<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the Fiscal Year Ended December 31, 1997, OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
Commission File No.0-13591
PROVIDENT AMERICAN CORPORATION
(Exact name of registrant as specified in its charter)
Pennsylvania 23-2214195
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2500 DeKalb Pike, Norristown, Pennsylvania 19404
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (610) 279-2500
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
------------------- -------------------
None None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.10 Par Value
(Title of class)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes __X__ No _____
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates
of the Registrant, based upon the closing sale price of the Common Stock on June
30, 1998 as reported on Standard and Poor's (S&P) ComStock system, was
approximately $ 41,070,669. Shares of Common Stock held by each officer and
director and by each person who owns 5% or more of the outstanding Common Stock
have been excluded in that such persons may be deemed to be affiliates. This
determination of affiliate status is not necessarily a conclusive determination
for other purposes.
As of June 30, 1998, Registrant had 10,173,860 shares of Common Stock
outstanding.
The Exhibit Index is located on Page 45
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PROVIDENT AMERICAN CORPORATION
Table of Contents
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Page
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<S> <C> <C>
I. Part I.
Item 1. Business 2-15
Item 2. Properties 15
Item 3. Legal Proceedings 15
Item 4. Submission of Matters to a Vote of Security Holders 15
II. Part II.
Item 5. Market for Registrant's Common Equity
and Related Stockholder Matters 16-18
Item 6. Selected Financial Data 19-20
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations 21-28
Item 8. Financial Statements and Supplementary Data 29
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 30
III. Part III.
Item 10. Directors and Executive Officers of the Registrant 31-33
Item 11. Executive Compensation 34-39
Item 12. Security Ownership of Certain Beneficial
Owners and Management 40-41
Item 13. Certain Relationships and Related Transactions 42
IV. Part IV.
Item 14. Exhibits, Financial Statement Schedules
and Reports on Form 8-K 43
Exhibit Index 45-52
</TABLE>
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<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. In March 1998, the Company sold 49% of MMC's outstanding common
stock along with a warrant to purchase an additional 31% of MMC's common stock
for $4 million, effective as of January 1, 1998.
The Company markets and underwrites medical insurance and life
insurance and derives a majority of its revenue from group association major
medical products sold to individuals. A smaller proportion of revenue is derived
from traditional life (whole life and limited pay) products. Recent significant
developments for the Company were the expansion of its healthcare insurance and
managed care business through the introduction of new products, alliances and
acquisitions. The impact of these events is as follows:
(Dollars in thousands) 1997 1996 1995
---- ---- ----
Gross premiums $ 94,274 $ 68,503 $ 52,248
Total revenue $ 62,030 $ 74,147 $ 37,047
Net income (loss) $(18,425) $ 16,120 $ (3,701)
Total assets $98,365 $ 93,054 $ 67,151
Total revenue for each year is net of premium ceded to reinsurers.
Total revenues in 1996 included a litigation settlement of $22.4 million. Gross
premium growth in 1997 was the result of significant sales from two managed care
products. These product sales were made possible by alliances and acquisitions.
The change in net income from 1996 to a loss in 1997 was attributable primarily
to higher policy benefits, write off of deferred acquisition costs, impairment
of certain assets, and transition costs associated with HPS.
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Product Profile
The following table sets forth the Company's gross earned premium by
product during each of the three years ended December 31:
(Dollars in thousands) 1997 1996 1995
----------- ------------ -----------
Managed Care:
The Provident Solution $41,199 $22,634 $3,087
HealthQuest 23,062 6,136 0
----------- ------------ -----------
64,261 28,770 3,087
----------- ------------ -----------
Non-Managed Care:
Small Group 4,784 7,258 11,778
Individual 12,414 18,463 21,359
----------- ------------ -----------
17,198 25,721 33,137
----------- ------------ -----------
Excess loss insurance 3,248 2,704 2,804
----------- ------------ -----------
Total Health Products 84,707 57,195 39,028
----------- ------------ -----------
Group Life 2,655 2,406 2,653
Individual Life 6,912 8,902 10,567
----------- ------------ -----------
Total Life Products 9,567 11,308 13,220
----------- ------------ -----------
Gross Premium $94,274 $68,503 $52,248
=========== ============ ===========
Health Products: The Company's medical insurance business has been
migrating from products designed for the small group indemnity market to
products designed for the individual and small group managed care market. This
change is being accomplished through product redesign, strategic relationships
with certain preferred provider organizations ("PPOs"), expanding distribution
channels and enhancing administrative capabilities.
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<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, First Health Group Corporation ("FHG"), and
designs and markets products utilizing that network of hospitals and physicians.
Other regional networks are used if and when the primary network is not a
practicable option. FHG also provides utilization and cost management services
such as pre-certification of hospital admissions and large case management
which, when taken together with the discounts the Company enjoys through all of
its PPO arrangements, are intended to allow for better control of claim costs
and, ultimately, competitively priced products. The Company has been active in
developing its provider network arrangements for several years. This has
resulted in increased net claim savings. It is the Company's practice to pass on
these savings to customers in the form of more competitive premium rates.
The Company distributes its managed care products through the managing
general agent ("MGA") system. At December 31, 1997, the Company had over 20,000
independent agents and brokers, organized under approximately 75 Managing
General Agents, actively selling its managed care products. In 1996, the Company
entered into a marketing agreement with the country's largest third party
administrator, HealthPlan Services, Inc. ("HPS"), with access to substantially
more independent agents. This relationship with HPS was expanded during 1997, as
discussed in greater detail below.
The Company is continuing the process of converting and expanding its
administrative infrastructure to one specifically designed to accommodate
managed care products. In October 1997, the Company announced an outsourcing
arrangement with HPS, whereby HPS provides administrative support for all of the
Company's medical products, including billing and collection of premium, claims
adjudication and ongoing policyholder services (the "HPS Outsourcing
Agreement"). This arrangement will also provide the Company with the opportunity
to grow its business and provide capable customer service while limiting capital
expenditures. The HPS Outsourcing Agreement, which commenced February 1, 1998,
is for a five-year term. The Company has agreed to pay a base monthly fee and a
sliding scale percentage of premiums, which will decrease as the volume of
business increases. The Company transitioned all functions covered by the
outsourcing agreement to HPS effective February 1998.
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The Company's principal managed care products are "The Provident
Solution" and "HealthQuest" which together offer a variety of deductibles,
coinsurance amounts and managed care options. Minimum amounts of group term life
are required with many of the medical products. "The Provident Solution" relies
on FHG for access to network providers and advantageous fee schedules, while
"HealthQuest" relies on regional PPOs. The following table illustrates
applications received for the principal products:
1997 1996 1995
----------- ----------- -----------
HealthQuest 26,935 7,119 0
The Provident Solution 23,257 21,292 9,260
All Others 1,085 3,149 3,095
----------- ----------- -----------
51,277 31,560 12,355
=========== =========== ===========
At December 31, 1997 the Company had a total of 50,000 in-force group
medical certificates compared to 36,000 at December 31, 1996. The Company has
systematically withdrawn from the small group indemnity markets as healthcare
reform at the state level has rendered those products obsolete. The book of
small group indemnity business has been in a runoff mode since 1992 and the
Company's individual indemnity products have only generated modest sales since
1994, when "The Provident Solution" was developed.
The mix of business has changed significantly over the last three
years. The following table illustrates the composition of annualized premium
in-force for the last three years:
(Dollars in thousands) 1997 1996 1995
--------- ----------- -----------
Managed Care
The Provident Solution $43,244 $33,169 $11,124
HealthQuest (1) 34,913 12,718 0
Non-Managed Care:
Small group 5,681 7,009 10,998
Individual 12,983 17,797 21,646
--------- ----------- -----------
$96,821 $70,693 $43,768
========= =========== ===========
(1) The Company assumed in-force HealthQuest policies with the acquisition of
NIA effective May 1, 1996 consisting of approximately $6.5 million of annualized
premium.
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The introduction of managed care products has impacted the Company's
distribution of business by state. The states which generated the largest share
of health premiums during each of the last three years were as follows:
1997 1996 1995
----- ----- -----
Georgia 28.7% 24.4% 20.3%
Florida 20.5 21.8 12.8
Louisiana 8.1 7.3 5.6
Pennsylvania 6.9 13.2 22.2
Texas 6.7 7.5 6.2
South Carolina 4.4 2.6 1.9
Colorado 2.6 0.4 0.3
Ohio 2.3 2.3 1.9
West Virginia 2.2 3.5 6.1
Virginia 2.1 2.3 2.6
All other 15.5 14.7 20.1
----- ----- -----
100.0% 100.0% 100.0%
===== ===== =====
The acquisition of PALHIC in 1996 significantly increased the number of
states within which the Company can write its insurance business. The importance
of any particular state may vary significantly from time to time as state
healthcare reforms are enacted, the managed care competitive environment changes
and the composition of the Company's distribution system evolves.
As part of its health product portfolio, the Company derived both
premiums and fees through the sale and underwriting of high-deductible medical
excess loss insurance for self-insured employers. MMC sells and services these
insurance products which are issued by unrelated insurance companies . The
Company assumes a portion of the insurance risk and earns premiums and up until
1997 earned profit sharing fees. During the first quarter of 1998 the Company
sold 80% of MMC to HPS. The sale resulted in a realized gain of $4 million in
the first quarter of 1998 which will help finance future growth in the Company's
target market. The Company continues to assume the premium administered by MMC.
Life Products: The Company's pre-need insurance products, single
premium and limited payment life insurance, provide funding in conjunction with
pre-arranged funerals. The policies sold average $2,830 of face amount and the
buyer's average age is 72. The Company's "Senior Estate Plan" is a whole life
insurance policy designed for senior citizens who have not yet pre-arranged
their funerals, but wish to plan for death-related expenses. The average policy
size is $5,000 and the buyer's average age is 65.
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<PAGE>
During 1997, the Company issued 1,347 pre-need and final expense
policies representing approximately $8.5 million of face value, as compared with
3,793 pre-need and final expense policies representing approximately $18.9
million of face value during 1996. Combined gross premium income for these two
products approximated $5.8 million in 1997 and $8.1 million in 1996. At December
31, 1997, the Company had 18,295 pre-need and final expense policies in-force
with a face value approximating $66.6 million. The remaining life insurance
premiums are derived from closed books of business. During 1997, the Company
expanded its life distribution to include a newly designed product for the
military marketplace.
Strategies
The Company plans to continue its growth in market share as a provider
of medical insurance through the sale of products which incorporate freedom of
choice and many elements of managed care such as cost containment. In this
regard the Company will target the one life and small employer group market. The
Company believes this segment of the market is large and under-served. In
response, the Company is designing managed care products that are responsive to
the needs of this market, and has built a marketing distribution system for the
purpose of achieving critical mass with respect to its product offerings.
The Company's strategy relies on the strategic alliances with FHG, HPS
and growing independent agent and broker distribution systems. In recruiting
agents the Company will emphasize its intention to create unique products, offer
competitive compensation arrangements, provide responsive service and allow MGAs
an opportunity to earn stock options to acquire PAMCO shares based upon sales
production. The Company believes this strategy creates the potential to
significantly increase the sales of managed care products. The Company believes
that increased sales will help build critical mass which will reduce incremental
costs.
Recent Developments
During the first half of 1998 the Company entered into various
agreements in order to sell and service insurance business via the Internet
along with related financing and start-up management. As of February 1, 1998 the
Company entered into an Amended and Restated Interactive Marketing Agreement
(the "AOL Agreement") with America Online, Inc. ("AOL"). The Company will be
AOL's exclusive third-party direct marketer for managed-care products along with
vision insurance, prescription coverage, critical care insurance and long-term
care insurance coverage for individuals and groups of less than fifty
individuals in the United States. AOL will advertise the Company's products to
its subscribers on AOL's online network under a brand name to be used
exclusively for the Company's products. This represents a new distribution
channel allowing access to customers not served by insurance agents. The Company
plans on marketing medical and related insurance products underwritten by PILIC
and PALHIC along with products underwritten by other companies.
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<PAGE>
The Company's new non-insurance subsidiaries, Provident Health
Services, Inc. ("PHS") and Insurion, Inc. ("Insurion"), will conduct this new
venture. It is anticipated that Internet-based sales will be tested during the
summer of 1998 and offered generally to AOL subscribers in the fall of 1998. PHS
will provide online customer service to the AOL member base in connection with
the sale of medical and related insurance products. The Company recently
expanded its outsourcing relationship with HPS whereby HPS will provide customer
service and have certain third party administrator rights over policies sold by
Insurion through its web site or other e-commerce vehicles.
The Company is considering numerous financing strategies in order to
fund Insurion's obligations including public and private financing. In addition,
the Company is seeking co-sponsor funding with regard to certain product
offerings on Insurion's web site.
Operations
The Company is organized and managed along functional lines which
include marketing, underwriting, claims, administration, investments and
finance.
Marketing: The marketing area manages MGA recruiting, training and
agent compensation plan design, and provides agents and consumers with a Company
advocate regarding product development and customer service. The Company
believes that the attractiveness of its products, its competitive compensation
arrangements for brokers and agents (including stock options), its emphasis on
personal service and accessibility to management encourages brokers and agents
to offer the Company's products to their clients.
Underwriting: All policies are fully underwritten . In some cases, the
Company may require attending physicians' statements with respect to conditions
disclosed on applications. A physician provides consulting services to the
underwriting department with respect to the evaluation of the insurability of
certain applicants and the general health prognosis for such applicants. In
connection with the HPS outsourcing agreement, the underwriting associated with
the HealthQuest products is done by HPS in accordance with pre-set standards and
all other products are underwritten by the Company's underwriting group. Prior
to 1998, essentially all policies were underwritten by the Company's
underwriting group.
Claims: The Company had augmented its core internal claims processing
with the use of selected third party claims administrators who review and pay
claims in accordance with guidelines and procedures approved and monitored by
the Company. In connection with the HPS outsourcing agreement, claims
adjudication associated with the Company's health products is provided by HPS.
Administration: This area includes customer service, premium and
commission processing and computer systems for life and group medical business
which was acquired in mid 1996. In connection with the HPS outsourcing
agreement, customer service, premium and commission processing associated with
the Company's health products is provided by HPS.
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<PAGE>
Investments and Finance: The majority of the Company's investments
consist of securities of the U. S. government (or its agencies ) and fixed
income securities, principally issued by public utilities and corporations. At
December 31, 1997, 100% of the Company's bond portfolio was of investment grade
quality; 40% of the Company's bonds will mature within a five-year period and
88% of the Company's bonds will mature within a ten-year period. The following
table shows the Company's market value of its total investments as of December
31, the investment income net of expenses which excludes realized gains and
losses and the weighted average annualized yield.
<TABLE>
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(Dollars in thousands) 1997 1996 1995
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Total investments, valued at market $47,101 $61,942 $46,890
Net investment income (excludes realized gains (losses)) $3,487 $3,280 $2,858
Annualized yield on the market value of investments 6.8% 6.5% 6.3%
</TABLE>
The Company utilizes both in-house actuaries and consulting actuaries
for product development, pricing and valuation.
Special Considerations and Risk Factors
All statements and information herein, other than statements of
historical fact, are forward looking statements that are based upon a number of
assumptions concerning future conditions that may ultimately prove to be
inaccurate. Many phases of the Company's operations are subject to influences
outside its control. Any one, or any combination of factors could have a
material adverse effect on the Company's results of operations. These factors
include: changes in governmental regulation, claims experience and reserve
adequacy, rating changes, competitive pressures, economic conditions, changes in
consumer spending, interest rate fluctuations, and other conditions affecting
capital markets. The following factors should be carefully considered, in
addition to other information contained in this document. This document contains
certain forward-looking statements within the meaning of section 27A of the
Securities Act of 1933 as amended ("Act") and section 21E of the Securities
Exchange Act of 1934, as amended. The Statements include among other things,
statements regarding trends, strategies, plans, beliefs, intentions,
expectations, goals and opportunities. Also they include statements regarding
migration to managed care products, greater control of costs, conversion and
expansion of administrative infrastructure and varying significance of
particular states within which the Company can write insurance; beliefs
regarding attractiveness of products; enhancements to claims system; increased
processing capacity; investments in computer hardware and funding of capital
expenditures; sufficient liquidity to fund growth fulfill statutory requirements
and meet all cash requirements, funding surrenders and benefit payments and loan
payments. Actual events, developments and results could differ materially from
those anticipated or projected in the forward looking statements as a result of
uncertainties set forth below and elsewhere in this document. Any investment in
the Company's securities involves a high degree of risk.
The following factors, in addition to the other information contained
in this report, should be considered carefully in evaluating an investment in
the Company.
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<PAGE>
Control of the Company: Alvin H. Clemens, Chairman and Chief Executive
Officer of the Company ("Mr. Clemens"), acquired control of the Company in
October 1989. Mr. Clemens is the largest shareholder of the Company. As of June
30, 1998, Mr. Clemens owned, either directly or beneficially, 3,813,745 shares,
or 33.2% of the Company's Common Stock, and 1,100,000 shares, or 97.3%, of the
Company's Preferred Stock. As of June 30, 1998, Mr. Clemens controled 37.1% of
the Company's outstanding voting rights and if he were to exercise all of his
outstanding options, he would control 47.4% of the Company's voting rights. In
addition, pursuant to terms of an agreement to grant options dated March 10,
1997, Mr. Clemens has the right to be granted an option to acquire 55% of the
common stock of the Company, subject to the conditions set forth therein.
Accordingly, Mr. Clemens could greatly influence the outcome of any matter
requiring shareholder approval, even if such matters were deemed by the
shareholders, other than Mr. Clemens, to be in their best interests.
A. M. Best's Insurance Ratings: The ratings assigned by A.M. Best
Company Inc. ("Best") are an important factor influencing the competitive
position of insurance companies. Best's ratings are based on an analysis of the
financial condition and operating performance of the companies rated. Best's
classifications are A++/A+ (superior), A/A- (excellent), B++/B+ (very good),
B/B- (adequate), C++/C+ (fair), C/C- (marginal), D (below minimum standards) and
E (under state supervision). Best's ratings are based upon factors of concern to
policyholders and insurance agents, and are not necessarily directed toward the
interests of investors in the rated insurance company and/or its parent and
therefore should not be relied upon as a basis for an investment decisions.
In 1997, PILIC and PALHIC Best's ratings were upgraded to a "B"
(adequate) rating, reflecting the Company's improved capital and surplus
position as a result of the Loewen settlement. This "B" (adequate) rating was
reaffirmed in February, 1998. The Company's goal is to strengthen the financial
position of PILIC and PALHIC which the Company believes will result in an
improved rating over time, but there can be no assurance that PILIC and PALHIC
can improve or maintain the current rating.
Regulation: Insurance companies are subject to supervision and
regulation in the states and jurisdictions in which they transact business, and
such supervision and regulation usually includes (1) regulating premium rates,
policy forms (coverages and terms), (2) setting minimum capital and surplus
requirements, (3) imposing guaranty fund assessments which fund insolvencies of
other insurers (4) licensing insurance companies and agents, (5) approving
accounting methods and methods of setting loss and loss-adjusted expense ("LAE")
liabilities, (6) setting requirements and limiting investments, establishing
requirements for filing of annual statements and other financial reports, (7)
approving changes in control, (8) limiting dividend payments that may be made
without regulatory approval, (9) regulating transactions with affiliated parties
and (10) regulating trade practices and market conduct. Compliance creates
additional expense and penalties may be imposed for non-compliance, which could
have a material adverse effect on the Company's business financial position and
results of operations.
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PILIC and PALHIC are domiciled in Pennsylvania and are regulated by the
Insurance Department of Pennsylvania which recognizes as net income and surplus
those amounts determined in conformity with statutory accounting practices
prescribed or permitted by the Department which may differ in certain respects
from generally accepted accounting principles. The amounts of statutory net
income for the year ended and surplus as of December 31 were as follows:
<TABLE>
<CAPTION>
1997 1996 1995
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<S> <C> <C> <C>
PILIC(1)
Net income (loss) ($10,385) $9,668 ($1,570)
Total capital and surplus 11,408 13,971 6,383
Adjusted capital and surplus 11,968 14,838 6,743
Company action level Risk Based Capital 9,303 6,569 5,190
PALHIC(2)
Net income (loss) ($862) $1,631 ($73)
Total capital and surplus 4,283 5,351 3,068
Adjusted capital and surplus 4,302 5,367 3,152
Company action level Risk Based Capital 1,730 19 235
</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 not included in 1995.
(2) PALHIC includes amounts prior to its acquisition by the Company.
At December 31, 1997, PILIC calculated its "Risk Based Capital" (RBC)
utilizing a formula required by the National Association of Insurance
Commissioners. The results of this computation indicate PILIC's adjusted capital
of $12.0 million exceeded the amount required by $2.7 million. PALHIC's adjusted
capital of $4.3 million exceeded its RBC requirement by $2.6 million. In
concept, RBC standards are designed to measure the acceptable amounts of capital
an insurer should have based on inherent and specific risks of an insurer's
business. Insurers failing to meet the benchmark capital level may be subject to
remedial action by the insurance department having jurisdiction over its
business and, ultimately, rehabilitation or liquidation.
The Company's business is subject to a changing legislative and
regulatory environment. Some of the proposed changes include initiatives to
restrict insurance pricing and the application underwriting standards, reform
health care and restrict investment practices. Proposals relating to national
health care reform have been under consideration, and could significantly change
the way health care is financed and provided. The effect on the Company of
comprehensive health care reforms, if enacted, could have a material adverse
impact upon the ability of the Company to achieve profitability and engage in
the writing of health insurance.
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<PAGE>
All of the states in which PILIC and PALHIC do business have life and
health guaranty fund laws under which insurers doing business in such states can
be assessed in order to fund policyholder liabilities of insurance companies
that may become insolvent. Under these laws, an insurer is subject to
assessment, depending upon its market share of a given line of business, to
assist in the payment of policyholder claims against insolvent insurers.
Although recent assessments have not been material, no assurances can be given
that such will be the case in the future.
Dividends: Dividends paid by the Company over and above the financial
assets of PAMCO are dependent on the ability of PILIC to pay dividends to the
Company and the ability of PALHIC to pay dividends to PILIC. The payment of
dividends by PILIC and PALHIC is dependent upon a number of factors including
earnings and financial condition, business needs and capital and surplus
requirements as well as applicable regulatory restrictions. Under Pennsylvania
law, PILIC and PALHIC are currently unable to pay dividends without the prior
approval of the Pennsylvania Insurance Commissioner as a result of PILIC's and
PALHIC's statutory unassigned deficit of $13,538,000 and $4,147,000,
respectively, which excludes common stock and additional paid-in capital
amounts. The Company has not paid a cash dividend on its common stock since its
inception in 1982 and intends on using retained earnings to fund its growth and
liquidity needs.
Possible Adverse Impact of Inadequate Loss Reserves or Deferred
Acquisition Costs: Policy claims and the related policy benefit expenses are
based upon a variety of estimation methods which are continually revised,
incorporating the Company's benefit experience. Health benefits related to the
Company's managed care products introduced in 1995 represent approximately 72%,
37% and 4% of 1997, 1996 and 1995 amounts, respectively. Since the Company's
experience with these products has been limited and continues to emerge, no
assurances can be given that policy benefit liabilities will ultimately be
deemed adequate. Accordingly, the need for increased reserves could have a
materially adverse affect on the Company's results of operations.
The Company deferred policy acquisition costs for its managed care
products are based on management's estimation that these costs are recoverable
against future profits on these products. Increased lapsation over current
levels or unprofitability in these products could result in an increase in the
amortization rate of deferred acquisition costs which could have a material
adverse impact.
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Reinsurance: The Company's principal reinsurer, Swiss Re Life & Health
Limited ("Swiss Re"), notified the Company in 1997 that the Quota Share
Reinsurance Agreement would not be renewed effective January 1, 1998. Swiss Re's
obligation to assume paid losses incurred prior to January 1, 1998 remains in
effect. The Company notified Swiss Re that it would not be renewing the Excess
of Loss Agreement. The Company is currently in negotiation with a group of
reinsurers and has placement slips regarding a replacement Quota Share Agreement
and Excess of Loss Agreement to be effective January 1, 1998. Effective January
1, 1998, the Company's new reinsurance will be on a no loss, no gain basis for
all policies in force as of December 31, 1997 until those policies are rate
increased. The new agreements, when executed, may not be as comprehensive as the
old agreement. Policies are generally rate increased on their six-month or
twelve-month anniversary. Once policies in force as of December 31, 1997 have
been rate increased, and for all policies sold during 1998, the Company will
cede approximately 47.5% of group medical benefits. Furthermore, the Company
will retain any profit in excess of 3% of ceded premium. Since the terms of the
new reinsurance are effective January 1, 1998 and the terms of the old
reinsurance remain in effect after December 31, 1997 for losses incurred prior
to December 31, 1997, management believes that the effect of changes in
reinsurance, if any, would not be material to the Company's financial position,
results of operations and cash flow. The Company's 1998 results may be adversely
impacted by loss experience on certain policies inforce as of December 31, 1997.
The Company's 1998 results may be favorably impacted if quota share cessions
result in a profit in excess of 3% of ceded premium on policies sold during 1998
and certain policies inforce as of December 31, 1997. The potential effect of
any differences between old and new reinsurance on future results has not been
determined; however, the impact could be significant.
Highly Competitive Nature of the Insurance Industry: The Company
operates in a competitive industry with regard to products, prices and services.
Many competitors have considerably greater financial resources than the Company.
In the United States more than 2,200 life insurance companies compete for life
and health insurance business, and no one company dominates the marketplace.
Most of the Company's direct competitors are small to medium sized life
insurance companies and regional Blue Cross/Blue Shield organizations.
Additionally, competition in the insurance industry may affect the Company's
ability to achieve greater critical mass in its chosen product lines, while
remaining competitive in compensation and product pricing.
Reliance on Existing Management and Consultants: The Company has been
largely dependent on existing management and certain consultants whose expertise
and relationships have brought about recent alliances and acquisitions. The loss
to the Company of one or more of its current existing executive officers or
consultants could have a material adverse effect on the business and operations
and results of operations of the Company. The Company has entered into
employment agreements with certain officers which have non-compete and
confidentiality provisions, and the Company maintains key man insurance with
regard to Mr. Clemens. The Company has entered into consulting agreements with
certain consultants which have non-compete and confidentiality provisions.
Inability to Migrate Computer Infrastructure: The Company has
contracted with consultants for the purpose of migrating the Company's computer
systems from mid-range computers to client-server technology supported by
well-known hardware and software suppliers. No assurances can be given that the
new computer system will meet the Company's expectations and that the migration
of administrative systems will contain costs and improve efficiency.
- 13 -
<PAGE>
Year 2000 Compliance: In 1997 the Company began implementing its year
2000 Compliance Plan. In 1997 the Company installed a new general ledger and
accounts payable system that would be year 2000 compliant. In addition, HPS, the
Company's outsourcing vendor, has begun the transition of HPS's billing and
administrative systems for fully insured products and will continue to work on
this project in 1998. HPS has received the new release of its ERISCO ClaimsFacts
claims management system, which the Company understands is Year 2000 compliant,
and intends to implement this release in 1998. The Company's health and group
life products are administered by HPS. The Company's and HPS's Year 2000
Compliance Plan also provides for updating interfaces between the Company and
HPS. The Company continues to evaluate alternatives for its life administration
hardware and software used in administering its individual life and annuity
policy billing, account values, loans, claims and commission activities. The
Company's life administration system is not Year 2000 Compliant but the Company
is evaluating a wide range of alternatives and expects to be Year 2000 Compliant
by mid 1999. Although the costs associated with becoming Year 2000 compliant
cannot be precisely predicted, management does not expected such costs to have a
material effect on the Company's results. There can be no assurance that HPS or
other third parties with whom the Company does business will achieve Year 2000
Compliance. As a result, the Company's business could be adversely affected.
HPS Outsourcing: The Company's group medical and life billing and
collection, customer service, claims processing and commission accounting are
now being performed by HPS. Further, information needed for the Company to
administer reinsurance and manage loss experience and premium rates are
dependent upon HPS. The Company's funds are retained in separate bank accounts
held in trust administered by HPS. The inability of HPS to perform under its
Agreement could have a material adverse impact on the Company's business and
results of operations.
Internet Venture: The Company, through Insurion, Inc. is developing
online sales and service capabilities utilizing internal and external resources.
Various agreements require Insurion to launch an Internet WEB site no later than
October 1, 1998. Insurion has retained outside consultants and vendors to
develop the Internet WEB site and oversee the development of the overall sales
process, the cost of which is significant. No assurance can be made that the
site will be operational on time, that the cost associated therewith will not
exceed the Company's estimates, or that the Company may be able to meet its
contractual obligations under the above agreements. The sale of medical and
other insurance via the Internet WEB is a new and unproven marketing channel and
there is no assurance that Insurion will be able to sell a sufficient volume of
new business on the Internet WEB during the initial term of the AOL Interactive
Marketing Agreement to make the venture viable. HPS paid the Company $0.75
million in March 1998 to be the exclusive administrator of this business.
Insurion privately placed $5 million of convertible debt in May 1998 to
partially fund future obligations. In addition, financing must be secured from
external sources to support the obligations and funding of Insurion. There can
be no assurance that the Company's efforts will be successful, or if successful,
that the terms will be favorable to the Company.
- 14 -
<PAGE>
Number of Employees
The Company, including its subsidiaries, currently employs
approximately 100 people, a decrease from 221 for the prior year, primarily as a
result of the HPS arrangement, which outsourced the Company's administration and
claims. None of the employees is represented by a collective bargaining
representative. The Company believes that its employee relations are excellent.
Item 2. Properties.
The Company's principal office, located at 2500 DeKalb Pike,
Norristown, Pennsylvania, is owned by PILIC. This property is comprised of
approximately 6.5 acres of land and buildings containing approximately 44,000
square feet of space. PILIC also owns a three-story office building located in
Abington, Pennsylvania, which is leased to unaffiliated third parties. NIA, a
wholly owned subsidiary of PILIC, leases commercial office space in Lakewood,
Colorado for the operation of a regional sales office. NIA's lease is for 3,300
square feet. The Company believes its existing facilities are suitable to
conduct its present business.
Item 3. Legal Proceedings.
The Company is involved in normal litigation in the settlement of
insurance claims. Management is of the opinion that neither the litigation nor
these claims will have a material adverse effect on the results of operations or
financial position of the Company.
Item 4. Submission of Matters to a Vote of Security Holders.
No matters were submitted to a vote of holders of the Company's common
stock during the fourth quarter of 1997 or the first quarter of 1998.
- 15 -
<PAGE>
PART II
Item 5. Market For Registrant's Common Equity and Related Shareholder Matters.
Price Range of Common Stock
The following table shows the range of quarterly high and low sale
prices for the Company's common stock. The Company's common stock was listed on
the NASDAQ National Market until its delisting on June 12, 1998 due to the
delayed filing of the Company's December 31,1997 Annual Report on Form 10-K and
the March 31, 1998 Quarterly Report on Form 10-Q. The Company's common stock
does not currently trade on any exchange. Recent trading activity of the
Company's common stock since June 12, 1998 has occurred on Instinet
Corporation's online trading service.
<TABLE>
<CAPTION>
1998 1997 1996
---------------------- --------------------- ---------------------
High Low High Low High Low
---------------------- --------------------- ---------------------
<S> <C> <C> <C> <C> <C> <C>
First Quarter 6-15/16 2-1/4 14-3/8 8-5/8 9-3/8 5-3/4
Second Quarter 6-15/16 3-5/16 10-1/2 3-3/4 10-5/8 5-1/8
Third Quarter 5-1/8 3 15-7/8 8-1/2
Fourth Quarter 3-7/8 2-1/8 14-1/2 10-5/8
</TABLE>
On June 30, 1998, the closing price of the Company's common stock was
$5.75. On that same date, there were approximately 2,650 shareholders.
Dividends
The Company has not paid a cash dividend on its Common Stock since its
inception in 1982, except for dividends paid for an acquired subsidiary. The
Company currently intends to retain all earnings to finance the expansion of its
business and does not anticipate paying cash dividends in the foreseeable
future.
Dividends paid by the Company over and above the financial assets of
PAMCO are dependent upon the ability of PILIC to pay dividends to PAMCO and the
ability of PALHIC to pay dividends to its parent, PILIC. Dividend payments by
PILIC and PALHIC are dependent upon a number of factors, including earnings and
financial condition, business needs and capital and surplus requirements, as
well as applicable regulatory restrictions. Under Pennsylvania law, PILIC and
PALHIC are currently unable to pay dividends without the prior approval of the
Pennsylvania Insurance Commissioner as a result of PILIC's and PALHIC's
statutory unassigned deficit of $13,538,000 and $4,147,000, respectively, which
excludes common stock and additional paid-in capital amounts.
The Company paid cash dividends on the Series A and Series B Preferred
Stock at the rate of $0.0636363 and $0.109090, respectively, per quarter from
1993 to the present. All Series B Preferred Stock was converted into common
stock in 1996.
- 16 -
<PAGE>
Recent Sales of Unregistered Securities
On November 1, 1995, the Company granted warrants to purchase 50,000
shares of the Company's common stock at $5.00 per share and are exercisable
through November 1, 1998 to a consultant in consideration for services rendered.
On June 6, 1996, 100,000 warrants were granted to an investment banking firm in
consideration for services rendered at $9.00 per share and are exercisable
through June 6, 2001.
Effective as of January 1, 1996, the Company granted a warrant and an
amended warrant to a consultant for services rendered to purchase 100,000 shares
of the Company's common stock per year for each of three years at the market
price per share as of January 1, 1996, January 1, 1997, and January 1, 1998,
provided PILIC has achieved new annualized premium sales production of at least
$35,000,000, $45,000,000 and $50,000,000, respectively, for each of these
calendar years. PILIC has realized the annualized premium threshold for the
years ended December 31, 1996 and December 31, 1997, and accordingly, the
consultant is entitled to exercise 200,000 warrants for 1996 and 1997.
Effective as of October 6, 1997, the Company granted warrants to
purchase 25,000 shares of its common stock to an employee for services rendered.
The exercise price was $4.00 per share, the fair market value on the date of the
grant. The option expires on October 6, 2000, and is exercisable in three equal
installments, one-third upon issuance, an additional one-third October 6, 1998,
and the remaining balance on October 6, 1999.
Effective in November, 1997, the Company granted warrants to purchase
25,000 shares of its common stock each to two of the Company's exclusive agents
engaged in selling life insurance to members of the U.S. Armed Forces and
government employees for services rendered at an exercise price of $5.00 per
share. These warrants expire in November 2002.
The Company and AOL entered into the AOL Agreement, dated as of
February 1, 1998. In connection therewith, warrants were granted to AOL as
follows: (a) for the purchase of 300,000 shares of the Company's common stock at
an exercise price of $4.48 (based on the average NASDAQ closing prices for the
last 20 days preceding the determination date as defined in the agreement) per
share, exercisable at anytime during the five-year term ending January 31, 2003;
(b) a performance warrant representing the right for a seven-year term to
purchase up to an additional 150,000 shares of the Company's common stock at an
exercise price of $5.15, which vests quarterly in accordance with the terms and
conditions of the warrant; and (c) in the event that the Company exercises its
right to renew the AOL Agreement for an additional two-year term following the
initial 20-month term, an additional warrant representing the right for a
seven-year term to purchase up to 300,000 shares of the Company's common stock
at an exercise price of $5.15, which vests quarterly in accordance with the
terms and conditions of the performance warrant.
Effective February 24, 1998, the Company agreed to issue warrants to
purchase 50,000 shares of the Company's common stock to an investment banking
firm at an exercise price of $9.00 per share and expiring April 30, 2005 for
services rendered.
- 17 -
<PAGE>
Effective March 31, 1998, the Company entered into a Consulting
Agreement with Lynx Capital Group, L.L.C., a California corporation (the
"Consultant"), which provides for retention of Lynx as a consultant with respect
to the development and marketing of health insurance products over the Internet
and the establishment of a web site for the Company. The Consultant is
compensated by the payment of a consulting fee of $10,000 per month. The Company
agreed to issue to Consultant (a) options to purchase 150,000 shares of the
Company's common stock upon the closing of an agreement with AOL at per share
exercise price equal to $3.57, exercisable within three years; (b) options to
purchase 100,000 shares of the Company's common stock upon securing equity
funding for the venture in an amount not less than $10,000,000, at a price equal
to the closing price of the Company's common stock during the sixty days
immediately preceding the closing of such financing, to expire three years from
the date of the grant; (c) options to purchase 50,000 shares of the Company's
common stock upon the internet based retailing venture and web site established
for the Company becoming operational at an exercise price equal to the average
closing price of the Company's common stock during the thirty business days
immediately preceding the date on which the web site becomes operational, the
options to be exercised within three years of the grant; (d) options to purchase
50,000 shares of the Company's common stock upon the conclusion of interactive
advertising/marketing agreements with internet service providers and search
engine specialty content providers at an exercise price equal to the average
closing price of the Company's common stock during the thirty business days
preceding conclusion of the interactive advertising/marketing agreements, the
option to be exercised within three years of the grant; and (d) options to
purchase 50,000 shares of the Company's common stock provided that Consultant
obtains funding for the Company in an amount not less than $5,000,000 from HPS,
FHG, or any other insurance company whose products are sold through Provident's
Internet WEB sites thirty business days from the date that financing is
completed, the options to be exercised within three years of the grant.
Effective May 29, 1998, the Company granted warrants to purchase
100,000 shares of the Company's common stock to a service provider to the
Company at an exercise price of $9.00 per share expiring May 29, 2003 in
consideration for entering into the HPS E-Commerce Agreement described in Note
S- Subsequent Events of the financial statements.
Effective May 29, 1998 Insurion, Inc. issued a $5,000,000 Convertible
Note due June 30, 2003 to a service provider to the Company. Interest on the
Convertible Note is accrued at an annual rate of 5.5% and is payable on
conversion or June 30, 1999, whichever occurs first. Insurion may repay the
Convertible Note before the due date in part or in full without penalty and in
that event the holder has the right to exercise the conversion privileges for a
period of 90 days prior to prepayment. The Convertible Note is convertible into
Insurion, Inc. Class A Common Stock, at the holder's option, in whole or in
part, 1 day prior to any of the following: 1) the sale of all or substantially
all of Insurion's business or assets, 2) the sale or transfer of 50% or more of
Insurion's outstanding capital stock owned by the Company, 3) the acquisition of
80% or more 's of Insurion's outstanding capital stock by an unaffiliated third
party, 4) May 29,1999 or 5) Insurion's first public offering of its common stock
which offering is underwritten on a firm commitment or best efforts basis and
produces gross proceeds in excess of $25,000,000.
All warrants issued in 1997 and 1998 and the Convertible Note issued in
1998, and the option issued in 1997, were issued in reliance upon the exemption
provided by Section 4(2) of the Securities Act of 1933, as amended.
- 18 -
<PAGE>
Item 6. Selected Financial Data.
The following selected consolidated financial information has been
derived from the consolidated financial statements of the Company and should be
read in conjunction with the Consolidated Financial Statements and notes thereto
included elsewhere in this report has been audited by BDO Seidman, LLP for 1997,
and by Coopers and Lybrand, LLP for all prior years.
<TABLE>
<CAPTION>
Years Ended December 31,
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
(in thousands, except for per share data)
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Premiums earned excluding HealthQuest $ 43,083 $ 41,656 $ 32,709 $ 36,395 $ 40,634
Premiums earned - HealthQuest 11,170 3,050
Net investment and other income 7,027 4,941 4,127 3,736 3,782
Realized gains (losses) on investments 750 2,100 211 (89) 1,575
Litigation settlement, net 22,400
--------------------------------------------------------------
Total revenues 62,030 74,147 37,047 40,042 45,991
Benefits and expenses 85,044 51,630 40,728 41,026 44,694
--------------------------------------------------------------
Income (loss) before income taxes and
cumulative effect of accounting change (23,014) 22,517 (3,681) (984) 1,297
Income taxes (benefit) (4,589) 6,397 20 13 99
--------------------------------------------------------------
Income (loss) before cumulative
effect of accounting change (18,425) 16,120 (3,701) (997) 1,198
Cumulative effect of accounting change (294)
--------------------------------------------------------------
Net income (loss) (18,425) 16,120 (3,701) (997) 904
Dividends on preferred stock 148 194 334 334 192
--------------------------------------------------------------
Net income (loss) applicable to common stock $ (18,573) $ 15,926 $ (4,035) $ (1,331) $ 712
==============================================================
Per share data, Basic
Before cumulative effect of accounting change ($1.84) $1.66 ($0.44) ($0.16) $0.10
Cumulative effect of accounting change (0.03)
--------------------------------------------------------------
Earnings (loss) per share of common stock ($1.84) $1.66 ($0.44) ($0.16) $0.07
Per share data, Diluted
Before cumulative effect of accounting change ($1.84) $1.36 ($0.44) ($0.16) $0.10
Cumulative effect of accounting change (0.03)
--------------------------------------------------------------
Earnings (loss) per share of common stock ($1.84) $1.36 ($0.44) ($0.16) $0.07
Per share dividends paid on common stock, basic $0.00 $0.00 $0.02 $0.00 $0.00
Per share dividends paid on common stock, diluted $0.00 $0.00 $0.02 $0.00 $0.00
Shares outstanding, basic 10,090 9,610 9,100 8,421 9,511
Shares outstanding, diluted 10,090 11,674 9,100 8,421 9,511
</TABLE>
- 19 -
<PAGE>
<TABLE>
<CAPTION>
Years Ended December 31,
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
(in thousands, except for per share data)
<S> <C> <C> <C> <C> <C>
Balance Sheet Data:
Investments $ 47,101 $ 61,942 $ 46,890 $ 39,467 $ 42,413
Total assets 98,365 93,054 67,151 60,586 62,934
Loans payable 5,077 298 830 1,166 182
Stockholders' equity 4,009 22,053 3,424 4,530 8,623
Stockholders' equity
per common share (1) $ 0.38 $ 2.08 $ 0.34 $ 0.48 $ 0.92
</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 1997 and 1996 on a share-for-share basis.
- 20 -
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Results of Operations
1997 Results compared to 1996 Results
Net loss applicable to common stock was $18.6 million or $1.84 per
diluted share for 1997 compared to net income of $15.9 million or $1.36 per
diluted share for 1996. The 1997 results were unfavorably impacted by higher
health policy benefits, write-off of deferred acquisition costs, and transition
costs associated with the HPS outsourcing. The 1996 results were primarily the
result of a litigation settlement representing $14.6 million of net income plus
related realized gains on the sale of stock received as a result of the
settlement.
Policy claims are based on a variety of estimation methods, which are
continually revised incorporating the Company's most recent benefit experience.
As a result of higher than expected out-of-network claim utilization and greater
than expected claim frequency, the Company increased its loss ratio assumptions
during the year, which, in turn, resulted in an underwriting loss for 1997. In
reaction to these items, the Company began a series of corrective actions,
including premium rate increases, more stringent underwriting and revised policy
designs providing for more severe penalties for those policyholders who elect to
receive medical treatment outside of the authorized PPO networks. Although the
Company believes policy claim liabilities are adequate, experience with these
newer managed care products is limited and continues to evolve. A greater than
anticipated claim experience could have a materially adverse impact on the
financial position and results of operations.
Accident and health gross premium was $84.7 million for 1997 compared
to $57.2 million for 1996. Accident and health ceded premium was $39.5 million
for 1997 compared to $25.7 for 1996. These increases were the result of
increased new business relating to the Company's managed care health insurance
products. The Company has expanded its group medical business through recent
alliances and acquisitions. The Company has agreements with FHG for managed care
cost containment and HPS for policy administration services which were effective
in 1998. The Company outsourced its policy administration and claims to HPS in
1998 in an effort to achieve economies of scale and to provide enhanced
policyholder services.
At December 31, 1997 and 1996, gross annualized accident and health
premium inforce on small group and managed care business amounted to $96.8
million and $68.2 million, respectively, consisting of approximately 50,000 and
36,000 certificate holders, respectively. The $28.6 million net increase in
annualized premium resulted from new business issued in 1997 of $68.1 million,
plus premium rate increases of approximately $10.0 million less lapses amounting
to approximately $49.5 million. Managed care products accounted for 82% and 65%
of the inforce premium at year end 1997 and 1996, respectively, of the group
accident and health business.
- 21 -
<PAGE>
The lapse ratio on small group and managed care accident and health
insurance business based on annualized premium was 45% for 1997 compared to 38%
for 1996. The lapse ratios reflect the results of premium rate increases as well
as the Company's continued shift toward managed care plans and away from
traditional healthcare insurance. The Company's traditional healthcare insurance
plans have higher premiums and higher policy benefits than its managed care
plans. The accident and health lapse ratios include small group medical plans
which by their nature have high lapsation. In an effort to improve the lapse
ratio, the Company continues to follow the practice of pooling claim experience
for re-rating of all cases with less than 25 participants. In addition, the
Company has a conservation program which, as part of the renewal process, offers
alternatives such as increased deductibles and different benefit structures
designed to enable policyholders to maintain insurance protection without
increased premium rates. While some policyholders have switched to lower premium
insurance plans, the Company does not believe the plans are less profitable.
Life and annuity premium of $9.6 million for 1997 declined from $11.3
million for 1996 due to reduced pre-need premium. Individual life insurance
lapse ratios for 1997 and 1996 were 11% and 10%, respectively. Life and annuity
reinsurance ceded was $0.5 million for 1997 compared to $1.9 million recaptured
for 1996, due to the Company's 1996 recapture of reinsurance originally ceded in
1995 on certain multi-pay pre-need life insurance policies.
Net investment income of $3.5 million for 1997 increased modestly
compared to $3.3 million for 1996, primarily due to an increase in bond
investments. Net realized gains on investments of $0.8 million for 1997
decreased from $2.1 million for 1996, and reflect the sale of the Company's
remaining holdings of Loewen stock.
Accident and health policy benefits ratio net of reinsurance increased
to 86.3% for 1997 compared to 60% for 1996 as a result of higher than expected
claim experience on the Company's managed care products.
1997 1996
---- ----
Accident and health policy claims, net of reinsurance $38,981 $18,963
Accident and health premiums, net of reinsurance
Gross before reinsurance ceded $84,719 $57,195
Less reinsurance ceded (39,548) (25,670)
------- -------
Premiums, net of reinsurance $45,171 $31,325
Accident and health policy benefit ratio 86.3% 60.2%
- 22 -
<PAGE>
Commissions, net of ceding allowance and deferred acquisition costs of
$7.1 million for 1997 decreased from $7.9 million from 1996 due to the increased
deferral of acquisition costs related to the Company's one-life managed-care
products 1997. These costs were written-off in 1997 as amortization of deferred
policy acquisition costs.
Other operating expenses of $16 million for 1997 increased from $11.7
million for 1996, due to increased policy administration expenses caused by
increased sales volume and transition expenses associated with the HPS
outsourcing.
Amortization of deferred policy acquisition costs of $10.9 million for
1997 increased from $0.6 million for 1996 primarily due to accelerated
amortization in 1997 due to higher than expected lapses and worse than expected
loss ratios. Increased lapsation over current levels or future unprofitability
in managed care and certain life products could result in an increase in the
amortization rate of unamortized deferred policy acquisition costs, which would
adversely impact future earnings.
1996 Results compared to 1995 Results
Net income applicable to common stock was $15.9 million or $1.36 per
diluted share in 1996 compared to a loss of $4.0 million or $.44 per diluted
share for 1995. The Company's 1996 net income was primarily the result of a
litigation settlement, representing $14.6 million of net income plus related
realized gains on the sale of stock received as a result of the settlement. 1996
results were favorably impacted by improved overall average accident and health
policy benefits ratio offset by the Company's decision to recapture reinsurance
ceded on certain multi-pay pre-need life insurance policies which resulted in a
non-recurring pre-tax charge in 1996 of $1.0 million.
Accident and health gross premium for 1996 was $57.2 million compared
to $39.0 million for 1995. Accident and health ceded premium in 1996 was $25.7
million compared to $15.9 in 1995. These increases are as a result of increased
new business from managed care health insurance products.
The Company has expanded its group medical business through alliances
and acquisitions. The Company has agreements with FHG for managed care cost
containment and HPS for certain policy administration services. The Company
acquired all of the outstanding shares of REF and Associates, Inc. ("REF") in
order to obtain full control and the rights to the Company's "The Provident
Solution" plan and eliminates future commission expense between the Company and
REF.
1996 results were not materially impacted as a result of the Company's
acquisition of PALHIC, acquired for the purpose of expanding the number of
available states which the Company is licensed to sell life and health
insurance. PALHIC is licensed in 40 states while PILIC is licensed in 25 states
and the District of Columbia. Together, the Company is licensed in 42 states and
the District of Columbia.
