<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 JUNE 30, 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)
Delaware 31-1145640
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
1209 Orange Street, Wilmington, Delaware 19801
(Address of principal executive offices) Zip Code
(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.
Common Stock, $0.01 Par Value 3,810,331
Class Outstanding at August 6, 1996
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HEALTH POWER, INC. AND SUBSIDIARIES
INDEX
PAGE
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets - as of 3 & 4
June 30, 1996 and December 31, 1995
Consolidated Statements of Operations for the 5
three months ended and six months ended
June 30, 1996 and June 30, 1995
Consolidated Statements of Cash Flows - for the 6
six months ended June 30, 1996 and June 30, 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 15
Signatures 16
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
HEALTH POWER, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS as of June 30, 1996 and December 31, 1995
<TABLE>
<CAPTION>
June 30, 1996 December 31,
ASSETS (Unaudited) 1995
------ ------------- ------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $14,705,339 $19,492,893
Accounts and notes receivable 3,130,745 1,892,111
Deferred commissions 38,315 15,481
Prepaid expenses 120,128 131,051
Income taxes 1,669,940 1,109,155
----------- -----------
Total current assets 19,664,467 22,640,691
----------- -----------
Property and equipment, net 2,362,007 2,566,038
Other assets 514,665 515,978
Intangible assets 5,000,000 0
----------- -----------
Total assets $27,541,139 $25,722,707
=========== ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
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CONSOLIDATED BALANCE SHEETS, Continued
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
June 30, 1996 December 31,
(Unaudited) 1995
------------- ------------
<S> <C> <C>
Current liabilities:
Health care costs payable $ 7,359,626 $ 6,754,001
Capitation costs withheld and risk-sharing funds 543,919 437,303
Deferred revenues 6,790,646 3,703,805
Accounts payable 509,589 514,776
Accrued commissions 96,177 45,987
Accrued profit sharing 25,000 0
Accrued expenses and other liabilities 264,488 264,891
----------- -----------
Total current liabilities 15,589,445 11,720,763
----------- -----------
Stockholders' equity:
Common stock 38,103 38,103
Additional paid-in capital 10,711,292 10,711,292
Retained earnings 1,202,299 3,252,549
----------- -----------
Total stockholders' equity 11,951,694 14,001,944
----------- -----------
Total liabilities and stockholders' equity $27,541,139 $25,722,707
============ ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
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HEALTH POWER, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
(Unaudited) (Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues: $ 15,495,116 $14,768,933 $ 30,882,311 $29,488,110
------------ ----------- ------------ -----------
Expenses:
Health care costs 13,827,313 11,390,189 26,933,535 22,368,986
Selling, general and administrative 3,867,744 3,158,577 7,442,564 5,994,813
------------ ----------- ------------ -----------
17,695,057 14,548,766 34,376,099 28,363,799
(Loss) income from operations (2,199,941) 220,167 (3,493,788) 1,124,311
Interest income and other, net 97,222 317,487 330,682 600,196
------------ ----------- ------------ -----------
(Loss) income before income taxes (2,102,719) 537,654 (3,163,106) 1,724,507
Federal, state and local income taxes (benefit) (736,591) 178,475 (1,112,856) 630,790
------------ ----------- ------------ -----------
Net (loss) income ($ 1,366,128) $ 359,179 ($ 2,050,250) $ 1,093,717
============ =========== ============ ===========
Net (loss) earnings per common share ($ 0.36) $ 0.09 ($ 0.54) $ 0.29
============ =========== ============ ===========
Weighted average common shares outstanding 3,810,331 3,840,702 3,810,331 3,836,740
============ =========== ============ ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
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HEALTH POWER, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 1996 AND 1995
<TABLE>
<CAPTION>
(Unuadited)
1996 1995
---- ----
<S> <C> <C>
Net cash provided by operating activities $ 312,940 $ 145,031
----------- -----------
Cash flows used in investing activities:
Proceeds from sale of assets 99,000 0
Purchase of property and equipment, net (200,807) (1,750,801)
Deposits and other assets 1,313 16,660
Intangible assets (5,000,000) 0
----------- -----------
Net cash used in investing activities (5,100,494) (1,734,141)
----------- -----------
Cash flows provided by financing activities:
Issuance of common stock for cash 0 2,066
----------- -----------
Net cash provided by financing activities 0 2,066
----------- -----------
Net decrease in cash and cash equivalents (4,787,554) (1,587,044)
Cash and cash equivalents, beginning of period 19,492,893 20,220,539
----------- -----------
Cash and cash equivalents, end of period $14,705,339 $18,633,495
=========== ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
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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 June 30, 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. Effective as of June 30, 1996, Health Power HMO, Inc. acquired by
assignment from ChoiceCare Health Plans, Inc., an Ohio corporation
("ChoiceCare"), certain contract rights with respect to ChoiceCare's
provider agreement with the Ohio Department of Human Services. Under that
provider agreement, ChoiceCare previously provided health care services to
Medicaid recipients residing in Hamilton County, Ohio, enrolled in the Aid
to Families with Dependent Children and Healthy Start programs (the "ADC
Medicaid Recipients"). Through its acquisition of such contract rights,
approximately 12,000 ADC Medicaid Recipients previously served by
ChoiceCare were automatically enrolled in Health Power HMO, Inc.'s health
maintenance organization effective as of July 1, 1996. The purchase price
for the contract rights assigned to Health Power HMO, Inc. was $5.0
million.
