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, 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
August 6, 1998 was 17,074,682.
<PAGE>
United Payors & United Providers, Inc.
and Subsidiaries
Second Quarter 1998 Form 10-Q
TABLE OF CONTENTS
Page
PART I FINANCIAL INFORMATION
ITEM 1. Financial Statements
Consolidated Balance Sheets as of June 30, 1998 (Unaudited) and
December 31, 1997......................................................1
Consolidated Statements of Operations for the Three and Six Months
Ended June 30, 1998 and 1997 (Unaudited)...............................2
Consolidated Statements of Cash Flows for the Six Months Ended
June 30, 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
SIGNATURES
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
UNITED PAYORS & UNITED PROVIDERS, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS June 30, December 31,
1998 1997
------------ ------------
(Unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents .................................... $ 16,751,201 $ 14,456,069
Short-term investments ....................................... 7,826,571 8,366,547
Accounts receivable .......................................... 11,866,918 11,233,277
Other current assets ......................................... 1,417,548 1,252,402
------------ ------------
Total current assets ....................................... 37,862,238 35,308,295
Fixed assets, net .............................................. 3,843,408 3,858,532
Advances to contracting providers, net ......................... 23,976,030 17,265,730
Investments .................................................... 1,175,539 1,496,051
Intangible and other assets, net ............................... 23,137,362 24,586,245
------------ ------------
Total assets ............................................... $ 89,994,577 $ 82,514,853
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses ........................ $ 6,068,064 $ 5,791,505
Income and other taxes payable ............................... 1,464,926 1,871,934
Notes payable and capital leases, current portion ............ 3,051,206 3,131,772
------------ ------------
Total current liabilities .................................. 10,584,196 10,795,211
Non-current accrued expenses ................................... 1,143,333 1,313,333
Notes payable and capital lease, less current portion .......... 10,563,687 12,109,606
------------ ------------
Total liabilities .......................................... $ 22,291,216 $ 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 June 30, 1998
and December 31, 1997 ...................................... -- --
Common stock, $0.01 par value, 35,000,000 shares authorized,
17,360,454 shares issued at June 30, 1998 and December 31,
1997, respectively ......................................... 173,605 173,605
Additional paid-in capital ................................... 37,123,886 37,123,886
Treasury stock, 290,312 shares at June 30, 1998 and 307,725
shares at December 31, 1997, at cost ....................... (2,925,230) (3,029,450)
Retained earnings ............................................ 34,120,300 24,911,862
Deferred compensation ........................................ (789,200) (883,200)
------------ ------------
Total stockholders' equity ................................. 67,703,361 58,296,703
------------ ------------
Total liabilities and stockholders' equity ................. $ 89,994,577 $ 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 June 30, Six Months Ended June 30,
1998 1997 1998 1997
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenue:
Provider network revenue .................. $14,069,115 $ 8,773,677 $27,802,862 $17,501,100
Utilization management services ........... 5,028,059 4,951,950 9,892,324 9,777,315
----------- ----------- ----------- -----------
Total revenue ........................... 19,097,174 13,725,627 37,695,186 27,278,415
----------- ----------- ----------- -----------
Operating expenses:
Direct contract expenses .................. 8,330,076 6,254,235 16,751,324 12,915,916
General and administrative ................ 1,949,890 1,430,063 3,929,156 3,019,511
Depreciation and amortization ............. 649,495 325,210 1,289,186 655,797
----------- ----------- ----------- -----------
Total operating expenses ................ 10,929,461 8,009,508 21,969,666 16,591,224
----------- ----------- ----------- -----------
Other income, net of interest expense ....... 77,531 427,365 40,623 743,294
----------- ----------- ----------- -----------
Income before income taxes .................. 8,245,244 6,143,484 15,766,143 11,430,485
Income tax provision ........................ 3,433,000 2,482,971 6,557,705 4,619,573
----------- ----------- ----------- -----------
Net income .................................. $ 4,812,244 $ 3,660,513 $ 9,208,438 $ 6,810,912
=========== =========== =========== ===========
Net income per share - basic ................ $ 0.28 $ 0.21 $ 0.54 $ 0.39
=========== =========== =========== ===========
Weighted average shares outstanding - basic . 17,063,505 17,332,489 17,052,039 17,337,373
=========== =========== =========== ===========
Net income per share - diluted .............. $ 0.27 $ 0.21 $ 0.51 $ 0.39
=========== =========== =========== ===========
Weighted average shares outstanding - diluted 18,021,629 17,651,617 17,924,266 17,523,147
=========== =========== =========== ===========
</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>
Six Months Ended June 30,
1998 1997
------------ ------------
<S> <C> <C>
Operating activities
Net income ..................................... $ 9,208,438 $ 6,810,912
Adjustment to reconcile net income to
net cash provided by (used in) operations
Depreciation and amortization ................ 1,289,186 655,797
Loss on sale of fixed assets ................. -- 143,138
Deferred income taxes and other non-cash items 671,150 432,769
Changes in assets and liabilities:
Accounts receivable ........................ (893,642) (1,521,001)
Accounts payable and accrued expenses ...... 73,619 274,071
Current and other assets ................... 417,693 (90,286)
Income and other taxes payable ............. (407,008) 57,580
------------ ------------
