<PAGE>
FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[ 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, 1996, 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. [X]
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
March 24, 1997 as reported on the NASDAQ National Market System, was
approximately $65,399,450. 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 March 24, 1997, Registrant had 10,066,664 shares of
Common Stock outstanding.
The Exhibit Index is located on Page 43.
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PROVIDENT AMERICAN CORPORATION
Table of Contents
Page
----
I. Part I.
Item 1. Business. . . . . . . . . . . . . . . . . . . . . . 1
Item 2. Properties. . . . . . . . . . . . . . . . . . . . . 12
Item 3. Legal Proceedings . . . . . . . . . . . . . . . . . 13
Item 4. Submission of Matters to a Vote
of Security Holders . . . . . . . . . . . . . . 13
II. Part II.
Item 5. Market for Registrant's Common
Equity and Related Stockholder
Matters . . . . . . . . . . . . . . . . . . . . 14
Item 6. Selected Financial Data . . . . . . . . . . . . . . 16
Item 7. Management's Discussion and
Analysis of Financial Condition
and Results of Operations . . . . . . . . . . . 18
Item 8. Financial Statements and
Supplementary Data. . . . . . . . . . . . . . . 26
Item 9. Changes in and Disagreements with
Accountants on Accounting and
Financial Disclosure. . . . . . . . . . . . . . 27
III. Part III.
Item 10. Directors and Executive Officers
of the Registrant . . . . . . . . . . . . . . . 28
Item 11. Executive Compensation. . . . . . . . . . . . . . . 31
Item 12. Security Ownership of Certain
Beneficial Owners and
Management. . . . . . . . . . . . . . . . . . . 37
Item 13. Certain Relationships and
Related Transactions. . . . . . . . . . . . . . 39
IV. Part IV.
Item 14. Exhibits, Financial Statement
Schedules and Reports on
Form 8-K. . . . . . . . . . . . . . . . . . . . 41
Exhibit Index . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
<PAGE>
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.
The Company, organized and managed along operational lines, markets and
underwrites medical insurance and life insurance throughout the United States.
The Company 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 sold principally to
senior citizens age 50 and above.
Recent significant developments for the Company were the expansion of
its healthcare insurance and managed care business through the roll-out of new
products, alliances and acquisitions (see "Product Profile - Group Medical
Products") and the result of the Loewen litigation settlement. The impact of
these events was to increase revenue, net income and total assets in 1996 as
shown below:
(Dollars in thousands) 1996 1995 1994
---- ---- ----
Gross premiums $68,503 $52,248 $56,880
Total revenue $74,147 $37,047 $40,042
Net income $16,120 $(3,701) $ (997)
Total assets $93,054 $67,151 $60,586
Total revenue in 1996 included $22.4 million related to the Loewen
litigation settlement and $2.0 million of realized gains on the sale of Loewen
stock (see Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations and Note J to the Notes to Consolidated Financial
Statements). Total revenue for each year was net of premium ceded to reinsurers.
- 1 -
<PAGE>
Gross premium growth in 1996 was the result of significant sales from
two recently introduced managed care products. The Company's introduction and
roll-out of these new products was made possible by recent alliances and
acquisitions (see Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations and Note C to the Notes to Consolidated
Financial Statements).
Product Profile
The following table sets forth the Company's gross earned premium by
product during each of the three years ended December 31, 1996:
(Dollars in thousands) 1996 1995 1994
---- ---- ----
Non-Managed Care:
Small Group $ 7,258 $11,778 $20,292
Individual 18,463 21,359 22,977
Managed Care:
The Provident Solution 22,634 3,087 - 0 -
HealthQuest 6,136 - 0 - - 0 -
Excess loss insurance 2,704 2,804 2,895
------- ------- -------
Group Medical Products 57,195 39,028 46,164
Group Life 2,406 2,653 2,798
Individual Life 8,902 10,567 7,918
------- ------- -------
Total Life Products 11,308 13,220 10,716
------- ------- -------
Total $68,503 $52,248 $56,880
======= ======= =======
Group Medical Products: Since 1994, 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 networks ("PPO"), expanding
distribution channels and enhancing administrative capabilities.
- 2 -
<PAGE>
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, HealthCare COMPARE Corporation ( "HCC" ), and
designs and markets products which primarily utilize that network of hospitals
and physicians. Additionally, other regional networks are used if and when the
primary network is not a practicable option. HCC 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 system ("MGA"). The 1996 acquisition of REF Associates, Inc. (
"REF" ) a national super MGA, provided the cornerstone for the Company's
expanding distribution system. Also, the 1996 acquisition of PALHIC added 17
states within which the Company could sell its products. At December 31, 1996,
the Company had over 12,000 independent agents and brokers, organized under 43
Managing General Agents, actively selling its managed care products. During
1996, the Company entered into a marketing agreement with the largest third
party administrator in the country, HealthPlan Services ( "HPS" ), with access
to substantially more independent agents than the Company currently utilizes,
for the purpose of distributing an individual major medical product designed and
underwritten by the Company.
Through the acquisitions of Coastal Services Eastern, Inc. ( "CSE" )
and NIA in 1996 and capital expenditures made in 1996 and planned for 1997, the
Company is continuing the process of converting and expanding its administrative
infrastructure to one specifically designed to accommodate managed care
products. The agreement with HPS provides, in addition to marketing and sales
support for the Company's Optimum plan, administrative support for this product
including billing and collection of premium and claims adjudication. This
arrangement allows the Company to continue to grow its business and provide
capable customer service, while limiting capital expenditures. NIA, located in
Lakewood, Colorado, marketed and serviced private label health insurance
products and now provides the Company an administrative service center in the
western United States.
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 also required to be purchased with many of the medical products. The
Provident "Solution" relies on HCC for access to network providers and
advantageous fee schedules while "HealthQuest" relies on regional PPOs. The
"Optimum" plan was designed for use by the HPS distribution system, has benefit
structures similar to the Provident "Solution" and also utilizes the HCC
network. This product was first introduced to the HPS distribution system in
December 1996. During 1996, the Company received 31,560 group medical
applications for all products as compared to 12,355 for 1995.
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The following table illustrates applications received for the principal
products:
Applications Received
1996 1995 1994
---- ---- ----
Solution 21,292 9,260
HealthQuest 7,119
All Others 3,149 3,095 6,659
------ ------ -----
31,560 12,355 6,659
====== ====== =====
At December 31, 1996 the Company had a total of 36,447 inforce group
medical certificates compared to 22,854 at December 31, 1995. The Company has
systematically withdrawn from small group indemnity markets as healthcare reform
at the state level 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
inforce for the last three years:
(Dollars in thousands) 1996 1995 1994
---- ---- ----
Non-Managed Care:
Small Group $ 7,009 $10,998 $18,580
Individual 17,797 21,646 23,654
Managed Care:
Solution 33,169 11,124
HealthQuest(1) 12,718
------- ------- -------
$70,693 $43,768 $42,234
======= ======= =======
(1) The Company assumed inforce HealthQuest policies with the acquisition of
NIA effective May 1, 1996 consisting of approximately $6.5 million of
annualized premium.
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<PAGE>
The acquisition of PALHIC 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.
The introduction of managed care products has impacted the Company's
distribution of business by state. The states which generated the largest share
of group medical premiums during each of the last three years ended December 31,
1996 were as follows:
1996 1995 1994
---- ---- ----
Georgia 24.4% 20.3% 17.4%
Florida 21.8 12.8 11.1
Pennsylvania 13.2 22.2 22.4
Texas 7.5 6.2 4.0
Louisiana 7.3 5.6 5.5
West Virginia 3.5 6.1 6.2
South Carolina 2.6 1.9 1.9
Ohio 2.3 1.9 1.9
Virginia 2.3 2.6 2.2
Mississippi 1.9 1.3 1.6
All other 13.2 19.1 25.8
------------------------------
100.0% 100.0% 100.0%
==============================
As part of its group medical product portfolio the Company also derives
both premium and fees through the sale and underwriting of high deductible
medical excess loss insurance for self-insured employers. The insurance products
are issued by unrelated insurance companies and sold/serviced by MMC. The
Company assumes a portion of the insurance risk and earns premiums and profit
sharing fees.
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 years. The Company's "Senior Estate Plan" is a whole
life insurance policy designed for senior citizens who have not yet pre-arranged
their funeral, but wish to plan for death-related expenses. The average policy
size is $5,000 and the buyer's average age is 65.
During 1996, the Company issued 3,793 pre-need and final expense
policies representing approximately $18.9 million of face value. Combined gross
premium income for these two products approximated $8.1 million in 1996. At
December 31, 1996, the Company had 17,246 pre-need and final expense policies
inforce with a face value approximating $76.8 million.
The remainder of the Life Products insurance premiums are derived from
closed books of business.
- 5 -
<PAGE>
Strategies
- ----------
The Company plans to continue its growth in market share as a provider
of medical insurance through the utilization 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
underserved.
The Company's strategy is to design managed care products that are
responsive to the needs of this underserved market and quickly build a marketing
distribution system for the purpose of reaching critical mass in its products.
The Company's strategy relies on the strategic alliances with HCC, HPS
and the growing independent agent and broker distribution systems. In recruiting
agents the Company will emphasize its intention to create unique products,
competitive compensation arrangements, responsive service and the MGAs'
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
in the customer service and claims administration areas which, combined with
investments in technology and people, will reduce incremental costs. The Company
commenced the execution of this strategy in 1996 by acquiring CSE and insourcing
group medical claims and administration and by acquiring NIA. Additionally, the
Company committed to implement a new administrative infrastructure in 1997.
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 and training and
agent compensation plan design along with providing 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 principally by the
Company's underwriting group. In some cases, PILIC and PALHIC 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.
- 6 -
<PAGE>
Claims: Effective in mid 1996, the Company acquired CSE to insource the
majority of its group medical claims administration and utilize its policy
administration, staff and systems to better control claim costs and service
levels. The Company has increased the number of claim staff and management since
acquiring CSE in order to more effectively handle the increasing volume and
complexity of the Company's managed care business. The Company augments its core
internal claims processing with the use of selected third party claims
administrators who review and pay claims to guidelines and procedures approved
and monitored by the Company.
During 1997 the Company intends on enhancing the claims system acquired
as part of the CSE acquisition by first migrating to client server technology
that supports both traditional high volume processing and modern systems
development and work flow techniques.
Administration: This area includes customer service, premium and
commission processing and computer systems, for life and for group medical
which was acquired in mid 1996 from CSE. The Company provides toll free 800
customer service and in 1996 initiated a conservation unit which has been
effective in retaining certain business that would have otherwise lapsed.
Computer systems staff is currently migrating the Company's mid-range
computer based customer administration and claims systems to a client server
platform which the Company believes will increase claims processing capacity,
accelerate system development and help contain costs. This will serve as the
technology platform that the Company will use in converting and expanding its
administrative infrastructure.
Investments and Finance: The majority of the Company's investments
consist of securities of the U. S. government (or its agencies or
instrumentalities) and fixed income securities, principally issued by public
utilities and corporations. At December 31, 1996, 100% of the Company's bond
portfolio was of investment grade quality; 40% of the Company's bonds will
mature within a 5-year period and 88% of the Company's bonds will mature within
a 10-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) 1996 1995 1994
------- ------- -------
Total Investments, valued at market $61,942 $46,890 $39,467
Net investment income (excludes realized
gains (losses)) $ 3,280 $ 2,858 $ 2,499
Annualized yield on the market value of
investments @ 12/31 6.5% 6.3% 7.0%
Further information is included in Item 7. Management's Discussion and
Analysis of Financial Condition and Results of Operations and Note D to the
Notes to Consolidated Financial Statements.
The Company utilizes both in-house actuaries and consulting actuaries
for product development, pricing and valuation.
- 7 -
<PAGE>
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 and section 21E of the securities Exchange act of 1934.
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 (See Item 1. "Business"-"Group Medical Products";
"Strategies" (See Item 1. "Business"-"Strategies"); beliefs regarding
attractiveness of products (See Item 1. "Business"-"Marketing"); enhancements to
claims system (See Item 1. "Business"-"Operations"-"Claims"); increased
processing capacity (See Item 1. "Business"-"Administration"); investments in
computer hardware and funding of capital expenditures (See Item 1. "Business",
See Item 7. Management's Discussion and Analysis of Financial Condition and
Results from Operations" - "Results from Operations"-"1996 Results Compared to
1995 Results" and "Capital Expenditures and Commitments"); sufficient liquidity
to fund growth fulfill statutory requirements and meet all cash requirements,
funding surrenders and benefit payments and loan payments (See Item 7.
Management's Discussion and Analysis of Financial Condition and Results from
Operations" - "Liquidity and Capital Resources") and inflation (See Item 7.
Management's Discussion and Analysis of Financial Condition and Results from
Operations" - "Impact of Inflation"). 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.
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<PAGE>
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 stockholder of the Company. As of March
24, 1997, Mr. Clemens owned, either directly or beneficially, 2,727,869 shares,
or 25.7% of the Company's Common Stock, 1,100,000 shares or 97.38% of the
Company's Preferred Stock. As of March 24, 1997, Mr. Clemens controls 35.6% of
the Company's outstanding voting rights and if he were to exercise all of his
outstanding options, he would control 54.2% of the Company's voting rights.
Furthermore, Mr. Clemens' options allows him to maintain his approximate 55%
voting control under the terms of his employment agreement (see Item 11.
"Employment Agreement"). 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.
Reinsurance: The Company utilizes reinsurance in order to both spread
the risk of large life and accident and health claims through "excess of loss"
agreements and to increase underwriting capacity of accident and health business
through "quota share" reinsurance. The Company has both automatic and
facultative agreements which use both yearly renewable term and coinsurance as a
basis for reinsurance on life insurance policies. The Company's group medical
quota share reinsurance agreement automatically reinsures 47.5% of the liability
on the first $85,000 of claims per person, per calendar year. This agreement is
renewable based on mutual agreement on an annual basis. This agreement was
renewed on October 1, 1996. The Company has no assurance that this reinsurance
agreement will be renewed in the future or that alternative reinsurance at
comparable terms will be available. The Company is also subject to credit risk
with respect to its reinsurers because the ceding of risk to reinsurers does not
relieve PILIC and PALHIC of their liabilities to insureds. The insolvency or
inability of any reinsurer to meet its obligations may have a material adverse
effect on the business and results of operations of the Company.
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+ (superior), A (excellent), B+ (very good), B (Adequate),
B- (Adequate), C+ (fair), 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 1996, PILIC received an initial B- (Adequate) rating reflecting the
Company's improved capital and surplus position as a result of the Loewen
settlement, while PALHIC is not rated at this time. The Company's goal is to
strengthen the financial position of PILIC which the Company believes will
result in an improved rating over time. The Company has requested a group rating
for PALHIC, but there can be no assurance that PILIC can improve or maintain its
rating or that PALHIC will receive a group rating.
- 9 -
<PAGE>
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 expense reserve 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.
PILIC and PALHIC are domiciled in Pennsylvania and are regulated by the
Insurance Department of Pennsylvania which recognizes as net income 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:
<TABLE>
<CAPTION>
(Dollars in thousands) 1996 1995 1994
------ ------ -----
<S> <C> <C> <C>
PILIC (1)
Net income (loss) $ 9,668 $(1,570) $ 127
Total capital and surplus 13,971 6,383 7,228
Adjusted capital and surplus 14,838 6,743 7,597
Company action level Risk Based Capital 6,569 5,190 5,248
PALHIC (2)
Net income (loss) $ 1,631 $ (73) $ 202
Total capital and surplus 5,351 3,068 3,002
Adjusted capital and surplus 5,367 3,152 3,225
Company action level Risk Based Capital 19 235 423
</TABLE>
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 only included in 1996 amounts.
2) PALHIC includes amounts prior to its acquisition by the Company.
At December 31, 1996, 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, amounting to $14.8 million, exceeded the amount required by $8.3
million. PALHIC's adjusted capital of $5.4 million exceeded its RBC amount by
$5.3 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 scrutiny by the insurance department having jurisdiction over
its business and, ultimately, rehabilitation or liquidation.
- 10 -
<PAGE>
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 which could significantly change the way
health care is financed and provided. The effect on the Company of comprehensive
healthcare reforms, which if enacted, may have a materially adverse impact upon
the ability of the Company to achieve profitability and engage in the writing of
health and accident insurance.
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
which 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 assessments have not been material for 1996 through 1994 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 (retained earnings) of $2,975,000 and
$3,079,000 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. The Company intends on using retaining 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 expense are
based upon a variety of estimation methods which are continually revised,
incorporating the Company's benefit experience. Accident and health policy
benefits related to the Company's managed care "The Provident Solution" and
HealthQuest products introduced in 1995 represent approximately 37% and 4% of
1996 and 1995 amounts, respectively. Since the Company's experience with these
relatively new products has been limited and continues to emerge no assurances
can be given that policy benefits 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 "The Provident Solution" and "HealthQuest" products, 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 would adversely impact future earnings.
- 11 -
<PAGE>
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 effect 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 operations of the
Company have been largely dependent on current 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 increased
its systems staff and 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.
Number of Employees
- -------------------
The Company, including its subsidiaries, currently employs 221 people,
an increase from 65 for the prior year, primarily as a result of the CSE
acquisition which effectively insourced the Company's administration and claims
and the acquisition of NIA which increased the Company's marketing, sales and
administrative capacities. 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, which is 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 26,250
square feet of space. In 1997, the Company intends to purchase a parcel of
adjoining land and to construct an 18,000 square foot addition to its offices at
a cost of approximately $2.5 million. PILIC also owns a three-story office
building located in Abington, Pennsylvania. As of December 31, 1996, all offices
were leased to unaffiliated third parties. PILIC entered into an open-end lease
for additional office space, in Norristown, Pennsylvania, in November 1996 for
4,893 square feet.
- 12 -
<PAGE>
NIA, a wholly-owned subsidiary of PILIC, leases commercial office space
in Lakewood, Colorado. NIA's lease is for 12,419 square feet and a term of five
years which commenced on July 1, 1996.
The Company believes its existing facilities are suitable for the
Company to conduct its present business. The Company anticipates in 1997
purchasing an adjacent parcel of land and adding an approximate
18,000-square-foot addition to the Company's principal office located in
Norristown, Pennsylvania in order to provide for future business needs.
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 1996.
- 13 -
<PAGE>
PART II
Item 5. Market For Registrant's Common Equity and Related Stockholder Matters.
Price Range of Common Stock
The following table sets forth the quarterly high and low sale prices
for the Company's Common Stock.
Year Ended December 31,
--------------------------------------------------
1996 1995
--------------------------------------------------
High Low High Low
------ ------- ----- -----
First Quarter 9-3/8 5-3/4 3-3/8 2
Second Quarter 10-5/8 5-1/8 3-3/8 2-3/4
Third Quarter 15-7/8 8-1/2 5-1/2 3
Fourth Quarter 14-1/2 10-5/8 7-3/8 3-7/8
- ---------
On March 24, 1997, the closing price of the Company's Common Stock was
$9.625. On that same date, there were approximately 1,540 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
Board of Directors of the Company currently intends to retain all earnings to
finance the expansion of the Company's 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 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 (retained earnings) of $2,975,000 and
$3,079,000, 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 .0636363 and .109090, respectively, per quarter. All
Series B Preferred Stock was converted into common stock in 1996.
Recent Sales of Unregistered Securities
On June 6, 1996, the Company issued 100,000 stock purchase warrants to
Ladenburg, Thalmann & Co. Inc. The warrants were issued in reliance upon the
exemption provided by Section 4(2) of the Securities Act of 1933.
-14-
<PAGE>
The Company issued a Stock Warrant Agreement to Richard E. Field dated
as of January 1, 1996, which contained insurance premium production requirements
as a condition of exercise. On March 20, 1997, the Company determined that Mr.
Field had generated sufficient annualized premiums during the calendar year 1996
in order that the condition of exercise of 100,000 stock purchase warrants had
been met. The stock purchase warrant was issued in reliance upon the excemption
provided by Section 4(2) of the Securities Act of 1933.
-15-
<PAGE>
Item 6. Selected Financial Data.
The selected consolidated financial information set forth below has
been derived from the consolidated financial statements of the Company and
should be read in conjunction the Consolidated Financial Statements and notes
thereto included elsewhere in this report, which have been audited by Coopers
and Lybrand, LLP and "Management's Discussion and Analysis of Financial
Condition and Results of Operations".
<TABLE>
<CAPTION>
Years Ended December 31,
1996 1995(1) 1994 1993 1992
---- ------- ---- ---- ----
(in thousands, except for per share data)
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Premiums earned excluding HealthQuest $41,656 $32,709 $36,395 $40,634 $39,852
Premiums earned - HealthQuest 3,050
Realized gains (losses) on investments 2,100 211 (89) 1,575 1,969
Litigation settlement, net 22,400
Net investment and other income 4,941 4,127 3,736 3,782 3,104
-------------------------------------------------------------------------
Total revenues 74,147 37,047 40,042 45,991 44,925
Benefits and expenses 51,630 40,728 41,026 44,694 44,711
-------------------------------------------------------------------------
Income (loss) before income taxes and
cumulative effect of accounting change 22,517 (3,681) (984) 1,297 214
Income taxes 6,397 20 13 99 153
-------------------------------------------------------------------------
Net income (loss) before cumulative
effect of accounting change 16,120 (3,701) (997) 1,198 61
Cumulative effect of accounting change (294)
-------------------------------------------------------------------------
Net income (loss) 16,120 (3,701) (997) 904 61
Dividends on preferred stock 194 334 334 192
-------------------------------------------------------------------------
Net income (loss) applicable
to common stock $15,926 $(4,035) $(1,331) $712 $61
=========================================================================
Earnings (loss) per share of common stock:
Before cumulative effect of
accounting change 1.46 (0.44) (0.16) 0.10 0.01
Cumulative effect of accounting change (0.03)
-------------------------------------------------------------------------
Earnings (loss) per share of common stock: $1.46 ($0.44) ($0.16) $0.07 $0.01
Common shares and equivalents used in
computing earnings (loss) per share 10,886 9,100 8,421 9,511 9,359
Per share dividends paid on common stock $0.00 $0.02 $0.00 $0.00 $0.00
</TABLE>
(1) Restated for the acquisition of REF Associates, Inc. accounted for as a
"pooling of interests".
-16-
<PAGE>
<TABLE>
<CAPTION>
Year Ended December 31,
1996 1995 (2) 1994 1993 1992
---- -------- ---- ---- ----
(in thousands, except for per share data)
<S> <C> <C> <C> <C> <C>
Balance Sheet Data:
Investments $61,942 $46,890 $39,467 $42,413 $35,470
Total assets 93,054 67,151 60,586 62,934 58,799
Notes payable 298 830 1,166 182 365
Stockholders' equity 22,053 3,424 4,530 8,623 4,093
Stockholders' equity
per common share (1) $2.08 $0.34 $0.48 $0.92 $0.49
</TABLE>
(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 1996.
(2) Restated for the acquisition of REF Associates, Inc. accounted for as a
"Pooling of Interest".
-17-
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
Results of Operations
1996 Results compared to 1995 Results
Net income: The Company's 1996 Net income applicable to common stock
was $15.9 million or $1.46 per share compared to a loss of $4 million or $.44
per share for 1995. The Company's 1996 Net income was favorably impacted by a
"Litigation Settlement" representing $14.6 million of net income plus related
realized gains on the sale of stock received as a result of Litigation
Settlement as described in Note J - Litigation Settlement in the Notes to
Consolidated Financial Statements.
1996's 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 million.
Accident and health premium: Accident and health gross premium for 1996
was $57.2 million compared to $39 million for 1995 and accident and health ceded
premium in 1996 was $25.7 million compared to $15.9 in 1995, both of which
increased as a result of increased new business from "The Provident Solution"
and HealthQuest one life managed care health insurance products.
The Company has expanded its group medical business through recent
alliances and acquisitions. The Company has agreements with HealthCare COMPARE
for managed care cost containment and HealthPlan Services Corporation for
certain policy administration services. The Company acquired all of the
outstanding shares of REF in order to obtain full control and the rights to the
Company's "Provident Solution" plans and eliminates future commission expense
between the Company and REF.
1996 results have not been 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 can write business in 42
states and the District of Columbia. PALHIC is in the process of obtaining
regulatory approval to sell life and health plans in various states to be
marketed by the Company's MGA, NIA and other distribution channels.
With the NIA acquisition the Company acquired a 3,500 customer inforce
book of business representing approximately $6.5 million of annualized premium
at the date of acquisition. This book consists primarily of the "HealthQuest"
product which is a managed care one-life PPO product similar to the Company's
"Provident Solution" Plan. The impact of the NIA Acquisition and the HealthQuest
book of business on 1996 results accounted for the following amounts; 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 book of
business acquired on May 1, 1996 together with post acquisition HealthQuest
sales and lapsation and NIA's operations. The impact on Goodwill is found in
Note B Significant Accounting Policies, Goodwill and a description of the
acquisition is found in Note C Acquisitions and Sales of Business.
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
-18-
<PAGE>
$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 to 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 order to further reduce 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 policy-holders have switched to lower
premium insurance plans, the Company does not believe the plans are less
profitable.
Life and annuity premium of $11.3 million for 1996 declined from 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 9.7% and 9.1%,
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 form 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 modestly
compared to 1995 primarily due to an increase in bond investments which occurred
in late 1996.
-19-
<PAGE>
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.
Accident and Health Policy Benefit Ratio
1996 1995
---- ----
Accident and health policy claims, net of
reinsurance $18,963 $14,458
Accident and health premiums, net of reinsurance
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%
As described in Note B - Significant Accounting Policies, Policy Claims and the
related policy benefit expense are based on a variety of estimation methods
which are continually revised incorporating the Company's benefit experience.
The Provident Solution and HealthQuest products, introduced in 1995 make up 37%
and 4% of accident and health policy benefits in 1996 and 1995, respectively.
Although the Company believes the Company's policy claim liabilities are
adequate, the Company's experience with these relatively new products is limited
and continues to emerge.
Other operating expenses of $13.4 million in 1996 increased from $12.2
million in 1995, due to increased policy administration expenses caused by
increased policy administration 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 supports the Company's recently introduced
managed care products and alliances with managed care networks.
Deferred policy acquisition costs of $2.7 million for 1996 increased $2
million from 1995 due to $2.1 million of deferred managed care policy
acquisition costs related to "The Provident Solution" and HealthQuest products.
The Company began deferring costs for its managed care products in the third
quarter of 1996 coinciding with management's estimation that costs are
recoverable against future profits on these products. Amortization of deferred
acquisition costs of $0.6 million increased $0.5 million from $0.1 million in
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.
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 DAC, which would adversely impact future earnings.
-20-
<PAGE>
1995 Results compared to 1994 Results
Net loss: The Company's 1995 Net loss applicable to common stock was
$4.0 million or ($0.44) per share compared to a loss of $1.3 million or ($.16)
per share for 1994. The Company's 1995 Net loss was unfavorably impacted by a
non recurring expense charge (write-off) of $2.2 million of intangible assets
and certain property and equipment, and a decreased amount of accident and
health premium, without a corresponding reduction of other operating expenses.
1995 has been restated for the acquisition of REF accounted for as a pooling of
interests.
Accident and health gross premium: Accident and health gross premium
for 1995 was $39 million, down from $46.2 million in 1994 and Accident and
health ceded premium in 1995 was $15.9 million, down from $20 million in 1994
both due to increased lapsation in 1995 without sufficient health sales to
offset lapsation. The Company's new managed care product "The Provident
Solution" was introduced in mid 1995 and for that reason did not have sufficient
earned premium volume to offset lapsation of the Company's traditional group
accident and heath plans. The accident and health insurance lapse ratios for
small group and managed care business in 1995 and 1994 were 41% and 35%,
respectively. The overall lapse ratio increased due to an increased proportion
of small group and managed care business which by their nature have higher
lapsation. The small group medical business for 1995 and 1994 accounted for
approximately 61.5% and 49.8%, respectively, of the group accident and health
business. The lapse ratios reflect the results of continued premium rate
increases as well as the increasing trend away from traditional healthcare
insurance to managed care plans which have lower premium amounts. While some
policyholders have switched to less expensive insurance plans, the Company does
not believe such plans are less profitable.
At December 31, 1995 and 1994, annualized accident and health premium
inforce on small group and managed care business amounted to $41.7 million and
$39.6 million, respectively, consisting of approximately 23,000 and 16,000
certificate holders, respectively. The net increase in annualized premium in
1995 resulted from new business amounting to approximately $19.9 million
primarily The Provident Solution plus premium rate increases of approximately
$13 million net of lapses amounting to approximately $30.8 million. In 1995,
"The Provident Solution" was introduced in mid 1995 and accounted for $11.1
million of annualized premium or 25% of total annualized accident and health
premium at December 31, 1995.
Life and annuity premium of $13.2 million for 1995 increased compared to
$10.7 million for 1994 due to increased pre-need sales. Life and annuity
reinsurance ceded of $3.7 million was $3.2 million higher compared to $0.4
million for 1994 due to the Company's 1995 reinsurance of certain multi-pay
pre-need life insurance policies. The individual life insurance premium lapse
ratios on an annualized basis for 1995 and 1994 were 9.1% and 7.8%,
respectively. The higher 1995 lapse ratio results primarily from final expense
policies.
-21-
<PAGE>
Accident and health policy benefits ratio improved in 1995 compared to
1994 as a result of improved experience in the Company's high deductible medical
excess loss insurance for self insured employers.
Accident and Health Policy Benefit Ratio
1995 1994
---- ----
Accident and health policy claims, net of reinsurance $14,458 $16,557
Accident and health premiums, net of reinsurance
Gross before reinsurance ceded $39,028 $46,164
Less reinsurance ceded (15,882) (20,043)
-----------------------
Premiums, net of reinsurance $23,146 $26,121
=======================
Accident and health policy benefit ratio 62.5% 63.5%
Commissions, net of ceding allowance of $4.5 million in 1995 increased
compared to $4.2 million in 1994 primarily due a reduction in the amount of
accident and health reinsurance ceding allowances of $1 million which resulted
from a decreased amount of accident and health premium, partially offset by
lower paid accident and health commissions paid to agents. Ceding allowances are
a reduction to commission expense.
Other operating expenses of $12.2 million in 1995 increased $2.5
million compared to $9.7 million in 1994 primarily due to a one time expense
charge (write-off) in 1995 of $2.2 million. In 1995 the Company adopted
Statement of Financial Accounting Standards (SFAS) No. 121 "Accounting for the
Impairment of Long-Lived Assets and for Long- Lived Assets to be Disposed of".
This standard requires that long-lived assets and certain identifiable
intangibles held and used by an entity be reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount of an asset
may not be recoverable. At the time of adoption, management determined that
certain intangible assets and equipment should be written off. Approximately
$2.2 million was charged against operations in 1995. The assets related to
systems development and hardware costs are being replaced with systems being
acquired through acquisitions and will no longer be used. In addition, the
carrying value of goodwill and value of insurance in force purchased was
reevaluated considering the Company's historical results.
Excluding the write-off in 1995, other operating expenses were 19.1% of
total gross earned premium in 1995, up from 17% in 1994 due to a decreased
amount of accident and health premium, without a corresponding reduction of
other operating expenses.
Deferred policy acquisition costs of $0.8 million for 1995 increased
$0.4 million from 1994 due to increased sales of final expense life policies.
No accident and health policy acquisition costs were deferred in 1995 or 1994.
-22-
<PAGE>
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, 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.
Cash and investments carried at market value at December 31, 1996
amounted to $68.2 million which consisted of $55 million of bonds issued by the
U.S. Government, government agencies, public utilities and other corporations,
$4.9 million of equity securities, $2.1 million invested in policy loans, real
estate and other invested assets and $6.2 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, 1996, 1995 and 1994 was 6.5%, 6.3% and 7%, respectively. The
Company's investment policy is to buy medium term U.S. government direct and
agency bonds which may require periodic sales of securities prior to maturity
when cash flow from operations is not sufficient to meet current obligations.
All bonds are considered to be "available for sale". The Company and its
subsidiaries do not invest in high yield debt instruments, defined as securities
below investment grade with interest rates or yields significantly above market
rates.
The Company has a line of credit with a bank in the amount of $250,000
with interest at 1% above the prime rate. The line of credit is collateralized
by an assignment of agents contracts, agents right to certain future life
insurance commissions due to be paid by PILIC and all of the assets of the
Company and Agency except the stock of PILIC. Outstanding borrowings at December
31, 1996, 1995 and 1994, amounted to $0, $230,000 and $166,000.
The Loewen settlement provided a significant source of cash and
invested assets in 1996. The settlement contributed approximately $22.4 million
of pre-tax income made up of $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 sale of equity investments which includes a
realized pre-tax gain of $2 million. The Company sold its remaining Loewen
Equity during the first quarter of 1997 resulting in $4.1 million of cash from
sale of investments which includes a realized pre-tax gain of $1 million.
Net cash from operating activities of $1.1 million in 1996 excludes
stock received from Loewen but includes cash received from Loewen and the
Company's federal income tax payments which largely relate to the settlement and
subsequent realized gain on the sale of Loewen stock.
Change in future policy benefits and claims and change in premium due
and uncollected, unearned premium and premium received in advance of $8.5
million and $1 million, respectively increased in 1996 compared to 1995 due to
increased accident and health new business from "The Provident Solution" and
HealthQuest one life managed care health insurance products. The Company
anticipates the majority of its unpaid accident and health claims incurred
during 1996 will be paid during 1997.
Change in amounts due to/from reinsurers in 1996 of $2.1 million
declined from 1995 due to the recapture of reinsurance ceded on certain
multi-pay pre-need life insurance policies which contributed to net cash from
operating activities in 1995.
-23-
<PAGE>
Change in accrued commissions and expenses in 1996 of $1.9 million
increased compared to 1995 due to increased accident and health premium volume
along with the timing of December 1996's commission payments. These accruals are
anticipated to be paid in 1997 though net cash from operations.
(Increase) decrease in loans receivable in 1995 and 1994 represents a
loan of $1 million originated in 1994 to six agents repayable over a period of
30 months, together with interest at the rate of prime plus one percent. The
loans, collateralized by their commissions to be earned in the future and
approximately 255,000 shares of the Company's common stock purchased with the
loan proceeds in market transactions, were repaid in 1994 and 1995. Concurrent
with the origination of the agent loan, the Company entered into a term loan
agreement with a bank and borrowed $1,000,000 included in Proceeds from note
payable - bank in 1994. Under the terms of the loan agreement, the loan is
repayable in 30 monthly installments of $33,333 from January 1995 and bears
interest at 1% above prime rate. The Company anticipates timely repayment of the
loan from cash from operations.
Acquisition of business, net of cash received represents the
consideration paid for PALHIC, NIA and CSE acquisitions as described in Note C -
Acquisitions and Sale of Subsidiaries and Businesses in Notes to Consolidated
Financial Statements. The Company's acquisition of PALHIC included a high
quality bond portfolio whose market and book value was approximately $3.6
million as of the date of acquisition and $5.4 million at December 31, 1996. In
connection with these acquisitions the Company issued $1.9 million of its common
stock.
Withdrawals from contractual deposit funds of $2.3 million, $1.8 million
and $1.5 million for 1996, 1995 and 1994, respectively represented withdrawals
from PILIC's deposit administration group annuities which were originally sold
in the late 1970s and may be surrendered by contractholders. Practically all
these contracts are subject to a 5% surrender charge, a six month waiting
period, a maximum withdrawal of $50,000 per month and reduction to 3% in the
amount of interest which is credited during the termination phase. Surrender
benefits on all other insurance products over the past several years have not
been significant and are not expected to be in the future. The pre-need and
final expense life products are relatively small and do not accumulate
significant surrender benefits.
PAMCO's assets consist primarily of the stock of its direct
subsidiaries. PAMCO's principal sources of funds in 1996 were PAMCO's portion of
the Loewen settlement and the issuance of stock. In 1995 and 1994 principal
sources were bank borrowings and borrowings from its direct and indirect
subsidiaries. Cash requirements consist of payment of interest and principal on
its outstanding debt, preferred dividends and the expenses of its corporate
activities. PAMCO sold its portion of Loewen stock in the first quarter of 1997
which the Company believes will provide sufficient funds to meet its current
obligations.
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 and the Company
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.
-24-
<PAGE>
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 $13.9 million at December 31, 1996 which
includes the benefits of certain permitted practices as described in Note P -
Reconciliation From Statutory Basis (Unaudited) to Generally Accepted Accounting
Principles Basis in the Notes to Consolidated Financial Statements. 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, exceeds the Company Action Level amount required by approximately $8.3
million. PALHIC's results of this computation indicate PALHIC's adjusted
capital, amounting to approximately $5.4 million, exceeds 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 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 on such policies 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.
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
Capital commitments in 1997 are anticipated to be approximately $1
million for computer hardware and software equipment which is expected to be
leased over a period of four years with a one dollar buyout at the end of the
lease. The Company anticipates purchasing in 1997 a parcel of land adjacent to
the Company's existing office and spending approximately $2.5 million for an
approximate 18,000 square foot addition to the Company's principal office
located in Norristown, Pennsylvania.
-25-
<PAGE>
Item 8. Financial Statements and Supplementary Data.
Report of Independent Accountants F-1
Consolidated Balance Sheets - December 31, 1996 and 1995 F-2
Consolidated Statements of Operations
Years ended December 31, 1996, 1995 and 1994 F-3
Consolidated Statements of Changes in Stockholders' Equity
Years ended December 31, 1996, 1995 and 1994 F-4
Consolidated Statements of Cash Flows - Years
ended December 31, 1996, 1995 and 1994 F-5
Notes to Consolidated Financial Statements F-6 to F-31
-26-
<PAGE>
Item 9. Changes in and Disagreements with Accountants on Accounting and
Disclosure.
None
-27-
<PAGE>
PART III
Item 10. Directors and Executive Officers of the Registrant
<TABLE>
<CAPTION>
Director or Year Term
Principal Occupation Executive Will
Name Age for Past Five Years Officer Since Expire
---- --- --------------------- ------------- ----------
<S> <C> <C> <C> <C>
Michael F. Beausang, Jr. 60 Director; Secretary and General Counsel 1989 1997
of the 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 42 President and Chief Operating Officer of 1996 N/A
the Company, PILIC and PAMCO since
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 59 Director; Chairman of the Board and 1989 1997
Chief 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) 41 Director; Founder/Owner of Valerie's 1989 1997
Limited Showcase of Fashion 1984-1990;
Executive Director of Miss America's
Maine Scholarship Pageant 1985-1987.
Harold M. Davis 61 Director; Chairman of the Board of 1989 1997
Realen Homes, Inc. since 1968.
William C. Fay III 42 Senior Vice President Sales of the 1994 N/A
Company and Subsidiaries since 1994;
Assistant Vice President of Consolidated
Group from 1982-1993.
John T. Gillin 57 Director; Self-employed since 1992; 1984 1997
Managing Director, Hopper Soliday
Corporation 1987-1992.
Henry G. Hager 62 Director; Partner in the law firm of 1996 1997
Stradley, Ronon, Stevens and Young since
1994; President and Chief Executive
Officer of The Insurance Federation of
Pennsylvania since 1985.
</TABLE>
-28-
<PAGE>
<TABLE>
<CAPTION>
Director or Year Term
Principal Occupation Executive Will
Name Age for Past Five Years Officer Since Expire
---- --- --------------------- ------------- ----------
<S> <C> <C> <C> <C>
Frederick S. Hammer 60 Director; Partner of Inter-Atlantic 1996 1997
Securities Corp. since 1994; Chairman of
the Board of Directors, National Media
Corp. since March 1996 and member of the
Board since 1994; President of Mutual of
America Capital Management Corp.
1992-1994, Director; Ikon Office
Solution since 1987.
George W. Karr, Jr. 59 Director; Chief Executive Officer of 1996 1997
Karr Barth Associates, Inc. since 1984.
P. Glenn Moyer 61 Director; Director, Maine National 1989 1997
1985-1995; Private Practice Attorney
since 1992; Partner in the law firm of
Butera, Beausang, Moyer & Cohen from
1968 through 1992.
Anthony R. Verdi 31 Treasurer and Chief Financial Officer of 1990 N/A
the Company, PILIC and PALHIC since
January 1990; Vice President and
Controller of Inter-County
Hospitalization Plan Inc. 1986-1990;
Assistant Controller Academy Insurance
Group Inc. 1971-1986.
</TABLE>
(1) Valerie C. Clemens is the wife of Alvin H. Clemens.
During 1996, the Company's Board of Directors held three (3) 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, and
Anthony R. Verdi are the executive officers of the Company.
David R. Carr, Jr. and Michael V. Warhurst resigned as directors of the
Company effective May 20 and June 1, 1996, respectively; Steven H. Rosner was
not nominated for reelection as a Director at the 1996 Annual Meeting of
Shareholders. Also, John A. Muller, III, Chief Operating Officer of the Company,
left the employ of the Company on March 7, 1997 to pursue other interests. Mr.
Bowles, President of the Company, assumed the duties of the Chief Operating
Officer of the Company and the Insurance Subsidiaries upon the resignation of
Mr. Muller.
-29-
<PAGE>
Committees of the Board of Directors
The Company's Board of Directors has standing an
Executive/Compensation/Nominating Committee and an Audit Committee. In addition,
during 1996 the Board created a new Option Administration 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 three meetings
during 1996.
The Audit Committee, on which Messrs. Gillin, Moyer, and Mrs. Clemens (Mr.
Beausang is an alternate) currently serve, 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 no meetings in
1996.
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 1996.
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 1996 the Company discontinued the payment of a quarterly retainer of
$1,500 to each non-employee Director, and in lieu thereof, granted each Director
an option to purchase 25,000 shares of the Company's Common Stock, at an
exercise price equal to 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 year from the date of grant, and the remaining one-third two years
from the date of grant; except that upon the death of a Director or the failure
of the Company to nominate a Director for re-election, all remaining options
will become immediately exercisable, and any unvested portion of the option
shall terminate if the Director resigns prior to two (2) years from the date of
grant of the option.
-30-
<PAGE>
Item 11. Executive Compensation
Employment 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. No bonus was paid to
Mr. Clemens in 1996. 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 effective March 10, 1997, the Company
granted Mr. Clemens an additional option to successively purchase shares of the
Company's Series A Cumulative Convertible Preferred Stock ("Series A Preferred")
upon any 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 (i) in the aggregate for that number of Series A Preferred Stock Options
which, when exercised or voted as exercised, shall permit Mr. Clemens to acquire
the right to vote 55% of the shares of the Company's Common Voting Stock from
time-to-time outstanding, after giving effect to all other shares of the
Company's Common Stock owned, either directly or beneficially, by Mr. Clemens at
such time (ii) the number of Series A Preferred Stock which are, as of the date
of any such exercise, authorize and unissued; and (iii) except upon the
occurrence of a "change of control" (defined therein), Mr. Clemens may not
exercise an option to purchase more than 550,000 shares of Series A Preferred
Stock in any six (6) month period. Upon the occurrence of a "change of control"
of the Company, Mr. Clemens shall have the right to immediately exercise all
options to purchase shares of Series A Preferred Stock, and the Company will
make a loan to him in an amount equal to the aggregate exercise price of all
options to purchase Series A Preferred Options which Mr. Clemens may then be
entitled to 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. For this purpose, a "change of control"
shall mean the acquisition by any individual, entity or group (within the
meaning of the Securities Exchange Act of 1934, as amended), of beneficial
ownership of 25% 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 three-year term
commencing as of October 1, 1996, which provides for a base salary of $195,000,
with an annual cost of living increase, and such additional incentive or bonus
compensation and certain insurance and other fringe benefits as shall be deemed
appropriate from time-to-time by the Executive Committee or the Board of
Directors of the Company. The Employment Contract further provides certain
restrictions on Mr. Bowles' competition and disclosure of confidential
information. In addition, Mr. Bowles was granted an option to purchase 50,000
shares of the Company's Common Voting Stock at an exercise price equal to the
fair market value of a share of the Company's Common Voting Stock on the date of
grant, which option is exercisable in its entirety as of the date of grant.
-31-
<PAGE>
The following three tables show information relating to the Chairman of the
Board, President and Chief Executive Officer and the most highly compensated
executive officers during the calendar years specified therein.
-32-
<PAGE>
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
Long-Term Compensation
- -----------------------------------------------------------------------------------------------------------------------------------
Annual Compensation Awards Payouts
- -----------------------------------------------------------------------------------------------------------------------------------
(a) (b) (c) (d) (e) (f) (g) (h) (i)
Long Term
Restricted Securities Incentive
Other Annual Stock Underlying Plan All Other
Name and Principal Salary Bonus Compensation Award(s) Options Payouts Compensation(2)
Position(1) Year ($) ($) ($) ($) (#) ($) ($)
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Alvin H. Clemens, 1996 386,662 50,000 15,748
Chairman of the Board 1995 381,814 15,225
and CEO 1994 356,494 26,036
James O. Bowles(3) 1996 130,000 125,000
President & Chief 1995
Operating Officer 1994
William C. Fay III 1996 111,958 173,570 160,000 3,080
Sr. Vice President 1995 120,802 89,108 3,042
Sales 1994 120,191 1,609
Anthony R. Verdi, 1996 128,072 75,000 10,406
Treasurer and CFO 1995 126,000 9,415
1994 127,549 10,015
John A. Muller, III(4) 1996 131,183 50,000 1,625
COO 1995 125,385 1,568
1994 113,508 10,000 1,407
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(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 1996 and 1995, respectively , (a) Company contributions to
savings plan (Mr. Clemens $3,750 and $4,620; Mr. Fay $3,080 and 3,042 Mr.
Verdi $3,150 and $2,558; and Mr. Muller $1,625 and $1,568), and (b)
automobile expense allowances (Mr. Clemens $11,998 and $10,605; and Mr.
Verdi $7,256 and $6,857).
(3) Mr. Bowles joined the Company on May 1, 1996 as a result of the NIA
acquisition.
(4) Mr. Muller began his employment with the Company on November 23, 1992 and
voluntarily terminated on March 7, 1997.
-33-
<PAGE>
Provident American Corporation
Aggregate Option Exercises in 1996 and Year End Values
<TABLE>
<CAPTION>
Number of
Shares Underlying Value of
Acquired Unexercised Unexercised In-the-
On exercise Value Options Money Options
Name (#) Realized ($) at 12/31/96 at 12/31/96 ($)
- ------------------------------------------------------------------------------------------------------------------------
(a) (b) (c) (d) (e)
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Alvin H. Clemens
Chairman of the Board, CEO
exercisable 0 $0 1,253,376 $16,407,820
unexercisable 50,000 $150,000
James O. Bowles
President & COO
exercisable 0 $0 60,000 $230,000
unexercisable 65,000 $270,000
William C. Fay III
Sr. Vice President, Sales
exercisable 42,000 $407,875
unexercisable 0 $0 118,000 $744,000
Anthony R. Verdi
Treasurer and CFO
exercisable 11,000 $135,135 27,000 $279,250
unexercisable 97,000 $270,000
John A. Muller, III (1)
COO
exercisable 0 $0 48,500 $148,628
</TABLE>
- -------------
(1) ceased employment on March 7, 1997.
-34-
<PAGE>
Provident American Corporation
Options Grants in 1996
<TABLE>
<CAPTION>
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 $/Shr date 5% 10% f&g (2)
- -----------------------------------------------------------------------------------------------------------------------------------
(a) (b) (c) (d) (e) (f) (g) (h)
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Alvin H. Clemens 50,000 6% $11.00 8/12/02 $88,210 $188,717 $165,000 (a)
Chairman of the Board, CEO
James O. Bowles 50,000 6% $10.00 8/12/02 $80,191 $171,561 $165,000 (a)
President & COO
James O. Bowles 25,000 3% $ 6.00 5/17/01 $ 4,500 $ 9,000 $ 45,000 (b)
President & COO
James O. Bowles 50,000 6% $11.00 11/7/96 $ 0 $ 0 $165,000 (a)
President & COO
William C. Fay III 85,000 10% $ 6.00 5/17/01 $81,795 $174,992 $303,450 (c)
Sr. Vice President, Sales
William C. Fay III 50,000 6% $10.00 8/12/02 $80,191 $171,561 $297,000 (c)
Sr. Vice President, Sales
Anthony R. Verdi 50,000 6% $10.00 8/12/02 $80,191 $171,561 $297,000 (c)
Treasurer and CFO
Anthony R. Verdi 25,000 3% $ 6.00 5/17/01 $24,057 $ 51,468 $ 89,250 (c)
Treasurer and CFO
John A. Muller, III(1) 50,000 6% $10.00 8/12/02 $80,191 $171,561 $297,000 (c)
COO
</TABLE>
- -------------
(1) Mr. Muller forfeited all options granted in 1996 due to his termination of
employment in March 7, 1997.
(2) Based on the Black-Scholes option pricing model asssuming; 0% dividend
yield, no adjustments for forfeitures and the following expected stock
volatility, length of time for exercise and risk free interest rate; (a)
71.8%, one year and 5.55%, (b) 75%, one year and 5.5% (c) 73.9%, four years
and 6.32%, respectively.
-35-
<PAGE>
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"), subject to the
approval by the Company's shareholders at the next Annual Meeting of
Shareholders. The 1996 Employee Plan provides for the issuance of options for up
to 950,000 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 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.
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. Effective March 10, 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
existing options and each subsequently granted options to purchase shares of
Series A Preferred Stock from time-to-time, limited in the aggregate to (i) that
the number of 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).
The Company's Stock Option Plans are administered by the Board of Directors
and 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.
During 1996, the Company granted incentive stock options to purchase an
aggregate of 850,000 shares of the Company's Common Voting Stock at prices
ranging from $6 to $11 per share under the 1996 Employee Plan and 250,000 shares
of the Company's Common Voting Stock at prices ranging from $8.75 to $12.25 per
share under the Directors' Plan. During 1996, a total of 27,550 options were
exercised under the 1996 Employee Plan and 33,000 options were exercised under
the Directors' Plan.
-36-
<PAGE>
Item 12. Security Ownership of Certain Beneficial Owners and Management.
The following table sets forth, as of March 24, 1997, 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.
<TABLE>
<CAPTION>
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)
- ---------------- ------------- -------- -------------- ---------
<S> <C> <C> <C> <C>
Alvin H. Clemens 2,727,869(3) 25.7% 1,100,000(4) 97.3%
907 Exeter Crest
Villanova, PA 19085
Richard E. Field 707,500(5) 7.0%
134 Medinah Drive
Blue Bell, PA 19422-3212
Michael F. Beausang, Jr. 21,108(6)(7) .2% 16,500 2.8%
James O. Bowles 75,000(8) .7.%
Valerie C. Clemens 228,333(7) 2.3%
Harold M. Davis 118,333(7) 1.2%
William C. Fay III 59,000(9) .6%
John T. Gillin 23,333(7) .2%
Henry G. Hager 18,333(7) .2%
Frederick S. Hammer 8,333(7) .1%
George W. Karr, Jr. 18,333(7) .2%
P. Glenn Moyer 12,333(7) .1%
Anthony R. Verdi 59,761(10) .6% 5,500 1.0%
ALL DIRECTORS AND OFFICERS
AS A GROUP (13 PERSONS FOR
COMMON STOCK AND 3 PERSONS
FOR PREFERRED STOCK) 2,870,069(11) 26.4% 1,122,000(4) 99.3%
</TABLE>
- -----------
-37-
<PAGE>
(1) Information furnished by directors and officers.
(2) Calculated as a percentage of outstanding shares plus each Owners (or all
Directors and Officers as a group) options to purchase Common Shares.
(3) Includes options granted to Mr. Clemens to purchase an additional 549,656
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, excludes 550,000 shares of Series A Cumulative Convertible Preferred
Stock purchased by Mr. Clemens on March 31, 1993 and also excludes 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. The Series A Cumulative Convertible Preferred Stock is convertible into
either Class A Common Stock when issuable or into Common Stock on a
share-for-share basis. Includes an option to purchase 8,333 shares of the
Company's Common Stock at $8.75 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 703,720 options to purchase additional shares of
the Company's Common Stock owned by a partnership in which Mr. Clemens is a
partner.
(4) Includes options granted to Mr. Clemens to purchase 550,000 shares of Series
A Cumulative Convertible Preferred Stock at $3.64 per share.
(5) Includes stock purchase warrant to purchase 100,000 shares of the Company's
Common Stock.
(6) Excludes 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.
(7) Includes an option to purchase 8,333 shares of the Company's Common Stock.
(8) Mr. Bowles includes options to purchase 75,000 shares of the Company's
Common Stock.
(9) Includes options to purchase 59,000 shares of the Company's Common Stock.
(10) Excludes 5,500 shares of Series A Cumulative Convertible Preferred Stock.
Includes an option to purchase 32,000 shares of the Company's Common Stock.
(11) Includes stock and options of all officers and directors to purchase an
aggregate of 166,000 shares and 66,664 shares, respectively, and options granted
to Mr. Clemens to (1) purchase an additional 549,676 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 8,333 shares of the Company's Common Stock at $8.75 per share;
excludes 572,000 shares of Series A Cumulative Convertible Preferred Stock and
also excludes 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.
-38-
<PAGE>
Item 13. Certain Relationships and Related Transactions.
Notes Receivable - Officers and Directors
During the second quarter of 1996 the Company made a loan of $300,000 to
Alvin H. Clemens, Chairman of the Board of Directors and Chief Executive Officer
of the Company. Mr. Clemens also owns, either directly or beneficially,
approximately 25.7% of the Common Stock of the Company. The loan was made to Mr.
Clemens in recognition of the origination of two acquisitions completed by the
Company during 1996 and the outstanding performance of his duties in connection
with the settlement of the Loewen litigation. The loan is represented by a
Promissory Note, and is repayable together with interest at a rate of 5.33% per
annum, on or before April 8, 1999. The loan is collateralized by 100,000 shares
of the Company's Common Stock owned by Mr. Clemens. As of March 24, 1997, the
principal balance due under the Note was $300,000 plus accrued interest.
During the second quarter of 1996 the Company made a loan of $140,000 to John
T. Gillin, a Director and shareholder of the Company. The loan was made to Mr.
Gillin in recognition of the assistance provided to the Company in managing the
Company's investments. The loan is represented by a Promissory Note, and is
repayable together with interest at the rate of 8.5% per annum on or before
April 30, 1997. The loan is collateralized by 15,000 shares of the Company's
Common Stock owned by Mr. Gillin. As of March 24, 1997, the principal balance
due under the Note was $140,000 plus accrued interest.
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 $258,600 in 1996.
Michael V. Warhurst, a former Director of the Company, received commissions
and expense allowances from the Company paid or payable to Passages
International Marketing Group, a company controlled by Mr. Warhurst of
approximately $314,000 during 1996.
Richard E. Field, former Chief Executive Officer of Richard E. Field &
Associates, Inc., d/b/a REF & Associates, Inc. ("REF") provides the Company with
exclusive marketing, sales, and product design services as part of a 36 month
Marketing and Consulting Agreement effected as of January 1, 1996 ("Consulting
Agreement"). The Company paid Mr. Field $300,000 in 1996 in connection with the
Consulting Agreement. Upon the execution of the Consulting Agreement, the
Company issued a warrant to Mr. Field 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 million, $45 million, and
$50 million, respectively, for each of these calendar years. PILIC has realized
the annualized premium threshold for the year ending December 31, 1996, and
accordingly, Mr. Field is entitled to exercise 100,000 warrants for 1996.
In an unrelated transaction, on June 18, 1996, the Company acquired REF. In
this transaction Mr. Field was issued 457,500 shares of the Company's Common
Stock. Mr. Field owned either directly or beneficially approximately 7% of the
Company's issued and outstanding stock as of March 24, 1997.
-39-
<PAGE>
Other Relationships
Frederick S. Hammer, a Director of the Company since 1996, is also the
Chairman of the Board of Directors of National Media Corporation ("National
Media"). National Media has produced, purchased air time, and aired a pilot TV
infomercial program in order to test market the Company's managed care health
products, and additional infomercial programs will be tested in 1997. The
Company's investment in these activities as of December 31, 1996 is less than
$60,000. In an unrelated transaction, during 1996 and 1997 the Company purchased
175,000 shares of National Media Common Stock at an aggregate cost of
approximately $1.6 million on the open market for investment purposes.
-40-
<PAGE>
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 Independent Accountants F-1
Consolidated Financial Statements:
Consolidated Balance Sheets -
December 31, 1996 and 1995 F-2
Consolidated Statements of Operations -
Years ended December 31, 1996, 1995
and 1994 F-3
Consolidated Statements of Changes in Stockholders'
Equity Years ended December 31, 1996, 1995 and
1994 F-4
Consolidated Statements of Cash Flow Years ended
December 31, 1996, 1995 and 1994 F-5
Notes to Consolidated Financial
Statements F-6 to F-31
(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:
No reports on Form 8-K were filed during the quarter ended
December 31, 1996.
-41-
<PAGE>
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 listed in
Item 14(a) of this Form 10-K. 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 1995, and the results
of their operations and their cash flows for each of the three 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.
As discussed in Note B to the consolidated financial statements, the Company
adopted Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of"
during 1995.
Coopers & Lybrand L.L.P.
