UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): September 29, 1997
COMMISSION FILE NUMBER 0-20905
UNITED PAYORS & UNITED PROVIDERS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 51-0374698
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
2275 RESEARCH BOULEVARD, 6TH FLOOR, ROCKVILLE, MARYLAND 20850
(Address of principal executive offices, Zip Code)
(301) 548-1000
(Registrant's phone number, including area code)
Not Applicable
--------------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
ITEM 1. (Not Applicable)
ITEM 2. ACQUISITION
Effective December 31, 1995, United Payors & United Providers, Inc. (the
"Company") entered into an agreement with America's Health Plan, Inc., an
indirect wholly-owned subsidiary of Principal Mutual Life Insurance Company
("Principal Mutual"), whereby specified payor clients representing approximately
40% of America's Health Plan, Inc.'s revenues for the year ended December 31,
1995, were transferred to the Company. Principal Mutual owns approximately 38%
of the Company's Common Stock.
On September 29, 1997, the Company acquired the remaining operations of
America's Health Plan for a purchase price of approximately $14.8 million with
additional contingent purchase price payments through the year 2001 possible, if
revenues exceed pre-determined targets.
America's Health Plan, Inc. develops and markets it proprietary health care
provider network for access by payors of health care costs such as insurers,
third-party administrators and unions. The name of America's Health Plan, Inc.
was changed to UP&UP, Inc. immediately prior to the closing. In connection with
the acquisition, the Company was granted the right to operate the health care
provider network under the name AMERICA'S HEALTH PLAN.
ITEMS 3-6. (Not Applicable)
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS
The following financial statements, pro forma financial information and
exhibits are filed as part of this report.
(a) Financial Statements of the Business Acquired.
(1) UP&UP, Inc. (formerly America's Health Plan, Inc.) Balance Sheets as of
December 31, 1996 and 1995.
(2) UP&UP, Inc. (formerly America's Health Plan, Inc.) Statements of
Operations for the Years Ended December 31, 1996 and 1995.
(3) UP&UP, Inc. (formerly America's Health Plan, Inc.) Statements of
Stockholder's Equity for the Years Ended December 31, 1996 and 1995.
(4) UP&UP, Inc. (formerly America's Health Plan, Inc.) Statements of Cash
Flows for the Years Ended December 31, 1996 and 1995.
(5) Notes to Financial Statements.
(6) Report of Independent Auditors.
(7) UP&UP, Inc. (formerly America's Health Plan, Inc.) Unaudited June 30,
1997 Balance Sheet.
(8) UP&UP, Inc. (formerly America's Health Plan, Inc.) Unaudited Statements
of Operations and Cash Flows for the Six Months Ended June 30, 1997 and
1996.
(9) Notes to the Unaudited June 30, 1997 Financial Statements.
(b) Pro Forma Consolidated Financial Information.
(1) Introduction.
(2) Unaudited Pro Forma Consolidated Balance Sheet as of June 30, 1997.
1
(3) Unaudited Pro Forma Consolidated Statements of Operations for the Six
Months Ended June 30, 1997 and the Year Ended December 31, 1996.
(4) Notes to Unaudited Pro Forma Consolidated Financial Statements.
(c) Exhibits.
Exhibit No. Description
----------- -----------
10.7 Stock Purchase Agreement between United Payors & United
Providers, Inc. and Principal Holding Company, a wholly-
owned subsidiary of Principal Mutual Life Insurance Company,
dated September 29, 1997.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
UNITED PAYORS & UNITED PROVIDERS, INC.
Date: October 13, 1997 By: /s/ EDUARDO V. FEITO
----------------------------------------
Eduardo V. Feito
Controller and Chief Accounting Officer
2
(a) Financial Statements of the Business Acquired.
UP&UP, INC.
(formerly America's Health Plan, Inc.)
