<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1999 OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 19934 FOR THE TRANSITION PERIOD FROM ______________
TO ______________.
Commission file number: 0-23220
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Health Power, Inc.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 31-1145640
- ---------------------------------------- ---------------------------------
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
1209 Orange Street, Wilmington, Delaware 19801
- ---------------------------------------- ---------------------------------
(Address of principal executive offices) Zip Code
(302) 658-7581
--------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes _X_ No ___. Indicate the number of shares
outstanding of each of the issuer's classes of common stock, as of the latest
practicable date.
Common Stock, $0.01 Par Value 3,849,567
- ---------------------------------------- ---------------------------------
Class Outstanding at May 12, 1999
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HEALTH POWER, INC. AND SUBSIDIARIES
<TABLE>
INDEX
<CAPTION>
PAGE
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets - as of 3 & 4
March 31, 1999 and December 31, 1998
Consolidated Statements of Operations for the 5
three months ended March 31, 1999 and
March 31, 1998
Consolidated Statements of Cash Flows - for the 6
three months ended March 31, 1999 and March
31, 1998
Notes to the Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial 9
Condition and Results of Operations
PART II. Item 3. Quantitative and Qualitative Disclosures about
Market Riskc 13
OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 14
Signatures 15
</TABLE>
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
<TABLE>
HEALTH POWER, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS as of March 31, 1999 and December 31, 1998
<CAPTION>
March 31, 1999 December 31,
ASSETS (Unaudited) 1998
------ ----------- ----
<S> <C> <C>
Current assets:
Cash and cash equivalents $15,406,723 $11,714,169
Accounts receivable, net 7,042,383 5,671,074
Prepaid expenses and other 475,185 239,900
Current non-cash assets of discontinued
operations 1,218,077 3,055,124
Deferred income taxes, net 33,511 80,669
----------- -----------
Total current assets 24,175,879 20,760,936
----------- -----------
Property and equipment, net 2,916,045 2,931,414
Goodwill 5,457,652 5,526,736
Non-current assets of discontinued operations 1,328,684 1,403,344
Deposits and other assets 255,362 46,905
----------- -----------
Total assets $34,133,622 $30,669,335
=========== ===========
</TABLE>
The accompanying notes are an integral part of the financial statements
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<TABLE>
CONSOLIDATED BALANCE SHEETS, Continued
<CAPTION>
March 31, 1999 December 31,
LIABILITIES AND STOCKHOLDERS' EQUITY (Unaudited) 1998
- ------------------------------------ ----------- ----
<S> <C> <C>
Current liabilities:
Deferred revenues $12,793,358 $ 8,378,113
Accounts payable 1,003,567 1,323,684
Taxes payable 1,685,874 2,788,701
Current liabilities of discontinued operations 8,657,197 9,163,635
Accrued expenses and other liabilities 268,209 160,442
Note payable 3,526,736 3,526,736
----------- -----------
Total current liabilities 27,934,941 25,341,311
----------- -----------
Note payable 2,000,000 2,000,000
Deferred income taxes, net 222,477 222,481
----------- -----------
Total liabilities 30,157,418 27,563,792
----------- -----------
Stockholders' equity:
Common stock 38,348 38,348
Additional paid-in capital 10,809,475 10,809,475
Retained (deficit) (6,871,619) (7,742,280)
----------- -----------
Total stockholders' equity 3,976,204 3,105,543
----------- -----------
Total liabilities and stockholders' equity $34,133,622 $30,669,335
=========== ===========
</TABLE>
The accompanying notes are an integral part of the financial statements
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<TABLE>
HEALTH POWER, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
for the three months ended March 31, 1999 and March 31, 1998
<CAPTION>
(Unaudited)
1999 1998
---- ----
<S> <C> <C>
Revenues:
Contract $7,430,419 $7,367,624
---------- ----------
Expenses:
Selling, general and administrative 6,363,828 5,074,849
