<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 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)
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 No X
------- -------
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the last practicable date.
The number of shares of Common stock, par value $.01 per share, outstanding on
August 2, 1996 was 11,573,637.
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UNITED PAYORS & UNITED PROVIDERS, INC.
AND SUBSIDIARIES
SECOND QUARTER 1996 FORM 10-Q
TABLE OF CONTENTS
Page
PART I FINANCIAL INFORMATION ----
ITEM 1. Financial Statements
Consolidated Balance Sheets as of June 30, 1996 and
December 31, 1995................................................ 1
Consolidated Statements of Operations for the Three and Six Months
Ended June 30, 1996 and 1995..................................... 2
Consolidated Statements of Cash Flows for the Six Months
Ended June 30, 1996 and 1995..................................... 3
Notes to Consolidated Financial Statements.......................... 4
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations........................... 6
PART II OTHER INFORMATION
SIGNATURES
EXHIBIT 11
EXHIBIT 27
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
UNITED PAYORS & UNITED PROVIDERS, INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
ASSETS
June 30, December 31,
1996 1995
----------- ------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 4,979,255 $ 8,701,135
Accounts receivable 5,626,865 1,254,844
Other current assets 71,678 153,899
Deferred income taxes -- 654,000
----------- -----------
Total current assets 10,677,798 10,763,878
Fixed assets, net 1,607,335 1,199,785
Investments 340,712 300,000
Due from contracting providers 352,000 125,000
Other assets 776,777 374,824
Deferred public offering costs 739,680 --
----------- -----------
Total assets $14,494,302 $12,763,487
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 1,388,157 $ 2,559,025
Due to affiliate 1,027,692 819,477
Income taxes payable 1,438,664 191,300
Advances/notes to stockholders -- 3,700,000
Note payable, current portion 7,535 15,000
Capital lease, current portion 13,907 --
Line of credit with bank 95,000 95,000
----------- -----------
Total current liabilities 3,970,955 7,379,802
Deferred income taxes 37,000 37,000
Note payable, less current portion 50,227 50,227
Capital lease, less current portion 130,192 --
----------- -----------
Total liabilities 4,188,374 7,467,029
----------- -----------
Commitments and contingencies
Stockholders' equity:
Convertible preferred stock, $0.01 par value, 5,000,000 shares - -
authorized, 1 share issued and outstanding convertible into
4,400,000 shares of common stock (liquidation preferences
$5,000,000)
Common stock, $0.01 par value, 35,000,000 shares authorized, 44,000 44,000
4,400,000 shares issued and outstanding
Additional paid-in capital 5,963,099 5,963,099
Retained earnings (deficit) 4,298,829 (710,641)
----------- -----------
Total stockholders' equity 10,305,928 5,296,458
----------- -----------
Total liabilities and stockholders' equity $14,494,302 $12,763,487
=========== ===========
The accompanying notes are an integral part of these financial statements.
</TABLE>
1
<PAGE> 4
UNITED PAYORS & UNITED PROVIDERS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
---------------------------- ----------------------------
1996 1995 1996 1995
------------- ------------- --------------- -----------
<S> <C> <C> <C> <C>
Provider network revenue $ 7,672,866 $ 107,347 $ 15,083,063 $ 107,347
Other revenue 74,205 -- 155,632 --
------------ ----------- ------------ -----------
Total revenue 7,747,071 107,347 15,238,695 107,347
------------ ----------- ------------ -----------
Operating expenses:
Direct contract expenses 1,796,377 27,720 3,601,313 27,720
General and administrative 1,589,652 405,125 3,277,361 592,803
Depreciation and amortization 89,069 2,693 141,340 2,693
------------ ----------- ------------ -----------
Total operating expenses 3,475,098 435,538 7,020,014 623,216
------------ ----------- ------------ -----------
Other income (expense)
Interest income 50,255 28,466 142,953 78,681
Interest expense (9,752) (4,050) (56,335) (4,050)
Other income expense, net (45,621) 28,000 44,171 40,000
------------ ---------- ------------ -----------
Total other income (expense), net (5,118) 52,416 130,789 114,631
------------ ---------- ------------ -----------
Income (loss) before income taxes 4,266,855 (275,775) 8,349,470 (401,238)
Income tax benefit (provision) (1,707,000) 99,183 (3,340,000) 144,306
------------ ---------- ------------ -----------
Net income (loss) $2,559,855 $ (176,592) $5,009,470 $ (256,932)
============ ========== ============ ===========
Net income (loss) per share $0.29 ($0.02) $0.57 $ (0.03)
============ ========== ============ ===========
Shares used in computing net income (loss)
per common share outstanding 8,800,000 8,800,000 8,800,000 8,800,000
------------ ---------- ------------ -----------
The accompanying notes are an integral part of these financial statements.
