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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES AND EXCHANGE ACT OF 1934
For the fiscal year ended: December 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___________ to __________
Commission File Number: 0-23220
HEALTH POWER, INC.
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(Exact name of Registrant as specified in its charter)
DELAWARE 31-1145640
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(State of Incorporation) (I.R.S. Employer Identification No.)
1209 Orange Street
Wilmington, Delaware 19801
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(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code: (302) 636-7593
Securities registered pursuant to Section 12(b) of the Act:
None
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(Title of Class)
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.01 par value
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(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [x] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
On March 17, 1999, the aggregate market value (based on the closing
sales price on that date) of the Common Stock held by nonaffiliates of the
Registrant was $5,462,466. On March 17, 1999, the Registrant had 3,834,829
shares of Common Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's proxy statement for its annual meeting of
stockholders to be held on June 3, 1999, which proxy statement will be filed
within 120 days of December 31, 1998, are incorporated by reference into Part
III, Items 10, 11, 12, and 13, of this Report.
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HEALTH POWER, INC.
FORM 10-K
PART I
ITEM 1. BUSINESS
GENERAL DEVELOPMENT OF BUSINESS
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 such subsidiaries
are hereinafter collectively referred to as the "Company."
Through CompManagement and M&N Risk Management, the Company serves as a
third party administrator ("TPA") for workers' and unemployment compensation
claims. The Company offers claims management, risk management, and medical cost
containment services primarily to Ohio employers, as well as employers located
in Washington and West Virginia. The Company is one of the largest workers'
compensation TPAs in Ohio, currently serving approximately 19,000 employers
located throughout Ohio. CompManagement was acquired by Health Power, Inc. in
July 1995. M&N Risk Management was acquired by Health Power, Inc. on December
31, 1998. See "Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations.
Through CompManagement Health Systems, the Company serves as a
state-wide managed care organization (an "MCO") under Ohio's Health Partnership
Program, a managed care workers' compensation program. The Company began
offering its MCO services in March 1997, and currently serves approximately
20,200 employers located throughout Ohio. As a state-wide certified MCO, the
Company provides medical management services for workers' compensation claims,
including, among other things, the following: a state-wide health care provider
network; treatment guidelines and utilization review procedures; peer review and
quality assurance programs; provider sanction and termination procedures;
medical and vocational case management programs; utilization management
programs; medical bill adjudication and payment procedures; dispute resolution
procedures; provider, employer, and employee relations and education programs;
and health care fraud detection and reporting programs. Because all workers'
compensation claims are reimbursed by the Ohio Bureau of Workers' Compensation,
the Company does not assume any risk for the payment of medical or disability
benefits to employees with respect to their workers' compensation claims.
Health Power HMO, Inc. ("Health Power HMO"), a subsidiary of Health
Power, Inc., operates a health maintenance organization (an "HMO") in Ohio. On
December 29, 1998, the Board of Directors of Health Power, Inc. formally
approved a plan to discontinue the operations of Health Power HMO. Health Power,
Inc.'s consolidated financial statements have been restated to reflect Health
Power HMO's operations as discontinued operations. See "Item 1. General
Development of Business--Discontinued Operations," "Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operations," and
"Item 8. Financial Statements."
On July 13, 1998, Health Power HMO was placed under the supervision of
the Ohio Department of Insurance ("ODI") for failure to maintain total admitted
assets equal to at least 110% of its liabilities and for failure to meet Ohio's
minimum statutory net worth requirements. On December 2, 1998, ODI served
notice that it intended to suspend or revoke Health Power HMO's certificate of
authority, and on January
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21, 1999, an administrative hearing was held on this matter. The hearing officer
issued a report recommending that the Superintendent of Insurance issue an order
to revoke Health Power HMO's certificate of authority, and on March 19, 1999,
ODI issued an order revoking Health Power HMO's certificate of authority
effective May 1, 1999. On March 19, 1999, Health Power HMO received notice from
the Ohio Department of Human Services ("ODHS") that, due to the issuance of the
revocation order, ODHS was commencing the disenrollment of Health Power HMO's
Medicaid members effective March 31, 1999. As a result of ODHS's action, Health
Power HMO will discontinue its Medicaid operations effective April 1, 1999. It
will discontinue its commercial operations 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, Inc. was incorporated under Delaware law on March 6,
1985.
FINANCIAL INFORMATION ON INDUSTRY SEGMENTS
Financial information on industry segments as required by Item 101(b)
of Regulation S-K is set forth in Note 13 of the Notes to the Consolidated
Financial Statements, which Note is part of the financial statements contained
in Item 8 of this Form 10-K, which Note is incorporated herein by reference.
INDUSTRY OVERVIEW
General
Workers' compensation is a state-mandated, comprehensive insurance
program that requires employers to fund medical expenses, lost wages and other
costs resulting from work-related injuries and illnesses. Since their
introduction in the early 1900s, these programs have been expanded to all fifty
states and the District of Columbia. In addition, federal statutes provide
workers' compensation benefits for federal employees. Each state is responsible
for implementing and regulating its own program. Consequently, workers'
compensation benefits and arrangements vary on a state-by-state basis and are
often highly complex.
Workers' compensation legislation generally requires employers,
directly or indirectly through an insurance vehicle, to fund all of an
employee's costs of medical treatment and a significant portion of lost wages,
legal fees and other associated costs, with no co-payment or deductible due from
the injured worker. Typically, work-related injuries are broadly defined, and
injured or ill employees are entitled to extensive benefits. Employers are
required directly or indirectly to provide first-dollar coverage with no
co-payment or deductible due from the injured or ill employee for medical
treatment and, in many states, there is no lifetime limit on expenses. However,
in exchange for providing this coverage for employees, employers are not subject
to litigation by employees for benefits in excess of those provided pursuant to
the relevant state statute. In most states, the extensive benefits coverage (for
both medical costs and lost wages) is provided through the purchase of
commercial insurance from private insurance companies, participation in
state-run insurance funds, or employer self-insurance.
Provider reimbursement methods vary on a state-by-state basis. A
majority of states have adopted fee schedules pursuant to which all health care
providers are uniformly reimbursed. The fee
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schedules are set by each state and generally prescribe the maximum amounts that
may be reimbursed for a designated procedure. In states without fee schedules,
health care providers are reimbursed based on usual, customary and reasonable
fees charged in the particular state in which the services are provided.
Ohio's Workers' Compensation System
Ohio's workers' compensation system is a no-fault state insurance
program whereby injured workers are provided with medical and disability
benefits. Ohio law requires all employers, with certain exceptions, to provide
their employees with workers' compensation coverage. Ohio's system is
administered by the Ohio Bureau of Workers' Compensation ("OBWC"), which is
responsible for managing the state insurance fund, determining premium rates and
manual classifications, collecting premiums from employers, and paying benefits
to or on behalf of injured workers. In determining the premium rates, OBWC first
classifies occupations or industries with respect to their degree of hazard and
then determines the risk of the different classes. The workers' compensation
program is funded by premiums paid by employers into the state insurance fund,
which premiums are based upon the classification of an employer's employees and
such employer's specific risk experience. If certain conditions are satisfied,
similar types of employers may participate in plans that group, for rating
purposes, such employers in pools that spread each employer's risk among all of
the employers participating in that group. Under these "group rating plans," the
premium rates are based upon the risk experience of the group and not the
individual employer participating in that group. Employers which generally have
500 or more employees in Ohio and have sufficient financial capabilities may be
granted status by OBWC as a self-insuring employer, which means that such
employers are not required to pay premiums into the state insurance fund, but
instead pay the same compensation, medical, and disability benefits as required
by the Ohio workers' compensation program directly to or for the benefit of
their injured workers.
In March 1997, OBWC implemented a managed care system for workers'
compensation claims known as the Health Partnership Program (the "HPP"). This
program applies to all Ohio employers other than self-insured employers. OBWC
has also implemented a similar program for self-insured employers known as the
Qualified Health Plan.
Under the HPP, participating employers are required to select an
OBWC-certified MCO, or have such an MCO assigned to them by OBWC, to medically
manage their workers' compensation claims. The MCO is primarily responsible to
provide medical management and cost containment services for employers with
respect to their workers' compensation claims. In order to receive OBWC
certification, an MCO is required to have, among other things, a network of
healthcare providers, a quality assurance program, and certain information
system capabilities. The MCO provides, among other things, utilization review
services, medical case management services, dispute resolution, rehabilitation,
peer review, and quality assurance programs with respect to workers'
compensation claims.
Ohio's Unemployment Compensation System
Ohio's unemployment compensation system provides compensation benefits
to workers who are laid off or involuntarily separated from employment without
just cause. This system is administered by the Ohio Bureau of Employment
Services ("OBES"), which is responsible for managing the unemployment
compensation fund, determining contribution rates, collecting contributions from
employers, maintaining each employer's account, determining eligibility for
benefits, and paying benefits to eligible unemployed workers. Contribution rates
are determined each year by the OBES and then assigned to the individual
employers. Employers are assigned the standard contribution rate (an amount
equal to a specified percentage of wages as determined by the OBES) or the
average contribution rate for its industry, whichever is greater, until they
become eligible for an experience rate. Thereafter, the annual
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contribution rate is based upon the specific experience of each employer. The
unemployment compensation program is funded by contributions paid by employers
into the unemployment compensation fund.
BUSINESS
The Company offers services in two general categories, third party
administration of workers' and unemployment compensation claims, or TPA
services, and medical management of workers' compensation claims, or MCO
services.
TPA Services
The Company provides claims management, risk management, and medical
cost containment services to employers with respect to workers' compensation
claims and, to a lesser extent, unemployment compensation claims. The Company's
TPA services for workers' compensation claims include the review and processing
of an employer's workers' compensation claims, the design of individual programs
to improve an employer's experience ratings, representation of employers before
the Ohio Industrial Commission and OBWC, the performance of risk analysis for an
employer's experience rating, the review of premium audits on behalf of
employers, and analysis of employers for inclusion in group rating plans. The
Company also acts as a TPA of workers' compensation claims for self-insured
employers. Each employer selects the types of services it desires and then
enters into a contract with the Company to provide such services. These
contracts are generally for a one-year period.
In the area of unemployment compensation, the Company's TPA services
are similar to its services in the area of workers' compensation. Such services
include the review and processing of an employer's unemployment compensation
claims and representation of employers before the OBES. Each employer selects
the types of services it desires and then enters into a contract with
CompManagement to provide such services. These contracts are generally for a one
year period.
The Company currently provides its TPA services to approximately 19,000
employers located throughout Ohio. A substantial number of these employers have
entered into contracts with the Company because of their participation in group
rating plans, discussed above, sponsored by trade associations of which such
employers are members. Fees from employers participating in one of these group
rating plans accounted for approximately 28% of the Company's 1998 revenues.
MCO Services
The Company operates a state-wide certified MCO under Ohio's Health
Partnership Program. The Company offers its MCO services to approximately 20,200
employers located throughout Ohio who have selected or been assigned to it as
their MCO. As a state-wide certified MCO, the Company provides medical
management services for workers' compensation cases resulting from injuries
suffered by employees arising out of the course and scope of their employment,
as required by law. Because all workers' compensation claims are reimbursed by
OBWC, the Company does not assume any risk for the payment of medical or
disability benefits to employees with respect to their claims.
The services provided by the Company are offered pursuant to a contract
with OBWC. Under this contract, the Company is responsible for providing, among
other things, the following: a state-wide health care provider network;
treatment guidelines and utilization review procedures; peer review and quality
assurance programs; provider sanction and termination procedures; medical and
vocational case management programs; utilization management programs; medical
bill adjudication and payment
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procedures; dispute resolution procedures; provider, employer, and employee
relations and education programs; and health care fraud detection and reporting
programs.
Under its OBWC contract, the Company receives an administrative fee
equal to 4% of the annual workers' compensation premiums for employers assigned
to the Company's MCO. The administrative fee is paid monthly and is subject to
setoffs if the Company does not meet certain criteria with respect to first
report of injuries, bill submissions, or data accuracy or the Company makes a
misfiling of death claims. The Company is also eligible to earn an additional
quarterly incentive fee of up to 3% of the annual workers' compensation premiums
for employers assigned to the Company's MCO based upon its attainment of certain
return to work measurements established in the contract.
The Company has a state-wide health care provider network consisting of
approximately 16,000 physicians, hospitals, and ancillary providers. This
network includes certain occupational health-based physician groups which serve
as its "anchor medical groups." The provider panel is credentialed using a
multi-faceted peer review committee. The Company has a provider services
department which recruits new providers for its state-wide network and offers
educational materials and training seminars.
Customers and Marketing
The Company's customers principally consist of employers required to
participate in Ohio's insurance fund for workers' compensation claims and, to a
lesser extent, self-insured employers. The Company markets its TPA and MCO
services jointly through both its own sales force of three persons who directly
contact prospective and existing employer groups and its relationships with over
500 insurance agents and brokers. The Company maintains service center locations
in Akron, Cincinnati, Cleveland, and Toledo, in addition to its Dublin, Ohio
offices. In addition, employers who do not select an MCO have one assigned to
them by OBWC. In 1998, approximately 4,100 employees were assigned to the
Company's MCO.
Competition
The workers' compensation cost containment and medical management
industry is highly fragmented and competitive, and the intensity of competition
can be expected to increase. In Ohio, the market share in this industry is
concentrated among a few companies, including the Company. The Company's primary
competitors in Ohio are several TPAs and/or MCOs owned by large insurance
carriers which offer one or more services similar to those offered by the
Company and numerous independent companies, typically on a regional basis. Some
of the Company's competitors are significantly larger and have greater financial
and marketing resources than the Company. The principal competitive factors are
the range of services offered and responsiveness to customer needs. The Company
competes on the basis of its specialization in the workers' compensation area,
breadth of services, outstanding service, and independence from insurance
carriers.
Government Regulation
The Company's TPA business is generally not subject to specific
government regulation or oversight. However, its business is substantially
dependent on the operation of workers' and unemployment compensation systems in
Ohio and the other states in which it operates. The Company believes that its
TPA business is presently in compliance in all material respects with all laws,
regulations, and certification requirements applicable to it.
Through CompManagement Health Systems, the Company is certified by OBWC
to operate a state-wide MCO under the HPP, and is subject to regulation by OBWC
as an MCO. The Company's MCO is not, however, subject to Ohio's law governing
health insuring corporations, since its MCO is not responsible for payment of
health care claims or benefits, nor is its MCO otherwise responsible for
risk-bearing activities commonly associated with organizations licensed under
Ohio's insurance laws.
As an MCO participating in the HPP, the Company is required to provide
medical management and cost containment services that promote the rendering of
high-quality, cost-effective medical care that focuses on minimizing the
physical, emotional, and financial impact of a work-related injury or illness
and promotes a safe return to work.
In order to participate in the HPP, the Company's MCO must be
credentialed and certified by OBWC every two years. The certification standards
for an MCO desiring to contract with OBWC include, among other things,
disclosure of the MCO's organizational structure, management and employees,
historical operation, provider network, payment processes, geographic coverage
and provider directories. OBWC also requires an MCO to furnish information
regarding the MCO's satisfaction of OBWC's requirements for MCO policies and
procedures, treatment guidelines, utilization review and quality assurance,
provider profiling, grievance and dispute resolution, information systems, case
management and records confidentiality/retention, provider relations,
educational activities, performance data, marketing and liability insurance. All
of the preceding activities of an MCO participating in the HPP are governed or
impacted by the regulations promulgated under the HPP enabling statute, found in
Ohio's Administrative Code. Upon satisfying the preceding certification criteria
and entering into a contract with OBWC, an MCO is certified to provide medical
management and cost containment services under the HPP.
The Company is required to credential its HPP provider network based on
its geographic service area, using objective, non-discriminatory professional
criteria that ensures that the Company is able to provide medical services and
supplies for injured workers in its service area, as well as demonstrate that
the Company provides such persons access to specialized care. At a minimum, a
network provider must be duly licensed or qualified to render in Ohio the types
of services for which the provider is engaged by the Company.
Upon the filing of a worker injury claim, the Company, in conjunction
with its participating providers and the employer, is required to manage the
medical or rehabilitative care for the injured employee to ensure a safe return
to work. Additionally, the Company is required to review all bills submitted by
its providers to determine that the bills are consistent with the Company's
utilization standards and certification requirements. The Company is required to
maintain a grievance hearing procedure allowing a provider, the employer or the
injured employee to dispute bill payment. The Company is required to pay its
providers the amount paid by OBWC to the Company for provider services submitted
in connection with the injured employee's claim.
The Company is required to submit electronically to OBWC, on a timely
basis, all bills for payment. The Company is subject to OBWC's electronic
billing policies, formats and systems. Further, the Company must comply with
OBWC requirements for electronic data interchange ("EDI"). The Company is
responsible for submitting bills of its panel providers, as well as those of
OBWC-certified providers in its service area who are not panel members but for
which the Company has medical management responsibility, and bills for initial
or emergency treatment by a non-OBWC-certified provider of an injured employee
in its service area.
OBWC is required to pay to the Company an administrative fee for its
medical management and administrative services, as well as an incentive payment,
provided that the Company meets the performance criteria required by OBWC. The
performance criteria may include measures pertaining to quality, total cost,
change in cost and customer satisfaction. The administrative and incentive
payments available to the Company re based on a percentage of the total premium
payments of employers in the Company's service area.
The compensability and payment of claims submitted to OBWC in
connection with services provided by the Company's panel of providers is
determined solely by OBWC. OBWC claims management and dispute procedures are
governed by regulations promulgated under the HPP enabling statute. The Company
may continue management of a medical claim during adjudication of a disputed
claim. However, the Company will not receive payment from OBWC until the
disputed claim is adjudicated; and the Company must inform the injured employee
that the claim is disputed and continued treatment may be at the employee's
expense.
The Company is required to maintain records supporting claims submitted
to OBWC, its electronic billing, as well as any records necessary to perform its
medical management functions or to substantiate the delivery, value, necessity,
and appropriateness of goods and services provided to injured employees.
Additionally, the Company is required to comply with Ohio laws governing
confidentiality of patient/employee records and information, subject to the
exceptions contained in such laws. Failure to create, maintain and retain
adequate records constitutes cause for denial of payment and/or de-certification
by OBWC.
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The Company believes that its MCO is presently in compliance in all
material respects with all laws, regulations, and certification requirements
applicable to it.
EMPLOYEES
As of March 1, 1999, Health Power, Inc. and its subsidiaries had 435
full-time employees, of which 205 were employed in connection with its TPA
operations, 197 were employed in connection with its MCO operations, and 33 were
employed in connection with its HMO operations. The employees of Health Power,
Inc. and its subsidiaries are not represented by a union. Health Power, Inc. and
its subsidiaries consider their relationship with their employees to be good.
DISCONTINUED OPERATIONS
Since 1984, Health Power HMO and its predecessors have operated an HMO
in Ohio. Prior to the acquisition of CompManagement in July 1995, the operation
of an HMO was the only business of Health Power, Inc. During the past several
years, Health Power HMO has suffered significant operating losses. On December
29, 1998, the Board of Directors of Health Power, Inc. formally approved a plan
to discontinue the operations of Health Power HMO. This plan directs the
management of Health Power HMO to take all actions necessary for the
discontinuation and cessation of all business activities of Health Power HMO
within one year, including divesting all property and other assets of the HMO.
As discussed elsewhere in this Form 10-K, Health Power HMO will discontinue its
Medicaid operations effective April 1, 1999, and its commercial operations
effective May 1, 1999. Under the terms of the ODI revocation order, Health Power
HMO is permitted 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.
