<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 JUNE 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
-------
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 3,850,267
- ----------------------------------- ---------------------------------------
Class Outstanding at August 6, 1999
Page 1
<PAGE> 2
<TABLE>
HEALTH POWER, INC. AND SUBSIDIARIES
INDEX
<CAPTION>
PAGE
<S> <C> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets - as of
June 30, 1999 and December 31, 1998 3 & 4
Consolidated Statements of Operations for the
three months ended and six months ended
June 30, 1999 and June 30, 1998 5
Consolidated Statements of Cash Flows - for the six months
ended June 30, 1999 and June 30, 1998 6
Notes to the Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 10
PART II. Item 3. Quantitative and Qualitative Disclosures about Market Risk 16
OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders 17
Item 6. Exhibits and Reports on Form 8-K 17
Signatures 18
</TABLE>
Page 2
<PAGE> 3
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
<TABLE>
HEALTH POWER, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS as of June 30, 1999 and December 31, 1998
<CAPTION>
June 30, 1999 December 31,
ASSETS (Unaudited) 1998
------ ----------- ----
<S> <C> <C>
Current assets:
Cash and cash equivalents $10,834,648 $11,714,169
Accounts receivable, net 5,993,872 5,671,074
Prepaid expenses and other 409,798 239,900
Current assets of discontinued operations 786,889 3,055,124
Deferred income taxes, net 0 80,669
----------- -----------
Total current assets 18,025,207 20,760,936
----------- -----------
Property and equipment, net 2,884,217 2,931,414
Goodwill 5,419,488 5,526,736
Non-current assets of discontinued operations 1,237,503 1,403,344
Deposits and other assets 74,395 46,905
----------- -----------
Total assets $27,640,810 $30,669,335
=========== ===========
</TABLE>
The accompanying notes are an integral part of the financial statements
Page 3
<PAGE> 4
<TABLE>
CONSOLIDATED BALANCE SHEETS, Continued
<CAPTION>
June 30, 1999 December 31,
LIABILITIES AND STOCKHOLDERS' EQUITY (Unaudited) 1998
- ------------------------------------ ----------- ----
<S> <C> <C>
Current liabilities:
Deferred revenues $ 6,495,876 $ 8,378,113
Accounts payable 975,460 1,323,684
Taxes payable 1,907,212 2,788,701
Current liabilities of discontinued operations 7,495,462 9,163,635
Accrued expenses and other liabilities 220,636 160,442
Note payable 3,526,736 3,526,736
----------- -----------
Total current liabilities 20,621,382 25,341,311
----------- -----------
Note payable 2,000,000 2,000,000
Deferred income taxes, net 365,601 222,481
----------- -----------
Total liabilities 22,986,983 27,563,792
----------- -----------
Stockholders' equity:
Common stock 38,503 38,348
Additional paid-in capital 10,848,945 10,809,475
Retained (deficit) (6,233,621) (7,742,280)
----------- -----------
Total stockholders' equity 4,653,827 3,105,543
----------- -----------
Total liabilities and stockholders' equity $27,640,810 $30,669,335
=========== ===========
</TABLE>
The accompanying notes are an integral part of the financial statements
Page 4
<PAGE> 5
<TABLE>
HEALTH POWER, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<CAPTION>
(Unaudited) (Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues:
Contract $7,987,650 $ 5,904,491 $15,418,069 $13,272,115
---------- ----------- ----------- -----------
Expenses:
Selling, general and administrative 6,677,244 5,257,078 13,041,072 10,331,927
---------- ----------- ----------- -----------
Income from operations 1,310,406 647,413 2,376,997 2,940,188
Interest income and other, net 26,785 111,518 37,385 281,685
---------- ----------- ----------- -----------
Income from continuing operations
before income taxes 1,337,191 758,931 2,414,382 3,221,873
Federal, state and local income taxes 699,193 357,950 905,723 1,294,360
---------- ----------- ----------- -----------
Net income from continuing operations 637,998 400,981 1,508,659 1,927,513
Discontinued operations:
Loss from discontinued operations (net of
tax benefit of $1,172,775 and $878,331) -- (1,712,905) -- (2,284,656)
---------- ----------- ----------- -----------
Net income (loss) $ 637,998 $(1,311,924) $ 1,508,659 $ (357,143)
========== =========== =========== ===========
Earnings per share (basic)
Income from continuing operations, per share $ 0.17 $ 0.10 $ 0.39 $ 0.50
Loss from discontinued operations, per share -- (0.45) -- (0.60)
---------- ----------- ----------- -----------
