<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. . . . . . . . . . . . . . . . .March 31, 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: 10,173,860 shares
of common stock, par value $.10, outstanding as of June 30, 1998.
Page 1 of 20 Pages
<PAGE>
PROVIDENT AMERICAN CORPORATION
INDEX
Page No.
--------
Part I. FINANCIAL INFORMATION
Item 1. Condensed Financial Statements
Consolidated Statements of Operations 3
Consolidated Balance Sheets 4-5
Consolidated Statements of changes in Stockholders' Equity 6
Consolidated Statements of Cash Flows 7-8
Notes to Condensed Consolidated Financial Statements 9-13
Item 2. Management's Discussion and Analysis of Results
of Operations and Financial Condition 14-18
Part II. OTHER INFORMATION
Items 1- 5 19
Reports on Form 8-K 19
SIGNATURES 20
Exhibit 11
Exhibit 27
Page 2 of 20 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>
3 Months Ended March 31,
1998 1997
--------- ---------
<S> <C> <C>
Revenue:
Premium: Accident and health, gross $ 28,668 $ 18,634
Life and annuity, gross 2,477 2,409
--------- ---------
Total gross premium 31,145 21,043
--------- ---------
Accident and health reinsurance ceded 11,699 8,361
Life and annuity reinsurance ceded 50 145
--------- ---------
Total reinsurance ceded 11,749 8,506
--------- ---------
Net premium 19,397 12,537
Net investment income 919 923
Realized gains (losses) on investments 0 998
Realized gain on the sale of subsidiary 4,000 0
Other revenue 205 121
--------- ---------
Total revenue 24,520 14,579
--------- ---------
Benefits and expenses:
Death and other policy benefits:
Life 1,113 1,588
Accident and health, net of reinsurance 12,096 6,172
Annuity contracts and other considerations 88 229
(Decrease) increase in liability for
future policy benefits (2) 396
Commissions, net of ceding allowance
and deferred acquisition costs 2,792 1,543
Other operating expenses, net of ceding allowance
and deferred acquisition costs 5,261 3,173
Amortization of deferred policy acquisition costs 233 369
Depreciation and amortization of goodwill 226 150
--------- ---------
Total benefits and expenses 21,807 13,620
--------- ---------
Income (loss) before income taxes 2,714 959
Provision (benefit) for income taxes:
Current 41 (525)
Deferred 0 669
--------- ---------
Total income taxes 41 144
--------- ---------
Net income (loss) 2,673 815
Dividends on preferred stock 37 37
--------- ---------
Net income (loss) applicable to common stock $ 2,636 $ 778
========= =========
Income (loss) per share of common stock
Basic $0.26 $ 0.08
========= =========
Diluted $0.22 $ 0.06
========= =========
Common shares and equivalents used in computing income (loss) per share
Basic 10,173 10,024
Diluted 11,787 12,120
</TABLE>
See notes to consolidated financial statements.
Page 3 of 20 Pages
<PAGE>
Provident American Corporation and Subsidiaries
Consolidated Balance Sheets
<TABLE>
<CAPTION>
UNAUDITED
(Dollars in thousands except Preferred and Common Stock Data) March 31, December 31,
1998 1997
---------- ------------
<S> <C> <C>
Assets
Investments:
Bonds $44,764 $45,134
Equity securities, cost $12 and $12 9 8
Real estate, less accumulated
depreciation of $188 and $182 912 918
Policy loans 498 498
Other invested assets 524 543
--------- -------
Total Investments 46,707 47,101
Cash and cash equivalents 16,064 16,767
Amounts due from third party administrator 5,391 0
Premiums due and uncollected 2,511 2,106
Amounts due from reinsurers 20,811 16,092
Loans receivable from officer, director and stockholder 1,262 1,243
Accrued investment income 575 610
Federal income taxes receivable 3,283 3,325
Property and equipment, less
accumulated depreciation of $2,832 and $2,751 6,823 6,804
Unamortized deferred policy acquisition costs 2,561 1,499
Goodwill less accumulated amortization of $1,990 and $1,973 1,176 1,193
Other assets 3,692 1,625
--------- -------
Total Assets $110,846 $98,365
========= =======
</TABLE>
Continued on next page.
See notes to consolidated financial statements.
