<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended. . . . . . . . . . . . . .September 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from. . . . . . . . . . . to. . . . . . . . . . .
Commission file number. . . . . . . . . . . . . . . . . . . . 0-13591
PROVIDENT AMERICAN CORPORATION
(Exact name of registrant as specified in its charter)
Pennsylvania 23-2214195
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2500 DeKalb Pike, Norristown, Pennsylvania 19404
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (610) 279-2500
Former name, former address and former fiscal year,
if changed since last report: N/A
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
------- -------
APPLICABLE ONLY TO CORPORATE ISSUERS
Indicate the number of shares outstanding of each of the issuer's classes
of Common Stock, as of the latest practicable date: 10,241,435 shares of Common
Stock, par value $.10, outstanding as of November 9, 1998.
Page 1 of 24 Pages
<PAGE>
PROVIDENT AMERICAN CORPORATION
INDEX
Page No.
Part I. FINANCIAL INFORMATION
Item 1. Condensed Financial Statements
Consolidated Statements of Operations 3
Statement of Comprehensive Income 4
Consolidated Balance Sheets 5
Consolidated Statements of Changes in Stockholders' Equity 6
Consolidated Statements of Cash Flows 7-8
Notes to Condensed Consolidated Financial Statements 9-16
Item 2. Management's Discussion and Analysis of Results
of Operations and Financial Condition 17-22
Part II. OTHER INFORMATION 23
Items 1 - 5 23
Reports on Form 8-K 23
SIGNATURES 24
Exhibit 11
Exhibit 27
Page 2 of 24 Pages
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Condensed Financial Statements
Provident American Corporation and Subsidiaries
Consolidated Statements of Operations
(Dollars in thousands, except preferred and Common Stock data)
<TABLE>
<CAPTION>
Unaudited Unaudited
3 Months Ended 9 Months Ended
September 30 September 30
1998 1997 1998 1997
----------- ------------ ----------- -----------
Revenue:
Premium:
<S> <C> <C> <C> <C>
Accident and health, gross $ 28,229 $ 22,185 $ 84,092 $ 61,653
Life and annuity, gross 1,897 2,316 6,473 7,162
-------- -------- -------- --------
Total gross premium 30,126 24,501 90,565 68,815
-------- -------- -------- --------
Accident and health reinsurance ceded 12,740 9,863 37,545 27,614
Life and annuity reinsurance ceded 76 138 150 416
-------- -------- -------- --------
Total reinsurance ceded 12,816 10,001 37,695 28,030
-------- -------- -------- --------
Net premium 17,310 14,500 52,870 40,785
Net investment income 947 853 2,853 2,619
Realized gains (losses) on investments 251 (44) 264 886
Realized gain on the sale of subsidiary 0 0 4,000 0
Other revenue 3 221 24 247
-------- -------- -------- --------
Total revenue 18,511 15,530 60,011 44,537
-------- -------- -------- --------
Benefits and expenses:
Death and other policy benefits:
Life 948 1,485 3,433 4,507
Accident and health, net of reinsurance 9,640 8,269 31,517 27,275
Annuity contracts and other considerations 188 156 359 545
Increase in liability for future policy benefits 714 559 190 1,579
Commissions, net of ceding allowance and deferred 1,821 2,039 7,145 5,278
acquisition costs
Other operating expenses, net of ceding allowance and
deferred acquisition costs 8,622 3,950 19,484 11,400
Amortization of deferred policy acquisition costs 608 487 1,148 3,506
Depreciation and amortization of goodwill 251 143 685 439
-------- -------- -------- --------
Total benefits and expenses 22,792 17,088 63,961 54,529
-------- -------- -------- --------
Income (loss) before income taxes (4,281) (1,558) (3,950) (9,992)
Provision (benefit) for income taxes:
Current (952) (994) (949) (4,390)
Deferred 0 448 0 282
-------- -------- -------- --------
Total income taxes (952) (546) (949) (4,108)
-------- -------- -------- --------
Net (loss) (3,329) (1,012) (3,001) (5,884)
Dividends on preferred stock 37 37 111 111
-------- -------- -------- --------
Net (loss) applicable to Common Stock $ (3,366) $ (1,049) $ (3,112) $ (5,995)
======== ======== ======== ========
(Loss) per share of Common Stock
Basic $ (0.33) $ (0.10) $ (0.31) $ (0.60)
======== ======== ======== ========
Diluted $ (0.33) $ (0.10) $ (0.31) $ (0.60)
======== ======== ======== ========
Common shares and equivalents used in computing (loss) per share
Basic 10,169 10,071 10,131 10,069
Diluted 10,169 10,071 10,131 10,069
</TABLE>
See notes to consolidated financial statements.
Page 3 of 24 Pages
<PAGE>
Provident American Corporation and Subsidiaries
Statement of Comprehensive Income
(Dollars in thousands)
UNAUDITED
<TABLE>
<CAPTION>
3 Months Ended 9 Months Ended
September 30 September 30
1998 1997 1998 1997
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net (loss) applicable to Common Stock $ (3,364) $ (1,049) $ (3,111) $ (5,995)
Other comprehensive income, net of tax:
Unrealized gains (losses) on securities: . . . .
Unrealized holding gains (losses) arising during period 790 409 973 (593)
=========== =========== =========== ===========
Comprehensive (loss) (2,574) (640) (2,138) (6,588)
=========== =========== =========== ===========
</TABLE>
Page 4 of 24 Pages
<PAGE>
Provident American Corporation and Subsidiaries
Consolidated Balance Sheets
<TABLE>
<CAPTION>
(Dollars in thousands) UNAUDITED
September 30, December 31,
1998 1997
------------------ ------------------
Assets
Investments:
<S> <C> <C>
Bonds $ 43,383 $ 45,134
Equity securities, cost $39 and $12 22 8
Real estate, less accumulated depreciation of $0 and $182 0 918
Policy loans 556 498
Other invested assets 516 543
------------ ------------
Total Investments 44,477 47,101
Cash and cash equivalents 6,995 16,767
Amounts due from third party administrator 7,220 0
Premiums due and uncollected 1,809 2,106
Amounts due from reinsurers 15,948 16,092
Loans receivable from officer, director and stockholder 1,306 1,243
Accrued investment income 494 610
Federal income taxes receivable 0 3,325
Property and equipment, less accumulated depreciation of $3,251 and $2,751 7,700 6,804
Unamortized deferred policy acquisition costs 4,643 1,499
Goodwill less accumulated amortization of $2,023 and $1,973 1,143 1,193
Deferred AOL and LYCOS fees 6,595 0
Other assets 2,405 1,625
------------ ------------
Total Assets $ 100,735 $ 98,365
============ ============
Liabilities and Stockholders' Equity
Future policy benefits:
Life 41,271 40,665
Annuity and other 5,175 5,428
Policy claims 32,848 31,109
Premiums received in advance and unearned 761 2,677
Amounts due to reinsurers 330 37
Accrued commissions and expenses 4,433 5,451
Loans payable 3,630 5,077
Accounts payable 921 1,151
Deferred income taxes 626 100
Other liabilities 2,537 2,661
------------ ------------
Total Liabilities 92,532 94,356
Minority interest in HealthAxis.com, Inc. 530 0
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 0 0
Common Stock, par value $.10: authorized 50,000,000, issued 10,237,035 and
10,078,710 1,024 1,021
Common Stock, Class A, par value $.10: authorized 20,000,000, none issued 0 0
Additional paid-in capital 19,567 13,767
Net unrealized appreciation (depreciation) of bonds 1,171 188
Net unrealized appreciation (depreciation) of equity securities (13) (3)
Retained earnings (14,580) (11,468)
------------ ------------
7,749 4,085
Less Common Stock held in treasury, at cost, 36,300 shares (76) (76)
