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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the Fiscal Year Ended December 31, 1997, OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
Commission File No.0-13591
PROVIDENT AMERICAN CORPORATION
(Exact name of registrant as specified in its charter)
Pennsylvania 23-2214195
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2500 DeKalb Pike, Norristown, Pennsylvania 19404
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (610) 279-2500
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
------------------- -------------------
None None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.10 Par Value
(Title of class)
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 by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates
of the Registrant, based upon the closing sale price of the Common Stock on June
30, 1998 as reported on Standard and Poor's (S&P) ComStock system, was
approximately $ 41,070,669. Shares of Common Stock held by each officer and
director and by each person who owns 5% or more of the outstanding Common Stock
have been excluded in that such persons may be deemed to be affiliates. This
determination of affiliate status is not necessarily a conclusive determination
for other purposes.
As of June 30, 1998, Registrant had 10,173,860 shares of Common Stock
outstanding.
The Exhibit Index is located on Page 45
PROVIDENT AMERICAN CORPORATION
Table of Contents
Page
----
I. Part I.
Item 1. Business 2-15
Item 2. Properties 15
Item 3. Legal Proceedings 15
Item 4. Submission of Matters to a Vote of Security Holders 15
II. Part II.
Item 5. Market for Registrant's Common Equity
and Related Stockholder Matters 16-18
Item 6. Selected Financial Data 19-20
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations 21-28
Item 8. Financial Statements and Supplementary Data 29
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 30
III. Part III.
Item 10. Directors and Executive Officers of the Registrant 31-33
Item 11. Executive Compensation 34-39
Item 12. Security Ownership of Certain Beneficial
Owners and Management 40-41
Item 13. Certain Relationships and Related Transactions 42
IV. Part IV.
Item 14. Exhibits, Financial Statement Schedules
and Reports on Form 8-K 43
Exhibit Index 45-52
- 1 -
PART I
Item 1. Business.
Description of the Business and Recent Significant Developments
Provident American Corporation ("PAMCO") is a Pennsylvania corporation
organized in 1982 and regulated as an insurance holding company by the 42 states
in which its wholly owned insurance subsidiaries, Provident Indemnity Life
Insurance Company ("PILIC") and Provident American Life and Health Insurance
Company ("PALHIC"), both Pennsylvania stock life insurance companies, are
licensed. PAMCO's business activities are conducted through PILIC, PALHIC,
Montgomery Management Corporation ("MMC") and NIA Corporation ("NIA").
Hereinafter, PAMCO and all of its subsidiaries are collectively referred to as
the Company. In March 1998, the Company sold 49% of MMC's outstanding common
stock along with a warrant to purchase an additional 31% of MMC's common stock
for $4 million, effective as of January 1, 1998.
The Company markets and underwrites medical insurance and life
insurance and derives a majority of its revenue from group association major
medical products sold to individuals. A smaller proportion of revenue is derived
from traditional life (whole life and limited pay) products. Recent significant
developments for the Company were the expansion of its healthcare insurance and
managed care business through the introduction of new products, alliances and
acquisitions. The impact of these events is as follows:
(Dollars in thousands) 1997 1996 1995
---- ---- ----
Gross premiums $ 94,274 $ 68,503 $ 52,248
Total revenue $ 62,030 $ 74,147 $ 37,047
Net income (loss) $(18,425) $ 16,120 $ (3,701)
Total assets $98,365 $ 93,054 $ 67,151
Total revenue for each year is net of premium ceded to reinsurers.
Total revenues in 1996 included a litigation settlement of $22.4 million. Gross
premium growth in 1997 was the result of significant sales from two managed care
products. These product sales were made possible by alliances and acquisitions.
The change in net income from 1996 to a loss in 1997 was attributable primarily
to higher policy benefits, write off of deferred acquisition costs, impairment
of certain assets, and transition costs associated with HPS.
- 2 -
Product Profile
The following table sets forth the Company's gross earned premium by
product during each of the three years ended December 31:
(Dollars in thousands) 1997 1996 1995
----------- ------------ -----------
Managed Care:
The Provident Solution $41,199 $22,634 $3,087
HealthQuest 23,062 6,136 0
----------- ------------ -----------
64,261 28,770 3,087
----------- ------------ -----------
Non-Managed Care:
Small Group 4,784 7,258 11,778
Individual 12,414 18,463 21,359
----------- ------------ -----------
17,198 25,721 33,137
----------- ------------ -----------
Excess loss insurance 3,248 2,704 2,804
----------- ------------ -----------
Total Health Products 84,707 57,195 39,028
----------- ------------ -----------
Group Life 2,655 2,406 2,653
Individual Life 6,912 8,902 10,567
----------- ------------ -----------
Total Life Products 9,567 11,308 13,220
----------- ------------ -----------
Gross Premium $94,274 $68,503 $52,248
=========== ============ ===========
Health Products: The Company's medical insurance business has been
migrating from products designed for the small group indemnity market to
products designed for the individual and small group managed care market. This
change is being accomplished through product redesign, strategic relationships
with certain preferred provider organizations ("PPOs"), expanding distribution
channels and enhancing administrative capabilities.
- 3 -
The new managed care comprehensive major medical product designs
incorporate both freedom of choice and financial incentives to utilize network
health care providers. The Company has a long-term agreement with the largest
independent PPO in the country, First Health Group Corporation ("FHG"), and
designs and markets products utilizing that network of hospitals and physicians.
Other regional networks are used if and when the primary network is not a
practicable option. FHG also provides utilization and cost management services
such as pre-certification of hospital admissions and large case management
which, when taken together with the discounts the Company enjoys through all of
its PPO arrangements, are intended to allow for better control of claim costs
and, ultimately, competitively priced products. The Company has been active in
developing its provider network arrangements for several years. This has
resulted in increased net claim savings. It is the Company's practice to pass on
these savings to customers in the form of more competitive premium rates.
The Company distributes its managed care products through the managing
general agent ("MGA") system. At December 31, 1997, the Company had over 20,000
independent agents and brokers, organized under approximately 75 Managing
General Agents, actively selling its managed care products. In 1996, the Company
entered into a marketing agreement with the country's largest third party
administrator, HealthPlan Services, Inc. ("HPS"), with access to substantially
more independent agents. This relationship with HPS was expanded during 1997, as
discussed in greater detail below.
The Company is continuing the process of converting and expanding its
administrative infrastructure to one specifically designed to accommodate
managed care products. In October 1997, the Company announced an outsourcing
arrangement with HPS, whereby HPS provides administrative support for all of the
Company's medical products, including billing and collection of premium, claims
adjudication and ongoing policyholder services (the "HPS Outsourcing
Agreement"). This arrangement will also provide the Company with the opportunity
to grow its business and provide capable customer service while limiting capital
expenditures. The HPS Outsourcing Agreement, which commenced February 1, 1998,
is for a five-year term. The Company has agreed to pay a base monthly fee and a
sliding scale percentage of premiums, which will decrease as the volume of
business increases. The Company transitioned all functions covered by the
outsourcing agreement to HPS effective February 1998.
- 4 -
The Company's principal managed care products are "The Provident
Solution" and "HealthQuest" which together offer a variety of deductibles,
coinsurance amounts and managed care options. Minimum amounts of group term life
are required with many of the medical products. "The Provident Solution" relies
on FHG for access to network providers and advantageous fee schedules, while
"HealthQuest" relies on regional PPOs. The following table illustrates
applications received for the principal products:
1997 1996 1995
----------- ----------- -----------
HealthQuest 26,935 7,119 0
The Provident Solution 23,257 21,292 9,260
All Others 1,085 3,149 3,095
----------- ----------- -----------
51,277 31,560 12,355
=========== =========== ===========
At December 31, 1997 the Company had a total of 50,000 in-force group
medical certificates compared to 36,000 at December 31, 1996. The Company has
systematically withdrawn from the small group indemnity markets as healthcare
reform at the state level has rendered those products obsolete. The book of
small group indemnity business has been in a runoff mode since 1992 and the
Company's individual indemnity products have only generated modest sales since
1994, when "The Provident Solution" was developed.
The mix of business has changed significantly over the last three
years. The following table illustrates the composition of annualized premium
in-force for the last three years:
(Dollars in thousands) 1997 1996 1995
--------- ----------- -----------
Managed Care
The Provident Solution $43,244 $33,169 $11,124
HealthQuest (1) 34,913 12,718 0
Non-Managed Care:
Small group 5,681 7,009 10,998
Individual 12,983 17,797 21,646
--------- ----------- -----------
$96,821 $70,693 $43,768
========= =========== ===========
(1) The Company assumed in-force HealthQuest policies with the acquisition of
NIA effective May 1, 1996 consisting of approximately $6.5 million of annualized
premium.
- 5 -
The introduction of managed care products has impacted the Company's
distribution of business by state. The states which generated the largest share
of health premiums during each of the last three years were as follows:
1997 1996 1995
----- ----- -----
Georgia 28.7% 24.4% 20.3%
Florida 20.5 21.8 12.8
Louisiana 8.1 7.3 5.6
Pennsylvania 6.9 13.2 22.2
Texas 6.7 7.5 6.2
South Carolina 4.4 2.6 1.9
Colorado 2.6 0.4 0.3
Ohio 2.3 2.3 1.9
West Virginia 2.2 3.5 6.1
Virginia 2.1 2.3 2.6
All other 15.5 14.7 20.1
----- ----- -----
100.0% 100.0% 100.0%
===== ===== =====
The acquisition of PALHIC in 1996 significantly increased the number of
states within which the Company can write its insurance business. The importance
of any particular state may vary significantly from time to time as state
healthcare reforms are enacted, the managed care competitive environment changes
and the composition of the Company's distribution system evolves.
As part of its health product portfolio, the Company derived both
premiums and fees through the sale and underwriting of high-deductible medical
excess loss insurance for self-insured employers. MMC sells and services these
insurance products which are issued by unrelated insurance companies . The
Company assumes a portion of the insurance risk and earns premiums and up until
1997 earned profit sharing fees. During the first quarter of 1998 the Company
sold 80% of MMC to HPS. The sale resulted in a realized gain of $4 million in
the first quarter of 1998 which will help finance future growth in the Company's
target market. The Company continues to assume the premium administered by MMC.
Life Products: The Company's pre-need insurance products, single
premium and limited payment life insurance, provide funding in conjunction with
pre-arranged funerals. The policies sold average $2,830 of face amount and the
buyer's average age is 72. The Company's "Senior Estate Plan" is a whole life
insurance policy designed for senior citizens who have not yet pre-arranged
their funerals, but wish to plan for death-related expenses. The average policy
size is $5,000 and the buyer's average age is 65.
- 6 -
During 1997, the Company issued 1,347 pre-need and final expense
policies representing approximately $8.5 million of face value, as compared with
3,793 pre-need and final expense policies representing approximately $18.9
million of face value during 1996. Combined gross premium income for these two
products approximated $5.8 million in 1997 and $8.1 million in 1996. At December
31, 1997, the Company had 18,295 pre-need and final expense policies in-force
with a face value approximating $66.6 million. The remaining life insurance
premiums are derived from closed books of business. During 1997, the Company
expanded its life distribution to include a newly designed product for the
military marketplace.
Strategies
The Company plans to continue its growth in market share as a provider
of medical insurance through the sale of products which incorporate freedom of
choice and many elements of managed care such as cost containment. In this
regard the Company will target the one life and small employer group market. The
Company believes this segment of the market is large and under-served. In
response, the Company is designing managed care products that are responsive to
the needs of this market, and has built a marketing distribution system for the
purpose of achieving critical mass with respect to its product offerings.
The Company's strategy relies on the strategic alliances with FHG, HPS
and growing independent agent and broker distribution systems. In recruiting
agents the Company will emphasize its intention to create unique products, offer
competitive compensation arrangements, provide responsive service and allow MGAs
an opportunity to earn stock options to acquire PAMCO shares based upon sales
production. The Company believes this strategy creates the potential to
significantly increase the sales of managed care products. The Company believes
that increased sales will help build critical mass which will reduce incremental
costs.
Recent Developments
During the first half of 1998 the Company entered into various
agreements in order to sell and service insurance business via the Internet
along with related financing and start-up management. As of February 1, 1998 the
Company entered into an Amended and Restated Interactive Marketing Agreement
(the "AOL Agreement") with America Online, Inc. ("AOL"). The Company will be
AOL's exclusive third-party direct marketer for managed-care products along with
vision insurance, prescription coverage, critical care insurance and long-term
care insurance coverage for individuals and groups of less than fifty
individuals in the United States. AOL will advertise the Company's products to
its subscribers on AOL's online network under a brand name to be used
exclusively for the Company's products. This represents a new distribution
channel allowing access to customers not served by insurance agents. The Company
plans on marketing medical and related insurance products underwritten by PILIC
and PALHIC along with products underwritten by other companies.
- 7 -
The Company's new non-insurance subsidiaries, Provident Health
Services, Inc. ("PHS") and Insurion, Inc. ("Insurion"), will conduct this new
venture. It is anticipated that Internet-based sales will be tested during the
summer of 1998 and offered generally to AOL subscribers in the fall of 1998. PHS
will provide online customer service to the AOL member base in connection with
the sale of medical and related insurance products. The Company recently
expanded its outsourcing relationship with HPS whereby HPS will provide customer
service and have certain third party administrator rights over policies sold by
Insurion through its web site or other e-commerce vehicles.
The Company is considering numerous financing strategies in order to
fund Insurion's obligations including public and private financing. In addition,
the Company is seeking co-sponsor funding with regard to certain product
offerings on Insurion's web site.
Operations
The Company is organized and managed along functional lines which
include marketing, underwriting, claims, administration, investments and
finance.
Marketing: The marketing area manages MGA recruiting, training and
agent compensation plan design, and provides agents and consumers with a Company
advocate regarding product development and customer service. The Company
believes that the attractiveness of its products, its competitive compensation
arrangements for brokers and agents (including stock options), its emphasis on
personal service and accessibility to management encourages brokers and agents
to offer the Company's products to their clients.
Underwriting: All policies are fully underwritten . In some cases, the
Company may require attending physicians' statements with respect to conditions
disclosed on applications. A physician provides consulting services to the
underwriting department with respect to the evaluation of the insurability of
certain applicants and the general health prognosis for such applicants. In
connection with the HPS outsourcing agreement, the underwriting associated with
the HealthQuest products is done by HPS in accordance with pre-set standards and
all other products are underwritten by the Company's underwriting group. Prior
to 1998, essentially all policies were underwritten by the Company's
underwriting group.
Claims: The Company had augmented its core internal claims processing
with the use of selected third party claims administrators who review and pay
claims in accordance with guidelines and procedures approved and monitored by
the Company. In connection with the HPS outsourcing agreement, claims
adjudication associated with the Company's health products is provided by HPS.
Administration: This area includes customer service, premium and
commission processing and computer systems for life and group medical business
which was acquired in mid 1996. In connection with the HPS outsourcing
agreement, customer service, premium and commission processing associated with
the Company's health products is provided by HPS.
- 8 -
Investments and Finance: The majority of the Company's investments
consist of securities of the U. S. government (or its agencies ) and fixed
income securities, principally issued by public utilities and corporations. At
December 31, 1997, 100% of the Company's bond portfolio was of investment grade
quality; 40% of the Company's bonds will mature within a five-year period and
88% of the Company's bonds will mature within a ten-year period. The following
table shows the Company's market value of its total investments as of December
31, the investment income net of expenses which excludes realized gains and
losses and the weighted average annualized yield.
(Dollars in thousands) 1997 1996 1995
---- ---- ----
Total investments, valued at market $47,101 $61,942 $46,890
Net investment income (excludes realized gains (losses)) $3,487 $3,280 $2,858
Annualized yield on the market value of investments 6.8% 6.5% 6.3%
The Company utilizes both in-house actuaries and consulting actuaries
for product development, pricing and valuation.
Special Considerations and Risk Factors
All statements and information herein, other than statements of
historical fact, are forward looking statements that are based upon a number of
assumptions concerning future conditions that may ultimately prove to be
inaccurate. Many phases of the Company's operations are subject to influences
outside its control. Any one, or any combination of factors could have a
material adverse effect on the Company's results of operations. These factors
include: changes in governmental regulation, claims experience and reserve
adequacy, rating changes, competitive pressures, economic conditions, changes in
consumer spending, interest rate fluctuations, and other conditions affecting
capital markets. The following factors should be carefully considered, in
addition to other information contained in this document. This document contains
certain forward-looking statements within the meaning of section 27A of the
Securities Act of 1933 as amended ("Act") and section 21E of the Securities
Exchange Act of 1934, as amended. The Statements include among other things,
statements regarding trends, strategies, plans, beliefs, intentions,
expectations, goals and opportunities. Also they include statements regarding
migration to managed care products, greater control of costs, conversion and
expansion of administrative infrastructure and varying significance of
particular states within which the Company can write insurance; beliefs
regarding attractiveness of products; enhancements to claims system; increased
processing capacity; investments in computer hardware and funding of capital
expenditures; sufficient liquidity to fund growth fulfill statutory requirements
and meet all cash requirements, funding surrenders and benefit payments and loan
payments. Actual events, developments and results could differ materially from
those anticipated or projected in the forward looking statements as a result of
uncertainties set forth below and elsewhere in this document. Any investment in
the Company's securities involves a high degree of risk.
The following factors, in addition to the other information contained
in this report, should be considered carefully in evaluating an investment in
the Company.
- 9 -
Control of the Company: Alvin H. Clemens, Chairman and Chief Executive
Officer of the Company ("Mr. Clemens"), acquired control of the Company in
October 1989. Mr. Clemens is the largest shareholder of the Company. As of June
30, 1998, Mr. Clemens owned, either directly or beneficially, 3,813,745 shares,
or 33.2% of the Company's Common Stock, and 1,100,000 shares, or 97.3%, of the
Company's Preferred Stock. As of June 30, 1998, Mr. Clemens controled 37.1% of
the Company's outstanding voting rights and if he were to exercise all of his
outstanding options, he would control 47.4% of the Company's voting rights. In
addition, pursuant to terms of an agreement to grant options dated March 10,
1997, Mr. Clemens has the right to be granted an option to acquire 55% of the
common stock of the Company, subject to the conditions set forth therein.
Accordingly, Mr. Clemens could greatly influence the outcome of any matter
requiring shareholder approval, even if such matters were deemed by the
shareholders, other than Mr. Clemens, to be in their best interests.
A. M. Best's Insurance Ratings: The ratings assigned by A.M. Best
Company Inc. ("Best") are an important factor influencing the competitive
position of insurance companies. Best's ratings are based on an analysis of the
financial condition and operating performance of the companies rated. Best's
classifications are A++/A+ (superior), A/A- (excellent), B++/B+ (very good),
B/B- (adequate), C++/C+ (fair), C/C- (marginal), D (below minimum standards) and
E (under state supervision). Best's ratings are based upon factors of concern to
policyholders and insurance agents, and are not necessarily directed toward the
interests of investors in the rated insurance company and/or its parent and
therefore should not be relied upon as a basis for an investment decisions.
In 1997, PILIC and PALHIC Best's ratings were upgraded to a "B"
(adequate) rating, reflecting the Company's improved capital and surplus
position as a result of the Loewen settlement. This "B" (adequate) rating was
reaffirmed in February, 1998. The Company's goal is to strengthen the financial
position of PILIC and PALHIC which the Company believes will result in an
improved rating over time, but there can be no assurance that PILIC and PALHIC
can improve or maintain the current rating.
Regulation: Insurance companies are subject to supervision and
regulation in the states and jurisdictions in which they transact business, and
such supervision and regulation usually includes (1) regulating premium rates,
policy forms (coverages and terms), (2) setting minimum capital and surplus
requirements, (3) imposing guaranty fund assessments which fund insolvencies of
other insurers (4) licensing insurance companies and agents, (5) approving
accounting methods and methods of setting loss and loss-adjusted expense ("LAE")
liabilities, (6) setting requirements and limiting investments, establishing
requirements for filing of annual statements and other financial reports, (7)
approving changes in control, (8) limiting dividend payments that may be made
without regulatory approval, (9) regulating transactions with affiliated parties
and (10) regulating trade practices and market conduct. Compliance creates
additional expense and penalties may be imposed for non-compliance, which could
have a material adverse effect on the Company's business financial position and
results of operations.
- 10 -
PILIC and PALHIC are domiciled in Pennsylvania and are regulated by the
Insurance Department of Pennsylvania which recognizes as net income and surplus
those amounts determined in conformity with statutory accounting practices
prescribed or permitted by the Department which may differ in certain respects
from generally accepted accounting principles. The amounts of statutory net
income for the year ended and surplus as of December 31 were as follows:
1997 1996 1995
------ ------ ------
PILIC(1)
Net income (loss) ($10,385) $9,668 ($1,570)
Total capital and surplus 11,408 13,971 6,383
Adjusted capital and surplus 11,968 14,838 6,743
Company action level Risk Based Capital 9,303 6,569 5,190
PALHIC(2)
Net income (loss) ($862) $1,631 ($73)
Total capital and surplus 4,283 5,351 3,068
Adjusted capital and surplus 4,302 5,367 3,152
Company action level Risk Based Capital 1,730 19 235
(1) PILIC's total capital and surplus, adjusted capital and surplus and company
action level Risk Based Capital include amounts for its subsidiaries including
PALHIC. PALHIC is not included in 1995.
(2) PALHIC includes amounts prior to its acquisition by the Company.
At December 31, 1997, PILIC calculated its "Risk Based Capital" (RBC)
utilizing a formula required by the National Association of Insurance
Commissioners. The results of this computation indicate PILIC's adjusted capital
of $12.0 million exceeded the amount required by $2.7 million. PALHIC's adjusted
capital of $4.3 million exceeded its RBC requirement by $2.6 million. In
concept, RBC standards are designed to measure the acceptable amounts of capital
an insurer should have based on inherent and specific risks of an insurer's
business. Insurers failing to meet the benchmark capital level may be subject to
remedial action by the insurance department having jurisdiction over its
business and, ultimately, rehabilitation or liquidation.
The Company's business is subject to a changing legislative and
regulatory environment. Some of the proposed changes include initiatives to
restrict insurance pricing and the application underwriting standards, reform
health care and restrict investment practices. Proposals relating to national
health care reform have been under consideration, and could significantly change
the way health care is financed and provided. The effect on the Company of
comprehensive health care reforms, if enacted, could have a material adverse
impact upon the ability of the Company to achieve profitability and engage in
the writing of health insurance.
- 11 -
All of the states in which PILIC and PALHIC do business have life and
health guaranty fund laws under which insurers doing business in such states can
be assessed in order to fund policyholder liabilities of insurance companies
that may become insolvent. Under these laws, an insurer is subject to
assessment, depending upon its market share of a given line of business, to
assist in the payment of policyholder claims against insolvent insurers.
Although recent assessments have not been material, no assurances can be given
that such will be the case in the future.
Dividends: Dividends paid by the Company over and above the financial
assets of PAMCO are dependent on the ability of PILIC to pay dividends to the
Company and the ability of PALHIC to pay dividends to PILIC. The payment of
dividends by PILIC and PALHIC is dependent upon a number of factors including
earnings and financial condition, business needs and capital and surplus
requirements as well as applicable regulatory restrictions. Under Pennsylvania
law, PILIC and PALHIC are currently unable to pay dividends without the prior
approval of the Pennsylvania Insurance Commissioner as a result of PILIC's and
PALHIC's statutory unassigned deficit of $13,538,000 and $4,147,000,
respectively, which excludes common stock and additional paid-in capital
amounts. The Company has not paid a cash dividend on its common stock since its
inception in 1982 and intends on using retained earnings to fund its growth and
liquidity needs.