BALANCE SHEETS
DECEMBER 31,
-----------------------------------------
1996 1995
------------------ ------------------
ASSETS
Current assets:
Cash and cash equivalents $ 6,769,899 $20,689,837
Short term investment (Note 2) -- 1,021,563
Accounts receivable - trade 2,100,608 6,974,152
Accounts receivable - Principal Mutual (Note 3) 1,300,999 1,724,400
Prepaid expenses 457,137 600,183
------------------ ------------------
Total current assets 10,628,643 31,010,135
------------------ ------------------
Fixed assets:
Leasehold improvements 77,584 25,286
Furniture and equipment 1,128,667 914,098
Data processing equipment 1,228,302 1,233,910
------------------ ------------------
2,434,553 2,173,294
Less accumulated depreciation (1,380,273) (956,799)
------------------ ------------------
1,054,280 1,216,495
------------------ ------------------
Goodwill, net of accumulated amortization of $9,015,567 in 11,019,016 13,022,476
1996 and $7,012,107 in 1995
Deposits and other assets 7,029 8,359
------------------ ------------------
Total assets $22,708,968 $45,257,465
================== ==================
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 947,861 $ 867,243
Due to Principal Mutual (Notes 3 and 5) 573,576 2,260,905
Obligations under capital leases - current portion (Note 4) 144,611 139,504
Other current liabilities 96,948 153,250
------------------ ------------------
Total current liabilities 1,762,996 3,420,902
------------------ ------------------
Deferred income taxes (Note 5) 167,995 117,537
Obligations under capital leases, less current portion (Note 4) 142,098 280,702
Stockholder's equity:
Common stock, $.01 par value, 100 shares authorized, 1 1
issued and outstanding
Additional paid in capital 19,999,999 19,999,999
Retained earnings 635,879 21,430,373
Unrealized gain on available-for-sale security (net of tax) -- 7,951
------------------ ------------------
Total stockholder's equity 20,635,879 41,438,324
------------------ ------------------
Total liabilities and stockholder's equity $22,708,968 $45,257,465
================== ==================
See accompanying notes.
3
UP&UP, INC.
(formerly America's Health Plan, Inc.)
STATEMENTS OF OPERATIONS
YEAR ENDED
DECEMBER 31,
-----------------------------------------
1996 1995
------------------ ------------------
Provider network revenue (Note 7) $ 9,963,416 $33,114,763
Provider network revenue - Principal Mutual (Note 3) 6,216,233 9,514,226
Other revenue (Note 7) 577,365 --
------------------ ------------------
Total revenues 16,757,014 42,628,989
------------------ ------------------
Operating expenses:
Direct contract expenses 8,000,367 16,778,156
General and administrative 1,586,977 1,428,247
Depreciation and amortization 2,446,816 2,387,587
------------------ ------------------
Total operating expenses 12,034,160 20,593,990
------------------ ------------------
Other income (expense):
Interest and other income, net 601,370 900,733
Interest expense (85,662) (69,713)
------------------ ------------------
Total other income, net 515,708 831,020
------------------ ------------------
Income before income taxes 5,238,562 22,866,019
Income tax provision (Notes 5) 3,033,056 9,848,011
------------------ ------------------
Net income $ 2,205,506 $13,018,008
================== ==================
See accompanying notes.
4
UP&UP, INC.
(formerly America's Health Plan, Inc.)
STATEMENTS OF STOCKHOLDER'S EQUITY
Additional Unrealized
Common Paid-in Net Gain on Retained
Stock Capital Securities Earnings Total
------------- -------------- -------------- -------------- ---------------
Balance at
December 31, 1994 $ 1 $ 19,999,999 -- $ 8,412,365 $ 28,412,365
Net income -- -- -- 13,018,008 13,018,008
Unrealized gain on
available-for-sale
security, net of
income taxes of
$4,282 -- -- $ 7,951 -- 7,951
------------- -------------- -------------- -------------- ---------------
Balance at
December 31, 1995 1 19,999,999 7,951 21,430,373 41,438,324
Net income -- -- -- 2,205,506 2,205,506
Dividends paid to Parent -- -- -- (23,000,000) (23,000,000)
Unrealized gain
adjustment associated
with maturity of the
available-for-sale
security -- -- $ (7,951) -- (7,951)
------------- -------------- -------------- -------------- ---------------
Balance at
December 31, 1996 $ 1 $ 19,999,999 -- $ 635,879 $ 20,635,879
============= ============== ============== ============== ===============
See accompanying notes.
5
UP&UP, INC.
(formerly America's Health Plan, Inc.)
