<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended.........June 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from....to.....
Commission file number........... 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
Former name, former address and former fiscal year, if changed since last
report: N/A
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
--- ---
APPLICABLE ONLY TO CORPORATE ISSUERS
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date: 10,108,610 shares of common
stock, par value $.10, outstanding as of August 8, 1997.
Page 1 of 19
<PAGE>
PROVIDENT AMERICAN CORPORATION
INDEX
Page No.
--------
Part I. FINANCIAL INFORMATION
Item 1. Condensed Financial Statements
Consolidated Statements of Operations 3
Consolidated Balance Sheets 4
Consolidated Statements of Cash Flows 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Results
of Operations and Financial Condition 10
Part II. OTHER INFORMATION
Items 1- 5 17
Reports on Form 8-K 18
SIGNATURES 19
Exhibit 11
Exhibit 27
Page 2 of 19
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Condensed Financial Statements
Provident American Corporation and Subsidiaries
Consolidated Statements of Operations
(UNAUDITED)
<TABLE>
<CAPTION>
(Dollars in thousands except per share data) 3 Months Ended June 30, 6 Months Ended June 30,
1997 1996 1997 1996
------ ------ ------ ------
<S> <C> <C> <C> <C>
Revenue:
Premium: Accident and health, gross $20,083 $13,706 $38,338 $25,364
Life and annuity, gross 2,437 2,895 4,846 5,856
------- ------- ------- -------
Total gross premium 22,520 16,601 43,184 31,220
------- ------- ------- -------
Accident and health reinsurance ceded 9,390 6,074 17,751 11,216
Life and annuity reinsurance ceded 133 (2,318) 278 (2,222)
------- ------- ------- -------
Total Reinsurance ceded 9,523 3,756 18,029 8,994
------- ------- ------- -------
Net premium 12,997 12,845 25,155 22,226
Net investment income 843 771 1,766 1,480
Realized gains (losses) on investments (68) (101) 930 29
Other revenue 656 238 1,156 452
Litigation settlement, net of expenses 22,400
------- ------- ------- -------
Total revenue 14,428 13,753 29,007 46,587
------- ------- ------- -------
Benefits and expenses:
Death and other policy benefits:
Life 1,434 1,203 3,022 2,500
Accident and health, net of reinsurance 12,834 4,607 19,006 8,483
Annuity and other 160 (24) 389 176
Increase in liability for future policy benefits 624 3,305 1,020 5,383
Depreciation and amortization of goodwill 146 89 296 145
Commissions, net of ceding allowance and
deferred acquisition costs 1,696 3,070 3,239 4,931
Other operating expenses, net of ceding allowance
and deferred acquisition costs 4,277 2,591 7,450 5,220
Amortization of deferred policy acquisition costs 2,650 26 3,019 52
------- ------- ------- -------
Total benefits and expenses 23,821 14,867 37,441 26,890
------- ------- ------- -------
Income (loss) before income taxes (9,393) (1,114) (8,434) 19,697
Provision for income taxes (benefit):
Current (2,871) (450) (3,396) 4,900
Deferred (835) (166) 400
------- ------- ------- -------
Total income taxes (3,706) (450) (3,562) 5,300
------- ------- ------- -------
Net income (loss) (5,687) (664) (4,872) 14,397
Dividends on preferred stock 37 37 74 120
------- ------- ------- -------
Net income (loss) applicable to common stock ($5,724) ($701) ($4,946) $14,277
======= ======= ======= =======
Income (loss) per share of common stock ($0.57) ($0.07) ($0.49) $1.30
======= ======= ======= =======
Common shares and equivalents used in
computing income (loss) per share 10,071 9,435 10,068 10,984
</TABLE>
See notes to condensed financial statements.
