<PAGE>
Page 1
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
[X] Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the quarterly period ended March 31, 1997
or
[ ] Transition Report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the transition period from
__________________________ to __________________________
Commission file number 0-13972
PENN TREATY AMERICAN CORPORATION
--------------------------------
(Exact name of registrant as specified in its charter)
PENNSYLVANIA 23-1664166
------------ ----------
(State or other jurisdiction of (I.R.S. Employer Identifi-
incorporation of organization) cation No.)
3440 LEHIGH STREET, Allentown, PA 18103
---------------------------------------
(Address, including zip code, of principal executive offices)
(610) 965-2222
--------------
(Registrant's telephone number, including area code)
Not Applicable
--------------
(Former name, former address and former fiscal year,
if change since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. YES X NO
--- ---
The number of shares outstanding on the Registrant's common stock, par value
$.10 per share, as of May 8, 1997 was 7,518,080.
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Page 2
PART I FINANCIAL INFORMATION
ITEM 1. Financial Statements
The registrant's Unaudited Consolidated Balance Sheets, Statements of Income
and Statements of Cash Flows and Notes thereto required under this item are
contained on pages 3 through 9 of this report, respectively. These financial
statements represent the consolidation of the operations of the registrant, and
its subsidiaries, American Network Insurance Company ("ANIC"), Senior Financial
Consultants Company and Penn Treaty Life Insurance Company ("PTLIC"). ANIC,
PTLIC and its subsidiary, Network America Life Insurance Company ("Network
America") (collectively, "the Insurers"), are underwriters of long-term care
insurance products. PTLIC and its subsidiary are also underwriters of life
insurance products.
<PAGE>
Page 3
PENN TREATY AMERICAN CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1997 1996
-------------- --------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Investments:
Bonds, available for sale at market (cost of $244,735,470
and $199,508,579, respectively).......................... $ 241,698,092 $ 201,329,966
Equity securities at market value, (cost of $13,640,295 and
$9,642,912, respectively)................................ 15,117,310 11,247,516
Policy loans............................................... 80,644 84,232
-------------- --------------
Total investments........................................ 256,896,046 212,661,714
Cash and cash equivalents.................................... 14,512,008 51,612,067
Property and equipment, at cost, less accumulated
depreciation of $2,316,362 and $2,205,407, respectively.... 8,156,881 8,092,028
Unamortized deferred policy acquisition costs................ 87,668,685 82,176,268
Receivables from agents, less allowance for uncollectable
amounts of $231,226 and $231,226, respectively............. 1,621,316 1,543,382
Accrued investment income.................................... 3,900,983 3,581,077
Federal income tax recoverable............................... 126,815 175,219
Cost in excess of fair value of net assets acquired, less
accumulated amortization of $379,667 and $324,203,
respectively............................................... 5,987,322 6,042,786
Present value of future profits acquired..................... 3,907,917 4,011,668
Receivable from reinsurers................................... 10,216,937 10,105,654
Other assets................................................. 6,663,446 6,766,129
-------------- --------------
Total assets............................................. $ 399,658,356 $ 386,767,992
-------------- --------------
-------------- --------------
LIABILITIES
Policy reserves:
Accident and health........................................ $ 110,439,081 $ 101,107,697
Life....................................................... 8,678,602 8,523,267
Unearned premium reserve..................................... 12,215 12,215
Policy and contract claims................................... 58,406,726 57,539,380
Accounts payable and other liabilities....................... 7,647,333 4,768,441
Long-term debt............................................... 76,925,396 77,114,592
Deferred income taxes........................................ 18,439,024 18,795,316
-------------- --------------
Total liabilities........................................ 280,548,377 267,860,908
-------------- --------------
Commitments and contingencies
SHAREHOLDERS' EQUITY
Preferred stock, par value $1.00; 5,000,000 shares
authorized, none outstanding............................... -- --
Common stock, par value $.10; 25,000,000 and 10,000,000
shares authorized, 8,123,709 and 8,116,464 shares issued... 812,370 811,646
Additional paid-in capital................................... 52,600,752 52,526,956
Net unrealized appreciation/(depreciation) of securities..... (1,029,840) 2,261,154
Retained earnings............................................ 68,432,571 65,013,202
-------------- --------------
120,815,853 120,612,958
Less 605,629 common shares held in treasury, at cost......... (1,705,874) (1,705,874)
-------------- --------------
119,109,979 118,907,084
-------------- --------------
Total liabilities and shareholders' equity............... $ 399,658,356 $ 386,767,992
-------------- --------------
-------------- --------------
</TABLE>
See accompanying notes to consolidated financial statements.
