<PAGE>
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 June 30, 1998
or
[ ] Transition Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from
to
------------------------------ ---------------------------
Commission file number 0-13972
PENN TREATY AMERICAN CORPORATION
--------------------------------
(Exact name of registrant as specified in its charter)
PENNSYLVANIA 23-1664166
------------ ----------
(State or other jurisdiction of (IRS Employer Identifi-
incorporation of organization) cation No.)
3440 Lehigh Street, Allentown, PA 18103
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(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 August 4, 1998 was 7,803,492.
<PAGE>
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
The registrant's Unaudited Consolidated Balance Sheets, Statements of Operations
and Comprehensive Income and Statements of Cash Flows and Notes thereto required
under this item are contained on pages 3 through 7 of this report, respectively.
These financial statements represent the consolidation of the operations of the
registrant, and its subsidiaries, Penn Treaty Network America Insurance Company
("PTNA"), Penn Treaty Life Insurance Company ("PTLIC"), American Network
Insurance Company ("ANIC"), American Independent Network Insurance Company of
New York and Senior Financial Consultants Company. PTNA, PTLIC, ANIC and AINIC,
(collectively, "the Insurers"), are underwriters of long-term care insurance
products. PTNA and PTLIC are also underwriters of life insurance products.
Effective December 31, 1997, PTLIC dividended its common stock ownership of PTNA
to the registrant as a tax-exempt transaction. The registrant intends to sell
the charter and insurance licenses of PTLIC on or before December 31, 1998. In
the event it is not sold by that time, the charter will dissolve. No new
business may be written by PTLIC prior to its sale.
<PAGE>
PENN TREATY AMERICAN CORPORATION
AND SUBSIDIARIES
Consolidated Balance Sheets
(amounts in thousands)
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
---- ----
(unaudited)
<S> <C> <C>
ASSETS
Investments:
Bonds, available for sale at market (cost of $282,828 and $271,315, respectively) $ 290,765 $ 278,148
Equity securities at market value, (cost of $6,075 and $18,511, respectively) 6,220 23,554
Policy loans 101 85
--------- ---------
Total investments 297,086 301,787
Cash and cash equivalents 45,851 11,241
Property and equipment, at cost, less accumulated depreciation of
$2,606 and $2,420, respectively 9,006 8,753
Unamortized deferred policy acquisition costs 130,779 110,471
Receivables from agents, less allowance for
uncollectable amounts of $130 and $130, respectively 1,173 1,107
Accrued investment income 4,322 4,112
Federal income tax recoverable 2,724 1,182
Cost in excess of fair value of net assets acquired, less
accumulated amortization of $872 and $716, respectively 6,505 6,662
Present value of future profits acquired 3,389 3,597
Receivable from reinsurers 12,610 10,542
Other assets 6,293 6,318
--------- ---------
Total assets $ 519,738 $ 465,772
--------- ---------
--------- ---------
LIABILITIES
Policy reserves:
Accident and health $ 166,105 $ 139,963
Life 8,352 8,117
Policy and contract claims 88,841 78,142
Accounts payable and other liabilities 7,283 6,192
Long-term debt 76,521 76,752
Deferred income taxes 29,454 23,850
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Total liabilities 376,556 333,016
--------- ---------
Commitments and contingencies
SHAREHOLDERS' EQUITY
Preferred stock, par value $1.00; 5,000 shares authorized, none outstanding -- --
Common stock, par value $.10; 25,000 and 10,000
shares authorized, 8,178 and 8,178 shares issued 818 818
Additional paid-in capital 53,271 53,194
Net unrealized appreciation of securities 5,325 7,838
Retained earnings 85,474 72,612
--------- ---------
144,888 134,462
Less 606 common shares held in treasury, at cost (1,706) (1,706)
--------- ---------
143,182 132,756
--------- ---------
Total liabilities and shareholders' equity $ 519,738 $ 465,772
--------- ---------
--------- ---------
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE>
PENN TREATY AMERICAN CORPORATION
AND SUBSIDIARIES
Consolidated Statements of Operations and Comprehensive Income
(unaudited)
(amounts in thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenue:
Accident and health premiums $ 53,749 $ 40,081 $ 104,662 $ 78,897
Life premiums 854 981 1,721 1,875
--------- --------- --------- ---------
54,603 41,062 106,383 80,772
Net investment income 4,950 4,103 9,576 7,997
Net realized capital gains 76 111 6,791 160
Other income 89 101 164 180
--------- --------- --------- ---------
59,718 45,377 122,914 89,109
Benefits and expenses:
Benefits to policyholders 38,093 31,556 72,376 56,887
Commissions 19,666 13,439 37,030 26,345
Net policy acquisition costs deferred (12,034) (11,283) (20,309) (16,775)
General and administrative expense 6,120 5,186 12,075 10,154
Interest expense 1,200 1,188 2,413 2,391
--------- --------- --------- ---------
53,045 40,086 103,585 79,002
--------- --------- --------- ---------
Income before federal income taxes 6,673 5,291 19,329 10,107
Provision for federal income taxes 2,182 1,561 6,467 2,958
--------- --------- --------- ---------
Net income 4,491 3,730 12,862 7,149
--------- --------- --------- ---------
Other comprehensive income:
Unrealized holding gain (loss) arising during period 1,286 (4,874) 2,983 (4,826)
Income (tax) benefit from unrealized holdings (437) 1,657 (1,014)
1,641
Reclassification adjustment for (gain) loss included in net income (76) (111) (6,791) (160)
Income (tax) benefit from reclassification adjustment 26 38 2,309 54
--------- --------- --------- ---------
Comprehensive income $ 5,290 $ 440 $ 10,349 $ 3,858
--------- --------- --------- ---------
--------- --------- --------- ---------
Basic earnings per share $ 0.59 $ 0.50 $ 1.70 $ 0.95
Diluted earnings per share $ 0.51 $ 0.45 $ 1.39 $ 0.86
Weighted average number of shares outstanding 7,573 7,524 7,573 7,520
Weighted average number of shares outstanding (diluted) 10,427 10,348 10,423 10,344
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE>
PENN TREATY AMERICAN CORPORATION
AND SUBSIDIARIES
Consolidated Statements of Cash Flows
for the six months ended June 30,
(unaudited)
(amounts in thousands)
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Net cash flow from operating activities:
Net income $ 12,862 $ 7,150
Adjustments to reconcile net income to cash
provided by operations:
Amortization of intangible assets 365 558
Deferred income taxes 6,881 2,790
Depreciation expense 186 203
Net realized capital gains (6,791) (161)
Increase (decrease) due to change in:
Receivables from agents (66) 141
Receivable from reinsurers (2,067) (419)
Policy acquisition costs, net (20,309) (16,775)
Policy and contract claims 10,699 4,724
Policy reserves 26,378 22,981
Accounts payable and other liabilities 1,091 39
Federal income taxes recoverable (1,542) (67)
Accrued investment income (210) (487)
Other, net 25 (1,508)
-------- --------
Cash provided by operations 27,502 19,169
Cash flow from (used in) investing activities:
Proceeds from sales of bonds 10,828 3,432
Proceeds from sales of equity securities 22,045 --
Maturities of investments 5,792 11,328
Purchase of bonds (27,794) (71,898)
Purchase of equity securities (3,169) --
Acquisition of property and equipment (440) (357)
-------- --------
Cash used in investing 7,262 (57,495)
Cash flow from (used in) financing activities:
Proceeds from excercise of stock options 77 406
Repayments of long-term debt (231) (216)
-------- --------
Cash from (used in) financing (154) 190
-------- --------
Increase (decrease) in cash and cash equivalents 34,610 (38,136)
Cash balances:
Beginning of period 11,241 51,612
-------- --------
End of period $ 45,851 $ 13,476
-------- --------
-------- --------
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1998
(unaudited)
(amounts in thousands, except per share data)
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, 1997 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 to 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 June 30, 1998, shareholders' equity was increased by $5,325
due to unrealized gains of $8,068 in the investment portfolio. As of
December 31, 1997, shareholders' equity was increased by $7,838 due to
unrealized gains of $11,876 in the investment portfolio.
The amortized cost and estimated market value of investments available for
sale as of June 30, 1998 and December 31, 1997 are as follows:
<TABLE>
<CAPTION>
June 30, 1998 December 31, 1997
------------- -----------------
Amortized Estimated Amortized Estimated
Cost Market Value Cost Market Value
<S> <C> <C> <C> <C>
U.S. Treasury securities
and obligations of U.S
Government authorities
and agencies $165,152 $170,509 $163,277 $167,857
Obligations of states and
political sub-divisions 26,542 25,716 30,515 32,152
Debt securities issued by
foreign governments 205 205 204 205
Corporate securities 90,943 94,335 77,319 77,934
Equities 6,075 6,220 18,511 23,554
Policy loans 101 101 85 85
-------- -------- -------- --------
Total investments $289,018 $297,086 $289,911 $301,788
-------- -------- -------- --------
-------- -------- -------- --------
Net unrealized gain 8,068 11,877
-------- --------
$ 297,086 $301,788
-------- --------
-------- --------
</TABLE>
6
<PAGE>
2. New Accounting Principles:
The Financial Accounting Standards Board ("FASB") issued Statement of Financial
Accounting Standard 130, "Reporting Comprehensive Income," which requires that
changes in comprehensive income be shown in a financial statement with the same
prominence as in other financial statements. While not mandating a specific
financial statement format, Statement 130 requires that an amount representing
total comprehensive income be reported for fiscal years beginning after December
15, 1997. Restatement for earlier years is required for comparative purposes.