Page 3 of 19 Pages
<PAGE>
Provident American Corporation and Subsidiaries
Consolidated Balance Sheets
<TABLE>
<CAPTION>
UNAUDITED
(Dollars in thousands) June 30, December 31,
1997 1996
---------- -----------
<S> <C> <C>
Assets
- ------
Investments:
Bonds, amortized cost $51,202 and $55,258 $50,752 $54,985
Equity securities, cost $1,437 and $3,901 1,100 4,930
Real estate, at cost, less accumulated depreciation of $170 and $158 930 942
Policy loans 520 526
Other invested assets 550 559
------- -------
Total Investments 53,852 61,942
Cash and cash equivalents 7,130 6,218
Premium due and uncollected 1,679 1,318
Amounts due from reinsurers 14,192 9,240
Loans receivable from officer, director and stockholder 1,205 461
Accrued investment income 788 836
Federal income taxes recoverable 2,585 90
Property and equipment, at cost, less accumulated depreciation of $1,447 and $1,261 5,564 4,711
Deferred tax asset 860 154
Unamortized deferred policy acquisition costs 4,604 3,140
Goodwill 3,049 3,166
Other assets 1,214 1,778
------- -------
Total Assets $96,722 $93,054
======= =======
Liabilities and Stockholders' Equity
- ------------------------------------
Future policy benefits:
Life 39,548 38,459
Annuity and other 5,846 6,354
Policy claims 24,027 15,438
Premium received in advance and unearned 2,779 2,348
Amounts due to reinsurers 1,177 705
Accrued commissions and expenses 4,049 4,179
Notes payable 69 298
Current income taxes 463
Other liabilities 3,025 2,757
------- -------
Total Liabilities 80,520 71,001
Commitments and Contingencies
Stockholders' Equity
- --------------------
Preferred stock, par value $1: authorized 5,000,000 shares:
Series A Cumulative Convertible, issued 580,250 580 580
Series B Cumulative Convertible, none issued
Common stock, par value $.10: authorized 25,000,000, issued 10,108,610 and 10,078,710 1,011 1,008
Common stock, Class A, par value $.10: authorized 2,500,000, none issued
Additional paid-in capital 13,039 12,945
Net unrealized depreciation of bonds (292) (177)
Net unrealized appreciation (depreciation) of equity securities (219) 688
Retained earnings 2,159 7,105
------- -------
16,278 22,129
Less common stock held in treasury, at cost, 36,300 shares (76) (76)
------- -------
Total Stockholders' Equity 16,202 22,053
------- -------
Total Liabilities and Stockholders' Equity $96,722 $93,054
======= =======
</TABLE>
See notes to condensed consolidated financial statements.
Page 4 of 19 Pages
<PAGE>
Provident American Corporation and Subsidiaries
Consolidated Statements of Cash Flows
UNAUDITED
<TABLE>
<CAPTION>
(Dollars in thousands) 6 Months Ended June 30,
1997 1996
------ ------
<S> <C> <C>
OPERATING ACTIVITIES
Net income (loss) $(4,871) $14,397
Adjustments to reconcile net income (loss)
to net cash from operating activities:
Equity securities received from litigation settlement (19,400)
Change in future policy benefits and policy claims 9,582 5,509
Change in premium due and uncollected and
premium received in advance and unearned 70 (151)
Change in amounts due to/from reinsurers (4,480) (2,626)
Change in accrued investment income 48 (81)
Change in accrued commissions and expenses (130) 1,115
Change in other assets, current and deferred
income taxes and other liabilities (2,291) 5,076
Depreciation and amortization 322 147
Depreciation policy acquisition costs, net (1,464) (289)
Net realized gain on investments (930) (29)
------- -------
Net cash from operating activities (4,144) 3,668
------- -------
INVESTING ACTIVITIES
Purchases of bonds (4,253) (13,262)
Purchases of equity securities and other investments (1,018) (155)
Sale of bonds 6,696 14,471
Sale of equity securities 4,439
Maturity of investments and loans 1,593 444
Acquisition of property and equipment (1,039) (179)
Increase in loans receivable from officer, director and
stockholder (744) (440)
Acquisition of business, net of cash acquired (4,486)
------- -------
Net cash from investing activities 5,674 (3,607)
------- -------
FINANCING ACTIVITIES
Deposits and interest credited to
contractholder deposit funds 176 231
Withdrawals from contractholder deposit funds (588) (1,118)
Issuance of common stock 97 747
Dividends paid on preferred stock (74) (120)
Repayment of note payable (229) (225)
------- -------
Net cash from financing activities (618) (485)
------- -------
Increase (decrease) in cash and cash equivalents 912 (424)
Cash and cash equivalents, beginning of period 6,218 2,162
------- -------
Cash and cash equivalents, end of period $ 7,130 $ 1,738
------- -------
Supplemental disclosure of cash flow information:
Interest paid $ 27 $ 34
Income taxes paid (refunded), net $ (477) $ 1
</TABLE>
See notes to condensed consolidated financial statements.
Page 5 of 19 Pages
<PAGE>
Provident American Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Dollars in thousands)
(1) General
The condensed consolidated financial statements included herein have
been prepared by Provident American Corporation (the "Company") without audit,
pursuant to the rules and regulations of the Securities and Exchange Commission
and reflect all adjustments which, in the opinion of the Company, are necessary
to present fairly results for the interim periods. Certain financial information
and footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted pursuant to such rules and regulations, although the Company believes
that the accompanying disclosures are adequate to make the information presented
not misleading. Results of operations for the six-month period ended June 30,
1997, are not necessarily indicative of the results that may be expected for the
year ending December 31, 1997.
