<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended. . . . . . . . . . . . . . . .June 30, 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: 10,200,735 shares of common
stock, par value $.10, outstanding as of August 12, 1998.
Page 1 of 23 Pages
<PAGE>
PROVIDENT AMERICAN CORPORATION
INDEX
<TABLE>
<CAPTION>
Page No.
--------
<S> <C>
Part I. FINANCIAL INFORMATION
Item 1. Condensed Financial Statements
Consolidated Statements of Operations 3
Statement of Comprehensive Income 4
Consolidated Balance Sheets 5-6
Consolidated Statements of Changes in Stockholders' Equity 7
Consolidated Statements of Cash Flows 8-9
Notes to Condensed Consolidated Financial Statements 10-15
Item 2. Management's Discussion and Analysis of Results
of Operations and Financial Condition 16-21
Part II. OTHER INFORMATION
Items 1 - 5 22
Reports on Form 8-K 22
SIGNATURES 23
Exhibit 11
Exhibit 27
</TABLE>
Page 2 of 23 Pages
<PAGE>
PART 1. 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>
3 Months Ended June 30 6 Months Ended June 30
1998 1997 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenue:
Premium: Accident and health, gross $ 27,195 $ 20,734 $ 55,863 $ 39,468
Life and annuity, gross 2,099 2,437 4,576 4,846
-------- -------- -------- --------
Total gross premium 29,294 23,171 60,439 44,314
-------- -------- -------- --------
Accident and health reinsurance ceded 13,106 9,390 24,805 17,751
Life and annuity reinsurance ceded 25 133 74 278
-------- -------- -------- --------
Total reinsurance ceded 13,131 9,523 24,879 18,029
-------- -------- -------- --------
Net premium 16,163 13,648 35,560 26,285
Net investment income 987 843 1,906 1,766
Realized gains (losses) on investments 13 (68) 13 930
Realized gain on the sale of subsidiary 0 0 4,000 0
Other revenue 5 5 128 26
-------- -------- -------- --------
Total revenue 17,168 14,428 41,607 29,007
-------- -------- -------- --------
Benefits and expenses:
Death and other policy benefits:
Life 1,372 1,434 2,485 3,022
Accident and health, net of reinsurance 9,781 12,834 21,876 19,006
Annuity contracts and other considerations 83 160 171 389
(Decrease) increase in liability for
future policy benefits (522) 624 (524) 1,020
Commissions, net of ceding allowance
and deferred acquisition costs 2,586 1,696 5,323 3,239
Other operating expenses, net of ceding allowance
and deferred acquisition costs 5,735 4,277 10,970 7,450
Amortization of deferred policy acquisition costs 307 2,650 540 3,019
Depreciation and amortization of goodwill 209 146 435 296
-------- -------- -------- --------
Total benefits and expenses 19,551 23,821 41,276 37,441
-------- -------- -------- --------
Income (loss) before income taxes (2,383) (9,393) 331 (8,434)
Provision (benefit) for income taxes:
Current (38) (2,871) 3 (3,396)
Deferred 0 (835) 0 (166)
-------- -------- -------- --------
Total income taxes (38) (3,706) 3 (3,562)
-------- -------- -------- --------
Net income (loss) (2,345) (5,687) 328 (4,872)
Dividends on preferred stock 37 37 74 74
-------- -------- -------- --------
Net income (loss) applicable to common stock $ (2,382) $(5,724) $ 254 $ (4,946)
======== ======== ======== ========
Income (loss) per share of common stock
Basic $ (0.20) ($ 0.57) $ 0.02 $ (0.49)
======== ======== ======== ========
Diluted $ (0.20) ($ 0.57) $ 0.02 $ (0.49)
======== ======== ======== ========
Common shares and equivalents used in computing income (loss) per share
Basic 11,990 10,071 11,699 10,068
Diluted 11,990 10,071 11,773 10,068
</TABLE>
See notes to consolidated financial statements.
