<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
------------------------------
FORM 8-K/A
(Amendment No. 1)
Current Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): March 16, 1999
(December 31, 1998)
HEALTH POWER, INC.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 0-23220 31-1145640
- ------------------------------- ------- ----------
(State or other jurisdiction of (Commission (IRS Employer
incorporation) File Number) Identification No.)
1209 Orange Street, Wilmington, Delaware 19801
- ---------------------------------------- -----
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (302) 658-7581
No Change
- --------------------------------------------------------------------------------
(Former name or former address, if changed since last report)
<PAGE> 2
HEALTH POWER, INC.
Form 8-K/A dated March 16, 1999
(Amendment No. 1), amending the
Current Report on Form 8-K dated January 15, 1999
Health Power, Inc., a Delaware corporation (the "Company"),
hereby amends its Current Report on Form 8-K dated January 15, 1999, to include
the financial statements and pro forma financial information set forth below
which was omitted from the original filing pursuant to Items 7(a)(4) and 7(b)(2)
of Form 8-K. The Company is also filing its audited consolidated financial
statements under Item 5.
ITEM 5. OTHER EVENTS.
Set forth below are the audited consolidated balance sheets of
Health Power, Inc. and Subsidiaries as of December 31, 1998 and
1997, the related consolidated statements of operations,
stockholders' equity, and cash flows for each of the three years
in the period ended December 31, 1998, and the notes thereto,
along with the report of independent accountants.
<PAGE> 3
HEALTH POWER, INC.
AND SUBSIDIARIES
REPORT ON AUDITS OF
CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED
DECEMBER 31, 1998, 1997 AND 1996
<PAGE> 4
REPORT OF INDEPENDENT ACCOUNTANTS
March 11, 1999
Board of Directors and Shareholders
Health Power, Inc.
Columbus, Ohio
We have audited the accompanying consolidated balance sheets of Health Power,
Inc., and Subsidiaries (the Company) as of December 31, 1998 and 1997,and the
related consolidated statements of operations, stockholders' equity, and cash
flows for each of the three years in the period ended December 31, 1998. 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 16 to the financial statements, at December 31, 1998 and
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.
Additionally, during the fourth quarter 1998 the Company decided to discontinue
operations of its HMO subsidiary.
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, 1998 and 1997, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1998, in conformity with generally
accepted accounting principles.
/s/ PricewaterhouseCoopers LLP
------------------------------
<PAGE> 5
HEALTH POWER, INC., AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 1998 AND 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1998 1997
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $11,714,169 $ 8,427,483
Accounts receivable, net 5,671,074 3,616,639
Prepaid expenses and other 239,900 330,496
Current non-cash assets of discontinued operations (Note 16) 3,055,124 4,248,950
Deferred income taxes, net 80,669 89,548
----------- -----------
Total current assets 20,760,936 16,713,116
----------- -----------
Property and equipment, at cost:
Leasehold improvements 188,068 160,840
Furniture, equipment and software 3,974,319 1,665,878
----------- -----------
4,162,387 1,826,718
Less accumulated depreciation 1,230,973 438,074
----------- -----------
2,931,414 1,388,644
----------- -----------
Goodwill 5,526,736 --
Noncurrent assets of discontinued operations (Note 16) 1,403,344 3,705,467
Deposits and other assets 46,905 541,581
----------- -----------
Total assets $30,669,335 $22,348,808
=========== ===========
</TABLE>
CONTINUED
- 2 -
<PAGE> 6
HEALTH POWER, INC., AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 1998 AND 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1998 1997
LIABILITIES AND STOCKHOLDERS' EQUITY
<S> <C> <C>
Current liabilities:
Deferred revenues $ 8,378,113 $ 498,806
Accounts payable 1,323,684 853,271
Taxes payable 2,788,701 2,009,209
Current liabilities of discontinued operations (Note 16) 9,163,635 11,142,394
Accrued expenses and other current liabilities 160,442 239,771
Note payable 3,526,736 --
------------ ------------
Total current liabilities 25,341,311 14,743,451
------------ ------------
Note payable 2,000,000
Deferred income taxes, net 222,481 40,536
------------ ------------
Total liabilities 27,563,792 14,783,987
------------ ------------
Commitments and contingencies (Notes 7 and 23) -- --
Stockholders' equity:
Preferred stock, par value of $.01 per share, 5,000,000
shares authorized; none issued -- --
Common stock, par value of $.01 per share, 10,000,000
shares authorized; 3,834,829 and 3,820,498 shares
issued and outstanding, respectively 38,348 38,205
Additional paid-in capital 10,809,475 10,743,643
Accumulated deficit (7,742,280) (3,217,027)
------------ ------------
Total stockholders' equity 3,105,543 7,564,821
------------ ------------
Total liabilities and stockholders' equity $ 30,669,335 $ 22,348,808
============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
- 3 -
<PAGE> 7
HEALTH POWER, INC., AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Revenues:
Contract $ 24,861,454 $ 22,182,644 $ 6,671,679
------------ ------------ ------------
Expenses:
General and administrative 21,271,804 16,558,530 6,338,479
------------ ------------ ------------
21,271,804 16,558,530 6,338,479
------------ ------------ ------------
Income from operations 3,589,650 5,624,114 333,200
Interest income and other, net 444,290 531,919 247,020
------------ ------------ ------------
Income from continuing operations
before income taxes 4,033,940 6,156,033 580,220
Federal, state and local income tax expense (1,570,204) (2,324,163) (184,934)
------------ ------------ ------------
Income from continuing operations 2,463,736 3,831,870 395,286
Discontinued operations (Note 16):
Loss from discontinued operations (net of
tax (expense) benefits of ($1,030,443), $3,965,073 and
$1,957,769, respectively) (4,902,232) (818,082) (9,878,650)
Loss on disposal of discontinued operations;
including $607,000 for operating losses
during phase-out period (net of tax
benefits of $0) (1,613,493) -- --
------------ ------------ ------------
Net (loss) income $ (4,051,989) $ 3,013,788 $ (9,483,364)
============ ============ ============
Earnings per share (basic and diluted):
Income from continuing operations, per share $ .64 $ 1.00 $ 0.10
Loss from discontinued operations, per share (1.70) (0.21) (2.59)
------------ ------------ ------------
Net (loss) income per share $ (1.06) $ 0.79 $ (2.49)
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
- 4 -
<PAGE> 8
HEALTH POWER, INC., AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL TOTAL
------------ PAID-IN ACCUMULATED STOCKHOLDERS'
SHARES AMOUNT CAPITAL DEFICIT EQUITY
------ ------ ------- ------- ------
<S> <C> <C> <C> <C> <C>
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
plan 10,167 101 32,351 -- 32,452
Net loss -- -- -- 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
Issuance of common stock -
director stock award
plan and exercise of
stock options 14,331 143 65,832 -- 65,975
Excess of liabilities
assumed in acquisition -- -- -- (473,264) (473,264)
Net loss -- -- -- (4,051,989) (4,051,989)
--------- ----------- ----------- ----------- -----------
Balance at December 31, 1998 3,834,829 $ 38,348 $10,809,475 $(7,742,280) $ 3,105,543
========= =========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
- 5 -
<PAGE> 9
HEALTH POWER, INC., AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
CASH FLOWS PROVIDED BY (USED IN) OPERATING ACTIVITIES:
Net income from continuing operations $ 2,463,736 $ 3,831,870 $ 395,286
Adjustments to reconcile net income to net cash
provided by (used in) operating activities of
continuing operations:
Depreciation 431,031 228,952 344,237
Loss on disposal of property and equipment -- -- 155,960
(Increase) decrease in deferred income taxes 49,479 (49,012) 63,084
Issuance of common stock for director stock award plan 65,975 32,452 --
Changes in current assets and current liabilities of continuing
operations:
Decrease (increase) in accounts and notes receivable 1,580,777 (3,152,377) (161,117)
Decrease (increase) in prepaid expenses and other 181,143 (193,611) (16,869)
Decrease (increase) in income taxes refundable -- 94,412 (94,412)
Increase (decrease) in deferred revenues 4,715,345 (530,138) 723,983
(Decrease) increase in accounts payable (481,731) 435,315 28,150
Increase (decrease) in taxes payable, net (648,983) 2,009,209 --
Increase (decrease) in accrued expenses and other liabilities (99,683) 95,578 6,002
------------ ------------ ------------
Cash provided by continuing operating activities 8,257,089 2,802,650 1,444,304
Cash used in discontinued operations (4,954,610) (6,515,633) (6,568,848)
------------ ------------ ------------
Net cash provided by (used in) operating activities 3,302,479 (3,712,983) (5,124,544)
------------ ------------ ------------
CASH FLOWS USED IN INVESTING ACTIVITIES:
Purchase of property and equipment, net (869,173) (1,230,105) (484,917)
Proceeds from sale of property and equipment -- -- 99,000
Cash of acquired M&N 352,913
Acquisition of M&N (3,000,000)
Deposits and other assets 495,379 (497,658) (28,926)
------------ ------------ ------------
Cash used in continuing operations (3,020,881) (1,727,763) (414,843)
Cash provided by (used in) discontinued operations 5,088 (60,411) (24,865)
------------ ------------ ------------
Net cash used in investing activities (3,015,793) (1,788,174) (439,708)
------------ ------------ ------------
CASH FLOWS PROVIDED BY FINANCING ACTIVITIES:
Issuance of note payable for acquisition of M&N 3,000,000 -- --
