<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A
AMENDMENT NO. 1
[ 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.
<PAGE>
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
* Preliminary Note
This amendment No. 1 amends in its entirety the Company's annual report on
form 10-K for the year ended December 31, 1996. No exhibits except exhibit 23
are being filed herewith
<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.
- 3 -
<PAGE>
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.
- 4 -
<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.
- 8 -
<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, 3,827,869 shares,
or 32.6% of the Company's Common Stock, 1,100,000 shares or 97.3% 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. In
addition, pursuant to terms of an agreement to grant options dated March 10,
1997, Mr. Clemens has the right to be granted an option to acquire 55% of the
common stock of the Company, subject to the conditions set forth therein (see
Item 11, "Employment and Other Agreements"). 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 with 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 to grant options dated as of March
10, 1997 (the "Option Contract"), the Company agreed to grant Mr. Clemens an
option to successively purchase up to 3,300,000 shares of the Company's Series A
Cumulative Convertible Preferred Stock ("Series A Preferred"), which option or
options will be granted upon any exercise by Mr. Clemens of any previously
granted option to purchase Series A Preferred, and each subsequently granted
option to purchase shares of Series A Preferred from time-to-time. The rights
set forth in the Option Contract are limited as follows: (1) the number of
shares of Series A Preferred Stock issuable upon each exercise of the Option
Contract shall be limited by the number of Series A Preferred which shall, as of
the date of any such exercise, be authorized and unissued; (2) the number of
shares of Series A Preferred issuable upon the exercise of all of the Options
granted to Mr. Clemens under the Option Contract and under a previously granted
option to purchase 550,000 shares of Series A Preferred shall not in the
aggregate exceed 3,850,000 shares of Series A Preferred; and (3) except upon the
occurrence of a "change in control" (as defined in the Option Contract), Mr.
Clemens shall not be permitted to exercise an option granted under the Option
Contract (i) to purchase more than 550,000 shares of Series A Preferred in any
six-month period, or (ii) to purchase shares which would result in Mr. Clemens
controlling more than 55% of the outstanding voting rights for all classes of
the Company's stock. Upon the occurrence of a "change in control" of the
Company, Mr. Clemens shall have the right to immediately exercise all options
(3,850,000) to purchase shares of Series A Preferred, and the Company will make
a loan to him in an amount equal to the aggregate exercise price of all options
to purchase shares of Series A Preferred which Mr. Clemens may then be entitled
to exercise, plus an amount equal to all federal and state income taxes incurred
by Mr. Clemens in connection with the exercise (the "Loan"). The Loan shall be
unsecured, and shall bear interest at the then applicable federal short-term
rate, but not less than six (6%) percent per annum, with interest and principal
due and payable in full five (5) years from the date of the Loan.
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 75,000 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 8,333 $ 43,748
unexercisable 66,667 $237,502
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 (2)
COO
exercisable 26,500 $334,497
unexercisable 0 $0 48,500 $148,628
</TABLE>
- -------------
(1) Excludes non compensatory stock option to purchase 1,253,376 shares of
common stock at $0.91 issued to Mr. Clemens in 1989 of which Mr. Clemens
disclaims beneficial ownership of 703,720 shares owned by a partnership of
which Mr. Clemens is a partner, excludes option to purchase 550,000 shares
of Series A Cumulative Preferred Stock at $3.64 issued on April 1, 1993 in
connection with the purchase by Mr. Clemens of other shares of Preferred
Stock at such time, and also excludes any options which could be granted to
Mr. Clemens under the Option Contract dated March 10, 1997 described in Item
11 "Employment and Other Agreements".
(2) 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 (1) 50,000 6% $11.00 8/12/02 $187,053 $424,359 $165,000 (a)
Chairman of the Board, CEO
Alvin H. Clemens (1) 25,000 3% $ 8.75 7/16/06 $ 45,398 $115,048 $116,000 (d)
Chairman of the Board, CEO
James O. Bowles 50,000 6% $10.00 8/12/02 $170,048 $385,781 $165,000 (a)
President & COO
James O. Bowles 25,000 3% $ 6.00 5/17/01 $ 51,014 $115,734 $ 45,000 (b)
President & COO
James O. Bowles 50,000 6% $11.00 11/7/96 $187,053 $424,359 $165,000 (a)
President & COO
William C. Fay III 85,000 10% $ 6.00 5/17/01 $173,449 $393,496 $303,450 (c)
Sr. Vice President, Sales
William C. Fay III 50,000 6% $10.00 8/12/02 $170,048 $358,781 $297,000 (c)
Sr. Vice President, Sales
Anthony R. Verdi 50,000 6% $10.00 8/12/02 $170,048 $385,781 $297,000 (c)
Treasurer and CFO
Anthony R. Verdi 25,000 3% $ 6.00 5/17/01 $ 51,014 $115,734 $ 89,250 (c)
Treasurer and CFO
John A. Muller, III(1) 50,000 6% $10.00 8/12/02 $ 0 $ 0 $ 0 (3)
COO
</TABLE>
- -------------
(1) Excludes any options which could be granted to Mr. Clemens under the Option
Contract described in Executive Compensation under caption "Employment and
Other Agreements".
