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, 1998
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 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 24, 1998 was 11,374,095.
<PAGE>
United Payors & United Providers, Inc.
and Subsidiaries
First Quarter 1998 Form 10-Q
TABLE OF CONTENTS
Page
PART I FINANCIAL INFORMATION
ITEM 1. Financial Statements
Consolidated Balance Sheets as of March 31, 1998 (Unaudited)
and December 31, 1997..............................................1
Consolidated Statements of Operations for the Three Months
Ended March 31, 1998 and 1997 (Unaudited)..........................2
Consolidated Statements of Cash Flows for the Three Months
Ended March 31, 1998 and 1997 (Unaudited)..........................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....................................................9
SIGNATURES...................................................................11
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
UNITED PAYORS & UNITED PROVIDERS, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
March 31, December 31,
1998 1997
------------ ------------
(Unaudited)
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents ...................... $ 15,646,109 $ 14,456,069
Short-term investments ......................... 10,470,868 8,366,547
Accounts receivable ............................ 11,893,320 11,233,277
Other current assets ........................... 1,326,700 1,252,402
------------ ------------
Total current assets ......................... 39,336,997 35,308,295
Fixed assets, net ................................ 4,036,308 3,858,532
Advances to contracting providers, net ........... 19,743,730 17,265,730
Investments ...................................... 1,187,853 1,496,051
Intangible and other assets, net ................. 23,848,387 24,586,245
------------ ------------
Total assets ................................. $ 88,153,275 $ 82,514,853
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses .......... $ 6,228,213 $ 5,791,505
Income and other taxes payable ................. 3,680,265 1,871,934
Notes payable and capital leases, current
portion ...................................... 3,098,753 3,131,772
------------ ------------
Total current liabilities .................... 13,007,231 10,795,211
Non-current accrued expenses ..................... 1,178,333 1,313,333
Notes payable and capital lease, less current
portion ........................................ 11,313,687 12,109,606
------------ ------------
Total liabilities ............................ 25,499,251 24,218,150
------------ ------------
Commitments and contingencies
Stockholders' equity:
Convertible preferred stock, $0.01 par value,
5,000,000 shares authorized, none issued
and outstanding at March 31, 1998 and
December 31, 1997 ............................. -- --
Common stock, $0.01 par value, 35,000,000
shares authorized, 11,573,636 shares issued
at March 31, 1998 and December 31, 1997,
respectively ................................. 115,736 115,736
Additional paid-in capital ..................... 37,181,755 37,181,755
Treasury stock, 206,150 shares at March 31,
1998 and 205,150 shares at December 31,
1997, at cost ................................ (3,115,324) (3,029,450)
Retained earnings .............................. 29,308,057 24,911,862
Deferred compensation .......................... (836,200) (883,200)
------------ ------------
Total stockholders' equity ................... 62,654,024 58,296,703
------------ ------------
Total liabilities and stockholders' equity ... $ 88,153,275 $ 82,514,853
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
1
<PAGE>
UNITED PAYORS & UNITED PROVIDERS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended March 31,
----------------------------
1998 1997
------------ -----------
<S> <C> <C>
Revenue:
Provider network revenue .................. $ 13,733,745 $ 8,772,423
Utilization management services ........... 4,864,265 4,825,365
------------ -----------
Total revenue ........................... 18,598,010 13,597,788
------------ -----------
Operating expenses:
Direct contract expenses .................. 8,421,248 6,842,419
General and administrative ................ 1,979,265 1,453,707
Depreciation and amortization ............. 639,689 330,589
------------ -----------
Total operating expenses ................ 11,040,202 8,626,715
------------ -----------
Other income, net of interest expense ....... (36,908) 315,929
------------ -----------
Income before income taxes .................. 7,520,900 5,287,002
Income tax provision ........................ 3,124,706 2,136,603
------------ -----------
Net income .................................. $ 4,396,194 $ 3,150,399
============ ===========
Net income per share - basic ................ $ 0.39 $ 0.27
