As filed with the Securities and Exchange Commission on June 18, 2002
Registration No. 333-89882
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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Amendment to No. 1
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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PENN TREATY AMERICAN CORPORATION
(Exact name of registrant as specified in its charter)
Pennsylvania 23-1664166
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3440 Lehigh Street
Allentown, Pennsylvania 18103
(610) 965-2222
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(Address, including zip code, and
telephone number, including area code,
of registrant's principal executive offices)
Irving Levit
Chairman of the Board
and Chief Executive Officer
Penn Treaty American Corporation
3440 Lehigh Street
Allentown, Pennsylvania 18103
(610) 965-2222
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(Name, address, including zip code, and
telephone number, including area code,
of agent for service)
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Copies to:
Justin P. Klein, Esq.
Ballard Spahr Andrews & Ingersoll, LLP
1735 Market Street, 51st Floor
Philadelphia, Pennsylvania 19103
(215) 665-8500
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Approximate date of commencement of proposed sale to
the public: From time to time after this Registration
Statement becomes effective.
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If the only securities being registered on this Form are being offered pursuant
to dividend or interest reinvestment plans, please check the following box: [ ]
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box: [X]
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, please check the following box and list
the Securities Act registration statement number of the earlier effective
registration statement for the same offering: [ ] ____________________
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering: [ ] ____________________
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box: [ ]
CALCULATION OF REGISTRATION FEE
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Title of each class of Amount to be Proposed maximum aggregate Amount of
securities to be registered registered offering price(1) registration fee
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Common Stock, par value $.10 540,000 shares $2,351,700 $217 (2)
per share
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(1) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(c) of the Securities Act of 1933, as amended,
based upon the average of the high and low prices of our common stock
as reported on the New York Stock Exchange on June 3, 2002.
(2) The registration fee in the amount of $217 was previously paid in
connection with the initial filing of the Registration Statement.
The Registrant hereby amends this Registration Statement on such date or dates
as may be necessary to delay its effective date until the Registrant shall file
a further amendment which specifically states that this Registration Statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933, as amended, or until this Registration Statement shall
become effective on such date as the Commission, acting pursuant to said Section
8(a), may determine.
PROSPECTUS
[PENN TREATY LOGO]
Penn Treaty American Corporation
3440 Lehigh Street
Allentown, PA 18103
(610) 965-2222
The information in this prospectus is not complete and may be changed. We may
not sell these securities until the registration statement filed with the
Securities and Exchange Commission is effective. This prospectus is not an offer
to sell these securities and it is not soliciting an offer to buy these
securities in any state where the offer or sale is not permitted.
Subject to Completion, Dated June 18, 2002
Penn Treaty American Corporation
540,000 Shares
Common Stock
The selling shareholders are offering to sell 540,000 shares of our common
stock. We will not receive any of the proceeds from sales of these shares by the
selling shareholders.
The selling shareholders acquired the offered shares directly from us in
two private placement transactions completed by us in March 2002 and May 2002
that were exempt from the registration requirements of the federal securities
laws.
Our common stock is traded on the New York Stock Exchange under the
symbol "PTA." On June 17, 2002, the last sale price of the common stock, as
reported on the New York Stock Exchange, was $4.10 per share.
The selling shareholders may sell their shares from time to time on the New
York Stock Exchange or otherwise. They may sell the shares at prevailing market
prices or at prices negotiated with purchasers. The selling shareholders will be
responsible for any commissions or discounts due to brokers or dealers. The
amount of those commissions or discounts cannot be known now because they will
be negotiated at the time of the sales. We will pay all other offering expenses.
Before buying any shares you should read the discussion of material risks
of investing in common stock in "Risk Factors" beginning on page 5.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
The date of this Prospectus is ________________ __,2002.
You should rely only on the information contained in this prospectus. We
have not authorized anyone to provide you with information that is different
from that contained in this prospectus. The selling shareholders are offering to
sell, and seeking offers to buy, the shares of common stock only in
jurisdictions where offers and sales are permitted. The information contained in
this prospectus is accurate only as of the date of this prospectus, regardless
of the time of delivery of this prospectus or any sale of the common stock. In
this prospectus, references to "we," "us" and "our" refer to Penn Treaty
American Corporation and its subsidiaries.
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TABLE OF CONTENTS
OUR BUSINESS.............................................................3
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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS.....................4
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RISK FACTORS.............................................................5
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USE OF PROCEEDS.........................................................13
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DIVIDEND POLICY.........................................................13
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SELECTED CONSOLIDATED FINANCIAL DATA....................................14
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SELLING SHAREHOLDERS....................................................18
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PLAN OF DISTRIBUTION....................................................20
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LEGAL MATTERS...........................................................21
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EXPERTS.................................................................21
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WHERE YOU CAN FIND MORE INFORMATION.....................................21
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INCORPORATION OF INFORMATION WE FILE WITH THE SEC.......................22
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2
OUR BUSINESS
This summary highlights information contained or incorporated by reference
elsewhere in this prospectus. It is not complete and does not contain all of the
information that you should consider before investing in the shares. You should
read the entire prospectus carefully including the documents incorporated by
reference, and you should consider the information set forth under "Risk
Factors."
We are a leading provider of long-term care insurance in the United States.
We market our products primarily to older persons in the states in which we are
licensed through independent insurance agents. Our principal products are
individual, defined benefit accident and health insurance policies covering
long-term skilled, intermediate and custodial nursing home and home health care.
Our policies are designed to make the administration of claims simple, quick and
sensitive to the needs of our policyholders. We also own insurance agencies that
sell senior-market insurance products underwritten by other insurers and us.
We introduced our first long-term nursing home insurance product in 1972
and our first home health care insurance product in 1983, and we have developed
a record of innovation in long-term care insurance products. Since 1994, we have
introduced several new products designed to meet the changing needs of our
customers, including the following:
o The Independent Living policy, which provides coverage over the full
term of the policy for home care services furnished by unlicensed
homemakers or companions, as well as licensed care providers;
o The Personal Freedom policy, which provides comprehensive coverage for
nursing home and home health care;
o The Assisted Living policy, which is a nursing home plan that provides
enhanced benefits and includes a home health care rider; and
o The Secured Risk Nursing Facility and Post Acute Recovery policies,
which provide limited benefits to higher risk insureds.
In addition, available policy riders include an automatic annual benefit
increase, benefits for adult day-care centers and a return of premium benefit.
Although nursing home and home health care policies accounted for 95.3% of
our total annualized premiums in-force as of December 31, 2001, we also market
and sell life, disability, Medicare supplement, other hospital care insurance
products and a group plan, which offers long-term care coverage to groups on a
guaranteed issue basis.
We are currently licensed to market products in all 50 states and the
District of Columbia. In September 2001, we ceased new sales in the majority of
states in which we are licensed to sell new insurance policies. This action
resulted from a concern that our statutory surplus would continue to decline
from new sales during a period in which we were formulating our Corrective
Action Plan with the Pennsylvania Insurance Department. The Corrective Action
Plan was necessary because of our subsidiaries' statutory surplus position.
Since our Corrective Action Plan was approved by the Pennsylvania Insurance
Department in February 2002, we have recommenced sales in Pennsylvania and 25
other states.
3
Effective December 31, 2001, we entered a reinsurance transaction to
reinsure, on a quota share basis, substantially all of our respective long-term
care insurance policies then in-force. The agreement, which was the principal
component of our Corrective Action Plan, was entered with Centre Solutions
(Bermuda) Limited, which is rated A- by A.M. Best. The reinsurance agreement is
subject to certain coverage limitations and an aggregate limit of liability,
which is a function of certain factors and which may be reduced as a result of
our inability to obtain rate increases. This limit of liability is subject to
certain events such as material breach of the covenants of the agreement,
regulatory risk of changes in regulation or law and our inability to achieve
rate increases deemed necessary by the provisions of the agreement. The
agreement meets the requirements to qualify as reinsurance for statutory
accounting, but not for generally accepted accounting principles.
Corporate Information
We were incorporated in Pennsylvania in 1965. Our principal executive
offices are located at 3440 Lehigh Street, Allentown, Pennsylvania 18103. Our
telephone number is (610) 965-2222.
