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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,
1998 OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM _______________
TO ____________________________.
Commission file number: 0-23220
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Health Power, Inc.
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(Exact name of registrant as specified in its charter)
Delaware 31-1145640
- ------------------------------------------ ------------------------------------
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
1209 Orange Street, Wilmington, Delaware 19801
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(Address of principal executive offices) Zip Code
(302) 636-7593
--------------
(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
- ------------------------------------------ ------------------------------------
Class Outstanding at November 5, 1998
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HEALTH POWER, INC. AND SUBSIDIARIES
INDEX
<TABLE>
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PAGE
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets - as of 3 & 4
September 30, 1998 and December 31, 1997
Consolidated Statements of Operations for the 5
three months ended and nine months ended
September 30,1998 and September 30, 1997
Consolidated Statements of Cash Flows - for the nine months 6
ended September 30,1998 and September 30, 1997
Notes to the Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial 9
Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures about Market Risk 15
PART II.
OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 16
Signatures 17
</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, 1998 and December 31, 1997
<TABLE>
<CAPTION>
September 30, 1998 December 31,
ASSETS (Unaudited) 1997
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<S> <C> <C>
Current assets:
Cash and cash equivalents $12,304,166 $ 8,334,729
Accounts and notes receivable 3,254,190 5,277,502
Deferred commissions 44,070 44,490
Other assets 1,177,976 1,172,979
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Total current assets 16,780,402 14,829,700
----------- -----------
Property and equipment, net 3,281,914 3,151,104
Other assets 1,791,302 2,444,052
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Total assets $21,853,618 $20,424,856
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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>
September 30, 1998 December 31,
LIABILITIES AND STOCKHOLDERS' EQUITY (Unaudited) 1997
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<S> <C> <C>
Current liabilities:
Health care costs payable $ 7,876,835 $ 6,688,029
Deferred revenues 5,130,795 3,902,493
Accounts payable 1,308,987 1,784,678
Accrued commissions 44,558 85,036
Taxes payable 67,741 218,547
Accrued expenses and other liabilities 377,731 181,252
------------ ------------
Total current liabilities 14,806,647 12,860,035
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Stockholders' equity:
Common stock 38,311 38,205
Additional paid-in capital 10,800,094 10,743,643
Retained (deficit) (3,791,434) (3,217,027)
------------ ------------
Total stockholders' equity 7,046,971 7,564,821
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Total liabilities and stockholders' equity $ 21,853,618 $ 20,424,856
============ ============
</TABLE>
The accompanying notes are an integral part of the financial statements
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HEALTH POWER, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
(Unaudited) (Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues: $ 15,113,400 $ 19,106,523 $ 49,217,082 $ 55,062,351
------------ ------------ ------------ ------------
Expenses:
Health care costs 8,211,976 14,354,891 30,036,844 39,348,710
Selling, general and administrative 7,247,128 6,304,705 20,801,317 16,567,460
------------ ------------ ------------ ------------
15,459,104 20,659,596 50,838,161 55,916,170
------------ ------------ ------------ ------------
(Loss) from operations (345,704) (1,553,073) (1,621,079) (853,819)
Interest income and other, net 196,215 305,525 1,236,032 938,859
------------ ------------ ------------ ------------
(Loss) income before income taxes (149,489) (1,247,548) (385,047) 85,040
Federal, state and local income
tax expense (benefit) 67,775 (2,532,336) 189,360 (2,218,145)
------------ ------------ ------------ ------------
Net (loss) income ($ 217,264) $ 1,284,788 ($ 574,407) $ 2,303,185
============ ============ ============ ============
Net (loss) income per common share, basic ($ 0.06) $ 0.34 ($ 0.15) $ 0.60
============ ============ ============ ============
Net (loss) income per common share, diluted ($ 0.06) $ 0.33 ($ 0.15) $ 0.60
============ ============ ============ ============
</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 NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
<TABLE>
<CAPTION>
(Unaudited)
1998 1997
---- ----
<S> <C> <C>
Net cash provided by (used in) operating activities: $ 4,083,426 ($ 5,423,553)
------------ ------------
Cash flows (used in) provided by investing activities:
Construction of Building in process (96,779)
Proceeds from sale of assets 5,080
Purchase of furniture and equipment (673,247) (872,998)
Other assets 502,701 (814,406)
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Net cash used in investing activities (170,546) (1,779,103)
------------ ------------
Cash flows provided by financing activities:
Issuance of common stock 56,557 32,453
Net cash provided by financing activities 56,557 32,453
------------ ------------
Net increase (decrease) in cash and cash equivalents 3,969,437 (7,170,203)
Cash and cash equivalents, beginning of period 8,334,729 13,928,640
------------ ------------
Cash and cash equivalents, end of period $ 12,304,166 $ 6,758,437
============ ============
</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 September 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
September 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.
