<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 SEPTEMBER 30,
1996 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: 0-23220
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Health Power, Inc.
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(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
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(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 November 12, 1996
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HEALTH POWER, INC. AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
PAGE
<S> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets - as of 3 & 4
September 30, 1996 and December 31, 1995
Consolidated Statements of Operations for the 5
three months ended and nine months ended
September 30, 1996 and September 30, 1995
Consolidated Statements of Cash Flows - for the nine months 6
ended September 30, 1996 and September 30, 1995
Notes to the Consolidated Financial Statements 7
PART II.
Item 2. Management's Discussion and Analysis of Financial 8
Condition and Results of Operations
OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 15
Signatures 16
</TABLE>
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
HEALTH POWER, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS as of September 30, 1996 and December 31, 1995
<TABLE>
<CAPTION>
September 30, 1996 December 31,
ASSETS (Unaudited) 1995
------ ----------- ----
<S> <C> <C>
Current assets:
Cash and cash equivalents $12,889,689 $19,492,893
Accounts and notes receivable 2,950,885 1,892,111
Deferred commissions 32,809 15,481
Prepaid expenses 136,736 131,051
Income taxes 2,184,767 1,109,155
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Total current assets 18,194,886 22,640,691
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Property and equipment, net 2,409,636 2,566,038
Other assets 507,551 515,978
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Total assets $21,112,073 $25,722,707
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</TABLE>
The accompanying notes are part of the financial statements.
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CONSOLIDATED BALANCE SHEETS, Continued
<TABLE>
<CAPTION>
September 30, 1996 December 31,
LIABILITIES AND STOCKHOLDERS' EQUITY (Unaudited) 1995
- ------------------------------------ ----------- ----
<S> <C> <C>
Current liabilities:
Health care costs payable $ 11,532,241 $ 6,754,001
Capitiaion costs withheld and risk-sharing funds 812,377 437,303
Deferred revenues 1,646,319 3,703,805
Accounts payable 768,466 514,776
Accrued commissions 48,096 45,887
Accrued bonus 37,500 0
Accrued expenses and other liabilities 318,596 264,891
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Total current liabilities 15,163,595 11,720,763
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Stockholders' equity:
Common stock 38,103 38,103
Additional paid-in captial 10,711,292 10,711,292
Retained (deficit) earnings (4,800,917) 3,252,549
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Total stockholders' equity 5,948,478 14,001,944
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Total liabilities and stockholders' equity $ 21,112,073 $25,722,707
============ ===========
</TABLE>
The accompanying notes are part of the financial statements.
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HEALTH POWER, INC. AND SUBSIDIARIES
CONOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
(Unaudited) (Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues: $ 18,089,254 $ 14,537,513 $ 48,971,565 $44,025,623
------------ ------------ ------------ -----------
Expenses:
Health care costs 15,990,144 11,247,005 42,923,679 33,615,991
Selling, general and administrative 3,917,039 3,773,318 11,359,603 9,768,131
Special charges for Special Health
purchase cost 5,000,000 0 5,000,000 0
------------ ------------ ------------ -----------
24,907,183 15,020,323 59,283,282 43,384,122
------------ ------------ ------------ -----------
(Loss) income from operations (6,817,929) (482,810) (10,311,717) 641,501
Interest income and other, net 261,542 299,535 592,224 899,730
------------ ------------ ------------ -----------
(Loss) income before income taxes (6,556,387) (183,275) (9,719,493) 1,541,231
Federal, state and local income
taxes (benefit) (553,170) 33,071 (1,666,026) 663,861
------------ ------------ ------------ -----------
Net (loss) income ($ 6,003,217) ($ 216,346) ($ 8,053,467) $ 877,370
============ ============ ============ ===========
Earnings (loss) per common share ($ 1.58) ($ 0.06) ($ 2.11) $ 0.23
============ ============ ============ ===========
Weighted average common shares outstanding 3,810,331 3,820,763 3,810,331 3,824,898