Possible Adverse Impact of Inadequate Loss Reserves or Deferred
Acquisition Costs: Policy claims and the related policy benefit expenses are
based upon a variety of estimation methods which are continually revised,
incorporating the Company's benefit experience. Health benefits related to the
Company's managed care products introduced in 1995 represent approximately 72%,
37% and 4% of 1997, 1996 and 1995 amounts, respectively. Since the Company's
experience with these products has been limited and continues to emerge, no
assurances can be given that policy benefit liabilities will ultimately be
deemed adequate. Accordingly, the need for increased reserves could have a
materially adverse affect on the Company's results of operations.
The Company deferred policy acquisition costs for its managed care
products are based on management's estimation that these costs are recoverable
against future profits on these products. Increased lapsation over current
levels or unprofitability in these products could result in an increase in the
amortization rate of deferred acquisition costs which could have a material
adverse impact.
- 12 -
Reinsurance: The Company's principal reinsurer, Swiss Re Life & Health
Limited ("Swiss Re"), notified the Company in 1997 that the Quota Share
Reinsurance Agreement would not be renewed effective January 1, 1998. Swiss Re's
obligation to assume paid losses incurred prior to January 1, 1998 remains in
effect. The Company notified Swiss Re that it would not be renewing the Excess
of Loss Agreement. The Company is currently in negotiation with a group of
reinsurers and has placement slips regarding a replacement Quota Share Agreement
and Excess of Loss Agreement to be effective January 1, 1998. Effective January
1, 1998, the Company's new reinsurance will be on a no loss, no gain basis for
all policies in force as of December 31, 1997 until those policies are rate
increased. The new agreements, when executed, may not be as comprehensive as the
old agreement. Policies are generally rate increased on their six-month or
twelve-month anniversary. Once policies in force as of December 31, 1997 have
been rate increased, and for all policies sold during 1998, the Company will
cede approximately 47.5% of group medical benefits. Furthermore, the Company
will retain any profit in excess of 3% of ceded premium. Since the terms of the
new reinsurance are effective January 1, 1998 and the terms of the old
reinsurance remain in effect after December 31, 1997 for losses incurred prior
to December 31, 1997, management believes that the effect of changes in
reinsurance, if any, would not be material to the Company's financial position,
results of operations and cash flow. The Company's 1998 results may be adversely
impacted by loss experience on certain policies inforce as of December 31, 1997.
The Company's 1998 results may be favorably impacted if quota share cessions
result in a profit in excess of 3% of ceded premium on policies sold during 1998
and certain policies inforce as of December 31, 1997. The potential effect of
any differences between old and new reinsurance on future results has not been
determined; however, the impact could be significant.
Highly Competitive Nature of the Insurance Industry: The Company
operates in a competitive industry with regard to products, prices and services.
Many competitors have considerably greater financial resources than the Company.
In the United States more than 2,200 life insurance companies compete for life
and health insurance business, and no one company dominates the marketplace.
Most of the Company's direct competitors are small to medium sized life
insurance companies and regional Blue Cross/Blue Shield organizations.
Additionally, competition in the insurance industry may affect the Company's
ability to achieve greater critical mass in its chosen product lines, while
remaining competitive in compensation and product pricing.
Reliance on Existing Management and Consultants: The Company has been
largely dependent on existing management and certain consultants whose expertise
and relationships have brought about recent alliances and acquisitions. The loss
to the Company of one or more of its current existing executive officers or
consultants could have a material adverse effect on the business and operations
and results of operations of the Company. The Company has entered into
employment agreements with certain officers which have non-compete and
confidentiality provisions, and the Company maintains key man insurance with
regard to Mr. Clemens. The Company has entered into consulting agreements with
certain consultants which have non-compete and confidentiality provisions.
Inability to Migrate Computer Infrastructure: The Company has
contracted with consultants for the purpose of migrating the Company's computer
systems from mid-range computers to client-server technology supported by
well-known hardware and software suppliers. No assurances can be given that the
new computer system will meet the Company's expectations and that the migration
of administrative systems will contain costs and improve efficiency.
- 13 -
Year 2000 Compliance: In 1997 the Company began implementing its year
2000 Compliance Plan. In 1997 the Company installed a new general ledger and
accounts payable system that would be year 2000 compliant. In addition, HPS, the
Company's outsourcing vendor, has begun the transition of HPS's billing and
administrative systems for fully insured products and will continue to work on
this project in 1998. HPS has received the new release of its ERISCO ClaimsFacts
claims management system, which the Company understands is Year 2000 compliant,
and intends to implement this release in 1998. The Company's health and group
life products are administered by HPS. The Company's and HPS's Year 2000
Compliance Plan also provides for updating interfaces between the Company and
HPS. The Company continues to evaluate alternatives for its life administration
hardware and software used in administering its individual life and annuity
policy billing, account values, loans, claims and commission activities. The
Company's life administration system is not Year 2000 Compliant but the Company
is evaluating a wide range of alternatives and expects to be Year 2000 Compliant
by mid 1999. Although the costs associated with becoming Year 2000 compliant
cannot be precisely predicted, management does not expected such costs to have a
material effect on the Company's results. There can be no assurance that HPS or
other third parties with whom the Company does business will achieve Year 2000
Compliance. As a result, the Company's business could be adversely affected.
HPS Outsourcing: The Company's group medical and life billing and
collection, customer service, claims processing and commission accounting are
now being performed by HPS. Further, information needed for the Company to
administer reinsurance and manage loss experience and premium rates are
dependent upon HPS. The Company's funds are retained in separate bank accounts
held in trust administered by HPS. The inability of HPS to perform under its
Agreement could have a material adverse impact on the Company's business and
results of operations.
Internet Venture: The Company, through Insurion, Inc. is developing
online sales and service capabilities utilizing internal and external resources.
Various agreements require Insurion to launch an Internet WEB site no later than
October 1, 1998. Insurion has retained outside consultants and vendors to
develop the Internet WEB site and oversee the development of the overall sales
process, the cost of which is significant. No assurance can be made that the
site will be operational on time, that the cost associated therewith will not
exceed the Company's estimates, or that the Company may be able to meet its
contractual obligations under the above agreements. The sale of medical and
other insurance via the Internet WEB is a new and unproven marketing channel and
there is no assurance that Insurion will be able to sell a sufficient volume of
new business on the Internet WEB during the initial term of the AOL Interactive
Marketing Agreement to make the venture viable. HPS paid the Company $0.75
million in March 1998 to be the exclusive administrator of this business.
Insurion privately placed $5 million of convertible debt in May 1998 to
partially fund future obligations. In addition, financing must be secured from
external sources to support the obligations and funding of Insurion. There can
be no assurance that the Company's efforts will be successful, or if successful,
that the terms will be favorable to the Company.
- 14 -
Number of Employees
The Company, including its subsidiaries, currently employs
approximately 100 people, a decrease from 221 for the prior year, primarily as a
result of the HPS arrangement, which outsourced the Company's administration and
claims. None of the employees is represented by a collective bargaining
representative. The Company believes that its employee relations are excellent.
Item 2. Properties.
The Company's principal office, located at 2500 DeKalb Pike,
Norristown, Pennsylvania, is owned by PILIC. This property is comprised of
approximately 6.5 acres of land and buildings containing approximately 44,000
square feet of space. PILIC also owns a three-story office building located in
Abington, Pennsylvania, which is leased to unaffiliated third parties. NIA, a
wholly owned subsidiary of PILIC, leases commercial office space in Lakewood,
Colorado for the operation of a regional sales office. NIA's lease is for 3,300
square feet. The Company believes its existing facilities are suitable to
conduct its present business.
Item 3. Legal Proceedings.
The Company is involved in normal litigation in the settlement of
insurance claims. Management is of the opinion that neither the litigation nor
these claims will have a material adverse effect on the results of operations or
financial position of the Company.
Item 4. Submission of Matters to a Vote of Security Holders.
No matters were submitted to a vote of holders of the Company's common
stock during the fourth quarter of 1997 or the first quarter of 1998.
- 15 -
PART II
Item 5. Market For Registrant's Common Equity and Related Shareholder Matters.
Price Range of Common Stock
The following table shows the range of quarterly high and low sale
prices for the Company's common stock. The Company's common stock was listed on
the NASDAQ National Market until its delisting on June 12, 1998 due to the
delayed filing of the Company's December 31,1997 Annual Report on Form 10-K and
the March 31, 1998 Quarterly Report on Form 10-Q. The Company's common stock
does not currently trade on any exchange. Recent trading activity of the
Company's common stock since June 12, 1998 has occurred on Instinet
Corporation's online trading service.
1998 1997 1996
---------------------- --------------------- ---------------------
High Low High Low High Low
---------------------- --------------------- ---------------------
First Quarter 6-15/16 2-1/4 14-3/8 8-5/8 9-3/8 5-3/4
Second Quarter 6-15/16 3-5/16 10-1/2 3-3/4 10-5/8 5-1/8
Third Quarter 5-1/8 3 15-7/8 8-1/2
Fourth Quarter 3-7/8 2-1/8 14-1/2 10-5/8
On June 30, 1998, the closing price of the Company's common stock was
$5.75. On that same date, there were approximately 2,650 shareholders.
Dividends
The Company has not paid a cash dividend on its Common Stock since its
inception in 1982, except for dividends paid for an acquired subsidiary. The
Company currently intends to retain all earnings to finance the expansion of its
business and does not anticipate paying cash dividends in the foreseeable
future.
Dividends paid by the Company over and above the financial assets of
PAMCO are dependent upon the ability of PILIC to pay dividends to PAMCO and the
ability of PALHIC to pay dividends to its parent, PILIC. Dividend payments by
PILIC and PALHIC are dependent upon a number of factors, including earnings and
financial condition, business needs and capital and surplus requirements, as
well as applicable regulatory restrictions. Under Pennsylvania law, PILIC and
PALHIC are currently unable to pay dividends without the prior approval of the
Pennsylvania Insurance Commissioner as a result of PILIC's and PALHIC's
statutory unassigned deficit of $13,538,000 and $4,147,000, respectively, which
excludes common stock and additional paid-in capital amounts.
The Company paid cash dividends on the Series A and Series B Preferred
Stock at the rate of $0.0636363 and $0.109090, respectively, per quarter from
1993 to the present. All Series B Preferred Stock was converted into common
stock in 1996.
- 16 -
Recent Sales of Unregistered Securities
On November 1, 1995, the Company granted warrants to purchase 50,000
shares of the Company's common stock at $5.00 per share and are exercisable
through November 1, 1998 to a consultant in consideration for services rendered.
On June 6, 1996, 100,000 warrants were granted to an investment banking firm in
consideration for services rendered at $9.00 per share and are exercisable
through June 6, 2001.
Effective as of January 1, 1996, the Company granted a warrant and an
amended warrant to a consultant for services rendered to purchase 100,000 shares
of the Company's common stock per year for each of three years at the market
price per share as of January 1, 1996, January 1, 1997, and January 1, 1998,
provided PILIC has achieved new annualized premium sales production of at least
$35,000,000, $45,000,000 and $50,000,000, respectively, for each of these
calendar years. PILIC has realized the annualized premium threshold for the
years ended December 31, 1996 and December 31, 1997, and accordingly, the
consultant is entitled to exercise 200,000 warrants for 1996 and 1997.
Effective as of October 6, 1997, the Company granted warrants to
purchase 25,000 shares of its common stock to an employee for services rendered.
The exercise price was $4.00 per share, the fair market value on the date of the
grant. The option expires on October 6, 2000, and is exercisable in three equal
installments, one-third upon issuance, an additional one-third October 6, 1998,
and the remaining balance on October 6, 1999.
Effective in November, 1997, the Company granted warrants to purchase
25,000 shares of its common stock each to two of the Company's exclusive agents
engaged in selling life insurance to members of the U.S. Armed Forces and
government employees for services rendered at an exercise price of $5.00 per
share. These warrants expire in November 2002.
The Company and AOL entered into the AOL Agreement, dated as of
February 1, 1998. In connection therewith, warrants were granted to AOL as
follows: (a) for the purchase of 300,000 shares of the Company's common stock at
an exercise price of $4.48 (based on the average NASDAQ closing prices for the
last 20 days preceding the determination date as defined in the agreement) per
share, exercisable at anytime during the five-year term ending January 31, 2003;
(b) a performance warrant representing the right for a seven-year term to
purchase up to an additional 150,000 shares of the Company's common stock at an
exercise price of $5.15, which vests quarterly in accordance with the terms and
conditions of the warrant; and (c) in the event that the Company exercises its
right to renew the AOL Agreement for an additional two-year term following the
initial 20-month term, an additional warrant representing the right for a
seven-year term to purchase up to 300,000 shares of the Company's common stock
at an exercise price of $5.15, which vests quarterly in accordance with the
terms and conditions of the performance warrant.
Effective February 24, 1998, the Company agreed to issue warrants to
purchase 50,000 shares of the Company's common stock to an investment banking
firm at an exercise price of $9.00 per share and expiring April 30, 2005 for
services rendered.
- 17 -
Effective March 31, 1998, the Company entered into a Consulting
Agreement with Lynx Capital Group, L.L.C., a California corporation (the
"Consultant"), which provides for retention of Lynx as a consultant with respect
to the development and marketing of health insurance products over the Internet
and the establishment of a web site for the Company. The Consultant is
compensated by the payment of a consulting fee of $10,000 per month. The Company
agreed to issue to Consultant (a) options to purchase 150,000 shares of the
Company's common stock upon the closing of an agreement with AOL at per share
exercise price equal to $3.57, exercisable within three years; (b) options to
purchase 100,000 shares of the Company's common stock upon securing equity
funding for the venture in an amount not less than $10,000,000, at a price equal
to the closing price of the Company's common stock during the sixty days
immediately preceding the closing of such financing, to expire three years from
the date of the grant; (c) options to purchase 50,000 shares of the Company's
common stock upon the internet based retailing venture and web site established
for the Company becoming operational at an exercise price equal to the average
closing price of the Company's common stock during the thirty business days
immediately preceding the date on which the web site becomes operational, the
options to be exercised within three years of the grant; (d) options to purchase
50,000 shares of the Company's common stock upon the conclusion of interactive
advertising/marketing agreements with internet service providers and search
engine specialty content providers at an exercise price equal to the average
closing price of the Company's common stock during the thirty business days
preceding conclusion of the interactive advertising/marketing agreements, the
option to be exercised within three years of the grant; and (d) options to
purchase 50,000 shares of the Company's common stock provided that Consultant
obtains funding for the Company in an amount not less than $5,000,000 from HPS,
FHG, or any other insurance company whose products are sold through Provident's
Internet WEB sites thirty business days from the date that financing is
completed, the options to be exercised within three years of the grant.
Effective May 29, 1998, the Company granted warrants to purchase
100,000 shares of the Company's common stock to a service provider to the
Company at an exercise price of $9.00 per share expiring May 29, 2003 in
consideration for entering into the HPS E-Commerce Agreement described in Note
S- Subsequent Events of the financial statements.
Effective May 29, 1998 Insurion, Inc. issued a $5,000,000 Convertible
Note due June 30, 2003 to a service provider to the Company. Interest on the
Convertible Note is accrued at an annual rate of 5.5% and is payable on
conversion or June 30, 1999, whichever occurs first. Insurion may repay the
Convertible Note before the due date in part or in full without penalty and in
that event the holder has the right to exercise the conversion privileges for a
period of 90 days prior to prepayment. The Convertible Note is convertible into
Insurion, Inc. Class A Common Stock, at the holder's option, in whole or in
part, 1 day prior to any of the following: 1) the sale of all or substantially
all of Insurion's business or assets, 2) the sale or transfer of 50% or more of
Insurion's outstanding capital stock owned by the Company, 3) the acquisition of
80% or more 's of Insurion's outstanding capital stock by an unaffiliated third
party, 4) May 29,1999 or 5) Insurion's first public offering of its common stock
which offering is underwritten on a firm commitment or best efforts basis and
produces gross proceeds in excess of $25,000,000.
All warrants issued in 1997 and 1998 and the Convertible Note issued in
1998, and the option issued in 1997, were issued in reliance upon the exemption
provided by Section 4(2) of the Securities Act of 1933, as amended.
- 18 -
Item 6. Selected Financial Data.
The following selected consolidated financial information has been
derived from the consolidated financial statements of the Company and should be
read in conjunction with the Consolidated Financial Statements and notes thereto
included elsewhere in this report has been audited by BDO Seidman, LLP for 1997,
and by Coopers and Lybrand, LLP for all prior years.
Years Ended December 31,
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
(in thousands, except for per share data)
Statement of Operations Data:
Premiums earned excluding HealthQuest $ 43,083 $ 41,656 $ 32,709 $ 36,395 $ 40,634
Premiums earned - HealthQuest 11,170 3,050
Net investment and other income 7,027 4,941 4,127 3,736 3,782
Realized gains (losses) on investments 750 2,100 211 (89) 1,575
Litigation settlement, net 22,400
--------------------------------------------------------------
Total revenues 62,030 74,147 37,047 40,042 45,991
Benefits and expenses 85,044 51,630 40,728 41,026 44,694
--------------------------------------------------------------
Income (loss) before income taxes and
cumulative effect of accounting change (23,014) 22,517 (3,681) (984) 1,297
Income taxes (benefit) (4,589) 6,397 20 13 99
--------------------------------------------------------------
Income (loss) before cumulative
effect of accounting change (18,425) 16,120 (3,701) (997) 1,198
Cumulative effect of accounting change (294)
--------------------------------------------------------------
Net income (loss) (18,425) 16,120 (3,701) (997) 904
Dividends on preferred stock 148 194 334 334 192
--------------------------------------------------------------
Net income (loss) applicable to common stock $ (18,573) $ 15,926 $ (4,035) $ (1,331) $ 712
==============================================================
Per share data, Basic
Before cumulative effect of accounting change ($1.84) $1.66 ($0.44) ($0.16) $0.10
Cumulative effect of accounting change (0.03)
--------------------------------------------------------------
Earnings (loss) per share of common stock ($1.84) $1.66 ($0.44) ($0.16) $0.07
Per share data, Diluted
Before cumulative effect of accounting change ($1.84) $1.36 ($0.44) ($0.16) $0.10
Cumulative effect of accounting change (0.03)
--------------------------------------------------------------
Earnings (loss) per share of common stock ($1.84) $1.36 ($0.44) ($0.16) $0.07
Per share dividends paid on common stock, basic $0.00 $0.00 $0.02 $0.00 $0.00
Per share dividends paid on common stock, diluted $0.00 $0.00 $0.02 $0.00 $0.00
Shares outstanding, basic 10,090 9,610 9,100 8,421 9,511
Shares outstanding, diluted 10,090 11,674 9,100 8,421 9,511
- 19 -
Years Ended December 31,
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
(in thousands, except for per share data)
Balance Sheet Data:
Investments $ 47,101 $ 61,942 $ 46,890 $ 39,467 $ 42,413
Total assets 98,365 93,054 67,151 60,586 62,934
Loans payable 5,077 298 830 1,166 182
Stockholders' equity 4,009 22,053 3,424 4,530 8,623
Stockholders' equity
per common share (1) $ 0.38 $ 2.08 $ 0.34 $ 0.48 $ 0.92
(1) Assumes conversion of Series A and Series B Cumulative Convertible Preferred
stock into common stock of the Company on a share-for-share basis in years 1995,
1994 and 1993 and conversion of Series A Cumulative Convertible Preferred stock
in 1997 and 1996 on a share-for-share basis.
- 20 -
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Results of Operations
1997 Results compared to 1996 Results
Net loss applicable to common stock was $18.6 million or $1.84 per
diluted share for 1997 compared to net income of $15.9 million or $1.36 per
diluted share for 1996. The 1997 results were unfavorably impacted by higher
health policy benefits, write-off of deferred acquisition costs, and transition
costs associated with the HPS outsourcing. The 1996 results were primarily the
result of a litigation settlement representing $14.6 million of net income plus
related realized gains on the sale of stock received as a result of the
settlement.
Policy claims are based on a variety of estimation methods, which are
continually revised incorporating the Company's most recent benefit experience.
As a result of higher than expected out-of-network claim utilization and greater
than expected claim frequency, the Company increased its loss ratio assumptions
during the year, which, in turn, resulted in an underwriting loss for 1997. In
reaction to these items, the Company began a series of corrective actions,
including premium rate increases, more stringent underwriting and revised policy
designs providing for more severe penalties for those policyholders who elect to
receive medical treatment outside of the authorized PPO networks. Although the
Company believes policy claim liabilities are adequate, experience with these
newer managed care products is limited and continues to evolve. A greater than
anticipated claim experience could have a materially adverse impact on the
financial position and results of operations.
Accident and health gross premium was $84.7 million for 1997 compared
to $57.2 million for 1996. Accident and health ceded premium was $39.5 million
for 1997 compared to $25.7 for 1996. These increases were the result of
increased new business relating to the Company's managed care health insurance
products. The Company has expanded its group medical business through recent
alliances and acquisitions. The Company has agreements with FHG for managed care
cost containment and HPS for policy administration services which were effective
in 1998. The Company outsourced its policy administration and claims to HPS in
1998 in an effort to achieve economies of scale and to provide enhanced
policyholder services.
At December 31, 1997 and 1996, gross annualized accident and health
premium inforce on small group and managed care business amounted to $96.8
million and $68.2 million, respectively, consisting of approximately 50,000 and
36,000 certificate holders, respectively. The $28.6 million net increase in
annualized premium resulted from new business issued in 1997 of $68.1 million,
plus premium rate increases of approximately $10.0 million less lapses amounting
to approximately $49.5 million. Managed care products accounted for 82% and 65%
of the inforce premium at year end 1997 and 1996, respectively, of the group
accident and health business.
- 21 -
The lapse ratio on small group and managed care accident and health
insurance business based on annualized premium was 45% for 1997 compared to 38%
for 1996. The lapse ratios reflect the results of premium rate increases as well
as the Company's continued shift toward managed care plans and away from
traditional healthcare insurance. The Company's traditional healthcare insurance
plans have higher premiums and higher policy benefits than its managed care
plans. The accident and health lapse ratios include small group medical plans
which by their nature have high lapsation. In an effort to improve the lapse
ratio, the Company continues to follow the practice of pooling claim experience
for re-rating of all cases with less than 25 participants. In addition, the
Company has a conservation program which, as part of the renewal process, offers
alternatives such as increased deductibles and different benefit structures
designed to enable policyholders to maintain insurance protection without
increased premium rates. While some policyholders have switched to lower premium
insurance plans, the Company does not believe the plans are less profitable.
Life and annuity premium of $9.6 million for 1997 declined from $11.3
million for 1996 due to reduced pre-need premium. Individual life insurance
lapse ratios for 1997 and 1996 were 11% and 10%, respectively. Life and annuity
reinsurance ceded was $0.5 million for 1997 compared to $1.9 million recaptured
for 1996, due to the Company's 1996 recapture of reinsurance originally ceded in
1995 on certain multi-pay pre-need life insurance policies.
Net investment income of $3.5 million for 1997 increased modestly
compared to $3.3 million for 1996, primarily due to an increase in bond
investments. Net realized gains on investments of $0.8 million for 1997
decreased from $2.1 million for 1996, and reflect the sale of the Company's
remaining holdings of Loewen stock.
