<PAGE>
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): October 24, 1996
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)
<PAGE>
THIS FORM 8-K INCLUDES THE REQUIRED ITEM 7 FINANCIAL STATEMENTS AND
OTHER FINANCIAL INFORMATION.
ITEM 1. (Not Applicable)
ITEM 2. ACQUISITION
As previously reported under item 5 of Form 10-Q for September 30, 1996
filed on November 13, 1996. On October 24, 1996, the Company acquired National
Health Services, Inc. ("NHS") from Preferred Health Choice, Inc., a wholly-owned
indirect subsidiary of Pioneer Financial Services, Inc. for a purchase price of
approximately $6.8 million, consisting of $5.8 million in cash and warrants to
purchase an aggregate of 318,000 shares of the Company's common stock.
NHS is a health care utilization management company that currently provides
services to approximately 70 clients, whose health care insureds aggregate in
excess of two million persons.
The Stock Purchase Agreement relating to the acquisition of NHS, including
the Warrants for the Company Common Stock, was attached as an Exhibit to the
Form 10-Q for September 30, 1996 filed on November 13, 1996 and reference is
made to such Agreement for the full description of the terms of the acquisition
and of the Warrants.
ITEMS 3-6. (Not Applicable)
ITEM 7. FINANCIAL STATEMENTS AND EXHIBIT
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) National Health Services, Inc. Consolidated Balance Sheets as of
December 31, 1995 and 1994.
(2) National Health Services, Inc. Consolidated Statements of Operations
for the Years Ended December 31, 1995, 1994 and 1993.
(3) National Health Services, Inc. Consolidated Statements of
Stockholder's Equity for the years ended December 31, 1995, 1994 and
1993.
(4) National Health Services, Inc. Consolidated Statements of Cash Flows
for the Years Ended December 31, 1995, 1994 and 1993.
(5) Notes to Financial Statements.
(6) Report of Independent Auditors.
(7) Unaudited September 30, 1996 Consolidated Balance Sheet.
(8) Unaudited Consolidated Statements of Operations and Cash Flows for the
Nine Months Ended September 30, 1996 and 1995.
(9) Notes to the September 30, 1996 Consolidated Financial Statements.
1
<PAGE>
(b) Pro Forma Consolidated Financial Information.
(1) Introduction.
(2) Unaudited Pro Forma Consolidated Statements of Operations for the Nine
Months Ended September 30, 1996, and the Year Ended December
31, 1995.
(3) Unaudited Pro Forma Consolidated Balance Sheet as of September 30,
1996.
(4) Notes to Unaudited Pro Forma Consolidated Financial Statements.
(c) Exhibits
(23) Consent of Independent Auditors
2
<PAGE>
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: January 7, 1997 By: /s/ S. JOSEPH BRUNO
------------------------------------------
S. Joseph Bruno
Vice President and Chief Financial Officer
3
<PAGE>
(a) FINANCIAL STATEMENTS OF THE BUSINESS ACQUIRED
NATIONAL HEALTH SERVICES, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31
1995 1994
------ ------
(In Thousands)
<S> <C> <C>
ASSETS
Current assets:
Cash $ 25 $ 258
Accounts receivable (less allowance for doubtful
accounts; 1995 - $50,000; 1994 - $10,000) 1,680 1,693
Receivables from affiliates 915 364
Advances to affiliates (Note 9) 617 -
Other current assets 197 129
Deferred income taxes 146 81
------ ------
Total current assets 3,580 2,525
Fixed assets, at cost (less accumulated depreciation:
1995 - $1,058,000; 1994 - $763,000) 1,050 1,225
Leasehold improvements, at cost (less accumulated
amortization: 1995 - $27,000; 1994 - $102,000) 18 12
Deferred income taxes 104 86
Intangible assets (less accumulated amortization:
1995 - $757,000; 1994 - $531,000) 1,581 1,618
------ ------
Total assets $6,333 $5,466
====== ======
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 898 $ 899
Payable to affiliate 178 192
Income taxes payable (Note 3) 854 405
Notes payable, current portion 300 300
Capital lease, current portion 37 50
------ ------
Total current liabilities 2,267 1,846
Long-term notes payable, less current portion 525 825
Capital lease, less current portion - 37
------ ------
Total liabilities 2,792 2,708
Stockholder's equity:
Common stock, $.01 par value:
Authorized - 20,000,000 shares, issued and
outstanding (1995 and 1994 - 8,499,998 shares) 85 85
Additional paid-in capital 1,714 1,714
Retained earnings 1,742 959
------ ------
Total stockholder's equity 3,541 2,758
------ ------
Total liabilities and stockholder's equity $6,333 $5,466
====== ======
</TABLE>
See accompanying notes.
