The following table sets forth selected consolidated financial data for Health Power, Inc. and its subsidiaries as of and for each of the years in the five-year period ended December 31, 1999. This selected consolidated financial data should be read in conjunction with the consolidated financial statements and related notes of Health Power, Inc. and subsidiaries and Management's Discussion and Analysis of Financial Condition and Results of Operation appearing under Items 8 and 7, respectively, of this Form 10-K. All periods in this table reflect the operations of Health Power HMO reclassified as discontinued operations. See Note 14 of the Notes to Consolidated Financial Statements appearing in Item 8 of this Form 10-K. In addition, all periods in this table have been restated to reflect the acquisition of CompManagement in July 1995. This acquisition was accounted for as a pooling of interests.
Through CompManagement Health Systems and its division, Integrated Comp, the Company owns and operates two state-wide certified MCO 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 47,700 employers located in Ohio and a small number of employers located in Kentucky and Indiana. Because all workers' compensation claims are reimbursed by OBWC, the Company does not assume any risk for the payment of medical or disability benefits to employees with respect to workers' compensation claims. The Company has offered its MCO services since the implementation of the Health Partnership Program in March 1997. The business of Integrated Comp represents the MCO assets acquired on July 16, 1999, from Anthem Managed Comp, an MCO division of a wholly owned subsidiary of Anthem Insurance Companies, Inc. This acquisition was accounted for under the purchase method of accounting for business combinations. As required by the purchase method of accounting, the results of operations of Integrated Comp are not included in the Company's results of operations prior to July 16, 1999.
On December 29, 1998, the Board of Directors of Health Power, Inc. formally approved a plan to discontinue the operations of Health Power HMO. Accordingly, the operating results of Health Power HMO have been segregated from continuing operations and are reported separately as discontinued operations.
Interest (expense) income and other decreased $668,000 to a net interest expense of $224,000 in 1999 from a net interest income of $444,000 in 1998. The decrease was primarily due to investable cash being used to acquire M&N Risk Management and Anthem Managed Comp. In addition, the Company incurred interest expense due to borrowings associated with these acquisitions.
As a result of the foregoing, income from continuing operations was $4.5 million, or basic and diluted earnings per share of $1.18, for 1999, as compared to income from continuing operations of $2.5 million, or basic and diluted earnings per share of $0.64, for 1998.
all of 1998 as compared to ten months in 1997. Revenues from TPA services increased by 9% from the prior year primarily as a result of an increase in the number of employers participating in the Company's group rating plans. Revenues from MCO services included one-time incentive payments of approximately $4.0 million related to the acceptance of workers' compensation claims with dates of injury which preceded the commencement date of the Health Partnership Program. The acceptance of these claims, known as beta and gamma claims, occurred during the fourth quarter of 1997. The Company recognized approximately $2.5 million of these one-time incentive payments in 1997 and $1.5 million in 1998.
G&A expenses increased to $21.3 million, or 85.6% of revenues, for 1998, as compared to $16.6, or 74.6% of revenues, for 1997. G&A expenses increased in 1998 as a percentage of revenues primarily due to 1997 revenues including significant one-time incentive payments related to the acceptance of beta and gamma claims in 1998 and the decrease in the amount of the 1998 incentive fees.
As a result of the foregoing, income from continuing operations was $2.5 million, or basic and diluted earnings per share of $0.64, for 1998, as compared to income from continuing operations of $3.8 million, or basic and diluted earnings per share of $1.00, for 1997.
The net loss from discontinued operations was $6.5 million, or basic and diluted earnings per share of $(1.70), for 1998, as compared to a net loss from discontinued operations of $0.8 million, or basic and diluted earnings per share of $(0.21), for 1997. The 1998 results included a $4.9 million loss from discontinued operations, net of taxes, which included a charge for a valuation allowance on deferred federal income tax assets of $2.8 million, along with a $1.6 million loss on disposal of discontinued operations, net of taxes.
The Company incurred a net loss of $4.1 million, or basic and diluted earnings per share of $(1.06), for 1998, as compared to net income of $3.0 million, or basic and diluted earnings per share of $0.79, for 1997.
As previously described, on May 1, 1999, the certificate of authority of Health Power HMO was revoked by ODI for failure to meet statutory financial requirements. Since that time, and in accordance with the ODI revocation order, Health Power HMO has been winding-up its business under the supervision of ODI, but without judicial involvement. This windup is substantially complete, and Health Power HMO is in the process of distributing all of its assets in payment of the claims of its creditors. Health Power HMO anticipates that this distribution process will be completed by the end of April 2000. Health Power HMO will 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.
