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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ______________ TO _______________
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)
Securities registered pursuant to 12(b) of the Act: None
Securities registered pursuant to 12(g) of the Act: Common Stock, $0.01 par
value
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
------- -------
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K: ( X )
The number of shares of Common stock, par value $.01 per share, outstanding on
March 14, 1997 was 11,563,286. As of March 14, 1997, assuming as fair value
the last sale price of $14.25 per share on The Nasdaq Stock Market, the
aggregate fair value of shares held by non-affiliates was approximately
$53,760,000.
DOCUMENTS INCORPORATED BY REFERENCE:
The Company's Proxy Statement for its annual meeting of stockholders to be held
in June, 1997, a definitive copy of which will be filed within 120 days of
December 31, 1996, is incorporated by reference in Part III of this Report on
Form 10-K.
The Company's Registration Statement filed with the Commission on Form S-1, as
amended, (Registration No. 333-3814) and the Company's Form 10-Q for the quarter
ended September 30, 1996 are incorporated by reference in Part IV of this Report
on Form 10-K.
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UNITED PAYORS & UNITED PROVIDERS, INC.
AND SUBSIDIARIES
FISCAL YEAR 1996 FORM 10-K
TABLE OF CONTENTS
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PART I
Item 1. Business........................................................ 1
Item 2. Properties...................................................... 10
Item 3. Legal Proceedings............................................... 10
Item 4. Submission of Matters for a Vote of Security Holders............ 10
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters......................................................... 11
Item 6. Selected Consolidated Financial Data............................ 11
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations....................................... 12
Item 8. Financial Statements and Supplementary Data..................... 18
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure........................................ 18
PART III
Item 10. Directors and Executive Officers of the Registrant.............. 19
Item 11. Executive Compensation.......................................... 19
Item 12. Security Ownership of Certain Beneficial Owners and Management.. 19
Item 13. Certain Relationships and Related Transactions.................. 19
PART IV
Item 14. Exhibits, Financial Statement Schedules, and
Reports on Form 8-K............................................. 20
SIGNATURES
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PART I
ITEM 1. BUSINESS
GENERAL
United Payors & United Providers, Inc. (the "Company" or "UP&UP") is a
Delaware corporation and the successor to an Iowa corporation organized in
January 1995. Its business operations include the operations of Initial Managers
and Investors, Inc. ("IM&I") which was merged into the Company effective April
9, 1996 and certain operations (the "Transferred Client Group") transferred from
America's Health Plan, Inc. ("AHP"). AHP is an indirect wholly-owned subsidiary
of Principal Mutual Life Insurance Company ("Principal Mutual"), which
indirectly owns approximately 38.1% of the Company's outstanding Common Stock at
December 31, 1996. IM&I was owned by Thomas L. Blair, the founder of the
Company, who owns approximately 19.3% of the Company's outstanding Common Stock
at December 31, 1996. The Company also has three direct subsidiaries: (i)
National Health Services,Inc., a Wisconsin corporation ("NHS"), which is a
national health care utilization management services company acquired by UP&UP
effective October 1, 1996; (ii) IM&I-NEWCO, Inc., a Delaware corporation
("NEWCO"), which administers the Continued Health Care Benefit Program ("CHCBP")
for the United States Department of Defense; and (iii) America's Health Card
Services, Inc., an Iowa corporation ("AHCS"), which is 90% owned by the Company
and promotes a multifunction co-branded health insurance identification card and
credit card for distribution by payors.
The Company serves as an intermediary between health care payors, such as
insurance companies, and health care providers, such as hospitals, by entering
into contractual arrangements designed generally to produce cost savings and
other benefits for payors and increased liquidity and improved efficiency in
claims submissions for providers. The Company derives its revenues primarily
from a portion of the price concessions offered by the providers under such
contractual arrangements.
The Company enters into contracts with both providers of medical services
("Contracting Providers") and payors of medical claims ("Payor Clients"). The
Company's contracts with Contracting Providers establish price concessions on
the charges for medical services rendered by the Contracting Providers to
beneficiaries covered by medical plans of Payor Clients. These Contracting
Providers collectively constitute the "UP&UP Network." In partial consideration
for the price concessions furnished by the Contracting Providers, the Company
offers the Contracting Providers a Prepayment Option. As of February 28, 1997,
the UP&UP Network consisted of approximately 2,900 Contracting Providers. See
"Business -- UP&UP Network and Payor Clients -- Provider Network and
Prepayment Option."
The Company's contracts with Payor Clients, such as insurance companies, third
party administrators ("TPAs"), self-insured employers and unions, and government
health plans, provide for specified reductions in the amounts ordinarily payable
by the Payor Clients for medical claims submitted by Contracting Providers. The
Company believes that, consistent with representations generally made by Payor
Clients to their respective state insurance commissioners, plan beneficiaries
receive the same proportionate reduction on the co-insurance portion of the
medical claims payable by such beneficiaries under the terms of those plans.
The Company has sophisticated information systems capabilities, which
facilitate claims data transmission and cost repricing pursuant to UP&UP
Network price concessions. In addition, the Company conducts extensive data
analyses of encounter and cost data by specific service areas for Payor Clients.
The Company also maintains an extensive, proprietary database of provider
charges for certain medical procedures by geographic area, which is offered to
both its Payor Clients and Contracting Providers.
Through its subsidiary, National Health Services, Inc., a national health care
utilization management company, the Company also offers a variety of utilization
management products and services, such as inpatient and outpatient utilization
review, catastrophic case management, high risk maternity review, professional
clinical opinion, allied or ancillary therapy review, and physician
consultation. NHS' strategic approach to utilization management, is to make its
products and services available separately or as part of an integrated package
tailored to meet specific client needs.
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NHS serves a variety of clients, including state governments, Taft-Hartley
plans, self-insured plans, indemnity insurance carriers, and TPAs, representing
more than two million lives. NHS manages its clients' medical expense through
determinations of medical necessity and appropriateness, negotiations with
providers regarding charges for services, and the coordination of cost effective
health care alternatives. In 1996, NHS was ranked as the 3rd largest utilization
management organization in the country by Business Insurance magazine based on
review volume.
INDUSTRY OVERVIEW
The health care industry in the United States constitutes a substantial
portion of the Gross National Product, with in excess of $1 trillion estimated
to be spent annually for health care. Of this total, over $300 billion annually
of services is estimated to be provided by hospitals and approximately $200
billion to be provided by physicians. Traditionally, health care services have
been provided on a fee-for-service basis through a generally fragmented system
of health care providers, which includes approximately 6,400 hospitals as of
December 31, 1994, as well as physicians, other health care providers and
pharmacies.
Payment for all or a portion of health care fees traditionally has been
assumed, in many instances, for recipients of the health care services by
indemnity insurance companies and large public or private sector employers or
unions, which offer, at their own risk, certain insurance coverage to their
beneficiaries, employees or members. It is estimated by Foster Higgins National
Survey of Employer-sponsored Health Plans ("Foster Higgins") that, as of
December 31, 1996, approximately 23% of the insured population in the United
States was covered by such traditional, indemnity-type health insurance plans.
The Company's Payor Clients primarily are these traditional, indemnity-type
insurance companies, self-insured companies and unions, government health plans
and their agents.
As a result of escalating health care costs, various concepts of managed care
have evolved and are continuing to evolve. Managed care attempts to influence
and reduce the cost of health care by managing the two variables that comprise
the cost of health benefits. These variables are the frequency of service (e.g.,
the number of laboratory tests that might be performed) and the cost per service
(e.g., the cost per laboratory test). Health maintenance organizations ("HMOs")
have emerged as integral components of the health care system and there have
been substantial increases in the population covered for health insurance
purposes by HMO-type organizations. It is estimated by Foster Higgins that, as
of December 31, 1996, approximately 27% of the insured population received
medical benefits through HMOs. The ability of HMOs to direct their beneficiaries
to specific providers by their inherent constraints on the freedom of selection
of providers enables the HMOs to utilize their purchasing power with such
providers to obtain price concessions.
HMOs have in many instances evolved from paying providers on a fee-for-service
basis to paying on a "capitation" basis. Under a capitation arrangement, a
physician group and/or hospital group receives a prepaid fixed monthly fee per
HMO member (i.e., per capita) in consideration for providing specified medical
benefits to the member. The capitation payment mechanism has the potential to
shift the risk of the cost of medical service from the HMO to the provider group
accepting the capitation. In order to accept a capitation arrangement, a
physician group and/or hospital must have defined protocols to allocate and
disburse the capitation payment to all those providers (e.g., hospitals, primary
care physicians, specialists, laboratories and pharmacies) that are responsible
for providing health benefits under the capitation arrangement. Many physician
groups and hospital groups do not have the necessary protocols and information
systems to manage the disbursement of a capitation payment.
The search for ways to contain medical costs also has involved the development
by non-HMO health coverage insurers of various managed care medical cost
containment protocols and mechanisms for their insured beneficiaries.
Facilitating the migration of the non-HMO insured programs to more of a managed
care product, certain states have created exemptions to state antitrust laws to
permit physicians, hospitals and other providers to participate in joint
ventures such as physician hospital organizations ("PHOs"), which have the
potential to provide comprehensive health coverage on a capitation basis. As a
result, various physicians and hospitals that do not presently contract with
HMOs and/or preferred provider organizations ("PPOs") are joining together to
form PHOs or other entities that may accept risk, in order to potentially
participate in capitated health care arrangements. However, there is still no
universal conduit between those payors wishing to access a national network of
"at-risk" providers and physician and hospital groups seeking to contract with
national payors on an at-risk basis.
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STRATEGY
The Company's strategy is: (i) to increase overall claims volume by
expanding the UP&UP Network of Contracting Providers and the number of Payor
Clients; (ii) to develop new services which allow national and other large Payor
Clients to compete more effectively in the marketplace, including the
development of capitated networks for Payor Clients; and (iii) to build upon its
existing capabilities to promote efficiencies in the relationships between
national and other large payors and local and regional providers, including
possibly the establishment of a national clearinghouse for claims transmissions
and electronic funds transfers ("EFTs").
The strategy of the Company's subsidiary, National Health Services, Inc., is:
(i) to continue to maintain flexibility in its approach to existing clients and
target markets by providing services and products which are consistent with the
clients' needs; (ii) to develop new products and services based upon a client's
utilization patterns and priorities; (iii) to form strategic alliances with
vendors of complementary products/services in order to offer existing and
potential clients an expanded range of health care services through a single
vendor.
Increase Claims Volume
To expand the UP&UP Network, the Company intends to market the Prepayment
Option and enhanced ancillary services to new providers. The Company believes
that the Prepayment Option has been and will continue to be attractive to
providers. The Prepayment Option is intended to enable Contracting Providers to
increase their liquidity by receiving an up-front payment which may reduce their
carrying costs pending receipt of actual payment from payors for services
already rendered. The Prepayment Option and the ancillary information systems
services, such as claims data transmission and cost repricing, are also expected
to further solidify the business and financial relationship between the Company
and its Contracting Providers.
The Company also is exploring the development of a national network of
capitated providers through strategic alliances with Physician Networks which
are forming in major markets throughout the United States. The Company has
established a capitated network with a group of hospitals and physicians in
California. To the extent desired by its Payor Clients, the Company would seek
to expand this California network and explore possible capitated network
arrangements in other states. The Company believes that as health care costs
continue to escalate, pressure from payors to enter into capitation arrangements
will increase. The Company plans to facilitate its development of capitated
networks by offering a sophisticated information system which will enable
capitated providers to manage and allocate capitation payments from national
payors among the various providers in a local health care delivery system, such
as hospitals, primary care physicians and specialists.
National Clearinghouse
The Company also intends to seek to acquire businesses that offer services or
technologies that would expand or supplement its current business. In this
regard and in order to increase its ability to facilitate the processing of
claims from Contracting Providers and the payment of claims by Payor Clients,
the Company may seek to acquire a claims processing clearinghouse. The Company
views its ability to act as a clearinghouse as a value-added service for its
Contracting Providers and Payor Clients that reduces their internal costs of
claims handling through an increase in efficiency and a possible reduction
in the price they pay for claims transmission service.