4
<PAGE>
NATIONAL HEALTH SERVICES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
1995 1994 1993
------- ------- ------
(In Thousands)
<S> <C> <C> <C>
Revenues:
Unaffiliated $11,746 $10,142 $3,474
Affiliated 4,019 4,928 5,363
------- ------- ------
Total revenues 15,765 15,070 8,837
Expenses:
Cost of services 10,769 9,139 5,734
Selling, general, and administrative 2,732 3,316 2,573
Interest expense 102 123 53
Depreciation and amortization 760 809 475
------- ------- ------
Total expenses 14,363 13,387 8,835
Income before income taxes 1,402 1,683 2
Income taxes 619 675 68
------- ------- ------
Net income (loss) $ 783 $ 1,008 $ (66)
======= ======= ======
</TABLE>
See accompanying notes.
5
<PAGE>
NATIONAL HEALTH SERVICES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1995 1994 1993
---------- ---------- ----------
(In Thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
<S> <C> <C> <C>
Net income (loss) $ 783 $1,008 $ (66)
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Depreciation and amortization 760 809 475
Loss on disposal of fixed assets 160 - -
Decrease (increase) in accounts receivable 13 (729) (572)
Increase in receivables from affiliates (551) (16) (227)
Decrease (increase) in other assets (68) 116 (58)
Increase (decrease) in income taxes 366 409 (86)
Increase (decrease) in other liabilities (12) (812) 1,775
-------- -------- -------
NET CASH PROVIDED BY OPERATING ACTIVITIES 1,451 785 1,241
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of fixed assets, net (527) (370) (1,047)
Purchase of subsidiary (189) (72) (1,544)
-------- -------- -------
NET CASH USED IN INVESTING ACTIVITIES (716) (442) (2,591)
CASH FLOWS FROM FINANCING ACTIVITIES
Borrowings (repayments) of notes payable
and capital lease obligations (351) (357) 985
Increase in advances to affiliates (617) - -
Capital contributions - - 450
-------- -------- -------
NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES (968) (357) 1,435
-------- -------- -------
INCREASE (DECREASE) IN CASH (233) (14) 85
Cash at beginning of year 258 272 187
-------- -------- -------
CASH AT END OF YEAR $ 25 $ 258 $ 272
======== ======== =======
</TABLE>
See accompanying notes.
7
<PAGE>
NATIONAL HEALTH SERVICES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY
<TABLE>
<CAPTION>
ADDITIONAL RETAINED TOTAL
COMMON PAID-IN EARNINGS STOCKHOLDER'S
STOCK CAPITAL (DEFICIT) EQUITY
------ ---------- --------- -------------
(In Thousands)
<S> <C> <C> <C> <C>
Balance at January 1, 1993 $ - $ 935 $ 17 $ 952
Stock issued 85 (85) - -
Capital contribution - 450 - 450
Net loss - - (66) (66)
---- ------- ------- -------
BALANCE AT DECEMBER 31, 1993 85 1,300 (49) 1,336
Capital contribution - 414 - 414
Net income - - 1,008 1,008
---- ------- ------- -------
BALANCE AT DECEMBER 31, 1994 85 1,714 959 2,758
Net income - - 783 783
---- ------- ------- -------
BALANCE AT DECEMBER 31, 1995 $ 85 $ 1,714 $ 1,742 $ 3,541
==== ======= ======= =======
</TABLE>
See accompanying notes.