Net cash provided by operating activities ...... 10,359,436 6,762,980
------------ ------------
Investing activities
Purchases of fixed assets .................... (600,018) (1,121,231)
Proceeds from sale of fixed assets ........... -- 37,038
Purchases of short-term investments .......... (7,873,931) (12,408,326)
Proceeds from sale of short-term investments . 8,593,759 11,393,108
Advances to contracting providers ............ (6,815,300) (7,699,000)
Other ........................................ 120,512 (732,052)
------------ ------------
Net cash used in investing activities .......... (6,574,978) (10,530,463)
------------ ------------
Financing activities
Purchases of treasury stock .................. (207,574) (507,365)
Exercises of stock options ................... 311,793 --
Repayment of debt ............................ (1,593,545) (539,918)
------------ ------------
Net cash used in financing activities .......... (1,489,326) (1,047,283)
------------ ------------
Increase (decrease) in cash and cash equivalents . 2,295,132 (4,814,766)
Cash and cash equivalents
Beginning of the period ...................... 14,456,069 16,034,184
------------ ------------
End of the period ............................ $ 16,751,201 $ 11,219,418
============ ============
</TABLE>
The accompany 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 a financial and technical interface 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,
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 certain payor clients 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 payor clients and operations of America's
Health Plan, Inc. Effective October 1, 1996, UP&UP acquired National Health
Services, Inc. ("NHS"). NHS provides health care utilization review and case
management services to large payor clients. NHS' proprietary software integrates
the three critical components of its service -- hospital admission
precertification, triage and medical case management -- to its clients.
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 damages, based generally
on allegations that representatives of the Company made various
misrepresentations to prospective contracting providers, in order to cause them
to join the UP&UP Network. The Company denies the allegations in the complaint
and believes the complaint lacks merit. No trial date has been scheduled and, to
date, the Plaintiff has not provided any basis to support its claim of damages.
Based upon available information and after consultation with our attorneys,
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 other
actions, if any, will not be material to the consolidated financial statements
of the Company.
3. BUSINESS COMBINATION
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
an aggregate amount of $15 million. The loan bears interest at the rate of LIBOR
plus 11/8%, 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
and six months ended June 30, 1997 are not included in the accompanying
consolidated statements of operations for those periods. The acquisition
resulted in goodwill of approximately $15.5 million which is being amortized
over 20 years. The unamortized portion of goodwill at June 30, 1998, is included
in intangible and other assets in the accompanying consolidated balance sheet.
4
<PAGE>
4. STOCKHOLDERS' EQUITY AND EARNINGS PER SHARE
On April 13, 1998, the Company's Board of Directors approved a
three-for-two stock split in the form of a stock dividend payable on May 4,
1998, to stockholders of record on April 24, 1998. The stock split resulted in
the issuance of a total of 5,786,818 additional shares of common stock. The par
value of the common stock was not changed. Accordingly, the issuance of the
additional shares resulted in the transfer of $57,869 from additional paid-in
capital to common stock to reflect the aggregate par value of the shares issued.
All references in the financial statements to number of shares, related prices
and per share amounts have been restated to reflect the stock split.
In addition, 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 and six
months ended June 30, 1997 has also 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 and six months ended June 30, 1998 and 1997
to the numerators and denominators of the diluted earnings per share
computations for the respective periods follows:
<TABLE>
<CAPTION>
Three Months Ended June 30, 1998 Three Months Ended June 30, 1997
----------------------------- -----------------------------
Per Per
Net Income Shares Share Net Income Shares Share
---------- ---------- ----- ---------- ---------- -----
<S> <C> <C> <C> <C> <C> <C>
Basic ............ $4,812,244 17,063,505 $0.28 $3,660,513 17,332,489 $0.21
Effect of Dilutive
Options and
Warrants ......... -- 958,124 (0.01) -- 319,028 --
---------- ---------- ----- ---------- ---------- -----
Diluted .......... $4,812,244 18,021,629 $0.27 $3,660,513 17,651,617 $0.21
========== ========== ===== ========== ========== =====
</TABLE>
* * * * *
<TABLE>
<CAPTION>
Six Months Ended June 30, 1998 Six Months Ended June 30, 1997
----------------------------- -----------------------------
Per Per
Net Income Shares Share Net Income Shares Share
---------- ---------- ----- ---------- ---------- -----
<S> <C> <C> <C> <C> <C> <C>
Basic ............ $9,208,438 17,052,039 $0.54 $6,810,912 17,337,373 $0.39
Effect of Dilutive
Options and
Warrants ......... -- 872,227 (0.03) -- 185,774 --
---------- ---------- ----- ---------- ---------- -----
Diluted .......... $9,208,438 17,924,266 $0.51 $6,810,912 17,523,147 $0.39
========== ========== ===== ========== ========== =====
</TABLE>
Stock options to purchase 4,500 shares of common stock at $21.59 per share
were outstanding during the three and six months ended June 30, 1998 but were
not included in the computation of diluted earnings per share because the
exercise price of the stock options was greater than the average market price of
the common shares and, therefore, was antidilutive. These stock options expire
in May 2008. All other options and warrants outstanding during the three and six
months ended June 30, 1998 were dilutive, and, therefore, were included in the
computation of dilutive earnings per share for each of those periods.