Page 4 of 20 Pages
<PAGE>
Provident American Corporation and Subsidiaries
Consolidated Balance Sheets (continued)
(Dollars in thousands)
<TABLE>
<CAPTION>
UNAUDITED
March 31, December 31,
1998 1997
--------- ------------
<S> <C> <C>
Liabilities and Stockholders Equity
Future policy benefits:
Life 40,488 40,665
Annuity and other 5,359 5,428
Policy claims 43,653 31,109
Premiums received in advance and unearned 443 2,677
Amounts due to reinsurers 0 37
Accrued commissions and expenses 4,465 5,451
Loans payable 4,945 5,077
Accounts Payable 1,076 1,151
Deferred income taxes 115 100
Other liabilities 2,638 2,661
--------- ------------
Total Liabilities 103,182 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 10,209,160 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 214 188
Net unrealized appreciation (depreciation) of equity securities (3) (3)
Retained earnings (8,832) (11,468)
--------- ------------
7,740 4,085
Less common stock held in treasury, at cost, 36,300 shares (76) (76)
--------- ------------
Total Stockholders' Equity 7,664 4,009
--------- ------------
Total Liabilities and Stockholders' Equity $110,846 $98,365
========= ============
</TABLE>
See notes to consolidated financial statements.
Page 5 of 20 Pages
<PAGE>
Provident American Corporation and Subsidiaries
Consolidated Statements of Changes in Stockholders' Equity
(Amounts in thousands)
<TABLE>
<CAPTION>
Net Unrealized Net Unrealized
Preferred Stock Common Stock Additional Appreciation Appreciation
Paid in (Depreciation) Of Marketable
Shares Amount Shares Amount Capital of Bonds Securities
------ ------ ------ ------- ----------- --------------- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1997 580 $ 580 10,209 $ 1,021 $ 13,767 $ 188 $ (3)
Stock options and warrants exercised 3
Compensation expense on stock issuance
Warrants issued 990
Net unrealized
depreciation of bonds 26
appreciation of equity securities 0
Cash dividends declared on preferred stock
Net income
---- ----- ------ ------- -------- ----- -------
BALANCE, MARCH 31, 1998 580 $ 580 10,209 $ 1,021 $ 14,760 $ 214 $ (3)
==== ===== ====== ======= ======== ===== =======
Retained Treasury
Earnings Stock
(Deficit) (at cost) Total
--------- --------- -----
BALANCE, DECEMBER 31, 1997 $ (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
Cash dividends declared on preferred stock (37) (37)
Net income 2,673 2,673
--------- ----- -------
BALANCE, MARCH 31, 1998 $ (8,832) $ (76) $ 7,664
========= ===== =======
</TABLE>
See notes to consolidated financial statements.
Page 6 of 20 Pages
<PAGE>
Provident American Corporation and Subsidiaries
Consolidated Statements of Cash Flows
(Dollars in thousands)
<TABLE>
<CAPTION>
3 Months Ended March 31,
1998 1997
------- ------
<S> <C> <C>
Cash flows from operating activities
Net income (loss) $ 2,673 $ 815
Adjustments to reconcile net income (loss)
to net cash provided by (used in) operating activities
Depreciation and amortization 229 158
Net realized (gain) on investments (998)
Not realized (gain) on sale of subsidiary (4,000)
Decrease (increase) in
Premium due and uncollected, unearned
premium and premium received in advance (2,050) 119
Due to/from reinsurers (4,756) (344)
Due from third party administrator (5,391) 0
Deferred policy acquisition costs, net 39 (2,131)
Accrued investment income 35 (59)
Other assets, current and deferred income
taxes and other liabilities (1,050) 1,364
Accrued commissions and expenses (986) 127
Future policy benefits and claims 11,197 (1,641)
======= ======
Net cash provided by (used in) operating activities (4,060) (2,590)
======= ======
Cash flows from investing activities
Purchases of bonds (1,676) (3,530)
Purchases of equity securities 0 (1,010)
Sale of bonds 2,104 796
Sale of equity securities 4,000 4,086
Maturity of investments and loans 0 892
Repayments of loans receivable 3 0
Loans to officer, director and shareholder (22) (7)
Purchases of property and equipment (298) (159)
</TABLE>
Continued on next page.
See notes to consolidated financial statements.