STATEMENTS OF CASH FLOWS
YEAR ENDED
DECEMBER 31,
-----------------------------------------
1996 1995
------------------ ------------------
Operating activities
Net income $ 2,205,506 $13,018,008
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 2,446,816 2,387,587
Deferred taxes 54,740 (8,387)
Changes in operating assets and liabilities:
Accounts receivable 5,296,945 (1,214,795)
Prepaid expenses and other assets 144,376 93,154
Accounts payable and accrued expenses 80,618 (765,794)
Due to Principal Mutual (1,687,329) (558,982)
Other current liabilities (56,302) (49,434)
------------------ ------------------
Net cash provided by operating activities 8,485,370 12,901,357
INVESTING ACTIVITIES
Purchases of fixed assets (271,811) (636,290)
Maturity (purchase) of investment 1,000,000 (1,009,330)
------------------ ------------------
Net cash provided by (used in) investing activities 728,189 (1,645,620)
FINANCING ACTIVITIES
Principal payments on note payable to bank -- (600,000)
Principal payments on capital lease obligations (133,497) (146,947)
Dividends paid to Parent (23,000,000) --
------------------ ------------------
Net cash used in financing activities (23,133,497) (746,947)
------------------ ------------------
Net (decrease) increase in cash and cash equivalents (13,919,938) 10,508,790
Cash and cash equivalents at beginning of period 20,689,837 10,181,047
------------------ ------------------
Cash and cash equivalents at end of period $ 6,769,899 $20,689,837
================== ==================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid for interest during the period $ 81,683 $ 80,075
================== ==================
See accompanying notes.
6
UP&UP, INC.
(formerly America's Health Plan, Inc.)
Notes to Financial Statements
December 31, 1996 and 1995
1. ORGANIZATION
UP&UP, Inc. (formerly America's Health Plan, Inc.) (the "Company") is
a wholly owned subsidiary of Principal Holding Company, Inc. (the "Parent"),
which is wholly owned by Principal Mutual Life Insurance Company ("Principal
Mutual"). Effective December 1, 1995 the Parent transferred all of the
outstanding common stock (100 shares at $0.01 per share) of the Company to
Principal Health Care, Inc. ("PHC"), also a wholly owned subsidiary of the
Parent. The transfer of stock had no impact on the stockholder's equity or
financial position of the Company.
The Company is a Maryland Corporation which develops and markets its
proprietary health care provider network for access by payors of health care
costs such as insurers, third-party administrators and unions.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
effect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
Cash Equivalents
The Company considers all highly liquid investments with a maturity of three
months or less when purchased to be cash equivalents. The carrying amounts
reported in the accompanying balance sheets for these financial instruments
approximate fair values.
Short Term Investment
During 1995, the Company purchased a bond with a par value of $1,000,000. The
investment was classified as available-for-sale and is stated at fair value,
with the unrealized gains and losses, net of tax, reported as a separate
component of stockholders equity. The bond matured on December 16, 1996.
Fixed Assets
Fixed assets are stated at cost. Depreciation is provided by the straight-
line method over the estimated useful lives of the various assets which range
from three to ten years. Leased equipment and leasehold improvements are
amortized using the straight-line method over the economic life of the asset.
Goodwill
Goodwill, which resulted from the acquisition of the Company in 1992, is
amortized using the straight-line method over a period of ten years.
7
Income Recognition
The Company recognizes revenues based on contracted percentage rates of the
amount of cost savings realized by payor clients which access the Company's
health care provider network.
Income Taxes
The Company is taxed at corporate rates based on existing tax laws and
included in the consolidated federal and state returns filed by its Parent. The
income tax provision includes federal and state income taxes both currently
payable and deferred because of differences between financial reporting and tax
bases of assets and liabilities. Deferred income tax assets or liabilities are
measured based on enacted tax rates and laws that will be in effect when the
differences are expected to reverse.
Reclassifications
Certain amounts for 1995 have been reclassified to conform with the 1996
presentation.
3. RELATED PARTY TRANSACTIONS
Approximately 38% and 23% of contract revenue was derived from contracts with
Principal Mutual or its subsidiaries during the years ended December 31, 1996
and 1995, respectively.
The Company periodically invests available cash in a demand deposit pooled
investment fund maintained by Principal Mutual. There was $720,544 and
$3,150,930 in this fund at December 31, 1996 and 1995, respectively. The
Company earned approximately $70,000 and $151,000 on amounts invested in this
fund during 1996 and 1995, respectively.
