<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 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, 1996 OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 19934 FOR THE TRANSITION PERIOD FROM ______________
TO ____________________________.
Commission file number: 0-23220
Health Power, Inc.
- - -------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
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<S> <C>
Delaware 31-1145640
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(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
1209 Orange Street, Wilmington, Delaware 19801
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(Address of principal executive offices) Zip Code
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(302) 658-7581
--------------
(Registrant's telephone number, including area code)
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
latest practicable date.
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<S> <C>
Common Stock, $0.01 Par Value 3,810,331
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Class Outstanding at May 2, 1996
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Page 1 of 14
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HEALTH POWER, INC. AND SUBSIDIARIES
INDEX
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PAGE
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets - as of 3 & 4
March 31, 1996 and December 31, 1995
Consolidated Statements of Operations for the 5
three months ended March 31, 1996 and
March 31, 1995
Consolidated Statements of Cash Flows - for the 6
three months ended March 31, 1996 and
March 31, 1995
Notes to the Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial 8
Condition and Results of Operations
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 12
Signatures 13
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Page 2 of 14
<PAGE> 3
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
HEALTH POWER, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS as of March 31, 1996 and December 31, 1995
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<CAPTION>
March 31, 1996 December 31,
ASSETS (Unaudited) 1995
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Current assets:
Cash and cash equivalents $22,509,260 $19,492,893
Accounts and notes receivable 2,572,525 1,892,111
Deferred commissions 24,006 15,481
Prepaid expenses 130,021 131,051
Income taxes 1,454,420 1,109,155
----------- -----------
Total current assets 26,690,232 22,640,691
----------- -----------
Property and equipment, net 2,565,148 2,566,038
Other assets 515,978 515,978
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Total assets $29,771,358 $25,722,707
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The accompanying notes are an integral part of the financial statements.
Page 3 of 14
<PAGE> 4
CONSOLIDATED BALANCE SHEETS, Continued
LIABILITIES AND STOCKHOLDERS' EQUITY
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<CAPTION>
March 31, 1996 December 31,
(Unaudited) 1995
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Current liabilities:
Health care costs payable $ 6,842,637 $ 6,754,001
Capitation costs withheld and risk-sharing funds 288,953 437,303
Deferred revenues 8,012,749 3,703,805
Note payable, current 3,031 2,963
Accounts payable 820,089 514,776
Accrued commissions 69,048 45,987
Association reimbursement fees 90,506 0
Accrued profit sharing 12,500 0
Accrued expenses and other liabilities 307,076 254,197
----------- -----------
Total current liabilities 16,446,589 11,713,032
----------- -----------
Note payable, noncurrent 6,947 7,731
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Total liabilities 16,453,536 11,720,763
----------- -----------
Stockholders' equity:
Common stock 38,103 38,103
Additional paid-in capital 10,711,292 10,711,292
Retained earnings 2,568,426 3,252,549
----------- -----------
Total stockholders' equity 13,317,822 14,001,944
----------- -----------
Total liabilities and stockholders' equity $29,771,358 $25,722,707
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The accompanying notes are an integral part of the financial statements.
Page 4 of 14
<PAGE> 5
HEALTH POWER, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
for the three months ended March 31, 1996 and March 31, 1995
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<CAPTION>
(Unaudited)
Three Months Ended
March 31,
1996 1995
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Revenues: $ 15,387,195 $14,719,177
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Expenses:
Health care costs 13,106,222 10,978,797
Selling, general and administrative 3,574,820 2,836,236
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16,681,042 13,815,033
(Loss) income from operations (1,293,847) 904,144
Interest income and other, net 233,460 282,709
------------ -----------
(Loss) income before income taxes (1,060,387) 1,186,853
Federal, state and local income taxes (benefit) (376,265) 452,315
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Net (loss) income ($ 684,122) $ 734,538
============ ===========
Net (loss) earnings per common share ($ 0.18) $ 0.19
============ ===========
Weighted average common shares outstanding 3,810,667 3,832,998
============ ===========
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The accompanying notes are an integral part of the financial statements.