6
<PAGE>
NATIONAL HEALTH SERVICES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995
1. NATURE OF OPERATIONS AND ORGANIZATION
National Health Services, Inc. (NHS), and subsidiaries provide health
care utilization management services to approximately 70 entities throughout the
United States. The medical utilization management services provided to
underwriters, self-insured businesses, provider organizations, and others
include pre-certification of in-patient and out-patient medical care, case
management, and management of provider networks. NHS' three largest unaffiliated
customers accounted for 74%, 68%, and 50% of unaffiliated revenue in 1995, 1994,
and 1993, respectively. Additionally, revenue for NHS' two largest unaffiliated
customers, each accounting for more than 10% of unaffiliated revenue were
$5,358,000 and $2,418,000 in 1995; $4,059,000 and $1,885,000 in 1994; and
$976,000 and $457,000 in 1993.
NHS is a wholly owned subsidiary of Preferred Health Choice, Inc.(PHC), a
corporation engaged in contractual third party administrative agreements. PHC is
a subsidiary of Direct Financial Services (Direct) which is a wholly owned
subsidiary of Pioneer Financial Services, Inc.(Pioneer). In July 1995, pursuant
to a purchase agreement, Direct retained 80% of the outstanding shares of PHC
and transferred the remaining 20% interest in PHC to ACMG, Inc., an affiliated
entity. Pioneer, through its insurance subsidiaries, markets and underwrites
life insurance, annuities and health insurance in selected niche markets
throughout the United States. Affiliated revenues are from Pioneer's insurance
subsidiaries.
In July 1993, 26 shares of $.01 par value common stock representing
all NHS outstanding shares were converted into 8,499,998 shares of $.01 par
value common stock. In 1994, amounts payable to affiliates of $414,000 were
transferred to Direct and recorded as a capital contribution.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements have been prepared
in conformity with generally accepted accounting principles and include the
accounts and operations, after intercompany eliminations, of NHS and its
subsidiaries.
USE OF ESTIMATES
The preparation of financial statements requires management to make
estimates and assumptions that affect amounts reported in the financial
statements and accompanying notes. Actual results could differ from those
estimates.
8
<PAGE>
INCOME TAXES
NHS is included in a consolidated federal income tax return with
Pioneer. NHS' income tax provisions are the amounts which it would have
incurred on a separate company tax return basis. Deferred income taxes are
provided for the effects of temporary differences between financial reporting
and tax bases of assets and liabilities and are measured using enacted tax
rates.
CASH
Cash balances are maintained in either demand deposit or interest bearing
money market accounts.
FIXED ASSETS
Furniture, fixtures, and equipment are recorded at cost and depreciated
over the estimated lives of the related assets of three to five years using the
straight-line method. Leasehold improvements and leased equipment under capital
leases are amortized over the remaining life of the related leases using the
straight-line method. During 1995, NHS wrote off certain fixed assets, with a
cost of $380,000, which were no longer in use. The write-off resulted in a
pretax loss to operations of $160,000.
INTANGIBLE ASSETS
Intangible assets represent the cost in excess of net assets of businesses
acquired (goodwill) and are amortized on a straight-line basis over 10 to 12
years. Additional distributable consideration is recorded as additional cost of
the assets. The additional costs of goodwill are amortized over the remaining
life of the asset. (See note 7.)
FAIR VALUE INFORMATION
The carrying amounts of financial instruments, principally cash, accounts
receivable, accounts payable, long-term notes payable, and short-term notes
payable reported in the balance sheet approximate their fair values.
REVENUE RECOGNITION
Revenue is recorded for medical utilization management services provided
based on the contractual relationships with customer entities. Contracts may
reflect a capitated rate, fee for service or hourly rate, or percentage of
savings. Precertification revenue is generally based on monthly capitation
calculations and is earned during the month for which the services are
provided. Case management and other fee for service revenues are based on
monthly amounts billed for services provided over the term of the contractual
agreements. Percentage of savings revenues are recognized in the month that
client claims are processed.
