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 September 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
November 11, 1998 was 17,080,516.
<PAGE>
United Payors & United Providers, Inc.
and Subsidiaries
Third Quarter 1998 Form 10-Q
TABLE OF CONTENTS
Page
PART I FINANCIAL INFORMATION
ITEM 1. Financial Statements
Consolidated Balance Sheets as of September 30, 1998 (Unaudited)
and December 31, 1997....................................................1
Consolidated Statements of Operations for the Three and Nine Months
Months Ended September 30, 1998 and 1997 (Unaudited).....................2
Consolidated Statements of Cash Flows for the Nine Months Ended
September 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
<TABLE>
UNITED PAYORS & UNITED PROVIDERS, INC.
CONSOLIDATED BALANCE SHEETS
<CAPTION>
ASSETS September 30, December 31,
1998 1997
------------ ------------
(Unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents .................................... $ 22,365,593 $ 14,456,069
Short-term investments ....................................... 6,304,902 8,366,547
Accounts receivable .......................................... 12,226,319 11,233,277
Other current assets ......................................... 1,454,195 1,252,402
------------ ------------
Total current assets ....................................... 42,351,009 35,308,295
Fixed assets, net .............................................. 3,768,850 3,858,532
Advances to contracting providers, net ......................... 24,491,030 17,265,730
Investments .................................................... 2,528,976 1,496,051
Intangible and other assets, net ............................... 26,431,010 24,586,245
------------ ------------
Total assets ............................................... $ 99,570,875 $ 82,514,853
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses ........................ $ 10,216,925 $ 5,791,505
Income and other taxes payable ............................... 2,102,696 1,871,934
Notes payable and capital leases, current portion ............ 3,028,937 3,131,772
------------ ------------
Total current liabilities .................................. 15,348,558 10,795,211
Non-current accrued expenses ................................... 1,441,670 1,313,333
Notes payable and capital leases, less current portion ......... 9,813,688 12,109,606
------------ ------------
Total liabilities .......................................... 26,603,916 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 September 30,
1998 and December 31, 1997 ................................. -- --
Common stock, $0.01 par value, 35,000,000 shares authorized,
17,360,454 shares issued at September 30, 1998 and
December 31, 1997, respectively ............................ 173,605 173,605
Additional paid-in capital ................................... 37,123,886 37,123,886
Treasury stock, 279,938 shares at September 30, 1998 and
307,725 shares at December 31, 1997, at cost ............... (2,745,563) (3,029,450)
Retained earnings ............................................ 39,157,231 24,911,862
Deferred compensation ........................................ (742,200) (883,200)
------------ ------------
Total stockholders' equity ................................. 72,966,959 58,296,703
------------ ------------
Total liabilities and stockholders' equity ................. $ 99,570,875 $ 82,514,853
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
1
<PAGE>
<TABLE>
UNITED PAYORS & UNITED PROVIDERS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------------- ---------------------------
1998 1997 1998 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Provider network revenue ............ $ 14,225,767 $ 10,346,719 $ 42,028,629 $ 27,892,819
Utilization management services ..... 5,289,683 4,910,284 15,182,007 14,687,599
------------ ------------ ------------ ------------
Total revenue ................... 19,515,450 15,257,003 57,210,636 42,580,418
------------ ------------ ------------ ------------
Operating expenses:
Direct contract expenses .......... 7,972,713 7,380,199 24,724,037 20,295,786
General and administrative ........ 1,907,856 1,559,002 5,837,012 4,578,512
Depreciation and amortization ..... 680,294 431,690 1,969,480 1,087,821
------------ ------------ ------------ ------------
Total operating expenses ........ 10,560,863 9,370,891 32,530,529 25,962,119
------------ ------------ ------------ ------------
Other income (expense) .............. (325,657) 791,976 (285,034) 1,490,270
------------ ------------ ------------ ------------
Income before income taxes .......... 8,628,930 6,678,088 24,395,073 18,108,569
Income tax provision ................ (3,592,000) (2,699,535) (10,149,704) (7,319,108)
------------ ------------ ------------ ------------
Net income .......................... $ 5,036,930 $ 3,978,553 $ 14,245,369 $ 10,789,461
============ ============ ============ ============
Net income per share - basic ........ $ 0.29 $ 0.23 $ 0.84 $ 0.62