2400 Eleven Penn Center
Philadelphia, Pennsylvania
March 11, 1997
F-1
<PAGE>
<TABLE>
<CAPTION>
Provident American Corporation and Subsidiaries
Consolidated Balance Sheets
(Dollars in thousands)
December 31,
1996 1995
---- ----
<S> <C> <C>
Assets
- ------
Investments:
Bonds, amortized cost $55,258, and $44,062 $54,985 $44,996
Equity securities, cost $3,901 4,930
Real estate, at cost, less accumulated depreciation of $158 and $134 942 966
Policy loans 526 533
Other invested assets 559 395
------- -------
Total Investments 61,942 46,890
Cash and cash equivalents 6,218 2,162
Premium due and uncollected 1,318 1,201
Amounts due from reinsurers 9,240 10,191
Loans receivable from officer and directors 461
Accrued investment income 836 650
Property and equipment, at cost, less accumulated depreciation of $1,261 and $831 4,711 3,479
Deferred tax asset 154
Unamortized deferred policy acquisition costs 3,140 986
Goodwill 3,166
Other assets 1,868 1,592
------- -------
Total Assets $93,054 $67,151
======= =======
Liabilities and Stockholders' Equity
- ------------------------------------
Future policy benefits:
Life 38,459 35,290
Annuity and other 6,354 8,265
Policy claims 15,438 10,105
Premium received in advance and unearned 2,348 1,260
Amounts due to reinsurers 705 3,768
Accrued commissions and expenses 4,179 1,893
Notes payable 298 830
Current income taxes 463 36
Deferred income taxes 327
Other liabilities 2,757 1,953
------- -------
Total Liabilities 71,001 63,727
Commitments and Contingencies (Note K)
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, issued 0 and 426,250 426
Common stock, par value $.10: authorized 25,000,000, issued 10,078,710
and 9,260,481 1,008 926
Common stock, Class A, par value $10: authorized 2,500,000, none issued
Additional paid-in capital 12,945 10,166
Net unrealized appreciation (depreciation) of bonds (177) 467
Net unrealized appreciation of equity securities 668
Retained earnings (deficit) 7,105 (8,821)
------- -------
22,129 3,744
Less common stock held in treasury, at cost, 36,300 and 143,550 shares (76) (320)
------- -------
Total Stockholders' Equity 22,053 3,424
------- -------
Total Liabilities and Stockholders' Equity $93,054 $67,151
======= =======
</TABLE>
See notes to consolidated financial statements.
F-2
<PAGE>
Provident American Corporation and Subsidiaries
Consolidated Statements of Operations
<TABLE>
<CAPTION>
(Dollars in thousands, except per share data) Years Ended December 31,
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Revenue:
Premium: Accident and health, gross $57,195 $39,028 $46,164
Life and annuity, gross 11,308 13,220 10,716
------- ------- -------
Total gross premium 68,503 52,248 56,880
------- ------- -------
Accident and health reinsurance ceded 25,670 15,882 20,043
Life and annuity reinsurance ceded (1,873) 3,657 442
------- ------- -------
Total reinsurance ceded 23,797 19,539 20,485
------- ------- -------
Net premium 44,706 32,709 36,395
Net investment income 3,280 2,858 2,499
Realized gains (losses) on investments 2,100 211 (89)
Other revenue 1,661 1,269 1,237
Litigation settlement, net of expenses 22,400
------- ------- -------
Total revenue 74,147 37,047 40,042
Benefits and expenses:
Death and other policy benefits:
Life 4,396 4,568 4,011
Accident and health, net of reinsurance 18,963 14,458 16,557
Annuity and other 1,137 892 806
Increase in liability for future policy benefits 6,474 2,243 3,244
Depreciation and amortization of goodwill 505 849 852
Taxes, licenses and fees 2,249 1,697 1,978
Commissions, net of ceding allowance 6,627 4,537 4,220
Other operating expenses 13,433 12,160 9,668
Amortization of deferred policy acquisition costs 584 103 54
Policy acquisition costs deferred (2,738) (779) (364)
------- ------- -------
Total benefits and expenses 51,630 40,728 41,026
------- ------- -------
Income (loss) before income taxes 22,517 (3,681) (984)
Provision (benefit) for income taxes:
Current 6,816 (131)
Deferred (419) 151 13
------- ------- -------
Total income taxes 6,397 20 13
------- ------- -------
Net income (loss) 16,120 (3,701) (997)
Dividends on preferred stock 194 334 334
------- ------- -------
Net income (loss) applicable to common stock $15,926 ($4,035) ($1,331)
======= ======= =======
Income (loss) per share of common stock $1.46 ($0.44) ($0.16)
======= ======= =======
Common shares and equivalents used in
computing income (loss) per share 10,886 9,100 8,421
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE>
Provident American Corporation and Subsidiaries
Consolidated Statements of Changes in Stockholders' Equity
<TABLE>
<CAPTION>
(Dollars in thousands)
Preferred Stock Common Stock Additional
Paid-In
Shares Amount Shares Amount Capital
------ ------ ------ ------ -------
<S> <C> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1994 1,006 $ 1,006 8,514 $ 851 $ 9,876
Stock options exercised 114 12 254
Cash dividends declared on preferred stock
Net unrealized depreciation of bonds
Net loss
------ ------ ------ ----- -------
BALANCE, DECEMBER 31, 1994 1,006 1,006 8,628 863 10,130
------ ------ ------ ----- -------
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
Net loss
------ ------ ------ ----- -------
BALANCE, DECEMBER 31, 1995 1,006 1,006 9,260 926 10,166
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
Net unrealized appreciation of equity securities
Cash dividends declared on preferred stock
Net income
------ ------ ------ ----- -------
BALANCE, DECEMBER 31, 1996 580 $ 580 10,079 $ 1,008 $ 12,945
------ ------ ------ ----- -------
</TABLE>
<PAGE>
(RESTUBBED TABLE)
<TABLE>
<CAPTION>
(Dollars in thousands) Net Unrealized Net Unrealized
Appreciation Appreciation Retained Treasury
(Depreciation) of Marketable Earnings Stock
of Bonds Securities (Deficit) (at cost) Total
-------- ---------- ---------- --------- -----
<S> <C> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1994 $465 $ (3,255) $ (320) $ 8,623
Stock options exercised 266
Cash dividends declared on preferred stock (334) (334)
Net unrealized depreciation of bonds (3,028) (3,028)
Net loss (997) (997)
------- ------- ------ ------
BALANCE, DECEMBER 31, 1994 (2,563) (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 3,030
Net loss (3,701) (3,701)
------- ------- ------ ------
BALANCE, DECEMBER 31, 1995 467 (8,821) (320) 3,424
Conversion of Series B Cumulative
Preferred stock
Retirement of treasury stock 244
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) (644)
Net unrealized appreciation of equity securities $668 668
Cash dividends declared on preferred stock (194) (194)
Net income 16,120 16,120
------- ------ ------- ------ ------
BALANCE, DECEMBER 31, 1996 $(177) $668 $ 7,105 $(76) $ 22,053
------- ------ ------- ------ ------
</TABLE>
F-4
See notes to consolidated financial statements.
<PAGE>
Provident American Corporation and Subsidiaries
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
(Dollars in thousands) Years Ended December 31,
1996 1995 1994
----- ---- ----
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss) $16,120 $(3,701) $(997)
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 8,528 1,743 2,447
Change in premium due and uncollected, unearned
premium and premium received in advance 971 237 190
Change in amounts due to/from reinsurers (2,112) 3,050 545
Change in accrued investment income (186) 3 (136)
Change in accrued commissions and expenses 1,906 74 32
Change in other assets, current and deferred
income taxes and other liabilities (1,036) 63 (434)
Depreciation, amortization and in 1995 asset impairment 515 2,934 840
Deferred policy acquisition costs, net (2,154) (676) (310)
Net realized (gain) loss on investments (2,100) (211) 89
Other 67 18
-------- -------- --------
Net cash from operating activities 1,119 3,534 2,266
-------- -------- --------
INVESTING ACTIVITIES
Purchases of bonds (24,861) (13,747) (26,643)
Purchases of equity securities and other investments (1,194) (246) (163)
Sale of bonds 16,719 9,350 24,386
Sale of equity securities 18,504
Maturity of investments and loans 645 328 541
Acquisition of property and equipment (745) (76) (258)
(Increase) decrease in loans receivable 738 (797)
Loans receivable from officer and directors (461)
Acquisition of businesses, net of cash acquired (3,745)
Sale of business, net of cash given 1,756
-------- -------- --------
Net cash from investing activities 4,862 (1,897) (2,934)
-------- -------- --------
FINANCING ACTIVITIES
Deposits and interest credited to
contract holder deposit funds 467 833 686
Withdrawals from contract holder deposit funds (2,264) (1,829) (1,484)
Issuance of common stock 733 81 266
Dividends paid on preferred and common stock (194) (534) (314)
Proceeds from note payable 78 78 1,030
Repayment of note payable (745) (414) (46)
-------- -------- --------
Net cash from financing activities (1,925) (1,785) 138
-------- -------- --------
Increase (decrease) in cash and cash equivalents 4,056 (148) (530)
Cash and cash equivalents, beginning of year 2,162 2,310 2,840
-------- -------- --------
Cash and cash equivalents, end of year $6,218 $2,162 $2,310
-------- -------- --------
Supplemental disclosure of cash flow information:
Interest paid $56 $101 $67
Income taxes paid (refunded), net $6,330 $(13) $(191)
Non-cash investing activities:
Issuance of common stock in connection with acquisition of business and receipt of stock
in connection to Litigation Settlement (see Notes C and J)
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE>
Provident American Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 1996
(Dollars in thousands, except per share amounts)
Note A - Nature of Operations
Provident American Corporation and all of 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").
Provident American Corporation ("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 accompanying consolidated financial
statements of PAMCO and all of its 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 generally accepted accounting principles 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.
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. Consideration from annuity contracts are accounted for as
fund deposits with revenues reflecting administrative and other charges.
Investments: Bonds represent fixed maturity, fixed income bonds and
mortgage backed securities with contractual maturities greater than one year.
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 shareholders' equity, net of applicable income taxes.
Equity Securities represents the Company's investments in
publicly-traded common stocks. These registered 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 and cash equivalents are carried at cost which approximates market
and consist of highly-liquid investments with maturities of three months or less
from date of purchase.
F-6
<PAGE>
Provident American Corporation and Subsidiaries
Notes to Consolidated Financial Statements-(Continued)
Realized and unrealized gains and losses: Realized investment 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.
Unrealized gains and losses are excluded from earnings and included as a
separate component of stockholders' equity, net of applicable deferred income
taxes. The cost of investments sold is determined on a specific identification
basis.
Property and Equipment: Property and equipment (principally home office
property) are recorded at cost. Expenditures for improvements which 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.
Unamortized Deferred Policy Acquisition Costs: Under generally accepted
accounting principles, policy acquisition costs are deferred and amortized in
order to match the costs of writing new business against the expected future
revenues. Policy acquisition costs deferred represent 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
net of reinsurance ceding allowances. 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.
Goodwill: Goodwill arises from the Company's 1996 acquisitions of NIA,
PALHIC and CSE as described in Note C - Acquisitions and Sale of Subsidiaries
and Business and represents the difference between the Company's cost and the
acquired tangible assets net of assumed liabilities. Goodwill at December 31,
1996 of $3,166 is made up of $1,264 relating to the Company's purchase of PALHIC
is being amortized over 20 years straight-line, $774 relating the Company's
purchase of NIA is being amortized over 10 years straight-line and $1,127
relating to the Company's purchase of CSE is being amortized over a period of 10
years straight-line. Goodwill is net of $150 of amortization expense of which
$50 relates to PALHIC, $55 relates to NIA and $45 relates to CSE.
Income Taxes: PAMCO and its subsidiaries file a consolidated federal
income tax return with the exception of PALHIC which files individually.
Deferred income taxes represent the tax effects of income and expense items that
are reported in different years for tax and financial statement purposes.
Deferred income taxes also arise from unrealized capital gains or losses in
bonds and equity securities carried at fair value.
F-7
<PAGE>
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 before reinsurance ceded together with the ceded premiums while
policy benefits are presented net of reinsurance and commissions are presented
net of reinsurance allowances as further described in Note N - Reinsurance.
Earnings (Loss) Per Share of Common Stock: Earnings (loss) per share
has been computed by dividing net income (loss) applicable to common stock, by
the weighted-average common shares and equivalents outstanding. Common share
equivalents included in the computation represent shares issuable upon assumed
exercise of stock options and stock purchase warrants which would have a
dilutive effect in years where there are earnings. Equivalents were
anti-dilutive in 1995 and 1994. There is no significant difference between
earnings per share on a primary and a fully-diluted basis since the assumed
conversion of the outstanding convertible preferred stock is anti-dilutive.
Reclassifications and restatement of prior year amounts: Certain prior
year amounts have been reclassified to conform with the current year's
presentation. Prior year amounts have been restated for the REF & Associates,
Inc. combination accounted for as a "pooling of interest" described in Note C -
Acquisitions and Sales of Subsidiaries and Business.
Impact of recently issued Accounting Standards: In 1995 the Company
adopted Statement of Financial Accounting Standards (SFAS) No. 121 "Accounting
for the Impairment of Long-Lived Assets and for Long- Lived Assets to be
Disposed of". This standard requires that long-lived assets and certain
identifiable intangibles held and used by an entity be reviewed for impairment
whenever events or changes in circumstances indicate that the carrying amount of
an asset may not be recoverable. At the time of adoption, 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, the carrying value of goodwill and value of
insurance in force purchased was reevaluated considering the Company's
historical results.
F-8
<PAGE>
Provident American Corporation and Subsidiaries
Notes to Consolidated Financial Statements-(Continued)
In 1996 the Company adopted Statement of Financial Accounting Standards
(SFAS) No. 123 "Accounting for Stock Based Compensation" issued in October 1995
by the Financial Accounting Standards Board. This statement entitles the choice
of recognizing related compensation expense by adopting the new fair value
method or to continue to measure the compensation using the intrinsic value
approach under Accounting Principles Board (APB) Opinion No. 25, the former
standard, for options granted after December 31, 1994. The Company has elected
to continue using the measurement prescribed by ABP Opinion No. 25 as described
in Note I - Stock Options.
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.
Note C - Acquisitions and Sales 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, UBLIC and PILIC entered into an agreement
for the purchase and sale of the UBLIC business with Life and Health Insurance
Company of America, a Pennsylvania insurer ("LHI"), pursuant to which all of the
insurance business of UBLIC was purchased by LHI immediately prior to the
purchase of the UBLIC stock by PILIC. The purchase price payable by LHI to UBLIC
for the purchase of the UBLIC business was $1,800. UBLIC is licensed to transact
life, accident and health insurance in forty (40) states and the District of
Columbia. It is anticipated that PALHIC will engage in the sale of life,
accident and health insurance business. This transaction is accounted for as a
purchase and did not have a material effect on the Company's consolidated
results of operations, total assets or stockholders' equity.
F-9
<PAGE>
Provident American Corporation and Subsidiaries
Notes to Consolidated Financial Statements-(Continued)
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 inforce
"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 and its impact on the Company's Consolidated Balance Sheets is disclosed
in Note B - Significant Accounting Policies - Goodwill.
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, owns certain product trademarks and derives commission earnings from
PILIC. This transaction is accounted for as a pooling of interests and
accordingly the Company's financial statements have been restated to include the
results of REF.
Previously reported results of the Company, REF and restated results in
1995 were as follows:
<TABLE>
<CAPTION>
Eliminate
As Previously Intercompany
Reported REF Transactions As Restated
-------- --- ------------ -----------
<S> <C> <C> <C> <C>
Total revenue $36,935 $410 ($298) $37,047
Net income (loss) (3,901) 200 0 (3,701)
Common shares and equivalents used in
computing income (loss) per share 8,490 610 9,100
Loss per share of common stock ($0.50) ($0.44)
</TABLE>
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 is providing the Company with policy and claims
administration at the Company's facility using CSE's administration system along
with its employees. This transaction is accounted for as a purchase and its
impact on the Company's consolidated results of operations and its impact on the
Company's Condensed Consolidated Balance Sheet is disclosed in Note B -
Significant Accounting Policies - Goodwill.
On June 16, 1995, the Company sold its investment in Maine National
Life Insurance Company ("Maine National Life") to an unaffiliated party for
approximately $2,200 and realized a gain of approximately $40. The sale of Maine
National Life did not have a significant impact on revenues, results of
operations or financial position of the Company.
F-10
<PAGE>
Provident American Corporation and Subsidiaries
Notes to Consolidated Financial Statements-(Continued)
Note D - Investments and Financial Instruments
<TABLE>
<CAPTION>
Summary of bond investments as of December 31, 1996: Book and
Amortized Unrealized Fair
Type of Investment Cost Cost Gains Losses Value
------------------ ---- --------- ----- ------ --------
<S> <C> <C> <C> <C> <C>
Fixed maturities:
Bonds, available for sale:
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
-------- -------- ------- ------- --------
</TABLE>
<TABLE>
<CAPTION>
Summary of bond investments as of December 31, 1995: Book and
Amortized Unrealized Fair
Type of Investment Cost Cost Gains Losses Value
------------------ ---- --------- ----- ------ --------
<S> <C> <C> <C> <C> <C>
Fixed maturities:
Bonds, available for sale:
United States Government
and agencies $37,417 $37,416 $ 750 $ 99 $38,067
Canadian Government 1,420 1,420 53 1,473
Public utilities 1,286 1,288 29 1 1,316
Corporate 3,919 3,938 202 4,140
-------- -------- ------ ------ --------
Total fixed maturities $44,042 $44,062 $1,034 $ 100 $44,996
-------- -------- ------ ------ -------
</TABLE>
F-11
<PAGE>
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, 1996 and 1995:
<TABLE>
<CAPTION>
Change during the
Balance at 12 months ended
December 31, December 31,
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C>
Net Unrealized Appreciation (Depreciation) on Bonds
Unrealized gains (losses), pre-tax
Gains $388 $1,034 ($646) $1,020
Losses (661) (100) (561) 3,708
---------------------- ----------------------
Net gains (losses) (273) 934 (1,207) 4,728
Deferred federal income tax (provision) benefit 96 (327) 423 (1,558)
Amount applicable to life future policy benefits (140) 140 (140)
---------------------- ----------------------
Net unrealized appreciation (depreciation) of bonds ($177) $467 ($644) $3,030
====================== ======================
Net Unrealized Appreciation (Depreciation) on Stocks
Unrealized gains (losses), pre-tax
Gains $1,311 $1,311
Losses (282) (282)
---------------------- ----------------------
Net gains (losses) 1,029 1,029
Deferred federal income tax (provision) benefit (361) (361)
---------------------- ----------------------
Net unrealized appreciation (depreciation) of bonds 668 $0 $688 $0
====================== ======================
</TABLE>
Changes in fair value of Bonds were a direct result of the overall
change in interest rates. The Company's bond securities investment portfolio is
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, 1996. 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.
Investments on deposit as required by regulatory agencies were valued
at approximately $7,500 at December 31, 1996. In addition, approximately $1,100
and $3,400 of U.S. Treasury Notes and U.S. Government Agency Bonds,
respectively, have been placed in escrow with a bank in connection with certain
reinsurance agreements.
F-12
<PAGE>
Provident American Corporation and Subsidiaries
Notes to Consolidated Financial Statements-(Continued)
The amortized cost and fair value of bonds at December 31, 1996, 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.
<TABLE>
<CAPTION>
Book and
Amortized Fair
Contractual Maturity Cost Value
-------------------- --------- --------
<S> <C> <C>
Within one year $ 1,855 $ 1,853
After one year but within five years 20,329 20,385
After five years but within ten years 26,350 25,956
Over ten years 1,402 1,422
------- -------
49,936 49,616
Mortgage-backed securities 5,322 5,369
------- -------
$55,258 $54,985
------- -------
</TABLE>
Proceeds from sales of investments in bonds during 1996, 1995 and 1994
were $16,719, $9,350 and $24,386, respectively. Gross gains of $200, $291 and
$194, respectively, and gross losses of $123, $170 and $283, respectively, were
realized on those sales.
Equity Securities represents the Company's investment of 108,119 shares
of Loewen common stock (NYSE: LWN) acquired as a result of litigation described
in Note J, Litigation Settlement, Net of Expenses and 100,000 shares of National
Media Corp. (NASDAQ: NM) acquired for investment purposes. These registered
securities are classified as "available for sale" and carried at fair value.
Net investment income for the years ended December 31, 1996, 1995 and
1994 is summarized as follows:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Bonds $3,072 $2,680 $2,403
Equity securities 39
Mortgage loans 28 4 9
Real estate 160 173 104
Policy loans 22 24 25
Cash and cash equivalents 244 176 149
Other 36 6 30
------ ------ ------
3,601 3,063 2,720
Investment expenses 321 205 221
------ ------ ------
Net investment income $3,280 $2,858 $2,499
------ ------ ------
</TABLE>
F-13
<PAGE>
Provident American Corporation and Subsidiaries
Notes to Consolidated Financial Statements-(Continued)
Note E - Loans Receivable - Officer and Directors (Related Parties)
During 1996 the Company entered into loans with two related parties. The
Company made a loan of $300 to Mr. Clemens, Chairman of the Board, Chief
Executive Officer and a shareholder 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. The Company made a loan of $140 to John
T. Gillin, a Director and shareholder 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 is repayable, together with interest at a rate of 8.5% per
annum, on or before April 30, 1997.
Note F - Notes Payable
In 1994 the Company entered into a term loan agreement with a bank and
borrowed $1,000 in connection with advancing several agents $1,000. Under the
terms of the loan agreement, the loan is repayable in 30 monthly installments of
$33 from January 1995. The outstanding balance of the loan at December 31, 1996,
was $200. The loan bears interest at 1% above prime rate (9.25% at December 31,
1996).
The Company has a line of credit with a bank in the amount of $250, of
which none was drawn upon at December 31, 1996. This loan bears interest at 1%
above the prime rate (9.25% at December 31, 1996) and is due on demand.
During 1996 and 1995, the average amount of bank borrowings outstanding
was $577 and $1,000, respectively, the weighted average interest rate was
approximately 9.3% and 9.8%, respectively, and the maximum amount outstanding
was $830 and $1,166, respectively.
The Company has an outstanding note in the amount of $98 with
MidAmerica Mutual Life Insurance Company ("MidAmerica"), NIA's former parent.
The note bears interest on the unpaid balance at an interest rate of 8.75%
compounded monthly with 36 equal monthly installments of $6 beginning on August
15, 1995, with final payment due on July 15, 1998. The note balance may be
repaid early with no prepayment penalties and is secured by any monthly policy
administration fee that is due and payable to MidAmerica under the existing
Policy Administration Agreement executed between NIA and MidAmerica.
F-14
<PAGE>
Provident American Corporation and Subsidiaries
Notes to Consolidated Financial Statements-(Continued)
Note G - 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, 1996 and 1995 are as follows:
<TABLE>
<CAPTION>
1996 1995
------ ------
<S> <C> <C>
Deferred tax assets:
Policy reserves $2,194 $1,999
Policy acquisition costs 326
Advance premiums 211 139
Postemployment benefits 208 209
Net operating loss carryforwards 286 869
Other, net 338 339
------- -------
3,237 3,881
Valuation allowance for deferred tax assets 1,285 2,819
------ ------
1,952 1,062
------ ------
Deferred tax liabilities:
Real estate 746 759
Unrealized appreciation of investments 265 327
Deferred and uncollected premiums, net 249 303
Policy acquisition costs 538
------- ------
1,798 1,389
------ ------
Net deferred tax asset (liability) $ 154 $ (327)
------ ------
</TABLE>
The Company and its subsidiaries have a net operating loss carryforward
amounting to $6,900 some of which is available to offset future taxable income
through 2010. The tax loss carryforwards result from a 1989 acquisition and
expire between 1997 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 carry forwards 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 1996 amounting to $1,534
results from a net decrease in temporary differences for which recovery is
uncertain primarily caused by the taxable income from the Loewen litigation
settlement.
F-15
<PAGE>
Provident American Corporation and Subsidiaries
Notes to Consolidated Financial Statements-(Continued)
The reconciliation of income tax expense to the amount computed by
applying the appropriate statutory income tax rate (35%) to income (loss) before
income taxes is summarized as follows:
<TABLE>
<CAPTION>
1996 1995 1994
--------- ------ -----
<S> <C> <C> <C>
Amount computed at statutory rate $7,881 $(1,359) $(344)
Change in valuation allowance and
Tax effect of losses or temporary
differences for which no current
or deferred benefit is available (1,534) 479 277
Permanent differences including
purchase accounting adjustments (2) 512 70
Special deductions available to life
insurance companies 316
State income taxes, net of tax benefit 302 2 10
Other, net (250) 70
-------- --------- ------
Total income taxes $6,397 $ 20 $ 13
------ --------- ------
</TABLE>
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, 1996, 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,
1996, the balance in the "Shareholders' Surplus" account amounted to
approximately $14,700. There is no present intention to make distributions in
excess of "Shareholders' Surplus".
F-16
<PAGE>
Provident American Corporation and Subsidiaries
Notes to Consolidated Financial Statements-(Continued)
Note H - Stockholders' Equity and Dividend Restrictions
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 and is convertible after March 1995 on a share-for-share
basis into either common voting stock or such other series of preferred stock
having such rights and privileges as shall be set forth by the Company from time
to time. Effective January 1, 1994, the annual cash dividend on the Series B
Cumulative Convertible Preferred Stock increased to $.43636 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.
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 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 became 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. 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 a 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 year ending December 31, 1996, and
accordingly, the consultant is entitled to exercise 100,000 warrants for 1996.
The Company continues to hold in treasury, shares of its common stock.
F-17
<PAGE>
Provident American Corporation and Subsidiaries
Notes to Consolidated Financial Statements-(Continued)
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 (retained earnings) of $2,975
and $3,079, respectively which excludes common stock and additional paid-in
capital amounts.
The insurance department of Pennsylvania in which PILIC and PALHIC are
domiciled recognizes as net income 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:
<TABLE>
<CAPTION>
1996 1995 1994
------ ------ -----
<S> <C> <C> <C>
PILIC (1)
Net income (loss) $ 9,668 $(1,570) $ 127
Total capital and surplus 13,971 6,383 7,228
Adjusted capital and surplus 14,838 6,743 7,597
Company action level Risk Based Capital 6,569 5,190 5,248
PALHIC (2)
Net income (loss) $ 1,631 $ (73) $ 202
Total capital and surplus 5,351 3,068 3,002
Adjusted capital and surplus 5,367 3,152 3,225
Company action level Risk Based Capital 19 235 423
</TABLE>
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 only included in 1996 amounts.
2) PALHIC includes amounts prior to its acquisition by the Company.
At December 31, 1996, PILIC and PALHIC calculated their respective
"Risk Based Capital" (RBC) utilizing a formula required by the National
Association of Insurance Commissioners. PALHIC's amounts are included in PILIC,
PALHIC's parent. The results of this computation indicate PILIC's adjusted
capital, amounting to $14,838, exceeds the amount required by $8,269. PALHIC's
adjusted capital, amounting to $5,367, exceeds the amount required by $5,348. 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 insurers'
business. Insurers failing to meet their benchmark capital level may be subject
to scrutiny by its domiciled insurance department and, ultimately,
rehabilitation or liquidation.
F-18
<PAGE>
Provident American Corporation and Subsidiaries
Notes to Consolidated Financial Statements-(Continued)
Note I - Stock 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 expired, and effective July
16, 1996, the Company's Board of Directors adopted the 1996 Employee Incentive
Stock Option Plan ("1996 Employee Plan"), subject to the approval by the
Company's shareholders at the next Annual Meeting of Shareholders. The 1996
Employee Plan provides for the issuance of options for up to 950,000 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.
F-19
<PAGE>
Provident American Corporation and Subsidiaries
Notes to Consolidated Financial Statements-(Continued)
The following table lists changes during 1994, 1995 and 1996 in
outstanding stock options for the Incentive Stock Option Plan and 1996 Employee
Plan:
<TABLE>
<CAPTION>
Incentive Plan 1996 Employee Incentive Plan
Weighted Weighted
Average Average
Number Exercise and Number Exercise and
of Shares Price Range Fair Value of Shares Price Range Fair Value
<S> <C> <C> <C> <C> <C> <C>
Outstanding, January 1, 1994
Exercisable 169,001 1.59 - 5.57 3.33
Not exercisable 0 0 0.00
Total outstanding 169,001 1.59 - 5.57 3.33
1994
Granted 35,000 2.00 - 3.13 2.80
Exercised 62,150 1.59 - 3.13 2.95
Canceled/expired 34,251 3.13 - 5.57 4.47
Outstanding. December 31, 1994
Exercisable 81,600 1.59 - 4.94 3.27
Not exercisable 26,000 2.00 - 3.13 2.69
Total outstanding 107,600 1.59 - 4.94 3.13
1995
Granted 0 0 0.00
Exercised 4,950 3.13 - 3.69 3.44
Canceled/expired 6,050 3.13 - 4.94 3.64
Outstanding, December 31, 1995
Exercisable 82,600 1.59 - 4.26 3.00
Not exercisable 14,000 2.00 - 3.13 2.64
Total outstanding 96,600 1.59 - 4.26 2.95
1996
Granted 150,000 6.00 - 8.06 6.20 700,000 10.00 - 11.00 10.15
Exercised 27,550 1.59 - 8.06 3.52 0 0 10.00
Canceled/expired 0 0 0.00 0 0 0.00
Outstanding, December 31, 1996
Exercisable 186,050 3.13 - 6.00 4.91 50,000 11.00 11.00
Not exercisable 33,000 2.00 - 8.60 6.26 650,000 10.00 - 11-00 10.08
Total Outstanding 219,050 3.13 - 8.06 5.11 700,000 10.00 - 11-00 10.15
</TABLE>
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.
F-20
<PAGE>
Provident American Corporation and Subsidiaries
Notes to Consolidated Financial Statements-(Continued)
The following table lists changes during 1994, 1995 and 1996 in outstanding
stock options for the Directors Plan:
<TABLE>
<CAPTION>
Directors Plan
Weighted
Average
Number Exercise and
of Shares Price Range Fair Value
<S> <C> <C> <C>
Outstanding, January 1, 1994
Exercisable 140,000 1.59 - 4.83 2.43
Not exercisable 0 0.00
Total outstanding 140,000 1.59 - 4.83 2.43
1994
Granted 0 0 0.00
Exercised 52,000 1.59 1.59
Canceled/expired 11,000 2.27 2.27
Outstanding, December 31, 1994
Exercisable 77,000 2.27 - 4.83 3.02
Not exercisable 0 0 0.00
Total outstanding 77,000 2.27 - 4.83 3.02
1995
Granted 0 0 0.00
Exercised 0 0 0.00
Canceled/expired 44,000 2.27 2.27
Outstanding, December 31, 1995
Exercisable 33,000 3.86 - 4.83 4.02
Not exercisable 0 0 0.00
Total outstanding 33,000 3.86 - 4.83 4.02
1996
Granted 225,000 8.75 - 12.25 10.11
Exercised 33,000 3.86 - 4.83 4.02
Canceled/expired 0 0 0.00
Outstanding, December 31, 1996
Exercisable 74,997 8.75 - 12.25 9.14
Not exercisable 150,003 8.75 - 12.25 9.14
Total outstanding 225,000 8.75 - 12.25 9.14
</TABLE>
F-21
<PAGE>
Provident American Corporation and Subsidiaries
Notes to Consolidated Financial Statements-(Continued)
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. Effective March 10, 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).
In addition, Mr. Clemens has an option to purchase 1,253,376 shares of
the Company's common stock at $ .91 per share expiring from time to time between
November 1999 through December 2002. Mr. Clemens also has 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 Company terminated the Stock Option Plan for Field Representatives
and Agents and adopted The Life and Health Insurance Agent non-Qualified Stock
Option Agent Plan ("Life and Health Agent Plan") effective January 1, 1996. The
Life and Health Agent Plan provides for the issuance of options for the purchase
of up to 750,000 shares of the Company's Common Stock to life and health
insurance agents who are licensed to sell insurance by any life insurance
subsidiary of the Company, and are exercisable for up to five years from the
effective date of the grant. All options granted under the Life and Health Plan
have been granted at 100% of the fair market value of the shares on the date of
grant.
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 and a charge was made to
operations in the amount of $67.
F-22
<PAGE>
Provident American Corporation and Subsidiaries
Notes to Consolidated Financial Statements-(Continued)
The following table lists changes during 1994, 1995 and 1996 in
outstanding stock options for the Field Representatives and Agents Plan, Life
and Health Agent Plan and Premium Production Plans:
<TABLE>
<CAPTION>
Field Rep & Agent Plan Premium Production Plan
Weighted Weighted
Average Average
Number Exercise and Number Exercise and
of Shares Price Range Fair Value of Shares Price Range Fair Value
<S> <C> <C> <C> <C> <C> <C>
Outstanding, January 1, 1994
Exercisable 42,275 .91 - 3.88 3.11 4,045 3.52 3.52
Not exercisable 0 0 0.00 0 0.00 0.00
Total outstanding 42,275 .91 - 3.88 3.11 4,045 3.52 3.52
1994
Granted 0 0 0.00 0 0.00 0.00
Exercised 0 0 0.00 0 0.00 0.00
Canceled/expired 7,684 .91 - 1.59 1.45 0 0.00 0.00
Outstanding, December 31, 1994
Exercisable 28,590 2.84 - 3.88 3.40 4,045 3.52 3.52
Not exercisable 6,000 3.88 3.88 0 0.00 0.00
Total outstanding 34,590 2.84 - 3.88 3.48 4,045 3.52 3.52
1995
Granted 1,675 2.38 - 3.13 2.98 25,500 2.94 - 3.52 3.47
Exercised 17,571 2.38 - 3.88 3.67 0 0.00 0.00
Canceled/expired 12,070 2.84 - 3.47 3.05 0 0.00 0.00
Outstanding, December 31, 1995
Exercisable 5,375 2.38 - 3.88 3.61 29,545 2.94 - 3.52 3.48
Not exercisable 1,250 3.88 3.88 0 0.00 0.00
Total outstanding 6,625 2.38 - 3.88 3.66 29,545 2.94 - 3.52 3.48
1996
Granted 48,600 4.75 - 10.00 6.30 14,750 3.52 3.52
Exercised 5,025 3.13 - 3.88 3.87 13,700 3.52 3.45
Canceled/expired 0 0 0.00 0 0.00 0.00
Outstanding December 31, 1996
Exercisable 14,575 2.38 - 10.00 5.97 30,595 3.50 - 3.52 3.51
Not exercisable 35,625 4.75 - 10.00 1.47 0 0.00 0.00
Total outstanding 50,200 2.38 - 10.00 6.19 30,595 3.50 - 3.52 3.51
</TABLE>
At December 31, 1996 and 1995, 1,081,300 shares and 1,072,173 shares,
respectively, were available for future grants for all plans.
F-23
<PAGE>
Provident American Corporation and Subsidiaries
Notes to Consolidated Financial Statements-(Continued)
Effective January 1, 1996 the Company adopted the disclosure-only
provisions of Statement of Financial Accounting Standards (SFAS) No. 123
"Accounting for Stock Based Compensation". Accordingly, no compensation cost has
been recognized for stock option grants which occurred in 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 No 123,
the Company would have amortized the cost over the vesting period of the option
which generally is 5 years for the 1996 Employee Plan and 3 years for the
Directors Plan. The Company's 1996 net income and net income per common share
would have been reduced to the following pro-forma amounts:
Net income applicable to common shares
as reported $15,926
pro forma $15,681
Net income per common share
as reported $1.46
pro forma $1.44
The fair value of the options granted during 1996 is estimated on the
date of grant using the Black-Scholes option pricing model. The major
assumptions used and the estimated fair value include assumed forfeitures of 10%
annually for non vested options under the 1996 Employee Plan and the Directors
Plan are listed as follows:
<TABLE>
<CAPTION>
Risk Rate Weighted
Expected Expected Free of Average
Term Stock Interest Dividend Fair
in Years Volatility Rate Dividend Increase Value
-------- ---------- ---- -------- -------- -----
<C> <C> <C> <C> <C> <C> <C>
1996 Employee Plan 1-5 73% 5.55%-6.32% 0% 0% $3.92
Directors Plan 3 75% 6.3% 0% 0% $4.64
</TABLE>
Note J - 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-24
<PAGE>
Provident American Corporation and Subsidiaries
Notes to Consolidated Financial Statements-(Continued)
Note K - Commitments and Contingencies
The Company and its subsidiaries have various leases which are
primarily related to office space, data processing and other equipment. Net
rental expense under all leases charged to operations was approximately $427,
$294 and $407 in 1996, 1995 and 1994, respectively. The future minimum rental
commitments under noncancelable leases at December 31, 1996, are: 1997 - $239;
1998 - $223; 1999 - $219; 2000 - $161; and 2001 - $62.
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.
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 1996, 1995 and 1994 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 which could significantly change the
way healthcare is financed and provided. The effect 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.
The Company anticipates purchasing in 1997 a parcel of land adjacent to the
Company's existing office and spending approximately $2.5 million for an
approximate 18,000 square foot addition to the Company's principal office
Note L - Employee Benefit Plans
The Company has a defined contribution retirement savings plan covering
substantially all employees. Employees may contribute up to 12.5% of
compensation of which the Company will match 50% of the first 5%. 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,
1996, the plan held 1,379 shares of the Company's common stock. 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 $57, $54 and $72 for 1996, 1995 and 1994, respectively.
F-25
<PAGE>
Provident American Corporation and Subsidiaries
Notes to Consolidated Financial Statements-(Continued)
The Company provides certain health care and life insurance benefits to
eligible retirees under an unfunded plan. These benefits were discontinued
effective January 1, 1993, except for those employees who had already retired.
Effective January 1, 1993, the Company adopted SFAS No. 106 "Employers'
Accounting for Postretirement Benefits Other Than Pensions" resulting in a
Accumulated Postretirement Benefit Obligation ("APBO") of approximately $815.
The Company has elected to amortize the APBO over approximately 14 years, the
average remaining life expectancy of plan participants.
In determining the APBO the Company assumed a 15% rate of increase for
health care costs for 1993, decreasing by 1% each year to 6% by the year 2002.
Increasing the assumed health care cost trend rates by one percentage point in
each year would increase the postretirement APBO as of January 1, 1996, by
approximately $71 and increase the interest cost by approximately $5. A discount
rate of 7.5% was used to determine APBO. The expense for postretirement health
care and life insurance benefits was approximately $106, $110 and $115 for the
years ended December 31, 1996, 1995 and 1994. Net periodic postretirement
benefit costs include amortization of the transition obligation and interest
cost amounting to approximately $58 and $42, respectively, for 1996, $58 and
$52, respectively, for 1995 and $58 and $57, respectively, for 1994. At December
31, 1996, the APBO amounted to approximately $810, the unrecognized transition
obligation was $583 resulting in an accrued liability of approximately $227 for
post-retirement benefits.
F-26
<PAGE>
Provident American Corporation and Subsidiaries
Notes to Consolidated Financial Statements-(Continued)
Note M - Liability for Unpaid Claims and Claim Adjustment Expenses
Activity in the liability for unpaid claims and claim adjustment
expenses is summarized as follows.
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C> <C>
Liability at January 1 $10,105 $10,524 $11,433
Less reinsurance recoverables 4,275 4,912 5,474
------- ------- -------
Net Balance at January 1 5,830 5,612 5,959
------- ------- -------
Provision (benefit) for unpaid losses:
Current year 23,858 19,821 21,491
Prior years (499) (794) (923)
------- ------- -------
Total incurred 23,359 19,027 20,568
------- ------- -------
Payments made related to:
Current year 15,705 14,068 15,958
Prior years 4,976 4,741 4,957
------- ------- -------
Total paid 20,681 18,809 20,915
------- ------- -------
Net Balance at December 31 8,508 5,830 5,612
Plus reinsurance recoverables 6,930 4,275 4,912
------- ------- -------
Balance at December 31 $15,438 $10,105 $10,524
------- ------- -------
</TABLE>
Note N - Reinsurance
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.
F-27
<PAGE>
Provident American Corporation and Subsidiaries
Notes to Consolidated Financial Statements-(Continued)
Under the terms of a Quota Share Reinsurance Agreement, the Company
cedes 47.5% of the liability on the first $85 of claims per person, per calendar
year of its group accident and health insurance business. The Company received a
ceding commission recorded as a reduction to commissions of 45.5% & 30.5%, 41.5%
& 26.5% and 41.5% & 26.5% for its first year and renewal small group medical
business in 1996, 1995 and 1994, respectively, which represents approximately
87%, 60% and 50%, respectively, of its group accident and health insurance
business as measured by earned premium. On its remaining group medical business,
the Company received a 30.5% ceding commission for 1996 and a 31.5% ceding
commission for 1995 and 1994. The combined ceding commissions amounted to
approximately 38.9%, 32.5% and 32.2% for 1996, 1995 and 1994, respectively. This
agreement is renewable based on mutual agreement on an annual basis on October
1, 1996, or any October 1 thereafter. 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.
At December 31, 1995, PILIC entered into an agreement to reinsure 90%
of the insurance in force of certain multi-pay pre-need life insurance policies
for a premium of approximately $3,233. The ceded insurance in force at December
31, 1995 amounted to approximately $12,700 and in connection therewith, PILIC
received a ceding allowance of $1,000 and reduced future policy benefits by
$3,233. At June 30, 1996, PILIC terminated the reinsurance agreement and
recaptured the life insurance policies reinsured thereunder, resulting in a
pre-tax charge to operations of $1,000.
To the extent that reinsuring companies are later unable to meet
obligations under reinsurance agreements, PILIC would remain liable.
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. At December 31, 1996,
reinsurance receivables amounting to approximately $8,985 were associated with a
single reinsurer.
The Company also has an agreement with Network America Life Insurance
Company, a Pennsylvania-domiciled insurance company ("Network America").
Pursuant to this agreement, Network America issued final expense and pre-need
insurance policies in states where PILIC is not licensed and will 100% reinsure
the business to PILIC for a ceding commission of 3.5% of the first $10 of
collected premium and 3% of all collected premium in excess of $10,000 which
will not be less than $200 per year. This agreement was canceled with respect to
new business effective January 1, 1996.
A summary of insurance in-force, premium income, benefits and
commission expense with respect to reinsurance operations is as follows:
F-28
<PAGE>
Provident American Corporation and Subsidiaries
Notes to Consolidated Financial Statements-(Continued)
<TABLE>
<CAPTION>
Ceded to Assumed % of Amt
Gross Other from Other Net Assumed
Amount Companies Companies Amount to Net
------ --------- --------- ------ ------
<S> <C> <C> <C> <C> <C>
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
-------- -------- -------- --------
Year ended December 31, 1994:
Life insurance in force $280,000 $118,000 $382,000 $544,000 70.2%
-------- -------- -------- --------
Premium:
Life insurance 9,251 442 1,392 10,201 13.6%
Annuity 73 73
Accident and health 43,744 20,043 2,420 26,121 9.3%
-------- -------- -------- --------
Total $53,068 $20,485 $3,812 $36,395
-------- -------- -------- --------
Benefits:
Life insurance 3,672 91 430 4,011
Annuity and other 797 9 806
Accident and health 29,560 14,681 1,678 16,557
-------- -------- -------- --------
Total $34,029 $14,772 $2,117 $21,374
-------- -------- -------- --------
Commissions $8,868 $5,711 $1,063 $4,220
-------- -------- -------- --------
</TABLE>
F-29
<PAGE>
Provident American Corporation and Subsidiaries
Notes to Consolidated Financial Statements-(Continued)
Note O - Related Party Transactions
See Note E - Notes Receivable - Officers and Directors (Related
Parties) for a description of loans to related parties.
Gross commissions and expense allowances paid or payable to Passages
International Marketing Group and its affiliates, which are controlled by
Michael V. Warhurst, a former Director of the Company, for the years ended
December 31, 1996, 1995 and 1994, amounted to approximately $314, $313 and $481,
respectively.
Gross commissions paid or payable to a company controlled by Arden O.
French, Jr., a former Director of the Company, for the years ended December 31,
1995 and 1994, amounted to approximately $357 and $434, respectively.
Legal fees included in Other operating expenses paid to Butera,
Beausang, Cohen & Brennan ("BBC&B") for the years ended December 31, 1996, 1995
and 1994, amounted to approximately $298, $225 and $143, respectively. Mr.
Beausang, a shareholder of BBC&B, is a director, general counsel and secretary
of the Company.
Consulting expenses included in Other expenses paid to Richard E. Field
amounted to $300 in 1996. Mr. Field, a shareholder of the Company and former
Chief Executive Officer of REF, provides the Company with exclusive marketing,
sales and product design services as part of a 36-month consulting agreement
effected January 1, 1996.
Note P - Reconciliation From Statutory Basis (Unaudited) To Generally Accepted
Accounting Principles Basis
The accompanying financial statements are prepared in conformity with
generally accepted accounting principles 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
The Company 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 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-30
<PAGE>
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:
<TABLE>
<CAPTION>
Net Income (Loss) Stockholders' Equity
For Years Ended December 31, December 31,
1996 1995 1994 1996 1995
------ ------ ------- ------- ------
<S> <C> <C> <C> <C> <C>
Balance per statutory accounting practices $ 11,300 $(1,488) $ 150 $13,971 $ 6,383
Deferred policy acquisition costs 2,154 676 310 3,140 986
Interest maintenance reserve (37) (1) (218) 1,458 1,464
Asset valuation reserve 867 360
Future policy benefits 2 (1,184) (640) (3,722) (3,864)
Goodwill and value of insurance in force,
net of amortization (57) (798) (106) 1,258
Adjustment of net deferred
and uncollected premium (188) (152) (194) (1,626) (1,438)
Restatement of reserves on reinsurance ceded 797 150
Effect of consolidating non-insurance
subsidiaries 2,097 (1,360) (327) 5,315 (1,639)
Deferred income taxes 352 (151) 604 252
Prepaid expenses 343 343
Fixed income securities, net of tax (83) 607
Non-admitted assets 364 303
Other, net 154 (40) (122) 164 10
----- ------- -------- ------- -----
Balance per generally accepted
accounting principles $ 16,120 $(3,701) $ (997) $ 22,053 $ 3,424
-------- ------- ------- -------- -------
</TABLE>
F-31
<PAGE>
PROVIDENT AMERICAN CORPORATION (Parent Company)
SCHEDULE II
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
BALANCE SHEETS
<TABLE>
<CAPTION>
(Dollars in thousands) December 31,
1996 1995
-------- ------
<S> <C> <C>
Assets
Investment in subsidiaries* $ 19,824 $6,395
Equity securities 4,186
Loans receivable 461 59
Cash 1
Other 185 163
-------- -------
Total Assets $ 24,656 $ 6,618
-------- -------
Liabilities and Stockholders' Equity
Liabilities
Accounts payable to subsidiaries* 767 1,636
Accrued expenses 827 728
Accrued federal income tax 809
Notes payable 200 830
-------- -------
Total Liabilities 2,603 3,194
-------- -------
Stockholders' Equity
Preferred stock Series A 580 580
Preferred stock Series B 426
Common stock 1,008 926
Additional paid-in capital 12,945 10,166
Net unrealized appreciation of stocks 668
Net unrealized appreciation (depreciation)
of bonds held by subsidiaries (177) 467
Retained earnings (deficit) (including undistributed
income (loss) of subsidiaries of $3,289 and $(9,045)) 7,105 (8,821)
Treasury stock, at cost (76) (320)
-------- -------
Total Stockholders' Equity 22,053 3,424
-------- -------
Total Liabilities and
Stockholders' Equity $ 24,656 $6,618
-------- -------
*Eliminated in consolidation.
</TABLE>
The condensed financial information should be read in conjunction with the
Provident American Corporation December 31, 1996 Consolidated Financial
Statements and notes thereto.
-S-1-
<PAGE>
PROVIDENT AMERICAN CORPORATION (Parent Company)
SCHEDULE II
CONDENSED FINANCIAL INFORMATION OF COMPANY
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Years Ended December 31,
1996 1995 1994
------- ------- ------
<S> <C> <C> <C>
Income:
Interest $ 23 $ 67 $ 60
Litigation settlement 5,320
Realized gain 699
Other 18 20 5
------- ------- --------
6,060 87 65
------- ------- --------
Expenses:
Operating and administrative 744 271 372
Interest 54 101 69
------- ------- --------
798 372 441
------- ------- --------
Income (loss) before income taxes and undistributed
income (loss) of subsidiaries 5,262 (285) (376)
Provision for income taxes 1,476
------- ------- --------
Income (loss) after income taxes 3,786 (285) (376)
Undistributed income (loss) of subsidiaries* 12,334 (3,416) (621)
------- ------- --------
Net income (loss) 16,120 (3,701) (997)
Dividends declared on preferred stock 194 334 334
------- ------- --------
Net income (loss) applicable
to common stock $15,926 $(4,035) $(1,331)
------- ------- --------
*Eliminated in consolidation.
</TABLE>
The condensed financial information should be read in conjunction with
Provident American Corporation's December 31, 1996 Consolidated Financial
Statements and notes thereto.
-S-2-
<PAGE>
PROVIDENT AMERICAN CORPORATION (Parent Company)
SCHEDULE II
CONDENSED FINANCIAL INFORMATION OF THE REGISTRANT
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended December 31,
1996 1995 1994
-------- -------- ------
<S> <C> <C> <C>
Operating Activities
Net income (loss) $ 16,120 $(3,701) $ (997)
Adjustments to reconcile net income (loss)
to net cash from operating activities:
Undistributed (income) loss of subsidiaries* (12,334) 3,416 621
Common stock received from litigation settlement (4,320)
(Increase) decrease in other assets and accrued
income taxes 333 82 (145)
Increase (decrease) in accrued expenses 99 (3)
Net realized gain on investments (699)
--------- ------- ------
Net cash from operating activities (801) (206) (521)
--------- ------- ------
Investing Activities
Sale of investments 2,130
(Increase) decrease in receivables (402) 738 (797)
Acquisition of businesses (35)
Other (128)
--------- ------- ------
Net cash from investing activities 1,693 610 (797)
--------- ------- ------
Financing Activities
Issuance of common stock 800 99 266
Dividends paid on preferred stock (194) (334) (314)
Proceeds from notes payable - bank 78 78 1,030
Repayment of notes payable - bank (708) (414) (46)
Increase (decrease) in accounts payable subsidiaries* (869) 167 382
--------- ------- ------
Net cash from financing activities (893) (404) 1,318
--------- ------- ------
Change in cash (1)
Cash, beginning of year 1 1 1
--------- ------- ------
Cash, end of year $ 0 $ 1 $ 1
--------- ------- ------
Supplemental disclosure of cash information:
Interest paid $ 56 $ 101 $ 67
Income taxes paid $1,119
Non-cash investing activities:
Issuance of common stock in connection with
acquisition of businesses $1,879
*Eliminated in consolidation.
</TABLE>
The condensed financial information should be read in conjunction with the
Provident American Corporation December 31, 1996 Consolidated Financial
Statements and notes thereto.
-S-3-
<PAGE>
PROVIDENT AMERICAN CORPORATION AND SUBSIDIARIES
SCHEDULE III - SUPPLEMENTARY INSURANCE INFORMATION
(in thousands)
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
===========================================================================================================================
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN F COLUMN G
- ---------------------------------------------------------------------------------------------------------------------------
Years Ended Segment Deferred Policy Future Policy Unearned Premium Net Investment
December 31, Acquisition Cost Benefits, Premiums Revenue Income(1)
Losses, Claims
And Loss Expenses
- ---------------------------------------------------------------------------------------------------------------------------
1994: Individual Life
And Annuity $310 $38,884 $ 7,670 $2,185
Group Life And
Health 10,887 $ 459 28,725 314
---------------------------------------------------------------------------------------------------------
TOTAL $310 $49,771 $ 459 $36,395 $2,499
- ---------------------------------------------------------------------------------------------------------------------------
1995: Individual Life
And Annuity 986 43,477 7,138 2,513
Group Life And
Health 10,183 544 25,571 345
---------------------------------------------------------------------------------------------------------
TOTAL $ 986 $53,660 $ 544 $32,709 $2,858
- ---------------------------------------------------------------------------------------------------------------------------
1996: Individual Life
And Annuity 1,468 44,782 10,814 2,831
Group Life And
Health 1,672 15,469 1,356 33,892 449
- ---------------------------------------------------------------------------------------------------------------------------
TOTAL $3,140 $60,251 $1,356 $44,706 $3,280
===========================================================================================================================
==========================================================================
COLUMN H COLUMN I COLUMN J
- --------------------------------------------------------------------------
Years Ended Benefits, Claims, Amortization Other Operating
December 31, Losses And Of Deferred Expenses
Settlement Expenses Policy
Acquisition
Costs
- --------------------------------------------------------------------------
1994:
$ 7,233 $ 54 $10,013
17,385 6,341
- --------------------------------------------------------------------------
$24,618 $ 54 $16,354
- --------------------------------------------------------------------------
1995:
6,604 103 4,733
15,558 13,731
- --------------------------------------------------------------------------
$22,162 $103 $18,464
- --------------------------------------------------------------------------
1996:
10,528 170 3,682
20,442 414 16,394
- --------------------------------------------------------------------------
$30,970 $584 $20,076
==========================================================================
</TABLE>
(1) Investment income by segment is allocated based on liabilities for future
policy benefits and policy claims.
-S-4-
<PAGE>
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
March 18, 1997
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 March 18, 1997
- ----------------------------------------
Alvin H. Clemens, Chairman of the Board
and Chief Executive Officer
(Principal Executive Officer)
/s/JAMES O. BOWLES March 18, 1997
- ----------------------------------------
James O. Bowles, President and
Chief Operating Officer
/s/ANTHONY R. VERDI March 18, 1997
- ----------------------------------------
Anthony R. Verdi, Treasurer and
Chief Financial Officer
(Principal Financial Officer)
March 18, 1997
/s/FRANCIS L. GILLAN III
- -----------------------------------------
Francis L. Gillan, III, Controller
(Chief Accounting Officer)
/s/MICHAEL F. BEAUSANG March 27, 1997
- ----------------------------------------
Michael F. Beausang, Jr., Director
/s/VALERIE C. CLEMENS March 26, 1997
- ----------------------------------------
Valerie C. Clemens, Director
/s/HAROLD M. DAVIS March 25, 1997
- ----------------------------------------
Harold M. Davis, Director
/s/JOHN T. GILLIN March 25, 1997
- ----------------------------------------
John T. Gillin, Director
/s/HENRY G. HAGER March 27, 1997
- ----------------------------------------
Henry G. Hager, Director
/s/FREDERICK S. HAMMER March 26, 1997
- ----------------------------------------
Frederick S. Hammer, Director
/s/GEORGE W. KARR March 25, 1997
- ----------------------------------------
George W. Karr, Jr., Director
/s/P. GLENN MOYER March 21, 1997
- ----------------------------------------
P. Glenn Moyer, Director
-42-
<PAGE>
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.
(2)(C) Purchase Agreement, dated May 1, 1996 among Registrant,
MidAmerica Mutual Life Insurance Corporation and
MidAmerica Enterprises, Inc.
(2)(D) Stock Exchange Agreement, dated June 18, 1996 among
Registrant, Richard E. Field, Arthur J. Ivey and Richard
E. Field & Associates, Inc.
(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.
(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.
-43-
<PAGE>
Exhibit Sequentially
Number Description of Exhibits Numbered Page
- ------ ----------------------- -------------
(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.
(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.
(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.
-44-
<PAGE>
Exhibit Sequentially
Number Description of Exhibits Numbered Page
- ------ ----------------------- -------------
(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) Reinsurance Contract dated January 1, 1991 between Network
America Life Insurance Company and Provident Indemnity
Life Insurance Company incorporated by reference to
Exhibit (10)(F) to Registrant's Annual Report on Form 10-K
for the year ended December 31, 1990.
(10)(F) 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)(G)* 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)(H)* 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)(I) 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.
-45-
<PAGE>
Exhibit Sequentially
Number Description of Exhibits Numbered Page
- ------ ----------------------- -------------
(10)(J)* 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)(K)* 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)(L) Harleysville loan documents including Revolving Agreement
of Sale and Security Agreement between PAMCO and PILIC,
PREMARCO Suretyship Agreement, PREMARCO Security
Agreement, and Loan Agreement among Bank, PAMCO, PILIC,
PREMARCO and all PAMCO subsidiaries, including negative
pledge covenants, all dated 11/27/91 incorporated by
reference to Exhibit (10)(Q) to Registrant's Annual Report
on Form 10-K for the year ended December 31, 1991.
(10)(M) Termination agreement dated August 1, 1992 among
Registrant, Premarco, Inc., Provident Indemnity Life
Insurance Company and Michael V. Warhurst, incorporated by
reference to Exhibit (10)(L) to Registrant's Annual Report
on Form 10-K for the year ended December 31, 1992.
(10)(N)* 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)(O)* 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.
-46-
<PAGE>
Exhibit Sequentially
Number Description of Exhibits Numbered Page
- ------ ----------------------- -------------
(10)(P)* 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)(Q)* 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.
(10)(R) Termination Agreement dated December 22, 1993 among
Registrant, Provident Indemnity Life Insurance Company,
Maine National Life Insurance Company, and Mitchell Allen
Kalish, incorporated by reference to Exhibit (99)(A) to
Registrant's Form 8-K dated December 22, 1993.
(10)(S) Agent's Loan, Stock Purchase and Pledge Agreement; Stock
Promissory Note; Commission Payment Agreement; Agent's
Loan and Commission Pledge Agreement; and Commission
Promissory Note between "Agent" and Provident Indemnity
Life Insurance Company dated February 1994, incorporated
by reference to Exhibit (10)(A) to Registrant's Quarterly
Report on Form 10-Q for the Quarterly period ended March
31, 1994.
(10)(T) Administrative Agreement dated September 31, 1994 between
Provident Indemnity Life Insurance Company and CSE, Inc.
Incorporated by reference to Exhibit (10)(T) to
Registrant's Annual Report on Form 10-K for the year ended
December 31, 1994.
(10)(U) Lease agreement between Coastal Services, Eastern, Inc.
trading as Coastal Services and Provident Indemnity Life
Insurance Company dated January 1, 1995. Incorporated by
reference to Exhibit (10)(U) to Registrant's Annual Report
on Form 10-K for the year ended December 31, 1994.
-47-
<PAGE>
Exhibit Sequentially
Number Description of Exhibits Numbered Page
- ------ ----------------------- -------------
(10)(V) Non-discount Note between Harleysville National Bank and
Registrant dated April 25, 1994. Incorporated by reference
to Exhibit (10)(V) to Registrant's Annual Report on Form
10-K for the year ended December 31, 1994.
(10)(W) 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)(X) 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)(Y) 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)(Z) 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)(AA) Warrant, dated July 5, 1995 granting Michael V. Warhurst
the right to purchase up to 100,000 shares of the common
stock of Registrant. Incorporated by reference to Exhibit
(10)(AA) to Registrant's Annual Report on Form 10-K for
the year ended December 31, 1995.
-48-
<PAGE>
Exhibit Sequentially
Number Description of Exhibits Numbered Page
- ------ ----------------------- -------------
(10)(BB) Warrant, dated July 5, 1995 granting Michael V. Warhurst
the right to purchase up to 100,000 shares of the common
stock of Registrant. Incorporated by reference to Exhibit
(10)(BB) to Registrant's Annual Report on Form 10-K for
the year ended December 31, 1995.