The Company has adopted Statement 130.
The FASB also issued Statement 131, "Disclosures about Segments of an Enterprise
and Related Information." This Statement, which supersedes Statement 14,
Financial Reporting for Segments of a Business Enterprise, changes the way
public companies report information about segments. The Statement, which is
based on the management approach to segment reporting, includes requirements to
report selected segment information quarterly and entity-wide disclosures about
products and services, major customers, and the material countries in which the
entity holds assets and reports revenues. The Statement is effective for periods
beginning after December 15, 1997. Restatement for earlier years is required for
comparative purposes unless impracticable. Statement 131 need not be applied to
interim periods in the initial year; however, in subsequent years, interim
period information must be presented on a comparative basis. The Company
believes that the adoption of Statement 131 will not have a material impact on
its financial condition or results of operations.
In 1998, the FASB issued Statement 132, "Employers' Disclosures about Pensions
and Other Postretirement Benefits," which revises employer's disclosures about
pension and other postretirement benefits. The Company expects that the adoption
of Statement 132, beginning in 1999, will have no material impact on its
financial condition or results of operations.
Statement of Position 97-3, "Accounting by Insurance and Other Enterprises for
Insurance-Related Assessments" (SOP 97-3) was issued by the American Institute
of Certified Public Accountants in December 1997 and provides guidance for
determining when an insurance or other enterprise should recognize a liability
for guaranty-fund assessments and guidance for measuring the liability. The
statement is effective for 1999 financial statements with early adoption
permitted. The Company does not expect adoption of this statement to have a
material effect on its financial position or results of operations.
7
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Three Months Ended June 30, 1998 and 1997:
(amounts in thousands, except per share data)
Accident and Health Premiums. First year accident and health premiums
earned in the three month period ended June 30, 1998 (the "1998 quarter"),
including long-term care and Medicare supplement, increased 48.2% to $20,489,
compared to $13,825 in the same period in 1997 (the "1997 quarter"). First year
long-term care premiums earned in the 1998 quarter increased 48.4% to $19,966,
compared to $13,455 in the 1997 quarter. The Company attributes its growth to
continued improvements in product offerings, which competitively meet the needs
of the long term care marketplace. In addition, the Company actively recruits
and trains agents to sell its products. Management believes that the general
public has become more educated regarding the benefits of long-term care
insurance, which has added to its growth. First year Medicare supplement
premiums earned by the Company in the 1998 quarter increased to $524 from $370
in the 1997 quarter. Although the Company does not actively solicit new Medicare
supplement business, Management expects that this product line will only
continue to grow as a result of its complimentary mix with other long-term care
products being sold.
Renewal accident and health premiums earned by the Company in the 1998 quarter
increased 28.5% to $31,580, compared to $24,567 in the 1997 quarter. Renewal
long-term care premiums earned in the 1998 quarter increased 28.3% to $30,805,
compared to $24,004 in the 1997 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 (renewals as a percentage of total prior
year business). Renewal Medicare supplement premiums in the 1998 quarter
increased 37.5% to $774, compared to $563 in the 1997 quarter.
Disability and Life Premiums. The Company posted $1,681 in disability
income in the 1998 quarter, compared to $1,689 in the 1997 quarter. During the
1998 quarter, first year disability premiums were $237 and renewal premiums were
$1,444. First year life premiums earned by the Company in the 1998 quarter
decreased 37.0% to $187, compared to $297 in the 1997 quarter. Renewal life
premiums earned by the Company in the 1998 quarter declined to $666, compared to
$684 in the 1997 quarter.
Net Investment Income. Net investment income earned by the Company for the
1998 quarter increased 20.6% to $4,950, from $4,103 for the 1997 quarter.
Management attributes this growth to larger invested assets as a result of
higher established reserves.
Benefits to Policyholders. Total benefits to policyholders in the 1998
quarter increased 20.7% to $38,093 compared to $31,556 in the 1997 quarter.
Accident and health benefits to policyholders, excluding disability benefits, in
the 1998 quarter increased 18.6% to $35,735 compared to $30,134 in the 1997
quarter. The Company's accident and health loss ratio (the ratio of benefits to
policyholders to total accident and health premiums) was 69.2% in the 1998
quarter, compared to 78.5% in the 1997 quarter. The 1997 loss ratio includes
additions to reserves that resulted from changes in actuarial factors for the
Company's newer products. These factors represent higher persistency levels for
the Company's in-force
8
<PAGE>
policies. The Company uses independent care managers to control claims in its
home health care coverage. The amounts due to care management included in
benefits to policyholders were approximately $375 or .7% and $200 or .5% of
premiums in the 1998 and 1997 quarters, respectively. Disability benefits were
$925 and $767 in the 1998 and 1997 quarters, or 43.7% and 45.4% of premiums,
respectively.
Commissions. Commissions to agents increased 46.3% to $19,666 in the 1998
quarter, compared to $13,439 in the 1997 quarter.
First year commissions on accident and health business in the 1998 quarter
increased 58.8% to $14,196, compared to $8,940 in the 1997 quarter,
corresponding to the increase in first year accident and health premiums and to
higher commission percentages being paid for new business as a result of
policies issued to younger applicants. The ratio of first year accident and
health commissions to first year accident and health premiums was 69.3% in the
1998 quarter and 64.7% in the 1997 quarter. First year commissions on life
business in the 1998 quarter decreased 28.1% to $163, compared to $227 in the
1997 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 87.2% in the 1998 quarter compared to 76.5% in the 1997 quarter. This ratio
varies from quarter to quarter depending on the issuance of single premium
policies, which typically pay a higher commission. First year commissions on
disability policies were $141 or 59.4% of premiums in the 1998 quarter.
Renewal commissions on accident and health business in the 1998 quarter
increased 27.4% to $4,944, compared to $3,880 in the 1997 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
15.7% in the 1998 quarter and 15.8% in the 1997 quarter. This ratio fluctuates
in relation to the age of the policies in force and the rates of commissions
paid to the agents. Life renewal commissions were 13.5% of premiums in the 1998
quarter compared to 11.7% in the 1997 quarter. Renewal commissions of $131 were
9.1% of disability premiums in the 1998 quarter.
Net Policy Acquisition Costs Deferred. The net deferred policy acquisition
costs in the 1998 quarter increased 6.7% to $12,034 compared to $11,283 in the
1997 quarter. The 1997 quarter is not indicative of a normal quarter, in that
the Company's actuary reset the factors used to establish deferred costs for all
of 1997 in order to account for increased persistency, resulting in higher
expense deferrals. 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. Generally, the deferral of policy
acquisition costs remained consistent with the growth of premiums.
General and Administrative Expenses. General and administrative expenses in
the 1998 quarter increased 18.0% to $6,120, compared to $5,186 in the 1997
quarter. This increase was due to variable expense growth, yet is below the 33%
rise in premiums. The Company attributes these savings to efficiencies in its
processing areas, which enables fixed costs to better utilized.
Provision for Federal Income Taxes. The provision for federal income taxes
recorded by the Company for the 1998 quarter increased to $2,182, compared to
$1,561 for the 1997 quarter. This increase is primarily attributable to the
Company's higher anticipated tax rates due to lower tax-exempt bond holdings and
reduced small life company exemptions. The effective tax rates
9
<PAGE>
of approximately 33% and 30% in the 1998 and 1997 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.
Six Months Ended June 30, 1998 and 1997:
(amounts in thousands, except per share data)
Accident and Health Premiums. First year accident and health premiums
earned in the six month period ended June 30, 1998 (the "1998 period"),
including long-term care and Medicare supplement, increased 45.9% to $37,786,
compared to $25,897 in the same period in 1997 (the "1997 period"). First year
long-term care premiums earned in the 1998 period increased 44.8% to $36,647,
compared to $25,302 in the 1997 period. Management believes that it is no longer
relevant to measure separate growth for nursing home and home health care
policies given the Company's sale of comprehensive coverage plans and base plans
with attached riders. The Company attributes its growth to continued
improvements in product offerings, which competitively meet the needs of the
long term care marketplace. In addition, the Company actively recruits and
trains agents to sell its products. First year Medicare supplement premiums
earned by the Company in the 1998 quarter increased to $1,139 from $594 in the
1997 quarter. Although the Company does not actively solicit new Medicare
supplement business, Management expects that this product line will only
continue to grow as a result of its complimentary mix with other long-term care
products being sold.