ITEM 2. PROPERTIES
CompManagement leases a 70,000 square foot office building in Dublin,
Ohio, which is used as the Company's principal office facilities. The building
is leased for a term of 15 years, provides for annual rent payments, and
requires the Company to pay all operating expenses for the building. The lease
also provides for, among other things, three renewal options of five years each,
an option to purchase the building, and a right of first offer with respect to
the sale of such building. The lease restricts CompManagement's ability to
distribute funds and/or assets to Health Power, Inc. or another affiliate unless
CompManagement meets certain tangible net worth requirements. The Company also
leases office space in Akron, Cincinnati, Cleveland, and Toledo, Ohio, which is
used as regional offices and service centers for its operations.
Health Power HMO owns two three-story office buildings located in
Columbus, Ohio. These buildings contain approximately 14,195 square feet of
office space. These buildings are currently for sale in connection with the
winding up of Health Power HMO's assets.
ITEM 3. LEGAL PROCEEDINGS
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On July 13, 1998, Health Power HMO was placed under ODI supervision for
failure to maintain total admitted assets equal to at least 110% of its
liabilities and for failure to meet Ohio's minimum statutory net worth
requirements. On December 2, 1998, ODI served notice that it intended to suspend
or revoke Health Power HMO's certificate of authority because of these failures,
and on January 21, 1999, an administrative hearing was held on this matter.
On February 25, 1999, the hearing officer issued a report recommending that
the Superintendent of Insurance issue an order to revoke Health Power HMO's
certificate of authority, and on March 18, 1999, ODI issued an order revoking
Health Power HMO's certificate of authority effective May 1, 1999. On March 19,
1999, Health Power HMO received notice from ODHS that, due to the issuance of
the revocation order, ODHS was commencing the disenrollment of Health Power
HMO's Medicaid members effective March 31, 1999. As a result of ODHS's action,
Health Power HMO will discontinue its Medicaid operations effective April
1,1999. Health Power HMO will discontinue its commercial operations effective
May 1, 1999.
On July 7, 1998, Health Power HMO instituted a lawsuit against Central
Benefits Administrators, Inc. ("Central Benefits Administrators") in the Common
Pleas Court of Franklin County, Ohio. The lawsuit involves an administrative
agreement between the parties pursuant to which Central Benefits Administrators
was to perform various claims processing and payment services on behalf of
Health Power HMO with respect to medical claims submitted by providers. The
lawsuit alleges that Central Benefits Administrators failed to perform its
services under the agreement. Health Power HMO is claiming breach of contract,
negligence and fraud and is seeking compensatory damages in the amount of $1.6
million and punitive damages in the amount of $5.0 million. On or about August
6, 1998, Central Benefits Administrators filed a counterclaim against Health
Power HMO involving the same administrative agreement. The counterclaim alleges
breach of contract, fraudulent or negligent misrepresentations, and
indemnification and is seeking $3.35 million in compensatory damages and
$5,000,000 in punitive damages. The lawsuit is in the discovery stage.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the
fourth quarter of Health Power's fiscal year ended December 31, 1998.
EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers of Health Power, Inc. and their respective ages
and present positions with Health Power, Inc. are as follows:
<TABLE>
<CAPTION>
Officers Age Present Position(s) with Health Power, Inc. and Subsidiaries
-------- --- ------------------------------------------------------------
<S> <C> <C>
Dr. Bernard F. Master 57 Chairman of the Board, Chief Executive Officer, and
President of Health Power, Inc.
Toni D. Spruell 40 Executive Vice President of Health Power, Inc.
Ronald J. Wurtz 56 Chief Financial Officer and Controller of Health Power, Inc.
Robert J. Bossart 47 Chief Executive Officer of CompManagement,
CompManagement Health Systems, and M&N Risk
</TABLE>
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<TABLE>
<S> <C> <C>
Management; director of Health Power, Inc.
Jonathan R. Wagner 41 President of CompManagement
Richard T. Kurth 40 Executive Vice President of CompManagement
</TABLE>
Dr. Master has been the Chairman of the Board and Chief Executive
Officer of Health Power, Inc. since its formation in March 1985, and President
of Health Power, Inc. since January 1998.
Ms. Spruell has been the Executive Vice President of Health Power, Inc.
since January 1998. Ms. Spruell joined Health Power HMO in October 1995, and
previously served as its Vice President of Provider Management Services. From
March 1994 to September 1995, Ms. Spruell served as provider network manager for
United Health Care of Ohio, Inc., a health insurance corporation. From July 1993
to March 1994, Ms. Spruell served as network manager for Principal Health Care
of Ohio, Inc., a health insurance corporation.
Mr. Wurtz has been Controller of Health Power, Inc. since August 1990
and has been Chief Financial Officer since June 1996. He also served as Chief
Financial Officer of Health Power, Inc. from November 1993 to July 1995.
Mr. Bossart has been an executive officer of CompManagement since its
formation in 1984, the chief executive officer of CompManagement Health Systems
since September 1996, and the chief executive officer of M&N Risk Management
since its acquisition by CompManagement on December 31, 1998. Mr. Bossart has
also been a director of Health Power, Inc. since July 1995.
Mr. Wagner has been an executive officer of CompManagement since its
formation in 1984.
Mr. Kurth has been an executive officer of CompManagement since its
formation in 1984.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Health Power, Inc.'s shares of common stock are traded on the Nasdaq
National Market system under the symbol HPWR. The following table sets forth the
range of the reported high and low sales prices of Health Power's common stock
by calendar quarter for 1997 and 1998:
<TABLE>
<CAPTION>
High Low
---- ---
<S> <C> <C>
For the quarter ended 1997:
March 31 $ 4.25 $ 2.75
June 30 $ 4.13 $ 2.25
September 30 $11.00 $ 2.50
December 31 $10.75 $ 4.25
For the quarter ended 1998:
March 31 $ 7.13 $ 4.00
</TABLE>
8
<PAGE> 10
<TABLE>
<S> <C> <C>
June 30 $ 6.75 $ 4.13
September 30 $ 6.00 $ 2.50
December 31 $ 3.75 $ 2.06
</TABLE>
Health Power, Inc. has not paid any dividends on its shares of common
stock to date, and it intends to retain its earnings to finance the development
and expansion of its business for the foreseeable future. CompManagement's lease
for its principal offices in Dublin, Ohio, 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. The Company's bank
debt does not include provisions restricting its ability to pay cash dividends.
As of March 17, 1999, there were 75 stockholders of record of Health
Power's common stock and approximately 2,000 beneficial owners of such stock.
9
<PAGE> 11
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth selected consolidated financial data for
Health Power, Inc. and its subsidiaries as of and for each of the years in the
five-year period ended December 31, 1998. This selected consolidated financial
data should be read in conjunction with the consolidated financial statements
and related notes of Health Power, Inc. and subsidiaries and Management's
Discussion and Analysis of Financial Condition and Results of Operation
appearing under Items 8 and 7, respectively, of this Form 10-K. All periods in
this table have been restated to reflect the operations of Health Power HMO as
discontinued operations. See Note 16 of the Notes to Consolidated Financial
Statements appearing in Item 8 of this Form 10-K. In addition, all periods in
this table have been restated to reflect the acquisition of CompManagement in
July 1995. This acquisition was accounted for as a pooling of interests.
<TABLE>
<CAPTION>
Years Ended December 31,
1998 1997 1996 1995 1994
(in thousands of dollars, except per share data)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
Contract................................. $24,861 $22,183 $ 6,672 $ 5,571 $ 3,547
------- ------- -------- -------- --------
Expenses:
General and administrative................ 21,271 16,559 6,339 5,072 3,516
------- ------- -------- -------- --------
Income from operations....................... 3,590 5,624 333 499 31
Interest income and other, net............... 444 532 247 450 290
------- ------- -------- -------- --------
Income from continuing operations before
income tax expense......................... 4,034 6,156 580 949 321
Income tax expense........................... 1,570 2,324 185 (75) 188
------- ------- -------- --------- --------
Income from continuing operations............ 2,464 3,832 395 1,024 133
Discontinued operations
(Loss) income from discontinued operations
(net of tax (expense) benefits of
($1,030), $3,965, $1,958, $(61), and
$(1,843), respectively)................. (4,902) (818) (9,878) (928) 3,049
Loss on disposal of discontinued operations;
including $607 for operating losses
during phase-out period (net of
tax benefits of $0)..................... (1,614) -- -- -- --
------- ------- -------- -------- --------
Net (loss) income............................ $(4,052) $ 3,014 $ (9,483) $ 96 $ 3,182
======= ======= ======== ======== ========
EARNINGS PER SHARE (Basic and Diluted):
Income from continuing operations......... $ .64 $ 1.00 $ .10 $ .27 $ .04
Loss from discontinued operations......... (1.70) (.21) (2.59) (.24) .84
------- ------- --------- -------- --------
Net (loss) income......................... $ (1.06) $ .79 $ (2.49) $ .03 $ .88
======= ======= ======== ======== ========
COMMON AND COMMON STOCK
EQUIVALENTS OUTSTANDING
Weighted average shares outstanding (basic) 3,829 3,818 3,810 3,810 3,624
Weighted average shares outstanding
(diluted)................................ 3,834 3,833 3,810 3,819 3,631
BALANCE SHEET DATA:
Total assets................................. $30,669 $22,349 $21,069 $25,723 $23,195
Long-term liabilities........................ $ 2,222 $ 41 $ -- $ -- $ 23
Stockholders' equity......................... $ 3,106 $ 7,565 $ 4,519 $14,002 $13,754
</TABLE>
10
<PAGE> 12
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
The Company 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. Through
CompManagement and M&N Risk Management, the Company serves as 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 statewide certified MCO
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 OBWC, the Company does not assume any risk
for the payment of medical or disability benefits to employees with respect to
workers' compensation claims.
CompManagement was acquired by Health Power, Inc. in July 1995. This
acquisition was accounted for as a pooling of interests.
On December 31, 1998, CompManagement acquired all of the outstanding
capital stock of M&N Risk Management and a related entity. 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 demand note with a financial institution and by a
$2,526,736 promissory note payable to the seller. 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
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.
Accordingly, the operating results of Health Power HMO, including provisions for
estimated lease costs, employee severance and benefits, write-downs of property,
plant, and equipment during the phase-out period, and a loss on the disposal of
the assets of Health Power HMO, have been segregated from continuing operations
and are reported separately as discontinued operations.
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. See Note 13 of the Notes to Consolidated Financial
Statements appearing in Item 8 of this Form 10-K.
The following discussion should be read in conjunction with the
consolidated financial statements, notes, and tables included in Item 8 of this
Form 10-K. Readers are cautioned that any forward-looking statements contained
in this Form 10-K or any other reports or documents prepared by Health Power,
Inc. involve risks and uncertainties and are subject to change based on various
factors. Certain of these factors are discussed in greater detail in various
parts of this Item 7.
RECENT REGULATORY ACTION
11
<PAGE> 13
As discussed in Item 3 of the Form 10-K, on January 21, 1999, an
administrative hearing was held before ODI regarding ODI's intention to suspend
or revoke the certificate of authority issued to Health Power HMO for failing to
maintain total admitted assets equal to at least 110% of its liabilities and for
failing to meet Ohio's minimum statutory net worth requirements. The hearing
officer issued a report recommending that the Superintendent of Insurance issue
an order to revoke Health Power HMO's certificate of authority, and on March 18,
1999, ODI issued an order revoking Health Power HMO's certificate of authority
effective May 1, 1999. On March 19, 1999, Health Power HMO received notice from
ODHS that, due to the issuance of the revocation order, ODHS was commencing the
disenrollment of Health Power HMO's Medicaid members effective March 31, 1999.
As a result of ODHS's action, Health Power HMO will discontinue its Medicaid
operations effective April 1,1999. Health Power HMO will discontinue its
commercial operations effective May 1, 1999.
RESULTS OF OPERATIONS
1998 Compared to 1997
Revenues from continuing operations increased $2.7 million, or 12.1%,
to $24.9 million during 1998, from $22.2 million for 1997, primarily as a result
of a 15% increase in revenues from MCO services. This increase was primarily the
result of the Company's MCO subsidiary being operational for all of 1998 as
compared to ten months in 1997. Revenues from TPA services increased by 9% from
the prior year primarily as a result of an increase in the number of employers
participating in the Company's group rating plans. Revenues from MCO services
included one-time incentive payments of approximately $4.0 million related to
the acceptance of workers' compensation claims with dates of injury which
preceded the commencement date of the Health Partnership Program. The acceptance
of these claims, known as beta and gamma claims, occurred during the fourth
quarter of 1997. The Company recognized approximately $2.5 million of these
one-time incentive payments in 1997 and $1.5 million in 1998.
General and administrative ("G&A") expenses increased to $21.3 million,
or 85.6% of revenues, for 1998, as compared to $16.6, or 74.6% of revenues, for
1997. G&A expenses increased in 1998 as a percentage of revenues primarily due
to 1997 revenues including significant one-time incentive payments related to
the acceptance of beta and gamma claims.
Interest income and other decreased $88,000 to $444,000 for 1998, from
$532,000 for 1997. This decrease resulted primarily from a decrease in other
income related to the discontinuance of a private label managed care product
managed by Health Power Management Corporation.
Income tax expense was $1.6 million in 1998, or an effective tax rate
of 39%, as compared to $2.3 million in 1997, or an effective tax rate of 38%.
As a result of the foregoing, income from continuing operations was
$2.5 million, or basic and diluted earnings per share of $0.64, for 1998, as
compared to income from continuing operations of $3.8 million, or basic and
diluted earnings per share of $1.00, for 1997.
The net loss from discontinued operations was $6.5 million, or basic
and diluted earnings per share of $(1.70), for 1998, as compared to a net loss
from discontinued operations of $0.8 million, or basic and diluted earnings per
share of $(0.21), for 1997. The 1998 results included a $4.9 million loss
12
<PAGE> 14
from discontinued operations, net of taxes, which included a charge for a
valuation allowance on deferred federal income tax assets of $2.8 million, along
with a $1.6 million loss on disposal of discontinued operations, net of taxes.
The Company incurred a net loss of $4.1 million, or basic and diluted
earnings per share of $(1.06), for 1998, as compared to net income of $3.0
million, or basic and diluted earnings per share of $0.79, for 1997. There were
3,828,564 and 3,818,465 basic weighted average of shares of common stock and
common stock equivalents outstanding at December 31, 1998 and 1997,
respectively, and 3,834,858 and 3,832,650 diluted weighted average of shares of
common stock and common stock equivalents outstanding at December 31, 1998 and
1997.
1997 Compared to 1996
Revenues from continuing operations increased $15.5 million, or 232.5%,
to $22.2 million during 1997, from $6.7 million for 1996. This increase was
primarily the result of $11.2 million in revenues from MCO services derived from
the first year of operations of CompManagement Health Systems. Revenues from TPA
services increased by 64% from the prior year primarily as a result of an
increase in the number of employers participating in the Company's group rating
plans.
G&A expenses increased to $16.6 million, or 74.6% of revenues, for
1997, as compared to $6.3 million, or 94.9% of revenues, for 1996. G&A expenses
decreased in 1997 as a percentage of revenues primarily due to the leverage
achieved on the significant increase in revenues.
Interest income and other increased $285,000 to $532,000 for 1997, from
$247,000 for 1996. This increase resulted primarily from an increase in other
income related to the private label managed care product managed by Health
Power Management Corporation and an increase in interest income related to
increases in the average available investable cash balance.
Income tax expense was $2.3 million in 1997, or an effective tax rate
of 38%, as compared to $0.2 million in 1996, or an effective tax rate of 32%.
The increase in the effective tax rate resulted from the Company's higher tax
bracket due to the significant increase in income from continuing operations
before income taxes.
As a result of the foregoing, income from continuing operations was
$3.8 million, or basic and diluted earnings per share of $1.00, for 1997, as
compared to income from continuing operations of $0.4 million, or basic and
diluted earnings per share of $0.10, for 1996.
The net loss from discontinued operations was $0.8 million, or basic
and diluted earnings per share of $(0.21), for 1997, as compared to a net loss
from discontinued operations of $9.9 million, or basic and diluted earnings per
share of $(2.59), for 1996. The improvement in the loss from discontinued
operations primarily resulted from a smaller after-tax loss from Health Power
HMO's operations due to the accounting for deferred taxes and the write-off of
the entire purchase price of $5.0 million paid by Health Power HMO to acquire
certain contract rights from ChoiceCare Health Plans, Inc.
The Company had net income of $3.0 million, or basic and diluted
earnings per share of $0.79, for 1997, as compared to a net loss of $9.4
million, or basic and diluted earnings per share of $(2.49), for 1996. There
were 3,818,465 and 3,810,331 basic weighted average of shares of common stock
and common stock equivalents outstanding at December 31, 1997 and 1996,
respectively, and 3,832,650 and 3,810,331 diluted weighted average shares of
common stock and common stock equivalents outstanding at December 31, 1997 and
1996.
LIQUIDITY AND CAPITAL RESOURCES
13
<PAGE> 15
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 $1.1 million from continuing operations
existed at December 31, 1998, as compared to working capital from continuing
operations of $3.2 million at December 31, 1997. The working capital deficit
resulted from incurring $3.5 million in short term debt for the acquisition of
M&N Risk Management, including a $3.0 million bank loan due on demand. The
Company believes that cash generated from continuing operations should be
sufficient to cure the working capital deficit during 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 operations.
At December 31, 1998, cash and cash equivalents from continuing
operations were $9.1 million, an increase of $6.2 million from $2.9 million at
December 31, 1997. 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 $8.3 million and
$2.8 million for 1998 and 1997, respectively.
Cash used in continuing operations in investing activities was $3.0
million and $1.7 million for 1998 and 1997, respectively. For 1998, this amount
included $2.6 million in cash used for the acquisition of M&N Risk Management,
net of cash acquired, and $0.9 for the purchase of property and equipment.
Property and equipment purchased in 1998 included additional computer software
and equipment. For 1997, property and equipment purchase amounted to $1.2
million, which included additional computer software and equipment.
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.
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.
The Company believes that cash generated from continuing operations
will be sufficient to fund its anticipated cash needs for working capital and
expenditures for continuing operations for the next 12 months, including working
capital requirements caused by the Bank making demand for payment of the $3.0
million demand loan. As discussed above, the Company had a working capital
deficit of $1.1 million from continuing operations as of December 31, 1998.
DISCONTINUED OPERATIONS
As previously described, ODI 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
14
<PAGE> 16
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
15
<PAGE> 17
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.
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. These costs have not been
calculated, but the Company believes the costs are not material.
INFLATION
The Company's operations are not significantly affected by inflationary
pressures. Although inflation does affect salaries, employee benefits, and other
operating expenses, after considering general inflationary trends, total
revenues of the Company produced growth in real terms in 1998 and 1997. Revenues
increased largely due to increased TPA and MCO services rather than increases in
inflation.
FORWARD LOOKING STATEMENTS; CERTAIN FACTORS AFFECTING FUTURE RESULTS
Statements contained in this Form 10-K or any other reports or
documents prepared by Health Power, Inc. or made by management of Health Power,
Inc. may be "forward-looking" within the meaning of the Private Securities
Litigation Reform Act of 1995. Such forward-looking statements are subject to
certain risks and uncertainties that could cause Health Power, Inc.'s operating
results to differ materially from those projected. The following factors, among
others, in some cases have affected and in the future could affect Health Power,
Inc.'s actual financial performance.
POTENTIAL LEGAL ACTIONS RELATED TO HEALTH POWER HMO AND ITS DISCONTINUED
OPERATIONS
Due to the revocation of its certificate of authority effective May 1,
1999, and the disenrollment of its Medicaid members effective March 31, 1999,
Health Power HMO has commenced the immediate windup of its business. The
revocation order issued by ODI 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 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. However,
there can be no assurance that creditors of Health Power HMO will not initiate
legal actions against Health Power, Inc. or any of its other subsidiaries
seeking satisfaction of their unpaid claims against Health Power HMO. The legal
fees and other costs of defending such legal actions could be significant.
