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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 JUNE 30, 1998 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 No X 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 3,831,561
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Class Outstanding at August 6, 1998
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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
June 30, 1998 and December 31, 1997
Consolidated Statements of Operations for the 5
three months ended and six months ended
June 30,1998 and June 30, 1997
Consolidated Statements of Cash Flows - for the six months 6
ended June 30,1998 and June 30, 1997
Notes to the Consolidated Financial Statements 7
9
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 17
Item 3. Quantitative and Qualitative Disclosures about Market Risk
OTHER INFORMATION
PART II.
Item 1. Legal Proceedings 17
Item 6. Exhibits and Reports on Form 8-K 17
Signatures 18
</TABLE>
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
HEALTH POWER, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS as of June 30, 1998 and December 31, 1997
June 30, 1998 December 31,
ASSETS (Unaudited) 1997
------ ----------- ----
Current assets:
Cash and cash equivalents $ 9,499,314 $ 8,427,483
Accounts and notes receivable 3,269,076 5,277,502
Deferred commissions 73,041 44,490
Other assets 1,264,554 1,172,979
----------- -----------
Total current assets 14,105,985 14,922,454
----------- -----------
Property and equipment, net 3,348,747 3,151,104
Other assets 1,939,372 2,444,052
----------- -----------
Total assets $19,394,104 $20,517,610
=========== ===========
The accompanying notes are an integral part of the financial statements
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CONSOLIDATED BALANCE SHEETS, Continued
June 30, 1998 December 31,
LIABILITIES AND STOCKHOLDERS' EQUITY (Unaudited) 1997
- ------------------------------------ ----------- ----
Current liabilities:
Health care costs payable $ 6,582,522 $ 6,688,029
Capitation costs withheld and risk-sharing funds 2,228 0
Deferred revenues 3,749,130 3,902,493
Accounts payable 1,380,697 1,801,394
Accrued commissions 42,164 85,036
Taxes payable 64,785 218,547
Accrued expenses and other liabilities 315,663 257,290
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Total current liabilities 12,137,189 12,952,789
----------- -----------
Stockholders' equity:
Common stock 38,300 38,205
Additional paid-in capital 10,792,785 10,743,643
Retained (deficit) (3,574,170) (3,217,027)
----------- -----------
Total stockholders' equity 7,256,915 7,564,821
----------- -----------
Total liabilities and stockholders' equity $19,394,104 $20,517,610
=========== ===========
The accompanying notes are an integral part of the financial statements
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HEALTH POWER, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
(Unaudited) (Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues: $16,060,848 $18,342,692 $34,103,682 $35,955,827
----------- ---------- --------- ----------
Expenses:
Health care costs 11,751,418 11,080,085 21,824,868 24,993,819
Selling, general and administrative 6,888,030 5,659,438 13,554,189 10,262,755
----------- ---------- --------- ----------
18,639,448 16,739,523 35,379,057 35,256,574
(Loss) income from operations (2,578,600) 1,603,169 (1,275,375) 699,253
Interest income and other, net 746,295 364,153 1,039,817 633,334
----------- ---------- --------- ----------
(Loss) income before income taxes (1,832,305) 1,967,322 (235,558) 1,332,587
Federal, state and local income taxes (benefit)
expense (520,381) 303,531 121,585 314,191
----------- ---------- --------- ----------
Net (loss) income ($1,311,924) $1,663,791 ($357,143) $1,018,396
=========== ========== ========= ==========
Net (loss) income per common share,
basic and diluted ($0.34) $0.44 ($0.09) $0.27
======= ====== ======= =====
</TABLE>
The accompanying notes are an integral part of the financial statements
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HEALTH POWER, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND 1997
<TABLE>
<CAPTION>
(Unaudited)
1998 1997
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<S> <C> <C>
Net cash provided by operating activities $1,066,215 $ 259,136
---------- -----------
Cash flows (used in) provided by investing activities:
Construction of building in process (28,003)
Proceeds from sale of assets 5,080
Purchase of property and equipment, net (548,301) (670,390)
Other assets 504,680 (494,406)
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Net cash (used in) investing activities (43,621) (1,187,719)
---------- -----------
Cash flows provided by financing activities
Issuance of common stock 49,237 27,451
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Net cash provided by financing activities 49,237 27,451
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Net increase (decrease) in cash and cash
equivalents 1,071,831 (901,132)
Cash and cash equivalents, beginning of period 8,427,483 13,928,640
---------- -----------
Cash and cash equivalents, end of period $9,499,314 $13,027,508
========== ===========
</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 June 30, 1998 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, 1997, financial statements and notes
thereto contained in the Company's 1997 Form 10-K.
