<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES AND EXCHANGE ACT OF 1934
For the fiscal year ended: December 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
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 of Incorporation) (I.R.S. Employer Identification No.)
1209 Orange Street
Wilmington, Delaware 19801
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(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code: (302) 636-7593
Securities registered pursuant to Section 12(b) of the Act:
None
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(Title of Class)
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.01 par value
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(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports
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 by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
On March 18, 1998, the aggregate market value (based on the closing
sales price on that date) of the Common Stock held by nonaffiliates of the
Registrant was $10,727,086.
On March 18, 1998, the Registrant had 3,820,498 shares of Common
Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's proxy statement for its annual meeting of
stockholders to be held on May 27, 1998, which proxy statement will be filed
within 120 days of December 31, 1997, are incorporated by reference into Part
III, Items 10, 11, 12, and 13, of this Report.
<PAGE> 2
HEALTH POWER, INC.
FORM 10-K
PART I
ITEM 1. BUSINESS
GENERAL
Health Power, Inc. (the "Company" or "Health Power") is a managed care
holding company which was incorporated under Delaware law on March 6, 1985. The
Company's 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.
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 Ohio Works First/Healthy Start
Program (the "OWF Program"). Health Power HMO also provides services to
commercial members enrolled through employer groups. As of December 31, 1997,
Health Power HMO had approximately 31,663 members, of which approximately 94%
were Medicaid recipients. Health Power HMO's provider network consists of
approximately 1,154 primary care physicians, 4,053 specialists, and 61
hospitals. Health Power HMO has a one-year accreditation from the National
Committee for Quality Assurance ("NCQA") which expires March 26, 1999. NCQA
accreditation is granted to HMOs which are found to have comprehensive
functioning continual quality improvement programs and which satisfy all NCQA
standards for accreditation.
Health Power HMO has entered into agreements to sell the contract
rights for its Medicaid membership in Cuyahoga (Cleveland) and Mahoning
(Youngstown) Counties, Ohio to Emerald HMO, Inc. and Total Health Care Plan,
Inc., respectively. In addition, it has entered into an agreement to transfer
the contract rights for its Butler County (between Dayton and Cincinnati), Ohio
Medicaid membership to Medical Mutual of Ohio ("Medical Mutual"), in exchange
for Medical Mutual's contract rights for that entity's Montgomery County
(Dayton) Medicaid membership. Such transactions are subject to a number of
conditions, including approvals from the Ohio Departments of Human Services and
Insurance. Health Power expects to complete these transactions, subject to
regulatory approvals, during the second quarter of 1998. See Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Recent Developments.
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 serves approximately 13,000 employers located
throughout Ohio. CompManagement began business in September 1984, and was
acquired by the Company 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 20,000 employers located throughout Ohio. As
a state-wide certified MCO,
<PAGE> 3
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.
The Company also has three other subsidiaries. Health Power TPA, Inc.,
an Ohio corporation ("Health Power TPA"), offers third party administrator
services to companies which self-insure their health care costs. Health Power
Life Insurance Agency, Inc., an Ohio corporation ("Health Power Life Agency"),
offers life insurance and other companion products as part of the benefit
package offered to commercial HMO members. Health Power TPA and Health Power
Life Agency have had insignificant operations to date. Health Power Management
Corporation, an Ohio corporation ("Health Power Management"), provides various
management and/or administrative services to the Company's other subsidiaries.
FINANCIAL INFORMATION ON INDUSTRY SEGMENTS
Financial information on industry segments as required by Item 101(b)
of Regulation S-K is set forth in Footnote 16 of the Notes to the Consolidated
Financial Statements, which footnote is part of the financial statements
contained in Item 8 of this Form 10-K, which footnote is incorporated herein by
reference.
HEALTH CARE SERVICES--HEALTH POWER HMO
OVERVIEW OF MANAGED HEALTH CARE
HMOs generally arrange for the provision of comprehensive health care
services, including physician and hospital care, to their members for a fixed,
prepaid premium regardless of frequency, extent, or type of the health care
services provided. Except in cases of medical emergency, the members receive
care from participating primary care physicians who provide all of the primary
care services and coordinate services with participating specialists and
hospitals. HMOs are frequently able to negotiate favorable rates with providers
due to their large membership base and to control medical expenses to a greater
extent than traditional health insurers. Typically, HMOs seek to enter into
arrangements with hospitals calling for discounted charges or fixed per diem
rates and with physicians for fixed monthly payments, regardless of the amount
of health care services which are actually required, known as "capitation
payments," or seek to contract with medical providers on a discounted
fee-for-service basis.
HMOs seek to combine quality health care with management controls
designed to encourage efficient and economical utilization of health care
services. Such controls include monitoring physician services, the level of
hospital care and lengths of stay, emergency room use, and the effective use of
hospital based medical services. HMOs generally receive fixed monthly premiums
for their members regardless of the health care services provided. Thus, HMOs
have an incentive to maintain the health of their members through preventive
medical programs while carefully monitoring expenses through the implementation
of various cost control strategies and effective management.
<PAGE> 4
The three basic HMO organizational models are primarily distinguishable
by the relationship of the HMO with its physician network. Staff model HMOs
employ physicians directly at HMO-controlled facilities and compensate each
physician through salary and incentives. Network model HMOs, such as Health
Power HMO, contract with a limited number of physician groups to provide health
care services to each member on a capitated or a discounted fee-for-service
basis. Individual practice association model HMOs contract with individual
physicians, either directly or through a physicians' association, and each
physician is typically compensated on a capitated or a discounted
fee-for-service basis.
HMOs may be contrasted with indemnity health insurers, which generally
provide reimbursement under a fee-for-service system in which the charges of
physicians, hospitals, and other providers selected by the insured are in direct
proportion to the quantity and complexity of the services provided. HMOs also
rely to a lesser extent on member cost sharing or copayment features that are
more characteristic of traditional indemnity insurance. Preferred provider
organizations ("PPOs") are similar to indemnity plans but typically feature
discounted fee-for-service charges by selected providers and financial
incentives for members to use providers within the PPO system.
MEMBERSHIP AND MARKETS
Medicaid Membership
Health Power HMO offers health care services to Medicaid recipients
enrolled in the OWF Program in the six Ohio counties of Butler, Cuyahoga,
Franklin, Hamilton, Mahoning, and Montgomery. Health care services are offered
to Medicaid recipients pursuant to a contract with the Ohio Department of Human
Services ("ODHS"). Under this contract, Health Power HMO is paid a fixed monthly
capitation rate from ODHS for each Medicaid recipient enrolled in its HMO. The
capitation rate is established on an annual basis by ODHS, varies by county, and
is based upon certain rate setting methodology and data assumptions adopted by
ODHS. As of December 31, 1997, approximately 94% of Health Power HMO's members
were Medicaid recipients. Health Power HMO's current contract with ODHS expires
September 30, 1998. For the years ended December 31, 1997, 1996, and 1995,
Medicaid revenues represented approximately 56%, 67%, and 64%, respectively, of
the Company's consolidated revenues.
In all of the counties other than Mahoning, Medicaid recipients
enrolled in the OWF Program are required, or "mandated" by legislature, to
enroll in a managed care plan. In these counties, Medicaid recipients either
select Health Power HMO from among several managed care plans offered to them
or, if no selection is made, they are assigned to a plan by ODHS. In Mahoning
County, which is a "non-mandated" or "voluntary" county, Medicaid recipients
join Health Power HMO as an alternative to the traditional fee-for-service
Medicaid program in which recipients receive a Medicaid medical card that
enables them to receive medical services performed by participating providers.
Medicaid recipients in voluntary counties may change the managed care plan
selected by them or the method in which they receive medical benefits (i.e.,
fee-for-service or managed care) on a monthly basis. Medicaid recipients in
mandated counties may change managed care plans only during the first month of
enrollment or during two "open enrollment" months during the year.
As previously described, Health Power HMO has entered into agreements
to sell the contract rights for its Medicaid membership in Cuyahoga and Mahoning
Counties to Emerald HMO, Inc. and Total Health Care Plan, Inc., respectively,
and to transfer the contract rights for its Butler County Medicaid membership to
Medical Mutual in exchange for Medical Mutual's contract rights for that
entity's Montgomery County Medicaid membership. See Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Recent Developments.
<PAGE> 5
Commercial Membership
Commercial members are individuals who join Health Power HMO through
their employer-sponsored health benefit plans. Premium rates are based on the
plan selected and are contained in the contract between Health Power HMO and
each employer. These contracts are generally for one-year terms. During a
designated annual "open enrollment period," or at the time of their employment,
employees may select their desired health care benefit program. Employees may be
disenrolled as a result of termination of employment or may disenroll
voluntarily during the open enrollment period.
During most of 1997, Health Power HMO offered health care services to
employees of the State of Ohio in its Columbus, Dayton, and Cincinnati service
areas pursuant to contracts with the Ohio Department of Administrative Services
("ODAS"). However, Health Power HMO terminated its contract with ODAS for the
Dayton service area effective March 1, 1997. Furthermore, ODAS did not renew its
contracts with Health Power HMO for the Columbus and Cincinnati service areas,
and these contracts terminated as of December 1, 1997. See Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Recent Developments. For the years ended December 31, 1997, 1996, and 1995, the
revenues from this employer group represented approximately 10%, 14% and 16%,
respectively, of the Company's consolidated revenues.
Service Areas
Health Power HMO operates in four service areas encompassing 19 Ohio
counties in and around the cities of Columbus, Dayton, Cincinnati, Cleveland,
and Youngstown. See Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Recent Developments, regarding Health
Power HMO's anticipated exit from its Northeast service area.
The Columbus service area encompasses the contiguous counties of
Delaware, Fairfield, Franklin, Licking, Madison, Pickaway, and Union, with
Franklin County being the only county in this group in which Health Power HMO is
permitted to offer its health care services to Medicaid recipients. For the
years ended December 31, 1997, 1996, and 1995, the Columbus service area
operations accounted for 27%, 34% and 41%, respectively, of the Company's
consolidated revenues.
The Dayton service area encompasses the contiguous counties of Butler,
Clark, Greene, Miami, and Montgomery, with Butler and Montgomery Counties being
the counties in this group in which Health Power HMO is permitted to offer its
health care services to Medicaid recipients. For the years ended December 31,
1997, 1996, and 1995, the Dayton service area operations accounted for 11%, 18%
and 21%, respectively, of the Company's consolidated revenues.
The Cincinnati service area encompasses the contiguous counties of
Clermont, Hamilton, and Warren, with Hamilton County being the county in this
group in which Health Power HMO is permitted to offer its health care services
to Medicaid recipients. For the years ended December 31, 1997, 1996, and 1995,
the Cincinnati service area operations accounted for 28%, 38%, and 29%,
respectively, of the Company's consolidated revenues.
The Northeast service area encompasses the Northeast Ohio counties of
Cuyahoga, Lorain, Mahoning, and Summit, with Cuyahoga and Mahoning Counties
being the only counties in this group in which Health Power HMO is permitted to
offer its health care services to Medicaid recipients. The expansion into the
Northeast area occurred during 1996. For the year ended December 31, 1997, the
Northeast service area operations accounted for 4% of the Company's consolidated
revenues.
<PAGE> 6
It is anticipated that ODHS will issue a Request for Proposal ("RFP")
to Medicaid-serving HMOs in April 1998, with respect to permitting such HMOs to
offer their service in certain counties that are not currently "mandated"
counties. Health Power HMO intends to participate in this RFP to add additional
counties to its existing Columbus, Cincinnati, and Dayton service areas.
Membership Information
The following table sets forth the number of Health Power HMO's
Medicaid and commercial members at December 31 for the years indicated and
member months for the years then ended:
<TABLE>
<CAPTION>
December 31,
---------------------------------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Columbus
Medicaid members 9,396 10,990 11,014
Commercial members 938 5,786 5,518
Dayton
Medicaid members 4,316 5,659 6,145
Commercial members 617 2,856 2,574
Cincinnati
Medicaid members 13,246 18,102 10,643
Commercial members 443 1,610 2,955
Northeast(1)
Medicaid members 2,689 1,688 ----
Commercial members 18 25 ----
All service areas
Medicaid members 29,647 36,439 27,802
Commercial members 2,016 10,277 11,047
HMO member months(2)
Medicaid 396,327 391,503 311,650
Commercial 91,440 134,069 133,561
------- ------- -------
Total 487,767 525,572 445,211
======= ======= =======
</TABLE>
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(1) Northeast service area operations began in 1996.
(2) Member months are the number of HMO members multiplied by the number of
months during which the members were enrolled in the HMO.
<PAGE> 7
SERVICES AND PRODUCTS
Revenues from health care services consist of amounts earned under
contracts with ODHS for Medicaid recipients enrolled in the OWF Program and with
commercial groups. The following table sets forth the revenues from each of the
foregoing and their approximate percentage contribution to HMO revenues during
the periods indicated:
<TABLE>
<CAPTION>
Years Ended December 31,
---------------------------------------------------------------------------------------
1997 1996 1995
---- ---- ----
Revenues Percentage Revenues Percentage Revenues Percentage
-------- ---------- -------- ---------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
Medicaid $42,819,206 80% $44,246,928 75% $37,587,138 71%
Commercial 10,811,320 20 15,167,341 26 15,602,926 29
----------- --- ----------- --- ----------- ---
Total $53,630,526 100% $59,414,269 100% $53,190,064 100%
=========== === =========== ==== =========== ===
</TABLE>
Medicaid
Health Power HMO provides a comprehensive range of health care services
to Medicaid members which are specified by ODHS. These services include primary
care physician, specialist, and hospital care, dental care, physical therapy,
mental health and chemical dependency care, eye care, home health care, skilled
nursing care, pharmacy, diagnostic laboratory tests, x-ray examinations,
ambulance services, and durable medical equipment. Medicaid recipients do not
pay any premiums, deductibles, or copayments for any of their health care
services. Health Power HMO assumes the risk that the actual cost of health care
services may exceed the monthly capitation fee received from the State of Ohio.
Commercial
Commercial members or their employers can select coverages available
from products which have varying levels of outpatient and inpatient copayments
and deductibles. Health Power HMO has a variety of plans available ranging from
basic plan, which provides basic health care coverages at a low monthly cost but
with higher deductibles, to a high plan which provides more comprehensive
coverage at a higher monthly cost but with lower deductibles.
PROVIDERS
Health Power HMO provides health care to its members through a provider
network consisting of primary care physicians, specialists, and hospitals. The
following table sets forth the total number of primary care physicians,
specialists, and hospitals in each of Health Power HMO's service areas as of
December 31, 1997.
<TABLE>
<CAPTION>
Service Area
-----------------------------------------------------------------------------
Columbus Dayton Cincinnati Northeast Total
-------- ------ ---------- --------- -----
<S> <C> <C> <C> <C> <C>
Primary Care Physicians 287 220 422 225 1,154
Specialists 1,000 617 1,325 1,111 4,053
Hospitals 11 12 18 20 61
</TABLE>
<PAGE> 8
Upon enrollment, each member selects a primary care physician from the
list of physicians in Health Power HMO's physician network. Primary care
physicians include family practitioners, pediatricians, and internists. Primary
care physicians coordinate the health care requirements of the members, assume
overall responsibility for the care of members, and coordinate the nature and
extent of services provided to any member. These physicians provide preventive
and routine health care services and are responsible for making referrals to
specialists, hospitals, and other providers. Health care services provided
directly by the primary care physicians include the treatment of illnesses not
requiring referrals, periodic physician examinations, routine immunizations,
maternity and well child care, and other preventive health care services.
Specialists provide medical care to members when referred by the primary care
physician. Certain specialist services, such as outpatient laboratory tests and
x-ray examinations and self-referrals for obstetrics, do not require a referral.
The physician network and provider satisfaction are critical to the
successful functioning of an HMO. Management believes that the number of primary
care physicians and sites enhances the marketability of its health care program.
Health Power HMO devotes significant resources to recruiting, credentialing, and
educating physicians and their staffs. Furthermore, Health Power HMO operates
plans that integrate the physician into the decision-making process through a
structure of standing and ad hoc committees. The provider services department is
responsible for responding directly with physicians and their staff concerning
administrative inquiries to supplement the on-site provider relations program.
Health Power HMO has established a continual quality improvement committee
composed of physicians in each service area to work with physicians in
monitoring and developing medical policies. The councils are supported by the
provider relations staff through the health services department.
Health Power HMO has contracted with other entities to provide, among
other things, dental care, physical therapy, mental health and chemical
dependency care, eye care, home health care, skilled nursing care, diagnostic
laboratory tests, x-ray examinations, ambulance services, a 24-hour nurse line,
and durable medical equipment to its HMO members. Members of the HMO have access
to approximately 300 pharmacies in its four service areas and approximately
30,000 pharmacies throughout the United States pursuant to an agreement with
ValueRx Pharmacy Program, Inc.
MEDICAL COST CONTROLS
Health Power HMO uses a number of methods and procedures to control and
manage medical costs. These include capitation and other fee arrangements with
providers, concurrent and utilization review of inpatient hospital services,
including advance approval procedures for elective hospital admissions, and
underwriting procedures.
Capitation Arrangements
As of December 31, 1997, approximately 60% of Health Power HMO's
members were covered by primary care physicians who were capitated. Capitation
is a method of compensation to providers in which payments by the HMO for health
care services are based on a fixed monthly amount for each person served by such
providers regardless of the actual number or nature of services provided. The
primary benefits of the capitation system of payment are that it improves the
forecasting of medical expenses and introduces an element of risk sharing
between the HMO and the primary care physicians who are responsible for
coordinating care with specialists, hospitals, and for other ancillary services.
Health Power HMO's arrangements with other providers for dental, mental health
and chemical dependency, and eye care services are also capitated.
<PAGE> 9
During the first half of 1997, Health Power HMO prepared an analysis of
the risk transfer elements contained in certain Medicaid capitated provider
contracts. In order to reduce the amount of risk transferred to the primary care
physicians in the contracts, Health Power HMO eliminate both the withhold and
incentive fund provisions included in such contracts. The effective date for
this change was July 1, 1997. Commercial capitated provider contracts continue
to include provisions for withholds ranging from 10 to 20% of the capitated
payments due such providers as a reserve for potential excess utilization and
incentive funds designed to encourage appropriate utilization. The balances in
these incentive fund accounts are retained by Health Power HMO or remitted to
the primary care physicians at the end of the year based upon the performance of
the combined physician groups for such year. For 1997, all such amounts were
retained by Health Power HMO. Health Power HMO annually reviews the capitation
fee paid to primary care physicians and makes adjustments as necessary. Among
the factors considered in capitation adjustments are utilization patterns and
competitive market conditions.
Other Fee Arrangements
Health Power HMO presently reimburses primary care physicians
representing approximately 40% of the HMO's total membership on an agreed-upon
fee schedule. Despite the success of its capitation program, Health Power HMO
has concluded that a significant number of primary care physicians prefer the
fee schedule arrangement over capitation payments, and in order to attract more
primary care physicians to its provider network, Health Power HMO offers fee
schedule arrangements. Consistent with its capitation arrangements, Health Power
HMO may withhold a portion of such fees to cover payments for fees to
specialists and hospital costs in excess of such physician's budgeted amounts.
Health Power HMO's primary care physicians coordinate care for members
with specialists participating in Health Power HMO's network. Health Power HMO's
provider arrangements with specialists provide for payment for commercial
services at fixed rates. Specialists' services to Medicaid members are paid at
rates established by ODHS. In order to encourage cost effective utilization of
specialists' services, amounts paid to specialists in the aggregate that are in
excess of budgeted amounts may be deducted from such primary care physician's
capitation withhold (commercial members). For Medicaid members, specialist
payments for most capitated primary care providers are included in their monthly
capitation payment.
With the exception of emergencies, all inpatient hospital services paid
by Health Power HMO on behalf of the physicians are provided pursuant to
contracts with various hospitals under a variety of arrangements, including
discounted charges and per diem arrangements, and require advance approval from
the patient's primary care physician and Health Power HMO's medical department.
Emergencies which require medical care by physicians or hospitals not under
contract with Health Power HMO are paid by Health Power HMO. In order to
encourage cost effective utilization of hospital services for its commercial
providers, if the aggregate amount of hospital costs exceed budgeted amounts,
the excess attributable to a particular primary care physician may be deducted
from such physician's capitation withhold.
In order to obtain high quality services at cost-effective rates,
Health Power HMO has contracted with other providers for, among other things,
physical therapy, home health care, skilled nursing care, pharmacy, diagnostic
laboratory tests, x-ray examinations, ambulance services, and durable medical
equipment.
Utilization Review
Health Power HMO believes that its ability to effectively manage the
appropriateness of services in the most cost-effective setting is a key
component of its operations. Health Power
<PAGE> 10
HMO seeks to manage medical costs by monitoring for inappropriate services. In
addition to approval by a member's primary care physician, all elective hospital
admissions must be approved in advance by Health Power HMO's utilization
management department. When members are admitted to a hospital, Health Power HMO
proactively and concurrently reviews all hospital admissions and coordinates
with the admitting physician the medical necessity and appropriateness of
hospital procedures and length of stay. Health Power HMO also coordinates
arrangements for alternative care for members as they progress through the
continuum of care. Health Power HMO conducts retrospective review of patient
records after services are complete to determine appropriateness of hospital
services and charges.
Underwriting
Health Power HMO's commercial underwriting practices are designed to
provide appropriate premium rates and benefits for employer groups. Health Power
HMO also monitors actual experience with each employer group and attempts to
make appropriate premium rate adjustments when contracts are renewed with the
employer.
With respect to commercial members, Health Power HMO establishes
premiums primarily pursuant to a "community rating system by class" which
generally means that it charges the same amount of premium per member within a
geographic area actuarially modified for each employer group based upon the age
and sex of its employees. In order to assure appropriately balanced risk
selection, management has developed underwriting criteria which establish
minimum requirements for each employer group to meet before qualifying for
coverage with Health Power HMO and tailors the benefit coverage to each employer
group. Since 1990, Health Power HMO has utilized the services of an independent
actuary to assist it in establishing its membership premiums for commercial
members and appropriate reserves for medical claims incurred but not yet
reported to Health Power HMO.
Because of its contractual arrangement with ODHS which requires Health
Power HMO to provide health care services to any Medicaid recipient who selects
its HMO, traditional underwriting guidelines do not apply to the Medicaid
program.
MARKETING
In mandatory counties (such as Butler, Cuyahoga, Franklin, Hamilton,
and Montgomery), Health Power HMO and all other managed care plans are
prohibited from directly marketing to potential enrollees. Instead, potential
enrollees contact or visit enrollment information centers ("EICs") located in a
mandatory county. EIC staff members review with enrollees information about each
plan's performance (i.e., consumer satisfaction surveys), provider network, and
any plan-specific advantages. Enrollees are also able to view a video about
Health Power HMO and the other managed care plans operating in the mandatory
county.
In voluntary counties (such as Mahoning), Health Power HMO may (and
does) directly market to potential enrollees. Health Power HMO markets its HMO
directly to recipients through a variety of methods, all of which require prior
approval of ODHS. Health Power HMO markets its programs to Medicaid recipients
as an alternative to the traditional fee-for-service Medicaid program in which
recipients receive a Medicaid medical card that enables them to receive medical
services performed by participating physicians, hospitals, and other health care
providers. Because Medicaid recipients may change the method of receiving
medical benefits on a monthly basis, Health Power HMO's representatives are
responsible for monitoring member satisfaction after initial enrollment. Unless
a member loses Medicaid eligibility or chooses to disenroll, Medicaid members
are automatically renewed in Health Power HMO's program on a monthly basis.
<PAGE> 11
Health Power HMO's commercial programs are marketed through a
combination of its own sales force and independent agents and brokers. Health
Power HMO markets its plans to private employers as well as to public employer
groups. Employers who offer Health Power's HMO to their employees generally do
so as an option to traditional coverage rather than as a required replacement.
Therefore, marketing Health Power's HMO commercial programs requires a two-part
sale. The employer must first decide to offer Health Power's HMO. The employee
then chooses among Health Power's HMO, traditional health care insurance, and
other options, including other HMOs. Each year employers conduct an open
enrollment during which their employees may change health care plans. Health
Power HMO utilizes various techniques to retain members and to attract
additional members during open enrollment periods, including work-site
presentations, direct mail, and local advertising.
Health Power HMO has a member services department which directly
communicates with members concerning their health care and service needs. Health
Power HMO conducts statistically valid annual surveys questioning members about
their level of satisfaction with the services they receive and satisfaction with
primary care physicians. Health Power HMO has also established member advisory
groups in each of its service areas, composed of members selected at random, to
provide information to Health Power HMO concerning services to members.
Management reviews any problems that are presented by members concerning the
delivery of medical care and receives periodic reports summarizing member
grievances.
QUALITY IMPROVEMENT
Health Power has developed policies and procedures to ensure that the
health care services provided by its HMO meet the professional standards of care
established by the medical community. Health Power HMO has a one-year NCQA
accreditation which expires March 26, 1999. NCQA accreditation is granted to
HMOs which are found to have comprehensive functioning continual quality
improvement programs and which satisfy all NCQA standards for accreditation.
Health Power HMO's methods for evaluating the quality and
appropriateness of medical care include performing periodic medical care
evaluation studies, analyzing the monthly utilization of certain services,
conducting periodic member satisfaction studies and reviewing and responding to
member and physician grievances. Health Power HMO also compiles statistical
information and publishes monthly departmental summary reports concerning the
utilization of various services, including emergency room care, member service
activity, provider service activity, claims related volume, outpatient care,
out-of-area services, hospital services and physician visits. Under-utilization
as well as over-utilization are evaluated in an effort to control the provision
of quality care to Health Power HMO's members.
As part of its continual quality improvement program, Health Power HMO
has established peer review procedures which are carried out by a quality
improvement committee consisting of members of the physician groups in each
service area. This committee reviews and evaluates the quality of health care
delivered by the physician groups and study the various tests and procedures
performed by physicians for specific diagnoses. Health Power HMO also reviews
the effectiveness of the physician group continual quality improvement committee
on a periodic basis. In addition, when a new physician group applies to become a
provider, Health Power HMO has a thorough credentialing procedure. Health Power
HMO evaluates the quality of the group's medical facility, medical records,
laboratory and x-ray facilities and capacity to handle membership demands,
performs an on-site inspection, and reviews malpractice complaints and relations
with area hospitals. Once a physician group is selected, it is periodically
reviewed in an attempt to ensure that members are receiving quality medical care
and appropriate access.
<PAGE> 12
RISK MANAGEMENT AND INSURANCE
Health Power HMO has reinsurance to limit its risks for hospital costs
with respect to its Medicaid members. This reinsurance provides that during each
12-month period, the reinsurer will pay 85% of hospital costs for each Medicaid
member above a stop-loss attachment amount of $50,000.
Health Power HMO also has reinsurance to limit its risks for commercial
members' hospital costs exceeding certain amounts. The percentage of the
hospital costs paid by reinsurance depends on whether the hospital has a
provider agreement with Health Power HMO which provides for fixed charges for
members for specified services (a "fixed fee hospital"), the type of services
provided and the age of the member. Health Power HMO's commercial reinsurance
arrangements provide, during each 12-month period, for coverage of the excess
loss on hospital costs according to the following table:
<TABLE>
<CAPTION>
Fixed Fee Other
Type of Service Hospital Hospital
--------------- -------- --------
<S> <C> <C>
Organ and bone marrow transplant therapy 80% 50%
All other services when member is under one year of age 90% 70%
All other services when member is over one year of age 90% 80%
</TABLE>
The excess loss on hospital costs is calculated by subtracting the
deductible, currently $75,000, to be paid by Health Power HMO from the "eligible
hospital services." Eligible hospital services are limited to the average daily
maximum set forth below per member, which limitation does not include operating
room charges or post-operative charges on the day of a surgical procedure, and
which are further limited to a maximum reinsurance amount. There is a risk that,
because of this average daily maximum limitation, Health Power HMO could be
responsible for hospital costs in excess of the $75,000 deductible.
Daily Maximum
-------------
1 to 60 days $2,500
61 to 180 days $1,500
181 days and beyond $1,200
The maximum lifetime reinsurance indemnity for each member is $2,000,000.
In addition, Health Power HMO has various types of liability insurance
to limit the ordinary risks of being engaged in the HMO business. Health Power
HMO requires each of its physician groups and contracting hospitals to have
medical malpractice insurance. Additionally, Health Power HMO carries its own
medical malpractice insurance. In the ordinary course of its business, Health
Power HMO may be subject to claims for which it may not be fully insured, such
as claims resulting from decisions regarding providers, claims resulting from
decisions regarding medical circumstances or necessity of treatment, including
failure to approve medical procedures or hospital admissions, claims against
Health Power HMO for malpractice by providers in its network, claims for failure
to provide coverage or for wrongful termination of coverage, claims resulting
from other issues with employer groups, members, or providers, and other general
liability claims. There is a risk that claims could exceed or not be covered by
insurance.
<PAGE> 13
COMPETITION
The health care industry is highly competitive. Health Power HMO faces
substantial competition in each of its service areas from many types of
competitors, including other for-profit and not-for-profit HMOs, PPOs,
self-funded plans, and traditional indemnity insurance carriers, many of which
have substantially larger enrollments and greater financial and other resources
than Health Power HMO. Health Power HMO believes that the principal competitive
factors affecting its ability to retain and increase membership include its
provider network, the cost of health benefit plans offered, geographic areas
served, reputation, financial stability, quality of staff, comprehensiveness of
benefit coverage, diversity of product offerings, and market presence. The
relative importance of each of these factors and Health Power HMO's key
competitors vary by customer type and by market. In addition, a number of Health
Power HMO's competitors offer diverse products, many of which are similar to
those that Health Power HMO is currently offering or may be offering in the
future. Furthermore, premium rates charged by Health Power HMO's competitors may
have an impact on Health Power HMO's ability to grow and to maintain
profitability. The market for HMO and managed care products has been subject to
historical changes in profitability resulting from increases in health care
costs during periods when significant competition or other market factors
prevent corresponding increases in premiums. During 1997, HMOs generally began
raising commercial premium rates on response to lower profit margins.
Health Power HMO will face varying levels of established competition if
it enters new markets or introduces new programs, products, and services. In
addition, new competitors may compete with Health Power HMO in the future.
Health Power HMO also competes with other managed care plans to enter
into contracts with independent physicians, physician groups and other
providers. Competitive factors influencing a physician's or other provider's
decision to contract with Health Power HMO include potential membership volume,
reimbursement rates, timeliness of reimbursement and administrative service
capabilities.
CLAIMS MANAGEMENT--COMPMANAGEMENT AND COMPMANAGEMENT
HEALTH SYSTEMS
OHIO'S WORKERS' AND UNEMPLOYMENT COMPENSATION SYSTEMS
The following is intended to provide a summary description of the Ohio
workers' and unemployment compensation systems.
Ohio's workers' compensation system is a no-fault state insurance
program whereby injured workers are provided with medical and disability
benefits. Ohio law requires all employers, with certain exceptions, to provide
their employees with workers' compensation coverage. Ohio's system is
administered by the Ohio Bureau of Workers' Compensation ("OBWC"), which is
responsible for managing the state insurance fund, determining premium rates and
manual classifications, collecting premiums from employers, and paying benefits
to or on behalf of injured workers. In determining the premium rates, OBWC first
classifies occupations or industries with respect to their degree of hazard and
then determines the risk of the different classes. The workers' compensation
program is funded by premiums paid by employers into the state insurance fund,
which premiums are based upon the classification of an employer's employees and
such employer's specific risk experience. If certain conditions are satisfied,
similar types of employers may participate in plans that group, for rating
purposes, such employers in pools that spread each employer's risk among all of
the employers participating in that group. Under these "group rating plans," the
premium rates are based upon the risk experience of the group and not the
individual employer participating in that group.
<PAGE> 14
Employers which generally have 500 or more employees in Ohio and have sufficient
financial capabilities may be granted status by OBWC as a self-insuring
employer, which means that such employers are not required to pay premiums into
the state insurance fund, but instead pay the same compensation, medical, and
disability benefits as required by the Ohio workers' compensation program
directly to or for the benefit of their injured workers.
In March 1997, OBWC implemented a new managed care system for workers'
compensation claims known as the Health Partnership Program (the "HPP"). This
program applies to all Ohio employers other than self-insured employers. OBWC
has also implemented a similar program for self-insured employers known as the
Qualified Health Plan.
Under the HPP, participating employers are required to select an
OBWC-certified managed care organization (an "MCO"), or have such an MCO
assigned to them by OBWC, to medically manage their workers' compensation
claims. The MCO is primarily responsible to provide medical management and cost
containment services for employers with respect to their workers' compensation
claims. In order to receive OBWC certification, an MCO is required to have,
among other things, a network of healthcare providers, a quality assurance
program, and certain information system capabilities. The MCO provides, among
other things, utilization review services, medical case management services,
dispute resolution, rehabilitation, peer review, and quality assurance programs
with respect to workers' compensation claims.
Ohio's unemployment compensation system provides compensation benefits
to workers who are laid off or involuntarily separated from employment without
just cause. This system is administered by the Ohio Bureau of Employment
Services (the "OBES"), which is responsible for managing the unemployment
compensation fund, determining contribution rates, collecting contributions from
employers, maintaining each employer's account, determining eligibility for
benefits, and paying benefits to eligible unemployed workers. Contribution rates
are determined each year by the OBES and then assigned to the individual
employers. Employers are assigned the standard contribution rate (an amount
equal to a specified percentage of wages as determined by the OBES) or the
average contribution rate for its industry, whichever is greater, until they
become eligible for an experience rate. Thereafter, the annual contribution rate
is based upon the specific experience of each employer. The unemployment
compensation program is funded by contributions paid by employers into the
unemployment compensation fund.