Net income (loss) per share $ 0.17 $ (0.34) $ 0.39 $ (0.09)
========== =========== =========== ===========
Earnings per share (diluted):
Income from continuing operations, per share $ 0.17 $ 0.10 $ 0.39 $ 0.50
Loss from discontinued operations, per share -- (0.44) -- (0.59)
---------- ----------- ----------- -----------
Net income (loss) per share $ 0.17 $ (0.34) $ 0.39 $ (0.09)
========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of the financial statements
Page 5
<PAGE> 6
<TABLE>
HEALTH POWER, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND 1998
<CAPTION>
(Unaudited)
1999 1998
---- ----
<S> <C> <C>
Cash flows (used in) provided by operating activities:
Cash (used in) provided by continuing operating activities $(1,295,849) $ 3,154,521
Cash provided by (used in) discontinued operations 765,502 (2,088,306)
----------- -----------
Net cash (used in) provided by operating activities: (530,347) 1,066,215
----------- -----------
Cash flows used in investing activities:
Purchase of property and equipment, net (389,199) (548,601)
Other assets 0 501,003
----------- -----------
Cash used in continuing operating activities (389,199) (47,598)
Cash provided by 400 3,977
----------- -----------
Net cash used in investing activities (388,799) (43,621)
----------- -----------
Cash flows provided by financing activities:
Issuance of common stock 39,625 49,237
----------- -----------
Net cash provided by investing activities 39,625 49,237
----------- -----------
Net (decrease) increase in cash and cash equivalents (879,521) 1,071,831
Cash and cash equivalents, beginning of year 11,714,169 8,427,483
----------- -----------
Cash and cash equivalents, end of period $10,834,648 $ 9,499,314
=========== ===========
</TABLE>
The accompanying notes are an integral part of the financial statements
Page 6
<PAGE> 7
HEALTH POWER, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
1. The accompanying consolidated financial statements are unaudited and have
been prepared by Health Power, Inc. In the opinion of management, they
contain the adjustments (all of which are normal and recurring in nature)
necessary to present fairly the financial position, results of operations,
and cash flows for all periods presented. The results of operations for the
period ended June 30, 1999 are not necessarily indicative of operating
results for a full year.
The accompanying unaudited consolidated financial statements have been
prepared in accordance with the instructions for Form 10-Q and, therefore,
do not include all information and footnote disclosures normally included
in financial statements prepared in accordance with generally accepted
accounting principles. These financial statements should be read in
conjunction with the December 31, 1998, financial statements and notes
thereto contained in the Company's 1998 Form 10-K.
2. On July 16, 1999, CompManagement Health Systems completed the acquisition
of the MCO assets of Anthem Managed Comp ("AMC"), a workers' compensation
managed care organization 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 approximately
$6.2 million and is subject to a post-closing adjustment.
3. 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.
4. On December 29, 1998, the Company's Board of Directors formally approved a
plan to discontinue operations of the Company's HMO. Accordingly, at
December 31, 1998, the operating results of the HMO operations included a
provision for estimated lease costs, employee severance and benefits, and
write-downs of property, plant and equipment during the phase-out period
and a loss on disposal and has been segregated from continuing operations
and reported as a separate line item on the statement of operations. All
operating results for the six month period ending June 30, 1999 have been
recorded against the provision for discontinued operations and management
does not believe that an adjustment to the provision is considered
necessary at June 30, 1999.
The Company has restated its prior financial statements to present the
operating results of the HMO as discontinued operations. The assets and
liabilities of such operations at June 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.
5. 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. The Company also has
an all other segment which derives its revenues from management fees and
interest income. Segment data includes intercompany revenues,
Page 7
<PAGE> 8
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.