------------ ------------ ------------
Net cash provided by financing activities 3,000,000 -- --
------------ ------------ ------------
Net increase (decrease) in cash and cash equivalents 3,286,686 (5,501,157) (5,564,252)
Cash and cash equivalents, beginning of year 8,427,483 13,928,640 19,492,893
------------ ------------ ------------
Cash and cash equivalents, end of year $ 11,714,169 $ 8,427,483 $ 13,928,641
============ ============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Income taxes paid $ -- $ 309,838 $ --
============ ============ ============
Issuance of promissory note for acquisition of M&N $ 2,526,736 $ -- $ --
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
- 6 -
<PAGE> 10
HEALTH POWER, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
- --------------------------------------------------------------------------------
1. DESCRIPTION OF OPERATIONS
Health Power, Inc. (the Company) is a Delaware holding company that
provides full-service workers' and unemployment compensation consulting
services through its CompManagement, Inc. (CompManagement) subsidiary
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). Effective December 31, 1998,
CompManagement purchased M&N Risk Management, Inc., and M&N Enterprise,
Inc., companies providing compensation consulting services. It also
operates Health Power HMO, Inc., a health maintenance organization
(HMO) in and around the Columbus, Cincinnati, Dayton, Ohio, areas for
Medicaid recipients primarily enrolled in the Ohio Works First/Healthy
Start (OWF) programs, as well as for commercial members. On December
29, 1998, the Company's Board of Directors formerly approved a plan to
discontinue operations of the HMO.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies followed
in preparation of these consolidated financial statements:
Basis of presentation. The accompanying consolidated financial
statements are presented in accordance with generally accepted
accounting principles (GAAP) and reflect the reclassification of the
HMO segment as discontinued operations. Assets and liabilities of the
discontinued operations are shown separate from the continuing
operations in the consolidated balance sheet. Income from discontinued
operations has been adjusted for the effect of the allocation of
certain general corporate overhead costs associated with continuing
operations. All intercompany balances and transactions have been
eliminated in consolidation.
Unless otherwise stated, the notes to the financial statements disclose
information related to continuing operations. See note 16 for
disclosure of discontinued operations and related notes.
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, 1998 include $9,381,956
deposited in an overnight sweep account and $96,793 invested in a money
market fund.
Leaseholds and equipment. Depreciation of leasehold improvements 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.
- 7 -
<PAGE> 11
HEALTH POWER, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
- --------------------------------------------------------------------------------
Goodwill. The Company records goodwill for the excess of cost over fair
value of net assets acquired. Goodwill is amortized on a straight-line
basis over a twenty year period. Goodwill will be evaluated
periodically as events or circumstances indicate a possible inability
to recover their carrying amount.
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 in 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 as an 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, 1998, contract
revenue from a major client approximated 28% of the Company's contract
revenue. Contract revenues received in advance are included in deferred
revenues.
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.
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
the accompanying financial statements. The Company applies the
disclosure requirements of Statement of Financial Accounting Standards
(SFAS) No. 123, Accounting for Stock-Based Compensation (see Note 10).
The Company provides a director stock award plan to non-employee
directors of Health Power, Inc., Health Power HMO, Inc., and
CompManagement, Inc. Under this plan, the directors elect percentages
of their directors' fees to be paid in cash or in stock of Health
Power, Inc. Payment of the directors' fees is made subsequent to
attendance of the respective meetings. In 1998, the Company issued
13,831 shares of common stock with a market value of $64,351 to the
directors. The Company records the expense in the year the stock is
earned.
Segment reporting. The Company adopted Statement of Financial
Accounting Standard 131, "Disclosure about Segment of an Enterprise and
Related Information" (FAS 131). This statement requires a "management"
segment approach in identifying reportable segments which focuses on
financial information that the Company's decision makers use to make
decisions and performance about the operating segments. FAS 131 also
requires disclosures about certain related disclosures about products
and services, geographic areas and major customers. The adoption of FAS
131 did not affect results of operations or financial position but did
affect the disclosure of segment information (see Note 13).
Use of estimates. The preparation of financial statements in conformity
with GAAP requires
- 8 -
<PAGE> 12
HEALTH POWER, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
- --------------------------------------------------------------------------------
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.
Other disclosures. Effective December 31, 1997, the Company 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 14). All
reported prior period earnings per share information has been restated
in accordance with SFAS No. 128.
Effective January 1, 1998, the Company adopted SFAS 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. The impact of the statement on
Health Power, Inc.'s financial statement was not included, as the
Company had no other comprehensive income items.
Investment in subsidiary (Parent Company Only). The Parent's investment
in its wholly-owned subsidiaries, is recorded using the equity method
of accounting. The investment represents the underlying net book value
of the subsidiaries on a generally accepted accounting principles basis
(see Note 15).
3. ACQUISITIONS
On December 31, 1998, the Company's subsidiary CompManagement acquired M&N Risk
Management, Inc. and M&N Enterprise, Inc., collectively referred to as "M&N" in
a transaction accounted for under the purchase method of accounting for business
combinations. CompManagement purchased 100% of the issued and outstanding shares
of capital stock of M&N for a purchase price of $6,000,000 with the provision
for adjustment based on the closing net equity of M&N. Funding for the
acquisition was provided by a $3,000,000 demand note with a financial
institution and $2,526,736 in a promissory note payable to the seller of M&N. At
the time of acquisition, M&N had $5,451,165 in total assets and $5,924,429 in
total liabilities, which have been included in the accompanying consolidated
financial statements. The Company has recorded a reduction in the promissory
note due the seller of M&N of $473,264 as a result of an adjustment to the
purchase price. The Company also recorded goodwill of $5,526,736 as a result of
the application of purchase accounting.
- 9 -
<PAGE> 13
HEALTH POWER, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
- --------------------------------------------------------------------------------
The following summarizes the pro-forma results of continuing operations
for the years ended December 31, 1997 and 1998 as if M&N had been
acquired at the beginning of each period presented:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------
1998 1997
------------ ------------
<S> <C> <C>
Contract revenue $ 31,817,930 $ 26,789,960
Income from continuing operations 2,525,101 3,334,673
Net (loss) income $ (3,990,624) $ 2,516,591
Earnings per share (basic and diluted):
Income from continuing operations, per share $ .66 $ .87
Net (loss) income, per share $ (1.04) $ .66
</TABLE>
The pro forma information, as presented above, is not necessarily indicative of
the results which would have been obtained had the transaction occurred at
January 1, 1997, nor is it indicative of future results.
4. ACCOUNTS RECEIVABLE
Accounts receivable consist of the following at December 31:
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Contract receivables $ 5,603,036 $ 3,609,777
Other 429,995 308,295
----------- -----------
6,033.031 3,918,072
Less allowance for doubtful accounts (361,957) (301,433)
----------- -----------
$ 5,671,074 $ 3,616,639
=========== ===========
</TABLE>
Contract receivables primarily represent amounts due from the OBWC for
incentive and bonus earned of approximately $1,200,000 and $2,558,000
in the fourth quarter of 1998 and 1997, respectively. In addition, due
to the acquisition of M&N at December 31, 1998 contract receivables
increased by $3,254,842. The Company maintains an allowance for
doubtful accounts when the receivable is deemed uncollectible.
- 10 -
<PAGE> 14
HEALTH POWER, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
- --------------------------------------------------------------------------------
5. DEPOSITS AND OTHER ASSETS
Deposits and other assets consist of the following:
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Pledged certificate of deposit $ -- $500,000
Deposits and other 46,905 41,580
-------- --------
$ 46,905 $541,580
======== ========
</TABLE>
In 1997, the certificate of deposit represented amounts pledged for the
HMO's Certificate of Authority with the Ohio Department of Insurance.
During 1998, cash in an equal amount was transferred to the HMO and the
pledge of the certificate of deposit was released.