---------- ----------
Income from operations 1,066,591 2,292,775
Interest income and other, net 10,600 170,167
---------- ----------
Income from continuing operations
before income taxes 1,077,191 2,462,942
Federal, state and local income taxes 206,530 936,410
---------- ----------
Net income from continuing operations 870,661 1,526,532
Discontinued operations:
Loss from discontinued operations (net of
tax benefit of $294,444) -- (571,751)
---------- ----------
Net income $ 870,661 $ 954,781
========== ==========
Earnings per share (basic and diluted):
Income from continuing operations, per share $ 0.23 $ 0.40
Loss from discontinued operations, per share $ -- $ (0.15)
---------- ----------
Net Income per share $ 0.23 $ 0.25
========== ==========
</TABLE>
The accompanying notes are an integral part of the financial statements
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<TABLE>
HEALTH POWER, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND 1998
<CAPTION>
(Unaudited)
1999 1998
---- ----
<S> <C> <C>
Cash flows provided by operating activities:
Cash provided by continuing operating activities $ 2,464,864 $ 7,256,723
Cash provided by (used in) discontinued operations 1,404,867 (2,295,459)
----------- -----------
Net cash provided by operating activities: 3,869,731 4,961,264
----------- -----------
Cash flows used in investing activities:
Purchase of property and equipment, net (177,577) (212,068)
----------- -----------
Cash used in continuing operating activities (177,577) (212,068)
Cash provided by discontinued operations 400
-----------
Net cash used in investing activities (177,177) (212,068)
----------- -----------
Net increase in cash and cash equivalents 3,692,554 4,749,196
Cash and cash equivalents, beginning of year 11,714,169 8,427,483
----------- -----------
Cash and cash equivalents, end of period $15,406,723 $13,176,679
=========== ===========
</TABLE>
The accompanying notes are an integral part of the financial statements
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HEALTH POWER, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
1. The accompanying consolidated financial statements are unaudited and have
been prepared by Health Power, Inc. In the opinion of management, they
contain the adjustments (all of which are normal and recurring in nature)
necessary to present fairly the financial position, results of operations,
and cash flows for all periods presented. The results of operations for the
period ended March 31, 1999 are not necessarily indicative of operating
results for a full year.
The accompanying unaudited consolidated financial statements have been
prepared in accordance with the instructions for Form 10-Q and, therefore,
do not include all information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted
accounting principles. These financial statements should be read in
conjunction with the December 31, 1998, financial statements and notes
thereto contained in the Company's 1998 Form 10-K.
2. For the three months ended March 31, 1999, the Company recorded in tax
expense from continuing operations the recognition of a deferred tax asset
in the amount of $247,808 based on the utilization of the net operating loss
carryforward.
3. On December 29, 1998, the Company's Board of Directors formally approved a
plan to discontinue operations of the Company's HMO. Accordingly, at
December 31, 1998, the operating results of the HMO operations included a
provision 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 and has been segregated from continuing operations and
reported as a separate line item on the statement of operations. All
operating results for the three month period ending March 31, 1999 have been
recorded against the provision for discontinued operations and management
does not believe that an adjustment to the provision is considered necessary
at March 31, 1999.
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 March 31, 1999 and December 31, 1998,
respectively, have been reflected as a separate line item on the balance
sheet based substantially on the original classification of such assets and
liabilities.
4. 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 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.
