<PAGE>
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                       SECURITIES AND EXCHANGE COMMISSION
 
                             WASHINGTON, D.C. 20549
 
                            ------------------------
 
                                 FORM 10-Q/A-1
 
[X]  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
    EXCHANGE ACT OF 1934 FOR QUARTERLY PERIOD ENDED JUNE 30, 1997
 
                                       OR
 
[ ]  TRANSACTION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
     EXCHANGE ACT OF 1934
 
                          COMMISSION FILE NO. 0-21440
 
                            ------------------------
 
                        PHYSICIAN CORPORATION OF AMERICA
 
             (Exact name of Registrant as specified in its charter)
 
               DELAWARE                                 48-1006287
   (State or Other Jurisdiction of                    (IRS Employer
    Incorporation or Organization)                 Identification No.)
 
                             6101 BLUE LAGOON DRIVE
 
                                MIAMI, FL 33126
 
               (Principal Executive Offices, Including Zip Code)
 
       Registrant's telephone number including area code: (305) 267-6633
 
                            ------------------------
 
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (I) HAS FILED ALL REPORTS REQUIRED
TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING
THE PRECEDING TWELVE MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE REGISTRANT WAS
REQUIRED TO FILE SUCH REPORTS), AND (II) HAS BEEN SUBJECT TO SUCH FILING
REQUIREMENTS FOR THE PAST NINETY DAYS.
 
                              YES __X__  NO _____
 
               APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
 
                  PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
 
INDICATE BY CHECK MARK WHETHER REGISTRANT HAS FILED ALL DOCUMENTS AND REPORTS
REQUIRED TO BE FILED BY SECTION 12, 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 SUBSEQUENT TO THE DISTRIBUTION OF SECURITIES UNDER A PLAN CONFIRMED BY A
COURT.
 
                             Not Applicable  __X__
 
                     APPLICABLE ONLY TO CORPORATE ISSUERS:
 
<TABLE>
<CAPTION>
                                 NUMBER OF SHARES OUTSTANDING
<S>                              <C>
     TITLE OF EACH CLASS               AT JUNE 30, 1997
------------------------------   ----------------------------
         Common Stock                     38,839,791
</TABLE>
 
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--------------------------------------------------------------------------------
<PAGE>
                        PHYSICIAN CORPORATION OF AMERICA
                       QUARTERLY REPORT ON FORM 10-Q/A-1
 
                        FOR QUARTER ENDED JUNE 30, 1997
 
                               TABLE OF CONTENTS
 
<TABLE>
<CAPTION>
                                                                                                              PAGE
                                                                                                            ---------
<S>              <C>                                                                                        <C>
PART I.          Financial Information
    Item 1.      Financial Statements.....................................................................       1-10
    Item 2.      Management's Discussion and Analysis of Financial Condition and Results of Operations....      11-16
 
PART II.         Other Information
    Item 1.      Legal Proceedings........................................................................         17
    Item 2.      Changes in Securities....................................................................         18
    Item 3.      Defaults Upon Senior Securities..........................................................         18
    Item 4.      Submission of Matters to a Vote of Security Holders......................................         18
    Item 5.      Other Information........................................................................         18
    Item 6.      Exhibits and Reports on Form 8-K.........................................................         18
 
Signature Page............................................................................................         19
</TABLE>
<PAGE>
               PHYSICIAN CORPORATION OF AMERICA AND SUBSIDIARIES
                          CONSOLIDATED BALANCE SHEETS
                      JUNE 30, 1997 AND DECEMBER 31, 1996
 
<TABLE>
<CAPTION>
                                                                                                UNAUDITED
                                                                                       ---------------------------
                                                                                         JUNE 30,    DECEMBER 31,
                                                                                           1997          1996
                                                                                       ------------  -------------
                                                                                             (IN THOUSANDS)
<S>                                                                                    <C>           <C>
                                       ASSETS
Current assets:
  Cash and cash equivalents..........................................................  $     88,472   $   134,011
 
  Short term investments.............................................................       138,009       130,788
 
  Accounts receivable, net of allowance of approximately $53,799 and $52,351 at June
    30, 1997 and December 31, 1996, respectively:
 
    Trade (health and workers' compensation premiums, and administrative service
      fees)..........................................................................        65,567        92,454
 
    Reinsurance and other recoverables on paid and unpaid losses.....................       108,460       102,893
 
    Other............................................................................        17,842        20,340
 
  Prepaid expenses, inventories and other current assets.............................         6,392         8,362
 
  Income taxes receivable............................................................       --             42,274
 
  Deferred income tax benefit........................................................        19,206        23,280
                                                                                       ------------  -------------
 
      Total current assets...........................................................       443,948       554,402
                                                                                       ------------  -------------
 
Property and equipment...............................................................        49,818        52,132
 
Long term investments................................................................       222,002       335,015
 
Reinsurance and other recoverables on unpaid losses..................................       218,099       246,211
 
Statutory deposits and other assets..................................................        77,797        45,242
 
Intangible assets, net...............................................................       118,381       121,985
                                                                                       ------------  -------------
 
                                                                                       $  1,130,045   $ 1,354,987
                                                                                       ------------  -------------
                                                                                       ------------  -------------
</TABLE>
 
                                       1
<PAGE>
               PHYSICIAN CORPORATION OF AMERICA AND SUBSIDIARIES
 
                     CONSOLIDATED BALANCE SHEETS, CONTINUED
 
                      JUNE 30, 1997 AND DECEMBER 31, 1996
 
<TABLE>
<CAPTION>
                                                                                                UNAUDITED
                                                                                       ---------------------------
                                                                                         JUNE 30,    DECEMBER 31,
                                                                                           1997          1996
                                                                                       ------------  -------------
                                                                                             (IN THOUSANDS)
<S>                                                                                    <C>           <C>
                        LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
  Accounts payable, accrued expenses and other current liabilities...................  $     70,995   $    82,792
  Health claims payable                                                                     141,827       182,206
  Current portion of other claims payable, primarily workers' compensation...........       199,351       230,476
  Unearned premiums and service fees.................................................        13,172        51,562
  Current portion of long-term debt and obligations under capital leases.............       121,791       122,709
  Income taxes payable...............................................................         4,090       --
                                                                                       ------------  -------------
      Total current liabilities......................................................       551,226       669,745
Long-term debt and obligations under capital leases, less current portion............         9,489        10,344
Long-term portion of other claims payable, primarily workers' compensation...........       586,588       699,299
Deferred income taxes................................................................         3,493         7,432
Deferred income and other long-term liabilities......................................        35,148        32,999
                                                                                       ------------  -------------
      Total liabilities..............................................................     1,185,944     1,419,819
                                                                                       ------------  -------------
Stockholders' equity (deficit):
  Preferred stock, $1.00 par value, 10,000,000 shares authorized; none issued and
    outstanding......................................................................       --            --
  Common stock, $.01 par value, authorized 200,000,000 shares; issued 38,839,791 and
    38,829,456 shares at June 30, 1997 and December 31, 1996, respectively...........           388           388
  Additional paid-in capital.........................................................       136,265       136,435
  Accumulated deficit................................................................      (182,518)     (193,627)
  Unrealized gain (loss) on investments..............................................        (1,030)        1,182
  Common stock held in treasury -- at cost; 450,419 and 460,754 shares at June 30,
    1997 and December 31, 1996, respectively.........................................        (9,004)       (9,210)
                                                                                       ------------  -------------
      Total stockholders' equity (deficit)...........................................       (55,899)      (64,832)
Commitments and contingencies........................................................
                                                                                       ------------  -------------
                                                                                       $  1,130,045   $ 1,354,987
                                                                                       ------------  -------------
                                                                                       ------------  -------------
</TABLE>
 
                                       2
<PAGE>
               PHYSICIAN CORPORATION OF AMERICA AND SUBSIDIARIES
                     CONSOLIDATED STATEMENTS OF OPERATIONS
           FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 1997 AND 1996
 
