The Company leases a 70,000 square foot office building in Dublin, Ohio, which 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, among other things, three renewal options of five years each, an option to purchase the building, and a right of first offer with respect to the sale of such building. 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 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.
The Company 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.
Through CompManagement and M&N Risk Management, the Company serves as a TPA for workers' and unemployment compensation claims and provides claims management, risk management, and medical cost containment services primarily to Ohio employers, as well as to a small number of employers located in the states of Washington and West Virginia. The Company is one of the largest workers' compensation TPAs in Ohio, currently serving approximately 19,000 employers located throughout Ohio. M&N Risk Management was acquired by Health Power, Inc. in December 1998. This acquisition was accounted for under the purchase method of accounting for business combinations.
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 other segment that derives its revenues from management fees and interest income. See Note 12 of the Notes to Consolidated Financial Statements appearing in Item 8 of this Form 10-K.
Revenues from continuing operations increased $13.4 million, or 54%, to $38.3 million during 1999, from $24.9 million for 1998. Revenues from TPA services increased by 65.8% from the prior year primarily as a result of the acquisition of M&N Risk Management in December 1998. The acquisition increased revenues by approximately $6.0 million. Revenues from MCO services increased by 42.8% from the prior year primarily as a result of the acquisition of the MCO assets of Anthem Managed Comp in July 1999. The acquisition increased revenues by approximately $5.7 million. In addition, revenues for 1998 were favorably impacted by the inclusion of a one-time incentive payment of approximately $1.5 million from the Ohio Bureau of Workers' Compensation related to the acceptance of workers' compensation claims with dates of injury that preceded the commencement date of the Health Partnership Program.
General and administrative ("G&A") expenses increased to $35.0 million, or 91.6% of revenues, for 1999, as compared to $21.3 million, or 85.6% of revenues, for 1998. G&A expenses increased in 1999 as a percentage of revenue primarily as a result of one-time expenses relating to the acquisitions of M&N Risk Management and Anthem Managed Comp. In addition, expenses as a percentage of revenues increased in 1999 due to 1998 revenues including a one-time incentive payment received for the acceptance of claims incurred prior to the commencement date of the Health Partnership Program.
The Company recognized an income tax benefit of $1.5 million in 1999 compared to an income tax expense of $1.6 million in 1998. The tax benefit was related to the recognition of certain tax assets which were not recognizable in prior years, but, due to the Company's profitability, became recognizable in 1999. Without recognition of the tax benefit, the Company would have incurred a tax expense in 1999 of $1.2 million for an effective tax rate of 42.5%.
The net loss from discontinued operations was $650,000, or basic and diluted earnings per share of $(0.17), for 1999, as compared to a net loss from discontinued operations of $6.5 million, or basic and diluted earnings per share of $(1.70), for 1998. The loss was related primarily to an increase in the reserve for anticipated costs in completing the liquidation of the discontinued operations.
The Company earned net income of $3.9 million, or basic and diluted earnings per share of $1.01, for 1999, as compared to a net loss of $4.1 million, or basic and diluted earnings per share of $(1.06), for 1998.
Revenues from continuing operations increased $2.7 million, or 12.1%, to $24.9 million during 1998, from $22.2 million for 1997, primarily as a result of a 15% increase in revenues from MCO services. This increase was primarily the result of the Company's MCO subsidiary being operational for
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 operation are to fund expenditures for continued growth and for possible acquisitions.
by the seller). The Company also has short term debt of $1.2 million payable to the seller for acquisition of Anthem Managed Comp. The foregoing events were the primary cause of the working capital deficit. The Company believes that the cash generated by continuing operations will be sufficient to cure the working capital deficit during 2000. However, there can be no assurance that cash generated from continuing operations will be sufficient to cure the working capital deficit. The Company intends to payoff the remaining balance of the bank demand note by the end of the third quarter 2000. The Company believes that cash generated from operations will be sufficient to pay this entire amount, but there can be no assurance that it will or that the bank will not make a demand for payment prior to the end of the third quarter. While the Company believes the bank will not make such a demand, if it does, such a demand could have an adverse effect on the Company's financial condition.