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Segment Reporting for Continuing Operations:
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31, 1999
---------------------------------
MANAGED
CARE CONSULTING
SERVICES SERVICES OTHER ELIMINATIONS TOTAL
------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenues to unaffiliated $2,709,342 $4,721,077 $ -- $ -- $7,430,419
customers
Intercompany revenues 535,673 (535,673)
Income before taxes 217,866 830,260 3,262,948 (3,233,883) 1,077,191
<CAPTION>
THREE MONTHS ENDED MARCH 31, 1998
---------------------------------
<S> <C> <C> <C> <C> <C>
Revenues to $4,403,711 $2,963,913 $ -- $ -- $7,367,624
unaffiliated customers
Intercompany revenues 723,389 (723,389)
Income before taxes 1,561,520 827,212 6,541,521 (6,467,311) 2,462,942
</TABLE>
5. Supplemental Disclosures for Earnings Per Share:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
1999 1998
<S> <C> <C>
BASIC:
Earnings:
Income from continuing operations $ 870,661 $1,526,532
Loss from discontinued operations $ -- $ (571,751)
---------- ----------
Net income $ 870,661 $ 954,781
---------- ----------
Shares:
Weighted average common shares outstanding 3,834,829 3,820,498
---------- ----------
Income from continuing operations per common share, basic $ 0.23 $ 0.40
Loss from discontinued operations per share, basic $ -- $ (0.15)
---------- ----------
Net income per common share, basic $ 0.23 $ 0.25
-------------------------
DILUTED:
Earnings:
Income from continuing operations $ 870,661 $1,526,532
Loss from discontinued operations $ -- $ (571,751)
---------- ----------
Net income $ 870,661 $ 954,781
---------- ----------
Shares:
Weighted average common shares outstanding 3,834,829 3,820,498
Add: dilutive effect of outstanding options 0 19,020
---------- ----------
Weighted average common shares outstanding, diluted 3,834,829 3,839,518
---------- ----------
Income from continuing operations per common share, diluted $ 0.23 $ 0.40
Loss from discontinued operations per share, diluted $ -- $ (0.15)
---------- ----------
Net income per common share, diluted $ 0.23 $ 0.25
-------------------------
</TABLE>
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Item 2. Management's Discussion and Analysis of Financial Condition and
- ------- ---------------------------------------------------------------
Results of Operations
---------------------
GENERAL
Health Power, Inc., through its subsidiaries, CompManagement, Inc.
("CompManagement"), CompManagement Health Systems, Inc. ("CompManagement Health
Systems"), and M&N Risk Management, Inc. ("M&N Risk Management"), is an
independent provider of comprehensive cost containment and medical management
services designed to minimize the costs of workers' and unemployment
compensation benefits for employers. Health Power, Inc. and these subsidiaries
are collectively referred to as the "Company."
Through CompManagement and M&N Risk Management, the Company serves as
a third party administrator (a "TPA") for workers' and unemployment compensation
claims and provides claims management, risk management, and medical cost
containment services primarily to Ohio employers. The Company is one of the
largest workers' compensation TPAs in Ohio, currently serving approximately
19,000 employers located throughout Ohio. Through CompManagement Health Systems,
the Company serves as a state-wide certified managed care organization (an
"MCO") under Ohio's Health Partnership Program and provides medical management
services for workers' compensation claims. The Company began offering its MCO
services in March 1997, and currently serves approximately 20,200 employers
located throughout Ohio. Because all workers' compensation claims are reimbursed
by the Ohio Bureau of Workers' Compensation, the Company does not assume any
risk for the payment of medical or disability benefits to employees with respect
to workers' compensation claims.
On December 31, 1998, CompManagement acquired all of the outstanding
capital stock of M&N Risk Management and a related entity. This acquisition was
accounted for under the purchase method of accounting for business combinations.
As required by the purchase method of accounting, the results of operations of
M&N Risk Management are not included in the Company's results of operations for
the first quarter of 1998 discussed below.
On December 29, 1998, the Board of Directors of Health Power, Inc.
formally approved a plan to discontinue the operations of Health Power HMO,
Inc., its health maintenance organization subsidiary ("Health Power HMO").
Accordingly, the operating results of Health Power HMO have been segregated from
continuing operations and are reported separately as discontinued operations.
Health Power HMO discontinued its Medicaid operations effective April 1, 1999,
and its commercial operations effective May 1, 1999. In addition, Health Power
HMO's certificate of authority was revoked by the Ohio Department of Insurance
effective May 1, 1999. The Department's revocation order permits Health Power
HMO to conclude its affairs and to windup its business on its own, subject to
the Department's continuing supervision, but without judicial involvement.
Health Power HMO has commenced the immediate windup of its business and is in
the process of collecting all of its receivables and other assets and attempting
to sell or otherwise dispose of all of its properties on the most favorable
terms and conditions under the circumstances. Once this process has been
completed, Health Power HMO will pay, or make provision for payment of, claims
against it, to the extent funds are available. Health Power HMO intends to pay
its creditors in a fair and equitable manner, in order of priority, and on a pro
rata basis. Health Power HMO anticipates that its windup will be completed by
the end of 1999.