- 23 -
<PAGE>
With the NIA acquisition the Company acquired 3,500 policyholders
representing approximately $6.5 million of annualized premium at the date of
acquisition. This business consists primarily of the "HealthQuest" product, a
managed care one-life PPO product similar to "The Provident Solution" plan. The
NIA Acquisition and the HealthQuest business accounted for the following during
1996; accident and health premiums, gross before reinsurance ceded of $6.1
million; accident and health premiums, net of reinsurance ceded of $3.1 million;
total revenue of $3.6 million; benefits, net of reinsurance of $1.7 million;
total expenses of $3.5 million; and pre-tax income of $0.1 million. These
amounts represent the business acquired on May 1, 1996 together with
post-acquisition HealthQuest sales and lapses and NIA's operations.
At December 31, 1996 and 1995, annualized accident and health premium
inforce on small group and managed care business amounted to $68.2 million and
$41.7 million, respectively, consisting of approximately 36,000 and 23,000
certificate holders, respectively. The $26.5 million net increase in annualized
premium resulted from an increase in new business issued in 1996 of $53.6
million ($19.9 million in 1995), plus $6.5 million of annualized premium related
to the HealthQuest book acquired on May 1, plus premium rate increases of
approximately $8.4 million less lapses amounting to approximately $42 million.
"The Provident Solution" and HealthQuest accounted for 65% and 25% of the
inforce premium at year end 1996 and 1995, respectively, of the group accident
and health business.
The lapse ratio on small group and managed care accident and health
insurance business based on annualized premium of 38% in 1996 declined from 41%
in 1995. The lapse ratios reflect the results of premium rate increases as well
as the Company's continued shift toward managed care plans and away from
traditional healthcare insurance. The Company's traditional healthcare insurance
plans have higher premiums and higher policy benefits than its managed care
plans. The accident and health lapse ratios include small group medical plans
which by their nature have high lapsation.
Life and annuity premium of $11.3 million for 1996 declined from $13.2
million in 1995 due to reduced new premium growth caused by refinements in
pre-need product and the Company's elimination of certain unprofitable marketing
relationships selling the Company's pre-need products. The individual life
insurance premium lapse ratios on an annualized basis for 1996 and 1995 were 10%
and 9%, respectively.
Life and annuity reinsurance ceded of ($1.9 million) was $5.5 million
higher compared to 1995 due to the Company's 1996 recapture of reinsurance
originally ceded in 1995 on certain multi-pay pre-need life insurance policies.
The Company recaptured this business as a result of the availability of
additional capital resulting from the litigation settlement. The recapture
impact on 1996 results accounted for the following amounts: premium - life and
annuity reinsurance ceded of $2.4 million; death and other life policy benefits
of $3.1 million; and commissions, net of ceding allowance of $0.3 million. The
cession impact on 1995 results accounted for the following amounts: premium -
life and annuity reinsurance ceded of $3.2 million; death and other policy
benefits of $3.2 million; and commissions, net of ceding allowance of ($1.0)
million.
Net investment income of $3.3 million for 1996 increased from $2.9
million in 1995, primarily due to an increase in bond investments in late 1996.
- 24 -
<PAGE>
The Company realized $2.1 million in capital gains in 1996 as a result of
selling Loewen stock received in connection with the litigation settlement.
Accident and health policy benefits ratio improved in 1996 compared to
1995 as the result of more first duration business where underwriting and policy
provisions tend to produce loss ratios that are lower than subsequent durations.
1996 1995
-------- --------
Accident and health policy claims,net of reinsurance $18,963 $14,458
Accident and health premiums
Gross before reinsurance ceded $57,195 $39,028
Less reinsurance ceded (25,670) (15,882)
-------- --------
Premiums,net of reinsurance $31,525 $23,146
======== ========
Accident and health policy benefit ratio 60.2% 62.5%
"The Provident Solution" and HealthQuest products, introduced in 1995
represented 37% and 4% of accident and health policy benefits in 1996 and 1995,
respectively.
Other operating expenses of $11.7 million in 1996 increased from $11.6
million in 1995, due to increased policy administration expenses resulting from
increased sales volume and expenses associated with the acquired HealthQuest
book of business. With the CSE acquisition, the Company insourced its accident
and health policy and claims administration functions in order to better control
costs and service levels. The Company acquired CSE's staff and administration
systems. The acquired administration system supported the Company's managed care
products and alliances with managed care networks. The Company later determined
that it was advantageous to outsource these functions to HPS effective in 1998.
Amortization of deferred policy acquisition costs of $0.6 million for
1996 increased $0.5 million from 1995 primarily due to $0.4 million of managed
care amortization in the second half of 1996 relating to deferrals in the third
and fourth quarters of 1996.
Liquidity and Capital Resources
A major objective of the Company is to maintain sufficient liquidity to
fund growth, fulfill statutory requirements and meet all cash requirements with
cash and short term equivalents plus funds generated from operating cash flow.
- 25 -
<PAGE>
The primary sources of cash are premiums, investment income and
investment sales and maturities. The primary uses of cash are benefit payments
to insureds, operating costs including policy acquisition costs and investment
purchases. The Company's liquidity requirements are primarily created and met by
PILIC and PALHIC. Starting in 1998, Insurion's sources of cash will be primarily
private placements, a public offering and to a lessor extent marketing fee
income. Insurion's primary uses of cash will be fee payments to AOL and other
Internet sites, WEB site development and start-up expenses.
Cash and investments carried at market value at December 31, 1997 of
$63.9 million. This included $45.1 million of bonds issued by the U.S.
Government, government agencies, public utilities and other corporations, $2.0
million invested in policy loans, real estate and other invested assets and
$16.8 million in cash and cash equivalents. Bonds are investment grade
securities with fixed incomes ranging in maturity from one to 30 years. The
gross average yield on fixed income bonds as of December 31, 1997, 1996 and 1995
was 6.8%, 6.5% and 6.3%, respectively. The Company's investment policy is to buy
medium term U.S. government direct and agency bonds. All bonds are considered to
be "available for sale". The Company and its subsidiaries invest in neither
high-yield debt instruments, defined as securities below investment grade with
interest rates or yields significantly above market rates, nor derivative
financial instruments.
The Company entered into a line of credit with a bank during 1997 in
the amount of $1 million with interest at 1% above the prime rate. The
outstanding borrowing at December 31, 1997 amounted to $1.0 million. The Company
anticipates repaying this amount in 1998.
The Loewen settlement, described in Note K to the financial statements,
provided a significant source of cash and invested assets in 1996. The
settlement contributed approximately $22.4 million of pre-tax income,
represented by $3 million of cash and 718,519 shares of Loewen common stock
valued at $19.4 million. The Company sold 85% of its Loewen stock representing
$18.5 million of equity investments, which included a realized pre-tax gain of
$2 million, in 1996. The Company sold its remaining Loewen shares during the
first quarter of 1997 that resulted in $4.1 million of cash from sale of
investments and included a corresponding pre-tax gain of $1 million.
Net cash used in operating activities of $5.4 million in 1997 reflects
higher than expected paid claims on the Company's managed care products. Change
in future policy benefits and claims of $17 million increased in 1997 compared
to 1996 due to managed care health insurance product sales at higher than
expected loss ratios. The Company anticipates the majority of its unpaid
accident and health claims incurred during 1997 will be paid during 1998. The
Company has sufficient cash available at December 31, 1997 to adequately fund
these claim payments as they arise in 1998.
Change in amounts due from reinsurers of $7.5 million in 1997 increased
from $2.1 million in 1996, due to higher than expected claim payments which are
recoverable from reinsurers in proportion to the percentage of risk they
reinsure.
- 26 -
<PAGE>
In connection with the HPS Outsourcing Agreement, the Company received
a $5.0 million cash advance in 1997 to be repaid over the 60-month term of the
agreement at the rate of $85,000 per month.
The Company has entered into agreements pursuant to which options to
purchase shares of the Company's common stock will be granted to various agents
as they achieve certain production quotas and performance levels. The Company
also initiated a "1996 Employee Incentive Plan," granting options to purchase
shares of the Company's common stock to key employees whom the Company believes
are critical to the future success of the Company.
The Company anticipates that it will fund surrenders and benefit
payments along with other operating expenses through net cash from operating
activities, scheduled investment maturities, and the liquidation of short-term
investments. Excess cash flow from operations and financing are transferred to
the investment portfolio where it is available for investment and future cash
needs. Anticipated capital expenditures are discussed later.
The statutory capital and surplus of PILIC which includes amounts
related to its subsidiary PALHIC, was $11.4 million at December 31, 1997. At
December 31, 1997, PILIC calculated its "Risk Based Capital" utilizing a formula
required by the National Association of Insurance Commissioners. The results of
this computation indicate PILIC's adjusted capital of $12.0 million exceeds the
Company Action Level amount required by $2.7 million. PALHIC's results of this
computation indicate PALHIC's adjusted capital of $4.3 million exceeds the
Company Action Level amount required by $2.6 million. In concept, Risk Based
Capital standards are designed to measure the acceptable amounts of capital an
insurer should have based on inherent and specific risks of the insurers
business. This formula is a primary measurement as to the adequacy of total
capital and surplus of life insurance companies. Administrative rules and legal
restrictions of state insurance departments presently prevent payment of
dividends by PILIC and PALHIC to their parent companies without regulatory
approval.
Impact of Inflation
Inflation increases the need for insurance. Many policyholders who once
had adequate insurance programs increase their life insurance coverage to
provide the same relative financial benefits and protection. The effect of
inflation on medical costs leads to accident and health policies with higher
benefits. Thus, inflation has increased the need for life and accident and
health products.
The higher interest rates which have traditionally accompanied
inflation also affect the Company's investment operation. The market value of
the Company's fixed rate long-term investments decreases as interest rates
increase.
Inflation has significantly increased the cost of health care. The
adequacy of premium rates in relation to the level of health claims is
constantly monitored and, where appropriate, premium rates are increased as
policy benefits increase. Failure to make such increases commensurate with
health care cost increases may result in a loss from health insurance
operations.
- 27 -
<PAGE>
The Company's pre-need products include periodic adjustments to the
face amount of the policy for increases in the consumer price index.
Capital Expenditures and Commitments
The Company announced an interactive marketing agreement with AOL in
March 1998. This agreement provides the Company with an exclusive agreement to
market health insurance products through AOL. The Company has agreed to pay AOL
a $8 million cash of which the Company paid AOL $4 million as of June 30, 1998
with $4 million due on September 1, 1998. Additionally, the Company expects to
incur certain initial operating costs which will require funding before the
AOL-related venture becomes operational in October 1998. HPS paid the Company
$0.750 million in March 1998 to be the exclusive administrator of this business.
Insurion privately placed $5 million of convertible debt in May 1998 to
partially fund these obligations.
- 28 -
<PAGE>
Item 8. Financial Statements and Supplementary Data.
Report of Current Independent Accountants F-1
Report of Previous Independent Accountants F-2
Consolidated Balance Sheets - December 31, 1997 and 1996 F-3
Consolidated Statements of Operations
Years ended December 31, 1997, 1996 and 1995 F-4
Consolidated Statements of Changes in Stockholders' Equity
Years ended December 31, 1997, 1996 and 1995 F-5
Consolidated Statements of Cash Flows
Years ended December 31, 1997, 1996 and 1995 F-6 to F-7
Notes to Consolidated Financial Statements F-8 to F-37
- 29 -
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Board of Directors of Provident American Corporation
We have audited the accompanying consolidated balance sheet of Provident
American Corporation and Subsidiaries as of December 31, 1997 and the related
consolidated statements of operations, stockholders' equity, and cash flows for
the year then ended. We have also audited the financial statement schedules as
of and for the year ended December 31, 1997 listed in the accompanying index.
These financial statements and schedules are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and schedules based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements and schedules are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements and
schedules. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation of the financial statements and schedules. We
believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Provident American
Corporation and Subsidiaries as of December 31, 1997, and the results of its
operations and its cash flows for the year then ended in conformity with
generally accepted accounting principles.
Also, in our opinion, the financial statement schedules present fairly, in all
material respects, the information set forth therein.
BDO Seidman LLP
Philadelphia, Pennsylvania
July 10, 1998
F-1
<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 as of
December 31, 1996 and for each of the two years in the period ended December 31,
1996. These financial statements and financial statement schedules are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements and financial statement schedules based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Provident American
Corporation and Subsidiaries as of December 31, 1996, and the results
of their operations and their cash flows for each of the two years in the
period ended December 31, 1996 in conformity with generally accepted accounting
principles. In addition, in our opinion, the financial statement schedules
referred to above, when considered in relation to the basic financial statements
taken as a whole, present fairly, in all material respects, the information
required to be included therein.
Coopers & Lybrand, LLP
2400 Eleven Penn Center
Philadelphia, Pennsylvania
March 11, 1997
F-2
<PAGE>
Provident American Corporation and Subsidiaries
Consolidated Balance Sheets
<TABLE>
<CAPTION>
(Dollars in thousands except Preferred and Common Stock Data) December 31, December 31,
1997 1996
-------- ------------
<S> <C> <C>
Assets
Investments:
Bonds $ 45,134 $ 54,985
Equity securities, cost $12 and $3,901 8 4,930
Real estate less accumulated depreciation of $182 and $158 918 942
Policy loans 498 526
Other invested assets 543 559
--------- ----------
Total Investments 47,101 61,942
Cash and cash equivalents 16,767 6,218
Premiums due and uncollected 2,106 1,318
Amounts due from reinsurers 16,092 9,240
Loans receivable from officer, director and stockholder 1,243 461
Accrued investment income 610 836
Federal income taxes receivable 3,325 90
Property and equipment, less accumulated depreciation of $2,751 and $1,261 6,804 4,711
Deferred tax asset 0 154
Unamortized deferred policy acquisition costs 1,499 3,140
Goodwill, less accumulated amortization of $150 and $1,973 1,193 3,166
Other assets 1,625 1,778
--------- ----------
Total Assets $ 98,365 $ 93,054
========= ==========
Liabilities and Stockholders' Equity
Future policy benefits:
Life $ 40,665 $ 38,459
Annuity and other 5,428 6,354
Policy claims 31,109 15,438
Premiums received in advance and unearned 2,677 2,348
Amounts due to reinsurers 37 705
Accrued commissions and expenses 5,451 4,179
Loans payable 5,077 298
Capital equipment leases 1,151 0
Income taxes payable 0 463
Deferred income taxes 100 0
Other liabilities 2,661 2,757
--------- ----------
Total Liabilities 94,356 71,001
Stockholders' Equity
Preferred stock, par value $1: authorized 20,000,000 shares:
Series A Cumulative Convertible, issued 580,250 580 580
Series B Cumulative Convertible, none issued
Common stock, par value $.10: authorized 50,000,000, issued 10,209,160 and 10,078,710 1,021 1,008
Common stock, Class A, par value $.10: authorized 20,000,000, none issued
Additional paid-in capital 13,767 12,945
Net unrealized appreciation (depreciation) of bonds 188 (177)
Net unrealized appreciation (depreciation) of equity securities (3) 668
Retained earnings (11,468) 7,105
--------- ----------
4,085 22,129
Less common stock held in treasury, at cost, 36,300 shares (76) (76)
--------- ----------
Total Stockholders' Equity 4,009 22,053
--------- ----------
Total Liabilities and Stockholders' Equity $ 98,365 $ 93,054
========= ==========
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE>
Provident American Corporation and Subsidiaries
Consolidated Statements of Operations
<TABLE>
<CAPTION>
(Dollars in thousands, except per share data) Years Ended December 31,
1997 1996 1995
----------- ------------ ------------
<S> <C> <C> <C>
Revenue:
Premium: Accident and health, gross $84,719 $57,195 $39,028
Life and annuity, gross 9,555 11,308 13,220
----------- ------------ ------------
Total gross premium 94,274 68,503 52,248
----------- ------------ ------------
Accident and health reinsurance ceded 39,548 25,670 15,882
Life and annuity reinsurance ceded 473 (1,873) 3,657
----------- ------------ ------------
Total reinsurance ceded 40,021 23,797 19,539
----------- ------------ ------------
Net premium 54,253 44,706 32,709
Net investment income 3,487 3,280 2,858
Realized gains (losses) on investments 750 2,100 211
Processing fees and other revenue 3,540 1,661 1,269
Litigation settlement, net of expenses 0 22,400 0
----------- ------------ ------------
Total revenue 62,030 74,147 37,047
----------- ------------ ------------
Benefits and expenses:
Death and other policy benefits:
Life 6,112 4,396 4,568
Accident and health, net of reinsurance 38,981 18,963 14,458
Annuity contracts and other considerations 737 1,137 892
Increase in liability for future policy benefits 1,896 6,474 2,243
Commissions, net of ceding allowance and
deferred acquisition costs 6,813 7,855 6,054
Other operating expenses, net of ceding allowance
and deferred acquisition costs 15,301 11,716 11,561
Amortization of deferred policy acquisition costs 10,943 584 103
Depreciation and amortization of goodwill 4,261 505 849
----------- ------------ ------------
Total benefits and expenses 85,044 51,630 40,728
----------- ------------ ------------
Income (loss) before income taxes (23,014) 22,517 (3,681)
Provision (benefit) for income taxes:
Current (5,205) 6,816 (131)
Deferred 616 (419) 151
----------- ------------ ------------
Total income taxes (4,589) 6,397 20
----------- ------------ ------------
Net income (loss) (18,425) 16,120 (3,701)
Dividends on preferred stock 148 194 334
----------- ------------ ------------
Net income (loss) applicable to common stock ($18,573) $15,926 ($4,035)
=========== ============ ============
Income (loss) per share of common stock
Basic $ (1.84) $ 1.66 $ (0.44)
=========== ============ ============
Diluted $ (1.84) $ 1.36 $ (0.44)
=========== ============ ============
Common shares and equivalents used in computing income (loss) per share
Basic 10,090 9,610 9,100
Diluted 10,090 11,674 9,100
See notes to consolidated financial statements.
</TABLE>
F-4
<PAGE>
Provident American Corporation and Subsidiaries
Consolidated Statements of Changes in Stockholders' Equity
(Dollars in thousands)
<TABLE>
<CAPTION>
Net Unrealized Net Unrealized
Additional Appreciation Appreciation
Preferred Stock Common Stock Paid-In (Depreciation) of Marketable
Shares Amount Shares Amount Capital of Bonds Securities
-------- -------- -------- -------- ---------- --------------- ----------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1994.......... 1,006 $1,006 8,628 $ 863 $10,130 $(2,563)
Pooling of interests with REF &
Associates (in 1996)............... 610 61 (61)
Stock options exercised............. 22 2 79
Compensation expense on stock option
grants............................. 18
Cash dividends declared on preferred
and common stock...................
Net unrealized appreciation of
bonds.............................. 3,030
Net loss............................
----- ------ ------ ------ ------- -------
BALANCE, DECEMBER 31, 1995.......... 1,006 1,006 9,260 926 10,166 467
Conversion of Series B Cumulative
Preferred stock.................... (426) (426) 426 43 383
Retirement of treasury stock........ (100) (10) (234)
Stock options and warrants
exercised.......................... 204 20 625
Compensation expense on stock
issuance and stock option grants... 15 2 153
Issuance of common stock in
connection with acquisition of
businesses......................... 274 27 1,852
Net unrealized depreciation of
bonds.............................. (644)
Net unrealized appreciation of
equity securities.................. $ 668
Cash dividends declared on preferred
stock..............................
Net income..........................
----- ------ ------ ------ ------- ------- -----
BALANCE, DECEMBER 31, 1996.......... 580 $ 580 10,079 $1,008 $12,945 $ (177) $ 668
Stock options and warrants
exercised.......................... 30 2 96
Compensation expense on stock
issuance........................... 100 11 478
Compensation expense on stock
option grants...................... 248
Net unrealized depreciation of
bonds.............................. 365
Net unrealized appreciation of
equity securities.................. (671)
Cash dividends declared on preferred
stock..............................
Net loss............................
----- ------ ------ ------ ------- ------- -----
BALANCE, DECEMBER 31, 1997.......... 580 $ 580 10,209 $1,021 $13,767 $ 188 $ (3)
===== ====== ====== ====== ======= ======= =====
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Retained Treasury
Earnings Stock
(Deficit) (at cost) Total
----------- --------- --------
<S> <C> <C> <C>
BALANCE, DECEMBER 31, 1994.......... $ (4,586) $(320) $ 4,530
Pooling of interests with REF &
Associates (in 1996)...............
Stock options exercised............. 81
Compensation expense on stock option
grants............................. 18
Cash dividends declared on preferred
and common stock................... (534) (534)
Net unrealized appreciation of
bonds.............................. 3,030
Net loss............................ (3,701) (3,701)
-------- ----- -------
BALANCE, DECEMBER 31, 1995.......... (8,821) (320) 3,424
Conversion of Series B Cumulative
Preferred stock.................... 0
Retirement of treasury stock........ 244 0
Stock options and warrants
exercised.......................... 645
Compensation expense on stock
issuance and stock option grants... 155
Issuance of common stock in
connection with acquisition of
businesses......................... 1,879
Net unrealized depreciation of
bonds.............................. (644)
Net unrealized appreciation of
equity securities.................. 668
Cash dividends declared on preferred
stock.............................. (194) (194)
Net income.......................... 16,120 16,120
-------- ----- -------
BALANCE, DECEMBER 31, 1996.......... $ 7,105 $ (76) $22,053
Stock options and warrants
exercised.......................... 98
Compensation expense on stock
issuance........................... 489
Compensation expense on stock
option grants...................... 248
Net unrealized depreciation of
bonds.............................. 365
Net unrealized appreciation of
equity securities.................. (671)
Cash dividends declared on preferred
stock.............................. (148) (148)
Net loss............................ (18,425) (18,425)
-------- ----- -------
BALANCE, DECEMBER 31, 1997.......... $(11,468) $ (76) $ 4,009
======== ===== =======
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE>
Provident American Corporation and Subsidiaries
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
(Dollars in thousands) Years Ended December 31,
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Cash flows from operating activities
Net income (loss) $(18,425) $ 16,120 $ (3,701)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation, amortization and in 1997 and 1995
asset impairment 4,286 515 2,934
Equity securities received from litigation settlement (19,400)
Net realized (gain) on investments (750) (2,100) (211)
Changes in assets and liabilities
Premium due and uncollected, unearned
premium and premium received in advance 130 971 237
Due to/from reinsurers (7,520) (2,112) 3,050
Accrued investment income 226 (186) 3
Other assets, current and deferred income
taxes and other liabilities (3,222) (969) 81
Deferred policy acquisition costs, net 1,641 (2,154) (676)
Accrued commissions and expenses 1,272 1,906 74
Future policy benefits and policy claims 16,951 8,528 1,743
-------- -------- --------
Net cash provided by (used in) operating activities (5,411) 1,119 3,534
-------- -------- --------
Cash flows from investing activities
Purchases of bonds (25,128) (24,861) (13,747)
Purchases of equity securities and other investments (100) (1,194) (246)
Sale of bonds 35,879 16,719 9,350
Sale of equity securities 4,420 18,504
Maturity of investments and loans 645 328
Repayments of loans receivable 250 738
Loans to officer, director and shareholder (1,032) (461)
Purchases of property and equipment (3,206) (745) (76)
Acquisition of businesses, net (3,745)
Sale of business, net 1,756
-------- -------- --------
Net cash provided by (used in) investing activities 11,083 4,862 (1,897)
-------- -------- --------
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE>
Provident American Corporation and Subsidiaries
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
(Dollars in thousands) Years Ended December 31,
1997 1996 1995
--------- ------- --------
<S> <C> <C> <C>
Cash flows from financing activities
Withdrawals from contractholder deposit funds, net (589) (1,797) (996)
Proceeds from note payable 5,039 78 78
Repayments of notes payable (260) (745) (414)
Issuance of common stock 835 733 81
Dividends paid on preferred and common stock (148) (194) (534)
-------- -------- --------
Net cash provided by (used in) financing activities 4,877 (1,925) (1,785)
-------- -------- --------
Net increase (decrease) in cash and cash equivalents 10,549 4,056 (148)
Cash and cash equivalents, beginning of year 6,218 2,162 2,310
-------- -------- --------
Cash and cash equivalents, end of year $ 16,767 $ 6,218 $ 2,162
======== ======== ========
Supplemental disclosure of cash flow information
Interest paid $ 97 $ 56 $ 101
Income taxes paid (refunded), net $ (1,490) $ 6,330 $ (13)
</TABLE>
Non-cash investing activities
In 1997, the Company incurred capital lease obligations in connection
with the acquisition of certain equipment.
In 1996, the Company issued stock in connection with certain business
acquisitions described in Note C and received stock in connection with a
litigation settlement described in Note K.
See notes to consolidated financial statements.
F-7
<PAGE>
Provident American Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 1997
(Dollars in thousands, except per share amounts)
Note A - Nature of Operations
Provident American Corporation ("PAMCO") is an insurance holding
company. The operations of PAMCO and its subsidiaries (the "Company") are
principally those of its wholly owned life insurance companies, Provident
Indemnity Life Insurance Company ("PILIC") and Provident American Life and
Health Insurance Company ("PALHIC").
PAMCO is a Pennsylvania corporation and is regulated as an insurance
holding company by the 42 states in which PILIC and PALHIC are licensed. The
Company markets and underwrites group life and accident and health coverages as
well as individual life insurance policies through independent agents and
brokers. The Company's major line of combined group life and health business is
written through several association groups and discretionary group trusts.
Note B - Significant Accounting Policies
Principles of consolidation: The consolidated financial statements of
PAMCO and subsidiaries have been prepared in accordance with generally accepted
accounting principles (GAAP) and include the accounts of PAMCO and all of its
subsidiaries. All significant intercompany accounts and transactions have been
eliminated.
Use of estimates: The preparation of financial statements in conformity
with GAAP requires management to make estimates and assumptions that affect the
reported amounts of revenues, expenses, assets, and liabilities and disclosure
of contingencies. Actual results could differ from those estimates.
Bonds are classified as "available-for-sale", reported at fair value,
with unrealized gains and losses excluded from earnings and reported as a
separate component of stockholders' equity, net of applicable deferred income
taxes.
Equity securities are classified as "available-for-sale" and carried at
fair value.
Real estate is stated at cost, less accumulated depreciation; policy
loans are stated at the aggregate unpaid principal balances.
Cash equivalents consist of highly liquid investments with maturities
of three months or less from date of purchase. The Company utilizes two banking
institutions for insurance and investment operations. The Company had bank
deposits which exceeded federally insured limits by approximately $12,000 at
December 31, 1997.
F-8
<PAGE>
Provident American Corporation and Subsidiaries
Notes to Consolidated Financial Statements - (Continued)
Realized gains and losses (including provisions for market declines
considered to be other than temporary) are included in the determination of net
income (loss) as revenues. The cost of investments sold is determined on a
specific identification basis.
Unrealized gains and losses on securities available-for-sale are
excluded from earnings and included as a separate component of stockholders'
equity, net of applicable deferred income taxes.
Deferred policy acquisition costs are costs which vary with and in
direct proportion to new business volume and include excess first year
commissions, policy issue and underwriting expenses net of application fees and
reinsurance ceding allowances. Accordingly, policy acquisition costs are
deferred and amortized in order to match the costs of writing new business
against the expected future revenues. Amortization of deferred policy
acquisition costs relating to managed care business ("The Provident Solution"
and HealthQuest) are established when polices are issued and is based on
projected premium over a four-year period incorporating current lapse experience
and for life insurance business based on the same projected premium assumptions
used in computing reserves for future policy benefits. Unamortized costs are
compared to the estimated future profitability for these products. If the
unamortized costs exceed the estimated future profitability for these products,
the unamortized cost will be written down to equal the estimated future
profitability. The Company's estimates of future profitability consider
investment income.
Property and equipment (principally home office property) are recorded
at cost. Expenditures for improvements that increase the estimated useful life
of the asset are capitalized. Expenditures for repairs and maintenance are
charged to operations as incurred. Depreciation is provided using the
straight-line method over the estimated useful lives of the assets. Upon sale or
retirement, the cost of the asset and the related accumulated depreciation are
removed from the accounts and the resulting gain or loss, if any, is included in
operations.
Goodwill represents the excess of the Company's purchase price over the
fair value of the net assets acquired and is being amortized on a straight line
basis over 10-20 years. The Company continually monitors the net realizable
value of goodwill and recognizes a charge to expense when it is determined that
a permanent impairment exists. During 1997 the Company determined the goodwill
associated with the NIA and CSE acquisitions were impaired as a result of the
outsourcing agreement with HPS described in Note R and was written off.
Income taxes: Income taxes are calculated using the liability method
specified by Statement of Financial Accounting Standards No. 109, "Accounting
for Income Taxes".
Recognition of premium revenue: For accident and health policies,
premiums are recognized when earned. For life insurance policies, premiums are
recognized when due. Limited-payment contract premiums received in excess of net
premiums are deferred and recognized into income in a constant relationship with
insurance in-force. Considerations from annuity contracts are accounted for as
fund deposits with revenues reflecting administrative and other charges.
F-9
<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 basis before reinsurance ceded together with the ceded premiums while
policy benefits are presented net of reinsurance and commissions are presented
net of reinsurance allowances.
Earnings (loss) per share of common stock: In 1997, the Company adopted
SFAS No. 128 "Earnings Per Share" resulting in the presentation of basic and
diluted earnings per share ("EPS"). Prior years' EPS data presented have been
restated. Equivalents were anti-dilutive in 1997 and 1995.
Reclassifications and restatement of prior year amounts: Certain prior
year amounts have been reclassified to conform to the current year's
presentation.
Impairment of Long-lived Assets: Long-lived assets and certain
identifiable intangibles including goodwill are reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount of an asset
may not be recoverable. In 1995 management determined that certain intangible
assets and equipment should be written off. Approximately $2,200 was charged
against operations in 1995. The assets related to systems development and
hardware costs were replaced with systems acquired through acquisitions. In
addition, goodwill and value of insurance in force purchased was written off.
During 1997 the Company wrote off certain computer hardware, equipment, software
and goodwill as described in Note R.
Recent accounting standards: SFAS 129 "Disclosure of "Information about
Capital Structure" establishes standards for disclosing information about an
entity's capital structure. SFAS 129 requires the disclosure of the pertinent
rights and privileges of various securities outstanding (stock, options,
warrants, preferred stock, debt and participating rights), call prices and
dates, conversion or exercise prices and redemption requirements. SFAS 129 has
been adopted by the Company.
F-10
<PAGE>
Provident American Corporation and Subsidiaries
Notes to Consolidated Financial Statements - (Continued)
SFAS 130 "Reporting Comprehensive Income" establishes standards for
reporting and display of comprehensive income, its components and accumulated
balances. Comprehensive income is defined to include all changes in equity
except those resulting from investments by owners and distributions to owners.
Among other disclosures, SFAS 130 requires that all items that are required to
be recognized under current accounting standards as components of comprehensive
income be reported in a financial statement that is displayed with the
prominence as other financial statements.
SFAS 131 "Disclosure about Segments of a Business Enterprise"
establishes standards for reporting information about operating segments in
annual financial statements and requires reporting of selected information about
operating segments in interim financial statements issued to the public. It also
establishes standards for disclosures regarding products and services,
geographic areas and major customers. SFAS 131 defines operating segments as
components of an enterprise about which separate financial information is
available and that is regularly used by the chief operating decision maker in
deciding how to allocate resources and in assessing performance.
SFAS 132 "Employers' Disclosures about Pensions and other
Postretirement Benefits" revises and standardizes disclosure requirements about
pensions and other postretirement benefit plans to the extent practicable. SFAS
132 requires additional information on changes in benefit obligations and the
fair values of plan assets that will facilitate financial analysis.
SFAS 130, SFAS 131 and SFAS 132 are effective for periods ending after
December 15, 1997. The Company has not been able to fully evaluate the impact,
if any, that adoption of these recent pronouncements will have on future
financial statement disclosures.
SFAS 133 "Accounting for Derivative Instruments and Hedging activities
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts,
(collectively referred to as derivatives) and for hedging activities. It
requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those instruments
at fair value. SFAS 133 is effective for all periods beginning after December
15, 1997. The Company had no derivative instruments as of December 31, 1997.
F-11
<PAGE>
Provident American Corporation and Subsidiaries
Notes to Consolidated Financial Statements - (Continued)
Note C - Acquisitions of Subsidiaries and Business
Effective March 1, 1996, PILIC acquired all of the issued and
outstanding stock of Union Benefit Life Insurance Company, a Pennsylvania stock
life insurance company, ("UBLIC") for an amount equal to its adjusted capital
and surplus (approximately $3,750), $500 in cash, plus the issuance of 100,000
shares of PAMCO's common stock. The Company has changed UBLIC's name to PALHIC.
The shares issued are registered securities but have trading restrictions
attached. Concurrently, the Company, PALHIC and PILIC entered into an agreement
for the purchase and sale of the PALHIC business with Life and Health Insurance
Company of America, a Pennsylvania insurer ("LHI"), pursuant to which all of the
insurance business of PALHIC was purchased by LHI immediately prior to the
purchase of the PALHIC stock by PILIC. The purchase price payable by LHI to
PALHIC for the purchase of the PALHIC business was $1,800. PALHIC is licensed to
transact life, accident and health insurance in forty (40) states and the
District of Columbia. PALHIC began underwriting the Company's life, accident and
health insurance products in 1997. This transaction was accounted for as a
purchase.
Effective May 1, 1996, the Company acquired all of the issued and
outstanding stock of NIA Corporation ("NIA"), d/b/a National Insurance
Administrators, and its wholly owned subsidiary, American Brokerage Corporation
("ABC") from MidAmerica Mutual Life Insurance Company ("MAM") for $254 of cash
and 50,000 shares of PAMCO's common stock. NIA and ABC are Colorado
corporations. NIA, a third party administrator, and ABC, an insurance marketer,
collectively design, market and service private-label health insurance plans. As
a part of this transaction, PILIC assumed approximately 3,500 in-force
"HealthQuest" medical policies originally underwritten by MAM and its
subsidiaries. This transaction was accounted for as a purchase and its impact on
the Company's consolidated results of operations was $3,100 of net earned
premium.
On June 18, 1996, the Company acquired, effective January 1, 1996, all
of the issued and outstanding stock of Richard E. Field & Associates, Inc.,
d/b/a REF & Associates, Inc. ("REF"), from its shareholders Richard E. Field and
Arthur Ivey for 610,000 shares of PAMCO's common stock. REF, a California
corporation, is engaged in marketing certain life and health insurance products
of PILIC. This transaction was accounted for as a pooling of interests.
On August 15, 1996, the Company acquired Coastal Services Eastern, Inc.
("CSE") from its shareholders for 123,937 shares of the Company's common stock.
CSE's sole business was providing the Company with policy and claims
administration at the Company's facility using CSE's administration system along
with its employees. This transaction was accounted for as a purchase.
F-12
<PAGE>
Provident American Corporation and Subsidiaries
Notes to Consolidated Financial Statements - (Continued)
Note D - Investments and Financial Instruments
Investments in bonds are classified as available for sale and consisted of the
following.
<TABLE>
<CAPTION>
December 31, 1997
------------------------------------------------------------------
Book and
Amortized Unrealized Fair
Cost Cost Gains Losses Value
---- ---- ----- ------ ------
<S> <C> <C> <C> <C> <C>
Fixed maturities:
United States Government
and Agencies 42,114 $42,079 $ 428 $ 198 $42,309
Canadian Government -- -- -- -- --
Public Utilities 788 790 8 -- 798
Corporate 1,960 1,976 52 -- 2,027
------- ------- ------- ------- -------
Total fixed maturities $44,862 $44,845 $ 488 $ 198 $45,134
======= ======= ======= ======= =======
December 31, 1996
------------------------------------------------------------------
Book and
Amortized Unrealized Fair
Cost Cost Gains Losses Value
---- ---- ----- ------ ------
Fixed maturities:
United States Government
and Agencies $49,407 $49,285 $ 246 637 $48,894
Canadian Government 1,488 1,486 93 1,579
Public Utilities 790 792 11 781
Corporate 3,670 3,695 49 13 3,731
------- ------- ------- ------- -------
Total fixed maturities 55,355 55,258 388 661 54,985
======= ======= ======= ======= =======
</TABLE>
F-13
<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, 1997 and 1996:
<TABLE>
<CAPTION>
Change during the
Balance at 12 months ended
December 31, December 31,
1997 1996 1997 1996
------- ------- ------- -------
<S> <C> <C> <C> <C>
Net Unrealized Appreciation (Depreciation) on Bonds
Unrealized gains (losses), pre-tax
Gains $ 487 $ 388 $ 99 ($ 646)
Losses (198) (661) 463 (561)
------- ------- ------- -------
Net gains (losses) 289 (273) 562 (1,207)
Deferred federal income tax (provision) benefit (101) 96 (197) 423
Amount applicable to life future policy benefits 0 0 0 140
------- ------- ------- -------
Net unrealized appreciation (depreciation) of bonds $ 188 ($ 177) $ 365 ($ 644)
======= ======= ======= =======
Net Unrealized Appreciation (Depreciation) on Stocks
Unrealized gains (losses), pre-tax
Gains $ 0 $ 1,311 ($1,311) $ 1,311
Losses (4) (282) 278 (282)
------- ------- ------- -------
Net gains (losses) (4) 1,029 (1,033) 1,029
Deferred federal income tax (provision) benefit 1 (361) 362 (361)
------- ------- ------- -------
Net unrealized appreciation (depreciation) of bonds ($ 3) $ 668 ($ 671) $ 668
======= ======= ======= =======
</TABLE>
Changes in fair value of bonds were a direct result of the overall
change in interest rates. The Company's bond investments are comprised of
high-quality investment-grade securities.
Fair values of bond investments in good standing are principally a
function of current interest rates, which are not considered in computing
related future liabilities to contract holders. The presentation of estimated
values for assets based on current interest yields without a corresponding
revaluation of contractholder liabilities can be misinterpreted.
The Company has various financial assets and liabilities outstanding at
December 31, 1997. Management believes that the book value of these financial
instruments (cash and invested assets, future policy benefits and notes payable)
approximates their fair values since the instruments carry interest rates which
approximate market or that the amounts involved are not material.
Bond investments on deposit as required by regulatory agencies were
valued at approximately $8,200 at December 31, 1997. In addition, approximately
$1,100 of bonds or other interest bearing deposits has been placed in escrow
with a bank in connection with certain reinsurance agreements.
F-14
<PAGE>
Provident American Corporation and Subsidiaries
Notes to Consolidated Financial Statements - (Continued)
The amortized cost and fair value (book value) of bonds at December 31,
1997, by contractual maturity, is shown below. Expected maturities will differ
from contractual maturities because borrowers may have the right to call or
prepay obligations with or without call or prepayment penalties.
<TABLE>
<CAPTION>
Contractual Maturity Amortized Cost Book and Fair Value
-------------------- -------------- -------------------
<S> <C> <C>
Within one year $ 252 $ 253
After one year but within five years 15,523 15,639
After five years but within ten years 18,289 18,383
Over ten years 6,420 6,521
------- -------
40,484 40,796
Mortgage-backed securities 4,361 4,338
------- -------
$44,845 $45,134
======= =======
</TABLE>
Proceeds from sales of investments in bonds during 1997, 1996 and 1995
were $35,848, $16,719 and $9,350, respectively. Gross gains of $455, $200 and
$291 in 1997, 1996 and 1995, respectively, and gross losses of $92, $123 and
$170 in 1997, 1996 and 1995, respectively, were realized on those sales.
The Company's investment in equity securities are classified as
"available for sale" and carried at fair value. Equity securities as of December
31, 1996 represents the Company's investment of 100,000 shares of National Media
Corp. and 108,119 shares of Loewen common stock (NYSE: LWN) acquired as a result
of litigation (See note K). All shares of both companies owned as of December
31, 1996 were sold during 1997.
F-15
<PAGE>
Provident American Corporation and Subsidiaries
Notes to Consolidated Financial Statements - (Continued)
Net investment income consisted of the following:
<TABLE>
<CAPTION>
1997 1996 1995
------ ------ ------
<S> <C> <C> <C>
Bonds $3,293 $3,072 $2,680
Equity securities 14 39
Mortgage loans 27 28 4
Real estate 250 160 173
Policy loans 19 22 24
Cash and cash equivalents 329 244 176
Other 116 36 6
------ ------ ------
4,048 3,601 3,063
Investment expenses 561 321 205
------ ------ ------
Net investment income $3,487 $3,280 $2,858
====== ====== ======
</TABLE>
Note E - Deferred Policy Acquisition Costs
Based on the Company's estimates of the future profitability of it's
group medical products, deferred acquisition costs of approximately $6,500 have
been written off as amortization of deferred policy acquisition costs in the
fourth quarter of 1997. Management believes that the estimated future
profitability of the life business exceeds the unamortized deferred policy
acquisition costs for life products.
Note F - Loans Receivable - Officer and Director and Shareholder
The loans, bearing interest at rates ranging from 5.33% to 9%, are due
from April 1999 through June 2003 and are collateralized primarily by the
Company's common stock.
Note G - Loans Payable and Capital Lease Obligations
During 1997 the Company entered into a $1,000 bank line of credit, of
which $1,000 was outstanding as of December 31, 1997. This loan bears interest
at 1% above the prime rate. Interest payments are due monthly and the principal
balance is due July 2, 1998.
During 1997 and 1996, the average amount of all bank borrowings
outstanding was $131 and $577, respectively, the weighted average interest rate
was approximately 6.7% and 9.3%, respectively, and the maximum amount
outstanding was $1,000 and $830, respectively.
F-16
<PAGE>
Provident American Corporation and Subsidiaries
Notes to Consolidated Financial Statements - (Continued)
As described in Note R, the Company received $5,000 from HPS, of which,
$3,978 has been accounted for as a loan payable discounted at the Company's
recent historical borrowing rate of 9.25% payable in 60 monthly payments of
principal and interest of $85 commencing in March 1998.
During 1997, the Company entered into capital lease obligations with
Harleysville National Bank in the amount of $1,390 on data processing and other
equipment. The obligation outstanding at December 31, 1997 was $1,151 with $92
of interest being paid on these leases during 1997.
F-17
<PAGE>
Provident American Corporation and Subsidiaries
Notes to Consolidated Financial Statements - (Continued)
Note H - Income Taxes
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes. Significant
components of the Company's deferred tax liabilities and assets as of December
31, 1997 and 1996 are as follows:
<TABLE>
<CAPTION>
1997 1996
------- -------
<S> <C> <C>
Deferred tax assets:
Policy reserves $ 2,589 $ 2,194
Policy acquisition costs 51 --
Advance premiums 427 211
Postemployment benefits 207 208
Net operating loss carryforwards 944 286
Accrued expenses 366 --
Goodwill related to NIA 258 --
Other, net 432 338
------- -------
5,274 3,237
Valuation allowance for deferred tax assets 3,923 1,285
------- -------
1,351 1,952
------- -------
Deferred tax liabilities:
Real estate 733 746
Unrealized appreciation of investments 100 265
Deferred and uncollected premiums, net 618 249
Policy acquisition costs -- 538
------- -------
1,451 1,798
------- -------
Net deferred tax asset (liability) ($ 100) $ 154
======= =======
</TABLE>
The Company and its subsidiaries have a net operating loss carryforward
amounting to $7,600 some of which is available to offset future taxable income
through 2012. Approximately $6,500 of the tax loss carryforwards result from a
1989 acquisition and expire between 1998 and 2004 and are subject to annual
limitations of approximately $100. This limitation will significantly reduce
their utilization. The net operating loss carryforwards included as deferred tax
assets have been reduced to exclude the estimated amount of carryforwards which
are unavailable due to certain limitations.
The Company has established a valuation allowance for deferred tax
assets reflecting the Company's lack of a history of consistent earnings which
give rise to uncertainty as to whether the deferred tax asset is fully
realizable. The change in valuation allowance in 1997 amounting to $2,638
results from a net increase in temporary differences for which recovery is
uncertain primarily caused by the 1997 loss from operations.
F-18
<PAGE>
Provident American Corporation and Subsidiaries
Notes to Consolidated Financial Statements - (Continued)
The reconciliation of income tax expense (benefit) to the amount
computed by applying the appropriate statutory income tax rate (35%) to income
(loss) before income taxes is summarized as follows:
<TABLE>
<CAPTION>
Years ended December 31,
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Amount computed at statutory rate ($7,740) $ 7,881 ($1,359)
Change in valuation allowance and
tax effect of losses or temporary
differences for which no current
or deferred benefit is available 2,324 (1,534) 479
Permanent differences including
purchase accounting adjustments 600 (2) 512
Special deductions available to life
insurance companies -- -- 316
State income taxes, net of tax benefit -- 302 2
Other, net 227 (250) 70
------- ------- -------
Total income tax expense (benefit) ($4,589) $ 6,397 $ 20
------- ------- -------
</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, 1997, would result in a tax liability of $840 (at a 35% rate), only
if distributed to shareholders or if the account balance exceeded a prescribed
maximum. No income taxes have been provided on this account because, in
management's opinion, the likelihood that these conditions will be met is
remote. "Shareholders' Surplus" represents an accumulation of taxable income
(net of tax thereon) plus the dividends-received deduction, tax-exempt interest,
and certain other special deductions as provided by the Act. At December 31,
1997, the balance in the "Shareholders' Surplus" account amounted to
approximately $3,500. There is no present intention to make distributions in
excess of "Shareholders' Surplus".
F-19
<PAGE>
Provident American Corporation and Subsidiaries
Notes to Consolidated Financial Statements - (Continued)
Note I - Stockholders' Equity and Earnings Per Share
Series A Cumulative Convertible Preferred Stock, $1 par value, entitles
its holder to vote on an "as-converted" basis at a rate of four common votes per
one share of Preferred Stock, to receive an annual cash dividend of $.25 per
share, to convert after March 1995 into either common voting stock or Class A
Common Stock on a share-for-share basis (each Class A Common Share has four
votes) adjusted for future dilution and to receive $3.65 per share plus all
accrued and unpaid dividends in the event of voluntary or involuntary
liquidation and may be redeemed at the option of the Company on June 30, 1998,
at the greater of (a) the current market price of the Class A Common Stock or
the Common Voting Stock or (b) $5.45 per share, plus in each case all accrued
and unpaid dividends. Redemption payments shall be payable in up to three annual
installments, with interest at the then-current prime rate. However, no
redemption shall be made unless, immediately thereafter, the Company and all of
its subsidiaries shall be in compliance with the applicable laws, rules and
regulations relating to insurance companies in the various states in which a
subsidiary of the Company may be licensed to do business.
Series B Cumulative Convertible Preferred Stock, $1 par value, is
identical to the Series A Cumulative Convertible Preferred Stock except it has
only one vote per share. During 1996 all of the outstanding Series B Cumulative
Convertible Preferred Stock was converted into common voting stock on a
share-for-share basis.
Dividend restrictions: Dividends paid by the Company over and above the
financial assets of PAMCO are dependent on the ability of PILIC to pay dividends
to PAMCO and the ability of PALHIC to pay dividends to its parent, PILIC. The
payment of dividends by PILIC and PALHIC is dependent upon a number of factors
including earnings and financial condition, business needs and capital and
surplus requirements as well as applicable regulatory restrictions. Under
Pennsylvania law, PILIC and PALHIC are currently unable to pay dividends without
the prior approval of the Pennsylvania Insurance Commissioner as a result of
PILIC's and PALHIC's statutory unassigned deficit of $13,538 and $4,147,
respectively which excludes common stock and additional paid-in capital amounts.
At December 31, 1997, PILIC and PALHIC calculated their respective
Risk Based Capital ("RBC") utilizing a formula required by the NAIC. PALHIC's
amounts are included in PILIC, PALHIC's parent. The results of this computation
are indicated in the table below. RBC standards are designed to measure the
acceptable amounts of statutory capital and surplus an insurer should have based
on inherent and specific risks of an insurer's business. Insurers failing to
meet their benchmark capital and surplus level may be subject to scrutiny by its
domiciled insurance department and, ultimately, rehabilitation or liquidation.