</TABLE>
2
<PAGE> 5
UNITED PAYORS & UNITED PROVIDERS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
-----------------------------
1996 1995
----------- -------------
<S> <C> <C>
OPERATING ACTIVITIES
NET INCOME (LOSS) $ 5,009,470 $ (256,932)
ADJUSTMENT TO RECONCILE NET INCOME (LOSS)
TO NET CASH PROVIDED BY (USED IN) OPERATIONS
Depreciation and amortization 141,340 2,693
Deferred income taxes 654,000 (144,306)
Change in accounts receivable (4,372,021) (103,727)
Change in other current assets 82,221 (3,034,382)
Change in due from contracting providers (227,000) (25,000)
Change in other assets (405,026) (165,919)
Change in accounts payable and accrued expenses (1,170,868) 199,840
Change in due to affiliates 208,215 -
Change in income taxes payable 1,247,364 -
----------- -----------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 1,167,695 (3,527,733)
----------- -----------
INVESTING ACTIVITIES
Purchase of fixed assets (395,123) (36,584)
Investments in complementary businesses (50,000) (300,000)
Return on investment 9,288 -
----------- -----------
NET CASH USED IN INVESTING ACTIVITIES (435,835) (336,584)
----------- -----------
FINANCING ACTIVITIES
Issuance of capital stock - 6,000,000
Deferred public offering costs (739,680) -
Repayment of advances/loan from stockholders (3,700,000) -
Repayment of note (7,465) -
Repayment of capital lease (6,595) -
----------- -----------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES (4,453,740) 6,000,000
----------- -----------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (3,721,880) 2,135,683
CASH AND CASH EQUIVALENTS
Beginning of the period 8,701,135 -
----------- -----------
End of the period $ 4,979,255 $ 2,135,683
=========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Interest paid during the period $ 64,335 $ -
Taxes paid during the period $ 1,473,700 $ -
SUPPLEMENTAL NONCASH DISCLOSURE
Fixed assets financed with capital lease $ 150,696 $ -
The accompanying notes are an integral part of these financial statements.
</TABLE>
3
<PAGE> 6
UNITED PAYORS & UNITED PROVIDERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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. 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 (e.g., insurance companies) and health care providers (e.g.,
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.
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 Mutual Life Insurance Company ("Principal Mutual"), an
affiliated entity, whereby AHP contributed a certain group of contracts
constituting "The Transferred Client Group" of AHP to UP&UP. (UP&UP, IM&I,
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. Since the contributions were
effective December 31, 1995, the accompanying consolidated statement of
operations for the three and six months ended June 30, 1995 do not include the
1995 results of operations of IM&I, IM&I-NEWCO, Inc. or The Transferred Client
Group (collectively the "Contributed Businesses").
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 December 31,
1995 and June 30, 1996 consolidated balance sheets.
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.
The closings of the sale of stock 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 $3.7 million, respectively.
4
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3. LEGAL PROCEEDINGS
Except as discussed below, the Company currently is not a party to any
legal proceedings, nor is it aware of any legal proceedings threatened against
it. 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. The Company intends to vigorously defend
against the complaint. 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.
