-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, K9rxviQxp246zXeqC6lRtMADLJTUG9NZd/xPcHg95K9xHYNip2gH1Jt96AB+YxoA eCEv+5a3Bk/qNy3t30a+CA== 0000912057-02-033850.txt : 20020828 0000912057-02-033850.hdr.sgml : 20020828 20020828182141 ACCESSION NUMBER: 0000912057-02-033850 CONFORMED SUBMISSION TYPE: SC TO-I PUBLIC DOCUMENT COUNT: 8 FILED AS OF DATE: 20020828 SUBJECT COMPANY: COMPANY DATA: COMPANY CONFORMED NAME: PENN TREATY AMERICAN CORP CENTRAL INDEX KEY: 0000814181 STANDARD INDUSTRIAL CLASSIFICATION: ACCIDENT & HEALTH INSURANCE [6321] IRS NUMBER: 231664166 STATE OF INCORPORATION: PA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: SC TO-I SEC ACT: 1934 Act SEC FILE NUMBER: 005-38689 FILM NUMBER: 02751701 BUSINESS ADDRESS: STREET 1: 3440 LEHIGH ST CITY: ALLENTOWN STATE: PA ZIP: 18103 BUSINESS PHONE: 6109652222 MAIL ADDRESS: STREET 1: 3440 LEHIGH ST CITY: ALLENTOWN STATE: PA ZIP: 18103 FILED BY: COMPANY DATA: COMPANY CONFORMED NAME: PENN TREATY AMERICAN CORP CENTRAL INDEX KEY: 0000814181 STANDARD INDUSTRIAL CLASSIFICATION: ACCIDENT & HEALTH INSURANCE [6321] IRS NUMBER: 231664166 STATE OF INCORPORATION: PA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: SC TO-I BUSINESS ADDRESS: STREET 1: 3440 LEHIGH ST CITY: ALLENTOWN STATE: PA ZIP: 18103 BUSINESS PHONE: 6109652222 MAIL ADDRESS: STREET 1: 3440 LEHIGH ST CITY: ALLENTOWN STATE: PA ZIP: 18103 SC TO-I 1 a2088064zscto-i.txt FORM TO-I As filed with the Securities and Exchange Commission on August 28, 2002 - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 --------------------- SCHEDULE TO (RULE 14D-100) TENDER OFFER STATEMENT UNDER SECTION 14(d)(1) OR 13(e)(1) OF THE SECURITIES EXCHANGE ACT OF 1934 ---------------------- PENN TREATY AMERICAN CORPORATION (Name of Subject Company (issuer)) PENN TREATY AMERICAN CORPORATION (Name of Filing Person (offeror)) 6 1/4% CONVERTIBLE SUBORDINATED NOTES DUE 2003 (Title of Class of Securities) 707874AA1 707874AB9 707874AC7 (CUSIP Number of Class of Securities) ----------------------- William W. Hunt President and Chief Operating Officer Penn Treaty American Corporation 3440 Lehigh Street Allentown, Pennsylvania 18103 (610) 965-2222 (Name, address and telephone number of person authorized to receive notices and communications on behalf of Filing Person) ------------------------- Copies to: Justin P. Klein, Esq. Ballard Spahr Andrews & Ingersoll, LLP 1735 Market Street, 51st Floor Philadelphia, Pennsylvania 19103 (215) 665-8500 ------------------------- CALCULATION OF FILING FEE ---------------------------------------------------------------------- Transaction Valuation* Amount Of Filing Fee** $74,750,000 $6,877 ---------------------------------------------------------------------- * Estimated for the purposes of calculating the amount of the filing fee only. The amount assumes the exchange of the entire aggregate principal amount of 6 1/4% Convertible Subordinated Notes due 2003 (the "Subordinated Notes") of Penn Treaty American Corporation ("Penn Treaty") for 6 1/4% Convertible Notes due 2008 (the "Exchange Notes") issued by Penn Treaty. Penn Treaty intends to issue up to $74,750,000 aggregate principal amount of Exchange Notes in exchange for the entire outstanding aggregate principal amount of the Subordinated Notes. Based on the August 26, 2002 value of the outstanding Subordinated Notes, the transaction value is equal to $74,750,000. ** The amount of the filing fee is calculated in accordance with Rule 0-11 of the Securities Exchange Act of 1934, as amended. [ ] Check box if any part of the fee is offset as provided by Rule 0-11(a)(2) and identify the filing with which the offsetting fee was previously paid. Identify the previous filing by registration statement number, or the Form or Schedule and the date of its filing. AMOUNT PREVIOUSLY PAID: Not applicable. FILING PARTY: Not applicable. FORM OR REGISTRATION NO.: Not applicable. DATE FILED: Not applicable. [ ] Check the box if the filing relates solely to preliminary communications made before the commencement of a tender offer. Check the appropriate boxes below to designate any transactions to which the statement relates: [ ] Third-party tender offer subject to Rule 14d-1. [X] Issuer tender offer subject to Rule 13e-4. [ ] Going-private transaction subject to Rule 13e-3. [ ] Amendment to Schedule 13D under Rule 13d-2. Check the following box if the filing is a final amendment reporting the results of the tender offer: [ ] - -------------------------------------------------------------------------------- ITEM 1. SUMMARY TERM SHEET This Tender Offer Statement on Schedule TO (this "Statement") is being filed by Penn Treaty American Corporation ("Penn Treaty"), pursuant to Section 13(e) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), in connection with its offer to exchange up to $74,750,000 aggregate principal amount of 6 1/4% Convertible Subordinated Notes due 2003 (the "Subordinated Notes") of Penn Treaty, or such lesser principal amount as is properly tendered and not withdrawn, for 6 1/4% Convertible Subordinated Notes due 2008 (the "Exchange Notes") upon the terms and subject to the conditions set forth in the Offering Circular, dated August 27 , 2002 (the "Offering Circular"), a copy of which is attached hereto as Exhibit (a)(1) and in the related Letter of Transmittal, a copy of which is attached hereto as Exhibit (a)(2) (which, as they may be amended or supplemented from time to time, together constitute the "Exchange Offer"). The information in the Exchange Offer, including all schedules and annexes thereto, is hereby expressly incorporated herein by reference in response to all the items of this Statement, except as otherwise set forth below. The information set forth in the Offering Circular, dated August 27, 2002, under the caption "Summary Term Sheet" is incorporated herein by reference. ITEM 2. SUBJECT COMPANY INFORMATION (a) Name and Address. The subject company and issuer of securities subject to the Exchange Offer is Penn Treaty American Corporation, a Pennsylvania corporation with principal executive offices located at 3440 Lehigh Street, Allentown, Pennsylvania 18103. Penn Treaty's telephone number is (610) 965-2222. (b) Securities. The subject class of securities is the 6 1/4% Convertible Subordinated Notes due 2003 of Penn Treaty. As of the date of this Statement, there were outstanding $74,750,000 aggregate principal amount of the Subordinated Notes. (c) Trading Market and Price. The Subordinated Notes are not listed on any national securities exchange or authorized to be quoted in any inter-dealer quotation system of any national securities association. Certain institutions and securities dealers do engage in transactions in the Subordinated Notes. However, there is no established trading market for the Subordinated Notes, other than these limited and sporadic transactions. ITEM 3. IDENTITY AND BACKGROUND OF THE FILING PERSON (a) Name and Address. The information set forth under Item 2(a) above is incorporated herein by reference. Pursuant to General Instruction C to Schedule TO promulgated by the United States Securities and Exchange Commission (the "SEC"), the following persons are the directors and/or officers and/or controlling persons of Penn Treaty: Irving Levit Founder, Chairman of the Board of Directors and Chief Executive Officer William W. Hunt President and Chief Operating Officer Cameron B. Waite Executive Vice President and Chief Financial Officer A. J. Carden Executive Vice President and Director Jim Heyer Senior Vice President, Risk Management Michael F. Grill Treasurer, Comptroller and Director Jack Baum Vice President of Agency Management and Director Alexander M. Clark Director Francis R. Grebe Director Gary E. Hindes Director Matthew W. Kaplan Director Domenic P. Stangherlin Director
The address of each director and/or executive officer listed above is c/o Penn Treaty American Corporation, 3440 Lehigh Street, Allentown, Pennsylvania 18103, and each such person's telephone number is (610) 965-2222. ITEM 4. TERMS OF THE TRANSACTION (a) Material Terms. The information set forth in the sections of the Offering Circular captioned "The Exchange Offer," "Description of the Exchange Notes" and "Comparison of Subordinated Notes and Exchange Notes" is incorporated herein by reference. (b) Purchases. Mr. Irving Levit, founder, Chairman of the Board of Directors and Chief Executive Officer, owns $90,000 of the Subordinated Notes, which he plans to tender in the exchange for Exchange Notes. ITEM 5. PAST CONTACTS, TRANSACTIONS, NEGOTIATIONS AND AGREEMENTS (a) Agreements Involving the Subject Company's Securities. The information set forth in the section of the Offering Circular captioned "Agreements Relating to Penn Treaty Securities" is incorporated herein by reference. ITEM 6. PURPOSES OF THE TRANSACTION AND PLANS OR PROPOSALS (a) Purposes. The information set forth in the section of the Offering Circular captioned "Summary Term Sheet - Why is Penn Treaty making the exchange offer?" is incorporated herein by reference. (b) Use of Securities Acquired. The securities acquired by Penn Treaty pursuant to the Exchange Offer will be retired. (c) Plans. (1) None. (2) None. (3) None. (4) None. (5) None. (6) None. (7) None. (8) None. (9) None. (10) Penn Treaty intends to seek shareholder approval to amend its articles of incorporation to increase the number of shares of common stock authorized for issuance to an amount sufficient to permit the conversion of all such Exchange Notes; to satisfy our obligation to issue shares of common stock upon the exercise of all outstanding options granted by us pursuant to our stock option plans and the conversion of our Convertible Preferred Stock issuable upon exercise of the four tranches of warrants granted to Centre Solutions (Bermuda) Limited; and to permit us to offer shares of our common stock in the future for capital raising and other purposes.
ITEM 7. SOURCE AND AMOUNT OF FUNDS OR OTHER CONSIDERATION (a) Source of Funds. The maximum amount of consideration required by Penn Treaty to consummate the Exchange Offer and to pay related expenses is approximately $100,000 in cash and $74,570,000 aggregate principal amount of Exchange Notes. Penn Treaty expects to obtain the cash required to pay expenses related to the Exchange Offer from current cash from operations. The Exchange Notes will be issued pursuant to an indenture by and between Penn Treaty and Wells Fargo Bank Minnesota, N.A., as trustee. The Exchange Notes to be issued pursuant to Exchange Offer will be issued in reliance on the exemption from registration provided by Section 3(a)(9) of the Securities Act of 1933, as amended (the "Securities Act"). In addition to the foregoing, the information set forth in the section of the Offering Circular captioned "The Exchange Offer - Expenses" is incorporated herein by reference. (b) Conditions. The information set forth in the section of the Offering Circular captioned "The Exchange Offer - Conditions to the Exchange Offer" is incorporated herein by reference. (c) Borrowed Funds. Penn Treaty will not borrow funds or consideration, either directly or indirectly, for the purpose of this transaction. ITEM 8. INTEREST IN THE SECURITIES OF THE SUBJECT COMPANY (a) Securities Ownership. Mr. Irving Levit, founder, Chairman of the Board of Directors and Chief Executive Officer, owns $90,000 of the Subordinated Notes. (b) Securities Transactions. None. ITEM 9. PERSONS/ASSETS, RETAINED, EMPLOYED, COMPENSATED OR USED Solicitations or Recommendations. The information set forth in the section of the Offering Circular captioned "The Exchange Offer - Solicitation" is incorporated herein by reference. ITEM 10. FINANCIAL STATEMENTS (a) Financial Information. The following financial statements and financial information are incorporated herein by reference: (1) The audited consolidated financial statements of Penn Treaty American Corporation set forth in Penn Treaty's Annual Report on Form 10-K for the fiscal year ended December 31, 2001; (2) The unaudited condensed and consolidated financial statements of Penn Treaty American Corporation set forth in Penn Treaty's Quarterly Reports on Form 10-Q for the fiscal quarters ended March 31, 2002 and June 30, 2002; and (3) The information set forth in the section of the Offering Circular captioned "Selected Consolidated Financial Information" is incorporated herein by reference. Copies of the financial statements incorporated herein by reference pursuant to clauses (1) and (2) of this paragraph 10(a) can be obtained as provided in the section of the Offering Circular captioned "Where You Can Find More Information." (b) Pro Forma Financial Information. The information set forth in footnote 7 to the section of the Offering Circular captioned "Selected Consolidated Financial Information" is incorporated herein by reference. ITEM 11. ADDITIONAL INFORMATION (a) Agreements, Regulatory Requirements and Legal Proceedings. (1) None. (2) Penn Treaty is required under the Trust Indenture Act of 1939, as amended, to qualify the indenture pursuant to which the Exchange Notes will be issued. (3) None. (4) None. (5) None. (b) Other Material Information. None. ITEM 12. EXHIBITS EXHIBIT NUMBER DESCRIPTION 99.(a)(1) Offering Circular dated August 28, 2002.* 99.(a)(2) Letter of Transmittal dated August 28, 2002.* 99.(a)(3) Letter to Clients dated August 28, 2002.* 99.(a)(4) Letter to Broker-Dealers dated August 28, 2002.* 99.(a)(5) Notice of Guaranteed Delivery dated August 28, 2002.* 99.(a)(6) Guidelines for Certification of Taxpayer Identification Number on Substitute Form W-9.* 99.(a)(7) Penn Treaty American Corporation Annual Report on Form 10-K for the fiscal year ended December 31, 2001 filed with the Securities and Exchange Commission on April 2, 2002 and incorporated herein by reference. 99.(a)(8) Penn Treaty American Corporation Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 2002 filed with the Securities and Exchange Commission on May 15, 2002 and incorporated herein by reference. 99.(a)(9) Penn Treaty American Corporation Quarterly Report on Form 10-Q for the fiscal quarter ended June 30, 2002 filed with the Securities and Exchange Commission on August 14, 2002 and incorporated herein by reference. 99.(b) None. 99.(d)(1) Indenture to be entered into between Penn Treaty and Wells Fargo Bank Minnesota, N.A., as Trustee, with respect to the 6 1/4% Convertible Subordinate Notes due 2008.* 99.(d)(2) Indenture, dated as of November 26, 1996, by and between Penn Treaty and First Union National Bank, as Trustee, with respect to the 6 1/4% Convertible Subordinated Notes due 2003 (incorporated by reference to Exhibit 4.1 to Penn Treaty's Current Report on Form 8-K filed December 6, 1996). 99.(d)(3) Terms of Series A-1 Convertible Preferred Stock, Series A-2 Convertible Preferred Stock, Series A-3 Convertible Preferred Stock and Series A-4 Convertible Preferred Stock of Penn Treaty (incorporated by reference to Exhibit 3.1 to Penn Treaty's Current Report on Form 8-K filed February 19, 2002). 99.(d)(4) Warrant to Purchase Shares of Series A-1 Convertible Preferred Stock of Penn Treaty American Corporation (incorporated by reference to Exhibit 4.1 to Penn Treaty's Current Report on Form 8-K filed February 19, 2002). 99.(d)(5) Warrant to Purchase Shares of Series A-2 Convertible Preferred Stock of Penn Treaty American Corporation (incorporated by reference to Exhibit 4.2 to Penn Treaty's Current Report on Form 8-K filed February 19, 2002). 99.(d)(6) Warrant to Purchase Shares of Series A-3 Convertible Preferred Stock of Penn Treaty American Corporation (incorporated by reference to Exhibit 4.3 to Penn Treaty's Current Report on Form 8-K filed February 19, 2002). 99.(d)(7) Warrant to Purchase Shares of Series A-4 Convertible Preferred Stock of Penn Treaty American Corporation (incorporated by reference to Exhibit 4.4 to Penn Treaty's Current Report on Form 8-K filed February 19, 2002). 99.(d)(8) Investor Rights Agreement, dated as of February 19, 2002, by and among Penn Treaty American Corporation and Centre Solutions (Bermuda) Limited (incorporated by reference to Exhibit 10.3 to Penn Treaty's Current Report on Form 8-K filed February 19, 2002). 99.(d)(9) Penn Treaty American Corporation 1987 Employee Incentive Stock Option Plan (incorporated by reference to Exhibit 99.1 to Penn Treaty's Registration Statement on form S-8, No. 333-89929, filed on October 29, 1999). 99.(d)(10) Penn Treaty American Corporation 1995 Participating Agent Stock Option Plan (incorporated by reference to Exhibit 10.2 to Penn Treaty's Annual Report on Form 10-K for the year ended December 31, 1997). 99.(d)(11) Penn Treaty American Corporation 1998 Employee Incentive Stock Option Plan (incorporated by reference to Exhibit 99.1 to Penn Treaty's Registration Statement on Form S-8, No. 333-89927, filed on October 29, 1999). 99.(d)(12) Penn Treaty American Corporation 1998 Incentive Stock Option Plan (incorporated by reference to Exhibit 10.47 to Penn Treaty's Annual Report on Form 10-K for the year ended December 31, 1998). 99.(d)(13) Penn Treaty American Corporation 2002 Employee Incentive Stock Option Plan (incorporated by reference to Exhibit A to Penn Treaty's Proxy Statement dated April 30, 2002 filed pursuant to Section 14(a) of the Securities Act). 99.(d)(14) Executive Compensation Agreement between Penn Treaty American Corporation and William W. Hunt, Jr. dated June 1, 2001 (incorporated by reference to Exhibit 10.50 to Penn Treaty's Quarterly Report on Form 10-Q for the quarter ended June 30, 2001). 99.(g) None. 99.(h) None. - ------------ * Filed herewith. ITEM 1. INFORMATION REQUIRED BY SCHEDULE 13e-3 Not applicable. SIGNATURE After due inquiry and to the best of my knowledge and belief, I certify that the information set forth in this statement is true, complete and correct. PENN TREATY AMERICAN CORPORATION Dated: August 28, 2002 By: /s/ William W. Hunt -------------------------------- William W. Hunt President and Chief Operating Officer EXHIBITS EXHIBIT NUMBER DESCRIPTION 99.(a)(1) Offering Circular dated August 28, 2002.* 99.(a)(2) Letter of Transmittal dated August 28, 2002.* 99.(a)(3) Letter to Clients dated August 28, 2002.* 99.(a)(4) Letter to Broker-Dealers dated August 28, 2002.* 99.(a)(5) Notice of Guaranteed Delivery dated August 28, 2002.* 99.(a)(6) Guidelines for Certification of Taxpayer Identification Number on Substitute Form W-9.* 99.(a)(7) Penn Treaty American Corporation Annual Report on Form 10-K for the fiscal year ended December 31, 2001 filed with the Securities and Exchange Commission on April 2, 2002 and incorporated herein by reference. 99.(a)(8) Penn Treaty American Corporation Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 2002 filed with the Securities and Exchange Commission on May 15, 2002 and incorporated herein by reference. 99.(a)(9) Penn Treaty American Corporation Quarterly Report on Form 10-Q for the fiscal quarter ended June 30, 2002 filed with the Securities and Exchange Commission on August 14, 2002 and incorporated herein by reference. 99.(b) None. 99.(d)(1) Indenture to be entered into between Penn Treaty and Wells Fargo Bank Minnesota, N.A., as Trustee, with respect to the 6 1/4% Convertible Subordinate Notes due 2008.* 99.(d)(2) Indenture, dated as of November 26, 1996, by and between Penn Treaty and First Union National Bank, as Trustee, with respect to the 6 1/4% Convertible Subordinated Notes due 2003 (incorporated by reference to Exhibit 4.1 to Penn Treaty's Current Report on Form 8-K filed December 6, 1996). 99.(d)(3) Terms of Series A-1 Convertible Preferred Stock, Series A-2 Convertible Preferred Stock, Series A-3 Convertible Preferred Stock and Series A-4 Convertible Preferred Stock of Penn Treaty (incorporated by reference to Exhibit 3.1 to Penn Treaty's Current Report on Form 8-K filed February 19, 2002). 99.(d)(4) Warrant to Purchase Shares of Series A-1 Convertible Preferred Stock of Penn Treaty American Corporation (incorporated by reference to Exhibit 4.1 to Penn Treaty's Current Report on Form 8-K filed February 19, 2002). 99.(d)(5) Warrant to Purchase Shares of Series A-2 Convertible Preferred Stock of Penn Treaty American Corporation (incorporated by reference to Exhibit 4.2 to Penn Treaty's Current Report on Form 8-K filed February 19, 2002). 99.(d)(6) Warrant to Purchase Shares of Series A-3 Convertible Preferred Stock of Penn Treaty American Corporation (incorporated by reference to Exhibit 4.3 to Penn Treaty's Current Report on Form 8-K filed February 19, 2002). 99.(d)(7) Warrant to Purchase Shares of Series A-4 Convertible Preferred Stock of Penn Treaty American Corporation (incorporated by reference to Exhibit 4.4 to Penn Treaty's Current Report on Form 8-K filed February 19, 2002). 99.(d)(8) Investor Rights Agreement, dated as of February 19, 2002, by and among Penn Treaty American Corporation and Centre Solutions (Bermuda) Limited (incorporated by reference to Exhibit 10.3 to Penn Treaty's Current Report on Form 8-K filed February 19, 2002). 99.(d)(9) Penn Treaty American Corporation 1987 Employee Incentive Stock Option Plan (incorporated by reference to Exhibit 99.1 to Penn Treaty's Registration Statement on form S-8, No. 333-89929, filed on October 29, 1999). 99.(d)(10) Penn Treaty American Corporation 1995 Participating Agent Stock Option Plan (incorporated by reference to Exhibit 10.2 to Penn Treaty's Annual Report on Form 10-K for the year ended December 31, 1997). 99.(d)(11) Penn Treaty American Corporation 1998 Employee Incentive Stock Option Plan (incorporated by reference to Exhibit 99.1 to Penn Treaty's Registration Statement on Form S-8, No. 333-89927, filed on October 29, 1999). 99.(d)(12) Penn Treaty American Corporation 1998 Incentive Stock Option Plan (incorporated by reference to Exhibit 10.47 to Penn Treaty's Annual Report on Form 10-K for the year ended December 31, 1998). 99.(d)(13) Penn Treaty American Corporation 2002 Employee Incentive Stock Option Plan (incorporated by reference to Exhibit A to Penn Treaty's Proxy Statement dated April 30, 2002 filed pursuant to Section 14(a) of the Securities Act). 99.(d)(14) Executive Compensation Agreement between Penn Treaty American Corporation and William W. Hunt, Jr. dated June 1, 2001 (incorporated by reference to Exhibit 10.50 to Penn Treaty's Quarterly Report on Form 10-Q for the quarter ended June 30, 2001). 99.(g) None. 99.(h) None. - ------------ * Filed herewith. EX-99.(A)(1) 3 a2088064zex-99_a1.txt EXHIBIT 99.(A)(1) Exhibit 99.(a)(1) OFFERING CIRCULAR PENN TREATY AMERICAN CORPORATION [LOGO] Offer to Exchange 6 1/4% Convertible Subordinated Notes due 2008 for All Outstanding 6 1/4% Convertible Subordinated Notes due 2003 -------------------------- THE EXCHANGE OFFER WILL EXPIRE AT 12:00 MIDNIGHT, NEW YORK CITY TIME, ON THURSDAY, SEPTEMBER 26, 2002, UNLESS EXTENDED OR EARLIER TERMINATED. -------------------------- PENN TREATY AMERICAN CORPORATION, A PENNSYLVANIA CORPORATION, HEREBY OFFERS (THE "EXCHANGE OFFER"), UPON THE TERMS AND CONDITIONS SET FORTH IN THIS OFFERING CIRCULAR, AND IN THE ACCOMPANYING LETTER OF TRANSMITTAL, TO ISSUE UP TO $74,750,000 IN AGGREGATE PRINCIPAL AMOUNT OF 6 1/4% CONVERTIBLE SUBORDINATED NOTES DUE 2008, CONVERTIBLE INTO SHARES OF COMMON STOCK AT $5.31 PER SHARE (THE "EXCHANGE NOTES") IN EXCHANGE FOR UP TO ALL OF ITS OUTSTANDING 6 1/4% CONVERTIBLE SUBORDINATED NOTES DUE 2003, CONVERTIBLE INTO SHARES OF COMMON STOCK AT $28.44 PER SHARE (THE "SUBORDINATED NOTES"). SUBJECT TO THE TERMS AND CONDITIONS OF THE EXCHANGE OFFER, PENN TREATY WILL ISSUE EXCHANGE NOTES IN EXCHANGE FOR ALL SUBORDINATED NOTES THAT ARE PROPERLY TENDERED AND NOT WITHDRAWN PRIOR TO THE EXPIRATION OF THE EXCHANGE OFFER. THE EXCHANGE OFFER IS NOT CONDITIONED UPON THE EXERCISE OF A MINIMUM PRINCIPAL AMOUNT OF SUBORDINATED NOTES. FOR A MORE DETAILED DESCRIPTION OF THE EXCHANGE NOTES WE ARE PROPOSING TO ISSUE IN THE EXCHANGE, PLEASE SEE THE SECTIONS OF THIS OFFERING CIRCULAR CAPTIONED "DESCRIPTION OF THE EXCHANGE NOTES" AND "DESCRIPTION OF CAPITAL STOCK." THE EXCHANGE OFFER IS SUBJECT TO CUSTOMARY CONDITIONS. SUBJECT TO APPLICABLE SECURITIES LAWS AND THE TERMS SET FORTH IN THIS OFFERING CIRCULAR, WE RESERVE THE RIGHT TO WAIVE ANY AND ALL CONDITIONS TO THE EXCHANGE OFFER, TO EXTEND THE EXCHANGE OFFER, TO TERMINATE THE EXCHANGE OFFER FOR ANY REASON OR NO REASON AND OTHERWISE TO AMEND THE EXCHANGE OFFER, IN ANY RESPECT. -------------------------- IMPORTANT Any Subordinated Note holder desiring to tender all or any portion of such holder's Subordinated Notes should either (i) complete and sign the enclosed Letter of Transmittal (or a facsimile thereof) in accordance with the instructions in the Letter of Transmittal, have such holder's signature thereon guaranteed (if required by Instruction 2 to the Letter of Transmittal), mail or deliver the Letter of Transmittal (or a facsimile thereof) and any other required documents to Wells Fargo Bank Minnesota, N.A., the Exchange Agent for this offering, and either deliver the certificates for such Subordinated Notes along with the Letter of Transmittal to the Exchange Agent or tender such Subordinated Notes in accordance with the procedures for book-entry transfer set forth in the section of this Offering Circular captioned "The Exchange Offer--Procedures for Tendering Subordinated Notes" or (ii) request such holder's broker, dealer, commercial bank, trust company or other nominee to effect the transaction for such holder. Any holder whose Subordinated Notes are registered in the name of a broker, dealer, commercial bank, trust company or other nominee must contact such broker, dealer, commercial bank, trust company or other nominee to tender such Subordinated Notes. Any Subordinated Notes holder who desires to tender Subordinated Notes but (i) whose certificates evidencing such Subordinated Notes are not immediately available, (ii) cannot comply with the procedures for book-entry transfer described in this Offering Circular on a timely basis or (iii) cannot deliver all required documents to the exchange agent prior to the expiration of the Exchange Offer, may tender the Subordinated Notes by following the procedures for guaranteed delivery set forth in the section of this Offering Circular captioned "The Exchange Offer--Guaranteed Delivery Procedures." If the Exchange Offer is consummated, Subordinated Noteholders who exchange their Subordinated Notes will not receive certificates representing their interests in the Exchange Notes. See "Description of the Exchange Notes--Delivery and Form." NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS OFFERING CIRCULAR IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. -------------------------- The Information Agent for the Exchange Offer The Exchange Agent of the Exchange Offer is: is: Wells Fargo Bank Minnesota, N.A. Philadelphia Brokerage Corporation
------------------------ SEE "RISK FACTORS" BEGINNING ON PAGE 15 FOR A DISCUSSION OF RISKS YOU SHOULD CONSIDER BEFORE TENDERING YOUR SUBORDINATED NOTES. -------------------------- THE DATE OF THIS OFFERING CIRCULAR IS AUGUST 28, 2002 THIS OFFERING CIRCULAR IS NOT AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, ANY OF THE SUBORDINATED NOTES OR SHARES OF PENN TREATY COMMON STOCK ISSUABLE ON CONVERSION OF THE EXCHANGE NOTES BY ANY PERSON WHERE IT IS UNLAWFUL FOR THAT PERSON TO MAKE SUCH AN OFFER OR SOLICITATION OR TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH AN OFFER OR SOLICITATION. THIS OFFERING CIRCULAR SUMMARIZES VARIOUS DOCUMENTS AND OTHER INFORMATION. THOSE SUMMARIES ARE QUALIFIED IN THEIR ENTIRETY BY REFERENCE TO THE DOCUMENTS AND INFORMATION TO WHICH THEY RELATE. IN MAKING AN INVESTMENT DECISION, INVESTORS MUST RELY ON THEIR OWN EXAMINATION OF PENN TREATY AND THE TERMS OF THE EXCHANGE OFFER, INCLUDING THE MERITS AND RISKS INVOLVED. THE INFORMATION CONTAINED IN THIS OFFERING CIRCULAR IS AS OF THE DATE HEREOF AND NEITHER THE DELIVERY OF THIS OFFERING CIRCULAR NOR THE OFFERING, SALE OR DELIVERY OF ANY EXCHANGE NOTES OF PENN TREATY SHALL CREATE ANY IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AT ANY TIME AFTER THE DATE HEREOF. NO REPRESENTATION IS MADE TO ANY OFFEREE OR PURCHASER OF THE EXCHANGE NOTES OF PENN TREATY REGARDING THE LEGALITY OF AN INVESTMENT IN THOSE SECURITIES BY THE OFFEREE OR PURCHASER UNDER ANY APPLICABLE LEGAL INVESTMENT OR SIMILAR LAWS OR REGULATIONS. THE CONTENTS OF THIS OFFERING CIRCULAR ARE NOT TO BE CONSTRUED AS LEGAL, BUSINESS OR TAX ADVICE. EACH PROSPECTIVE INVESTOR SHOULD CONSULT ITS OWN ATTORNEY, BUSINESS ADVISOR AND TAX ADVISOR AS TO LEGAL, BUSINESS OR TAX ADVICE WITH RESPECT TO AN INVESTMENT IN THE EXCHANGE NOTES. ALL INQUIRIES RELATING TO THIS OFFERING CIRCULAR AND THE TRANSACTIONS CONTEMPLATED HEREBY SHOULD BE DIRECTED TO PHILADELPHIA BROKERAGE CORPORATION, THE INFORMATION AGENT FOR THE EXCHANGE OFFER, AT THE TELEPHONE NUMBER OR THE ADDRESS LISTED ON THE BACK COVER PAGE OF THIS OFFERING CIRCULAR. PROSPECTIVE INVESTORS MAY ALSO OBTAIN ADDITIONAL INFORMATION FROM PENN TREATY, WHICH THEY MAY REASONABLY REQUIRE TO VERIFY THE INFORMATION CONTAINED HEREIN. QUESTIONS REGARDING THE PROCEDURES FOR TENDERING IN THE EXCHANGE OFFER AND REQUESTS FOR ASSISTANCE IN TENDERING YOUR SUBORDINATED NOTES SHOULD BE DIRECTED TO THE EXCHANGE AGENT AT ONE OF THE TELEPHONE NUMBERS AND ADDRESSES LISTED ON THE BACK COVER PAGE OF THIS OFFERING CIRCULAR. REQUESTS FOR ADDITIONAL COPIES OF THIS OFFERING CIRCULAR, THE ENCLOSED LETTER OF TRANSMITTAL AND NOTICES OF GUARANTEED DELIVERY, OR FOR COPIES OF PENN TREATY'S SECOND QUARTER 2002 QUARTERLY REPORT ON FORM 10-Q, PENN TREATY'S FIRST QUARTER 2002 QUARTERLY REPORT ON FORM 10-Q, PENN TREATY'S 2001 ANNUAL REPORT ON FORM 10-K, PENN TREATY'S 2002 CURRENT REPORTS ON FORM 8-K AND PENN TREATY'S 2002 ANNUAL MEETING PROXY STATEMENT, MAY BE DIRECTED TO EITHER THE EXCHANGE AGENT OR THE INFORMATION AGENT AT THE RESPECTIVE TELEPHONE NUMBERS AND ADDRESSES LISTED ON THE BACK COVER PAGE OF THIS OFFERING CIRCULAR. YOU SHOULD BE AWARE THAT YOU MAY BE REQUIRED TO BEAR THE FINANCIAL RISKS OF YOUR INVESTMENT FOR AN INDEFINITE PERIOD OF TIME. ii TABLE OF CONTENTS SUMMARY TERM SHEET.......................................... 1 SUMMARY DESCRIPTION OF THE EXCHANGE NOTES AND OUR COMMON STOCK..................................................... 8 SELECTED CONSOLIDATED FINANCIAL INFORMATION................. 11 RISK FACTORS................................................ 15 USE OF PROCEEDS............................................. 25 MARKET FOR OUR COMMON STOCK................................. 25 DIVIDEND POLICY............................................. 25 CAPITALIZATION.............................................. 26 RATIO OF EARNINGS TO FIXED CHARGES.......................... 27 BUSINESS.................................................... 28 CERTAIN UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS..... 52 THE EXCHANGE OFFER.......................................... 58 DESCRIPTION OF THE EXCHANGE NOTES........................... 66 COMPARISON OF SUBORDINATED NOTES AND EXCHANGE NOTES......... 77 DESCRIPTION OF CAPITAL STOCK................................ 79 AGREEMENTS RELATING TO PENN TREATY SECURITIES............... 82 CAUTIONARY STATEMENTS....................................... 83 WHERE YOU CAN FIND MORE INFORMATION......................... 84 INCORPORATION OF INFORMATION WE FILE WITH THE SEC........... 84 INDEPENDENT AUDITORS........................................ 84
iii SUMMARY TERM SHEET Through this Offering Circular and the enclosed letter of transmittal, Penn Treaty American Corporation is offering to issue Penn Treaty's 6 1/4% Convertible Subordinated Notes due 2008 (at a conversion price of $5.31 per share), which we refer to in this Offering Circular as the "Exchange Notes," in exchange for Penn Treaty's outstanding 6 1/4% Convertible Subordinated Notes due 2003 (at a conversion price of $28.44 per share), which we refer to in this Offering Circular as the "Subordinated Notes." The following are some of the questions that you may have as a holder of the Subordinated Notes and answers to those questions. The following summary highlights selected information from this Offering Circular and may not contain all the information that you will need to make a decision regarding whether or not to tender your Subordinated Notes in the exchange offer and accept the Exchange Notes that we propose to give you. This Offering Circular includes specific terms of the exchange offer, including a description of the Exchange Notes we are proposing to give you as well as a description of our common stock issuable upon conversion of the Exchange Notes. This Offering Circular also provides information regarding our business and some financial data. In addition, as set forth in the section of this Offering Circular captioned "Incorporation of Information We File With the SEC," we are incorporating by reference the information contained in certain documents we file with the SEC. We encourage you to read carefully this Offering Circular and the documents to which we refer you in their entirety, including the discussion of risks and uncertainties affecting our business included in the section of this Offering Circular captioned "Risk Factors" beginning on page 15. When used in this Offering Circular, the terms "Penn Treaty," "we," "our" and "us" refer to Penn Treaty American Corporation and its subsidiaries, unless otherwise specified. WHO IS MAKING THE EXCHANGE OFFER? The exchange offer is being made by Penn Treaty. Penn Treaty is a leading provider of long-term care insurance in the United States. We market our products primarily to older persons in the states in which we are licensed through independent insurance agents. Our principal products are individual, defined benefit, accident and health insurance policies covering long-term skilled, intermediate and custodial nursing home and home health care. Our policies are designed to make the administration of claims simple, quick and sensitive to the needs of our policyholders. We also own insurance agencies that sell senior-market insurance products underwritten by other insurers and us. Penn Treaty's principal executive offices are located at 3440 Lehigh Street, Allentown, Pennsylvania 18103. Our main phone number is (610) 965-2222. For further information concerning Penn Treaty, please see the section of this Offering Circular captioned "Where You Can Find More Information." Our common stock is currently traded on the New York Stock Exchange under the symbol "PTA." WHAT CLASS OF SECURITIES IS SOUGHT IN THE EXCHANGE OFFER? We are offering to acquire all of our currently outstanding Subordinated Notes in exchange for newly issued Exchange Notes. As of the date of this Offering Circular, $74.75 million principal amount of Subordinated Notes was outstanding. For more information regarding the terms of the exchange offer, please see the section of this Offering Circular captioned "The Exchange Offer." WHAT CONSIDERATION ARE YOU OFFERING IN EXCHANGE FOR MY SUBORDINATED NOTES? We are offering to issue an Exchange Note of a principal amount equal to the principal amount of each Subordinated Note that is properly tendered and not withdrawn in the exchange offer. If 100% of the outstanding Subordinated Notes are exchanged in this exchange offer, Penn Treaty will issue approximately $74.75 million aggregate principal amount of Exchange Notes. On August 27, 2002, the closing price per share of our common stock on the New York Stock Exchange was $3.85. 1 The Exchange Notes will be subordinated in right of payment to all existing and future Senior Debt (as defined herein), but will rank senior to the Subordinated Notes. For more information regarding the Exchange Notes we propose to issue to you, as well as the underlying common stock, please see the sections of this Offering Circular captioned "Description of Exchange Notes," and "Description of Capital Stock." WHY IS PENN TREATY MAKING THE EXCHANGE OFFER? Our Board of Directors believes that an important issue we face is the uncertainty surrounding our ability to satisfy our obligations under the Subordinated Notes, including our obligation to pay the principal amount of the Subordinated Notes to Subordinated Note holders on December 1, 2003. Given our current financial condition, it is unlikely that we would be able to satisfy these obligations under the Subordinated Notes with cash. Raising sufficient funds to pay the principal amount due under the Subordinated Notes by issuing stock would, at our recent stock prices, result in substantial dilution to holders of common stock and uncertainty with respect to the control and governance of Penn Treaty. We are making the exchange offer in an effort to mitigate this uncertainty and believe that extending the maturity of these obligations will significantly increase the likelihood that we will be able to satisfy them when they become due. Our Board believes that successful consummation of the exchange offer should: - reduce some of the uncertainty surrounding our ability to satisfy our obligations, which we expect would improve our stock price performance and thereby increase the effective returns on the Exchange Notes provided in exchange for the Subordinated Notes; - enhance our ability to obtain financing for working capital, new product development, capital expenditures and other needs; - enhance our competitive position by increasing the confidence of our sales force and policy holders and causing regulatory authorities to regard our financial condition as strengthened; - enhance our credit profile with A.M. Best Company, Inc. and Standard & Poor's Insurance Rating Services; and - improve our ability to adjust in a timely fashion to changing market conditions. WHAT DOES PENN TREATY'S BOARD OF DIRECTORS THINK OF THE EXCHANGE OFFER? While our Board believes that the exchange offer is in Penn Treaty's best interests, Penn Treaty is not making any recommendation regarding whether you should tender your Subordinated Notes in the exchange offer and, accordingly, you must make your own determination as to whether to tender your Subordinated Notes for exchange and accept the Exchange Notes we propose to give you. We urge you to read carefully this Offering Circular and the other documents to which we refer you in their entirety, including the discussion of risks and uncertainties affecting our business set forth in the section of this Offering Circular captioned "Risk Factors," and make your own decision. WHAT ARE THE SIGNIFICANT DIFFERENCES BETWEEN THE EXCHANGE NOTES AND THE SUBORDINATED NOTES? Our Exchange Notes will rank senior to our Subordinated Notes, but are similar to the Subordinated Notes in many respects. The terms of our Exchange Notes that differ significantly from the terms of our Subordinated Notes are the maturity date, conversion price, mandatory conversion provision, terms of redemption and the amount of a judgment against Penn Treaty that will constitute an event of default under the indenture. Our Exchange Notes mature on October 15, 2008 and are convertible at a price of $5.31 per share while our Subordinated Notes mature December 1, 2003 and are convertible at a price of $28.44 per share. Our Exchange Notes automatically convert into shares of 2 our common stock if the average closing share price of our common stock is equal to at least $5.84 during any 15 consecutive trading days beginning on or after October 15, 2004 and we have sufficient shares of common stock available for issuance. Conversion of the Subordinated Notes is not mandatory. We may redeem any or all of the Exchange Notes at any time on or after October 15, 2004 at a price equal to the principal amount plus accrued unpaid interest. Our Subordinated Notes are currently redeemable at a price equal to 101.04% of the principal amount plus accrued unpaid interest and will be redeemable on or after December 1, 2002 at a price equal to the principal amount plus accrued unpaid interest. In addition, the amount of a judgment or decree entered by a court of competent jurisdiction against us or our subsidiaries that will, after deducting the portion accepted by an insurance company, trigger an event of default under the indenture has been increased from $10 million for the Subordinated Notes to $25 million for the Exchange Notes. WHAT RISKS SHOULD I CONSIDER IN DECIDING WHETHER OR NOT TO TENDER MY SUBORDINATED NOTES? In deciding whether to exchange your Subordinated Notes for the Exchange Notes, you should consider carefully the discussion of risks and uncertainties affecting our business described in the section of this Offering Circular captioned "Risk Factors." WILL I GIVE UP ANY LEGAL RIGHTS BY TENDERING MY SUBORDINATED NOTES? Yes. By tendering your Subordinated Notes in the exchange offer, you will be deemed to have waived any and all rights to receive any payments, including, without limitation, interest payments with respect to the Subordinated Notes, and you agree that Penn Treaty's obligations to you under the Exchange Note indenture and the Exchange Notes described in this Offering Circular supersede and replace in their entirety Penn Treaty's obligations to you under the Subordinated Note indenture, the Subordinated Notes and any other documents executed in connection therewith. IS PENN TREATY PRESENTLY ABLE TO ISSUE THE EXCHANGE NOTES? The consideration we are proposing to give you in the exchange offer consists of newly issued Exchange Notes. We are not required to have an effective registration statement on file with the SEC to register the issuance of the Exchange Notes in the exchange offer because the exchange offer is being extended to you in reliance on the exemption from registration provided by Section 3(a)(9) of the Securities Act and has not been registered with the SEC. Accordingly, the issuance of these securities need not be delayed pending SEC review of a registration statement filing. Provided that none of the events described in the section of this Offering Circular captioned "The Exchange Offer--Conditions to the Exchange Offer" has occurred, Penn Treaty expects to be able to issue the exchange offer consideration immediately following the expiration of the exchange offer. For more information regarding the timing of the issuance of the Exchange Notes in the exchange offer, please see the section of this Offering Circular captioned "The Exchange Offer--Acceptance of Subordinated Notes for Exchange; Delivery of Exchange Notes." DOES PENN TREATY CURRENTLY HAVE A SUFFICIENT NUMBER OF SHARES AVAILABLE FOR ISSUANCE UPON CONVERSION OF THE EXCHANGE NOTES? We currently do not have a sufficient number of shares of common stock available for issuance upon the conversion of all of the Exchange Notes, the exercise of all outstanding options granted by Penn Treaty pursuant to our stock option plans and the four tranches of warrants granted to Centre Solutions (Bermuda) Limited in a reinsurance transaction we entered into in February 2002. See the section of this Offering Circular captioned "Agreements Related to Penn Treaty." However, we will, as soon as practicable, seek and recommend the approval of our shareholders to amend our articles of incorporation to increase the number of authorized shares of common stock to an amount sufficient to permit the conversion of all such Exchange Notes as well as exercise of all outstanding options and 3 warrants. In the event you desire to convert all, or any portion, of Exchange Notes into shares of common stock and we do not have a sufficient number of shares of common stock available for such conversion, in lieu of delivering shares of common stock upon conversion of that portion of your Exchange Notes for which there is an insufficient number of shares of common stock, we will pay to you an amount in cash equal to the market price of the shares of common stock into which the Exchange Notes are then convertible. There can be no assurance that we will have sufficient funds available when necessary to make any required cash payments in lieu of delivering common stock to Exchange Note holders seeking to convert Exchange Notes into shares of common stock. CAN I TRANSFER THE EXCHANGE NOTES AND COMMON STOCK ISSUABLE UPON THE CONVERSION OF THE EXCHANGE NOTES TO THIRD PARTIES? The resale of the Subordinated Notes and the common stock the