3. Supplemental Disclosures for Earnings Per Share:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
1998 1997
<S> <C> <C>
Basic:
Earnings:
Net (loss) income ($217,264) $ 1,284,788
Shares:
Weighted average common shares outstanding 3,831,151 3,819,927
Net (loss) income per common share, basic ($0.06) $ 0.34
=========== ===========
Diluted:
Earnings:
Net (loss) income ($217,264) $ 1,284,788
Shares:
Weighted average common shares outstanding 3,831,151 3,819,927
Add: dilutive effect of outstanding options 866 31,453
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Weighted average common shares outstanding, diluted 3,832,017 3,851,380
Net (loss) income per common share, diluted ($0.06) $ 0.33
=========== ===========
</TABLE>
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<TABLE>
<CAPTION>
NINE MONTHS ENDED
1998 1997
<S> <C> <C>
Basic:
Earnings:
Net (loss) income ($574,407) $ 2,303,185
Shares:
Weighted average common shares outstanding 3,827,074 3,817,780
Net (loss) income per common share, basic ($0.15) $ 0.60
=========== ===========
Diluted:
Earnings:
Net (loss) income ($574,407) $ 2,303,185
Shares:
Weighted average common shares outstanding 3,827,074 3,817,780
Add: dilutive effect of outstanding options 15,688 8,417
----------- -----------
Weighted average common shares outstanding, diluted 3,842,762 3,826,197
Net (loss) income per common share, diluted ($0.15) $ 0.60
=========== ===========
</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
Program (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.
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
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factors related to the Company's ability to comply with applicable governmental
regulations, control health care 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
Sales of Medicaid Membership
On October 29, 1998, Health Power HMO entered into a definitive
agreement to sell its contract rights and interests for its Medicaid membership
in Hamilton County (Cincinnati) to Dayton Area Health Plan, a not-for-profit
Ohio corporation ("DAHP"). Pursuant to its provider agreement with the Ohio
Department of Human Services ("ODHS"), Health Power HMO is providing health care
services to approximately 15,000 Medicaid recipients in Hamilton County as of
October 31, 1998. This transaction is subject to a number of conditions,
including approvals from the Ohio Department of Insurance ("ODI") and ODHS.
Health Power anticipates the transaction will be completed during either the
fourth quarter of 1998 or the first quarter of 1999.
The Company's management is currently in serious discussions with a
potential purchaser for its Franklin County (Columbus) Medicaid membership and
its related license. However, no definitive agreement has been reached and the
timing of any such agreement is uncertain.
The previously announced exchange of the contract rights for Health
Power HMO's Montgomery County (Dayton) Medicaid membership for the Hamilton
County (Cincinnati) Medicaid membership of DayMed Health Maintenance Plan, Inc.
("DayMed") was completed effective October 1, 1998. Under their respective
provider agreements, Health Power HMO and DayMed were providing health care
services to approximately 3,090 Montgomery County Medicaid recipients and 3,735
Hamilton County Medicaid recipients. Health Power HMO is also to receive
approximately $44,820 in this transaction. Effective with this transfer, Health
Power HMO exited the Dayton service area for providing health care services to
Medicaid recipients.