Furthermore, due to the fact-intensive nature of these actions and the
unpredictability of courts in this area of the law, there can be no assurance
that Health Power, Inc. or its other subsidiaries will be successful in
defending any such legal actions. Any such legal actions having an unfavorable
outcome to Health Power, Inc. or any of its other subsidiaries could have a
material adverse affect on their financial condition and results of operations.
Any such legal actions could also cause Health Power HMO or ODI to seek
regulatory or court protection and oversight of the liquidation process.
16
<PAGE> 18
DEPENDENCE UPON HEALTH PARTNERSHIP PROGRAM
The Company participates in Ohio's Health Partnership Program through
its contract with OBWC. This contract is for a two-year term expiring on
December 31, 2000. There can be no assurance that OBWC will renew this contract
when it expires. In addition, there can be no assurance that OBWC will not
modify this contract in the future in a manner unfavorable to the Company.
Furthermore, OBWC may at any time initiate proceedings to decertify the Company
as an MCO if it fails to substantially perform its duties under the contract,
and if such decertification occurs, the contract will automatically terminate.
Finally, approximately 43% of the fees payable under this contract are subject
to the attainment of certain return to work measurements established in the
contract. There can be no assurance that the Company will be able to meet any or
a significant portion of these performance measurements. This contract accounts
for all of the revenues associated with MCO services, which revenues were $13.0
million and $11.3 million in 1998 and 1997, respectively. For 1998 and 1997, the
Company's MCO revenues represented approximately 52% and 51%, respectively, of
the Company's consolidated revenues. The loss or unfavorable modification of
this contract or the failure to significantly satisfy the performance
measurements under the contract would have a material adverse effect on the
Company's business, financial condition, and results of operations.
DEPENDENCE UPON GROUP RATING PLANS
The Company provides TPA services for group rating plans for
approximately 100 trade associations, which include approximately 17,600
employers. Each association and employer administrative agreement is typically
for a one-year service period. Revenues from one group rating plan represented
approximately 28% of the Company's 1998 revenues. There can be no assurance that
the agreement with this trade association or any other associations or employers
will be renewed upon their expiration, or if renewed, upon terms favorable to
the Company. The failure to renew the contract with this trade association could
have a material adverse effect on the Company's financial condition and results
of operations.
GOVERNMENT REGULATION
The Company is significantly dependent upon plans or programs
administered by governmental agencies pursuant to state statutes and
regulations. In particular, the Company is significantly dependent on Ohio's
group rating program and Health Partnership Program. The Company's MCO is
subject to extensive regulation by OBWC relating to the operation of its MCO.
Any changes to Ohio's statutes or regulations applicable to group rating plans
or the Health Partnership Program, or interpretations of these statutes and
regulations by OBWC, could have a material adverse effect upon the revenues and
operations of the Company. The Company believes that its continuing operations
are presently in material compliance with all laws, regulations and
certification requirements applicable to such operations. However, there can be
no assurance that the Company will be able to continue to maintain required
regulatory authority or that regulatory changes will not have an adverse impact
on the Company in the future.
17
<PAGE> 19
FAILURE OF YEAR 2000 COMPLIANCE
The Company is actively assessing its Year 2000 readiness, including
the extent to which third parties with whom the Company has significant
relationships may be vulnerable to Year 2000 issues and what impact, if any,
these Year 2000 issues will have on the Company. As part of these assessments,
the Company has created a task force which has developed a timetable for
identifying, evaluating, resolving and testing its Year 2000 issues. The Company
anticipates timely completion of its Year 2000 remediation by the end of the
third quarter of 1999. However, the failure to become Year 2000 compliant on a
timely basis could have a material adverse affect on the Company's business,
financial condition, and results of operations. Currently, the Company does not
have a contingency plan in place if it fails to become Year 2000 compliant on a
timely basis. However, the Year 2000 task force is continuously reviewing the
status of the Company's remediation efforts and intends to develop appropriate
contingency plans as necessary to address Year 2000 compliance issues as they
arise.
RISKS ASSOCIATED WITH ACQUISITIONS
During the past year the Company has invested, and for the foreseeable
future the Company anticipates investing, a substantial amount of capital in
acquisitions. Acquisitions involve numerous risks, including the failure to
retain key employees and contracts and the inability to integrate businesses
without material disruption. In addition, some competitors of the Company have
similar acquisition strategies. There can be no assurance that any future
acquisitions will be successfully integrated into the Company's operations, that
competition for acquisitions will not intensify, or that the Company will be
able to complete such acquisitions on acceptable terms and conditions. In
addition, the costs of unsuccessful acquisition efforts may adversely affect the
Company's results of operations.
DEPENDENCE ON KEY PERSONNEL
The Company's operations are highly dependent upon the efforts of
certain key personnel, including Dr. Bernard F. Master, Robert J. Bossart,
Jonathan R. Wagner, and Richard T. Kurth. The loss of the services of any of
these individuals could have a material adverse effect on the operations of the
Company. The Company has employment agreements with each of these individuals.
COMPETITION
The workers' compensation cost containment and medical management
industry is highly fragmented and competitive, and the intensity of competition
can be expected to increase. In Ohio, the market share in this industry is
concentrated among a few companies, including the Company. The Company's primary
competitors in Ohio are several TPAs and/or MCOs owned by large insurance
carriers which offer one or more services similar to those offered by the
Company and numerous independent companies, typically on a regional basis. Some
of the Company's competitors are significantly larger and have greater financial
and marketing resources than the Company. Although the Company believes its
specialization in the workers' compensation area, breadth of services,
outstanding service, and independence from insurance carriers will enable it to
compete successfully, there can be no assurance that the Company will be able to
compete effectively against existing competitors or that additional competitors
will not enter the Company's areas of operations in the future.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The following discussion about the Company's risk-management
activities includes "forward-looking statements" that involve risk and
uncertainties. Actual results could differ materially from those projected in
the forward-looking statements.
The Company's primary market risk exposure is to changes in the level
or volatility of interest rates primarily due to its borrowing activities.
Interest rate risk is a consequence of maintaining fixed rate financial
instruments.
18
<PAGE> 20
The Company's interest rate risk at December 31, 1998, arises primarily due
to a fixed rate note that matures in 2001 and is considered to be sensitive
to changes in interest rates; however, such changes are not considered to
have a material impact on projected cash flows of the Company.
The Company does not enter into financial instruments for trading or
speculative purposes, nor does it own any derivative financial instruments. The
Company has no exposure to foreign currency exchange rate risk.
The Company does not maintain a trading portfolio. The Company does not
anticipate significant changes in the Company's primary market risk exposures
or in how these exposures are managed in future reporting periods based upon
what is known or expected to be in effect in future reporting periods.
19
<PAGE> 21
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
HEALTH POWER, INC.
AND SUBSIDIARIES
REPORT ON AUDITS OF
CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED
DECEMBER 31, 1998, 1997 AND 1996
<PAGE> 22
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> 23
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> 24
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> 25
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> 26
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> 27
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> 28
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 formally 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> 29
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> 30
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> 31
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> 32
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> 33
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> 34
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> 35
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> 36
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> 37
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> 38
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> 39
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> 40
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> 41
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> 42
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> 43
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> 44
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 formally
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> 45
================================================================================
================================================================================
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> 46
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> 47
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> 48
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> 49
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> 50
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> 51
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> 52
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT
Information required under this Item with respect to directors will be
contained in Health Power, Inc.'s proxy statement to be filed within 120 days of
December 31, 1998, and is hereby incorporated herein by reference. Information
regarding the executive officers of Health Power, Inc. may be found under the
caption "Executive Officers of the Registrant" in Part I, and is also
incorporated by reference into this Item 10.
ITEM 11. EXECUTIVE COMPENSATION
Information required under this Item will be contained in Health Power,
Inc.'s proxy statement to be filed within 120 days of December 31, 1998, and is
hereby incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information required under this Item will be contained in Health Power,
Inc.'s proxy statement to be filed within 120 days of December 31, 1998, and is
hereby incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information required under this Item will be contained in Health Power,
Inc.'s proxy statement to be filed within 120 days of December 31, 1998, and is
hereby incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM
8-K
(a)(1) FINANCIAL STATEMENTS
The following financial statements of Health Power, Inc. are
included in Item 8:
Consolidated Balance Sheets as of December 31, 1998 and 1997
Consolidated Statements of Operations for the Years Ended
December 31, 1998, 1997, and 1996
<PAGE> 53
Consolidated Statements of Stockholders' Equity for the Years
Ended December 31, 1998, 1997, and 1996
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1998, 1997, and 1996
Notes to Consolidated Financial Statements
Report of Independent Accountants
(a)(2) FINANCIAL STATEMENT SCHEDULES
All financial statement schedules have been omitted because
they are not applicable or the required information is included
in Health Power, Inc.'s consolidated financial statements or
notes thereto.
(a)(3) LISTING OF EXHIBITS
<TABLE>
<CAPTION>
If Incorporated by Reference,
Exhibit Document with which Exhibit was
No. Description of Exhibit Previously Filed with SEC
- ------- ---------------------- -------------------------------
<S> <C> <C>
2 Stock Purchase Agreement dated Current Report on Form 8-K dated
December 31, 1998, among January 15, 1999 (see Exhibit 2 therein).
CompManagement, Inc., Century
Business Services, Inc., CBSI
Management Co., M&N Risk
Management, Inc. and M&N Enterprises,
Inc.
3(a) Amended and Restated Certificate of Registration Statement on Form S-1, File
Incorporation of Health Power, Inc. No. 33-74124 (see Exhibit 3(a) therein).
3(b) Amended and Restated By-Laws of Registration Statement on Form S-1, File
Health Power, Inc. No. 33-74124 (see Exhibit 3(b) therein).
4 Form of stock certificate. Amendment No. 2 to Registration
Statement on Form S-1, File No.
33-74124 (see Exhibit 4(b) therein).
10(a) Agreement between Ohio Bureau of Contained herein.
Workers' Compensation and
CompManagement Health Systems, Inc.,
dated November 10, 1998.
10(b) Form of Indemnification Agreement Registration Statement on Form S-1, File
between Health Power, Inc. and each of No. 33-74124 (see Exhibit 10(i) therein).
its officers and directors.
</TABLE>
<PAGE> 54
<TABLE>
<CAPTION>
If Incorporated by Reference,
Exhibit Document with which Exhibit was
No. Description of Exhibit Previously Filed with SEC
- ------- ---------------------- -------------------------------
<S> <C> <C>
10(c) Primary Care Provider Agreement Registration Statement on Form S-1, File
between Parsons Avenue Medical Clinic No. 33-74124 (see Exhibit 10(o) therein).
and Health Power of Columbus, Inc.,
dated January 19, 1984.
10(d) Primary Care Provider Agreement Registration Statement on Form S-1, File
between Westland Family Practice No. 33-74124 (see Exhibit 10(p) therein).
Associates, Inc. and Health Power of
Columbus, Inc., dated April 17, 1984.
10(e) Primary Care Provider Agreement Registration Statement on Form S-1, File
between Schear Family Practice Center No. 33-74124 (see Exhibit 10(q) therein).
East and Health Power of Dayton, Inc.,
dated October 15, 1984.
10(f) Primary Care Provider Agreement Registration Statement on Form S-1, File
between Schear Family Practice Center No. 33-74124 (see Exhibit 10(r) therein).
West and Health Power of Dayton, Inc.,
dated October 11, 1984.
10(g) Primary Care Provider Agreement Registration Statement on Form S-1, File
between Needmore Medical Center and No. 33-74124 (see Exhibit 10(s) therein).
Health Power of Dayton, Inc., dated May
1, 1993.
10(h)* Employment Agreement between Health Contained herein.
Power Management Corporation and Dr.
Bernard F. Master, dated as of May 1,
1998.
10(i)* Employment Agreement between Health Annual Report on Form 10-K for the
Power Management Corporation and Dr. fiscal year ended December 31, 1997 File
Bernard Master, dated as of January 15, No. 0-23220 (see Exhibit 10(l) therein).
1998.
10(j)* Employment Agreement between Quarterly Report on Form 10-Q for the
CompManagement, Inc. and Robert J. quarterly period ended June 30, 1995,
Bossart, dated as of July 21, 1995. File No. 0-23220 (see Exhibit 10(c)
therein).
10(k)* Amendment to Employment Agreement Annual Report on Form 10-K for the
between CompManagement, Inc. and fiscal year ended December 31, 1996,
Robert J. Bossart, dated as of October File No. 0-23220 (see Exhibit 10(t)
31, 1996. therein).
10(l)* Second Amendment to Employment Annual Report on Form 10-K for the
Agreement between CompManagement, fiscal year ended December 31, 1997,
Inc. and Robert J. Bossart, dated as of File No. 0-23220 (see Exhibit 10(p)
December 15, 1997. therein).
</TABLE>
<PAGE> 55
<TABLE>
<CAPTION>
If Incorporated by Reference,
Exhibit Document with which Exhibit was
No. Description of Exhibit Previously Filed with SEC
- ------- ---------------------- -------------------------------
<S> <C> <C>
10(m)* Third Amendment to Employment Contained herein.
Agreement between CompManagement,
Inc. and Robert J. Bossart, dated as of
May 28, 1998.
10(n)* Employment Agreement between Quarterly Report on Form 10-Q for the
CompManagement, Inc. and Jonathan R. quarterly period ended June 30, 1995,
Wagner, dated as of July 21, 1995. File No. 0-23220 (see Exhibit 10(d)
therein).
10(o)* Amendment to Employment Agreement Annual Report on Form 10-K for the
between CompManagement, Inc. and fiscal year ended December 31, 1996,
Jonathan R. Wagner, dated as of October File No. 0-23220 (see Exhibit 10(v)
31, 1996. therein).
10(p)* Second Amendment to Employment Annual Report on Form 10-K for the
Agreement between CompManagement, fiscal year ended December 31, 1997,
Inc. and Jonathan R. Wagner, dated as of File No. 0-23220 (see Exhibit 10(s)
December 15, 1997. therein).
10(q)* Third Amendment to Employment Contained herein.
Agreement between CompManagement,
Inc. and Jonathan R. Wagner, dated as of
May 28, 1998.
10(r)* Employment Agreement between Quarterly Report on Form 10-Q for the
CompManagement, Inc. and Richard T. quarterly period ended June 30, 1995,
Kurth, dated as of July 21, 1995. File No. 0-23220 (see Exhibit 10(e)
therein).
10(s)* Amendment to Employment Agreement Annual Report on Form 10-K for the
between CompManagement, Inc. and fiscal year ended December 31, 1996,
Richard T. Kurth, dated as of October 31, File No. 0-23220 (see Exhibit 10(x)
1996. therein).
10(t)* Second Amendment to Employment Annual Report on Form 10-K for the
Agreement between CompManagement, fiscal year ended December 31, 1997,
Inc. and Richard T. Kurth, dated as of File No. 0-23220 (see Exhibit 10(v)
December 15, 1997. therein).
10(u) Third Amendment to Employment Contained herein.
Agreement between CompManagement,
Inc. and Richard T. Kurth, dated as of
May 28, 1998.
10(v)* Health Power, Inc. 1996 Directors Stock Registration Statement on Form S-8, File
Award and Purchase Plan. No. 333-20535 (see Exhibit 4(d) therein).
</TABLE>
<PAGE> 56
<TABLE>
<CAPTION>
If Incorporated by Reference,
Exhibit Document with which Exhibit was
No. Description of Exhibit Previously Filed with SEC
- ------- ---------------------- -------------------------------
<S> <C> <C>
10(w)* Amendment No. 1 to Health Power, Inc. Annual Report on Form 10-K for the
1996 Directors Stock Award and fiscal year ended December 31, 1997,
Purchase Plan. File No. 0-23220 (see Exhibit 10(x)
therein).
10(x)* Health Power, Inc. 1985 Nonqualified Registration Statement on Form S-1, File
Directors' Stock Option Plan, as No. 33-74124 (see Exhibit 10(w) therein).
amended.
10(y)* Health Power, Inc. 1993 Directors Stock Registration Statement on Form S-1, File
Option Plan. No. 33-74124 (see Exhibit 10(x) therein).
10(z)* Amendment No. 1 to Health Power, Inc. Annual Report on Form 10-K for the
1993 Directors Stock Option Plan. fiscal year ended December 31, 1994,
File No. 0-23220 (see Exhibit 10(t)
therein).
10(aa)* Health Power, Inc. 1994 Stock Option Registration Statement on Form S-1, File
Plan. No. 33-74124 (see Exhibit 10(y) therein).
10(bb)* Amendment No. 1 to Health Power, Inc. Annual Report on Form 10-K for the
1994 Stock Option Plan. fiscal year ended December 31, 1994,
File No. 0-23220 (see Exhibit 10(v)
therein).
10(cc)* Health Power, Inc. 1994 Executive Quarterly Report on Form 10-Q for the
Performance Stock Option Plan. quarterly period ended June 30, 1994,
File No. 0-23220 (see Exhibit (a)(1)
therein).
10(dd)* Amendment No. 1 to Health Power, Inc. Annual Report on Form 10-K for the
1994 Executive Performance Stock fiscal year ended December 31, 1994,
Option Plan. File No. 0-23220 (see Exhibit 10(x)
therein).
10(ee)* Amendment No. 2 to Health Power, Inc. Annual Report on Form 10-K for the
1994 Executive Performance Stock fiscal year ended December 31, 1995,
Option Plan. File No. 0-23220 (see Exhibit 10(dd)
therein).
10(ff) Commercial Note dated December 31, Current Report on Form 8-K dated
1998, from CompManagement, Inc. and January 15, 1999 (see Exhibit 99(a)
CompManagement Health Systems, Inc. therein).
to National City Bank
21 Subsidiaries of Health Power, Inc. Contained herein.
23 Consent of PricewaterhouseCoopers LLP Contained herein.
</TABLE>
<PAGE> 57
<TABLE>
<CAPTION>
If Incorporated by Reference,
Exhibit Document with which Exhibit was
No. Description of Exhibit Previously Filed with SEC
- ------- ---------------------- -------------------------------
<S> <C> <C>
24 Powers of Attorney for Dr. Bernard F. Annual Report on Form 10-K for the
Master, Dr. Elliott P. Feldman, Robert S. fiscal year ended December 31, 1997,
Garek, Frank R. Nutis, Dr. Burt E. File No. 0-23220 (see Exhibit 24 therein).
Schear, Dr. Peter Somani, Robert J.
Bossart and Crystal A. Kuykendall
27 Financial Data Schedule Current Report on Form 8-K/A dated March 16,
1999 (see Exhibit 27 therein).
</TABLE>
* Executive compensation plans and arrangements required to be filed
pursuant to Item 601(b)(10) of Regulation S-K.
(b) REPORTS ON FORM 8-K
(1) On November 23, 1998, the Company filed a Form 8-K
(dated November 20, 1998) reporting under Item 5 of
such report.
(2) On December 7, 1998, the Company filed a Form 8-K
(dated December 4, 1998) reporting under Item 5 of such
report.
(c) EXHIBITS
The exhibits in response to this portion of Item 14 are
submitted following the signatures.
(d) FINANCIAL STATEMENT SCHEDULES
All financial statement schedules have been omitted because
they are not applicable or the required information is included
in Health Power, Inc.'s consolidated financial statements or
notes thereto.
<PAGE> 58
SIGNATURES
Pursuant to the requirements of Sections 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
HEALTH POWER, INC.