Principal Mutual charges the Company for certain allocated administrative
services provided to the Company including tax, payroll processing, financial
management, and other similar services. Total allocated expenses charged were
approximately $444,000 and $224,000 in 1996 and 1995, respectively.
4. LEASE COMMITMENTS
The Company leases office space under cancelable and noncancelable operating
leases. A noncancelable agreement for office space which expires in 1997 will
not be renewed. The Company is moving to a new site in 1997 under the terms of a
ten-year operating lease agreement. The terms of the lease provide for rent-free
periods. For financial reporting purposes, the Company recognizes rent expense
on a straight-line basis over the term of the lease. Rent expense for all
operating leases for the years ending December 31, 1996 and 1995, was $434,004
and $367,190, respectively.
The Company has entered into various capital lease agreements for office
equipment with a total cost and accumulated amortization of $913,389 and
$699,354 respectively, at December 31, 1996.
8
Future minimum lease payments under noncancelable operating leases and capital
leases at December 31, 1996, together with the present value of the minimum
lease payments for capital leases, are as follows:
CAPITAL LEASES OPERATING LEASES
---------------------- ----------------------
1997 $167,259 $ 182,649
1998 146,338 493,357
1999 500,682
2000 508,216
2001 and thereafter 3,207,317
---------------------- ----------------------
313,597 $4,892,221
======================
Less amount representing interest 26,888
----------------------
Present value of net minimum lease payments $286,709
======================
5. INCOME TAXES
The Company is taxed at corporate rates based on existing tax laws. The
Company's taxable income is included in the consolidated federal income and
state tax returns filed by Principal Mutual. Due to the inherent differences
between income for financial reporting purposes and income tax purposes, the
Company's provision for income taxes may not have the customary relationship of
taxes to income.
Principal Mutual has adopted the policy of allocating current income tax
expense to members of the consolidated group based upon their pro-rata
contribution of taxable income or taxable losses. As of December 31, 1996 and
1995, net current federal and state taxes payable of $155,296 and $1,893,543 are
included in the balance due to Principal Mutual. Taxes paid during 1996 and
1995 were approximately $4,717,000 and $10,708,000 respectively.
Deferred income taxes reflect the net income tax effects of temporary
differences between the carrying amounts of fixed assets for financial reporting
purposes and the amounts used for income tax purposes. Significant components
of the Company's income taxes as of December 31 are as follows:
1996 1995
----------------- ------------------
Current:
Federal $2,453,291 $8,105,926
State 525,025 1,750,472
----------------- ------------------
2,978,316 9,856,398
Deferred:
Federal 49,126 (4,797)
State 5,614 (3,590)
----------------- ------------------
54,740 (8,387)
----------------- ------------------
Total income tax expense $3,033,056 $9,848,011
================= ==================
9
Significant differences between income tax expense as included in the
financial statements versus income tax calculated at the federal statutory rate
are as follows:
1996 1995
----------------- ------------------
Tax on income at statutory Federal
rate $1,833,497 $8,003,106
State taxes, net of Federal benefit 507,461 1,137,807
Tax effect of non-deductible
amortization of goodwill 701,211 701,211
Other, net (9,113) 5,887
----------------- ------------------
$3,033,056 $9,848,011
================= ==================
6. EMPLOYEE BENEFIT PLANS
All employees who have attained the age of twenty-one and have completed one
year of service are eligible to participate in the Principal Mutual savings
plan. Upon eligibility, employees may contribute up to 15% of their
compensation up to certain limits. The Company matches 50% of the employee
contribution up to 4% of the employee compensation. The Company contributed
$36,682 and $38,632 to the 401(k) savings plan in 1996 and 1995, respectively.
All employer and employee contributions are vested.
Commencing January 1, 1995, employees of the Company were also eligible to
participate in the defined benefit plans of Principal Mutual. The plans cover
substantially all of the Company's employees. The amount charged to pension
costs and contributed to the plan during 1996 and 1995 totaled approximately
$130,521 and $119,000, respectively.
7. UNITED PAYORS & UNITED PROVIDERS TRANSACTION
During 1995, the Company entered into an agreement with an affiliate,
United Payors & United Providers, Inc. ("UP&UP") which is 38.1% owned by PHC,
to transfer approximately 40% of the Company's client base to UP&UP. The
Company received a management fee and was reimbursed by UP&UP for expenses
incurred in administering clients up to the date when clients effectively
transferred. The total management fee earned under this agreement during 1996
was $577,365.