F-20
<PAGE>
Provident American Corporation and Subsidiaries
Notes to Consolidated Financial Statements - (Continued)
The insurance department of Pennsylvania in which PILIC and PALHIC are
domiciled recognizes as net income and capital and surplus (Stockholders'
Equity) those amounts determined in conformity with statutory accounting
practices prescribed or permitted by the department which differ in certain
respects from generally accepted accounting principles. The amounts of statutory
net income for the year ended and surplus as of December 31 were as follows:
<TABLE>
<CAPTION>
1997 1996 1995
------------- ----------- ------------
<S> <C> <C> <C>
PILIC (1)
Net income (loss) ($10,385) $9,668 ($1,570)
Total capital and surplus 11,408 13,971 6,383
Adjusted capital and surplus 11,968 14,838 6,743
Company action level Risk Based Capital 9,303 6,569 5,190
PALHIC (2)
Net income (loss) ($862) $1,631 ($73)
Total capital and surplus 4,283 5,351 3,068
Adjusted capital and surplus 4,302 5,367 3,152
Company action level Risk Based Capital 1,730 19 235
</TABLE>
(1) PILIC's total capital and surplus, adjusted capital and surplus and company
action level Risk Based Capital includes amounts for its subsidiaries
including PALHIC. PALHIC is included in 1997 and 1996 amounts.
(2) PALHIC includes amounts prior to its acquisition by the Company.
A reconciliation of the numerator and denominator of the basic and diluted
earnings per share computation for 1996 is as follows:
<TABLE>
<CAPTION>
(amounts in thousands except per share amounts)
Income Shares Per-Share
(numerator) (denominator) Amount
----------- ------------- ---------
<S> <C> <C> <C>
Net income $16,120
Dividends on perferred stock (194)
Basic EPS -------
Net income applicable to common stock $15,926 9,610 $1.66
Effect of dilutive securities
Options and warrants 2,064
Diluted EPS ------- ------ ----
Net income applicable to common stock $15,926 11,674 $1.36
======= ====== ====
</TABLE>
F-21
<PAGE>
Provident American Corporation and Subsidiaries
Notes to Consolidated Financial Statements - (Continued)
Note J - Stock Options and Warrants
Options: The Company has stock option plans which provide for the
granting of options to directors and key employees of the Company and its
subsidiaries, and certain field representatives and agents.
The Incentive Stock Option Plan for Employees authorized the granting
of options for up to 650,000 shares of the Company's Common Stock to key
managerial employees of the Company, which are exercisable for up to five years
at a price not less than the fair market value of the shares on the date of
grant. All options granted under the Incentive Stock Option Plan have been
granted at 100% of the fair market value of the shares on the date of grant. The
Incentive Stock Option Plan for Employees expired, and during 1996 the Company
adopted the 1996 Employee Incentive Stock Option Plan ("1996 Employee Plan"),
which was approved by the Company's shareholders at the 1997 Annual Meeting of
Shareholders. The 1996 Employee Plan was amended in 1997 to increase the number
of shares issuable thereunder from 950,000 shares to 1,250,000 shares of the
Company's Common Voting Stock to key employees of the Company and its
subsidiaries and affiliates, exercisable for up to five years from the effective
date of the grant at a price not less than the fair market value of the shares
on the effective date of grant. All options granted under the 1996 Employee Plan
have been granted at 100% of the fair market value of the shares on the
effective date of the grant, with the exception of an option granted Mr.
Clemens, which was granted at 110% of the fair market value on the date of the
grant.
The Non-Qualified Stock Option Plan for Directors ("Directors' Plan")
was amended in 1996 to increase the number of shares authorized for the issuance
thereunder from 585,000 shares to 1,010,000 shares and to incorporate prior
amendments. Options granted under the Directors' Plan are exercisable for up to
ten years from the date of grant at a price of not less than the fair market
value of the shares on the date of the grant. All options granted under the
Directors' Plan have been granted at 100% of the fair market value of the shares
on the date of grant. During 1997, pursuant to the Directors' Plan, the Company
granted to each Director with the exception of Mr. Clemens an option to purchase
30,000 shares of the Company's Common Stock at an exercise price of $2.75 per
share.
The incentive Stock Option Plan for Field Representatives and Agents
authorize the granting of options for up to 750,000 shares of the Company's
Common Stock, which are market value of the shares on the date of grant. All
options granted under the Incentive Stock Option Plan for Field Representatives
and Agents have been granted at 100% of the fair market value of the shares on
the date of grant. The Company terminated the Incentive Stock Option Plan for
Field Representatives and Agent in 1997.
F-22
<PAGE>
Provident American Corporation and Subsidiaries
Notes to Consolidated Financial Statements - (Continued)
The Premium Production Stock Option Plan authorizes the granting of
options to agents, managers and employees of the Company's common stock, which
are exercisable for up to five years from the date of grant, but in no event
later than December 31, 2002, at a price equal to the lesser of $3.50 per share
or the market price thereof. The Company has discontinued the granting of
additional options under this plan. Since the fair market value of options
granted during 1996 exceeded the option price, a charge was made to 1996
operations in the amount of $67. This plan was terminated as of June 30, 1997.
Also during 1997, the Company approved the adoption of a Military Stock
Option Plan and a 1997 Insurance Agent Stock Option Plan ("Agents Plan"),
designed to replace and supercede all previous stock option plans for
non-employee agents. Each Plan is administered by the Option Administration
Committee, options are granted at fair market value and subject to certain other
vesting or performance conditions, and the Company has reserved 750,000 shares
of the Company's common Stock for issuance under each Plan. Options will be
issued under each Plan only to insurance agents who are licensed to sell
insurance by a life insurance subsidiary of the company, and are exercisable for
up to five years from the effective date of the grant.
The following table lists changes during 1997, 1996 and 1995 in
outstanding stock options for the 1996 Employee Plan, the Directors' Plan, the
Premium Production Stock Option Plan, the Military Stock Option Plan all stock
option plans:
F-23
<PAGE>
Provident American Corporation and Subsidiaries
Notes to Consolidated Financial Statements - (Continued)
<TABLE>
<CAPTION>
Employee, Director & Agent Plans Combined
Number Exercise Weighted Average
of Shares Price Range Exercise and Fair Value
--------- ----------- -----------------------
<S> <C> <C> <C> <C>
Outstanding, January 1, 1995
Exercisable 191,235 1.59 - 4.94 3.19
Not exercisable 32,000 2.00 - 3.88 2.91
Total outstanding 223,235 1.59 - 4.95 3.10
1995
Granted 27,175 2.38 - 3.52 3.44
Exercised 22,520 2.38 - 3.88 3.61
Canceled/expired 62,120 2.27 - 4.94 2.56
Outstanding, December 31, 1995
Exercisable 150,520 1.59 - 4.83 3.35
Not exercisable 15,250 2.00 - 3.88 2.64
Total outstanding 165,770 1.59 - 4.83 3.29
1996
Granted 1,138,350 3.52 - 12.25 9.18
Exercised 79,275 1.59 - 8.06 3.79
Canceled/expired -- 0.00 0.00
Outstanding, December 31, 1996
Exercisable 356,217 8.38 - 12.25 6.70
Not exercisable 868,628 2.00 - 12.25 9.35
Total outstanding 1,224,845 2.00 - 12.25 8.73
1997
Granted 1,197,000 2.47 - 5.00 4.03
Exercised 30,450 2.00 - 3.64 3.23
Canceled/expired 113,000 2.00 - 10.00 9.43
Outstanding, December 31, 1997
Exercisable 154,795 2.38 - 3.88 3.07
Exercisable 398,583 4.00 - 5.00 4.12
Exercisable 75,100 6.00 - 7.00 6.21
Exercisable 138,328 8.06 - 8.75 8.73
Exercisable 160,500 10.00 - 11.00 10.38
Exercisable 16,666 12.25 12.25
Not exercisable 260,000 2.47 - 2.88 2.72
Not exercisable 472,917 4.00 - 5.00 4.89
Not exercisable 81,000 6.00 - 7.00 6.19
Not exercisable 71,672 8.06 - 8.75 8.70
Not exercisable 440,500 10.00 - 11.00 10.09
Not exercisable 8,334 12.25 12.25
Total outstanding 2,278,395 2.38 - 12.25 6.30
</TABLE>
F-24
<PAGE>
Provident American Corporation and Subsidiaries
Notes to Consolidated Financial Statements - (Continued)
In addition, Mr. Clemens directly owns options to purchase 253,376
shares of the Company's Common Stock at $ .9091 per share expiring from time to
time between November 1999 through December 2002. Mr. Clemens indirectly owns
options to purchase 82,080 shares of the Company's common stock at $.9091 per
share expiring from time to time between November 1999 and December 2002. Mr.
Clemens disclaims beneficial ownership of all other options of any partnership
in which Mr. Clemens directly or indirectly is a partner.
In addition, a partnership of which Mr. Clemens is a partner owns
options to purchase 1,000,000 shares of the Company's Common Stock at $ .9091
per share expiring from time to time between November 1999 through December
2002. Mr. Clemens also owns an option to purchase up to 550,000 shares of Series
A Cumulative Convertible Preferred Stock at $3.64 per share (fair market value
at date of grant) exercisable on or before March 31, 2003.
The Stock Option Plan for Executives ("Executive Plan") was amended in
1996 and authorizes the granting of options to purchase up to 3,850,000 shares
of the Company's Series A Cumulative Convertible Preferred Stock ("Series A
Preferred Stock"), which are exercisable for up to ten years from the effective
date of grant at a price of not less than the fair market value of the shares on
the date of grant. Also in 1997, the Company granted Alvin H. Clemens an option
to purchase shares of the Company s Series A Preferred Stock successively upon
each exercise by Mr. Clemens of his existing option and each subsequently
granted option to purchase shares of Series A Preferred Stock from time-to-time,
limited in the aggregate to (i) that the number shares of Series A Preferred
Stock which, when exercised, shall permit Mr. Clemens to acquire the right to
vote not more than 55% of the shares of the Company's Common Voting Stock owned,
either directly or beneficially, by Mr. Clemens at such time, (ii) the shares of
Series A Preferred Stock which are, as of the date of any such exercise,
authorized and unissued; and (iii) an option to purchase more than 550,000
shares of Series A Preferred Stock in any six month period shall be prohibited
except upon the occurrence of a "change of control" (within the meaning of the
Securities Exchange Act of 1934, as amended).
Warrants: During 1995, the Company issued stock purchase warrants for
the purchase of 250,000 shares of the Company's common stock. Warrants to
purchase 200,000 shares were issued to a director of the Company on July 5,
1995, at $2.875 per share, 100,000 of these warrants are exercisable at any time
through July 5, 2000, and 100,000 of the warrants are exercisable through July
5, 2000, in increments of 5,000 warrants for each $1,250 of pre-need insurance
premium produced between August 1995 and July 1997. On October 1, 1996, the
100,000 warrants exercisable at any time and 21,267 warrants earned under this
arrangement were exercised; the remaining 78,733 warrants were then terminated.
50,000 warrants were issued on November 1, 1995, to an unaffiliated party at
$5.00 per share and are exercisable through November 1, 1998.
F-25
<PAGE>
Provident American Corporation and Subsidiaries
Notes to Consolidated Financial Statements - (Continued)
On June 6, 1996, the Company issued 100,000 stock purchase warrants to
an unaffiliated party at $9.00 per share and are exercisable through June 6,
2001. The Company issued a warrant to an exclusive consultant of the Company to
purchase 100,000 shares of the Company's Common Stock at the market price per
share as of each of January 1, 1996, January 1, 1997, and January 1, 1998,
provided PILIC has realized new annualized premium sales production of at least
$35,000, $45,000, and $50,000, respectively, for each of these calendar years.
PILIC has realized the annualized premium threshold for the years ending
December 31, 1996 and 1997, and accordingly, the consultant is entitled to
exercise 100,000 warrants at $7.375 per share for 1996 and 100,000 at $14.00 per
share for 1997.
During 1997 the Company issued warrants to two exclusive agents, who
are also directors of a subsidiary of PAMCO, for the purchase of 50,000 shares
of the Company's common stock at $5.00 per share. These warrants become
exercisable throughout 2001. The Company also issued a warrant exercisable at
any time to an employee for the purchase of 25,000 shares of the Company's
common stock at $4.00 per share.
Effective January 1, 1996, the Company adopted the disclosure-only
provisions of SFAS 123 "Accounting for Stock Based Compensation." Accordingly,
no compensation cost has been recognized for stock option and warrant grants
that occurred in 1997 and 1996. Had compensation cost for the Company's stock
option grants been determined based on the fair value at the date of grants in
accordance with the provisions of SFAS 123, the Company would have amortized the
cost over the vesting period of the option which generally is five years for the
1996 Employee Plan and three years for the Directors Plan. The Company's 1997
and 1996 net income and net income per common share would have been reduced to
the following pro-forma amounts:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C> <C> <C>
Net income (loss) applicable to common shares
as reported ($18,573) $15,926
pro forma ($20,505) $15,681
Net income (loss) applicable to common shares Basic Diluted Basic Diluted
----- ------- ----- -------
as reported ($1.84) ($1.84) $1.66 $1.36
pro forma ($2.03) ($2.03) $1.63 $1.34
</TABLE>
F-26
<PAGE>
Provident American Corporation and Subsidiaries
Notes to Consolidated Financial Statements - (Continued)
The fair value of the options and warrants granted during 1997 and 1996
are estimated on the date of grant using the Black-Scholes option-pricing model.
The major assumptions used and the estimated fair value include no dividends
paid, assumed forfeitures of 10% annually for non-vested options and warrants
granted in 1996, and the following:
<TABLE>
<CAPTION>
Risk Weighted
Expected Expected Free Average
Term Stock Interest Fair
In Years Volatility Rate Value
-------- ---------- ---- -----
<S> <C> <C> <C> <C> <C>
For options granted in 1996
1996 Employee Plan 1-5 73% 5.55%-6.32% $3.92
Directors Plan 3 75% 6.32% $4.64
For options granted in 1997
1996 Employee Plan & Employee Warrant 5 63% 5.50% $1.42
Directors Plan 5 63% 5.50% $1.36
Military Market Plan & Warrants 5 63% 5.50% $1.13
</TABLE>
Note K - Litigation Settlement, Net of Expenses
The Company received from the Loewen Group, Inc. and Loewen Group
International, Inc. (collectively "Loewen") on April 1, 1996, $3,000 in cash and
718,519 shares of the common stock of Loewen Group (NYSE: LWN) to compensate the
Company for damages sustained pursuant to a February 12, 1996 agreement between
the Company and Loewen to settle certain litigation filed by the Company against
Loewen. The settlement, net of legal expenses, was valued at $22,400. The impact
on net income was approximately $14,600, which is net of approximately $7,800 of
income taxes.
The Company sold 610,400 shares of Loewen stock in 1996 realizing a
$2,023 gain. During the first quarter of 1997 the Company sold its remaining
shares of Loewen stock realizing a gain of $961.
F-27
<PAGE>
Provident American Corporation and Subsidiaries
Notes to Consolidated Financial Statements - (Continued)
Note L - Commitments and Contingencies
The Company has various capital leases that are primarily related to
office space, data processing and other equipment. Annual payments under all
capital and operating leases was approximately $857, $427 and $294 in 1997, 1996
and 1995, respectively. The future minimum rental commitments under
noncancelable leases at December 31, 1997, are: 1998 - $537; 1999 - $537; 2000 -
$537; 2001 - $183; and 2002 - $0.
The Company entered into an outsourcing agreement as described in Note
- - R HPS Outsourcing Agreement which guarantees certain minimum payments which at
December 31, 1997, are: 1998 - $935; 1999 - $120; 2000 - $120; 2001 - $120; 2002
- - $120; and thereafter $10.
The Company has a sixty-five month agreement with First Health Group
Corporation ("FHG") whereby the Company pays FHG the greater of $50 per year or
the sum of a sliding scale percentage of the discount recognized when
policyholders utilize the FHG network (primarily for the Solution product),
pre-certification of hospital admissions and large case management at agreed
upon rates. This agreement has resulted in claim savings, better control of
claim costs and competitively priced products.
The Company is involved in litigation in the customary settlement of
insurance claims. Management is of the opinion that neither the litigation nor
these claims will have a material adverse effect on the results of operations or
financial position of the Company.
Unfavorable economic conditions have contributed to an increase in the
number of insurance companies that are under regulatory supervision. This is
expected to result in an increase in mandatory assessments by state guaranty
funds of solvent insurance companies to cover losses to policyholders of
insolvent or rehabilitated companies. Mandatory assessments, which are subject
to statutory limits, can be partially recovered through a reduction in future
premium taxes in some states. Although the Company is not able to reasonably
estimate the potential effect on it of any such future assessments, such amounts
charged against operations for 1997, 1996 and 1995 have not been material.
The Company's business is subject to a changing legislative and
regulatory environment. Some of the proposed changes include initiatives to
restrict insurance pricing and the application of underwriting standards; reform
health care; and restrict investment practices. Proposals on national health
care reform have been under consideration that could significantly change the
way healthcare is financed and provided. The effects on the Company of
comprehensive healthcare reforms, which, if enacted, may have a material adverse
impact upon the ability of the Company to profitably engage in the writing of
accident and health insurance. Additionally, competition in the insurance
industry may effect the Company's ability to reach critical mass while remaining
competitive in agent compensation and product pricing. In response to these
developments the Company entered into an outsourcing agreement described in Note
R and continually reviews agent compensation and product pricing.
F-28
<PAGE>
Provident American Corporation and Subsidiaries
Notes to Consolidated Financial Statements - (Continued)
Note M - Employee Benefit Plans
The Company sponsors a defined contribution retirement savings plan
under section 401(k) of the Internal Revenue Code covering substantially all
employees. Employees may contribute up to 15% of compensation, of which the
Company will match 50% of the first 5%. All contributions are subject to
limitations imposed by IRS regulations. Effective January 1, 1995, employees
were given the option to invest the "employer match" portion of their
contribution in common stock of the Company. At December 31, 1997 and 1996, the
plan held 1,379 and 3,496 shares of the Company's common stock, respectively.
All contributions are subject to limitations imposed by the Internal Revenue
Code on 401(k) plans.
All employee contributions are immediately vested, and the Company
contribution becomes 20% vested after two years of service. Thereafter, an
additional 20% becomes vested for each year of service up to 5 years, at which
time all contributions become completely vested. Pension expense under this plan
amounted to $78, $57 and $54 for 1997, 1996 and 1995, respectively.
F-29
<PAGE>
Provident American Corporation and Subsidiaries
Notes to Consolidated Financial Statements - (Continued)
Note N - Liability for Unpaid Claims and Claim Adjustment Expenses
Activity in the liability for unpaid claims and claim adjustment
expenses is summarized as follows.
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Liability at January 1 $ 15,438 $ 10,105 $ 10,524
Less reinsurance recoverables 6,930 4,275 4,912
-------- -------- --------
Net Balance at January 1 8,508 5,830 5,612
Provision (benefit) for unpaid losses:
Current year 40,628 23,858 19,821
Prior years 3,272 (499) (794)
-------- -------- --------
Total incurred 43,900 23,359 19,027
Payments made related to:
Current year 24,754 15,705 14,068
Prior years 11,610 4,976 4,741
-------- -------- --------
Total paid 36,364 20,681 18,809
Net Balance at December 31 16,044 8,508 5,830
Plus reinsurance recoverables 14,165 6,930 4,275
-------- -------- --------
Balance at December 31 $ 30,209 $ 15,438 $ 10,105
======== ======== ========
</TABLE>
The 1997 provision for prior year unpaid losses of $3,272 reflects
higher than expected claim costs on the Company's managed care plans for
business written during 1996. The 1996 and 1995 benefit for prior year unpaid
losses of $499 and $794, respectively, reflects better than expected claim costs
on the Company's stop loss plans.
F-30
<PAGE>
Provident American Corporation and Subsidiaries
Notes to Consolidated Financial Statements - (Continued)
Note O- Reinsurance
Reinsurance does not relieve the Company of its primary obligation to
its policyholders. Reinsurance varies according to the age of the insured, type
of risk and type of policy. Retention amounts for life insurance range up to $50
of coverage per individual life and for health insurance up to $85 per
individual.
Under the terms of a Quota Share Reinsurance Agreement, the Company
ceded 47.5% of the liability on its accident and health insurance business. The
Company received a ceding commission of 45.5% on all first year business, and
25.5% to 30.5% on renewal business, depending on product, in 1997, received
41.5% on all first year business , and 26.5% to 30.5% on renewal business,
depending on product, in 1996, and received 41.5% on all first year business ,
and 26.5% to 30.5% on renewal business, depending on product, in 1995. The
combined ceding commissions amounted to approximately 37%, 38.9% and 32.5% of
ceded earned premium for 1997, 1996, and 1995 respectively. The Company was
notified by its reinsurer, Swiss Re, that the Quota Share Reinsurance Agreement
would not be renewed effective January 1, 1998. Swiss Re's obligation to assume
paid losses incurred prior to January 1, 1998 remains in effect. Accordingly,
the Company notified Swiss Re that it would not be renewing the Excess of Loss
Agreement. The Company is currently negotiating with a group of reinsurers and
has placement slips regarding a replacement Quota Share Agreement and Excess of
Loss Agreement with a group of reinsurers to be effective January 1, 1998.
Effective January 1, 1998, the Company's new reinsurance will be on a no loss,
no gain basis for all policies inforce as of December 31, 1997 until those
policies are rate increased. The new agreements, when executed, may not be as
comprehensive as the old agreement. Policies are generally rate increased on
their six month or twelve month anniversary. Once policies inforce as of
December 31, 1997 have been rate increased, and for all policies sold during
1998, the Company will cede approximately 47.5% of group medical benefits.
Furthermore, the Company will retain any profit in excess of 3% of ceded
premium. The effect of any differences has not been determined; however,
management believes that the effect, if any, will not be material to the
accompanying financial statements.
In addition, the Company generally assumes 30% (up to $150 per
individual) of the liability on its limited self-funded accident and health
business, which consists generally of policies issued to limit the claims
expenses of employers that self-insure group medical benefits with respect to
any individual employee and in the aggregate.
The Company evaluates the financial condition of its reinsurers and
monitors concentrations of credit risk of the reinsurers to minimize exposure to
significant losses from reinsurer insolvencies. Reinsurance receivables
associated with a single reinsurer as of December 31, 1997 and 1996 amounting to
approximately $17,225 and $8,985, respectively.
F-31
<PAGE>
Provident American Corporation and Subsidiaries
Notes to Consolidated Financial Statements - (Continued)
A summary of insurance in-force, premium income, benefits and
commission expense with respect to reinsurance operations is as follows:
<TABLE>
<CAPTION>
Ceded to Assumed % of Am
Gross Other from Other Net Assumed
Amount Companies Companies Amount to Net
------ --------- ---------- ------ ---------
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1997:
Life insurance in force $ 446,300 $ 56,000 $ 528,000 $ 918,300 57.5%
--------- --------- --------- ---------
Premium:
Life insurance 8,893 444 $ 524 8,973 5.8%
Annuity 137 29 -- 108 0.0%
Accident and health $ 81,472 39,548 3,248 45,172 7.2%
--------- --------- --------- ---------
Total $ 90,502 $ 40,021 $ 3,772 $ 54,253
--------- --------- --------- ---------
Benefits:
Life insurance 6,065 584 631 6,112
Annuity and other 711 -- 26 737
Accident and health 72,950 36,785 1,916 38,081
--------- --------- --------- ---------
Total 79,726 $ 37,369 $ 2,573 $ 44,930
--------- --------- --------- ---------
Commissions $ 18,029 $ 12,571 $ 1,077 $ 6,535
--------- --------- --------- ---------
Year ended December 31, 1996:
Life insurance in force $ 495,000 $ 60,000 $ 417,000 $ 852,000 48.9%
--------- --------- --------- ---------
Premium:
Life insurance 10,384 (1,888) 816 13,088 6.2%
Annuity 108 15 -- 93
Accident and health 52,442 25,670 4,753 31,525 15.1%
--------- --------- --------- ---------
Total $ 62,934 $ 23,797 $ 5,569 $ 44,706
--------- --------- --------- ---------
Benefits:
Life insurance 4,244 424 576 4,396
Annuity and other 1,128 -- 9 1,137
Accident and health 34,414 18,190 2,739 18,963
--------- --------- --------- ---------
Total $ 39,786 $ 18,614 $ 3,324 $ 24,496
--------- --------- --------- ---------
Commissions $ 13,365 $ 8,241 $ 1,503 $ 6,627
--------- --------- --------- ---------
Year ended December 31, 1995:
Life insurance in force $ 613,000 $ 120,000 $ 412,000 $ 905,000 45.5%
--------- --------- --------- ---------
Premium:
Life insurance 11,597 3,657 1,529 9,469 16.1%
Annuity 94 -- -- 94
Accident and health 36,259 15,882 2,769 23,146 12.0%
--------- --------- --------- ---------
Total $ 47,950 $ 19,539 $ 4,298 $ 32,709
--------- --------- --------- ---------
Benefits:
Life insurance 4,383 284 469 4,568
Annuity and other 878 -- 14 892
Accident and health 23,021 9,920 1,357 14,458
--------- --------- --------- ---------
Total $ 28,282 $ 10,204 $ 1,840 $ 19,918
--------- --------- --------- ---------
Commissions $ 8,903 $ 5,740 $ 1,374 $ 4,537
--------- --------- --------- ---------
</TABLE>
F-32
<PAGE>
Provident American Corporation and Subsidiaries
Notes to Consolidated Financial Statements - (Continued)
Note P - Related Party Transactions
Gross commissions and expense allowances paid or payable to entities
which are controlled by former Directors in 1996 and 1995, amounted to
approximately $314 and $313, respectively.
Legal fees to the law firm of a director and general counsel and
secretary of the Company in 1997, 1996 and 1995, amounted to approximately $282,
$298 and $225, respectively.
Consulting expenses paid to a shareholder of the Company and former
Chief Executive Officer of REF amounted to $300 in both 1997 and 1996. The
shareholder provides the Company with exclusive marketing, sales and product
design services as part of a 36-month consulting agreement effective January 1,
1996.
Computer software development and consulting expense paid to an entity
controlled by an employee of the Company in 1997 amounted to $107.
Note Q - Reconciliation From Statutory Basis To GAAP Basis
The accompanying financial statements are prepared in conformity with
GAAP which differ in some respects from the statutory accounting practices
prescribed or permitted by insurance regulatory authorities. The Pennsylvania
Department of Insurance (the "Department") permitted PILIC the following
statutory accounting practices: (1) since 1989, the statutory carrying value of
the home office at the value transferred from PAMCO to PILIC in 1988 in
satisfaction of intercompany debt, less depreciation since that time; and (2) to
continue PILIC's statutory reserve methodology which, up until January 1, 1996,
had not considered the impact of policy provisions pertaining to increasing the
face amount of pre-need life insurance for anticipated future Consumer Price
Index increases. Starting in 1996 PILIC modified its statutory reserve
methodology on 1996 issued business which now considers the impact of policy
provisions pertaining to increasing the face amount of pre-need life insurance
for anticipated future Consumer Price Index increases. Furthermore, PILIC
increased reserves by $200 in 1997 and 1996 for 1995 and prior issues in
recognition of the increasing face amount of pre-need life insurance for
anticipated future Consumer Price Index increases as required by the Department.
The Department will require PILIC to increase reserves in future years by the
greater of $200 or the statutory profits on the block of business. The potential
effects of this permitted practice has not been determined but could be material
to statutory surplus.
F-33
<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,
1997 1996 1995 1997 1996
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Balance per statutory accounting practices (11,247) $ 11,300 $ (1,488) $ 11,408 $ 13,971
Deferred policy acquisition costs (2,541) 2,154 676 599 3,140
Interest maintenance reserve &
asset valuation reserve 10 (37) (1) 2,028 2,325
Future policy benefits (261) (186) (1,336) (5,609) (5,348)
Goodwill and value of insurance in-force,
not of amortization (66) (57) (798) 1,193 1,258
Restatament of reserves on reinsurance ceded 797
Effect of consolidation non-insurance
subsidiaries (3,205) 2,097 (1,360) (5,890) 5,315
Deferred income taxes (604) 352 (151) -- 604
Prepaid expenses 356 343
Fixed income securities, net of tax 188 (83)
HPS outsourcing (489) (489) --
Non-admitted assets 223 364
Other, net (22) 497 (40) 2 164
Balance per generally accepted
accounting principles $(18,425) $ 16,120 ($ 3,701) $ 4,009 $ 22,053
======== ======== ======== ======== ========
</TABLE>
F-34
<PAGE>
Provident American Corporation and Subsidiaries
Notes to Consolidated Financial Statements - (Continued)
Note R - HPS Outsourcing Agreement
In October 1997 the Company and HealthPlan Services Corporation ("HPS")
entered into a 5 year agreement under which the Company outsourced to HPS all of
its current health insurance policy issuance, billing, and claims, effective
February 1998 for certain claim processing and February 1998 for all remaining
outsourced functions (the "Outsourcing Agreement"). The Company's life and stop
loss operations are unaffected. The Company expects to benefit from a reduction
in expenses over the life of the contract. HPS will charge the Company a fixed
service fee plus a sliding scale variable percentage of premiums for customer
service and claim processing. HPS will also charge the Company a fixed amount
per policy submitted for underwriting services.
The Company received $5,000 from HPS in the fourth quarter of 1997 as
an inducement to enter into the Outsourcing Agreement. The liability is to be
repaid at a rate of $85 per month over the five year term of the Outsourcing
Agreement commencing March 1998.
As a result of entering into the Outsourcing Agreement the Company
incurred transition and related expenses included in 1997's results from
operations of approximately $4,185; $1,051 included in other operating expenses,
net of ceding, $1,433 of accelerated depreciation included in depreciation and
amortization of goodwill related to impaired computer hardware, equipment and
software used in performing the outsourced activities and $1,701 of accelerated
amortization of goodwill relating to NIA and CSE whose customer service and
claims activities will be outsourced to HPS.
Note S - Subsequent Events
Sale of Montgomery Management: In February 1998 the Company sold a
portion of its interest in its wholly owned subsidiary, Montgomery Management
Corporation ("MMC"), to HPS for $4,000 in cash and other consideration,
effective January 1, 1998. The Company sold 49% of MMC's outstanding common
stock along with a warrant to purchase an additional 31% of MMC's common stock
for one dollar, which if exercised would result in the Company owning a 20%
interest in MMC. Immediately prior to the sale MMC declared a dividend payable
to its parent PILIC equal to its total equity. During the first quarter of 1998
the Company will recognize a $4,000 pre-tax gain on the sale of MMC and no
longer include MMC in the Company's consolidated financial statements. The
Company will account for its 20% ownership of MMC as an equity investment. MMC
retains its headquarters at the Company's home office. The Company, through its
subsidiary PILIC, continues to assume via reinsurance approximately 30% of the
premiums, benefits, commissions and expenses of the stop-loss business
administered by MMC. During 1997 MMC's impact on the Company's results from
operations excluding intercompany amounts was $945 of other income and $718 of
expense.
F-35
<PAGE>
Provident American Corporation and Subsidiaries
Notes to Consolidated Financial Statements - (Continued)
AOL Interactive Marketing Agreement: In March 1998, the Company's
wholly owned subsidiary, Provident Health Services, Inc. ("PHS"), entered into
an Interactive Marketing Agreement (the "AOL Agreement") with America Online,
Inc. ("AOL"). The AOL Agreement provides that PHS will be the exclusive
third-party direct marketer of certain managed-care and health insurance
policies ("the Products") for individuals and groups of less than fifty
individuals in the United States. Additionally AOL will advertise the Products
to its subscribers on AOL's online network under a brand name to be used
exclusively for the Products. The Products will be sold on-line through a PHS
web-site linked to the AOL service. It is anticipated that Internet-based sales
of the Products will be tested in the third quarter of 1998 and offered
generally to AOL subscribers in the fourth quarter of 1998.
The AOL Agreement has an initial term commencing on February 1, 1998
and ending on September 30, 1999, with a renewal period of two additional years
at PHS's election. As consideration under the AOL Agreement, PHS will pay $8,000
to AOL during 1998 and the Company agreed to issue warrants to AOL. PHS paid AOL
$1,500 and $2,500 during the first and second quarters of 1998, respectively
with $4,000 due AOL during the third quarter of 1998. The Company will account
for the $8,000 that PHS will pay to AOL as a deferred cost asset, which will be
amortized over the balance of the initial term. In addition, the Company issued
to AOL warrants to purchase 300,000 shares of the Company's common stock at an
exercise price of $4.48 (based on the average NASDAQ closing prices for the last
20 days preceeding the determination date as defined in the agreement) per
share, for a period of five years commencing February 1, 1998 which are
immediately exercisable. The fair value of these warrants (approximately $990)
will be recognized as a deferred cost asset as of March 31, 1998 and will be
amortized over the initial term of the AOL Agreement starting October 1, 1998.
The AOL Agreement also provides for the issuance of warrants subject to the
terms and conditions of the AOL Agreement.
If PHS elects the two-year renewal term, then PHS shall make an
additional payment to AOL of $32,500 on or before September 30, 1999. Under
certain circumstances the AOL Agreement can be extended by AOL. If PHS exercises
its right to renew the AOL Agreement then the AOL Agreement also provides for
the issuance of warrants subject to the terms and conditions of the AOL
Agreement.
PHS will pay additional administrative fees to AOL if applications
exceed certain levels for the initial and renewal terms of the AOL Agreement.
HPS E-Commerce Agreement: In May 1998 the Company and HPS entered into
an agreement ("the E-Commerce Agreement") for the period February 1, 1998
through October 1, 1999 where-by: 1) HPS paid Insurion $750 as an off-set
against the Holding Fee paid by PHS to AOL, 2) HPS shall have certain third
party administrator rights over policies sold by the Company over its web site
or other e-commerce methods, 3) HPS shall have equal prominence to the Company
on the Company's Web pages, 4) the Company shall pay HPS 4% of certain fees paid
to the Company by co-sponsors of the Company's web site and 5) PAMCO agrees to
issue to HPS a warrant to purchase 100,000 shares of PAMCO's common stock at
$9.00 for a period of 2 years. The fair value of these warrants (approximately
$164) will be recognized in the second quarter of 1998.
F-36
<PAGE>
Provident American Corporation and Subsidiaries
Notes to Consolidated Financial Statements - (Continued)
Lynx Consulting Agreement: In March 1998 Insurion entered into a
consulting agreement ("Lynx Consulting Agreement ") with Lynx Capital Group, LLC
("Lynx") to provide consulting services in regards to entering into online and
internet commerce agreements and the subsequent development of Insurion's
capabilities and business. Insurion will pay Lynx a monthly fee, travel expenses
and issue warrants to purchase up to 350,000 PAMCO's common stock subject to the
terms of the Lynx Consulting Agreement. The fair value of the warrants has not
been determined.
Insurion Convertible Note: In May of 1998 Insurion issued a $5,000
Convertible Note due June 30, 2003. The Convertible Note pays interest at an
annual rate of 5.5% payable together with interest on conversion or June 30,
1999 whichever occurs first. Insurion may repay the Convertible Note subject to
the terms of the Convertible Note. The Convertible Note is convertible based
upon certain terms and conditions into the greater of 125,000 shares of
Insurion's Class A Common Stock or 12.5% of Insurion's outstanding common stock
as calculated on a fully diluted basis. The Convertible Note may also be
converted at a conversion price of one a share of Insurion's Class A Common
Stock for each $40.00 of principal to be converted. The conversion price is
subject to adjustment subject to the terms of the Convertible Note. The
Convertible Note further provides that the holder of Insurion's Convertible Note
agrees to purchase and Insurion agrees to sell additional securities in an
aggregate amount up to or equal to $5,000 in the form of Insurion stock or
convertible securities whose conversion terms are acceptable to the holder of
Insurion's Convertible Note, subject to the following conditions occurring prior
to September 30, 1998: 1) Insurion sells the same amount of similar securities
to accredited investors as defined in Rule 501 of Regulation D under the
Securities Act of 1933, 2) Insurion executes its business strategy to the sole
satisfaction of the holder of Insurion's Convertible Note, and 3) the fully
diluted market capitalization of Insurion shall be less than or equal to
$100,000.
F-37
<PAGE>
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
In December 1997, the Company's former independent accountants, Coopers
& Lybrand, LLP, resigned. Their report on the financial statements for 1996 and
1995 did not contain an adverse opinion or a disclaimer of opinion, nor was it
qualified as to uncertainty, audit scope, or accounting principles. There were
no disagreements on any matter of accounting principles or practices, financial
statement disclosure, or auditing scope or procedure. In February 1998, the
Company engaged BDO Seidman, LLP, as its new independent auditors.
- 30 -
<PAGE>
PART III
Item 10. Directors and Executive Officers of the Registrant.
<TABLE>
<CAPTION>
Director or
Principal Occupation Executive Year Term
Name Age For Past Five Years Officer Since Will Expire
---- ---- ---------------------- --------------- -------------
<S> <C> <C> <C>
Michael F. Beausang, Jr. 61 Director; Secretary and General Counsel of the 1989 1998
Company, PILIC and PALHIC since October 1989;
Director and Secretary of Maine National Life
1984-1995; Partner in the law firm of Butera,
Beausang, Cohen & Brennan since 1970; Director,
Jefferson Bank.
James O. Bowles 43 President of the Company, PILIC and PAHLIC since 1996 N/A
October 1996; President of NIA Corporation since
1994; Vice President of Mid America Mutual Life
Insurance Company 1989-1995; Senior Manager of
KPMG Peat Marwick 1978-1989.
Alvin H. Clemens 60 Director; Chairman of the Board and Chief 1989 1998
Executive Officer of the Company and subsidiary
companies since October 1989 and President of the
Company and PILIC 1993-1996; President of Maine
National 1989-1995; Owner and Chairman of the
Board-of Maine National 1985-1989; President and
Director of Academy Life Insurance Co.and Pension
Life Insurance Co. 1970-1985; Chairman/Chief
Executive Officer of Academy Insurance Group Inc.
1967-1985.
Valerie C. Clemens (1) 42 Director; Founder/Owner of Valerie's Limited 1989 1998
Showcase of Fashion 1984-1990; Executive Director
of Miss America's Maine Scholarship Pageant
1985-1987.
Harold M. Davis 62 Director; Chairman of the Board of Realen Homes, 1989 1998
Inc. since 1968.
William C. Fay III 43 Chief Sales Officer of the Company and 1994 N/A
subsidiaries since 1994; Assistant Vice President
of Consolidated Group 1982-1993.
John T. Gillin 58 Director; Consultant to Registrant since 1996; 1984 1998
otherwise self-employed since 1992; Managing
Director, Hopper Soliday Corporation 1987-1992.
Henry G. Hager 63 Director; Partner in the law firm of Stradley, 1996 1998
Ronon, Stevens and Young since 1994; President and
Chief Executive Officer of The Insurance
Federation of Pennsylvania since 1985.
</TABLE>
-31-
<PAGE>
<TABLE>
<CAPTION>
Director or
Principal Occupation Executive Year Term
Name Age For Past Five Years Officer Since Will Expire
---- ---- ---------------------- --------------- -------------
<S> <C> <C> <C>
Frederick S. Hammer 61 Director; Vice Chairman of Inter-Atlantic 1996 1998
Securities Corp. since 1994; Chairman of the Board
of Directors, National Media Corp. since March
1996 and member of the Board since 1994; Chairman
and Chief Executive Officer of Mutual of America
Capital Management Corp. 1993-1994; Director; Ikon
Office Solution since 1987.
Benedict J. Iacovetti 41 Chief Financial Officer of the Company, PILIC and 1997 N/A
PAHLIC since December 1997; Treasurer and Chief
Financial Officer of American Travelers 1992-1997.
George W. Karr, Jr. 60 Director; Chief Executive Officer of Karr Barth 1996 1998
Associates, Inc. since 1984.
P. Glenn Moyer 62 Director; Private Practice Attorney since 1992; 1989 1998
Director, Maine National 1985-1995; Partner in the
law firm of Butera, Beausang, Moyer & Cohen from
1968 through 1992.
Anthony R. Verdi 49 Chief Operating Officer of the Company, PILIC and 1990 N/A
PALHIC since December 1997; Treasurer and Chief
Financial Officer of the Company, PILIC and PALHIC
1990-1997; Vice President and Controller of
Inter-County Hospitalization Plan Inc. 1986-1990;
Assistant Controller Academy Insurance Group Inc.
1971-1986
</TABLE>
(1) Valerie C. Clemens is the wife of Alvin H. Clemens.
During 1997, the Company's Board of Directors held five (5) meetings.
All Directors attended at least 75% of the aggregate meetings of the Board and
the Committees on which they served.
Messrs. Alvin H. Clemens, James O. Bowles, William C. Fay, III,
Benedict J. Iacovetti and Anthony R. Verdi are the executive officers of the
Company.
-32-
<PAGE>
Committees of the Board of Directors
The Company's Board of Directors has standing an
Executive/Compensation/Nominating Committee and an Audit Committee.
The Executive/Compensation/Nominating Committee, on which Messrs.
Clemens, Davis, Gillin and Karr currently serve, is appointed to act when a
meeting of the full Board of Directors is not feasible, administers the
Company's compensation matters and also nominate directors and determine
replacements for directors when membership on the Board of Directors ends prior
to the expiration of a term. The Executive/Compensation/Nominating Committee
held two meetings during 1997.
The Audit Committee is appointed to recommend the selection of the
Company's auditors, review the scope and results of audits, review the adequacy
of the Company's accounting, financial and operating system and supervise
special investigations. The Audit Committee held one meeting in 1997. The Audit
Committee in 1997 was comprised of Messrs. Gillin, Moyer, and Mrs. Clemens (Mr.
Beausang was an alternate); effective March 13, 1998 the Audit Committee is
comprised of Messrs. Davis, Moyer and Hager.
The Option Administration Committee was established by the Board of
Directors on July 16, 1996 and consists of James O. Bowles, Alvin H. Clemens,
Harold M. Davis, P. Glenn Moyer, and Anthony R. Verdi. Any options to be granted
to Messrs. Bowles, Clemens, or Verdi are subject to the approval of only Messrs.
Davis and Moyer, who are outside directors of the Company and as such are
disinterested persons. The Option Administration Committee held one meeting
during 1997.
Director Compensation
Directors who are not employees of the Company are paid a fee of $1,000
for attendance at each meeting of the Board of Directors of the Company, with no
fee being paid for attendance at meetings of any of the Company's subsidiaries,
and $500 for attendance at each meeting of any committee of the Board. During
1997 the Company granted each Director other than Mr. Clemens an option to
purchase 30,000 shares of the Company's common stock at an exercise price of
$2.75 per share, the fair market value of a share of the Company's common stock
on the date of grant, exercisable one-third on the date of grant, one-third one
(1) year from the date of grant, and the remaining one-third two (2) years from
the date of grant (see Note J to the Consolidated Financial Statements).
Mr. John T. Gillin, a director, also serves as a consultant for the
Company. The Company paid Mr. Gillin $90,000 in 1997 for his consulting serves.
-33-
<PAGE>
Item 11. Executive Compensation.
Employment and Other Agreements
Effective February 19, 1997, the Company and Mr. Clemens entered into a
new employment agreement ("Agreement") which replaces Mr. Clemens' prior
Employment Contract dated as of January 1, 1993. Pursuant to the Agreement, Mr.
Clemens is employed as Chief Executive Officer of the Company for a five-year
term ending December 31, 2002 (the "Term"), and unless otherwise terminated, the
Term shall automatically be extended at the end of each year after December 31,
1997, in order that at all times, on each December 31st during the duration of
the Agreement, there shall be an unexpired five-year term. Mr. Clemens is paid a
base salary in 1997 of $394,308, plus an annual cost of living increase, and
such additional incentive or bonus compensation as shall be deemed appropriate
from time to time by the Board of Directors of the Company. A bonus of $305,850
was paid to Mr. Clemens in 1997. The Agreement further provides for group life,
health, disability, major medical, and other insurance coverages for Mr. Clemens
and his family, and upon termination, provides termination benefits which
include the provision of health insurance for Mr. Clemens and his spouse for
life, a salary benefit of five times base salary in the event of Mr. Clemens'
death, disability, or termination without cause, and includes certain
restrictions on Mr. Clemens competition and disclosure of confidential
information.
In addition, pursuant to an Agreement to grant options dated as of
March 10, 1997 (the "Option Contract"), the Company agreed to grant Mr. Clemens
an option to successively purchase up to 3,300,000 shares of the Company's
Series A Cumulative Convertible Preferred Stock ("Series A Preferred"), which
option or options will be granted upon any exercise by Mr. Clemens of any
previously granted option to purchase Series A Preferred, and each subsequently
granted option to purchase shares of Series A Preferred from time-to-time. The
rights set forth in the Option Contract are limited as follows: (1) the number
of shares of Series A Preferred Stock issuable upon each exercise of the Option
Contract shall be limited by the number of Series A Preferred which shall, as of
the date of any such exercise, be authorized and unissued; (2) the number of
shares of Series A Preferred issuable upon the exercise of all of the Options
granted to Mr. Clemens under the Option Contract and under a previously granted
option to purchase 550,000 shares of Series A Preferred shall not in the
aggregate exceed 3,850,000 shares of Series A Preferred; and (3) except upon the
occurrence of a "change in control" (as defined in the Option Contract), Mr.
Clemens shall not be permitted to exercise an option granted under the Option
Contract (i) to purchase more than 550,000 shares of Series A Preferred in any
six-month period, or (ii) to purchase shares which would result in Mr. Clemens
controlling more than 55% of the outstanding voting rights for all classes of
the Company's stock.
Upon the occurrence of a "change in control" of the Company, Mr.
Clemens shall have the right to immediately exercise all options (3,850,000) to
purchase shares of Series A Preferred, and the Company will make a loan to him
in an amount equal to the aggregate exercise price of all options to purchase
shares of Series A Preferred which Mr. Clemens may then be entitled to exercise,
plus an amount equal to all federal and state income taxes incurred by Mr.
Clemens in connection with the exercise (the Loan"). The Loan shall be
unsecured, and shall bear interest at the then applicable federal short-term
rate, but not less than six (6%) percent per annum, with interest and principal
due and payable in full five (5) years from the date of the Loan.
-34-
<PAGE>
For this purpose a "change of control" shall mean the acquisition by
any individual, entity or group or more of either the then outstanding shares of
the Common Voting Stock of the Company, or the combined voting power of the then
outstanding voting securities of the Company entitled to vote generally in the
election of directors.
Mr. Bowles is employed as President pursuant to an Amended and Restated
Employment Contract dated as of November 7, 1996 for a two-year term commencing
as of October 1, 1996, which provides for a base salary of $195,000, with an
annual cost of living increase, and such additional incentive or bonus
compensation and certain insurance and other fringe benefits as shall be deemed
appropriate from time-to-time by the Executive Committee or the Board of
Directors of the Company. The Employment Contract further provides certain
restrictions on Mr. Bowles' competition and disclosure of confidential
information. In addition, Mr. Bowles was granted an option to purchase 50,000
shares of the Company's Common Voting Stock at an exercise price equal to the
fair market value of a share of the Company's Common Voting Stock on the date of
grant, which option is exercisable in its entirety as of the date of grant.
The following three tables show information relating to the Chairman of
the Board, President and Chief Executive Officer and the most highly compensated
executive officers during the calendar years specified therein.
-35-
<PAGE>
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
===================================================================================================================================
Long-Term Compensation
===================================================================================================================================
Annual Compensation Awards Payouts
===================================================================================================================================
(a) (b) (c) (d) (e) (f) (g) (h) (i)
Long Term
Restricted Securities Incentive
Other Annual Stock Underlying Plan All Other
Name and Principal Salary Bonus Compensation Award(s) Options Payouts Compensation(2)
Position(1) Year ($) ($) ($) ($) (#) ($) ($)
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Alvin H. Clemens, 1997 417,453 305,850 18,288
Chairman of the Board 1996 386,662 75,000 15,748
and CEO 1995 381,814 15,225
- -----------------------------------------------------------------------------------------------------------------------------------
James O. Bowles(3) 1997 195,000 64,945
President 1996 130,000 125,000
1995
- -----------------------------------------------------------------------------------------------------------------------------------
William C. Fay III 1997 125,625 177,386 50,000 4,000
Sr. Vice President 1996 111,958 173,570 160,000 3,080
Sales 1995 120,802 89,108 3,042
- -----------------------------------------------------------------------------------------------------------------------------------
Anthony R. Verdi, 1997 151,335 9,295
Chief Operating Officer 1996 128,072 75,000 10,406
1995 126,000 9,415
===================================================================================================================================
(1) Includes Chairman of the Board, President and Chief Executive Officer and the most highly compensated executive officers whose
total annual salary and bonus exceeded $100,000.
(2) Includes for 1997 and 1996, respectively , (a) Company contributions to savings plan (Mr. Clemens $4,000 and $3,750; Mr. Fay
$4,000 and 3,080; Mr. Verdi $3,595 and $3,150), and (b) automobile expense allowances (Mr. Clemens $11,998 and $11,998; and
Mr. Verdi $5,700 and $7,256).