Page 3 of 23 Pages
<PAGE>
Provident American Corporation and Subsidiaries
Statement of Comprehensive Income
(Dollars in thousands)
<TABLE>
<CAPTION>
3 Months Ended June 30 6 Months Ended June 30
1998 1997 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net income (loss) applicable to common stock $(2,382) $(5,724) $ 254 $ (4,946)
Other comprehensive income, net of tax:
Unrealized gains (losses) on securities:
Unrealized holding gains (losses) arising during period 157 436 183 (1,002)
------- ------- ------- --------
Comprehensive income (loss) $(2,225) $(5,288) $ 437 $ (5,948)
======= ======= ======= ========
</TABLE>
See notes to consolidated financial statements.
Page 4 of 23 Pages
<PAGE>
Provident American Corporation and Subsidiaries
Consolidated Balance Sheets
<TABLE>
<CAPTION>
(Dollars in thousands) UNAUDITED
June 30, December 31,
1998 1997
-------- ----------
<S>
Assets <C> <C>
Investments:
Bonds $ 43,402 $45,134
Equity securities, cost $39 and $12 29 8
Real estate, less accumulated
depreciation of $194 and $182 906 918
Policy loans 495 498
Other invested assets 520 543
-------- -------
Total Investments 45,352 47,101
Cash and cash equivalents 10,648 16,767
Amounts due from third party administrator 7,117 0
Premiums due and uncollected 1,693 2,106
Amounts due from reinsurers 12,819 16,092
Loans receivable from officer, director and stockholder 1,284 1,243
Accrued investment income 562 610
Federal income taxes receivable 3,119 3,325
Property and equipment, less
accumulated depreciation of $3,019 and $2,751 7,032 6,804
Unamortized deferred policy acquisition costs 3,944 1,499
Goodwill less accumulated amortization of $2,006 and $1,973 1,160 1,193
Other assets 6,241 1,625
-------- -------
Total Assets $100,971 $98,365
======== =======
</TABLE>
Continued on next page.
See notes to consolidated financial statements.
Page 5 of 23 Pages
<PAGE>
Provident American Corporation and Subsidiaries
Consolidated Balance Sheets (continued)
<TABLE>
<CAPTION>
(Dollars in thousands)
UNAUDITED
June 30, December 31,
1998 1997
--------- -----------
<S>
Liabilities and Stockholders' Equity <C> <C>
Future policy benefits:
Life 40,310 40,665
Annuity and other 5,376 5,428
Policy claims 33,962 31,109
Premiums received in advance and unearned 805 2,677
Amounts due to reinsurers 0 37
Accrued commissions and expenses 1,478 5,451
Loans payable 4,799 5,077
Convertible Note 5,000 0
Accounts Payable 997 1,151
Deferred income taxes 0 100
Other liabilities 2,805 2,661
--------- ---------
Total Liabilities 95,532 94,356
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 10,210,160 and 10,078,710 1,021 1,021
Common stock, Class A, par value $.10: authorized 20,000,000,
none issued 0 0
Additional paid-in capital 14,760 13,767
Net unrealized appreciation (depreciation) of bonds 378 188
Net unrealized appreciation (depreciation) of equity securities (10) (3)
Retained earnings (11,214) (11,468)
--------- ---------
5,515 4,085
Less common stock held in treasury, at cost, 36,300 shares (76) (76)
--------- ---------
Total Stockholders' Equity 5,439 4,009
--------- ---------
Total Liabilities and Stockholders' Equity $ 100,971 $ 98,365
========= =========
</TABLE>
See notes to condensed financial statements.
