<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30,
1999 OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 19934 FOR THE TRANSITION PERIOD FROM ______________
_____ TO ____________________________.
Commission file number: 0-23220
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Health Power, Inc.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 31-1145640
- ------------------------------- ------------------------------------
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
1209 Orange Street, Wilmington, Delaware 19801
- ---------------------------------------- ------------------------------------
(Address of principal executive offices) Zip Code
(302) 658-7581
--------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No . Indicate the number of
--- ---
shares outstanding of each of the issuer's classes of common stock, as of the
latest practicable date.
Common Stock, $0.01 Par Value 3,852,119
- ------------------------------------------ ------------------------------------
Class Outstanding at November 3, 1999
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HEALTH POWER, INC. AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
PAGE
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets - as of 3 & 4
September 30, 1999 and December 31, 1998
Consolidated Statements of Operations for the 5
three months ended and nine months
ended September 30, 1999 and September 30, 1998
6
Consolidated Statements of Cash Flows - for the
nine months ended September 30, 1999 and
September 30, 1998
Notes to the Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial 10
Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures about Market
Risk 16
PART II.
OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 17
Signatures 18
</TABLE>
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
HEALTH POWER, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS as of September 30, 1999 and December 31, 1998
<TABLE>
<CAPTION>
September 30, 1999 December 31,
ASSETS (Unaudited) 1998
------ ----------- ----
<S> <C> <C>
Current assets:
Cash and cash equivalents $6,221,998 $11,714,169
Accounts receivable, net 8,006,500 5,671,074
Prepaid expenses and other 455,266 239,900
Current assets of discontinued operations 835,426 3,055,124
Deferred income taxes, net 80,669
------------ ------------
Total current assets 15,519,190 20,760,936
------------ ------------
Property and equipment, net 3,567,588 2,931,414
Goodwill 10,186,072 5,526,736
Non-current assets of discontinued operations 1,210,578 1,403,344
Deposits and other assets 174,678 46,905
------------ ------------
Total assets $ 30,658,106 $30,669,335
============ ============
</TABLE>
THE ACCOMPANYING NOTES ARE IN INTEGRAL PART OF THE FINANCIAL STATEMENTS
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<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEETS, Continued
September 30, December 31,
LIABILITIES AND STOCKHOLDERS' EQUITY (Unaudited) 1998
- ------------------------------------ ----------- ----
<S> <C> <C>
Current liabilities:
Deferred revenues $4,137,856 $8,378,113
Accounts payable 2,087,963 1,323,684
Taxes payable 1,521,354 2,788,701
Current liabilities of discontinued operations 7,334,601 9,163,635
Accrued expenses and other liabilities 870,915 160,442
Notes payable 4,276,736 3,526,736
----------- -----------
Total current liabilities 20,229,425 25,341,311
----------- -----------
Notes payable 4,868,221 2,000,000
Deferred income taxes, net 385,677 222,481
----------- -----------
Total liabilities 25,483,323 27,563,792
----------- -----------
Stockholders' equity:
Common stock 38,521 38,348
Additional paid-in capital 10,852,169 10,809,475
Accumulated (deficit) (5,715,907) (7,742,280)
----------- -----------
Total stockholders' equity 5,174,783 3,105,543
----------- -----------
Total liabilities and stockholders' equity $30,658,106 $30,669,335
=========== ===========
</TABLE>
THE ACCOMPANYING NOTES ARE IN INTEGRAL PART OF THE FINANCIAL STATEMENTS
Page 4
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HEALTH POWER, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
(Unaudited) (Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Contract Revenues $10,571,121 $5,856,203 $25,989,190 $19,128,318
------------ ----------- ------------ -----------
General and administrative expenses 9,754,888 5,697,164 22,795,960 16,029,091
---------- ---------- ----------- ----------
Income from operations 816,233 159,039 3,193,230 3,099,227
Interest income and other, net (114,430) 106,139 (77,045) 387,824