(10)(CC)* 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)(DD) 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.
(10)(EE)* Registrant's Life and Health Insurance Agent Non-Qualified
Stock Option Plan, effective January 2, 1996
(10)(FF)* Employment Contract, dated April 1, 1996 among Registrant,
Provident Indemnity Life Insurance Company and Edward
Bolton.
(10)(GG)* Amended and Restated Employment Contract, dated November
7, 1996 among Registrant, NIA Corporation, Provident
American Life & Health Insurance Company and James O.
Bowles.
(10)(HH)* Employment Contract, dated February 19, 1997 among
Registrant, Provident Indemnity Life Insurance Company,
Provident American Life & Health Insurance Company and
Alvin H. Clemens.
(10)(II) Promissory Note; Pledge and Security Agreement, dated
April 8, 1996 between Registrant and Alvin H. Clemens.
(10)(JJ)* Amendment and Restatement of the Registrant's Stock Option
Plan for Directors, effective July 16, 1996.
-49-
<PAGE>
Exhibit Sequentially
Number Description of Exhibits Numbered Page
- ------ ----------------------- -------------
(10)(KK)* Registrant's 1996 Employee Incentive Stock Option Plan,
effective July 16, 1996.
(10)(LL)* Registrant's Amended and Restated Stock Option Plan for
Executives, dated December 11, 1996.
(10)(MM) Promissory Note with Amendments; Pledge and Security
Agreement; and Escrow Agreement, dated April 2, 1996
between Registrant and John T. Gillin.
(10)(NN) Letter of Agreement, dated June 6, 1996 confirming that
Ladenburg, Thalmann & Co. Inc. has been retained as
financial advisor to Registrant.
(10)(OO) 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.
(10)(PP)* Marketing and Consulting Agreement, dated June 18, 1996
between Provident Indemnity Life Insurance Company and
Richard E. Field.
(10)(QQ)* Stock Option/Warrant Agreement, dated January 1, 1996
between Registrant and Richard E. Field.
(11) Computation of Earnings Per Share.
(22) Subsidiaries of Registrant.
(23) Consent of Independent Accountants.
(27) Financial Data Schedule.
* Indicates management contract or compensatory plan or arrangement.
-50-
<PAGE>
AGREEMENT AND PLAN OF REORGANIZATION
Among
PROVIDENT AMERICAN CORPORATION
and
SAUL ROSE AND JOAN ROSE
Relating to the
Capital Stock
of
COASTAL SERVICES, EASTERN, INC.
<PAGE>
AGREEMENT AND PLAN OF REORGANIZATION
This Agreement and Plan of Reorganization (this "Agreement") is made
and entered into as of the 15th day of August, 1996, between PROVIDENT AMERICAN
CORPORATION, a corporation organized under the laws of the Commonwealth of
Pennsylvania ("PAMCO") and SAUL ROSE AND JOAN ROSE (collectively the
"Stockholders"), who own all of the issued and outstanding shares of capital
stock of COASTAL SERVICES, EASTERN, INC. (the "CSE Shares"), a New Jersey
corporation (the "Company").
WITNESSETH:
WHEREAS, the Company is engaged in the business of providing health
care third party administration and cost containment services;
WHEREAS, the Stockholders desire to exchange the CSE Shares for shares
of Common Stock of PAMCO (the "PAMCO Shares") on the terms and conditions set
forth in this Agreement; and
WHEREAS, PAMCO desires to exchange the PAMCO Shares for the CSE Shares
on the terms and conditions set forth in this Agreement;
NOW, THEREFORE, PAMCO and the Stockholders, in consideration of the
agreements, covenants and conditions contained herein, hereby make the following
representations and warranties, give the following covenants and agree as
follows:
ARTICLE I
REPRESENTATIONS AND WARRANTIES
OF THE STOCKHOLDERS
The Stockholders represent and warrant to PAMCO and agree as follows:
1.1 Organization. As of March 31, 1996, the Company is a corporation
duly organized, validly existing and in good standing under the laws of the
State of New Jersey. The Company is not qualified to transact business as a
foreign corporation in any jurisdiction other than Pennsylvania. The Company has
the corporate power and authority and other authorizations necessary or required
in order for it to own or lease and operate its properties and to carry on its
business as now conducted.
1.2 Subsidiaries. As of March 31, 1996, the Company had no
subsidiaries.
1.3 Authority. This Agreement and the transactions contemplated herein
have been duly approved by all necessary action on the part of the Stockholders.
This Agreement, when executed and delivered by the Stockholders, and assuming
the due execution hereof by PAMCO, will constitute the valid, legal and binding
<PAGE>
agreement of the Stockholders enforceable in accordance with its terms. Neither
the execution nor the delivery of this Agreement nor the consummation of the
transactions contemplated herein, nor compliance with nor fulfillment of the
terms and provisions hereof, will (i) conflict with or result in a breach of the
terms, conditions or provisions of or constitute a default under the Certificate
of Incorporation or By-laws of the Company, any instrument, agreement, mortgage,
judgment, order, award, decree or other restriction to which the Company or the
Stockholders are a party or by which any of them is bound or, to the knowledge
of the Stockholders, violates any statute or regulatory provision affecting any
of them; (ii) give any party to or with rights under any such instrument,
agreement, mortgage, judgment, order, award, decree or other restriction the
right to terminate, modify or otherwise change the rights or obligations of the
Company under such instrument, agreement, judgment, order, award, decree,
mortgage or other restriction or (iii) require on behalf of the Company or the
Stockholders any approval, consent or authorization of or any filing with or
notification to any federal, state or local court, governmental authority or
regulatory body, except as set forth in this Agreement or except where such
breach or default, right of termination, modification or change or failure to
obtain any approval, consent or authorization or to make any filing or notice
would not have a material adverse effect on the business or prospects of the
Company. The Stockholders have full power and authority to exchange the CSE
Shares with PAMCO pursuant to this Agreement and to do and perform all acts and
things required to be done by the Stockholders under this Agreement. True and
complete copies of the Certificate of Incorporation and By-laws of the Company
have been delivered to PAMCO.
1.4 Capital Structure. The authorized capital stock of the Company
consists of 1,000 shares of common stock, no par value per share, one hundred
(100%) percent of the issued and outstanding shares are owned beneficially and
of record by the Stockholders. None of the CSE Shares are held as treasury
shares. Except for this Agreement, there are no agreements, arrangements,
options, warrants or other rights or commitments of any character relating to
the issuance, sale, purchase or redemption of any shares of capital stock of the
Company, and no such agreements, arrangements, options, warrants or other rights
or commitments will be entered into or granted between the date hereof and the
Closing Date (as hereinafter defined). All of the CSE Shares of the Company are
validly issued, fully paid and nonassessable with no liability attaching to the
ownership thereof, and are owned of record and beneficially by the Stockholders
free and clear of any liens, claims, encumbrances or restrictions of any kind
and the exchange of the CSE Shares with PAMCO by the Stockholders as
contemplated by this Agreement will be sufficient to transfer good and
marketable record and beneficial title to such outstanding shares to PAMCO, free
and clear of liens, claims, encumbrances or restrictions of any kind.
- 2 -
<PAGE>
1.5 No Distributions on Capital Stock. Since June 30, 1995, the Company
has not purchased or redeemed any shares of its outstanding capital stock, has
not declared or paid any dividend or made any other distribution in respect of
its capital stock, excepting the cancellation of shares of the Company's stock
owned by Edward Bolton.
1.6 Financial Statements.
(a) The Company has furnished to PAMCO the balance sheets of
the Company as of June 30, 1995, and for the nine months ending March 31, 1996,
the related statements of income and of changes in financial position for the
periods then ended together with appropriate notes to such financial statements
(collectively, the "Financial Statements"). The Financial Statements are correct
and complete in all material respects and fairly present the financial position
of the Company as at the respective dates thereof and the results of its
operations for the respective years covered thereby, and have been prepared in
conformity with generally accepted accounting principles consistently applied
throughout all periods. Such financial statements are included in Schedule
1.6(A) hereto.
(b) There is set forth in Schedule 1.6(B) hereto a correct and
complete list of all (i) accounts, borrowing resolutions and deposit boxes
maintained by the Company at any bank or other financial institution, (ii) the
names of the persons authorized to sign or otherwise act with respect thereto,
and (iii) powers of attorney for the Company as of March 31, 1996.
1.7 Material Changes Since July 1, 1995. To March 31, 1996, the
business of the Company has been operated only in the ordinary course and,
whether or not in the ordinary course of business, there has not been, occurred
or arisen (i) any material adverse change in the financial condition of the
Company from that shown on the Company's March 31, 1996 balance sheet; (ii) any
damage or destruction in the nature of a casualty loss, whether covered by
insurance or not, to any property or business of the Company which is material
to the financial condition, operations or business of the Company; (iv) any
amendment or termination of any agreement or cancellation or reduction of any
debt owing to the Company or waiver or relinquishment of any right of material
value to the Company; or (v) any other event, condition or state of facts of any
character which materially and adversely affects the results of operations or
business, financial condition or property of the Company.
1.8 Availability of Assets and Legality of Use. The assets owned or
leased by the Company as of March 31, 1996 constitute all of the assets which
are being used in its business. To the knowledge of the Stockholders, such
assets are in good and serviceable condition, normal wear and tear excepted, and
suitable for the uses for which intended and such assets and their uses conform
in all material respects to all applicable laws.
- 3 -
<PAGE>
1.9 Title to Property. The Company has good and marketable title to all
of its assets, including the assets reflected on the Company's March 31, 1996
balance sheet and all of the assets thereafter acquired by it, except to the
extent that such assets have thereafter been disposed of for fair value in the
ordinary course of business.
1.10 Governmental Permits. To the knowledge of the Stockholders, as of
March 31, 1996, the Company possessed all licenses, permits and other
authorizations necessary to own or lease and operate its properties and to
conduct its business as now conducted.
1.11 Real Property and Leases. The Company does not own any real
property. Attached hereto as Schedule 1.11(A) are true and correct copies of
every lease or agreement under which the Company is lessee or sublessee of, or
holds or operates, any real property owned by any third party. To the knowledge
of the Stockholders, each of such leases and agreements is in full force and
effect and constitutes a legal, valid and binding obligation of the Company and,
to the knowledge of the Stockholders, the other parties thereto. To the
knowledge of the Stockholders, the Company is not in default in any material
respect under any such lease or agreement nor has any event occurred which, with
the passage of time or giving of notice or both, would constitute such a default
nor will the Company take any action or fail to take required action between the
date hereof and the Closing Date which would permit any such default or event to
occur. None of such leases and agreements requires the consent of any party
thereto to the transactions contemplated by this Agreement.
1.12 Insurance. As of March 31, 1996, the Company was not insured under
any insurance policy.
1.13 Insurance Claims. As of March 31, 1996, there are no claims which
are pending or, to the knowledge of the Stockholders, threatened against the
Company.
1.14 No Undisclosed Liabilities. As of March 31, 1996, the Company is
not subject to any material liability which is not shown or which is in excess
of amounts shown or reserved for in the Company's March 31, 1996 balance sheet
referred to in Section 1.6 hereof.
1.15 No Default, Violation or Litigation. As of March 31, 1996, the
Company was not in default in any material respect under any agreement, lease or
other document to which it is a party, or in violation of any law, rule, order,
writ, injunction or decree of any court or federal, state, municipal or other
governmental department, commission, board, bureau, agency or instrumentality.
As of March 31, 1996, there were no lawsuits, proceedings, claims or
governmental investigations pending or, to the knowledge of the Stockholders,
threatened, against the Company or against the properties or business thereof,
- 4 -
<PAGE>
and the Stockholders know of no factual basis for any such lawsuit, proceeding,
claim or investigation and there is no action, suit, proceeding or investigation
pending, threatened or contemplated which questions the legality, validity or
propriety of the transactions contemplated by this Agreement.
1.16 Tax Liabilities. The amounts reflected as liabilities for taxes on
the Company's March 31, 1996 balance sheet referred to in Section 1.6 hereof are
sufficient for the payment of all unpaid federal, state, county, local and
foreign taxes of the Company accrued for or applicable to the period ended on
such balance sheet date and all years and periods prior thereto. To the
knowledge of the Stockholders, all federal, state, county, local and foreign
income, use, excise, property, sales, business activity and other tax returns
which are required to be filed by or in respect of the Company up to and
including the date hereof have been filed and all taxes, including any interest
and penalties thereon, which have become due pursuant to such returns or
pursuant to any assessment have been paid and no extension of the time for
filing of any such return is presently in effect. To the knowledge of the
Stockholders, all such returns which have been filed or will be filed by or in
respect of the Company for any period ending on or before the Closing Date are
or will be true and correct.
1.17 Contracts. Except as set forth in Schedule 1.17 hereto or any
other schedule referred to herein, the Company is not a party to any contract as
of March 31, 1996.
1.18 Employee Agreements.
(a) The Company is a party to an Employment Agreement dated
as of July 20, 1994 between it and Edward Bolton, a copy of which is attached to
Schedule 1.18 hereto and no other employment agreements.
(b) There are no plans, contracts and arrangements, oral or
written, including but not limited to union contracts and employee benefit
plans, whereunder the Company has any obligations (other than obligations to
make current wage or salary payments terminable on notice of 30 days or less) to
or on behalf of its officers, employees or their beneficiaries or whereunder any
of such persons owes money to the Company as of March 31, 1996.
1.19 Employee Relations. To the knowledge of the Stockholders, as of
March 31, 1996, (i) the Company has not engaged in any unfair labor practice,
unlawful employment practice or unlawful discriminatory practice in the conduct
of its business, (ii) the Company has complied in all respects with all
applicable laws, rules and regulations relating to wages, hours and collective
bargaining and has withheld all amounts required by agreement to be withheld
from the wages or salaries of its employees and (iii) the Company is not a party
to or affected by or threatened with or, to the knowledge of the Stockholders,
in danger of being a party to or affected by, any labor dispute which materially
interferes or would materially interfere with the conduct of its business. There
- 5 -
<PAGE>
is set forth in Schedule 1.19 hereto the name and total annual compensation,
including bonuses, payable to each of the officers, directors and employees of
the Company whose total annual compensation, including bonuses, during the year
ended December 31, 1995 exceeded the sum of $100,000. Since December 31, 1995,
there has been no material increase in the compensation payable to any of such
officers, directors and employees, except as set forth in Schedule 1.19 hereto.
1.20 Employee Retirement Income Security Act. As of March 31, 1996, the
Company had no unpaid liability in respect of any "employee benefit plans"
within the meaning of Section 3(3) of the Employee Retirement Income Security
Act of 1974, as amended, ("ERISA") established or maintained or to which
contributions are or were made by the Company to the Pension Benefit Guaranty
Corporation ("PBGC") or to any beneficiary of such plans.
1.21 Trademarks and Proprietary Rights. As of March 31, 1996, the
Company owns no trademarks, trade names, copyrights or applications thereto.
1.22 Finders. Neither the Company nor the Stockholders have paid or
become obligated to pay any fee or commission to any broker, finder or
intermediary. Neither the Company nor the Stockholders have any agreement or
obligation whatsoever with entities other than PAMCO regarding any proposed
acquisition of the Company by any such entity and neither of them is engaged in
any negotiations with any such entity for any such acquisition.
1.24 Representations and Warranties to Be True on the Closing Date. All
representations and warranties set forth in this Article I will be true and
correct on the Closing Date or otherwise on the date indicated herein. As used
in this Agreement, the phrase "to the knowledge of the Stockholders" and
variations thereof shall mean the knowledge of Saul Rose, after due inquiry by
him of the officers of the Company.
ARTICLE II
REPRESENTATIONS AND WARRANTIES OF PAMCO
PAMCO represents and warrants to the Stockholders and agrees as
follows:
2.1 Organization of PAMCO. PAMCO is a corporation duly organized,
validly existing and in good standing under the laws of the Commonwealth of
Pennsylvania. Each of PAMCO's subsidiaries is a corporation duly organized,
validly existing and in good standing under the laws of its respective
jurisdiction of incorporation. PAMCO has the corporate power and authority
necessary or required to carry on its business as presently conducted.
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2.2 Subsidiaries. PAMCO has no subsidiaries other than Provident
Indemnity Life Insurance Company ("PILIC"), Premarco, Inc., Passages Advance
Planning Agency, Inc., Tamerlane Agency, Inc., PAMCO Financial Services, Inc.,
and PAMCO Leasing Corp. (collectively, the "PAMCO Subsidiaries"). PILIC has five
subsidiaries, Provident American Life & Health Insurance Company (formerly Union
Benefit Life Insurance Company), PAMCO Realty Co., Inc., Montgomery Management
Corporation, Richard E. Field & Associates, Inc., and NIA Corporation.
2.3 Corporate Authority. This Agreement and the transactions
contemplated herein have been duly approved by all necessary corporate action on
the part of PAMCO. This Agreement, when executed and delivered by PAMCO, and
assuming the due execution hereof by the Stockholders, will constitute the
valid, legal and binding agreement of PAMCO enforceable in accordance with its
terms.
2.4 Capital Structure of PAMCO. The authorized capital stock of PAMCO
consists of 25,000,000 shares of common stock, $.10 par value, of which
approximately 9,711,931 shares have been issued and are outstanding, 2,500,000
shares of Class A common voting stock, $.10 par value per share, of which no
shares are issued and outstanding and 5,000,000 shares of preferred stock, $1.00
par value, of which 580,250 shares of Series A Cumulative Convertible Preferred
Stock are issued and outstanding. There are a number of agreements,
arrangements, options, and warrants relating to the issuance, sale, purchase or
redemption of any shares of capital stock of PAMCO. All of the outstanding
shares of capital stock of PAMCO are validly issued, fully paid and
nonassessable with no liability attaching to the ownership thereof.
2.5 Finders. PAMCO has not paid or become obligated to pay any fee or
commission to any broker, finder or intermediary for or on account of the
transactions provided for in this Agreement.
2.6 Nasdaq Listing. The shares of PAMCO's Common Stock (the "PAMCO
Shares") to be issued to the Stockholders pursuant to Section 4.2 hereof will,
upon the issuance thereof, be authorized for quotation on the Nasdaq SmallCap
Market under the symbol "PAMC." To the knowledge of PAMCO, the authorization for
quotation of shares of PAMCO's Common Stock on the Nasdaq Market System, as
defined in Securities and Exchange Commission Rule 11Ac1-2(a)(3), is not
suspended, terminated or prohibited, and PAMCO has no knowledge of any facts
which would lead PAMCO to believe that such authorization for quotation of
shares of PAMCO's Common Stock in the Nasdaq Market System will be suspended,
terminated or prohibited.
2.7 Representations and Warranties to Be True on the Closing Date. All
of the representations and warranties set forth in this Article II will be true
and correct on the Closing Date.
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ARTICLE III
ACTION PRIOR TO THE CLOSING DATE
The parties covenant to take the following action between the date
hereof and the Closing Date:
3.1 Investigation.
(a) The Stockholders and the Company shall afford to the
officers, employees and authorized representatives, including, without
limitation, independent public accountants and attorneys, of PAMCO such access
during normal working hours to the offices, properties, business and financial
and other records of the Company as PAMCO shall deem necessary or desirable, and
shall furnish to PAMCO and its authorized representatives such additional
financial and operating and other data as shall be reasonably requested,
including all such information and data as shall be necessary in order to enable
PAMCO and its representatives to verify to their satisfaction the accuracy of
the financial statements of the Company and the representations and warranties
of the Stockholders contained in Article I of this Agreement.
(b) PAMCO shall afford to the Stockholders and their
authorized representatives, including, without limitation, their independent
public accountants and attorneys, such access during normal working hours to the
offices, properties, business and financial and other records of PAMCO as the
Stockholders shall deem necessary or desirable, and shall furnish to the
Stockholders and their authorized representatives such additional financial and
operating and other data as shall be reasonably requested, including all such
information and data as shall be necessary in order to enable the Stockholders
and their representatives to verify to their satisfaction the accuracy of the
consolidated financial statements of PAMCO and the representations and
warranties of PAMCO contained in Article II of this Agreement.
3.2 Confidential Nature of Information. PAMCO, the Stockholders and the
Company agree that, in the event that the transactions contemplated herein shall
not be consummated, each will treat in confidence all documents, materials and
other information which it shall have obtained during the course of the
negotiations leading to this Agreement, the investigation of the other party
hereto and the preparation of this Agreement and other documents relating to
this Agreement, and shall return to the other party all copies of non-public
documents and materials which have been furnished in connection therewith.
3.3 Preserve Accuracy of Representations and Warranties.
(a) The Stockholders shall refrain from taking any action, and
shall cause the Company to refrain from taking any action, which would render
any representation or warranty contained in Article I of this Agreement
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inaccurate as of the Closing Date hereunder. The Stockholders will promptly
notify PAMCO of any lawsuits, claims, proceedings or investigations that, to the
knowledge of the Stockholders, may be threatened, brought, asserted or commenced
against the Company, its officers or directors or the Stockholders (i) involving
in any way the transactions contemplated by this Agreement or (ii) which would,
if determined adversely to the Company, have a material adverse impact on the
business, properties or assets of the Company.
(b) PAMCO shall refrain from taking any action and shall cause
the PAMCO Subsidiaries to refrain from taking any action which would render any
representation or warranty contained in Article II of this Agreement inaccurate
as of the Closing Date. PAMCO will promptly notify the Stockholders of any
lawsuits, claims, proceedings or investigations that, to the knowledge of PAMCO,
may be threatened, brought, asserted or commenced against PAMCO or the PAMCO
Subsidiaries or their respective officers and directors (i) involving in any way
the transactions contemplated by this Agreement or (ii) which would, if
determined adversely, have a material adverse impact on the business, properties
or assets of PAMCO or the PAMCO Subsidiaries.
3.4 Insurance Law Compliance. PAMCO and the Stockholders shall file as
promptly as possible after the date hereof with the Pennsylvania Insurance
Department the notifications, requests for exemptions and other information
required to be filed under the insurance company laws of the Commonwealth of
Pennsylvania (the "Law"), or any rules and regulations promulgated thereunder,
with respect to the transactions contemplated hereby. Each party warrants that
all such filings by it will be, as of the date filed, true and accurate and in
accordance with the requirements of the Law and any such rules and regulations.
Each of PAMCO and the Stockholders agrees to make available to the other such
information as each of them may reasonably request relative to its business,
assets and property as may be required of each of them to file any additional
information requested by the Pennsylvania Insurance Department under the Law and
any such rules and regulations. PAMCO shall be responsible for, and shall bear
the expense of, all such filings.
ARTICLE IV
EXCHANGE AND CLOSING
4.1 Closing Date. Subject to the fulfillment of the conditions
precedent specified in Articles V, VI and VII hereof, the transactions
contemplated by this Agreement shall be consummated at 3:00 p.m. on August 15,
1996 (the "Closing Date") at the offices of PAMCO, 2500 DeKalb Pike, Norristown,
Pennsylvania 19404.
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4.2 Exchange. On the Closing Date, and subject to the terms and
conditions set forth herein, PAMCO will issue and deliver 123,937 PAMCO Shares
to the Stockholders in exchange for delivery of the CSE Shares to PAMCO by the
Stockholders. PAMCO and the Stockholders agree that the exchange of the PAMCO
Shares for the CSE Shares contemplated by this Agreement is intended to result
in a tax-free reorganization within the meaning of Section 368(a)(1)(B) of the
Internal Revenue Code of 1986 as amended (the "Code"). PAMCO and the
Stockholders further agree to adopt and file any documentation to comply with
the Code in order to preserve the tax-free treatment of the exchange of the
PAMCO Shares for the CSE Shares.
4.3 Delivery by the Stockholders. In addition to the deliveries called
for by Article VI hereof, the Stockholders shall deliver to PAMCO a certificate
or certificates representing all of the CSE Shares, together with fully executed
and witnessed stock powers in blank attached thereto with signatures guaranteed
by a bank or trust company or a New York Stock Exchange Medallion Signature
Program participant.
4.4 Delivery by PAMCO. In addition to the deliveries called for by
Article VII hereof, PAMCO shall deliver to the Stockholders a certificate or
certificates representing the PAMCO Shares. The Stockholders acknowledge that
the PAMCO Shares will not have been registered under the Securities Act of 1933,
as amended, and accordingly, shall bear a restrictive legend similar to that set
forth in Section 6.8 hereof.
ARTICLE V
CONDITIONS PRECEDENT TO OBLIGATIONS OF BOTH PARTIES
The obligations of PAMCO to purchase and pay for the CSE Shares and the
obligations of the Stockholders to sell and deliver the CSE Shares shall be
subject to the satisfaction, on or prior to the Closing Date, of the following
conditions:
5.1 Insurance Regulatory Approval. To the extent approval of the
issuance of the PAMCO Shares to the Stockholders is required under Section
1402(a) of the Law, the Stockholders shall have received an order of the
Pennsylvania Insurance Department approving the issuance of the PAMCO Shares to
the Stockholders or an order of the Pennsylvania Insurance Department exempting
the issuance of the PAMCO Shares to the Stockholders from the requirements of
Section 1402(a) of the Law.
5.2 Certain Legal Proceedings. There shall not be pending by any
governmental entity any action, suit or proceeding challenging the exchange of
the PAMCO Shares by PAMCO for the CSE Shares or seeking to restrain or prohibit
the making or consummation of the exchange of the CSE Shares for the PAMCO
Shares; or seeking to prohibit or materially limit the ownership of operation by
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PAMCO of a material portion of the business or assets of the Company or to
compel PAMCO to dispose of or hold separate any material portion of the business
or assets of the Company; or seeking to impose material limitations on the
ability of PAMCO to acquire, hold or exercise full rights of ownership of any of
the CSE Shares or seeking to prohibit PAMCO or any of its subsidiaries from
effectively controlling in any material respect any material portion of the
business or operations of the Company.
5.3 Bolton Release. Edward Bolton shall have executed and delivered to
PAMCO a Release by Edward Bolton of PAMCO, its subsidiaries, affiliates,
officers and directors, agents and employees and CSE in form satisfactory to the
parties.
5.4 Releases.
(a) On the Closing Date, the Stockholders shall have executed
and delivered to PAMCO a release by the Stockholders of PAMCO, its subsidiaries,
affiliates, officers and directors, agents and employees in form and substance
satisfactory to counsel, and the Stockholders shall have caused Residential
Health Care, Inc., t/a Medical Resource, and National Hospital Network, Inc. to
execute and deliver to PAMCO a release by each of them of PAMCO, its
subsidiaries, affiliates, officers and directors, agents and employees.
(b) On the Closing Date, PAMCO shall have executed and
delivered to the Stockholders a release by PAMCO of the Stockholders, its
subsidiaries, affiliates, officers and directors, agents and employees,
including Residential Health Care, Inc., t/a Medical Resource, and National
Hospital Network, Inc., in form and substance satisfactory to counsel.
ARTICLE VI
CONDITIONS PRECEDENT TO OBLIGATIONS OF PAMCO
The obligations of PAMCO under this Agreement to purchase and pay for
the CSE Shares shall, at the option of PAMCO, be subject to the satisfaction, on
or prior to the Closing Date, of the following conditions:
6.1 Termination of Contracts. All Contracts of the Company, other than
those with PAMCO, any subsidiary or affiliate of PAMCO, or the Bolton Employment
Agreement shall have been terminated. With regard to the Bolton Employment
Agreement, a fully executed original shall be delivered to PAMCO at or prior to
the Closing Date.
6.2 No Misrepresentation or Breach of Covenants and Warranties. There
shall have been no breach by the Stockholders in the performance of any of their
covenants and agreements herein, each of the representations and warranties of
the Stockholders contained or referred to in this Agreement shall be true and
correct in all material respects on the Closing Date as though made on the
Closing Date and there shall have been delivered to PAMCO a certificate or
certificates to that effect, dated the Closing Date and signed by the
Stockholders.
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6.3 No Changes in or Destruction of Property. There shall have been,
prior to March 31, 1996, (i) no material adverse change in the condition,
financial or otherwise, of the Company; (ii) no adverse federal, state or local
legislative or regulatory change affecting in any material respect the services
or business of the Company and (iii) the properties and assets of the Company
shall not have been materially damaged by fire, flood, casualty, act of God or
the public enemy or other cause, regardless of insurance coverage for such
damage, so as to impair in any material respect the ability of the Company to
render services or continue operations. There shall have been delivered to PAMCO
a certificate, dated the Closing Date, and signed by the Stockholders (a) to the
effect that prior to March 31, 1996, there was no such material adverse change
as stated in clause (i) hereof and no such material damage as stated in clause
(iii) hereof and (b) further stating that nothing has come to the Stockholders'
attention since March 31, 1996, in the course of their activities on behalf of
the Company, which causes them to believe that during such period there occurred
any adverse federal, state or local legislative or regulatory change affecting
in any material respect the services or business of the Company.
6.4 Legal Matters. All approvals required under the Law shall have been
obtained and no action, suit, investigation or proceeding shall have been
instituted or threatened by any person, corporation or governmental agency to
restrain, prohibit, collect damages arising out of or otherwise challenge the
legality or validity of the transactions contemplated herein.
6.5 Resignation of Company Directors. There shall have been delivered
to PAMCO, dated the Closing Date, the written resignation of each director of
the Company.
6.6 Opinion of Counsel for the Stockholders. PAMCO shall have received
from Judith Jennings, counsel to the Stockholders, an opinion dated the Closing
Date, in form and substance satisfactory to PAMCO and its counsel, to the effect
that:
(a) As of March 31, 1996, the Company is a corporation duly
organized, validly existing and in good standing under the laws of the State of
New Jersey. The Company is not qualified to transact business as a foreign
corporation in any jurisdiction other than the Commonwealth of Pennsylvania
where the Company is duly qualified to do business and is good standing as a
foreign corporation. The Company has full corporate power and authority and
other authorizations necessary or required for it to own or lease and operate
its properties and to carry on its business as now conducted.
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(b) The authorized capital stock of the Company consists of
1,000 shares of common stock, no par value per share; one hundred (100%) percent
of the issued and outstanding shares are owned beneficially and of record by the
Stockholders. Except for this Agreement, to the knowledge of such counsel, there
are no agreements, arrangements, options, warrants or other rights or
commitments of any character relating to the issuance, sale, purchase or
redemption of any shares of capital stock of the Company and all of the issued
and outstanding shares of common stock of the Company on the Closing Date are
validly issued, fully paid and nonassessable with no liability attaching to the
ownership thereof.
(c) This Agreement has been duly and validly executed and
delivered by the Stockholders and such agreement, assuming due execution by
PAMCO, is the valid and binding agreement of the Stockholders enforceable
against the Stockholders in accordance with its terms except as enforcement of
the Agreement may be limited by bankruptcy, insolvency or other similar laws
affecting creditors' rights generally and that the remedy of specific
performance is subject to the discretion of the court before which proceedings
therefor are brought.
(d) The Stockholders have full power and authority to execute
and deliver this Agreement and to perform their obligations thereunder. Neither
the execution and delivery of this Agreement, nor the consummation of the
transactions contemplated herein, nor compliance with and fulfillment of the
terms and provisions hereof (i) conflicts with or results in the breach of the
terms, conditions or provisions of, or constitutes a default under any agreement
or instrument known to such counsel to which the Company or the Stockholders is
a party or by which any of them is bound; (ii) gives any party to or with rights
under any such agreement or instrument the right to terminate, modify or
otherwise change the rights or obligations of the Company under any such
agreement or instrument or (iii) requires the consent, approval or authorization
of or any filing with or notification to any federal, state or local court,
governmental authority or regulatory body not already obtained or made, as the
case may be.
(e) Such counsel do not know of any action, suit, proceeding
or investigation pending or threatened against the Stockholders or the Company
which might result in a material adverse change in the properties, business or
assets or in the condition (financial or otherwise) of the Company, or that any
action, suit, proceeding or investigation is pending or to their knowledge
threatened which questions the legality, validity or propriety of this Agreement
or of any action taken or to be taken by the Stockholders pursuant to or in
connection with this Agreement.
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(f) After due inquiry and examination of the stock records of
the Company, to the knowledge of such counsel, the Stockholders are the lawful
owners of the CSE Shares, free and clear of all adverse claims, with
unrestricted right and power to exchange the CSE Shares with PAMCO. The
Stockholders have executed and delivered to PAMCO such instruments as are
sufficient to vest good and marketable title to the CSE Shares in PAMCO free and
clear of all adverse claims.
(g) To such further effect with respect to legal matters
relating to this agreement as PAMCO or its counsel may reasonably request.
In giving such opinion, counsel for the Stockholders may rely, as to
matters of fact, upon certificates of officers of the Company, and as to matters
relating to the law of any state other than the State of New Jersey, upon
opinions of other counsel satisfactory to them, provided that such counsel shall
state that they believe that they are justified in relying upon such
certificates and opinions and deliver copies thereof to PAMCO prior to the
Closing Date.
6.7 Access to Books and Records. The Stockholders and the Company have
provided reasonable access to the Company's books and records as provided in
Section 3.1(a) hereof.
6.8 Investment Representation. The Stockholders acknowledge that the
PAMCO Shares have not been registered under the Securities Act of 1933, as
amended (the "Act"), and agree that they are acquiring the PAMCO Shares for
investment purposes only and not with a view to any sale or other distribution
thereof in a manner that would violate the Act. The Stockholders consent to the
placement of the following legend on the certificate or certificates
representing the PAMCO Shares to be issued to them:
"THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED, OR ANY STATE SECURITIES
LAWS. THESE SECURITIES MAY NOT BE SOLD OR OFFERED FOR SALE
IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT AS TO
THE SECURITIES UNDER SAID ACT AND ANY APPLICABLE STATE
SECURITIES LAWS OR AN EXEMPTION FROM SUCH REQUIREMENTS."
6.9 Board Approval. PAMCO's Board of Directors shall have approved this
Agreement and the consummation of the transactions contemplated hereby.
6.10 Stockholder Approval. The transactions contemplated by this
Agreement shall have been approved on or before the Closing Date by the
requisite vote of the stockholders of the Company as is required under the New
Jersey Business Corporation Act.
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6.11 Approval by Counsel. All matters, proceedings, instruments and
documents required to carry out this Agreement or incidental thereto and all
other relevant legal matters shall have been approved at or before the Closing
Date by Butera, Beausang, Cohen & Brennan, counsel to PAMCO, which approval
shall not be unreasonably withheld.
ARTICLE VII
CONDITIONS PRECEDENT TO OBLIGATIONS OF
THE STOCKHOLDERS
The obligations of the Stockholders under this Agreement to sell and
deliver the CSE Shares shall, at the option of the Stockholders, be subject to
the satisfaction, on or prior to the Closing Date, of the following conditions:
7.1 No Misrepresentation or Breach of Covenants and Warranties. There
shall have been no breach by PAMCO in the performance of any of its covenants
herein, each of the representations and warranties of PAMCO contained or
referred to in this Agreement shall be true and correct in all material respects
on the Closing Date as though made on the Closing Date, and there shall have
been delivered to the Stockholders a certificate or certificates to that effect,
dated the Closing Date and signed on behalf of PAMCO by the President or any
Vice President of PAMCO.
7.2 Opinion of Counsel for PAMCO. The Stockholders shall have received
from Butera, Beausang, Cohen & Brennan, counsel to PAMCO, an opinion dated the
Closing Date, in form and substance satisfactory to the Stockholders and their
counsel, to the effect that:
(a) PAMCO is a duly organized and validly existing corporation
in good standing under the laws of the Commonwealth of Pennsylvania and PAMCO
has the corporate power and authority to consummate the transactions as provided
for herein.
(b) The authorized capital stock of PAMCO consists of
25,000,000 shares of common stock, $.10 par value, of which 9,711,931 shares
have been issued and are outstanding, 2,500,000 shares of Class A common voting
stock, $.10 par value per share, of which no shares are issued or outstanding,
and 5,000,000 shares of preferred stock, $1.00 par value, of which 580,250
shares of Series A Cumulative Convertible Preferred Stock are issued and
outstanding. All of the outstanding shares of PAMCO are validly issued, fully
paid, and nonassessable with no liability attaching to the ownership thereof.
(c) This Agreement and the transactions contemplated herein
have been duly approved by all necessary corporate action on the part of PAMCO
and this Agreement has been duly and validly executed and delivered by PAMCO;
this Agreement, assuming due execution hereof by the Stockholders, is the valid
and binding agreement of PAMCO enforceable against PAMCO in accordance with its
terms, except as enforcement of this Agreement may be limited by bankruptcy,
insolvency or other similar laws affecting the enforcement of creditors' rights
generally and that the remedy of specific performance is subject to the
discretion of the court before which proceedings therefor are brought.
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(d) Neither the execution and delivery of this Agreement nor
the consummation of the transactions contemplated herein, nor compliance with
and fulfillment of the terms and provisions hereof (i) conflicts with or results
in the breach of the terms, conditions or provisions of the governing
instruments of PAMCO or any agreement or instrument known to such counsel to
which PAMCO is a party or by which it is bound; (ii) gives any party to or with
rights under any such agreement or instrument the right to terminate, modify or
otherwise change the rights or obligations of PAMCO under any such agreement or
instrument or (iii) requires the consent, approval or authorization of or any
filing with or notification to any federal, state or local court, governmental
authority or regulatory body not already obtained or made, as the case may be.
(e) Such counsel do not know of any action, suit, proceeding
or investigation pending or threatened against PAMCO and which questions the
legality, validity or propriety of (i) this Agreement or of (ii) any action
taken or to be taken by PAMCO hereto pursuant to or in connection with this
Agreement.
(f) The PAMCO Shares are authorized for quotation on the
Nasdaq SmallCap Market and, to the knowledge of such counsel, such authorization
has not been suspended, terminated or prohibited nor are there any facts which
cause such counsel to believe such authorization will be suspended, terminated
or prohibited.
(g) To such further effect with respect to legal matters
relating to this Agreement as the Stockholders or their counsel may reasonably
request.
In giving such opinion, Butera, Beausang, Cohen & Brennan may rely, as
to matters of fact, upon certificates of officers of PAMCO and, as to matters
relating to the law of any jurisdiction other than the Commonwealth of
Pennsylvania, upon the opinions of other counsel satisfactory to them, provided
that such counsel shall state that they believe that they are justified in
relying upon such certificates and opinions and deliver copies thereof to the
Stockholders prior to the Closing Date.
7.4 Approval by Counsel. All matters, proceedings, instruments and
documents required to carry out this Agreement or incidental thereto and all
other relevant legal matters shall have been approved at or before the Closing
Date by Stephen M. Robinson, P.A., special counsel to the Stockholders, which
approval shall not be unreasonably withheld.
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7.5 Registration. Provident shall have agreed to register the PAMCO
Shares under the Act by filing Form S-3 with the United States Securities and
Exchange Commission promptly following the completion of Closing hereunder, and
at Provident's expense to use its best effort to cause the S-3 to become
effective.
ARTICLE VIII
TERMINATION
8.1 Termination. This Agreement shall be terminated and there shall
thereafter be no liability of any party to any other party hereunder, at any
time prior to the Closing Date:
(a) By the mutual consent of PAMCO and the Stockholders.
(b) By PAMCO or the Stockholders, if the transactions
contemplated herein are not closed on or before August 16, 1996; provided,
however, that nothing in this Section 8.1 shall relieve any party of liability
for breach of this Agreement.
ARTICLE IX
SURVIVAL OF OBLIGATIONS; INDEMNIFICATION
9.1 Survival of Obligations. All certifications, representations and
warranties made herein by the Stockholders and their obligations to be performed
pursuant to the terms hereof, shall survive the Closing Date hereunder. All
representations and warranties contained herein shall terminate on March 31,
1997; provided, that: (i) the representations and warranties contained in
Section 1.16 hereof shall expire on March 31, 1999, or with respect to any
dispute with the Internal Revenue Service, upon the earlier to occur of (x)
final settlement and satisfaction of any judgment or full payment of any
resolution of such dispute and the payment of all taxes, interest and penalties
arising therefrom, as the case may be or (y) such time, if any, as the claim
shall be barred by the applicable statute of limitations, and (ii) the
representations and warranties contained in Section 1.4 hereof shall not
terminate.
9.2 Indemnification.
(a) The Stockholders agree to jointly and severally indemnify
and hold harmless PAMCO, the Company and their successors and assigns
(collectively, the "Indemnified Persons") from and against any and all (x)
liabilities, losses, costs, deficiencies or damages ("Loss") and (y) reasonable
attorneys' and accountants' fees and expenses, court costs and all other
reasonable out-of-pocket expenses ("Expense") incurred by any Indemnified
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Person, in each case net of any insurance proceeds received and retained by such
Indemnified Person, in connection with or arising from (i) any claim that the
Stockholders did not convey to PAMCO good and marketable title to all of the
issued and outstanding capital stock of the Company pursuant to this Agreement,
(ii) any breach by the Stockholders of any of their covenants in, or any failure
of the Stockholders to perform any of their obligations under, this Agreement or
(iii) any breach of any warranty or the inaccuracy of any representation of the
Stockholders contained or referred to in this Agreement or in any certificate
delivered by or on behalf of the Stockholders pursuant hereto. This
indemnification shall not extend to any claim by PAMCO for monies due PAMCO from
the Company through March 31, 1996.
(b) If PAMCO believes that any Indemnified Person has suffered
or incurred any Loss or incurred any Expense, PAMCO shall so notify the
Stockholders promptly in writing describing such Loss or Expense, the amount
thereof, if known, and the method of computation of such Loss or Expense, all
with reasonable particularity and containing a reference to the provision of
this Agreement or any certificate delivered pursuant hereto in respect of which
such Loss or Expense shall have occurred. If any action at law or suit in equity
is instituted by or against a third party with respect to which any Indemnified
Person intends to claim any liability or expense as Loss or Expense under this
Section 9.2, such Indemnified Person shall promptly notify the Stockholders of
such action or suit.
(c) Subject to paragraph (d) of this Section 9.2, the
Indemnified Persons shall have the right to conduct and control, through counsel
of their choosing, any third party claim, action or suit and may compromise or
settle the same, provided that any of the Indemnified Persons shall give the
Stockholders advance notice of any proposed compromise or settlement. The
Indemnified Persons shall permit the Stockholders to participate in the defense
of any such action or suit through counsel chosen by it, provided that the fees
and expenses of such counsel shall be borne by the Stockholders. Any compromise
or settlement with respect to a claim for money damages effected after the
Stockholders, by notice to the Indemnified Persons, shall have disapproved such
compromise or settlement, shall discharge the Stockholders from liability with
respect to the subject matter thereof and no amount in respect thereof shall be
claimed as Loss or Expense under this Section 9.2.
(d) If the remedy sought in any action or suit referred to in
paragraph (c) of this Section 9.2 is solely money damages and the sum of (i) the
amount claimed in such action or suit and (ii) all amounts claimed in all
pending claims for indemnity under this Section 9.2 does not exceed the
aggregate liability of the Stockholders under this Section 9.2, the Stockholders
shall have 15 business days after receipt of the notice referred to in the last
sentence of paragraph (b) of this Section 9.2 to notify the Indemnified Persons
that they elect to conduct and control such action or suit. If the Stockholders
do not give the foregoing notice, the Indemnified Persons shall have the right
to defend, contest, settle or compromise such action or suit in the exercise of
their exclusive discretion and the Stockholders shall, upon request from any of
- 18 -
<PAGE>
the Indemnified Persons, promptly pay to such Indemnified Persons in accordance
with the other terms of this Section 9.2 the amount of any Loss resulting from
its liability to the third party claimant and all related Expense. If the
Stockholders give the foregoing notice, the Stockholders shall have the right to
undertake, conduct and control, through counsel of their own choosing and at the
sole expense of the Stockholders, the conduct and settlement of such action or
suit, and the Indemnified Persons shall cooperate with the Stockholders in
connection therewith; provided that (x) the Stockholders shall not thereby
permit to exist any lien, encumbrance or other adverse charge upon any asset of
any Indemnified Person, (y) the Stockholders shall permit the Indemnified
Persons to participate in such conduct or settlement through counsel chosen by
the Indemnified Persons, but the fees and expenses of such counsel shall be
borne by the Indemnified Persons, except as provided in clause (z) hereof and
(z) the Stockholders shall agree promptly to reimburse to the extent required
under this Section 9.2 the Indemnified Persons for the full amount of any Loss
resulting from such action or suit and all related Expense incurred by the
Indemnified Persons, except fees and expenses of counsel for the Indemnified
Persons incurred after the assumption of the conduct and control of such action
or suit by the Stockholders. So long as the Stockholders are contesting any such
action or suit in good faith, the Indemnified Persons shall not pay or settle
any such action or suit. Notwithstanding the foregoing, the Indemnified Persons
shall have the right to pay or settle any such action or suit, provided that in
such event the Indemnified Persons shall waive any right to indemnity therefor
by the Stockholders and no amount in respect thereof shall be claimed as Loss or
Expense under this Section 9.2.
ARTICLE X
POST-CLOSING OBLIGATIONS
10.1 Registration of PAMCO Shares. Promptly following the Closing Date
hereunder, but in no event later than twelve (12) months from the Closing Date,
PAMCO shall file a Registration Statement on Form S-3 ("Registration Statement")
with the United States Securities and Exchange Commission ("SEC") to register
the PAMCO Shares issued to the Stockholders hereunder, and shall use its best
effort to cause the Registration Statement to become effective as soon as
practicable thereafter. All expenses incurred in connection with the
registration of the PAMCO Shares issued to the Stockholders pursuant to this
Agreement shall be borne by PAMCO. Notwithstanding the foregoing, the
Stockholders shall be responsible for any underwriter's fees, discounts, or
commissions related to the sale by them to third parties of the PAMCO Shares and
any legal fees incurred by the Stockholders in connection therewith.
- 19 -
<PAGE>
10.2 Aggregate Transaction Value; Payment of Additional PAMCO Shares.
In the event that the aggregate value of the PAMCO Shares on the date on which
the Registration Statement is declared effective by the SEC is less than
$1,239,370 ("Aggregate Transaction Value"), PAMCO shall, within ten (10)
business days following the effective date of the Registration Statement, issue
to the Stockholders such additional number of PAMCO Shares as shall be necessary
to increase the value of the PAMCO Shares to the Aggregate Transaction Value.
For purposes hereof, the value of the PAMCO Shares shall be determined by
ascertaining the Market Price of the PAMCO Shares on the date the Registration
Statement becomes effective. As used herein, the term "Market Price" shall mean,
with respect to one share of PAMCO Common Stock at any date, the average of the
daily closing prices for the PAMCO Common Stock on the Nasdaq SmallCap Market
for the 30 consecutive business days before the day in question, as adjusted for
any stock dividend, split, combination, or reclassification that took effect
during such 30 business day period, or, in case no sales took place on any day
in question during such 30 business day period, the last bid price on such day,
in either case on the principal national securities exchange on which the PAMCO
Common Stock is then listed or admitted to trading, or on the National
Association of Securities Dealers Automated Quotations System ("NASDAQ"),
National Market System, or, if the PAMCO Common Stock is not listed or admitted
for trading on any such exchange or on the NASDAQ National Market System on any
day in question, then such price as shall be deemed to be the last bid price
quoted on the NASDAQ interdealer quotation system on such day, or, if the PAMCO
Common Stock is not listed or admitted for trading on the NASDAQ interdealer
quotation system, then the price shall be deemed to be the last reported bid
price on such day as reported by the National Quotation Bureau, Inc., provided,
however, that if the Common Stock is not traded in such matter that the
quotations referred to in this subsection are available for the period required
hereunder, the Market Price shall be determined in good faith by at least a
majority of the members of the Board of Directors of PAMCO. If the PAMCO Common
Stock is not then traded, or the Market Price cannot be ascertained by the
method described above, the Market Price shall be as agreed between PAMCO and
the Stockholders, or in the absence of an agreement, each shall appoint an
appraiser, the appraisers so chosen shall appoint a third appraiser, and the
Market Price shall be equal to the average price per share determined by the
three appraisers.
10.3 Obligation of PAMCO to File Registration Statement to Survive
Closing. The obligation of PAMCO to file a Registration Statement to register
the PAMCO Shares shall survive the Closing hereunder.
- 20 -
<PAGE>
ARTICLE XI
MISCELLANEOUS
11.1 Notices. All notices or other communications required or permitted
hereunder shall be in writing and shall be given by confirmed telex or telecopy
or registered mail addressed,
If to PAMCO, to:
Provident American Corporation
P.O. Box 511
2500 DeKalb Pike
Norristown, PA 19404-0511
Attention: Alvin H. Clemens,
Chairman of the Board
and Chief Executive Officer
with a copy to:
Butera, Beausang, Cohen & Brennan
Suite 212
630 Freedom Business Center
King of Prussia, PA 19406
Attention: Michael F. Beausang, Jr., Esq.
If to the Stockholders, to:
Saul Rose, D.O. and Joan Rose
3415 N.W. 59th Street
Boca Raton, FL 33496
with a copy to:
Judith Jennings, Esq.
P.O. Box 631
40 Jennings Road
Medford, NJ 08055
and to:
Stephen M. Robinson, P.A.
172 Tuckerton Road
Medford, NJ 08055
Attention: Stephen M. Robinson, Esq.
11.2 Expenses. Except as may be otherwise provided herein, each party
hereto shall pay its own expenses, including, without limitation, legal and
accounting fees and expenses, incident to its negotiation and preparation of
this Agreement and to its performance and compliance with the provisions
contained herein.
- 21 -
<PAGE>
11.3 Governing Law. This Agreement shall be governed by and construed
in accordance with the laws of the Commonwealth of Pennsylvania without regard
to its rules on conflicts of law.
11.4 Successors and Assigns. This Agreement shall be binding upon and
inure to the benefit of the parties hereto and their respective successors and
assigns, provided that the rights of the Stockholders herein may not be assigned
and the rights of PAMCO may only be assigned (a) to such other business
organization which shall succeed to substantially all the assets, liabilities
and business of PAMCO or (b) to a wholly owned subsidiary of PAMCO in which
event such assignment shall not relieve PAMCO of any of PAMCO's obligations to
the Stockholders under this Agreement.
11.5 Partial Invalidity. In case any one or more of the provisions
contained herein shall, for any reason, be held to be invalid, illegal or
unenforceable in any respect, such invalidity, illegality or unenforceability
shall not affect any other provision of this Agreement, but this Agreement shall
be construed as if such invalid, illegal or unenforceable provision or
provisions had never been contained herein unless the deletion of such provision
or provisions would result in such a material change as to cause completion of
the transactions contemplated herein to be unreasonable.
11.6 Waivers. The Stockholders and PAMCO may, by written instrument,
extend the time for the performance of any of the obligations or other acts of
the other party and with respect to this Agreement, (a) waive any inaccuracies
in the representations and warranties of the other party in this Agreement or in
any document delivered pursuant to this Agreement, (b) waive compliance with any
of the covenants or the other party contained in this Agreement and (c) waive
the other party's performance of any of its obligations set out in this
Agreement. Any agreement on the part of the parties hereto for any such
extension or waiver shall be validly and sufficiently authorized for the
purposes of this Agreement if, as to PAMCO, it is authorized by Alvin H. Clemens
and, as to the Stockholders, it is authorized by Saul Rose.
11.7 Execution in Counterparts. This Agreement may be executed in two
or more counterparts, all of which shall be considered one and the same
agreement and shall become a binding agreement when one or more counterparts
have been signed by each of the parties and delivered to each of the other
parties.
11.8 Titles and Headings. Titles and headings to Articles and Sections
herein are inserted for convenience of reference only and are not intended to be
a part of or to affect the meaning or interpretation of this Agreement.
11.9 Schedules. The Schedules to this Agreement shall be construed with
and as an integral part of this Agreement to the same extent as if the same had
been set forth verbatim herein.
- 22 -
<PAGE>
11.10 Entire Agreement; Amendments and Waivers. This Agreement,
including the Appendices and the Schedules hereto, contains the entire
understanding of the parties hereto with regard to the subject matter contained
herein. The parties hereto, by mutual agreement in writing, may amend, modify
and supplement this Agreement. The failure of any party hereto to enforce at any
time any provision of this Agreement shall not be construed to be a waiver of
such provision, nor in any way to affect the validity of this Agreement or any
part hereof or the right of such party hereafter to enforce each and every such
provision. No waiver of any breach of this Agreement shall be held to constitute
a waiver of any other or subsequent breach.
IN WITNESS WHEREOF, the parties hereto have executed these presents the
day and year first above written.
PROVIDENT AMERICAN CORPORATION
By:
------------------------------
Anthony R. Verdi, Treasurer
and Chief Financial Officer
STOCKHOLDERS:
---------------------------------
Saul Rose
---------------------------------
Joan Rose
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<PAGE>
SCHEDULE 1.6(A)
---------------
FINANCIAL STATEMENTS OF THE COMPANY
-----------------------------------
1. COMPILED FINANCIAL STATEMENTS -- MARCH 31, 1996
2. U.S. CORPORATION INCOME TAX RETURN FOR THE PERIOD BEGINNING
JULY 20, 1994 AND ENDING JUNE 30, 1995
<PAGE>
SCHEDULE 1.6(B)
LIST OF CSE BANK ACCOUNTS, BORROWING RESOLUTIONS
AND DEPOSIT BOXES
JULY 26, 1994 -- $150,000 LINE OF CREDIT AGREEMENT WITH MEDICAL
RESOURCE
JULY 26, 1994 -- $20,000 ADVANCE AGAINST $150,000 LINE OF CREDIT
AUGUST 9, 1994 -- $5,000 ADVANCE AGAINST $150,000 LINE OF CREDIT
AUGUST 15, 1994 -- CONSENT OF SHAREHOLDERS TO CANCELLATION OF LINE OF
CREDIT WITH MEDICAL RESOURCE
<PAGE>
SCHEDULE 1.11(A)
LEASES
LEASE AGREEMENT BETWEEN COASTAL SERVICES, EASTERN, INC. TRADING AS COASTAL
SERVICES AND PROVIDENT INDEMNITY LIFE INSURANCE COMPANY DATED JANUARY 1, 1995
<PAGE>
SCHEDULE 1.17
CONTRACTS
1. ADMINISTRATIVE AGREEMENT DATED AS OF SEPTEMBER 1, 1994 BY AND BETWEEN CSE,
INC. AND PROVIDENT INDEMNITY LIFE INSURANCE COMPANY
2. ADOPTION AGREEMENT DATED AS OF JANUARY 1, 1995 BY AND BETWEEN COASTAL
SERVICES, EASTERN, INC. AND PROVIDENT INDEMNITY LIFE INSURANCE COMPANY
<PAGE>
SCHEDULE 1.18
EMPLOYMENT AGREEMENTS
ATTACHED HERETO IS A TRUE AND CORRECT COPY OF THE EMPLOYMENT AGREEMENT DATED AS
OF JULY 20, 1994 BETWEEN COASTAL SERVICES, EASTERN, INC. AND EDWARD BOLTON.
<PAGE>
SCHEDULE 1.19
MATERIAL INCREASE IN COMPENSATION PAYABLE TO
OFFICERS, DIRECTORS AND EMPLOYEES SINCE DECEMBER 31, 1995
NONE
<PAGE>
PURCHASE AGREEMENT
THIS PURCHASE AGREEMENT, dated as of May 1, 1996, is by and among
PROVIDENT AMERICAN CORPORATION, a Pennsylvania corporation ("Purchaser"),
MIDAMERICA MUTUAL LIFE INSURANCE CORPORATION, an Minnesota mutual corporation
("MAM") and MIDAMERICA ENTERPRISES, INC., a South Dakota corporation and a
wholly-owned subsidiary of MAM ("MEI").
A. The parties hereto wish to provide for the terms and conditions upon
which Purchaser will acquire all of the outstanding capital stock of NIA
Corporation, a Colorado corporation ("NIA") from MEI, and two servicemarks owned
by MAM but which are used in connection with the business of NIA.
B. The parties hereto wish to make certain representations, warranties,
covenants and agreements in connection with the transactions contemplated hereby
and also to prescribe various conditions to such transaction.
Accordingly, and in consideration of the representations, warranties, covenants,
agreements and conditions herein contained, the parties hereto agree as follows:
SECTION 1.
----------
Purchase
--------
(a) Acquisition of the NIA. Purchaser agrees to purchase from MEI, and
MEI agrees to sell to Purchaser (or its designee), all of the outstanding
capital stock of NIA ("NIA Stock"), in a transaction intended to be taxable for
United States federal and state income tax purposes and with respect to which
the parties agree to make an election under Section 338(h)(10) of the Internal
Revenue Code of 1954 as amended (the "Code").
(b) Acquisition of Servicemark. Purchaser agrees to purchase from JAM,
and MAM agrees to assign to Purchaser, all its right, title and interest in and
to two servicemarks, one a non-stylized version of the term "HealthQuest", and
one a stylized version of such term (the "Servicemarks"). Registration of the
Servicemarks has been applied for with the United States Patent and Trademark
Office ("PTO"), but has not yet been obtained.
(c) Consideration. In exchange for the NIA Stock and the Servicemarks,
Purchaser agrees to (a) issue to MEI fifty thousand (50,000) shares (the
"Acquired shares") of the $.10 par value common stock of Purchaser (herein
"Common Stock") and (b) pay Two Hundred Fifty-Four Thousand Six Hundred
Thirty-Five Dollars ($254,635) by wire transfer on the Closing Date. Of this
consideration the parties agree to allocate $5000.00 to the acquisition of the
Servicemarks.
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<PAGE>
(d) Closing. The transactions contemplated hereby are to be effective
as of 12:01 a.m. Eastern daylight savings time May 1, 1996 (the "Effective
Time") irrespective of the date such transactions in fact close. The closing
(the "Closing") shall be held at the offices of Oppenheimer, Wolff &Donnelly or
such other place as the parties may agree, at 9:00 a.m., Central Standard Time
or such other time, and on such date, as upon which the parties may agree, at
which time and place the documents and instruments necessary or appropriate to
effect the transactions contemplated herein will be exchanged by the parties.
SECTION 2.