Subordinated Notes are convertible into was registered by us under a registration statement on Form S-3, which became effective on April 11, 1997. The exchange offer is being extended to you in reliance on the exemption from registration provided by Section 3(a)(9) of the Securities Act. As a result, the securities we issue to you in exchange for your Subordinated Notes will have similar characteristics to the Subordinated Notes with respect to transfer to third parties. If your Subordinated Notes are freely tradable, the Exchange Notes and the common stock issuable upon the conversion of the Exchange Notes can be transferred freely. WILL THE EXCHANGE NOTES BE LISTED FOR TRADING? The Exchange Notes are not listed for trading on any national securities exchange or authorized to be quoted in any inter-dealer quotation system of any national securities association and we do not intend to apply for either listing or quotation. Our common stock is listed for trading on the New York Stock Exchange under the symbol "PTA." We intend to apply for the listing of our common stock issuable upon the conversion of the Exchange Notes. For more information regarding the trading markets for the Exchange Notes we propose to give you, please see the sections of this Offering Circular captioned "Risk Factors," "Market for Common Stock" and "Dividend Policy." WHAT WILL BE THE FEDERAL INCOME TAX CONSEQUENCES TO ME OF THE EXCHANGE OFFER? THE TAX CONSEQUENCES TO YOU OF THE EXCHANGE OFFER WILL DEPEND ON YOUR INDIVIDUAL SITUATION. YOU SHOULD CONSULT YOUR OWN TAX ADVISOR FOR A FULL UNDERSTANDING OF THESE TAX CONSEQUENCES. The law is unclear as to whether you will recognize for federal income tax purposes, any gain or loss realized by you on the exchange (i.e., the difference between (a) your tax basis in the Subordinated Notes and (b) the face amount of the Exchange Notes in exchange for the Subordinated Notes). A non-U.S. holder will generally not be subject to U.S. Federal income tax on any gain resulting from the exchange. For more information regarding the tax consequences to you of the exchange offer, please see the section of this Offering Circular captioned "Certain United States Federal Income Tax Considerations." IS PENN TREATY'S FINANCIAL CONDITION RELEVANT TO MY DECISION TO TENDER IN THE EXCHANGE OFFER? The consideration we are offering to give you in the exchange offer consists of Exchange Notes. Our financial condition is relevant to your decision whether to tender in the offer because it relates to whether we will be able to meet our interest and principal payment obligations under the Exchange Notes and the value of the common stock upon conversion of the Exchange Notes. Although there is no guarantee that we will be able to repay the Exchange Notes, by accepting the exchange offer we believe you will improve your position with respect to other current or future subordinated debt 4 holders. Detailed historical financial information concerning Penn Treaty can be found in our Annual Report on Form 10-K for the fiscal year ended December 31, 2001. We have also provided selected consolidated financial information concerning Penn Treaty in the section of this Offering Circular captioned "Selected Consolidated Financial Information." WILL PENN TREATY RECEIVE ANY CASH PROCEEDS FROM THE EXCHANGE OFFER? No. We will not receive any cash proceeds from the exchange offer. WHAT ARE THE CONDITIONS TO THE EXCHANGE OFFER? THE EXCHANGE OFFER IS NOT CONDITIONED UPON THE EXCHANGE OF A MINIMUM PRINCIPAL AMOUNT OF SUBORDINATED NOTES. THE EXCHANGE OFFER IS, HOWEVER, SUBJECT TO A NUMBER OF CUSTOMARY CONDITIONS, WHICH WE MAY WAIVE. If any of these conditions are not satisfied, we will not be obligated to accept any properly tendered Subordinated Notes for exchange. In addition, we may decide to terminate the exchange offer for any reason or no reason and not accept for exchange any tendered Subordinated Notes. For more information regarding the conditions to the exchange offer, please see the section of this Offering Circular captioned "The Exchange Offer--Conditions to the Exchange Offer." HOW LONG DO I HAVE TO DECIDE WHETHER TO TENDER IN THE EXCHANGE OFFER? You will have until 12:00 midnight, New York City time, on September 26, 2002 to decide whether to tender your Subordinated Notes in the exchange offer. If you cannot deliver the Subordinated Notes certificates and other documents required to make a valid tender by that time, you may be able to use a guaranteed delivery procedure, which is described later in this Offering Circular. For more information regarding the time period for tendering your Subordinated Notes, please see the section of this Offering Circular captioned "The Exchange Offer--Terms of the Exchange Offer; Period for Tendering Subordinated Notes." CAN THE EXCHANGE OFFER BE EXTENDED AND UNDER WHAT CIRCUMSTANCES? We can elect to extend the exchange offer in our sole discretion, and we expressly reserve the right to do so. During any extension of the exchange offer, all Subordinated Notes previously tendered and not withdrawn will remain subject to the exchange offer and we may accept them for exchange. For more information regarding our right to extend the exchange offer, please see the section of this Offering Circular captioned "The Exchange Offer--Terms of the Exchange Offer; Period for Tendering Subordinated Notes." HOW WILL I BE NOTIFIED IF THE EXCHANGE OFFER IS EXTENDED? If we extend the exchange offer, we will issue a press release or another form of public announcement no later than 9:00 a.m., New York City time, on the next business day after the previously scheduled expiration of the exchange offer. For more information regarding notification of exchange offer extensions, please see the section of this Offering Circular captioned "The Exchange Offer--Terms of the Exchange Offer; Period for Tendering Subordinated Notes." HOW DO I TENDER MY SUBORDINATED NOTES? To tender your Subordinated Notes, you must deliver the certificates representing your Subordinated Notes, together with a completed letter of transmittal and any other documents required by the letter of transmittal, to Wells Fargo Bank Minnesota, N.A., the exchange agent for the exchange offer, not later than the time the exchange offer expires. If your Subordinated Notes are held in street name--that is, through a broker, dealer or other nominee-the Subordinated Notes can be tendered by your nominee through The Depository Trust Company, which we refer to in this Offering Circular as 5 DTC. If you cannot provide the exchange agent with all required documents prior to the expiration of the exchange offer, you may obtain additional time to do so by submitting, prior to the expiration of the exchange offer, a Notice of Guaranteed Delivery to the exchange agent, which must be certified by a broker, bank or other fiduciary that is a member of the Securities Transfer Agent Medallion Program or another eligible institution guarantee. You must also guarantee that these items will be received by the exchange agent within three New York Stock Exchange trading days after the date the exchange agent received your Notice of Guaranteed Delivery. However, for your tender to be valid, the exchange agent must receive the missing items within that three trading-day period. For more information regarding the procedures for tendering your Subordinated Notes, please see the section of this Offering Circular captioned "The Exchange Offer--Procedures for Tendering Subordinated Notes." UNTIL WHEN CAN I WITHDRAW PREVIOUSLY TENDERED SUBORDINATED NOTES? You can withdraw previously tendered Subordinated Notes at any time until the exchange offer has expired and, if we have not agreed to accept your Subordinated Notes for exchange by December 31, 2002, you can withdraw them at any time after that date until we do accept your Subordinated Notes for exchange. For more information regarding your right to withdraw tendered Subordinated Notes, please see the section of this Offering Circular captioned "The Exchange Offer--Withdrawal of Tenders." HOW DO I WITHDRAW PREVIOUSLY TENDERED SUBORDINATED NOTES? To withdraw previously tendered Subordinated Notes, you must deliver a written notice of withdrawal, or a facsimile of one, to the exchange agent, with all information required by the notice of withdrawal completed, while you still have the right to withdraw the Subordinated Notes. For more information regarding the procedures for withdrawing tendered Subordinated Notes, please see the section of this Offering Circular captioned "The Exchange Offer--Withdrawal of Tenders." WHEN WILL I RECEIVE THE EXCHANGE NOTES IN EXCHANGE FOR MY SUBORDINATED NOTES? Subject to the satisfaction or waiver of all conditions to the exchange offer, and assuming we have not previously elected to terminate the exchange offer for any reason or no reason, in our sole discretion, we will accept for exchange all Subordinated Notes that are properly tendered and not withdrawn prior to the expiration of the exchange offer at 12:00 midnight, New York City time, on September 26, 2002. Promptly following this date, Exchange Notes will be delivered and paid in exchange for all Subordinated Notes that are properly tendered and not withdrawn. For more information regarding our obligation to issue the Exchange Notes in exchange for tendered Subordinated Notes, please see the section of this Offering Circular captioned "The Exchange Offer--Acceptance of Subordinated Notes for Exchange; Delivery of Exchange Notes." WHAT HAPPENS IF MY SUBORDINATED NOTES ARE NOT ACCEPTED FOR EXCHANGE? If we decide for any reason not to accept any Subordinated Notes for exchange, we will return the Subordinated Notes to the registered holder at our expense promptly after the expiration or termination of the exchange offer. In the case of Subordinated Notes tendered by book-entry transfer into the exchange agent's account at DTC, as described above, DTC will credit any withdrawn or unaccepted Subordinated Notes to the tendering holder's account at DTC. For more information regarding the withdrawal of tendered Subordinated Notes, please see the sections of this Offering Circular captioned "The Exchange Offer--Terms of the Exchange Offer; Period for Tendering Subordinated Notes" and "--Withdrawal of Tenders." 6 WHOM CAN I TALK TO IF I HAVE QUESTIONS ABOUT THE EXCHANGE OFFER? If you have questions regarding the information in this Offering Circular or the exchange offer generally, please contact Philadelphia Brokerage Corporation, the information agent for the exchange offer. If you have questions regarding the procedures for tendering in the exchange offer or require assistance in tendering your Subordinated Notes, please contact Wells Fargo Bank Minnesota, N.A., the exchange agent for the exchange offer. If you would like to obtain additional copies of this Offering Circular or the enclosed letter of transmittal or copies of our Second Quarter 2002 Quarterly Report on Form 10-Q, our 2001 Annual Report on Form 10-K for the fiscal year ended December 31, 2001, our 2002 Current Reports on Form 8-K or our 2002 Annual Meeting Proxy Statement, please contact the information agent or the exchange agent of this exchange offer at the addresses and telephone numbers listed on the back cover page of this Offering Circular. You can also contact Penn Treaty by writing to us at the following address: Penn Treaty American Corporation 3440 Lehigh Street Allentown, Pennsylvania 18103 Attn: Cameron B. Waite, Executive Vice President and Chief Financial Officer For more information regarding Penn Treaty, please see the section of this Offering Circular captioned "Where You Can Find More Information." 7 SUMMARY DESCRIPTION OF THE EXCHANGE NOTES AND OUR COMMON STOCK ------------------------ EXCHANGE NOTES ------------------------ ISSUER............................... Penn Treaty American Corporation DEBT SECURITIES OFFERED.............. Up to $74,750,000 aggregate principal amount at issuance of 6 1/4% Convertible Subordinated Notes due 2008 to be issued under an indenture between Penn Treaty and Wells Fargo Bank Minnesota, N.A., as trustee. MATURITY DATE........................ October 15, 2008 INTEREST............................. Interest on the Exchange Notes will accrue at the rate of 6 1/4% per annum and will be payable semi-annually on October 15 and April 15 of each year, commencing on October 15, 2002. Interest on the Exchange Notes begins accruing as of June 1, 2002. CONVERSION........................... A holder of an Exchange Note is entitled to convert it into shares of our common stock at any time, at a conversion price of $5.31 per share, subject to customary anti-dilution adjustments. If an Exchange Note is called for redemption, the holder is entitled to convert it at any time before the close of business on the last business day prior to the redemption date. An Exchange Note in respect of which a holder has delivered a change in control purchase notice exercising that holder's option to require us to purchase that holder's Exchange Note, may be converted only if the change in control purchase notice is withdrawn by a written notice of withdrawal delivered by the holder to Penn Treaty not later than the close of business on the second business day prior to the change in control purchase date, in accordance with the terms of the indenture. If an Exchange Note holder desires to convert his or her Exchange Notes into common stock and we do not have a sufficient number of shares of common stock available for such conversion, in lieu of delivering shares of common stock upon conversion of the portion of such Exchange Notes for which there is an insufficient number of shares of common stock, we will pay an amount of cash equal to the market price of the shares of common into which the Exchange Notes are then convertible. MANDATORY CONVERSION................. If the average closing share price of our common stock for any 15 consecutive trading days beginning on or after October 15, 2004 is at least 10% greater than the conversion price ($5.84) of the Exchange Notes and we have sufficient shares of common stock available for issuance, then holders of the Exchange Notes are required to convert their Exchange Notes into common stock at the conversion price set forth on the cover page of this Offering Circular ($5.31).
8 RANKING; SUBORDINATION............... The Exchange Notes will constitute general unsecured obligations of Penn Treaty, will be senior to the Subordinated Notes and will be subordinated in right of payment to all existing and future Senior Indebtedness (as defined herein) of Penn Treaty. As of August 22, 2002 the Company had approximately $1,538,000 of Senior Indebtedness outstanding. In addition, because our operations are conducted through subsidiaries, claims of holders of indebtedness of such subsidiaries, as well as claims of regulators and creditors of such subsidiaries, will have priority with respect to the assets and earnings of such subsidiaries over the claims of creditors of Penn Treaty, including the Exchange Note holders. As of June 30, 2002, the aggregate liabilities as described herein of such subsidiaries were approximately $707,773,000. The indenture will not limit the amount of additional Senior Indebtedness or other indebtedness which Penn Treaty can create, incur, assume or guarantee, nor will the indenture limit the amount of indebtedness which any subsidiary can create, incur, assume or guarantee. LISTING.............................. The Exchange Notes are not listed for trading on any national securities exchange authorized to be quoted in any inter-dealer quotation system of any national securities association and we do not intend to apply for either listing or quotation. However, certain broker/dealers make a market in our Subordinated Notes. OPTIONAL REDEMPTION.................. The Exchange Notes are redeemable, in whole or in part, at our option, at any time after October 15, 2004, at a price equal to the principal amount of the Exchange Notes plus accrued interest. See "Description of Exchange Notes--Optional Redemption by Penn Treaty." CHANGE OF CONTROL.................... In the event of a Change of Control (as defined herein) of Penn Treaty, holders of the Exchange Notes will have the right, at the holder's option, subject to the terms and conditions of the indenture, to require us to repurchase all or any part of the holder's Exchange Notes, provided that the principal amount must be $1,000 or an integral multiple of $1,000, at a price equal to 101% of the principal amount of that holder's Exchange Notes plus accrued and unpaid interest. REGISTRATION......................... The exchange offer is being extended to you in reliance on the exemption from registration provided by Section 3(a)(9) of the Securities Act and has not been registered with the SEC. The resale of the Subordinated Notes was registered by us under a registration statement on Form S-3. If you currently hold Subordinated Notes that are freely tradable, then Exchange Notes you receive in the exchange should be freely tradable.
9 ------------------------ COMMON STOCK ------------------------ ISSUER............................... Penn Treaty American Corporation EQUITY SECURITIES OFFERED............ Shares of common stock, par value $.10 per share, of Penn Treaty American Corporation, issuable upon the conversion of the Exchange Notes. LISTING.............................. The common stock is currently trading on the New York Stock Market under the symbol "PTA." We intend to apply for listing on the New York Stock Exchange of the shares of common stock issuable upon the conversion of the Exchange Notes. MARKET PRICE......................... On August 27, 2002, the closing price per share of our common stock on the New York Stock Exchange was $3.85. DIVIDENDS............................ We have never paid any dividends and have no present intention to pay any dividends for the foreseeable future. REGISTRATION......................... The exchange offer is being extended to you in reliance on the exemption from registration provided by Section 3(a)(9) of the Securities Act and has not been registered with the SEC. The resale of the Subordinated Notes and common stock issuable upon conversion was registered by us under a registration statement on Form S-3. If you currently hold Subordinated Notes that are freely tradable, then the common stock you receive upon conversion of the Exchange Notes you receive in the exchange should be freely tradable.
10 SELECTED CONSOLIDATED FINANCIAL INFORMATION The following table presents our selected consolidated financial information for each of the years ended December 31, 1997, 1998, 1999, 2000 and 2001, which have been derived from our Consolidated Financial Statements. The selected data for each of the six month periods ended June 30, 2001 and 2002, which have been derived from our unaudited Consolidated Financial Statements, reflect in the opinion of our management, all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the results for such periods. The results for the six month period ended June 30, 2002 are not necessarily indicative of results for the full year. The selected financial data should be read in conjunction with our unaudited Consolidated Financial Statements and related notes set forth in our Second Quarter 2002 Quarterly Report on Form 10-Q and our audited consolidated financial statements and related notes set forth in our Annual Report on Form 10-K for the fiscal year ended 2001, each of which is incorporated herein by reference. All amounts in the table are expressed in thousands, except per share data and ratios. Consolidated Financial Statements and "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our SEC filings are incorporated by reference in this Offering Circular. See "Incorporation of Certain Documents by Reference." 11
SIX MONTHS ENDING JUNE 30, ------------------- 1997 1998 1999 2000 2001 2001 2002 -------- -------- -------- -------- -------- -------- -------- (IN THOUSANDS, EXCEPT PER SHARE DATA AND RATIOS) STATEMENT OF OPERATIONS DATA: Revenues: Total premiums..................................... $167,680 $223,692 $292,516 $357,113 $350,391 $186,058 $168,142 Net investment income.............................. 17,009 20,376 22,619 27,408 30,613 13,910 19,707 Net realized (losses) gains........................ 1,417 9,209 5,393 652 4,367 854 14,564 Trading account loss............................... -- -- -- -- (3,428) (1,324) -- Market loss on experience account.................. -- -- -- -- -- -- (8,654) Other income....................................... 417 885 6,297 8,096 9,208 4,765 7,814 -------- -------- -------- -------- -------- -------- -------- Total revenues..................................... 186,523 254,162 326,825 393,269 382,417 202,555 201,573 -------- -------- -------- -------- -------- -------- -------- Benefits and expenses: Benefits to policyholders.......................... 123,865 154,300 200,328 243,571 239,155 132,372 142,702 Commissions........................................ 55,240 80,273 96,752 102,313 76,805 45,824 24,507 Net acquisition costs amortized (deferred)(1)...... (28,294) (46,915) (51,134) (43,192) 9,860 (3,647) 4,451 Impairment of net unamortized policy acquisition costs(2)......................................... -- -- -- -- 61,800 -- -- General and administrative expenses................ 20,614 26,069 40,736 49,973 49,282 25,591 21,585 Expense and risk charge and excise tax(3).......... -- -- -- -- 5,635 -- 8,527 Loss due to impairment of property and equipment(4)..................................... -- -- 2,799 -- -- -- -- Change in reserve for claim litigation............. -- -- -- 1,000 (250) (250) -- Interest expense................................... 4,804 4,809 5,187 5,134 4,999 2,522 2,390 -------- -------- -------- -------- -------- -------- -------- Total benefits and expenses........................ 176,229 218,536 294,668 358,799 447,286 202,412 204,162 -------- -------- -------- -------- -------- -------- -------- Income (loss) before federal income taxes and cumulative effect of accounting change............. 10,294 35,626 32,157 34,470 (64,869) 143 (2,589) Provision (benefit) for federal income taxes......... 2,695 11,578 10,837 11,720 (16,280) 49 (880) -------- -------- -------- -------- -------- -------- -------- Net income (loss) before cumulative effect of accounting change(5)............................... $ 7,599 $ 24,048 $ 21,320 $ 22,750 $(48,589) $ 94 $ (1,709) ======== ======== ======== ======== ======== ======== ======== Net income (loss).................................... $ 7,599 $ 24,048 $ 21,320 $ 22,750 $(48,589) $ 94 $ (6,860) Basic earnings per share before cumulative effect of accounting change(5)............................... $ 1.01 $ 3.17 $ 2.83 $ 3.13 $ (3.41) $ 0.01 $ (0.09) ======== ======== ======== ======== ======== ======== ======== Diluted earnings per share before cumulative effect of accounting change(5)............................ $ 0.98 $ 2.40 $ 2.64 $ 2.61 $ (3.41) $ 0.01 $ (0.09) ======== ======== ======== ======== ======== ======== ======== Basic earnings per share............................. $ 1.01 $ 3.17 $ 2.83 $ 3.13 $ (3.41) $ 0.01 $ (0.36) ======== ======== ======== ======== ======== ======== ======== Diluted earnings per share........................... $ 0.98 $ 2.40 $ 2.64 $ 2.61 $ (3.41) $ 0.01 $ (0.36) ======== ======== ======== ======== ======== ======== ======== Weighted average shares outstanding(6)............... 7,540 7,577 7,533 7,279 14,248 9,585 19,102 Weighted average diluted shares outstanding(7)....... 7,758 10,402 10,293 9,976 14,248 9,594 19,102 OTHER SUPPLEMENTAL DATA: Net operating income(8).............................. $ 6,553 $ 17,832 $ 19,600 $ 23,180 $ 6,838 $ 1,531 $ 473 Net operating income excluding goodwill amortization(9).................................... $ 6,784 $ 18,043 $ 20,259 $ 24,034 $ 7,691 $ 1,957 $ 473 GAAP RATIOS: Loss ratio........................................... 73.9% 69.0% 68.5% 68.2% 68.3% 71.1% 84.9% Expense ratio(10).................................... 31.2% 28.7% 31.3% 32.0% 59.0% 36.5% 37.5% -------- -------- -------- -------- -------- -------- -------- Total................................................ 105.1% 97.7% 99.8% 100.2% 127.3% 107.6% 122.4% ======== ======== ======== ======== ======== ======== ======== Return on average equity(11)......................... 6.0% 16.6% 13.5% 13.1% (25.5)% 0.0% 1.8% SELECTED STATUTORY DATA: Net premiums written(12)............................. $167,403 $143,806 $208,655 $130,676 $(64,689) Statutory surplus (beginning of period).............. $ 81,795 $ 67,249 $ 76,022 $ 67,070 $ 30,137 Ratio of net premiums written to statutory surplus... 2.0x 2.1x 2.7x 1.9x (2.2)x
AS DECEMBER 31, ADJUSTED ---------------------------------------------------- JUNE 30, JUNE 30, 1997 1998 1999 2000 2001 2002 2002 -------- -------- -------- -------- -------- -------- --------- BALANCE SHEET DATA: Total investments.............................. $301,787 $338,889 $373,001 $366,126 $488,591 $ 25,646 $ 25,646 Total assets................................... 465,772 580,552 697,639 856,131 941,158 960,460 960,460 Total debt..................................... 76,752 76,550 82,861 81,968 79,190 76,288 76,288 Shareholders' equity........................... 132,756 157,670 158,685 188,062 192,796 177,937 177,937 Book value per share........................... $ 17.53 $ 20.79 $ 21.81 $ 25.81 $ 10.24 $ 9.20 $ 9.20
12 NOTES TO SELECTED FINANCIAL DATA (IN THOUSANDS) (1) Effective September 10, 2001, we discontinued the sale, nationally, of all new long-term care insurance policies until our Corrective Action Plan was completed and approved by the Pennsylvania Insurance Department. As a result, there was a substantial reduction in the deferral of costs associated with new policy issuance, while we continued to amortize existing deferred acquisition costs. (2) Effective December 31, 2001, we entered a reinsurance agreement for substantially all of our long-term care insurance policies. The agreement requires us to pay an annual expense and risk charge to the reinsurer in the event we later commute the agreement. Primarily as a result of these anticipated charges, we determined to impair the value of our net unamortized policy acquisition costs by $61,800. (3) As a result of our December 31, 2001 reinsurance agreement with a foreign reinsurer, we must pay federal excise tax of 1% on all ceded premium. The 2001 expense represents excise taxes due for premiums transferred at the inception of the contract. Beginning in 2002, we also accrue an annual expense and risk charge payable to the reinsurer in the event of future commutation of the agreement. (4) During 1999, we discontinued the implementation of a new computer system, for which we had previously capitalized $2,799 of licensing, consulting and software costs. When we decided not to use this system, its value became fully impaired. (5) Excludes ($5,151) impairment charge of goodwill from the adoption of SFAS Nos. 141 and 142, which was recorded as a cumulative effect from accounting change. In 2002, in accordance with SFAS No. 142, we determined that the goodwill associated with our insurance subsidiaries was impaired and recognized an impairment loss of $5,151, which we recorded as a cumulative effect of change in accounting principle. In 2002 we ceased the amortization of goodwill expense. (6) On May 25, 2001, we issued approximately 11,547 new common shares of our common stock, for net proceeds of $25,726, through an investor rights offering. We also issued approximately 510 new shares in 2002 through a direct equity placement. (7) Diluted shares outstanding includes shares issuable upon the conversion of our existing convertible debt and exercise of options outstanding, except in 2001 and for the period ending June 30, 2002, for which the inclusion of such shares would be anti-dilutive. The inclusion of converted shares from the Exchange Notes is expected to produce significant dilution in earnings per share in future periods. (8) Net operating income excludes the effect, net of taxes, of (1) net realized gains and losses from the sale of our investments in cash and qualified securities in all years, the market value adjustment of our experience account, and trading account losses, (2) our 1999 property and equipment impairment charge, (3) our 2001 DAC impairment charge and excise tax expense and (4) our tax valuation allowance in 2001. Net operating income is not calculated in accordance with GAAP. It should not be considered in isolation or as a substitute for net income calculated in accordance with GAAP. Different companies calculate net operating income differently and therefore net operating income as presented for us may not be comparable to net operating income reported by other companies. (9) Net operating income excluding goodwill amortization excludes the effect, net of taxes, of amortization of goodwill. This amount is not calculated in accordance with GAAP. It should not be considered in isolation or as a substitute for net income calculated in accordance with GAAP. Different companies calculate net operating income differently and therefore net operating income as presented for us may not be comparable to net operating income reported by other companies. 13 (10) Expense ratios exclude the impact of reduced commissions and increased general and administrative expenses resulting from the 1999 and 2000 acquisitions of our agency subsidiaries. (11) Return on average equity is calculated by dividing net income by the average of equity at the beginning and end of each period. (12) Under statutory accounting principles, ceded reserves are accounted for as offsetting negative benefits and negative premium. Our 2001, 2000 and 1999 premium is reduced by $408,093, $225,741 and $90,230, respectively from reinsurance transactions. 14 RISK FACTORS BEFORE DECIDING TO EXCHANGE YOUR SECURITIES YOU SHOULD CONSIDER CAREFULLY THE RISKS DESCRIBED IN THIS OFFERING CIRCULAR, AS WELL AS OTHER INFORMATION WE INCLUDE OR INCORPORATE BY REFERENCE IN THIS OFFERING CIRCULAR AND THE ADDITIONAL INFORMATION IN THE REPORTS THAT WE FILE WITH THE SEC. THE RISKS AND UNCERTAINTIES DESCRIBED BELOW ARE NOT THE ONLY ONES WE FACE. ADDITIONAL RISKS AND UNCERTAINTIES THAT WE DO NOT PRESENTLY KNOW ABOUT, THAT WE CURRENTLY BELIEVE ARE IMMATERIAL OR WHICH ARE SIMILAR TO THOSE FACED BY OTHER COMPANIES IN OUR INDUSTRY OR BUSINESS IN GENERAL, MAY ALSO ADVERSELY IMPACT OUR BUSINESS. IF ANY OF THE RISKS DESCRIBED ACTUALLY OCCUR, OUR BUSINESS, FINANCIAL CONDITION OR RESULTS OF FUTURE OPERATIONS COULD BE MATERIALLY AND ADVERSELY AFFECTED. IN SUCH CASE, THE PRICE OF OUR SECURITIES COULD DECLINE, AND YOU MAY LOSE ALL OR PART OF YOUR INVESTMENT. RISKS PARTICULAR TO PENN TREATY WE COULD SUFFER A LOSS IF OUR PREMIUM RATES ARE NOT ADEQUATE AND WE MAY BE REQUIRED TO REFUND OR REDUCE PREMIUMS IF OUR PREMIUM RATES ARE DETERMINED TO BE TOO HIGH. We set our premiums based on facts and circumstances known at the time and on assumptions about numerous variables, including the actuarial probability of a policyholder incurring a claim, the severity and duration of the claim and the mortality rate of our policyholder base, the persistency or renewal of our policies in-force and the interest rate which we expect to earn on the investment of premiums. In setting premiums, we consider historical claims information, industry statistics and other factors. If our actual experience proves to be less favorable than we assumed and we are unable to raise our premium rates, our net income may decrease. We generally cannot raise our premiums in any state unless we first obtain the approval of the insurance regulator in that state. We have filed and are preparing to file rate increases on the majority of our products. We cannot assure you that we will be able to obtain approval for premium rate increases from existing requests or requests filed in the future. If we are unable to raise our premium rates because we fail to obtain approval for a rate increase in one or more states, our net income may decrease. Our reinsurance coverage with Centre Solutions (Bermuda) Limited may also be reduced if we fail to obtain required rate increases. If we are successful in obtaining regulatory approval to raise premium rates, the increased premiums may reduce our sales and cause policyholders to let their policies lapse. Increased lapsation would reduce our premium income and would require us to expense fully the deferred policy costs relating to lapsed policies in the period in which those policies lapse, reducing our net income in that period. Insurance regulators also require us to maintain certain minimum statutory loss ratios on the policies that we sell. We must pay out, on average, a certain minimum percentage of premiums as benefits to policyholders. State regulations also mandate the manner in which insurance companies may compute loss ratios and the manner in which compliance is measured and enforced. If our policies are not in compliance with state mandated minimum loss ratios, state regulators may require us to reduce or refund premiums. WE MAY BE UNABLE TO SERVICE AND REPAY OUR DEBT OBLIGATIONS UNDER OUR OUTSTANDING SUBORDINATED NOTES OR THE EXCHANGE NOTES IF OUR SUBSIDIARIES CANNOT PAY SUFFICIENT DIVIDENDS OR MAKE OTHER CASH PAYMENTS TO US. We are an insurance holding company whose assets principally consist of the capital stock of our operating subsidiaries. Our ability to redeem, repurchase or make interest payments on our outstanding debt is dependent upon the ability of our subsidiaries to pay cash dividends or make other cash payments to us. Our insurance subsidiaries are subject to state laws and regulations and an order of the Pennsylvania Insurance Department, which restrict their ability to pay dividends and make other 15 payments to us. If a sufficient amount of the Subordinated Notes are not exchanged for Exchange Notes, we cannot assure you that we will be able to service and repay our Subordinated Notes through their maturity in December 2003. We do not expect our subsidiaries to have sufficient dividend capability to enable us to repay all of our currently outstanding 6 1/4% Convertible Subordinated Notes of $74,750,000 due December 2003. OUR RESERVES FOR FUTURE POLICY BENEFITS AND CLAIMS MAY BE INADEQUATE, REQUIRING US TO INCREASE LIABILITIES AND RESULTING IN REDUCED NET INCOME AND BOOK VALUE. We calculate and maintain reserves for the estimated future payment of claims to our policyholders using the same actuarial assumptions that we use to set our premiums. Establishing reserves is an uncertain process, and we cannot assure you that actual claims expense will not materially exceed our reserves and have a material adverse effect on our results of operations and financial condition. Our net income depends significantly upon the extent to which our actual claims experience is consistent with the assumptions we used in setting our reserves and pricing our policies. If our assumptions with respect to future claims are incorrect, and our reserves are insufficient to cover our actual losses and expenses, we would suffer an increase in liabilities resulting in reduced net income. Claims experience can differ from our expectations due to numerous factors, including mortality rates, duration of care and type of care utilized. Due to the inherent uncertainty in establishing reserves, it has been necessary in the past for us to increase the estimated future liabilities reflected in our reserves for claims and policy expenses. In 1999, we added approximately $4.1 million to our claim reserves for 1998 and prior claim incurrals; in 2000, we added approximately $6.6 million to our claim reserves for 1999 and prior claim incurrals; and in 2001, we added approximately $8.8 million to our claim reserves for 2000 and prior claim incurrals. Our additions to prior year incurrals in 2001 resulted from a continuance study performed by our consulting actuary. We also increased claim reserves in 2001 by $1.6 million as a result of utilizing a lower interest rate for the purpose of discounting our future liabilities. Over time, it may continue to be necessary for us to increase our reserves. New insurance products, such as our Independent Living, Assisted Living and Personal Freedom policies, entail a greater risk of unanticipated claims than products, which have more extensive historical claims data, such as long-term nursing home and home health care insurance. We believe that individuals may be more inclined to use home health care than nursing home care, which is generally only considered after all other possibilities have been exhausted. Accordingly, we believe that home health care policies entail a greater risk of wide variations in claims experience than nursing home insurance. Because we have relatively limited claims experience with these products, we may incur higher than expected losses and expenses and may be required to adjust our reserve levels with respect to these products. WE MAY RECOGNIZE A DISPROPORTIONATE AMOUNT OF POLICY COSTS IN ONE FINANCIAL REPORTING PERIOD IF OUR ESTIMATES WITH RESPECT TO THE DURATION OF OUR POLICIES ARE INACCURATE. We recognize policy costs over the life of each policy we sell. These costs include all expenses that are directly related to, and vary with, the acquisition of the policy, including commission, underwriting and other policy issue expenses. We employ the same actuarial assumptions used to compute premiums and reserves to determine the period over which to amortize policy costs. Upon the occurrence of an unanticipated termination of a policy, we must fully expense deferred acquisition costs associated with the terminated policy. If actual experience adversely differs from our actuarial assumptions or if policies are terminated early by the insured or by us, we would recognize a disproportionate amount of policy expenses at one time, which would negatively affect our net income for that period. 16 Annually, we determine if the future profitability of current in-force policies is sufficient to support our remaining deferred acquisition cost amount. This determination may include assumptions regarding the current need for and future implementation of premium rate increases. We believe that we need certain rate increases in order to generate sufficient profitability to offset our current deferred acquisition costs. In the event that profits are considered insufficient to fully support the deferred acquisition costs, or if we are unable to obtain anticipated premium rate increases, we would impair the value of our deferred acquisition expense asset and would recognize a disproportionate amount of policy expenses at one time, which would negatively affect our net income for that period. WE MAY NOT BE ABLE TO COMPETE SUCCESSFULLY WITH INSURERS WHO HAVE GREATER FINANCIAL RESOURCES OR HIGHER FINANCIAL STRENGTH RATINGS. We sell our products in highly competitive markets. We compete with large national insurers, smaller regional insurers and specialty insurers. Many insurers are larger and have greater resources and higher financial strength ratings than we do and have not experienced the regulatory problems we have faced. In addition, we are subject to competition from insurers with broader product lines. We also may be subject, from time to time, to new competition resulting from changes in Medicare benefits, as well as from additional private insurance carriers introducing products similar to those offered by us. Also, the removal of regulatory barriers (including as a result of the Gramm-Leach-Bliley Financial Services Modernization Act of 1999) might result in new competitors entering the long-term care insurance business. These new competitors may include diversified financial services companies that have greater financial resources than we do and that have other competitive advantages, such as large customer bases and extensive branch networks for distribution. WE MAY SUFFER REDUCED INCOME IF GOVERNMENTAL AUTHORITIES CHANGE THE REGULATIONS APPLICABLE TO THE INSURANCE INDUSTRY. We are licensed to do business as an insurance company in all states and are subject to comprehensive regulation by the insurance regulatory authorities of those states. The primary purpose of such regulation is to protect policyholders, not shareholders. The laws of the various states establish insurance departments with broad powers with respect to such things as licensing companies to transact business, licensing agents, prescribing accounting principles and practices, admitting statutory assets, mandating certain insurance benefits, regulating premium rates, approving policy forms, regulating unfair trade, market conduct and claims practices, establishing statutory reserve requirements and solvency standards, limiting dividends, restricting certain transactions between affiliates and regulating the types, amounts and statutory valuation of investments. State insurance regulators and the National Association of Insurance Commissioners ("NAIC") continually reexamine existing laws and regulations, and may impose changes in the future that materially adversely affect our business, results of operations and financial condition. In particular, rate rollback legislation and legislation to control premiums, policy terminations and other policy terms may affect the amount we may charge for insurance premiums. In addition, some state legislatures have discussed and implemented proposals to limit rate increases on long-term care insurance products. Because insurance premiums are our primary source of income, our net income may be negatively affected by any of these changes. Many states are now disallowing coverage exclusions incurred as a result of war or terrorist acts. We have proactively removed these exclusions in some states, but cannot be certain that our financial results would not be adversely affected by such acts. Proposals currently pending in the U.S. Congress may affect our income. These include the implementation of minimum consumer protection standards for inclusion in all long-term care policies, including: guaranteed premium rates; protection against inflation; limitations on waiting periods for pre-existing conditions; setting standards for sales practices for long-term care insurance; and guaranteed consumer access to information about insurers, including lapse and replacement rates for 17 policies and the percentage of claims denied. Enactment of any of these proposals could adversely affect our net income. In addition, recent federal financial services legislation requires states to adopt laws for the protection of consumer privacy. Compliance with various existing and pending privacy requirements also could result in significant additional costs to us. WE MAY NOT BE ABLE TO COMPETE SUCCESSFULLY IF WE CANNOT RECRUIT AND RETAIN INSURANCE AGENTS. We distribute our products principally through independent agents whom we recruit and train to market and sell our products. We also engage marketing general agents from time to time to recruit independent agents and develop networks of agents in various states. We compete vigorously with other insurance companies for productive independent agents, primarily on the basis of our financial position, support services, compensation and product features. We may not be able to continue to attract and retain independent agents to sell our products, especially if we are unable to obtain permission to recommence sales in a larger number of states, restore our capital and surplus and improve our financial strength ratings. Our business and ability to compete would suffer if we are unable to recruit and retain insurance agents and if we lose the services provided by our marketing agents. OUR BUSINESS IS CONCENTRATED IN A FEW STATES. Historically, our business has been concentrated in a few states. Over the past four fiscal years, approximately half of our premiums were from sales of policies in California, Florida and Pennsylvania. Increased competition, changes in economic conditions, legislation or regulations, rating agency downgrades, statutory surplus deficiencies or the loss of our ability to write business due to regulatory intervention in any of these states could significantly affect our results of operations or prospects. In 2001, we voluntarily ceased new sales in these states as a result of our subsidiary's statutory surplus position. We recommenced sales in Pennsylvania, Florida and 27 other states since February 2002 and petitioned California, where sales have historically accounted for approximately 14% of our business, for reentry. Until the necessary approvals are received, we are unable to sell new policies in California and in 20 other states. As a result of not selling policies in these states, or if we fail to recommence sales in other states, our financial condition may be materially adversely affected. DECLINES IN THE VALUE OR THE YIELDS ON OUR INVESTMENT PORTFOLIO AND SIGNIFICANT DEFAULTS IN OUR INVESTMENT PORTFOLIO MAY ADVERSELY AFFECT OUR NET INCOME. Income from our investment portfolio is a significant element of our overall net income. If our investments do not perform well, we would have reduced net income and could suffer a net loss. We are susceptible to changes in market rates when cash flows from maturing investments are reinvested at prevailing market rates. Accordingly, a prolonged decrease in interest rates or in equity security prices or an increase in defaults on our investments could adversely affect our net income. Effective December 31, 2001, we entered a reinsurance agreement to reinsure, on a quota share basis, substantially all of our long-term care insurance policies in-force. The transaction resulted in the transfer of debt and equity securities of approximately $563,000,000 to the reinsurer and a funds withheld balance of $56,000,000. The agreement provides us the opportunity to commute on or after December 31, 2007. The reinsurer will maintain a notional experience account, which reflects the initial premium paid, future premiums collected net of claims, expenses and accumulated investment earnings. The notional experience account balance will receive an investment credit based upon the total return of a series of benchmark indices and hedges, which are designed to closely match the duration of reserve liabilities. Periodic changes in the market values of the benchmark indices and hedges will be recorded in our financial statements as investment gains or losses in the period in which they occur. As a result, we will likely experience significant volatility in our future financial statements. 