8. SUBSEQUENT EVENT
On September 29, 1997, UP&UP acquired all of the outstanding stock of the
Company for a purchase price of approximately $14.8 million, with the potential
of additional contingent consideration through 2001.
9. CONTINGENCIES
The Company is being sued for breach of contract and fraud by a health care
provider organization. The suit seeks $10 million in damages for breach of a
contract that the Company believes was never formed. The suit also seeks
punitive damages. The suit is being contested vigorously. Management believes
the action is without merit and that the plaintiff's loss calculation is flawed.
However, the Company is currently unable to estimate the likelihood of success
of the suit or any potential damages.
10
REPORT OF INDEPENDENT AUDITORS
The Board of Directors
UP&UP, Inc.
We have audited the accompanying balance sheets of UP&UP, Inc. (formerly
America's Health Plan, Inc.) as of December 31, 1996 and 1995, and the related
statements of operations, stockholder's equity, and cash flows for the years
then ended. 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 in accordance with generally accepted auditing
standards. Those standards 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. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of UP&UP, Inc. at December 31,
1996 and 1995, and the results of its operations and its cash flows for the
years then ended in conformity with generally accepted accounting principles.
ERNST & YOUNG, LLP
Washington, D.C.
February 21, 1997, except for
Note 8 as to which the date is
September 29, 1997
11
UP&UP, INC.
(formerly America's Health Plan, Inc.)
UNAUDITED BALANCE SHEET
June 30, 1997
ASSETS
Current assets:
Cash and cash equivalents $ 8,725,864
Accounts receivable 3,424,519
Other current assets 148,910
------------
Total current assets 12,299,293
------------
Fixed assets, net 1,130,097
Intangible and other assets, net 10,023,836
------------
Total assets $ 23,453,226
============
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 1,470,693
Income and other taxes payable 293,912
Notes payable and capital lease 154,216
------------
Total current liabilities 1,918,821
Deferred income taxes 227,092
Notes payable and capital leases, less current portion 62,509
------------
Total liabilities 2,208,422
------------
Stockholder's equity:
Common stock, $0.01 par value, 100 shares authorized,
issued and outstanding 1
Additional paid-in capital 19,999,999
Retained earnings 1,244,804
------------
Total stockholder's equity 21,244,804
------------
Total liabilities and stockholder's equity $ 23,453,226
============
See accompanying notes.
12
UP&UP, INC.
(formerly America's Health Plan, Inc.)
UNAUDITED STATEMENTS OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND 1996
1997 1996
----------- -----------
Provider network revenue $ 7,324,022 $ 8,452,579
Other revenue 36,650 375,324
----------- -----------
Total revenue 7,360,672 8,827,903
----------- -----------
Operating expenses:
Direct contract expenses 3,761,863 3,976,018
General and administrative 776,008 773,330
Depreciation and amortization 1,219,868 1,220,341
----------- -----------
Total operating expenses 5,757,739 5,969,689
----------- -----------
Other income (expense):
Interest and other income, net 177,149 383,450
Interest expense (13,657) (22,393)
----------- -----------
Total other income, net 163,492 361,057
----------- -----------
Income before income taxes 1,766,425 3,219,271
Income tax provision 1,157,500 1,827,680
----------- -----------
Net income $ 608,925 $ 1,391,591
=========== ===========
See accompanying notes.
13
UP&UP, INC.
(formerly America's Health Plan, Inc.)
UNAUDITED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND 1996
1997 1996
----------- -----------
Operating activities:
Net income $ 608,925 $ 1,391,591
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 1,219,868 1,220,341
Deferred taxes 59,097 1,975
(Gain)/loss on disposal of fixed assets 1,309 (315)
Changes in operating assets and liabilities:
Accounts receivable (22,938) 3,955,398
Other current assets 607,067 (280,461)
Accounts payable and accrued expenses 7,603 (503,565)
Income taxes payable (159,719) (1,894,157)
----------- -----------
Net cash provided by operating activites 2,321,212 3,890,807
----------- -----------
Investing activities:
Proceeds from disposal of fixed assets 8,731 6,300
Purchases of fixed assets (303,995) (144,649)
----------- -----------
Net cash used in investing activities (295,264) (138,349)
----------- -----------
Financing activities:
Principal payments on capital lease obligations (69,983) (65,166)
Dividends to parent - (17,000,000)
----------- -----------
Net cash used in financing activities (69,983) (17,065,166)
----------- -----------
Net increase (decrease) in cash and cash equivalents 1,955,965 (13,312,708)
Cash and cash equivalents at beginning of period 6,769,899 20,689,837
----------- -----------
Cash and cash equivalents at end of period $ 8,725,864 $ 7,377,129
=========== ===========
See accompanying notes.