----------
Representations and Warranties of MAM and MEI
---------------------------------------------
MAM and MEI hereby represent and warrant to Purchaser as of the date
hereof that, except as set forth in the disclosure schedule of MAM (the "MAM
Disclosure Schedule") provided to Purchaser as contemplated hereby (which MAM
and MEI hereby separately represent and warrant is complete and correct as to
the matters described therein):
(a) Corporate Organization. NIA has a single, wholly-owned subsidiary
named American Brokerage Corporation ("ABC" and collectively with NIA the
"Companies"). Each Company is a corporation duly organized, validly existing and
in good standing under the law of the state of its incorporation, has full
corporate power and authority to carry on and conduct its business and
operations as now being conducted, is duly qualified or licensed to do business
as a foreign corporation in good standing in every other jurisdiction in which
the failure to be so qualified or licensed and in good standing could have a
material adverse effect on such Company, its assets, businesses or prospects.
The MAM Disclosure Schedule includes complete and correct copies of its articles
or certificate of incorporation and bylaws, as presently in effect.
(b) Capitalization. The authorized capital stock of each Company is set
forth on the MAM Disclosure Schedule. The number of shares of capital stock of
each Company issued and outstanding and the number of shares of capital stock of
each Company held in treasury as of the date of this Agreement are set forth on
the MAM Disclosure Schedule. All issued and outstanding shares of capital stock
of NIA are owned beneficially and of record by MEI free of any mortgage, pledge,
security interest, lien, encumbrance, restriction or charge of any kind (herein
a "Lien"), and are duly authorized, validly issued, fully paid, nonassessable
and are without, and were not issued in violation of, any preemptive rights. All
issued and outstanding shares of the capital stock of ABC are owned beneficially
and of record by NIA free of any Lien and are duly authorized, validly issued,
fully paid, nonassessable and are without, and were not issued in violation of,
any preemptive rights. There are not outstanding any other securities of either
2
<PAGE>
Company, nor options, warrants, conversion privileges or other rights to
purchase or acquire either Company's securities (including its capital stock)
nor any contracts, commitments, understandings, arrangements or restrictions by
which either Company is bound to issue or acquire any of its securities or any
options, warrants, conversion privileges or other rights to purchase or acquire
any of its securities.
(c) Authorization. Each of MAM and MEI has the legal capacity to enter
into this Agreement and to carry out the transactions contemplated herein. All
action required by law, by the articles of incorporation or bylaws of MAM or MEI
or otherwise to authorize the execution, delivery and performance of this
Agreement and the consummation of the transactions contemplated herein have been
taken. This Agreement has been duly and validly executed and delivered by MAM
and MEI. This Agreement is the valid and binding legal obligation of MAM and
MEI, enforceable against them in accordance with its terms.
(d) Non-Contravention. Neither the execution, delivery and performance
of this Agreement nor the consummation of the transactions contemplated herein
will: (i) violate or be in conflict with any provision of the articles of
incorporation or bylaws of MAM, MEI or either Company; or (ii) be in conflict
with, or constitute a default under, or cause or permit the acceleration of the
maturity of, or give rise to any right of termination or cancellation or any
imposition of fees or penalties under, any Consent or Permit (as those terms are
hereinafter defined) or agreement, instrument or other obligation to which MAM,
MEI or, to the knowledge of MAM, either Company is a party or by which any of
their respective properties or assets is bound; or (iii) result in the creation
or imposition of any Lien upon any property or assets of MAM, MEI or to the
knowledge of MAM either Company; or (iv) violate any statute, treaty, law,
judgment, writ, injunction, decision, decree, order, rule, regulation, ordinance
or other similar authoritative matter (herein a "Law") of any foreign, federal,
state, local government or any court, agency or instrumentality of any thereof
(herein an "Authority") applicable to MAM, MEI or to the knowledge of MAM either
Company.
(e) Consents and Approvals. No consent, approval, order or
authorization of or from, or registration, notification, declaration or filing
(herein a "Consent") with any individual or entity, including without limitation
any Authority, is required in connection with the execution, delivery or
performance of this Agreement by MAM or MEI or the consummation by MAM or MEI of
the transactions contemplated herein.
(f) Financial Statements. MAM has furnished to Purchaser the
consolidated financial statements of the Companies for the fiscal year ending
December 31, 1995 (the "Latest NIA Financial Statements"). The Latest NIA
Financial Statements (i) have been prepared to the in accordance with generally
3
<PAGE>
accepted accounting principles, and (ii) fairly present the assets and
liabilities of the Companies as of the date thereof, and the results of
operations for the period covered thereby.
(g) Litigation. There is no legal, administrative, arbitration, or
other proceeding, suit, claim or action of any nature or investigation, review
or audit of any kind, judgment, decree, decision, injunction, writ or order
(collectively "Claims or Proceedings") pending, or to MAM's knowledge threatened
against either Company or its properties or business, or which questions or
challenges the validity of this Agreement or any action taken or to be taken by
the parties hereto in connection with the transactions contemplated herein.
(h) Insurance. The MAM Disclosure Schedule contains an accurate and
complete list of all policies of property, casualty, liability, workers'
compensation, health, and other forms of insurance owned or held by either
Company, specifying the insurer, the policy number, the term of the coverage
and, in the case of any "claims made" coverage, the same information as to
predecessor policies for the previous five years. All present policies are in
full force and effect and all premiums with respect thereto have been paid,
however, policies in which the Companies participate because they are
subsidiaries of MAM will cease to apply following closing. Neither Company has
been denied any form of insurance and no policy of insurance has been revoked or
rescinded during the past five years, except as described on the MAM Disclosure
Schedule.
(i) Brokers. None of MAM, MEI or either Company or any of its
directors, officers or employees has employed any broker, finder, or financial
advisor or incurred any liability for any brokerage fee or commission, finder's
fee or financial advisory fee, in connection with the transactions contemplated
hereby, nor is there any basis known to MAM for any such fee or commission to be
claimed by any person or entity.
(j) Investment Intent. Without prejudice to Section 9 hereof, MEI is
acquiring the Acquired Shares for investment and not with view to distribution
or resale.
(k) Minimum Stockholder's Equity. As of the Effective Time the
consolidated stockholder's equity of the Companies shall be at least three
hundred fifty thousand dollars ($350,000).
(1) No Known Defaults. MAM and MEI are unaware of any material defaults
by NIA under the Policy Administrative Agreements or the Management Services
Agreements to which it is party with each of them or by ABC under the Marketing
Agreements or the Management Services Agreements to which it is party with each
of them, other than such defaults by NIA as may be associated with its use of
funds in trust accounts for working capital purposes.
4
<PAGE>
SECTION 3.
----------
Representations and Warranties of Purchaser
-------------------------------------------
Purchaser represents and warrants to MAM and MEI as of the date hereof
that:
(a) Corporate Organization. Purchaser and each company controlled by
it, including Provident Indemnity Life Insurance Company ("Provident Life") is a
corporation duly organized, validly existing and in good standing under the law
of the state of its incorporation, has full corporate power and authority to
carry on and conduct its business and operations as now being conducted, is duly
qualified or licensed to do business as a foreign corporation in good standing
in every other jurisdiction in which the failure to be so qualified or licensed
and in good standing could have a material adverse effect on the Purchaser, its
assets, businesses or prospects.
(b) Capitalization. The authorized capital stock of Purchaser consists
of 25,000,000 shares of common stock, $.10 par value, of which 8,614,831 shares
have been issued and are outstanding, 2,500,000 shares of Class A common voting
stock, $.10 par value, none of which is outstanding and 5,000,000 shares of
preferred stock, $1.00 par value, of which 580,250 shares of Series A and
425,250 shares of Series B Cumulative Convertible Preferred Stock are issued and
outstanding. No shares of capital stock of Purchaser are held in treasury. There
are outstanding various agreements, arrangements, options, warrants and other
rights or commitments relating to the issuance, sale, purchase or redemption of
shares of the capital stock of Purchaser. All issued and outstanding shares of
the capital stock of Provident Life are owned beneficially and of record by
Purchaser free of any Lien and are duly authorized, validly issued, fully paid,
nonassessable and are without, and were not issued in violation of, any
preemptive rights.
(c) Authorization. Purchaser has the legal capacity to enter into this
Agreement and to carry out the transactions contemplated herein. All action
required by law, Purchaser's articles of incorporation and bylaws and otherwise
to authorize the execution, delivery and performance of this Agreement and the
consummation of the transactions contemplated herein have been taken. This
Agreement has been duly and validly executed and delivered by Purchaser. This
Agreement is the valid and binding legal obligations of Purchaser, enforceable
against it in accordance with its terms.
(d) Non-Contravention. Neither the execution, delivery and performance
of this Agreement nor the consummation of the transactions contemplated herein
will: (i) violate or be in conflict with any provision of the articles of
incorporation or bylaws of Purchaser; or (ii) be in conflict with, or constitute
5
<PAGE>
a default under, or cause or permit the acceleration of the maturity of, or give
rise to any right of termination or cancellation or any imposition of fees or
penalties under, any Consent or Permit or agreement, instrument or other
obligation to which Purchaser is a party or by which any of their respective
properties or assets is bound; or (iii) result in the creation or imposition of
any Lien upon any property or assets of Purchaser; or (iv) violate Law of any
Authority applicable to Purchaser.
(e) Consents and Approvals. No Consent with any individual or entity,
including without limitation any Authority, is required in connection with the
execution, delivery or performance of this Agreement by Purchaser or the
consummation by Purchaser of the transactions contemplated herein.
(f) Financial Statements. Purchaser has furnished to MAM its audited
consolidated financial statement for the fiscal years ending December 31, 1995
(the "Latest Purchaser Balance Sheet"). Such Financial Statement (i) has been
prepared in accordance with generally accepted accounting principles
consistently applied, and (ii) fairly presents the assets and liabilities of the
Purchaser as of the date thereof, and the results of operations for the period
covered thereby.
(g) Brokers. Neither Purchaser nor any of its directors, officers or
employees has employed any broker, finder, or financial advisor or incurred any
liability for any brokerage fee or commission, finder's fee or financial
advisory fee, in connection with the transactions contemplated hereby, nor is
there any basis known to Purchaser for any such fee or commission to be claimed
by any person or entity.
SECTION 4.
----------
Covenants
---------
(a) Confidentiality. Each of the parties hereto agrees that it will not
use, or permit any of its affiliates or their respective agents or employees to
use, any of the information relating to any other party hereto furnished to it
in connection with the transactions contemplated herein which is not in the
public domain ("Information") in a manner or for a purpose detrimental to such
other party or otherwise than in connection with the transaction, and that they
will maintain the confidentiality of and not disclose the Information to any
person or entity, other than their respective affiliates, directors, officers,
employees, and authorized representatives and agents who are similarly bound to
maintain such confidentiality, except as may be required by judicial or
administrative process or, in the opinion of such party's regular counsel, by
other requirements of Law. Each party hereto also agrees to promptly return to
the party from whom originally received all original and duplicate copies of
written materials containing Information should the transactions contemplated
6
<PAGE>
herein not occur. A party hereto shall be deemed to have satisfied its
obligations to hold the Information confidential if it exercises the same care
as it takes with respect to its own similar information. Each party hereto
agrees that it will not (nor will it permit any of its affiliates or their
respective agents or employees to), intentionally characterize any other party's
(or its affiliates') rationale or business purpose for entering into this
Agreement or consummating the transactions contemplated hereby in a manner which
causes economic loss to, or damage to the reputation of, another party.
(b) Filings; Consents; Removal of Objections. Subject to the terms and
conditions herein provided, each party hereto shall, where reasonably within its
control, use its commercially reasonable efforts to take or cause to be taken
all actions necessary, proper or advisable under applicable Law to consummate
and make effective, as soon as reasonably practicable, the transactions
contemplated hereby, including without limitation obtaining all Consents of any
person or entity required in connection with the consummation of the
transactions contemplated herein. Without limiting the foregoing, MAM agrees to
use its good faith best efforts to ensure that any redomestication of MidAmerica
Life Insurance Company ("MALICO") to Minnesota does not result in the Minnesota
Department of Commerce ordering or otherwise causing the cancellation of the
fronting arrangements provided for in that certain Reinsurance and Assumption
Agreement dated as of May 1, 1996 among MAM, MALICO and Provident Life (the
"Reinsurance Agreement").
(c) Public Announcements. None of the parties hereto shall make any
public announcement with respect to the transactions contemplated herein without
the prior written consent of the other parties, which consent shall not be
unreasonably withheld or delayed; provided, however, that any of the parties
hereto may at any time make any announcements which are required by applicable
Law so long as the party so required to make an announcement promptly upon
learning of such requirement notifies the other parties of such requirement and
discusses with the other parties in good faith the exact proposed wording of any
such announcement.
(d) Guaranty of Payment and Performance. Subject only to the Closing
occurring, Provident hereby guarantees the full and timely payment and
performance of any and all obligations of NIA and ABC, contractual or otherwise
(including any arising in relation to any trust or other account controlled by
either of them) arising after the Effective Time, to MAM or any of its
affiliates, or which have been guaranteed by MAM or any of its affiliates,
including (i) the obligations of NIA under that certain promissory note in an
original principal amount of $150,000, (ii) all obligations of NIA to MAM or
MALICO as a third party administrator therefore under certain Policy
Administration Agreements, and (iii) the obligations of NIA under the lease of
its facility. In connection with the foregoing, Provident hereby agrees to
advance, on May 10, 1996, to trust accounts held by NIA for the purpose of
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depositing premium received with respect to policies issued by any carrier for
which it acts as an administrator amounts by which such accounts may be
deficient (including with respect to the accounts of MAM and MALICO an aggregate
amount of Two Hundred Forty-Five Thousand Three Hundred and Sixty-Five Dollars
($245,365), being the aggregate amount by which the parties agree such a deficit
exists with respect to them), and to cause NIA to pay to MAM, MALICO and any
such other carriers any amounts due them in connection therewith (being in the
case of MAM and MALICO collectively the amount of Five Hundred Seventy-Two
Thousand Eight Hundred Nineteen Dollars ($572,819), net of any expense
authorized to be paid by NIA on behalf of MAM or MALICO in the ordinary course
of its business consistent with past practice, and plus or minus, as the case
may be, the proration settlement provided for in Section 4 of the Reinsurance
Agreement).
SECTION 5.
----------
Conditions to Obligations of Purchaser
--------------------------------------
Notwithstanding any other provision of this Agreement to the contrary,
the obligation of Purchaser to effect the transactions contemplated herein shall
be subject to the satisfaction at or prior to the Closing of each of the
following conditions:
(a) Representations and Warranties True. The representations and
warranties of MAM contained in this Agreement, including without limitation in
the MAM Disclosure Schedule, shall be in all material respects true, complete
and accurate as of the date when made and at and as of the Closing as though
such representations and warranties were made at and as of such time, except for
changes specifically permitted or contemplated by this Agreement, and except
insofar as the representations and warranties relate expressly and solely to a
particular date or period, in which case they shall be true and correct in all
material respects at the Closing with respect to such date or period.
(b) Performance. MAM shall have performed and complied in all material
respects with all agreements, covenants, obligations and conditions required by
this Agreement to be performed or complied with by it on or prior to the
Closing.
(c) Required Approvals and Consents. All Consents required of MAM or
any of its affiliates to consummate the transactions contemplated hereby shall
have been delivered, made or obtained, and Purchaser shall have received copies
thereof.
(d) No Proceeding or Litigation. No suit, action, investigation,
inquiry or other proceeding by any Authority or other person or entity shall
have been instituted or threatened which questions the validity or legality of
the transactions contemplated hereby or which, if successfully asserted, would
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<PAGE>
individually or in the aggregate, otherwise have a material adverse effect on
the conduct of the business of either Company.
(e) Opinion of MAM Counsel. Purchaser shall have received an opinion of
MAM counsel, dated the closing date, in form and substance reasonably
satisfactory to it.
(f) ServiceMark Assignment. Purchaser shall have received an assignment
of the Servicemarks in form reasonably satisfactory to it.
(g) Certain Other Agreements. The Policy Administrative Services
Agreement between MALICO and NIA effective January 1, 1995 shall have been
assigned to Provident Life and the Policy Administration Agreement between MAM
and NIA effective January 1, 1994 shall have been amended. The Management
Services Agreements (a) between MALICO and ABC, (b) between MALICO and NIA, (c)
between MAM and ABC, and (d) between MALICO and NIA, each effective as of July
1, 1994 (the "MSAs"), shall all have been terminated. The Marketing Agreements
(i) between MALICO and ABC effective as of January 1, 1995 and (ii) between MAM
and ABC dated as of January 1, 1994, shall have been amended. ABC and NIA on the
one hand, and MAM, MALICO and MEI on the other hand, shall entered into a mutual
release. All the foregoing shall be effective as of the Effective Time and shall
be in form reasonably satisfactory to Purchaser.
(h) Resignation and Release. The directors of each Company, and Norman
Storbakken and Eric Netteberg as officers of each Company, shall have duly
executed and delivered to Purchaser, in form reasonably satisfactory to it,
their respective resignations from such Company.
(i) Reinsurance Agreement. MALICO and MAM shall have each duly executed
and delivered the Reinsurance Agreement, which shall be in form and substance
satisfactory to Purchaser, and Consumer Benefits of America, a Missouri
not-for-profit corporation, shall have expressly consented to the transactions
contemplated thereby on terms reasonably satisfactory to Purchaser.
(j) Delivery of Shares. MEI shall have delivered to Purchaser
certificates representing all the issued and outstanding share capital of NIA
together with a duly executed stock power endorsed in blank.
SECTION 6.
----------
Conditions to Obligations of MAM and MEI
----------------------------------------
Notwithstanding anything in this Agreement to the contrary, the
obligation of MAM and MEI to effect the transactions contemplated herein shall
be subject to the satisfaction at or prior to the Closing of each of the
following conditions:
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(a) Representations and Warranties True. The representations and
warranties of Purchaser contained in this Agreement shall be in all material
respects true, complete and accurate as of the date when made and at and as of
the Closing as though such representations and warranties were made at and as of
such time, except for changes specifically permitted or contemplated by this
Agreement, and except insofar as the representations and warranties relate
expressly and solely to a particular date or period, in which case they shall be
true and correct in all material respects at the Closing with respect to such
date or period.
(b) Performance. Purchaser shall have performed and complied in all
material respects with all agreements, covenants, obligations and conditions
required by this Agreement to be performed or complied with by it on or prior to
the Closing.
(c) Required Approvals and Consents. All Consents required of Purchaser
or its affiliates to consummate the transactions contemplated hereby shall have
been delivered, made or obtained, and MAM shall have received copies thereof.
(d) No Proceeding or Litigation. No suit, action, investigation,
inquiry or other proceeding by any Authority or other person or entity shall
have been instituted or threatened which questions the validity or legality of
the transactions contemplated hereby or which, if successfully asserted, would
individually or in the aggregate, otherwise have a material adverse effect on
Purchaser or Provident Life.
(e) Opinion of Purchaser Counsel. MAM shall have received an opinion of
Purchaser counsel, dated the closing date, in form and substance reasonably
satisfactory to it.
(f) Receipt. MAM and MEI shall have received the consideration
contemplated by Section l(c) and, if then due, the amount payable to them
pursuant to the last sentence of Section 4(d).
(g) Certain Other Agreements. The Policy Administrative Services
Agreement between MALICO and NIA effective January 1, 1995 shall have been
assigned to Provident Life and the Policy Administration Agreement between MAM
and NIA effective January 1, 1994 shall have been amended. The Management
Services Agreements (a) between MALICO and ABC, (b) between MALICO and NIA, (c)
between MAM and ABC, and (d) between MALICO and NIA, each effective as of July
1, 1994 (the "MSAs"), shall all have been terminated. The Marketing Agreements
(i) between MALICO and ABC effective as of January 1, 1995 and (ii) between MAM
and ABC dated as of January 1, 1994, shall have been amended. ABC and NIA on the
one hand, and MAM, MALICO and MEI on the other hand, shall entered into a mutual
release. All the foregoing shall be effective as of the Effective Time and shall
be in form reasonably satisfactory to MAM and MEI.
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(h) Reinsurance Agreement. Provident Life shall have duly executed and
delivered to MAM and MALICO the Reinsurance Agreement, which shall be in form
and substance satisfactory to MAM, and Consumer Benefits of America, a Missouri
not-for-profit corporation, shall have expressly consented to the transactions
contemplated thereby on terms reasonably satisfactory to MAM.
(i) Resignations. James Bowles and David Ward shall each have duly
executed and delivered to MAM, in a form satisfactory to it, their respective
resignations in all capacities from MAM and all its subsidiaries.
SECTION 7.
----------
Termination and Abandonment
---------------------------
(a) Methods of Termination. This Agreement may be terminated and the
transactions contemplated herein may be abandoned at any time but not later than
the Closing:
(i) By mutual written consent of MAM and Purchaser; or
(ii) By Purchaser on or after the Termination Date, if any of
the conditions provided for in Section 5 shall not have been satisfied
or waived in writing by Purchaser prior to such date; or
(iii) By MAM on or after the Termination Date, if any of the
conditions provided for in Section 6 shall not have been satisfied or
waived in writing by MAM prior to such date.
(b) Procedure Upon Termination. In the event of termination and
abandonment pursuant to subsection 7(a), written notice thereof shall forthwith
be given to the other party or parties, and the provisions of this Agreement
shall terminate, and the transactions contemplated herein shall be abandoned,
without further action by any party hereto. If this Agreement is terminated as
provided herein: (i) each party will, upon request, redeliver all documents,
work papers and other material of any other party (and all copies thereof)
relating to the transactions contemplated herein, whether so obtained before or
after the execution hereof, to the party furnishing the same; (ii) the
confidentiality obligations of subsection 4(a) shall continue to be applicable.
No such termination shall relieve any party hereto of any liability arising from
breach of its obligations hereunder arising prior to such termination.
SECTION 8.
----------
Survival and Indemnification
----------------------------
(a) Survival. The representations, warranties and covenants of each of
the parties hereto shall survive the Closing.
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(b) Indemnification by Purchaser. Purchaser agrees to indemnify MAM and
MEI from and against any and all claims, loss, liability, cost, expense or
damage (collectively "Damage") suffered or incurred by it or MEI by reason of
(i) any untrue representation of, or breach of warranty by, Purchaser in this
Agreement, provided, however, that no claim for indemnity may be made pursuant
to this clause (i): (A) unless and until and then only to the extent that the
aggregate Damage exceeds $25,000, and (B) after May 1, 1998; and (ii) any
nonfulfillment of any covenant, agreement or undertaking of Purchaser in this
Agreement which by its terms is to remain in effect after the Closing and has
not been specifically waived in writing at the Closing by the party or parties
hereof entitled to the benefits thereof.
(c) Indemnification by MAM and MEI. MAM and MEI agree to indemnify and
hold the Purchaser harmless from and against any and all Damage suffered or
incurred by it by reason of (i) any untrue representation of, or breach of
warranty by MAM or MEI in this Agreement, provided, however, that no claim for
indemnity may be made pursuant to this clause (i): (A) unless and until and then
only to the extent that the aggregate Damage exceeds $25,000 and (B) after May
1, 1998, or (ii) any nonfulfillment of any covenant, agreement or undertaking of
MAM or MEI in this Agreement which by its terms is to remain in effect after the
Closing and has not been specifically waived in writing at the Closing by the
party or parties hereto entitled to the benefits thereof.
(d) Claims for Indemnification. The parties intend that all claims for
indemnification or payment hereunder be made as promptly as practicable by the
party seeking indemnification or payment (the "Indemnified Party"). Whenever any
claim for such indemnification or payment shall arise hereunder (a"claim") the
Indemnified Party shall promptly notify in writing the party from whom
indemnification or payment is sought (the "Indemnifying Party") of the claim
and, when known, the facts constituting the basis for such claim (a "Claim
Notice"). In the case of any Claim resulting from or in connection with any
claim or legal proceedings of a third party (a "Third Party Claim"), the Claim
Notice shall also specify, if known, the amount or an estimate of the amount of
the liability arising therefrom. If the Indemnifying Party is of the opinion
that the Indemnified Party is not entitled to indemnification or payment, or is
not entitled to indemnification in the amount stated in the Claim Notice, it
shall promptly deliver a written objection to such claim and written
specifications in reasonable detail of the aspects or details objected to, and
the grounds for such objection. Payment for any claim for indemnification shall
become due if and when the Indemnifying Party shall fail to timely object to the
Claim, shall admit the Claim in writing or in the event of an arbitral finding
in favor of the Indemnified Party.
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(e) Right of Recovery. In the event that any party (or its affiliates)
is entitled to recover any sum (whether by payment, discount, credit or
otherwise) from any third party in respect of any matter for which a Claim for
could be or has been made against the other party, it shall promptly inform such
other party of such entitlement and shall take such steps as shall have been
reasonably requested by such other party both before and after making any Claim
in relation thereto to recover, at such other party's expense, such sum (keeping
such other party fully informed of the progress of any action taken). Any sum
recovered will reduce the amount of the Claim; in the event of the recovery
being delayed until after the Claim has been satisfied, the party paying the
Claim shall account to the other party in respect of any amount so recovered
(after deduction of all reasonable costs and expenses of the recovery) up to the
amount of the Claim. The failure to comply with this subsection shall not
prejudice the right of a party to pursue any Claim.
(f) Matters Involving Third Parties. In connection with any Third Party
Claim, the Indemnifying Party will have the right to defend the Indemnified
Party against such Third Party Claim with counsel of its choice reasonably
satisfactory to the Indemnified Party provided that:
(i) the Indemnifying Party provides the Indemnified Party with
evidence reasonably acceptable to the Indemnified Party that the
Indemnifying Party will have the financial resources to defend against
the Third Party Claim and fulfill its indemnification obligations
hereunder,
A. the Third Party Claim involves only money damages and
does not seek an injunction or other equitable relief,
B. settlement of, or an adverse judgment with respect to, the
Third Party Claim is not, in the good faith judgment of
the Indemnified Party, likely to establish a precedential
custom or practice materially adverse to the continuing
business interests of the Indemnified Party, and
C. the Indemnifying Party conducts the defense of the Third
Party Claim actively and diligently.
(ii) So long as the Indemnifying Party is conducting the
defense of the Third Party Claim in accordance with subsection:
A. the Indemnified Party may retain separate co-counsel at
its sole cost and expense and participate in the defense
of the Third Party Claim, and
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<PAGE>
B. the Indemnifying Party will determine whether to consent
to the entry of any judgment or enter into any settlement
with respect to the Third Party Claim subject to the
prior written consent of the Indemnified Party (not to be
withheld unreasonably).
(iii) In the event any of the conditions in clause (i) above
is or becomes unsatisfied, however,
A. the Indemnified Party may defend against, and consent to
the entry of any judgment or enter into any settlement
with respect to, the Third Party Claim in any manner it
reasonably may deem appropriate (and the Indemnified
Party need not consult with, or obtain any consent from,
any Indemnifying Party in connection therewith),
B. the Indemnifying Parties will reimburse the Indemnified
Party promptly and periodically for the reasonable costs
of defending against the Third Party Claim (including
reasonable attorneys' fees and expenses), and
C. the Indemnifying Parties will remain responsible for any
Damages the Indemnified Party may suffer resulting from,
arising out of, relating to, in the nature of, or caused
by the Third Party Claim to the fullest extent provided
in this Section.
SECTION 9.
----------
Stock Transfers, Registration and Added Consideration
-----------------------------------------------------
(a) Requirements for Transfer of Purchaser Common Stock. Except for the
sale of Acquired Shares pursuant to a public offering, no Acquired Shares shall
be transferred by MEI until, unless waived by Purchaser, a written opinion
reasonably satisfactory to Purchaser in form and substance from counsel
reasonably satisfactory to Purchaser to the effect that the holder may transfer
such Acquired Shares without registration under the Securities Act of 1933 (the
"Securities Act") or any applicable state securities or blue sky laws.
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<PAGE>
(b) Common Stock Legend. Each certificate representing Acquired Shares
will be imprinted with legends in substantially the following form:
The shares represented by this certificate have not been
registered under the Securities Act of 1933, as amended, or
under any state securities or blue sky laws and may not be
transferred in the absence of such registration or any
exception therefrom under such Act or under such state
securities or blue sky laws.
(c) Demand Registrations.
(i) In the event the Acquired Shares have not then
previously been registered either by Purchaser of its
own volition or pursuant to Section 9(d), then upon the
written request of MEI or any permitted (pursuant to
Section 9(a) hereof) transferee of all the Acquired
Shares (a "Requesting Holder") given at anytime on or
after May 1, 1997, the Purchaser, to the extent
permitted by law and subject to the terms hereof, shall
register the Acquired Shares pursuant to an effective
registration statement (a "Registration") under the
Securities Act. Any such Registration pursuant to this
Section 9(c) is hereinafter referred to as a "Demand
Registration."
(ii) If a Demand Registration is an underwritten offering,
no securities other than the Acquired Shares shall be
included among the securities covered by such Demand
Registration unless (i) the managing underwriters in
such Demand Registration advise the Purchaser and the
Requesting Holder in writing that in their opinion the
inclusion of the securities requested to be included in
such Demand Registration by other persons would not
materially adversely affect such offering.
(iii) Notwithstanding the foregoing, Purchaser shall have the
right to delay any such Demand Registration for up to
twenty (20) business days if Purchaser's counsel has
advised Purchaser (which advice shall be given as soon
as practicable) that certain material information (the
"Required Information") must be included in the
registration statement and Purchaser's Board of
Directors has in good faith, in view of pending
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<PAGE>
negotiations or other developments regarding Purchaser
not otherwise required to be made public, determined
that disclosure of the Required Information is not in
the best interest of Purchaser. Under no circumstances
will one or more delays pursuant to this clause extend
beyond thirty (30) calendar days from the date
Purchaser receives a Requesting Holder's request for a
Demand Registration. The Company agrees to use
reasonable commercial efforts to resolve any pending
negotiations or other developments referred to in this
clause as soon as reasonably practicable. Notice of
Purchaser's postponement of a Demand Registration
pursuant to this Clause shall be given to the
Requesting Holder within ten (10) business days of the
receipt of notice requesting a Demand Registration.
(d) Other Registrations. If the Purchaser, at any time when the
Acquired Shares have not been previously registered either through Purchaser of
its own volition (it being agreed that Purchaser has the right to register the
Acquired Shares, on any appropriate form, including a Form S-3, if it so
desires) or pursuant to Section 9(c), proposes to register any shares of its
Common Stock under the Securities Act, whether for its own account or for others
(other than a registration statement on Form S-4 or S-8 or any successor or
similar forms), and the registration form to be used may be used for a offering
of Common Stock (an "Other Registration") and at the time thereof MEI or any
permitted (pursuant to Section 9(a) hereof) transferee thereof (herein a
"Holder") continues to hold any Acquired Shares which have not then previously
been the subject of a Registration, the Purchaser will give written notice of
such determination to the Holder, not less than ten (10) business days prior to
the projected filing of a Registration statement with the Securities Exchange
Commission (the "Commission"), and Purchaser, to the extent permitted by law,
shall include in such Registration all Acquired Shares held thereby.
(e) Registration Procedures. If and whenever the Purchaser effects a
Registration pursuant to the provisions of Sections 9(c) or (d) or otherwise
determines to effect of its own volition a Registration which covers the
Acquired Shares, Purchaser will as expeditiously as reasonably possible:
(i) prepare and file with the Commission a registration
statement on the appropriate form with respect to the shares proposed
to be registered and use its reasonable commercial efforts to cause
such registration statement to become effective (provided that at least
fifteen (15) business days before filing a registration statement or
prospectus or
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<PAGE>
any amendments or supplements thereto, Purchaser shall furnish to the
counsel selected by the Requesting Holder or Holder (the term "Holder"
as used in the Sections (e), (f), (g) and (j) to include both
Requesting Holders and Holders as defined) copies of all such documents
proposed to be filed, which documents shall be subject to the prior
review of such counsel reasonably prior to such filing);
(ii) prepare and file with the Commission such amendments and
supplements to such registration statement and the prospectus used in
connection therewith as may be necessary to keep such registration
statement effective for a period of the lesser of sixty (60) calendar
days or the completion of the plan of distribution described in such
prospectus and completion of the plan of distribution described in such
prospectus and comply with the provisions of the Securities Act with
respect to the disposition of all shares covered by such registration
statement during such period in accordance with the intended methods of
disposition set forth in such registration statement;
(iii) furnish to the Holder such number of copies of such
registration statement, each amendment and supplement thereto, the
prospectus included in such registration statement (including each
preliminary prospectus) and such other documents as the Holder may
reasonably request in order to facilitate the disposition of the
Acquired Shares;
(iv) use its reasonable commercial efforts to register or qualify
the Acquired Shares under such other securities or blue sky laws of
such jurisdictions as the Holder reasonably requests and do any and all
other acts and things which may be reasonably necessary or advisable to
enable the Holder to consummate the disposition of the Acquired Shares
in such jurisdictions (provided that Purchaser will not be required to
(i) qualify generally to do business in any jurisdiction where it would
not otherwise be required to qualify but for this subsection, (ii)
subject itself to taxation in any such jurisdiction or (iii) consent to
general service of process in any such jurisdiction, if in the opinion
of counsel reasonably acceptable to the Holder, any of such actions in
this clause (iv) would occur or result);
(v) notify the Holder, at any time when a prospectus relating
thereto is required to be delivered under the Securities Act, of the
happening of any event or the receipt of any information as a result of
which the prospectus included in such registration statement contains
an untrue statement of a material fact or omits any fact necessary to
make the statements therein not misleading, and prepare a
17
<PAGE>
supplement or amendment to such prospectus so that, as thereafter
delivered to the purchasers of such shares of Common Stock, such
prospectus will not contain an untrue statement of a material fact or
omit to state any fact necessary to make the statements therein not
misleading;
(vi) enter into such customary agreements (including, unless the
Holder shall designate to the contrary in writing, underwriting
agreements in customary form) and use its reasonable best efforts to
take all such other actions in order to expedite or facilitate the
disposition of the Acquired Shares;
(vii) comply with all applicable rules and regulations of the
Commission, and make available to its security holders, as soon as
reasonably practicable, an earnings statement covering the period of at
least twelve months beginning with the first day of the Purchaser's
first full calendar quarter after the effective date of the
registration statement, which earnings statement shall satisfy the
provisions of Section 11 (a) of the Securities Act and Rule 158
thereunder;
(viii) permit the Holder to participate in the preparation of
such registration statement and to require the insertion therein of
written material concerning the Holder (and any person included
therein) and the intended method of distribution, furnished to
Purchaser in writing, which in the reasonable judgment of the Holder
and its counsel should be included;
(ix) in the event of the issuance of any stop order suspending
the effectiveness of a registration statement, or of any order
suspending or preventing the use of any related prospectus or
suspending the qualification of any shares of Common Stock included in
such registration statement for sale in any jurisdiction, use its
reasonable best efforts to promptly obtain the withdrawal of such
order;
(x) cause, subject to applicable law and regulations, the
Acquired Shares to be listed on each securities exchange on which
shares of Purchaser Common Stock are then listed and, if not so listed,
to be listed on the NASD automated quotation system; and
(xi) use its best efforts to deliver an opinion of counsel to the
Purchaser and a cold comfort letter from Purchaser's independent public
accountants each in customary form and covering such matters of the
type customarily covered by such opinions and letters in an
underwritten offering.
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<PAGE>
Any Registration which covers the Acquired Shares, whether effected pursuant to
Sections 9(c) or (d) hereof or otherwise, shall remain effective for a period of
not less than six (6) months.
(f) Registration Expenses. All expenses to Purchaser or the Holder
(including reasonable attorneys fees but excluding the underwriting fees,
commission and other costs of any underwriter, broker or other person through
which the Acquired Shares are sold (collectively "Commissions), in connection
with any Registration in which any Acquired Shares are included will be paid by
Purchaser ("Registration Expenses"); provided that the Holder shall pay to
Purchaser to help defray such expense an amount equal to $5,000, payment to be
made promptly following demand made not more than ten (10) days prior to the
date such expense is incurred. In addition, Purchaser will pay its internal
expenses (including, without limitation, all salaries and expenses of its
officers and employees performing legal or accounting duties), the expense of
any annual audit or quarterly review, and the expense of any liability
insurance.
(g) Indemnification.
(i) Purchaser agrees to indemnify, to the extent permitted by
law, the Holder, its officers and directors, each person who
controls the Holder (within the meaning of the Securities Act)
and each underwriter for any Registration against all Damages
caused by any untrue or alleged untrue statement of material fact
contained in any registration statement, prospectus or
preliminary prospectus or any amendment thereof or supplement
thereto or any omission or alleged omission of a material fact
required to be stated therein or necessary to make the statements
therein not misleading, except insofar as the same are caused by
or contained in any information furnished in writing to Purchaser
by or on behalf of the Holder expressly for use therein or arises
out of such the Holder's failure to deliver a copy of the final
prospectus to the person asserting such claim or loss at or prior
to the written confirmation of the sale of Acquired Shares by the
Holder to such person, provided the untrue statement or omission
was corrected in the final prospectus and the Purchaser furnished
such person with sufficient copies of the final prospectus for
delivery to such person.
(ii) Each Holder, by availing itself of registration pursuant
to the terms hereof, agrees to indemnify the Purchaser, its
directors and officers, each person who controls the Purchaser
(within the meaning of the Securities Act) and each underwriter
for any Registration against any Damages resulting from any
untrue or alleged untrue statement
19
<PAGE>
of material fact contained in the registration statement,
prospectus or preliminary prospectus or any amendment thereof or
supplement thereto or any omission or alleged omission of a
material fact required to be stated therein or necessary to make
the statements therein not misleading, but only if, and to the
extent that, such statement or omission was in reliance upon and
in conformity with written information furnished to the Purchaser
by or on behalf of such Holder specifically for use in the
preparation of such Registration statement.
(iii) Any person entitled to indemnification hereunder will:
A. give prompt written notice to the indemnifying party of
any claim with respect to which it seeks
indemnification and
B. unless in such indemnified party's reasonable
judgment a conflict of interest between such
indemnified and indemnifying parties may exist with
respect to such claim, permit such indemnifying party
to assume the defense of such claim with counsel
reasonably satisfactory to the indemnified party.
If such defense is assumed, the indemnifying party
will not be subject to any liability for any
settlement made by the indemnified party without its
consent (but such consent will not be reasonably
withheld).
(iv) The indemnification provided for under this Agreement
will remain in full force and effect regardless of any
investigation made by or on behalf of the indemnified party or
any officer, director or controlling person of such indemnified
party and will survive the transfer of the Acquired Shares.
(v) In the event the indemnification provided for under this
Agreement is unavailable for any reason other than the exceptions
to indemnification contained herein, then the indemnifying party
shall contribute to the amount paid or payable by the indemnified
party as a result of such Damages in such proportion as is
appropriate to reflect the relative fault of the indemnifying
party on one hand and the indemnified party on the other hand in
connection with the statements or omissions that resulted in such
Damages, as well as any other relevant equitable considerations.
Notwithstanding the foregoing, no person guilty of fraudulent
misrepresentations (within the meaning of Section 11(f) of the
20
<PAGE>
Securities Act) shall be entitled to contribution from any person
who was not guilty of such fraudulent misrepresentation.
(h) Selection of Underwriters. The Purchaser will have the right to
select the investment banker(s) and manager(s) to administer the offering
pursuant to any Registration.
(i) SEC Filings; Public Information. So long as MAM or its affiliates
holds unregistered Acquired Shares, the Purchaser shall use commercially
reasonable efforts to file on a timely basis all reports required to be filed
pursuant to the Securities Exchange Act of 1934.
(j) Additional Shares. In the event that the Acquired Shares are sold
by the Holder within six (6) months of the time a Registration statement filed
pursuant to Section 9(c) or 9(d) hereof becomes effective, and the Holder of the
Acquired Shares does not receive in such sale a price per share, net of
Commissions, of at least $6.65 per share (the "Guaranteed Net Price Per Share"),
then the Purchaser will promptly following the demand of the Holder issue to
such Holder such number of additional shares of the common stock of Purchaser
(the "Additional Shares"), which will also be covered by such Registration
statement, as shall be equal to the result of dividing (i) fifty thousand
(50,000) multiplied by the difference between the (A) Guaranteed Net Price Per
Share minus (B) the difference between ninety five percent (95%) of the gross
price per Acquired Share at which the Holder actually so effects the sale of the
Acquired Shares less actual Commissions which will be due on such sale to the
extent in excess of five percent (5%) (the "Actual Net Price Per Share") by (ii)
the Actual Net Price Per Share. For the avoidance of doubt, no Holder shall be
entitled to any additional shares pursuant to this Section unless it sells the
Acquired Shares within six (6) months of the date the Registration statement
covering the Acquired Shares becomes effective. A Holder shall demand the
issuance of any additional shares to which it is entitled pursuant to this
Section within a reasonable time following the sale of the Acquired Shares.
SECTION 10.
-----------
Miscellaneous Provisions.
-------------------------
(a) Expenses. Each of the parties hereto shall bear its own costs, fees
and expenses in connection with the negotiation, preparation, execution,
delivery and performance of this Agreement and the consummation of the
transactions contemplated hereby, including without limitation fees, commissions
and expenses payable to brokers, finders, investment bankers, consultants,
exchange or
21
<PAGE>
transfer agents, attorneys, accountants and other professionals, whether or not
the transactions contemplated herein is consummated, except as may be
contemplated by Section 9 hereof.
(b) Amendment and Modification. Subject to applicable Law, this
Agreement may be amended or modified by the parties hereto at any time prior to
the Closing with respect to any of the terms contained herein; provided,
however, that all such amendments and modifications must be in writing duly
executed by the parties hereto.
(c) Waiver of Compliance; Consents. Any failure of a party to comply
with any obligation, covenant, agreement or condition herein may be expressly
waived in writing by the party entitled hereby to such compliance, but such
waiver or failure to insist upon strict compliance with such obligation,
covenant, agreement or condition shall not operate as a waiver of, or estoppel
with respect to, any subsequent or other failure. No single or partial exercise
of a right or remedy shall preclude any other or further exercise thereof or of
any other right or remedy hereunder. Whenever this Agreement requires or permits
the consent by or on behalf of a party, such consent shall be given in writing
in the same manner as for waivers of compliance.
(d) No Third Party Beneficiaries. Nothing in this Agreement shall
entitle any person or entity (other than a party hereto and his, her or its
respective successors and assigns permitted hereby) to any claim, cause of
action, remedy or right of any kind.
(e) Notices. All notices, requests, demands and other communications
required or permitted hereunder shall be made in writing and shall be deemed to
have been duly given and effective: (i) on the date of delivery, if delivered
personally; (ii) on the earlier of the fourth (4th) day after mailing or the
date of the return receipt acknowledgement, if mailed, postage prepaid, by
certified or registered mail, return receipt requested; or (iii) on the date of
transmission, if sent by facsimile, telecopy, telegraph, telex or other similar
telegraphic communications equipment:
If to Purchaser:
To: Provident American Corporation
2500 DeKalb Pike
Norristown, PA 19404-0511
Attn: Mr. Alvin H. Clemens
Fax: 610-279-1486
22
<PAGE>
With a copy to:
Butera Beausang Cohen & Brennan
630 Freedom Business Center, Suite 212
King of Prussia, Pa. 19406
Attn: Michael F. Beausang, Jr.
Fax: 610-265-7205
and to:
NIA Corporation
1620 Kipling
Lakewood, Colorado 80215
Attn: James O. Bowles
Fax: 303-232-4758
If to MAM or MEI:
To: MidAmerica Mutual Life Insurance Company
1801 West County Road B
Roseville, MN 55113
Attn: General Counsel
Fax: 612-628-1100
With a copy to:
Oppenheimer Wolff & Donnelly
First Bank Building
Suite 1700
St. Paul, MN 55101
Attn: Dennis Whelpley
Fax: 612-223-2596, and
or to such other person or address as a party shall furnish to the other parties
hereto in writing in accordance with this subsection.
(f) Assignment. This Agreement and all of the provisions hereof shall
be binding upon and inure to the benefit of the parties hereto and their
respective heirs, legal representatives, successors and permitted assigns, but
neither this Agreement nor any of the rights, interests or obligations hereunder
shall be assigned (whether voluntarily, involuntarily, by operation of law or
otherwise) by any of the parties hereto without the prior written consent of the
other parties.
(g) Governing Law. This Agreement and the legal relations among the
parties hereto shall be governed by and construed in accordance with the
internal substantive laws of the State of
23
<PAGE>
Minnesota (without regard to the laws of conflict that might otherwise apply) as
to all matters, including without limitation matters of validity, construction,
effect, performance and remedies.
(h) Counterparts. This Agreement may be executed simultaneously in one
or more counterparts, each of which shall be deemed an original, but all of
which together shall constitute one and the same instrument.
(i) Headings. The table of contents and the headings of the sections
and subsections of this Agreement are inserted for convenience only and shall
not constitute a part hereof.
(j) Entire Agreement. The MAM Disclosure Schedule and the exhibits and
other writings referred to in this Agreement or in the MAM Disclosure Schedule
or any such exhibit or other writing are part of this Agreement, together they
embody the entire agreement and understanding of the parties hereto in respect
of the transactions contemplated by this Agreement and together they are
referred to as "this Agreement" or the "Agreement". There are no restrictions,
promises, warranties, agreements, covenants or undertakings, other than those
expressly set forth or referred to in this Agreement. This Agreement supersedes
all prior agreements and understandings between the parties with respect to the
transaction or transactions contemplated by this Agreement.
(k) Informal Dispute Resolution. If there shall be any dispute,
controversy or claim ("Dispute"), between the MAM or its affiliates or Purchaser
and its affiliates arising out of, relating to, or connected with this
Agreement, the negotiation thereof or the breach or invalidity thereof, or the
provisions contained therein or omitted therefrom, the parties shall use their
best endeavors to resolve the matter on an amicable basis and in a manner fair
and equitable to the parties hereto. If one party notifies the other party that
a Dispute has arisen and the parties are unable to resolve such Dispute within a
period of fifteen (15) days from such notice, then the matter shall be referred
to the Chief Executive Officer of MAM and Purchaser for attempted resolution,
who shall have a further thirty (30) days to resolve the Dispute. Except to the
extent the sole relief sought is equitable, no recourse to litigation shall take
place unless and until such procedure has been followed.
(l) Agreement as to Venue. Should any party or its affiliates wish to
initiate litigation, whether by was of claim, counter-claim or otherwise, with
respect to a Dispute, each of the parties agrees to, and to cause any such
affiliate to, submit in respect thereto to the jurisdiction of the federal court
sitting in Denver, Colorado if it has subject matter jurisdiction over such
24
<PAGE>
claim, or if it does not state courts sitting in such city. Each party also
agrees not to bring any action or proceeding with respect to any Dispute in any
other court. Each of the parties waives any defense of inconvenient forum to the
maintenance of any action or proceeding so brought and waives any bond, surety,
or other security that might be required of any other party with respect
thereto. Any party may make service on any other party by sending or delivering
a copy of the process to the party to be served at the address and in the manner
provided for the giving of notices in Section 10(e) hereof. Nothing in this
Section 10(1), however, shall affect the right of any party to serve legal
process in any other manner permitted by law or at equity.
(m) Further Assurances. Each party hereto shall, before, at and after
Closing, execute and deliver such instruments and take such other actions as the
other party or parties, as the case may be, may reasonably require in order to
carry out the intent of this Agreement.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed as of the day and year first above written.
MidAmerica Mutual Life Insurance
Company
Attest:________________________ By:_______________________________
Its:___________________________
MidAmerica Enterprises Inc.
Attest:_________________________ By:_______________________________
Its:___________________________
Provident American Corporation
Attest:__________________________ By:_______________________________
Its:___________________________
25
<PAGE>
STOCK EXCHANGE AGREEMENT
------------------------
THIS STOCK EXCHANGE AGREEMENT is made and entered into the 18th day of
June, 1996 (the "Agreement") by and among PROVIDENT AMERICAN CORPORATION, a
Pennsylvania insurance holding company with an address at 2500 DeKalb Pike,
Norristown, Pennsylvania 19404-0511 ("PAMCO"), RICHARD E. FIELD, an individual
residing at 134 Medinah Drive, Blue Bell, Pennsylvania 19422 ("Field"), ARTHUR
J. IVEY ("Ivey"), and RICHARD E. FIELD & ASSOCIATES, INC., doing business as REF
& ASSOCIATES, INC., a California corporation, having its principal business
address at 1620 Kipling Street, Lakewood, Colorado 80215 ("REF"). Field and Ivey
are hereinafter collectively referred to as "the Shareholders".
BACKGROUND
----------
A. REF is engaged in the business of marketing certain life and health
insurance products of Provident Indemnity Life Insurance Company ("PILIC").
B. PAMCO is a Pennsylvania state-chartered insurance holding company
which, through PILIC, its wholly-owned subsidiary, markets and underwrites group
life, accident and health coverage and individual life insurance policies.
C. The Shareholders are the owners of all of the issued and outstanding
shares of the common stock of REF (the "REF Shares"), and PAMCO is desirous of
acquiring the REF Shares from the Shareholders in accordance with the terms and
conditions of this Agreement.
NOW THEREFORE, in consideration of the mutual covenants herein
contained, and other good and valuable consideration, the receipt and adequacy
of which are hereby acknowledged, and intending to be legally bound hereby, the
parties hereby agree as follows:
ARTICLE I
REPRESENTATIONS, WARRANTIES, AND AGREEMENTS
OF REF AND THE SHAREHOLDERS
As an inducement to PAMCO to enter into this Agreement and to
consummate the transactions contemplated herein, REF, Field, and Ivey, to the
extent of his knowledge, jointly and severally warrant and represent to PAMCO
and agree as set forth below:
<PAGE>
1.1. Organization; Qualification. REF is duly organized, validly
existing, and in good standing under the laws of the State of California, and is
qualified as a foreign corporation in the State of Colorado. REF is qualified to
transact business in all other jurisdictions where such qualification is
necessary and has the corporate power and authority necessary or required to
carry on its business as now conducted.
1.2. Subsidiaries. REF has no subsidiaries.
1.3. Authority. This Agreement and the transactions contemplated herein
have been duly approved by all necessary action on the part of REF. This
Agreement, when executed and delivered by REF, and assuming the due execution
hereof by PAMCO, will constitute the valid, legal, and binding agreement of REF,
enforceable in accordance with its terms. Neither the execution and delivery nor
the consummation of the transactions contemplated in this Agreement, nor
compliance with nor fulfillment of the terms and provisions hereof will (i)
conflict with or result in a breach of the terms, conditions, or provisions of
or constitute a default under the Certificate or Articles of Incorporation or
By-Laws of REF, any instrument to which REF is a party or by which it is bound,
or any statute or regulatory provisions affecting REF, or (ii) require the
approval, consent, or authorization of or any filing with or notification to any
federal, state, or local court, governmental authority or regulatory body. REF
has full power and authority to do and perform all acts and things required to
be done by REF under this Agreement. REF has delivered to PAMCO true and
complete copies of the Certificate or Articles of Incorporation and By-Laws of
REF.
1.4. Capital Structure. The authorized capital stock of REF consists of
100,000 shares of common stock, no par value, of which 1600 shares are issued
and outstanding and owned 400 shares by Ivey and 1,200 shares by Field, and none
of which are held by REF as treasury shares. Except for this Agreement, there
are no agreements, arrangements, options, warrants, or other rights or
commitments of any character relating to the issuance, sale, purchase, or
redemption of any shares of capital stock of REF, and no such agreements,
arrangements, options, warrants, or other rights or commitments will be entered
into or granted between the date hereof and the Closing Date. All of the
outstanding shares of REF are validly issued, fully paid, and nonassessable with
no liability attaching to the ownership thereof, and are owned of record and
beneficially by Field and Ivey, free and clear of any liens, claims,
encumbrances, or restrictions of any kind; the transfer and delivery of the REF
Shares by the Shareholders to PAMCO, as contemplated by this Agreement, will be
sufficient to transfer good and marketable record and beneficial title to the
REF Shares, free and clear of liens, claims, encumbrances, and restrictions of
any kind.
1.5. Financial Statements. Prior to the Closing Date, REF agrees to
furnish to PAMCO REF's financial statements for the years ending December 31,
1992, 1993, 1994, and 1995 (the "REF Financial Statements"). All of the REF
Financial Statements are true, correct, and complete in all material respects
and fairly present the financial position of REF as of the date thereof, have
been prepared in accordance with generally accepted accounting principles
consistently applied throughout all periods. Set forth in Exhibit "A" attached
- 2 -
<PAGE>
hereto is a correct and complete list of all (i) accounts, borrowing
resolutions, and deposit boxes maintained by REF at any bank or other financial
institution, and (ii) the names of the persons authorized to sign or otherwise
act with respect thereto.
1.6. Material Changes. Since December 31, 1995, the business of REF has
been operated only in the ordinary course and, whether or not in the ordinary
course of business, other than as disclosed in this Agreement or the schedules
referred to herein there has not been, occurred, or arisen any material adverse
change in the financial condition of REF from that shown on the REF Financial
Statements referred to in Section 1.5 hereof.
1.7. Contracts. Except as set forth in Schedule 1.7 hereto or any other
schedule referred to herein, REF is not a party to (i) any contract for the
lease, purchase or sale of real or personal property to or from any third party;
(ii) any contract involving the borrowing or lending of money or the guarantee
of the obligations of officers, directors, employees or others; (iii) any
agency, agent's, general agents, brokerage or expense allowance agreement or any
other agreements pursuant to which REF has binding authority in the placement of
insurance coverage or its currently obligated to make payments in connection
with the sale of insurance; (iv) any contract with any of the Shareholders; or
(v) any other contract, whether or not made in the ordinary course of business
which is material to the business or assets of REF. Copies of all contracts and
agreements identified in Schedule 1.7 have been made available to PAMCO No
outstanding purchase commitment by REF is in excess of its ordinary business
requirements or at a price in excess of market price at the date hereof.
1.8. Availability of Assets and Legality of Use. The assets owned or
leased by REF constitute all of the assets which are being used in its business,
and such assets are in good and serviceable condition, normal wear and tear
excepted.
1.9. Title to Property. REF has good and marketable title to all of its
assets, including the assets reflected on the December 31, 1995 REF Financial
Statements referred to in Section 1.5 hereto and all of the assets thereafter
acquired by it except to the extent that such assets have thereafter been
disposed of for fair value in the ordinary course of business.
1.10. Accounts Receivable. All accounts receivable reflected on the
December 31, 1995 REF Financial Statements referred to in Section 1.5 hereto
arising prior to the date hereof, and not collected at the date hereof, have
arisen from bona fide transactions in the ordinary course of REF's business.
1.11. Notes Receivable - Stockholders and Officers. Attached hereto as
Schedule 1.11 is an itemized list of all amounts due from stockholders and
officers of REF as reflected on the December 31, 1995 REF Financial Statements.
No changes will have occurred in the balances prior to the Closing Date, except
for the normal accrual of earned interest.
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<PAGE>
1.12. Liabilities.
(a) All liabilities of REF as of December 31, 1995 are reflected
in the December 31, 1995 REF Financial Statements referred to in Section 1.5
hereto, which shall be updated from time-to-time through the Closing Date.
(b) As of the Closing Date, REF will either have no liabilities of
any kind whatsoever, or the liabilities shall be equal to cash or cash
equivalent.
(c) As of the Closing Date, the Shareholders' Equity Net of REF,
determined in accordance with generally accepted accounting principles
consistently applied using the accrual method of accounting, shall not be less
than zero.
1.13. Governmental Permits. REF possesses all licenses, permits and
other authorizations necessary to own or lease and operate its properties and to
conduct its business as now conducted. All of such licenses, permits and
authorizations of REF are hereinafter collectively called (the "Permits").
Attached hereto as Schedule 1.13 is a list of all of the Permits. All Permits
are in full force and effect and will continue in effect after the date hereof
and the Closing Date without the consent, approval or act of, or the making of
any filing with, any governmental or regulatory agency, commission or authority.
REF is not in violation of the terms of any Permit, and REF has not received
notice of any violation or claimed violation thereunder.
1.14. Insurance. REF maintains policies of fire and casualty, product
and other liability and other forms of insurance in such amounts and against
such risks and losses as are adequate and reasonable for its business and
properties.
1.15. Conduct of Business. There are no claims, suits, proceedings, or
actions now pending or threatened against REF, and there are no claims, suits,
proceedings, or actions now pending or threatened against the Shareholders which
relate to the transactions contemplated by this Agreement.
1.16. No Undisclosed Liabilities. To the knowledge of REF, REF is not
subject to any material liability (including unasserted claims), absolute or
contingent, which is not shown or which is in excess of amounts shown or
reserved for in the December 31, 1995 balance sheet referred to in Section 1.5
hereof, other than liabilities of the same nature as those set forth in the
Financial Statements and reasonably incurred in the ordinary course of its
business after December 31, 1995.
1.17. No Default, Violation or Litigation. REF is not in default in any
material respect under any agreement, lease or other document to which it is a
party, or in violation of any law, rule, order, writ, injunction or decree of
any court or federal, state, municipal or other governmental department,
commission, board, bureau, agency or instrumentality. There are no lawsuits,
proceedings, claims or governmental investigations pending or, to the best
knowledge of REF, threatened against REF or against the properties or business
thereof, and REF knows of no factual basis for any such lawsuits, proceedings,
- 4 -
<PAGE>
claims or investigations and there is no action, suit, proceeding or
investigation pending, threatened or contemplated which questions the legality,
validity or propriety of the transactions contemplated by this Agreement.
1.18. Tax Liabilities. To the knowledge of REF, the amounts reflected as
liabilities for taxes on the December 31, 1995 REF Financial Statements referred
to in Section 1.5 hereof are sufficient for the payment of all unpaid federal,
state, county, local and foreign taxes of REF accrued for or applicable to the
period ended on such REF Financial Statements' date and all years prior thereto.
Attached hereto as Schedule 1.18 is a complete list of all tax obligations, as
reflected on the December 31, 1995 REF Financial Statements referred to in
Section 1.5 hereto, itemized by jurisdiction, obligation type and taxing period.