Date: March 30, 1999 By /s/Dr. Bernard F. Master
--------------------------------------
Dr. Bernard F. Master, Chairman of
the Board, Chief Executive Officer,
and President
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of
Registrant and in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/Dr. Bernard F. Master Chairman of the Board, March 30, 1999
- ----------------------------- Chief Executive Officer,
Dr. Bernard F. Master President, and Director
(principal executive
officer)
/s/Ronald J. Wurtz Controller and Chief March 30, 1999
- ----------------------------- Financial Officer (principal
Ronald J. Wurtz financial and accounting
officer)
Dr. Elliott P. Feldman* Director March 30, 1999
- -----------------------------
Dr. Elliott P. Feldman
Robert J. Bossart* Director March 30, 1999
- -----------------------------
Robert J. Bossart
Robert S. Garek* Director March 30, 1999
- -----------------------------
Robert S. Garek
Crystal A. Kuykendall* Director March 30, 1999
- -----------------------------
Crystal A. Kuykendall
Frank R. Nutis* Director March 30, 1999
- -----------------------------
Frank R. Nutis
Dr. Peter Somani* Director March 30, 1999
- -----------------------------
Dr. Peter Somani
Dr. Burt E. Schear* Director March 30, 1999
- -----------------------------
Dr. Burt E. Schear
* The undersigned, Dr. Bernard F. Master, by signing his name hereto, does
hereby execute this Annual Report on Form 10-K for the Registrant's fiscal
year ended December 31, 1998, on behalf of each of the other above-named
directors of the Registrant pursuant to Powers of Attorney executed by such
directors and filed with the Securities and Exchange Commission as an
exhibit to this report.
/s/ Dr. Bernard F. Master March 30, 1999
- ---------------------------------------
Dr. Bernard F. Master, Attorney in Fact
<PAGE> 59
<TABLE>
EXHIBIT INDEX
<CAPTION>
If Incorporated by Reference,
Exhibit Document with which Exhibit was
No. Description of Exhibit Previously Filed with SEC
- ------- ---------------------- -------------------------------
<S> <C> <C>
2 Stock Purchase Agreement dated Current Report on Form 8-K dated
December 31, 1998, among January 15, 1999 (see Exhibit 2 therein).
CompManagement, Inc., Century
Business Services, Inc., CBSI
Management Co., M&N Risk
Management, Inc. and M&N Enterprises,
Inc.
3(a) Amended and Restated Certificate of Registration Statement on Form S-1, File
Incorporation of Health Power, Inc. No. 33-74124 (see Exhibit 3(a) therein).
3(b) Amended and Restated By-Laws of Registration Statement on Form S-1, File
Health Power, Inc. No. 33-74124 (see Exhibit 3(b) therein).
4 Form of stock certificate. Amendment No. 2 to Registration
Statement on Form S-1, File No.
33-74124 (see Exhibit 4(b) therein).
10(a) Agreement between Ohio Bureau of Contained herein.
Workers' Compensation and
CompManagement Health Systems, Inc.,
dated November 10, 1998.
10(b) Form of Indemnification Agreement Registration Statement on Form S-1, File
between Health Power, Inc. and each of No. 33-74124 (see Exhibit 10(i) therein).
its officers and directors.
10(c) Primary Care Provider Agreement Registration Statement on Form S-1, File
between Parsons Avenue Medical Clinic No. 33-74124 (see Exhibit 10(o) therein).
and Health Power of Columbus, Inc.,
dated January 19, 1984.
10(d) Primary Care Provider Agreement Registration Statement on Form S-1, File
between Westland Family Practice No. 33-74124 (see Exhibit 10(p) therein).
Associates, Inc. and Health Power of
Columbus, Inc., dated April 17, 1984.
10(e) Primary Care Provider Agreement Registration Statement on Form S-1, File
between Schear Family Practice Center No. 33-74124 (see Exhibit 10(q) therein).
East and Health Power of Dayton, Inc.,
dated October 15, 1984.
10(f) Primary Care Provider Agreement Registration Statement on Form S-1, File
between Schear Family Practice Center No. 33-74124 (see Exhibit 10(r) therein).
West and Health Power of Dayton, Inc.,
dated October 11, 1984.
</TABLE>
<PAGE> 60
<TABLE>
<CAPTION>
If Incorporated by Reference,
Exhibit Document with which Exhibit was
No. Description of Exhibit Previously Filed with SEC
- ------- ---------------------- -------------------------------
<S> <C> <C>
10(g) Primary Care Provider Agreement Registration Statement on Form S-1, File
between Needmore Medical Center and No. 33-74124 (see Exhibit 10(s) therein).
Health Power of Dayton, Inc., dated May
1, 1993.
10(h) Employment Agreement between Health Contained herein.
Power Management Corporation and Dr.
Bernard F. Master, dated as of May 1,
1998.
10(i) Employment Agreement between Health Annual Report on Form 10-K for the
Power Management Corporation and Dr. fiscal year ended December 31, 1997 File
Bernard Master, dated as of January 15, No. 0-23220 (see Exhibit 10(l) therein).
1998.
10(j) Employment Agreement between Quarterly Report on Form 10-Q for the
CompManagement, Inc. and Robert J. quarterly period ended June 30, 1995,
Bossart, dated as of July 21, 1995. File No. 0-23220 (see Exhibit 10(c)
therein).
10(k) Amendment to Employment Agreement Annual Report on Form 10-K for the
between CompManagement, Inc. and fiscal year ended December 31, 1996,
Robert J. Bossart, dated as of October File No. 0-23220 (see Exhibit 10(t)
31, 1996. therein).
10(l) Second Amendment to Employment Annual Report on Form 10-K for the
Agreement between CompManagement, fiscal year ended December 31, 1997,
Inc. and Robert J. Bossart, dated as of File No. 0-23220 (see Exhibit 10(p)
December 15, 1997. therein).
10(m) Third Amendment to Employment Contained herein.
Agreement between CompManagement,
Inc. and Robert J. Bossart, dated as of
May 28, 1998.
10(n) Employment Agreement between Quarterly Report on Form 10-Q for the
CompManagement, Inc. and Jonathan R. quarterly period ended June 30, 1995,
Wagner, dated as of July 21, 1995. File No. 0-23220 (see Exhibit 10(d)
therein).
10(o) Amendment to Employment Agreement Annual Report on Form 10-K for the
between CompManagement, Inc. and fiscal year ended December 31, 1996,
Jonathan R. Wagner, dated as of October File No. 0-23220 (see Exhibit 10(v)
31, 1996. therein).
10(p) Second Amendment to Employment Annual Report on Form 10-K for the
Agreement between CompManagement, fiscal year ended December 31, 1997,
Inc. and Jonathan R. Wagner, dated as of File No. 0-23220 (see Exhibit 10(s)
December 15, 1997. therein).
</TABLE>
<PAGE> 61
<TABLE>
<CAPTION>
If Incorporated by Reference,
Exhibit Document with which Exhibit was
No. Description of Exhibit Previously Filed with SEC
- ------- ---------------------- -------------------------------
<S> <C> <C>
10(q) Third Amendment to Employment Contained herein.
Agreement between CompManagement,
Inc. and Jonathan R. Wagner, dated as of
May 28, 1998.
10(r) Employment Agreement between Quarterly Report on Form 10-Q for the
CompManagement, Inc. and Richard T. quarterly period ended June 30, 1995,
Kurth, dated as of July 21, 1995. File No. 0-23220 (see Exhibit 10(e)
therein).
10(s) Amendment to Employment Agreement Annual Report on Form 10-K for the
between CompManagement, Inc. and fiscal year ended December 31, 1996,
Richard T. Kurth, dated as of October 31, File No. 0-23220 (see Exhibit 10(x)
1996. therein).
10(t) Second Amendment to Employment Annual Report on Form 10-K for the
Agreement between CompManagement, fiscal year ended December 31, 1997,
Inc. and Richard T. Kurth, dated as of File No. 0-23220 (see Exhibit 10(v)
December 15, 1997. therein).
10(u) Third Amendment to Employment Contained herein.
Agreement between CompManagement,
Inc. and Richard T. Kurth, dated as of
May 28, 1998.
10(v) Health Power, Inc. 1996 Directors Stock Registration Statement on Form S-8, File
Award and Purchase Plan. No. 333-20535 (see Exhibit 4(d) therein).
10(w) Amendment No. 1 to Health Power, Inc. Annual Report on Form 10-K for the
1996 Directors Stock Award and fiscal year ended December 31, 1997,
Purchase Plan. File No. 0-23220 (see Exhibit 10(x)
therein).
10(x) Health Power, Inc. 1985 Nonqualified Registration Statement on Form S-1, File
Directors' Stock Option Plan, as No. 33-74124 (see Exhibit 10(w) therein).
amended.
10(y) Health Power, Inc. 1993 Directors Stock Registration Statement on Form S-1, File
Option Plan. No. 33-74124 (see Exhibit 10(x) therein).
10(z) Amendment No. 1 to Health Power, Inc. Annual Report on Form 10-K for the
1993 Directors Stock Option Plan. fiscal year ended December 31, 1994,
File No. 0-23220 (see Exhibit 10(t)
therein).
10(aa) Health Power, Inc. 1994 Stock Option Registration Statement on Form S-1, File
Plan. No. 33-74124 (see Exhibit 10(y) therein).
10(bb) Amendment No. 1 to Health Power, Inc. Annual Report on Form 10-K for the
1994 Stock Option Plan. fiscal year ended December 31, 1994,
File No. 0-23220 (see Exhibit 10(v)
therein).
</TABLE>
<PAGE> 62
<TABLE>
<CAPTION>
If Incorporated by Reference,
Exhibit Document with which Exhibit was
No. Description of Exhibit Previously Filed with SEC
- ------- ---------------------- -------------------------------
<S> <C> <C>
10(cc) Health Power, Inc. 1994 Executive Quarterly Report on Form 10-Q for the
Performance Stock Option Plan. quarterly period ended June 30, 1994,
File No. 0-23220 (see Exhibit (a)(1)
therein).
10(dd) Amendment No. 1 to Health Power, Inc. Annual Report on Form 10-K for the
1994 Executive Performance Stock fiscal year ended December 31, 1994,
Option Plan. File No. 0-23220 (see Exhibit 10(x)
therein).
10(ee) Amendment No. 2 to Health Power, Inc. Annual Report on Form 10-K for the
1994 Executive Performance Stock fiscal year ended December 31, 1995,
Option Plan. File No. 0-23220 (see Exhibit 10(dd)
therein).
10(ff) Commercial Note dated December 31, Current Report on Form 8-K dated
1998, from CompManagement, Inc. and January 15, 1999 (see Exhibit 99(a)
CompManagement Health Systems, Inc. therein).
to National City Bank
21 Subsidiaries of Health Power, Inc. Contained herein.
23 Consent of PricewaterhouseCoopers LLP Contained herein.
24 Powers of Attorney for Dr. Bernard F. Annual Report on Form 10-K for the
Master, Dr. Elliott P. Feldman, Robert S. fiscal year ended December 31, 1997,
Garek, Frank R. Nutis, Dr. Burt E. File No. 0-23220 (see Exhibit 24 therein).
Schear, Dr. Peter Somani, Robert J.
Bossart and Crystal A. Kuykendall
27 Financial Data Schedule Current Report on Form 8-K/A dated March 16,
1999 (see Exhibit 27 therein).
</TABLE>
<PAGE> 1
EXHIBIT 10(a)
AGREEMENT BETWEEN
OHIO BUREAU OF WORKERS' COMPENSATION
AND COMPMANAGEMENT HEALTH SYSTEMS, INC.
This is an Agreement by and between CompManagement Health Systems, Inc.
(the "MCO"), having offices at 6377 Emerald Parkway, Dublin, Ohio 43017, and the
State of Ohio, Bureau of Workers' Compensation (the "Bureau" or "BWC"), having
offices at 30 W. Spring Street, Columbus, Ohio 43215-2256, entered into the day,
month and year set out below.
Whereas, the Bureau is required to administer the Health Partnership
Program ("HPP") under the provisions of Revised Code Section 4121.44 and the
Rules promulgated under the authority of Revised Code Section 4121.441; and,
Whereas, the Bureau desires to obtain the services of one or more
managed care organizations to provide medical management and cost containment
services to Ohio employers and injured workers in accordance with the HPP; and,
Whereas, the MCO desires to provide medical management and cost
containment services in support of the Bureau's administration of the HPP:
Now, therefore, the parties hereto in consideration of the services to
be performed and the compensation to be paid mutually agree to the following:
1. SCOPE OF SERVICES. The MCO shall provide for and perform the following
services and activities:
A. MEDICAL MANAGEMENT.
The MCO shall provide medical management services for all workers'
compensation cases that result from injuries and occupational diseases
to employees arising out of the course and scope of employment as
provided by law, including Medical Case Management services as defined
under Appendix G of this Agreement). The MCO recognizes that (1) all
services provided are linked to the successful return to work or
resolution for injured workers, (2) close interaction between the MCO
and the employer is critical to the program's success, (3) close
attention to treatment protocols and Treatment Plans is required, (4)
provider networks must emphasize the appropriate provider composition
to treat occupational injuries and illness, and (5) continually meeting
data requirements is essential for effecting and measuring return to
work.
B. HEALTH CARE PROVIDER NETWORK.
(1) The MCO shall provide for and maintain a health care provider
network (the "Network"). The MCO shall not discriminate against any
category of health care provider when establishing categories of
providers for participation in its Network. However, the MCO is not
required to accept or retain any individual provider in its Network.
The MCO shall submit to the Bureau for prior approval any changes in
the Network that would materially change Network provider composition.
(2) In addition to primary care physicians specifically selected and
recruited to treat workers' compensation patients under the HPP, the
Network shall continually provide access to specialty
<PAGE> 2
providers recruited to treat workers' compensation patients under the
HPP, including but not limited to:
Orthopedic Surgeons Psychologists
Physical Therapists Plastic Surgeons
Occupational Therapists Neurosurgeons
Chiropractors Podiatrists
Occupational Medicine Physicians Dentists
General Surgeons Ophthalmologists
Radiologists Prosthetists and Orthotists
Anesthesiologists Pulmonary Disease Specialists
Neurologists Infectious Disease Specialists
Physiatrists (Physical Medicine Dermatologists
Physicians)
Hand Surgeons
Psychiatrists
(3) Maintaining appropriate Network provider composition is the sole
responsibility of the MCO and not the responsibility of any leased
provider network.
(4) The MCO's Network shall consist of providers sufficient in number
and type to meet the needs of employers and employees in each county in
which the MCO is certified. All Network providers shall be Bureau
certified. The MCO shall credential all Network providers in terms of
qualifications to provide treatment for workers' compensation patients
and to meet HPP return to work objectives. All Network providers shall
be credentialed by the MCO as of the Effective Date of this Agreement.
The Bureau retains the discretion to require that Network providers be
re-credentialed by the MCO during the term of this Agreement.
(5) The MCO shall provide access to the following health care
facilities, supplies and services as part of its Network:
Acute Care Hospitals
Urgent Care Centers
Laboratories
Diagnostic Radiology Centers
Medical Equipment Suppliers
Home Health Agencies
Acute Rehabilitation Centers
Sub-Acute Facilities (including Sub-Acute Rehabilitation and Skilled
Medical Facilities)
Rehabilitation Hospitals
Long Term Care Facilities
Traumatic Brain Injury Facilities
C. ADHERENCE TO PRESCRIBED TREATMENT GUIDELINES.
(1) The MCO services shall include implementation of treatment
guidelines, return to work guidelines and utilization review to
evaluate the necessity and/or effectiveness of medical care. The
treatment and return to work guidelines utilized by the MCO shall be
nationally recognized guidelines and shall include one or more of the
guidelines specified in Sections 1C(1)(a), (b), or (c) of this
Agreement.
(a) The Bureau shall distribute the following treatment
guidelines, as applicable, to Bureau certified providers
designated by the Bureau. The MCO may use any of these
guidelines to comply with Section 1C(1) of this Agreement:
<PAGE> 3
Milliman and Robertson, Healthcare Management
Guidelines, Volume 7.
InterQual Clinical Decision Support Criteria:
Indications for Workers' Compensation Clinical
Management.
Scott Haldeman, D.C., M.D., Ph.D., David
Chapman-Smith, LLB, Donald M. Petersen, Jr., B.S.,
eds., Guidelines for Chiropractic Quality Assurance
and Practice Parameters, Proceedings of the Mercy
Center Consensus Conference, 1993.
(b) If the MCO does not wish to use the guidelines listed in
Section 1C(1)(a) of this Agreement, the MCO may use any of the
following treatment guidelines to comply with Section 1C(1) of
this Agreement. The MCO shall distribute any treatment
guidelines it opts to use under this Section to all Bureau
certified Network providers designated by the Bureau to
receive treatment guidelines under Section 1C(1)(a) of this
Agreement:
The American Accreditation Healthcare Commission,
URAC National Workers' Compensation Utilization
Management Standards.
Jeffrey S. Harris, M.D., M.P.H., M.B.A., Chair,
American College of Occupational and Environmental
Medicine, ed., Occupational Medicine Practice
Guidelines.
Institute for Health Care Quality, Quality First Risk
Management System Practice Guidelines.
Presley Reed, M.D., The Medical Disability Advisor -
Workplace Guidelines for Disability Duration, Second
Edition.
U.S. Department of Health and Human Services, Public
Health Service, Agency for Health Care Policy and
Research, Acute Low Back Problems in Adults -
Assessment and Treatment.
(c) If the MCO does not wish to use the guidelines listed in
Section 1C(1)(a) or (b) of this Agreement, the MCO may use any
alternative guidelines that are approved in advance by the
Bureau as being at least equal in effectiveness to the
guidelines listed in Section 1C(1)(a) or (b) of this Agreement
to comply with Section 1C(1) of this Agreement. The MCO shall
distribute any treatment guidelines it opts to use under this
Section to all of its Bureau certified Network providers
designated by the Bureau to receive treatment guidelines under
Section 1C(1)(a) of this Agreement:
(3) All MCO Medical Case Management staff members shall complete annual
training on the MCO's treatment guidelines, return to work guidelines,
utilization review and protocols.
D. SUBMISSION OF PLANS OF CARE.
(1) The MCO shall submit coordinated Plans of Care on all lost-time
injured workers and injured workers with designated medical-only
diagnosis codes as designated in the MCO Policy Reference Guide
(Appendix A) to the Bureau as follows: (a) if hard copy, must be
submitted within five (5) Business Days of the Bureau's allowance
decision; (b) if electronic 278 Plan of
<PAGE> 4
Care or equivalent (when reinstated by the Bureau pursuant to Section
1J(3) of this Agreement), must be available for pickup by the EDI
system provider designated by the Bureau no later than 2:00 P.M.
Eastern Time the fifth Business Day after the Bureau's allowance
decision; and (c) in all cases, must be re-submitted or updated when
significant changes in the Treatment Plan occur as defined in the MCO
Policy Reference Guide, but no less often than every sixty (60) days
for so long as treatment is ongoing unless otherwise specified in
writing by an appropriate Bureau representative.
(2) A submitted Plan of Care shall include the diagnosis (including
designation of the primary diagnosis), prognosis, expected outcomes
(including anticipated return to work date) and provider Treatment Plan
(including prescribed medications, duration and frequency of
treatment).
(3) Not later than March 1, 1999, the MCO's process of reviewing
medical bills shall be integrated with the associated Plan of Care.
Plan of Care compliance by the MCO and integration with bill review are
subject to periodic audit by the Bureau.
E. TREATMENT REIMBURSEMENT AUTHORIZATIONS/DENIALS.
(1) Treatment reimbursement authorizations and denials by the MCO shall
be evaluated using the following three-part test (all parts must be met
to authorize treatment reimbursement):
o The requested services are reasonably related to
the injury;
o The requested services are reasonably necessary for
treatment of the injury;
o The costs of the services are medically reasonable.