============ ============ ============ ============
Weighted average shares outstanding -
basic ............................. 17,074,745 17,195,288 17,059,691 17,289,727
============ ============ ============ ============
Net income per share - diluted ...... $ 0.28 $ 0.23 $ 0.79 $ 0.62
============ ============ ============ ============
Weighted average shares outstanding -
diluted ........................... 18,060,640 17,675,643 17,972,358 17,525,373
============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
2
<PAGE>
<TABLE>
UNITED PAYORS & UNITED PROVIDERS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<CAPTION>
Nine Months Ended September 30,
1998 1997
------------ ------------
<S> <C> <C>
Operating activities
Net income ............................................. $ 14,245,369 $ 10,789,461
Adjustment to reconcile net income to
net cash provided by operations
Depreciation and amortization ........................ 1,969,480 1,087,821
Loss on sale of fixed assets ......................... -- 143,138
Deferred income taxes and other non-cash items ....... 1,440,480 549,868
Changes in assets and liabilities, net of effects from
acquisition in 1997:
Accounts receivable ................................ (1,528,212) (1,273,099)
Accounts payable and accrued expenses .............. 520,817 (920,306)
Other current and non-current assets ............... 695,163 101,718
Income and other taxes payable ..................... 230,762 109,898
------------ ------------
Net cash provided by operating activities .............. 17,573,859 10,588,499
------------ ------------
Investing activities
Purchases of fixed assets ............................ (853,120) (1,335,478)
Proceeds from sale of fixed assets ................... -- 37,305
Purchases of short-term investments .................. (7,617,830) (16,011,644)
Proceeds from sale of short-term investments ......... 9,458,767 15,357,623
Advances to contracting providers .................... (7,337,300) (10,100,000)
Payment for acquisition, net of cash acquired ........ -- (13,322,685)
Other ................................................ (1,232,925) (726,691)
------------ ------------
Net cash used in investing activities .................. (7,582,408) (26,101,570)
------------ ------------
Financing activities
Purchases of treasury stock .......................... (207,574) (2,447,843)
Issuances of stock from treasury ..................... 491,461 --
Proceeds from borrowing .............................. -- 10,000,000
Repayment of debt .................................... (2,365,814) (560,139)
------------ ------------
Net cash provided by (used in) financing activities .... (2,081,927) 6,992,018
------------ ------------
Increase (decrease) in cash and cash equivalents ......... 7,909,524 (8,521,053)
Cash and cash equivalents
Beginning of the period .............................. 14,456,069 16,034,184
------------ ------------
End of the period .................................... $ 22,365,593 $ 7,513,131
============ ============
</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 December 31, 1995, UP&UP entered into
an agreement with America's Health Plan, Inc. ("AHP"), an indirect wholly-owned
subsidiary of Principal Life Insurance Company ("Principal Life"), whereby
certain payor clients were transferred to UP&UP. Principal Life owns
approximately 38% of the Company's Common Stock. Effective September 1, 1997,
UP&UP acquired the operations of AHP. Effective October 1, 1996, UP&UP acquired
National Health Services, Inc. ("NHS"). NHS provides health care utilization
review and case management services to 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. In connection with the acquisition, the Company 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 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 and nine months ended September
30, 1997 are included in the accompanying consolidated statements of operations
since the effective date of the acquisition. The acquisition resulted in
goodwill of approximately $15.5 million which is being amortized over 20 years.
The unamortized portion of goodwill at September 30, 1998, is included in
intangible and other assets in the accompanying consolidated balance sheet.
Under the terms of the acquisition agreement, the purchase price of AHP was
subject to adjustment through the year 2000, if AHP revenues exceeded
pre-determined targets. In August, 1998, the Company and the seller entered into
4
<PAGE>
an agreement to set the purchase price of AHP and eliminate the contingent
consideration provisions in the original acquisition agreement. Under the term
of the August, 1998 agreement, the Company is to pay the seller $4.0 million in
twelve equal monthly installments commencing November 1, 1998. This amount has
been recorded as a liability (included in accounts payable and accrued expenses)
and additional goodwill in the accompanying consolidated balance sheet as of
September 30, 1998.