Page 6 of 23 Pages
<PAGE>
Provident American Corporation and Subsidiaries
Consolidated Statements of Changes in Stockholders' Equity
(Dollars in thousands)
<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
depreciation of bonds 26
appreciation 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
depreciation of bonds 164
appreciation of equity securities
Cash dividends declared on preferred stock
Net income
--- ----- ------ ------- ------- -----
BALANCE, JUNE 30, 1998 580 $ 580 10,210 $ 1,021 $14,760 $ 378
=== ===== ====== ======= ======= =====
</TABLE>
RESTUBBED TABLE
<TABLE>
<CAPTION>
Net Unrealized
Appreciation Retained Treasury
of 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
depreciation of bonds 26
appreciation 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
depreciation of bonds 164
appreciation 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
====== ======== ===== ======
</TABLE>
See notes to consolidated financial statements.
Page 7 of 23 Pages
<PAGE>
Provident American Corporation and Subsidiaries
Consolidated Statements of Cash Flows
(Dollars in thousands)
<TABLE>
<CAPTION>
6 Months Ended June 30,
1998 1997
-------- --------
<S> <C> <C>
Cash flows from operating activities
Net income (loss) $ 328 $ (4,871)
Adjustments to reconcile net income (loss)
to net cash provided by (used in) operating activities
Depreciation and amortization 441 322
Net realized (gain) on investments (13) (930)
Net realized (gain) on sale of subsidiary (4,000)
Decrease(increase)in
Premium due and uncollected, unearned
premium and premium received in advance (870) 70
Due to/from reinsurers 3,236 (4,480)
Due from third party administrator (7,117) 0
Deferred policy acquisition costs, net (2,445) (1,464)
Accrued investment income 48 48
Other assets, current and deferred income
taxes and other liabilities (3,475) (2,290)
Accrued commissions and expenses (3,973) (130)
Future policy benefits and claims 2,445 9,582
-------- --------
Net cash provided by (used in) operating activities (15,395) (4,144)
-------- --------
Cash flows from investing activities
Purchases of bonds (2,674) (4,253)
Purchases of equity securities (26) (1,018)
Sale of bonds 4,727 6,696
Sale of equity securities 4,000 4,439
Maturity of investments and loans 0 1,593
Loans to officer, director and shareholder (41) (744)
Purchases of property and equipment (772) (1,039)
-------- --------
Net cash from investing activities 5,214 5,674
-------- --------
</TABLE>
Continued on next page.
See notes to consolidated financial statements.
Page 8 of 23 Pages
<PAGE>
Provident American Corporation and Subsidiaries
Consolidated Statements of Cash Flows (continued)
(Dollars in thousands)
<TABLE>
<CAPTION>
6 Months Ended June 30,
1998 1997
-------- --------
<S> <C> <C>
Cash flows form financing activities
Withdrawals from contractholder deposit funds (590) (412)
Repayments of notes payable (278) (229)
Issuance of common stock 4 97
Issuance of convertible note 5,000 0
Dividends paid on preferred and common stock (74) (74)
-------- --------
Net cash from financing activities 4,062 (618)
-------- --------
Increase (decrease) in cash and cash equivalents (6,119) 912
Cash and cash equivalents, beginning of period 16,767 6,218
-------- --------
Cash and cash equivalents, end of period 10,648 7,130
-------- --------
Supplemental disclosure of cash flow information:
Interest paid $ 102 $ 27
Income taxes paid (refunded), net $ -- $ (477)
Non-cash financing activities:
Issuance of warrants $ 990
</TABLE>
See notes to consolidated financial statements.
Page 9 of 23 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 six-month period ended June 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 with 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 its wholly owned life insurance companies, Provident
Indemnity Life Insurance Company ("PILIC") and Provident American Life and
Health Insurance Company ("PALHIC").
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. 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 LOCOS' web sites.
Page 10 of 23 Pages
<PAGE>
The Company's new non-insurance subsidiaries, Provident Health Services,
Inc. ("PHS") and its wholly owned subsidiary HealthAxis.com Inc. ("HealthAxis",
formerly known as Insurion, Inc.) will conduct this new venture. It is
anticipated that Internet-based sales will be tested during the third quarter of
1998 and offered generally to AOL subscribers in the fourth quarter 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
HealthAxis through its web site or other e-commerce vehicles.