(2) Treatment reimbursement decisions shall be communicated in writing,
with an appropriate explanation, within three (3) Business Days from
the MCO's treatment reimbursement request Receipt Date as follows: all
treatment reimbursement decisions shall be sent to the Bureau and the
provider; treatment reimbursement denials shall also be provided to the
injured worker and his or her representative, if any; treatment
reimbursement approvals shall also be provided to the employer and its
representative, if any, upon request and as set forth in the MCO Policy
Reference Guide (Appendix A).
(3) The MCO shall respond to a provider's proposed Treatment Plan
(submitted on a C-9 or other appropriate form) within three (3)
Business Days from the MCO's Treatment Plan Receipt Date, either
authorizing, denying, or pending reimbursement approval for the
proposed Treatment Plan due to insufficient information, in accordance
with the provisions of the MCO Policy Reference Guide (Appendix A). A
Clinician (as defined in Appendix G of this Agreement) shall make all
treatment reimbursement denials on behalf of the MCO.
(4) The MCO shall phase in the appropriate certification requirements
for its Medical Case Management staff (including vendors and
subcontractors) as follows: twenty-five percent (25%) of all MCO staff
performing Medical Case Management (as defined in Appendix G of this
Agreement) shall be certified as medical case managers as defined in
Rule 4123-6-022(C)(32) of the Ohio Administrative Code by December 31,
1999; fifty percent (50%) of all MCO staff performing Medical Case
Management (as defined in Appendix G of this Agreement) shall be
certified as medical case managers as defined in Rule 4123-6-022(C)(32)
of the Ohio Administrative Code by September 15, 2000.
F. ALTERNATIVE DISPUTE RESOLUTION.
The MCO shall have an alternative dispute resolution ("ADR") process
for the resolution of medical disputes that includes one independent
level of review. If an individual health care
<PAGE> 5
provider is involved in the dispute, the independent level of review
shall consist of a peer review conducted by an individual or
individuals licensed pursuant to the same section of the Ohio Revised
Code as the health care provider. The MCO shall conduct its ADR process
in accordance with the provisions of Rule 4123-6-16 of the Ohio
Administrative Code and the MCO Policy Reference Guide.
G. HEALTH CARE QUALITY ASSURANCE / PROVIDER QUALITY IMPROVEMENT.
The MCO shall have a medical management quality assurance program that
includes the use of an updated quality assurance policies and
procedures manual that is in compliance with American Accreditation
Health Care Commission/URAC standards. The MCO shall continually assess
the quality of treatment reimbursement decisions and billing procedures
in connection with approved treatment reimbursement.
H. PROVIDER PAYMENTS.
(1) The MCO shall submit medical provider bills electronically to the
Bureau within seven (7) Business Days from the MCO's provider bill
Receipt Date. The Bureau shall review all bills for allowed conditions
and allowed claims and shall pay the MCO for allowed payments after
receipt of a proper invoice and after a final adjudication permitting
payment for the claim. The Bureau shall make Electronic Fund Transfer
("EFT") to the MCO within seven (7) Business Days after receipt of a
proper invoice and after a final adjudication permitting payment for
the claim. The MCO shall pay the provider within seven (7) Business
Days from receipt of the EFT. The MCO shall pay interest to the Bureau
at the rate established by the Office of Budget and Management, if the
provider is not paid within thirty (30) days of receipt of the EFT from
the Bureau.
(2) The MCO shall retrieve electronic bills from the Bureau's World
Wide Web site (www.ohiobwc.com) no later than 5:00 P.M. the next
Business Day after the bills are placed in the MCO's directory by the
Bureau.
(3) The MCO shall pay provider bills in accordance with Rules
4123-6-10, 4123-6-11, and 4123-6-12 of the Ohio Administrative Code.
However, if the MCO utilizes a leased provider network to fulfill the
requirements of Section 1B. of this Agreement, the MCO shall not apply
the discounted payment rates of the leased network to its payments to
any provider within that network without first obtaining the signed
written consent of the provider.
(4) Not later than March 1, 1999, the MCO shall have and use a system
that tracks the status of provider bills at any stage of the bill
adjudication process. Such a system must allow the MCO to respond to
inquiries by authorized parties and to the Bureau as to the disposition
of a bill and the expected payment date of a bill. The Bureau may
require the MCO to issue reports to the Bureau and/or medical providers
on the status of payments to providers.
(5) The MCO shall educate providers, both in-state and out-of-state, on
correct billing procedures and the MCO's prior authorization methods.
(6) Following termination of this Agreement the Bureau shall reimburse
the MCO for providers' services only if invoices are submitted within
sixty (60) days of the termination date and only if such payment is not
subject to deduction.
I. EMPLOYER EDUCATION / INJURED WORKER ASSISTANCE.
(1) The MCO shall have an employer education program where the MCO (or
its vendor or subcontractor) shall visit each employer with an
experience modification of one hundred twenty-
<PAGE> 6
five percent (125%) or greater that is serviced by the MCO for the
purposes of educating the employer on effective return to work programs
and learning more about the employer's work site and operations. Such
visits are subject to audit by the Bureau and Bureau staff may
accompany the MCO representatives to on-site visits at the Bureau's
discretion.
(2) The MCO shall provide MCO identification ("I.D.") cards to all
employers within thirty (30) days of employer assignment to the MCO.
The Bureau may reassign an employer from the MCO if the Bureau
determines that the reassignment is in the best interest of both the
employer and the MCO.
(3) The MCO shall provide Network provider directories to employers
upon request. The MCO shall assist the injured worker in locating a
Bureau certified provider, whether in-state or out-of-state, if the
injured worker or employer requests assistance.
J. ELECTRONIC DATA INTERCHANGE ("EDI") REQUIREMENTS.
(1) The MCO shall comply with all requirements for submission and
receipt of EDI transactions as set forth in the EDI Implementation
Documentation (Appendix B) and within this Agreement. The EDI
Implementation Documentation may be modified by the Bureau from time to
time to comply with Bureau policies, the Health Insurance Portability &
Accountability Act of 1996 ("HIPAA") and the Accredited Standards
Committee ("ASC") X12 versions. The MCO shall have in force a contract
with an EDI system provider designated by the Bureau. The MCO will be
given a minimum of six (6) weeks for implementation of any EDI
modification unless both parties mutually agree to a shorter time
frame.
(2) EDI pick-up and delivery is the responsibility of the MCO. The MCO
shall pick-up EDI transactions according to its EDI system provider
contract and the EDI Implementation Documentation from a location
determined by the Bureau. The MCO will deliver all EDI transactions
according to its EDI system provider contract and the EDI
Implementation Documentation to a location approved by the Bureau.
(3) The MCO shall meet and implement whenever applicable all
requirements for submission to the Bureau of the following EDI
transaction types as defined by the EDI Implementation Documentation:
o 148 Report of Injury, Illness or Accident (including all
planned changes as defined in the 148 Summary of Planned
Changes for 1999 section of the EDI Implementation
Documentation)
- First Report Of Injury ("FROI") -- must be
available for pickup by the EDI system provider
designated by the Bureau no later than 2:00 P.M.
Eastern Time the second FROI Business Day after the
MCO's FROI Receipt Date
- Subsequent Claim Information
o 837 Health Care Claim
- Medical Bill for an allowed claim -- within seven
(7) Business Days of the MCO's Receipt Date for the
bill
o 278 Health Care Services Review Information
- Plan of Care or equivalent (when reinstated)
o 997 Functional Acknowledgment
- Within twenty-four (24) hours of transactions
received from the Bureau.
<PAGE> 7
(4) The MCO shall meet and implement whenever applicable all
requirements for receipt from the Bureau of the following EDI
transaction types as defined by the EDI Implementation Documentation:
o 835 Health Care Claim Payment/Advice
o 824 Application Advice
- Initial Claim Acknowledgment or Denial, Subsequent
Claim Denial, Plan of Care or Equivalent Denial,
Medical Bill Denial, and Positive Bill Receipt
Acknowledgment if and when implemented.
o 997 Functional Acknowledgment
o 816 Organizational Relationships
- Employer Information
- Employer & Injured Worker Representative(s)
Demographic Data once implemented
o 148 Report of Injury, Illness or Accident (including all
planned changes as defined in the 148 Summary of Planned
Changes for 1999 section of the EDI Implementation
Documentation)
- Subsequent Claim Information
o Electronic provider information or equivalent once implemented
(5) The MCO shall meet and implement whenever applicable all
requirements for receipt of the following EDI transaction types from
medical providers as defined by the EDI Implementation Documentation:
o 837 Health Care Claim by February 1,1999.
o 148 Report of Injury, Illness or Accident (Inbound FROI) once
o implemented Electronic Treatment Plan or equivalent once
implemented
(6) The MCO shall meet and implement whenever applicable all
requirements for submission of the following EDI transaction types to
medical providers as defined by the EDI Implementation Documentation:
o Advice and Response to the Provider 837 by February 1, 1999
o 835 Health Care Claim Payment/Advice once implemented
o Electronic fund transfers once implemented
(7) The Bureau's required data element criteria is defined for each
transaction set, where applicable, in the transaction set overview in
the EDI Implementation Documentation. The required data element
criteria is listed alphabetically for each data element for each
transaction set, where applicable, in the Business Rules Matrix in the
EDI Implementation Documentation.
K. INFORMATION SYSTEMS CAPABILITY.
(1) The MCO shall have a Year 2000 Compliant integrated information
system that supports each business function throughout the lifecycle of
a claim. The MCO warrants that all products or services provided under
this Agreement shall be Year 2000 Compliant, as defined in Appendix G
of this Agreement. The provisions of this paragraph shall survive any
termination or expiration of this Agreement.
(2) The MCO shall periodically demonstrate to the satisfaction of the
Bureau that its information system is capable of supporting its managed
care process through the effective integration of its technical
information processing components.
<PAGE> 8
(3) The MCO shall have the capacity to access claim information via the
Bureau's External Data Access (EDA) program and to bear its own
equipment and Network Service Provider (NSP) costs where applicable.
(4) The MCO shall demonstrate its ability to capture data required for
the Return to Work Degree of Disability Management (DoDM) measurement
set forth in Appendix E of this Agreement.
(5) In addition to electronic bills, the MCO shall have Internet access
and shall retrieve files available for download from the Bureau World
Wide Web site (www.ohiobwc.com) no later than 5:00 P.M. the next
Business Day after the files are placed in the MCO's directory by the
Bureau. These files include but are not limited to Provider List
Update, Customer Service Team (CST) update, Open Enrollment Claim
Update File, the Foresight Corporation's EDISIM product along with the
Ambassador Kit and, when available, the Employer and Injured Worker
Representative(s) demographic data.
(6) The MCO shall have the capability to communicate with the Bureau
via Internet e-mail, including the capability to access e-mail
attachments. The MCO shall also have the capability to create and
interpret text-based documents.
(7) The MCO shall have at least one personal computer that is capable
of executing downloaded computer programs, including but not limited
to, Foresight EDISIM and Ambassador Kit products from the Bureau World
Wide Web site (www.ohiobwc.com).
L. MCO REVIEWS AND AUDITS.
(1) The Bureau may conduct random, unannounced reviews or audits of the
MCO. The scope of such reviews or audits shall include, but is not
limited to, substantial performance with the terms and conditions of
this Agreement, consistent and appropriate use of treatment guidelines
and return to work guidelines, compliance with any and all technical
requirements and time deadlines, financial and accounting information
and return to work results.
(2) On or before June 30, 1999, the Bureau shall require an independent
auditor's report on the policies and procedures placed in operation at
the MCO and tests of operating effectiveness, specifically the
Statement on Auditing Standards No. 70, Level 2 Report ("SAS 70"). This
report shall cover at a minimum a ten (10) month period occurring
between July 1, 1998 and June 30, 1999. The SAS 70 report shall be
prepared using the control objectives provided by the Bureau and in the
format specified by the Bureau. During the term of this Agreement the
MCO shall submit such reports on or before June 30 of each year
covering at a minimum a ten (10) month period occurring between July 1
of the preceding year and the filing deadline. The MCO shall implement
all SAS 70 audit recommendations resulting from deficiencies identified
in the report.
(3) On or before June 30, 1999, the Bureau shall require independently
audited financial statements from the MCO. The audit report shall be
prepared using Generally Accepted Accounting Principles ("GAAP"), and
shall cover a twelve (12) month period ending between July 1, 1998 and
June 30, 1999. During the term of this Agreement, the MCO shall submit
such reports on or before June 30 of each year covering the MCO's most
recent fiscal year.
(4) The MCO shall retain copies of canceled checks, original provider
bills and other documentation for provider payments as provided in the
MCO Policy Reference Guide (Appendix A) and shall make copies available
to the Bureau upon request for audit. If supporting documentation is
not received, administrative payment to the MCO will be withheld until
the
<PAGE> 9
requested information is provided. Each review or audit will be based
on the information received as of the due date. Documentation not
received by due date will not be included.
(5) The MCO shall permit any authorized representative of the Bureau to
inspect, copy and audit such records, books, vouchers, invoices, and
medical bill payment information as is reasonably required to
substantiate the fees billed to or paid by the Bureau, upon prior
written notice, during Normal Business Hours, Monday through Friday
9:00 A.M through 5:00 P.M. Eastern Time.
M. MCO CUSTOMER SERVICE COMMUNICATIONS.
(1) The MCO shall assign cases to appropriate staff no later than 5:00
P.M. Eastern Time the next Business Day after the MCO's FROI Receipt
Date. The MCO shall respond to all communications (e-mail, fax, phone,
mail) within a reasonable period of time.
(2) The MCO shall have one toll-free telephone number through which all
types of issues can be addressed as well as a toll-free fax telephone
number. Customer service telephone lines shall be staffed during Normal
Business Hours, Monday through Friday 9:00 A.M through 5:00 P.M.
Eastern Time.
(3) The MCO (or any vendor or subcontractor) shall use only fax
machines with date/time indicators (showing either A.M./P.M. or
military time), and shall leave the date/time indicators on at all
times.
2. OBLIGATIONS OF MCO
A. GENERAL.
The MCO agrees to perform the services required by this Agreement in
accordance with all rules, regulations, guidelines, standards and
procedures of the Bureau and according to commercially reasonable
business practices. The MCO's Application to be certified for the HPP
is hereby incorporated into this Agreement by reference. The MCO hereby
acknowledges that it has provided the Bureau with a list of Bureau
certified providers who are enrolled in its provider Network. The MCO
agrees to review the treatment rendered by all providers and assist its
providers in any manner or means necessary to return the injured worker
to work.
B. RULES.
The MCO agrees to abide by all rules established for the HPP as set
forth in Rule 4123-6-01, et seq. of the Ohio Administrative Code (the
"HPP Rules"). The MCO hereby acknowledges that as part of the
application process to become certified as a Bureau managed care
organization under the HPP, it has provided the Bureau with the
internal guidelines, standards and procedures established for the
medical management of workers' compensation cases and that such
procedures are in accordance with all applicable Federal and Ohio laws.
C. CURRENT POLICIES.
The MCO agrees to abide by all Bureau policies and MCO reporting
requirements that are set forth in the MCO Policy Reference Guide
(Appendix A). The MCO is responsible for communication with the Bureau
Customer Service Teams and for the medical management of employers'
cases for employers who have selected them and for employers who have
been assigned to them.
<PAGE> 10
D. FRAUD.
(1) The MCO agrees to identify and report any suspected fraudulent or
deceptive behavior committed by injured workers, employers, providers
or any other person or entity (as defined in Ohio Revised Code Sections
2913.01(A) and (B), Ohio Revised Code Section 2913.48 and the criteria
and requirements that are hereby incorporated by reference and attached
hereto as "Appendix C: Fraud/Special Investigations-MCO Fraud Reporting
and Referral Requirements," as may be modified during the term of this
Agreement) to the Bureau's Fraud/Special Investigations Department. The
MCO agrees to report these incidents and shall supply supporting
preliminary documentation to the Bureau's Fraud/Special Investigations
Department within ten (10) Business Days of discovery. The MCO and it
agents, subcontractors and assignees agree to provide the Bureau's
Fraud/Special Investigations Department with immediate and reasonable
investigative access to any and all records, data, electronic storage
media, personnel, and information relating to any subjects of an
investigation.
(2) The Bureau agrees to provide the MCO with fraud reporting criteria,
requirements and processes as defined in Appendix C. The Bureau and MCO
agree to jointly develop and provide supportive training to the MCO and
to the Bureau's Fraud/Special Investigations Department personnel in
the identification and detection of fraud or deceptive behavior or
patterns. The Bureau and the MCO agree to jointly develop and refine
detection, reporting and recovery processes as needed.
E. EMPLOYER AND CASE ASSIGNMENT.
The parties agree that the cases subject to this Agreement shall be all
cases of employers who select the MCO and all cases of employers
assigned to the MCO by the Bureau. In addition to managing the cases of
employers who select the MCO, the MCO agrees that the Bureau may assign
other employers to the MCO and the MCO shall service those employers in
accordance with the provisions of this Agreement. The MCO agrees that
the Bureau may revoke any assignment made in error.
F. CAPACITY.
(1) The MCO may limit assignment and employer selection by providing
the Bureau with written notice that it is at capacity and that it will
accept no further employer selections or assignments as of the date
identified in the notice. The request should fully disclose and detail
any and all reasons for the capacity limitation request and it should
identify the counties where capacity will be limited.
(2) In addition, the Bureau may declare the MCO ineligible to solicit
or accept selection of the MCO by an employer or assignment of an
employer to the MCO by the Bureau by placing the MCO at capacity. The
Bureau may place the MCO at capacity for the following reasons: (a) The
MCO is undergoing the decertification process pursuant to Rule
4123-6-17 of the Ohio Revised Code; (b) The MCO has notified the
Bureau, pursuant to Section 3(C) of this Agreement, that it proposes to
merge into or be acquired by another MCO; (c) the MCO has notified the
Bureau, pursuant to Section 5(B) of this Agreement, that it intends to
terminate this Agreement without cause; (d) the MCO's Capacity Bill
Timing (as defined in Appendix G of this Agreement) is greater than
fourteen (14.00) calendar days.
<PAGE> 11
3. ADMINISTRATIVE REQUIREMENTS
A. MCO BANK ACCOUNTS.
The MCO's check stock shall bear the name, address, and telephone
number of the MCO for identification purposes. The MCO provider account
and the MCO administrative account shall be separate accounts with
account numbers provided to and kept current with the Bureau. The MCO
provider account shall be a dedicated account for the funds provided to
the MCO by the Bureau to pay providers and shall only be used to pay
providers. The MCO provider account shall not be an interest-bearing
account and shall not be a "sweep account" (an account where funds over
a certain amount are temporarily placed in an interest-bearing account
until called on for payment).
B. MCO ORGANIZATIONAL STRUCTURE.
The MCO shall provide to the Bureau a detailed description of the MCO's
current organizational structure, including all subsidiary, parent and
affiliate relationships. The MCO shall identify its principals, provide
the date of incorporation or formation of partnership or limited
liability company, and provide any fictitious names the managed care
organization is, or has been, doing business under. The MCO shall
provide the Bureau with the number of years it has operated as a
managed care organization in the State of Ohio and the number of
employees in each job description, identify other states in which the
MCO has or is currently conducting business in the last five (5) years,
and identify any banking relationships including all account
information with any financial institutions doing business in Ohio.
Information relating to the immediately preceding five years and
current data shall be provided to the Bureau as of the effective date
of this Agreement.