Accident and health policy benefits ratio net of reinsurance increased
to 86.3% for 1997 compared to 60% for 1996 as a result of higher than expected
claim experience on the Company's managed care products.
1997 1996
---- ----
Accident and health policy claims, net of reinsurance $38,981 $18,963
Accident and health premiums, net of reinsurance
Gross before reinsurance ceded $84,719 $57,195
Less reinsurance ceded (39,548) (25,670)
------- -------
Premiums, net of reinsurance $45,171 $31,325
Accident and health policy benefit ratio 86.3% 60.2%
- 22 -
Commissions, net of ceding allowance and deferred acquisition costs of
$7.1 million for 1997 decreased from $7.9 million from 1996 due to the increased
deferral of acquisition costs related to the Company's one-life managed-care
products 1997. These costs were written-off in 1997 as amortization of deferred
policy acquisition costs.
Other operating expenses of $16 million for 1997 increased from $11.7
million for 1996, due to increased policy administration expenses caused by
increased sales volume and transition expenses associated with the HPS
outsourcing.
Amortization of deferred policy acquisition costs of $10.9 million for
1997 increased from $0.6 million for 1996 primarily due to accelerated
amortization in 1997 due to higher than expected lapses and worse than expected
loss ratios. Increased lapsation over current levels or future unprofitability
in managed care and certain life products could result in an increase in the
amortization rate of unamortized deferred policy acquisition costs, which would
adversely impact future earnings.
1996 Results compared to 1995 Results
Net income applicable to common stock was $15.9 million or $1.36 per
diluted share in 1996 compared to a loss of $4.0 million or $.44 per diluted
share for 1995. The Company's 1996 net income was primarily the result of a
litigation settlement, representing $14.6 million of net income plus related
realized gains on the sale of stock received as a result of the settlement. 1996
results were favorably impacted by improved overall average accident and health
policy benefits ratio offset by the Company's decision to recapture reinsurance
ceded on certain multi-pay pre-need life insurance policies which resulted in a
non-recurring pre-tax charge in 1996 of $1.0 million.
Accident and health gross premium for 1996 was $57.2 million compared
to $39.0 million for 1995. Accident and health ceded premium in 1996 was $25.7
million compared to $15.9 in 1995. These increases are as a result of increased
new business from managed care health insurance products.
The Company has expanded its group medical business through alliances
and acquisitions. The Company has agreements with FHG for managed care cost
containment and HPS for certain policy administration services. The Company
acquired all of the outstanding shares of REF and Associates, Inc. ("REF") in
order to obtain full control and the rights to the Company's "The Provident
Solution" plan and eliminates future commission expense between the Company and
REF.
1996 results were not materially impacted as a result of the Company's
acquisition of PALHIC, acquired for the purpose of expanding the number of
available states which the Company is licensed to sell life and health
insurance. PALHIC is licensed in 40 states while PILIC is licensed in 25 states
and the District of Columbia. Together, the Company is licensed in 42 states and
the District of Columbia.
- 23 -
With the NIA acquisition the Company acquired 3,500 policyholders
representing approximately $6.5 million of annualized premium at the date of
acquisition. This business consists primarily of the "HealthQuest" product, a
managed care one-life PPO product similar to "The Provident Solution" plan. The
NIA Acquisition and the HealthQuest business accounted for the following during
1996; accident and health premiums, gross before reinsurance ceded of $6.1
million; accident and health premiums, net of reinsurance ceded of $3.1 million;
total revenue of $3.6 million; benefits, net of reinsurance of $1.7 million;
total expenses of $3.5 million; and pre-tax income of $0.1 million. These
amounts represent the business acquired on May 1, 1996 together with
post-acquisition HealthQuest sales and lapses and NIA's operations.
At December 31, 1996 and 1995, annualized accident and health premium
inforce on small group and managed care business amounted to $68.2 million and
$41.7 million, respectively, consisting of approximately 36,000 and 23,000
certificate holders, respectively. The $26.5 million net increase in annualized
premium resulted from an increase in new business issued in 1996 of $53.6
million ($19.9 million in 1995), plus $6.5 million of annualized premium related
to the HealthQuest book acquired on May 1, plus premium rate increases of
approximately $8.4 million less lapses amounting to approximately $42 million.
"The Provident Solution" and HealthQuest accounted for 65% and 25% of the
inforce premium at year end 1996 and 1995, respectively, of the group accident
and health business.
The lapse ratio on small group and managed care accident and health
insurance business based on annualized premium of 38% in 1996 declined from 41%
in 1995. The lapse ratios reflect the results of premium rate increases as well
as the Company's continued shift toward managed care plans and away from
traditional healthcare insurance. The Company's traditional healthcare insurance
plans have higher premiums and higher policy benefits than its managed care
plans. The accident and health lapse ratios include small group medical plans
which by their nature have high lapsation.
Life and annuity premium of $11.3 million for 1996 declined from $13.2
million in 1995 due to reduced new premium growth caused by refinements in
pre-need product and the Company's elimination of certain unprofitable marketing
relationships selling the Company's pre-need products. The individual life
insurance premium lapse ratios on an annualized basis for 1996 and 1995 were 10%
and 9%, respectively.
Life and annuity reinsurance ceded of ($1.9 million) was $5.5 million
higher compared to 1995 due to the Company's 1996 recapture of reinsurance
originally ceded in 1995 on certain multi-pay pre-need life insurance policies.
The Company recaptured this business as a result of the availability of
additional capital resulting from the litigation settlement. The recapture
impact on 1996 results accounted for the following amounts: premium - life and
annuity reinsurance ceded of $2.4 million; death and other life policy benefits
of $3.1 million; and commissions, net of ceding allowance of $0.3 million. The
cession impact on 1995 results accounted for the following amounts: premium -
life and annuity reinsurance ceded of $3.2 million; death and other policy
benefits of $3.2 million; and commissions, net of ceding allowance of ($1.0)
million.
Net investment income of $3.3 million for 1996 increased from $2.9
million in 1995, primarily due to an increase in bond investments in late 1996.
- 24 -
The Company realized $2.1 million in capital gains in 1996 as a result of
selling Loewen stock received in connection with the litigation settlement.
Accident and health policy benefits ratio improved in 1996 compared to
1995 as the result of more first duration business where underwriting and policy
provisions tend to produce loss ratios that are lower than subsequent durations.
1996 1995
-------- --------
Accident and health policy claims,net of reinsurance $18,963 $14,458
Accident and health premiums
Gross before reinsurance ceded $57,195 $39,028
Less reinsurance ceded (25,670) (15,882)
-------- --------
Premiums,net of reinsurance $31,525 $23,146
======== ========
Accident and health policy benefit ratio 60.2% 62.5%
"The Provident Solution" and HealthQuest products, introduced in 1995
represented 37% and 4% of accident and health policy benefits in 1996 and 1995,
respectively.
Other operating expenses of $11.7 million in 1996 increased from $11.6
million in 1995, due to increased policy administration expenses resulting from
increased sales volume and expenses associated with the acquired HealthQuest
book of business. With the CSE acquisition, the Company insourced its accident
and health policy and claims administration functions in order to better control
costs and service levels. The Company acquired CSE's staff and administration
systems. The acquired administration system supported the Company's managed care
products and alliances with managed care networks. The Company later determined
that it was advantageous to outsource these functions to HPS effective in 1998.
Amortization of deferred policy acquisition costs of $0.6 million for
1996 increased $0.5 million from 1995 primarily due to $0.4 million of managed
care amortization in the second half of 1996 relating to deferrals in the third
and fourth quarters of 1996.
Liquidity and Capital Resources
A major objective of the Company is to maintain sufficient liquidity to
fund growth, fulfill statutory requirements and meet all cash requirements with
cash and short term equivalents plus funds generated from operating cash flow.
- 25 -
The primary sources of cash are premiums, investment income and
investment sales and maturities. The primary uses of cash are benefit payments
to insureds, operating costs including policy acquisition costs and investment
purchases. The Company's liquidity requirements are primarily created and met by
PILIC and PALHIC. Starting in 1998, Insurion's sources of cash will be primarily
private placements, a public offering and to a lessor extent marketing fee
income. Insurion's primary uses of cash will be fee payments to AOL and other
Internet sites, WEB site development and start-up expenses.
Cash and investments carried at market value at December 31, 1997 of
$63.9 million. This included $45.1 million of bonds issued by the U.S.
Government, government agencies, public utilities and other corporations, $2.0
million invested in policy loans, real estate and other invested assets and
$16.8 million in cash and cash equivalents. Bonds are investment grade
securities with fixed incomes ranging in maturity from one to 30 years. The
gross average yield on fixed income bonds as of December 31, 1997, 1996 and 1995
was 6.8%, 6.5% and 6.3%, respectively. The Company's investment policy is to buy
medium term U.S. government direct and agency bonds. All bonds are considered to
be "available for sale". The Company and its subsidiaries invest in neither
high-yield debt instruments, defined as securities below investment grade with
interest rates or yields significantly above market rates, nor derivative
financial instruments.
The Company entered into a line of credit with a bank during 1997 in
the amount of $1 million with interest at 1% above the prime rate. The
outstanding borrowing at December 31, 1997 amounted to $1.0 million. The Company
anticipates repaying this amount in 1998.
The Loewen settlement, described in Note K to the financial statements,
provided a significant source of cash and invested assets in 1996. The
settlement contributed approximately $22.4 million of pre-tax income,
represented by $3 million of cash and 718,519 shares of Loewen common stock
valued at $19.4 million. The Company sold 85% of its Loewen stock representing
$18.5 million of equity investments, which included a realized pre-tax gain of
$2 million, in 1996. The Company sold its remaining Loewen shares during the
first quarter of 1997 that resulted in $4.1 million of cash from sale of
investments and included a corresponding pre-tax gain of $1 million.
Net cash used in operating activities of $5.4 million in 1997 reflects
higher than expected paid claims on the Company's managed care products. Change
in future policy benefits and claims of $17 million increased in 1997 compared
to 1996 due to managed care health insurance product sales at higher than
expected loss ratios. The Company anticipates the majority of its unpaid
accident and health claims incurred during 1997 will be paid during 1998. The
Company has sufficient cash available at December 31, 1997 to adequately fund
these claim payments as they arise in 1998.
Change in amounts due from reinsurers of $7.5 million in 1997 increased
from $2.1 million in 1996, due to higher than expected claim payments which are
recoverable from reinsurers in proportion to the percentage of risk they
reinsure.
- 26 -
In connection with the HPS Outsourcing Agreement, the Company received
a $5.0 million cash advance in 1997 to be repaid over the 60-month term of the
agreement at the rate of $85,000 per month.
The Company has entered into agreements pursuant to which options to
purchase shares of the Company's common stock will be granted to various agents
as they achieve certain production quotas and performance levels. The Company
also initiated a "1996 Employee Incentive Plan," granting options to purchase
shares of the Company's common stock to key employees whom the Company believes
are critical to the future success of the Company.
The Company anticipates that it will fund surrenders and benefit
payments along with other operating expenses through net cash from operating
activities, scheduled investment maturities, and the liquidation of short-term
investments. Excess cash flow from operations and financing are transferred to
the investment portfolio where it is available for investment and future cash
needs. Anticipated capital expenditures are discussed later.
The statutory capital and surplus of PILIC which includes amounts
related to its subsidiary PALHIC, was $11.4 million at December 31, 1997. At
December 31, 1997, PILIC calculated its "Risk Based Capital" utilizing a formula
required by the National Association of Insurance Commissioners. The results of
this computation indicate PILIC's adjusted capital of $12.0 million exceeds the
Company Action Level amount required by $2.7 million. PALHIC's results of this
computation indicate PALHIC's adjusted capital of $4.3 million exceeds the
Company Action Level amount required by $2.6 million. In concept, Risk Based
Capital standards are designed to measure the acceptable amounts of capital an
insurer should have based on inherent and specific risks of the insurers
business. This formula is a primary measurement as to the adequacy of total
capital and surplus of life insurance companies. Administrative rules and legal
restrictions of state insurance departments presently prevent payment of
dividends by PILIC and PALHIC to their parent companies without regulatory
approval.
Impact of Inflation
Inflation increases the need for insurance. Many policyholders who once
had adequate insurance programs increase their life insurance coverage to
provide the same relative financial benefits and protection. The effect of
inflation on medical costs leads to accident and health policies with higher
benefits. Thus, inflation has increased the need for life and accident and
health products.
The higher interest rates which have traditionally accompanied
inflation also affect the Company's investment operation. The market value of
the Company's fixed rate long-term investments decreases as interest rates
increase.
Inflation has significantly increased the cost of health care. The
adequacy of premium rates in relation to the level of health claims is
constantly monitored and, where appropriate, premium rates are increased as
policy benefits increase. Failure to make such increases commensurate with
health care cost increases may result in a loss from health insurance
operations.
- 27 -
The Company's pre-need products include periodic adjustments to the
face amount of the policy for increases in the consumer price index.
Capital Expenditures and Commitments
The Company announced an interactive marketing agreement with AOL in
March 1998. This agreement provides the Company with an exclusive agreement to
market health insurance products through AOL. The Company has agreed to pay AOL
a $8 million cash of which the Company paid AOL $4 million as of June 30, 1998
with $4 million due on September 1, 1998. Additionally, the Company expects to
incur certain initial operating costs which will require funding before the
AOL-related venture becomes operational in October 1998. HPS paid the Company
$0.750 million in March 1998 to be the exclusive administrator of this business.
Insurion privately placed $5 million of convertible debt in May 1998 to
partially fund these obligations.
- 28 -
Item 8. Financial Statements and Supplementary Data.
Report of Current Independent Accountants F-1
Report of Previous Independent Accountants F-2
Consolidated Balance Sheets - December 31, 1997 and 1996 F-3
Consolidated Statements of Operations
Years ended December 31, 1997, 1996 and 1995 F-4
Consolidated Statements of Changes in Stockholders' Equity
Years ended December 31, 1997, 1996 and 1995 F-5
Consolidated Statements of Cash Flows
Years ended December 31, 1997, 1996 and 1995 F-6 to F-7
Notes to Consolidated Financial Statements F-8 to F-37
- 29 -
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Board of Directors of Provident American Corporation
We have audited the accompanying consolidated balance sheet of Provident
American Corporation and Subsidiaries as of December 31, 1997 and the related
consolidated statements of operations, stockholders' equity, and cash flows for
the year then ended. We have also audited the financial statement schedules as
of and for the year ended December 31, 1997 listed in the accompanying index.
These financial statements and schedules are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and schedules based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements and schedules are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements and
schedules. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation of the financial statements and schedules. We
believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Provident American
Corporation and Subsidiaries as of December 31, 1997, and the results of its
operations and its cash flows for the year then ended in conformity with
generally accepted accounting principles.
Also, in our opinion, the financial statement schedules present fairly, in all
material respects, the information set forth therein.
BDO Seidman LLP
Philadelphia, Pennsylvania
July 10, 1998
F-1
REPORT OF INDEPENDENT ACCOUNTANTS
Board of Directors and Shareholders
Provident American Corporation
Norristown, Pennsylvania
We have audited the consolidated financial statements and the financial
statement schedules of Provident American Corporation and Subsidiaries as of
December 31, 1996 and for each of the two years in the period ended December 31,
1996. These financial statements and financial statement schedules are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements and financial statement schedules based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards 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. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Provident American
Corporation and Subsidiaries as of December 31, 1996, and the results
of their operations and their cash flows for each of the two years in the
period ended December 31, 1996 in conformity with generally accepted accounting
principles. In addition, in our opinion, the financial statement schedules
referred to above, when considered in relation to the basic financial statements
taken as a whole, present fairly, in all material respects, the information
required to be included therein.
Coopers & Lybrand, LLP
2400 Eleven Penn Center
Philadelphia, Pennsylvania
March 11, 1997
F-2
Provident American Corporation and Subsidiaries
Consolidated Balance Sheets
(Dollars in thousands except Preferred and Common Stock Data) December 31, December 31,
1997 1996
-------- ------------
Assets
Investments:
Bonds $ 45,134 $ 54,985
Equity securities, cost $12 and $3,901 8 4,930
Real estate less accumulated depreciation of $182 and $158 918 942
Policy loans 498 526
Other invested assets 543 559
--------- ----------
Total Investments 47,101 61,942
Cash and cash equivalents 16,767 6,218
Premiums due and uncollected 2,106 1,318
Amounts due from reinsurers 16,092 9,240
Loans receivable from officer, director and stockholder 1,243 461
Accrued investment income 610 836
Federal income taxes receivable 3,325 90
Property and equipment, less accumulated depreciation of $2,751 and $1,261 6,804 4,711
Deferred tax asset 0 154
Unamortized deferred policy acquisition costs 1,499 3,140
Goodwill, less accumulated amortization of $150 and $1,973 1,193 3,166
Other assets 1,625 1,778
--------- ----------
Total Assets $ 98,365 $ 93,054
========= ==========
Liabilities and Stockholders' Equity
Future policy benefits:
Life $ 40,665 $ 38,459
Annuity and other 5,428 6,354
Policy claims 31,109 15,438
Premiums received in advance and unearned 2,677 2,348
Amounts due to reinsurers 37 705
Accrued commissions and expenses 5,451 4,179
Loans payable 5,077 298
Capital equipment leases 1,151 0
Income taxes payable 0 463
Deferred income taxes 100 0
Other liabilities 2,661 2,757
--------- ----------
Total Liabilities 94,356 71,001
Stockholders' Equity
Preferred stock, par value $1: authorized 20,000,000 shares:
Series A Cumulative Convertible, issued 580,250 580 580
Series B Cumulative Convertible, none issued
Common stock, par value $.10: authorized 50,000,000, issued 10,209,160 and 10,078,710 1,021 1,008
Common stock, Class A, par value $.10: authorized 20,000,000, none issued
Additional paid-in capital 13,767 12,945
Net unrealized appreciation (depreciation) of bonds 188 (177)
Net unrealized appreciation (depreciation) of equity securities (3) 668
Retained earnings (11,468) 7,105
--------- ----------
4,085 22,129
Less common stock held in treasury, at cost, 36,300 shares (76) (76)
--------- ----------
Total Stockholders' Equity 4,009 22,053
--------- ----------
Total Liabilities and Stockholders' Equity $ 98,365 $ 93,054
========= ==========
See notes to consolidated financial statements.
F-3
Provident American Corporation and Subsidiaries
Consolidated Statements of Operations
(Dollars in thousands, except per share data) Years Ended December 31,
1997 1996 1995
----------- ------------ ------------
Revenue:
Premium: Accident and health, gross $84,719 $57,195 $39,028
Life and annuity, gross 9,555 11,308 13,220
----------- ------------ ------------
Total gross premium 94,274 68,503 52,248
----------- ------------ ------------
Accident and health reinsurance ceded 39,548 25,670 15,882
Life and annuity reinsurance ceded 473 (1,873) 3,657
----------- ------------ ------------
Total reinsurance ceded 40,021 23,797 19,539
----------- ------------ ------------
Net premium 54,253 44,706 32,709
Net investment income 3,487 3,280 2,858
Realized gains (losses) on investments 750 2,100 211
Processing fees and other revenue 3,540 1,661 1,269
Litigation settlement, net of expenses 0 22,400 0
----------- ------------ ------------
Total revenue 62,030 74,147 37,047
----------- ------------ ------------
Benefits and expenses:
Death and other policy benefits:
Life 6,112 4,396 4,568
Accident and health, net of reinsurance 38,981 18,963 14,458
Annuity contracts and other considerations 737 1,137 892
Increase in liability for future policy benefits 1,896 6,474 2,243
Commissions, net of ceding allowance and
deferred acquisition costs 6,813 7,855 6,054
Other operating expenses, net of ceding allowance
and deferred acquisition costs 15,301 11,716 11,561
Amortization of deferred policy acquisition costs 10,943 584 103
Depreciation and amortization of goodwill 4,261 505 849
----------- ------------ ------------
Total benefits and expenses 85,044 51,630 40,728
----------- ------------ ------------
Income (loss) before income taxes (23,014) 22,517 (3,681)
Provision (benefit) for income taxes:
Current (5,205) 6,816 (131)
Deferred 616 (419) 151
----------- ------------ ------------
Total income taxes (4,589) 6,397 20
----------- ------------ ------------
Net income (loss) (18,425) 16,120 (3,701)
Dividends on preferred stock 148 194 334
----------- ------------ ------------
Net income (loss) applicable to common stock ($18,573) $15,926 ($4,035)
=========== ============ ============
Income (loss) per share of common stock
Basic $ (1.84) $ 1.66 $ (0.44)
=========== ============ ============
Diluted $ (1.84) $ 1.36 $ (0.44)
=========== ============ ============
Common shares and equivalents used in computing income (loss) per share
Basic 10,090 9,610 9,100
Diluted 10,090 11,674 9,100
See notes to consolidated financial statements.
F-4
Provident American Corporation and Subsidiaries
Consolidated Statements of Changes in Stockholders' Equity
(Dollars in thousands)
Net Unrealized Net Unrealized
Additional Appreciation Appreciation
Preferred Stock Common Stock Paid-In (Depreciation) of Marketable
Shares Amount Shares Amount Capital of Bonds Securities
-------- -------- -------- -------- ---------- --------------- ----------------
BALANCE, DECEMBER 31, 1994.......... 1,006 $1,006 8,628 $ 863 $10,130 $(2,563)
Pooling of interests with REF &
Associates (in 1996)............... 610 61 (61)
Stock options exercised............. 22 2 79
Compensation expense on stock option
grants............................. 18
Cash dividends declared on preferred
and common stock...................
Net unrealized appreciation of
bonds.............................. 3,030
Net loss............................
----- ------ ------ ------ ------- -------
BALANCE, DECEMBER 31, 1995.......... 1,006 1,006 9,260 926 10,166 467
Conversion of Series B Cumulative
Preferred stock.................... (426) (426) 426 43 383
Retirement of treasury stock........ (100) (10) (234)
Stock options and warrants
exercised.......................... 204 20 625
Compensation expense on stock
issuance and stock option grants... 15 2 153
Issuance of common stock in
connection with acquisition of
businesses......................... 274 27 1,852
Net unrealized depreciation of
bonds.............................. (644)
Net unrealized appreciation of
equity securities.................. $ 668
Cash dividends declared on preferred
stock..............................
Net income..........................
----- ------ ------ ------ ------- ------- -----
BALANCE, DECEMBER 31, 1996.......... 580 $ 580 10,079 $1,008 $12,945 $ (177) $ 668
Stock options and warrants
exercised.......................... 30 2 96
Compensation expense on stock
issuance........................... 100 11 478
Compensation expense on stock
option grants...................... 248
Net unrealized depreciation of
bonds.............................. 365
Net unrealized appreciation of
equity securities.................. (671)
Cash dividends declared on preferred
stock..............................
Net loss............................
----- ------ ------ ------ ------- ------- -----
BALANCE, DECEMBER 31, 1997.......... 580 $ 580 10,209 $1,021 $13,767 $ 188 $ (3)
===== ====== ====== ====== ======= ======= =====
Retained Treasury
Earnings Stock
(Deficit) (at cost) Total
----------- --------- --------
BALANCE, DECEMBER 31, 1994.......... $ (4,586) $(320) $ 4,530
Pooling of interests with REF &
Associates (in 1996)...............
