<PAGE>
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 MARCH 31, 1997
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
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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
incorporation or organization) Identification Number)
2275 RESEARCH BOULEVARD, 6TH FLOOR, ROCKVILLE, MARYLAND 20850
- --------------------------------------------------------------------------------
(Address of principal executive offices, Zip Code)
(301) 548-1000
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(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 X No
----- -----
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
April 15, 1997 was 11,558,186.
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<PAGE>
UNITED PAYORS & UNITED PROVIDERS, INC.
AND SUBSIDIARIES
FIRST QUARTER 1997 FORM 10-Q
TABLE OF CONTENTS
Page
----
PART I FINANCIAL INFORMATION
ITEM 1. Financial Statements
Consolidated Balance Sheets as of March 31, 1997 and
December 31, 1996....................................... 1
Consolidated Statements of Operations for the Three Months
Ended March 31, 1997 and 1996........................... 2
Consolidated Statements of Cash Flows for the Three Months
Ended March 31, 1997 and 1996........................... 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
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
UNITED PAYORS & UNITED PROVIDERS, INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
March 31, December 31,
1997 1996
------------ -------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 20,494,489 $ 16,034,184
Short-term investments 10,281,185 10,448,564
Accounts receivable 7,644,228 8,108,015
Deferred income taxes 260,300 342,300
Other current assets 280,263 227,922
------------ ------------
Total current assets 38,960,465 35,160,985
Fixed assets, net 2,991,218 2,782,601
Due from contracting providers, net 6,424,914 4,300,730
Investments 1,469,449 1,079,354
Intangible and other assets, net 9,651,283 9,924,253
------------ ------------
Total assets $ 59,497,329 $ 53,247,923
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 7,551,485 $ 5,758,025
Income and other taxes payable 2,649,606 958,991
Notes payable and capital lease 23,584 330,912
------------ ------------
Total current liabilities 10,224,675 7,047,928
Non-current accrued expense 550,000 700,000
Notes payable and capital lease, less current portion 99,281 324,281
------------ ------------
Total liabilities 10,873,956 8,072,209
Commitments and contingencies
Stockholders' equity:
Convertible preferred stock, $0.01 par value, 5,000,000 shares
authorized, none issued and outstanding at March 31, 1997 and
December 31, 1996 -- --
Common stock, $0.01 par value, 35,000,000 shares authorized,
11,573,636 shares issued at March 31, 1997 and
December 31, 1996, respectively 115,736 115,736
Additional paid-in capital 35,542,080 35,154,820
Retained earnings 13,085,557 9,935,158
Less treasury stock, 15,200 shares at March 31, 1997 and
22,500 shares at December 31, 1996, at cost (120,000) (30,000)
------------ ------------
Total stockholders' equity 48,623,373 45,175,714
------------ ------------
Total liabilities and stockholders' equity $ 59,497,329 $ 53,247,923
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
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UNITED PAYORS & UNITED PROVIDERS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended March 31,
1997 1996
------------ ------------
<S> <C> <C>
Provider network revenue $ 8,665,977 $ 7,410,197
Utilization management services 4,825,365 --
Other revenue 106,446 81,427
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Total revenue 13,597,788 7,491,624
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Operating expenses:
Direct contract expenses 6,842,419 3,150,578
General and administrative 1,453,707 317,300
Depreciation and amortization 330,589 77,038
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Total operating expenses 8,626,715 3,544,916
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Other income, net 315,929 135,904
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Income before income taxes 5,287,002 4,082,612
Income tax provision 2,136,603 1,633,000
----------- -----------
Net income $ 3,150,399 $ 2,449,612
=========== ===========
Net income per share $ 0.27 $ 0.28
=========== ===========
Weighted average shares outstanding 11,604,753 8,800,000
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
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UNITED PAYORS & UNITED PROVIDERS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended March 31,
1997 1996
------------ ------------
<S> <C> <C>
OPERATING ACTIVITIES
NET INCOME $ 3,150,399 $ 2,449,612
ADJUSTMENT TO RECONCILE NET INCOME TO