Segment Reporting for Continuing Operations:
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30, 1999
------------------------------
MANAGED CARE CONSULTING OTHER ELIMINATIONS TOTAL
SERVICES SERVICES
-------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenues to unaffiliated customers $5,830,629 $9,587,440 $ -- $ -- $15,418,069
Intercompany revenues 960,491 (960,491)
Income before taxes 844,295 1,586,264 4,148,754 (4,164,931) 2,414,382
<CAPTION>
SIX MONTHS ENDED JUNE 30, 1998
------------------------------
<S> <C> <C> <C> <C> <C>
Revenues to unaffiliated customers $7,342,060 $5,930,055 $ -- $ -- $13,272,115
Intercompany revenues 1,254,304 (1,254,304)
Income before taxes 1,589,219 1,632,466 11,277,165 (11,276,977) 3,221,873
</TABLE>
6. Supplemental Disclosures for Earnings Per Share:
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30
1999 1998
<S> <C> <C>
BASIC:
Earnings:
Income from continuing operations $ 637,998 $ 400,981
Loss from discontinued operations -- (1,712,905)
---------- -----------
Net income (loss) $ 637,998 $(1,311,924)
---------- -----------
Shares:
Weighted average common shares outstanding 3,844,229 3,829,457
---------- -----------
Income from continuing operations per common share,
basic $ 0.17 $ 0.10
Loss from discontinued operations per share, basic -- (0.45)
---------- -----------
Net income (loss) per common share, basic $ 0.17 $ (0.34)
---------- -----------
DILUTED:
Earnings:
Income from continuing operations $ 637,998 $ 400,981
Loss from discontinued operations -- (1,712,905)
---------- -----------
Net income $ 637,998 $(1,311,924)
---------- -----------
Shares:
Weighted average common shares outstanding 3,844,229 3,829,457
Add: dilutive effect of outstanding options 0 26,785
---------- -----------
Weighted average common shares outstanding,
diluted 3,844,229 3,856,242
---------- -----------
Income from continuing operations per common share,
diluted $ 0.17 $ 0.10
Loss from discontinued operations per share, diluted -- (0.44)
Net income (loss) per common share, diluted $ 0.17 $ (0.34)
---------- -----------
</TABLE>
Page 8
<PAGE> 9
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30
1999 1998
<S> <C> <C>
BASIC:
Earnings:
Income from continuing operations $1,508,659 $ 1,927,513
Loss from discontinued operations -- (2,284,656)
---------- -----------
Net income (loss) $1,508,659 $ (357,143)
---------- -----------
Shares:
Weighted average common shares outstanding 3,839,555 3,825,002
---------- -----------
Income from continuing operations per common share, basic $ 0.39 $ 0.50
Loss from discontinued operations per share, basic -- (0.60)
---------- -----------
Net income (loss) per common share, basic $ 0.39 $ (0.09)
---------- -----------
DILUTED:
Earnings:
Income from continuing operations $1,508,659 $ 1,927,513
Loss from discontinued operations -- (2,284,656)
---------- -----------
Net income (loss) $1,508,659 $ (357,143)
---------- -----------
Shares:
Weighted average common shares outstanding 3,839,555 3,825,002
Add: dilutive effect of outstanding options 0 22,983
---------- -----------
Weighted average common shares outstanding,
diluted 3,839,555 3,847,985
---------- -----------
Income from continuing operations per common share,
diluted $ 0.39 $ 0.50
Loss from discontinued operations per share, diluted $ -- $ (0.59)
---------- -----------
Net income (loss) per common share, diluted $ 0.39 $ (0.09)
---------- -----------
</TABLE>
Page 9
<PAGE> 10
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 47,000 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 December 31, 1998, CompManagement acquired all of the outstanding
capital stock of M&N Risk Management and a related entity. This acquisition was
accounted for under the purchase method of accounting for business combinations.
As required by the purchase method of accounting, the results of operations of
M&N Risk Management are not included in the Company's results of operations for
the first six months of 1998 discussed below.
On December 29, 1998, the Board of Directors of Health Power, Inc.
formally approved a plan to discontinue the operations of Health Power HMO,
Inc., its health maintenance organization subsidiary ("Health Power HMO").
Accordingly, the operating results of Health Power HMO have been segregated from
continuing operations and are reported separately as discontinued operations. On
May 1, 1999, Health Power HMO ceased operations because its certificate of
authority was revoked by the Ohio Department of Insurance. 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 attempting to
sell or otherwise dispose 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
Page 10
<PAGE> 11
the extent funds are available. Health Power HMO intends to pay its creditors in
a fair and equitable manner, in order of priority, and on a pro rata basis.
Health Power HMO anticipates that its windup will be completed by the end of
1999.
The Company has two reportable segments for its continuing operations,
TPA services and MCO services, which were determined based upon its method of
internal reporting. Each of these segments is managed separately. The Company
also has an all other segment which derives its revenues from management fees
and interest income.
The following discussion should be read in conjunction with the
consolidated financial statements, notes, and tables included elsewhere in this
report and in the Company's Form 10-K for its fiscal year ended December 31,
1998.