18 In addition, we depend in part on income from our investment portfolio to fund our reserves for future policy claims and benefits. In establishing the level of our reserves, we make assumptions about the performance of our investments. If our investment income or the capital gains in our portfolio are lower than expected, we may have to increase our reserves, which could adversely affect our net income. OUR REINSURANCE AGREEMENT IS SUBJECT TO AN AGGREGATE LIMIT OF LIABILITY, WHICH IS A FUNCTION OF CERTAIN FACTORS AND WHICH MAY BE REDUCED AS A RESULT OF OUR INABILITY TO OBTAIN CERTAIN RATE INCREASES. Our reinsurance agreement with Centre Solutions (Bermuda) Limited, effective December 31, 2001, is subject to certain coverage limitations and an aggregate limit of liability, which is a function of certain factors and which may be reduced as a result of our inability to obtain rate increases. This limit of liability is subject to certain events such as material breach of the covenants of the agreement, risk of changes in regulation or law and our inability to achieve rate increases deemed necessary by the provisions of the agreement. In the event that the reinsurer's limit of liability is reduced, our financial condition and statutory surplus could be materially adversely affected. All references to this reinsurance agreement or to Centre Solutions (Bermuda) Limited throughout this filing are intended to contain this statement of risk. OUR REINSURERS MAY NOT SATISFY THEIR OBLIGATIONS TO US. We obtain reinsurance from unaffiliated reinsurers on most of our policies to increase the number and size of the policies we may underwrite and reduce the risk to which we are exposed. Although reinsurance makes the reinsurer liable to us to the extent the risk is transferred to the reinsurer, it does not relieve us of our liability to our policyholders. Accordingly, we bear credit risk with respect to our reinsurers. We cannot assure you that our reinsurers will pay all of our reinsurance claims or that they will pay our reinsurance claims on a timely basis. Our Corrective Action Plan, as approved by the Pennsylvania Insurance Department, will result in a strengthening of our statutory reserves. A component of the Corrective Action Plan is a reinsurance agreement. If the reinsurer does not honor our agreement, if the limit of liability is reduced as a result of limitations and/or conditions contained in the reinsurance agreement, or if the agreement is cancelled, our statutory surplus would be materially adversely affected. WE MAY NOT COMMUTE OUR REINSURANCE TRANSACTION ON DECEMBER 31, 2007, WHICH MAY CAUSE US TO INCUR INCREASED EXPENSES AND WOULD PERMIT THE REINSURER TO ACQUIRE PREFERRED STOCK POTENTIALLY CONVERTIBLE INTO A SUBSTANTIAL ADDITIONAL NUMBER OF SHARES OF COMMON STOCK; BREACH OF THE REINSURANCE AGREEMENT COULD ALSO RESULT IN SIGNIFICANT COSTS. Our reinsurance agreement contains commutation provisions and allows us to recapture the reserve liabilities and the current experience account balance as of December 31, 2007 or on December 31 of any year thereafter. If we choose not to or are unable to commute the agreement as planned, our financial results would likely suffer a materially adverse impact due to an escalation of the charges required to be paid to the reinsurer after December 31, 2007. Additionally, our reinsurance agreement contains covenants and conditions that, if breached, could result in a significant loss, requiring a payment of $2.5 million per quarter from the period of the breach through December 31, 2007. Any breach of the reinsurance agreement may also result in the immediate recapture of the reinsured business, which would have a material adverse effect on our subsidiaries' statutory surplus. In connection with the reinsurance agreement, we have granted the reinsurer four tranches of warrants to acquire convertible preferred stock. Three tranches of these warrants are currently exercisable for convertible preferred stock that would represent approximately 15 percent of our outstanding common stock after conversion. In the 19 event we do not commute the agreements, an additional tranche of warrants will become exercisable for convertible preferred stock that, if converted, would represent approximately an additional 20 percent of our common stock outstanding after conversion, for a total of approximately 35% of the outstanding common stock after conversion of all four tranches of warrants. WE MAY BE AFFECTED BY OUR FINANCIAL STRENGTH RATINGS DUE TO HIGHLY COMPETITIVE MARKETS. Our ability to expand and to attract new business is affected by the financial strength ratings assigned to our insurance company subsidiaries by A.M. Best Company, Inc. and Standard & Poor's Insurance Rating Services, two independent insurance industry rating agencies. A.M. Best's ratings for the industry range from "A++ (superior)" to "F (in liquidation)." Standard & Poor's ratings range from "AAA (extremely strong)" to "CC (extremely weak)." Some companies are unrated. A.M. Best and Standard & Poor's insurance company ratings are based upon factors of concern to policyholders and insurance agents and are not directed toward the protection of investors. Our subsidiaries that are rated have A.M. Best ratings of "B- (fair)" and Standard & Poor's ratings of "B- (weak)." Certain distributors will not sell our group products unless we have a financial strength rating of at least an "A-." The inability of our subsidiaries to obtain higher A.M. Best or Standard & Poor's ratings will adversely affect the sales of our products if customers favor policies of competitors with better ratings. In addition, the recent downgrades and further downgrades in our ratings may cause our policyholders to allow their existing policies to lapse. Increased lapsation would reduce our premium income and would also cause us to expense fully the deferred policy costs relating to lapsed policies in the period in which those policies lapsed, thereby reducing our capital and surplus. Downgrades to our ratings may also lead some independent agents to sell fewer of our products or to cease selling our policies altogether. WE MAY NOT HAVE ENOUGH CAPITAL AND SURPLUS TO CONTINUE TO WRITE BUSINESS. Our continued ability to write business is dependent upon our ability to continue to fund expansion of our markets and our network of agents while at the same time maintaining required minimum statutory levels of capital and surplus to support such business writing. Our new business writing typically results in net losses on a statutory basis during the early years of a policy, due primarily to differences in accounting practices between statutory accounting principles and generally accepted accounting principles. The resultant reduction in statutory surplus, or surplus strain, can limit our ability to generate new business due to statutory restrictions on premium to surplus ratios and required statutory surplus parameters. If we cannot generate sufficient statutory surplus to maintain minimum statutory requirements through increased statutory profitability, reinsurance or other capital generating alternatives, we will be limited in our ability to generate additional premium from new business writing, which would result in lower net income under generally accepted accounting principles, or, in the event that our statutory surplus is not sufficient to meet minimum state premium to surplus and risk based capital ratios, we could be prohibited from generating additional premium revenue. Furthermore, the insurance industry may undergo change in the future and, accordingly, new products and methods of service may also be introduced. In order to keep pace with any new developments, we may need to expend significant capital to offer new products and to train our agents and employees to sell and administer these products and services. We may also need to make significant capital expenditures for computer systems and other technology needed to market and administer our policies. We may not be successful in developing new products and we may not have the funds necessary to make capital expenditures. Any significant capital expenditures, or the failure to make necessary investments, may have a material adverse effect on us. 20 LITIGATION MAY RESULT IN FINANCIAL LOSSES, HARM TO OUR REPUTATION AND DIVERSION OF MANAGEMENT RESOURCES. We are regularly involved in litigation, both as a defendant and as a plaintiff. The litigation naming us as a defendant ordinarily involves our activities as an insurer. In recent years, many insurance companies have been named as defendants in class actions relating to market conduct or sales practices, and other long-term care insurance companies have been sued when they sought to implement premium rate increases. We cannot assure you that we will not be named as a defendant in a similar case. Current and future litigation may result in financial losses, harm our reputation and require the dedication of significant management resources. The Company and certain of its key executive officers are defendants in consolidated actions that were instituted on April 17, 2001 in the United States District Court for the Eastern District of Pennsylvania by shareholders of the Company, on their own behalf and on behalf of a putative class of similarly situated shareholders who purchased shares of the Company's common stock between July 23, 2000 through and including March 29, 2001. The consolidated amended class action complaint seeks damages in an unspecified amount for losses allegedly incurred as a result of misstatements and omissions allegedly contained in the Company's periodic reports filed with the SEC, certain press releases issued by them, and in other statements made by its officials. The alleged misstatements and omissions relate, among other matters, to the statutory capital and surplus position of the Company's largest subsidiary, Penn Treaty Network America Insurance Company. On December 7, 2001, the defendants filed a motion to dismiss the complaint, which was denied on May 15, 2002. We believe that the complaint is without merit, and we will continue to vigorously defend the matter. On July 1, 2002, the defendants filed an answer to the complaint, denying all liability. Plaintiffs filed a motion for class certification on August 15, 2002, which is currently pending. WE ARE DEPENDENT UPON KEY PERSONNEL AND OUR OPERATIONS COULD BE AFFECTED BY THE LOSS OF THEIR SERVICES. Our success largely depends upon the efforts of our senior operating management. The loss of the services of one or more of our key personnel could have a material adverse effect on our operations. CERTAIN ANTI-TAKEOVER PROVISIONS IN STATE LAW AND OUR ARTICLES OF INCORPORATION MAY MAKE IT MORE DIFFICULT TO ACQUIRE US AND THUS MAY DEPRESS THE MARKET PRICE OF OUR COMMON STOCK. Our Restated and Amended Articles of Incorporation, the Pennsylvania Business Corporation Law of 1988, as amended, and the insurance laws of states in which our insurance subsidiaries do business contain certain provisions which could delay or impede the removal of incumbent directors and could make a merger, tender offer or proxy contest involving us difficult, even if such a transaction would be beneficial to the interests of our shareholders, or discourage a third party from attempting to acquire control of us. In particular, the classification of our board of directors could have the effect of delaying a change in control. Insurance laws and regulations of Pennsylvania and New York prohibit any person from acquiring control of us, and thus indirect control of our insurance subsidiaries, without the prior approval of the insurance commissioners of those states. REDUCED LIQUIDITY AND PRICE VOLATILITY COULD RESULT IN A LOSS TO INVESTORS. Although our common stock is listed on the New York Stock Exchange, there can be no assurance as to the liquidity of investments in our common stock or as to the price investors may realize upon the sale of our common stock. These prices are determined in the marketplace and may be influenced by many factors, including the liquidity of the market for the common stock, the market price of the common stock, investor perception and general economic and market conditions. If the price of our common stock decreases, our investors could suffer a loss on their investments. 21 RISKS RELATING TO THE OFFERING THE EXCHANGE NOTES WILL BE SUBORDINATED TO OUR SENIOR INDEBTEDNESS, AS THIS TERM IS DEFINED IN THE EXCHANGE NOTE INDENTURE. The Exchange Notes will be subordinated to all Senior Indebtedness, as this term is defined in the Exchange Note indenture, but will be senior to the Subordinated Notes. At August 22, 2002, we had approximately $1,538,000 of indebtedness outstanding that will rank senior to the Exchange Notes. In addition, because our operations are conducted through subsidiaries, claims of holders of indebtedness of such subsidiaries, as well as claims of regulators and creditors of such subsidiaries, will have priority with respect to the assets and earnings of such subsidiaries over the claims of creditors of Penn Treaty, including the Exchange Note holders. As of June 30, 2002, the aggregate liabilities as described herein of such subsidiaries were approximately $707,773,000. The indenture for the Exchange Notes will not limit the amount of Senior Indebtedness or other indebtedness we or any of our subsidiaries can create, incur, assume or guarantee. IF THE MARKET PRICE OF OUR COMMON STOCK REMAINS LOWER THAN THE CONVERSION PRICE OF THE EXCHANGE NOTES, THE CONVERSION OF YOUR EXCHANGE NOTES MAY NOT BE PRACTICABLE OR PROFITABLE. The initial conversion price for the Exchange Notes is $5.31 per share of common stock. As of August 27, 2002, the closing price per share for our common stock on the New York Stock Exchange was $3.85. If the market price for our common stock remains lower than the conversion price for the Exchange Notes, the conversion of your Exchange Notes may not be practicable or profitable because you would be paying more for our shares of common stock than the market price for these shares. THE CONVERSION OF THE EXCHANGE NOTES ISSUED IN THE EXCHANGE OFFER, TOGETHER WITH OUR ANTICIPATED FUTURE CAPITAL RAISING ACTIVITIES AND THE EXERCISE OF OUR OUTSTANDING WARRANTS AND STOCK OPTIONS, WILL RESULT IN SIGNIFICANT DILUTION TO OUR EXISTING COMMON STOCK HOLDERS. Assuming that a large portion of our Subordinated Note holders exchange their Subordinated Notes for Exchange Notes, a significant amount of our common stock will be issuable upon conversion of the Exchange Notes. In addition we have granted warrants to Centre Solutions (Bermuda) Limited, which are exercisable for our Convertible Preferred Stock convertible into approximately 35% of the outstanding common stock after conversion, and we anticipate that in order to adequately finance the growth of our business, we may offer and sell our shares of common stock in private or public offerings. The occurrence of any or all of the foregoing will result in significant dilution to our existing common stock holders. YOU MAY NOT BE ABLE TO SELL THE EXCHANGE NOTES WHEN YOU WANT AND, IF YOU DO, YOU MAY NOT BE ABLE TO RECEIVE THE PRICE YOU WANT. As the exchange offer will be the first issuance of the Exchange Notes, there has previously been no trading market for the Exchange Notes you will receive in the exchange offer. The Exchange Notes will not be listed for trading on any national securities exchange or authorized to be quoted in any inter-dealer quotation system of any national securities association and we do not intend to apply for either listing or quotation. We do not anticipate that an active market for Exchange Notes will develop. Moreover, the liquidity of any market for the Exchange Notes will also depend upon the number of holders of the Exchange Notes, our financial performance, the market for similar securities and the interest of securities dealers in making a market in the Exchange Notes. Therefore, you may not be able to sell the Exchange Notes when you want and, if you are, you may not be able to receive the price you want. 22 WE MAY NOT RECEIVE THE APPROVAL OF OUR SHAREHOLDERS TO AMEND OUR ARTICLES OF INCORPORATION TO INCREASE THE NUMBER OF AUTHORIZED SHARES OF COMMON STOCK TO AN AMOUNT SUFFICIENT TO PERMIT THE CONVERSION OF ALL SUCH EXCHANGE NOTES. We are currently obligated to issue common stock upon the exercise of all outstanding options granted by us pursuant to our stock option plans and the conversion of our Convertible Preferred Stock issuable upon exercise of the four tranches of warrants granted to Centre Solutions (Bermuda) Limited. Following the issuance of the Exchange Notes, we will be obligated to issue common stock upon the conversion of the Exchange Notes. We currently do not have enough shares available for issuance to satisfy all of these obligations. We plan to seek the approval of our shareholders to amend our articles of incorporation to increase the number of authorized shares of common stock to an amount sufficient to permit the conversion of all such Exchange Notes; to satisfy our obligation to issue shares of common stock upon the exercise of all outstanding options granted by us pursuant to our stock option plans and the conversion of our Convertible Preferred Stock issuable upon exercise of the four tranches of warrants granted to Centre Solutions; and to offer shares of our common stock in the future for capital raising purposes. Our shareholders may not improve an increase in the number of authorized shares of common stock to an amount sufficient to cover the conversion of all of the Exchange Notes as well as the exercise of the options granted by us pursuant to our stock option plans and conversion of our Convertible Preferred Stock issuable upon exercise of the four tranches of warrants granted to Centre Solutions. In the event that our shareholders do not approve an appropriate increase in the number of shares of our common stock authorized for issuance, we may be required to pay Exchange Note holders who desire to convert their Exchange Notes an amount in cash equal to the market price of the shares of common stock into which the Exchange Notes are then convertible. Our financial resources may not be sufficient to pay cash to holders of Exchange Notes in lieu of delivering common stock. We can make no assurance that sufficient funds will be available when necessary to make any required cash payments in lieu of delivering common stock to Exchange Note holders seeking to convert their Exchange Notes into shares of common stock. IF YOU HAVE CLAIMS AGAINST PENN TREATY RESULTING FROM YOUR ACQUISITION OR OWNERSHIP OF SUBORDINATED NOTES, YOU WILL GIVE UP THOSE CLAIMS IF YOU EXCHANGE YOUR SUBORDINATED NOTES. By tendering your Subordinated Notes in the exchange offer, you will be deemed to have waived any and all rights to receive any payments, including, without limitation, interest payments with respect to the Subordinated Notes, and you agree that Penn Treaty's obligations to you under the Exchange Note indenture and the Exchange Notes described in this Offering Circular supersede and replace in their entirety Penn Treaty's obligations to you under the Subordinated Note indenture, the Subordinated Notes and any other documents executed in connection therewith. It is possible that the consideration you receive in the exchange offer will have a value less than the value of the rights you are relinquishing. Moreover, holders who do not tender their Subordinated Notes for exchange and former holders who have already sold their Subordinated Notes will continue to have the right to assert their rights under the Subordinated Notes against Penn Treaty. YOU WILL LOSE YOUR RIGHT TO RECEIVE INTEREST PAYMENTS ON THE EXCHANGE NOTES YOU RECEIVE IN EXCHANGE FOR YOUR SUBORDINATED NOTES IF THE MANDATORY CONVERSION FEATURE OF THE EXCHANGE NOTES IS TRIGGERED. If the average closing share price of our common stock for any 15 consecutive trading days beginning on or after October 15, 2004 is at least 10% greater than the conversion price ($5.84) of the Exchange Notes and we have a sufficient number of shares of our common stock available for issuance to cover the conversion, then holders of the Exchange Notes will be required to convert their Exchange Notes into common stock at the conversion price of $5.31. In the event that the mandatory conversion feature is triggered prior to the maturity of the Exchange Notes, holders of the Exchange Notes will be 23 required to convert their Exchanges Notes into common stock and will lose their right to receive subsequent interest payments on the Exchange Notes. YOU MAY RECOGNIZE TAXABLE GAIN OR LOSS ON YOUR EXCHANGE OF SUBORDINATED NOTES FOR EXCHANGE NOTES. The Exchange Notes will mature in six years and the law is unclear as to whether a debt instrument with a six-year maturity is considered a "security" for United States Federal Income Tax purposes. If the Exchange Notes are not considered "securities," then the exchange will not qualify as a capitilization under Section 368(a)(1)(E) of the Internal Revenue Code. If the exchange does not qualify as a recapitalization, so long as the 6 1/4% interest rate on the Exchange Notes is at least equal to the applicable federal rate for notes of this term, you will (i) recognize gain or loss on the exchange in the amount of the difference between your tax basis for our Subordinated Notes and the face amount of the Exchange Notes, (ii) have a tax basis in the Exchange Notes equal to the face amount of the Exchange Notes at the time of the exchange, and (iii) have a holding period in the Exchange Notes that begins on the date of the exchange. 24 USE OF PROCEEDS We will not receive any cash proceeds from the exchange offer. All Subordinated Notes that are properly tendered and not withdrawn in the exchange offer will be retired and cancelled. MARKET FOR OUR COMMON STOCK Our common stock is traded on the New York Stock Exchange under the symbol "PTA." The following table sets forth, for the calendar periods indicated, the high and low sale prices per share of our common stock as reported on the New York Stock Exchange:
HIGH LOW -------- -------- FISCAL YEAR ENDED DECEMBER 31, 2000 First Quarter........................................... $18.000 $12.250 Second Quarter.......................................... 19.938 13.125 Third Quarter........................................... 18.813 14.875 Fourth Quarter.......................................... 21.563 15.625 FISCAL YEAR ENDED DECEMBER 31, 2001 First Quarter........................................... 19.750 8.800 Second Quarter.......................................... 9.700 2.150 Third Quarter........................................... 4.290 2.100 Fourth Quarter.......................................... 6.420 2.700 FISCAL YEAR ENDING DECEMBER 31, 2002 First Quarter........................................... 6.710 4.100 Second Quarter.......................................... 6.850 3.750 Third Quarter (through August 27, 2002)................. 4.780 3.670
DIVIDEND POLICY We have not paid and do not expect to declare or pay any dividends on our common stock in the foreseeable future. 25 CAPITALIZATION (amounts in thousands of dollars) The following table sets forth the capitalization of the Company as of June 30, 2002, and as adjusted, to reflect the exchange of the Subordinated and Exchange Notes and the application of the estimated net proceeds therefrom:
JUNE 30, 2002 ---------------------- ACTUAL AS ADJUSTED -------- ----------- Debt: Mortgage loan............................................... $ 1,538 $ 1,538 6 1/4% Convertible Subordinated Notes Due 2003 and 2008, respectively.............................................. 74,750 74,750 -------- -------- Total debt.............................................. $ 76,288 $ 76,288 Shareholders' equity: Preferred Stock, par value $1.00; 5,000 shares authorized; none outstanding.......................................... $ -- $ -- Common Stock, par value $.10; 40,000 shares authorized; 20,261 shares issued and outstanding(1)................... 2,026 2,026 Additional paid-in capital.................................. 96,739 96,739 Other comprehensive income, net of deferred taxes........... 596 596 Retained earnings........................................... 85,281 85,281 Less 915 shares of Common Stock in treasury, at cost........ (6,705) (6,705) -------- -------- Total shareholders' equity.............................. $177,937 $177,937 Total capitalization........................................ $254,225 $254,225
- ------------------------ (1) Does not include shares of Common Stock reserved for issuance under the Company's Employee Incentive Stock Option Plan and under the Company's Agent Stock Option Plan. 26 RATIO OF EARNINGS TO FIXED CHARGES (THOUSANDS OF DOLLARS)
SIX MONTHS ENDING JUNE 30, --------------------------- 1997 1998 1999 2000 2001 2001 2002 -------- -------- -------- -------- -------- ------------ ------------ Fixed charges, as defined: Interest on long-term debt.................. 4,804 4,809 5,187 5,134 4,999 2,522 2,390 Amortization of debt expense............... 359 359 359 359 359 179 179 Estimated interest component of operating rentals............... 67 87 210 229 187 94 56 Total fixed charges... 5,230 5,255 5,756 5,722 5,545 2,795 2,626 Earnings, as defined: Net income.............. 7,599 24,048 21,320 22,750 (48,589) 94 (6,860) Add (Deduct): Income taxes............ 2,695 11,578 10,837 11,720 (16,280) 49 (880) Total fixed charges as above................. 5,230 5,255 5,756 5,722 5,545 2,795 2,626 Total earnings........ 15,524 40,881 37,913 40,192 (59,324) 2,938 (5,114) Ratio of earnings to fixed charges................. 3.0x 7.8x 6.6x 7.0x -10.7x 1.1x -1.9x
27 BUSINESS THE FOLLOWING DESCRIPTION OF OUR BUSINESS CONTAINS FORWARD-LOOKING STATEMENTS WHICH INVOLVE RISKS AND UNCERTAINTIES. OUR ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE ANTICIPATED IN THESE FORWARD-LOOKING STATEMENTS AS A RESULT OF CERTAIN FACTORS. SEE "RISK FACTORS" BEGINNING ON PAGE 15, AS WELL AS OTHER FACTORS DESCRIBED IN OUR PERIODIC REPORTS FILED WITH THE SEC. (a) PENN TREATY AMERICAN CORPORATION We are a leading provider of long-term care insurance in the United States. We market our products primarily to older persons in the states in which we are licensed through independent insurance agents. Our principal products are individual, defined benefit accident and health insurance policies covering long-term skilled, intermediate and custodial nursing home and home health care. Our policies are designed to provide meaningful benefits if and when the insured is no longer capable of functioning independently. We also own insurance agencies that sell senior-market insurance products underwritten by other insurers and us. We are among the largest writers of individual long-term care insurance in terms of annualized premiums. We sold 26,474 long-term care policies in 2001, representing $47 million of annualized premiums. At December 31, 2001, we had 242,644 long-term care insurance policies in-force, representing $351 million of annualized premiums. Our total premiums were $350 million in 2001, representing a compound annual growth rate of 22.7% from $102.4 million in 1995. We market our products primarily through the independent agency channel, which we believe to be effective in distributing long-term care insurance. We introduced our first long-term nursing home insurance product in 1972 and our first home health care insurance product in 1983, and we have developed a record of innovation in long-term care insurance products. Since 1994, we have introduced several new products designed to meet the changing needs of our customers, including the following: - The Independent Living policy, which provides coverage over the full term of the policy for home care services furnished by unlicensed homemakers, as well as licensed care providers; - The Personal Freedom policy, which provides comprehensive coverage for nursing home and home health care; - The Assisted Living policy, which is a nursing home plan that provides enhanced benefits and others a home health care rider; - The Secured Risk Nursing Facility policy, which provides limited benefits to higher risk insureds; and - The Post Acute Recovery policy, which provides short term benefits after medical procedures. In addition, available policy riders include an automatic annual benefit increase and a return of premium benefit. Although nursing home and home health care policies accounted for 95.3% of our total annualized premiums in-force as of December 31, 2001, we also market and sell Medicare supplement products and a group plan, which offers long-term care coverage to groups on a guaranteed issue basis. Effective December 31, 2001, we entered a reinsurance transaction to reinsure, on a quota share basis, substantially all of our respective long-term care insurance policies then in-force. The agreement was entered with Centre Solutions (Bermuda) Limited. The agreement, which is subject to certain coverage limitations, meets the requirements to qualify as reinsurance for statutory accounting, but not for generally accepted accounting principles. The initial premium of the treaties is approximately $619,000,000, comprised of $563,000,000 of debt and equity securities transferred subsequent to 28 December 31, 2001, and $56,000,000 held as funds due to the reinsurer. The initial premium and future cash flows from the reinsured policies, less claims payments, ceding commissions and risk charges, will be credited to a notional experience account, which is held for our benefit in the event of commutation and recapture on or after December 31, 2007. The notional experience account balance will receive an investment credit based upon the total return of a series of benchmark indices and hedges, which are designed to closely match the duration of our reserve liabilities. THE LONG-TERM CARE INSURANCE INDUSTRY The long-term care insurance market has grown rapidly in recent years. According to studies by Conning & Co. and LifePlans, Inc., the long-term care insurance market experienced a compound average growth rate of 20.1% from 1994 to 1999, rising from approximately $1.7 billion of net written premiums in 1994 to approximately $4.2 billion of net written premiums in 1999. We expect this growth to continue based on the projected demographics of the United States population, the rising costs of health care and a regulatory environment that supports the use of private long-term care insurance. The population of senior citizens (over age 65) in the U.S. is projected to grow from the current estimated level of approximately 35 million to approximately 70 million by 2030, according to a 1996 U.S. Census Bureau report. Furthermore, health and medical technologies are improving life expectancy and, by extension, increasing the number of people requiring some form of long-term care. According to a 1999 report by Conning & Co., market penetration of long-term care insurance products in the over-65 age group ranges from 5% to 7%. The size of the target population and the lack of penetration of the existing market indicate a substantial growth opportunity for companies providing long-term care insurance products. We believe that the rising cost of nursing home and home health care services makes long-term care insurance an attractive means to pay for these services. According to a 1998 report by the U.S. Healthcare Financing Administration, the combined cost of home health care and nursing home care was $20.0 billion in 1980. By 1996, this cost had risen to $108.7 billion. In addition, recent and proposed tax legislation encourages individuals to use private insurance for long-term care needs through tax incentives at both the federal and state levels. OUR STRATEGY We seek to enhance shareholder value by strengthening our position as a leader in providing long-term care insurance. We intend to accomplish this goal through the following strategies: RECOMMENCING SALES IN ALL STATES. During 2001, we ceased new sales in the majority of states in which we are licensed to sell new insurance policies. This action resulted from a concern that our statutory surplus would continue to decline from new sales during a period in which we were formulating our Corrective Action Plan with the Pennsylvania Insurance Department. Since our Corrective Action Plan was approved in February 2002, we have recommenced sales in 29 states. We are actively working with all other states in order to recommence sales in all jurisdictions. DEVELOPING AND QUALIFYING NEW PRODUCTS WITH STATE INSURANCE REGULATORY AUTHORITIES. We have sold long-term care insurance for 30 years. As an innovator in nursing home and home health care insurance, we have introduced many new policies over the years, including four new products in the last five years. By continually discussing long-term care needs with our agency force and policyholders, we are able to design new products and to offer what we believe to be the most complete benefit features in the industry. The development of new products enables us to generate new business, maintain proper pricing levels and provide advancements in the benefits we offer. We intend to continue to develop new insurance products designed to meet the needs of senior citizens and their families. 29 INCREASING THE SIZE AND PRODUCTIVITY OF OUR NETWORK OF INDEPENDENT AGENTS. We have significantly increased the number of agents who sell products for us and have focused our efforts on states that have larger concentrations of older individuals. We have successfully increased our number of licensed agents from approximately 13,000 in 1995 to approximately 49,000 at December 31, 2001. We intend to continue to recruit agents and we believe that we will be able to continue to expand our business. Historically, approximately one-third of our agents write new business for us each year. UTILIZING INTERNET STRATEGIES. We have developed a proprietary agent sales system for long-term care insurance, LTCWorks!, which enables agents to sell products utilizing downloadable software. We believe that LTCWorks! increases the potential distribution of our products by enhancing agents' ability to present the products, assist policyholders in the application process and submit applications over the Internet. LTCWorks! provides agents who specialize in the regular sale of long-term care insurance products with a unique and easy to use sales tool and enables agents who are less familiar with long-term care insurance to present it when they are discussing other products such as life insurance or annuities. DEVELOPING THIRD-PARTY ADMINISTRATION CONTRACTS. We believe that our surplus and parent company liquidity can be supplemented by providing administrative services to other long-term care insurance providers and self-funded plans. We believe that our experience in long-term care insurance affords us opportunities to develop these relationships. INTRODUCING GROUP PRODUCTS. In 2000, we began actively marketing our new group policy, which we anticipate will generate additional premium revenue from a younger policyholder base. Group products allow us to penetrate an additional market for the sale of long-term care insurance. We pursue large and small groups, and offer supplemental coverage on an individually underwritten basis to group members and their families. We currently market our group products primarily through agents who market products to individuals. However, we are in the process of developing a network of agents who generally sell other group products, and who often have existing relationships with employer groups, to market our group products. As of December 31, 2001, premiums in-force for our group products were approximately $4.0 million, covering 3,256 individuals. We believe our group products present an opportunity to significantly increase the number of policies in-force without paying significantly increased commissions. CORPORATE BACKGROUND We are registered and approved as a holding company under the Pennsylvania Insurance Code. We were incorporated in Pennsylvania on May 13, 1965 under the name Greater Keystone Investors, Inc. and changed our name to Penn Treaty American Corporation on March 25, 1987. Penn Treaty Life Insurance Company ("Penn Treaty Life") was incorporated in Pennsylvania under the name Family Security Life Insurance Company on June 6, 1962, and its name was changed to Quaker State Life Insurance Company on December 29, 1969, at which time it was operating under a limited insurance company charter. We acquired Quaker State Life Insurance Company on May 4, 1976, and changed its name to Penn Treaty Life Insurance Company. On July 13, 1989, Penn Treaty Life acquired all of the outstanding capital stock of AMICARE Insurance Company (formerly Fidelity Interstate Life Insurance Company), a stock insurance company organized and existing under the laws of Pennsylvania, and changed its name to Network America Life Insurance Company on August 1, 1989. On August 30, 1996, we consummated the acquisition of all of the issued and outstanding capital stock of Health Insurance of Vermont, Inc., and have since changed its name to American Network Insurance Company. Senior Financial Consultants Company, an insurance agency that we own, was incorporated in Pennsylvania on February 23, 1988 under the name Penn Treaty Service Company. On February 29, 30 1988, it acquired, among other assets, the rights to renewal commissions on a certain block of Penn Treaty Life's existing in-force policies from Cher-Britt Agency, Inc., and an option to purchase the rights to renewal commissions on a certain block of Penn Treaty Life's existing policies from Cher-Britt Insurance Agency, Inc., an affiliated company of Cher-Britt Agency, Inc. In connection with this acquisition, on March 3, 1988, we changed the name of the Agency to Cher-Britt Service Company. The option was exercised on March 3, 1989. Its name was changed to Senior Financial Consultants Company on August 9, 1994. On December 31, 1997, Penn Treaty Life dividended to us its common stock ownership of Penn Treaty Network America Insurance Company. At that time, Penn Treaty Network America Insurance Company assumed substantially all of the assets, liabilities and premium in-force of Penn Treaty Life through a purchase and assumption reinsurance agreement. On December 30, 1998, we sold our common stock interest in Penn Treaty Life to an unaffiliated insurer. All remaining policies in-force were assumed by Penn Treaty Network America Insurance Company through a 100% quota share agreement. On November 25, 1998, we entered into a purchase agreement to acquire all of the common stock of United Insurance Group Agency, Inc. ("United Insurance Group"), a Michigan based consortium of long-term care insurance agencies. The acquisition was effective January 1, 1999. On December 10, 1999, we incorporated Penn Treaty (Bermuda), Ltd., a Bermuda based reinsurer, for the purpose of reinsuring affiliated long-term insurance contracts at a future date. On January 1, 2000, we acquired Network Insurance Senior Health Division ("NISHD"), a Florida-based insurance agency brokerage company. NISHD was purchased by Penn Treaty Network America Insurance Company. (b) INSURANCE PRODUCTS Since 1972, we have developed, marketed and underwritten defined benefit accident and health insurance policies designed to be responsive to changes in: - the characteristics and needs of the senior citizen market; - governmental regulations and governmental benefits available for senior citizens; and - the health care and long-term care delivery systems. As of December 31, 2001, 95.3% of our total annualized premiums in-force were derived from long-term care policies, which include nursing home and home health care policies. Our other lines of insurance include Medicare supplements and other riders. We solicit input from both our independent agents and our policyholders with respect to the changing needs of insureds. In addition, our representatives regularly attend regulatory meetings and seminars to monitor significant trends in the industry. Our focus on long-term care insurance has enabled us to gain expertise in claims and underwriting which we have applied to product development. Through the years, we have continued to build on our brand names by offering the independent agency channel a series of differentiated products. We have expanded our product line to offer both tax-qualified and non-qualified plans based on consumer demand for both. We received an insurance license in 1972, which permitted us to write insurance in 12 states. In 1974, we filed a long-term care policy offering a five-year benefit period. Our policy was the first national plan to equally cover all levels of care, including skilled, intermediate and custodial care, with an extended benefit period. We began the sale of home health care riders, which pay for licensed nurses, certified nurses' aides and home health care workers who provide care/assistance in the 31 policyholder's home, in 1983. This plan was the first in the industry to include a limited benefit for homemaker care provided by a friend, neighbor, relative or religious organization. We began the use of table-based underwriting, which enables higher risk policyholders to receive coverage at a risk-adjusted premium level, in 1986. Appropriate risk is calculated based upon medical conditions and likelihood of inability to perform daily activities. Multiple rate classes enabled us to penetrate an untapped market in long-term care insurance sales. The following table sets forth, for each of our last three fiscal years our annualized gross premiums by type of policy.