============ ===========
Weighted average shares outstanding - basic . 11,360,000 11,562,000
============ ===========
Net income per share - diluted .............. $ 0.37 $ 0.27
============ ===========
Weighted average shares outstanding - diluted 11,866,000 11,605,000
============ ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
2
<PAGE>
UNITED PAYORS & UNITED PROVIDERS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended March 31,
----------------------------
1998 1997
------------ ------------
<S> <C> <C>
Operating activities
Net income ..................................... $ 4,396,194 $ 3,150,399
Adjustment to reconcile net income to
net cash provided by (used in) operations
Depreciation and amortization ................ 639,689 330,589
Deferred income taxes and other non-cash items 251,020 420,093
Changes in assets and liabilities:
Accounts receivable ........................ (690,043) 463,787
Accounts payable and accrued expenses ...... 268,768 1,834,584
Current and other assets ................... 230,539 152,650
Income and other taxes payable ............. 1,808,331 1,690,615
------------ ------------
Net cash provided by operating activities ...... 6,904,498 8,042,717
------------ ------------
Investing activities
Purchases of fixed assets .................... (480,444) (417,227)
Purchases of short-term investments .......... (4,322,285) (4,565,946)
Proceeds from sale of short-term investments . 2,379,945 4,687,368
Advances to contracting providers ............ (2,518,000) (2,174,184)
Other, net ................................... 108,198 (490,095)
------------ ------------
Net cash used in investing activities .......... (4,832,586) (2,960,084)
------------ ------------
Financing activities
Purchase of treasury stock ................... (207,574) (90,000)
Exercise of stock options .................... 121,700 --
Repayment of debt ............................ (795,998) (532,328)
------------ ------------
Net cash used in financing activities .......... (881,872) (622,328)
------------ ------------
Increase in cash and cash equivalents ............ 1,190,040 4,460,305
Cash and cash equivalents
Beginning of the period ........................ 14,456,069 16,034,184
------------ ------------
End of the period .............................. $ 15,646,109 $ 20,494,489
============ ============
</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" or the "Company"), a
Delaware corporation, 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 October 1, 1996, UP&UP acquired
National Health Services, Inc. ("NHS"), a national health care utilization
management services company. NHS 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.
Effective December 31, 1995, UP&UP entered into an agreement with America's
Health Plan, Inc., an indirect wholly-owned subsidiary of Principal Mutual Life
Insurance Company ("Principal Mutual"), whereby specified payor clients
representing approximately 45% of America's Health Plan, Inc.'s revenues for the
year ended December 31, 1995, were transferred to UP&UP. Principal Mutual owns
approximately 38% of the Company's Common Stock. Effective September 1, 1997,
UP&UP acquired the remaining operations of America's Health Plan, Inc.
America's Health Plan, Inc. develops and markets its proprietary health
care provider network for access by payors of health care costs such as
insurers, third-party administrators and unions. The name of America's Health
Plan, Inc. was changed to UP&UP, Inc. immediately prior to the closing. In
connection with the acquisition, the Company was granted the right to operate
the health care provider network under the name AMERICA'S HEALTH PLAN. UP&UP,
Inc. is hereafter referred to as "AHP". UP&UP, NHS and AHP are hereafter
collectively referred to as "the Company".
2. 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. The
Plaintiff seeks injunctive and other relief, including possible damages, based
generally on allegations that representatives of the Company, in at least four
instances, made various misrepresentations to prospective Contracting Providers,
including to the effect that the Company's provider network was affiliated with
the Plaintiff's provider network or that the Plaintiff had agreed to utilize the
Company's provider network. The Company denies the allegations in the complaint
and believes the complaint is without basis. After consultation with counsel and
review of available facts, management believes that damages, if any, arising
from litigation will not be material to the consolidated financial statements of
the Company.
The Company is also a party to other legal actions arising in the ordinary
course of business. Management believes that damages arising from these actions,
if any, will not be material to the consolidated financial statements of the
Company.
