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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,
1997 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
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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) 636-7593
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(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 3,820,498
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Class Outstanding at October 28, 1997
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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, 1997 and December 31, 1995
Consolidated Statements of Operations for the 5
three months ended and nine months ended
September 30, 1997 and September 30, 1996
Consolidated Statements of Cash Flows - for the 6
nine months ended September 30, 1997
and September 30, 1996
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 14
Signatures 15
</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, 1997 and December 31, 1996
<TABLE>
<CAPTION>
September 30, 1997 December 31,
ASSETS (Unaudited) 1996
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<S> <C> <C>
Current assets:
Cash and cash equivalents $6,758,437 $13,928,641
Accounts and notes receivable 4,827,714 2,257,390
Deferred commissions 116,868 19,065
Prepaid expenses 287,472 132,667
Income taxes refundable 570,920 1,794,919
Deferred income taxes 1,988,760 0
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Total current assets 14,550,171 18,132,682
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Property and equipment, net 2,989,347 2,392,677
Other assets 1,357,626 543,218
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Total assets $18,897,144 $21,068,577
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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, 1997 December 31,
LIABILITIES AND STOCKHOLDERS' EQUITY (Unaudited) 1996
- ------------------------------------ ----------- ----
<S> <C> <C>
Current liabilities:
Health care costs payable $7,596,714 $10,865,798
Capitation costs withheld and risk-sharing funds 404,616 0
Deferred revenues 2,097,523 4,782,552
Accounts payable 1,371,266 665,779
Accrued expenses and other liabilities 572,806 235,868
- -
Total current liabilities 12,042,925 16,549,997
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Stockholders' equity:
Common stock 38,205 38,103
Additional paid-in capital 10,743,643 10,711,292
Retained (deficit) (3,927,629) (6,230,815)
----------- -----------
Total stockholders' equity 6,854,219 4,518,580
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Total liabilities and stockholders' equity $18,897,144 $21,068,577
=========== ===========
</TABLE>
The accompanying notes are 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 Nine Months Ended
September 30, September 30,
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues: $19,106,523 $18,089,254 $55,062,351 $48,971,565
------------ ------------ ------------ -----------
Expenses:
Health care costs 14,354,891 15,990,144 39,348,710 42,923,679
Selling, general and administrative 6,304,705 3,917,039 16,567,460 11,359,603
Membership acquisition 0 5,000,000 0 5,000,000
- ---------- - ---------
20,659,596 24,907,183 55,916,170 59,283,282
----------- ----------- ----------- ----------
(Loss) income from operations (1,553,073) (6,817,929) (853,819) (10,311,717)
Interest income and other, net 305,525 261,542 938,859 592,224
-------- -------- -------- -------
(Loss) income before income taxes (1,247,548) (6,556,387) 85,040 (9,719,493)
Federal, state and local income taxes (benefit) (2,532,336) (553,170) (2,218,145) (1,666,026)
----------- --------- ----------- -----------
Net (loss) income $1,284,788 ($6,003,217) $2,303,185 ($8,053,467)
=========== ============ =========== ============
Net (loss) earnings per common share $0.33 ($1.58) $0.60 ($2.11)
====== ======= ====== =======
Weighted average common shares outstanding 3,853,028 3,810,331 3,826,554 3,810,331
========== ========== ========== ==========
</TABLE>
The accompanying notes are part of the financial statements
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HEALTH POWER, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
<TABLE>
<CAPTION>
(Unaudited)
1997 1996
---- ----
<S> <C> <C>
Net cash used in operating activities ($5,423,553) ($6,371,863)
------------ ------------
Cash flows provided by (used in) investing activities:
Construction of Building in process (96,779) 0
Proceeds from sale of assets 5,080 99,000
Purchase of furniture and equipment (872,998) (338,770)
Other assets (814,406) 8,429
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Net cash used in investing activities (1,779,103) (231,341)
----------- ---------
Cash flows provided by (used in) financing activities:
Issuance of common stock 32,453 0
Net cash provided by financing activities 32,453 0
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Net (decrease) in cash and cash equivalents (7,170,203) (6,603,204)
Cash and cash equivalents, beginning of period 13,928,640 19,492,893
----------- ----------
Cash and cash equivalents, end of period $6,758,437 $12,889,689
=========== ===========
</TABLE>
The accompanying notes are 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 period ended September 30, 1997 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, 1996, financial statements and notes
thereto contained in the Company's 1996 Annual Report on Form 10-K.