(2) Based on the Black-Scholes option pricing model assuming; 0% dividend yield,
no adjustments for forfeitures and the following expected stock volatility,
length of time for exercise and risk free interest rate; (a) 71.8%, one year
and 5.55%, (b) 75%, one year and 5.5% (c) 73.9%, four years and 6.32% (d)
74.8%, 3 years and 6.21%, respectively.
(3) Mr. Muller forfeited all options granted to him in 1996 due to his
voluntary termination of employment on March 7, 1997.
-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. During 1996, the Company granted incentive stock options to
purchase an aggregate of 850,000 shares of the Company's Common Stock at prices
ranging from $6 to $11 per share under the 1996 Employee Plan. During 1996 a
total of 27,550 options were exercised under the 1993 and 1996 Employee plans.
The Non-Qualified Stock Option Plan for Directors (Directors Plan") was
amended and restated effective as of July 16, 1996 in order to increase the
number of shares authorized for the issuance thereunder by 356,500 shares and to
incorporate prior amendments. Options granted under the Directors' Plan are
exercisable for up to ten years from the date of grant at a price of not less
than the fair market value of the shares on the date of the grant. All options
granted under the Director's Plan have been granted at 100% of the fair market
value of the shares on the date of grant. During 1996, the Company granted
options to purchase 25,000 shares of the Company's Common Stock to nine
Directors, for an aggregate of 225,000 shares, at prices ranging from $8.75 to
$12.25 per share, under the Directors Plan. During 1996 a total of 33,000
options were exercised under the Directors' Plan.
The Stock Option Plan for Executives ("Executive Plan") was amended and
restated effective December 11, 1996 and authorizes the granting of options to
purchase up to 3,850,000 shares of the Company's Series A Cumulative Convertible
Preferred Stock ("Series A Preferred Stock"), which are exercisable for up to
ten years from the effective date of grant at a price of not less than the fair
market value of the shares on the date of grant. No options were granted under
the Executive Plan during 1996.
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 3,827,869(3) 32.6% 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. 37,608(6)(7) .4% 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 65,261(10) .6% 5,500 1.0%
ALL DIRECTORS AND OFFICERS
AS A GROUP (13 PERSONS FOR
COMMON STOCK AND 3 PERSONS
FOR PREFERRED STOCK) 3,992,069(11) 33.3% 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, includes 550,000 shares of Series A Cumulative Convertible Preferred
Stock purchased by Mr. Clemens on March 31, 1993 and also includes 550,000
options at $3.64 per share to purchase Series A Cumulative Convertible Preferred
Stock granted to Mr. Clemens pursuant to a Stock Option Agreement dated April 1,
1993. Includes 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. Excludes shares of
Series A Cumulative Convertible Preferred Stock which may be issued under the
Option Contract. See Item 11. "Employment and Other Agreements". The Series A
Cumulative Convertible Preferred Stock is voted on an as converted basis at the
rate of 4 votes per share. Each share of Class A Common Stock is entitled to 4
votes and each share of Common Stock is entitled to 1 vote in connection with
matters coming to a vote of the shareholders.
(4) Includes options granted to Mr. Clemens to purchase 550,000 shares of Series
A Cumulative Convertible Preferred Stock at $3.64 per share. This does not
include shares of Series A Cumulative Convertible Stock which may be issued
under the Option Contract. See Item 11. "Employment and other Agreements".
(5) Includes stock purchase warrant to purchase 100,000 shares of the Company's
Common Stock.
(6) Includes 16,500 shares of Series A Cumulative Convertible Preferred Stock.