These financial statements should be read in conjunction with the
financial statements and notes thereto contained in the Company's Annual Report
on Form 10-K for the year ended December 31, 1996.
Certain prior year amounts have been reclassified to conform with the
current presentation.
The Company is a Pennsylvania corporation which was organized in 1982
and is regulated as an insurance holding company by the 42 states in which its
principal 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. 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.
(2) Bonds and Marketable Securities at Fair Market Value
The Company has classified all of its debt and equity securities as
"available-for-sale" and accordingly, at December 31, 1996, recorded as a
separate component of stockholders' equity an unrealized gain amounting to
approximately $756, net of $265 applicable to deferred federal income taxes. At
June 30, 1997, the Company recorded an unrealized loss of $450 on bonds net of
$158 applicable to deferred federal income taxes and an unrealized loss of $337
on equity securities, net of $118 applicable to deferred federal income taxes.
The net effect on stockholders' equity as a result of this fair market value
accounting method was to decrease stockholders' equity by $511 at June 30, 1997.
The cumulative change in aggregate fair market values of bonds is a direct
result of the overall change in interest rates.
Page 6 of 19 Pages
<PAGE>
(3) Earnings (Loss) Per Share of Common Stock
Primary earnings (loss) per share has been computed by dividing net
income applicable to common stock by the weighted average number of common
shares and equivalents outstanding. Common share equivalents included in the
computation represent shares issuable upon assumed exercise of stock options
which would have a dilutive effect in periods where there are earnings.
Common shares and equivalents used in computing earnings (loss) per
share for 1996 have been restated to include 610,000 shares issued to acquire
REF & Associates, Inc. in 1996 accounted for as a "Pooling of Interests."
(4) Reinsurance and Deferred Acquisition Cost Impact on Benefits and
Expenses
Accident and health policy benefits, commissions other operating
expenses and are net of the following ceded reinsurance and deferred acquisition
cost amounts:
<TABLE>
<CAPTION>
3 Months Ended 6 Months Ended
June 30, June 30,
1997 1996 1997 1996
------ ------ ------ ------
<S> <C> <C> <C> <C>
Accident and health benefits
- ----------------------------
Gross before reinsurance ceded $24,825 $8,844 $36,672 $16,275
Less reinsurance ceded 11,991 4,237 17,666 7,792
------- ------ ------- -------
Net of reinsurance $12,834 $4,607 $19,006 $ 8,483
======= ====== ======= =======
Commissions
- -----------
Gross before reinsurance ceded $ 4,549 $4,209 $ 8,640 $ 7,460
Less reinsurance ceded 1,785 989 3,435 2,188
Less deferred acquisition costs 1,068 150 1,966 341
------- ------ ------- -------
Net $ 1,696 $3,070 $ 3,239 $ 4,931
======= ====== ======= =======
Other operating expenses
- ------------------------
Gross before reinsurance ceded $ 6,437 $3,730 $12,315 $ 6,887
Less reinsurance ceded 1,245 1,139 2,348 1,667
Less deferred acquisition costs 915 2,517
------- ------ ------- -------
Net $ 4,277 $2,591 $ 7,450 $ 5,220
======= ====== ======= =======
</TABLE>
Page 7 of 19 Pages
<PAGE>
(5) Loans Receivable from Officer, Director and Shareholder
During 1996 the Company made a loan of $300 to Mr. Clemens, Chairman of
the Board and Chief Executive Officer of the Company, collateralized by 100,000
shares of the Company's Common Stock owned by Mr. Clemens and represented by a
promissory note which is repayable, together with interest at a rate of 5.33%
per annum, on or before April 8, 1999. During the second quarter of 1997, the
Company increased the principal amount of the note to Mr. Clemens by an
additional $300, bringing the principal balance to $600. Collateral was
increased by an additional 20,000 shares of the Company's Common Stock owned by
Mr. Clemens. The entire principal balance and interest is due and payable on
April 8, 1999. The interest was 5.33% through April 7, 1997, and increased to
5.75% per annum thereafter.