2. In February 1997, the Financial Accounting Standards Board (FASB) issued
SFAS 128 "Earnings Per Share" and is effective for financial statements
issued for periods ending after December 15, 1997. The statement specifies
the computation, presentation and disclosure requirements for earnings per
share for entities with publicly held common stock. The impact of the
statement on Health Power, Inc.'s earnings per share is not expected to be
material.
In June 1997, the FASB issued SFAS No. 130 "Reporting Comprehensive
Income". This Statement, which is effective for the year ended December
31, 1998, requires the reporting of comprehensive income and its components
in an additional full set of general-purpose financial statements. Health
Power, Inc. is reviewing the components of comprehensive income as outlined
by the Statement and plans to disclose the information as required.
In June 1997, the FASB issued SFAS No. 131 "Disclosures about Segments of
an Enterprise and Related Information." This Statement provides guidance
for the way public enterprises report information about operating segments
in annual financial statements and requires selected information about
operating segments in interim financial reports. It also requires certain
related disclosures about products and services, geographic areas and major
customers. The segment and other information disclosure are required for
the year ended December 31, 1998.
3. Based on the Company's periodic review of the ultimate realization of the
net deferred tax asset and the Company's interpretation of the Financial
Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes," the
deferred tax valuation allowance recorded at December 31, 1996 was
reversed. The reversal was made in the third quarter of 1997, resulting in
the recognition of a deferred tax benefit in the amount of $2.4 million.
This benefit was created due to changes in the deferred tax asset which
released $468,000 of the valuation allowance and $1,989,000 of the reversal
was due to management's expectation of profitable operations in the future,
including the fourth quarter of 1997.
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Item 2. 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 operating subsidiaries are Health Power HMO,
Inc., an Ohio corporation ("Health Power HMO"), CompManagement, Inc., an Ohio
corporation ("CompManagement"), and CompManagement Health Systems, Inc., an
Ohio corporation ("CompManagement Health Systems").
Health Power HMO provides comprehensive managed health care services
to members of its health maintenance organization ("HMO") in four service areas
encompassing 19 Ohio counties in and around the cities of Columbus, Dayton,
Cincinnati, Cleveland, and Youngstown. Health Power HMO primarily focuses on
serving Medicaid recipients enrolled in the Aid to Families with Dependent
Children and Healthy Start ("ADC") programs. Health Power HMO has been a leader
in developing the HMO markets for ADC Medicaid recipients in its service areas.
It was the first HMO to offer these services in the Columbus and Dayton markets
and an early entrant in the Cincinnati and Youngstown markets. Health Power HMO
also provides comprehensive managed care services to commercial members
enrolled through employer groups. Health Power HMO is accredited by the
National Committee for Quality Assurance.
CompManagement offers claims management, risk management, and medical
cost containment services to employers with respect to workers' compensation
and unemployment compensation claims. It is one of the largest companies in
Ohio offering such services, as it currently serves approximately 11,000
employers located throughout Ohio. The Company acquired CompManagement in July
1995. The acquisition was accounted for as a pooling of interests.
CompManagement Health Systems is certified as a state-wide managed care
organization (an "MCO") under Ohio's recently implemented managed care workers'
compensation system, and in March 1997, it began offering its MCO services to
approximately 18,000 employers located throughout Ohio. CompManagement Health
Systems was not operational prior to November 1996. As a state certified MCO,
CompManagement Health Systems provides, among other things, claims review and
processing for workers' compensation claims, bill review and payment with
respect to physician and hospital charges, quality assurance programs, and
medical management and cost containment services for employers with respect to
their workers' compensation claims. Because all workers' compensation claims
are reimbursed by the Ohio Bureau of Workers' Compensation, CompManagement
Health Systems does not assume any risk for the payment of medical or
disability benefits to employees with respect to their workers' compensation
claims.