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus contains certain "forward-looking statements" based on our
current expectations, assumptions, estimates and projections about our business
and our industry. These forward-looking statements involve risks and
uncertainties. Words such as "believe," "anticipate," "expect," "intend,"
"plan," "will," "may" and other similar expressions identify forward-looking
statements. In addition, any statements that refer to expectations, projections
or other characterizations of future events or circumstances are forward-looking
statements. Our actual results could differ materially from those anticipated in
such forward-looking statements as a result of several factors more fully
described in "Risk Factors." The forward-looking statements made in this
prospectus relate only to events as of the date on which the statements are
made. We undertake no obligation to update publicly any forward-looking
statements for any reason, even if new information becomes available or other
events occur in the future.
4
RISK FACTORS
Before deciding to invest in our securities you should consider carefully
the risks described below and the risks set forth in any prospectus supplement,
as well as other information we include or incorporate by reference in this
prospectus and the additional information in the reports that we file with the
Securities and Exchange Commission (the "SEC"). The risks and uncertainties
described below are not the only ones we face. Additional risks and
uncertainties that we do not presently know about, that we currently believe are
immaterial or which are similar to those faced by other companies in our
industry or business in general, may also adversely impact our business. If any
of the risks described actually occur, our business, financial condition or
results of future operations could be materially and adversely affected. In such
case, the price of our securities could decline, and you may lose all or part of
your investment.
We may be unable to service and repay our debt obligations if our
subsidiaries cannot pay sufficient dividends or make other cash payments to us
and we may be unable to refinance our debt on favorable or acceptable terms as
necessary.
We are an insurance holding company whose assets principally consist of the
capital stock of our operating subsidiaries. Our ability to redeem, repurchase
or make interest payments on our outstanding debt is dependent upon the ability
of our subsidiaries to pay cash dividends or make other cash payments to us. Our
insurance subsidiaries are subject to state laws and regulations and an order of
the Pennsylvania Insurance Department, which restrict their ability to pay
dividends and make other payments to us. We cannot assure you that we will be
able to service and repay our debt obligations through their maturity in
December 2003. We do not expect our subsidiaries to have sufficient dividend
capability to enable us to repay our 6.25% Convertible Subordinated Notes of
$74,750,000 due December 2003. If these notes are not converted into common
stock, we will have to refinance them. We cannot assure you that we will be able
to refinance the notes on favorable or acceptable terms.
We could suffer a loss if our premium rates are not adequate and we may be
required to refund or reduce premiums if our premium rates are determined to be
too high.
We set our premiums based on facts and circumstances known at the time and
on assumptions about numerous variables, including the actuarial probability of
a policyholder incurring a claim, the severity and duration of the claim and the
mortality rate of our policyholder base, the persistency or renewal of our
policies in-force and the interest rate which we expect to earn on the
investment of premiums. In setting premiums, we consider historical claims
information, industry statistics and other factors. If our actual experience
proves to be less favorable than we assumed and we are unable to raise our
premium rates, our net income may decrease. We generally cannot raise our
premiums in any state unless we first obtain the approval of the insurance
regulator in that state. We have filed and are preparing to file rate increases
on the majority of our products. We cannot assure you that we will be able to
obtain approval for premium rate increases from existing requests or requests
filed in the future. If we are unable to raise our premium rates because we fail
to obtain approval for a rate increase in one or more states, our net income may
decrease. Our reinsurance coverage may also be reduced if we fail to obtain
required rate increases.
5
If we are successful in obtaining regulatory approval to raise premium
rates, the increased premiums may reduce our sales and cause policyholders to
let their policies lapse. Increased lapsation would reduce our premium income
and would require us to expense fully the deferred policy costs relating to
lapsed policies in the period in which those policies lapse, reducing our net
income in that period.
Insurance regulators also require us to maintain certain minimum statutory
loss ratios on the policies that we sell. We must pay out, on average, a certain
minimum percentage of premiums as benefits to policyholders. State regulations
also mandate the manner in which insurance companies may compute loss ratios and
the manner in which compliance is measured and enforced. If our policies are not
in compliance with state mandated minimum loss ratios, state regulators may
require us to reduce or refund premiums.
Our reserves for future policy benefits and claims may be inadequate,
requiring us to increase liabilities and resulting in reduced net income and
book value.
We calculate and maintain reserves for the estimated future payment of
claims to our policyholders using the same actuarial assumptions that we use to
set our premiums. Establishing reserves is an uncertain process, and we cannot
assure you that actual claims expense will not materially exceed our reserves
and have a material adverse effect on our results of operations and financial
condition. Our net income depends significantly upon the extent to which our
actual claims experience is consistent with the assumptions we used in setting
our reserves and pricing our policies. If our assumptions with respect to future
claims are incorrect, and our reserves are insufficient to cover our actual
losses and expenses, we would suffer an increase in liabilities resulting in
reduced net income.
Claims experience can differ from our expectations due to numerous
factors, including mortality rates, duration of care and type of care utilized.
Due to the inherent uncertainty in establishing reserves, it has been necessary
in the past for us to increase the estimated future liabilities reflected in our
reserves for claims and policy expenses. In 1999, we added approximately $4.1
million to our claim reserves for 1998 and prior claim incurrals, in 2000, we
added approximately $6.6 million to our claim reserves for 1999 and prior claim
incurrals, and in 2001, we added approximately $8.8 million to our claim
reserves for 2000 and prior claim incurrals. Our additions to prior year
incurrals in 2001 resulted from a continuance study performed by our consulting
actuary. We also increased claim reserves in 2001 by $1.6 million as a result of
utilizing a lower interest rate for the purpose of discounting our future
liabilities. Over time, it may continue to be necessary for us to increase our
reserves.
New insurance products, such as our Independent Living, Assisted Living and
Personal Freedom policies, entail a greater risk of unanticipated claims than
products, which have more extensive historical claims data, such as long-term
nursing home, care insurance. We believe that individuals may be more inclined
to use home health care than nursing home care, which is generally only
considered after all other possibilities have been exhausted. Accordingly, we
believe that home health care policies entail a greater risk of wide variations
in claims experience than nursing home insurance. Because we have relatively
limited claims experience with these products, we may incur higher than expected
losses and expenses and may be required to adjust our reserve levels with
respect to these products.
6
We may recognize a disproportionate amount of policy costs in one financial
reporting period if our estimates with respect to the duration of our policies
are inaccurate.
We recognize policy costs over the life of each policy we sell. These costs
include all expenses that are directly related to, and vary with, the
acquisition of the policy, including commission, underwriting and other policy
issue expenses. We employ the same actuarial assumptions used to compute
premiums and reserves to determine the period over which to amortize policy
costs.
Upon the occurrence of an unanticipated termination of a policy, we must
fully expense deferred acquisition costs associated with the terminated policy.
If actual experience adversely differs from our actuarial assumptions or if
policies are terminated early by the insured or by us, we would recognize a
disproportionate amount of policy expenses at one time, which would negatively
affect our net income for that period.
Annually, we determine if the future profitability of current in-force
policies is sufficient to support our remaining deferred acquisition cost
amount. This determination may include assumptions regarding the current need
and future implementation of premium rate increases. We believe that we need
certain rate increases in order to generate sufficient profitability to offset
our current deferred acquisition costs. In the event that profits are considered
insufficient to fully support the deferred acquisition costs, or if we are
unable to obtain anticipated premium rate increases, we would impair the value
of our deferred acquisition expense asset and would recognize a disproportionate
amount of policy expenses at one time, which would negatively affect our net
income for that period.
We may not be able to compete successfully with insurers who have greater
financial resources or higher financial strength ratings.
We sell our products in highly competitive markets. We compete with large
national insurers, smaller regional insurers and specialty insurers. Many
insurers are larger and have greater resources and higher financial strength
ratings than we do. In addition, we are subject to competition from insurers
with broader product lines. We also may be subject, from time to time, to new
competition resulting from changes in Medicare benefits, as well as from
additional private insurance carriers introducing products similar to those
offered by us. Also, the removal of regulatory barriers (including as a result
of the Gramm-Leach-Bliley Financial Services Modernization Act of 1999) might
result in new competitors entering the long-term care insurance business. These
new competitors may include diversified financial services companies that have
greater financial resources than we do and that have other competitive
advantages, such as large customer bases and extensive branch networks for
distribution.