SERVICES
CompManagement
CompManagement provides claims management, risk management, and medical
cost containment services to employers with respect to workers' and unemployment
compensation claims. In the area of workers' compensation, such services include
the review and processing of an employer's workers' compensation claims, the
design of individual programs to improve an employer's experience ratings,
representation of employers before the Ohio Industrial Commission and OBWC, the
performance of risk analysis for an employer's experience rating, the review of
premium audits on behalf of employers, and analysis of employers for inclusion
in group rating plans. CompManagement also acts as a third party administrator
("TPA") of workers' compensation claims for self-insured employers. Each
employer selects the types of services it desires and then enters into a
contract with CompManagement to provide such services. These contracts are
typically for a one-year period.
In the area of unemployment compensation, CompManagement's services are
similar to its services in the area of workers' compensation. Such services
include the review and processing of an employer's unemployment compensation
claims and representation of employers before the OBES. Each employer selects
the types of services it desires and then enters into a
<PAGE> 15
contract with CompManagement to provide such services. These contracts are
typically for a one year period.
CompManagement currently provides its services to approximately 13,000
employers located throughout Ohio. A substantial number of these employers have
entered into contracts with CompManagement because of their participation in
group rating plans, discussed above, sponsored by trade associations of which
such employers are members. Fees from employers participating in group rating
plans accounted for approximately 58% of CompManagement's 1997 revenues, with
three trade associations accounting for approximately 41% of such revenues.
CompManagement Health Systems
CompManagement Health Systems operates a state-wide certified MCO under
Ohio's Health Partnership Program. CompManagement Health Systems offers its
services to approximately 20,000 employers located throughout Ohio which have
selected or been assigned to it as their MCO. As a state-wide certified MCO,
CompManagement provides medical management services for workers' compensation
claims resulting from injuries suffered by employees arising out of the course
and scope of their employment, as required by law. Because all workers'
compensation claims are reimbursed by OBWC, CompManagement Health Systems does
not assume any risk for the payment of medical or disability benefits to
employees with respect to their claims.
The services provided by CompManagement Health Systems are offered
pursuant to a contract with OBWC. Under this contract, CompManagement Health
Systems is responsible for providing, 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.
Under its OBWC contract, CompManagement Health Systems receives an
administrative fee which is equal to 3% of the annual workers' compensation
premiums of those employers who have selected or been assigned to CompManagement
Health Systems. CompManagement Health Systems is also eligible to receive a
performance fee and an incentive under its contract. The performance fee is a
variable fee which may equal up to a maximum of 2% of the annual premiums of
those employers who have selected or been assigned to CompManagement Health
Systems. The calculation of the performance fee is based upon the MCO's
achievement of certain objective performance measurements developed by OBWC. The
incentive fee is a variable fee which may equal up to a maximum of 1% of the
annual premiums of those employers who have selected or been assigned to
CompManagement Health Systems. The calculation of the incentive fee is based
upon the MCO' achievement of certain subjective performance measurements
developed by OBWC, primarily relating to employer and injured worker
satisfaction.
CompManagement Health Systems has a state-wide health care provider
network consisting of approximately 16,000 physicians, hospitals, and ancillary
providers. This network includes certain occupational health-based physician
groups which serve as its "anchor medical groups." The provider panel is
credentialed using a multi-faceted peer review committee. CompManagement Health
Systems has a provider services department which recruits new providers for its
state-wide network and offers educational materials and training seminars.
<PAGE> 16
MARKETING
CompManagement
CompManagement markets its services through both its own sales force of
three persons who directly contact prospective and existing employer groups and
its relationships with over 500 insurance agents and brokers. CompManagement has
service center locations in Akron, Cincinnati, Cleveland, and Toledo, in
addition to its Dublin, Ohio offices.
CompManagement Health Systems
CompManagement Health Systems primarily markets its MCO directly to
employers through its relationship with CompManagement and its relationship with
over 500 insurance agents and brokers. In addition, employers who do not select
an MCO have one assigned to them by OBWC. In 1997, approximately 4,000 employees
were assigned to CompManagement Health Systems' MCO.
COMPETITION
CompManagement
Claims management for workers' compensation and unemployment
compensation claims is a highly competitive industry, with most of the market
share concentrated among a few companies, including CompManagement. The
principal competitive factors are types of services offered and responsiveness
to customer needs. CompManagement's strategy is to effectively compete on the
basis of quality and outstanding customer service, while offering a full range
of services.
CompManagement Health Systems
The managed care of workers' compensation claims under the HPP is
highly competitive. As of March 1, 1998, there were approximately 57 MCOs which
were certified by OBWC under the HPP Program, of which 29 were certified
state-wide. CompManagement Health Systems competes with both the other
state-wide certified MCOs as well as each county-certified MCO. CompManagement
Health Systems believes that the principal competitive factors affecting its
ability to retain and attract new employers include its reputation, relationship
with its insurance agents and brokers, geographic areas served, financial
stability, provider network, and responsiveness to customer needs.
CompManagement Health Services' strategy is to effectively compete on the basis
of quality and outstanding service. Many of its competitors have greater
financial and other resources than CompManagement Health Systems.
GOVERNMENT REGULATION
REGULATION OF HMOs IN OHIO
On June 4, 1997, a new law took effect in Ohio which regulates all
aspects of the business of HMOs, provider networks, and other managed health
care plans bearing insurance risk. Under the new law, the separate statutes
governing HMOs, health care and medical care corporations, prepaid dental plans,
and other types of managed care organizations were repealed in favor of a
comprehensive statute governing all entities that bear insurance risk and
provide or make available health care services through either an open or closed
panel of providers. As a result, HMOs operating in Ohio are now referred to as
"health insuring corporations" ("HICs"). The new law governs all aspects of the
business of HICs in Ohio, including
<PAGE> 17
certification, licensing, financial condition, solicitation of subscribers,
contracts with health care providers, subscriber participation and the scope of
benefits provided by HICs. HICs continue to be subject to concurrent regulation
by the Ohio Department of Health ("ODH"), ODI, and, for those HICs participating
in the OWF Program, ODHS.
Certificate of Authority
An HIC may not commence or continue operations in the State of Ohio
without a certificate of authority from ODI. The procedures for application and
maintenance of a certificate of authority require, among other things,
satisfying the Director of Health of ODH (the "Director of Health") that the HIC
possesses the willingness and ability to provide prompt, appropriate and
continuous health care in the areas described in its application; has made
effective arrangements for access to qualified providers, including providers of
specialty care and emergency services (in and out of service area); has made
arrangements for ongoing evaluation and assurance of quality of health care and
the adequacy of facilities, equipment and personnel; and has developed a
procedure for data collection and reporting on cost, effectiveness, utilization
of services, and the quality, availability and accessibility of its services.
Following review by the Director of Health, an HIC must satisfy the
Superintendent of the ODI ("Superintendent of Insurance") that the HIC's
organizational structure, financial resources and proposed operation are
adequate to deliver appropriate and effective health care services to its
enrollees. Several factors are included in the Superintendent's review,
including the HIC's arrangements for health care services, such as premiums,
co-pays, deductibles and working capital; agreements for insuring payment for
health care services, including automatic alternative coverage in the event of
discontinuation of operations; documentation of continuation of services through
the expiration of enrollee contracts and in the event of discontinuation of
operations; and provider agreement provisions. As a financial safeguard, each
HIC operating in Ohio must deposit securities with the Superintendent of
Insurance or an approved custodian. Health Power HMO holds a certificate of
authority to operate as an HIC in Ohio. As an HMO with a pre-existing
certificate of authority under the former law, it was not required to submit an
application for a new certificate of authority upon enactment of the Health
Insuring Corporation law.
Reporting Requirements; Periodic Review
Ohio HICs must file annual reports with both the Director of Health and
the Superintendent of Insurance, containing similar information as is required
in the application for the certificate of authority. The reports must include,
among other things, statutory financial statements; enrollee population
information; a summary of enrollee complaints and their disposition; information
on the number of subscriber contracts that were terminated during the year;
summaries of cost, utilization, quality and availability of the health care
services provided; disclosure of the HIC's management; an independent auditor's
report; and an actuarial report.
The Director of Health is required to review an HIC with respect to the
same matters reviewed under the HIC's original application as often as is
necessary to protect the public, but no less frequently than once every three
years. In addition, the Superintendent of Insurance is empowered to conduct a
market conduct examination of an HIC as often as necessary to protect the
interests of subscribers and enrollees.
Financial Requirements
Ohio law requires HICs providing both basic and supplemental health
care services to deposit $400,000 with the Superintendent of Insurance or an
approved custodian. In addition, every HIC must maintain a certain minimum total
admitted assets in Ohio, with only certain assets and liabilities of the HIC
considered in calculating such minimum total admitted assets.
<PAGE> 18
As of December 31, 1997, Ohio law required HICs to maintain statutory net worth
in an amount such that admitted assets were equal to at least 110% of
liabilities, but in no event less than $500,000 for Ohio HICs providing both
basic and supplemental health care services. Effective as of January 1, 1998,
the minimum statutory net worth dollar amount requirement was increased from
$500,000 to $1,700,000. At December 31, 1997, the statutory net worth of Health
Power HMO was $577,350, which neither meet the minimum statutory net worth
requirements in effect on such date nor the new minimum statutory net worth
requirements effective as of January 1, 1998. Health Power HMO has submitted a
corrective action plan to ODI outlining the proposed actions to be undertaken by
the HMO to bring it in compliance with the minimum statutory net worth
requirements. The corrective action plan is currently under review by ODI.
HICs are included in the definition of "insurers" for purposes of the
Ohio Insurance Holding Company Systems Act (the "Holding Company Act"), and as
such, are subject to regulation under the Holding Company Act. Generally, the
Holding Company Act requires HICs to register with ODI and furnish information
concerning the operations of companies within the holding company system that
may materially affect the operations, management, or financial condition of the
HIC. Pursuant to these laws, ODI may examine the HIC at any time, require
disclosure of material transactions involving the HIC and the other members of
the holding company system, and require prior notice and an opportunity to
disapprove of certain "extraordinary" transactions, including, but not limited
to, extraordinary dividends. Pursuant to these laws, all transactions within the
holding company system affecting the HIC must be fair and reasonable. In
addition, approval of ODI is required prior to the consummation of transactions
affecting the control of the HIC.
Ohio law requires ODI approval if dividends or distributions of an HIC
that is a member of an insurance holding company system are to exceed, within a
12-month period, 10% of the HIC's statutory net worth as of the end of the
preceding fiscal year. As a result of Health Power HMO's failure to meet the
statutory net worth requirements at December 31, 1997 and January 1, 1998, no
dividends may be paid by Health Power HMO to the Company. Additionally, each HIC
must demonstrate its financial soundness to the Superintendent of Insurance and
submit to monitoring of its financial condition by ODI.
Pursuant to Ohio statutes, each HIC belonging to an insurance holding
company system must notify the Superintendent of Insurance of any major
modification of its operations that affects, among other things, the HIC's
solvency, the health care services the HIC provides or the manner in which the
HIC conducts its business. If the modification is the result of action by the
HIC, the modification is subject to prior approval by the Superintendent of
Insurance.
FEDERALLY QUALIFIED HMOs
Health Power HMO is not a federally qualified HMO. At the present time,
Health Power's management has determined that the effort and expense of
obtaining federal qualification outweigh the benefits, as described below, of
becoming a federally qualified HMO.
Federally qualified HMOs must file periodic financial disclosure
reports with, and are subject to continuous oversight and periodic review by,
the United States Department of Health and Human Services and the United States
Health Care Financing Administration ("HCFA"). Subject to certain exceptions,
federally qualified HMOs are required to set their premiums according to
principles of community rating and to offer a minimum level of benefits which
typically exceeds the level of benefits required by state regulation.
Historically, the primary benefits of obtaining federal qualification were that
it enabled an HMO to offer health care services to Medicare recipients and to be
exempt from federal (and possibly state) enrollment mix requirements. However,
non-federally qualified HMOs are now permitted to offer health care services to
Medicare recipients. Health Power's management periodically reviews whether or
not federal qualification would yield tangible benefits that would make the
effort and expense of obtaining federal qualification worthwhile to the Company.
<PAGE> 19
FEDERAL REGULATION OF PHYSICIAN INCENTIVE PLANS
Under federal regulations effective on January 1, 1997, HMOs
participating in the Medicare and Medicaid programs must comply with certain
restrictions and reporting requirements mandated in connection with risk-sharing
arrangements, or physician incentive plans, between HMOs and physicians. The
regulations specify that an HMO may operate a physician incentive plan only if
no payment is made, directly or indirectly, to a physician or physician group as
an "inducement to reduce or limit medically necessary services furnished to an
individual enrollee" and only if certain stop-loss protection and disclosure
requirements are met.
Where a physician incentive plan under a capitated payment arrangement
places the physician or physician group at risk for the cost of use or referral
of services that exceeds a threshold of 25% of the total potential payment
received by the physicians from the HMO, the physicians are deemed to be at
"substantial financial risk." HMOs that place physicians at substantial
financial risk must conduct annual enrollee/disenrollee surveys addressing
satisfaction with the quality of services provided and degrees of access to
services. In addition, HMOs must ensure that all physicians and physician groups
which are at substantial financial risk have either aggregate or per-patient
stop-loss protection (e.g., insurance) covering 90% of the costs of referral
services that exceed 25% of the potential payments to the physicians under the
physician incentive plan. Each HMO with physician incentive plans must provide
to HCFA, at the time of application for a contract, annually and upon request,
information concerning its physician incentive plans. Medicare/Medicaid
beneficiaries may also request information from an HMO pertaining to its
physician incentive plans.
HEALTH INSURANCE PORTABILITY AND ACCOUNTABILITY ACT OF 1996
The Health Insurance Portability and Accountability Act of 1996
("HIPAA") established, among other things, minimum federal standards for private
health insurers. HIPAA creates standards for guaranteed issue and guaranteed
renewability of health insurance coverage, maximum pre-existing condition
exclusions, credit against those exclusions for prior creditable coverage (i.e.,
"portability"), premium limitations, and disclosure. In response to the
federally- mandated standards, the Ohio General Assembly enacted House Bill 374,
effective June 30, 1997, which establishes the state's minimum standards
intended to comply with the requirements of HIPAA.
Under Ohio's enactment of the HIPAA standards, for HICs providing
benefits to small or large employer groups, the maximum exclusion period for
enrollees with pre-existing conditions is limited to 12 months (18 months for
late enrollees). The pre-existing condition exclusion does not apply to
maternity benefits, as pregnancy is prohibited from being considered a
pre-existing condition. Further, as part of the federal standards' emphasis on
"portability," Ohio's new law generally requires that a pre-existing condition
exclusion period be reduced by the aggregate of the periods of continuous
creditable coverage immediately prior to enrollment, if any, applicable to the
enrollee as of the enrollment date. Creditable coverage includes a group health
plan, health insurance, Medicare or Medicaid, state health benefits risk pool,
or public health plan. The foregoing provisions do not apply, however, to
insurance policies and HIC contracts issued to groups other than large or small
employer groups.
Ohio's new law also provides for guaranteed issue and guaranteed
renewability of health insurance benefits under certain situations. If an HIC
offers coverage in the small or large group employer market, or individual
market, in connection with a contract or policy, the HIC must continue or renew
such coverage at the request of the plan sponsor or contract holder, subject to
certain exceptions, including fraud, intentional misrepresentation and failure
to pay premiums. An HIC may cancel coverage for a particular enrollee, employee,
or dependent for
<PAGE> 20
fraud or intentional misrepresentation, provided that the cancellation not based
on any health status-related factor. The Ohio law also requires HICs to make
available to every small employer that applies for coverage every health benefit
plan that it is actively marketing to small employers, subject to certain
exceptions and to rules to be adopted by the Superintendent of Insurance.
Ohio's enactment of the HIPAA standards also includes provisions
requiring insurers and HICs providing coverage to small or large employer groups
to disclose provisions relating to the issuer's right to change premium or
periodic prepayment rates, renewability of coverage, pre-existing condition
exclusions and the benefits and rates available under all contracts for which
the employer is qualified. This information must be identified in all marketing
and sales materials as being available upon request.
HICs and other insurers are also prohibited under the new law from
requiring, as a condition of coverage or of continued coverage, that an
individual pay higher premiums when compared to a similarly situated individual
covered under the contract or policy, on the basis of a health status-related
factor.
The new law also modifies the open enrollment periods previously
required of HICs and sickness and accident insurers. Ohio's enactment of the
HIPAA standards eliminates the former open enrollment periods for small employer
groups, in favor of the new "guaranteed issue" provisions under the new law.
Individuals who are not "federally eligible individuals" may continue to apply
for open enrollment coverage under the former law.
Federally eligible individuals (defined as "eligible individuals" under
rules adopted by HHS) consist of individuals who generally have at least 18
months of prior creditable coverage under a group health plan, are not eligible
for Medicare or Medicaid, have no other insurance coverage (any COBRA
continuation has been elected and expired), and whose prior coverage was not
terminated because of nonpayment of premiums, or fraud. HICs are required under
Ohio's new law to establish an open enrollment period in January of each year
for federally eligible individuals, extending until 1/2% of the HIC's total
number of insureds are new insureds. Certain other requirements exist, including
a provision enabling an HIC to deny coverage upon demonstrating that the HIC
will not have the capacity to deliver services adequately because of existing
obligations to group and individual contract holders.
Finally, the new law modifies the conversion coverage requirements in
the case of individuals who terminate employment or membership in a group. HICs
and other insurers must provide an option to federally eligible individuals for
conversion to a basic or standard plan established by the Ohio Health
Reinsurance Program, or one substantially similar to such standard plans.
Certain limitations on the maximum periodic prepayment under such plans are
established under the new law. Subscribers of an HIC group contract that are not
federally eligible individuals may convert to a direct-payment contract
comparable to any of the individual contracts then being issued by the HIC.
GOVERNMENT REGULATION OF COMPMANAGEMENT
CompManagement's business is not subject to specific government
regulation or oversight. However, its business is substantially dependent on the
operation of Ohio's workers' and unemployment compensation systems.
<PAGE> 21
GOVERNMENT REGULATION OF COMPMANAGEMENT HEALTH SYSTEMS
CompManagement Health Systems is certified by the BWC to operate a
state-wide MCO and is subject to regulation by the BWC as an MCO. In order to
receive BWC certification, an MCO must demonstrate that it has, among other
things, a satisfactory network of healthcare providers in each of its service
areas, a quality assurance program, and certain information system capabilities.
GOVERNMENT REGULATION OF HEALTH POWER TPA AND HEALTH POWER LIFE AGENCY
Health Power TPA is licensed by ODI and is subject to regulation as a
third party administrator ("TPA"). Health Power Life Agency is licensed by ODI
and is subject to regulation as an insurance agency.
MEDICAID
Medicaid is a cooperative state and federal program which provides
health care services to low income individuals in the United States. Medicaid is
divided into several types of programs, including aid to families with dependent
children and healthy start, blind and disabled persons, and persons requiring
nursing home care (who may also be concurrently receiving Medicare benefits).
Medicaid is sponsored by individual state governments, such as Ohio, which
obtain significant financial support from the federal government in the form of
matching funds. Ohio's Medicaid program is supervised and regulated by ODHS.
Currently, only enrollees in the OWF Program are eligible to receive Medicaid
medical benefits through a participating HMO.
Health Power HMO participates in the OWF Program through a provider
agreement with ODHS. ODHS may enter into provider agreements for the provision
of Medicaid services with HICs that meet ODHS's definition of an HIC and that
comply with certain other rules. As a participant in the OWF Program, Health
Power HMO must comply with specific rules established for such participation.
These rules contain specific requirements, including eligibility, enrollment,
disenrollment, covered services, eligible providers, subcontractors,
recordkeeping, reporting, quality assurance, and marketing. An HIC's compliance
with these requirements is subject to monitoring by ODHS or its designee, the
State of Ohio's auditor's office, and the United States Department of Human
Services. The process by which ODHS evaluates an HIC's compliance with the
quality assurance standards is an annual comprehensive quality assurance
evaluation by a third party reviewing organization. The HIC must also submit
annual and semiannual utilization reports. The most recent evaluations of the
Medicaid HIC operated by Health Power HMO indicated that it was in compliance
with ODHS quality assurance standards.
HICs participating in the OWF Program receive, as compensation for
health care services provided to enrollees, a contractual periodic prepayment,
or "capitated fee" for all enrollees. Under Ohio Medicaid regulations, HICs
participating in the OWF Program must file annual and quarterly cost reports
with ODHS.
In voluntary counties, Ohio and federal regulations require HICs
participating in the OWF Medicaid Program to derive, generally, at least 25% of
their membership residing in a single county, or group of contiguous counties
approved as a single service area, from non-Medicaid recipients. ODHS has the
authority to waive the state requirement for an HIC on an annual basis for up to
three years, provided that HCFA has also waived the federal
<PAGE> 22
enrollment mix requirement for such HIC. HCFA has the authority to waive the
federal requirement for up to three years. Mahoning County is the only voluntary
county in which Health Power HMO offers its services to Medicaid recipients, and
it currently has ODHS and HCFA waivers for this county. See also -- "Mandatory
Managed Care Counties for Medicaid Recipients."
Mandatory Managed Care Counties for Medicaid Recipients
Legislation adopted by the General Assembly, in conjunction with a
waiver of certain federal requirements granted by HCFA in 1995, grants authority
to ODHS to "mandate" Medicaid recipients enrolled in the OWF Program and
residing in certain Ohio counties to enroll in managed care plans in order to
receive medical services. Pursuant to this authority, ODHS has designated seven
counties (Franklin, Montgomery, Hamilton, Butler, Cuyahoga, Summit, and Lucas)
as mandatory enrollment counties. All Medicaid recipients residing in a
mandatory enrollment county must enroll with a managed care plan in order to
receive medical services. In a mandatory enrollment county, all participating
HICs must accept all eligible Medicaid recipients desiring to enroll in such
HIC, without restriction, in the order in which such recipients apply to become
enrollees of such HIC. Enrollment opportunities must remain open and available
as long as the enrollment maximums determined by ODHS and found in the provider
agreement with such HIC are not exceeded. Because of this requirement,
participating HICs are not subject to the federal and state enrollment mix
requirements, but instead, membership is limited as to a maximum number of
enrollees by the ODHS provider agreement.
EMPLOYEES
As of March 1, 1998, the Company had 360 full-time employees, of which
55 were employed in connection with Health Power HMO's operations, 139 were
employed in connection with CompManagement's operations, and 166 were employed
in connection with CompManagement Health Systems' operations. The employees of
the Company are not represented by a union. The Company considers its relations
with such employees to be good.
ITEM 2. PROPERTIES
Health Power HMO owns two three-story office buildings located in
Columbus, Ohio, which are used as its principal office facilities. These
buildings contain approximately 14,195 square feet of office space. Health Power
HMO also leases office space in Cincinnati, Ohio, which is used for its
Cincinnati service area operations.
CompManagement leases a 70,000 square foot office building in Dublin,
Ohio, which is used as the principal office facilities for CompManagement and
CompManagement Health Systems. The building lease is for a term of 15 years,
provides for annual rent payments ranging from $251,864 in year one to $953,312
in year eight and thereafter, and requires CompManagement to pay all operating
expenses for the building. The lease also provides for, among other things,
three renewal options of five years each, an option to purchase the building,
and a right of first offer with respect to the sale of such building. The lease
restricts CompManagement's ability to distribute funds and/or assets to the
Company or another affiliate unless CompManagement meets certain tangible net
worth requirements. CompManagement also leases office space in Akron,
Cincinnati, Cleveland, and Toledo, Ohio, which is used as service centers for
its operations.
<PAGE> 23
ITEM 3. LEGAL PROCEEDINGS
Neither the Company nor any of its subsidiaries are a party to any
material legal proceedings, nor, to the Company's knowledge, is any material
legal proceeding threatened against the Company or any of its subsidiaries.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the
fourth quarter of the Company's fiscal year ended December 31, 1997.
EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers of the Company and their respective ages and
present positions with the Company are as follows:
<TABLE>
<CAPTION>
Officers Age Present Position(s) with the Company
-------- --- ------------------------------------
<S> <C> <C>
Dr. Bernard F. Master 56 Chairman of the Board, Chief Executive Officer,
and President of the Company
Toni D. Spruell 39 Executive Vice President of the Company
Ronald J. Wurtz 55 Chief Financial Officer and Controller of the
Company
Robert J. Bossart 46 Chief Executive Officer of CompManagement and
CompManagement Health Systems
Jonathan R. Wagner 40 President of CompManagement
Richard T. Kurth 39 Executive Vice President of CompManagement
</TABLE>
Dr. Master has been the Chairman of the Board and Chief Executive
Officer of the Company since its formation in March 1985, and President of the
Company since January 1998.
Ms. Spruell has been Executive Vice President of the Company since
January 1998. Ms. Spruell joined the Company in October 1995, and previously
served as its Vice President of Provider Management Services. From March 1994 to
September 1995, Ms. Spruell served as provider network manager for United Health
Care of Ohio, Inc., a health insurance corporation. From July 1993 to March
1994, Ms. Spruell served as network manager for Principal Health Care of Ohio
Inc., a health insurance corporation. From September 1988 to July 1993, Ms.
Spruell worked for Ethix-CoMed Management Inc., a then wholly owned subsidiary
of New York Life Insurance Company, in Dublin, Ohio, last serving as a manager
of the PPO division of this managed healthcare subsidiary.
Mr. Wurtz has been the Controller of the Company since August 1990 and
has been Chief Financial Officer since June 1996. He also served as Chief
Financial Officer of the Company from November 1993 to July 1995.
Mr. Bossart has been an executive officer of CompManagement since its
formation in 1984 and the chief executive officer of CompManagement Health
Systems since September 1996.
Mr. Wagner has been an executive officer of CompManagement since its
formation in 1984.
Mr. Kurth has been an executive officer of CompManagement since its
formation in 1984.
<PAGE> 24
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's shares of common stock are traded on the Nasdaq National
Market system under the symbol HPWR. The following table sets forth the range of
the reported high and low sales prices of the Company's common stock by calendar
quarter for 1996 and 1997:
<TABLE>
<CAPTION>
High Low
---- ---
<S> <C> <C>
For the quarter ended 1996:
March 31 $ 9.75 $ 8.50
June 30 $11.50 $ 6.50
September 30 $ 8.00 $ 6.00
December 31 $ 5.75 $ 1.94
For the quarter ended 1997:
March 31 $ 4.25 $ 2.75
June 30 $ 4.13 $ 2.25
September 30 $11.00 $ 2.50
December 31 $10.75 $ 4.25
</TABLE>
The Company has not paid any dividends on its shares of common stock to
date, and it intends to retain its earnings to finance its ongoing operations
and to maintain necessary regulatory capital. The approval of ODI is required if
dividends or distributions of a health insuring corporation, such as Health
Power HMO, within a 12-month period would exceed 10% of such corporation's
statutory net worth as of the end of the preceding fiscal year. As a result of
Health Power HMO's failure to meet the statutory net worth requirements at
December 31, 1997 and January 1, 1998, no dividends may be paid by Health Power
HMO to the Company. See also Footnote 14 of the Notes to the Consolidated
Financial Statements contained in Item 8 of this Form 10-K and Item 1. Business
- -- Government Regulation. In addition, CompManagement's lease for its new office
facilities restricts its ability to distribute funds and/or assets to the
Company or another affiliate unless CompManagement meets certain tangible net
worth requirements.
As of March 18, 1998, there were 81 stockholders of record of the
Company's common stock and approximately 2,000 beneficial owners of such stock.
<PAGE> 25
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth selected consolidated financial data,
operating statistics, and membership data for the Company as of and for each of
the years in the five-year period ended December 31, 1997. All periods in the
table have been restated to reflect the acquisition of CompManagement, which was
accounted for as a pooling of interests.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
(in thousands of dollars, except per share data, operating
statistics and membership data)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
Medicaid ................................. $ 42,819 $ 44,247 $ 37,587 $34,901 $28,915
Commercial ............................... 10,811 15,167 15,603 15,563 14,961
Contract ................................. 22,183 6,672 5,571 3,547 1,774
-------- -------- -------- ------- -------
Total revenues ........................... 75,813 66,086 58,761 54,011 45,650
-------- -------- -------- ------- -------
Expenses:
HMO health care costs .................... 51,091 57,288 46,242 39,186 35,276
Selling, general and administrative ...... 24,750 15,888 13,595 10,349 7,695
Membership acquisition ................... -- 5,000 -- -- --
-------- -------- -------- ------- -------
Total expenses ........................... 75,661 78,176 59,837 49,535 42,971
-------- -------- -------- ------- -------
Income (loss) from operations .............. 152 (12,090) (1,076) 4,476 2,680
Interest income and other, net ............. 1,221 834 1,158 737 231
-------- -------- -------- ------- -------
Income (loss) before income tax expense
(benefit) ............................... 1,373 (11,256) 82 5,213 2,911
Income tax expense (benefit) ............... (1,641) (1,773) (14) 2,031 1,256
-------- -------- -------- ------- -------
Net income (loss) .......................... $ 3,014 $ (9,483) $ 96 $ 3,182 $ 1,655
======== ======== ======== ======= =======
PER SHARE OF COMMON STOCK:
Net income (loss) .......................... $ 0.79 $ (2.49) $ 0.03 $ 0.88 $ 0.58
Weighted average shares outstanding,
diluted.................................. 3,832 3,810 3,810 3,634 2,857
BALANCE SHEET DATA:
Working capital ............................ $ 1,970 $ 1,582 $ 10,920 $12,884 $ 569
Total assets ............................... 20,518 21,069 25,723 23,172 11,574
Long-term debt, including current portion .. -- -- -- -- 353
Stockholders' equity ....................... 7,565 4,519 14,002 13,754 1,691
HMO OPERATING STATISTICS:
HMO medical loss ratio (1) ................. 95.3% 96.4% 86.9% 77.7% 80.4%
HMO administrative ratio(2) ................ 15.5% 16.2% 17.0% 13.8% 13.4%
HMO MEMBERSHIP DATA:
Medicaid ................................... 29,647 36,439 27,802 24,720 20,503
Commercial ................................. 2,016 10,277 11,047 10,475 10,367
-------- -------- -------- ------- -------
Total ...................................... 31,663 46,716 38,849 35,195 30,870
======== ======== ======== ======= =======
</TABLE>
- ------------------------------
(1) HMO health care costs calculated as a percentage of Medicaid and commercial
revenues.
(2) HMO selling, general and administrative expenses calculated as a percentage
of Medicaid and commercial revenues.
<PAGE> 26
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
The Company is a managed care holding company whose operating
subsidiaries are Health Power HMO, CompManagement, and CompManagement Health
Systems. Health Power HMO provides comprehensive managed health care services to
members of its HMO, primarily Medicaid recipients enrolled in the OWF Program,
in four service areas encompassing 19 Ohio counties in and around the cities of
Columbus, Dayton, Cincinnati, Cleveland, and Youngstown. Health Power HMO has a
one-year NCQA accreditation which expires March 26, 1999. CompManagement, which
was acquired by the Company in July 1995, 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, currently serving
approximately 13,000 employers located throughout Ohio. CompManagement Health
Systems is a state-wide certified MCO providing medical management services for
workers' compensation claims under Ohio's Health Partnership Program for
approximately 20,000 employers. Because all workers' compensation claims are
reimbursed by BWC, CompManagement Health Systems does not assume any risk for
the payment of medical or disability benefits to employees with respect to
workers' compensation claims.
The Company's acquisition of CompManagement was accounted for as a
pooling of interests. For purposes of the following discussion, and except as
otherwise described below, the revenues and expenses of CompManagement Health
Systems have been included with the revenues and expenses of CompManagement. In
addition, the following discussion reflects the acquisition of certain contract
rights from ChoiceCare Health Plans, Inc. ("ChoiceCare") which enabled the
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. The
Company cautions readers that any forward looking statements contained in this
Form 10-K or any other reports or documents prepared by the Company involve
risks and uncertainties and are subject to change based on various factors.
Certain of these factors are discussed in greater detail in various parts of
this Item 7.
RECENT DEVELOPMENTS
Sales and Exchange of Medicaid Membership; Exit from Northeast Service
Area
Health Power HMO has entered into agreements to sell the contract
rights for its Medicaid membership in Cuyahoga (Cleveland) and Mahoning
(Youngstown) Counties, Ohio to Emerald HMO, Inc. and Total Health Care Plan,
Inc., respectively. Pursuant to its provider agreement with ODHS, Health Power
HMO was providing health care services to approximately 2,700 residents in those
counties as of December 31, 1997, which represented over 99% of Health Power
HMO's membership in its Northeast service area. The aggregate sale prices for
these transactions are expected to be approximately $700,000. The Company plans
to exit the Northeast service area as soon as permissible following the
completion of these transactions because of the insignificant membership
remaining in that service area.
<PAGE> 27
Health Power HMO has also entered into an agreement to transfer the
contract rights for its Butler County (between Dayton and Cincinnati), Ohio
Medicaid membership to Medical Mutual in exchange for Medical Mutual's contract
rights for that entity's Montgomery County (Dayton) Medicaid membership. Under
their respective provider agreements, Health Power HMO and Medical Mutual were
providing health care services to approximately 500 Butler County Medicaid
recipients and 800 Montgomery County Medicaid recipients, respectively, as of
December 31, 1997.