------------ ------------
Total Stockholders' Equity 7,673 4,009
------------ ------------
Total Liabilities and Stockholders' Equity $ 100,735 $ 98,365
============ ============
</TABLE>
See notes to consolidated financial statements
Page 5 of 24 Pages
<PAGE>
Provident American Corporation and Subsidiaries
Consolidated Statements of Changes in Stockholders' Equity
(Dollars in thousands)
UNAUDITED
<TABLE>
<CAPTION>
Net Unrealized
Preferred Stock Common Stock Additional Appreciation
Paid-In (Depreciation)
Shares Amount Shares Amount Capital of Bonds
------ ------ ------ ------ ------- --------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1997 580 $ 580 10,209 $ 1,021 $ 13,767 $ 188
Stock options and warrants exercised 3
Compensation expense on stock issuance
Warrants issued 990
Net unrealized
Appreciation of bonds 26
Depreciation of equity securities
Cash dividends declared on preferred stock
Net income
----------------------------------------------------------------------
BALANCE, MARCH 31, 1998 580 $ 580 10,209 $ 1,021 $ 14,760 $ 214
Stock options and warrants exercised 1 0
Compensation expense on stock issuance
Warrants issued
Net unrealized
Appreciation of bonds 164
Depreciation of equity securities
Cash dividends declared on preferred stock
Net income
----------------------------------------------------------------------
BALANCE, JUNE 30, 1998 580 $ 580 10,210 $ 1,021 $ 14,760 $ 378
Stock options and warrants exercised 27 3 85
Increase in net assets in HealthAxis.com, Inc. 4,577
Warrants issued 145
Net unrealized
Appreciation of bonds 793
Depreciation of equity securities
Cash dividends declared on preferred stock
Net income
======================================================================
BALANCE, SEPTEMBER 30, 1998 580 $ 580 10,237 $ 1,024 $ 19,567 $1,171
======================================================================
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Net
Unrealized
Appreciation
of Retained Treasury
Marketable Earnings Stock
Securities (Deficit) (at cost) Total
---------- --------- --------- -----
<S> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1997 $ (3) $ (11,468) $ (76) $ 4,009
Stock options and warrants exercised 3
Compensation expense on stock issuance 0
Warrants issued 990
Net unrealized
Appreciation of bonds 26
Depreciation of equity securities 0 0
Cash dividends declared on preferred stock (37) (37)
Net income 2,673 2,673
-------------------------------------------------------
BALANCE, MARCH 31, 1998 $ (3) $ (8,832) $ (76) $ 7,664
Stock options and warrants exercised 0
Compensation expense on stock issuance 0
Warrants issued 0
Net unrealized
Appreciation of bonds 164
Depreciation of equity securities (7) (7)
Cash dividends declared on preferred stock (37) (37)
Net income (2,345) (2,345)
-------------------------------------------------------
BALANCE, JUNE 30, 1998 $ (10) $ (11,214) $ (76) $ 5,439
Stock options and warrants exercised 88
Increase in net assets in HealthAxis.com, Inc. 4,577
Warrants issued 145
Net unrealized
Appreciation of bonds 793
Depreciation of equity securities (3) (3)
Cash dividends declared on preferred stock (37) (37)
Net income (3,329) (3,329)
=======================================================
BALANCE, SEPTEMBER 30, 1998 $ (13) $ (14,580) $ (76) $ 7,673
=======================================================
</TABLE>
See notes to consolidated financial statements.
Page 6 of 24 Pages
<PAGE>
Provident American Corporation and Subsidiaries
Consolidated Statements of Cash Flows
(Dollars in thousands)
UNAUDITED
<TABLE>
<CAPTION>
Unaudited
9 Months Ended September 30,
1998 1997
----------------- ----------------
Cash flows from operating activities
<S> <C> <C>
Net (loss) $ (3,000) $ (5,884)
Adjustments to reconcile net (loss) to net cash (used in) operating
activities
Depreciation and amortization 693 479
Net realized (gain) on investments (264) (886)
Net realized (gain) on sale of subsidiary (4,000) 0
Decrease (increase) in
Premium due and uncollected, unearned premium and premium
received in advance (1,030) (44)
Due to/from reinsurers 437 (2,113)
Due from third party administrator (7,220) 0
Deferred policy acquisition costs, net (3,144) (2,971)
Accrued investment income 116 108
Other assets, current and deferred income taxes and other liabilities (2,933) (2,593)
Accrued commissions and expenses (1,018) 698
Future policy benefits and claims 2,091 8,891
-------- --------
Net cash (used in) operating activities (19,272) (4,316)
-------- --------
Cash flows from investing activities
Purchases of bonds (2,674) (12,105)
Purchases of equity securities (85) (1,018)
Sale of bonds 5,943 15,466
Sale of equity securities 0 5,134
Sale of subsidiary 4,000 0
Sale of investment in real estate 1,154 0
Maturity of investments and loans 27 2,105
Loans to officer, director and shareholder (63) (1,019)
Purchases of property and equipment (1,747) (2,373)
-------- --------
Net cash from investing activities 6,555 6,190
-------- --------
</TABLE>
Continued on next page
See notes to consolidated financial statements.
Page 7 of 24 Pages
<PAGE>
Provident American Corporation and Subsidiaries
Consolidated Statements of Cash Flows
(Dollars in thousands)
UNAUDITED
<TABLE>
<CAPTION>
9 Months Ended September 30,
1998 1997
----------------- ----------------
<S> <C> <C>
Cash flows from financing activities
Withdrawals from contractholder deposit funds (589) (589)
Repayments of notes payable (1,447) (245)
Issuance of Common Stock 92 97
Issuance of convertible note 5,000 0
Dividends paid on preferred stock (111) (111)
-------- --------
Net cash from (used in) financing activities 2,945 (848)
-------- --------
(Decrease) increase in cash and cash equivalents (9,772) 1,026
Cash and cash equivalents, beginning of period 16,767 6,218
======== ========
Cash and cash equivalents, end of period $ 6,995 $ 7,244
======== ========
Supplemental disclosure of cash flow information:
Interest paid $ 127 $ 5
Income taxes (refunded), net $ (5,218) $ (477)
Non-cash financing activities:
Issuance of warrants $ 1,135
Issuance of HealthAxis.com, Inc. common stock 5,107
</TABLE>
See notes to consolidated financial statements.
Page 8 of 24 Pages
<PAGE>
Provident American Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Dollars in thousands)
Note A - General
The condensed consolidated financial statements have been prepared by
Provident American Corporation (the "Company") without audit, pursuant to the
rules and regulations of the Securities and Exchange Commission and reflect all
adjustments which, in the opinion of the Company, are necessary to present
fairly results for the interim periods. Certain financial information and
footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted pursuant to such rules and regulations, although the Company believes
that the accompanying disclosures are adequate to make the information presented
not misleading. Results of operations for the nine-month period ended September
30, 1998, are not necessarily indicative of the results that may be expected for
the year ending December 31, 1998.
These financial statements should be read in conjunction with the
financial statements and notes thereto contained in the Company's Annual Report
on Form 10-K for the year ended December 31, 1997.