14
UP&UP, INC.
(formerly America's Health Plan, Inc.)
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
1. NATURE OF OPERATIONS AND ORGANIZATION
UP&UP, Inc. (formerly America's Health Plan, Inc.) is an indirect wholly-
owned subsidiary of Principal Mutual Life Insurance Company. UP&UP, Inc. is a
Maryland Corporation which develops and markets its proprietary health care
provider network for access by payors of health care costs such as insurers,
third-party administrators and unions.
2. UNAUDITED INFORMATION
The financial statements for the six months ended June 30, 1997 and 1996 have
not been audited but, in the opinion of management, include all adjustments
(consisting only of normal recurring accruals) necessary to present fairly the
information set forth therein. The results of operations for the six months
ended June 30, 1997 and 1996 are not necessarily indicative of the results to be
expected for the full year or in the future.
3. SUBSEQUENT EVENT
On September 29, 1997, all of the Company's outstanding common stock was
acquired by United Payors & United Providers, Inc. for a purchase price of
approximately $14.8 million with additional contingent purchase price payments
through the year 2001 possible, if revenues exceed pre-determined targets.
15
(b) Pro Forma Consolidated Financial Information.
UNITED PAYORS & UNITED PROVIDERS, INC.
PRO FORMA CONSOLIDATED INFORMATION
(UNAUDITED)
INTRODUCTION
The following unaudited pro forma consolidated financial statements are based
on the historical consolidated financial statements of United Payors & United
Providers, Inc. (the "Company") and the historical results of operations of
UP&UP, Inc. (formerly America's Health Plan, Inc.) The unaudited pro forma
adjustments are based upon available information and certain assumptions that
management of the Company believes are reasonable. These pro forma financial
statements have been prepared to illustrate the effects of the consummation of
the acquisition of UP&UP, Inc. by the Company. The pro forma financial
information and accompanying notes thereto should be read in conjunction with
the historical consolidated financial statements of the Company and other
information contained in this Form 8-K, including the historical financial
statements of UP&UP, Inc .
The Unaudited Pro Forma Consolidated Balance Sheet as of June 30, 1997
presents, on a pro forma basis, the balance sheet of the Company and UP&UP, Inc.
assuming that the acquisition of UP&UP, Inc. had been consummated on June 30,
1997.
The Unaudited Pro Forma Consolidated Statement of Operations for the six
months ended June 30, 1997 presents, on a pro forma basis, the results of
operations of the Company and the results of operations of UP&UP, Inc. assuming
that the acquisition of UP&UP, Inc. had been consummated on January 1, 1996.
The Unaudited Pro Forma Consolidated Statement of Operations for the year
ended December 31, 1996 presents, on a pro forma basis, the results of
operations of the Company and the results of operations of UP&UP, Inc. assuming
that the acquisition of UP&UP, Inc. had been consummated on January 1, 1996.
The unaudited pro forma condensed consolidated financial statements do not
purport to be indicative of what the Company's consolidated financial position
or consolidated results of operations would actually have been had the
acquisition been completed on such dates, or to project the Company's
consolidated financial position for any future period or the Company's
consolidated results of operations for any future period.
16
UNITED PAYORS & UNITED PROVIDERS, INC.
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
JUNE 30, 1997
UNITED PAYORS UP&UP, INC.