At December 31, 1999, cash and cash equivalents from continuing operations were $6.8 million, a decrease of $2.4 million from $9.2 million at December 31, 1998. The decrease in cash and cash equivalents was primarily related to the retirement of the debt associated with the M&N Risk Management acquisition and the initial payment made for the acquisition of Anthem Managed Comp.
As previously described, CompManagement Health Systems acquired all of the MCO assets of Anthem Managed Comp in July 1999. The purchase price for this acquisition, after an adjustment based on the results of the open enrollment caused by the transaction, was $4.6 million. The Company paid $1.6 million of the purchase price at the closing, and the balance of the purchase price was financed by the seller and payable, including principal and interest, as follows: $249,000 on February 1, 2000; $1.0 million on July 16, 2000; $561,000 due on February 1, 2001, 2002, 2003 and 2004; and $124,000 on July 1, 2004. These amounts due are offset by amounts paid to the seller under a network access fee agreement. The amounts due the seller are not secured by any assets of the Company.
The Company believes that cash generated from continuing operations will be sufficient to fund its anticipated cash needs for working capital and expenditures for continuing operations for the next 12 months, including working capital requirements caused by the bank making demand for payment of the $1.5 million balance on the demand loan. As discussed above, the Company had a working capital deficit from continuing operations of $2.1 million as of December 31, 1999.
Each of the Company's MCOs has a contract with OBWC enabling that MCO to participate in Ohio's Health Partnership Program. These contracts are each for a two-year term expiring on December 31, 2000. There can be no assurance that OBWC will renew either or both of these contracts when they expire. In addition, there can be no assurance that OBWC will not modify these contracts in the future in a manner unfavorable to the Company. Furthermore, OBWC may at any time initiate proceedings to decertify one of the Company's MCOs if that MCO fails to substantially perform its duties under its respective contract, and if such decertification occurs, the effected contract will automatically terminate. Finally, approximately 43% of the fees payable under these contracts are subject to the attainment of certain return to work measurements established in the contracts. There can be no assurance that the Company will be able to meet any or a significant portion of these performance measurements. These contracts account for all of the revenues associated with MCO services, which revenues were $18.5 million and $13.0 million in 1999 and 1998, respectively. For 1999 and 1998, the Company's MCO revenues represented approximately 48% and 52%, respectively, of the Company's consolidated revenues. The loss or unfavorable modification of these contracts or the failure to significantly satisfy the performance measurements under these contracts would have a material adverse effect on the Company's business, financial condition, and results of operations.
The Company is significantly dependent upon plans or programs administered by governmental agencies pursuant to state statutes and regulations. In particular, the Company is significantly dependent on Ohio's group rating program and, as described above, Ohio's Health Partnership Program. The Company provides TPA services for group rating plans for approximately 100 trade associations, which include approximately 17,920 employers. Each association and employer administrative agreement is typically for a one-year service period. The Company's MCOs are subject to extensive regulation by OBWC relating to their operations. Any changes to Ohio's statutes or regulations applicable to group rating plans or the Health Partnership Program, or interpretations of these statutes and regulations by OBWC, could have a material adverse effect upon the revenues and operations of the Company. The Company believes that its continuing operations are presently in compliance, in all material respects, with all laws, regulations and certification requirements applicable to such operations. However, there can be no assurance that the Company will be able to continue to maintain required regulatory authority or that regulatory changes will not have an adverse impact on the Company in the future.
During the past year the Company has invested, and may continue to invest, a substantial amount of capital for acquisitions. Acquisitions involve numerous risks, including the failure to retain key employees and contracts and the inability to integrate businesses without material disruption. In addition, some competitors of the Company have similar acquisition strategies. There can be no assurance that any future acquisitions will be successfully integrated into the Company's operations, that competition for acquisitions will not intensify, or that the Company will be able to complete such acquisitions on acceptable terms and conditions. In addition, the costs of unsuccessful acquisition efforts may adversely affect the Company's results of operations.