Renewal accident and health premiums earned by the Company in the 1998 period
increased 27.9% to $63,530, compared to $49,643 in the 1997 period. Renewal
long-term care premiums earned in the 1998 period increased 28.2% to $61,925,
compared to $48,292 in the 1997 period. This increase reflects renewals of a
larger base of in-force policies. The Company believes that this increase also
reflects an increase in persistency (renewals as a percentage of total prior
year business). Renewal Medicare supplement premiums in the 1998 period
increased 18.8% to $1,605, compared to $1,351 in the 1997 period.
Disability and Life Premiums. The Company posted $3,345 in disability
income in the 1998 period, compared to $3,358 in the 1997 period. During the
1998 period, first year disability premiums were $486 and renewal premiums were
$2,859. First year life premiums earned by the Company in the 1998 period
decreased 29.3% to $395, compared to $559 in the 1997 period. Renewal life
premiums earned by the Company in the 1998 period increased to $1,326, compared
to $1,316 in the 1997 period.
Net Investment Income. Net investment income earned by the Company for the
1998 period increased 19.7% to $9,576, from $7,997 for the 1997 period. During
the 1998 period, the Company sold its entire common equity securities portfolio,
or approximately $22,000 of invested assets. From this sale, the Company
recognized an approximate $6,500 capital gain. The Company has focused its
short-term investment strategy upon fixed income securities in order to increase
realized income.
Benefits to Policyholders. Total benefits to policyholders in the 1998
period increased 27.2% to $72,376 compared to $56,887 in the 1997 period.
10
<PAGE>
Accident and health benefits to policyholders, excluding disability benefits, in
the 1998 period increased 27.8% to $68,536, compared to $53,643 in the 1997
period. The Company's accident and health loss ratio (the ratio of benefits to
policyholders to total accident and health premiums) was 68.1% in the 1998
period, compared to 71.0% in the 1997 period. The Company uses independent care
managers to monitor and control claims in its home health care coverage. The
amounts due to care management included in benefits to policyholders were
approximately $675 or .6% and $400 or .5% of premiums in the 1998 and 1997
periods, respectively. Disability benefits were $1,743 and $1,586 in the 1998
and 1997 periods, or 43.9% and 47.2% of premiums, respectively.
Commissions. Commissions to agents increased 40.6% to $37,030 in the 1998
period compared to $26,345 in the 1997 period.
First year commissions on accident and health business in the 1998 period
increased 51.3% to $26,042, compared to $17,209 in the 1997 period,
corresponding to the increase in first year accident and health premiums and to
the issuance of younger age policies, which typically pay a higher first year
commission rate. The ratio of first year accident and health commissions to
first year accident and health premiums was 68.9% in the 1998 period and 66.5%
in the 1997 period. First year commissions on life business in the 1998 period
decreased 21.3% to $346, compared to $440 in the 1997 period. The ratio of first
year life commissions to first year life premiums was 87.4% in the 1998 period
compared to 78.8% in the 1997 period. First year disability commissions, at
58.6% of premiums, were $285 in the 1998 period.
Renewal commissions on accident and health business in the 1998 period increased
25.5% to $9,920, compared to $7,906 in the 1997 period, consistent with the
increase in renewal premiums discussed above. The ratio of renewal accident and
health commissions to renewal accident and health premiums was 15.6% in the 1998
period and 15.9% in the 1997 period. The ratio fluctuates in relation to the age
of the policies in force and the rates of commissions paid to the agents. The
ratio of renewal disability commissions to disability premiums was 9.1% in the
1998 period, accounting for $259 in 1998 commissions, compared to $254 in the
1997 period.
Net Policy Acquisition Costs Deferred. The net deferred policy acquisition
costs in the 1998 period increased 21.1% to $20,309 compared to $16,775 in the
1997 period, 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. Generally, the deferral of policy acquisition costs remained
consistent with the growth of premiums. Management believes that these costs are
amortized more slowly in the 1998 period due to increased persistency of the
policies on which the costs were incurred.
General and Administrative Expenses. General and administrative expenses in
the 1998 period increased 18.9% to $12,075, compared to $10,154 in the 1997
period. This increase was due to variable expense growth yet is below the 30.0%
rise in premiums. The Company attributes these savings to efficiencies in its
processing and reduction in ANIC expense of approximately $260 in the 1998
period.
Provision for Federal Income Taxes. The provision for federal income taxes
recorded by the Company for the 1998 period increased 118.7% to $6,467, compared
to $2,958 for the 1997 period. This increase is primarily attributable to the
capital gains recognized on the sale of the Company's equity portfolio. The
effective tax rates of approximately 33.5% and 29.3% in the
11
<PAGE>
1998 and 1997 periods, 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's cash flows in the 1998 period were attributable to cash provided
by operations, cash used in investing, and cash provided by financing. The
Company's cash increased by approximately $34,610 in the 1998 period primarily
due to the sale of approximately $22,045 of its equity securities portfolio and
cash from operations of approximately $27,502. The major provider of cash from
operations was premiums used to fund additions to reserves of approximately
$37,077 in the 1998 period. The primary uses of cash were additions to policy
acquisition costs of $20,309 and the purchase of bonds of $27,794.
The Company's cash decreased by approximately $38,136 in the 1997 period
primarily due to the purchase of approximately $71,898 of investments, which
more than offset cash from operations of approximately $19,169. The major
provider of cash from operations was premiums used to fund additions to reserves
of approximately $27,705 in the 1997 period.
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. The market value of the Company's bond portfolio represented
approximately 102.8% of its cost at June 30, 1998, compared to 102.5% at
December 31, 1997, with a current unrealized gain of $7,923 at June 30, 1998,
compared to $6,832 at December 31, 1997. Its equity portfolio, which consisted
primarily of preferred stock at June 30, 1998, exceeded cost by $145, compared
to 5,043 on December 31, 1997.
As of December 31, 1997, shareholders' equity was increased by approximately
$7,838 due to unrealized gains in the investment portfolio. As of June 30, 1998,
shareholders' equity was increased by approximately $5,325 due to unrealized
gains in the investment portfolio.
The Company's debt currently consists primarily of a mortgage note in the
approximate amount of $2,000 and $74,750 in convertible subordinated debt. The
convertible debt, issued in November 1996, is convertible at $28.44 per share
until November 2003. The debt carries a fixed interest
12
<PAGE>
coupon of 6.25%, payable semi-annually. The mortgage 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.
The Company consists of the Insurers and a non-insurer parent company, Penn
Treaty American Corporation ("the Parent"). The Parent directly or indirectly
controls 100% of the voting stock of the subsidiary insurers. In the event the
Parent is unable to meet its financial obligations, becomes insolvent, or
discontinues operations, the Insurers' financial condition and results of
operations could be materially affected.
The Parent currently has the obligation of making semi-annual interest payments
attributable to the Company's convertible debt. In that the dividend ability of
the subsidiaries is restricted, the Parent must rely on its own liquidity and
cash flows to make all required interest installments. Management believes that
the Parent holds sufficient liquid funds to meet its obligations for the
foreseeable future.
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.
Some of the information presented in this filing constitutes forward-looking
statements within the meaning of the Private Securities Litigation Reform Act of
1995. Although the Company believes that its expectations are based on
reasonable assumptions within the bounds of its knowledge of its business and
operations, there can be no assurance that actual results of the Company's
operations will not differ materially from its expectations. Factors which could
cause actual results to differ from expectations include, among others, the
adequacy of the Company's loss reserves, the Company's ability to qualify new
insurance products for sale in the states in which it is licensed and the
acceptance of such products, the Company's ability to comply with government
regulations, the ability of senior citizens to purchase the Company's products
in light of the increasing costs of health care and the Company's ability to
expand its network of productive independent agents.
New Accounting Principles:
The Financial Accounting Standards Board ("FASB") issued Statement of Financial
Accounting Standard 130, "Reporting Comprehensive Income," which requires that
changes in comprehensive income be
13
<PAGE>
shown in a financial statement with the same prominence as in other financial
statements. While not mandating a specific financial statement format, Statement
130 requires that an amount representing total comprehensive income be reported
for fiscal years beginning after December 15, 1997. Restatement for earlier
years is required for comparative purposes. The Company has adopted Statement
130.
The FASB also issued Statement 131, "Disclosures about Segments of an Enterprise
and Related Information." This Statement, which supersedes Statement 14,
Financial Reporting for Segments of a Business Enterprise, changes the way
public companies report information about segments. The Statement, which is
based on the management approach to segment reporting, includes requirements to
report selected segment information quarterly and entity-wide disclosures about
products and services, major customers, and the material countries in which the
entity holds assets and reports revenues. The Statement is effective for periods
beginning after December 15, 1997. Restatement for earlier years is required for
comparative purposes unless impracticable. Statement 131 need not be applied to
interim periods in the initial year; however, in subsequent years, interim
period information must be presented on a comparative basis. The Company
believes that the adoption of Statement 131 will not have a material impact on
its financial condition or results of operations.