For purposes of the following discussion, and except as otherwise
described below, the revenues and expenses of CompManagement Health systems have
been included with the revenues and expenses of CompManagement. In addition, the
following discussion reflects the acquisition of certain contract rights from
ChoiceCare Health Plans, Inc. ("ChoiceCare") which enabled the ADC Medicaid
recipients previously served by ChoiceCare to be automatically enrolled in
Health Power HMO as of July 1, 1996.
This discussion should be read in conjunction with the consolidated
financial statements, notes, and tables included elsewhere in this report and in
the Company's Form 10-K for its fiscal year ended December 31, 1996. The Company
cautions readers that any forward looking statements contained in this report,
in a report incorporated by reference into 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.
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RECENT DEVELOPMENTS
Health Power HMO's health care costs include reserve estimates of
health care costs incurred but not yet reported or paid. Health Power HMO
estimates this reserve amount on a quarterly basis based upon a number of
factors, including recent claim payments experience. Adjustments, if necessary,
are made to health care costs in the period during which the actual claim costs
are ultimately determined. Health Power HMO utilizes an actuarial company to
review the adequacy of its reserve estimates. As part of the recent quarterly
reserve setting process, Health Power HMO increased its reserve estimate for
health care costs by $2.5 million, which increase included adjustments for the
settlement of prior quarters. This reserve estimate may be subject to further
adjustments in subsequent quarters.
Both the third quarter and nine month periods for the current year
include the recognition of a deferred tax benefit in the amount of $2.4 million
based on the Company's return to profitable operations and management's
expectation of profitable operations in future periods, including the fourth
quarter of 1997. This deferred tax asset recognition is recorded in accordance
with the Company's interpretation of the Financial Accounting Standards
("SFAS") No. 109, "Accounting for Income Taxes."
The State of Ohio employees commercial group contract is subject to a
request for proposal (RFP) for a renewal effective date of December 1, 1997.
Health Power has been informed by the State Department of Administrative
Services that, as a result of the RFP, the State will not be renewing its
contracts with Health Power HMO. The contract termination date is expected to
be December 1, 1997 and will result in the reduction of approximately 5,700
commercial members. The loss of this contract revenue will result in an
approximate 11% reduction in consolidated revenue. Management is preparing
expense reduction measures to mitigate the offset of not having this contract.
The contract with the State of Ohio employees has not been profitable in 1997.
RESULTS OF OPERATIONS
Three months ended September 30, 1997, compared to three months ended
September 30, 1996
The Company's revenues increased $1.0 million, or 5.6 %, to $19.1
million during the third quarter of 1997, from $18.1 million for the same
period in 1996. CompManagement's revenues increased $3.7 million, or 222.0%, to
$5.4 million during the third quarter of 1997, as compared to $1.7 million for
the same period in the prior year, as a result of an increase in the number of
employers contracting for its services, in particular, employers participating
in group rating plans, and to $2.7 million in revenues received by
CompManagement Health Systems. CompManagement Health Systems was not
operational during the same period in 1996. Health Power HMO's revenues
decreased $2.7 million, or 16.6%, to $13.7 million during the third quarter of
1997, from $16.4 million for the same period in the prior year. Health Power
HMO's commercial revenues decreased $1.3 million, or 31.3%, to $2.8 million
during the third quarter of 1997, from $4.1 million for the same period in the
prior year. Commercial revenues decreased primarily as a result of a 32.6%
decrease in member months, which offset a 2.0% increase in revenue per member
months. The decrease in the commercial member months was the result of actions
taken to eliminate unprofitable commercial accounts as part of the Company's
financial turnaround plan, discussed below. Health Power HMO's ADC Medicaid
revenues decreased $1.4 million, or 11.7%, to $10.8 million during the third
quarter of 1997, from $12.3 million for the same period in the prior year. ADC
Medicaid revenues decreased primarily as a result of a 14.2% decrease in
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the ADC member months which was partially offset by a 2.8% increase in revenue
per member months. The decrease in the ADC Medicaid member months was primarily
due to membership losses caused by involuntary terminations. Involuntary
terminations relate to members who are no longer eligible to receive ADC
Medicaid benefits. Because of favorable economic conditions, Ohio has
experienced a recent 11.4% decrease in the number of eligible ADC Medicaid
recipients. The increase in the ADC Medicaid revenue per member month resulted
from the July 1, 1997 capitation rate increase from ODHS.