9
<PAGE>
3. INCOME TAXES
Significant components of the provisions for income taxes are as follows:
<TABLE>
<CAPTION>
1995 1994 1993
------------------------------
<S> <C> <C> <C>
Current Tax (benefit):
Federal $534,000 $576,000 $(15,000)
State 168,000 135,000 49,000
------------------------------
702,000 711,000 34,000
Deferred tax (benefit):
Federal (80,000) (35,000) 33,000
State (3,000) (1,000) 1,000
------------------------------
(83,000) (36,000) 34,000
------------------------------
$619,000 $675,000 $ 68,000
==============================
</TABLE>
Deferred tax assets and liabilities are comprised of the following:
<TABLE>
<CAPTION>
December 31
1995 1994
------------------
<S> <C> <C>
Deferred tax assets:
Bad debt expense $146,000 $ 81,000
Fixed assets 29,000 5,000
Intangible assets 42,000 77,000
Other 48,000 19,000
------------------
Total deferred tax assets 265,000 182,000
Deferred tax liability:
Prepaid insurance 15,000 15,000
------------------
Net deferred tax asset $250,000 $167,000
==================
</TABLE>
The sources of NHS' taxable income, including taxable income in prior
carryback years, should result in realization of the deferred tax assets, as
such, NHS has not established a valuation allowance against those assets.
10
<PAGE>
Reconciliation of the federal statutory income tax rate of 34% to NHS'
provision for income taxes is as follows:
<TABLE>
<CAPTION>
1995 1994 1993
----------------------------
<S> <C> <C> <C>
Federal statutory income tax rate applied $477,000 $572,000 $ 1,000
to income before income taxes
State income taxes, net of federal tax 111,000 88,000 32,000
benefit
Amortization of intangibles 27,000 25,000 25,000
Other 4,000 (10,000) 10,000
============================
$619,000 $675,000 $68,000
============================
</TABLE>
Income taxes paid amounted to $253,000, $262,000, and $145,000, for
1995, 1994, and 1993, respectively. At December 31, 1995 and 1994, income taxes
payable includes amounts payable to Pioneer of $806,000 and $331,000,
respectively.
4. LONG-TERM OBLIGATIONS
At December 31, 1995, NHS had an unsecured loan of $825,000. The portion of
the loan due in 1996 of $300,000 is included in current liabilities. The
remainder of the note is included in long-term notes payable. The note bears
interest at prime and is payable quarterly with the final payment due July 1998.
Interest paid amounted to $98,000, $103,000, and $23,000 for 1995, 1994, and
1993, respectively.
5. BENEFIT PLAN
NHS participates in Pioneer's defined-contribution benefit plan that
covers substantially all NHS employees who have attained age 21 and completed
one year of service. Plan participants may contribute from 1% to a maximum of
10% of their total compensation subject to an annual maximum. Under the Plan,
NHS matches participants' contributions 100% up to $1,000 and thereafter 50%
of contribution up to the 1995 IRS limit of $9,240. NHS's contributions charged
to operations were $174,000, $73,000, and $43,000 in 1995, 1994 and 1993,
respectively.
11
<PAGE>
6. COMMITMENTS AND CONTINGENCE
NHS leases office facilities, furniture, equipment, and automobiles under a
capital lease and noncancelable operating leases. Rent expense was $465,000,
$463,000, and $426,000 in 1995, 1994, and 1993, respectively. Minimum future
rental commitments in connection with the capital lease and noncancelable
operating leases are as follows:
<TABLE>
<CAPTION>
Capital Lease Operating Leases
-----------------------------------
<S> <C> <C>
1996 $38,000 $ 470,000
1997 ----- 460,000
1998 ----- 420,000
1999 ----- 400,000
2000 ----- 410,000
Thereafter 310,000
----------------------------------
Total minimum lease payments $38,000 $2,470,000
==============
Amounts representing interest (1,000)
--------------
Present value of net minimum lease payments $37,000
==============
</TABLE>
NHS and its subsidiaries are named as defendants in legal actions arising
from disputes with customers and other corporate matters. NHS's management and
its legal counsel are of the opinion that the disposition of these actions will
not have a material adverse effect on NHS's financial position.