5
<PAGE>
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 three
and six months ended June 30, 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 three and six months
ended June 30, 1997 have been reclassified to conform to the presentation of the
financial statements for the three and six months ended June 30, 1998.
7. UNAUDITED INFORMATION
The consolidated financial statements for the three and six months ended
June 30, 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 and six months ended June 30, 1998 are not necessarily indicative
of the results to be expected for the full year or in the future.
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 a financial and technical interface 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"). NHS provides health care utilization review and case
management services to large payor clients. NHS' proprietary software integrates
the three critical components of its service -- hospital admission
precertification, triage and medical case management -- to its clients.
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 certain payor clients 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 payors
clients and 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 and six months ended June 30, 1997 do
not include the results of operations of America's Health Plan, Inc. for that
period. Effective January 1, 1998, the operating infrastructure of UP&UP and AHP
were fully
6
<PAGE>
integrated into a single business, administrative and financial reporting unit.
During the second quarter of 1998, the Company completed the merger of the UP&UP
and AHP individual provider networks into a seamless and fully integrated
provider network.
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.
Medical utilization management services revenues are based on contractual
arrangements. Contracts may reflect a per-employee-per-month ("PEPM") rate, fee
for service or hourly rate. Precertification revenues are generally based on
PEPM 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 June 30, 1998 Compared to Three Months Ended June 30, 1997
Total revenue increased $5.4 million from $13.7 million in 1997 to $19.1
million in 1998. Provider network revenue increased by $5.3 million, from $8.8
million in 1997 to $14.1 million in 1998. This increase was attributable to the
acquisition of AHP, 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. Because of the merger of the UP&UP and AHP provider networks,
the Company is not able to quantify the portion of the increase attributable to
the acquisition of AHP. At June 30, 1998, the provider network (including AHP)
consisted of direct contracts with approximately 14,000 medical facilities and
approximately 140,000 physicians compared to approximately 4,400 medical
facilities at June 30, 1997. Utilization management services revenue of $5.0
million in 1998 increased approximately $76,000 when compared to 1997.
Direct contract expenses increased by $2.1 million, from $6.2 million in
1997 to $8.3 million in 1998. Access fees to other provider networks as a
percentage of provider network revenue were 12.9% ($1.1 million) in 1997
compared to 9.6% ($1.4 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 $1.8 million, from $4.8 million in 1997 to $6.6
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 June 30, 1997 to accommodate
7
<PAGE>
growth in the provider network business, increased provider network development
activities and the continued development of products and services. Because of
the integration of the operations of UP&UP and AHP, the Company is not able to
quantify the portion of the increase in expenses attributable to each of the
components.
General and administrative expenses increased approximately $0.5 million,
from approximately $1.4 million in 1997 to approximately $1.9 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 from
the addition of employees in the administrative and executive areas and an
increase in professional fees for accounting and legal services. Because of the
integration of the operations of UP&UP and AHP, the Company is not able to
quantify the portion of the overall increase in expenses attributable to each of
these two factors.
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.
Six Months Ended June 30, 1998 Compared to Six Months Ended June 30, 1997
Total revenue increased $10.4 million from $27.3 million in 1997 to $37.7
million in 1998. Provider network revenue increased by $10.3 million, from $17.5
million in 1997 to $27.8 million in 1998. Of this increase, $3.9 million was
attributable to the acquisition of AHP, 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. Because of the merger of the UP&UP
and AHP provider networks, the Company is not able to quantify the portion of
the increase attributable to the acquisition of AHP. At June 30, 1998, the
provider network (including AHP) consisted of direct contracts with
approximately 14,000 medical facilities and approximately 140,000 physicians
compared to approximately 4,400 medical facilities at June 30, 1997. Utilization
management services revenue of $9.9 million in 1998 increased approximately
$115,000 when compared to 1997.