Stock options exercised............. 81
Compensation expense on stock option
grants............................. 18
Cash dividends declared on preferred
and common stock................... (534) (534)
Net unrealized appreciation of
bonds.............................. 3,030
Net loss............................ (3,701) (3,701)
-------- ----- -------
BALANCE, DECEMBER 31, 1995.......... (8,821) (320) 3,424
Conversion of Series B Cumulative
Preferred stock.................... 0
Retirement of treasury stock........ 244 0
Stock options and warrants
exercised.......................... 645
Compensation expense on stock
issuance and stock option grants... 155
Issuance of common stock in
connection with acquisition of
businesses......................... 1,879
Net unrealized depreciation of
bonds.............................. (644)
Net unrealized appreciation of
equity securities.................. 668
Cash dividends declared on preferred
stock.............................. (194) (194)
Net income.......................... 16,120 16,120
-------- ----- -------
BALANCE, DECEMBER 31, 1996.......... $ 7,105 $ (76) $22,053
Stock options and warrants
exercised.......................... 98
Compensation expense on stock
issuance........................... 489
Compensation expense on stock
option grants...................... 248
Net unrealized depreciation of
bonds.............................. 365
Net unrealized appreciation of
equity securities.................. (671)
Cash dividends declared on preferred
stock.............................. (148) (148)
Net loss............................ (18,425) (18,425)
-------- ----- -------
BALANCE, DECEMBER 31, 1997.......... $(11,468) $ (76) $ 4,009
======== ===== =======
See notes to consolidated financial statements.
F-5
Provident American Corporation and Subsidiaries
Consolidated Statements of Cash Flows
(Dollars in thousands) Years Ended December 31,
1997 1996 1995
-------- -------- --------
Cash flows from operating activities
Net income (loss) $(18,425) $ 16,120 $ (3,701)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation, amortization and in 1997 and 1995
asset impairment 4,286 515 2,934
Equity securities received from litigation settlement (19,400)
Net realized (gain) on investments (750) (2,100) (211)
Changes in assets and liabilities
Premium due and uncollected, unearned
premium and premium received in advance 130 971 237
Due to/from reinsurers (7,520) (2,112) 3,050
Accrued investment income 226 (186) 3
Other assets, current and deferred income
taxes and other liabilities (3,222) (969) 81
Deferred policy acquisition costs, net 1,641 (2,154) (676)
Accrued commissions and expenses 1,272 1,906 74
Future policy benefits and policy claims 16,951 8,528 1,743
-------- -------- --------
Net cash provided by (used in) operating activities (5,411) 1,119 3,534
-------- -------- --------
Cash flows from investing activities
Purchases of bonds (25,128) (24,861) (13,747)
Purchases of equity securities and other investments (100) (1,194) (246)
Sale of bonds 35,879 16,719 9,350
Sale of equity securities 4,420 18,504
Maturity of investments and loans 645 328
Repayments of loans receivable 250 738
Loans to officer, director and shareholder (1,032) (461)
Purchases of property and equipment (3,206) (745) (76)
Acquisition of businesses, net (3,745)
Sale of business, net 1,756
-------- -------- --------
Net cash provided by (used in) investing activities 11,083 4,862 (1,897)
-------- -------- --------
See notes to consolidated financial statements.
F-6
Provident American Corporation and Subsidiaries
Consolidated Statements of Cash Flows
(Dollars in thousands) Years Ended December 31,
1997 1996 1995
--------- ------- --------
Cash flows from financing activities
Withdrawals from contractholder deposit funds, net (589) (1,797) (996)
Proceeds from note payable 5,039 78 78
Repayments of notes payable (260) (745) (414)
Issuance of common stock 835 733 81
Dividends paid on preferred and common stock (148) (194) (534)
-------- -------- --------
Net cash provided by (used in) financing activities 4,877 (1,925) (1,785)
-------- -------- --------
Net increase (decrease) in cash and cash equivalents 10,549 4,056 (148)
Cash and cash equivalents, beginning of year 6,218 2,162 2,310
-------- -------- --------
Cash and cash equivalents, end of year $ 16,767 $ 6,218 $ 2,162
======== ======== ========
Supplemental disclosure of cash flow information
Interest paid $ 97 $ 56 $ 101
Income taxes paid (refunded), net $ (1,490) $ 6,330 $ (13)
Non-cash investing activities
In 1997, the Company incurred capital lease obligations in connection
with the acquisition of certain equipment.
In 1996, the Company issued stock in connection with certain business
acquisitions described in Note C and received stock in connection with a
litigation settlement described in Note K.
See notes to consolidated financial statements.
F-7
Provident American Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 1997
(Dollars in thousands, except per share amounts)
Note A - Nature of Operations
Provident American Corporation ("PAMCO") is an insurance holding
company. The operations of PAMCO and its subsidiaries (the "Company") are
principally those of its wholly owned life insurance companies, Provident
Indemnity Life Insurance Company ("PILIC") and Provident American Life and
Health Insurance Company ("PALHIC").
PAMCO is a Pennsylvania corporation and is regulated as an insurance
holding company by the 42 states in which PILIC and PALHIC are licensed. The
Company markets and underwrites group life and accident and health coverages as
well as individual life insurance policies through independent agents and
brokers. The Company's major line of combined group life and health business is
written through several association groups and discretionary group trusts.
Note B - Significant Accounting Policies
Principles of consolidation: The consolidated financial statements of
PAMCO and subsidiaries have been prepared in accordance with generally accepted
accounting principles (GAAP) and include the accounts of PAMCO and all of its
subsidiaries. All significant intercompany accounts and transactions have been
eliminated.
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 revenues, expenses, assets, and liabilities and disclosure
of contingencies. Actual results could differ from those estimates.
Bonds are classified as "available-for-sale", reported at fair value,
with unrealized gains and losses excluded from earnings and reported as a
separate component of stockholders' equity, net of applicable deferred income
taxes.
Equity securities are classified as "available-for-sale" and carried at
fair value.
Real estate is stated at cost, less accumulated depreciation; policy
loans are stated at the aggregate unpaid principal balances.
Cash equivalents consist of highly liquid investments with maturities
of three months or less from date of purchase. The Company utilizes two banking
institutions for insurance and investment operations. The Company had bank
deposits which exceeded federally insured limits by approximately $12,000 at
December 31, 1997.
F-8
Provident American Corporation and Subsidiaries
Notes to Consolidated Financial Statements - (Continued)
Realized gains and losses (including provisions for market declines
considered to be other than temporary) are included in the determination of net
income (loss) as revenues. The cost of investments sold is determined on a
specific identification basis.
Unrealized gains and losses on securities available-for-sale are
excluded from earnings and included as a separate component of stockholders'
equity, net of applicable deferred income taxes.
Deferred policy acquisition costs are costs which vary with and in
direct proportion to new business volume and include excess first year
commissions, policy issue and underwriting expenses net of application fees and
reinsurance ceding allowances. Accordingly, policy acquisition costs are
deferred and amortized in order to match the costs of writing new business
against the expected future revenues. Amortization of deferred policy
acquisition costs relating to managed care business ("The Provident Solution"
and HealthQuest) are established when polices are issued and is based on
projected premium over a four-year period incorporating current lapse experience
and for life insurance business based on the same projected premium assumptions
used in computing reserves for future policy benefits. Unamortized costs are
compared to the estimated future profitability for these products. If the
unamortized costs exceed the estimated future profitability for these products,
the unamortized cost will be written down to equal the estimated future
profitability. The Company's estimates of future profitability consider
investment income.
Property and equipment (principally home office property) are recorded
at cost. Expenditures for improvements that increase the estimated useful life
of the asset are capitalized. Expenditures for repairs and maintenance are
charged to operations as incurred. Depreciation is provided using the
straight-line method over the estimated useful lives of the assets. Upon sale or
retirement, the cost of the asset and the related accumulated depreciation are
removed from the accounts and the resulting gain or loss, if any, is included in
operations.
Goodwill represents the excess of the Company's purchase price over the
fair value of the net assets acquired and is being amortized on a straight line
basis over 10-20 years. The Company continually monitors the net realizable
value of goodwill and recognizes a charge to expense when it is determined that
a permanent impairment exists. During 1997 the Company determined the goodwill
associated with the NIA and CSE acquisitions were impaired as a result of the
outsourcing agreement with HPS described in Note R and was written off.
Income taxes: Income taxes are calculated using the liability method
specified by Statement of Financial Accounting Standards No. 109, "Accounting
for Income Taxes".
Recognition of premium revenue: For accident and health policies,
premiums are recognized when earned. For life insurance policies, premiums are
recognized when due. Limited-payment contract premiums received in excess of net
premiums are deferred and recognized into income in a constant relationship with
insurance in-force. Considerations from annuity contracts are accounted for as
fund deposits with revenues reflecting administrative and other charges.
F-9
Provident American Corporation and Subsidiaries
Notes to Consolidated Financial Statements - (Continued)
Future policy benefits: The liabilities for future life policy benefits
have been computed using a net level premium method including assumptions as to
investment yields ranging from 2 1/2% to 11 1/2%. Mortality, withdrawals and
other assumptions are based either on the Company's past experience or various
actuarial tables modified as necessary for possible unfavorable variations.
Future policy benefits for annuities represent the policyholders' accumulated
value that includes accrued interest at the credited rate and excludes any
provision for surrender charges.
Policy claims: The liability for life and health policy claims is based
upon the aggregate of claim estimates for reported and unreported losses based
upon the Company's experience. The methods for making such estimates and
establishing the resulting liabilities are continually revised and updated and
any changes resulting therefrom are immediately charged or credited to income
(loss) in the periods in which they are made.
Reinsurance: The Company uses reinsurance to limit the impact of large
losses by spreading the risk, and therefore limiting adverse claims experience.
A significant portion of the reinsurance is effected under quota-share
reinsurance contracts and, in some instances, by excess-of-loss reinsurance
contracts. The Company's consolidated statements of operations present premium
on a gross basis before reinsurance ceded together with the ceded premiums while
policy benefits are presented net of reinsurance and commissions are presented
net of reinsurance allowances.
Earnings (loss) per share of common stock: In 1997, the Company adopted
SFAS No. 128 "Earnings Per Share" resulting in the presentation of basic and
diluted earnings per share ("EPS"). Prior years' EPS data presented have been
restated. Equivalents were anti-dilutive in 1997 and 1995.
Reclassifications and restatement of prior year amounts: Certain prior
year amounts have been reclassified to conform to the current year's
presentation.
Impairment of Long-lived Assets: Long-lived assets and certain
identifiable intangibles including goodwill are reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount of an asset
may not be recoverable. In 1995 management determined that certain intangible
assets and equipment should be written off. Approximately $2,200 was charged
against operations in 1995. The assets related to systems development and
hardware costs were replaced with systems acquired through acquisitions. In
addition, goodwill and value of insurance in force purchased was written off.
During 1997 the Company wrote off certain computer hardware, equipment, software
and goodwill as described in Note R.
Recent accounting standards: SFAS 129 "Disclosure of "Information about
Capital Structure" establishes standards for disclosing information about an
entity's capital structure. SFAS 129 requires the disclosure of the pertinent
rights and privileges of various securities outstanding (stock, options,
warrants, preferred stock, debt and participating rights), call prices and
dates, conversion or exercise prices and redemption requirements. SFAS 129 has
been adopted by the Company.
F-10
Provident American Corporation and Subsidiaries
Notes to Consolidated Financial Statements - (Continued)
SFAS 130 "Reporting Comprehensive Income" establishes standards for
reporting and display of comprehensive income, its components and accumulated
balances. Comprehensive income is defined to include all changes in equity
except those resulting from investments by owners and distributions to owners.
Among other disclosures, SFAS 130 requires that all items that are required to
be recognized under current accounting standards as components of comprehensive
income be reported in a financial statement that is displayed with the
prominence as other financial statements.
SFAS 131 "Disclosure about Segments of a Business Enterprise"
establishes standards for reporting information about operating segments in
annual financial statements and requires reporting of selected information about
operating segments in interim financial statements issued to the public. It also
establishes standards for disclosures regarding products and services,
geographic areas and major customers. SFAS 131 defines operating segments as
components of an enterprise about which separate financial information is
available and that is regularly used by the chief operating decision maker in
deciding how to allocate resources and in assessing performance.
SFAS 132 "Employers' Disclosures about Pensions and other
Postretirement Benefits" revises and standardizes disclosure requirements about
pensions and other postretirement benefit plans to the extent practicable. SFAS
132 requires additional information on changes in benefit obligations and the
fair values of plan assets that will facilitate financial analysis.
SFAS 130, SFAS 131 and SFAS 132 are effective for periods ending after
December 15, 1997. The Company has not been able to fully evaluate the impact,
if any, that adoption of these recent pronouncements will have on future
financial statement disclosures.
SFAS 133 "Accounting for Derivative Instruments and Hedging activities
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts,
(collectively referred to as derivatives) and for hedging activities. It
requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those instruments
at fair value. SFAS 133 is effective for all periods beginning after December
15, 1997. The Company had no derivative instruments as of December 31, 1997.
F-11
Provident American Corporation and Subsidiaries
Notes to Consolidated Financial Statements - (Continued)
Note C - Acquisitions of Subsidiaries and Business
Effective March 1, 1996, PILIC acquired all of the issued and
outstanding stock of Union Benefit Life Insurance Company, a Pennsylvania stock
life insurance company, ("UBLIC") for an amount equal to its adjusted capital
and surplus (approximately $3,750), $500 in cash, plus the issuance of 100,000
shares of PAMCO's common stock. The Company has changed UBLIC's name to PALHIC.
The shares issued are registered securities but have trading restrictions
attached. Concurrently, the Company, PALHIC and PILIC entered into an agreement
for the purchase and sale of the PALHIC business with Life and Health Insurance
Company of America, a Pennsylvania insurer ("LHI"), pursuant to which all of the
insurance business of PALHIC was purchased by LHI immediately prior to the
purchase of the PALHIC stock by PILIC. The purchase price payable by LHI to
PALHIC for the purchase of the PALHIC business was $1,800. PALHIC is licensed to
transact life, accident and health insurance in forty (40) states and the
District of Columbia. PALHIC began underwriting the Company's life, accident and
health insurance products in 1997. This transaction was accounted for as a
purchase.
Effective May 1, 1996, the Company acquired all of the issued and
outstanding stock of NIA Corporation ("NIA"), d/b/a National Insurance
Administrators, and its wholly owned subsidiary, American Brokerage Corporation
("ABC") from MidAmerica Mutual Life Insurance Company ("MAM") for $254 of cash
and 50,000 shares of PAMCO's common stock. NIA and ABC are Colorado
corporations. NIA, a third party administrator, and ABC, an insurance marketer,
collectively design, market and service private-label health insurance plans. As
a part of this transaction, PILIC assumed approximately 3,500 in-force
"HealthQuest" medical policies originally underwritten by MAM and its
subsidiaries. This transaction was accounted for as a purchase and its impact on
the Company's consolidated results of operations was $3,100 of net earned
premium.
On June 18, 1996, the Company acquired, effective January 1, 1996, all
of the issued and outstanding stock of Richard E. Field & Associates, Inc.,
d/b/a REF & Associates, Inc. ("REF"), from its shareholders Richard E. Field and
Arthur Ivey for 610,000 shares of PAMCO's common stock. REF, a California
corporation, is engaged in marketing certain life and health insurance products
of PILIC. This transaction was accounted for as a pooling of interests.
On August 15, 1996, the Company acquired Coastal Services Eastern, Inc.
("CSE") from its shareholders for 123,937 shares of the Company's common stock.
CSE's sole business was providing the Company with policy and claims
administration at the Company's facility using CSE's administration system along
with its employees. This transaction was accounted for as a purchase.
F-12
Provident American Corporation and Subsidiaries
Notes to Consolidated Financial Statements - (Continued)
Note D - Investments and Financial Instruments
Investments in bonds are classified as available for sale and consisted of the
following.
December 31, 1997
------------------------------------------------------------------
Book and
Amortized Unrealized Fair
Cost Cost Gains Losses Value
---- ---- ----- ------ ------
Fixed maturities:
United States Government
and Agencies 42,114 $42,079 $ 428 $ 198 $42,309
Canadian Government -- -- -- -- --
Public Utilities 788 790 8 -- 798
Corporate 1,960 1,976 52 -- 2,027
------- ------- ------- ------- -------
Total fixed maturities $44,862 $44,845 $ 488 $ 198 $45,134
======= ======= ======= ======= =======
December 31, 1996
------------------------------------------------------------------
Book and
Amortized Unrealized Fair
Cost Cost Gains Losses Value
---- ---- ----- ------ ------
Fixed maturities:
United States Government
and Agencies $49,407 $49,285 $ 246 637 $48,894
Canadian Government 1,488 1,486 93 1,579
Public Utilities 790 792 11 781
Corporate 3,670 3,695 49 13 3,731
------- ------- ------- ------- -------
Total fixed maturities 55,355 55,258 388 661 54,985
======= ======= ======= ======= =======
F-13
Provident American Corporation and Subsidiaries
Notes to Consolidated Financial Statements - (Continued)
Summary of net unrealized gain or loss balances and change for the year
ended December 31, 1997 and 1996:
Change during the
Balance at 12 months ended
December 31, December 31,
1997 1996 1997 1996
------- ------- ------- -------
Net Unrealized Appreciation (Depreciation) on Bonds
Unrealized gains (losses), pre-tax
Gains $ 487 $ 388 $ 99 ($ 646)
Losses (198) (661) 463 (561)
------- ------- ------- -------
Net gains (losses) 289 (273) 562 (1,207)
Deferred federal income tax (provision) benefit (101) 96 (197) 423
Amount applicable to life future policy benefits 0 0 0 140
------- ------- ------- -------
Net unrealized appreciation (depreciation) of bonds $ 188 ($ 177) $ 365 ($ 644)
======= ======= ======= =======
Net Unrealized Appreciation (Depreciation) on Stocks
Unrealized gains (losses), pre-tax
Gains $ 0 $ 1,311 ($1,311) $ 1,311
Losses (4) (282) 278 (282)
------- ------- ------- -------
Net gains (losses) (4) 1,029 (1,033) 1,029
Deferred federal income tax (provision) benefit 1 (361) 362 (361)
------- ------- ------- -------
Net unrealized appreciation (depreciation) of bonds ($ 3) $ 668 ($ 671) $ 668
======= ======= ======= =======
Changes in fair value of bonds were a direct result of the overall
change in interest rates. The Company's bond investments are comprised of
high-quality investment-grade securities.
Fair values of bond investments in good standing are principally a
function of current interest rates, which are not considered in computing
related future liabilities to contract holders. The presentation of estimated
values for assets based on current interest yields without a corresponding
revaluation of contractholder liabilities can be misinterpreted.
The Company has various financial assets and liabilities outstanding at
December 31, 1997. Management believes that the book value of these financial
instruments (cash and invested assets, future policy benefits and notes payable)
approximates their fair values since the instruments carry interest rates which
approximate market or that the amounts involved are not material.
Bond investments on deposit as required by regulatory agencies were
valued at approximately $8,200 at December 31, 1997. In addition, approximately
$1,100 of bonds or other interest bearing deposits has been placed in escrow
with a bank in connection with certain reinsurance agreements.
F-14
Provident American Corporation and Subsidiaries
Notes to Consolidated Financial Statements - (Continued)
The amortized cost and fair value (book value) of bonds at December 31,
1997, by contractual maturity, is shown below. Expected maturities will differ
from contractual maturities because borrowers may have the right to call or
prepay obligations with or without call or prepayment penalties.
Contractual Maturity Amortized Cost Book and Fair Value
-------------------- -------------- -------------------
Within one year $ 252 $ 253
After one year but within five years 15,523 15,639
After five years but within ten years 18,289 18,383
Over ten years 6,420 6,521
------- -------
40,484 40,796
Mortgage-backed securities 4,361 4,338
------- -------
$44,845 $45,134
======= =======
Proceeds from sales of investments in bonds during 1997, 1996 and 1995
were $35,848, $16,719 and $9,350, respectively. Gross gains of $455, $200 and
$291 in 1997, 1996 and 1995, respectively, and gross losses of $92, $123 and
$170 in 1997, 1996 and 1995, respectively, were realized on those sales.
The Company's investment in equity securities are classified as
"available for sale" and carried at fair value. Equity securities as of December
31, 1996 represents the Company's investment of 100,000 shares of National Media
Corp. and 108,119 shares of Loewen common stock (NYSE: LWN) acquired as a result
of litigation (See note K). All shares of both companies owned as of December
31, 1996 were sold during 1997.
F-15
Provident American Corporation and Subsidiaries
Notes to Consolidated Financial Statements - (Continued)
Net investment income consisted of the following:
1997 1996 1995
------ ------ ------
Bonds $3,293 $3,072 $2,680
Equity securities 14 39
Mortgage loans 27 28 4
Real estate 250 160 173
Policy loans 19 22 24
Cash and cash equivalents 329 244 176
Other 116 36 6
------ ------ ------
4,048 3,601 3,063
Investment expenses 561 321 205
------ ------ ------
Net investment income $3,487 $3,280 $2,858
====== ====== ======
Note E - Deferred Policy Acquisition Costs
Based on the Company's estimates of the future profitability of it's
group medical products, deferred acquisition costs of approximately $6,500 have
been written off as amortization of deferred policy acquisition costs in the
fourth quarter of 1997. Management believes that the estimated future
profitability of the life business exceeds the unamortized deferred policy
acquisition costs for life products.
Note F - Loans Receivable - Officer and Director and Shareholder
The loans, bearing interest at rates ranging from 5.33% to 9%, are due
from April 1999 through June 2003 and are collateralized primarily by the
Company's common stock.
Note G - Loans Payable and Capital Lease Obligations
During 1997 the Company entered into a $1,000 bank line of credit, of
which $1,000 was outstanding as of December 31, 1997. This loan bears interest
at 1% above the prime rate. Interest payments are due monthly and the principal
balance is due July 2, 1998.
During 1997 and 1996, the average amount of all bank borrowings
outstanding was $131 and $577, respectively, the weighted average interest rate
was approximately 6.7% and 9.3%, respectively, and the maximum amount
outstanding was $1,000 and $830, respectively.
F-16
Provident American Corporation and Subsidiaries
Notes to Consolidated Financial Statements - (Continued)
As described in Note R, the Company received $5,000 from HPS, of which,
$3,978 has been accounted for as a loan payable discounted at the Company's
recent historical borrowing rate of 9.25% payable in 60 monthly payments of
principal and interest of $85 commencing in March 1998.
During 1997, the Company entered into capital lease obligations with
Harleysville National Bank in the amount of $1,390 on data processing and other
equipment. The obligation outstanding at December 31, 1997 was $1,151 with $92
of interest being paid on these leases during 1997.
F-17
Provident American Corporation and Subsidiaries
Notes to Consolidated Financial Statements - (Continued)
Note H - Income Taxes
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes. Significant
components of the Company's deferred tax liabilities and assets as of December
31, 1997 and 1996 are as follows:
1997 1996
------- -------
Deferred tax assets:
Policy reserves $ 2,589 $ 2,194
Policy acquisition costs 51 --
Advance premiums 427 211
Postemployment benefits 207 208
Net operating loss carryforwards 944 286
Accrued expenses 366 --
Goodwill related to NIA 258 --
Other, net 432 338
------- -------
5,274 3,237
Valuation allowance for deferred tax assets 3,923 1,285
------- -------
1,351 1,952
------- -------
Deferred tax liabilities:
Real estate 733 746
Unrealized appreciation of investments 100 265
Deferred and uncollected premiums, net 618 249
Policy acquisition costs -- 538
------- -------
1,451 1,798
------- -------
Net deferred tax asset (liability) ($ 100) $ 154
======= =======
The Company and its subsidiaries have a net operating loss carryforward
amounting to $7,600 some of which is available to offset future taxable income
through 2012. Approximately $6,500 of the tax loss carryforwards result from a
1989 acquisition and expire between 1998 and 2004 and are subject to annual
limitations of approximately $100. This limitation will significantly reduce
their utilization. The net operating loss carryforwards included as deferred tax
assets have been reduced to exclude the estimated amount of carryforwards which
are unavailable due to certain limitations.
