<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, 2000 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 3,876,974
----------------------------- ------------------------------
Class Outstanding at August 14, 2000
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HEALTH POWER, INC. AND SUBSIDIARIES
<TABLE>
INDEX
<CAPTION>
PAGE
<S> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets - as of
June 30, 2000 and December 31, 1999 3 & 4
Consolidated Statements of Operations for the six months
ended June 30, 2000 and June 30, 1999 5
Consolidated Statements of Cash Flows - for the six
months ended June 30, 2000 and June 30, 1999 6
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 14
PART II. OTHER INFORMATION
Signatures 15
Exhibits & Reports 16
</TABLE>
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
<TABLE>
HEALTH POWER, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS as of June 30, 2000 and December 31, 1999
<CAPTION>
June 30, 2000 December 31,
ASSETS (Unaudited) 1999
------ ----------- ----
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 6,588,848 $ 6,815,578
Accounts receivable, net 4,179,294 4,094,365
Prepaid expenses and other assets 1,076,039 332,988
Currrent assets of discontinued operations 101,944 4,273,765
Deferred income taxes 460,313 2,107,984
----------- -----------
Total current assets 12,406,438 17,624,680
----------- -----------
Property and equipment, net 3,981,125 3,889,237
Goodwill 9,363,211 9,510,984
Deposits and other assets 63,780 553,371
----------- -----------
Total assets $25,814,554 $31,578,272
=========== ===========
</TABLE>
The accompanying notes are part of the financial statements
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<TABLE>
CONSOLIDATED BALANCE SHEETS, Continued
<CAPTION>
June 30, 2000 December 31,
LIABILITIES AND STOCKHOLDERS' EQUITY (Unaudited) 1999
------------------------------------ ----------- ----
<S> <C> <C>
Current liabilities:
Deferred revenues 7,360,447 10,527,550
Accounts payable 1,546,151 1,023,945
Accrued expenses and other liabilities 1,061,618 965,476
Taxes payable 524,917 215,215
Current liabilities of discontinued operations 47,631 6,734,980
Notes and leases payable - current 2,514,126 2,764,536
----------- -----------
Total current liabilities 13,054,890 22,231,702
Notes and leases payable - noncurrent 1,576,366 2,086,460
Deferred income taxes 529,640 224,131
----------- -----------
Total Liabilities 15,160,896 24,542,293
----------- -----------
Stockholders' equity:
Common stock 38,770 38,537
Additional paid-in capital 10,889,603 10,854,153
Accumulated earnings (deficit) (274,715) (3,856,711)
----------- -----------
Total stockholders' equity 10,653,658 7,035,979
----------- -----------
Total liabilities and stockholders' equity $25,814,554 $31,578,272
=========== ===========
</TABLE>
The accompanying notes are part of the financial statements
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<TABLE>
HEALTH POWER, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<CAPTION>
(Unaudited) (Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues:
Contract $11,660,032 $7,987,650 $23,748,450 $15,418,069
Expenses:
Selling, general and administrative 10,512,039 6,677,244 20,650,032 13,041,072
----------- ---------- ----------- -----------
Income from operations 1,147,993 1,310,406 3,098,418 2,376,997
Interest income and other, net 37,711 26,785 75,213 37,385
----------- ---------- ----------- -----------
Income from continuing operations
before income taxes 1,185,704 1,337,191 3,173,631 2,414,382
Federal, state and local income taxes 403,136 699,193 1,233,140 905,723
----------- ---------- ----------- -----------
Net income from continuing operations 782,568 637,998 1,940,491 1,508,659
Discontinued operations:
Gain from disposal of discontinued operations (net of
tax expense of $151,740 and $ 0, respectively) 10,879 0 185,976 0
Extraordinary Item
Gain from extinguishment of debt (net of
tax benefit of $783,058) 1,455,529 0 1,455,529 0
----------- ---------- ----------- -----------
Net income (loss) $ 2,248,976 $ 637,998 $ 3,581,996 $ 1,508,659
=========== ========== =========== ===========
EARNINGS PER SHARE (BASIC)
Continuing operations, per share $ 0.20 $ 0.17 $ 0.50 $ 0.39
Discontinued operations, per share $ 0.00 $ 0.00 $ 0.05 $ 0.00
----------- ---------- ----------- -----------
Extraordinary item, per share $ 0.38 $ 0.00 $ 0.38 $ 0.00
----------- ---------- ----------- -----------
Net income per share - basic $ 0.58 $ 0.17 $ 0.93 $ 0.39
=========== ========== =========== ===========
EARNINGS PER SHARE (DILUTED)
Continuing operations, per share $ 0.20 $ 0.17 $ 0.50 $ 0.39
Discontinued operations, per share $ 0.00 $ 0.00 $ 0.05 $ 0.00
----------- ---------- ----------- -----------
Extraordinary item, per share $ 0.38 $ 0.00 $ 0.38 $ 0.00
----------- ---------- ----------- -----------
Net income per share - diluted $ 0.58 $ 0.17 $ 0.93 $ 0.39
=========== ========== =========== ===========
</TABLE>
The accompanying footnotes are an integral part of the financial statements.