Includes shares owned beneficially by Mr. Beausang through the Butera, Beausang,
Cohen & Brennan Employees' Pension Plan. Mr. Beausang disclaims beneficial
ownership of all shares owned directly or beneficially by his wife, Deborah D.
Beausang.
(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) Includes 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;
includes 572,000 shares of Series A Cumulative Convertible Preferred Stock and
also includes 550,000 options at $3.64 per share to purchase Series A Cumulative
Convertible Preferred Stock granted to Mr. Clemens pursuant to a Stock Option
Agreement dated as of April 1, 1993.
-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. No options were granted under
the Executive Plan during 1996.
Effective March 10, 1997 the Company agreed to grant Mr. Clemens an
option (the "Option Contract"), to successively purchase up to 3,300,000 shares
of the Company's Series A Cumulative Convertible Preferred Stock ("Series A
Preferred"), which option or options will be granted upon any exercise by Mr.
Clemens of any previously granted option to purchase Series A Preferred, and
each subsequently granted option to purchase shares of Series A Preferred from
time-to-time. The righs set forth in the Option Contract are limited as follows:
(1) the number of shares of Series A Preferred Stock issuable upon each exercise
of the Option Contract shall be limited by the number of Series A Preferred
which shall, as of the date of any such exercise, be authorized and unissued;
(2) the number of shares of Series A Preferred issuable upon the exercise of all
of the Options granted to Mr. Clemens under the Option Contract and under a
previously granted option to purchase 550,000 shares of Series A Preferred shall
not in the aggregate exceed 3,850,000 shares of Series A Preferred; and (3)
except upon the occurrence of a "change in control" (as defined in the Option
Contract), Mr. Clemens shall not be permitted to exercise an option granted
under the Option Contract (i) to purchase more than 550,00 shares of Series A
Preferred in any six-month period, or (ii) the effect of which would be to
permit Mr. Clemens to vote more than 55% of the number of shares of the
Company's Common Stock owned by Mr. Clemens at such time. Upon the occurrence of
a "change in control" of the Company, Mr. Clemens shall have the right to
immediately exercise all options (3,850,000) to purchase shares of Series A
Preferred, and the Company will make a loan to him in an amount equal to the
aggregate exercise price of all options to purchase shares of Series A Preferred
which Mr. Clemens may then be entitled to exercise, plus an amount equal to all
federal and state income taxes incurred by Mr. Clemens in connection with the
exercise (the "Loan"). The Loan shall be unsecured, and shall bear interest at
the then applicable federal short-term rate, but not less than six (6%) percent
per annum, with interest and principal due and payable in full five (5) years
from the date of the Loan.
Mr. Clemens has an option to purchase 549,656 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. In
addition, a partnership in which Mr. Clemens is a partner has an option to
purchase 703,720 shares of the Company's common stock at $.91 per share expiring
from time to time between November 1999 through December 2002.
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 April 17, 1997
- ----------------------------------------
Alvin H. Clemens, Chairman of the Board
and Chief Executive Officer
(Principal Executive Officer)
/s/JAMES O. BOWLES April 18, 1997
- ----------------------------------------
James O. Bowles, President and
Chief Operating Officer
/s/ANTHONY R. VERDI April 17, 1997
- ----------------------------------------
Anthony R. Verdi, Treasurer and
Chief Financial Officer
(Principal Financial Officer)
April 18, 1997
/s/FRANCIS L. GILLAN III
- -----------------------------------------
Francis L. Gillan, III, Controller
(Chief Accounting Officer)
/s/MICHAEL F. BEAUSANG April 18, 1997
- ----------------------------------------
Michael F. Beausang, Jr., Director
/s/VALERIE C. CLEMENS April 17, 1997
- ----------------------------------------
Valerie C. Clemens, Director
/s/HAROLD M. DAVIS April 21, 1997
- ----------------------------------------
Harold M. Davis, Director
/s/JOHN T. GILLIN April 17, 1997
- ----------------------------------------
John T. Gillin, Director
/s/HENRY G. HAGER April 24, 1997
- ----------------------------------------
Henry G. Hager, Director
* /s/FREDERICK S. HAMMER April 30, 1997
- ----------------------------------------
Frederick S. Hammer, Director
/s/GEORGE W. KARR April 21, 1997
- ----------------------------------------
George W. Karr, Jr., Director
/s/P. GLENN MOYER April 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>
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/A.
Coopers & Lybrand L.L.P.
2400 Eleven Penn Center
Philadelphia, Pennsylvania
April 30, 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>