The foregoing transactions are subject to a number of conditions,
including approvals from ODI and ODHS. Health Power HMO expects to complete
these transactions, subject to regulatory approvals, during the second quarter
of 1998.
Termination of State of Ohio Employee Commercial Group Contracts
During most of 1997, Health Power HMO offered health care services to
employees of the State of Ohio in its Columbus, Dayton, and Cincinnati service
areas pursuant to commercial group contracts with ODAS. Health Power HMO
terminated its commercial group contract with ODAS for the Dayton service area
effective March 1, 1997. Furthermore, ODAS did not renew its commercial group
contracts with Health Power HMO for the Columbus and Cincinnati service areas,
and these contracts terminated as of December 1, 1997. The termination of the
commercial group contracts for the Columbus and Cincinnati service areas
resulted in the reduction of approximately 5,700 commercial members. It is
anticipated that the loss of revenue from the termination of the commercial
group contracts for the Columbus and Cincinnati service areas will result in an
approximate 11% reduction in the Company's consolidated revenues. The Company's
management has implemented expense reduction measures to mitigate the loss of
revenues associated with the termination of these contracts. However, these
commercial group contracts, in the aggregate, were not profitable in 1997.
Termination of Private Label Product
In July 1996, Health Power HMO and Health Power Management entered into
agreements with MedOhio Health, Inc. and MedOhio Health Plan, Inc.
(collectively, "MedOhio Health") to offer and manage a private label managed
care product known as the "University Healthcare Plan." Health Power HMO began
offering the University Healthcare Plan to Franklin County Medicaid recipients
during the first quarter of 1997. MedOhio Health terminated these agreements
effective as of January 31, 1998. The loss of these agreements will not have a
significant effect on the operations of Health Power HMO.
RESULTS OF OPERATIONS
1997 Compared to 1996
The Company's revenues increased $9.7 million, or 14.7%, to $75.8
million during 1997, from $66.1 million for 1996. CompManagement's revenues
increased $15.5 million, or 232.5%, to $22.2 million during 1997, as compared to
$6.7 million for the prior year, as a result of an increase in the number of
employers contracting for its services, and in particular, employers
participating in group rating plans, and to $11.3 million in revenues received
by CompManagement Health Systems, which entity was not operational in 1996.
Health Power HMO's revenues decreased $5.8 million, or 9.7%, to $53.6 million
during 1997, from $59.4 million for 1996. Health Power HMO's commercial revenues
decreased $4.4 million, or 28.7%, to $10.8 million during 1997, as compared to
$15.2 million for the prior year. Commercial revenues decreased primarily as a
result of a 31.8% decrease in members months, which offset a 4.5% increase in
revenue per member months. The decrease in the commercial revenues and member
months was the result of actions to eliminate unprofitable commercial
<PAGE> 28
accounts as part of the Company's financial turnaround plan, along with the
termination of the State of Ohio employee commercial group contracts. See
"Recent Developments--Termination of State of Ohio Employee Commercial Group
Contracts." Health Power HMO's Medicaid revenues decreased $1.4 million, or
3.2%, to $42.8 million during 1997, as compared to $44.2 million for the prior
year. Medicaid revenues decreased primarily as a result of a 4.4% decrease in
revenue per member months, which was partially offset by a 1.2% increase in
member months. The decrease in the Medicaid revenue per member month resulted
from the July 1996 capitation rate reduction of approximately 12% from ODHS,
which was partially offset by the July 1997 capitation increase of approximately
4%. Because of favorable economic conditions, Ohio experienced a 13% decrease in
the number of eligible Medicaid recipients enrolled in the OWF Program during
1997. This decrease has impacted Health Power HMO by a loss of Medicaid
membership during the latter half of 1997 caused by involuntary terminations.
Involuntary terminations relate to members who are no longer eligible to receive
Medicaid benefits. The decrease in the number of eligible Medicaid recipients
may continue to negatively impact Health Power HMO in 1998.
Health Power HMO's health care costs decreased $6.2 million, or 10.8%,
to $51.1 million during 1997, from $57.3 million for 1996. Health care costs,
stated as a percentage of Health Power HMO's revenues (the "HMO medical loss
ratio"), were 95.3% for 1997, as compared to 96.4% for 1996. The decrease in the
HMO medical loss ratio was primarily due to a decrease in per member health care
costs of 3.2% for Medicaid business during 1997, as compared to the prior year.
The foregoing results include increases in health care cost reserves for the
fourth quarter in 1997, discussed below, and a single large commercial medical
claim of approximately $1.0 million incurred primarily during the second half of
1997.
Health Power HMO's health care costs include reserve estimates of
health care costs incurred but not yet reported or paid. Health Power 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 actuarial company to
review the adequacy of its reserve estimates. As part of the recent quarterly
reserve setting process, Health Power HMO increased its reserve estimate for
health care costs by $1.5 million for the fourth quarter of 1997, which increase
included adjustments for the settlement of claims from prior quarters. This
reserve estimate may be subject to further adjustments in subsequent quarters.
The Company's selling, general and administrative ("SGA") expenses
increased $8.7 million, or 54.6%, to $24.6 million for 1997, from $15.9 million
for 1996. CompManagement's SGA expenses increased $10.0 million, or 159.2%, to
$16.3 million for 1997, from $6.3 million for 1996. This increase was primarily
a result of CompManagement Health Systems' expenditures of $8.2 million in 1997
in connection with the operation of its MCO; it was not operational in 1996. The
balance of the increase in SGA expenses was to support the increase in the
number of employers contracting for CompManagement's services. Health Power
HMO's SGA expenses decreased $1.3 million, or 13.7%, to $8.3 million for 1997,
from $9.6 million for 1996. These SGA expenses, stated as a percentage of Health
Power HMO's revenues (the "HMO administrative ratio"), were 15.5% for 1997, as
compared to 16.2% for 1996. The improvement in Health Power HMO's SGA expenses
and HMO administrative ratio 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.
During 1996, the Company elected to write-off the entire purchase price
of $5.0 million paid by Health Power HMO to acquire certain contract rights with
respect to the ChoiceCare provider agreement with ODHS.
<PAGE> 29
The Company's interest and other income increased $0.4 million to $1.2
million for 1997, from $0.8 million for 1996. This increase resulted primarily
from an increase in other income related to the private label managed care
product and an increase in interest income related to increases in the average
available investable cash balance.
The Company had an income tax benefit of $1.6 million for 1997, as
compared to $1.8 for 1996. The 1997 tax benefit was the result of the
recognition of a deferred tax asset in the amount of $2.2 million, which was
offset by tax expense on the Company's income from operations. The recognition
of the $2.2 million deferred tax asset was due to the reversal of the valuation
allowance established in 1996 for the deferred tax asset, which reversal was
based on the Company's return to profitable operations and management's
expectations of profitable operations in future periods. This deferred tax asset
recognition was recorded in accordance with Financial Accounting Standards
("SFAS") No. 109, "Accounting for Income Taxes."
As a result of the foregoing, the Company had net income of $3.0
million, or $0.79 per share, diluted, for 1997, as compared to a net loss of
$9.5 million, or ($2.49) per share, diluted, for 1996. There were 3,818,465 and
3,810,331 weighted average common diluted shares outstanding at December 31,
1997 and 1996, respectively.
The Company's management believes that, barring unforeseen
circumstances, the Company's operating results on a consolidated basis will
continue to be profitable during 1998, primarily because of the operations of
CompManagement and CompManagement Health Systems. Health Power HMO's operating
results have been and may continue to be adversely affected by the potential
occurrence of various factors, such as decreases in capitation rates from ODHS,
increases in health care cost, decreases in the size of the Medicaid population,
and increases in reserve estimates. 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 of eligible Medicaid recipients may
continue to negatively impact Health Power HMO in 1998. Finally, there can be no
assurance that reserve estimates will not be subject to adjustments during 1998.
Based upon the foregoing factors and the Company's most recent operating
projections, it is uncertain at this time whether the operations of Health Power
HMO will be profitable in 1998.
1996 Compared to 1995
The Company's revenues increased $7.3 million, or 12.5%, to $66.1
million during 1996, from $58.8 million for 1995. CompManagement's revenues
increased $1.1 million, or 19.8%, to $6.7 million during 1996, as compared to
the prior year, as a result of an increase in the number of employers
contracting for its services, and in particular, employers participating in
group rating plans. Health Power HMO's revenues increased $6.2 million, or
11.7%, to $59.4 million during 1996, from $53.2 million for 1995. Health Power
HMO's Medicaid revenues increased 17.7% during 1996, as compared to the prior
year, primarily as a result of a 25.6% increase in member months which was
primarily due to the enrollment of the Medicaid recipients previously served by
ChoiceCare, which more than offset a 6.3% decrease in the revenue per member
months. Health Power HMO's commercial revenues decreased 2.8% during 1996, as
compared to the prior year, primarily as a result of a 3.2% decrease in the
revenue per member month. The decrease in the Medicaid revenue per member month
resulted from the July 1, 1996 capitation rate reduction of approximately 12%
from ODHS. The decrease in the commercial revenue per member month was the
result of a competitive and price sensitive commercial marketplace.
<PAGE> 30
Health Power HMO's health care costs increased $11.0 million, or 23.9%,
to $57.3 million during 1996, from $46.2 million for 1995. The 1996 results
included a fourth quarter adjustment in which Health Power HMO decreased its
health care costs by approximately $1.0 million to record retention of
risk-sharing funds previously accrued for payment to its primary care
physicians. The HMO medical loss ratio was 96.4% for 1996, as compared to 86.9%
for 1995. The increase in the HMO medical loss ratio was primarily due to
increases in per member health care costs of 14.0% and 2.6% for commercial and
Medicaid business, respectively, during 1996, as compared to the prior year,
along with the aforementioned 3.2% decrease in per member commercial revenue and
the 6.3% decrease in per member Medicaid revenue during the same period. The
decrease in the commercial per member revenue was attributable to rate decreases
based upon the competitive and price sensitive commercial marketplace during
1996. The decrease in the 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 rates, in part, on
its estimates of Medicaid health care costs increases. During 1996, Health Power
HMO experienced health care cost increases at rates in excess of the ODHS cost
estimates.
The Company's SGA expenses increased $2.3 million, or 16.9%, to $15.9
million for 1996, from $13.6 million for 1995. CompManagement's SGA expenses
increased $1.7 million, or 38.3%, to $6.3 million for 1996, from $4.5 million
for 1995. This increase was primarily the result of expenses incurred by
CompManagement Health Systems in connection with the development of its MCO
operations and increases in CompManagement's selling commissions. Health Power
HMO's SGA expenses increased $0.6 million, or 6.1%, to $9.6 million for 1996,
from $9.1 million for 1995. This increase was primarily the result of expenses
incurred in connection with obtaining NCQA accreditation and expansion into the
Northeast service area. The HMO administrative ratio was 16.2% for 1996, as
compared to 17.0% for 1995. The improvement in the HMO administrative ratio was
due to the achievement of certain operating efficiencies as fixed overhead costs
and expenses were allocated over a larger membership base due to the increase in
membership resulting from the ChoiceCare transaction.
During 1996, Health Power HMO acquired certain contract rights from
ChoiceCare for a purchase price of $5.0 million. This acquisition enabled the
Medicaid recipients previously served by ChoiceCare to be automatically enrolled
in Health Power HMO as of July 1, 1996. Because of the nature of the intangible
asset acquired, the Company elected to write-off the entire purchase price in
1996.
The Company's interest and other income decreased $0.3 million to $0.8
million for 1996, from $1.2 million for 1995. This decrease resulted primarily
from a decrease in interest income caused by decreases in the average available
investable cash balance combined with reduced interest yields. The decrease in
the average available investable cash balance was primarily the result of the
payment of the $5.0 million purchase price for the acquisition of the ChoiceCare
contract rights at the end of the second quarter of 1996 and the operating
losses sustained during the year.
The Company had an income tax benefit of $1.8 million for 1996, as
compared to an income tax benefit of $14,000 for 1995. This tax benefit was the
result of a loss from operations of $12.1 million.
As a result of the foregoing, the Company sustained a net loss of $9.5
million, or $(2.49) per share, diluted, for 1996, as compared to net income of
$96,000, or $0.03 per share, diluted, for 1995.
<PAGE> 31
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 and to maintain necessary regulatory
capital. At December 31, 1997, the statutory net worth of Health Power HMO was
$577,350, which did not meet Ohio's minimum statutory net worth requirements in
effect on such date. Furthermore, the minimum statutory net worth dollar amount
requirement was increased to $1.7 million effective as of January 1, 1998. See
Footnote 14 of the Notes to the Consolidated Financial Statements contained in
Item 8 of this Form 10-K. Health Power HMO has submitted a corrective action
plan to ODI outlining the proposed actions to be undertaken by the HMO to bring
it in compliance with the minimum statutory net worth requirements. The
corrective action plan is currently under review by ODI. Health Power HMO had
been placed under supervision by ODI in December 1996, because of its failure to
satisfy the minimum statutory net worth requirements. It was released from
supervision in March 1997, after satisfying ODI's release requirements. This
increased minimum statutory net worth requirement will place an additional
burden on the Company's capital needs during 1998.
At December 31, 1997, the Company had working capital of $2.0 million,
as compared to working capital of $1.6 million at December 31, 1996. At December
31, 1997, cash and cash equivalents were $8.4 million, a decrease of $5.5
million from $13.9 million at December 31, 1996. This decrease was attributable
primarily to a decrease in cash from operating activities of $3.7 million and a
decrease in cash from investing activities of $1.8 million. The Company's cash
and cash equivalents do not include statutory cash deposits segregated as
required by ODI and ODHS. These deposits of $0.4 million as of December 31,
1997, are included with other assets on the balance sheet.
CompManagement has entered into a lease agreement to lease a 70,000
square foot building in Dublin, Ohio, and began occupying this space in November
1997. The lease is for a term of 15 years, provides for annual rents ranging
from $251,864 in year one to $953,312 in year eight and thereafter, and requires
CompManagement to pay all operating expenses for the building. The lease also
provides for, among other things, three renewal options of five years each, an
option to purchase the building, and a right of first offer with respect to the
sale of the building. The lease restricts CompManagement's ability to distribute
funds and/or assets to the Company or another affiliate unless CompManagement
meets certain tangible net worth requirements.
Net cash used in operating activities was $3.7 million for 1997, as
compared to net cash used in operating activities of $5.1 million during 1996.
In 1997, changes in cash flow from operations were primarily due to changes in
net earnings, deferred income taxes, and changes in current assets and current
liabilities. Many of these fluctuations are due to timing of cash receipts or
payments. Because premium payments received prior to the month of coverage are
recorded as deferred revenues, the extent of such receipts can cause
fluctuations in the total amount of cash from month-to-month.
As previously discussed, the Company's management believes that,
barring unforeseen circumstances, the Company's operating results on a
consolidated basis will continue to be profitable during 1998. The Company
believes that internally generated funds will be sufficient to support the
Company's ongoing operations and satisfy regulatory capital requirements during
1998.
INFLATION
Historically, health care costs have risen at a higher rate than the
general rate of inflation. The Company believes that its cost containment
procedures and contractual arrangements with providers mitigate, but do not
wholly offset, the effects of health care cost inflation on its operating
results. While the Company does not anticipate capitation rate
<PAGE> 32
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. There can be no assurance that health care costs will not increase at a
rate in excess of such capitation rate increases. Because of the foregoing, the
Company may be unable to offset the adverse effects of inflationary health care
cost increases to its operations.
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's management currently does not believe
that the cost of addressing the Year 2000 Issue will materially effect the
Company's business, operations, or financial condition or will require material
expenditures of capital for Year 2000 compliance.
<PAGE> 33
FORWARD LOOKING STATEMENTS; CERTAIN FACTORS AFFECTING FUTURE RESULTS
Any forward looking statements contained in this Form 10-K or any other
reports or documents prepared by the Company or made by management of the
Company involve risks and uncertainties, and are subject to change based on
various important factors. The following factors, among others, in some cases
have affected and in the future could affect the Company's actual financial
performance.
DEPENDENCE UPON MEDICAID PROGRAM
Health Power HMO participates in the OWF Medicaid program through its
contract with ODHS. Under this contract, Health Power HMO is paid a fixed
monthly capitation rate from ODHS for each Medicaid recipient enrolled in its
HMO. This capitation rate was reduced by approximately 5% in 1995 and further
reduced by approximately 12% in 1996. Although increased by approximately 4% in
1997, there can be no assurance that the capitation rates under this contract
will not be reduced in the future. The current contract with ODHS expires in
September 1998, and there can be no assurance that this contract will be renewed
upon its expiration. For the years ended December 31, 1997, 1996, and 1995,
Medicaid revenues represented approximately 56%, 67%, and 64%, respectively, of
the Company's consolidated revenues. The loss of this contract or further
reductions in capitation rates paid by ODHS would have a material adverse effect
on the Company's business, financial condition, and operations. Furthermore,
because of favorable economic conditions, Ohio experienced a 13% decrease in the
number of eligible Medicaid recipients enrolled in the OWF Program during 1997.
This decrease has impacted Health Power HMO by a loss of Medicaid membership
during the latter half of 1997 caused by involuntary terminations. Involuntary
terminations relate to members who are no longer eligible to receive Medicaid
benefits. The decrease in the number of eligible Medicaid recipients may
continue to negatively impact Health Power HMO in 1998.
DEPENDENCE UPON HEALTH PARTNERSHIP PROGRAM
CompManagement Health Systems participates in Ohio's Health Partnership
Program through its contract with OBWC. This contract is for a two-year term
expiring in March 1999. There can be no assurance that OBWC will renew this
contract when it expires. Furthermore, OBWC may at any time initiate proceedings
to decertify CompManagement Health Systems as an MCO if CompManagement Health
Systems fails to satisfactorily perform its duties under the contract, and if
such decertification occurs, the contract will automatically terminate. Finally,
50% of the fees payable under this contract are subject to the attainment of
certain objective and subjective performance measurements established by OBWC.
There can be no assurance that CompManagement Health Systems will be able to
meet all or any of these performance measurements. This contract accounts for
all of its revenues, which revenues were $11.3 million in 1997. For the year
ended December 31, 1997, CompManagement Health Systems' revenues represented
approximately 14.9% of the Company's consolidated revenues. The loss of this
contract or the failure to significantly satisfy the performance measurements
under the contract would have a material adverse effect on the Company's
business, financial condition, and operations.
DEPENDENCE UPON GROUP RATING PLANS
CompManagement provides administrative services for group rating plans
for over 35 trade associations, which include approximately 12,000 employers.
Each association and employer administrative agreement is typically for a
one-year service period. Revenues from group rating plans represented
approximately 58% of CompManagement's 1997 revenues, with three trade
associations accounting for approximately 41% of such revenues. There can be no
assurance that the agreements with these three trade associations or any other
associations or
<PAGE> 34
employers will be renewed upon their expiration, or if renewed, upon terms
favorable to CompManagement. The failure to renew one or more of the contracts
with these three trade associations could have a material adverse effect upon
the Company's revenues.
GOVERNMENT REGULATION
Each of the Company's operating subsidiaries are subject to regulation
by governmental agencies or are otherwise dependent upon plans or programs
administered by governmental agencies. These governmental plans and programs
have been implemented pursuant to state statutes and regulations and, in the
case of Medicaid, federal statutes and regulations. Health Power HMO is subject
to extensive regulation by various state agencies relating to, among other
things, scope of benefits, premium rates, quality assurance procedures,
enrollment requirements and financial condition. CompManagement Health Systems
is subject to extensive regulation by OBWC relating to the operation of its MCO.
Any changes to Ohio's statutes or regulations applicable to group rating plans
or the Health Partnership Program, or interpretations of these statutes and
regulations by OBWC, could have a material adverse effect upon the revenues and
operations of CompManagement and CompManagement Health Systems. Any changes to
the Medicaid program could have a material adverse effect upon the revenues and
operations of Health Power HMO. There can be no assurance that the Company's
subsidiaries will be able to continue to maintain required regulatory authority
or that regulatory changes will not have an adverse impact on the Company in the
future.
CONTROL OF HEALTH CARE COSTS
Health Power HMO's profitability is dependent, in part, upon its
ability to predict and control health care costs. Health care costs are affected
by a variety of factors that are difficult to predict and not entirely within
Health Power HMO's control, including the severity and frequency of claims.
Health care cost inflation, new technologies, natural disasters, epidemics and
other external factors may adversely affect Health Power HMO's ability to
control the costs of providing health care services. Although Health Power HMO
attempts to control these health care costs through a variety of techniques,
including capitation and fee schedule arrangements with primary care physicians
and other providers, advance approval for elective hospital admissions,
utilization review, appropriate underwriting criteria, quality assurance
programs and reinsurance arrangements, there can be no assurance that Health
Power HMO will be successful in its efforts to control these costs in the
future.
ESTIMATION OF UNPAID CLAIMS; SEVERITY OF CLAIMS; POTENTIAL LIABILITY
Health Power HMO's health care costs include estimates of health care
costs incurred but not yet reported ("IBNR"). Health Power HMO estimates its
IBNR health care costs based on a number of factors, including hospital
admission data and prior claims 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 independent actuary to
review the adequacy of its IBNR estimates. The Company believes that such IBNR
estimates are adequate to satisfy Health Power HMO's ultimate claims liability.
However, there can be no assurance as to the adequacy of such IBNR estimates or
that adjustments to such IBNR estimates will not have a material adverse affect
on the Company's operations.
The occurrence of certain severe medical claims by HMO members cannot
be predicted with any certainty. In order to protect itself against severe
claims with respect to its commercial members, Health Power HMO maintains
reinsurance coverages in amounts it believes adequate for its commercial
business. However, there is a risk that, because of average daily maximum
limitations, Health Power HMO could be responsible for hospital costs in excess
of its
<PAGE> 35
deductible, which is currently $75,000. Health Power HMO also maintains, as
required by ODHS, stop-loss insurance with respect to its Medicaid members. No
assurance can be given as to the future availability or cost of such reinsurance
or stop-loss coverage or that losses or risks will be maintained within the
limits of such coverage. Notwithstanding the maintenance of reinsurance
coverage, the severity of claims, in particular by Health Power HMO's commercial
members, could have a material adverse effect on the Company's operations.
Health Power HMO is also subject to the risk of other claims normally
associated with the operation of an HMO, including claims resulting from
decisions regarding providers, medical circumstances or necessity of treatment,
including failure to approve medical procedures or hospital admissions, claims
against Health Power HMO for malpractice by providers in its network, claims for
failure to provide coverage or wrongful termination of coverage, claims
resulting from other issues with employer groups, members or providers and other
general liability claims. Various claims have recently been made against other
HMOs to expand the liability of the HMO to include damages arising from a
member's failure to obtain medical treatment due to the HMOs refusal of coverage
or the negligence of providers with whom the HMO directly or indirectly
contracts. Certain legislation currently before the Ohio General Assembly
includes provisions expanding liability of managed health care companies to
include damages arising from a member's failure to obtain medical treatment due
to the HMOs refusal of coverage. Although Health Power HMO maintains malpractice
and general liability insurance and requires its providers to maintain
malpractice insurance, there is a risk that claims could exceed or not be
covered by insurance.
DEPENDENCE ON KEY PERSONNEL
The operations of Health Power HMO is highly dependent upon the efforts
of certain key personnel, particularly Dr. Bernard F. Master, who serves as both
its chief executive officer and chief operating officer. The operations of
CompManagement and CompManagement Health Systems are highly dependent upon the
efforts of certain key personnel, particularly Robert J. Bossart, Jonathan R.
Wagner, and Richard T. Kurth. The loss of the services of any of these
individuals could have a material adverse effect on the operations of the
Company. The Company or one of its subsidiaries has employment agreements with
each of these individuals.
COMPETITION
The Company's subsidiaries each operate in industries which are highly
competitive. Each of the Company's subsidiaries compete with numerous types of
competitors, many of which have greater financial and other resources.
Additional competitors may enter the Company's areas of operations in the
future.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not applicable at this time.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Consolidated Financial Statements, including the Notes to
Consolidated Financial Statements and the Report of Independent Accountants,
appear following this page. Supplemental data is omitted because it is not
applicable to the Company.
<PAGE> 36
HEALTH POWER, INC., AND SUBSIDIARIES
REPORT ON AUDITS OF CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<PAGE> 37
REPORT OF INDEPENDENT ACCOUNTANTS
Board of Directors and Shareholders
Health Power, Inc.
Columbus, Ohio
We have audited the accompanying consolidated balance sheets of Health Power,
Inc., and Subsidiaries as of December 31, 1997 and 1996, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
each of the three years in the period ended December 31, 1997. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
As discussed in Note 14 to the financial statements, at December 31, 1997, the
Company's HMO subsidiary did not meet minimum statutory net worth and admitted
asset requirements as established by the Ohio Department of Insurance.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Health
Power, Inc., and Subsidiaries as of December 31, 1997 and 1996, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1997, in conformity with generally
accepted accounting principles.
COOPERS & LYBRAND, L.L.P.
Columbus, Ohio
March 10, 1998
1
<PAGE> 38
HEALTH POWER, INC., AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
as of December 31, 1997 and 1996
<TABLE>
<CAPTION>
ASSETS 1997 1996
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 8,427,483 $13,928,640
Accounts receivable, net 5,277,502 2,257,390
Prepaid expenses and other 430,043 151,732
Income taxes refundable 1,794,919
Deferred income taxes, net 787,426
----------- -----------
Total current assets 14,922,454 18,132,681
----------- -----------
Property and equipment, at cost:
Land 152,640 152,640
Buildings and leasehold improvements 1,413,492 1,252,654
Furniture, equipment and software 3,577,596 2,447,919
----------- -----------
5,143,728 3,853,213
Less accumulated depreciation 1,992,624 1,460,535
----------- -----------
3,151,104 2,392,678
----------- -----------
Deferred income taxes, net 1,403,176
Deposits and other assets 1,040,876 543,218
----------- -----------
Total assets $20,517,610 $21,068,577
=========== ===========
</TABLE>
Contined
2
<PAGE> 39
HEALTH POWER, INC., AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
as of December 31, 1997 and 1996
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY 1997 1996
Current liabilities:
<S> <C> <C>
Health care costs payable $ 6,688,029 $ 10,896,149
Deferred revenues:
HMO 3,403,687 3,753,608
Consulting 498,806 1,028,944
Accounts payable 1,801,394 665,779
Taxes payable 218,547
Accrued expenses and other current liabilities 342,326 205,516
------------ ------------
Total current liabilities 12,952,789 16,549,996
------------ ------------
Commitments and contingencies (Notes 6 and 9)
Stockholders' equity:
Preferred stock, par value of $.01 per share, 5,000,000 shares
authorized; none issued
Commonstock, par value of $.01 per share, 10,000,000 shares authorized;
3,820,498 and 3,810,331 shares issued
and outstanding, respectively 38,205 38,104
Additional paid-in capital 10,743,643 10,711,292
Accumulated deficit (3,217,027) (6,230,815)
------------ ------------
Total stockholders' equity 7,564,821 4,518,581
------------ ------------
Total liabilities and stockholders' equity $ 20,517,610 $ 21,068,577
============ ============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
3
<PAGE> 40
HEALTH POWER, INC., AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
for the years ended December 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
Revenues:
Medicaid $42,819,206 $ 44,246,928 $ 37,587,138
Commercial 10,811,320 15,167,341 15,602,926
Contract 22,182,644 6,671,679 5,571,118
----------- ------------ ------------
75,813,170 66,085,948 58,761,182
----------- ------------ ------------
Expenses:
Health care costs, net 51,091,217 57,287,623 46,242,509
General and administrative 24,569,825 15,888,246 13,594,520
Membership acquisition 5,000,000
----------- ------------ ------------
75,661,042 78,175,869 59,837,029
----------- ------------ ------------
Income (loss) from operations 152,128 (12,089,921) (1,075,847)
Interest income and other, net 1,220,750 833,723 1,158,298
----------- ------------ ------------
Income (loss) before income taxes 1,372,878 (11,256,198) 82,451
Federal, state and local income tax benefit 1,640,910 1,772,834 13,666
----------- ------------ ------------
Net income (loss) $ 3,013,788 $ (9,483,364) $ 96,117
=========== ============ ============
Net income (loss) per common share, basic and diluted $ 0.79 $ (2.49) $ 0.03
=========== ============ ============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
4
<PAGE> 41
HEALTH POWER, INC., AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
for the years ended December 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
RETAINED
EARNINGS
COMMON STOCK ADDITIONAL UNEARNED (ACCUMU- TOTALSTOCK-
------------------------- PAID-IN COMPENSA- LATED HOLDERS'
SHARES AMOUNT CAPITAL TION DEFICIT) EQUITY
----------- ------------ ------------ ----------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1994 3,809,279 $38,093 $10,612,327 $(53,188) $ 3,156,432 $ 13,753,664
Issuance of common stock--
employee stock option
plan 1,052 11 11,561 11,572
Tax benefit on incentive
stock option plan 87,404 87,404
Earned compensation--
incentive stock bonus
plan 53,188 53,188
Net income 96,117 96,117
---------- ------- ----------- -------- ----------- ------------
Balance at December 31, 1995 3,810,331 38,104 10,711,292 3,252,549 14,001,945
Net loss (9,483,364) (9,483,364)
---------- ------- ----------- -------- ----------- ------------
Balance at December 31, 1996 3,810,331 38,104 10,711,292 (6,230,815) 4,518,581
Issuance of common stock--
director stock award 10,167 101 32,351 32,452
plan
Net income 3,013,788 3,013,788
---------- ------- ----------- -------- ----------- ------------
Balance at December 31, 1997 $3,820,498 $38,205 $10,743,643 $ $(3,217,027) $ 7,564,821
========== ======= =========== ======== =========== ============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
5
<PAGE> 42
HEALTH POWER, INC., AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
for the years ended December 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
1997 1996 1995
Cash flows from operating activities:
<S> <C> <C> <C>
Net income (loss) $ 3,013,788 $(9,483,364) $ 96,117
Adjustments to reconcile net income (loss) to net
cash (used in) provided by operating
activities:
Depreciation 532,090 359,855 202,242
Loss (gain) on disposal of property and
equipment 209,226 (751)
(Increase) decrease in deferred income taxes (2,190,602) 705,258 (39,395)
Issuance of common stock for director stock
award plan 32,452
Incentive stock bonus plan 140,592
Changes in current assets and current liabilities:
Increase in accounts and notes receivable (3,020,112) (350,279) (634,086)
(Increase) decrease in prepaid expenses and other (278,311) (5,200) 40,304
Decrease (increase) in income taxes refundable 1,794,919 (1,389,275) (405,644)
(Decrease) increase in health care costs payable (4,208,120) 4,111,797 (125,211)
Decrease in capitation costs withheld (437,303) (105,150)
(Decrease) increase in deferred revenues (880,059) 1,078,747 3,435,188
Increase in accounts payable 1,135,615 151,003 293,411
Increase (decrease) in taxes payable 218,547 (719,756)
Increase (decrease) in accrued expenses and
other liabilities 136,810 (75,010) (476,306)
----------- ----------- -----------
Net cash (used in) provided by operating
activities (3,712,983) (5,124,545) 1,701,555
----------- ----------- -----------
Cash flows (used in) provided by investing activities:
Purchase of property and equipment, net (1,290,516) (509,721) (2,360,380)
Proceeds from sale of property and equipment 99,000
Deposits and other assets (497,658) (28,987) (80,393)
----------- ----------- -----------
Net cash used in investing activities (1,788,174) (439,708) (2,440,773)
----------- ----------- -----------
</TABLE>
Continued
6
<PAGE> 43
HEALTH POWER, INC., AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
Cash flows provided by financing activities:
Issuance of common stock for cash $ 11,572
------------
Net cash provided by financing activities 11,572
------------ ------------ ------------
Net decrease in cash and cash equivalents (5,501,157) (5,564,253) (727,646)
Cash and cash equivalents, beginning of year 13,928,640 19,492,893 20,220,539
------------ ------------ ------------
Cash and cash equivalents, end of year $ 8,427,483 $ 13,928,640 $ 19,492,893
============ ============ ============
Supplemental disclosures of cash flow information:
Income taxes paid $ 309,838 $ 1,329,860
============ ============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
7
<PAGE> 44
HEALTH POWER, INC., AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
A. DESCRIPTION OF OPERATIONS: Health Power, Inc. (the Company) is a
Delaware holding company that operates Health Power HMO, Inc., a
health maintenance organization (HMO) in and around the Columbus,
Cincinnati, Dayton, Cleveland and Youngstown, Ohio, areas for Medicaid
recipients primarily enrolled in the Ohio Works First/Healthy Start
(OWF) programs, as well as for commercial members. The HMO has a
one-year accreditation from the National Committee for Quality
Assurance (NCQA), which expires March 26, 1999. The Company also
provides full-service workers' and unemployment compensation
consulting services through its CompManagement, Inc. (CompManagement)
subsidiary (see Note 2) to employers in the State of Ohio. Effective
March 1, 1997, CompManagement Health Systems, Inc., a subsidiary of
CompManagement, began operations as a managed care organization for
the Ohio Bureau of Workers' Compensation (OBWC).