Certain prior year amounts have been reclassified to conform to the
current presentation.
Provident American Corporation ("PAMCO") is an insurance holding
company. The operations of PAMCO and its subsidiaries (the "Company") are
principally those of HealthAxis.com Inc. ("HealthAxis") and its wholly owned
life insurance companies, Provident Indemnity Life Insurance Company ("PILIC")
and Provident American Life and Health Insurance Company ("PALHIC").
During 1998 the Company entered into various agreements in order to sell
and service insurance business via the Internet along with agreements related to
financing and 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. HealthAxis will advertise the Company's products to AOL subscribers on
AOL's online network under the HealthAxis.com brand name to be used exclusively
for the Company's products. This represents a new distribution channel. The
Company plans on marketing medical and related insurance products underwritten
by PILIC and PALHIC along with products underwritten by other companies. In June
1998 the Company entered into promotional agreements with CNET, Inc. and LYCOS
Inc. whereby CNET and LYCOS will exclusively promote the Company's health
insurance and other related products on CNET's and LYCOS' web sites. See Notes
D, E, F and G, which describe these agreements and current developments.
The Company's new non-insurance subsidiaries, Provident Health Services,
Inc. ("PHS") and its subsidiary HealthAxis are conducting this new venture. The
HealthAxis web site launched on November 13, 1998 will be tested during the
fourth quarter of 1998 and offered generally to AOL subscribers in the first
quarter of 1999. 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 HealthAxis through its web site or other e-commerce vehicles.
Page 9 of 24 Pages
<PAGE>
During the fourth quarter of 1998 the Company entered into an agreement
with Central Reserve Life Company ("CRLC") to effectively sell PILIC's group
medical and group life inforce business via reinsurance, its marketing and
agency sales force rights along with PALHIC to CRLC as described in Note H. The
Company's revised business plan will focus predominately on HealthAxis, the
Company's E-Commerce subsidiary along with the assumption of group medical
business sold through the Company's agents managed in the future by CRLC and
with the continued assumption of stop loss medical business administered by
Montgomery Management Corporation and its individual life insurance business.
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 - Reinsurance and Deferred Acquisition Cost Impact on Benefits and
Expenses
Accident and health policy benefits, commissions and other operating
expenses are net of the following ceded reinsurance and deferred acquisition
cost amounts:
3 Months Ended 9 Months Ended
September 30, September 30,
1998 1997 1998 1997
------- ------- ------- -------
Accident and health benefits
Gross before reinsurance ceded $21,513 $16,076 $62,542 $53,023
Less reinsurance ceded 11,873 7,807 31,025 25,748
------- ------- ------- -------
Net of reinsurance $ 9,640 $ 8,269 $31,517 $27,275
======= ======= ======= =======
Commissions
Gross before reinsurance ceded $ 4,956 $ 4,944 $16,778 $13,584
Less reinsurance ceded 2,296 1,880 6,509 5,315
Less deferred acquisition costs 839 1,025 3,124 2,991
------- ------- ------- -------
Net $ 1,821 $ 2,039 $ 7,145 $ 5,278
======= ======= ======= =======
Other operating expenses
Gross before reinsurance ceded $10,549 $ 6,114 $25,170 $18,429
Less reinsurance ceded 1,458 1,195 4,520 3,543
Less deferred acquisition costs 469 969 1,168 3,486
------- ------- ------- -------
Net $ 8,622 $ 3,950 $19,482 $11,400
======= ======= ======= =======
Page 10 of 24 Pages
<PAGE>
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. 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. The new agreement, when executed, may not be as
comprehensive as the old agreement. 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. 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. The potential effect of any differences
between old and new reinsurance on future results has not been determined;
however, the impact could be significant.
The Company anticipates the cancellation or non-renewal of the 1998
Quota Share and 1998 Excess Loss reinsurance agreements as a result of the
transactions with CRLC effective January 1, 1999. The reinsurers' obligation to
assume paid losses incurred prior to January 1, 1999 remains in effect once the
Reinsurance Agreements are executed.
Effective January 1, 1999 PILIC may assume up to 20% of new business
sold by the Company's agency force and up to 50% of HealthAxis generated
business as described in Note H.
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 notified Swiss Re that
it would not be renewing the Stop Loss Assumption Reinsurance Agreement
effective January 1, 1998. The Company has placement slips and an agreement in
principal regarding a replacement agreement to be effective January 1, 1998 at
equivalent terms.
Based on the Company's estimates of the future profitability of it's
group medical products sold through December 31, 1997, deferred acquisition
costs of approximately $6,708 were written off as amortization of deferred
policy acquisition costs in the fourth quarter of 1997. Management believes the
estimated future profitability of group medical products sold during 1998 has
improved due to improved underwriting and rate increases and will approximate
the value received from CRLC regarding the sale of the inforce business as
described in Note H. Management further believes the estimated future
profitability of the life business exceeds the unamortized deferred policy
acquisition costs for life products.
Page 11 of 24 Pages
<PAGE>
Note C - Sale of Montgomery Management:
In February 1998 the Company sold for $4,000, 49% of Montgomery
Management Corporation ("MMC") Common Stock along with a warrant to purchase an
additional 31% of MMC's Common Stock for one dollar. Immediately prior to the
sale MMC declared a dividend payable to its parent PILIC equal to its total
equity. The Company recognized a $4,000 pre-tax gain on the sale of MMC and no
longer includes MMC in the Company's consolidated financial statements. The
Company's remaining ownership of MMC is accounted for as an equity investment
valued at September 30, 1998 at zero. During the fourth quarter of 1998 the
warrant to purchase an additional 31% of MMC's Common Stock for one dollar was
exercised. MMC retains its headquarters at the Company's home office but is
managed and controlled by the buyer of MMC. 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.
Note D - AOL Interactive Marketing Agreement
In February 1998, the Company's wholly owned subsidiary, Provident
Health Services, Inc. ("PHS") on behalf of HealthAxis, entered into an
Interactive Marketing Agreement with America Online, Inc. ("AOL") and in
November PHS and HealthAxis entered into a first Amendment to the Amended and
Restated Interactive Marketing Agreement with AOL. Both agreements are
collectively referred to as the "AOL Agreement". The AOL Agreement provides that
PHS will be the exclusive third-party direct marketer of certain health
insurance and other related policies ("the Products") for individuals and groups
of less than fifty individuals in the United States. Additionally HealthAxis
will advertise the Products to AOL subscribers on AOL's online network under the
HealthAxis.com brand name to be used exclusively for the Products. The AOL
Agreement calls for the official launch of www.healthaxis.com web site no later
than March 31, 1999.
The AOL Agreement has an initial term commencing on February 1, 1998
and ending on January 31, 2000, with a renewal period of two additional years at
PHS's election. As consideration under the AOL Agreement, PHS will pay $10,000
to AOL during 1998 and 1999. PHS paid AOL $1,500, $2,500 and $2,400 during the
first, second and third quarters of 1998, respectively. PHS paid AOL $2,100
during the fourth quarter of 1998 and will pay $1,500 during 1999. Payments
under the AOL Agreement are guaranteed by PHS's parent, PAMCO. The Company has
accounted for the $6,400 paid to AOL as a deferred cost asset, which is being
amortized over the initial term. As consideration under the AOL Agreement, the
Company issued to AOL warrants to purchase 300,000 shares of the Company's
common stock at an exercise price of $4.48 per share (based on the average
NASDAQ closing prices for the last 10 days preceding the determination date as
defined in the agreement), for a period of seven years commencing February 1,
1998 which are immediately exercisable. The fair value of these warrants
(approximately $990) was recognized as a deferred cost asset and will be
amortized over the initial term of the AOL Agreement. The Company agreed to
issue to AOL warrants in the fourth quarter of 1998 to purchase 300,000 shares
of the Company's common stock or 300,000 shares of HealthAxis common stock or
any combination of both for a total of 300,000 shares. The exercise price of
the PAMCO warrant is $3.38 per share for a period of nine years commencing
November 13, 1998 which is immediately exercisable. The HealthAxis warrant has
an exercise price of $1.77 per share for a period of nine years commencing
November 13, 1998 which is immediately exercisable. The fair value of warrants
issued during the fourth quarter has not been valued. The AOL Agreement also
provides for the issuance of warrants subject to the terms and conditions of
the AOL Agreement.