--------- -------- -------- -------
Income from continuing operations
before income taxes 701,803 265,178 3,116,185 3,487,051
Federal, state and local income taxes 184,089 134,944 1,089,812 1,429,304
-------- -------- ---------- ---------
Net income from continuing operations 517,714 130,234 2,026,373 2,057,747
Discontinued operations:
Loss from discontinued operations (net of
tax benefit of $1,239,944 for the three
months ended 1998 and $67,169 for the
nine months ended 1998) - (347,498) - (2,632,154)
---------- --------- ----------- -----------
Net income (loss) $517,714 ($217,264) $2,026,373 ($574,407)
========= ========== =========== ==========
Earnings per share (basic)
Income from continuing operations, per share $0.13 $0.03 $0.53 $0.54
Loss from discontinued operations, per share - (0.09) - (0.69)
------ ------- ------ -------
Net income (loss) per share $0.13 ($0.06) $0.53 ($0.15)
====== ======= ====== =======
Earnings per share (diluted):
Income from continuing operations, per share $0.13 $0.03 $0.53 $0.54
Loss from discontinued operations, per share - (0.09) - (0.69)
------ ------- ------ ------
Net income (loss) per share $0.13 ($0.06) $0.53 ($0.15)
====== ======= ====== =======
</TABLE>
THE ACCOMPANYING NOTES ARE IN INTEGRAL PART OF THE FINANCIAL STATEMENTS
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HEALTH POWER, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
<TABLE>
<CAPTION>
(Unaudited)
1999 1998
---- ----
<S> <C> <C>
Cash flows from operating activities:
Cash (used in) provided by continuing operating activities ($3,755,552) $1,322,728
Cash provided by discontinued operations 562,344 2,667,945
------------ ----------
Net cash (used in) provided by operating activities: (3,193,208) 3,990,673
------------ ----------
Cash flows from investing activities:
Purchase of property and equipment, net (772,340) (673,548)
Acquisition of business (1,590,576) 0
Other assets 0 499,024
------------ ----------
Cash used in continuing operating activities (2,362,916) (174,524)
Cash provided by discontinued operations 21,086 3,977
------------ ----------
Net cash used in investing activities (2,341,830) (170,547)
------------ ----------
Cash flows from financing activities:
Issuance of common stock 42,867 56,557
------------ ----------
Net cash provided by investing activities 42,867 56,557
------------ ----------
Net (decrease) increase in cash and cash equivalents (5,492,171) 3,876,683
Cash and cash equivalents, beginning of year 11,714,169 8,427,483
------------ ----------
Cash and cash equivalents, end of period $6,221,998 $12,304,166
============ ===========
</TABLE>
THE ACCOMPANYING NOTES ARE IN INTEGRAL PART OF THE FINANCIAL STATEMENTS
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HEALTH POWER, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
1. The accompanying consolidated financial statements are unaudited and have
been prepared by the management of Health Power, Inc. In the opinion of
management, they contain the adjustments (all of which are normal and
recurring in nature) necessary to present fairly the financial position,
results of operations, and cash flows for all periods presented. The
results of operations for the three and nine month periods ending September
30, 1999 and 1998 are not necessarily indicative of operating results for a
full year.
The accompanying unaudited consolidated financial statements have been
prepared in accordance with the instructions for Form 10-Q and, therefore,
do not include all information and footnote disclosures normally included
in financial statements prepared in accordance with generally accepted
accounting principles. These financial statements should be read in
conjunction with the December 31, 1998, financial statements and notes
thereto contained in the Company's 1998 Form 10-K.
2. Pursuant to the plan submitted to the Ohio Department of Insurance ("ODI"),
the cash and cash equivalents of the HMO business are designated to pay
liabilities of the HMO. The amount of this cash reported as cash and cash
equivalents on the financial statements is approximately $3.1 million. See
further discussion regarding discontinued operations at footnote 5.
3. On July 16, 1999, CompManagement Health Systems completed the acquisition
of the managed care organization ("MCO") assets of Anthem Managed Comp
("AMC"), a workers' compensation managed care organization operating as a
division of a wholly-owned subsidiary of Anthem Insurance Companies, Inc.
