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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 MARCH 31, 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
Health Power, Inc.
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(Exact name of registrant as specified in its charter)
Delaware 31-1145640
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(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
1209 Orange Street, Wilmington, Delaware 19801
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(Address of principal executive offices) Zip Code
(302) 658-7581
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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 3,819,115
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Class Outstanding at May 5, 1997
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HEALTH POWER, INC. AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
PAGE
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets - as of 3 & 4
March 31, 1997 and December 31, 1996
Consolidated Statements of Operations for the 5
three months ended March 31, 1997 and
March 31, 1996
Consolidated Statements of Cash Flows - for the 6
three months ended March 31, 1997 and
March 31, 1996
Notes to the Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial 8
Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures about Market Risk 11
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 12
Signatures 13
</TABLE>
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
HEALTH POWER, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS as of March 31, 1997 and December 31, 1996
<TABLE>
<CAPTION>
March 31, 1997 December 31,
ASSETS (Unaudited) 1996
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<S> <C> <C>
Current assets:
Cash and cash equivalents $18,225,822 $13,928,640
Accounts and notes receivable 5,391,882 2,257,390
Deferred commissions 180,390 19,065
Prepaid expenses 275,697 132,667
Income taxes 1,779,773 1,794,919
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Total current assets 25,853,564 18,132,681
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Property and equipment, net 2,657,451 2,392,678
Other assets 1,037,127 543,218
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Total assets $29,548,142 $21,068,577
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</TABLE>
The accompanying notes are an integral part of the financial statements.
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CONSOLIDATED BALANCE SHEETS, Continued
<TABLE>
<CAPTION>
March 31, 1997 December 31,
LIABILITIES AND STOCKHOLDERS' EQUITY (Unaudited) 1996
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<S> <C> <C>
Current liabilities:
Health care costs payable $ 14,946,048 $ 10,865,798
Capitation costs withheld and risk-sharing funds 209,991 0
Deferred revenues 8,149,750 4,782,552
Accounts payable 1,777,279 665,779
Accrued commissions 200,388 0
Accrued expenses and other liabilities 364,050 235,868
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Total current liabilities 25,647,506 16,549,997
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Stockholders' equity:
Common stock 38,191 38,103
Additional paid-in capital 10,738,655 10,711,292
Retained (deficit) (6,876,210) (6,230,815)
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Total stockholders' equity 3,900,636 4,518,580
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Total liabilities and stockholders' equity $ 29,548,142 $ 21,068,577
============ ============
</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
for the three months ended March 31, 1997 and March 31, 1996
<TABLE>
<CAPTION>
(Unaudited)
1997 1996
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<S> <C> <C>
Revenues: $ 17,613,135 $ 15,387,195
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Expenses:
Health care costs 13,913,734 13,106,222
Selling, general and administrative 4,603,317 3,574,820
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18,517,051 16,681,042
(Loss) from operations (903,916) (1,293,847)
Interest income and other, net 269,181 233,460
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(Loss) before income taxes (634,735) (1,060,387)
Federal, state and local income taxes (benefit) 10,660 (376,265)
------------ ------------
Net (loss) ($ 645,395) ($ 684,122)
============ ============
Net (loss) per common share ($ 0.17) ($ 0.18)
============ ============
Weighted average common shares outstanding 3,814,235 3,810,667
============ ============
</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 THREE MONTHS ENDED MARCH 31, 1997 AND 1996
<TABLE>
<CAPTION>
(Unaudited)
1997 1996
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<S> <C> <C>
Net cash provided by operating activities $ 5,134,260 $ 3,098,827
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Cash flows provided by (used in) investing activities:
Construction of building in process (21,732) 0
Proceeds from sale of assets 5,080 0
Purchase of furniture and equipment (353,970) (82,460)
Other assets (493,907) 0
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Net cash (used in) investing activities (864,529) (82,460)
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Cash flows provided by financing activities
Issuance of common stock 27,451 0
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Net cash provided by financing activities 27,451 0
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Net increase in cash and cash equivalents 4,297,182 3,016,367
Cash and cash equivalents, beginning of period 13,928,640 19,492,893
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Cash and cash equivalents, end of period $ 18,225,822 $ 22,509,260
============ ============
</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 period ended March 31, 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.