In 1998, the FASB issued Statement 132, "Employers' Disclosures about Pensions
and Other Postretirement Benefits," which revises employer's disclosures about
pension and other postretirement benefits. The Company expects that the adoption
of Statement 132, beginning in 1999, will have no material impact on its
financial condition or results of operations.
Statement of Position 97-3, "Accounting by Insurance and Other Enterprises for
Insurance-Related Assessments" (SOP 97-3) was issued by the American Institute
of Certified Public Accountants in December 1997 and provides guidance for
determining when an insurance or other enterprise should recognize a liability
for guaranty-fund assessments and guidance for measuring the liability. The
statement is effective for 1999 financial statements with early adoption
permitted. The Company does not expect adoption of this statement to have a
material effect on its financial position or results of operations.
14
<PAGE>
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
The Company's Annual Meeting of Shareholders was held on May 22, 1998. At such
meeting, the following matters were voted upon by the shareholders, receiving
the number of affirmative, negative and withheld votes, as well as abstentions
and broker non-votes, set forth below each matter.
(1) Election of three persons to the Company's Board of Directors as Class
I Directors to serve until the 2001 Annual Meeting of Shareholders and until
their successors are elected and have been qualified.
Glen A. Levit
5,685,741 Affirmative 0 Negative
--------- ------
0 Withheld 97,364 Abstentions and broker non-votes
--------- ------
Emile Ilchuck
5,685,911 Affirmative 0 Negative
--------- ------
0 Withheld 97,194 Abstentions and broker non-votes
--------- ------
Jack D. Baum
5,685,511 Affirmative 0 Negative
--------- ------
0 Withheld 97,594 Abstentions and broker non-votes
--------- ------
(2) Ratification of the selection of Coopers & Lybrand L.L.P. as
independent public accountants for the Company and its subsidiaries for the year
ending December 31, 1998.
5,712,074 Affirmative 63,340 Negative
--------- ------
0 Withheld 7,691 Abstentions and broker non-votes
--------- ------
15
<PAGE>
(3) Adoption of the Penn Treaty American Corporation 1998 Employee
Incentive Stock Option Plan.
3,835,068 Affirmative 1,280,640 Negative
--------- ---------
0 Withheld 17,937 Abstentions and broker non-votes
Item 5. Other Information
On May 11, 1998, the Company entered into a Change of Control Employment
Agreement with the following Director and Officer:
Cameron B. Waite, Chief Financial Officer
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
Exhibit 10.46 - Material Contract with Cameron B. Waite
Exhibit 10.47 - Penn Treaty American Corporation 1998 Incentive Stock
Option Plan
Exhibit 11 - Earnings Per Share Calculation
Exhibit 27 - Financial Data Schedule
(b) Reports on Form 8-K:
The Company filed no reports on Form 8-K during the quarter ending June 30,
1998.
16
<PAGE>
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 August 12, 1998 /s/ Irving Levit
--------------- ------------
Irving Levit
President
Date August 12, 1998 /s/ Michael F. Grill
--------------- -----------------
Michael F. Grill
Treasurer
17
<PAGE>
Exhibit 10.46
CHANGE OF CONTROL
EMPLOYMENT AGREEMENT
AGREEMENT made as of this __11__day of May, 1998 by and between PENN TREATY
AMERICAN CORPORATION, a Pennsylvania corporation (the "Company"), and Cameron B.
Waite ("Employee").
The Board of Directors of the Company has determined that it is in the best
interests of the Company and its shareholders to assure that the Company will
have the continued dedication of Employee, notwithstanding the possibility,
threat, or occurrence of a Change of Control (as defined below) of the Company.
The Board believes it is imperative to diminish the inevitable distraction of
Employee by virtue of the personal uncertainties and risks created by a pending
or threatened Change of Control, to encourage Employee's full attention and
dedication to the Company currently and in the event of any threatened or
pending Change of Control, and to provide Employee with compensation
arrangements upon a Change of Control which provide Employee with individual
financial security and which are competitive with those of other corporations
and, in order to accomplish these objectives, the Board has caused the Company
to enter into this Agreement.
In consideration of the mutual covenants set forth herein and intending to
be legally bound hereby, the parties hereto agree as follows:
I. CHANGE OF CONTROL
For the purpose of this Agreement, a "Change of Control" shall mean:
(a) The acquisition, other than from the Company, by any person,
entity or "group" within the meaning of Section 13(d) (3) or 14(d) (2) of the
Securities Exchange Act of 1934 (the "Exchange Act"), but excluding, for this
purpose, the Company, its subsidiaries, or any employee benefit plan of the
Company or its subsidiaries which acquires beneficial ownership of voting
securities of the Company of beneficial ownership (within the meaning of Rule
13d-3 promulgated under the Exchange Act) of 20% or more of either the then
outstanding shares of common stock or the combined voting power of the Company's
then outstanding voting securities entitled to vote generally in the election of
directors; or
(b) Individuals who, as of the date hereof, constitute the Board (the
"Incumbent Board") cease for any reason to constitute at least a majority of the
Board, provided that any person becoming a director subsequent to the date
hereof whose election, or nomination for election by the Company's shareholders,
was approved by a vote of at least a majority of the directors then comprising
the Incumbent Board (other than an election or nomination of an individual whose
initial assumption of office is in connection with an actual or threatened
election contest relating to the election of the directors of the Company, as
such terms are used in Rule 14A-11 of Regulation 14A promulgated under the
Exchange Act) shall be, for purposes of this Agreement, considered as though
such person were a member of the Incumbent Board; or
<PAGE>
(c) Approval by the shareholders of the Company of (i) a
reorganization, merger or consolidation, in each case, with respect to which
persons who were the shareholders of the Company immediately prior to such
reorganization, merger or consolidation do not, immediately thereafter, own more
than 50% of the combined voting power entitled to vote generally in the election
of directors of the reorganized, merged or consolidated company's then
outstanding voting securities, or (ii) a liquidation or dissolution of the
Company or the sale of all or substantially all of the assets of the Company
(whether such assets are held directly or indirectly).
II. EMPLOYMENT
2.01. Effective Date. The Company hereby agrees to continue to employ
Employee and Employee hereby agrees to remain an employee of the Company, for
the period beginning upon a Change of Control (as defined in Section I) and
ending on the third anniversary of such date (the "Employment Period"), subject
to the terms and conditions hereinafter set forth. The Employment Period shall
automatically be extended for one or more additional one-year periods commencing
at the conclusion of the initial three-year period, unless three (3) months
prior to the end of the initial term or any subsequent term, the Company shall
have delivered to Employee, or Employee shall have delivered to the Company,
written notice that the term of Employee's employment hereunder will not be
extended.
2.02. Prior Termination. Anything in this Agreement to the contrary,
notwithstanding, if Employee's employment with the Company is terminated prior
to the date on which a Change of Control occurs, and it is reasonably
demonstrated that such termination (i) was at the request of a third party who
has taken steps reasonably calculated to effect a Change of control or (ii)
otherwise arose in connection with or anticipation of a Change of Control, then
Employee's Employment Period shall begin as of the date immediately prior to the
date of such termination.
III. DUTIES
3.01. Position and Duties. During the Employment Period, (a) Employee's
position (including status, offices, titles and reporting requirements),
authority, duties and responsibilities shall be comparable in all material
respects with the most significant of those held, exercised and assigned at any
time during the 90-day period immediately preceding the commencement of the
Employment Period and (b) Employee's services shall be performed at the location
where he was employed immediately preceding the commencement of the Employment
Period or at any office or location not more than fifty (50) miles from such
location.
3.02. Full Efforts. During the Employment Period, Employee agrees to
continue to devote reasonable attention and time to the business and affairs of
the Company, consistent with prior practice, and to use his reasonable best
efforts to perform faithfully and efficiently the responsibilities incidental to
his position.
IV. COMPENSATION AND RELATED MATTERS
4.01. Base Salary. (a) During the Employment Period, the Company shall pay
to
<PAGE>
Employee a base salary of not less than the highest base salary paid or payable
to Employee by the Company during the twelve-month period immediately preceding
the commencement of the Employment Period, payable in 24 equal installments on
the 1st and 15th day of each month in arrears. This base salary may be increased
from time to time by the Company's Board of Directors. Once Employee's base
salary is increased, it may not thereafter be reduced.
The base salary payments (including any increased base salary payments)
hereunder shall not in any way limit or reduce any other obligation of the
Company under this Agreement, nor shall any other compensation benefit or
payment hereunder in any way limit or reduce the obligation of the Company to
pay Employee's base salary.
4.02. Bonus. During the Employment Period, the Company shall pay to
Employee a bonus in an amount at least equal to the highest bonus paid to
Employee during the three fiscal years immediately preceding the year in which
the Employment Period commences.
4.03. Incentive Awards. During the Employment Period, Employee shall be
entitled to participate in all incentive, savings and retirement plans,
practices, policies and programs applicable to key employees of the Company.
4.04. Welfare Benefits. During the Employment Period, Employee shall be
entitled to participate in all welfare plans, practices, policies and programs
provided by the Company (including, without limitation, medical plans, dental
plans, disability plans, and group or other insurance plans and benefits), to
the extent that he is and remains eligible to participate thereunder, and
subject to the provisions of such plans as the same may be in effect from time
to time.