The acquired assets will be operated as a division of CompManagement Health
Systems under the name "Integrated Comp." The aggregate purchase price for
the asset acquisition was $5,208,797. The Company paid approximately $1.59
million of the purchase price at closing and will pay the balance on a
deferred basis over a five-year period. The acquisition has been accounted
for under the purchase method. The purchase price has been allocated as
follows:
Property and equipment $500,576
Goodwill $4,885,668
Accounts Payable $177,447
4. During the first three months of 1999, the Company recorded a reduction in
tax expense from continuing operations by recognizing a deferred tax asset
in the amount of $247,808 based on the utilization of the net operating
loss carryforward. The Company recognizes income tax expense in interim
periods based on an estimated annual effective tax rate, adjusted for
events and circumstances expected to impact the estimated annual rate.
5. On December 29, 1998, the Company's Board of Directors formally approved a
plan to discontinue operations of the Company's HMO. Accordingly, at
December 31, 1998, the operating results of the HMO operations included a
provision for estimated lease costs, employee severance and benefits, and
write-downs of property, plant and equipment during the phase-out period
and a loss on disposal and has been segregated from continuing operations
and reported as a separate line item on the statement of operations. All
operating costs related to HMO operations for the nine month period ending
September 30, 1999 have been charged against the provision for discontinued
operations and management does not believe that an adjustment to the
provision is considered necessary at September 30, 1999.
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The Company has reclassified the operating results of the HMO as
discontinued operations in its prior period financial statements. The
assets and liabilities of such operations at September 30, 1999 and
December 31, 1998, respectively, have been reflected as a separate line
item on the balance sheet based substantially on the original
classification of such assets and liabilities.
6. 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 Ohio Bureau of Workers'
Compensation ("OBWC"). The Company also has an all other segment which
derives its revenues from management fees and interest income. Segment data
includes intercompany revenues, as well as a charge for allocating
corporate expenses to each of its segments. Such amounts have been included
in the elimination column to reconcile to consolidated totals.
<TABLE>
<CAPTION>
Segment Reporting for Continuing Operations:
NINE MONTHS ENDED SEPTEMBER 30, 1999
-----------------------------------------------------------------------------------
MANAGED CARE CONSULTING OTHER ELIMINATIONS TOTAL
SERVICES SERVICES
------------------- --------------- -------------- ---------------- ---------------
<S> <C> <C> <C> <C> <C>
Revenues to unaffiliated $11,313,773 14,675,417 $ - $ - 25,989,190
customers
Intercompany revenues 1,276,924 (1,276,924)
Income before taxes 147,317 3,006,692 4,666,468 (4,704,292) 3,166,185
NINE MONTHS ENDED SEPTEMBER 30, 1998
------------------------------------
Revenues to unaffiliated $10,157,300 $8,971,018 $ - $ - $19,128,318
customers
Intercompany revenues 1,886,735 (1,886,735)
Income before taxes 1,345,129 2,139,360 11,647,515 (11,644,953) 3,487,051
THREE MONTHS ENDED SEPTEMBER 30, 1999
-------------------------------------
Revenues to unaffiliated $ 5,483,144 5,087,977 $ - $ - $10,571,121
customers
Intercompany revenues 316,433 (316,433)
Income before taxes (696,978) 1,420,428 517,714 (539,361) 701,803
THREE MONTHS ENDED SEPTEMBER 30, 1999
-------------------------------------
Revenues to unaffiliated $52,815,240 3,040,963 $ - $ - $ 5,856,203
customers
Intercompany revenues 632,431 (632,431)
Income before taxes (244,090) 506,894 370,350 (367,976) 265,178
</TABLE>
<TABLE>
<CAPTION>
7. Supplemental Disclosures for Earnings Per Share:
THREE MONTHS ENDED
SEPTEMBER 30,
1999 1998
<S> <C> <C>
BASIC:
Earnings:
Income from continuing operations $517,714 $130,234
Loss from discontinued operations (347,498)