7. BUSINESS COMBINATION
In August 1993, NHS acquired Healthcare Review Corporation, a managed
care company, for $1,544,000 in cash. The combination was accounted for by the
purchase method and, accordingly, the purchase price was allocated to the assets
and liabilities acquired based on estimates of fair values. The purchase
agreement provides for additional cash consideration based on earnings.
8. RELATED PARTIES
NHS has an administrative agreement with a subsidiary of Pioneer.
Under this agreement, Pioneer provides payroll and other administrative services
to NHS. Service fees charged to NHS were $205,000, $171,000, and $80,000, in
1995, 1994, and 1993, respectively.
9. SUBSEQUENT EVENTS
In September 1996, Direct reacquired the 20% minority interest in PHC
as part of the sale of ACMG, Inc. In conjunction with the sale of ACMG, Inc.,
NHS made a dividend to PHC of intercompany amounts due from ACMG, Inc. The
intercompany amounts due from ACMG, Inc. at December 31, 1995, was $280,000.
12
<PAGE>
On October 24, 1996, all of NHS' outstanding common stock was acquired
by United Payors & United Providers, Inc. (UP&UP) for a purchase price
consisting of $5,800,000 in cash and warrants to purchase an aggregate of
318,000 shares of UP&UP common stock. The effective date of this transaction
was September 30, 1996. In connection with the acquisition, Pioneer and NHS
entered into a service agreement.
13
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors
National Health Services, Inc.
We have audited the accompanying consolidated balance sheets of National
Health Services, Inc. and subsidiaries as of December 31, 1995 and 1994, and the
related statements of consolidated operations, stockholder's equity and cash
flows for each of the three years in the period ended December 31, 1995. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated 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 consolidated financial position of National
Health Services, Inc. and subsidiaries as of December 31, 1995 and 1994, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1995, in conformity with generally
accepted accounting principles.
Chicago, Illinois
December 31, 1996
ERNST & YOUNG LLP
14
<PAGE>
NATIONAL HEALTH SERVICES, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 1996 (UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
<S> <C>
ASSETS
Current assets:
Cash $ 604
Accounts receivable 1,136
Receivables from affiliates 719
Other current assets 74
Deferred income taxes 146
-------
Total current assets 2,679
Fixed assets, at cost (less accumulated depreciation of $586) 863
Leasehold improvements, at cost (less accumulated amortization of $26) 115
Deferred income taxes 104
Intangible assets (less accumulated amortization of $488) 1,497
-------
Total assets $ 5,258
=======
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 1,198
Payable to affiliate 1,268
Income taxes payable 921
Notes payable, current portion 300
-------
Total current liabilities 3,687
Long-term notes payable, less current portion 300
-------
Total liabilities 3,987
Stockholder's equity:
Common stock, $.01 par value:
Authorized - 20,000,000 shares, issued and outstanding
8,499,998 shares 85
Additional paid-in capital 961
Retained earnings 225
-------
Total stockholder's equity 1,271
-------
Total liabilities and stockholder's equity $ 5,258
=======
See accompanying notes.
</TABLE>
15
<PAGE>
NATIONAL HEALTH SERVICES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1996 and 1995 (UNAUDITED)
(In Thousands)
<TABLE>
<CAPTION>
1996 1995
<S> ------- -------
Revenues: <C> <C>
Unaffiliated $ 7,519 $ 8,777
Affiliated 4,230 3,035
------- -------
Total revenues 11,749 11,812
Expenses:
Cost of services 8,153 7,068
Selling, general, and administrative 2,717 2,880
Interest expense 44 82
Depreciation and amortization 450 566
------- -------
Total operating expenses 11,364 10,596
Income before income taxes 385 1,216
Income taxes 160 537
------- -------
Net income $ 225 679
======= =======
</TABLE>
See accompanying notes.