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 nine
months ended September 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 nine months ended September 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 Three Months Ended
September 30, 1998 September 30, 1997
----------------------------- -----------------------------
Per Per
Net Income Shares Share Net Income Shares Share
---------- ---------- ----- ---------- ---------- -----
<S> <C> <C> <C> <C> <C> <C>
Basic ............ $5,036,930 17,074,745 $0.29 $3,978,553 17,195,288 $0.23
Effect of Dilutive
Options and
Warrants ......... -- 985,895 (0.01) -- 480,355 --
---------- ---------- ----- ---------- ---------- -----
Diluted .......... $5,036,930 18,060,640 $0.28 $3,978,553 17,675,643 $0.23
========== ========== ===== ========== ========== =====
</TABLE>
* * * * *
<TABLE>
<CAPTION>
Nine Months Ended Nine Months Ended
September 30, 1998 September 30, 1997
------------------------------- -------------------------------
Per Per
Net Income Shares Share Net Income Shares Share
----------- ---------- ----- ----------- ---------- -----
<S> <C> <C> <C> <C> <C> <C>
Basic ............ $14,245,369 17,059,691 $0.84 $10,789,461 17,289,727 $0.62
Effect of Dilutive
Options and
Warrants ......... -- 912,667 (0.05) -- 235,646 --
----------- ----------- ----- ----------- ----------- -----
Diluted .......... $14,245,369 17,972,358 $0.79 $10,789,461 17,525,373 $0.62
=========== =========== ===== =========== =========== =====
</TABLE>
5
<PAGE>
Stock options to purchase 4,500 shares of common stock at $21.59 per share
were outstanding during the nine months ended September 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 nine
months ended September 30, 1998 were dilutive, and, therefore, were included in
the computation of dilutive earnings per share for each of those periods.
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 nine months ended September 30, 1998 and 1997.
The Financial Accounting Standards Board has issued SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information," SFAS No.
132, "Employers' Disclosures About Pensions and Other Postretirement Benefits,"
and SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities." SFAS No. 131, which is effective for the year ending December 31,
1998, establishes standards for reporting information about operating segments,
including related disclosures about products and services, geographic areas and
major customers. SFAS No. 132, which is effective for fiscal years beginning
after December 31, 1997, revises employers' disclosures about pensions and other
postretirement benefit plans. SFAS No. 133, which is effective for all fiscal
quarters of fiscal years beginning after June 15, 1999, establishes accounting
and reporting standards for derivative instruments and for hedging activities.
These pronouncements are not expected to have a material impact on the financial
position or results of operations of the Company.
6. UNAUDITED INFORMATION
The consolidated financial statements for the three and nine months ended
September 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 nine months ended September 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 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"). 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.
6
<PAGE>
Effective December 31, 1995, UP&UP entered into an agreement with America's
Health Plan, Inc. ("AHP"), an indirect wholly-owned subsidiary of Principal Life
Insurance Company ("Principal Life"), whereby certain payor clients were
transferred to UP&UP. Principal Life owns approximately 38% of the Company's
Common Stock. Effective September 1, 1997, UP&UP acquired the operations of AHP.
The acquisition was accounted for as a purchase and, accordingly, the
consolidated results of operations of the Company for the three and nine months
ended September 30, 1997 include the results of operations of AHP since the
effective date of the acquisition. Effective January 1, 1998, the operating
infrastructure of UP&UP and AHP were fully 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 September 30, 1998 Compared to Three Months Ended
September 30, 1997
Total revenue increased $4.2 million from $15.3 million in 1997 to $19.5
million in 1998. Provider network revenue increased by $3.9 million, from $10.3
million in 1997 to $14.2 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 September 30, 1998, the provider network (including
AHP) consisted of direct contracts with approximately 14,000 medical facilities
and approximately 142,000 physicians compared to approximately 13,300 medical
facilities and approximately 123,000 physicians at September 30, 1997.