The Company has established a valuation allowance for deferred tax
assets reflecting the Company's lack of a history of consistent earnings which
give rise to uncertainty as to whether the deferred tax asset is fully
realizable. The change in valuation allowance in 1997 amounting to $2,638
results from a net increase in temporary differences for which recovery is
uncertain primarily caused by the 1997 loss from operations.
F-18
Provident American Corporation and Subsidiaries
Notes to Consolidated Financial Statements - (Continued)
The reconciliation of income tax expense (benefit) to the amount
computed by applying the appropriate statutory income tax rate (35%) to income
(loss) before income taxes is summarized as follows:
Years ended December 31,
1997 1996 1995
---- ---- ----
Amount computed at statutory rate ($7,740) $ 7,881 ($1,359)
Change in valuation allowance and
tax effect of losses or temporary
differences for which no current
or deferred benefit is available 2,324 (1,534) 479
Permanent differences including
purchase accounting adjustments 600 (2) 512
Special deductions available to life
insurance companies -- -- 316
State income taxes, net of tax benefit -- 302 2
Other, net 227 (250) 70
------- ------- -------
Total income tax expense (benefit) ($4,589) $ 6,397 $ 20
------- ------- -------
In accordance with the Life Insurance Company Income Tax Act of 1959, a
portion of the Insurance Subsidiaries' statutory income was not subject to
current income taxation but was accumulated in an account designated
Policyholders' Surplus. Under the Tax Reform Act of 1984, no further additions
may be made to the Policyholders' Surplus Account for tax years ending after
December 31, 1983. The balance in the account of approximately $2,400 at
December 31, 1997, would result in a tax liability of $840 (at a 35% rate), only
if distributed to shareholders or if the account balance exceeded a prescribed
maximum. No income taxes have been provided on this account because, in
management's opinion, the likelihood that these conditions will be met is
remote. "Shareholders' Surplus" represents an accumulation of taxable income
(net of tax thereon) plus the dividends-received deduction, tax-exempt interest,
and certain other special deductions as provided by the Act. At December 31,
1997, the balance in the "Shareholders' Surplus" account amounted to
approximately $3,500. There is no present intention to make distributions in
excess of "Shareholders' Surplus".
F-19
Provident American Corporation and Subsidiaries
Notes to Consolidated Financial Statements - (Continued)
Note I - Stockholders' Equity and Earnings Per Share
Series A Cumulative Convertible Preferred Stock, $1 par value, entitles
its holder to vote on an "as-converted" basis at a rate of four common votes per
one share of Preferred Stock, to receive an annual cash dividend of $.25 per
share, to convert after March 1995 into either common voting stock or Class A
Common Stock on a share-for-share basis (each Class A Common Share has four
votes) adjusted for future dilution and to receive $3.65 per share plus all
accrued and unpaid dividends in the event of voluntary or involuntary
liquidation and may be redeemed at the option of the Company on June 30, 1998,
at the greater of (a) the current market price of the Class A Common Stock or
the Common Voting Stock or (b) $5.45 per share, plus in each case all accrued
and unpaid dividends. Redemption payments shall be payable in up to three annual
installments, with interest at the then-current prime rate. However, no
redemption shall be made unless, immediately thereafter, the Company and all of
its subsidiaries shall be in compliance with the applicable laws, rules and
regulations relating to insurance companies in the various states in which a
subsidiary of the Company may be licensed to do business.
Series B Cumulative Convertible Preferred Stock, $1 par value, is
identical to the Series A Cumulative Convertible Preferred Stock except it has
only one vote per share. During 1996 all of the outstanding Series B Cumulative
Convertible Preferred Stock was converted into common voting stock on a
share-for-share basis.
Dividend restrictions: Dividends paid by the Company over and above the
financial assets of PAMCO are dependent on the ability of PILIC to pay dividends
to PAMCO and the ability of PALHIC to pay dividends to its parent, PILIC. The
payment of dividends by PILIC and PALHIC is dependent upon a number of factors
including earnings and financial condition, business needs and capital and
surplus requirements as well as applicable regulatory restrictions. Under
Pennsylvania law, PILIC and PALHIC are currently unable to pay dividends without
the prior approval of the Pennsylvania Insurance Commissioner as a result of
PILIC's and PALHIC's statutory unassigned deficit of $13,538 and $4,147,
respectively which excludes common stock and additional paid-in capital amounts.
At December 31, 1997, PILIC and PALHIC calculated their respective
Risk Based Capital ("RBC") utilizing a formula required by the NAIC. PALHIC's
amounts are included in PILIC, PALHIC's parent. The results of this computation
are indicated in the table below. RBC standards are designed to measure the
acceptable amounts of statutory capital and surplus an insurer should have based
on inherent and specific risks of an insurer's business. Insurers failing to
meet their benchmark capital and surplus level may be subject to scrutiny by its
domiciled insurance department and, ultimately, rehabilitation or liquidation.
F-20
Provident American Corporation and Subsidiaries
Notes to Consolidated Financial Statements - (Continued)
The insurance department of Pennsylvania in which PILIC and PALHIC are
domiciled recognizes as net income and capital and surplus (Stockholders'
Equity) those amounts determined in conformity with statutory accounting
practices prescribed or permitted by the department which differ in certain
respects from generally accepted accounting principles. The amounts of statutory
net income for the year ended and surplus as of December 31 were as follows:
1997 1996 1995
------------- ----------- ------------
PILIC (1)
Net income (loss) ($10,385) $9,668 ($1,570)
Total capital and surplus 11,408 13,971 6,383
Adjusted capital and surplus 11,968 14,838 6,743
Company action level Risk Based Capital 9,303 6,569 5,190
PALHIC (2)
Net income (loss) ($862) $1,631 ($73)
Total capital and surplus 4,283 5,351 3,068
Adjusted capital and surplus 4,302 5,367 3,152
Company action level Risk Based Capital 1,730 19 235
(1) PILIC's total capital and surplus, adjusted capital and surplus and company
action level Risk Based Capital includes amounts for its subsidiaries
including PALHIC. PALHIC is included in 1997 and 1996 amounts.
(2) PALHIC includes amounts prior to its acquisition by the Company.
A reconciliation of the numerator and denominator of the basic and diluted
earnings per share computation for 1996 is as follows:
(amounts in thousands except per share amounts)
Income Shares Per-Share
(numerator) (denominator) Amount
----------- ------------- ---------
Net income $16,120
Dividends on perferred stock (194)
Basic EPS -------
Net income applicable to common stock $15,926 9,610 $1.66
Effect of dilutive securities
Options and warrants 2,064
Diluted EPS ------- ------ ----
Net income applicable to common stock $15,926 11,674 $1.36
======= ====== ====
F-21
Provident American Corporation and Subsidiaries
Notes to Consolidated Financial Statements - (Continued)
Note J - Stock Options and Warrants
Options: The Company has stock option plans which provide for the
granting of options to directors and key employees of the Company and its
subsidiaries, and certain field representatives and agents.
The Incentive Stock Option Plan for Employees authorized the granting
of options for up to 650,000 shares of the Company's Common Stock to key
managerial employees of the Company, which are exercisable for up to five years
at a price not less than the fair market value of the shares on the date of
grant. All options granted under the Incentive Stock Option Plan have been
granted at 100% of the fair market value of the shares on the date of grant. The
Incentive Stock Option Plan for Employees expired, and during 1996 the Company
adopted the 1996 Employee Incentive Stock Option Plan ("1996 Employee Plan"),
which was approved by the Company's shareholders at the 1997 Annual Meeting of
Shareholders. The 1996 Employee Plan was amended in 1997 to increase the number
of shares issuable thereunder from 950,000 shares to 1,250,000 shares of the
Company's Common Voting Stock to key employees of the Company and its
subsidiaries and affiliates, exercisable for up to five years from the effective
date of the grant at a price not less than the fair market value of the shares
on the effective date of grant. All options granted under the 1996 Employee Plan
have been granted at 100% of the fair market value of the shares on the
effective date of the grant, with the exception of an option granted Mr.
Clemens, which was granted at 110% of the fair market value on the date of the
grant.
The Non-Qualified Stock Option Plan for Directors ("Directors' Plan")
was amended in 1996 to increase the number of shares authorized for the issuance
thereunder from 585,000 shares to 1,010,000 shares and to incorporate prior
amendments. Options granted under the Directors' Plan are exercisable for up to
ten years from the date of grant at a price of not less than the fair market
value of the shares on the date of the grant. All options granted under the
Directors' Plan have been granted at 100% of the fair market value of the shares
on the date of grant. During 1997, pursuant to the Directors' Plan, the Company
granted to each Director with the exception of Mr. Clemens an option to purchase
30,000 shares of the Company's Common Stock at an exercise price of $2.75 per
share.
The incentive Stock Option Plan for Field Representatives and Agents
authorize the granting of options for up to 750,000 shares of the Company's
Common Stock, which are market value of the shares on the date of grant. All
options granted under the Incentive Stock Option Plan for Field Representatives
and Agents have been granted at 100% of the fair market value of the shares on
the date of grant. The Company terminated the Incentive Stock Option Plan for
Field Representatives and Agent in 1997.
F-22
Provident American Corporation and Subsidiaries
Notes to Consolidated Financial Statements - (Continued)
The Premium Production Stock Option Plan authorizes the granting of
options to agents, managers and employees of the Company's common stock, which
are exercisable for up to five years from the date of grant, but in no event
later than December 31, 2002, at a price equal to the lesser of $3.50 per share
or the market price thereof. The Company has discontinued the granting of
additional options under this plan. Since the fair market value of options
granted during 1996 exceeded the option price, a charge was made to 1996
operations in the amount of $67. This plan was terminated as of June 30, 1997.
Also during 1997, the Company approved the adoption of a Military Stock
Option Plan and a 1997 Insurance Agent Stock Option Plan ("Agents Plan"),
designed to replace and supercede all previous stock option plans for
non-employee agents. Each Plan is administered by the Option Administration
Committee, options are granted at fair market value and subject to certain other
vesting or performance conditions, and the Company has reserved 750,000 shares
of the Company's common Stock for issuance under each Plan. Options will be
issued under each Plan only to insurance agents who are licensed to sell
insurance by a life insurance subsidiary of the company, and are exercisable for
up to five years from the effective date of the grant.
The following table lists changes during 1997, 1996 and 1995 in
outstanding stock options for the 1996 Employee Plan, the Directors' Plan, the
Premium Production Stock Option Plan, the Military Stock Option Plan all stock
option plans:
F-23
Provident American Corporation and Subsidiaries
Notes to Consolidated Financial Statements - (Continued)
Employee, Director & Agent Plans Combined
Number Exercise Weighted Average
of Shares Price Range Exercise and Fair Value
--------- ----------- -----------------------
Outstanding, January 1, 1995
Exercisable 191,235 1.59 - 4.94 3.19
Not exercisable 32,000 2.00 - 3.88 2.91
Total outstanding 223,235 1.59 - 4.95 3.10
1995
Granted 27,175 2.38 - 3.52 3.44
Exercised 22,520 2.38 - 3.88 3.61
Canceled/expired 62,120 2.27 - 4.94 2.56
Outstanding, December 31, 1995
Exercisable 150,520 1.59 - 4.83 3.35
Not exercisable 15,250 2.00 - 3.88 2.64
Total outstanding 165,770 1.59 - 4.83 3.29
1996
Granted 1,138,350 3.52 - 12.25 9.18
Exercised 79,275 1.59 - 8.06 3.79
Canceled/expired -- 0.00 0.00
Outstanding, December 31, 1996
Exercisable 356,217 8.38 - 12.25 6.70
Not exercisable 868,628 2.00 - 12.25 9.35
Total outstanding 1,224,845 2.00 - 12.25 8.73
1997
Granted 1,197,000 2.47 - 5.00 4.03
Exercised 30,450 2.00 - 3.64 3.23
Canceled/expired 113,000 2.00 - 10.00 9.43
Outstanding, December 31, 1997
Exercisable 154,795 2.38 - 3.88 3.07
Exercisable 398,583 4.00 - 5.00 4.12
Exercisable 75,100 6.00 - 7.00 6.21
Exercisable 138,328 8.06 - 8.75 8.73
Exercisable 160,500 10.00 - 11.00 10.38
Exercisable 16,666 12.25 12.25
Not exercisable 260,000 2.47 - 2.88 2.72
Not exercisable 472,917 4.00 - 5.00 4.89
Not exercisable 81,000 6.00 - 7.00 6.19
Not exercisable 71,672 8.06 - 8.75 8.70
Not exercisable 440,500 10.00 - 11.00 10.09
Not exercisable 8,334 12.25 12.25
Total outstanding 2,278,395 2.38 - 12.25 6.30
F-24
Provident American Corporation and Subsidiaries
Notes to Consolidated Financial Statements - (Continued)
In addition, Mr. Clemens directly owns options to purchase 253,376
shares of the Company's Common Stock at $ .9091 per share expiring from time to
time between November 1999 through December 2002. Mr. Clemens indirectly owns
options to purchase 82,080 shares of the Company's common stock at $.9091 per
share expiring from time to time between November 1999 and December 2002. Mr.
Clemens disclaims beneficial ownership of all other options of any partnership
in which Mr. Clemens directly or indirectly is a partner.
In addition, a partnership of which Mr. Clemens is a partner owns
options to purchase 1,000,000 shares of the Company's Common Stock at $ .9091
per share expiring from time to time between November 1999 through December
2002. Mr. Clemens also owns an option to purchase up to 550,000 shares of Series
A Cumulative Convertible Preferred Stock at $3.64 per share (fair market value
at date of grant) exercisable on or before March 31, 2003.
The Stock Option Plan for Executives ("Executive Plan") was amended in
1996 and authorizes the granting of options to purchase up to 3,850,000 shares
of the Company's Series A Cumulative Convertible Preferred Stock ("Series A
Preferred Stock"), which are exercisable for up to ten years from the effective
date of grant at a price of not less than the fair market value of the shares on
the date of grant. Also in 1997, the Company granted Alvin H. Clemens an option
to purchase shares of the Company s Series A Preferred Stock successively upon
each exercise by Mr. Clemens of his existing option and each subsequently
granted option to purchase shares of Series A Preferred Stock from time-to-time,
limited in the aggregate to (i) that the number shares of Series A Preferred
Stock which, when exercised, shall permit Mr. Clemens to acquire the right to
vote not more than 55% of the shares of the Company's Common Voting Stock owned,
either directly or beneficially, by Mr. Clemens at such time, (ii) the shares of
Series A Preferred Stock which are, as of the date of any such exercise,
authorized and unissued; and (iii) an option to purchase more than 550,000
shares of Series A Preferred Stock in any six month period shall be prohibited
except upon the occurrence of a "change of control" (within the meaning of the
Securities Exchange Act of 1934, as amended).
Warrants: During 1995, the Company issued stock purchase warrants for
the purchase of 250,000 shares of the Company's common stock. Warrants to
purchase 200,000 shares were issued to a director of the Company on July 5,
1995, at $2.875 per share, 100,000 of these warrants are exercisable at any time
through July 5, 2000, and 100,000 of the warrants are exercisable through July
5, 2000, in increments of 5,000 warrants for each $1,250 of pre-need insurance
premium produced between August 1995 and July 1997. On October 1, 1996, the
100,000 warrants exercisable at any time and 21,267 warrants earned under this
arrangement were exercised; the remaining 78,733 warrants were then terminated.
50,000 warrants were issued on November 1, 1995, to an unaffiliated party at
$5.00 per share and are exercisable through November 1, 1998.
F-25
Provident American Corporation and Subsidiaries
Notes to Consolidated Financial Statements - (Continued)
On June 6, 1996, the Company issued 100,000 stock purchase warrants to
an unaffiliated party at $9.00 per share and are exercisable through June 6,
2001. The Company issued a warrant to an exclusive consultant of the Company to
purchase 100,000 shares of the Company's Common Stock at the market price per
share as of each of January 1, 1996, January 1, 1997, and January 1, 1998,
provided PILIC has realized new annualized premium sales production of at least
$35,000, $45,000, and $50,000, respectively, for each of these calendar years.
PILIC has realized the annualized premium threshold for the years ending
December 31, 1996 and 1997, and accordingly, the consultant is entitled to
exercise 100,000 warrants at $7.375 per share for 1996 and 100,000 at $14.00 per
share for 1997.
During 1997 the Company issued warrants to two exclusive agents, who
are also directors of a subsidiary of PAMCO, for the purchase of 50,000 shares
of the Company's common stock at $5.00 per share. These warrants become
exercisable throughout 2001. The Company also issued a warrant exercisable at
any time to an employee for the purchase of 25,000 shares of the Company's
common stock at $4.00 per share.
Effective January 1, 1996, the Company adopted the disclosure-only
provisions of SFAS 123 "Accounting for Stock Based Compensation." Accordingly,
no compensation cost has been recognized for stock option and warrant grants
that occurred in 1997 and 1996. Had compensation cost for the Company's stock
option grants been determined based on the fair value at the date of grants in
accordance with the provisions of SFAS 123, the Company would have amortized the
cost over the vesting period of the option which generally is five years for the
1996 Employee Plan and three years for the Directors Plan. The Company's 1997
and 1996 net income and net income per common share would have been reduced to
the following pro-forma amounts:
1997 1996
---- ----
Net income (loss) applicable to common shares
as reported ($18,573) $15,926
pro forma ($20,505) $15,681
Net income (loss) applicable to common shares Basic Diluted Basic Diluted
----- ------- ----- -------
as reported ($1.84) ($1.84) $1.66 $1.36
pro forma ($2.03) ($2.03) $1.63 $1.34
F-26
Provident American Corporation and Subsidiaries
Notes to Consolidated Financial Statements - (Continued)
The fair value of the options and warrants granted during 1997 and 1996
are estimated on the date of grant using the Black-Scholes option-pricing model.
The major assumptions used and the estimated fair value include no dividends
paid, assumed forfeitures of 10% annually for non-vested options and warrants
granted in 1996, and the following:
Risk Weighted
Expected Expected Free Average
Term Stock Interest Fair
In Years Volatility Rate Value
-------- ---------- ---- -----
For options granted in 1996
1996 Employee Plan 1-5 73% 5.55%-6.32% $3.92
Directors Plan 3 75% 6.32% $4.64
For options granted in 1997
1996 Employee Plan & Employee Warrant 5 63% 5.50% $1.42
Directors Plan 5 63% 5.50% $1.36
Military Market Plan & Warrants 5 63% 5.50% $1.13
Note K - Litigation Settlement, Net of Expenses
The Company received from the Loewen Group, Inc. and Loewen Group
International, Inc. (collectively "Loewen") on April 1, 1996, $3,000 in cash and
718,519 shares of the common stock of Loewen Group (NYSE: LWN) to compensate the
Company for damages sustained pursuant to a February 12, 1996 agreement between
the Company and Loewen to settle certain litigation filed by the Company against
Loewen. The settlement, net of legal expenses, was valued at $22,400. The impact
on net income was approximately $14,600, which is net of approximately $7,800 of
income taxes.
The Company sold 610,400 shares of Loewen stock in 1996 realizing a
$2,023 gain. During the first quarter of 1997 the Company sold its remaining
shares of Loewen stock realizing a gain of $961.
F-27
Provident American Corporation and Subsidiaries
Notes to Consolidated Financial Statements - (Continued)
Note L - Commitments and Contingencies
The Company has various capital leases that are primarily related to
office space, data processing and other equipment. Annual payments under all
capital and operating leases was approximately $857, $427 and $294 in 1997, 1996
and 1995, respectively. The future minimum rental commitments under
noncancelable leases at December 31, 1997, are: 1998 - $537; 1999 - $537; 2000 -
$537; 2001 - $183; and 2002 - $0.
The Company entered into an outsourcing agreement as described in Note
- - R HPS Outsourcing Agreement which guarantees certain minimum payments which at
December 31, 1997, are: 1998 - $935; 1999 - $120; 2000 - $120; 2001 - $120; 2002
- - $120; and thereafter $10.
The Company has a sixty-five month agreement with First Health Group
Corporation ("FHG") whereby the Company pays FHG the greater of $50 per year or
the sum of a sliding scale percentage of the discount recognized when
policyholders utilize the FHG network (primarily for the Solution product),
pre-certification of hospital admissions and large case management at agreed
upon rates. This agreement has resulted in claim savings, better control of
claim costs and competitively priced products.
The Company is involved in litigation in the customary settlement of
insurance claims. Management is of the opinion that neither the litigation nor
these claims will have a material adverse effect on the results of operations or
financial position of the Company.
Unfavorable economic conditions have contributed to an increase in the
number of insurance companies that are under regulatory supervision. This is
expected to result in an increase in mandatory assessments by state guaranty
funds of solvent insurance companies to cover losses to policyholders of
insolvent or rehabilitated companies. Mandatory assessments, which are subject
to statutory limits, can be partially recovered through a reduction in future
premium taxes in some states. Although the Company is not able to reasonably
estimate the potential effect on it of any such future assessments, such amounts
charged against operations for 1997, 1996 and 1995 have not been material.
The Company's business is subject to a changing legislative and
regulatory environment. Some of the proposed changes include initiatives to
restrict insurance pricing and the application of underwriting standards; reform
health care; and restrict investment practices. Proposals on national health
care reform have been under consideration that could significantly change the
way healthcare is financed and provided. The effects on the Company of
comprehensive healthcare reforms, which, if enacted, may have a material adverse
impact upon the ability of the Company to profitably engage in the writing of
accident and health insurance. Additionally, competition in the insurance
industry may effect the Company's ability to reach critical mass while remaining
competitive in agent compensation and product pricing. In response to these
developments the Company entered into an outsourcing agreement described in Note
R and continually reviews agent compensation and product pricing.
F-28
Provident American Corporation and Subsidiaries
Notes to Consolidated Financial Statements - (Continued)
Note M - Employee Benefit Plans
The Company sponsors a defined contribution retirement savings plan
under section 401(k) of the Internal Revenue Code covering substantially all
employees. Employees may contribute up to 15% of compensation, of which the
Company will match 50% of the first 5%. All contributions are subject to
limitations imposed by IRS regulations. Effective January 1, 1995, employees
were given the option to invest the "employer match" portion of their
contribution in common stock of the Company. At December 31, 1997 and 1996, the
plan held 1,379 and 3,496 shares of the Company's common stock, respectively.
All contributions are subject to limitations imposed by the Internal Revenue
Code on 401(k) plans.
All employee contributions are immediately vested, and the Company
contribution becomes 20% vested after two years of service. Thereafter, an
additional 20% becomes vested for each year of service up to 5 years, at which
time all contributions become completely vested. Pension expense under this plan
amounted to $78, $57 and $54 for 1997, 1996 and 1995, respectively.
F-29
Provident American Corporation and Subsidiaries
Notes to Consolidated Financial Statements - (Continued)
Note N - Liability for Unpaid Claims and Claim Adjustment Expenses
Activity in the liability for unpaid claims and claim adjustment
expenses is summarized as follows.