4. UNAUDITED INFORMATION
The consolidated financial statements for the three months and six months
ended June 30, 1996 and 1995 have not been audited but, in the opinion of
management, include all adjustments (consisting only of normal recurring
accruals) necessary to present fairly the information set forth therein. The
results of operations for the three months and six months ended June 30, 1996
and 1995 are not necessarily indicative of the results to be expected for the
full year or in the future.
5
<PAGE> 8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
THIS FORM 10-Q 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 OBLIGTION 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, specifically the
Transferred Client Group, Initial Managers & Investors, Inc. and IM&I-NEWCO,
Inc. (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 transferors' historical cost
as of December 31, 1995. Since the contributions were effective December 31,
1995, the consolidated statements of operations for the three and six months
ended June 30, 1995 do not include the results of operations of the Contributed
Businesses. The results of operations of the Contributed Businesses are included
in the consolidated financial statements for the three and six months ended June
30, 1996.
REVENUE
The Company serves as an intermediary between health care payors, such as
insurance companies ("Payor Clients"), and health care providers, such as
hospitals ("Contracting Providers"), 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 substantially all of its revenue from a portion of the price
concessions offered by the providers under such contractual arrangements.
The Company's revenues are influenced by, among other variables: (i) the
number of Contracting Providers and Payor Clients, (ii) the volume of claims
from the Contracting Providers submitted 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.
Additionally, the Company generates revenue from the administration of the
Continued Health Care Benefit Program ("CHCBP"). 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
6
<PAGE> 9
("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.
OPERATING EXPENSES
Direct contract expenses include access fees paid by the Company for the
utilization of other provider networks and, to a limited extent, marketing
commissions incurred by the Contributed Businesses. Currently, the Company
accesses a third party network of medical providers through its investment
affiliation and, to a lesser extent, another network organized by one of its
Payor Clients. During 1995 and during the transition period, the Contributed
Businesses utilized the AHP provider network and other non-affiliated provider
networks. The level of network access fees as a percentage of network revenue is
expected to decrease as a result of the continued expansion of the Company's
direct network.
General and administrative expenses include compensation and related
benefits, sales and marketing, rent, professional services and general overhead
expenses.
HISTORICAL RESULTS OF OPERATIONS
The following table sets forth unaudited results of operations data for the
three and six months periods ended June 30, 1996 and 1995.
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
------------------------------------ -----------------------------------
1996 1995 1996 1995
---------------- ----------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Revenue
Provider network $7,672,866 $107,347 $15,083,063 $107,347
Other 74,205 -- 155,632
---------------- ----------------- ---------------- ----------------
Total revenue 7,747,071 107,347 15,238,695 107,347
---------------- ----------------- ---------------- ----------------
Operating expenses
Direct contract expenses 1,796,377 27,720 3,601,313 27,720
General and administrative 1,589,652 405,125 3,277,361 92,803
Depreciation and amortization 89,069 2,693 141,340 2,693
---------------- ----------------- ---------------- ----------------
Total operating expenses 3,475,098 435,538 7,020,014 623,216
---------------- ----------------- ---------------- ----------------
Operating income (loss) 4,271,973 (328,191) 8,218,681 (515,869)
Other income (expense) (5,118) 52,416 130,789 114,631
---------------- ----------------- ---------------- ----------------
Income (loss) before income taxes 4,266,855 (275,775) 8,349,470 (401,238)
Income tax benefit (expense) (1,707,000) 99,183 (3,340,000) 144,306
---------------- ----------------- ---------------- ----------------
Net income (loss) $2,559,855 $(176,592) $5,009,470 $(256,932)
================ ================= ================ ================
</TABLE>
7
<PAGE> 10
THREE MONTHS ENDED JUNE 30, 1996 COMPARED TO THREE MONTHS ENDED JUNE 30, 1995
The Company was incorporated and commenced operations on January 3, 1995.