Page 7 of 20 Pages
<PAGE>
Provident American Corporation and Subsidiaries
Consolidated Statements of Cash Flows (continued)
(Dollars in thousands)
<TABLE>
<CAPTION>
3 Months Ended March 31,
1998 1997
---------- ----------
<S> <C> <C>
Cash flows from financing activities
Withdrawals from contractholder deposit funds (589) (300)
Repayments of notes payable (132) (115)
Issuance of common stock 4 87
Dividends paid on preferred and common stock (37) (37)
-------- -------
Net cash from financing activities (755) (365)
-------- -------
Increase (decrease) in cash and cash equivalents (703) (1,887)
Cash and cash equivalents, beginning of period 16,767 6,218
-------- -------
Cash and cash equivalents, end of period $16,064 $ 4,331
-------- -------
Supplemental disclosure of cash flow information:
Interest paid $ 52 $ 4
Income taxes paid (refunded), net $ (942)
Non-cash financing, activities:
Issuance of warrants $ 990
</TABLE>
See notes to consolidated financial statements
Page 8 of 20 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 three-month period ended March 31,
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.
Page 9 of 20 Pages
<PAGE>
The Company's new non-insurance subsidiaries, Provident Health
Services, Inc. ("PHS") and its wholly owned subsidiary Insurion, Inc.
("Insurion"), 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 Insurion 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:
3 Months Ended
March 31,
1998 1997
---- ----
Accident, and health benefits
Gross before reinsurance ceded $23,845 $11,847
Less reinsurance ceded 11,749 5,675
------- -------
Net of reinsurance $12,096 $ 6,172
======= =======
Commissions
Gross before reinsurance ceded $ 7,587 $ 4,091
Less reinsurance ceded 3,915 1,650
Less deferred acquisition costs 880 898
------- -------
Net $ 2,792 $ 1,543
======= =======
Other operating expenses
Gross before reinsurance ceded $ 7,405 $ 5,878
Less reinsurance ceded 1,729 1,103
Less deferred acquisition costs 416 1,602
------- -------
Net $ 5,261 $ 3,173
======= =======
Page 10 of 20 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 the
first quarter of 1998 has improved due to improved underwriting and rate
increases and therefore the Company has deferred policy acquisition costs
during the first quarter of 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 March 31, 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 11 of 20 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
managed-care and health insurance policies ("the Products") for individuals
and groups of less than fifty individuals in the United States. Additionally
AOL will advertise the Products to its subscribers on AOL's online network
under a brand name to be used exclusively for the Products. The Products will
be sold on-line through a PHS web-site linked to the AOL service. It is
anticipated that Internet-based sales of the Products will be tested in the
third quarter of 1998 and offered generally to AOL subscribers in the fourth
quarter of 1998.
The AOL Agreement has an initial term commencing on February 1, 1998
and ending on September 30, 1999, with a renewal period of two additional years
at PHS's election. As consideration under the AOL Agreement, PHS will pay $8,000
to AOL during 1998 and the Company agreed to issue warrants to AOL. PHS paid AOL
$1,500 and $2,500 during the first and second quarters of 1998, respectively,
with $4,000 due AOL during the third quarter of 1998. The Company will account
for the $8,000 that PHS will pay to AOL as a deferred cost asset, which will be
amortized over the balance of the initial term. In addition, the Company issued
to AOL warrants to purchase 300,000 shares of the Company's common stock at an
exercise price of $4.48 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)
will be recognized as a deferred cost asset as of March 31, 1998 and will be
amortized over the initial term of the AOL Agreement starting October 1, 1998.
The AOL Agreement also provides for the issuance of warrants subject to the
terms and conditions of the AOL Agreement.
If PHS elects the two-year renewal term, then PHS shall make an
additional payment to AOL of $32,500 on or before September 30, 1999. Under
certain circumstances the AOL Agreement can be extended by AOL. If PHS
exercises its right to renew the AOL Agreement then the AOL Agreement also
provides for the issuance of warrants subject to the terms and conditions of
the AOL Agreement.
PHS will pay additional administrative fees to AOL if applications
exceed certain levels for the initial and renewal terms of the AOL Agreement.