During 1996 the Company made a loan of $140 to John T. Gillin, a
Director of the Company, collateralized by 15,000 shares of the Company's Common
Stock owned by Mr. Gillin and represented by a promissory note which was
repayable, together with interest at a rate of 8.5% per annum. During the second
quarter of 1997 the promissory note with Mr. Gillin was amended. The principal
amount was increased to $156 to include the accrued interest as of June 30,
1997. The interest rate was increased to 8.75% effective July 1, 1997.
Collateral was increased to include options to purchase 25,000 shares of the
Company's Common Stock at a price of $8.75 owned by Mr. Gillin. Interest is
payable quarterly on September 30, 1997, December 31, 1997, March 31, 1998 and
June 30, 1998. Commencing on July 31, 1998, for a period of 60 months, Mr.
Gillin shall make equal payments of $3 to the Company representing principal and
interest.
During the second quarter of 1997, the Company made a loan of $422 to
Richard E. Field, a consultant to and shareholder of the Company, collateralized
by Mr. Field's consulting agreement with the Company, and represented by a
promissory note which is repayable with interest at the prime rate plus one
percent and payable on demand.
(5) Accounting Standards Not Yet Adopted
In 1997 the Company will adopt the recently issued SFAS No. 128
"Earnings Per Share", establishing standards for computing and presenting
earnings per share (EPS). This Statement simplifies the previous standards for
computing earnings per share and replaces the presentation of primary EPS with a
presentation of basic EPS. It also requires dual presentation of basic and
diluted EPS on the face of the income statement. Basic EPS excludes dilution and
is computed by dividing income available to common stockholders by the
weighted-average number of common shares outstanding for the period. Diluted EPS
reflects the potential dilution that could occur if securities or other
contracts to issue common stock were exercised or converted into common stock or
resulted in the issuance of common stock that then shared in the earnings of the
entity. Diluted EPS is computed similarly to fully diluted EPS. This Statement
is effective for periods ending after December 15, 1997, including interim
periods; earlier application is not permitted. This statement requires
restatement of all prior-period EPS data presented. The effect of the
pronouncement on the financial statements has not been quantified.
Page 8 of 19 Pages
<PAGE>
(7) Investment Considerations
In analyzing whether to make, or continue, an investment in the Company,
investors should consider, among other factors, certain investment
considerations more particularly described in the Company's Annual Report on
Form 10-K for the year ended December 31, 1996, a copy of which can be obtained
from Anthony R. Verdi, Chief Financial Officer of Provident American
Corporation.
(8) Forward-looking Statements
The information contained in the Quarterly Report on form 10-Q for the
quarter ended June 30, 1997 contains forward-looking statements (as such term is
defined under Section 21E of the Securities Exchange Act of 1934 and the
regulations thereunder), including without limitation, statements as to trends,
management's beliefs, expectations or opinions, which are based upon a number of
assumptions concerning future conditions that ultimately may prove to be
inaccurate.
Such forward-looking statements are subject to risks and uncertainties
and may be affected by various factors which may cause actual results to differ
materially from those in the forward-looking statements. Certain of these risks,
uncertainties and other factors, are discussed in the Company's Annual Report on
Form on 10-K for the year ended December 31, 1996.
Page 9 of 19 Pages
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Results of Operations
For the three months ended June 30, 1997 (the second quarter), the
Company's Consolidated Statement of Operations was adversely impacted by
increased accident and health benefits expense and expensing certain policy
acquisition and product development costs. The Company's net loss applicable to
common stock for the second quarter was $5.7 million or $0.57 per share compared
to a net loss of $0.7 million ($0.07 per share) for the three months ended June
30, 1996 (same quarter last year). The Company's net loss in the second quarter
included $3 million of accident and health policy benefits expense net of
reinsurance related to prior periods ($4.6 million pre-tax, net of reinsurance),
$1.3 million additional amortization of deferred policy acquisition costs ($2
million pre-tax) and $0.3 million of costs related to the start-up of a new
individual-life product line ($0.5 million pre-tax).
Accident and health gross premium was $20.1 million for the second
quarter compared to $13.7 million for the same quarter last year and accident
and health ceded premium was $9.4 million for the second quarter as compared to
$6.1 million for the same quarter last year. Both increases resulted from
increased new business related to "The Provident Solution" one-life managed-care
health insurance product introduced in the fourth quarter of 1995 and premium
related to the purchased HealthQuest book of business and new managed care
product sales. The Company purchased via an assumption reinsurance agreement
approximately 3,500 in-force "HealthQuest" medical policies in May of 1996.
Life and annuity gross premium, consisting primarily of group life and
individual pre-need and final expense business was $2.4 million for the second
quarter and declined from $2.9 million for the same quarter last year due to
reduced sales volume.
Net investment income was $0.8 million for the second quarter compared
to $0.8 million for the same quarter last year. The nominal increase in
investment income in the second quarter related to increased bond investments
over the same quarter last year.