4.05. Fringe Benefits. During the Employment Period, Employee shall be
entitled to all fringe benefits provided by the Company to its key employees.
4.06. Expenses. During the Employment Period, Employee shall be entitled to
receive prompt reimbursement for all reasonable expenses incurred by him in
performing services hereunder, including all travel and living expenses while
away from home and on business or at the request of and in the service of the
Company, provided that such expenses are incurred and accounted for in
accordance with the policies and procedures established by the Company.
4.07. Services Furnished. During the Employment Period, the Company shall
furnish Employee with office space in the Company's current executive offices in
Allentown, Pennsylvania (or in another location proximate to Allentown,
Pennsylvania which is acceptable to Employee), secretarial assistance, and such
other facilities and services as shall be suitable to Employee's position and
adequate for the performance of his duties hereunder.
V. TERMINATION
5.01. Termination by Company. Employee's employment hereunder may be
terminated by the Company without any breach of this Agreement only under the
following circumstances:
(a) Death. Employee's employment hereunder shall terminate upon his
death.
<PAGE>
(b) Disability. If, as a result of Employee's incapacity due to
physical or mental illness, Employee shall have been absent from his duties
hereunder on a full-time basis for the entire period of six consecutive months,
and within thirty (30) days after written notice of termination is given (which
may occur before or after the end of such six-month period) shall not have
returned to the performance of his duties hereunder on a full-time basis, the
Company may terminate Employee's employment hereunder.
(c) Cause. The company may terminate Employee's employment hereunder
for "Cause". For purposes of this Agreement, "Cause" means the willful
commission of an act of dishonesty or fraud by the Employee, provided that no
act, or failure to act, on Employee's part shall be considered "willful" unless
done, or omitted to be done, by him not in good faith and without reasonable
belief that his action or omission was in the best interest of the Company.
Notwithstanding the foregoing, Employee shall not be deemed to have been
terminated for Cause without (i) reasonable notice to Employee setting forth the
reasons for the Company's intention to terminate him for Cause, (ii) an
opportunity for Employee, together with his counsel, to be heard before the full
Board of Directors of the Company with reasonable advance notice of the time and
place of meeting, and (iii) delivery to Employee of a Notice of Termination (as
defined in Section 5.03 hereof) stating that in the good faith opinion of the
Board of Directors, Employee was guilty of conduct constituting "Cause", and
specifying the particulars thereof in detail.
5.02. Termination by Employee. The Employee may terminate his employment
without any breach of this Agreement only for "Good Reason". For purposes of
this Agreement, "Good Reason" shall mean:
(a) the assignment to Employee of any duties inconsistent with
Employee's position (including status, offices, titles and reporting
requirements), authority, duties or responsibilities as contemplated by this
Agreement, or any other action by the Company which results in a diminution in
such position, authority, duties or responsibilities, excluding for this purpose
an isolated, insubstantial and inadvertent action not taken in bad faith and
which is remedied by the Company promptly after receipt of notice thereof given
by Employee;
(b) any failure by the Company to comply with Section IV of this
Agreement, other than an isolated, insubstantial and inadvertent failure not
occurring in bad faith and which is remedied by the Company promptly after
receipt of notice thereof given by Employee;
(c) the Company's requiring Employee to relocate to any office or
location other than that described in Section 4.07 (excluding travel reasonably
required in the performance of Employee's responsibilities);
(d) any purported termination by the Company of Employee's employment
otherwise than as expressly permitted by this Agreement; or
(e) any failure by the Company to comply with and satisfy Section 8.04
of this Agreement.
<PAGE>
5.03. Termination Procedure.
(a) Notice of Termination. Any termination of Employee's employment by
the Company or by Employee (other than termination due to Employee's death)
shall be communicated by written Notice of Termination to the other party
hereto. For purposes of this Agreement, a "Notice of Termination" shall mean a
written notice which shall (i) indicate the specific termination provision in
this Agreement relied upon, (ii) set forth in reasonable detail the facts and
circumstances claimed to provide a basis for termination of Employee's
employment under the provision so indicated, and (iii) the Date of Termination
(as defined below).
(b) Date of Termination. "Date of Termination" shall mean:
(i) if Employee's employment is terminated by his death, the date
of his death,
(ii) if the Employee's employment is terminated pursuant to
Section 5.01(b), thirty (30) days after Notice of Termination is given (provided
that Employee shall not have returned to the performance of his duties on a
full-time basis during such thirty (30) day period),
(iii) if Employee's employment is terminated pursuant to Section
5.01(c), the date specified in the Notice of Termination, and
(iv) if Executive's employment is terminated for any other
reason, the date on which a Notice of Termination is given, provided that if
within thirty (30) days after any Notice of Termination is given, the party
receiving such Notice of Termination notifies the other party that a dispute
exists concerning the termination, the Date of Termination shall be the date on
which the dispute is finally determined, either by mutual written agreement of
the parties, by a binding and final arbitration award or by a final judgment,
order or decree of a court of competent jurisdiction (the time for appeal
therefrom having expired and no appeal having been perfected).
VI. COMPENSATION UPON TERMINATION
6.01. Death. If Employee's employment is terminated by reason of his death,
this Agreement shall terminate without further obligations to Employee's legal
representatives under this Agreement, other than those obligations accrued or
earned and vested (if applicable) by Employee as of the Date of Termination,
including, for this purpose (i) Employee's full base salary through the Date of
Termination at the rate in effect on the Date of Termination, (ii) if Employee
dies on or after the Company's year-end but before payment of the Company's
year-end bonus (if any), the bonus payment to which Employee is entitled being
hereinafter referred to as "Accrued Obligations". All such Accrued Obligations
shall be paid to Employee's spouse or other designated beneficiary (or if he
leaves to spouse or other designated beneficiary, to his estate) in a lump sum
in cash within thirty (30) days after the Date of Termination.
6.02. Disability. If Employee's employment is terminated by reason of
disability pursuant to Section 5.01(b), this Agreement shall terminate without
further obligations to Employee, other
<PAGE>
than the obligation to pay to Employee all Accrued Obligations. All such Accrued
Obligations shall be paid to Employee in a lump sum in cash within thirty (30)
days after the Date of Termination.
6.03. Termination for Cause: Termination by Employee in Breach of
Agreement. If Employee's employment is terminated for Cause or if Employee
terminates employment for any reason other than Good Reason, this Agreement
shall terminate without further obligations to Employee other than the Company's
obligation to pay to Employee all Accrued Obligations. All such Accrued
Obligations shall be paid to Employee in a lump sum in cash within thirty (30)
days after the Date of Termination.
6.04. Termination by Employee for Good Reason; Termination by the Company
in Breach of Agreement. If Employee's employment is terminated by the Company
for any reason other than those specified in Section 5.01, or if Employee shall
terminate his employment for Good Reason:
(a) the Company shall pay to Employee in a lump sum in cash within
thirty (30) days after the Date of Termination the aggregate of the following
amounts:
(i) Employee's full base salary through the end of the Employment
Period; and
(ii) the product of (x) the annual bonus (if any) paid to
Employee for the last full fiscal year and (y) a fraction, the numerator of
which is the number of days in the current fiscal year through the Date of
Termination and the denominator of which is 365; and
(iii) all Accrued Obligations.
(b) for the remainder of the Employment Period, or such longer period
as any plan, program, practice or policy may provide, the Company shall continue
benefits to Employee and/or Employee's family at least equal to those that would
have been provided to them if Employee's employment had not been terminated,
including health insurance and life insurance, and for purposes of eligibility
for retiree benefits pursuant to such plans, practices, programs and policies,
Employee shall be considered to have remained employed until the end of the
Employment Period and to have retired on the last day of such period. In the
event that Employee's participation in any such plan, program, practice or
policy is barred, the Company shall arrange to provide Employee with benefits
substantially similar to those which Employee would otherwise have been entitled
to receive under the plans, programs, practices or policies from which his
continued participation is barred.
VII. CONFIDENTIALITY
Employee acknowledges and agrees that in the course of, or incident to, his
employment, the Company may provide to Employee, or Employee may otherwise
become exposed to, confidential information. For purposes of the Agreement, the
term "confidential information" shall mean all information concerning the
business of the Company, including but not limited to, all data processing
programs, systems and methods of processing of the Company, all
<PAGE>
software concepts, ideas, developments or products of the Company, all
inventions, experiments and research of the Company, all marketing initiatives
or techniques of the Company, all customer and prospect lists of the Company,
and all information received from third parties and held in confidence by the
Company, but shall not include any information that enters the public domain,
other than information that enters the public domain as a result of a violation
by Employee, or any other person or entity at his direction. In light of the
foregoing, Employee agrees to hold the confidential information in the strictest
confidence and will not disclose (without the prior written consent of the
Company) any portion thereof to any person or entity, other than the Company or
those designated by it.