6. NOTES PAYABLE
Notes payable represents the amounts payable for the acquisition of M&N
at December 31, 1998 and consists of $3,000,000 demand note payable to
a financial institution with interest payable monthly at prime rate. At
December 31, 1998, the prime rate was 7.75%. In addition, the Company
recorded a $2,526,736 promissory note payable to the parent company of
M&N with a stated interest rate of 7% due quarterly. The scheduled
principal payments of the promissory note are as follows:
<TABLE>
<S> <C>
1999 $ 526,736
2000 1,000,000
2001 1,000,000
----------
$2,526,736
==========
</TABLE>
7. COMMITMENTS
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 the terms of their agreements. In 1997,
CompManagement and CompManagement Health Systems amended the above
employee agreements to include certain commissions to be paid to these
employees. These agreements expire on December 31, 1999. Total
commission expense paid in 1998, 1997 and 1996 in connection with these
agreements was approximately $668,000 and $2,050,000 and $74,000,
respectively.
- 11 -
<PAGE> 15
HEALTH POWER, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
- --------------------------------------------------------------------------------
8. INCOME TAXES
The Company and its subsidiaries file a consolidated federal income tax
return.
The (provision) benefit for income taxes in 1998, 1997 and 1996 for
continuing operations consists of the following:
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Current $(1,457,737) $(2,373,175) $ (123,597)
Deferred (112,467) 49,012 (61,337)
----------- ----------- -----------
$(1,570,204) $(2,324,163) $ (184,934)
=========== =========== ===========
</TABLE>
The significant components of the deferred tax (expense) benefit for
the years ended December 31, 1998, 1997 and 1996 were as follows:
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Deferred tax expense
from change in temporary
differences $(112,467) $ (12,325) $ --
Reversal (establishment) of
of valuation allowance -- 61,337 (61,337)
--------- --------- ---------
$(112,467) $ 49,012 $ (61,337)
========= ========= =========
</TABLE>
A reconciliation of the Company's effective income tax rate for
continuing operations, as reflected in the consolidated statement of
operations, to the statutory federal, state and local tax rate is as
follows:
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Federal income tax expense
at the statutory rate $(1,295,258) $(1,979,787) $ (243,692)
State and local income taxes, net
of federal tax (expense) benefit (234,482) (359,040) 184,211
Tax-exempt interest -- -- 61,762
Business meals (18,448) (22,841) 5,975
Reversal (establishment) of
valuation allowance -- 61,337 (61,337)
Other (22,016) (23,832) (131,853)
----------- ----------- -----------
Effective tax expense $(1,570,204) $(2,324,163) $ (184,934)
=========== =========== ===========
</TABLE>
- 12 -
<PAGE> 16
HEALTH POWER, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
- --------------------------------------------------------------------------------
The components of the net deferred tax (liability) asset as of December
31, 1998 and 1997 were as follows:
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Deferred tax assets:
Bad debt allowance $ 83,802 $ 124,172
Deferred contract revenue 24,660 49,321
Other 13,815 9,472
--------- ---------
122,277 182,965
--------- ---------
Deferred tax liabilities:
Property and equipment 236,904 40,536
Prepaid expenses 25,059 90,228
Other 2,126 3,189
--------- ---------
264,089 133,953
--------- ---------
Net deferred tax (liability) asset $(141,812) $ 49,012
========= =========
</TABLE>
9. 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, 1998, future minimum rental payments under the
leases are as follows:
<TABLE>
<S> <C>
1999 $ 1,742,885
2000 1,236,494
2001 889,967
2002 842,699
2003 832,518
Thereafter 8,320,264
-----------
$13,864,827
===========
</TABLE>
Rental expense was approximately $1,579,786, $876,813, and $470,350,
for 1998, 1997 and 1996, respectively.
- 13 -
<PAGE> 17
HEALTH POWER, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
- --------------------------------------------------------------------------------
10. STOCK OPTIONS AND AWARDS
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. 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 1998, 1997 and 1996 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.
Employee and director stock options. The Company granted market price
stock options in 1998, 1997 and 1996 to employees and directors. The
stock options granted in 1998, 1997 and 1996 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 1998, 1997 and
1996.
- 14 -
<PAGE> 18
HEALTH POWER, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
- --------------------------------------------------------------------------------
A summary of the status of the Company's director and employee stock
options, and the changes during the years is presented below:
<TABLE>
<CAPTION>
1998 1997 1996
----------------------- -------------------------- --------------------------
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 year 244,781 $ 9.36 204,615 $11.49 146,334 $13.43
Granted 59,078 4.42 78,788 3.92 83,512 8.33
Exercised 500 -- -- -- -- --
Forfeited 53,070 11.41 26,077 9.02 25,231 12.26
Expired 1,000 10.57 12,545 11.89 -- --
Outstanding at the end of year 249,289 8.16 244,781 9.36 204,615 11.50
Exercisable at end of year 122,092 10.77 95,124 11.52 75,232 12.25
Weighted-average fair value of
options granted during year $ 2.33 $ 1.83 $ 4.60
</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 1998, 1997 and 1996,
respectively: no dividend yield for all years; risk-free interest rates
are different for each grant and range from 5.06% to 6.73%; the
expected lives of options are estimated to be five years; and a
volatility of 50.20% for 1998 grants, 41.97% for 1997 grants, and
54.73% for 1996.
- 15 -
<PAGE> 19
HEALTH POWER, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
- --------------------------------------------------------------------------------
The following table summarizes information about director and employee
stock options outstanding at December 31, 1998
<TABLE>
<CAPTION>
OPTIONS OPTIONS EXERCISABLE
OUTSTANDING -------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
NUMBER OF REMAINING AVERAGE NUMBER AVERAGE
RANGE OF OUTSTANDING CONTRACTUAL EXERCISE EXERCISABLE EXERCISE
EXERCISE PRICES AT 12/31/98 LIFE PRICE AT 12/31/98 PRICE
--------------- ----------- ---- ----- ----------- -----
<S> <C> <C> <C> <C> <C>
$3.25 to 4.00 107,926 $ 3.91 $ 8.26 21,337 $ 3.72
$7.00 to 9.00 65,731 6.01 8.37 19,580 7.94
$11.00 to 15.31 75,632 13.45 5.88 81,175 13.31
------- ------ ------ ------- ------
$3.25 to $15.31 249,289 $ 8.16 $ 7.44 122,092 $10.77
======= ====== ====== ======= ======
</TABLE>
ProForma net income and net income per common share. Had the
compensation cost for the Company's stock-based compensation plans been
determined in accordance with SFAS 123, the Company's net income and
net income per common share for 1998 and 1997 would approximate the pro
forma amounts below:
<TABLE>
<CAPTION>
AS AS AS
REPORTED PROFORMA REPORTED PROFORMA REPORTED PROFORMA
12/31/98 12/31/98 12/31/97 12/31/97 12/31/96 12/31/96
----------- ----------- ---------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Net (loss) income $(4,051,989) $(4,084,216) $3,013,788 $2,904,414 $(9,483,364) $(9,628,842)
Net (loss )income per common
share, diluted (1.06) (1.07) 0.79 0.76 (2.49) (2.53)
</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.
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 had an exercise price of $6.50
per share and various vesting provisions. No expense has been
recognized for these options. The agreement was terminated as of
February 1998 and all options were forfeited.
- 16 -
<PAGE> 20
HEALTH POWER, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
- --------------------------------------------------------------------------------
11. 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
and may contribute a percentage of their compensation to this plan. The
Company matches a portion of the employee contributions based on the
terms of the plan agreement. The Company's matching contributions to
the 401(k) plans were approximately $79,803, $50,332, and $34,497 for
1998, 1997 and 1996, respectively, for employees of the continuing
operations and approximately $3,438, $5,976 and $7,334 for 1998, 1997
and 1996, respectively, for employees of the discontinued operations.
12. 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 have been
exercised as of December 31, 1998. The warrants expired on March 3,
1999.
13. SEGMENT REPORTING
The Company has two reportable segments for its continuing operations:
consulting services and managed care services, which were determined
based upon its method of internal reporting. Each segment of the
Company is managed separately. The consulting services segment offers
workers' and unemployment compensation consulting services. The managed
care services administer workers' compensation claims for the OBWC and
began operations March 1, 1997. The Company also has an all other
segment which derives its revenues from management fees and interest
income. Segment assets of the all other segment includes those assets
of the discontinued operations of the HMO.
The accounting policies of the segments are the same as those described
in Note 2 "Summary of Significant Accounting Policies". Segment data
includes intercompany revenues, as well as a charge to allocating
corporate expenses to each of its segments. Such amounts have been
included in the elimination column to reconcile to consolidated totals.