3. BUSINESS COMBINATIONS
Effective September 1, 1997, UP&UP acquired AHP for a purchase price of
approximately $15.5 million, consisting of $15.1 million in cash and the
assumption of approximately $400,000 in liabilities in excess of the fair value
of the assets acquired. The purchase price may be subject to adjustment through
the year 2001, if AHP revenues exceed pre-determined targets. In connection with
the acquisition, the Company has entered into a loan agreement with a bank for
4
<PAGE>
an aggregate amount of $15 million. The loan bears interest at the rate of LIBOR
plus 1-1/8%, payable quarterly. Principal is to be repaid in equal quarterly
installments over a period of five years. The acquisition has been accounted for
as a purchase and, accordingly, the results of operations of AHP for the three
months ended March 31, 1997 are not included in the accompanying consolidated
statement of operations for that period. The acquisition resulted in goodwill of
approximately $15.5 million which is being amortized over 20 years. The
unamortized portion of goodwill at March 31, 1998, is included in intangible and
other assets in the accompanying consolidated balance sheet.
4. EARNINGS PER SHARE
The Company has adopted the provisions of Statement of Financial Accounting
Standards No. 128, "Earnings Per Share" ("FAS 128"), which establishes standards
for computing and presenting basic and diluted earnings per share. Previously
presented earnings per share data for the three months ended March 31, 1997 has
been restated to conform with the provisions of FAS 128.
A reconciliation of the numerators and denominators of the basic earnings
per share computations for the three months ended March 31, 1998 and 1997 to the
numerators and denominators of the diluted earnings per share computations for
the respective periods follows:
<TABLE>
<CAPTION>
1998 1997
----------------------------- -----------------------------
Per Per
Net Income Shares Share Net Income Shares Share
---------- ---------- ----- ---------- ---------- -----
<S> <C> <C> <C> <C> <C> <C>
Basic ............ $4,396,194 11,360,000 $0.39 $3,150,399 11,562,000 $0.27
Effect of Dilutive
Securities ..... -- 506,000 (0.02) -- 43,000 --
---------- ---------- ----- ---------- ---------- -----
Diluted .......... $4,396,194 11,866,000 $0.37 $3,150,399 11,605,000 $0.27
========== ========== ===== ========== ========== =====
</TABLE>
Stock options to purchase 100,000 shares of common stock at a weighted
average exercise price of $15.50 per share and warrants to purchase 318,000
shares of common stock at $16.00 per share were outstanding during the three
months ended March 31, 1997 but were not included in the computation of diluted
earnings per share because the exercise prices of the stock options and warrants
were greater than the average market price of the common shares and, therefore,
were antidilutive. These stock options and warrants have expiration dates
ranging from October, 1999 to February, 2003.
5. NEW PRONOUNCEMENTS
The Company has adopted the provisions of Statement of Financial Accounting
Standards ("SFAS") No. 130, "Reporting Comprehensive Income." The Company had no
other comprehensive income items (as defined in SFAS No. 130) during the
quarters ended March 31, 1998 and 1997.
The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and
Related Information," in June 1997 which is effective for the year ending
December 31, 1998. SFAS No. 131 establishes standards for reporting information
about operating segments, including related disclosures about products and
services, geographic areas and major customers. The Company is in the process of
evaluating the impact of the disclosures required by this standard on its
financial statements.
6. RECLASSIFICATIONS
Certain amounts in the financial statements for the quarter ended March 31,
1997 have been reclassified to conform to the presentation of the financial
statements for the quarter ended March 31, 1998.
7. UNAUDITED INFORMATION
The consolidated financial statements for the three months ended March 31,
1998 and 1997 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, 1998 are not necessarily indicative of the
results to be expected for the full year or in the future.
5
<PAGE>
8. SUBSEQUENT EVENT
On April 13, 1998, the Company's Board of Directors approved a three-share
for two-share stock split to be effected in the form of a stock dividend for
stockholders of record on April 24, 1998. The stock split will take effect on
May 4, 1998 and all earnings per share data reported after that date will
reflect the stock split.