<TABLE>
<CAPTION>
                                                                UNAUDITED                     UNAUDITED
                                                       ----------------------------  ----------------------------
                                                            THREE MONTHS ENDED             SIX MONTHS ENDED
                                                                 JUNE 30,                      JUNE 30,
                                                       ----------------------------  ----------------------------
                                                           1997           1996           1997           1996
                                                       -------------  -------------  -------------  -------------
                                                                 (IN THOUSANDS, EXCEPT PER SHARE DATA)
 
<S>                                                    <C>            <C>            <C>            <C>
Revenues:
  Health premiums....................................  $     349,908  $     324,602  $     682,741  $     642,811
  Workers compensation related revenues..............         15,440         13,291         39,356         62,654
  Investment income..................................          9,317          5,913         17,120         11,609
  Other revenues.....................................          2,463          4,383          3,395         10,038
                                                       -------------  -------------  -------------  -------------
    Total revenues...................................        377,128        348,189        742,612        727,112
Operating expenses:
  Medical costs......................................        298,402        282,904        588,339        560,869
  Health administrative, marketing and other
    expenses.........................................         45,148         50,242         86,848        102,275
  Workers' compensation related administrative,
    marketing and other expenses.....................         17,340          7,394         36,601         49,910
  Depreciation and amortization......................          4,427          5,735          8,792         11,969
  Other operating expenses...........................            147          4,289            208          9,071
                                                       -------------  -------------  -------------  -------------
    Total operating expenses.........................        365,464        350,564        720,788        734,094
    Operating income (loss)..........................         11,664         (2,375)        21,824         (6,982)
Gain on sale of subsidiaries.........................       --                7,900       --                7,900
Interest expense.....................................         (4,012)        (3,695)        (9,215)        (7,722)
Other income (expense)...............................            (35)          (147)           (50)          (137)
                                                       -------------  -------------  -------------  -------------
  Earnings (loss) before income taxes................          7,617          1,683         12,559         (6,941)
Income tax benefit (expense).........................         (1,131)         3,653         (1,450)         7,343
                                                       -------------  -------------  -------------  -------------
    Net earnings.....................................  $       6,486  $       5,336  $      11,109  $         402
                                                       -------------  -------------  -------------  -------------
                                                       -------------  -------------  -------------  -------------
Net earnings per common and common equivalent
 share...............................................  $        0.17  $        0.14  $        0.29  $        0.01
                                                       -------------  -------------  -------------  -------------
                                                       -------------  -------------  -------------  -------------
Net earnings per common and common equivalent share
 assuming full dilution..............................  $        0.17  $        0.14  $        0.29  $        0.01
                                                       -------------  -------------  -------------  -------------
                                                       -------------  -------------  -------------  -------------
Number of common shares used in computation of
 primary earnings per share..........................     38,932,000     39,144,000     38,935,000     39,281,000
                                                       -------------  -------------  -------------  -------------
                                                       -------------  -------------  -------------  -------------
Number of common shares used in computation of fully
 diluted earnings per share..........................     38,935,000     39,144,000     38,935,000     39,281,000
                                                       -------------  -------------  -------------  -------------
                                                       -------------  -------------  -------------  -------------
</TABLE>
 
                                       3
<PAGE>
               PHYSICIAN CORPORATION OF AMERICA AND SUBSIDIARIES
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND 1996
 
<TABLE>
<CAPTION>
                                                                                                 UNAUDITED
                                                                                          ------------------------
                                                                                              SIX MONTHS ENDED
                                                                                                  JUNE 30,
                                                                                          ------------------------
                                                                                             1997         1996
                                                                                          -----------  -----------
                                                                                               (IN THOUSANDS)
<S>                                                                                       <C>          <C>
Cash flows from operating activities:
  Net earnings..........................................................................  $    11,109  $       402
  Adjustments to reconcile net earnings to net cash provided by operating activities:
    Depreciation and amortization.......................................................        8,792       11,969
    Amortization of premium/accretion of discount.......................................          303        1,405
    Gain on sale of subsidiaries........................................................      --            (7,900)
    Loss on sale of property and equipment..............................................      --                70
    Changes in working capital:
      Accounts receivable...............................................................       51,931      (56,958)
      Income taxes......................................................................       46,363       11,371
      Accounts payable, accrued expenses and other current liabilities..................         (647)         215
      Claims payable....................................................................     (184,215)     125,932
      Unearned premiums.................................................................      (38,390)     (13,917)
      Deferred income taxes.............................................................        2,514       (7,725)
      Other changes in other assets and liabilities.....................................       (8,424)        (266)
                                                                                          -----------  -----------
      Total adjustments.................................................................     (121,773)      64,196
                                                                                          -----------  -----------
      Net cash provided by (used in) operating activities...............................     (110,664)      64,598
                                                                                          -----------  -----------
Cash flows from investing activities:
  Purchase of investments...............................................................      (52,312)    (200,075)
  Proceeds from sale of investments.....................................................      119,465      115,068
  Purchase of property and equipment....................................................       (2,595)      (6,505)
  Proceeds from sale of property and equipment..........................................            3        1,574
  Statutory deposits and other assets...................................................        2,325      (63,955)
  Disposals, net of cash sold...........................................................      --            (3,103)
                                                                                          -----------  -----------
      Net cash provided by (used in) investing activities...............................       66,886     (156,996)
                                                                                          -----------  -----------
Cash flows from financing activities:
  Proceeds from borrowings..............................................................          146      --
  Principal payments on debt and capital leases.........................................       (1,109)     (15,558)
  Principal payments on covenants not-to-compete........................................         (825)      (1,500)
  Proceeds from issuance of common stock................................................           27        1,314
                                                                                          -----------  -----------
      Net cash provided by (used in) financing activities...............................       (1,761)     (15,744)
                                                                                          -----------  -----------
Net decrease in cash....................................................................      (45,539)    (108,142)
Cash and cash equivalents at beginning of period........................................      134,011      164,706
                                                                                          -----------  -----------
Cash and cash equivalents at end of period..............................................  $    88,472  $    56,564
                                                                                          -----------  -----------
                                                                                          -----------  -----------
</TABLE>
 
                                       4
<PAGE>
                        PHYSICIAN CORPORATION OF AMERICA
 
              NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
 
                        FOR QUARTER ENDED JUNE 30, 1997
 
            (AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
 
NOTE A: ORGANIZATION
 
    The accompanying unaudited consolidated financial statements of Physician
Corporation of America ("PCA" or the "Company") have been prepared in accordance
with generally accepted accounting principles for interim financial information
and the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly,
they do not include all information and footnotes required by generally accepted
accounting principles for annual financial statements. In management's opinion,
all adjustments, consisting only of normal recurring adjustments, considered
necessary for a fair presentation have been included.
 
    The consolidated balance sheet as of December 31, 1996 was derived from the
registrant's audited financial statements.
 
    The results for the six months ended June 30, 1997 are not necessarily
indicative of the results to be expected for the full year.
 
NOTE B: PENDING MERGER
 
    On June 2, 1997, the Company entered into an Agreement and Plan of Merger
among Humana Inc. (Humana) HUMNOV, Inc., a wholly owned subsidiary of Humana,
and the Company (the "Merger Agreement"). The Merger Agreement provides for the
merger of HUMNOV, Inc. with and into the Company, pursuant to which each
outstanding share of the common stock of the Company will be converted into the
right to receive $7.00 per share in cash (subject to dissenters' rights of
appraisal). The proposed transaction will require the approvals from the
Company's shareholders and various state and federal regulatory agencies,
including, but not limited to, the Florida, Texas, and Puerto Rico Departments
of Insurance and State Medicaid Agencies in those jurisdictions. The Company has
filed a definitive proxy with the Securities and Exchange Commission dated
August 8, 1997 which gave notice of a special meeting of the shareholders of the
Company ("special meeting") to be held on September 8, 1997 to consider and act
upon a proposal to adopt the Merger Agreement. The close of business on July 25,
1997 has been fixed as the record date for the determination of shareholders
entitled to receive notice of and vote at the special meeting. All government
agency and regulatory filings have been made. The expiration of the waiting
period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 has
occurred. The Company anticipates the transaction to close in the third quarter
of 1997.
 