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<TABLE>
HEALTH POWER, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2000 AND 1999
<CAPTION>
(Unaudited) (Unaudited)
2000 1999
----- ----
<S> <C> <C>
Cash flows provided by operating activities:
Cash (used in) provided by continuing operating activities $ 909,994 $(1,295,849)
Cash in) provided by discontinued operations (3,973,183) 765,502
----------- -----------
Net cash provided by operating activities: (3,063,189) (530,347)
----------- -----------
Cash flows used in investing activities:
Purchase of property and equipment, net (633,360) (389,199)
----------- -----------
Cash used in continuing operating activities (633,360) (389,199)
Cash provided by discontinued operations 0 400
----------- -----------
Net cash used in investing activities (633,360) (388,799)
----------- -----------
Cash flows used in financing activities:
Payments on notes payable and lease obligations (538,814) 0
Issuance of Common Stock 35,450 39,625
Change restricted cash of discontinued operations 3,973,183 0
----------- -----------
Net cash used in financing activities 3,469,819 39,625
----------- -----------
Net increase in cash and cash equivalents (226,730) (879,521)
Cash and cash equivalents, beginning of year 6,815,578 11,714,169
----------- -----------
Cash and cash equivalents, end of period $ 6,588,848 $10,834,648
=========== ===========
</TABLE>
The accompanying notes are an integral part of the financial statements
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HEALTH POWER, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
1. The accompanying consolidated financial statements are unaudited and have
been prepared by the management of Health Power, Inc. and subsidiaries (the
Company). 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 six-month periods
ending June 30, 2000 and 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, 1999, financial statements and notes
thereto contained in the Company's 1999 Form 10-K.
2. 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.
3. On December 29, 1998, the Company's Board of Directors formally approved a
plan to discontinue operations of the Company's HMO. Accordingly, at
December 31, 1998 and 1999, 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 six
month period ending June 30, 2000 have been charged against the provision
for discontinued operations and management has adjusted the provision to
reflect estimated costs considered necessary through the anticipated
wind-up date. The Company has classified the operating results of the HMO
as discontinued operations in its financial statements. The assets and
liabilities of such operations at June 30, 2000 and December 31, 1999,
respectively, have been reflected as separate line items on the balance
sheet based substantially on the original classification of such assets and
liabilities.
On July 18, 1998, the Ohio Department of Insurance (ODI) issued on order
that the Company's HMO business was to be placed under the supervision of
ODI. On June 30, 2000, ODI issued an order that terminated the supervision
order. As a result of the termination order, certain liabilities of the HMO
were extinguished due to the insufficiency of the assets of the HMO. The
Company has classified the extinguishment of these liabilities, net of the
related tax effect as an extraordinary item in the statement of
operations..
4. The Company has two reportable segments for it's 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.
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Segment Reporting for Continuing Operations:
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30, 2000
------------------------------
MANAGED CARE CONSULTING
SERVICES SERVICES OTHER ELIMINATION'S TOTAL
------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenues to unaffiliated
customers $13,836,148 $ 9,912,302 $ -- $ -- $23,748,450
Intercompany revenues 244,611 (244,611)
Income before taxes 1,332,556 1,913,478 4,675,136 (4,747,539) 3,173,631
<CAPTION>
SIX MONTHS ENDED JUNE 30, 1999
------------------------------
<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
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, 2000
--------------------------------
MANAGED CARE CONSULTING
SERVICES SERVICES OTHER ELIMINATION'S TOTAL
------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenues to unaffiliated
customers $6,642,452 $5,018,557 $ (977) -- $11,660,032
Intercompany revenues 123,258 (123,258) --
Income before taxes 372,471 812,613 3,443,213 (3,442,593) 1,185,704
<CAPTION>
THREE MONTHS ENDED JUNE 30, 1999
--------------------------------
<S> <C> <C> <C> <C> <C>
Revenues to unaffiliated
customers $3,121,287 $4,866,363 -- -- $ 7,987,650
Intercompany revenues 424,818 (424,818) --
Income before taxes 626,429 756,004 3,368,577 (3,413,819) 1,337,191
</TABLE>
5. On June 8, 2000, the Board of Directors of Security Capital Corporation
(SCC) and the Company., signed a definitive agreement to merge. The merger
has been approved by the Company's special committee of Independent
Directors (the "Special Committee") and is subject to the approval of the
Company's shareholders. Pursuant to the terms of the agreement, the Company
would become a subsidiary of SCC and stockholders of the Company would
receive approximately $26.5 million in cash in exchange for their shares.