The Company has two reportable segments for its continuing operations,
TPA services and MCO services, which were determined based upon its method of
internal reporting. Each of these segments is managed separately. The Company
also has an all other segment which derives its revenues from management fees
and interest income.
The following discussion should be read in conjunction with the
consolidated financial statements, notes, and tables included elsewhere in this
report and in the Company's Form 10-K for its fiscal year ended December 31,
1998.
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RECENT DEVELOPMENTS
Agreement to Acquire MCO Assets of Anthem Managed Comp
On may 12, 1999, CompManagement Health Systems entered into a
definitive agreement to acquire the MCO assets of Anthem Managed Comp ("AMC"), a
division of a wholly owned subsidiary of Anthem Insurance Companies, Inc. The
assets to be acquired include AMC's contract with the Ohio Bureau of Workers'
Compensation which allows AMC to operate a state-wide certified MCO. The
purchase price for the asset acquisition is expected to be approximately $5.75
million payable over five years. AMC operates in Ohio, Kentucky, and Indiana and
is currently the third largest MCO in Ohio based upon its approximately 27,000
employers. The AMC assets to be acquired from the Anthem subsidiary will be
operated as a division of CompManagement Health Systems under the name
"Integrated Comp." The transaction is subject to a number of conditions,
including approval from regulatory agencies in Ohio and Kentucky. CompManagement
Health Systems expects to complete the transaction, subject to regulatory
approvals, during the second quarter of 1999.
Appeal of Nasdaq Delisting
On April 26, 1999, the Company received notice from the Nasdaq Stock
Market that it intended to remove the Company's common stock from listing on the
Nasdaq National Market system because of the Company's failure to meet its $4.0
million net tangible asset requirement for continued listing. On April 30, 1999,
the Company filed an appeal of this decision with Nasdaq. The Company's failure
to meet the National Market system's net tangible asset requirement related to
the Company's decision to discontinue its HMO business, which required a
significant write-down of the HMO's assets, and the Company's purchase of M&N
Risk Management in December 1998, which required the Company to record over $5.5
million of goodwill which is excluded from the net tangible asset calculation.
The Company is exploring its options with respect to continued listing on the
Nasdaq Stock Market, either on the Nasdaq National Market or Nasdaq SmallCap
Market systems. The Company's common stock will remain traded on the Nasdaq
National Market system pending a final decision by the Nasdaq Listing
Qualifications Panel.
RESULTS OF OPERATIONS
Three months ended March 31, 1999, compared to three months ended March 31, 1998
Revenues from continuing operations increased $63,000, or .9%, to $7.4
million during the first quarter of 1999, from $7.4 million for the same period
in 1998. Revenues from TPA services increased 59.3% primarily as a result of the
inclusion of revenues from M&N Risk Management. This increase was offset by a
38.5% decrease in revenues from MCO services during the first quarter of 1999.
Revenues for MCO services during the first quarter of 1998 included
approximately $1.5 million of one-time incentive payments related to the
acceptance of workers' compensation claims with dates of injury which preceded
the commencement date of the Health Partnership Program.
General and administrative ("G&A") expenses increased $1.3 million to
$6.4 million, or 85.6% of revenues, for the first quarter of 1999, as compared
to $5.1 million, or 68.9% of revenues, for the same period in 1998. G&A expenses
increased in 1999 as a percentage of revenues primarily due to 1998 first
quarter MCO revenues including significant one-time incentive payments related
to the acceptance of workers' compensation claims with dates of injury which
preceded the commencement date of the Health Partnership Program.
Interest income and other decreased $160,000 to $10,600 for the first
quarter of 1999, from $170,000 for the same period in 1998. This decrease
resulted from interest expense related to the M&N Risk Management acquisition
and a decrease in interest income.
Income tax expense was $207,000 in the first quarter of 1999, or an
effective tax of 19%, as compared to $936,000 for the same period in 1998, or an
effective tax rate of 38%. First quarter 1999 tax expense reflects the
recognition of a deferred tax asset in the amount of $247,808 based on the
utilization of the net operating loss carryforward from continuing operations.