    Until the Merger Agreement is completed, the Company does not have the
immediate financial resources to fund the following: (i) the $16,750 loan from
Sierra Health Services, Inc. ("Sierra") which is due on September 17, 1997, (ii)
the $101,750 Credit Facility indebtedness which is due on October 1, 1997, and
(iii) the $80,000 reinsurance premium to be paid to Centre Reinsurance Company
of New York ("Centre Re") by October 31, 1997 if such reinsurance is to be
obtained. The Merger Agreement can be unilaterally terminated by either party on
October 31, 1997. On October 31, 1997, or upon earlier termination of the Merger
Agreement, the Company will be subject to the terms of a June 3, 1997 Florida
Department of Insurance (FDOI) Consent Order which permits the FDOI to place
PCA/P&C into receivership without contest from the Company. Further, if the
Merger Agreement is terminated, the Company would be required to submit a
revised plan to show NASDAQ how it will comply with NASDAQ's tangible net worth
requirements to avoid termination of its status as a listed company on NASDAQ.
In the event that the Merger Agreement is terminated, the Company would
re-establish its evaluation of refinancing alternatives to raise the capital
(whether debt or equity related) required to meet its obligations or outright
sale/merger of the Company with another party.
 
                                       5
<PAGE>
                        PHYSICIAN CORPORATION OF AMERICA
 
        NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
                        FOR QUARTER ENDED JUNE 30, 1997
 
            (AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
 
NOTE C: EARNINGS PER COMMON AND COMMON EQUIVALENT SHARE
 
    Primary earnings per share were based on the weighted average number of
common and common equivalent shares outstanding during the periods presented.
Equivalent shares consist of those shares issuable upon the assumed exercise of
stock options calculated under the treasury stock method, based on average stock
market prices in the periods.
 
    Fully diluted earnings per share were computed using the weighted average
number of common and common equivalent shares outstanding in the periods,
assuming exercise of stock options calculated under the treasury stock method,
based on the higher of average stock prices in the periods or the stock market
price at the end of the periods. In April 1997, the Company repriced certain of
its employee stock options to $7.625. This amount exceeded the market price of
its common stock by $3.125 on the date of repricing.
 
NOTE D: DEBT
 
    On April 22, 1997, the Company entered into an eighth amendment to modify
its $101,750 Credit Facility Agreement with its primary lenders. The significant
terms of the amendment include (i) extending the maturity date of the loan to
October 1, 1997, (ii) increasing the interest rate to prime plus 3% through July
31, 1997 and to prime plus 4% during August and September 1997, (iii) charging
an amendment fee at the time of amendment of approximately $1,023 and, in the
event the Company did not enter into a merger or other agreement to refinance
the debt by July 31, 1997, an additional fee of 1% of the then outstanding
balance of indebtedness, and (iv) customary financial covenants. Additionally,
the Company is indebted to Sierra for $16,750 under the terms of a demand note
payable. Interest on this note accrues at 8.25% with the default interest rate
increasing by 5%. In September 1997, Sierra may demand repayment of the note
which would then become due after the Credit Facility indebtedness is repaid.
The Company does not have the existing cash resources to be able to pay the
principle balance due Sierra nor its Credit Facility lenders on October 1, 1997
and contemplates the satisfaction of both items of indebtedness as part of the
Humana merger. See Management's Discussion and Analysis -- "Liquidity and
Capital Resources" for further discussion.
 
NOTE E: WORKERS' COMPENSATION
 
    PCA Property and Casualty Insurance Company ("PCA/P&C"), the Company's
Florida property and casualty insurer, has reported a deficit as of June 30,
1997 and December 31, 1996, of approximately $115,000 and $121,000,
respectively, under generally accepted accounting principles. This deficit
resulted from losses incurred or assumed under excess insurance, reinsurance and
indemnification contracts in favor of assessable workers' compensation self
insurance funds and mutual insurers.
 
    The Florida Department of Insurance ("DOI") has exerted increasing control
over, and has initiated legal proceedings against, PCA/P&C because of its
deteriorating financial condition. In November 1996, PCA/P&C entered into an
administrative consent order, pursuant to which PCA/P&C ceased writing and
renewing insurance policies, subjected most of its business operations and
decisions to review and approval by the DOI, and was required to submit a
corrective plan satisfactory to the DOI. In late February 1997, the DOI brought
judicial proceedings seeking its appointment as receiver for PCA/P&C for
purposes of rehabilitation. Several proposed corrective plans were submitted,
but none were approved.
 
                                       6
<PAGE>
                        PHYSICIAN CORPORATION OF AMERICA
 
        NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
                        FOR QUARTER ENDED JUNE 30, 1997
 
            (AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
 
NOTE E: WORKERS' COMPENSATION (CONTINUED)
    Under a Forbearance Agreement entered into May 2, 1997 (the "Forbearance
Agreement"), PCA/ P&C consented to the DOI's appointment as receiver for
purposes of rehabilitation or liquidation on or after June 2, 1997. The DOI
allowed PCA/P&C until that date to submit a satisfactory plan assuring full
payment of claims and in the interim obtained greater control over its affairs
and access to its records. Separately, the DOI requested that the Company and
certain subsidiaries pay PCA/P&C amounts aggregating approximately $35,000 and
refused to permit PCA/P&C to pay substantial amounts due to affiliates. The
Company disputed these demands but agreed to inform the DOI of progress in
negotiations intended to obtain reinsurance coverage for PCA/P&C and/or to pay
for such coverage through a financing transaction or business combination as
described elsewhere herein.
 
    In connection with execution of the Merger Agreement, and after lengthy
negotiations in which the DOI participated, on June 2, 1997, the Company,
PCA/P&C and PCA Solutions entered into four interrelated agreements with Centre
Re and an affiliate. Under the Aggregate Excess of Loss Reinsurance Agreement
(the "Reinsurance Agreement"), Centre Re agreed to pay up to $230,000 to satisfy
policyholder claims against PCA/P&C if PCA/P&C is not able to discharge all its
liabilities from its own resources. The Company agreed to pay or arrange for
payment of certain other liabilities of PCA/P&C, to contribute $20,100 to
PCA/P&C for tax benefits realized and to purchase or guarantee the collection of
specified assets. In addition, upon entering into the Reinsurance Agreement,
PCA/P&C paid to and received from various affiliates amounts agreed by the
parties to be owing through March 31, 1997. Of the total premium of $84,000
payable to Centre Re, $4,000 has been paid and has been recorded as a contra
revenue amount included in Workers' Compensation related revenues in the
accompanying unaudited statements of operations for the three and six months
ended June 30, 1997. The balance of the premium would be due at closing of the
Reinsurance Agreement. In the event the Company consummates the Reinsurance
Agreement, the Company may receive an experience refund up to a maximum amount
of $42,000 and would record an expense of approximately $38,000 at such time. If
the balance of the premium is not paid or the Centre Re transaction is not
closed by October 31, 1997, the Reinsurance Agreement and the three related
agreements identified below will automatically terminate, and Centre Re will
retain the $4,000 premium already paid and the Company would not be liable for
the remaining premium.
 