7
We may suffer reduced income if governmental authorities change the
regulations applicable to the insurance industry.
We are licensed to do business as an insurance company in all states and
are subject to comprehensive regulation by the insurance regulatory authorities
of those states. The primary purpose of such regulation is to protect
policyholders, not shareholders. The laws of the various states establish
insurance departments with broad powers with respect to such things as licensing
companies to transact business, licensing agents, prescribing accounting
principles and practices, admitting statutory assets, mandating certain
insurance benefits, regulating premium rates, approving policy forms, regulating
unfair trade, market conduct and claims practices, establishing statutory
reserve requirements and solvency standards, limiting dividends, restricting
certain transactions between affiliates and regulating the types, amounts and
statutory valuation of investments.
State insurance regulators and the National Association of Insurance
Commissioners ("NAIC") continually reexamine existing laws and regulations, and
may impose changes in the future that materially adversely affect our business,
results of operations and financial condition. In particular, rate rollback
legislation and legislation to control premiums, policy terminations and other
policy terms may affect the amount we may charge for insurance premiums. In
addition, some state legislatures have discussed and implemented proposals to
limit rate increases on long-term care insurance products. Because insurance
premiums are our primary source of income, our net income may be negatively
affected by any of these changes. Many states are now disallowing coverage
exclusions incurred as a result of war or terrorist acts. We have proactively
removed these exclusions in some states, but cannot be certain that our
financial results would not be adversely affected by such acts.
Proposals currently pending in the U.S. Congress may affect our income.
These include the implementation of minimum consumer protection standards for
inclusion in all long-term care policies, including: guaranteed premium rates;
protection against inflation; limitations on waiting periods for pre-existing
conditions; setting standards for sales practices for long-term care insurance;
and guaranteed consumer access to information about insurers, including lapse
and replacement rates for policies and the percentage of claims denied.
Enactment of any of these proposals could adversely affect our net income. In
addition, recent federal financial services legislation requires states to adopt
laws for the protection of consumer privacy. Compliance with various existing
and pending privacy requirements also could result in significant additional
costs to us.
We may not be able to compete successfully if we cannot recruit and retain
insurance agents.
We distribute our products principally through independent agents whom we
recruit and train to market and sell our products. We also engage marketing
general agents from time to time to recruit independent agents and develop
networks of agents in various states. We compete vigorously with other insurance
companies for productive independent agents, primarily on the basis of our
financial position, support services, compensation and product features. We may
not be able to continue to attract and retain independent agents to sell our
products, especially if we are unable to obtain permission to recommence sales
in a larger number of states, restore our capital and surplus and improve our
financial strength ratings. Our business and ability to compete would suffer if
we are unable to recruit and retain insurance agents and if we lose the services
provided by our marketing agents.
8
Our business is concentrated in a few states.
Historically, our business has been concentrated in a few states. Over the
past four fiscal years, approximately half of our premiums were from sales of
policies in California, Florida and Pennsylvania. Increased competition, changes
in economic conditions, legislation or regulations, rating agency downgrades,
statutory surplus deficiencies or the loss of our ability to write business due
to regulatory intervention in any of these states could significantly affect our
results of operations or prospects. In 2001, we voluntarily ceased new sales in
these states as a result of our subsidiary's statutory surplus position. We
recommenced sales in Pennsylvania and 25 other states since February 2002 and
petitioned Florida and California, where sales have historically accounted for
approximately 30% of our business, for reentry. Until the necessary approvals
are received, we are unable to sell new policies in these states and in 22
others. As a result of not selling policies in these states, or if we fail to
recommence sales in other states, our financial condition may be materially
adversely affected.
Declines in the value or the yields on our investment portfolio and
significant defaults in our investment portfolio may adversely affect our net
income.
Income from our investment portfolio is a significant element of our
overall net income. If our investments do not perform well, we would have
reduced net income and could suffer a net loss. We are susceptible to changes in
market rates when cash flows from maturing investments are reinvested at
prevailing market rates. Accordingly, a prolonged decrease in interest rates or
in equity security prices or an increase in defaults on our investments could
adversely affect our net income.
Effective December 31, 2001, we entered a reinsurance agreement to
reinsure, on a quota share basis, substantially all of our long-term care
insurance policies in-force. The transaction resulted in the transfer of debt
and equity securities of approximately $563,000,000 to the reinsurer and a funds
withheld balance of $56,000,000. The agreement provides us the opportunity to
commute on or, after December 31, 2007. The reinsurer will maintain a notional
experience account, which reflects the initial premium paid, future premiums
collected net of claims, expenses and accumulated investment earnings. The
notional experience account balance will receive an investment credit based upon
the total return of a series of benchmark indices and hedges, which are designed
to closely match the duration of reserve liabilities. Periodic changes in the
market values of the benchmark indices and hedges will be recorded in our
financial statements as investment gains or losses in the period in which they
occur. As a result, we will likely experience volatility in our future financial
statements.
In addition, we depend in part on income from our investment portfolio to
fund our reserves for future policy claims and benefits. In establishing the
level of our reserves, we make assumptions about the performance of our
investments. If our investment income or the capital gains in our portfolio are
lower than expected, we may have to increase our reserves, which could adversely
affect our net income.
9
Our new reinsurance agreement is subject to an aggregate limit of
liability, which is a function of certain factors and which may be reduced as a
result of our inability to obtain certain rate increases.
Our new reinsurance agreement with Centre Solutions (Bermuda) Limited,
effective December 31, 2001, is subject to certain coverage limitations and
aggregate limit of liability, which is a function of certain factors and which
may be reduced as a result of our inability to obtain rate increases. This limit
of liability is subject to certain events such as material breach of the
covenants of the agreement, regulatory risk of changes in regulation or law and
our inability to achieve rate increases deemed necessary by the provisions of
the agreement. In the event that the reinsurer's limit of liability is reduced,
our financial condition and statutory surplus could be materially adversely
affected.
All references to this reinsurance agreement or to Centre Solutions
(Bermuda) Limited throughout this filing are intended to contain this statement
of risk.
Our reinsurers may not satisfy their obligations to us.
We obtain reinsurance from unaffiliated reinsurers on most of our policies
to increase the number and size of the policies we may underwrite and reduce the
risk to which we are exposed. Although reinsurance makes the reinsurer liable to
us to the extent the risk is transferred to the reinsurer, it does not relieve
us of our liability to our policyholders. Accordingly, we bear credit risk with
respect to our reinsurers. We cannot assure you that our reinsurers will pay all
of our reinsurance claims or that they will pay our reinsurance claims on a
timely basis.
Our Corrective Action Plan, as approved by the Pennsylvania Insurance
Department, will result in a strengthening of our statutory reserves. A
component of the Corrective Action Plan is a reinsurance agreement. If the
reinsurer does not honor our agreement, if the limit of liability is reduced as
a result of limitations and / or conditions contained in the reinsurance
agreement, or if the agreement is cancelled, our statutory surplus would be
materially adversely affected.
We may not commute our new reinsurance transaction on December 31, 2007,
which may cause us to incur increased expenses and would permit the reinsurer to
acquire preferred stock potentially convertible into a substantial additional
number of shares of common stock; breach of the reinsurance agreement could also
result in significant costs.
Our reinsurance agreement contains commutation provisions and allows us to
recapture the reserve liabilities and the current experience account balance as
of December 31, 2007 or on December 31 of any year thereafter.
If we choose not to or are unable to commute the agreement as planned, our
financial results would likely suffer a materially adverse impact due to an
escalation of the charges required to be paid to the reinsurer after December
31, 2007. Additionally, our reinsurance agreement contains covenants and
conditions that, if breached, could result in a significant loss, requiring a
payment of $2.5 million per quarter from the period of the breach through
December 31, 2007. Any breach of the reinsurance agreement may also result in
the immediate recapture of the reinsured business, which would have a material
adverse effect on our subsidiaries' statutory surplus. The reinsurer has been
granted warrants to acquire convertible preferred stock in the event we do not
commute the agreements that, if converted, would represent an additional 20
percent of the common stock then outstanding.
10
We may be affected by our financial strength ratings due to highly
competitive markets.