2. In June 1997, the Financial Accounting Standards Board 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. There are no components of
comprehensive income as outlined by the statement for the periods ended
June 30, 1998 and 1997, respectively.
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.
<TABLE>
<CAPTION>
3. Supplemental Disclosures for Earnings Per Share: THREE MONTHS ENDED
1998 1997
<S> <C> <C>
Basic:
Earnings:
Net (loss) income ($1,311,924) $1,663,791
----------- ----------
Shares:
Weighted average common shares outstanding 3,829,457 3,819,115
----------- ----------
Net (loss) income per common share, basic $(0.34) $0.44
----------- ----------
Diluted:
Earnings:
Net (loss) income ($1,311,924) $1,663,791
----------- ----------
Shares:
Weighted average common shares outstanding 3,829,457 3,819,115
Add: dilutive effect of outstanding options 26,785 137
----------- ----------
Weighted average common shares
outstanding, diluted 3,856,242 3,819,252
----------- ----------
Net income (loss) per common share, diluted $(0.34) $0.44
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</TABLE>
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<TABLE>
<CAPTION>
SIX MONTHS ENDED
1998 1997
<S> <C> <C>
Basic:
Earnings:
Net (loss) income ($357,143) $1,018,396
----------- ----------
Shares:
Weighted average common shares outstanding 3,825,002 3,816,688
----------- ----------
Net (loss) income per common share, basic $(0.09) $0.27
------ -----
Diluted:
Earnings:
Net (loss) income ($357,143) $1,018,396
----------- ----------
Shares:
Weighted average common shares outstanding 3,825,002 3,816,688
Add: dilutive effect of outstanding options 22,983 63
----------- ----------
Weighted average common shares
outstanding, diluted 3,847,985 3,816,751
----------- ----------
Net income (loss) per common share, diluted $(0.09) $0.27
------ -----
</TABLE>
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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 is authorized to provide comprehensive managed health
care services to members of its health maintenance organization ("HMO") in three
service areas encompassing 19 Ohio counties. Health Power HMO primarily focuses
on serving Medicaid recipients enrolled in the Ohio Works First/Healthy Start
(the "OWF Program"). 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 13,000 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 Health Partnership Program, a managed care
workers' compensation program. It began offering its MCO services in March 1997,
and currently serves approximately 19,800 employers located throughout Ohio. As
a state certified MCO, CompManagement Health Systems provides medical management
services for workers' compensation claims, including, among other things, the
following: a state-wide health care provider network; treatment guidelines and
utilization review procedures; peer review and quality assurance programs;
provider sanction and termination procedures; medical and vocational case
management programs; utilization management programs; medical bill adjudication
and payment procedures; dispute resolution procedures; provider, employer, and
employee relations and education programs; and health care fraud detection and
reporting programs. 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.
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,
1997. Except for historical information, all other information provided in this
report is "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995. 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. Certain factors
that might cause such a difference include changes to Medicaid adversely
affecting Health Power HMO, changes to the Health Partnership Program adversely
affecting CompManagement Health Systems, and changes to group rating plans and
programs adversely affecting CompManagement, as well as factors related to the
Company's ability to comply with applicable governmental regulations, control
health care
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costs, adequately estimate its incurred but not reported health care claims,
retain key personnel, and compete in its various industries. These and other
risks are further described in the Company's Form 10-K filed with the Securities
and Exchange Commission for its fiscal year ended December 31, 1997.
RECENT DEVELOPMENTS
Supervision by the Ohio Department of Insurance; Divestiture of HMO
Operations
On July 13, 1998, Health Power HMO was placed under supervision by the
Ohio Department of Insurance ("ODI") because of its failure to meet Ohio's
minimum statutory net worth requirements for health insuring corporations.