(3) Mr. Bowles joined the Company on May 1, 1996 as a result of the NIA acquisition.
</TABLE>
-36-
<PAGE>
Provident American Corporation
Aggregate Option Exercises in 1997 and Year End Values
<TABLE>
<CAPTION>
Number of Value of
Shares Underlying Unexercised
Acquired Value Unexercised In-the-Money
On Exercise Realized Options Options at
Name (#) ($) at 12/31/97 12/31/97 ($)
- ----------------------------------------------------------------------------------------
(a) (b) (c) (d) (e)
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Alvin H. Clemens
Chairman of the Board, CEO
Exercisable(1) 0 $0 26,669 $0
Unexercisable 48,334 $0
James O. Bowles
President
Exercisable 0 $0 75,000 $0
Unexercisable 40,000 $0
William C. Fay III
Sr. Vice President, Sales
Exercisable 0 $0 69,000 $0
Unexercisable 141,000 $0
Anthony R. Verdi
COO
Exercisable 0 $0 42,000 $0
Unexercisable 55,000
</TABLE>
(1) Excludes non-compensatory stock options to purchase 1,253,376 shares of
common stock at $0.9091 issued to Mr. Clemens in 1989 of which Mr. Clemens
disclaims beneficial ownership of 703,720 shares owned by a partnership of which
Mr. Clemens is a partner; excludes an option to purchase 550,000 shares of
Series A Cumulative Preferred Stock at $3.64 issued on April 1, 1993 in
connection with the purchase by Mr. Clemens of other shares of Preferred Stock
at such time, and also excludes any options which could be granted to Mr.
Clemens under the Option Contract dated March 10, 1997 described in Item
11-"Employment and Other Agreements".
-37-
<PAGE>
Provident American Corporation
Option Grants in 1997
<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 $/Share Date 5% 10% f & g (1)
- -------------------------------------------------------------------------------------------------------------------------
(a) (b) (c) (d) (e) (f) (g) (h)
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
William C. Fay III 50,000 5.24% $4.00 10/6/02 $17,367 $74,290 $71,070
Sr. Vice President, Sales
</TABLE>
(1) Based on the Black-Scholes option pricing model assuming: 0% dividend yield,
no adjustments for forfeitures and the following expected stock volatility,
length of time for exercise and risk free interest rate: 63.235%, three years
and 5.5%, respectively.
-38-
<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"), which was approved
by the Company's shareholders at the 1997 Annual Meeting of Shareholders. The
1996 Employee Plan was amended in 1997 to increase the number of shares issuable
thereunder from 950,000 shares to 1,250,000 shares of the Company's common
voting stock to key employees of the Company and its subsidiaries and
affiliates, exercisable for up to five years from the effective date of the
grant at a price not less than the fair market value of the shares on the
effective date of grant. The amendment of the 1996 Employee Plan will be
submitted for approval by the Company's shareholders at the next Annual Meeting
of Shareholders. All options granted under the 1996 Employee Plan have been
granted at 100% of the fair market value of the shares on the effective date of
the grant, with the exception of an option granted Mr. Clemens, which was
granted at 110% of the fair market value on the date of the grant. During 1997,
the Company granted incentive stock options to purchase an aggregate of 500,000
shares of the Company's common stock at prices ranging from $2.47 to $4.00 per
share under the 1996 Employee Plan. During 1997 a total of 24,050 options were
exercised under the 1993 Employee plan.
The Non-Qualified Stock Option Plan for Directors ("Directors Plan")
was amended and restated effective as of July 16, 1996 in order to increase the
number of shares authorized for the issuance thereunder by 356,500 shares and to
incorporate prior amendments. Options granted under the Directors' Plan are
exercisable for up to ten years from the date of grant at a price of not less
than the fair market value of the shares on the date of the grant. All options
granted under the Director's Plan have been granted at 100% of the fair market
value of the shares on the date of grant. During 1997, the Company granted
options to purchase 30,000 shares of the Company's common stock to eight
Directors, for an aggregate of 240,000 shares, at a price of $2.875 per share,
under the Directors Plan. During 1997 no options were exercised under the
Directors' Plan.
The Stock Option Plan for Executives ("Executive Plan") was amended and
restated effective December 11, 1996 and authorizes the granting of options to
purchase up to 3,850,000 shares of the Company's Series A Cumulative Convertible
Preferred Stock ("Series A Preferred Stock"), which are exercisable for up to
ten years from the effective date of grant at a price of not less than the fair
market value of the shares on the date of grant. No options were granted under
the Executive Plan during 1997.
The Company's Stock Option Plans are administered by the Board of
Directors and the Option Administration Committee. The respective administrators
of the Stock Option Plans are authorized to select optionees, determine the
number of shares for which options are granted to each optionee, the exercise
price of the options, and the other terms and conditions of the options.
-39-
<PAGE>
Item 12. Security Ownership of Certain Beneficial Owners and Management.
The following table sets forth, as of June 30, 1998, the amount and
percentage of the Company's outstanding common stock beneficially owned by (i)
each person who is known by the Company to be the beneficial owner of more than
5% of the Company's outstanding common stock; (ii) each director; (iii) each
executive officer and (iv) all officers and directors of the Company as a group.
<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 3,813,745(3) 33.2% 1,100,000(4) 97.3%
907 Exeter Crest
Villanova, PA 19085
Richard E. Field 717,500(5) 6.7%
134 Medinah Drive
Blue Bell, PA 19422-3212
Michael F. Beausang, Jr. 35,566(6)(7) (8) 16,500 2.8%
James O. Bowles 75,000(9) (8)
Valerie C. Clemens 246,666(7) 2.4%
Harold M. Davis 146,666(7) 1.4%
William C. Fay III 86,000(10) (8)
John T. Gillin 26,666(7) (8)
Henry G. Hager 36,666(7) (8)
Frederick S. Hammer 51,666(7) (8)
George W. Karr, Jr. 48,666(7) (8)
P. Glenn Moyer 30,666(7) (8)
Anthony R. Verdi 70,935(11) (8) 5,500 1.0%
ALL DIRECTORS AND OFFICERS
AS A GROUP (21 PERSONS FOR
COMMON STOCK AND 3 PERSONS
FOR PREFERRED STOCK) 4,820,199(12) 40.0% 1,122,000(4) 99.3%
</TABLE>
(1) Information furnished by directors and officers.
(2) Calculated as a percentage of outstanding shares plus each individual's
options to purchase common shares (or all Directors and Officers as a group).
-40-
<PAGE>
(3) Includes options granted to Mr. Clemens to purchase an additional 253,376
shares of the Company's common stock at a price of $.91 per share granted
pursuant to the Amended and Restated Stock Option Agreement dated as of February
27, 1989, includes 550,000 shares of Series A Cumulative Convertible Preferred
Stock purchased by Mr. Clemens on March 31, 1993 and also includes 550,000
options at $3.64 per share to purchase Series A Cumulative Convertible Preferred
Stock granted to Mr. Clemens pursuant to a Stock Option Agreement dated April 1,
1993. Includes options to purchase 16,666 shares of the Company's Common Stock
at $8.75 per share and 5,000 shares of the Company's common stock at $6.00 per
share. Mr. Clemens disclaims beneficial ownership of 616,000 shares of the
Company's Common Stock given by him to The Mark Twain Trust in 1991 and
1,000,000 options to purchase additional shares of the Company's common stock
owned by a partnership in which Mr. Clemens is a partner. Excludes shares of
Series A Cumulative Convertible Preferred Stock, which may be issued under the
Option Contract. See Item 11. "Employment and Other Agreements". The Series A
Cumulative Convertible Preferred Stock is voted on an as converted basis at the
rate of 4 votes per share. Each share of Class A Common Stock is entitled to 4
votes and each share of common stock is entitled to 1 vote in connection with
matters coming to a vote of the shareholders.
(4) Includes options granted to Mr. Clemens to purchase 550,000 shares of Series
A Cumulative Convertible Preferred Stock at $3.64 per share. This does not
include shares of Series A Cumulative Convertible Stock which may be issued
under the Option Contract. See Item 11. "Employment and Other Agreements".
(5) Includes warrants and options to purchase 550,000 shares of the Company's
common stock.
(6) Includes 16,500 shares of Series A Cumulative Convertible Preferred Stock.
Includes shares owned beneficially by Mr. Beausang through the Butera, Beausang,
Cohen & Brennan Employees' Pension Plan. Mr. Beausang disclaims beneficial
ownership of all shares owned directly or beneficially by his wife, Deborah D.
Beausang. Includes options to purchase 13,333 shares of the Company's common
stock.
(7) Includes an option to purchase 26,666 shares of the Company's common stock.
(8) Less than 1%.
(9) Includes options to purchase 75,000 shares of the Company's common stock.
(10) Includes options to purchase 86,000 shares of the Company's common stock.
(11) Includes 5,500 shares of Series A Cumulative Convertible Preferred Stock.
Includes an option to purchase 47,000 shares of the Company's common stock.
(12) Includes stock and options of all officers and directors to purchase an
aggregate of 245,250 shares and 199,995 shares, respectively, and options
granted to Mr. Clemens to (1) purchase an additional 253,376 shares of the
Company's common stock at a price of $.91 per share granted pursuant to the
Amended and Restated Stock Option Agreement dated as of February 27, 1989 and
(2) purchase an additional 16,666 shares of the Company's common stock at $8.75
per share and 5,000 shares of the Company's common stock at $6.00 per share;
includes 572,000 shares of Series A Cumulative Convertible Preferred Stock and
also includes 550,000 options at $3.64 per share to purchase Series A Cumulative
Convertible Preferred Stock granted to Mr. Clemens pursuant to a Stock Option
Agreement dated as of April 1, 1993.
-41-
<PAGE>
Item 13. Certain Relationships and Related Transactions.
Notes Receivable - Officers and Directors
The Company has loans receivable from related parties with: Mr. Alvin
Clemens, Chairman of the Board, Chief Executive Officer and a shareholder of the
Company, which is collateralized by 128,478 shares of the Company's common stock
("Shares") owned by Mr. Clemens; Mr. John Gillin, a Director and shareholder of
the Company, which is collateralized by 10,000 shares and a stock option grant
to purchase 30,000 shares, both owned by Mr. Gillin; and Mr. Richard Field, with
whom the Company has a Marketing and Consulting Agreement, which is
collateralized by 157,500 shares, a second mortgage on real estate, and unpaid
amounts on the Marketing and Consulting Agreement, all owned by Mr. Field.
Mr. Clemens' loan is due in April 1999. Mr. Gillin's loan has principal
and interest payment commencing July 1998 through June 2003 and Mr. Field's loan
is due upon demand.
The following table details the loans receivable at December 31, 1997.
Clemens Gillin Field
------- ------ -----
Amounts due at December 31, 1997
Loan Principal $600,000 $155,849 $422,280
Accrued Interest 41,195 0 23,848
-------- -------- --------
Balance Due $641,195 $155,849 $446,128
======== ======== ========
1997 Interest Income $ 35,002 $ 12,726 $ 23,848
Interest Rate 5.33% 8.50% 9.00%
The highest outstanding balance during the year for Mr. Clemens, Mr.
Gillin, and Mr. Field were $893,192, $161,414, and $446,128, respectively.
During the third quarter of 1997 the Company made a loan of $250,000 to
Mr. Clemens represented by a promissory note which was repaid prior to the
December 15, 1997 due date together with interest at a rate of 5.75% per annum.
Business transactions with related parties
The Company's Secretary and General Counsel, Michael F. Beausang, Jr.,
is also a member of the Board of Directors and a shareholder in the law firm of
Butera, Beausang, Cohen & Brennan ("BBC&B"). The Company paid BBC&B legal fees
of approximately $282,000 in 1997. For a description of the consulting services
rendered by John T. Gillin, a director of the Company, see Item 11 - Executive
Compensation.
-42-
<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 Current Independent Accountants F-1
Report of Previous Independent Accountants F-2
Consolidated Financial Statements:
Consolidated Balance Sheets -
December 31, 1997 and 1996 F-3
Consolidated Statements of Operations -
Years ended December 31, 1997, 1996 and 1995 F-4
Consolidated Statements of Changes in
Stockholders' Equity -
Years ended December 31, 1997, 1996 and 1995 F-5
Consolidated Statements of Cash Flow -
Years ended December 31, 1997, 1996 and 1995 F-6 to F-7
Notes to Consolidated Financial Statements F-8 to F-37
(2) Financial Statement Schedules: Page
----
Schedule II - Condensed Financial
Information of the Company S-1 to S-3
Schedule III - Supplementary
Insurance Information S-4
All other Financial Statement Schedules are omitted because they are
not applicable or the required information is shown in the Financial
Statements or Notes thereto.
(3) Exhibits:
The Exhibits listed on the accompanying Exhibit Index immediately
following the Financial Statement Schedules are filed as part of, or
incorporated by reference into, this Report.
(b) Reports on Form 8-K:
December 30, 1997 - Item 4 - Changes in Registrant's certifying
accountant
No other reports on Form 8-K were filed during the quarter ended
December 31, 1997.
-43-
<PAGE>
PROVIDENT AMERICAN CORPORATION (Parent Company Only)
SCHEDULE II
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
BALANCE SHEETS
<TABLE>
<CAPTION>
(Dollars in thousands) December 31,
1997 1996
------------- -------------
<S> <C> <C>
Assets
Investment in subsidiaries * $ 11,158 $ 19,824
Equity securities -- 4,186
Equipment, net 526 --
Loans receivable from officer, director and stockholder 1,243 461
Cash 2 --
Other assets 788 185
-------- --------
Total Assets $ 13,717 $ 24,656
======== ========
Liabilities and Stockholders' Equity
Liabilities
Accounts payable to subsidiaries * $ 1,687 $ 767
Accrued expenses 1,463 827
Accrued federal income tax 1,518 809
Notes payable - other 4,040 --
Notes payable-bank 1,000 200
-------- --------
Total Liabilities 9,708 2,603
-------- --------
Stockholders' Equity
Preferred stock Series A 580 580
Preferred stock Series B
Common stock 1,021 1,008
Additional paid-in capital 13,767 12,945
Net unrealized appreciation of stocks (3) 668
Net unrealized appreciation (depreciation)
of bonds held by subsidiaries 188 (177)
Retained earnings (deficit) (including undistributed net
income (loss) of subsidiaries of $(14,052) and $2,850) (11,468) 7,105
Treasury stock, at cost (76) (76)
-------- --------
Total Stockholders' Equity 4,009 22,053
-------- --------
Total Liabilities and
Stockholders' Equity $ 13,717 $ 24,656
======== ========
</TABLE>
*Eliminated in consolidation.
The condensed financial information should be read in conjunction with
the Provident American Corporation and Subsidiaries December 31, 1997
Consolidated Financial Statements and notes thereto.
S-1
<PAGE>
PROVIDENT AMERICAN CORPORATION (Parent Company Only)
SCHEDULE II
CONDENSED FINANCIAL INFORMATION OF COMPANY
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Years Ended December 31,
1997 1996 1995
-------------- ------------- ----------------
<S> <C> <C> <C>
Revenue:
Interest income $ 93 $ 23 $ 67
Investment Income 26 -- --
Litigation settlement -- 5,320 --
Realized gain on investments 950 699 --
Other 93 18 20
-------- -------- --------
1,162 6,060 87
-------- -------- --------
Expenses:
Depreciation 863 0 0
Operating and administrative 1,045 744 271
Interest 35 54 101
-------- -------- --------
1,943 798 372
-------- -------- --------
Income (loss) before income taxes and undistributed
income (loss) of subsidiaries (781) 5,262 (285)
Provision for income taxes -- 1,476 --
-------- -------- --------
Income (loss) after income taxes (781) 3,786 (285)
Undistributed income (loss) of subsidiaries * (17,644) 12,334 (3,416)
-------- -------- --------
Net income (loss) (18,425) 16,120 (3,701)
Dividends declared on preferred stock 148 194 334
-------- -------- --------
Net income (loss) applicable
to common stock $(18,573) $ 15,926 $ (4,035)
======== ======== ========
</TABLE>
*Eliminated in consolidation.
The condensed financial information should be read in conjunction with
the Provident American Corporation and subsidiaries December 31, 1997
Consolidated Financial Statements and notes thereto.
S-2
<PAGE>
PROVIDENT AMERICAN CORPORATION (Parent Company Only)
SCHEDULE II
CONDENSED FINANCIAL INFORMATION OF THE REGISTRANT
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended December 31,
1997 1996 1995
-------------- ------------- -------------
<S> <C> <C> <C>
Operating Activities
Net income (loss) $(18,425) $ 16,120 $ (3,701)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Undistributed (income) loss of subsidiaries * 17,644 (12,334) 3,416
Depreciation 863 0 0
Net realized gain on investments (950) (699) --
Common stock received from litigation settlement -- (4,320) --
Changes in assets and liabilities
(Increase) decrease in other assets and accrued
income taxes 1,234 333 82
Increase (decrease) in accrued expenses (38) 99 (3)
-------- -------- --------
Net cash from operating activities 328 (801) (206)
-------- -------- --------
Investing Activities
Sale of investments 3,839 2,130 --
Repayments of loans receivable 250 738
Loans to officer, director and shareholder (1,032) (461)
Decrease in receivables 60 59
Acquisition of equipment (680) 0 0
Acquisition of businesses, net -- (35) --
Other -- -- (128)
-------- -------- --------
Net cash from investing activities 2,437 1,693 610
-------- -------- --------
Financing Activities
Proceeds from notes payable - bank 1,000 78 78
Proceeds from notes payable - other 3,978 -- --
Repayment of notes payable - bank (200) (708) (414)
Issuance of common stock 835 800 99
Dividends paid on preferred stock (148) (194) (334)
Capital Contribution to Subsidiary* (8,000) -- --
Increase (decrease) in accounts payable subsidiaries * (228) (869) 167
-------- -------- --------
Net cash from financing activities (2,763) (893) (404)
-------- -------- --------
Change in cash 2 (1) --
Cash, beginning of year -- 1 1
-------- -------- --------
Cash, end of year $ 2 $ -- $ 1
======== ======== ========
Supplemental disclosure of cash information:
Interest paid $ 5 $ 56 $ 101
Income taxes paid (refunded) $ (1,128) $ 1,119 $ --
Non-cash investing activities:
Issuance of common stock in connection with
acquisition of businesses $ -- $ 1,879 $ --
*Eliminated in consolidation.
</TABLE>
The condensed financial information should be read in conjunction with
the Provident American Corporation and subsidiaries December 31, 1997
Consolidated Financial Statements and notes thereto.
S-3
<PAGE>
PROVIDENT AMERICAN CORPORATION AND SUBSIDIARIES
SCHEDULE III - SUPPLEMENTARY INSURANCE INFORMATION
(in thousands)
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN F
- ---------------------------------------------------------------------------------------------------------------------------------
Years Ended Segment Deferred Policy Future Policy Unearned Premium
December 31, Acquisition Cost Benefits, Premiums Revenue
Losses, Claims
And Loss
Expenses
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1995: Individual Life
And Annuity $ 986 $ 43,477 $ - $ 7,138
Group Life
And Health - 10,183 544 25,571
-----------------------------------------------------------------------------------------------------------
Total $ 986 $ 53,660 $ 544 $ 32,709
- ---------------------------------------------------------------------------------------------------------------------------------
1996: Individual Life
And Annuity $ 1,468 $ 44,782 $ - $ 10,814
Group Life
And Health 1,672 15,469 1,356 33,892
-----------------------------------------------------------------------------------------------------------
Total $ 3,140 $ 60,251 $ 1,356 $ 44,706
- ---------------------------------------------------------------------------------------------------------------------------------
1997: Individual Life
And Annuity $ 1,499 $ 46,418 $ - $ 6,520
Group Life
And Health - 29,884 2,022 47,733
-----------------------------------------------------------------------------------------------------------
Total $ 1,499 $ 76,302 $ 2,022 $ 54,253
=================================================================================================================================
</TABLE>
RESTUBBED TABLE
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
COLUMN A COLUMN G COLUMN H COLUMN I COLUMN J
- ----------------------------------------------------------------------------------------------------------------------------------
Years Ended Segment Net Investment Benefits, Claims, Amortization Other Operating
December 31, Income (1) Losses And Of Deferred Expenses
Settlement Policy
Expenses Acquisition
Costs
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1995: Individual Life
And Annuity $ 2,513 $ 6,604 $ 103 $ 4,733
Group Life
And Health 345 15,558 - 13,731
------------------------------------------------------------------------------------------------------------
Total $ 2,858 $ 22,162 $ 103 $ 18,464
- ----------------------------------------------------------------------------------------------------------------------------------
1996: Individual Life
And Annuity $ 2,831 $ 10,528 $ 170 $ 3,682
Group Life
And Health 449 20,442 414 16,394
------------------------------------------------------------------------------------------------------------
Total $ 3,280 $ 30,970 $ 584 $ 20,076
- ----------------------------------------------------------------------------------------------------------------------------------
1997: Individual Life
And Annuity $ 2,887 $ 7,534 $ 82 $ 3,745
Group Life
And Health 600 40,192 10,861 22,630
-----------------------------------------------------------------------------------------------------------
Total $ 3,487 $ 47,726 $ 10,943 $ 26,375
=================================================================================================================================
</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
June 30, 1998
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Company and in
the capacities and on the dates indicated.
/s/ALVIN H. CLEMENS June 30, 1998
- ---------------------------------------
Alvin H. Clemens, Chairman of the Board
and Chief Executive Officer
(Principal Executive Officer)
/s/JAMES O. BOWLES June 30, 1998
- ---------------------------------------
James O. Bowles, President
/s/BENEDICT J, IACOVETTI June 30, 1998
- ----------------------------------------------
Benedict J. Iacovetti, Chief Financial Officer
(Principal Financial Officer)
/s/FRANCIS L. GILLAN III June 30, 1998
- ---------------------------------------
Francis L. Gillan III, Treasurer
(Chief Accounting Officer)
/s/MICHAEL F. BEAUSANG June 30, 1998
- ---------------------------------------
Michael F. Beausang, Jr., Director
/s/VALERIE C. CLEMENS June 30, 1998
- ---------------------------------------
Valerie C. Clemens, Director
- ---------------------------------------
Harold M. Davis, Director
/s/JOHN T. GILLIN June 30, 1998
- ---------------------------------------
John T. Gillin, Director
/s/HENRY G. HAGER June 30, 1998
- ---------------------------------------
Henry G. Hager, Director
/s/FREDERICK S. HAMMER June 30, 1998
- ---------------------------------------
Frederick S. Hammer, Director
/s/GEORGE W. KARR June 30, 1998
- ---------------------------------------
George W. Karr, Jr., Director
/s/P. GLENN MOYER June 30, 1998
- ---------------------------------------
P. Glenn Moyer, Director
-44-
<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
EXHIBITS TO FORM 10-K
ANNUAL REPORT OF
PROVIDENT AMERICAN CORPORATION
For the Fiscal Year Ended December 31, 1997
Filed pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
<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. Incorporated by
reference to Exhibit (2)(B) to Registrant's
Annual Report on Form 10-K for the year ended
December 31, 1996.
(2)(C) Purchase Agreement, dated May 1, 1996 among
Registrant, MidAmerica Mutual Life Insurance
Corporation and MidAmerica Enterprises, Inc.
Incorporated by reference to Exhibit (2)(C) to
Registrant's Annual Report on Form 10-K for the
year ended December 31, 1996.
(2)(D) Stock Exchange Agreement, dated June 18, 1996
among Registrant, Richard E. Field, Arthur J.
Ivey and Richard E. Field & Associates, Inc.
Incorporated by reference to Exhibit (2)(D) to
Registrant's Annual Report on Form 10-K for the
year ended December 31, 1996.
(3)(A) Articles of Incorporation of the Registrant, as
amended, incorporated by reference to Exhibit
(3)(A) to Registrant's Form 10 Registration
Statement No. 0-13591, as amended. Amendment to
Registrants Articles of Incorporation dated
December 5, 1989, incorporated by reference to
Exhibit (C)(2) to Registrant's Form 8-K dated
December 29, 1989.
(3)(B) By-laws of Registrant, as amended, incorporated
by reference to Exhibit (3)(B) to Registrant's
Form 10 Registration Statement No. 0-13591, as
amended.
-45-
<PAGE>
Exhibit Sequentially
Number Description of Exhibits Numbered Page
------ ----------------------- -------------
(4)(A)* Form of Registrant's Common Stock Certificate
incorporated by reference to Exhibit (4)(A) to
Registrant's Form S-1 Registration Statement
No. 33-5884, as amended.
(4)(B) Amended and Restated Statement With Respect To
Shares - Domestic Business Corporation For
Provident American Corporation. Series A
Cumulative Convertible Preferred Stock, $1.00
Par Value. Incorporated by reference to Exhibit
(4)(A) to Registrant's Quarterly Report on Form
10-Q for the Quarterly period ended September
30, 1993.
(4)(C) Amended and Restated Statement With Respect To
Shares - Domestic Business Corporation For
Provident American Corporation. Series B
Cumulative Convertible Preferred Stock, $1.00
Par Value. Incorporated by reference to Exhibit
(4)(B) to Registrant's Quarterly Report on Form
10-Q for the Quarterly period ended September
30, 1993.
(4)(D) Stock Purchase Agreement dated March 31, 1993
by and among the Registrant, Alvin H. Clemens
and the group of investors known as "The
Brumley Group" for the purchase of 387,500
shares of Series B Cumulative Convertible
Preferred Stock. Incorporated by reference to
Exhibit (4)(C) to Registrant's Quarterly Report
on Form 10-Q for the Quarterly period ended
September 30, 1993.
(4)(E) Insurion, Inc. 5.5% Convertible Note due June
30, 2003, the principal amount of $5,000,000
received on May 29, 1998.
(10)(A)* Employment Contract dated April 1, 1991 among
Registrant, Provident Indemnity Life Insurance
Company, Maine National Life Insurance Company
and Alvin H. Clemens incorporated by reference
to Exhibit (10)(A) to Registrant's Quarterly
Report on Form 10-Q for the quarterly period
ended September 30, 1993.
(10)(B) Stock Exchange Agreement dated January 19, 1991
among Registrant, Premarco, Inc., Thomas D.
Bischoff and Michael V. Warhurst incorporated
by reference to Exhibit (10)(B) to Registrant's
Annual Report on Form 10-K for the year ended
December 31, 1990.
-46-
<PAGE>
Exhibit Sequentially
Number Description of Exhibits Numbered Page
------ ----------------------- -------------
(10)(C) Escrow and Security Agreement dated January 19,
1991 among Registrant, Thomas D. Bischoff,
Michael V. Warhurst and Anthony R. Verdi
(escrow agent) incorporated by reference to
Exhibit (10)(D) to Registrant's Annual Report
on Form 10-K for the year ended December 31,
1990.
(10)(D)* Premium Production and Stock Option Agreement
dated January 19, 1991 among Registrant,
Provident Indemnity Life Insurance Company and
Premarco, Inc. incorporated by reference to
Exhibit (10)(E) to Registrant's Annual Report
on Form 10-K for the year ended December 31,
1990.
(10)(E) Escrow Agreement dated January 1, 1991 between
Network America Life Insurance Company,
Provident Indemnity Life Insurance Company and
Harleysville National Bank and Trust Company
incorporated by reference to Exhibit (10)(G) to
Registrant's Annual Report on Form 10-K for the
year ended December 31, 1990.
(10)(F)* Registrant's 1983 Incentive Stock Option Plan
and Management Contracts thereunder,
incorporated by reference to Exhibit
(10)(C)(17) to Registrant's Form 10
Registration Statement No. 0-13591, as amended.
(10)(G)* Registrant's 1985 Non-Qualified Stock Option
Plan, incorporated by reference to Exhibit
(10)(C)(1) to Registrant's Form 10 Registration
Statement No. 0-13591, as amended.
(10)(H) Quota Share Reinsurance Agreement effective as
of October 1, 1989 among Provident Indemnity
Life Insurance Company, Continental Assurance
Company, First Equicor Life Insurance Company,
The Mercantile and General Reinsurance Company,
Limited, The Manufacturers Life Insurance
Company, Ltd. and Gerling Global Life Insurance
Company incorporated by reference to Exhibit
(10)(L) to Registrant's Form S-1 Registration
Statement No. 33-40842, as amended.
-47-
<PAGE>
Exhibit Sequentially
Number Description of Exhibits Numbered Page
------ ----------------------- -------------
(10)(I)* Registrant's 1991 Executive Stock Option Plan
incorporated by reference to Exhibit (10)(O) to
Registrant's Annual Report on Form 10-K for the
year ended December 31, 1991.
(10)(J)* Registrant's 401(k) Profit Sharing Plan and
Trust incorporated by reference to Exhibit
(10)(P) to Registrant's Annual Report on Form
10-K for the year ended December 31, 1991.
(10)(K)* Amendment dated November 17, 1992 to Premium
Production and Stock Option Agreement dated
January 19, 1991 among Registrant, Provident
Indemnity Life Insurance Company and Premarco,
Inc., incorporated by reference to Exhibit
(10)(S) to Registrant's Annual Report on Form
10-K for the year ended December 31, 1992.
(10)(L)* Amended and Restated Provident American
Corporation Incentive Stock Option Plan for
Field Representatives and Agents dated January
1, 1991, incorporated by reference to Exhibit
(10)(T) to Registrant's Annual Report on Form
10-K for the year ended December 31, 1992.
(10)(M)* Third Amendment to the Amended and Restated
Stock Option Agreement dated April 1, 1993
among Registrant, Provident Indemnity Life
Insurance Company and Alvin H. Clemens,
incorporated by reference to Exhibit (10)(B) to
Registrant's Quarterly Report on Form 10-Q for
the Quarterly period ended September 30, 1993.
(10)(N)* Option Agreement dated as of April 1, 1993
granting Alvin H. Clemens the right to purchase
500,000 shares of Series A Preferred Stock,
incorporated by reference to Exhibit (10)(C) to
Registrant's Quarterly Report on Form 10-Q for
the Quarterly period ended September 30, 1993.
-48-
<PAGE>
Exhibit Sequentially
Number Description of Exhibits Numbered Page
------ ----------------------- -------------
(10)(O) Stock Purchase Agreement dated February 16,
1995 by and among Blue Alliance Mutual
Insurance Company, Registrant and Provident
Indemnity Life Insurance Company as to the sale
of all of the outstanding stock of Maine
National Life Insurance Company. Incorporated
by reference to Exhibit (10)(W) to Registrant's
Annual Report on Form 10-K for the year ended
December 31, 1994.
(10)(P) Stock Purchase Agreement, dated January 2, 1995
among Maine National Life Insurance Company,
Provident Indemnity Life Insurance Company and
PAMCO Realty Co., Inc. Incorporated by
reference to Exhibit (10)(X) to Registrant's
Annual Report on Form 10-K for the year ended
December 31, 1994.
(10)(Q) Reinsurance Agreement, dated December 31, 1995
between Provident Indemnity Life Insurance
Company and London Life Reinsurance Company.
Incorporated by reference to Exhibit (10)(Y) to
Registrant's Annual Report on Form 10-K for the
year ended December 31, 1995.
(10)(R) Warrant, dated November 1, 1995 granting Thomas
A. Bruderman the right to purchase up to 50,000
shares of the common stock of Registrant.
Incorporated by reference to Exhibit (10)(Z) to
Registrant's Annual Report on Form 10-K for the
year ended December 31, 1995.
(10)(S)* Fourth Amendment to Registrant's Incentive
Stock Option Plan for Field Representatives and
Agents, effective January 1, 1995. Incorporated
by reference to Exhibit (10)(CC) to
Registrant's Annual Report on Form 10-K for the
year ended December 31, 1995.
(10)(T) Settlement Agreement and Mutual General
Release, effective February 12, 1996 among
Registrant, Provident Indemnity Life Insurance
Company, The Loewen Group Inc., and Loewen
Group International, Inc. Incorporated by
reference to Exhibit (10)(EE) to Registrant's
Annual Report on Form 10-K for the year ended
December 31, 1995.
-49-
<PAGE>
Exhibit Sequentially
Number Description of Exhibits Numbered Page
------ ----------------------- -------------
(10)(U)* Registrant's Life and Health Insurance Agent
Non-Qualified Stock Option Plan, effective
January 2, 1996. Incorporated by reference to
Exhibit (10)(EE) to Registrant's Annual Report
on Form 10-K for the year ended December 31,
1996.
(10)(V)* Employment Contract, dated April 1, 1996 among
Registrant, Provident Indemnity Life Insurance
Company and Edward Bolton. Incorporated by
reference to Exhibit (10)(FF) to Registrant's
Annual Report on Form 10-K for the year ended
December 31, 1996.
(10)(W)* Amended and Restated Employment Contract, dated
November 7, 1996 among Registrant, NIA
Corporation, Provident American Life & Health
Insurance Company and James O. Bowles.
Incorporated by reference to Exhibit (10)(GG)
to Registrant's Annual Report on Form 10-K for
the year ended December 31, 1996.
(10)(X)* Employment Contract, dated February 19, 1997
among Registrant, Provident Indemnity Life
Insurance Company, Provident American Life &
Health Insurance Company and Alvin H. Clemens.
Incorporated by reference to Exhibit (10)(HH)
to Registrant's Annual Report on Form 10-K for
the year ended December 31, 1996.
(10)(Y) Promissory Note; Pledge and Security Agreement,
dated April 8, 1996 between Registrant and
Alvin H. Clemens. Incorporated by reference to
Exhibit (10)(II) to Registrant's Annual Report
on Form 10-K for the year ended December 31,
1996.
(10)(Z)* Amendment and Restatement of the Registrant's
Stock Option Plan for Directors, effective July
16, 1996. Incorporated by reference to Exhibit
(10)(JJ) to Registrant's Annual Report on Form
10-K for the year ended December 31, 1996.
(10)(AA)* Registrant's 1996 Employee Incentive Stock
Option Plan, effective July 16, 1996.
Incorporated by reference to Exhibit (10)(KK)
to Registrant's Annual Report on Form 10-K for
the year ended December 31, 1996.
-50-
<PAGE>
Exhibit Sequentially
Number Description of Exhibits Numbered Page
------ ----------------------- -------------
(10)(BB)* Registrant's Amended and Restated Stock Option
Plan for Executives, dated December 11, 1996.
Incorporated by reference to Exhibit (10)(LL)
to Registrant's Annual Report on Form 10-K for
the year ended December 31, 1996.
(10)(CC) Promissory Note with Amendments; Pledge and
Security Agreement; and Escrow Agreement, dated
April 2, 1996 between Registrant and John T.
Gillin. Incorporated by reference to Exhibit
(10)(MM) to Registrant's Annual Report on Form
10-K for the year ended December 31, 1996.
(10)(DD) Warrant for the Purchase of Shares of Common
Stock, dated July 18, 1996 granting Ladenburg,
Thalmann & Co. Inc. the right to purchase
100,000 shares of the common stock of
Registrant. Incorporated by reference to
Exhibit (10)(OO) to Registrant's Annual Report
on Form 10-K for the year ended December 31,
1996.
(10)(EE)* Marketing and Consulting Agreement, dated June
18, 1996 between Provident Indemnity Life
Insurance Company and Richard E. Field.
Incorporated by reference to Exhibit (10)(PP)
to Registrant's Annual Report on Form 10-K for
the year ended December 31, 1996.
(10)(FF)* Stock Option/Warrant Agreement, dated January
1, 1996 between Registrant and Richard E.
Field. Incorporated by reference to Exhibit
(10)(QQ) to Registrant's Annual Report on Form
10-K for the year ended December 31, 1996.
(10)(GG) Amendment to Promissory Note, dated April 8,
1997 between Registrant and Alvin H. Clemens.
(10)(HH) Promissory Note, dated July 28, 1997 between
Registrant and Alvin H. Clemens.
(10)(II) Second Amendment to Promissory Note, dated
February 1, 1997; Third Amendment to Promissory
Note, dated April 30, 1997, between Registrant
and John T. Gillin.
-51-
<PAGE>
Exhibit Sequentially
Number Description of Exhibits Numbered Page
------ ----------------------- -------------
(10)(JJ) Services Agreement with Amendment to Services
Agreement, dated February 1, 1998 between
Provident Indemnity Life Insurance Company,
Provident American Life and Health Insurance
Company, HealthPlan Services Corporation and
HealthPlan Services, Inc.
(10)(KK) Inducement Agreement, dated October 16, 1997
between Registrant and HealthPlan Services,
Inc.
(10)(LL) The Provident and HealthPlan Services
E-Commerce Agreement, dated May 29, 1998 and
effective February 1, 1998 between Registrant,
Insurion, Inc., Provident Health Services, Inc.
and HealthPlan Services, Inc.
(10)(MM) Amended and Restated Interactive Marketing
Agreement, dated February 1, 1998 between
Provident Health Services, Inc. and American
Online, Inc. Incorporated by reference to
Exhibit 1 to Registrant's Form 8-K/A dated June
8, 1998.
(10)(NN) MGU Stock Purchase Agreement, dated February
27, 1998 between Montgomery Management
Corporation and HealthPlan Services, Inc.
(10)(OO) Lynx Capital Group, LLC Consulting Agreement,
dated March 31, 1998 between Provident
Indemnity Life Insurance Company, Provident
American Life and Health Insurance Company and
Lynx Capital Group, LLC.
(11) Computation of Earnings Per Share.
(16) Letter re: change in certifying account.
(22) Subsidiaries of Registrant.
(23)(A) Consent of Current Independent Accountants.
(23)(B) Consent of Previous Independent Accountants.
(27) Financial Data Schedule.
* Indicates management contract or compensatory plan or arrangement.
-52-
<PAGE>
THIS CONVERTIBLE NOTE AND THE COMMON STOCK ISSUABLE UPON CONVERSION HEREOF HAVE
NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT") NOR
UNDER ANY STATE SECURITIES LAW AND MAY NOT BE PLEDGED, SOLD, ASSIGNED,
HYPOTHECATED OR OTHERWISE TRANSFERRED UNTIL (1) A REGISTRATION STATEMENT WITH
RESPECT THERETO IS EFFECTIVE UNDER THE ACT AND ANY APPLICABLE STATE SECURITIES
LAW OR (2) THE COMPANY RECEIVES AN OPINION OF COUNSEL TO THE COMPANY OR OTHER
COUNSEL TO THE HOLDER OF SUCH NOTE WHICH OTHER COUNSEL IS SATISFACTORY TO THE
COMPANY THAT SUCH NOTE AND/OR COMMON STOCK MAY BE PLEDGED, SOLD, ASSIGNED,
HYPOTHECATED OR TRANSFERRED WITHOUT AN EFFECTIVE REGISTRATION STATEMENT UNDER
THE ACT OR APPLICABLE STATE SECURITIES LAWS.
THESE SECURITIES ARE SUBJECT TO RESTRICTIONS ON TRANSFERABILITY AND RESALE AND
MAY NOT BE TRANSFERRED OR RESOLD EXCEPT AS PERMITTED UNDER THE SECURITIES ACT OF
1933, AS AMENDED, AND THE APPLICABLE STATE SECURITIES LAWS, PURSUANT TO
REGISTRATION OR EXEMPTION THEREFROM. THE HOLDER SHOULD BE AWARE THAT IT WILL BE
REQUIRED TO BEAR THE FINANCIAL RISKS OF THIS INVESTMENT FOR AN INDEFINITE PERIOD
OF TIME.
INSURION, INC.
5 1/2% Convertible Note
Due June 30, 2003
May 29, 1998
INSURION, INC., a Pennsylvania corporation (the "Company"), for value
received, hereby promises to pay to [***] (the "Holder") upon due presentation
and surrender of this Note, on June 30, 2003, (the "Maturity Date") the
principal amount of $5,000,000, and accrued interest thereon as hereinafter
provided.
1. PAYMENT OF PRINCIPAL AND INTEREST; METHOD OF PAYMENT.
Payment of the principal and accrued interest on this Note
shall be made in such coin or currency of the United States of America as at the
time of payment shall be legal tender for the payment of public and private
debts, or as otherwise provided herein. Interest (computed on the basis of a
360-day year of twelve 30-day months) on the unpaid portion of the principal
amount from time to time outstanding shall be accrued by the Company at the rate
equal to five and one-half percent (5 1/2%) per annum. Interest shall be accrued
and payable by the Company at the time of conversion or the Maturity Date, at
the option of the Company, in cash, additional convertible securities, or shares
of the Company's common stock,provided that an Event of Default (as defined in
Section 4) shall not have occurred and be continuing. If interest is paid by
shares of the Company's common stock, interest will be payable by the issuance
to the Holder of the number of shares of the Company's Stock (as hereinafter
defined) equal to the dollar amount of interest to be paid divided by the
Conversion Price (as defined in Section 6). Both principal hereof and interest
thereon are payable at the Holder's address set forth herein or such other
address as the Holder shall designate from time to time by written notice to the
Company. Prior to any sale or other disposition of this Note, the Holder hereof
agrees to endorse hereon the amount of principal paid hereon and the last date
to which interest has been paid hereon and to notify the Company of the name and
address of the transferee.
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2. REPRESENTATIONS AND WARRANTIES OF THE COMPANY.
The Company represents and warrants to the Holder that:
(a) the Company is a corporation duly organized, validly
existing and in good standing under the laws of the Commonwealth of
Pennsylvania;
(b) the Company has all requisite power and authority and all
necessary licenses and permits to own and operate its properties and to carry on
its business as now conducted and as presently proposed to be conducted. This
Note and the transactions contemplated herein have been duly approved by all
necessary action on the part of the Company. This Note, when duly executed and
delivered by the Company, will constitute the valid, legal and binding agreement
of the Company, enforceable in accordance with its terms;
(c) the Company is duly licensed or qualified and is in good
standing as a foreign corporation in each jurisdiction wherein the nature of the
business transacted by it or the nature of the property owned or leased by it
makes such licensing or qualification necessary. The execution, delivery and
performance of this Note by the Company and the consummation of the transactions
contemplated hereby will not: (i) require the consent, approval or authorization
of any person, corporation or public authority; (ii) violate, with or without
notice or the passage of time, or both, any
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provisions of law applicable to the Company, or (iii) conflict with or result in
the breach of any of the terms, conditions or provisions of the Articles of
Incorporation or By-laws of the Company;
(d) the Stock (as hereinafter defined) to be issued pursuant
to the conversion of this Note is duly authorized and there are no restrictions,
regulatory or otherwise, which would prevent the Company from issuing the Stock
if and when the Holder exercises its right of conversion; and
(e) the Company was incorporated on March 26, 1998, and its
authorized capital consists of twenty million (20,000,000) shares of common
voting stock, par value $0.10 per share (the "Class A Common Stock"), twenty
million (20,000,000) shares of common voting stock, par value $0.10 per share
(the "Class B Common Stock"), and five million (5,000,000) shares of preferred
stock, par value $1.00 per share (the "Preferred Stock"), of which eight hundred
seventy-five thousand (875,000) shares of Class A Common Stock are issued and
outstanding and owned by Provident American Corporation ("PAMCO").
3. REPRESENTATIONS AND WARRANTIES OF THE HOLDER.
The Holder understands that this Note, and the Stock issuable
upon conversion of this Note, are being sold under one or more exemptions from
registration provided in the Securities Act of 1933, as amended (the "Act") and
limited offering exemptions contained in the securities laws of other
jurisdictions; that it is purchasing the Note, and upon the conversion the
Stock, without being furnished any offering literature, prospectus, or business
plan; that this transaction has not been examined by the United States
Securities and Exchange Commission or by any administrative agency charged with
the administration of the securities laws of any other jurisdiction; that all
documents, records, and books pertaining to this investment requested by the
Holder have been made available by the Company to the Holder and its
representatives, including its attorney, its accountant, and/or its authorized
representatives; and that the books and records of the Company have been and
will be available for inspection by the Holder at the Company's offices upon
reasonable notice during reasonable business hours. The Holder hereby further
represents and warrants as follows:
(a) the Holder is a business corporation organized under the
laws of Florida, all of the issued and outstanding capital stock of which is
owned by [***];
(b) the Holder understands and has fully considered for the
purposes of the investment in this Note that there are substantial restrictions
on the transferability of the Note and any Stock into which this Note may be
convertible under the Act and applicable state securities laws and such
registration is not required;
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(c) the Holder confirms that it is able to bear the economic
risk of its investment in this Note and the Stock into which this Note is
convertible, and has such knowledge and experience in financial and business
matters that the Holder is capable of evaluating the merits and risks of an
investment in the Note and in the Stock into which the Note is convertible;
(d) the Holder understands that (1) there are no financial
statements available for the Company, the Company has not filed any statement or
report with any governmental agency nor has the Company's operations been
included in any such report filed by any affiliate of the Company, and (2) the
Company has not engaged in business, has paid no dividends, there is no
recognized market for the Company's Stock or this Note, and the Company's sole
asset is its interest as an assignee of a certain Agreement between Provident
Health Services, Inc. and America OnLine, Inc. dated February 1, 1998, a copy of
which has been provided to the Holder;
(e) the Holder acknowledges that it is a party to a Health
Plan Administrative Services Agreement effective February 1, 1998 (the
"Administration Agreement") with PAMCO, Provident Indemnity Life Insurance
Company ("PILIC"), and Provident American Life & Health Insurance Company
("PALHIC") pursuant to which the Holder is administering substantially all of
the health insurance business underwritten by PILIC and PALHIC, and that in
connection with the negotiation and execution of the Administration Agreement
the Holder became familiar with the business and financial affairs of PAMCO,
PILIC and PALHIC and those contemplated for the Company;
(f) the Holder consents to the placement of a legend on the
certificates representing the Stock issuable upon the conversion of this Note,
which legend will be in substantially the following form:
"THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT
BEEN REGISTERED WITH THE SECURITIES AND EXCHANGE
COMMISSION UNDER THE SECURITIES ACT OF 1933, AS
AMENDED, OR THE SECURITIES LAWS OF ANY JURISDICTION.
THE SALE OR OTHER DISPOSITION OF THESE SHARES IS
PROHIBITED UNLESS THE DISPOSITION IS SATISFACTORY IN
THE OPINION OF COUNSEL FOR THE COMPANY THAT SUCH SALE
OR OTHER DISPOSITION CAN BE MADE WITHOUT REGISTRATION
UNDER THE SECURITIES ACT OF 1933 AND OTHER APPLICABLE
STATUTES. BY ACQUIRING THE SHARES REPRESENTED BY THIS
CERTIFICATE, THE HOLDER OF THIS CERTIFICATE
REPRESENTS THAT IT WILL NOT SELL OR OTHERWISE DISPOSE
OF THESE SHARES WITHOUT REGISTRATION OR OTHER
COMPLIANCE WITH THE AFORESAID ACTS AND THE RULES AND
REGULATIONS THEREUNDER."
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(g) The Holder has been advised by the Company and understands
that the Holder has all rights under the applicable state securities laws, if
any, with respect to the cancellation and withdrawal of this Note.
The foregoing representations, warranties, and undertakings are made by the
Holder with the intent that they be relied upon in determining its suitability
as an investor in the Company, and the Holder hereby agrees that such
representations and warranties shall survive the issuance of the Note or the
Stock.
4. EVENTS OF DEFAULT.
It shall be an Event of Default with respect to this Note upon
the occurrence and continuation uncured of any of the following events:
4.1 This Note.
(a) a default in the payment of the principal or
interest on this Note, when and as the same shall become due and payable, either
by the terms hereof or upon redemption or otherwise and the default continues
uncured for a period of ten (10) days after written notice thereof; or
(b) a default in the performance, or breach, of any
material covenant of the Company in this Note (other than a covenant or a
default which is elsewhere herein specifically dealt with as an Event of
Default), and the continuance of such default or breach uncured for a period of
sixty (60) days after written notice thereof, or within a reasonable time
thereafter, provided the Company utilizes its best efforts therefor.
4.2 Bankruptcy. The entry of a decree or order by a court
having jurisdiction adjudging the Company a bankrupt or insolvent, or approving
a petition seeking reorganization, arrangement, adjustment or composition of or
in respect of the Company, under federal bankruptcy law, as now or hereafter
constituted, or any other applicable federal or state bankruptcy, insolvency or
other similar law, or appointing a receiver, liquidator, assignee, trustee,
sequestrator or other similar official of the Company or of any substantial part
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of its affairs, and the continuance of any such decree or order unstayed and in
effect for a period of one hundred twenty (120) days; or the commencement by the
Company of a voluntary case under federal bankruptcy law, as now or hereafter
constituted, or any other applicable Federal or state bankruptcy, insolvency, or
other similar law, or the consent by it to the institution of bankruptcy or
insolvency proceedings against it, or the filing by it of a petition or answer
or consent seeking reorganization or relief under federal bankruptcy law or any
other applicable Federal or state law, or the consent by it to the filing of
such petition or to the appointment of a receiver, liquidator, assignee,
trustee, sequestrator or similar official of the Company or of any substantial
part of its property, or the making by it of an assignment for the benefit of
creditors, or the admission by it in writing of its inability to pay its debts
generally as they become due, or the taking of corporate action by the Company
in furtherance of any such action.