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:
<TABLE>
<CAPTION>
3 Months Ended 6 Months Ended
June 30, June 30,
1998 1997 1998 1997
------- ------- ------- -------
<S> <C> <C> <C> <C>
Accident and health benefits
Gross before reinsurance ceded $21,770 $24,825 $41,029 $36,672
Less reinsurance ceded 11,990 11,991 19,153 17,666
------- ------- ------- -------
Net of reinsurance $ 9,780 $12,834 $21,876 $19,006
======= ======= ======= =======
Commissions
Gross before reinsurance ceded $ 7,352 $ 4,549 $14,883 $ 8,640
Less reinsurance ceded 3,360 1,785 7,275 3,435
Less deferred acquisition costs 1,406 1,068 2,285 1,966
------- ------- ------- -------
Net $ 2,586 $ 1,696 $ 5,323 $ 3,239
======= ======= ======= =======
Other operating expenses
Gross before reinsurance ceded $ 7,354 $ 6,437 $14,732 $12,315
Less reinsurance ceded 1,333 1,245 3,062 2,348
Less deferred acquisition costs 284 915 700 2,517
------- ------- ------- -------
Net $ 5,737 $ 4,277 $10,970 $ 7,450
======= ======= ======= =======
</TABLE>
Page 11 of 23 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.
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 therefore the
Company has deferred policy acquisition costs during 1998 as recoverable against
the present value of future profits. Management further believes the estimated
future profitability of the life business exceeds the unamortized deferred
policy acquisition costs for life products.
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 June 30, 1998 at zero. 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.
Page 12 of 23 Pages
<PAGE>
Note D - 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
health insurance and other related 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 fourth quarter of
1998 and offered generally to AOL subscribers in the first quarter of 1999.
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 per share (based on the average NASDAQ closing prices
for the last 20 days preceding the determination date as defined in the
agreement), for a period of five 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 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 one-year renewal terms, then PHS shall make an
additional payment to AOL of $32,500 on or before September 30, 1999 and
September 30, 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.
Page 13 of 23 Pages
<PAGE>
Note E - CNET Promotional Agreement:
In June 1998, HealthAxis entered into a Promotional Agreement (the "CNET
Agreement") with CNET, Inc. ("CNET"). The CNET Agreement provides that CNET will
exclusively promote HealthAxis' health insurance and other related products
("the 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 accounted for as marketing expense and will pay
an additional $2,140, 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 the payments 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 it's 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 (the
"LYCOS Agreement") with LYCOS, Inc. ("LYCOS"). The LYCOS Agreement provides that
LYCOS will exclusively promote HealthAxis' health insurance and other related
("the Products") on LYCOS' web site.
The LYCOS Agreement has an initial term commencing on November 1, 1998
and ending on January 31, 2000. As consideration under the LYCOS Agreement,
HealthAxis paid $300 during the second quarter and will pay an additional $6,270
to LYCOS during the initial term of which $4,390 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 will pay LYCOS $2,300 during
the second half of 1998, $1,400 when HealthAxis' web site is launched which is
anticipated to occur in 1998 with the balance being paid during 1999. 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.
Note G - 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 14 of 23 Pages
<PAGE>
Note H - Forward-looking Statements
The information contained in the Quarterly Report on Form 10-Q for the
quarter ended June 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 15 of 23 Pages
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Results of Operations
For the three months ended June 30, 1998 ("the current quarter"), the
Company's net loss applicable to common stock was $2.4 million or $.20 per share
diluted compared to net loss of $5.7 million or $0.57 per share diluted for the
three months ended June 30, 1997 ("the same period last year"). The Company's
net loss in the current quarter was unfavorably impacted by HealthAxis start-up
expense, costs related to the HPS transition, unusually high audit and actuarial
fees incurred in connection with the Company's 1997 audit and continued high
health benefit claims experience. The net loss in the same period last year
included $3 million of accident and health policy benefits expense net of
reinsurance related to prior periods ($4.6 million pre-tax, net of reinsurance),
$1.3 million additional amortization of deferred policy acquisition costs ($2
million pre-tax) and $0.3 million of costs related to the start-up of a new
individual-life product line ($0.5 million pre-tax).