Other revenue was $0.7 million for the second quarter which increased
from $0.2 million from the same quarter last year primarily due to fee income
from NIA acquired in May 1996 along with the HealthQuest business.
Page 10 of 19 Pages
<PAGE>
Accident and health policy benefits net of reinsurance represented 120%
of net accident and health earned premium for the second quarter compared to 60%
for the same quarter last year. Accident and health policy benefits included a
$4.6 million increase to prior period reserves based on management's
anticipation of greater-than-expected loss experience in the Company's one-life
managed-care products. Excluding the prior-period reserve increase, accident and
health policy benefits for the second quarter represent 78% of accident and
health earned premium. Based on the Company's current assessment of loss
experience, the Company estimates accident and health policy benefits for the
same quarter last year at 70% of accident and health earned premium. Excluding
the prior-period reserve increase, the increase in the ratio was due to the
diminished effect of underwriting and pre-existing exclusion policy provisions
as the business sold during 1995 and 1996 ages. Policy benefits tend to be lower
during the first year a policy is inforce where underwriting and policy
provisions tend to produce loss ratios that are lower than business greater than
one-year inforce.
Recent analysis of actual payment patterns indicated
higher-than-expected policy benefit expense for managed-care plans. This
resulted primarily from increased frequency of doctor visits coupled with more
procedures such as x-rays and lab work performed on an outpatient basis and a
greater differential between in- and out-of-network doctor and hospital charges.
The Company has begun implementing more aggressive price increases for
lower-deductible plans for new and renewal business and plans on enhancing
managed-care plan design initiatives by providing for greater penalties when
policyholders utilize doctors and hospitals outside the HealthCare COMPARE
network. The Company plans on implementing this enhanced product design during
the fourth quarter of this year. Although the Company believes that the
combination of more aggressive rate action and enhanced product design will
reduce policy benefit expense in the long term, they will have minimum impact on
results from operations during the second half of 1997.
Increase in liability for future policy benefits of $0.6 million
declined from $3.3 million from the same quarter last year primarily due to a
non-recurring charge in 1996 related the Company's recapture of reinsurance
ceded on certain multi-pay pre-need life insurance policies.
Commissions, net of ceding allowance and deferred acquisition costs of
$1.7 million for the second quarter declined from $3.1 million from the same
quarter last year due to the deferral of policy acquisition costs and declining
life commissions as a result of declining life premium. The Company commenced
deferring excess first year commissions as policy acquisition costs in the third
quarter of 1996 relating to one-life managed-care products. Prior to the third
quarter of 1996, excess first year commissions for all managed-care products
were expensed as incurred.
Page 11 of 19 Pages
<PAGE>
Other operating expenses, net of ceding allowance and deferred
acquisition costs for the second quarter of $4.3 million increased compared to
$2.6 million for the same quarter last year due to $0.5 million of costs related
to the start-up of a new individual-life product line and increased policy
administration expenses caused by increased new sales volume and policy
administration expenses associated with the acquired HealthQuest book of
business. Partially offsetting the increased costs was the deferral of $0.9
million of managed-care policy acquisition costs. Deferred costs represent
policy issue, underwriting and certain marketing costs. Prior to the third
quarter of 1996, policy issue, underwriting and marketing costs for all
managed-care products were expensed as incurred.
Other operating expenses, net of ceding allowance and acquisition costs
for the second quarter excluding the start-up costs related to a new
individual-life product line represents 29% of net premiums for the second
quarter compared to 20% for the same quarter last year due to increased policy
administration expenses. The Company insourced its group health policy and
claims processing effective June 1996 due to the third-party administrator's
inability to honor pricing and performance commitments. The Company has incurred
additional cost to improve customer service levels and reduce claims backlog.
The Company continues to evaluate alternatives to improve both cost efficiency
and service effectiveness of its group health policy and claims processing.
Amortization of deferred policy acquisition costs for the second quarter
of $2.7 million increased from the same quarter last year as a result of
amortization of policy acquisition costs relating to managed-care products. The
second quarter included approximately $2 million of additional amortization
expense reflecting a reduction of unamortized managed care policy acquisition
costs due to the estimated future profitability of those products. 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
deferred acquisition costs ("DAC"), which would adversely impact future
earnings. Prior to the third quarter of 1996, DAC for all managed-care products
was expensed as incurred.