Health Care Costs Adjustments
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 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 decreased its health care
costs by $435,000 for the third quarter of 1998, which decrease included
adjustments for the settlement of claims from prior quarters. This reserve
estimate may be subject to further adjustments in subsequent quarters.
RESULTS OF OPERATIONS
Three months ended September 30, 1998, compared to three months ended
September 30, 1997
The Company's revenues decreased $4.0 million, or 20.9%, to $15.1
million during the third quarter of 1998, from $19.1 million for the same period
in 1997. Health Power HMO's revenues decreased $4.5 million, or 32.6%, to $9.3
million during the third quarter of 1998, from $13.8 million for the same period
in the prior
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year, due to a 33.4% decrease in member months, which offset a 1.1% 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 accounts, the sale of
its Medicaid memberships in the Northeast service area and Butler County, and
involuntary terminations of OWF Medicaid members. Involuntary terminations
relate to members who are no longer eligible to receive OWF Medicaid benefits.
During the last twelve months, there has been an approximate 7.6% decrease in
the number of eligible Medicaid recipients in the OWF Program in the State of
Ohio in the counties where HMOs are authorized to offer their services. At
September 30, 1998, Health Power HMO's Medicaid enrollment was 24,551, as
compared to 32,004 at September 30, 1997 a decease of 23.3%, and its commercial
enrollment was 2,061 at September 30, 1998, as compared to 7,743 at September
30, 1997, a decrease of 73.4%. CompManagement's revenues increased $421,000, or
7.7%, to $5.9 million during the third quarter of 1998, as compared to $5.4
million in the same period in the prior year. This increase was primarily due to
revenues from CompManagement increasing $302,000, or 11.0%, to $3.0 million
during the third quarter of 1998, as compared to $2.7 million in 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.
CompManagement Health Systems revenue increased $119,000, or 4.4%, to $2.8
million during the third quarter of 1998, as compared to $2.7 million the same
period of 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.
Health Power HMO's health care costs decreased $6.1 million, or 42.8%,
to $8.2 million during the third quarter of 1998, from $14.4 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 88.2% for the third quarter
of 1998, as compared to 103.9% for the same period in the prior year. The
decrease in the HMO medical loss ratio was due to a 14.2% decrease in the per
member health care costs and the aforementioned increase in the per member
revenue of 1.1% during the third quarter of 1998, as compared to the same period
in the prior year. The decrease in per member health care costs was due to a
$435,000 third quarter decrease in health care cost, discussed above, as
compared to a $2.5 million increase in health care costs and a single large
commercial claim of approximately $600,000 for the same period in 1997. See
"Recent Developments--Health Care Costs Adjustments." The increase in per member
revenue resulted primarily from changes in the mix of membership by service area
and a July 1, 1998, capitation rate increase from ODHS.
The Company's selling, general and administrative ("SGA") expenses
increased $942,000, or 15.0%, to $7.2 million for the third quarter of 1998,
from $6.3 million for the same period in 1997. CompManagement's SGA expenses
increased $1.7 million, or 42.5%, to $5.7 million for the third quarter of 1998,
from $4.0 million for the same period in the prior year. This increase was
primarily the result of CompManagement Health Systems' SGA expenses increasing
$1.2 million, or 61.7%, to $3.1 million for the third quarter of 1998, from $1.9
million for the same period in 1997. This increase was primarily due to a 37%
increase in the number of persons employed by CompManagement Health Systems,
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 $756,000, or 32.7%, to $1.6 million for the third
quarter of 1998, from $2.3 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 16.7% for both the third quarter of 1998 and 1997.
The improvement in the Health Power HMO's SGA expenses was the result of
management's implementing a plan of action to reduce costs in 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 administrative ratio remained
unchanged due to allocating the HMO's fixed SGA expenses over a substantially
smaller revenue base.
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The Company's interest income and other decreased approximately
$109,000 to $196,000 for the third quarter of 1998, from $306,000 for the same
period in the prior year. This decrease resulted primarily from a decrease in
the average available investable cash balance.