Accident and health gross premium was $27.2 million for the current
quarter compared to $20.7 million for the prior year and accident and health
ceded premium was $13.1 million for the current quarter as compared to $9.4
million for the prior year. The increases were the result of increased new
business from one-life managed-care health insurance products.
Life and annuity net premium, consisting primarily of group life and
individual pre-need and final expense business accounted for $2.1 million for
the current quarter compared to $2.4 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.
Accident and health policy benefits represented 69% of accident and
health earned premium for the current quarter down from 113% from the same
period last year. During the second quarter of 1997 the Company recognized a
$4.6 million reserve strengthening in its one-life managed-care products, of
which $1.6 million related to the first quarter of 1997. Excluding the
prior-period reserve increase, accident and health policy benefits for the
second quarter of 1997 represented 73% of accident and health earned premium.
The decrease in the accident and health policy benefits as a percentage of
premium reflects the impact of improved underwriting and rate increases which
were implemented during 1997.
Commissions, net of ceding allowance and deferred acquisition costs of
$2.6 million for the current quarter increased from $1.7 million for the same
period last year due to increased commissions paid on increased premiums related
to the Company's one-life managed-care products and a change in accrued ceding
allowance under the Company's new quota share reinsurance.
Other operating expenses, net of ceding allowance and deferred
acquisition costs for the current quarter of $5.7 million increased compared to
$4.3 million for the same period last year due to $0.8 million of costs related
to the HPS transition, $0.8 million of cost related to the startup of
HealthAxis, unusually high costs of completing the Company's 1997 year end audit
of $0.3 million partially offset by cost savings as a result of outsourcing to
HPS. Costs related to the HPS transition included claims processing charges,
systems cost related to migrating policyholder and agent data and travel costs.
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.
Page 16 of 23 Pages
<PAGE>
Other operating expenses, net of ceding allowance and deferred
acquisition costs for the current quarter excluding HPS transition costs,
HealthAxis and unusually high audit costs represented 24% of net premiums for
the current quarter which decreased from 31% for the same period last year due
to the cost savings resulting from Company's decision to outsource its group
health policy and claims processing to HPS effective February 1, 1998.
For the six months ended June 30, 1998 ("the current year"), the
Company's net income applicable to common stock was $0.3 million or $.02 per
share diluted compared to net loss of $4.9 million or $0.49 per share diluted
for the six months ended June 30, 1997 ("the prior year"). The Company's net
income in the current year was favorably impacted by a $4 million gain on the
sale of MMC, partially offset by HealthAxis start-up expense, costs related to
the HPS transition, unusually high audit and actuarial fees and continued high
health benefit claims experience. The Company's net loss in the prior year
included approximately $2 million of accident and health policy benefits expense
net of reinsurance related to prior periods ($3 million pre-tax, net of
reinsurance), $1.3 million additional amortization of deferred policy
acquisition costs ($2 million pre-tax) and $0.3 million of costs related to the
start-up of a new individual-life product line ($0.5 million pre-tax).
Accident and health gross premium was $55.9 million for the current
year compared to $39.5 million for the prior year and accident and health ceded
premium was $24.8 million for the current year as compared to $17.8 million for
the prior year. The increases were the result of increased new business from
one-life managed-care health insurance products.
At June 30, 1998 and 1997, annualized accident and health premium in
force on small group and managed-care business amounted to $107.6 million and
$81.8 million, respectively, consisting of approximately 54,000 and 43,000
policies inforce, respectively. The $25.8 million net increase in annualized
premium from June 30, 1998 to June 30, 1997 resulted from new business issued of
$74.2 million, of which $36.7 million occurred during 1998, plus premium rate
increases less lapses.