YEAR ENDED DECEMBER 31, --------------------------------------------------------- 2001 2000 1999 --------------- --------------- --------------- (ANNUALIZED PREMIUMS IN THOUSANDS) Long-term facility, home and comprehensive coverage: Annualized premiums..................... $351,268 95.3% $360,600 95.2% $313,222 94.6% Number of policies...................... 242,644 242,075 208,955 Average premium per policy.............. $ 1,448 $ 1,490 $ 1,499 Disability insurance: Annualized premiums..................... $ 6,415 1.7% $ 6,634 1.8% $ 7,126 2.2% Number of policies...................... 13,226 13,502 14,963 Average premium per policy.............. $ 485 $ 491 $ 476 Medicare supplement: Annualized premiums..................... $ 8,449 2.3% $ 7,314 1.9% $ 6,131 1.9% Number of policies...................... 8,216 7,696 5,934 Average premium per policy.............. $ 1,028 $ 950 $ 1,033 Life insurance: Annualized premiums..................... $ 2,185 0.6% $ 3,785 1.0% $ 4,095 1.2% Number of policies...................... 3,763 6,315 6,677 Average premium per policy.............. $ 581 $ 599 $ 613 Other insurance: Annualized premiums..................... $ 398 0.1% $ 609 0.2% $ 548 0.2% Number of policies...................... 2,459 3,900 2,968 Average premium per policy.............. $ 162 $ 156 $ 185 Total annualized premiums in force........ $368,715 100% $378,942 100% $331,122 100% Total Policies............................ 270,308 273,488 239,497
We specialize in the sale of long-term care insurance, which is generally defined as nursing home and home health care insurance coverage. LONG-TERM NURSING HOME CARE. Our long-term nursing home care policies generally provide a fixed or maximum daily benefit payable during periods of nursing home confinement prescribed by a physician or necessitated by the policyholder's cognitive impairment or inability to perform two or more activities of daily living. These policies include built-in benefits for alternative plans of care, waivers of premiums after 90 days of benefit payments on a claim and unlimited restoration of the policy's maximum benefit period. All levels of nursing care, including skilled, intermediate and custodial (assisted living) care, are covered and benefits continue even when the policyholder's required level of care changes. Skilled nursing care refers to professional nursing care provided by a medical professional (a doctor or registered or licensed practical nurse) located at a licensed facility that cannot be provided by a non-medical professional. Assisted living care generally refers to non-medical care, which does not require professional treatment and can be provided by a non-medical professional with minimal or no training. Intermediate nursing care is designed to cover situations that would otherwise fall between 32 skilled and assisted living care and includes situations in which an individual may require skilled assistance on a sporadic basis. Our current long-term nursing home care policies provide benefits that are payable over periods ranging from one to five years, or the lifetime of the policyholder. These policies provide for a maximum daily benefit on costs incurred ranging from $60 to $300 per day. Our Personal Freedom policies also provide comprehensive coverage for nursing home and home health care, offering benefit "pools of coverage" ranging from $75,000 to $300,000, as well as unlimited coverage. LONG-TERM HOME HEALTH CARE. Our home health care policies generally provide a benefit payable on an expense-incurred basis during periods of home care prescribed by a physician or necessitated by the policyholder's cognitive impairment or inability to perform two or more activities of daily living. These policies cover the services of registered nurses, licensed practical nurses, home health aides, physical therapists, speech therapists, medical social workers and other similar home health practitioners. Benefits for our currently marketed home health care policies are payable over periods ranging from six months to five years, or the lifetime of the policyholder, and provide from $40 to $200 per day of home benefits. Our home health care policies also include built-in benefits for waivers of premiums after 90 days of benefit payments, and unlimited restoration of the policy's maximum benefit period. We currently offer the following products: INDEPENDENT LIVING PLAN. The Independent Living Plan (offered since 1994) was our first stand-alone home health care plan that covered all levels of care received at home. Besides covering skilled care and care by home health aides, this plan pays for care provided by unlicensed, unskilled homemakers. This care includes assistance with cooking, shopping, housekeeping, laundry, correspondence, using the telephone and paying bills. Historically, only limited coverage had been provided under certain of our home health care policies for homemaker care, typically for a period of up to 30 days per calendar year during the term of the policy. This benefit is now standard in most long-term care policies. Family members also may be reimbursed for any training costs incurred in order to provide in-home care. The Independent Living policy provides that we will waive the elimination period, the time at the beginning of the period during which care is provided for which no benefits are available under the policy (usually twenty days), if the insured agrees to utilize a care management service referred by us. Newer policies offer up to 100% of the daily benefit if a care management service is used, versus 80% if the policyholder does not elect care management services. We engage the care manager at the time a claim is submitted to prepare a written assessment of the insured's condition and to establish a written plan of care. We have subsequently incorporated the use of care management in all of our new home health care policies. PERSONAL FREEDOM PLAN. Our Personal Freedom Plan (offered since 1996) is a comprehensive plan which provides a sum of money for long-term care to be used for either nursing facility or home health care. The plan also provides coverage for homemaker care for insureds who are unable to perform activities of daily living such as cooking, shopping, housekeeping, laundry, correspondence, using the telephone, paying bills and managing medication. When policyholders purchase this policy, with benefits ranging from $75,000 to $300,000, as well as unlimited coverage, they may then access up to the face amount of the policy for nursing home or home health care as needed, subject to maximum daily limits. This plan also includes an optional return of premium/nonforfeiture benefit. ASSISTED LIVING PLAN. The Assisted Living Plan (offered since 1999) is a stand-alone facility care plan that provides benefits in either a traditional nursing home setting or in an Assisted Living Facility, 33 the setting preferred by the majority of policyholders. This policy, coupled with an optional home health care rider, offers benefits similar to those of the Personal Freedom Plan, but on benefit day (number of days) basis with a maximum daily benefit rather than a sum of money basis. SECURED RISK PLAN. Our Secured Risk Plan (offered since 1998) offers limited, yet meaningful, facility care benefits to people who would most likely not qualify for long-term care insurance under traditional policies. Table-based underwriting allows us to examine these substandard conditions by level of activity and independence of the applicant. This plan offers protection to such individuals by providing coverage for care in a nursing facility or in the insured's home if he or she chooses the limited optional home health care benefits. Features of this plan include coverage for pre-existing conditions after six months, guaranteed renewal for life, premiums that will not increase with age and no requirement of prior hospitalization. POST ACUTE RECOVERY PLAN. The Post Acute Recovery Plan (offered since 1999) provides facility and home health care benefits for up to one year after traditional medical insurance, Medicare, Medigap or HMO services stop, thereby providing a more affordable short-term plan. Coupled with optional home health care benefits, this product pays for medical recovery in a facility or in the insured's home. Features of this plan include immediate coverage (no elimination period or deductible), coverage for pre-existing conditions after six months in most states, guaranteed renewal and premiums that will not increase with age. As with most plans, we also offer a "Care Solutions" benefit with this plan, in which a care manager works with the insured to design a plan of care tailored to the insured's individual needs. GROUP LONG-TERM CARE INSURANCE PLAN. Our group long-term care insurance plan (offered since 2000) provides group long-term care insurance to groups formed for purposes other than the purchase of insurance, such as an employee group, an association or a professional organization. A group master policy is issued to the group and all participating members are issued certificates of insurance, which describe the benefits available under the policy. Group members, spouses and parents can generally purchase supplemental coverage beyond the level paid by the group. This coverage is offered on a modified guaranteed issue basis to group members and an individually underwritten basis to their families and retirees. We are currently seeking to expand our group insurance business and are enhancing our marketing efforts towards this end. Our management considers this area to offer significant opportunities for sales growth. RIDERS. Our policies generally offer an optional lifetime inflation rider, which provides for a 5% increase of the selected daily benefit amount on each anniversary date for the lifetime of the policy. An optional nonforfeiture shortened benefit rider, which provides the insured with the right to maintain a portion of his or her benefit period in the event the policy lapses after being continuously in-force for at least three years, is also available. The return of premium benefit rider provides for a pro-rata return of premium in the event of death or surrender beginning in the sixth year. We also offer and encourage the purchase of home health care riders to supplement our nursing home policies and nursing home riders to supplement our home health care policies. Previously, we offered numerous other riders to supplement our long-term care policies. The need, however, for many of these riders has been eliminated due to the incorporation of many of the benefits they provided into the basic coverage included in our newest long-term care policies. Among the built-in benefits provided under the long-term care policies we currently market are hospice care, adult day care and restoration of benefits. After the enactment of the Health Insurance Portability and Accountability Act of 1996, issues arose relating to the tax status of long-term care benefits included as part of non-qualified plans. To permit policyholders to purchase either the tax-qualified plan or non-qualified plan that best suits their 34 needs, we introduced the Pledge and Promise. The Pledge states that, if the U.S. Congress or the Treasury Department should determine that the benefits received on a long-term care policy are considered taxable income, we will allow a policyholder to convert the policy to a tax-qualified policy at any time. The Promise provides that, if the U.S. Congress or Treasury Department should determine that the benefits received on a non-qualified plan will not be considered taxable income, we will allow a policyholder to convert the policy from a tax-qualified plan to a non-qualified plan at any time prior to its first anniversary. (c) MARKETING Markets. The following chart shows premium revenues by state for each of the states where we do business:
YEAR ENDED DECEMBER 31, YEAR ------------------------------ 2001 STATE ENTERED 2001 2000 1999 % OF TOTAL - ----- -------- -------- -------- -------- ----------- (IN THOUSANDS) Arizona...................... 1988 $ 15,392 $ 15,677 $ 13,715 4.4% California................... 1992 51,498 50,165 43,514 14.7% Colorado..................... 1969 4,701 3,564 2,563 1.3% Florida...................... 1987 65,067 71,588 63,218 18.6% Georgia...................... 1990 5,066 4,764 3,350 1.4% Illinois..................... 1990 19,525 19,748 15,970 5.6% Iowa......................... 1990 5,361 5,097 4,317 1.5% Maryland..................... 1987 3,948 3,896 3,427 1.1% Michigan..................... 1989 6,654 6,357 5,469 1.9% Missouri..................... 1990 4,061 4,391 4,297 1.2% Nebraska..................... 1990 4,263 4,358 3,952 1.2% New Jersey................... 1996 8,374 7,856 4,707 2.4% New York..................... 1998 4,103 2,665 676 1.2% North Carolina............... 1990 10,399 9,690 8,089 3.0% Ohio......................... 1989 11,880 11,935 10,149 3.4% Pennsylvania................. 1972 43,126 48,692 37,661 12.3% Texas........................ 1990 17,847 16,105 11,879 5.1% Virginia..................... 1989 22,638 22,370 19,597 6.5% Washington................... 1993 10,670 9,814 7,485 3.0% All Other States(1).......... 35,818 38,381 28,481 10.2% -------- -------- -------- ----- All States................... $350,391 $357,113 $292,516 100.0% ======== ======== ======== =====
- ------------------------ (1) Includes all states in which premiums comprised less than one percent of total premiums in 2001. Our goal is to strengthen our position as a leader in providing long-term care insurance to senior citizens by underwriting, marketing and selling our products throughout the United States. We focus our marketing efforts primarily in those states where we have successfully developed networks of agents and that have the highest concentration of individuals whose financial status and insurance needs are compatible with our products. AGENTS. We market our products principally through independent agents. With the exception of agents employed by our insurance agency subsidiaries, we do not directly employ agents but instead rely on relationships with independent agents and their sub-agents. We provide assistance to our agents through seminars, underwriting training and field representatives who consult with agents on underwriting matters, assist agents in research and accompany agents on marketing visits to current and prospective policyholders. 35 Each independent agent must be authorized by contract to sell our products in each state in which the agent and our companies are licensed. Some of our independent agents are large general agencies with many sales-persons (sub-agents), while others are individuals operating as sole proprietors. Some independent agents sell multiple lines of insurance, while others concentrate primarily or exclusively on accident and health insurance. We do not have exclusive agency agreements with any of our independent agents and they are free to sell policies of other insurance companies, including our competitors. We generally do not impose production quotas or assign exclusive territories to agents. The amount of insurance written for us by individual independent agents varies. We periodically review and terminate our agency relationships with non-producing or under-producing independent agents and agents who do not comply with our guidelines and policies with respect to the sale of our products. We are actively engaged in recruiting and training new agents. Sub-agents are recruited by the independent agents and are licensed by us with the appropriate state regulatory authorities to sell our policies. Independent agents are generally paid higher commissions than those employed directly by insurance companies, in part to account for the expenses of operating as an independent agent. We believe that the commissions we pay to independent agents are competitive with the commissions paid by other insurance companies selling similar policies. The independent agent's right to renewal commissions is vested and commissions are paid as long as the policy remains in-force, provided the agent continues to abide by the terms of the contract. We generally permit many of our established independent agents to collect the initial premium with the application and remit such premium to us less the commission. New independent agents are required to remit the full amount of initial premium with the application. We provide assistance to our independent agents in connection with the processing of paperwork and other administrative services. We have developed a proprietary agent sales system for long-term care insurance, LTCWorks!, which enables agents to sell products utilizing downloadable software. We believe that LTCWorks! increases the potential distribution of our products by enhancing agents' ability to present the products, assist policyholders in the application process and submit applications over the Internet. LTCWorks! provides agents who specialize in the regular sale of long-term care insurance products with a unique and easy to use sales tool and enables agents who are less familiar with long-term care insurance to present it when they are discussing other products such as life insurance or annuities. MARKETING GENERAL AGENTS AND GENERAL AGENTS. We selectively utilize marketing general agents for the purpose of recruiting independent agents and developing networks of agents in various states. Marketing general agents receive an override commission on business written in return for recruiting, training and motivating the independent agents. In addition, marketing general agents may function as general agents for us in various states. No single grouping of agents accounted for more than 10% of our new premiums or renewal premiums written in 2001 or 2000. One agency accounted for 16% of total premiums earned in 1999. We acquired a division of this agency during 2000, which reduced our reliance on this unaffiliated agency. We have not delegated any underwriting or claims processing authority to any agents. GROUP AND FRANCHISE INSURANCE. We have recently begun to sell group long-term care insurance to groups formed for purposes other than the purchase of insurance, such as an employee group, an association or a professional organization. A group master policy is issued to the group and all participating members are issued certificates of insurance, which describe the benefits available under the policy. Eligibility for insurance is available to all members of the group on a modified guaranteed issue basis. Group members, spouses and parents can generally purchase supplemental coverage beyond the level paid by the group. This coverage is offered on an individually underwritten basis. We currently market our group products primarily through agents who market products to individuals. However, we are in the process of developing a network of agents who generally sell other 36 group products, and who often have existing relationships with employer groups, to market our group products. As of December 31, 2001, premiums in-force for our group products were approximately $4.0 million, covering 3,256 individuals. We believe our group products present an opportunity to significantly increase the number of policies in-force without paying significantly increased commissions. From time to time, we also sell franchise insurance, which is a series of individually underwritten policies sold to an association or group. While franchise insurance is generally presented to groups that endorse the insurance, policies are issued to individual group members. Each application is underwritten and issuance of policies is not guaranteed to members of the franchise group. (d) ADMINISTRATION UNDERWRITING We believe that the underwriting process through which we, as an accident and health insurance company particularly in the long-term care segment, choose to accept or reject an applicant for insurance is critical to our success. We have offered long-term care insurance products for nearly 30 years and we believe we have benefited significantly from our longstanding focus on this specialized line. Through our experience with and focus on this niche product, we have been able to establish a system of underwriting designed to permit us to process our new business and assess the risk presented effectively and efficiently. Applicants for insurance must complete detailed medical questionnaires. Physical examinations are not required for our accident and health insurance policies, but medical records are frequently requested. All long-term care applications are reviewed by our in-house underwriting department and all applicants are also interviewed by members of our underwriting department via telephone. This "personal history interview" is aimed at not only confirming the information disclosed on the application, but also at gaining more insight into the applicant's physical abilities, activity level and cognitive functioning. We consider age, cognitive status and medical history, among other factors, in deciding whether to accept an application for coverage and, if accepted, the appropriate rate class for the applicant. With respect to medical history, efforts are made to underwrite on the basis of the medical information listed on the application, but an Attending Physician's Statement is often requested. We also frequently use face-to-face assessments conducted in the applicant's home by independent subcontractors (nurse networks). This evaluation is similar to the personal history interview in terms of obtaining medical information and information regarding the applicant's functional abilities, and it includes an expanded cognitive test. We also use the Minnesota Cognitive Acuity Screening test (formerly known as Cognistat) when a question of cognitive functioning exists and is not adequately addressed by the other underwriting tools, or when the possibility of cognitive problems is identified by one of the other underwriting tools. In addition to age, cognitive status and medical history, our underwriters are concerned with the applicant's abilities to perform the activities of daily living. Our underwriting process extends beyond current conditions, however, and takes into account how existing health conditions are likely to progress and to what degree the independence of the applicant is likely to change as the applicant ages. We use table-based underwriting, or multiple rate classifications, as a means to accept more business while obtaining the appropriate premiums for additional risk. Applicants are placed in different risk classes for acceptance and premium calculation based on medical conditions and level of activity during the application process. We currently offer Premier, Select, Standard and Secured risk classifications. If we determine that we cannot offer the requested coverage, we may suggest an alternative product suitable for coverage for higher risk applicants. Accepted policies are usually issued within seven working days from receipt of the information necessary to underwrite the application. Pre-existing conditions disclosed on an application for new long-term nursing home care and most home health care policies are covered immediately upon approval of the policy. Undisclosed 37 pre-existing conditions are covered after six months in most states and two years in certain other states. In addition, our Independent Living policies immediately cover all disclosed pre-existing conditions. In the case of individual Medicare supplement policies, pre-existing conditions are generally not covered during the six-month period following the effective date of the policy. In group long-term care insurance, eligibility is guaranteed to all members of the group without an underwriting review on an individual basis. However, supplemental coverage offered to group members and their parents and spouses is individually underwritten. Franchise insurance is a series of individually underwritten policies sold to the members of an association or group. The issuance of policies is not guaranteed to individual members of the franchise group. In conjunction with the development of our LTCWorks! system, we developed an underwriting credit-scoring system, which provides consistent underwriting and rate classification for applicants with similar medical histories and conditions. CLAIMS Claims for policy benefits, except with respect to Medicare supplement and disability claims, are processed by our claims department, which includes nurses employed or retained as consultants. We use third party administrators to process our Medicare supplement claims due to the large number of claims and the small benefit amount typically paid for each claim. Beginning in 1999, we also engaged a third party administrator to perform all administration, including claims processing, for our disability business. For nursing home claims, upon notification of a claim, a personal claims assistant is assigned to review all necessary documentation, including verification of the facility where the claimant resides. A claims examiner verifies eligibility of the claim under the policy. Every effort is made to facilitate the processing of the claim, recognizing that this service efficiency provides substantial value to the policyholder and his or her family. Toward this end, the personal claims assistant verifies the continued residence of the policyholder in the facility each month and expedites payment of the claim. We periodically utilize the services of "care managers" to review certain claims, particularly those filed under home health care policies. When a claim is filed, we may engage a care manager to review the claim, including the specific health problem of the insured and the nature and extent of health care services being provided. This review may include visiting the claimant to assess his or her condition. The care manager assists the insured and us by ensuring that the services provided to the insured, and the corresponding benefits paid, are appropriate under the circumstances. The care manager then follows the claimant's progress with periodic contact to ensure that the plan of care continues to be appropriate and that it is adjusted if warranted by improvement in the claimant's condition. Home care claims require the greatest amount of diligent overview and we have utilized care management techniques for nearly ten years. Under the terms of our Independent Living policy, we will waive the elimination period if the insured agrees to utilize a care manager. Newer policies offer 100% claims coverage if the claimant uses a care manager and provide up to 80% of the daily benefit if care manager services are not used. The majority of all of our home health care claims in 2001 were submitted to care management. We anticipate that this usage will continue as our business grows. In 1999, we created and staffed an in-house care management unit. This in-house unit conducts the full range of care management services, which were previously provided exclusively by subcontractors. We intend to continue to develop this unit, as we believe it can meet many of our care management needs more effectively and less expensively than third party vendors can. 38 SYSTEMS OPERATIONS We maintain our own computer system for most aspects of our operations, including policy issuance, billing, claims processing, commission reports, premium production by agent (state and product) and general ledger. Critical to our ongoing success is our ability to continue to provide the quality of service for which we are known to our policyholders and agents. We believe that our overall systems are an integral component in delivering that service. Accordingly, we have begun a replacement project which will expand and enhance our existing system. The project is estimated to cost approximately $7 million to $9 million over three years. In 2000, we entered an outsourcing agreement with a computer services vendor, which thereby assumed responsibility for the majority of the daily operations of our system, future program development and business continuity planning. This vendor provides both in-house and external servicing of all existing legacy systems and hardware. We believe that this vendor can provide better expertise in the evolving arena of information technology than we can provide by running our own operations. (e) PREMIUMS Our long-term care policies provide for guaranteed renewability at then current premium rates at the option of the insured. The insured may elect to pay premiums on a monthly, quarterly, semi-annual or annual basis. In addition, we offer an automatic payment feature that allows policyholders to have premiums automatically withdrawn from a checking account. Premium rates for all lines of insurance are subject to state regulation. Premium regulations vary greatly among jurisdictions and lines of insurance. Rates for our insurance policies are established with the assistance of our independent actuarial consultants and reviewed by the insurance regulatory authorities. Before a rate change can be made, the proposed change must be filed with and, with respect to rates for individual policies, approved by the insurance regulatory authorities in each state in which an increase is sought. Regulators may not approve the increases we request, may approve them only with respect to certain types of policies or may approve increases that are smaller than those we request. As a result of minimum statutory loss ratio standards imposed by state regulations, the premiums on our accident and health polices are subject to reduction and/or corrective measures in the event insurance regulatory agencies in states where we do business determine that our loss ratios either have not reached or will not reach required minimum levels. See "Government Regulation." (f) FUTURE POLICY BENEFITS AND CLAIMS RESERVES We are required to maintain reserves equal to our probable ultimate liability for claims and related claims expenses with respect to all policies in-force. Reserves, which are computed with the assistance of an independent firm of actuarial consultants, are established for: - claims which have been reported but not yet paid; - claims which have been incurred but not yet reported; and - the discounted present value of all future policy benefits less the discounted present value of expected future premiums. The amount of reserves relating to reported and unreported claims incurred is determined by periodically evaluating historical claims experience and statistical information with respect to the probable number and nature of such claims. We compare actual experience with estimates and adjust reserves on the basis of such comparisons. 39 In addition to reserves for incurred claims, reserves are also established for future policy benefits. The policy reserves represent the discounted present value of future obligations that are likely to arise from the policies that we underwrite, less the discounted present value of expected future premiums on such policies. The reserve component is determined using generally accepted actuarial assumptions and methods. However, the adequacy of these reserves rests on the validity of the underlying assumptions that were used to price the products; the more important of these assumptions relate to policy lapses, loss ratios and claim incidence rates. We review the adequacy of our deferred acquisition costs and reserves on an annual basis, utilizing assumptions for future expected claims and interest rates. If we determine that future gross profits of our in-force policies are not sufficient to recover our deferred acquisition costs, we recognize a premium deficiency and "unlock" or change our original assumptions and reset our reserves to appropriate levels using new assumptions. The assumptions we use to calculate reserves for claims under our long-term care products are based on our 29 years of significant claims experience, primarily with respect to nursing home care products, and on the experience of the industry as a whole. We began offering home health care coverage in 1983 and since that time have realized a significant increase in the number of home health care policies written. Claims experience with home health care coverage is more limited than the available nursing home care claims experience. Our experience with respect to the Independent Living policy, which was first offered in November 1994, and the Assisted Living and Personal Freedom policies, which were first offered in late 1999 and 1996, respectively, is more limited than our experience with skilled care facilities. We believe that individuals may be more inclined to utilize home health care than nursing home care, which is generally considered only after all other possibilities have been explored. Accordingly, we believe that wide variations in claims experience may be more likely in home health care insurance than in nursing home insurance. Our actuarial consultants utilize both our experience and other industry data in the computation of reserves for the home health care product line. In addition, newer long-term care products, developed as a result of regulation or market conditions, may incorporate more benefits with fewer limitations or restrictions. For instance, the Omnibus Budget Reconciliation Act of 1990 required that Medicare supplement policies provide for guaranteed renewability and waivers of pre-existing condition coverage limitations under certain circumstances. In addition, the NAIC has recently adopted model long-term care policy language providing nonforfeiture benefits and a rate stabilization standard for long-term care policies, either or both of which may be adopted by the states in which we write policies. The fluidity in market and regulatory forces may limit our ability to rely on historical claims experience for the development of new premium rates and reserve allocations. See "Government Regulation." We use an independent firm of actuarial consultants and an in-house actuary to assist us in pricing insurance products and establishing reserves with respect to those products. Additionally, actuaries assist us in improving the documentation of our reserve methodology and in determining the adequacy of our reserves and their underlying assumptions, a process that has resulted in certain adjustments to our reserve levels. Although we believe that our reserves are adequate to cover all policy liabilities, we cannot assure you that reserves are adequate or that future claims experience will be similar to, or accurately predicted by, our past or current claims experience. As of June 30, 2002 and December 31, 2001 and 2000, our reserves for current claims were $232,459,000, $214,466,000 and $164,565,000, respectively. In 2001, we added approximately $8.8 million to our claim reserves for 2000 and prior claim incurrals, and in 2000 we added approximately $6.6 million to our claim reserves for 1999 and prior claim incurrals. Our additions to prior year incurrals in 2001 resulted from a continuance study performed by our consulting actuary. We also increased reserves in 2001 by $1.6 million as a result of utilizing a lower interest rate for the purpose of discounting our future liabilities. Over time, it may continue to be necessary for us to increase our claim reserves. 40 Policy reserves have been computed principally by the net level premium method based upon estimated future investment yield, mortality, morbidity, withdrawals, premium rate increases and other benefits. The following table sets forth the composition of our policy reserves at June 30, 2002 and December 31, 2001 and 2000 and the assumptions pertinent thereto:
AMOUNT OF POLICY RESERVES ------------------------------------ AS OF JUNE 30, AS OF DECEMBER 31, -------------- ------------------- 2002 2001 2000 -------------- -------- -------- (IN THOUSANDS) Accident and health......................... $416,936 $382,660 $348,344 Annuities and other......................... 125 131 118 Ordinary life, individual................... 13,017 13,255 12,947
YEARS OF ISSUE 2001 DISCOUNT RATE 2000 DISCOUNT RATE -------------- ------------------ ------------------ Accident and health........... 1976 to 1986 6.5% 7.0% 1987 6.5% 7.5% 1988 to 1991 6.5% 8.0% 1992 to 1995 6.5% 6.0% 1996 6.5% 7.0% 1997 to 2000 6.5% 6.8% 2001 to 2002 6.5% 6.5% Annuities and other........... 1977 to 1983 6.5% & 7.0% 6.5% & 7.0% Ordinary life, individual..... 1962 to 2002 3.0% to 5.5% 3.0% to 5.5%
BASIS OF ASSUMPTION Accident and health............ Morbidity and withdrawals based on actual and projected experience. Annuities and other............ Primarily funds on deposit inclusive of accrued interest. Ordinary life, individual...... Mortality based on 1955-60 Intercompany Mortality Table Combined Select and Ultimate.
In 2001, the anticipated future gross profits of our in-force long-term care business was not sufficient to recover our deferred acquisition costs, resulting in the recognition of an impairment charge. In connection with this, we unlocked our prior reserve assumptions due to our determination that certain elements were insufficient to produce adequate future coverage of claims. These assumptions include interest rates, premium rates, shock lapses and anti-selection of policyholder persistence. (g) REINSURANCE As is common in the insurance industry, we purchase reinsurance to increase the number and size of the policies we may underwrite. Reinsurance is purchased by insurance companies to insure their liability under policies written to their insureds. By transferring, or ceding, certain amounts of premium (and the risk associated with that premium) to reinsurers, we can limit our exposure to risk. However, if a reinsurance company becomes insolvent or otherwise fails to honor its obligations under any reinsurance agreements, we would remain fully liable to the policyholder. We reinsure any life insurance policy to the extent the risk on that policy exceeds $50,000. We currently reinsure our ordinary life policies through Reassurance Company of Hanover. We also have a reinsurance agreement with Transamerica Occidental Life Insurance Company to reinsure term life policies whose risk exceeds $15,000, and with Employer's Reassurance Corporation to reinsure credit life policies whose risk exceeds $15,000. 41 We have ceded, through a fronting arrangement, 100% of certain whole life and deferred annuity policies to Provident Indemnity Life Insurance Company. No new policies have been ceded under this arrangement since December 31, 1995. We also entered into a reinsurance agreement to cede 100% of certain life, accident, health and Medicare supplement insurance policies to Life and Health of America. These fronting arrangements are used when one insurer wishes to take advantage of another insurer's ability to procure and issue policies. As the fronting company, we remain ultimately liable to the policyholder, even though all of our risk is reinsured. Therefore, the agreements require the maintenance of securities in escrow for our benefit in the amount equal to our statutory reserve credit. We have also entered into a reinsurance agreement with Cologne Life Reinsurance Company with respect to home health care policies with benefit periods exceeding 36 months. No new policies have been reinsured under this agreement since 1998. We also enter into funds withheld financial reinsurance treaties, which allow us to temporarily increase statutory surplus. Although these treaties qualify for statutory accounting treatment as reinsurance, we believe that the agreements do not qualify as reinsurance according to generally accepted accounting principles. We commuted all existing financial reinsurance treaties, effective December 31, 2001, which reduced statutory surplus by approximately $20,000,000. At December 31, 2001 and 2000, our statutory surplus was increased by $0 and approximately $20,000,000, respectively, from financial reinsurance. We have stop-loss reinsurance on our disability business that limits our liability in aggregate for the life of the policy or above monthly loss amounts. This coverage is ceded to Employer's Reassurance Corporation, Reassurance America Life Insurance Company and Lincoln National Life Insurance Company. Since January 1, 2000, no new policies have been ceded to Employer's Reassurance Corporation, which has historically provided the majority of our stop-loss reinsurance. In 2001, we ceded substantially all of our disability policies to Assurity Life Insurance Company on a 100% quota share basis. The reinsurer may assume ownership of the policies as a sale upon various state and policyholder approvals. We received a ceding allowance of approximately $5,000,000 and ceded reserves to the reinsurer of approximately $10,300,000. Effective December 31, 2001, we entered a reinsurance transaction to reinsure, on a quota share basis, substantially all of our respective long-term care insurance policies then in-force. The agreement was entered with Centre Solutions (Bermuda) Limited. The agreement is subject to certain coverage limitations, including an aggregate limit of liability, which is a function of certain factors and which may be reduce in the event that the rate increases that the reinsurance agreement may require are not obtained. The agreement meets the requirements to qualify as reinsurance for statutory accounting, but not for generally accepted accounting principles. The initial premium of the treaties is approximately $619,000,000, comprised of $563,000,000 of cash and qualified securities transferred subsequent to December 31, 2001, and $56,000,000 held as funds due to the reinsurer. The initial premium and future cash flows from the reinsured policies, less claims payments, ceding commissions and risk charges, will be credited to a notional experience account, which is held for our benefit in the event of commutation and recapture on or after December 31, 2007. The notional experience account balance will receive an investment credit based upon the total return of a series of benchmark indices and hedges, which are designed to closely match the duration of our reserve liabilities. Pennsylvania insurance regulations require that funds ceded for reinsurance provided by a foreign or "unauthorized" reinsurer must be secured by funds held in a trust account or by a letter of credit for the protection of policyholders. We received approximately $648,000,000 in statutory reserve credits from this transaction as of December 31, 2001, of which $619,000,000 was held by us and $29,000,000 was backed by Letters of Credit, which increased our statutory surplus by $29,000,000 as well. 42 The agreements contain commutation provisions and allow us to recapture the reserve liabilities and the current experience account balance as of December 31, 2007 or on December 31 of any year thereafter. We intend to commute the treaty on December 31, 2007; therefore, we are accounting for the agreements in anticipation of this commutation. In the event we do not commute the agreements on December 31, 2007, we will be subject to escalating expenses. The agreement also granted the reinsurer an option to participate in reinsuring new business sales up to 50% on a quota share basis. In August 2002, we announced that the reinsurer had exercised its option to reinsure a portion of future sales. Final terms are still pending. The following table shows our historical use of reinsurance, excluding financial reinsurance and our new reinsurance agreement:
REINSURANCE RECOVERABLE ------------------------------------------------ DECEMBER 31, DECEMBER 31, COMPANY A.M. BEST RATING 2001 2000 - ------- ---------------- ------------- ------------- (IN THOUSANDS) General and Cologne Life Re of America............... A+ $10,365 $8,196 Assurity Life Insurance Company...................... A- 8,403 -- Provident Indemnity Life Insurance Company(1)........ NR3 4,362 4,643 Lincoln National Life Insurance Company(2)........... A 999 1,142 Employer's Reassurance Corporation(2)................ A++ 510 662 Reassure America Life Insurance Company(2)........... A++ 426 400 Life and Health of America........................... B- 388 409 Transamerica Occidental Life Insurance Company....... A+ 30 1 Reassurance Company of Hanover....................... A 15 11 Swiss Reassurance Life and Health America............ A++ 7 6
- ------------------------ (1) Reinsurance recoverable is supported by assets held in trust. (2) We determine the amount of reinsurance recoverable in accordance with GAAP on an aggregate basis for multiple companies that provide reinsurance on our disability business. In order to segregate the risk by reinsurer, we have listed the amount reported for Reassure America Life Insurance Company and Lincoln National Life Insurance Company for reserve credits as calculated under statutory accounting principles as of December 31, 2001 and 2000. The amounts reported for Employer's Reassurance Corporation include the net differences between statutory and GAAP reporting for our disability reinsurance. (h) INVESTMENTS We have categorized all of our investment securities as available for sale because they may be sold in response to changes in interest rates, prepayments and similar factors. Investments in this category 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 total shareholders' equity on the balance sheet. As of June 30, 2002, shareholders' equity was increased by $611,000 due to unrealized gains of $926,000 in the investment portfolio. As of December 31, 2001, shareholders' equity was increased by $10,581,000 due to unrealized gains of $16,032,000 in the investment portfolio. The amortized cost and 43 estimated market value of our available for sale investment portfolio as of June 30, 2002 and December 31, 2001 are as follows:
JUNE 30, 2002 DECEMBER 31, 2001 ------------------------ ------------------------ AMORTIZED ESTIMATED AMORTIZED ESTIMATED COST MARKET VALUE COST MARKET VALUE --------- ------------ --------- ------------ (IN THOUSANDS) U.S. Treasury securities and obligations of U.S. Government authorities and agencies............ $13,451 $14,513 $164,712 $172,063 Obligations of states and political sub-divisions.................................. -- -- 572 612 Mortgage backed securities....................... 1,924 1,970 42,587 43,331 Debt securities issued by foreign governments.... 206 212 11,954 12,089 Corporate securities............................. 8,930 8,742 243,793 250,513 Equities......................................... -- -- 8,760 9,802 Policy Loans..................................... 209 209 181 181 ------- ------- -------- -------- Total Investments................................ $24,720 $25,646 $472,559 $488,591 ======= ======= ======== ======== Net unrealized gain.............................. 926 16,032 ------- -------- $25,646 488,591 ======= ========
Our investment portfolio, excluding our experience account, consists primarily of investment grade fixed income securities. Income generated from this portfolio is largely dependent upon prevailing levels of interest rates. Due to the duration of our investments (approximately 5.0 years), investment income does not immediately reflect changes in market interest rates. In 2001, we classified our convertible portfolio as trading account investments. Changes in trading account investment market values are recorded in our statement of operations during the period in which the change occurs, rather than as an unrealized gain or loss recorded directly through equity. We recorded a trading account loss in 2001 of $3,428,000, which reflects the unrealized and realized loss of our convertible portfolio that arose during the year ended December 31, 2001. At December 31, 2001, we had liquidated our entire trading portfolio. In February 2002, in connection with our December 31, 2001 reinsurance agreement, we transferred substantially our entire investment portfolio to our reinsurer. The reinsurer will maintain a notional experience account for our benefit that includes the initial premium paid, all future cash flows from the reinsured business and accumulated investment earnings. The reinsurer provides us with an experience account investment credit equal to the total return of a series of benchmark indices and hedges, which are designed to closely match the duration of our claims liabilities. We are accounting for the experience account investment credit in accordance with SFAS No. 133 and have determined to bifurcate the total return into two components: 1. the investment income component, or an embedded derivative debt host with a yield that is represented by the current yield to maturity of the underlying benchmark indices, in effect providing us with investment earnings equal to current market rates, and 2. a change in market value component, which reflects the effect of a change in current interest rates, as determined by the current market value of the underlying indices. As a result, our future financial statements are subject to significant volatility. Recorded market value gains or losses, although recognized in current earnings, are expected to be offset in future periods as 44 a result of our receipt of the most recent market rates, and, therefore, have no anticipated long-term impact on shareholder value. The experience account balance at June 30, 2002 was $594,449,000. (i) SELECTED FINANCIAL INFORMATION: STATUTORY BASIS The following table shows certain ratios derived from our insurance regulatory filings with respect to our accident and health policies presented in accordance with accounting principles prescribed or permitted by insurance regulatory authorities ("SAP"), which differ from the presentation under generally accepted accounting principles ("GAAP") and, which also differ from the presentation under SAP for purposes of demonstrating compliance with statutorily mandated loss ratios. See "Government Regulation."
YEAR ENDED DECEMBER 31, -------------------------------------- 2001 2000 1999 -------- -------- -------- Loss Ratio(1)(4)................................. 154.4% 67.1% 70.4% Expense ratio(2)(4).............................. (201.3)% 114.4% 44.1% ------ ----- ----- Combined loss and expense ratio.................. (46.9)% 181.5% 114.5% ====== ===== ===== Persistency(3)................................... 88.0% 86.4% 86.7%
- ------------------------ (1) Loss ratio is defined as incurred claims and increases in policy reserves divided by collected premiums. (2) Expense ratio is defined as commissions and expenses incurred divided by collected premiums. (3) Persistency represents the percentage of premiums renewed, which we calculate by dividing the total annual premiums in-force at the end of each year (less first year business for that year) by the total annual premiums in-force for the prior year. For purposes of this calculation, a decrease in total annual premiums in-force at the end of any year would be a result of non-renewal policies, including those policies that have terminated by reason of death, lapse due to nonpayment of premiums and/or conversion to other policies offered by us. (4) The 2001, 2000 and 1999 loss ratios and expense ratios are significantly affected by the reinsurance of approximately $408,093,000, $225,741,000 and $90,230,000, respectively, in premium on a statutory basis under financial and other reinsurance treaties reserves are accounted for as offsetting negative benefits and negative premium, causing substantial deviation in reported ratios. STATUTORY ACCOUNTING PRACTICES. As long-term care insurers, our insurance subsidiaries are required by state insurance regulation to have statutory surplus, which is calculated differently than under GAAP, at a sufficient level to support existing policies as well as new business growth. Under SAP, costs associated with sales of new policies must be charged to earnings as incurred. Because these costs, together with required reserves, generally exceed first year premiums, statutory surplus may be reduced during periods of increasing first year sales. The commissions paid to agents on new business production are generally higher for new business than for renewing policies. Because statutory accounting requires commissions to be expensed as paid, rapid growth in first year business generally results in higher expense ratios. Effective December 31, 2001, we entered a reinsurance transaction that, according to Pennsylvania insurance regulation, required the reinsurer to provide us with Letters of Credit in order for us to receive statutory reserve and surplus credit from the reinsurance. The Letters of Credit were dated subsequent to December 31, 2001, to reflect that of the final closing of the agreement. In addition, the initial premium paid for the reinsurance included investment securities carried at amortized cost but 45 valued at market price for purposes of the premium transfer and the experience account. The Pennsylvania Insurance Department permitted us to receive credit of $29,000,000 for the Letters of Credit, and to accrue the anticipated, yet unknown, gain of $18,000,000 from the sale of securities at market value, in our statutory financial results for December 31, 2001. The impact of this permitted practice served to increase the statutory surplus of our insurance subsidiaries by approximately $47,000,000 at December 31, 2001. Had we not been granted a permitted practice, our statutory surplus would have been negative until the first quarter 2002 reporting period, when a permitted practice would no longer be required due to our receipt of the Letters of Credit prior to March 31, 2002. MINIMUM LOSS RATIOS. Mandated loss ratios are calculated in a manner intended to provide adequate reserving for the long-term care insurance risks, using statutory lapse rates and certain assumed interest rates. The statutorily assumed interest rates differ from those used in developing reserves under GAAP. For this reason, statutory loss ratios differ from loss ratios reported under GAAP. Mandatory statutory loss ratios also differ from loss ratios reported on a current basis under SAP for purposes of our annual and quarterly state insurance filings. The states in which we are licensed have the authority to change these minimum ratios and to change the manner in which these ratios are computed and the manner in which compliance with these ratios is measured and enforced. We are unable to predict the impact of (1) the imposition of any changes in the mandatory statutory loss ratios for individual or group long-term care policies to which we may become subject, (2) any changes in the minimum loss ratios for individual or group long-term care or Medicare supplement policies, or (3) any change in the manner in which these minimums are computed or enforced in the future. We have not been informed by any state that our subsidiaries do not meet mandated minimums, and we believe we are in compliance with all such minimum ratios. In the event the we are not in compliance with minimum statutory loss ratios mandated by regulatory authorities with respect to certain policies, we may be required to reduce or refund our premiums on such policies. (j) INSURANCE INDUSTRY RATING AGENCIES Our subsidiaries have A.M. Best ratings of "B- (fair)" and Standard & Poor's ratings of "B- (weak)." A.M. Best and Standard & Poor's ratings are based on a comparative analysis of the financial condition and operating performance for the prior year of the companies rated, as determined by their publicly available reports. A.M. Best's classifications range from "A++ (superior)" to "F (in liquidation)." Standard & Poor's ratings range from "AAA (extremely strong)" to "CC (extremely weak)." A.M. Best and Standard & Poor's ratings are based upon factors of concern to policyholders and insurance agents and are not directed toward the protection of investors and are not recommendations to buy, hold or sell a security. In evaluating a company's financial and operating performance, the rating agencies review profitability, leverage and liquidity, as well as book of business, the adequacy and soundness of reinsurance, the quality and estimated market value of assets, the adequacy of reserves and the experience and competence of management. Certain distributors will not sell our group products unless we have a financial strength rating of at least an "A-." The inability of our subsidiaries to obtain higher A.M. Best or Standard & Poor's ratings will adversely affect the sales of our products if customers favor policies of competitors with better ratings. In addition, a downgrade in our ratings may cause our policyholders to allow their existing policies to lapse. Increased lapsation would reduce our premium income and would also cause us to expense fully the deferred policy costs relating to lapsed policies in the period in which those policies lapsed. Recent downgrades or further downgrades in our ratings also may lead some independent agents to sell less of our products or to cease selling our policies altogether. (k) COMPETITION We operate in a highly competitive industry. We believe that competition is based on a number of factors, including service, products, premiums, commission structure, financial strength, insurance 46 industry ratings and name recognition. We compete with a large number of national insurers, smaller regional insurers and specialty insurers, many of whom have considerably greater financial resources, higher ratings from A.M. Best and Standard and Poor's and larger networks of agents than we do. Many insurers offer long-term care policies similar to those we offer and utilize similar marketing techniques. In addition, we are subject to competition from insurers with broader product lines. We also may be subject, from time to time, to new competition resulting from changes in Medicare benefits, as well as from additional private insurance carriers introducing products similar to those offered by us. We also actively compete with other insurers in attracting and retaining agents to distribute our products. Competition for agents is based on quality of products, commission rates, underwriting, claims service and policyholder service. We continuously recruit and train independent agents to market and sell our products. We also engage marketing general agents from time to time to recruit independent agents and develop networks of agents in various states. Our business and ability to compete may suffer if we are unable to recruit and retain insurance agents and if we lose the services provided by our marketing general agents. We also compete with non-insurance financial services companies such as banks, securities brokerage firms, investment advisors, mutual fund companies and other financial intermediaries marketing insurance products, annuities, mutual funds and other retirement-oriented investments. The Gramm-Leach-Bliley Financial Services Modernization Act of 1999 ("Gramm-Leach-Bliley Act") implemented fundamental changes in the regulation of the financial services industry, permitting mergers that combine commercial banks, insurers and securities firms under one holding company. The ability of banks to affiliate with insurers may adversely affect our ability to remain competitive. The insurance industry may undergo further change in the future and, accordingly, new products and methods of service may also be introduced. In order to keep pace with any new developments, we may need to expend significant capital to offer new products and to train our agents and employees to sell and administer these products and services. Our ability to compete with other insurers depends on our success in developing