B. BASIS OF PRESENTATION: The accompanying consolidated financial
statements are presented in accordance with generally accepted
accounting principles (GAAP). The Company's HMO subsidiary is subject
to regulation by the Ohio Department of Insurance (the Department) and
is required to file separate financial statements with the Department
prepared in accordance with prescribed or permitted statutory
accounting practices. Such practices differ in certain respects from
GAAP. Significant statutory differences relate to certain assets
designated as "nonadmitted", principally intercompany accounts and
prepaids (which are charged directly to surplus) and deferred federal
income taxes both of which are not recognized for statutory reporting
purposes.
C. PRINCIPLES OF CONSOLIDATION: The consolidated financial statements
include the accounts of the Company and its wholly owned subsidiaries.
All intercompany balances and transactions have been eliminated in
consolidation.
D. CASH EQUIVALENTS: It is the policy of the Company to classify
investments with original maturities of three months or less as cash
equivalents. Cash equivalents at December 31, 1997 include $6,555,000
deposited in an overnight sweep account and $96,716 invested in a
money market fund.
E. PROPERTY AND EQUIPMENT: Depreciation of property and equipment is
computed using the straight-line method over the estimated useful
lives of the assets, ranging from 3 to 25 years.
Expenditures for major betterments are capitalized, and expenditures
for repairs and maintenance are charged to operations as incurred.
When property and equipment are retired or sold, the cost and related
accumulated depreciation and amortization are removed from the
accounts, with any gain or loss reflected in operations.
8
<PAGE> 45
HEALTH POWER, INC., AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
F. REVENUES: Commercial and Medicaid revenues consist primarily of
amounts earned under contracts with commercial groups and the Ohio
Department of Human Services (ODHS) for Medicaid recipients. Such
amounts are recognized when earned. Amounts received prior to the
month of service are recorded as deferred revenues. Effective February
24, 1997, the Company gave notice to cancel its contract to provide
services for a commercial group in the Dayton area; therefore, health
care coverage for that group ceased on March 1, 1997. This group
accounted for approximately 15% of the HMO's commercial revenue during
1996. In addition, effective December 1, 1997, the State of Ohio
commercial group coverage for the remaining Columbus and Cincinnati
areas were cancelled. For the year ended December 31, 1997, commercial
group premiums from the State of Ohio approximated 63% of the
Company's commercial revenues.
Contract revenues are derived from claims management, administrative,
consulting services, and managed care administration services which
are recorded as earned based on the requirements and duration of the
related contract. Revenue from the managed care administration
services are recognized on a monthly basis based on the contracted
administrative fee with the OBWC. In addition, contract revenue earned
is recorded for some incentive awards when the claims are processed to
which the incentive is related and a bonus award is recorded in the
year earned. Revenue on certain contracts has been deferred and is
recognized into income on a pro rata basis over the related contract
periods, which typically range between 3 and 12 months. Commission
expense associated with these contracts is also deferred and
recognized into expense on a pro rata basis over the related contract
periods. For services related to group rating contracts, fees are paid
to the group's sponsor and netted against contract revenues. For the
year ended December 31, 1997, contract revenue from a major client
approximated 32% of the Company's contract revenue.
G. HEALTH CARE COSTS: Health care costs include primary care and
physician-related costs and hospital costs. Primary care and
physician-related costs represent expenses incurred under contracts
and arrangements with health care providers in rendering services to
enrollees. Such costs include fee-for-service amounts and capitation
(a monthly fixed fee per enrollee) recognized in providing medical,
vision, pharmacy and other health care services. Hospital costs are
recognized when hospital services are provided to enrollees and
include stop-loss insurance coverage premiums, net of recoveries (see
Note 7). Such expenses are recognized as incurred, except as noted
below.
Primary care and physician-related costs and hospital costs include
management's estimate of services provided but not reported at
year-end and expected future losses on contracts in effect at
year-end. The Company recognizes expected future contract losses when
it is probable that expected future health care costs and maintenance
costs under a group of existing contracts will exceed anticipated
future premiums and stop-loss insurance recoveries on those contracts.
The reserve for expected future contract losses is approximately
$11,853 and $266,175 as of December 31, 1997 and 1996, respectively,
and
9
<PAGE> 46
HEALTH POWER, INC., AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
is included with health care costs payable. The methods of making such
estimates and for establishing the resulting liabilities are
continually reviewed and updated based on current circumstances, and
any adjustments resulting therefrom are currently reflected in
operations. It is reasonably possible that circumstances impacting
these estimates may change in the near term.
Stop-loss reinsurance premiums are reported as health care costs and
recoveries are reported as a reduction of health care costs.
H. INCOME TAXES: Deferred income tax assets and liabilities are
recognized for the tax consequences of "temporary differences" by
applying enacted statutory tax rates applicable to future years to
differences between the financial statement carrying amounts and the
tax bases of existing assets and liabilities. The effect on deferred
tax assets and liabilities of a change in tax rates recognized as
income or expense in the period that includes the enactment date.
I. MEMBERSHIP ACQUISITION COSTS: Effective June 30, 1996, the HMO
acquired by assignment from ChoiceCare Health Plans, Inc., an Ohio
corporation (ChoiceCare), certain contract rights with respect to
ChoiceCare's provider agreement with the ODHS. Under that provider
agreement, ChoiceCare previously provided health care services to OWF
Medicaid recipients residing in Hamilton County, Ohio. Through its
acquisition of such contract rights, approximately 12,000 OWF Medicaid
recipients previously served by ChoiceCare were enrolled in the
Company's HMO effective July 1, 1996. The purchase price for the
contract rights assigned to the Company's HMO was $5 million and was
charged to operations in 1996.
J. STOCK-BASED COMPENSATION: The Company applies APB Opinion No. 25,
Accounting for Stock Issued to Employees (APB No. 25) and related
interpretations in accounting for its stock-based compensation plans.
In 1995, the FASB issued Statement of Financial Accounting Standards
(SFAS) No. 123, Accounting for Stock-Based Compensation which is
effective for fiscal years beginning after December 15, 1995. Under
SFAS No. 123, companies may elect to recognize stock-based
compensation expense based on the fair value of the awards or continue
to account for stock-based compensation under APB No. 25. The Company
has elected to continue to apply the provisions of APB No. 25 (see
Note 12).
The Company provides a director stock award plan to the directors of
Health Power, Inc., Health Power HMO, Inc., and CompManagement, Inc.
Under this plan, the directors elect percentages of their director
fees to be paid in cash or in stock of Health Power, Inc. Payment of
the director fees is made subsequent to attendance of the respective
meeting. In 1997, the Company issued 10,167 shares of common stock
with a market value of $32,452 to the directors. The Company records
the expense in the year the stock is issued.
10
<PAGE> 47
HEALTH POWER, INC., AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
K. USE OF ESTIMATES: The preparation of financial statements in
conformity with GAAP requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the dates of
the financial statements and the reported amounts of revenues and
expenses during the reporting periods. Actual results could differ
from those estimates.
L. NEW ACCOUNTING PRONOUNCEMENTS: Effective December 31, 1997, Health
Power, Inc., adopted SFAS No. 128, Earnings Per Share. The statement
specifies the computation, presentation and disclosure requirements
for earnings per share for entities with publicly held common stock
(see Note 17). All reported prior period earnings per share
information has been restated in accordance with SFAS No. 128.
In June 1997, the FASB issued SFAS No. 130, Reporting Comprehensive
Income. This statement establishes standards for reporting of
comprehensive income and its components in a full set of
general-purpose financial statements. Health Power, Inc. will be
required to adopt this statement as of January 1, 1998. The impact of
the statement on Health Power, Inc.'s financial statements is not
expected to be material.
In June 1997, the FASB issued SFAS No. 131, Disclosure 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. The Company will adopt this standard beginning in 1998, and
the segments currently presented will not change.
2. MERGER OF COMPMANAGEMENT, INC.:
On July 21, 1995, CompManagement was merged with and into the Company,
and 634,878 shares of the Company's common stock were issued in exchange
for all the outstanding common stock of CompManagement. The merger has
been accounted for as a pooling of interests, and the financial
statements for 1995 have been restated to include CompManagement.
11
<PAGE> 48
HEALTH POWER, INC., AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
Separate results of the combined entities for the six months ended June 30,
1995 are as follows:
<TABLE>
<CAPTION>
(UNAUDITED)
SIX MONTHS
ENDED
JUNE 30, 1995
<S> <C>
Revenues:
Health Power, Inc. $25,549,146
CompManagement, Inc. 2,578,267
-----------
$28,127,413
===========
Net income:
Health Power, Inc. $ 737,033
CompManagement, Inc. 356,681
-----------
$ 1,093,714
===========
</TABLE>
3. ACCOUNTS RECEIVABLE:
Accounts receivable consist of the following:
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
Primary care providers (Note 11) $ 118,601 $ 561,046
Reinsurance recoverable on paid
claims (Note 7) 203,374 739,487
Reinsurance recoverable on unpaid
claims (Note 7) 451,666 398,721
Premiums receivable 753,004 33,322
Contract receivables 3,689,270 425,846
Other 363,020 216,984
----------- -----------
5,578,935 2,375,406
----------- -----------
Less allowance for doubtful
accounts (301,433) (118,016)
----------- -----------
$ 5,277,502 $ 2,257,390
=========== ===========
</TABLE>
Accounts receivable from primary care providers primarily represent
amounts due for referral claims paid by the Company on behalf of
capitated Medicaid primary care providers. Premium receivables include
these amounts primarily due from commercial contracts billed during 1997
and 1996, respectively. Contract receivables primarily represent amounts
due from the OBWC
12
<PAGE> 49
HEALTH POWER, INC., AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
for incentive and bonus earned of approximately $2,558,500 in the fourth
quarter of 1997. The Company maintains an allowance for doubtful accounts
when the receivable is deemed uncollectible.
4. DEPOSITS AND OTHER ASSETS:
Deposits and other assets consist of the following:
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
Certificates of deposit $ 920,379 $420,381
Deposits and other 120,497 122,837
---------- --------
$1,040,876 $543,218
========== ========
</TABLE>
Certificates of deposit represent amounts held on deposit or pledged
under the terms of the HMO's Certificate of Authority with the Ohio
Department of Insurance and the Ohio Department of Human Services.
5. HEALTH CARE COSTS PAYABLE:
Activity in health care costs payable is summarized as follows:
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
Balance at January 1 $10,896,149 $ 6,754,001
Incurred related to:
Current year 49,511,766 57,441,618
Prior year 1,579,451 (153,995)
----------- ------------
Total incurred 51,091,217 57,287,623
Paid related to:
Current year 43,701,340 47,462,999
Prior year 11,597,997 5,682,476
----------- ------------
Total paid 55,299,337 53,145,475
Balance at December 31 $ 6,688,029 $ 10,896,149
=========== ============
</TABLE>
13
<PAGE> 50
HEALTH POWER, INC., AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
The Company's HMO went through a claims vendor conversion at the end of
1996 and into 1997 and due to this conversion the health care costs
payable had to be adjusted during 1997.
6. RISK-SHARING FUNDS AND CAPITATION COSTS WITHHELD:
In 1997 and 1996, the Company's HMO provided incentives to capitated
primary care providers to promote appropriate utilization and control of
hospital and ancillary medical costs. These incentives included withholds
and risk-sharing funds. Risk-sharing funds were established using
budgeted amounts and shared with providers based on actual utilization
and health care cost experience.
The Company's HMO withholds 10%-20% of fees due certain commercial
primary care providers and 10% of fees due Medicaid primary care
providers as a reserve for potential excessive utilization. The balances
in these reserve accounts were retained by the Company or remitted to the
providers at the end of the year at the discretion of the Company.
During 1997 and 1996, the Company elected not to remit any capitation
costs withheld and risk-sharing funds. The Company retained $51,097 and
$177,105 of capitation costs withheld from commercial primary care
providers in 1997 and 1996, respectively, and retained $361,719 and
$825,254 of capitation costs withheld from Medicaid primary care
providers in 1997 and 1996, respectively. Retained costs were netted
against health care costs in the fourth quarter 1997 and 1996.
In July 1997, the Company's HMO discontinued these incentives for the
Medicaid business.
7. COMMITMENTS:
The Company's HMO maintains stop-loss insurance coverage for 85% of
inpatient hospital costs in excess of $50,000 ($40,000 prior to April 1,
1996) per Medicaid member, per contract year. The HMO also maintains
stop-loss insurance coverage for varying percentages (generally 80%) of
inpatient hospital costs in excess of $75,000 per commercial member, per
contract year, subject to certain limitations. These reinsurance
contracts do not relieve the Company of its obligations to commercial
members, and failure of reinsurers to honor their obligations could
result in losses to the Company.
Stop-loss insurance premiums of $1,872,282, $1,848,274 and $1,500,957 are
included in health care costs for 1997, 1996 and 1995, respectively.
Stop-loss recoveries of $1,178,104, $1,897,806 and $1,248,179 are
deducted from health care costs for 1997, 1996 and 1995, respectively.
14
<PAGE> 51
HEALTH POWER, INC., AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
Effective January 1, 1997, the HMO entered into an agreement to outsource
the claims adjudication and payment process and other administrative
functions related to the HMO's Medicaid and commercial members with a
third-party administrator. The HMO incurred approximately $1,358,000 of
operating expenses under this agreement as of December 31, 1997. In
November 1997, the HMO terminated the original agreement and contracted a
new third-party administrator in December 1997. The new administrative
and claim processing agreement is for five years beginning on May 1, 1998
and the fees are subject to adjustment at the end of each twelve-month
period. The operating expenses to be incurred under these agreements for
1998 is approximately $1,764,000 and for the years 1999 to 2002, at a
minimum of approximately $600,000 per year.
CompManagement is party to employment agreements with certain employees.
The agreements call for certain levels of commission expense to be paid
by CompManagement to these individuals for selected contract revenue
earned over a two-year period, which ended in July 1996. In 1997,
CompManagement and CompManagement Health Systems amended the above
employee agreements to include certain commissions to be paid to certain
employees based on a percent of contract revenue recorded from the
managed care administrative services provided to the OBWC and extended
the agreement to December 31, 1999. Total commission expense paid in 1997
and 1996 in connection with these agreements was approximately $2,050,000
and $74,000, respectively.
8. INCOME TAXES:
The Company and its subsidiaries file a consolidated federal income tax
return.
The (provision) benefit for income taxes in 1997, 1996 and 1995 consists
of the following:
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
Current $ (549,692) $ 2,374,360 $(25,726)
Deferred 2,190,602 (601,696) 39,392
----------- ----------- --------
$ 1,640,910 $ 1,772,664 $ 13,666
=========== =========== ========
</TABLE>
15
<PAGE> 52
HEALTH POWER, INC., AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
The significant components of the deferred tax benefit (expense) for the
years ended December 31, 1997, 1996 and 1995 were as follows:
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
Deferred tax (expense) benefit
from change in temporary
differences $ (266,447) $ 1,855,353 $39,392
Reversal (establishment) of valuation
allowance 2,457,049 (2,457,049)
----------- ----------- -------
$ 2,190,602 $ (601,696) $39,392
=========== =========== =======
</TABLE>
A reconciliation of the Company's effective income tax rate, as reflected
in the consolidated statement of operations, to the statutory federal tax
rate is as follows:
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
Federal income tax (expense) benefit
at the statutory rate $ (466,779) $ 3,795,723 $(28,033)
State and local income taxes, net
of federal tax benefit (370,688) 285,769 48,054
Tax-exempt interest 61,762 117,393
Acquisition costs (111,286)
Business meals (23,886) (11,950) (11,237)
Reversal (establishment) of
valuation allowance 2,457,049 (2,457,049)
Other 45,214 98,409 (1,225)
----------- ----------- --------
Effective tax benefit $ 1,640,910 $ 1,772,664 $ 13,666
=========== =========== ========
</TABLE>
16
<PAGE> 53
HEALTH POWER, INC., AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
The components of the net deferred tax asset as of December 31, 1997 and
1996 were as follows:
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
Deferred tax assets:
Health care costs payable $ 394,129 $ 515,751
Membership acquisition 1,589,400 1,707,133
Bad debt allowance 124,172
Deferred contract revenue 49,321 61,651
Credits carryforward 216,799 216,799
Other 18,140 73,109
---------- -----------
2,391,961 2,574,443
---------- -----------
Deferred tax liabilities:
Property and equipment 68,491 63,141
Prepaid expenses 129,679 48,939
Other 3,189 5,314
---------- -----------
201,359 117,394
---------- -----------
Net deferred tax asset before
valuation allowance 2,190,602 2,457,049
---------- -----------
Less valuation allowance 0 (2,457,049)
---------- -----------
Net deferred tax asset $2,190,602 $ 0
========== ===========
</TABLE>
Due to the current consolidated profitable operations of the Company,
management believes that it is more likely than not that the Company will
generate sufficient future taxable income to realize the entire deferred tax
asset, therefore, the valuation allowance established in 1996 has been reversed.
At December 31, 1997 the Company had the following net federal investment
credits and tax credit carryforwards available:
<TABLE>
<CAPTION>
Expiration Dates Investment Credits Tax Credits
---------------- ------------------ -----------
<S> <C> <C>
1997-1998 $38,139
No expiration $178,660
</TABLE>
17
<PAGE> 54
HEALTH POWER, INC., AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
9. Ohio Department of Human Services Contracts:
The Company's Medicaid revenue is derived from a contract with the ODHS.
The Company's current contract with ODHS expires September 30, 1998.
Management expects the ODHS contract to be renewed for the 1998-1999
contract year.
In January 1998, the Company's HMO has entered into agreements to sell
the contract rights for its Medicaid membership in the Youngstown
(Mahoning County) and Cleveland (Cuyahoga County) Ohio area. The HMO has
agreed to a sales price per Medicaid member of $305 and $325 for the
Youngstown contract and Cleveland contract, respectively. These members
represent 9% of total Medicaid members at December 31, 1997. In addition,
it has entered into an agreement to transfer the contract right for its
Butler County Medicaid membership in exchange for contract rights of the
unaffiliated entity's Montgomery County Medicaid membership. These
transactions are subject to certain conditions and approval of the
Department and ODHS. Management expects to complete the transactions in
the second quarter of 1998.
10. Leases:
The Company has various operating leases for office space and equipment.
The leases have initial terms of up to fifteen years, contain certain
escalation clauses, and provide for renewal options for up to 10 years.
As of December 31, 1997, future minimum rental payments under the leases
are as follows:
<TABLE>
<CAPTION>
<S> <C> <C>
1998 $ 1,382,415
1999 1,065,304
2000 1,035,301
2001 879,552
2002 840,612
Thereafter 9,152,783
-----------
$14,355,967
===========
</TABLE>
Rental expense was approximately $967,040, $577,756 and $549,824, for
1997, 1996 and 1995, respectively, which includes $60,460 paid to
affiliates for 1995.
18
<PAGE> 55
HEALTH POWER, INC., AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
11. Related-Party Transactions:
The Company engages in transactions with medical centers and companies
controlled by certain shareholders and directors of the Company and its
subsidiaries, which are herein referred to as affiliates or affiliated
providers, as follows:
a. Health Care Providers: During 1997, 1996 and 1995, primary care and
physician-related costs of $1,485,107, $2,854,159 and $2,127,691,
respectively, resulted from transactions between the Company's HMO and
affiliated providers. Such transactions resulted in receivables from
related primary care providers of $31,570 and $150,026, as of December
31, 1997 and 1996.
b. Commercial Revenue: Certain affiliated providers have contracted with
the Company's HMO to provide health care services to their employees
and dependents. The Company recognized commercial premiums from these
affiliated providers in the amounts of $65,793, $137,223 and $152,774
in 1997, 1996 and 1995, respectively.
12. Stock Options and Awards:
a. Stock-Based Compensation Plans: The Company sponsors various
stock-based incentive compensation plans (the Plans) for directors and
eligible employees. The Company applies APB Opinion 25 and related
interpretations in accounting for the Plans. In 1995, the Financial
Accounting Standards Board (FASB) issued FASB Statement No. 123
Accounting for Stock-Based Compensation (SFAS 123) which, if fully
adopted by the Company, would change the methods the Company applies
in recognizing the cost of the Plans. Adoption of the cost recognition
provisions of SFAS 123 is optional, and the Company has decided not to
elect these provisions of SFAS 123. However, pro forma disclosures as
if the Company adopted the cost recognition provisions of SFAS 123 are
required by SFAS 123 and are presented below.
Under the Plans, the Company is authorized to issue shares of common
stock pursuant to "awards" granted in various forms, including
incentive stock options (intended to qualify under Section 422 of the
Internal Revenue Code of 1986, as amended), nonqualified stock
options, and other similar stock-based awards to directors and
eligible employees of the Company for up to 400,000 common shares of
the Company. The Company granted stock options in 1997, 1996 and 1995
under the Plans in the form of incentive stock options and
nonqualified stock options. In January 1997, the Company registered
35,000 shares of common stock for the 1996 directors' stock award
plan. In February 1998, the Company registered 180,000 shares of
common stock under an executive stock option plan.
19
<PAGE> 56
HEALTH POWER, INC., AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
b. Employee and Director Stock Options: The Company granted market price
stock options in 1997, 1996 and 1995 to employees and directors. The
stock options granted in 1997, 1996 and 1995 have terms of 10 years.
The options granted to directors were vested immediately on the grant
date. The options granted to employees vest at the rate of 25% per
year on each of the first four anniversaries of the date of grant.
Options granted to various executives vest 100% at the end of six
years (subject to acceleration to a two-year period depending on the
performance of the Company or at the discretion of the Compensation
Committee). In accordance with APB 25, the Company has not recognized
any compensation cost for these stock options granted in 1997, 1996
and 1995.
A summary of the status of the Company's stock options, and the
changes during the years is presented below:
<TABLE>
<CAPTION>
1997 1996 1995
----------------------- -----------------------------------------------
Weighted Weighted Weighted
# Shares of Average # Shares of Average # Shares of Average
Underlying Exercise Underlying Exercise Underlying Exercise
Options Prices Options Prices Options Prices
----------- ----------- ----------- ----------------------------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of 204,615 $11.49 146,334 $13.43 71,341 $12.22
year
Granted 78,778 3.92 83,512 8.33 92,174 14.22
Exercised 26,077 9.02 0 0 1,052 11.00
Expired 12,545 11.89 25,231 12.26 16,129 12.75
Outstanding at the end of year 244,771 9.36 204,615 11.50 146,334 13.43
Exercisable at end of year 95,124 11.52 75,232 12.25 21,740 12.99
Weighted-average fair value of
options granted during year $ 1.83 $ 4.73 $ 7.75 $
</TABLE>
The fair value of each stock option granted is estimated on the date of
grant using the Black-Scholes option-pricing model with the following
weighted-average assumptions for grants in 1997, 1996 and 1995,
respectively: no dividend yield for all years; risk-free interest rates
are different for each grant and range from 5.44% to 7.06%; the expected
lives of options are estimated to be five years; and a volatility of
41.97% for 1997 grants and 54.73% for 1996 and 1995 grants.
20
<PAGE> 57
HEALTH POWER, INC., AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
The following table summarizes information about stock options
outstanding at December 31, 1997:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
Weighted
Average Weighted Weighted
Number of Remaining Average Number Average
Range of Outstanding Contractual Exercise Exercisable Exercise
Exercise Prices at 12/31/97 Life Price at 12/31/97 Price
<S> <C> <C> <C> <C> <C>
$3.25 to 4.00 70,908 9.30 $ 3.92 8,000 $ 3.25
$7.00 to 9.00 65,925 8.34 8.32 16,837 7.98
$11.00 to 15.31 107,938 6.92 13.57 70,287 13.30
------- ---- ------ ------ ------
$3.25 to $15.31 244,771 7.99 $ 9.36 95,124 $11.52
</TABLE>
c. ProForma Net Income and Net Income per Common Share: Had the
compensation cost for the Company's stock-based compensation plans
been determined consistent with SFAS 123, the Company's net income and
net income per common share for 1996 and 1997 would approximate the
pro forma amounts below:
<TABLE>
<CAPTION>
As As As
Reported Pro Forma Reported Pro Forma Reported Pro Forma
12/31/97 12/31/97 12/31/96 12/31/96 12/31/95 12/31/95
<S> <C> <C> <C> <C> <C> <C>
Net income (loss) $3,013,788 $2,904,414 $(9,483,364) $(9,628,842) $ 96,117 $ (26,724)
Net income per
common share,
diluted 0.79 0.76 (2.49) (2.53) 0.03 (0.01)
</TABLE>
The effects of applying SFAS 123 in this pro forma disclosure are not
indicative of future amounts. SFAS 123 does not apply to awards prior
to 1995.
d. MedOhio Stock Options: During 1996, the Company entered into a
management agreement with Med Ohio Health, Inc., and Med Ohio Health
Plan, Inc., to offer a managed care product. In connection with this
agreement, MedOhio was granted the option to purchase 25,000 shares of
common stock of the Company. Each option has an exercise price of
$6.50 per share. This option vests based on performance over the
four-year period beginning with the year closing on June 30, 1997 and
ending with the year closing on June 30, 2000. At the end of each year
within this period, 6,250 options will vest if a predetermined number
of new members are added by MedOhio for the year (otherwise, the 6,250
options are forfeited). At June 30, 1997, all 6,250 options were
forfeited.
Each of the options has a fair value of $3.36 for purposes of SFAS
123. The fair value of each stock option is estimated on the date of
grant using the Black-Scholes option-pricing model with the following
assumptions: no dividend yield; a risk-free interest rate of 6.64%; an
expected life of five years; and a volatility of 54.73%. Based on the
21
<PAGE> 58
HEALTH POWER, INC., AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
current status of the Company and MedOhio's performance (number of new
members added) to date, the Company has determined that it is likely
that the 1997 options will not vest. As a consequence and in
accordance with SFAS 123, the Company has not yet recognized any
expense for these options. Outstanding options at December 31, 1997
was 18,750 and have a remaining contractual life of five and one-half
years and an exercise price of $6.50 per share. In February 1998, the
agreement with Med Ohio Health, Inc. was terminated and all available
options were forfeited.
13. Employee Benefits Plans:
The Company maintains 401(k) plans for its employees meeting certain age
requirements and completing six months to one year of employment. The
Company may make discretionary contributions not to exceed 1% and 6% of
the participant's compensation for the plan year for Health Power HMO and
CompManagement, respectively. The Company's discretionary contributions
to the 401(k) plans were approximately $56,308, $37,829 and $40,221 for
1997, 1996 and 1995, respectively.
14. Agreements with the Ohio Department of Insurance:
As of December 31, 1997, Ohio law required HMO's providing both basic and
supplemental health care services to maintain statutory net worth in an
amount such that admitted assets were equal to at least one hundred and
ten percent of liabilities, but in no event less than $500,000. At
December 31, 1997, the statutory net worth of the Company's HMO was
$577,350, which did not meet these minimum statutory net worth
requirements. This failure will cause the Company's HMO to submit a
corrective action plan to the Department.
In June 1997, the General Assembly of the State of Ohio passed
legislation which, among other things, requires HMOs that provide both
basic and supplemental health care services to maintain, as of January 1,
1998, statutory net worth in an amount such that admitted assets are
equal to at least one hundred ten percent of liabilities, but in no event
less than $1,700,000, and deposits to be maintained with the Ohio
Department of Insurance of $400,000. The HMOs are permitted to phase-in
the minimum statutory net worth requirement over a three-year period,
beginning January 1, 1998. In addition, the law permits a phase-in of the
deposits to be maintained, however, the Company's HMO has met this
deposit requirement at December 31, 1997. At January 1, 1998, the
Company's HMO did not meet the new statutory net worth requirements.
Management will provide its corrective action plan to the Department.
Additionally, the board of directors has adopted a resolution authorizing
and directing the officers of the Company and its subsidiaries to take
appropriate action, as may be directed or approved by the Department of
Insurance, to increase the HMO's statutory net worth to meet the new
minimum net worth requirements.
22
<PAGE> 59
HEALTH POWER, INC., AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
On March 20, 1997, the Company's HMO was released from the December 5,
1996, order of supervision issued by the Department. The release occurred
after affiliates of the HMO paid cash and transferred property in payment
of, and pledged a certificate of deposit as security for, amounts due to
the HMO, which actions satisfied the Department's supervision release
requirements.
Payment of dividends by HMOs is subject to prior approval by the
Department when the fair market value of the dividend or distribution,
inclusive of any other dividends or distributions made within the
preceding 12 months, is in excess of 10% of the HMO's total statutory net
worth as of the preceding December 31. As a result of the HMO's failure
to meet the statutory net worth requirements at December 31, 1997 and
January 1, 1998, no dividends can be paid by the HMO to the Company.
15. Initial Public Offering:
In March 1994, the Company issued 915,060 shares of common stock in
connection with an initial public offering.
In connection with the initial public offering, the Company issued
warrants to its underwriters to purchase 30,000 shares of common stock at
an exercise price of $13.20. None of the warrants has been exercised as
of December 31, 1997. The warrants expire on March 3, 1999.
23
<PAGE> 60
HEALTH POWER, INC., AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
16. Segments:
The Company operates in three business segments, HMO, workers' and
unemployment compensation consulting services, and managed care services
for the OBWC. Separate results of the consolidated Company's segments for
the period ended December 31, 1997 are as follows:
<TABLE>
<CAPTION>
Managed
Consulting Care
HMO Services Services Eliminations Consolidations
<S> <C> <C> <C> <C>
Revenues to unaffiliated $53,630,526 $10,913,374 $11,269,270 $75,813,170
customers
Intersegment revenues 483,975 $(483,975) 0
----------- ----------- ----------- --------- -----------
Total Revenues 54,114,501 $10,913,374 $11,269,270 (483,975) 75,813,170
=========== =========== =========== ========= ===========
Operating (loss) profit (5,471,985) 2,834,801 3,077,625 440,441
=========== =========== =========== ========= ===========
General corporate expenses (288,313)
Interest income and other, net 1,220,750
-----------
Income From:
Continuing operations
Before income taxes 1,372,878
===========
Identifiable assets at 12/31/97 $14,837,428 $ 5,406,765 $ 4,615,448 $(4,669,419) $20,190,227
=========== =========== =========== =========== ===========
Corporate assets 327,383
-----------
Total assets at 12/31/97 $20,517,610
===========
</TABLE>
Operating (loss) profit is total revenue less operating expenses. In
computing operating (loss) profit, the following items are not included:
general corporate expenses, interest income and expense and income taxes.
Depreciation for the HMO, consulting services, and managed care services
segments for the year ended December 31, 1997 were $296,334, $142,145,
and $74,176, respectively. Capital expenditures for the three segments
were $64,181, $515,288 and $628,558, respectively for the year ended
December 31, 1997.
Identifiable assets by segment are those assets that are used in the
Company's operations in each segment. Corporate assets are principally
cash, prepaids and property, plant and equipment.
24
<PAGE> 61
HEALTH POWER, INC., AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
17. Supplemental Disclosures for Earnings Per Share:
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
Basic:
Earnings:
Net income (loss) $3,013,788 $(9,483,364) $ 96,117
---------- ----------- ----------
Shares:
Weighted average common shares
outstanding 3,818,465 3,810,331 3,809,757
========== =========== ==========
Net income (loss) per common share, basic 0.79 (2.49) 0.03
========== =========== ==========
Diluted:
Earnings:
Net income (loss) 3,013,788 (9,483,364) 96,117
---------- ----------- ----------
Shares:
Weighted average common shares
outstanding 3,818,465 3,810,331 3,809,757
Add: dilutive effect of outstanding
options 14,185 9,399
---------- ----------- ----------
Weighted average common shares
outstanding, diluted $3,832,650 $ 3,810,331 $3,819,156
========== =========== ==========
Net income (loss) per common share, diluted $ 0.79 $ (2.49) $ 0.03
========== =========== ==========
</TABLE>
25
<PAGE> 62
HEALTH POWER, INC., AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
18. Parent Company Only:
Condensed balance sheets of Health Power, Inc. (parent company only) as
of December 31, 1997 and 1996 and the condensed statements of operations
and cash flows for the years ended December 31, 1997, 1996 and 1995 are
as follows:
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS 1997 1996
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 96,717 $1,472,844
Accounts receivable, intercompany, net 1,880,947 455,287
Prepaid expenses and other 417 4,315
---------- ----------
Total current assets 1,978,081 1,932,446
Investment in subsidiaries, on equity basis 5,586,740 2,586,135
---------- ----------
Total assets $7,564,821 $4,518,581
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Stockholders' equity $7,564,821 $4,518,581
---------- ----------
Total liabilities and stockholders' equity $7,564,821 $4,518,581
========== ==========
</TABLE>
26
<PAGE> 63
HEALTH POWER, INC., AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
CONDENSED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
Interest income $ 19,975 $ 179,907 $ 338,974
General and administrative expenses 14,500
----------- ----------- ---------
Income before income taxes and
equity in operations of
subsidiaries 19,975 179,907 324,474
Federal, state and local income tax
(expense) benefit (6,792) 72,073
----------- ----------- ---------
Income before equity in operations
of subsidiaries 13,183 179,907 396,547
Equity in the income (loss) of subsidiaries 3,000,605 (9,663,271) (300,430)
----------- ----------- ---------
Net income (loss) $ 3,013,788 $(9,483,364) $ 96,117
=========== =========== =========
</TABLE>
27
<PAGE> 64
HEALTH POWER, INC., AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 3,013,788 $(9,483,364) $ 96,117
Adjustments to reconcile net income (loss)
to net cash provided
by (used in):
Issuance of common stock for director's
plan 32,452
Incentive stock bonus plans 152,164
Equity in net (income) loss of
subsidiaries (3,000,605) 9,663,271 300,430
Deferred income taxes 640,715 (5,850)
Changes in current assets and
current liabilities:
Prepaid expenses and other 3,898 26,500 4,279
Accounts receivable, intercompany (1,425,660) (140,714) (314,573)
Accounts payable, intercompany (1,010,233)
----------- ----------- -----------
Net cash (used in) provided by
operating activities (1,376,127) 706,408 (777,666)
----------- ----------- -----------
Cash flows from financing activities:
Capital infusion to HMO subsidiary (7,500,000)
-----------
Net cash used in financing activities (7,500,000)
----------- ----------- -----------
Net decrease in cash and cash equivalents (1,376,127) (6,793,592) (777,666)
Cash and cash equivalents, beginning of
year 1,472,844 8,266,436 9,044,102
----------- ----------- -----------
Cash and cash equivalents, end of
year $ 96,717 $ 1,472,844 $ 8,266,436
=========== =========== ===========
</TABLE>
There were no cash dividends paid by the Company's consolidated subsidiaries to
the Company in 1997, 1996, or 1995.