Page 12 of 24 Pages
<PAGE>
If PHS elects the two year renewal, then PHS shall make an additional
payment to AOL of $33,500 on or before January 31, 2000. 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 accepted
applications exceed certain levels for the initial and renewal terms of the AOL
Agreement.
Note E - CNET Promotional Agreement:
In June 1998, HealthAxis entered into a Promotional Agreement with
CNET, Inc. ("CNET") and in November HealthAxis entered into a first Amendment to
the Promotional Agreement with CNET. Both agreements are collectively referred
to as the "CNET Agreement". The CNET Agreement provides that CNET will
exclusively promote HealthAxis' health insurance and other related products
on CNET's web site.
The CNET Agreement has an initial term commencing in June 1998 and
ending in March 2000. As consideration under the CNET Agreement, HealthAxis paid
$250 during the second quarter as promotion expense and accrued $250 for
promotion expense during the third quarter payable on or before March 31, 1999,
unless HealthAxis completes a financing of at least $500 after November 17, 1998
at which time $75 of the $250 amount is then due on December 31, 1998. In
addition, HealthAxis will pay CNET an additional $1,890 with $390 due on March
31, 1999 and the balance payable throughout the initial term of the agreement,
plus additional fees if policy issuance exceeds certain levels, during the
initial term of the CNET Agreement. Certain portions of HealthAxis' payments to
CNET are subject to reduction under the CNET Agreement if certain minimum retail
impressions are not realized. The Company will account for amounts paid and
accrued to CNET as $750 marketing expense and the balance as a deferred cost
asset, which will be amortized over the balance of the initial term. HealthAxis,
at its option, may elect a one-year renewal term where HealthAxis will pay CNET
$7,500, plus additional fees if policy issuance exceeds certain levels.
Note F - LYCOS Promotional Agreement
In June 1998, HealthAxis entered into a Promotional Agreement with
LYCOS, Inc. ("LYCOS"). In November HealthAxis entered into an Amended and
Restated Agreement with LYCOS ("the LYCOS Agreement"). The LYCOS Agreement
provides that LYCOS will exclusively promote HealthAxis' health insurance and
other related products on LYCOS' web site.
The LYCOS Agreement has an initial term commencing on the launch date
and ending one year later. Under the LYCOS Agreement, HealthAxis is required to
launch a co-branded web site between March 1, 1999 and May 1, 1999. If
HealthAxis does not launch this co-branded site by April 1, 1999 either party
may terminate the agreement. Lycos will retain $800 and HealthAxis will have no
further obligation to Lycos.
As consideration under the LYCOS Agreement, HealthAxis paid $800 and
will pay an additional $1,700 to LYCOS during the initial term of which $2,000
represents pre-paid referral fees and the balance represents an exclusivity fee.
HealthAxis may pay additional referral fees to LYCOS if Policy issuance exceeds
certain levels for the initial term of the LYCOS Agreement. HealthAxis is
obligated to pay LYCOS $1,700 in four quarterly payments of $425 commencing 30
days after the launch of the co-branded site. The Company will account for
payments to LYCOS as a deferred cost asset, which will be amortized over the
initial term. Assuming certain performance targets are met, the LYCOS Agreement
will be renewed for a one-year term where HealthAxis will pay LYCOS $6,560 which
is subject to reduction if certain minimum retail impressions are not realized
during the initial term. Additionally, HealthAxis will receive continued
impressions if certain policy issuance targets are not achieved.
Page 13 of 24 Pages
<PAGE>
Note G - HealthAxis Issuance of Common Stock upon Conversion of $5 Million
Convertible Note.
On September 30, 1998 the holder of HealthAxis' $5 million Convertible
Note exercised an option to convert the note into 2,316,177 shares of HealthAxis
Class A Common Stock, representing approximately 15% of HealthAxis outstanding
Common Stock. In addition, HealthAxis issued 49,188 shares of HealthAxis Class A
Common Stock in consideration for $106 of outstanding accrued but unpaid
interest on the Convertible Note. The minority shareholders equity interest in
HealthAxis is shown on the Company's consolidated balance sheet as "Minority
Interest in HealthAxis.com, Inc." As a result of the conversion of the $5
million Convertible Note, the increase in the net assets of HealthAxis is
included as additional paid in capital on the Company's balance sheet.
Note H - Subsequent Event - Reinsurance of Inforce Group Medical and Group
Life Inforce and Sale of PALHIC to Central Reserve Life Company
On November 12, 1998 PILIC signed a binding agreement to reinsure 100%
of its group medical and group life inforce business and sell the Company's
group medical marketing, sales distribution rights and PALHIC to CRLC. The
Company is currently in the process of finalizing a series of transactions
whereby PALHIC will reinsure 100% of its business to PILIC, which in turn will
reinsure via a 100% quota share reinsurance agreement all of the Company's group
medical and group life business to CRLC together with Reassurance Company of
Hanover for a $10 million ceding commission. In addition PILIC will sell PALHIC
to CRLC for PALHIC's capital and surplus. The Company will transfer all rights
and control regarding the Company's agents and enter into non-compete and
non-solicitation agreements regarding the Company's agents with respect to the
future sale of health insurance products for a 3-year period. The Company
anticipates that these transactions will be effective at year-end 1998 and are
subject to regulatory and other approvals.
The $10 million ceding commission paid from CRLC to PILIC consists of a
$5 million non refundable payment plus a $5 million contingent payment, whereby
PAMCO guarantees that CRLC will earn at least $10 million in future profits from
the purchased inforce business, plus 12% interest on $10 million and other
amounts due (the "guaranteed amount"). If at the end of 5 years CRLC fails to
earn the guaranteed amount, PAMCO must repay CRLC the lesser of the guaranteed
amount less CRLC's actual profits on the inforce business, or $5 million plus
12% interest on $10 million and other amounts due. As security for PAMCO's
guarantee, PAMCO will execute a security agreement in favor of CRLC with respect
to the stock of PILIC whereby CRLC will take ownership of PILIC if PAMCO
defaults on its guarantee to CRLC. If CRLC's future profits exceed the
guaranteed amount then PILIC is entitled to receive an additional payment from
CRLC equal to the lesser of CRLC's future profits less the guaranteed amount, or
2/3 of the policy fees collected during 1999 and 1/3 of the policy fees
collected during 2000.
The Company is evaluating the accounting and financial impact on the
Company's 1998 consolidated GAAP earnings of the transactions with CRLC.