------------ ------------
Net income (loss) $517,714 $(217,264)
------------ ------------
Shares:
Weighted average common shares outstanding 3,851,172 3,831,151
------------ ------------
Income from continuing operations per common share, basic $0.13 $0.03
Loss from discontinued operations per share, basic (0.09)
------------ ------------
Net income (loss) per common share, basic $0.13 $(0.06)
------------ ------------
</TABLE>
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<TABLE>
<CAPTION>
DILUTED: 1999 1998
<S> <C> <C>
Earnings:
Income from continuing operations $517,714 $130,234
Loss from discontinued operations - (347,498)
--------- ---------
Net income $517,714 $(217,264)
--------- ---------
Shares:
Weighted average common shares outstanding 3,851,172 3,831,151
--------- ---------
Add: dilutive effect of outstanding options 0 866
--------- ---------
Weighted average common shares outstanding, diluted 3,851,172 3,832,017
--------- ---------
Income from continuing operations per common share, diluted $0.13 $0.03
Loss from discontinued operations per share, diluted - (0.09)
--------- ---------
Net income (loss) per common share, diluted $0.13 $(0.06)
--------- ---------
</TABLE>
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
1999 1998
<S> <C> <C>
BASIC:
Earnings:
Income from continuing operations $2,026,373 $2,057,747
Loss from discontinued operations - (2,632,154)
---------- ----------
Net income (loss) $2,026,373 $ (574,407)
---------- ----------
Shares:
Weighted average common shares outstanding 3,843,470 3,827,074
---------- ----------
Income from continuing operations per common share, basic $0.53 $0.54
Loss from discontinued operations per share, basic - (0.69)
---------- ----------
Net income (loss) per common share, basic $0.53 $ (0.15)
---------- ----------
DILUTED:
Earnings:
Income from continuing operations $2,026,373 $2,057,747
Loss from discontinued operations - (2,632,154)
---------- ----------
Net income (loss) $2,026,373 $ (574,407)
---------- ----------
Shares:
Weighted average common shares outstanding 3,843,470 3,827,074
Add: dilutive effect of outstanding options 98 15,688
---------- ----------
Weighted average common shares outstanding, diluted 3,843,568 3,842,762
---------- ----------
Income from continuing operations per common share, diluted $0.53 $0.54
Loss from discontinued operations per share, diluted $ - $(0.69)
---------- ----------
Net income (loss) per common share, diluted $0.53 $(0.15)
---------- ----------
</TABLE>
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Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
Health Power, Inc., through its subsidiaries, CompManagement, Inc.
("CompManagement"), CompManagement Health Systems, Inc. ("CompManagement Health
Systems"), and M&N Risk Management, Inc. ("M&N Risk Management"), is an
independent provider of comprehensive cost containment and medical management
services designed to minimize the costs of workers' and unemployment
compensation benefits for employers. Health Power, Inc. and these subsidiaries
are collectively referred to as the "Company."
Through CompManagement and M&N Risk Management, the Company serves as
a third party administrator (a "TPA") for workers' and unemployment compensation
claims and provides claims management, risk management, and medical cost
containment services primarily to Ohio employers. The Company is one of the
largest workers' compensation TPAs in Ohio, currently serving approximately
19,000 employers located throughout Ohio. Through CompManagement Health Systems
and its division, Integrated Comp, the Company owns and operates two state-wide
certified managed care organizations ("MCOs") under Ohio's Health Partnership
Program and provides medical management services for workers' compensation
claims. Together, CompManagement Health Systems and Integrated Comp currently
serve approximately 45,000 employers located throughout Ohio. Because all
workers' compensation claims are reimbursed by the Ohio Bureau of Workers'
Compensation, the Company does not assume any risk for the payment of medical or
disability benefits to employees with respect to workers' compensation claims.