Except as set forth on Schedule 1.18, all federal, state, county, local and
foreign income, use, excise, property, sales, business activity and other tax
returns which are required to be filed by or in respect of REF up to and
including the date hereto have been filed and all taxes, including any interest
and penalties thereon, which have become due pursuant to such returns or
pursuant to any assessment have been paid, and no extension of the time for
filing of any such return is presently in effect. To the knowledge of REF, all
such returns which have been filed or are under extension or will be filed by or
in respect of REF for any period ending on or before the Closing Date are or
will be true and correct. The federal tax returns for REF have not been examined
by the Internal Revenue Service.
1.19. Employees.
(a) On the Closing Date, REF will not be a party to any oral or
written agreement for employment of any officers, employers, agents, or
consultants, including but not limited to union contracts and employee benefit
plans.
(b) As of the Closing Date, REF will not have any employees.
1.20. Employee Retirement Income Security Act. REF does not maintain any
employee benefit plans within the meaning of Section 3(3) of the Employee
Retirement Income Security Act of 1974, as amended, ("ERISA") and has no
liability with respect to any employee benefit plans. REF is not required, and
was not required within the immediately preceding five years, to make any
contribution to any "multiemployer plan" within the meaning of Section 3(37) of
ERISA REF has no liability in respect of any employee benefit plans established
or maintained or to which contributions are or were made by it to the Pension
Benefit Guaranty Corporation ("PBGC") or to any beneficiary of such plans.
1.21. Corporate Name. To the knowledge of REF, REF owns and possesses
all rights to the use of the names "Richard E. Field & Associates, Inc." and
"REF & Associates, Inc."
1.22. Trademarks and Proprietary Rights. REF has no trademarks,
tradenames, copyrights or applications therefor which are owned or used or
registered in the name of or licensed to REF, and no proceedings have been
- 5 -
<PAGE>
instituted or are pending or threatened or, to the best knowledge of REF,
contemplated with regard to any trademarks, trade names, copyrights or
applications involving REF.
1.23. No Omissions. None of the representations or warranties of REF
contained herein, none of the information contained in the schedules referred to
in this Article I, and none of the other information or documents furnished to
PAMCO or its representatives by REF in connection with this Agreement is false
or misleading in any material respect or omits to state a fact herein or therein
necessary to make the statements herein or therein not misleading in any
material respect. To the best knowledge of REF, there is no fact which adversely
affects, or in the future is likely to adversely affect, the business or assets
of REF in any material respect which has not been disclosed in writing to PAMCO.
ARTICLE II
REPRESENTATIONS, WARRANTIES, AND AGREEMENTS
OF PAMCO
As an inducement to the Shareholders and REF to enter into this
Agreement and to consummate the transactions contemplated herein, PAMCO
represents and warrants to the Shareholders and REF and agrees as set forth
below:
2.1. Organization. PAMCO is duly organized, validly existing, and in
good standing under the laws of the Commonwealth of Pennsylvania. PAMCO has the
corporate power and authority necessary or required to carry on its business as
now conducted.
2.2. Authority. This Agreement and the transactions contemplated herein
have been duly approved by all necessary action on the part of PAMCO. This
Agreement, when executed and delivered by PAMCO, and assuming the due execution
hereof by the Shareholders and REF, will constitute the valid, legal, and
binding agreement of PAMCO, enforceable in accordance with its terms. Neither
the execution and delivery nor the consummation of the transactions contemplated
in this Agreement, nor compliance with nor fulfillment of the terms and
provisions hereof will (i) conflict with or result in a breach of the terms,
conditions, or provisions of or constitute a default under the Certificate or
Articles of Incorporation or By-Laws of PAMCO, any instrument to which PAMCO is
a party or by which it is bound, or any statute or regulatory provisions
affecting PAMCO, or (ii) require the approval, consent, or authorization of or
any filing with or notification to any federal, state, or local court,
governmental authority or regulatory body. PAMCO has full power and authority to
do and perform all acts and things required to be done by PAMCO under this
Agreement.
2.3. Capital Structure. The authorized capital stock of PAMCO consists
of 25,000,000 shares of common stock, $.10 par value ("PAMCO Common Stock"), of
which approximately 9,711,931 shares have been issued and are outstanding,
2,500,000 shares of Class A common voting stock, $.10 par value per share, and
5,000,000 shares of preferred stock, $1.00 par value, of which 580,250 shares of
- 6 -
<PAGE>
Series A Cumulative Convertible Preferred Stock are issued and outstanding. All
of such issued and outstanding shares have been validly issued and are fully
paid and non-assessable.
2.4. Financial Statement. PAMCO has furnish to Field and REF the PAMCO
consolidated audited financial statements for the period ending December 31,
1995 (the "PAMCO Financial Statement"). The PAMCO Financial Statement is true,
correct, and complete in all material respects and fairly presents the financial
position of PAMCO as of the date thereof, has been prepared in accordance with
generally accepted accounting principles consistently applied throughout all
periods.
2.5. No Default, Violation or Litigation. To the knowledge of PAMCO,
PAMCO is not in default in any material respect under any agreement, lease or
other document to which it is a party, or in violation of any law, rule, order,
writ, injunction or decree of any court or federal, state, municipal or other
governmental department, commission, board, bureau, agency or instrumentality.
2.6. No Omissions. None of the representations or warranties of PAMCO
contained herein, none of the information contained in the schedules referred to
in this Article II, and none of the other information or documents furnished to
Field and REF or their representatives by PILIC in connection with this
Agreement is false or misleading in any material respect or omits to state a
fact herein or therein necessary to make the statements herein or therein not
misleading in any material respect.
ARTICLE III
ACTIONS PRIOR TO CLOSING
3.1. Investigation.
(a) REF shall afford to the officers, employees and authorized
representatives of PAMCO including, without limitation, independent public
accountants and attorneys of PAMCO such access during normal working hours to
the offices, properties, business and financial and other records of REF as
PAMCO shall reasonably deem necessary or desirable, and shall furnish to PAMCO
or its authorized representatives such additional financial and operating and
other data as shall be reasonably requested, including all such information and
data as shall be necessary in order to enable PAMCO or its representatives to
verify to their satisfaction the accuracy of the Financial Statements of REF and
the representations and warranties contained in Article I of this Agreement. No
investigation made by PAMCO or its representatives, except to the extent of
actual knowledge by PAMCO of any inaccuracy or breach contained herein, shall
affect the representations and warranties of REF hereunder or the liability of
REF with respect thereto.
(b) PAMCO shall afford REF and its authorized representatives,
including, without limitation, its independent public accountants and attorneys
such access during normal working hours to the offices, properties, business and
financial and other records of PAMCO as REF shall reasonably deem necessary or
- 7 -
<PAGE>
desirable, and shall furnish to REF or its authorized representatives such
additional financial and operating and other data as shall be reasonably
requested, including all such information and data as shall be necessary to
enable REF or its representatives to verify to their satisfaction the accuracy
of the Financial Statements of PAMCO and the representations and warranties
contained in Article II of this Agreement. No investigation made by REF or its
representatives, except to the extent of actual knowledge by REF of any
inaccuracy or breach of the representations and warranties of PAMCO contained
herein, shall affect the representations and warranties of PAMCO hereunder or
the liability of PAMCO with respect thereto.
3.2. Confidential Nature of Information. Each party agrees that in the
event that the transactions contemplated herein shall not be consummated, each
will treat in confidence all documents, materials and other information which
either shall have obtained during the course of the negotiations leading to this
Agreement, the investigation of the other party hereto and the preparation of
this Agreement and other documents relating to this Agreement, and shall return
to the other party all copies of non-public documents and materials which have
been furnished in connection therewith.
3.3. Preserve Accuracy of Representations and Warranties.
(a) REF shall refrain from taking any action which would render
any representation and/or warranty contained in Article I of this Agreement
inaccurate as of the Closing Date hereunder, except to the extent that REF deems
such action to be necessary or appropriate to conduct the business of REF in the
ordinary course. REF will promptly notify PAMCO of any lawsuits, claims,
proceedings or investigations that, to the knowledge of REF or the Shareholders,
may be threatened, brought, asserted or commenced against REF or its officers or
directors (i) involving in any way the transactions contemplated by this
Agreement or (ii) which would, if determined adversely, have a material adverse
impact on the business, properties or assets of REF.
(b) PAMCO shall refrain from taking any action which would render
any representation and/or warranty contained in Article II of this Agreement
inaccurate as of the Closing Date. PAMCO will promptly notify REF of any
lawsuits, claims, proceedings or investigations that, to the knowledge of PAMCO,
may be threatened, brought, asserted or commenced against PAMCO or its
respective officers and directors (i) involving in any way the transactions
contemplated by this Agreement or (ii) which would, if determined adversely,
have a material adverse impact on the business, properties or assets of PAMCO.
3.4. Maintain REF as a Going Concern.
(a) REF shall conduct its business in accordance with past
practices and to use its best efforts to maintain the business organization of
REF intact and preserve the good will of its employees, clients and others
having business relations with it. REF shall provide PAMCO promptly with interim
monthly financial information and any other management reports, as and when they
shall become available.
- 8 -
<PAGE>
(b) PAMCO shall conduct its business in accordance with past
practices and use its best efforts to maintain the business organization of
PAMCO intact and preserve the good will of its employees, clients and others
having business relations with it. PAMCO shall provide REF promptly with interim
monthly financial information and any other management reports, as and when they
shall become available.
3.5. Make No Material Change in REF. Prior to the Closing Date, REF
shall not, without the prior written approval of PAMCO, cause or permit REF to
(i) make any material change in the business or operations of REF; (ii) make any
material change in the accounting policies applied in the preparation of the
Financial Statements referred to in Section 1.5 hereof; (iii) declare any
dividends on its issued and outstanding shares of capital stock or make any
other distribution of any kind in respect thereof; (iv) issue, sell or otherwise
distribute any authorized but unissued shares of its capital stock or effect any
stock split or reclassification of any such shares or grant or commit to grant
any option, warrant or other rights to subscribe for or purchase or otherwise
acquire any shares of capital stock of REF or any security convertible or
exchangeable for any such shares; (v) purchase or redeem any of the capital
stock of REF; (vi) incur or be liable for indebtedness to REF or any of its
affiliates; (vii) make any material change in the compensation of officers or
key employees of REF; (viii) enter into any contract, license, franchise or
commitment other than in the ordinary course of business or waive any rights of
substantial value; (ix) make any donation to any charitable, civic, educational
or other eleemosynary institution in excess of donations made in comparable past
periods or (x) enter into any other transaction affecting in any material
respect the business of REF other than in the ordinary course of business and in
conformity with past practices or as contemplated by this Agreement.
3.6. No Public Announcement. REF shall not, without the prior approval
of PAMCO, make any press release. PAMCO shall be permitted to release and make a
public announcement or filing with respect to the transactions contemplated by
this Agreement.
ARTICLE IV
CONDITIONS PRECEDENT TO OBLIGATIONS OF PAMCO
The obligations of PAMCO under this Agreement to acquire the REF Shares
in exchange for the PAMCO Shares (as hereinafter defined) shall, at the option
of PAMCO, be subject to the satisfaction, on or prior to the Closing Date, of
the following conditions:
4.1. No Misrepresentations or Breach of Covenants and Warranties.
Subject to changes incurred in the normal course of business, there shall have
been no breach by REF in the performance of any of its covenants and agreements
herein, each of the representations and warranties of REF contained or referred
to in this Agreement shall be true and correct in all material respects on the
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<PAGE>
Closing Date as though made on the Closing Date, and there shall have been
delivered to PAMCO a certificate or certificates to that effect, dated the
Closing Date and signed on behalf of REF.
4.2. No Changes in Assets. Since the date of this Agreement, there has
been no material adverse change in the condition, financial or otherwise, of
REF.
4.3. Opinion of Counsel for REF. PAMCO shall have received from counsel
for REF, an opinion dated the Closing Date, in form and substance satisfactory
to PAMCO and its counsel, to the effect that:
(a) REF is a corporation duly organized, validly existing, and in
good standing under the laws of the State of California, and is qualified as a
foreign corporation in the State of Colorado. REF is qualified to transact
business in all other jurisdictions where such qualification is necessary, and
has full corporate power and authority to carry on its business as now
conducted. REF has no subsidiaries.
(b) The authorized capital stock of REF consists of 100,000
shares of common stock, no par value, of which 1600 shares are issued and
outstanding and owned by the Shareholders, and none of which are held by REF as
treasury shares. Except for this Agreement, there are no agreements,
arrangements, options, warrants, or other rights or commitments of any character
relating to the issuance, sale, purchase or redemption of any shares of capital
stock of REF, and all of the issued and outstanding shares of common stock of
REF on the Closing Date are validly issued, fully paid, and nonassessable with
no liability attaching to the ownership thereof.
(c) This Agreement and the transactions contemplated herein have
been duly approved by all necessary action on the part of REF and the
Shareholders. This Agreement has been duly and validly executed and delivered by
REF and Field, and the Agreement, assuming due execution by PAMCO, is the valid
and binding agreement of REF and the Shareholders and enforceable against them
in accordance with its terms, except as enforcement of such agreement may be
limited by bankruptcy, insolvency, or other similar laws affecting creditors'
rights generally and that the remedy of specific performance is subject to the
discretion of the court before which proceedings therefor are brought.
(d) REF has full power and authority to execute and deliver the
Agreement and to perform its obligations thereunder. Neither the execution and
delivery of this Agreement, nor the consummation of the transactions
contemplated herein, nor compliance with and fulfillment of the terms and
provisions hereof (i) conflicts with or results in the breach of the terms,
conditions, or provisions of, or constitutes a default under, the Certificate or
Articles of Incorporation or the By-Laws of REF or any agreement or instrument
known to counsel to which REF is a party or by which any of them is bound; (ii)
gives any party to or with rights under any such agreement or instrument the
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<PAGE>
right to terminate, modify, or otherwise change the rights or obligations of REF
under any such agreement or instrument, or (iii) requires the consent, approval,
or authorization of or any filing with or notification to any federal, state, or
local court, governmental authority, or regulatory body not already obtained or
made, as the case may be.
(e) Counsel does not know of any action, suit, proceeding, or
investigation pending or threatened against REF which might result in a material
adverse change in the business or assets or in the condition, financial or
otherwise, of REF, or that any action, suit, proceeding, or investigation is
pending, or to their knowledge threatened which questions the legality,
validity, or propriety of this Agreement or of any action taken or to be taken
by REF pursuant to or in connection with this Agreement.
(f) The Shareholders, to the best of counsel's knowledge and
after due investigation, are the lawful owner of the REF Shares, free and clear
of all adverse claims, with unrestricted right and power to transfer and deliver
the REF Shares to PAMCO. Field has executed and delivered to PAMCO the
instruments sufficient to vest good and marketable title to the REF Shares.
(g) To such further effect, with respect to legal matters
relating to this Agreement, as PAMCO or its counsel may reasonably request.
In giving this opinion, counsel for REF may rely as to matters of
fact upon certificates of officers of REF, and as to matters relating to the law
of any state other than the State of California upon opinions of other counsel
satisfactory to them, provided that such other counsel shall state that they
believe they are justified in relying upon such certificates and opinions, and
deliver copies thereof to PAMCO prior to the Closing Date.
4.4. Approval by Counsel. All matters, proceedings, instruments, and
documents required to carry out this Agreement or incidental thereto, and all
other relevant legal matters shall have been approved at or prior to the Closing
Date by Butera, Beausang, Cohen & Brennan, which approval shall not be
unreasonably withheld.
4.5. Investment Representation. The Shareholders acknowledge that the
PAMCO Shares (as hereinafter defined) which are to be received hereunder have
not and will not be registered under the Securities Act of 1933, as amended (the
"Act"), and the Shareholders agree that they are acquiring the REF Shares for
investment purposes only and not with a view to any sale or other distribution
thereof in a manner that would violate the Act. The Shareholders consent to the
placement of the following legends (or legends substantially similar thereto) on
the certificate or certificates representing the PAMCO Shares issued pursuant
hereto:
"THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED, OR ANY STATE
SECURITIES LAWS. THEY MAY NOT BE SOLD OR OFFERED FOR SALE
IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT AS
TO THE SECURITIES UNDER SAID ACT AND ANY APPLICABLE STATE
SECURITIES LAWS OR AN EXEMPTION FROM SUCH REQUIREMENTS."
"THESE SECURITIES ARE SUBJECT TO THE TERMS AND CONDITIONS
SET FORTH IN A CERTAIN STOCK EXCHANGE AGREEMENT BETWEEN
THE HOLDER HEREOF AND PAMCO, AND SHALL BE TRANSFERRABLE
ONLY IN ACCORDANCE WITH THE TERMS AND CONDITIONS THEREOF."
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<PAGE>
4.7. Restrictions on Transfer. The certificate(s) representing the PAMCO
Shares shall be transferrable only in accordance with the provisions of the Act
or an exemption therefrom.
4.8. Net Worth - Shareholders' Equity of REF. On the Closing Date, the
Shareholders' Equity - Net (as hereinafter defined) of REF shall not be less
than zero. For the purposes of this Agreement, the term "Shareholders' Equity -
Net" shall mean the shareholder's equity determined in accordance with generally
accepted accounting principles consistently applied.
ARTICLE V
CONDITIONS PRECEDENT TO OBLIGATIONS OF REF
The obligations of REF under this Agreement shall, at the option of REF,
be subject to the satisfaction, on or prior to the Closing, of the following
conditions:
5.1. No Misrepresentations or Breach of Covenants and Warranties. There
shall have been no breach by PAMCO in the performance of any of its covenants
and agreements herein, each of the representations and warranties of PAMCO
contained or referred to in this Agreement shall be true and correct in all
material respects on the Closing Date as though made on the Closing Date, and
there shall have been delivered to REF certificate or certificates to that
effect, dated the Closing Date and signed by the President of PAMCO.
5.2. Opinion of Counsel for PAMCO. REF shall have received from Butera,
Beausang, Cohen & Brennan, counsel for PAMCO, an opinion dated the Closing Date,
in form and substance satisfactory to REF and its counsel, to the effect that:
(a) PAMCO is a corporation duly organized, validly existing, and
in good standing under the laws of the Commonwealth of Pennsylvania, and PAMCO
has full corporate power and authority to carry on its business as now
conducted.
(b) The authorized capital stock of PAMCO consists of 25,000,000
shares of Common Stock, $.10 par value, of which approximately 9,711,931 shares
have been issued and are outstanding, 2,000,000 shares of Class A common voting
stock, $.10 par value per share, and 5,000,000 shares of preferred stock, $1.00
par value, of which 580,250 shares of Series A Cumulative Convertible Preferred
Stock are issued and outstanding. All of the outstanding shares of PAMCO are
validly issued, fully paid, and nonassessable with no liability attaching to the
ownership thereof.
(c) This Agreement and the transactions contemplated herein have
been duly approved by all necessary action of PAMCO. This Agreement has been
duly and validly executed and delivered by PAMCO, and the Agreement, assuming
due execution by REF and the Shareholders, is the valid and binding agreement of
PAMCO, enforceable against PAMCO in accordance with its terms, except as
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<PAGE>
enforcement of such agreement may be limited by bankruptcy, insolvency, or other
similar laws affecting creditors' rights generally and that the remedy of
specific performance is subject to the discretion of the court before which
proceedings therefor are brought.
(d) PAMCO has full power and authority to execute and deliver the
Agreement and to perform its obligations thereunder. Neither the execution and
delivery of this Agreement, nor the consummation of the transactions
contemplated herein, nor compliance with and fulfillment of the terms and
provisions hereof (i) conflicts with or results in the breach of the terms,
conditions, or provisions of, or constitutes a default under, the Certificate or
Articles of Incorporation or the By-Laws of PAMCO or any agreement or instrument
known to counsel to which PAMCO is a party or by which it is bound; (ii) gives
any party to or with rights under any such agreement or instrument the right to
terminate, modify, or otherwise change the rights or obligations of PAMCO under
any such agreement or instrument, or (iii) requires the consent, approval, or
authorization of or any filing with or notification to any federal, state, or
local court, governmental authority, or regulatory body not already obtained or
made, as the case may be.
(e) Counsel does not know of any action, suit, proceeding, or
investigation pending or threatened against PAMCO which might result in a
material adverse change in the business or assets or in the condition, financial
or otherwise, of PAMCO, or that any action, suit, proceeding, or investigation
is pending, or to their knowledge threatened which questions the legality,
validity, or propriety of this Agreement or of any action taken or to be taken
by PAMCO pursuant to or in connection with this Agreement.
(f) To such further effect, with respect to legal matters
relating to this Agreement, as REF or its counsel may reasonably request.
In giving this opinion, Butera, Beausang, Cohen & Brennan may
rely, as to matters of fact upon certificates of officers of PAMCO, and as to
matters relating to the law of any state other than the Commonwealth of
Pennsylvania, upon opinions of other counsel satisfactory to them, provided that
such other counsel shall state that they believe they are justified in relying
upon such certificates and opinions, and deliver copies thereof to REF prior to
the Closing Date.
5.3. Approval be Counsel. All matters, proceedings, instruments, and
documents required to carry out this Agreement or incidental thereto, and all
other relevant legal matters shall have been approved at or prior to the Closing
Date by counsel for REF, which approval shall not be unreasonably withheld.
5.4. No Changes in Assets. Since the date of this Agreement, there has
been no material adverse change in the condition, financial or otherwise, of
PAMCO.
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<PAGE>
ARTICLE VI
EXCHANGE OF STOCK AND CLOSING
6.1. Closing Date. Subject to the fulfillment of the conditions
precedent specified in this Agreement and as soon as practicable following such
fulfillment, but in no event later than June 25, 1996 the transactions
contemplated by this Agreement shall be consummated (the "Closing") at such
place as shall be agreed upon between the parties, or in the absence thereof at
the offices of Butera, Beausang, Cohen & Brennan, 630 Freedom Business Center,
Suite 212, King of Prussia, Pennsylvania 19406, or such other place as shall be
agreeable between the parties. The date on which the Closing is to take place is
sometimes referred to herein as the "Closing Date."
6.2. Exchange of Shares. On the Closing Date, PILIC shall receive from
the Shareholders and the Shareholders shall transfer to PILIC the shares of REF
in exchange for the issuance by PAMCO to the Shareholders of 610,000 shares of
the common stock of PAMCO, $.10 par value (the "PAMCO Shares"), to be
distributable 457,500 PAMCO Shares to Field and 152,500 PAMCO Shares to Ivey,
and subject to adjustment as set forth herein.
6.3. Delivery by REF. At the Closing, the Shareholders shall deliver to
PAMCO certificated representing all of the REF Shares, together with fully
executed and witnessed stock powers in blank attached thereto with signatures
guaranteed by a bank or trust company or a New York Stock Exchange Medallion
Signature Program participant.
6.4. Delivery by PAMCO. On the Closing Date, in exchange for the REF
Shares, PAMCO shall deliver to the Shareholders a certificate or certificates
representing the PAMCO Shares, which shall be issued in accordance with the
Shareholders' instructions. The Shareholders acknowledge that the PAMCO Shares
will not have been registered under the Securities Act of 1933, as amended, and
accordingly, shall bear a restrictive legend similar to that set forth in
Section 4.5 hereof.
6.5. Resignations of Officers and Directors of REF. At the Closing,
Field shall deliver to PAMCO the resignations of all of the Officers, Directors
and employees of REF, effective as of the Closing Date.
ARTICLE VII
TERMINATION
7.1. Termination Prior to the Closing Date.
(a) Notwithstanding anything to the contrary contained in this
Agreement or elsewhere, this Agreement may be terminated, and the transactions
contemplated hereby may be abandoned, at any time prior to the Closing Date:
(i) By mutual consent of PAMCO and REF;
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<PAGE>
(ii) By REF if any of the conditions to its obligations to
consummate this Agreement set forth in Article V shall not have been fulfilled
in all respects on or prior to the Closing Date and shall not have been waived,
if permitted to be waived, or by PAMCO if any of the conditions to its
obligations to consummate this Agreement set forth in Article IV shall not have
been fulfilled in all respects on or prior to the Closing Date and shall not
have been waived, if permitted to be waived;
(iii) Upon ten (10) days' prior written notice by either
party if the Closing date shall not have occurred on or before April 30, 1996.
(b) In the event that REF breaches any material term or
condition of this Agreement prior to the Closing Date, which breach is not cured
within five (5) days after notice thereof, this Agreement may be terminated by
PAMCO upon written notice to such effect.
(c) In the event that PAMCO breaches any material term or
condition of this Agreement prior to the Closing Date, which breach is not cured
within five (5) days after notice thereof, this Agreement may be terminated by
REF upon written notice to such effect.
(d) In the event of a termination of this Agreement pursuant to
Section 7.1(a) hereof, each party shall pay the costs and expenses incurred by
it in connection with this Agreement, this Agreement shall be of no further
force or effect, and no party shall have any liability to any other party
hereunder.
(e) In the event of a termination of this Agreement pursuant to
Section 7.1(c) hereof, PAMCO shall pay to REF all reasonable costs and expenses,
including attorney's fees, incurred by REF through the date of termination.
(f) Upon termination of this Agreement pursuant to this Section
7.1 and except as expressly set forth herein, no party shall have any liability
to any other party hereunder.
ARTICLE VIII
SURVIVAL OF OBLIGATIONS, INDEMNIFICATION
8.1. Survival of Obligations. In the event that this Agreement is not
rescinded, the terms and conditions of this Agreement, and all certifications,
representations, and warranties respectively made herein by REF, the
Shareholders and PAMCO, and their respective obligations to be performed
pursuant to the terms hereof, shall survive the Closing Date hereunder for a
period of two (2) years thereafter with respect to the representations an
warranties, except with respect to the representations and warranties regarding
taxes, which will survive for a period of three (3) years thereafter.
- 15 -
<PAGE>
8.2. Indemnification.
(a) REF, Field and Ivey jointly and severally agree to indemnify
and hold harmless PAMCO, its subsidiaries, affiliates, successors and assigns
from and against any and all liabilities, losses, costs, deficiencies, or
damages ("Loss"), and reasonable attorneys' and accountants' fees and expenses,
court costs, and all other reasonable out-of-pocket expenses ("Expenses")
incurred by PAMCO, in each case net of any insurance proceeds received and
retained by PAMCO in connection with or arising from (i) any claim that REF did
not convey to PAMCO good and marketable title to all of the Shares pursuant to
this Agreement, (ii) any breach by REF of any of its covenants in, or failure of
REF to perform any of its obligations under, this Agreement, or (iii) any
material breach of any warranty or the inaccuracy of any representation of REF
or the Shareholders contained or referred to in this Agreement or in any
certificate delivered by or on behalf of REF pursuant hereto.
(b) PAMCO agrees to indemnify and hold harmless REF, Field, and
Ivey, their successors and assigns from and against any and all Loss and Expense
incurred by REF, in each case net of any insurance received and retained by REF,
in connection with or arising from (j) any claim that PAMCO failed to deliver
the PAMCO Shares in exchange for the REF Shares as set forth in this Agreement,
(ii) any breach by PAMCO to perform any of its obligations under this Agreement,
or (iii) any material breach of any warranty of the inaccuracy of any
representation of PAMCO contained or referred to in this Agreement or in any
certificate delivered by or on behalf of PAMCO pursuant hereto.
(c) No claim shall be made for indemnity pursuant to Paragraphs
8.2(a) and (b) until the aggregate amount of Loss and Expense exceeds $50,000,
but if the aggregate amount of the Loss and Expense exceeds such amount, the
person responsible therefor (an "Indemnifying Person") shall be liable for all
Loss and Expense in excess of the initial $50,000 amount, to the person
incurring the Loss or Expense (an "Indemnified Person").
(d) Each indemnified Person shall give notice to the
Indemnifying Person promptly after such Indemnified Person has actual knowledge
of any claim as to which indemnity may be sought, and shall permit the
Indemnifying Person to assume the defense of any such claim or any litigation
resulting therefrom, provided that counsel for the Indemnifying Person, who
shall conduct the defense of such claim or litigation, shall be approved by the
Indemnified Person (whose approval shall not unreasonably be withheld), and the
Indemnified Person may participate in such defense at such party's expense, and
provided further that the failure of any Indemnified Person to give notice as
provided herein shall not relieve the Indemnifying Person of its obligations
under this Agreement unless the failure to give such notice is materially
prejudicial to an Indemnifying Person's ability to defend such action and
provided further that the Indemnifying Person shall not assume the defense for
matters as to which there is a conflict of interest or separate and different
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<PAGE>
defenses. No Indemnifying Person, in the defense of any such claim or
litigation, shall, except with the consent of each Indemnified Person, consent
to entry of any judgment or enter into any settlement which does not include as
an unconditional term thereof the giving by the claimant or plaintiff to such
Indemnified Party of a release from all liability in respect to such claim or
litigation.
(e) The liability of Ivey for any claim for indemnification shall
be enforceable only out of the PAMCO Shares acquired by Ivey as set forth
herein, or shall be limited to the fair market value thereof as of the Closing
Date in the event that Ivey disposes of the PAMCO Shares during the period set
forth in Paragraph 8.1 hereof.
ARTICLE IX
MISCELLANEOUS
9.1. Effective Date. The Effective Date for the purposes of the
transactions set forth herein or contemplated hereby shall be January 1, 1996.
9.2. Governing Law/Consent to Jurisdiction. This Agreement shall be
governed by and construed in accordance with the laws of the Commonwealth of
Pennsylvania. All employment or lease agreements contemplated hereunder shall be
governed by and construed in accordance with the laws of the Commonwealth of
Pennsylvania. The parties hereto agree to consent to the jurisdiction and venue
of the United States District Court for the Eastern District of Pennsylvania,
and agree that all disputes between the parties shall be litigated only therein.
9.3. Successors and Assigns. This Agreement shall not be assignable by
any party without the prior written consent of all parties. The Agreement shall
be binding upon the inure to the benefit of the parties hereto and their
respective heirs, administrators, successors and assigns.
9.4. Notice. Any notice hereunder, if mailed, shall be effective upon
receipt, and shall be by professional express service, registered mail (return
receipt requested) or by personal service. Notices shall be given to the
following addresses, or such other addresses as the parties shall designate in
writing from time to time:
If to PAMCO: Provident Indemnity Life Insurance Company
2500 DeKalb Pike
P.O. Box 511
Norristown, PA 19404-0511
Attention: Alvin H. Clemens, President
with a copy to: Butera, Beausang, Cohen & Brennan
630 Freedom Business Center
Suite 212
King of Prussia, PA 19406
Attention: Michael F. Beausang, Jr., Esq.
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<PAGE>
If to REF: Richard E. Field & Associates, Inc.
1620 Kipling Street
Lakewood, CO 80215
Attention: Richard E. Field, President
with a copy to: Posternak, Blankstein & Lund
100 Charles River Plaza
Boston, MA 02114-2723
Attention: Michael J. Wolfson, Esq.
If to Shareholders: Mr. Richard E. Field
134 Medinah Drive
Blue Bell, PA 19422
Mr. Arthur J. Ivey
Heritage on the Garden
300 Boylston Street, Unit 507
Boston, MA 02116
with a copy to: Posternak, Blankstein & Lund
100 Charles River Plaza
Boston, MA 02114-2723
Attention: Michael J. Wolfson, Esq.
9.5. Expenses; Income Tax Matters. Each of REF and PAMCO shall pay their
own expenses including, without limitation, legal and accounting fees and
expenses, incident to the negotiation and preparation of this Agreement and to
its performance and compliance with the provisions contained herein. Each party
hereto shall determine the manner in which the transactions set forth herein
shall be treated for federal and state income tax purposes, and no party shall
be deemed to have made any representation or warranty to any other party as to
the income tax treatment of any transaction described herein.
9.6. Entire Agreement; Amendments. This Agreement constitutes the entire
understanding and agreement among the parties hereto relative to the subject
matter hereof. Any amendments to the Agreement must be in writing, signed by
each party hereto.
9.7. Partial Invalidity. In case any one or more of the provisions
contained in this Agreement shall for any reason be held to be invalid, illegal,
or unenforceable in any respect, such invalidity, illegality, or
unenforceability shall not affect any other provision hereof, and this Agreement
shall be construed as if such invalid, illegal, or unenforceable provision had
never been contained herein, unless the deletion of the provision or provisions
would result in such a material change as to cause completion of the
transactions contemplated herein to be unreasonable.
9.8. Execution in Counterparts. This Agreement may be executed by the
parties hereto signing the same instrument, or by each party hereto signing a
separate counterpart or counterparts, each of which shall be deemed to be an
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<PAGE>
original, but all of which together shall constitute one and the same
instrument. The parties agree that documents executed by facsimile shall be
acceptable in this transaction, and the signatures thereof shall have the same
force and effect as original signatures.
9.9. Waivers. REF and the Shareholders and PAMCO may, by written
instrument, extend the time for the performance of any of the obligations or
other acts of the other party and with respect to this Agreement (a) waive any
inaccuracies in the representations and warranties of the other parties in this
Agreement or in any document delivered pursuant to this Agreement, (b) waive
compliance with any of the covenants of the other parties contained in this
Agreement, and (c) waive any other party's performance of any of its obligations
set forth in this Agreement.
9.10. Titles and Headlines. Titles and headings to Paragraphs herein are
inserted for convenience of reference only and are not intended to be a part of
or to affect the meaning or interpretation of this Agreement.
9.11. Exhibits. The Exhibits and Schedules to this Agreement shall be
construed with and as an integral part of this Agreement to the same extent as
if the same had been set forth verbatim herein.
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<PAGE>
IN WITNESS WHEREOF, the parties hereto have set their hands and seals
the day and year first above-written.
PROVIDENT AMERICAN CORPORATION
Attest:
By:
- ----------------------------------- -------------------------------------
Michael F. Beausang, Jr., Secretary Alvin H. Clemens, President
RICHARD E. FIELD & ASSOCIATES, INC.
Attest:
By:
- ----------------------------------- -------------------------------------
Secretary Richard E. Field, President
THE SHAREHOLDERS:
Witness:
(SEAL)
- ----------------------------------- ----------------------------------
Richard E. Field
(SEAL)
- ----------------------------------- ----------------------------------
Arthur J. Ivey
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<PAGE>
LIST OF EXHIBITS
EXHIBIT "A" Correct and complete list of all (i) accounts,
borrowing resolutions, and deposit boxes maintained by REF
at any bank or other financial institutions, and (ii) the
names of the persons authorized to sign or otherwise act
with respect thereto.
<PAGE>
Stock Exchange Agreement
Exhibit A
Bank Accounts
First Interstate Bank of Denver, N.A.
633 Seventeenth Street
Denver, Colorado 80270
REF & Associates
Account No. 5391856
Authorized Signatory: Richard E. Field
<PAGE>
LIST OF SCHEDULES
Schedule 1.7 - Contracts and Agreements to which REF is a Party
Schedule 1.11 - List of all amounts due from stockholders and officers of
REF a reflected on the REF Financial Statements.
Schedule 1.13 - List of all REF Licenses, Permits and Other Authorizations
Schedule 1.18 - List of REF Tax Obligations as reflected on the December
31, 1995 REF Financial Statements itemized by
jurisdiction, obligation type, and taxing period
<PAGE>
Stock Exchange Agreement
Schedule 1.7
Contracts
1. ORAL CONTRACTS
Listed below are companies that REF currently receives
commissions from:
TrustMark Life Ins. Co.
American Brokerage Corporation/NIA Corporation
Combined Insurance
Harden & Company
Managed Health Fund
Midland
Union Bankers
AFLAC
California Organized Producers
Guarantee Mutual
Healthplan Services
Mid-Continent
National Insurance Service
Zavidow-Shows
2. WRITTEN CONTRACTS
Agreement dated February 2, 1995 and between Concerned Health Care
Users of America Association ("CHUA"), Richard E. Field & Associates, Inc., t/a
REF & Associates, Inc., and Richard E. Field.
<PAGE>
Stock Exchange Agreement
Schedule 1.11
Amounts Due From Stockholders and Officers
NONE
<PAGE>
Stock Exchange Agreement
Schedule 1.13
Permits
REF is incorporated in California and is qualified to do business
as a foreign corporation in the State of Colorado.
<PAGE>
Stock Exchange Agreement
Schedule 1.18
Tax Liabilities
1. California Corporation tax.
2. Colorado Corporation tax.
<PAGE>
PROVIDENT AMERICAN CORPORATION
THE LIFE AND HEALTH INSURANCE AGENT
NON-QUALIFIED STOCK OPTION PLAN
------------------------------------
1. Purpose of the Plan
-------------------
The purpose of the Life and Health Insurance Agent Non-Qualified
Stock Option Plan ("Plan") is to afford an incentive to life and health
insurance agents who are licensed to sell insurance by any insurance subsidiary
of Provident American Corporation (the "Company") to acquire a proprietary
interest in the Company and to enable the Company and its subsidiaries to
attract and retain qualified insurance agents.
2. The Stock
---------
Except as provided in Section 7, the number of shares of stock
which may be optioned and sold under the Plan is 750,000 shares of Common Stock,
$.10 par value, of the Company (the 750,000 shares or any portion thereof shall
hereinafter be referred to as "Shares"). If options granted under this Plan
shall expire or terminate for any reason without having been exercised in full,
the unpurchased Shares subject thereto shall again be available for the granting
of options under this Plan. Shares which are the subject of options to purchase
may be made available from authorized and unissued stock or from treasury stock.
3. Eligibility
-----------
(a) An option may be granted under this Plan to any agent who or
which is licensed by Provident American Life & Health Insurance Company,
Provident Indemnity Life Insurance Company, or any other insurance subsidiary of
the Company existing from time to time (the "Insurance Company"), who or which
utilizes the Insurance Company as the Agent's primary insurance carrier, and
acts primarily and predominantly as an Agent for the Insurance Company
("Agent").
(b) The Company's Board of Directors (the "Board"), based upon
the recommendation of the Committee (defined in Section 8 hereof), shall
determine from time to time the Agents to whom options shall be granted, the
number of Shares subject to each option, the exercise price of the option (which
shall not be less than the fair market value on the effective date of the
grant), and the other terms, conditions or restrictions on the right to exercise
an option and related to achievement of performance goals or service with the
Insurance Company.
<PAGE>
4. Price
-----
(a) The price at which Shares may be purchased upon exercise of
each option ("option price") shall be fixed at the time of the grant of such
option and shall not be less than 100% of the fair market value of the Shares at
the time the option is granted. The Board or the Committee shall, in good faith,
determine the fair market value of the Shares based upon a reasonable method of
valuation adopted by the Board or the Committee. In no event shall the option
price be less than the par value of the Shares. None of the Company, the Board,
the Committee or any member thereof makes or shall make any representation or
warranty to any Agent regarding the consequences or effects of participation in
the Plan for federal or state income tax or any other purpose.
(b) Nothing contained in this Plan or in any option agreement
issued hereunder shall impose any liability or responsibility on the Company,
the Board, the Committee, or any member thereof to pay or reimburse any Agent
for the payment of any tax arising out of, or on account of, the issuance of an
option or options hereunder to any Agent, an Agent's exercise of any option
issued under this Plan, or an Agent's sale, transfer or other disposition of any
Shares acquired pursuant to the exercise of an option issued hereunder. Any
person receiving an option hereunder shall expressly acknowledge and agree that
such participation is voluntary and that the Agent will be solely responsible
for all taxes to which he may be or become subject as a consequence of such
participation.
5. Option Terms
------------
(a) Subject to the provisions and limitations of this Plan, and
subject to applicable securities, tax and other laws and regulations, options
may be granted at such time or times and pursuant to such terms and conditions
as may be determined by the Board during the period this Plan is in effect.
(b) Each option, which shall become exercisable in accordance
with its terms, must be exercised within five (5) years after the date on which
it first becomes exercisable. Each option shall further provide that it may not
be exercised in full or in part after the expiration of ten (10) years from the
date such option is granted. Except as set forth below, options which have been
granted to an Agent will continue to be exercisable only so long as the Agent
remains an Agent. Notwithstanding anything to the contrary contained in this
Section 5, the Board may, in its sole discretion and after prior written notice
to an Agent, accelerate the option exercise period, based upon its evaluation of
an Agent's individual performance.
(c) Shares to be purchased upon the exercise of any option shall
be paid for, in full, in cash, by wire transfer of funds to the Company's
account, or by certified check payable to the order of the Company.
(d) Each option granted under the Plan shall be evidenced by a
stock option agreement between the Company and the Agent. The Board shall make
all decisions as to the form of stock option agreement to be entered into
-2-
<PAGE>
with each Agent. All forms of stock option agreement shall contain such
provisions, restrictions and conditions as are not inconsistent with this Plan
but need not be identical. The provisions of this Plan shall be set forth in
full or incorporated by reference in each stock option agreement.
(e) In the event (i) an Agent ceases to be an Agent (other than a
cessation due to death or disability), (ii) an Agent breaches the Agent's
contract with the Insurance Company, or (iii) the Agent's contract with the
Insurance Company is terminated for cause, then the Committee shall have the
right, upon written notice to Agent to terminate the stock option agreement and
the Agent thereafter shall have no right of any kind to exercise any then
unexercised option.
(f) In the event an Agent's contract is terminated for any reason
not set forth in (e) above, such Agent shall have the right to exercise any
options which became exercisable prior to such cessation but only within a
period of three months from the date of such cessation (the "post-revocation
exercise period") (but in any event not later than the termination date of the
option), after which time any unexercised portion of all outstanding options
shall expire. If the Agent dies during the post-revocation exercise period, the
executors, administrators, legatees or distributees of the Agent's estate shall
have the right to exercise such options during the remainder of such period. In
no event and under no circumstances may an option be exercised by an Agent (or
his personal representative) after the end of the post-revocation exercise
period.
(g) In the event an Agent becomes permanently and totally
disabled or dies while serving as an Agent, any option which was exercisable on
the date when such Agent became disabled or died may be exercised by the Agent
or the executors, administrators, legatees or distributees of the estate of the
Agent, as applicable, within three months after the date thereof (but in no
event later than the termination date of the option), after which time any
unexercised portion of all outstanding options shall expire. In the event an
option is exercised by the executors, administrators, legatees or distributees
of the estate of the Agent, under subsection (f) or (g) of this Section 5, the
Company shall be under no obligation to issue Shares hereunder unless and until
the Company is satisfied that the person exercising the option is the duly
appointed legal representative of the Agent's estate or the proper legatee or
distributee thereof.
6. Non-Transferability
-------------------
No option granted hereunder shall be transferable by the Agent
other than by will or by the laws of descent and distribution and options shall
be exercisable during the Agent's lifetime only by such Agent; provided,
however, that in the event an Agent shall be subject to a legal disability, his
legal representative may exercise an option on his behalf.
<PAGE>
7. Stock Dividends or Recapitalization
-----------------------------------
In the event of a stock dividend paid in shares of the class of
stock subject to any option outstanding hereunder, or recapitalization,
reclassification, split-up or combination of shares with respect to said class
of stock, the Committee shall make appropriate adjustments of the option price
under such option and of the kind and number of shares as to which such option
is then exercisable, to the end that the Agent's proportionate interest shall be
maintained as before the occurrence of such event, and in any case an
appropriate adjustment shall also be made in the total number and kind of shares
of stock reserved for the future granting of options under this Plan. Any such
adjustment made by the Committee pursuant to this Plan shall be binding upon the
holders of all unexpired options outstanding hereunder.
8. Administration of the Plan
--------------------------
This Plan shall be administered by an Option Administration
Committee ("Committee") from time to time appointed by the Board. The Committee
shall have the power to grant options under the Plan subject to the subsequent
approval by the Board or make recommendations periodically to the Board with
respect to the individuals to whom options should be granted, the number of
options to be granted, and the form and content of the options to be granted,
including such provisions and conditions, and such restrictions on exercise of
an option as the Board or the Committee shall determine to be advisable. No
options shall be granted by the Committee to any person who does not qualify as
a "disinterested person" (within the meaning of Rule 16b-3 under the Securities
Exchange Act of 1934, as amended). The Board shall be authorized to interpret
the Plan, to prescribe, amend and rescind rules and regulations relating to it,
and to make all other determinations necessary or appropriate for its
administration.
9. Effective Date; Duration of the Plan Amendments
-----------------------------------------------
The Plan shall be effective as of January 1, 1996. Unless sooner
terminated, the Plan shall expire ten (10) years from the date the Plan is
adopted by the Board. The Plan may be altered, suspended, discontinued, or
terminated by the Board at any time. Nothing contained herein shall be construed
to permit a termination, modification, or amendment adversely affecting the
rights of any Agent under an existing option theretofore granted without the
consent of such Agent.
10. General
-------
(a) The provisions of this Plan shall be binding upon and inure
to the benefit of the parties and their respective heirs, executors,
administrators, personal representatives, successors and permitted assigns.
(b) Wherever used herein, the singular shall be deemed to refer
to and include the plural and vice versa, where appropriate. Wherever used
-4-
<PAGE>
herein, the masculine shall be deemed to refer to and include the feminine and
the neuter and vice versa, where appropriate.
(c) The rights of any Agent under the Plan shall not be
assignable by the Agent and shall not be subject to the rights of creditors, and
any attempt to cause such right to be so subjected shall not be recognized,
except to such extent as may be required by law.
(d) The Company, upon notice to Agents, at any time or from time
to time, may amend, modify or terminate any or all of the provisions of the Plan
without the consent of any Agent. No amendment shall have the effect of
modifying any benefit election of any Agent in effect at the time of such
amendment, unless such amendment is made to comply with federal, state or local
laws, statutes or regulations.
(e) This Plan shall not be deemed to constitute a contract
between the Company and any Agent or to be a consideration or an inducement for
any contract with any Agent. Nothing contained in this Plan shall be deemed to
give any Agent the right to be retained as an Agent of the Company or to
interfere with the right of the Company to terminate any Agent's contract at any
time, regardless of the effect which such termination shall have upon him as an
Agent under this Plan.
(f) This Plan constitutes the entire agreement between the
Company and the Agent relative to the purchase of the Shares. This Plan is
governed by the laws of the Commonwealth of Pennsylvania.
(g) The invalidity of any provision of this Plan shall not affect
the validity of the remaining provisions, and this Plan shall be construed as if
such invalid provision had been omitted.
-5-
<PAGE>
IN WITNESS WHEREOF, in order to record the adoption of this Plan, the
Company has caused its duly authorized officers to affix the corporate name and
seal hereto effective as of the 2nd day of January, 1996.
ATTEST: PROVIDENT AMERICAN CORPORATION
By:
- ------------------------ -------------------------
Michael F. Beausang, Jr. James O. Bowles, President
Secretary and Chief Operating Officer
[CORPORATE SEAL]
-6-
<PAGE>
EMPLOYMENT CONTRACT
-------------------
THIS EMPLOYMENT CONTRACT ("Agreement") is dated as of the _____ day of
November, 1996, effective as of April 1, 1996, by and between PROVIDENT
INDEMNITY LIFE INSURANCE COMPANY, a stock life insurance company organized under
the laws of the Commonwealth of Pennsylvania (the "Company"), PROVIDENT AMERICAN
CORPORATION, a Pennsylvania corporation ("PAMCO"), each with an address at 2500
DeKalb Pike, P.O. Box 511, Norristown, Pennsylvania 19404-0511, and EDWARD
BOLTON, an individual ("Employee"), residing at Exton, Pennsylvania.
BACKGROUND
----------
A. The Company desires to employ and Employee is desirous of becoming
employed by the Company as Vice President - Systems of the Company and PAMCO,
and further, to accept the duties and responsibilities set forth in this
Agreement.
B. The parties are desirous of entering into an Employment Agreement for
the payment of compensation to Employee in an amount which is fair and
reasonable for the duties to be performed.
NOW THEREFORE, in consideration of the foregoing and of the
mutual promises and undertakings contained in this Agreement, and for other good
and valuable consideration, the receipt and adequacy of which are hereby
acknowledged, and intending to be legally bound hereby, the parties hereby agree
as follows:
<PAGE>
1. TERM AND DUTIES OF EMPLOYMENT.
-----------------------------
a. Term. The Company hereby employs Employee for a term
commencing effective as of April 1, 1996 and ending April 1, 1999, unless
terminated earlier as hereinafter provided. Thereafter, the Company may extend
the term of this Agreement on a year-to-year basis, provided employee is in
agreement with such extension.
b. Duties. Employee shall be employed as Vice President -
Systems of the Company and PAMCO, and in such capacity, he shall perform the
duties and responsibilities customarily performed by an officer in that
capacity, including but not limited to the overall responsibility for the
successful operation and management of the Company's computer and information
systems, as well as such other duties and responsibilities as may be reasonably
determined and assigned to him from time to time by senior management of the
Company. Employee hereby accepts such employment and agrees to perform all
duties and responsibilities as may be reasonably required of him.
2. EXCLUSIVE EMPLOYMENT. During his employment pursuant to this
Agreement, Employee shall devote his principal business time, attention, energy,
skill, and best efforts to the business and affairs of the Company and his
duties under this Agreement to the exclusion of active work in other business
interests (except passive investments by Employee), and shall perform faithfully
to the fullest extent of his ability all of the duties which relate to his
position of employment with the Company.
3. COMPENSATION AND REIMBURSEMENT OF EXPENSES.
-------------------------------------------
a. For all services rendered by Employee under this
-2-
<PAGE>
Agreement, and in addition to other monetary or employee benefits, the Company
shall pay Employee the following amounts:
(1) Salary. Employee shall be paid an annual
salary in the amount of $90,000 for the period commencing effective as of April
1, 1996 and ending April 1, 1999 ("Salary").
(2) Additional Benefits.
(a) Employee shall be included in the
Company's group life, health, disability, major medical, and other insurance
coverages provided to the Company's employees during the term of this Agreement
and any renewal thereof. Employee shall also be included as a member in any
profit-sharing, pension, retirement, or other employee benefit plan which may be
adopted by the Company during the term of this Agreement or any renewal thereof,
provided such plan applies to other employees of the Company and Employee has
met the qualification requirements thereof.
(b) Paid vacation in such amount as shall
from time to time be agreed upon between Employee and the Company, but which
shall not be less than two (2) weeks in any calendar year. Employee shall not be
entitled to carry over any unused vacation accrued during any calendar year to
any succeeding year, unless approved in advance by the Company.
(c) Upon submission of receipts and proper
documentation, the Company hereby agrees to reimburse Employee for expenses
incurred by Employee in connection with business travel, including parking,
tolls, mileage, lodging and meals, business entertainment, dues, subscription
fees, and membership fees to any professional association or organization
related to the Company's business of which Employee is a member or shall become
a member during the term hereof or any renewal thereof.
-3-
<PAGE>
(d) In the event that Employee, during the
term of this Agreement, is transferred to a new principal place of work, the
Company shall be liable only for such moving and traveling expenses as are duly
authorized in advance in writing given to Employee by the Company in accordance
with the then regular policy of the Company.
4. STOCK AWARDS. In further consideration of Employee's entering
into this Agreement and his future services to the Company and its subsidiaries,
PAMCO agrees to award Employee up to 90,000 shares in the aggregate ("Aggregate
Stock Award") of its Common Stock, $.10 par value ("Common Stock") as follows:
a. Upon Signing of Employment Contract. Upon the signing
of this Agreement, PAMCO shall cause 15,000 shares of its Common Stock to be
issued to Employee, 5,000 shares in recognition of each of the three (3) years
of the term of this Agreement.
b. Annual Performance Criteria. Effective on each of April
1, 1997, April 1, 1998, and April 1, 1999 (collectively, the "Anniversary
Dates"), provided Employee is still actively and exclusively employed by the
Company and has met the performance criteria set forth on Exhibit "A" attached
hereto (the "Annual Performance Criteria") as of each of the respective
Anniversary Dates, PAMCO shall cause 25,000 shares of its Common Stock to be
issued to Employee (the "Annual Stock Award"). PAMCO agrees that if the Annual
Performance Criteria have been satisfactorily performed by Employee prior to the
respective Anniversary Dates (such determination to be made in the sole
discretion of the Company's senior management), it will cause the Annual Stock
Award to Employee for such year to be issued sooner than the Anniversary Date.
-4-
<PAGE>
c. In Event of Termination Prior to Receipt of Annual
Stock Award. Notwithstanding the foregoing: (i) in the event of Employee's
death, (ii) permanent disability (within the meaning of Section 22(e)(3) of the
Internal Revenue Code of 1986, as amended), or (iii) termination without cause
at any time prior to the expiration of this Agreement, provided the Aggregate
Stock Award has not previously been issued to Employee, PAMCO shall cause to be
issued to Employee or Employee's estate, as the case may be, the balance of the
Aggregate Stock Award, if any, as of such date. Upon termination for any other
reason, Employee shall not thereafter be entitled to any Annual Stock Award.
d. Investment Representation. Employee acknowledges that
the Common Stock has not been registered under the Securities Act of 1933, as
amended (the "Act"), and agrees that he is acquiring the Common Stock for
investment purposes only and not with a view to any sale or other distribution
thereof in a manner that would violate the Act. Employee consents to the
placement of a legend or legends along the lines of the following on the
certificates representing the Common Stock to be issued to Employee:
"THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED, OR ANY STATE
SECURITIES LAWS. THESE SECURITIES MAY NOT BE SOLD OR
OFFERED FOR SALE IN THE ABSENCE OF AN EFFECTIVE
REGISTRATION STATEMENT AS TO THE SECURITIES UNDER SAID ACT
AND ANY APPLICABLE STATE SECURITIES LAWS OR AN EXEMPTION
FROM ANY SUCH REQUIREMENTS."
5. TERMINATION OF EMPLOYMENT. Notwithstanding anything to the
contrary contained herein, Employee's employment hereunder:
a. Shall be automatically terminated effective on the date
of Employee's death.
-5-
<PAGE>
b. May be terminated by Employee by written notice to the
Company, in which event such termination shall become effective 30 days after
the giving of notice, or earlier as may be specified by the Company after
receipt of Employee's notice of termination.
c. May be terminated by the Company for cause upon 30
days' prior written notice to Employee, such termination to become effective as
provided in the written notice:
(1) if Employee shall fail or become unable to
perform any of his duties hereunder due to illness or other incapacity and such
illness or incapacity shall continue for a period of more than 180 days;
(2) if Employee shall breach or violate any of the
provisions of this Agreement, which breach or violation shall not be cured
within 30 days after written notice thereof to Employee; or
(3) for incompetence, alcohol or drug addition,
insubordination, gross negligence, any violation of any express direction of the
Company's senior management or Board of Directors of any reasonable rule or
regulation established by the Company regarding the conduct of its business,
which violation shall not be cured within 10 days after written notice thereof
to Employee.
d. Employee's employment hereunder may also be terminated
without cause by the Company by written notice to Employee, and such termination
shall become effective as provided in such notice, provided, however, that upon
such termination, Employee shall be entitled to the termination compensation
benefits described in Paragraph 6 below.
6. TERMINATION COMPENSATION BENEFITS. If this Agreement is
terminated by the Company prior to April 1, 1999 without cause as specified in
-7-
<PAGE>
Paragraph 5.d hereof, Employee agrees that in lieu of any other compensation or
payment, and as liquidated damages and in complete satisfaction of any and all
liabilities which the Company may have or have had to Employee, the Company
shall issue to Employee the balance of the Aggregate Stock Award, if any, as of
such date, and shall pay Employee and Employee shall accept an amount equal to
the Salary for the balance of the term of this Agreement, payable (at the option
of the Company) either as and when such Salary would have been paid pursuant to
this Agreement, or in a lump-sum payment. Upon the payment of the amount set
forth herein and the issuance of the balance of the Aggregate Stock Award, if
any, each party agrees to and does release the other party from all liabilities,
damages, claims, or demands of any kind whatsoever arising as a result of the
employment of Employee by the Company and/or PAMCO, excepting and excluding
therefrom the obligations of Employee pursuant to the provisions of Paragraph 8
hereof.
7. INDEMNITY. The Company agrees to indemnify Employee to the
extent provided in any insurance policy customarily and generally available for
the purpose of covering the officers and directors of the Company, and in
accordance with the terms and conditions of Section VI of the By-Laws of the
Company, which provides for a plan of indemnification.
8. RESTRICTIVE COVENANTS.
a. Agreement to Keep Confidential. Employee acknowledges
that he will be subject to certain restrictive covenants concerning his
employment. In consideration of the terms of this Agreement, Employee
acknowledges and agrees that he will acquire confidential information of a
special and unique nature and value relating to the Company's intentions,
-7-
<PAGE>
plans, procedures, confidential reports, financial resources, shareholders,
investors, and prospective business. In this regard, Employee hereby agrees that
he will not:
(1) persuade or attempt to persuade any customer
of the Company to cease doing business with the Company, or persuade or attempt
to persuade any potential customer not to become a customer of the Company;
(2) persuade or attempt to persuade any employee
of the Company to leave the Company's employ, or to become employed by any
person, firm, or corporation other than the Company;
(3) divulge to anyone (other than the Company or
any person employed or designated in writing by the Company), make any
unauthorized use of, or publish or use for their benefit or to the Company's
detriment, any knowledge or information of any type whatsoever of a confidential
nature relating to the businesses of the Company.
b. Covenant Not to Compete. In recognition of the
foregoing agreements, in the event that Employee's employment pursuant to this
Agreement is terminated for any reason by either party, Employee agrees that he
shall not for a period of 12 months following the date of such termination or
resignation, within a geographic limit of 50 miles of any location of the
Company, any of its affiliated companies, or any agency, directly or indirectly
own, manage, operate, consult, join, control, invest in, be employed by, or
participate in the formation, ownership, management, operation or control of, or
be connected in any manner with, any existing or proposed insurance company,
insurance holding company, insurance agency, or any investor group forming or
proposing to form either an insurance company, insurance holding company, or
insurance agency that engages in business that
-8-
<PAGE>
competes with the business of the Company.
c. Specific Enforcement. The parties recognize that the
services rendered by Employee hereunder are special, unique, and of an
extraordinary character, and in the event of Employee's breach of the terms and
conditions of this Agreement, or in the event Employee shall leave Company's
employment and breach the terms and conditions of this Agreement, Employee
consents to and authorizes the Company to institute and prosecute proceedings in
any court of competent jurisdiction, either in law or in equity, to enjoin
Employee from performing services in violation hereof during the term of this
Agreement or the 12-month period specified in this Agreement. The parties agree
that the period and geographic areas of restriction imposed upon Employee by
this Agreement are fair and reasonable and are reasonably required for the
protection of the Company and its goodwill.