C. CHANGE IN MCO ORGANIZATION OR OPERATION.
Any Changes to the MCO organizational structure or business operations
must be approved in advance by the Bureau in writing. The MCO shall
submit any proposed Change to the Bureau at least ninety (90) days in
advance of the proposed effective date of the Change, unless the Bureau
approves in advance a shorter period. The MCO shall comply with the
Bureau's Merger and Acquisition Policy, which is attached hereto as
Appendix D. For purposes of this Agreement "Change" means a
reorganization, consolidation, merger or other combination with an
unaffiliated party, the acquisition of substantially all the assets of
the MCO by an unaffiliated party, any action causing the dissolution,
insolvency or voluntary bankruptcy of the MCO, a change in the right to
appoint, reelect or approve more than fifty percent (50%) of the
directors or members of the controlling body of the MCO, or the MCO's
becoming subject to a management agreement that covers all or
substantially all the business operations of the MCO or any
subcontractor or change in subcontractors, or any material change in
the business operations of the MCO, including but not limited to
changes in information technology or systems. Any unapproved Change to
the MCO organizational structure or business operations shall permit
the Bureau at its discretion to terminate this Agreement in accordance
with the provisions of Section 5B of this Agreement.
D. MCO RECORD KEEPING AND DOCUMENTATION REQUIREMENTS.
(1) The MCO shall ensure confidentiality of hard copy and electronic
files. MCOs shall retain records received from providers and
subcontractors that are utilized by the MCO to develop electronic
billings to the Bureau. The MCO shall retain any records obtained from
the
<PAGE> 12
providers and subcontractors that are utilized by the MCO to perform
its medical management functions or to substantiate the delivery,
value, necessity and appropriateness of goods and services to injured
workers. MCOs shall retain records for the period of time and in the
format provided in the MCO Policy Reference Guide (Appendix A). The
MCO, upon request of the Bureau, shall provide all requested records to
another MCO in conjunction with the reassignment of any employer.
(2) Any medical and claim information that is part of the Bureau's
claim file, including hard copies and electronic copies gathered by the
MCO in the course of providing services under the HPP, is the property
of the Bureau and such files shall be returned to the Bureau
immediately upon termination of this Agreement. All documents received
by the MCO shall be date stamped by the MCO on the document's Receipt
Date as defined in Appendix G of this Agreement. Any equipment
materials or supplies provided to the MCO by the Bureau shall be
returned to the Bureau upon request.
4. AMOUNT AND METHOD OF PAYMENT.
A. MCO PAYMENT METHODOLOGY.
(1) The parties agree to the payment calculations and the payment
schedules described in Appendix E of this Agreement. Reimbursement to
the MCO for the period from January 1, 1999 to March 31, 1999 shall be
as set forth in Appendix E of this Agreement.
(2) Starting April 1, 1999, reimbursement to the MCO shall be based on
a flat monthly administrative fee payment of one-twelfth (1/12) of four
percent (4%) of annual workers' compensation premium for employers
assigned to the MCO, to be paid in monthly installments as set forth in
Appendix E of this Agreement. The administrative fee shall be
calculated using the premium base set forth in Section 4B below and
shall be subject to the setoffs set forth in Section 4C below.
(3) Starting April 1, 1999, the MCO shall be eligible to earn an
additional quarterly incentive fee payment of up to one-fourth (1/4) of
three percent (3%) of annual workers' compensation premium for
employers assigned to the MCO, based on its performance on the Return
to Work Degree of Disability Management ("DoDM") measurement used under
this Agreement, to be paid in quarterly installments as set forth in
Appendix E of this Agreement. The incentive fee shall be calculated
using the premium base set forth in Section 4B below. A description of
the DoDM measurement approach is contained in Appendix E: MCO Payment
Methodology.
(4) In addition to the administrative and incentive fee payments set
forth above, the MCO shall have the opportunity to recoup expenditures
associated with upgrading its systems capabilities and transmission of
data to the Bureau as required under this Agreement. Reimbursement to
the MCO for these transmission and developmental acquisition costs
shall be calculated as set forth in Appendix E of this Agreement.
B. MCO PAYMENT PREMIUM BASE.
(1) From April 1, 1999 to December 31, 1999, the premium base used to
calculate the administrative and incentive fees due to the MCO under
this Agreement shall consist of (1) for private employers assigned to
the MCO, the premium associated with the employers' July 1, 1997 - June
30, 1998 rating year (as of December 31, 1998) and (2) for public
employers assigned to the MCO, the premium associated with the
employers' January 1, 1997 - December 31, 1997 rating year (as of
December 31, 1998).
(2) The premium base used to calculate the administrative and incentive
fees due to the MCO under this Agreement from April 1, 1999 to December
31, 1999 shall be adjusted monthly (starting January 1999) to reflect
changes in the employer assignment to the MCO, including the
<PAGE> 13
addition of employers through auto-assignment and the loss of employers
who are granted self-insured status, as set forth in Appendix E of this
Agreement.
(3) The premium base used to calculate the administrative and incentive
fees due to the MCO under this Agreement during calendar year 2000
shall consist of the premium base used for calendar year 1999 (as
adjusted through December 31, 1999, in accordance with Sections 4B(1)
and 4B(2) of this Agreement) with the following additional adjustments:
(1) the MCO's December 31, 1999 premium base shall be increased by the
percentage difference in the Consumer Price Index - Urban (CPIU), All
Urban, Base Years 82-84, from July 1998 to July 1999; and (2) the
appropriate premium for those employers who were zero premium employers
during the 1999 premium year shall be added to the MCO's December 31,
1999 premium base.
(4) The premium base used to calculate the administrative and incentive
fees due to the MCO under this Agreement during calendar year 2000
shall be adjusted monthly to reflect changes in the employer assignment
to the MCO, including the addition of employers through auto-assignment
and the loss of employers who are granted self-insured status, as set
forth in Appendix E of this Agreement.
(5) The premium base used to calculate the administrative, performance
and incentive fees due to the MCO under this Agreement for the period
from January 1, 1999 to March 31, 1999 shall be as set forth in
Appendix E of this Agreement.
C. SETOFFS.
(1) The monthly administrative fee payment to the MCO shall be subject
to the following setoffs or deductions:
(a) FROI Timing - Defined as the average number of calendar
days between Date of Injury (DOI) and Bureau Filing Date for
all claims (with a DOI of March 1, 1997 or later) filed during
each reporting period (set forth in Appendix E of this
Agreement), excluding the five percent (5%) of claims with the
longest lag time between DOI and Bureau Filing Date. Starting
April 1, 1999, the Bureau shall deduct a percentage of the
MCO's monthly administrative fee payment as set forth in
Section 4C(2) of this Agreement if the MCO's FROI Timing for
the applicable reporting period (set forth in Appendix E of
this Agreement) was greater than twenty-one (21.00) calendar
days.
(b) Bill Timing: MCO Receipt - Bureau Receipt - Defined as the
average lag time in calendar days from the MCO's Receipt Date
for a provider medical bill or the most recent date the claim
in which the bill was incurred was placed in an Allowed
status, whichever is later ("MCO Receipt") to the date the
MCO's outgoing provider bill 837 transmission is accepted by
the EDI system provider designated by the Bureau ("Bureau
Receipt"), calculated on the basis of all bills with a paid
amount greater than $0.00 received by the Bureau from the MCO
during each reporting period (set forth in Appendix E of this
Agreement). Starting April 1, 1999, the Bureau shall deduct a
percentage of the MCO's monthly administrative fee payment as
set forth in Section 4C(2) of this Agreement if the MCO's Bill
Timing: MCO Receipt - Bureau Receipt for the applicable
reporting period (set forth in Appendix E of this Agreement)
was greater than twenty-one (21.00) calendar days.
(c) Data Accuracy -- Starting January 1, 2000, the Bureau
shall deduct twelve and one-half percent (12.5%) of the MCO's
monthly administrative fee payment if the MCO's MCO-to-Bureau
148 and 837 EDI transaction data accuracy percentages for the
period being measured (as further set forth in Appendix E of
this Agreement) fall below the criteria set forth in Appendix
E of this Agreement.
<PAGE> 14
(d) Misfiling of Death Claims - Starting January 1, 1999, if
the MCO submits a claim as a medical-only or lost-time claim
where the claim should have been submitted as a death claim
because the injured worker is deceased, the Bureau shall
deduct the lesser of two thousand dollars ($2,000.00) or one
percent (1%) of the MCO's monthly administrative fee payment
per instance.
(2) For the period from April 1, 1999 to December 31, 1999, the FROI
Timing and Bill Timing: MCO Receipt - Bureau Receipt setoffs shall each
be equal to twelve and one-half percent (12.5%) of the MCO's monthly
administrative fee payment in any given month. For the period from
January 1, 2000 to December 31, 2000, the FROI Timing and Bill Timing:
MCO Receipt Bureau Receipt setoffs shall each be equal to six and
one-quarter percent (6.25%) of the MCO's monthly administrative fee
payment in any given month.
B. EXPENSES.
Except as otherwise provided in Section 4A(4) and Appendix E of this
Agreement, the payment of expenses associated with this Agreement is
the sole responsibility of the MCO. The Bureau shall not be required to
pay for or reimburse the MCO for any expenses incurred or paid by the
MCO in connection with the performance of services, including
publication, travel and staffing requirements, pursuant to this
Agreement.
5. TERM AND TERMINATION.
A. TERM.
This Agreement shall become effective January 1, 1999 (the "Effective
Date") and shall continue in force for a period of two years unless
earlier terminated in accordance with this Agreement. All terms and
conditions set forth in this Agreement shall go into effect on the
Effective Date unless otherwise stated.
B. TERMINATION.
(1) The MCO may terminate this Agreement without cause upon sixty (60)
days written notice to the Bureau. The Bureau may terminate this
Agreement for cause at any time upon (a) the insolvency of the MCO, (b)
any act of fraud or misrepresentation by the MCO of the amount or cost
of services or supplies rendered or provided to an injured worker, (c)
any act of fraud or misrepresentation by an MCO in reporting or
submitting data to the Bureau, including but not limited to data used
by the Bureau to calculate or determine the MCO's administrative,
performance, or incentive payments, (d) an unapproved Change in the
organizational structure of the MCO or a material Change in its
business operations, (e) decertification of the MCO or (f) substantial
failure to perform on the part of the MCO.
(2) Prior to terminating this contract for 5B(1)(f) substantial failure
to perform, the Bureau shall send written notice to the MCO containing
a statement of the reasons for the proposed termination of the
contract; a citation to the statutes, rules, or contract provisions
forming the basis for the termination of the contract; a statement
indicating that the MCO shall be provided a hearing, if requested
within thirty (30) days of the time of the mailing of the notice; and a
statement informing the MCO that if a hearing is not requested within
thirty (30) days, the Bureau shall terminate the MCO contract.
(3) If the MCO does not timely request a hearing, the Bureau may
terminate this contract for substantial failure to perform. If the MCO
timely requests a hearing, the Bureau shall immediately set the date,
time, and place for such hearing, and shall notify the MCO of the
hearing. The hearing shall be held at the Bureau central office in
Columbus.
<PAGE> 15
(4) The Administrator may conduct the hearing personally or may
delegate the hearing to a designee, who shall be an attorney at law.
The designee may be from the Bureau law section or an attorney employed
by the Administrator especially for such purpose. Should the hearing be
conducted by a designee, the designee shall issue a report and
recommendation, a copy of which shall be mailed to all parties and
representatives, and which may be objected to in writing within ten
(10) days. The Administrator may approve, disapprove, or modify the
report and recommendation of the designee, but shall not take such
action until after the expiration of the period for objection to the
designee's report. The Administrator shall issue a decision in writing
to the MCO and any representative informing them of the Administrator's
decision as to the proposed termination. The Administrator's final
decision as to termination of this Agreement, whether a hearing was
conducted or not, shall not be appealable.
(5) In the event of termination for any reason, the Bureau shall
determine a transition plan for the transfer of services to another
managed care organization selected by employers or assigned by the
Bureau. In the event of termination for any reason the Bureau may
withhold further payment due to the MCO pursuant to this Agreement, or
otherwise, for the purpose of set-off until such time as any damages
due to the Bureau are determined.
C. DAMAGES.
The MCO acknowledges that the Bureau may suffer damages due to the
failure of the MCO to act in accordance with the terms and conditions
of this Agreement. The MCO agrees that if the Bureau does not give
prompt notice of such failure the Bureau has NOT WAIVED any of its
rights or remedies concerning the failure of performance by the MCO. In
the event that this Agreement is terminated for any reason the MCO
shall be liable for any damages and additional costs the Bureau incurs
in seeking replacement services.
D. FORCE MAJEURE
Neither the MCO nor the Bureau shall be liable to the other for any
delay or failure of performance of any provisions contained herein, to
the extent that such delay or failure is caused by any act of God, such
as earthquake; fire; storms; tornadoes; floods, or other severe weather
disturbances; explosions; civil disturbances; war; and other such
events or any other cause that could not be reasonably foreseen in the
exercise of ordinary care, and that is beyond the reasonable control of
the party affected, and that the party is unable to prevent.
E. DECERTIFICATION.
The Bureau retains the discretion to initiate decertification
proceedings against the MCO upon termination of this Agreement.
6. GENERAL AND PROFESSIONAL LIABILITY INSURANCE.
The MCO shall maintain general and professional liability insurance against
claims for bodily injury, personal injury, death or property damage arising from
the services performed by the MCO, its employees, agents, representatives, or
subcontractors, under this Agreement for the duration of this Agreement,
together with any renewals. Such insurance shall afford initial protection of
not less than three million dollars ($3,000,000.00) for each occurrence with
respect to bodily injury, personal injury or death and not less than three
million dollars ($3,000,000.00) for each occurrence with respect to property
damage.
<PAGE> 16
7. AMENDMENT.
The parties may, by mutual agreement, amend, modify, supplement or rescind the
terms of this Agreement. The term "this Agreement" shall be deemed to include
any such future amendments, modifications, renewals, extensions, and
supplements. Any such amendment, modification, renewal, extension, supplement or
rescission shall not be effective unless expressed in writing and signed by the
parties hereto; provided, however, the MCO agrees to permit the Bureau to update
and substitute, from time to time, its policies, procedures and guidelines that
are referred to in this Agreement.
8. ENTIRE AGREEMENT.
It is mutually understood and agreed that this Agreement, with its Appendices,
and the MCO's Application, with any amendments, and the "MCO Application &
Requirements Training Manual" are incorporated by reference into this Agreement,
and together, represent the entire Agreement between the MCO and the Bureau. The
parties have entered into no agreements, express or implied, other than the
Agreement set forth in this writing. It is further agreed that no parole
representation of any amendment, modification, supplement or rescission of the
terms set forth herein shall be given any force or effect unless such amendment,
modification, supplement or rescission has been expressed in writing and signed
by the parties and meets any and all conditions precedent deemed applicable by
the Bureau.
9. ORDER OF PRIORITIES.
To the extent that the terms and provisions of the MCO's Application, with any
amendments, may be inconsistent with this writing, and cannot be harmonized
herewith, the terms and provisions of this Agreement shall control followed in
order of priority by the Application, with any amendments, then the "MCO
Application & Requirements Training Manual."
10. SEVERABILITY.
If for any reason any provision or part of this Agreement is declared void,
invalid, or unenforceable, the validity of the rest of this Agreement shall not
be affected and the Agreement shall remain in full force and effect with the
void, invalid, or unenforceable provision(s) eliminated.
11. WAIVER.
No waiver of any provision of this Agreement shall be valid unless it is in
writing and signed by the party against whom the waiver is sought to be
enforced. Failure of a party to insist upon strict performance of any provision
of this Agreement in any one or more instances shall not be construed as a
waiver or relinquishment of the right to insist upon strict compliance with such
provision in the future.
12. ASSIGNABILITY AND SUBCONTRACTING.
(A) MCOs are permitted to subcontract services and the MCO is accountable for
the actions and performance of any subcontractors engaged by the MCO. The MCO
shall not assign, sell, or subcontract any rights, duties or obligations
acquired pursuant to this Agreement without prior written approval by the Bureau
as provided under Section 3C and/or Appendix D of this Agreement. Such prior
written approval by the Bureau shall not be construed to modify or abrogate the
MCO's responsibility and liability pursuant to this Agreement.
(B) In the event the MCO assigns or subcontracts its duties or obligations under
this Agreement, the MCO shall develop with the Bureau a transition plan for the
transfer of services to a new MCO selected by employers or assigned by the
Bureau as provided under Appendix D of this Agreement. The MCO shall bear any
expenses related to any transitioning or transfer of services by assignment or
otherwise.
<PAGE> 17
13. NON-DISCRIMINATION.
The hiring of employees for the performance of work under this Agreement shall
be done in accordance with Ohio Revised Code Section 125.111 and the Governor's
amended Executive Order 84-9 of November 30, 1984. The contract shall not
discriminate against or intimidate any person hired for the performance of the
work by reason of race, color, religion, national origin, ancestry, sex,
handicap, or disability as that term is defined by the Americans with
Disabilities Act (ADA).
14. INDEPENDENT MCO RELATIONSHIP.
It is mutually understood and agreed that the MCO is at all times acting as an
independent MCO in performing services under this Agreement and shall be
responsible for compliance with all laws, rules, and regulations involving, but
not limited to, employment of labor, hours of labor, health and safety, working
conditions and payment of wages. The persons provided by the MCO shall be solely
the MCO's employees and subcontractors of the MCO and shall not be considered
employees of the Bureau. The MCO shall be responsible for payment of federal,
state, and municipal taxes and costs such as Social Security, unemployment,
workers' compensation, disability insurance, and federal and state withholding
with respect to its employees.
15. CONFIDENTIALITY.
The MCO, its officers, agents, employees, representatives, subcontractors and
assigns shall keep confidential all information, in whatever form obtained, in
the performance of this Agreement, including but not limited to knowledge of the
contents of confidential records of the Bureau. Any information subject to the
confidentiality laws of this state shall not be released to any person other
than authorized representatives of the Bureau, unless the Bureau directs its
release.
16. HOLD HARMLESS AND INDEMNIFICATION.
The MCO shall hold the Bureau harmless and indemnify the Bureau from and against
any and all claims, demands, losses, and causes of action asserted against or
incurred by the Bureau that result from or arise out of the work performed by
the MCO, its agents, employees, representatives, and subcontractors, under this
Agreement, or any errors, omissions, negligent conduct or intentional acts of
the MCO, its agents, employees, representatives, and subcontractors.
17. LIMITATION OF LIABILITY.
The Bureau's liability for damages for services rendered pursuant to this
Agreement, whether in contract or in tort, shall not exceed the total amount of
compensation payable to the MCO pursuant to this Agreement, or the amount of
direct damages incurred by the MCO, whichever is less. The MCO's sole and
exclusive remedies for the Bureau's failure to perform shall be subject to the
jurisdiction of the Ohio Court of Claims. In no event shall the Bureau be liable
for any consequential, incidental, or punitive losses, damages, expenses,
including the loss of profits, even if the Bureau knew or should have known of
the possibility of such damages.
18. APPLICABLE STATE LAW.
The terms and conditions contained herein shall be construed and interpreted in
accordance with the laws of the State of Ohio. Any and all disputes arising from
this Agreement shall be governed by the laws of the State of Ohio, and the MCO
agrees to submit exclusively to the jurisdiction of the Ohio Court of Claims in
any and all disputes arising from this Agreement.
<PAGE> 18
19. COMPLIANCE WITH THE LAWS OF OHIO.
The MCO agrees and covenants that it at this time is not and for the duration of
this Agreement will not knowingly violate the laws of Ohio specifically
including, but not limited to, the workers' compensation laws of Ohio, the
corporate laws of Ohio, and all rules and regulations promulgated under those
laws.
20. CONFLICTS OF INTEREST.
(A) The MCO affirms that it presently has no interest and shall not acquire any
interest, direct or indirect, which would conflict, in any manner or degree,
with the performance of services which are required to be performed under any
resulting Agreement. In addition, the MCO affirms that a person who is or may
become an agent of MCO not having such interest upon the execution of this
Agreement shall likewise advise the Bureau in the event it acquires such
interest during the term of this Agreement.