SCC would also assume or pay approximately $9.75 million in liabilities and
expenses of the Company, including amounts needed to extinguish certain
severance benefits. The anticipated net purchase price per share to
stockholders of the Company is expected to be in the range of $6.88 to
$6.93. Following the merger, it is expected that all members of the
CompManagement management team will remain in their current positions and
maintain an equity interest in the merged entity.
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6. Supplemental Disclosures for Earnings Per Share:
<TABLE>
<CAPTION>
SIX
MONTHS ENDED JUNE 30,
2000 1999
<S> <C> <C>
BASIC & DILUTED:
Earnings:
Continuing operations $1,940,491 $1,508,659
Discontinued operations 185,976 0
Extraordinary item 1,455,529 0
---------- ----------
Net income 3,581,996 $1,508,659
---------- ----------
Shares:
Weighted average common shares outstanding 3,859,469 3,839,555
---------- ----------
Continuing operations per share, basic $ 0.50 $ 0.39
Discontinued operations per share, basic 0.05 0.00
---------- ----------
Extraordinary item per share, basic 0.38 0.00
-------------------------
Net income per share, basic 0.93 0.39
-------------------------
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30,
2000 1999
<S> <C> <C>
BASIC & DILUTED:
Earnings:
Continuing operations $11,660,032 $7,987,650
Discontinued operations 10,879 0
Extraordinary item 1,455,529 0
----------- ----------
Net income 2,248,976 637,998
----------- ----------
Shares:
Weighted average common shares outstanding 3,865,219 3,844,229
----------- ----------
Continuing operations per share, basic $ 0.20 $ 0.17
Discontinued operations per share, basic 0.00 0.00
Extraordinary item per share, basic 0.38 0.00
----------- ----------
Net income per share, basic $ 0.58 0.17
--------------------------
Continuing operations per share, diluted $ 0.20 $ 0.17
Discontinued operations per share, diluted 0.00 0.00
Extraordinary item per share, diluted 0.38 0.00
----------- ----------
Net income per share, diluted $ 0.58 0.17
--------------------------
</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 20,000 employers
located throughout Ohio. Through CompManagement Health Systems and its division
Integrated Comp, the Company operates two state-wide certified managed care
organizations (an "MCO") under Ohio's Health Partnership Program and provides
medical management services for workers' compensation claims. The Company began
offering its MCO services in March 1997, and acquired the assets of Integrated
Comp (formerly known as Anthem Managed Comp) in July 1999. The Company's MCOs
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 29, 1998, the Board of Directors of Health Power, Inc. formally
approved a plan to discontinue the operations of Health Power HMO, Inc., its
health maintenance organization subsidiary ("Health Power HMO"). Accordingly,
the operating results of Health Power HMO have been segregated from continuing
operations and are reported separately as discontinued operations. Health Power
HMO's certificate of authority was revoked by the order of the Ohio Department
of Insurance effective May 1, 1999, for failure to meet statutory financial
requirements. The Department's revocation order permitted Health Power HMO to
conclude its affairs and to windup its business on its own, subject to the
Department's continuing supervision, but without judicial involvement. Health
Power HMO has completed the distribution of its assets in payment of the claims
of its creditors in the manner approved by the Department. On June 30, 2000, the
Ohio Department of Insurance terminated its regulatory supervision of Health
Power HMO. All remaining windup matters will be completed by the end of
September 2000.
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. As of June 30, 2000 this other segment was no longer in
operation.
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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, 1999.
RECENT DEVELOPMENTS
SECURITY CAPITAL CORPORATION AND HEALTH POWER, INC. SIGN MERGER AGREEMENT
On June 8, 2000, Security Capital Corporation ("Security Capital") and Health
Power, Inc. ("Health Power") signed a definitive merger agreement. This
agreement was approved by both the Board of Directors of Health Power and its
Special Independent Committee of Directors. Pursuant to the terms of the
agreement, Health Power would become a subsidiary of Security Capital and
stockholders of Health Power would receive approximately $26.5 million in cash
in exchange for their shares. Security Capital would also assume or pay
approximately $9.75 million in liabilities and expenses of Health Power,
including amounts needed to extinguish certain severance benefits. The
anticipated net purchase price per share to stockholders of Health Power will be
in the range of $6.88 to $6.93. Following the merger, it is expected that all
members of the CompManagement management team will remain in their current
positions and maintain an equity stake in the company.