NET CASH PROVIDED BY (USED IN) OPERATIONS
Depreciation and amortization 330,589 77,038
Deferred income taxes and other non-cash items 270,093 654,000
Changes in reserves and allowances 150,000 --
Changes in assets and liabilities:
Accounts receivable 463,787 (3,097,883)
Accounts payable and accrued expenses 1,834,584 (693,893)
Current and other assets 152,650 (543,959)
Due from contracting providers (2,174,184) (70,000)
Income taxes payable 1,690,615 206,460
------------ ------------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 5,868,533 (1,018,625)
------------ ------------
INVESTING ACTIVITIES
Purchases of fixed assets (417,227) (92,996)
Purchases of short-term investments (4,565,946) --
Proceeds from sale of short-term investments 4,687,368 --
Payments for investments (490,095) --
------------ ------------
NET CASH USED IN INVESTING ACTIVITIES (785,900) (92,996)
------------ ------------
FINANCING ACTIVITIES
Purchase of treasury stock (90,000) --
Repayment of loan from stockholder -- (3,700,000)
Repayment of other debt (532,328) (2,949)
------------ ------------
NET CASH USED IN FINANCING ACTIVITIES (622,328) (3,702,949)
------------ ------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 4,460,305 (4,814,570)
CASH AND CASH EQUIVALENTS
Beginning of the period 16,034,184 8,701,135
------------ ------------
End of the period $ 20,494,489 $ 3,886,565
============ ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Interest paid during the period $ 20,326 $ --
Taxes paid during the period $ 501,360 $ --
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
<PAGE>
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 non-monetary in nature and made by
the existing stockholders of UP&UP, the assets and liabilities contributed were
recorded at the transferors' historical cost as of December 31, 1995. Since the
contributions were effective December 31, 1995, the accompanying consolidated
statements of operations for the three months ended March 31, 1997 and 1996
include the results of operations of IM&I, IM&I-NEWCO, Inc. and The Transferred
Client Group.
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 were common stock and 5,000,000
shares were preferred stock.
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
accompanying consolidated statement of operations for the three months ended
March 31, 1996 does not reflect the results of operations of NHS for that
period.
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 $3.5 million, respectively.
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"). The litigation is currently in the discovery phase. HealthCare
COMPARE seeks injunctive and other relief, including possible damages, based
generally on allegations that representatives of the Company, in at least
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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. 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.
4. BUSINESS COMBINATION
Effective October 1, 1996, the Company acquired National Health Services,
Inc. 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 market 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 for the three months ended March 31, 1996 have not been
included in the accompanying consolidated statement of operations of the Company
for that period. The acquisition resulted in goodwill of $7.2 million which is
being amortized over 15 years. Accumulated amortization at March 31, 1997
amounted to $240,882. The unamortized portion of the goodwill at March 31, 1997,
is included in intangible and other assets in the accompanying consolidated
balance sheet.
5. RECLASSIFICATIONS
Certain amounts in the financial statements for the quarter ended March 31,
1996 have been reclassified to conform to the presentation of the financial
statements for the quarter ended March 31, 1997.
6. EARNINGS PER SHARE
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128, Earnings per Share, effective for
financial statements for both interim and annual periods ending after December
15, 1997. This Statement replaces the existing calculation and presentation of
primary and fully diluted earnings per share with basic and diluted earnings per
share. This change is not expected to have a material effect on the Company's
earnings per share.
7. UNAUDITED INFORMATION
The consolidated financial statements for the three months ended March 31,
1997 and 1996 have not been audited but, in the opinion of management, include
all adjustments (consisting only of normal recurring accruals) necessary to
present fairly the information set forth therein. The results of operations for
the three months ended March 31, 1997 and 1996 are not necessarily indicative of
the results to be expected for the full year or in the future.