In prior years, the Company discussed the nature and progress of its plans to become Year 2000 compliant. In the latter part of 1999, the Company completed its remediation and testing of systems. As a result of those planning and implementation efforts, the Company experienced no significant disruptions in its information and non-information technology systems and believes those systems successfully responded to the Year 2000 date change. The Company is not aware of any material problems resulting from Year 2000 issues, either with its internal systems or those of its third party vendors. The Company will continue to monitor its computer applications throughout the current year to ensure that any latent Year 2000 matters that may arise are addressed promptly. The Company expensed less than $100,000 during 1999 in connection with its Year 2000 compliance efforts.
The Company's operations are not significantly affected by inflationary pressures. Although inflation does affect salaries, employee benefits, and other operating expenses, after considering general inflationary trends, total revenues of the Company produced growth in real terms in 1999 and 1998. Revenues increased largely due to increased TPA and MCO services rather than increases in inflation.
Company's primary competitors in Ohio are several TPAs and/or MCOs which offer one or more services similar to those offered by the Company and numerous independent companies, typically operated on a regional basis. Some of the Company's competitors are significantly larger and have greater financial and marketing resources than the Company. Although the Company believes its specialization in the workers' compensation area, breadth of services, attention to customer service, and independence from insurance carriers will enable it to compete successfully, there can be no assurance that the Company will be able to compete effectively against existing competitors or that additional competitors will not enter the Company's areas of operations in the future.
In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations, of stockholders' equity and of cash flows present fairly, in all material respects, the financial position of Health Power, Inc. and its subsidiaries at December 31, 1999 and 1998, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1999 in conformity with accounting principles generally accepted in the United States. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above.
HEALTH POWER, INC., AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31, 1999 AND 1998 - --------------------------------------------------------------------------------
The Company also operated Health Power HMO, Inc. (HPHMO), a health maintenance organization (HMO), in and around the Columbus, Cincinnati and Dayton, Ohio areas for Medicaid recipients primarily enrolled in the Ohio Works First/Healthy Start (OWF) programs, as well as for commercial members. HPHMO ceased business operations effective April 30, 1999.
Basis of presentation. The accompanying consolidated financial statements are presented in accordance with generally accepted accounting principles (GAAP) and reflect the reclassification of the HMO segment as discontinued operations for all periods presented. Assets and liabilities of the discontinued operations are shown separate from the continuing operations in the consolidated balance sheet. The results of discontinued operations have been adjusted for the effect of the allocation of certain general corporate overhead costs associated with continuing operations. All intercompany balances and transactions have been eliminated in consolidation.
Cash and cash equivalents. For purposes of the consolidated statements of cash flows, the Company classifies investments with original maturities of three months or less as cash equivalents. Restricted cash balances of HPHMO of $4,058,980 at December 31, 1999 have been included in current assets of discontinued operation.
Expenditures for major betterments are capitalized, and expenditures for repairs and maintenance are charged to operations, as incurred. When property and equipment are retired or sold, the cost and related accumulated depreciation and amortization are removed from the accounts, with any gain or loss reflected in operations. Depreciation expense was $964,943, $431,031 and $228,952 for 1999, 1998 and 1997, respectively.
Stock-based compensation. The Company applies APB Opinion No. 25, Accounting for Stock Issued to Employees (APB No. 25), and related interpretations in accounting for its stock-based compensation plans in the accompanying financial statements. The Company applies the disclosure requirements of Statement of Financial Accounting Standards (SFAS) No. 123, Accounting for Stock-Based Compensation (see Note 10).
Use of estimates. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates.
Reclassifications. Certain 1998 and 1997 amounts have been reclassified to conform with the 1999 presentation.
The agreement to acquire M&N included a guarantee of the collectablility of certain accounts receivable. During 1999, approximately $1,018,383 of accounts receivable were deemed uncollectible by the Company. Accordingly, the Company has recognized a reduction in accounts receivable purchased and a corresponding reduction in the note due to the seller.
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 operating as a division of a wholly-owned subsidiary of Anthem Insurance Companies, Inc. The acquired assets are operated as a division of CompManagement Health Systems under the name "Integrated Comp." The aggregate purchase price for the asset acquisition was $4,649,423. The Company paid approximately $1,610,000 of cash at closing and the remaining balance of $3,038,846 will be paid over a five-year period.
The following summarizes the pro forma results of continuing operations for the years ended December 31, 1999 and 1998 as if M&N and AMC had been acquired at the beginning of each period presented (unaudited):
The pro forma information, as presented above, is not necessarily indicative of the results which would have been obtained had the transactions occurred at January 1, 1998, nor is it indicative of future results.