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Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
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 second
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 managed 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.
This discussion should be read in conjunction with the consolidated
financial statements, notes and tables included elsewhere in this report and in
the Annual Report on Form 10-K and quarterly report on Form 10-Q for the
quarter ended March 31, 1996. The Company cautions that any forward looking
statements contained in this report, in a report incorporated by reference to
this report or made by management of the Company, involve risks and
uncertainties and are subject to change based on various factors. Actual
results could differ materially from those expressed or implied.
RECENT DEVELOPMENTS
Completion of Transaction with ChoiceCare
Effective as of June 30, 1996, Health Power HMO acquired by assignment
from ChoiceCare Health Plans, Inc., an Ohio corporation ("ChoiceCare"), certain
contract rights with respect to ChoiceCare's provider agreement with the Ohio
Department of Human Services. Under that provider agreement, ChoiceCare
previously provided health care services to Medicaid recipients residing in
Hamilton County, Ohio, enrolled in the Aid to Families with Dependent Children
and Healthy Start programs (the "ADC Medicaid Recipients"). Through its
acquisition of such contract rights, approximately 12,000 ADC Medicaid
Recipients previously served by ChoiceCare were automatically enrolled in Health
Power HMO's health maintenance organization effective as of July 1, 1996. The
purchase price for the contract rights assigned to Health Power HMO was $5.0
million. The Results of Operations set forth below do not reflect the
acquisition of such contract rights or the enrollment of the ADC Medicaid
Recipients previously served by ChoiceCare.
Offering of Health Care Services in Northeast Ohio
In July 1996, Health Power HMO began offering its managed health care
services in Cuyahoga, Lorain, Mahoning, and Summit Counties, Ohio (the
"Northeast Service Area"). Health Power HMO will serve commercial members in all
four of these counties and ADC Medicaid Recipients in Cuyahoga and Mahoning
Counties.
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Offering of Private Label Product on Behalf of MedOhio Health
Effective as of July 31, 1996, Health Power HMO and Health Power
Management Corporation, the Company's wholly owned management company subsidiary
("HMPC"), entered into agreements with MedOhio Health, Inc. and its wholly owned
subsidiary, MedOhio Health Plan, Inc. (collectively, "MedOhio Health"), to offer
and manage on behalf of MedOhio Health a private label managed care product to
be known as the "University Health Care Plan" (the "MedOhio Product"). The
MedOhio Product will be offered by Health Power HMO to Franklin County ADC
Medicaid Recipients. The provider network for the MedOhio Product will consist
of hospitals and physician-providers associated with The Ohio State University.
RESULTS OF OPERATIONS
Three months ended June 30, 1996, compared to three months ended June
30, 1995
The Company's revenues increased $.7 million, or 4.9%, to $15.5 million
during the second quarter of 1996, from $14.8 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 26.2 %, to $1.6 million during the second quarter of 1996, as
compared to the same 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 2.8%, to $13.8 million during the second quarter of 1996, from $13.4
million for the same period in the prior year. Health Power HMO's ADC Medicaid
revenues increased 8.7% during the second quarter of 1996, as compared to the
same period in the prior year, primarily as a result of a 7.8% increase in
member months and a .8% increase in the revenue per member month. Health Power
HMO's commercial revenues decreased 10% during the second quarter of 1996, as
compared to the same period in the prior year, primarily as a result of a 10.7%
decrease in the revenue per member months, which more than offset a .7% increase
in member months. The increase in the ADC Medicaid revenue per member month
resulted from a change in the overall mix of ADC Medicaid Recipients enrolled in
the HMO. This enrollment mix effects the ADC Medicaid revenue per member because
ODHS pays different capitation rates based upon a member's age and sex. 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 per member premium rate for the State of Ohio
employer group which was in effect for the second quarter of 1996 represented an
approximate 14% reduction from the per member premium rate for the same period
in the prior year.