Our ability to expand and to attract new business is affected by the
financial strength ratings assigned to our insurance company subsidiaries by
A.M. Best Company, Inc. and Standard & Poor's Insurance Rating Services, two
independent insurance industry rating agencies. A.M. Best's ratings for the
industry range from "A++ (superior)" to "F (in liquidation)." Standard & Poor's
ratings range from "AAA (extremely strong)" to "CC (extremely weak)." Some
companies are unrated. A.M. Best and Standard & Poor's insurance company ratings
are based upon factors of concern to policyholders and insurance agents and are
not directed toward the protection of investors. Our subsidiaries that are rated
have A.M. Best ratings of "B- (fair)" and Standard & Poor's ratings of "B-
(weak)."
Certain distributors will not sell our group products unless we have a
financial strength rating of at least an "A-." The inability of our subsidiaries
to obtain higher A.M. Best or Standard & Poor's ratings could adversely affect
the sales of our products if customers favor policies of competitors with better
ratings. In addition, the recent downgrades and further downgrades in our
ratings may cause our policyholders to allow their existing policies to lapse.
Increased lapsation would reduce our premium income and would also cause us to
expense fully the deferred policy costs relating to lapsed policies in the
period in which those policies lapsed, thereby reducing our capital and surplus.
Downgrades to our ratings may also lead some independent agents to sell fewer of
our products or to cease selling our policies altogether.
We may not have enough capital and surplus to continue to write business.
Our continued ability to write business is dependent upon our ability to
continue to fund expansion of our markets and our network of agents while at the
same time maintaining required minimum statutory levels of capital and surplus
to support such business writing. Our new business writing typically results in
net losses on a statutory basis during the early years of a policy, due
primarily to differences in accounting practices between statutory accounting
principles and generally accepted accounting principles. The resultant reduction
in statutory surplus, or surplus strain, can limit our ability to generate new
business due to statutory restrictions on premium to surplus ratios and required
statutory surplus parameters. If we cannot generate sufficient statutory surplus
to maintain minimum statutory requirements through increased statutory
profitability, reinsurance or other capital generating alternatives, we will be
limited in our ability to generate additional premium from new business writing,
which would result in lower net income under generally accepted accounting
principles, or, in the event that our statutory surplus is not sufficient to
meet minimum state premium to surplus and risk based capital ratios, we could be
prohibited from generating additional premium revenue.
11
Furthermore, the insurance industry may undergo change in the future and,
accordingly, new products and methods of service may also be introduced. In
order to keep pace with any new developments, we may need to expend significant
capital to offer new products and to train our agents and employees to sell and
administer these products and services. We may also need to make significant
capital expenditures for computer systems and other technology needed to market
and administer our policies. We may not be successful in developing new products
and we may not have the funds necessary to make capital expenditures. Any
significant capital expenditures, or the failure to make necessary investments,
may have a material adverse effect on us.
Litigation may result in financial losses, harm to our reputation and
divert management resources.
We are regularly involved in litigation, both as a defendant and as a
plaintiff. The litigation naming us as a defendant ordinarily involves our
activities as an insurer. In recent years, many insurance companies have been
named as defendants in class actions relating to market conduct or sales
practices, and other long-term care insurance companies have been sued when they
sought to implement premium rate increases. We cannot assure you that we will
not be named as a defendant in a similar case. Current and future litigation may
result in financial losses, harm our reputation and require the dedication of
significant management resources.
The Company and certain of its key executive officers are defendants in
consolidated actions that were instituted on April 17, 2001 in the United States
District Court for the Eastern District of Pennsylvania by shareholders of the
Company, on their own behalf and on behalf of a putative class of similarly
situated shareholders who purchased shares of the Company's common stock between
July 23, 2000 through and including March 29, 2001. The consolidated amended
class action complaint seeks damages in an unspecified amount for losses
allegedly incurred as a result of misstatements and omissions allegedly
contained in the Company's periodic reports filed with the SEC, certain press
releases issued by them, and in other statements made by its officials. The
alleged misstatements and omissions relate, among other matters, to the
statutory capital and surplus position of the Company's largest subsidiary, Penn
Treaty Network America Insurance Company. On December 7, 2001, the defendants
filed a motion to dismiss the complaint, which was denied on May 15, 2002. The
Company believes that the complaint is without merit, and it and its executives
will continue to vigorously defend the matter.
We are dependent upon key personnel and our operations could be affected by
the loss of their services.
Our success largely depends upon the efforts of our senior operating
management, including our chairman, chief executive officer and founder, Irving
Levit. The loss of the services of Mr. Levit or one or more of our key personnel
could have a material adverse effect on our operations.
12
Certain anti-takeover provisions in state law and our Articles of
Incorporation may make it more difficult to acquire us and thus may depress the
market price of our common stock.
Our Restated and Amended Articles of Incorporation, the Pennsylvania
Business Corporation Law of 1988, as amended, and the insurance laws of states
in which our insurance subsidiaries do business contain certain provisions which
could delay or impede the removal of incumbent directors and could make a
merger, tender offer or proxy contest involving us difficult, even if such a
transaction would be beneficial to the interests of our shareholders, or
discourage a third party from attempting to acquire control of us. In
particular, the classification of our board of directors could have the effect
of delaying a change in control. Insurance laws and regulations of Pennsylvania
and New York prohibit any person from acquiring control of us, and thus indirect
control of our insurance subsidiaries, without the prior approval of the
insurance commissioners of those states.
Reduced liquidity and price volatility could result in a loss to investors.
Although our common stock is listed on the New York Stock Exchange, there
can be no assurance as to the liquidity of investments in our common stock or as
to the price investors may realize upon the sale of our common stock. These
prices are determined in the marketplace and may be influenced by many factors,
including the liquidity of the market for the common stock, the market price of
the common stock, investor perception and general economic and market
conditions.
USE OF PROCEEDS
We will not receive any of the proceeds from the sale of our common stock
offered in this prospectus.
DIVIDEND POLICY
We have not and do not expect to declare or pay cash dividends in the
foreseeable future.
13
SELECTED CONSOLIDATED FINANCIAL DATA
Our selected consolidated financial data are based on and derived from, and
should be read in conjunction with, our quarterly report on Form 10-Q for the
quarter ended March 31, 2002, and our annual report on Form 10-K for the year
ended December 31, 2001, and the related notes thereto. Our consolidated balance
sheets at December 31, 2001 and 2000, and the consolidated statements of income
and comprehensive income, shareholders' equity and cash flows for each of the
three years ended December 31, 2001, 2000 and 1999, and notes thereto were
audited by PricewaterhouseCoopers LLP, independent accountants. Our consolidated
financial statements as of December 31, 2001 and 2000, and for each of the three
years ended December 31, 2001, are included in our annual report on Form 10-K
for the year ended December 31, 2001, which is incorporated by reference herein.
The selected consolidated financial data set forth for the three months ended
March 31, 2002, may not be indicative of the results of operations to be
expected for a full year. See "INCORPORATION OF INFORMATION WE FILE WITH THE
SEC" on page 22 of this prospectus.
The comparison of selected consolidated financial data is significantly affected
by the following business combinations accounted for as purchases: Network
Insurance Senior Health Division (effective January 1, 2000); United Insurance
Group Agency, Inc. (effective January 1, 1999); and American Network Insurance
Company (effective August 26, 1996).