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<PAGE> 6
CONSOLIDATED STATEMENT OF CASH FLOWS
for the three months ended March 31, 1995 and 1996
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<CAPTION>
(Unuadited)
1995 1994
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Net cash provided by (used in) operating activities
$ 3,098,827 ($ 498,012)
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Cash flows used in investing activities:
Purchase of property and equipment, net
(82,460) (274,743)
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Net cash used in investing activities
(82,460) (274,743)
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Cash flows provided by financing activities:
0 0
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Net cash provided by financing activities
0 0
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Net increase (decrease) in cash and cash equivalents
3,016,367 (772,755)
Cash and cash equivalents, beginning of period
19,492,893 20,220,539
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Cash and cash equivalents, end of period
$ 22,509,260 $19,447,784
============ ===========
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The accompanying notes are an integral part of the financial statements.
Page 6 of 14
<PAGE> 7
HEALTH POWER, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
1. The accompanying consolidated financial statements are unaudited and have
been prepared by Health Power, Inc. In the opinion of management, they
contain the adjustments (all of which are normal and recurring in nature)
necessary to present fairly the financial position, results of operations,
and cash flows for all periods presented. The results of operations for
the periods ended March 31, 1996 are not necessarily indicative of
operating results for a full year.
The accompanying unaudited consolidated financial statements have been
prepared in accordance with the instructions for Form 10-Q and, therefore,
do not include all information and footnote disclosures normally included
in financial statements prepared in accordance with generally accepted
accounting principles. These financial statements should be read in
conjunction with the December 31, 1995, financial statements and notes
thereto contained in the Company's 1995 Annual Report on Form 10-K.
2. On April 9, 1996, Health Power HMO entered into a purchase agreement
with ChoiceCare Health Plans, Inc., an Ohio Corporation
("ChoiceCare"), to acquire certain contract rights and interests with
respect to ChoiceCare's provider agreement with the Ohio Department of
Human Services ("ODHS"). Under that provider agreement, ChoiceCare
provides health services to approximately 13,000 ADC Medicaid recipients
residing in Hamilton County, Ohio. The transaction is subject to a number
of conditions, including approval from ODHS and the Ohio Department of
Insurance. The contract rights being assigned by ChoiceCare are to be
purchased for $5.0 million. The transaction is expected to be completed,
subject to the aforementioned conditions, during the second quarter of
1996.
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Item 7. Management's Discussion and Analysis of Financial Condition and
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Results of Operations
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GENERAL
Health Power, Inc., a Delaware corporation (the "Company"), is a
managed care holding company whose two wholly owned operating subsidiaries are
Health Power HMO, Inc., an Ohio corporation ("Health Power HMO"), and
CompManagement, Inc., an Ohio corporation ("CompManagement"). During the first
quarter of 1996, Health Power HMO operated in three service areas encompassing
Ohio counties based around the cities of Columbus, Dayton, and Cincinnati.
Health Power HMO provides comprehensive health care services to members of its
health maintenance organization ("HMO"). Health Power HMO has historically
focused on serving Medicaid recipients enrolled in the aid to families with
dependent children and healthy start ("ADC") programs and, to a lesser extent,
commercial members enrolled through employer groups.
The Company acquired CompManagement on July 21, 1995. The acquisition
was accounted for as a pooling of interests. CompManagement, which began
business in September 1984, provides claims management, medical cost
containment, and managed care services to employers with respect to their
workers' and unemployment compensation claims. CompManagement provides its
services to over 6,400 employers located in all 88 Ohio counties.
RECENT DEVELOPMENTS
On April 9, 1996, Health Power HMO entered into a purchase agreement
with ChoiceCare Health Plans, Inc., an Ohio corporation ("ChoiceCare"), to
acquire certain contract rights and interests with respect to ChoiceCare's
provider agreement with the Ohio Department of Human Services ("ODHS"). Under
that provider agreement, ChoiceCare provides health care services to
approximately 13,000 ADC Medicaid recipients residing in Hamilton County, Ohio.