9. MISCELLANEOUS.
-------------
a. Assignment. This Agreement shall not be assignable by
either party, except that without the prior written consent of the other party:
(1) it may be assigned by the Company to any
person or entity acquiring all or substantially all of the assets thereof; and
(2) it may be assigned by Employee as to his right
to payment, but not as to any of his obligations hereunder; and
(3) Company shall have the right to assign all or
any portion of its rights hereunder to PAMCO or any other affiliate or
subsidiary of the Company.
b. Entire Agreement; Amendments; and Waivers. This
Agreement constitutes the entire agreement among the parties and supersedes all
prior
-9-
<PAGE>
oral or written agreements relative to the employment of Employee by the
Company. Any amendments to the Agreement must be in writing, signed by each
party hereto. No waiver of any breach of this Agreement shall be held to
constitute a wavier of any other or subsequent breach.
c. Severability of Provisions. If any of the provisions of
this Agreement or the application of any such provision shall for any reason be
held invalid by a court of competent jurisdiction, such invalidity shall not
affect or impair any other provision, it being the intention of the parties that
such other provisions shall be and remain in full force and effect.
d. Compliance and Confidentiality. Employee agrees to
comply with all laws and regulations in the conduct of his duties and
obligations under this Agreement, and to comply with all regulations,
resolutions, and policies of the Company.
e. Notices. All notices, requests, demands and other
communications provided for by this Agreement shall be in writing and shall be
deemed to have been given at the time when mailed at any office of the United
States Postal Service enclosed in a certified postage-paid envelope addressed to
the respective party at the addresses set forth herein or to such changed
address as such party may have fixed by notice to the other party, provided,
however, that any notice or change of address shall be affected only upon
receipt and further provided that any notice may be personally delivered to the
respective party by the party giving notice in lieu of being mailed.
f. Binding Effect. This Agreement shall inure to the
benefit of and shall be binding upon the Company, its successors and assigns,
and any corporation which may acquire all or substantially all of the Company's
assets
-10-
<PAGE>
or into which the Company may be consolidated or merged, and upon Employee, his
heirs, executors, administrators and legal representatives.
g. Applicable Law. This Agreement shall be governed by and
construed in accordance with the laws of the Commonwealth of Pennsylvania.
h. Waiver.The failure of any party to insist in any one or
more instances upon performance of any terms or conditions of this Agreement
shall not be construed as a waiver of future performance of any such term,
covenant or conditions, but the obligations of either party with respect thereto
shall continue in full force and effect.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement
under seal the day and year above first written.
WITNESS:
(SEAL)
- ----------------------------- ------------------------------------
EDWARD BOLTON
PROVIDENT INDEMNITY LIFE INSURANCE
COMPANY
Attest:
By:
- ----------------------------- ---------------------------- (SEAL)
M. F. Beausang, Jr., Secretary James O. Bowles, President
PROVIDENT AMERICAN CORPORATION
Attest:
By:
- ------------------------------ ---------------------------- (SEAL)
M. F. Beausang, Jr., Secretary James O. Bowles, President
-11-
<PAGE>
EXHIBIT "A" TO BOLTON EMPLOYMENT CONTRACT
-----------------------------------------
ANNUAL PERFORMANCE CRITERIA FOR VICE PRESIDENT - SYSTEMS
--------------------------------------------------------
Following is the Annual Performance Criteria for the Vice President - Systems
for Provident Indemnity Life Insurance Company, its parent company, Provident
American Corporation, and each of their subsidiaries and affiliates:
o Work closely with outside consulting firms in developing annual
information services plans by November 30, 1996.
o Establish service levels for all services provided by information
services and how these will be achieved and monitored.
o Oversee all information services projects with accountability for
results and schedules.
o Establish budget for all system development, equipment, software,
and training.
o Establish monthly indicators including service level reports -
project status and budget status.
o Meet target objectives and schedules of Provident Strategic
Information Services Plan to be established in conjunction with
outside consulting firms and other target objectives and
schedules established by other consultants of Provident American
Corporation and its subsidiaries and affiliates.
<PAGE>
AMENDED AND RESTATED EMPLOYMENT CONTRACT
----------------------------------------
THIS AMENDED AND RESTATED EMPLOYMENT CONTRACT ("Agreement") is dated the
7th day of November, 1996, by and among PROVIDENT AMERICAN CORPORATION, a
Pennsylvania corporation ("PAMCO"), NIA CORPORATION, a Colorado corporation
("NIA"), PROVIDENT AMERICAN LIFE & HEALTH INSURANCE COMPANY, a Pennsylvania
domiciled insurance company ("PALHIC") (formerly known as UNION BENEFIT LIFE
INSURANCE COMPANY ("UBLIC")), and JAMES O. BOWLES, an individual ("Employee"),
c/o NIA Corporation, 1620 Kipling Street, Lakewood, Colorado 80215.
BACKGROUND
----------
A. Employee, NIA, and UBLIC (now known as PALHIC) entered into an
Employment Contract dated as of May 17, 1996 (the "Employment Contract")
pursuant to which Employee became employed as the President of NIA, ABC, and
UBLIC.
B. Effective as of October 1, 1996, Employee was appointed as President
of PAMCO and Provident Indemnity Life Insurance Company ("PILIC"), in addition
to PALHIC, NIA and ABC, and such other subsidiaries or affiliates as are from
time-to-time designated in writing as coming within the scope of the obligations
to be performed under this Agreement, and the parties are desirous of amending
and restating the Employment Contract as hereinafter set forth to provide for
the payment to Employee of compensation in an amount which is fair and
reasonable for the additional duties to be performed. For purposes hereof, the
term "Company" shall mean PAMCO, PILIC, PALHIC, NIA, ABC, and such other
subsidiaries or affiliates as are from time-to-time designated in writing as
coming within the scope of the obligations to be performed under this Agreement.
NOW THEREFORE, in consideration of the foregoing and of the mutual
covenants and undertakings contained in this Agreement, and for other good and
valuable consideration, the receipt and adequacy of which are hereby
acknowledged, and intending to be legally bound hereby, the parties hereto agree
as follows:
1. TERMS AND DUTIES OF EMPLOYMENT.
-------------------------------
a. Term. The Company hereby employs Employee for a term
commencing effective as of October 1, 1996 through September 30, 1998, unless
terminated earlier as hereinafter provided. Thereafter, the Company extend
<PAGE>
the term of this Agreement on a year-to-year basis by action of the Board of
Directors of the Company taken prior to the end of any then current term,
provided Employee is in agreement with such extension.
b. Duties. Employee shall be employed as President of the
Company, and in such capacity, he shall perform such duties and responsibilities
as are customarily performed by an officer in that capacity, including but not
limited to the overall responsibility for the successful operation and
management of the Company and its marketing of insurance products, as well as
such other duties and responsibilities as may be reasonably determined and
assigned to him from time-to-time by the Board of Directors of the Company.
Employee hereby accepts such employment and agrees to perform all duties and
responsibilities as may be reasonably required of him. In addition, Employee
agrees to accept appointment as an officer or director of any other subsidiary
or affiliate of PAMCO.
2. EXCLUSIVE EMPLOYMENT. During his employment pursuant to this
Agreement, Employee shall devote his principal business time, attention, energy,
skill, and best efforts to the business and affairs of the Company, and his
duties under this Agreement to the exclusion of active work in other business
interests (except passive investments by Employee) and shall perform faithfully
to the fullest extent of his ability all of the duties which relate to his
position of employment with the Company, subject to reasonable vacations
compatible with his position.
3. COMPENSATION AND REIMBURSEMENT OF EXPENSES.
------------------------------------------
a. For all services rendered by Employee under this
Agreement, and in addition to other monetary or other employee benefits, Company
shall pay Employee the following amounts:
(1) Base Salary. Employee shall be paid a base
salary in the amount of $195,000 for the period commencing as of May 17, 1996
and ending May 17, 1997, which shall be increased at the end of each subsequent
twelve (12) month period during the term of this Agreement by a minimum of the
increase in the Cost of Living Index (as defined herein) ("Base Salary"). For
purposes of this Agreement, the term "Cost of Living Index" shall refer to the
percentage change (increases only) of the Consumer Price Index ("CPI"), all
items, for the City of Philadelphia, Pennsylvania, compiled by the United States
Department of Labor, Bureau of Labor Statistics, Washington, D.C., or its
successor index. If at the time of adjustment the CPI is no longer reported or
its basic principle has been altered, an alternative method shall be used to
equitably reflect the percentage of increase in the cost of living.
(2) Incentive Compensation. In addition to the
compensation described in subparagraph (1) above, Employee may be eligible to
receive additional compensation in the form of an annual incentive bonus, if
such has been recommended and approved by the Executive Committee or the Board
of Directors of the Company. The amount of the annual incentive bonus, if any,
is subject to a formula that has been approved by the Board of Directors of the
Company. Any annual incentive bonus awarded to Employee shall be paid
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<PAGE>
to Employee as soon as practicable after the end of the fiscal year of the
Company for which such incentive bonus has been awarded.
(3) Additional Benefits.
-------------------
(a) Employee shall be included in the
Company's group life, health, disability, major medical, and other insurance
coverages provided to the Company's employees during the term of this Agreement
and any renewal thereof. Employee shall also be included as a member in any
profit-sharing, pension, retirement, or other employee benefit plan which may be
adopted by the Company during the term of this Agreement or any renewal thereof,
provided such plan applies to other employees of the Company and Employee has
met the qualification requirements thereof.
(b) Paid vacation of four (4) weeks, which
vacation shall be taken at such times as are mutually convenient to Employee and
the Company. Employee shall not be entitled to carry over any unused vacation
accrued during any calendar year to any succeeding year, unless approved in
advance by the Company.
(c) Upon submission of receipts and proper
documentation, the Company hereby agrees to reimburse Employee for expenses
incurred by Employee in connection with business travel, including parking,
tolls, mileage, lodging and meals, business entertainment, dues, subscription
fees, and membership fees to any professional association or organization
related to the Company's business of which Employee is a member or shall become
a member during the term hereof or any renewal thereof.
(d) During the term of this Agreement, the
Company shall provide Employee with an automobile for his exclusive use for
business purposes. The selection of the make and model of an automobile shall be
at the discretion of Employee with the cost of the vehicle not to exceed $500
per month.
(e) In the event that Employee, during the
term of this Agreement, is transferred to a new principal place of work, the
Company shall be liable only for such moving and traveling expenses as are duly
authorized in advance in writing given to Employee by the Company in accordance
with the then regular policy of the Company.
4. GRANT OF OPTIONS TO PURCHASE SHARES OF PAMCO'S COMMON STOCK.
Employee shall be granted an option to purchase 50,000 shares of PAMCO's Common
Voting Stock, $.10 par value, at the mean between the bid and ask price as of
the date hereof, under the 1996 Employee Incentive Stock Option Plan, which
option is exercisable in its entirety as of the date of grant. From time-to-time
PAMCO may grant additional options to purchase shares of PAMCO's Common Stock to
Employee.
5. TERMINATION OF EMPLOYMENT. Notwithstanding anything to the
contrary contained herein, Employee's employment hereunder:
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<PAGE>
a. Shall be automatically terminated effective on the date
of Employee's death.
b. May be terminated by Employee by written notice to the
Company, in which event such termination shall become effective 30 days after
the giving of notice, or earlier as may be specified by the Company after
receipt of Employee's notice of termination.
c. May be terminated by the Company for cause upon 30
days' prior written notice to Employee, such termination to become effective as
provided in the written notice. As used herein, the term "for cause" shall be
defined as follows: If at any time during the term of this Agreement or while
any termination compensation benefits are being paid to Employee hereunder,
Employee shall: (i) fail or become unable to perform any of his duties hereunder
due to illness or other incapacity and such illness or incapacity shall continue
for a period of more than 180 days; (ii) become incompetent, suffer from alcohol
or drug addiction, insubordination, gross negligence, any violation of any
express direction of the Company's senior management or Board of Directors of
any reasonable rule or regulation established by the Company regarding the
conduct of its business, which violation shall not be cured within 10 days after
written notice thereof to Employee, (iii) commit any act of malfeasance or
wrongdoing affecting the Company, PAMCO, or any of their subsidiaries or
affiliates, (iv) breach or violate any covenant not to compete or any other term
or provision of this Agreement, or (iv) engage in any act of disloyalty or any
conduct clearly tending to bring discredit upon the Company, PAMCO, or any of
their subsidiaries or affiliates.
d. Employee's employment hereunder may also be terminated
without cause by the Company by written notice to Employee, and such termination
shall become effective as provided in such notice, provided, however, that upon
such termination, Employee shall be entitled to the termination compensation
payments described in Paragraph 6 below.
6. TERMINATION COMPENSATION BENEFITS. If this Agreement is
terminated by the Company without cause (as specified in Paragraph 5.d hereof),
Employee agrees that in lieu of any other compensation or payment, and as
liquidated damages, and in complete satisfaction of any and all liabilities
which the Company may have or have had to Employee, the Company shall pay
Employee and Employee shall accept an amount equal to the Base Salary in effect
on the date of termination for the balance of the term of this Agreement, which
amount shall be payable, at the option of the Company, either as and when such
Base Salary would have been paid pursuant to this Agreement, or in a lump-sum
payment. Upon the payment of the amount set forth herein, each party agrees to
and does release the other party, its subsidiaries, affiliates, successors and
assigns, if any, from all liabilities, damages, claims, or demands of any kind
whatsoever arising as a result of the employment of Employee by the Company,
excepting and excluding therefrom the obligations of Employee pursuant to the
provisions of Paragraph 7 hereof.
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<PAGE>
7. RESTRICTIVE COVENANTS.
---------------------
a. Agreement to Keep Confidential. Employee acknowledges
that he will be subject to certain restrictive covenants concerning his
employment. In consideration of the terms of this Agreement, Employee
acknowledges and agrees that he will acquire confidential information of a
special and unique nature and value relating to the intentions, plans,
procedures, confidential reports, financial resources, shareholders, investors,
and prospective business of the Company and any of its subsidiaries or
affiliates. In this regard, Employee hereby agrees that he will not:
(1) persuade or attempt to persuade any customer
of the Company or any of their subsidiaries or affiliates to cease doing
business with the Company or any of its subsidiaries or affiliates or persuade
or attempt to persuade any potential customer not to become a customer of the
Company or any of its subsidiaries or affiliates;
(2) persuade or attempt to persuade any employee
of the Company or any of its subsidiaries or affiliates to leave the employ of
the Company or any of its subsidiaries or affiliates, or to become employed by
any person, firm, or corporation other than the Company or any of its
subsidiaries or affiliates;
(3) divulge to anyone (other than the Company or
any of its subsidiaries or affiliates or any person employed or designated in
writing by the Company or any of its subsidiaries or affiliates), make any
unauthorized use of, or publish or use for their benefit or to the detriment of
the Company or any of its subsidiaries or affiliates, any knowledge or
information of any type whatsoever of a confidential nature relating to the
businesses of the Company or any of its subsidiaries or affiliates.
b. Covenant Not to Compete. In recognition of the
foregoing agreements, in the event that Employee's employment pursuant to this
Agreement is terminated for any reason by either party:
(1) if the termination is by reason of the
resignation of Employee as an employee or his termination by the Company for
cause (as defined in Paragraph 5.c above), Employee agrees that he shall not for
period of twelve (12) months following the date of such termination or
resignation, within a geographic limit of 50 miles of any location of the
Company or any of its subsidiaries or affiliates, or any agency, directly or
indirectly own, manage, operate, consult, join, control, invest in, be employed
by, or participate in the formation, ownership, management, operation or control
of, or be connected in any manner with, any existing or proposed insurance
company, insurance holding company, or any investor group forming or proposing
to form either an insurance company or insurance holding company that engages in
business that competes with the business of the Company or any of its
subsidiaries or affiliates; and
<PAGE>
(2) if the termination of Employee is by the
Company without cause, Employee agrees that the period of non-competition
described in subparagraph (1) above shall be void.
c. Specific Enforcement. The parties recognize that the
services rendered by Employee hereunder are special, unique, and of an
extraordinary character, and in the event of Employee's breach of the terms and
conditions of this Agreement, or in the event Employee shall leave Company's
employment and breach the terms and conditions of this Agreement, Employee
consents to and authorizes the Company to institute and prosecute proceedings in
any court of competent jurisdiction, either in law or in equity, to enjoin
Employee from performing services in violation hereof during the term of this
Agreement or the 12-month period specified in this Agreement. The parties agree
that the period and geographic areas of restriction imposed upon Employee by
this Agreement are fair and reasonable and are reasonably required for the
protection of the Company and its goodwill.
8. MISCELLANEOUS
-------------
a. Assignment. This Agreement shall not be assignable by
either party, except that without the prior written consent of the other party:
(1) It may be assigned by the Company to any
person or entity acquiring all or substantially all of the assets thereof; and
(2) It may be assigned by Employee as to his right
to payment, but not as to any of his obligations hereunder; and
(3) Company shall have the right to assign all or
any portion of its rights hereunder to any other subsidiary or affiliate of the
Company.
b. Severability of Provisions. If any of the provisions of
this Agreement or the application of any such provision shall for any reason be
held invalid by a court of competent jurisdiction, such invalidity shall not
affect or impair any other provision, it being the intention of the parties that
such other provisions shall be and remain in full force and effect.
c. Compliance and Confidentiality. Employee agrees to
comply with all laws and regulations in the conduct of his duties and
obligations under this Agreement, and to comply with all regulations,
resolutions, and policies of the Company.
d. Notices. All notices, requests, demands and other
communications provided for by this Agreement shall be in writing and shall be
deemed to have been given at the time when mailed at any office of the United
States Postal Service enclosed in a certified postage-paid envelope addressed to
the respective party at the addresses set forth below or to such changed address
as such party may have fixed by notice to the other party, provided,
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<PAGE>
however, that any notice or change of address shall be affected only upon
receipt and further provided that any notice may be personally delivered to the
respective party by the party giving notice in lieu of being mailed.
e. Binding Effect. This Agreement shall inure to the
benefit of and shall be binding upon the Company, its successors and assigns,
and any corporation which may acquire all or substantially all of the Company's
assets or into which the Company may be consolidated or merged, and upon
Employee, his heirs, executors, administrators and legal representatives.
f. Applicable Law. This Agreement shall be governed by and
construed in accordance with the laws of the Commonwealth of Pennsylvania.
g. Entire Agreement/Amendments. This Agreement represents
the entire agreement of the parties, and supersedes all prior understandings and
agreements between the parties, including the Employment Contract dated as of
May 17, 1996. This Agreement may not be modified or amended except by an
instrument in writing signed by the parties hereto.
h. Waiver. The failure of any party to insist in any one
or more instances upon performance of any terms or conditions of this Agreement
shall not be construed as a waiver of future performance of any such term,
covenant or conditions, but the obligations of either party with respect thereto
shall continue in full force and effect.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement
under seal the day and year above first written.
PROVIDENT AMERICAN CORPORATION
Attest:
By:
- ------------------------------ ---------------------------------
M. F. Beausang, Jr., Secretary Alvin H. Clemens, Chairman and
Chief Executive Officer
[SEAL]
PROVIDENT AMERICAN LIFE & HEALTH
INSURANCE COMPANY
Attest:
By:
- ------------------------------ ---------------------------------
M. F. Beausang, Jr., Secretary Alvin H. Clemens, Chairman and
Chief Executive Officer
[SEAL]
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<PAGE>
NIA CORPORATION
Attest:
By:
David W. Ward, Secretary James O. Bowles, President
EMPLOYEE:
WITNESS:
- ------------------------------- ----------------------------------- (SEAL)
JAMES O. BOWLES
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<PAGE>
EMPLOYMENT CONTRACT
-------------------
THIS EMPLOYMENT CONTRACT ("Agreement") is dated as of the 19th day of
February, 1997, by and between PROVIDENT AMERICAN CORPORATION, a Pennsylvania
corporation (the "Company"), Provident Indemnity Life Insurance Company, a
Pennsylvania domiciled stock life insurance company ("PILIC"), Provident
American Life & Health Insurance Company, a Pennsylvania domiciled stock life
insurance company ("PALHIC"), each with an address at 2500 DeKalb Pike,
Norristown, Pennsylvania 19404, and ALVIN H. CLEMENS, an individual
("Executive"), residing at 907 Exeter Crest, Villanova, Pennsylvania 19085.
BACKGROUND
----------
E. The Board of Directors of the Company (the "Board") and Executive
each desires that Executive continue to furnish services to the Company on the
terms and conditions hereinafter set forth.
F. The parties desire to enter into this agreement setting forth the
terms and conditions of the continued employment of the Executive with the
Company.
NOW, THEREFORE, in consideration of the foregoing and of the mutual
promises and undertakings contained in the Employment Contract and this
Agreement, and for other good and valuable consideration, the receipt and
adequacy of which are hereby acknowledged, and intending to be legally bound
hereby, the parties hereto agree as follows:
<PAGE>
28. Employment. The Company hereby agrees to employ the
Executive, and the Executive hereby accepts such employment, on the terms and
conditions hereinafter set forth.
29. Term/Parties.
i. Term. The term of Executive's employment under this
Agreement shall be for a period of five (5) years, commencing on January 1, 1997
and ending on December 31, 2002, unless further extended or sooner terminated as
hereinafter provided ("Term"). On December 31, 1997 and on the last day of each
year thereafter, the Term shall be automatically extended for five (5) years, so
that at all times, the Term on each December 31st during the duration of this
Agreement shall be an unexpired period of five (5) years. The last day of the
Terms, as from time to time extended, is hereinafter referred to as the
"Expiration Date." The Company or Executive may elect to terminate the automatic
extension of the Term set forth in this section by giving written notice of such
election on or before December 31st of any calendar year. Upon the giving of
such notice, Executive's employment under this Agreement shall terminate on the
Expiration Date (as last extended); provided, however, the giving of notice by
the Company not to extend the Term shall not constitute a termination without
Cause or a Constructive Termination (each as defined in Section 6 hereof).
j. Parties. The obligations of the Company hereunder shall
include the obligation to cause PILIC or PALHIC to act in accordance with the
terms hereof.
30. Position and Duties. During the Term of this Agreement,
Executive shall be employed as Chief Executive Officer of the Company, and the
Board shall use its best efforts to cause him to be elected as Chairman of the
Board of the Company. In addition, Executive shall be employed as Chief
Executive Officer of PILIC, PALHIC, and all present and future subsidiaries or
affiliates of the Company which are licensed to sell insurance. In these
capacities, Executive shall have overall responsibility for the management of
the business of the Company and the subsidiaries and affiliates of the Company
of which he serves as Chief Executive Officer. Executive hereby accepts such
employment and agrees to perform the duties and responsibilities set forth
herein.
<PAGE>
31. Place of Performance. The principal place of employment and
office of the Executive shall be at the Company's headquarters in Norristown,
Pennsylvania, or such other location as may be agreed to in writing by the
Executive.
32. Compensation and Related Matters.
a. Base Salary. As compensation for the performance by the
Executive of his duties hereunder, the Company shall pay the Executive a base
salary of $394,308 for the period commencing January 1, 1997 through and
including December 31, 1997, which shall be increased in each of the subsequent
twelve (12) month periods by a minimum of the increase in the Cost of Living
Index (as defined herein) ("Base Salary"). For purposes of this Agreement, the
term "Cost of Living Index" shall refer to the percentage change (increases
only) of the Consumer Price Index ("CPI"), all items, for the City of
Philadelphia, Pennsylvania, compiled by the United States Department of Labor,
Bureau of Labor Statistics, Washington, D.C., or its successor index. If at the
time of adjustment the CPI is no longer reported or its basic principle has been
altered, an alternative method shall be used to equitably reflect the percentage
of increase in the cost of living.
b. Annual Bonus/Incentive Compensation. In addition to the
compensation described in subparagraph a. above, Executive may receive such
additional compensation in the form of an annual incentive bonus, as has been
approved and recommended by the Executive Committee or the Board of the Company.
The amount of the annual incentive bonus, if any, is subject to a formula that
has been approved by the Board of the Company. Any annual incentive bonus
awarded to Executive shall be paid to Executive as soon as practicable after the
end of the fiscal year of the Company for which such incentive bonus has been
awarded.
c. Additional Benefits.
(1) Insurance Coverage; Employee Benefit Plans.
Executive shall be included in the Company's group life, health, disability,
major medical, and other insurance coverages provided for senior employees of
the Company during the term of this Agreement and any renewal thereof. Executive
shall also be included as a member in any profit-sharing, pension, retirement,
or other employee benefit plan which may be adopted by the Company during the
term of this Agreement or any renewal thereof, provided such plan applies to
other executive employees of the Company and Executive has met the qualification
requirements thereof. In addition, during Executive's life, the Company shall
fund the premium portion of one or more split-dollar life insurance policies on
the life of Executive purchased during the term of this Agreement, provided that
Executive enters into an appropriate agreement relative to the repayment of the
premiums funded out of the death benefits received upon the death of Executive.
<PAGE>
(2) Vacation. Paid vacation of four (4) weeks, and
such additional vacation as shall be approved by the Company, which vacation
shall be taken at such times as are mutually convenient to Executive and the
Company. Executive shall not be entitled to carry over any unused vacation
accrued during any calendar year to any succeeding year.
(3) Expenses. Upon submission of receipts and
proper documentation, the Company hereby agrees to reimburse Executive for
expenses incurred by Executive in connection with business travel, including
parking, tolls, mileage, lodging and meals, business entertainment, dues,
subscription fees, and membership fees to the Union League of Philadelphia,
Arronomink Country Club, and any professional association or organization
related to the Company's business of which Executive is a member or shall become
a member during the term hereof or any renewal thereof, and up to an additional
$10,000 for expenses incurred by Executive in connection with his membership in
an organization for senior executives (such as the World President's
Organization) during the term hereof or any renewal thereof.
(4) Automobile. During the term of this Agreement,
the Company shall provide Executive with an automobile for his exclusive use for
business purposes, and shall pay for all business costs of operation thereof,
including but not limited to maintenance, repairs, insurance, fuel, and all
other costs necessary and incident thereto. The selection of the make and model
of an automobile shall be at the discretion of Executive with the cost of the
vehicle not to exceed $1,500 per month.
d. Payment. The amounts of Base Salary, incentive
compensation, and other payments and benefits as specified herein shall be paid
from time to time in such manner as shall be agreeable between Executive and the
Company.
33. Termination. The Executive's employment hereunder may be
terminated as follows:
a. Death. The Executive's employment shall terminate upon
his death, and the date of his death shall be the Date of Termination.
b. Disability. If Executive shall fail or become unable to
perform any of his duties hereunder due to illness or other incapacity (as
determined by a medical doctor mutually agreed to by the Executive or his legal
representative and the Company) and such illness or incapacity shall continue
for a period of more than 180 consecutive days ("Disability"), the Company may
terminate the Executive's employment hereunder. In this event, the Date of
Termination shall be thirty (30) days after notice of termination is given
(provided that the Executive shall not have returned to the performance of his
duties on a full-time basis during such thirty (30) day period).
<PAGE>
c. Cause. The Company may terminate the Executive's
employment in the event there occurs one or more of the following events that
has not been cured (if curable) within thirty (30) days after written notice
thereof has been given by the Company to the Executive ("Cause"); provided that
the Company shall have delivered a written notice to Executive within 30 days of
its having actual knowledge of the occurrence of any of such events stating that
the Company intends to terminate the Executive's employment for Cause and
specifying the factual basis for such termination:
(1) the willful failure by the Executive to
perform substantially the Executive's duties as an employee of
the Company (other than due to physical or mental illness or
after the delivery of a Notice of Termination for Constructive
Termination by the Executive pursuant to subsection d. of this
Section 6);
(2) the Executive's engaging in misconduct that is
materially injurious to the Company or any subsidiary or any
affiliate of the Company;
(3) the Executive's having been convicted of, or
entered a plea of nolo contendere to, a crime that constitutes a
felony;
(4) the material breach by the Executive of any
written covenant or agreement not to compete with the Company or
any subsidiary or any affiliate; or
(5) the breach by the Executive of his duty of
loyalty to the Company.
d. Constructive Termination. The Executive may terminate
his employment in the event there occurs one or more of the following events,
without the written consent of the Executive, that has not been cured (if
curable) within thirty (30) days after written notice thereof has been given by
the Executive to the Company ("Constructive Termination"); provided that the
Executive shall have delivered a written notice to the Board of the Company
within 30 days of his having actual knowledge of the occurrence of the event or
events constituting Constructive Termination, stating that he intends to
terminate his employment for Constructive Termination and specifying the factual
basis for such termination:
<PAGE>
(1) without Executive's express written consent,
the assignment to Executive of any duties or the reduction of
Executive's duties, either of which results in a significant
diminution in Executive's position or responsibilities with the
Company in effect immediately prior to such assignment, or the
removal of Executive from such position and responsibilities;
(2) without Executive's express written consent, a
substantial reduction, without good business reasons, of the
facilities and perquisites (including office space and location)
available to Executive immediately prior to such reduction;
(3) the relocation of Executive to a facility or a
location more than fifty (50) miles from Executive's present
location, without Executive's express written consent;
(4) any purported termination of Executive's
employment by the Company which is not effected for death,
disability or for cause (as set forth in Paragraph 6.c hereof),
or any purported termination for which the grounds relied upon
are not valid; or
(5) any material breach by the Company of any
material provision of this Agreement. In the event of a
Constructive Termination, the Date of Termination shall be the
date specified in the Notice of Termination, which shall be no
more than thirty (30) days after the Notice of Termination. Any
termination of Executive under Paragraph 6.c.(1), (2), (3), (4),
or (5) above shall be effective only following the adoption of a
resolution of the Company's Board of Directors at a duly convened
meeting of the Board of which Executive shall be given at least
ten (10) days' prior written notice and at which Executive shall
be entitled to be present.
<PAGE>
e. Termination by Executive. Executive may terminate his
employment hereunder by giving written notice to the Company, in which event
such termination shall become effective thirty (30) days after the giving of
written notice thereof, or earlier as may be specified by the Company after
receipt of Executive's Notice of Termination.
f. Other Termination. If the Executive's employment is
terminated hereunder for any reason other than as set forth in subsections (a)
through (d) of this Section 6, the date on which a Notice of Termination is
given or any later date (within 30 days) set forth in such Notice of Termination
shall be the Date of Termination.
g. Notice of Termination. Any purported termination of the
Executive's employment (other than termination pursuant to subsection a. of this
Section 6) shall be communicated by written Notice of Termination to the other
party hereto in accordance with Section 13 hereof. For purposes of this
Agreement, a "Notice of Termination" shall mean a notice that shall indicate the
specific termination provision in this Agreement relied upon and shall set forth
in reasonable detail the facts and circumstances claimed to provide a basis for
termination of the Executive's employment under the provision so indicated.
h. Dispute Concerning Termination. If, within fifteen (15)
days after any Notice of Termination (other than with respect to a termination
of the Executive's employment by the Company without Cause) is given, or, if
later, prior to the Date of Termination (as determined without regard to this
Section 6.h.), the party receiving such Notice of Termination notifies the other
party that a dispute exists concerning the termination, the Date of Termination
shall be extended until the earlier of (i) the date on which the Term ends, or
(ii) the date on which the dispute is finally resolved, either by mutual written
agreement of the parties, by settlement of litigation, or by Order of a court of
competent jurisdiction; provided, however, that the Date of Termination shall be
extended by a notice of dispute given by the Executive only if such notice is
given in good faith and the Executive pursues the resolution of such dispute
with reasonable diligence.
i. Compensation During Dispute. If the Date of Termination
is extended in accordance with subsection 6.h above, the Company shall continue
to pay the Executive the full compensation in effect when the notice giving rise
to the dispute was given and continue the Executive as a participant in all
compensation, benefit, and insurance plans in which the Executive was
participating when the notice giving rise to the dispute was given, until the
Date of Termination, as determined in accordance with subsection 6.h above.
Amounts paid under this Section 6.i shall not offset against or reduce any other
amounts due under Section 7 of this Agreement.
<PAGE>
34. Termination Benefits. Upon the termination of this Agreement
by the Company prior to the expiration of the Term for any reason other than as
specified in Paragraphs 6.c or 6.e hereof, or upon the Constructive Termination
(as defined in Section 6.d hereof), as a termination benefit:
a. Salary Benefit. The Company shall pay to Executive an
amount equal to five (5) times the Base Salary in effect on the Date of
Termination, such payment to be made as follows:
(1) in a lump-sum payment within ninety (90) days
of the Date of Termination in the event of a termination upon death;
(2) in a lump-sum payment within thirty (30) days
of the Date of Termination in the event of a termination without cause; and
(3) in equal monthly installments commencing
within thirty (30) days of the Date of Termination and continuing for the Term
in the event of a termination upon disability; provided, however, that if
Executive's death occurs during a period of disability, the remaining unpaid
monthly installments shall be payable in a lump-sum within ninety (90) days of
Executive's death.
b. Health Benefit. During the life of Executive and his
spouse, Executive and his spouse shall have the right to elect from time-to-time
to be included in the Company's group accident and health insurance policies or
programs, or shall be entitled to be paid an amount equal to the premiums which
would be incurred for the purchase of accident and health insurance coverage
comparable to that in effect on the Date of Termination. In addition, Executive
shall be included in the Company's group life and disability insurance policies
in an amount not less than that in effect on the Date of Termination or shall be
entitled to be paid an amount equal to the premiums which would be incurred for
the purchase of comparable coverage.
c. Legal Fees. In the event of any dispute or proceeding
arising under this Agreement where the Executive is ultimately the substantially
prevailing party, the Company shall promptly reimburse Executive for all costs,
including without limitation, the reasonable attorneys' fees of any attorney of
the Executive's choosing, incurred by the Executive in any such dispute or
proceeding arising under this Agreement. Any termination of the Executive's
employment or of this Agreement shall have no effect on the continuing operation
of this subsection 7.c.
<PAGE>
35. Noncompetition and Confidentiality.
a. Noncompetition. In recognition of the foregoing
agreements, in the event that Executive's employment pursuant to this Agreement
is terminated for any reason by either party:
(1) if the termination is by reason of a
Constructive Termination or for Cause, Executive agrees that he
shall not for period of 24 months following the date of such
termination or resignation, within a geographic limit of 50 miles
of any location of the Company, any of its affiliated companies,
or any agency, directly or indirectly own, manage, operate,
consult, join, control, invest in (other than as a holder of not
in excess of 1% of the outstanding voting shares of any publicly
traded company), be employed by, participate in the formation,
ownership, management, operation or control of, or be connected
in any manner with, any existing or proposed insurance company,
insurance holding company, or any investor group forming or
proposing to form either an insurance company or insurance
holding company that engages in business that competes with the
business of the Company; and
(2) if the termination of Executive is by the
Company without cause, Executive agrees that the period of
non-competition described in subparagraph (1) above shall be for
a term of 12 months instead of 24 months.
b. Confidentiality. Executive acknowledges that he will be
subject to certain restrictive covenants concerning his employment. In
consideration of the terms of this Agreement, Executive acknowledges and agrees
that he will acquire confidential information of a special and unique nature and
value relating to the Company's intentions, plans, procedures, confidential
reports, financial resources, shareholders, investors, and prospective business.
In this regard, Executive hereby agrees that he will not:
(1) persuade or attempt to persuade any customer
of the Company to cease doing business with the Company, or
persuade or attempt to persuade any potential customer not to
become a customer of the Company;
(2) persuade or attempt to persuade any employee
of the Company to leave the Company's employ, or to become
employed by any person, firm, or corporation other than the
Company;
(3) divulge to anyone (other than the Company or
any person employed or designated in writing by the Company),
make any unauthorized use of, or publish or use for their benefit
or to the Company's detriment, any knowledge or information of
any type whatsoever of a confidential nature relating to the
businesses of the Company.
<PAGE>
c. Specific Enforcement. The parties recognize that the
services rendered by Executive hereunder are special, unique, and of an
extraordinary character, and in the event of Executive's breach of the terms and
conditions of this Agreement, or in the event Executive shall leave Company's
employment and breach the terms and conditions of this Agreement, Executive
consents to and authorizes the Company to institute and prosecute proceedings in
any court of competent jurisdiction, either in law or in equity, to enjoin
Executive from performing services in violation hereof during the term of this
Agreement or the non-competition period specified in this Agreement. The parties
agree that the period and geographic areas of restriction imposed upon Executive
by this Agreement are fair and reasonable and are reasonably required for the
protection of the Company and its goodwill.
36. Joint and Several Obligations. The obligations set forth
herein shall be deemed to be joint and several obligations of each of the
Company, PILIC, and PALHIC.
37. Assignment. This Agreement shall not be assignable by either
party, except that without the prior written consent of the other party:
(1) It may be assigned by the Company to any
person or entity acquiring all or substantially all of the assets thereof; and
(2) It may be assigned by Executive as to his
right to payment, but not as to any of his obligations hereunder; and
(3) Company shall have the right to assign all or
any portion of its rights hereunder to the PILIC, PALHIC, or any other
subsidiary.
38. Severability of Provisions. If any of the provisions of this
Agreement or the application of any such provision shall for any reason be held
invalid by a court of competent jurisdiction, such invalidity shall not affect
or impair any other provision, it being the intention of the parties that such
other provisions shall be and remain in full force and effect.
39. Compliance with Applicable Laws. Executive agrees to comply
with all laws and regulations in the conduct of his duties and obligations under
this Agreement, and to comply with all regulations, resolutions, and policies of
the Company.
40. Notices. All notices, requests, demands and other
communications provided for by this Agreement shall be in writing and shall be
deemed to have been given at the time when mailed at any office of the United
States Postal Service enclosed in a certified postage-paid envelope addressed to
the respective party at the addresses set forth below or to such changed address
as such party may have fixed by notice to the other party, provided, however,
that any notice or change of address shall be affected only upon receipt and
further provided that any notice may be personally delivered to the respective
party by the party giving notice in lieu of being mailed.
<PAGE>
If to Company: Provident American Corporation
2500 DeKalb Pike
P.O. Box 511
Norristown, PA 19404-0511
Attention: Board of Directors
If to PILIC: Provident Indemnity Life Insurance Company
2500 DeKalb Pike
P.O. Box 511
Norristown, PA 19404-0511
Attention: Board of Directors
If to PALHIC: Provident American Life & Health Insurance Company
2500 DeKalb Pike
P.O. Box 511
Norristown, PA 19404-0511
Attention: Board of Directors
If to Executive: Mr. Alvin H. Clemens
907 Exeter Crest
Villanova, PA 19085
41. Binding Effect. This Agreement shall inure to the benefit of
and shall be binding upon the Company, its successors and assigns, and any
corporation which may acquire all or substantially all of the Company's assets
or into which the Company may be consolidated or merged, and shall inure to the
benefit of Executive's personal or legal representatives, executors,
administrators, successors, heirs, distributees, devisees and legatees. Upon the
Executive's death, all amounts to which he is entitled hereunder, unless
otherwise provided herein, shall be paid in accordance with the terms of this
Agreement to the Executive's devisee, legatee, or other designee, or, if there
be no such designee, to the Executive's estate.
42. Governing Law/Consent to Jurisdiction. This Agreement shall
be governed by and construed in accordance with the laws of the Commonwealth of
Pennsylvania. The parties hereto agree to consent to the jurisdiction and venue
of the courts of the Commonwealth of Pennsylvania located in Montgomery County,
Pennsylvania, and of the United States District Court for the Eastern District
of Pennsylvania, and agree that all disputes between the parties shall be
litigated only therein.
43. Entire Agreement. This Agreement represents the entire
agreement of the parties, and supersedes all prior understandings and agreements
between the parties relating to the subject matter of the employment of
Executive, including a certain Employment Contract dated April 1, 1993, as
amended. This Agreement may not be modified or amended except by an instrument
in writing signed by all of the parties hereto.
<PAGE>
44. Execution in Counterparts. This Agreement may be executed by
the parties hereto signing the same instrument, or by each party hereto signing
a separate counterpart or counterparts, each of which shall be deemed to be an
original, but all of which together shall constitute one and the same
instrument. The parties agree that documents executed by facsimile shall be
acceptable in this transaction, and the signatures thereof shall have the same
force and effect as original signatures.
45. Waiver. The failure of any party to insist in any one or more
instances upon performance of any terms or conditions of this Agreement shall
not be construed as a waiver of future performance of any such term, covenant or
conditions, but the obligations of either party with respect thereto shall
continue in full force and effect.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement
under seal the day and year above first written.
WITNESS:
_______________________________ ______________________________(SEAL)
ALVIN H. CLEMENS
PROVIDENT AMERICAN CORPORATION
Attest:
______________________________ By:_______________________________
M. F. Beausang, Jr., Secretary James O. Bowles, President
[SEAL]
PROVIDENT INDEMNITY LIFE
INSURANCE COMPANY
Attest:
______________________________ By:_______________________________
M. F. Beausang, Jr., Secretary James O. Bowles, President
[SEAL]
PROVIDENT AMERICAN LIFE & HEALTH
INSURANCE COMPANY
Attest:
______________________________ By:_______________________________
M. F. Beausang, Jr., Secretary James O. Bowles, President
[SEAL]
<PAGE>
PROMISSORY NOTE
---------------
$300,000.00 April 8, 1996
The undersigned, ALVIN H. CLEMENS ("Clemens"), hereby promises to pay
to the order of PROVIDENT AMERICAN CORPORATION, a Pennsylvania corporation, the
sum of Three Hundred Thousand and 00/100 ($300,000.00) Dollars, together with
interest at the rate of five and one-third (5.33%) percent per annum. The Note
shall be repayable interest only for two (2) years from the date hereof, the
first interest payment being due and payable on April 8, 1997, and the second
interest payment being due and payable on April 8, 1998; the entire principal
balance, together with all accrued and unpaid interest thereon, shall be due and
payable on April 8, 1999.
The undersigned shall have the right to prepay in whole or in part any
amounts due under this Note, without penalty.
And further, the undersigned does hereby authorize and empower the
Prothonotary, Clerk of Court or any Attorney of any Court of Record of
Pennsylvania, or elsewhere, to appear for and to confess judgment against him
for the above sum, as of any term, past, present or future, with or without
declaration, with costs of suit, release of errors, without stay of execution,
and with 15% added for collection fees; and the undersigned also waives the
right of inquisition on any real estate that may be levied upon to collect this
Note and does hereby voluntarily condemn the same and authorize the Prothonotary
to enter upon the writ of execution his said voluntary condemnation, and he
further agrees that said real estate may be sold on a writ of execution and he
hereby waives and releases all relief from any and all appraisement, stay or
exemption laws of any State, now in force or hereafter to be passed.
/s/ -----------------
ALVIN H. CLEMENS
<PAGE>
PLEDGE AND SECURITY AGREEMENT
-----------------------------
THIS PLEDGE AND SECURITY AGREEMENT ("Agreement") made this 8th day of
April, 1996, by and between ALVIN H. CLEMENS ("Pledgor") and PROVIDENT AMERICAN
CORPORATION, a Pennsylvania corporation ("Secured Party").
NOW THEREFORE, in consideration of the mutual covenants herein
contained, and other good and valuable consideration, the receipt and adequacy
of which are hereby acknowledged, and intending to be legally bound hereby, the
parties hereby agree as follows:
1. Creation of Security Interest. Pledgor hereby grants to
Secured Party a security interest in and pledges to the Secured Party the
Collateral described in Exhibit "A" attached hereto, together with any proceeds
thereof ("Collateral"). Pledgor hereby delivers the Collateral to Secured Party,
together with a stock power of attorney duly endorsed in blank, or such other
documents of transfer as shall be necessary to effectuate the transfer of title
of the Collateral.
<PAGE>
2. Debt Secured. Pledgor has borrowed from the Secured Party the
sum of Three Hundred Thousand ($300,000) Dollars, in accordance with the terms
and conditions of a Promissory Note dated as of the date hereof (the "Note"),
which shall be repayable as set forth in the Note.
3. Representations, Warranties, and Covenants of Pledgor. Pledgor
represents, warrants and covenants to Secured Party that:
a. Pledgor is the legal and beneficial owner of the
Collateral.
b. The Collateral has been validly issued, is fully paid
and non-assessable and is owned by Pledgor free and clear of all security
interests, liens, restrictions, charges, and other encumbrances of any nature
other than the lien created hereby.
c. The execution, delivery, and performance of this
Agreement do not violate the provisions of or cause a default or constitute an
event which, with notice or the lapse of time or both, would constitute a
default on the part of Pledgor under any law or any contract, agreement, or
other instrument or judgment or decree to which Pledgor is a party or by which
he is bound.
d. The Collateral is not the subject of any present or
threatened suit, action, arbitration, or administrative or other proceeding, and
Pledgor knows of no reasonable grounds for the institution of any such
proceeding.
<PAGE>
e. Pledgor shall, at his expense, defend Secured Party's
right, title and security interest in and to the Collateral against the claims
of any person, corporation or other entity.
f. Pledgor shall not:
(1) sell, convey, or otherwise dispose of any
of the Collateral or any interest therein;
or
(2) create, incur or permit to exist any
security interest, lien, charge or
encumbrance whatsoever with respect to any
of the Collateral other than the lien
created hereby.
g. This Agreement constitutes the valid and binding
obligation of Pledgor enforceable in accordance with its term.
4. Voting Rights. Prior to the occurrence of an Event of Default
(as defined herein), Pledgor shall have the right to vote the Collateral. Upon
the occurrence of any Event of Default, Secured Party shall immediately have the
right to vote the Collateral as if the absolute owner thereof, whether or not
the Collateral shall have been registered in the name of Secured Party.
5. Custodial Duties.
a. Secured Party's sole duty with respect to the
Collateral shall be to exercise reasonable care in the physical custody and
preservation of the Collateral. Secured Party shall be relieved of all
responsibility for the Collateral, or any portion thereof, upon surrendering it
or tendering surrender of it to Pledgor.
b. Secured Party shall have no duty or responsibility to
take any steps (i) to preserve any rights in the Collateral against prior
parties, (ii) to protect, perfect, preserve or maintain any security interest
given to secure the Collateral, (iii) to protect the Collateral from decline in
value, (iv) to ascertain any maturities or exercise or accept any calls,
conversions, exchanges, offers, tenders, or similar matters relating to any
Collateral, or (v) to send notices, perform services or take any action in
connection with the management of the Collateral.
6. Powers of Escrow Agent With Respect to Collateral.
-------------------------------------------------
a. Secured Party shall have the power, in its sole
discretion, and after five (5) days' written notice to Pledgor, to take one or
more of the following actions, but shall be under no duty or responsibility to
exercise or withhold the exercise of these rights, powers, privileges, and
options, and shall not have any liability for any failure or delay in doing so,
other than to account for property actually received by Secured Party:
(1) receive all income, dividends,
distributions or other property and apply
them against the liabilities of
-2-
<PAGE>
Pledgor, in any priority, or hold the same
as additional Collateral;
(2) make any compromise or settlement deemed
advisable with respect to any of the
Collateral;
(3) renew, extend, or otherwise change the
terms and conditions of the Note or the
Collateral;
(4) take or release any other collateral as
security for any of the Collateral;
(5) take or release any guarantor, endorser,
surety, or other party to the Note or the
Collateral; and
(6) execute any necessary endorsements,
assignments, or other instruments or
conveyances or transfer with respect to the
Collateral to effect Secured Party's
remedies under Section 9 hereof.
b. Pledgor hereby irrevocably makes, constitutes and
appoints Secured Party as Pledgor's true and lawful attorney-in-fact to take one
or more of the actions, rights, powers, privileges and options set forth in
Section 6.a hereof.
7. Obligations of Pledgor.
a. Without the prior written consent of Secured Party,
Pledgor will not sell, exchange, transfer, or otherwise dispose of the
Collateral or any of Pledgor's rights therein or under this Agreement, or permit
any lien or security interest to attach to same except that created by this
Agreement.
b. Pledgor will not permit anything to be done that may
impair the value of any of the Collateral or the security intended to be
afforded by this Agreement.
8. Events of Default. The occurrence of any of the following
events shall, at the option of Secured Party, without notice or demand,
constitute a default on the part of Pledgor hereunder ("Event of Default").
a. If there occurs any breach, failure or violation by
Pledgor (i) in the payment or performance of any of Pledgor's obligations or
liabilities as set forth in the Note, or (ii) in the performance of any of the
terms and conditions of this Agreement.
b. If Pledgor shall become insolvent or shall file a
voluntary petition to effect a plan or other arrangement with creditors, or if
Pledgor shall be adjudicated bankrupt or shall make an assignment for the
benefit of creditors, or shall apply for a consent to the appointment of any
receiver or trustee of all or a part of Pledgor's property, or as may be
applicable, Pledgor shall institute dissolution or liquidation proceedings.
-3-
<PAGE>
9. Remedies Upon Event of Default. Upon the occurrence of an
Event of Default, Secured Party shall have the right to do any of the following:
a. Secured Party may exercise all the rights and remedies
given to a secured party by the Pennsylvania Uniform Commercial Code.
b. Secured Party may have the Collateral registered in its
name or that of its nominee.
c. Secured Party may proceed to foreclose the security
interest given to it hereunder by selling all or any part of the Collateral in
whole or in part, at the same or different times, at public or private sale,
upon such terms as it deems best, for cash, upon credit or for future delivery
and, in connection therewith, Secured Party may grant options. Secured Party or
its nominee may purchase all or any part of the Collateral, absolutely freed and
discharged from any equity or redemption and from all trusts or other claims
whatsoever. If any of the Collateral is sold by Secured Party upon credit or for
future delivery, Secured Party shall not be liable for the failure of the
purchaser to pay for the same, and, in the event of any such failure, Secured
Party may resell such Collateral.
d. The proceeds of any sale of the Collateral shall be
applied as follows: (i) to pay all costs and expenses of every kind incurred by
Secured Party in connection with any actual or attempted sale, including
brokers' and attorneys' fees; (ii) to the satisfaction of all obligations of
Pledgor under the Note; (iii) to the payment of any other amounts required by
applicable laws, and (iv) to Pledgor in the event of any surplus. Pledgor shall
continue to be liable for any deficiency. In no event shall Pledgor be credited
with any part of the proceeds of any sale of the Collateral until such payment
thereon has actually been received by Secured Party.
e. Secured Party shall give Pledgor ten (10) days' prior
notice of the time and place of any public sale and of the time after which any
private sale or other disposition is to be made, which notice Pledgor agrees is
reasonable.
f. Pledgor recognizes that Secured Party may be unable to
effect a public sale of all or any part of the Collateral by reason of certain
prohibitions contained in the Securities Act of 1933 (the "Act"), and therefore
may resort to one or more private sales to a restricted group of purchasers who
will be obligated to agree, among other things to acquire the Collateral for
their own account, for investment and without a view to the distribution or
resale thereof. Pledgor acknowledges that private sales so made may be at prices
and other terms less favorable to Secured Party than if the Collateral was sold
at public sale, and agrees Secured Party has no obligation to delay the sale of
any of the Collateral for the period of time necessary to permit the issuer of
the securities which are being sold (even if the issuer would agree), to
register such securities for sale under the Act. Pledgor agrees that private
sales made under the foregoing circumstances shall be deemed to have been made
in a commercially reasonable manner.
-4-
<PAGE>
g. The remedies provided herein in favor of Secured Party
shall not be deemed exclusive, but shall be cumulative, and shall be in addition
to all other legal and equitable remedies which Secured Party may have.
10. Termination of Agreement. This Agreement shall terminate upon
the full payment by Pledgor to Secured Party of all amounts due under the Note
and the completion of Pledgor's obligations under this Agreement.
11. Miscellaneous.
-------------
a. Secured Party may waive any default or remedy a default
in any reasonable manner without waiving such subsequent default, and Secured
Party may waive or delay the exercise of any right or remedy under this
Agreement without waiving the right or remedy of any other right or remedy
hereunder.
b. This Agreement shall be binding upon and shall inure to
the benefit of the respective heirs, executors, administrators, successors and
assigns of the parties hereto.
c. All notices, requests, demands, or other communications
provided for herein shall be in writing and shall be deemed to have been given
when sent by registered or certified mail, return receipt requested, addressed
to the parties at such address as either party shall designate to the other from
time to time.
d. This Agreement may not be amended, modified or
terminated, except in writing and executed by all parties hereto, and no waiver
of any provision or consent hereunder shall be effective unless executed in
writing by the waiving or consenting party.
e. This Agreement shall not be assignable by Pledgor
without the prior written consent of Secured Party.
f. This Agreement shall be construed in accordance with
the laws of the Commonwealth of Pennsylvania.
-5-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have placed their hands
and seals as of the day and year above first written.
PLEDGOR:
- --------------------- ---------------------------
Witness ALVIN H. CLEMENS
SECURED PARTY:
PROVIDENT AMERICAN CORPORATION
Attest:
By:
- ----------------------------------- -------------------------------
Michael F. Beausang, Jr., Secretary Anthony R. Verdi, Treasurer
-6-
<PAGE>
EXHIBIT "A"
-----------
COLLATERAL
----------
100,000 shares of the common stock of PROVIDENT AMERICAN CORPORATION,
together with all dividends or other distributions issued with respect
thereto.
-7-
<PAGE>
AMENDMENT AND RESTATEMENT OF THE
PROVIDENT AMERICAN CORPORATION
STOCK OPTION PLAN FOR DIRECTORS
This amendment and restatement of the Provident American Corporation
Stock Option Plan for Directors is effected as of the date set forth herein.
BACKGROUND
A. PROVIDENT AMERICAN CORPORATION, a Pennsylvania corporation
(hereinafter called "PAMCO"), maintains the Provident American Corporation Stock
Option Plan for Directors (formerly known as the Stock Option Plan for Field
Sales Representatives and Directors) dated January 25, 1985 (the "Plan").
B. Pursuant to Section 9 of the Plan, PAMCO has reserved the right to
amend the Plan at any time with the approval of either the Board of Directors or
the shareholders of PAMCO, provided such amendment does not prejudice the rights
of any optionee with respect to the shares covered by his option.
C. PAMCO now desires to amend and restate the Plan to incorporate prior
amendments to the Plan, to increase the number of shares which may be optioned
and sold under the Plan, to extend the term of the Plan, and to change the term
and certain conditions for the exercise of the options issued pursuant to the
Plan.
NOW THEREFORE, the Plan is hereby amended and restated as
follows:
PROVIDENT AMERICAN CORPORATION
STOCK OPTION PLAN FOR DIRECTORS
1. Purpose of the Plan.
The purpose of this Stock Option Plan for Directors
("Plan") is to afford an incentive to Directors of Provident American
Corporation ("PAMCO") and its subsidiaries and affiliates (collectively,
the "Company") to acquire a proprietary interest in PAMCO and to enable
the Company to attract and retain such key persons as Directors.
2. The Stock.
Except as provided in Section 7, the number of shares of
stock which may be optioned and sold under the Plan is 1,000,000 shares
<PAGE>
of Common Stock, $.10 par value, of PAMCO ("Shares"). If options
granted under this Plan shall expire or terminate for any reason without
having been exercised in full, the unpurchased Shares subject thereto
shall again be available for the granting of options under this Plan.
Shares which are the subject of options to purchase may be made
available from authorized and unissued stock or from treasury stock.
3. Eligibility.
An option shall be granted only to a person who at the
time of the grant is a Director of the Company. The Board of Directors
of PAMCO (the "Board"), based upon the recommendation of the Committee
designated pursuant to Section 8 hereof (the "Committee"), shall
determine from time-to-time the persons to whom options shall be
granted and the number of Shares subject to each option.
4. Price.
The price at which Shares may be purchased upon exercise
of each option ("option price") shall be fixed by the Board at the time
of the grant of such option and shall not be less than 100% of the fair
market value of the stock at the time the option is granted. The Board
shall, in good faith, determine the fair market value of the stock
based upon a reasonable method of valuation adopted by the Board or the
Committee. In no event shall the option price be less than the par
value of the Shares. The Board will use its best efforts to determine
the fair market value of the Shares subject to the option, but neither
the Board nor the Company will be responsible for the payment of any
tax which may be imposed upon the participants, nor will they reimburse
participants for their payment of any tax so imposed. Neither the
Company, the Board, nor the Committee, nor any member thereof, makes or
shall make any representation or warranty to any participant regarding
the consequences or effects of participation in the Plan of federal or
state income tax or any other purpose.
Nothing contained in this Plan or in any option agreement
issued hereunder shall impose any liability or responsibility on the
Company, the Board, the Committee, or any member of either of the
foregoing to pay or reimburse any participant for the payment of any
tax arising out of, or on account of, the issuance of an option or
options hereunder to any participant, a participant's exercise of any
option issued under this Plan, or a participant's sale, transfer, or
other disposition of any Shares acquired pursuant to the exercise of an
option issued hereunder. Any person receiving an option hereunder shall
expressly acknowledge and agree that such participation is voluntary
and that the participant will be solely responsible for all taxes to
which he or she may be or become subject as a consequence of such
participation.
- 2 -
<PAGE>
5. Option Terms.
a. Subject to the provisions and limitations of this Plan, and
subject to applicable securities, tax, and other laws and regulations,
options may be granted at such time or times and pursuant to such terms
and conditions as may be determined by the Board during the period this
Plan is in effect.
b. Each option, which shall become exercisable in accordance with
its terms, must be exercised within ten (10) years after the date on
which it first becomes exercisable, and may not be exercised in full or
in part after the expiration of ten (10) years from the date such
option is granted. Unless otherwise provided in the option agreement,
any unvested portion of the option shall terminate upon the optionee's
resignation as a Director prior to two (2) years from the Date of grant
of the option.
c. No new stock option granted to an optionee under the Plan
("new option") shall be exercisable while there is outstanding, in
whole or in part, any stock option which option was granted to such
person before the granting of the new option to purchase stock in PAMCO
or in a corporation which (at the time of granting of such option) is a
subsidiary or affiliate corporation of PAMCO or in a predecessor
corporation of any such corporations.
d. Shares to be purchased upon the exercise of any option shall be
paid for, in full, in cash or by certified check payable to the order
of PAMCO or by the wire transfer of funds to PAMCO's bank account, and
delivered to PAMCO at the time of such exercise.
e. Each option granted under the Plan shall be evidenced by a
form of option agreement issued by PAMCO to the optionee. The Board
shall initially make all decisions as to the form of the option
agreement, and all forms of option agreements shall contain such
provisions, restrictions, and conditions as are not inconsistent with
this Plan, but need not be identical. The provisions of this Plan shall
be set forth in full or incorporated by reference in each form of option
agreement.
f. In the event an optionee resigns as a Director prior to two (2)
years from the date of grant of an option, any portion of the option
which has not become exercisable on such date shall terminate.