In May 1996, the Company and EDIComm, Inc. ("EDIComm") entered into an
agreement (the "EDIComm Agreement") whereby EDIComm agreed to assign to the
Company its existing contracts (the "Assigned Contracts") with 19 hospital or
other medical care facilities. Under the Assigned Contracts, EDIComm acted as an
agent for such hospitals or other facilities to electronically transmit or
distribute the claims of such providers to appropriate payors. The EDIComm
Agreement provides that EDIComm will continue to administer the Assigned
Contracts and provide the technical assistance necessary to support the Assigned
Contracts until both parties mutually agree to discontinue such arrangements.
The Company believes that the EDIComm Agreement will enable it to gain
experience in the business of acting as an agent for the provider in
transmitting claims directly to payors.
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Flexibility
Flexibility in NHS' approach to service and product design results in a
utilization management program which is consistent with the evolving needs of
its clients. Clinical department managers, executives responsible for
operations, the Medical Director, and Associate Medical Directors are directly
accessible to clients. Therefore, the unique and specific needs of clients are
accommodated through working relationships with staff at all levels of the
organization. The expertise of NHS' staff includes the ability to analyze and
interpret utilization data in order to identify, recommend and implement
strategies that will maximize the effectiveness of health care dollars. Based
upon a client's utilization experience and priorities, NHS is able to customize
programs such as focused review or high risk maternity/perinatal management
carve-out products.
Strategic Alliances
The more sophisticated purchasers of utilization management services already
recognize the importance of an integrated, coordinated health care delivery
system in ensuring both the quality and cost effectiveness of health care.
Therefore, through NHS, the Company intends to explore strategic alliances with
managed care companies which offer complementary products/services, such as home
health services, specialty networks, demand management, PPOs, and TPAs. The end
result would be a single-source offering that would not only positively impact
on quality and cost effectiveness but would also have a positive impact on
clients' administrative costs by consolidating vendor services.
New Products and Services
The Company has developed a multifunction co-branded card that serves as both
a health insurance card and a VISA credit card. The Company has entered into an
agreement with a credit card issuing bank and expects to issue the first group
of cards during the third quarter of 1997. This multifunction co-branded card
should generate ancillary revenues and, more importantly, should promote
communication and facilitate payments among the Contracting Providers, Payor
Clients and the beneficiaries of those Payor Clients. The Company believes that
the availability of the multifunction co-branded card will enhance the Company's
ability to attract and retain Contracting Providers.
The Company currently maintains an extensive, proprietary database of provider
charges and other encounter data by geographic areas. The Company is continuing
to expand this database, which it offers to both Payor Clients and Contracting
Providers. The Company believes that the availability of its constantly updated
database that tracks various reimbursement rates and other key indicators will
assist it in maintaining its relationships with its Payor Clients.
NHS is in the process of developing and refining two new products: an enhanced
mental health and substance abuse review program, and a disease management
program. The mental health and substance abuse review product will initially be
geared toward state government, Medicaid and self-insured clients. The review
concept will include the application of NHS' Physician Developed Criteria
for mental health and substance abuse to assist the review staff in validating
the clinical diagnosis under which each patient is admitted, evaluating the
appropriateness of the proposed treatment for the reported symptoms, and
documenting the expected results of services delivered. The proposed treatment
will be evaluated for both medical necessity and level of care, with an emphasis
on discharge readiness and alternative care settings.
NHS is also developing a disease management program that will seek to develop
a realistic model of particular diseases and the typical drivers of cost in
their treatment. The disease management program will involve a clinical approach
to patient care that coordinates all aspects of health care delivery. The
program will seek to provide integrated clinical management of a disease state
which will result in improved quality of life, improved clinical outcomes, and
overall reduction in total health care costs. In collaboration with the
physician provider, the NHS disease manager would develop a clinical care plan
that would seek to improve quality of life and clinical outcomes, while
achieving an overall reduction in total health care costs.
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UP&UP NETWORK AND PAYOR CLIENTS
Provider Network and Prepayment Option
The UP&UP Network is a nationwide network of medical care providers which, as
of February 28, 1997, consisted of approximately 2,900 Contracting Providers
located in 50 states and the District of Columbia. The UP&UP Network was
organized to meet the medical service, financial and geographic needs of Payor
Clients and their beneficiaries and to provide health benefit services in a
cost-effective manner to beneficiaries of such Payor Clients. The Company
intends to continue to concentrate on expanding the number of Contracting
Providers, including physician groups. In its marketing to health care
providers, the Company focuses on recruiting for the UP&UP Network those
providers who could best serve Payor Clients and their beneficiaries.
The Company contracts directly with individual hospitals and groups of
hospitals and other health care providers for such providers to participate in
the UP&UP Network and to grant price concessions to the Payor Clients. Price
concessions are individually negotiated with each Contracting Provider and
generally consist of either discounts from billed charges or per diem rates. The
Company's standard contract with a Contracting Provider includes a one-year term
renewable automatically for successive one-year terms, unless the Contracting
Provider gives written notice of termination, typically at least 90 days prior
to the renewal date.
Moreover, the Company believes that the attractiveness of the UP&UP Network to
Contracting Providers is significantly enhanced by the Company's Prepayment
Option. Cash payments to Contracting Providers under the Prepayment Option are
computed for selected Contracting Providers based upon annual claims volume for
beneficiaries of the Company's Payor Clients who utilize the services of such
Contracting Provider. The cash payments are made at the option of the
Contracting Provider, either at the end of the contract period based upon one-
twelfth of the actual claims presented for the preceding 12-month period or at
the beginning of the contract period based upon one-twelfth of the estimated
claims for the following 12-month period.
The Company believes its operations are distinguishable from the objectionable
operational characteristics some have attributed to purported Silent PPOs.
First, the Company's practices permit its Payor Clients to take discounts from
Contracting Providers only if both the Payor Client and Contracting Provider
have a signed contract with the Company (or with another entity with which the
Company has contracted for access to such entity's provider network) at the time
a medical service was rendered and Contracting Providers are apprised of their
contractual relationships with the Company's Payor Clients through the receipt
of a Payor Client Directory that lists each Payor Client (or in some cases an
affiliate of the Payor Client) and is regularly updated. Second, the Company
believes that, consistent with representations made by its Payor Clients to
their respective state insurance commissioners, plan beneficiaries receive the
same proportionate reduction on any co-insurance portion of the medical claims
payable by such beneficiaries under the terms of those plans. This serves as a
financial incentive to the beneficiary to use the Company's Contracting
Providers. Third, the Company also offers Contracting Providers the Prepayment
Option.
Payor Clients
In order to maximize its marketing efforts, the Company has focused on
establishing relationships with Payor Clients who have a nationwide presence and
who, therefore, insure in the aggregate large numbers of beneficiaries. The
Company intends to continue to market to national payors because of the
significant claims volume which any single national payor represents. In
addition, as the Company expands its Payor Client base, it may enter into
contracts with regional and local payors. During 1996, three Payor Clients,
MetraHealth, John Hancock and CIGNA accounted for 22%, 13% and 12%,
respectively, of the Company's total revenue. The loss of any of these Payor
Clients could have a material adverse effect on the Company.
The duration of the Company's contracts with its Payor Clients typically is
one year with automatic renewals on the anniversary date. However, such
contracts may be terminated by either party at any time, generally, upon 90
days' notice. The contracts do not preclude the Payor Clients from contracting
with other networks or developing or offering other products or services which
do not use the Company's services and/or Contracting Providers.
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Payor Clients generally compensate the Company based on a percentage of the
price concessions from Contracting Providers on claims for such Payor Clients.
Such compensation generally is due to the Company by Payor Clients at the time
the Payor Client pays claims either directly to the Contracting Provider or
indirectly through the Company to the Contracting Provider. Compensation to the
Company varies depending upon the terms of individual contracts and the
aggregate amount of claims volume for the individual Payor Clients. Larger
claims volume can result in a decreased share of price concessions.
Capitated Network
Under increasing pressure to contain health care costs, insurers are turning
to capitation to control their costs and to share the risk with providers. In
recognition of this, particularly in areas with heavy managed care penetration
rates, such as southern California, the Company is exploring the development of
a national capitated network of hospitals utilizing incentive-based
reimbursement principles (the "Capitated Network"). Using published "base line"
age and sex-adjusted monthly capitation rates for standard managed care
programs, the Company and providers in the Capitated Network would share in
savings when physician gatekeepers manage health care expenditures below
projected capitation levels.
SOFTWARE SYSTEMS CAPABILITIES
Information Systems
In order to influence and control health care costs, payors and providers must
have the ability to monitor costs. Because of the number of variables that may
affect total health care-related expenses, effective monitoring of medical costs
is difficult. The Company utilizes a broad range of information systems
applications to support its business and to enhance its ability to service its
Payor Clients and Contracting Providers. The Company believes that its systems
provide for the high level of flexibility and functionality necessary to service
both its Payor Clients and Contracting Providers.
The systems are able to accommodate a variety of insurance products, changes
and modifications of contractual arrangements with Contracting Providers and
generate a range of encounter data reports. Such reports include both the cost
per service and the frequency of service by a Contracting Provider to a
beneficiary of a Payor Client. In the Capitated Network, sophisticated systems
capabilities are necessary to support physician and hospital groups in
administering the allocation and disbursement to all providers in the Capitated
Network. In addition to allocating risk and disbursing capitation among
providers, the systems have the capability to adjudicate claims and to generate
the encounter data necessary to support quality assurance programs.
Claims Data Transmission and Repricing Systems
In order for the Company's Payor Clients to access the contractual
arrangements which the Company has with its Contracting Providers, the Company
has installed, in the facilities of its larger Payor Clients, the appropriate
hardware and software necessary to provide such Payor Clients with direct access
to the Company's provider database. To facilitate the repricing of medical
claims received by Payor Clients, the Company has developed a system for the
electronic transmission of claims and repricing data to such Payor Clients. The
Company has also installed the necessary software at these same facilities to
access the repricing database. All information in the provider database and in
the repricing database is updated monthly by electronic interface between the
Company and the Payor Clients. The Company believes that the availability of
these products and services to Payor Clients strengthens the relationship
between the Payor Clients and the Company and adds value to the Company's
contracts with such Payor Clients.
For Contracting Providers, the Company calculates the repricing of all claims
from such Contracting Providers to its Payor Clients in accordance with the
price concessions of the individual contract with that Contracting Provider.
This calculation is furnished to the Contracting Provider in the form of a
transmittal notice so that it can verify the accuracy of payments it receives
from Payor Clients.
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Provider Database
A wide range of reimbursement rates exists among providers for the same
procedures and services. These variations are not based solely on geographic
location and there can be a wide variety of reimbursement rates within one
geographic area. The Company has developed a provider database that tracks
various reimbursement rates and other key indicators among provider hospitals.
These indicators include charges per day, occupancy rates and the volume of
medical claims being generated by each Contracting Provider for each of the
Payor Clients. This database is available to all Payor Clients to assist them in
evaluating which Providers may be cost effective.
ADMINISTRATION OF CHCBP PROGRAM
NEWCO administers CHCBP which is a benefit program that allows certain groups
of military health service beneficiaries to continue receiving benefits under
CHAMPUS when they lose their eligibility for military health care. The Company
processes applications, tracks and maintains enrollment, and collects premiums
for individuals or families who enroll in the CHCBP program.
AGREEMENT WITH AHP
In December 1995, AHP transferred the Transfer Client Group to the Company
through the transfer of specified AHP payor clients (the "Transfer Clients").
The Transfer Client Group represented approximately 45.0% of AHP's revenues for
the year ended December 31, 1995, and did not include the business of Principal
Mutual, a significant payor client of AHP. AHP is an indirect wholly-owned
subsidiary of Principal Mutual and thus Principal Mutual, directly and
indirectly, receives the full benefit of the price concessions available through
the AHP provider network. AHP's predecessor was originally organized by Mr.
Blair in December 1988. Mr. Blair was the primary stockholder of AHP when
Principal Mutual, through a subsidiary, acquired it in June 1992. At the time
of such acquisition, AHP technically was a subsidiary of the acquired entity,
Direct Health, Inc., which subsequently was merged into AHP. This acquisition
was finalized on May 3, 1993, upon the termination of a put arrangement in favor
of the Principal Mutual subsidiary, supported by escrowed funds, which was part
of the acquisition agreement in June 1992.
