Commissions, net of ceding allowance and deferred acquisition costs of $6.8 million for 1997 decreased from $7.9 million from 1996 due to the increased deferral of acquisition costs related to the Company's one-life managed-care products in 1997. These costs were written-off in 1997 as amortization of deferred policy acquisition costs.
Impairment of Long-lived Assets: Long-lived assets and certain identifiable intangibles including goodwill are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. At December 31,1998 no assets were deemed to have been impaired. During 1997 the Company wrote off certain computer hardware, equipment, software and goodwill as described in Note Z.
The American Institute of Certified Public Accountants issued Statement of Position No. 97-3 ("SOP 97-3"), "Accounting by Insurance and Other Enterprises for Insurance-Related Assessments". SOP 97-3 provides guidance for determining whether an entity should recognize a liability for guaranty-fund and other assessments. In addition to the disclosure requirements, SOP 97-3 provides guidance on how to measure the liability and criteria for when an asset may be recognizd for a portion or all of the assessment liability or paid assessment that can be recovered through premium tax offsets or policy surcharges. SOP 97-3 is effective for financial statements for fiscal years beginning after December 15, 1998. Management believes that this accounting pronouncement will not have a material impact on the Company's financial statements.
Management believes the sale of PALHIC, MMC and the reinsurance of the group medical business will enable the Company to more sharply focus its efforts on its remaining insurance operations including military life, stop loss and HealthAxis.
HealthAxis's amended agreement with CNet provides that CNet will promote HealthAxis as its exclusive provider of medical and PPO, dental, vision, prescription, long term care, and long term disability insurance through the Internet and television, for a total approximating $2,400 (of which $500 has been accounted for as advertising and promotional expense). The balance of $1,900 will be paid in two increments of $1,008 (in 1999) and $882 (in 2000) and accounted for as prepaid interactive marketing expense and amortized over the initial term of the agreement. HealthAxis may, at its option, extend the agreement during a renewal term until March 31, 2001 by paying CNet an additional $7,500 of which $1,875 and $5,625 would be due in 2000 and 2001, respectively. In addition, HealthAxis shall pay to CNet certain fees based upon the success of sales from the co-branded web site.
On May 29, 1998, HealthAxis, PAMCO, and Provident Health Services, Inc. ("PHS"), a wholly-owned subsidiary of PAMCO, entered into an Internet claims administration agreement with HPS (the "E-Commerce Agreement") which provides HPS with the right to be the exclusive administrator of all insurance business sold over HealthAxis' web site and any other form of electronic commerce ("e-commerce") used by HealthAxis underwritten by PILIC and PALHIC during the term of the E-Commerce Agreement. HealthAxis also agreed to use its best efforts to provide HPS with the right of first refusal to provide claims administration services for insurance business sold by HealthAxis but not underwritten by PILIC and PALHIC that may require the services of a third party administrator.
During 1997 the Company issued warrants to two exclusive insurance agents, who are also directors of a subsidiary of PAMCO, for the purchase of 50,000 shares of the Company's common stock at $5.00 per share. These warrants become exercisable throughout 2001. The Company also issued a warrant exercisable at any time to an employee for the purchase of 25,000 shares of the Company's common stock at $4.00 per share.
All employee contributions are immediately vested, and the Company contribution becomes 20% vested after two years of service. Thereafter, an additional 20% becomes vested for each year of service up to 6 years. Pension expense under this plan amounted to $21, $78 and $57 for 1998, 1997 and 1996, respectively.
Note Y - Reconciliation From Statutory Basis (Unaudited) To GAAP Basis
The accompanying financial statements are prepared in conformity with GAAP which differs in some respects from the statutory accounting practices prescribed or permitted by insurance regulatory authorities. The Pennsylvania Department of Insurance permitted PILIC the following statutory accounting practices: (1) since 1989, the statutory carrying value of the home office at the value transferred from PAMCO to PILIC in 1988 in satisfaction of intercompany debt, less depreciation since that time; and (2) to continue PILIC's statutory reserve methodology which, up until January 1, 1996, had not considered the impact of policy provisions pertaining to increasing the face amount of pre-need life insurance for anticipated future Consumer Price Index increases. Starting in 1996 PILIC modified its statutory reserve methodology on 1996 issued business which now considers the impact of policy provisions pertaining to increasing the face amount of pre-need life insurance for anticipated future Consumer Price Index increases. Furthermore, PILIC increased reserves by $200 in 1998, 1997 and 1996 for 1995 and prior issues in recognition of the increasing face amount of pre-need life insurance for anticipated future Consumer Price Index increases. The potential effects of this permitted practice has not been determined but could be material to statutory surplus.