On July 16, 1999, CompManagement Health Systems acquired the MCO assets
of Anthem Managed Comp, a workers' compensation managed care organization
operated as a division of a wholly-owned subsidiary of Anthem Insurance
Companies, Inc. The acquired assets are operated as a division of CompManagement
Health Systems under the name "Integrated Comp." 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
Integrated Comp are not included in the Company's results of operations prior to
July 16, 1999.
On December 31, 1998, CompManagement acquired all of the outstanding
capital stock of M&N Risk Management and a related entity. This acquisition was
accounted for under the purchase method of accounting. As required by the
purchase method of accounting, the results of operations of M&N Risk Management
are not included in the Company's results of operations for the first nine
months of 1998.
On December 29, 1998, the Board of Directors of Health Power, Inc.
formally approved a plan to discontinue the operations of Health Power HMO,
Inc., its health maintenance
10
<PAGE> 11
organization subsidiary ("Health Power HMO"). Accordingly, the operating results
of Health Power HMO have been segregated from continuing operations and are
reported separately as discontinued operations. On May 1, 1999, Health Power HMO
ceased operations because its certificate of authority was revoked by the Ohio
Department of Insurance ("ODI"). Health Power HMO is currently winding-up its
business on its own, subject to the ODI's continuing supervision, but without
judicial involvement. Health Power HMO is in the process of collecting its
receivables and other assets and selling or otherwise disposing of its
properties on the most favorable terms and conditions obtainable under the
circumstances. Upon the completion of this process, Health Power HMO will pay,
or make provision for payment of, claims against it, to the extent funds are
available. Health Power HMO intends to pay its creditors in a fair and equitable
manner, in order of priority, and on a pro rata basis. Health Power HMO
anticipates that its windup will be completed by the end of 1999.
The Company has two reportable segments for its continuing operations,
TPA services and MCO services, which were determined based upon its method of
internal reporting. Each of these segments are managed separately. The Company
also has an all other segment which derives its revenues from management fees
and interest income.
The following discussion should be read in conjunction with
the consolidated financial statements, notes, and tables included elsewhere in
this report and in the Company's Form 10-K for its fiscal year ended December
31, 1998.
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1999, COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 1998
Revenues from continuing operations increased $4.7 million, or 80.5%,
to $10.6 million during the third quarter of 1999, from $5.9 million for the
same period in 1998. Revenues increased, primarily as a result of the inclusion
of revenues from M&N Risk Management and from Integrated Comp.
General and administrative ("G&A") expenses increased $4.1 million to
$9.8 million, or 92.3% of revenues, for the third quarter of 1999, as compared
to $5.7 million, or 97.3% of revenues, for the same period in 1998. G&A expenses
decreased in 1999 as a percentage of revenues primarily due to the inclusion of
revenues from M&N Risk Management and Integrated Comp which enabled the
administrative expenses to be spread over a larger revenue base.
Interest income and other decreased $221,000 to ($114,000) for the
third quarter of 1999, from $106,000 for the same period in 1998. This decrease
resulted primarily from the recording of interest expense related to the M&N
Risk Management acquisition.
Income tax expense was $184,000 in the third quarter of 1999, or an
effective tax rate of 26.2%, as compared to $135,000 for the same period in
1998, or an effective tax rate of 50.9%. Third quarter 1999 tax expense reflects
an adjustment resulting from a review of the year to date
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<PAGE> 12
tax accrual. The company recognizes income tax expense in interim periods based
on an estimated annual effective tax rate, adjusted quarterly for events and
circumstances expected to impact the estimated annual rate.
As a result of the foregoing, income from continuing operations was
$518,000, or basic and diluted earnings per share of $0.13, for the third
quarter of 1999, as compared to income from continuing operations of $130,000,
or basic and diluted earnings per share of $0.03, for the same period in 1998.
There was no income or loss from discontinued operations for the third
quarter of 1999. The loss from discontinued operations was $347,000, net of
taxes, during the third quarter of 1998. The Company recorded an accrual for
anticipated further losses from discontinued operations at the end of 1998.
