UNITED PAYORS & UNITED PROVIDERS INC
10-Q, 1996-08-13
SERVICES, NEC
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<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.


<PAGE> 2


                     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

<PAGE> 7


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>


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