<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 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
-------
Health Power, Inc.
- -------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
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<S> <C>
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
</TABLE>
(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.
<TABLE>
<S> <C>
Common Stock, $0.01 Par Value 3,853,719
- ---------------------------------------------------------- --------------------------------------------------------
Class Outstanding at May 15, 2000
</TABLE>
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HEALTH POWER, INC. AND SUBSIDIARIES
INDEX
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<CAPTION>
PAGE
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets - as of 3 & 4
March 31, 2000 and December 31, 1999
Consolidated Statements of Operations for the three months 5
ended March 31, 2000 and March 31, 1999
Consolidated Statements of Cash Flows - for the three months 6
ended March 31, 2000 and March 31, 1999
Notes to the Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial 9
Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures about Market Risk 12
PART II. OTHER INFORMATION
Signatures 13
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
HEALTH POWER, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS as of March 31, 2000 and December 31, 1999
<TABLE>
<CAPTION>
March 31, 2000 December 31,
ASSETS (Unaudited) 1999
------ ----------- ----
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 7,650,546 $ 6,815,578
Accounts receivable, net 5,669,446 4,094,365
Prepaid expenses and other assets 1,047,423 332,988
Currrent assets of discontinued operations 1,321,620 4,273,765
Deferred income taxes 1,466,799 2,107,984
----------- -----------
Total current assets 17,155,834 17,624,680
----------- -----------
Property and equipment, net 3,653,390 3,889,237
Goodwill 9,341,711 9,510,984
Deposits and other assets 64,626 553,371
----------- -----------
Total assets $30,215,561 $31,578,272
=========== ===========
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The accompanying notes are part of the financial statements
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CONSOLIDATED BALANCE SHEETS, Continued
<TABLE>
<CAPTION>
March 31, 2000 December 31,
LIABILITIES AND STOCKHOLDERS' EQUITY (Unaudited) 1999
- ------------------------------------ ----------- ----
<S> <C> <C>
Current liabilities:
Deferred revenues 11,790,645 10,527,550
Accounts payable 621,038 1,023,945
Accrued expenses and other liabilities 779,689 965,476
Taxes payable 718,556 215,215
Current liabilities of discontinued operations 3,479,286 6,734,980
Notes and leases payable 2,993,107 2,764,536
------------ ------------
Total current liabilities 20,382,321 22,231,702
Non - current notes and leases payable 1,262,493 2,086,460
Deferred income taxes 201,361 224,131
------------ ------------
Total Liabilities 21,846,175 24,542,293
------------ ------------
Stockholders' equity:
Common stock 38,737 38,537
Additional paid-in capital 10,854,153 10,854,153
Accumulated deficit (2,523,504) (3,856,711)
------------ ------------
Total stockholders' equity 8,369,386 7,035,979
------------ ------------
Total liabilities and stockholders' equity $ 30,215,561 $ 31,578,272
============ ============
</TABLE>
The accompanying notes are part of the financial statements
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HEALTH POWER, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
for the three months ended March 31, 2000 and March 31, 1999
<TABLE>
<CAPTION>
(Unaudited)
2000 1999
---- ----
<S> <C> <C>
Revenues:
Contract $12,088,418 $ 7,430,419
----------- -----------
Expenses:
General and administrative expenses 10,137,993 6,363,828
----------- -----------
Income from operations 1,950,425 1,066,591
Interest income and other, net 37,502 10,600
----------- -----------
Income from continuing operations
before income taxes 1,987,927 1,077,191
Federal, state and local income taxes 830,004 206,530
----------- -----------
Net income from continuing operations 1,157,923 870,661
Discontinued operations:
Gain on disposal of discontinued operations 175,097 0
----------- -----------
Net income $ 1,333,020 $ 870,661
=========== ===========
Earnings per share (basic and diluted):
Income from continuing operations, per share $ 0.30 $ 0.23
Gain on disposal of discontinued operations, per share $ 0.05 $ 0.00
----------- -----------
Net income per share $ 0.35 $ 0.23
=========== ===========
</TABLE>