Utilization management services revenue of $5.3 million in 1998 increased by
approximately $379,000 when compared to 1997.
7
<PAGE>
Direct contract expenses increased by $0.6 million, from $7.4 million in
1997 to $8.0 million in 1998. Access fees to other provider networks as a
percentage of provider network revenue decreased by 3.9%, from 10.5% ($1.1
million) in 1997 to 6.6% ($0.9 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 by approximately $0.7 million, from $6.0 million in 1997 to
$6.7 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 September 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 by approximately $0.3
million, from approximately $1.6 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 $0.4 million in 1997 to approximately $0.7 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.
Nine Months Ended September 30, 1998 Compared to Nine Months Ended
September 30, 1997
Total revenues increased by $14.6 million, from $42.6 million in 1997 to
$57.2 million in 1998. Provider network revenues increased by $14.1 million,
from $27.9 million in 1997 to $42.0 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 September 30, 1998, the
provider network consisted of direct contracts with approximately 16,900 medical
facilities and approximately 142,000 physicians compared to approximately 13,300
medical facilities and approximately 123,000 physicians at September 30, 1997.
Utilization management services revenues increased by approximately $494,000,
from $14.7 million in 1997 to $15.2 million in 1998.
Direct contract expenses increased by $4.4 million, from $20.3 million in
1997 to $24.7 million in 1998. Access fees to other provider networks as a
percentage of provider network revenues decreased by 4.1%, from 12.4% ($3.4
million) in 1997 to 8.3% ($3.5 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 by approximately $4.2 million, from $16.0 million in 1997 to
$20.2 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 an increase in the number of
employees subsequent to September 30, 1997 to accommodate growth in the provider
network business, increased provider network development activities and the
continued development of new 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 by approximately $1.2
million, from approximately $4.6 million in 1997 to approximately $5.8 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 an increase in the number 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 the components.
8
<PAGE>
Depreciation and amortization increased by approximately $0.9 million, from
approximately $1.1 million in 1997 to approximately $2.0 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 September 30, 1998 the Company had working capital of approximately
$27.0 million. Net cash provided by operating activities increased by
approximately $7.0 million, from $10.6 million for the nine months ended
September 30, 1997 to $17.6 million for the nine months ended September 30,
1998. In March 1997, the Company entered into two lines of credit arrangements
for loan commitments totaling $15 million, which is available to the Company at
September 30, 1998. The Company has also entered into a $15 million term loan
with a bank. As of September 30, 1998, the Company had repaid $2.25 million
under the terms of the loan.
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 $2.5 million
to $5.0 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
September 30, 1998, the Company had repurchased 389,625 shares of its
outstanding common stock under the program, at an aggregate purchase price of
$3,537,023 and reissued 109,687 of the shares for an aggregate consideration of
$791,460.
The Company believes that its existing liquidity sources, anticipated funds
from operations, and credit arrangements will satisfy its operating cash
requirements for the next twenty-four months. However, in the event that the
advances for Prepayment Options exceed 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 issue additional equity securities to fund the balance of such advances.
There can be no assurances that the Company will be able to effect any such
additional borrowings or issue additional equity securities on acceptable terms.
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 upon 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 revenues is derived from a small
number of Payor Clients and state governments. The Company's standard contract
with a Payor Client or state government is generally for a one to two-year term,
with automatic renewals on the anniversary date. However, certain contracts may
be terminated by either party at any time, generally upon ninety days' notice or
at the convenience of the state governments. These contracts are also subject to
fee negotiations and revisions on an annual basis. As a result, Payor Clients
could terminate or not renew contracts, or renew only with terms unfavorable to
the Company. 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. Even if a Payor Client does not terminate its
contract with the Company, the Company could experience a significant decrease
in claims from a Payor Client as a result of the use of other provider networks
or other managed care systems and/or the consolidation being experienced in the
industry.
The Company's contracts with Contracting Providers typically have a
one-year term, renewable automatically for successive one year terms unless
either party gives notice of intent not to renew. Either party to these
contracts generally may terminate upon satisfaction of specified notice
requirements. The termination of a significant number of contracts
9
<PAGE>
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.
