to this firm in the Registration
Statement on Form S-1 filed by HealthExtras, Inc. and all amendments.
MULDOON, MURPHY & FAUCETTE LLP
Dated this 26th day of
July, 1999
<PAGE>
Exhibit 99.2
CONSENT
In accordance with Item 401 of Regulation S-K, I, do hereby consent to
being named in the Registration Statement to be filed with the Securities and
Exchange Commission by HealthExtras, Inc. as a person who is to become a
director of HealthExtras, Inc., and the disclosure of that fact in the
Registration Statement.
By: /s/ David T. Blair
--------------------------------
David T. Blair
Dated this 26th day of
July, 1999
<PAGE>
Exhibit 99.3
CONSENT
In accordance with Item 401 of Regulation S-K, I, do hereby consent to
being named in the Registration Statement to be filed with the Securities and
Exchange Commission by HealthExtras, Inc. as a person who is to become a
director of HealthExtras, Inc., and the disclosure of that fact in the
Registration Statement.
By: /s/ Thomas J. Graf
----------------------------
Thomas J. Graf
Dated this 26th day of
July, 1999
<PAGE>
Exhibit 99.5
CONSENT
In accordance with Item 401 of Regulation S-K, I, do hereby consent to
being named in the Registration Statement to be filed with the Securities and
Exchange Commission by HealthExtras, Inc. as a person who is to become a
director of HealthExtras, Inc., and the disclosure of that fact in the
Registration Statement.
By: /s/ Karen M. Shaff
-----------------------------
Karen M. Shaff
Dated this 23rd day of
July, 1999
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<ARTICLE> 5
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<FISCAL-YEAR-END> DEC-31-1998 JUN-30-1999
<PERIOD-START> JAN-01-1998 JAN-01-1999
<PERIOD-END> DEC-31-1998 JUN-30-1999
<CASH> 219,285 5,221,126
<SECURITIES> 1,844,255 930,978
<RECEIVABLES> 0 0
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<CURRENT-ASSETS> 2,063,540 6,506,696
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0 0
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<OTHER-SE> (2,133,164) (91,833)
<TOTAL-LIABILITY-AND-EQUITY> 2,063,540 6,506,696
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<INTEREST-EXPENSE> 128,206 24,020
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