In addition, on December 31, 1995, AHP agreed to the termination of the
marketing arrangements IM&I had with AHP. Prior to its contribution by Mr. Blair
to the Company effective December 31, 1995, IM&I operated primarily as a
marketing agent for AHP to certain governmental and commercial payors, and IM&I
shared with AHP the fees earned from those payors. IM&I was organized by Mr.
Blair in May 1989 but did not conduct any significant operations until July
1993. IM&I has been contributed to the Company. The Company now has both the AHP
and the IM&I rights with respect to Payor Clients who were obtained by IM&I.
The transfer of the Transfer Clients from AHP to the Company was effected by
the assignment by AHP of its contract rights with those Transfer Clients to the
Company, subject to any right of a Transfer Client to consent to the assignment
of the contract, combined with AHP's grant to the Company of permission for the
Company to contract separately with those Transfer Clients, and thereby
terminate the contractual arrangement of those Transfer Clients with AHP. During
the transition period between the transfer of the Transfer Clients and any
required consent to assignment of the contract or UP&UP separately contracting
with the Transfer Client, UP&UP was entitled to the revenue under the Transfer
Client contracts. To facilitate the transfer and accommodate the needs of the
Transfer Clients during the transitional period needed to complete the transfer,
and for a certain period thereafter, AHP agreed that the Transfer Clients could
continue to access the AHP provider network through the Company without any
payment to AHP, except to the extent necessary to cover costs of AHP under
certain sharing arrangements it has with other provider networks. The Transfer
Clients may not have continuing access to certain providers in the other
provider networks and access to such providers will be curtailed as early as
April 1, 1997. Because the Payor Client contracts in question generally required
the consent of the Transfer Client for the assignment of the contract and
because of the Company's desire to promote its unique contractual arrangements
involving the Prepayment Option, the Company negotiated new contracts with the
Transfer Clients.
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COMPETITION
The health care industry is fragmented, competitive and evolving. The
traditional functions of payors and providers are beginning to overlap in
certain arenas and there is no consensus as to the ultimate structure of the
health care industry.
The Company potentially competes with any entity that contracts with payors to
offer them a means to contain or reduce the cost of their medical claims'
expenses. These groups of potential competitors could include HMOs, preferred
provider organizations, PHOs and other managed care providers, including
networks, organizations and companies owned directly or indirectly by Principal
Mutual.
Payors could, to the detriment of the Company's business strategy, elect to
establish their own proprietary provider contractual relationships, thus
eliminating their need to access provider price concessions made available by
third parties such as the Company. Likewise, providers could elect to contract
directly with payors. Such action, if taken by the majority of providers, could
jeopardize the business of the Company.
Several potential competitors are significantly larger and better capitalized
than the Company. Many competitors have ongoing access to greater resources,
provide a more comprehensive range of services, and have greater experience in
providing those services offered by the Company. Furthermore, various
competitors have longer term business relationships with payors and providers
than does the Company. The health care industry is considered to be a growing
industry. Accordingly, the industry may attract additional potential competitors
to the Company.
With respect to the Company's subsidiary, National Health Services, Inc.,
competition in the utilization management market is typically on two levels. The
large utilization management companies compete for insurance companies and large
employer groups, while the smaller companies compete for the TPA and small self-
insured markets. The key to success in the large group market, which is NHS'
focus, is a combination of price, service, and flexibility. As the level of
client sophistication grows, there appears to be more interest in a shared-
savings (shared-risk) approach to fee structuring as opposed to fee-for-service
or capitated arrangements. Also, with the profitability pressure in the
insurance industry and the rise in health benefit costs for large self-insured
employers, utilization management companies are expected more than ever to
deliver on their commitments involving both savings and client support.
GOVERNMENT REGULATION
General
As an entity conducting business within the health care industry, the
Company's operations (including the operations of NHS) are potentially subject
to extensive and increasing regulation by a number of governmental entities at
the federal, state and local levels. The Company and its affiliates are also
subject to laws and regulations relating to business corporations in general.
The Company believes its operations are in material compliance with applicable
laws as currently interpreted. Nevertheless, because of the structure of the
Company, certain aspects of the Company's current or anticipated business
operations could fall within the regulatory oversight of federal or state
authorities, and there can be no assurance that a review of the Company's
business by courts or regulatory authorities will not result in a determination
that could adversely affect the operations of the Company. There also can be no
assurance that the regulatory environment in which the Company operates will not
change significantly in the future, which change could restrict the Company's
existing operations, expansion, financial condition or opportunities for
success. See "Business -- UP&UP Network and Payor Clients -- Provider Network
and Prepayment Option."
Health Care Reform
The agencies and legislative bodies of the states and federal government
recently have focused significant attention on reforming the health care system
in the United States. Within the past two years, a broad range of health care
reform measures have been introduced in Congress and in certain state
legislatures. Additional health care reform measures have been brought before
the public in state voter initiatives. These initiatives range from those that
8
<PAGE>
would tend to encourage managed care, such as allowing physician and hospital
groups to accept risk, to those that would impede managed care, such as
mandating that any willing provider could participate in any health plan. Among
the proposals that have been considered are cost controls on hospitals,
insurance market reforms to increase the availability of group health insurance
to small businesses, requirements that all businesses offer health insurance
coverage to their employees and the creation of a single government health
insurance plan at the state or federal level that would cover all citizens.
Legislative interest recently has focused on the effect of managed care
reimbursement mechanisms on health care service utilization and quality of
service. It is not clear at this time what proposals, if any, will be adopted
or, if adopted what effect, if any, such proposals would have on the Company.
Certain proposals, such as containment of health care costs that could include a
freeze on prices charged by physicians, hospitals or other health care
providers, could adversely affect the Company. There can be no assurance that
currently proposed or future health care legislation or policies or other
changes in the administration or interpretation of governmental health care
programs, laws, regulations or policies will not have a material adverse effect
on the Company's business, financial condition or results of operations.
State Licensure
The Company believes that its current business activities are not subject to
state licensure, other than such general business licensure as may be required
of all domestic or foreign business corporations in a jurisdiction. However, it
is possible that regulatory authorities in some states might conclude that some
of the Company's activities subject it to licensure as a PPO or similar entity.
In some states, such licensure may be conditioned on the licensed entity
engaging in practices, such as quality assurance or utilization review, that are
beyond the scope of the Company's current or anticipated operations. Although
the Company believes that, in general, it would be able to modify its operations
to obtain any licenses that were deemed to be required, there can be no
assurance that the Company would be able to modify its operations, or otherwise
to obtain or to maintain any such licenses.
The Company's subsidiary, National Health Services, Inc., maintains
utilization management certification in all states in which it is required and
monitors state legislation on a regular basis to ensure ongoing compliance.
ERISA Regulation
It is possible that in the usual course of its business the Company (including
NHS) could be deemed to provide services to employee benefit plans regulated
under the Employee Retirement Income Security Act of 1974, as amended ("ERISA"),
including self-insured health benefit plans. Recently, the U.S. Department of
Labor ("DOL"), the federal agency that administers ERISA, has been auditing
certain insurance companies in connection with their practices involving medical
provider discounts and the transfer of those discounts to self-insured ERISA
plans. In connection with these audits, DOL has indicated that the negotiation
and administration of provider discount arrangements by these insurance
companies for the benefit of ERISA plans could constitute the activities of an
ERISA fiduciary. The Company is not engaged in the business of insurance under
state law nor does it provide administrative services to ERISA-regulated benefit
plans. Although the Company believes that its practices relating to provider
discount arrangements are beyond the scope of ERISA regulation, there can be no
assurance that DOL or some other person would not assert that the Company acts
as an ERISA fiduciary with respect to its limited activities for self-insured
ERISA plans. In the unlikely event that the Company were deemed to be an ERISA
fiduciary, the Company believes that it would be viewed as being in compliance
with applicable ERISA rules.
Anti-Remuneration Laws
Medicare and Medicaid law provides civil and criminal penalties for paying or
receiving any remuneration to induce the referral of Medicare or Medicaid
patients, or to induce the purchase or the arranging for or recommending of the
purchase of items or services for which payment may be made under Medicare,
Medicaid or other federally-funded state health care programs. Various
exceptions and "safe harbors," including those applicable to certain properly
reported discounts, may be available in appropriate circumstances. Several
states also have similar laws which are not limited to services for which
Medicare or Medicaid payment may be made. State laws vary and have been
infrequently interpreted by courts or regulatory agencies. It is possible that
enforcement officials could seek to review the fees paid to or by the Company
and NHS to determine whether such fees should be deemed to be unlawful
9
<PAGE>
remuneration given indirectly by providers in exchange for arranging for the
referral of patients from their Payor Clients. While there can be no assurance
that the Company's and NHS' position would be upheld if challenged, the Company
and NHS believe that their fee arrangements represent reasonable compensation
for legitimate services actually provided to or by the Company and NHS and
should not be deemed to be unlawful remuneration under these anti-remuneration
laws.
EMPLOYEES
As of February 28, 1997, the Company employed 291 people on a full-time basis.
The Company believes that its relations with its employees are good.
ITEM 2. PROPERTIES
The Company's principal executive office is located in Rockville, Maryland in
approximately 22,500 square feet of leased space. The Company also leases
approximately 29,300 square feet of office space in Louisville, Kentucky and
approximately 6,600 square feet of office space in Dallas, Texas. The Rockville,
Maryland and the Louisville, Kentucky leases expire in 2001. The Dallas, Texas
lease expires in 1999. The Company believes that its current facilities are
adequate for its existing needs and that suitable additional space will be
available as required.
ITEM 3. LEGAL PROCEEDINGS
On April 26, 1996, a civil complaint was filed against the Company in the
United States District Court for the Northern District of Illinois by HealthCare
COMPARE Corporation d/b/a The Affordable Medical Networks ("HealthCare
COMPARE"). HealthCare COMPARE seeks injunctive and other relief, including
possible damages, based generally on allegations that representatives of the
Company, in at least four instances, made various misrepresentations to
prospective Contracting Providers, including to the effect that the Company's
provider network was affiliated with HealthCare COMPARE's provider network or
that HealthCare COMPARE had agreed to utilize the Company's provider network.
The Company denies the allegations in the complaint and believes the complaint
by HealthCare COMPARE is without merit. After consultation with counsel and
review of available facts, management believes that damages, if any, arising
from litigation will not be material to the consolidated financial statements of
the Company. The Company intends to vigorously defend against the complaint.
The Company is also a party to other legal actions arising in the ordinary
course of business. Management believes that damages arising from these actions,
if any, will not be material to the consolidated financial statements of the
Company.
ITEM 4. SUBMISSION OF MATTERS FOR A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders during the
quarter ended December 31, 1996.
10
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
The Company's Common Stock has traded on the Nasdaq National Market under the
symbol UPUP since the effective date of the Company's registration statement
which registered shares of the Company's common stock in its initial pubic
offering on June 28, 1996. The high and low sales prices for each of the last
two quarters of 1996 as reported by Nasdaq are set forth below.
High Low
---- ---
Quarter Ended September 30, 1996 14 3/4 11
Quarter Ended December 31, 1996 15 11 3/4
The high and low sales price for the Company's stock as reported by Nasdaq on
March 14, 1997 were $14 1/4 and $13 1/4, respectively.
As of March 14, 1997, there were approximately 1,050 holders of record of the
Company's common stock. The Company did not pay any cash dividends in 1996 and
has no plans to do so in the foreseeable future.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
(In thousands, except per share data)
The following selected consolidated financial data for 1996 and 1995 have
been derived from the audited financial statements of the Company. The unaudited
pro forma consolidated financial data for the year ended December 31, 1995 have
been derived from the financial statements of the Transfer Client Group, IM&I,
NEWCO and the Company. The pro forma consolidated financial data have not been
audited but, in the opinion of management, include all adjustments necessary to
present fairly the information set forth therein. The selected consolidated
financial data should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the consolidated
financial statements of the Company, including notes thereto. The pro forma
consolidated financial data are provided for comparative purposes only and may
not be indicative of the results that would have been achieved if the
transactions reflected therein had occurred at the beginning of the period for
which the pro forma data is presented or of future results.