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 88% and 76% of annualized premium in force as of June
30, 1998 and 1997, respectively.
Life and annuity net premium, consisting primarily of group life and
individual pre-need and final expense business accounted for $4.6 million for
the current year compared to $4.8 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 $1.9 million for the current year compared to
$1.8 million for the prior year. The gross average book yield on bond
investments, which accounted for 96% total investments for the quarters ended
June 30, 1998 and December 31, 1997, was 6.3% and 6.4% for the 6 months ended
June 30, 1998 and 1997, respectively. Realized gain on the sale of subsidiary is
discussed in Note D - Sale of Montgomery Management. Realized gains in the prior
year related primarily to the sale of Loewen stock acquired as a result of
litigation.
Page 17 of 23 Pages
<PAGE>
Accident and health policy benefits represented 70% of accident and
health earned premium for the current year down from 88% from the prior year.
During the second quarter of 1997 the Company recognized a $4.6 million reserve
strengthening in its one-life managed-care products, of which $1.6 million
related to the first quarter of 1997. Excluding the prior-period reserve
increase, accident and health policy benefits for the second quarter of 1997
represented 73% of accident and health earned premium. The decrease in the
accident and health policy benefits as a percentage of premiums reflects the
impact of improved underwriting and rate increases, which were implemented
during 1997.
Commissions, net of ceding allowance and deferred acquisition costs of
$5.3 million for the current year increased from $3.2 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 $11 million increased compared to $7.5
million for the same period last year due to $2.2 million of costs related to
the HPS transition, $1 million of cost related to the startup of HealthAxis,
$0.3 million of unusually high costs of completing the Company's 1997 year end
audit partially offset by cost savings as a result of outsourcing to HPS. Costs
related to the HPS transition included claims processing charges, systems cost
related to migrating policyholder and agent data and travel costs. 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.
Other operating expenses, net of ceding allowance and deferred
acquisition costs for the current year excluding HPS transition costs,
HealthAxis and unusually high audit costs represented 21% of net premiums for
the current year which decreased from 29% for the same period last year due to
the cost savings resulting from 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 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.
Page 18 of 23 Pages
<PAGE>
Cash and investments carried at market value at June 30, 1998 amounted
to $56 million. This included $43.4 million of bonds issued by the U.S.
Government, government agencies, public utilities and other corporations, $1.9
million invested in policy loans, real estate and other invested assets and
$10.6 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 June 30, 1998 and 1997 was 6.3%
and 6.5%, 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 has
entered into an agreement to sell its investment in real estate at a gain during
the third quarter of 1998.
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 and March 31, 1998 amounted to $1.0 million. The
Company repaid this amount in the third quarter of 1998.
Net cash used in operating activities of $15.4 million in 1998 reflects
the impact of the transition of business to HPS and new reinsurance agreements.
Change in future policy benefits and claims of $2.4 million in the
current year in comparison to the prior year reflects higher premium and claim
volume but is reduced from the first quarter due to reduced claim backlogs.
Claims processing was transitioned to HPS by the end of the first quarter of
1998. Claims backlogs were reduced during the second quarter of 1998. Change in
amounts due from reinsurers is impacted by changes in claims backlog since
approximately 47.5% of group medical claims are ceded.
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 $7.1 million
change in amounts due from third party administrator represented June 1998's net
cash settlement collected in July. 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 $3.5 million related primarily to HealthAxis' payments to AOL and
LYCOS, net of funds received from HPS.
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 in order to focus on the one-life market and
increase PILIC's statutory capital and surplus to fund growth.
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.
Page 19 of 23 Pages
<PAGE>
The statutory capital and surplus of PILIC which includes amounts
related to its subsidiary PALHIC, was $11.4 million at December 31, 1997. The
statutory capital and surplus of PILIC, which includes amounts related to its
subsidiary PALHIC, was $9.3 million at June 30, 1998. 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 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.