Page 14 of 24 Pages
<PAGE>
As part of the CRLC transaction, PILIC has the right to assume new
business written by PILIC's agents for 5 years after the effective date. PILIC
may assume up to 20% of the new business written by PILIC's agents during 1999
and up to 50% for the remaining 4 years via a new quota share reinsurance
agreement with PALHIC. CRLC, through PALHIC, will charge PILIC a ceding
allowance of 43% of first year premium and 28% of renewal premium, plus an
administrative fee of 3%, which will be reduced to 2% if total policies under
administration exceed $100,000 of premium inforce.
PILIC may also assume 50% of the new business sold through HealthAxis
and directly underwritten by PALHIC starting January 1, 1999 via a new quota
share reinsurance agreement with PALHIC for 3 years. CRLC, through PALHIC, will
charge PILIC a ceding allowance not to exceed 28% of first year premium and 21%
of renewal premium, plus an administrative fee of 3%. CRLC, through PALHIC, will
pay HealthAxis commissions of 15% of first year premium and 8% of renewal
premium, plus all administrative fees until HealthAxis has recovered all
payments made to initiate its Internet program. After such time the fees will be
subject to the quota share agreement between PALHIC and PILIC. CRLC will work to
develop additional health insurance products for sale by HealthAxis and enter
into comparable reinsurance agreements with PILIC. The transactions are subject
to regulatory and other approvals.
These pending transactions are anticipated to have a material favorable
impact on PILIC's statutory basis financial statements. The net result of the
transactions with CRLC are anticipated to increase PILIC capital and surplus,
increase PILIC's liquidity and reduce PILIC's Risk based Capital ("RBC")
requirement. PILIC anticipates that the cash payment from CRLC net of brokerage
fees of $0.5 million will be recognized as $9.5 million of income on a statutory
accounting basis upon closing. PILIC anticipates the sale of PALHIC will not
impact PILIC's total capital and surplus but will increase PILIC's liquidity.
PILIC's RBC will be reduced with PALHIC's sale, which as of December 31, 1997
represented approximately 18% of PILIC's RBC. PILIC's 100% cession of its group
medical and group life lines will ultimately reduce PILIC's RBC, which as of
December 31, 1997 represented approximately 58% of PILIC's RBC. Because of a
year-end effective date PILIC's RBC calculation as of December 31, 1998 will
continue to include an amount related to the ceded group medical and group life
lines since the RBC calculation uses historical premium data. PILIC's RBC
requirement will be reduced on January 1, 1999 effective with the cession of the
inforce business.
Note I - Investment Considerations
In analyzing whether to make, or continue, an investment in the
Company, investors should consider, among other factors, certain investment
considerations more particularly described in the Company's Annual Report on
Form 10-K for the year ended December 31, 1997, a copy of which can be obtained
from the Company.
Page 15 of 24 Pages
<PAGE>
Note J - Forward-looking Statements
The information contained in the Quarterly Report on Form 10-Q for the
quarter ended September 30, 1998 contains forward-looking statements (as such
term is defined under Section 21E of the Securities Exchange Act of 1934 and the
regulations thereunder), including without limitation, statements as to trends,
management's beliefs, expectations or opinions, which are based upon a number of
assumptions concerning future conditions that ultimately may prove to be
inaccurate.
Such forward-looking statements are subject to risks and uncertainties
and may be affected by various factors, which may cause actual results to differ
materially from those in the forward-looking statements. Certain of these risks,
uncertainties and other factors are discussed in the Company's Annual Report on
Form on 10-K for the year ended December 31, 1997.
Page 16 of 24 Pages
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
Results of Operations
For the three months ended September 30, 1998 ("the current quarter"),
the Company's net loss applicable to Common Stock was $3.4 million or $.33 per
share compared to net loss of $1.0 million or $0.10 per share for the three
months ended September 30, 1997 ("the same period last year"). The Company's net
loss in the current quarter was unfavorably impacted by increased operating
expenses largely from HealthAxis and continued high health benefit claims
experience.
Accident and health gross premium was $28.2 million for the current
quarter compared to $22.2 million for the same period last year and accident and
health ceded premium was $12.7 million for the current quarter as compared to
$9.9 million for the same period last year. The increases were the result of
increased new business from one-life managed-care health insurance products.
Effective January 1, 1999 all accident and health premium is proposed to be 100%
reinsured with CRLC as described in Note H.
Life and annuity net premium, consisting primarily of $0.4 million
group life and individual pre-need and final expense business accounted for $1.8
million for the current quarter compared to $2.2 million for the same period
last year due to a slight decrease in sales and lapsation of the Company's
pre-need and final expense life inforce. Effective January 1, 1999 all group
life premiums will be 100% reinsured with CRLC as described in Note H.
Accident and health policy benefits represented 62% of accident and
health earned premium for the current quarter down from 67% from the same period
last year. The decrease in the accident and health policy benefits as a
percentage of premium reflected the impact of improved underwriting and rate
increases which were implemented during 1997.
Commissions, net of ceding allowance and deferred acquisition costs of
$1.8 million for the current quarter decreased from $2.0 million for the same
period last year primarily due to a re-estimation of accrued commission expense
on certain individual life policies, partially off set by increased commissions
paid on increased premiums related to the Company's one-life managed-care
products.
Other operating expenses, net of ceding allowance and deferred
acquisition costs for the current quarter of $8.6 million increased compared to
$4 million for the same period last year due to HealthAxis costs of $2.2
million, increased marketing costs of $0.9 million, HPS transition costs of $0.6
million along with increased administrative costs and premium taxes. HealthAxis
costs include legal, advertising and consulting expenses incurred as a result of
entering into various agreements and the formulation and development of the
HealthAxis web site and business. Increased marketing costs include agent system
development, agent service and costs related to an exclusive agreement. Costs
related to the HPS transition included claims processing charges, certain
managed care costs, systems cost related to migrating policyholder and agent
data and travel costs. HealthAxis costs combined with HPS transition costs and
increased marketing and administrative costs more than offset the cost savings
resulting from Company's decision to outsource its group health policy and
claims processing to HPS during the quarter.
For the nine months ended September 30, 1998 ("the current year"), the
Company's net loss applicable to Common Stock was $3.1 million or $.31 per share
compared to net loss of $6.0 million or $0.60 per share for the nine months
ended September 30, 1997 ("the prior year"). The Company's net loss in the
current year was unfavorably impacted by HealthAxis start-up expense, costs
related to the HPS transition, high marketing and administrative expenses and
continued high health benefit claims experience, partially offset by a $4.0
million gain on the sale of MMC and $0.26 million realized gains on the sale of
investments.
Page 17 of 24 Pages
<PAGE>
Accident and health gross premium was $84.1 million for the current
year compared to $61.7 million for the prior year and accident and health ceded
premium was $37.5 million for the current year as compared to $27.6 million for
the prior year. The increases were the result of increased new business from
one-life managed-care health insurance products.
At September 30, 1998 and 1997, annualized accident and health premium
in force on small group and managed-care business amounted to $110.8 million and
$90.7 million, respectively, consisting of approximately 52,000 and 47,000
policies inforce, respectively. The $20.1 million increase in annualized premium
from September 30, 1997 to September 30, 1998 was the net result of new business
issue. 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 First Health Group for access to network providers and advantageous fee
schedules, while "HealthQuest" relies on regional PPOs. The Provident Solution
and HealthQuest comprised 87% and 79% of annualized premium in force as of
September 30, 1998 and 1997, respectively. Effective January 1, 1999 all
accident and health polices and products are proposed to be reinsured 100% as
described in Note H.