    Under the Claims Run-Off Administration Services Agreement (the "Claims
Agreement"), PCA Solutions will act as a third party claims service
administrator for purposes of handling the run-off of PCA/P&C's insurance
liabilities. The Claims Agreement, which supplements the prior Management
Contract under which PCA Solutions serves as managing general agent for PCA/P&C,
imposed additional duties on PCA Solutions and entitles Centre Re to participate
in and direct employment, compensation and property acquisition decisions of PCA
Solutions. The Company guaranteed PCA Solution's performance of its duties under
the Claims Agreement. PCA Solutions' compensation for its services will be
deferred and paid only from any available funds of PCA/P&C remaining after the
run-off, which will probably be more than five years from the date of this
statement.
 
    Under the Investment Management Agreement, Zurich Investment Management,
Inc., an affiliate of Centre Re, will manage the investment portfolio of
PCA/P&C, within agreed guidelines and constraints under the Florida Insurance
Code, for fees based on the size of the portfolio. Under the Tax Allocation and
Escrow Agreement between the Company and PCA/P&C, the latter will receive the
 
                                       7
<PAGE>
                        PHYSICIAN CORPORATION OF AMERICA
 
        NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
                        FOR QUARTER ENDED JUNE 30, 1997
 
            (AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
 
NOTE E: WORKERS' COMPENSATION (CONTINUED)
benefit of certain federal net operating loss carryforwards of up to $72,000 if
and when realized in the future by its corporate affiliates due to its net
operating losses and capital loss carryforwards.
 
    If the Centre Re transaction is closed (whether or not in connection with
the Merger), in addition to paying the balance of the reinsurance premium, the
Company, PCA/P&C, and PCA Solutions are required to collateralize various of
their obligations to Centre Re. PCA/P&C must pledge all its assets to secure its
obligations under the Reinsurance Agreement. In addition, the Company must
pledge $45,000 of liquid investments and its stock in PCA Solutions, and PCA
Solutions must pledge all of its assets, to secure (a) obligations of PCA
Solutions under the Claims Agreement, (b) the Company's guaranty of PCA
Solutions' performance under the Claims Agreement and (c) certain of the
Company's obligations under the Reinsurance Agreement. The Company expects to
obtain the $45,000 of liquid investments through the Merger (or another
financing transaction or business combination). Other collateral agreed to be
pledged to Centre Re will be available only if the Company's present lenders
release their security interests in connection with repayment of their loans or
otherwise.
 
    The Reinsurance Agreement provides that either Centre Re or Humana may, by
notice, prevent the Centre Re transactions from closing if the Merger is
consummated. However, under the Agreement, Humana must, from and after the
Effective Time, select one of these three alternatives: (a) adhere to the Centre
Re agreement, (b) eliminate PCA/P&C's statutory deficit by making a capital
contribution in that amount and committing to make additional such contributions
as and when needed thereafter (the "Recapitalization Alternative") or (c) enter
into such other arrangements as the DOI deems acceptable in its sole discretion.
If Centre Re elects not to close the reinsurance transaction, Humana must comply
with the alternatives set forth in clauses (b) or (c) above. The DOI has
indicated that Humana's Recapitalization Alternative is acceptable. No other
alternative arrangement has been proposed or is now anticipated.
 
    Based on its evaluation of the Agreement and Centre Re agreements, on June
2, 1997, the DOI entered into a Joint Report to the Court and Supplemental
Agreement (the "Supplemental Agreement") with PCA/P&C. In the Supplemental
Agreement, the DOI determined that the Company had made sufficient progress
toward fulfilling the conditions in the Forbearance Agreement to justify
extending the period of forbearance from appointment of a receiver for PCA/P&C
and to allow a reasonable period for the agreed upon transactions to close. The
DOI agreed not to seek its appointment as receiver so long as certain conditions
are being met, including: payment of amounts due to PCA/P&C's creditors, the
absence of an event of default, absence of a material adverse change in the
financial condition of PCA/ P&C, PCA Solutions and Centre Re, and diligent
pursuit of regulatory approvals required to close the Merger by October 31,
1997. The DOI reserved the right to obtain its appointment as receiver for PCA/
P&C in the event of, among other circumstances, noncompliance with or material
misrepresentation in provisions of the Supplemental Agreement, denial of a
regulatory consent or approval requisite to closing of the Merger, and failure
to close the Merger by October 31, 1997. The Company agreed to cooperate in the
DOI's investigation of the assessable workers' compensation business and to keep
the DOI regularly informed of progress in obtaining consents necessary to
consummate the Merger. PCA/ P&C continues under the DOI's administrative
supervision, and the receivership petition remains pending.
 
                                       8
<PAGE>
                        PHYSICIAN CORPORATION OF AMERICA
 
        NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
                        FOR QUARTER ENDED JUNE 30, 1997
 
            (AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
 
NOTE E: WORKERS' COMPENSATION (CONTINUED)
    The Supplemental Agreement also provides that, if the DOI does not enforce
the Forbearance Agreement by obtaining its appointment as receiver or otherwise,
and if the Merger is consummated, the receivership proceeding respecting PCA/P&C
will be dismissed or abated and the parties will enter into a new administrative
consent order. That new order is to provide, among other things, for continued
administrative supervision of PCA/P&C at least through 1998 under somewhat less
stringent DOI control, suspension of PCA/P&C's certificate of authority (so that
it could not resume active insurance operations unless its certificate were
reinstated), and covenants that would protect the Company and its affiliates
against the assertion of certain claims based on matters predating March 31,
1997. The agreements among PCA/P&C, the DOI and other interested parties
including Humana may be modified before or after the Effective Time (subject to
required consent of the affected parties).
 
NOTE F: SIGNIFICANT CONTRACTS
 
    PUERTO RICO:
 
        Effective April 1, 1997, the Company's Puerto Rico HMO (PCA/P.R.) was
    awarded an additional contract to provide health services to approximately
    145,000 (reform) Medicaid members in the Southeastern region of Puerto Rico.
    This two-year contract is in addition to the two-year renewal of the
    Company's 270,000 member reform contract which was also effective April 1,
    1997. In conjunction with these contracts, PCA/P.R. pledged approximately
    $11,000 of investments in March 1997 to Puerto Rico insurance regulators.
    Such amount has been included in statutory deposits and other assets in the
    accompanying consolidated balance sheet.
 
    Additionally, the Company has committed to the Puerto Rico Insurance
Commission that the equity of PCA/P.R. will be sufficient by December 31, 1997
to meet a 7:1 ratio of premiums to capital. This commitment will likely require
the Company to infuse an additional $2,500 before December 31, 1997. See
Management's Decision and Analysis of Financial Condition and Results of
Operations - Liquidity and Capital Resources.
 
    FLORIDA:
 
        The Company's subsidiary, PCA Family Health Plans, Inc. (PCA Family)
    provides health services to Medicaid beneficiaries in Florida under the
    terms of an annual contract which expires on June 30, 1998.
 
    In the fourth quarter of 1996, AHCA initiated a competitive bidding process
whereby it would grade responses to request for proposal ("RFP") from qualified
bidders using both cost and quality of care criteria and award contracts to
selected bid winners to provide health services to Medicaid recipients in
Florida. PCA's response to the RFP was submitted to AHCA in November 1996. In
February 1997, AHCA announced its intent to award a 30-month Medicaid managed
care contract to bid winners including PCA, which were not expected to begin
before the end of the second quarter of 1997. The premium rates were expected to
be set at 92% of fee-for-service costs and PCA was awarded capacity to provide
services to up to 337,000 Medicaid beneficiaries, which was the largest award in
the state. In April 1997, AHCA reduced the rates it paid to managed care
organizations, including the Company, to amount equal to 92% of fee for service
costs, down from the 95% level then in effect.
 
    However, as a result of litigation brought against AHCA by certain parties
submitting responses to AHCA's RFP, in June 1997 AHCA withdrew its RFP and
entered into separate one year contracts with
 
                                       9
<PAGE>
                        PHYSICIAN CORPORATION OF AMERICA
 
        NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
                        FOR QUARTER ENDED JUNE 30, 1997
 
            (AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
 
NOTE F: SIGNIFICANT CONTRACTS (CONTINUED)
managed care organizations. Accordingly, PCA Family entered into a contract with
AHCA to provide health services from July 1, 1997 to June 30, 1998 to Medicaid
beneficiaries in Florida at premium rates which the Company anticipates will
approximate a 1-2% increase over those in place at June 30, 1997 on a per member
per month basis.
 