5. REMEDIES UPON DEFAULT.
5.1 Acceleration. Upon each occurrence of an Event of Default
and at any time during the continuation thereof (unless the principal of this
Note shall already have become and be due and payable), the Holder, by notice in
writing given to the Company, may declare the principal of the Note then
outstanding and all interest thereon to be due and payable immediately, and upon
any such declaration the same shall become and be due and payable immediately,
anything herein contained to the contrary notwithstanding.
5.2 Proceedings and Actions. During the continuation of any
one or more Events of Default, the Holder may institute such actions or
proceedings in law or equity as it shall deem expedient for the protection of
its rights and may prosecute and enforce its claims against all assets of the
Company, except as hereinafter set forth, and shall be entitled to receive
therefrom payment on such claims up to an amount not exceeding the principal
amount of this Note plus accrued interest to the date of payment plus reasonable
expenses of collection.
6. CONVERSION.
6.1 Exercise of Conversion Privilege. During the term of this
Note, the principal amount represented by this Note is convertible at the
Holder's option in whole or in part on the date which is one day prior to the
settlement or the completion of the first to occur of the following events:
(a) the sale of all or substantially all of the business
or assets of the Company;
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(b) the sale or transfer by PAMCO of fifty percent (50%)
or more of the outstanding capital stock of the Company in single or series of
transactions to a person or entity not owned or controlled by PAMCO;
(c) the acquisition of eighty percent (80%) or more of the
then outstanding capital stock of the Company by an unaffiliated third party;
(d) May 29, 1999; or
(e) the Company's first offering of its common stock that
is registered under the Securities Act of 1933, as amended, which offering is
underwritten on a firm commitment or best efforts basis and produces gross
proceeds in excess of $25,000,000.
The principal amount represented by this Note is convertible into the number of
fully paid and non-assessable shares of the Company's Class A Common Stock (the
"Stock") which is equal to the greater of (i) One Hundred Twenty-Five Thousand
(125,000) shares at the conversion price of one (1) share of Stock for each
$40.00 of principal to be converted, and subject to adjustment as hereinafter
provided (the "Conversion Price"), and (ii) twelve and one-half percent (12.5%)
of the Company's outstanding common stock as calculated on a Fully Diluted Basis
after such conversion. "Fully Diluted Basis" shall mean that, for purposes of
calculating the total outstanding number of shares of the Company's common
stock, all shares of any series of the Company's Preferred Stock which are
convertible into shares of the Company's Class A Common Stock shall be deemed to
have been converted into Class A Common Stock and, except as described below,
all outstanding options or warrants to acquire Class A Common Stock shall be
assumed to be exercised, converted and exchanged into the shares of Class A
Common Stock into which they, pursuant to their terms, may then or thereafter
upon the passage of time be exercised, converted or exchanged. For purposes of
determining the aggregate of outstanding Class A Common Stock, unexercised stock
options issued to employees or directors for compensatory purposes pursuant to
an employee stock option or other stock incentive plan approved by a majority of
the outside directors of the Board of Directors of Insurion shall be deemed to
not have been exercised, and for purposes of determining the aggregate shares of
Class A Common Stock held by any person, all such stock options held by such
person shall be deemed to be exercised. This Note is convertible upon surrender
of a certificate representing the principal amount to be converted, at the
office of the Company, accompanied by a written notice of conversion in the form
annexed hereto to the Company duly executed by the Holder or its duly authorized
attorney. If this Note is converted in part only, the Company will issue a new
note representing the outstanding principal amount not so converted. No
adjustments in respect of cash dividends will be made upon any conversion.
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6.3 Dividends; Reclassifications, etc. In the event that the
Company shall, at any time prior to the exercise of conversion rights hereunder:
(i) declare or pay to the holders of the Stock a dividend payable in any kind of
shares of capital stock of the Company; or (ii) combine, subdivide or otherwise
reclassify its Stock into the same or a different number of shares with or
without par value, or in shares of any class or classes; or (iii) transfer its
property as an entirety or substantially as an entirety to any other company; or
(iv) make any distribution of its assets to holders of the Stock as a
liquidation or partial liquidation dividend or by way of return of capital;
then, in each case, the Conversion Price, and the number and kind of shares of
the Stock receivable upon conversion of each dollar of the principal amount
represented by this Note, in effect at the time of the record date for such
dividend or distribution, or on the effective date of such subdivision,
combination or reclassification, shall be proportionally adjusted so that the
Holder upon the subsequent exercise of conversion rights, shall receive, in
addition to or in substitution for the shares of Stock to which it would
otherwise be entitled upon such exercise, such additional shares of capital
stock of the Company, or such reclassified shares of capital stock of the
Company, or such shares of the securities or property of the Company resulting
from such transfer, or such assets of the Company, which it would have been
entitled to receive had it exercised these conversion rights prior to the
happening of any of the foregoing events. Such adjustment shall be made
successively whenever any of the foregoing events shall occur.
6.4 Notice to Holder. If, at any time while this Note is
outstanding, the Company shall pay any dividend on the Stock payable in cash or
in stock, shall offer to the holders of the Stock for subscription or purchase
by them any shares of stock of any class or any other rights, or shall enter
into an agreement to merge or consolidate with another corporation, the Company
shall cause notice thereof to be mailed to the Holder at the addresses for
notices set forth herein, at least ten (10) days prior to the record date as of
which holders of the Stock shall participate in such dividend, distribution or
subscription or other rights or at least ten (10) days prior to the effective
date of the merger or consolidation. Failure to give notice as required by this
Section, or any defect therein, shall not affect the legality or validity of any
dividend, distribution or subscription or other right.
6.5 Adjustments to Conversion Price. Subject to the provisions
of Section 6.5(viii) hereof, the Conversion Price in effect at the time of the
exercise of conversion rights hereunder as set forth in Section 6.1 shall be
subject to adjustment from time to time as follows:
(i) Issuance of Common Stock or Convertible Securities. If
at any time after the date of issuance hereof the Company shall issue and sell
any shares of the Class A Common Stock, or grant or issue any rights or options
exercisable for the purchase of stock or other securities convertible into or
exchangeable for the Class A Common Stock (such convertible stock or securities
being herein collectively referred to as; "Convertible Securities") other than:
(1) shares issued in a transaction described in Section 6.5(ii); or (2) shares
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issued, subdivided or combined in transactions described in this Section 6
(provided that the Conversion Price shall have been previously adjusted pursuant
thereto); then the Conversion Price in effect immediately prior to such issuance
or sale (the "Applicable Conversion Price") shall simultaneously with such
issuance or sale, be adjusted to equal a price determined by multiplying the
Applicable Conversion Price by a fraction, the numerator of which shall be:
(A) the number of shares of the Class A Common Stock for which the
aggregate consideration received for the issuance or sale of such
additional Class A Common Stock as determined in accordance herewith,
or Convertible Securities deemed to be an issuance of the Class A
Common Stock as provided in Section 6.5(iv), would purchase (including
any consideration received by the Company upon the issuance of any
shares of Class A Common Stock since the date the Applicable Conversion
Price was established not previously included in any computation
resulting in an adjustment pursuant to this Section 6.5(i)) at the
Applicable Conversion Price in effect immediately prior to such
issuance or sale; and the denominator of which shall be
(B) the number of shares of such additional Class A Common Stock issued
or deemed to be issued (as provided in Section 6.5(iv)) in such
issuance or sale;
provided, however, that no such adjustment shall be made if the Applicable
Conversion Price thus obtained would be greater than the Applicable Conversion
Price immediately prior to such adjustment.
(ii) Exclusions. Anything in this Section 6.5 to the
contrary notwithstanding, no adjustment in the Conversion Price shall be made in
connection with the grant, issuance or exercise of any Convertible Securities
pursuant to the Company's qualified or non-qualified Stock Option Plans or any
other bona fide employee, agent or director benefit plan or incentive
arrangement, adopted or approved by the Company's Board of Directors, as may be
amended from time to time, or under any other bona fide employee, agent or
director benefit plan hereafter adopted by the Company's Board of Directors.
(iii) Computations. For the purpose of this Section, the
following provisions shall be applicable:
(A) In case of the issuance or sale of additional shares of the Class A
Common Stock for cash, the consideration received by the Company
therefor shall be deemed to be the amount of cash received by the
Company for such shares, before deducting therefrom any commissions,
compensations or other expenses
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paid or incurred by the Company for any underwriting of, or otherwise in
connection with, the issuance or sale of such shares.
(B) In the case of the issuance of Convertible Securities, the
consideration received by the Company therefor shall be deemed to be
the amount of cash, if any, received by the Company for the issuance of
such rights or options, plus the minimum amounts of cash and fair value
of other consideration, if any, payable to the Company upon the
exercise of such rights or options or payable to the Company upon
conversion of such Convertible Securities.
(C) In the case of the issuance of shares of the Class A Common Stock
or Convertible Securities for a consideration in whole or in part,
other than cash, the consideration other than cash shall be deemed to
be the fair market value thereof as reasonably determined in good faith
by the Board of Directors of the Company (irrespective of the
accounting treatment thereof); provided, however, that if such
consideration consists of the cancellation of debt issued by the
Company, the consideration shall be deemed to be the amount the Company
received upon issuance of such debt (gross proceeds) plus accrued
interest and, in the case of original issue discount or zero coupon
indebtedness, accreted value to the date of such cancellation, but not
including any premium or discount at which the debt may then be trading
or which might otherwise be appropriate for such class of debt.
(D) In case of the issuance of additional shares of the Class A Common
Stock upon the exchange of any obligations (other than Convertible
Securities), the amount of the consideration received by the Company
for the Class A Common Stock shall be deemed to be the consideration
received by the Company for such obligations or shares so exchanged,
before deducting from such consideration so received by the Company any
expenses or commissions or compensation incurred or paid by the Company
for any underwriting of, or otherwise in connection with, the issuance
or sale of such obligations or shares, plus any consideration received
by the Company in connection with such exchange other than a payment in
adjustment of interest and dividends. If obligations or shares of the
same class or series of a class as the obligations or shares so
exchanged have been originally issued for different amounts of
consideration, then the amount of consideration received by the Company
upon the original issuance of each of the obligations or shares so
converted or exchanged shall be deemed to be the average amount of the
consideration received by the Company upon the original issuance of all
such obligations or shares. The amount of consideration received by the
Company upon the original issuance of the obligations or shares so
exchanged and the amount of the consideration, if any, other than such
obligations or shares, received by the Company upon such exchange shall
be determined in the same manner as provided in paragraphs (A) and (B)
above with respect to the consideration received by the Company in case
of the issuance of additional shares of the Class A Common Stock or
Convertible Securities.
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(E) In the case of the issuance of additional shares of the Class A
Common Stock as a dividend, the aggregate number of shares of the Class
A Common Stock issued in payment of such dividend shall be deemed to
have been issued at the close of business on the record date fixed for
the determination of stockholders entitled to such dividend and shall
be deemed to have been issued without consideration; provided, however,
that if the Company, after fixing such record date, shall legally
abandon its plan to so issue the Class A Common Stock as a dividend, no
adjustment of the Applicable Conversion Price shall be required by
reason of the fixing of such record date.
(iv) Deemed Issuances of the Stock. For purposes of the
adjustment provided for in Section 6.5(i) above, if at any time the Company
shall issue any Convertible Securities, the Company shall be deemed to have
issued at the time of the issuance of such Convertible Securities the maximum
number of shares of the Class A Common Stock issuable upon conversion of the
total amount of such Convertible Securities.
(v) Readjustments. On the expiration, cancellation or
redemption of any Convertible Securities, the Conversion Price then in effect
hereunder shall forthwith be readjusted to such Conversion Price as would have
been obtained (a) had the adjustments made upon the issuance or sale of such
expired, cancelled or redeemed Convertible Securities been made upon the basis
of the issuance of only the number of shares of the Class A Common Stock
theretofore actually delivered upon the exercise or conversion of such
Convertible Securities (and the total consideration received therefor) and (b)
had all subsequent adjustments been made on only the basis of the Conversion
Price as readjusted under this Section 6.5(v) for all transactions (which would
have affected such adjusted Conversion Price) made after the issuance or sale of
such Convertible Securities.
(vi) De Minimis Adjustments. Anything in this Section 6.5
to the contrary notwithstanding, no adjustment in the Conversion Price shall be
required unless such adjustment would require an increase or decrease of at
least 5% in such Conversion Price; provided, however, that any adjustments which
by reason of this subsection 6.5(vi) are not required to be made shall be
carried forward and taken into account in making subsequent adjustments. All
calculations under this Section 6.5 shall be made to the nearest cent.
(vii) Notice of Adjustment. Upon any adjustment of the
Conversion Price, then and in each such case the Company shall promptly deliver
a notice to the Holder, which notice shall state the Conversion Price resulting
from such adjustment, setting forth in reasonable detail the method of
calculation and the facts upon which such calculation is based.
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(viii) Termination of Adjustment of Conversion Price. The
adjustment set forth in this Section 6.5 shall be made until the date of the
occurrence of the event set forth in Section 6.1(e) hereof, and after that date,
the Conversion Price shall not be adjusted.
6.6 Assurances. The Company shall be under no obligation to
effect such conversion into the Stock until either it has received such
assurances as it may require that the Stock to be so issued is being taken for
investment and not for distribution or such issuance is exempt from registration
under the Act or a registration statement under the Act with respect to the
Stock has been declared effective.
7. PREPAYMENT.
This Note may be prepaid in whole or in part, at any time
without premium or penalty at the option of the Company at a prepayment price
equal to 100% of the principal amount to be prepaid plus interest to the
prepayment date. In order to exercise its right of prepayment hereunder, the
Company shall send written notice to the Holder of the Company's intention to
exercise its prepayment rights hereunder. In the case of partial prepayment, the
amount and other details thereof shall be noted on this Note. Following the date
of notice of prepayment, or partial prepayment as the case may be, the Holder
shall have a period of ninety (90) calendar days to exercise the conversion
rights provided in Section 6 hereof. After the expiration of such ninety (90)
day period, unless the Company shall have failed to tender to the Holder the
amount to be prepaid and accrued interest under this Note, the Holder shall have
no further rights of conversion.
8. TRANSFER TO COMPLY WITH THE SECURITIES ACT OF 1933.
8.1 The Holder of this Note, each transferee hereof and any
Holder and transferee of the Stock, by acceptance thereof, agrees that (i) no
public distribution of the Note or the Stock will be made in violation of the
Act, and (ii) during such period as the delivery of a prospectus with respect to
the Stock may be required by the Act, no public distribution of the Stock will
be made in a manner or on terms different from those set forth in, or without
delivery of, a prospectus then meeting the requirements of Section 10 of the Act
and in compliance with applicable state securities laws.
The Holder of this Note and each transferee hereof further agrees that if any
distribution of any Stock is proposed to be made by them otherwise than by
delivery of a prospectus meeting the requirements of Section 10 of the Act, such
action shall be taken only after submission to the Company of an opinion of
counsel, reasonably satisfactory in form and substance to the Company's counsel,
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to the effect that the proposed distribution will not be in violation of the Act
or of applicable state law. Furthermore, it shall be a condition to the transfer
of this Note that any transferee thereof deliver to the Company his written
agreement to accept and be bound by all of the terms and conditions contained in
this Note.
8.2 Neither this Note, the Stock, nor any other security
issued or issuable upon conversion of this Note may be sold or otherwise
disposed of except as follows:
(1) To a person who, in the opinion of counsel to the
Company, is a person to whom this Note or the Stock may legally be transferred
without registration and without the delivery of a current prospectus under the
Act with respect thereto and then only against receipt of an agreement of such
person to comply with the provisions of this Subsection (1) with respect to any
resale or other disposition of such securities which agreement shall be
satisfactory in form and substance to the Company and its counsel; provided that
the foregoing shall not apply to any such Note, the Stock or other security as
to which such Holder shall have received an opinion letter from counsel to the
Company as to the exemption thereof from the registration under the Act pursuant
to Rule 144(k) under the Act; or
(2) To any person upon delivery of a prospectus then
meeting the requirements of the Act relating to such securities and the offering
thereof for such sale or disposition.
8.3 Each certificate for the Stock issued upon conversion of
this Note shall bear a legend relating to the non-registered status of the Stock
under the Act unless, at the time of conversion of this Note, the Stock is
subject to a currently effective registration statement under the Act.
9. MISCELLANEOUS.
9.1 Financial Statements and Other Information. Until the
earlier to occur of (i) Insurion's registration of one or more classes of its
securities under the Securities Exchange Act of 1934, as amended, or (ii)
following the conversion of this Note, HPS ceasing to own at least 100,000
shares of Series A Common Stock of Insurion, Insurion will deliver to HPS:
(i) as soon as available but in any event within 30 days
after the end of each monthly accounting period in each fiscal year, unaudited
consolidated statements of income and cash flows of Insurion for such monthly
period and for the period from the beginning of the fiscal year to the end of
such month, and unaudited consolidated balance sheets of Insurion as of the end
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of such monthly period, setting forth in each case comparisons to the Annual
Budget (as defined below) and to the corresponding period in the preceding
fiscal year, and all such statements shall be prepared in accordance with
generally accepted accounting principles, consistently applied;
(ii) as soon as available and in any event within 120 days
after the end of each fiscal year, unaudited consolidated statements of income
and cash flows of Insurion for such fiscal year, and unaudited consolidated
balance sheets of Insurion as of the end of such fiscal year, setting forth in
each case comparisons to the preceding fiscal year, all prepared in accordance
with generally accepted accounting principles, consistently applied, and
accompanied by a copy of such firm's annual management letter to the board of
directors;
(iii) promptly upon receipt thereof, any additional
reports, management letters or other detailed information concerning significant
aspects of Insurion's operations or financial affairs given to Insurion by its
independent accountants (and not otherwise contained in other materials provided
hereunder);
(iv)(A) at least 30 days (but not more than 90 days) prior
to the beginning of each fiscal year, an annual budget prepared on a monthly
basis for Insurion for such fiscal year (displaying anticipated statements of
income and cash flows and balance sheets), based on assumptions set forth
therein reasonably believed by Insurion to be fair and reasonable in light of
the historical financial performance of the company and of current and
reasonably foreseeable business conditions (the "Annual Budget"), (B) promptly
upon preparation thereof any other significant budgets prepared by Insurion and
any revisions of such annual or other budgets, and (C) within 30 days after any
monthly period in which there is a material adverse deviation from the Annual
Budget, an Officer's Certificate explaining the deviation and what actions
Insurion has taken and proposes to take with respect thereto;
(v) promptly (but in any event within five business days)
after the discovery or receipt of notice of any Event of Default (as defined in
the Convertible Note) or any other material adverse event or circumstance
affecting Insurion (including, without limitation, the filing of any material
litigation against Insurion or the existence of any dispute with any person
which involves a reasonable likelihood of such litigation being commenced),
accompanied by an Officer's Certificate specifying the nature and period of
existence thereof and what actions Insurion has taken and proposes to take with
respect thereto;
(vi) copies of all financial statements, proxy statements,
reports and any other general written communications which Insurion sends to its
shareholders, and copies of all press releases and other statements made
available generally by Insurion
-14-
<PAGE>
to the public concerning material developments in Insurion's business, which
Insurion will use its best efforts to deliver within ten days after transmission
thereof; and
(vii) with reasonable promptness, such other information
and financial data concerning Insurion as HPS reasonably requests.
The financial statements referred to in subsections 9.1(i) and
9.1(ii) shall be true and correct in all material respects as of the dates and
for the periods stated therein, subject in the case of the unaudited financial
statements to changes resulting from normal year-end adjustments (none of which
would, alone or in the aggregate, be materially adverse to the financial
condition, operating results, assets, operations or business prospects of
Insurion taken as a whole).
Notwithstanding anything contained herein to the contrary, HPS
(a) acknowledges that Insurion may not have accounting staff in place at the
inception of this Agreement, and (b) agrees that until such staff is in place,
but in no event later than September 30, 1998, Insurion shall be obligated to
deliver only such financial statements as it is preparing in the normal course
of business or for other prospective investors.
9.2 Inspection of Property. Insurion shall permit any
representatives designated by HPS, upon reasonable written notice and during
normal business hours and such other times as HPS may reasonably request, to (i)
visit and inspect any of the properties of Insurion, (ii) examine the corporate
and financial records of the company, and make copies thereof or extracts
therefrom, and (iii) discuss the affairs, finances and accounts of any such
corporations with the directors, officers, key employees and independent
accountants of Insurion. The presentation of an executed copy of this Agreement
by HPS to Insurion's independent accountants shall constitute Insurion's
permission to its independent accountants to participate in discussions with
such persons.
9.3 Registered Owner; Note Non-Transferable. The Company shall
consider and treat the person in whose name this Note shall be registered as the
absolute owner thereof for all purposes whatsoever, and the Company shall not be
affected by any notice to the contrary. This Note is non-transferable, except by
operation of law or pursuant to Section 8, and is non-negotiable. In the case of
any transfer by operation of law, the transferee agrees to notify the Company of
such transfer and of his address and to submit appropriate evidence satisfactory
to the Company regarding such transfer so that this Note may be registered in
the name of the transferee.
9.4 Notices. Any notice hereunder, if mailed, shall be deemed
given and received 48 hours after mailing, and if sent by professional express
service, notice shall be deemed given and received at the time of actual
delivery. Notices shall be sent
-15-
<PAGE>
to the following addresses, or such other addresses as the parties shall
designate in writing from time to time:
IF TO THE COMPANY:
Insurion, Inc.
Attention: Alvin H. Clemens
Chairman
If Delivered by Hand:
2500 DeKalb Pike
Norristown, PA 19404-0511
If Delivered by U.S. Mail:
P.O. Box 511
Norristown, PA 9404-0511
If Delivered by Fax:
610/279-0410
with a copy to: M. F. Beausang, Jr., Esquire
Butera, Beausang, Cohen & Brennan
630 Freedom Business Center
Suite 630
King of Prussia, PA 19406
IF TO THE HOLDER:
[***]
Attention: [***]
[***]
If Delivered by Hand:
[***]
[***]
-16-
<PAGE>
If Delivered by U.S. Mail:
[***]
[***]
If Delivered by Fax:
[***]
9.5 No Rights of a Stockholder. The Holder shall not be
entitled to any rights of a stockholder of the Company, either at law or in
equity, until such time as the Holder shall have elected to convert all or a
portion of this Note and the Stock shall have been issued to the Holder.
9.6 Lost, Stolen or Mutilated Notes. In case this Note shall
be mutilated, lost, stolen or destroyed, the Company may, in its discretion,
issue and deliver in exchange and substitution for and upon cancellation of the
mutilated Note, or in lieu of and substitution for the Note, lost, stolen or
destroyed, a new Note of like tenor and representing an equivalent right or
interest, but only upon receipt of evidence satisfactory to the Company of such
loss, theft or destruction and an indemnity, if requested, also satisfactory to
it.
9.7 Reserved Shares. The Company warrants that it shall take
such steps as are reasonably necessary to reserve, out of the authorized and
unissued Class A Common Stock, a number of shares sufficient to provide for the
exercise of the rights of conversion represented by this Note. The Company
agrees that all shares issuable upon conversion of this Note shall be, at the
time of delivery of the certificates for such shares, validly issued and
outstanding, fully paid and non-assessable and that the issuance of such shares
will not give rise to preemptive rights in favor of existing shareholders.
9.8 Execution in Counterparts. This Note may be executed by
the parties hereto signing the same instrument, or by each party hereto signing
a separate counterpart or counterparts, each of which shall be deemed to be an
original, but all of which together shall constitute one and the same
instrument. The parties agree that documents executed by facsimile shall be
acceptable in this transaction, and the signatures thereof shall have the same
force and effect as original signatures.
9.9 Governing Law. This Note shall be construed in accordance
with and governed by the laws of the Commonwealth of Pennsylvania, without
giving effect to conflict of laws principles.
9.10 No Security. This Note is not secured by any assets of
the Company.
-17-
<PAGE>
IN WITNESS WHEREOF, Insurion, Inc. has caused this Note to be signed
in its corporate name by its President and to be dated the day and year first
above written.
INSURION, INC.
Attest:
____________________________ By: __________________________________
Michael F. Beausang, Jr., Michael Ashker, President
Secretary
[SEAL]
[***]
Attest:
____________________________ By: __________________________________
[***] [***]
-18-
<PAGE>
STATE OF :
: SS
COUNTY OF :
On this ___ day of _________, 1998, before me, a Notary Public in the
County and State aforesaid, personally appeared MICHAEL ASHKER, who, according
to law, deposed and said that he is the President of INSURION, INC.; that he,
being authorized to do so, duly executed the foregoing Note on behalf of said
INSURION, INC. for the purposes therein contained and desired this instrument to
be recorded as such.
________________________________
Notary Public
My Commission Expires: _________
-19-
<PAGE>
STATE OF :
: SS
COUNTY OF :
On this ___ day of _______, 1998, before me, a Notary Public in the
County and State aforesaid, personally appeared [***]; that he, being authorized
to do so, duly executed the foregoing Note on behalf of said [***] for the
purposes therein contained and desired this instrument to be recorded as such.
________________________________
Notary Public
My Commission Expires: _________
-20-
<PAGE>
ASSIGNMENT
For value received I hereby assign, subject to the provisions of
Section 6, to _____________________________, $________________ principal amount
of the Convertible Note due June 30, 2003, evidenced hereby and hereby
irrevocably appoint ______________________________________, as the undersigned's
duly authorized attorney to transfer the Note on the books of the within named
corporation with full power of substitution in the premises.
Dated:
In the presence of:
______________________________
No purported assignment of this Note shall be effective unless the provisions of
Section 6 shall have been complied with and the Company shall have received
prior written notice of, and consented to, such assignment.
-21-
<PAGE>
CONVERSION NOTICE
TO: INSURION, INC.
The undersigned holder of this Note hereby irrevocably exercises the option to
convert $______________ principal amount of such Note (which may be less than
the stated principal amount thereof) into shares of Class A Common Stock of
Insurion, Inc., in accordance with the terms of such Note, and directs that the
shares of Class A Common Stock issuable and deliverable upon such conversion,
together with a check (if applicable) in payment for any fractional shares as
provided in such Note, be issued and delivered to the undersigned unless a
different name has been indicated below. If shares of Class A Common Stock are
to be issued in the name of a person other than the undersigned holder of such
Note, the undersigned will pay all transfer taxes payable with respect thereto.
__________________________
Name and address of Holder
_________________________
Signature of Holder
Principal amount converted $________
If shares are to be issued other than to the Holder:
________________________ ___________________________________
Name of Transferee Address and SS# of Transferee
_______________________________
_______________________________
-22-
<PAGE>
LYNX CAPITAL GROUP, LLC
CONSULTING AGREEMENT
This Agreement (the "Agreement") is entered into as of the 31st day of
March, 1998 by and among PROVIDENT INDEMNITY LIFE INSURANCE COMPANY, a
Pennsylvania corporation ("PILIC"), and PROVIDENT AMERICAN LIFE AND HEALTH
INSURANCE COMPANY, a Pennsylvania corporation ("PALHIC") (collectively referred
to herein as ("The Provident")), and LYNX CAPITAL GROUP, LLC, a California
Corporation ("Consultant").
BACKGROUND
A. Consultant is engaged in the business of providing consulting and
investment management and advisory services (the "Consulting
Services").
B. The Provident is desirous of engaging Consultant as a consultant
upon the terms set forth herein.
NOW, THEREFORE, in consideration of the mutual covenants contained
herein and for other valuable consideration, the receipt of which is
hereby acknowledged, the parties agree as follows:
1. CONSULTING SERVICES. The Provident hereby engages
Consultant to act as a consultant with respect to a possible agreement
to be entered into with America On-Line relative to the marketing of
health insurance products over the internet and the establishment of a
web site for The Provident. Provident intends to form a separate
business unit for the purpose of selling healthcare related insurance
directly to consumers over the internet. At the request of Provident
Consultant shall manage the business unit until such time that the unit
is operational and a qualified management team is in place. At the
request of Provident, Consultant shall develop an enterprise to be
known as the Insurion.com division of Provident American Corporation,
or a subsidiary thereof. At the request of Provident, Consultant shall
use its best efforts to enter into interactive marketing agreements
with internet service providers and search engine specialty content
providers. At the request of Provident Consultant shall use its best
efforts to obtain financing pursuant to such instructions provided by
Provident to Consultant, In the performance of the Consulting Services:
a. Consultant shall from time to time provide the
services of Michael Ashker and one other person designated by him; and
b. neither Consultant nor any person acting on behalf
of Consultant hereunder shall be deemed to be an agent, employee,
officer, owner, or joint venturer of The Provident.
<PAGE>
2. COMPENSTION.
a. The provident agrees to pay Consultant a
consulting fee for the Consulting Services rendered to The Provident hereunder
in the amount of Ten Thousand ($10,000) Dollars per month (the "Consulting
Fee").
b. In addition, The Provident agrees to pay or
reimburse Consultant for reasonable travel and other related expenses incurred
by Consultant; it being understood that Consultant shall submit requests for
reimbursement twice a month, and The Provident shall have the right at the end
of any reimbursement period, to advise Consultant as to any limitations on
reimbursement imposed by The Provident thereafter, it being understood that any
such limitation shall be reasonable and not preclude Consultant from performing
the services required to be performed hereunder.
c. Consultant shall receive the following options:
(1) Options to purchase 150,000 shares of
Provident American Corporation ("PAMCO")
Common Stock upon the closing of an agreement
(the "AOL Agreement") between PAMCO and
American On Line, Inc. ("AOL"), whereby PAMCO
will launch a medical insurance web site
through AOL. The issuance of such options
shall be further conditioned upon the
AOL/PAMCO web site becoming operational and
the securing of financing with regard to the
venture. The exercise price of the options
granted hereunder shall be equal to the
average closing price of PAMCO Common Stock
during the 60 day period immediately
proceeding the closing of the AOL Agreement.
The option shall expire three years from the
date of grant.
(2) Options to purchase 100,000 shares of PAMCO
Common Stock upon securing equity funding for
the venture in an amount not less than $10
Million. the exercise price of the options
shall be equal to the closing price of PAMCO
Common Stock during the 60 days immediately
preceding the closing regarding such
financing. The options shall expire three
years from the date of grant.
(3) Options to purchase 50,000 shares of PAMCO
Common Stock upon the Internet based retailing
venture and web site associated therewith to
be known as "Insurion.com" becoming
operational, based primarily upon the efforts
of Consultant. The exercise price of the
options granted hereunder shall be equal to
the average closing price of PAMCO Common
Stock during the 30 business days immediately
the Insurion.com web site becomes operational.
The options shall expire three years from the
date of grant.
(4) Options to purchase a total of 50,000 shares
of PAMCO entering into interactive
advertising/marketing agreements with interned
service providers and search engine specialty
content Common Stock pursuant to Schedule
2c.(3) hereof, regarding providers, referenced
therein. The exercise price of the options
shall be equal to the average closing price of
PAMCO Common Stock during the 30 business days
immediately preceding entering into agreements
with the service providers set forth in
Schedule 2c.(c) hereto. The options hall
expire three years from the date of grant.
2
<PAGE>
(5) Options to purchase 50,000 shares of PAMCO,
provided Consultant obtains funding for
Provident in an amount not less than $5
Million from Health Plan Services Corporation,
First Health Corp., or any other insurance
companies whose products are sold through
Provident's web sites. The exercise price of
the options shall be equal to the average
closing price of PAMCO Common Stock during the
30 business days immediately preceding the
closing of the funding or any portion thereof,
in which the $5 Million threshold is achieved.
The options shall expire three years from the
date of grant.
3. NON-COMPETITION/CONFIDENTIALITY.
a. During the term of this Agreement, and for a period
three (3) months after the termination of this Agreement, Consultant agrees that
it shall not offer Consulting Services to any health insurance company without
the prior written consent of The Provident.
b. Consultant acknowledges and agrees that The
Provident has been requested by Consultant to disclose certain Confidential
Material which is either non-public, confidential, and/or of a proprietary
business nature, concerning the business and financial affairs of The Provident,
the disclosure of which to members of the general public may be unlawful and
would cause irrevocable harm to The Provident. Without the prior written consent
of The Provident, except as may be required by law, Consultant agrees that
Consultant will not disclose to any person the fact of any discussions between
Consultant and The Provident, the fact that Consultant has requested or received
any Confidential Material, except as may be required by applicable laws, in
which Consultant shall give five (5) days written notice to such effect tot The
Provident before any such disclosure.
c. (1) The term "Confidential Material" means all
information concerning The Provident's business and financial affairs, including
the marketing of life and health insurance products, statutory and GAAP
accounting procedures, specific details concerning The Provident's business,
such as loss ratios, the management and processing of claims for health and life
insurance benefits, policy and product forms, agents, policyholders, and any
other information relative to the operations, accounting, employees, corporate
proceedings, and relevant data (regardless of whether written, transmitted
orally, visually, electronically, or in any other manner, or whether received by
Consultant prior or subsequent to the date of this Agreement) which is provided
to Consultant by or at the direction of The Provident, any of its officers,
directors, employees, agents, or affiliates, as well as all analyses,
compilations, data, studies, or other documents or work products containing or
based, in whole or in part, on any such Confidential Material and Consultant's
review thereof. The term "Confidential Material" shall not include any
information that (i) is or becomes available to third parties, to any regulatory
agencies, or to the securities trading industry generally without breach of this
agreement by Consultant, (ii) was, at the time of receipt, otherwise known to
Consultant free of restrictions on further disclosure, (iii) was developed by
Consultant independently before the date of this agreement, provided that
Confidential Material is not used as a basis for such development, or (iv)
becomes known or available to Consultant from a source other than The Provident,
without breach of this agreement by Consultant. Consultant agrees that all
Confidential Material is the sole and exclusive property of The Provident.
(2) The term "person" as used herein shall be
interpreted broadly to include, without limitation, any corporation, company,
partnership, or individual.
3
<PAGE>
4. ADMINISTRATIVE PROVISIONS.
a. The Provident is under no obligation, by virtue of
this Agreement or otherwise, to disclose any information to Consultant. If at
any time The Provident so requests, Consultant will promptly return to The
Provident, upon request, all copies of any Confidential Material in Consultant's
possession or in the possession of Consultant's representatives, and Consultant
will destroy all copies of any analyses, compilations. studies, or other
documents prepared by Consultant or for Consultant's use containing or
reflecting any Confidential Material.
b. Consultant agrees that The Provident shall be
entitled to equitable relief, including the remedies of injunction and specific
performance, in the event of any breach of the provisions of this Agreement, in
addition to all other remedies available to The Provident at law or in equity.
c. It is further understood and agreed that no failure
or delay by The Provident to exercise any right, power, or privilege hereunder
will be interpreted as a waiver thereof, nor will any single or partial exercise
thereof preclude any other or further exercise thereof or the exercise of any
right, power, or privilege hereunder.
d. This Agreement shall be governed by and construed
in accordance with the laws of the Commonwealth of Pennsylvania. The parties
hereto agree to consent to the jurisdiction and venue of the courts of the
Commonwealth of Pennsylvania located in Montgomery County, Pennsylvania, and of
the United States District court for the Eastern District of Pennsylvania, and
agree that all disputes between the parties shall be litigated only therein.
e. This Agreement shall be binding upon Consultant,
Consultant's officers, directors, employees, agents, shareholders, and any
subsidiaries or affiliates, and all officers, directors, employees, agents, and
shareholders thereof, and Consultant's respective successors and assigns. All
rights and benefits of The Provident as provided hereunder shall inure to the
benefit of any corporation or partnership which is an affiliate of The Provident
at any time between the date hereof and the date that such right or benefit
hereunder is asserted.
f. Consultant's agreement not to disclose any of the
Confidential Materials and to return and/or destroy all Confidential Materials
as set forth herein shall survive the termination of any discussions or
relationship between Consultant and The Provident.
g. Notwithstanding anything to the contrary in this
Agreement, however, nothing herein shall prevent Consultant from purchasing the
securities of any issuer in the health insurance or any other business, whether
for Consultant's own account or for the accounts of affiliates or clients of
Consultant and nothing herein shall prevent Consultant from communicating with
the management of any such issuer.
5. TERMINATION. This Agreement shall be Terminable by either
party upon five (5) days' prior written notice to such
effect to the other party. Notwithstanding the foregoing,
in the event this Agreement is terminated by The Provident,
the consulting fee shall be paid to Consultant for a period
of sixty (60) days thereafter. In the event of a
termination by Provident, there shall be no obligation to
issue options pursuant to Sections 2c.(2), (3) or (4)
unless all conditions have been fulfilled by Consultant
prior to such notice of termination. Should Consultant, at
the time of termination, have performed substantial value
added services in connection with Sections 2c.2(2), (3) or
(4) hereof, the parties agree in good faith, to negotiate a
materially acceptable number of options to be granted
thereunder. All expenses shall be reimbursed through
termination. [OPEN]
4
<PAGE>
6. RESTRICTION ON PURCHASE AND SALE OF STOCK.
a. Consultant, its officers, directors, affiliates,
and shareholders agree that each shall comply with all applicable state and
federal securities laws, regulations, and rules relating to the purchase and
sale of all securities issued by The Provident.
b. During the term of this Agreement and for a period
of fifteen (15) business days following the termination of this Agreement,
Consultant, its officers, directors, affiliates, and shareholders agree not to
purchase or sell any shares of the capital stock of the Provident, except that
Lynx Technology Fund (the "Fund") shall not be subject to the restrictions
herein so long as the knowledge of Michael Ashker (and other representatives of
Consultant providing services hereunder) is not attributable to the Fund and the
Fund receives an option of counsel to the effect that such purchase or sale is
not in violation of applicable federal or state securities laws.
c. Consultant may elect to distribute such shares of
Provident Common Stock to limited partners of the Fund, provided such
transferees are subject to the same restrictions, if any, as Consultant, and
Consultant delivers an opinion of counsel to Provident that such transfer is
being made pursuant to applicable exemptions from the registration provisions
under federal and state securities laws.
7. MISCELLANEOUS.
a. Effective Date. This Agreement shall become effective as
of February 1, 1998, provided however Consultant hereby acknowledges that this
Agreement is subject to and conditioned upon the approval of the Board of
Directors of PAMIC.
b. Governing Law/Consent to Jurisdiction. This Agreement
shall be governed by and construed in accordance with the laws of the
Commonwealth of Pennsylvania. The parties hereto agree to consent to the
jurisdiction and venue of the courts of the Commonwealth of Pennsylvania located
in Montgomery County, Pennsylvania, and of the United States District Court for
the Eastern District of Pennsylvania, and agree that all disputes between the
parties shall litigated only therein.
c. Successors and Assigns. The Agreement shall be binding
upon and inure to the benefit of the parties hereto and their respective heirs,
administrators, successors and assigns.
d. Notice. Any notice hereunder, if mailed, shall be deemed
given and received 48 hours after mailing, and if sent by professional express
service, notice shall be deemed given and received at the time of actual
delivery. Notices shall be sent to the following addresses, or such other
addresses as the parties shall designate in writing from time to time:
If to PILIC: Provident Indemnity Life Insurance Company
2500 DeKalb Pike
P.O. Box 511
Norristown, PA 19404-0511
Attention: Alvin H. Clemens, Chairman
If to PALHIC: Provident American Life and Health Insurance Company
2500 DeKalb Pike
P.O. Box 511
Norristown, PA 19404-0511
Attention: Alvin H. Clemens, Chairman
If to Consultant: Lynx Capital Group, LLC
2601 Fairoaks Blvd., Suite 150
Sacramento, CA 85864
Attention: Michael Ashker, Managing Director
5
<PAGE>
e. Expenses. Each party hereto shall pay its own expenses
including, without limitation, legal and accounting fees and expenses, incident
to the negotiation and preparation of this Agreement and to its performance and
compliance with the provisions contained herein.
f. Entire Agreement: Amendments: and Waivers. This
Agreement constitutes the entire understanding and agreement among the parties
hereto relative to the subject matter hereof. Any amendments to the Agreement
must be in writing, signed by each party hereto. The failure of each party
hereto to enforce at any time any provision of this Agreement shall not be
construed to be a waiver of the provision, nor in any way to affect the validity
of this Agreement or any part hereof or the right of such party thereafter to
enforce each and every such provision. No waiver of any breach of this Agreement
shall be held to constitute a waiver of any other or subsequent breach.
g. Partial Invalidity. In case any one or more of the
provisions contained in this Agreement shall for any reason be held to be
invalid, illegal, or unenforceable in any respect, such invalidity, illegality,
or unenforceability shall not affect any other provision hereof, and this
Agreement shall be construed as if such invalid, illegal, or unenforceable
provision had never been contained herein, unless the deletion of the provision
or provisions would result in such a material change as to cause completion of
the transactions contemplated herein to be unreasonable.
h. Execution in Counterparts. This Agreements may be
executed by the parties hereto signing the same instrument, or by each party
hereto signing a separate counterpart or counterparts, each of which shall be
deemed to be an original, but all of which together shall constitute one and the
same instrument. The parties agree that documents executed by facsimile shall be
acceptable in this transaction, and the signatures thereof shall have the same
force and effect as original signatures.
i. Waivers. Any one party may, by written instrument,
extend the time for the performance of any of the obligations or other acts of
the other party and with respect to this Agreement (a) waive any inaccuracies in
the representations and warranties of the other party in this Agreement or in
any document delivered pursuant to this Agreement, (b) waive compliance with any
of the covenants of the other party contained in this Agreement, and (c) waive
the other party's performance of any of its obligations set out in this
Agreement. Any agreement on the part of the parties hereto for any such
extension or waiver shall be validly and sufficiently authorized for the
purposes of this Agreement if it is approved by the persons authorized to make
such agreements on behalf of the parties hereto.
j. Titles and Headings. Titles and headings to Paragraphs
herein are inserted for convenience of reference only and are not intended to be
a part of or to effect the meaning or interpretation of this Agreement.
6
<PAGE>
IN WITNESS WHEREOF, the parties hereto have set their hands and seals
the day and year first above written,
PROVIDENT INDEMNITY LIFE
INSURANCE COMPANY
Attest:______________________________ By: _________________________________
M. F. Beausang, Jr., Secretary Alvin H. Clemens, Chairman
PROVIDENT AMERICAN LIFE AND
HEALTH INSURANCE COMPANY
Attest:______________________________ By: _________________________________
M. F. Beausang, Jr., Secretary Alvin H. Clemens, Chairman
with respect to Section 2c. only]
PROVIDENT AMERICAN CORPORATION
By: _________________________________
Alvin H. Clemens, Chairman
LYNX CAPITAL GROUP, LLC
Attest:______________________________ By: _________________________________
Michael Ashker, Managing Director
7
<PAGE>
SCHEDULE 2c.(3)
Interactive advertising/marketing agreements to be entered into any
three (3) of the following entities, or such others as may be mutually agreed to
by the parties hereto:
1. Lycos
2. Infoseek
3. Yahoo
4. Netscape
5. Excite
6. Schwab
7. Etrade
8. Intuit
9. Cnet
10. Biztravel
11. Preview
12. Microsoft
8
<PAGE>
EXHIBIT 10GG
AMENDMENT TO PROMISSORY NOTE
THIS AMENDMENT TO PROMISSORY NOTE ("Note") is made and dated as of the
8th day of April, 1997, by and between Alvin H. Clemens ("Clemens"), an
individual residing at 907 Exeter Crest, Villanova, Pennsylvania, and PROVIDENT
AMERICAN CORPORATION, a Pennsylvania corporation ("PAMCO").
BACKGROUND
A. Clemens executed and delivered to PAMCO a Promissory Note dated
April 8, 1996 in the original principal amount of $300,000 (the "Note").
B. The parties are desirous of amending the Note as hereinafter set
forth.
NOW THEREFORE, in consideration of the mutual covenants herein
contained, and other good and valuable consideration, the receipt and adequacy
of which are hereby acknowledged, and intending to be legally bound hereby, the
parties hereby agree as follows:
1. Principal Balance. The principal balance of the Note shall be
increased to Six Hundred Thousand ($600,000) Dollars.
2. Repayment of Principal. The entire principal balance of the
Note shall be due and payable in full on April 8, 1999.
3. Payment of Interest. The Note shall bear interest at the rate
of five and one-third (5.33%) percent per annum through April 7, 1997, and shall
bear interest at the rate of five and three-quarters (5.75%) percent per annum
thereafter. Interest shall accrue and shall be due and payable, together with
the principal balance, on April 8, 1999.
4. Ratification. As herein amended, the Note is ratified,
approved, and affirmed, and remains in full force and effect.
IN WITNESS WHEREOF, the parties hereto have executed this Amendment to
Promissory Note as of the day and year first above-written.
Witness:
/s/ Eva M. Seeton /s/ Alvin H. Clemens (SEAL)
- ------------------ ----------------------------
ALVIN H. CLEMENS
PROVIDENT AMERICAN CORPORATION
Attest:
/s/ M. F. Beausang, Jr. By: /s/ James O. Bowles
- ------------------------------ --------------------------
M. F. Beausang, Jr., Secretary James O. Bowles, President
<PAGE>
EXHIBIT 10 HH
PROMISSORY NOTE
$250,000.00 July 28, 1997
The undersigned, ALVIN H. CLEMENS ("Clemens"), hereby promises to pay
to the order of PROVIDENT AMERICAN CORPORATION, a Pennsylvania corporation, the
sum of Two Hundred Fifty Thousand and 00/100 ($250,000.00) Dollars, together
with interest at the rate of five and three-quarter (5.75%) percent per annum.
Interest shall accrue and be due and payable together with the principal balance
on December 15, 1997.
The undersigned shall have the right to prepay in whole or in part any
amounts due under this Note, without penalty.
And further, the undersigned does hereby authorize and empower the
Prothonotary, Clerk of Court or any Attorney of any Court of Record of
Pennsylvania, or elsewhere, to appear for and to confess judgment against him
for the above sum, as of any term, past, present or future, with or without
declaration, with costs of suit, release of errors, without stay of execution,
and with 15% added for collection fees; and the undersigned also waives the
right of inquisition on any real estate that may be levied upon to collect this
Note and does hereby voluntarily condemn the same and authorize the Prothonotary
to enter upon the writ of execution his said voluntary condemnation, and he
further agrees that said real estate may be sold on a writ of execution and he
hereby waives and releases all relief from any and all appraisement, stay or
exemption laws of any State, now in force or hereafter to be passed.
--------------------------
ALVIN H. CLEMENS
<PAGE>
EXHIBIT 10.II
SECOND AMENDMENT TO PROMISSORY NOTE
THIS SECOND AMENDMENT ("Amendment") TO PROMISSORY NOTE is made and dated
as of the 1st day of February, 1997, by and between JOHN T. GILLIN ("Gillin"),
an individual, and PROVIDENT AMERICAN CORPORATION, a Pennsylvania corporation
(the "Company").
BACKGROUND
A. Gillin executed and delivered to the Company a Promissory Note dated
April 2, 1996 in the principal amount of $140,900, as amended by an Amendment to
Promissory Note dated June 20, 1996 (the "Note").
B. The parties are desirous of amending the Note as hereinafter set
forth.
NOW THEREFORE, in consideration of the mutual covenants herein
contained, and other good and valuable consideration, the receipt and adequacy
of which are hereby acknowledged, and intending to be legally bound hereby, the
parties hereby agree as follows:
1. Repayment of Note. The Note and all interest accrued thereon
shall be paid in full on or before April 30, 1997.
2. Ratification. As herein amended, the Note is ratified,
approved, and affirmed, and remains in full force and effect.
IN WITNESS WHEREOF, the parties hereto have executed this Amendment to
Promissory Note as of the day and year first above-written.
Witness:
- ----------------------------- ------------------------------
(SEAL)
JOHN T. GILLIN
PROVIDENT AMERICAN CORPORATION
Attest:
By:
- ---------------------------- ---------------------------------
M. F. Beausang, Jr., Alvin H. Clemens, Chairman and
Secretary Chief Executive Officer
<PAGE>
THIRD AMENDMENT TO PROMISSORY NOTE
THIS THIRD AMENDMENT ("Amendment") TO PROMISSORY NOTE is made and dated
as of the 30th day of April, 1997, by and between JOHN T. GILLIN ("Gillin"), an
individual, and PROVIDENT AMERICAN CORPORATION, a Pennsylvania corporation (the
"Company").