- 17 -
<PAGE> 21
HEALTH POWER, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
- --------------------------------------------------------------------------------
The following tables present this information by segment as it is
reported internally to management:
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------
1998
-------------------------------------------------------------------------------------
MANAGED CARE CONSULTING
SERVICES SERVICES OTHER ELIMINATIONS TOTAL
------------ ------------ ------------ ------------ -------------
<S> <C> <C> <C> <C> <C>
Revenues to unaffiliated customers $ 12,962,611 $ 11,898,843 $ -- $ -- $ 24,861,454
Intercompany revenues -- -- 2,425,500 2,425,500 --
Salaries and benefits 7,437,574 6,057,233 1,385,806 (1,235,806) 13,644,807
Depreciation expense 185,249 220,475 25,307 -- 431,031
Interest income and other, net 123,837 298,237 8,488,334 (8,466,128) 444,290
Income before taxes 1,458,103 2,590,998 8,451,271 (8,466,432) 4,033,940
Income tax (expense) benefit (626,308) (1,031,431) 87,535 -- (1,570,204)
Net income 831,795 1,599,566 8,538,806 (8,466,432) 2,463,736
Segment assets 3,682,746 21,708,398 13,020,667 (7,742,476) 30,669,335
-------------------------------------------------------------------------------------
1997
-------------------------------------------------------------------------------------
Revenues to unaffiliated customers $ 11,269,270 $ 10,913,374 $ -- $ -- $ 22,182,644
Intercompany revenues -- -- 2,970,070 (2,979,070) --
Salaries and benefits 5,495,032 5,411,519 1,516,192 (1,600,192) 10,852,551
Depreciation expense 74,176 139,552 15,224 -- 228,952
Interest income and other, net 216,609 2,975,993 (2,660,683) 531,919
Income before taxes 3,077,625 3,051,410 2,687,681 (2,660,683) 6,156,033
Income tax (expense) benefit (1,197,864) (1,208,225) 81,926 -- (2,324,163)
Net income 1,879,761 1,843,185 2,769,607 (2,660,683) 3,831,870
Segment assets 4,615,448 5,406,046 27,073,702 (14,746,388) 22,348,808
-------------------------------------------------------------------------------------
1996
-------------------------------------------------------------------------------------
Revenues to unaffiliated customers -- $ 6,671,679 $ -- $ -- $ 6,671,679
Intercompany revenues -- -- 4,465,419 (4,465,419) --
Salaries and benefits -- 4,263,209 2,208,541 (2,208,541) 4,263,209
Depreciation expense -- 73,618 270,619 -- 344,237
Interest income and other, net -- 131,283 (9,949,396) 10,065,133 247,020
Income before taxes -- 525,983 (10,010,896) 10,065,133 580,220
Income tax (expense) benefit -- (224,828) 39,894 -- (184,934)
Net income -- 301,155 (9,971,002) 10,065,133 395,286
Segment assets -- 2,564,707 26,253,250 (7,749,380) 21,068,577
</TABLE>
- 18 -
<PAGE> 22
HEALTH POWER, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
- --------------------------------------------------------------------------------
14. SUPPLEMENTAL DISCLOSURES FOR EARNINGS PER SHARE
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Basic:
Earnings:
Income from continuing operations $ 2,463,736 $ 3,831,870 $ 395,286
Less: Loss on discontinued operations (6,515,725) (818,082) (9,878,650)
----------- ----------- -----------
Net (loss) income $(4,051,989) $ 3,013,788 $(9,483,364)
=========== =========== ===========
Shares:
Weighted average common
shares outstanding 3,828,564 3,818,465 3,810,331
=========== =========== ===========
Income from continuing operations
per common share, basic $ .64 $ 1.00 $ .10
Loss from discontinued operations, per
common share, basic (1.70) (.21) (2.59)
----------- ----------- -----------
Net (loss) income per
common share, basic $ (1.06) $ .79 $ (2.49)
=========== =========== ===========
Diluted:
Earnings:
Income from continuing operations $ 2,463,736 $ 3,831,870 $ 395,286
Less: Loss on discontinued operations (6,515,725) (818,082) (9,878,650)
----------- ----------- -----------
Net (loss) income $(4,051,989) $ 3,013,788 $(9,483,364)
=========== =========== ===========
Shares:
Weighted average common
shares outstanding 3,828,564 3,818,465 3,810,331
Add: dilutive effect of
outstanding options 6,294 14,185 --
----------- ----------- -----------
Weighted average common
shares outstanding, diluted 3,834,858 3,832,650 3,810,331
=========== =========== ===========
Income from continuing operations
per common share, diluted $ 0.64 $ 1.00 $ .10
Loss from discontinued operations, per
common share, diluted $ (1.70) $ (.21) $ (2.59)
=========== =========== ===========
Net (loss) income per
common share, diluted $ (1.06) $ .79 $ (2.49)
=========== =========== ===========
</TABLE>
- 19 -
<PAGE> 23
HEALTH POWER, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
- --------------------------------------------------------------------------------
15. PARENT COMPANY ONLY
Condensed balance sheets of Health Power, Inc. (parent company only) as
of December 31, 1998 and 1997 and the condensed statements of
operations and cash flows for the years ended December 31, 1998, 1997
and 1996 are as follows:
CONDENSED BALANCE SHEETS -- PARENT COMPANY ONLY
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 96,794 $ 96,717
Accounts receivable 1,626 --
Accounts receivable, intercompany, net 845,008 1,880,947
Prepaid expenses and other 401 417
---------- ----------
Total current assets 943,829 1,978,081
Investment in subsidiaries, on equity basis 2,640,095 5,586,740
---------- ----------
Total assets $3,583,924 $7,564,821
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current assets:
Taxes payable $ 5,117 $ --
---------- ----------
Total liabilities 5,117 --
Stockholders' equity 3,578,807 7,564,821
---------- ----------
Total liabilities and stockholders' equity $3,583,924 $7,564,821
========== ==========
</TABLE>
- 20 -
<PAGE> 24
HEALTH POWER, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
- --------------------------------------------------------------------------------
CONDENSED STATEMENTS OF OPERATIONS -- PARENT COMPANY ONLY
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Interest income $ 4,777 $ 19,975 $ 179,907
General and administrative
expenses 11,896 -- --
----------- ----------- -----------
(Loss) income before income taxes
and equity in operations
of subsidiaries (7,119) 19,975 179,907
Federal, state and local income
tax (expense) (1,675) (6,792) --
----------- ----------- -----------
(Loss) income before equity in
operations of subsidiaries (5,444) 13,183 179,907
Equity in the (loss) income
of subsidiaries (4,046,545) 3,000,605 (9,663,271)
----------- ----------- -----------
Net income (loss) $(4,051,989) $ 3,013,788 $(9,483,364)
=========== =========== ===========
</TABLE>
- 21 -
<PAGE> 25
HEALTH POWER, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
- --------------------------------------------------------------------------------
CONDENSED STATEMENTS OF CASH FLOWS -- PARENT COMPANY ONLY
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income $(4,051,989) $ 3,013,788 $(9,483,364)
Adjustments to reconcile net income
income to net cash provided by (used in):
Issuance of common stock for director's plan 65,975 32,452 --
Equity in net loss (income) of subsidiaries 4,046,645 (3,000,605) 9,663,271
Deferred income taxes -- -- 640,715
Changes in current assets and current liabilities:
Prepaid expenses and other 16 3,898 26,500
Accounts receivable, intercompany 1,035,939 (1,425,660) (140,714)
Accounts receivable (1,626) -- --
Taxes payable 5,117 -- --
----------- ----------- -----------
Net cash provided by (used in)
operating activities 1,100,077 (1,376,127) 706,408
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Capital infusion to HMO subsidiary (1,100,000) -- (7,500,000)
----------- ----------- -----------
Net cash used in financing activities (1,100,000) -- (7,500,000)
----------- ----------- -----------
Net increase (decrease) in cash and cash equivalents 77 (1,376,127) (6,793,592)
Cash and cash equivalents, beginning of year 96,717 1,472,844 8,266,436
----------- ----------- -----------
Cash and cash equivalents, end of year $ 96,794 $ 96,717 $ 1,472,844
=========== =========== ===========
</TABLE>
There were no cash dividends paid by the Company's consolidated
subsidiaries to the Company in 1998, 1997, or 1996.
- 22 -
<PAGE> 26
HEALTH POWER, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
- --------------------------------------------------------------------------------
16. DISCONTINUED OPERATIONS
On December 29, 1998, the Company's Board of Directors formerly
approved a plan to discontinue operations of the HMO. Accordingly, the
operating results of the HMO operations, including provisions for
estimated lease costs, employee severance and benefits, and write-downs
of property, plant and equipment during the phase-out period and a loss
on disposal have been segregated from continuing operations and
reported as a separate line item on the statement of operations. Income
from operations of the discontinued HMO operations for the year 1998
included results through December 31, 1998.