Life and annuity net premium, consisting primarily of $1.6 million
group life and individual pre-need and final expense business accounted for $6.3
million for the current year compared to $6.7 million for the prior year due to
a decrease in sales and lapsation of the Company's pre-need and final expense
life inforce.
Net investment income was $2.9 million for the current year. The gross
average book yield on bond investments, which accounted for 98% total
investments as of September 30, 1998 and December 31, 1997, was
6.2% and 6.4% for the nine months ended September 30, 1998 and 1997,
respectively. Realized gain on the sale of subsidiary is discussed in Note C.
Realized gains in the current year relate primarily to the sale of real estate
held for investment and in the prior year related primarily to the sale of
Loewen stock acquired as a result of litigation.
Accident and health policy benefits represented 68% of accident and
health earned premium for the current year down from 80% from the prior year.
The decrease in the accident and health policy benefits as a percentage of
premiums reflected the impact of improved underwriting and rate increases, which
were implemented during 1997.
Commissions, net of ceding allowance and deferred acquisition costs of
$7.1 million for the current year increased from $5.3 million for the prior year
due to increased commissions paid on increased premiums related to the Company's
one-life managed-care products.
Other operating expenses, net of ceding allowance and deferred
acquisition costs for the current year of $19.4 million increased compared to
$11.4 million for the same period last year due to HealthAxis costs of $3.2
million, increased marketing costs of $1.3 million, HPS transition costs of $2.1
million, along with increased administrative costs and premium taxes.
Page 18 of 24 Pages
<PAGE>
Other operating expenses, net of ceding allowance and deferred
acquisition costs for the current year, excluding HealthAxis and HPS transition
costs, represented 27% of net premiums for the current, year which decreased
from 29% for the same period last year due to the cost savings resulting from
the Company's decision to outsource its group health policy and claims
processing to HPS effective February 1, 1998.
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.
The primary sources of cash for insurance operations are premiums,
investment income and investment sales and maturities. The primary uses of cash
for insurance operations 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. The
primary sources of cash for HealthAxis were the issuance of debt and equity
securities to outside parties and to PILIC. The primary uses of cash for
HealthAxis were operating costs and payments to AOL, LYCOS and CNET.
Cash and investments carried at market value at September 30, 1998
amounted to $51.5 million. This included $43.4 million of bonds issued by the
U.S. Government, government agencies, public utilities and other corporations,
$1.1 million invested in policy loans and other invested assets and $7.0 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 September 30, 1998 and 1997 was 6.2% and 6.4%,
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 do not invest in high-yield debt
instruments, defined as securities below investment grade with interest rates or
yields significantly above market rates.
The Company 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
repaid this amount in the third quarter of 1998.
Net cash used in operating activities of $19.4 million in 1998 reflects
negative cash flow from the Company's group medical business, the impact of the
transition of business to HPS, and the impact of HealthAxis' AOL, CNET and Lycos
payments of $7.5 million.
During the third quarter of 1998, the Company received $6.9 million
from reinsurers, collected $5.2 million of recoverable federal income tax and
sold its investment in real estate for $1.2 million. In addition to normal
operating activities, these receipts were used by the Company to pay reinsurers
$5.2 million and make a $2.4 million exclusivity payment to AOL.
In connection with the Company's outsourcing to HPS the Company now
receives premiums, net of commissions, HPS fees and certain out of pocket
expenses monthly on or before the 15th of following month. The $7.2 million
change in amounts due from third party administrator represented September
1998's net cash settlement collected in October. Premium due and uncollected,
unearned premium and premium received in advance reflects new billing due dates
established by HPS. Since HPS now pays the Company's group commissions, unpaid
commissions are included in amounts due from third party administrator and are
no longer included in accrued commissions.
Change in other assets, current and deferred income taxes and other
liabilities of $3.0 million related primarily to HealthAxis' payments to AOL and
LYCOS, net of funds received from HPS.
Page 19 of 24 Pages
<PAGE>
Change in future policy benefits and claims of $2.1 million in the
current year in comparison to the prior year reflects higher paid claim volume
on the Company's group medical business and is partially offset by the change in
amounts due from reinsurers.
The Company sold an 80% interest (49% in Common Stock and warrants for
an additional 31%) in MMC for $4 million realizing a gain for the same amount
during the first quarter of 1998.
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.
The Company has determined it prudent to modify its business plan to
take into account PILIC's lower capital and surplus level. PILIC has signed a
binding agreement to sell its group medical and group life inforce business,
marketing and sales distribution and PILIC's wholly owned insurance subsidiary
PALHIC to CRLC as discussed in Note H.
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 that PILIC's adjusted capital of $12.0 million
exceeded the Company Action Level amount required by $2.7 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. The adjusted statutory
capital and surplus of PILIC, which includes amounts related to its subsidiary
PALHIC, was $5 million at September 30, 1998, which is $4.3 million below
Company Action Level RBC as calculated at December 31, 1997. Since PILIC failed
to meet its RBC requirement as of September 30, 1998 it may be subject to
regulatory action. Insurers failing to meet their RBC requirement may be subject
to scrutiny by its domiciled insurance department and other insurance
departments, which the insurer does business in, and, ultimately, rehabilitation
or liquidation.
PILIC anticipates that its capital and surplus will be below Company
Action Level but above Regulatory Action Level RBC at December 31, 1998, after
recognizing a gain on the transaction with CRLC and a reduction in RBC related
to PALHIC as described in Note H. There can be no assurance that the transaction
with CRL will be effective December 31, 1998. PILIC contemplates that its RBC
will drop further effective January 1, 1999 with the reduction of the RBC
component that relates to PILIC's sold group medical and life business.
Excluding the impact of the transaction with CRLC, PILIC's capital and surplus
is anticipated to be below Mandatory Action Level RBC, meaning that PILIC would
be subject to regulatory rehabilitation or liquidation. The Company believes
that PILIC's adjusted capital and surplus will exceed regulatory action level
RBC upon completion of the transactions with CRLC described in Note H.
PALHIC's results of the RBC computation as of December 31, 1997
indicate PALHIC's adjusted capital of $4.3 million exceeds the Company Action
Level amount required by $2.6 million as of that date. The statutory capital and
surplus of PALHIC was $5.2 million at September 30, 1998. CRLC will assume
responsibility for PALHIC effective with purchase of PALHIC.
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.
Page 20 of 24 Pages
<PAGE>
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 generally 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 monitored
and, where appropriate, premium rates on such policies, when appropriate, are
increased as policy benefits increase. Failure to make such increases
commensurate with health care cost increases may result in a loss from health
insurance operations.
The Company's pre-need products include periodic adjustments to the
face amount of the policy for increases in the consumer price index.
HealthAxis Capital Expenditures and Commitments
During 1998 the Company entered into an Interactive Marketing Agreement
with AOL and promotional agreements with CNET and LYCOS. In connection with
these agreements the Company has paid $7.5 million as of September 30, 1998 and
is required to pay additional amounts as described in Notes D, E and F.
Additionally, the Company expects to incur significant HealthAxis costs that
will require external funding.
HealthAxis has obtained $8,150 in funding as of September 30, 1998
consisting of a $750 fee payment from HPS in March 1998 to be the exclusive
administrator of this business, a $5 million private placement of HealthAxis,
Inc. convertible debt during the second quarter of 1998 which was converted into
HealthAxis common during the third quarter and a $2.4 million issuance of
convertible cumulative preferred stock to PILIC in the third quarter. The
Company and HealthAxis received $5.75 million as a result of the issuance of
PAMCO common stock to a group led by Lynx private equity partners and HealthAxis
convertible cumulative preferred stock purchased by AOL on November 16, 1998.