BACKGROUND
A. Gillin executed and delivered to the Company a Promissory Note dated
April 2, 1996 in the principal amount of $140,900, as amended by an Amendment to
Promissory Note dated June 20, 1996 and a Second Amendment to Promissory Note
dated February 1, 1997 (the "Note").
B. The parties are desirous of amending the Note as hereinafter set
forth.
NOW THEREFORE, in consideration of the mutual covenants herein
contained, and other good and valuable consideration, the receipt and adequacy
of which are hereby acknowledged, and intending to be legally bound hereby, the
parties hereby agree as follows:
1. Principal Balance. The principal balance of the Note shall be
increased to One Hundred Fifty Five Thousand Eight Hundred Fifty ($155,850)
Dollars.
2. Repayment of Note. The Note and all interest accrued thereon
shall be payable as follows:
(a) Interest accrued through June 30, 1997 shall be due
and payable on June 30, 1997.
(b) Thereafter, interest shall be repayable quarterly on
September 30, 1997 December 31, 1997, March 31, 1998, and June 30, 1998.
(c) Commencing on July 31, 1998 and continuing on the
last day of each month thereafter for a total of sixty (60) consecutive months,
Gillin shall make equal payments of $3,197.49 to the Company, to be applied
first to interest accrued during the preceding month, and the balance applied to
the principal obligation, in accordance with the amortization schedule attached
hereto as Exhibit "A" and made a part hereof.
3. Ratification. As herein further amended, the Note is
ratified, approved, and affirmed, and remains in full force and effect.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Amendment to
Promissory Note as of the day and year first above-written.
Witness:
- ----------------------------- ------------------------------
(SEAL)
JOHN T. GILLIN
PROVIDENT AMERICAN CORPORATION
Attest:
By:
- ---------------------------- ---------------------------------
M. F. Beausang, Jr., Alvin H. Clemens, Chairman and
Secretary Chief Executive Officer
<PAGE>
SERVICES AGREEMENT
This Services Agreement (the "Agreement") is entered into by and among
PROVIDENT INDEMNITY LIFE INSURANCE COMPANY, a Pennsylvania corporation, and
PROVIDENT AMERICAN LIFE AND HEALTH INSURANCE COMPANY, a Pennsylvania corporation
(collectively, "Provident"), HEALTHPLAN SERVICES CORPORATION, a Delaware
corporation ("HPC") and HEALTHPLAN SERVICES, INC., a Florida corporation
("HPS"), effective as of February 1, 1998 (the "Effective Date").
WHEREAS, Provident and HPS previously entered into a Services Agreement
effective as of July 19, 1996, which has governed the parties' relationship to
date and relates to certain business sold through HPS' distribution network (the
"First Agreement"); and
WHEREAS, Provident has developed another block of individual and
individually underwritten group association health insurance business, excluding
the True Small Group insurance business as hereinafter defined (the "Program")
(through its own distribution system of agents, subagents, and managing general
agents("MGAs")) which was not previously administered by HPS, and such block
includes the same or similar types of health insurance coverage to individuals
and group associations as is currently being administered by HPS pursuant to the
First Agreement; and
WHEREAS, Provident desires that HPS assist and otherwise provide
administrative and other services to Provident with respect to such block of
business and assist Provident in entering the small group market; and
WHEREAS, HPS desires to perform such services in accordance with the
terms of this Agreement, and to assist Provident in entering the small group
market by developing small group product and pricing.
NOW, THEREFORE, in consideration of the mutual covenants contained
herein and for other valuable consideration, the receipt and sufficiency of
which is hereby acknowledged, Provident and HPS hereby agree as follows:
PART 1
DEFINITIONS
Capitalized terms used in this Agreement shall have the meanings
ascribed to them in Exhibit A, which is attached hereto and incorporated herein
by reference.
<PAGE>
PART 2
ADMINISTRATIVE SERVICES
2.1 Processing Applications. HPS shall process applications for coverage
under the Policy pursuant to the written guidelines that Provident provides to
HPS in accordance with this Agreement.
2.2 Participation Documents. HPS shall distribute Participation
Documents to Enrollees in accordance with the procedures set forth in Part 4
hereof.
2.3 Intentionally deleted.
2.4 Customer Service. HPS shall maintain a full-time WATTS line on each
Business Day (from 8:00 A.M. to 8:00 P.M., Eastern Standard Time, Monday through
Thursday, and 8:00 A.M. to 7:00, P.M., Eastern Standard Time, on Fridays), to
respond to Provident (including agent access unit), agent and Enrollee requests
for information or assistance regarding Premium payments, administration,
claims, commissions, and other aspects of the Program, in accordance with
procedures reasonably required by Provident.
2.5 Claims Processing. HPS shall perform the claims services set forth
below on behalf of Provident in compliance with the Program and with Provident's
claim policy and procedures, as set forth in Appendix 2.10(B) to be mutually
agreed upon by the parties, using Provident approved forms:
(a) HPS shall receive and correlate all information
necessary to confirm eligibility for benefits and determine Program
benefits due to Enrollees, and transmit such information to Provident;
(b) HPS shall calculate Program benefits and pay Enrollee
claims by drafts drawn on a Provident bank account established for that
purpose, in accordance with written procedures and controls established
by Provident and submitted to HPS;
(c) HPS shall maintain claim records necessary for the
processing of claims in a manner reasonably satisfactory to Provident
and, at a minimum, compliant with regulatory market conduct standards;
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<PAGE>
(d) HPS shall refer to the group claim department at
Provident's home office in Norristown, Pennsylvania, or such other
location designated by Provident, any issue relating to claim handling
when HPS determines Provident's written claims payment guidelines are
not reasonably clear;
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<PAGE>
(e) In the event any single claim transaction would result
in a benefit draft or drafts exceeding $20,000, HPS shall refer the
claim(s) to the claim department of Provident for prior approval; and
(f) Provident will make the final determination as to the
payment of any claim that is denied in whole or in part by HPS and with
respect to which a request for claim review has been made.
2.6 Special Claims Services. HPS shall provide the following services
(the "Special Claims Services") on behalf of Provident with respect to claims
submitted for health care services provided to any Enrollee, to the extent
reasonably required by Provident, and in accordance with the policies and
procedures reasonably required by Provident and provided to HPS, as set forth in
Appendices "A" and "B" and as mutually agreed upon by the parties:
(a) identifying certain claims that may be incorrectly
billed, using criteria developed by one or more recognized experts in
the health care field;
(b) investigating, within agreed upon parameters, certain
of such potentially incorrect claims and adjusting such claims if
appropriate;
(c) identifying potentially fraudulent practices and
referring such practices to Provident and other parties designated by
Provident; and
(d) identifying providers that may have improperly billed
for services, or participated in overutilization of services, and
implementing procedures to monitor such providers' future billing and
utilization practices.
(e) providing persons to testify as witnesses in
litigation involving the Program, at Provident's cost and expense.
2.7 Generally Accepted Clinical Standards. To the extent reasonably
required by Provident, HPS shall utilize Generally Accepted Clinical Standards
in performing services pursuant to this Part 2. For purposes of this Agreement,
"Generally Accepted Clinical Standards" shall mean standards of clinical
practice regarding inpatient and outpatient utilization of health care services,
as assessed by one or more recognized experts in the health care field.
2.8 No Incentive Payment. HPS agrees that it shall not enter into any
incentive payment agreement with a provider of health services that is based on
reduction of services or the charges thereof, reduction of length of stay, or
utilization of alternative treatment settings to reduce the amount of necessary
or appropriate medical care.
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<PAGE>
2.9 Loss Ratio Management Advisory Services. Provident agrees that HPS
shall participate in its loss ratio management analysis during the first sixty
(60) months of the term of the Agreement, including but not limited to those
decisions relating to new business, in force rate adjustments, and plan
modifications. In that regard, Provident shall inform HPS of all decisions to be
made within 10 days prior to the proposed decision date, give HPS reasonable
access to relevant information connected with such decision, and give HPS a
reasonable opportunity to provide input.
2.10 Performance Standards. HPS shall perform its services hereunder
pursuant to the performance standards (the "Performance Standards") set forth in
Appendices 2.10(A), (B) and (C) attached hereto and incorporated herein by
reference. The performance standards fall into three categories:
(i) Those where Provident suffers indirectly when HPS
does not meet the Performance Standards set forth in Appendix 2.10(A)
hereto ("Quality of Service Standards");
(ii) Those where Provident suffers directly as a result
of HPS not implementing/executing the Performance Standards set forth in
Appendix 2.10(B) hereto ("Policy/Procedure Standards"); and
(iii) Those where Provident suffers indirectly when HPS
does not meet Performance Standards set forth in Appendix 2.10(C) hereto
("Data Warehouse Standards").
The following penalties shall apply for non-compliance with the above
Performance Standards:
(a) $10,000 per infraction, to a maximum of $85,000 per
month (on a prorata basis depending upon when in the month following the
60-day cure period that such infraction is cured) and $360,000 per year
for any "Quality of Service Standard" or any Data Warehouse Standard"
violations unremedied for more than 60 days after the date Provident
notifies HPS of such violation in writing.
(b) Any and all losses, damagesand costs in excess of
$20,000 per claim, for any "Policy/Procedure Standard" violation; and
(c) Provident may terminate this Agreement and receive
liquidated damages equal to 200% of the "direct costs" referred to in
Section 17.8 hereof, for any "Quality of Service Standards" or any "Data
Warehouse Standard" violation which is unremedied for more than 120 days
after the date Provident notifies HPS of the violation in writing.
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<PAGE>
All penalties assessed herein shall be paid to Provident on the 15th day
of the month following the later of receipt of notice of violation or the end of
the applicable cure period, and the amount shall be calculated back to the end
of the applicable cure period.
The parties hereto agree that drafts of Appendices 2.10(A), (B) and (C)
as of the date of this Agreement shall be finalized within four (4) weeks of the
date of this Agreement. Such finalized Appendices shall be mutually agreed upon
and shall include, at a minimum, information on the drafts as of the date of
this Agreement. In the event that the parties cannot agree within four (4) weeks
of the date of this Agreement as to the form of Appendices 2.10 (A), (B), and
(C), the draft forms attached hereto shall be applicable until agreement is
reached.
2.11 Data Warehouse Requirements. HPS agrees to comply with the data
warehouse requirements set forth in Appendix "2.10(C)" hereto.
PART 3
MARKETING ASSISTANCE SERVICES
3.1 Marketing. Provident shall be responsible for all marketing services
and materials provided hereunder.
PART 4
PARTICIPATION DOCUMENTS
4.1 Preparation and Distribution of Participation Documents. Provident
shall prepare, at its own cost, the layout, design, and copy of all
Certificates, booklets, identification cards, and other written documents
relating to participation in the Program to be delivered to any Agent and/or
Enrollee (each a "Participation Document"). HPS shall distribute and pay the
cost of the distribution of the Participation Documents to Agents and/or
Enrollees as reasonably required by Provident, in accordance with a schedule to
be mutually agreed upon by the Parties.
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<PAGE>
4.2 Printing/Delivery. To the extent reasonably required by Provident,
HPS shall arrange for the printing of all or part of the Participation
Documents. In the event that Provident requires such printing service, then
Provident shall deliver to HPS a camera-ready copy of the prototype of such
Participation Documents, and a copy stored on a 3 1/2" standard computer
diskette in an American standard code for information interchange, at least
twenty-five (25) Business Days before the first date on which HPS is required to
distribute such Participation Documents pursuant to Section 4.1 above. HPS shall
arrange for the printing of such Participation Documents, and HPS shall be
responsible for the cost of such printing. In the event that Provident does not
require HPS to arrange for printing any Participation Documents, then Provident
shall make deliveries to HPS, on a schedule to be mutually agreed upon by the
Parties, of sufficient Participation Documents to allow HPS to maintain a
three-month supply of such Documents.
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<PAGE>
4.3 Distribution. HPS shall promptly distribute the Participation
Documents in accordance with this Part 4 at no cost to Provident.
Notwithstanding the foregoing, if a change in any Participation Documents
results in a redistribution of such Participation Documents, then Provident
shall reimburse HPS for the total postage and other direct costs associated with
such redistribution, except to the extent that the change is required as a
result of an error that is solely the responsibility of HPS.
4.4 Vendor Materials. Notwithstanding anything contained in this Part 4
to the contrary, Provident shall be responsible for procuring all vendor
materials, including but not limited to PPO directories, managed care cards
(other than policy issue I.D. cards which are the responsibility of HPS and
shall be at HPS's cost), pharmaceutical cards, and other vendor cards and
materials. HPS shall be responsible for mailing all vendor materials and the
mailing cost.
PART 5
PREMIUM COLLECTION AND COMMISSION PAYMENTS
5.1 Billing and Commission Payments. On behalf of Provident, HPS, at its
cost, shall bill each Enrollee for Premium amounts and other amounts owed by
such Enrollee to Provident, calculate commissions to agents, prepare and
distribute commission statements, and distribute commissions to agents (funded
by Provident), in accordance with Provident's policy and procedure, subject to
mutual agreement (as previously referred to).
5.2 Receipt of Premium Payments. On behalf of Provident, HPS shall
receive and credit all Premium payments and other payments made by Enrollees,
and shall make all cash adjustments for Premium refunds and other required cash
transfers with respect to such payments, in accordance with Provident's policy
and procedure. Any Premium payments that are received by HPS shall be deemed to
have been received by Provident, but the payment of return Premium amounts by
Provident to HPS shall not be deemed payment to an insured or claimant until
such payment is received by such insured or claimant. Nothing in this Section
5.2 shall limit any right of Provident against HPS resulting from HPS' failure
to make payments to Provident or to any insured claimant.
5.3 Remittance. HPS shall immediately deposit each Premium payment or
other payment it receives from an Enrollee into a separate custodian account in
trust for Provident (the "Custodial Account") at First Union National Bank, or
at such other financial institution as the parties may agree. The parties agree
that funds flowing in and out of the Custodial Account shall be limited as
follows:
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(a) On or before the seventh (7th) calendar day of each
month (or if the seventh (7th) falls on a day other than a Business Day, then on
the first Business Day thereafter), HPS shall initiate, with Provident's joint
signature, the transfer by Automated Clearing House Transfer ("ACH") to an
account designated by HPS an amount equal to the Remittance Due. The term
"Remittance Due" shall be an amount equal to the HPS compensation for the prior
month, commissions paid during the prior month, all investment earnings
generated by the Custodial Account and other reimbursable items that may
include, but not be limited to, premium refunds, attending physician statements,
PPO Directories, and third party vendor payments, all such amounts may be
estimated as necessary with an adjustment in the following month for any over
payment or under payment.
(b) On or before the fifteenth (15th) calendar day of each
month (or if the fifteenth (15th) falls on a day other than a Business Day, then
on the first Business Day thereafter), HPS shall initiate, with Provident's
joint signature, the transfer by ACH to an account designated by Provident an
amount equal to all premiums deposited in the Custodial Account during the prior
month, minus the Remittance Due (as described in Section 5.3(a) above).
(c) The Parties agree that the foregoing procedures must
be reflected in an appropriate agreement with First Union National Bank or
such other financial institution as the Parties may agree, the Parties will use
their best efforts to promptly complete such agreement, it being understood that
the account shall require an authorized signature from both HPS and Provident,
with such signatures to not be unreasonably withheld, in order to make any
withdrawals from the account. In the event that on or after the fifteenth, HPS
refuses to authorize the withdrawal within forty-eight (48) hours after written
notice thereof by Provident, Provident may independently initiate withdrawals
from the Custodial Account provided that such withdrawals do not reduce the
balance of the Custodial Account below $12,000,000, it being understood that the
distribution of funds in excess of $12,000,000 of Collected Funds in any one
month shall be subject to the sole signatory of Provident.
5.4 Reconciliation. On or before the seventh calendar day of each month
(or, if the seventh falls on a day other than a Business Day, then on the first
Business Day thereafter), HPS shall deliver to Provident a reconciliation report
of the Custodial Account for the previous month (the "Reconciliation Report"),
which Reconciliation Report shall set forth (i) the total amount of Premium and
other payments deposited into the Custodial Account during such month, as
adjusted for Premium refunds and other required cash transfers with respect to
such Premium payments (the "Collected Funds"), and (ii) the Remittance Due.
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5.5 Reports. Subject to the terms of Section 3.4 above, HPS shall
provide Provident with such reports regarding Premium billing and remittance as
are reasonably required by Provident, in a format and on a timetable to be
mutually agreed upon by the Parties. HPS shall maintain records of cash receipts
and disbursements relating to HPS' performance of services under the Program, as
required by laws and regulations applicable to third party administrators.
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5.6 Deposits. Any Premium payment received from an individual prior to
the final coverage determination with respect to such individual (any "Deposit")
shall not at that time be deemed to be a "Premium" for purposes of this Section
5 or any other provision of this Agreement. As reasonably required by Provident,
HPS shall place each individual's Deposit in the Custodial Account until such
individual is accepted for coverage under the Policy in accordance with the
terms of this Agreement, at which time the Deposit will be deemed to be a
"Premium" for purposes of this Agreement. In the event that such individual is
not accepted for coverage under the Policy, then HPS shall return the Deposit to
such individual in accordance with procedures reasonably required by Provident.
PART 6
RECORDS
6.1 Record Retention; Data. During the term of this Agreement and for a
period of seven (7) years after termination hereof, HPS shall maintain at its
principal administrative office, in original form or on electronic media,
adequate books and records of all transactions between HPS, Provident, and
Enrollees (the "Records"), in accordance with all rules and regulations of
regulatory authorities applicable to third party administrators (including but
not limited to state laws requiring that HPS provide state officials with access
to such books and records). HPS and Provident may use the data recorded on such
Records for any purpose, subject to the provisions of this Agreement and
Applicable Law (including laws protecting confidential Enrollee information).
HPS shall retain full ownership rights over all compilations, analyses, and
reports generated by HPS, as well as all proprietary technology, software, and
other data utilized by HPS in the performance of its obligations under this
Agreement. Such ownership rights shall include, but are not limited to, all
rights associated with publication, trade secrets, copyrights, trademarks, and
patents.
6.2 Provident Access. Provident is the legal owner of the Records and
retains the right to continuing access to the Records needed by Provident to
fulfill all its obligations to Enrollees, subject to the terms of this
Agreement, Applicable Law, and laws, rules, and regulations applicable to third
party administrators. All Records maintained by HPS hereunder shall be used by
HPS solely for the day-to-day operational purposes contemplated by this
Agreement and shall be made available to Provident during normal business hours
of any Business Day for review, inspection, examination, and, reproduction,
provided that Provident provides HPS with reasonable notice of its intention to
inspect the Records, and provided that Provident reimburses HPS for HPS'
reasonable cost of reproduction. If HPS is required to disclose any of such
Records to any third party pursuant to Applicable Law or any law, rule or
regulation applicable to third party administrators, such disclosure shall be at
the expense of Provident. Upon termination of this Agreement, as reasonably
required by Provident and at Provident's expense, HPS shall transfer the Records
within a reasonable time after termination. HPS may retain at its discretion
copies of all or a portion of the Records, subject to the terms of this
Agreement. Upon the reasonable request of Provident, and at Provident's expense,
HPS shall destroy all or part of the records, except to the extent prohibited by
applicable law.
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PART 7
OTHER PROVIDENT RESPONSIBILITIES
7.1 Notice of Changes. Provident shall notify HPS of any change in
benefits, rates, forms, commission schedules, or other aspects of the Program:
(i) at least ninety (90) calendar days (or up to 12 months in the event
Provident's proposed changes fundamentally alter the Program) before the date on
which Provident requires HPS to include such change in renewals or proposals
issued in accordance with Section 3.1 above; and (ii) at least thirty (30)
Business Days before Provident requires that HPS notify Enrollees of such change
(whether or not such notice is required by Applicable Law). In the event that
Provident does not provide HPS with notice as required in the previous sentence
with respect to any rate change, then the rates that were applicable before such
change shall apply. The provisions of this Section 7.1 shall not limit any other
remedies that may be available to HPS in the event that Provident fails to
comply with the terms hereof.
7.2 Intentionally deleted.
7.3 Provident Agents. Notwithstanding anything contained herein to the
contrary, Provident shall be responsible for all interface and relationship
management for both sales and service with respect to the agents, subagents, and
MGAs identified by Provident in its list of Agents and subagents. Provident
shall also be financially responsible for paying all Agents' commissions payable
in connection herewith and which are distributed by HPS.
7.4 Attending Physician Fees. Provident shall be responsible for and pay
all attending physician fees incurred in connection with the underwriting
process.
7.5 Miscellaneous. Provident shall be responsible for all PPO network
contracting, managed care contracting, vendor fees, agent appointment fees, and
all other fees except for third party administrator licensing fees.
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7.6 Provident Entering Small Group Business. During 1998, provided HPS
provides assistance in developing the True Small Group market, Provident shall,
with the assistance of HPS, use its best efforts to enter the True Small Group
market, and HPS shall serve as the exclusive administrator of such business on
such terms as the Parties hereto may mutually agree. The exclusivity herein
provided shall become non-exclusive if after ninety (90) days' written notice by
Provident, HPS shall not agree to provide the service, product design and
distribution of products in the True Small Group market.
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7.7 Quarterly Meetings. At HPS's request, the Chairman and CEO of
Provident agree to be available to meet quarterly with HPS to discuss the
business being transacted pursuant to this Agreement, future direction, and
profitability.
PART 8
AUDIT
Provident shall have the right to audit the books and accounts of HPS
relating to all transactions subject to this Agreement, in accordance with
Applicable Law and subject to the terms of this Agreement. Such audits shall be
conducted in a reasonable manner.
PART 9
UNDERWRITING
HPS shall perform underwriting services as requested by Provident.
Provident expressly retains sole authority to establish underwriting rules for
approval of applicants for coverage under the Program. The establishment of such
rules shall be solely within the discretion of Provident and will be contained
in written underwriting rules provided to HPS. HPS shall have authority to
implement and apply Provident's underwriting guidelines but may not modify any
term or condition of any Certificate or waive any provision thereof except to
the extent required by Provident. HPS shall refer any questions regarding
implementation of Provident's underwriting guidelines to Provident. Provident
shall provide designated HPS employees with sufficient training with respect to
the Provident underwriting guidelines. Such training shall include but not be
limited to (i) at least five (5) Business Days of training at HPS offices by a
senior Provident underwriter prior to the date on which HPS begins underwriting
the Program, (ii) during the first six (6) months after HPS begins underwriting
under the Program, monthly training sessions at HPS offices by senior Provident
underwriters, and (iii) annual training sessions at HPS offices by senior
Provident underwriters. On sixty (60) days advance written notice to HPS,
Provident may assume responsibility for underwriting (with a corresponding
reduction in the Additional Service Fees).
PART 10
ADVERTISING
10.1 Advertising Materials. HPS shall not use any written or oral
advertisement that bears Provident's name unless HPS has obtained Provident's
prior written approval of such advertisement. To the extent required by
Applicable Law, HPS shall keep a file of all advertisements used by HPS in the
performance of its obligations hereunder.
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PART 11
COMPENSATION
11.1 Service Fee. As compensation to HPS for the services that HPS
provides hereunder, and in addition to the other amounts to be paid by Provident
to HPS hereunder, HPS shall retain as a service fee (the "Service Fee,"
specifically defined to include both a Base Service Fee and an Additional
Service Fee) a portion of each Premium payment it receives pursuant to Section 5
hereof. The Service Fee shall be calculated in accordance with the terms of
Exhibit B attached hereto. Notwithstanding anything contained herein to the
contrary, HPS agrees that it shall not price its services for Provident at a
rate any greater than fees charged by HPS to any other carrier for similar
services, regardless of scale.
11.2 HPS Administration Fees. To the extent permitted by Applicable Law,
and approved by Provident, HPS may charge each Enrollee late fees, insufficient
funds fees, and other penalty charges associated with the Premium amounts to be
received by HPS in accordance with this Agreement and Applicable Law. Fees
collected by HPS pursuant to this Section 11.2 will be deposited in the
Custodial Account.
PART 12
RELATIONSHIP OF PARTIES
12.1 Contractual Relationship. The only relationships between HPS and
Provident are the contractual relationships referred to in this Agreement.
Nothing contained in this Agreement shall be construed to create the
relationship of employer and employee or principal and agent, or to create a
partnership or joint venture relationship, between Provident and HPS. Each
Party's authority shall be limited to that which is expressly stated in this
Agreement. Except as specifically provided elsewhere in this Agreement, neither
Party shall exercise any control over the hours, office location, rentals, or
employees of the other.
12.2 Subcontracts. HPS may subcontract for the performance of services
which HPS is to provide hereunder; provided, however, that HPS will not, without
Provident's prior written consent, subcontract, except to a Corporate Affiliate
of HPS, for the performance of any services hereunder requiring direct contact
with Enrollees.
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12.3 Changes in Obligations. In the event that any mandate of a
regulatory body having jurisdiction over the Parties hereto, any Applicable Law
(as defined in Exhibit A hereto), any law or regulation applicable to the
parties hereto or the transactions herein contemplated, or any change in the
Program results in a material change in the nature or financial impact of either
Party's obligations or compensation hereunder ("Material Change"), then such
Party may provide the other Party with notice of such Material Change, and the
Parties shall negotiate in good faith an amendment to this Agreement that shall
set forth the terms under which the Parties shall perform such new obligations.
In the event that the Parties cannot reach agreement on an amendment to this
Agreement within thirty (30) calendar days after the delivery of a Material
Change notice pursuant to this Section 12.3, then either Party may terminate
this Agreement in accordance with Section 17.4 below.
12.4 Amendment of Agreement. In the event that any mandate of a
regulatory body having jurisdiction over the Parties hereto, any Applicable Law,
or any law or regulation applicable to the parties hereto or the transactions
herein contemplated, requires the Parties to amend this Agreement, then the
Parties shall negotiate in good faith to amend this Agreement in order to comply
with such law or regulation. In the event that the Parties cannot reach
agreement with respect to an amendment of this Agreement pursuant to this
Section 12.4, then either Party may terminate this Agreement pursuant to Section
17.5 below.
12.5 HPS Sales of Individual Group Association Products. For a period of
one (1) year from the Effective Date of the Agreement (and during the remaining
term of this Agreement, provided the annualized premium administered by HPS for
Provident exceeds $65,000,000 and does not fall below such amount for two
consecutive quarters), HPS agrees not to sell any individual or group
association health insurance products on behalf of payors other than Provident
if such products directly compete with the individual products sold by Provident
in connection herewith. Individual or group association products do not include
True Small Group which, by definition, may include individuals. Notwithstanding
anything contained herein to the contrary, this Section 12.5 shall not apply
with respect to any HMO health care product HPS currently sells, markets, or
distributes, or wishes to sell, market, or distribute in the future, or to the
extent that:
(a) HPS desires to sell, market, or distribute an individual or
group association health insurance product in a state in which Provident
is either not licensed to conduct business or is not willing to conduct
business;
(b) Provident (or another fronting carrier acceptable to HPS, in
its sole and absolute discretion) does not meet specifications for a
particular health insurance product offering designed by a non-carrier
which HPS desires to sell, market, or distribute directly to the
consumer, without the involvement of independent agents and/or brokers
(because, for example, of Provident's A.M. Best rating);
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(c) HPS desires to sell, market, or distribute an individual or
group association health insurance product for or on behalf of any of
its current customers, for which HPS currently sells individual or group
association health insurance products; or
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(d) HPS has asked Provident to supply an individual or group
association health insurance product in connection with a marketing
opportunity which will not involve any independent MGAs, and Provident
either declines or fails to make the product available within a
reasonable time frame.
Further, HPS may perform any and all administration, risk management, and other
back office services for any and all carriers, whether or not such carriers
currently have a business relationship with HPS.
12.6 Other Vendors. Provident shall not engage a third party
administrator other than HPS for the services and Program which are the subject
of this Agreement for the term of this Agreement.
12.7 First Agreement Amendments. The parties hereto agree to negotiate,
in good faith, an amendment to the First Agreement, only with regard to Part 5,
Premium Collection and Commission Reports, and adjustments that may be necessary
to compensate HPS in connection therewith.
PART 13
COMPLAINTS AND LITIGATION
13.1 Notice of Regulatory Action. Each Party shall promptly notify the
other Party of any complaint to or from any federal or state regulatory agency
of which such Party becomes aware in connection with any transaction covered by
this Agreement. In the event that HPS receives a complaint letter from any state
insurance department, then HPS shall forward such complaint letter, together
with its file and a detailed report on the matter, to Provident promptly by
express delivery.
13.2 Notice of Litigation. Each Party shall promptly notify the other
Party of any litigation or attorney's letter threatening litigation of which
such Party becomes aware in connection with any transaction covered by this
Agreement. Each Party shall forward to the other Party promptly by express mail
any summons or complaint received by such Party in connection with any matter
covered by this Agreement.
13.3 Defense Costs. Except as provided in Part 14 below, each Party
hereto shall be responsible at its own expense for defending itself in any
litigation brought against it, whether or not the other Party hereto is also a
defendant, arising out of any aspect of activities engaged in connection with
this Agreement.
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PART 14
INDEMNIFICATION AND INSURANCE
14.1 HPS Indemnification of Provident. Except as set forth in Section
14.2 below, and as provided in Section 2.10, HPS agrees to indemnify and hold
harmless Provident, and its parents, subsidiaries, affiliates, officers, agents,
and employees, from and against any and all losses, costs, claims, demands, and
damages, including but not limited to attorneys' fees, arising out of or caused
by any act or omission which is an intentional breach of this Agreement, or
proven gross negligence, proven fraudulent conduct, or embezzlement of HPS, its
officers, agents, or employees.
14.2 Provident Indemnification of HPS. Except as set forth in Section
14.1 above, Provident agrees to indemnify and hold harmless HPS, and its
parents, subsidiaries, affiliates, officers, agents, and employees, from and
against any and all losses, costs, claims, demands, and damages, including but
not limited to attorneys' fees, arising out of or caused by:
(a) any act done by Provident, or any omission by
Provident, in connection with the carrying out or performance of its
obligations in connection with the Program or this Agreement, or any
action or inaction by HPS that was taken or not taken at the direction
or request of Provident (or in accordance with Provident's underwriting,
administration, and claims guidelines, rules, policies, or procedures as
set forth herein); and
(b) intentional breach of this Agreement, proven gross
negligence, proven fraudulent conduct or embezzlement attributable to
Provident, its officers, agents, or employees.
14.3 Insurance. During the term of this Agreement HPS shall maintain, at
HPS expense, insurance in effect that covers loss by reason of acts of fraud or
dishonesty, fidelity and errors and omissions. Such insurance shall be in an
amount of no less than $2,000,000 and shall list Provident as a named insured to
the extent of its interest therein. HPS shall cause the issuer of each insurance
policy to deliver to Provident evidence of the existence of such policy and
shall require the insurer to give Provident thirty (30) calendar days written
notice prior to cancellation of, or any material change in, the policy. HPS
shall provide Provident with prompt notice of any such change. The Parties
hereto acknowledge that pursuant to that certain HPC Executive Protection Policy
(#8142-20-00), specifically Section 12 thereof, HPC, as the first named insured
therein has various rights and is subject to certain restrictions contained
therein. Any losses or other payments received by HPC thereunder, to the extent
of Provident's interest therein, shall be forwarded to Provident by HPC within
five (5) days of receipt by HPC.
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PART 15
REGULATORY AND OTHER LIABILITY
15.1 HPS Warranties, Representations, and Compliance. In the conduct of
its business and the performance of its obligations under this Agreement, HPS
(a) warrants and represents to Provident that it is in compliance with, and
shall continue to comply with, all Applicable Law, all applicable statutes,
ordinances, rules, and regulations of any and all federal, state, and municipal
regulatory authorities specifically applicable to third party administrators
(including but not limited to applicable bond requirements). Except as otherwise
specifically provided in this Agreement, HPS shall be solely responsible for,
and, shall comply with all Applicable Law with respect to the services it is
performing hereunder. Where required by state law or regulation, HPS shall hold
a certificate of registration as a third party administrator issued by the
Department of Insurance or other regulatory body. To the extent required by (and
in accordance with the requirements of) laws applicable to third party
administrators, HPS shall provide written notice to Enrollees of the terms of
this Agreement. At Provident's reasonable request, HPS shall provide Provident
with any HPS records evidencing compliance with third party administrator
regulations; and (b) warrants to Provident that (i) HPS is a corporation duly
organized, validly existing and in good standing under the laws of the State of
Florida and (ii) this Agreement constitutes a valid and binding obligation of
HPC and HPS enforceable against HPC and HPS in accordance with its terms. The
undersigned officers have the full power and authority to execute and deliver
this Agreement and perform the obligations of HPS hereunder, and no further
action or authorization is necessary on the part of HPS or the undersigned
officers in order to consummate the transaction herein contemplated.
15.2 Provident Warranties, Representations, and Compliance. In the
conduct of its business and the performance of its obligations under this
Agreement, Provident (a) warrants and represents to HPS that it is in compliance
with, and shall continue to comply with, all Applicable Law, all statutes,
ordinances, rules and regulations of any and all federal, state, and municipal
regulatory authorities. Except as otherwise specifically provided in this
Agreement, Provident shall be solely responsible for, and shall comply with all
Applicable Law with respect to, all aspects of the design and implementation of
the Program, including but not limited to (i) Agent appointment and licensure
(including all fees associated therewith), (ii) underwriting criteria and
coverage determinations, (iii) the disposition of Premium amounts prior to final
coverage determinations, (iv) the rights or obligations to Enrollees, (v) the
scope of benefits under the Certificates, (vi) Premium rates, and (vii) the
content of the Policy, the Materials, Participation Documents, group contracts,
and Certificates. At HPS' reasonable request Provident shall provide HPS with
written guidelines setting forth procedures applicable to these matters.
Provident shall notify HPS of any Provident obligation under Applicable Law that
HPS is required to perform on behalf of Provident in accordance with this
Agreement; and (b) warrants to HPS that (i) each of Provident American
Corporation and Provident American Life and Health Insurance Company are
corporations duly organized, validly existing and in good standing under the
laws of the Commonwealth of Pennsylvania, (ii) this Agreement constitutes a
valid and binding obligation against each of them enforceable against each of
them in accordance with its terms. The undersigned officers have the full power
and authority to execute and deliver this Agreement and perform the obligations
of hereunder, and no further action or authorization is necessary on the part of
either of them or the undersigned officers in order to consummate the
transaction herein contemplated, and (iii) PILIC is the owner of 100% of the
issued and outstanding shares of the capital stock of PALHIC.
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PART 16
CONFIDENTIAL AND PROPRIETARY INFORMATION
16.1 Confidential Information. For purposes of this Agreement,
"Confidential Information" of a Party shall mean any confidential and/or
proprietary information belonging to such Party, including but not limited to
information concerning (i) the terms of this Agreement and discussions of the
matters described herein, and (ii) the business and operations of such Party,
such as all information regarding Participating Agents, the costs to each Party
of performing its obligations under this Agreement, insureds, Agents,
policyholders, products, Agent lists, distribution strategies, loss ratio
information, and marketing programs, and information regarding Provident
insureds, including Enrollees. Notwithstanding the foregoing, "Confidential
Information" shall not include:
(a) information that, at the time of disclosure to the
Party receiving the information (the "Receiving Party"), is in the
public domain;
(b) information that, after disclosure, is published or
otherwise becomes part of the public domain through no fault of the
Receiving Party;
(c) information that was in the Receiving Party's
possession or the possession of an affiliate of the Receiving Party at
the time of disclosure to the Receiving Party;
(d) information that is received by the Receiving Party in
good faith from an independent source that has no duty of nondisclosure
with respect to the information (or, if such source does have a duty of
nondisclosure, the Receiving Party was unaware of or had no reasonable
basis for knowing of such duty); or
(e) information that a Party is required by Applicable Law
to disclose to a third party, to the extent of such disclosure.
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16.2 Protection of Confidential Information. Except as otherwise
specifically provided in this Agreement or as otherwise required by Applicable
Law, each Party (a) shall hold in confidence any and all Confidential
Information which belongs to the other Party and shall take such precautions
with respect to such Confidential Information as it normally takes with its own
confidential and/or proprietary information, and (b) shall not use the
Confidential Information of the other Party (including any information relating
to Agents or Enrollees) for any purpose other than the performance of its
obligations under this Agreement. In particular, HPS agrees that it shall not
disseminate or utilize Provident's database of MGAs, Agents or subagents
(although Provident expressly acknowledges that HPS may currently use the
services of certain individuals contained on such databases, and nothing herein
shall prohibit HPS from continuing to use such individuals, it being the
objective of this provision to prevent HPS' dissemination or use of "the
database," (particularly in a manner which competes with Provident's
distribution) not HPS' use of specific individuals named therein).
16.3 Judicial Proceedings. Each Party shall endeavor to keep and assist
the other Party's keeping the Confidential Information confidential in judicial
or administrative hearings or proceedings, and shall provide assistance in
obtaining confidential treatment under applicable laws, statutes, or
regulations. If a Party finds it necessary to disclose any Confidential
Information in any such judicial or administrative hearing or proceeding, the
Party shall immediately notify the other Party and shall attempt to disclose
such Confidential Information "in camera" or subject to "protective order" or on
some other non-public basis.
16.4 Enrollee Information. HPS shall not supply information regarding
any Enrollee to any Party that is not affiliated with HPS or Provident, except
as may be required by this Agreement or Applicable Law, or as permitted in
writing by such Enrollee.
PART 17
TERM AND TERMINATION
17.1 Term. The term of this Agreement shall commence on the Effective
Date and shall continue in effect until December 31, 2002 unless terminated in
accordance with the provisions of this Part 17. The term shall automatically
renew for successive one (1) year terms unless either Party provides the other
with 180 days advance written notice of its intent not to renew.
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17.2 Intentionally deleted.
17.3 Termination for Cause. In the event that a Termination Event has
occurred with respect to a Party (the "Defaulting Party"), then the other Party
may terminate this Agreement upon thirty (30) calendar days written notice to
the Defaulting Party. Such notice shall be given within a reasonable time after
the occurrence of the Termination Event, and shall describe such Termination
Event in reasonable detail. For purposes of this Agreement, the occurrence of
any of the events specified below in this Section 17.3 shall constitute a
"Termination Event" with respect to a Party.
(a) Breach of Agreement. A Termination Event shall be
deemed to occur with respect to a Party if such Party breaches this
Agreement, and the Breach continues for a period of sixty (60) calendar
days after such Party receives written notice of the Breach from the
other Party. Notwithstanding the foregoing, if such Breach is not
reasonably susceptible to correction within such sixty-day period, then
a Termination Event shall not be deemed to have occurred if the Party in
Breach commences and diligently pursues corrective action within such
sixty-day period, and the Breach is cured within a reasonable time
thereafter.
(b) Dissolution; Insolvency. A Termination Event shall be
deemed to occur with respect to a Party upon the occurrence of any of
the following:
(i) the entry of a decree or order for relief of
such Party by a court of competent jurisdiction in any
involuntary case involving such Party under any bankruptcy,
insolvency, or other similar law now or hereafter in effect, or
the filing with respect to such Party of a petition in any such
involuntary bankruptcy or similar case, which petition remains
undismissed for a period of ninety (90) calendar days;
(ii) the appointment of a receiver for such Party
or substantially all the assets of such Party; or
(iii) the commencement by such Party of a
voluntary case under any bankruptcy or insolvency law (or other
similar law now or hereafter in effect), or the dissolution of
the business and operations of such Party necessary for such
Party to perform its obligations hereunder.
17.4 Termination Upon Material Change. In the event that a Material
Change Termination Event has occurred, then either Party may terminate this
Agreement upon thirty (30) calendar days written notice to the other Party. For
purposes of this Agreement, a "Material Change Termination Event" shall be
deemed to have occurred if the Parties have been unable to negotiate an
amendment to this Agreement within thirty (30) calendar days after delivery of a
Material Change notice pursuant to Section 12.3 above.
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17.5 Termination Upon Failure to Agree. In the event that the Parties
are unable to reach agreement with respect to an amendment of this Agreement in
accordance with Section 12.4 above, then either Party may terminate this
Agreement upon thirty (30) calendar days notice to the other Party, unless the
Parties reach agreement with respect to such amendment within the thirty-day
notice period.
17.6 Suspension of Underwriting Authority. To the extent required by
law, Provident shall have the right to suspend the underwriting authority of HPS
during the pendency of any dispute between the Parties regarding the cause for
termination of this Agreement. Provident shall fulfill all of Provident's lawful
obligations with respect to the Enrollees, regardless of any dispute between
Provident and HPS, and HPS shall cooperate with Provident in this regard.
17.7 Notice to State Regulators. Provident shall provide the Director of
Insurance of the State of Arizona with fifteen (15) calendar days prior written
notice of termination or cancellation or any other change in this Agreement.
17.8 Remedies of Provident. Except as set forth in Section 2.10 and
Section 14.1 hereof, Provident shall not, and hereby waives any right to, pursue
any right or remedy at law or equity to recover any losses, costs, claims,
demands, damages, or attorneys' fees arising out of or caused by (i) any Breach
(other than an intentional Breach or as a result of gross negligence or fraud)
of this Agreement or any other Termination Event relating to HPS' performance of
services pursuant to this Agreement, (ii) any Material Change, or (iii) any
other occurrence relating to HPS' performance of services pursuant to this
Agreement. The rights and remedies available to Provident pursuant to Part 14
and Section 2.10 of this Agreement shall be the sole rights and remedies
available to Provident with respect to any losses, costs, claims, damages, or
attorneys fees arising out of this Agreement. Notwithstanding the foregoing,
Provident does not waive its rights to pursue the remedies available to it in
law or equity for an intentional Breach of this Agreement by HPS, gross
negligence, or proven fraud, or as a named insured under the insurance policy or
policies required to be provided pursuant to Section 14.3 hereof.
17.9 Remedies of HPS. Except with regard to remedies available under
Section 11.1 and as set forth in Section 14.2 hereof, HPS shall not, and hereby
waives any right to, pursue any right or remedy at law or equity to recover any
losses, costs, claims, demands, damages, or attorneys' fees arising out of or
caused by (i) any Breach (other than an intentional Breach or as a result of
gross negligence or fraud) of this Agreement or any other Termination Event
relating to Provident's performance under this Agreement, (ii) any Material
Change, or (iii) any other occurrence relating to Provident's performance of
services under this Agreement. The rights and remedies available to HPS pursuant
to Part 14 of this Agreement shall be the sole rights and remedies available to
HPS with respect to any losses, costs, claims, damages, or attorneys' fees
arising out of this Agreement. Notwithstanding the foregoing, HPS does not waive
its rights to pursue the remedies available to it in law or equity for an
intentional Breach of this Agreement by Provident, gross negligence, or proven
fraud. Notwithstanding the foregoing, in the event the Agreement is terminated
for any reason other than as provided in Section 17.12 hereof during the first
forty-eight (48) months of the term hereof, Provident agrees to pay HPS the sum
of all remaining Base Service Fee payments (identified in Exhibit B) through the
end of the sixty month term hereof and shall reimburse HPS for all direct costs
incurred by HPS in connection with its effort to undertake the business
contemplated hereby on a pro rated basis. HPS shall have the right to receive
such payments in all events and shall be able to pursue any and all remedies
available with respect thereto. Direct costs shall be formally communicated by
HPS in writing within six (6) months of the Effective Date, for purposes of
calculating pro-rata costs over the sixty (60) month term of this Agreement.
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17.10 Transition. Notwithstanding the inherent implied duty of good
faith of the Parties with respect to this Agreement, HPS and Provident agree
that they will cooperate and assist each other upon termination of this
Agreement for any reason to the degree possible consistent with the intent of
this Agreement.
17.11 Post Termination. In the event Provident requires HPS' continued
service for a period of six (6) months after the effective date of termination
of this Agreement for any reason other than a termination by Provident pursuant
to Section 17.3 hereof, Provident shall pay HPS no greater than $6 per claim
incurred before but administered by HPS after such termination date, to the
extent requested by Provident.
17.12 Recapture; Return. Notwithstanding any provision to the contrary
in this Agreement:
(a) Provident shall have the right to recapture from HPS
the administrative services of the Program to be performed by HPS hereunder,
and upon the completion thereof to terminate this Agreement. In the event that
Provident desires to exercise the rights granted hereunder, it shall give six
(6) months' written notice thereof to HPS. Upon the termination of this
Agreement as herein provided, Provident shall pay to HPS an amount equal to (i)
Base Service Fee payments for the remainder of the initial term of the Agreement
as set forth in Exhibit "B", in a lump sum, and (ii) a Recapture/Return Fee.
(b) HPS shall have the right to cease providing the
administrative services of the Program and return the administrative services of
the Program to Provident, and upon the transition thereof, to terminate this
Agreement. In the event that HPS desires to exercise the rights granted
hereunder, it shall give six (6) months' written notice to Provident. Upon the
termination of this Agreement as herein provided, HPS shall pay to Provident a
Recapture/Return Fee. In which event, Provident shall pay the Base Service Fee
payments for the remainder of the initial term of the Agreement as set forth in
Exhibit "B".
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PART 18
MISCELLANEOUS PROVISIONS
18.1 Identification of Services. HPS shall use its best efforts to
perform, whenever possible, the administrative services hereunder on behalf of
Provident under the name of Provident such that Provident's Agents,
policyholders, insureds, Enrollees, and providers shall maintain identification
with Provident and shall not be provided with any identification to HPS or any
of its subcontractors.
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18.2 Guarantee by HPC. As an inducement to Provident to enter into this
Agreement, HPC guarantees the prompt and timely performance by HPS of the
obligations of HPS as set forth in this Agreement.
18.3 Modification; Waivers. No modification, amendment or waiver of this
Agreement, or any part of it, shall be valid unless in writing, signed by the
Party sought to be charged therewith. No waiver of any Breach or condition of
this Agreement shall be deemed to be a waiver of any subsequent Breach or
condition, whether of like or different nature.
18.4 Governing Law. This Agreement shall be subject to and construed
under the laws of the Commonwealth of Pennsylvania (but not including the choice
of law rules thereof). The parties hereto agree to consent to the jurisdiction
and venue of the courts of the Commonwealth of Pennsylvania located in
Montgomery County, Pennsylvania, and of the United States District Court for the
Eastern District of Pennsylvania, and agree that all disputes between the
parties shall be litigated only therein.
18.5 References and Section Headings. Any reference to the singular
shall include reference to the plural, and vice versa. Part and section headings
are intended for the purpose of description only and shall not be used for
purposes of interpretation of this Agreement.
18.6 Severability. In the event any court of competent jurisdiction
holds that a particular provision or requirement of this Agreement is in
violation of any Applicable Law, such provision or requirement shall be enforced
only to the extent it is not in violation of such Applicable Law or is not
otherwise unenforceable, and all other provisions and requirements of this
Agreement shall remain in full force and effect.
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18.7 Notices. Any notice, demand or other document required or permitted
to be delivered hereunder shall be in writing and shall be (i) mailed by
first-class, registered or certified mail, return receipt requested, postage
prepaid, (ii) delivered in person, by reputable delivery service, (iii) sent by
telegram, or (iii) transmitted by facsimile, and shall be addressed to the
recipient Party at the address indicated below, or at such other address as such
party shall indicate in a notice to the other Party sent in accordance with this
Section 18.7:
(a) If to HPS:
HealthPlan Services, Inc.
Attention: Phillip S. Dingle
Senior Vice President & Chief Counsel
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If Delivered By Hand:
3501 Frontage Road
Tampa, FL 33607
If Delivered By U.S. Mail:
P.O. Box 30098
Tampa, FL 33630-3098
If Delivered By Fax:
813/287-6629
(b) If to Provident:
If Delivered By Hand or By U.S. Mail:
James O. Bowles, President and Chief
Operating Officer
Provident Indemnity Life Insurance Company
2500 DeKalb Pike
Norristown, PA 19404-0511
If Delivered By Fax:
610/279-1486
(c) With a copy to:
M.F. Beausang, Jr., Esq.
Butera, Beausang, Cohen & Brennan
630 Freedom Business Center
Suite 212
King of Prussia, PA 19406-1331
Each notice, demand or other document that is delivered in the manner described
above shall be deemed to be sufficiently delivered, given, served, sent,
provided, and received for all purposes at such time as it is delivered to the
addressee (with the return receipt, delivery receipt, affidavit of messenger or,
with respect to a facsimile transmission, the answerback being conclusive, but
not exclusive, evidence of such delivery), or at such time as delivery is
refused upon presentation.