1997 1996 1995
-------- -------- --------
Liability at January 1 $ 15,438 $ 10,105 $ 10,524
Less reinsurance recoverables 6,930 4,275 4,912
-------- -------- --------
Net Balance at January 1 8,508 5,830 5,612
Provision (benefit) for unpaid losses:
Current year 40,628 23,858 19,821
Prior years 3,272 (499) (794)
-------- -------- --------
Total incurred 43,900 23,359 19,027
Payments made related to:
Current year 24,754 15,705 14,068
Prior years 11,610 4,976 4,741
-------- -------- --------
Total paid 36,364 20,681 18,809
Net Balance at December 31 16,044 8,508 5,830
Plus reinsurance recoverables 14,165 6,930 4,275
-------- -------- --------
Balance at December 31 $ 30,209 $ 15,438 $ 10,105
======== ======== ========
The 1997 provision for prior year unpaid losses of $3,272 reflects
higher than expected claim costs on the Company's managed care plans for
business written during 1996. The 1996 and 1995 benefit for prior year unpaid
losses of $499 and $794, respectively, reflects better than expected claim costs
on the Company's stop loss plans.
F-30
Provident American Corporation and Subsidiaries
Notes to Consolidated Financial Statements - (Continued)
Note O- Reinsurance
Reinsurance does not relieve the Company of its primary obligation to
its policyholders. Reinsurance varies according to the age of the insured, type
of risk and type of policy. Retention amounts for life insurance range up to $50
of coverage per individual life and for health insurance up to $85 per
individual.
Under the terms of a Quota Share Reinsurance Agreement, the Company
ceded 47.5% of the liability on its accident and health insurance business. The
Company received a ceding commission of 45.5% on all first year business, and
25.5% to 30.5% on renewal business, depending on product, in 1997, received
41.5% on all first year business , and 26.5% to 30.5% on renewal business,
depending on product, in 1996, and received 41.5% on all first year business ,
and 26.5% to 30.5% on renewal business, depending on product, in 1995. The
combined ceding commissions amounted to approximately 37%, 38.9% and 32.5% of
ceded earned premium for 1997, 1996, and 1995 respectively. The Company was
notified by its reinsurer, Swiss Re, that the Quota Share Reinsurance Agreement
would not be renewed effective January 1, 1998. Swiss Re's obligation to assume
paid losses incurred prior to January 1, 1998 remains in effect. Accordingly,
the Company notified Swiss Re that it would not be renewing the Excess of Loss
Agreement. The Company is currently negotiating with a group of reinsurers and
has placement slips regarding a replacement Quota Share Agreement and Excess of
Loss Agreement with a group of reinsurers to be effective January 1, 1998.
Effective January 1, 1998, the Company's new reinsurance will be on a no loss,
no gain basis for all policies inforce as of December 31, 1997 until those
policies are rate increased. The new agreements, when executed, may not be as
comprehensive as the old agreement. Policies are generally rate increased on
their six month or twelve month anniversary. Once policies inforce as of
December 31, 1997 have been rate increased, and for all policies sold during
1998, the Company will cede approximately 47.5% of group medical benefits.
Furthermore, the Company will retain any profit in excess of 3% of ceded
premium. The effect of any differences has not been determined; however,
management believes that the effect, if any, will not be material to the
accompanying financial statements.
In addition, the Company generally assumes 30% (up to $150 per
individual) of the liability on its limited self-funded accident and health
business, which consists generally of policies issued to limit the claims
expenses of employers that self-insure group medical benefits with respect to
any individual employee and in the aggregate.
The Company evaluates the financial condition of its reinsurers and
monitors concentrations of credit risk of the reinsurers to minimize exposure to
significant losses from reinsurer insolvencies. Reinsurance receivables
associated with a single reinsurer as of December 31, 1997 and 1996 amounting to
approximately $17,225 and $8,985, respectively.
F-31
Provident American Corporation and Subsidiaries
Notes to Consolidated Financial Statements - (Continued)
A summary of insurance in-force, premium income, benefits and
commission expense with respect to reinsurance operations is as follows:
Ceded to Assumed % of Am
Gross Other from Other Net Assumed
Amount Companies Companies Amount to Net
------ --------- ---------- ------ ---------
Year ended December 31, 1997:
Life insurance in force $ 446,300 $ 56,000 $ 528,000 $ 918,300 57.5%
--------- --------- --------- ---------
Premium:
Life insurance 8,893 444 $ 524 8,973 5.8%
Annuity 137 29 -- 108 0.0%
Accident and health $ 81,472 39,548 3,248 45,172 7.2%
--------- --------- --------- ---------
Total $ 90,502 $ 40,021 $ 3,772 $ 54,253
--------- --------- --------- ---------
Benefits:
Life insurance 6,065 584 631 6,112
Annuity and other 711 -- 26 737
Accident and health 72,950 36,785 1,916 38,081
--------- --------- --------- ---------
Total 79,726 $ 37,369 $ 2,573 $ 44,930
--------- --------- --------- ---------
Commissions $ 18,029 $ 12,571 $ 1,077 $ 6,535
--------- --------- --------- ---------
Year ended December 31, 1996:
Life insurance in force $ 495,000 $ 60,000 $ 417,000 $ 852,000 48.9%
--------- --------- --------- ---------
Premium:
Life insurance 10,384 (1,888) 816 13,088 6.2%
Annuity 108 15 -- 93
Accident and health 52,442 25,670 4,753 31,525 15.1%
--------- --------- --------- ---------
Total $ 62,934 $ 23,797 $ 5,569 $ 44,706
--------- --------- --------- ---------
Benefits:
Life insurance 4,244 424 576 4,396
Annuity and other 1,128 -- 9 1,137
Accident and health 34,414 18,190 2,739 18,963
--------- --------- --------- ---------
Total $ 39,786 $ 18,614 $ 3,324 $ 24,496
--------- --------- --------- ---------
Commissions $ 13,365 $ 8,241 $ 1,503 $ 6,627
--------- --------- --------- ---------
Year ended December 31, 1995:
Life insurance in force $ 613,000 $ 120,000 $ 412,000 $ 905,000 45.5%
--------- --------- --------- ---------
Premium:
Life insurance 11,597 3,657 1,529 9,469 16.1%
Annuity 94 -- -- 94
Accident and health 36,259 15,882 2,769 23,146 12.0%
--------- --------- --------- ---------
Total $ 47,950 $ 19,539 $ 4,298 $ 32,709
--------- --------- --------- ---------
Benefits:
Life insurance 4,383 284 469 4,568
Annuity and other 878 -- 14 892
Accident and health 23,021 9,920 1,357 14,458
--------- --------- --------- ---------
Total $ 28,282 $ 10,204 $ 1,840 $ 19,918
--------- --------- --------- ---------
Commissions $ 8,903 $ 5,740 $ 1,374 $ 4,537
--------- --------- --------- ---------
F-32
Provident American Corporation and Subsidiaries
Notes to Consolidated Financial Statements - (Continued)
Note P - Related Party Transactions
Gross commissions and expense allowances paid or payable to entities
which are controlled by former Directors in 1996 and 1995, amounted to
approximately $314 and $313, respectively.
Legal fees to the law firm of a director and general counsel and
secretary of the Company in 1997, 1996 and 1995, amounted to approximately $282,
$298 and $225, respectively.
Consulting expenses paid to a shareholder of the Company and former
Chief Executive Officer of REF amounted to $300 in both 1997 and 1996. The
shareholder provides the Company with exclusive marketing, sales and product
design services as part of a 36-month consulting agreement effective January 1,
1996.
Computer software development and consulting expense paid to an entity
controlled by an employee of the Company in 1997 amounted to $107.
Note Q - Reconciliation From Statutory Basis To GAAP Basis
The accompanying financial statements are prepared in conformity with
GAAP which differ in some respects from the statutory accounting practices
prescribed or permitted by insurance regulatory authorities. The Pennsylvania
Department of Insurance (the "Department") permitted PILIC the following
statutory accounting practices: (1) since 1989, the statutory carrying value of
the home office at the value transferred from PAMCO to PILIC in 1988 in
satisfaction of intercompany debt, less depreciation since that time; and (2) to
continue PILIC's statutory reserve methodology which, up until January 1, 1996,
had not considered the impact of policy provisions pertaining to increasing the
face amount of pre-need life insurance for anticipated future Consumer Price
Index increases. Starting in 1996 PILIC modified its statutory reserve
methodology on 1996 issued business which now considers the impact of policy
provisions pertaining to increasing the face amount of pre-need life insurance
for anticipated future Consumer Price Index increases. Furthermore, PILIC
increased reserves by $200 in 1997 and 1996 for 1995 and prior issues in
recognition of the increasing face amount of pre-need life insurance for
anticipated future Consumer Price Index increases as required by the Department.
The Department will require PILIC to increase reserves in future years by the
greater of $200 or the statutory profits on the block of business. The potential
effects of this permitted practice has not been determined but could be material
to statutory surplus.
F-33
Provident American Corporation and Subsidiaries
Notes to Consolidated Financial Statements - (Continued)
The combined reconciliations of net income (loss) and stockholders'
equity prepared in conformity with statutory reporting practices to that
reported in the accompanying consolidated financial statements are as follows:
Net Income (Loss) Stockholders' Equity
For Years Ended December 31, December 31,
1997 1996 1995 1997 1996
---- ---- ---- ---- ----
Balance per statutory accounting practices (11,247) $ 11,300 $ (1,488) $ 11,408 $ 13,971
Deferred policy acquisition costs (2,541) 2,154 676 599 3,140
Interest maintenance reserve &
asset valuation reserve 10 (37) (1) 2,028 2,325
Future policy benefits (261) (186) (1,336) (5,609) (5,348)
Goodwill and value of insurance in-force,
not of amortization (66) (57) (798) 1,193 1,258
Restatament of reserves on reinsurance ceded 797
Effect of consolidation non-insurance
subsidiaries (3,205) 2,097 (1,360) (5,890) 5,315
Deferred income taxes (604) 352 (151) -- 604
Prepaid expenses 356 343
Fixed income securities, net of tax 188 (83)
HPS outsourcing (489) (489) --
Non-admitted assets 223 364
Other, net (22) 497 (40) 2 164
Balance per generally accepted
accounting principles $(18,425) $ 16,120 ($ 3,701) $ 4,009 $ 22,053
======== ======== ======== ======== ========
F-34
Provident American Corporation and Subsidiaries
Notes to Consolidated Financial Statements - (Continued)
Note R - HPS Outsourcing Agreement
In October 1997 the Company and HealthPlan Services Corporation ("HPS")
entered into a 5 year agreement under which the Company outsourced to HPS all of
its current health insurance policy issuance, billing, and claims, effective
February 1998 for certain claim processing and February 1998 for all remaining
outsourced functions (the "Outsourcing Agreement"). The Company's life and stop
loss operations are unaffected. The Company expects to benefit from a reduction
in expenses over the life of the contract. HPS will charge the Company a fixed
service fee plus a sliding scale variable percentage of premiums for customer
service and claim processing. HPS will also charge the Company a fixed amount
per policy submitted for underwriting services.
The Company received $5,000 from HPS in the fourth quarter of 1997 as
an inducement to enter into the Outsourcing Agreement. The liability is to be
repaid at a rate of $85 per month over the five year term of the Outsourcing
Agreement commencing March 1998.
As a result of entering into the Outsourcing Agreement the Company
incurred transition and related expenses included in 1997's results from
operations of approximately $4,185; $1,051 included in other operating expenses,
net of ceding, $1,433 of accelerated depreciation included in depreciation and
amortization of goodwill related to impaired computer hardware, equipment and
software used in performing the outsourced activities and $1,701 of accelerated
amortization of goodwill relating to NIA and CSE whose customer service and
claims activities will be outsourced to HPS.
Note S - Subsequent Events
Sale of Montgomery Management: In February 1998 the Company sold a
portion of its interest in its wholly owned subsidiary, Montgomery Management
Corporation ("MMC"), to HPS for $4,000 in cash and other consideration,
effective January 1, 1998. The Company sold 49% of MMC's outstanding common
stock along with a warrant to purchase an additional 31% of MMC's common stock
for one dollar, which if exercised would result in the Company owning a 20%
interest in MMC. Immediately prior to the sale MMC declared a dividend payable
to its parent PILIC equal to its total equity. During the first quarter of 1998
the Company will recognize a $4,000 pre-tax gain on the sale of MMC and no
longer include MMC in the Company's consolidated financial statements. The
Company will account for its 20% ownership of MMC as an equity investment. MMC
retains its headquarters at the Company's home office. The Company, through its
subsidiary PILIC, continues to assume via reinsurance approximately 30% of the
premiums, benefits, commissions and expenses of the stop-loss business
administered by MMC. During 1997 MMC's impact on the Company's results from
operations excluding intercompany amounts was $945 of other income and $718 of
expense.
F-35
Provident American Corporation and Subsidiaries
Notes to Consolidated Financial Statements - (Continued)
AOL Interactive Marketing Agreement: In March 1998, the Company's
wholly owned subsidiary, Provident Health Services, Inc. ("PHS"), entered into
an Interactive Marketing Agreement (the "AOL Agreement") with America Online,
Inc. ("AOL"). The AOL Agreement provides that PHS will be the exclusive
third-party direct marketer of certain managed-care and health insurance
policies ("the Products") for individuals and groups of less than fifty
individuals in the United States. Additionally AOL will advertise the Products
to its subscribers on AOL's online network under a brand name to be used
exclusively for the Products. The Products will be sold on-line through a PHS
web-site linked to the AOL service. It is anticipated that Internet-based sales
of the Products will be tested in the third quarter of 1998 and offered
generally to AOL subscribers in the fourth quarter of 1998.
The AOL Agreement has an initial term commencing on February 1, 1998
and ending on September 30, 1999, with a renewal period of two additional years
at PHS's election. As consideration under the AOL Agreement, PHS will pay $8,000
to AOL during 1998 and the Company agreed to issue warrants to AOL. PHS paid AOL
$1,500 and $2,500 during the first and second quarters of 1998, respectively
with $4,000 due AOL during the third quarter of 1998. The Company will account
for the $8,000 that PHS will pay to AOL as a deferred cost asset, which will be
amortized over the balance of the initial term. In addition, the Company issued
to AOL warrants to purchase 300,000 shares of the Company's common stock at an
exercise price of $4.48 (based on the average NASDAQ closing prices for the last
20 days preceeding the determination date as defined in the agreement) per
share, for a period of five years commencing February 1, 1998 which are
immediately exercisable. The fair value of these warrants (approximately $990)
will be recognized as a deferred cost asset as of March 31, 1998 and will be
amortized over the initial term of the AOL Agreement starting October 1, 1998.
The AOL Agreement also provides for the issuance of warrants subject to the
terms and conditions of the AOL Agreement.
If PHS elects the two-year renewal term, then PHS shall make an
additional payment to AOL of $32,500 on or before September 30, 1999. Under
certain circumstances the AOL Agreement can be extended by AOL. If PHS exercises
its right to renew the AOL Agreement then the AOL Agreement also provides for
the issuance of warrants subject to the terms and conditions of the AOL
Agreement.
PHS will pay additional administrative fees to AOL if applications
exceed certain levels for the initial and renewal terms of the AOL Agreement.
HPS E-Commerce Agreement: In May 1998 the Company and HPS entered into
an agreement ("the E-Commerce Agreement") for the period February 1, 1998
through October 1, 1999 where-by: 1) HPS paid Insurion $750 as an off-set
against the Holding Fee paid by PHS to AOL, 2) HPS shall have certain third
party administrator rights over policies sold by the Company over its web site
or other e-commerce methods, 3) HPS shall have equal prominence to the Company
on the Company's Web pages, 4) the Company shall pay HPS 4% of certain fees paid
to the Company by co-sponsors of the Company's web site and 5) PAMCO agrees to
issue to HPS a warrant to purchase 100,000 shares of PAMCO's common stock at
$9.00 for a period of 2 years. The fair value of these warrants (approximately
$164) will be recognized in the second quarter of 1998.
F-36
Provident American Corporation and Subsidiaries
Notes to Consolidated Financial Statements - (Continued)
Lynx Consulting Agreement: In March 1998 Insurion entered into a
consulting agreement ("Lynx Consulting Agreement ") with Lynx Capital Group, LLC
("Lynx") to provide consulting services in regards to entering into online and
internet commerce agreements and the subsequent development of Insurion's
capabilities and business. Insurion will pay Lynx a monthly fee, travel expenses
and issue warrants to purchase up to 350,000 PAMCO's common stock subject to the
terms of the Lynx Consulting Agreement. The fair value of the warrants has not
been determined.
Insurion Convertible Note: In May of 1998 Insurion issued a $5,000
Convertible Note due June 30, 2003. The Convertible Note pays interest at an
annual rate of 5.5% payable together with interest on conversion or June 30,
1999 whichever occurs first. Insurion may repay the Convertible Note subject to
the terms of the Convertible Note. The Convertible Note is convertible based
upon certain terms and conditions into the greater of 125,000 shares of
Insurion's Class A Common Stock or 12.5% of Insurion's outstanding common stock
as calculated on a fully diluted basis. The Convertible Note may also be
converted at a conversion price of one a share of Insurion's Class A Common
Stock for each $40.00 of principal to be converted. The conversion price is
subject to adjustment subject to the terms of the Convertible Note. The
Convertible Note further provides that the holder of Insurion's Convertible Note
agrees to purchase and Insurion agrees to sell additional securities in an
aggregate amount up to or equal to $5,000 in the form of Insurion stock or
convertible securities whose conversion terms are acceptable to the holder of
Insurion's Convertible Note, subject to the following conditions occurring prior
to September 30, 1998: 1) Insurion sells the same amount of similar securities
to accredited investors as defined in Rule 501 of Regulation D under the
Securities Act of 1933, 2) Insurion executes its business strategy to the sole
satisfaction of the holder of Insurion's Convertible Note, and 3) the fully
diluted market capitalization of Insurion shall be less than or equal to
$100,000.
F-37
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
In December 1997, the Company's former independent accountants, Coopers
& Lybrand, LLP, resigned. Their report on the financial statements for 1996 and
1995 did not contain an adverse opinion or a disclaimer of opinion, nor was it
qualified as to uncertainty, audit scope, or accounting principles. There were
no disagreements on any matter of accounting principles or practices, financial
statement disclosure, or auditing scope or procedure. In February 1998, the
Company engaged BDO Seidman, LLP, as its new independent auditors.
- 30 -
PART III
Item 10. Directors and Executive Officers of the Registrant.
Director or
Principal Occupation Executive Year Term
Name Age For Past Five Years Officer Since Will Expire
---- ---- ---------------------- --------------- -------------
Michael F. Beausang, Jr. 61 Director; Secretary and General Counsel of the 1989 1998
Company, PILIC and PALHIC since October 1989;
Director and Secretary of Maine National Life
1984-1995; Partner in the law firm of Butera,
Beausang, Cohen & Brennan since 1970; Director,
Jefferson Bank.
James O. Bowles 43 President of the Company, PILIC and PAHLIC since 1996 N/A
October 1996; President of NIA Corporation since
1994; Vice President of Mid America Mutual Life
Insurance Company 1989-1995; Senior Manager of
KPMG Peat Marwick 1978-1989.
Alvin H. Clemens 60 Director; Chairman of the Board and Chief 1989 1998
Executive Officer of the Company and subsidiary
companies since October 1989 and President of the
Company and PILIC 1993-1996; President of Maine
National 1989-1995; Owner and Chairman of the
Board-of Maine National 1985-1989; President and
Director of Academy Life Insurance Co.and Pension
Life Insurance Co. 1970-1985; Chairman/Chief
Executive Officer of Academy Insurance Group Inc.
1967-1985.
Valerie C. Clemens (1) 42 Director; Founder/Owner of Valerie's Limited 1989 1998
Showcase of Fashion 1984-1990; Executive Director
of Miss America's Maine Scholarship Pageant
1985-1987.
Harold M. Davis 62 Director; Chairman of the Board of Realen Homes, 1989 1998
Inc. since 1968.
William C. Fay III 43 Chief Sales Officer of the Company and 1994 N/A
subsidiaries since 1994; Assistant Vice President
of Consolidated Group 1982-1993.
John T. Gillin 58 Director; Consultant to Registrant since 1996; 1984 1998
otherwise self-employed since 1992; Managing
Director, Hopper Soliday Corporation 1987-1992.
Henry G. Hager 63 Director; Partner in the law firm of Stradley, 1996 1998
Ronon, Stevens and Young since 1994; President and
Chief Executive Officer of The Insurance
Federation of Pennsylvania since 1985.
-31-
Director or
Principal Occupation Executive Year Term
Name Age For Past Five Years Officer Since Will Expire
---- ---- ---------------------- --------------- -------------
Frederick S. Hammer 61 Director; Vice Chairman of Inter-Atlantic 1996 1998
Securities Corp. since 1994; Chairman of the Board
of Directors, National Media Corp. since March
1996 and member of the Board since 1994; Chairman
and Chief Executive Officer of Mutual of America
Capital Management Corp. 1993-1994; Director; Ikon
Office Solution since 1987.
Benedict J. Iacovetti 41 Chief Financial Officer of the Company, PILIC and 1997 N/A
PAHLIC since December 1997; Treasurer and Chief
Financial Officer of American Travelers 1992-1997.
George W. Karr, Jr. 60 Director; Chief Executive Officer of Karr Barth 1996 1998
Associates, Inc. since 1984.
P. Glenn Moyer 62 Director; Private Practice Attorney since 1992; 1989 1998
Director, Maine National 1985-1995; Partner in the
law firm of Butera, Beausang, Moyer & Cohen from
1968 through 1992.
Anthony R. Verdi 49 Chief Operating Officer of the Company, PILIC and 1990 N/A
PALHIC since December 1997; Treasurer and Chief
Financial Officer of the Company, PILIC and PALHIC
1990-1997; Vice President and Controller of
Inter-County Hospitalization Plan Inc. 1986-1990;
Assistant Controller Academy Insurance Group Inc.
1971-1986
(1) Valerie C. Clemens is the wife of Alvin H. Clemens.
During 1997, the Company's Board of Directors held five (5) meetings.
All Directors attended at least 75% of the aggregate meetings of the Board and
the Committees on which they served.
Messrs. Alvin H. Clemens, James O. Bowles, William C. Fay, III,
Benedict J. Iacovetti and Anthony R. Verdi are the executive officers of the
Company.
-32-
Committees of the Board of Directors
The Company's Board of Directors has standing an
Executive/Compensation/Nominating Committee and an Audit Committee.
The Executive/Compensation/Nominating Committee, on which Messrs.
Clemens, Davis, Gillin and Karr currently serve, is appointed to act when a
meeting of the full Board of Directors is not feasible, administers the
Company's compensation matters and also nominate directors and determine
replacements for directors when membership on the Board of Directors ends prior
to the expiration of a term. The Executive/Compensation/Nominating Committee
held two meetings during 1997.
The Audit Committee is appointed to recommend the selection of the
Company's auditors, review the scope and results of audits, review the adequacy
of the Company's accounting, financial and operating system and supervise
special investigations. The Audit Committee held one meeting in 1997. The Audit
Committee in 1997 was comprised of Messrs. Gillin, Moyer, and Mrs. Clemens (Mr.
Beausang was an alternate); effective March 13, 1998 the Audit Committee is
comprised of Messrs. Davis, Moyer and Hager.