As of September 30, 1998 HealthAxis was not current in its payments to
vendors, many of whom are involved in the development of its web site, due to
lack of funds. The Company anticipates that the $5.75 million received in
November is sufficient to repay current vendors and satisfy HealthAxis cash
needs for the balance of 1998 and the first quarter of 1999.
In November HealthAxis renegotiated the AOL Agreement, CNET Agreement
and LYCOS Agreement in order to obtain additional time needed to test its web
site and secure funds. AOL, CNET and LYCOS agreed to extend HealthAxis' launch
date and payment of fees. In consideration for the extension HealthAxis agreed
to pay AOL an additional $2 million during the initial term, $1 million during
the renewal term, revise the terms of a warrant to purchase the Company's common
stock from five to seven years and issue warrants to purchase the Company's
and/or HealthAxis' common stock as described in Note D. LYCOS agreed to reduce
the fees payable by HealthAxis by $4.57 million during the first term of the
LYCOS Agreement and HealthAxis agreed to a 30% reduction in guaranteed
impressions during the first term of the LYCOS Agreement.
Page 21 of 24 Pages
<PAGE>
HealthAxis is also seeking other external sources of funds in order to
fund payments to its marketing partners and working capital expenses. No
assurance can be given with regard to the success or timing of the Company's
efforts in obtaining such funding. In the event that HealthAxis is unable to
obtain funding or launch its web site in accordance with the AOL Agreement, CNET
Agreement and LYCOS Agreement HealthAxis will be in breach of one or more of
those agreements. HealthAxis would forfeit all amounts paid to AOL, CNET or
LYCOS if it is in breach of the AOL Agreement, CNET Agreement and LYCOS
Agreement, respectively.
Page 22 of 24 Pages
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
Not applicable.
Item 2. Change in Securities.
Not applicable.
Item 3. Defaults Upon Senior Securities.
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders.
Not applicable.
Item 5. Other Information.
Not applicable.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits 10A: Binding Agreement between Provident
American Corporation, Provident Indemnity Life Insurance
Company and Central Reserve Life Insurance Company dated
November 12, 1998.
(b) Reports on Form 8-K:
No reports of Form 8-K were filed during the quarter
ended September 30, 1998.
Page 23 of 24 Pages
<PAGE>
Signature
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Provident American Corporation
By: /s/ Alvin H. Clemens
--------------------------------------
Alvin H. Clemens,
Chairman of the Board of Directors
and Chief Executive Officer
By: /s/ James O. Bowles
--------------------------------------
James O. Bowles, President
By: /s/ Francis L. Gillan III
--------------------------------------
Francis L. Gillan III,
Chief Accounting Officer And Treasurer
Date: November 16, 1998
Page 24 of 24 Pages
<PAGE>
CRL Central Reserve life
INSURANCE COMPANY
November 12, 1998
Provident American Corporation
P. O. Box 511
Norristown, Pennsylvania 19404-0511
ATTN: Mr. Alvin H. Clemens
Chairman and Chief Executive Officer
RE: Acquisition of Provident American Life
and Health Insurance Company ("PALHIC")
Gentlemen:
This letter is to memorialize a binding agreement between Provident American
Corporation ("PAMCO"), joined in by its subsidiary, Provident Indemnity Life
Insurance Company ("PILIC"), and Central Reserve Life Insurance Company ("CRL')
with respect to the purchase of PALHIC by CRL from PILIC, subject to all
required regulatory approvals.
This letter will also evidence our agreement with respect to the ongoing
relationship between PAMCO and CRL. The agreements between the parties, which
have been approved by all necessary corporate action, are as follows:
1. Purchase of PALHIC. Subject to regulatory approval, on or
before January 1, 1999, CRL will purchase all of the stock
of all classes of PALHIC for an amount equal to the adjusted
capital and surplus of PALHIC, with its assets and
liabilities to be only those approved by CRL. PALHIC will
maintain reserves deemed adequate by the Chicago office of
Milliman & Robertson at closing with a reserve true-up after
one year guaranteed by PAMCO.
2. PILIC Reinsurance. All of the in force health business of
PALHIC will be reinsured to PILIC prior to the closing, and
the life insurance in force in PALHIC will be also reinsured
to PILIC. At closing, there will be no insurance in force in
PALHIC that is not reinsured to PILIC, and PALHIC will have
no operations or employees.
<PAGE>
Provident American Corporation
November 12, 1998
Page 2
3. Payment to PILIC. Subject to regulatory approval and
approval of CRL's purchase of PALHIC, CRL, joined in by
Reassurance Company of Hannover ("RCH"), will enter into a
quota-share reinsurance agreement with PILIC to reinsure all
of the health business in PILIC, constituting approximately
$100 million in premium (the "Ceded Block"). CRL, joined in
by RCH, will make a $10 million cash payment (the "Ceding
Commission") to PILIC in connection with the reinsurance.
Profits from the Ceded Block will be retained by CRL and RCH
until they have recaptured the entire Ceding Commission,
together with any losses incurred and interest thereon at
12% per annum.
4) PAMCO Guarantee. The first $5 million of the Ceding
Commission shall be an unconditional payment. PAMCO will
unconditionally guarantee that the balance of the Ceding
Commission, together with interest at 12%, will be paid to
CRL from cumulative profits of the Ceded Block, or PAMCO
will otherwise pay such amount to CRL. As security for this
guarantee, PAMCO will execute a security agreement in favor
of CRL granting CRL a first lien with respect to the stock
of PILIC. This agreement will contain the usual lender
covenants regarding corporate governance and other matters.
PAMCO's guarantee will be in default if CRL does not receive
at least $10 million in profits plus interest within five
(5) years after closing. After CRL recovers the Ceding
Commission plus interest and other amounts due, PILIC shall
be entitled to receive an amount equal to 2/3 (two-thirds)
of the policy fees paid with respect to the Ceded Block for
1999 and 1/3 (one-third) of such fees for 2000 from the
profits derived from the Ceded Block, but not otherwise. CRL
shall have no further obligation to PILIC or PAMCO with
respect to the Ceded Block.
5. Continued Marketing. At closing, PAMCO and its affiliate,
Provident Health Services, will transfer to PALHIC and CRL
all of their rights under any agreements with agents and
brokers for the sale of health insurance, and PAMCO and
PILIC will enter into non-competition, non-solicitation
agreements regarding such agents with respect to the future
sale of health insurance products. PALHIC will continue to
issue HealthQuest, Solution and AdvantaEdge policies or
similar policies (the "PALHIC
<PAGE>
Provident American Corporation
November 12, 1998
Page 3
Policies") for a period of three (3) years following the
closing and will make such policies available for sale by
the existing agency force of PALHIC and agents recruited by
their hierarchy (the "PALHIC Agents") during that time
period. CRL will establish a mechanism to track the business
written by such PALHIC agents.
6. PILIC Reinsurance. During 1999, PILIC may reinsure up to 20%
of the PALHIC policies issued after closing and, thereafter,
up to 50% of such policies issued after 1999 for a period of
four (4) additional years from the first anniversary of the
date of closing. Policy fees for such products will be
shared based on the quota-share ratio, except that PALHIC
shall be entitled to retain all application fees.