During the three months ended June 30, 1995, the Company focused its efforts on
the development of its Contracting Provider network and marketing to prospective
clients. Net loss for the period was $176,592 after the tax benefit of the
recognition of the period's net operating loss carry forward in the amount of
$99,183.
The results of operations for the three months ended June 30, 1996 include
the results of operations of the Contributed Businesses. As of June 30, 1996,
the Company had 35 Payor Clients and approximately 1,300 Contracting Providers.
Provider network revenue was $7.7 million. Other revenue of approximately
$74,000 relates to the administration of the CHCBP program.
Direct contract expenses for the three months ended June 30, 1996,
primarily consisted of fees for the utilization of other provider networks of
$1.5 million, representing 19.5% of provider network revenue, and marketing
commissions of $271,935.
General and administrative expenses for the three months ended June 30,
1996 of approximately $1.6 million represented 20.5% of total revenue. Net
income was $2.6 million, or 33.0% of total revenue.
SIX MONTHS ENDED JUNE 30, 1996 COMPARED TO SIX MONTHS ENDED JUNE 30, 1995
The Company was incorporated and commenced operations on January 3, 1995.
During the first six months of 1995, the Company focused its efforts on the
development of its Contracting Provider network and marketing to prospects. Net
loss for the period was $236,932 after the tax benefit of the recognition of the
period's net operating loss carry forward in the amount of $144,306.
The results of operations for the six months ended June 30, 1996 include
the results of operations of the Contributed Businesses. As of June 30, 1996,
the Company had 35 Payor Clients and approximately 1,300 Contracting Providers.
Provider network revenue was $15.1 million. Other revenue of $155,632 relates to
the administration of the CHCBP program.
Direct contract expenses for the six months ended June 30, 1996, primarily
consisted of fees for the utilization of other provider networks of $2.8
million, representing 18.8% of provider network revenue, and marketing
commissions of $681,547.
General and administrative expenses for the six months ended June 30, 1996
of approximately $3.3 million represented 21.3% of total revenue. Net income was
$5.0 million, or 32.9% 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 for the three and
six month periods ended June 30, 1995 as if the contributions had been
consummated as of January 1, 1995 for IM&I, the Transferred Client Group, and
for IM&I-NEWCO, Inc. The pro forma financial data have not been audited but, in
the opinion of management, include adjustments (consisting of normal recurring
accruals) 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.
8
<PAGE> 11
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
-------------------------------------- -------------------------------------
Historical Pro Forma Historical Pro Forma
1996 1995 1996 1995
---------------- ----------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Revenue
Provider network $7,672,866 $6,477,187 $15,083,063 $12,360,327
Other 74,205 33,322 155,632 91,829
---------------- ----------------- ---------------- ----------------
Total revenue $7,747,071 $6,510,509 $15,238,695 $12,452,156
================ ================= ================ ================
Operating expenses
Direct contract expenses $1,796,377 $2,171,458 $3,601,313 $3,982,928
General and administrative 1,589,652 1,721,390 3,277,361 3,339,045
Depreciation and amortization 89,069 59,744 141,340 115,206
---------------- ----------------- ---------------- ----------------
Total operating expenses $3,475,098 $3,952,592 $7,020,014 $7,437,179
================ ================= ================ ================
</TABLE>
HISTORICAL THREE MONTHS ENDED JUNE 30, 1996 COMPARED TO
PRO FORMA THREE MONTHS ENDED JUNE 30, 1995
Revenue increased $1.2 million from $6.5 million for the three months ended
June 30, 1995 to $7.7 million for the three months ended June 30, 1996. This
increase was attributable to the addition of seven Payor Clients, the growth in
the claims volume from existing Payor Clients and the expansion of the provider
network.