The Option Administration Committee was established by the Board of
Directors on July 16, 1996 and consists of James O. Bowles, Alvin H. Clemens,
Harold M. Davis, P. Glenn Moyer, and Anthony R. Verdi. Any options to be granted
to Messrs. Bowles, Clemens, or Verdi are subject to the approval of only Messrs.
Davis and Moyer, who are outside directors of the Company and as such are
disinterested persons. The Option Administration Committee held one meeting
during 1997.
Director Compensation
Directors who are not employees of the Company are paid a fee of $1,000
for attendance at each meeting of the Board of Directors of the Company, with no
fee being paid for attendance at meetings of any of the Company's subsidiaries,
and $500 for attendance at each meeting of any committee of the Board. During
1997 the Company granted each Director other than Mr. Clemens an option to
purchase 30,000 shares of the Company's common stock at an exercise price of
$2.75 per share, the fair market value of a share of the Company's common stock
on the date of grant, exercisable one-third on the date of grant, one-third one
(1) year from the date of grant, and the remaining one-third two (2) years from
the date of grant (see Note J to the Consolidated Financial Statements).
Mr. John T. Gillin, a director, also serves as a consultant for the
Company. The Company paid Mr. Gillin $90,000 in 1997 for his consulting serves.
-33-
Item 11. Executive Compensation.
Employment and Other Agreements
Effective February 19, 1997, the Company and Mr. Clemens entered into a
new employment agreement ("Agreement") which replaces Mr. Clemens' prior
Employment Contract dated as of January 1, 1993. Pursuant to the Agreement, Mr.
Clemens is employed as Chief Executive Officer of the Company for a five-year
term ending December 31, 2002 (the "Term"), and unless otherwise terminated, the
Term shall automatically be extended at the end of each year after December 31,
1997, in order that at all times, on each December 31st during the duration of
the Agreement, there shall be an unexpired five-year term. Mr. Clemens is paid a
base salary in 1997 of $394,308, plus an annual cost of living increase, and
such additional incentive or bonus compensation as shall be deemed appropriate
from time to time by the Board of Directors of the Company. A bonus of $305,850
was paid to Mr. Clemens in 1997. The Agreement further provides for group life,
health, disability, major medical, and other insurance coverages for Mr. Clemens
and his family, and upon termination, provides termination benefits which
include the provision of health insurance for Mr. Clemens and his spouse for
life, a salary benefit of five times base salary in the event of Mr. Clemens'
death, disability, or termination without cause, and includes certain
restrictions on Mr. Clemens competition and disclosure of confidential
information.
In addition, pursuant to an Agreement to grant options dated as of
March 10, 1997 (the "Option Contract"), the Company agreed to grant Mr. Clemens
an option to successively purchase up to 3,300,000 shares of the Company's
Series A Cumulative Convertible Preferred Stock ("Series A Preferred"), which
option or options will be granted upon any exercise by Mr. Clemens of any
previously granted option to purchase Series A Preferred, and each subsequently
granted option to purchase shares of Series A Preferred from time-to-time. The
rights set forth in the Option Contract are limited as follows: (1) the number
of shares of Series A Preferred Stock issuable upon each exercise of the Option
Contract shall be limited by the number of Series A Preferred which shall, as of
the date of any such exercise, be authorized and unissued; (2) the number of
shares of Series A Preferred issuable upon the exercise of all of the Options
granted to Mr. Clemens under the Option Contract and under a previously granted
option to purchase 550,000 shares of Series A Preferred shall not in the
aggregate exceed 3,850,000 shares of Series A Preferred; and (3) except upon the
occurrence of a "change in control" (as defined in the Option Contract), Mr.
Clemens shall not be permitted to exercise an option granted under the Option
Contract (i) to purchase more than 550,000 shares of Series A Preferred in any
six-month period, or (ii) to purchase shares which would result in Mr. Clemens
controlling more than 55% of the outstanding voting rights for all classes of
the Company's stock.
Upon the occurrence of a "change in control" of the Company, Mr.
Clemens shall have the right to immediately exercise all options (3,850,000) to
purchase shares of Series A Preferred, and the Company will make a loan to him
in an amount equal to the aggregate exercise price of all options to purchase
shares of Series A Preferred which Mr. Clemens may then be entitled to exercise,
plus an amount equal to all federal and state income taxes incurred by Mr.
Clemens in connection with the exercise (the Loan"). The Loan shall be
unsecured, and shall bear interest at the then applicable federal short-term
rate, but not less than six (6%) percent per annum, with interest and principal
due and payable in full five (5) years from the date of the Loan.
-34-
For this purpose a "change of control" shall mean the acquisition by
any individual, entity or group or more of either the then outstanding shares of
the Common Voting Stock of the Company, or the combined voting power of the then
outstanding voting securities of the Company entitled to vote generally in the
election of directors.
Mr. Bowles is employed as President pursuant to an Amended and Restated
Employment Contract dated as of November 7, 1996 for a two-year term commencing
as of October 1, 1996, which provides for a base salary of $195,000, with an
annual cost of living increase, and such additional incentive or bonus
compensation and certain insurance and other fringe benefits as shall be deemed
appropriate from time-to-time by the Executive Committee or the Board of
Directors of the Company. The Employment Contract further provides certain
restrictions on Mr. Bowles' competition and disclosure of confidential
information. In addition, Mr. Bowles was granted an option to purchase 50,000
shares of the Company's Common Voting Stock at an exercise price equal to the
fair market value of a share of the Company's Common Voting Stock on the date of
grant, which option is exercisable in its entirety as of the date of grant.
The following three tables show information relating to the Chairman of
the Board, President and Chief Executive Officer and the most highly compensated
executive officers during the calendar years specified therein.
-35-
SUMMARY COMPENSATION TABLE
===================================================================================================================================
Long-Term Compensation
===================================================================================================================================
Annual Compensation Awards Payouts
===================================================================================================================================
(a) (b) (c) (d) (e) (f) (g) (h) (i)
Long Term
Restricted Securities Incentive
Other Annual Stock Underlying Plan All Other
Name and Principal Salary Bonus Compensation Award(s) Options Payouts Compensation(2)
Position(1) Year ($) ($) ($) ($) (#) ($) ($)
- -----------------------------------------------------------------------------------------------------------------------------------
Alvin H. Clemens, 1997 417,453 305,850 18,288
Chairman of the Board 1996 386,662 75,000 15,748
and CEO 1995 381,814 15,225
- -----------------------------------------------------------------------------------------------------------------------------------
James O. Bowles(3) 1997 195,000 64,945
President 1996 130,000 125,000
1995
- -----------------------------------------------------------------------------------------------------------------------------------
William C. Fay III 1997 125,625 177,386 50,000 4,000
Sr. Vice President 1996 111,958 173,570 160,000 3,080
Sales 1995 120,802 89,108 3,042
- -----------------------------------------------------------------------------------------------------------------------------------
Anthony R. Verdi, 1997 151,335 9,295
Chief Operating Officer 1996 128,072 75,000 10,406
1995 126,000 9,415
===================================================================================================================================
(1) Includes Chairman of the Board, President and Chief Executive Officer and the most highly compensated executive officers whose
total annual salary and bonus exceeded $100,000.
(2) Includes for 1997 and 1996, respectively , (a) Company contributions to savings plan (Mr. Clemens $4,000 and $3,750; Mr. Fay
$4,000 and 3,080; Mr. Verdi $3,595 and $3,150), and (b) automobile expense allowances (Mr. Clemens $11,998 and $11,998; and
Mr. Verdi $5,700 and $7,256).
(3) Mr. Bowles joined the Company on May 1, 1996 as a result of the NIA acquisition.
-36-
Provident American Corporation
Aggregate Option Exercises in 1997 and Year End Values
Number of Value of
Shares Underlying Unexercised
Acquired Value Unexercised In-the-Money
On Exercise Realized Options Options at
Name (#) ($) at 12/31/97 12/31/97 ($)
- ----------------------------------------------------------------------------------------
(a) (b) (c) (d) (e)
- ----------------------------------------------------------------------------------------
Alvin H. Clemens
Chairman of the Board, CEO
Exercisable(1) 0 $0 26,669 $0
Unexercisable 48,334 $0
James O. Bowles
President
Exercisable 0 $0 75,000 $0
Unexercisable 40,000 $0
William C. Fay III
Sr. Vice President, Sales
Exercisable 0 $0 69,000 $0
Unexercisable 141,000 $0
Anthony R. Verdi
COO
Exercisable 0 $0 42,000 $0
Unexercisable 55,000
(1) Excludes non-compensatory stock options to purchase 1,253,376 shares of
common stock at $0.9091 issued to Mr. Clemens in 1989 of which Mr. Clemens
disclaims beneficial ownership of 703,720 shares owned by a partnership of which
Mr. Clemens is a partner; excludes an option to purchase 550,000 shares of
Series A Cumulative Preferred Stock at $3.64 issued on April 1, 1993 in
connection with the purchase by Mr. Clemens of other shares of Preferred Stock
at such time, and also excludes any options which could be granted to Mr.
Clemens under the Option Contract dated March 10, 1997 described in Item
11-"Employment and Other Agreements".
-37-
Provident American Corporation
Option Grants in 1997
Potential Realizable Value
Number of % of Total at Assumed Annual Rates
Securities Options Exercise of Stock Appreciation for
Options Granted to Price Expiration Option Term Alternative to
Name Granted Employees $/Share Date 5% 10% f & g (1)
- -------------------------------------------------------------------------------------------------------------------------
(a) (b) (c) (d) (e) (f) (g) (h)
- -------------------------------------------------------------------------------------------------------------------------
William C. Fay III 50,000 5.24% $4.00 10/6/02 $17,367 $74,290 $71,070
Sr. Vice President, Sales
(1) Based on the Black-Scholes option pricing model assuming: 0% dividend yield,
no adjustments for forfeitures and the following expected stock volatility,
length of time for exercise and risk free interest rate: 63.235%, three years
and 5.5%, respectively.
-38-
Stock Option Plans
The Company maintains the Stock Option Plans for executives, officers
or directors of the Company and its subsidiaries and affiliates.
The 1993 Incentive Stock Option Plan for Employees was discontinued,
and effective July 16, 1996, the Company's Board of Directors adopted the 1996
Employee Incentive Stock Option Plan ("1996 Employee Plan"), which was approved
by the Company's shareholders at the 1997 Annual Meeting of Shareholders. The
1996 Employee Plan was amended in 1997 to increase the number of shares issuable
thereunder from 950,000 shares to 1,250,000 shares of the Company's common
voting stock to key employees of the Company and its subsidiaries and
affiliates, exercisable for up to five years from the effective date of the
grant at a price not less than the fair market value of the shares on the
effective date of grant. The amendment of the 1996 Employee Plan will be
submitted for approval by the Company's shareholders at the next Annual Meeting
of Shareholders. All options granted under the 1996 Employee Plan have been
granted at 100% of the fair market value of the shares on the effective date of
the grant, with the exception of an option granted Mr. Clemens, which was
granted at 110% of the fair market value on the date of the grant. During 1997,
the Company granted incentive stock options to purchase an aggregate of 500,000
shares of the Company's common stock at prices ranging from $2.47 to $4.00 per
share under the 1996 Employee Plan. During 1997 a total of 24,050 options were
exercised under the 1993 Employee plan.
The Non-Qualified Stock Option Plan for Directors ("Directors Plan")
was amended and restated effective as of July 16, 1996 in order to increase the
number of shares authorized for the issuance thereunder by 356,500 shares and to
incorporate prior amendments. Options granted under the Directors' Plan are
exercisable for up to ten years from the date of grant at a price of not less
than the fair market value of the shares on the date of the grant. All options
granted under the Director's Plan have been granted at 100% of the fair market
value of the shares on the date of grant. During 1997, the Company granted
options to purchase 30,000 shares of the Company's common stock to eight
Directors, for an aggregate of 240,000 shares, at a price of $2.875 per share,
under the Directors Plan. During 1997 no options were exercised under the
Directors' Plan.
The Stock Option Plan for Executives ("Executive Plan") was amended and
restated effective December 11, 1996 and authorizes the granting of options to
purchase up to 3,850,000 shares of the Company's Series A Cumulative Convertible
Preferred Stock ("Series A Preferred Stock"), which are exercisable for up to
ten years from the effective date of grant at a price of not less than the fair
market value of the shares on the date of grant. No options were granted under
the Executive Plan during 1997.
The Company's Stock Option Plans are administered by the Board of
Directors and the Option Administration Committee. The respective administrators
of the Stock Option Plans are authorized to select optionees, determine the
number of shares for which options are granted to each optionee, the exercise
price of the options, and the other terms and conditions of the options.
-39-
Item 12. Security Ownership of Certain Beneficial Owners and Management.
The following table sets forth, as of June 30, 1998, the amount and
percentage of the Company's outstanding common stock beneficially owned by (i)
each person who is known by the Company to be the beneficial owner of more than
5% of the Company's outstanding common stock; (ii) each director; (iii) each
executive officer and (iv) all officers and directors of the Company as a group.
Series A
Cumulative Convertible
Common Stock Preferred Stock
No. of Shares Percent No. of Shares Percent
Name of Beneficially of Beneficially of
Beneficial Owner Owned(1) Class(2) Owned(1) Class(2)
- ---------------- ------------- ------------ ------------- ------------
Alvin H. Clemens 3,813,745(3) 33.2% 1,100,000(4) 97.3%
907 Exeter Crest
Villanova, PA 19085
Richard E. Field 717,500(5) 6.7%
134 Medinah Drive
Blue Bell, PA 19422-3212
Michael F. Beausang, Jr. 35,566(6)(7) (8) 16,500 2.8%
James O. Bowles 75,000(9) (8)
Valerie C. Clemens 246,666(7) 2.4%
Harold M. Davis 146,666(7) 1.4%
William C. Fay III 86,000(10) (8)
John T. Gillin 26,666(7) (8)
Henry G. Hager 36,666(7) (8)
Frederick S. Hammer 51,666(7) (8)
George W. Karr, Jr. 48,666(7) (8)
P. Glenn Moyer 30,666(7) (8)
Anthony R. Verdi 70,935(11) (8) 5,500 1.0%
ALL DIRECTORS AND OFFICERS
AS A GROUP (21 PERSONS FOR
COMMON STOCK AND 3 PERSONS
FOR PREFERRED STOCK) 4,820,199(12) 40.0% 1,122,000(4) 99.3%
(1) Information furnished by directors and officers.
(2) Calculated as a percentage of outstanding shares plus each individual's
options to purchase common shares (or all Directors and Officers as a group).
-40-
(3) Includes options granted to Mr. Clemens to purchase an additional 253,376
shares of the Company's common stock at a price of $.91 per share granted
pursuant to the Amended and Restated Stock Option Agreement dated as of February
27, 1989, includes 550,000 shares of Series A Cumulative Convertible Preferred
Stock purchased by Mr. Clemens on March 31, 1993 and also includes 550,000
options at $3.64 per share to purchase Series A Cumulative Convertible Preferred
Stock granted to Mr. Clemens pursuant to a Stock Option Agreement dated April 1,
1993. Includes options to purchase 16,666 shares of the Company's Common Stock
at $8.75 per share and 5,000 shares of the Company's common stock at $6.00 per
share. Mr. Clemens disclaims beneficial ownership of 616,000 shares of the
Company's Common Stock given by him to The Mark Twain Trust in 1991 and
1,000,000 options to purchase additional shares of the Company's common stock
owned by a partnership in which Mr. Clemens is a partner. Excludes shares of
Series A Cumulative Convertible Preferred Stock, which may be issued under the
Option Contract. See Item 11. "Employment and Other Agreements". The Series A
Cumulative Convertible Preferred Stock is voted on an as converted basis at the
rate of 4 votes per share. Each share of Class A Common Stock is entitled to 4
votes and each share of common stock is entitled to 1 vote in connection with
matters coming to a vote of the shareholders.
(4) Includes options granted to Mr. Clemens to purchase 550,000 shares of Series
A Cumulative Convertible Preferred Stock at $3.64 per share. This does not
include shares of Series A Cumulative Convertible Stock which may be issued
under the Option Contract. See Item 11. "Employment and Other Agreements".
(5) Includes warrants and options to purchase 550,000 shares of the Company's
common stock.
(6) Includes 16,500 shares of Series A Cumulative Convertible Preferred Stock.
Includes shares owned beneficially by Mr. Beausang through the Butera, Beausang,
Cohen & Brennan Employees' Pension Plan. Mr. Beausang disclaims beneficial
ownership of all shares owned directly or beneficially by his wife, Deborah D.
Beausang. Includes options to purchase 13,333 shares of the Company's common
stock.
(7) Includes an option to purchase 26,666 shares of the Company's common stock.
(8) Less than 1%.
(9) Includes options to purchase 75,000 shares of the Company's common stock.
(10) Includes options to purchase 86,000 shares of the Company's common stock.
(11) Includes 5,500 shares of Series A Cumulative Convertible Preferred Stock.
Includes an option to purchase 47,000 shares of the Company's common stock.
(12) Includes stock and options of all officers and directors to purchase an
aggregate of 245,250 shares and 199,995 shares, respectively, and options
granted to Mr. Clemens to (1) purchase an additional 253,376 shares of the
Company's common stock at a price of $.91 per share granted pursuant to the
Amended and Restated Stock Option Agreement dated as of February 27, 1989 and
(2) purchase an additional 16,666 shares of the Company's common stock at $8.75
per share and 5,000 shares of the Company's common stock at $6.00 per share;
includes 572,000 shares of Series A Cumulative Convertible Preferred Stock and
also includes 550,000 options at $3.64 per share to purchase Series A Cumulative
Convertible Preferred Stock granted to Mr. Clemens pursuant to a Stock Option
Agreement dated as of April 1, 1993.
-41-
Item 13. Certain Relationships and Related Transactions.
Notes Receivable - Officers and Directors
The Company has loans receivable from related parties with: Mr. Alvin
Clemens, Chairman of the Board, Chief Executive Officer and a shareholder of the
Company, which is collateralized by 128,478 shares of the Company's common stock
("Shares") owned by Mr. Clemens; Mr. John Gillin, a Director and shareholder of
the Company, which is collateralized by 10,000 shares and a stock option grant
to purchase 30,000 shares, both owned by Mr. Gillin; and Mr. Richard Field, with
whom the Company has a Marketing and Consulting Agreement, which is
collateralized by 157,500 shares, a second mortgage on real estate, and unpaid
amounts on the Marketing and Consulting Agreement, all owned by Mr. Field.
Mr. Clemens' loan is due in April 1999. Mr. Gillin's loan has principal
and interest payment commencing July 1998 through June 2003 and Mr. Field's loan
is due upon demand.
The following table details the loans receivable at December 31, 1997.
Clemens Gillin Field
------- ------ -----
Amounts due at December 31, 1997
Loan Principal $600,000 $155,849 $422,280
Accrued Interest 41,195 0 23,848
-------- -------- --------
Balance Due $641,195 $155,849 $446,128
======== ======== ========
1997 Interest Income $ 35,002 $ 12,726 $ 23,848
Interest Rate 5.33% 8.50% 9.00%
The highest outstanding balance during the year for Mr. Clemens, Mr.
Gillin, and Mr. Field were $893,192, $161,414, and $446,128, respectively.
During the third quarter of 1997 the Company made a loan of $250,000 to
Mr. Clemens represented by a promissory note which was repaid prior to the
December 15, 1997 due date together with interest at a rate of 5.75% per annum.
Business transactions with related parties
The Company's Secretary and General Counsel, Michael F. Beausang, Jr.,
is also a member of the Board of Directors and a shareholder in the law firm of
Butera, Beausang, Cohen & Brennan ("BBC&B"). The Company paid BBC&B legal fees
of approximately $282,000 in 1997. For a description of the consulting services
rendered by John T. Gillin, a director of the Company, see Item 11 - Executive
Compensation.
-42-
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) The materials set forth below are filed as part of this report.
(1) List of Financial Statements: Page
----
Report of Current Independent Accountants F-1
Report of Previous Independent Accountants F-2
Consolidated Financial Statements:
Consolidated Balance Sheets -
December 31, 1997 and 1996 F-3
Consolidated Statements of Operations -
Years ended December 31, 1997, 1996 and 1995 F-4
Consolidated Statements of Changes in
Stockholders' Equity -
Years ended December 31, 1997, 1996 and 1995 F-5
Consolidated Statements of Cash Flow -
Years ended December 31, 1997, 1996 and 1995 F-6 to F-7
Notes to Consolidated Financial Statements F-8 to F-37
(2) Financial Statement Schedules: Page
----
Schedule II - Condensed Financial
Information of the Company S-1 to S-3
Schedule III - Supplementary
Insurance Information S-4
All other Financial Statement Schedules are omitted because they are
not applicable or the required information is shown in the Financial
Statements or Notes thereto.
(3) Exhibits:
The Exhibits listed on the accompanying Exhibit Index immediately
following the Financial Statement Schedules are filed as part of, or
incorporated by reference into, this Report.
(b) Reports on Form 8-K:
December 30, 1997 - Item 4 - Changes in Registrant's certifying
accountant
No other reports on Form 8-K were filed during the quarter ended
December 31, 1997.
-43-
PROVIDENT AMERICAN CORPORATION (Parent Company Only)
SCHEDULE II
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
BALANCE SHEETS
(Dollars in thousands) December 31,
1997 1996
------------- -------------
Assets
Investment in subsidiaries * $ 11,158 $ 19,824
Equity securities -- 4,186
Equipment, net 526 --
Loans receivable from officer, director and stockholder 1,243 461
Cash 2 --
Other assets 788 185
-------- --------
Total Assets $ 13,717 $ 24,656
======== ========
Liabilities and Stockholders' Equity
Liabilities
Accounts payable to subsidiaries * $ 1,687 $ 767
Accrued expenses 1,463 827
Accrued federal income tax 1,518 809
Notes payable - other 4,040 --
Notes payable-bank 1,000 200
-------- --------
Total Liabilities 9,708 2,603
-------- --------
Stockholders' Equity
Preferred stock Series A 580 580
Preferred stock Series B
Common stock 1,021 1,008
Additional paid-in capital 13,767 12,945
Net unrealized appreciation of stocks (3) 668
Net unrealized appreciation (depreciation)
of bonds held by subsidiaries 188 (177)
Retained earnings (deficit) (including undistributed net
income (loss) of subsidiaries of $(14,052) and $2,850) (11,468) 7,105
Treasury stock, at cost (76) (76)
-------- --------
Total Stockholders' Equity 4,009 22,053
-------- --------
Total Liabilities and
Stockholders' Equity $ 13,717 $ 24,656
======== ========
*Eliminated in consolidation.
The condensed financial information should be read in conjunction with
the Provident American Corporation and Subsidiaries December 31, 1997
Consolidated Financial Statements and notes thereto.