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Page 4
PENN TREATY AMERICAN CORPORATION
AND SUBSIDIARIES
Consolidated Statements of Operations
for the three months ended March 31,
(unaudited)
<TABLE>
<CAPTION>
1997 1996
------------- -------------
<S> <C> <C>
Revenue:
Accident and health premiums................................. $ 38,816,211 $ 29,523,797
Life premiums................................................ 893,677 946,097
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39,709,888 30,469,894
Net investment income........................................ 3,893,298 2,386,069
Net realized capital gains................................... 49,762 51,221
Other income................................................. 78,966 85,750
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43,731,914 32,992,934
Benefits and expenses:
Benefits to policyholders.................................... 25,330,614 19,786,654
Commissions.................................................. 12,906,707 10,186,871
Net policy acquisition costs deferred........................ (5,492,417) (4,169,856)
General and administrative expense........................... 4,967,307 3,305,716
Interest expense............................................. 1,203,334 36,215
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38,915,545 29,145,600
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Income before federal income taxes............................. 4,816,369 3,847,334
Provision for federal income taxes............................. 1,397,000 1,154,000
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Net Income................................................. $ 3,419,369 $ 2,693,334
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Primary earnings per share..................................... $ 0.45 $ 0.39
Fully diluted earnings per share............................... $ 0.42 --
Weighted average number of shares outstanding.................. 7,515,608 6,985,988
Weighted average number of shares outstanding (fully
diluted)..................................................... 10,370,416 --
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</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
Page 5
PENN TREATY AMERICAN CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
for the three months ended March 31,
(unaudited)
<TABLE>
<CAPTION>
1997 1996
------------- -------------
<S> <C> <C>
Net cash flow from operating activities:
Net income...................................................... $ 3,419,369 $ 2,693,334
Adjustments to reconcile net income to cash provided by
operations:
Amortization of intangible assets............................. 265,464 8,940
Policy acquisition costs, net................................. (5,492,417) (4,169,856)
Deferred income taxes......................................... 1,339,067 612,248
Depreciation expense.......................................... 101,405 70,665
Net realized capital gains.................................... (49,762) (51,221)
Increase (decrease) due to change in:
Receivables from agents....................................... (77,934) (78,896)
Receivable from reinsurers.................................... (111,283) (311,257)
Policy and contract claims.................................... 867,346 2,868,746
Policy and unearned premium reserves.......................... 9,486,719 7,013,305
Accounts payable and other liabilities........................ 2,878,892 1,008,682
Federal income taxes recoverable.............................. 48,404 --
Federal income tax payable.................................... -- (8,249)
Accrued investment income..................................... (319,906) 103,029
Other, net.................................................... (3,249) (642,134)
------------ -------------
Cash provided by operations................................... 12,352,115 9,117,336
Cash flow from (used in) investing activities:
Proceeds from sales of investments............................. 529,897 2,549,725
Maturities of investments...................................... 8,021,760 2,140,771
Purchase of investments........................................ (57,722,898) (14,117,271)
Acquisition of property and equipment.......................... (166,257) (338,025)
------------ -------------
Cash used in investing........................................ (49,337,498) (9,764,800)
Cash flow from (used in) financing activities:
Proceeds from exercise of stock options........................ 74,520 156,520
Repayments of mortgages and other debts........................ (189,196) (40,445)
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Cash provided/(used) by financing............................. (114,676) 116,075
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Decrease in cash and cash equivalents............................ (37,100,059) (531,389)
Cash balances:
Beginning of period............................................. 51,612,067 8,881,061
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End of period................................................... $ 14,512,008 $ 8,349,672
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</TABLE>
See accompanying notes to consolidated financial statements
<PAGE>
Page 6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1997
(unaudited)
The Consolidated Financial Statements should be read in conjunction with
these notes and with the Notes to Consolidated Financial Statements included in
the Annual Report on Form 10-K for the year ended December 31, 1996 of Penn
Treaty American Corporation ("the Company").
In the opinion of management, the summarized financial information reflects
all adjustments (consisting only of normal recurring adjustments) which are
necessary for a fair presentation of the financial position and results of
operations for the interim periods. Certain prior period amounts have been
reclassified to conform with current period presentation.