<TABLE>
<CAPTION>
Pro Forma
1996 1995 1995
-------- --------- --------
<S> <C> <C> <C>
STATEMENT OF OPERATIONS DATA
Revenue
Provider network........................... $30,992 $ 877 $26,326
Utilization management services............ 4,190 -- --
Other...................................... 267 -- 255
------- ------- -------
Total revenue............................. 35,449 877 26,581
Operating expenses
Direct contract expenses................... 15,295 2,238 14,192
General and administrative................. 2,783 334 1,768
Depreciation and amortization.............. 538 114 172
------- ------- -------
Total operating expenses.................. 18,616 2,686 16,132
Operating income (loss)..................... 16,833 (1,809) 10,449
Other income................................ 971 699 764
------- ------- -------
Income (loss) before income taxes.......... 17,804 (1,110) 11,213
Income tax (expense) benefit................ (7,158) 399 (4,378)
------- ------- -------
Net income (loss)........................... $10,646 $ (711) $ 6,835
======= ======= =======
Distributions to stockholders (1)........... $ -- $ -- $ 8,379
Net income (loss) per share (2)............. $1.05 $(0.08) $0.78
Weighted average common shares outstanding.. 10,126 8,800 8,800
</TABLE>
11
<PAGE>
<TABLE>
1996 1995
------- -------
<S> <C> <C>
BALANCE SHEET DATA
Working capital............................. $28,113 $ 3,384
Total assets................................ 53,248 12,763
Long-term debt.............................. 324 50
Note payable to stockholder................. -- 3,700
Total stockholders' equity.................. 45,176 5,296
</TABLE>
(1) Represents distributions to the owner of the Transfer Client Group and the
stockholder of IM&I prior to the respective transfers to the Company.
(2) The pro forma information assumes the automatic mandatory conversion of the
Principal Preferred Stock into Common Stock pursuant to its terms
immediately prior to the sale of the Company's Common Stock in its initial
public offering.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
This Form 10-K may contain forward-looking statements (see "Certain Factors
That May Affect Future Operating Results or Stock Prices") within the meaning of
Section 21E of the Securities Exchange Act of 1934, as amended. These forward-
looking statements involve a number of risks and uncertainties. The Company
undertakes no obligation to revise any forward-looking statements in order to
reflect events or circumstances that may arise after the date of this report.
Readers are urged to carefully review and consider the various disclosures made
by the Company in this report and in the Company's other filings with the
Securities and Exchange Commission that attempt to advise interested parties of
the risks and factors that may affect the Company's business.
GENERAL
UP&UP, a Delaware corporation, was originally incorporated in the State of
Iowa on January 3, 1995 as PB Newco, Inc. Effective June 7, 1996, PB Newco, Inc.
merged into UP&UP, with UP&UP being the surviving corporation. Effective
December 31, 1995, the Company's stockholders and a subsidiary of a stockholder
contributed to the Company certain complementary businesses (see "Business --
General" and "Business -- Agreement with AHP") specifically the Transfer Client
Group, IM&I and NEWCO (collectively the "Contributed Businesses"). Because the
contributions were nonmonetary in nature and made by existing stockholders of
UP&UP, the assets and liabilities contributed have been recorded at the
transferor's historical cost as of December 31, 1995. Since the contributions
were effective December 31, 1995, the historical Selected Consolidated Financial
Data for the year ended December 31, 1995 do not include the results of
operations of the Contributed Businesses. The results of operations of the
Contributed Businesses are included in the Pro Forma Selected Consolidated
Financial Data for the year ended December 31, 1995.
The Company filed a Registration Statement on Form S-1 with the Securities and
Exchange Commission which offered to the public 2,400,000 shares (2,760,000
shares, including the over allotment) of the Company's common stock. This
registration statement was declared effective on June 28, 1996. The closings of
the sale of stock for an aggregate of 2,760,000 shares were effected on July 8,
1996 and July 15, 1996 for which the Company received proceeds (net of
underwriters' commissions and expenses) of $23.4 million and $3.5 million,
respectively.
Effective October 1, 1996, the Company acquired National Health Services, Inc.
("NHS"), a national health care utilization management services company. The
acquisition has been accounted for as a purchase and, accordingly, the results
of operations of NHS have been included in the Selected Consolidated Financial
Data and the consolidated financial statements of the Company since the
effective date of the acquisition.
UP&UP serves as an intermediary between health care payors (such as insurance
companies) and health care providers (such as hospitals) by entering into
contractual arrangements designed generally to produce cost savings and other
benefits for payors and increased liquidity and improved efficiency in claims
submissions for providers. The Company derives its revenue from a portion of the
price concessions offered by the providers under such contractual arrangements.
Through NHS, the Company offers medical utilization management services to
insurance underwriters, self-insured businesses, provider organizations, and
other. Such services include precertification of in-patient and out-patient
medical care, case management, and management of provider networks.
12
<PAGE>
REVENUE
A significant majority of the Company's revenues are based on a percentage of
the price concessions from the Contracting Providers on claims to its Payor
Clients.
Provider network revenues are influenced by, among other variables: (i) the
number of Contracting Providers and Payor Clients; (ii) the volume of claims
submitted by Contracting Providers to Payor Clients; (iii) the amount of price
concessions the Company negotiates with Contracting Providers; and (iv) the
contractual price concession sharing arrangements negotiated by the Company with
Payor Clients. In effect, these variables correspond to breadth (number of
Contracting Providers and Payor Clients), volume (claims per period) and depth
(amount of price concession), all of which define savings and the Company's
resultant revenues.
Medical utilization management services revenues are based on contractual
arrangements. Contracts may reflect a capitated rate, fee for service or hourly
rate. Pre-certification revenues are generally based on monthly capitation
calculations. Case management revenues are generally based on fee for service or
hourly rates.
Additionally, the Company generates revenue from the administration of the
CHCBP program. This program allows certain groups of military health service
beneficiaries to continue receiving benefits under the Civilian Health and
Medical Program of the Uniformed Services ("CHAMPUS") when they lose their
eligibility for military health care. The CHCBP program provides benefits for a
period of time, up to 36 months, to former U.S. Armed Forces service members and
their family members who enroll and pay their quarterly premiums.
DIRECT CONTRACT EXPENSES
Direct contract expenses include access fees paid by the Company for the
utilization of other provider networks, marketing commissions, and other direct
costs of services such as personnel related to repricing of claims, client
services, and other costs incurred in connection with the generation of revenue
and the development of the UP&UP Network. NHS direct contract expenses include
the costs of medical personnel (nurses and doctors) and other expenses related
to administering their contracts.
The Company accesses certain other networks of medical providers, including
the provider network organized and maintained by AHP (see "Business -- Agreement
with AHP"). The level of network access fees as a percentage of provider network
revenue is expected to decrease as a result of the continued expansion of the
Company's direct network. Marketing commissions are payable to consultants who
became entitled to such commissions for their role in obtaining contracts with
certain Payor Clients. Generally, these marketing commissions are based on a
percentage of the revenue generated by the Payor Client. The marketing
commissions are also expected to decrease as the commission arrangements expire.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses include salaries and related costs for
personnel involved in the administration of the Company and other costs such
as professional services and general overhead expenses.
13
<PAGE>
HISTORICAL RESULTS OF OPERATIONS
The following table sets forth certain results of operations data for the
periods ended December 31, 1996 and 1995.
<TABLE>
<CAPTION>
1996 1995
--------- --------
(in thousands)
<S> <C> <C>
Revenue
Provider network................... $30,992 $ 877
Utilization management services.... 4,190 --
Other.............................. 267 --
------- -------
Total revenue................... 35,449 877
Operating expenses
Direct contract expenses........... 15,295 2,238
General and administrative......... 2,783 334
Depreciation and amortization...... 538 114
------- -------
Total operating expenses........ 18,616 2,686
Operating income (loss).............. 16,833 (1,809)
Other income......................... 971 699
------- -------
Income (loss) before income taxes.. 17,804 (1,110)
Income tax (expense) benefit......... (7,158) 399
------- -------
Net income (loss).................... $10,646 $ (711)
======= =======
</TABLE>
Year Ended December 31, 1996 Compared to Year Ended December 31, 1995
The Company was incorporated and commenced operations on January 3, 1995.
During 1995, the Company focused its efforts on the development of its
contracting provider network and marketing to prospective clients. At December
31, 1995, the UP&UP Network consisted of approximately 700 Contracting
Providers and the Company had contracts with eight Payor Clients. The Company
entered into contracts with such providers and payors primarily during the last
six months of 1995. As a result, the Company had an operating loss of $1.8
million for the year. The operating loss was primarily offset by net realized
gains of $452,000 on the sale of marketable securities, $191,000 of interest
income and $436,000 from the tax benefit from the recognition of the year's net
operating loss carry forward. Net loss for the year was $711,000.
The results of operations for the year ended December 31, 1996 include the
results of operations of the Contributed Businesses for the year and the
results of operations of NHS since October 1, 1996. As of December 31, 1996, the
Company had approximately 2,600 Contracting Providers. Other revenue of $267,000
relates to the administration of the CHCBP program.
Direct contract expenses of $15.3 million consisted of $5.4 million in access
fees to other provider networks, $1.3 million in marketing commissions and $8.6
million in other direct costs of services. Access fees to other provider
networks and marketing commissions represented 17.5% and 4.3% of provider
network revenue, respectively. Other direct costs represented 24.1% of total
revenues.
General and administrative expenses of $2.8 million represented 7.9% of total
revenue. Net income was $10.6 million or 30.0% of total revenue.
PRO FORMA RESULTS OF OPERATIONS
The following table sets forth certain unaudited pro forma consolidated
financial data of the Company and the Contributed Businesses and such data
expressed as a percentage of total consolidated revenue for the Company
and the Contributed Businesses for the years ended December 31, 1995 and 1994,
as if the contributions had been consummated as of January 1, 1994 for IM&I
14
<PAGE>
and the Transfer Client Group, and August 1994 for NEWCO. The pro forma
financial data have not been audited but, in the opinion of management, include
adjustments necessary to present fairly the information set forth therein. The
pro forma financial data may not be indicative of the results that would have
been achieved if the transactions reflected therein had occurred at the
beginning of the period for which the pro forma data is presented or of future
results.
<TABLE>
<CAPTION>
Consolidated Financial Data
------------------------------------------------------------
Historical Pro Forma
-------------- -------------------------------------
1996 1995 1994
-------------- --------------- --------------
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Revenue
Provider network................. $30,992 87.4% $26,326 99.0% $13,924 99.4%
Utilization management services.. 4,190 11.8 -- -- -- --
Other............................ 267 0.8 255 1.0 81 0.6
------- ----- ------- ----- ------- -----
Total revenue................. $35,449 100.0% $26,581 100.0% $14,005 100.0%
======= ===== ======= ===== ======= =====
Operating expenses
Direct contract expenses......... $15,295 43.1% $14,192 53.4% $ 7,550 53.9%
General and administrative....... 2,783 7.9 1,768 6.7 1,077 7.8
Depreciation and amortization.... 538 1.5 172 0.6 8 0.1
------- ----- ------- ----- ------- -----
Total operating expenses...... $18,616 52.5% $16,132 60.7% $ 8,635 61.8%
======= ===== ======= ===== ======= =====
</TABLE>
Historical Year Ended December 31, 1996 Compared to Pro Forma Year Ended
December 31, 1995
Provider network revenue increased by $4.7 million, from $26.3 million in 1995
to $31.0 million in 1996. This increase was attributable to the addition of new
Payor Clients, the growth in the claims volume from existing Payor Clients and
the expansion of the Company's provider network. At December 31, 1996 the
provider network consisted of approximately 2,600 Contracting Providers
compared to 700 Contracting Providers at December 31, 1995. Utilization
management services revenue of $4.2 million in 1996 represents the revenue of
NHS since October 1, 1996, the effective date of the acquisition. Other revenue
of $267,000 in 1996 and $255,000 in 1995 relates to the administration of the
CHCBP program.