Direct contract expenses decreased approximately $375,000. Of this
decrease, approximately $235,000 was attributable to marketing commissions,
including approximately $136,000 in marketing commissions to an affiliate of the
Company by one of the Contributed Businesses in the three months ended June 30,
1995 which were reduced to zero in 1996 because the agreement, pursuant to which
such commissions were payable, was terminated as of January 1, 1996. Fees to
other provider networks of $1.6 million in the three months ended June 30, 1995
and $1.5 million in the three months ended June 30, 1996, decreasing from 25.2%
of provider network revenue in the three months ended June 30, 1995 to 19.5% in
the three months ended June 30, 1996. This decrease was attributable to the
growth in the number of providers contracting directly with the Company and
Payor Clients accessing more direct contracts.
General and administrative expenses decreased by approximately $132,000
from $1.7 million in the three months ended June 30, 1995 to $1.6 million in the
three months ended June 30, 1996. This decrease occurred primarily because the
1995 pro forma consolidated results of operations included the Company's general
and administrative expenses, in addition to the general and administrative
expenses from the Contributed Businesses. General and administrative expenses
decreased as a percentage of total revenue from 26.4% in the three months ended
June 30, 1995 to 20.5% in the three months ended June 30, 1996.
9
<PAGE> 12
HISTORICAL SIX MONTHS ENDED JUNE 30, 1996 COMPARED TO
PRO FORMA SIX MONTHS ENDED JUNE 30, 1995
Revenue increased $2.8 million from $12.4 million for the six months ended
June 30, 1995 to $15.2 million for the six months ended June 30, 1996. This
increase was attributable to the addition of seven new Payor Clients, the growth
in the claims volume from existing Payor Clients and the expansion of the
provider network.
Direct contract expenses decreased approximately $382,000. Of this
decrease, approximately $200,000 was attributable to marketing commissions to an
affiliate of the Company by one of the Contributed Businesses in the six months
ended June 30, 1995 which were reduced to zero in 1996 because the agreement,
pursuant to which such commissions were payable, was terminated as of January 1,
1996. Fees to other provider networks of $3.0 million in the first six months of
1995 and $2.8 million in the first six months of 1996, decreasing from 24.6% of
provider network revenue in the first six months of 1995 to 18.8% in the first
six months of 1996. This decrease was attributable to the growth in the number
of providers contracting directly with the Company and Payor Clients accessing
more direct contracts.
General and administrative expenses decreased by approximately $62,000 from
$3.3 million in the six months ended June 30, 1995 to $3.2 million in the six
months ended June 30, 1996. This decrease occurred primarily because the 1995
pro forma consolidated results of operations included the Company's general and
administrative expenses in addition to the general and administrative expenses
from the Contributed Businesses. General and administrative expenses decreased
as a percentage of total revenue from 26.8% in the six months ended June 30,
1995 to 21.5% in the six months ended June 30, 1996.
LIQUIDITY AND CAPITAL RESOURCES
Since its inception, the Company has financed its operations principally
through equity contributions and its results of operations. At December 31, 1995
and June 30, 1996, the Company had working capital of approximately $3.4 million
and $6.7 million, respectively. In July 1996, the Company received net proceeds
of approximately $27.1 million from its initial public offering.
The Company's primary capital resources commitment is to fund payments due
upon exercise of Prepayment Options granted to Contracting Providers. The
Company estimates that for the remainder of 1996, the Company will be required
to fund approximately $5.0 million of Prepayment Options. Depending on increases
in claims volume and in the number of Contracting Providers and Payor Clients,
the Company estimates that an additional $25.0 million to $30.0 million could be
required to fund Prepayment Options in 1997.
The Company believes that the net proceeds from the Initial Public
Offering, together with its funds from operations, will satisfy its cash
requirements for the next 36 months. However, in the event that the payment of
Prepayment Options exceeds the Company's estimates and/or other available
sources of liquidity to fund such payments are not as great as anticipated, the
Company could seek to borrow funds or obtain additional infusions of capital 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.
10
<PAGE> 13
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. The duration of the Company's contracts with its Payor
Clients 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. 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.