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
United Payors & United Providers, Inc. ("UP&UP" or the "Company"), a
Delaware corporation, 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 ("Payor Clients") and increased liquidity
and improved efficiency in claims submissions for providers ("Contracting
Providers"). UP&UP derives its revenue primarily from a portion of the price
concessions offered by the providers under such contractual arrangements.
Effective October 1, 1996, UP&UP acquired National Health Services, Inc.
("NHS"), a national health care utilization management services company. NHS
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.
Effective December 31, 1995, UP&UP entered into an agreement with America's
Health Plan, Inc., an indirect wholly-owned subsidiary of Principal Mutual Life
Insurance Company ("Principal Mutual"), whereby specified payor clients
representing approximately 45% of America's Health Plan, Inc.'s revenues for the
year ended December 31, 1995, were transferred to UP&UP. Under the terms of the
agreement, the transferred payor clients have continued to access America's
Health Plan, Inc.'s proprietary health care provider network. Principal Mutual
owns approximately 38% of the Company's Common Stock. Effective September 1,
1997, UP&UP acquired the remaining operations of America's Health Plan, Inc. The
acquisition was accounted for as a purchase and, accordingly, the consolidated
results of operations of the Company for the three months ended March 31, 1997
do not include the results of operations of America's Health Plan, Inc. for that
period.
America's Health Plan, Inc. develops and markets its proprietary health
care provider network for access by payors of health care costs such as
insurers, third-party administrators and unions. The name of America's Health
Plan, Inc. was changed to UP&UP, Inc. immediately prior to the closing. In
connection with the acquisition, the Company was granted the right to operate
the health care provider network under the name AMERICA'S HEALTH PLAN. UP&UP,
Inc. is hereafter referred to as "AHP". UP&UP, NHS and AHP are hereafter
collectively referred to as "the Company".
REVENUE
Provider network revenues are influenced by, among other variables: (i) the
number of Contracting Providers and Payor Clients; (ii) the volume of claims
submitted by Contracting Providers to Payor Clients; (iii) the amount of price
concessions the Company negotiates with Contracting Providers; and (iv) the
contractual price concession sharing arrangements negotiated by the Company with
Payor Clients. In effect, these variables correspond to breadth (number of
Contracting Providers and Payor Clients), volume (claims per period) and depth
(amount of price concession), all of which define savings and the Company's
resultant revenues.
6
<PAGE>
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 UP&UP and AHP 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 Company's provider network. NHS direct contract
expenses include the costs of medical personnel (nurses and doctors) and other
expenses related to administering its contracts.
Marketing commissions are payable to consultants who became entitled to
such commissions for their role in obtaining contracts with certain Payor
Clients.
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.
RESULTS OF OPERATIONS
Three Months Ended March 31, 1998 Compared to Three Months Ended March 31, 1997
Total revenue increased $5.0 million from $13.6 million in 1997 to $18.6
million in 1998. Provider network revenue increased by $5.0 million, from $8.7
million in 1997 to $13.7 million in 1998. Of this increase, $1.8 million 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. The remainder of the increase was attributable to the
acquisition of AHP. At March 31, 1998, the provider network (including AHP)
consisted of approximately 12,000 medical facilities and approximately 150,000
physicians compared to approximately 2,900 medical facilities at March 31, 1997.
Utilization management services revenue of $4.9 million in 1998 increased
approximately $39,000 when compared to 1997.
