10-Q 1 l84662ae10-q.txt HEALTH POWER, INC. FORM 10-Q 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 SEPTEMBER 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 ------- 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 3,888,460 ------------------------------------- ----------------------------------------- Class Outstanding at November 14, 2000 Page 1 2 HEALTH POWER, INC. AND SUBSIDIARIES INDEX PAGE PART I. FINANCIAL INFORMATION Item 1. Financial Statements Consolidated Balance Sheets - as of 3 & 4 September 30, 2000 and December 31, 1999 Consolidated Statements of Operations for the nine months 5 ended September 30, 2000 and September 30, 1999 Consolidated Statements of Cash Flows - for the nine months ended September 30, 2000 and September 30, 1999 6 Notes to the Consolidated Financial Statements 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 11 Item 3. Quantitative and Qualitative Disclosures about Market Risk 15 PART II.OTHER INFORMATION Item 4. Exhibits & Reports 15 Signatures 16 Page 2 3 PART I - FINANCIAL INFORMATION Item 1. Financial Statements HEALTH POWER, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS as of September 30, 2000 and December 31, 1999 September 30, 2000 December 31, ASSETS (Unaudited) 1999 ------ ----------- ---- Current assets: Cash and cash equivalents $3,990,997 $6,815,578 Accounts receivable, net 4,022,296 4,094,365 Prepaid expenses and other assets 1,005,603 332,988 Current assets of discontinued operations 55,011 4,273,765 Deferred income taxes 255,680 2,107,984 ---------- ---------- Total current assets 9,329,587 17,624,680 ---------- ---------- Property and equipment, net 4,151,867 3,889,237 Goodwill 9,238,441 9,510,984 Deposits and other assets 63,780 553,371 ----------- ----------- Total assets $22,783,675 $31,578,272 =========== =========== The accompanying notes are an integral part of the financial statements Page 3 4 CONSOLIDATED BALANCE SHEETS, Continued
September 30, 2000 December 31, LIABILITIES AND STOCKHOLDERS' EQUITY (Unaudited) 1999 ------------------ ------------ Current liabilities: Deferred revenues $4,735,835 $10,527,550 Accounts payable 789,208 1,023,945 Accrued expenses and other liabilities 1,218,399 965,476 Taxes payable 958,200 215,215 Current liabilities of discontinued operations 2,389 6,734,980 Notes and leases payable 1,566,845 2,764,536 ----------- ----------- Total current liabilities 9,270,876 22,231,702 Notes and leases payable - noncurrent 1,576,366 2,086,460 Deferred income taxes 480,240 224,131 ----------- ----------- Total Liabilities 11,327,482 24,542,293 ----------- ----------- Stockholders' equity: Common stock 38,885 38,537 Additional paid-in capital 10,907,502 10,854,153 Accumulated earnings (deficit ) 509,806 (3,856,711) ----------- ----------- Total stockholders' equity 11,456,193 7,035,979 ----------- ----------- Total liabilities and stockholders' equity $22,783,675 $31,578,272 =========== ===========
The accompanying notes are an integral part of the financial statements Page 4 5 HEALTH POWER, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited) (Unaudited) Three Months Ended Nine Months Ended Sept 30, Sept 30, 2000 1999 2000 1999 ---- ---- ---- ---- Revenues: Contract $11,658,520 $10,571,121 $35,406,970 $25,989,190 Expenses: Selling, general and administrative 10,318,395 9,754,888 30,968,427 22,795,960 ----------- ----------- ----------- ----------- Income from operations 1,340,125 816,233 4,438,543 3,193,230 Interest income and other, net (8,863) (114,430) 66,350 (77,045) ----------- ----------- ----------- ----------- Income from continuing operations before income taxes 1,331,262 701,803 4,504,893 3,116,185 Federal, state and local income taxes 541,741 184,089 1,774,881 1,089,812 ----------- ----------- ----------- ----------- Net income from continuing operations 789,521 517,714 2,730,012 2,026,373 Discontinued operations: Gain from disposal of discontinued operations (net of tax expense of $3,000 and $ 0 , / (5,000) 0 180,976 0 / $149,640 and $ 0 , respectively ) Extraordinary Item Gain from extinguishment of debt (net of tax benefit of $783,058 ) 0 0 1,455,529 0 ----------- ----------- ----------- ----------- Net income (loss) $784,521 $517,714 $4,366,517 $2,026,373 =========== =========== =========== =========== EARNINGS PER SHARE (BASIC) Continuing operations, per share $0.20 $0.13 $0.70 $0.53 Discontinued operations, per share $0.00 $0.00 $0.05 $0.00 Extraordinary item, per share $0.00 $0.00 $0.38 $0.00 =========== =========== =========== =========== Net income per share - basic $0.20 $0.13 $1.13 $0.53 =========== =========== =========== =========== EARNINGS PER SHARE (DILUTED) Continuing operations, per share $0.20 $0.13 $0.70 $0.53 Discontinued operations, per share $0.00 $0.00 $0.05 $0.00 Extraordinary item, per share $0.00 $0.00 $0.38 $0.00 =========== =========== =========== =========== Net income per share - diluted $0.20 $0.13 $1.13 $0.53 =========== =========== =========== ===========