5
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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 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. The stockholders of PB Newco, Inc.
consisted primarily of two groups, Principal Mutual and management. Effective
December 31, 1995, the stockholder of 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 AHP, an indirect, wholly-owned subsidiary of Principal
Mutual whereby AHP contributed a certain group of contracts constituting The
Transferred Client Group of AHP to UP&UP. Because the contributions were non-
monetary in nature and made by existing stockholders of UP&UP, the assets and
liabilities contributed were 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 months ended March 31, 1997
and 1996 include the results of operations of IM&I, IM&I-NEWCO, Inc. and the
Transferred Client Group.
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 for the three months ended March 31, 1996 have not been
included in the consolidated financial statements of the Company for that
period.
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 ("Payor Clients") and increased liquidity and improved
efficiency in claims submissions for providers ("Contracting 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 others. Such services include
precertification of in-patient and out-patient medical care and case management.
REVENUE
A significant portion 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
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(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. Precertification revenues are generally based on monthly capitation
calculations. Case management revenues are generally based on fee for service or
hourly rates.
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 its contracts.
The Company accesses certain other networks of medical providers, including
the provider network organized and maintained by 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.
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.
HISTORICAL RESULTS OF OPERATIONS
The following table sets forth certain results of operations data for the
three months ended March 31, 1997 and 1996.
<TABLE>
<CAPTION>
1997 1996
---------- ---------
(in thousands)
<S> <C> <C>
Revenue
Provider network................................... $ 8,666 $ $7,410
Utilization management services.................... 4,825 --
Other.............................................. 107 82
------- --------
Total revenue................................... 13,598 7,492
Operating expenses
Direct contract expenses........................... 6,843 3,151
General and administrative......................... 1,453 317
Depreciation and amortization...................... 331 77
------- --------
Total operating expenses........................ 8,627 3,545
Operating income..................................... 4,971 3,947
Other income......................................... 316 136
------- --------
Income before income taxes......................... 5,287 4,083
Income tax expense................................... 2,137 1,633
------- --------
Net income........................................... $ 3,150 $ $2,450
======= ========
</TABLE>
7
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Three Months Ended March 31, 1997 Compared to Three Months Ended March 31, 1996
Provider network revenue increased by $1.3 million, from $7.4 million in 1996
to $8.7 million in 1997. This increase was attributable to the addition of new
Payor Clients, the growth in the overall claims volume from existing Payor
Clients and the expansion of the Company's provider network. At March 31, 1997
the provider network consisted of approximately 2,900 Contracting Providers
compared to approximately 1,000 Contracting Providers at March 31, 1996.
Utilization management services revenue of $4.8 million in 1997 represents the
revenue of NHS which was acquired effective October 1, 1996.
Access fees to other provider networks as a percentage of provider network
revenue were 18.8% ($1.4 million) in 1996 compared to 14.2% ($1.2 million) in
1997. 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 $132,000, from approximately
$410,000 in 1996 to approximately $278,000 in 1997. This decrease was
attributable to the restructuring of a marketing commission agreement during the
last quarter of 1996.
Other direct costs of services increased approximately $4.0 million, from $1.3
million in 1996 to $5.3 million in 1997. Of this increase, approximately $3.1
million represented expenses of NHS which was acquired effective October 1,
1996. The remainder of the increase was attributable to an overall increase in
expenses resulting primarily from a significant increase in the number of
employees to accommodate growth in the provider network business, increased
provider network development activities and the development of new businesses.
Excluding NHS employees, the Company employed 93 employees at March 31, 1997 as
compared to 43 employees at March 31, 1996.
General and administrative expenses increased approximately $1.1 million, from
approximately $317,000 in 1996 to approximately $1.4 million in 1997. Of this
increase, approximately $561,000 represented expenses of NHS which was acquired
effective October 1, 1996. The remainder of the increase was attributable to an
overall increase in expenses resulting from the addition of employees in the
administrative and executive areas, expenses related to bonus and other benefit
programs which became effective subsequent to the initial public offering and an
increase in professional fees for accounting and legal services.
Depreciation and amortization increased approximately $254,000 from
approximately $77,000 in 1996 to approximately $331,000 in 1997. The increase
was primarily attributable to the depreciation and amortization expense of NHS.