Direct contract expenses increased by $1.6 million, from $6.8 million in
1997 to $8.4 million in 1998. Access fees to other provider networks as a
percentage of provider network revenue were 14.0% ($1.2 million) in 1997
compared to 8.8% ($1.2 million) in 1998. This percentage decrease was
attributable to the growth in the number of providers contracting directly with
UP&UP and Payor Clients accessing more direct contracts. Other direct costs of
services increased approximately $1.6 million, from $5.3 million in 1997 to $6.9
million in 1998. The increase was primarily attributable to the acquisition of
AHP effective September 1, 1997 and an overall increase in expenses of UP&UP
resulting primarily from a significant increase in the number of employees
subsequent to March 31, 1997 to accommodate growth in the provider network
business, increased provider network development activities and the continued
development of products and services. Effective January 1, 1998, the operating
infrastructures of UP&UP and AHP were fully integrated into a single business
and financial reporting unit. Accordingly, the portion of the increase in
expenses attributable to each of the components is not quantifiable.
General and administrative expenses increased approximately $0.5 million,
from approximately $1.5 million in 1997 to approximately $2.0 million in 1998.
The increase was primarily attributable to the acquisition of AHP effective
September 1, 1997 and an overall increase in expenses of UP&UP resulting from
the addition of employees in the administrative and executive areas and an
increase in professional fees for accounting and legal services. Effective
January 1, 1998, the operations of UP&UP and AHP were fully integrated into a
single business and financial reporting unit. Accordingly, the Company is not
able to quantify the portion of the overall increase in expenses attributable to
each of these two factors.
7
<PAGE>
Depreciation and amortization increased approximately $0.3 million from
approximately $0.3 million in 1997 to approximately $0.6 million in 1998. The
increase was primarily attributable to the depreciation expense and amortization
of goodwill of AHP, as well as depreciation on increased capital expenditures to
accommodate growth.
LIQUIDITY AND CAPITAL RESOURCES
During the first six months of 1996, the Company financed its operations
principally through equity contributions. In July 1996, the Company completed
the sale to the public of 2,760,000 shares of the Company's common stock and
received proceeds (net of underwriters' commissions and expenses) of
approximately $26.9 million. At March 31, 1998 the Company had working capital
of approximately $26.3 million. In March 1997, the Company entered into two
lines of credit arrangements for loan commitments totaling $15 million. Of this
amount, $10 million was used for the purchase of AHP. The Company has also
entered into a $15 million term loan with the same bank, $10 million of which
was used to replenish the amount drawn under the line of credit. 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 advances to
Contracting Providers 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 $7.5 million
to $12.5 million could be required to fund Prepayment Options during the
remainder of 1998. During June 1997, the Board of Directors of the Company
approved a common stock repurchase program of up to $5 million. As of March 31,
1998, the Company had repurchased 237,250 shares of its outstanding common stock
under the program, at an aggregate purchase price of $3,537,024. The Company
cancelled the common stock repurchase program as of February 1, 1998.
The Company believes that its existing liquidity sources, anticipated funds
from operations, and credit arrangements will satisfy its operating cash
requirements for the next 30 months. However, in the event that the advances for
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 advances.
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. During May 1997, Conseco, Inc.
completed its merger with Pioneer Financial Services, Inc., also one of the
Company's clients. The Company has not been advised of and does not anticipate
any changes, at least in the short term, in its contracts with these clients.
8
<PAGE>
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.
Certain interest groups within the health care industry have expressed
concern with certain activities of entities that have been referred to as
"Silent PPOs". The Company understands that some provider-sponsored professional
or trade associations may be considering a legal challenge against one or more
such organizations, and that regulatory agencies in certain states may be
investigating the activities of such organizations. Although it is unclear what
legal theories would support such a challenge or warrant such an investigation,
there can be no assurance that the Company would not be a target of such
challenge or investigation.
The potential impact of all of the above factors is difficult for the
Company to forecast, and these or other factors, such as sales of substantial
amounts of the Company's common stock in the public market, the Company's common
stock repurchase program, 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.
YEAR 2000 TECHNOLOGY
The Company, like other organizations, is in the process of assessing and
modifying its computer applications to ensure their functionality with respect
to the "year 2000" millennium change. At present, the Company does not
anticipate that material incremental costs will be incurred in any single future
year. The Company is also dependent on its Contracting Providers and Payor
Clients to successfully address their respective "year 2000" technology issues
in connection with their claims processing functions.