Access fees to other provider networks as a percentage of provider network
revenue were 17.5% ($5.4 million) in 1996 compared to 24.1% ($6.4 million) in
1995. This decrease was attributable to the growth in the number of providers
contracting directly with the Company, Payor Clients accessing more direct
contracts and the negotiation of lower rates in agreements with other provider
networks.
Marketing commissions decreased approximately $900,000 from $2.2 million in
1995 to $1.3 million in 1996. Of this decrease, approximately $600,000 was
attributed to the termination of commission agreements relating to certain Payor
Clients of the Contributed Businesses. The remainder of the decrease was
attributable to the restructuring of a marketing commission agreement in 1996.
Other direct costs of services increased by approximately $3.0 million from
$5.6 million in 1995 to $8.6 million in 1996. Of this increase, approximately
$2.9 million represented expenses of NHS reflected in the results of operations
of the Company since October 1, 1996, the effective date of the acquisition. The
remainder of the increase was directly attributable to the increase in provider
network revenue.
General and administrative expenses increased approximately $1.0 million,
from $1.8 million in 1995 to approximately $2.8 million in 1996. Of this
increase, approximately $850,000 represented expenses of NHS reflected in the
results of operations of the Company since the effective date of the
acquisition.
15
<PAGE>
Pro Forma Year Ended December 31, 1995 Compared to Pro Forma Year Ended December
31, 1994
Provider network revenue increased by $12.4 million in 1995 from $13.9 million
in 1994 to $26.3 million in 1995. This was attributable to the addition of 12
new Payor Clients in 1995 and the growth in the claims volume for existing
Payor Clients. Other revenue relates to the administration of the CHCBP program,
which the Company commenced in the second half of 1994. Such revenue totaled
$81,000 in 1994 and $225,000 in 1995.
Access fees to other provider networks as a percentage of provider network
revenues were 24.1% ($6.4 million) in 1995 compared to 19.4% ($2.7 million) in
1994. This increase was attributable to the addition of significant Payor
Clients included in the Contributed Businesses with a concentration of insureds
in areas where AHP utilized other local networks, while expanding its network of
directly contracted providers.
Marketing commissions increased approximately $800,000 from $1.4 million in
1994 to $2.2 million in 1995. This increase was directly attributable to
marketing commissions incurred by the Contributed Business.
Other direct costs of services increased $2.2 million from $3.4 million in
1994 to $5.6 million in 1995. This increase was attributable to a combination of
the expansion of the operations of the Contributed Businesses to support growth
and the 1995 pro forma consolidated results of operations including the
Company's operating expenses, in addition to the operating expenses of the
Contributed Businesses.
General and administrative expenses increased approximately $691,000. This
increase was attributable to a combination of the expansion of the operations of
the Contributed Businesses to support growth and the 1995 pro forma consolidated
results of operations including the Company's general and administrative
expenses, in addition to the general and administrative expenses of the
Contributed Businesses.
LIQUIDITY AND CAPITAL RESOURCES
During 1995 and the first six months of 1996, the Company financed its
operations principally through equity contributions. In July 1996, the Company
completed the sale to the public of 2,760,000 shares of the Company's common
stock and received proceeds (net of underwriters' commissions and expenses) of
approximately $26.9 million. At December 31, 1996 the Company had working
capital of approximately $28.1 million. In March 1997, the Company entered into
two lines of credit arrangements for loan commitments totaling $15 million. In
addition, the Company has also received a standby commitment for an additional
$10 million.
The Company's primary capital resources commitment is to fund payments due
upon exercise of Prepayment Options granted to Contracting Providers. Depending
on increases in claims volume and in the number of Contracting Providers and
Payor Clients, the Company estimates that $15 million to $20 million could be
required to fund Prepayment Options in 1997.
The Company believes that its existing liquidity sources, anticipated funds
from operations, and credit arrangements will satisfy its cash requirements for
the next 36 months. However, in the event that the payment of Prepayment Options
exceeds the Company's currently anticipated estimates and/or other available
sources of liquidity to fund such payments are not as great as anticipated, the
Company could seek to borrow additional funds or obtain additional infusions of
equity to fund the balance of such payments.
IMPACT OF INFLATION
Since the Company's revenues are based on medical costs, the impact of
inflation on operating costs and expenses should be offset by the impact of
inflation of medical costs.
16
<PAGE>
CERTAIN FACTORS THAT MAY AFFECT FUTURE OPERATING RESULTS OR STOCK PRICES
The Company's business is dependent on a variety of factors, including its
ability to enter into contracts with payors and providers on terms attractive
to all parties and the absence of substantial changes in the health care
industry that would diminish the need for the services offered by the Company.
A significant portion of the Company's revenue is derived from a small number
of Payor Clients and state governments. The duration of the Company's contracts
with its Payor Clients and state governments are generally for a one to two-year
period, with automatic renewals on the anniversary date. However, certain
contracts may be terminated by either party at any time generally upon 90 days'
notice and at the convenience of the state governments. Such contracts are also
subject to fee negotiations and revisions on an annual basis. There can be no
assurance that any of the Company's contracts with Payor Clients will not be
terminated early or will be renewed, and, if renewed, will contain favorable
terms. The loss of a contract with a major Payor Client and the inability to
replace any such client with significant new clients could have a material
adverse effect on the Company's business, financial condition or results of
operations. During October 1996, Wellpoint Health Networks, Inc. announced the
acquisition of the health insurance business of one of the Company's clients,
John Hancock Mutual Life Insurance Company. The Company has not been advised of
and does not anticipate any changes, at least in the short term, in its
contract.
The Company's standard contract with a Contracting Provider includes a one-
year term, renewable automatically for successive one-year terms, unless the
Contracting Provider gives written notice of termination, typically at least 90
days prior to the renewal date. These contracts are also subject to negotiation
and revisions on an annual basis with respect to the level and amount of price
concessions for medical services. The termination of a significant number of
contracts with Contracting Providers having a high volume of claims with the
Company's Payor Clients, the inability to replace such contracts with contracts
with similar Contracting Providers and/or the renegotiation of contracts
resulting in reduced price concessions could have a material adverse effect on
the Company. A number of health care providers and/or hospital systems are
merging with or acquiring other hospitals or hospital systems to create large
integrated delivery systems. The formation of these delivery systems may impact
the future ability of the Company to contract directly with the individual
hospital facilities or obtain price concessions at the same level currently
obtained.
Under the Company's agreement with AHP (see "Business -- Agreement with AHP")
the Transfer Clients have continued to access other provider networks with which
AHP currently has contractual relationships. The Transfer Clients may not have
continuing access to certain providers in these other provider networks and
access to such providers will be curtailed as early as April 1, 1997. The
Company is focusing its contracting efforts on replacing these providers either
through direct contracts or by contracting with other provider networks. As of
February 28, 1997, the Company entered into a contract with one of these
provider networks and is in discussions with other networks.
Certain interest groups within the health care industry have expressed concern
with certain activities of entities that have been referred to as "Silent PPOs."
The Company understands that some provider-sponsored professional or trade
associations may be considering a legal challenge against one or more such
organizations, and that regulatory agencies in certain States may be
investigating the activities of such organizations. Although it is unclear what
legal theories would support such a challenge or warrant such an investigation,
there can be no assurance that the Company would not be a target of such
challenge or investigation.
The potential impact of all of the above factors is difficult for the Company
to forecast, and these or other factors, such as sales of substantial amounts of
the Company's Common Stock in the public market, and changes in earnings
estimates by securities analysts, can materially affect the Company's operating
results and stock price. Further, in recent years, the stock market has
experienced extreme price and volume fluctuations that have particularly
affected the market prices of securities of many companies, for reasons
frequently unrelated to the performance of the specific companies. These
fluctuations, as well as general economic, political and market conditions, may
materially adversely affect the market price of the Company's Common Stock.
There can be no assurances that the trading price of the Company's Common Stock
will remain at or near its current level.
17
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Company's Audited Consolidated Financial Statements are contained in a
separate section of this Annual Report on Form 10-K on pages F-1 through F-14,
attached hereto. Information with respect to selected quarterly financial data
has been omitted because it is not applicable.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None.
18
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information required under this item is contained in the section entitled
"Executive Officers and Directors" in the Company's 1997 Proxy Statement and is
incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
Information required under this item is contained in the sections entitled
"Directors Compensation" and "Executive Compensation" in the Company's 1997
Proxy Statement and is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information required under this item is contained in the section entitled
"Stock Ownership" in the Company's 1997 Proxy Statement and is incorporated
herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information required under this item is contained in the section entitled
"Certain Transactions" on the Company's 1997 Proxy Statement and is incorporated
herein by reference.
19
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) Documents filed as part of this report
(1) Financial Statements
Report of Independent Accountants
Consolidated Balance Sheets as of December 31, 1996 and 1995
Consolidated Statements of Operations for the Year Ended December 31,
1996 and the Period From January 3, 1995 (Date of Incorporation)
to December 31, 1995
Consolidated Statements of Stockholders' Equity for the Period from
January 3, 1995 (Date of Incorporation) to December 31, 1995 and
for the Year Ended December 31, 1996
Consolidated Statements of Cash Flows for the Year Ended December 31,
1996 and the Period From January 3, 1995 (Date of Incorporation)
to December 31, 1995
Notes to Consolidated Financial Statements
(2) All schedules have been omitted because they are not applicable, not
required or the information is included elsewhere in the Company's
consolidated financial statements or notes thereto.
(b) Reports on Form 8-K
The Company filed a Current Report on Form 8-K dated October 24, 1996
reporting Items 2 and 7 in connection with the Company's acquisition of National
Health Services, Inc. The following financial statements and pro forma
financial information were filed:
National Health Services, Inc. Consolidated Balance Sheets as of
December 31, 1995 and 1994
National Health Services, Inc. Consolidated Statements of Operations for
the Years Ended December 31, 1995, 1994, and 1993
National Health Services, Inc. Consolidated Statements of Stockholder's
Equity for the Years Ended December 31, 1995, 1994 and 1993
National Health Services, Inc. Consolidated Statements of Cash Flows for
the Years Ended December 31, 1995, 1994 and 1993
Notes to Financial Statements
Report of Independent Auditors
Unaudited September 30, 1996 Consolidated Balance Sheet
Unaudited Consolidated Statements of Operations and Cash Flows for the
Nine Months Ended September 30, 1996 and 1995
Notes to the September 30, 1996 Consolidated Financial Statements
Unaudited Pro Forma Consolidated Statements of Operations for the Nine
Months Ended September 30, 1996 and the Year Ended December 31, 1995
Unaudited Pro Forma Consolidated Balance Sheet as of September 30, 1996
Notes to Unaudited Pro Forma Consolidated Financial Statements
20
<PAGE>
(c) Exhibits
Exhibit No. Description
----------- -----------
2.1 Agreement with America's Health Plan, Inc.*
2.2 Plan and Agreement of Merger of IM&I, Inc. into PB Newco*
2.3 Plan and Agreement of Merger of PB Newco, Inc. into United
Payors & United Providers, Inc.*
3.1 Certificate of Incorporation of United Payors & United Providers,
Inc.*
3.2 Bylaws of United Payors & United Providers, Inc.*
4.1 Specimen Stock Certificate of United Payors & United Providers,
Inc.*
4.2 Shareholder Agreement*
10.1 Employment Agreement between United Payors & United Providers,
Inc. and Thomas L. Blair*
10.2 Employment Agreements between United Payors & United Providers,
Inc. and each of Spiro A. Karadimas, S. Joseph Bruno and Michael
A. Smith*
10.3 Form of Indemnification Agreement*
10.4 Stock Purchase Agreement between Preferred Health Choice and
United Payors & United Providers, Inc. dated October 22, 1996**
10.5 Warrants to Purchase 150,000 Shares of Common Stock of United
Payors & United Providers, Inc. Issued to Preferred Health
Choice, Inc. dated October 23, 1996***
10.6 Warrants to Purchase 168,000 Shares of Common Stock of United
Payors & United Providers, Inc. Issued to Preferred Health
Choice, Inc. dated October 27, 1996***
11.1 Statement Regarding Computation of Earnings Per Common Share
(filed herewith)
21.1 Subsidiaries of United Payors and United Providers, Inc. (filed
herewith)
27.1 Financial Data Schedule (filed herewith)
- -----------------
* Incorporated herein by reference into this document from the Exhibits to
the Form S-1 Registration Statement as amended, Registration No. 333-3814,
initially filed on April 19, 1996.