LIQUIDITY AND CAPITAL RESOURCES
During the first three 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 March 31, 1997 the Company had working capital
of approximately $28.7 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 $10 million to $12 million could be
required to fund Prepayment Options during the remainder of 1997.
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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.
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 The Transferred Client Group has
continued to access other provider networks with which AHP currently has
contractual relationships. The Transferred Client Group 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 April 30, 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.
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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.
10
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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 months ended March 31, 1997.
ITEM 2. CHANGES IN SECURITIES (Not Applicable)
ITEM 3. DEFAULTS UPON SENIOR SECURITIES (Not Applicable)
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITIES HOLDERS (Not Applicable)
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:
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
27.1 Financial Data Schedule
2. Reports on Form 8-K (None)
- ------------------------------
* 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.
11
<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: May 14, 1997 By: /s/ THOMAS L. BLAIR
-------------------------------------------
Thomas L. Blair
Chairman and Chief Executive Officer
Date: May 14, 1997 By: /s/ EDWARD S. CIVERA
-------------------------------------------
Edward S. Civera
President and Chief Operating Officer
Date: May 14, 1997 By: /s/ S. JOSEPH BRUNO
-------------------------------------------
S. Joseph Bruno
Vice President and Chief Financial Officer
Date: May 14, 1997 By: /s/ EDUARDO V. FEITO
-------------------------------------------
Eduardo V. Feito
Controller and Chief Accounting Officer
12
<PAGE>
EXHIBIT 11.1
UNITED PAYORS & UNITED PROVIDERS, INC.
AND SUBSIDIARIES
COMPUTATION OF PRIMARY EARNINGS PER COMMON SHARE
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended March 31,
1997 1996
----------- ----------
<S> <C> <C>
PRIMARY
Net income $ 3,150,399 $2,449,612
=========== ==========
Weighted average number of common shares
outstanding:
Shares outstanding from beginning of
period 11,551,136 8,800,000
Other issuances of common stock 12,363 -
Purchases of treasury stock (1,705) -
Common stock equivalents:
Additional equivalent shares issuable from
assumed exercise of common stock options 42,959 -
----------- ----------
Weighted average common and common share
equivalents 11,604,753 8,800,000
=========== ==========
Net income per common share $ 0.27 $ 0.28
=========== ==========
FULLY DILUTED
Net income $ 3,150,399 $2,449,612
=========== ==========
Weighted average number of common shares
outstanding:
Shares outstanding from beginning of
period 11,551,136 8,800,000
Other issuances of common stock 12,363 -
Purchases of treasury stock (1,705) -
Common stock equivalents:
Additional equivalent issuable
from assumed exercise of common
stock options 100,025 -
----------- ----------
Weighted average common and common share
equivalents 11,661,819 8,800,000
=========== ==========
Net income per common share $ 0.27 $ 0.28
=========== ==========
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEETS AND STATEMENTS OF OPERATIONS OF UNITED PAYORS &
UNITED PROVIDERS, INC. AS OF AND FOR THE THREE MONTHS ENDED MARCH 31, 1997 AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<CASH> 20,494,489
<SECURITIES> 10,281,185
<RECEIVABLES> 7,644,228
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 38,960,465
<PP&E> 3,749,235
<DEPRECIATION> 758,017
<TOTAL-ASSETS> 59,497,329
<CURRENT-LIABILITIES> 10,224,675
<BONDS> 0
0
0
<COMMON> 35,537,816
<OTHER-SE> 13,085,557
<TOTAL-LIABILITY-AND-EQUITY> 59,497,329
<SALES> 0
<TOTAL-REVENUES> 13,597,788
<CGS> 0
<TOTAL-COSTS> 8,626,715
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 11,842
<INCOME-PRETAX> 5,287,002
<INCOME-TAX> 2,136,603
<INCOME-CONTINUING> 3,150,399
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,150,399
<EPS-PRIMARY> .27
<EPS-DILUTED> 0
</TABLE>