VIII. MISCELLANEOUS
8.01. Notice. All notices or other communications hereunder shall be in
writing and deemed given if mailed by registered or certified mail, return
receipt requested, or by similarly reliable means, to the parties at the
addresses set forth below or to such other addresses as shall be specified by
notice to the other parties hereunder:
To the Company at:
Penn Treaty American Corporation
3440 Lehigh Street
Allentown, PA 18103
To Employee at:
1860 Bauman Road
Quakertown, PA 18951
8.02. Waiver of or Consent to Breach. The waiver by the Company or Employee
of a breach or violation of any of the provisions of this Agreement shall not
operate or be construed as a waiver of any subsequent breach or violation
thereof.
8.03. Assignability. This Agreement shall not be assignable by Employee,
but otherwise shall be binding upon and inure to the benefit of the parties
hereto and their successors and assigns.
8.04. Successors. The Company will require any successor (whether direct or
indirect, by purchase, merger, consolidation or otherwise) to all or
substantially all of the business and/or assets of the Company to assume
expressly and agree to perform this Agreement in the same manner and to the same
extent that the Company would be required to perform it if no such succession
had taken place. As used in this Agreement, "Company" shall mean the Company as
herein before defined and any successor to its business and/or assets as
aforesaid which assumes and agrees to perform this Agreement by operation of
law, or otherwise.
8.05. Withholding. The Company may withhold from any amounts payable under
this Agreement such federal, state or local taxes as shall be required to be
withheld pursuant to any
<PAGE>
applicable law or regulation.
8.06. Employment Before Change of Control
(a) Employee and the Company acknowledge that the employment of
Employee by the Company is "at will," and, prior to a Change of Control, may be
terminated by either Employee or the Company at any time. Upon a termination of
Employee's employment prior to a Change of Control, there shall be no further
rights under this Agreement.
(b) Nothing in this Agreement shall prevent or limit Employee's
continuing or future participation in any benefit, bonus, incentive or other
plans, programs, policies or practices provided by the Company and for which
Employee may qualify, nor shall anything herein limit or otherwise affect such
rights as Employee may have under any stock option or other agreements with the
Company.
8.07. Entire Agreement. This writing represents the entire agreement and
understanding of the parties with respect to the matters addressed herein, and
it may not be altered or amended except by a written instrument signed by the
Company and Employee. Any and all promises, agreements, representations,
warranties and other statements, written or oral, made among the parties in
respect to such matters prior to, or contemporaneously with, the execution
hereof are hereby canceled and superseded and shall be of no further force and
effect.
8.08. Severability. If any provision of this Agreement shall be or become
illegal or unenforceable in whole or in part for any reason whatsoever, the
remaining provisions shall be deemed severable and independent and shall
nevertheless be deemed valid, binding and enforceable.
8.09. Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the Commonwealth of Pennsylvania.
8.10. Headings. The headings in this Agreement are for convenience only;
they form no part of this Agreement and shall not affect its interpretation.
8.11. Gender. As used herein the neuter shall include the masculine and
feminine, as the context may require.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
first above written.
PENN TREATY AMERICAN CORPORATION
(x) A.J. Carden
-----------------
By: A. J. Carden
Title: Executive Vice President
<PAGE>
(x) Cameron B. Waite
--------------------
Cameron B. Waite
Title: Chief Financial Officer
<PAGE>
Exhibit 10.47
PENN TREATY AMERICAN CORPORATION
1998 EMPLOYEE STOCK OPTION PLAN
ARTICLE I
Purpose
The purpose of the 1998 Employee Stock Option Plan (the "Plan") is to
enable Penn Treaty American Corporation (the "Company") to offer its officers,
directors and employees of the Company and its Subsidiaries options to acquire
equity interests in the Company, thereby attracting, retaining and rewarding
such persons, and strengthening the mutuality of interests between such persons
and the Company's shareholders.
ARTICLE II
Definitions
For purposes of the Plan, the following terms shall have the following
meanings:
2..1 "Award" shall mean an award under the Plan of a Stock Option.
2..1 "Board" shall mean the Board of Directors of the Company.
2..2 "Code" shall mean the Internal Revenue Code of 1986, as amended.
2..3 "Committee" shall mean the Compensation Committee of the Board,
consisting of two or more members of the Board.
2..4 "Common Stock" shall mean the Common Stock, par value $.10 per share,
of the Company.
2..5 "Disability" shall mean a disability that results in a Participant's
Termination of Employment with the Company or a Subsidiary, as determined
pursuant to standard Company procedures.
2..6 "Fair Market Value" for purposes of the Plan, unless otherwise
required by any applicable provision of the Code or any
<PAGE>
regulations issued thereunder, shall mean, as of any date, the average of the
high and low sales prices of a share of Common Stock as reported on the
principal national securities exchange on which the Common Stock is listed or
admitted to trading, or, if not listed or traded on any such exchange, The
Nasdaq Stock Market ("NASDAQ"), or, if such sales prices are not available, the
average of the bid and asked prices per share reported on NASDAQ, or, if such
quotations are not available, the fair market value as determined by the Board,
which determination shall be conclusive.
2..7 "Incentive Stock Option" shall mean any Stock Option awarded under the
Plan intended to be and designated as an "Incentive Stock Option" within the
meaning of Section 422 of the Code.
2..8 "Non-Qualified Stock Option" shall mean any Stock Option granted under
the Plan that is not an Incentive Stock Option.
2..9 "Participant" shall mean an employee to whom an Award has been
granted.
2..10 "Stock Option" or "Option" shall mean any option to purchase shares
of Common Stock granted pursuant to Article VI of the Plan.
2..11 "Subsidiary" shall mean any subsidiary of the Company, 80% or more of
the voting stock of which is owned, directly or indirectly, by the Company.
2..12 "Termination of Employment" shall mean a termination of employment
with the Company and all of its Subsidiaries. Whether authorized leave of
absence or absence for military or governmental service shall constitute
termination of employment, for the purposes of the Plan, shall be determined by
the Committee, which determination shall be final and conclusive.
ARTICLE III
Administration
3..1 The Committee. The Plan shall be administered and interpreted by the
Committee.
3..2 Awards. The Committee shall have full authority to grant, pursuant to
the terms of the Plan, Stock Options to persons eligible under Article V. In
particular, the Committee shall have the authority:
2
<PAGE>
(a) to select the persons to whom Stock Options may from time to time
be granted;
(b) to determine whether and to what extent Incentive Stock Options
and Non-Qualified Stock Options, or any combination thereof, are to be granted
to one or more persons eligible to receive Awards under Article V;
(c) to determine the number of shares of Common Stock to be covered by
each Award granted hereunder; and
(d) to determine the terms and conditions, not inconsistent with the
terms of the Plan, of any Award granted hereunder (including, but not limited
to, the option price, the option term, and provisions relating to any
restriction or limitation, any vesting schedule or acceleration, or any waiver
with respect to the Award).
3..3 Guidelines. Subject to Article VII hereof, the Committee shall have
the authority to adopt, alter and repeal such administrative rules, guidelines
and practices governing the Plan as it shall, from time to time, deem advisable;
to interpret the terms and provisions of the Plan and any Award granted under
the Plan (and any agreements relating thereto); and to otherwise supervise the
administration of the Plan. The Committee may correct any defect, supply any
omission or reconcile any inconsistency in the Plan or in any Award in the
manner and to the extent it shall deem necessary to carry the Plan into effect.
Notwithstanding the foregoing, no action of the Committee under this Section 3.3
shall impair the rights of any Participant without the Participant's consent,
unless otherwise required by law.
3..4 Decisions Final. Any decision, interpretation or other action made or
taken in good faith by the Committee arising out of or in connection with the
Plan shall be final, binding and conclusive on the Company, all Participants and
their respective heirs, executors, administrators, successors and assigns.
ARTICLE IV
Share Limitation
4..1 Shares. The maximum aggregate number of shares of Common Stock that
may be issued under the Plan is 600,000 (subject to any increase or decrease
pursuant to Section 4.3), which may be either
3
<PAGE>
authorized and unissued shares of Common Stock or issued Common Stock reacquired
by the Company. If any Option granted under the Plan shall expire, terminate or
be canceled for any reason without having been exercised in full, the number of
unpurchased shares shall again be available for the purposes of the Plan.
4..2 Individual Limit. No employee may be granted Awards covering more than
100,000 shares of Common Stock (subject to increase or decrease pursuant to
Section 4.3) during any calendar year.
4..3 Changes.
(a) The number of shares of Common Stock covered by each outstanding
Stock Option, and the exercise price per share in each such Option, shall be
proportionately adjusted for any increase or decrease in the number of issued
shares of Common Stock of the Company resulting from a subdivision or
consolidation of shares or the payment of a stock dividend (but only on the
Common Stock) or any other increase or decrease in the number of such shares
effected without receipt of consideration by the Company.