The Company's HMO 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. In addition, Ohio law requires HMOs to
maintain 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 requires cash deposits to be maintained
with the Department of $400,000. The Company's HMO did not meet the
statutory net worth requirements at December 31, 1998 and 1997. In
addition, the Department placed the HMO under supervision on July 13,
1998 and subsequently had a hearing on January 21, 1999 to determine
whether to suspend or revoke the license of the HMO. On February 25,
1999, the hearing officer issued a report recommending that the
Superintendent of Insurance revoke the license of the HMO. The HMO has
filed an objection to the hearing officer report. It is management's
intention to cease operations of HMO by April 30, 1999 if it is not
disposed of prior to that date.
The Company has restated its prior financial statements to present the
operating results of the HMO as discontinued operations. The assets and
liabilities of such operations at December 31, 1998 and 1997,
respectively, have been reflected as a separate line item on the
balance sheet based substantially on the original classification of
such assets and liabilities.
17. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES FOR DISCONTINUED OPERATIONS
Revenues. 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 the State of Ohio group in
the Dayton area; therefore, health care coverage for that group ceased
on March 1, 1997. In addition, effective December 1, 1997, the State of
Ohio commercial group coverage for the remaining Columbus and
Cincinnati areas were canceled. For the year ended December 31, 1997,
commercial group premiums from the State of Ohio approximated 63% of
the Company's commercial revenues.
The HMO's Medicaid revenue is derived from contracts with the ODHS.
The HMO's current contracts with ODHS expire June 30, 1999 with
automatic renewals until December 31, 1999. The contracts will not be
renewed in 1999 by the HMO, due to the formal plan to discontinue the
HMO's operations.
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. A valuation
- 23 -
<PAGE> 27
================================================================================
================================================================================
HEALTH POWER, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
- --------------------------------------------------------------------------------
allowance has been recorded to reflect property and equipment at
estimated fair value and the resulting loss included in loss on
disposal.
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 23).
Such expenses are recognized as incurred, except as noted below.
Due to the plan to discontinue the operations of the HMO, management
has recorded an estimate of all health care costs for the period
January 1, 1999 through April 30,1999 and included them in loss on
disposal.
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 $0 and $11,853 as of December 31,
1998 and 1997, respectively, and 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 will be
reflected in discontinued operations during the claim run-off period.
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.
Management Services: The Company has a management service agreement
between Health Power Management Company (HPMC), a subsidiary of the
Company, and its affiliate, Health Power HMO, to provide administrative
services. Services provided include finance and accounting functions,
data processing, office of the president, marketing and membership
services, corporate planning, legal and regulatory services. The
affiliates of HPMC pay a management fee on a monthly basis. In 1998,
1997 and 1996, the HMO paid approximately $2,257,000, $2,970,000 and
$4,465,000 to HPMC for these administrative services. In addition,
beginning in 1997, the HMO was reimbursed approximately $14,000 and
$7,000 in 1998 and 1997, respectively, per month by its affiliates
CompManagement, Inc., and CompManagement Health Systems, for the
portion of management services that related to their organization's
activities.
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. Due to the uncertainty
regarding the method of disposal of the HMO, a full valuation allowance
has been provided for the net deferred tax assets.
- 24 -
<PAGE> 28
HEALTH POWER, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
- --------------------------------------------------------------------------------
18. OPERATING RESULTS OF DISCONTINUED OPERATIONS
Operating results from discontinued operations for the years ended
December 31 were as follows:
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Medicaid Revenues $ 36,731,250 $ 42,819,206 $ 44,246,928
Commercial Revenues 2,648,965 10,811,320 15,167,340
Healthcare costs and expenses (44,248,972) (59,102,511) (71,837,390)
Interest income and other, net 996,968 688,830 586,703
Loss on disposal of discontinued operations (1,613,493) -- --
------------ ------------ ------------
Net loss before taxes (5,485,282) (4,783,155) (11,836,419)
Federal, state and local income tax (expense) benefit (1,030,443) 3,965,073 1,957,769
------------ ------------ ------------
Net loss $ (6,515,725) $ (818,082) $ (9,878,650)
============ ============ ============
</TABLE>
- 25 -
<PAGE> 29
HEALTH POWER, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
- --------------------------------------------------------------------------------
19. ASSETS AND LIABILITIES OF DISCONTINUED OPERATIONS
The assets and liabilities of the discontinued HMO operations as of the
years ended December 31 were as follows:
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Current assets of discontinued operations:
Accounts receivables $ 1,909,928 $ 1,660,863
Prepaid expenses and other 5,155 99,547
Income taxes refundable 1,140,041 1,790,662
Deferred income taxes, net -- 697,878
------------ ------------
Total current assets of discontinued operations 3,055,124 4,248,950
Non-current assets of discontinued operations:
Land 152,640 152,640
Buildings and leasehold improvements 1,252,652 1,252,652
Furniture, equipment and software 1,910,308 1,911,718
Less accumulated depreciation (2,407,874) (1,554,550)
Deferred income taxes, net -- 1,443,712
Deposits and other assets 495,618 499,295
------------ ------------
Total non-current assets of discontinued
operations $ 1,403,344 $ 3,705,467
============ ============
Current liabilities:
Health care costs payable $ 4,679,105 $ 6,688,029
Deferred revenues 2,683,638 3,403,687
Accounts payable 693,619 948,123
Accrued expenses and other current liabilities 47,122 102,555
Accrued expenses for disposal 1,060,151 --
------------ ------------
Total current liabilities of discontinued operations $ 9,163,635 $ 11,142,394
============ ============
</TABLE>
- 26 -
<PAGE> 30
HEALTH POWER, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
- --------------------------------------------------------------------------------
20. RELATED PARTIES OF DISCONTINUED OPERATIONS
The HMO 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:
Health care providers. During 1998, 1997 and 1996, primary care and
physician-related costs of $564,123, $1,485,107 and $2,854,159,
respectively, resulted from transactions between the HMO and affiliated
providers. Such transactions resulted in receivables from related
primary care providers of $12,830 and $31,570, as of December 31, 1998
and 1997.
Commercial revenue. Certain affiliated providers have contracted with
the HMO to provide health care services to their employees and
dependents. The HMO recognized commercial premiums from these
affiliated providers in the amounts of $53,674, $65,793, and $137,223
in 1998, 1997 and 1996, respectively.
21. DEPOSITS AND OTHER ASSETS OF DISCONTINUED OPERATIONS
Deposits and other assets consist primarily of $420,379 at December 31,
1998 and 1997 in certificate of deposits held on deposit under the
terms of the HMO's Certificate of Authority with the Department and
ODHS.
22. HEALTH CARE COSTS PAYABLE OF DISCONTINUED OPERATIONS
Activity in health care costs payable is summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------
1998 1997
----------- -----------
<S> <C> <C>
Balance at January 1 $ 6,688,029 $10,896,149
Incurred related to:
Current year 36,274,506 49,511,766
Prior years 1,798,011 1,579,451
----------- -----------
Total incurred 38,072,517 51,091,217
Paid related to:
Current year 31,149,829 43,701,340
Prior years 8,931,612 11,597,997
----------- -----------
Total paid 40,081,441 55,299,337
----------- -----------
Balances at December 31 $ 4,679,105 $ 6,688,029
=========== ===========
</TABLE>
- 27 -
<PAGE> 31
HEALTH POWER, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
- --------------------------------------------------------------------------------
The HMO went through a claims vendor conversion in 1997 and in 1998.
Due to these conversions and the resulting interruption of claims
payments the health care costs payable had to be adjusted during 1997
and 1998.
23. COMMITMENTS OF DISCONTINUED OPERATIONS
The HMO maintains stop-loss insurance coverage for 85% of inpatient
hospital costs in excess of $50,000 per Medicaid member, per contract
year and varying percentages (generally 80%) of inpatient hospital
costs in excess of $81,000 per commercial member, per contract year.
These stop-loss insurance contracts do not relieve the HMO of its
obligations to members, and failure of reinsurers to honor their
obligations could result in losses to the HMO.
Stop-loss insurance premiums of $1,261,535, $1,872,282, and $1,848,274
are included in health care costs for 1998, 1997 and 1996,
respectively. Stop-loss recoveries of $1,624,502, $1,178,104, and
$1,897,806 are deducted from health care costs for 1998, 1997 and 1996,
respectively.
In addition, the HMO recorded an experience refund receivable of
approximately $135,000 due from a reinsurer based on the terms of the
contract.
In 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. In September 1997, the HMO terminated the original
agreement and contracted with a new third-party administrator in 1998.
The HMO incurred approximately $1,358,000 of operating expenses under
this agreement as of December 31, 1997 and $1,764,000 under a new
administrative agreement (began May 1, 1998) as of December 31, 1998.
The HMO expects to incur approximately $520,000 in the period January
through April 1999, under this agreement. In addition, the HMO accrued
a termination fee of $135,000, as specified in the contract as a loss
on disposal of discontinued operations in 1998.