new products. (l) GOVERNMENT REGULATION Insurance companies are subject to supervision and regulation in all states in which they transact business. We are registered and approved as a holding company under the Pennsylvania Insurance Code. Our insurance company subsidiaries are chartered in the states of Pennsylvania and New York. We are currently licensed in all states and the District of Columbia. The extent of regulation of insurance companies varies, but generally derives from state statutes which delegate regulatory, supervisory and administrative authority to state insurance departments. Although many states' insurance laws and regulations are based on models developed by the National Association of Insurance Commissioners, and are therefore similar, variations among the laws and regulations of different states are common. The NAIC is a voluntary association of all of the state insurance commissioners in the United States. The primary function of the NAIC is to develop model laws on key insurance regulatory issues that can be used as guidelines for individual states in adopting or enacting insurance legislation. While the NAIC model laws are accorded substantial deference within the insurance industry, these laws are not binding on insurance companies unless adopted by states, and variation from the model laws within states is common. The Pennsylvania Insurance Department, the New York Insurance Department and the insurance regulators in other jurisdictions have broad administrative and enforcement powers relating to the granting, suspending and revoking of licenses to transact insurance business, the licensing of agents, the 47 regulation of premium rates and trade practices, the content of advertising material, the form and content of insurance policies and financial statements and the nature of permitted investments. In addition, regulators have the power to require insurance companies to maintain certain deposits, capital, surplus and reserve levels calculated in accordance with prescribed statutory standards. The NAIC has developed minimum capital and surplus requirements utilizing certain risk-based factors associated with various types of assets, credit, underwriting and other business risks. This calculation, commonly referred to as RBC, serves as a benchmark for the regulation of insurance company solvency by state insurance regulators. The primary purpose of such supervision and regulation is the protection of policyholders, not investors. Most states mandate minimum benefit standards and loss ratios for long-term care insurance policies and for other accident and health insurance policies. Most states have adopted the NAIC's proposed standard minimum loss ratios of 65% for individual Medicare supplement policies and 75% for group Medicare supplement policies. A significant number of states, including Pennsylvania and Florida, also have adopted the NAIC's proposed minimum loss ratio of 60% for both individual and group long-term care insurance policies. Certain states, including New Jersey and New York, have adopted a minimum loss ratio of 65% for long-term care. The states in which we are licensed have the authority to change these minimum ratios, the manner in which these ratios are computed and the manner in which compliance with these ratios is measured and enforced. On an annual basis, the Pennsylvania Insurance Department and the New York Insurance Department are provided with a calculation prepared by our consulting actuaries regarding compliance with required minimum loss ratios for Medicare supplement and credit policies. This report is made available to all states. Although certain other policies (e.g., nursing home and hospital care policies) also have specific mandated loss ratio standards, there presently are no similar reporting requirements in the states in which we do business for such other policies. In December 1986, the NAIC adopted the Long-Term Care Insurance Model Act ("Model Act"), which was adopted to promote the availability of long-term care insurance policies, to protect applicants for such insurance and to facilitate flexibility and innovation in the development of long-term care coverage. The Model Act establishes standards for long-term care insurance, including provisions relating to disclosure and performance standards for long-term care insurers, incontestability periods, nonforfeiture benefits, severability, penalties and administrative procedures. Model regulations were also developed by the NAIC to implement the Model Act. Some states have also adopted standards relating to agent compensation for long-term care insurance. In addition, from time to time, the federal government has considered adopting standards for long-term care insurance policies, but it has not enacted any such legislation to date. Some state legislatures have adopted proposals to limit rate increases on long-term care insurance products. In the past, we have been generally successful in obtaining rate increases when necessary. We currently have rate increases on file with various state insurance departments and anticipate that increases on other products may be required in the future. If we are unable in the future to obtain rate increases, or in the event of legislation limiting rate increases, we believe it would have a negative impact on our future earnings. In September 1996, Congress enacted the Health Insurance Portability and Accountability Act ("HIPAA"), which permits premiums paid for eligible long-term care insurance policies after December 31, 1996 to be treated as deductible medical expenses for federal income tax purposes. The deduction is limited to a specified dollar amount ranging from $200 to $2,500, with the amount of the deduction increasing with the age of the taxpayer. In order to qualify for the deduction, the insurance contract must, among other things, provide for limitations on pre-existing condition exclusions, prohibitions on excluding individuals from coverage based on health status and guaranteed renewability of health insurance coverage. Although we offer tax-deductible policies, we will continue to offer a 48 variety of non-deductible policies as well. We have long-term care policies that qualify for tax exemption under HIPAA in all states in which we are licensed. In 1998, the NAIC adopted the Codification of Statutory Accounting Principles ("Codification") guidance, which replaced the current Accounting Practices and Procedures manual as the NAIC's primary guidance on statutory accounting as of January 1, 2001. The Codification provides guidance for areas where statutory accounting has been silent and changes current statutory accounting in some areas, including the recognition of deferred income taxes. The Pennsylvania and New York Insurance Departments have adopted the Codification guidance, effective January 1, 2001. The Codification guidance serves to reduce the insurance subsidiaries' surplus, primarily due to certain limitations on the recognition of goodwill and EDP equipment and the recognition of other than temporary declines in investments. In 2001, our statutory surplus was reduced by approximately $2,000 as a result of the Codification guidance. These reductions are partially offset by certain other items, including the recognition of deferred tax assets subject to certain limitations. We are also subject to the insurance holding company laws of Pennsylvania and of the other states in which we are licensed to do business. These laws generally require insurance holding companies and their subsidiary insurers to register and file certain reports, including information concerning their capital structure, ownership, financial condition and general business operations. Further, states often require prior regulatory approval of changes in control of an insurer and of intercompany transfers of assets within the holding company structure. The Pennsylvania Insurance Department and the New York Insurance Department must approve the purchase of more than 10% of the outstanding shares of our common stock by one or more parties acting in concert, and may subject such party or parties to the reporting requirements of the insurance laws and regulations of Pennsylvania and New York and to the prior approval and/or reporting requirements of other jurisdictions in which we are licensed. In addition, our officers, directors and 10% shareholders and those of our insurance subsidiaries are subject to the reporting requirements of the insurance laws and regulations of Pennsylvania and New York, as the case may be, and may be subject to the prior approval and/or reporting requirements of other jurisdictions in which they are licensed. Under Pennsylvania law, public utilities and their affiliates, subsidiaries, officers and employees may not be licensed or admitted as insurers. If any public utility or affiliate, subsidiary, officer or employee of any public utility acquires 5% or more of the outstanding shares of our common stock, such party may be deemed to be an affiliate, in which event our Certificate of Authority to do business in Pennsylvania may be revoked upon a determination by the Pennsylvania Insurance Department that such party exercises effective control over us. Although several entities own more than 5% of our common stock, no public utility or affiliate, subsidiary, officer or employer of any public utility holds sufficient voting authority to exercise effective control over us. States also restrict the dividends our insurance subsidiaries are permitted to pay. Dividend payments will depend on profits arising from the business of our insurance company subsidiaries, computed according to statutory formulae. Under the insurance laws of Pennsylvania and New York, insurance companies can pay dividends only out of surplus. In addition, Pennsylvania law requires each insurance company to give 30 days advance notice to the Pennsylvania Insurance Department of any planned extraordinary dividend (any dividend paid within any twelve-month period which exceeds the greater of (1) 10% of an insurer's surplus as shown in its most recent annual statement filed with the Insurance Department or (2) its net gain from operations, after policyholder dividends and federal income taxes and before realized gains or losses, shown in such statement) and the Insurance Department may refuse to allow it to pay such extraordinary dividends. Our Corrective Action Plan also requires the approval of the Pennsylvania Insurance Department of all dividends. Under New York law, our New York insurance subsidiary must give the New York Insurance Department 30 days' 49 advance notice of any proposed extraordinary dividend and cannot pay any dividend if the regulator disapproves the payment during that 30-day period. In addition, our New York insurance company must obtain the prior approval of the New York Insurance Department before paying any dividend that, together with all other dividends paid during the preceding twelve months, exceeds the lesser of 10% of the insurance company's surplus as of the preceding December 31 or its adjusted net investment income for the year ended the preceding December 31. In 2002, we received a dividend from our New York subsidiary of $651,000. The dividend proceeds were used for parent company liquidity needs. We believe that, other than our New York subsidiary, none of our insurance subsidiaries are eligible to make dividend payments to the parent company in 2002. Periodically, the federal government has considered adopting a national health insurance program. Although it does not appear that the federal government will enact an omnibus health care reform law in the near future, the passage of such a program could have a material impact upon our operations. In addition, legislation enacted by Congress could impact our business. Among the proposals are the implementation of certain minimum consumer protection standards for inclusion in all long-term care policies, including guaranteed renewability, protection against inflation and limitations on waiting periods for pre-existing conditions. These proposals would also prohibit "high pressure" sales tactics in connection with long-term care insurance and would guarantee consumers access to information regarding insurers, including lapse and replacement rates for policies and the percentage of claims denied. As with any pending legislation, it is possible that any laws finally enacted will be substantially different from the current proposals. Accordingly, we are unable to predict the impact of any such legislation on our business and operations. Compliance with multiple federal and state privacy laws may affect our profits. Congress enacted the Gramm-Leach-Bliley Financial Services Modernization Act in November 1999. Federal agencies have adopted regulations to implement this legislation. The Gramm-Leach-Bliley Act empowers states to adopt their own measures to protect the privacy of consumers and customers of insurers that are covered by the Gramm-Leach-Bliley Act, so long as those protections are at least as stringent as those required by the Gramm-Leach-Bliley Act. If states do not enact their own insurance privacy laws or adopt regulations, the privacy requirements of the Gramm-Leach-Bliley Act will apply to insurers, although no enforcement mechanism has yet been adopted for insurers. The Department of Health and Human Services has adopted privacy rules, which will also apply to at least some of our products. The NAIC has adopted the Insurance Information and Privacy Model Act, but no state has yet adopted this model act. Individual state insurance regulators have indicated that their states may adopt privacy laws or regulations that are more stringent than the NAIC's model act and those provided for under federal law. Compliance with different laws in states where we are licensed could prove extremely costly. We monitor economic and regulatory developments that have the potential to impact our business. Recently enacted federal legislation will allow banks and other financial organizations to have greater participation in securities and insurance businesses. This legislation may present an increased level of competition for sales of our products. Furthermore, the market for our products is enhanced by the tax incentives available under current law. Any legislative changes that lessen these incentives could negatively impact the demand for these products. (m) EMPLOYEES As of June 30, 2002, we had 292 full-time employees (not including independent agents). We are not a party to any collective bargaining agreements. 50 (n) PROPERTIES Our principal offices in Allentown, Pennsylvania occupy two buildings, totaling approximately 30,000 square feet of office space in a 40,000 square foot building and all of an 8,000 square foot building. We own both buildings and a 2.42 acre undeveloped parcel of land located across the street from our home offices. We also lease additional office space in Michigan and New York. (o) LEGAL PROCEEDINGS Our subsidiaries are parties to various lawsuits generally arising in the normal course of their business. We do not believe that the eventual outcome of any of the suits to which we are party will have a material adverse effect on our financial condition or results of operations. However, the outcome of any single event could have a material impact upon the quarterly or annual financial results of the period in which it occurs. The Company and certain of our key executive officers are defendants in consolidated actions that were instituted on April 17, 2001 in the United States District Court for the Eastern District of Pennsylvania by shareholders of the Company, on their own behalf and on behalf of a putative class of similarly situated shareholders who purchased shares of the Company's common stock between July 23, 2000 through and including March 29, 2001. The consolidated amended class action complaint seeks damages in an unspecified amount for losses allegedly incurred as a result of misstatements and omissions allegedly contained in our periodic reports filed with the SEC, certain press releases issued by us, and in other statements made by our officials. The alleged misstatements and omissions relate, among other matters, to the statutory capital and surplus position of our largest subsidiary, Penn Treaty Network America Insurance Company. On December 7, 2001, the defendants filed a motion to dismiss the complaint, which was denied on May 15, 2002. We believe that the complaint is without merit, and we will continue to vigorously defend the matter. On July 1, 2002, the defendants filed an answer to the complaint, denying all liability. Plaintiffs filed a motion for class certification on August 15, 2002, which is currently pending. 51 CERTAIN UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS The following is a general discussion of certain anticipated U.S. Federal income tax consequences to U.S. holders and non-U.S. holders whose Subordinated Notes are tendered and accepted in the exchange offer. For purposes of this discussion, a U.S. holder is a beneficial holder of the Subordinated Notes or Exchange Notes received in the Exchange Offer that is: - a citizen or resident of the United States, including, an alien resident who is a lawful permanent resident of the United States or who meets the substantial presence test under Section 7701(b) of the Internal Revenue Code; - a corporation (or other entity taxable as a corporation for United States Federal income tax purposes) created or organized under the laws of the United States or any political subdivision thereof; - an estate, if its income is subject to United States Federal income taxation regardless of its source; or - a trust, if a United States court is able to exercise primary supervision over the administration of the trust and one or more United States persons have the authority to control all substantial decisions of the trust, or if it has made a valid election to be treated as a United States person. A non-U.S. holder is a holder that is not a U.S. holder. This discussion does not purport to address all aspects of United States Federal income taxation that may be relevant to particular holders in light of their personal circumstances or the effect of any applicable state, local or foreign tax laws. In addition, this discussion does not deal with persons that are subject to special tax rules, such as (i) dealers or traders in securities or currencies, (ii) financial institutions or other U.S. holders that treat income in respect of the Subordinated Notes or the Exchange Notes as financial services income, (iii) insurance companies, (iv) tax-exempt entities, (v) persons holding Subordinated Notes or Exchange Notes as part of a straddle, conversion transaction or other arrangement involving more than one position, or (vi) persons whose functional currency is not the U.S. dollar. This discussion assumes that the Subordinated Notes are held, and the Exchange Notes will be held, as "capital assets" within the meaning of Section 1221 of the Internal Revenue Code. Because the law with respect to certain United States Federal income tax consequences of the exchange of Subordinated Notes for Exchange Notes is uncertain and no ruling has been or will be requested from the Internal Revenue Service (the "IRS") on any tax matter concerning the exchange of Subordinated Notes for Exchange Notes, no assurances can be given that the IRS or a court considering these issues would agree with the positions or conclusions discussed below. HOLDERS ARE URGED TO CONSULT THEIR TAX ADVISORS AS TO THE CONSEQUENCES TO THEM OF THE EXCHANGE OFFER, INCLUDING THE APPLICABILITY AND EFFECT OF FEDERAL, STATE, LOCAL AND FOREIGN INCOME AND OTHER TAX LAWS. FEDERAL INCOME TAX CONSEQUENCES TO U.S. HOLDERS WHO EXCHANGE SUBORDINATED NOTES FOR EXCHANGE NOTES GENERAL. The exchange of Subordinated Notes for Exchange Notes will qualify as a recapitalization under Section 368(a)(1)(E) of the Internal Revenue Code if the Subordinated Notes and Exchange Notes are considered "securities" for the United States Federal income tax purposes. The law is unclear as to whether a debt instrument with a six-year maturity is considered a security. If the exchange qualifies as a recapitalization, (i) no gain or loss will be recognized by an exchanging U.S. holder except that gain (i.e., the excess of the fair market value of the Exchange Notes plus the amount of cash received over the tax basis of the Subordinated Notes), if any, will be recognized to the extent of the amount of cash received, (ii) the Exchange Notes will have an initial tax basis in the hands of 52 the exchanging U.S. holder equal to the tax basis of the Subordinated Notes exchanged, and (iii) the Exchange Notes will have a holding period that includes the period during which the exchanging U.S. holder held the Subordinated Notes. Management believes that neither the Exchange Notes nor the Subordinated Notes are publicly traded as defined in the Regulations under Section 1273 of the Internal Revenue Code. Therefore, if the exchange does not qualify as a recapitalization, so long as the 6 1/4% interest rate on the Exchange Notes is at least equal to the applicable federal rate for notes of this term, an exchanging U.S. holder will (i) recognize gain or loss on the exchange in the amount of the difference between its tax basis for Penn Treaty's Subordinated Notes and the face amount of the Exchange Notes, (ii) have a tax basis in the Exchange Notes equal to the face amount of the Exchange Notes at the time of the exchange, and (iii) have a holding period in the Exchange Notes that begins on the date of the exchange. MARKET DISCOUNT. If the exchange qualifies as a recapitalization, market discount rules will apply to any Exchange Notes received by an exchanging U.S. holder who acquired its Subordinated Notes subsequent to their original issuance at a price lower (by more than a de minimis amount) than the revised issue price of such Subordinated Notes. An Exchange Note that is exchanged for a Subordinated Note with market discount will continue to accrue market discount over its term. Holders exchanging market discount Subordinated Notes pursuant to the exchange offer will not recognize any gain or loss upon the exchange with respect to accrued market discount. Any gain recognized by the U.S. holder on the disposition of Exchange Notes received in exchange for Subordinated Notes having market discount will be treated as ordinary income to the extent of the market discount that accrued while held by such holder. A U.S. holder of a debt instrument acquired at market discount may elect to include market discount in gross income as such market discount accrues, either on a straight-line basis or a constant interest rate basis. This current inclusion election, once made, applies to all market discount obligations acquired by the U.S. holder on or after the first day of the first taxable year to which such election applies and is revocable only with the consent of the IRS. Unless the U.S. holder elects to include market discount in income on a current basis, as described above, the holder could be required to defer the deduction of a portion of the interest paid on any indebtedness incurred or maintained to purchase or carry market discount Subordinated Notes and Exchange Notes. ACQUISITION PREMIUM. To the extent that the tax basis of a U.S. holder in an Exchange Note exceeds the issue price of such Exchange Note but is not more than the principal amount of such Exchange Note, the full daily portions of original issue discount will still be reported for each holder of such Exchange Note for information reporting purposes, but the exchanging U.S. holder will reduce each daily portion of original issue discount includible in the U.S. holder's gross income by a constant fraction calculated so as to cause the full amount of such excess to be amortized over the life of such Exchange Note. SALE OR EXCHANGE OF EXCHANGE NOTES. In general, subject to the rules discussed above under "Market Discount," the sale, exchange or redemption of the Exchange Notes will result in capital gain or loss equal to the difference between the amount realized and the exchanging U.S. holder's tax basis in the Exchange Notes immediately before such sale, exchange or redemption (which will reflect any original issue discount and market discount previously included in income). PAYMENT OF INTEREST. Interest on the Exchange Notes will generally be taxable as ordinary income at the time it is paid or accrued based on the U.S. holder's method of accounting for United States Federal income tax purposes. CONVERSION OF EXCHANGE NOTES. In general, income, gain or loss will not be recognized on the conversion of Exchange Notes into common stock, except for any cash received instead of a fractional share of common stock as described below or accrued market discount not previously taxed. Any gain so recognized will generally be capital gain. The tax basis in the common stock received in the 53 conversion will be the same as the U.S. holder's adjusted tax basis in the Exchange Notes at the time of conversion, reduced by any basis attributable to fractional shares. For capital gains purposes, the holding period for the common stock will generally include the holding period for the Exchange Notes that were converted (as noted above, the U.S. holder's holding period should include the period during which the U.S. holder held his or her Subordinated Note prior to the exchange). Cash received instead of a fractional share of common stock should be treated as a payment in exchange for the fractional share of common stock. This will result in capital gain or loss (measured by the difference between the cash received for the fractional share and the adjusted tax basis allocated to the fractional share). ADJUSTMENTS TO CONVERSION PRICE. Certain adjustments to the conversion price of the Exchange Notes that increase the proportionate interest of the U.S. holders of the Exchange Notes in the common stock, made to reflect the issuance of certain rights, warrants, evidences of indebtedness, securities or other assets to holders of common stock may result in constructive distributions to the U.S. holders of the Exchange Notes, taxable as ordinary income (subject to a possible dividends received deduction in the case of corporate holders) to the extent of Penn Treaty's current earnings and profits as of the end of the taxable year to which such constructive distribution relates and/or accumulated earnings and profits. In addition, if full adjustment to the conversion price is not made upon the issuance of a stock dividend or upon the occurrence of another event, resulting in the increase in the proportionate interests of holders of common stock, such increase in the proportionate interests of holders of common stock will be treated as a distribution to such holders, taxable as ordinary income (subject to a possible dividends received deduction in the case of corporate holders) to the extent of Penn Treaty's current earnings and profits as of the end of the taxable year to which such constructive distribution relates and/or accumulated earnings and profits. BACKUP WITHHOLDING AND INFORMATION REPORTING. The Internal Revenue Code and the Treasury regulations require those who make specified payments to report the payments to the IRS. Among the specified payments are interest, dividends, and proceeds paid by brokers to their customers. The required information returns enable the IRS to determine whether the recipient properly included the payments in income. This reporting regime is reinforced by "backup withholding" rules. These rules require the payors to withhold tax from payments subject to information reporting if the recipient fails to cooperate with the reporting regime by failing to provide his taxpayer identification number to the payor, furnishing an incorrect identification number, or repeatedly failing to report interest or dividends on his returns. The withholding tax rate is currently 30 percent, but will be reduced to 29 percent effective January 1, 2004, and to 28 percent effective January 1, 2006. The information reporting and backup withholding rules do not apply to payments to corporations. Payments of interest or dividends to individual U.S. holders of Exchange Notes or common stock will generally be subject to information reporting, and will be subject to backup withholding unless the holder provides us or our paying agent with a correct taxpayer identification number. Payments made by a broker to a U.S. holder of Exchange Notes or common stock upon a sale of the Exchange Notes or common stock will generally be subject to information reporting and backup withholding. If, however, the sale is made through a foreign office of a U.S. broker, the sale will be subject to information reporting but not backup withholding. If the sale is made through a foreign office of a foreign broker, the sale will generally not be subject to either information reporting or backup withholding. This exception may not apply, however, if the foreign broker is owned or controlled by U.S. persons, or is engaged in a U.S. trade or business. Any amounts withheld from a payment to a U.S. holder of Exchange Notes or common stock under the backup withholding rules can be credited against any United States Federal income tax liability of the holder. 54 Each prospective investor should consult its own tax advisor regarding the particular United States Federal, state, local, and foreign tax consequences of the exchange offer and of holding and disposing of Exchange Notes and common stock, including the consequences of any proposed change in applicable laws. FEDERAL INCOME TAX CONSEQUENCES TO NON-U.S. HOLDERS WHO EXCHANGE SUBORDINATED NOTES FOR EXCHANGE NOTES THE EXCHANGE. Except as described in the discussion regarding gain or income realized upon the sale, exchange, redemption or other taxable disposition of an Exchange Note in the section captioned "Federal income tax consequences to non-U.S. holders who exchange Subordinated Notes for Exchange Notes--The Exchange Notes," a non-U.S. holder generally will not be subject to United States Federal income tax on any gains resulting from the exchange of the Subordinated Notes for the Exchange notes. THE EXCHANGE NOTES. Under present United States Federal income and estate tax law, and subject to the below concerning backup withholding: (a) no withholding of United States Federal income tax will be required with respect to the payment by Penn Treaty of principal or interest on an Exchange Note owned by a non-U.S. holder, provided that (i) the beneficial owner does not actually or constructively own 10% or more of the total combined voting power of all classes of stock of Penn Treaty entitled to vote within the meaning of section 871(h)(3) of the Internal Revenue Code and the regulations thereunder, (ii) the beneficial owner is not a controlled foreign corporation that is related to Penn Treaty through stock ownership, (iii) the beneficial owner is not a bank whose receipt of interest on an Exchange Note is described in section 881(c)(3)(A) of the Internal Revenue Code and (iv) the beneficial owner satisfies the statement requirement (described generally below) set forth in section 871(h) and section 881(c) of the Internal Revenue Code and the regulations thereunder; and (b) no withholding of United States Federal income tax will be required with respect to any gain or income realized by a non-U.S. holder upon the sale, exchange or retirement of an Exchange Note. To satisfy the requirement referred to in (a)(iv) above, the beneficial owner of such Note, or a financial institution holding the Exchange Note on behalf of such owner in the ordinary course of its trade or business, must provide, in accordance with specified procedures, Penn Treaty (or a paying agent of Penn Treaty) with a statement to the effect that the beneficial owner is not a U.S. person. Pursuant to current Treasury regulations, these requirements will be met if (1) the beneficial owner provides his name and address, and certifies, under penalties of perjury, that he is not a U.S. person (which certification may be made on IRS Form W-8 (or successor form)) or (2) a financial institution holding the Exchange Note on behalf of the beneficial owner certifies, under penalties of perjury, that such a statement has been received by it and furnishes a paying agent with a copy thereof. If a non-U.S. holder cannot satisfy the requirements of the "portfolio interest" exception described in (a) above, payments of interest made to such non-U.S. holder will be subject to a 30% withholding tax unless the beneficial owner of the Exchange Note provides Penn Treaty or its paying agent, as the case may be, with a properly executed (1) IRS Form 1001 (or successor form) claiming an exemption from withholding under the benefit of a tax treaty or (2) IRS Form 4224 (or successor form) stating that interest paid on the Exchange Note is not subject to withholding tax because it is effectively connected with the beneficial owner's conduct of a trade or business in the United States. If interest on an Exchange Note is effectively connected with the conduct by a non-U.S. holder of a trade or business in the United States, the non-U.S. holder, although exempt from the withholding tax discussed above, generally will be subject to United States Federal income tax on such amounts in 55 the same manner as if it were a United States Exchange Note holder. In addition, if such Exchange Note holder is a foreign corporation, it may be subject to a branch profits tax equal to 30% of its effectively connected earnings and profits for the taxable year, subject to adjustments. For this purpose, interest on an Exchange Note will be included in such foreign corporation's earnings and profits. Any gain or income realized upon the sale, exchange, redemption or other taxable disposition of an Exchange Note (which includes those instances in which a Holder elects to convert its Exchange Note into Penn Treaty common stock and Penn Treaty exercises its right to deliver cash (instead of Common Stock) in an amount equal to the common stock that such Exchange Note holder would have otherwise received) generally will not be subject to United States Federal income tax unless (i) such gain or income is effectively connected with the conduct by the non-U.S. holder of a United States trade or business or (ii) in the case of an individual, such non-U.S. holder is present in the United States for a total of 183 days or more during the taxable year of such sale, exchange or retirement, and certain other conditions are met. Additionally, such gain or income would be subject to United States Federal income tax if Penn Treaty were a "United States real property holding corporation" and the fair market value of the Exchange Notes owned by such non-U.S. holder (determined on the date such Exchange Notes were acquired) exceeded the fair market value of 5% of Penn Treaty common stock (determined also on such date) (see discussion below in the section captioned "--Federal income tax consequences to non-U.S. holders who exchange Subordinated Notes for Exchange Notes--The Common Stock"). In general, upon conversion of an Exchange Note into common stock, a non-U.S. holder will not recognize any gain or loss for United States Federal income tax purposes. See "--Federal income tax consequences to U.S. holders who exchange Subordinated Notes for Exchange Notes--Conversion of Exchange Notes." A Note beneficially owned by an individual who at the time of death is a non-U.S. holder will not be subject to United States Federal estate tax as a result of such individual's death, provided that such individual does not actually or constructively own 10% or more of the total combined voting power of all classes of capital stock of Penn Treaty entitled to vote within the meaning of section 871(h)(3) of the Internal Revenue Code and provided that the interest payments with respect to such Note would not have been, if received at the time of such individual's death, effectively connected with the conduct of a United States trade or business by such individual. Even if the Exchange Note was includable in the gross estate under the foregoing rules, the Exchange Note may be excluded under the provisions of an applicable estate tax treaty. INFORMATION REPORTING AND BACKUP WITHHOLDING. Payments on the Exchange Notes made by Penn Treaty or any paying agent of Penn Treaty and payments of dividends on Penn Treaty common stock to certain noncorporate non-U.S. holders generally should be subject to information reporting and possibly to backup withholding at a rate of 30% reducing to 29% in 2003 and 20% beginning January 1, 2004. However, no information reporting or backup withholding will be required by Penn Treaty or any paying agent to non-U.S. holders if a statement described in (a)(iv) in the section captioned "--Federal income tax consequences to non-U.S. holders who exchange Subordinated Notes for Exchange Notes--The Exchange Notes" has been received and the payor does not have actual knowledge that the beneficial owner is a United States person. In addition, under current law, backup withholding generally will not apply to dividends paid to a non-U.S. holder at an address outside the United States (unless the payor has knowledge that the payee is a United States person). A non-U.S. holder would generally be subject to backup withholding in the case of dividends unless certain certification procedures are met or such holder otherwise establishes an exemption from backup withholding. In addition, backup withholding and information reporting will not apply if payments of the principal interest on an Exchange Note or dividends on Penn Treaty common stock are paid or collected by a foreign office of a custodian, nominee or other foreign agent on behalf of the beneficial owner of such Note or common stock, or if a foreign office of a broker (as defined in applicable 56 Treasury regulations) pays the proceeds of the sale of an Exchange Note or common stock to the owner thereof. If, however, such nominee, custodian, agent or broker is, for United States Federal income tax purposes, a United States person, a controlled foreign corporation or a foreign person that derives 50% or more of its gross income for certain periods from the conduct of a trade or business in the United States, such payments will be subject to information reporting, but not backup withholding, unless (i) such custodian, nominee, agent or broker has documentary evidence in its records that the beneficial owner is not a United States person and certain other conditions are met or (ii) the beneficial owner otherwise establishes an exemption. Payments of principal, interest and premium on an Exchange Note or dividends on Penn Treaty common stock paid to the beneficial owner of an Exchange Note or common stock respectively, by a United States office of a custodian, nominee or agent, or the payment by the United States office of a broker of the proceeds of sale of an Exchange Note or common stock, will be subject to both backup withholding and information reporting unless the beneficial owner provides the statement referred to in (a)(iv) of the section captioned "--Federal income tax consequences to non-U.S. holders who exchange Subordinated Notes for Exchange Notes--The Exchange Notes" and the payor does not have actual knowledge that the beneficial owner is a United States person or otherwise establishes an exemption. Any amounts withheld under the backup withholding rules will be allowed as a refund or a credit against such holder's United States Federal income tax liability provided the required information is furnished to the IRS. TAX CONSEQUENCES TO PENN TREATY LIMITATION ON USE OF OPERATING LOSS CARRYOVERS. On December 31, 2001, we had consolidated operating loss carryovers of approximately $64.3 million for United States Federal income tax purposes (of which no financial statement benefit has been recognized for approximately $16.3 million, through the establishment of a valuation allowance) that are available to reduce future Federal income tax. To the extent not used, the operating loss carryovers expire in varying amounts beginning in 2018. Our ability to use our operating loss carryovers to reduce future United States Federal income tax, if any, may be limited in the future if we undergo an "ownership change" (i.e., a more than fifty percentage point change in the ownership of our common stock) upon conversion of the Exchange Notes. A corporation that undergoes an ownership change is subject to limitations on the amount of its operating loss carryovers that may be used to offset its Federal income tax following the ownership change. In addition, the use of certain other deductions attributable to events occurring in periods before an ownership change that are claimed within a five year period after the ownership change may also be limited (such "built-in deductions," together with the operating loss carryovers, are collectively known as "pre-change losses"). As a result, our ability to use pre-change losses may be subject to a limitation and may result in accelerated or additional tax payments which, with respect to taxable periods after conversion, could have a material adverse impact on our consolidated financial positions or results of operations. At this time, management does not believe it will be necessary to provide an additional valuation allowance against our ability to utilize our operating loss carryovers upon the consummation of the proposed transactions. Management believes that neither the Exchange Notes nor the Subordinated Notes are publicly traded as defined in the Regulations under Section 1273 of the Internal Revenue Code. Therefore, management believes the Company should not recognize any cancellation of indebtedness income. 57 THE EXCHANGE OFFER GENERAL On November 26, 1996, we sold $74.75 million aggregate principal amount of the Subordinated Notes. The offering was made pursuant to Rule 144A, Regulation D and Regulation S under the Securities Act and was not registered under the Securities Act. The Subordinated Notes were issued under an indenture, dated as of November 26, 1996, between Penn Treaty and First Union National Bank, as trustee. We sold the Subordinated Notes to Bear, Stearns & Co. Inc. and Advest Inc. under a Purchase Agreement, dated November 20, 1996, among Bear, Stearns, Advest and Penn Treaty. When we sold the Subordinated Notes to Bear, Stearns and Advest, we also signed a Registration Rights Agreement in which we agreed to file with the SEC, at our own expense, a registration statement to cover resales of the Subordinated Notes and the shares of common stock issuable upon conversion of the Subordinated Notes. We filed this registration statement on February 20, 1997. The registration statement was declared effective by the SEC on April 11, 1997. The exchange offer is being extended to you in reliance on the exemption from registration provided by Section 3(a)(9) of the Securities Act and has not been registered with the SEC. If your Subordinated Notes are freely tradable, then the Exchange Notes you receive in the exchange offer, and the common stock the Exchange Notes are convertible into, should be freely tradable. TERMS OF THE EXCHANGE OFFER; PERIOD FOR TENDERING SUBORDINATED NOTES This Offering Circular and the enclosed letter of transmittal constitute an offer to exchange, for each outstanding Subordinated Note, an Exchange Note of a principal amount equal to the principal amount of such Subordinated Note, subject to the terms and conditions described in this Offering Circular. This exchange offer is being extended to all holders of the Subordinated Notes. As of the date of this Offering Circular, $74.75 million aggregate principal amount of the Subordinated Notes are outstanding. This Offering Circular and the enclosed letter of transmittal are first being sent on or about August 28, 2002, to all holders of Subordinated Notes known to us. Subject to the conditions listed below, and assuming we have not previously elected to terminate the exchange offer for any reason or no reason, in our sole discretion, we will accept for exchange all Subordinated Notes which are properly tendered on or prior to the expiration of the exchange offer and not withdrawn as permitted below. See "--Conditions to the Exchange Offer." The exchange offer will expire at 12:00 midnight, New York City Time, on September 26, 2002. In our sole discretion, we may extend the period of time during which the exchange offer is open. Our obligation to accept Subordinated Notes for exchange in the exchange offer is subject to the conditions listed below under the caption "--Conditions to the Exchange Offer." The form and terms of the Exchange Notes are described in this Offering Circular in the section captioned "Description of the Exchange Notes." We expressly reserve the right, at any time and from time to time, to extend the period of time during which the exchange offer is open, and thereby delay acceptance for exchange of any Subordinated Notes. If we elect to extend the period of time during which the exchange offer is open, we will give you oral or written notice of the extension and delay, as described below. During any extension of the exchange offer, all Subordinated Notes previously tendered and not withdrawn will remain subject to the exchange offer and may be accepted for exchange by us. We will return to the registered holder, at our expense, any Subordinated Notes not accepted for exchange as promptly as practicable after the expiration or termination of the exchange offer. In the case of an extension, we will issue a press release or other public announcement no later than 9:00 a.m., New York City time, on the next business day after the previously scheduled expiration of the exchange offer. We expressly reserve the right to amend or terminate the exchange offer, and not to accept for exchange any Subordinated Notes not previously accepted for exchange if any of the events described below under the caption "--Conditions to the Exchange Offer" should occur or for any other reason 58 within our sole and absolute discretion. We will give you oral or written notice of any amendment, termination or non-acceptance as promptly as practicable. Following completion of the exchange offer, we may, in our sole discretion, seek to acquire Subordinated Notes not tendered in the exchange offer by means of open market purchases, privately negotiated acquisitions, redemptions or otherwise, or commence one or more additional exchange offers to those Subordinated Note holders who did not exchange their Subordinated Notes for the Exchange Notes. RELEASE OF LEGAL CLAIMS BY TENDERING SUBORDINATED NOTE HOLDERS By tendering your Subordinated Notes in the exchange offer, you will be deemed to have released and waived any and all claims or causes of action of any kind whatsoever, whether known or unknown, that, directly or indirectly, arise out of, are based upon or are in any manner connected with your or your successors' and assigns' ownership or acquisition of the Subordinated Notes, including any related transaction, event, circumstance, action, failure to act or occurrence of any sort or type, whether known or unknown, including without limitation any approval or acceptance given or denied, which occurred, existed, was taken, permitted or begun prior to the date of such release, in each case, that you, your successors and your assigns have or may have had against (i) Penn Treaty, its subsidiaries, its affiliates and its shareholders, and (ii) the directors, officers, employees, attorneys, accountants, advisors, agents and representatives, in each case whether current or former, of Penn Treaty, its subsidiaries, its affiliates and its shareholders, whether those claims arise under federal or state securities laws or otherwise. CONDITIONS TO THE EXCHANGE OFFER THE EXCHANGE OFFER IS NOT CONDITIONED UPON THE EXCHANGE OF A MINIMUM PRINCIPAL AMOUNT OF SUBORDINATED NOTES. Notwithstanding any other provision of the exchange offer, we will not be required to accept any Subordinated Notes for exchange or to issue any Exchange Notes in exchange for Subordinated Notes, and we may terminate or amend the exchange offer if, at any time before the acceptance of the Subordinated Notes for exchange or the exchange of Exchange Notes for Subordinated Notes, any of the following events occurs: - the exchange offer is determined to violate any applicable law or any applicable interpretation of the staff of the SEC; - an action or proceeding is pending or threatened in any court or by any governmental agency or third party that might materially impair our ability to proceed with the exchange offer; - any material adverse development occurs in any existing legal action or proceeding involving Penn Treaty; - we do not receive any governmental approval we deem necessary for the completion of the exchange offer; or - the indenture for the Exchange Notes has not been qualified under the Trust Indenture Act of 1939. These conditions are for our benefit only and we may assert them regardless of the circumstances giving rise to any condition. We may also waive any condition in whole or in part at any time in our sole discretion. Our failure at any time to exercise any of the foregoing rights will not constitute a waiver of that right and each right is an ongoing right that we may assert at any time. Moreover, we are free to terminate the exchange offer for any reason, in our sole and absolute discretion, and not accept any tendered Subordinated Notes for exchange. 59 In addition, we will not accept any Subordinated Notes for exchange or issue any Exchange Notes in exchange for Subordinated Notes, if at the time a stop order is threatened or in effect which relates to the qualification of the indenture for the Exchange Notes under the Trust Indenture Act of 1939. PROCEDURES FOR TENDERING SUBORDINATED NOTES When you tender your Subordinated Notes, and we accept the Subordinated Notes for exchange, this will constitute a binding agreement between you and Penn Treaty, subject to the terms and conditions set forth in this Offering Circular and the enclosed letter of transmittal. Unless you comply with the procedures described below under the caption "--Guaranteed Delivery Procedures," you must do one of the following on or prior to the expiration of the exchange offer to participate in the exchange offer: - if you hold Subordinated Notes in certificated form, tender your Subordinated Notes by sending the certificates for your Subordinated Notes, in proper form for transfer, a properly completed and duly executed letter of transmittal, with any required signature guarantees, and all other documents required by the letter of transmittal, to Wells Fargo Bank Minnesota, N.A., as exchange agent, at one of the addresses listed below under the caption "--Exchange Agent"; or - if you hold Subordinated Notes in "street name," tender your Subordinated Notes by using the book-entry procedures described below under the caption "--Book-Entry Transfer" and transmitting a properly completed and duly executed letter of transmittal, with any required signature guarantees, or an agent's message instead of the letter of transmittal, to the exchange agent. In order for a book-entry transfer to constitute a valid tender of your Subordinated Notes in the exchange offer, the exchange agent must receive a confirmation of book-entry transfer of your Subordinated Notes into its account at The Depository Trust Company prior to the expiration of the exchange offer. The term "agent's message" means a message, transmitted by DTC and received by the exchange agent and forming a part of the book-entry confirmation, which states that DTC has received an express acknowledgment from you that you have received and have agreed to be bound by the letter of transmittal. If you use this procedure, we may enforce the letter of transmittal against you. THE METHOD OF DELIVERY OF CERTIFICATES FOR SUBORDINATED NOTES, LETTERS OF TRANSMITTAL, AGENT'S MESSAGES AND ALL OTHER REQUIRED DOCUMENTS IS AT YOUR ELECTION. IF YOU DELIVER YOUR SUBORDINATED NOTES BY MAIL, WE RECOMMEND REGISTERED MAIL, PROPERLY INSURED, WITH RETURN RECEIPT REQUESTED. IN ALL CASES, YOU SHOULD ALLOW SUFFICIENT TIME TO ASSURE TIMELY DELIVERY. PLEASE SEND ALL CERTIFICATES FOR SUBORDINATED NOTES, LETTERS OF TRANSMITTAL AND AGENT'S MESSAGES TO WELLS FARGO BANK MINNESOTA, N.A., THE EXCHANGE AGENT FOR THE EXCHANGE OFFER, AT ONE OF THE ADDRESSES SET FORTH ON THE BACK COVER PAGE OF THIS OFFERING CIRCULAR. PLEASE DO NOT SEND THESE MATERIALS TO US. Signatures on a letter of transmittal or a notice of withdrawal, as the case may be, must be guaranteed by an eligible guarantor institution unless you are either: - a registered Subordinated Note holder and have not completed the box entitled "Special Issuance Instructions" or "Special Delivery Instructions" on the letter of transmittal or - you are exchanging Subordinated Notes for the account of an eligible guarantor institution. An eligible guarantor institution means: - Banks, as defined in Section 3(a) of the Federal Deposit Insurance Act of 1950, as amended (the "Federal Deposit Insurance Act"); 60 - Brokers, dealers, municipal securities dealers, municipal securities brokers, government securities dealers and government securities brokers, as defined in the Securities Exchange Act of 1934, as amended (the "Exchange Act"); - Credit unions, as defined in Section 19B(1)(A) of the Federal Reserve Act of 1913, as amended; - National securities exchanges, registered securities associations and clearing agencies, as these terms are defined in the Exchange Act; and - Savings associations, as defined in Section 3(b) of the Federal Deposit Insurance Act. If you plan to sign the letter of transmittal but you are not the "registered holder" of the Subordinated Notes--which term, for this purpose, includes any participant in DTC's system whose name appears on a security position listing as the owner of the Subordinated Notes--you must have the Subordinated Notes signed by the registered holder of the Subordinated Notes and that signature must be guaranteed by an eligible guarantor institution. You may also send a separate instrument of transfer or exchange signed by the registered holder and guaranteed by an eligible guarantor institution, but that instrument must be in a form satisfactory to us in our sole discretion. In addition, if a person or persons other than the registered holder or holders of Subordinated Notes signs the letter of transmittal, certificates for the Subordinated Notes must be endorsed or accompanied by appropriate bond powers, in either case signed exactly as the name or names of the registered holder or holders that appear on the certificates for Subordinated Notes. All questions as to the validity, form, eligibility--including time of receipt-and acceptance of Subordinated Notes tendered for exchange will be determined by us in our sole discretion. Our determination will be final and binding. We reserve the absolute right to reject any and all tenders of Subordinated Notes improperly tendered or to not accept any Subordinated Notes, the acceptance of which might be unlawful as determined by us or our counsel. We also reserve the absolute right to waive any defects or irregularities or conditions of the exchange offer as to any Subordinated Notes either before or after the expiration of the exchange offer--including the right to waive the ineligibility of any holder who seeks to tender Subordinated Notes in the exchange offer. Our interpretation of the terms and conditions of the exchange offer as to any particular Subordinated Notes either before or after the expiration of the exchange offer--including the terms and conditions of the letter of transmittal and the accompanying instructions--will be final and binding. Unless waived, any defects or irregularities in connection with tenders of Subordinated Notes for exchange must be cured within a reasonable period of time, as determined by us. Neither we, the exchange agent nor any other person has any duty to give notification of any defect or irregularity with respect to any tender of Subordinated Notes for exchange, nor will we have any liability for failure to give this notification. If you are a trustee, executor, administrator, guardian, attorney-in-fact, officer of a corporation, or act in a similar fiduciary or representative capacity, and wish to sign the letter of transmittal or any certificates for Subordinated Notes or bond powers, you must indicate your status when signing. If you are acting in any of these capacities, you must submit proper evidence satisfactory to us of your authority to so act unless we waive this requirement. ACCEPTANCE OF SUBORDINATED NOTES FOR EXCHANGE; DELIVERY OF EXCHANGE NOTES Upon satisfaction or waiver of all of the conditions to the exchange offer, and assuming we have not previously elected to terminate the exchange offer for any reason or no reason, in our sole discretion, we will accept, promptly after the expiration of the exchange offer, all Subordinated Notes properly tendered and not withdrawn and will issue the Exchange Notes promptly after acceptance of the Subordinated Notes. For purposes of the exchange offer, we will be deemed to have accepted properly tendered Subordinated Notes for exchange when, as and if we have given oral or written 61 notice of acceptance to the exchange agent, with written confirmation of any oral notice to be given promptly after any oral notice. For each Subordinated Note accepted for exchange in the exchange offer, the tendering holder will receive an Exchange Note of a principal amount equal to that of the accepted Subordinated Note, which will be represented by a beneficial interest in an unrestricted global note. In all cases, the issuance of Exchange Notes in exchange for Subordinated Notes will be made only after the exchange agent timely receives either certificates for all physically tendered Subordinated Notes, in proper form for transfer, or a book-entry confirmation of transfer of the Subordinated Notes into the exchange agent's account at DTC, as the case may be, a properly completed and duly executed letter of transmittal, with any required signature guarantees, and all other required documents or, in the case of a book-entry confirmation, a properly completed and duly executed letter of transmittal, with any required signature guarantees, or an agent's message instead of the letter of transmittal. If for any reason we do not accept any tendered Subordinated Notes or if Subordinated Notes are submitted for a greater principal amount than the holder desires to exchange, we will return the unaccepted or non-exchanged Subordinated Notes without expense to the registered tendering holder. In the case of Subordinated Notes tendered by book-entry transfer into the exchange agent's account at DTC by using the book-entry procedures described below, the unaccepted or non-exchanged Subordinated Notes will be credited to an account maintained by the tendering holder with DTC. Any Subordinated Notes to be returned to the holder will be returned as promptly as practicable after the expiration or termination of the exchange offer. BOOK-ENTRY TRANSFER Within two business days after the date of this Offering Circular, the exchange agent will make a request to establish an account at DTC for the Subordinated Notes tendered in the exchange offer. Once established, any financial institution that is a participant in DTC's system may make book-entry delivery of Subordinated Notes by causing DTC to transfer the Subordinated Notes into the exchange agent's account at DTC in accordance with DTC's procedures for transfer. Although delivery of the Subordinated Notes may be effected through book-entry transfer at DTC, the letter of transmittal or facsimile of the letter of transmittal, with any required signature guarantees, or an agent's message instead of the letter of transmittal, and any other required documents, must be transmitted to and received by the exchange agent on or prior to the expiration of the exchange offer at one of the addresses listed below under the caption "--Exchange Agent." In addition, the exchange agent must receive book-entry confirmation of transfer of the Subordinated Notes into the exchange agent's account of DTC prior to the expiration of the exchange offer. If you cannot comply with these procedures, you may be able to use the guaranteed delivery procedures described below. GUARANTEED DELIVERY PROCEDURES If you are a registered holder of the Subordinated Notes and wish to tender your Subordinated Notes, but: - the certificates for the Subordinated Notes are not immediately available; - time will not permit your certificates for the Subordinated Notes or other required documents to reach the exchange agent before the expiration of the exchange offer; or - the procedure for book-entry transfer cannot be completed before the expiration of the exchange offer, you may effect a tender of your Subordinated Notes if: - the tender is made through an eligible guarantor institution; 62 - prior to the expiration of the exchange offer, the exchange agent receives from an eligible guarantor institution a properly completed and duly executed notice of guaranteed delivery, substantially in the form we have provided, setting forth your name and address, and the amount of Subordinated Notes you are tendering and stating that the tender is being made by notice of guaranteed delivery; these documents may be sent by overnight courier, registered or certified mail or facsimile transmission; - you guarantee that within three NYSE trading days after the date of execution of the notice of guaranteed delivery, the certificates for all physically tendered Subordinated Notes, in proper form for transfer, or a book-entry confirmation of transfer of the Subordinated Notes into the exchange agent's account at DTC, including the agent's message that forms a part of the book-entry confirmation, as the case may be, a properly completed and duly executed letter of transmittal, with any required signature guarantees, and any other documents required by the letter of transmittal, will be deposited by the eligible guarantor institution with the exchange agent; and - the exchange agent receives the certificates for all physically tendered Subordinated Notes, in proper form for transfer, or a book-entry confirmation of transfer of the Subordinated Notes into the exchange agent's account at DTC, as the case may be, a properly completed and duly executed letter of transmittal, with any required signature guarantees, and all other required documents or, in the case of a book-entry confirmation, a properly completed and duly executed letter of transmittal, with any required signature guarantees, or an agent's message instead of the letter of transmittal, in each case, within three NYSE trading days after the date of execution of the notice of guaranteed delivery. WITHDRAWAL OF TENDERS YOU MAY WITHDRAW TENDERS OF SUBORDINATED NOTES AT ANY TIME PRIOR TO THE EXPIRATION OF THE EXCHANGE OFFER AND, UNLESS YOUR TENDERED SUBORDINATED NOTES HAVE PREVIOUSLY BEEN ACCEPTED FOR EXCHANGE AND YOU HAVE RECEIVED THE EXCHANGE NOTES ISSUABLE IN EXCHANGE THEREFOR, YOU MAY ALSO WITHDRAW PREVIOUSLY TENDERED SUBORDINATED NOTES AT ANY TIME AFTER DECEMBER 31, 2002. For a withdrawal to be effective, a written notice of withdrawal must be received by the exchange agent prior to the expiration of the exchange offer at one of the addresses listed below under the caption "--Exchange Agent." Any notice of withdrawal must specify the name of the person who tendered the Subordinated Notes to be withdrawn, identify the Subordinated Notes to be withdrawn, including the principal amount of the Subordinated Notes, and, where certificates for Subordinated Notes have been transmitted, specify the name in which the Subordinated Notes are registered, if different from that of the withdrawing holder. If certificates for Subordinated Notes have been delivered or otherwise identified to the exchange agent, then, prior to the release of the certificates, the withdrawing holder must also submit the serial numbers of the particular certificates to be withdrawn and a signed notice of withdrawal with signatures guaranteed by an eligible guarantor institution unless the holder is an eligible guarantor institution. If Subordinated Notes have been tendered using the procedure for book-entry transfer described above, any notice of withdrawal must specify the name and number of the account at DTC to be credited with the withdrawn Subordinated Notes and otherwise comply with the procedures of the book-entry transfer facility. All questions as to the validity, form and eligibility--including time of receipt--of these notices will be determined by us. Our determination will be final and binding. Any Subordinated Notes properly withdrawn will be deemed not to have been validly tendered for exchange for purposes of the exchange offer. Any Subordinated Notes which have been tendered for exchange but which are not exchanged for any reason will be returned to the registered holder without cost to that holder as soon as practicable after withdrawal, non-acceptance of tender or termination of 63 the exchange offer. In the case of Subordinated Notes tendered by book-entry transfer into the exchange agent's account at DTC by using the book-entry transfer procedures described above, any withdrawn or unaccepted Subordinated Notes will be credited to the tendering holder's account at DTC. Properly withdrawn Subordinated Notes may be retendered at any time on or prior to the expiration of the exchange offer by following one of the procedures described above under "--Procedures for Tendering Subordinated Notes." EXCHANGE AGENT We have appointed Wells Fargo Bank Minnesota, N.A. as the exchange agent for the exchange offer. All completed letters of transmittal and agent's messages should be directed to the exchange agent at one of the addresses set forth below. All questions regarding the procedures for tendering in the exchange offer and requests for assistance in tendering your Subordinated Notes should also be directed to the exchange agent at one of the following telephone numbers and addresses: To: Wells Fargo Bank Minnesota, N.A. BY REGISTERED OR CERTIFIED MAIL: BY REGULAR MAIL OR OVERNIGHT IN PERSON BY HAND ONLY: CARRIERS: MAC # N9303-121 MAC # N9303-121 608 Second Avenue South Corporate Trust Operations Corporate Trust Operations Corporate Trust Operations, P.O. Box 1517 6th & Marquette Avenue 12th Floor Minneapolis, MN 55480-1517 Minneapolis, MN 55479 Minneapolis, MN 55402