Supervision is the lowest level of direct oversight by ODI. During the period of
supervision, Health Power HMO will be restricted from engaging in various types
of transactions without the consent of ODI. However, there can be no assurance
that ODI will not begin liquidation proceedings at any time against Health Power
HMO. If liquidation proceedings are commenced, Health Power HMO will be under
the complete control of ODI.
In addition, the Company's Board of Directors has authorized management
to explore all opportunities for divestiture of the Company's HMO operations
before the end of the year, and management is in discussions with a number of
potential purchasers at the present time. However, there can be no assurance
that a purchaser can be found for this business, or if found, that the Company
will be able to sell the HMO on favorable terms and conditions.
Reserve Adjustments
Health Power HMO's health care costs include estimates of health care
costs incurred but not yet reported or paid. Health Power HMO estimates a
reserve amount quarterly and makes adjustments based upon a number of factors,
including recent claim payment 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 actuary company to review
the adequacy of its reserve estimates. As part of the recent quarterly reserve
setting process, Health Power HMO increased its health care costs by $2.2
million for the second quarter of 1998, which increase included adjustments for
the settlement of claims from prior quarters. This reserve estimate may be
subject to further adjustments in subsequent quarters.
NCQA Accreditation
Health Power HMO received full (three year) accreditation from the
National Committee for Quality Assurance ("NCQA"). Full accreditation is granted
to plans that have well-established quality improvement programs and meet NCQA's
rigorous standards. Health Power HMO had previously received a one-year
accreditation.
Sales and Exchange of Medicaid Membership; Exit from Northeast Service
Area
Health Power HMO has received approval from ODI and the Ohio Department
of Human Services ("ODHS") for the transfer of the contract rights for its
Montgomery County (Dayton), Ohio Medicaid membership to DayMed Health
Maintenance Plan, Inc. ("DayMed") in exchange for DayMed's contract rights for
that entity's Hamilton County (Cincinnati) Medicaid membership. In addition,
Health Power HMO expects to receive cash of approximately $48,000 in the
transaction. Under their respective provider agreements, Health
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Power HMO and DayMed were providing health care services to approximately 3,800
Montgomery County Medicaid recipients and 4,800 Hamilton County Medicaid
recipients, respectively, as of July 31, 1998.
The contract rights for Health Power HMO's Medicaid membership in
Cuyahoga (Cleveland) County were sold to Emerald HMO, Inc. effective June 1,
1998. In connection with such sale, 1,327 Medicaid members were transferred from
Health Power HMO to Emerald HMO, Inc. for an aggregate purchase price of
$431,275, which is included in interest income and other, in the financial
statements. The Company exited the Northeast service area following the
completion of this transaction because of insignificant membership remaining in
that service area.
The exchange of the contract rights for Health Power HMO's Butler
County (between Dayton and Cincinnati) Medicaid membership and the contract
rights for the Montgomery County (Dayton) Medicaid membership of Medical Mutual
of Ohio was completed effective June 1, 1998. Under their respective provider
agreements, Health Power HMO and Medical Mutual were providing health care
services to approximately 400 Butler County Medicaid recipients and 700
Montgomery County Medicaid recipients, respectively as of April 30, 1998.