The Company had an income tax expense of $68,000 for the third quarter
of 1998, as compared to an income tax benefit of $2.5 million for the same
period in 1997. The 1997 tax benefit was the result of the recognition of a $2.4
million deferred tax asset in accordance with the Company's interpretation of
the Financial Accounting Standards ("SFAS") No. 109, Accounting for Income
Taxes.
As a result of the foregoing, the Company had a net loss of $217,000,
or ($0.06) per share (diluted), for the third quarter of 1998, as compared to
net income of $1.3 million, or $0.33 per share (diluted), during the same period
in the prior year. There were 3,832,017 and 3,851,380 weighted average common
diluted shares outstanding for the three months ended September 30, 1998 and
1997, respectively.
Nine months ended September 30, 1998, compared to nine months ended
September 30, 1997
The Company's revenues decreased $5.8 million, or 10.6%, to $49.2
million during the first nine months of 1998, from $55.1 million for the same
period in 1997. Health Power HMO's revenues decreased $11.5 million, or 27.5%,
to $30.3 million during the first nine months of 1998, from $41.8 million for
the same period in the prior year, due to a 30.4% decrease in member months,
which offset a 4.1% 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 of the Medicaid membership in the Northeast service area and Butler County,
and involuntary terminations of OWF Medicaid members. CompManagement's revenues
increased $5.4 million, or 39.1%, to $19.1 million during the first nine months
of 1998, from $13.8 million for the same period in the prior year. This increase
was primarily due to revenues from CompManagement Health Systems increasing $4.6
million, or 81.7%, to $10.2 million during the first nine months of 1998, as
compared to $5.6 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-recurring revenue of $1.6
million recorded in the first quarter of 1998 and to CompManagement Health
Systems being operational during all of the first nine months of 1998 as
compared to only seven months in 1997 (March through September).
Health Power HMO's health care costs decreased $9.3 million, or 23.7%,
to $30.0 million during the first nine months of 1998, from $39.3 million for
the same period in 1997. The HMO medical loss ratio was 99.3% for the first nine
months of 1998, as compared to 94.2% for the same period in the prior year. The
increase in the HMO medical loss ratio was due to a 9.6% increase in the per
member health care costs, which was partially offset by the aforementioned
increase in per member revenue of 4.1% during the first nine months of 1998, as
compared to the same period in the prior year. The increase in per member health
care costs was primarily due to changes in the reserve for health care costs.
The increase in per member revenue resulted primarily from changes in the mix of
members by service area and a July 1, 1998 capitation rate increase from ODHS.
The Company's SGA expenses increased $4.2 million, or 25.6%, to $20.8
million for the first nine months of 1998, from $16.6 million for the same
period in 1997. CompManagement's SGA expenses increased $5.6 million, or 53.5%,
to $16.0 million for the first nine months of 1998, from $10.4 million for the
same period in the prior year. This increase was primarily the result of
CompManagement Health Systems' SGA expenses
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increasing $4.3 million, or 92.6%, to $8.9 million for the first nine months of
1998, from $4.6 million for the same period in 1997. This increase was primarily
due to a significant increase in the number of persons employed by
CompManagement Health Systems, which increase was necessary to support its MCO
operations, and to CompManagement Health Systems being operational for only
seven months in the 1997 nine-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 $1.3 million, or 21.8%, to $4.8 million for the first nine
months of 1998, from $6.1 million for the same period in 1997. The HMO
administrative ratio was 15.9% for the first nine months of 1998, as compared to
14.7% 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 reduce
costs in 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 $297,000
to $1.2 million for the first nine months of 1998, from $939,000 for the same
period in the prior year. This increase resulted primarily from Medicaid
membership sales totaling $534,000 in the Northeast service area.
The Company's had an income tax expense of $189,000 for the first nine
months of 1998 as compared to an income tax benefit of $2.2 million for the same
period in 1997. The 1997 tax benefit was the result of the recognition of a $2.4
million deferred tax asset.