1. INVESTMENTS
Management has categorized all of its investment securities as available
for sale since they may be sold in response to changes in interest
rates, prepayments, and similar factors. Investments in this
classification are reported at their current market value with net
unrealized gains and losses, net of the applicable deferred income tax
effect, being added to or deducted from the Company's total shareholders'
equity on the balance sheet. As of March 31, 1997, shareholders' equity
was decreased by $1,029,840 due to unrealized losses of $1,560,363 in the
investment portfolio. As of December 31, 1996, shareholders' equity was
increased by $2,261,154 due to unrealized gains of $3,425,991 in the
investment portfolio.
The amortized cost and estimated market value of investments available
for sale as of March 31, 1997 and December 31, 1996 are as follows:
<TABLE>
<CAPTION>
MARCH 31, 1997 DECEMBER 31, 1996
------------------------------ ------------------------------
<S> <C> <C> <C> <C>
AMORTIZED ESTIMATED AMORTIZED ESTIMATED
COST MARKET VALUE COST MARKET VALUE
-------------- -------------- -------------- --------------
U.S. Treasury securities and obligations of U.S
Government authorities and agencies.......... $ 179,120,140 $ 176,335,721 $ 149,354,655 $ 150,196,015
Obligations of states and political sub-
divisions.................................... 34,410,032 34,945,642 30,460,952 31,537,001
Debt securities issued by foreign
governments.................................. 399,275 414,496 424,275 445,250
Corporate securities........................... 30,605,481 29,808,233 19,068,114 18,959,700
Other debt securities.......................... 200,542 194,000 200,583 192,000
Equities....................................... 13,640,295 15,117,310 9,642,912 11,247,516
Policy Loans................................... 80,644 80,644 84,232 84,232
-------------- -------------- -------------- --------------
Total Investments.............................. $ 258,456,409 $ 256,896,046 $ 209,235,723 $ 212,661,714
-------------- -------------- -------------- --------------
Net unrealized gain (loss)..................... (1,560,363) 3,425,991
-------------- --------------
$ 256,896,046 $ 212,661,714
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</TABLE>
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Page 7
2. NEW ACCOUNTING PRINCIPLE:
-------------------------
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standard No. 128, "Earnings per
Share" ("SFAS 128"). SFAS 128 establishes standards for computing and
presenting earnings per share, and simplifies the standards for
computing earnings per share previously found in Accounting
Principles Board Opinion No. 15, "Earnings per Share." Primary and
fully diluted earnings per share will be replaced with basic and
diluted earnings per share, and these amounts are required to be shown
on the face of the income statement. In addition, a reconciliation
of the numerator and denominator of the basic earnings per share
computation to the numerator and denominator of the diluted earnings
per share computation is required.
Basic earnings per share excludes dilution and is computed by
dividing income available to common stockholders by the
weighted-average number of common shares outstanding for the period.
Diluted earnings per share reflects the potential dilution that could
occur if securities or other contracts to issue common stock were
exercised or converted into common stock. This Statement is effective
for financial statements issued for periods ending after December 15,
1997, and requires restatement of all prior-period earnings per share
data presented. Management has determined the impact that SFAS 128
may have on the financial statements for the current quarter and
prior year quarter is as follows:
<TABLE>
<CAPTION>
1997 1996
------------ ------------
<S> <C> <C>
Net income................................................... $ 3,419,369 $ 2,693,334
Weighted average common shares outstanding................... 7,515,608 6,985,988
Basic earnings per share..................................... $ 0.45 $ 0.39
------------ ------------
------------ ------------
Net income................................................... $ 3,419,369 $ 2,693,334
Adjustments net of tax:
Interest expense on convertible debt....................... 829,196 --
Amortization of debt offering costs........................ 64,466 --
------------ ------------
Diluted net income........................................... $ 4,313,031 $ 2,693,334
------------ ------------
------------ ------------
Weighted average common shares outstanding................... 7,515,608 6,985,988
Common stock equivalents due to dilutive effect of stock
options.................................................... 226,468 108,860
Shares converted from convertible debt....................... 2,628,340 --
------------ ------------
Total outstanding shares for diluted earnings per share
computation................................................ 10,370,416 7,094,848
Diluted earnings per share................................... $ 0.42 $ 0.38
------------ ------------
------------ ------------
</TABLE>
<PAGE>
Page 8
ITEM 2. Management's Discussion and Analysis Of Financial Condition And
Results Of Operations.