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, could have a material adverse effect
on the Company's business, financial condition, results of operations or 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, could have a material adverse effect
on 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 READINESS DISCLOSURE
The Company is aware of the issues associated with the programming code in
existing computer and software systems regarding the Year 2000. The Company,
like other organizations, is in the process of assessing and modifying or
replacing its information technology and non-information technology to ensure,
to the extent within the control of the Company, their functionality with
respect to the "Year 2000" millennium change and to identify and evaluate
potential risks to the Company to the extent that Year 2000 problems not within
the Company's control could impact the Company. The Company's primary computer
systems operate from an IBM platform and were designed in the 1990's, generally
with four digit year capability. With respect to non-information
technology, all of the Company's facilities are relatively modern, post-1990,
and are believed, based on the evaluation to date, not to have any significant
Year 2000 problems. The Company has budgeted $1 million, as a conservative
estimate of the maximum cost to it, to address "Year 2000 problems," and has
presently spent approximately $250,000. The Company does not anticipate that
material incremental costs will be incurred in any single future year. The
Company anticipates that it will be substantially Year 2000 ready by July 1,
1999 and will spend the remainder of 1999 testing. In light of the Company's
view that Year 2000 issues with respect to its information technology and
non-information technology systems within its control will be adequately
addressed by it and will not cause material disruption to the Company's
operations, the Company does not intend to develop a contingency plan with
respect to such system.
However, the Company's operations are dependent to a substantial extent on
the ability of its Payor Clients, and to a lesser extent, possibly its
Contracting Providers, to address successfully their Year 2000 issues in
connection with their claims processing. The Company has no guarantee, however,
that its Payor Clients or Contracting Providers will be able to resolve all of
their own Year 2000 problems in a timely manner. The Company has had discussions
with its major Payor Clients and the Company believes, based on the meetings and
other information available to it, that its major Payor Clients are aware of the
Year 2000 issue and are expending significant resources to identify and resolve
their Year 2000 problems. The Company could be materially and adversely affected
as a result of Year 2000 problems incurred by Payor Clients or Contracting
Providers or their inability to interface with the Company's systems, or as a
result of unforeseen problems regarding the Company's own system. Since Year
2000 problems encountered, and their resolution by, Payor Clients and
Contracting Providers are not subject to control by the Company, generally the
Company cannot and has not developed contingency plans to address whatever
problems might be encountered by those entities. The Company intends to continue
to monitor to the best of its ability the likelihood of significant problems
experienced by such entities which could materially affect the Company or its
operations.
10
<PAGE>
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 September 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
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)
11
<PAGE>
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 Nine Months Ended
September 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)
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: November 13, 1998 By: /s/ THOMAS L. BLAIR
------------------------------------------
Thomas L. Blair
Chairman and Chief Executive Officer
Date: November 13, 1998 By: /s/ EDWARD S. CIVERA
------------------------------------------
Edward S. Civera
President and Chief Operating Officer
Date: November 13, 1998 By: /s/ S. JOSEPH BRUNO
------------------------------------------
S. Joseph Bruno
Vice President and Chief Financial Officer
Date: November 13, 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 NINE MONTHS ENDED SEPTEMBER 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 nine months ended September 30, 1998
and is qualified in its entirety by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 22,365,593
<SECURITIES> 6,304,902
<RECEIVABLES> 12,226,319
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 42,351,009
<PP&E> 6,122,198
<DEPRECIATION> 2,353,348
<TOTAL-ASSETS> 99,570,875
<CURRENT-LIABILITIES> 15,348,558
<BONDS> 9,813,688
0
0
<COMMON> 34,551,928
<OTHER-SE> 38,415,031
<TOTAL-LIABILITY-AND-EQUITY> 99,570,875
<SALES> 0
<TOTAL-REVENUES> 57,210,636
<CGS> 0
<TOTAL-COSTS> 32,530,529
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 730,682
<INCOME-PRETAX> 24,395,073
<INCOME-TAX> 10,149,704
<INCOME-CONTINUING> 14,245,369
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 14,245,369
<EPS-PRIMARY> 0.84
<EPS-DILUTED> 0.79
</TABLE>