As a result of the foregoing, income from continuing operations was
$871,000, or basic and diluted earnings per share of $0.23, for the first
quarter of 1999, as compared to income from continuing operations of $1.5
million, or basic and diluted earnings per share of $0.40, for the same period
in 1998.
There was no net income or loss from discontinued operations for the
first quarter of 1999. The net loss from discontinued operations was $572,000,
net of taxes, or basic and diluted earnings per share of $(0.15), for the first
quarter of 1998.
The Company had net income of $871,000, or basic and diluted earnings
per share of $0.23, for the first quarter of 1999, as compared to net income of
$955,000, or basic and diluted earnings per share of $0.25, for the
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same period in 1998. There were 3,834,829 and 3,820,498 basic weighted average
shares of common stock and common stock equivalents outstanding at March 31,
1999 and 1998, respectively, and 3,834,829 and 3,839,518 diluted weighted
average shares of common stock and common stock equivalents outstanding at March
31, 1999 and 1998.
LIQUIDITY AND CAPITAL RESOURCES
CONTINUING OPERATIONS
The Company finances its continuing operations through internally
generated funds, and its principal sources of cash for continuing operations are
revenues from TPA and MCO services. The Company's principal capital needs for
continuing operations are to fund expenditures for continued growth and for
possible acquisitions.
A working capital deficit of $117,000 from continuing operations
existed at March 31, 1999, as compared to working capital deficit from
continuing operations of $1.1 million at December 31, 1998. The working capital
deficit includes a $3.0 million bank loan due on demand related to the
acquisition of M&N Risk Management. The Company believes that cash generated
from continuing operations should be sufficient to cure the working capital
deficit during the second quarter of 1999. In addition, the Company is
considering refinancing the bank demand loan for a long-term bank loan once the
windup of Health Power HMO is substantially complete. However, there can be no
assurance that cash generated from continuing operations will be sufficient to
cure the working capital deficit or that the Company will be able to refinance
this demand loan for a long-term bank loan. In addition, although the Company
believes that the bank does not intend to make demand for payment of such loan
in the immediate future, the facts and circumstances surrounding the Company
could change at any time such that the bank would demand payment of such loan.
Such a demand for payment could have an adverse effect on the Company's
financial condition and results of operation.
At March 31, 1999, cash and cash equivalents from continuing
operations were $11.4 million, an increase of $2.3 million from $9.1 million at
December 31, 1998. This increase was attributable primarily to payments received
with respect to the Company's TPA contracts. These payments constitute deferred
revenues which are recognized as income on a pro rata basis over the related
contract period, which typically ranges from three to twelve months.
Cash provided by continuing operating activities was $2.5 million for
the first quarter of 1999, as compared to $7.3 million during the same period of
1998.
As previously described, CompManagement acquired all of the
outstanding capital stock of M&N Risk Management and a related entity on
December 31, 1998. The purchase price for this acquisition, after an adjustment
based upon the closing net equity of M&N Risk Management and the related entity,
was $5,526,736. The purchase price was financed by a $3,000,000 promissory note
from National City Bank (the "Bank") and by a $2,526,736 promissory note payable
to the seller. The promissory note from the Bank is due on demand, accrues
interest at the Bank's prime rate (currently 7.8%), and is secured by a lien on
all business assets of CompManagement, CompManagement Health Systems, and M&N
Risk Management. The seller's promissory note is a three-year note maturing on
December 31, 2001. This note provides for principal payments in the amounts of
$526,736, $1,000,000, and $1,000,000 due on December 31, 1999, 2000, and 2001,
respectively, and interest payments at the rate of 7% per annum due quarterly
over the term of the note. The payment of the seller's promissory note is
guaranteed by M&N Risk Management and is secured by a lien on all business
assets of CompManagement, CompManagement Health Systems, and M&N Risk
Management. The seller's promissory note and all liens granted with respect to
such note are subordinated in all respects to the Bank's promissory note.