The accompanying footnotes are an integral part of the financial statements. Page 5 6 HEALTH POWER, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS for the nine months ended September 30, 2000 and 1999
(Unaudited) (Unaudited) 2000 1999 ---- ---- CASH FLOWS (USED IN) PROVIDED BY OPERATING ACTIVITIES: Cash (used in) continuing operating activities ($207,118) ($3,755,552) Cash (used in) provided by discontinued operations (4,021,230) 562,344 ---------- ---------- Net cash (used in) operating activities: (4,228,348) (3,193,208) ---------- ---------- CASH FLOWS (USED IN) PROVIDED BY INVESTING ACTIVITIES: Purchase of property and equipment, net (1,183,384) (772,340) Acquisition of business 0 (1,590,576) ---------- ---------- Cash (used in) continuing operating activities (1,183,384) (2,362,916) Cash provided by discontinued operations 0 21,086 ---------- ---------- Net cash (used in) investing activities (1,183,384) (2,341,830) ---------- ---------- CASH FLOWS (USED IN) PROVIDED BY FINANCING ACTIVITIES: Payments on notes payable and lease obligations (1,487,776) 0 Issuance of Common Stock 53,697 42,867 Change restricted cash of discontinued operations 4,021,230 0 ---------- ---------- Net cash provided by financing activities 2,587,151 42,867 ---------- ---------- Net decrease in cash and cash equivalents (2,824,581) (5,492,171) Cash and cash equivalents, beginning of year 6,815,578 11,714,169 ---------- ---------- Cash and cash equivalents, end of period $3,990,997 $6,221,998 ========== ===========
The accompanying notes are an integral part of the financial statements Page 6 7 HEALTH POWER, INC. AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 1. The accompanying consolidated financial statements are unaudited and have been prepared by 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 nine-month periods ending September 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 nine month period ending September 30, 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 September 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 an 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. On June 8, 2000, Security Capital Corporation (SCC) and the Company signed a definitive agreement to merge. The merger is subject to the approval of the Company's shareholders. Pursuant to the terms of the agreement, the Company will become a subsidiary of SCC and stockholders of the Company will receive approximately $27.3 million in cash, or in the range of $6.98 to $7.03 per share, in exchange for their shares. 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. 5. 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 Page 7 8 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. Segment Reporting for Continuing Operations:
NINE MONTHS ENDED SEPTEMBER 30, 2000 --------------------------------------------- MANAGED CARE CONSULTING OTHER ELIMINATION'S TOTAL SERVICES SERVICES ------------------- ---------------- --------------- ---------------- --------------- Revenues to unaffiliated $20,559,353 $14,847,617 $ $ - $35,406,970 customers Intercompany revenues 246,423 (246,423) Income before taxes 1,885,228 2,692,175 5,758,686 (5,831,196) 4,504,893 NINE MONTHS ENDED SEPTEMBER 30, 1999 ------------------------------------ Revenues to unaffiliated $11,313,773 $14,675,417 $ - $ - $25,989,190 customers Intercompany revenues 1,276,924 (1,276,924) Income before taxes 147,317 3,006,692 4,666,468 (4,704,292) 3,116,185 THREE MONTHS ENDED SEPTEMBER 30, 2000 -------------------------------------------- MANAGED CARE CONSULTING OTHER ELIMINATION'S TOTAL SERVICES SERVICES ------------------- --------------- -------------- ---------------- --------------- Revenues to unaffiliated $6,723,205 $4,935,315 $ $ - $11,658,520 customers Intercompany revenues 1,812 (1,812) Income before taxes 552,672 778,697 802,416 (802,523) 1,331,262 THREE MONTHS ENDED SEPTEMBER 30, 1999 ------------------------------------- Revenues to unaffiliated $5,483,144 $5,087,977 $ - $ - $10,571,121 customers Intercompany revenues 316,433 (316,433) Income before taxes (696,978) 1,420,428 517,714 (539,361) 701,803
6. Supplemental Disclosures for Earnings Per Share:
NINE MONTHS ENDED SEPTEMBER 30, 2000 1999
Page 8 9 BASIC: Earnings: Income from continuing operations $2,730,012 $2,026,373 Gain on disposal of discontinued operations 180,976 - Gain on extraordinary item 1,455,529 - ---------- ---------- Net income $4,366,517 $2,026,373 ---------- ---------- Shares: Weighted average common shares outstanding 3,865,918 3,843,470 ---------- ---------- Income from continuing operations per common share, basic $0.70 $0.53 Gain on disposal of discontinued operations per share, basic 0.05 0.00 Gain on extraordinary item per share, basic 0.38 0.00 ---------- ---------- Net income per common share, basic $1.13 $0.53 DILUTED: 2000 1999 Earnings: Income from continuing operations $2,730,012 $2,026,373 Gain on disposal of discontinued operations 180,976 - Gain on extraordinary item 1,455,529 - ---------- ---------- Net income $4,366,517 $2,026,373 ---------- ---------- Shares: Weighted average common shares outstanding 3,865,918 3,843,470 Add: Dilutive effect of outstanding options 8,610 98 Weighted average common shares outstanding, diluted 3,874,528 3,843,568 ---------- ---------- Income from continuing operations per common share, diluted $0.70 $0.53 Gain on disposal of discontinued operations per share, diluted 0.05 0.00 Gain on extraordinary item per share, diluted 0.38 0.00 ---------- ---------- Net income per common share, diluted $1.13 $0.53 ------------------------- THREE MONTHS ENDED SEPTEMBER 30, 2000 1999 BASIC: Earnings: Income from continuing operations $789,521 $517,714 Loss on disposal of discontinued operations (5,000) - Gain on extraordinary item - - -------- -------- Net income $784,521 $517,714 -------- -------- Shares: Weighted average common shares outstanding 3,878,928 3,851,172 --------- --------- Income from continuing operations per common share, basic $0.20 $0.13 Gain on disposal of discontinued operations per share, basic 0.00 0.00 Gain on extraordinary item per share, basic 0.00 0.00 --------- --------- Net income per common share, basic $0.20 $0.13 DILUTED: 2000 1999 Earnings: Income from continuing operations $789,521 $517,714 Gain on disposal of discontinued operations (5,000) - Gain on extraordinary item - - --------- ---------
Page 9 10 Net income $784,521 $517,714 --------- --------- Shares : Weighted average common shares outstanding 3,878,928 3,851,172 Add: Dilutive effect of outstanding options 23,299 0 Weighted average common shares outstanding, diluted 3,902,227 3,851,172 --------- --------- Income from continuing operations per common share, diluted $0.20 $0.13 Gain on disposal of discontinued operations per share, diluted 0.00 0.00 Gain on extraordinary item per share, diluted 0.00 0.00 --------- --------- Net income per common share, diluted $0.20 $0.13
Page 10 11 November 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 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 substantially completed the distribution of all of its assets in payment of the claims of its creditors in the manner approved by the Department. As of June 30, 2000, the Ohio Department of Insurance removed its supervision order. All remaining windup matters will be completed by the end of November 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. Page 11 12 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 (SCC) and Health Power, Inc. signed a definitive agreement to merge. The merger is subject to the approval of the Company's shareholders. Pursuant to the terms of the agreement, the Company will become a subsidiary of SCC and stockholders of the Company will receive approximately $27.3 million in cash, or in the range of $6.98 to $7.03 per share, in exchange for their shares. 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. RESULTS OF OPERATIONS THREE MONTHS ENDED SEPTEMBER 30, 2000, COMPARED TO THREE MONTHS ENDED SEPTEMBER 30, 1999 Revenues from continuing operations increased $1,089,000 or 10.3%, to $11,660,000 during the third quarter of 2000, from $10,571,000 for the same period in 1999. Revenues from TPA services decreased 3.0% primarily as a result of adjustments and cancellations through the annual group rating process. Revenues from the MCO services increased 22.6% primarily as a result of the inclusion of revenues from Integrated Comp. General and administrative ("G&A") expenses increased $565,000 to $10,320,000, or 88.5% of revenues, for the third quarter of 2000, as compared to $9,755,000, or 92.2% of revenues, for the same period in 1999. G&A expenses decreased in the third quarter of 2000 as a percentage of revenues due to spreading fixed costs over a higher revenue base. Included in G&A expense is $146,000 of expenses directly related to the merger of Security Capital Corporation and the Company. Such expenses relate to the negotiation and preparation of the merger agreement as well as other documents. "Open enrollment" for the MCO business and professional services associated with the integration of the acquisition of Integrated CompManagement increased the overall G&A expenses in the third quarter. Interest income and other expenses,net decreased $105,000 to $9,000 expenses for the third quarter of 2000, from $114,000 for the same period in 1999. This decrease in expense resulted primarily from the retirement of the seller-financed debt related to the M&N Risk Management acquisition. Income tax expense was $542,000 in the third quarter of 2000, or an effective tax of 40.75%, as compared to $184,000 for the same period in 1999, or an effective tax rate of 26.23%. As a result of the foregoing, income from continuing operations was $790,000, or basic and diluted earnings per share of $0.20, for the third quarter of 2000, as compared to income from continuing operations of $518,000, or basic and diluted earnings per share of $ 0.13 for the same period in 1999. Excluding the transaction costs, the income from continuing operations was $936,000 or basic & diluted earnings per share of $0.24. Page 12 13 The Company had net income of $784,000, or basic and diluted earnings per share of $0.20 for the third quarter of 2000, as compared to net income of $518,000, or basic and diluted earnings per share of $0.13, for the same period in 1999. There were 3,878,928 and 3,851,172 basic weighted average shares of common stock and common stock equivalents for the three months outstanding at September 30, 2000 and 1999, respectively. There were 3,902,227 and 3,851,172 diluted weighted average shares of common stock and common stock equivalents for the three months outstanding at September 30, 2000 and 1999, respectively. NINE MONTHS ENDED SEPTEMBER 30, 2000, COMPARED TO NINE MONTHS ENDED SEPTEMBER 30, 1999 Revenues from continuing operations increased $9,418,000 or 36.2%, to $35,407,000 during the first nine months of 2000, from $25,989,000 for the same period in 1999. Revenues from TPA services increased 1.2% primarily as a result of increased revenues from M&N Risk Management. Revenues from the MCO services increased 81.7% primarily as a result of the inclusion of revenues from Integrated Comp. General and administrative ("G&A") expenses stayed the same, $8,172,000 to $30,968,000, or 87.5% of revenues, for the first nine months of 2000, as compared to $22,796,000, or 87.7% of revenues, for the same period in 1999. G&A expenses increased overall in the first nine months of 2000 primarily due to costs associated with "Open Enrollment" for the MCO business and professional services associated with the integration of the Integrated CompManagement acquisition. Interest income and other increased $143,000 to $66,000 for the first nine months of 2000, from $77,000 expense 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 $1,775,000 in the first nine months of 2000, or an effective tax of 39.4%, as compared to $1,090,000 for the same period in 1999, or an effective tax rate of 35.0%. As a result of the foregoing, income from continuing operations was $2,730,000, or basic earnings per share of $0.70 and diluted earnings per share of $0.70, for the first nine months of 2000, as compared to income from continuing operations of $2,026,000, or basic and diluted earnings per share of $ 0.53 for the same period in 1999. The Company experienced a gain from discontinued operations for the first nine months of 2000 of $180,000 or $0.05 basic and diluted earnings per share as compared to no net income or loss from discontinued operations for the same period during 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 has recognized an extraordinary, non-cash gain of $1,456,000, net of taxes, for the second quarter ended June 30, 2000. The Company had net income of $4,367,000, or basic and diluted earnings per share of $1.13 for the first nine months of 2000, as compared to net income of $2,026,000, or basic and diluted earnings per share of $0.53, for the same period in 1999. There were 3,865,918 and 3,843,470 basic weighted average shares of common stock and common stock equivalents outstanding at September 30, 2000 and 1999, respectively. There were 3,874,528 and 3,843,568 diluted weighted average shares of common stock and common stock equivalents outstanding at September 30, 2000 and 1999, respectively. Page 13 14 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. The company had $6,000 of working capital from continuing operations as of September 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 meet the working capital requirement during the fourth quarter of 2000. However, there can be no assurance that cash generated from continuing operations will be sufficient to meet the working capital requirement. 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 September 30, 2000, cash and cash equivalents from continuing operations were $3,991,000, a decrease of $2,824,000 from $6,815,000 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 and the payments towards the seller financed debt related to the Anthem Integrated purchase. 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 released it supervision effective June 30, 2000. 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 November 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. Page 14 15 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. Part II - Other Information Item 4. Exhibits and Reports on Form 8 -K (a) EXHIBITS 27 Financial Data Schedule (b) REPORTS ON FORM 8 - K On August 25, 2000, the Company filed a Form 8 - K (dated August 23, 2000) reporting under item 5 of such report the Company's entering into an amended merger agreement with Security Capital Corporation. Page 15 16 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: NOVEMBER 14, 2000 By /s/ BERNARD F. MASTER, DO ---------------------------------------------- BERNARD F. MASTER, DO, PRESIDENT, CHIEF OPERATING OFFICER AND CHAIRMAN OF THE BOARD DATE: NOVEMBER 14, 2000 By /s/ PAUL A. MILLER ---------------------------------------------- PAUL A. MILLER, CHIEF FINANCIAL OFFICER AND PRINCIPAL ACCOUNTING OFFICER Page 16