Health Power HMO's health care costs decreased $1.6 million, or 10.2%,
to $14.4 million during the third quarter of 1997, from $16.0 million for the
same period in 1996. Health care costs, stated as a percentage of Health Power
HMO's revenues (the "HMO medical loss ratio"), were 105.0% for the third
quarter of 1997, as compared to 97.5% for the same period in the prior year.
The increase in the HMO medical loss ratio was due to increases in the
commercial and ADC Medicaid per member health care costs of 38.0% and 3.1%
respectively. The increase in the commercial and ADC Medicaid per member
health care costs were the result of the aforementioned $2.5 million increase
in health care cost reserves which included adjustments for the settlement of
prior quarters, and a single large commercial medical claim of approximately
$.6 million during the third quarter of 1997. Health Power HMO anticipates that
it will incur additional medical expenses related to this claim, the amount of
which cannot be estimated at this time.
The Company's selling, general and administrative ("SGA") expenses
increased $2.4 million, or 61%, to $6.3 million for the third quarter of 1997,
from $3.9 million for the same period in 1996. CompManagement's SGA expenses
increased $2.5 million, or 163.8%, to $4.0 million for the third quarter of
1997, from $1.5 million for the same period in the prior year. This increase
was primarily a result of CompManagement Health Systems' expenditures of $1.9
million for the third quarter of 1997 in connection with the operation of its
MCO; it was not operational for the same period in the prior year. The balance
of the increase in SGA expenses was to support the increase in the number of
employers contracting for CompManagement's services. Health Power HMO's SGA
expenses decreased $.1 million, or 3.9%, to $2.3 million for the third quarter
of 1997, from $2.4 million for the same period in 1996. These SGA expenses,
stated as a percentage of Health Power HMO's revenues (the "HMO administrative
ratio"), were 16.9% for the third quarter of 1997, as compared to 14.7% for the
same period in 1996. The improvement in the Health Power HMO's SGA expenses was
the result of management's implementing a plan of action to turn around the HMO
business. Among the actions implemented were a reduction in the number of HMO
employees, a reduction in the amount of professional fees and lower
transportation and advertising expenses. The increase in the HMO administrative
ratio was due to the decrease in the HMO's revenues during the quarter.
During the third quarter of 1996, the Company elected to write off the
entire purchase price of $5.0 million Health Power HMO paid to acquire certain
contract rights with respect to the ChoiceCare provider agreement with ODHS.
The Company's interest income and other increased approximately $44,000
to $306,000 for the third quarter of 1997, from $262,000 for the same period in
the prior year. This increase resulted primarily from an increase in the
average available investable cash balance.
The Company had an income tax benefit of $2.5 million for the third
quarter of 1997, as compared to $553,000 for the same period in 1996. The 1997
tax benefit was the result of the aforementioned $2.4 million recognition of a
deferred tax asset and a loss from operations of $1.2 million.
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As a result of the foregoing, the Company reported a net income of
$1.3 million, or $0.33 per share, for the third quarter of 1997, as compared to
a net loss of $6.0 million, or ($1.58) per share, during the same period in the
prior year. There were 3,853,028 and 3,810,331 weighted average common shares
outstanding at September 30, 1997 and 1996, respectively.