As previously described, on May 12, 1999, CompManagement Health
Systems entered into a definitive agreement to acquire the MCO assets from a
subsidiary of Anthem Insurance Companies, Inc. The purchase price for the asset
acquisition is expected to be approximately $5.75 million, with $1.0 million to
be paid at the closing and the balance payable over five years. The Company
intends to fund the cash payment due at the closing with funds from its current
cash balances and to fund the balance of the purchase price with funds generated
from internal operations. The transaction is subject to a number of conditions,
including approval from regulatory agencies in Ohio and Kentucky. CompManagement
Health Systems expects to complete the transaction, subject to regulatory
approvals, during the second quarter of 1999.
CompManagement leases a 70,000 square foot building in Dublin, Ohio.
The lease restricts CompManagement's ability to distribute funds and/or assets
to Health Power, Inc. or another affiliate unless CompManagement meets certain
tangible net worth requirements.
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The Company believes that cash generated from continuing operations
will be sufficient to fund its anticipated cash needs for working capital,
acquisitions, and expenditures for continuing operations for the next 12 months,
including capital requirements caused by the Bank making demand for payment of
the $3.0 million demand loan and capital needed for the acquisition of the MCO
assets from the Anthem Subsidiary. As discussed above, the Company had a working
capital deficit from continuing operations as of March 31, 1999.
DISCONTINUED OPERATIONS
As previously described, the Ohio Department of Insurance issued an
order revoking Health Power HMO's certificate of authority effective May 1,
1999. The revocation order permits Health Power HMO to conclude its affairs and
to windup its business on its own, subject to ODI's continuing supervision, but
without judicial involvement. Health Power HMO has commenced the immediate
windup of its business and is in the process of collecting all of its
receivables and other assets and attempting to sell or otherwise dispose of all
of its properties on the most favorable terms and conditions under the
circumstances. Once this process has been completed, Health Power HMO will pay,
or make provision for payment of, claims against it, to the extent funds are
available. Health Power HMO intends to pay its creditors in a fair and equitable
manner, in order of priority, and on a pro rata basis. Health Power HMO
anticipates that its windup will be completed by the end of 1999. Health Power
HMO expects that its liabilities will exceed its assets by a significant amount.
Accordingly, it is not anticipated that the creditors of Health Power HMO will
receive payment in full for their claims against Health Power HMO. Health Power,
Inc. believes that neither it nor any of its other subsidiaries are liable for
any claims against Health Power HMO. Furthermore, Health Power, Inc. does not
intend to fund, or cause any other subsidiary to fund, any deficits of Health
Power HMO.
YEAR 2000 MATTERS
The Year 2000 issue is the result of computer programs having been
written using two digits rather than four to define the applicable year. Any
information technology ("IT") systems used by the Company that have
time-sensitive software may recognize a date using "00" as the year 1900 rather
than the year 2000. This could result in a system failure or miscalculations
causing disruptions of uncertain duration in the Company's operations,
including, among other things, an inability to process transactions or engage in
normal business activities. The Company uses IT systems which are essential to
its operations, such as computer software and hardware in the mainframe,
midrange and desktop environments, as well as telecommunications. Additionally,
the impact of the problem extends to non-IT systems, such as automated building
systems and instrumentation.
The Company has created a committee to address Year 2000 issues. This
committee has been actively assessing the Company's Year 2000 readiness and, as
part of these assessments, has developed a compliance plan which includes a
timetable for identifying, evaluating, resolving, and testing the Company's IT
systems for Year 2000 issues. This committee includes members of the Company's
senior management and information systems departments to ensure that issues are
adequately addressed and completed in a timely manner.
The timetable provides for the Company's completion of its remediation
of any Year 2000 issues by the end of the third quarter of 1999. During the
first quarter of 1999, the Company substantially completed an inventory of its
IT systems. According to the compliance plan, the testing phase is expected to
be complete by the end of the second quarter of 1999. In that phase, the Company
will perform a system-wide test on all of its proprietary and non-proprietary IT
systems and applications for Year 2000 compliance. The Company believes that all
proprietary and non-proprietary IT systems and applications utilized by the
Company are either Year 2000 compliant or will be Year 2000 compliant upon
installation of available patches and upgrades. The Company currently believes
that all of its IT systems will be Year 2000 compliant by the end of the third
quarter 1999. The Company also performed a Year 2000 readiness review of M&N
Risk Management in connection with the acquisition of that company, and the
Company currently believes that all of M&N Risk Management's IT systems will be
Year 2000 compliant by the end of the third quarter of 1999. The Company's Year
2000 committee is working with significant third party vendors to verify that
they are Year 2000 compliant.