============ ============ ============ ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
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HEALTH POWER, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
for the three months ended September 30, 1996 and 1995
<TABLE>
<CAPTION>
(Unaudited)
1996 1995
---- ----
<S> <C> <C>
Net cash (used in) provided by operating activities ($6,371,863) $ 3,526,490
Cash flows provided by (used in) investing
activities:
Proceeds from sale of assets 99,000 0
Purchase of furniture and equipment (338,770) (1,937,127)
Other assets 8,429 119,607
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Net cash used in investing activities (231,341) (1,817,520)
----------- -----------
Cash flows provided by (used in)
financing activities:
Issuance fo common stock for cash 0 11,572
Repayment of debt obligations 0 (2,048)
----------- -----------
Net cash provided by financing activities 0 9,524
----------- -----------
Net (decrease) increase in cash and cash equivalents (6,603,204) 1,718,494
Cash and cash equivalents, beginning of period 19,492,893 20,220,539
----------- -----------
Cash and cash equivalents, end of period $12,889,689 $21,939,003
=========== ===========
</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 September 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. During the third quarter 1996, The Company recorded a $5.0 million
write-off in connection with the purchase from ChoiceCare Health Plans,
Inc, an Ohio Corporation ("ChoiceCare") of certain contract rights and
interests with respect to a provider agreement with the Ohio Department of
Human Services ("ODHS"). Under that provider agreement, ChoiceCare
previously provided health services to approximately 12,000 Medicaid
recipients residing in Hamilton County, Ohio, enrolled in Aid to Families
with Dependent Children and Healthy Start Programs.
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Item 7. Management's Discussion and Analysis of Financial Condition and Results
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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"). Health Power HMO
provides comprehensive managed health care services to members of its health
maintenance organization ("HMO") in nineteen Ohio counties in and around the
cities of Columbus, Dayton, Cincinnati, Cleveland and Youngstown. 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 7,500 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 1995 Annual Report on Form 10-K and quarterly report on Form 10-Q for the
quarter ended June 30, 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 ("ODHS"). Under that provider agreement, ChoiceCare
previously provided health care services to ADC Medicaid recipients residing in
Hamilton County, Ohio. 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 reflect the acquisition of such contract rights and the
enrollment of the ADC Medicaid Recipients previously served by ChoiceCare.
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Offering of Health Care Services in Northeast Ohio
In July 1996, Health Power HMO became authorized to offer its managed
health care services in Cuyahoga, Lorain, Mahoning, and Summit Counties, Ohio
(the "Northeast Service Area"). Health Power HMO is authorized to serve
commercial members in all four of these counties and ADC Medicaid recipients in
Cuyahoga and Mahoning Counties.
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 Healthcare Option" (the "MedOhio Product"). The
MedOhio Product will be offered by Health Power HMO to Franklin County ADC
Medicaid recipients. The offering of the MedOhio Product is currently undergoing
regulatory review and approval. Currently, Health Power HMO anticipates offering
the MedOhio Product in the fourth quarter of 1996, to be effective in the first
quarter of 1997.
Approval of CompManangement Health Systems, Inc. as MCO
In November 1996, CompManagement Health Systems, Inc., an Ohio
corporation and a wholly owned subsidiary of CompManagement ("CHS"), received
approval from the Ohio Bureau of Workers' Compensation ("BWC") to operate a
state-wide managed care organization ("MCO") under Ohio's new managed care
workers' compensation laws. Under these laws, a MCO will be responsible to
provide medical management and cost containment services for employers with
respect to their workers' compensation claims. By March 1, 1997, CHS must, among
other things, receive BWC approval of its healthcare provider network and its
information system capabilities to process claims. Subject to such approvals,
CHS anticipates commencing operations when the BWC implements the new managed
care workers' compensation laws, expected to be in March 1997.