28
<PAGE> 65
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT
Information required under this Item with respect to directors will be
contained in the Company's proxy statement to be filed within 120 days of
December 31, 1997, and is hereby incorporated herein by reference. Information
regarding the executive officers of the Company may be found under the caption
"Executive Officers of the Company" in Part I, and is also incorporated by
reference into this Item 10.
ITEM 11. EXECUTIVE COMPENSATION
Information required under this Item will be contained in the Company's
proxy statement to be filed within 120 days of December 31, 1997, and is hereby
incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information required under this Item will be contained in the Company's
proxy statement to be filed within 120 days of December 31, 1997, and is hereby
incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information required under this Item will be contained in the Company's
proxy statement to be filed within 120 days of December 31, 1997, and is hereby
incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a)(1) Financial Statements
The following financial statements of the Company are included
in Item 8:
Consolidated Balance Sheets as of December 31, 1997 and 1996
Consolidated Statements of Operations for the Years Ended
December 31, 1997, 1996, and 1995
Consolidated Statements of Stockholders' Equity for the Years
Ended December 31, 1997, 1996, and 1995
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1997, 1996, and 1995
Notes to Consolidated Financial Statements
Report of Independent Accountants
<PAGE> 66
(a)(2) Financial Statement Schedules
All financial statement schedules have been omitted because
they are not applicable or the required information is
included in the Company's consolidated financial statements or
notes thereto.
(a)(3) Listing of Exhibits
<TABLE>
<CAPTION>
If Incorporated by Reference,
Exhibit Document with which Exhibit was
No. Description of Exhibit Previously Filed with SEC
--- ---------------------- -------------------------------
<S> <C> <C>
3(a) Amended and Restated Certificate of Registration Statement on Form S-1,
Incorporation of Health Power, Inc. File No. 33-74124 (see Exhibit 3(a)
therein).
3(b) Amended and Restated By-Laws of Registration Statement on Form S-1,
Health Power, Inc. File No. 33-74124 (see Exhibit 3(b)
therein).
4 Form of stock certificate. Amendment No. 2 to Registration
Statement on Form S-1, File No. 33-
74124 (see Exhibit 4(b) therein).
10(a) Provider Agreement between the State Annual Report on Form 10-K for the
of Ohio, Department of Human fiscal year ended December 31,
Services, and Health Power HMO, Inc., 1995, File No. 0-23220 (see Exhibit
dated December 29, 1995, as amended. 10(a) therein).
10(b) Agreement between Ohio Bureau of Contained herein.
Workers' Compensation and
CompManagement Health Systems, Inc.,
dated February 14, 1997,
as amended February 12, 1998.
10(c) Form of Indemnification Agreement Registration Statement on Form S-1,
between Health Power, Inc. and each of File No. 33-74124 (see Exhibit 10(i)
its officers and directors. therein).
10(d) Primary Care Provider Agreement Annual Report on Form 10-K for the
between Over The Rhine Family Care, fiscal year ended December 31,
Inc. and Health Power of Columbus, 1995, File No. 0-23220 (see Exhibit
Inc., dated July 1, 1994. 10(f) therein).
10(e) Primary Care Provider Agreement Annual Report on Form 10-K for the
between Fairmont Family Practice and fiscal year ended December 31,
Health Power HMO, Inc., dated 1995, File No. 0-23220 (see Exhibit
December 1, 1995. 10(g) therein).
10(f) Primary Care Provider Agreement Registration Statement on Form S-1,
between Parsons Avenue Medical Clinic File No. 33-74124 (see Exhibit 10(o)
and Health Power of Columbus, Inc., therein).
dated January 19, 1984.
</TABLE>
<PAGE> 67
<TABLE>
<CAPTION>
If Incorporated by Reference,
Exhibit Document with which Exhibit was
No. Description of Exhibit Previously Filed with SEC
--- ---------------------- -------------------------------
<S> <C> <C>
10(g) Primary Care Provider Agreement Registration Statement on Form S-1,
between Westland Family Practice File No. 33-74124 (see Exhibit 10(p)
Associates, Inc. and Health Power of therein).
Columbus, Inc., dated April 17, 1984.
10(h) Primary Care Provider Agreement Registration Statement on Form S-1,
between Schear Family Practice Center File No. 33-74124 (see Exhibit 10(q)
East and Health Power of Dayton, Inc., therein).
dated October 15, 1984.
10(i) Primary Care Provider Agreement Registration Statement on Form S-1,
between Schear Family Practice Center File No. 33-74124 (see Exhibit 10(r)
West and Health Power of Dayton, therein).
Inc., dated October 11, 1984.
10(j) Primary Care Provider Agreement Registration Statement on Form S-1,
between Needmore Medical Center and File No. 33-74124 (see Exhibit 10(s)
Health Power of Dayton, Inc., dated therein).
May 1, 1993.
10(k) Primary Care Provider Agreement Registration Statement on Form S-1,
between Child Care Consultants and File No. 33-74124 (see Exhibit 10(t)
Health Power of Columbus, Inc., dated therein).
August 1, 1990.
10(l)* Employment Agreement between Health Contained herein.
Power Management Corporation and
Dr. Bernard F. Master, dated as of May
1, 1997.
10(m)* Employment Agreement between Health Contained herein.
Power Management Corporation and
Dr. Bernard Master, dated as of
January 15, 1998.
10(n)* Employment Agreement between Quarterly Report on Form 10-Q for
CompManagement, Inc. and Robert J. the quarterly period ended June 30,
Bossart, dated as of July 21, 1995. 1995, File No. 0-23220 (see Exhibit
10(c) therein).
10(o)* Amendment to Employment Agreement Annual Report on Form 10-K for the
between CompManagement, Inc. and fiscal year ended December 31,
Robert J. Bossart, dated as of October 1996, File No. 0-23220 (see Exhibit
31, 1996. 10(t) therein).
10(p)* Second Amendment to Employment Contained herein.
Agreement between CompManagement,
Inc. and Robert J. Bossart, dated as of
December 15, 1997.
10(q)* Employment Agreement between Quarterly Report on Form 10-Q for
CompManagement, Inc. and Jonathan the quarterly period ended June 30,
R. Wagner, dated as of July 21, 1995. 1995, File No. 0-23220 (see Exhibit
10(d) therein).
</TABLE>
<PAGE> 68
<TABLE>
<CAPTION>
If Incorporated by Reference,
Exhibit Document with which Exhibit was
No. Description of Exhibit Previously Filed with SEC
--- ---------------------- -------------------------------
<S> <C> <C>
10(r)* Amendment to Employment Agreement Annual Report on Form 10-K for the
between CompManagement, Inc. and fiscal year ended December 31,
Jonathan R. Wagner, dated as of 1996, File No. 0-23220 (see Exhibit
October 31, 1996. 10(v) therein).
10(s)* Second Amendment to Employment Contained herein.
Agreement between CompManagement,
Inc. and Jonathan R. Wagner, dated as
of December 15, 1997.
10(t)* Employment Agreement between Quarterly Report on Form 10-Q for
CompManagement, Inc. and Richard T. the quarterly period ended June 30,
Kurth, dated as of July 21, 1995. 1995, File No. 0-23220 (see Exhibit
10(e) therein).
10(u)* Amendment to Employment Agreement Annual Report on Form 10-K for the
between CompManagement, Inc. and fiscal year ended December 31,
Richard T. Kurth, dated as of October 1996, File No. 0-23220 (see Exhibit
31, 1996. 10(x) therein).
10(v)* Second Amendment to Employment Contained herein.
Agreement between CompManagement,
Inc. and Richard T. Kurth, dated as of
December 15, 1997.
10(w)* Health Power, Inc. 1996 Directors Registration Statement on Form S-8,
Stock Award and Purchase Plan. File No. 333-20535 (see Exhibit 4(d)
therein).
10(x)* Amendment No. 1 to Health Power, Contained herein.
Inc. 1996 Directors Stock Award and
Purchase Plan.
10(y)* Health Power, Inc. 1985 Nonqualified Registration Statement on Form S-1,
Directors' Stock Option Plan, as File No. 33-74124 (see Exhibit
amended. 10(w) therein).
10(z)* Health Power, Inc. 1993 Directors Registration Statement on Form S-1,
Stock Option Plan. File No. 33-74124 (see Exhibit 10(x)
therein).
10(aa)* Amendment No. 1 to Health Power, Annual Report on Form 10-K for the
Inc. 1993 Directors Stock Option Plan. fiscal year ended December 31,
1994, File No. 0-23220 (see Exhibit
10(t) therein).
10(bb)* Health Power, Inc. 1994 Stock Option Registration Statement on Form S-1,
Plan. File No. 33-74124 (see Exhibit 10(y)
therein).
10(cc)* Amendment No. 1 to Health Power, Annual Report on Form 10-K for the
Inc. 1994 Stock Option Plan. fiscal year ended December 31,
1994, File No. 0-23220 (see Exhibit
10(v) therein).
</TABLE>
<PAGE> 69
<TABLE>
<CAPTION>
If Incorporated by Reference,
Exhibit Document with which Exhibit was
No. Description of Exhibit Previously Filed with SEC
--- ---------------------- -------------------------------
<S> <C> <C>
10(dd)* Health Power, Inc. 1994 Executive Quarterly Report on Form 10-Q for
Performance Stock Option Plan. the quarterly period ended June 30,
1994, File No. 0-23220 (see Exhibit
(a)(1) therein).
10(ee)* Amendment No. 1 to Health Power, Annual Report on Form 10-K for the
Inc. 1994 Executive Performance Stock fiscal year ended December 31,
Option Plan. 1994, File No. 0-23220 (see Exhibit
10(x) therein).
10(ff)* Amendment No. 2 to Health Power, Annual Report on Form 10-K for the
Inc. 1994 Executive Performance Stock fiscal year ended December 31,
Option Plan. 1995, File No. 0-23220 (see Exhibit
10(dd) therein).
11 Statement Regarding Computation of Contained herein.
Per Share Earnings.
21 Subsidiaries of Health Power, Inc. Contained herein.
23 Consent of Coopers & Lybrand L.L.P. Contained herein.
24 Powers of Attorney for Dr. Bernard F. Contained herein.
Master, Dr. Elliott P. Feldman, Robert
S. Garek, Frank R. Nutis, Dr. Burt E.
Schear, Dr. Peter Somani, Robert J.
Bossart and Crystal A. Kuykendall.
27 Financial Data Schedule Contained herein.
</TABLE>
*Executive compensation plans and arrangements required to be filed
pursuant to Item 601(b)(10) of Regulation S-K.
(b) Reports on Form 8-K
-------------------
No reports on Form 8-K were filed during the fourth quarter of
the Company's fiscal year ended December 31, 1997.
(c) Exhibits
--------
The exhibits in response to this portion of Item 14 are
submitted following the signatures.
(d) Financial Statement Schedules
-----------------------------
All financial statement schedules have been omitted because
they are not applicable or the required information is
included in the Company's consolidated financial statements or
notes thereto.
<PAGE> 70
SIGNATURES
Pursuant to the requirements of Sections 13 or 15(d) 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: March 30, 1998 By /s/DR. BERNARD F. MASTER
------------------------
Dr. Bernard F. Master, Chairman of the Board,
Chief Executive Officer, and President
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of
Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/DR. BERNARD F. MASTER Chairman of the Board, March 30, 1998
- ------------------------------------ Chief Executive Officer,
Dr. Bernard F. Master President, and Director
(principal executive officer)
/s/RONALD J. WURTZ Controller and Chief Financial March 30, 1998
- -------------------------------------- Officer (principal financial
Ronald J. Wurtz and accounting officer)
DR. ELLIOTT P. FELDMAN* Director March 30, 1998
- -------------------------------------
Dr. Elliott P. Feldman
ROBERT J. BOSSART* Director March 30, 1998
- -------------------------------------
Robert J. Bossart
ROBERT S. GAREK* Director March 30, 1998
- -------------------------------------
Robert S. Garek
CRYSTAL A. KUYKENDALL* Director March 30, 1998
- -------------------------------------
Crystal A. Kuykendall
FRANK R. NUTIS* Director March 30, 1998
- -------------------------------------
Frank R. Nutis
DR. PETER SOMANI* Director March 30, 1998
- -------------------------------------
Dr. Peter Somani
DR. BURT E. SCHEAR* Director March 30, 1998
- -------------------------------------
Dr. Burt E. Schear
</TABLE>
*The undersigned, Dr. Bernard F. Master, by signing his name hereto, does hereby
execute this Annual Report on Form 10-K for the Registrant's fiscal year ended
December 31, 1997, on behalf of each of the other above-named directors of the
Registrant pursuant to Powers of Attorney executed by such directors and filed
with the Securities and Exchange Commission as an exhibit to this report.
/s/ DR. BERNARD F. MASTER
- ---------------------------------------
Dr. Bernard F. Master, Attorney in Fact
<PAGE> 71
EXHIBIT INDEX
<TABLE>
<CAPTION>
If Incorporated by Reference,
Exhibit Document with which Exhibit was
No. Description of Exhibit Previously Filed with SEC
--- ---------------------- -------------------------------
<C> <C> <C>
3(a) Amended and Restated Certificate of Registration Statement on Form S-1,
Incorporation of Health Power, Inc. File No. 33-74124 (see Exhibit 3(a)
therein).
3(b) Amended and Restated By-Laws of Registration Statement on Form S-1,
Health Power, Inc. File No. 33-74124 (see Exhibit 3(b)
therein).
4 Form of stock certificate. Amendment No. 2 to Registration
Statement on Form S-1, File No. 33-
74124 (see Exhibit 4(b) therein).
10(a) Provider Agreement between the State Annual Report on Form 10-K for the
of Ohio, Department of Human fiscal year ended December 31,
Services, and Health Power HMO, Inc., 1995, File No. 0-23220 (see Exhibit
dated December 29, 1995, as amended. 10(a) therein).
10(b) Agreement between Ohio Bureau of Contained herein.
Workers' Compensation and
CompManagement Health Systems, Inc.,
dated February 14, 1997,
as amended February 12, 1998.
10(c) Form of Indemnification Agreement Registration Statement on Form S-1,
between Health Power, Inc. and each of File No. 33-74124 (see Exhibit 10(i)
its officers and directors. therein).
10(d) Primary Care Provider Agreement Annual Report on Form 10-K for the
between Over The Rhine Family Care, fiscal year ended December 31,
Inc. and Health Power of Columbus, 1995, File No. 0-23220 (see Exhibit
Inc., dated July 1, 1994. 10(f) therein).
10(e) Primary Care Provider Agreement Annual Report on Form 10-K for the
between Fairmont Family Practice and fiscal year ended December 31,
Health Power HMO, Inc., dated 1995, File No. 0-23220 (see Exhibit
December 1, 1995. 10(g) therein).
10(f) Primary Care Provider Agreement Registration Statement on Form S-1,
between Parsons Avenue Medical Clinic File No. 33-74124 (see Exhibit 10(o)
and Health Power of Columbus, Inc., therein).
dated January 19, 1984.
10(g) Primary Care Provider Agreement Registration Statement on Form S-1,
between Westland Family Practice File No. 33-74124 (see Exhibit 10(p)
Associates, Inc. and Health Power of therein).
Columbus, Inc., dated April 17, 1984.
</TABLE>
<PAGE> 72
<TABLE>
<CAPTION>
If Incorporated by Reference,
Exhibit Document with which Exhibit was
No. Description of Exhibit Previously Filed with SEC
--- ---------------------- -------------------------------
<C> <C> <C>
10(h) Primary Care Provider Agreement Registration Statement on Form S-1,
between Schear Family Practice Center File No. 33-74124 (see Exhibit 10(q)
East and Health Power of Dayton, Inc., therein).
dated October 15, 1984.
10(i) Primary Care Provider Agreement Registration Statement on Form S-1,
between Schear Family Practice Center File No. 33-74124 (see Exhibit 10(r)
West and Health Power of Dayton, therein).
Inc., dated October 11, 1984.
10(j) Primary Care Provider Agreement Registration Statement on Form S-1,
between Needmore Medical Center and File No. 33-74124 (see Exhibit 10(s)
Health Power of Dayton, Inc., dated therein).
May 1, 1993.
10(k) Primary Care Provider Agreement Registration Statement on Form S-1,
between Child Care Consultants and File No. 33-74124 (see Exhibit 10(t)
Health Power of Columbus, Inc., dated therein).
August 1, 1990.
10(l)* Employment Agreement between Health Contained herein.
Power Management Corporation and
Dr. Bernard F. Master, dated as of May
1, 1997.
10(m)* Employment Agreement between Health Contained herein.
Power Management Corporation and
Dr. Bernard Master, dated as of
January 15, 1998.
10(n)* Employment Agreement between Quarterly Report on Form 10-Q for
CompManagement, Inc. and Robert J. the quarterly period ended June 30,
Bossart, dated as of July 21, 1995. 1995, File No. 0-23220 (see Exhibit
10(c) therein).
10(o)* Amendment to Employment Agreement Annual Report on Form 10-K for the
between CompManagement, Inc. and fiscal year ended December 31,
Robert J. Bossart, dated as of October 1996, File No. 0-23220 (see Exhibit
31, 1996. 10(t) therein).
10(p)* Second Amendment to Employment Contained herein.
Agreement between CompManagement,
Inc. and Robert J. Bossart, dated as of
December 15, 1997.
10(q)* Employment Agreement between Quarterly Report on Form 10-Q for
CompManagement, Inc. and Jonathan the quarterly period ended June 30,
R. Wagner, dated as of July 21, 1995. 1995, File No. 0-23220 (see Exhibit
10(d) therein).
10(r)* Amendment to Employment Agreement Annual Report on Form 10-K for the
between CompManagement, Inc. and fiscal year ended December 31,
Jonathan R. Wagner, dated as of 1996, File No. 0-23220 (see Exhibit
October 31, 1996. 10(v) therein).
</TABLE>
<PAGE> 73
<TABLE>
<CAPTION>
If Incorporated by Reference,
Exhibit Document with which Exhibit was
No. Description of Exhibit Previously Filed with SEC
--- ---------------------- -------------------------------
<C> <C> <C>
10(s)* Second Amendment to Employment Contained herein.
Agreement between CompManagement,
Inc. and Jonathan R. Wagner, dated as
of December 15, 1997.
10(t)* Employment Agreement between Quarterly Report on Form 10-Q for
CompManagement, Inc. and Richard T. the quarterly period ended June 30,
Kurth, dated as of July 21, 1995. 1995, File No. 0-23220 (see Exhibit
10(e) therein).
10(u)* Amendment to Employment Agreement Annual Report on Form 10-K for the
between CompManagement, Inc. and fiscal year ended December 31,
Richard T. Kurth, dated as of October 1996, File No. 0-23220 (see Exhibit
31, 1996. 10(x) therein).
10(v)* Second Amendment to Employment Contained herein.
Agreement between CompManagement,
Inc. and Richard T. Kurth, dated as of
December 15, 1997.
10(w)* Health Power, Inc. 1996 Directors Registration Statement on Form S-8,
Stock Award and Purchase Plan. File No. 333-20535 (see Exhibit 4(d)
therein).
10(x)* Amendment No. 1 to Health Power, Contained herein.
Inc. 1996 Directors Stock Award and
Purchase Plan.
10(y)* Health Power, Inc. 1985 Nonqualified Registration Statement on Form S-1,
Directors' Stock Option Plan, as File No. 33-74124 (see Exhibit
amended. 10(w) therein).
10(z)* Health Power, Inc. 1993 Directors Registration Statement on Form S-1,
Stock Option Plan. File No. 33-74124 (see Exhibit 10(x)
therein).
10(aa)* Amendment No. 1 to Health Power, Annual Report on Form 10-K for the
Inc. 1993 Directors Stock Option Plan. fiscal year ended December 31,
1994, File No. 0-23220 (see Exhibit
10(t) therein).
10(bb)* Health Power, Inc. 1994 Stock Option Registration Statement on Form S-1,
Plan. File No. 33-74124 (see Exhibit 10(y)
therein).
10(cc)* Amendment No. 1 to Health Power, Annual Report on Form 10-K for the
Inc. 1994 Stock Option Plan. fiscal year ended December 31,
1994, File No. 0-23220 (see Exhibit
10(v) therein).
10(dd)* Health Power, Inc. 1994 Executive Quarterly Report on Form 10-Q for
Performance Stock Option Plan. the quarterly period ended June 30,
1994, File No. 0-23220 (see Exhibit
(a)(1) therein).
</TABLE>
<PAGE> 74
<TABLE>
<CAPTION>
If Incorporated by Reference,
Exhibit Document with which Exhibit was
No. Description of Exhibit Previously Filed with SEC
--- ---------------------- -------------------------------
<C> <C> <C>
10(ee)* Amendment No. 1 to Health Power, Annual Report on Form 10-K for the
Inc. 1994 Executive Performance Stock fiscal year ended December 31,
Option Plan. 1994, File No. 0-23220 (see Exhibit
10(x) therein).
10(ff)* Amendment No. 2 to Health Power, Annual Report on Form 10-K for the
Inc. 1994 Executive Performance Stock fiscal year ended December 31,
Option Plan. 1995, File No. 0-23220 (see Exhibit
10(dd) therein).
11 Statement Regarding Computation of Contained herein.
Per Share Earnings.
21 Subsidiaries of Health Power, Inc. Contained herein.
23 Consent of Coopers & Lybrand L.L.P. Contained herein.
24 Powers of Attorney for Dr. Bernard F. Contained herein.
Master, Dr. Elliott P. Feldman, Robert
S. Garek, Frank R. Nutis, Dr. Burt E.
Schear, Dr. Peter Somani, Robert J.
Bossart and Crystal A. Kuykendall.
27 Financial Data Schedule Contained herein.
</TABLE>
<PAGE> 1
Exhibit 10(b)
AGREEMENT
between
OHIO BUREAU OF WORKERS' COMPENSATION
and
CompManagement Health Systems, Inc.
This is an Agreement by and between CompManagement Health Systems, Inc.
(hereinafter referred to as the "MCO"), and the State of Ohio, Bureau of
Workers' Compensation (hereinafter referred to as the "Bureau"), having offices
at 30 W. Spring Street, Columbus, Ohio 43266-0581, entered into the day, month
and year set out below.
Whereas, the Bureau is required to administer a health partnership
program (hereinafter referred to as "HPP") under the provisions of Revised Code
Section 4121.44 and the Rules promulgated under the authority of Revised Code
Section 4121.441; and,
Whereas, the Bureau desires to obtain the services of one or more
managed care organizations to provide health care management services to Ohio
employers and injured workers in accordance with the health partnership program;
and,
Whereas, the MCO desires to provide services in support of this
endeavor:
Now, therefore, the parties hereto mutually agree to the following:
1. SCOPE OF SERVICES. The MCO, in consideration of the Bureau's promise to
pay remuneration, shall undertake the work and activities enumerated, defined,
and described as follows:
The MCO shall provide medical management services for all workers'
compensation cases as a result of injuries to employees arising out of
the course and scope of employment as provided by law. The MCO services
shall include provision of a health care provider network; treatment
guidelines and utilization review to evaluate the necessity or
effectiveness of medical care; peer review and quality assurance;
procedures for sanctioning and terminating providers; medical and
vocational case management; utilization management; medical bill
adjudication and payment; dispute resolution; provider, employer and
employee relations and education programs; and health care fraud
detection and applicable reporting to the Bureau. The MCO hereby agrees
to perform the services required by this Agreement in accordance with
said guidelines, standards and procedures submitted with the MCO
Application and approved by the Bureau. The MCO's Application to be a
certified MCO for the HPP is incorporated in this Agreement by
reference. The MCO hereby acknowledges that it has provided the Bureau
with a list of Certified Providers which are enrolled as its provider
panel and will notify the Bureau, enrolled employers, and employees of
any changes to the panel in accordance with the requirements of the HPP
rules. The MCO agrees to review the treatment rendered by all providers
and assist its providers in any manner or means necessary to return the
injured worker to work and to close the case. The MCO shall pay all
providers for services provided to injured workers in accordance with
the HPP rules. The MCO shall establish a quality improvement program
which shall include a peer review panel. The MCO shall profile
providers and compare treatment practices and use the information to
educate its providers and shall continually monitor its providers to
improve the services rendered to injured workers.
<PAGE> 2
The MCO further agrees to abide by all rules established for the Health
Partnership Program (HPP) as set forth Sections 4123-6-01, et seq. of
the Ohio Administrative Code (HPP rules), as may be amended during the
term of this Agreement. These rules are attached as "Appendix A" and
incorporated herein by reference. The MCO hereby acknowledges that as
part of the application process to become certified as a Bureau managed
care organization under the HPP, it has provided the Bureau with the
internal guidelines, standards and procedures established for medical
management of workers' compensation cases and that such procedures are
in accordance with all applicable Federal and Ohio laws.
Bureau policies and MCO reporting requirements are set forth in
"Appendix B: BWC Policy Overview Reference". as may be modified during
the term of this Agreement. This Appendix is attached hereto and is
incorporated herein by reference. The MCO agrees to perform the
services according to reasonable best business practices. The MCO is
responsible for communication with the Bureau Customer Service Teams
and medical management of employers' cases for employers that have
selected them and for employers that have been assigned to them.
The MCO agrees to adhere to the "CARE Systems Trading Partnership
Agreement," the receipt of which is hereby acknowledged. The MCO agrees
to perform in accordance with the electronic interface procedures
contained in the "Bureau Magnetic Media Instructions For Bureau and
Employer Data and MCO Panel Provider Data," the receipt of which is
hereby acknowledged. The MCO agrees to perform in accordance with the
provisions of the "EDI Implementation Guide" regarding the capture,
storage and transmission of case data, and the receipt of which
publication is hereby acknowledged. The MCO further agrees to indemnify
the Bureau or its contractors for or any and all costs incurred to
recover or reconstruct any data lost as a result of the MCO's failure
to adhere to said EDI procedures. EDI terminology is explained by
definition in the "EDI Data Element Dictionary," the receipt of which
is hereby acknowledged. The MCO shall adhere to the following time
period requirements for data transmissions defined in the "EDI Data
Element Dictionary". Mandatory data elements shall be reported via the
148 transaction to the Bureau within 24 hours after the injury is
reported to the MCO. Case information data elements are required to be
reported to the Bureau within 48 hours after being reported to the MCO.
Medical information data elements shall be reported to the Bureau
within 48 hours after initial treatment of the injured worker. The MCO
shall adhere to all data reporting and data accuracy requirements as
defined by the Bureau. The MCO acknowledges and agrees that the Bureau
owns all data transmitted pursuant to this Agreement.
The MCO agrees to identify and report any suspected fraudulent or
deceptive behavior as defined in O.R.C. Section 2913.01(A) and (B),
O.R.C. Section 2913.48 and the criteria and requirements attached
hereto as "Appendix C: Fraud/Special Investigations-MCO Fraud Reporting
and Referral Requirements", as may be modified during the term of this
Agreement, committed by injured workers, employers, providers or any
other person or entity to the Bureau's Fraud/Special Investigations
Department. The MCO agrees to report these incidents and shall supply
supporting preliminary documentation to the Bureau's Fraud/Special
Investigations Department within ten (10) working days of discovery.
The MCO and it agents, subcontractors and assignees agree to provide
the Bureau's Fraud/Special Investigations Department with immediate and
reasonable investigative access to any and all records, data,
electronic storage media, personnel and information relating to any
subjects of an investigation. The Bureau agrees to provide the MCO with
fraud reporting criteria, requirements and processes as defined in
Appendix C. The Bureau and MCO agree to jointly develop and provide
supportive training to the MCO and to the Bureau's Fraud/Special
Investigations Department
<PAGE> 3
personnel in the identification and detection of fraud or deceptive
behavior or patterns. The Bureau and the MCO agree to Jointly develop
and refine detection, reporting and recovery process as needed.
On or before June 30, 1998, the Bureau shall require an independent
auditor's report on the policies and procedures placed in operation at
the MCO and tests of operating effectiveness (Statement on Auditing
Standards No. 70, Level 2 Report). This report shall cover at a minimum
a ten-month period occurring between July 1, 1997, and June 30, 1998.
During the term of this Agreement the MCO shall submit such reports on
or before June 30 of each year covering at a minimum a ten-month period
occurring between July I of the preceding year and the filing deadline.
On or before June 30, 1998, the Bureau shall require independently
audited financial statements from the MCO. The audit report shall cover
a twelve month period ending between July 1, 1997, and June 30, 1998.
During the term of this Agreement, the MCO shall submit such reports on
or before June 30 of each year covering the MCO's most recent fiscal
year.
The parties agree that the cases subject to this Agreement shall be all
cases of employers that select the MCO and all cases of employers
assigned to the MCO, except that for cases involving injuries prior to
March 1, 1997, the groups of cases shall be managed in accordance with
the timeframes specified in "Appendix D: MCO Payment Methodology", as
may be modified during the term of this Agreement. This Appendix is
appended hereto and incorporated by reference.
In addition to managing the cases of employers that select the MCO, the
MCO agrees that the Bureau may assign other employers to the MCO and
the MCO shall service those employers in accordance with the provisions
of this Agreement. The MCO agrees that the Bureau may revoke such
assignment for good cause. Administrative error shall be considered to
be good cause for such revocation of assignment. In the event an
assignment is revoked, the MCO shall provide the Bureau with all
relevant information relating to the cases subject to the assignment
revocation.
It is agreed that the MCO shall have the right to limit assignment and
employer selection by providing the Bureau with written notice that it
is at capacity and that it will accept no further employer selections
or assignments as of the date identified in the notice. The request
should fully disclose and detail any and all reasons for the capacity
limitation request and it should detail the counties where capacity
will be limited. It is further agreed that the capacity limits will
remain in effect for a minimum of twelve (12) months.
2. AMOUNT AND METHOD OF PAYMENT
A. PREMIUM-BASED PAYMENTS. The parties agree to the payment
calculations and the payment schedules described in Appendix D.
B. REIMBURSEMENT FOR PROVIDERS' SERVICES. The MCO agrees to submit to
the Bureau electronic invoices for services performed by the providers in cases
it is managing pursuant to this Agreement. The Bureau agrees to pay properly
submitted electronic invoice(s), subject to approval by the Bureau's
Administrator, or designee, of the electronic invoice and the work represented
thereby, but such approval shall not unreasonably be withheld. The Bureau shall
only pay for authorized provider fees in accordance with the HPP rules. The
Bureau shall use its best efforts to pay the MCO within seven (7) calendar days
of receipt of any electronic invoice(s) by the MCO; however, the required
payment date of such electronic invoices shall be thirty (30) calendar days from
receipt of a proper invoice and such invoices shall accrue interest, in
accordance with the provisions of Revised Code Section 126.30. The MCO shall
<PAGE> 4
submit electronic invoices at a minimum of two times per week via the 837
transaction. The MCO agrees to follow the procedures in the "BWC Policy Overview
Reference" included in Appendix B.
3. TIME OF PERFORMANCE. The MCO and the Bureau agree that, contingent upon
compliance with any and all conditions precedent as provided for herein, all
services required to be performed pursuant to this Agreement shall commence in
accordance with the schedule attached hereto in Appendix D, and shall continue
for two (2) years.
Except for the obligations, promises, covenants and indemnities set
forth in Sections 1,2 and 27 of this Agreement, the obligations, promises,
covenants and indemnities set forth in the remainder of this Agreement and any
documents or portions thereof referenced herein or any subsequent modifications
thereto shall survive termination of this Agreement by either party for any
reason. It is agreed that the Bureau will reimburse the MCO for providers'
services in accordance with Section 2 (B) of this Agreement only if such
invoices are submitted within sixty (60) days of the termination date and only
if such payment is not subject to deduction in accordance with the provisions of
Sections 5 and 6.
This Agreement shall become effective upon the execution by all parties
to the Agreement, and on compliance with any and all conditions precedent.
Subject to mutual agreement, the period covered by this Agreement under the same
terms and conditions stated herein may be renewed for one (1) additional period
of two (2) years, not to exceed a total of four years. All renewals are
conditioned upon the MCO meeting any and all re-certification requirements in
effect at the time of the renewal.
4. EXPENSES. The Bureau shall not be required to pay for or reimburse
the MCO for any other expenses incurred or paid by the MCO in connection with
the performance of services, including publication, travel and staffing
requirements, pursuant to this Agreement. The payment of such expenses is the
sole responsibility of the MCO and not the responsibility of the Bureau.