(B) Furthermore, any such person who is or may become an agent of the MCO who
acquires an incompatible or conflicting personal interest, prior to, on or after
the effective date of this Agreement, or who involuntarily acquires any such
incompatible or conflicting personal interest, shall immediately disclose his or
her interest to the Bureau in writing. Thereafter, such person shall not
participate in any action affecting the work under this Agreement, unless the
Bureau determines that, in light of the personal interest disclosed, such
person's participation in any such action would not be contrary to the public
interest.
(C) The MCO and any affiliated Third Party Administrators ("TPAs"), if
applicable, shall have complete separation of functions, offices, systems, and
staff. The MCO shall not use or contract with any provider who has an ownership
interest in, or who is the medical director for, the MCO to provide Independent
Medical Examination ("IME") services for injured workers assigned to the MCO.
The MCO and any subcontractor(s) must be separate legal entities and may not
have the same Bureau provider number or tax identification number. The MCO shall
not be a Bureau certified health care provider.
21. HEADINGS.
The headings in this Agreement and its appendices are for convenience only and
are not intended to be part of, or to affect the interpretation of, the terms of
this Agreement.
22. CERTIFICATION.
The MCO is certified to provide services under this Agreement only in the
counties listed in Appendix F of this Agreement, as may be modified during the
term of this Agreement.
23. OHIO ELECTIONS LAW.
The MCO affirms that, as applicable to the MCO, no party listed in Division (I)
or (J) of Section 3517.13 of the Revised Code, or spouse of such party, has
made, as an individual, within the two previous calendar years, one or more
political contributions totaling in excess of $1,000.00 to the Governor of Ohio
or to his campaign committees.
24. DEFINITIONS.
Unless otherwise defined in the text of this Agreement, the capitalized terms
and capitalized abbreviations as used in this Agreement shall have the same
meaning as defined in Rule 4123-6-01 of the Ohio Administrative Code. A Glossary
of the defined terms used in this Agreement is attached as Appendix G.
<PAGE> 19
IN WITNESS WHEREOF, the parties hereunto affix their signatures this 10th day of
November, 1999.
COMPMANAGEMENT HEALTH SYSTEMS, INC STATE OF OHIO
TAX ID # 31141515248 BUREAU OF WORKERS' COMPENSATION
/s/ Robert J. Bossart /s/ James Conrad
- ---------------------------------- ----------------------------------
Name: Robert J. Bossart Name: James Conrad
Title: President Title: Administrator
<PAGE> 1
EXHIBIT 10(h)
EMPLOYMENT AGREEMENT
This agreement is made effective as of May 1, 1998, at Columbus, Ohio,
between Health Power Management Corporation, an Ohio corporation (the
"Company"), and Bernard F. Master, D.O. (the "Employee"), who hereby agrees as
follows:
Section 1. Employment. The terms and conditions of this agreement shall
supersede and replace in their entirety the terms and conditions of the
Employment Agreement between the Company and the Employee dated as of May 1,
1997. The Company hereby renews and continues the Employee's employment, and the
Employee hereby accepts employment renewal and continuation by the Company, on
the terms and subject to the conditions set forth in this agreement.
Section 2. Term of Employment. The term of the Employee's employment
under this agreement shall begin as of the date of this agreement and shall
terminate, unless sooner terminated in accordance with the provisions of Section
6, on April 30, 1999. Upon agreement of the Company and the Employee, the term
of the Employee's employment under this agreement may be renewed for successive
one-year periods, commencing on the termination date of the immediately
preceding term and terminating, unless sooner terminated in accordance with the
provisions of Section 6, on the first anniversary thereof.
Section 3. Services. The Employee shall be the Chairman of the Board and
Chief Executive Officer of the Company and, as such, shall perform such services
as may be reasonably assigned to him from time to time by the Board of Directors
of the Company. The Employee shall devote his best efforts to the performance of
his duties hereunder.
Section 4. Responsibilities. The Employee shall be responsible for
establishing and supervising the implementation of the business policies and
operating programs, budgets, procedures, and directions of the Company and its
affiliates (reporting only to the Board of Directors of the Company); monitoring
and evaluating the effectiveness of the management of the Company, including
without limitation reviewing and evaluating the performance of the president and
chief operating officer of the Company; establishing and implementing a
strategic plan for the Company and its affiliates; determining the necessity of
and, if necessary and possible, supervising the raising of additional capital
for the Company and its affiliates; presiding at all meetings of the
shareholders and the Board of Directors of the Company and its affiliates; and
such other activities as are incident to his office or as may be prescribed or
delegated by the Board of Directors of the Company.
Section 5. Compensation. The Employee shall receive the following
compensation:
(a) A base salary of $192,000 per annum or if the term of the
Employee's employment is renewed, such other amount as may be
approved by the Company's Compensation Committee from time to
time, payable in accordance with the Company's general policies
for payment of compensation to its salaried personnel; provided
if the Employee's employment is terminated pursuant to the
provisions of Section 6, the base salary shall cease as of the
day of termination;
(b) $3,500 per month, payable in arrears, as an expense
allowance for expenditures advanced by the Employee on behalf of
the Company;
(c) A cash bonus payable in the discretion of the Company's
Compensation Committee, and, if payable, in an amount to be
determined by such Committee and based
<PAGE> 2
upon such criteria as may be selected by such Committee,
including without limitation the Employee's performance with
respect to providing leadership to the Company's personnel,
supervising the Company's operations, and enhancing value for
the Company's stockholders; and
(d) Formula Vesting Stock Options pursuant to the 1994 Executive
Performance Stock Option Plan (the "Plan") for 1998 and, if the
term of the Employee's employment is renewed, for each
subsequent fiscal year of the Company (each "Performance Year")
ending during each renewal term of the Employee's employment
under this agreement with the number of Shares subject to the
Formula Vesting Option and the Ceiling Amount (as such term is
defined in the Plan) for determining accelerated vesting under
the Plan being set forth for each Performance Year on the
schedule attached to this agreement. Such amounts shall be set
forth on the attached schedule on or about the anniversary date
of this agreement for each year during which the term of the
Employee's employment is renewed, and initialed by the Company
and the Employee.
The Company shall also provide disability insurance for the benefit of
the Employee and pay all premiums with respect thereto, which insurance shall
supplement the Company's current disability insurance benefits to the Employee.
The policy or policies for such disability insurance shall provide for benefits
in the amount of $6,000 per month for a maximum of five years, which benefits
shall commence 90 days after the date of the Employee's disability (as
determined under the terms of such policy).
Section 6. Termination of Employment. The Employee's employment under
this agreement may be terminated:
(a) By the Employee with or without cause upon giving 90 days
advance written notice to the Company, provided that the
Employee shall continue to perform all duties under this
agreement until the earlier of:
(i) The expiration date of such 90-day period; or
(ii) Any earlier date which may be specified by the
Company.
(b) By the Company upon the occurrence of any one of the
following events or any time thereafter:
(i) The Employee fails to fully perform and observe all
obligations and conditions to be performed and observed by the
Employee under this agreement, or under any other agreement
between the Employee and the Company, and fails to correct such
problem within 10 days after notice by the Board of Directors to
do so or, if it is impossible to correct such problem within
such 10 days, fails to commence the action necessary to correct
such problem and continues diligently to pursue such action
until the correction is complete; or
(ii) The Employee is under a long-term disability. For
purposes of this agreement, the term "long-term disability"
shall have the same meaning as long-term disability or other
similar term used in any long-term or permanent disability
policy provided by the Company and covering the Employee. In the
event there is no long-term or permanent disability policy in
effect covering the Employee, the term "long-term disability"
shall mean that because of physical or mental incapacity, the
Employee has not performed his duties under this agreement for
60 days or longer and it is probable, in the opinion of a
licensed physician selected by the Company, that the Employee
will not
<PAGE> 3
be able to engage actively in his employment by the Company for
an additional period of 90 days or longer.
Section 7. Employee's Capacity. The Employee represents and warrants to
the Company that he has the capacity and right to enter into this agreement and
perform all his duties under this agreement without any restriction whatsoever
by any other agreement, document, or otherwise.
Section 8. Complete Agreement. This document contains the entire
agreement between the parties and supersedes any prior discussions,
negotiations, representations, or agreements between them relating to the
employment of the Employee. No additions or other changes to this agreement
shall be made or be binding on either party unless made in writing and signed by
each party to this agreement.
Section 9. Notices. Any notice or other communication required or
desired to be given to any party under this agreement shall be in writing and
shall be deemed given:
(a) In the case of the Employee, when delivered personally to
the Employee or when deposited in the United States mail,
first-class postage prepaid, addressed to the Employee at 340
Tucker Drive, Worthington, Ohio 43085, or at any other address
thereafter designated by the Employee in notice theretofore
given to the Company; and
(b) In the case of the Company, when deposited in the United
States mail, first-class postage prepaid, addressed to the
Company at 560 East Town Street, Columbus, Ohio 43215, or at any
other address thereafter designated by the Company in notice
theretofore given to the Employee.
Section 10. Governing Law. All questions concerning the validity,
intention, or meaning of this agreement or relating to the rights and
obligations of the parties with respect to performance hereunder shall be
construed and resolved under the laws of Ohio.
Section 11. Severability. The intention of the parties to this agreement
is to comply fully with all laws and public policies, and this agreement shall
be construed consistently with all laws and public policies to the extent
possible. If and to the extent that any court of competent jurisdiction is
unable to so construe part or all of any provision of this agreement, and holds
part or all of that provision to be invalid, such invalidity shall not affect
the validity of the balance of that provision or the remaining provisions of
this agreement, which shall remain in full force and effect.
Section 12. Nonwaiver. No failure by any party to insist upon strict
compliance with any term of this agreement, to exercise any option, enforce any
right, or seek any remedy upon any default of any other party shall affect, or
constitute a waiver of, the first party's right to insist upon such strict
compliance, exercise that option, enforce that right, or seek that remedy with
respect to that default or any prior, contemporaneous, or subsequent default;
nor shall any custom or practice of the parties at variance with any provision
of this agreement affect, or constitute a waiver of, any party's right to demand
strict compliance with all provisions of this agreement.
Section 13. Captions. The captions of the various sections of this
agreement are not part of the context of this agreement, but are only labels to
assist in locating those sections, and shall be ignored in construing this
agreement.
<PAGE> 4
Section 14. Successors. This agreement shall be binding upon, inure to
the benefit of, and be enforceable by and against the respective heirs, legal
representatives, successors, and assigns of each party to this agreement,
provided that neither party may assign any of its rights or obligations under
this agreement without the prior written consent of the other party.
HEALTH POWER MANAGEMENT
CORPORATION
/s/ Bernard F. Master By /s/ Toni D. Spruell
- ------------------------------- -------------------------------
BERNARD F. MASTER, D.O. Toni D. Spruell, Executive Vice
President
<TABLE>
Schedule to Dr. Master's Employment Agreement
---------------------------------------------
<CAPTION>
Number of Shares Acknowledged and Agreed
to be Subject to -------------------------
Performance Formula Vesting Ceiling Employees Company
Year Options to be Granted Amount Initials Initials
- ----------- --------------------- ------- --------- --------
<S> <C> <C> <C> <C>
1998 -0- $1,000,000 BFM TSP
</TABLE>
<PAGE> 1
EXHIBIT 10(m)
THIRD AMENDMENT TO EMPLOYMENT AGREEMENT
This amendment is made as of May 28, 1998, in Columbus, Ohio, among
CompManagement, Inc., an Ohio corporation ("CMI"), CompManagement Health
Systems, Inc., an Ohio corporation ("CHS") (CMI and CHS are collectively
referred to as the "Company"), and Robert J. Bossart (the "Employee").
Background Information
----------------------
The Employee and the Company are parties to an Employment Agreement
dated as of July 21, 1995 (the "Original Employment Agreement"), which agreement
was amended as of October 1996 (the "First Amendment"), and as of December 15,
1997 (the "Second Amendment"). The Original Employment Agreement, as amended by
the First Amendment and the Second Amendment, is hereinafter collectively
referred to as the "Employment Agreement." The Employment Agreement, as amended
by this amendment, is hereinafter collectively referred to as the "Agreement."
Statement of Agreement
----------------------
The parties hereby acknowledge the accuracy of the foregoing Background
Information and hereby agree as follows:
Section 1. Sales Commissions. The provisions of this section shall
govern the payment of sales commissions to the Employee and shall supersede and
replace in its entirety Section 5(b) of the Original Employment Agreement,
Section 3 of the First Amendment, and Section 7 of the Second Amendment.
(a) CMI Sales Commissions. The Company shall pay to the Employee
sales commissions on the CMI Fees (as defined below) generated by the
sales efforts of the Employee (the "CMI Sales Commissions"). The CMI
Sales Commissions shall be in an amount up to (i) 25% of the amount
(subject to allocation as described in (d), below) of the CMI Fees for
the first year of business from a CMI Employer (as defined below), which
CMI Fees were generated by the sales efforts of the Employee, plus (ii)
25% of the amount (subject to allocation as described in (d), below) of
the increase in CMI Fees from one Calendar Year (as defined in (e),
below) to the next Calendar Year from CMI Employers who are part of
group rating plans of CMI, which CMI Fees were generated by the sales
efforts of the Employee.
CMI Sales Commissions shall be payable on CMI Fees applicable to
CMI Employers located in any state or jurisdiction in which CMI is
authorized and approved to conduct business. With respect to a business
acquisition by CMI (whether such acquisition is structured as an asset,
stock, merger, or other similar type of transaction), no CMI Sales
Commissions shall be payable with respect to any fees received by CMI
from any employer who, at the time of such acquisition, was a client or
customer of the business acquired by CMI, except to the extent payable
pursuant to (ii), above.
For purposes of the Agreement: (A) "CMI Fees" shall mean fees
payable to CMI for its performance of third party administrative
services for workers' compensation and unemployment compensation claims
on behalf of CMI Employers; and (B) a "CMI Employer" shall mean any
individual or entity (including a corporation, limited liability
company, partnership, or business trust) which has entered into a
contract with CMI pursuant to which CMI performs third party
administrative services for workers' compensation or unemployment
compensation claims on
<PAGE> 2
behalf of such individual or entity, but is limited to employers that
are part of group rating plans (prospective and retrospective group
rating plans), state-funded employers, and self-funded employers.
(b) CHS Sales Commissions. The Company shall pay to the Employee
sales commissions on the CHS Fees (as defined below) generated by the
sales efforts of the Employee (the "CHS Sales Commissions") as set forth
in this section.
For the first quarter of the 1998 Calendar Year, the CHS Sales
Commissions shall be $177,920 (the "1998 First Quarter Commissions"). An
amount equal to 5/12ths of the 1998 First Quarter Commissions shall be
due and payable upon the execution of this amendment by the Employee.
The remaining 1998 First Quarter Commissions shall be payable during the
remainder of the 1998 Calendar Year in equal installments at the same
time and in the same manner as the Employee's base salary is payable.
If, during the 1998 Calendar Year, the Employee's employment is
terminated by the Company for "just cause" (as defined in the Original
Employment Agreement) other than due to the death of the Employee or by
the Employee, then the Employee shall receive payment of the 1998 First
Quarter Commissions payable through the date of termination of
employment, and the Company shall have no further obligation with
respect to the payment of the 1998 First Quarter Commissions. If, during
the 1998 Calendar Year, the Employee's employment is terminated due to
the death of the Employee or by the Company for any reason other than
just cause, then the Employee (or his beneficiaries) shall receive
payment of the 1998 First Quarter Commissions for the remainder of the
1998 Calendar Year in the manner set forth in the preceding sentence. In
the event the Employee is not an employee of the Company at the time of
any payment of the 1998 First Quarter Commission, the 1998 First Quarter
Commissions shall be treated as a salary continuation by the Company.
Beginning as of the second quarter of the 1998 Calendar Year and
continuing thereafter, the CHS Sales Commissions shall be in an amount
up to 25% of the amount (subject to allocation as described in (d),
below) of the CHS Fees for the first year of business from a CHS
Employer, which CHS Fees were generated by the sales efforts of the
Employee.
CHS Sales Commissions shall be payable only on CHS Fees
applicable to CHS Employers located in Ohio. With respect to the
acquisition of another MCO by CHS (whether such acquisition is
structured as an asset, stock, merger, or other similar type of
transaction), no CHS Sales Commissions shall be payable with respect to
any fees received by CHS with respect to any employer who, at the time
of such acquisition, had either selected the acquired MCO as its MCO or
been assigned to the acquired MCO by the Bureau (as defined below).
For purposes of the Agreement: (A) "CHS Fees" shall mean the
performance, incentive, and administrative fees payable to CHS under the
agreement dated as of February 12, 1997, and the Addendum thereto dated
February 2, 1998, between the Ohio Bureau of Workers' Compensation (the
"Bureau") and CHS (as such agreement may be further amended, modified,
renewed, extended, supplemented, or replaced), pursuant to which CHS has
agreed to provide medical management services for workers' compensation
claims on behalf of employers who have either selected CHS as their MCO
or been assigned to CHS by the Bureau; and (B) a "CHS Employer" is any
individual or entity (including a corporation, limited liability
company, partnership, or business trust) who has selected CHS as its
MCO.
(c) Annual Deduction. For each Calendar Year, a deduction in the
amount of $82,500 shall be made to the aggregate amount of the CMI Sales
Commissions and the CHS Sales Commissions payable to the Employee. Such
deduction shall be made prior to any payment of such commissions for
such Calendar Year.
<PAGE> 3
(d) Allocation of Commissions. The Employee acknowledges and
agrees that the "25%" sales commission amount described in (a) and (b),
above, represents the total amount of sales commissions which are
payable with respect to any CMI Employer or CHS Employer, as the case
may be, and that the 25% sales commission amount may be allocated by the
Company among all of the salespersons participating in the sales effort
to the CMI Employer or CHS Employer, as the case may be. The Chief
Executive Officer of CMI or CHS, as the case may be, shall have the
authority to allocate the 25% sales commission amount in any manner such
officer deems appropriate, in his reasonable discretion. In the event of
any dispute regarding the allocation by the Chief Executive Officer of
the 25% sales commission amount, such dispute shall be referred to, and
resolved by, the Compensation Committee of Health Power, whose
determination shall be binding and conclusive on all parties.
(e) Miscellaneous. The CMI Sales Commissions and the CHS Sales
Commissions shall be determined on a Calendar Year basis.
The payment of the CMI Sales Commissions shall accrue upon the
execution of the contract with the CMI Employer. Except for the 1998
First Quarter Commissions, the payment of the CHS Sales Commissions
shall accrue upon CHS receiving notification from the Bureau that the
CHS Employer has selected CHS as its MCO. In any event, neither CMI nor
CHS shall be obligated to pay such commissions unless and until the
corresponding CMI Fees or CHS Fees, as the case may be, are received by
CMI or CHS, respectively.
No commissions shall be payable to the Employee with respect to
any entity other than CMI or CHS.
For purposes of the Agreement, a "Calendar Year" shall mean the
period from January 1 through December 31 of the same year.
Section 2. Change of Control Exception. Notwithstanding any language in
the Employment Agreement to the contrary, a change of control of Health Power
shall not be deemed to have occurred if Heartland Advisors, Inc. becomes the
beneficial owner of securities of Health Power representing 20% or more of the
combined voting power of Health Power's then outstanding securities.
Section 3. Definitions. All capitalized terms used in this amendment
which are not otherwise defined herein shall have the respective meanings given
those terms in the Employment Agreement.
Section 4. Captions. The captions of the various sections of this
amendment are not part of the context of this amendment, but are only labels to
assist in locating those sections, and shall be ignored in construing this
amendment.