As a result of the foregoing, the Company had a net loss of $547,000,
or ($0.15) per share (diluted), for the first nine months of 1998, as compared
to net income of $2.3 million, or $0.60 per share (diluted), during the same
period in the prior year. There were 3,842,762 and 3,826,197 weighted average
common diluted shares outstanding for the nine months ended September 30, 1998
and 1997, respectively.
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 the fourth quarter of 1998. While the Company did receive
a slight increase in the capitation rate from ODHS in the second half of 1998,
as compared to the significant reductions experienced in 1995 and 1996, 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 the fourth
quarter of 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 continues to explore the
opportunity for divesture of the Company's HMO operations. As previously
discussed, Health Power HMO has entered into a definitive agreement to sell its
Hamilton County Medicaid membership and management is in serious discussions
with a potential purchaser for its Franklin County membership and its related
license. However, no definitive agreement has been reached and the timing of any
such agreement is uncertain. 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
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liquidation proceedings are commenced, Health Power HMO will be under the
complete control of ODI. See "Recent Developments--Sales of Medicaid
Membership."
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 September 30, 1998, Health Power HMO had negative
statutory capital of approximately $567,000, 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.
Health Power HMO has received a deposit of $10,000 and will receive an
additional $34,820 in the fourth quarter of 1998 in connection with the exchange
of the contract rights for its Montgomery County Medicaid membership for the
Hamilton County Medicaid membership of DayMed. Health Power HMO anticipates that
the net proceeds for the sale of its Hamilton County Medicaid membership will
cause it to be at or near the minimum statutory net worth requirement.
The Company had working capital of $2.0 million at both September 30,
1998 and December 31, 1997. At September 30, 1998, cash and cash equivalents
were $12.3 million, an increase of $4.0 million from $8.4 million at December
31, 1997. This increase was attributable primarily to the receipt of deferred
revenue by CompManagement during the first nine 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 September 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.
CompManagement has received a $1.0 million line of credit from National
City Bank (the "Bank") to be used to provide short term financing for
acquisitions. Advances under this line of credit will be due on demand, accrue
interest at an interest rate equal to the Bank's prime rate, and be secured by a
lien on all business assets of CompManagement. The closing date for this line of
credit is to be no later than January 31, 1999. CompManagement has not utilized
this line of credit.
Net cash provided by operating activities was $4.1 million for the
first nine months of 1998, as compared to net cash used by operating activities
of $5.4 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.
14
<PAGE> 15
The Company believes that internally generated funds will be sufficient
to support the operations of CompManagement and CompManagement Health Systems
for the balance of 1998 and into 1999. The Company continues to explore the
opportunity for divesture of the Company's HMO operations. In that regard,
Health Power HMO has entered into a definitive agreement to sell its Hamilton
County Medicaid membership and management is in serious discussions with a
potential purchaser for its Franklin County membership and its related license.
However, no definitive agreement has been reached and the timing of any such
agreement is uncertain. 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, and 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. CompManagement is in the final
stages of confirming compliance with its third party vendors and anticipates
completing such confirmation by the first quarter of 1999.
Item 3. Quantitative and Qualitative Disclosure About Market Risk
- ------- ---------------------------------------------------------
Disclosure not currently required
15
<PAGE> 16
Part II - Other Information
Item 6. Exhibits and Reports on Form 8-K
- ------- --------------------------------
(a) Exhibits
--------
27 Financial Data Schedule
(b) Reports on Form 8-K
-------------------
On July 15, 1998, a Current Report on Form 8-K was
filed with the Securities and Exchange Commission
reporting under Item 5 of such report.
Page 16
<PAGE> 17
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 12, 1998 BY /S/ BERNARD F. MASTER, DO
------------------------------------------
BERNARD F. MASTER, DO, PRESIDENT,
CHIEF OPERATING OFFICER AND CHAIRMAN
OF THE BOARD
DATE: : NOVEMBER 12, 1998 BY /S/ RONALD J. WURTZ
------------------------------------------
RONALD J. WURTZ, CHIEF FINANCIAL
OFFICER AND PRINCIPAL ACCOUNTING
OFFICER
Page 17
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