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.
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.
All of the above factors are difficult for the Company to forecast, and
these or other factors 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.
11
<PAGE> 14
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Neither the Company nor its subsidiaries are involved in any pending legal
proceedings, other than routine legal matters occurring in the ordinary course
of business, which in the aggregate involve amounts which are believed by
management to be immaterial to the consolidated financial condition or results
of operations of the Company, except as referenced in Note 3 to the Consolidated
Financial Statements for the three and six months ended June 30, 1996.
ITEM 2. CHANGES IN SECURITIES (Not Applicabale)
ITEM 3. DEFAULTS UPON SENIOR SECURITIES (Not Applicable)
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITIES HOLDERS
Effective June 7, 1996, PB Newco, Inc. merged into its subsidiary, United
Payors & United Providers, Inc. ("UP&UP") a Delaware corporation, with UP&UP
being the surviving corporation in order to change domicile and name of
corporation. This action was authorized by the unanimous consent of stock-
holders.
ITEM 5. OTHER INFORMATION (None)
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
1. The following exhibits are filed as part of this report unless noted
otherwise.
3.1 Certificate of Incorporation of United Payors & United Providers,
Inc.(1)
3.2 Bylaws of United Payors & United Providers, Inc.(1)
11.0 Statement Regarding Computation of Earnings Per Share
27.0 Financial Data Schedule
2. Reports on Form 8-K (None)
____________________________
(1) Incorporated herein by reference into this document from the Exhibits to
Form S-1, Registration Statement, filed on April 19, 1996 and any
amendments thereto, Registration No. 333-3814.
12
<PAGE> 15
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: August 13, 1996 By: /s/ THOMAS L. BLAIR
------------------------------------------
Thomas L. Blair
President and Chief Executive Officer
Date: August 13, 1996 By: /s/ S. JOSEPH BRUNO
------------------------------------------
S. Joseph Bruno
Vice President and Chief Financial Officer
13
<PAGE> 1
EXHIBIT 11
UNITED PAYORS & UNITED PROVIDERS, INC.
AND SUBSIDIARIES
COMPUTATION OF PRIMARY EARNINGS PER COMMON SHARE
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended June 30, Three Months Ended June 30,
--------------------------------- --------------------------------
1996 1995 1996 1995
--------------- --------------- -------------- ---------------
<S> <C> <C> <C> <C>
Net income (loss) $ 5,009,725 $ (256,932) $ 2,559,855 $ (176,592)
=============== =============== =============== ===============
Weighted average number of common shares
outstanding 8,800,000 8,800,000 8,800,000 8,800,000
=============== =============== =============== ===============
Net income (loss) per common share $ 0.57 $ (0.03) $ 0.29 $ (0.02)
=============== =============== =============== ===============
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Consolidated Balance Sheets and Statements of Operations of United Payors &
Unied Providers, Inc. as of and for the six months ended June 30, 1996 and is
qualified in its entirety by reference to such financial statements.
</LEGEND>
<CIK> 0001012441
<NAME> UNITED PAYORS & UNITED PROVIDERS, INC.
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> JUN-30-1996
<CASH> 4,979,255
<SECURITIES> 0
<RECEIVABLES> 5,626,865
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 10,677,798
<PP&E> 1,887,158
<DEPRECIATION> (279,823)
<TOTAL-ASSETS> 14,494,302
<CURRENT-LIABILITIES> 3,970,955
<BONDS> 0
0
5,000,000
<COMMON> 1,007,099
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 14,494,302
<SALES> 0
<TOTAL-REVENUES> 15,238,695
<CGS> 0
<TOTAL-COSTS> 7,020,014
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 56,335
<INCOME-PRETAX> 8,349,470
<INCOME-TAX> (3,340,000)
<INCOME-CONTINUING> 5,009,470
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,009,470
<EPS-PRIMARY> 0.57
<EPS-DILUTED> 0
</TABLE>