16
<PAGE>
NATIONAL HEALTH SERVICES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1996 and 1995 (UNAUDITED)
(In Thousands)
<TABLE>
<CAPTION> 1996 1995
CASH FLOWS FROM OPERATING ACTIVITIES ------- -------
<S> <C> <C>
Net income $ 225 $ 679
Adjustments to reconcile net income to
net cash provided by operating activities
Depreciation and amortization 450 566
Loss on disposal of fixed assets 52 118
Decrease (increase) in receivables 740 (67)
Decrease in other assets 123 37
Increase in income taxes payable 67 -
Increase in payables 1,390 405
------- -------
NET CASH PROVIDED BY OPERATING ACTIVITIES 3,047 1,738
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to fixed assets and leasehold improvements (328) (582)
------- -------
NET CASH USED IN INVESTING ACTIVITIES (328) (582)
CASH FLOWS FROM FINANCING ACTIVITIES
Repayments of notes payable and capital lease obligations (262) (225)
Dividend distribution to parent (2,495) -
Decrease in advances to affiliates 617 -
------- -------
NET CASH USED BY FINANCING ACTIVITES (2,140) (225)
------- -------
INCREASE IN CASH 579 931
Cash at beginning of year 25 258
------- -------
CASH AT SEPTEMBER 30, 1996 AND 1995 $ 604 $ 1,189
======= =======
</TABLE>
See accompanying notes.
17
<PAGE>
NATIONAL HEALTH SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. NATURE OF OPERATIONS AND ORGANIZATION
National Health Services, Inc. (NHS), and subsidiaries provide health care
utilization management services to approximately 70 entities throughout the
United States. The medical utilization management services provided to
underwriters, self-insured businesses, provider organizations, and others
include precertification of in-patient and out-patient medical care, case
management, and management of provider networks.
NHS is a wholly owned subsidiary of Preferred Health Choice, Inc. (PHC), a
corporation engaged in contractual third party administrative agreements. PHC
is a subsidiary of Direct Financial Services (Direct) which is a wholly owned
subsidiary of Pioneer Financial Services, Inc. (Pioneer). Pioneer, through its
insurance subsidiaries, markets and underwrites life insurance, annuities and
health insurance in selected niche markets throughout the United States.
Affiliated revenues are from Pioneer's insurance subsidiaries.
2. UNAUDITED INFORMATION
The considered financial statements for the nine months ended September 30,
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 nine
months ended September 30, 1996 are not necessarily indicative of the results to
be expected for the full year or in the future.
3. SUBSEQUENT EVENT
On October 24, 1996, all of NHS' outstanding common stock was acquired by
United Payors & United Providers, Inc. (UP&UP) for a purchase price consisting
of $5,800,000 in cash and warrants to purchase an aggregate of 318,000 shares of
UP&UP common stock. The effective date of this transaction was September 30,
1996.
18
<PAGE>
(B) UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL INFORMATION
UNITED PAYORS & UNITED PROVIDERS, INC.
UNAUDITED PRO FORMA CONSOLIDATED INFORMATION
INTRODUCTION
The Unaudited Pro Forma Consolidated Statement of Operations for the nine
months ended September 30, 1996 presents, on a pro forma basis, the results of
operations of United Payors & United Providers, Inc. (the Company), and the
results of operations of National Health Services, Inc. assuming that the
acquisition of National Health Services, Inc. had been consummated on January 1,
1995.
The Unaudited Pro Forma Consolidated Statement of Operations for the year
ended December 31, 1995 presents, on a pro forma basis, the results of
operations of United Payors & United Providers, Inc. and the results of
operations of National Health Services, Inc. assuming that the acquisition of
National Health Services, Inc. had been consummated on January 1, 1995.
The Unaudited Pro Forma Consolidated Balance Sheet as of September 30, 1996
presents, on a pro forma basis, the balance sheet of the company and National
Health Services, Inc. as if the acquisition of National Health Services, Inc.
had been consummated on September 30, 1996.
The pro forma operating results are not necessarily indicative of the
results of operations that would have been attained had the acquisition taken
place earlier or of future results of the consolidated company. The pro forma
adjustments reflect the acquisition.
The Pro Forma Consolidated Balance Sheet and the Pro Forma Consolidated
Statements of Operations should be read in conjunction with the other
information contained in this form 8K regarding the acquisition.
19
<PAGE>
UNITED PAYORS & UNITED PROVIDERS, INC.