By Facsimile Transmission: (612) 667-4927 Confirm by Telephone: (800) 344-5128 DELIVERY OF A LETTER OF TRANSMITTAL OR AGENT'S MESSAGE TO AN ADDRESS OTHER THAN THE ADDRESS LISTED ABOVE OR TRANSMISSION OF INSTRUCTIONS BY FACSIMILE OTHER THAN AS SET FORTH ABOVE IS NOT VALID DELIVERY OF THE LETTER OF TRANSMITTAL OR AGENT'S MESSAGE. Requests for additional copies of this Offering Circular, Penn Treaty's Second Quarter 2002 Quarterly Report on Form 10-Q, Penn Treaty's First Quarter 2002 Quarterly Report on Form 10-Q, Penn Treaty's Annual Report on Form 10-K for the fiscal year ended December 31, 2002, Penn Treaty's 2002 Annual Meeting Proxy Statement, the enclosed letter of transmittal or the enclosed notice of guaranteed delivery may be directed to either the Exchange Agent at one of the telephone numbers and addresses listed above or to the information agent at the telephone number and address listed on the back cover page of this Offering Circular. Wells Fargo Bank Minnesota, N.A. will assist us with the distribution of this Offering Circular and the other exchange materials. We will pay Wells Fargo customary fees for its services and reimburse Wells Fargo for its reasonable out-of-pocket expenses incurred in connection with the provision of these services and pay other expenses, including fees and expenses of the trustee under the indenture, filing fees and printing and distribution expenses. FINANCIAL ADVISOR Philadelphia Brokerage Corporation is providing financial advisory services to Penn Treaty in connection with, and acting as the information agent for, the exchange offer. As compensation for its services in connection with the exchange offer and for other services related to subsequent proposed capital raising activities, we entered into an agreement pursuant to which we have agreed to pay Philadelphia Brokerage Corporation $5,000 a month for a twelve-month period and have granted Philadelphia Brokerage 60,000 shares of our common stock, of which 30,000 shares have not been registered with the SEC. In addition, Philadelphia Brokerage is eligible to receive, upon the completion 64 of certain services, up to an additional 40,000 shares of our common stock, 20,000 of which will be granted upon completion of the exchange offer. We will reimburse Philadelphia Brokerage for reasonable expenses it incurs in connection with the exchange offer. Philadelphia Brokerage is one of the broker/dealers that currently makes a market in our Subordinated Notes. EXPENSES In addition to the fees we are paying Philadelphia Brokerage Corporation, we expect that we will have to pay about $100,000 in expenses relating to the exchange offer for legal, accounting, printing and administrative fees. We expect to obtain the cash required to pay our expenses through cash flow from operations. RECOMMENDATION Penn Treaty is not making any recommendation regarding whether you should tender your Subordinated Notes in the exchange offer and, accordingly, you must make your own determination as to whether to tender your Subordinated Notes for exchange and accept the Exchange Notes we propose to give you. SOLICITATION The solicitation is being made by us. We will not make any payment to brokers, dealers or others soliciting acceptances of the exchange offer. We will, however, reimburse reasonable expenses incurred by brokers and dealers in forwarding this Offering Circular and the other exchange offer materials to the holders of the Subordinated Notes. Our solicitation may be made by telephone, facsimile or in person by officers and regular employees of Penn Treaty and its affiliates. TRANSFER TAXES You will not be obligated to pay any transfer taxes in connection with the tender of Subordinated Notes in the exchange offer unless you instruct us to register your Exchange Notes in the name of, or request that Subordinated Notes not tendered or not accepted in the exchange offer be returned to, a person other than the registered tendering holder. In those cases, you will be responsible for the payment of any applicable transfer tax. 65 DESCRIPTION OF THE EXCHANGE NOTES The Exchange Notes are to be issued under an indenture, to be dated as of the expiration of the exchange offer, between the Company and Wells Fargo Bank Minnesota, N.A., as trustee. A copy of the Exchange Note indenture is available from Penn Treaty upon request and is on file with the SEC. The following summaries of certain provisions of the Exchange Notes and the indenture do not purport to be complete and are subject to, and are qualified in their entirety by reference to, all the provisions of the Exchange Notes and the indenture, including the definitions therein of certain terms which are not otherwise defined in this Offering Circular. Wherever particular provisions or defined terms of the Exchange Note indenture (or of the form of Exchange Notes which is a part thereof) are referred to, such provisions or defined terms are incorporated herein by reference in their entirety. As used in this "Description of the Exchange Notes," the "Company" refers to Penn Treaty American Corporation and does not, unless the context otherwise indicates, include its subsidiaries. GENERAL The Exchange Notes will represent general unsecured subordinated obligations of the Company and, except as set forth below under "--Conversion of the Exchange Notes," will be convertible into common stock as described below under the subheadings "--Conversion of the Exchange Notes" and "--Mandatory Conversion of the Exchange Notes." The Exchange Notes will be limited to $74,750,000 aggregate principal amount, will be issued in fully registered form only in denominations of $1,000 in principal amount or any integral multiple thereof and will mature on October 15, 2008, unless earlier redeemed at the option of the Company or repurchased at the option of the Exchange Note holder upon a change of control or converted. The indenture will not contain any financial covenants or any restrictions on the payment of dividends, the repurchase of securities of the Company or the incurrence of debt by the Company or any of its subsidiaries. The Exchange Notes will bear interest from June 1, 2002 at the annual rate set forth on the cover page hereof, payable semi-annually on October 15 and April 15, commencing on October 15, 2002, to holders of record at the close of business on the preceding October 1 and April 1, respectively. Interest will be computed on the basis of a 360-day year composed of twelve 30-day months. Interest may, at the option of the Company, be paid by check mailed to the address of such holder as it appears in the note register. Any holder of Exchange Notes with an aggregate principal amount equal to or in excess of $5,000,000 may request that interest be paid by wire transfer upon written notice by such holder to the trustee in accordance with the provisions of the indenture. Principal will be payable, and the Exchange Notes may be presented for conversion, registration of transfer and exchange, without service charge, at the office of the trustee in New York, New York. Reference is made to the information set forth below under the subheading "--Delivery and Form." DELIVERY AND FORM GLOBAL NOTE; BOOK ENTRY FORM. The Exchange Notes will be issued in fully registered form, without coupons, in denominations of $1,000 and any integral multiple thereof. A recipient of Exchange Notes pursuant to this exchange offer will receive a beneficial interest in an unrestricted global note. The global note will be deposited with, or on behalf of, The Depository Trust Company ("DTC"), and registered in the name of Cede & Co. ("Cede") as DTC's nominee. Upon issuance of the global note, DTC will credit, on its book-entry registration and transfer systems, the respective principal amounts of the Exchange Notes represented by that global note to the accounts of institutions or persons, commonly known as participants, that have accounts with DTC or its nominee. Ownership of beneficial interests in the global note will be limited to participants or persons that may hold beneficial interests through participants. Owners of beneficial interests in the global note will not receive certificates 66 representing their ownership interests in the Exchange Notes, except in the event use of the book-entry system for the Exchange Notes is discontinued. Except as set forth below, the record ownership of the global note may be transferred, in whole or in part, only to another nominee of DTC or to a successor of DTC or its nominee. Payment of interest on and the redemption and repurchase price of the global note will be made to Cede, the nominee for DTC, as registered owner of the global note, by wire transfer of immediately available funds on each interest payment date, each redemption date and each repurchase date, as applicable. None of the Company, the trustee or any paying agent will have any responsibility or liability for any aspect of the records relating to or payments made on account of beneficial ownership interests in the global note or for maintaining, supervising or reviewing any records relating to such beneficial ownership interest. The Company has been informed by DTC that, with respect to any payment of interest on, or the redemption or repurchase price of, the global note, DTC's practice is, upon receipt of payment, to credit participants' accounts with payments in amounts proportionate to their respective beneficial interests in the principal amount represented by the global note as shown on the records of DTC. Payments by participants to owners of beneficial interests in the principal amount represented by the global note held through such participants will be the responsibility of such participants, as is now the case with securities held for the accounts of customers registered in "street name." Transfers between participants will be effected in the ordinary way in accordance with DTC rules and will be settled in immediately available funds. Because DTC can only act on behalf of participants, who in turn act on behalf of persons who hold interests through them and certain banks, the ability of a person having a beneficial interest in the principal amount represented by the global note to pledge such interest to persons or entities that do not participate in the DTC system, or otherwise take actions in respect of such interest, may be affected by the lack of a physical certificate evidencing such interest. Neither the Company nor the trustee (or any registrar, paying agent or conversion agent under the indenture) will have responsibility for the performance of DTC or its participants or persons who hold interests through the participants of their respective obligations under the rules and procedures governing their operations. DTC has advised the Company that it will take any action permitted to be taken by a holder of Exchange Notes (including, without limitation, the presentation of Exchange Notes for exchange as described below) only at the direction of one or more participants to whose account with DTC interests in the global note are credited, and only in respect of the principal amount of the Exchange Notes represented by the global note as to which such participant or participants has or have given such direction. DTC has advised the Company as follows: DTC is a limited purpose trust company organized under the laws of the State of New York, a member of the Federal Reserve System, a "clearing corporation" within the meaning of the New York Uniform Commercial Code and a "clearing agency" registered pursuant to the provisions of Section 17A of the Exchange Act. DTC holds securities for its participants and facilitates the clearance and settlement of securities transactions between participants through electronic book-entry changes to accounts of its participants, thereby eliminating the need for physical movement of certificates. Participants include securities brokers and dealers, banks, trust companies, clearing corporations and certain other organizations. DTC is owned by a number of its participants and by the New York Stock Exchange, Inc., the American Stock Exchange, LLC and the National Association of Securities Dealers, Inc. Indirect access to the DTC system is available to others such as banks, securities brokers and dealers and trust companies that clear through, or maintain a custodial relationship with, a participant, either directly or indirectly. The Rules applicable to DTC and its participants and indirect participants are on file with the SEC. Although DTC has agreed to the foregoing procedures in order to facilitate transfers of interests in the global note among participants, they are under no obligation to perform or continue to perform 67 such procedures, and such procedures may be discontinued at any time. If DTC is at any time unwilling or unable to continue as depositary and a successor depositary is not appointed by the Company within 90 days, the Company will cause the Exchange Notes to be issued in definitive form in exchange for the global note. REGISTRATION AND TRANSFER. The exchange offer is being extended to you in reliance on the exemption from registration provided by Section 3(a)(9) of the Securities Act. As a result, the securities we issue to you in exchange for your Subordinated Notes, including the Exchange Notes and the shares of common stock issuable upon conversion of the Exchange Notes, will have similar characteristics to the Subordinated Notes with respect to transfer to third parties. The resale of the Subordinated Notes and the common stock issuable upon conversion was registered by us on a registration statement on Form S-3 which became effective on April 11, 1997. If your Subordinated Notes are freely tradable, then the Exchange Notes you receive in the exchange and the common stock issuable upon the conversion of those Exchange Notes can be transferred freely. CONVERSION OF THE EXCHANGE NOTES The holders of the Exchange Notes will be entitled at any time until the close of business on October 14, 2008 subject to prior redemption or repurchase, to convert any Exchange Notes or portions thereof (in denominations of $1,000 in principal amount or integral multiples thereof) into common stock (subject to the next paragraph) at the conversion price set forth on the cover page of this Offering Circular, subject to adjustment as described below; provided that in the case of Exchange Notes called for redemption, conversion rights will expire at the close of business on the business day immediately preceding the date fixed for redemption, unless the Company defaults in payment of the redemption price. An Exchange Note (or portion thereof) in respect of which a holder is exercising its option to require repurchase upon a Change of Control (as defined below) may be converted only if such holder withdraws its election to exercise such redemption option in accordance with the terms of the indenture. The Company currently does not have a sufficient number of shares of common stock available for issuance upon the conversion of all of the Exchange Notes, the exercise of all outstanding options granted by the Company pursuant to the Company's stock option plans and the four tranches of warrants granted to Centre Solutions (Bermuda) Limited. See the section of this Offering Circular captioned "Agreements Related to Penn Treaty." In order to provide a sufficient number of shares to permit the conversion of all of the Exchange Notes, the Company will, as soon as practicable, seek and recommend the approval of its shareholders to amend its articles of incorporation to increase the number of authorized shares of common stock to an amount sufficient to permit the conversion of all such Exchange Notes. In the event a holder desires to convert all, or any portion, of its Exchange Notes into shares of common stock and the Company does not have a sufficient number of shares of common stock available for such conversion, in lieu of delivering shares of common stock upon conversion of that portion of such holder's Exchange Notes for which there is an insufficient number of shares of common stock, the Company will pay to the holder an amount in cash equal to the market price of the shares of common stock into which the Exchange Notes are then convertible. "Market price" means the average of the last reported closing prices of the common stock for the ten trading day period (appropriately adjusted to take into account the occurrence during such period of certain events that would result in an adjustment of the conversion price), commencing on the first trading day after delivery of notice to such holder that the Company must pay cash in lieu of delivering shares of common stock. Any cash paid to the holder in lieu of shares of common stock will generally result in taxable gain or loss to the holder converting such Exchange Notes. See "Certain United States Federal Income Tax Considerations." However, the ability of the Company to pay cash to holders of Exchange Notes in lieu of delivering common stock may be limited by the Company's then existing financial resources. There can be no assurance that sufficient funds will be available when necessary to make any 68 required cash payments in lieu of delivering common stock to Exchange Note holders seeking to convert their Exchange Notes into shares of common stock. Except as described below, no adjustment will be made on conversion of any Exchange Notes for interest accrued thereon or for dividends paid on any common stock issued. Any unpaid interest on any Exchange Note or portion therefore as of the date such Exchange Note is surrendered for conversion shall (unless such Exchange Note or portion thereof being converted is called for redemption on a redemption date during the period from the close of business on or after any record date to the close of business on the business day following the corresponding interest payment date) be paid in cash on the next succeeding interest payment date. The Company is not required to issue fractional shares of common stock upon conversion of Exchange Notes and, in lieu thereof, will pay a cash adjustment based upon the closing price of the common stock on the last business day prior to the date of conversion. The conversion price is subject to adjustment (under formulae set forth in the Exchange Note indenture) upon the occurrence of certain events, including: (i) the issuance of common stock as a dividend or distribution on the outstanding common stock; (ii) the issuance to all holders of common stock of certain rights, options or warrants to purchase common stock at less than the Current Market Price (as defined in the indenture); (iii) certain subdivisions, combinations and reclassifications of common stock; (iv) distributions to all holders of common stock of the Company of any class of capital stock of the Company (other than distributions of common stock as a dividend or distribution) or evidences of indebtedness of the Company or assets (including securities, but excluding those rights, options and warrants referred to in clause (ii) above and dividends and distributions in connection with the liquidation, dissolution or winding up of the Company and dividends and distributions paid exclusively in cash); (v) distributions consisting exclusively of cash (excluding any cash portion of distributions referred to in clause (iv) or in connection with a consolidation, merger or sale of assets of the Company as referred to in clause (ii) of the third paragraph below) to all holders of common stock in an aggregate amount that, together with (x) all other such all-cash distributions made within the preceding 12 months in respect of which no adjustment has been made and (y) any cash and the fair market value of other consideration payable in respect of any tender offers by the Company or any of its subsidiaries for common stock concluded within the preceding 12 months in respect of which no adjustment has been made, exceeds 20% of the Company's market capitalization (being the product of the then current market price of the common stock times the number of shares of common stock then outstanding) on the record date for such distribution; and (vi) the purchase of common stock pursuant to a tender offer made by the Company or any of its subsidiaries which involves an aggregate consideration that, together with (x) any cash and the fair market value of any other consideration payable in any other tender offer by the Company or any of its subsidiaries for common stock expiring within the 12 months preceding such tender offer in respect of which no adjustment has been made and (y) the aggregate amount of any such all-cash distributions referred to in clause (v) above to all holders of common stock within the 12 months preceding the expiration of such tender offer in respect of which no adjustments have been made, exceeds 20% of the Company's market capitalization on the expiration of such tender offer. No adjustment of the conversion price will be made for shares issued pursuant to a plan for reinvestment of dividends or interest. No adjustment will be made pursuant to clause (iv) of the preceding paragraph if the Company makes proper provision for each holder of Exchange Notes who converts an Exchange Note (or portion thereof) to receive, in addition to the common stock issuable upon such conversion, the kind and amount of assets (including securities) that such holder would have been entitled to receive if such holder had been a holder of the common stock at the time of the distribution of such assets or securities. Rights, options or warrants distributed by the Company to all holders of the common stock that entitle the holders thereof to purchase shares of the Company's capital stock and that, until the occurrence of an event (a "Triggering Event"), (i) are deemed to be transferred with the common 69 stock, (ii) are not exercisable and (iii) are also issued in respect of future issuances of common stock, shall not be deemed to be distributed (and no adjustment in the Conversion Price shall be required) until the occurrence of the Triggering Event. Except as stated above, the conversion price will not be adjusted for the issuance of common stock or any securities convertible into or exchangeable for common stock or carrying the right to purchase any of the foregoing. No adjustment in the conversion price will be required unless such adjustment would require a change of at least 1% in the conversion price then in effect; provided that any adjustment that would otherwise be required to be made shall be carried forward and taken into account in any subsequent adjustment. In the case of (i) any reclassification or change of the common stock (other than changes in par value or from par value to no par value as a result of a subdivision or a combination) or (ii) a consolidation, merger or combination involving the Company or a sale or conveyance to another corporation of the property and assets of the Company as an entirety or substantially as an entirety (determined on a consolidated basis), in each case as a result of which holders of common stock shall be entitled to receive stock, other securities, other property or assets (including cash) with respect to or in exchange for such common stock, the holders of the Exchange Notes then outstanding will be entitled thereafter to convert such Exchange Notes into the kind and amount of shares of stock, other securities or other property or assets which they would have owned or been entitled to receive upon such reclassification, change, consolidation, merger, sale or conveyance had such Exchange Notes been converted into common stock immediately prior to such reclassification, change, consolidation, merger, sale or conveyance assuming that a holder of Exchange Notes did not exercise any rights of election, if any, as to the stock, other securities or other property or assets receivable in connection therewith. In the event of a taxable distribution to holders of common stock (or other transaction) which results in any adjustment of the conversion price, the holders of Exchange Notes may, in certain circumstances, be deemed to have received a distribution subject to the United States income tax as a dividend; in certain other circumstances, the absence of such an adjustment may result in a taxable dividend to the holders of common stock. See "Certain United States Federal Income Tax Considerations--Adjustments to Conversion Price." The Company from time to time may to the extent permitted by law reduce the conversion price by any amount for any period of at least 20 days, in which case the Company shall give at least 15 days' notice of such decrease, if the Board of Directors has made a determination that such decrease would be in the best interests of the Company, which determination shall be conclusive. The Company may, at its option, make such reductions in the conversion price, in addition to those set forth above, as the Company deems advisable to avoid or diminish any income tax to its shareholders resulting from any dividend or distribution of stock (or rights to acquire stock) or from any event treated as such for income tax purposes. See "Certain United States Federal Income Tax Considerations." MANDATORY CONVERSION OF THE EXCHANGE NOTES If the average closing share price of our common stock for any 15 consecutive trading days beginning on or after October 15, 2004 is at least 10% greater than the conversion price ($5.84) of the Exchange Notes and we have a sufficient number of shares of our common stock available for issuance to cover the conversion, then the Exchange Notes shall convert automatically into shares of common stock at the conversion price of $5.31. Any unpaid interest on the Exchange Notes accrued as of the date that the Exchange Notes are required to convert will be paid in cash to the holders of such notes on the next succeeding interest payment date. 70 SUBORDINATION The payment of principal of, premium, if any, and interest on the Exchange Notes will, to the extent set forth in the indenture, be senior to the Subordinated Notes but will be subordinated in right of payment to the prior payment in full of all Senior Indebtedness (defined below). Upon any distribution to creditors of the Company in a liquidation or dissolution of the Company or in a bankruptcy, reorganization, insolvency, receivership or similar proceeding related to the Company or its property, in an assignment for the benefit of creditors or any marshalling of the Company's assets and liabilities, the holders of all Senior Indebtedness will first be entitled to receive payment in full of all amounts due or to become due thereon before the holders of the Exchange Notes will be entitled to receive any payment in respect of the principal of, premium, if any, or interest on the Exchange Notes (except that holders of Exchange Notes may receive securities that are subordinated at least to the same extent as the Exchange Notes to Senior Indebtedness and any securities issued in exchange for Senior Indebtedness). The Company also may not make any payment upon or in respect of the Exchange Notes (except in such subordinated securities) and may not acquire from the trustee or the holder of any Exchange Note for cash or property (other than securities subordinated to at least the same extent as the Exchange Note to (i) Senior Indebtedness and (ii) any securities issued in exchange for all Senior Indebtedness) until Senior Indebtedness has been paid in full if (i) a default in the payment of the principal of, premium, if any, or interest on Senior Indebtedness occurs and is continuing beyond any applicable period of grace or (ii) any other default occurs and is continuing with respect to Senior Indebtedness that permits holders of the Senior Indebtedness as to which such default relates to accelerate its maturity and the trustee receives a notice of such default (a "Payment Blockage Notice") from the representative or representatives of holders of at least a majority in principal amount of Senior Indebtedness then outstanding. Payments on the Exchange Notes may and shall be resumed (i) in the case of a payment default, upon the date on which such default is cured or waived, or (ii) in the case of a default other than a non-payment default, 179 days after the date on which the applicable Payment Blockage Notice is received, unless the maturity of any Senior Indebtedness has been accelerated. No new period of payment blockage may be commenced within 360 days after the receipt by the trustee of any prior Payment Blockage Notice. No default, other than a nonpayment default, that existed or was continuing on the date of delivery of any Payment Blockage Notice to the trustee shall be, or be made, the basis for a subsequent Payment Blockage Notice, unless such default shall have been cured or waived for a period of not less than 180 days. "Senior Indebtedness" with respect to the Exchange Notes means the principal of, premium, if any, and interest on, and any fees, costs, expenses and any other amounts (including indemnity payments) related to the following, whether outstanding on the date of the indenture or thereafter incurred or created: (i) indebtedness, matured or unmatured, whether or not contingent, of the Company for money borrowed evidenced by notes or other written obligations, (ii) any interest rate contract, interest rate swap agreement or other similar agreement or arrangement designed to protect the Company or any of its subsidiaries against fluctuations in interest rates, (iii) indebtedness, matured or unmatured, whether or not contingent, of the Company evidenced by notes, debentures, bonds or similar instruments or Letters of Credit (or reimbursement agreements in respect thereof), (iv) obligations of the Company as lessee under capitalized leases and under leases of property made as part of any sale and leaseback transactions, (v) indebtedness of others of any of the kinds described in the preceding clauses (i) through (iv) assumed or guaranteed by the Company and (vi) renewals, extensions, modifications, amendments and refundings of, and indebtedness and obligations of a successor person issued in exchange for or in replacement of, indebtedness or obligations of the kinds described in the preceding clauses (i) through (iv), unless the agreement pursuant to which any such indebtedness described in clauses (i) through (vi) is created, issued, assumed or guaranteed expressly provides that such indebtedness is not senior or superior in right of payment to the Exchange Notes; 71 provided, however, that the following shall not constitute Senior Indebtedness: (i) any indebtedness or obligation of the Company in respect of the Exchange Notes; (ii) any indebtedness of the Company to any of its subsidiaries or other affiliates; (iii) any indebtedness that is subordinated or junior in any respect to any other indebtedness of the Company other than Senior Indebtedness; (iv) any indebtedness incurred for the purchase of goods or materials in the ordinary course of business; and (v) any indebtedness or obligation of the Company in respect of the Subordinated Notes. In the event that the trustee (or paying agent if other than the trustee) or any holder receives any payment of principal or interest with respect to the Exchange Notes at a time when such payment is prohibited under the indenture, such payment shall be held in trust for the benefit of, and immediately shall be paid over and delivered to, the holders of Senior Indebtedness or their representative as their respective interests may appear. After all Senior Indebtedness is paid in full and until the Exchange Notes are paid in full, holders shall be subrogated (equally and ratably with all other indebtedness pari passu with the Exchange Notes) to the rights of holders of Senior Indebtedness to receive distributions applicable to Senior Indebtedness to the extent that distributions otherwise payable to the holders have been applied to the payment of Senior Indebtedness. As of August 22, 2002, the Company had approximately $1,538,000 outstanding under its mortgage. The Company will not have any other material Senior Indebtedness outstanding immediately following completion of this offering. The indenture does not prohibit or limit the incurrence of such Senior Indebtedness. In addition, because the Company's operations are conducted primarily through its subsidiaries, claims of holders of indebtedness of such subsidiaries, as well as claims of regulators and creditors of such subsidiaries, will have priority with respect to the assets and earnings of such subsidiaries over the claims of creditors of the Company, including holders of the Exchange Notes. As of June 30, 2002, the aggregate liabilities of such subsidiaries were approximately $707,773,000. The indenture does not limit the amount of additional indebtedness which any of the Company's subsidiaries can create, incur, assume or guarantee. Because of these subordination provisions, in the event of a liquidation or insolvency of the Company or any of its subsidiaries, holders of Exchange Notes may recover less, ratably, than the holders of Senior Indebtedness. OPTIONAL REDEMPTION BY PENN TREATY The Exchange Notes are not redeemable at the option of the Company prior to October 15, 2004. At any time on or after that date, the Exchange Notes may be redeemed at the Company's option on at least 30 but not more than 60 days' notice, in whole at any time or in part from time to time, at a price equal to the principal amount of the Exchange Notes, together with accrued interest to the date fixed for redemption. If fewer than all the Exchange Notes are to be redeemed, the trustee will select the Exchange Notes to be redeemed in principal amounts of $1,000 or integral multiples thereof by lot or, in its discretion, on a pro rata basis. If any Exchange Note is to be redeemed in part only, a new Exchange Note or Exchange Notes in principal amount equal to the unredeemed principal portion thereof will be issued. If a portion of a holder's Exchange Notes is selected for partial redemption and such holder converts a portion of such Exchange Notes, such converted portion shall be deemed to be taken from the portion selected for redemption. No sinking fund is provided for the Exchange Notes. CHANGE OF CONTROL Upon the occurrence of a Change of Control (as defined below), each holder of Exchange Notes shall have the right to require that the Company repurchase such holder's Exchange Notes in whole or 72 in part in integral multiples of $1,000, at a purchase price in cash in an amount equal to 101% of the principal amount thereof, together with accrued and unpaid interest to the date of repurchase, pursuant to an offer (the "Change of Control Offer") made in accordance with the procedures described below and the other provisions in the indenture. A "Change of Control" means an event or series of events in which (i) any "person" or "group" (as such terms are used in Sections 13(d) and 14(d) of the Exchange Act) acquires "beneficial ownership" (as determined in accordance with Rule 13d-3 under the Exchange Act), directly or indirectly, of more than 50% of the total Voting Stock (as defined below) of the Company at an Acquisition Price (as defined below) less than the conversion price then in effect with respect to the Exchange Notes and (ii) the holders of the common stock receive consideration which is not all or substantially all common stock that is (or upon consummation of or immediately following such event or events will be) listed on a United States national securities exchange or approved for quotation on the Nasdaq Stock Market or any similar United States system of automated dissemination of quotations of securities' prices; provided, however, that any such person or group shall not be deemed to be the beneficial owner of, or to beneficially own, any Voting Stock tendered in a tender offer until such tendered Voting Stock is accepted for purchase under the tender offer. "Voting Stock" means stock of the class or classes pursuant to which the holders thereof have the general voting power under ordinary circumstances to elect at least a majority of the board of directors, managers or trustees of a corporation (irrespective whether or not at the time stock of any other class or classes shall have or might have voting power by reason of the happening of any contingency). "Acquisition Price" means the weighted average price paid by the person or group in acquiring the Voting Stock. Within 30 days following any Change of Control, the Company shall send by first-class mail, postage prepaid, to the trustee and to each holder of Exchange Notes, at such holder's address appearing in the note register, a notice stating, among other things, that a Change of Control has occurred, the repurchase price, the repurchase date, which shall be a business day no earlier than 30 days nor later than 60 days from the date such notice is mailed, and certain other procedures that a holder of Exchange Notes must follow to accept a Change of Control Offer or to withdraw such acceptance. The Company will comply, to the extent applicable, with the requirements of Rule 13e-4 and Rule 14e-1 under the Exchange Act and other securities laws or regulations, to the extent such laws are applicable, in connection with the repurchase of the Exchange Notes as described above. Future indebtedness of the Company may contain prohibitions of certain events which would constitute a Change of Control or require the Company to offer to repurchase such indebtedness upon a Change of Control. Moreover, the exercise by the holders of Exchange Notes of their right to require the Company to purchase the Exchange Notes could cause a default under such indebtedness, even if the Change of Control itself does not, due to the financial effect of such purchase on the Company. Finally, the Company's ability to pay cash to holders of Exchange Notes upon a purchase may be limited by the Company's then existing financial resources. There can be no assurance that sufficient funds will be available when necessary to make any required purchases. Furthermore, the Change of Control provisions may in certain circumstances make more difficult or discourage a takeover of the Company and the removal of the incumbent management. MERGER, CONSOLIDATION AND SALE OF ASSETS The indenture prohibits the Company from consolidating with or merging with or into, or conveying, transferring or leasing all or substantially all its assets (determined on a consolidated basis), to any person unless: (i) either the Company is the resulting, surviving or transferee person (the "Successor Company") or the Successor Company is a person organized and existing under the laws of the United States or any state thereof or the District of Columbia, and the Successor Company (if not 73 the Company) expressly assumes by a supplemental indenture, executed and delivered to the trustee, in form satisfactory to the trustee, all the obligations of the Company under the Exchange Note indenture and the Exchange Notes, including the conversion rights described above under "--Conversion of the Exchange Notes," (ii) immediately after giving effect to such transaction no Event of Default (as defined below) has happened and is continuing and (iii) the Company delivers to the trustee an officers' certificate and an opinion of counsel, each stating that such consolidation, merger or transfer and such supplemental indenture (if any) comply with the indenture. EVENTS OF DEFAULT AND REMEDIES An Event of Default is defined in the indenture as being, among other things: default in payment of the principal of or premium, if any, on the Exchange Notes when due at maturity, upon redemption or otherwise, including failure by the Company to purchase the Exchange Notes when required as described under "--Change of Control" (whether or not such payment shall be prohibited by the subordination provisions of the indenture); default for 30 days in payment of any installment of interest on the Exchange Notes (whether or not such payment shall be prohibited by the subordination provisions of the indenture); default by the Company for 90 days after notice in the observance or performance of any other covenants in the indenture; final judgments or decrees entered into by a court of competent jurisdiction against the Company, which have not been vacated, discharged, satisfied or stayed pending appeal within 60 days of entry, involving liabilities of $25 million or more after deducting the portion of such liabilities accepted by an insurance company; or certain events involving bankruptcy, insolvency or reorganization of the Company. The indenture provides that the trustee may withhold notice to the holders of Exchange Notes of any default (except in payment of principal, premium, if any, or interest with respect to the Exchange Notes) if the trustee, in good faith, considers it in the interest of the holders of the Exchange Notes to do so. The Exchange Note indenture provides that if an Event of Default (other than an Event of Default with respect to certain events, including bankruptcy, insolvency or reorganization of the Company) shall have occurred and be continuing, the trustee or the holders of not less than 25% in principal amount of the Exchange Notes then outstanding may declare the principal of and premium, if any, on the Exchange Notes to be due and payable immediately, but if the Company shall pay or deposit with the trustee a sum sufficient to pay all matured installments of interest on all Exchange Notes and the principal and premiums, if any, on all Exchange Notes that have become due other than by acceleration and certain expenses and fees of the trustee and if all defaults (except the nonpayment of interest on, premium, if any, and principal of any Exchange Notes which shall have become due by acceleration) shall have been cured or waived and certain other conditions are met, such declaration may be canceled and past defaults may be waived by the holders of a majority in principal amount of the Exchange Notes then outstanding. The holders of a majority in principal amount of the Exchange Notes then outstanding shall have the right to direct the time, method and place of conducting any proceedings for any remedy available to the trustee, subject to certain limitations specified in the indenture. The indenture provides that, subject to the duty of the trustee following an Event of Default to act with the required standard of care, the trustee will not be under an obligation to exercise any of its rights or powers under the indenture at the request or direction of any of the holders, unless the trustee receives satisfactory indemnity against any associated costs, liability or expense. SATISFACTION AND DISCHARGE; DEFEASANCE The Exchange Note indenture will cease to be of further effect as to all outstanding Exchange Notes (except as to (i) rights of the holders of Exchange Notes to receive payments of principal of, premium, if any, and interest on, the Exchange Notes, (ii) rights of holders of Exchange Notes to convert to common stock or, in certain circumstances, cash, (iii) the Company's right of optional 74 redemption, (iv) rights of registration of transfer and exchange, (v) substitution of apparently mutilated, defaced, destroyed, lost or stolen Exchange Notes, (vi) rights, obligations and immunities of the trustee under the indenture and (vii) rights of the holders of Exchange Notes as beneficiaries of the indenture with respect to the property so deposited with the trustee payable to all or any of them) if (A) the Company will have paid or caused to be paid the principal of, premium, if any, and interest on the Exchange Notes as and when the same will have become due and payable or (B) all outstanding Exchange Notes (except lost, stolen or destroyed Exchange Notes which have been replaced or paid) have been delivered to the trustee for cancellation or (C) (x) the Exchange Notes not previously delivered to the trustee for cancellation will have become due and payable or are by their terms to become due and payable within one year or are to be called for redemption under arrangements satisfactory to the trustee upon delivery of notice and (y) the Company will have irrevocably deposited with the trustee, as trust funds, cash, in an amount sufficient to pay principal of and interest on the outstanding Exchange Notes, to maturity or redemption, as the case may be. Such trust may only be established if such deposit will not result in a breach or violation of, or constitute a default under, any agreement or instrument pursuant to which the Company is a party or by which it is bound and the Company has delivered to the trustee an officers' certificate and an opinion of counsel, each stating that all conditions related to such defeasance have been complied with. The Exchange Note indenture will also cease to be in effect (except as described in clauses (i) through (vii) in the immediately preceding paragraph) and the indebtedness on all outstanding Exchange Notes will be discharged on the 123rd day after the irrevocable deposit by the Company with the trustee, in trust, specifically pledged as security for, and dedicated solely to, the benefit of the holders of the Exchange Notes, of cash, U.S. Government Obligations (as defined in the indenture) or a combination thereof, in an amount sufficient, in the opinion of a nationally recognized firm of independent public accountants expressed in a written certification thereof delivered to the trustee, to pay the principal of, premium, if any, and interest on the Exchange Notes then outstanding in accordance with the terms of the indenture and the Exchange Notes ("legal defeasance"). Such legal defeasance may only be effected if (i) no Event of Default has occurred or is continuing, (ii) such deposit will not result in a breach or violation of, or constitute a default under, any agreement or instrument to which the Company is a party or by which it is bound, (iii) the Company has delivered to the trustee an opinion of counsel stating that (A) the Company has received from, or there has been published by, the Internal Revenue Service a ruling or (B) since the date of the indenture, there has been a change in the applicable federal income tax law, in either case to the effect that, based thereon, the holders of the Exchange Notes will not recognize income, gain or loss for federal income tax purposes as a result of such deposit, defeasance and discharge by the Company and will be subject to federal income tax on the same amount and in the same manner and at the same times as would have been the case if such deposit, defeasance and discharge had not occurred, (iv) the Company has delivered to the trustee an opinion of counsel to the effect that after the 123rd day following the deposit, the trust funds will not be subject to the effect of any applicable bankruptcy, insolvency, reorganization or similar laws affecting creditors' rights generally and (v) the Company has delivered to the trustee an officers certificate and an opinion of counsel stating that all conditions related to the defeasance have been complied with. The Company may also be released from its obligations under the covenants described above captioned "--Change of Control" and "--Merger, Consolidation and Sale of Assets" with respect to the Exchange Notes outstanding on the 123rd day after the irrevocable deposit by the Company with the trustee, in trust, specifically pledged as security for, and dedicated solely to, the benefit of the holders of the Exchange Notes, of cash, U.S. Government Obligations or a combination thereof, in an amount sufficient in the opinion of a nationally recognized firm of independent public accountants expressed in a written certification thereof delivered to the trustee, to pay the principal of, premium, if any, and interest on the Exchange Notes then outstanding in accordance with the terms of the indenture and the Exchange Notes ("covenant defeasance"). Such covenant defeasance may only be 75 effected if (i) no Event of Default has occurred or is continuing (ii) such deposit will not result in a breach or violation of, or constitute a default under, any agreement or instrument to which the Company is a party or by which it is bound, (iii) the Company has delivered to the trustee an officers' certificate and an opinion of counsel to the effect that the holders of the Exchange Notes will not recognize income, gain or loss for federal income tax purposes as a result of such deposit and covenant defeasance by the Company and will be subject to federal income tax on the same amount, in the same manner and at the same times as would have been the case if such deposit and covenant defeasance had not occurred, (iv) the Company has delivered to the trustee an opinion of counsel to the effect that after the 123rd day following the deposit, the trust funds will not be subject to the effect of any applicable bankruptcy, insolvency, reorganization or similar laws affecting creditors' rights generally and (v) the Company has delivered to the trustee an officers' certificate and an opinion of counsel stating that all conditions related to the covenant defeasance have been complied with. Following such covenant defeasance, the Company will no longer be required to comply with the obligations described above under "Merger, Consolidation and Sale of Assets" and will have no obligation to repurchase the Exchange Notes pursuant to the provisions described under "--Change of Control." Notwithstanding any satisfaction and discharge or defeasance of the indenture, the obligations of the Company described under "--Conversion of the Exchange Notes" will survive to the extent provided in the indenture until the Exchange Notes cease to be outstanding. MODIFICATIONS OF THE INDENTURE The Exchange Note indenture contains provisions permitting the Company and the trustee, with the consent of the holders of not less than a majority in principal amount of the Exchange Notes at the time outstanding, to modify the indenture or any supplemental indenture or the rights of the holders of the Exchange Notes, except that no such modification shall (i) extend the fixed maturity of any Exchange Note, reduce the rate or extend the time of payment of interest thereon, reduce the principal amount thereof or premium, if any, thereon, reduce any amount payable upon redemption thereof, change the obligation of the Company to repurchase the Exchange Notes, at the option of the holder, upon the happening of a Change of Control, impair or affect the right of a holder to institute suit for the payment thereof, change the currency in which the Exchange Notes are payable, modify the subordination provisions of the indenture in a manner adverse to the holders of the Exchange Notes or impair the right to convert the Exchange Notes into common stock subject to the terms set forth in the indenture, without the consent of the holder of each Exchange Note so affected or (ii) reduce the aforesaid percentage of the Exchange Notes, without the consent of the holders of all of the Exchange Notes then outstanding. The Company and the trustee may amend or supplement the indenture without notice to or consent of any holder in certain events, such as to make provision for certain conversion rights, to provide for the issuance of Exchange Notes in coupon form, to correct or supplement any inconsistent or deficient provision in the indenture, to comply with the provisions of the Trust indenture Act of 1939 or to appoint a successor trustee. CONCERNING THE TRUSTEE Wells Fargo Bank Minnesota, N.A., the trustee under the Exchange Note indenture, has been appointed by the Company as the paying agent, conversion agent, registrar and custodian with regard to the Exchange Notes. The trustee and/or its affiliates may in the future provide banking and other services to the Company in the ordinary course of their respective businesses. Under the indenture, each holder or former holder of an Exchange Note agrees to indemnify the Company and the trustee against any liability that may result from the transfer, exchange or assignment of such holder's or former holder's Exchange Note in violation of any provision of the indenture or applicable United States federal or state securities laws. 76 COMPARISON OF SUBORDINATED NOTES AND EXCHANGE NOTES Set forth below is a comparison of the terms of the existing Subordinated Notes and the Exchange Notes that will be issued and outstanding following completion of the exchange offer.