The transaction is subject to a number of conditions, including approval from
ODHS and the Ohio Department of Insurance. The contract rights being assigned
by ChoiceCare are to be purchased for $5.0 million. The transaction is expected
to be completed, subject to the aforementioned conditions, during the second
quarter of 1996.
RESULTS OF OPERATIONS
Three months ended March 31, 1996, compared to three months ended
March 31, 1995
The Company's revenues increased $.7 million, or 4.5 %, to $15.4
million during the first quarter of 1996, from $14.7 million for the same
period in 1995. This increase was due to growth in the number of employers
contracting with CompManagement and to growth in HMO membership, which more
than offset reductions in HMO revenue per member months. CompManagement's
revenues increased $.3 million, or 20.0 %, to $1.5 million during the first
quarter of 1996, as compared to the same
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period in the prior year, as a result of an increase in the number of
employers contracting for its services, and in particular, employers
participating in group rating plans. Health Power HMO's revenues increased
$.4 million, or 3.1%, to $13.9 million during the first quarter of 1996,
from $13.5 million for the same period in the prior year. Health Power
HMO's ADC Medicaid revenues increased 8.8% during the first quarter of
1996, as compared to the same period in the prior year, primarily as a
result of a 13.6% increase in member months, which more than offset a 4.2%
decrease in the revenue per member month. Health Power HMO's commercial
revenues decreased 9.7% during the first quarter of 1996, as compared to the
same period in the prior year, primarily as a result of a 11.1% decrease in
the revenue per member months, which more than offset a 1.6% increase in
member months. The decrease in the ADC Medicaid revenue per member month
resulted from the March 1, 1995 capitation rate reduction of approximately 5%
from ODHS, discussed below. The decrease in the commercial revenue per
member month was the result of the increasingly competitive and price
sensitive commercial marketplace. In particular, Health Power HMO's current
one-year agreements with the State of Ohio employer group, which were
effective July 1, 1995, provide for an annual per member premium rate which
represents an approximate 14% reduction from the prior year's per member
premium rate.
Health Power HMO's health care costs increased $2.1 million, or 19.4%,
to $13.1 million during the first quarter of 1996, from $11.0 million for the
same period in 1995. Health care costs, stated as a percentage of Health Power
HMO's revenues (the "HMO medical loss ratio"), were 94.5% for the first quarter
of 1996, as compared to 81.6% for the same period in the prior year. The
increase in the HMO medical loss ratio was primarily due to increases in per
member health care costs of 19.2% and 4.3% for commercial and ADC Medicaid
business, respectively, during the first quarter of 1996, as compared to the
same period in the prior year, along with the aforementioned 11.1% decrease in
per member commercial revenue and the 4.2% decrease in per member ADC Medicaid
revenue during the same period. Health Power HMO normally adjusts its
commercial rating to include health care cost increases, but also balances
marketing decisions against marketplace considerations. With respect to ADC
Medicaid pricing, because Health Power HMO's monthly per member capitation rate
payment from ODHS is based, in part, on ODHS estimates of ADC Medicaid health
care cost increases, Health Power HMO is unable to appropriately adjust its
pricing if actual ADC Medicaid health care costs increase at a rate in excess
of the ODHS estimates. Health Power HMO continues its efforts to control health
care costs through claims auditing, utilization review, improved provider
contracting, and increased efficiencies through improved technology.
The Company's selling, general and administrative ("SGA") expenses
increased $.7 million, or 26.0%, to $3.6 million for the first quarter of 1996,
from $2.8 million for the same period in 1995. CompManagement's SGA expenses
increased $.3 million, or 30.0%, to $1.2 million for the first quarter of
1996, from $1.0 million for the same period in the prior year, primarily as a
result of increases in selling commissions and other expenses necessary to
support the increase in the number of employers contracting for its services.