RECENT DEVELOPMENTS
COMPLETION OF ACQUISITION OF MCO ASSETS OF ANTHEM MANAGED COMP
On July 16, 1999, CompManagement Health Systems completed the
previously announced acquisition of the MCO assets of Anthem Managed Comp
("AMC"), a workers' compensation managed care organization 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." With this acquisition, CompManagement Health Systems expanded
its operations into Kentucky and Indiana.
OTC BULLETIN BOARD TRADING BEGINS
On June 25, 1999, the Company's common stock began trading on the OTC
Bulletin Board under the symbol HPWR. The Company's last day of trading on the
Nasdaq National Market was June 24, 1999.
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 1999, COMPARED TO THREE MONTHS ENDED JUNE 30, 1998
Revenues from continuing operations increased $2.1 million, or 35.3%,
to $8.0 million during the second quarter of 1999, from $5.9 million for the
same period in 1998. Revenues from TPA services increased $1.9 million primarily
as a result of the inclusion of revenues from M&N Risk Management.
General and administrative ("G&A") expenses increased $1.4 million to
$6.7 million, or 83.6% of revenues, for the second quarter of 1999, as compared
to $5.3 million, or 89.0% 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 which enabled the administrative expenses to
be spread over a larger revenue base.
Page 11
<PAGE> 12
Interest income and other decreased $85,000 to $26,800 for the second
quarter of 1999, from $111,500 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 $699,000 in the second quarter of 1999, or an
effective tax of 52.3%, as compared to $358,000 for the same period in 1998, or
an effective tax rate of 47.2%. Second quarter 1999 tax expense reflects an
adjustment of the year to date tax accrual primarily to record the amortization
of a deferred tax asset established relative to the acquisition of M&N Risk
Management.
As a result of the foregoing, income from continuing operations was
$638,000, or basic and diluted earnings per share of $0.17, for the second
quarter of 1999, as compared to income from continuing operations of $401,000,
or basic and diluted earnings per share of $0.10, for the same period in 1998.
There was no income or loss from discontinued operations for the second
quarter of 1999. The loss from discontinued operations was $1.7 million, net of
taxes, during the second 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 $638,000, or basic and diluted earnings
per share of $0.17, for the second quarter of 1999, as compared to a net loss of
$1.3 million, or basic and diluted earnings per share of $(0.34), for the same
period in 1998. There were 3,844,229 basic and diluted weighted average shares
of common stock and common stock equivalents outstanding for the second quarter
ending June 30, 1999, and 3,829,457 basic and 3,856,242 diluted weighted average
shares of common stock and common stock equivalents outstanding at the second
quarter ending June 30, 1998.
SIX MONTHS ENDED JUNE 30, 1999, COMPARED TO SIX MONTHS ENDED JUNE 30, 1998
Revenues from continuing operations increased $2.1 million, or 16.2%,
to $15.4 million during the first six months of 1999, from $13.3 million for the
same period in 1998. Revenues from TPA services increased 61.7% primarily as a
result of the inclusion of revenues from M&N Risk Management. This increase was
offset by a 20.6% decrease in revenues from MCO services during the first six
months of 1999 as compared to the same period in 1998. Revenues for MCO services
during the first six months of 1998 included approximately $1.5 million of
one-time incentive payments related to the acceptance of workers' compensation
claims with dates of injury which preceded the commencement date of the Health
Partnership Program. These one-time incentive payments were reported as revenue
during the first quarter of 1998.
G&A expenses increased $2.7 million to $13.0 million, or 84.6% of
revenues, for the first six months of 1999, as compared to $10.3 million, or
77.8% of revenues, for the same period in 1998. G&A expenses increased in 1999
as a percentage of revenues primarily due to 1998 first six months MCO revenues
including the aforementioned 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.
Page 12
<PAGE> 13
Interest income and other decreased $244,000 to $37,400 for the first
six months of 1999, from $281,700 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 $906,000 in the first six months of 1999, or an
effective tax rate of 37.5%, as compared to $1.3 million for the same period in
1998, or an effective tax rate of 40.2%. 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
net of second quarter adjustments to the year to date tax accrual.
As a result of the foregoing, income from continuing operations was
$1.5 million, or basic and diluted earnings per share of $0.39, for the first
six months of 1999, as compared to income from continuing operations of $1.3
million, or basic and diluted earnings per share of $0.50, for the same period
in 1998.