RESULTS OF OPERATIONS
Three months ended September 30, 1996, compared to three months ended
September 30, 1995
The Company's revenues increased $3.6 million, or 24.4%, to $18.1
million during the third quarter of 1996, from $14.5 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
$.3 million, or 21.8 %, to $1.7 million during the third 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 $3.2
million, or 24.7%, to $16.4 million during the third quarter of 1996, from $13.2
million for the same period in the prior year, primarily as a result of the
growth in HMO membership due to the enrollment of the ADC Medicaid recipients
previously served by ChoiceCare. Health Power HMO's ADC Medicaid revenues
increased 31.4% during the third quarter of 1996, as compared to the same period
in the prior year, primarily as a result of a 45.7% increase in member months
due to the enrollment of the ADC Medicaid recipients previously served by
ChoiceCare, which more than offset a 9.8% decrease in the revenue per member
months. Health Power HMO's commercial revenues
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increased 8.2% during the third quarter of 1996, as compared to the same period
in the prior year, primarily as a result of a 5.7% increase in revenue per
member months. The decrease in the ADC Medicaid revenue per member month
resulted from the July 1, 1996 capitation rate reduction of approximately 12%
from ODHS. The increase in the commercial revenue per member month was the
result of premium rate increases.
Health Power HMO's health care costs increased $4.7 million, or 42.2%,
to $16.0 million during the third quarter of 1996, from $11.2 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 97.5% for the third quarter
of 1996, as compared to 85.5% 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 decrease in per member ADC Medicaid
revenue during the same period. The per member health care costs for the ADC
Medicaid business increased 7.5% during the third quarter of 1996, as compared
to the same period in the prior year, while the ADC Medicaid business
experienced a 9.8% decrease in per member revenue. The decrease in the ADC
Medicaid per member revenue was attributable to changes in the capitation rates
from ODHS. 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 cost estimates. The per member health
care costs for commercial business increased 11.8% during the third quarter of
1996, as compared to the same period in the prior year, while the commercial
business experienced a 5.7% increase 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 $.1 million, or 3.8%, to $3.9 million for the third quarter of 1996,
from $3.8 million for the same quarter in 1995. CompManagement's SGA expenses
increased $.3 million, or 20.3 %, to $1.5 million for the third quarter of 1996,
from $1.2 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 and expenses
incurred in the development of the MCO. Health Power HMO's SGA expenses
decreased $.1 million, or 4.4%, to $2.4 million for the third quarter of 1996,
from $2.5 million the same period in 1995. The Company initiated a program
during the third quarter of 1996 to review all HMO operations, including SGA
expenses, to search for efficiencies to enhance operating results. Identified
savings were reflected in operations during the third quarter of 1996. These SGA
expenses, stated as a percentage of Health Power HMO's revenues (the "HMO
administrative ratio"), were 14.7% for the third quarter of 1996, as compared to
19.1% for the same period in 1995.
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
elected to write-off the entire purchase price during the third quarter of 1996.
The Company's interest income and other decreased slightly to $.26
million for the third quarter of 1996, from $.3 million for the same period in
the prior year. This decrease resulted primarily from a decrease in the average
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available investable cash balance combined with reduced interest yields. The
decrease in the average available investable cash balance was primarily the
result of the payment of the $5.0 million purchase price for the acquisition of
the ChoiceCare contract rights at the end of the second quarter of 1996.
The Company had an income tax benefit of $.6 million for the third
quarter of 1996, as compared to an income tax expense of $.03 million for the
same period in 1995. This tax benefit was the result of a loss from operations
of $6.8 million.
As a result of the foregoing, the Company sustained a net loss of $6.0
million as compared to net loss of $.2 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, 1996 through June 30, 1997, Health Power HMO will receive
a per member capitation rate which represents a reduction of approximately 12%
from the prior year's per member capitation rate, which prior year's rate had
already been reduced by 5% from the previous year's rate.
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.
The reduced capitation rates, the substantial expenditures for the
establishment of a presence in the Northeast Service Area, the incurrance of the
other expenses, and the write-off 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.