THREE MONTHS ENDED MARCH 31, 1997 AND 1996:
ACCIDENT AND HEALTH PREMIUMS. First year accident and health premiums
earned in the three month period ended March 31, 1997 (the "1997 quarter"),
including long-term care and Medicare supplement, increased 20.5% to
$12,071,192, compared to $10,013,934 in the same period in 1996 (the "1996
quarter"). First year long-term care premiums earned in the 1997 quarter
increased 21.0% to $11,847,425, compared to $9,792,244 in the 1996 quarter. This
increase was primarily attributable to increased sales of nursing home policies,
which increased to $8,334,360 for the 1997 quarter from $5,144,205 for the 1996
quarter. Premiums from sales of home health care policies decreased from
$4,648,039 in the 1996 quarter to $3,513,065 in the 1997 quarter. These results
reflect increased market demand for the Company's newest products, which include
nursing home coverage with attached home health care riders and its Personal
Freedom policy, which combines the benefit coverage of nursing home and home
health care protection in one plan. Management believes this increase is
indicative of the growing need for both types of coverage following its late
1996 introduction of the plans. The Personal Freedom policies are classified as
nursing home products for reporting purposes. Management believes that as market
awareness of the need for combined coverage increases, less emphasis will be
placed on the growth of individual products, but rather upon total long-term
care coverage. First year Medicare supplement premiums earned by the Company in
the 1997 quarter increased to $223,767 from $221,690 in the 1996 quarter. Total
new business for this product remains low due to the Company's continued reduced
emphasis of its Medicare supplement products because of lower profit margins
associated with this line of business.
Renewal accident and health premiums earned by the Company in the 1997
quarter increased 28.5% to $25,076,535, compared to $19,509,862 in the 1996
quarter. Renewal long-term care premiums earned in the 1997 quarter increased
29.3% to $24,288,508, compared to $18,788,224 in the 1996 quarter. This increase
reflects renewals of a larger base of in-force policies. The Company believes
that this increase also reflects an increase in persistency, or renewals as a
percentage of total prior year business. Renewal Medicare supplement premiums in
the 1997 quarter increased 9.2% to $788,027, compared to $721,638 in the 1996
quarter.
DISABILITY PREMIUMS. The Company, following its August, 1996,
acquisition of ANIC, posted $1,668,484 in disability income in the 1997
quarter. Due to the accounting of the acquisition as a purchase, no
disability income is recorded for the 1996 quarter. During the 1997 quarter,
first year disability premiums were $327,513 and renewal premiums were
$1,340,971.
LIFE PREMIUMS. First year life premiums earned by the Company in the 1997
quarter decreased 32.4% to $261,699, compared to $387,036 in the 1996 quarter.
Renewal life premiums earned by the Company in the 1997 quarter increased to
$631,978, compared to $559,061 in the 1996 quarter. The Company's life business
has remained stable as the Company is focusing its marketing efforts on its
Independent Living, Personal Freedom and other long-term care plans.
NET INVESTMENT INCOME. Net investment income earned by the Company for
the 1997 quarter increased 63.2% to $3,893,298, from $2,386,069 for the 1996
quarter. This increase was primarily the result of growth in the Company's
investment assets from the proceeds of the Company's November, 1996,
$74,750,000 convertible debt issuance and continued premium growth. Interest
expense includes a charge of $1,167,969, which is due to the interest cost of
the convertible debt issuance. This cost is excluded from fully-diluted
earnings per share calculations, as though all of the debt had been
converted. The additional shares, if converted, are included in the
fully-diluted earnings per share calculation.
<PAGE>
Page 9
BENEFITS TO POLICYHOLDERS. Total benefits to policyholders in the 1997
quarter increased 28.0% to $25,330,614 compared to $19,786,654 in the 1996
quarter.
Accident and health benefits to policyholders, excluding disability benefits,
in the 1997 quarter increased 24.7% to $24,057,609 compared to $19,287,695 in
the 1996 quarter. The Company's accident and health loss ratio (the ratio of
benefits to policyholders to total accident and health premiums) was 64.8% in
the 1997 quarter, compared to 65.3% in the 1996 quarter. The Company uses
independent case managers to control claims in its home health care coverage.