Health Power HMO's health care costs increased $2.4 million, or 21.4%,
to $13.8 million during the second quarter of 1996, from $11.4 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 100.1% for the second
quarter of 1996, as compared to 84.8% 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 coupled with a nominal increase in per member ADC
Medicaid revenue and a decrease in per member commercial revenue during the same
period. The per member health care costs for the ADC Medicaid business increased
13.9% during the second quarter of 1996, as compared to the same period in the
prior year, while the ADC Medicaid business experienced only a .8% increase in
per member revenue. The increase in the ADC Medicaid per member revenue was
attributable to changes in the overall enrollment mix of ADC Medicaid Recipients
rather than an increase in the capitation rates from ODHS. The capitation rates
from ODHS are fixed in advance of each year's agreement, and Health
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Power HMO is unable to adjust such rates during the contract term. ODHS bases
its rates, in part, on its estimates of ADC Medicaid health care cost increases.
Health Power HMO is experiencing health care cost increases at rates in excess
of the ODHS cost estimates. The per member health care costs for commercial
business increased 18.1% during the second quarter of 1996, as compared to the
same period in the prior year, while the commercial business suffered a 10.7%
decrease in per member commercial 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. 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 22.4%, to $3.9 million for the second quarter of 1996,
from $3.2 million for the same period in 1995. CompManagement's SGA expenses
increased $.2 million, or 20.5 %, to $1.3 million for the second quarter of
1996, from $1.1 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 were $2.1 million for the second quarter of 1996 and for
the same period in 1995. These SGA expenses, stated as a percentage of Health
Power HMO's revenues (the "HMO administrative ratio"), were 15.5% for the second
quarter of 1996, as compared to 15.5% 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 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 SGA expenses were $.4 million for the second quarter of 1996.
The Company's interest income and other decreased $.2 million to $.1
million for the second 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. Also,
the Company wrote off computer software no longer anticipated for future use in
the amount of $137,000 during the second quarter of 1996.
The Company had an income tax benefit of $.7 million for the second
quarter of 1996, as compared to an income tax expense of $.2 million for the
same period in 1995. This tax benefit was the result of a loss from operations
of $2.1 million.
As a result of the foregoing, the Company sustained a net loss of $1.4
million as compared to net income of $.4 million during the same period in the
prior year.
Health Power HMO has experienced and continues to experience premium
and capitation rate decreases at a time when its health care costs are
increasing. In particular, the Company's operating results have been and will
continue to be adversely affected by capitation rate reductions from ODHS. For
the period of July 1, 1995 through June 30, 1996, Health Power HMO received a
per member capitation rate which represented a reduction of approximately 5%
from the prior year's per member premium rate. For the upcoming period of July
1, 1996
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through June 30, 1997, Health Power HMO will receive a per member capitation
rate which represents a further reduction of approximately 12%.
The Company has also incurred substantial expenses during 1996 in
connection with establishing its presence in the Northeast Service Area,
expanding its network of providers, continuing the expansion and upgrading of
its information system, strengthening internal controls and operating
procedures, training and developing personnel, and pursuing NCQA accreditation.
As previously discussed, Health Power HMO has begun offering its managed health
care services in the Northeast Service Area. In addition, the Company's NCQA
accreditation review was completed during the second quarter of 1996. The
Company will continue to incur expenses in 1996 in support of these activities.
The Company's management believes these activities are necessary to position
Health Power HMO for continued growth. However, these activities will adversely
impact 1996 earnings, and there can be no assurance that such activities will
result in such future growth.
As previously discussed, effective as of June 30, 1996, Health Power
HMO acquired certain contract rights from ChoiceCare for a purchase price of
$5.0 million (see "Recent Developments--Completion of Transaction with
ChoiceCare). Because of the nature of the intangible asset acquired, the Company
anticipates amortizing the purchase price over a short period of time.
Currently, the Company anticipates that the entire purchase price will be
amortized during the third quarter of 1996.
The reduced premium and capitation rates, the substantial expenditures
for the establishment of a presence in the Northeast Service Area and the
incurrance of the other expenses, and the amortization of the contract rights
acquired from ChoiceCare, all as discussed above, have had and will continue to
have an adverse effect on the net income of the Company for 1996. The Company
will likely report losses during all of 1996 and into 1997. 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.
Six months ended June 30, 1996, compared to six months ended June 30,
1995
The Company's revenues increased $1.4 million, or 4.7%, to $30.9
million during the first six months of 1996, from $29.5 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 $.6 million, or 23.2 %, to $3.2 million during the first six months of
1996, as compared to the same 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 $.8 million, or 2.9%, to $27.7 million during the first six
months of 1996, from $26.9 million for the same period in the prior year. Health
Power HMO's ADC Medicaid revenues increased 8.8% during the first six months of
1996, as compared to the same period in the prior year, primarily as a result of
a 10.7% increase in member months, which more than offset a 1.7% decrease in the
revenue per member month. Health Power HMO's commercial revenues decreased 9.9%
during the first six months of 1996, as compared to the same period in the prior
year, primarily as a result of a 10.9% decrease in the revenue per member
months, which more than offset a 1.1% 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 above. 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 per member premium rate for the State of Ohio
employer group which was in effect for the first half of 1996 represented an
approximate 14 % reduction from the per member premium rate for the same period
in the prior year.