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
SEPTEMBER 30, 1996
UNITED PAYORS NATIONAL
& UNITED HEALTH PRO FORMA PRO FORMA
ASSETS PROVIDERS, INC. SERVICES, INC. ADJUSTMENTS CONSOLIDATED
--------------- -------------- ------------ ------------
<S> <C> <C> <C> <C>
Current assets:
Cash and cash equivalents $27,838,505 $ 604,000 $(5,900,000) $22,542,505
Accounts receivable 6,060,795 1,136,000 - 7,196,795
Trading equity securities 4,425,349 - - 4,425,349
Other current assets and prepaid income taxes 455,318 793,000 - 1,248,318
Deferred income taxes - 146,000 - 146,000
------------- -------------- ------------ ------------
Total current assets 38,779,967 2,679,000 (5,900,000) 35,558,967
Fixed assets, net 1,654,562 978,000 - 2,632,562
Investments 482,118 - - 482,118
Due from contracting providers 1,654,230 - - 1,654,230
Other assets 492,347 104,000 - 596,347
Intangible assets - 1,497,000 5,729,000 7,226,000
------------- -------------- ------------ ------------
Total assets $43,063,224 $5,258,000 $ (171,000) $48,150,224
============= ============== ============ ============
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 2,985,096 $2,466,000 $ - $ 5,451,096
Income taxes payable - 921,000 - 921,000
Notes payable and capital lease, current portion 7,586 300,000 - 307,586
------------- -------------- ------------ ------------
Total current liabilities 2,992,682 3,687,000 - 6,679,682
Deferred income taxes 37,000 - - 37,000
Notes payable and capital lease, less current portion 130,192 300,000 - 430,192
------------- -------------- ------------ ------------
Total liabilities 3,159,874 3,987,000 - 7,146,874
Commitments and contingencies
Stockholders' equity:
Convertible preferred stock, $0.01 par value, 5,000,000
shares authorized, none issued and outstanding - - - -
Warrants to purchase common stock - - 1,100,000 1,100,000
Common stock, $0.01 par value, 35,000,000 shares
authorized, 11,573,634 shares issued and
outstanding 115,736 85,000 (85,000) 115,736
Treasury stock, 2,500 shares, at cost (30,000) - - (30,000)
Additional paid-in capital 32,916,806 961,000 (961,000) 32,916,806
Retained earnings 6,900,808 225,000 (225,000) 6,900,808
------------- -------------- ------------ ------------
Total stockholder's equity 39,903,350 1,271,000 (171,000) 41,003,350
------------- -------------- ------------ ------------
Total liabilities and stockholder's equity $43,063,224 $5,258,000 $ (171,000) $48,150,224
============= ============== ============ ============
</TABLE>
See accompanying notes.
20
<PAGE>
UNITED PAYORS & UNITED PROVIDERS, INC.
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED SSEPTEMBER 30, 1996
<TABLE>
<CAPTION>
UNITED NATIONAL
PAYORS & UNITED HEALTH PRO FORMA PRO FORMA
PROVIDERS, INC. SERVICES, INC. ADJUSTMENTS COMBINED
--------------- --------------- ------------- -------------
<S> <C> <C> <C> <C>
Revenue
Provider network revenue $22,771,386 $ - $ - $22,771,386
Management services - 11,749,000 - 11,749,000
Other revenue 203,225 - - 203,225
-------------- --------------- ------------- -------------
Total revenue 22,974,611 11,749,000 - 34,723,611
-------------- --------------- ------------- -------------
Operating expenses:
Direct contract expenses 5,283,518 8,153,000 - 13,436,518
General and administrative 5,339,744 2,717,000 - 8,056,744
Depreciation and amortization 228,741 450,000 200,000 878,741
-------------- --------------- ------------- -------------
Total operating expenses 10,852,003 11,320,000 200,000 22,372,003
-------------- --------------- ------------- -------------
Other income (expense), net
Interest income 390,472 - - 390,472
Interest expense (63,448) (44,000) - (107,448)
Other income, net 213,817 - - 213,817
-------------- --------------- ------------- -------------
Total other income (expense), net 540,841 (44,000) - 496,841
-------------- --------------- ------------- -------------
Income before income taxes 12,663,449 385,000 (200,000) 12,848,449
Income tax (provision) benefit (5,052,000) (160,000) 80,000 (5,132,000)
-------------- --------------- ------------- -------------
Net income $ 7,611,449 $ 225,000 $ (120,000) $ 7,716,449
============== ============== ============ =============
Net income per share $ 0.80
=============
Shares used in computing net income
per common share outstanding 9,650,940
=============
</TABLE>
See accompanying notes.