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Item 2. Management's Discussion and Analysis of Financial Condition and
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Results of Operations
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GENERAL
Health Power, Inc., a Delaware corporation (the "Company"), is a
managed care holding company whose 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, Cleveland, 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 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 an 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 consolidated 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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RESULTS OF OPERATIONS
Three months ended March 31, 1997, compared to three months ended March
31, 1996
The Company's revenues increased $2.2 million, or 14.5 %, to $17.6
million during the first quarter of 1997, from $15.4 million for the same period
in 1996. This increase was primarily due to growth in the number of employers
contracting with CompManagement and to revenues received for CompManagement
Health Systems' first month of operations. CompManagement's revenues increased
$1.9 million, or 125.4 %, to $3.4 million during the first quarter of 1997, 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, in particular, employers
participating in group rating plans, and the $.7 million in revenue received by
CompManagement Health Systems for March 1997, its first month of operations.
Health Power HMO's revenues increased $.3 million, or 2.4%, to $14.2 million
during the first quarter of 1997, from $13.9 million for the same period in the
prior year. Health Power HMO's ADC Medicaid revenues increased 9.0% during the
first quarter of 1997, as compared to the same period in the prior year,
primarily as a result of a 24.0% increase in member months which was primarily
due to the enrollment of the ADC Medicaid recipients previously served by
ChoiceCare, which more than offset a 12.1 % decrease in the revenue per member
month. Health Power HMO's commercial revenues decreased 15.4% during the first
quarter of 1997, as compared to the same period in the prior year, primarily as
a result of a 19.1% decrease in member months, which more than offset a 4.6%
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 the Ohio Department of Human Services ("ODHS"),
discussed below. The decrease in the commercial revenue was the result of
actions taken to eliminate unprofitable commercial accounts as part of the
Company's financial turn around plan, discussed below.
Health Power HMO's health care costs increased $.8 million, or 6.2%, to
$13.9 million during the first quarter of 1997, from $13.1 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 98.0% for the first quarter of
1997, as compared to 94.5% for the same period in the prior year. The increase
in the HMO medical loss ratio was due to the aforementioned 12.1% decrease in
per member medicaid revenue, which was partially offset by a decrease in the ADC
Medicaid per member health care costs of 2.6% during the first quarter of 1997,
as compared to the same period in the prior year, a 1.8% decrease in commercial
per member health care costs during the first quarter of 1997, as compared to
the same period in the prior year, and the aforementioned 4.6% increase in per
member commercial revenue. The increase in commercial per member revenue was due
to improving pricing conditions in the marketplace. The decrease in the ADC
Medicaid per member revenue was attributable to decreases 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 rate, in part, on estimates of per member ADC
Medicaid health care costs. During the first quarter of 1997, Health Power HMO
experienced per member health care costs in excess of the ODHS cost estimates.
As further discussed below, Health Power HMO is attempting to control its health
care costs by renegotiating existing provider contracts at more favorable rates
and not renewing unprofitable commercial accounts.
The Company's selling, general and administrative ("SGA") expenses
increased $1.0 million, or 28.8%, to $4.6 million for the first quarter of 1997,
from $3.6 million for the same period in 1996. CompManagement's SGA expenses
increased $1.7 million, or 136.0%, to $2.9 million for the first quarter of
1997, from $1.2 million for the same period in the prior year,. This increase
was primarily a result of CompManagement Health Systems' expenditures of $1.1
million for the first quarter of 1997 in connection with the development of its
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MCO operations; it was not operational for the same period in the prior year.