Nine months ended September 30, 1997, compared to nine months ended
September 30, 1996
The Company's revenues increased $6.1 million, or 12.4%, to $55.1
million during the first nine months of 1997, from $49.0 million for the same
period in 1996. CompManagement's revenues increased $8.9 million, or 181.9% to
$13.8 million during the first nine months of 1997, as compared to $4.9 million
for 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, and to $5.6 million in revenues received
by CompManagement Health Systems since March 1997, its first seven months of
operations. Health Power HMO's revenues decreased $2.8 million, or 6.3%, to
$41.3 million during the first nine months of 1997, from $44.1 million for the
same period in the prior year. Health Power HMO's commercial revenues decreased
$3.0 million, or 25.5%, to $8.7 million during the first nine months of 1997,
from $11.7 million for the same period in the prior year. Commercial revenues
decreased primarily as a result of a 27.4% decrease in member months, which
offset a 2.6% increase in revenue per member months. The decrease in the
commercial member months was the result of actions taken to eliminate
unprofitable commercial accounts as part of the Company's financial turnaround
plan, discussed below. Health Power HMO's ADC Medicaid revenues increased $0.2
million, or .6%, to $32.6 million during the first nine months of 1997, from
$32.4 million for the same period in the prior year, primarily as a result of a
8.5% increase in member months, which more than offset a 7.2% decrease in the
revenue per member month. The decrease in the ADC Medicaid revenue per member
month resulted from the July 1, 1996 capitation rate reduction of approximately
12% from ODHS which was offset with an approximate 4% increase in July 1997.
Health Power HMO's health care costs decreased $3.6 million, or 8.3%,
to $39.3 million during the first nine months of 1997, from $42.9 million for
the same period in 1996. The HMO medical loss ratio was 95.3% for the first
nine months of 1997, as compared to 97.4% for the same period in the prior
year. The decrease in the HMO medical loss ratio was primarily due to the
aforementioned 2.6% increase in per member revenue during the first nine months
of 1997, as compared to the same period in the prior year. The increase in the
commercial per member revenue was due to improved pricing conditions in the
marketplace.
The Company's SGA expenses increased $5.2 million, or 45.8%, to $16.6
million for the first nine months of 1997, from $11.4 million for the same
period in 1996. CompManagement's SGA expenses increased $6.4 million, or 157.6
%, to $10.4 million for the first nine months of 1997, from $4.0 million for
the same period in the prior year. This increase was primarily the result of
CompManagement Health Systems' expenditures of $4.6 million in connection with
the development and operation of its MCO; it was not operational for the same
period in the prior year. The balance of the increase in SGA expenses was to
support the increase in the number of employers contracting for
CompManagement's services. Health Power HMO's SGA expenses decreased $1.2
million, or 16.0%, to $6.1 million for the first nine months of 1997, from $7.3
million for the same period in 1996. The HMO administrative ratio was 14.9% for
the first nine months of 1997, as compared to 16.6% for the same period in
1996. The improvement in the Health Power HMO's SGA expenses was the result of
management's implementing a plan of action to turn around the HMO business.
Among the actions implemented were a reduction in the number of HMO employees,
a reduction in the amount of professional fees and lower transportation and
advertising expenses. The improvement in the HMO administrative ratio was due
to the decrease in the HMO's SGA expenses and to the achievement of certain
operating efficiencies. At the
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direction of the Ohio Department of Insurance, the Company changed its method of
allocating SGA expenses among its subsidiaries. Because of this change, the 1996
first nine months administrative ratio and the 1996 first nine months SGA
expenses of Health Power HMO have been revised to be comparable to those of the
1997 first nine months. This change resulted in the 1996 first nine months HMO
administrative ratio being 16.6% instead of the previously reported 15.5%, and
the 1996 first nine months SGA expenses of Health Power HMO being $7.3 million
instead of the previously reported $6.8 million.
As previously discussed, during the third quarter of 1996, the Company
elected to write off the entire purchase price of $5.0 million Health Power HMO
paid to acquire certain contract rights with respect to the ChoiceCare provider
agreement with ODHS.
The Company's interest income and other increased approximately
$347,000 to $939,000 for the first nine months of 1997, from $592,000 for the
same period in the prior year. This increase resulted primarily from an
increase in the average available investable cash balance.
The Company had an income tax benefit of $2.2 million for the first
nine months of 1997, as compared to $1.7 million for the same period in 1996.
The 1997 tax benefit was the result of the aforementioned $2.4 million
recognition of a deferred tax asset based on the Company's return to profitable
operations and management's expectation of profitable operations in future
periods, including the fourth quarter of 1997.