** Incorporated herein by reference into this document from the Exhibits to
the Form 10-Q for the quarter ended September 30, 1996.
*** Incorporated herein by reference into this document from the Exhibits A-1
and A-2 to the Stock Purchase Agreement filed as Exhibit 10.4 to the
Form 10-Q for the quarter ended September 30, 1996.
Pursuant to the requirements of Section 13 or 15(d) of the Securities 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: March 28, 1997 By: /s/ THOMAS L. BLAIR
------------------------------------
Thomas L. Blair
Chairman of the Board, President and
Chief Executive Officer
21
<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: March 28, 1997 By: /s/ THOMAS L. BLAIR
---------------------------------------------
Thomas L. Blair
Chairman of the Board, President and
Chief Executive Officer
Date: March 28, 1997 By: /s/ S. JOSEPH BRUNO
---------------------------------------------
S. Joseph Bruno
Chief Financial Officer
Date: March 28, 1997 By: /s/ EDUARDO V. FEITO
---------------------------------------------
Eduardo V. Feito
Chief Accounting Officer
Date: March 28, 1997 By: /s/ BETTE B. ANDERSON
---------------------------------------------
Bette B. Anderson
Director
Date: March 28, 1997 By: /s/ WILLIAM E. BROCK
---------------------------------------------
William E. Brock
Director
Date: March 28, 1997 By: /s/ DAVID J. DRURY
---------------------------------------------
David J. Drury
Director
Date: March 28, 1997 By: /s/ THOMAS J. GRAF
---------------------------------------------
Thomas J. Graf
Director
Date: March 28, 1997 By: /s/ FREDERICK H. GRAEFE
----------------------------------------------
Frederick H. Graefe
Director
Date: March 28, 1997 By: /s/ JULIA LAWLER
----------------------------------------------
Julia Lawler
Director
22
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
The Stockholders
United Payors & United Providers, Inc.
We have audited the accompanying consolidated balance sheets of United Payors
& United Providers, Inc. (the "Company"), as of December 31, 1996 and 1995, and
the related consolidated statements of operations, stockholders' equity and cash
flows for the year ended December 31, 1996 and the period from January 3, 1995
(date of incorporation) to December 31, 1995. 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 consolidated financial position of United Payors &
United Providers, Inc. as of December 31, 1996 and 1995, and the consolidated
results of their operations and their cash flows for the year ended December 31,
1996 and the period from January 3, 1995 (date of incorporation) to December 31,
1995 in conformity with generally accepted accounting principles.
COOPERS & LYBRAND L.L.P.
Rockville, Maryland
March 7, 1997
F-1
<PAGE>
UNITED PAYORS & UNITED PROVIDERS, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
ASSETS December 31,
1996 1995
------------ ------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 16,034,184 $ 8,701,135
Short-term investments 10,448,564 -
Accounts receivable 8,108,015 1,254,844
Deferred income taxes 342,300 654,000
Other current assets 227,922 153,899
------------ ------------
Total current assets 35,160,985 10,763,878
Fixed assets, net 2,782,601 1,199,785
Due from contracting providers, net 4,300,730 125,000
Investments 1,079,354 300,000
Intangible and other assets, net 9,924,253 374,824
------------ ------------
Total assets $ 53,247,923 $ 12,763,487
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 5,758,025 $ 3,378,502
Income and other taxes payable 958,991 191,300
Note to stockholder - 3,700,000
Notes payable and capital lease, current portion 330,912 110,000
------------ ------------
Total current liabilities 7,047,928 7,379,802
Non-current accrued expense 700,000 -
Deferred income taxes - 37,000
Notes payable and capital lease, less current portion 324,281 50,227
------------ ------------
Total liabilities 8,072,209 7,467,029
Commitments and contingencies
Stockholders' equity:
Convertible preferred stock, $0.01 par value, 5,000,000 shares - -
authorized, none issued and outstanding at December 31,
1996, 1 share issued and outstanding convertible into
4,400,000 shares of common stock (liquidation preference
$5,000,000) at December 31, 1995
Common stock, $0.01 par value, 35,000,000 shares authorized, 115,736 44,000
11,551,136 and 4,400,000 shares issued and outstanding
at December 31, 1996 and 1995, respectively
Additional paid-in capital 35,154,820 5,963,099
Retained earnings (deficit) 9,935,158 (710,641)
Less treasury stock, 22,500 shares, at cost (30,000) -
------------ ------------
Total stockholders' equity 45,175,714 5,296,458
------------ ------------
Total liabilities and stockholders' equity $ 53,247,923 $ 12,763,487
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-2
<PAGE>
UNITED PAYORS & UNITED PROVIDERS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1996 AND
THE PERIOD FROM JANUARY 3, 1995 (DATE OF INCORPORATION)
TO DECEMBER 31, 1995
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
Provider network revenue $30,992,191 $ 877,423
Utilization management services 4,190,476 -
Other revenue 266,662 -
----------- -----------
Total revenue 35,449,329 877,423
----------- -----------
Operating expenses:
Direct contract expenses 15,294,892 2,238,173
General and administrative 2,783,212 334,376
Depreciation and amortization 538,593 113,514
----------- -----------
Total operating expenses 18,616,697 2,686,063
----------- -----------
Other income (expense):
Realized gain on sale of marketable securities 149,383 452,327
Interest income, net of interest expense 693,003 163,127
Other income, net 128,781 83,545
----------- -----------
Total other income, net 971,167 698,999
----------- -----------
Income (loss) before income taxes 17,803,799 (1,109,641)
Income tax (provision) benefit (7,158,000) 399,000
----------- -----------
Net income (loss) $10,645,799 $ (710,641)
=========== ===========
Net income (loss) per share $ 1.05 $ (0.08)
=========== ===========
Weighted average shares outstanding
10,125,699 8,800,000
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE>
UNITED PAYORS & UNITED PROVIDERS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE PERIOD FROM JANUARY 3, 1995 (DATE OF INCORPORATION)
TO DECEMBER 31, 1995 AND FOR THE YEAR ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
Convertible
Preferred Stock Common Stock Additional Retained
----------------- --------------------- Paid-in Earnings Treasury
Shares Amount Shares Amount Capital (Deficit) Stock Total
-------- -------- --------- --------- ----------- ------------ --------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Issuance of stock at
incorporation 1 $ - 4,400,000 $ 44,000 $ 5,956,000 $ - $ - $ 6,000,000
Transfer of stock from
existing stockholder
to employees - - - - 126,109 - - 126,109
Net deficit at
December 31, 1995 of
contributed companies - - - - (119,010) - - (119,010)
Net loss - - - - - (710,641) - (710,641)
-------- -------- --------- --------- ----------- ------------ --------- -----------
Balance at
December 31, 1995 1 - 4,400,000 44,000 5,963,099 (710,641) - 5,296,458
Conversion of preferred
stock (1) - 4,400,000 44,000 (44,000) - - -
Shares issued in public
offering - - 2,760,000 27,600 26,847,857 - - 26,875,457
Shares issued in
connection with - - 13,636 136 149,864 - - 150,000
investment
Warrants issued in
connection with - - - - 1,088,000 - - 1,088,000
acquisition
Stock options issued in
connection with non-
compete and restruc-
turing of marketing - - - - 1,150,000 - - 1,150,000
agreement
Acquisition of treasury - - (22,500) - - - (30,000) (30,000)
stock
Net income - - - - - 10,645,799 - 10,645,799
--------- --------- ---------- ----------- ---------- ----------- --------- -----------
Balance at
December 31, 1996 - $ - 11,551,136 $ 115,736 $35,154,820 $ 9,935,158 $ (30,000) $45,175,714
========= ========= ========== ========= =========== =========== ========= ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
UNITED PAYORS & UNITED PROVIDERS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1996 AND THE PERIOD FROM
JANUARY 3, 1995 (DATE OF INCORPORATION) TO DECEMBER 31, 1995
<TABLE>
<CAPTION>
1996 1995
----------- ----------
<S> <C> <C>
Operating activities
NET INCOME (LOSS) $10,645,799 $ (710,641)
ADJUSTMENT TO RECONCILE NET INCOME (LOSS) TO
NET CASH PROVIDED BY (USED IN) OPERATIONS
Realized gain on sale of marketable securities (149,383) (452,327)
Depreciation and amortization 538,593 113,514
Noncash compensation expense - 126,109
Deferred income taxes 274,700 (399,000)
Changes in reserves and allowances 115,000 -
Changes in assets and liabilities, net of effects
from purchase of NHS in 1996:
Accounts receivable (4,998,837) (503,970)
Accounts payable and accrued expenses (1,324,495) 1,240,344
Current and other assets (1,307) (545,768)
Due from contracting providers (4,290,730) (125,000)
Income taxes payable 730,691 -
----------- ----------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 1,540,031 (1,256,739)
----------- ----------
INVESTING ACTIVITIES
Purchases of fixed assets (865,827) (1,082,420)
Purchases of marketable securities (5,958,812) (3,994,993)
Cash acquired from Contributed Businesses - 1,187,967
Proceeds from sale of marketable securities 6,108,195 4,447,320
Purchases of short-term investments (10,448,564) -
Payment for purchase of NHS, net of cash acquired (5,304,221) -
Payments for investments (629,354) (300,000)
----------- ----------
NET CASH (USED IN) PROVIDED BY INVESTING ACTIVITIES (17,098,583) 257,874
----------- ----------
FINANCING ACTIVITIES
Proceeds from initial public offering 26,875,457 -
Purchase of treasury stock (30,000) -
Issuance of capital stock - 6,000,000
Loan from stockholder - 4,000,000
Repayment of loan from stockholder (3,700,000) (300,000)
Repayment of other debt (253,856) -
----------- ----------
NET CASH PROVIDED BY FINANCING ACTIVITIES 22,891,601 9,700,000
----------- ----------
INCREASE IN CASH AND CASH EQUIVALENTS 7,333,049 8,701,135
CASH AND CASH EQUIVALENTS
Beginning of the period 8,701,135 -
----------- ----------
End of the period $16,034,184 $8,701,135
=========== ==========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Interest paid during the year $ 85,497 $ 14,009
Taxes paid during the year $ 6,509,000 $ -
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE>
UNITED PAYORS & UNITED PROVIDERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BUSINESS, ORGANIZATION AND BASIS OF PRESENTATION
United Payors & United Providers, Inc. ("UP&UP"), a Delaware corporation was
originally incorporated in the State of Iowa on January 3, 1995 as PB Newco,
Inc. The stockholders of PB Newco, Inc. consisted primarily of two groups,
Principal Mutual Life Insurance Company ("Principal") and management. Principal
held 100% of the outstanding convertible preferred stock and management held
approximately 77% of the outstanding common stock. In accordance with the
preferred stock provisions, the preferred stock converted into 4,400,000 shares
of common stock immediately preceding the initial public offering.
Effective December 31, 1995, the stockholder of Initial Managers and
Investors, Inc. ("IM&I") and the stockholders of IM&I-NEWCO, Inc., all of whom
were stockholders of UP&UP, contributed 100% of the issued and outstanding
shares of each of those entities to UP&UP. IM&I, IM&I-NEWCO, Inc. and UP&UP
were affiliated entities. Effective December 31, 1995, UP&UP entered into an
agreement with America's Health Plan, Inc. ("AHP"), an indirect, wholly-owned
subsidiary of Principal, whereby AHP contributed a certain group of contracts
constituting "The Transferred Client Group" of AHP to UP&UP (UP&UP, IM&I, and
IM&I-NEWCO, Inc. and The Transferred Client Group are hereafter referred to as
the "Company"). Because the contributions were nonmonetary in nature and made by
the existing stockholders of UP&UP, the assets and liabilities contributed have
been reflected at the transferors' historical cost in the accompanying
consolidated balance sheet as of December 31, 1995. Such assets and liabilities
approximated $2,400,000 and $2,500,000, respectively. Since the contributions
were effective December 31, 1995, the accompanying consolidated statement of
operations for the period ended December 31, 1995 does not include the 1995
results of operations of IM&I, IM&I-NEWCO, Inc. or The Transferred Client Group.