The HMO has various operating leases for office equipment. Rental
expense was approximately $58,057, $103,273, and $119,255 for 1998,
1997 and 1996, respectively. The HMO expects to incur approximately
$42,424 in the period January through April 1999, and has accrued
future rental payments for the remaining lease terms of approximately
$98,000, as a loss on disposal of discontinued operations in 1998.
During 1998 the Company's HMO subsidiary commenced a legal action
seeking compensation for damages alleged under a prior administrative
agreement with a claims processing organization. A counterclaim was
filed against the HMO alleging breach of contract and other items and
seeks compensatory and punitive damages totaling approximately $8
million. The lawsuits are in the formative stage, however, management
does not believe the outcome of the counterclaim will have a material
adverse impact in the earnings, cash flows or financial position on the
HMO.
- 28 -
<PAGE> 32
HEALTH POWER, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
- --------------------------------------------------------------------------------
24. INCOME TAXES OF DISCONTINUED OPERATIONS
The Company and its subsidiaries file a consolidated federal income tax
return.
The benefit for income taxes of the discontinued operations of the HMO
in 1998, 1997 and 1996 consists of the following:
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Current benefit $ 1,140,041 $ 1,823,483 $ 2,497,957
Deferred (expense) benefit (2,170,485) 2,141,590 (540,359)
----------- ----------- -----------
$(1,030,444) $ 3,965,073 $ 1,957,598
=========== =========== ===========
</TABLE>
The significant components of the deferred tax benefit of the
discontinued operations of the HMO for the years ended December 31 were
as follows:
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Deferred tax (expense) benefit from change in temporary differences $ 642,457 $ (254,122) $ 1,855,353
Reversal (establishment) of valuation allowance (2,812,942) 2,395,712 $(2,395,712)
----------- ----------- -----------
$(2,170,485) $ 2,141,590 $ (540,359)
=========== =========== ===========
</TABLE>
- 29 -
<PAGE> 33
HEALTH POWER, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
- --------------------------------------------------------------------------------
The components of the net deferred tax asset as of December 31, 1998 and 1997
were as follows:
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Deferred tax assets:
Health care costs payable $ 326,128 $ 394,129
Membership acquisition 1,471,667 1,589,400
Credits carryforward 239,857 216,799
Net operating carryover 247,808
Provision for discontinued operations 548,588
Other 8,669 8,669
----------- -----------
2,842,717 2,208,997
----------- -----------
Deferred tax liabilities:
Property and equipment 16,038 27,954
Prepaid expenses 13,737 39,453
----------- -----------
29,775 67,407
----------- -----------
Net deferred tax asset before valuation
allowance 2,812,942 2,141,590
Valuation allowance (2,812,942) --
----------- -----------
Net deferred tax asset $ -- $ 2,141,590
=========== ===========
</TABLE>
At December 31, 1998 the Company had the following net federal
investment credits and tax credit carryforwards available:
<TABLE>
<CAPTION>
EXPIRATION TAX
DATES CREDITS
------------- ----------
<S> <C>
No expiration $ 201,718
</TABLE>
- 30 -
<PAGE> 34
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS.
(a) Financial Statements of Business Acquired.
<PAGE> 35
M&N RISK MANAGEMENT, INC.
AND M&N ENTERPRISES, INC.
COMBINED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
<PAGE> 36
REPORT OF INDEPENDENT ACCOUNTANTS
March 13, 1999
To the Board of Directors and Shareholder of
M&N Risk Management, Inc. and M&N Enterprises, Inc.
Columbus, Ohio
In our opinion, the accompanying combined balance sheets and the related
combined statements of income and changes in shareholder's equity and of cash
flows present fairly, in all material respects, the combined financial position
of M&N Risk Management, Inc. and M&N Enterprises, Inc. (the Company) at December
31, 1998 and 1997, and the results of their operations and their cash flows for
the year ended December 31, 1998 and the ten months ended December 31, 1997, in
conformity with generally accepted accounting principles. 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 of these statements in accordance with
generally accepted auditing standards which 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,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
/s/ PricewaterhouseCoopers LLP
------------------------------
<PAGE> 37
M&N RISK MANAGEMENT, INC. AND M&N ENTERPRISES, INC.
COMBINED BALANCE SHEETS
DECEMBER 31, 1998 AND 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
ASSETS
Cash $ 352,913 $ 4,895
Cash held in trust 259,660 350,590
Accounts receivable - non-group rating 524,998 458,161
Accounts receivable - group rating 2,729,844 3,947,539
Accounts receivable - related party 380,370 5,095
Prepaid and other assets 90,548 84,932
Taxes receivable - related party -- 702,947
Deferred tax asset 7,501 --
------------ ------------
Total current assets 4,345,834 5,554,159
Property and equipment, net 1,104,628 867,787
Intangible assets, net of amortization of $79,167 -- 870,833
Goodwill, net of amortization of $133,791 -- 4,682,681
Other non-current assets 703 703
------------ ------------
Total assets $ 5,451,165 $ 11,976,163
============ ============
LIABILITIES AND SHAREHOLDER'S EQUITY
Accounts payable $ 362,440 $ 61,471
Accounts payable - group rating sponsor 489,449 825,649
Accounts payable - bank overdraft 100,255 170,499
Accounts payable - related party -- 1,694,209
Deposits due to customers 259,660 350,590
Taxes payable - related party 1,051,475 --
State and local taxes payable 377,000 --
Deferred revenue 3,163,962 3,903,594
Deferred tax liability -- 1,262,047
Accrued liabilities and other 20,354 150,544
Line of credit -- 307,000
Current portion of long-term debt -- 124,284
------------ ------------
Total current liabilities 5,824,595 8,849,887
Non-current deferred tax liability 99,834 47,782
Long-term debt -- 277,190
------------ ------------
Total liabilities 5,924,429 9,174,859
------------ ------------
Shareholder's equity:
Common stock, 200 shares authorized, issued and outstanding 200 200
Additional paid-in-capital -- 4,816,472
Retained earnings (473,464) (2,015,368)
------------ ------------
Total shareholder's equity (473,264) 2,801,304
Total liabilities and shareholder's equity $ 5,451,165 $ 11,976,163
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
- 2 -
<PAGE> 38
M&N RISK MANAGEMENT, INC. AND M&N ENTERPRISES, INC.
COMBINED STATEMENTS OF INCOME
FOR THE YEAR ENDED DECEMBER 31, 1998 AND TEN MONTHS ENDED DECEMBER 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Revenue
Contract revenues $ 6,889,648 $ 4,573,962
Other commissions 66,828 33,354
----------- -----------
6,956,476 4,607,316
----------- -----------
Costs and expenses:
Employee compensation and related costs 3,002,934 2,286,815
Occupancy costs 318,280 156,543
Office operating expenses 758,997 637,486
Depreciation and amortization 279,509 337,899
Other selling, general and administrative expenses 1,588,704 1,037,818
----------- -----------
5,948,424 4,456,561
----------- -----------
Other (income) expense:
Interest expense 27,955 65,442
Other expense 45,116 20,550
Other income (5,844) (16,000)
----------- -----------
Income before income taxes 940,825 80,763
Income tax provision 357,500 56,000
----------- -----------
Net income $ 583,325 $ 24,763
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
- 3 -
<PAGE> 39
M&N RISK MANAGEMENT, INC. AND M&N ENTERPRISES, INC.
COMBINED STATEMENTS OF CHANGES IN SHAREHOLDER'S EQUITY
FOR THE YEAR ENDED DECEMBER 31, 1998 AND TEN MONTHS ENDED DECEMBER 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ADDITIONAL
COMMON PAID IN RETAINED
STOCK CAPITAL EARNINGS TOTAL
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Balance at February 28, 1997 $ 200 $ 4,816,472 $(2,040,131) $ 2,776,541
Net income -- -- 24,763 24,763
----------- ----------- ----------- -----------
Balance at December 31, 1997 200 4,816,472 (2,015,368) 2,801,304
Push-back of goodwill and other intangible
assets to former parent, net -- (4,816,472) (694,450) (5,510,922)
Forgiveness of related party debt -- -- 1,653,029 1,653,029
Net income -- -- 583,325 583,325
----------- ----------- ----------- -----------
Balance at December 31, 1998 $ 200 $ -- $ (473,464) $ (473,264)
=========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
- 4 -
<PAGE> 40
M&N RISK MANAGEMENT, INC. AND M&N ENTERPRISES, INC.