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 2 to the Consolidated
Financial Statements for the three months ended March 31, 1998.
ITEM 2. CHANGES IN SECURITIES (Not Applicable)
ITEM 3. DEFAULTS UPON SENIOR SECURITIES (Not Applicable)
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS (Not Applicable)
ITEM 5. OTHER INFORMATION (None)
9
<PAGE>
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. (1)
2.2 Plan and Agreement of Merger of IM&I, Inc. into PB Newco (1)
2.3 Plan and Agreement of Merger of PB Newco, Inc. into United
Payors & United Providers, Inc. (1)
3.1 Certificate of Incorporation of United Payors & United
Providers, Inc. (1)
3.2 Bylaws of United Payors & United Providers, Inc. (1)
4.1 Specimen Stock Certificate of United Payors & United
Providers, Inc. (1)
4.2 Shareholder Agreement (1)
10.1 Employment Agreement between United Payors & United Providers,
Inc. and Thomas L. Blair (1)
10.2 Employment Agreements between United Payors & United Providers,
Inc. and each of Spiro A. Karadimas, S. Joseph Bruno and
Michael A. Smith (1)
10.3 Form of Indemnification Agreement (1)
10.4 Stock Purchase Agreement between Preferred Health Choice and
United Payors & United Providers,
Inc. dated October 22, 1996 (2)
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 (3)
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 (3)
10.7 Stock Purchase Agreement between United Payors & United
Providers, Inc. and Principal Holding Company, a wholly-owned
subsidiary of Principal Mutual Life Insurance Company, dated
September 29, 1997 (4)
10.8 Employment Agreement By and Between United Payors & United
Providers, Inc., Thomas L. Blair, Chairman of the board and
Chief Executive Officer of United Payors & United Providers,
Inc., and Edward S. Civera (5)
27.1 Financial Data Schedule As Of and For the Three Months Ended
March 31, 1998
27.2 Amended Financial Data Schedule As Of and For the Three Months
Ended March 31, 1997
27.3 Amended Financial Data Schedule As Of and For the Six Months
Ended June 30, 1997
27.4 Amended Financial Data Schedule As Of and For the Nine Months
Ended September 30, 1997
- --------------
(1) 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.
(2) Incorporated herein by reference into this document from the Exhibits to
the Form 10-Q for the quarter ended September 30, 1996.
(3) 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.
(4) Incorporated herein by reference into this document from the Exhibits to
the Form 8-K dated October 13, 1997.
(5) Incorporated herein by reference into this document from the Exhibits to
the Form 10-K for the year ended December 31, 1997.
2. REPORTS ON FORM 8-K (None)
10
<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.
(Registrant)
Date: April 30, 1998 By: /s/ THOMAS L. BLAIR
------------------------------------------
Thomas L. Blair
Chairman and Chief Executive Officer
Date: April 30, 1998 By: /s/ EDWARD S. CIVERA
------------------------------------------
Edward S. Civera
President and Chief Operating Officer
Date: April 30, 1998 By: /s/ S. JOSEPH BRUNO
------------------------------------------
S. Joseph Bruno
Vice President and Chief Financial Officer
Date: April 30, 1998 By: /s/ EDUARDO V. FEITO
------------------------------------------
Eduardo V. Feito
Controller and Chief Accounting Officer
11
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
UNITED PAYORS & UNITED PROVIDERS, INC.