For the six months ended June 30, 1997 (current year), the Company's
Consolidated Statement of Operations was adversely impacted by increased
accident and health benefits expense and expensing certain policy acquisition
and product development costs. The Company's net loss applicable to common stock
for the current year was $4.9 million or $0.49 per share compared to net income
of $14.3 million ($1.30 per share) for the six months ended June 30, 1996 (prior
year). The Company's net loss in the current year includes approximately $2
million of accident and health policy benefits expense net of reinsurance
related to prior periods ($3 million pre-tax, net of reinsurance), $1.3 million
additional amortization of deferred policy acquisition costs ($2 million
pre-tax) and $0.3 million of costs related to the start-up of a new
individual-life product line ($0.5 million pre-tax). Net income for the prior
year includes a $16.6 million litigation settlement, net of tax.
Accident and health gross premium was $38.3 million compared to $25.4
million and accident and health ceded premium was $17.8 million as compared to
$11.2 million for the current and prior year, respectively. The increases were
the result of increased new business from "The Provident Solution" one-life
managed-care health insurance product introduced in the fourth quarter of 1995
and premium related to the purchased HealthQuest book of business and new sales.
Page 12 of 19 Pages
<PAGE>
At June 30, 1997 and 1996, annualized accident and health premium in
force on small group and managed-care business [OBJECT OMITTED] million and $59
million, respectively, consisting of approximately 43,000 and 30,000
certificateholders, respectively. The $22.8 million net increase in annualized
premium resulted from new business issued of $59.7 million plus premium rate
increases of approximately $22.3 million less lapses amounting to approximately
$59.2 million. The small group and managed-care business annualized premium
lapse ratios were 42% and 40% for 12 months ended June 30 1997 and 1996,
respectively. "The Provident Solution" and HealthQuest products comprised 76%
and 51% of annualized premium in force as of June 30, 1997 and 1996,
respectively
Life and annuity net premium, consisting primarily of group life and
individual pre-need and final expense business was $4.7 million for the current
year and declined from $8.1 million for the prior year due to reduced sales
volume.
Net investment income was $1.8 million for the current year compared to
$1.5 million for the prior year. The increase in investment income related to
increased bond investments over the prior year. The gross average book yield on
bond investments, which accounted for 94% and 65% of total investments at June
30, 1997 and 1996, respectively, decreased slightly from 6.6% at June 30, 1996,
to 6.4% at June 30, 1997. Realized gains in the current quarter related to the
sale of Loewen stock acquired as a result of litigation.
Accident and health policy benefits represented 92% of accident and
health earned premium for the current year compared to 60% for the prior year.
Current year accident and health policy benefits included a $3 million increase
to prior year reserves (net of reinsurance) due to management's anticipation of
greater-than-expected health policy benefits in the Company's one-life
managed-care products. Excluding the prior-period reserve increase, accident and
health policy benefits for the current year represented 78% of accident and
health earned premium. Based on the Company's current assessment of loss
experience, the Company estimates accident and health policy benefits for the
prior year at 68% of accident and health earned premium. Excluding the
prior-period reserve increase, the increase in the ratio was due to the
diminished effect of underwriting and pre-existing exclusion policy provisions
as the business sold during 1995 and 1996 ages.
Increase in liability for future policy benefits of $1 million in the
current year declined from $5.4 million from the prior year primarily due to a
non-recurring charge in 1996 related to the Company's recapture of reinsurance
ceded on certain multi-pay pre-need life insurance policies.
Commissions, net of ceding allowance and deferred acquisition costs of
$3.2 million for the current year declined from $4.9 million for the prior year
due to the deferral of acquisition costs related to the Company's one-life
managed-care products in the current year of $1.9 million and declining life
commissions as a result of declining life premiums.
Page 13 of 19 Pages
<PAGE>
Amortization of deferred policy acquisition costs for the current year
of $3 million increased from the prior year as a result of the Company's
deferral and amortization of policy acquisition costs relating to managed-care
products. The current year included approximately $2 million of additional
amortization expense reflecting a reduction of unamortized managed care policy
acquisition costs to the estimated future profitability of those products.
Other operating expenses, net of ceding allowance and acquisition costs
for the current year of $7.5 million increased compared to $5.2 million for the
prior year due to $0.5 million of costs related to the start-up of a new
individual-life product line and increased policy administration expenses caused
by increased new sales volume and policy administration expenses associated with
the acquired HealthQuest book of business. Partially offsetting the increased
costs was the deferral of managed-care policy acquisition costs.
Other operating expenses, net of ceding allowance and acquisition costs
for the current year excluding start-up costs related to a new individual-life
product line represents 32% of net premiums for the current year which increased
from 23% for the same quarter last year due to the Company's decision to
insource its group health policy and claims processing effective June 1996. The
Company's decision was based on the third-party administrator's inability to
honor pricing and performance agreements.