& UNITED (FORMERLY AMERICA'S PRO FORMA PRO FORMA
PROVIDERS, INC. HEALTH PLAN, INC.) ADJUSTMENTS CONSOLIDATED
--------------- ------------------- --------------- ---------------
ASSETS
Current assets:
Cash and cash equivalents $ 11,219,418 $ 8,725,864 $ (12,803,622)(a) $ 7,141,660
Short-term investments 11,695,919 - - 11,695,919
Accounts receivable 9,679,016 3,424,519 (1,553,820)(b) 11,549,715
Deferred income taxes 260,300 - - 260,300
Other current assets 297,288 148,910 - 446,198
--------------- --------------- --------------- ---------------
Total current assets 33,151,941 12,299,293 (14,357,442) 31,093,792
--------------- --------------- --------------- ---------------
Fixed assets, net 3,261,817 1,130,097 (200,000)(c) 4,191,914
Advances to contracting providers, net 11,933,009 - - 11,933,009
Investments 1,811,406 - - 1,811,406
Intangible and other assets, net 9,659,215 10,023,836 5,360,546 (d) 25,043,597
--------------- --------------- --------------- ---------------
Total assets $ 59,817,388 $ 23,453,226 $ (9,196,896) $ 74,073,718
=============== =============== =============== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 6,140,096 $ 1,470,693 $ 2,275,000 (e) $ 9,885,789
Income and other taxes payable 1,016,571 293,912 - 1,310,483
Notes payable and capital lease 15,994 154,216 10,000,000 (f) 10,170,210
--------------- --------------- --------------- ---------------
Total current liabilities 7,172,661 1,918,821 12,275,000 21,366,482
Deferred income taxes - 227,092 (227,092)(g) -
Non-current accrued expense 400,000 - - 400,000
Notes payable and capital leases,
less current portion 99,281 62,509 - 161,790
--------------- --------------- --------------- ---------------
Total liabilities 7,671,942 2,208,422 12,047,908 21,928,272
--------------- --------------- --------------- ---------------
Stockholders' equity:
Convertible preferred stock, $0.01 par
value, 5,000,000 shares authorized,
none issued and outstanding - - - -
Common stock, $0.01 par value,
35,000,000 shares authorized,
11,573,636 shares issued 115,736 1 (1)(h) 115,736
Additional paid-in capital 37,086,505 19,999,999 (19,999,999)(h) 37,086,505
Deferred compensation (1,265,500) - - (1,265,500)
Retained earnings 16,746,070 1,244,804 (1,244,804)(h) 16,746,070
Less treasury stock, 47,050 shares, at cost (537,365) - - (537,365)
--------------- --------------- --------------- ---------------
Total stockholders' equity 52,145,446 21,244,804 (21,244,804) 52,145,446
--------------- --------------- --------------- ---------------
Total liabilities and stockholders' equity $ 59,817,388 $ 23,453,226 $ (9,196,896) $ 74,073,718
=============== =============== =============== ===============
See accompanying notes
17
UNITED PAYORS & UNITED PROVIDERS, INC.
UNAUDITED PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1997
UP&UP, Inc.
United Payors (Formerly
& United America's Pro Forma Pro Forma
Providers, Inc. Health Plan, Inc.) Adjustments Combined
--------------- ----------------- ----------- -----------
Provider network revenue $17,299,034 $ 7,324,022 $ (160,415) (b) 24,462,641
Utilization management services 9,777,315 - - 9,777,315
Other revenue 202,066 36,650 - 238,716
----------- ----------- ----------- -----------
Total revenue 27,278,415 7,360,672 (160,415) 34,478,672
----------- ----------- ----------- -----------
Operating expenses:
Direct contract expenses 12,915,916 3,761,863 468,750 (i) 17,146,529
General and administrative 3,019,511 776,008 - 3,795,519
Depreciation and amortization 655,797 1,219,868 (612,284) (j) 1,263,381
----------- ----------- ----------- -----------
Total operating expenses 16,591,224 5,757,739 (143,534) 22,205,429
----------- ----------- ----------- -----------
Other income (expense):
Interest and other income, net 752,058 177,149 (706,371) (k) 222,836
Interest expense (8,764) (13,657) (400,000) (l) (422,421)
----------- ----------- ----------- -----------
Total other income (expense), net 743,294 163,492 (1,106,371) (199,585)
----------- ----------- ----------- -----------
Income before income taxes 11,430,485 1,766,425 (1,123,252) 12,073,658
Income tax (provision) benefit (4,619,573) (1,157,500) 887,242 (m) (4,889,831)
----------- ----------- ----------- -----------
Net income $ 6,810,912 $ 608,925 $ (236,010) $ 7,183,827
=========== =========== =========== ===========
Net income per share $ 0.58 $ 0.61
=========== ===========
Weighted average shares
outstanding 11,682,098 11,682,098
=========== ===========
See accompanying notes.