The workers' compensation cost containment and medical management industry is highly fragmented and competitive, and the intensity of competition can be expected to increase. In Ohio, the market share in this industry is concentrated among a few companies, including the Company. The
CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997 AND SUPPLEMENTAL FINANCIAL INFORMATION FOR THE YEAR ENDED DECEMBER 31, 1999
HEALTH POWER, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31, 1999 AND 1998 - --------------------------------------------------------------------------------
HEALTH POWER, INC., AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997 - --------------------------------------------------------------------------------
HEALTH POWER, INC., AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997 - --------------------------------------------------------------------------------
HEALTH POWER, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1999, 1998 AND 1997 - --------------------------------------------------------------------------------
Health Power, Inc. (the Company) is a Delaware holding company that provides full-service workers' and unemployment compensation consulting services through its CompManagement, Inc. (CompManagement) subsidiary to employers primarily located in the State of Ohio. Effective March 1, 1997, CompManagement Health Systems, Inc., a subsidiary of CompManagement, began operations as a managed care organization (MCO) for the Ohio Bureau of Workers' Compensation (OBWC). Effective December 31, 1998, CompManagement purchased M&N Risk Management, Inc. and M&N Enterprise, Inc., companies providing compensation consulting services. Effective July 16, 1999, CompManagement Health Systems, Inc. purchased the MCO assets of Anthem Managed Comp, a division of Anthem Insurance Company.
Unless otherwise stated, the notes to the financial statements disclose information related to continuing operations. See note 14 for disclosure of discontinued operations and related notes.
Property and equipment. Property and equipment are stated at cost. Depreciation is computed using the straight-line method over the estimated useful lives of the assets as follows:
Computer equipment 3-5 years Furniture and fixtures 5-10 years Office equipment 5-7 years Leasehold improvements 10-20 years
Goodwill. The Company records goodwill for the excess of cost over fair value of net assets acquired. Goodwill is amortized on a straight-line basis over a twenty year period. Goodwill is evaluated periodically as events or circumstances indicate a possible inability to recover their carrying amount.
Revenues. Contract revenues are derived from claims management, administrative, consulting services and managed care administration services which are recorded as earned based on the requirements and duration of the related contract. Revenue from the managed care administration services are recognized on a monthly basis based on the contracted administrative fee with the OBWC. In addition, contract revenue is recorded for certain incentive awards when the claims are processed to which the incentive is related and a bonus award is recorded in the year earned. Revenue on certain contracts has been deferred and is recognized in income on a pro rata basis over the related contract periods, which typically range between 3 and 12 months. Commission expense associated with these contracts is also deferred and recognized as an expense on a pro rata basis over the related contract periods. For services related to group rating contracts, fees are paid to the group's sponsor and netted against contract revenues. Contract revenues received in advance are included in deferred revenues.
Income taxes. Income taxes are accounted for on the liability method. Under this method, deferred income tax assets and liabilities are recognized for the tax consequences of differences between the financial statement carrying amounts and the tax bases of existing assets and liabilities by applying enacted statutory tax rates applicable to future years. The effect on deferred tax assets and liabilities of a change in tax rates is recognized as income or expense in the period that includes the enactment date.
The Company provides a director stock award plan to non-employee directors of Health Power, Inc., Health Power HMO, Inc. and CompManagement, Inc. Under this plan, the directors elect percentages of their directors' fees to be paid in cash or in stock of Health Power, Inc. Payment of the directors' fees is made subsequent to attendance of the respective meetings. Under this plan, the Company issued 18,890, 13,831, and 10,167 shares of common stock with a market value of $44,867, $65,975 and $32,452 for the years ended December 31, 1999, 1998 and 1997, respectively. The Company records the expense in the year the stock is earned.
Earnings per share. Basic earnings per share is computed based on the weighted average number of shares of common stock outstanding during the reporting period. Diluted earnings per share is computed based on the weighted average number of shares outstanding during the period adjusted for common stock equivalents that are dilutive during the period.
Accounts receivable $ 3,635,212 Deferred tax and other assets 2,031,375 Goodwill 5,624,392 Accounts payable and accrued liabilties (2,600,281) Deferred revenue (3,163,962) -----------
The acquisition has been accounted for under the purchase method. The purchase price has been allocated as follows:
Property and equipment $ 500,576 Goodwill 4,279,152 Accounts payable (130,305) ----------
The Company maintains an allowance for doubtful accounts when the receivable is estimated to be uncollectible.