5. TERMINATION. The Bureau may cancel this Agreement at any time prior
to the commencement of services. Furthermore, the MCO shall have the right to
cancel this Agreement upon ninety (90) days written notice. In the event that
the MCO executes its right to terminate this Agreement, the MCO will develop
with the Bureau a transition plan for the transfer of services to a new MCO
selected by employers or assigned by the Bureau. The transition plan shall
include but not limited to the following: transfer of services, transfer of case
information to a new MCO, uninterrupted service to injured workers, bill
adjudication information for providers, payment plan and refund of overpayment
by the Bureau. In the event the MCO executes its right to terminate this
agreement, the MCO shall not be relieved of any liability for damages sustained
by the Bureau, and the Bureau may withhold further payment due to the MCO
pursuant to this Agreement or otherwise, for the purpose of set-off until such
time as damages due to the Bureau are determined.
The MCO may cancel its duties and obligations under this Agreement at
any time prior to the commencement of services upon notice to the Chief of
Medical Management and Cost Containment of the Bureau, provided that such
termination is without prejudice to the State of Ohio.
The rights of cancellation to which reference is made in this Agreement
are not intended to be exclusive and are in addition to any other rights and
remedies available to either party at law or in equity.
<PAGE> 5
6. DEFAULT. The Bureau declares, and the MCO acknowledges, that the
Bureau may suffer damages due to the failure of the MCO to act in accordance
with the specification, terms and conditions of the Agreement. The MCO agrees
that if the Bureau does not give prompt notice of such failure the Bureau has
NOT WAIVED any of its rights or remedies concerning the failure of performance
by the MCO.
The parties understand that the Bureau may begin proceedings to
decertify the MCO if it fails to perform satisfactorily under this Agreement.
Unless the failure is a result of a force majeure as defined herein, the failure
shall constitute an event of default on the part of the MCO and the Bureau shall
begin proceedings to decertify the MCO.
In the event that a MCO is decertified, the MCO shall be in default and
may be held liable for any additional costs the Bureau incurs in seeking
replacement services. In addition, the MCO may be held liable for liquidated
damages prior to cancellation if the MCO has failed to deliver the service. The
Bureau reserves the right to deduct from any payments due to the MCO liquidated
damages of five percent (5%) of the total annual premium of all employers
covered by this Agreement with the MCO.
MCO acknowledges and agrees that in the event of a breach by the MCO of
the terms of this Agreement, the damages which will be sustained by the Bureau
are not capable of reasonable estimation and the liquidated damages for which
provision is made herein are reasonable under the circumstances. The MCO agrees
that it may be held liable for liquidated damages in addition to the other
remedies available to the Bureau for which provision is made in this Agreement.
7. FORCE MAJEURE. Except as otherwise provided herein, neither the MCO
nor the Bureau shall be liable to the other for any delay or failure of
performance of any provisions contained herein, nor shall any such delay or
failure of performance constitute default hereunder, to the extent that such
delay or failure is caused by force majeure. The term force majeure, as used
herein shall mean without limitation: acts of God, such as epidemics; lightning;
earthquake; fire; storms; tornadoes; floods; washouts; droughts, or other severe
weather disturbances; explosions; arrests; restraint of government and people;
and other such events or any other cause which could not be reasonably foreseen
in the exercise of ordinary care, and which is beyond the reasonable control of
the party affected and said party is unable to prevent.
8. PERFORMANCE BOND. The Bureau may require a performance bond or other
security acceptable to the Bureau in the amount of five percent (5%) of the
total annual premium of all employers covered by this Agreement with the MCO,
which bond shall be submitted by the MCO to the Bureau no later than sixty (60)
days from the execution of this Agreement. When the MCO begins management of the
group of cases incurred on or after October 20, 1993, and before March 1, 1997,
(the "Beta" cases as defined in Appendix D), the bond or other security
acceptable to the Bureau shall be increased to ten percent (10%) of the total
annual premium of all employers covered by this Agreement with the MCO, which
additional bond shall be submitted by the MCO to the Bureau prior to the
acceptance of the "Beta" cases.
The purpose of the bond is to ensure proper performance by the MCO. A
standard bond form from any company authorized to do business within the State
of Ohio is acceptable. The bond shall be made payable to the Treasurer, State of
Ohio, referencing this Agreement. The bond shall remain in effect for the
duration of the Agreement and any renewals thereto. Any action on the part of
the MCO or its bonding company to revoke or cancel the bond prior to the
expiration of the Agreement or any renewal thereto, will be considered as a
breach of this Agreement and will result in the immediate cancellation of this
Agreement. Should this occur, the MCO will be held liable for any additional
costs incurred by the Bureau in seeking replacement services.
<PAGE> 6
9. GENERAL AND PROFESSIONAL LIABILITY INSURANCE. The MCO shall maintain
general and professional liability insurance against claims for bodily injury,
personal injury, death or property damage arising from the services performed by
the MCO, its employees, agents, representatives, or subcontractors, under this
Agreement, effective March 1, 1997, and to continue for the duration of this
Agreement together with any renewals. The Bureau shall be named as an additional
insured under this insurance. Such insurance shall afford initial protection of
not less than three million ($3,000,000.00) for each occurrence with respect to
bodily injury, personal injury or death and not less than three million
($3,000,000.00) for each occurrence with respect to property damage.
10. AMENDMENTS, MODIFICATIONS, SUPPLEMENTS AND READINGS. The parties
may, by mutual agreement, amend, modify, supplement or rescind the terms of this
Agreement. The term "this Agreement" shall be deemed to include any such future
amendments, modifications, renewals, extensions, and supplements. Any such
amendment, modification, renewal, extension, supplement or rescission shall not
be effective unless expressed in writing and signed by the parties hereto.
Any change in the business organization of the MCO that affects its
organizational structure or financial structure must be immediately reported to
the Chief of Medical Management and Cost Containment of the Bureau.
1. MERGER CLAUSE. It is mutually understood and agreed that this
Agreement, with its appendices, and the MCO's Application, with any amendments,
and the "MCO Application & Requirements Training Manual" are incorporated by
reference into this Agreement, and together, represent the entire agreement
between the MCO and the Bureau. The parties have entered into no agreements,
express or implied, other than the Agreement set forth in this writing. It is
further agreed that no parole representation of any amendment, modification,
supplement or rescission of the terms set forth herein shall be given any force
or effect unless such amendment, modification, supplement or rescission shall
have been expressed in writing and signed by the parties and meet any and all
conditions precedent deemed applicable by the Bureau.
12. ORDER OF PRIORITIES. To the extent that the terms and provisions of
the MCO's Application, with any amendments, may be inconsistent with this
writing, and cannot be harmonized herewith, the terms and provisions of this
Agreement shall control followed in order of priority by the Application, with
any amendments, then the "MCO Application & Requirements Training Manual".
13 SEVERABILITY. If for any reason any provision or part of this
Agreement is declared void, invalid, or unenforceable, the validity of the rest
of this Agreement shall not be affected and the Agreement shall remain in full
force and effect with the void, invalid, or unenforceable provision(s)
eliminated.
14. WAIVER. No waiver of any provision of this Agreement shall be valid
unless it is in writing and signed by the party against whom the waiver is
sought to be enforced. Failure of a party to insist upon strict performance of
any provision of this Agreement in any one or more instances shall not be
construed as a waiver or relinquishment of the right to insist upon strict
compliance with such provision in the future.
15. ASSIGNABILITY AND TRANSFER OF RIGHTS AND RESPONSIBILITIES. The MCO
shall not assign, sell, or subcontract any rights, duties or obligations
acquired pursuant to this Agreement without prior written approval by the
Bureau. Such prior written approval by the Bureau shall not be construed to
modify or abrogate the MCO's responsibility and liability pursuant to this
Agreement. Any transfer of the ownership of the MCO shall require
<PAGE> 7
review and Bureau approval before any rights or liabilities of the MCO pursuant
to this Agreement may be assigned to or assumed by a transferee. In the event
that the MCO assigns or subcontracts its duties or obligations under this
Agreement, the MCO will develop with the Bureau a transition plan for the
transfer of services to a new MCO selected by employers or assigned by the
Bureau. The transition plan shall include but not limited to the following:
transfer of services, transfer of case information to a new MCO, uninterrupted
service to injured workers, bill adjudication information for providers, payment
plan and refund of overpayment by the Bureau. The MCO shall pay any related
expenses.
16. NON-DISCRIMINATION. The hiring of employees for the performance of
work under this Agreement shall be done in accordance with Ohio Revised Code
Sections 153.59 and 153.591, and the Governor's Executive Order of January 27,
1972, and the Governor's amended Executive Order 84-9 of November 30, 1984. The
MCO shall not discriminate against or intimidate any person hired for the
performance of the work by reason of race, color, religion, national origin,
ancestry, sex, handicap; or disability as that term is defined by the Americans
with Disabilities Act (ADA). For any violation, the MCO shall suffer such
penalties as provided for in Ohio Revised Code Section 153.60 and the Governor's
Executive Order of January 27, 1972, or any applicable federal civil or criminal
penalties.
17. INDEPENDENT MCO RELATIONSHIP. It is mutually understood and agreed
that the MCO is at all times acting as an independent MCO in performing services
under this Agreement and shall be responsible for compliance with all laws,
rules, regulations involving, but not limited to, employment of labor, hours of
labor, health and safety, working conditions and payment of wages. The persons
provided by the MCO shall be solely the MCO's employees and subcontractors of
the MCO and shall not be considered employees of the Bureau. The MCO shall be
responsible for payment of federal, state, and municipal taxes and costs such as
social security, unemployment, workers' compensation, disability insurance, and
federal and state withholding with respect to its employees.
18. CONFIDENTIALITY. The MCO agrees that all work performed in
connection with the services performed hereunder shall be subject to the
confidentiality laws of this state. Such information may not be released to any
person other than authorized representatives of the Bureau, unless at the
Bureau's direction. The MCO agrees to keep confidential any knowledge acquired
in the course of performance of services hereunder of the contents of
confidential records of the Bureau. In addition to the foregoing prohibition,
the MCO, its officers, agents, employees, representatives, subcontractors and
assigns shall keep confidential all information, in whatever form obtained, in
the performance of this Agreement.
19. PROPRIETARY RIGHTS. Any and all documents and information released
by the Bureau to the MCO, or submitted by the MCO, pursuant to this Agreement
shall remain, at all times, the exclusive property of the Bureau.
20. INSPECTION OF MCO RECORDS. The MCO shall permit any authorized
representative of the Bureau to inspect, copy and audit such records, books,
vouchers, invoices, and medical bill payment information as is reasonably
required to substantiate the fees billed to or paid by the Bureau, upon prior
written notice, during normal working hours.
21. HOLD HARMLESS AND INDEMNIFICATION. The MCO shall hold the Bureau
harmless and indemnify the Bureau from and against any and all claims, demands,
losses, and causes of action asserted against or incurred by the Bureau which
result from or arise out of the work performed by the MCO, its agents,
employees, representatives, and subcontractors, under this Agreement, or any
errors, omissions, negligent conduct or intentional acts of the MCO, its agents,
employees, representatives, and subcontractors.
<PAGE> 8
22. LIMITATION OF LIABILITY. The Bureau's liability for damages for
services rendered pursuant to this Agreement, whether in contract or in tort,
shall not exceed the total amount of compensation payable to the MCO pursuant to
this Agreement, or the amount of direct damages incurred by the MCO, whichever
is less. The MCO'S sole and exclusive remedies for the Bureau's failure to
perform shall be as set forth herein. In no event shall the Bureau be liable for
any consequential, incidental, or punitive losses, damages, expenses, including
the loss of profits, even if the Bureau knew or should have known of the
possibility of such damages.
23. APPLICABLE STATE LAW. The terms and conditions contained herein
shall be construed and interpreted in accordance with the laws of the State of
Ohio. Any and all disputes arising from this Agreement shall be governed by the
laws of the State of Ohio, and the parties mutually agree to submit exclusively
to the jurisdiction of Ohio in any and all disputes arising from this Agreement.
24. COMPLIANCE WITH THE LAWS OF OHIO. The MCO agrees and covenants that
it at this time is and for the duration of this Agreement will not knowingly
violate the laws of Ohio specifically including, but not limited to, the
workers' compensation laws of Ohio, the corporate laws of Ohio, and all rules
and regulations promulgated under those laws.
25. CONFLICTS OF INTEREST. The MCO affirms that it presently has no
interest and shall not acquire any interest, direct or indirect, which would
conflict, in any manner or degree, with the performance of services which are
required to be performed under any resulting Agreement. In addition, the MCO
affirms that a person who is or may become an agent of MCO not having such
interest upon the execution of this Agreement shall likewise advise the Bureau
in the event it acquires such interest during the term of this Agreement.
Furthermore, any such person who is or may become an agent of MCO who
acquires an incompatible or conflicting personal interest, prior to, on or after
the effective date of this Agreement, or who involuntarily acquires any such
incompatible or conflicting personal interest, shall immediately disclose his or
her interest to the Bureau in writing. Thereafter, such person shall not
participate in any action affecting the work under this Agreement, unless the
Bureau shall determine that, in light of the personal interest disclosed, such
person's participation in any such action would not be contrary to the public
interest.
26. HEADINGS. The headings in this Agreement and its appendices are for
convenience only and are not intended to be part of, or to affect the
interpretation of, the terms of this Agreement.
27. CERTIFICATION. The MCO is certified for the counties listed in
Appendix E of this Agreement, as may be modified during the term of this
Agreement, subject to the conditions precedent herein described.
28. OHIO ELECTIONS LAW. The MCO affirms that, as applicable to the MCO,
no party listed in Division (1) or (J) of Section 3517.13 of the Revised Code,
or spouse of such party, has made, as an individual, within the two previous
calendar years, one or more contributions totaling in excess of $1,000.00 to the
Governor of Ohio or to his campaign committees.
IN WITNESS WHEREOF, the parties hereunto affix their signatures this
12th day of February, 1997.
<PAGE> 9
IN WITNESS WHEREOF, the parties hereunto affix their signatures this 12th day of
February, 1997.
CompManagement Health Systems, Inc. State of Ohio
Tax ID #34-1415243 Bureau of Workers' Compensation
/s/ ROBERT J. BOSSART /s/ JAMES CONRAD
- ---------------------------------- --------------------------------
Name: Robert J. Bossart James Conrad
Title: President Administrator
RECEIPT FOR SIGNED MCO AGREEMENT
BWC's MCO Business Unit acknowledges that your signed MCO Agreement for
CompManagement Health Systems, Inc. was received on by 2-13-97 BWC staff member
. If you have not already completed your EDI testing, please note
that you must successfully complete testing on the 148 and 837 transactions
prior to 5:00 p.m. on Friday, February 14, 1997 in order to become certified.
<PAGE> 10
ADDENDUM
The following is an Addendum to the Agreement ("Agreement") as entered
into on CompManagement February 12, 1997, by and between CompManagement Health
Systems Inc. (the "MCO") with principal offices at 6377 Emerald Parkway and the
State of Ohio, Bureau of Workers' Compensation ("the Bureau"), having offices at
30 West Spring Street, Columbus, Ohio 43215-2256.
Whereas, the MCO and the Bureau have entered into this Agreement under
which the MCO is providing health care management services to Ohio employers as
a Managed Care Organization participating in the Health Partnership Program
("HPP); and
Whereas, under Section 2, "Amount and Method of Payment", and Appendix
D, "MCO -Payment Methodology" of this Agreement, the MCO is eligible to receive
Incentive and Performance Fees in an amount to be determined by its performance
during calendar years 1997 and 1998 as measured by certain enumerated criteria;
and
Whereas, the implementation of the HPP to date has demonstrated to the
MCO and the Bureau that utilizing the criteria initially set forth in Section 2
and Appendix D of this Agreement as the basis for establishing the MCO's right
to Incentive and Performance Fees for calendar years 1997 and 1998 would be both
impractical and inappropriate; and
Whereas, all fees to be paid to the MCO under Section 2 and Appendix D
of this Agreement, including Administrative, Incentive and Performance Fees, are
calculated on the basis of a percentage of the annual premiums of those
employers who have selected or been assigned to the MCO; and
Whereas, subsequent to the MCO and the Bureau entering into this
Agreement, the Workers' Compensation Oversight Commission approved premium rate
reductions for both public and private employers, and the implementation of
these premium rate reductions may result in a decrease in the fees to be paid to
the MCO under Section 2 and Appendix D of this Agreement; and
Whereas, the MCO and the Bureau both wish to replace the criteria
initially set forth in Section 2 and Appendix D of this Agreement for
establishing the MCO's right to Incentive and that the fees paid to the MCO
under Section 2 and Appendix D of this Agreement do not decrease due to the
employer premium rate reductions announced subsequent to the MCO and the Bureau
entering into this Agreement;
Now, therefore, the parties mutually agree that the following
modifications shall be made to the Agreement:
1. The MCO and the Bureau mutually agree that all provisions in Appendix D
regarding the calculation of the 1998 Performance Fee are hereby
revoked, and that the 1998 Performance Fee shall be calculated using
the following provisions:
1998 Performance Fee
* The Bureau shall pay to the MCO, in four (4) quarterly installments of
up to one-half of one percent (.5%) each quarter, a variable fee up to
a maximum total over the entire 1998 calendar year of two (2%) percent
of the premium of those employers who have selected or been assigned to
the MCO. The calculation of each quarterly payment shall be based on
the MCO's performance during the quarter on the following measurements,
<PAGE> 11
which shall be equally weighted, each counting for one-fourth (1/4) of
the quarterly payment:
FROI Timing - Defined as the average number of calendar days
between Date of Injury (DOI) and Filing Date for all claims
(with a DOI of March 1, 1997 or later) filed during the
quarter, excluding the five percent (5%) of claims with the
longest lag time between DOI and Filing Date. The MCO's
eligibility for this portion of the quarterly payment shall be
prorated between low and high benchmarks (which are set forth
in Appendix H of this Agreement, which is attached hereto and
is incorporated herein by reference) according to the
following formula:
MCO score <= Low Benchmark = 100% of the 1/4 portion
MCO score > High Benchmark = 0% of the 1/4 portion
If MCO score between Low and High Benchmarks, then
((High Benchmark + .0000000000001) - MCO score) *
(100/(High Benchmark - Low Benchmark)/100) = % of the
1/4 portion
An example of the application of this formula is set forth in
Appendix I of this Agreement, which is attached hereto and is
incorporated herein by reference.
<PAGE> 12
Return to Work Rate - Defined as the ratio of the number of
claims where temporary total compensation has been stopped for
at least 90 days to the number of claims that received
temporary total compensation or had a return to work (RTW)
less death and permanent total disability claims. The MCO's
eligibility for this portion of the quarterly payment shall be
calculated based on all "Alpha" lost time claims (lost time
claims with a DOI of March 1, 1997 or later) for the year
prior to the quarter being measured, and shall be prorated
between high and low benchmarks (which are set forth in
Appendix H of this Agreement, which is attached hereto and is
incorporated herein by reference) according to the following
formula:
MCO score >= High Benchmark = 100% of the 1/4 portion
MCO score < Low Benchmark = 0% of the 1/4 portion
If MCO score between High and Low Benchmarks, then
(MCO score -(Low Benchmark - .0000000000001)) *
(100/(High Benchmark - Low Benchmark)/100) = % of the
1/4 portion
An example of the application of this formula is set forth in
Appendix I of this Agreement, which is attached hereto and is
incorporated herein by reference.
MCO Bill Payment - Defined as the average number of days from
the date on which the MCO receives funds from BWC to pay a
provider to the date on which the MCO issues a check to the
provider, based on Bureau audit of a sample of those claims
administered by the MCO. The MCO's eligibility to receive this
portion of the quarterly payment shall be determined on an all
or nothing basis, with the MCO receiving this 1/4 portion of
the payment if its performance on this measure during the
quarter is less than or equal to the benchmark of 7.00
business days.
Turnaround of FROIs - MCO to Bureau - Defined as the average
number of days between FROI receipt by the MCO and the MCO's
filing of the FROI with the Bureau, based on all claims filed
during the quarter (with a DOI of March 1, 1997 or later) and
determined by Bureau audit of the MCO's FROI documentation.
The MCO's eligibility to receive this portion of the quarterly
payment shall be determined on an all or nothing basis, with
the MCO receiving this 1/4 portion of the payment if its
performance on this measure during the quarter is less than or
equal to the benchmark of 3.00 calendar days.
* The MCO's quarterly 1998 Performance Fee payments shall be calculated
for the following periods: 1st quarter -- January 1, 1998 to March 31,
1998; 2nd quarter -- April 1, 1998 to June 30, 1998; 3rd quarter --
July 1, 1998 to September 30, 1998; and 4th quarter -- October 1, 1998
to December 31, 1998. The Performance Fee payment for the 1st quarter,
1998 shall be calculated using the MCO's Administrative Fee Payment
premium base for April, 1998; the Performance Fee payment for the 2nd
quarter, 1998 shall be calculated using the MCO's Administrative Fee
payment premium base for July, 1998; and the Performance Fee payment
for the 3rd and 4th quarters, 1998 shall be calculated using the MCO's
Administrative Fee payment premium base for September, 1998.
* Payments earned by the MCO during each quarter shall be calculated and
paid to the MCO by the Bureau no later than 45 days after the end of
that quarter.
<PAGE> 13
* The 1998 Performance Fee measurement criteria, including benchmark
performance levels, are more fully set forth in Appendix H of this
Agreement, which is attached hereto and is incorporated herein by
reference.
2. The MCO and the Bureau mutually agree that all provisions in Appendix D
regarding the calculation of the 1998 Incentive Fee are hereby revoked,
and that the 1998 Incentive Fee shall be calculated using the following
provisions:
1998 Incentive Fee
* The Bureau shall pay to the MCO, in four (4) quarterly installments of
up to one-quarter of one percent (.25%) each quarter, a variable
incentive fee up to a maximum total over the entire 1998 calendar year
of one percent (1%) of the premium of those employers who have selected
or been assigned to the MCO. The calculation of each quarterly payment
shall be based on the MCO's performance during the quarter on the
following measurements, which shall be equally weighted, each counting
for one-third (1/3) of the quarterly payment:
Employer Satisfaction - The MCO's eligibility for this portion
of the quarterly payment shall be based on the MCO's score on
an employer satisfaction survey (to be conducted by the
Bureau), and shall be prorated between high and low benchmarks
(which are set forth in Appendix H of this Agreement, which is
attached hereto and is incorporated herein by reference)
according to the following formula:
MCO score >= High Benchmark = 100% of the 1/3 portion
MCO score < Low Benchmark = 0% of the 1/3 portion
If MCO score between High and Low Benchmarks, then
(MCO score -(Low Benchmark - .0000000000001)) *
(100/(High Benchmark - Low Benchmark)/100) = % of the
1/3 portion
An example of the application of this formula is set forth in
Appendix I of this Agreement, which is attached hereto and is
incorporated herein by reference.
Injured Worker Satisfaction - The MCO's eligibility for this
portion of the quarterly payment shall be based on the MCO's
score on an injured worker satisfaction survey (to be
conducted by the Bureau), and shall be prorated between high
and low benchmarks (which are set forth in Appendix H of this
Agreement, which is attached hereto and is incorporated herein
by reference) according to the following formula:
MCO score >= High Benchmark = 100% of the 1/3 portion
MCO score < Low Benchmark = 0% of the 1/3 portion
If MCO score between High and Low Benchmarks, then
(MCO score -(Low Benchmark - .0000000000001)) *
(100/(High Benchmark - Low Benchmark)/100) = % of the
1/3 portion
<PAGE> 14
An example of the application of this formula is set forth in
Appendix I of this Agreement, which is attached hereto and is
incorporated herein by reference.
Bill Timing: DOS-BWC - Defined as the average lag time in
calendar days from the date that a medical service was
provided in a claim administered by the MCO ("Date of Service"
or DOS) to the date that the Bureau receives a bill(s) for
that service from the MCO. The MCO's eligibility for this
portion of the quarterly payment shall be calculated on the
basis of all bills with a paid amount greater than $0.00
received by the Bureau from the MCO during the quarter, and
shall be prorated between low and high benchmarks (which are
set forth in Appendix H of this Agreement, which is attached
hereto and is incorporated herein by reference) according to
the following formula:
MCO score <= Low Benchmark 100% of the 1/3 portion
MCO score > High Benchmark = 0% of the 113 portion
If MCO score between Low and High Benchmarks, then
((High Benchmark + .0000000000001) - MCO score) *
(100/(High Benchmark - Low Benchmark)/100) = % of the
1/3 portion
An example of the application of this formula is set forth in
Appendix I of this Agreement, which is attached hereto and is
incorporated herein by reference.
* The MCO's quarterly 1998 Incentive Fee payments shall be calculated
for the following periods: 1st quarter -- January 1, 1998 to March 31,
1998; 2nd quarter -- April 1, 1998 to June 30, 1998; 3rd quarter --
July 1, 1998 to September 30, 1998; and 4th quarter -- October 1, 1998
to December 31, 1998. The Incentive Fee payment for the 1st quarter,
1998 shall be calculated using the MCO's Administrative Fee Payment
premium base for April, 1998; the Incentive Fee payment for the 2nd
quarter, 1998 shall be calculated using the MCO's Administrative Fee
payment premium base for July, 1998; and the Incentive Fee payment for
the 3rd and 4th quarters, 1998 shall be calculated using the MCO's
Administrative Fee payment premium base for September, 1998.
* Payments earned by the MCO during each quarter shall be calculated and
paid to the MCO by the Bureau no later than 45 days after the end of
that quarter.
* The 1998 Incentive Fee measurement criteria, including benchmark
performance levels, are more fully set forth in Appendix H of this
Agreement, which is attached hereto and is incorporated herein by
reference.
3. In consideration for the foregoing promises, the MCO and the Bureau
mutually agree that all provisions in Appendix D regarding the
calculation of the 1998 Administrative Fee are hereby revoked, and that
all administrative fee payments due to the MCO for calendar year 1998
shall be calculated as a fixed percentage of the applicable premium of
those employers who have selected or been assigned to the MCO, in
accordance with the provisions of Rule 4123-6-13 of the Ohio
Administrative Code, as follows:
For each of the months of January, February, March, April,
May, June, July, August, and September, 1998, the Bureau shall
pay to the MCO one-twelfth (1/12) of three percent (3%) of the
applicable premium of those employers who have selected or
been assigned to the MCO.
<PAGE> 15
For each of the months of October, November and December,
1998, the Bureau shall pay to the MCO one-twelfth (1/12) of
that percentage (%) of the applicable premium of those
employers who have selected or been assigned to the MCO which
results in an amount equal to the Administrative Fee payment
made to the MCO for the month of September, 1998.
Administrative Fee payments shall be made to the MCO by the
Bureau not later than the 15th of each month.
In witness whereof, the parties hereto, each acting under due and
proper authority, have executed this Agreement as of this 2nd day of February,
1998.
CompManagement Health Systems,Inc. State of Ohio
Tax ID #34-1415243 Bureau of Workers' Compensation
/s/ ROBERT J. BOSSART /s/ JAMES CONRAD
- ---------------------------------- --------------------------------
Name: Robert J. Bossart James Conrad
Title: President Administrator
<PAGE> 1
Exhibit 10(l)
EMPLOYMENT AGREEMENT
This agreement is made effective as of May 1, 1997, at Columbus, Ohio,
between Health Power Management Corporation, an Ohio corporation (the
"Company"), and Bernard F. Master, D.O. (the "Employee"), who hereby agrees as
follows:
Section 1. Employment. The terms and conditions of this agreement shall
supersede and replace in their entirety the terms and conditions of the
Employment Agreement between the Company and the Employee dated as of May 1,
1996. The Company hereby renews and continues the Employee's employment, and the
Employee hereby accepts employment renewal and continuation by the Company, on
the terms and subject to the conditions set forth in this agreement.
Section 2. Term of Employment. The term of the Employee's employment
under this agreement shall begin as of the date of this agreement and shall
terminate, unless sooner terminated in accordance with the provisions of Section
6, on April 30, 1998. Upon agreement of the Company and the Employee, the term
of the Employee's employment under this agreement may be renewed for successive
one-year periods, commencing on the termination date of the immediately
preceding term and terminating, unless sooner terminated in accordance with the
provisions of Section 6, on the first anniversary thereof.
Section 3. Services. The Employee shall be the Chairman of the Board
and Chief Executive Officer of the Company and, as such, shall perform such
services as may be reasonably assigned to him from time to time by the Board of
Directors of the Company. The Employee shall devote his best efforts to the
performance of his duties hereunder.
Section 4. Responsibilities. The Employee shall be responsible for
establishing and supervising the implementation of the business policies and
operating programs, budgets, procedures, and directions of the Company and its
affiliates (reporting only to the Board of Directors of the Company); monitoring
and evaluating the effectiveness of the management of the Company, including
without limitation reviewing and evaluating the performance of the president and
chief operating officer of the Company; establishing and implementing a
strategic plan for the Company and its affiliates; determining the necessity of
and, if necessary and possible, supervising the raising of additional capital
for the Company and its affiliates; presiding at all meetings of the
shareholders and the Board of Directors of the Company and its affiliates; and
such other activities as are incident to his office or as may be prescribed or
delegated by the Board of Directors of the Company.
Section 5. Compensation. The Employee shall receive the following
compensation:
(a) A base salary of $192,000 per annum or if the term of the
Employee's employment is renewed, such other amount as may be approved
by the Company's Compensation Committee from time to time, payable in
accordance with the Company's general policies for payment of
compensation to its salaried personnel; provided if the Employee's
employment is terminated pursuant to the provisions of Section 6, the
base salary shall cease as of the day of termination;
(b) $3,500 per month, payable in arrears, as an expense
allowance for expenditures advanced by the Employee on behalf of the
Company;
<PAGE> 2
(c) A cash bonus payable in the discretion of the Company's
Compensation Committee, and, if payable, in an amount to be determined
by such Committee and based upon such criteria as may be selected by
such Committee, including without limitation the Employee's performance
with respect to providing leadership to the Company's personnel,
supervising the Company's operations, and enhancing value for the
Company's stockholders; and
(d) Formula Vesting Stock Options pursuant to the 1994
Executive Performance Stock Option Plan (the "Plan") for 1997 and, if
the term of the Employee's employment is renewed, for each subsequent
fiscal year of the Company (each "Performance Year") ending during each
renewal term of the Employee's employment under this agreement with the
number of Shares subject to the Formula Vesting Option and the Ceiling
Amount (as such term is defined in the Plan) for determining
accelerated vesting under the Plan being set forth for each Performance
Year on the schedule attached to this agreement. Such amounts shall be
set forth on the attached schedule on or about the anniversary date of
this agreement for each year during which the term of the Employee's
employment is renewed, and initialed by the Company and the Employee.
The Company shall also provide disability insurance for the benefit of
the Employee and pay all premiums with respect thereto, which insurance shall
supplement the Company's current disability insurance benefits to the Employee.
The policy or policies for such disability insurance shall provide for benefits
in the amount of $6,000 per month for a maximum of five years, which benefits
shall commence 90 days after the date of the Employee's disability (as
determined under the terms of such policy).
Section 6. Termination of Employment. The Employee's employment under
this agreement may be terminated:
(a) By the Employee with or without cause upon giving 90 days
advance written notice to the Company, provided that the Employee shall
continue to perform all duties under this agreement until the earlier
of:
(i) The expiration date of such 90-day period; or
(ii) Any earlier date which may be specified by the
Company.
(b) By the Company upon the occurrence of any one of the
following events or any time thereafter:
(i) The Employee fails to fully perform and observe
all obligations and conditions to be performed and observed by
the Employee under this agreement, or under any other
agreement between the Employee and the Company, and fails to
correct such problem within 10 days after notice by the Board
of Directors to do so or, if it is impossible to correct such
problem within such 10 days, fails to commence the action
necessary to correct such problem and continues diligently to
pursue such action until the correction is complete; or
(ii) The Employee is under a long-term disability.
For purposes of this agreement, the term "long-term
disability" shall have the same meaning as long-term
disability or other similar term used in any long-term or
permanent disability policy provided by the Company and
covering the Employee. In the event there is no long-term or
permanent disability policy in effect covering the Employee,
the term "long-term disability" shall mean that because of
physical or mental
<PAGE> 3
incapacity, the Employee has not performed his duties under
this agreement for 60 days or longer and it is probable, in
the opinion of a licensed physician selected by the Company,
that the Employee will not be able to engage actively in his
employment by the Company for an additional period of 90 days
or longer.
Section 7. Employee's Capacity. The Employee represents and warrants to
the Company that he has the capacity and right to enter into this agreement and
perform all his duties under this agreement without any restriction whatsoever
by any other agreement, document, or otherwise.
Section 8. Complete Agreement. This document contains the entire
agreement between the parties and supersedes any prior discussions,
negotiations, representations, or agreements between them relating to the
employment of the Employee. No additions or other changes to this agreement
shall be made or be binding on either party unless made in writing and signed by
each party to this agreement.
Section 9. Notices. Any notice or other communication required or
desired to be given to any party under this agreement shall be in writing and
shall be deemed given:
(a) In the case of the Employee, when delivered personally to
the Employee or when deposited in the United States mail, first-class
postage prepaid, addressed to the Employee at 340 Tucker Drive,
Worthington, Ohio 43085, or at any other address thereafter designated
by the Employee in notice theretofore given to the Company; and
(b) In the case of the Company, when deposited in the United
States mail, first-class postage prepaid, addressed to the Company at
560 East Town Street, Columbus, Ohio 43215, or at any other address
thereafter designated by the Company in notice theretofore given to the
Employee.