The significant components of the deferred tax benefit (expense) for the years ended December 31, 1999, 1998 and 1997 were as follows:
A reconciliation of the Company's income tax benefit (expense) for continuing operations from the statutory tax expense is as follows:
At December 31, 1999, the Company had the following tax credit and net operating loss carryforwards available:
The Company leases computer equipment under an agreement which is classified as a capital lease. Equipment subject to capital leases with a cost of $360,485 and accumulated depreciation of $48,335 at December 31, 1999 is included in property and equipment. At December 31, 1999, future minimum lease payments under the capital lease obligations for the periods ending December 31 are as follows:
The Company leases a 70,000 square foot office building in Dublin, Ohio that is used as its principal office facilities. The lease for the building is for a term of 15 years, which began in 1997, provides for annual rent payments and requires the Company to pay all operating expenses for the building. The lease also provides for three renewal options of five years each, an option to purchase the building between the fourth and fifth years of the lease term at a price determined under a formula based on the rentable and unimproved square footage of the building, and a right of first offer to purchase the building before the Landlord enters into a contract to sell the building to a third-party. The lease restricts CompManagement, Inc. from paying a dividend, or otherwise distributing funds or assets outside the ordinary course of business to Health Power, Inc. or another affiliate unless CompManagement, Inc. meets certain tangible net worth requirements. The Company also leases office space in Akron, Cincinnati, Cleveland, and Toledo, Ohio; Seattle, Washington; Charleston, West Virginia; Lexington, Kentucky; and Indianapolis, Indiana. These spaces are used as regional offices and service centers for its operations.
At December 31, 1999, future minimum rental payments under the operating leases are as follows:
Rental expense was approximately $2,564,137, $1,579,786 and $876,813, for 1999, 1998 and 1997, respectively.
Under the Plans, the Company is authorized to issue shares of common stock pursuant to "awards" granted in various forms, including incentive stock options (intended to qualify under Section 422 of the Internal Revenue Code of 1986, as amended), nonqualified stock options, and other similar stock-based awards for up to 400,000 common shares of the Company. The Company granted stock options in 1999, 1998 and 1997 under the Plans in the form of incentive stock options and nonqualified stock options. The Company is authorized to issue 55,000 shares of common stock under the 1996 directors' stock award plan. In February 1998, the Company registered 180,000 shares of common stock under an executive stock option plan.
The fair value of each stock option granted is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions for grants in 1999, 1998 and 1997, respectively: no dividend yield for all years; risk-free interest rates are different for each grant and range from 5.06% to 6.73%; the expected lives of options are estimated to be five years; and a volatility of 59.81% for 1999 grants, 50.20% for 1998 grants, and 41.97% for 1997 grants.
The following table summarizes information about director and employee stock options outstanding at December 31, 1999
ProForma net income and net income per common share. Had the compensation cost for the Company's stock-based compensation plans been determined in accordance with SFAS No. 123, the Company's net income and net income per common share for 1999, 1998 and 1997 would approximate the pro forma amounts below:
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 segment administers workers' compensation claims for the OBWC and began operations March 1, 1997. The Company also has an other segment which derives its revenues from management fees and interest income. Segment assets of the other segment includes assets of the discontinued operations of HPHMO.
On December 29, 1998, the Company's Board of Directors formally approved a plan to discontinue operations of HPHMO. Accordingly, the operating results of the HMO operations, including provisions for estimated lease costs, employee severance and benefits, write-downs of property, plant and equipment during the phase-out period and a loss on disposal have been segregated from continuing operations and reported as a separate line item on the statement of operations. Income from operations of the discontinued HMO operations for the year 1998 included results through December 31, 1998.
The Company has reclassified its prior financial statements to present the operating results of HPHMO as discontinued operations. The assets and liabilities of such operations at December 31, 1999 and 1998, respectively, have been reflected as separate line items on the balance sheet based substantially on the original classification of such assets and liabilities.
The assets and liabilities of the discontinued HMO operations as of December 31 were as follows:
Health care providers. During 1999, 1998 and 1997, primary care and physician-related costs of $58,346, $564,123 and $1,485,107, respectively, resulted from transactions between HPHMO and affiliated providers. Such transactions resulted in receivables from related primary care providers of $39,076 and $12,830 as of December 31, 1999 and 1998, respectively.
Commercial revenue. Certain affiliated providers had contracted with HPHMO to provide health care services to their employees and dependents. HPHMO recognized commercial premiums from these affiliated providers in the amounts of $20,582, $53,674, and $65,793 in 1999, 1998 and 1997, respectively.