In February 1996, the Company formed a majority (90%) owned subsidiary,
America's Health Card Services, Inc. ("AHCS"). The minority (10%) stockholder is
also a stockholder of the Company. AHCS coordinates and establishes a
relationship with credit card issuing banks to issue a combined health insurance
identification card and credit card.
Effective April 9, 1996, IM&I was merged into PB Newco, Inc. with PB Newco,
Inc. being the surviving corporation. Effective June 7, 1996 PB Newco, Inc. was
merged into UP&UP with UP&UP being the surviving corporation. UP&UP serves as
an intermediary between health care payors (such as insurance companies) and
health care providers (such as hospitals) by entering into contractual
arrangements designed generally to produce cost savings and other benefits for
payors and increased liquidity and improved efficiency in claims submissions for
providers. UP&UP derives its revenue primarily from a portion of the price
concessions offered by the providers under such contractual arrangements.
In connection with the June 7, 1996 merger, the Company effected a 10:1
exchange of common stock and an increase in authorized shares of capital stock
to 40,000,000 shares, of which 35,000,000 shares are common stock and 5,000,000
shares are preferred stock. These events have been reflected in the financial
statements for all periods presented.
Effective October 1, 1996, the Company acquired National Health Services, Inc.
("NHS"), a national health care utilization management services company which
provides precertification of in-patient and out-patient medical care, case
management, and management of provider networks to underwriters, self-insured
businesses and provider organizations.
2. INITIAL PUBLIC OFFERING
The Company filed a Registration Statement on Form S-1 with the Securities and
Exchange Commission which offered to the public 2,400,000 shares (2,760,000
shares, including the overallotment) of the Company's common stock. This
registration statement was declared effective on June 28, 1996.
F-6
<PAGE>
UNITED PAYORS & UNITED PROVIDERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The closings of the sale of stock for an aggregate of 2,760,000 shares were
effected on July 8, 1996 and July 15, 1996 for which the Company received
proceeds (net of underwriters' commissions and expenses) of $23.4 million and
$3.5 million, respectively.
3. 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 the Company and of
IM&I-NEWCO, AHCS, and NHS and its subsidiaries.
Revenue recognition
The Company recognizes provider network revenue, under the accrual method,
based on a contracted percentage of the amount of cost savings realized by payor
clients which access the Company's contracting provider network. Revenue is
recorded in the period in which claims are repriced.
For medical utilization management services revenue is recorded based on the
contractual arrangements. Contracts may reflect a capitated rate, fee for
service or hourly rate. Precertification revenue is generally based on monthly
capitation calculations and is earned during the month for which the services
are provided. Case management revenue is generally based on fee for service or
hourly rates over the term of the contractual agreements.
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 disclosures of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenue and expenses during the period. Actual results
could differ from those estimates.
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.
Reclassifications
Certain amounts in the 1995 financial statements have been reclassified to
conform to the 1996 presentation.
Cash equivalents
The Company considers all highly liquid instruments with original maturities
of three months or less to be cash equivalents. The Company maintains its cash
in bank deposit accounts which, at times, may exceed federally insured amounts.
The Company has not experienced any losses in such accounts. The Company
believes it is not exposed to any significant credit risk on cash and cash
equivalents. At December 31, 1996 and December 31, 1995, the Company had
approximately $6,651,000 and $8,524,000, respectively, of cash and cash
equivalents on deposit with commercial banks in excess of insured amounts.
F-7
<PAGE>
UNITED PAYORS & UNITED PROVIDERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Marketable securities/short-term investments
During 1995 and 1996, the Company purchased certain marketable securities.
Management considers all marketable securities to be available for sale as
defined by Statement of Financial Accounting Standards 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
stockholders' equity. From time to time, the Company engages in the trading of
marketable securities. All marketable securities were sold prior to December 31,
1995 and 1996. Cost was determined using the specific identification method,
which resulted in realized gains of $402,197 and realized losses of $252,814 in
1996, and realized gains of $564,988 and realized losses of $112,661 in 1995. At
December 31, 1996 and 1995 all available funds were invested in short-term
investments. Short-term investments consist of $8,474,574 of securities backed
by the United States Government, $963,990 of other debt securities, and
certificates of deposit in the amount of $1,010,000. These investments are
reflected at fair value which approximates the respective amortized cost. There
were no unrealized gains or losses on these investments in 1996.
Due from contracting providers
The Company enters into contracts directly with providers of medical services
("contracting providers"). The Company's contracts with contracting providers
prescribe specific fee concessions on medical services rendered by the
contracting providers to patients covered by medical plans of payor clients. In
partial consideration for the price concessions furnished by them, the
contracting providers are offered the option by the Company of receiving a
prepayment of a portion of the estimated annual claims volume that such
contracting providers have with payor clients. As of December 31, 1996 and
December 31, 1995, the amount of prepayments was $4,415,730 and $125,000,
respectively. Upon termination of a provider contract by either party, the
amount of prepayments through the date of termination becomes fully due and
payable to the Company.
The Company considers deposits with contracting providers recoverable and only
a nominal reserve of $115,000 has been established for these deposits. As the
amount of the deposits increase, the Company will evaluate the credit worthiness
of contracting providers on a periodic basis and consider the need to establish
a larger reserve.
Fixed assets
Fixed assets are stated at cost. Depreciation is computed using the straight-
line method over the estimated useful lives of the various assets which range
from five to seven years. Leasehold improvements are amortized using the
straight-line method over the shorter of the estimated useful lives of the
assets or the lease term.
Intangible assets
Intangible assets represent the cost in excess of net assets of businesses
acquired (goodwill) and the value of options to purchase an aggregate of 182,000
shares of the Company's common stock issued in connection with the Company
obtaining a covenant not to compete upon the restructuring of a marketing
agreement. These intangibles are amortized on a straight-line basis over 3 to 15
years. Accumulated amortization at December 31, 1996 amounted to $120,441. The
Company annually evaluates the recoverability of intangible assets utilizing
qualitative factors. At such time as an impairment in value is identified, the
impairment will be quantitatively measured using a discounted cash flow
methodology and charged to expense.
Income taxes
Income taxes have been recorded using the liability method in accordance with
Statement of Financial Accounting Standards No. 109, Accounting for Income
Taxes.
F-8
<PAGE>
UNITED PAYORS & UNITED PROVIDERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The income tax benefit or 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 tax assets and
liabilities are measured using the enacted tax rates and laws that will be in
effect when the differences are expected to reverse.
Net income (loss) per common share
Net income (loss) per share is based on the weighted average number of common
stock and common stock equivalent shares outstanding during the year.
Concentration of payor clients
A significant portion of the Company's revenue is derived from a small number
of payor clients. The inability to replace any such clients with significant new
payor clients would have a material adverse effect on the Company's business.
The Company's revenue was concentrated (as a percentage of total revenue) in the
following payor clients at December 31, 1996 and December 31, 1995.
<TABLE>
<CAPTION>
1996 1995
----- -----
<S> <C> <C>
Payor client A.. -- 26%
Payor client B.. -- 12%
Payor client C.. 22% --
Payor client D.. 13% --
Payor client E.. 12% --
</TABLE>
No other payor client accounted for 10% or more of the Company's revenue.
Revenue from Payor Clients A and B was less than 10% for the year ended December
31, 1996.
At December 31, 1996, three payor clients represented 20%, 17% and 11%,
respectively, of the Company's accounts receivable.
4. BUSINESS COMBINATION
Effective October 1, 1996, the Company acquired National Health Services, Inc.
("NHS") for a purchase price of approximately $7.2 million, consisting of $5.9
million in cash, warrants to purchase an aggregate of 318,000 shares of the
Company's common stock valued at $1.1 million and the assumption of
approximately $200,000 in liabilities in excess of the fair value of the assets
acquired. NHS is a national health care management services company. The
acquisition has been accounted for as a purchase and, accordingly, the results
of operations of NHS have been included in the accompanying consolidated
statements of operations since the effective date of the acquisition. The
acquisition resulted in goodwill of $7.2 million which is being amortized over
15 years. The unamortized portion of the goodwill at December 31, 1996, is
included in intangible assets in the accompanying consolidated balance sheet.
The following unaudited pro forma consolidated results of operations are
presented as though NHS had been acquired at the beginning of 1995, after giving
effect to purchase accounting adjustments relating to the amortization of
goodwill and income taxes.
<TABLE>
<CAPTION>
1996 1995
----------- ------------
(unaudited)
<S> <C> <C>
Revenue...................... $47,198,329 $16,642,423
Net income (loss)............ $10,746,510 $ (81,241)
Net income (loss) per share.. $ 1.06 $ (0.01)
</TABLE>
F-9
<PAGE>
UNITED PAYORS & UNITED PROVIDERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The pro forma results of operations are not necessarily indicative of the
results that would have occurred had the NHS acquisition been consummated as of
January 1, 1995, nor are they necessarily indicative of future operating
results.
<TABLE>
<CAPTION>
5. FIXED ASSETS
Fixed assets consist of the following:
December 31,
------------------------- Depreciable
1996 1995 Lives
---------- ---------- -----------
<S> <C> <C> <C>
Computer equipment......................... $1,373,632 $ 214,806 5 years
Furniture, fixtures, and office equipment.. 1,149,005 522,933 5-7 years
Leasehold improvements..................... 714,835 504,920 5 years
Vehicles................................... 95,609 95,609 5 years
---------- ----------
Total fixed assets.................... 3,333,081 1,338,268
Accumulated depreciation and amortization.. (550,480) (138,483)
---------- ---------
Fixed assets, net..................... $2,782,601 $1,199,785
========== ==========
</TABLE>
6. INVESTMENTS
The Company currently holds a 6% interest in R.J. Associates, Inc. which is
recorded at cost (which approximates market value) of $265,000 at December 31,
1996. R.J. Associates, Inc. has a 50% ownership interest in Health Payors
Organization, Ltd. ("HPO"), which maintains a network of medical care providers.
In May 1995 an entity affiliated with R.J. Associates, Inc. assisted the Company
in its marketing effort for which it was paid approximately $132,000. In June
1995, the Company entered into an agreement with HPO to utilize its provider
network. In 1996 and 1995, the Company incurred fees related to this agreement
of approximately $284,000 and $70,000, respectively.
In May 1996, the Company and EDIComm, Inc. ("EDIComm") entered into an
agreement in which EDIComm granted the Company a one-year option to acquire
EDIComm on terms to be negotiated and accepted by both parties. The Company paid
EDIComm $200,000 in cash and Company stock for this option. In addition, the
Company has advanced EDIComm $150,000 which is collateralized by 13,636 shares
of the Company's common stock.
During 1996, the Company invested in two health care related entities. The
Company: (a) purchased 23,752 shares of common stock of Wheeler Peak Capital
Corporation for approximately $214,000, and (b) through a private placement,
invested in 500 shares of the common stock of Cimarron Managed Care Corporation
of New Mexico for $250,000. Both investments are recorded at cost, which
approximates market value.
7. RELATED PARTY TRANSACTIONS
The note payable to a stockholder at December 31, 1995 consisted of a demand
note in the amount of $3,700,000 payable to the then principal owner of the
common stock with interest of 5%. The Company repaid this note on March 22,
1996.
During 1995, the Company utilized, for corporate business purposes, the
services of a corporate jet owned by a major stockholder of the Company. The
amount paid by the Company to this corporation in 1996 and 1995 was
approximately $153,000 and $70,000, respectively.
F-10
<PAGE>
UNITED PAYORS & UNITED PROVIDERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
During 1996, the Company accessed AHP's provider network for certain claims of
The Transferred Client Group without any payment to AHP, except to the extent
necessary to cover costs of AHP under certain sharing arrangements it has with
other provider networks. Amounts due AHP to cover these costs amounted to
$175,368 at December 31, 1996 and are included in accounts payable and accrued
expenses.
During 1996, Principal became a payor client of the Company. Approximately
$80,000 of the Company's provider network revenue was derived from its contract
with Principal. At December 31, 1996, approximately $33,000 is due from
Principal and is included in accounts receivable.