THE SUBORDINATED NOTES THE EXCHANGE NOTES ------------------------------ ------------------------------ Issue............................. 6 1/4% convertible 6 1/4% convertible Subordinated Notes Subordinated Notes Issuer............................ Penn Treaty American Penn Treaty American Corporation Corporation Security.......................... Unsecured Unsecured Issue Date........................ November 26, 1996 Upon completion of the exchange offer Conversion........................ Convertible until maturity at Convertible until maturity at a rate of 35.1617 shares of a rate of 188.3239 shares of common stock per $1,000 common stock per $1,000 principal amount, subject to principal amount, subject to adjustment adjustment Principal Outstanding Amount...... $74,750,000 $74,750,000 Coupon............................ 6 1/4% 6 1/4% Maturity.......................... December 1, 2003 October 15, 2008 Interest Payments................. In cash, semi-annually on each In cash, semi-annually, on June 1 and December 1 each October 15 and April 15 Mandatory Conversion.............. None If the average closing price of our common stock for any 15 consecutive trading days beginning on or after October 15, 2004 is at least 10% greater than the conversion price ($5.84) of the Exchange Notes and we have sufficient shares of common stock available for issuance, then holders of the Exchange Notes are required to convert their Exchange Notes into common stock at the conversion price set forth on the cover page of this Offering Circular
77
THE SUBORDINATED NOTES THE EXCHANGE NOTES ------------------------------ ------------------------------ Optional Redemption............... Redeemable on or after Redeemable on or after December 1, 2001 at price October 15, 2004 at price equal to the 101.04% of the equal to the principal amount principal amount plus accrued plus accrued and unpaid and unpaid interest thereon interest thereon and on or after December 1, 2002 at a price equal to principal amount plus accrued and unpaid interest thereon Ranking; Subordination............ The Subordinated Notes rank The Exchange Notes rank senior junior to the Exchange Notes to the Subordinated Notes and and all of Penn Treaty's other junior to all of Penn Treaty's Senior Indebtedness Senior Indebtedness Covenants......................... Penn Treaty is not restricted Penn Treaty is not restricted from incurring additional from incurring additional indebtedness senior to the indebtedness senior to the indebtedness evidenced by the indebtedness evidenced by the Subordinated Notes Exchange Notes Judgment Defaults................. Final judgments or decrees Final judgments or decrees entered into by a court of entered into by a court of competent jurisdiction against competent jurisdiction against Penn Treaty, which have not Penn Treaty, which have not been vacated, discharged, been vacated, discharged, satisfied or stayed pending satisfied or stayed pending appeal within 60 days of appeal within 60 days of entry, involving liabilities entry, involving liabilities of $10 million or more after of $25 million or more after deducting the portion of such deducting the portion of such liabilities accepted by an liabilities accepted by an insurance company insurance company
78 DESCRIPTION OF CAPITAL STOCK The Company's authorized capital stock consists of 40,000,000 shares of common stock, par value $.10 per share and 5,000,000 shares of preferred stock, par value $1.00 per share. The relative rights of the Company's common stock and preferred stock are defined by the Company's Restated and Amended Articles of Incorporation, as described below, as well as by the Company's Amended and Restated By-laws and the 1988 BCL. COMMON STOCK Subject to the rights of holders of any series of preferred stock which may from time to time be issued, holders of common stock are entitled to one vote per share on matters acted upon at any shareholders' meeting, including the election of directors, and to dividends when, as and if declared by the board of directors out of funds legally available therefor. There is no cumulative voting and the common stock is not redeemable. In the event of any liquidation, dissolution or winding up of Penn Treaty, each holder of common stock is entitled to share ratably in all assets of the Company remaining after the payment of liabilities and any amounts required to be paid to holders of preferred stock, if any. Holders of common stock have no preemptive or conversion rights and are not subject to further calls or assessments by Penn Treaty. All shares of common stock now outstanding, and all shares to be outstanding upon the completion of this offering, are and will be fully paid and non-assessable. The common stock is traded on the New York Stock Exchange. As of August 22, 2002, there were approximately 436 holders of record of common stock. This number was derived from the Company's shareholder records, and does not include beneficial owners of the Company's common stock whose shares are held in the names of various dealers, clearing agencies, banks, brokers, and other fiduciaries. PREFERRED STOCK The Board of Directors of the Company, without further action by the shareholders, is authorized to issue the shares of preferred stock in one or more series and to determine the voting rights, preferences as to dividends, and the liquidation, conversion, redemption and other rights of each series. The issuance of a series with voting and conversion rights may adversely affect the voting power of the holders of common stock. Although none of Penn Treaty's preferred stock has been issued, in connection with an agreement with Centre Solutions (Bermuda) Limited, whereby Centre Solutions agreed to reinsure 100% of the long-term care insurance policies of our subsidiaries Penn Treaty Network Insurance Company and American Network Insurance Company in-force on December 31, 2001, we granted Centre Solutions four tranches of warrants to purchase up to 5,000,000 shares of non-voting convertible preferred stock, which is all of our preferred stock available for issuance. See the discussion of the Centre Solutions Warrants in the section of this Offering Circular captioned "Agreements Relating to Penn Treaty Securities." ANTI-TAKEOVER PROVISIONS Penn Treaty's board of directors is divided into three classes, each of which is comprised of three directors elected for a three-year term, with one class being elected each year. Directors may be removed without cause only with the approval of 67% of the voting power of the stock entitled to vote in the election of directors. Any director elected to fill a vacancy, however created, serves for the remainder of the term of the director which he or she is replacing. Penn Treaty's Restated and Amended Articles of Incorporation require the affirmative vote of shareholders owning at least 67% of the outstanding shares of Penn Treaty's common stock in order for Penn Treaty to: amend, repeal or add any provision to the Restated and Amended Articles of Incorporation; merge or consolidate with another corporation, other than a wholly-owned subsidiary; exchange shares of Penn Treaty's common stock in such a manner that a corporation, person or entity 79 acquires the issued or outstanding shares of common stock of Penn Treaty pursuant to a vote of shareholders; sell, lease, convey, encumber or otherwise dispose of all or substantially all of the property or business of Penn Treaty; or liquidate or dissolve Penn Treaty. In addition, the Restated and Amended Articles of Incorporation permit our board of directors to oppose a tender offer or other offer for Penn Treaty's securities, and allow the board to consider any pertinent issue in determining whether to oppose any such offer. Pursuant to Penn Treaty's Amended and Restated By-laws, shareholder nominations for election to the board of directors must be made in writing and delivered or mailed to the President of Penn Treaty not less than fifty days nor more than seventy-five days prior to any meeting of shareholders called for the election of directors; provided, however, that if less than fifty days' notice of the meeting is given to shareholders, such nominations shall be mailed or delivered to the President not later than the close of business on the seventh day following the day on which the notice of the meeting was mailed. The 1988 BCL includes certain shareholder protection provisions, some of which apply to Penn Treaty and two of which, relating to "Disgorgement by Certain Controlling Shareholders following Attempts to Acquire Control" and "Control Share Acquisitions," the Company has specifically opted out of pursuant to an amendment to its by-laws. The following is a description of those provisions of the 1988 BCL that still apply to the Company and that may have an anti-takeover effect. This description of the 1988 BCL is only a summary thereof, does not purport to be complete and is qualified in its entirety by reference to the full text of the 1988 BCL. (i) The control transaction provisions allow holders of voting shares of a corporation to "put" their stock to an acquiror for fair value in the event of a control transaction (the acquisition of 20% of the voting stock of the corporation). Fair value is defined as not less than the highest price paid by the acquiror during a certain 90 day period. (ii) An interested shareholder (the beneficial owner of twenty percent of the voting stock either of a corporation or of an affiliate of the corporation who was at any time within the five-year period immediately prior to the date in question the beneficial owner of twenty percent of the voting stock of the corporation) cannot engage in a business combination with the corporation for a period of five years unless: (a) the board approves the business combination or the acquisition of shares in advance, or (b) if the interested shareholder owns 80% of such stock, the business combination is approved by a majority of the disinterested shareholders and the transaction satisfies certain "fair price" provisions. After the five-year period, the same restrictions apply, unless the transaction either is approved by a majority of the disinterested shareholders or satisfies the fair price provisions. (iii) Corporations may adopt shareholders' rights plans with discriminatory provisions (sometimes referred to as poison pills) whereby options to acquire shares or corporate assets are created and issued which contain terms that limit persons owning or offering to acquire a specified percentage of outstanding shares from exercising, converting, transferring or receiving options and allows the exercise of options to be limited to shareholders or triggered based upon control transactions. Such poison pills take effect only in the event of a control transaction. Pursuant to the 1988 BCL, such poison pills may be adopted by the Board without shareholder approval. (iv) In taking action with respect to tender offers or takeover proposals (as for any other action), directors may, in considering the best interests of the corporation, consider the effects of any action upon employees, suppliers, customers, communities where the corporation is located and all other pertinent factors. (v) Shareholders of a corporation no longer have a statutory right to call special meetings of shareholders or to propose amendments to the articles under the provisions of the 1988 BCL. 80 The foregoing provisions may discourage certain types of transactions that involve a Change of Control of Penn Treaty and ensure a measure of continuity in the management of the business and affairs of Penn Treaty. While Penn Treaty does not currently have a shareholder rights plan or poison pill, the effect of the above-described provisions may be to deter hostile takeovers at a price higher than the prevailing market price for the common stock and to permit current management to remain in control of Penn Treaty. In some circumstances certain shareholders may consider these anti-takeover provisions to have disadvantageous effects. Tender offers or other non-open market acquisitions of stock are frequently made at prices above the prevailing market price of a company's stock. In addition, acquisitions of stock by persons attempting to acquire control through market purchases may cause the market price of the stock to reach levels that are higher than would otherwise be the case. These anti-takeover provisions may discourage any or all such acquisitions, particularly those of LESS than all of Penn Treaty's shares, and may thereby deprive certain holders of Penn Treaty's common stock of any opportunity to sell their stock at a temporarily higher market price. Pursuant to an amendment to Penn Treaty's Amended and Restated By-laws adopted on July 19, 1990, Penn Treaty opted out of "Disgorgement by Certain Controlling Shareholders following Attempts to Acquire Control," which would otherwise allow Penn Treaty to recover all profits derived by any person or group that acquires control or disclosed an intention to acquire voting power over 20% of the equity securities of Penn Treaty on the disposition of any of the securities of Penn Treaty acquired within two years prior or eighteen months after acquiring such control or announcing an intention to that effect. Penn Treaty also opted out of "Control Share Acquisitions," which would otherwise suspend the voting rights of a shareholder when his ownership of Penn Treaty's securities crossed any of three thresholds (20%, 33% or 50%). The voting rights are held in abeyance until the shareholders holding a majority of disinterested shares vote to restore them. The inapplicability of these provisions mitigates somewhat the deterrence of hostile anti-takeover attempts at prices in excess of the prevailing market prices and lessens the ability of current management to retain control of Penn Treaty. In addition to provisions of the 1988 BCL, insurance laws and regulations of Pennsylvania and Vermont prohibit any person from acquiring control of Penn Treaty, and thus indirect control of Penn Treaty's insurance subsidiaries, without the prior approval of the applicable states' insurance commissioners. Any purchaser or holder of shares of common stock of Penn Treaty possessing 10% or more of the voting power of such class would be presumed to have acquired such control unless the applicable insurance commissioner, upon application, has determined otherwise. TRANSFER AGENT The transfer agent and registrar for the shares of the common stock is Wachovia Bank, N.A., Charlotte, North Carolina. 81 AGREEMENTS RELATING TO PENN TREATY SECURITIES SUBORDINATED NOTE INDENTURE. Pursuant to the indenture, dated as of November 26, 1996, between Penn Treaty, as issuer, and First Union National Bank, as trustee, relating to the Subordinated Notes, Penn Treaty has granted holders of the Subordinated Notes certain rights relating to the Penn Treaty common stock. In particular, the Subordinated Notes are convertible into shares of Penn Treaty common stock at a conversion price of $28.44 per share. The Subordinated Note indenture is substantially similar to the Exchange Note indenture described in the section of this Offering Circular captioned "Description of the Exchange Notes." However, notable differences are that the Exchange Note indenture requires mandatory conversion under certain circumstances and the Exchange Notes will not be redeemable for approximately two years. For a comparison between the Exchange Notes and the Subordinated Notes, see also the section in the Offering Circular captioned "Comparison between Subordinated Notes and Exchange Notes." CENTRE SOLUTIONS WARRANTS AND INVESTOR RIGHTS AGREEMENT. On February 19, 2002, Penn Treaty granted four tranches of warrants to Centre Solutions (Bermuda) Limited. The warrants issued consisted of the following, with the exercise percentages and exercise prices subject to certain anti-dilution adjustments: - A warrant to purchase the number of shares of the Company's Series A-1 Convertible Preferred Stock which initially would, on the date of exercise, be convertible into 8.69% of the number of fully diluted outstanding shares of the common stock of the Company determined as of the date of exercise. The exercise price of this warrant is initially $12.00 per share. - A warrant to purchase the number of shares of the Company's Series A-2 Convertible Preferred Stock which initially would, on the date of exercise, be convertible into 4.55% of the number of fully diluted outstanding shares of the common stock of the Company determined as of the date of exercise. The exercise price of this warrant is initially $24.00 per share. - A warrant to purchase the number of shares of the Company's Series A-3 Convertible Preferred Stock which initially would, on the date of exercise, be convertible into 3.52% of the number of fully diluted outstanding shares of the common stock of the Company determined as of the date of exercise. The exercise price of this warrant is initially $36.00 per share. - A warrant to purchase the number of shares of the Company's Series A-4 Convertible Preferred Stock which initially would, on the date of exercise, be convertible into 30.78% of the number of fully diluted outstanding shares of the common stock of the Company determined as of the date of exercise. The exercise price of this warrant is initially $6.00 per share. The Convertible Preferred Stock issued upon exercise of the warrants would represent approximately 35% of the outstanding common stock after conversion. The warrants to purchase shares of Series A-1 Convertible Preferred Stock, Series A-2 Convertible Preferred Stock and Series A-3 Convertible Preferred Stock are currently exercisable and expire on December 31, 2007. The warrant to purchase shares of Series A-4 Convertible Preferred Stock becomes exercisable on January 1, 2008 and expires on the earlier of December 31, 2013 or the date the business reinsured with Centre Solutions (Bermuda) Limited is commuted. The four tranches of warrants were granted in connection with a Reinsurance Agreement between Penn Treaty and Centre Solutions, pursuant to which Centre Solutions agreed to reinsure 100% of the long-term care insurance policies of Penn Treaty Network America Insurance Company and American Network Insurance Company in-force on December 31, 2001, subject to an aggregate limit of liability. The Reinsurance Agreement was the principal component of Penn Treaty's Corrective Action Plan to remedy the statutory surplus position of Penn Treaty's subsidiaries, Penn Treaty Network America Insurance Company and American Network Insurance Company. For more information regarding these warrants and the reinsurance Agreement with Centre Solutions, see the section of this Offering Circular 82 captioned "Business--(g) Reinsurance" and the section in Penn Treaty's 2002 Annual Meeting Proxy Statement captioned "Proposal III--Ratification and Approval of Issuance of Warrants, Convertible Preferred Stock and Common Stock." We have granted to Centre Solutions, under an Investor Rights Agreement dated February 19, 2002, certain demand and incidental registration rights with respect to the common stock issuable upon conversion of our convertible preferred stock, which may be acquired upon exercise of the warrants granted to Centre Solutions. The registration rights granted to Centre Solutions are transferable in certain situations. In addition, under the terms of the Investor Rights Agreement, certain actions of Penn Treaty require the written consent of the holders of the warrants exercisable for two-thirds of each series of convertible preferred stock issuable upon exercise of all such warrants. Actions requiring consent of the warrant holders include amendments to Penn Treaty's Articles of Incorporation or By-laws that have an effect on the rights of the preferred stock disproportionately adverse in comparison to the effect on the rights of other Penn Treaty security holders; increases or decreases in the authorized number of shares of common stock or preferred stock; the issuance of securities with certain rights equal or senior to the rights of the preferred stock; any redemption of Penn Treaty common stock; any change in the authorized number of directors of Penn Treaty; any merger or consolidation of Penn Treaty or certain of its subsidiaries where Penn Treaty's shareholders do not have control of the resulting entity and disposition of substantially all of Penn Treaty's or certain of its subsidiaries' property, assets or business. RELATED PARTY TRANSACTIONS; EMPLOYEE COMPENSATION ARRANGEMENTS. Penn Treaty sponsors certain equity-based compensation plans, including stock option and restricted stock plans, and is party to employment agreements and stock option agreements with certain of its employees. These plans and agreements provide for the grant of options to purchase shares of Penn Treaty common stock, among other things. For further information regarding the terms of these plans and agreements, see Penn Treaty's 2001 Annual Report on Form 10-K and the sections in Penn Treaty's 2002 Annual Meeting Proxy Statement captioned "Executive Compensation and Other Matters" and "Proposal II--Approval of the 2002 Employee Stock Option Plan." Proposal II was approved by Penn Treaty's stockholders at our May 24, 2002 annual meeting of shareholders. Except as described in this Offering Circular and the materials being distributed with it, there are no contracts, arrangements, understandings or relationships in connection with the exchange offer between Penn Treaty or any of its directors or executive officers and any person with respect to the Subordinated Notes or the Exchange Notes and shares of our common stock to be issued in the exchange offer. SUBORDINATED NOTES HELD BY OUR CHAIRMAN OF THE BOARD AND CHIEF EXECUTIVE OFFICER. Irving Levit, our founder, Chairman of the Board of Directors and Chief Executive Officer owns $90,000 of the Subordinated Notes and has informed Penn Treaty that he intends to tender those Subordinated Notes in the exchange offer. DESCRIPTION OF OTHER INDEBTEDNESS. For additional information concerning Penn Treaty's outstanding indebtedness, see the unaudited consolidated financial statements of Penn Treaty and related notes set forth in Penn Treaty's Second Quarter 2002 Quarterly Report on Form 10-Q and the audited consolidated financial statements of Penn Treaty and related notes set forth in Penn Treaty's 2001 Annual Report on Form 10-K. CAUTIONARY STATEMENTS Certain statements in this Offering Circular may constitute forward-looking statements. These forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance, or achievements of Penn Treaty to be materially different from any future results, performance, or achievements expressed or implied by such forward-looking 83 statements. Statements that are not historical fact are forward-looking statements. Forward-looking statements can be identified by, among other things, the use of forward-looking language, such as the word "estimate," "project," "intend," "expect," "believe," "may," "well," "should," "seeks," "plans," "scheduled to," "anticipates," or "intends," or the negative of these terms or other variations of these terms or comparable language, or by discussions of strategy or intentions, when used in connection with Penn Treaty, including its management. These forward-looking statements were based on various factors and were derived utilizing numerous important assumptions and other important factors that could cause actual results to differ materially from those in the forward-looking statements. Penn Treaty cautions investors that any forward-looking statements made by Penn Treaty are not guarantees of future performance. Important assumptions and other important factors that could cause actual results to differ materially from those in the forward-looking statements with respect to Penn Treaty include, but are not limited to, the risks and uncertainties affecting our business and this exchange offer described in the section of this Offering Circular captioned "Risk Factors," as well as elsewhere in this Offering Circular. WHERE YOU CAN FIND MORE INFORMATION We are subject to the reporting requirements of the Securities Exchange Act of 1934, and we file annual, quarterly and current reports and other information with the SEC. Our reports filed with the SEC may be inspected, without charge, and copies may be obtained at prescribed rates, at the public reference facility maintained by the SEC at Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549. The public may obtain information regarding the SEC's public reference facility by calling 1-800-SEC-0330. Our reports, the registration statement and other information filed by us with the SEC are also available at the SEC's Website on the Internet at http://www.sec.gov. Our common shares are listed on the New York Stock Exchange under the symbol "PTA." INCORPORATION OF INFORMATION WE FILE WITH THE SEC We incorporate by reference the documents listed below and any future filings made with the SEC under Section 13(a), 13(c), 14 or 15(d) of the Securities Exchange Act of 1934 until this exchange offer is completed: - Annual Report on Form 10-K for the fiscal year ended December 31, 2001; - Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 2002; - Quarterly Report on Form 10-Q for the fiscal quarter ended June 30, 2002; - Current Report on Form 8-K filed February 21, 2002; and - Proxy Statement for the 2002 Annual Meeting of Shareholders. Penn Treaty will provide without charge to each person to whom a copy of this Offering Circular is delivered, including any beneficial owner, upon the written or oral request of such person, a copy of any or all of the documents incorporated by reference (other than exhibits to such documents, unless such exhibits are specifically incorporated by reference into the information that this Offering Circular incorporates). Requests should be directed to: Penn Treaty American Corporation Attention: Cameron B. Waite Executive Vice President and Chief Financial Officer 3440 Lehigh Street Allentown, PA 18103 (610) 965-2222 INDEPENDENT AUDITORS The consolidated financial statements of Penn Treaty American Corporation as of December 31, 2001 and for each of the five years in the period ended December 31, 2001 incorporated by reference in this Offering Circular have been audited by PricewaterhouseCoopers LLP, independent auditors, as stated in their report which is incorporated herein by reference. 84 We have appointed Philadelphia Brokerage Corporation as the Information Agent for the exchange offer. All inquiries relating to this Offering Circular and the transactions contemplated hereby should be directed to the information agent at the telephone numbers and address set forth below. The Information Agent for the Offer is: Philadelphia Brokerage Corporation 992 Old Eagle School Road Suite 915 Wayne, PA 19087 (610) 975-9990 We have appointed Wells Fargo Bank Minnesota, N.A. as the exchange agent for the exchange offer. All completed Letters of Transmittal and agent's messages should be directed to the exchange agent at one of the addresses set forth below. All questions regarding the procedures for tendering in the exchange offer and requests for assistance in tendering your Subordinated Notes should also be directed to the exchange agent at one of the following telephone numbers and addresses: To: Wells Fargo Bank Minnesota, N.A. BY REGISTERED OR CERTIFIED MAIL: BY REGULAR MAIL OR OVERNIGHT IN PERSON BY HAND ONLY: CARRIERS: MAC # N9303-121 MAC # N9303-121 608 Second Avenue South Corporate Trust Operations Corporate Trust Operations Corporate Trust Operations, P.O. Box 1517 6th & Marquette Avenue 12th Floor Minneapolis, MN 55480-1517 Minneapolis, MN 55479 Minneapolis, MN 55402
By Facsimile Transmission: (612) 667-4927 Confirm by Telephone: (800) 344-5128 DELIVERY OF A LETTER OF TRANSMITTAL OR AGENT'S MESSAGE TO AN ADDRESS OTHER THAN THE ADDRESS LISTED ABOVE OR TRANSMISSION OF INSTRUCTIONS BY FACSIMILE OTHER THAN AS SET FORTH ABOVE IS NOT VALID DELIVERY OF THE LETTER OF TRANSMITTAL OR AGENT'S MESSAGE. Requests for additional copies of this Offering Circular, the enclosed Letter of Transmittal, the enclosed Notice of Guaranteed Delivery, or for copies of Penn Treaty's Second Quarter 2002 Quarterly Report on Form 10-Q, Penn Treaty's First Quarter 2002 Quarterly Report on form 10-Q, Penn Treaty's Annual Report on Form 10-K for the fiscal year ended December 31, 2002, Penn Treaty's 2002 Current Reports on Form 8-K and Penn Treaty's 2002 Annual Meeting Proxy Statement, may be directed to us or to the Exchange Agent or the Information Agent at the respective telephone numbers and addresses listed above. EX-99.(A)(2) 4 a2088064zex-99_a2.txt EXHIBIT 99.(A)(2) Exhibit 99.(a)(2) LETTER OF TRANSMITTAL PENN TREATY AMERICAN CORPORATION OFFER TO EXCHANGE 6 1/4% CONVERTIBLE SUBORDINATED NOTES DUE 2008 FOR ALL OUTSTANDING 6 1/4% CONVERTIBLE SUBORDINATED NOTES DUE 2003 PURSUANT TO THE OFFERING CIRCULAR, DATED AUGUST 28, 2002 - -------------------------------------------------------------------------------- THE EXCHANGE OFFER WILL EXPIRE AT 12:00 A.M., NEW YORK CITY TIME, ON SEPTEMBER 26, 2002, UNLESS THE EXCHANGE OFFER IS EXTENDED. TENDERS MAY BE WITHDRAWN PRIOR TO 12:00 A.M., NEW YORK CITY TIME, ON THE EXPIRATION DATE. - -------------------------------------------------------------------------------- THE EXCHANGE AGENT FOR THE EXCHANGE OFFER IS: WELLS FARGO BANK MINNESOTA, N.A. To: Wells Fargo Bank Minnesota, N.A. BY REGISTERED OR CERTIFIED BY REGULAR MAIL OR OVERNIGHT CARRIERS: IN PERSON BY HAND ONLY: MAIL: MAC # N9303-121 608 Second Avenue South MAC # N9303-121 Corporate Trust Operations Corporate Trust Operations, Corporate Trust Operations 6th & Marquette Avenue 12th Floor P.O. Box 1517 Minneapolis, MN 55479 Minneapolis, MN 55402 Minneapolis, MN 55480-1517 By Facsimile Transmisson: (612) 667-4927 Confirm by Telephone: (800) 344-5128
DELIVERY OF THIS LETTER OF TRANSMITTAL TO AN ADDRESS OTHER THAN THOSE LISTED ABOVE, OR TRANSMISSION OF INSTRUCTIONS BY FACSIMILE OTHER THAN AS SET FORTH ABOVE, WILL NOT CONSTITUTE A VALID DELIVERY OF YOUR SUBORDINATED NOTES. By signing this Letter of Transmittal, you hereby acknowledge that you have received and reviewed the Offering Circular, dated August 28, 2002 (the "Offering Circular"), of Penn Treaty American Corporation ("Penn Treaty") and this Letter of Transmittal. The Offering Circular, together with this Letter of Transmittal, constitutes Penn Treaty's offer to exchange (the "Exchange Offer") up to an aggregate principal amount of $74,750,000 of its 6 1/4% Convertible Subordinated Notes due 2008 of Penn Treaty (the "Exchange Notes") for up to all of Penn Treaty's issued and outstanding 6 1/4% Convertible Subordinated Notes due 2003 (the "Subordinated Notes"). This Exchange Offer is being extended to all holders of the outstanding Subordinated Notes. If you decide to tender your Subordinated Notes, and we accept the Subordinated Notes, this will constitute a binding agreement between you and Penn Treaty, subject to the terms and conditions set forth in the Offering Circular and this Letter of Transmittal. Unless you comply with the procedures described in the Offering Circular under the caption "The Exchange Offer--Guaranteed Delivery Procedures," you must do one of the following on or prior to the expiration of the Exchange Offer to participate in the Exchange Offer: - tender your Subordinated Notes by sending the certificates for your Subordinated Notes, in proper form for transfer, a properly completed and duly executed Letter of Transmittal, with any required signature guarantees, and all other documents required by this Letter of Transmittal to the Exchange Agent at one of the addresses listed above; or - tender your Subordinated Notes by using the book-entry transfer procedures described in the Offering Circular under the caption "The Exchange Offer--Book-Entry Transfer," and transmitting this Letter of Transmittal, with any required signature guarantees, or an Agent's Message (as defined below) instead of this Letter of Transmittal to the Exchange Agent. In order for a book-entry transfer to constitute a valid tender of your Subordinated Notes in the Exchange Offer, the Exchange Agent must receive a confirmation of book-entry transfer (a "Book-Entry Confirmation") of your Subordinated Notes into the Exchange Agent's account at The Depository Trust Company prior to the expiration of the Exchange Offer. The term "Agent's Message" means a message, transmitted by The Depository Trust Company and received by the Exchange Agent and forming a part of the Book-Entry Confirmation, which states that The Depository Trust Company has received an express acknowledgment from you that you have received and have agreed to be bound by the terms of this Letter of Transmittal. If you use this procedure, we may enforce the Letter of Transmittal against you. DELIVERY OF DOCUMENTS TO THE DEPOSITORY TRUST COMPANY'S BOOK-ENTRY TRANSFER FACILITY WILL NOT CONSTITUTE DELIVERY TO THE EXCHANGE AGENT. If you are a holder of Subordinated Notes and wish to tender your Subordinated Notes in the Exchange Offer, but (1) your certificates for Subordinated Notes are not immediately available, (2) time will not permit your certificates for Subordinated Notes or other required documents to reach the Exchange Agent before the expiration of the Exchange Offer, or (3) the procedure for book-entry transfer cannot be completed prior to the expiration of the Exchange Offer, you may tender the Subordinated Notes by following the procedures described in the Offering Circular under the caption "The Exchange Offer--Guaranteed Delivery Procedures." Only registered holders of the Subordinated Notes (the "Registered Holders")--which term, for purposes of this Letter of Transmittal, includes any participant in the Depository Trust Company's system whose name appears on a security position listing as the owner of the Subordinated Notes--are entitled to tender their Subordinated Notes for exchange in the Exchange Offer. If you are a beneficial owner whose Subordinated Notes are registered in the name of a broker, dealer, commercial bank, trust company or other nominee and you wish to tender your Subordinated Notes in the Exchange Offer, you should promptly contact the person in whose name the Subordinated Notes are registered and instruct that person to tender on your behalf. If you wish to tender in the Exchange Offer on your own behalf, prior to completing and executing this Letter of Transmittal and delivering the certificates for your Subordinated Notes, you must either make appropriate arrangements to register ownership of the Subordinated Notes in your name or obtain a properly completed bond power from the person in whose name the Subordinated Notes are registered. YOU MUST COMPLETE THIS LETTER OF TRANSMITTAL IF YOU ARE A REGISTERED HOLDER OF SUBORDINATED NOTES--WHICH INCLUDES ANY PARTICIPANT IN THE DEPOSITORY TRUST COMPANY'S SYSTEM WHOSE NAME APPEARS ON A SECURITY POSITION LISTING AS THE OWNER OF THE SUBORDINATED NOTES--AND EITHER (1) YOU WISH TO TENDER THE CERTIFICATES REPRESENTING YOUR SUBORDINATED NOTES TO THE EXCHANGE AGENT TOGETHER WITH THIS LETTER OF TRANSMITTAL OR (2) YOU WISH TO TENDER YOUR SUBORDINATED NOTES BY BOOK-ENTRY TRANSFER TO THE EXCHANGE AGENT'S ACCOUNT AT THE DEPOSITORY TRUST COMPANY AND YOU ELECT TO SUBMIT THIS LETTER OF TRANSMITTAL TO THE EXCHANGE AGENT INSTEAD OF AN AGENT'S MESSAGE. In order to properly complete this Letter of Transmittal, you must: (1) complete the box entitled "Description of Subordinated Notes Tendered," (2) if appropriate, check and complete the boxes relating to book-entry transfer and guaranteed delivery and the boxes entitled "Special Payment/Issuance Instructions" and/or "Special Delivery Instructions," (3) sign this Letter of Transmittal by completing the box entitled "Sign Here" and (4) complete the box entitled "Substitute Form W-9." By completing the box entitled "Description of Subordinated Notes Tendered" and signing below, you will have tendered your Subordinated Notes for exchange on the terms and conditions described in the Offering Circular and this Letter of Transmittal. You should read the detailed instructions at the end of this document before completing this Letter of Transmittal. 2 NOTE: SIGNATURES MUST BE PROVIDED BELOW. PLEASE READ THE ACCOMPANYING INSTRUCTIONS CAREFULLY. BOX BELOW TO BE COMPLETED BY ALL TENDERING HOLDERS OF THE SUBORDINATED NOTES
- ------------------------------------------------------------------------------------------------- DESCRIPTION OF SUBORDINATED NOTES TENDERED - ------------------------------------------------------------------------------------------------- 1 2 3 PRINCIPAL AMOUNT NAME AND ADDRESS OF OF SUBORDINATED NOTES REGISTERED HOLDER CERTIFICATE NUMBER(S)* TENDERED ** - ------------------------------------------------------------------------------------------------- --------------------------------------------------------------- --------------------------------------------------------------- --------------------------------------------------------------- --------------------------------------------------------------- --------------------------------------------------------------- --------------------------------------------------------------- --------------------------------------------------------------- - ------------------------------------------------------------------------------------------------- TOTAL: - -------------------------------------------------------------------------------------------------
* Need not be completed by holders who tender by book-entry transfer. ** Unless otherwise indicated in column 3, a holder will be deemed to have tendered ALL of the Subordinated Notes represented by the certificate(s) listed in column 2. (See Instruction 4). BOXES BELOW TO BE CHECKED AS APPLICABLE / / CHECK HERE IF THE CERTIFICATE(S) REPRESENTING YOUR SUBORDINATED NOTES IS BEING TENDERED WITH THIS LETTER OF TRANSMITTAL. / / CHECK HERE IF THE CERTIFICATE(S) REPRESENTING YOUR SUBORDINATED NOTES HAS BEEN LOST, DESTROYED OR STOLEN AND YOU REQUIRE ASSISTANCE IN OBTAINING A NEW CERTIFICATE(S). Certificate Number(s) ______________________________________________________ Principal Amount(s) Represented ____________________________________________ You must contact the Exchange Agent to obtain instructions for replacing lost, destroyed or stolen certificate(s) representing Subordinated Notes. (See Instruction 12) 3 - --------------------------------------------- SPECIAL PAYMENT/ISSUANCE INSTRUCTIONS (SEE INSTRUCTIONS 1, 5 AND 6) To be completed ONLY if certificates for Subordinated Notes not tendered and/or Exchange Notes are to be issued in the name of and sent to someone other than the registered holder of the Subordinated Notes whose name(s) appear below: / / Issue Exchange Notes to: / / Issue Subordinated Notes to: Name(s): ___________________________________________________________________ ____________________________________________________________________________ (PLEASE TYPE OR PRINT) Address: ___________________________________________________________________ ____________________________________________________________________________ (INCLUDING ZIP CODE) Telephone: _________________________________________________________________ Tax Identification or Social Security Number (See Instruction 9): _______________________________________________________ / / Credit unexchanged Subordinated Notes delivered by book-entry transfer to the DTC account set forth below. ____________________________________________________________________________ (DTC ACCOUNT NUMBER, IF APPLICABLE) - --------------------------------------------------------- - --------------------------------------------------------- SPECIAL DELIVERY INSTRUCTIONS (SEE INSTRUCTIONS 1, 5 AND 6) To be completed ONLY if certificates for Subordinated Notes not tendered and/or Exchange Notes are to be sent to someone other than the registered holder of the Subordinated Notes whose name(s) appears below or to the registered holder at an address other than that shown below: / / Deliver Exchange Notes to: / / Deliver Subordinated Notes to: Name(s): ___________________________________________________________________ ____________________________________________________________________________ (PLEASE TYPE OR PRINT) Address: ___________________________________________________________________ ____________________________________________________________________________ (INCLUDING ZIP CODE) Telephone: _________________________________________________________________ ____________________________________________________________________________ Tax Identification or Social Security Number (See Instruction 9): _______________________________________________________ - ------------------------------------------ 4 / / CHECK HERE AND ENCLOSE A PHOTOCOPY OF THE NOTICE OF GUARANTEED DELIVERY IF TENDERED SUBORDINATED NOTES ARE BEING DELIVERED UNDER A NOTICE OF GUARANTEED DELIVERY PREVIOUSLY SENT TO THE EXCHANGE AGENT AND COMPLETE THE FOLLOWING: Name(s) of Registered Holder(s) ____________________________________________ Window Ticket Number (if any) ______________________________________________ Date of Execution of Notice of Guaranteed Delivery _________________________ Name of Institution Which Guaranteed Delivery ______________________________ IF DELIVERED BY BOOK-ENTRY TRANSFER, COMPLETE THE FOLLOWING: Name of Tendering Institution ______________________________________________ Account Number _____________________________________________________________ Transaction Code Number ____________________________________________________ - -------------------------------------------------------------------------------- BOXES BELOW TO BE CHECKED BY ELIGIBLE INSTITUTIONS ONLY / / CHECK HERE IF TENDERED SUBORDINATED NOTES ARE BEING DELIVERED BY BOOK-ENTRY TRANSFER TO THE EXCHANGE AGENT'S ACCOUNT AT THE DEPOSITORY TRUST COMPANY AND COMPLETE THE FOLLOWING: Name of Tendering Institution ______________________________________________ Account Number _____________________________________________________________ Transaction Code Number ____________________________________________________ / / CHECK HERE IF TENDERED SUBORDINATED NOTES NOT TO BE TENDERED OR NOT EXCHANGED ARE TO BE RETURNED BY CREDITING THE DEPOSITORY TRUST COMPANY ACCOUNT NUMBER INDICATED ABOVE. - -------------------------------------------------------------------------------- 5 Ladies and Gentlemen: Upon the terms and subject to the conditions of the Exchange Offer, as described in the Offering Circular and this Letter of Transmittal, I hereby tender to Penn Treaty American Corporation the aggregate principal amount of the Subordinated Notes described above in the box entitled "Description of Subordinated Notes Tendered" in exchange for an equal principal amount of Exchange Notes. Subject to and effective upon the acceptance for exchange of all or any portion of the Subordinated Notes tendered by this Letter of Transmittal in accordance with the terms and conditions of the Exchange Offer--including, if the Exchange Offer is extended or amended, the terms and conditions of any extension or amendment--I hereby sell, assign and transfer to, or upon the order of, Penn Treaty all right, title and interest in and to the Subordinated Notes tendered by this Letter of Transmittal. I hereby irrevocably constitute and appoint the Exchange Agent as my agent and attorney-in-fact--with full knowledge that the Exchange Agent is also acting as the agent of Penn Treaty in connection with the Exchange Offer--with respect to the tendered Subordinated Notes, with full power of substitution, such power of attorney being deemed to be an irrevocable power coupled with an interest, subject only to the right of withdrawal described in the Offering Circular, to (1) deliver certificates for the tendered Subordinated Notes to Penn Treaty together with all accompanying evidences of transfer and authenticity to, or upon the order of, Penn Treaty, upon receipt by the Exchange Agent, as my agent, of the Exchange Notes to be issued in exchange for the tendered Subordinated Notes, (2) present certificates for the tendered Subordinated Notes for transfer, and to transfer the tendered Subordinated Notes on the books of Penn Treaty, and (3) receive for the account of Penn Treaty all benefits and otherwise exercise all rights of ownership of the tendered Subordinated Notes, all in accordance with the terms and conditions of the Exchange Offer. I hereby represent and warrant that I have full power and authority to tender, sell, assign and transfer the Subordinated Notes tendered by this Letter of Transmittal and that, when the tendered Subordinated Notes are accepted for exchange, Penn Treaty will acquire good, marketable and unencumbered title to the tendered Subordinated Notes, free and clear of all liens, restrictions, charges and encumbrances, and that the tendered Subordinated Notes are not subject to any adverse claims or proxies. I will, upon request, execute and deliver any additional documents deemed by Penn Treaty or the Exchange Agent to be necessary or desirable to complete the exchange, sale, assignment and transfer of the Subordinated Notes tendered by this Letter of Transmittal. I have read and I agree to all of the terms of the Exchange Offer. The name(s) and address(es) of the Registered Holder(s)--which term, for purposes of this Letter of Transmittal, includes any participant in The Depository Trust Company's system whose name appears on a security position listing as the holder of the Subordinated Notes tendered by this Letter of Transmittal--are printed above as they appear on the certificate(s) representing the Subordinated Notes. The certificate number(s) and the Subordinated Notes that I wish to tender are indicated in the appropriate boxes above. Unless I have otherwise indicated by completing the box entitled "Special Payment/Issuance Instructions" above, I hereby direct that the Exchange Notes be issued in the name(s) of the undersigned or, in the case of a book-entry transfer of Subordinated Notes, that the Exchange Notes be credited to the account indicated above maintained with The Depository Trust Company. Similarly, unless I have otherwise indicated by completing the box entitled "Special Delivery Instructions," I hereby direct that the Exchange Notes be delivered to the address shown below my signature. If I have (1) tendered any Subordinated Notes that are not exchanged in the Exchange Offer for any reason or (2) submitted certificates for more Subordinated Notes than I wish to tender, unless I have otherwise indicated by completing the boxes entitled "Special Payment/Issuance Instructions" or "Special Delivery Instructions," I hereby direct that certificates for any Subordinated Notes that are not tendered or not exchanged should be issued in the name of the undersigned, if applicable, and delivered to the address shown below my signature or, in the case of a book-entry transfer of Subordinated Notes, that Subordinated Notes that are not tendered or not exchanged be credited to the account indicated above maintained with The Depository Trust Company, in each case, at Penn Treaty's expense, promptly following the expiration or termination of the Exchange Offer. 