AND SUBSIDIARIES
FINANCIAL DATA SCHEDULE
AS OF AND FOR THE THREE MONTHS ENDED MARCH 31, 1998
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, 1998 and
is qualified in its entirety by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 15,646,109
<SECURITIES> 10,470,868
<RECEIVABLES> 11,893,320
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 39,336,997
<PP&E> 5,749,522
<DEPRECIATION> 1,713,214
<TOTAL-ASSETS> 88,153,275
<CURRENT-LIABILITIES> 13,007,231
<BONDS> 11,313,687
0
0
<COMMON> 34,182,167
<OTHER-SE> 28,471,857
<TOTAL-LIABILITY-AND-EQUITY> 88,153,275
<SALES> 0
<TOTAL-REVENUES> 18,598,010
<CGS> 0
<TOTAL-COSTS> 11,040,202
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 256,931
<INCOME-PRETAX> 7,520,900
<INCOME-TAX> 3,124,706
<INCOME-CONTINUING> 4,396,194
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,396,194
<EPS-PRIMARY> 0.39
<EPS-DILUTED> 0.37
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
UNITED PAYORS & UNITED PROVIDERS, INC.
AND SUBSIDIARIES
AMENDED FINANCIAL DATA SCHEDULE
AS OF AND FOR THE THREE MONTHS ENDED MARCH 31, 1997
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. This
schedule has been amended to reflect the adoption of the provisions of Statement
of Accounting Standards No. 128, Earnings Per Share, which establishes standards
for computing and presenting basic and diluted earnings per share and requires
the restatement of previously presented earnings per share data.
</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> 0.27
<EPS-DILUTED> 0.27
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
UNITED PAYORS & UNITED PROVIDERS, INC.
AND SUBSIDIARIES
AMENDED FINANCIAL DATA SCHEDULE
AS OF AND FOR THE SIX MONTHS ENDED JUNE 30, 1997
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 six months ended June 30, 1997 and is
qualified in its entirety by reference to such financial statements. This
schedule has been amended to reflect the adoption of the provisions of Statement
of Accounting Standards No. 128, Earnings Per Share, which establishes standards
for computing and presenting basic and diluted earnings per share and requires
the restatement of previously presented earnings per share data.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 11,219,418
<SECURITIES> 11,695,919
<RECEIVABLES> 9,679,016
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 33,151,941
<PP&E> 4,172,967
<DEPRECIATION> 911,150
<TOTAL-ASSETS> 59,817,388
<CURRENT-LIABILITIES> 7,172,661
<BONDS> 0
0
0
<COMMON> 35,399,376
<OTHER-SE> 16,746,070
<TOTAL-LIABILITY-AND-EQUITY> 59,817,388
<SALES> 0
<TOTAL-REVENUES> 27,278,415
<CGS> 0
<TOTAL-COSTS> 16,591,224
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 16,350
<INCOME-PRETAX> 11,430,485
<INCOME-TAX> 4,619,573
<INCOME-CONTINUING> 6,810,912
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,810,912
<EPS-PRIMARY> 0.59
<EPS-DILUTED> 0.58
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
UNITED PAYORS & UNITED PROVIDERS, INC.
AND SUBSIDIARIES
AMENDED FINANCIAL DATA SCHEDULE
AS OF AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997
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 nine months ended September 30, 1997
and is qualified in its entirety by reference to such financial statements. This
schedule has been amended to reflect the adoption of the provisions of Statement
of Accounting Standards No. 128, Earnings Per Share, which establishes standards
for computing and presenting basic and diluted earnings per share and requires
the restatement of previously presented earnings per share data.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 7,513,131
<SECURITIES> 11,418,464
<RECEIVABLES> 10,939,768
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 30,560,630
<PP&E> 5,112,657
<DEPRECIATION> 1,157,067
<TOTAL-ASSETS> 75,225,678
<CURRENT-LIABILITIES> 11,329,580
<BONDS> 8,145,760
0
0
<COMMON> 33,515,798
<OTHER-SE> 20,724,540
<TOTAL-LIABILITY-AND-EQUITY> 75,225,678
<SALES> 0
<TOTAL-REVENUES> 42,580,418
<CGS> 0
<TOTAL-COSTS> 25,962,119
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 21,908
<INCOME-PRETAX> 18,108,569
<INCOME-TAX> 7,319,108
<INCOME-CONTINUING> 10,789,461
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 10,789,461
<EPS-PRIMARY> 0.94
<EPS-DILUTED> 0.92
</TABLE>