Prior to 1997, the cost associated with case management was reported as
general and administrative expense. Management believes that these costs
impact total benefits expense, and has chosen to report them as benefits to
policyholders to objectively compare benefits costs in different periods. The
amounts reported in the 1997 quarter due to case management were approximately
$200,000 or .5% of premiums. Expenses related to case management in the 1996
quarter were immaterial and have not been reclassified to benefits.
Disability benefits were $819,682 in the 1997 quarter, or 49.1% of premiums.
Life benefits to policyholders in the 1997 quarter decreased to $453,323,
compared to $498,959 for the 1996 quarter. The life loss ratio (the ratio of
claims experience and increases in policy reserves to total life premium) was
50.7% in the 1997 quarter, compared to 52.7% in the 1996 quarter, and
reflects the actual claims incurred and actuarial reserves necessary to
support the portfolio mix of business.
COMMISSIONS. Commissions to agents increased 26.7% to $12,906,707 in the
1997 quarter compared to $10,186,871 in the 1996 quarter..
First year commissions on accident and health business in the 1997 quarter
increased 22.4% to $8,269,142, compared to $6,756,482 in the 1996 quarter,
corresponding to the increase in first year accident and health premiums. The
ratio of first year accident and health commissions to first year accident
and health premiums was 68.5% in the 1997 quarter and 67.5% in the 1996
quarter. First year commissions on life business in the 1997 quarter
decreased 31.3% to $213,309, compared to $310,272 in the 1996 quarter,
directly reflecting the Company's reduction in first year life premiums. The
ratio of first year life commissions to first year life premiums was 81.5% in
the 1997 quarter compared to 80.2% in the 1996 quarter.
Renewal commissions on accident and health business in the 1997 quarter
increased 31.5% to $4,025,570, compared to $3,060,449 in the 1996 quarter,
consistent with the increase in renewal premiums discussed above. The ratio
of renewal accident and health commissions to renewal accident and health
premiums was 16.1% in the 1997 quarter and 15.6% in the 1996 quarter. This
ratio fluctuates in relation to the age of the policies in force and the
rates of commissions paid to the agents. The ratio of disability commissions
to disability premiums was 19.1% in the 1997 quarter, including 59.3% on
first year premiums and 9.3% on renewal premiums, accounting for $319,384 in
1997 commissions.
NET POLICY ACQUISITION COSTS DEFERRED. The net deferred policy acquisition
costs in the 1997 quarter increased 31.7% to $5,492,417 compared to
$4,169,856 in the 1996 quarter, consistent with the growth of the Company's
business. This deferral is net of amortization, which decreases or increases as
the Company's actual persistency is higher or lower than the persistency assumed
for reserving purposes. The deferral of policy acquisition costs has remained
consistent with the growth of premiums, and the growth in amortization of policy
acquisition costs has been modified by improved persistency.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses in
the 1997 quarter
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Page 10
increased 50.3% to $4,967,307, compared to $3,305,716 in the 1996 quarter.
This increase was due to variable expense growth related to the 30% rise in
premiums, approximately $628,000 related to the operating expense and
amortization of goodwill of ANIC, and to the amortization of approximately
$90,000 related to the Company's convertible debt issuance. In addition, the
Company has incurred additional actuarial and legal fees related to the
filings of new products in its newly licensed states and has increased its
management infrastructure to accommodate future growth. The ratio of general
and administrative expenses to total premiums, excluding the ANIC goodwill
and debt cost amortization, was 11.9% in the 1997 quarter, compared to 10.8%
in the 1996 quarter, reflecting the additional costs. Management estimates
that this ratio will decline as premium growth continues.
PROVISION FOR FEDERAL INCOME TAXES. The provision for federal income taxes
recorded by the Company for the 1997 quarter increased 21.1% to $1,397,000,
compared to $1,154,000 for the 1996 quarter. The effective tax rates of
approximately 29% and 30% in the 1997 and 1996 quarters, respectively, are below
the normal federal corporate rate as a result of credits from the small life
insurance company deduction as well as the Company's investments in tax-exempt
bonds.
LIQUIDITY AND CAPITAL RESOURCES
The Company's consolidated liquidity requirements have historically been
created and met from the operations of its insurance subsidiaries. The Company's
primary sources of cash are premiums and investment income. The Company has
provided, and may continue to provide, cash through public offerings of its
common stock, capital markets activities or debt instruments. The primary uses
of cash are policy acquisition costs (principally commissions), payments to
policyholders, investment purchases and general and administrative expenses.