S-1
PROVIDENT AMERICAN CORPORATION (Parent Company Only)
SCHEDULE II
CONDENSED FINANCIAL INFORMATION OF COMPANY
STATEMENTS OF OPERATIONS
Years Ended December 31,
1997 1996 1995
-------------- ------------- ----------------
Revenue:
Interest income $ 93 $ 23 $ 67
Investment Income 26 -- --
Litigation settlement -- 5,320 --
Realized gain on investments 950 699 --
Other 93 18 20
-------- -------- --------
1,162 6,060 87
-------- -------- --------
Expenses:
Depreciation 863 0 0
Operating and administrative 1,045 744 271
Interest 35 54 101
-------- -------- --------
1,943 798 372
-------- -------- --------
Income (loss) before income taxes and undistributed
income (loss) of subsidiaries (781) 5,262 (285)
Provision for income taxes -- 1,476 --
-------- -------- --------
Income (loss) after income taxes (781) 3,786 (285)
Undistributed income (loss) of subsidiaries * (17,644) 12,334 (3,416)
-------- -------- --------
Net income (loss) (18,425) 16,120 (3,701)
Dividends declared on preferred stock 148 194 334
-------- -------- --------
Net income (loss) applicable
to common stock $(18,573) $ 15,926 $ (4,035)
======== ======== ========
*Eliminated in consolidation.
The condensed financial information should be read in conjunction with
the Provident American Corporation and subsidiaries December 31, 1997
Consolidated Financial Statements and notes thereto.
S-2
PROVIDENT AMERICAN CORPORATION (Parent Company Only)
SCHEDULE II
CONDENSED FINANCIAL INFORMATION OF THE REGISTRANT
STATEMENTS OF CASH FLOWS
Years Ended December 31,
1997 1996 1995
-------------- ------------- -------------
Operating Activities
Net income (loss) $(18,425) $ 16,120 $ (3,701)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Undistributed (income) loss of subsidiaries * 17,644 (12,334) 3,416
Depreciation 863 0 0
Net realized gain on investments (950) (699) --
Common stock received from litigation settlement -- (4,320) --
Changes in assets and liabilities
(Increase) decrease in other assets and accrued
income taxes 1,234 333 82
Increase (decrease) in accrued expenses (38) 99 (3)
-------- -------- --------
Net cash from operating activities 328 (801) (206)
-------- -------- --------
Investing Activities
Sale of investments 3,839 2,130 --
Repayments of loans receivable 250 738
Loans to officer, director and shareholder (1,032) (461)
Decrease in receivables 60 59
Acquisition of equipment (680) 0 0
Acquisition of businesses, net -- (35) --
Other -- -- (128)
-------- -------- --------
Net cash from investing activities 2,437 1,693 610
-------- -------- --------
Financing Activities
Proceeds from notes payable - bank 1,000 78 78
Proceeds from notes payable - other 3,978 -- --
Repayment of notes payable - bank (200) (708) (414)
Issuance of common stock 835 800 99
Dividends paid on preferred stock (148) (194) (334)
Capital Contribution to Subsidiary* (8,000) -- --
Increase (decrease) in accounts payable subsidiaries * (228) (869) 167
-------- -------- --------
Net cash from financing activities (2,763) (893) (404)
-------- -------- --------
Change in cash 2 (1) --
Cash, beginning of year -- 1 1
-------- -------- --------
Cash, end of year $ 2 $ -- $ 1
======== ======== ========
Supplemental disclosure of cash information:
Interest paid $ 5 $ 56 $ 101
Income taxes paid (refunded) $ (1,128) $ 1,119 $ --
Non-cash investing activities:
Issuance of common stock in connection with
acquisition of businesses $ -- $ 1,879 $ --
*Eliminated in consolidation.
The condensed financial information should be read in conjunction with
the Provident American Corporation and subsidiaries December 31, 1997
Consolidated Financial Statements and notes thereto.
S-3
PROVIDENT AMERICAN CORPORATION AND SUBSIDIARIES
SCHEDULE III - SUPPLEMENTARY INSURANCE INFORMATION
(in thousands)
- ---------------------------------------------------------------------------------------------------------------------------------
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN F
- ---------------------------------------------------------------------------------------------------------------------------------
Years Ended Segment Deferred Policy Future Policy Unearned Premium
December 31, Acquisition Cost Benefits, Premiums Revenue
Losses, Claims
And Loss
Expenses
- ---------------------------------------------------------------------------------------------------------------------------------
1995: Individual Life
And Annuity $ 986 $ 43,477 $ - $ 7,138
Group Life
And Health - 10,183 544 25,571
-----------------------------------------------------------------------------------------------------------
Total $ 986 $ 53,660 $ 544 $ 32,709
- ---------------------------------------------------------------------------------------------------------------------------------
1996: Individual Life
And Annuity $ 1,468 $ 44,782 $ - $ 10,814
Group Life
And Health 1,672 15,469 1,356 33,892
-----------------------------------------------------------------------------------------------------------
Total $ 3,140 $ 60,251 $ 1,356 $ 44,706
- ---------------------------------------------------------------------------------------------------------------------------------
1997: Individual Life
And Annuity $ 1,499 $ 46,418 $ - $ 6,520
Group Life
And Health - 29,884 2,022 47,733
-----------------------------------------------------------------------------------------------------------
Total $ 1,499 $ 76,302 $ 2,022 $ 54,253
=================================================================================================================================
RESTUBBED TABLE
- ----------------------------------------------------------------------------------------------------------------------------------
COLUMN A COLUMN G COLUMN H COLUMN I COLUMN J
- ----------------------------------------------------------------------------------------------------------------------------------
Years Ended Segment Net Investment Benefits, Claims, Amortization Other Operating
December 31, Income (1) Losses And Of Deferred Expenses
Settlement Policy
Expenses Acquisition
Costs
- ----------------------------------------------------------------------------------------------------------------------------------
1995: Individual Life
And Annuity $ 2,513 $ 6,604 $ 103 $ 4,733
Group Life
And Health 345 15,558 - 13,731
------------------------------------------------------------------------------------------------------------
Total $ 2,858 $ 22,162 $ 103 $ 18,464
- ----------------------------------------------------------------------------------------------------------------------------------
1996: Individual Life
And Annuity $ 2,831 $ 10,528 $ 170 $ 3,682
Group Life
And Health 449 20,442 414 16,394
------------------------------------------------------------------------------------------------------------
Total $ 3,280 $ 30,970 $ 584 $ 20,076
- ----------------------------------------------------------------------------------------------------------------------------------
1997: Individual Life
And Annuity $ 2,887 $ 7,534 $ 82 $ 3,745
Group Life
And Health 600 40,192 10,861 22,630
-----------------------------------------------------------------------------------------------------------
Total $ 3,487 $ 47,726 $ 10,943 $ 26,375
=================================================================================================================================
(1) Investment income by segment is allocated based on liabilities for future
policy benefits and policy claims.
S-4
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Company has duly caused this report to be signed on its behalf
by undersigned, thereunto duly authorized.
PROVIDENT AMERICAN CORPORATION
By: /s/ALVIN H. CLEMENS
-----------------------------
Alvin H. Clemens, Chairman of
the Board and Chief Executive Officer
June 30, 1998
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Company and in
the capacities and on the dates indicated.
/s/ALVIN H. CLEMENS June 30, 1998
- ---------------------------------------
Alvin H. Clemens, Chairman of the Board
and Chief Executive Officer
(Principal Executive Officer)
/s/JAMES O. BOWLES June 30, 1998
- ---------------------------------------
James O. Bowles, President
/s/BENEDICT J, IACOVETTI June 30, 1998
- ----------------------------------------------
Benedict J. Iacovetti, Chief Financial Officer
(Principal Financial Officer)
/s/FRANCIS L. GILLAN III June 30, 1998
- ---------------------------------------
Francis L. Gillan III, Treasurer
(Chief Accounting Officer)
/s/MICHAEL F. BEAUSANG June 30, 1998
- ---------------------------------------
Michael F. Beausang, Jr., Director
/s/VALERIE C. CLEMENS June 30, 1998
- ---------------------------------------
Valerie C. Clemens, Director
- ---------------------------------------
Harold M. Davis, Director
/s/JOHN T. GILLIN June 30, 1998
- ---------------------------------------
John T. Gillin, Director
/s/HENRY G. HAGER June 30, 1998
- ---------------------------------------
Henry G. Hager, Director
/s/FREDERICK S. HAMMER June 30, 1998
- ---------------------------------------
Frederick S. Hammer, Director
/s/GEORGE W. KARR June 30, 1998
- ---------------------------------------
George W. Karr, Jr., Director
/s/P. GLENN MOYER June 30, 1998
- ---------------------------------------
P. Glenn Moyer, Director
-44-
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
EXHIBITS TO FORM 10-K
ANNUAL REPORT OF
PROVIDENT AMERICAN CORPORATION
For the Fiscal Year Ended December 31, 1997
Filed pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
EXHIBIT INDEX
(Pursuant to Item 601 of Regulation S-K)
Exhibit Sequentially
Number Description of Exhibits Numbered Page
------ ----------------------- -------------
(2)(A) Purchase Agreement, dated November 30, 1995
among Registrant and UBL Financial Corporation.
Incorporated by reference to Exhibit (2)(A) to
Registrant's Annual Report on Form 10-K for the
year ended December 31, 1995.
(2)(B) Agreement and Plan of Reorganization, dated
August 15, 1996 among Registrant and Saul Rose
and Joan Rose relating to the capital stock of
Coastal Services, Eastern, Inc. Incorporated by
reference to Exhibit (2)(B) to Registrant's
Annual Report on Form 10-K for the year ended
December 31, 1996.
(2)(C) Purchase Agreement, dated May 1, 1996 among
Registrant, MidAmerica Mutual Life Insurance
Corporation and MidAmerica Enterprises, Inc.
Incorporated by reference to Exhibit (2)(C) to
Registrant's Annual Report on Form 10-K for the
year ended December 31, 1996.
(2)(D) Stock Exchange Agreement, dated June 18, 1996
among Registrant, Richard E. Field, Arthur J.
Ivey and Richard E. Field & Associates, Inc.
Incorporated by reference to Exhibit (2)(D) to
Registrant's Annual Report on Form 10-K for the
year ended December 31, 1996.
(3)(A) Articles of Incorporation of the Registrant, as
amended, incorporated by reference to Exhibit
(3)(A) to Registrant's Form 10 Registration
Statement No. 0-13591, as amended. Amendment to
Registrants Articles of Incorporation dated
December 5, 1989, incorporated by reference to
Exhibit (C)(2) to Registrant's Form 8-K dated
December 29, 1989.
(3)(B) By-laws of Registrant, as amended, incorporated
by reference to Exhibit (3)(B) to Registrant's
Form 10 Registration Statement No. 0-13591, as
amended.
-45-
Exhibit Sequentially
Number Description of Exhibits Numbered Page
------ ----------------------- -------------
(4)(A)* Form of Registrant's Common Stock Certificate
incorporated by reference to Exhibit (4)(A) to
Registrant's Form S-1 Registration Statement
No. 33-5884, as amended.
(4)(B) Amended and Restated Statement With Respect To
Shares - Domestic Business Corporation For
Provident American Corporation. Series A
Cumulative Convertible Preferred Stock, $1.00
Par Value. Incorporated by reference to Exhibit
(4)(A) to Registrant's Quarterly Report on Form
10-Q for the Quarterly period ended September
30, 1993.
(4)(C) Amended and Restated Statement With Respect To
Shares - Domestic Business Corporation For
Provident American Corporation. Series B
Cumulative Convertible Preferred Stock, $1.00
Par Value. Incorporated by reference to Exhibit
(4)(B) to Registrant's Quarterly Report on Form
10-Q for the Quarterly period ended September
30, 1993.
(4)(D) Stock Purchase Agreement dated March 31, 1993
by and among the Registrant, Alvin H. Clemens
and the group of investors known as "The
Brumley Group" for the purchase of 387,500
shares of Series B Cumulative Convertible
Preferred Stock. Incorporated by reference to
Exhibit (4)(C) to Registrant's Quarterly Report
on Form 10-Q for the Quarterly period ended
September 30, 1993.
(4)(E) Insurion, Inc. 5.5% Convertible Note due June
30, 2003, the principal amount of $5,000,000
received on May 29, 1998.
(10)(A)* Employment Contract dated April 1, 1991 among
Registrant, Provident Indemnity Life Insurance
Company, Maine National Life Insurance Company
and Alvin H. Clemens incorporated by reference
to Exhibit (10)(A) to Registrant's Quarterly
Report on Form 10-Q for the quarterly period
ended September 30, 1993.
(10)(B) Stock Exchange Agreement dated January 19, 1991
among Registrant, Premarco, Inc., Thomas D.
Bischoff and Michael V. Warhurst incorporated
by reference to Exhibit (10)(B) to Registrant's
Annual Report on Form 10-K for the year ended
December 31, 1990.
-46-
Exhibit Sequentially
Number Description of Exhibits Numbered Page
------ ----------------------- -------------
(10)(C) Escrow and Security Agreement dated January 19,
1991 among Registrant, Thomas D. Bischoff,
Michael V. Warhurst and Anthony R. Verdi
(escrow agent) incorporated by reference to
Exhibit (10)(D) to Registrant's Annual Report
on Form 10-K for the year ended December 31,
1990.
(10)(D)* Premium Production and Stock Option Agreement
dated January 19, 1991 among Registrant,
Provident Indemnity Life Insurance Company and
Premarco, Inc. incorporated by reference to
Exhibit (10)(E) to Registrant's Annual Report
on Form 10-K for the year ended December 31,
1990.
(10)(E) Escrow Agreement dated January 1, 1991 between
Network America Life Insurance Company,
Provident Indemnity Life Insurance Company and
Harleysville National Bank and Trust Company
incorporated by reference to Exhibit (10)(G) to
Registrant's Annual Report on Form 10-K for the
year ended December 31, 1990.
(10)(F)* Registrant's 1983 Incentive Stock Option Plan
and Management Contracts thereunder,
incorporated by reference to Exhibit
(10)(C)(17) to Registrant's Form 10
Registration Statement No. 0-13591, as amended.
(10)(G)* Registrant's 1985 Non-Qualified Stock Option
Plan, incorporated by reference to Exhibit
(10)(C)(1) to Registrant's Form 10 Registration
Statement No. 0-13591, as amended.
(10)(H) Quota Share Reinsurance Agreement effective as
of October 1, 1989 among Provident Indemnity
Life Insurance Company, Continental Assurance
Company, First Equicor Life Insurance Company,
The Mercantile and General Reinsurance Company,
Limited, The Manufacturers Life Insurance
Company, Ltd. and Gerling Global Life Insurance
Company incorporated by reference to Exhibit
(10)(L) to Registrant's Form S-1 Registration
Statement No. 33-40842, as amended.
-47-
Exhibit Sequentially
Number Description of Exhibits Numbered Page
------ ----------------------- -------------
(10)(I)* Registrant's 1991 Executive Stock Option Plan
incorporated by reference to Exhibit (10)(O) to
Registrant's Annual Report on Form 10-K for the
year ended December 31, 1991.
(10)(J)* Registrant's 401(k) Profit Sharing Plan and
Trust incorporated by reference to Exhibit
(10)(P) to Registrant's Annual Report on Form
10-K for the year ended December 31, 1991.
(10)(K)* Amendment dated November 17, 1992 to Premium
Production and Stock Option Agreement dated
January 19, 1991 among Registrant, Provident
Indemnity Life Insurance Company and Premarco,
Inc., incorporated by reference to Exhibit
(10)(S) to Registrant's Annual Report on Form
10-K for the year ended December 31, 1992.
(10)(L)* Amended and Restated Provident American
Corporation Incentive Stock Option Plan for
Field Representatives and Agents dated January
1, 1991, incorporated by reference to Exhibit
(10)(T) to Registrant's Annual Report on Form
10-K for the year ended December 31, 1992.
(10)(M)* Third Amendment to the Amended and Restated
Stock Option Agreement dated April 1, 1993
among Registrant, Provident Indemnity Life
Insurance Company and Alvin H. Clemens,
incorporated by reference to Exhibit (10)(B) to
Registrant's Quarterly Report on Form 10-Q for
the Quarterly period ended September 30, 1993.
(10)(N)* Option Agreement dated as of April 1, 1993
granting Alvin H. Clemens the right to purchase
500,000 shares of Series A Preferred Stock,
incorporated by reference to Exhibit (10)(C) to
Registrant's Quarterly Report on Form 10-Q for
the Quarterly period ended September 30, 1993.
-48-
Exhibit Sequentially
Number Description of Exhibits Numbered Page
------ ----------------------- -------------
(10)(O) Stock Purchase Agreement dated February 16,
1995 by and among Blue Alliance Mutual
Insurance Company, Registrant and Provident
Indemnity Life Insurance Company as to the sale
of all of the outstanding stock of Maine
National Life Insurance Company. Incorporated
by reference to Exhibit (10)(W) to Registrant's
Annual Report on Form 10-K for the year ended
December 31, 1994.
(10)(P) Stock Purchase Agreement, dated January 2, 1995
among Maine National Life Insurance Company,
Provident Indemnity Life Insurance Company and
PAMCO Realty Co., Inc. Incorporated by
reference to Exhibit (10)(X) to Registrant's
Annual Report on Form 10-K for the year ended
December 31, 1994.
(10)(Q) Reinsurance Agreement, dated December 31, 1995
between Provident Indemnity Life Insurance
Company and London Life Reinsurance Company.
Incorporated by reference to Exhibit (10)(Y) to
Registrant's Annual Report on Form 10-K for the
year ended December 31, 1995.
(10)(R) Warrant, dated November 1, 1995 granting Thomas
A. Bruderman the right to purchase up to 50,000
shares of the common stock of Registrant.
Incorporated by reference to Exhibit (10)(Z) to
Registrant's Annual Report on Form 10-K for the
year ended December 31, 1995.
(10)(S)* Fourth Amendment to Registrant's Incentive
Stock Option Plan for Field Representatives and
Agents, effective January 1, 1995. Incorporated
by reference to Exhibit (10)(CC) to
Registrant's Annual Report on Form 10-K for the
year ended December 31, 1995.
(10)(T) Settlement Agreement and Mutual General
Release, effective February 12, 1996 among
Registrant, Provident Indemnity Life Insurance
Company, The Loewen Group Inc., and Loewen
Group International, Inc. Incorporated by
reference to Exhibit (10)(EE) to Registrant's
Annual Report on Form 10-K for the year ended
December 31, 1995.
-49-
Exhibit Sequentially
Number Description of Exhibits Numbered Page
------ ----------------------- -------------
(10)(U)* Registrant's Life and Health Insurance Agent
Non-Qualified Stock Option Plan, effective
January 2, 1996. Incorporated by reference to
Exhibit (10)(EE) to Registrant's Annual Report
on Form 10-K for the year ended December 31,
1996.
(10)(V)* Employment Contract, dated April 1, 1996 among
Registrant, Provident Indemnity Life Insurance
Company and Edward Bolton. Incorporated by
reference to Exhibit (10)(FF) to Registrant's
Annual Report on Form 10-K for the year ended
December 31, 1996.
(10)(W)* Amended and Restated Employment Contract, dated
November 7, 1996 among Registrant, NIA
Corporation, Provident American Life & Health
Insurance Company and James O. Bowles.
Incorporated by reference to Exhibit (10)(GG)
to Registrant's Annual Report on Form 10-K for
the year ended December 31, 1996.
(10)(X)* Employment Contract, dated February 19, 1997
among Registrant, Provident Indemnity Life
Insurance Company, Provident American Life &
Health Insurance Company and Alvin H. Clemens.
Incorporated by reference to Exhibit (10)(HH)
to Registrant's Annual Report on Form 10-K for
the year ended December 31, 1996.
(10)(Y) Promissory Note; Pledge and Security Agreement,
dated April 8, 1996 between Registrant and
Alvin H. Clemens. Incorporated by reference to
Exhibit (10)(II) to Registrant's Annual Report
on Form 10-K for the year ended December 31,
1996.
(10)(Z)* Amendment and Restatement of the Registrant's
Stock Option Plan for Directors, effective July
16, 1996. Incorporated by reference to Exhibit
(10)(JJ) to Registrant's Annual Report on Form
10-K for the year ended December 31, 1996.
(10)(AA)* Registrant's 1996 Employee Incentive Stock
Option Plan, effective July 16, 1996.
Incorporated by reference to Exhibit (10)(KK)
to Registrant's Annual Report on Form 10-K for
the year ended December 31, 1996.
-50-
Exhibit Sequentially
Number Description of Exhibits Numbered Page
------ ----------------------- -------------
(10)(BB)* Registrant's Amended and Restated Stock Option
Plan for Executives, dated December 11, 1996.
Incorporated by reference to Exhibit (10)(LL)
to Registrant's Annual Report on Form 10-K for
the year ended December 31, 1996.
(10)(CC) Promissory Note with Amendments; Pledge and
Security Agreement; and Escrow Agreement, dated
April 2, 1996 between Registrant and John T.
Gillin. Incorporated by reference to Exhibit
(10)(MM) to Registrant's Annual Report on Form
10-K for the year ended December 31, 1996.
(10)(DD) Warrant for the Purchase of Shares of Common
Stock, dated July 18, 1996 granting Ladenburg,
Thalmann & Co. Inc. the right to purchase
100,000 shares of the common stock of
Registrant. Incorporated by reference to
Exhibit (10)(OO) to Registrant's Annual Report
on Form 10-K for the year ended December 31,
1996.
(10)(EE)* Marketing and Consulting Agreement, dated June
18, 1996 between Provident Indemnity Life
Insurance Company and Richard E. Field.
Incorporated by reference to Exhibit (10)(PP)
to Registrant's Annual Report on Form 10-K for
the year ended December 31, 1996.
(10)(FF)* Stock Option/Warrant Agreement, dated January
1, 1996 between Registrant and Richard E.
Field. Incorporated by reference to Exhibit
(10)(QQ) to Registrant's Annual Report on Form
10-K for the year ended December 31, 1996.
(10)(GG) Amendment to Promissory Note, dated April 8,
1997 between Registrant and Alvin H. Clemens.
(10)(HH) Promissory Note, dated July 28, 1997 between
Registrant and Alvin H. Clemens.
(10)(II) Second Amendment to Promissory Note, dated
February 1, 1997; Third Amendment to Promissory
Note, dated April 30, 1997, between Registrant
and John T. Gillin.
-51-
Exhibit Sequentially
Number Description of Exhibits Numbered Page
------ ----------------------- -------------
(10)(JJ) Services Agreement with Amendment to Services
Agreement, dated February 1, 1998 between
Provident Indemnity Life Insurance Company,
Provident American Life and Health Insurance
Company, HealthPlan Services Corporation and
HealthPlan Services, Inc.
(10)(KK) Inducement Agreement, dated October 16, 1997
between Registrant and HealthPlan Services,
Inc.
(10)(LL) The Provident and HealthPlan Services
E-Commerce Agreement, dated May 29, 1998 and
effective February 1, 1998 between Registrant,
Insurion, Inc., Provident Health Services, Inc.
and HealthPlan Services, Inc.
(10)(MM) Amended and Restated Interactive Marketing
Agreement, dated February 1, 1998 between
Provident Health Services, Inc. and American
Online, Inc. Incorporated by reference to
Exhibit 1 to Registrant's Form 8-K/A dated June
8, 1998.
(10)(NN) MGU Stock Purchase Agreement, dated February
27, 1998 between Montgomery Management
Corporation and HealthPlan Services, Inc.
(10)(OO) Lynx Capital Group, LLC Consulting Agreement,
dated March 31, 1998 between Provident
Indemnity Life Insurance Company, Provident
American Life and Health Insurance Company and
Lynx Capital Group, LLC.
(11) Computation of Earnings Per Share.
(16) Letter re: change in certifying account.
(22) Subsidiaries of Registrant.
(23)(A) Consent of Current Independent Accountants.
(23)(B) Consent of Previous Independent Accountants.
(27) Financial Data Schedule.
* Indicates management contract or compensatory plan or arrangement.
-52-