                                       10
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
  OF OPERATIONS
 
GENERAL
 
    The discussion and analysis presented below provides management's assessment
of the company's results of operations and financial condition as of and for the
three and six months ended June 30, 1997. This information should be read in
conjunction with the company's June 30, 1997 unaudited consolidated financial
statements and notes thereto.
 
    FROM TIME TO TIME, THE COMPANY MAY MAKE CERTAIN STATEMENTS THAT CONTAIN
"FORWARD-LOOKING" INFORMATION (AS DEFINED IN THE PRIVATE SECURITIES LITIGATION
REFORM ACT OF 1995). WORDS SUCH AS "ANTICIPATE", "ESTIMATE", "PROJECT" AND
SIMILAR EXPRESSIONS ARE INTENDED TO IDENTIFY SUCH FORWARD-LOOKING STATEMENTS.
FORWARD-LOOKING STATEMENTS MAY BE MADE BY MANAGEMENT ORALLY OR IN WRITING,
INCLUDING, BUT NOT LIMITED TO, IN PRESS RELEASES, AS PART OF THIS MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS AND AS
PART OF OTHER SECTIONS OF THIS QUARTERLY REPORT ON FORM 10-Q AND THE COMPANY'S
OTHER FILINGS WITH THE SECURITIES AND EXCHANGE COMMISSION UNDER THE SECURITIES
ACT OF 1933 AND THE SECURITIES EXCHANGE ACT OF 1934.
 
    SUCH FORWARD-LOOKING STATEMENTS ARE SUBJECT TO CERTAIN RISKS, UNCERTAINTIES
AND ASSUMPTIONS, INCLUDING WITHOUT LIMITATION THOSE IDENTIFIED BELOW. SHOULD ONE
OR MORE OF THESE RISKS OR UNCERTAINTIES MATERIALIZE, OR SHOULD ANY OF THE
UNDERLYING ASSUMPTIONS PROVE INCORRECT, ACTUAL RESULTS OF CURRENT AND FUTURE
OPERATIONS MAY VARY MATERIALLY FROM THOSE ANTICIPATED, ESTIMATED OR PROJECTED.
READERS ARE CAUTIONED NOT TO PLACE UNDUE RELIANCE ON THESE FORWARD-LOOKING
STATEMENTS, WHICH SPEAK ONLY AS OF THEIR RESPECTIVE DATES.
 
    AMONG THE RISKS AND UNCERTAINTIES THAT HAVE A DIRECT BEARING ON THE
COMPANY'S RESULTS OF OPERATIONS AND FINANCIAL CONDITION ARE (A) THE EXPECTATION
BUT NOT ASSURANCE THAT THE CASH ACQUISITION OF THE COMPANY BY HUMANA FOR $7 PER
SHARE WILL CLOSE DURING THE THIRD QUARTER OF 1997, AND IF NECESSARY, THE ABILITY
OF THE COMPANY TO MITIGATE THE EFFECTS OF THE MERGER AGREEMENT NOT CLOSING,
INCLUDING BUT NOT LIMITED TO (I) THE ABILITY OF PCA/P&C TO SUBMIT A DETAILED
CORRECTIVE PLAN TO REMEDY ITS CAPITAL DEFICIENCY THAT IS ACCEPTABLE TO THE DOI
PRIOR TO THE DOI EXERCISING ITS RIGHT TO ITS UNCONTESTED APPOINTMENT AS RECEIVER
FOR PURPOSES OF REHABILITATION OR LIQUIDATION ANYTIME ON OR AFTER OCTOBER 1,
1997, IF THE DOI IS NOT SATISFIED WITH THE CORRECTIVE PLAN, (II) THE ABILITY OF
THE COMPANY TO REFINANCE ITS CREDIT FACILITY INDEBTEDNESS BY ITS MATURITY DATE
OF OCTOBER 1, 1997, AND (III) THE ABILITY OF THE COMPANY TO BE ABLE TO REDUCE
THE LOSS OF BUSINESS THAT COULD RESULT FROM HUMANA HAVING HAD DETAILED REVIEW OF
THE COMPANY'S OPERATIONS INCLUDING ITS PRICING AND MARKETING STRATEGIES, (B) THE
ABILITY OF SIERRA TO CALL PCA'S DEMAND PROMISSORY NOTE PAYABLE TO SIERRA PRIOR
TO CONSUMMATION OF THE PROPOSED MERGER WITH HUMANA AND SIERRA'S SUCCESS IN ANY
ACTION BROUGHT TO ENFORCE ITS DEMANDS FOR EXPENSES IN CONNECTION WITH THE
TERMINATED MERGER AGREEMENT BETWEEN SIERRA AND THE COMPANY, (C) MEDICARE AND
MEDICAID PREMIUM RATES SET BY STATE AND FEDERAL GOVERNMENT AGENCIES CHANGING
UNEXPECTEDLY, (D) ACTIONS BY TEXAS, FLORIDA OR PUERTO RICO REGULATORS, (E)
NASDAQ AND OTHER FACTORS DISCUSSED HEREIN.
 
    The Company is a managed health care company that provides comprehensive
health care services through its health maintenance organizations ("HMOs") and
workers compensation administrative management services through its workers'
compensation third party administration companies ("TPAs"). The Company conducts
all of its business in the Southeastern United States, Texas and Puerto Rico.
 
                                       11
<PAGE>
    In the second quarter 1997, the Company continued to increase net income
revenues and health plan membership. The following sets forth certain financial
and operating information pertaining to the Company's results for the three and
six months ended June 30, 1997 compared to the same periods in 1996:
 
<TABLE>
<CAPTION>
                                                                        THREE MONTHS ENDED
                                                                                               SIX MONTHS ENDED
                                                                             JUNE 30,              JUNE 30,
                                                                       --------------------  ---------------------
                                                                         1997       1996        1997       1996
                                                                       ---------  ---------  ----------  ---------
                                                                                     (IN THOUSANDS)
<S>                                                                    <C>        <C>        <C>         <C>
Health Premiums:
  Commercial.........................................................    125,800    144,537     253,602    287,093
  Medicaid...........................................................    122,014     90,596     226,322    181,921
  Medicare...........................................................     86,876     80,536     172,536    156,722
  Indemnity..........................................................     15,218      8,933      30,281     17,075
                                                                       ---------  ---------  ----------  ---------
    Total health premiums............................................    349,908    324,602     682,741    642,811
                                                                       ---------  ---------  ----------  ---------
                                                                       ---------  ---------  ----------  ---------
Operating Statistics and Data:
  Medical loss ratio (1).............................................      85.3%      87.2%       86.2%      87.3%
  Health administrative, marketing and other expenses ratio (2)......      12.9%      15.5%       12.7%      15.9%
Period ending membership:
  HMO:
    Commercial.......................................................                           397,000    452,000
    Medicaid.........................................................                           612,000    418,000
    Medicare.........................................................                            61,000     60,000
                                                                                             ----------  ---------
    Total HMO........................................................                         1,070,000    930,000
  Health Indemnity and PPO...........................................                            82,000     36,000
                                                                                             ----------  ---------
    Total HMO and Insured Health Membership..........................                         1,152,000    966,000
                                                                                             ----------  ---------
                                                                                             ----------  ---------
</TABLE>
 
------------------------
 
    (1) Medical costs as a percentage of health premiums.
 
    (2) Health administrative, marketing and other expenses, including
allocations of corporate overhead as a percentage of health premiums.
 