Section 5. Construction. This document is an amendment to the Employment
Agreement. In the event of any inconsistencies between the provisions of the
Employment Agreement and this amendment,
<PAGE> 4
the provisions of this amendment shall control. Except as modified by this
amendment, the Employment Agreement shall continue in full force and effect
without change.
COMPMANAGEMENT, INC.
By /s/ Bernard F. Master /s/ Robert J. Bossart
-------------------------------- --------------------------------
Bernard F. Master, D.O., ROBERT J. BOSSART
Chairman
COMPMANAGEMENT HEALTH
SYSTEMS, INC.
By /s/ Bernard F. Master
--------------------------------
Bernard F. Master, D.O.,
Chairman
<PAGE> 1
EXHIBIT 10(q)
THIRD AMENDMENT TO EMPLOYMENT AGREEMENT
This amendment is made as of May 28, 1998, in Columbus, Ohio, among
CompManagement, Inc., an Ohio corporation ("CMI"), CompManagement Health
Systems, Inc., an Ohio corporation ("CHS") (CMI and CHS are collectively
referred to as the "Company"), and Jonathan R. Wagner (the "Employee").
Background Information
----------------------
The Employee and the Company are parties to an Employment Agreement
dated as of July 21, 1995 (the "Original Employment Agreement"), which agreement
was amended as of October 1996 (the "First Amendment"), and as of December 15,
1997 (the "Second Amendment"). The Original Employment Agreement, as amended by
the First Amendment and the Second Amendment, is hereinafter collectively
referred to as the "Employment Agreement." The Employment Agreement, as amended
by this amendment, is hereinafter collectively referred to as the "Agreement."
Statement of Agreement
----------------------
The parties hereby acknowledge the accuracy of the foregoing Background
Information and hereby agree as follows:
Section 1. Sales Commissions. The provisions of this section shall
govern the payment of sales commissions to the Employee and shall supersede and
replace in its entirety Section 5(b) of the Original Employment Agreement,
Section 3 of the First Amendment, and Section 7 of the Second Amendment.
(a) CMI Sales Commissions. The Company shall pay to the Employee
sales commissions on the CMI Fees (as defined below) generated by the
sales efforts of the Employee (the "CMI Sales Commissions"). The CMI
Sales Commissions shall be in an amount up to (i) 25% of the amount
(subject to allocation as described in (d), below) of the CMI Fees for
the first year of business from a CMI Employer (as defined below), which
CMI Fees were generated by the sales efforts of the Employee, plus (ii)
25% of the amount (subject to allocation as described in (d), below) of
the increase in CMI Fees from one Calendar Year (as defined in (e),
below) to the next Calendar Year from CMI Employers who are part of
group rating plans of CMI, which CMI Fees were generated by the sales
efforts of the Employee.
CMI Sales Commissions shall be payable on CMI Fees applicable to
CMI Employers located in any state or jurisdiction in which CMI is
authorized and approved to conduct business. With respect to a business
acquisition by CMI (whether such acquisition is structured as an asset,
stock, merger, or other similar type of transaction), no CMI Sales
Commissions shall be payable with respect to any fees received by CMI
from any employer who, at the time of such acquisition, was a client or
customer of the business acquired by CMI, except to the extent payable
pursuant to (ii), above.
For purposes of the Agreement: (A) "CMI Fees" shall mean fees
payable to CMI for its performance of third party administrative
services for workers' compensation and unemployment compensation claims
on behalf of CMI Employers; and (B) a "CMI Employer" shall mean any
individual or entity (including a corporation, limited liability
company, partnership, or business trust) which has entered into a
contract with CMI pursuant to which CMI performs third party
administrative services for workers' compensation or unemployment
compensation claims on
<PAGE> 2
behalf of such individual or entity, but is limited to employers that
are part of group rating plans (prospective and retrospective group
rating plans), state-funded employers, and self-funded employers.
(b) CHS Sales Commissions. The Company shall pay to the Employee
sales commissions on the CHS Fees (as defined below) generated by the
sales efforts of the Employee (the "CHS Sales Commissions") as set forth
in this section.
For the first quarter of the 1998 Calendar Year, the CHS Sales
Commissions shall be $177,920 (the "1998 First Quarter Commissions"). An
amount equal to 5/12ths of the 1998 First Quarter Commissions shall be
due and payable upon the execution of this amendment by the Employee.
The remaining 1998 First Quarter Commissions shall be payable during the
remainder of the 1998 Calendar Year in equal installments at the same
time and in the same manner as the Employee's base salary is payable.
If, during the 1998 Calendar Year, the Employee's employment is
terminated by the Company for "just cause" (as defined in the Original
Employment Agreement) other than due to the death of the Employee or by
the Employee, then the Employee shall receive payment of the 1998 First
Quarter Commissions payable through the date of termination of
employment, and the Company shall have no further obligation with
respect to the payment of the 1998 First Quarter Commissions. If, during
the 1998 Calendar Year, the Employee's employment is terminated due to
the death of the Employee or by the Company for any reason other than
just cause, then the Employee (or his beneficiaries) shall receive
payment of the 1998 First Quarter Commissions for the remainder of the
1998 Calendar Year in the manner set forth in the preceding sentence. In
the event the Employee is not an employee of the Company at the time of
any payment of the 1998 First Quarter Commission, the 1998 First Quarter
Commissions shall be treated as a salary continuation by the Company.
Beginning as of the second quarter of the 1998 Calendar Year and
continuing thereafter, the CHS Sales Commissions shall be in an amount
up to 25% of the amount (subject to allocation as described in (d),
below) of the CHS Fees for the first year of business from a CHS
Employer, which CHS Fees were generated by the sales efforts of the
Employee.
CHS Sales Commissions shall be payable only on CHS Fees
applicable to CHS Employers located in Ohio. With respect to the
acquisition of another MCO by CHS (whether such acquisition is
structured as an asset, stock, merger, or other similar type of
transaction), no CHS Sales Commissions shall be payable with respect to
any fees received by CHS with respect to any employer who, at the time
of such acquisition, had either selected the acquired MCO as its MCO or
been assigned to the acquired MCO by the Bureau (as defined below).
For purposes of the Agreement: (A) "CHS Fees" shall mean the
performance, incentive, and administrative fees payable to CHS under the
agreement dated as of February 12, 1997, and the Addendum thereto dated
February 2, 1998, between the Ohio Bureau of Workers' Compensation (the
"Bureau") and CHS (as such agreement may be further amended, modified,
renewed, extended, supplemented, or replaced), pursuant to which CHS has
agreed to provide medical management services for workers' compensation
claims on behalf of employers who have either selected CHS as their MCO
or been assigned to CHS by the Bureau; and (B) a "CHS Employer" is any
individual or entity (including a corporation, limited liability
company, partnership, or business trust) who has selected CHS as its
MCO.
(c) Annual Deduction. For each Calendar Year, a deduction in the
amount of $82,500 shall be made to the aggregate amount of the CMI Sales
Commissions and the CHS Sales Commissions payable to the Employee. Such
deduction shall be made prior to any payment of such commissions for
such Calendar Year.
<PAGE> 3
(d) Allocation of Commissions. The Employee acknowledges and
agrees that the "25%" sales commission amount described in (a) and (b),
above, represents the total amount of sales commissions which are
payable with respect to any CMI Employer or CHS Employer, as the case
may be, and that the 25% sales commission amount may be allocated by the
Company among all of the salespersons participating in the sales effort
to the CMI Employer or CHS Employer, as the case may be. The Chief
Executive Officer of CMI or CHS, as the case may be, shall have the
authority to allocate the 25% sales commission amount in any manner such
officer deems appropriate, in his reasonable discretion. In the event of
any dispute regarding the allocation by the Chief Executive Officer of
the 25% sales commission amount, such dispute shall be referred to, and
resolved by, the Compensation Committee of Health Power, whose
determination shall be binding and conclusive on all parties.
(e) Miscellaneous. The CMI Sales Commissions and the CHS Sales
Commissions shall be determined on a Calendar Year basis.
The payment of the CMI Sales Commissions shall accrue upon the
execution of the contract with the CMI Employer. Except for the 1998
First Quarter Commissions, the payment of the CHS Sales Commissions
shall accrue upon CHS receiving notification from the Bureau that the
CHS Employer has selected CHS as its MCO. In any event, neither CMI nor
CHS shall be obligated to pay such commissions unless and until the
corresponding CMI Fees or CHS Fees, as the case may be, are received by
CMI or CHS, respectively.
No commissions shall be payable to the Employee with respect to
any entity other than CMI or CHS.
For purposes of the Agreement, a "Calendar Year" shall mean the
period from January 1 through December 31 of the same year.
Section 2. Change of Control Exception. Notwithstanding any language in
the Employment Agreement to the contrary, a change of control of Health Power
shall not be deemed to have occurred if Heartland Advisors, Inc. becomes the
beneficial owner of securities of Health Power representing 20% or more of the
combined voting power of Health Power's then outstanding securities.
Section 3. Definitions. All capitalized terms used in this amendment
which are not otherwise defined herein shall have the respective meanings given
those terms in the Employment Agreement.
Section 4. Captions. The captions of the various sections of this
amendment are not part of the context of this amendment, but are only labels to
assist in locating those sections, and shall be ignored in construing this
amendment.
Section 5. Construction. This document is an amendment to the Employment
Agreement. In the event of any inconsistencies between the provisions of the
Employment Agreement and this amendment,
<PAGE> 4
the provisions of this amendment shall control. Except as modified by this
amendment, the Employment Agreement shall continue in full force and effect
without change.
COMPMANAGEMENT, INC.
By /s/ Bernard F. Master /s/ Jonathan R. Wagner
------------------------------- -------------------------------
Bernard F. Master, D.O., JONATHAN R. WAGNER
Chairman
COMPMANAGEMENT HEALTH
SYSTEMS, INC.
By /s/ Bernard F. Master
-------------------------------
Bernard F. Master, D.O.,
Chairman
<PAGE> 1
Exhibit 10(u)
THIRD AMENDMENT TO EMPLOYMENT AGREEMENT
This amendment is made as of May 28, 1998, in Columbus, Ohio, among
CompManagement, Inc., an Ohio corporation ("CMI"), CompManagement Health
Systems, Inc., an Ohio corporation ("CHS") (CMI and CHS are collectively
referred to as the "Company"), and Richard T. Kurth (the "Employee").
Background Information
----------------------
The Employee and the Company are parties to an Employment Agreement
dated as of July 21, 1995 (the "Original Employment Agreement"), which agreement
was amended as of October 1996 (the "First Amendment"), and as of December 15,
1997 (the "Second Amendment"). The Original Employment Agreement, as amended by
the First Amendment and the Second Amendment, is hereinafter collectively
referred to as the "Employment Agreement." The Employment Agreement, as amended
by this amendment, is hereinafter collectively referred to as the "Agreement."
Statement of Agreement
----------------------
The parties hereby acknowledge the accuracy of the foregoing Background
Information and hereby agree as follows:
Section 1. Sales Commissions. The provisions of this section shall
govern the payment of sales commissions to the Employee and shall supersede and
replace in its entirety Section 5(b) of the Original Employment Agreement,
Section 3 of the First Amendment, and Section 7 of the Second Amendment.
(a) CMI Sales Commissions. The Company shall pay to the Employee
sales commissions on the CMI Fees (as defined below) generated by the
sales efforts of the Employee (the "CMI Sales Commissions"). The CMI
Sales Commissions shall be in an amount up to (i) 25% of the amount
(subject to allocation as described in (d), below) of the CMI Fees for
the first year of business from a CMI Employer (as defined below), which
CMI Fees were generated by the sales efforts of the Employee, plus (ii)
25% of the amount (subject to allocation as described in (d), below) of
the increase in CMI Fees from one Calendar Year (as defined in (e),
below) to the next Calendar Year from CMI Employers who are part of
group rating plans of CMI, which CMI Fees were generated by the sales
efforts of the Employee.
CMI Sales Commissions shall be payable on CMI Fees applicable to
CMI Employers located in any state or jurisdiction in which CMI is
authorized and approved to conduct business. With respect to a business
acquisition by CMI (whether such acquisition is structured as an asset,
stock, merger, or other similar type of transaction), no CMI Sales
Commissions shall be payable with respect to any fees received by CMI
from any employer who, at the time of such acquisition, was a client or
customer of the business acquired by CMI, except to the extent payable
pursuant to (ii), above.
For purposes of the Agreement: (A) "CMI Fees" shall mean fees
payable to CMI for its performance of third party administrative
services for workers' compensation and unemployment compensation claims
on behalf of CMI Employers; and (B) a "CMI Employer" shall mean any
individual or entity (including a corporation, limited liability
company, partnership, or business trust) which has entered into a
contract with CMI pursuant to which CMI performs third party
administrative services for workers' compensation or unemployment
compensation claims on behalf of such individual or entity, but is
limited to employers that are part of group rating plans
<PAGE> 2
(prospective and retrospective group rating plans), state-funded
employers, and self-funded employers.
(b) CHS Sales Commissions. The Company shall pay to the Employee
sales commissions on the CHS Fees (as defined below) generated by the
sales efforts of the Employee (the "CHS Sales Commissions") as set forth
in this section.
For the first quarter of the 1998 Calendar Year, the CHS Sales
Commissions shall be $177,920 (the "1998 First Quarter Commissions"). An
amount equal to 5/12ths of the 1998 First Quarter Commissions shall be
due and payable upon the execution of this amendment by the Employee.
The remaining 1998 First Quarter Commissions shall be payable during the
remainder of the 1998 Calendar Year in equal installments at the same
time and in the same manner as the Employee's base salary is payable.
If, during the 1998 Calendar Year, the Employee's employment is
terminated by the Company for "just cause" (as defined in the Original
Employment Agreement) other than due to the death of the Employee or by
the Employee, then the Employee shall receive payment of the 1998 First
Quarter Commissions payable through the date of termination of
employment, and the Company shall have no further obligation with
respect to the payment of the 1998 First Quarter Commissions. If, during
the 1998 Calendar Year, the Employee's employment is terminated due to
the death of the Employee or by the Company for any reason other than
just cause, then the Employee (or his beneficiaries) shall receive
payment of the 1998 First Quarter Commissions for the remainder of the
1998 Calendar Year in the manner set forth in the preceding sentence. In
the event the Employee is not an employee of the Company at the time of
any payment of the 1998 First Quarter Commission, the 1998 First Quarter
Commissions shall be treated as a salary continuation by the Company.
Beginning as of the second quarter of the 1998 Calendar Year and
continuing thereafter, the CHS Sales Commissions shall be in an amount
up to 25% of the amount (subject to allocation as described in (d),
below) of the CHS Fees for the first year of business from a CHS
Employer, which CHS Fees were generated by the sales efforts of the
Employee.
CHS Sales Commissions shall be payable only on CHS Fees
applicable to CHS Employers located in Ohio. With respect to the
acquisition of another MCO by CHS (whether such acquisition is
structured as an asset, stock, merger, or other similar type of
transaction), no CHS Sales Commissions shall be payable with respect to
any fees received by CHS with respect to any employer who, at the time
of such acquisition, had either selected the acquired MCO as its MCO or
been assigned to the acquired MCO by the Bureau (as defined below).
For purposes of the Agreement: (A) "CHS Fees" shall mean the
performance, incentive, and administrative fees payable to CHS under the
agreement dated as of February 12, 1997, and the Addendum thereto dated
February 2, 1998, between the Ohio Bureau of Workers' Compensation (the
"Bureau") and CHS (as such agreement may be further amended, modified,
renewed, extended, supplemented, or replaced), pursuant to which CHS has
agreed to provide medical management services for workers' compensation
claims on behalf of employers who have either selected CHS as their MCO
or been assigned to CHS by the Bureau; and (B) a "CHS Employer" is any
individual or entity (including a corporation, limited liability
company, partnership, or business trust) who has selected CHS as its
MCO.
(c) Annual Deduction. For each Calendar Year, a deduction in the
amount of $16,481 shall be made to the aggregate amount of the CMI Sales
Commissions and the CHS Sales Commissions payable to the Employee. Such
deduction shall be made prior to any payment of such commissions for
such Calendar Year.
<PAGE> 3
(d) Allocation of Commissions. The Employee acknowledges and
agrees that the "25%" sales commission amount described in (a) and (b),
above, represents the total amount of sales commissions which are
payable with respect to any CMI Employer or CHS Employer, as the case
may be, and that the 25% sales commission amount may be allocated by the
Company among all of the salespersons participating in the sales effort
to the CMI Employer or CHS Employer, as the case may be. The Chief
Executive Officer of CMI or CHS, as the case may be, shall have the
authority to allocate the 25% sales commission amount in any manner such
officer deems appropriate, in his reasonable discretion. In the event of
any dispute regarding the allocation by the Chief Executive Officer of
the 25% sales commission amount, such dispute shall be referred to, and
resolved by, the Compensation Committee of Health Power, whose
determination shall be binding and conclusive on all parties.
(e) Miscellaneous. The CMI Sales Commissions and the CHS Sales
Commissions shall be determined on a Calendar Year basis.
The payment of the CMI Sales Commissions shall accrue upon the
execution of the contract with the CMI Employer. Except for the 1998
First Quarter Commissions, the payment of the CHS Sales Commissions
shall accrue upon CHS receiving notification from the Bureau that the
CHS Employer has selected CHS as its MCO. In any event, neither CMI nor
CHS shall be obligated to pay such commissions unless and until the
corresponding CMI Fees or CHS Fees, as the case may be, are received by
CMI or CHS, respectively.
No commissions shall be payable to the Employee with respect to
any entity other than CMI or CHS.
For purposes of the Agreement, a "Calendar Year" shall mean the
period from January 1 through December 31 of the same year.
Section 2. Change of Control Exception. Notwithstanding any language in
the Employment Agreement to the contrary, a change of control of Health Power
shall not be deemed to have occurred if Heartland Advisors, Inc. becomes the
beneficial owner of securities of Health Power representing 20% or more of the
combined voting power of Health Power's then outstanding securities.
Section 3. Definitions. All capitalized terms used in this amendment
which are not otherwise defined herein shall have the respective meanings given
those terms in the Employment Agreement.
Section 4. Captions. The captions of the various sections of this
amendment are not part of the context of this amendment, but are only labels to
assist in locating those sections, and shall be ignored in construing this
amendment.
Section 5. Construction. This document is an amendment to the Employment
Agreement. In the event of any inconsistencies between the provisions of the
Employment Agreement and this amendment,
<PAGE> 4
the provisions of this amendment shall control. Except as modified by this
amendment, the Employment Agreement shall continue in full force and effect
without change.
COMPMANAGEMENT, INC.
By /s/ Bernard F. Master /s/ Richard T. Kurth
-------------------------------- --------------------------------
Bernard F. Master, D.O., RICHARD T. KURTH
Chairman
COMPMANAGEMENT HEALTH
SYSTEMS, INC.
By /s/ Bernard F. Master
--------------------------------
Bernard F. Master, D.O.,
Chairman
<PAGE> 1
EXHIBIT 21
SUBSIDIARIES OF HEALTH POWER, INC.
1. Health Power HMO, Inc., an Ohio corporation
2. CompManagement, Inc., an Ohio corporation
3. CompManagement Health Systems, Inc., an Ohio corporation
4. M&N Risk Management, Inc., an Ohio corporation
5. M&N Enterprises, Inc., an Ohio corporation
6 Health Power Management Corporation, an Ohio corporation
<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 (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
11, 1999, on our audits of the consolidated financial statements of Health
Power, Inc. and Subsidiaries as of December 31, 1998 and 1997, and for the years
ended December 31, 1998, 1997, and 1996 which report is included in this Annual
Report on Form 10-K.
/s/ PricewaterhouseCoopers LLP
-----------------------------------
PricewaterhouseCoopers LLP
Columbus, Ohio
March 31, 1999