During 1996, the Company purchased medical and life insurance from Principal.
Amounts paid to Principal in 1996 approximated $180,000. Commencing in 1997,
Principal will administer the Company's 401(k) plan.
In December 1996, two stockholders who hold shares in the Company's stock,
aggregating approximately 59%, formed and funded a new entity to pursue the
development and marketing of new products and services for the health care
industry.
8. INCOME TAXES
The provision (benefit) for income taxes consists of the following:
<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
Current provision............. $6,883,300 $ --
Deferred provision (benefit).. 274,700 (399,000)
---------- ---------
Total provision (benefit).. $7,158,000 $(399,000)
========== =========
</TABLE>
The provision for income taxes varies from the amount of income tax determined
by applying the applicable U.S. statutory tax rate to pre-tax income as follows:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Statutory U.S. tax rate.............. 34% (34)%
State taxes, net of Federal benefit.. 6% (2)%
---- ----
Effective tax rate................ 40% (36)%
==== ====
</TABLE>
A summary of the tax effect of the significant components of deferred income
taxes follows:
<TABLE>
<CAPTION>
1996 1995
--------- ---------
<S> <C> <C>
Property and equipment........................ $ (66,700) $ 37,000
Allowance for doubtful accounts............... (37,500) --
Accrual versus cash method of accounting...... (116,500) (218,000)
Other accrued expenses........................ (121,600) --
Net operating loss carry forwards............. -- (436,000)
--------- ---------
Net deferred tax asset..................... $(342,300) $(617,000)
========= =========
</TABLE>
The tax net operating loss carry forward at December 31, 1995, was realized in
1996.
F-11
<PAGE>
UNITED PAYORS & UNITED PROVIDERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9. COMMON STOCK
Stock option plan
In October, 1996, the Company adopted the United Payors & United Providers,
Inc. Stock Option Plan ("SOP"). Stock options may be granted under the plan as
either incentive stock options or non-qualified stock options. The maximum
number of shares of the Company's common stock reserved for purchase pursuant to
the exercise of options granted under the SOP is 800,000 shares. All Company
employees, outside directors and consultants are eligible to receive option
awards. A Committee of the Board of Directors determines award amounts and
vesting periods (generally 5 to 12 years from the date of grant).
Information regarding options granted under the SOP is as follows:
<TABLE>
<CAPTION>
Shares
Total Option Exercisable
Shares Price at Year End
------------- ------------ -----------
<S> <C> <C> <C>
Options authorized......... 800,000
=======
Options granted............ 57,500 $11.00-13.00 24,165
Options exercised.......... --
Options canceled........... --
-------
Options outstanding at
December 31, 1996 57,500
=======
</TABLE>
During 1995, the Financial Accounting Standards Board issued Financial
Accounting Standard No. 123 (FAS 123), Accounting for Stock-Based Compensation.
This pronouncement requires that the Company calculate the value of stock
options at the date of grant using an option pricing model. The Company has
elected the "pro forma, disclosure only" option permitted under FAS 123, instead
of recording a charge to operations. For 1996, pro forma information is not
presented as the impact of applying FAS 123 for pro forma disclosure is
immaterial. The weighted average exercise price of options granted during 1996
is $11.26.
Other stock options and warrants
In connection with certain business transactions, the Company has granted
options and warrants as follows: (a) 182,000 shares of its common stock (at
$12.50 per share) pursuant to a non-compete agreement related to a marketing
commission restructuring; (b) 50,000 shares of its common stock (at $17.00 per
share) pursuant to a contractual arrangement with a client; and (c) 318,000
shares of its common stock (at $16.00 per share) in the form of stock warrants
pursuant to the acquisition of NHS. These options and warrants expire from 3 to
10 years from the date of the respective agreements. The weighted average
exercise price of the options or warrants granted during 1996 is $14.93. At
December 31, 1996, 382,000 options and warrants were exercisable.
The options related to the above transactions have been valued using the
modified American Black Scholes economic model. The resultant valuation is
reflected in the respective financial statement accounts.
Employee stock purchase plan
In October 1996, the Company established an Employee Stock Purchase Plan
("ESPP") with a maximum of 350,000 shares of the Company's common stock. This
plan will become effective in 1997. The Company will acquire shares of the
Company's common stock in the open market. Shares that will be issued under the
ESPP will generally be priced at 85% of the fair market value of the Company's
common stock.
F-12
<PAGE>
UNITED PAYORS & UNITED PROVIDERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. 401(K) SAVINGS PLAN
In October 1996, the Company authorized the establishment of an employee
401(k) Savings Plan to be effective February 1997. The 401(k) Savings Plan is
available to all of its employees subject to certain service requirements. For
1997, the Company will match the first $1,000 of the employee's contribution and
50% thereafter. The Company's contribution vests after the employee has
participated in the 401(k) Savings Plan for five years.
11. LEASE COMMITMENTS
The Company leases office space under non-cancelable operating leases. The
agreements provide for annual escalations and for the payment by the Company of
a proportionate share of the increase in the costs of operating the building.
For financial reporting purposes, the Company recognizes rent expense on a
straight-line basis over the term of the lease. The Company has also entered
into various operating lease agreements for office equipment. Rent expense under
the Company's non-cancelable operating leases aggregated $469,637 in 1996.
The Company entered into a capital lease for computer equipment effective
March 31, 1996 for approximately $151,000. The capitalized lease obligation is
payable through June 2000 and bears interest at approximately 14%. At December
31, 1996, included in fixed assets and accumulated depreciation are $150,694 and
$26,593, respectively, relating to the leased assets.
Future minimum lease payments under non-cancelable leases are as follows:
<TABLE>
<CAPTION>
Operating Capital
Leases Leases
---------- --------
<S> <C> <C>
1997............................... $ 900,472 $ 47,364
1998............................... 910,355 47,364
1999............................... 890,201 47,364
2000............................... 807,877 23,682
2001............................... 375,101 --
---------- --------
Total........................... $3,884,006 165,774
==========
Less amount representing interest.. 35,581
--------
Present value of minimum lease payments $130,193
========
</TABLE>
12. BANK LINE OF CREDIT
During 1996 and 1995, the Company had a line of credit with a bank, with
provision for advances up to a maximum of $200,000. The outstanding balance of
$95,000 at December 31, 1995 was paid off in 1996. The line of credit expired
December 31, 1996.
13. NOTE PAYABLE
The Company has a loan with a bank with an outstanding balance of $525,000 at
December 31, 1996. The loan is uncollateralized, bears interest at prime, and is
payable in quarterly installments of $75,000, with the final payment due in July
1998.
F-13
<PAGE>
UNITED PAYORS & UNITED PROVIDERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
14. COMMITMENTS AND CONTINGENT LIABILITIES
The Company offers its contracting providers a prepayment option based on the
percentage of claims volume for the preceding year. The prepayment option may be
requested at the execution of a contract between the Company and contracting
provider, or at the anniversary date. The Company estimates that the amount of
prepayment options that may be requested in 1997 should not exceed $20,000,000.
During 1996, the Company entered into an agreement with a financial
institution to purchase approximately 106,000 shares of the financial
institution's common stock for $500,000.
During 1996, the Company restructured the IM&I 1994 marketing commission
agreement with Direct Resource Managers ("DRM"). The restructured agreement
contains provisions for: (a) payment to DRM of $50,000 per month for 26 months
commencing January, 1997 and (b) options to purchase 182,000 shares of the
Company's common stock at $12.50 per share (or alternatively receive cash
consideration in lieu of the options under certain conditions) in exchange for
consulting and marketing assistance and a covenant not to compete for three
years. Amounts paid to DRM in 1996 by the Company and in 1995 by IM&I
approximated $1,425,000 and $1,412,000, respectively. Amounts related to this
commitment are reflected in intangible assets and in accrued expenses and
stockholders' equity, respectively, and are being amortized over a period not to
exceed three years.
On April 26, 1996,a stockholders' civil complaint was filed against the
Company in the United States District Court for the Northern District of
Illinois. The Plaintiff seeks injunctive and other relief, including possible
damages, based generally on allegations that representatives of the Company, in
at least four instances, made various misrepresentations to prospective
Contracting Providers, including to the effect that the Company's provider
network was affiliated with the Plaintiff's provider network or that the
Plaintiff had agreed to utilize the Company's provider network. The Company
denies the allegations in the complaint and believes the complaint is without
basis. After consultation with counsel and review of available facts, management
believes that damages, if any, arising from litigation will not be material to
the consolidated financial statements of the Company.
The Company is also a party to other legal actions arising in the ordinary
course of business. Management believes that damages arising from these actions,
if any, will not be material to the consolidated financial statements of the
Company.
15. SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES
In connection with the acquisition of NHS, the Company assumed liabilities in
the amount of $3,987,192 and issued warrants to purchase common stock of the
Company valued at $1,088,000.
A capital lease obligation was incurred when the Company entered into a lease
for new equipment.
Shares of common stock were issued in connection with the investment in
EDIComm.
Options to purchase shares of common stock were issued in connection with
obtaining a covenant not to compete upon the restructuring of a marketing
agreement.
Shares of common stock were issued in connection with the conversion of
preferred stock.
F-14
<PAGE>
EXHIBIT 11.1
UNITED PAYORS & UNITED PROVIDERS, INC.
COMPUTATION OF EARNINGS PER COMMON SHARE
(Unaudited)
<TABLE>
<CAPTION>
Years Ended December 31,
1996 1995
-------------- ------------
<S> <C> <C>
PRIMARY
Net income (loss) $10,645,799 $(710,641)
============== ============
Weighted average number of common shares outstanding:
Shares outstanding from beginning of period 8,800,000 8,800,000
Initial public offering 1,327,870 -
Other issuances of common stock 2,789 -
Purchases of treasury stock (5,060) -
Common stock equivalents:
Additional equivalent shares issuable from assumed
exercise of common stock options 100 -
-------------- ------------
Weighted average common and common share equivalent 10,125,699 8,800,000
============== ============
Net income (loss) per common share $1.05 ($0.08)
============== ============
</TABLE>
Vote: The computation of fully diluted earnings per share has not been presented
as the resultant earnings per common share ($1.06) would reflect the
antidilutive effect of the respective stock options and warrants in the
computation, principally due to the exercise price of the options and
warrants being in excess of the market price of the Company's common
stock.
<PAGE>
EXHIBIT 21.1
UNITED PAYORS & UNITED PROVIDERS, INC.
LIST OF SUBSIDIARIES
The Company directly or indirectly owns the following subsidiaries:
National Health Services, Inc. (a Wisconsin corporation)
National Health Services of Mississippi, Inc. (a Mississippi corporation)
Healthcare Review Corporation (a Kentucky corporation)
Healthcare Review Corporation of Missouri, Inc. (a Missouri corporation)
Healthcare Review Corporation of New York, Inc. (a New York corporation)
Medical Network, Inc. (a Delaware corporation)
NHS Coordinated Care, Inc. (a Nevada corporation)
NHS Coordinated Care of Texas, Inc. (a Texas corporation)
IM&I-NEWCO, Inc. (a Delaware corporation)
America's Health Card Services, Inc. (an Iowa corporation)
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFOMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEETS AND STATEMENTS OF OPERATIONS OF UNITED PAYORS &
UNITED PROVIDERS, INC. AS OF AND FOR THE YEAR ENDED DECEMBER 31, 1996 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 16,034,184
<SECURITIES> 10,448,564
<RECEIVABLES> 8,108,015
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 35,160,985
<PP&E> 3,333,081
<DEPRECIATION> (550,480)
<TOTAL-ASSETS> 53,247,923
<CURRENT-LIABILITIES> 7,047,928
<BONDS> 0
0
0
<COMMON> 35,240,556
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 53,247,923
<SALES> 0
<TOTAL-REVENUES> 35,449,329
<CGS> 0
<TOTAL-COSTS> 18,616,697
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 62,867
<INCOME-PRETAX> 17,803,799
<INCOME-TAX> 7,158,000
<INCOME-CONTINUING> 10,645,799
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 10,645,799
<EPS-PRIMARY> 1.05
<EPS-DILUTED> 0
</TABLE>