Section 10. Governing Law. All questions concerning the validity,
intention, or meaning of this agreement or relating to the rights and
obligations of the parties with respect to performance hereunder shall be
construed and resolved under the laws of Ohio.
Section 11. Severability. The intention of the parties to this
agreement is to comply fully with all laws and public policies, and this
agreement shall be construed consistently with all laws and public policies to
the extent possible. If and to the extent that any court of competent
jurisdiction is unable to so construe part or all of any provision of this
agreement, and holds part or all of that provision to be invalid, such
invalidity shall not affect the validity of the balance of that provision or the
remaining provisions of this agreement, which shall remain in full force and
effect.
Section 12. Nonwaiver. No failure by any party to insist upon strict
compliance with any term of this agreement, to exercise any option, enforce any
right, or seek any remedy upon any default of any other party shall affect, or
constitute a waiver of, the first party's right to insist upon such strict
compliance, exercise that option, enforce that right, or seek that remedy with
respect to that default or any prior, contemporaneous, or subsequent default;
nor shall any custom or practice of the parties at variance with any provision
of this agreement affect, or constitute a waiver of, any party's right to demand
strict compliance with all provisions of this agreement.
Section 13. Captions. The captions of the various sections of this
agreement are not part of the context of this agreement, but are only labels to
assist in locating those sections, and shall be ignored in construing this
agreement.
<PAGE> 4
Section 14. Successors. This agreement shall be binding upon, inure to
the benefit of, and be enforceable by and against the respective heirs, legal
representatives, successors, and assigns of each party to this agreement,
provided that neither party may assign any of its rights or obligations under
this agreement without the prior written consent of the other party.
HEALTH POWER MANAGEMENT
CORPORATION
___________________________________ By__________________________________
BERNARD F. MASTER, D.O. Thomas E. Beaty, Jr., President
Schedule to Dr. Master's Employment Agreement
---------------------------------------------
<TABLE>
<CAPTION>
Number of Shares Acknowledged and Agreed
to be Subject to -----------------------
Performance Formula Vesting Ceiling Employees Company
Year Options to be Granted Amount Initials Initials
---- --------------------- ------ -------- --------
<S> <C> <C> <C> <C>
1997 Options for 3,472 shares $1,000,000
of Health Power's
common stock at an
exercise price of $4.00 a
share. The date of grant
shall be April 15, 1997,
as determined by Health
Power's Compensation
Committee
</TABLE>
<PAGE> 1
Exhibit 10(m)
EMPLOYMENT AGREEMENT
This agreement is made effective as of January 15, 1998, at Columbus,
Ohio, between Health Power Management Corporation, an Ohio corporation (the
"Company"), and Bernard F. Master, D.O. (the "Employee"), who hereby agrees
as follows:
Section 1. Employment as President. The Company hereby employs the
Employee as the President of the Company upon the terms and subject to the
conditions set forth in this agreement. The terms and conditions of this
agreement shall be in addition to, and separate and apart from, the terms and
conditions set forth in the Employment Agreement dated as of May 1, 1997,
between the Company and the Employee regarding the Company's employment of the
Employee as its Chairman of the Board and Chief Executive Officer.
Section 2. Term of Employment. The term of the Employee's employment
under this agreement shall begin as of the date of this agreement and shall
terminate, unless sooner terminated in accordance with the provisions of Section
8, on April 30, 1999. Upon agreement of the Company and the Employee, the term
of the Employee's employment under this agreement may be renewed for successive
one-year periods, commencing on the termination date of the immediately
preceding term and terminating, unless sooner terminated in accordance with the
provisions of Section 8, on the first anniversary thereof.
Section 3. Services. The Employee shall act as the President of the
Company and, as such, shall perform such services as may be reasonably assigned
to him from time to time by the Board of Directors of the Company. The Employee
shall devote such time and attention as may be reasonably necessary to carry out
the responsibilities set forth in this agreement. The Employee shall devote his
best efforts to the performance of his duties under this agreement.
Section 4. Responsibilities. The Employee shall be responsible for the
day-to-day supervision and administration of the Company's business pursuant to
policies and operating programs, budgets, procedures, and directions established
or changed from time to time by the Board of Directors of the Company, including
without limitation coordination and supervision of the accounting and financial
operations of the Company; maintenance of the land, building, fixtures,
equipment, inventory, and other property of the Company; hiring, training,
supervision, and discharging employees; coordination and supervision of
advertising, promotion, and other marketing programs; maintenance of customer
relations; maintenance of quality assurance and other medical standards; and all
other activities relating to the management and day-to-day operations of the
Company's busineSection The Employee shall report to, and consult with, the
Board of Directors of the Company, from time to time, on all matters relating to
the business policies, financial planning and major decisions of and for the
Company.
Section 5. Authority. The Employee shall have the authority on behalf
of the Company to manage and conduct the day-to-day operations of the Company in
the ordinary course of its busineSection
Section 6. Compensation. The Employee shall receive the following
compensation:
(a) A base salary of $120,000 per annum or, if the term of the
Employee's employment is renewed, such other amount as may be approved
by the Company's Compensation Committee from time to time, payable in
accordance with the Company's
<PAGE> 2
general policies for payment of compensation to its salaried personnel;
provided if the Employee's employment is terminated pursuant to the
provisions of Section 8, the base salary shall cease as of the day of
termination;
(b) A cash bonus, the amount of which shall be determined
under, and paid pursuant to, the Profit Sharing Plan maintained for the
benefit of the employees of Health Power, Inc., a Delaware corporation
("Health Power") and its subsidiaries (Health Power and its
subsidiaries, including the Company, are hereinafter collectively
referred to as the "Health Power Companies"). As a condition to
receiving such cash bonus, the Employee must be an employee of the
Company at the time of the distribution.
Section 7. Stock Options. As soon as practical after the execution of
this agreement, the Employee shall be granted Discretionary Vesting Options (the
"Options") under Health Power's 1994 Executive Performance Stock Option Plan, as
amended (the "Plan"), to purchase up to 20,000 shares of common stock, $0.01 par
value (the "Shares"), of Health Power. The grant of the Options shall be subject
to approval by the Plan's Stock Option Committee (the "Committee"). The Options
will be at an exercise price equal to the fair market value of the Shares as of
the approval date of such grant. The Options shall be subject to accelerated
vesting in accordance with the achievement of performance goals to be
established in writing between the Company and the Employee.
Section 8. Termination of Employment. The Employee's employment under
this agreement may be terminated:
(a) By the Employee with or without cause upon giving 90 days
advance written notice to the Company, provided that the Employee shall
continue to perform all duties under this agreement until the earlier
of:
(i) The expiration date of such 90-day period; or
(ii) Any earlier date which may be specified by the
Company.
(b) By the Company upon the occurrence of any one of the
following events or any time thereafter:
(i) The Employee fails to fully perform and observe
all obligations and conditions to be performed and observed by
the Employee under this agreement, or under any other
agreement between the Employee and the Company, and fails to
correct such problem within ten days after notice by the Board
of Directors to do so or, if it is impossible to correct such
problem within such ten days, fails to commence the action
necessary to correct such problem and continues diligently to
pursue such action until the correction is complete; or
(ii) The Employee is under a long-term disability.
For purposes of this agreement, the term "long-term
disability" shall have the same meaning as long-term
disability or other similar term used in any long-term or
permanent disability policy provided by the Company and
covering the Employee. In the event there is no long-term or
permanent disability policy in effect covering the Employee,
the term "long-term disability" shall mean that because of
physical or mental incapacity, the Employee has not performed
his duties under this agreement for 60 days or longer and it
is probable, in the opinion of a licensed physician selected
by the Company, that the Employee will not be able to engage
actively in his employment by the Company for an additional
period of 90 days or longer.
<PAGE> 3
Section 9. Employee's Capacity. The Employee represents and warrants to
the Company that he has the capacity and right to enter into this agreement and
perform all his duties under this agreement without any restriction whatsoever
by any other agreement, document, or otherwise.
Section 10. Complete Agreement. This document contains the entire
agreement between the parties and supersedes any prior discussions,
negotiations, representations, or agreements between them relating to the
employment of the Employee. No additions or other changes to this agreement
shall be made or be binding on either party unless made in writing and signed by
each party to this agreement.
Section 11. Notices. Any notice or other communication required or
desired to be given to any party under this agreement shall be in writing and
shall be deemed given:
(a) In the case of the Employee, when delivered personally to
the Employee or when deposited in the United States mail, first-class
postage prepaid, addressed to the Employee at 340 Tucker Drive,
Worthington, Ohio 43085, or at any other address thereafter designated
by the Employee in notice theretofore given to the Company; and
(b) In the case of the Company, when deposited in the United
States mail, first-class postage prepaid, addressed to the Company at
560 East Town Street, Columbus, Ohio 43215, or at any other address
thereafter designated by the Company in notice theretofore given to the
Employee.
Section 12. Governing Law. All questions concerning the validity,
intention, or meaning of this agreement or relating to the rights and
obligations of the parties with respect to performance hereunder shall be
construed and resolved under the laws of Ohio.
Section 13. Severability. The intention of the parties to this
agreement is to comply fully with all laws and public policies, and this
agreement shall be construed consistently with all laws and public policies to
the extent possible. If and to the extent that any court of competent
jurisdiction is unable to so construe part or all of any provision of this
agreement, and holds part or all of that provision to be invalid, such
invalidity shall not affect the validity of the balance of that provision or the
remaining provisions of this agreement, which shall remain in full force and
effect.
Section 14. Nonwaiver. No failure by any party to insist upon strict
compliance with any term of this agreement, to exercise any option, enforce any
right, or seek any remedy upon any default of any other party shall affect, or
constitute a waiver of, the first party's right to insist upon such strict
compliance, exercise that option, enforce that right, or seek that remedy with
respect to that default or any prior, contemporaneous, or subsequent default;
nor shall any custom or practice of the parties at variance with any provision
of this agreement affect, or constitute a waiver of, any party's right to demand
strict compliance with all provisions of this agreement.
Section 15. Captions. The captions of the various sections of this
agreement are not part of the context of this agreement, but are only labels to
assist in locating those sections, and shall be ignored in construing this
agreement.
Section 16. Successors. This agreement shall be binding upon, inure to
the benefit of, and be enforceable by and against the respective heirs, legal
representatives, successors, and assigns of each party to this agreement,
provided that neither party may assign any of its rights or obligations under
this agreement without the prior written consent of the other party.
<PAGE> 4
HEALTH POWER MANAGEMENT
CORPORATION
___________________________________ By__________________________________
BERNARD F. MASTER, D.O. Toni D. Spruell, Executive
Vice President
<PAGE> 1
Exhibit 10(p)
SECOND AMENDMENT TO EMPLOYMENT AGREEMENT
This amendment is made as of December 15, 1997, in Columbus, Ohio,
among CompManagement, Inc., an Ohio corporation ("CMI"), CompManagement Health
Systems, Inc., an Ohio corporation ("CHS"), and Robert J. Bossart (the
"Employee").
Background Information
A. The Employee and CMI are parties to an Employment Agreement dated as
of July 21, 1995 (the "Original Employment Agreement"), which agreement was
amended as of October 1996 (the "First Amendment"). The Original Employment
Agreement, as amended by the First Amendment, is hereinafter referred to as the
"Employment Agreement."
B. CHS, a wholly owned subsidiary of CMI, is a managed care
organization (an "MCO") under Ohio's managed care workers' compensation system.
The parties desire to amend the Employment Agreement in order to, among other
things, make CHS a party to the employment arrangement and to reflect the
Employee's responsibilities with respect to the businesses of CMI and CHS. The
Employment Agreement, as amended by this amendment, is hereinafter collectively
referred to as the "Agreement."
Statement of Agreement
The parties hereby acknowledge the accuracy of the foregoing Background
Information and hereby agree as follows:
Section 1. Effective Date. This amendment shall be effective as of
December 15, 1997.
Section 2. Additional Party. CHS is hereby made a party to the
Agreement. As used in the Agreement, the term "Company" shall collectively mean
CMI and CHS, and the term "Health Power Companies" shall include CHS.
Section 3. Term of Employment. The parties acknowledge that, pursuant
to Section 2 of the First Amendment, the term of the Employee's employment by
the Company pursuant to the Agreement shall end on December 31, 1999 (the
"Termination Date"), unless sooner terminated or thereafter extended in
accordance with the provisions of the Agreement.
Section 4. Services. Section 3 of the Original Employment Agreement is
hereby amended in its entirety to read as follows:
The Employee shall serve as the Chief Executive Officer of CMI
and as the Chief Executive Officer and President of CHS. As such, the
Employee shall perform such services as may be reasonably assigned to
him in order to enable him to carry out the responsibilities and
authority granted to him under the Agreement. The Employee shall devote
his full business time, attention, energy, and skill to the businesses
of the Company; provided that he shall be entitled to attend business
and trade conventions and meetings and to take sick leaves as may be
provided generally for the Company's personnel and to take vacations as
provided in the Agreement. The Employee shall not engage in any
business or investment activity (whether or not competitive with the
Company) which requires any substantial time on his part.
<PAGE> 2
Section 5. Responsibilities; Authority. Section 5 of the Original
Employment Agreement is hereby amended in its entirety to read as follows:
As the Chief Executive Officer and President of CHS, the
Employee shall be responsible for supervising and managing the
day-to-day business operations of CHS and for supervising and
implementing the policies and operating programs, budgets, procedures,
and directions established or changed from time to time (collectively,
the "Policies and Programs") by (i) the Chairman of the Board or the
Board of Directors of CHS, or (ii) the Chairman of the Board or the
Board of Directors of CMI, or (iii) the Chairman of the Board or the
Board of Directors of Health Power, Inc., a Delaware corporation
("Health Power"), which is the parent of CMI. Such responsibilities
shall include, without limitation, the following: developing CHS's
financial and operational goals and objectives and implementing
strategies to achieve such goals and objectives within budgeted
amounts; planning and developing CHS's financial and operational
budgets and projections; assisting department managers with developing
financial and operational goals and objectives for each department of
CHS and implementing strategies to achieve such goals and objectives
within such department's budgeted amounts; coordinating and
supervising the accounting and financial operations of CHS; hiring,
training, supervising, and discharging employees; and performing all
other activities relating to the management and day-to-day operations
of CHS's busineSection The Employee shall report to the Chairman of
CHS and shall consult with the Chairman of CHS, from time to time, on
all matters relating to the business policies and financial planning
of and for CHS.
The Employee shall have the authority on behalf of CHS to
manage and conduct the day-to-day operations of CHS in the ordinary
course of its business pursuant to the Policies and Programs of CHS and
the Policies and Programs of CMI and Health Power which are applicable
to CHS, provided that the Employee shall not take any of the following
actions without the prior approval of the Chairman of the Board of CHS:
(a) Incur capital expenditures or acquire assets
having a price in excess of $25,000 or incur expenditures,
debts, liabilities, or other financial commitments in excess
of $25,000, unless the incurrance of such expenditures, debts,
liabilities, or other financial commitments or the acquisition
of such assets are in accordance with budgeted amounts set
forth in budgets previously approved by the Board of Directors
of CHS;
(b) Grant any mortgage, security interest, or other
encumbrance on any assets of CHS;
(c) Employ, change the compensation, or terminate the
employment of the President or any Executive Vice President of
CHS; or enter into any employment agreement not terminable at
the will of CHS; or
(d) Enter into any transaction, agreement, or take
any other action that is outside the ordinary course of CHS's
business or contrary to the Policies and Programs of CHS or
the Policies and Programs of CMI or Health Power applicable to
CHS.
As the Chief Executive Officer of CMI, the Employee shall,
along with the President of CMI, be responsible for supervising and
implementing the Policies and Programs for CMI. The Employee shall
report to the Chairman of CMI and shall consult with the Chairman of
CMI, from time to time, on all matters relating to the
<PAGE> 3
business policies and financial planning of and for CMI. The Employee's
authority on behalf of CMI shall be limited in the same manner as set
forth in (a) through (d), above.
Section 6. Change in Control Definition. The last paragraph in Section
8 of the Original Employment Agreement, which paragraph sets forth the events
when a change of control of Health Power is deemed to have occurred, is hereby
amended in its entirety to read as follows:
For purposes of the Agreement, a change in control shall be
deemed to occur:
(A) When any "person" as defined in Section 3(a)(9)
of the Securities Exchange Act of 1934 (the "Exchange Act")
and as used in Section Section 13(d) and 14(d) thereof,
including a "group" as defined in Section 13(d) of the
Exchange Act, but excluding Health Power and any subsidiary of
Health Power and any employee benefit plan sponsored or
maintained by Health Power or any subsidiary of Health Power
(including any trustee of such plan acting as trustee),
directly or indirectly, becomes the "beneficial owner" (as
defined in Rule 13d-3 under the Exchange Act, as amended from
time to time) of securities of Health Power representing 20%
or more of the combined voting power of Health Power's then
outstanding securities;
(B) When, during any period of 24 consecutive months
during the term of the Agreement, the individuals who, at the
beginning of such period, constitute the Board of Directors of
Health Power (the "Incumbent Directors") cease for any reason
other than death to constitute at least a majority thereof;
provided, however, that a director who was not a director at
the beginning of such 24-month period shall be deemed to have
satisfied such 24-month requirement (and be an Incumbent
Director) if such director was elected by, or on the
recommendation of or with the approval of, at least two-thirds
of the directors who then qualified as Incumbent Directors
either actually (because they were directors at the beginning
of such 24-month period) or by prior operation of this Section
8(B);
(C) Upon the occurrence of a transaction requiring
stockholder approval for the acquisition of Health Power by an
entity other than Health Power or a subsidiary of Health Power
through purchase of assets, by merger or otherwise.
(D) Upon the occurrence of the sale of either CMI or
CHS to a third party, whether such sale is structured as an
asset, stock, merger, or other similar type of transaction.
Section 7. Sales Commissions. The provisions of this section shall
govern the payment of sales commissions to the Employee and shall supersede and
replace in its entirety Section 5(b) of the Original Employment Agreement and
Section 3 of the First Amendment.
(a) CMI Sales Commissions. The Company shall pay to the
Employee sales commissions on the CMI Fees (as defined below) generated
by the sales efforts of the Employee (the "CMI Sales Commissions"). The
CMI Sales Commissions shall be in an amount up to (i) 25% of the amount
(subject to allocation as described in (d), below) of the CMI Fees for
the first year of business from a CMI Employer (as defined below),
which CMI Fees were generated by the sales efforts of the Employee,
plus (ii) 25% of the amount (subject to allocation as described in (d),
below) of the increase in CMI Fees from one Calendar Year (as defined
in (c), below) to the next Calendar Year from CMI Employers who are
part of group rating plans of CMI, which CMI Fees were generated by the
sales efforts of the Employee.
<PAGE> 4
CMI Sales Commissions shall be payable on CMI Fees applicable
to CMI Employers located in any state or jurisdiction in which CMI is
authorized and approved to conduct busineSection With respect to a
business acquisition by CMI (whether such acquisition is structured as
an asset, stock, merger, or other similar type of transaction), no CMI
Sales Commissions shall be payable with respect to any fees received by
CMI from any employer who, at the time of such acquisition, was a
client or customer of the business acquired by CMI, except to the
extent payable pursuant to (ii), above.
For purposes of the Agreement: (A) "CMI Fees" shall mean fees
payable to CMI for its performance of third party administrative
services for workers' compensation and unemployment compensation claims
on behalf of CMI Employers; and (B) a "CMI Employer" shall mean any
individual or entity (including a corporation, limited liability
company, partnership, or business trust) which has entered into a
contract with CMI pursuant to which CMI performs third party
administrative services for workers' compensation or unemployment
compensation claims on behalf of such individual or entity, but is
limited to employers that are part of group rating plans (prospective
and retrospective group rating plans), state-funded employers, and
self-funded employers.
(b) CHS Sales Commissions. The Company shall pay to the
Employee sales commissions on the CHS Fees (as defined below) generated
by the sales efforts of the Employee (the "CHS Sales Commissions") as
set forth in this section.
For the 1997 Calendar Year (as defined below), the CHS Sales
Commissions shall be $638,918, which represents approximately 5.9% of
the 1997 CHS Fees.
For the first quarter of the 1998 Calendar Year, the CHS Sales
Commissions shall be in an amount up to 25% of the amount (subject to
allocation as described in (d), below) of the gamma claim revenues of
CHS accrued during such quarter.
The parties shall enter into good faith discussions with
respect to the CHS Sales Commissions payable for the remainder of the
1998 Calendar Year and thereafter, with the intent that the CHS Sales
Commissions will be in an amount up to 25% of the amount (subject to
allocation as described in (d), below) of the CHS Fees for the first
year of business from a CHS Employer, which CHS Fees were generated by
the sales efforts of the Employee. The parties will determine, among
other things, the extent to which bonuses from the Bureau (as defined
below) will be included in CHS Fees for the first year of business from
a CHS Employer.
CHS Sales Commissions shall be payable only on CHS Fees
applicable to CHS Employers located in Ohio. With respect to the
acquisition of another MCO by CHS (whether such acquisition is
structured as an asset, stock, merger, or other similar type of
transaction), no CHS Sales Commissions shall be payable with respect to
any fees received by CHS with respect to any employer who, at the time
of such acquisition, had either selected the acquired MCO as its MCO or
been assigned to the acquired MCO by the Bureau (as defined below).
For purposes of the Agreement: (A) "CHS Fees" shall mean the
fees payable to CHS under the agreement dated as of February 12, 1997,
between the Ohio Bureau of Workers' Compensation (the "Bureau") and CHS
(as such agreement may be hereafter amended, modified, renewed,
extended, supplemented, or replaced), pursuant to which CHS has agreed
to provide medical management services for workers' compensation claims
on behalf of employers who have either selected CHS as their MCO or
been assigned to CHS by the Bureau; and (B) a "CHS Employer" is any
individual or entity (including a corporation, limited liability
company, partnership, or business trust) who has selected CHS as its
MCO.
<PAGE> 5
(c) Annual Deduction. For each Calendar Year, a deduction in
the amount of $82,500 shall be made to the aggregate amount of the CMI
Sales Commissions and the CHS Sales Commissions payable to the
Employee. Such deduction shall be made prior to any payment of such
commissions for such Calendar Year.
(d) Allocation of Commissions. The Employee acknowledges and
agrees that the "25%" sales commission amount described in (a) and (b),
above, represents the total amount of sales commissions which are
payable with respect to any CMI Employer or CHS Employer, as the case
may be, and that the 25% sales commission amount may be allocated by
the Company among all of the salespersons participating in the sales
effort to the CMI Employer or CHS Employer, as the case may be. The
Chief Executive Officer of CMI or CHS, as the case may be, shall have
the authority to allocate the 25% sales commission amount in any manner
such officer deems appropriate, in his reasonable discretion. In the
event of any dispute regarding the allocation by the Chief Executive
Officer of the 25% sales commission amount, such dispute shall be
referred to, and resolved by, the Compensation Committee of Health
Power, whose determination shall be binding and conclusive on all
parties.
(e) Miscellaneous. The CMI Sales Commissions and the CHS Sales
Commissions shall be determined on a Calendar Year basis.
The payment of the CMI Sales Commissions shall accrue upon the
execution of the contract with the CMI Employer. The payment of the CHS
Sales Commissions shall accrue upon CHS receiving notification from the
Bureau that the CHS Employer has selected CHS as its MCO. In any event,
neither CMI nor CHS shall be obligated to pay such commissions unless
and until the corresponding CMI Fees or CHS Fees, as the case may be,
are received by CMI or CHS, respectively.
No commissions shall be payable to the Employee with respect
to any entity other than CMI or CHS.
For purposes of the Agreement, a "Calendar Year" shall mean
the period from January 1 through December 31 of the same year.
Section 8. Additional Base Salary. In addition to the base salary set
forth in Section 5(a) of the Original Employment Agreement (the "Original Base
Salary"), for the 1998 Calendar Year, the Company shall pay the Employee an
additional base salary of $201,461 (the "Additional Base Salary"), payable in 24
equal installments at the same time and in the same manner as the Original Base
Salary. The Additional Base Salary shall be applicable only for the 1998
Calendar Year.
If, during the 1998 Calendar Year, the Employee's employment is
terminated by the Company for "just cause" (as defined in the Original
Employment Agreement) other than due to the death of the Employee or by the
Employee, then the Employee shall receive payment of the Additional Base Salary
accrued through the date of termination of employment, and the Company shall
have no further obligation with respect to the payment of the Additional Base
Salary. If, during the 1998 Calendar Year, the Employee's employment is
terminated due to the death of the Employee or by the Company for any reason
other than just cause, then the Employee (or his beneficiaries) shall receive
payment of the Additional Base Salary for the remainder of the 1998 Calendar
Year in the manner set forth in the preceding paragraph. In the event the
Employee is not an employee of the Company at the time of any payment of the
Additional Base Salary, the Additional Base Salary shall be treated as a salary
continuation by the Company.
<PAGE> 6
The Additional Base Salary shall be excluded from the calculation of
the Employee's severance pay under Section 8(b) of the Original Employment
Agreement.
Section 9. Miscellaneous Changes. The term "President of the Company"
as used in Section 6 of the Original Employment Agreement is hereby amended to
read "Chief Executive Officer and President of CHS and Chief Executive Officer
of CMI."
Section 10. Definitions. All capitalized terms used in this amendment
which are not otherwise defined herein shall have the respective meanings given
those terms in the Original Employment Agreement or the First Amendment, as the
case may be.
Section 11. Captions. The captions of the various sections of this
amendment are not part of the context of this amendment, but are only labels to
assist in locating those sections, and shall be ignored in construing this
amendment.
Section 12. Construction. This document is an amendment to the
Employment Agreement. In the event of any inconsistencies between the provisions
of the Employment Agreement and this amendment, the provisions of this amendment
shall control. Except as modified by this amendment, the Employment Agreement
shall continue in full force and effect without change.
COMPMANAGEMENT, INC.
By__________________________________ ___________________________________
Bernard F. Master, D.O., ROBERT J. BOSSART
Chairman
COMPMANAGEMENT HEALTH
SYSTEMS, INC.
By__________________________________
Bernard F. Master, D.O.,
Chairman
<PAGE> 1
Exhibit 10(s)
SECOND AMENDMENT TO EMPLOYMENT AGREEMENT
This amendment is made as of December 15, 1997, in Columbus, Ohio,
among CompManagement, Inc., an Ohio corporation ("CMI"), CompManagement Health
Systems, Inc., an Ohio corporation ("CHS"), and Jonathan R. Wagner (the
"Employee").
Background Information
C. The Employee and CMI are parties to an Employment Agreement dated as
of July 21, 1995 (the "Original Employment Agreement"), which agreement was
amended as of October 1996 (the "First Amendment"). The Original Employment
Agreement, as amended by the First Amendment, is hereinafter referred to as the
"Employment Agreement."
D. CHS, a wholly owned subsidiary of CMI, is a managed care
organization (an "MCO") under Ohio's managed care workers' compensation system.
The parties desire to amend the Employment Agreement in order to, among other
things, make CHS a party to the employment arrangement and to reflect the
Employee's responsibilities with respect to the businesses of CMI and CHS. The
Employment Agreement, as amended by this amendment, is hereinafter collectively
referred to as the "Agreement."
Statement of Agreement
The parties hereby acknowledge the accuracy of the foregoing Background
Information and hereby agree as follows:
Section 1. Effective Date. This amendment shall be effective as of
December 15, 1997.
Section 2. Additional Party. CHS is hereby made a party to the
Agreement. As used in the Agreement, the term "Company" shall collectively mean
CMI and CHS, and the term "Health Power Companies" shall include CHS.
Section 3. Term of Employment. The parties acknowledge that, pursuant
to Section 2 of the First Amendment, the term of the Employee's employment by
the Company pursuant to the Agreement shall end on December 31, 1999 (the
"Termination Date"), unless sooner terminated or thereafter extended in
accordance with the provisions of the Agreement.
Section 4. Services. Section 3 of the Original Employment Agreement is
hereby amended in its entirety to read as follows:
The Employee shall serve as the President of CMI and, as such,
shall perform such services as may be reasonably assigned to him in
order to enable him to carry out the responsibilities and authority
granted to him under the Agreement. The Employee shall devote his full
business time, attention, energy, and skill to the businesses of the
Company; provided that he shall be entitled to attend business and
trade conventions and meetings and to take sick leaves as may be
provided generally for the Company's personnel and to take vacations as
provided in the Agreement. The Employee shall not engage in any
business or investment activity (whether or not competitive with the
Company) which requires any substantial time on his part.
Section 5. Responsibilities; Authority. Section 5 of the Original
Employment Agreement is hereby amended in its entirety to read as follows:
<PAGE> 2
As the President of CMI, the Employee shall be responsible for
supervising and managing the day-to-day business operations of CMI and
for supervising and implementing the policies and operating programs,
budgets, procedures, and directions established or changed from time
to time (collectively, the "Policies and Programs") by (i) the
Chairman of the Board, the Chief Executive Officer, or the Board of
Directors of CMI, or (ii) the Chairman of the Board or the Board of
Directors of Health Power, Inc., a Delaware corporation ("Health
Power"), which is the parent of CMI. Such responsibilities shall
include, without limitation, the following: developing CMI's financial
and operational goals and objectives and implementing strategies to
achieve such goals and objectives within budgeted amounts; planning
and developing CMI's financial and operational budgets and
projections; assisting department managers with developing financial
and operational goals and objectives for each department of CMI and
implementing strategies to achieve such goals and objectives within
such department's budgeted amounts; coordinating and supervising the
accounting and financial operations of CMI; hiring, training,
supervising, and discharging employees; and performing all other
activities relating to the management and day-to-day operations of
CMI's busineSection The Employee shall report to the Chief Executive
Officer of CMI and shall consult with the Chief Executive Officer of
CMI, from time to time, on all matters relating to the business
policies and financial planning of and for CMI.
The Employee shall have the authority on behalf of CMI to
manage and conduct the day-to-day operations of CMI in the ordinary
course of its business pursuant to the Policies and Programs of CMI
and the Policies and Programs of Health Power which are applicable to
CMI, provided that the Employee shall not take any of the following
actions without the prior approval of the Chief Executive Officer or
of the Board of CMI:
(a) Incur capital expenditures or acquire assets
having a price in excess of $25,000 or incur expenditures,
debts, liabilities, or other financial commitments in excess
of $25,000, unless the incurrance of such expenditures, debts,
liabilities, or other financial commitments or the acquisition
of such assets are in accordance with budgeted amounts set
forth in budgets previously approved by the Board of Directors
of CMI;
(b) Grant any mortgage, security interest, or other
encumbrance on any assets of CMI;
(c) Employ, change the compensation, or terminate the
employment of any management employees of CMI; or enter into
any employment agreement not terminable at the will of CMI; or
(d) Enter into any transaction, agreement, or take
any other action that is outside the ordinary course of CMI's
business or contrary to the Policies and Programs of CMI or
the Policies and Programs of Health Power applicable to CMI.
Section 6. Change in Control Definition. The last paragraph in Section
8 of the Original Employment Agreement, which paragraph sets forth the events
when a change of control of Health Power is deemed to have occurred, is hereby
amended in its entirety to read as follows:
For purposes of the Agreement, a change in control shall be
deemed to occur:
(A) When any "person" as defined in Section 3(a)(9)
of the Securities Exchange Act of 1934 (the "Exchange Act")
and as used in Sections 13(d) and 14(d) thereof, including a
"group" as defined in Section 13(d) of the Exchange Act, but
excluding Health Power and any subsidiary of Health Power and
any employee
<PAGE> 3
benefit plan sponsored or maintained by Health Power or any
subsidiary of Health Power (including any trustee of such plan
acting as trustee), directly or indirectly, becomes the
"beneficial owner" (as defined in Rule 13d-3 under the
Exchange Act, as amended from time to time) of securities of
Health Power representing 20% or more of the combined voting
power of Health Power's then outstanding securities;
(B) When, during any period of 24 consecutive months
during the term of the Agreement, the individuals who, at the
beginning of such period, constitute the Board of Directors of
Health Power (the "Incumbent Directors") cease for any reason
other than death to constitute at least a majority thereof;
provided, however, that a director who was not a director at
the beginning of such 24-month period shall be deemed to have
satisfied such 24-month requirement (and be an Incumbent
Director) if such director was elected by, or on the
recommendation of or with the approval of, at least two-thirds
of the directors who then qualified as Incumbent Directors
either actually (because they were directors at the beginning
of such 24-month period) or by prior operation of this
Section 8(B);
(C) Upon the occurrence of a transaction requiring
stockholder approval for the acquisition of Health Power by an
entity other than Health Power or a subsidiary of Health Power
through purchase of assets, by merger or otherwise.
(D) Upon the occurrence of the sale of either CMI or
CHS to a third party, whether such sale is structured as an
asset, stock, merger, or other similar type of transaction.
Section 7. Sales Commissions. The provisions of this section shall
govern the payment of sales commissions to the Employee and shall supersede and
replace in its entirety Section 5(b) of the Original Employment Agreement and
Section 3 of the First Amendment.
(a) CMI Sales Commissions. The Company shall pay to the
Employee sales commissions on the CMI Fees (as defined below) generated
by the sales efforts of the Employee (the "CMI Sales Commissions"). The
CMI Sales Commissions shall be in an amount up to (i) 25% of the amount
(subject to allocation as described in (d), below) of the CMI Fees for
the first year of business from a CMI Employer (as defined below),
which CMI Fees were generated by the sales efforts of the Employee,
plus (ii) 25% of the amount (subject to allocation as described in (d),
below) of the increase in CMI Fees from one Calendar Year (as defined
in (c), below) to the next Calendar Year from CMI Employers who are
part of group rating plans of CMI, which CMI Fees were generated by the
sales efforts of the Employee.