14
Three months ended
March 31, Years ended December 31,
------------------ ---------------------------------------------------
2002 2001 2001 2000 1999 1998 1997
---- ---- ---- ---- ---- ---- ----
(in thousands, except per share data and ratios)
Statement of Operations Data:
Revenues:
Total premiums $ 84,236 $ 96,019 $ 350,391 $ 357,113 $ 292,516 $ 223,692 $ 167,680
Net investment income 692 6,725 30,613 27,408 22,619 20,376 17,009
Net realized gains (losses) 14,523 (3,289) (7,795) 652 5,393 9,209 1,417
Investment credit on experience account (1) (17,110) - - - - - -
Other income 2,770 2,400 9,208 8,096 6,297 885 417
Total revenues 85,111 101,855 382,417 393,269 326,825 254,162 186,523
Benefits and expenses:
Benefits to policyholders (2) 80,187 72,137 239,155 243,571 200,328 154,300 123,865
Commissions 12,830 24,988 76,805 102,313 96,752 80,273 55,240
Net acquisition costs (deferred) amortized (3) (3,326) (5,397) 9,860 (43,192) (51,134) (46,915) (28,294)
Impairment of net unamortized policy
acquisition costs (4) - - 61,800 - - - -
General and administrative expenses 10,712 12,634 49,282 49,973 40,736 26,069 20,614
Expense and risk charges on reinsurance 3,577 - - - - - -
Excise tax expense (5) 581 - 5,635 - - - -
Loss due to impairment of property
and equipment (6) - - - - 2,799 - -
Change in reserve for claim litigation - (250) (250) 1,000 - - -
Interest expense 1,196 1,282 4,999 5,134 5,187 4,809 4,804
Total benefits and expenses 105,757 105,394 447,286 358,799 294,668 218,536 176,229
(Loss) income before federal income taxes (20,646) (3,539) (64,869) 34,470 32,157 35,626 10,294
(Benefit) provision for federal income taxes (7,020) (1,203) (16,280) 11,720 10,837 11,578 2,695
Net (loss) income (13,626) (2,336) (48,589) 22,750 21,320 24,048 7,599
Net (loss) income, adjusted (7) (13,626) (2,123) (47,736) 23,603 21,979 24,259 7,830
Basic earnings per share (0.72) (0.32) (3.41) 3.13 2.83 3.17 1.01
Basic earnings per share, adjusted (7) (0.72) (0.29) (3.35) 3.24 2.92 3.20 1.04
Diluted earnings per share (0.72) (0.32) (3.41) 2.61 2.40 2.64 0.98
Diluted earnings per share, adjusted (7) (0.72) (0.29) (3.35) 2.70 2.46 2.66 1.01
Weighted average shares outstanding (8) 18,853 7,288 14,248 7,279 7,533 7,577 7,540
Weighted average diluted shares outstanding (9) 18,853 7,288 14,248 9,976 10,293 10,402 7,758
Balance Sheet Data:
Total investments (1) $ 22,075 $ 438,804 $ 488,591 $ 366,126 $ 373,001 $ 338,889 $ 301,787
Total assets 939,952 898,179 941,158 856,131 697,639 580,552 465,772
Total debt (10) 76,310 79,250 79,190 81,968 82,861 76,550 76,752
Shareholders' equity 171,363 191,242 192,796 188,062 158,685 157,670 132,756
Book value per share 8.46 23.31 10.24 25.81 21.81 20.79 17.53
Other Supplemental Data:
Net operating income (11) $ 7,691 $ 24,034 $ 20,259 $ 18,043 $ 6,784
GAAP Ratios:
Loss ratio 68.3% 68.2% 68.5% 69.0% 73.9%
Expense ratio (12) 59.0% 32.0% 31.3% 28.7% 31.2%
Total 127.3% 100.2% 99.8% 97.7% 105.1%
Return on average equity (13) -25.5% 13.1% 13.5% 16.6% 6.0%
Selected Statutory Data:
Net premiums written (14) $ (64,689) $ 130,676 $ 208,655 $ 143,806 $ 167,403
Statutory surplus (beginning of
period) 30,137 67,070 76,022 67,249 81,795
Ratio of net premiums written to
statutory surplus (2.2)x 1.9x 2.7x 2.1x 2.0x
15
Notes to Selected Financial Data (in thousands)
(1) Effective December 31, 2001, the Company entered into a reinsurance
agreement with an unaffiliated reinsurer. In connection with this
agreement, the Company transferred initial reinsurance premiums, in the
form of cash and marketable securities, of approximately $563 million
to the reinsurer during February 2002. The initial premium and future
cash flows of the reinsured policies, less claims payments, ceding
commissions and risk charges, is credited to a notional experience
account, which is held for the Company's benefit in the event of
commutation and recapture following December 31, 2007. The notional
experience account balance receives an investment credit based upon the
total return of a series of benchmark indices and derivative hedges,
which are designed to closely match the duration of reserve
liabilities. Periodic changes in the market values of the benchmark
indices and derivative hedges are recorded in the Company's financial
statements as investment gains or losses in the period in which they
occur. As a result, the Company's financial statements are subject to
significant volatility. During the period ending March 31, 2002, the
Company recorded a net loss of $17,110 resulting from the total return
of the benchmark portfolio during the period. For more information,
refer to our annual report on Form 10-K for the year ended December 31,
2001 and our quarterly report on Form 10-Q for the period ended March
31, 2002, both of which are incorporated by reference herein.
(2) In 1997, we added approximately $12,000 to our reserves as a result of
our reassessment of assumptions utilized in the actuarial determination
of our claims reserves. For more information, refer to our annual
report on Form 10-K for the year ended December 31, 2001, which is
incorporated by reference herein.
(3) Effective September 10, 2001, we discontinued the sale, nationally, of
all new long-term care insurance policies until our Corrective Action
Plan was completed and approved by the Pennsylvania Insurance
Department. As a result, we did not defer the costs associated with new
policy issuance and recognized only the amortization of existing
deferred acquisition costs. In addition, we recognized approximately
$10,000 in additional amortization expense when we unlocked our factors
during the second quarter of 2001. For more information, refer to our
annual report on Form 10-K for the year ended December 31, 2001 and our
quarterly repot on Form 10-Q for the period ended March 31, 2002, both
of which are incorporated by reference herein.
(4) Effective December 31, 2001, we entered a reinsurance agreement for
substantially all of our long-term care insurance policies. The
agreement requires us to pay an annual expense and risk charge to the
reinsurer in the event we later commute the agreement. As a result of
these anticipated charges, we determined to impair the value of our net
unamortized policy acquisition costs by $61,800.
(5) As a result of our December 31, 2001 reinsurance agreement with a
foreign reinsurer, we must pay federal excise tax of 1% on all ceded
premium. The 2001 expense represents excise taxes due for premiums
transferred at the inception of the contract.
(6) During 1999, we discontinued the implementation of a new computer
system, for which we had previously capitalized $2,799 of licensing,
consulting and software costs. When we decided not to use this system,
its value became fully impaired. For more information, refer to our
annual report on Form 10-K for the year ended December 31, 2001, which
is incorporated by reference herein.
(7) The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 142, "Goodwill and Other Intangible Assets"
("SFAS 142") in June 2001. Under the new rules, intangible assets with
an indefinite life are no longer amortized in periods subsequent to
December 31, 2001, but are subject to annual impairment tests (or more
frequent under certain circumstances), effective January 1, 2002. The
Company has determined that all of its goodwill has an indefinite life
and is therefore subject to the new rules. Net (loss) income for all
periods prior to implementation of goodwill has been adjusted to
exclude goodwill amortization expense, net of taxes.
(8) On May 25, 2001, we issued approximately 11,547 new common shares of
our common stock, for net proceeds of $25,726, through an investor
rights offering.
(9) Diluted shares outstanding includes shares issuable upon the conversion
of our convertible debt and exercise of options outstanding, except in
2001 and the three months ended March 2002, for which the inclusion of
such shares would be anti-dilutive.
(10) In 1996, we issued $74,750 in convertible debt, due December 2003. In
1999, we purchased an agency for cash and a note for $7,167 payable in
installments through January 2002. For more information, refer to our
annual report on Form 10-K for the year ended December 31, 2001 and our
quarterly repot on Form 10-Q for the period ended March 31, 2002, both
of which are incorporated by reference herein.
16
(11) Net operating income excludes the effect, net of taxes, of (1) net
realized gains and losses from the sale of our investments in cash and
qualified securities in all years and trading account losses, (2) our
1999 property and equipment impairment charge, (3) our 2001 DAC
impairment charge and excise tax expense, (4) our tax valuation
allowance in 2001, and (5) goodwill amortization. Prior to
implementation of SFAS 142, the Company presented net operating income
including goodwill amortization and, separately, excluding goodwill
amortization. Net operating income is not calculated in accordance with
GAAP. It should not be considered in isolation or as a substitute for
net income calculated in accordance with GAAP. Different companies
calculate net operating income differently and therefore net operating
income as presented for us may not be comparable to net operating
income reported by other companies.