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 the cash flow from
operations. The primary sources of cash are premiums and investment income. The
primary uses of cash are operating costs and benefit payments to policyholders.
The Company anticipates that it will continue to fund surrenders and benefit
payments through cash flow of normal operations, scheduled investment maturities
and interest income. Excess cash flow from operations is transferred to the
investment portfolio where it is available for investment and future cash needs.
For the six months ended June 30, 1997, total cash and cash equivalents
increased by approximately $0.9 million, of which $5.7 million was provided by
investing activities, primarily the sale of Loewen stock, and $4.1 million was
used by operating activities, primarily the settlement of pending accident and
health benefit payments incurred in prior periods and increased acquisition
costs as a result of increased sales volume. The sales growth of the Company's
managed-care products exceeded the Company's claim processing capacity during
1996. The Company increased its claim payment capacity through both increased
staffing and outsourcing in order to reduce the backlog of pending health claims
resulting in high claim payment activity during 1997. The Company maintained an
appropriate level of liquidity in anticipation of the reduction of pending
health claims.
Page 14 of 19 Pages
<PAGE>
Amounts due from reinsurers increased as a result of increased ceded
group health policy claim reserves. These amounts are payable by the reinsurer
to the Company as group health claims are paid by the Company to policyholders.
Acquisition of Property and Equipment during the year primarily
represent construction progress payments for an approximately 18,000-square-foot
addition to the Company's principal office located in Norristown, Pennsylvania.
Construction began in the second quarter of 1997 with completion anticipated in
the third quarter of 1997 at a cost of approximately $2 million.
Management believes, under its present assessment of the Company's
insurance operations, that the Company has sufficient liquidity and capital to
meet the Company's short-term and long-term financial commitments. At June 30,
1997, the Company had stockholders' equity of $16.2 million with total assets of
$97.7 million. Total assets included cash and investments carried at market
value of $61 million which consisted of $50.8 million in bonds issued by the
U.S. Government or government agencies, public utilities and other corporations,
$1.1 million of equity securities, $2.0 million invested in policy loans, real
estate and other invested assets and $7.1 million in cash and cash equivalents.
The Company's bond investments are investment-grade securities ranging in
maturity from one to twenty-nine years.
Because of the long-term nature of its life insurance and annuity
contracts, the Company expects to hold its bonds to maturity. However, all bonds
are considered to be "available-for-sale" and in order to maximize investment
income, Company policy presently is to purchase medium-term U.S. Treasury and
government agency bonds, rather than purchasing short-term securities, which
would provide for anticipated maturities up to ten years. This policy
necessitates periodic sales of securities prior to maturity when cash flow from
operations is not sufficient to meet current obligations. Changes in net
unrealized depreciation of bonds from December 31, 1996, to June 30, 1997, was
due to changes in interest rates.
The sale of life insurance policies requires substantial capital due to
acquisition costs incurred in the initial year of issuance and the necessity to
maintain sufficient surplus levels for regulatory purposes. In general, the
Company anticipates meeting these demands from premiums on new business,
investment income and income from current business in force.
Page 15 of 19 Pages
<PAGE>
The statutory capital and surplus of PILIC, which includes amounts
related to its subsidiary, PALHIC, was $12.1 million at June 30, 1997, which
includes the benefits of certain permitted practices. The minimum statutory
capital and surplus requirement for life insurance companies domiciled in
Pennsylvania is currently $1.7 million. At December 31, 1996, 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, amounting to approximately $14.8 million, exceeded the
Company Action Level amount required by approximately $8.3 million. PALHIC's
results of this computation indicate its adjusted capital, amounting to
approximately $5.4 million, exceeded the Company Action Level amount required by
approximately $5.3 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 insurer's business. This formula is
the 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 respective parent companies without regulatory approval.
Page 16 of 19 Pages
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
Not applicable.
Item 2. Change in Securities.
Not applicable.
Item 3. Defaults Upon Senior Securities.
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders.
The annual meeting of shareholders was held on June 17,
1997 at which time the following proposals were voted upon.
The following 9 candidates received the highest number of
votes and were, accordingly elected directors of the Company:
Alvin H. Clemens - 8,690,617, Michael F. Beausang, Jr. -
8,690,617, Valerie C. Clemens - 8,684,311, Harold M. Davis -
8,691,617, John T. Gillin - 8,690,117, Henry G. Hager -
8,691,617, Frederick S. Hammer - 8,691,617, George W. Karr, Jr.
- 8,691,617, P. Glenn Moyer - 8,691,617.