7. Limitation on Expenses. Maximum expense allowances with
respect to the policies which are the subject of the
reinsurance described in Paragraph No. 6 above shall be 43%
of collected premium for first year (administration 1O%,
premium tax 3%, commission 28%, marketing expenses 2%) and
26% for subsequent years (administration 10%, premium tax
3%, commissions 13%). In addition, CRL will receive a 3%
administrative payment with respect to policies issued after
closing, which fee will reduce to 2% for total policies
under administration which exceed $100 million of premium in
force. Additionally, managed care costs will be paid as
incurred.
8. Ceded Block Agreements. With respect to the Ceded Block, CRL
will assume administrative responsibility for such business
effective at closing. In this regard, CRL will assume the
obligations to Health Plan Services ("HPS") under PAHLIC's
existing contract with HPS, except that CRL will not be
responsible for the Base Service Fee and Loss Ratio
Management Fee ($95,000 per month) to HPS and will only be
required to pay the percentage payment with respect to claim
services, and not the $6.00 per claim charge presently being
paid. CRL will administer the Ceded Block for administration
costs equal to the HPS costs plus 2-1/2% for other
administrative costs plus premium taxes and managed care
costs. In addition, CRL will receive a 3% administrative
payment with respect to policies issued after closing, which
fee will reduce to 2% for total policies under
administration which exceed $100 million of premium in
force.
<PAGE>
Provident American Corporation
November 12, 1998
Page 4
9. Personnel and Facilities. At closing, PILIC will furnish to
CRL on a contract basis such employees as CRL may designate
to assist in the transition of the Ceded Block to CRL's
administrative facility in Cleveland. CRL will reimburse
PILIC for the costs of such employees and will lease the
PILIC's facilities and all of the equipment utilized in
connection with the health insurance business on a
month-to-month basis for a payment of $20,000 per month,
such lease to be cancelable by CRL on ninety (90) days
notice. With respect to the employees provided by PILIC, CRL
will make a payment to PILIC for distribution to such
employees equal to four (4) weeks' pay at such time as such
employees are no longer needed by CPL.
10. Internet Sales. PALHIC will provide health insurance
products for Internet sale through HealthAxis for a
three-year period. PILIC may reinsure such products on a
50/50 quota-share basis, except that the maximum first-year
expense allowance shall not exceed 28% with commission
expense reduced to 15% and marketing expense eliminated and
the second-year expense allowance shall not exceed 21% with
commission expense reduced to 8%. In addition, HealthAxis
will be entitled to retain all administrative fees until it
has recovered the payments made to initiate the Internet
program. Thereafter, fees will be split as set forth in
Paragraph No. 6 above. CRL will also be entitled to a 2%
administrative payment with respect to all Internet
policies.
11. Additional Internet Products. CRL will also work to develop
additional health insurance products for sale over the
Internet through HealthAxis and enter into reinsurance
agreements with PILIC consistent with those described above.
<PAGE>
Provident American Corporation
November 12, 1998
Page 5
12. PAMCO/PILIC Undertaking. PAMCO and PILIC jointly agree to
obtain the cancellation of all existing reinsurance
agreements with respect to the Ceded Block immediately prior
no closing and to hold CRL harmless from any amounts due to
any reinsurer in this regard. Further, PAMCO agrees to
indemnify PALHIC and CRL from any claims with respect to
HPS, other than the ongoing claims services obligation
assumed, and from any and all employee claims of PILIC or
PALHIC employees with respect to pension plans, stock
purchase plans, or other employee benefits arising prior to
the closing, and from any claims regarding the sale by
PALHIC of debit life insurance to Life and Health Insurance
Company of America in 1996.
If the above sets forth our agreements and understandings, please sign below to
so indicate and to bind PAMCO and its affiliates to the terms of this agreement.
Sincerely,
CENTRAL RESERVE LIFE INSURANCE COMPANY
By: /s/ Frank W. Grimone
<PAGE>
Provident American Corporation
November 12, 1998
Page 6
AGREED AND accepted THIS 12th DAY OF NOVEMBER, 1998.
PROVIDENT AMERICAN CORPORATION
By: /s/ Alvin H. Clemens
-------------------------------
Authorized Officer
PROVIDENT INDEMNITY LIFE INSURANCE COMPANY
By: /s/ Alvin H. Clemens
-------------------------------
Authorized Officer
PROVIDENT AMERICAN LIFE AND HEALTH INSURANCE
COMPANY
By: /s/ Alvin H. Clemens
-------------------------------
Authorized Officer
<PAGE>
<TABLE>
<CAPTION>
PROVIDENT AMERICAN CORPORATION EXHIBIT 11
COMPUTATION OF EARNINGS PER SHARE
(In thousands except per share data) Three Months ended September 30, Nine Months Ended September 30,
1998 1997 1998 1997
- - -------------------------------------------------------------------------------------------------------------------------
Basic Earnings Per Share
<S> <C> <C> <C> <C>
NET INCOME APPLICABLE TO COMMON STOCK: $ (3,364) $ (1,049) $ (3,111) $ (5,995)
- - -------------------------------------------------------------------------------------------------------------------------
WEIGHTED AVERAGE SHARES: 10,169 10,071 10,131 10,069
- - -------------------------------------------------------------------------------------------------------------------------
BASIC EARNINGS PER SHARE: $ (0.33) $ (0.10) $ (0.31) $ (0.60)
- - -------------------------------------------------------------------------------------------------------------------------
Diluted Earnings Per Share
NET INCOME APPLICABLE TO COMMON STOCK: $ (3,364) $ (1,049) $ (3,111) $ (5,995)
- - -------------------------------------------------------------------------------------------------------------------------
WEIGHTED AVERAGE SHARES:
Common stock 10,169 10,071 10,131 10,069
Common stock equivalents applicable
to stock options and warrants * * * *
- - -------------------------------------------------------------------------------------------------------------------------
Total 10,169 10,071 10,131 10,069
- - -------------------------------------------------------------------------------------------------------------------------
DILUTED EARNINGS PER SHARE: $ (0.33) $ (0.10) $ (0.31) $ (0.60)
- - -------------------------------------------------------------------------------------------------------------------------
</TABLE>
* Not applicable
<TABLE> <S> <C>
<ARTICLE> 7
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> Dec-31-1998
<PERIOD-START> Jan-01-1998
<PERIOD-END> Sep-30-1998
<DEBT-HELD-FOR-SALE> 43,383
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 22
<MORTGAGE> 287
<REAL-ESTATE> 0
<TOTAL-INVEST> 44,477
<CASH> 6,995
<RECOVER-REINSURE> 15,948
<DEFERRED-ACQUISITION> 4,643
<TOTAL-ASSETS> 100,735
<POLICY-LOSSES> 41,271
<UNEARNED-PREMIUMS> 761
<POLICY-OTHER> 32,848
<POLICY-HOLDER-FUNDS> 5,175
<NOTES-PAYABLE> 3,630
0
580
<COMMON> 1,024
<OTHER-SE> 19,567
<TOTAL-LIABILITY-AND-EQUITY> 100,735
52,870
<INVESTMENT-INCOME> 2,853
<INVESTMENT-GAINS> 4,264
<OTHER-INCOME> 24
<BENEFITS> 35,309
<UNDERWRITING-AMORTIZATION> 1,148
<UNDERWRITING-OTHER> 27,504
<INCOME-PRETAX> (3,950)
<INCOME-TAX> (949)
<INCOME-CONTINUING> (3,001)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,001)
<EPS-PRIMARY> (0.31)
<EPS-DILUTED> (0.31)
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