(12) Expense ratios exclude the impact of reduced commissions and increased
general and administrative expenses resulting from the 1999 and 2000
acquisitions of our agency subsidiaries. For more information, refer to
our annual report on Form 10-K for the year ended December 31, 2001 and
our quarterly report on Form 10-Q for the period ended March 31, 2002,
both of which are incorporated by reference herein.
(13) Return on average equity is calculated by dividing net income by the
average of equity at the beginning and end of each period.
(14) Under statutory accounting principles, ceded reserves are accounted for
as offsetting negative benefits and negative premium. Our 2001, 2000
and 1999 premium is reduced by $408,093, $225,741 and $90,230,
respectively, from reinsurance transactions.
17
SELLING SHAREHOLDERS
We are registering a total of 540,000 shares of our common stock on behalf
of the selling shareholders named in the table below. We issued 510,000 of the
shares covered by this prospectus pursuant to stock purchase agreements dated
March 28, 2002 in a private placement transaction. The remaining 30,000 shares
were issued to Philadelphia Brokerage Corporation as part of a private placement
transaction, which was completed on May 14, 2002. We are required to register
the 510,000 shares pursuant to the terms of the stock purchase agreements dated
March 28, 2002 and we have agreed to register the resale of the 30,000 shares.
We are registering all 540,000 shares covered by this prospectus on behalf
of the selling shareholders. We have registered the shares to permit the selling
shareholders and their pledgees, donees, transferees or other
successors-in-interest that receive their shares from the selling shareholders
as a gift, partnership distribution or another non-sale related transfer after
the date of this prospectus to resell the shares when they deem appropriate.
The following table sets forth, as of June 4, 2002, the number of shares of
our common stock that each selling shareholder beneficially owns. We have
prepared this table based upon information furnished to us by or on behalf of
the selling shareholders or based upon our records and it is accurate to the
best of our knowledge. Based on the information provided to us by the selling
shareholders, none of the selling shareholders beneficially owns any shares of
our common stock other than those listed below.
The selling shareholders confirmed at the time they acquired the shares
listed below that they acquired the shares for investment purposes only and not
with a view toward resale, and acknowledged the existence of restrictions on
resale applicable to these shares. The offering relates only to the sale of
shares held or to be held by the selling shareholders named in the following
table. Since the date on which the selling shareholders provided us with the
information below, they may have sold, transferred or otherwise disposed of some
or all of their shares of our common stock in transactions exempt from
Securities Act registration requirements.
Shares Beneficially Number of Shares Shares Beneficially
Owned Prior to Offering Being Offered Owned After Offering(3)
Number(1) Percent(2) Number(1) Percent(2)
--------------------------------------------------- ------------------------------ ------------------ -------------------------
Acadia Fund I, LP 229,157 1.2% 127,000 102,157 *
--------------------------------------------------- -------------- --------------- ------------------ ------------ ------------
Dennis L. Adams 60,000 * 10,000 50,000 *
--------------------------------------------------- -------------- --------------- ------------------ ------------ ------------
Avant Garde Investment Limited 24,489 * 15,000 9,489 *
--------------------------------------------------- -------------- --------------- ------------------ ------------ ------------
Frank J. Campbell III IRA 145,000 * 80,000 65,000 *
--------------------------------------------------- -------------- --------------- ------------------ ------------ ------------
Cerulean Partners, Ltd. 43,600 * 16,000 27,600 *
--------------------------------------------------- -------------- --------------- ------------------ ------------ ------------
Penelope Hansen 75,000 * 75,000 0 0%
--------------------------------------------------- -------------- --------------- ------------------ ------------ ------------
Patricia Houtz and Ruth Ann Marshall(4) 28,000 * 28,000 0 0%
--------------------------------------------------- -------------- --------------- ------------------ ------------ ------------
Ernest G. Jacob 10,000 * 10,000 0 *
--------------------------------------------------- -------------- --------------- ------------------ ------------ ------------
Alexander Levitan 60,000 * 50,000 10,000 *
--------------------------------------------------- -------------- --------------- ------------------ ------------ ------------
Losty Capital Management 22,000 * 22,000 0 0%
--------------------------------------------------- -------------- --------------- ------------------ ------------ ------------
Irving L. Mazer 35,000 * 20,000 15,000 *
--------------------------------------------------- -------------- --------------- ------------------ ------------ ------------
MRM Life Ltd. 10,954 * 7,000 3,954 *
--------------------------------------------------- -------------- --------------- ------------------ ------------ ------------
A. Morris Williams, Jr. & Ruth W. Williams(4) 100,000 * 50,000 50,000 *
--------------------------------------------------- -------------- --------------- ------------------ ------------ ------------
Philadelphia Brokerage Corporation(5) 60,000 * 30,000 30,000 *
--------------------------------------------------- -------------- --------------- ------------------ ------------ ------------
TOTAL 903,200 4.6% 540,000 363,200 1.9%
--------------------------------------------------- -------------- --------------- ------------------ ------------ ------------
* Less than 1%.
18
(1) Unless otherwise indicated, each person has sole investment and voting
power with respect to the shares listed in the table, subject to community
property laws, where applicable.
(2) Percentage ownership is based on 19,427,737 shares of common stock
outstanding on June 4, 2002.
(3) Assumes all the shares of common stock that may be offered hereunder are
sold.
(4) Shares are jointly owned.
Philadelphia Brokerage Corporation, one of the selling shareholders, acted
as a placement agent in the private placement we completed in March 2002 with
the other selling shareholders and received a commission for its services. In
addition, we have retained Philadelphia Brokerage Corporation to provide us with
certain professional services, including services in connection with potential
future financings. As compensation for such services, Philadelphia Brokerage
Corporation is receiving a $5,000 a month for a twelve-month period, has
received 60,000 shares of our common stock, 30,000 shares of which are covered
by this prospectus, and is eligible to receive up to an additional 40,000 shares
of our common stock upon the completion of certain services. To the best of our
knowledge, none of the other selling shareholders had any material relationship
with us or any of our affiliates during the three-year period ending on the date
of this prospectus.
The information regarding the selling shareholders may change from time to
time. If required, we will set forth these changes in one or more prospectus
supplements.
19
PLAN OF DISTRIBUTION
We are registering the shares of common stock on behalf of the selling
shareholders. The selling shareholders can use this prospectus to sell the
shares at any time while the prospectus is in effect, unless we have notified
the selling shareholders that the prospectus is not then available. Any sale may
occur in one or more of the following types of transactions (including block
transactions), or in other kinds of transactions:
o transactions on the New York Stock Exchange or on any national
securities exchange or U.S. inter-dealer system of a registered
national securities association on which our common stock may be
listed or quoted at the time of sale;
o in the over-the-counter market;
o privately negotiated transactions between a selling shareholder and a
purchaser;
o through short sales of our common stock;
o through pledges made by a selling shareholder to secure debt and other
obligations;
o through put or call options transactions relating to our common stock,
whether the options are listed on an options exchange or otherwise;
o in connection with the writing of non-traded and exchange-traded call
options, in hedge transactions and in settlement of other transactions
in standardized or over-the-counter options; or
o through a combination of any of the above transactions.
The selling shareholders may effect such transactions by selling shares
directly to purchasers or to or through a broker-dealer acting as either agent
or principal. If a broker-dealer is used in the sale of shares, that person may
solicit potential purchasers. The shares may also be transferred as a gift or
pursuant to a pledge, or may be sold to a broker-dealer acting as principal.
These persons may then sell the shares to another person, either directly or
through another broker-dealer, subject to compliance with the requirements of
the Securities Act.
The price at which sales of the shares occur may be based on market prices
or may be negotiated between the parties, and the consideration may be cash or
another form negotiated between the parties. Broker-dealers acting as agents or
principals may be paid compensation in the form of discounts, concessions or
commissions from a selling shareholder and/or from the purchasers of the shares,
or both. Brokers or dealers may be deemed to be "underwriters" within the
meaning of the Securities Act. Any profits on the resale of shares by a
broker-dealer acting as principal might be deemed to be underwriting discounts
or commissions under the Securities Act. Discounts, concessions, commissions and
similar selling expenses, if any attributable to the sale of shares will be
borne by a selling shareholder and/or the purchasers. We have agreed to pay
certain of the costs, expenses and fees of preparing, filing and maintaining
this prospectus and the selling shareholders may agree to indemnify any agent,
dealer or broker-dealer that participates in transactions involving sales of the
shares if liabilities are imposed on that person under the Securities Act.