The Company had net income of $518,000, or basic and diluted earnings
per share of $0.13, for the third quarter of 1999, as compared to a net loss of
$217,000, or basic and diluted earnings per share of $(0.06) for the same period
in 1998. There were 3,851,172 basic and diluted weighted average shares of
common stock and common stock equivalents outstanding for the third quarter
ending September 30, 1999, and 3,831,151 basic and 3,832,017 diluted weighted
average shares of common stock and common stock equivalents outstanding at the
third quarter ending September 30, 1998.
NINE MONTHS ENDED SEPTEMBER 30, 1999, COMPARED TO NINE MONTHS ENDED SEPTEMBER
30, 1998
Revenues from continuing operations increased $6.9 million, or 35.9%,
to $26.0 million during the first nine months of 1999, from $19.1 million for
the same period in 1998. Revenues increased primarily as a result of the
inclusion of revenues from M&N Risk Management and from Integrated Comp.
G&A expenses increased $6.8 million to $22.8 million, or 87.7% of
revenues, for the first nine months of 1999, as compared to $16.0 million, or
83.8% of revenues, for the same period in 1998. G&A expenses increased in 1999
as a percentage of revenues primarily due to 1998 first nine months MCO revenues
including approximately $1.5 million of one-time incentive payments related to
the acceptance of workers' compensation claims with dates of injury which
preceded the commencement date of the Health Partnership Program. These one-time
incentive payments were reported as revenue during the first quarter of 1998.
Interest income and other decreased $465,000 to ($77,000) for the first
nine months of 1999, from $388,000 for the same period in 1998. This decrease
resulted primarily from interest expense related to the M&N Risk Management
acquisition.
Income tax expense was $1.1 million in the first nine months of 1999,
or an effective tax rate of 35.0%, as compared to $1.4 million for the same
period in 1998, or an effective tax rate of 41.0%. The reduction in the tax rate
is due to the first quarter 1999 recognition of a deferred tax asset based on
the utilization of the net operating loss carry forward from discontinued
operations.
12
<PAGE> 13
As a result of the foregoing, income from continuing operations was
$2.0 million, or basic and diluted earnings per share of $0.53, for the first
nine months of 1999, as compared to income from continuing operations of $2.1
million, or basic and diluted earnings per share of $0.54, for the same period
in 1998.
There was no net income or loss from discontinued operations for the
first nine months of 1999. The net loss from discontinued operations was $2.6
million, net of taxes, or basic and diluted earnings per share of $(0.69), for
the first nine months of 1998. The Company recorded an accrual for anticipated
further losses from discontinued operations at the end of 1998.
The Company had net income of $2.0 million, or basic and diluted
earnings per share of $0.53, for the first nine months of 1999, as compared to
net loss of $574,000, or basic and diluted earnings per share of $(0.15), for
the same period in 1998. There were 3,843,470 basic and 3,843,568 diluted
average shares of common stock and common stock equivalents outstanding at
September 30, 1999, and 3,827,074 basic and 3,842,762 diluted weighted average
shares of common stock and common stock equivalents outstanding at September 30,
1998.
LIQUIDITY AND CAPITAL RESOURCES
CONTINUING OPERATIONS
The Company finances its continuing operations through internally
generated funds and funds on hand, and its principal sources of cash for
continuing operations are revenues from TPA and MCO services. The Company has
financed its acquisitions primarily through bank and seller financing. The
Company's principal capital needs for continuing operations are to fund
expenditures for continued growth and for possible acquisitions.
Working capital of $2.9 million from continuing operations existed at
September 30, 1999, as compared to a working capital deficit from continuing
operations of $1.1 million at December 31, 1998. The Company was able to
generate cash from continuing operations sufficient to cure the working capital
deficit during the first nine months of 1999.
At September 30, 1999, cash and cash equivalents from continuing
operations were $3.0 million, a decrease of $6.1 million from $9.1 million at
December 31, 1998. This decrease was attributable to a decrease in cash balances
from TPA operations and a $1.59 million payment made in connection with the
purchase of Integrated Comp.