Note E - 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 12 of 20 Pages
<PAGE>
Note F - Forward-looking Statements
The information contained in the Quarterly Report on form 10-Q for the
quarter ended March 31, 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 13 of 20 Pages
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
Results of Operations
For the three months ended March 31, 1998 ("the current year"), the
Company's net income applicable to common stock for the current year was $2.6
million or $.22 per diluted share compared to net income of $0.8 million
or $0.06 per diluted share for the three months ended March 31, 1997
("the prior year"). The Company's net income was favorably impacted by a $4
million gain on the sale of MMC, partially offset by higher health benefit
claims experience and costs related to the transition of group health
administration to HPS discussed later. Net income for the prior year included a
$1 million realized gain on the sale of investments, primarily Loewen stock
received as the result of a litigation settlement received in 1996.
Accident and health gross premium was $28.7 million for the current
year compared to $18.6 million for the prior year and accident and health ceded
premium was $11.7 million for the current year as compared to $8.4 million for
the prior year. The increases were the result of increased new business from
one-life managed-care health insurance products.
At March 31, 1998 and 1997, annualized accident and health premium in
force on small group and managed-care business amounted to $100.4 million and
$76.2 million, respectively, consisting of approximately 51,000 and 40,000
covered lives, respectively. The $24.2 million net increase in annualized
premium from March 31, 1998 to March 31, 1997 resulted from new business
issued of $72.6 million, of which $19.5 million occurred in the current year,
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 Inc. for access to network providers and advantageous fee
schedules, while "HealthQuest" relies on regional PPOs. The Provident Solution
and HealthQuest comprised 86% and 71% of annualized premium in force as of March
31, 1998 and 1997, respectively.
Life and annuity net premium, consisting primarily of group life and
individual pre-need and final expense business accounted for $2.5 million for
the current year compared to $2.4 million for the prior year due to a slight
increase in sales attributable to an increase in sales of traditional whole life
policies, offset by lapsation of the Company's pre-need and final expense life
inforce.
Net investment income was $0.9 million for the current year compared
to $0.9 million for the prior year. The gross average book yield on bond
investments, which accounted for 96% total investments for the quarters ended
March 31, 1998 and December 31, 1997, was 5.9% and 6.5% for the quarter ended
March 31, 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 14 of 20 Pages
<PAGE>
Accident and health policy benefits represented 71.5% of accident and
health earned premium for the current year up from 60% from the prior year,
due to higher health policy benefits in the Company's one-life managed-care
products compared to last year. In 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. Based on
the Company's current assessment of loss experience, the Company estimates
accident and health policy benefits for last year at 76% 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.
Increase in liability for future policy benefits of $1.1 million in the
current year declined from $1.6 million from the prior year, primarily due to a
$0.5 million reduction to prior year policy claims for group life business.
Commissions, net of ceding allowance and deferred acquisition costs of
$2.8 million for the current year increased from $1.5 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 $5.3 million increased compared to
$3.2 million for the prior year due to $1.2 million of costs related to the
HPS transition and increased policy administration expenses arising from
increased volume. Costs related to the HPS transition included claims
processing charges, systems cost related to migrating policyholder and agent
data and travel costs. Other operating expenses deferred as acquisition costs
in the current year declined compared to the prior year due to cost savings
resulting from the outsourcing to HPS.
Other operating expenses, net of ceding allowance and deferred
acquisition costs for the current year excluding HPS transition costs and
non-deferred acquisition costs represented 21.1% of net premiums for the current
year which decreased from 25% 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 15 of 20 Pages
<PAGE>
Cash and investments carried at market value at March 31, 1998
amounted to $62.7 million. This included $44.8 million of bonds issued by the
U.S. Government, government agencies, public utilities and other corporations,
$2.0 million invested in policy loans, real estate and other invested assets
and $16.0 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 March 31, 1998 and 1997 was
5.9% 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 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 $4.1 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 $12.3 million increased
in the current year in comparison to the prior year due to higher premium and
claim volume along with delays in claim processing resulting from the HPS
transition. 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
and the Company anticipates that claims disbursements will increase during the
second and third quarters of 1998.
Change in amounts due from reinsurers of $4.8 million in 1998
increased in comparison to the prior year due to higher direct and ceded claim
payment activity and delays in processing reinsurance settlements to old and
new reinsurers. Amounts due from Swiss RE were collected during the second
quarter of 1998. New information requirements combined with the HPS transition
caused delays in submitting reinsurance settlements to reinsurers. The Company
anticipates that delays in reinsurance processing will continue into the third
quarter of 1998.