18
UNITED PAYORS & UNITED PROVIDERS, INC.
UNAUDITED PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1996
UP&UP, Inc.
United Payors (Formerly
& United America's Pro Forma Pro Forma
Providers, Inc. Health Plan, Inc.) Adjustments Combined
--------------- ----------------- --------------- ---------------
Provider network revenue $ 30,992,191 $ 16,179,649 $ 150,413 (b) 47,322,253
Utilization management services 4,190,476 - - 4,190,476
Other revenue 266,662 577,365 - 844,027
--------------- --------------- --------------- ---------------
Total revenue 35,449,329 16,757,014 150,413 52,356,756
--------------- --------------- --------------- ---------------
Operating expenses:
Direct contract expenses 15,294,892 8,000,367 962,500 (i) 24,257,759
General and administrative 2,783,212 1,586,977 - 4,370,189
Depreciation and amortization 538,593 2,446,816 (1,224,568) (j) 1,760,841
--------------- --------------- --------------- ---------------
Total operating expenses 18,616,697 12,034,160 (262,068) 30,388,789
--------------- --------------- --------------- ---------------
Other income (expense):
Interest and other income, net 1,034,034 601,370 (1,359,047) (k) 276,357
Interest expense (62,867) (85,662) (800,000) (l) (948,529)
--------------- --------------- --------------- ---------------
Total other income (expense), net 971,167 515,708 (2,159,047) (672,172)
--------------- --------------- --------------- ---------------
Income before income taxes 17,803,799 5,238,562 (1,746,566) 21,295,795
Income tax (provision) benefit (7,158,000) (3,033,056) 1,566,259 (m) (8,624,797)
--------------- --------------- --------------- ---------------
Net income $ 10,645,799 $ 2,205,506 $ (180,307) $12,670,998
=============== =============== =============== ===============
Net income per share $ 1.05 $ 1.25
=============== ===============
Weighted average shares
outstanding 10,125,699 10,125,699
=============== ===============
See accompanying notes.
19
UNITED PAYORS & UNITED PROVIDERS, INC.
NOTES TO PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(a) Adjustment reflects the net effect on cash of the following:
Borrowing from line of credit with NationsBank, N.A. $ 10,000,000
Payment of purchase price and transaction expenses
of $325,000 (15,075,000)
Dividend by UP&UP, Inc. to its former parent
immediately prior to closing (7,728,622)
------------
($12,803,622)
============
(b) Adjustment to conform revenue recognition method of UP&UP, Inc. to that of
the Company.
(c) Adjustment to provide for the disposal of fixed assets of UP&UP, Inc.
(d) Adjustment reflects the net effect of the elimination of existing UP&UP,
Inc. goodwill ($10,017,286) and the excess cost of the acquisition over the
fair value of the assets acquired determined as follows:
Cash paid, including transaction expenses $15,075,000
Liabilities assumed in excess of fair value of
tangible assets 302,832
-----------
Excess cost over fair value $15,377,832
===========
(e) Adjustment reflects the accrual of costs related to the acquisition
including the assumption of an unfavorable lease, severance and transition
costs of certain UP&UP, Inc. employees and a provision for an ongoing legal
matter involving UP&UP, Inc.
(f) Adjustment reflects the borrowing from line of credit.
(g) Adjustment to eliminate deferred taxes of UP&UP, Inc.
(h) Adjustment to eliminate the equity and retained earnings of UP&UP, Inc.
(i) Adjustment reflects the effect of provider credentialing expense.
(j) Adjustment to reflect the amortization of goodwill arising from the
acquisition of UP&UP, Inc.
(k) Adjustment to reflect the reduction of interest income as a result of the
cash payment of the purchase price, acquisition costs and the dividend by
UP&UP, Inc. to its former parent immediately prior to closing.
(l) Adjustment to reflect interest expense on borrowing from the existing line
of credit.
(m) Adjustment to reflect income tax effect of adjustments relating to the
acquisition, including the net effect of the deductibility of the
amortization of goodwill arising from the acquisition by the Company for
income tax purposes versus the non-deductibility of the amortization of
goodwill of UP&UP, Inc.
20