The balance of the increases in SGA expenses were to support the increase in the
number of employers contracting for CompManagement's services. Health Power
HMO's SGA expenses decreased $.7 million, or 28.2%, to $1.7 million for the
first quarter of 1997, from $2.3 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 11.8% for the first quarter of 1997, as compared to
16.8% 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 of 20%
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 as fixed overhead costs and
expenses were allocated over a larger membership base. At the 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 quarter
HMO administrative ratio and the 1996 first quarter SGA expenses of Health Power
HMO have been revised to be comparable to those of the 1997 first quarter. This
change resulted in the 1996 first quarter HMO administrative ratio being 16.8%
instead of the previously reported 14.9%, and the 1996 first quarter SGA
expenses of Health Power HMO being $2.3 million instead of the previously
reported $2.1 million.
The Company's interest income and other increased approximately $36,000
to $269,000 for the first quarter of 1997, from $233,000 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 expense of $ 11,000 for the first quarter
of 1997, as compared to an income tax benefit of $376,000 for the same period in
1996. The first quarter of 1996 tax benefit included loss carrybacks that were
no longer available in the first quarter of 1997.
As a result of the foregoing, the Company sustained a net loss of
$645,000 as compared to a net loss of $684,000 during the same period in the
prior year.
Health Power HMO's operating results have been and will continue to be
adversely affected by capitation rate reductions from ODHS. As of July 1, 1996,
the per member capitation rates from ODHS were reduced by approximately 12% from
the prior fiscal year rates. The 1996 rate reduction followed a 5% capitation
rate reduction in 1995. The current rate will remain in effect until June 30,
1997.
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; and a
20% reduction in the number of the Company's HMO staff.
While the reduced capitation rates will continue to have an adverse
effect on the Company's operations for 1997, management believes that turnaround
efforts in the Company's HMO business and the profitable operations of
CompManagement will lead to improved operating results. The Company will likely
report losses during 1997. A return to profitability will likely require rate
increases in the public and private sectors.
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LIQUIDITY AND CAPITAL RESOURCES
The Company finances its operations through funds on hand from the 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 March 31, 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 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 March 31, 1997, the Company had working capital of $.2 million, as
compared to working capital of $1.6 million at December 31, 1996. At March 31,
1997, cash and cash equivalents were $18.2 million, an increase of $4.3 million
from $13.9 million at December 31, 1996. This increase was attributable
primarily to the receipt of deferred revenue by CompManagement during the first
quarter of 1997. The Company's cash and cash equivalents do not include
statutory cash deposits segregated as required by the Ohio Department of
Insurance and the Ohio Department of Human Services. These deposits of $0.4
million as of March 31, 1997, are included with other assets on the balance
sheet.
Net cash provided by operating activities was $5.1 million for the
first quarter of 1997, as compared to $3.1 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 will likely report losses during
1997, which will adversely impact the Company's liquidity. However the Company's
management continues with its implementation of the plan of action to turn
around its HMO business. Among the actions taken which should improve operating
results in 1997 are improved provider contracting, a substantial reduction in
unprofitable commercial accounts and lower administration expenses.
Nevertheless, the Company has experienced capitation rate decreases with respect
to its ADC Medicaid membership, which affects the Company's ability to generate
sufficient revenues to offset its health care costs.
Item 3. Quantitative and Qualitative Disclosure About Market Risk
- ------- ---------------------------------------------------------
Disclosure not currently required.
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<PAGE> 12
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
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None
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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: MAY 14, 1997 BY /s/ THOMAS E. BEATY, JR.
----------------------------------------------------
THOMAS E. BEATY, JR., PRESIDENT AND
CHIEF OPERATING OFFICER
DATE: MAY 14, 1997 BY /s/ RONALD J. WURTZ
----------------------------------------------------
RONALD J. WURTZ, CHIEF FINANCIAL OFFICER AND
PRINCIPAL ACCOUNTING OFFICER
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<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<CASH> 18,226
<SECURITIES> 0
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<OTHER-SE> 3,862
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