Health Power HMO's SGA expenses decreased $.2 million, or 9.5%, to $2.1 million
for the first quarter of 1996, from $2.3 million for the same period in 1995.
These SGA expenses, stated as a percentage of Health Power HMO's revenues (the
"HMO administrative ratio"), were 14.9% for the first quarter of 1996, as
compared to 17.5% for the same period in 1995. In the fourth quarter of 1995,
the Company revised its accounting procedure for allocating certain
administrative expenses among its subsidiaries. Prior to this change, all
administrative expenses, regardless of purpose, were allocated to Health Power
HMO. The change in the accounting procedure was implemented because of the
Company's acquisition of CompManagement and the need to better allocate
administrative expenses that were applicable to the consolidated operations of
the Company but not specific to the operation of any one subsidiary. Certain of
these administrative expenses are now allocated to the Company's
management-subsidiary which is responsible for managing and overseeing the
operations of Health Power HMO and certain of the Company's other subsidiaries.
These other administrative expenses were $.3 million for the first quarter of
1996. The decrease in the SG&A expense for Health Power HMO, as well as the
lower HMO administrative ratio, was due to this change.
The Company will incur substantial expenses during 1996 in connection
with establishing its presence in the new Northeast service area (including
Cleveland), expanding its network of providers, continuing the
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expansion and upgrading of its information system, strengthening internal
controls and operating procedures, training and developing personnel, and
pursuing NCQA accreditation. CompManagement may also incur substantial expenses
during such period in connection with increasing the number of its support
staff, training and developing personnel, expanding and upgrading its
information system, and developing products and support systems for the managed
care workers' compensation product. The Company's management believes these
activities are necessary to position Health Power HMO and CompManagement for
continued growth. However, these activities will adversely impact 1996
earnings.
The Company's interest income and other decreased $49,000 to $.2
million for the first quarter of 1996, from $.3 million for the same period in
the prior year. This decrease resulted primarily from a decrease in the average
available investable cash balance combined with reduced interest yields.
The Company had an income tax benefit of $.4 million for the first
quarter of 1996, as compared to an income tax expense of $.3 million for the
same period in 1995. This tax benefit was the result of a loss from operations
of $1.3 million.
As a result of the foregoing, the Company sustained a net loss of $.7
million as compared to net income of $.7 million during the same period in the
prior year.
Effective March 1, 1995, Health Power HMO received an approximate 5%
capitation rate reduction from ODHS with respect to its ADC Medicaid
membership, which rate will be effective until June 30, 1996. The Company
expects further capitation rate reductions from ODHS, varying by service area,
of approximately 10%. These further reduced rates will be effective for the
period of July 1, 1996 through June 30, 1997. Similar reductions were and will
be applied by ODHS to other HMOs providing health care services to ADC Medicaid
recipients in Ohio. In addition, Health Power HMO's current commercial
agreements with the State of Ohio employer group provide for an annual per
member premium rate which represents an approximate 14% reduction from the
prior year's per member premium rate through June 30, 1995. These reduced rates
had an adverse effect on the first quarter 1996 revenues and net income of the
Company. These rates, coupled with the substantial expenses to be incurred
during 1996 in connection with the establishment of a presence in the Northeast
service area, the expansion of the provider network, and the incurrance of the
other expenses, as discussed above, will have an adverse effect on the net
income of the Company for 1996. The Company will likely report losses during
most or all of 1996. The Company's management believes that the Company will
return to profitable operations; however, there can be no assurance as to when
this will occur.
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its operations through internally generated
funds and the net proceeds from the March 1994 public offering, and its
principal sources of cash have been premium revenues from Health Power HMO,
contract revenues from CompManagement, and investment income. The net proceeds
from the March 1994 public offering were $8.6 million. The Company's principal
capital needs are to fund planned geographic and product expansion, for
property and equipment purchases, to increase marketing and sales efforts, to
maintain necessary regulatory capital, and for possible acquisitions. At March
31, 1996, the statutory net worth of Health Power HMO was $1.8 million, which
met the minimum statutory net worth requirements of the Ohio Department of
Insurance.