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Health Power HMO's health care costs increased $4.6 million, or 20.4%,
to $26.9 million during the first six months of 1996, from $22.3 million for the
same period in 1995. The HMO medical loss ratio, was 97.3% for the first six
months of 1996, as compared to 83.2% 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 coupled with decreases in per member revenues during
the same period. The per member health care costs for the ADC Medicaid business
increased 9.0% during the first half of 1996, as compared to the same period in
the prior year, while the ADC Medicaid business suffered a 1.7% decrease in per
member revenue. The capitation rates from ODHS are fixed in advance of each
year's agreement, and Health Power HMO is unable to adjust such rates during the
contract term. ODHS bases its rates, in part, on its estimates of ADC Medicaid
health care cost increases. Health Power HMO is experiencing health care cost
increases at rates in excess of the ODHS estimates. The per member health care
costs for commercial business increased 18.6% during the first half of 1996, as
compared to the same period in the prior year, while the commercial business
suffered a 10.9% decrease in per member commercial 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. 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 SGA expenses increased $1.4 million, or 24.2%, to $7.4
million for the first six months of 1996, from $6 million for the same period in
1995. CompManagement's SGA expenses increased $.5 million, or 25 %, to $2.5
million for the first six months of 1996, from $2 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 increased $.3
million, or 8.1%, to $4.3 million for the first six months of 1996, from $4
million for the same period in 1995. The HMO administrative ratio was 15.5% for
the first six months of 1996, as compared to 14.8% for the same period in 1995.
The increase in the HMO administrative ratio was primarily due to expenses in
connection with the Company establishing its presence in the Northeast Service
Area, increased marketing and sales expenditures, and expenses associated with
efforts to seek NCQA accreditation. Other SGA expenses were $.6 million for the
first half of 1996.
The Company's interest income and other decreased $.3 million to $.3 million for
the first six months of 1996, from $.6 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. Also, during the
first quarter of 1996, the Company wrote off $137,000 of software no longer
considered for future use.
The Company had an income tax benefit of $1.1 million for the first six
months of 1996, as compared to an income tax expense of $.6 million for the same
period in 1995. This tax benefit was the result of a loss from operations of
$3.2 million.
As a result of the foregoing, the Company sustained a net loss of $2.1
million as compared to net income of $1.1 million during the same period in the
prior year.
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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 ongoing operations and to maintain necessary
regulatory capital. 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 June 30, 1996, the Company had working capital of $4.1 million, as
compared to working capital of $10.9 million at December 31, 1995. At June 30,
1996, cash and cash equivalents were $14.7 million, a decrease of $4.8 million
from $19.5 million at December 31, 1995. This decrease was attributable
primarily to the payment of the $5.0 million purchase price to ChoiceCare for
the acquisition of certain contract rights of ChoiceCare (see "Recent
Developments--Completion of Transaction with ChoiceCare). 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 June 30, 1996, are included with other
assets on the balance sheet.
Net cash provided by operating activities was $.3 million for the first
six months of 1996, as compared $.1 million during the same period in 1995. 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.
As previously discussed, the Company will likely report losses during
1996 and into 1997. These losses will adversely impact the Company's liquidity.
As previously discussed, the Company is attempting to control and, where
possible, decrease its expenses through a variety of methods. However, the
Company has experienced and continues to experience premium and capitation rate
decreases, in particular with respect to its ADC Medicaid membership, which
effects the Company's ability to generate sufficient revenues to offset its
health care costs. The Company's management believes that existing working
capital will be sufficient to support the Company's ongoing operations during
1996. However, continued and substantial losses into 1997 will affect the
Company's ability to maintain its current operations.
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 six months 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.
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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 was in effective until June 30, 1996. The Company received further
capitation rate reductions from ODHS, varying by service area, of approximately
12 %. 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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Part II - Other Information
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
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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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.
HEALTH POWER, INC.
DATE: AUGUST 13, 1996 BY
-----------------------------------------
THOMAS E. BEATY, JR., PRESIDENT AND
CHIEF OPERATING OFFICER
DATE: AUGUST 13, 1996
BY
-----------------------------------------
RONALD J. WURTZ, CONTROLLER AND
PRINCIPAL ACCOUNTING OFFICER
Page 16
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