The accompanying notes are part of the financial statements
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HEALTH POWER, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 2000 AND 1999
<TABLE>
<CAPTION>
(Unaudited) (Unaudited)
2000 1999
---- ----
<S> <C> <C>
Cash flows provided by operating activities:
Cash provided by continuing operating activities $ 1,809,974 $ 2,464,864
Cash (used in) provided by discontinued operations (3,416,766) 1,404,867
------------ ------------
Net cash provided by operating activities: (1,606,792) 3,869,731
------------ ------------
Cash flows used in investing activities:
Purchase of property and equipment, net (76,260) (177,577)
------------ ------------
Cash used in continuing operating activities (76,260) (177,577)
Cash provided by discontinued operations 0 400
------------ ------------
Net cash used in investing activities (76,260) (177,177)
------------ ------------
Cash flows used in financing activities:
Payments on notes payable and lease obligations (595,196)
Change in restricted cash of discontinued operations 3,113,216 0
------------ ------------
Net cash used in financing activities 2,518,020 0
------------ ------------
Net increase in cash and cash equivalents 834,968 3,692,554
Cash and cash equivalents, beginning of year 6,815,578 11,714,169
------------ ------------
Cash and cash equivalents, end of period $ 7,650,546 $ 15,406,723
============ ============
</TABLE>
The accompanying notes are 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 month periods ending March 31, 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 three
month period ending March 31, 2000 have been charged against the provision
for discontinued operations and management has adjusted the provision to
reflect anticipated 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 March 31, 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.
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:
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<CAPTION>
THREE MONTHS ENDED MARCH 31, 2000
---------------------------------
MANAGED CARE CONSULTING OTHER ELIMINATIONS TOTAL
SERVICES SERVICES
------------------- --------------- -------------- ---------------- ---------------
<S> <C> <C> <C> <C> <C>
Revenues to unaffiliated $7,193,696 $4,893,745 $ 977 $ - $12,088,418
customers
Intercompany revenues 121,353 (121,353)
Income before taxes 960,085 1,100,865 3,872,018 (3,945,041) 1,987,927
THREE MONTHS ENDED MARCH 31, 1999
---------------------------------
Revenues to unaffiliated $2,709,342 $4,721,077 $ - $ - $7,430,419
customers
Intercompany revenues 535,673 (535,673)
Income before taxes 217,866 830,260 3,262,948 (3,233,883) 1,077,191
</TABLE>
5. Supplemental Disclosures for Earnings Per Share:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
2000 1999
<S> <C> <C>
BASIC:
Earnings:
Income from continuing operations $1,157,923 $ 870,661
Gain on disposal of discontinued operations 175,097 --
---------- ----------
Net income $1,333,020 $ 870,661
---------- ----------
Shares:
Weighted average common shares outstanding 3,853,719 3,834,829
---------- ----------
Income from continuing operations per common share, basic $ 0.30 $ 0.23
Gain on disposal of discontinued operations per share, basic 0.05 --
---------- ----------
Net income per common share, basic $ 0.35 $ 0.23
---------- ----------
DILUTED: 2000 1999
Earnings:
Income from continuing operations $1,157,923 $ 870,661
Gain on disposal of discontinued operations 175,097 --
---------- ----------
Net income $1,333,020 $ 870,661
---------- ----------
Shares:
Weighted average common shares outstanding 3,853,719 3,834,829
Add: dilutive effect of outstanding options 6,781 0
---------- ----------
Weighted average common shares outstanding, diluted 3,860,500 3,834,829
---------- ----------
Income from continuing operations per common share, diluted $ 0.30 $ 0.23
Gain on disposal of discontinued operations per share, diluted 0.05 --
---------- ----------
Net income per common share, diluted $ 0.35 $ 0.23
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</TABLE>
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May 10, 2000 HEALTH POWER INC /DE/ (HPWR) Quarterly Report (SEC form 10-Q)
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 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 all of its assets in payment of the
claims of its creditors in the manner approved by the Department. All remaining
windup matters will be completed by the end of May 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.