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18.8 Entire Agreement. This Agreement and the attached Exhibits and
Appendices hereto contains the whole of the understanding between the Parties
hereto relating in any manner of its subject matter, and any representation,
warranty, covenant, understanding or agreement not contained or incorporated in
it by reference shall be of no force or effect. As of the Effective Date, this
Agreement supersedes all prior proposals, discussions, writings, and agreements
between any of the parties to this Agreement relating the subject matter hereof.
18.9 Binding Agreement: Assignment. This Agreement and all the
provisions hereof will be binding upon and inure to the benefit of the parties
hereto and their permitted assigns. Neither this Agreement nor any other rights,
interests, or obligations hereunder my be assigned by either Party without the
prior written consent of the other Party hereto, which consent will not be
unreasonably withheld. Any assignment in violation of this Agreement shall be
void and to no effect. Notwithstanding the foregoing, upon sixty (60) days'
prior written notice to such effect, HPS may assign its rights and obligations
hereunder to a Corporate Affiliate.
18.10 Third Party Beneficiaries. This Agreement shall not, and is not
intended to, confer upon any party, other than the Parties hereto and their
successors and permitted assigns, any rights, remedies, obligations or
liabilities, except as expressly provided herein.
18.11 Force Majeure. Neither Party shall be liable for any delay or
failure to perform its obligations under this Agreement arising out of a cause
beyond its control or without its fault or negligence. Such causes may include,
but are not limited to, fires, floods, and natural disasters.
18.12 Survival. Each applicable provision of Section 2.10, Part 5 (for
payments owed to Provident hereunder) Part 6, Part 8, Parts 14 through 16, and
Sections 17.8, 17.9, 17.10 and 17.12 of this Agreement, as well as any other
provision applicable to the implementation of such provisions, shall survive
termination of this Agreement for any reason, and for a period of one (1) year
thereafter, unless by its terms it is no longer applicable.
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IN WITNESS WHEREOF, each of the parties hereto has caused this Agreement
to be executed on its behalf as of the date set forth hereunder.
HEALTHPLAN SERVICES, INC.
Dated: By:
--------------------------- -----------------------------
Timothy T. Clifford
Chief Operating Officer,
Small Group Business
HEALTHPLAN SERVICES CORPORATION
Dated: By:
---------------------------- ------------------------------
Timothy T. Clifford
Chief Operating Officer,
Small Group Business
PROVIDENT INDEMNITY LIFE
INSURANCE COMPANY
Dated: By:
----------------------------- -------------------------------
James O. Bowles, President
and Chief Operating Officer
PROVIDENT AMERICAN LIFE AND
HEALTH INSURANCE COMPANY
Dated: By:
------------------------------ -------------------------------
James O. Bowles, President
and Chief Operating Officer
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EXHIBIT A
DEFINITIONS
"Administration Fee" shall have the meaning set forth in Section 11.2 of
this Agreement.
"Agent" shall mean any licensed insurance agent or broker.
"Applicable Law" shall mean any statute, ordinance, rule, or regulation
of any federal, state, municipal, or other governmental authority applicable to
(i) the Policy or the Certificates, (ii) Agent appointment or licensure, (iii)
underwriting criteria or coverage determinations, (iv) the disposition of
Premium amounts prior to final coverage determinations, (v) the rights or
obligations of Enrollees, (vi) the scope of benefits under the Policy, (vii)
Premium rates, or (viii) any other aspect of the Program (except any law that
specifically regulates solely third party administrators and that is not
otherwise applicable to the Program).
"Appointment Form" shall mean any appointment or licensure material
provided by Provident to HPS for distribution to Agents.
"Association" shall mean the association or associations designated and
accessed by Provident, the members of which are covered under the terms of a
Policy issued by Provident.
"Breach" shall mean a Party's failure, or the act of a Party's failing,
to perform, observe, or satisfy any applicable obligation under this Agreement,
which failure or failing (i) constitutes a pattern of nonperformance, (ii) a
violation of Section 2.10(c), and (iii) has a material adverse effect on the
efficiency of the Program or the profits that the other Party hereto realizes
from the Program.
"Business Day" shall mean any day other than a Saturday, Sunday, HPS
holiday or holiday at a financial institution at which the Premium Account (or
the account designated by Provident pursuant to Section 5.4 hereof) is located.
"Certificate" shall mean a certificate issued by Provident to an
Enrollee evidencing such Enrollee's enrollment in the Association and coverage
under the Policy, which certificate (i) is delivered by HPS to an Enrollee
pursuant to this Agreement, or (ii) is issued upon receipt of an application for
enrollment processed by HPS.
"Collected Funds" shall have the meaning set forth in Section 5.4 of
this Agreement.
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"Confidential Information" shall have the meaning set forth in Section
16.1 hereof.
"Corporate Affiliate" shall mean a corporation, more than 50% of the
capital stock of which is owned by a Party.
"Defaulting Party" shall have the meaning set forth in Section 17.3 of
this Agreement.
"Deposit" shall have the meaning set forth in Section 5.6 of this
Agreement.
"Effective Date" shall have the meaning set forth in the Recitals of
this Agreement.
"Enrollee" shall mean any individual covered under a Certificate.
"Generally Accepted Clinical Standards" shall have the meaning set forth
in Section 2.7 of this Agreement.
"Material Change" shall have the meaning set forth in Section 12.3 of
this Agreement.
"Material Change Termination Event" shall have the meaning set forth in
Section 17.4 of this Agreement.
"Participation Document" shall have the meaning set forth in Section 4.1
of this Agreement.
"Party" shall mean either HPS or Provident.
"Policy" shall mean the health insurance policy issued by Provident that
covers all Enrollees in the Association.
"Premium" shall mean any amount that Provident charges any Enrollee for
coverage under the Policy, excluding association dues, enrollment,
administration and billing fees.
"Premium Account" shall have the meaning set forth in Section 5.3 of
this Agreement.
"Recapture/Return Fee" shall mean a payment as liquidated damages of
$2,000,000; no Recapture Fee shall be payable upon termination after the fourth
year.
"Reconciliation Report" shall have the meaning set forth in Section 5.4
of this Agreement.
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<PAGE>
"Receiving Party" shall have the meaning set forth in Section 16.1(a) of
this Agreement.
"Records" shall have the meaning set forth in Section 6.1 of this
Agreement.
"Remittance Due" shall have the meaning set forth in Section 5.4 of this
Agreement.
"Service Fee" shall have the meaning set forth in Section 11.1 of this
Agreement.
"Special Claims Services" shall have the meaning set forth in Section
2.6 of this Agreement.
"Termination Event" shall have the meaning set forth in Section 17.3 of
this Agreement.
"True Small Group" shall mean a plan of, or contributed by, an employer,
including a self-employed person, or employee organization to provide health
care to the employees, former employees, the employer, others associated with or
formerly associated with the employer in a business relationship, or their
families. True Small Group shall also include bona fide associations as defined
by Health Insurance Portability and Accessability Act of 1996.
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<PAGE>
EXHIBIT B
COMPENSATION
For purposes of this Agreement, the "Service Fee" to be retained by HPS
with respect to each Certificate shall be as follows:
(i) A Base Service Fee of $85,000 per month during the first
sixty (60) months of the term of the Agreement;
(ii) $10,000 per month during the first sixty (60) months of the
term of the Agreement in exchange for loss ratio management advisory
services to be provided by HPS;
(iii) Additional Service Fees as a percent of premium with
respect to the policies administered by HPS, as follows:
Annualized Earned Premium
(paid monthly, but determined
on a quarterly basis)
HPS Service Fee
(000,000)
$ %
Less than 110 8.00
At least 110 but less than 120 7.75
" 120 " 130 7.50
" 130 " 140 7.25
" 140 " 150 7.00
" 150 " 175 6.75
" 175 " 200 6.50
" 200 " 250 6.25
[250 or more] 6.00
Additional Service Fees shall be paid on a monthly basis, upon the preceding
calendar quarter's Annualized Earned Premium.
(iv) Additional Service Fees with respect to underwriting shall
be: $25 per submitted application, if less than 15,000 applications per
quarter, plus $20 per application submitted in excess of 14,999
applications per quarter; (for 1998, the total payable shall not be less
than $225,000 per quarter; for 1999 and thereafter, the amount payable
shall be $30 per submitted application if less than 10,000 applications
are submitted per quarter; if more than 10,000 applications are
submitted per quarter, the above scale applies).
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<PAGE>
(v) Additional Service Fees for premium from (I) those policies
assumed after the date hereof through Provident's acquisition of other
companies or of blocks of business and (II) those policies or plans
issued by Provident which are not customary in the industry or which
require significant programming changes by HPS shall be adjusted
accordingly, and the pricing will be mutually agreed upon by both
parties; and
(vi) Six Dollars ($6) for each claim that HPS administers which
is incurred before the Effective Date but received after such date, in
addition to those claims reported and outstanding as of any transition
dates as mutually agreed upon by the parties, on all administered
business that is the subject of this Agreement; and
(vii) The cost of claim payment for claims incurred during the
Agreement period and submitted following the termination date, or, if
later, a mutually agreed upon transition date, shall be borne by HPS, at
a mutually agreeable rate, not to exceed Six Dollars ($6) per claim.
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<PAGE>
AMENDMENT TO SERVICES AGREEMENT
THIS AMENDMENT TO SERVICES AGREEMENT is made and entered into this _____
day of February, 1998, by and among PROVIDENT INDEMNITY LIFE INSURANCE COMPANY,
a Pennsylvania corporation, and PROVIDENT AMERICAN LIFE AND HEALTH INSURANCE
COMPANY, a Pennsylvania corporation (collectively, "Provident"), HEALTHPLAN
SERVICES CORPORATION, a Delaware corporation ("HPC") and HEALTHPLAN SERVICES,
INC., a Florida corporation ("HPS").
BACKGROUND
A. The parties entered into an agreement entitled Services Agreement
dated October 16, 1997 and effective as of February 1, 1998 (the "Services
Agreement").
B. The parties are desirous of amending the Services Agreement as
hereinafter set forth.
NOW THEREFORE, in consideration of the mutual covenants herein contained
and other good and valuable consideration, the receipt and adequacy of which are
hereby acknowledged, and intending to be legally bound hereby, the parties
hereby agree as follows:
1. Amendment to Exhibit "B". Exhibit "B" to the Services
Agreement is hereby amended in its entirety as set forth in the form of the
Amended Exhibit "B" attached hereto as Exhibit "A".
2. Effective Date. The effective date for Amended Exhibit "B"
shall be February 1, 1998.
3. Ratification. As herein amended, the Services Agreement is
ratified, approved, and affirmed, and remains in full force and effect.
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<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Amendment to
Services Agreement as of the day and year first above written.
HEALTHPLAN SERVICES, INC.
Dated: By:
--------------------------- --------------------------------
Phillip S. Dingle
Chief Legal Officer
HEALTHPLAN SERVICES CORPORATION
Dated: By:
---------------------------- --------------------------------
Phillip S. Dingle
Chief Legal Officer
PROVIDENT INDEMNITY LIFE INSURANCE
COMPANY
Dated: By:
------------------------------ --------------------------------
James O. Bowles, President
PROVIDENT AMERICAN LIFE AND HEALTH
INSURANCE COMPANY
Dated: By:
-------------------------------- --------------------------------
James O. Bowles, President
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<PAGE>
EXHIBIT 10.KK
AGREEMENT
This Agreement (the "Agreement") is entered into by and between
Provident American Corporation, a Pennsylvania corporation ("Provident") and
HealthPlan Services, Inc., a Florida corporation ("HPS"), effective as of
October ___, 1997 (the "Effective Date").
BACKGROUND
A. On even date herewith Provident Indemnity Life Insurance Company
("PILIC") and Provident American Life and Health Insurance Company ("PALHIC")
and HPS have entered into a services agreement (the "Services Agreement")
whereby HPS will provide administrative and other services to PILIC and PALHIC
with regard to a block of business (the "Block of Business") developed through
Provident's own distribution system of agents, subagents and general agents
specified in the Services Agreement, and in return therefor will receive various
fees as set forth in the Services Agreement.
B. HPS hereby acknowledges Provident's efforts in inducing PILIC, a
wholly-owned subsidiary of Provident, and PALHIC, a wholly-owned subsidiary of
PILIC, to enter into the Services Agreement and to transfer to HPS the
performance of administrative and other services in connection with the Block of
Business.
NOW, THEREFORE, in consideration of the mutual covenants contained
herein and for other good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged, Provident and HPS hereby agree as
follows:
1. Obligations of Provident.
1.1 Provident hereby agrees to cause PILIC and PALHIC to each
enter into the Services Agreement.
1.2 Provident guarantees the prompt and timely payment and
performance by each of PILIC and PALHIC of the obligations thereof to HPS as
set forth in the Services Agreement.
1.3 Provident further agrees to provide reasonable assistance
to PILIC and PALHIC with respect to the transition of the administration of the
Block of Business pursuant to the Services Agreement.
2. Obligations of HPS.
<PAGE>
2.1 HPS agrees to pay to Provident the sum of $5 Million
Dollars (the "Fee"), $1 Million Dollars by wire transfer on or before October
16, 1997, and the balance of $4 Million Dollars by wire transfer on or before
October 31, 1997, to be represented by a promissory note in the form attached
hereto as Exhibit "B", as an inducement to Provident to perform the obligations
of Provident under Paragraph 1 above and as payment to offset transition costs.
2.2 The Fee shall be non-refundable, and Provident shall not
have any obligation of any kind whatsoever to return any portion of the Fee.
3. Warranties of Provident.
3.1 Provident is a corporation duly organized, validly
existing and in good standing under the laws of the Commonwealth of
Pennsylvania.
3.2 This Agreement constitutes a valid and binding obligation
of Provident enforceable against Provident in accordance with its terms. The
undersigned officers have the full power and authority to execute and deliver
this Agreement and perform the obligations of Provident hereunder, and no
further action or authorization is necessary on the part of Provident or the
undersigned officers in order to consummate the transaction herein contemplated.
3.3 Provident is the owner of 100% of the issued and
outstanding shares of the capital stock of PILIC.
3.4 PILIC is the owner of 100% of the issued and outstanding
shares of the capital stock of PALHIC.
4. Warranties of HPS.
4.1 HPS is a corporation duly organized, validly existing and
in good standing under the laws of the State of Florida.
4.2 This Agreement constitutes a valid and binding obligation
of HPS enforceable against HPS in accordance with its terms. The undersigned
officers have the full power and authority to execute and deliver this Agreement
and perform the obligations of HPS hereunder, and no further action or
authorization is necessary on the part of HPS or the undersigned officers in
order to consummate the transaction herein contemplated.
5. Term. The term of this Agreement shall commence on the
Effective Date and shall continue in effect during the term of the Services
Agreement.
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<PAGE>
6. Miscellaneous Provisions.
6.1 Modification; Waivers. No modification, amendment or
waiver of this Agreement, or any part of it, shall be valid unless in writing,
signed by the party sought to be charged therewith. No waiver of any breach or
condition of this Agreement shall be deemed to be a waiver of any subsequent
breach or condition, whether of like or different nature.
6.2 Governing Law/Consent to Jurisdiction. This Agreement
shall be governed by and construed in accordance with the laws of the State of
Florida. The parties hereto agree to consent to the jurisdiction and venue of
the courts of the State of Florida located in Hillsbourgh County, Florida, and
of the United States District Court for the Middle District of Florida, and
agree that all disputes between the parties shall be litigated only therein.
6.3 References and Section Headings. Any reference to the
singular shall include reference to the plural, and vice versa. Part and section
headings are intended for the purpose of description only and shall not be used
for purposes of interpretation of this Agreement.
6.4 Severability. In the event any court of competent
jurisdiction holds that a particular provision or requirement of this Agreement
is in violation of any applicable law, such provision or requirement shall be
enforced only to the extent it is not in violation of such law or is not
otherwise unenforceable, and all other provisions and requirements of this
Agreement shall remain in full force and effect.
6.5 Notices. Any notice, demand or other document required or
permitted to be delivered hereunder shall be in writing and shall be (i) mailed
by first-class, registered or certified mail, return receipt requested, postage
prepaid, (ii) delivered in person, by reputable delivery service, (iii) sent by
telegram, or (iv) transmitted by facsimile, and shall be addressed to the
recipient party at the address indicated below, or at such other address as such
party shall indicate in a notice to the other party sent in accordance with this
Section 6.5:
IF TO PROVIDENT:
If Delivered by Hand or by U.S. Mail:
Mr. James O. Bowles
President and Chief Operating Officer
Provident American Corporation
2500 DeKalb Pike
P.O. Box 511
Norristown, PA 19404-0511
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<PAGE>
If Delivered by Fax:
1-610-279-1486
WITH A COPY TO:
M. F. Beausang, Jr., Esquire
Butera, Beausang, Cohen & Brennan
630 Freedom Business Center
Suite 212
King of Prussia, PA 19406-1331
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<PAGE>
IF TO HPS: Phillip S. Dingle
Senior Vice President & Chief Counsel
HEALTHPLAN SERVICES, INC.
If Delivered by Hand:
3501 Frontage Road
Tampa, Florida 33607
If Delivered by U.S. Mail:
P.O. Box 30098
Tampa, Florida 33630-3098
If Delivered by Fax:
1-813-287-6629
P.O. Box 30098
Tampa, Florida 33630-3098
6.6 Entire Agreement. This Agreement contains the whole of the
understanding between the parties hereto relating in any manner to its subject
matter, and any representation, warranty, covenant, understanding or agreement
not contained or incorporated in it by reference shall be of no force or effect.
As of the Effective Date, this Agreement supersedes all prior proposals,
discussions, writings, and agreements between any of the parties to this
Agreement relating to the subject matter hereof.
6.7 Binding Agreement; Assignment. This Agreement and all the
provisions hereof will be binding upon and inure to the benefit of the parties
hereto and their permitted assigns. Neither this Agreement nor any other rights,
interests, or obligations hereunder may be assigned by either party without the
prior written consent of the other party hereto, which consent will not be
unreasonably withheld. Any assignment in violation of this Agreement shall be
void and to no effect. Notwithstanding the foregoing, HPS may assign its rights
and obligations hereunder to a corporation affiliate of HPS, as such term is
defined in the Services Agreement.
6.8 Third Party Beneficiaries. This Agreement shall not, and
is not intended to, confer upon any party, other than the parties hereto and
their successors and permitted assigns, any rights, remedies, obligations or
liabilities, except as expressly provided herein.
6.9 Execution in Counterparts. This Agreement may be executed
by the parties hereto signing the same instrument, or by
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<PAGE>
each party hereto signing a separate counterpart or counterparts, each of which
shall be deemed to be an original, but all of which together shall constitute
one and the same instrument. The parties agree that documents executed by
facsimile shall be acceptable in his transaction, and the signatures thereof
shall have the same force and effect as original signatures.
IN WITNESS WHEREOF, the parties hereto have set their hands and
seals the day and year first above-written.
PROVIDENT AMERICAN CORPORATION
Attest:
_____________________________________ By:__________________________________
M. F. Beausang, Jr., Secretary Alvin H. Clemens, Chairman and
Chief Executive Officer
HEALTHPLAN SERVICES, INC.
Attest:
_____________________________________ By:__________________________________
Timothy T. Clifford,
Chief Operating Officer,
Small Group Business
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<PAGE>
EXHIBIT 10 LL
THE PROVIDENT AND HEALTHPLAN SERVICES
E-COMMERCE AGREEMENT
AGREEMENT made and entered into as of the 29th day of May, 1998, by and
among PROVIDENT AMERICAN CORPORATION, a Pennsylvania corporation ("PAMCO"),
INSURION, INC., a Pennsylvania corporation ("Insurion"), PROVIDENT HEALTH
SERVICES, INC., a Pennsylvania corporation (PHS'), and HEALTHPLAN SERVICES,
INC., a Florida corporation ("HPS").
BACKGROUND
A. Effective February 1, 1998, Provident Indemnity Life Insurance
Company ("PILIC"), Provident American Life & Health Insurance Company ("PALHIC")
(collectively, "The Provident"), and HPS entered into a Services Agreement
pursuant to which HPS is providing certain administrative services to The
Provident ("HPS Services Agreement").
B. PHS and American On-Line, Inc. ("AOL") entered into an Amended and
Restated Interactive Marketing Agreement dated as of February 1, 1998 (the "AOL
Agreement") pursuant to which AOL has agreed to provide certain advertising and
distribution services for certain Products (as defined in the AOL Agreement) for
PHS.
C. Insurion is a wholly-owned subsidiary of PAMCO, and will seek to
establish strategic interactive marketing agreements and/or advertising
agreements with a number of internet service providers, search engines,
specialty e-commerce sites, and generally with other internet partners who
possess favorable demographic characteristics.
D. On or about March __, 1998, HPS paid PHS Seven Hundred and Fifty
Thousand Dollars ($750,000) to be treated by PHS as an off-set against the
Holding Fee paid by PHS to AOL as provided in the AOL Agreement.
E. The parties are desirous of entering into an agreement relative to
certain aspects of the operation of the business of Insurion.
NOW, THEREFORE, in consideration of the mutual covenants contained
herein and for other valuable consideration, the receipt and sufficiency of
which is hereby acknowledged, the parties hereby agree as follows:
ARTICLE 1
[***]
<PAGE>
ARTICLE 2
HPS ADMINISTRATIVE RIGHTS AND OBLIGATIONS
2.1 Exclusive Right. Subject to the terms and conditions of this
Agreement, the Administrative Agreement (as hereinafter defined), and the HPS
Services Agreement, the parties agree that HPS shall have the right to be the
exclusive administrator of all insurance business underwritten by The Provident
during the term of this Agreement and sold over the Insurion website and any
other form of e-commerce used by The Provident to sell policies of insurance.
2.2 Quality of Service Obligations. The rights granted to HPS hereunder
are conditioned upon the performance of services by HPS of a standard of quality
to be set forth in an e-commerce administrative services agreement in form
mutually satisfactory to the parties hereto (the "Administrative Agreement').
The parties agree to enter into the Administrative Agreement as promptly as
practicable, and that the Administrative Agreement shall contain appropriate
provisions to formulate a standard of quality and performance, including, but
not limited to, the following;
(a) the establishment of a Quality of Service Committee comprised
of an equal number of representatives of Insurion and HPS employees, plus one
additional independent committee member to be mutually agreed upon, the said
Committee to be responsible for establishing the operating and service standards
to be utilized by HPS in acting as; the third-party administrator as provided in
Section 2.3 hereof, and also the operating and service standards to be adhered
to by co-sponsors;
(b) the establishment by HPS of a separate and designated operating
unit for the e-commerce business generated by Insurion; and
(c) the implementation of guidelines of quality and performance
standards to be used in the processing of applications for coverage under any
insurance policy to be issued by The Provident, and any customer service,
claims, or other service to be provided by HPS.
2.3 Third-Party Administrator. PHS and Insurion shall use their best
efforts to cause HPS to have the right of first refusal to provide
administrative services for 811 Insurion co-sponsors which may require the
services of an outside administrator.
2.4 Identification of HPS. PHS and Insurion will (a) cause HPS to be
given frequent mention in a variety of formats, including but not limited to
banners, icons, portals, and sidebars on the Insurion website and any other form
of e-commerce, and will maintain a constant click through feature to a mutually
agreed upon HPS website, and (b) reference HPS as a partner and co-sponsor in
press releases and other information disseminated to the public (unless
restricted from doing so by another Insurion agreement then in force).
2
<PAGE>
2.5 Universal Processing Platform. Insurion hereby agrees to use its
best efforts to create and adopt a universal platform, based upon HPS's
electronic administration capabilities, for all e-commerce transacted through
the Insurion website.
ARTICLE 3
LICENSE FEES
Insurion intends to charge transaction fees to co-sponsors and others
for various services to be provided, including but not limited to a transaction
fee on each item of e-commerce transacted through the Insurion web site (the
"License Fees"). PHS agrees to pay to HPS an amount equal to four (4%) percent
of the License Fees generated by each co-sponsor relationship which exists. HPS
shall not receive any portion of any revenues paid to PHS by third parties for
the purposes of co-sponsor docking, advertising, front holding fees and other
fees for the right to participate in the sale of insurance products over the
Insurion website and any other form of e-commerce. Upon a Change in Control of
Insurion or the Initial Public Offering of Insurion, Insurion shall have the
right to terminate HPS's right to the License Fees upon payment to HPS of an
amount equal to the lower of (i) eight times the License Fees earned by HPS in
the two quarters prior to the Change of Control or Initial Public Offering, and
(ii) one times the License Fees projected to be earned by HPS based upon the
twelve-month forward pro-forma projections used for the purpose of doing a
secondary offering, IP0 or spin-out of Insurion. For purposes of this Agreement,
"Change in Control" means, with respect to Insurion, a sale of all or
substantially all of Insurion's assets; a merger, consolidation, spin-out,
spin-off, split-up, statutory share exchange or consolidation in which the
persons holding Insurion's voting securities immediately prior to the closing
date of such transaction (and assuming (i) [***] (ii) the exercise of all
warrants and options of Insurion outstanding on the closing date of such
transaction by the holders thereof) cease to hold more than 50% of the
outstanding voting power of the surviving or resulting corporation; or a
transaction or series of transactions in which a person or group (as defined in
Section 13(d)(3) of the Securities Exchange Act of 1934), (i) who did not hold
voting securities of Insurion as of the date of this Agreement, acquires
beneficial ownership of more than 50% of the outstanding voting power of
Insurion or (ii) increased its ownership of voting securities of Insurion from
the number beneficially owned by such person or group as of the closing date of
such transaction to more than 50% of the outstanding voting power of Insurion.
For purposes of this Agreement, "Initial Public Offering" means Insurion's first
offering of common stock of Insurion that is registered under the Securities Act
of 1933, as amended, which offering is underwritten on a firm commitment or best
efforts basis and produces gross proceeds in excess of $25,000,000.
3
<PAGE>
ARTCLE 4
ISSUANCE OF WARRANTS TO PURCHASE
SHARES OF PAMC COMMON STOCK
4.1 PAMCO agrees to cause to be issued to HPS a warrant (the
"Warrant"), representing the right for a two (2) year period to purchase up to
One Hundred Thousand (100,000) shares of PAMCO's common stock, $.10 par value
(the "Common Stock"), at a price per share equal to Nine ($9.00) Dollars. In the
event that PAMCO issues any warrants after the Effective Date of this Agreement
and before six (6) months following the Effective Date of this Agreement
(excluding warrants or options issued to employees, consultants, or other
interactive marketing partners), having an exercise price lower than Nine
($9.00) Dollars per share, PAMCO agrees that the exercise price per share shall
be reduced to such lower exercise price. The Warrant shall further provide that
PAMCO shall have the right, upon thirty (30) days notice to cancel any
unexercised Warrant in the event that the average weekly last-sale price for
shares of PAMCO Common Stock over any consecutive eight (8) week period exceeds
$12.825
4.2 The rights, preferences and privileges of the Warrant and the
Common Stock issuable upon exercise of the Warrant shall be as set forth in the
Warrant Agreement which shall be delivered to HPS on or before June 15, 1998 and
which shall contain terms and conditions reasonably acceptable to HPS.
ARTICLE 5
TERM AND TERMINATION
5.1 Term. This Agreement shall become effective as of May 29, 1998
and shall continue in effect until October 1, 1999 (the "Term").
5.2 Termination of Term Sheet. The Term Sheet dated March 18,1998 and
the Final Term Sheet dated May 26, 1998 are hereby terminated and of no further
force or effect. Upon the execution of this Agreement, no person shall have any
liability to any other person under the Term Sheets.
5.3 Renewal. At least ninety (90) days prior to the expiration of the
Term, the parties agree to negotiate in good faith to extend the Term of this
Agreement provided that such is for the mutual benefit of each party to this
Agreement.
ARTICLE 6
MISCELLANEOUS PROVISIONS
6.1 Modification: Waivers. No modification, amendment or waiver of this
Agreement, or any part of it shall be valid unless in writing, signed by the
Party sought to be charged therewith. No waiver of any Breach or condition of
this Agreement shall be deemed to be a waiver of any subsequent Breach or
condition, whether of like or different nature.
4
<PAGE>
6.2 Governing Law. This Agreement shall be subject to and construed
under the laws of the Commonwealth of Pennsylvania (but not including the choice
of law rules thereof). The parties hereto agree to consent to the jurisdiction
and venue of the courts of the Commonwealth of Pennsylvania located in
Montgomery County, Pennsylvania, and of the United States District Court for the
Eastern District of Pennsylvania, and agree that all disputes between the
parties shall be litigated only therein.
6.3 References and Section Heading. Any reference to the singular shall
include reference to the plural, and vice versa, Part and section headings are
intended for the purpose of description only and shall not be used for purposes
of interpretation of this Agreement.
6.4 Severabilitv. In the event any court of competent jurisdiction
holds that a particular provision or requirement of this Agreement is in
violation of any Applicable Law, such provision or requirement shall be enforced
only the extent it is not in violation of such Applicable Law or is not
otherwise unenforceable, and all other provisions and requirements of this
Agreement shall remain in full force and effect.
6.5 Notices. Any notice, demand or other document required or
permitted to be delivered hereunder shall be in writing and shall be (i) mailed
by first-class, registered or certified mail, return receipt requested, postage
prepaid, (ii) delivered in person, by reputable delivery service, (iii) sent by
telegram, or (iii) transmitted by facsimi1e, and shall be addressed to the
recipient Party at the address indicated below, or at such other address as such
party shall indicate in a notice to the other Party sent in accordance with this
Section 6.5:
(a) If to HPS:
HealthPlan Services, Inc.
Attention: Phillip S. Dingle
Senior Vice President & Chief Counsel
If Delivered by Hand:
3501 Frontage Road
Tampa, FL 33607
If Delivered by U.S. Mail:
P.O. Box 30098
Tampa, FL 33630-3098
If Delivered by Fax:
813/287-6629
5
<PAGE>
(b) If to Provident:
If Delivered by Hand or by U.S. Mail:
James O. Bowles, President and
Chief Operating Officer
Provident Indemnity Life Insurance Company
2500 DeKalb Pike
Norristown, PA 19404-0511
If Delivered by Fax:
610/279-1486
(c) With a copy to:
M.F. Beausang, Jr., Esq.
Butera9 Beausang, Cohen & Brennan
630 Freedom Business; Center
Suite 212
King of Prussia, PA 19406-13:31
Each notice, demand or other document that is delivered in the manner described
above shall be deemed to be sufficiently delivered, given, served, sent,
provided, and received for all purposes at such time as it is delivered to the
addressee (with the return receipt, delivery receipt, affidavit of messenger or,
with respect to a facsimile transmission, the answerback being conclusive, but
not exclusive, evidence of such delivery), or at such time as delivery is
refused upon presentation.
6.6 Effective Date and Counterparts. The Effective Date of this
Agreement shall be May 29, 1998. This Agreement may be executed in any number of
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
6.7 Entire Agreement. This Agreement contains the whole of the
understanding between the Parties hereto relating in any manner of its subject
matter, and any representation, warranty, covenant, understanding or agreement
not contained or incorporated in it by reference shall be of no force or effect.
As of the Effective Date, this Agreement supersedes all prior proposals,
discussions, writings, and agreements between any of the parties to this
Agreement relating the subject matter hereof.
6
<PAGE>
6.8 Binding Agreement: Assignment. This Agreement and all the
provisions hereof will be binding upon and inure to the benefit of the parties
hereto and their permitted assigns. Neither this Agreement nor any other rights,
interests, or obligations hereunder may be assigned by any Party without the
prior written consent of the other Party hereto, which consent will not be
unreasonably withheld. Any assignment in violation of this Agreement shall be
void and to no effect.
Notwithstanding the foregoing, such of HPS and PHS shall, upon sixty (60) days'
prior written notice to such effect, have the right to assign the rights and
obligations hereunder to a corporation affiliated therewith.
6.9 Third Party Beneficiaries. This Agreement shall not, and is not
intended to, confer upon any party, other than the Parties hereto and their
successors and permitted assigns, any rights, remedies, obligations or
liabilities, except as expressly provided herein.
6.10 Force Mejeurs. Neither Party shall be liable for any delay or
failure to perform its obligations under this Agreement arising out of a cause
beyond its control or without its fault or negligence. Such causes may include,
but are not limited to, fires, floods, and natural disasters.
IN WITNESS WHEREOF, each of the parties hereto has caused this
Agreement to be executed on its behalf as of the date set forth hereunder.
HEALTHPLAN SERVICES, INC.
Dated:___________________ By:______________________________________
Name: Phillip S. Dingle, Senior Vice
President and Chief Counsel
PROVIDENT AMERICAN CORPORATION
Dated:___________________ By:______________________________________
Name: James O. Bowles, President
INSURION, INC.
Dated:___________________ By:______________________________________
Name: Michael Ashker, President
PROVIDENT HEALTH SERVICES, INC.
Dated:___________________ By:______________________________________
Name: Michael Beausang, Secretary
7
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EXHIBIT 10NN
MGU
STOCK PURCHASE AGREEMENT
THIS AGREEMENT dated as of February 27, 1998, is among HealthPlan
Services, Inc. (the "Buyer"), and Provident Indemnity Life Insurance Company, a
Pennsylvania corporation (the "Seller").
WHEREAS, the Seller owns 26,000 shares of the capital stock of
Montgomery Management Corporation ("MGU"), $.10 par value (the "Shares"), which
constitute all of the issued and outstanding capital stock of MGU.
WHEREAS, MGU is a full service managing general underwriter.
WHEREAS, the Seller desires to sell and the Buyer desires to purchase
49% of the Shares and to issue and obtain a warrant to purchase an additional
31% of the Shares upon the terms and conditions set forth herein.
NOW, THEREFORE, in consideration of the payments provided for and the
covenants contained in this Agreement, the parties agree as follows:
1. SALE AND PURCHASE OF STOCK, WARRANT FOR STOCK
1.1 Sale and Purchase
Subject to the conditions set forth in this Agreement, at the Time of
Closing (as defined in Section 8.1), the Seller will sell and transfer to the
Buyer, and the Buyer will purchase from the Seller, 12,740 of the outstanding
Shares, constituting forty-nine (49%) percent thereof, free and clear of any
security interest, lien, claim, encumbrance, charge, pledge, or any other
restriction of any kind (the "Purchased Shares").
1.2 Warrant
Subject to the conditions set forth in this Agreement, at the Time of
Closing (as defined in Section 8.1), the Seller will issue to the Buyer, and the
Buyer will receive from the Seller, a warrant to purchase from the Seller for a
period of ten (10) years from the date thereof 8,060 of the outstanding Shares,
constituting thirty-one (31%) percent thereof at a price of $1.00 per share,
free and clear of any security interest, lien, claim, encumbrance, charge,
pledge, or any other restriction of any kind (the "Warrant").
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2. CONSIDERATION FOR THE PURCHASED SHARES
2.1 Amount of Consideration
As consideration for the Purchased Shares and the Warrant, the
Buyer will:
(a) pay to the Seller $4,000,000 in immediately available funds
at the Time of Closing; and
(b) enter into a Profit Sharing Agreement with the Seller as
described in Section 5.5.
The amount of consideration is subject to adjustment following the Time of
Closing as provided in Sections 2.2 through 2.5.
2.2 Working Capital Statement
As soon as practicable following the Time of Closing (and in no
event later than 45 days following the Time of Closing), the Seller will prepare
and deliver to the Buyer a statement showing the book value of the total assets
and the total liabilities of MGU as of the Time of Closing (the "Working Capital
Statement"). The Working Capital Statement will be based upon the books and
records of the Seller and MGU and prepared in accordance with the same
accounting principles and practices used in determining the total assets and the
total liabilities shown on the Closing Balance Sheet (as defined in Section
3.5), except as set forth on the Accounting Principles Schedule attached to this
Agreement as Exhibit 2.2. The Buyer will, at its expense, make available to the
Seller, any accounting, personnel and records of MGU required for the
preparation of the Working Capital Statement.
2.3 Review of Working Capital Statement
Following receipt of the Working Capital Statement, the Buyer
will be afforded a period of 21 days to review the Working Capital Statement. To
assist in any such review, the Seller will make available to the Buyer any work
sheets prepared in connection with the Working Capital Statement. At or before
the end of the 21 day review period, the Buyer will either (a) accept the
Working Capital Statement in its entirety, or (b) deliver to the Seller a
written notice setting forth a detailed explanation of those items in the
Working Capital Statement that the Buyer disputes (a Notice of Dispute). If the
Buyer does not deliver a Notice of Dispute to the Seller within the 21 day
review period, the Buyer will be deemed to have accepted the Working Capital
Statement in its entirety. If the Buyer delivers a Notice of Dispute in which it
disputes some, but not all, of the items in the Working Capital Statement, the
Buyer will be deemed to have accepted all of the items not disputed.
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2.4 Resolution of Disputes
Within a period of 14 days after the delivery of a Notice of
Dispute, the parties will attempt to resolve in good faith any disputed items.
If they are unable to do so, the remaining disputed items will be referred to
Price, Waterhouse LLP for resolution. The parties will share equally the cost of
the independent public accountants. The book value of the disputed items, as
determined by the independent public accountants, will be binding on the
parties.
2.5 Adjustment in Amount of Consideration
If the book value of total assets, less the book value of the
total liabilities, shown on the Working Capital Statement, after the resolution
of any dispute pursuant to Section 2.4 (the Working Capital) is negative, the
Seller will pay promptly to the Buyer an amount equal to the negative Working
Capital balance. If the Working Capital is positive, the Buyer will pay promptly
to the Seller an amount equal to the positive Working Capital balance.
3. REPRESENTATIONS AND WARRANTIES OF THE SELLER
When used in this Section 3, the phrase "to the knowledge of the Seller"
means the actual knowledge of, or the knowledge that would have been acquired
by, the executive officers of the Seller in the ordinary course of reasonably
performing their duties with the Seller. The Seller hereby represents and
warrants to the Buyer as follows:
3.1 Organization
Each of the Seller and MGU are corporations duly organized,
validly existing, and in good standing under the laws of the Commonwealth of
Pennsylvania. MGU does not have any ownership interest, or any obligation to
acquire an ownership interest, directly or indirectly, in any other corporation,
partnership, joint venture, or other entity.
3.2 Authority
MGU has all corporate power and authority necessary to conduct
its business as presently and ordinarily conducted. The Seller has the corporate
power and authority required to enter into and perform its obligations under
this Agreement, and the execution, delivery, and performance of this Agreement
have been duly authorized by all necessary corporate action on the part of the
Seller. Assuming the due authorization, execution, and delivery by the Buyer,
this Agreement is a valid and binding obligation of the Seller, enforceable
against it in accordance with its terms.
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3.3 Capitalization
The authorized capital stock of MGU consists of (a) 1,000,000
shares of common voting stock, $.10 par value, of which 26,000 shares are issued
and outstanding, and owned by the Seller, and (b) 5,000,000 shares of preferred
stock, $1.00 par value, Series I, none of which are outstanding. The Seller owns
all of the Shares free and clear of any security interest, lien, claim,
encumbrance, charge, pledge, or any other restriction of any kind. All of the
Shares are duly authorized, validly issued, fully paid, and non-assessable.
There are no outstanding warrants, options, or other rights to purchase, or
rights under debentures or other instruments for conversion into any Shares or
any other equity securities of MGU. There are no shareholders, voting trust, or
other agreements or understandings to which the Seller or MGU is a party or is
bound relating to the voting or disposition of any Shares. Except as set forth
herein, there are no other classes of shares of MGU authorized or outstanding.
Neither the authorized capital stock of MGU nor the issued and outstanding
shares of MGU will be changed without the prior written approval of the Buyer.
3.4 No Violation
The execution and delivery of this Agreement by the Seller does
not, and the performance by the Seller of its obligations under this Agreement
will not, result in any violation of or default under, or give rise to a right
of modification, termination, or acceleration of any obligation under any
provision of the charter or bylaws (or similar charter documents) of the Seller
or MGU; of any loan or credit agreement, mortgage, indenture, lease, or other
agreement or instrument to which the Seller or MGU is a party; of any permit,
license, judgment, order, or decree by which the Seller or MGU is bound; or, to
the knowledge of the Seller and MGU of any statute, ordinance, rule, or
regulation by which the Seller or MGU is bound; except, in each case for
matters:
(a) set forth in Section 3.4 of the Disclosure Schedule attached
as Exhibit 3.4 to this Agreement (the Disclosure Schedule); or
(b) that would not, individually or in the aggregate, have a
material adverse effect on the financial condition or the results of operations
of MGU or prevent the Seller from performing any of its material obligations
under this Agreement. No authorization, consent, or approval of, or filing with,
any government or governmental agency or instrumentality, whether federal,
state, or local (Governmental Entity), is necessary for the performance by the
Seller of its obligations under this Agreement.
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3.5 Financial Data
Except as set forth in Section 3.5 of the Disclosure Schedule,
the consolidated balance sheets of MGU as of the Effective Date, (the Closing
Balance Sheet) and the financial records of MGU for fiscal periods ending
December 31, 1995, 1996, and 1997, including revenue and expense details
(collectively the Financial Data) were derived from the books and records of the
Seller and MGU, have been prepared in accordance with generally accepted
accounting principles ("GAAP"), and fairly present the financial condition and
the results of operations of MGU at the dates and for the periods indicated. The
amounts reflected in the Financial Data (other than the Closing Balance Sheet)
are the same as the amounts used by the Seller in the preparation of Provident
American Corporation's audited consolidated financial statements for the years
ended December 31, 1995 and 1996.
3.6 No Material Adverse Change
There has been no material adverse change in the financial
condition or the results of operations of MGU since December 31, 1997.
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3.7 Tax Matters
Except as set forth in Section 3.7 of the Disclosure Schedule:
(a) all tax returns required to be filed by or on behalf of MGU
have been filed when due;
(b) the Seller or MGU has timely paid, withheld, or made
provision for the payment of all taxes shown as payable on those tax returns;
(c) the accruals and reserves for taxes, if any, shown in the
Closing Balance Sheet are adequate to cover all tax liabilities of MGU as of the
Timne of Closing;
(d) no extension of time has been granted for the payment of any
tax or the filing of any tax return by MGU;
(e) no extension or waiver of the limitation period has been
granted with respect to any tax return filed or to be filed by MGU;
(f) there are no pending or, to the knowledge of the Seller,
threatened claims against MGU or the Seller with respect to any tax owed by MGU;
and
(g) there are no liens for taxes upon the assets of MGU other
than liens for current taxes not yet due. For purposes of this Section 3.7, the
term "taxes" includes all federal, state, and local taxes, including income
employment, payroll and withholding, sales, use, ad valorem, transfer,
franchise, license, excise, property, or windfall profit taxes.
3.8 Service Agreement
Section 3.8 of the Disclosure Schedule contains the terms of the
existing Service Agreement between MGU and the Seller, pursuant to which the
Seller provides operation, administration, and management services to MGU.
3.9 Agreements with Customers/Reinsurance Carriers
Section 3.9 of the Disclosure Schedule contains true and complete
copies or contract identification forms of:
(a) the standard forms of contracts between MGU and its customers
and reinsurance carriers; and
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(b) each form of customer or reinsurance carrier contract that
varies from the standard form in any material respect (collectively, the
"Contracts").
Except as set forth in Section 3.9 of the Disclosure Schedule, MGU has not given
or received any oral or written notice(s) of default or termination(s) under any
of the Contracts. Except as set forth in Section 3.9 of the Disclosure Schedule,
to the knowledge of the Seller, none of the Contracts are terminable at the
option of the other party thereto as a result of the transaction contemplated by
this Agreement and there are no material disputes in respect of such contracts
which would likely result in the termination of any of the Contracts other than
in the ordinary course.
3.10 Insurance
(a) Section 3.10 of the Disclosure Schedule sets forth a true and
correct list (indicating the insurer, the types and amounts of coverage, the
applicable deductible, and the expiration date) of all insurance policies or
binders of fire, liability, errors and omissions, vehicular, and other insurance
held by or on behalf of MGU (the Insurance Policies).
(b) Except as set forth in Section 3.10 of the Disclosure
Schedule: (i) to the knowledge of the Seller, the Insurance Policies are each in
full force and effect; (ii) neither MGU nor, to the knowledge of the Seller, is
the insurer in default of any material obligation under any of the Insurance
Policies; and (iii) MGU has not given nor received any notice(s) of default or
termination(s) under the Insurance Policies.
3.11 Employee Benefit Plans
(a) Identification - Section 3.11 of the Disclosure Schedule
lists: (i) all bonus, incentive, commission, deferred compensation, supplemental
retirement, medical disability, severance, stock option, stock purchase, and
other employee benefit plans or arrangements that are maintained, sponsored,
administered, or contributed to by MGU or in which current or former employees
of MGU participate; and (ii) all employment, executive compensation, severance,
consulting, or non-competition agreements with current or former employees of
MGU (together the "Employee Plans").
(b) Compliance; Contributions - Except as set forth in Section
3.11 of the Disclosure Schedule: (i) there has been no "prohibited transaction",
as defined in Section 406 of the Employee Retirement Income Security Act of
1974, as amended (ERISA) and Section 4975 of the Internal Revenue Code of 1986
as amended (the Code), with respect to any Employee Plan that is not exempt
under a class, individual, or statutory exemption; (ii) all of the Employee
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Plans are in material compliance with the applicable requirements of ERISA and
the Code, including without limitation, the reporting and disclosure
requirements of Title I of ERISA,and MGU has performed all material obligations
required to be performed by it under the terms of each of the Employee Plans;
(iii) each Employee Plan intended to qualify under Section 401(a) of the Code,
and each trust intended to qualify under Section 501(a) of the Code, does so
qualify; (iv) each Employee Plan which constitutes a "group health plan", as
defined in Section 5000(b)(1) of the Code, has, at all applicable times, been in
material compliance with the continuation of the coverage requirements contained
in Section 4980B(f) of the Code; (v) each fiduciary, as defined in Section 3(21)
of ERISA, of each Employee Plan has, at all applicable times, satisfied his
material obligations under Part IV of Title I of ERISA with respect to such
Employee Plan; (vi) all contributions required to be made to any Employee Plan
pursuant to Section 412 of the Code, or by the terms of the Employee Plan, have
been made; (vii) none of the Employee Plans constitutes a "multi-employer plan",
as defined in Section 3(37) of ERISA; (viii) no Employee Plan provides group
health benefits to either retired employees or to dependents of retired
employees (other than: A-coverage mandated by applicable law; B-death benefits
or retirement benefits under any "employee pension benefit plan" as that term is
defined in Section 3 (2) of ERISA; C-deferred compensation accrued on the books
of the Seller; or D-benefits the full cost of which is borne by the current or
former employee (or his or her beneficiary); (ix) there has been no "reportable
event" within the meaning of Section 4043 of ERISA, nor any event described in
Section 4062, 4063, 4064, 4069 or 4041 of ERISA with respect to any Employee
Plan that, individually or in the aggregate, is likely to result in a material
liability to MGU; and (x) with respect to each Employee Plan which is subject to
Title IV of ERISA, as of the Time of Closing, the fair market value of the
assets of each such Employee Plan equals or exceeds the liability for accrued
benefits, determined as if such Employee Plan were to be terminated as of the
Time of Closing.
3.12 Other Contracts and Commitments
Section 3.12 of the Disclosure Schedule identifies each of the
following contracts and commitments (collectively, the "Contracts") to which MGU
is a party or is bound (other than those referred to in Sections 3.8, 3.9, 3.10,
and 3.11):
(a) Contract with any sales agent or distributor of MGU that has
a term of more than one (1) year and cannot be terminated earlier by MGU on
notice of ninety (90) days or less;
(b) Brokerage or other agreement with any insurer or re-insurer;
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(c) Contract that: (i) entails the expenditure of more than
$10,000 in any year; or (ii) has a term of more than one (1) year and cannot be
terminated earlier by MGU on notice of ninety (90) days or less;
(d) Contract limiting the right of MGU to compete or do business
in any territory;
(e) Contract limiting the right of MGU to use trademarks, trade
names, or other proprietary rights;
(f) Contract or arrangement for financing or for the grant, as
security, of an interest in any of MGU's assets;
(g) Any other material contract not made in the ordinary course
of business.
Except as set forth in Section 3.12 of the Disclosure Schedule: (i) to the
knowledge of the Seller, all of the Contracts are in full force and effect; (ii)
neither MGU nor, to the knowledge of the Seller, no other party to the Contracts
is in default of any material obligation under any of the Contracts; and (iii)
MGU has not given nor received any notice (s) of default or termination(s) under
the Contracts.