At March 31, 1996, the Company had working capital of $10.2 million, as
compared to working capital of $10.9 million at December 31, 1995. At March 31,
1996, cash and cash equivalents were $22.5 million, a increase of $3.0 million
from $19.5 million at December 31, 1995. This increase was attributable
primarily to
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<PAGE> 11
the receipt of deferred revenue by CompManagement during the first quarter of
1996. The Company's cash and cash equivalents do not include statutory cash
deposits segregated as required by the Ohio Department of Insurance and the
Ohio Department of Human Services. These deposits of $0.4 million as of March
31, 1996, are included with other assets on the balance sheet.
Net cash provided by operating activities was $3.1 million for the
first quarter of 1996, as compared to net cash used in operating activities of
$.5 million during the same period in the prior year. In general, changes from
year to year in cash flow from operations are primarily due to changes in net
earnings, health care costs payable, purchase of property and equipment, and
deferred revenues. Many of these fluctuations are due to timing of cash
receipts or payments. Because premium payments received prior to the month of
coverage are recorded as deferred revenues, the extent of such receipts can
cause fluctuations in the total amount of cash from month to month.
The Company believes that internally generated funds and existing
working capital will be sufficient to support the Company's currently planned
expansion in existing and new geographic markets.
INFLATION
Historically, medical costs have risen at a higher rate than the
general rate of inflation. The Company believes that its cost containment
procedures and contractual arrangements with providers mitigate, but do not
wholly offset, the effects of medical cost inflation on its operating results.
The commercial marketplace was intensely competitive and price
sensitive during 1995, a trend which continued during the first quarter of
1996. The Company believes that this trend will continue for the balance of
1996, perhaps longer. Because commercial premium rate changes are balanced
against marketplace considerations, Health Power HMO has generally been unable
to increase its commercial premium rates commensurate with its medical cost
increases.
With respect to ADC Medicaid capitation rates, and as previously
discussed, effective July 1, 1995, Health Power HMO received an approximate 5%
capitation rate reduction from ODHS with respect to its ADC Medicaid
membership. This rate will be effective until June 30, 1996. The Company
expects further capitation rate reductions from ODHS, varying by service area,
of approximately 10%. These further reduced rates will be effective, for the
period of July 1, 1996 through June 30, 1997.
Because of the foregoing, the Company may be unable to offset the
adverse effects of inflationary medical cost increases to its operation.
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<PAGE> 12
Part II - Other Information
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
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27 Financial Data Schedule
(b) Reports on Form 8-K
-------------------
No reports on Form 8-K were filed or required during the
quarter.
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<PAGE> 13
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.
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HEALTH POWER, INC.
DATE: MAY 14, 1996 BY /s/ Thomas E. Beaty, Jr.
---------------------------------------------
THOMAS E. BEATY, JR., PRESIDENT AND
CHIEF OPERATING OFFICER
DATE: MAY 14, 1996 BY /s/ Daryl L. Klinko
------------------------------------------------
DARYL L. KLINKO, EXECUTIVE VICE PRESIDENT/
INTERNAL AFFAIRS, CHIEF FINANCIAL OFFICER
AND TREASURER
DATE: MAY 14, 1996 BY /s/ Ronald J. Wurtz
------------------------------------------------
RONALD J. WURTZ, CONTROLLER AND
PRINCIPAL ACCOUNTING OFFICER
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<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> MAR-31-1996
<CASH> 22,509
<SECURITIES> 0
<RECEIVABLES> 2,573
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 26,690
<PP&E> 3,776
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<TOTAL-ASSETS> 29,771
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<BONDS> 0
<COMMON> 38
0
0
<OTHER-SE> 13,280
<TOTAL-LIABILITY-AND-EQUITY> 13,318
<SALES> 0
<TOTAL-REVENUES> 15,387
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