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The Company currently believes that all Year 2000 issues will be
resolved in a timely manner and that costs associated with Year 2000 compliance
issues will not be material to the Company's financial position or results of
operations. However, there is a risk that third parties will not achieve Year
2000 compliance in a timely manner, which could have an adverse effect on the
Company's operations. The Company's Year 2000 committee intends to develop
appropriate contingency plans as necessary to address Year 2000 compliance
issues as they arise.
The Company currently believes that the primary costs associated with
Year 2000 compliance issues are in-house time costs associated with
administration, review and testing of systems. The costs incurred thus far have
been less than $50,000, and the Company believes additional costs will not
exceed $100,000 for the remainder of 1999.
SAFE HARBOR STATEMENT UNDER THE SECURITIES LITIGATION REFORM ACT OF 1995
Some of the information in this Form 10-Q contains "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. The words "believe," "expect," "anticipate," "project," and similar
expressions, among others, identify forward-looking statements. Forward-looking
statements speak only as of the date the statement was made. These
"forward-looking statements" are subject to certain risks, uncertainties, and
other factors that could cause the Company's actual results to differ materially
from those projected, anticipated, or implied. Such risks, uncertainties, and
factors that might cause such a difference include, but are not limited to,
potential legal actions related to the Company's HMO and its discontinued
operations, the Company's dependence upon its MCO contract and group rating
plans for revenues, its dependence upon workers' compensation plans and programs
administered by governmental agencies pursuant to state statutes and
regulations, in particular Ohio's Health Partnership Program and group rating
program, its ability to achieve Year 2000 compliance, risks associated with
acquisitions, in particular the Company's ability to locate and acquire other
businesses and to integrate these newly acquired operations effectively with its
existing businesses, its dependence on certain key personnel, and the Company's
ability to effectively compete with larger and more diverse competitors. These
and other risks, uncertainties, and factors that could materially affect the
financial results of the Company are further discussed in the Company's filings
with the Securities and Exchange Commission, including the Form 10-K for the
Company's fiscal year ended December 31, 1998.
Item 3. Quantitative and Qualitative Disclosure About Market Risk
- ------- ---------------------------------------------------------
There is no change in the quantitative and qualitative disclosures
about the Company's market risk from the disclosures contained in the Company's
Form 10-K for its fiscal year ended December 31, 1998.
Page 13
<PAGE> 14
Part II - Other Information
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
--------
27 Financial Data Schedule
(b) Reports on Form 8-K
-------------------
On January 15, 1999 the Company filed a Form 8-K (dated
January 15, 1999) (the "Initial Form 8-K") reporting under
Item 2 of such report the acquisition by CompManagement, Inc.
of all of the outstanding capital stock of M&N Risk
Management, Inc. and a related entity (collectively, the "M&N
Entities") on December 31, 1998.
On March 16, 1999, the Company filed a Form 8-K/A (dated March
16, 1999) (the "Amended Form 8-K") amending the Initial Form
8-K. The Amended Form 8-K included under Item 7 of such
report: (i) the audited combined balance sheets of the M&N
Entities as of December 31, 1998 and 1997, the results of
their operations and their cash flows for the year ended
December 31, 1998, and the ten months ended December 31, 1997,
and the notes thereto, along with the report of independent
accountants; and (ii) the unaudited condensed pro forma
combined statements of income for the year ended December 31,
1998. The Amended Form 8-K also included under Item 5 of such
report 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 independent accountants.
Page 14
<PAGE> 15
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HEALTH POWER, INC.
Date: May 14, 1999 By /s/ Bernard F. Master, DO
----------------------------------------------
Bernard F. Master, DO, President,
Chief Operating Officer and Chairman
of the Board
Date: May 14, 1999
By /s/ Ronald J. Wurtz
----------------------------------------------
Ronald J. Wurtz, Chief Financial Officer
and Principal Accounting Officer
Page 15
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