Cash used in continuing operating activities was $3.8 million for the
first nine months of 1999, as compared to cash provided of $1.3 million during
the same period of 1998.
As previously described, CompManagement acquired all of the outstanding
capital stock of M&N Risk Management and a related entity on December 31, 1998.
The purchase price for this acquisition, after a post-closing adjustment, was
$5,526,736. This amount will be subject to a further downward adjustment based
upon the difference in the accounts receivables reflected on the closing date
balance sheet of M&N Risk Management and the actual accounts receivable
collected within 180 days of the closing. It is anticipated this adjustment will
be finalized during
13
<PAGE> 14
the fourth quarter of 1999. The purchase price was financed by a $3,000,000
promissory note from National City Bank (the "Bank") and by a $2,526,736
promissory note payable to the seller. The promissory note from the Bank is due
on demand, accrues interest at the Bank's prime rate (currently 7.8%), and is
secured by a lien on all business assets of CompManagement, CompManagement
Health Systems, and M&N Risk Management. The seller's promissory note is a
three-year note maturing on December 31, 2001. This note provides for principal
payments in the amounts of $526,736, $1,000,000, and $1,000,000 due on December
31, 1999, 2000, and 2001, respectively, and interest payments at the rate of 7%
per annum due quarterly over the term of the note. The payment of the seller's
promissory note is guaranteed by M&N Risk Management and is secured by a lien on
all business assets of CompManagement, CompManagement Health Systems, and M&N
Risk Management. The seller's promissory note and all liens granted with respect
to such note are subordinated in all respects to the Bank's promissory note.
As previously described, CompManagement Health Systems
acquired the MCO assets of Anthem Managed Comp on July 16, 1999. The purchase
price for this acquisition, after a post-closing adjustment, was $5,208,797. The
Company paid approximately $1.59 million of the purchase price at the closing
and will pay the balance on a deferred basis over a five-year period. The
Company funded the payment made at the closing with funds from its current cash
balances and intends to fund the balance of the purchase price with funds
generated from internal operations.
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 and
cash on hand will be sufficient to fund its anticipated cash needs for working
capital, acquisitions, and expenditures for continuing operations for the next
12 months.
DISCONTINUED OPERATIONS
As previously described, on May 1, 1999, Health Power HMO ceased
operations because its certificate of authority was revoked by the ODI. Health
Power HMO is currently winding-up its business on its own, subject to the
Department's continuing supervision, but without judicial involvement. Health
Power HMO is in the process of collecting its receivables and other assets and
selling or otherwise disposing 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.
14
<PAGE> 15
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 billing
systems and instrumentation.
The Company created a committee to address Year 2000 issues. This
committee actively assessed the Company's Year 2000 readiness and, as part of
these assessments, developed a compliance plan which included a timetable for
identifying, evaluating, resolving, and testing the Company's IT systems for
Year 2000 issues. This committee included members of the Company's senior
management and information systems departments to ensure that issues were
adequately addressed and completed in a timely manner.
The timetable provided 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. The testing phase was complete by the end of the third quarter of
1999. In that phase, the Company performed a system-wide test on all of its
proprietary and non-proprietary IT systems and applications for Year 2000
compliance. The Company currently believes that all of its IT systems are Year
2000 compliant. 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 are Year
2000 compliant. The Company also performed a year 2000 readiness review if
Integrated Comp in connection with the acquisition of that company, and the
vendors have certified all applications as being year 2000 compliant. The
Company will complete a certification verification by the end of November, 1999.
The Company's Year 2000 committee worked with significant third party vendors to
verify that they are Year 2000 compliant.
The Company currently believes that any Year 2000 issue will be
resolved in a timely manner and that costs associated with Year 2000 compliance
issues will not be material to the Company's financial position or results of
operations. However, there is a risk that third parties will not achieve Year
2000 compliance in a timely manner, which could have an adverse effect on the
Company's operations. The Company's Year 2000 committee intends to develop
appropriate contingency plans as necessary to address Year 2000 compliance
issues as they arise.