(b) If the Company shall be the surviving corporation in any merger or
consolidation, each outstanding Stock Option shall pertain to and apply to the
securities to which a holder of the number of shares of Common Stock subject to
the Stock Option would have been entitled. A dissolution or liquidation of the
Company or a merger or consolidation in which the Company is not the surviving
corporation, shall cause each outstanding Stock Option to terminate, provided
that each optionee shall, in such event, if a period of 12 months from the date
of the granting of the Stock Option shall have expired, have the right
immediately prior to such dissolution or liquidation, or merger or consolidation
in which the Company is not the surviving corporation, to exercise his Stock
Option in whole or in part without regard to the installment provisions of
Section 6.4(d) of the Plan. Notwithstanding the above provisions upon a merger
or consolidation, a Stock Option will not terminate if assumed by the surviving
or acquiring corporation, or its parent, and in the case of an Incentive Stock
Option the circumstances of such assumption are not deemed a modification of the
Incentive Stock Option within the meaning of Sections 424(a) and 424(h)(3)(A) of
the Code.
(c) In the event of a change in the Common Stock of the Company as
presently constituted, which is limited to a change of all of its authorized
shares with par value into the same number of shares with a different par value
or without par value, the shares resulting from any such change shall be deemed
to be the Common Stock within the meaning of the Plan.
4
<PAGE>
(d) To the extent that the foregoing adjustments relate to stock or
securities of the Company, such adjustments shall be made by the Committee,
whose determination in that respect shall be final, binding and conclusive,
provided that no Incentive Stock Option granted pursuant to the Plan shall be
adjusted in a manner that causes the Incentive Stock Option to fail to continue
to qualify as an incentive stock option within the meaning of Section 422 of the
Code.
(e) The grant of a Stock Option pursuant to the Plan shall not affect
in any way the right or power of the Company to make adjustments,
reclassification, reorganizations or changes of its capital or business
structure or to merge or to consolidate or to dissolve, liquidate or sell, or
transfer all or any part of its business or assets.
ARTICLE V
Eligibility
All officers, directors and employees of the Company and its Subsidiaries are
eligible to be granted Stock Options under the Plan.
ARTICLE VI
Stock Options
6..1 Options. Each Stock Option granted under the Plan shall be either an
Incentive Stock Option or a Non-Qualified Stock Option.
6..2 Grants. The Committee shall have the authority to grant to any person
eligible under Article V one or more Incentive Stock Options, Non-Qualified
Stock Options, or both types of Stock Options. To the extent that any Stock
Option does not qualify as an Incentive Stock Option (whether because of its
provisions or the time or manner of its exercise or otherwise), such Stock
Option or the portion thereof which does not qualify as an Incentive Stock
Option shall constitute a separate Non-Qualified Stock Option.
6..3 Incentive Stock Options. Anything in the Plan to the contrary
notwithstanding, no term of the Plan relating to Incentive Stock Options shall
be interpreted, amended or altered, nor shall any discretion or authority
granted under the Plan be exercised, so as to disqualify the Plan under Section
422 of the Code, or, without the consent of the Participants affected, to
disqualify any Incentive Stock Option under such Section 422.
5
<PAGE>
6..4 Terms of Options. Options granted under the Plan shall be subject to
the following terms and conditions and shall contain such additional terms and
conditions, not inconsistent with the terms of the Plan, as the Committee shall
deem desirable:
(a) Notice of Grant of Stock Option. Each Stock Option shall be
evidenced by, and subject to the terms of, a Notice of Grant of Stock Option
executed by the Company and the Participant. The Notice of Grant of Stock Option
shall specify whether the Option is an Incentive Stock Option or a Non-Qualified
Stock Option, the number of shares of Common Stock subject to the Stock Option,
the option price, the option term, and the other terms and conditions applicable
to the Stock Option.
(b) Option Price. The option price per share of Common Stock
purchasable upon exercise of a Stock Option shall be determined by the Committee
at the time of grant, but shall be not less than 100% of the Fair Market Value
of the Common Stock on the date of grant if the Stock Option is intended to be
an Incentive Stock Option. The Committee may, in its discretion, grant
Non-Qualified Stock Options at an option price per share which is below the Fair
Market Value of the Common Stock on the date of grant.
(c) Option Term. The term of each Stock Option shall be fixed by the
Committee at the time of grant, but no Stock Option shall be exercisable more
than ten years after the date it is granted.
(d) Exercisability. Stock Options shall be exercisable at such time or
times and subject to such terms and conditions as shall be determined by the
Committee at the time of grant; provided, however, that no Stock Option shall be
exercisable in whole or in part prior to 12 months from the date it is granted;
and provided further, that the Committee may waive any installment exercise or
waiting period provisions, in whole or in part, at any time after the date of
grant, based on such factors as the Committee shall deem appropriate in its sole
discretion.
(e) Method of Exercise. Subject to such installment exercise and
waiting period provisions as may be imposed by the Committee, Stock Options may
be exercised in whole or in part at any time during the option term by
delivering to the Company written notice of exercise specifying the number of
shares of Common Stock to be purchased and the option price therefor; provided,
however, that not less than 50 shares may be purchased at any one time unless
the number purchased is the total number at the time purchasable under the Stock
Option. The notice of exercise shall be accompanied by payment
6
<PAGE>
in full of the option price and, if requested, by the representation described
in Section 9.2. Payment of the option price may be made (i) in cash or by check
payable to the Company, (ii) to the extent determined by the Committee on or
after the date of grant, in shares of Common Stock duly owned by the Participant
(and for which the Participant has good title free and clear of any liens and
encumbrances) or (iii) by reduction in the number of shares of Common Stock
issuable upon such exercise, based, in each case, on the Fair Market Value of
the Common Stock on the date of exercise. In addition, the Committee shall have
the discretion to include in any Option grant the right of the Participant (A)
to receive a loan from the Company to pay the exercise price of the Stock
Option, with such terms as shall not cause the Stock Option, if an Incentive
Stock Option, to become disqualified under Section 422 of the Code or amendments
thereto, and/or (B) to receive such assistance from the Company in obtaining a
loan from a financial institution as is necessary in the sole discretion of the
Committee. Upon payment in full of the option price and satisfaction of the
other conditions provided herein, a stock certificate representing the number of
shares of Common Stock to which the Participant is entitled shall be issued and
delivered to the Participant.
(f) Death. In the event of a Participant's Termination of Employment
by reason of death, any Stock Option held by such Participant which was
exercisable on the date of death may thereafter be exercised by the legal
representative of the Participant's estate until the earlier of twelve months
after the date of death or the expiration of the stated term of such Stock
Option, and any Stock Option not exercisable on the date of death shall be
forfeited.
(g) Disability. In the event of a Participant's Termination of
Employment by reason of Disability, any Stock Option held by such Participant
which was exercisable on the date of such Termination of Employment may
thereafter be exercised by the Participant until the earlier of twelve months
after such date or the expiration of the stated term of such Stock Option, and
any Stock Option not exercisable on the date of such Termination of Employment
shall be forfeited. If an Incentive Stock Option is exercised after the
expiration of the exercise period that applies for purposes of Section 422 of
the Code, such Stock Option will thereafter be treated as a Non-Qualified Stock
Option.
(h) Termination of Employment. Unless otherwise determined by the
Committee on or after the date of grant, in the event of a Participant's
Termination of Employment other than by reason of Death or Disability, all Stock
Options held by such
7
<PAGE>
Participant on the date of such Termination of Employment shall be forfeited as
of such date.
(i) Non-Transferability of Options. No Stock Option shall be
transferrable by the Participant otherwise than by will or by the laws of
descent and distribution, to the extent consistent with the terms of the Plan
and the Option, and all Stock Options shall be exercisable, during the
Participant's lifetime, only by the Participant.
(j) Incentive Stock Option Limitations. To the extent that the
aggregate Fair Market Value (determined as of the date of grant) of the Common
Stock with respect to which Incentive Stock Options are exercisable for the
first time by the Participant during any calendar year under the Plan and/or any
other stock option plan of the Company or any subsidiary or parent corporation
(within the meaning of Section 424 of the Code) exceeds $100,000, such Options
shall be treated as Options which are not Incentive Stock Options.
Should the foregoing provisions not be necessary in order for the
Stock Options to qualify as Incentive Stock Options, or should any additional
provisions be required, the Committee may amend the Plan accordingly, without
the necessity of obtaining the approval of the shareholders of the Company.
(k) Ten-Percent Shareholder Rule. Notwithstanding any other provision
of the Plan to the contrary, no Incentive Stock Option shall be granted to any
person who, immediately prior to the grant, owns stock possessing more than ten
percent of the total combined voting power of all classes of stock of the
Company or any subsidiary or parent corporation (within the meaning of Section
424 of the Code), unless the option price is at least 110% of the Fair Market
Value of the Common Stock on the date of grant and the Option, by its terms,
expires no later than five years after the date of grant.
6..5 Rights as Shareholder. A Participant shall not be deemed to be the
holder of Common Stock, or to have any of the rights of a holder of Common
Stock, with respect to shares subject to the Option, unless and until the Option
is exercised and a stock certificate representing such shares of Common Stock is
issued to the Participant.