RESULTS OF OPERATIONS
Three months ended June 30, 1998, compared to three months ended June
30, 1997
The Company's revenues decreased $2.3 million, or 12.4 %, to $16.1
million during the second quarter of 1998, from $18.3 million for the same
period in 1997, due to revenue decreases experienced by Health Power HMO. Health
Power HMO's revenues decreased $3.4 million, or 24.9%, to $10.2 million during
the second quarter of 1998, from $13.6 million for the same period in the prior
year, due to a 29.1% decrease in member months, which offset a 6.0% increase in
revenue per member months. The decrease in member months was the result of the
termination of the State of Ohio employee commercial group contracts, the sale
of the Medicaid membership in the Northeast service area, and involuntary
terminations of OWF Medicaid members. Involuntary termination's relate to
members who are no longer eligible to receive OWF Medicaid benefits. There has
been an approximate 8.8% decrease in the number of eligible Medicaid recipients
enrolled in the OWF Program in the counties Health Power HMO serves due to
favorable economic conditions experienced in those counties. At June 30, 1998,
Health Power HMO's Medicaid enrollment was 25,843, as compared to 33,914 at June
30, 1997 a decease of 23.8%, and its commercial enrollment was 2,048, as
compared to 7,738 at June 30, 1998, a decrease of 73.5%. CompManagement's
revenues increased $1.0 million, or 20.3%, to $5.9 million during the second
quarter of 1998, as compared to $4.9 million in the same period in the prior
year. This increase was primarily due to revenues from CompManagement Health
Systems increasing $756,000, or 34.6%, to $2.9 million during the second quarter
of 1998, as compared to $2.2 million in the same period in 1997, as a result of
performance and incentive fees being paid quarterly in 1998 as compared to being
paid once at year end in 1997. CompManagement's revenues increased $241,000, or
8.8%, to $3.0 million during the second quarter of 1998, from $2.7 million for
the same period in 1997, as a result of an increase in the number of employers
contracting for its services, in particular, employers participating in group
rating plans.
Health Power HMO's health care costs increased $671,000, or 6.1%, to
$11.8 million during the second quarter of 1998, from $11.1 million for the same
period in 1997. Health care costs, stated as a percentage of Health Power HMO's
revenues (the "HMO medical loss ratio"), were 115.1% for the second quarter of
1998, as compared to 81.51% for the same period in the prior year. The increase
in the HMO medical loss ratio was due to a 49.6% increase in the per member
health care costs, which was partially offset by the aforementioned
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increase in the per member revenue of 6.0% during the second quarter of 1998, as
compared to the same period in the prior year. The increase in per member health
care costs was primarily due to the $2.2 million second quarter increase in
health care cost, discussed above. See "Recent Developments--Reserve
Adjustments." The increase in per member revenue resulted primarily from the
July 1, 1997 capitation rate increase from ODHS.
The Company's selling, general and administrative ("SGA") expenses
increased $1.2 million, or 21.7%, to $6.9 million for the second quarter of
1998, from $5.7 million for the same period in 1997. CompManagement's SGA
expenses increased $1.7 million, or 49.2%, to $5.2 million for the second
quarter of 1998, from $3.5 million for the same period in the prior year. This
increase was primarily the result of CompManagement Health Systems' SGA expenses
increasing $1.4 million, or 87.7%, to $3.0 million for the second quarter of
1998, from $1.6 million for the same period in 1997. This increase was primarily
due to a significant increase in salaries, commissions, benefits and contract
labor, which increase was necessary to support its MCO operations. The balance
of the increase in CompManagement's SGA expenses was to support the increase in
the number of employers contracting for CompManagement's TPA services. Health
Power HMO's SGA expenses decreased $492,000, or 22.8%, to $1.7 million for the
second quarter of 1998, from $2.2 million for the same period in 1997. These SGA
expenses, stated as a percentage of Health Power HMO's revenues (the "HMO
administrative ratio"), were 16.3% for the second quarter of 1998, as compared
to 15.9% for the same period in 1997. 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, limited use of contract labor, and cost savings in
the areas of professional fees, transportation and advertising. The increase in
administrative ratio was due to allocating the HMO's fixed SGA expenses over a
substantially smaller revenue base.
The Company's interest income and other increased approximately $382,000
to $746,000 for the second quarter of 1998, from $364,000 for the same period in
the prior year. This increase resulted primarily from cash receipts during
quarter two of 1998 associated with the company's HMO's sale of Medicaid members
in Cuyahoga and Mahoning counties.
The Company had an income tax benefit of $520,000 for the second quarter
of 1998, as compared to an income tax expense of $304,000 for the same period in
1997. The second quarter of 1998 tax benefit was the result of a loss before
income taxes of $1.8 million.
As a result of the foregoing, the Company had a net loss of $1.3
million, or ($0.34) per share (diluted), for the second quarter of 1998, as
compared to net income of $1.7 million, or $0.44 per share (diluted), during the
same period in the prior year. There were 3,856,242 and 3,819,252 weighted
average common diluted shares outstanding for the three months ended June 30,
1998 and 1997, respectively.