Statutory requirements allow insurers to pay dividends only from statutory
earnings as approved by the state insurance commissioner. Statutory earnings are
generally lower than publicly-reported earnings due to the immediate or
accelerated recognition of all costs associated with premium growth and benefit
reserves. The Company has not and does not intend to pay shareholder dividends
in the near future due to these requirements, choosing to retain statutory
surplus to support continued premium growth.
The Company invests in securities and other investments authorized by
applicable state laws and regulations and follows an investment policy designed
to maximize yield to the extent consistent with liquidity requirements and
preservation of assets. On December 31, 1996, the market value of the Company's
investment portfolio exceeded cost by 1.6% or approximately $3,426,000. At March
31, 1997, the market value of the Company's portfolio represented approximately
99.4% of its cost, with a current unrealized loss of approximately $1,560,000.
The reduction of the portfolio's market value is attributable to first quarter,
1997, increases in interest rates.
As of December 31, 1996, shareholders' equity was increased by
approximately $2,261,000 due to unrealized gains in the investment portfolio.
As of March 31, 1997, shareholders' equity was decreased by approximately
$1,030,000 due to unrealized losses in the investment portfolio.
In November, 1996, the Company contributed $5,000,000 of the net proceeds of
the public offering in July 1995 to Network America. In December, 1996, the
Company contributed an additional $20,000,000 to the surplus of Network America,
$20,000,000 to PTLIC, and $5,000,000 to the surplus of ANIC. These
<PAGE>
Page 11
funds were made available through the November, 1996 issuance of $74,750,000
convertible, subordinated debt by the Company. The debt issuance was intended
to provide additional surplus for future subsidiary growth and for
acquisitions of blocks of business. The Company believes that it has retained
sufficient proceeds from the debt issuance to meet its interest payment
obligations, and has not relied upon the dividend paying ability of its
subsidiaries to meet these obligations. The Company believes that its
insurance subsidiaries' capital and surplus presently meet or exceed the
requirements in all jurisdictions in which they are licensed.
The Company's debt currently consists primarily of a mortgage note in the
approximate amount of $2,000,000. This note is currently amortized over 12
years, and has a balloon payment due on the remaining outstanding balance in
September, 1998. Although the note carries a variable interest rate, the
Company has entered into an amortizing swap agreement with the same bank,
with a notional amount equal to the outstanding debt, which has the effect of
converting the note to a fixed rate of interest. In 1996, the Company
acquired a block of renewal commissions from an agency. In addition to cash,
the Company entered a two-year agreement to pay an additional $325,000 to the
seller.
The Company's continued growth is dependent upon its ability to (i) continue
marketing efforts to expand its historical markets, (ii) continue to expand its
network of agents and effectively market its products in states where its
insurance subsidiaries are currently licensed and (iii) fund such marketing and
expansion while at the same time maintaining minimum statutory levels of capital
and surplus required to support such growth. Management believes that the funds
necessary to accomplish the foregoing, including funds required to maintain
adequate levels of statutory surplus in the Company's insurance subsidiaries,
can be met for the foreseeable future by funds generated from the Company's debt
issuance, its public offering in 1995 and from operations.
In the event (i) the Company fails to maintain minimum loss ratios
calculated in accordance with statutory guidelines, (ii) the Company fails to
meet other requirements mandated and enforced by regulatory authorities, (iii)
the Company has adverse claims experience in the future, (iv) the Company is
unable to obtain additional financing to support future growth, or (v) the
economy continues to effect the buying powers of senior citizens, the Company's
results of operations, liquidity and capital resources could be adversely
affected.
<PAGE>
Page 12
NEW ACCOUNTING PRINCIPLE
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standard No. 128, "Earnings per Share" ("SFAS 128").
SFAS 128 establishes standards for computing and presenting earnings per share,
and simplifies the standards for computing earnings per share previously found
in Accounting Principles Board Opinion No. 15, "Earnings per Share." Primary and
fully diluted earnings per share will be replaced with basic and diluted
earnings per share, and these amounts are required to be shown on the face of
the income statement. In addition, a reconciliation of the numerator and
denominator of the basic earnings per share computation to the numerator and
denominator of the diluted earnings per share computation will be required.