6. Transferability.
Any option granted hereunder shall be freely transferable
by the optionee, by presentation of the Option at the principal office
of PAMCO, properly endorsed for transfer, provided the transferee
agrees to be bound by the terms and conditions of the form of option
agreement. In the event an option is transferred, the owner agrees by
- 3 -
<PAGE>
holding the option that when endorsed in blank, the option may be
deemed negotiable and the owner may be treated by PAMCO and all other
persons dealing with the option as the absolute owner thereof for any
purpose, and as the party entitled to exercise the rights represented
by the option, or to the transfer thereof on the books of PAMCO, any
notice to the contrary notwithstanding. The form of an Option is
exchangeable upon its surrender by the owner at the principal office of
PAMCO for a new option of like tenor representing in the aggregate the
right to purchase the number of Shares purchasable under the option
being exchanged, each such new option to represent the right to
purchase such number of Shares as shall be designated by the owner at
the time of surrender, but not to exceed in the aggregate the number of
Shares subject hereto.
7. Stock Dividends or Recapitalization.
In the event of a stock dividend paid in shares of the class of
stock subject to any option outstanding hereunder, or capitalization,
reclassification, split-up or combination of shares with respect to
said class of stock, the Committee shall make appropriate adjustments
to the option price under such option and to the kind and number of
shares as to which such option is then exercisable, so that the
optionee's proportionate interest shall be maintained as before the
occurrence of such event, and in any case an appropriate adjustment
shall also be made to the total number and kind of Shares of stock
reserved for the future granting of options under this Plan. Any such
adjustment made by the Committee pursuant to this Plan shall be binding
upon the holders of all unexpired options outstanding hereunder.
8. Administration of the Plan.
This Plan shall be administered by the Board of PAMCO. The
Executive Committee ("Committee"), consisting of three (3) or more
members of the Board, shall be elected from time to time by a majority
of the entire Board and shall make recommendations periodically to the
Board with respect to criteria for participation in the Plan, the extent
of their participation, and the form and content of the options to be
granted. Options shall be granted only by the Board, which shall provide
the form and content of the options to be granted, including such
provisions and conditions, in addition to those included in this Plan,
as the Board shall determine to be advisable; provided, however, that
no such additional provisions or conditions shall be inconsistent with
the provisions of this Plan. The Board or the Committee shall be
authorized to interpret the Plan, to prescribe, amend and rescind rules
and regulations relating to it, and to make all other determinations
necessary or appropriate for its administration.
9. Effective Date; Duration of the Plan; Amendments.
The Plan shall become effective upon adoption by the Board. Unless
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<PAGE>
sooner terminated, the Plan shall expire on December 31, 2012. The Plan
may be altered, suspended, discontinued or terminated at any time by the
approval of either the Board or the shareholders of PAMCO. Nothing
contained herein shall be construed to permit a termination,
modification, or amendment adversely affecting the rights of any
optionee under an existing option theretofore granted without the
consent of such optionee.
The amendments set forth herein shall be effective as of July 16, 1996,
and as herein amended and restated, the Plan shall continue in full force effect
and is hereby ratified, approved, and affirmed.
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<PAGE>
IN WITNESS WHEREOF, in order to record the adoption of these
Amendments, PAMCO has caused its duly authorized officers to affix the corporate
name and seal hereto as of the 16th day of July, 1996.
ATTEST: PROVIDENT AMERICAN CORPORATION
______________________________ By:_____________________________
Michael F. Beausang, Jr. Alvin H. Clemens, President
Secretary and Chief Executive Officer
[CORPORATE SEAL]
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<PAGE>
PROVIDENT AMERICAN CORPORATION
1996 EMPLOYEE INCENTIVE STOCK OPTION PLAN
1. Purpose of the Plan.
The purpose of this 1996 Employee Incentive Stock Option Plan
("Plan") is to afford an incentive to key employees of Provident American
Corporation ("PAMCO") and its affiliates and subsidiaries (collectively "the
Company"), to acquire a proprietary interest in PAMCO and to enable the Company
to attract and retain such key employees.
2. The Stock
Except as provided in Section 7 hereof, the number of shares of
stock which may be optioned and sold under the Plan is 950,000 shares of Common
Stock, $.10 par value, of PAMCO (the 950,000 shares or any portion thereof shall
hereinafter be referred to as "Shares"). If options granted under this Plan
shall expire or terminate for any reason without having been exercised in full,
the unpurchased Shares subject thereto shall again be available for the granting
of options under this Plan. Shares which are the subject of options to purchase
may be made available from authorized and unissued stock or from treasury stock.
3. Eligibility
An option shall be granted only to a person who at the time of
the grant is a key employee of the Company. The term "key employee" shall mean
an employee (including officers) who has responsibility for the management,
administration, or support of the management or administration of the Company.
The Company's Board of Directors (the "Board"), based upon the recommendation of
the Committee (defined in Section 8 hereof), shall determine from time to time
the key employees to whom options shall be granted, any criteria for such
options, the number of Shares subject to each option, the exercise price of the
option, such restrictions on exercise as are permitted under Section 422 of the
Internal Revenue Code of 1986, as it may be amended from time to time (the
"Code"), and the other terms and conditions thereof. An option shall not be
granted to any employee who owns, directly or indirectly, more than ten percent
(10%) of the total combined voting power of all classes of stock of the Company,
unless such option shall satisfy the special rules set forth in Section
422A(c)(8) of the Code for the grant of an incentive stock option to such a
10-percent shareholder. For purposes of this provision, ownership of stock in
the Company shall be determined under Section 425(d) of the Code.
4. Price
The price at which Shares may be purchased upon exercise of each
option ("option price") shall be fixed by the Board at the time of the grant of
such option and shall not be less than 100% of the fair market value of the
<PAGE>
stock at the time the option is granted. The Board shall, in good faith,
determine the fair market value of the stock based upon a reasonable method of
valuation adopted by the Board or the Committee, or such other method as may be
permitted by the Code, or regulations or rulings promulgated thereunder. In no
event shall the option price be less than the par value of the Shares. The Board
will use its best efforts to determine the fair market value of the Shares
subject to the option, but neither the Board nor the Company will be responsible
for the payment of any tax which may be imposed upon the participants, nor will
they reimburse participants for their payment of any tax so imposed. Neither the
Company, the Boards of Directors, the Committee nor any member thereof makes or
shall make any representation or warranty to any participant regarding the
consequences or effects of participation in the Plan for federal or state income
tax or any other purpose.
Nothing contained in this Plan or in any option agreement issued
hereunder shall impose any liability or responsibility on the Company, the
Boards of Directors, the Committee or any member of any of the foregoing to pay
or reimburse any participant for the payment of any tax arising out of, or on
account of the issuance of, an option or options hereunder to any participant, a
participant's exercise of any option issued under this Plan, or a participant's
sale, transfer or other disposition of any Shares acquired pursuant to the
exercise of an option issued hereunder. Any person receiving an option hereunder
shall expressly acknowledge and agree that such participation is voluntary and
that the participant will be solely responsible for all taxes to which he or she
may be or become subject as a consequence of such participation.
5. Option Terms
(a) Subject to the provisions and limitations of this Plan, and
subject to applicable securities, tax and other laws and regulations, options
may be granted at such time or times and pursuant to such terms and conditions
as may be determined by the Board at the recommendation of the Committee during
the period this Plan is in effect.
(b) Each option, which shall become exercisable in accordance
with its terms, must be exercised within five (5) years after the date on which
it first becomes exercisable. Each option shall further provide that it may not
be exercised in full or in part after the expiration of ten (10) years from the
date such option is granted. Unless otherwise provided in the stock option
agreement issued pursuant hereto and except as set forth below, options which
have been granted to an employee will continue to be exercisable only so long as
the optionee remains an employee of the Company. Notwithstanding anything to the
contrary contained in this Section 5, the Board may, in its sole discretion,
accelerate the option exercise period, based upon its evaluation of an
optionee's individual performance.
(c) Any option granted to an employee which, when aggregated with
all other incentive stock options granted after December 31, 1986, to such
employee by the Company, would result in shares having an aggregate fair market
value (determined for each share as of the date of grant of the option covering
such share) in excess of $100,000 becoming first available for purchase upon
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<PAGE>
exercise of the option during any calendar year shall be deemed to be a
non-statutory stock option and upon the exercise thereof, the gain shall be
apportioned accordingly between the gain attributable to the statutory stock
options and the non-statutory stock options in the order in which the options
were granted.
(d) Shares to be purchased upon the exercise of any option shall
be paid for, in full, in cash, by wire transfer of funds to the Company's
account, or by certified check payable to the order of PAMCO. During the three
(3) month period immediately prior to the date the right to exercise an option
expires only, the shares to be purchased upon the exercise of that option may be
purchased with certificates of stock issued by PAMCO, which stock shall be
assigned a fair value by the Board in its discretion, and delivered to PAMCO at
the time of such exercise (including stock which is part of the option being
exercised).
(e) Each option granted under the Plan shall be evidenced by a
stock option agreement between PAMCO and the employee. The Board shall initially
make all decisions as to the form of stock option agreement to be entered into
with each optionee. All forms of stock option agreement shall contain such
provisions, restrictions and conditions as are not inconsistent with this Plan
but need not be identical. The provisions of this Plan shall be set forth in
full or incorporated by reference in each stock option agreement.
(f) In the event an optionee becomes permanently and totally
disabled, dies, retires or otherwise ceases to be employed by the Company for
any reason, including leaves of absence (other than a termination for cause),
such optionee, or the executors, administrators, legatees or distributees of the
estate of the optionee, shall have the right to exercise any option which became
exercisable prior to retirement or cessation of employment but only within a
period of three (3) months from the date of cessation of employment (but in any
event not later than the termination date of the option), after which time any
unexercised portion of all outstanding options shall expire. If the optionee
dies during such three-month period, the executors, administrators, legatees or
distributees of the optionee's estate shall have the right to exercise such
options during the remainder of such period. In the event an option is exercised
by the executors, administrators, legatees or distributees of the estate of the
optionee, PAMCO shall be under no obligation to issue Shares hereunder unless
and until PAMCO is satisfied that the person (or persons) exercising the option
is the duly-appointed legal representative of the optionee's estate or the
proper legatee or distributee thereof. In no event and under no circumstances
may an option be exercised by an employee (or his personal representative) after
termination of the optionee's employment for cause.
6. Non-Transferability
No option granted hereunder shall be transferable by the optionee
other than by will or by the laws of descent and distribution, and options shall
be exercisable, during the optionee's lifetime only by such optionee; provided,
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<PAGE>
however, that in the event an optionee shall be subject to a legal disability,
his legal representative may exercise an option on his behalf.
7. Stock Dividends or Recapitalization
In the event of a stock dividend paid in shares of the class of
stock subject to any option outstanding hereunder, or capitalization,
reclassification, splitup or combination of shares with respect to said class of
stock, the Committee shall make appropriate adjustments to the option price
under such option and to the kind and number of shares as to which such option
is then exercisable, so that the optionee's proportionate interest shall be
maintained as before the occurrence of such event, and in any case an
appropriate adjustment shall also be made to the total number and kind of Shares
of stock reserved for the future granting of options under this Plan. Any such
adjustment made by the Committee pursuant to this Plan shall be binding upon the
holders of all unexpired options outstanding hereunder.
8. Administration of the Plan
This Plan shall be administered by the Board. An Option
Administration Committee ("Committee"), consisting of three (3) or more
employees, shall be elected from time to time by a majority of the entire Board
of Directors and shall make recommendations periodically to the Board with
respect to criteria for key employee participation in the Plan, the extent of
employees' participation, and the form and content of the options to be granted.
Options shall be granted only by the Board, which shall provide the form and
content of the options to be granted, including such provisions, conditions, and
such restrictions on exercise as are permitted under Section 422 of the Code, in
addition to those included in this Plan, as the Board shall determine to be
advisable; provided, however, that no such additional provisions or conditions
shall be inconsistent with the provisions of this Plan. The Board or the
Committee shall be authorized to interpret the Plan, to prescribe, amend and
rescind rules and regulations relating to it, and to make all other
determinations necessary or appropriate for its administration.
9. Effective Date; Duration of the Plan; Amendments
The Plan shall become effective upon adoption by the Board. At
the next regular meeting of the shareholders of PAMCO, which shall be scheduled
and will occur within twelve (12) months following the date of adoption by
PAMCO's Board, this Plan will be presented for consideration and approval by the
shareholders. If this Plan is not approved by the shareholders, this Plan shall
terminate, and all options granted hereunder shall be immediately forfeited.
Unless sooner terminated, the Plan shall expire ten (10) years from the date the
Plan is adopted by the Board. The Plan may be altered, suspended, discontinued
or terminated at any time by the approval of either the Board or the
shareholders of PAMCO. Nothing contained herein shall be construed to permit a
termination, modification, or amendment adversely affecting the rights of any
optionee under an existing option theretofore granted without the consent of
such optionee, except due to non-approval of the Plan by the shareholders.
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<PAGE>
10. General
(a) The provisions of this Plan shall be binding upon and inure
to the benefit of the parties and their respective heirs, executors,
administrators, personal representatives, successors and permitted assigns.
(b) Wherever used herein, the singular shall be deemed to refer
to and include the plural, and vice versa, where appropriate. Wherever used
herein, the masculine shall be deemed to refer to and include the feminine and
the neuter, and vice versa, where appropriate.
(c) The rights of any participant under the Plan shall not be
assignable by the participant and shall not be subject to the rights of
creditors, and any attempt to cause such right to be so subjected shall not be
recognized, except to such extent as may be required by law.
(d) PAMCO, upon notice to participants, at any time or from time
to time, may amend, modify or terminate any or all of the provisions of the Plan
without the consent of any participant. No amendment shall have the effect of
modifying any benefit election of any participant in effect at the time of such
amendment, unless such amendment is made to comply with federal, state or local
laws, statutes or regulations.
(e) This Plan shall not be deemed to constitute a contract
between the Company and any participant or to be a consideration or an
inducement for any contract with any participant. Nothing contained in this Plan
shall be deemed to give any participant the right to be retained in the service
of the Company or to interfere with the right of the Company to terminate any
participant's employment at any time, regardless of the effect which such
termination shall have upon him as a participant of this Plan.
(f) This Plan constitutes the entire agreement between the
Company and the participant relative to the purchase of PAMCO stock. This Plan
is governed by the laws of the Commonwealth of Pennsylvania.
(g) If any provision of the Plan is held invalid or
unenforceable, its invalidity or unenforceability shall not affect any other
provisions of the Plan, and the Plan shall be construed and enforced as if such
provision had not been included herein.
IN WITNESS WHEREOF, in order to record the adoption of this Plan,
Provident American Corporation has caused its duly authorized officers to affix
the corporate name and seal hereto effective as of July 16, 1996.
ATTEST: PROVIDENT AMERICAN CORPORATION
_______________________________ By:_____________________________
Michael F. Beausang, Jr. Alvin H. Clemens, President
Secretary and Chief Executive Officer
[CORPORATE SEAL]
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<PAGE>
PROVIDENT AMERICAN CORPORATION
AMENDED AND RESTATED STOCK OPTION PLAN FOR EXECUTIVES
1. Purpose of the Plan
This Amended and Restated Provident American Corporation Stock Option
Plan for Executives ("Plan") is intended to afford an incentive to executives
of Provident American Corporation (the "Company") and its subsidiaries to
acquire a proprietary interest in the Company and to enable the Company and its
subsidiaries to attract and retain such key persons.
2. The Stock
Except as provided in Section 6, the number of shares of stock which
may be optioned and sold under the Plan is 3,850,000 shares of Series A
Cumulative Convertible Preferred Stock of the Company, $1.00 par value
("Preferred Shares"). If options granted under this Plan shall expire or
terminate for any reason without having been exercised in full, the unpurchased
Preferred Shares subject thereto shall again be available for the granting of
options under this Plan. The Preferred Shares which are the subject of options
to purchase may be made available from authorized and unissued stock or from
treasury stock; provided, however, that the Preferred Shares which are issuable
upon exercise of an option granted under the Plan shall be limited by the
number of shares of Preferred Shares which are, as of the date of the exercise
of such option, authorized, unissued, and unreserved.
3. Eligibility
An option shall be granted under this Plan to executives employed by
the Company or its subsidiaries. The Company's Board of Directors (the "Board"),
based upon the recommendation of the committee designated pursuant to Section 7
hereof (the "Committee"), shall determine from time to time the persons to whom
options shall be granted, the number of Preferred Shares subject to each option,
the exercise price of the option and the other terms and conditions thereof.
4. Price
The price at which Preferred Shares may be purchased upon exercise of
each option ("option price") shall be fixed by the Board at the time of the
grant of such option and shall not be less than 100% of the fair market value
of the stock at the time the option is granted. The Board of Directors shall,
in good faith, determine the fair market value of the stock based upon a
reasonable method of valuation adopted by the Board or the Committee, or such
<PAGE>
other method as may be permitted by the Internal Revenue Code of 1986, as
amended, or regulations or rulings promulgated thereunder. In no event shall
the option price be less than the par value of the Preferred Shares. The Board
will use its best efforts to determine the fair market value of the Preferred
Shares subject to the option, but neither the Board or the Company will be
responsible for the payment of any tax which may be imposed upon the
participants, nor will they reimburse participants for their payment of any tax
so imposed. None of the Company, the Board, the Committee or any member thereof
makes or shall make any representation or warranty to any participant regarding
the consequences or effects of participation in the Plan for federal or state
income tax or any other purpose.
Nothing contained in this Plan or in any option agreement issued
hereunder shall impose any liability or responsibility on the Company, the
Board, the Committee or any member thereof to pay or reimburse any optionee for
the payment of any tax arising out of, or on account of, the issuance of an
option or options hereunder to any optionee, an optionee's exercise of any
option issued under this Plan or an optionee's sale, transfer or other
disposition of any Preferred Shares acquired pursuant to the exercise of an
option issued hereunder. Any person receiving an option hereunder shall
expressly acknowledge and agree that such participation is voluntary and that
the optionee will be solely responsible for all taxes to which he may be or
become subject as a consequence of such participation.
5. Option Terms
(a) Subject to the provisions and limitations of this Plan, and
subject to applicable securities, tax and other laws and regulations, options
may be granted at such time or times and pursuant to such terms and conditions
as may be determined by the Board during the period this Plan is in effect.
(b) Each option shall provide that it may not be exercised in full
or in part after the expiration of ten (10) years from the date such option is
granted. Options which have been granted to a person will continue to be
exercisable only so long as the optionee remains employed with the Company or a
subsidiary of the Company. Notwithstanding anything to the contrary contained
in this Section 5, the Board may, in its sole discretion, accelerate the option
exercise period, based upon its evaluation of an optionee's individual
performance.
(c) Preferred Shares to be purchased upon the exercise of any option
shall be paid for, in full, in cash or by certified check payable to the order
of the Company or if authorized in the Stock Option Agreement, in certificates
of stock issued by the Company, which stock shall be assigned a fair market
value by the Board in its discretion, and delivered to the Company at the time
of such exercise.
(d) Each option granted under the Plan shall be evidenced by a
Stock Option Agreement between the Company and the optionee. The Board shall
make all decisions as to the form of Stock Option Agreement to be entered into
with each optionee. All forms of Stock Option Agreement shall contain such
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<PAGE>
provisions, restrictions and conditions as are not inconsistent with this Plan
but need not be identical. The provisions of this Plan shall be set forth in
full or incorporated by reference in each Stock Option Agreement.
(e) Unless otherwise provided in the form of option granted to an
optionee, in the event an optionee ceases to be an employee of the Company or
any subsidiary of the Company (other than a termination by death or for cause),
such optionee shall have the right to exercise any options which became
exercisable prior to such cessation but only within a period of three months
from the date of such cessation (the "post-termination exercise period") (but
in any event not later than the termination date of the option), after which
time any unexercised portion of all outstanding options shall expire. If the
optionee dies during the post-termination period, the executors, administrators,
legatees or distributees of the optionee's estate shall have the right to
exercise such options during the remainder of such period. In no event and
under no circumstances may an option be exercised by an optionee (or his
personal representative) after termination for cause of the optionee's status
as an executive.
(f) In the case of a person who becomes permanently and totally
disabled while serving as an executive with the Company or any subsidiary of the
Company, any option which was exercisable on the date when such person became
disabled may be exercised within one year after such person ceased such service
(but in no event later than the termination date of the option), after which
time any unexercised portion of all outstanding options shall expire.
(g) In the event of the death of an optionee while serving as an
executive of the Company or any subsidiary of the Company, the executors,
administrators, legatees or distributees of the estate of the optionee shall
have the right to exercise any options which became exercisable prior to the
optionee's death but only within a period of three months from the date of the
optionee's death (but in no event later than the termination date of the
options), after which time any unexercised portion of the outstanding options
shall expire. In the event an option is exercised by the executors,
administrators, legatees or distributees of the estate of the optionee, under
subsection (e) or (g) of this Section 5, the Company shall be under no
obligation to issue Preferred Shares hereunder unless and until the Company is
satisfied that the person exercising the option is the duly appointed legal
representative of the optionee's estate or the proper legatee or distributee
thereof.
6. Stock Dividends or Recapitalization
In the event of a stock dividend paid in shares of the class of stock
subject to any option outstanding hereunder, or recapitalization,
reclassification, split-up or combination of shares with respect to said class
of stock, the Committee shall make appropriate adjustments of the option price
under such option and of the kind and number of shares as to which such option
is then exercisable, to the end that the optionee's proportionate interest shall
be maintained as before the occurrence of such event, and in any case an
appropriate adjustment shall also be made in the total number and kind of shares
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<PAGE>
of stock reserved for the future granting of options under this Plan. Any such
adjustment made by the Committee pursuant to this Plan shall be binding upon the
holders of all unexpired options outstanding hereunder.
7. Administration of the Plan
This Plan shall be administered by the Board. A Stock Option Committee
(the "Committee"), consisting of three or more members of the Board, no more
than one of whom shall be eligible to participate in the Plan, shall be elected
from time to time by a majority of the whole Board and shall make
recommendations periodically to the Board with respect to the individuals to
whom options should be granted, the number of options to be granted and the
form and content of the options to be granted. Options shall be granted only by
the Board which shall provide the form and content of the options to be granted,
including such provisions and conditions, in addition to those included in this
Plan, as the Board shall determine to be advisable; provided, however, that no
such additional provisions or conditions shall be inconsistent with the
provisions of this Plan. The Board or the Committee shall be authorized to
interpret the Plan, to prescribe, amend and rescind rules and regulations
relating to it and to make all other determinations necessary or appropriate for
its administration.
8. Effective Date; Duration of the Plan Amendments
The Plan shall become effective November 1, 1990. Unless sooner
terminated, the Plan shall expire on December 31, 2006. The Plan may be altered,
suspended, discontinued, or terminated by the Board at any time. Nothing
contained herein shall be construed to permit a termination, modification, or
amendment adversely affecting the rights of any optionee under an existing
option theretofore granted without the consent of such optionee.
9. General
(a) The provisions of this Plan shall be binding upon and inure to the
benefit of the parties and their respective heirs, executors, administrators,
personal representatives, successors and permitted assigns.
(b) Wherever used herein, the singular shall be deemed to refer to and
include the plural and vice versa, where appropriate. Wherever used herein, the
masculine shall be deemed to refer to and include the feminine and the neuter
and vice versa, where appropriate.
(c) The invalidity of any provision of this Plan shall not affect the
validity of the remaining provisions, and this Plan shall be construed as if
such invalid provision had been omitted.
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<PAGE>
IN WITNESS WHEREOF, in order to record the adoption of this Plan, the
Company has caused its duly authorized officers to affix the corporate name and
seal hereto on this 11th day of December, 1996.
ATTEST: PROVIDENT AMERICAN CORPORATION
______________________________ By:______________________________
Michael F. Beausang, Jr. James O. Bowles, President
Secretary
[CORPORATE SEAL]
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<PAGE>
Exhibit 10.LL
PROMISSORY NOTE
$140,900.00 April 2, 1996
The undersigned, JOHN T. GILLIN ("Gillin"), hereby promises to pay to
the order of PROVIDENT AMERICAN CORPORATION, a corporation organized and
existing under the laws of the Commonwealth of Pennsylvania (the "Company"), the
sum of One Hundred Forty Thousand Nine Hundred ($140,900.00) Dollars, repayable
on or before June 20, 1996, together with interest at the rate of eight and
one-half (8.5%) percent per annum.
The undersigned shall have the right to prepay in whole or in part any
amounts due under this Note, without penalty.
And further, the undersigned does hereby authorize and empower the
Prothonotary, Clerk of Court or any Attorney of any Court of Record of
Pennsylvania, or elsewhere, to appear for and to confess judgment against him
for the above sum, as of any term, past, present or future, with or without
declaration, with costs of suit, release of errors, without stay of execution,
and with 15% added for collection fees; and the undersigned also waives the
right of inquisition on any real estate that may be levied upon to collect this
Note and does hereby voluntarily condemn the same and authorize the Prothonotary
to enter upon the writ of execution his said voluntary condemnation, and he
further agrees that said real estate may be sold on a writ of execution and he
hereby waives and releases all relief from any and all appraisement, stay or
exemption laws of any State, now in force or hereafter to be passed.
This Promissory Note supersedes the Promissory Note dated January 16,
1996 in the original principal amount of $28,500 executed by Gillin in favor of
and delivered to Provident Indemnity Life Insurance Company, the Company's
wholly-owned subsidiary.
----------------------------
JOHN T. GILLIN
<PAGE>
AMENDMENT TO PROMISSORY NOTE
THIS AMENDMENT ("Amendment") TO PROMISSORY NOTE is made and dated as of
the 20th day of June, 1996, by and between JOHN T. GILLIN ("Gillin"), an
individual, and PROVIDENT AMERICAN CORPORATION, a Pennsylvania corporation (the
"Company").
BACKGROUND
A. Gillin executed and delivered to the Company a Promissory Note dated
April 2, 1996 in the principal amount of $140,900 (the "Note").
B. The parties are desirous of amending the Note as hereinafter set
forth.
NOW THEREFORE, in consideration of the mutual covenants herein
contained, and other good and valuable consideration, the receipt and adequacy
of which are hereby acknowledged, and intending to be legally bound hereby, the
parties hereby agree as follows:
1. Repayment of Note. The Note and all interest accrued thereon
shall be paid in full on or before January 31, 1997.
2. Ratification. As herein amended, the Note is ratified,
approved, and affirmed, and remains in full force and effect.
IN WITNESS WHEREOF, the parties hereto have executed this Amendment to
Promissory Note as of the day and year first above-written.
Witness:
____________________________ _______________________________ (SEAL)
JOHN T. GILLIN
PROVIDENT AMERICAN CORPORATION
Attest:
____________________________ By:_____________________________
M. F. Beausang, Jr., Alvin H. Clemens,
Secretary President
<PAGE>
SECOND AMENDMENT TO PROMISSORY NOTE
THIS SECOND AMENDMENT ("Amendment") TO PROMISSORY NOTE is made and dated
as of the 1st day of February, 1997, by and between JOHN T. GILLIN ("Gillin"),
an individual, and PROVIDENT AMERICAN CORPORATION, a Pennsylvania corporation
(the "Company").
BACKGROUND
C. Gillin executed and delivered to the Company a Promissory Note dated
April 2, 1996 in the principal amount of $140,900, as amended by an Amendment to
Promissory Note dated June 20, 1996 (the "Note").
D. The parties are desirous of amending the Note as hereinafter set
forth.
NOW THEREFORE, in consideration of the mutual covenants herein
contained, and other good and valuable consideration, the receipt and adequacy
of which are hereby acknowledged, and intending to be legally bound hereby, the
parties hereby agree as follows:
1. Repayment of Note. The Note and all interest accrued thereon shall
be paid in full on or before April 30, 1997.
2. Ratification. As herein amended, the Note is ratified, approved,
and affirmed, and remains in full force and effect.
IN WITNESS WHEREOF, the parties hereto have executed this Amendment to
Promissory Note as of the day and year first above-written.
Witness:
____________________________ ___________________________________ (SEAL)
JOHN T. GILLIN
PROVIDENT AMERICAN CORPORATION
Attest:
____________________________ By:________________________________
M. F. Beausang, Jr., Alvin H. Clemens, Chairman and
Secretary Chief Executive Officer
<PAGE>
PLEDGE AND SECURITY AGREEMENT
THIS PLEDGE AND SECURITY AGREEMENT ("Agreement") made this 2nd day of
April, 1996, by and between JOHN T. GILLIN ("Pledgor") and PROVIDENT AMERICAN
CORPORATION, a corporation organized and existing under the laws of the
Commonwealth of Pennsylvania ("Secured Party").
NOW THEREFORE, in consideration of the mutual covenants herein
contained, and other good and valuable consideration, the receipt and adequacy
of which are hereby acknowledged, and intending to be legally bound hereby, the
parties hereby agree as follows:
1. Creation of Security Interest. Pledgor hereby grants to
Secured Party a security interest in and pledges to the Secured Party the
Collateral described in Exhibit "A" attached hereto, together with any proceeds
thereof ("Collateral"). Pledgor hereby delivers the Collateral to Escrow Agent
(as hereinafter defined), together with a stock power of attorney duly endorsed
in blank, or such other documents of transfer as shall be necessary to
effectuate the transfer of title of the Collateral, to be held in accordance
with the terms and conditions of an Escrow Agreement of even date herewith
("Escrow Agreement") among Pledgor, Secured Party, and Anthony R. Verdi ("Escrow
Agent").
2. Debt Secured. Pledgor has borrowed from the Secured Party the
sum of One Hundred Forty Thousand Nine Hundred ($140,900) Dollars, in accordance
with the terms and conditions of a Promissory Note dated as of the date hereof
(the "Note"), the entire remaining balance of principal and interest of which
shall be due and payable on demand.
3. Representations, Warranties, and Covenants of Pledgor. Pledgor
represents, warrants and covenants to Secured Party that:
a. Pledgor is the legal and beneficial owner of the
Collateral.
b. The Collateral has been validly issued, is fully paid and
non-assessable and is owned by Pledgor free and clear of all security interests,
liens, restrictions, charges, and other encumbrances of any nature other than
the lien created hereby.
c. The execution, delivery, and performance of this Agreement
do not violate the provisions of or cause a default or constitute an event
which, with notice or the lapse of time or both, would constitute a default on
the part of Pledgor under any law or any contract, agreement, or other
instrument or judgment or decree to which Pledgor is a party or by which he is
bound.
<PAGE>
d. The Collateral is not the subject of any present or
threatened suit, action, arbitration, or administrative or other proceeding, and
Pledgor knows of no reasonable grounds for the institution of any such
proceeding.
e. Pledgor shall, at his expense, defend Secured Party's
right, title and security interest in and to the Collateral against the claims
of any person, corporation or other entity.
f. Pledgor shall not:
(1) sell, convey, or otherwise dispose of any of the
Collateral or any interest therein; or
(2) create, incur or permit to exist any security interest,
lien, charge or encumbrance whatsoever with respect to
any of the Collateral other than the lien created
hereby.
g. This Agreement constitutes the valid and binding obligation
of Pledgor enforceable in accordance with its term.
4. Voting Rights. Prior to the occurrence of an Event of Default
(as defined herein), Pledgor shall have the right to vote the Collateral. Upon
the occurrence of any Event of Default, Secured Party shall immediately have the
right to vote the Collateral as if the absolute owner thereof, whether or not
the Collateral shall have been registered in the name of Secured Party.
5. Custodial Duties.
a. Secured Party's sole duty with respect to the Collateral
shall be to cause Escrow Agent to exercise reasonable care in the physical
custody and preservation of the Collateral. Secured Party shall be relieved of
all responsibility for the Collateral, or any portion thereof, upon surrendering
it or tendering surrender of it to Pledgor.
b. Secured Party shall have no duty or responsibility to take
any steps (i) to preserve any rights in the Collateral against prior parties,
(ii) to protect, perfect, preserve or maintain any security interest given to
secure the Collateral, (iii) to protect the Collateral from decline in value,
(iv) to ascertain any maturities or exercise or accept any calls, conversions,
exchanges, offers, tenders, or similar matters relating to any Collateral, or
(v) to send notices, perform services or take any action in connection with the
management of the Collateral.
6. Powers of Escrow Agent With Respect to Collateral.
a. Secured Party shall have the power, in its sole discretion,
and without notice to Pledgor, to cause the Escrow Agent under the Escrow
Agreement to take one or more of the following actions, but shall be under no
duty or responsibility to exercise or withhold the exercise of these
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<PAGE>
rights, powers, privileges, and options, and shall not have any liability for
any failure or delay in doing so, other than to account for property actually
received by Secured Party:
(1) receive all income, dividends, distributions or other
property and apply them against the liabilities of
Pledgor, in any priority, or hold the same as
additional Collateral;
(2) make any compromise or settlement deemed advisable with
respect to any of the Collateral;
(3) renew, extend, or otherwise change the terms and
conditions of the Note or the Collateral;
(4) take or release any other collateral as security for
any of the Collateral;
(5) take or release any guarantor, endorser, surety, or
other party to the Note or the Collateral;
(6) execute any necessary endorsements, assignments, or
other instruments or conveyances or transfer with
respect to the Collateral to effect Secured Party's
remedies under Section 9 hereof; and
(7) sell the Collateral and apply the proceeds to the
payment of the Note.
b. Pledgor hereby irrevocably makes, constitutes and appoints
Escrow Agent under the Escrow Agreement as Pledgor's true and lawful
attorney-in-fact to take one or more of the actions, rights, powers, privileges
and options set forth in Section 6.a hereof.
7. Agreements of Pledgor.
a. Pledgor authorizes the Escrow Agent under the Escrow
Agreement to register title to the Collateral in the name of Escrow Agent during
the term of the Note.
b. Pledgor agrees not to sell, pledge, assign, exchange,
transfer, or otherwise dispose of any interest in the Collateral, permit any
lien or security interest to attach to same except that created by this
Agreement, or permit anything to be done that may impair the value of the
Collateral or the security intended to be afforded hereunder during the term of
this Agreement.
8. Events of Default. The occurrence of any of the following
events shall, at the option of Secured Party, without notice or demand,
constitute a default on the part of Pledgor hereunder ("Event of Default").
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<PAGE>
a. If there occurs any breach, failure or violation by Pledgor
(i) in the payment or performance of any of Pledgor's obligations or liabilities
as set forth in the Note, or (ii) in the performance of any of the terms and
conditions of this Agreement.
b. If Pledgor shall become insolvent or shall file a voluntary
petition to effect a plan or other arrangement with creditors, or if Pledgor
shall be adjudicated bankrupt or shall make an assignment for the benefit of
creditors, or shall apply for a consent to the appointment of any receiver or
trustee of all or a part of Pledgor's property, or as may be applicable, Pledgor
shall institute dissolution or liquidation proceedings.
9. Remedies Upon Event of Default. Upon the occurrence of an
Event of Default, Secured Party shall have the right to do any of the following:
a. Secured Party may exercise all the rights and remedies
given to a secured party by the Pennsylvania Uniform Commercial Code.
b. Secured Party may have the Collateral registered in its
name or that of its nominee.
c. Secured Party may proceed to foreclose the security
interest given to it hereunder by causing Escrow Agent to sell all or any part
of the Collateral in whole or in part, at the same or different times, at public
or private sale, upon such terms as it deems best, for cash, upon credit or for
future delivery and, in connection therewith, Secured Party may grant options.
Secured Party or its nominee may purchase all or any part of the Collateral,
absolutely freed and discharged from any equity or redemption and from all
trusts or other claims whatsoever. If any of the Collateral is sold by Secured
Party upon credit or for future delivery, Secured Party shall not be liable for
the failure of the purchaser to pay for the same, and, in the event of any such
failure, Secured Party may resell such Collateral.
d. The proceeds of any sale of the Collateral shall be applied
as follows: (i) to pay all costs and expenses of every kind incurred by Secured
Party in connection with any actual or attempted sale, including brokers' and
attorneys' fees; (ii) to the satisfaction of all obligations of Pledgor under
the Note; (iii) to the payment of any other amounts required by applicable laws,
and (iv) to Pledgor in the event of any surplus. Pledgor shall continue to be
liable for any deficiency. In no event shall Pledgor be credited with any part
of the proceeds of any sale of the Collateral until such payment thereon has
actually been received by Secured Party.
e. Secured Party shall give Pledgor two (2) days' prior notice
of the time and place of any public sale and of the time after which any private
sale or other disposition is to be made, which notice Pledgor agrees is
reasonable.
f. Pledgor recognizes that Secured Party may be unable to
effect a public sale of all or any part of the Collateral by reason of certain
prohibitions contained in the Securities Act of 1933 (the "Act"), and
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<PAGE>
therefore may resort to one or more private sales to a restricted group of
purchasers who will be obligated to agree, among other things to acquire the
Collateral for their own account, for investment and without a view to the
distribution or resale thereof. Pledgor acknowledges that private sales so made
may be at prices and other terms less favorable to Secured Party than if the
Collateral was sold at public sale, and agrees Secured Party has no obligation
to delay the sale of any of the Collateral for the period of time necessary to
permit the issuer of the securities which are being sold (even if the issuer
would agree), to register such securities for sale under the Act. Pledgor agrees
that private sales made under the foregoing circumstances shall be deemed to
have been made in a commercially reasonable manner.
g. The remedies provided herein in favor of Secured Party
shall not be deemed exclusive, but shall be cumulative, and shall be in addition
to all other legal and equitable remedies which Secured Party may have.
10. Termination of Agreement. This Agreement and the Escrow
Agreement shall terminate upon the full payment by Pledgor to Secured Party of
all amounts due under the Note and the completion of Pledgor's obligations under
this Agreement.
11. Miscellaneous.
a. Secured Party may waive any default or remedy a default in
any reasonable manner without waiving such subsequent default, and Secured Party
may waive or delay the exercise of any right or remedy under this Agreement
without waiving the right or remedy of any other right or remedy hereunder.
b. This Agreement shall be binding upon and shall inure to the
benefit of the respective heirs, executors, administrators, successors and
assigns of the parties hereto.
c. All notices, requests, demands, or other communications
provided for herein shall be in writing and shall be deemed to have been given
when sent by registered or certified mail, return receipt requested, addressed
to the parties at such address as either party shall designate to the other from
time to time.
d. This Agreement may not be amended, modified or terminated,
except in writing and executed by all parties hereto, and no waiver of any
provision or consent hereunder shall be effective unless executed in writing by
the waiving or consenting party.
e. This Agreement shall not be assignable by Pledgor without
the prior written consent of Secured Party.
f. This Agreement shall be governed by and construed in
accordance with the laws of the Commonwealth of Pennsylvania.
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<PAGE>
g. This Agreement represents the entire agreement between the
parties with respect to the subject matter hereof, and supersedes the Pledge and
Security Agreement between Pledgor and Provident Indemnity Life Insurance
Company, the Secured Party's wholly-owned subsidiary, dated January 16, 1996.
IN WITNESS WHEREOF, the parties hereto have placed their hands
and seals as of the day and year above first written.
PLEDGOR:
______________________________ __________________________________
Witness JOHN T. GILLIN
SECURED PARTY:
PROVIDENT AMERICAN CORPORATION
By:_______________________________
Alvin H. Clemens, President
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<PAGE>
EXHIBIT "A"
COLLATERAL
25,000 shares of the common stock of PROVIDENT AMERICAN CORPORATION, together
with all dividends or other distributions issued with respect thereto.
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<PAGE>
ESCROW AGREEMENT
THIS ESCROW AGREEMENT (the "Agreement") made this 2nd day of April,
1996, by and among PROVIDENT AMERICAN CORPORATION, a Pennsylvania corporation
("PAMCO" or "Lender"), JOHN T. GILLIN, an individual ("Gillin"), and ANTHONY R.
VERDI ("Escrow Agent").
BACKGROUND
A. Gillin and Lender are parties to a Pledge and Security Agreement
dated of even date herewith ("Security Agreement"), pursuant to the terms and
conditions of which Gillin will pledge certain shares of the common stock of
PAMCO which he owns individually to Lender.
B. The Security Agreement requires Gillin to deposit into escrow with
the Escrow Agent a certificate or certificates representing Twenty Five Thousand
(25,000) shares of the common stock of PAMCO, $0.10 par value per share (the
"Pledged Shares").
C. The parties are desirous of providing for the appointment of the
Escrow Agent, to confirm that the Pledged Shares have been deposited in an
escrow account as required by the Security Agreement, and to set forth the other
terms and conditions of the escrow of the Pledged Shares.
NOW, THEREFORE, intending to be legally bound, and in consideration of
the mutual covenants contained herein, the parties hereto agree as follows:
1. Appointment of Escrow Agent. Lender and Gillin hereby appoint
Escrow Agent to act as the escrow agent under this Agreement. Escrow Agent
hereby accepts such appointment and agrees to hold and deposit all of the
Pledged Shares into escrow pursuant to the Security Agreement on behalf of
Gillin and Lender, in accordance with the terms hereof, and to perform his
duties hereunder.
2. Establishment of Escrow Account. Escrow Agent hereby
acknowledges receipt of the certificate or certificates comprising the Pledged
Shares, with stock powers duly endorsed in blank, and confirms that such Pledged
Shares and stock powers have been received and shall be held by him in
accordance with the terms of this Agreement, together with all additions thereto
and replacements thereof (collectively, the "Pledged Shares").
3. Voting Rights. Lender and Gillin agree that during the term of
this Agreement, and provided that an Event of Default has not occurred and is
not then existing under the Security Agreement, Gillin shall have the right to
vote the Pledged Shares.
<PAGE>
4. Dividends, Warrants. In the event that, during the term of
this Agreement, any share dividend, reclassification, readjustment, or other
change is declared or made with respect to the Pledged Shares, all new,
substituted, and additional shares, or other securities, issued by reason of any
such change shall be delivered to and held by Escrow Agent under the terms of
this Agreement in the same manner as the Pledged Shares. In the event that
subscription warrants or any other rights or options shall be issued in
connection with the Pledged Shares, such warrants, rights, and options may be
exercised by Gillin, and if so exercised, all new shares or other securities so
acquired by Gillin shall be delivered to Escrow Agent and held under the terms
of this Agreement in the same manner as the Pledged Shares.
5. Pledged Shares Certificates. The parties acknowledge, agree,
and hereby authorize Escrow Agent to register title to the Pledged Shares in the
name of Escrow Agent.
6 Income on Pledged Shares. All income earned on the Pledged
Shares shall be held by the Escrow Agent and distributed to the recipient of the
Pledged Shares (or the proceeds from the sale thereof), either wholly or in
proportion, as the case may be. All taxable income earned on the Pledged Shares,
if any, shall be treated as taxable to Gillin. Gillin's taxpayer identification
number is _____________.
7. Disposition of Pledged Shares. The Escrow Agent shall act only
in accordance with the provisions of Paragraph 9 hereof, or with the mutual
written direction of Lender and Gillin.
8. Fees and Expenses of Escrow Agent. No fee shall be collected
by Escrow Agent on account of services rendered under this Agreement, provided,
however, that all costs or expenses incurred shall be split equally between the
parties if no dispute has arisen, or in the event of a dispute, paid entirely by
the losing party.
9. Obligations to Deliver Instructions to Escrow Agent.
a. Upon repayment of all amounts due under the Promissory Note
of even date herewith executed by Gillin and delivered to Lender (the "Note"),
and provided that all of Gillin's obligations under the Pledge Agreement and
this Agreement have been satisfied, Gillin may submit a notice to Lender and
Escrow Agent requesting distribution to him of the Pledged Shares. If Lender
shall in good faith dispute that Gillin is entitled to the Pledged Shares, then
Lender shall within ten (10) days of such receipt so notify Gillin and Escrow
Agent in writing, whereupon the Escrow Agent shall retain the Pledged Shares
until furnished with a notification executed by each of Lender and Gillin
relative to the disbursement of such Pledged Shares. If Lender shall fail to
deliver its response within the ten (10) day period, the Pledged Shares will be
delivered by the Escrow Agent to Gillin.
b. If, while the Pledged Shares are held in escrow by the
Escrow Agent, there occurs an Event of Default (as defined in the Security
Agreement), Lender shall deliver notice to such effect to the Escrow Agent and
to Gillin. If Gillin shall cure the Event of Default within ten (10) days of
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<PAGE>
receipt of such notice, the Pledged Shares shall remain in escrow. In the event
that Gillin fails to cure the Event of Default within such ten (10) day period,
the Escrow Agent shall have the right to sell or otherwise dispose of the
Pledged Shares, and to distribute the proceeds thereof to Lender on account of
the obligations of Gillin set forth in the Note.
c. If a dispute between Gillin and Lender with regard to the
disposition of the Pledged Shares shall arise, the legal fees, expenses and
other costs of the party awarded the Pledged Shares by the court hearing the
dispute and the legal fees and expenses of Escrow Agent shall be paid by the
losing party.
10. Term. The term of this Agreement shall commence on the date
hereof and shall continue during such period of time as the Pledged Shares shall
remain in escrow.
11. Resignation or Removal of Escrow Agent. The Escrow Agent
shall have the right to resign upon fifteen (15) days' prior written notice to
Gillin and Lender, and may be removed by the mutual consent of Gillin and Lender
upon fifteen (15) days' prior notice to the Escrow Agent. If the Escrow Agent
resigns, Lender and Gillin shall select a successor Escrow Agent to serve under
the same terms and conditions set forth herein. A successor Escrow Agent shall,
without further act, become vested with all rights, powers, and duties of the
predecessor Escrow Agent as if originally named herein.
12. Liability of Escrow Agent.
a. The duties of Escrow Agent hereunder are entirely
administrative and not discretionary. Escrow Agent is obligated to act only in
accordance with written instructions received by him as provided in this
agreement, is authorized hereby to comply with any orders, judgments or decrees
of any court and shall not incur any liability as a result of his compliance
with such instructions, orders, judgments or decrees.
b. The Escrow Agent may rely upon any instrument, not only as
to its due execution, validity and effectiveness, but also as to the truth and
accuracy of any information contained therein, which the Escrow Agent shall in
good faith believe to be genuine, to have been signed or presented by the
persons or parties purporting to sign the name, and to conform to the provisions
of this Agreement.
c. Gillin and Lender hereby waive any suit, claim, demand or
cause of action of any kind which either one or both may have or assert against
Escrow Agent arising out of or relating to the execution or performance by
Escrow Agent of this Agreement, unless such suit, claim, demand or cause of
action is based upon the negligence, intentional acts of, or the
misappropriation of funds by Escrow Agent.
d. Lender and Gillin hereby agree to jointly and severally
indemnify and hold harmless Escrow Agent (and any successor escrow agent) from
any loss, liability, costs or expense incurred by the Escrow Agent in
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<PAGE>
defending against any claims made against the Escrow Agent by third parties
arising out of the Escrow Agent's appointment as Escrow Agent hereunder or in
connection with the performance by the Escrow Agent's of his duties hereunder,
except such claims as may arise from the negligence, intentional acts of, or the
misappropriation of funds by the Escrow Agent.
13. Consultation of Counsel. In the event any legal question
arises concerning Escrow Agent's duties hereunder, the Escrow Agent may consult
his legal counsel and rely upon the written opinions of such counsel.
14. Assignment. The provisions of this Agreement shall be binding
upon, inure to the benefit of and be enforceable by the parties hereto and their
successors and assigns. No rights herein may be assigned by Lender or Gillin
without the prior written consent of the other party and prior written notice to
the Escrow Agent, and no modifications hereof shall be binding or enforceable
unless in writing and signed by the party against whom enforcement is sought.
15. Miscellaneous.
a. Governing Law/Consent to Jurisdiction. This Agreement shall
be governed by and construed in accordance with the laws of the Commonwealth of
Pennsylvania. The parties hereto agree to consent to the jurisdiction and venue
of the courts of the Commonwealth of Pennsylvania located in Montgomery County,
Pennsylvania, and of the United States District Court for the Eastern District
of Pennsylvania, and agree that all disputes between the parties shall be
litigated only therein.
b. Successors and Assigns. The Agreement shall be binding upon
and inure to the benefit of the parties hereto and their successors and assigns.
c. Notice. Any notice hereunder, if mailed, shall be deemed
given and received 48 hours after mailing, and if sent by professional express
service, notice shall be deemed given and received at the time of actual
delivery. Notices shall be sent to the addresses of the parties set forth in the
Purchase Agreement, or such other addresses as the parties shall designate in
writing from time to time.
d. Expenses. Each party hereto shall pay its own expenses
including, without limitation, legal and accounting fees and expenses, incident
to the negotiation and preparation of this Agreement and to its performance.
e. Entire Agreement and Amendments. This Agreement constitutes
the entire understanding and agreement among the parties hereto relative to the
subject matter hereof. Any amendments to the Agreement must be in writing,
signed by each party hereto.
f. Partial Invalidity. In case any one or more of the
provisions contained in this Agreement shall for any reason be held to be
invalid, illegal, or unenforceable in any respect, such invalidity,
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<PAGE>
illegality, or unenforceability shall not affect any other provision hereof, and
this Agreement shall be construed as if such invalid, illegal, or unenforceable
provision had never been contained herein, unless the deletion of the provision
or provisions would result in such a material change as to cause completion of
the transactions contemplated herein to be unreasonable.
g. Execution in Counterparts. This Agreement may be executed
by the parties hereto signing the same instrument, or by each party hereto
signing a separate counterpart or counterparts, each of which shall be deemed to
be an original, but all of which together shall constitute one and the same
instrument.
h. Waivers.
(1) Any one party may, by written instrument, extend the
time for the performance of any of the obligations or other acts of the other
party and with respect to this Agreement (i) waive any inaccuracies in the
representations and warranties of the other party in this Agreement or in any
document delivered pursuant to this Agreement, (ii) waive compliance with any of
the covenants of the other party contained in this Agreement, and (iii) waive
the other party's performance of any of its obligations set out in this
Agreement. Any agreement on the part of the parties hereto for any such
extension or waiver shall be validly and sufficiently authorized for the
purposes of this Agreement if it is approved by the persons authorized to make
such agreements on behalf of the parties hereto.
(2) The failure of any party hereto to enforce at any time
any provision of this Agreement shall not be construed to be a waiver of the
provision, nor affect the validity of this Agreement or any part hereof or the
right of such party thereafter to enforce each and every such provision. No
waiver of any breach of this Agreement shall be held to constitute a wavier of
any other or subsequent breach.
IN WITNESS WHEREOF, the individual parties hereto have hereunto duly set
their hands and seals, and the corporate parties hereto have caused these
presents to be duly executed and their corporate seal to be duly attached by
their proper officers thereunder duly authorized, the day and year first above
written.
GILLIN:
Witness:
_________________________________ ______________________________________
JOHN T. GILLIN
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<PAGE>
PROVIDENT AMERICAN CORPORATION
By:_____________________________
Alvin H. Clemens, President
ESCROW AGENT:
By:______________________________
ANTHONY R. VERDI
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<PAGE>
June 6, 1996
Provident American Corporation
2500 DeKalb Pike
P.O. Box 511
Norristown, PA 19404-0511
Attention: Mr. Alvin H. Clemens
Chairman of the Board
Gentlemen:
This will confirm that Ladenburg, Thalmann & Co. Inc. ("Ladenburg") has
been retained as a financial advisor to Provident American Corporation (the
"Company") to perform such financial consulting services as the Company may
reasonably request. The term of this agreement (the "Agreement") shall extend
through June 6, 1997, provided, however, that either the Company or Ladenburg
may terminate this Agreement prior to such date and as of the end of any month
upon no less than 30 days prior written notice.
As part of and concomitant with its services as financial advisor to the
Company, Ladenburg will undertake to:
1. Sponsor the Company to the institutional investment community by providing
research coverage of the Company and assisting in the planning and
execution of a presentation to institutional investors.
2. Assist in the preparation and execution of a presentation by the Company
concerning its historical financial performance, its current market
position and the prospects for future operational and financial
performance to Ladenburg's institutional and retail sales.
3. Manage the Company's investment portfolio of government and AAA and AA
rated corporate bonds for a quarterly fee equal to one quarter of the
average quarterly balance of the portfolio multiplied by 0.15% of the
first $100.0 million of the average quarterly balance of the portfolio and
0.10% on the amount of the portfolio in excess of $100.0 million. In
addition, the Company will pay Ladenburg an annual performance fee equal
to 20% of the excess, if any, of the total return on the portfolio for the
prior year over the total return on a to be established benchmark treasury
note for the comparable period.
<PAGE>
Provident American Corporation
Mr. Alvin H. Clemens
June 6, 1996
Page 2
4. Divest for the Company at its direction the 1.0 million shares of common
stock of The Loewen Group through open market trades for a fee of $0.065
per share, to be deducted from the proceeds of such sale or sales at the
time of settlement. The Company agrees to reimburse Ladenburg for all
reasonable out-of-pocket expenses incurred in carrying out the terms of
this Agreement, including travel, telephone, facsimile, courier, computer
time charges, attorneys' fees and disbursements, and any sales, use or
similar taxes. These out-of-pocket expenses will be payable from time to
time promptly upon invoicing by Ladenburg therefor.
As further consideration to Ladenburg for entering into this Agreement,
the Company will issue to Ladenburg or its designees upon the execution of this
Agreement a warrant or warrants to purchase 100,000 shares of the Company's
common stock at $9.00 per share, the terms and conditions governing such issue
of warrants to be substantially in the form of Appendix B hereto annexed. The
Company will have the option until December 6, 1996 to cancel one-half of such
warrants upon thirty days written notice if the Company is unsatisfied with the
performance of Ladenburg in providing the previously outlined services.
It is contemplated that from time to time the Company may request
Ladenburg to perform investment banking services (as distinguished from
financial consulting services) in connection with matters involving the Company,
such as the private placement of securities; mergers; acquisitions;
divestitures; valuations; or corporate reorganizations. Any fees which Ladenburg
shall become entitled to receive from the Company in connection with the
performance of any such investment banking services shall be set forth in a
separate agreement between the Company and Ladenburg and shall be in addition to
the compensation provided for herein. Ladenburg, however, will have no
obligation to enter into any separate agreement, the terms and conditions of
which must be negotiated between Ladenburg and the Company.
In order to enable Ladenburg to render its services hereunder, the Company
agrees to provide to Ladenburg, among other things, all reasonable information
requested or required by Ladenburg including, but not limited to, information
concerning historical and projected financial results and possible and known
litigious, environmental and other contingent liabilities. The Company also
agrees to make available to Ladenburg such representatives of the Company,
including, among others, directors, officers, employees, outside counsel and
independent certified public accountants, as Ladenburg may reasonably request.
The Company
<PAGE>
will promptly advise Ladenburg of any material changes in its business or
finances. The Company represents that all information made available to
Ladenburg by the Company will be complete and correct in all material respects
and will not contain any untrue statements of a material fact or omit to state a
material fact necessary in order to make the statements therein not misleading
in light of the circumstances under which such statements are made. In rendering
its services hereunder, Ladenburg will be using and relying primarily on such
information without independent verification thereof or independent appraisal of
any of the Company's assets. Ladenburg does not assume responsibility for the
accuracy or completeness of the information to which reference is made hereto.
The services herein provided are to be rendered solely to the Company.
They are not being rendered by Ladenburg as an agent or as a fiduciary of the
shareholders of the Company and Ladenburg shall not have any liability or
obligation with respect to its services hereunder to such shareholders or any
other person, firm or corporation.
The Company and Ladenburg hereby agree to the terms and conditions of the
Indemnification Agreement attached hereto as Appendix A with the same force and
effect as if such terms and conditions were set forth at length herein.
This Agreement sets forth the entire understanding of the parties relating
to the subject matter hereof and supersedes and cancels any prior
communications, understandings and agreements between the parties. This
Agreement cannot be terminated or changed, nor can any of its provisions be
waived, except by written agreement signed by all parties hereto or except as
otherwise provided herein. This Agreement shall be binding upon and inure to the
benefit of any successors and assigns of the Company and Ladenburg.
This Agreement shall be governed by and construed to be in accordance with
the laws of the State of New York applicable to contracts made and to be
performed solely in such state by citizens thereof. Any dispute arising out of
this Agreement shall be adjudicated in the courts of the State of New York or in
the federal courts sitting in the Southern District of New York, and the Company
hereby agrees that service of process upon it by registered or certified mail at
its address set forth above shall be deemed adequate and lawful. The parties
hereto shall deliver notices to each other by personal delivery or by registered
or certified mail (return receipt requested) at the addresses set forth above.
<PAGE>
Provident American Corporation
Mr. Alvin H. Clemens
June 6, 1996
Page 4
Please confirm that the foregoing is in accordance with your understanding
by signing upon behalf of the Company and returning an executed copy of this
Agreement, together with the warrant or warrants described herein, whereupon
after execution by Ladenburg this Agreement shall become binding between the
Company and Ladenburg. A telecopy of a signed original of this Agreement shall
be sufficient to bind the parties whose signatures appear hereon.
Very truly yours,
LADENBURG, THALMANN & CO.
By:______________________
Peter M. Graham
President
ACCEPTED AND AGREED TO:
PROVIDENT AMERICAN CORPORATION
By:___________________________
Alvin H. Clemens
Chief Executive Officer
Chairman of the Board
Date: June 14, 1996
<PAGE>
APPENDIX B
WARRANT FOR THE PURCHASE OF SHARES OF COMMON STOCK
No. 100,000 Shares
FOR VALUE RECEIVED, Provident American Corporation (the "Company"), a
Pennsylvania corporation, hereby certifies that Ladenburg, Thalmann & Co. Inc.,
or its permitted assigns are entitled to purchase from the Company, at any time
or from time to time commencing June 6, 1996, and prior to 5:00 p.m., New York
City time then current, on June 6, 2001, fully paid and non-assessable shares of
the common stock, $.10 par value, of the Company at the purchase price of $9.00
per share. (Hereinafter, (i) said common stock, together with any other equity
securities which may be issued by the Company with respect thereto or in
substitution therefor, is referred to as the "Common Stock," (ii) the shares of
the Common Stock purchasable hereunder are referred to as the "Warrant Shares,"
(iii) the aggregate purchase price payable hereunder for the Warrant Shares is
referred to as the "Aggregate Warrant Price," (iv) the price payable hereunder
for each of the shares of the Warrant Shares is referred to as the "Per Share
Warrant Price" and (v) this warrant and all warrants hereafter issued in
exchange or substitution for this warrant are referred to as the "Warrants.")