Six months ended June 30, 1998, compared to six months ended June 30,
1997
The Company's revenues decreased $1.9 million, or 5.2%, to $34.1
million during the first six months of 1998, from $36.0 million for the same
period in 1997, due to revenue decreases experienced by Health Power HMO. Health
Power HMO's revenues decreased $7.0 million, or 25.0%, to $21.0 million during
the first six months of 1998, from $27.9 million for the same period in the
prior year, due to a 28.6% decrease in member months, which offset a 5.1%
increase in revenue per member months. The decrease in member months was the
result of the termination of the State of Ohio employee commercial group
contracts, elimination of unprofitable commercial accounts, the sale the
Medicaid membership in the Northeast service area, and involuntary terminations
of OWF Medicaid members. CompManagement's revenues increased $5.0 million, or
60%, to
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$13.3 million during the first six months of 1998, from $8.3 million for the
same period in the prior year. This increase was primarily due to revenues from
CompManagement Health Systems increasing $4.4 million, or 153.8%, to $7.3
million during the first six months of 1998, as compared to $2.9 million in the
same period in 1997. This increase was the result of the performance and
incentive fees being paid quarterly in 1998 as compared to being paid once at
year end in 1997, non-reoccurring revenue of $1.6 million recorded in the first
quarter of 1998 and to CompManagement Health Systems being operational during
all of the first six months of 1998 as compared to only four months in 1997
(March through June).
Health Power HMO's health care costs decreased $3.2 million, or 12.7%,
to $21.8 million during the first six months of 1998, from $25.0 million for the
same period in 1997. The HMO medical loss ratio was 104.2% for the first six
months of 1998, as compared to 89.5% for the same period in the prior year. The
increase in the HMO medical loss ratio was due to a 22.4% increase in the per
member health care costs, which was partially offset by the aforementioned
increase in per member revenue of 5.1% during the first half of 1998, as
compared to the same period in the prior. The increase in per member health care
costs was primarily due to first and second quarter increase in health care cost
claims, discussed above. See "Recent Developments--Reserve Adjustments." The
increase in per member revenue resulted primarily from the July 1, 1997
capitation rate increase from ODHS.
The Company's SGA expenses increased $3.3 million, or 32.1%, to $13.6
million for the first six months of 1998, from $10.3 million for the same period
in 1997. CompManagement's SGA expenses increased $3.9 million, or 60.3 %, to
$10.3 million for the first six months of 1998, from $6.4 million for the same
period in the prior year. This increase was primarily the result of
CompManagement Health Systems' SGA expenses increasing $3.1 million, or 114.2%,
to $5.8 million for the first six months of 1998, from $2.7 million for the same
period in 1997. This increase was primarily due to a significant increase in
salaries, commissions, benefits and contract labor, which increase was necessary
to support its MCO operations and to CompManagement Health Systems being
operational for only four months in the 1997 six month period. The balance of
the increase in CompManagement's SGA expenses was to support the increase in the
number of employers contracting for CompManagement's services. Health Power
HMO's SGA expenses decreased $582,000, or 15.2%, to $3.3 million for the first
six months of 1998, from $3.8 million for the same period in 1997. The HMO
administrative ratio was 15.5% for the first six months of 1998, as compared to
13.7% for the same period in 1997. 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. The increase in the HMO administrative ratio was due to
allocating the HMO's fixed SGA expenses over a substantially smaller revenue
base.
The Company's interest income and other increased approximately $406,000
to $1.0 million for the first six months of 1998, from $633,000 for the same
period in the prior year. This increase resulted primarily from cash receipts
during quarter two of 1998 associated with the sale of HMO Medicaid members in
Cuyahoga and Mahoning counties.
The Company's income tax expense decreased $193,000 to $122,000 for the
first six months of 1998, from $314,000 for the same period in 1997. This
decrease resulted from of a loss before taxes for Health Power HMO of $3.5
million. The Company files its income taxes on a consolidated basis.