9
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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.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2000, COMPARED TO THREE MONTHS ENDED MARCH 31, 1999
Revenues from continuing operations increased $4,658,000 or 62.7%, to
$12,088,000 during the first quarter of 2000, from $7,430,000 for the same
period in 1999. Revenues from TPA services increased 3.6% primarily as a result
of increased revenues from M&N Risk Management. Revenues from the MCO services
increased 165.5% primarily as a result of the inclusion of revenues from
Integrated Comp.
General and administrative ("G&A") expenses increased $3,774,000 to $10,138,000,
or 83.9% of revenues, for the first quarter of 2000, as compared to $6,364,000,
or 85.7% of revenues, for the same period in 1999. G&A expenses decreased in the
first quarter of 2000 as a percentage of revenues primarily due to costs savings
achieved through the integration of M&N Risk Management into the Company's TPA
operations.
Income tax expense was $835,000 in the first quarter of 2000, or an effective
tax of 42.0%, as compared to $206,000 for the same period in 1999, or an
effective tax rate of 19.1%.
As a result of the foregoing, income from continuing operations was $1,158,000,
or basic and diluted earnings per share of $0.30, for the first quarter of 2000,
as compared to income from continuing operations of $871,000, or basic and
diluted earnings per share of $ 0.23 for the same period in 1999.
The Company experienced a gain on the disposal of discontinued operations for
the first quarter of 2000 of $175,000, 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.
The Company had net income of $1,333,000, or basic and diluted earnings per
share of $0.35 for the first quarter of 2000, as compared to net income of
$871,000, or basic and diluted earnings per share of $0.23, for the same period
in 1999. There were 3,853,719 and 3,834,829 basic weighted average shares of
common stock outstanding at March 31, 2000 and 1999, respectively, and 3,860,500
and 3,834,829 diluted weighted average shares of common stock and common stock
equivalents outstanding at March 31, 2000 and 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.
10
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A working capital deficit of $1,069,000 from continuing operations existed at
March 31, 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 second 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 $1.5 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 March 31, 2000, cash and cash equivalents from continuing operations were
$7,651,000, an increase of $835,000 from $6,816,000 at December 31, 1999. This
increase was attributable primarily to payments received with respect to the
Company's TPA contracts. These payments constitute deferred revenues that are
recognized as income on a pro rata basis over the related contract period, which
typically ranges from three to twelve months.
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 $1.5
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. Health Power HMO has begun the distribution of all
of its assets in payment of the claims of its creditors in the manner approved
by the Department. All remaining windup matters, including the distribution of
all of its assets, will be completed by the end of May 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
11
<PAGE> 12
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.
12
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SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THE
REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY THE
UNDERSIGNED THEREUNTO DULY AUTHORIZED.
HEALTH POWER, INC.
DATE: MAY 15, 2000 BY /S/ BERNARD F. MASTER, DO
-------------------------------------------------
BERNARD F. MASTER, DO, PRESIDENT,
CHIEF OPERATING OFFICER AND CHAIRMAN
OF THE BOARD
DATE: MAY 15, 2000
BY /S/ PAUL A. MILLER
-------------------------------------------------
PAUL A. MILLER, CHIEF FINANCIAL OFFICER AND
PRINCIPAL ACCOUNTING OFFICER
Page 13
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<CASH> 7,651
<SECURITIES> 0
<RECEIVABLES> 6,301
<ALLOWANCES> (632)
<INVENTORY> 0
<CURRENT-ASSETS> 17,156
<PP&E> 6,161
<DEPRECIATION> (2,508)
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<CURRENT-LIABILITIES> 20,382
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0
0
<COMMON> 39
<OTHER-SE> 8,330
<TOTAL-LIABILITY-AND-EQUITY> 30,216
<SALES> 0
<TOTAL-REVENUES> 12,088
<CGS> 0
<TOTAL-COSTS> 10,138
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<INCOME-TAX> (830)
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<EPS-BASIC> .35
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