THREE AND SIX MONTHS ENDED JUNE 30, 1997 COMPARED TO THREE AND SIX MONTHS ENDED
  JUNE 30, 1996
 
    The Company earned net income of $6.5 million and $11.1 million for the
three and six months ended June 30, 1997 respectively, as compared to net income
of $5.3 million and $0.4 million for the same periods in 1996. The increase was
primarily due to a $11.1 million and $19.6 million improvement in profitability
of the Company's HMOs for the three and six months ended June 30, 1997,
respectively, as compared to the same periods in 1996. The three and six month
1996 amounts include a $7.9 million gain from the sale of the Company's medical
centers in June of 1996.
 
    Health premium revenues for the three and six months ended June 30, 1997 as
compared to 1996 increased by $25.3 million or 8% and $39.9 million or 6%,
respectively. Of the three month increase, $68.8 million was due to a 21%
increase in the average number of members during the period offset by a $43.5
million decrease due to a 11% decrease in the weighted average health premium
rate per member. Of the six month increase, $99.7 million was due to a 16%
increase in the average number of members during the period, offset by a $59.8
million decrease due to a 8% decrease in the weighted average premium rate per
member. Total membership at June 30, 1997 increased by approximately 186,000
members from membership at June 30, 1996 (55,000 decrease in Commercial, 194,000
increase in Medicaid, 1,000 increase
 
                                       12
<PAGE>
in Medicare and 46,000 increase in indemnity and PPO members). The decrease in
Commercial membership is primarily due to the Company selling its HMO operations
in Georgia and Alabama which had approximately 37,500 Commercial members at June
30, 1996. The premium rate decrease period to period was attributable to (i)
during the three and six months ended June 30, 1997, the Company provided health
care to approximately 605,000 and 530,000 Medicaid members, respectively, (the
majority of which are members of the Reform Program in Puerto Rico at an average
premium rate of approximately $47 per member per month) representing a 53% and
38% increase in Medicaid members from the corresponding period in 1996 while
(ii) the weighted average Medicare premium rates increased by approximately 5%
for the three and six months ended June 30, 1997 vs. 1996 to approximately $475
per member per month, and (iii) commercial premium rates remained principally
unchanged at approximately $106 per member per month during the period.
 
    Workers' compensation related revenues (which are comprised of workers'
compensation TPA revenues and workers' compensation premiums) for the three and
six month periods ended June 30, 1997 increased by $2.1 million or 16% and
decreased by $23.3 million or 37%, respectively, as compared to the same periods
in 1996. The three month increase was primarily the result of the Company,
during the quarter ended June 30, 1996, retroactively amending to January 1,
1996, its quota share arrangements with its third party reinsurers whereby its
retained share of related premiums and claims decreased from 50% to 25%. This
adjustment, which amounted to approximately $33.8 million for the quarter ended
June 30, 1996, accounts for the $0.6 million increase in premium revenues during
the quarter ended June 30, 1997 despite the Company not writing new or renewal
premiums. TPA revenues increased by $1.5 million for the three months ended June
30, 1997 as compared to 1996. The six month decrease is consistent with the
Company ceasing to write new and renewal workers' compensation insurance in
November 1996. Accordingly, workers' compensation related insurance premiums
decreased by $28.2 million for the six months ended June 30, 1997, as compared
to 1996. Additionally, workers' compensation TPA fees increased by $4.9 million
during the six months ended June 30, 1997, compared to the same period in 1996.
The three and six month increases in workers' compensation related TPA revenues
are attributable to the Company, beginning in November 1996, to provide TPA
services to employer groups that previously obtained workers' compensation
related insurance (including the administration thereof) from PCA/P&C which then
utilized PCA Solutions to provide TPA services for such policies. As the 1996
TPA revenues were generated by PCA Solutions from its affiliate, PCA/P&C, those
revenues were eliminated upon consolidation of the Company's financial
statements. In 1997 the majority of TPA revenues were generated from third party
customers which resulted in an increase in TPA revenues despite PCA's overall
workers' compensation premium base decreasing. The Company anticipates its TPA
revenue base to continue to decrease over the remainder of 1997.
 
    Investment income for the three and six months ended June 30, 1997 as
compared to 1996 increased by $3.4 million or 57% and $5.5 million or 47%,
respectively. These increases are due to the Company having larger investment
balances during the 1997 periods as compared to 1996 as a result of the
approximately $160.0 million in investments assumed from the workers'
compensation self insured funds effective September 30, 1996. Additionally,
during the three months ended June 30, 1997, the Company recorded a gain of
approximately $1 million on the disposal of common stock it acquired as partial
consideration when it sold its medical clinics in June 30, 1996.
 
    Other revenues for the three and six months ended June 30, 1997 as compared
to 1996 decreased by $1.9 million or 44% and $6.6 million or 66%, respectively.
These decreases are due entirely to the Company selling its medical center
subsidiary and Alabama and Georgia HMOs operations in June and September 1996,
respectively, which together earned $3.4 million and $7.5 million in
professional services and management administration revenues in the three and
six months ended June 30, 1996. The 1997 amounts include a $1 million
performance fee earned by the Company from global capitation agreements in
Florida by achieving specified membership levels.
 
                                       13
<PAGE>
    Medical costs for the three and six months ended June 30, 1997 as compared
to 1996 increased by $15.5 million or 5% and $27.5 million or 5%. Of the three
month increase, $60.0 million was due to a 21% increase in the average number of
members during the period offset by a $44.5 million decrease due to a 13%
decrease in the weighted average medical cost per member. Of the six month
increase, $87.0 million was due to a 16% increase in the average number of
members during the period offset by a $59.5 million decrease in the weighted
average cost per member. This decrease in the weighted average medical cost per
member was due primarily to (i) an increase in Medicaid members (which have a
lower than average per member medical cost) and (ii) an overall decrease in
medical costs arising from the global capitation agreements entered into by the
Company in its Florida and Puerto Rico markets. As a result of these factors,
the Company's medical loss ratio for the three and six months ended June 30,
1997 decreased to 85.3% from 87.2% and to 86.2% from 87.3%, respectively, for
the same periods in 1996.
 
    Health related administrative, marketing and other expenses for the three
and six months ended June 30, 1997 as compared to 1996 decreased by $5.1 million
or 10% and $15.4 million or 15%, respectively. The three and six month decreases
were due in part to $2.3 million and $5.2 million reduction in costs incurred in
1996 by subsidiaries sold by the Company in 1996. The remaining $2.8 million and
$10.2 million decreases, respectively, are the result of management implementing
its plan to reduce administrative costs incurred by the Company's HMOs which
included employee headcount reductions and office consolidations in the second
and third quarters of 1996. The reduction in overall administrative costs in
1997 was achieved despite a 21% and 16% increase in the weighted average number
of members during the three and six months ended June 30, 1997, respectively, as
compared to 1996. As a result, the Company's health administrative ratio
improved to 12.9% from 15.5% and to 12.7% from 15.9%, respectively, for the
three and six months ended June 30, 1997 as compared to the same periods in
1996.
 
    Workers' compensation related administrative, marketing and other expenses
for the three and six months ended June 30, 1997 increased by $10.0 million or
135% and decreased by $13.3 million or 27%, respectively as compared to the same
periods in 1996. The three month increase is entirely attributable to the quota
share treaties which was recorded in the second quarter of 1996 reducing the
Company's retention on its primary workers' compensation insurance from 50% to
25%. Accordingly, the six month decrease is reflective of the fact the Company
ceased writing all new and renewal workers' compensation related insurance
effective in November 1996. The Company's workers' compensation related revenues
consist of run off workers' compensation premiums and TPA revenues. The Company
expects its TPA revenues to continue to decline throughout 1997.
 
    Depreciation and amortization for the three and six months ended June 30,
1997 amounted to $4.4 million and $8.8 million, respectively, and decreased by
$1.3 million or 23% and $3.2 million or 27%, respectively, as compared to 1996.
The decreases are attributable primarily to lower amortization of intangibles
relating to the Company's workers' compensation TPA following the $39.0 million
write-off of intangibles in the fourth quarter of 1996 as well as lower
depreciation resulting from the sale of subsidiaries in 1996.
 