As a result of the foregoing, the Company had a net loss of $357,000,
or ($0.09) per share (diluted), for the first six months of 1998, as compared to
net income of $1.0 million, or $0.27 per share (diluted), during the same period
in the prior year. There were 3,847,985 and 3,816,751 weighted average common
diluted shares outstanding for the six months ended June 30, 1998 and 1997,
respectively.
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Health Power HMO's operating results have been and may continue to be
adversely affected by the potential occurrence of various factors, such as
increases in reserve estimates, decreases in capitation rates from ODHS,
increases in health care costs and decreases in the size of the Medicaid
population. There can be no assurance that reserve estimates will not be subject
to adjustments during 1998. While the Company does not anticipate capitation
rate reductions from ODHS in 1998, as was experienced in 1995 and 1996, it
anticipates only a slight increase in such rates to occur during the second half
of 1998. However, there can be no assurance that health care costs will not
increase at a rate in excess of such capitation rate increases. Furthermore,
because of favorable economic conditions, Ohio has experienced, and continues to
experience, a decrease in the number of eligible Medicaid recipients. This
decrease in the number Medicaid recipients may continue to negatively impact
Health Power HMO in 1998.
Based upon the foregoing factors and the Company's most recent
operating projections, it is not expected that the operations of Health Power
HMO will be profitable during 1998. The Company's Board of Directors has
authorized management to explore all opportunities for divestiture of the
Company's HMO operations before the end of the year, and management is in
discussions with a number of potential purchasers at the present time. However,
there can be no assurance that a purchaser can be found for this business, or if
found, that the Company will be able to sell the HMO on favorable terms and
conditions. Furthermore, Health Power HMO has been placed under supervision by
ODI because of its failure to meet Ohio's minimum statutory net worth
requirements for health insuring corporations. There can be no assurance that
ODI will not begin liquidation proceedings at any time against Health Power HMO.
If liquidation proceedings are commenced, Health Power HMO will be under the
complete control of ODI. See "Recent Developments--Supervision by the Ohio
Department of Insurance; Divestiture of HMO Operations."
LIQUIDITY AND CAPITAL RESOURCES
The Company finances its operations through internally generated funds,
and its principal sources of cash have been contract and MCO revenues from
CompManagement and CompManagement Health Systems, respectively, premium revenues
from Health Power HMO, and investment income. The Company's principal capital
needs are to fund ongoing operations.
The Company's HMO needs to maintain necessary regulatory capital for
its continued operation. At June 30, 1998, the statutory net worth of Health
Power HMO was approximately ($1.5) million, which did not meet Ohio's $1.7
million minimum statutory net worth requirement. Health Power HMO has been
placed under supervision by ODI effective as of July 13, 1998. Supervision is
the lowest level of direct oversight by ODI. During the period of supervision,
Health Power HMO will be restricted from engaging in various types of
transactions without the consent of ODI.
In June 1998, Health Power HMO received $431,275 in connection with the
sale of contract rights for its Medicaid membership in Cuyahoga County. The HMO
also anticipates receiving approximately $48,000 in October 1998, as part of the
exchange of its contract rights for its Medicaid membership in Montgomery
County. See "Recent Developments--Sale and Exchange of Medicaid Membership; Exit
from Northeast Service Area."
The Company had working capital of $2.0 million, at both June 30, 1998
and December 31, 1997. At June 30, 1998, cash and cash equivalents were $9.5
million, an increase of $1.1 million from $8.4 million at December 31, 1997.
This increase was attributable primarily to the receipt of deferred revenue by
Page 14
<PAGE> 15
CompManagement during the first six months of 1998. The Company's cash and cash
equivalents do not include statutory cash deposits segregated as required by ODI
and ODHS. These deposits of $420,000 as of June 30, 1998, are included with
other assets on the balance sheet.
CompManagement leases a 70,000 square foot building in Dublin, Ohio.
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 provided by operating activities was $1.1 million for the
first half of 1998, as compared to $259,000 during the same period in the prior
year. In general, changes from year to year in cash flow from operations are
primarily due to changes in net earnings, health care costs payable, purchase of
property and equipment, and deferred revenues. Many of these fluctuations are
due to timing of cash receipts or payments. Because premium payments received
prior to the month of coverage are recorded as deferred revenues, the extent of
such receipts can cause fluctuations in the total amount of cash from month to
month.