As a result of the foregoing, the Company reported a net income of
$2.3 million, or $0.60 per share, for the first nine months of 1997, as
compared to net loss of $8.1 million, or ($2.11) per share, during the same
period in the prior year. There were 3,826,554 and 3,810,331 weighted average
common shares outstanding for the first nine months ended September 30, 1997
and 1996, respectively.
During the second half of 1996, the Company's management developed and
implemented a plan of action to turn around its HMO business. As previously
discussed, among the actions implemented were the renegotiation of existing
provider contracts at more favorable rates; the elimination of unprofitable
commercial accounts; the closure of the Company's Dayton and Miamisburg offices
and the consolidation of such operations in the Company's Columbus office; a
reduction in the number of the Company's HMO staff; and decreases in expenses
for advertising, professional fees and transportation.
Management believes that the turnaround efforts in the Company's HMO
business, the increase in the capitation rate from ODHS, and the continued
profitable operations of CompManagement will continue the improved operating
results of the Company. In this regard, the Company intends to further downsize
and improve the HMO business by reducing costs and eliminating unprofitable
contracts and that, barring unforeseen circumstances, the Company's operating
results on a consolidated basis will continue to be profitable during the
fourth quarter of 1997 and into 1998.
LIQUIDITY AND CAPITAL RESOURCES
The Company finances its operations through funds on hand from its
March 1994 public offering and internally generated funds, and its principal
sources of cash are premium revenues from Health Power HMO, contract and MCO
revenues from CompManagement, and investment income. The Company's principal
capital needs are to fund ongoing operations and to maintain necessary
regulatory capital. At September 30, 1997, the statutory net worth of Health
Power HMO was approximately $1.5 million, which met the minimum statutory net
worth requirements of the Ohio Department of Insurance. Health Power HMO had
been placed under
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supervision by the Ohio Department of Insurance in December 1996, because of its
failure to satisfy these minimum statutory net worth requirements. However, on
March 20, 1997, Health Power was released from supervision after it satisfied
the Department's requirements to be released from supervision.
At September 30, 1997, the Company had working capital of $2.5 million,
as compared to working capital of $1.6 million at December 31, 1996. At
September 30, 1997, cash and cash equivalents were $6.8 million, a decrease of
$7.2 million from $13.9 million at December 31, 1996. This decrease was
attributable primarily to decreases in liabilities for deferred revenue and
health care costs payable and an increase in accounts receivable. 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, 1997, are included
with other assets on the balance sheet.
CompManagement has entered into a lease agreement to lease a 70,000
square foot building in Dublin, Ohio and began occupying this space on November
1, 1997. The lease is for a term of 15 years, provides for an annual rent of
$814,800 for years one through seven and $938,000 for years eight through
fifteen, and requires CompManagement to pay all operating expenses for the
building. The lease also provides for, among other things, three renewal
options of five years each, an option to purchase the building, and a right of
first offer with respect to the sale of such building. The lease restricts
CompManagement's ability to distribute funds and/or assets to the Company or
another affiliate unless CompManagement meets certain tangible net worth
requirements.
Net cash used in operating activities was $5.4 million for the third
quarter of 1997, as compared to $6.4 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.
As previously discussed, the Company's management believes that,
barring unforeseen circumstances, the Company's operating results on a
consolidated basis will continue to be profitable during the fourth quarter of
1997 and into 1998. The Company believes that internally generated funds will
be sufficient to support the Company's ongoing operations and to maintain
necessary regulatory capital for the next 12 months.
Item 3. Quantitative and Qualitative Disclosure About Market Risk
Disclosure not currently required.
13
<PAGE> 14
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
None
Page 14
<PAGE> 15
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 14, 1996 BY /S/ THOMAS E. BEATY, JR.
--------------------------------------
THOMAS E. BEATY, JR., PRESIDENT AND
CHIEF OPERATING OFFICER
DATE: NOVEMBER 14, 1996 BY /S/ RONALD J. WURTZ
--------------------------------------
RONALD J. WURTZ, CONTROLLER AND
PRINCIPAL ACCOUNTING OFFICER
Page 15
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