The ratification of the appointment of Coopers & Lybrand
L.L.P. as the independent public accountants for the Company for
its 1997 fiscal year received the following votes; approved
10,813,829, disapproved 118,108, abstained 4,945.
The ratification and approval of the Company's 1996
Employee Incentive Stock Option Plan as more fully described in
the Company's Proxy Statement received the following votes;
approved 8,064,837, disapproved 423,757 abstained 14,713.
The ratification of the Company's of the amendment to the
Company's Articles of Incorporation to increase the number of
shares authorized thereunder received the following votes;
approved 7,998,442, disapproved 490,850, abstained 14,015.
Item 5. Other Information.
Not applicable.
Page 17 of 19 Pages
<PAGE>
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits: Not applicable.
(b) Reports on Form 8-K:
No reports of Form 8-K were filed during the quarter
ended June 30, 1997.
Page 18 of 19 Pages
<PAGE>
Signature
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Provident American Corporation
By: /s/ Alvin H. Clemens
-----------------------------------------------------
Alvin H. Clemens, Chairman of the Board of Directors
and CEO
By: /s/ James O. Bowles
-----------------------------------------------------
James O. Bowles, President
By: /s/ Anthony R. Verdi
-----------------------------------------------------
Anthony R. Verdi, Treasurer and
Chief Financial Officer
Date: August 14, 1997
Page 19 of 19 Pages
<PAGE>
EXHIBIT 11
PROVIDENT AMERICAN CORPORATION
COMPUTATION OF EARNINGS (LOSS) PER SHARE
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
(In thousands except per share data) 1997 1996 1997 1996
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Primary Earnings (Loss) Per Share
- ---------------------------------
NET INCOME (LOSS) APPLICABLE TO COMMON STOCK: $ (5,724) $ (701) $ (4,946) $ 14,277
- ------------------------------------------------------------------------------------------------------------------------------------
WEIGHTED AVERAGE SHARES:
Common stock 10,071 9,435 10,068 9,296
Common stock equivalents applicable to stock options and warrants * * * 1,515
- ------------------------------------------------------------------------------------------------------------------------------------
Total 10,071 9,435 10,068 10,811
- ------------------------------------------------------------------------------------------------------------------------------------
PRIMARY EARNINGS (LOSS) PER SHARE: $ (0.57) $ (0.07) $ (0.49) $ 1.32
- ------------------------------------------------------------------------------------------------------------------------------------
Fully Diluted Earnings (Loss) Per Share
- ---------------------------------------
NET INCOME (LOSS) APPLICABLE TO COMMON STOCK: $ (5,724) $ (701) $ (4,946) $ 14,277
- ------------------------------------------------------------------------------------------------------------------------------------
WEIGHTED AVERAGE SHARES:
Common stock 10,071 9,435 10,068 9,296
Common stock equivalents applicable to stock options and warrants * * * 1,688
- ------------------------------------------------------------------------------------------------------------------------------------
Total 10,071 9,435 10,068 10,984
- ------------------------------------------------------------------------------------------------------------------------------------
FULLY DILUTED EARNINGS (LOSS) PER SHARE: $ (0.57) $ (0.07) $ (0.49) $ 1.30
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
* Anti-dilutive; therefore effects have been excluded.
<TABLE> <S> <C>
<ARTICLE> 7
<MULTIPLIER> 1,000
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<DEBT-HELD-FOR-SALE> 50,752
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 1,100
<MORTGAGE> 305
<REAL-ESTATE> 830
<TOTAL-INVEST> 53,852
<CASH> 7,130
<RECOVER-REINSURE> 14,192
<DEFERRED-ACQUISITION> 4,604
<TOTAL-ASSETS> 96,722
<POLICY-LOSSES> 39,548
<UNEARNED-PREMIUMS> 1,592
<POLICY-OTHER> 24,027
<POLICY-HOLDER-FUNDS> 5,846
<NOTES-PAYABLE> 69
0
580
<COMMON> 1,011
<OTHER-SE> 14,611
<TOTAL-LIABILITY-AND-EQUITY> 96,722
25,155
<INVESTMENT-INCOME> 1,766
<INVESTMENT-GAINS> 930
<OTHER-INCOME> 1,156
<BENEFITS> 23,437
<UNDERWRITING-AMORTIZATION> 296
<UNDERWRITING-OTHER> 13,708
<INCOME-PRETAX> (8,434)
<INCOME-TAX> (3,562)
<INCOME-CONTINUING> (4,872)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,872)
<EPS-PRIMARY> (0.49)
<EPS-DILUTED> (0.49)
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