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3.13 Litigation; Certain Liabilities
(a) Except as set forth in Section 3.13 of the Disclosure
Schedule, there is no action, proceeding, order, or investigation: (i) pending
against MGU before any court or other Governmental Entity; and/or (ii) to the
knowledge of the Seller, threatened against MGU before any court or other
Governmental Entity that, if adversely determined, would have a material adverse
effect on the financial condition or the results of operation of MGU or would
prohibit the completion of the transactions contemplated by this Agreement.
(b) Except as set forth in Section 3.13 of the Disclosure
Schedule, to the knowledge of the Seller, there are no material facts,
circumstances or events caused by or relating to the conduct of the Business
that have occurred which if asserted against MGU and if adversely determined,
would have a material adverse effect on the financial condition or the results
of operation of MGU or would prohibit the completion of the transactions
contemplated by this Agreement.
3.14 Permits, Licenses. Etc.; Compliance with Laws
(a) Section 3.14 of the Disclosure Schedule sets forth all
permits, licenses, and other authorizations by a Governmental Entity that are
held by MGU. To the knowledge of the Seller, no other material permits,
licenses, or authorizations are required for the conduct of the business of MGU
as presently and ordinarily conducted.
(b) except as identified on Section 3.14 of the Disclosure
Schedule: (i) the operation of the business as presently conducted by MGU does
not violate in any material way any applicable order, law, ordinance, code, or
regulation, including but not limited to those relating to protection of the
environment, civil rights, equal employment opportunity, occupational health and
safety, and interstate commerce; and (ii) no investigation by any governmental
authorities asserting or alleging any violation of any such order, law,
ordinance, code, or regulation, is pending, or to the knowledge of the Seller,
threatened.
3.15 Labor Matters
MGU has no employees, and is operated in accordance with a
Service Agreement with the Seller as described on Section 3.8 of the Disclosure
Schedule.
3.16 Trade Name, Trademarks and Copyrights
Section 3.16 of the Disclosure Schedule sets forth a list of all
trade name, trademark, and copyright registrations of MGU. Except as set forth
in Section 3.16 of the Disclosure Schedule, neither the Seller nor MGU has
received written notice alleging that any of those trade names, trademarks, or
copyrights infringe upon the rights of others. Neither the Seller nor MGU own
any trade names, trademarks, copyrights, or other proprietary rights used in the
business as presently and ordinarily conducted.
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3.17 Banks
Section 3.17 of the Disclosure Schedule sets forth a list of all
savings, payroll, checking, and other bank accounts and safe deposit boxes
maintained by MGU, together with a list of all individuals having signatory
powers over such accounts or access to such safe deposit boxes.
3.18 Accounts Receivable
All of the accounts receivable recorded on the Closing Balance
Sheet are due and valid claims against account debtors for goods or services
delivered or rendered, and, to the knowledge of the Seller, are not subject to
any defenses, offsets, or counterclaims. All such accounts receivable arose in
the ordinary course of business, and are not subject to any prior assignment,
claim, lien, or security interest.
3.19 Minute Books
The corporate minute books of MGU, copies of which have been
provided to the Buyer, contain accurate records of all of the meetings and
actions of the shareholder and directors of MGU.
3.20 Finders
No finder or broker has acted on behalf of the Seller or MGU in
connection with the transactions contemplated by this Agreement other than whose
fee will be paid by the Seller.
4. REPRESENTATIONS AND WARRANTIES OF THE BUYER
The Buyer represents and warrants to the Seller as follows:
4.1 Organization
The Buyer is a corporation duly organized, validly existing, and
in good standing under the laws of the State of Florida.
4.2 Authority
The Buyer has all corporate power and authority required to enter
into and perform its obligations under this Agreement and the execution,
delivery, and performance of this Agreement have been duly authorized by all
necessary corporate action on the part of the Buyer. Assuming the due
authorization, execution, and delivery by the Seller, this Agreement is a valid
and binding obligation of the Buyer, enforceable against the Buyer in accordance
with its terms.
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4.3 No Violation
The execution and delivery of this Agreement by the Buyer do not
and the performance by the Buyer of its obligations under this Agreement will
not, result in any violation of or default under, or give rise to a right of
modification, termination, or acceleration of any obligation under, any
provision of the charter or bylaws of the Buyer of any loan or credit agreement,
mortgage, indenture, lease, or other agreement or instrument to which the Buyer
is a party; of any permit, license, judgment, order, or decree by which the
Buyer is bound; or, to the knowledge of the Buyer, of any statute, ordinance,
rule, or regulation by which the Buyer is bound; except, in each case, for
matters that would not, individually or in the aggregate, have a material
adverse effect on the financial condition or the results of operations of the
Buyer or prevent the Buyer from performing any of its material obligations under
this Agreement. No authorization, consent, or approval of, or filing with, any
Governmental Entity is necessary for the performance by the Buyer of its
obligations under this Agreement.
4.4 Finders
No finder or broker has acted on behalf of the Buyer in
connection with the transactions contemplated by this Agreement.
5. COVENANTS
5.1 Operation of the Business Prior to the Time of Closing
From the date of this Agreement until the Time of Closing, the
Seller will cause MGU to operate the business as follows:
(a) Operate Business as Presently and Ordinarily Conducted - MGU
will continue to operate the business as presently and ordinarily conducted.
(b) Preserve Business Relationships - MGU will use all reasonable
efforts to preserve its existing relationships with suppliers, customers,
employees, and others having business relations with it.
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(c) Perform Material Obligations Under Contracts; Not Amend - MGU
agrees to perform all of its material obligations under all existing Contracts
and, subject to Section 5.5, will not amend, supplement or terminate any of the
same. MGU will not enter into any contract, agreement, or commitment that would
be listed on an updated Contracts List, or voluntarily incur a material
liability, without receiving the prior written consent of the Buyer.
(d) Maintain Books of Account - MGU will maintain its books of
account and records in the usual and ordinary manner and will not adopt any
material change in any method of accounting or accounting practice, except as
contemplated or required by GAAP.
(e) Maintain Corporate Organization - MGU will refrain from
taking any action that would cause any significant corporate action, including
but not limited to merger, consolidation, liquidation or sale of substantially
all of its assets, to occur, without receiving the prior written consent of the
Buyer.
(f) Maintain Assets - MGU will not sell, mortgage, pledge or
otherwise dispose of any material assets or properties other than in the
ordinary course of business.
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(g) Preserve Capital Structure - MGU will not amend its Articles
of Incorporation or By-Laws without the prior written consent of the Buyer or
issue, or authorize the issuance of any additional shares of its capital stock
and/or securities or obligations convertible into shares of its capital stock or
issue or grant any option, warrant, or other right to purchase, any shares of
its capital stock or declare or pay any dividends or make any other
distributions in respect of its capital stock, except for dividends, if any,
prior to Time of Closing required to be made by MGU in respect of inter-company
accounts to be retained by the Seller or its affiliates in accordance with the
Accounting Principles Statement attached hereto as Exhibit 2.2.
(h) Maintain Insurance - MGU will maintain present insurance in
full force and effect, with policy limits and scope of coverage not less than is
now provided by its present insurance.
(i) Payroll - MGU will not increase the wages of any employee of
MGU.
5.2 Access to Premises and Records
Prior to the date hereof, the Seller has granted and has caused
MGU to grant to the Buyer, the opportunity to conduct investigations with
respect to the books, records, and financial and operating information relating
to, and the affairs and prospects of MGU and the business, and the Buyer has
availed itself of such opportunity. From the date of this Agreement until the
Time of Closing, the Seller will continue to:
(a) permit the Buyer and its representative(s) to review the
books and records relating to MGU and the business;
(b) furnish any additional financial and operating information
reasonably requested by the Buyer;
(c) cause MGU to permit authorized representative(s) of the
Buyer, at times agreed upon by both parties, to interview key officers and
employees of MGU; and
(d) cause MGU to permit authorized representative(s) of the
Buyer, at times agreed upon by both parties, to interview Customers and
reinsurance carriers that have relationships with MGU.
All of the Buyer's investigations will be conducted in a manner that does not
interfere with the conduct of the business. The Buyer agrees to treat the
information obtained in the course of this investigation as confidential and not
to use for its own benefit or the benefit of any other person (except in
connection with the consideration of this Agreement and the transactions
contemplated hereby) the documents and information furnished by the Seller.
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5.3 Best Efforts to Satisfy Conditions to Closing
The Buyer and the Seller will use all reasonable efforts to
satisfy the conditions to closing set forth in Sections 6 and 7.
5.4 Tax Matters
(a) The parties shall cooperate in connection with the filings of
all tax returns covering the period prior to the Closing and relating to MGU.
The Seller shall not destroy or permit the destruction of any books, records, or
files used in preparing the Returns without offering in writing, to deliver
those books, records, or files to the Buyer at the expense of the Buyer.
(b) Concurrently with the Closing, the Seller agrees that MGU
shall cease to be a party to any tax allocation agreement(s) in effect
immediately prior to the Closing and shall not have any further rights or
liabilities thereunder in respect of MGU.
(c) The Buyer and the Seller agree to make an election on Form
8023 pursuant to Section 338(h)(10) of the Code. The parties agree to report the
sale contemplated by this Agreement consistently with such election(s) on all
applicable returns.
5.5 Profit Sharing
The parties agree to share the net MGU income earned after the
Effective Date between the Buyer and the Seller at 80% and 20%, respectively.
For purposes hereof, the term "net MGU income" shall be defined as MGU fee
income plus MGU contingent profit commission from reinsurers (on 1998 and
subsequent treaty years) less all expenses (but excluding any indirect overhead
or related allocations of the Buyer or its affiliates), including expenses and
fees associated with the Administrative Support and Services Agreement and
Commercial Lease Agreement described in Section 9.1. Any MGU contingent profit
commissions received from reinsurers for 1997 and prior treaty years shall be
paid to the Seller. The Buyer agrees to remit the 20% share to the Seller
quarterly on the 30th day following the calendar quarter close. The Seller
agrees, to the extent that the Seller shares in the insurance risk with respect
to any stop loss insurance placed by MGU, to share equally the Seller's
underwriting profits on such insurance risk with the Buyer. The Seller agrees to
remit to the Buyer the 50% share quarterly on the 30th day following the
calendar quarter close.
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5.6 Compliance with Licensing Laws
The Seller hereby agrees that it will take all reasonable and necessary
steps required to obtain all appropriate and material permits, licenses, and
other authorizations by a Governmental Entity that should be held by MGU should
MGU not be under the majority control of the Seller. It is the intent of both
parties and a material requirement of the Buyer that the operation of the
business conducted by MGU not violate in any material way any applicable order,
law, ordinance, code, or regulation, including but not limited to those relating
to insurance or managing general underwriting licensing, once the Buyer obtains
the Purchased Shares and the additional shares available to it upon exercise of
the Warrant. Except as to those legal fees incurred by the Buyer in evaluating
MGU's licensing obligations, the Seller hereby guarantees and warrants that the
Seller shall take full financial responsibility for any and all expenses and
costs related to the initial licensing (1998) of MGU, as described in this
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Section 5.6. (The parties acknowledge that to the extent the Buyer receives an
allocation of income pursuant to Section 5.5 above for the period between the
Effective Date and the Closing Date, the Seller will not take such financial
responsibility.) The Seller understands that the Buyer may elect not to exercise
the Warrant until the Buyer is completely satisfied that MGU will be properly
licensed in each and every state in which MGU does business and that such
licenses will remain in effect once the Warrant is exercised. Therefore, the
Seller hereby guarantees and warrants to use its best efforts to acquire any and
all appropriate licensing necessary for MGU to allow the Buyer to exercise said
Warrant in a timely manner.
6. CONDITIONS PRECEDENT TO OBLIGATIONS OF THE BUYER
The Buyer's obligation to complete the transactions contemplated by this
Agreement is subject to the satisfaction at or before the Time of Closing of all
of the following conditions:
6.1 Performance of Agreements
The Seller has performed in all material respects all of the
obligations to be performed by it under this Agreement at or before the Time of
Closing.
6.2 Representations and Warranties
The representations and warranties made by the Seller in this
Agreement are true in all material respects at and as of the Time of Closing as
though those representations and warranties had been made at and as of the Time
of Closing.
6.3 No Injunction
No temporary restraining order or preliminary or final injunction
prohibiting the completion of the transactions contemplated by this Agreement
has been issued and is in effect. No action, suit, proceeding, order, or
investigation is pending or threatened before any court of Governmental Entity
that, if adversely determined, would have a material adverse affect on the
financial condition or the results of operations of MGU or would materially
impair the ability of the Buyer, after the Time of Closing, to operate the
business as presently and ordinarily conducted.
6.4 Documents Delivered
The Seller has delivered to the Buyer all of the documents
required under Section 8.2.
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7. CONDITIONS TO OBLIGATIONS OF THE SELLER
The Seller's obligation to complete the transactions contemplated by
this Agreement is subject to the satisfaction at or before the Time of Closing
of all of the following conditions:
7.1 Performance of Agreements
The Buyer has performed in all material respects all of the
obligations to be performed by it under this Agreement at or before the Time of
Closing.
7.2 Representations and Warranties
The representations and warranties made by the Buyer in this
Agreement are true in all material respects at and as of the Time of Closing as
though those representations and warranties had been made at and as of the Time
of Closing.
7.3 No Injunction
No temporary restraining order or preliminary or final injunction
prohibiting the completion of the transactions contemplated by this Agreement
has been issued and is in effect.
7.4 Documents
The Buyer has delivered to the Seller all of the documents
required under Section 8.3.
7.5 Policy Sales and Servicing and Management Agreement
The Policy Sales and Servicing and Management Agreement dated as
of January 1, 1992 shall be terminated as of the time of closing.
8. THE CLOSING
8.1 Time and Location
The Closing will take place at the offices of Health Plan
Services, Inc. in Tampa, Florida or at such other place and time as the parties
may agree (the Time of Closing).
8.2 Deliveries by the Seller
At the Closing, the Seller will deliver or cause to be delivered
to the Buyer the following:
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(a) Certificates, dated not more than 30 days prior to the Time
of Closing from the appropriate authorities in the Commonwealth of Pennsylvania
attesting to the existence and good standing of the Seller and MGU,
respectively.
(b) Within thirty (30) days after the Time of Closing, Certified
copies of resolutions adopted by the Board of Directors of the Seller approving
the execution, delivery, and performance of this Agreement by the Seller.
(c) An Officer's Certificate of the Seller, signed by the
President of the Seller, substantially in the form of Exhibit 8.2(c).
(d) An Opinion of Counsel to the Seller substantially in the form
of Exhibit 8.2(d).
(e) Resignation of such of the directors and officers of MGU as
are requested by Buyer.
(f) A Certificate or Certificates for the Purchased Shares, duly
endorsed for transfer to the Buyer or accompanied by duly executed stock powers,
so as to transfer to the Buyer the Purchased Shares, free and clear of any
security interest, lien, claim, encumbrance, charge, pledge, or any other
restriction of any kind.
(g) A warrant in the form attached hereto as Exhibit 8.2(g).
8.3 Deliveries by the Buyer
At the Closing, the Buyer will deliver or cause to be delivered
to the Seller the following:
(a) A certificate dated not more than 30 days prior to the Time
of Closing, from the appropriate authority in the State of Florida attesting to
the existence and good standing of the Buyer.
(b) Certified copies of resolutions adopted by the Board of
Directors of the Buyer approving the execution, delivery and performance of this
Agreement by the Buyer.
(c) An Officer's certificate of the Buyer, signed by the Chief
Executive Officer or the Chief Financial Officer of the Buyer, substantially in
the form of Exhibit 8.3(c).
(d) An Opinion of the Buyer's Counsel substantially in the form
of Exhibit 8.3(d).
(e) $4,000,000 in immediately available funds, as provided in
Section 2.1.
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8.4 Further Assurances
Each of the parties agrees that it will from time to time after
the date of this Agreement, execute and deliver such other documents and
instruments and take such other actions as may be reasonably requested by the
other parties to carry out the transactions contemplated by this Agreement.
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9. AGREEMENTS AFTER CLOSING
9.1 Administrative Support and Services Agreement; Commercial
Lease Agreement
Within thirty (30) days after the Time of Closing, Seller and MGU will enter
into an Administrative Support and Services Agreement and a Commercial Lease
Agreement with respect to the offices presently being utilized by MGU in the
office building owned by the Seller, on terms mutually agreeable to the parties.
9.2 Right of First Refusal
Except as provided in the Warrant, no shareholder of MGU shall
transfer any of the Shares without first giving written notice thereof to the
other shareholder. The written notice shall contain a full description of the
terms and conditions of the transfer of the Shares, including the purchase price
per Share and other consideration per Share offered in connection with the
transfer and the identity of the parties-in-interest which are involved. The
non-offering shareholder shall have ninety (90) days after the date of such
notice to purchase all or any portion of the Shares offered for sale upon the
terms and conditions set forth in the notice. If the non-offering shareholder
fails to purchase the Shares within the time specified, the offering shareholder
shall be permitted to transfer the Shares in accordance with the terms and
conditions of the notice. If all of the Shares are not purchased pursuant to the
terms set forth in the notice, the unpurchased shares shall again become subject
to the restrictions contained herein.
9.3 Director of MGU
As of the Time of Closing, and until such time that either party
is no longer a shareholder of MGU, the Board shall consist of three (3)
directors. Both parties agree that two (2) directors of the Board, including the
Chairman shall be appointed by Buyer and one (1) director of the Board shall be
appointed by the Seller. A director may only be removed from the Board by the
appointing party upon written notice. Vacancies on the Board shall be filled by
the party appointing the director whose death, removal or resignation gives rise
to the vacancy. The Buyer and the Seller shall each appoint their respective
directors at each annual meeting of the shareholders to hold office for a term
expiring at the next succeeding annual meeting of the shareholders. Directors
may serve an unlimited number of successive terms. All directors shall hold
office for the term for which they are appointed and until their successors
shall have been duly appointed. Seller agrees to cooperate as necessary if the
Articles of Incorporation or By-Laws need amended to reflect the obligations set
forth in this Section 9.3.
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10. TERMINATION
This Agreement may be terminated on or before the Time of Closing:
(a) by the mutual written consent of the Seller and the Buyer;
(b) by the Buyer, if there has been a material violation or
breach by the Seller of any of the representations, warranties, or covenants
made by the Seller in this Agreement that has not been waived in writing by the
Buyer and has not been or cannot be cured by the Seller at or before the Time of
Closing;
(c) by the Seller if there has been a material violation or
breach by the Buyer of any of the representations, warranties, or covenants made
by the Buyer in this Agreement that has not been waived in writing by the Seller
and has not or cannot be cured by the Buyer at or before the Time of Closing; or
(d) by the Seller or the Buyer in the event the Closing has not
occurred by February 28, 1998; provided that, if the Closing has not occurred
due to a violation or breach of the representations, warranties, or covenants
made in this Agreement by the Seller or by the Buyer, those parties or that
party, as the case may be, may not terminate this Agreement under this clause
(d).
If this Agreement is terminated pursuant to this Section 10 and the transactions
contemplated hereby are not consummated as described herein, this Agreement
shall become null and void and of no further force and effect, and no party
shall have any liability or obligation to any other party, except for the
provisions of Section 5.2 relating to the obligation of the Buyer to keep
confidential, to return, and not to use certain information and data obtained by
it from MGU and the the Seller, the provisions of Section 13.1 relating to
expenses and the provisions of Section 13.11 relating to publicity.
11. SURVIVAL PROVISIONS/INDEMNIFICATION
11.1 Survival of Representations and Warranties
The representations and warranties made by the Seller and the
Buyer in this Agreement will survive the Time of Closing and investigation or
inquiry made by either of them. However, any claim for the incorrectness or
breach of these representations or warranties must be brought within the
following periods:
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(a) with respect to the representations and warranties in
Sections 3.1, 3.2, 3.3, 4.1 and 4.2, without limitation as to time;
(b) with respect to the representations and warranties in Section
3.7, prior to the lapse of time specified in the applicable statutes of
limitation;
(c) with respect to all representations and warranties not
referred to in clause (a) or (b) of this Section 11.1, within a period of 18
months following the Time of Closing.
11.2 Survival of Other Obligations
The obligations of the parties set forth in Sections 8.4, 9.1,
9.2, and 9.3 shall survive the time of Closing and continue until the
termination of the Profit Sharing Agreement described in Section 5.5 hereof.
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11.3 Indemnification by the Seller
Subject to Sections 11.1 and 11.5, the Seller will indemnify the
Buyer for any loss, cost, liability, or expense (including reasonable attorney
fees) that may be incurred by the Buyer as a result of:
(a) the incorrectness of any of the representations or warranties
made by the Seller in this Agreement; or
(b) the breach of any of the covenants made by the Seller in this
Agreement.
(c) any and all claims or losses incurred as a result of any and
all acts or omissions of the Seller or MGU pertaining to the business of the
Seller or MGU prior to the Time of Closing.
11.4 Indemnification by the Buyer
Subject to Sections 11.1 and 11.5, the Buyer will indemnify the
Seller for any loss, cost, liability, or expense (including reasonable attorney
fees) that may be incurred by the Seller as a result of:
(a) the incorrectness of any of the representations or warranties
made by the Buyer in this Agreement, or
(b) the breach of any of the covenants made by the Buyer in this
Agreement.
(c) any and all claims or losses incurred as a result of any and
all acts or omissions of the Buyer prior to the Time of Closing.
11.5 Notice and Defense of Claims
A party claiming indemnification under this Section 11 (the
Asserting Party) will give prompt written notice of the claim to the patty from
whom indemnification is being sought (the "Indemnifying Party") of the nature
and basis of the claim. If the claim for indemnification arises out of a claim,
action, or proceeding by a third party (a Third Party Claim), the Indemnifying
Party may elect to assume the defense of the Third Party Claim at its own
expense with counsel selected by the Indemnifying Party. If the Indemnifying
Party assumes the defense of the Third Party Claim, the Indemnifying Party will
not be liable for any fees or expenses of counsel for the Asserting Party
incurred in connection with the Third Party Claim. If the Indemnifying Party
does not assume the defense of the Third Party Claim, the Asserting Party will
have the right to defend and settle the Third Party Claim. The Asserting Party
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and the Indemnifying Party will cooperate in the defense of any claim, action,
or proceeding covered by this Section 11.5. The Asserting Party will make
available to the Indemnifying Party all records and other materials reasonably
required by the Indemnifying Party for use in contesting the Third Party Claim.
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12. COVENANT NOT TO COMPETE
Until the earlier of five (5) years after the Time of Closing, or one
year from the date when Seller owns no shares of MGU, the Seller will not and
will cause its affiliates not to, act as a managing general underwriter; except
that, this Section 12 will not prohibit the Seller or any of its affiliates from
owning not more than five (5%) percent of the outstanding shares of any
corporation whose shares are traded on a national securities exchange or in the
over-the-counter market.
13. MISCELLANEOUS PROVISIONS
13.1 Expenses
Except as otherwise expressly provided in this Agreement, the
Seller will pay all fees and expenses:
(a) incurred by the Seller, whether before or after the Time of
Closing, in connection with the transactions contemplated by this Agreement; or
(b) incurred by MGU prior to the Time of Closing in connection
with the transactions contemplated by this Agreement.
The Buyer will pay all fees and expenses:
(a) incurred by the Buyer, whether before or after the Time of
Closing, in connection with the transactions contemplated by this Agreement; or
(b) incurred by MGU after the Time of Closing in connection with
the transactions contemplated by this Agreement.
13.2 Retention of Records
For a period of six (6) years following the Time of Closing, the
Buyer will cause MGU to retain and provide the Seller with copies of and
reasonable access to, all accounting and other records required by the Seller
for purposes of the preparation of tax returns, or response to any inquiry or
audit by taxing authorities, or the defense of any claim, action, or proceeding
relating to MGU or the business.
13.3 Waiver and Amendment
Any provision of this Agreement may be waived in writing by the
party that is entitled to the benefit of that provision. This Agreement may be
amended or supplemented at any time, although no such amendment or supplement
will be effective unless it is in writing and signed by all of the parties.
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13.4 Entire Agreement; No Rights or Remedies to Other Persons;
Assignment
This Agreement, including the Exhibits to this Agreement:
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(a) constitutes the entire Agreement among the parties on its
subject matter and supersedes all prior agreements, both written and oral;
(b) is not intended to confer any rights or remedies upon any
individual or organization other than the parties; and
(c) may not be assigned by either the Seller or MGU, by operation
of law or otherwise, without the prior written consent of the Buyer.
13.5 Governing Law
The interpretation, validity, and enforcement of this Agreement
will be governed by the laws of the State of Florida.
13.6 Notices
All notices and other communications under this Agreement must be
in writing and will be deemed to be given:
(a) when delivered in person;
(b) when sent by facsimile with confirmation of receipt;
(c) one day after being sent by overnight courier; or
(d) five (5) business days after being sent by registered or
certified mail (return receipt requested), addressed in each case as follows:
If to Buyer: HealthPlan Services, Inc.
3501 Frontage Road
Tampa, Florida 33607
Attn: Phillip Dingle
Facsimile Number: 813/287-6629
If to Seller: Provident Indemnity Life
Insurance Company
2500 DeKalb Pike
Norristown, PA 19404
Attn: James O. Bowles
Facsimile Number: 610-279-1486
Any party may change the address or facsimile number to which notices or other
communications are to be given by furnishing the other party with written notice
of the change.
13.7 Dispute Resolution
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Except with respect to the disputed matters referred to for
resolution pursuant to Section 2.4, any dispute concerning this Agreement,
including but not limited to its existence, validity, interpretation, and
performance or non-performance, arising before or after termination or
expiration of this Agreement, shall be settled as follows:
(a) Negotiation - The parties shall in good faith attempt to
resolve any dispute arising out of or relating to this Agreement promptly by
negotiations between senior executives of the Seller and the Buyer
(collectively, the Executives). Any party may give the other party written
notice of any dispute not resolved in the ordinary course of business. Within
twenty (20) days after delivery of said notice, the Executives shall meet at a
mutually acceptable time and place, and thereafter as often as they reasonably
deem necessary, to exchange relevant information and to attempt to resolve the
dispute. If the matter has not been resolved within sixty (60) days of the
disputing party's notice, or if the parties fail to meet within twenty (20)
days, either party may initiate arbitration of the controversy or claim as
provided hereinafter. If an Executive intends to be accompanied at a meeting by
an attorney, the other Executive shall be given at least three (3) working days'
notice of such intention and may also be accompanied by an attorney. All
negotiations pursuant to this Section 13.7(a) shall be confidential, privileged,
and inadmissible in arbitration or legal proceeding and shall be treated as
compromise and settlement negotiations for purposes of the Federal Rules of
Evidence.
(b) Rights and Remedies Available to the Parties in Law or in
Equity. In the event that the parties are unable to resolve a dispute by
non-binding means as provided in Section 13.7(a) above, each party shall be free
to pursue all rights and remedies available to the party.
(c) Fees. Each party shall pay its own fees and expenses in
connection with the resolution of any dispute, except that in the event that the
dispute is resolved by a final, unappealable judgment of a court having
competent jurisdiction, the losing party shall pay reasonable attorneys' fees
and costs of the prevailing party.
13.8 Headings
The headings contained in this Agreement are for reference
purposes only and are not intended to affect the meaning or interpretation of
this Agreement.
13.9 Counterparts
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This Agreement may be executed in two or more counterparts, each
of which will be considered one and the same agreement and will become effective
when one counterpart has been signed by each of the parties and delivered to the
other party. The parties agree that documents executed by facsimile shall be
acceptable in this transaction, and the signatures thereof shall have the same
force and effect as original signatures.
13.10 Severability
The invalidity of any provision or provisions of this Agreement
will not affect the validity of any other provision(s) of this Agreement, which
will remain in full force and effect.
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13.11 Publicity
No press releases or other public disclosure, either written or
oral, of the transactions contemplated by this Agreement will be made by any
party without first consulting with the other party.
13.12 Effective Date
This Agreement shall be effective as of January 1, 1998 (the
"Effective Date").
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first above written.
BUYER:
HEALTH PLAN SERVICES, INC.
By:____________________________
Phillip S. Dingle
Title: Senior Vice President and
Chief Counsel
SELLER:
PROVIDENT INDEMNITY LIFE INSURANCE
COMPANY
By:___________________________
James O. Bowles
Title: President
<PAGE>
LYNX CAPITAL GROUP, LLC
CONSULTING AGREEMENT
This Agreement (the "Agreement") is entered into as of the 31st day of
March, 1998 by and among PROVIDENT INDEMNITY LIFE INSURANCE COMPANY, a
Pennsylvania corporation ("PILIC"), and PROVIDENT AMERICAN LIFE AND HEALTH
INSURANCE COMPANY, a Pennsylvania corporation ("PALHIC") (collectively referred
to herein as ("The Provident")), and LYNX CAPITAL GROUP, LLC, a California
Corporation ("Consultant").
BACKGROUND
A. Consultant is engaged in the business of providing consulting and
investment management and advisory services (the "Consulting
Services").
B. The Provident is desirous of engaging Consultant as a consultant
upon the terms set forth herein.
NOW, THEREFORE, in consideration of the mutual covenants contained
herein and for other valuable consideration, the receipt of which is
hereby acknowledged, the parties agree as follows:
1. CONSULTING SERVICES. The Provident hereby engages
Consultant to act as a consultant with respect to a possible agreement
to be entered into with America On-Line relative to the marketing of
health insurance products over the internet and the establishment of a
web site for The Provident. Provident intends to form a separate
business unit for the purpose of selling healthcare related insurance
directly to consumers over the internet. At the request of Provident
Consultant shall manage the business unit until such time that the unit
is operational and a qualified management team is in place. At the
request of Provident, Consultant shall develop an enterprise to be
known as the Insurion.com division of Provident American Corporation,
or a subsidiary thereof. At the request of Provident, Consultant shall
use its best efforts to enter into interactive marketing agreements
with internet service providers and search engine specialty content
providers. At the request of Provident Consultant shall use its best
efforts to obtain financing pursuant to such instructions provided by
Provident to Consultant, In the performance of the Consulting Services:
a. Consultant shall from time to time provide the
services of Michael Ashker and one other person designated by him; and
b. neither Consultant nor any person acting on behalf
of Consultant hereunder shall be deemed to be an agent, employee,
officer, owner, or joint venturer of The Provident.
<PAGE>
2. COMPENSTION.
a. The provident agrees to pay Consultant a
consulting fee for the Consulting Services rendered to The Provident hereunder
in the amount of Ten Thousand ($10,000) Dollars per month (the "Consulting
Fee").
b. In addition, The Provident agrees to pay or
reimburse Consultant for reasonable travel and other related expenses incurred
by Consultant; it being understood that Consultant shall submit requests for
reimbursement twice a month, and The Provident shall have the right at the end
of any reimbursement period, to advise Consultant as to any limitations on
reimbursement imposed by The Provident thereafter, it being understood that any
such limitation shall be reasonable and not preclude Consultant from performing
the services required to be performed hereunder.
c. Consultant shall receive the following options:
(1) Options to purchase 150,000 shares of
Provident American Corporation ("PAMCO")
Common Stock upon the closing of an
agreement (the "AOL Agreement") between
PAMCO and American On Line, Inc.
("AOL"), whereby PAMCO will launch a
medical insurance web site through AOL.
The issuance of such options shall be
further conditioned upon the AOL/PAMCO
web site becoming operational and the
securing of financing with regard to the
venture. The exercise price of the
options granted hereunder shall be equal
to the average closing price of PAMCO
Common Stock during the 60 day period
immediately proceeding the closing of
the AOL Agreement. The option shall
expire three years from the date of
grant.
(2) Options to purchase 100,000 shares of
PAMCO Common Stock upon securing equity
funding for the venture in an amount not
less than $10 Million. the exercise
price of the options shall be equal to
the closing price of PAMCO Common Stock
during the 60 days immediately preceding
the closing regarding such financing.
The options shall expire three years
from the date of grant.
(3) Options to purchase 50,000 shares of
PAMCO Common Stock upon the Internet
based retailing venture and web site
associated therewith to be known as
"Insurion.com" becoming operational,
based primarily upon the efforts of
Consultant. The exercise price of the
options granted hereunder shall be equal
to the average closing price of PAMCO
Common Stock during the 30 business days
immediately the Insurion.com web site
becomes operational. The options shall
expire three years from the date of
grant.
(4) Options to purchase a total of 50,000
shares of PAMCO entering into
interactive advertising/marketing
agreements with interned service
providers and search engine specialty
content Common Stock pursuant to
Schedule 2c.(3) hereof, regarding
providers, referenced therein. The
exercise price of the options shall be
equal to the average closing price of
PAMCO Common Stock during the 30
business days immediately preceding
entering into agreements with the
service providers set forth in Schedule
2c.(c) hereto. The options hall expire
three years from the date of grant.
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(5) Options to purchase 50,000 shares of
PAMCO, provided Consultant obtains
funding for Provident in an amount not
less than $5 Million from Health Plan
Services Corporation, First Health
Corp., or any other insurance companies
whose products are sold through
Provident's web sites. The exercise
price of the options shall be equal to
the average closing price of PAMCO
Common Stock during the 30 business days
immediately preceding the closing of the
funding or any portion thereof, in which
the $5 Million threshold is achieved.
The options shall expire three years
from the date of grant.
3. NON-COMPETITION/CONFIDENTIALITY.
a. During the term of this Agreement, and for a period
three (3) months after the termination of this Agreement, Consultant agrees that
it shall not offer Consulting Services to any health insurance company without
the prior written consent of The Provident.
b. Consultant acknowledges and agrees that The Provident
has been requested by Consultant to disclose certain Confidential Material
which is either non-public, confidential, and/or of a proprietary business
nature, concerning the business and financial affairs of The Provident, the
disclosure of which to members of the general public may be unlawful and would
cause irrevocable harm to The Provident. Without the prior written consent of
The Provident, except as may be required by law, Consultant agrees that
Consultant will not disclose to any person the fact of any discussions between
Consultant and The Provident, the fact that Consultant has requested or received
any Confidential Material, except as may be required by applicable laws, in
which Consultant shall give five (5) days written notice to such effect tot The
Provident before any such disclosure.
c. (1) The term "Confidential Material" means all
information concerning The Provident's business and financial affairs, including
the marketing of life and health insurance products, statutory and GAAP
accounting procedures, specific details concerning The Provident's business,
such as loss ratios, the management and processing of claims for health and life
insurance benefits, policy and product forms, agents, policyholders, and any
other information relative to the operations, accounting, employees, corporate
proceedings, and relevant data (regardless of whether written, transmitted
orally, visually, electronically, or in any other manner, or whether received by
Consultant prior or subsequent to the date of this Agreement) which is provided
to Consultant by or at the direction of The Provident, any of its officers,
directors, employees, agents, or affiliates, as well as all analyses,
compilations, data, studies, or other documents or work products containing or
based, in whole or in part, on any such Confidential Material and Consultant's
review thereof. The term "Confidential Material" shall not include any
information that (i) is or becomes available to third parties, to any regulatory
agencies, or to the securities trading industry generally without breach of this
agreement by Consultant, (ii) was, at the time of receipt, otherwise known to
Consultant free of restrictions on further disclosure, (iii) was developed by
Consultant independently before the date of this agreement, provided that
Confidential Material is not used as a basis for such development, or (iv)
becomes known or available to Consultant from a source other than The Provident,
without breach of this agreement by Consultant. Consultant agrees that all
Confidential Material is the sole and exclusive property of The Provident.
(2) The term "person" as used herein shall be interpreted
broadly to include, without limitation, any corporation, company, partnership,
or individual.
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4. ADMINISTRATIVE PROVISIONS.
a. The Provident is under no obligation, by virtue of this
Agreement or otherwise, to disclose any information to Consultant. If at any
time The Provident so requests, Consultant will promptly return to The
Provident, upon request, all copies of any Confidential Material in Consultant's
possession or in the possession of Consultant's representatives, and Consultant
will destroy all copies of any analyses, compilations. studies, or other
documents prepared by Consultant or for Consultant's use containing or
reflecting any Confidential Material.
b. Consultant agrees that The Provident shall be entitled
to equitable relief, including the remedies of injunction and specific
performance, in the event of any breach of the provisions of this Agreement, in
addition to all other remedies available to The Provident at law or in equity.
c. It is further understood and agreed that no failure or
delay by The Provident to exercise any right, power, or privilege
hereunder will be interpreted as a waiver thereof, nor will any single or
partial exercise thereof preclude any other or further exercise thereof or the
exercise of any right, power, or privilege hereunder.
d. This Agreement shall be governed by and construed in
accordance with the laws of the Commonwealth of Pennsylvania. The parties
hereto agree to consent to the jurisdiction and venue of the courts of the
Commonwealth of Pennsylvania located in Montgomery County, Pennsylvania, and of
the United States District court for the Eastern District of Pennsylvania, and
agree that all disputes between the parties shall be litigated only therein.
e. This Agreement shall be binding upon Consultant,
Consultant's officers, directors, employees, agents, shareholders, and any
subsidiaries or affiliates, and all officers, directors, employees, agents, and
shareholders thereof, and Consultant's respective successors and assigns. All
rights and benefits of The Provident as provided hereunder shall inure to the
benefit of any corporation or partnership which is an affiliate of The Provident
at any time between the date hereof and the date that such right or benefit
hereunder is asserted.
f. Consultant's agreement not to disclose any of the
Confidential Materials and to return and/or destroy all Confidential Materials
as set forth herein shall survive the termination of any discussions or
relationship between Consultant and The Provident.
g. Notwithstanding anything to the contrary in this
Agreement, however, nothing herein shall prevent Consultant from purchasing the
securities of any issuer in the health insurance or any other business, whether
for Consultant's own account or for the accounts of affiliates or clients of
Consultant and nothing herein shall prevent Consultant from communicating with
the management of any such issuer.
5. TERMINATION. This Agreement shall be Terminable by either
party upon five (5) days' prior written notice to such
effect to the other party. Notwithstanding the foregoing,
in the event this Agreement is terminated by The
Provident, the consulting fee shall be paid to Consultant
for a period of sixty (60) days thereafter. In the event
of a termination by Provident, there shall be no
obligation to issue options pursuant to Sections 2c.(2),
(3) or (4) unless all conditions have been fulfilled by
Consultant prior to such notice of termination. Should
Consultant, at the time of termination, have performed
substantial value added services in connection with
Sections 2c.2(2), (3) or (4) hereof, the parties agree in
good faith, to negotiate a materially acceptable number of
options to be granted thereunder. All expenses shall be
reimbursed through termination. [OPEN]
4
<PAGE>
6. RESTRICTION ON PURCHASE AND SALE OF STOCK.
a. Consultant, its officers, directors, affiliates, and
shareholders agree that each shall comply with all applicable state and federal
securities laws, regulations, and rules relating to the purchase and sale of all
securities issued by The Provident.
b. During the term of this Agreement and for a period of
fifteen (15) business days following the termination of this Agreement,
Consultant, its officers, directors, affiliates, and shareholders agree not to
purchase or sell any shares of the capital stock of the Provident, except that
Lynx Technology Fund (the "Fund") shall not be subject to the restrictions
herein so long as the knowledge of Michael Ashker (and other representatives of
Consultant providing services hereunder) is not attributable to the Fund and the
Fund receives an option of counsel to the effect that such purchase or sale is
not in violation of applicable federal or state securities laws.
c. Consultant may elect to distribute such shares of
Provident Common Stock to limited partners of the Fund, provided such
transferees are subject to the same restrictions, if any, as Consultant, and
Consultant delivers an opinion of counsel to Provident that such transfer is
being made pursuant to applicable exemptions from the registration provisions
under federal and state securities laws.
7. MISCELLANEOUS.
a. Effective Date. This Agreement shall become effective
as of February 1, 1998, provided however Consultant hereby acknowledges that
this Agreement is subject to and conditioned upon the approval of the Board of
Directors of PAMIC.
b. Governing Law/Consent to Jurisdiction. This Agreement
shall be governed by and construed in accordance with the laws of the
Commonwealth of Pennsylvania. The parties hereto agree to consent to the
jurisdiction and venue of the courts of the Commonwealth of Pennsylvania located
in Montgomery County, Pennsylvania, and of the United States District Court for
the Eastern District of Pennsylvania, and agree that all disputes between the
parties shall litigated only therein.
c. Successors and Assigns. The Agreement shall be binding
upon and inure to the benefit of the parties hereto and their respective
heirs, administrators, successors and assigns.
d. Notice. Any notice hereunder, if mailed, shall be
deemed given and received 48 hours after mailing, and if sent by professional
express service, notice shall be deemed given and received at the time of actual
delivery. Notices shall be sent to the following addresses, or such other
addresses as the parties shall designate in writing from time to time:
If to PILIC: Provident Indemnity Life Insurance Company
2500 DeKalb Pike
P.O. Box 511
Norristown, PA 19404-0511
Attention: Alvin H. Clemens, Chairman
If to PALHIC: Provident American Life and Health Insurance Company
2500 DeKalb Pike
P.O. Box 511
Norristown, PA 19404-0511
Attention: Alvin H. Clemens, Chairman
5
<PAGE>
If to Consultant: Lynx Capital Group, LLC
2601 Fairoaks Blvd., Suite 150
Sacramento, CA 85864
Attention: Michael Ashker, Managing Director
e. Expenses. Each party hereto shall pay its own expenses
including, without limitation, legal and accounting fees and expenses,
incident to the negotiation and preparation of this Agreement and to its
performance and compliance with the provisions contained herein.
f. Entire Agreement: Amendments: and Waivers. This
Agreement constitutes the entire understanding and agreement among the parties
hereto relative to the subject matter hereof. Any amendments to the Agreement
must be in writing, signed by each party hereto. The failure of each party
hereto to enforce at any time any provision of this Agreement shall not be
construed to be a waiver of the provision, nor in any way to affect the validity
of this Agreement or any part hereof or the right of such party thereafter to
enforce each and every such provision. No waiver of any breach of this Agreement
shall be held to constitute a waiver of any other or subsequent breach.
g. Partial Invalidity. In case any one or more of the
provisions contained in this Agreement shall for any reason be held to be
invalid, illegal, or unenforceable in any respect, such invalidity, illegality,
or unenforceability shall not affect any other provision hereof, and this
Agreement shall be construed as if such invalid, illegal, or unenforceable
provision had never been contained herein, unless the deletion of the provision
or provisions would result in such a material change as to cause completion of
the transactions contemplated herein to be unreasonable.
h. Execution in Counterparts. This Agreements may be
executed by the parties hereto signing the same instrument, or by each party
hereto signing a separate counterpart or counterparts, each of which shall be
deemed to be an original, but all of which together shall constitute one and the
same instrument. The parties agree that documents executed by facsimile shall be
acceptable in this transaction, and the signatures thereof shall have the same
force and effect as original signatures.
i. Waivers. Any one party may, by written instrument,
extend the time for the performance of any of the obligations or other acts
of the other party and with respect to this Agreement (a) waive any inaccuracies
in the representations and warranties of the other party in this Agreement or in
any document delivered pursuant to this Agreement, (b) waive compliance with any
of the covenants of the other party contained in this Agreement, and (c) waive
the other party's performance of any of its obligations set out in this
Agreement. Any agreement on the part of the parties hereto for any such
extension or waiver shall be validly and sufficiently authorized for the
purposes of this Agreement if it is approved by the persons authorized to make
such agreements on behalf of the parties hereto.
j. Titles and Headings. Titles and headings to Paragraphs
herein are inserted for convenience of reference only and are not intended to be
a part of or to effect the meaning or interpretation of this Agreement.
6
<PAGE>
IN WITNESS WHEREOF, the parties hereto have set their hands and seals
the day and year first above written,
PROVIDENT INDEMNITY LIFE
INSURANCE COMPANY
Attest: ______________________________ By: ______________________________
M. F. Beausang, Jr., Secretary Alvin H. Clemens, Chairman
PROVIDENT AMERICAN LIFE AND
HEALTH INSURANCE COMPANY
Attest: _______________________________ By: ______________________________
M. F. Beausang, Jr., Secretary Alvin H. Clemens, Chairman
[with respect to Section 2c. only]
PROVIDENT AMERICAN CORPORATION
By: ______________________________
Alvin H. Clemens, Chairman
LYNX CAPITAL GROUP, LLC
Attest: _______________________________ By: ________________________________
Michael Ashker,
Managing Director
7
<PAGE>
SCHEDULE 2c.(3)
Interactive advertising/marketing agreements to be entered into any
three (3) of the following entities, or such others as may be mutually agreed to
by the parties hereto:
1. Lycos
2. Infoseek
3. Yahoo
4. Netscape
5. Excite
6. Schwab
7. Etrade
8. Intuit
9. Cnet
10. Biztravel
11. Preview
12. Microsoft
8
<PAGE>
PROVIDENT AMERICAN CORPORATION EXHIBIT 11
COMPUTATION OF EARNINGS (LOSS) PER SHARE
<TABLE>
<CAPTION>
(In thousands except per share data) Years Ended December 31,
1997 1996 1995
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Basic Earnings (Loss) Per Share
- -------------------------------
NET INCOME (LOSS) APPLICABLE TO COMMON STOCK: $ (18,573) $ 15,926 $ (4,035)
- --------------------------------------------------------------------------------------------------------------------------
WEIGHTED AVERAGE SHARES 10,090 9,610 9,100
- --------------------------------------------------------------------------------------------------------------------------
BASIC EARNINGS (LOSS) PER SHARE: $ (1.84) $ 1.66 $ (0.44)
- --------------------------------------------------------------------------------------------------------------------------
Fully Diluted Earnings (Loss) Per Share
- ---------------------------------------
NET INCOME (LOSS) APPLICABLE TO COMMON STOCK: $ (18,573) $ 15,926 $ (4,035)
- --------------------------------------------------------------------------------------------------------------------------
WEIGHTED AVERAGE SHARES:
Common stock 10,090 9,610 9,100
Common stock equivalents applicable to stock options and warrants * 2,064 *
- --------------------------------------------------------------------------------------------------------------------------
Total 10,090 11,674 9,100
- --------------------------------------------------------------------------------------------------------------------------
FULLY DILUTED EARNINGS (LOSS) PER SHARE: $ (1.84) $ 1.36 $ (0.44)
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
* Anti-dilutive; therefore effects have been excluded.
<PAGE>
Exhibit 23A
BDO BDO Seldman, LLP 1601 Market Street
Accountants and Consultants Philadelphia, Pennsylvania 19103-2311
Telephone: (215) 241-1500
Fax: (215) 977-8314
CONSENT OF INDEPENDENT ACCOUNTANTS
Provident American Corporation
Norristown, PA
We hereby consent to the incorporation by reference in the Prospectus
constituting a part of the Registration Statements on Form S-8 (SEC File No.
33-43617 and SEC File No. 33-43615) of our report dated July 10, 1998, relating
to the financial statements and schedules of Provident American Corporation
appearing in the Company's Annual Report on Form 10-K for the year ended
December 31, 1997.
/s/ BDO Seidman, LLP
--------------------------
BDO SEIDMAN, LLP
Philadelphia, PA
July 16, 1998
<PAGE>
Exhibit 23B
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 for the years ended December 31, 1996 and 1995,
which report is included in this Annual Report on Form 10-K.
Coopers & Lybrand L.L.P.
2400 Eleven Penn Center
Philadelphia, Pennsylvania
July 16, 1998
<TABLE> <S> <C>
<ARTICLE> 7
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<DEBT-HELD-FOR-SALE> 45,134
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 8
<MORTGAGE> 298
<REAL-ESTATE> 918
<TOTAL-INVEST> 47,101
<CASH> 16,767
<RECOVER-REINSURE> 16,092
<DEFERRED-ACQUISITION> 1,499
<TOTAL-ASSETS> 98,365
<POLICY-LOSSES> 40,665
<UNEARNED-PREMIUMS> 1,936
<POLICY-OTHER> 31,109
<POLICY-HOLDER-FUNDS> 5,428
<NOTES-PAYABLE> 5,077
0
580
<COMMON> 1,021
<OTHER-SE> 2,408
<TOTAL-LIABILITY-AND-EQUITY> 98,365
54,253
<INVESTMENT-INCOME> 3,487
<INVESTMENT-GAINS> 750
<OTHER-INCOME> 3,540
<BENEFITS> 47,726
<UNDERWRITING-AMORTIZATION> 4,261
<UNDERWRITING-OTHER> 33,057
<INCOME-PRETAX> (23,014)
<INCOME-TAX> (4,589)
<INCOME-CONTINUING> (18,425)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (18,425)
<EPS-PRIMARY> (1.84)
<EPS-DILUTED> (1.84)
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