Health Power stockholders owning approximately 47.7% of the outstanding common
stock have signed voting agreements to support the transaction. The merger is
expected to be completed during the fourth quarter 2000. The transaction is
contingent upon Security Capital's obtaining financing for the transaction,
approval by a majority of the Company's stockholders, clearance under the Hart
Scott Rodino Antitrust Improvements Act of 1976, and other customary conditions
for a transaction of this type. The agreement provides for the Company to call a
special meeting of its stockholders as soon as practicable after financing
commitments have been obtained.
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 2000, COMPARED TO THREE MONTHS ENDED JUNE 30, 1999
Revenues from continuing operations increased $3,672,000 or 45.9%, to
$11,660,000 during the second quarter of 2000, from $7,988,000 for the same
period in 1999. Revenues from TPA services increased 3.1% primarily as a result
of increased revenues earned through the annual group rating process as well as
from those employers who did not qualify for a group rating plan. Revenues from
the MCO services increased 112.8% primarily as a result of the inclusion of
revenues from Integrated Comp.
General and administrative (G&A) expenses increased $3,835,000 to $10,512,000,
or 90.1% of revenues, for the second quarter of 2000, as compared to $6,677,000,
or 83.6% of revenues, for the same period in 1999. G&A expenses increased in the
second quarter of 2000 as a percentage of revenues primarily due to costs
associated with Open Enrollment - MCO and professional services cost associated
with the integration of the acquisition of Integrated Comp. Included in ("G&A")
are $103,000 of expenses directly related to the merger of Security Capital
Corporation and Health Power. Such expenses relate to the drafting of the merger
agreement as well as other documents.
Interest income and other increased $11,000 to $38,000 for the second quarter of
2000, from $27,000 for the same period in 1999. This increase resulted primarily
from the retirement of the seller-financed debt related to the M&N Risk
Management acquisition.
Income tax expense was $403,000 in the second quarter of 2000, or an effective
tax of 33.9%, as compared to $699,000 for the same period in 1999, or an
effective tax rate of 52.2%.
As a result of the foregoing, income from continuing operations was $783,000, or
basic and diluted earnings per share of $0.20, for the second quarter of 2000,
as compared to income from continuing operations of $638,000, or basic and
diluted earnings per share of $ 0.17 for the same period in 1999.
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The Company experienced a gain from discontinued operations for the second
quarter of 2000 of $11,000 or $0.00 basic and diluted earnings per share as
compared to no net income or loss from discontinued operations for the same
quarter of 1999.
On June 30, 2000, the Ohio Department of Insurance terminated its regulatory
supervision of Health Power HMO after the HMO had completed its final windup
plan. As a result of this termination, which resulted in the extinguishment of
certain liabilities of the HMO business in excess of the assets of the HMO, the
Company had to recognize an extraordinary, non-cash gain of $1,456,000, net of
taxes, for the second quarter and the six months ended June 30, 2000.
The Company had net income of $2,249,000, or basic and diluted earnings per
share of $.58 for the second quarter of 2000, as compared to net income of
$638,000, or basic and diluted earnings per share of $0.17, for the same period
in 1999. There were 3,865,219 and 3,844,229 basic weighted average shares of
common stock and common stock equivalents outstanding at June 30, 2000 and 1999,
respectively. There were 3,874,017 and 3,844,229 diluted weighted average shares
of common stock and common stock equivalents outstanding at June 30, 2000 and
1999, respectively.
SIX MONTHS ENDED JUNE 30, 2000, COMPARED TO SIX MONTHS ENDED JUNE 30, 1999
Revenues from continuing operations increased $8,330,000 or 54.0%, to
$23,748,000 during the first six months of 2000, from $15,418,000 for the same
period in 1999. Revenues from TPA services increased 3.3% primarily as a result
of increased revenues from M&N Risk Management. Revenues from the MCO services
increased 137.3% primarily as a result of the inclusion of revenues from
Integrated Comp.