Basic earnings per share excludes dilution and is computed by dividing
income available to common stockholders by the weighted-average number of common
shares outstanding for the period. Diluted earnings per share reflects the
potential dilution that could occur if securities or other contracts to issue
common stock were exercised or converted into common stock. This Statement is
effective for financial statements issued for periods ending after December 15,
1997, and requires restatement of all prior-period earnings per share data
presented. Management has determined the impact that SFAS 128 may have on the
financial statements will result in similar statements of earnings per share as
are currently reported.
<PAGE>
Page 13
PART II OTHER INFORMATION
ITEM 1. Legal Proceedings
The Insurers are parties to various lawsuits generally arising in the normal
course of their insurance business. The Company does not believe that the
eventual outcome of any of the suits to which the Insurers are currently a party
will have a material effect on the financial condition or result of operations
of the Company.
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
(a) A Special Meeting of Shareholders was held on January 28, 1997.
(b) The meeting did not involve election of directors.
(c) At such meeting, the shareholders voted upon a proposal to amend the
Company's Restated Articles of Incorporation to increase the number of
authorized shares of Common Stock of the Company from 10,000,000 shares to
25,000,000 shares. The results of the voting were as follows:
5,468,741 Affirmative 1,436,414 Negative
--------- ---------
441,427 Withheld 4,477 Abstentions and broker non-votes
------- -----
ITEM 5. Other Information
For information concerning the terms and the manner of the
offering, see Item 2 of Part I of this report, "Management's Discussion and
Analysis of Financial Condition and Results of Operations-- Liquidity and
Capital Resources."
ITEM 6. Exhibits And Reports On Form 8-K
(a) Exhibits:
Exhibit 11-- Earnings Per Share Calculation
Exhibit 27-- Financial Data Schedule
(b) Reports on Form 8-K:
None.
<PAGE>
Page 14
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant had duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PENN TREATY AMERICAN CORPORATION
--------------------------------
REGISTRANT
DATE: MAY 8, 1997 /S/ IRVING LEVIT
----------- ---------------------------------
IRVING LEVIT
PRESIDENT
DATE: MAY 8, 1997 /S/ MICHAEL F. GRILL
----------- ---------------------------------
MICHAEL F. GRILL
TREASURER
<PAGE>
Page 15
EXHIBIT 11
STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS
for the three months ended March 31,
(unaudited)
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Net income........................................................ $ 3,419,369 $ 2,693,334
Weighted average common shares outstanding........................ 7,515,608 6,985,988
Primary earnings per share........................................ $ 0.45 $ 0.39
------------ ------------
------------ ------------
Net income........................................................ $ 3,419,369
Adjustments net of tax:
Interest expense on convertible debt............................ 829,196
Amortization of debt offering costs............................. 64,466
------------
Fully diluted net income.......................................... $ 4,313,031
------------
------------
Weighted average common shares outstanding........................ 7,515,608
Common stock equivalents due to dilutive effect of stock
options......................................................... 226,468
Shares converted from convertible debt............................ 2,628,340
------------
Total outstanding shares for fully diluted earnings per share
computation..................................................... 10,370,416
Fully diluted earnings per share.................................. $ 0.42
------------
------------
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 7
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<DEBT-HELD-FOR-SALE> 241,698,092
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 15,117,310
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 256,896,046
<CASH> 14,512,008
<RECOVER-REINSURE> 10,216,937
<DEFERRED-ACQUISITION> 87,668,685
<TOTAL-ASSETS> 399,658,356
<POLICY-LOSSES> 119,117,683
<UNEARNED-PREMIUMS> 12,215
<POLICY-OTHER> 58,406,726
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 76,925,396
0
0
<COMMON> 812,370
<OTHER-SE> 118,297,609
<TOTAL-LIABILITY-AND-EQUITY> 399,658,356
39,709,888
<INVESTMENT-INCOME> 3,893,298
<INVESTMENT-GAINS> 49,762
<OTHER-INCOME> 78,966
<BENEFITS> 25,350,614
<UNDERWRITING-AMORTIZATION> (5,492,417)
<UNDERWRITING-OTHER> 19,077,348
<INCOME-PRETAX> 4,816,369
<INCOME-TAX> 1,397,000
<INCOME-CONTINUING> 3,419,369
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,419,369
<EPS-PRIMARY> .45
<EPS-DILUTED> .42
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