COMBINED STATEMENTS OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1998 AND TEN MONTHS ENDED DECEMBER 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 583,325 $ 24,763
Adjustments to reconcile net income to net cash
provided by operating activities:
Change in deferred revenue (739,632) 698,102
Depreciation and amortization 279,509 337,899
Provision for deferred income taxes (1,217,500) 745,000
Increase (decrease) in cash from
changes in certain assets and liabilities:
Accounts receivable - non-group rating (66,837) (268,473)
Account receivable - group rating 1,218,118 (2,724,176)
Accounts receivable - related party (375,275) (5,095)
Prepaid and other assets (5,616) (66,699)
Other non-current assets -- (703)
Accounts payable 300,969 (4,409)
Accounts payable - group rating sponsor (336,200) 825,649
Accounts payable - related party (750,149) 1,057,499
Deposits due to customers (90,930) 350,590
Taxes - related party 1,754,422 (702,947)
State and local taxes payable 377,000 --
Accrued liabilities and other (130,190) 97,045
----------- -----------
Net cash provided by operating activities 801,014 364,045
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (473,682) (523,496)
----------- -----------
Net cash used in investing activities (473,682) (523,496)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Change in accounts payable - bank overdraft (70,244) 170,499
Proceeds from issuance of notes payable -- 328,957
----------- -----------
Net cash (used in) (70,244) 499,456
----------- -----------
Net increase in cash 257,088 340,005
Cash, beginning of period 355,485 15,480
----------- -----------
Cash, end of period $ 612,573 $ 355,485
=========== ===========
SUPPLEMENTAL CASH FLOW INFORMATION
Interest paid $ 27,955 $ 65,442
=========== ===========
Income taxes paid $ 148,558 $ --
=========== ===========
NON-CASH TRANSACTIONS
Pushback of goodwill and other intangible assets to former parent, net $ 5,510,922 $ --
=========== ===========
Forgiveness of related party debt $ 1,653,029 $ --
=========== ===========
Payment of note payable by parent - reclass to related party liability $ 708,474 $ 950,000
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
- 5 -
<PAGE> 41
M&N RISK MANAGEMENT, INC. AND M&N ENTERPRISES, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 1998 AND TEN MONTHS ENDED DECEMBER 31, 1997
- --------------------------------------------------------------------------------
1. BACKGROUND AND DESCRIPTION OF BUSINESS
M&N Risk Management, Inc. and M&N Enterprises, Inc., both of which are
Ohio corporations and wholly owned subsidiaries of Century Business
Services, Inc. and CompManagement, Inc. at December 31, 1997 and
December 31, 1998 respectively, are herein collectively referred to as
the "Company." In February 1997, the Company was acquired by
International Alliance Services, Inc. (now known as Century Business
Services, Inc.) in a stock purchase transaction. The Company was a
wholly owned subsidiary of Century Business Services, Inc. until
December 31, 1998. On December 31, 1998, the Company was purchased by
CompManagement, Inc., a subsidiary of Health Power, Inc. that
specializes in full-service workers' and unemployment compensation
consulting services. CompManagement, Inc. purchased 100% of the issued
and outstanding shares of the capital stock of the Company.
The Company operates in a fairly niche industry, specific to Ohio
workers compensation, providing third party administrator services to
both self-insured as well as state-insured employers located primarily
in the state of Ohio. Services provided include claims administration,
group rating, and loss prevention. Group rating services represent the
majority of the Company's revenue, and are available only to employers
who are insured through the State. The Company's fees for group rating
services are based on the discount or savings the Company estimates the
employers will receive as a result of participating in the group.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies followed
in preparation of these combined financial statements:
Basis of presentation. The accompanying combined financial statements
are presented in accordance with generally accepted accounting
principles ("GAAP"). These financial statements are presented on a
historical, separate company basis, and do not reflect any purchase
accounting adjustments relating to the December 31, 1998 acquisition of
the Company.
Cash held in trust. Cash held in trust represents funds collected in
advance from certain clients for whom the Company administers workers
compensation claims. A related liability for these claims payments is
recorded as deposits due to customers in the balance sheets.
- 6 -
<PAGE> 42
M&N RISK MANAGEMENT, INC. AND M&N ENTERPRISES, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 1998 AND TEN MONTHS ENDED DECEMBER 31, 1997
- --------------------------------------------------------------------------------
Recognition of revenue. Contract revenues are derived from claims
management, administrative and consulting services which are recorded
as earned based on the requirements and duration of the related
contract. Revenue on certain contracts has been deferred and is
recognized as income on a pro rata basis over the related service
periods, which typically range between three and twelve months. For
services related to group rating contracts, fees are paid to the
group's sponsor and netted against contract revenues. Contract revenues
received in advance of the contract or service period are included in
deferred revenue.
Goodwill and intangible assets. The Company records goodwill for the
excess of cost over fair value of net assets acquired. The intangible
asset represents the purchase of a customer list and is amortized on a
straight-line basis over a period of ten years. Goodwill is amortized
on a straight-line basis over a thirty-year period. Both the intangible
asset and goodwill are evaluated periodically as events or
circumstances indicate a possible inability to recover the carrying
amounts. During 1998, in connection with the acquisition of the
Company, goodwill was adjusted back to the parent (Century Business
Services, Inc.)
Property and equipment. Property and equipment are recorded at cost,
less accumulated depreciation. Depreciation of property and equipment
is computed using the straight-line method over estimated useful asset
lives generally ranging from five to ten years. Expenditures for
maintenance and repairs and minor renewals and betterments which do not
improve or extend the life of the respective assets are expensed. All
other expenditures for renewals and betterments are capitalized. The
assets and related depreciation accounts are adjusted for retirements
and disposals using the specific identification method, with the
resulting gain or loss included in operations.
Income taxes. The Company files a consolidated federal income tax
return with its parent under a tax sharing agreement. In accordance
with this agreement, federal income tax expense is determined as if the
Company filed a separate federal income tax return and payments for
this liability are made to the parent. Accordingly, deferred income tax
assets and liabilities are recognized for the expected future tax
consequences of events that have been included in the financial
statements or tax returns. Deferred income taxes are recognized at
prevailing income tax rates for temporary 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 is recognized as income or expense
in the period that includes the enactment date.
Concentrations. Financial instruments which potentially subject the
Company to concentrations of credit risk, consist primarily of accounts
receivable. Receivables arising from services provided to clients are
not collateralized and, as a result, management continually monitors
the financial condition of its clients to reduce the risk of loss. For
the year ended December 31, 1998, and ten months ended December 31,
1997, contract revenue from the Company's most significant ten clients
approximated 48% and 58% of the Company's revenue, respectively.
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.
- 7 -
<PAGE> 43
M&N RISK MANAGEMENT, INC. AND M&N ENTERPRISES, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 1998 AND TEN MONTHS ENDED DECEMBER 31, 1997
- --------------------------------------------------------------------------------
Other disclosures. Effective January 1, 1998, the Company adopted SFAS
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. The impact of the
Statement on the Company's financial statements was not material, as
the Company had no other comprehensive income items.
3. INCOME TAXES
Deferred income taxes for 1998 and 1997 reflect the impact of
"temporary differences" between amounts of assets and liabilities for
financial reporting purposes and such amounts as measured on an income
tax basis. Temporary differences which give rise to the net deferred
tax liability at December 31 are as follows:
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Deferred tax assets:
Accrued vacation $ 7,501 $ --
---------- ----------
Subtotal 7,501 --
Deferred tax liabilities:
Accrual to cash adjustment $ -- $1,262,047
Fixed assets 99,834 47,782
---------- ----------
Subtotal 99,834 1,309,829
Net deferred tax liability $ 92,333 $1,309,829
========== ==========
</TABLE>
Deferred tax assets and liabilities and income tax expense in future
years can be significantly affected by changes in enacted tax rates or
by unexpected adverse events.
The provision (benefit) for income taxes at December 31, consists of
the following:
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Current $ 1,198,000 $ (546,000)
Deferred (federal, state and local) (1,217,500) 745,000
----------- -----------
Federal income tax expense (benefit) (19,500) 199,000
State and local income tax expense 377,000 (143,000)
----------- -----------
Total provision $ 357,500 $ 56,000
=========== ===========
</TABLE>
The difference between federal income taxes provided at the Company's
effective tax rate and the 34% statutory rate at December 31, is due to
goodwill amortization and non-deductible business meals and
entertainment.
- 8 -
<PAGE> 44
M&N RISK MANAGEMENT, INC. AND M&N ENTERPRISES, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 1998 AND TEN MONTHS ENDED DECEMBER 31, 1997
- --------------------------------------------------------------------------------
4. DEBT
At December 31, long-term debt consisted of the following:
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Note payable to a bank due in monthly installments,
bearing interest at 8.96%, with maturity
at January 2003 $ -- $ 353,274
Note payable to a bank due in monthly installments,
bearing interest at 9.00% with maturity -- 48,200
at June 1999
------- ---------
Less Current Portion (124,284)
------- ---------
Notes payable, noncurrent $ -- $ 277,190
======= =========
</TABLE>
The above outstanding balances were paid by Century Business Services,
Inc. in March of 1998 and a related party payable was established by
the Company. Interest expense incurred on the above notes approximated
$6,686 and $37,353 for the year ending December 31, 1998 and the ten
months ending December 31, 1997, respectively.