The Company currently believes that the primary costs associated with
Year 2000 compliance issues are in-house time costs associated with
administration, review and testing of systems. The costs incurred thus far have
been less than $100,000, and the Company believes additional costs will not
exceed $50,000 for the remainder of 1999.
15
<PAGE> 16
SAFE HARBOR STATEMENT UNDER THE SECURITIES LITIGATION REFORM ACT OF 1995
Some of the information in this Form 10-Q contains "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. The words "believe," "expect," "anticipate," "project," and similar
expressions, among others, identify forward-looking statements. Forward-looking
statements speak only as of the date the statement was made. These
"forward-looking statements" are subject to certain risks, uncertainties, and
other factors that could cause the Company's actual results to differ materially
from those projected, anticipated, or implied. Such risks, uncertainties, and
factors that might cause such a difference include, but are not limited to,
potential legal actions related to the Company's HMO and its discontinued
operations, the Company's dependence upon its MCO contract and group rating
plans for revenues, its dependence upon workers' compensation plans and programs
administered by governmental agencies pursuant to state statutes and
regulations, in particular Ohio's Health Partnership Program and group rating
program, its ability to achieve Year 2000 compliance, risks associated with
acquisitions, in particular the Company's ability to locate and acquire other
businesses and to integrate these newly acquired operations effectively with its
existing businesses, its dependence on certain key personnel, and the Company's
ability to effectively compete with larger and more diverse competitors. These
and other risks, uncertainties, and factors that could materially affect the
financial results of the Company are further discussed in the Company's filings
with the Securities and Exchange Commission, including the Form 10-K for the
Company's fiscal year ended December 31, 1998.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
There is no change in the quantitative and qualitative disclosures
about the Company's market risk from the disclosures contained in the Company's
Form 10-K for its fiscal year ended December 31, 1998.
16
<PAGE> 17
Part II - Other Information
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
--------
27 Financial Data Schedule
(b) Reports on Form 8-K
-------------------
On July 30, 1999 the Company filed a Form 8-K (dated
July 30, 1999) (the "Initial Form 8-K") reporting
under Item 2 of such report the acquisition by
CompManagement Health Systems, Inc. of substantially
all of the assets used in the operation of Anthem
Managed Comp ("AMC"), a division of Community
Insurance Company, an Ohio corporation ("CIC") and a
wholly owned subsidiary of Anthem Insurance
Companies, Inc., an Indiana corporation ("AIC"), on
July 16, 1999.
On September 30, 1999, the Company filed a Form 8-K/A
(dated September 30, 1999) (the "Amended Form 8-K")
amending the Initial Form 8-K. The Amended Form 8-K
included under Item 7 of such report: (i) the audited
balance sheets of AMC as of December 31, 1998 and
1997, the results of their operations and their cash
flows for the years ended December 31, 1998 and 1997,
and the period from October 1, 1996 (date of
commencement) to December 31, 1996 and the notes
thereto, along with the report of independent
accountants; and (ii) the unaudited proforma combined
balance sheets as of December 31, 1998 and June 30,
1999, and the results of operations for the year
ended December 31, 1998 and the six months ended June
30, 1999.
Page 17
<PAGE> 18
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THE
REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY THE
UNDERSIGNED THEREUNTO DULY AUTHORIZED.
HEALTH POWER, INC.
DATE: NOVEMBER 15, 1999 BY /S/ BERNARD F. MASTER, DO
-----------------------------------------
BERNARD F. MASTER, DO, PRESIDENT,
CHIEF OPERATING OFFICER AND CHAIRMAN
OF THE BOARD
DATE: NOVEMBER 15, 1999 BY /S/ RONALD J. WURTZ
-----------------------------------------
RONALD J. WURTZ, CHIEF FINANCIAL OFFICER
AND PRINCIPAL ACCOUNTING OFFICER
Page 18
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