21
<PAGE>
UNITED PAYORS & UNITED PROVIDERS, INC.
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1995
<TABLE>
<CAPTION>
PRO FORMA
UNITED NATIONAL
PAYORS & UNITED HEALTH PRO FORMA PRO FORMA
PROVIDERS, INC. SERVICES, INC. ADJUSTMENTS COMBINED
--------------- -------------- ------------- -------------
<S> <C> <C> <C> <C>
Revenue
Provider network revenue $26,325,348 $ - $ - $26,325,348
Management services - 15,765,000 - 15,765,000
Other revenue 255,204 - - 255,204
------------- -------------- ------------- -------------
Total revenue 26,580,552 15,765,000 - 42,345,552
------------- -------------- ------------- -------------
Operating expenses:
Direct contract expenses 8,564,707 10,769,000 - 19,333,707
General and administrative 7,394,960 2,732,000 - 10,126,960
Depreciation and amortization 171,979 760,000 300,000 1,231,979
------------- -------------- ------------- -------------
Total operating expenses 16,131,646 14,261,000 300,000 30,692,646
------------- -------------- ------------- -------------
Other income (expense)
Interest income 220,421 - - 220,421
Interest expense (102,422) (102,000) - (204,422)
Other income (expense), net 646,321 - - 646,321
------------- -------------- ------------- -------------
Total other income (expense), net 764,320 (102,000) - 662,320
------------- -------------- ------------- -------------
Income before income taxes 11,213,226 1,402,000 (300,000) 12,315,226
Income tax (provision) benefit (4,378,600) (619,000) 120,000 (4,877,600)
------------- -------------- ------------- -------------
Net income $ 6,834,626 $ 783,000 $(180,000) $ 7,437,626
============= ============== ============= =============
Net income per share $ 0.84
=============
Shares used in computing net income
per common share outstanding 8,800,000
=============
</TABLE>
See accompanying notes.
22
<PAGE>
UNITED PAYORS & UNITED PROVIDERS, INC.
NOTES TO
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
The pro forma adjustments to the Unaudited Pro Forma Consolidated
Statement of Operations for the nine months ended September 30, 1996 reflect
additional amortization expense for the goodwill resulting from the acquisition
and the related tax effect.
The Unaudited Pro Forma Consolidated Statements of Operations for the
year ended December 31, 1995 includes the (a) Pro Forma United Payors & United
Providers, Inc. results of operations, which include the operations of United
Payors & United Providers, Inc. Initial Managers and Investors, Inc.,
IM&I-NEWCO. Inc., and the Transferred Client Group, as filed with the Company's
Registration Form S-1 on June 24, 1996; and (b) the results of operations for
National Health Services. The pro forma adjustments reflect additional
amortization expense for goodwill resulting from the acquisition and the related
tax effect.
The pro forma adjustments to the Unaudited Pro Forma Consolidated
Balance Sheet as of September 30, 1996 consist of the following:
<TABLE>
<CAPTION>
<S> <C>
Cash paid, including transaction expenses $5,900,000
of approximately $100,000
Value of warrants to purchase stock 1,100,000
Liabilities assumed in excess of fair value 226,000
of tangible assets
----------
Excess cost over fair value $7,226,000
==========
</TABLE>
23
<PAGE>
EXHIBIT (23)
CONSENT OF INDEPENDENT AUDITORS
We consent to the use of our report dated December 31, 1996 with respect to
the consolidated financial statements of National Health Services, Inc. and
subsidiaries as of December 31, 1995 and 1994, and for each of the three years
in the period ended December 31, 1995 included in the Current Report on Form 8-K
of United Payors & United Providers, Inc. filed January 7, 1997.
ERNST & YOUNG LLP
Chicago, Illinois
December 31, 1996
24