General and administrative ("G&A") expenses increased $7,609,000 to $20,650,000,
or 86.9% of revenues, for the first six months of 2000, as compared to
$13,040,000, or 84.6% of revenues, for the same period in 1999. G&A expenses
increased in the first six months of 2000 as a percentage of revenues primarily
due to costs associated with the May open enrollment period for employer
selecting an MCO for the MCO business and professional services associated with
the integration of the Integrated Comp acquisition.
Interest income and other increased $38,000 to $75,000 for the first six months
of 2000, from $37,000 for the same period in 1999. This increase resulted
primarily from the retirement of the seller-financed debt related to the M&N
Risk Management acquisition.
Income tax expense was $1,233,000 in the first six months of 2000, or an
effective tax of 38.8%, as compared to $906,000 for the same period in 1999, or
an effective tax rate of 37.5%.
As a result of the foregoing, income from continuing operations was $1,940,000,
or basic and diluted earnings per share of $0.50, for the first six months of
2000, as compared to income from continuing operations of $1,509,000, or basic
and diluted earnings per share of $ 0.39 for the same period in 1999.
The Company experienced a gain from discontinued operations for the first six
months of 2000 of $186,000 or $0.05 basic and diluted earnings per share as
compared to no net income or loss from discontinued operations for the same
quarter of 1999.
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The Company had net income of $3,582,000, or basic and diluted earnings per
share of $0.93 for the first six months of 2000, as compared to net income of
$1,509,000, or basic and diluted earnings per share of $0.39, for the same
period in 1999. There were 3,859,469 and 3,839,555 basic weighted average shares
of common stock and common stock equivalents outstanding at June 30, 2000 and
1999, respectively. There were 3,862,936 and 3,839,555 diluted weighted average
shares of common stock and common stock equivalents outstanding at June 30, 2000
and 1999, respectively.
LIQUIDITY AND CAPITAL RESOURCES
CONTINUING OPERATIONS
The Company finances its continuing operations through internally generated
funds, and its principal sources of cash for continuing operations are revenues
from TPA and MCO services. The Company's principal capital needs for continuing
operations are to fund expenditures for continued growth and for possible
acquisitions.
A working capital deficit of $664,200 from continuing operations existed at June
30, 2000, as compared to a working capital deficit from continuing operations of
$2,147,000 at December 31, 1999. The Company believes that cash generated from
continuing operations should be sufficient to cure the working capital deficit
during the third quarter of 2000. However, there can be no assurance that cash
generated from continuing operations will be sufficient to cure the working
capital deficit. In addition, the Company has an outstanding balance of $1.0
million on a bank loan due on demand related to the acquisition of M&N Risk
Management. Although the Company believes that the bank does not intend to make
demand for payment of such loan in the immediate future, the facts and
circumstances surrounding the Company could change at any time such that the
bank would demand payment of such loan. Such a demand for payment could have an
adverse effect on the Company's financial condition and results of operation.
At June 30, 2000, cash and cash equivalents from continuing operations were
$6,589,000, a decrease of $227,000 from $6,816,000 at December 31, 1999. This
decrease was attributable primarily to payment towards the bank demand loan
related to the acquisition of M&N Risk Management.
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, including
capital requirements caused by the Bank making demand for payment of the $1.0
million demand loan.
DISCONTINUED OPERATIONS
As previously described, the Ohio Department of Insurance issued an order
revoking Health Power HMO's certificate of authority effective May 1, 1999. The
revocation order permitted 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. The Ohio Department of Insurance terminated its
regulatory supervision of Health Power HMO. Health Power HMO has completed the
distribution of its assets in payment of the claims of its creditors in the
manner approved by the Department. All remaining windup matters will be
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completed by the end of September 2000. Health Power HMO did not have sufficient
assets to pay the claims of all of its creditors. 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.
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, 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, 1999.
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, 1999.
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<PAGE> 15
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THE
REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY THE
UNDERSIGNED THEREUNTO DULY AUTHORIZED.
HEALTH POWER, INC.
DATE: AUGUST 14, 2000 BY /S/ BERNARD F. MASTER, DO
---------------------------------------
BERNARD F. MASTER, DO, PRESIDENT,
CHIEF EXECUTIVE OFFICER AND
CHAIRMAN OF THE BOARD
DATE: AUGUST 14, 2000 BY /S/ PAUL A. MILLER
---------------------------------------
PAUL A. MILLER, CHIEF FINANCIAL
OFFICER AND PRINCIPAL ACCOUNTING
OFFICER
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<PAGE> 16
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 June 15, 2000, the Company filed a Form 8 - K (dated
June 8, 2000) reporting under item 5 of such report the
Company's entering into a merger agreement with Security
Capital Corporation.
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