    In June 1996, the Company sold its wholly owned subsidiary, Physicians
First, Inc., which held and operated the Company's medical centers. This
transaction resulted in a gain of $7.9 million in the second quarter of 1996. No
subsidiaries were sold by the Company in 1997.
 
    Interest expense for the three and six months ended June 30, 1997 was $4.0
million and $9.2 million, respectively, representing a $0.3 million and $1.5
million increase in the same periods in 1996. These increases resulted from an
approximate 4% increase in the average annual interest rate change increasing
from 7% to 11%, while the average outstanding loan balance decreased by
approximately $40 million. The 1997 amount also includes approximately $1.0
million of fees paid to its primary lenders in connection with amendments of its
Credit Facility.
 
                                       14
<PAGE>
    Income tax expense for the three and six months ended June 30, 1997 was $1.1
million and $1.45 million compared to a $3.7 million and $7.3 million income tax
benefit, respectively, for the same periods in 1996. This income tax expense in
1997 resulted from tax incurred on the Company's income generated by its
subsidiaries in Puerto Rico. The tax expense attributable to the Company's other
operations was eliminated as a result of the utilization of net operating loss
carryforwards. Accordingly, the approximate 15% and effective income tax rate
for the three and six months ended June 30, 1997 is lower than the 35% statutory
rate for such period, primarily due to the nondeductibility of goodwill
amortization for income tax purposes arising from the acquisition of HMOs and
workers compensation companies offset by tax exempt investment income and the
utilization of net operating loss carryforwards. The Company's tax benefit for
the three and six months ended June 30, 1996 was primarily the result of the
utilization of capital loss carryforwards which eliminated tax expense relating
to the 1996 gain on sale of subsidiaries.
 
LIQUIDITY AND CAPITAL RESOURCES
 
    At June 30, 1997, the Company had a working capital deficit of $107.3
million, primarily the result of the Company's Credit Facility and Sierra debt
being classified as a current liability. Cash and cash equivalents were $88.5
million at June 30, 1997, a decrease of $45.5 million from $134.0 million at
December 31, 1996 and short term investments were $138.0 million at June 30,
1997, an increase of $7.2 million from a $130.8 million balance at December 31,
1996. The decrease in cash and cash equivalents is primarily the result of cash
used in operations and financing activities offset by cash provided by investing
activities. The Company's cash and cash equivalents do not include statutory
cash deposits segregated as required by various regulatory authorities.
 
    Net cash used in operating activities for the six months ended June 30, 1997
was $110.7 million compared to cash of $64.6 million provided by operating
activities for the six months ended June 30, 1996. The cash used in operating
activities in 1997 was principally the result of the following factors: (i) net
income of $11.1 million, (ii) decrease in claims payable in the amount of $184.2
million (primarily the result of a $153.0 million decrease in workers'
compensation related claims caused by PCA paying claims without writing new or
renewal workers' compensation business in 1997), (iii) increase in income taxes
payable in the amount of $46.4 million resulting principally from income tax
refunds received, (iv) decrease in unearned premiums in the amount of $38.4
million, (v) $51.9 million decrease in accounts receivable and reinsurance
recoveries, (vi) a decrease in accounts payable, accrued expenses and other
current liabilities of $0.6 million and (vii) a $3.1 million net increase from
changes in other assets and liabilities and non cash operating items.
 
    In 1997, net cash provided by investment activities increased to $66.9
million, from $157.0 million used in investment activities in 1996. The net cash
provided by investing activities was primarily the result of the net proceeds
from sale of investments of $67.2 million which was used to pay claims. The
Company believes it will be able to finance all capital expenditures from cash
generated from operations and amounts available from cash. The Company has
utilized capital leases to finance certain equipment additions in the past and
expects to continue to do so in the future.
 
    In 1997, net cash used in financing activities for the six months ended June
30, 1997 increased to $1.8 million compared to $15.7 million cash provided in
the six months ended June 30, 1996. The cash used in financing activities was
primarily the result of $1.9 million of long-term debt principal and covenant
payments offset by $0.1 million of indebtedness and diminimous proceeds from
employee exercises of stock options.
 
    The Company believes that cash on hand and cash flow generated from
operations will not be sufficient to meet its Credit Facility and debt
obligations which become due in October 1997. The Company anticipates its
liquidity requirements will be met by working capital to be provided by Humana
after the merger is completed. In the event the merger is not completed, the
Company will be
 
                                       15
<PAGE>
required to effect one or more of the following refinancing alternatives in
order to meet its obligations under the Credit Facility indebtedness: (i)
completing a merger or sale transaction with another partner, (ii) raising
equity capital or high-yield debt through a private placement or a public
offering, or (iii) completing the sale of certain of the Company's assets. In
the past, the Company has received indications of interest from third parties
related to each of these four possible alternatives. However, there can be no
assurance that it will be successful in such endeavors. Additionally, if the
merger is not consummated, the Company will be required to raise additional
capital to be able to meet its obligations regarding (i) the reinsurance policy
with Centre Re for PCA/P&C, if it is so consummated, (ii) capital infusion
requirements of its regulated HMOs, (iii) repayment of indebtedness due to
Sierra and (iv) its ongoing operations.
 
    The Company is significantly restricted in its ability to utilize the
working capital or the operating cash flows of its regulated subsidiaries. These
restrictions include requirements to maintain a certain level of statutory
equity in each regulated subsidiary and to obtain prior consent to declare any
dividend. At June 30, 1997, the Company's regulated HMO and insurance
subsidiaries (excluding PCA/P&C) had approximately $18.0 million in excess
statutory equity. The Company's Florida HMOs incurred operating losses in 1996
and the Company has submitted and revised a corrective action plan to regulators
under which these HMOs will operate until profitability is obtained. The
Company's Texas HMO, PCA/ Texas has been notified by the Texas Department of
Health (TDH) that the TDH intends to suspend PCA/ Texas' right to enroll new
Medicaid members effective September 10, 1997 until PCA/Texas demonstrates full
compliance with the TDH's claims payment requirements. Additionally, the PCA/P&C
subsidiary had a deficit of approximately $115.0 million as of June 30, 1997,
which, pursuant to a corrective action plan in process, will be replenished
through collection of non-admitted assets and future investment earnings, as
well as either the purchase of reinsurance or infusion of capital by Humana if
the sale to Humana is completed. As a result, the Company will not have access
to the cash flow from PCA/P&C which is expected from its estimated 1997 pretax
earnings to be $11.5 million to $15.0 million and will pay approximately $2.0
million in income tax obligations from other cash flow sources or the
utilization of net operating loss carryforwards. The Company expects that this
deficit will be reduced by actual future earnings and the collection of
non-admitted assets, including certain intercompany balances if required, the
largest component of which is an income tax receivable of approximately $22.0
million from PCA.
 
    As described in Note E to the June 30, 1997 unaudited consolidated financial
statements, the Company believes that should the Company be found to be
responsible for the deficit of PCA/P&C, its liquidity position would be
adversely impacted, and its cash on hand and cash flow generated from operations
would not be sufficient to fund such deficit on a current basis. The impact of
this inability on the Company's financial condition and results of operations
cannot be determined.
 
    Additionally, as a result of being awarded the new and renewal contracts to
provide health services to an aggregate of approximately 415,000 Medicaid
(reform) members in Puerto Rico (see Note F to the June 30, 1997 unaudited
consolidated financial statements), the Company has committed to increasing its
investment in PCA/P.R. and pledging assets to the Puerto Rico insurance
regulators. Accordingly, the Company has made additional capital contributions
to PCA/P.R. of approximately $4.3 million and PCA/ P.R. has pledged assets of
approximately $11.0 million to the Puerto Rico insurance regulators during the
first quarter of 1997. However, the Company anticipates it will be able to fund
the additional PCA/P.R. equity requirements of approximately $2.5 million,
during the foreseeable future as needed, from operations of PCA/P.R. and from
capitalizing management fees and income taxes otherwise payable to PCA
Corporate.
 