There was no net income or loss from discontinued operations for the
first six months of 1999. The net loss from discontinued operations was $2.3
million, net of taxes, or basic and diluted earnings per share of $(0.60) and
$(0.59), respectively, for the first six 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 $1.5 million, or basic and diluted
earnings per share of $0.39, for the first six months of 1999, as compared to
net loss of $357,000, or basic and diluted earnings per share of $(0.09), for
the same period in 1998. There were 3,839,555 basic and diluted average shares
of common stock and common stock equivalents outstanding at June 30, 1999, and
3,825,002 basic and 3,847,985 diluted weighted average shares of common stock
and common stock equivalents outstanding at June 30, 1999.
LIQUIDITY AND CAPITAL RESOURCES
CONTINUING OPERATIONS
The Company finances its continuing operations through internally
generated funds, and its principal sources of cash for continuing operations are
revenues from TPA and MCO services. The Company's principal capital needs for
continuing operations are to fund expenditures for continued growth and for
possible acquisitions.
Working capital of $713,000 from continuing operations existed at June
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 six months of 1999.
At June 30, 1999, cash and cash equivalents from continuing operations
were $7.4 million, a decrease of $1.7 million from $9.1 million at December 31,
1998. This decrease was attributable to a decrease in cash balances from TPA
operations.
Page 13
<PAGE> 14
Cash used in continuing operating activities was $1.3 million for the
first six months of 1999, as compared to cash provided of $3.2 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. The purchase price was financed by a $3,000,000 promissory note from
National City Bank (the "Bank") and by a $2,526,736 promissory note payable to
the seller. The promissory note from the Bank is due on demand, accrues interest
at the Bank's prime rate (currently 7.8%), and is secured by a lien on all
business assets of CompManagement, CompManagement Health Systems, and M&N Risk
Management. The seller's promissory note is a three-year note maturing on
December 31, 2001. This note provides for principal payments in the amounts of
$526,736, $1,000,000, and $1,000,000 due on December 31, 1999, 2000, and 2001,
respectively, and interest payments at the rate of 7% per annum due quarterly
over the term of the note. The payment of the seller's promissory note is
guaranteed by M&N Risk Management and is secured by a lien on all business
assets of CompManagement, CompManagement Health Systems, and M&N Risk
Management. The seller's promissory note and all liens granted with respect to
such note are subordinated in all respects to the Bank's promissory note.
As previously described, on July 16, 1999, CompManagement Health
Systems acquired the MCO assets from a subsidiary of Anthem Insurance Companies,
Inc. The aggregate purchase price for the asset acquisition was approximately
$6.2 million. The purchase price is subject to a post-closing adjustment based
upon the number of employers, if any, who choose a managed care organization
other than the Company's MCO during a 30-day open enrollment period. The Company
paid approximately $1.45 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
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 Ohio
Department of Insurance. 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 attempting to sell or otherwise dispose 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
Page 14
<PAGE> 15
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. The testing phase will be complete by the end of the third quarter
of 1999. In that phase, the Company will perform a system-wide test on all of
its proprietary and non-proprietary IT systems and applications for Year 2000
compliance. The Company believes that all proprietary and non-proprietary IT
systems and applications utilized by the Company are either Year 2000 compliant
or will be Year 2000 compliant upon installation of available patches and
upgrades. The Company currently believes that all of its IT systems will be Year
2000 compliant by the end of the third quarter 1999. The Company also performed
a Year 2000 readiness review of M&N Risk Management in connection with the
acquisition of that company, and the Company currently believes that all of M&N
Risk Management's IT systems will be Year 2000 compliant by the end of the third
quarter of 1999. The Company's Year 2000 committee is working with significant
third party vendors to verify that they are Year 2000 compliant.
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
Page 15
<PAGE> 16
on the Company's operations. The Company's Year 2000 committee intends to
develop appropriate contingency plans as necessary to address Year 2000
compliance issues as they arise.
The Company currently believes that the primary costs associated with
Year 2000 compliance issues are in-house time costs associated with
administration, review and testing of systems. The costs incurred thus far have
been less than $50,000, and the Company believes additional costs will not
exceed $100,000 for the remainder of 1999.