20
The selling shareholders have advised us that they have not entered into
any agreements, understandings or arrangements with underwriters or
broker-dealers regarding the sale of their shares, nor is there an underwriter
or coordinating broker acting in connection with a proposed sale of shares by
any selling shareholder. If we are notified by any selling shareholder that any
material arrangement has been entered into with a broker-dealer for the sale of
shares, if required, we will file a supplement to this prospectus.
If the selling shareholders use this prospectus for any sale of the shares,
they will be subject to the prospectus delivery requirements of the Securities
Act. For transactions effected on or through the New York Stock Exchange, those
requirements may be satisfied by our delivery of copies of this prospectus to
the New York Stock Exchange in compliance with Securities Act Rule 153. Instead
of using this prospectus for any sale of the shares, a selling shareholder may
resell shares in compliance with the criteria and requirements of Rule 144
promulgated under the Securities Act.
The anti-manipulation Rules of Regulation M under the Securities Exchange
Act of 1934 may apply to sales of our common stock and activities of the selling
shareholders.
LEGAL MATTERS
Ballard Spahr Andrews & Ingersoll, LLP, Philadelphia, Pennsylvania will
pass on the validity of the common stock offered with this prospectus.
EXPERTS
PricewaterhouseCoopers LLP, independent auditors, have audited our
consolidated financial statements and schedule included in our Annual Report on
Form 10-K for the year ended December 31, 2001, as set forth in their report,
which is incorporated by reference in this prospectus and elsewhere in this
registration statement. Our financial statements and schedule are incorporated
by reference in reliance on the report of PricewaterhouseCoopers LLP, given on
their authority as experts in accounting and auditing.
WHERE YOU CAN FIND MORE INFORMATION
We are subject to the reporting requirements of the Securities Exchange Act
of 1934, and we file reports and other information with the SEC. We have also
filed with the SEC a registration statement on Form S-3 under the Securities Act
relating to the offer and sale of common shares under this prospectus. This
prospectus, filed as a part of the registration statement, does not contain all
of the information set forth in the registration statement or the exhibits and
schedules to the registration statement as permitted by the rules and
regulations of the SEC. You should read these exhibits for a more complete
description of the matters involved. Our reports, the registration statement and
the exhibits and schedules to the registration statement filed with the SEC may
be inspected, without charge, and copies may be obtained at prescribed rates, at
the public reference facility maintained by the SEC at Judiciary Plaza, 450
Fifth Street, N.W., Washington, D.C. 20549 and at the regional offices of the
SEC located at 233 Broadway, New York, New York 10279 and CitiCorp Center, 500
West Madison Street, Suite 1400, Chicago, Illinois 60621-2511. The public may
obtain information regarding the SEC's public reference facility by calling
1-800-SEC-0330. Our reports, the registration statement and other information
filed by us with the SEC are also available at the SEC's Website on the Internet
at http://www.sec.gov. Our common shares are listed on the New York Stock
Exchange under the symbol "PTA."
21
INCORPORATION OF INFORMATION WE FILE WITH THE SEC
The SEC allows us to "incorporate by reference" the information we file
with it, which means that we can disclose important information to you by
referring to those documents. The information incorporated by reference is an
important part of this prospectus, and the information that we file later with
the SEC will automatically update and supersede this information. We incorporate
by reference the documents listed below and any future filings made with the SEC
under Section 13(a), 13(c), 14 or 15(d) of the Securities Exchange Act of 1934
until this offering is completed:
o Annual Report on Form 10-K for the fiscal year ended December 31,
2001;
o Quarterly Report on Form 10-Q for the fiscal quarter ended March 31,
2002;
o Current Report on Form 8-K filed February 21, 2002;
o Proxy Statement for the 2002 Annual Meeting of Shareholders; and
o The description of our common stock contained in our registration
statement on Form 8-A, including any amendments or reports filed for
the purpose of updating such description.
You may request a copy of these filings, at no cost, by writing to or
telephoning us at the address below. However, we will not provide copies of the
exhibits to these filings unless we specifically incorporated by reference the
exhibits in this prospectus.
Penn Treaty American Corporation
Attention: Cameron B. Waite
Executive Vice President and Chief Financial Officer
3440 Lehigh Street
Allentown, PA 18103
(610) 965-2222
22
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 14. Other Expenses of Issuance and Distribution.
The following table sets forth the amounts of expenses attributed to the
issuance of the securities offered pursuant to this registration statement,
which shall be borne by us. All of the expenses listed below, except the SEC
registration fee, represent estimates only.
Estimated
---------
SEC registration fee............................. $ 217.00
Blue sky qualification fees and expenses......... 1,500.00
Transfer agent fees.............................. 1,500.00
Printing and engraving expenses.................. 1,000.00
Accounting fees and expenses..................... 5,000.00
Legal fees and expenses.......................... 10,000.00
Miscellaneous fees and expenses.................. 10,000.00
---------
Total................................... $29,217.00
Item 15. Indemnification of Directors and Officers.
Sections 1741 to 1750 of the Pennsylvania Business Corporation Law of 1988,
as amended, permit indemnification of directors, officers, employees and agents
of a corporation under certain conditions and subject to certain limitations.
Under the provisions of our Amended and Restated Bylaws, as amended, each
person who is or was a director, officer, employee or agent of us shall be
indemnified by us against expenses (including attorneys' fees), judgments, fines
and amounts paid in settlement actually and reasonably incurred by him or her in
connection with such action, suit or proceeding (other than an action by or in
right of us) if he or she acted in good faith and in a manner he or she
reasonably believed to be in, or not opposed to, our best interests, and, with
respect to any criminal action or proceedings, had no reasonable cause to
believe his or her conduct was unlawful. The termination of any action, suit or
proceedings by judgment, order, settlement, conviction, or upon a plea of nolo
contendre or its equivalent, shall not, of itself, create a presumption that the
person did not act in good faith and in a manner which he or she reasonably
believed to be in, or not opposed to, our best interests and, with respect to
any criminal action or proceeding, had reasonable cause to believe that his or
her conduct was unlawful.
II-1
In connection with the defense or settlement of a suit brought by or in the
right of us, our bylaws provide that each person who is or was a director,
officer, employee or agent of us shall be indemnified only against expenses
including attorney's fees incurred in the defense or settlement of such suit if
he or she acted in good faith and in a manner he or she reasonably believed to
be in, or not opposed to, our best interest except that if such a person is
adjudged to be liable in such a suit for negligence or misconduct in the
performance of his or her duty to us, he or she cannot be indemnified unless the
Court of Common Pleas of the county in which our registered office is located or
any other court in which such action or suit was brought determines that he or
she is fairly and reasonably entitled to indemnity for such expenses.
Under the provisions of our bylaws, our directors shall have no personal
liability to us or our shareholders for monetary damages for any action taken
unless they have breached their duty of good faith or duty of loyalty or failed
to perform the duties of their offices and/or their breach or failure to perform
constitutes self-dealing, willful misconduct or recklessness.
Our bylaws provide that expenses incurred by an officer, director, employee
or agent of us in defending a civil or criminal action, suit or proceeding may
be paid by us in advance of the final disposition of such action, suit or
proceeding upon receipt of an undertaking by or on behalf of the director,
officer, employee or agent to repay such amount if it shall ultimately be
determined that he or she is not entitled to be indemnified by us.
In addition, to the extent that an officer, director, employee or agent of
us is successful on the merits or otherwise in defense of any action, suit or
proceeding brought against him or her by reason of the fact that he or she is
our director, officer, employee or agent, our bylaws provide that he or she
shall be indemnified against expenses, including attorneys' fees actually and
reasonably incurred in connection therewith.
We maintain director and officer insurance with respect to those claims
described above in customary amounts.
The foregoing summaries are necessarily subject to the complete text of the
relevant document or statute.
II-2
Item 16. Exhibits and Financial Statement Schedules.