                                       16
<PAGE>
                           PART II. OTHER INFORMATION
 
ITEM 1. LEGAL PROCEEDINGS
 
    As a result of the deterioration of PCA/P&C's financial condition, in
November 1996, the Florida DOI placed PCA/P&C under regulatory supervision. In
February 1997, after the Company announced it expected further losses in its
PCA/P&C subsidiary, the Florida DOI obtained a Florida circuit court order
requiring PCA/P&C to submit a detailed corrective action plan setting forth a
program to remedy the capital deficiency in PCA/P&C. Additionally, this plan was
to be the basis for the evaluation of whether the DOI should place PCA/P&C under
statutory rehabilitation at a hearing to take place on May 2, 1997. The May 2,
1997 hearing was then rescheduled to June 2, 1997. Under a Forbearance Agreement
entered into May 2, 1997 (the Forbearance Agreement), PCA/P&C consented to the
DOI's appointment as receiver for purposes of rehabilitation or liquidation on
or after June 2, 1997. The DOI allowed PCA/P&C until that date to submit a
satisfactory plan assuring full payment of claims and in the interim obtained
greater control over its affairs and access to its records. Separately, the DOI
requested that the Company and certain subsidiaries pay PCA/P&C amounts
aggregating approximately $35 million and refused to permit PCA/P&C to pay
substantial amounts due to affiliates.
 
    On June 2, 1997, the DOI entered into a Joint Report to the Court and
Supplemental Agreement (the Supplemental Agreement) with PCA/P&C. In the
Supplemental Agreement, the DOI determined that the Company had made sufficient
progress toward fulfilling the conditions in the Forbearance Agreement to
justify extending the period of forbearance from appointment of a receiver for
PCA/P&C and to allow a reasonable period for the agreed upon transactions to
close. The DOI agreed not to seek its appointment as receiver so long as certain
conditions are being met, including: payment of amounts due to PCA/P&C's
creditors, the absence of an event of default, absence of a material adverse
change in the financial condition of PCA/P&C, PCA Solutions and Centre Re, and
diligent pursuit of regulatory approvals required to close the Merger by October
31, 1997. The DOI reserved the right to obtain its appointment as receiver for
PCA/P&C in the event of, among other circumstances, noncompliance with or
material misrepresentation in provisions of the Supplemental Agreement, denial
of a regulatory consent or approval requisite to closing of the Merger, and
failure to close the Merger by October 31, 1997. The Company agreed to cooperate
in the DOI's investigation of the assessable workers' compensation business and
to keep the DOI regularly informed of progress in obtaining consents necessary
to consummate the Merger. PCA/P&C continues under the DOI's administrative
supervision, and the receivership petition remains pending.
 
    The Supplemental Agreement also provides that, if the DOI does not enforce
the Forbearance Agreement by obtaining its appointment as receiver or otherwise,
and if the Merger is consummated, the receivership proceeding respecting PCA/P&C
will be dismissed or abated and the parties will enter into a new administrative
consent order. That new order is to provide, among other things, for continued
administrative supervision of PCA/P&C at least through 1998 under somewhat less
stringent DOI control, suspension of PCA/P&C's certificate of authority (so that
it could not resume active insurance operations unless its certificate were
reinstated), and covenants that would protect the Company and its affiliates
against the assertion of certain claims based on matters predating March 31,
1997. The agreements among PCA/P&C, the DOI and other interested parties
including Humana May be modified before or after the Effective Time (subject to
required consent of the affected parties). See note E to the Company's June 30,
1997 unaudited consolidated financial statements. The Company cannot predict the
outcome of this matter.
 
    On March 18, 1997, the Company filed suit against Sierra in the United
States District Court for the Southern District of Florida. In the suit, the
Company alleges that Sierra terminated the Agreement and Plan of Merger among
Sierra, Sierra Acquisition, Inc. and PCA (the Sierra-PCA Merger Agreement) on
March 1, 1997 and that the termination was not permitted by the terms of the
Sierra-PCA Merger Agreement. Alternatively, the Company alleges that Sierra's
statement on March 1, 1997 that it would not
 
                                       17
<PAGE>
proceed with the merger under its existing terms constituted a withdrawal or
modification, or proposed withdrawal or modification, of the approval or
recommendation of the Sierra-PCA Merger Agreement by the Sierra board of
directors. The Company also alleges that Sierra breached its covenants and
agreements under the Sierra-PCA Merger Agreement by failing to take all
reasonable action necessary or use all reasonable efforts to obtain approval of
the merger by the DOI and the Florida Agency for Health Care Administration and
by failing to offer employment to a key executive of the Company as required by
the terms of the PCA-Sierra Merger Agreement. The Company seeks liquidated
damages in the amount of $20 million plus costs and expenses, pursuant to the
terms of the Sierra-PCA Merger Agreement. The Company also seeks additional
actual damages for, among other things, loss of business opportunities, damage
to business reputation, lost profits and other consequential damages allegedly
caused by Sierra's breach of contract and fraudulent inducement to enter into
the Sierra-PCA Merger Agreement.
 
    On March 27, 1997, Sierra and its wholly owned subsidiary filed suit against
the Company in the Court of Chancery of the State of Delaware in and for New
Castle County with respect to the failed merger. In the suit, Sierra alleges
that the Company's disclosures relating to PCA/P&C constitute a breach of the
Company's representations and warranties under the Sierra-PCA Merger Agreement
and that this breach entitled Sierra to terminate the Sierra-PCA Merger
Agreement and to recover from the Company the sum of $3 million plus its
expenses, as defined under the Sierra-PCA Merger Agreement. Sierra also alleges
that it is entitled to an award of damages resulting from allegedly false
representations by the Company regarding its financial condition and the
financial condition of its subsidiaries. Sierra takes the position that it
terminated the Sierra-PCA Merger Agreement in a letter to the Company dated
March 18, 1997.
 
    Both lawsuits are still pending. At this stage of the proceedings, it is
impossible to predict with any degree of certainty whether the Company will
prevail on the merits or the financial impact of the lawsuits on the Company.
Management of the Company believes that these lawsuits will not impact the
ability to consummate the Merger.
 
ITEM 2. CHANGES 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 furnished as part of the Report:
 
    (1) Financial Statements, See PART I, Item 1
 
    (2) Exhibits:
 
    (B)  Reports on Form 8-K:
 
    (1) Form 8-K dated April 28, 1997 (filed April 28, 1997 and incorporated
       herein by this reference)
 
    (2) Form 8-K dated June 16, 1997 (filed June 17, 1997 and incorporated
       herein by this reference)
 
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<PAGE>
                                   SIGNATURES
 
    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.
 
<TABLE>
<S>                             <C>  <C>
                                PHYSICIAN CORPORATION OF AMERICA
                                Registrant
 
                                By:        /s/ E. STANLEY KARDATZKE, M.D.
                                     -----------------------------------------
                                             E. Stanley Kardatzke, M.D.
                                           CHAIRMAN OF THE BOARD AND CEO
                                           (PRINCIPAL EXECUTIVE OFFICER)
 
                                By:           /s/ CLIFFORD W. DONNELLY
                                     -----------------------------------------
                                                Clifford W. Donnelly
                                        SENIOR VICE PRESIDENT OF FINANCE AND
                                              CHIEF FINANCIAL OFFICER
 
                                By:             /s/ JAY M. GROBOWSKY
                                     -----------------------------------------
                                                  Jay M. Grobowsky
                                             VICE PRESIDENT OF FINANCE
</TABLE>
 
Date: August 15, 1997
 
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