The Company believes that internally generated funds will be sufficient
to support the operations of CompManagement and CompManagement Health Systems
during 1998. As mentioned above, the Company's HMO subsidiary has been placed
under supervision by ODI because of its failure to meet Ohio's $1.7 million
minimum statutory net worth requirements. In addition, the Company's Board of
Directors has authorized management to explore all opportunities for divestiture
of the Company's HMO operations before the end of the year, and management is in
discussions with a number of potential purchasers at the present time. However,
there can be no assurance that a purchaser can be found for this business, or if
found, that the Company will be able to sell the HMO on favorable terms and
conditions. Furthermore, there can be no assurance that ODI will not begin
liquidation proceedings at any time against Health Power HMO. If liquidation
proceedings are commenced, Health Power HMO will be under the complete control
of ODI.
YEAR 2000 COMPLIANCE
The Year 2000 Issue is the result of computer programs having been
written using two digits rather than four to define the applicable year. Any of
the computer programs used by the Company or its subsidiaries that have
time-sensitive software may recognize a date using "00" as the year 1900 rather
than the year 2000. This could result in a system failure or miscalculations
causing disruptions of uncertain duration in the Company's operations,
including, among other things, an inability to process transactions or engage in
normal business activities. The Company utilizes software and related computer
technologies essential to its operations.
The Company's management currently believes that the software systems
utilized by the Company are either currently Year 2000 compliant or patches and
upgrades are readily available to make such systems compliant. The Company does
not believe that the cost of addressing the Year 2000 will materially effect the
Company's business, operations, or financial condition or will require material
expenditures for the Year 2000 compliance.
In addition, Year 2000 issues relating to third parties with which the
Company has a significant relationship could adversely impact the Company's
operations. The Company has not yet determined the extent to which the third
parties' systems may be vulnerable to Year 2000 issues and what impact, if any,
these Year 2000 issues would have on the Company.
Page 15
<PAGE> 16
Item 3. Quantitative and Qualitative Disclosure About Market Risk
Disclosure not currently required
Page 16
<PAGE> 17
Part II - Other Information
Item 1. Legal Proceedings
On July 7, 1998, Health Power HMO, Inc. ("Health Power HMO") instituted
a lawsuit against Central Benefits Administrators, Inc. ("Central Benefits
Administrators") in the Common Pleas Court of Franklin County, Ohio. The lawsuit
involves an administrative agreement between the parties pursuant to which
Central Benefits Administrators was to perform various claims processing and
payment service on behalf of Health Power HMO with respect to medical claims
submitted by providers. The lawsuit alleges that Central Benefits Administrators
failed to perform its services under the agreement. Health Power HMO is claiming
breach of contract, negligence and fraud and is seeking compensatory damages in
the amount of $1.6 million and punitive damages in the amount of $5.0 million.
On or about August 6, 1998, Central Benefits Administrators filed a counterclaim
against Health Power HMO involving the same administrative agreement. The
counterclaim alleges breach of contract, fraudulent or negligent
misrepresentations, and indemnification and is seeking $3.35 million in
compensatory damages and $5.0 million in punitive damages. The lawsuit is in its
formative stage, and no discovery has been undertaken to date by the parties.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27 Financial Data Schedule
(b) Reports on Form 8-K
None
Page 17
<PAGE> 18
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THE
REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY THE
UNDERSIGNED THEREUNTO DULY AUTHORIZED.
HEALTH POWER, INC.
DATE: AUGUST 14, 1998 BY /S/ BERNARD F. MASTER, DO
------------------------------------------
BERNARD F. MASTER, DO, PRESIDENT,
CHIEF OPERATING OFFICER AND CHAIRMAN
OF THE BOARD
DATE: AUGUST 14, 1998
BY /S/ RONALD J. WURTZ
------------------------------------------
RONALD J. WURTZ, CHIEF FINANCIAL
OFFICER AND PRINCIPAL ACCOUNTING
OFFICER
Page 18
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