Exhibit
Number Description
------ -----------
4.1 Form of Common Stock Certificate (Incorporated by reference to
Exhibit 4 to the Company's Registration Statement on Form S-1
(File No. 033-92690)).
4.2 Restated and Amended Articles of Incorporation (Incorporated by
reference to Exhibit 3.1 to the Company's Registration Statement
on Form S-1 (File No. 033-92690)).
4.3 Amendment to Restated and Amended Articles of Incorporation
(Incorporated by reference to Exhibit 3.1(b) to the Company's
Registration Statement on Form S-3 (File No. 333-22125)).
4.4 Amended and Restated Bylaws, as amended (Incorporated by reference
to Exhibit 3.2 to the Company's Registration Statement on Form S-3
(File No. 333-22125)).
4.5 Form of Stock Purchase Agreement, dated March 28, 2002.*
5.1 Opinion of Ballard Spahr Andrews & Ingersoll, LLP.
23.1 Consent of PricewaterhouseCoopers LLP.
23.2 Consent of Ballard Spahr Andrews & Ingersoll, LLP (included in
Exhibit 5.1)
24.1 Power of Attorney.*
* Previously filed.
Item 17. Undertakings.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 (the "Securities Act") may be permitted to directors, officers or
controlling persons of the Registrant pursuant to the foregoing provisions or
otherwise, the Registrant has been advised that in the opinion of the Securities
and Exchange Commission such indemnification is against public policy as
expressed in the Securities Act and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other than the
payment by the Registrant of expenses incurred or paid by a director, officer or
controlling person of the Registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered, the Registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
II-3
The undersigned Registrant hereby undertakes:
(1) To file, during any period in which any offers or sales are being made,
a post-effective amendment to the registration statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in the
registration statement. Notwithstanding the foregoing, any increase or
decrease in volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered) and any
deviation from the low or high end of the estimated maximum offering range
may be reflected in the form of prospectus filed with the Commission
pursuant to Rule 424(b) if, in the aggregate, the changes in volume and
price represent no more than a 20% change in the maximum aggregate offering
price set forth in the "Calculation of Registration Fee" table in the
effective registration statement; and/or
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or any
material change to such information in the registration statement.
Provided, however, that paragraphs (1)(i) and (1)(ii) do not apply if the
information required to be included in a post-effective amendment by those
paragraphs is contained in periodic reports filed by the Registrant pursuant to
Section 13 or Section 15(d) of the Securities Exchange Act of 1934 that are
incorporated by reference in the registration statement.
(2) That, for the purpose of determining any liability under the Securities
Act, each such post-effective amendment shall be deemed to be a new registration
statement relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide offering
thereof.
(3) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination of the
offering.
The undersigned Registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act, each filing of the
Registrant's annual report pursuant to Section 13(a) or Section 15(d) of the
Securities Exchange Act of 1934 (and, where applicable, each filing of an
employee benefit plan's annual report pursuant to Section 15(d) of the
Securities Exchange Act of 1934) that is incorporated by reference in the
registration statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.
II-4
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-3 and has duly caused this Amendment No. 1 to
the registration statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of Allentown, Commonwealth of
Pennsylvania, on June 18, 2002.
PENN TREATY AMERICAN CORPORATION
By: /s/ A.J. Carden
-----------------------------
A.J. Carden
Executive Vice President
and Director
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 1 to the registration statement has been signed by the following persons in
the capacities and on the date indicated.
Signature Title Date
------------------------------ ---------------------------- -------------
* Chairman of the Board and June 18, 2002
------------------------------ Chief Executive Officer
Irving Levit (principal executive officer)
* Executive Vice President and June 18, 2002
------------------------------ Chief Financial Officer
Cameron B. Waite (principal financial officer)
Signature Title Date
------------------------------ -------------------------- -------------
* Treasurer, Comptroller and June 18, 2002
------------------------------ Director (principal
Michael F. Grill accounting officer)
* Vice President of Agency June 18, 2002
------------------------------ Management and Director
Jack D. Baum
/s/ A.J. Carden Executive Vice President June 18, 2002
------------------------------ and Director
A.J. Carden
* Director June 18, 2002
------------------------------
Alexander M. Clark
* Director June 18, 2002
------------------------------
Francis R. Grebe
* Director June 18, 2002
------------------------------
Gary E. Hindes
* Director June 18, 2002
------------------------------
Matthew W. Kaplan
* Director June 18, 2002
------------------------------
Domenic P. Stangherlin
*By: /s/ A.J. Carden
------------------------
A.J. Carden
Attorney-in-Fact
EXHIBIT INDEX
Exhibit No. Exhibit
----------- -------
4.1 Form of Common Stock Certificate (Incorporated by reference to
Exhibit 4 to the Company's Registration Statement on Form S-1
(File No. 033-92690)).
4.2 Restated and Amended Articles of Incorporation (Incorporated by
reference to Exhibit 3.1 to the Company's Registration Statement
on Form S-1 (File No. 033-92690)).
4.3 Amendment to Restated and Amended Articles of Incorporation
(Incorporated by reference to Exhibit 3.1(b) to the Company's
Registration Statement on Form S-3 (File No. 333-22125)).
4.4 Amended and Restated Bylaws, as amended (Incorporated by reference
to Exhibit 3.2 to the Company's Registration Statement on Form S-3
(File No. 333-22125)).
4.5 Form of Stock Purchase Agreement, dated March, 28, 2002.*
5.1 Opinion of Ballard Spahr Andrews & Ingersoll, LLP.
23.1 Consent of PricewaterhouseCoopers LLP.
23.2 Consent of Ballard Spahr Andrews & Ingersoll, LLP (included in
Exhibit 5.1).
24.1 Power of Attorney.*
* Previously filed.
EXHIBIT 5.1
[LETTERHEAD OF BALLARD SPAHR ANDREWS & INGERSOLL, LLP]
June 18, 2002
Penn Treaty American Corporation
3440 Lehigh Street
Allentown, Pennsylvania 18103
Re: Registration Statement on Form S-3 for Penn Treaty American Corporation
Ladies and Gentlemen:
We have acted as counsel to Penn Treaty American Corporation, a
Pennsylvania corporation (the "Company"), and are rendering this opinion in
connection with the filing of a Registration Statement on Form S-3 (the
"Registration Statement") by the Company with the Securities and Exchange
Commission under the Securities Act of 1933, as amended, relating to the
registration by the Company of 540,000 shares of the Company's common stock, par
value $.10 per share (the "Common Stock"), to be sold by the holders thereof as
described in the Registration Statement (the "Selling Shareholders").
We have examined originals or copies, certified or otherwise identified to
our satisfaction, of the Registration Statement and all exhibits thereto and
such corporate records and other agreements, documents and instruments, and such
certificates or comparable documents of public officials and officers and
representatives of the Company and have made such inquiries of such officers and
representatives and have considered such matters of law as we have deemed
appropriate as the basis for the opinion hereinafter set forth, including the
Company's Amended and Restated Bylaws, as amended, certain resolutions adopted
by the Board of Directors of the Company relating to the issuance of the Common
Stock and statements from certain officers of the Company.
Based upon and subject to the limitations and qualifications set forth
herein, we are of the opinion that the shares of Common Stock to be sold by the
Selling Shareholders are duly authorized, legally issued, fully paid and
nonassessable.
We express no opinion as to the law of any jurisdiction other than the law
of the Commonwealth of Pennsylvania.
We hereby consent to the sole use of this opinion as Exhibit 5.1 to the
Registration Statement and to the use of our name under the heading "Legal
Matters" in the Prospectus included therein.
Very truly yours,
/s/ Ballard Spahr Andrews & Ingersoll, LLP
EXHIBIT 23.1
Consent Of Independent Accountants
We hereby consent to the incorporation by reference in this Registration
Statement on Form S-3 of our report dated April 1, 2002 relating to the
financial statements and financial statement schedules, which appears in Penn
Treaty American Corporation's Annual Report on Form 10-K for the year ended
December 31, 2001. We also consent to the references to us under the heading
"Experts" in such Registration Statement.
/s/ PricewaterhouseCoopers LLP
-------------------------------
PricewaterhouseCoopers LLP
Philadelphia, Pennsylvania
June 18, 2002