Notes payable at December 31, 1999 and 1998 were as follows:
The fair value of the note payable to a bank approximates the carrying amount at December 31, 1999 and 1998 since its interest rate is based on recent market rates. At December 31, 1998, the fair value approximated the carrying amount of the note payable to the parent Company of M&N as the note originated on that date. The fair value of the note payable to AMC at December 31, 1999, based on the present value of future cash flows discounted at estimated borrowing rates for similar debt instruments, was $3,002,000.
Maturities of notes payable at December 31, 1999 are as follows:
CompManagement is party to employment agreements with certain employees. The agreements call for certain levels of commission expense to be paid by CompManagement to these individuals for selected contract revenue earned over the terms of their agreements. In 1997, CompManagement and CompManagement Health Systems amended the above employment agreements to include certain commissions to be paid to these employees. These agreements expired on December 31, 1999. In March, 2000 new employment agreements with certain employees were approved by the Board of Directors. These agreements extend the commission arrangements through December 31, 2002. Total commission expense paid in 1999, 1998 and 1997 in connection with these agreements was approximately $497,000, $668,000 and $2,050,000, respectively.
Income tax benefit (expense) for the years ended December 31, 1999, 1998 and 1997 consists of the following:
Income tax benefit (expense) is included in the financial statements as follows:
The components of the net deferred tax asset (liability) as of December 31, 1999 and 1998 were as follows:
Stock-based compensation plans. The Company sponsors various stock-based incentive compensation plans (the Plans) for directors and eligible employees.
The Company maintains 401(k) plans for its employees meeting certain age requirements and completing six months to one year of employment. Qualifying employees may contribute a percentage of their compensation to the plans. The Company matches a portion of the employee contributions based on the terms of the plan agreement. The Company's matching contributions to the 401(k) plans were approximately $237,854, $79,803 and $50,332 for 1999, 1998 and 1997, respectively, for employees of the continuing operations and approximately $6,793, $3,438 and $5,976 for 1999, 1998 and 1997, respectively for employees of the discontinued operations.
The accounting policies of the segments are the same as those described in Note 2 " Summary of Significant Accounting Policies". 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.
On May 1, 1999, the certificate of authority of HPHMO was revoked by the Ohio Department of Insurance ("ODI") for failure to meet statutory financial requirements. Since that time, and in accordance with the ODI revocation order, HPHMO has been winding-up its business under the supervision of ODI, but without judicial involvement.
The HMO accepted all valid claims related to provider services rendered prior to April 30, 1999. In addition, the HMO has disposed of substantially all tangible assets related to its operations and, pursuant to the wind-down plan, the proceeds from these sales have been segregated to be used in satisfaction of all claims filed through October 31, 1999. The HMO will not have sufficient assets to pay the claims of all of its creditors.
Management services. The Company has a management service agreement between Health Power Management Company (HPMC), a subsidiary of the Company, and its affiliate HPHMO, to provide administrative services. Services provided include finance and accounting functions, data processing, office of the president, marketing and membership services, corporate planning, and legal and regulatory services. The affiliates of HPMC pay a management fee on a monthly basis. Beginning in 1997, HPHMO was reimbursed approximately $14,000 per month through April 1999 and $14,000 and $7,000 per month in 1998 and 1997, respectively, by its affiliates CompManagement, Inc. and CompManagement Health Systems, for the portion of management services that related to their organization's activities.
HPHMO engaged in transactions with medical centers and companies controlled by certain shareholders and directors of the Company and its subsidiaries, which are herein, referred to as affiliates or affiliated providers as follows:
HPHMO maintains stop-loss insurance coverage for 85% of inpatient hospital costs in excess of $50,000 per Medicaid member, per contract year and varying percentages (generally 80%) of inpatient hospital costs in excess of $81,000 per commercial member, per contract year. These stop-loss insurance contracts do not relieve HPHMO of its obligations to members, and failure of reinsurers to honor their obligations could result in losses to HPHMO.
During 1998, the Company's HMO subsidiary commenced a legal action seeking compensation for damages alleged under a prior administrative agreement with a claims processing organization. A counterclaim was filed against HPHMO sought compensatory and punitive damages alleged under this same agreement. HPHMO and the claims processing organization signed a settlement agreement effective February 25, 2000 which provided for the dismissal of all claims in litigation.