The Company had a line of credit with a bank with interest payable
monthly at prime rate, and an outstanding balance of $307,000 at
December 31, 1997. The outstanding balance was paid in full by Century
Business Services, Inc. in March of 1998 and a related party payable
was established by the Company. The line of credit was cancelled at
that time. During 1998 and 1997, the Company incurred $1,290 and
$28,089 in fees and interest associated with this line of credit,
respectively.
- 9 -
<PAGE> 45
M&N RISK MANAGEMENT, INC. AND M&N ENTERPRISES, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 1998 AND TEN MONTHS ENDED DECEMBER 31, 1997
- --------------------------------------------------------------------------------
5. PROPERTY AND EQUIPMENT
Property and equipment reflected on the accompanying balance sheets is
comprised of the following:
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Property and equipment, at cost:
Computer equipment $1,068,405 $ 649,281
Furniture & fixtures 384,652 337,510
Leasehold improvements 13,439 5,967
---------- ----------
1,466,496 992,758
Less accumulated depreciation 361,868 124,971
---------- ----------
$1,104,628 $ 867,787
========== ==========
</TABLE>
6. RELATED PARTIES
The related party accounts receivable and payable at December 31, 1997
and December 31, 1998 result primarily from cash funding transactions
between the Company and Century Business Services, Inc. In 1998,
Century Business Services, Inc. forgave approximately $1.6 million of
the outstanding liability.
At December 31, 1998, Century Business Services, Inc. in connection
with the sale of the Company, guaranteed the collection of the
outstanding accounts receivable - non-group rating and accounts
receivable - group rating.
- 10 -
<PAGE> 46
M&N RISK MANAGEMENT, INC. AND M&N ENTERPRISES, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 1998 AND TEN MONTHS ENDED DECEMBER 31, 1997
- --------------------------------------------------------------------------------
7. LEASES
The Company leases and subleases various types of office facilities,
equipment, and furniture and fixtures under noncancelable operating
lease agreements, which expire at various dates. Certain of the leases
allow the Company, at its option, to extend the lease term. Rental
expense was approximately $333,280 and $166,158 for the year ending
December 31, 1998 and the ten months ending December 31, 1997,
respectively. Two of the office facilities are subleased from related
parties. At December 31, 1998, future minimum lease payments under the
leases are as follows:
<TABLE>
<CAPTION>
YEAR ENDING
-----------
<S> <C>
1999 $ 297,842
2000 306,357
2001 290,668
2002 264,835
2003 241,487
Thereafter $ 967,360
</TABLE>
8. COMMITMENTS AND CONTINGENCIES
The Company is, from time to time, a party to litigation arising in the
normal course of its business, as well as to other nonmaterial
litigation. Management believes that no individual item of litigation,
or group of similar items of litigation, is likely to result in
judgments that will have a material adverse effect on the financial
condition or results of operations of the Company.
9. EMPLOYEE BENEFIT PLANS
In 1997, the Company participated in the 401(k) plan of its former
owner. The Company made certain matching contributions to this plan,
with eligibility for all employees beginning one month after the first
ninety days of employment. Expenses incurred in 1997 related to this
plan were $45,020. During 1998, the Company participated in the 401(k)
plan offered by Century Business Services, Inc. The Company's match
under this plan was fifty cents on the dollar up to three percent. All
employees were eligible to participate after one year of employment.
Expenses incurred in 1998 related to this plan were $36,715.
In 1998, the Company established a discretionary incentive compensation
plan available to key management executives. There were no payments
made under this plan during 1998.
- 11 -
<PAGE> 47
ITEM 7. (b) Pro Forma Financial Information.
The following pro forma combined financial statements present in
condensed form the results of operations of Health Power, Inc.
historical, as presented in Item 5 and the historical combined
results of operations of M&N Risk Management, Inc. and M&N
Enterprises, Inc. (collectively referred to as M&N) which was
acquired on December 31, 1998. The pro forma combined Statement
of Income that follows assumes Health Power, Inc. acquired M&N at
the beginning of the period presented.
The pro forma financial statements do not purport to be
indicative of the results that actually would have occurred if
the acquisition of M&N had occurred on the date indicated or that
may be obtained in the future.
<PAGE> 48
Health Power, Inc., and Subsidiaries
Pro Forma Combined Statement of Income
For the year ended December 31, 1998
<TABLE>
<CAPTION>
(i) (ii) (iii) (iv)
Health Power M&N Adjustments Total
<S> <C> <C> <C> <C>
Revenues:
Contract $ 24,861,454 $ 6,956,476 $ -- $ 31,817,930
Expenses:
General and Administrative 21,271,804 5,948,424 685,709 (1) 27,905,937
------------ ------------ ------------ ------------
Income from operations 3,589,650 1,008,052 (685,709) 3,911,993
Interest income (expense) and other, net 444,290 (67,227) -- 377,063
------------ ------------ ------------ ------------
Income from continuing operations 4,033,940 940,825 (685,709) 4,289,056
before income taxes
Federal, state and local income tax expense (1,570,204) (357,500) 163,749 (2) (1,763,955)
------------ ------------ ------------ ------------
Income from continuing operations $ 2,463,736 $ 583,325 $ (521,960) $ 2,525,101
Earnings per share (basic and diluted):
Income from continuing operations, per share $ 0.64 $ 0.66
Shares
Weighted average common shares outstanding 3,828,564 3,828,564
Add: dilutive effect of outstanding options 6,294 6,294
------------ ------------
Weighted average common shares
outstanding, diluted 3,834,858 3,834,858
(1) Interest expense of debt used for the acquisition $ 409,372
Amortization of goodwill over a 20 year period 276,337
------------
$ 685,709
(2) Tax effects at the federal and state effective
rate of 40%
</TABLE>
<PAGE> 49
ITEM 7. (c) Exhibits.
Exhibit
No. Description of Exhibit
- ------- ----------------------
2 Stock Purchase Agreement dated December 31, 1998, among
CompManagement, Inc., Century Business Services, Inc., CBSI
Management Co., M&N Risk Management, Inc. and M&N Enterprises,
Inc.
23 Consent of PricewaterhouseCoopers LLP
27 Financial Data Schedule
99(a) Commercial Note dated December 31, 1998, from CompManagement,
Inc. to National City Bank.
99(b) Press release issued by CompManagement, Inc. on January 4, 1999.
<PAGE> 50
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on its behalf by
the undersigned hereunto duly authorized.
HEALTH POWER, INC.
Date: March 15, 1999 By /s/ Bernard F. Master, D.O.
---------------------------
Bernard F. Master, D.O.
Chairman, President, and Chief
Executive Officer
<PAGE> 51
EXHIBIT INDEX
- --------------------------------------------------------------------------------
If Incorporated by
Reference, Document with
which Exhibit was
Exhibit No. Description of Exhibit Previously Filed with SEC
- --------------------------------------------------------------------------------
2 Stock Purchase Agreement dated Current Report on Form
December 31, 1998, among 8-K dated January 15,
CompManagement, Inc., Century 1999
Business Services, Inc., CBSI
Management Co., M&N Risk
Management, Inc. and M&N
Enterprises, Inc.
- --------------------------------------------------------------------------------
23 Consent of Contained herein
PricewaterhouseCoopers LLP
- --------------------------------------------------------------------------------
27 Financial Data Schedule Contained herein
- --------------------------------------------------------------------------------
99(a) Commercial Note dated December Current Report on Form
31, 1998, from CompManagement, 8-K dated January 15,
Inc. to National City Bank. 1999
- --------------------------------------------------------------------------------
99(b) Press release issued by Current Report on Form
CompManagement, Inc. on 8-K dated January 15,
January 4, 1999. 1999
- --------------------------------------------------------------------------------
<PAGE> 1
Exhibit 23
CONSENT OF PRICEWATERHOUSECOOPERS LLP
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the Registration Statements
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
13, 1999, on our audits of the combined financial statements of M&N Risk
Management, Inc. and M&N Enterprises, Inc. as of December 31, 1998 and 1997, and
for the year ended December 31, 1998 and for the ten-month period ended December
31, 1997, which report is included in this Form 8-K/A filing of Health Power,
Inc.
Columbus, Ohio /s/ PricewaterhouseCoopers LLP
March 16, 1999 ------------------------------------
PricewaterhouseCoopers LLP
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<TABLE> <S> <C>
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<S> <C>
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0
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<TOTAL-LIABILITY-AND-EQUITY> 22,349
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<CGS> 0
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<OTHER-EXPENSES> 0
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<EPS-PRIMARY> .79
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