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 $5.4 million
change in amounts due from third party administrator represented March 1998's
net cash settlement collected in April. Premium due and uncollected, unearned
premium and premium received in advance was $2.1 million as a result of new
billing due dates established by HPS. Premium billings that were due beyond
March 31, 1998 were prorated thus reducing collected premiums in March and for
the first quarter. All HPS administered premium amounts are now due from
customers by the end of the month. 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 $1.1 million related primarily to Insurion and payments to AOL,
net of funds received from HPS.
Page 16 of 20 Pages
<PAGE>
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.
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 $12.5 million at March 31, 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 17 of 20 Pages
<PAGE>
Capital Expenditures and Commitments
In March 1998, the Company announced an interactive marketing agreement
with AOL described in Note D. In connection with this agreement the Company has
paid AOL $4 million as of the end of the second quarter of 1998 and will pay AOL
an additional $4 million in the third quarter of 1998. Additionally, the Company
expects to incur certain 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 million private placement of Insurion, 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 Insurion's web site and pursuing other external sources of funds in order
to fund payments to AOL and start up expenses.
Page 18 of 20 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:
(1) CHANGES IN REGISTRANT'S CERTIFYING ACCOUNTANT filed
under Item 4 dated February 26, 1998
(2) Item 5 regarding the Company's subsidiary, Provident
Health Services, Inc. entering into an Interactive
Marketing Agreement with America Online, Inc. filed
on March 27, 1998
Page 19 of 20 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 CEO
By: /s/ James O. Bowles
--------------------------------------------------------
James O. Bowles, President
By: /s/ Benedict J, Iacovetti
--------------------------------------------------------
Benedict J. Iacovetti, Chief Financial Officer
Date: July 16, 1998
Page 20 of 20 Pages
<PAGE>
PROVIDENT AMERICAN CORPORATION EXHIBIT 11
COMPUTATION OF EARNINGS PER SHARE
<TABLE>
<CAPTION>
(In thousands except per share data) Three Months Ended March 31,
1998 1997
- ------------------------------------------------------------------------------------------------------
<S> <C> <C>
Basic Earnings Per Share
NET INCOME APPLICABLE TO COMMON STOCK: $ 2,636 $ 778
- ------------------------------------------------------------------------------------------------------
WEIGHTED AVERAGE SHARES: 10,173 10,024
- ------------------------------------------------------------------------------------------------------
BASIC EARNINGS PER SHARE: $ 0.26 $ 0.08
- ------------------------------------------------------------------------------------------------------
Diluted Earnings Per Share
NET INCOME APPLICABLE TO COMMON STOCK: $ 2,636 $ 778
- ------------------------------------------------------------------------------------------------------
WEIGHTED AVERAGE SHARES:
Common stock 10,173 10,024
Common stock equivalents applicable to stock options and warrants 1,614 2,096
- ------------------------------------------------------------------------------------------------------
Total 11,787 12,120
- ------------------------------------------------------------------------------------------------------
DILUTED EARNINGS PER SHARE: $ 0.22 $ 0.06
- ------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 7
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<DEBT-HELD-FOR-SALE> 44,764
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 9
<MORTGAGE> 295
<REAL-ESTATE> 912
<TOTAL-INVEST> 46,707
<CASH> 16,064
<RECOVER-REINSURE> 20,811
<DEFERRED-ACQUISITION> 2,561
<TOTAL-ASSETS> 110,846
<POLICY-LOSSES> 40,488
<UNEARNED-PREMIUMS> 443
<POLICY-OTHER> 43,653
<POLICY-HOLDER-FUNDS> 5,359
<NOTES-PAYABLE> 4,945
0
580
<COMMON> 1,021
<OTHER-SE> 14,760
<TOTAL-LIABILITY-AND-EQUITY> 110,846
19,397
<INVESTMENT-INCOME> 919
<INVESTMENT-GAINS> 4,000
<OTHER-INCOME> 205
<BENEFITS> 13,295
<UNDERWRITING-AMORTIZATION> 233
<UNDERWRITING-OTHER> 8,279
<INCOME-PRETAX> 2,714
<INCOME-TAX> 41
<INCOME-CONTINUING> 2,673
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,673
<EPS-PRIMARY> 0.26
<EPS-DILUTED> 0.22
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