Direct contract expenses increased by $3.8 million, from $12.9 million in
1997 to $16.7 million in 1998. Access fees to other provider networks as a
percentage of provider network revenue were 13.5% ($2.4 million) in 1997
compared to 9.2% ($2.6 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 $3.5 million, from $10.0 million in 1997 to
$13.5 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 June 30, 1997 to accommodate growth in the provider
network business, increased provider network development activities and the
continued development of products and services. Because of the integration of
the operations of UP&UP and AHP, the Company is not able to quantify the portion
of the increase in expenses attributable to each of the components.
General and administrative expenses increased approximately $0.9 million,
from approximately $3.0 million in 1997 to approximately $3.9 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 from
the addition of employees in the administrative and executive areas and an
increase in professional fees for accounting and legal services. Because of the
integration of the operations of UP&UP and AHP, the Company is not able to
quantify the portion of the overall increase in expenses attributable to each of
these two factors.
Depreciation and amortization increased approximately $0.6 million from
approximately $0.7 million in 1997 to approximately $1.3 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
At June 30, 1998 the Company had working capital of approximately $27.3
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
8
<PAGE>
million of which was used to replenish the amount drawn under the line of
credit. As of June 30, 1998, the Company had repaid $1.5 million under the terms
of the loan. 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 $5.0 million
to $7.5 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. The Company
canceled the common stock repurchase program as of February 1, 1998. As of June
30, 1998, the Company had repurchased 259,750 shares of its outstanding common
stock under the program, at an aggregate purchase price of $3,537,023 and
reissued 66,209 of the shares for an aggregate consideration of $611,793.
The Company believes that its existing liquidity sources, anticipated funds
from operations, and credit arrangements will satisfy its operating cash
requirements for the next thirty 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 periodically renegotiates its contracts with its
Payor Clients.
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
ninety 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.
9
<PAGE>
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 quarter ended June 30, 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
The annual meeting of the stockholders of the Company was held on June 4,
1998. The following matters were submitted to a vote of the stockholders:
1. The following individuals were elected to the Board of Directors for a
three-year term with the indicated votes:
<TABLE>
<CAPTION>
For Against Abstain
---------- ------- -------
<S> <C> <C> <C>
Bette B. Anderson ............ 15,736,689 375 None
Michael H. Gersie ............ 15,736,689 375 None
Kenneth J. Linde ............. 15,736,689 375 None
</TABLE>
Board members whose term of office continued after the meeting are as
follows:
Thomas L. Blair
William E. Brock
Edward S. Civera
David J. Drury
Frederick H. Graefe
Thomas J. Graf
10
<PAGE>
2. The appointment of PriceWaterhouseCoopers LLP (formerly Coopers & Lybrand
L.L.P.) as independent auditors of the Company was ratified by a count of
15,726,036 affirmative votes, 4,500 negative votes and 6,528 abstentions.
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. (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 Six Months Ended
June 30,1998
- --------------
(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)
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.
(Registrant)
Date: August 7, 1998 By: /s/ THOMAS L. BLAIR
-------------------------
Thomas L. Blair
Chairman and Chief Executive Officer
Date: August 7, 1998 By: /s/ EDWARD S. CIVERA
--------------------------
Edward S. Civera
President and Chief Operating Officer
Date: August 7, 1998 By: /s/ S. JOSEPH BRUNO
-------------------------
S. Joseph Bruno
Vice President and Chief Financial Officer
Date: August 7, 1998 By: /s/ EDUARDO V. FEITO
--------------------------
Eduardo V. Feito
Controller and Chief Accounting Officer
12
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
UNITED PAYORS & UNITED PROVIDERS, INC.
AND SUBSIDIARIES
FINANCIAL DATA SCHEDULE
AS OF AND FOR THE SIX MONTHS ENDED JUNE 30, 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 six months ended June 30, 1998 and is
qualified in its entirety by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 16,751,201
<SECURITIES> 7,826,571
<RECEIVABLES> 11,866,918
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 37,862,238
<PP&E> 5,869,095
<DEPRECIATION> 2,025,688
<TOTAL-ASSETS> 89,994,577
<CURRENT-LIABILITIES> 10,584,196
<BONDS> 10,563,687
0
0
<COMMON> 34,372,260
<OTHER-SE> 33,331,101
<TOTAL-LIABILITY-AND-EQUITY> 89,994,577
<SALES> 0
<TOTAL-REVENUES> 37,695,186
<CGS> 0
<TOTAL-COSTS> 21,969,666
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 509,972
<INCOME-PRETAX> 15,766,143
<INCOME-TAX> 6,557,705
<INCOME-CONTINUING> 9,208,438
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 9,208,438
<EPS-PRIMARY> 0.54
<EPS-DILUTED> 0.51
</TABLE>