ARTICLE VII
8
<PAGE>
Termination or Amendment
7..1 Termination or Amendment of Plan. The Committee may at any time amend,
discontinue or terminate the Plan or any part thereof (including any amendment
deemed necessary to ensure that the Company may comply with any regulatory
requirement referred to in Article IX); provided, however, that, unless
otherwise required by law, the rights of a Participant with respect to Awards
granted prior to such amendment, discontinuance or termination may not be
impaired without the consent of such Participant and, provided further that, the
Company will seek the approval of the Company's shareholders for any amendment
if such approval is necessary to comply with the Code, Federal or state
securities law or any other applicable rules or regulations.
7..2 Amendment of Options. The Committee may amend the terms of any Award
previously granted,prospectively or retroactively, but, subject to Article IV,
no such amendment or other action by the Committee shall impair the rights of
any holder without the holder's consent.
ARTICLE VIII
Unfunded Plan
The Plan is intended to constitute an "unfunded" plan for incentive
compensation. With respect to any payment not yet made to a Participant by the
Company, nothing contained herein shall give any such Participant any rights
that are greater than those of a general creditor of the Company.
ARTICLE IX
General Provisions
9..1 Nonassignment. Except as otherwise provided in the Plan, any Award
granted hereunder and the rights and privileges conferred thereby shall not be
sold, transferred, assigned, pledged or hypothecated in any way (whether by
operation of law or otherwise), and shall not be subject to execution,
attachment or similar process. Upon any attempt to transfer, assign, pledge,
hypothecate or otherwise dispose of an Award, right or privilege contrary to the
provisions hereof, or upon the levy of any attachment or similar process
thereon, such Award and the rights and privileges conferred
9
<PAGE>
hereby shall immediately terminate and the Award shall immediately be forfeited
to the Company.
9..2 Legend. The Committee may require each person acquiring shares upon
exercise of a Stock Option to represent to the Company in writing that the
Participant is acquiring the shares without a view to distribution thereof. The
stock certificates representing such shares may include any legend which the
Committee deems appropriate to reflect any restrictions on transfer.
All certificates representing shares of Common Stock delivered under the
Plan shall be subject to such stock transfer orders and other restrictions as
the Committee may deem advisable under the rules, regulations and other
requirements of the Securities and Exchange Commission, any stock exchange or
stock market upon which the Common Stock is then listed or traded, any
applicable Federal or state securities law, and any applicable corporate law,
and the Committee may cause a legend or legends to be put on any such
certificates to make appropriate reference to such restrictions.
9..3 Other Plans. Nothing contained in the Plan shall prevent the Board
from adopting other or additional compensation arrangements, subject to
shareholder approval if such approval is required; and such arrangements may be
either generally applicable or applicable only in specific cases.
9..4 No Right to Employment. Neither the Plan nor the grant of any Award
hereunder shall give any Participant or other employee any right with respect to
continuance of employment by the Company or any Subsidiary, nor shall the Plan
impose any limitation on the right of the Company or any Subsidiary by which a
Participant is employed to terminate such Participant's employment at any time.
9..5 Withholding of Taxes. The Company shall have the right to reduce the
number of shares of Common Stock otherwise deliverable pursuant to the Plan by
an amount that would have a Fair Market Value equal to the amount of all
Federal, state and local taxes required to be withheld, or to deduct the amount
of such taxes from any cash payment otherwise to be made to the Participant. In
connection with such withholding, the Committee may make such arrangements as
are consistent with the Plan as it may deem appropriate.
9..6 Listing and Other Conditions.
(a) If the Common Stock is listed on a national securities exchange or
The Nasdaq Stock Market, the issuance of any
10
<PAGE>
shares of Common Stock pursuant to an Award shall be conditioned upon such
shares being listed on such exchange or NASDAQ. The Company shall have no
obligation to issue any shares of Common Stock unless and until such shares are
so listed, and the right to exercise any Option shall be suspended until such
listing has been effected.
(b) If at any time counsel to the Company shall be of the opinion that
any sale or delivery of shares of Common Stock upon exercise of a Stock Option
is or may in the circumstances be unlawful or result in the imposition of excise
taxes under the statutes, rules or regulations of any applicable jurisdiction,
the Company shall have no obligation to make such sale or delivery, or to make
any application or to effect or to maintain any qualification or registration
under the Securities Act of 1933, as amended, or otherwise with respect to
shares of Common Stock or Awards, and the right to exercise any Option shall be
suspended until, in the opinion of such counsel, such sale or delivery shall be
lawful or shall not result in the imposition of excise taxes.
(c) Upon termination of any period of suspension under this Section
9.6, any Award affected by such suspension which shall not then have expired or
terminated shall be reinstated as to all shares available before such suspension
and as to shares which would otherwise have become available during the period
of such suspension, but no such suspension shall extend the term of any Option.
9..7 Governing Law. The Plan and actions taken in connection herewith shall
be governed and construed in accordance with the laws of the Commonwealth of
Pennsylvania.
9..8 Construction. Wherever any words are used in the Plan in the masculine
gender they shall be construed as though they were also used in the feminine
gender in all cases where they would so apply, and wherever any words are used
herein in the singular form they shall be construed as though they were also
used in the plural form in all cases where they would so apply.
9..9 Liability of the Board and the Committee. No member of the Board or
the Committee nor any employee of the Company or any of its subsidiaries shall
be liable for any act or action hereunder, whether of omission or commission, by
any other member or employee or by any agent to whom duties in connection with
the administration of the Plan have been delegated or, except in circumstances
involving bad faith, gross negligence or fraud, for anything done or omitted to
be done by himself.
11
<PAGE>
9..10 Other Benefits. No payment pursuant to an Award shall be deemed
compensation for purposes of computing benefits under any retirement plan of the
Company or any Subsidiary nor affect any benefits under any other benefit plan
now or hereafter in effect under which the availability or amount of benefits is
related to the level of compensation.
9..11 Costs. The Company shall bear all expenses incurred in administering
the Plan, including expenses related to the issuance of Common Stock upon
exercise of Stock Options.
9..12 Severability. If any part of the Plan shall be determined to be
invalid or void in any respect, such determination shall not affect, impair,
invalidate or nullify the remaining provisions of the Plan which shall continue
in full force and effect.
9..13 Successors. The Plan shall be binding upon and inure to the benefit
of any successor or successors of the Company.
9..14 Headings. Article and section headings contained in the Plan are
included for convenience only and are not to be used in construing or
interpreting the Plan.
ARTICLE X
Term of Plan
10..1 Effective Date. The Plan shall be effective as of the date of its
approval by the Company's shareholders.
10..2 Termination Date. Unless sooner terminated, the Plan shall terminate
ten years after it is adopted by the Board and no Awards may be granted
thereafter. Termination of the Plan shall not affect Awards granted before such
date.
12
<PAGE>
Exhibit 11
STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS
(amounts in thousands, except per share data)
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
--------------------------- -------------------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net income $ 4,491 $ 3,730 $12,862 $ 7,149
Weighted average common shares outstanding 7,573 7,524 7,573 7,520
Basic earnings per share $ 0.59 $ 0.50 $ 1.70 $ 0.95
------- ------- ------- -------
------- ------- ------- -------
Net income $ 4,491 $ 3,730 $12,862 $ 7,149
Adjustments net of tax:
Interest expense on convertible debt 786 823 1,554 1,652
Amortization of debt offering costs 61 64 121 129
------- ------- ------- -------
Diluted net income $ 5,338 $ 4,617 $14,537 $ 8,930
------- ------- ------- -------
------- ------- ------- -------
Weighted average common shares outstanding 7,573 7,524 7,573 7,520
Common stock equivalents due to dilutive
effect of stock options 226 196 222 196
Shares converted from convertible debt 2,628 2,628 2,628 2,628
------- ------- ------- -------
Total outstanding shares for diluted earnings
per share computation 10,427 10,348 10,423 10,344
Diluted earnings per share $ 0.51 $ 0.45 $ 1.39 $ 0.86
------- ------- ------- -------
------- ------- ------- -------
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 7
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<DEBT-HELD-FOR-SALE> 290,765
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 6,220
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 297,086
<CASH> 45,851
<RECOVER-REINSURE> 12,610
<DEFERRED-ACQUISITION> 130,779
<TOTAL-ASSETS> 519,738
<POLICY-LOSSES> 174,457
<UNEARNED-PREMIUMS> 0
<POLICY-OTHER> 88,841
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 76,521
0
0
<COMMON> 818
<OTHER-SE> 142,364
<TOTAL-LIABILITY-AND-EQUITY> 519,738
106,383
<INVESTMENT-INCOME> 9,576
<INVESTMENT-GAINS> 6,791
<OTHER-INCOME> 164
<BENEFITS> 72,376
<UNDERWRITING-AMORTIZATION> (20,309)
<UNDERWRITING-OTHER> 51,518
<INCOME-PRETAX> 19,329
<INCOME-TAX> 6,467
<INCOME-CONTINUING> 12,862
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 12,862
<EPS-PRIMARY> 1.70
<EPS-DILUTED> 1.39
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