Nine months ended September 30, 1996, compared to nine months ended
September 30, 1995
The Company's revenues increased $5.0 million, or 11.2%, to $49.0
million during the first nine months of 1996, from $44.0 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 $.9 million, or 22.7 %, to $4.9 million during the first nine 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 $4.0 million, or 10.1%, to $44.1 million during the first
nine months of 1996, from $40.1 million for the same period in the prior year,
primarily as a result of the growth in HMO membership due to the enrollment of
the ADC Medicaid recipients previously served by ChoiceCare. Health Power HMO's
ADC Medicaid revenues increased 16.4% during the first nine
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months of 1996, as compared to the same period in the prior year, primarily as a
result of a 22.6% increase in member months due to the enrollment of the ADC
Medicaid recipients previously served by ChoiceCare, which more than offset a
5.1% decrease in the revenue per member months. Health Power HMO's commercial
revenues decreased 4.2% during the first nine months of 1996, as compared to the
same period in the prior year, primarily as a result of a 5.7% decrease in the
revenue per member months, which more than offset a 1.5% increase in member
months. The decrease in the ADC Medicaid revenue per member months resulted from
the 1995 and 1996 capitation rate reductions from ODHS, discussed above. The
decrease in the commercial revenue per member month was the result of the
continued competitive and price sensitive commercial marketplace.
Health Power HMO's health care costs increased $9.3 million, or 27.7%,
to $42.9 million during the first nine months of 1996, from $33.6 million for
the same period in 1995. The HMO medical loss ratio was 97.4% for the first nine
months of 1996, as compared to 83.9% 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 8.3% during the first nine months of 1996, as compared to the same
period in the prior year, while the ADC Medicaid business suffered a 5.1%
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 16.4% during the
first nine months of 1996, as compared to the same period in the prior year,
while the commercial business suffered a 5.7% 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 SGA expenses increased $1.6 million, or 16.3%, to $11.4
million for the first nine months of 1996, from $9.8 million for the same period
in 1995. CompManagement's SGA expenses increased $.8 million, or 23.2%, to $4.0
million for the first nine months of 1996, from $3.3 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 and expenses incurred in the development of the
MCO. Health Power HMO's SGA expenses increased $.3 million, or 5.4%, to $6.8
million for the first nine months of 1996, from $6.5 million for the same period
in 1995. The HMO administrative ratio was 15.5% for the first nine months of
1996, as compared to 16.2% for the same period in 1995. Other SGA expenses were
$.5 million for the first nine months of 1996.
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
elected to write-off the entire purchase price during the third quarter of 1996.
The Company's interest income and other decreased $.3 million to $.6
million for the first nine months of 1996, from $.9 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.
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The Company had an income tax benefit of $1.7 million for the first nine
months of 1996, as compared to an income tax expense of $.7 million for the same
period in 1995. This tax benefit was the result of a loss from operations of
$10.3 million.
As a result of the foregoing, the Company sustained a net loss of $8.1
million as compared to net income of $.9 million during the same period in the
prior year.
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 June 30, 1996, the statutory net worth of Health Power
HMO was $1.9 million, which met the minimum statutory net worth requirements of
the Ohio Department of Insurance.
At September 30, 1996, the Company had working capital of $3.0 million,
as compared to working capital of $10.9 million at December 31, 1995. At
September 30, 1996, cash and cash equivalents were $12.9 million, a decrease of
$6.6 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 September 30, 1996, are included
with other assets on the balance sheet.
Net cash used in operating activities was $6.4 million for the first
nine months of 1996, as compared to net cash provided by operating activities of
$3.5 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, 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
affects 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 could affect the
Company's ability to maintain its current operations.
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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 nine 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.
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 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
--------------------
On July 11, 1996, a current report on Form 8-K, dated
June 30, 1996 was filed with the Securities and
Exchange Commission reporting under Items 2 and 7
of such report.
Page 15
<PAGE> 16
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: NOVEMBER 13, 1996 BY
--------------------------------------------
THOMAS E. BEATY, JR., PRESIDENT AND
CHIEF OPERATING OFFICER
DATE: NOVEMBER 13, 1996 BY
--------------------------------------------
RONALD J. WURTZ, CONTROLLER AND
PRINCIPAL ACCOUNTING OFFICER
Page 16
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