The Aggregate Warrant Price is not subject to adjustment. The Per Share Warrant
Price is subject to adjustment as hereinafter provided; in the event of any such
adjustment, the number of Warrant Shares shall be adjusted by dividing the
Aggregate Warrant Price by the Per Share Warrant Price in effect immediately
after such adjustment.
1. Exercise of Warrant.
(a) This Warrant may be exercised, in whole at any time or in part from time
to time, commencing June 6, 1996 [One-half of the Warrant shall not be
exercisable until after December 6, 1996 and then only in the event that the
Company does not exercise its right to cancel one-half of the Warrant as set
forth in the June 6, 1996 letter agreement] (the "Commencement Date"), and prior
to 5:00 p.m., New York City time then current, on June 6, 2001 (the "Expiration
Date"), by the holder of this Warrant (the "Holder") by the surrender of this
Warrant (with the subscription form at the end hereof duly executed) at the
address set forth in Subsection 10(a) hereof, together with proper payment of
the Aggregate Warrant Price, or the proportionate part thereof if this Warrant
is exercised in part. Payment for the Warrant Shares shall be made by certified
or official bank check, payable to the order of the Company. If this Warrant is
exercised in part, this Warrant must be exercised for a number of whole shares
of the Common Stock, and the Holder is entitled to received a new Warrant
covering
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the number of Warrant Shares in respect of which this Warrant has not
been exercised and setting forth the proportionate part of the Aggregate Warrant
Price applicable to such Warrant Shares. Upon such exercise and surrender of
this Warrant, the Company will (i) issue a certificate or certificates in the
name of the Holder for the number of whole shares of the Common Stock to which
the Holder shall be entitled and, if this Warrant is exercised in whole, in lieu
of any fractional share of the Common Stock to which the Holder shall be
entitled, pay cash equal to the fair value of such fractional share (determined
in such reasonable manner as the Board of Directors of the Company shall
determine), and (ii) deliver the other securities and properties receivable upon
the exercise of this Warrant, or the proportionate part thereof if this Warrant
is exercised in part, pursuant to the provisions of this Warrant.
(b) In lieu of exercising this Warrant in the manner set forth in paragraph
l(a) above, this Warrant may be exercised between the Commencement Date and the
Expiration Date by surrender of the Warrant without payment of any other
consideration, commission or remuneration, together with the cashless exercise
subscription form at the end hereof, duly executed. The number of shares to be
issued in exchange for the Warrant shall be the product of (x) the excess of the
market price of the Common Stock on the date of surrender of the Warrant and the
exercise subscription form over the Per Share Warrant Price and (y) the number
of shares subject to issuance upon exercise of the Warrant, divided by the
market price of the Common Stock on such date. Upon such exercise and surrender
of this Warrant, the Company will (i) issue a certificate or certificates in the
name of the Holder for the number of whole shares of the Common Stock to which
the Holder shall be entitled and, in lieu of any fractional share of the Common
Stock to which the Holder shall be entitled, pay cash equal to the fair value of
such fractional share (determined in such reasonable manner as the Board of
Directors of the Company shall determine), and (ii) deliver the other securities
and properties receivable upon the exercise of this Warrant, pursuant to the
provisions of this Warrant.
2. Reservation of Warrant Shares.
The Company agrees that, prior to the expiration of this Warrant, the Company
will at all times have authorized and in reserve, and will keep available,
solely for issuance or delivery upon the exercise of this Warrant, such number
of shares of the Common Stock and such amount of other securities and properties
as from time to time shall be deliverable to the Holder upon the exercise of
this Warrant, free and clear of all restrictions on sale or transfer (except
such as may be imposed under applicable federal and state securities laws) and
free and clear of all preemptive rights and all other rights to purchase
securities of the Company.
3. Protection Against Dilution.
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(a) If, at any time or from time to time after the date of this Warrant, the
Company shall distribute to the holders of its outstanding Common Stock, (i)
securities, other than shares of Common Stock, or (ii) property, other than cash
dividends paid in conformity with past practice, without payment therefor, with
respect to Common Stock, then, and in each such case, the Holder, upon the
exercise of this Warrant, shall be entitled to receive the securities and
property which the Holder would have held on the date of such exercise if, on
the date of this Warrant, the Holder had been the holder of record of the number
of shares of the Common Stock subscribed for upon such exercise and, during the
period from the date of this Warrant to and including the date of such exercise,
had retained such shares and the securities and properties receivable by the
Holder during such period. Notice of each such distribution shall be forthwith
mailed to the Holder.
(b) If, at any time or from time to time after the date of this Warrant, the
Company shall (i) pay a dividend or make a distribution on its capital stock in
shares of Common Stock, (ii) subdivide its outstanding shares of Common Stock
into a greater number of shares, (iii) combine its outstanding shares of Common
Stock into a smaller number of shares or (iv) issue by reclassification of its
Common Stock any shares of capital stock of the Company, the Per Share Warrant
Price in effect immediately prior to such action shall be adjusted so that the
Holder of any Warrant thereafter exercised shall be entitled to receive the
number of shares of Common Stock or other capital stock of the Company which he
would have owned or been entitled to receive immediately following the happening
of any of the events described above had such Warrant been exercised immediately
prior thereto. An adjustment made pursuant to this (b) shall become effective
immediately after the record date in the case of a dividend or distribution and
shall become effective immediately after the effective date in the case of a
subdivision, combination or reclassification. If, as a result of an adjustment
made pursuant to this (b), the holder of any Warrant thereafter surrendered for
exercise shall become entitled to receive shares of two or more classes of
capital stock or shares of Common Stock and other capital stock of the Company,
the Board of Directors (whose determination shall be conclusive and shall be
described in a written notice to the Holder of any Warrant promptly after such
adjustment) shall determine the allocation of the adjusted Per Share Warrant
Price between or among shares of such classes or capital stock or shares of
Common Stock and other capital stock.
(c) Except as provided in 3(e), in case the Company shall hereafter issue or
sell any shares of Common Stock for a consideration per share less than the Per
Share Warrant Price in effect immediately prior to such issuance or sale, the
Per Share Warrant Price shall be adjusted as of the date of such issuance or
sale so that the same shall equal the price determined by dividing (i) the sum
of (A) the number of shares of Common Stock outstanding immediately prior to
such issuance or sale multiplied by the Per Share Warrant Price plus (B) the
consideration received by the Company upon such issuance or sale by (ii) the
total number of shares of Common Stock outstanding after such issuance or sale.
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(d) Except as provided in 3(e), in case the Company shall hereafter issue or
sell any rights, options, warrants or securities convertible into Common Stock
entitling the holders thereof to purchase the Common Stock or to convert such
securities into Common Stock at a price per share (determined by dividing (i)
the total amount, if any, received or receivable by the Company in consideration
of the issuance or sale of such rights, options, warrants or convertible
securities plus the total consideration, if any, payable to the Company upon
exercise or conversion thereof (the "Total Consideration") by (ii) the number of
additional shares of Common Stock issuable upon exercise or conversion of such
securities) less than the then Per Share Warrant Price in effect on the date of
such issuance or sale, the Per Share Warrant Price shall be adjusted as of the
date of such issuance or sale so that the same shall equal the price determined
by dividing (i) the sum of (A) the number of shares of Common Stock outstanding
on the date of such issuance or sale multiplied by the Per Share Warrant Price
plus (B) the Total Consideration by (ii) the number of shares of Common Stock
outstanding on the date of such issuance or sale plus the maximum number of
additional shares of Common Stock issuable upon exercise or conversion of such
securities.
(e) No adjustment in the Per Share Warrant Price shall be required in the
case of (i) the issuance of shares of Common Stock upon the exercise of options
which have been or may be granted under all of the Company's Stock Option Plans
as in effect on the date hereof, or (ii) the issuance of shares pursuant to the
exercise of this Warrant.
(f) In case of any consolidation or merger to which the Company is a party
other than a merger or consolidation in which the Company is the continuing
corporation, or in case of any sale or conveyance to another entity of the
property of the Company as an entirety or substantially as an entirety, or in
the case of any statutory exchange of securities with another entity (including
any exchange effectuated in connection with a merger of any other corporation
with the Company), the Holder of this Warrant shall have the right thereafter to
convert such Warrant into the kind and amount of securities, cash or other
property which he would have owned or have been entitled to receive immediately
after such consolidation, merger, statutory exchange, sale or conveyance had
this Warrant been exercised immediately prior to the effective date of such
consolidation, merger, statutory exchange, sale or conveyance and in any such
case, if necessary, appropriate adjustment shall be made in the application of
the provisions set forth in this Section 3 with respect to the rights and
interests thereafter of the Holder of this Warrant to the end that the
provisions set forth in this Section 3 shall thereafter correspondingly be made
applicable, as nearly as may reasonably be, in relation to any shares of stock
or other securities or property thereafter deliverable on the exercise of this
Warrant. The above provisions of this
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<PAGE>
3(f) shall similarly apply to successive consolidations, mergers, statutory
exchanges, sales or conveyances. Notice of any such consolidation, merger,
statutory exchange, sale or conveyance, and of said provisions so proposed to be
made, shall be mailed to the Holder not less than 20 days prior to such event. A
sale of all or substantially al) of the assets of the Company for a
consideration consisting primarily of securities shall be deemed a consolidation
or merger for the foregoing purposes.
(g) No adjustment in the Per Share Warrant Price shall be required unless
such adjustment would require an increase or decrease of at least $0.05 per
share of Common Stock; provided, however, that any adjustments which by reason
of this (g) are not required to be made shall be carried forward and taken into
account in any subsequent adjustment; and provided further, however, that
adjustments shall be required and made in accordance with the provisions of this
Section 3 (other than this (g)) not later than such time as may be required in
order to preserve the tax-free nature of a distribution to the Holder of this
Warrant or Common Stock. All calculations under this Section 3 shall be made to
the nearest cent or to the nearest 1/1OOth of a share, as the case may be.
Anything in this Section 3 to the contrary notwithstanding, the Company shall be
entitled to make such reductions in the Per Share Warrant Price, in addition to
those required by this Section 3, as it in its discretion shall deem to be
advisable in order that any stock dividend, subdivision of shares or
distribution of rights to purchase stock or securities convertible or
exchangeable for stock hereafter made by the Company to its shareholders shall
not be taxable.
(h) Whenever the Per Share Warrant Price is adjusted as provided in this
Section 3 and upon any modification of the rights of the Holder of this Warrant
in accordance with this Section 3, the Company shall, at its own expense, within
ten (10) days of such adjustment or modification, deliver to the holder of this
Warrant a certificate of the Principal Financial Officer of the Company setting
forth the Per Share Warrant Price and the number of Warrant Shares after such
adjustment or the effect of such modification, a brief statement of the facts
requiring such adjustment or modification and the manner of computing the same.
In addition, within ninety (90) days of the end of the Company's fiscal year
next following any such adjustment or modification, the Company shall, at its
own expense, deliver to the Holder of this Warrant a certificate of a firm of
independent public accountants of recognized standing selected by the Board of
Directors (who may be the regular auditors of the Company) setting forth the
same information as required by such Principal Financial Officer Certificate.
(i) If the Board of Directors of the Company shall declare any dividend or
other distribution in cash with respect to the Common Stock, other than out of
earned surplus, the Company shall mail notice thereof to the Holder not less
than 10 days prior to the record date fixed for determining shareholders
entitled to participate in such dividend or other distribution.
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4. Fully Paid Stock; Taxes.
The Company agrees that the shares of the Common Stock represented by each
and every certificate for Warrant Shares delivered on the exercise of this
Warrant in accordance with the terms hereof shall, at the time of such delivery,
be validly issued and outstanding, fully paid and non-assessable and not subject
to preemptive rights or other contractual rights to purchase securities of the
Company, and the Company will take all such actions as may be necessary to
assure that the par value or stated value, if any, per share of the Common Stock
is at all times equal to or less than the then Per Share Warrant Price. The
Company further covenants and agrees that it will pay, when due and payable, any
and all federal and state stamp, original issue or similar taxes which may be
payable in respect of the issue of any Warrant Share or certificate therefor.
5. Registration Under Securities Act of 1933.
(a) The Company agrees that if, at any one time during the period commencing
on June 6, 1996 and ending on June 6, 2001, the Holder and/or the Holders of any
other Warrants and/or Warrant Shares who or which shall hold not less than 50%
of the Warrants and/or Warrant Shares outstanding at such time and not
previously sold pursuant to this Section 5, request that the Company file a
registration statement under the Securities Act of 1933 (the "Act") covering all
or any of the Warrant Shares, the Company will (i) promptly notify the Holder
and all other registered holders, if any, of other Warrant and/or Warrant Shares
that such registration statement will be filed and that the Warrant Shares which
are then held, and/or which may be acquired upon the exercise of Warrants, by
the Holder and such holders will be included in such registration statement at
the Holder's and such Holders' request, (ii) cause such registration statement
to cover all Warrant Shares which it has been so requested to include, (iii) use
its best efforts to cause such registration statement to become effective as
soon as practicable and to remain effective and current and (iv) take all other
action necessary under any federal or state law or regulation of any
governmental authority to permit all Warrant Shares which it has been so
requested to include in such registration statement to be sold or otherwise
disposed of and will maintain such compliance with each such federal and state
law and regulation of any governmental authority for the period necessary for
the Holder and such Holders to effect the proposed sale or other disposition.
(b) The Company agrees that if, at any time and, from time to time during the
period commencing on June 6, 1996 and ending on June 6, 2001, the Board of
Directors of the Company shall authorize the filing of a registration statement
other than on Form S-3 (any such registration statement being sometimes
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<PAGE>
hereinafter called a "Subsequent Registration Statement") under the Act
(otherwise than pursuant to Section 5(a) hereof) in connection with the proposed
offer of any of its securities by it or any of its shareholders, the Company
will (i) promptly notify the Holder and all other registered Holders, if any, of
other Warrants and/or Warrant Shares that such Subsequent Registration Statement
will be filed and that the Warrant Shares which are then held, and/or which may
be acquired upon the exercise of the Warrants, by the Holder and such Holders
will be included in such Subsequent Registration Statement at the Holder's and
such Holders' request, (ii) cause such Subsequent Registration Statement to
cover all Warrant Shares which it has been so requested to include, (iii) cause
such Subsequent Registration Statement to become effective as soon as
practicable and to remain effective and current and (iv) take all other action
necessary under any federal or state law or regulation of any governmental
authority to permit all Warrant Shares which it has been so requested to include
in such Subsequent Registration Statement to be sold or otherwise disposed of by
the Holders and will maintain such compliance with each such federal and state
law and regulation of any governmental authority for the period necessary for
the Holder and such Holders to effect the proposed sale or other disposition.
(c) Whenever the Company is required pursuant to the provisions of this
Section 5 to include Warrant Shares in a registration statement, the Company
shall (i) furnish each Holder of any such Warrant Shares and each underwriter of
such Warrant Shares with such copies of the prospectus, including the
preliminary prospectus, conforming to the Act (and such other documents as each
such Holder or each such underwriter may reasonably request) in order to
facilitate the sale or distribution of the Warrant Shares, (ii) use its best
efforts to register or qualify such Warrant Shares under the blue sky laws (to
the extent applicable) of such jurisdiction or jurisdictions as the Holders of
any such Warrant Shares and each underwriter of Warrant Shares being sold by
such Holders shall reasonably request and (iii) take such other actions as may
be reasonably necessary or advisable to enable such Holders and such
underwriters to consummate the sale or distribution in such jurisdiction or
jurisdictions in which such Holders shall have reasonably requested that the
Warrant Shares be sold.
(d) The Company shall pay all expenses incurred in connection with any
registration or other action pursuant to the provisions of this Section,
including the attorneys' fees and expenses of the Holder(s) of the Warrant
Shares covered by such registration incurred in connection with such
registration or other action, other than underwriting discounts and applicable
transfer taxes relating to the Warrant Shares.
(e) The market price of Common Stock shall mean the price of a share of
Common Stock on the relevant date, determined on the basis of the last reported
sale price of the Common Stock as reported on the NASDAQ National Market System
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("NASDAQ"), or, if there is no such reported sale on the day in question, on the
basis of the average of the closing bid and asked quotations as so reported, or,
if the Common Stock is not listed on NASDAQ, the last reported sale price of the
Common Stock on such other national securities exchange upon which the Common
Stock is listed, or, if the Common Stock is not listed on any national
securities exchange, on the basis of the average of the closing bid and asked
quotations on the day in question in the over-the-counter market as reported by
the National Association of Securities Dealers' Automated Quotations System, or,
if not so quoted, as reported by National Quotation Bureau, Incorporated or a
similar organization.
6. Indemnification.
(a) The Company agrees to indemnify and hold harmless each selling holder of
Warrant Shares and each person who controls any such selling holder within the
meaning of Section 15 of the Act, and each and all of them, from and against any
and all losses, claims, damages, liabilities or actions, joint or several, to
which any selling holder of Warrant Shares or they or any of them may become
subject under the Act or otherwise and to reimburse the persons indemnified as
above for any legal or other expenses (including the cost of any investigation
and preparation) incurred by them in connection with any litigation or
threatened litigation, whether or not resulting in any liability, but only
insofar as such losses, claims, damages, liabilities or actions arise out of, or
are based upon (i) any untrue statement or alleged untrue statement of a
material fact contained in any registration statement pursuant to which Warrant
Shares were registered under the Act (hereinafter called a "Registration
Statement"), any preliminary prospectus, the final prospectus or any amendment
or supplement thereto (or in any application or document filed in connection
therewith) or document executed by the Company based upon written information
furnished by or on behalf of the Company filed in any jurisdiction in order to
register or qualify the Warrant Shares under the securities laws thereof or the
omission or alleged omission to state therein a material fact required to be
stated therein or necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading, or (ii) the employment
by the Company of any device, scheme or artifice to defraud, or the engaging by
the Company in any act, practice or course of business which operates or would
operate as a fraud or deceit, or any conspiracy with respect thereto, in which
the Company shall participate, in connection with the issuance and sale of any
of the Warrant Shares; provided, however, that (i) the indemnity agreement
contained in this (a) shall not extend to any selling holder of Warrant
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<PAGE>
Shares in respect of any such losses, claims, damages, liabilities or actions
arising out of, or based upon, any such untrue statement or alleged untrue
statement, or any such omission or alleged omission, if such statement or
omission was based upon and made in conformity with information furnished in
writing to the Company by a selling holder of Warrant Shares specifically for
use in connection with the preparation of such Registration Statement, any final
prospectus, any preliminary prospectus or any such amendment or supplement
thereto. The Company agrees to pay any legal and other expenses for which it is
liable under this (a) from time to time (but not more frequently than monthly)
within 30 days after its receipt of a bill therefor.
(b) Each selling holder of Warrant Shares, severally and not jointly, will
indemnify and hold harmless the Company, its directors, its officers who shall
have signed the Registration Statement and each person, if any, who controls the
Company within the meaning of Section 15 of the Act to the same extent as the
foregoing indemnity from the Company, but in each case to the extent, and only
to the extent, that any statement in or omission from or alleged omission from
such Registration Statement, any final prospectus, any preliminary prospectus or
any amendment or supplement thereto was made in reliance upon information
furnished in writing to the Company by such selling holder specifically for use
in connection with the preparation of the Registration Statement, any final
prospectus or the preliminary prospectus or any such amendment or supplement
thereto; provided, however, that the obligation of any holder of Warrant Shares
to indemnify the Company under the provisions of this (b) shall be limited to
the product of the number of Warrant Shares being sold by the selling holder and
the market price of the Common Stock on the date of the sale to the public of
these Warrant Shares. Each selling holder of Warrant Shares agrees to pay any
legal and other expenses for which it is liable under this (b) from time to time
(but not more frequently than monthly) within 30 days after receipt of a bill
therefor.
(c) If any action is brought against a person entitled to indemnification
pursuant to the foregoing Sections 6 (a) or (b) (an "indemnified party") in
respect of which indemnity may be sought against a person granting
indemnification (an "indemnifying party") pursuant to such Sections, such
indemnified party shall promptly notify such indemnifying party in writing of
the commencement thereof; but the omission so to notify the indemnifying party
of any such action shall not release the indemnifying party from any liability
it may have to such indemnified party otherwise than on account of the indemnity
agreement contained in (a) or (b) of this Section 6. In case any such action is
brought against an indemnified party and it notifies an indemnifying party of
the commencement thereof, the indemnifying party against which a claim is to be
made will be entitled to participate therein at its own expense and, to the
extent that it may wish, to assume at its own expense the defense thereof, with
counsel reasonably satisfactory to such indemnified party; provided, however,
that (i) if the defendants in any such action include both the indemnified party
and the indemnifying party and the indemnified party shall have reasonably
concluded based upon advice of counsel that there may be legal defenses
available to it and/or other indemnified parties which are different from or
additional to those available to the indemnifying party, the indemnified party
shall have the right to select separate counsel to
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assume such legal defenses and otherwise to participate in the defense of such
action on behalf of such indemnified party or parties and (ii) in any event, the
indemnified party shall be entitled to have counsel chosen by such indemnified
party participate in, but not conduct, the defense at the expense of the
indemnifying party. Upon receipt of notice from the indemnifying party to such
indemnified party of its election so to assume the defense of such action and
approval by the indemnified party of counsel, the indemnifying party will not be
liable to such indemnified party under this Section 6 for any legal or other
expenses subsequently incurred by such indemnified party in connection with the
defense thereof unless (i) the indemnified party shall have employed such
counsel in connection with the assumption of legal defenses in accordance with
proviso (i) to the next preceding sentence (it being understood, however, that
the indemnifying party shall not be liable for the expenses of more than one
separate counsel), (ii) the indemnifying party shall not have employed counsel
reasonably satisfactory to the indemnified party to represent the indemnified
party within a reasonable time after notice of commencement of the action or
(iii) the indemnifying party has authorized the employment of counsel for the
indemnified party at the expense of the indemnifying party. An indemnifying
party shall not be liable for any settlement of any action or proceeding
effected without its written consent.
(d) In order to provide for just an equitable contribution in circumstances
in which the indemnity agreement provided for in (a) of this Section 6 is
unavailable to a selling holder of Warrant Shares in accordance with its terms,
the Company and the selling holder of Warrant Shares shall contribute to the
aggregate losses, claims, damages and liabilities, of the nature contemplated by
said indemnity agreement, incurred by the Company and the selling holder of
Warrant Shares, in such proportions as is appropriate to reflect the relative
benefits received by the Company and the selling holder of Warrant Shares from
any offering of the Warrant Shares; provided, however, that if such allocation
is not permitted by applicable law or if the indemnified party failed to give
the notice required under (c) of this Section 6, then the relative fault of the
Company and the selling holder of Warrant Shares in connection with the
statements or omissions which resulted in such losses, claims, damages and
liabilities and other relevant equitable considerations will be considered
together with such relative benefits.
(e) The respective indemnity and contribution agreements by the Company and
the selling holder of Warrant Shares in section (a), (b), (c) and (d) of this
Section 6 shall remain operative and in full force and effect regardless of (i)
any investigation made by any selling holder of Warrant Shares or by or on
behalf of any person who controls such selling holder or by the Company or any
controlling person of the Company or any director or any officer of the Company,
(ii) payment for any of the Warrant Shares or (iii) any termination of this
Agreement, and shall survive the delivery of the Warrant Shares, and any
successor of the Company, or of any selling holder of Warrant Shares, or of any
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person who controls the Company or of any selling holder of Warrant Shares, as
the case may be, shall be entitled to the benefit of such respective indemnity
and contribution agreements. The respective indemnity and contribution
agreements by the Company and the selling holder of Warrant Shares contained in
(a), (b), (c) and (d) of this Section 6 shall be in addition to any liability
which the Company and the selling holder of Warrant Shares may otherwise have.
7. Limited Transferability.
(a) This Warrant is not transferable or assignable by the Holder except (i)
to Ladenburg, Thalmann & Co. Inc., any successor firm or corporation of
Ladenburg, Thalmann & Co. Inc., (ii) to any of the officers or employees of
Ladenburg, Thalmann & Co. Inc. or of any such successor firm or (iii) in the
case of an individual, pursuant to such individual's last will and testament or
the laws of descent and distribution and is so transferable only upon the books
of the Company which it shall cause to be maintained for the purpose. The
Company may treat the registered holder of this Warrant as he or it appears on
the Company's books at any time as the Holder for all purposes. The Company
shall permit any holder of a Warrant or his duly authorized attorney, upon
written request during ordinary business hours, to inspect and copy or make
extracts from its books showing the registered holders of Warrants. All Warrants
will be dated the same date as this Warrant.
(b) By acceptance hereof, the Holder represents and warrants that this
Warrant is being acquired, and all Warrant Shares to be purchased upon the
exercise of this Warrant will be acquired, by the Holder solely for the account
of such Holder and not with a view to the fractionalization and distribution
thereof and will not be sold or transferred except in accordance with the
applicable provisions of the Act and the rules and regulations of the Securities
and Exchange Commission promulgated thereunder, and the Holder agrees that
neither this Warrant nor any of the Warrant Shares may be sold or transferred
except under cover of a Registration Statement under the Act which is effective
and current with respect to such Warrant Shares or pursuant to an opinion, in
form and substance reasonably acceptable to the Company's counsel, that
registration under the Act is not required in connection with such sale or
transfer. Any Warrant Shares issued upon exercise of this Warrant shall bear the
following legend:
"The Securities represented by this certificate have not been registered
under the Securities Act of 1933 and are restricted securities within the
meaning thereof. Such securities may not be sold or transferred except pursuant
to a Registration Statement under such Act which is effective and current with
respect to such securities or pursuant to an opinion of counsel reasonably
satisfactory to the issuer of such securities that such sale or transfer is
exempt from the registration requirements of such Act."
11
<PAGE>
8. Loss, Etc., of Warrant.
Upon receipt of evidence satisfactory to the Company of the loss, theft,
destruction or mutilation of this Warrant, and of indemnity reasonably
satisfactory to the Company, if lost, stolen or destroyed, and upon surrender
and cancellation of this Warrant, if mutilated, and upon reimbursement of the
Company's reasonable incidental expenses, the Company shall execute and deliver
to the Holder a new Warrant of like date, tenor and denomination.
9. Warrant Holder Not Shareholders.
Except as otherwise provided herein, this Warrant does not confer upon the
Holder any right to vote or to consent to or receive notice as a shareholder of
the Company, as such, in respect of any matters whatsoever, or any other rights
or liabilities as a shareholder, prior to the exercise hereof.
10. Communication.
No notice or other communication under this Warrant shall be effective
unless, but any notice or other communication shall be effective and shall be
deemed to have been given if, the same is in writing and is mailed by
first-class mail, postage prepaid, addressed to:
(a) the Company at 2500 DeKalb Pike, P.O. Box 511, Norristown, PA 19404-0511,
or such other address as the Company has designated in writing to the Holder; or
(b) the Holder at 540 Madison Avenue, 10th Floor, New York, NY 10022, or such
other address as the Holder has designated in writing to the Company.
11. Headings.
The headings of this Warrant have been inserted as a matter of convenience
and shall not affect the construction hereof.
12. Applicable Law.
This Warrant shall be governed by and construed in accordance with the laws
of the State of New York without giving effect to the principles of conflicts of
law thereof.
12
<PAGE>
IN WITNESS WHEREOF, Provident American Corporation has caused this Warrant to be
signed by its Chairman of the Board and its corporate seal to be hereunto
affixed and attested by its Secretary this 18th day of July, 1996.
ATTEST: PROVIDENT AMERICAN CORPORATION
__________________________ By:___________________________
Michael F. Beausang, Jr., Alvin H. Clemens,
Secretary Chairman of the Board
[Corporate Seal]
SUBSCRIPTION
The undersigned, , pursuant to the provisions of the foregoing Warrant,
hereby agrees to subscribe for and purchase shares of the Common Stock of
Provident American Corporation covered by said Warrant, and makes payment
therefor in full at the price per share provided by said Warrant.
Dated: Signature:
Address:
13
<PAGE>
SUBSCRIPTION FOR CASHLESS WARRANT SUBSCRIPTION
The undersigned, , pursuant to the provisions of the foregoing Warrant,
hereby agrees to subscribe to that number of shares of the Common Stock as are
issuable in accordance with the formula set forth in paragraph l(b) of the
Warrant, and makes payment therefor in full by surrender and delivery of this
Warrant.
Dated: Signature:
Address:
ASSIGNMENT
FOR VALUE RECEIVED, hereby sells, assigns and transfers unto the foregoing
Warrant and all rights evidenced thereby, and does irrevocably constitute and
appoint , attorney, to transfer said Warrant on the books of Provident
American Corporation.
Dated: Signature:
Address:
PARTIAL ASSIGNMENT
------------------
FOR VALUE RECEIVED, hereby assigns and transfers unto the right to
purchase shares of the Common Stock of Provident American Corporation by the
foregoing Warrant, and a proportionate part of said Warrant and the rights
evidenced hereby, and does irrevocably constitute and appoint ,
attorney, to transfer that part of said Warrant on the books of Provident
American Corporation.
Dated: Signature:
Address:
14
<PAGE>
FIELD
MARKETING AND CONSULTING AGREEMENT
THIS AGREEMENT ("Marketing and Consulting Agreement"), dated as
of the 18th day of June, 1996, with an effective date as set forth herein, is
made and entered into by and between PROVIDENT INDEMNITY LIFE INSURANCE COMPANY,
a stock life insurance company domiciled in the Commonwealth of Pennsylvania
(hereinafter called the "PILIC"), and RICHARD E. FIELD ("Field").
BACKGROUND
A. PILIC underwrites and administers certain life and health insurance
programs and Field markets such programs.
B. PILIC and Field are desirous of entering into a marketing and
consulting agreement reflecting the rights and obligations of the parties with
respect to the marketing of the policies underwritten and administered by PILIC
(hereinafter called "policies").
C. The parties mutually agree that this Marketing and Consulting
Agreement, including Amendments and Exhibits thereto, if any, shall constitute
the full and complete embodiment of the intentions of the parties regarding the
marketing of all Policies.
NOW, THEREFORE, for and in consideration of these premises and of the
mutual covenants and agreements hereinafter set forth, the parties hereto agree
as follows:
1. Duties and Responsibilities of Field; Exclusivity.
a. Field shall provide consulting services exclusively to PILIC
and PILIC's wholly-owned subsidiary, Union Benefit Life Insurance Company
("UBLIC"), and other subsidiaries and affiliates of PILIC and UBLIC, with
respect to the marketing and sale of the health insurance products of PILIC and
UBLIC which are presently being marketed under the names "THE PROVIDENT
SOLUTION" and "HEALTHQUEST". In connection therewith, Field agrees to devote his
full-time and best efforts to the business of PILIC and UBLIC during the term
of this Agreement.
b. Field's consulting duties hereunder shall be rendered in Field's
capacity as an independent contractor, and Field shall not be considered an
agent, employee, partner, or joint venturer of PILIC or any of its subsidiaries
or affiliates.
<PAGE>
c. Field shall indemnify and hold PILIC harmless against any and
all claims, actions, charges and expenses, including court costs and attorney's
fees, and against any and all liabilities, judgments and awards which PILIC may
sustain as a result of: (i) Field's gross negligence or willful misconduct, (ii)
as a result of Field's willful breach of a material term or condition of this
Agreement, and (iii) the failure of Field to comply with the provisions of
Paragraph 2.c hereof.
2. Compensation to Field.
a. For and during the term of this Agreement, Field shall be paid
a monthly consulting fee of Twenty Five Thousand ($25,000) Dollars ("Consulting
Fee").
b. Field shall pay all of his direct expenses, including but not
limited to travel, meals, lodging, postage, printing, secretarial and similar
administrative expenses, and Field agrees that a portion of the Consulting Fee
has been provided for the purpose of payment of such expenses.
c. Field shall be responsible for the payment of all taxes of any
kind whatsoever arising as a result of the payment of the Consulting Fee or any
other payments made by PILIC to Field hereunder, including but not limited to
federal, state, and local income and employment taxes. Field agrees to and does
hereby indemnify and hold PILIC, UBLIC, and their subsidiaries and affiliates,
successors and assigns, free, clear and harmless from and against all
liabilities, claims, demands, actions or causes of action arising as a result
of Field's failure to pay, or PILIC's failure to deduct or withhold, such taxes.
3. Term; Termination; Payments Upon Termination.
a. Term. Unless sooner terminated as herein provided, this
Agreement shall continue in effect for a term of three (3) years from the
Effective Date (as hereinafter defined).
b. Termination. This Agreement:
(1) Shall automatically terminate in the event that in any
calendar year during the term of this Agreement, PILIC does not realize
annualized premiums from the sale of "THE PROVIDENT SOLUTION" and the
"HEALTHQUEST" insurance policies equal to or greater than $20 million during
such calendar year.
(2) Shall automatically terminate as of the date of Field's
death.
(3) Shall terminate in the event of the Permanent Disability
of Field. For purposes of this Agreement, the term "Permanent Disability" shall
mean the first to occur of the receipt of a certification of a board certified
specialist approved by PILIC that Field is permanently disabled, the receipt by
Field of benefits under a disability insurance policy, or Field's failure or
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<PAGE>
inability to perform his duties hereunder due to illness or other incapacity
and such illness or incapacity shall continue for a period of more than 180
days.
(4) May be terminated by PILIC upon 30 days' prior written
notice to Field, such termination to become effective as provided in the
written notice:
(a) if Field shall fail or become unable to perform any
of his duties hereunder due to Permanent Disability; or
(b) if Field shall breach or violate any material
provisions of this Agreement, which breach or violation shall not be cured
within 10 days after written notice thereof to Field.
(5) May be terminated without cause by PILIC by written
notice to Field, and such termination shall become effective as provided in the
notice, provided, however, that upon such termination, Field shall be entitled
to the termination compensation payments described in Paragraph 3.c below.
(6) May be terminated by Field upon thirty (30) days' prior
written notice to PILIC.
c. Payments Upon Termination. In the event of the termination of
this Agreement:
(1) By reason of Field's failure to produce annualized
premium as set forth in subparagraph a.(1) above, no further payments shall be
due and payable by PILIC hereunder
(2) By reason of Field's death, PILIC shall make all
payments through the end of the term of this Agreement to Field's personal
representative.
(3) By reason of Field's Permanent Disability (as defined
above), PILIC shall make payments under this Agreement for a period of up to
six (6) months following the date of the determination of Field's Permanent
Disability or through the end of the term of the Agreement, whichever is
shorter.
(4) For cause, as set forth in subparagraph 3.b.(4) above,
no further payments shall be due and payable by PILIC hereunder.
(5) Without cause, as set forth in subparagraph 3.b.(5)
above, PILIC shall make all payments through the end of the term of this
Agreement.
(6) By Field, as set forth in subparagraph 3.b.(6) above, no
further payments shall be due and payable by PILIC hereunder.
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<PAGE>
4. Covenant Not To Compete: Nonsolicitation; Proprietary Information;
Confidentiality.
a. During the term of this Agreement and (i) for a period of one (1)
your after the termination of this Agreement if terminated by Field, or (ii)
for a period of one (1) year after the termination of this Agreement if
terminated by PILIC, Field shall not directly or indirectly solicit former
policyholders, customers, prospects, or leads which Field solicited or knew of
during the term of this Agreement for the purpose of replacing coverage with
another insurer when such customer purchased a policy or contract from PILIC or
any of its affiliated companies, nor shall Field reassign any interest in the
proceeds of any policy or contract which any policyholder or customer purchased
from PILIC to any entity or person other than the assignee designated under the
initial assignment.
b. Field shall not, without the prior written consent of PILIC,
directly or indirectly, use or, except as required by law, disclose or furnish
to any person, company, or other entity at any time, both during and after the
term of this Agreement, any Confidential Information (as defined herein).
"Confidential Information" means information not generally known outside of
PILIC and which relates to demographic data, marketing research methods,
customer lists, call-back lists, lists or names of policyowners, unworked leads,
unsold leads, program summaries, narratives, sample contracts, sales kits,
sales aids, trade secrets, and any other proprietary information of PILIC or
any other association or entity for whom Field has acted or with respect to
whom solicitation has been made.
c. During the term of this Agreement and (i) for a period of one (1)
year after the termination of this Agreement if terminated by Field or PILIC,
Field shall not, without the prior written consent of PILIC, directly or
indirectly, engage, participate or invest as a partner, joint venturer,
shareholder, employee, officer, director or otherwise, in any business which is
competitive with the business conducted by PILIC in any geographical territory
in which Field has been working while engaged by PILIC.
d. The covenants set forth in this Paragraph 4 shall not be held
invalid or unenforceable because of the scope of the territory or actions
subject thereto or restricted hereby or the period of time within which such
covenants, respectively, are operative, but the maximum territory and action
subject to such covenants, and the period of time within which such covenants,
respectively, are enforceable, shall be subject to any determination by a final
judgment of any court which has jurisdiction over the parties and subject
matter.
e. Field acknowledges that Field's compliance with the provisions
of this Paragraph 4 is necessary to protect both the existing goodwill and
other proprietary rights of PILIC and all goodwill and relationships that may
be acquired or enhanced during the course of Field's engagement, and all
Confidential Information which may come into existence or to which Field may
have access during Field's engagement, that Field will become conversant with
certain of PILIC's affairs, operations, customers and Confidential Information
and data by means of Field's engagement, and that Field's failure to comply
- 4 -
<PAGE>
with the provisions of this Paragraph 4 will result in irreparable and
continuing damage to PILIC and to the business of PILIC for which there will be
no adequate remedy at law. In the event Field shall fail to comply with the
provisions of this Paragraph 4, PILIC shall be entitled to, and Field shall not
oppose, any application by PILIC for preliminary or permanent injunctive relief,
damages and such other and further relief as may be deemed proper and necessary
by the courts in order to ensure Field's compliance with the provisions of this
Paragraph 4.
5. Effective Date. This Agreement shall have an effective date of
January 1, 1996 (the "Effective Date").
6. Security for Obligations.
a. Concurrent with the execution of this Agreement, Field is
entering into a Stock Pledge Agreement pursuant to which Field is pledging to
PILIC 65,000 shares of the common stock, $.10 par value, of Provident American
Corporation (the "PAMCO Shares"), together with all dividends issued or other
distributions with respect thereto as security for the payment of any
indebtedness of Field to PILIC, and is also entering into a Stock Option
Agreement with Provident American Corporation ("PAMCO") pursuant to which Field
is being granted options to purchase additional PAMCO shares (the "PAMCO
Options").
b. Field hereby agrees to pledge the PAMCO Shares and the PAMCO
Options to PILIC as security for Field's Obligations set forth in this
Agreement, as well as with respect to the indebtedness referred to in Paragraph
6(a) above.
c. Field agrees that the PAMCO Options shall be treated as
Collateral, as such term is defined in the Stock Pledge Agreement, and that
PILIC shall have the right to exercise all rights and remedies under the Stock
Pledge Agreement in the event that Field breaches any material term or
condition of this Agreement, unless such breach is cured within ten (10) days'
written notice thereof by PILIC.
7. Miscellaneous.
a. Entire Agreement; Amendments; and Waivers. This Agreement
constitutes the entire understanding and agreement among the parties hereto
relative to the subject matter hereof. Any amendments to the Agreement must be
in writing, signed by each party hereto. The failure of any party hereto to
enforce at any time any provision of this Agreement shall not be construed to
be a waiver of the provision, nor in any way to affect the validity of this
Agreement or any part hereof or the right of such party thereafter to enforce
each and every such provision. No waiver of any breach of this Agreement shall
be held to constitute a wavier of any other or subsequent breach.
b. Assignment. This Agreement shall not be assignable by either
party without the prior consent of the other party, except that without the
prior written consent of the other party:
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<PAGE>
(1) It may be assigned by PILIC to any person or entity
acquiring all or substantially all of the assets thereof; and
(2) It may be assigned by Field as to his right to payment,
but not as to any of his obligations hereunder; and
(3) PILIC shall have the right to assign all or any portion
of its rights hereunder to any other affiliate or subsidiary of PILIC.
c. Governing Law; Submission to Jurisdiction. This Agreement
shall be governed by and construed in accordance with the laws of the
Commonwealth of Pennsylvania. The parties hereto hereby submit to the
nonexclusive jurisdiction of the United States District Court for the Eastern
District of Pennsylvania and of any state court sitting in Montgomery County,
Pennsylvania, for purposes of all legal proceedings arising out of or relating
to this Agreement or the transactions contemplated hereby. Each of the parties
waives, to the fullest extent permitted by law, any objection which he may now
or hereafter have to the laying of the venue of any such proceeding brought in
such a court and any claim that any such proceeding brought in such a court has
been brought in an inconvenient forum. Each of the parties hereto irrevocably
consents to service of process in the manner provided for notices in
subparagraph d. below. Nothing in this Agreement will affect the right of any
party to this Agreement to serve process in any other manner permitted by law.
d. Notices. Any notices required by this Agreement shall be
deemed to have been adequately given if delivered in person or sent by
certified or registered mail to the receiving party at its address shown below
or such other address as may from time to time be designated, in writing, to
the other party:
To Field: Mr. Richard E. Field
134 Medinah Drive
Blue Bell, PA 19422
To PILIC: Provident Indemnity Life Insurance Company
2500 DeKalb Pike, PRO. Box 511
Norristown, PA 19401
Attention: John A. Muller, III,
Chief Operating Officer
e. Successors and Assigns. The Agreement shall be binding upon
and inure to the benefit of the parties hereto and their respective heirs,
administrators, successors and assigns.
f. Partial Invalidity. In case any one or more of the provisions
contained in this Agreement shall for any reason be held to be invalid, illegal,
or unenforceable in any respect, such invalidity, illegality, or
unenforceability shall not affect any other provision hereof, and this Agreement
shall be construed as if such invalid, illegal, or unenforceable provision had
never been contained herein, unless the deletion of the provision of provisions
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<PAGE>
would result in such a material change as to cause completion of the
transactions contemplated herein to be unreasonable.
IN WITNESS WHEREOF, the parties hereto have either individually or by
their duly authorized officers executed and delivered these presents in
duplicate effective the day and year first above written.
PROVIDENT INDEMNITY LIFE
Attest: INSURANCE COMPANY
- ----------------------------------- By:-----------------------------
Michael F. Beausang, Jr.,Secretary Alvin H. Clemens, President
Date: June 18, 1996
------------------------------
Witness: RICHARD E. FIELD
By:----------------------------
- ------------------------ Richard E. Field
Date: June 18, 1996
------------------------------
<PAGE>
OPTION/WARRANT NO.:
STOCK OPTION/WARRANT AGREEMENT
THIS STOCK OPTION/WARRANT AGREEMENT ("Agreement") dated as of the 1st
day of January, 1996, between PROVIDENT AMERICAN CORPORATION, a Pennsylvania
corporation ("PAMCO") and RICHARD E. FIELD, an individual ("Field").
BACKGROUND
A. PAMCO's wholly-owned life insurance subsidiary, Provident Indemnity
Life Insurance Company ("PILIC"), and Field have entered into a marketing and
consulting agreement with respect to the marketing of certain life and health
insurance programs/products of PILIC by Field (the "Marketing Agreement").
B. In connection with the Marketing Agreement, PAMCO has agreed to
issue options to Field on an annual basis to purchase shares of PAMCO common
stock, $.10 par value per share (the "PAMCO Stock"), based upon the amount of
annualized health insurance premiums realized by PILIC as a result of the sale
of its products "THE PROVIDENT SOLUTION" and "HEALTHQUEST" ("Annualized
Premium").
NOW THEREFORE, in consideration of the mutual covenants herein
contained, and intending to be legally bound hereby, the parties agree as
follows:
1. Grant of the Option. Subject to the terms and conditions set
forth in this Agreement and any adjustment required pursuant to Paragraph 5
hereof, PAMCO grants to Field an option (the "Option") to purchase shares of
PAMCO Stock (the "Option Shares") at a price equal to the Market Price of the
PAMCO Stock as of the applicable date, as follows:
a. For the one-year period commencing on January 1, 1996 and
ending on December 31, 1996, provided that PILIC has realized at least $35
million of Annualized Premium (as defined herein), PAMCO agrees to grant to
Field as of December 31, 1996 an Option to purchase 100,000 shares of PAMCO
Stock at the Market Price on January 1, 1996, subject to adjustment as provided
in Paragraph 5 hereof. However, in the event that PILIC has not realized at
least $35 million of Annualized Premium which is in force on December 31, 1996,
no Options shall be issued for the year 1996.
b. For the one-year period commencing on January 1, 1997 and
ending on December 31, 1997, provided that PILIC has realized at least $45
million of new Annualized Premium (as defined herein), PAMCO agrees to grant to
Field as of December 31, 1997 an Option to purchase 100,000 shares of PAMCO
Stock at the Market Price on January 1, 1997, subject to adjustment as provided
in Paragraph 5 hereof. However, in the event that PILIC has not realized at
<PAGE>
least $45 million of new Annualized Premium which is in force on December 31,
1997, no Options shall be issued for the year 1997.
c. For the one-year period commencing on January 1, 1998 and
ending on December 31, 1998, provided that PILIC has realized at least $50
million of new Annualized Premium (as defined herein), PAMCO agrees to grant to
Field as of December 31, 1998 an Option to purchase 100,000 shares of PAMCO
Stock at the Market Price on January 1, 1998, subject to adjustment as provided
in Paragraph 5 hereof. However, in the event that PILIC has not realized at
least $50 million of new Annualized Premium which is in force on December 31,
1998, no Options shall be issued for the year 1998.
d. The parties agree that the Annualized Premium amounts set
forth in this Paragraph 1 have been specifically negotiated, that partial or
substantial performance shall not be sufficient for the award of an Option, and
that an Option shall only be issued in the event that the respective targeted
Annualized Premium has been produced and is in force on December 31 of that
year.
As used herein, the term "Market Price" shall mean, with respect to one share
of PAMCO Stock at any date, the average of the daily closing prices for the 30
consecutive business days before the day in question, as adjusted for any stock
dividend, split, combination, or reclassification that took effect during such
30 business day period, or, in case no sales took place on any day in question
during such 30 business day period, the last bid price on such day, in either
case on the principal national securities exchange on which the PAMCO Stock is
then listed or admitted to trading, or on the National Association of
Securities Dealers Automated Quotations System ("NASDAQ"), National Market
System, or, if the PAMCO Stock is not listed or admitted for trading on any
such exchange or on the NASDAQ National Market System on any day in question,
then such price as shall be deemed to be the last bid price quoted on the
NASDAQ interdealer quotation system on such day, or, if the PAMCO Stock is not
listed or admitted for trading on the NASDAQ interdealer quotation system, then
the price shall be deemed to be the last reported bid price on such day as
reported by the National Quotation Bureau, Inc., provided, however, that if the
PAMCO Stock is not traded in such matter that the quotations referred to in this
subsection are available for the period required hereunder, the Market Price
shall be determined in good faith by at least a majority of the members of the
Board of Directors of PAMCO.
2. Conditions and Exercise of the Option.
a. The Options to be granted hereunder shall become
exercisable by Field as of the date of the grant, provided that as of such date
the Annualized Premium for which the Options were granted is then in force. If
the Annualized Premium therefor is not then in force, then the Option with
respect to such Annualized Premium shall be terminated and of no further force
or effect.
b. Subject to the terms and conditions hereof, the Option or
any part thereof may be exercised in accordance with the terms hereof, in whole
or in part, by written notice to PAMCO.
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<PAGE>
c. The notice of exercise shall specify the number of Option
Shares to be purchased, shall acknowledge and agree that such Option Shares are
being purchased for investment and not for distribution or resale, and shall be
accompanied by payment in cash or by certified or bank cashier's check payable
to the order of PAMCO, for the aggregate price of the Option Shares being
purchased. Such exercise shall be effective upon the actual receipt of such
written notice and payment to PAMCO.
d. Field shall have no rights or privileges as a shareholder
of PAMCO with respect to the Option Shares then being purchased until the date
on which a stock certificate representing such Option Shares has been issued to
Field.
e. Upon the partial exercise by Field of any Option herein
granted, upon written notification to PAMCO and the surrender of the Option to
PAMCO, Field shall be entitled to be issued an Option to purchase such lesser
number of Option Shares as Field shall request. The Option granted hereunder
shall expire with respect to any Option Shares as to which Field has not
exercised the Option on or before the Expiration Date (as defined below).
3. Termination of the Option. Unless sooner exercised, the
Options granted hereunder shall expire at 5:00 P.M. five years from the date of
issue (the "Expiration Date").
4. Transfer of the Option. After the date on which Options are
to be granted pursuant to the provisions of Paragraph 1 hereof, the Options
which have been granted shall be freely transferable by Field, to any person or
entity at any time, without condition, by presentation of the Option to PAMCO,
properly endorsed for transfer. In the event that the Option is being
transferred, the owner agrees by holding this Option that the Option, when
endorsed in blank, may be deemed negotiable and that the owner, when this Option
shall have been endorsed, may be treated by PAMCO and all other persons dealing
with the Option as the absolute owner thereof for any purpose, and as the party
entitled to exercise the rights represented by this Option, or to the transfer
thereof on the books of PAMCO, any notice to the contrary notwithstanding. The
form of this Option is exchangeable upon the surrender thereof by Field to PAMCO
for new Options of like tenor representing in the aggregate the right to
purchase the number of Option Shares purchasable under the Option being
exchanged, each such new Option to represent the right to purchase such number
of Option Shares as shall be designated by Field at the time of such surrender,
but not to exceed in the aggregate the number of Option Shares subject hereto.
5. Adjustment. If the number of issued and outstanding shares of
PAMCO Stock changes at any time on or before the Expiration Date as a result of
any recapitalization, stock split, stock dividend, or other change in the
capital structure of PAMCO, the number of Option Shares covered by the Option
shall be increased or decreased in direct proportion to such change in the
number of shares of issued and outstanding PAMCO Stock, and the per share
purchase price for such Option Shares shall be adjusted accordingly so that it
is the substantial equivalent of the purchase price prior to such change.
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<PAGE>
6. Registration. If the registration or qualification of the
Shares subject to the Option under any federal or state law or the consent or
approval of any governmental regulatory body or a national stock exchange is
necessary as a condition of or in connection with the purchase or issuance of
such Shares, PAMCO shall not be obligated to issue or deliver the certificates
representing the Shares as to which the option has been exercised unless and
until such registration, qualification, consent, or approval shall have been
effected or obtained.
7. Field's Obligation. Field, by acceptance of this Agreement,
expressly acknowledges and agrees that: (1) Field will be solely responsible for
all taxes levied by or under federal, state, or municipal authority, to which
Field may be or become subject arising out of or resulting from receipt of any
Option, holding or exercise thereof or holding, sale, transfer, or other
disposition of shares acquired on such exercise; and (2) Field will indemnify
PAMCO and its affiliates, and hold such person harmless, of, from, and against
any and all loss, damage, obligation or liability, and all costs and expenses
(including attorneys' fees) arising as a result of the breach by Field of his
obligations set forth in subsection (1) above.
8. Miscellaneous.
a. Notices. All notices or other communications required or
permitted hereunder shall be in writing and shall be given by confirmed telecopy
or registered mail addressed as follows:
If to PAMCO: Provident American Corporation
Attention: Mr. Alvin H. Clemens
2500 DeKalb Pike, P.O. Box 511
Norristown, PA 19404
If to Field: Richard E. Field
134 Medinah Drive
Blue Bell, PA 19422
or such other address as may from time to time be provided by either party.
b. Governing Law. This Agreement shall be governed by and
construed in accordance with the laws of the Commonwealth of Pennsylvania,
without regard to its rules on conflicts of law.
c. Integration; Modification. This Agreement constitutes the
entire agreement between PAMCO and Field regarding the subject matter hereof,
and supersedes all prior negotiations and agreements, whether oral or written,
between PAMCO and Field with respect to the subject matter of this Agreement.
This Agreement may not be modified except by a written agreement signed by
PAMCO and Field.
d. Severability. In the event of the invalidity or
unenforceability of any part or provision of this Agreement, such invalidity or
unenforceability shall not affect the validity or enforceability of any other
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<PAGE>
part or provision of this Agreement, and the remainder of this Agreement shall
continue in full force and effect in accordance with its terms.
e. Binding Effect. This Agreement shall be binding upon PAMCO
and Field and shall inure to their benefit, and their respective heirs, legal
representatives, successors, and permitted assigns.
IN WITNESS WHEREOF, the parties hereto have placed their hands and
seals as of the day and year first above-written.
PROVIDENT AMERICAN CORPORATION
Attest:
______________________________ By: __________________________________
M. F. Beausang, Jr., Secretary Alvin H. Clemens, President
AGREED AND ACCEPTED THIS ______ DAY OF
__________________________, 1996
FIELD:
________________________________(SEAL)
RICHARD E. FIELD
- 5 -
<PAGE>
PURCHASE AGREEMENT
To:_____________________________ Date:__________________________________
The undersigned, pursuant to the provisions of the attached Option,
agrees to purchase ________________________ (_____________) Shares of the
Common Stock, $0.10 par value, of Provident American Corporation, and makes
payment herewith in full therefore at the price per share provided by such
Option.
Signature:_____________________________
Address: ______________________________
______________________________
_____________________________________________________________________________
ASSIGNMENT
FOR VALUE RECEIVED, _________________________ hereby sells, assigns,
and transfers all of the rights of the undersigned under the Option attached
hereto, with respect to the number of Shares of Provident American Corporation
covered by such Option to:
NAME OF ASSIGNEE ADDRESS NO. OF OPTION SHARES
- ---------------- ------- --------------------
Date:________________ Signature:____________________
Witness:_________________________
- 6 -
<PAGE>
PROVIDENT AMERICAN CORPORATION EXHIBIT 11
COMPUTATION OF EARNINGS (LOSS) PER SHARE
<TABLE>
<CAPTION>
(In thousands except per share data) Years Ended December 31,
1996 1995 1994
- ----------------------------------------------------------------------------------------------------------------------------------
Primary Earnings (Loss) Per Share
<S> <C> <C> <C>
NET INCOME (LOSS) APPLICABLE TO COMMON STOCK: $15,926 $(4,035) (1,331)
- ----------------------------------------------------------------------------------------------------------------------------------
WEIGHTED AVERAGE SHARES:
Common stock 9,610 9,100 8,421
Common stock equivalents applicable to stock options and warrants 1,276 * *
- ----------------------------------------------------------------------------------------------------------------------------------
Total 10,886 9,100 8,421
- ----------------------------------------------------------------------------------------------------------------------------------
PRIMARY EARNINGS (LOSS) PER SHARE: $ 1.46 $ (0.44 (0.16)
- ----------------------------------------------------------------------------------------------------------------------------------
Fully Diluted Earnings (Loss) Per Share
NET INCOME (LOSS) APPLICABLE TO COMMON STOCK: $15,926 $(4,035) (1,331)
- ----------------------------------------------------------------------------------------------------------------------------------
WEIGHTED AVERAGE SHARES:
Common stock 9,610 9,100 8,421
Common stock equivalents applicable to stock options and warrants 1,491 * *
- ----------------------------------------------------------------------------------------------------------------------------------
Total 11,101 9,100 8,421
- ----------------------------------------------------------------------------------------------------------------------------------
FULLY DILUTED EARNINGS (LOSS) PER SHARE: $ 1.43 $ (0.44 (0.16)
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
* Anti-dilutive; therefore effects have been excluded.
<PAGE>
EXHIBIT 22
SUBSIDIARIES OF THE COMPANY
The following table shows name and place of incorporation of each subsidiary of
the Company as of March 24, 1997. All subsidiaries do business in their
respective corporate names.
<TABLE>
<CAPTION>
NAME PLACE OF INCORPORATION
---- ----------------------
<S> <C>
Provident Indemnity Life Insurance Company Pennsylvania
Montgomery Management Corporation Pennsylvania
Provident American Life & Health Insurance Company Pennsylvania
NIA Corporation Colorado
Coastal Services Eastern, Inc. New Jersey
REF & Associates, Inc. Colorado
Passages Advance Planning Agency, Inc. Pennsylvania
Tamerlane Agency, Inc. Delaware
</TABLE>
<PAGE>
EXHIBIT 23
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the Registration Statement of
Provident American Corporation on Form S-8 (SEC File No. 33-43617 effective date
October 29, 1991 and SEC File No. 33-43615 effective date October 31, 1991) of
our report dated March 11, 1997, on our audit of the consolidated financial
statements and financial statement schedules of Provident American Corporation
as of December 31, 1996 and 1995, and for the years ended December 31, 1996,
1995 and 1994, which report is included in this Annual Report on Form 10-K.
Coopers & Lybrand L.L.P.
2400 Eleven Penn Center
Philadelphia, Pennsylvania
March 28, 1997
<TABLE> <S> <C>
<ARTICLE> 7
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<DEBT-HELD-FOR-SALE> 54,985
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 4,930
<MORTGAGE> 326
<REAL-ESTATE> 942
<TOTAL-INVEST> 61,942
<CASH> 6,218
<RECOVER-REINSURE> 9,240
<DEFERRED-ACQUISITION> 3,140
<TOTAL-ASSETS> 93,054
<POLICY-LOSSES> 38,459
<UNEARNED-PREMIUMS> 1,356
<POLICY-OTHER> 15,438
<POLICY-HOLDER-FUNDS> 6,354
<NOTES-PAYABLE> 298
0
580
<COMMON> 1,008
<OTHER-SE> 20,465
<TOTAL-LIABILITY-AND-EQUITY> 93,054
44,706
<INVESTMENT-INCOME> 3,280
<INVESTMENT-GAINS> 2,100
<OTHER-INCOME> 24,061
<BENEFITS> 30,970
<UNDERWRITING-AMORTIZATION> 584
<UNDERWRITING-OTHER> 20,076
<INCOME-PRETAX> 22,517
<INCOME-TAX> 6,397
<INCOME-CONTINUING> 16,120
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 16,120
<EPS-PRIMARY> 1.46
<EPS-DILUTED> 1.43
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