CMI Sales Commissions shall be payable on CMI Fees applicable
to CMI Employers located in any state or jurisdiction in which CMI is
authorized and approved to conduct busineSection With respect to a
business acquisition by CMI (whether such acquisition is structured as
an asset, stock, merger, or other similar type of transaction), no CMI
Sales Commissions shall be payable with respect to any fees received
by CMI from any employer who, at the time of such acquisition, was a
client or customer of the business acquired by CMI, except to the
extent payable pursuant to (ii), above.
For purposes of the Agreement: (A) "CMI Fees" shall mean fees
payable to CMI for its performance of third party administrative
services for workers' compensation and unemployment compensation claims
on behalf of CMI Employers; and (B) a "CMI Employer" shall mean any
individual or entity (including a corporation, limited liability
<PAGE> 4
company, partnership, or business trust) which has entered into a
contract with CMI pursuant to which CMI performs third party
administrative services for workers' compensation or unemployment
compensation claims on behalf of such individual or entity, but is
limited to employers that are part of group rating plans (prospective
and retrospective group rating plans), state-funded employers, and
self-funded employers.
(b) CHS Sales Commissions. The Company shall pay to the
Employee sales commissions on the CHS Fees (as defined below) generated
by the sales efforts of the Employee (the "CHS Sales Commissions") as
set forth in this section.
For the 1997 Calendar Year (as defined below), the CHS Sales
Commissions shall be $575,764, which represents approximately 5.3% of
the 1997 CHS Fees.
For the first quarter of the 1998 Calendar Year, the CHS Sales
Commissions shall be in an amount up to 25% of the amount (subject to
allocation as described in (d), below) of the gamma claim revenues of
CHS accrued during such quarter.
The parties shall enter into good faith discussions with
respect to the CHS Sales Commissions payable for the remainder of the
1998 Calendar Year and thereafter, with the intent that the CHS Sales
Commissions will be in an amount up to 25% of the amount (subject to
allocation as described in (d), below) of the CHS Fees for the first
year of business from a CHS Employer, which CHS Fees were generated by
the sales efforts of the Employee. The parties will determine, among
other things, the extent to which bonuses from the Bureau (as defined
below) will be included in CHS Fees for the first year of business from
a CHS Employer.
CHS Sales Commissions shall be payable only on CHS Fees
applicable to CHS Employers located in Ohio. With respect to the
acquisition of another MCO by CHS (whether such acquisition is
structured as an asset, stock, merger, or other similar type of
transaction), no CHS Sales Commissions shall be payable with respect to
any fees received by CHS with respect to any employer who, at the time
of such acquisition, had either selected the acquired MCO as its MCO or
been assigned to the acquired MCO by the Bureau (as defined below).
For purposes of the Agreement: (A) "CHS Fees" shall mean the
fees payable to CHS under the agreement dated as of February 12, 1997,
between the Ohio Bureau of Workers' Compensation (the "Bureau") and CHS
(as such agreement may be hereafter amended, modified, renewed,
extended, supplemented, or replaced), pursuant to which CHS has agreed
to provide medical management services for workers' compensation claims
on behalf of employers who have either selected CHS as their MCO or
been assigned to CHS by the Bureau; and (B) a "CHS Employer" is any
individual or entity (including a corporation, limited liability
company, partnership, or business trust) who has selected CHS as its
MCO.
(c) Annual Deduction. For each Calendar Year, a deduction in
the amount of $82,500 shall be made to the aggregate amount of the CMI
Sales Commissions and the CHS Sales Commissions payable to the
Employee. Such deduction shall be made prior to any payment of such
commissions for such Calendar Year.
(d) Allocation of Commissions. The Employee acknowledges and
agrees that the "25%" sales commission amount described in (a) and (b),
above, represents the total amount of sales commissions which are
payable with respect to any CMI Employer or CHS Employer, as the case
may be, and that the 25% sales commission amount may be allocated by
the Company among all of the salespersons participating in the sales
effort to the CMI Employer or CHS Employer, as the case may be. The
Chief Executive
<PAGE> 5
Officer of CMI or CHS, as the case may be, shall have the authority to
allocate the 25% sales commission amount in any manner such officer
deems appropriate, in his reasonable discretion. In the event of any
dispute regarding the allocation by the Chief Executive Officer of the
25% sales commission amount, such dispute shall be referred to, and
resolved by, the Compensation Committee of Health Power, whose
determination shall be binding and conclusive on all parties.
(e) Miscellaneous. The CMI Sales Commissions and the CHS Sales
Commissions shall be determined on a Calendar Year basis.
The payment of the CMI Sales Commissions shall accrue upon the
execution of the contract with the CMI Employer. The payment of the CHS
Sales Commissions shall accrue upon CHS receiving notification from the
Bureau that the CHS Employer has selected CHS as its MCO. In any event,
neither CMI nor CHS shall be obligated to pay such commissions unless
and until the corresponding CMI Fees or CHS Fees, as the case may be,
are received by CMI or CHS, respectively.
No commissions shall be payable to the Employee with respect
to any entity other than CMI or CHS.
For purposes of the Agreement, a "Calendar Year" shall mean
the period from January 1 through December 31 of the same year.
Section 8. Additional Base Salary. In addition to the base salary set
forth in Section 5(a) of the Original Employment Agreement (the "Original Base
Salary"), for the 1998 Calendar Year, the Company shall pay the Employee an
additional base salary of $264,615 (the "Additional Base Salary"), payable in 24
equal installments at the same time and in the same manner as the Original Base
Salary. The Additional Base Salary shall be applicable only for the 1998
Calendar Year.
If, during the 1998 Calendar Year, the Employee's employment is
terminated by the Company for "just cause" (as defined in the Original
Employment Agreement) other than due to the death of the Employee or by the
Employee, then the Employee shall receive payment of the Additional Base Salary
accrued through the date of termination of employment, and the Company shall
have no further obligation with respect to the payment of the Additional Base
Salary. If, during the 1998 Calendar Year, the Employee's employment is
terminated due to the death of the Employee or by the Company for any reason
other than just cause, then the Employee (or his beneficiaries) shall receive
payment of the Additional Base Salary for the remainder of the 1998 Calendar
Year in the manner set forth in the preceding paragraph. In the event the
Employee is not an employee of the Company at the time of any payment of the
Additional Base Salary, the Additional Base Salary shall be treated as a salary
continuation by the Company.
The Additional Base Salary shall be excluded from the calculation of
the Employee's severance pay under Section 8(b) of the Original Employment
Agreement.
Section 9. Miscellaneous Changes. The term "President of the Company"
as used in Sections 5(a), 6, 7(a), and 7(e) of the Original Employment Agreement
is hereby amended to read "Chief Executive Officer of CMI," and the term "Vice
President of Marketing for the Company" as used in Section 6 of the Original
Employment Agreement is hereby amended to read "President of CMI."
Section 10. Definitions. All capitalized terms used in this amendment
which are not otherwise defined herein shall have the respective meanings given
those terms in the Original Employment Agreement or the First Amendment, as the
case may be.
<PAGE> 6
Section 11. Captions. The captions of the various sections of this
amendment are not part of the context of this amendment, but are only labels to
assist in locating those sections, and shall be ignored in construing this
amendment.
Section 12. Construction. This document is an amendment to the
Employment Agreement. In the event of any inconsistencies between the provisions
of the Employment Agreement and this amendment, the provisions of this amendment
shall control. Except as modified by this amendment, the Employment Agreement
shall continue in full force and effect without change.
COMPMANAGEMENT, INC.
By__________________________________ ___________________________________
Bernard F. Master, D.O., JONATHAN R. WAGNER
Chairman
COMPMANAGEMENT HEALTH
SYSTEMS, INC.
By__________________________________
Bernard F. Master, D.O.,
Chairman
<PAGE> 1
Exhibit 10(v)
SECOND AMENDMENT TO EMPLOYMENT AGREEMENT
This amendment is made as of December 15, 1997, in Columbus, Ohio,
among CompManagement, Inc., an Ohio corporation ("CMI"), CompManagement Health
Systems, Inc., an Ohio corporation ("CHS"), and Richard T. Kurth (the
"Employee").
Background Information
E. The Employee and CMI are parties to an Employment Agreement dated as
of July 21, 1995 (the "Original Employment Agreement"), which agreement was
amended as of October 1996 (the "First Amendment"). The Original Employment
Agreement, as amended by the First Amendment, is hereinafter referred to as the
"Employment Agreement."
F. CHS, a wholly owned subsidiary of CMI, is a managed care
organization (an "MCO") under Ohio's managed care workers' compensation system.
The parties desire to amend the Employment Agreement in order to, among other
things, make CHS a party to the employment arrangement and to reflect the
Employee's responsibilities with respect to the businesses of CMI and CHS. The
Employment Agreement, as amended by this amendment, is hereinafter collectively
referred to as the "Agreement."
Statement of Agreement
The parties hereby acknowledge the accuracy of the foregoing Background
Information and hereby agree as follows:
Section 1. Effective Date. This amendment shall be effective as of
December 15, 1997.
Section 2. Additional Party. CHS is hereby made a party to the
Agreement. As used in the Agreement, the term "Company" shall collectively mean
CMI and CHS, and the term "Health Power Companies" shall include CHS.
Section 3. Term of Employment. The parties acknowledge that, pursuant
to Section 2 of the First Amendment, the term of the Employee's employment by
the Company pursuant to the Agreement shall end on December 31, 1999 (the
"Termination Date"), unless sooner terminated or thereafter extended in
accordance with the provisions of the Agreement.
Section 4. Services. Section 3 of the Original Employment Agreement is
hereby amended in its entirety to read as follows:
The Employee shall serve as the Executive Vice President of
CMI and, as such, shall perform such services as may be reasonably
assigned to him from time to time by the President of CMI. The Employee
shall devote his full business time, attention, energy, and skill to
the businesses of the Company; provided that he shall be entitled to
attend business and trade conventions and meetings and to take sick
leaves as may be provided generally for the Company's personnel and to
take vacations as provided in the Agreement. The Employee shall not
engage in any business or investment activity (whether or not
competitive with the Company) which requires any substantial time on
his part.
Section 5. Responsibilities; Authority. Section 5 of the Original
Employment Agreement is hereby amended in its entirety to read as follows:
<PAGE> 2
As the Executive Vice President of CMI, the Employee shall be
responsible for assisting the President in supervising and managing the
day-to-day business operations of CMI and for assisting the President
in supervising and implementing the policies and operating programs,
budgets, procedures, and directions established or changed from time to
time (collectively, the "Policies and Programs") by (i) the Chairman of
the Board, the Chief Executive Officer, or the Board of Directors of
CMI, or (ii) the Chairman of the Board or the Board of Directors of
Health Power, Inc., a Delaware corporation ("Health Power"), which is
the parent of CMI. Such responsibilities shall include, without
limitation, the following: developing CMI's financial and operational
goals and objectives and implementing strategies to achieve such goals
and objectives within budgeted amounts; planning and developing CMI's
financial and operational budgets and projections; assisting department
managers with developing financial and operational goals and objectives
for each department of CMI and implementing strategies to achieve such
goals and objectives within such department's budgeted amounts;
coordinating and supervising the accounting and financial operations of
CMI; hiring, training, supervising, and discharging employees; and
performing all other activities relating to the management and
operations of CMI's business as may be reasonably assigned to him from
time to time by the President of CMI. The Employee shall report to the
President of CMI.
The Employee shall have such authority to act on behalf of CMI
as may be delegated to him from time to time by the President of the
Company.
Section 6. Change in Control Definition. The last paragraph in Section
8 of the Original Employment Agreement, which paragraph sets forth the events
when a change of control of Health Power is deemed to have occurred, is hereby
amended in its entirety to read as follows:
For purposes of the Agreement, a change in control shall be
deemed to occur:
(A) When any "person" as defined in Section 3(a)(9)
of the Securities Exchange Act of 1934 (the "Exchange Act")
and as used in Sections 13(d) and 14(d) thereof, including a
"group" as defined in Section 13(d) of the Exchange Act, but
excluding Health Power and any subsidiary of Health Power and
any employee benefit plan sponsored or maintained by Health
Power or any subsidiary of Health Power (including any trustee
of such plan acting as trustee), directly or indirectly,
becomes the "beneficial owner" (as defined in Rule 13d-3 under
the Exchange Act, as amended from time to time) of securities
of Health Power representing 20% or more of the combined
voting power of Health Power's then outstanding securities;
(B) When, during any period of 24 consecutive months
during the term of the Agreement, the individuals who, at the
beginning of such period, constitute the Board of Directors of
Health Power (the "Incumbent Directors") cease for any reason
other than death to constitute at least a majority thereof;
provided, however, that a director who was not a director at
the beginning of such 24-month period shall be deemed to have
satisfied such 24-month requirement (and be an Incumbent
Director) if such director was elected by, or on the
recommendation of or with the approval of, at least two-thirds
of the directors who then qualified as Incumbent Directors
either actually (because they were directors at the beginning
of such 24-month period) or by prior operation of this Section
8(B);
<PAGE> 3
(C) Upon the occurrence of a transaction requiring
stockholder approval for the acquisition of Health Power by an
entity other than Health Power or a subsidiary of Health Power
through purchase of assets, by merger or otherwise.
(D) Upon the occurrence of the sale of either CMI or
CHS to a third party, whether such sale is structured as an
asset, stock, merger, or other similar type of transaction.
Section 7. Sales Commissions. On and after January 1, 1997, the
provisions of this section shall govern the payment of sales commissions to the
Employee and shall supersede and replace in its entirety Section 5(b) of the
Original Employment Agreement and Section 3 of the First Amendment.
(a) CMI Sales Commissions. The Company shall pay to the
Employee sales commissions on the CMI Fees (as defined below) generated
by the sales efforts of the Employee (the "CMI Sales Commissions"). The
CMI Sales Commissions shall be in an amount up to (i) 25% of the amount
(subject to allocation as described in (d), below) of the CMI Fees for
the first year of business from a CMI Employer (as defined below),
which CMI Fees were generated by the sales efforts of the Employee,
plus (ii) 25% of the amount (subject to allocation as described in (d),
below) of the increase in CMI Fees from one Calendar Year (as defined
in (c), below) to the next Calendar Year from CMI Employers who are
part of group rating plans of CMI, which CMI Fees were generated by the
sales efforts of the Employee.
CMI Sales Commissions shall be payable on CMI Fees applicable
to CMI Employers located in any state or jurisdiction in which CMI is
authorized and approved to conduct busineSection With respect to a
business acquisition by CMI (whether such acquisition is structured as
an asset, stock, merger, or other similar type of transaction), no CMI
Sales Commissions shall be payable with respect to any fees received by
CMI from any employer who, at the time of such acquisition, was a
client or customer of the business acquired by CMI, except to the
extent payable pursuant to (ii), above.
For purposes of the Agreement: (A) "CMI Fees" shall mean fees
payable to CMI for its performance of third party administrative
services for workers' compensation and unemployment compensation claims
on behalf of CMI Employers; and (B) a "CMI Employer" shall mean any
individual or entity (including a corporation, limited liability
company, partnership, or business trust) which has entered into a
contract with CMI pursuant to which CMI performs third party
administrative services for workers' compensation or unemployment
compensation claims on behalf of such individual or entity, but is
limited to employers that are part of group rating plans (prospective
and retrospective group rating plans), state-funded employers, and
self-funded employers.
(b) CHS Sales Commissions. The Company shall pay to the
Employee sales commissions on the CHS Fees (as defined below) generated
by the sales efforts of the Employee (the "CHS Sales Commissions") as
set forth in this section.
For the 1997 Calendar Year (as defined below), the CHS Sales
Commissions shall be $655,388, which represents approximately 6.1% of
the 1997 CHS Fees.
For the first quarter of the 1998 Calendar Year, the CHS Sales
Commissions shall be in an amount up to 25% of the amount (subject to
allocation as described in (d), below) of the gamma claim revenues of
CHS accrued during such quarter.
The parties shall enter into good faith discussions with
respect to the CHS Sales Commissions payable for the remainder of the
1998 Calendar Year and thereafter, with
<PAGE> 4
the intent that the CHS Sales Commissions will be in an amount up to
25% of the amount (subject to allocation as described in (d), below) of
the CHS Fees for the first year of business from a CHS Employer, which
CHS Fees were generated by the sales efforts of the Employee. The
parties will determine, among other things, the extent to which bonuses
from the Bureau (as defined below) will be included in CHS Fees for the
first year of business from a CHS Employer.
CHS Sales Commissions shall be payable only on CHS Fees
applicable to CHS Employers located in Ohio. With respect to the
acquisition of another MCO by CHS (whether such acquisition is
structured as an asset, stock, merger, or other similar type of
transaction), no CHS Sales Commissions shall be payable with respect to
any fees received by CHS with respect to any employer who, at the time
of such acquisition, had either selected the acquired MCO as its MCO or
been assigned to the acquired MCO by the Bureau (as defined below).
For purposes of the Agreement: (A) "CHS Fees" shall mean the
fees payable to CHS under the agreement dated as of February 12, 1997,
between the Ohio Bureau of Workers' Compensation (the "Bureau") and CHS
(as such agreement may be hereafter amended, modified, renewed,
extended, supplemented, or replaced), pursuant to which CHS has agreed
to provide medical management services for workers' compensation claims
on behalf of employers who have either selected CHS as their MCO or
been assigned to CHS by the Bureau; and (B) a "CHS Employer" is any
individual or entity (including a corporation, limited liability
company, partnership, or business trust) who has selected CHS as its
MCO.
(c) Annual Deduction. For each Calendar Year, a deduction in
the amount of $16,481 shall be made to the aggregate amount of the CMI
Sales Commissions and the CHS Sales Commissions payable to the
Employee. Such deduction shall be made prior to any payment of such
commissions for such Calendar Year.
(d) Allocation of Commissions. The Employee acknowledges and
agrees that the "25%" sales commission amount described in (a) and (b),
above, represents the total amount of sales commissions which are
payable with respect to any CMI Employer or CHS Employer, as the case
may be, and that the 25% sales commission amount may be allocated by
the Company among all of the salespersons participating in the sales
effort to the CMI Employer or CHS Employer, as the case may be. The
Chief Executive Officer of CMI or CHS, as the case may be, shall have
the authority to allocate the 25% sales commission amount in any manner
such officer deems appropriate, in his reasonable discretion. In the
event of any dispute regarding the allocation by the Chief Executive
Officer of the 25% sales commission amount, such dispute shall be
referred to, and resolved by, the Compensation Committee of Health
Power, whose determination shall be binding and conclusive on all
parties.
(e) Miscellaneous. The CMI Sales Commissions and the CHS Sales
Commissions shall be determined on a Calendar Year basis.
The payment of the CMI Sales Commissions shall accrue upon the
execution of the contract with the CMI Employer. The payment of the CHS
Sales Commissions shall accrue upon CHS receiving notification from the
Bureau that the CHS Employer has selected CHS as its MCO. In any event,
neither CMI nor CHS shall be obligated to pay such commissions unless
and until the corresponding CMI Fees or CHS Fees, as the case may be,
are received by CMI or CHS, respectively.
No commissions shall be payable to the Employee with respect
to any entity other than CMI or CHS.
<PAGE> 5
For purposes of the Agreement, a "Calendar Year" shall mean
the period from January 1 through December 31 of the same year.
Section 8. Additional Base Salary. In addition to the base salary set
forth in Section 5(a) of the Original Employment Agreement (the "Original Base
Salary"), for the 1998 Calendar Year, the Company shall pay the Employee an
additional base salary of $184,991 (the "Additional Base Salary"), payable in 24
equal installments at the same time and in the same manner as the Original Base
Salary. The Additional Base Salary shall be applicable only for the 1998
Calendar Year.
If, during the 1998 Calendar Year, the Employee's employment is
terminated by the Company for "just cause" (as defined in the Original
Employment Agreement) other than due to the death of the Employee or by the
Employee, then the Employee shall receive payment of the Additional Base Salary
accrued through the date of termination of employment, and the Company shall
have no further obligation with respect to the payment of the Additional Base
Salary. If, during the 1998 Calendar Year, the Employee's employment is
terminated due to the death of the Employee or by the Company for any reason
other than just cause, then the Employee (or his beneficiaries) shall receive
payment of the Additional Base Salary for the remainder of the 1998 Calendar
Year in the manner set forth in the preceding paragraph. In the event the
Employee is not an employee of the Company at the time of any payment of the
Additional Base Salary, the Additional Base Salary shall be treated as a salary
continuation by the Company.
The Additional Base Salary shall be excluded from the calculation of
the Employee's severance pay under Section 8(b) of the Original Employment
Agreement.
Section 9. Miscellaneous Changes. The term "Vice President of Sales for
the Company" as used in Section 6 of the Original Employment Agreement is hereby
amended to read "Executive Vice President of CMI."
Section 10. Definitions. All capitalized terms used in this amendment
which are not otherwise defined herein shall have the respective meanings given
those terms in the Original Employment Agreement or the First Amendment, as the
case may be.
Section 11. Captions. The captions of the various sections of this
amendment are not part of the context of this amendment, but are only labels to
assist in locating those sections, and shall be ignored in construing this
amendment.
<PAGE> 6
Section 12. Construction. This document is an amendment to the
Employment Agreement. In the event of any inconsistencies between the provisions
of the Employment Agreement and this amendment, the provisions of this amendment
shall control. Except as modified by this amendment, the Employment Agreement
shall continue in full force and effect without change.
COMPMANAGEMENT, INC.
By__________________________________ ___________________________________
Bernard F. Master, D.O., RICHARD T. KURTH
Chairman
COMPMANAGEMENT HEALTH
SYSTEMS, INC.
By__________________________________
Bernard F. Master, D.O.,
Chairman
<PAGE> 1
Exhibit 10(x)
AMENDMENT NO. 1
TO
HEALTH POWER, INC.
1996 DIRECTORS STOCK AWARD AND PURCHASE PLAN
The Health Power, Inc. 1996 Directors Stock Award and Purchase Plan
(the "Plan") is hereby amended pursuant to the following provisions:
Section 1. Definitions.
All capitalized terms used in this amendment which are not otherwise
defined herein shall have the respective meanings given such terms in the Plan.
Section 2. Additional Retainer.
Commencing in 1997, each Eligible Director of the Company (but not an
Eligible Director of one of the Company's subsidiaries) shall receive on an
annual basis, in addition to the Retainer, an additional annual retainer (the
"Additional Retainer"), which Additional Retainer shall be paid solely in the
form of Shares pursuant to the Plan. The number of Shares evidencing the
Additional Retainer shall be in an amount equal to $3,000 divided by the fair
market value of the Shares as of the last trading day of the year with respect
to which the Additional Retainer is paid, which number shall then be rounded
down to the nearest whole number. No fractional Shares shall be issued in
connection with the payment of the Additional Retainer. In order to receive the
Additional Retainer, a person must be an Eligible Director as of December 31 of
the year with respect to which the Additional Retainer is paid.
Section 3. Effective Date; Construction.
The effective date of this amendment is August 21, 1997, and this
amendment shall be deemed to be a part of the Plan as of such date. In the event
of any inconsistencies between the provisions of the Plan and this amendment,
the provisions of this amendment shall control. Except as modified by this
amendment, the Plan shall continue in full force and effective without change.
<PAGE> 1
Exhibit 11
Statement Regarding Computation of Per Share Earnings
<TABLE>
<CAPTION>
BASIC: 1997 1996 1995
----- ----- ----
<S> <C> <C> <C>
Average Number of Common Shares 3,818,465 3,810,331 3,809,757
Average Common Share Equivalents -0- -0- -0-
---------- ----------- ----------
Average Shares Outstanding 3,818,465 3,810,331 3,809,757
Net Income (Loss) $3,013,788 ($9,483,364) $ 96,117
Net Income (Loss) per Common and Common
Equivalent Share $ 0.79 ($ 2.49) $ 0.03
========== =========== ==========
DILUTED:
Average Number of Common Shares 3,818,465 3,810,331 3,809,757
Average Common Shares Equivalents 14,185 -0- -0-
---------- ----------- ----------
Average Shares Outstanding 3,832,650 3,810,331 3,809,757
Net Income (Loss) $3,013,788 ($9,483,364) $ 96,117
Net Income (Loss) per Common and Common
Equivalent Share $ 0.79 ($ 2.49) $ 0.03
========== =========== ==========
</TABLE>
<PAGE> 1
Exhibit 21
Subsidiaries of Health Power, Inc.
1. Health Power HMO, Inc., an Ohio corporation.
2. CompManagement, Inc., an Ohio corporation.
3. CompManagement Health Systems, Inc., an Ohio corporation.
4. Health Power Management Corporation, an Ohio corporation.
5. Health Power Life Insurance Agency, Inc., an Ohio corporation.
6. Health Power TPA, Inc., an Ohio corporation.
<PAGE> 1
Exhibit 23
Consent of Coopers & Lybrand L.L.P.
Consent of Independent Accountants
We consent to incorporation by reference in the registration statement of Health
Power, Inc. on Form S-8 (File No. 33-91956), Form S-8 (File No. 33-91958), Form
S-8 (File No. 33-91852), Form S-8 (File No. 333-20535), Form S-8 (File No.
333-45857), and Form S-3 (File No. 33-80035) of our report dated March 10, 1998,
on our audits of the consolidated financial statements of Health Power, Inc. and
Subsidiaries as of December 31, 1997 and 1996, and for the years ended December
31, 1997, 1996, and 1995 which report is included in this Annual Report on Form
10-K.
Columbus, Ohio /s/ COOPERS & LYBRAND L.L.P.
March 31, 1998 ----------------------------
Coopers & Lybrand L.L.P.
<PAGE> 1
Exhibit 24
POWER OF ATTORNEY
FOR
ANNUAL REPORTS ON FORM 10-K
The undersigned, a director of Health Power, Inc., a Delaware
corporation (the "Company"), hereby constitutes and appoints Dr. Bernard F.
Master and Alec Wightman, and each of them, my true and lawful attorneys-in-fact
and agents, with full power to act without the other, with full power of
substitution and resubstitution, for me and in my name, place, and stead, in my
capacity as director of the Company, to execute the Company's Form 10-K Annual
Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
for the Company's fiscal year ended December 31, 1997, and for each fiscal year
thereafter, and any amendments thereto, and to file the same, with all exhibits
thereto and other documents in connection therewith, with the Securities and
Exchange Commission, granting unto said attorneys-in-fact and agents, and each
of them, full power and authority to do and perform each and every act and thing
requisite and necessary to be done, as fully to all intents and purposes as I
might or could do in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents or any of them or their or his substitute or
substitutes may lawfully do or cause to be done by virtue hereof.
/s/ ROBERT J. BOSSART January 28, 1998
- ------------------------------------ ----------------
Robert J. Bossart Date
/s/ ELLIOTT P. FELDMAN January 29, 1998
- ------------------------------------ ----------------
Elliott P. Feldman, D.O. Date
/s/ ROBERT S. GAREK January 28, 1998
- ------------------------------------ ----------------
Robert S. Garek Date
/s/ CRYSTAL A. KUYKENDALL January 30, 1998
- ------------------------------------ ----------------
Crystal A. Kuykendall, Ph.D., J.D. Date
/s/ BERNARD F. MASTER February 7, 1998
- ------------------------------------ ----------------
Bernard F. Master, D.O. Date
/s/ FRANK R. NUTIS January 30, 1998
- ------------------------------------ ----------------
Frank R. Nutis Date
/s/ BURT E. SCHEAR February 6, 1998
- ------------------------------------ ----------------
Burt E. Schear, M.D. Date
/s/ PETER SOMANI January 28, 1998
- ------------------------------------ ----------------
Peter Somani, M.D. Date
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
REGISTRANT'S CONSOLIDATED BALANCE SHEET DATED AS OF DECEMBER 31, 1997, AND ITS
CONSOLIDATED STATEMENT OF OPERATIONS, CONSOLIDATED STATEMENT OF STOCKHOLDERS'
EQUITY, AND CONSOLIDATED STATEMENT OF CASH FLOWS FOR THE YEAR ENDED DECEMBER 31,
1997, WHICH FINANCIAL STATEMENTS ARE INCLUDED IN ITEM 8 OF THIS REPORT, AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> US DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<EXCHANGE-RATE> 1
<CASH> 8,427
<SECURITIES> 0
<RECEIVABLES> 5,579
<ALLOWANCES> (301)
<INVENTORY> 0
<CURRENT-ASSETS> 14,922
<PP&E> 5,144
<DEPRECIATION> 1,993
<TOTAL-ASSETS> 20,518
<CURRENT-LIABILITIES> 12,953
<BONDS> 0
0
0
<COMMON> 38
<OTHER-SE> 7,527
<TOTAL-LIABILITY-AND-EQUITY> 20,518
<SALES> 0
<TOTAL-REVENUES> 75,813
<CGS> 0
<TOTAL-COSTS> 75,661
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,221
<INCOME-PRETAX> 1,373
<INCOME-TAX> (1,641)
<INCOME-CONTINUING> 3,014
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,014
<EPS-PRIMARY> .79
<EPS-DILUTED> .79
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<RESTATED>
<MULTIPLIER> 1,000
<S> <C> <C> <C>
<PERIOD-TYPE> 3-MOS 6-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1997 DEC-31-1997
<PERIOD-START> JAN-01-1997 JAN-01-1997 JAN-01-1997
<PERIOD-END> MAR-31-1997 JUN-30-1997 SEP-30-1997
<CASH> 18,226 13,028 6,758
<SECURITIES> 0 0 0
<RECEIVABLES> 5,510 4,353 4,935
<ALLOWANCES> (118) (118) 107
<INVENTORY> 0 0 0
<CURRENT-ASSETS> 25,854 17,775 14,550
<PP&E> 4,224 4,547 4,818
<DEPRECIATION> 1,566 1,688 1,829
<TOTAL-ASSETS> 29,548 21,672 18,897
<CURRENT-LIABILITIES> 25,648 16,107 12,043
<BONDS> 0 0 0
0 0 0
0 0 0
<COMMON> 38 38 38
<OTHER-SE> 3,862 5,526 6,816
<TOTAL-LIABILITY-AND-EQUITY> 29,548 21,672 18,897
<SALES> 0 0 0
<TOTAL-REVENUES> 17,613 35,956 55,062
<CGS> 0 0 0
<TOTAL-COSTS> 18,517 35,257 55,916
<OTHER-EXPENSES> 0 0 0
<LOSS-PROVISION> 0 0 0
<INTEREST-EXPENSE> (269) (633) 939
<INCOME-PRETAX> (635) 1,333 85
<INCOME-TAX> 11 314 (2,218)
<INCOME-CONTINUING> (645) 1,018 2,303
<DISCONTINUED> 0 0 0
<EXTRAORDINARY> 0 0 0
<CHANGES> 0 0 0
<NET-INCOME> (645) 1,018 2,303
<EPS-PRIMARY> (.17) .27 .60
<EPS-DILUTED> (.17) .27 .60
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<RESTATED>
<MULTIPLIER> 1,000
<S> <C> <C> <C> <C>
<PERIOD-TYPE> 3-MOS 6-MOS 9-MOS YEAR
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1996 DEC-31-1996 DEC-31-1996
<PERIOD-START> JAN-01-1996 JAN-01-1996 JAN-01-1996 JAN-01-1996
<PERIOD-END> MAR-31-1996 JUN-30-1996 SEP-30-1996 DEC-31-1996
<CASH> 22,509 14,705 12,890 13,929
<SECURITIES> 0 0 0 0
<RECEIVABLES> 2,583 3,161 2,989 2,375
<ALLOWANCES> (10) (30) (38) (118)
<INVENTORY> 0 0 0 0
<CURRENT-ASSETS> 26,690 19,664 18,195 18,133
<PP&E> 3,776 3,658 3,796 3,853
<DEPRECIATION> 1,211 1,296 1,387 1,461
<TOTAL-ASSETS> 29,771 27,541 21,112 21,069
<CURRENT-LIABILITIES> 16,447 15,589 15,164 16,550
<BONDS> 0 0 0 0
0 0 0 0
0 0 0 0
<COMMON> 38 38 38 38
<OTHER-SE> 13,280 11,914 5,910 4,480
<TOTAL-LIABILITY-AND-EQUITY> 29,771 27,541 21,112 21,069
<SALES> 0 0 0 0
<TOTAL-REVENUES> 15,387 30,882 48,972 66,086
<CGS> 0 0 0 0
<TOTAL-COSTS> 16,681 34,376 59,283 78,176
<OTHER-EXPENSES> 0 0 0 0
<LOSS-PROVISION> 0 0 0 0
<INTEREST-EXPENSE> (233) (331) (592) (834)
<INCOME-PRETAX> (1,060) (3,163) (9,719) (11,256)
<INCOME-TAX> (376) (1,113) (1,666) (1,773)
<INCOME-CONTINUING> (684) (2,050) (8,053) (9,483)
<DISCONTINUED> 0 0 0 0
<EXTRAORDINARY> 0 0 0 0
<CHANGES> 0 0 0 0
<NET-INCOME> (684) (2,050) (8,053) (9,483)
<EPS-PRIMARY> (.18) (.54) (2.11) (2.49)
<EPS-DILUTED> (.18) (.54) (2.11) (2.49)
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<RESTATED>
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0
0
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