Page 20 of 23 Pages
<PAGE>
Capital Expenditures and Commitments
During 1998 the Company entered into an interactive marketing agreement
with AOL described in Note D and promotional agreements with CNET and LYCOS
described in Note E and F, respectively. In connection with these agreements the
Company has paid $4.6 million as of the end of the second quarter of 1998 and is
required to pay an additional $7.1 million in the second half of 1998.
Additionally, the Company expects to incur certain significant start-up costs
that will require funding before the AOL-related venture is scheduled to become
operational in October 1998. HPS paid the Company $0.75 million in March 1998 to
be the exclusive administrator of this business. In addition a $5.0 private
placement of HealthAxis, Inc. convertible debt was completed during the second
quarter of 1998. The Company is seeking marketing co-sponsors who would pay the
Company fees for participating in the HealthAxis' web site and pursuing other
external sources of funds in order to fund payments to AOL and start up
expenses. No assurance can be given with regard to the timing or success of the
Company in obtaining such funding.
Page 21 of 23 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: Not applicable.
(b) Reports on Form 8-K:
No reports of Form 8-K were filed during the quarter ended
June 30, 1998.
Page 22 of 23 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: August 14, 1998
Page 23 of 23 Pages
<PAGE>
PROVIDENT AMERICAN CORPORATION EXHIBIT 11
COMPUTATION OF EARNINGS PER SHARE
<TABLE>
<CAPTION>
(In thousands except per share data) Three Months Ended June 30, Six Months Ended June 30,
1998 1997 1998 1997
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Basic Earnings Per Share
NET INCOME APPLICABLE TO COMMON STOCK: $ (2,382) $ (5,724) $ 254 $ (4,946)
-------- -------- -------- --------
WEIGHTED AVERAGE SHARES: 11,990 10,071 11,699 10,068
-------- -------- -------- --------
BASIC EARNINGS PER SHARE: $ (0.20) $ (0.57) $ 0.02 $ (0.49)
-------- -------- -------- --------
Diluted Earnings Per Share
NET INCOME APPLICABLE TO COMMON STOCK: $ (2,382) $ (5,724) $ 254 $ (4,946)
-------- -------- -------- --------
WEIGHTED AVERAGE SHARES:
Common stock 11,990 10,071 11,699 10,068
Common stock equivalents applicable to stock options and warrants * * 74 *
-------- -------- -------- --------
Total 11,990 10,071 11,773 10,068
-------- -------- -------- --------
DILUTED EARNINGS PER SHARE: $ (0.20) $ (0.57) $ 0.02 $ (0.49)
-------- -------- -------- --------
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 7
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<DEBT-HELD-FOR-SALE> 43,402
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 29
<MORTGAGE> 291
<REAL-ESTATE> 906
<TOTAL-INVEST> 45,352
<CASH> 10,648
<RECOVER-REINSURE> 12,819
<DEFERRED-ACQUISITION> 3,944
<TOTAL-ASSETS> 100,971
<POLICY-LOSSES> 40,310
<UNEARNED-PREMIUMS> 805
<POLICY-OTHER> 33,962
<POLICY-HOLDER-FUNDS> 5,376
<NOTES-PAYABLE> 9,799
0
580
<COMMON> 1,021
<OTHER-SE> 14,760
<TOTAL-LIABILITY-AND-EQUITY> 100,971
35,559
<INVESTMENT-INCOME> 1,906
<INVESTMENT-GAINS> 4,013
<OTHER-INCOME> 128
<BENEFITS> 24,532
<UNDERWRITING-AMORTIZATION> 540
<UNDERWRITING-OTHER> 16,204
<INCOME-PRETAX> 231
<INCOME-TAX> 3
<INCOME-CONTINUING> 328
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 328
<EPS-PRIMARY> 0.01
<EPS-DILUTED> 0.01
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