SAFE HARBOR STATEMENT UNDER THE SECURITIES LITIGATION REFORM ACT OF 1995
Some of the information in this Form 10-Q contains "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. The words "believe," "expect," "anticipate," "project," and similar
expressions, among others, identify forward-looking statements. Forward-looking
statements speak only as of the date the statement was made. These
"forward-looking statements" are subject to certain risks, uncertainties, and
other factors that could cause the Company's actual results to differ materially
from those projected, anticipated, or implied. Such risks, uncertainties, and
factors that might cause such a difference include, but are not limited to,
potential legal actions related to the Company's HMO and its discontinued
operations, the Company's dependence upon its MCO contract and group rating
plans for revenues, its dependence upon workers' compensation plans and programs
administered by governmental agencies pursuant to state statutes and
regulations, in particular Ohio's Health Partnership Program and group rating
program, its ability to achieve Year 2000 compliance, risks associated with
acquisitions, in particular the Company's ability to locate and acquire other
businesses and to integrate these newly acquired operations effectively with its
existing businesses, its dependence on certain key personnel, and the Company's
ability to effectively compete with larger and more diverse competitors. These
and other risks, uncertainties, and factors that could materially affect the
financial results of the Company are further discussed in the Company's filings
with the Securities and Exchange Commission, including the Form 10-K for the
Company's fiscal year ended December 31, 1998.
Item 3. Quantitative and Qualitative Disclosure About Market Risk
- ------- ---------------------------------------------------------
There is no change in the quantitative and qualitative disclosures
about the Company's market risk from the disclosures contained in the Company's
Form 10-K for its fiscal year ended December 31, 1998.
Page 16
<PAGE> 17
Part II - Other Information
Item 4. Submission of Matters to a Vote of Security Holders
- ------- ---------------------------------------------------
(a) The Company held its Annual Meeting of Stockholders on June 3,
1999.
(b) Class I directors elected at the meeting were Crystal A.
Kuykendall and Jonathan R. Wagner. Class Three III directors
elected at the meeting were Dr. Elliott P. Feldman and Dr.
Bernard F. Master. Set forth below is the number of votes cast
for and the number of votes withheld with respect to each
nominee:
FOR WITHHELD
(i) Crystal A. Kuykendall 2,826,617 770,475
(ii) Jonathan R. Wagner 3,591,117 5,975
(iii) Dr. Elliott P. Feldman 2,826,717 770,375
(iv) Dr. Bernard F. Master 2,827,217 769,875
Directors whose terms continued after the meeting were Robert J.
Bossart, Frank R. Nutis, Robert S. Garek, and Dr. Burt E. Schear
Item 6. Exhibits and Reports on Form 8-K
- ------- --------------------------------
(a) Exhibits
--------
27 Financial Data Schedule
(b) Reports on Form 8-K
-------------------
None
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: AUGUST 16, 1999 BY /S/ BERNARD F. MASTER, DO
--------------------------------------------
BERNARD F. MASTER, DO, PRESIDENT,
CHIEF OPERATING OFFICER AND CHAIRMAN
OF THE BOARD
DATE: AUGUST 16, 1999 BY /S/ RONALD J. WURTZ
--------------------------------------------
RONALD J. WURTZ, CHIEF FINANCIAL OFFICER
AND PRINCIPAL ACCOUNTING OFFICER
Page 18
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 10,835
<SECURITIES> 0
<RECEIVABLES> 6,364
<ALLOWANCES> 370
<INVENTORY> 0
<CURRENT-ASSETS> 18,025
<PP&E> 4,521
<DEPRECIATION> 1,636
<TOTAL-ASSETS> 27,641
<CURRENT-LIABILITIES> 20,621
<BONDS> 0
0
0
<COMMON> 39
<OTHER-SE> 4,615
<TOTAL-LIABILITY-AND-EQUITY> 27,640
<SALES> 0
<TOTAL-REVENUES> 15,418
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 13,041
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (37)
<INCOME-PRETAX> 2,414
<INCOME-TAX> 906
<INCOME-CONTINUING> 1,509
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,509
<EPS-BASIC> 0.39
<EPS-DILUTED> 0.39
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 9,499
<SECURITIES> 0
<RECEIVABLES> 2,866
<ALLOWANCES> 457
<INVENTORY> 0
<CURRENT-ASSETS> 14,106
<PP&E> 2,375
<DEPRECIATION> 638
<TOTAL-ASSETS> 19,394
<CURRENT-LIABILITIES> 12,137
<BONDS> 0
0
0
<COMMON> 38
<OTHER-SE> 7,219
<TOTAL-LIABILITY-AND-EQUITY> 19,394
<SALES> 0
<TOTAL-REVENUES> 13,272
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 10,332
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (282)
<INCOME-PRETAX> 3,222
<INCOME-TAX> 1,294
<INCOME-CONTINUING> 1,928
<DISCONTINUED> (2,285)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (357)
<EPS-BASIC> (0.09)
<EPS-DILUTED> (0.09)
</TABLE>