6 I understand that if I decide to tender Subordinated Notes, and Penn Treaty accepts the Subordinated Notes for exchange, this will constitute a binding agreement between me and Penn Treaty, subject to the terms and conditions set forth in the Offering Circular and this Letter of Transmittal. I also recognize that, under certain circumstances described in the Offering Circular under the caption "Exchange Offer," Penn Treaty may not be required to accept for exchange any Subordinated Notes tendered by this Letter of Transmittal. By tendering Subordinate Notes and executing this Letter of Transmittal, or delivering an Agent's Message instead of this Letter of Transmittal, I hereby waive any and all rights to receive any payments, including, without limitation, interest payments with respect to the Subordinated Notes and waive any and all claims that arise out of or are based upon my ownership or acquisition of the Subordinated Notes, and agree that Penn Treaty's obligations to me under the Exchange Notes Indenture and the Exchange Notes described in the Offering Circular supercede and replace in their entirety Penn Treaty's obligations to me under the Subordinated Notes Indenture, the Subordinated Notes and any other documents executed in connection therewith. Any Subordinated Note holder who becomes eligible to receive consideration under the terms of this Exchange Offer will receive, Exchange Notes issued in principal amounts equal to that of the Subordinated Notes so tendered. All authority conferred in or agreed to be conferred in this Letter of Transmittal will survive my death or incapacity, and any obligation of mine under this Letter of Transmittal will be binding upon my heirs, executors, administrators, personal representatives, trustees in bankruptcy, legal representatives, successors and assigns. Except as stated in the Offering Circular, this tender is irrevocable. 7 PLEASE COMPLETE SUBSTITUTE FORM W-9 BELOW (See Instructions 2, 5 and 6) SIGNATURE(S) MUST BE GUARANTEED IF REQUIRED BY INSTRUCTION 2 This Letter of Transmittal must be signed by (1) the Registered Holder(s)--which term, for purposes of this Letter of Transmittal, includes any participant in The Depository Trust Company's system whose name appears on a security position listing as the holder of the Subordinated Notes--exactly as the name(s) of the Registered Holder(s) appear(s) on the certificate(s) for the Subordinated Notes tendered or on the register of holders maintained by Penn Treaty, or (2) by any person(s) authorized to become the Registered Holder(s) by endorsements and documents transmitted with this Letter of Transmittal--including any opinions of counsel, certifications and other information as may be required by Penn Treaty for the Subordinated Notes to comply with the restrictions on transfer, if any, applicable to the Subordinated Notes. If the signature below is by a trustee, executor, administrator, guardian, attorney-in-fact, officer of a corporation or another acting in a similar fiduciary or representative capacity, please set forth the signer's full title. (See Instruction 5). - -------------------------------------------------------------------------------- ____________________________________________________________________________ SIGNATURE(S) OF SUBORDINATED NOTE HOLDER(S) Dated ________________, 2002 Names(s) ___________________________________________________________________ ____________________________________________________________________________ (PLEASE PRINT) Capacity ___________________________________________________________________ Address ____________________________________________________________________ (ZIP CODE) Tax Identification or Social Security No. ________________________________________________________ (SEE INSTRUCTION 9) Area Code and Telephone No. ________________________________________________ SIGNATURE(S) GUARANTEED (See Instruction 2, If Required) ELIGIBLE GUARANTOR INSTITUTION _____________________________________________ OFFICIAL SIGNATURE _________________________________________________________ DATED _______________ , 2002 - -------------------------------------------------------------------------------- 8 SUBSTITUTE FORM W-9 DEPARTMENT OF THE TREASURY INTERNAL REVENUE SERVICE TO BE COMPLETED BY ALL TENDERING HOLDERS (SEE INSTRUCTION 5) PAYOR'S NAME: WELLS FARGO BANK MINNESOTA, N.A. - ------------------------------------------------------------------------------------------------------- SUBSTITUTE Part 1--PLEASE PROVIDE YOUR TIN IN THE BOX AT FORM W-9 THE RIGHT AND CERTIFY BY SIGNING AND DATING TIN: Department of the BELOW. For individuals, this is your Social Social Security Number Treasury Security Number (SSN). For sole proprietors, or Internal Revenue see the Social Security Number or Employer Service Instructions in the enclosed Guidelines. For Identification Number other entities, it is your Employer Identification Number (EIN). If you do not have a number, see how to get a TIN in the enclosed Guidelines. -------------------------------------------------------------------------- Part 2--TIN Applied for / / -------------------------------------------------------------------------- Part 3--CERTIFICATION--UNDER PENALTIES OF PERJURY, I CERTIFY THAT: (1) the number shown on this form is my correct Taxpayer Identification Number (or I am waiting for a number to be issued to me), (2) I am not Payor's Request for subject to backup withholding because (a) I am exempt from backup Taxpayer withholding, (b) I have not been notified by the Internal Revenue Service Identification Number (the "IRS") that I am subject to backup withholding as a result of a ("TIN") and failure to report all interest or dividends, or (c) the IRS has notified Certification me that I am no longer subject to backup withholding, and (3) I am a U.S. person (including a U.S. resident alien). -------------------------------------------------------------------------- SIGNATURE: DATE: - ------------------------------------------------------------------------------------------------------- YOU MUST CROSS OUT ITEM (2) OF THE ABOVE CERTIFICATION IF YOU HAVE BEEN NOTIFIED BY THE IRS THAT YOU ARE SUBJECT TO BACKUP WITHHOLDING BECAUSE OF UNDERREPORTING OF INTEREST OR DIVIDENDS ON YOUR TAX RETURNS AND YOU HAVE NOT BEEN NOTIFIED BY THE IRS THAT YOU ARE NO LONGER SUBJECT TO BACKUP WITHHOLDING. THE INTERNAL REVENUE SERVICE DOES NOT REQUIRE YOUR CONSENT TO ANY PROVISIONS OF THIS DOCUMENT OTHER THAN THE CERTIFICATIONS REQUIRED TO AVOID BACKUP WITHHOLDING. - -------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------ YOU MUST COMPLETE THE FOLLOWING CERTIFICATE IF YOU CHECKED THE BOX IN PART 2 OF SUBSTITUTE FORM W-9. CERTIFICATE OF AWAITING TAXPAYER IDENTIFICATION NUMBER I certify under penalties of perjury that a taxpayer identification number has not been issued to me, and either (a) I have mailed or delivered an application to receive a taxpayer identification number to the appropriate Internal Revenue Service Center or Social Security Administration Office or (b) I intend to mail or deliver an application in the near future. I understand that if I do not provide a taxpayer identification number by the time of payment, 30 percent of all reportable cash payments made to me thereafter will be withheld until I provide a number and such retained amounts will be remitted to the Internal Revenue Service as backup withholding. Signature: Date: FAILURE TO COMPLETE AND RETURN THIS FORM MAY RESULT IN BACKUP WITHHOLDING OF ANY PAYMENTS MADE TO YOU ON ACCOUNT OF THE EXCHANGE NOTES. PLEASE REVIEW THE ENCLOSED GUIDELINES FOR CERTIFICATION OF TAXPAYER IDENTIFICATION NUMBER ON SUBSTITUTE FORM W-9 FOR ADDITIONAL DETAILS - ------------------------------------------------------------
9 INSTRUCTIONS FORMING PART OF THE TERMS AND CONDITIONS OF THE EXCHANGE OFFER 1. DELIVERY OF LETTER OF TRANSMITTAL AND CERTIFICATES; GUARANTEED DELIVERY PROCEDURES. You must complete this Letter of Transmittal if you are a holder of Subordinated Notes--which term, for purposes of this Letter of Transmittal, includes any participant in The Depository Trust Company's system whose name appears on a security position listing as the holder of the Subordinated Notes--and either (1) you wish to tender the certificates representing your Subordinated Notes to the Exchange Agent together with this Letter of Transmittal or (2) you wish to tender your Subordinated Notes by book-entry transfer to the Exchange Agent's account at The Depository Trust Company and you elect to submit this Letter of Transmittal to the Exchange Agent instead of an Agent's Message. In order to constitute a valid tender of your Subordinated Notes, unless you comply with the procedures for Guaranteed Delivery described below, the Exchange Agent must receive the following documents at one of the addresses listed above on or prior to the expiration of the Exchange Offer: (1) certificates for the Subordinated Notes, in proper form for transfer, or Book-Entry Confirmation of transfer of the Subordinated Notes into the Exchange Agent's account at The Depository Trust Company, (2) a properly completed and duly executed Letter of Transmittal, with any required signature guarantees, or, in the case of a Book-Entry Confirmation, an Agent's Message instead of this Letter of Transmittal, and (3) all other documents required by this Letter of Transmittal. If you are a holder of the Subordinated Notes and wish to tender your Subordinated Notes, but (1) your certificates for Subordinated Notes are not immediately available, (2) time will not permit your certificates for the Subordinated Notes or other required documents to reach the Exchange Agent before the expiration of the Exchange Offer, or (3) the procedure for book-entry transfer cannot be completed prior to the expiration of the Exchange Offer, you may effect a tender if: (1) the tender is made through an Eligible Guarantor Institution (as defined below); (2) prior to the expiration of the Exchange Offer, the Exchange Agent receives from an Eligible Guarantor Institution a properly completed and duly executed Notice of Guaranteed Delivery, substantially in the form we have provided, setting forth your name and address and the amount of Subordinated Notes you are tendering and stating that the tender is being made by Notice of Guaranteed Delivery; and (3) the Exchange Agent receives within three NYSE trading days after the date of execution of the Notice of Guaranteed Delivery: (a) the certificates for all physically tendered Subordinated Notes, in proper form for transfer, or a Book-Entry Confirmation of transfer of the Subordinated Notes into the Exchange Agent's account at The Depository Trust Company, as the case may be, (b) a properly completed and duly executed Letter of Transmittal, with any required signature guarantees, or, in the case of a Book-Entry Confirmation, an Agent's Message instead of the Letter of Transmittal, and (c) all other documents required by the Letter of Transmittal. The Notice of Guaranteed Delivery may be sent by overnight courier, hand delivery, registered or certified mail or facsimile transmission and must include a guarantee by an Eligible Guarantor Institution in the form set forth in the Notice. THE METHOD OF DELIVERY OF CERTIFICATES FOR SUBORDINATED NOTES, LETTERS OF TRANSMITTAL, AGENT'S MESSAGES AND ALL OTHER REQUIRED DOCUMENTS IS AT YOUR ELECTION. IF YOU DELIVER YOUR SUBORDINATED NOTES BY MAIL, WE RECOMMEND REGISTERED MAIL, PROPERLY INSURED, WITH RETURN RECEIPT REQUESTED. IN ALL CASES, YOU SHOULD ALLOW SUFFICIENT TIME TO ASSURE TIMELY DELIVERY. PLEASE SEND CERTIFICATES FOR SUBORDINATED NOTES, LETTERS OF TRANSMITTAL, AGENT'S MESSAGES OR OTHER REQUIRED DOCUMENTS TO THE EXCHANGE AGENT AT ONE OF THE ADDRESSES LISTED ABOVE. PLEASE DO NOT SEND THESE DOCUMENTS TO PENN TREATY. Penn Treaty will not accept any alternative, conditional or contingent tenders. Each tendering holder, by execution of this Letter of Transmittal or delivery of an Agent's Message instead of the Letter of Transmittal, waives any right to receive any notice of the acceptance of such tender. 2. GUARANTEE OF SIGNATURES. No signature guarantee on this Letter of Transmittal is required if: (a) this Letter of Transmittal is signed by the Registered Holder--which term, for purposes of this Letter of Transmittal, includes any participant in the Depository Trust Company's system whose name appears on a security position listing as the owner of the Subordinated Notes--of Subordinated Notes tendered with this Letter of Transmittal, unless such holder(s) has completed either the box entitled "Special Payment/Issuance Instructions" or the box entitled "Special Delivery Instructions" above, or 10 (b) the Subordinated Notes are tendered for the account of a firm that is an Eligible Guarantor Institution. In all other cases, an Eligible Guarantor Institution must guarantee the signature(s) on this Letter of Transmittal. (See Instruction 5). An "Eligible Guarantor Institution" (as defined in Rule 17Ad-15 promulgated under the Securities Exchange Act of 1934, as amended (the "Exchange Act")) means: - Banks (as defined in Section 3(a) of the Federal Deposit Insurance Act); - Brokers, dealers, municipal securities dealers, municipal securities brokers, government securities dealers and government securities brokers (as defined in the Exchange Act); - Credit unions (as defined in Section 19B(1)(A) of the Federal Reserve Act); - National securities exchanges, registered securities associations and clearing agencies (as these terms are defined in the Exchange Act); and - Savings associations (as defined in Section 3(b) of the Federal Deposit Insurance Act). 3. INADEQUATE SPACE. If the space provided in the box captioned "Description of Subordinated Notes Tendered" is inadequate, the certificate number(s) and/or the principal amount of Subordinated Notes and any other required information should be listed on a separate signed schedule which is attached to this Letter of Transmittal. 4. PARTIAL TENDERS AND WITHDRAWAL RIGHTS. If you are tendering less than all of the Subordinated Notes evidenced by any certificate you are submitting, please fill in the principal amount of Subordinated Notes which are to be tendered in column 3 ("Principal Amount of Subordinated Notes Tendered") of the box entitled "Description of Subordinated Notes Tendered." In that case, unless you have otherwise indicated by completing the boxes entitled "Special Payment/Issuance Instructions" or "Special Delivery Instructions," new certificate(s) for the remainder of the Subordinated Notes that were evidenced by your old certificate(s) will be sent to the registered holder of the Subordinated Notes, promptly after the expiration of the Exchange Offer. All Subordinated Notes represented by certificates delivered to the Exchange Agent will be deemed to have been tendered unless otherwise indicated. Except as otherwise provided in this Letter of Transmittal, tenders of Subordinated Notes may be withdrawn (i) at any time on or prior to the expiration of the Exchange Offer or (ii) from and after December 31, 2002, if Penn Treaty has not accepted the tendered Subordinated Notes for exchange by that date. For a withdrawal pursuant to clause (i) to be effective, a written notice of withdrawal must be received by the Exchange Agent prior to the expiration of the Exchange Offer at one of the addresses listed above. Any notice of withdrawal must specify the name of the person who tendered the Subordinated Notes to be withdrawn, identify the Subordinated Notes to be withdrawn, including the principal amount of the Subordinated Notes, and, where certificates for Subordinated Notes have been transmitted, specify the name in which the Subordinated Notes are registered, if different from that of the withdrawing holder. If certificates for Subordinated Notes have been delivered or otherwise identified to the Exchange Agent, then, prior to the release of the certificates, the withdrawing holder must also submit the serial numbers of the particular certificates to be withdrawn and a signed notice of withdrawal with signatures guaranteed by an Eligible Guarantor Institution unless the holder is an Eligible Guarantor Institution. If Subordinated Notes have been tendered using the procedure for book-entry transfer described in the Offering Circular under the caption "The Exchange Offer--Book-Entry Transfer", any notice of withdrawal must specify the name and number of the account at The Depository Trust Company to be credited with the withdrawn Subordinated Notes and otherwise comply with the procedures of the book-entry transfer facility. All questions as to the validity, form and eligibility--including time of receipt--of these notices will be determined by Penn Treaty. Any such determination will be final and binding. Any Subordinated Notes so withdrawn will be deemed not to have been validly tendered for exchange for purposes of the Exchange Offer. Any Subordinated Notes which have been tendered for exchange but which are not exchanged for any reason will be returned to the Registered Holder without cost to that holder as soon as practicable after withdrawal, non-acceptance of tender or termination of the Exchange Offer. In the case of Subordinated Notes tendered using the 11 procedure for book-entry transfer described in the Offering Circular under the caption "The Exchange Offer--Book-Entry Transfer," the Subordinated Notes will be credited to the tendering holder's account with The Depository Trust Company. Properly withdrawn Subordinated Notes may be retendered at any time on or prior to the expiration of the Exchange Offer by following one of the procedures described in the Offering Circular under the caption "The Exchange Offer--Procedures for Tendering Subordinated Notes." 5. SIGNATURES ON LETTER OF TRANSMITTAL, ASSIGNMENTS AND ENDORSEMENTS. If this Letter of Transmittal is signed by the Registered Holder(s) of the Subordinated Notes tendered hereby, the signature(s) must correspond exactly with the name(s) as written on the face of the certificate(s) without alteration, enlargement or any change whatsoever. If any of the Subordinated Notes tendered hereby are registered in the name of two or more joint owners, all such owners must sign this Letter of Transmittal. If any tendered Subordinated Notes are registered in different name(s) on several certificates, it will be necessary to complete, sign and submit as many separate Letters of Transmittal as there are different registered holders. When this Letter of Transmittal is signed by the registered holder(s) of the Subordinated Notes listed and transmitted by this Letter of Transmittal, no endorsement(s) of certificate(s) or separate bond power(s) are required unless, Exchange Notes are to be issued in the name of a person other than the Registered Holder(s). Signature(s) on the certificate(s) or bond power(s) must be guaranteed by an Eligible Guarantor Institution. If a person or persons other than the Registered Holder(s) of Subordinated Notes signs the Letter of Transmittal, certificates for the Subordinated Notes must be endorsed or accompanied by appropriate bond powers, signed exactly as the name or names of the Registered Holder(s) that appears on the certificates for the Subordinated Notes and also must be accompanied by any opinions of counsel, certifications and other information as Penn Treaty may require in accordance with the restrictions on transfer, if any, applicable to the Subordinated Notes. Signatures on certificates or bond powers must be guaranteed by an Eligible Guarantor Institution. If you are a trustee, executor, administrator, guardian, attorney-in-fact, officer of a corporation, or act in a similar fiduciary or representative capacity, and wish to sign this Letter of Transmittal or any certificates for Subordinated Notes or bond powers, you must indicate your status when signing. If you are acting in any of these capacities, you must submit proper evidence satisfactory to us of your authority to so act unless we waive this requirement. 6. SPECIAL ISSUANCE AND DELIVERY INSTRUCTIONS. If Exchange Notes are to be issued in the name of a person other than the signer of this Letter of Transmittal, or if Exchange Notes are to be delivered to someone other than the signer of this Letter of Transmittal or to an address other than that shown above, the boxes entitled "Special Payment/Issuance Instructions" and/or "Special Delivery Instructions" on this Letter of Transmittal should be completed. Certificates for Subordinated Notes not exchanged will be returned by mail or, if tendered by book-entry transfer, by crediting the account indicated above maintained with The Depository Trust Company. (See Instruction 4). 7. IRREGULARITIES. All questions as to the validity, form, eligibility--including time of receipt--and acceptance of Subordinated Notes tendered for exchange will be determined by Penn Treaty in its sole discretion. Our determination will be final and binding. We reserve the absolute right to reject any and all tenders of Subordinated Notes improperly tendered or to not accept any Subordinated Notes, this right is not limited to situations where the acceptance of tender might be unlawful as determined by us or our counsel. We also reserve the absolute right to waive any defects or irregularities or conditions of the Exchange Offer as to any Subordinated Notes either before or after the expiration of the Exchange Offer--including the right to waive the ineligibility of any holder who seeks to tender Subordinated Notes in the Exchange Offer. Our interpretation of the terms and conditions of the Exchange Offer as to any particular Subordinated Notes either before or after the expiration of the Exchange Offer--including the terms and conditions of the Letter of Transmittal and the accompanying instructions--will be final and binding. Unless waived, any defects or irregularities in connection with tenders of Subordinated Notes for exchange must be cured within a reasonable period of time, as determined by us. Neither we, the Exchange Agent nor any 12 other person has any duty to give notification of any defect or irregularity with respect to any tender of Subordinated Notes for exchange, nor will we have any liability for failure to give such notification. 8. QUESTIONS, REQUESTS FOR ASSISTANCE AND ADDITIONAL COPIES. Questions and requests for assistance may be directed to the Exchange Agent at the addresses and telephone number listed on the front of this Letter of Transmittal or to Philadelphia Brokerage Corporation, the Information Agent for the Exchange Offer, at the address and telephone numbers set forth in the Offering Circular. Additional copies of the Offering Circular, this Letter of Transmittal or the Notice of Guaranteed Delivery may be obtained from the Exchange Agent, the Information Agent or from your broker, dealer, commercial bank, trust company or other nominee. 9. TAX IDENTIFICATION NUMBER. Federal income tax law generally requires that a tendering holder whose Subordinated Notes are accepted for exchange must provide the Exchange Agent (as payor) with such holder's correct Taxpayer Identification Number ("TIN") on Substitute Form W-9 below or otherwise establish a basis for exemption from backup withholding. If such holder is an individual, the TIN is his or her social security number. If the Exchange Agent is not provided with the current TIN or an adequate basis for an exemption, such tendering holder may be subject to a $50 penalty imposed by the Internal Revenue Service. In addition, delivery to such tendering holder of Exchange Notes may be subject to backup withholding rate that will 30% for payment made in 2002, and decrease in steps to 28% for payments made in 2006 and thereafter when the holder receives interest with respect to the Exchange Notes, or when the holder receives proceeds upon sale, exchange, redemption, retirement or other disposition of the Exchange Notes. Certain holders (including, among others, all corporations and certain foreign individuals) are not subject to these backup withholding and reporting requirements. See the enclosed Guidelines for Certification of Taxpayer Identification Number on Substitute Form W-9 (the "W-9 Guidelines") for additional instructions. Under the federal income tax laws, payments that may be made by Exchange Agent on account of Exchange Notes issued pursuant to the Exchange Offer may be subject to the above mentioned backup withholding. To prevent backup withholding, each tendering holder of Subordinated Notes must provide its correct TIN by completing the "Substitute Form W-9" set forth below, certifying that the TIN provided is correct (or that such holder is awaiting a TIN) and that (i) the holder is exempt from backup withholding, (ii) the holder has not been notified by the Internal Revenue Service that such holder is subject tot a backup withholding as a result of a failure to report all interest or dividends or (iii) the Internal Revenue Service has notified the holder that such holder is no longer subject to backup withholding. If the tendering holder of Subordinated Notes is a nonresident alien or foreign entity not subject to backup withholding, such holder must give the Exchange Agent a completed Form W-8, Certificate of Foreign Status. These forms may be obtained from the Exchange Agent. If the Subordinated Notes are in more than one name or are not in the name of the actual owner, such holder should consult the W-9 Guidelines for information on which TIN to report. If such holder does not have a TIN, such holder should consult the W-9 Guidelines for instructions for applying for a TIN, check the box in Part 2 of the Substitute Form W-9, write "applied for" in lieu of its TIN and complete the Certificate of Awaiting Taxpayer Identification Number. Checking this box or writing "applied for" on the form means that such holder has already applied for a TIN or that such holder intends to apply for one in the near future. If a holder checks the box in Part 2 of the Substitute Form W-9 or writes "applied for" on that form, backup withholding will nevertheless apply to all reportable payments made to such holder. If such a holder furnishes its TIN to Exchange Agent within 60 days, however, any amounts so withheld shall be refunded to such holder. If, however, the holder has not provided the Exchange Agent with its TIN within such 60-day period, the Exchange Agent will remit such previously retained amounts to the IRS as backup withholding. Backup withholding is not an additional federal income tax. Rather, the federal income tax liability of persons subject to backup withholding will be reduced by the amount of tax withheld. If withholding results in overpayment of taxes, a refund may be obtained from the Internal Revenue Service. 13 10. WAIVER OF CONDITIONS. Penn Treaty's obligation to complete the Exchange Offer is subject to the conditions described in the Offering Circular under the caption "The Exchange Offer--Conditions to the Exchange Offer." These conditions are for our benefit only and we may assert them regardless of the circumstances giving rise to any condition. We may also waive any condition in whole or in part at any time in our sole discretion. Our failure at any time to exercise any of the foregoing rights will not constitute a waiver of that right and each right is an ongoing right that we may assert at any time. 11. NO CONDITIONAL TENDERS. No alternative, conditional or contingent tenders will be accepted. All tendering holders of Subordinated Notes, by execution of this Letter of Transmittal, waive any right to receive notice of the acceptance of Subordinated Notes for exchange. 12. LOST, DESTROYED OR STOLEN CERTIFICATES. If any certificate(s) representing Subordinated Notes have been lost, destroyed or stolen, the holder should check the box above regarding lost, destroyed or stolen certificates and promptly notify the Exchange Agent. The holder will then be instructed as to the steps that must be taken in order to replace the certificate(s). This Letter of Transmittal and related documents cannot be processed until the procedures for replacing lost, destroyed or stolen certificate(s) have been followed. 13. TRANSFER TAXES. You will not be obligated to pay any transfer taxes in connection with the tender of Subordinated Notes in the Exchange Offer unless you instruct us to make payment to or register Exchange Notes in the name of, or request that Subordinated Notes not tendered or not accepted in the Exchange Offer be registered in the name of, a person other than the registered tendering holder. In those cases, you will be responsible for the payment of any applicable transfer tax. If satisfactory evidence of payment of these taxes or an exemption from payment is not submitted with this Letter of Transmittal, no certificates for the Exchange Notes will be issued until such evidence is received by the Exchange Agent. IMPORTANT: UNLESS YOU COMPLY WITH THE GUARANTEED DELIVERY PROCEDURES DESCRIBED ABOVE, THIS LETTER OF TRANSMITTAL (OR A FACSIMILE OF THIS LETTER OF TRANSMITTAL), OR, IN THE CASE OF SUBORDINATED NOTES TENDERED BY BOOK-ENTRY TRANSFER TO THE EXCHANGE AGENT'S ACCOUNT AT THE DEPOSITORY TRUST COMPANY, AN AGENT'S MESSAGE INSTEAD OF THIS LETTER OF TRANSMITTAL, AND ALL OTHER REQUIRED DOCUMENTS MUST BE RECEIVED BY THE EXCHANGE AGENT ON OR PRIOR TO THE EXPIRATION OF THE EXCHANGE OFFER. 14 EX-99.(A)(3) 5 a2088064zex-99_a3.txt EXHIBIT 99.(A)(3) EXHIBIT 99.(a)(3) CLIENT LETTER PENN TREATY AMERICAN CORPORATION OFFER TO EXCHANGE 6-1/4% CONVERTIBLE SUBORDINATED NOTES DUE 2008 FOR ALL OUTSTANDING 6-1/4% CONVERTIBLE SUBORDINATED NOTES DUE 2003 August 28, 2002 To Our Clients: Enclosed for your consideration is an Offering Circular, dated August 28, 2002 (the "Offering Circular"), and the enclosed Letter of Transmittal (the "Letter of Transmittal"), relating to the offer (the "Exchange Offer") of Penn Treaty American Corporation ("Penn Treaty") to exchange its 6-1/4% Convertible Subordinated Notes due 2008 (the "Exchange Notes") for all outstanding 6-1/4% Convertible Subordinated Notes due 2003 (the "Subordinated Notes"), upon the terms and subject to the conditions described in the Offering Circular. This material is being forwarded to you as the beneficial owner of the Subordinated Notes carried by us in your account but not registered in your name. A TENDER OF SUCH SUBORDINATED NOTES MAY ONLY BE MADE BY US AS THE HOLDER OF RECORD AND PURSUANT TO YOUR INSTRUCTIONS. Accordingly, we request instructions as to whether you wish us to tender on your behalf the Subordinated Notes held by us for your account, pursuant to the terms and conditions set forth in the enclosed Offering Circular and Letter of Transmittal. Your instructions should be forwarded to us as promptly as possible in order to permit us to tender the Subordinated Notes on your behalf in accordance with the provisions of the Exchange Offer. The Exchange Offer will expire at 12:00 a.m., New York City time, on September 26, 2002, unless extended by Penn Treaty (as it may be extended, the "Expiration Date"). Any Subordinated Notes tendered pursuant to the Exchange Offer may be withdrawn at any time before expiration of the Exchange Offer or at any time after December 31, 2002 if we have not accepted the tendered Subordinated Notes for exchange by that date. The Exchange Offer is not conditioned upon any minimum number of Subordinated Notes being tendered. Your attention is directed to the following: 1. The Exchange Offer is for any and all Subordinated Notes. 2. The Exchange Offer is subject to certain conditions set forth in the Offering Circular under the caption "The Exchange Offer--Conditions to the Exchange Offer." 3. Any transfer taxes incident to the transfer of the Subordinated Notes from the holder to Penn Treaty will be paid by Penn Treaty, except as otherwise provided in Instruction 13 of the Letter of Transmittal. 4. The Exchange Offer expires at 12:00 a.m., New York City time, on the Expiration Date, unless extended by Penn Treaty. PLEASE READ THE OFFERING CIRCULAR IF YOU WISH TO TENDER YOUR SUBORDINATED NOTES, PLEASE SO INSTRUCT US BY COMPLETING, EXECUTING AND RETURNING TO US THE INSTRUCTION FORM ON THE BACK OF THIS LETTER. THE LETTER OF TRANSMITTAL IS FURNISHED TO YOU FOR INFORMATION ONLY AND MAY NOT BE USED DIRECTLY BY YOU TO TENDER SUBORDINATED NOTES. If we do not receive written instructions in accordance with the procedures presented in the Offering Circular and the Letter of Transmittal, we will not tender any of the Subordinated Notes on your account. Unless a specific contrary instruction is given in the space provided, your signature(s) hereon shall constitute an instruction to us to tender all the Subordinated Notes held by us for your account. 2 Please carefully review the enclosed material as you consider the Exchange Offer. - -------------------------------------------------------------------------------- INSTRUCTIONS WITH RESPECT TO THE EXCHANGE ORDER The undersigned acknowledge(s) receipt of your letter and the enclosed material referred to therein relating to the Exchange Offer made by Penn Treaty American Corporation with respect to its 6-1/4% Convertible Subordinated Notes due 2003. This will instruct you to tender the Subordinated Notes held by you for the account of the undersigned, upon and subject to terms and conditions set forth in the Offering Circular and the related Letter of Transmittal. Please tender the Subordinated Notes held by you for my account as indicated below: The aggregate face amount of Subordinated Notes held by you for the account of the undersigned is (fill in amount): $ of 6-1/4% Convertible Subordinated Notes --------------------------- due 2003. With respect to the Exchange Offer, the undersigned hereby instructs you (check appropriate box): / / To TENDER the following Subordinated Notes held by you for the account of the undersigned (insert principal amount of Subordinated Notes to be tendered (if any)): $ of 6-1/4% Convertible Subordinated Notes --------------------------- due 2003. / / NOT to TENDER any Subordinated Notes held by you for the account of the undersigned. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SIGN HERE Name of beneficial owner(s) (please print): ------------------------------------- Signature(s): ------------------------------------------------------------------- Address: ------------------------------------------------------------------------ Telephone Number: --------------------------------------------------------------- Taxpayer Identification or Social Security Number: ------------------------------ Date: --------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 3 EX-99.(A)(4) 6 a2088064zex-99_a4.txt EXHIBIT 99.(A)(4) EXHIBIT 99.(a)(4) BROKER DEALER LETTER PENN TREATY AMERICAN CORPORATION OFFER TO EXCHANGE 6-1/4% CONVERTIBLE SUBORDINATED NOTES DUE 2008 FOR ALL OUTSTANDING 6-1/4% CONVERTIBLE SUBORDINATED NOTES DUE 2003 August 28, 2002 To: Brokers, Dealers, Commercial Banks, Trust Companies and Other Nominees: Penn Treaty American Corporation ("Penn Treaty") is offering to exchange (the "Exchange Offer"), upon and subject to the terms and conditions set forth in the Offering Circular, dated August 28, 2002 (the "Offering Circular"), and the enclosed Letter of Transmittal (the "Letter of Transmittal"), its 6-1/4% Convertible Subordinated Notes due 2008 (the "Exchange Notes") for all outstanding 6-1/4% Convertible Subordinated Notes due 2003 (the "Subordinated Notes"). We are requesting that you contact your clients for whom you hold Subordinated Notes regarding the Exchange Offer. For your information and for forwarding to your clients for whom you hold Subordinated Notes registered in your name or in the name of your nominee, or who hold Subordinated Notes registered in their own names, we are enclosing the following documents: 1. Offering Circular, dated August 28, 2002; 2. The Letter of Transmittal for your use and for the information of your clients; 3. A Notice of Guaranteed Delivery to be used to accept the Exchange Offer if certificates for the Subordinated Notes are not immediately available, time will not permit all required documents to reach the Exchange Agent prior to the Expiration Date (as defined below), or if the procedure for book-entry transfer cannot be completed on a timely basis; 4. A form of letter which may be sent to your clients for whose account you hold Subordinated Notes registered in your name or the name of your nominee, with space provided for obtaining such clients' instructions with regard to the Exchange Offer; and 5. Guidelines for Certification of Taxpayer Identification Number on Substitute Form W-9. YOUR PROMPT ACTION IS REQUESTED. THE EXCHANGE OFFER WILL EXPIRE AT 12:00 A.M., NEW YORK CITY TIME, ON SEPTEMBER 26, 2002, UNLESS EXTENDED BY PENN TREATY (AS IT MAY BE EXTENDED, "THE EXPIRATION DATE"). THE SUBORDINATED NOTES TENDERED PURSUANT TO THE EXCHANGE OFFER MAY BE WITHDRAWN AT ANY TIME BEFORE THE EXPIRATION DATE OR AT ANY TIME AFTER DECEMBER 31, 2002 IF WE HAVE NOT ACCEPTED THE TENDERED SUBORDINATED NOTES FOR EXCHANGE BY THAT DATE. Unless a holder of the Subordinated Notes complies with the procedures described in the Offering Circular under the caption "The Exchange Offer - Guaranteed Delivery Procedures," the holder must do one of the following on or prior to the Expiration Date to participate in the Exchange Offer: o tender the Subordinated Notes by sending the certificates for the Subordinated Notes, in proper form for transfer, a properly completed and duly executed Letter of Transmittal, with any required signature guarantees, and all other documents required by the Letter of Transmittal, to Wells Fargo Bank Minnesota, N.A., as Exchange Agent, at the address listed in the Offering Circular under the caption "The Exchange Offer - Exchange Agent"; or o tender the Subordinated Notes by using the book-entry procedures described in the Offering Circular under the caption "The Exchange Offer - Book Entry Transfer" and transmitting a properly completed and duly executed Letter of Transmittal, with any required signature guarantees, or an Agent's Message (defined below) instead of the Letter of Transmittal, to the Exchange Agent. In order for a book-entry transfer to constitute a valid tender of Subordinated Notes in the Exchange Offer, the Exchange Agent must receive a confirmation of book-entry transfer (a "Book-Entry Confirmation") of the Subordinated Notes into the Exchange Agent's account at The Depository Trust Company prior to the Expiration Date. The term "Agent's Message" means a message, transmitted by The Depository Trust Company and received by the Exchange Agent and forming a part of the Book-Entry Confirmation, which states that The Depository Trust Company has received an express acknowledgment from the tendering holder of Subordinated Notes that the holder has received and has agreed to be bound by the Letter of Transmittal. If a registered holder of Subordinated Notes wishes to tender the Subordinated Notes in the Exchange Offer, but (a) the certificates for the Subordinated Notes are not immediately available, (b) time will not permit the certificates for the Subordinated Notes or other required documents to reach the Exchange Agent before the Expiration Date, or (c) the procedure for book-entry transfer cannot be completed before the Expiration Date, a tender of Subordinated Notes may be effected by following the Guaranteed Delivery Procedures described in the Offering Circular under the caption "The Exchange Offer - Guaranteed Delivery Procedures." Penn Treaty will, upon request, reimburse brokers, dealers, commercial banks, trust companies and other nominees for reasonable and necessary costs and expenses incurred by them in forwarding the Offering Circular and the related documents to the beneficial owners of Subordinated Notes held by them as nominee or in a fiduciary capacity. Penn Treaty will pay or 2 cause to be paid all stock transfer taxes applicable to the exchange of Subordinated Notes in the Exchange Offer, except as set forth in Instruction 13 of the Letter of Transmittal. Any inquiries you may have with respect to the Exchange Offer, or requests for additional copies of the enclosed materials, should be directed to Wells Fargo Bank Minnesota, N.A., the Exchange Agent for the Exchange Offer, at its address and telephone number set forth on the front of the Letter of Transmittal or Philadelphia Brokerage Corporation, the Information Agent for the Exchange Offer, at the address and telephone numbers set forth in the Offering Circular. Very truly yours, Penn Treaty American Corporation Enclosures - -------------------------------------------------------------------------------- NOTHING HEREIN OR IN THE ENCLOSED DOCUMENTS SHALL CONSTITUTE YOU OR ANY OTHER PERSON AS AN AGENT OF PENN TREATY OR THE EXCHANGE AGENT, OR AUTHORIZE YOU OR ANY OTHER PERSON TO USE ANY DOCUMENT OR MAKE ANY STATEMENTS ON BEHALF OF EITHER OF THEM WITH RESPECT TO THE EXCHANGE OFFER, EXCEPT FOR STATEMENTS EXPRESSLY MADE IN THE OFFERING CIRCULAR OR THE LETTER OF TRANSMITTAL. - -------------------------------------------------------------------------------- 3 EX-99.(A)(5) 7 a2088064zex-99_a5.txt EXHIBIT 99.(A)(5) EXHIBIT 99.(a)(5) NOTICE OF GUARANTEED DELIVERY PENN TREATY AMERICAN CORPORATION OFFER TO EXCHANGE 6-1/4% CONVERTIBLE SUBORDINATED NOTES DUE 2008 FOR ALL OUTSTANDING 6-1/4% CONVERTIBLE SUBORDINATED NOTES DUE 2003 This form or one substantially equivalent hereto must be used to accept the Exchange Offer of Penn Treaty ( "Penn Treaty") made pursuant to the Offering Circular, dated August 28, 2002 (the "Offering Circular") and the enclosed Letter of Transmittal (the "Letter of Transmittal") if certificates for Subordinated Notes of Penn Treaty are not immediately available or if the procedure for book-entry transfer cannot be completed on a timely basis or time will not permit all required documents to reach the Exchange Agent prior to 12:00 a.m., New York City time, on the Expiration Date of the Exchange Offer. Such form may be delivered or transmitted by facsimile transmission, mail or hand delivery to Wells Fargo Bank Minnesota, N.A. (the "Exchange Agent") as set forth below. In addition, in order to use the guaranteed delivery procedure to tender Subordinated Notes pursuant to the Exchange Offer, a completed, signed and dated Letter of Transmittal (or facsimile thereof) must also be received by the Exchange Agent prior to 12:00 a.m., New York City time, on the Expiration Date. Capitalized terms not defined herein are defined in the Offering Circular or the Letter of Transmittal. THE EXCHANGE OFFER WILL EXPIRE AT 12:00 A.M., NEW YORK CITY TIME ON SEPTEMBER 26, 2002 UNLESS EXTENDED (SUCH DATE AND TIME, AS IT MAY BE EXTENDED, THE "EXPIRATION DATE"). TENDERS MAY BE WITHDRAWN PRIOR TO 12:00 A.M., NEW YORK CITY TIME, ON THE EXPIRATION DATE. THE EXCHANGE AGENT: WELLS FARGO BANK MINNESOTA, N.A. To: Wells Fargo Bank Minnesota, N.A. - ------------------------------------ ------------------------------- ----------------------------------- BY REGISTERED OR CERTIFIED MAIL: BY REGULAR MAIL OR OVERNIGHT IN PERSON BY HAND ONLY: CARRIERS: - ------------------------------------ ------------------------------- ----------------------------------- MAC # N9303-121 MAC # N9303-121 608 Second Avenue South Corporate Trust Operations Corporate Trust Operations Corporate Trust Operations, 12th P.O. Box 1517 6th & Marquette Avenue Floor Minneapolis, MN 55480-1517 Minneapolis, MN 55479 Minneapolis, MN 55402 - ------------------------------------ ------------------------------- -----------------------------------
By Facsimile Transmisson: (612) 667-4927 Confirm by Telephone: (800) 344-5128 DELIVERY OF THIS INSTRUMENT TO AN ADDRESS OTHER THAN AS SET FORTH ABOVE, OR TRANSMISSION OF INSTRUCTION VIA FACSIMILE OTHER THAN AS SET FORTH ABOVE, WILL NOT CONSTITUTE A VALID DELIVERY. This form is not to be used to guarantee signatures. If a signature on a Letter of Transmittal is required to be guaranteed to by an Eligible Institution under the instructions thereto, such signature guarantee must appear in the applicable space provided in the signature box in the Letter of Transmittal. Ladies and Gentlemen: Upon the terms and conditions set forth in the Offering Circular and the accompanying Letter of Transmittal, the undersigned hereby tenders to Penn Treaty the principal amount of Subordinated Notes set forth below, pursuant to the guaranteed delivery procedure described in "The Exchange Offer" section of the Offering Circular. The undersigned understands that tenders of Subordinated Notes pursuant to the Exchange Offer may not be withdrawn after 12:00 a.m., New York City time on the Expiration Date. Tenders of Subordinated Notes may be withdrawn if the Exchange Offer is terminated or as otherwise provided in the Offering Circular. All authority herein conferred or agreed to be conferred by this Notice of Guaranteed Delivery shall survive the death or incapacity of the undersigned and every obligation of the undersigned under this Notice of Guaranteed Delivery shall be binding upon the heirs, personal representatives, executors, administrators, successors, assigns, trustees in bankruptcy and other legal representatives of the undersigned. - ------------------------------------- ---------------------------------------- Principal Amount of Subordinated If Subordinated Notes will be delivered Notes Tendered by book-entry transfer, provide account number ___________________________________ _____________________________________ $__________________________________ Account Number_______________________ - ------------------------------------- ---------------------------------------- 2 - -------------------------------------------------------------------------------- PLEASE SIGN HERE x ___________________________________ _____________________________________ x ___________________________________ _____________________________________ Signature(s) of Owner(s) or Date authorized Signatory Area Code and Telephone Number: ____________________________ Must be signed by the holder(s) of Subordinated Notes as the name(s) of such holder(s) appear(s) on the certificate(s) for the Subordinated Notes or on a security position listing, or by person(s) authorized to become registered holder(s) by endorsement and documents transmitted with this Notice of Guaranteed Delivery. If any signature is by a trustee, executor, administrator, guardian, attorney-in-fact, officer of a corporation or other person acting in a fiduciary or representative capacity, such person must set forth his or her full title below and furnish evidence of his or her authority as provided in this Letter of Transmittal. PLEASE PRINT NAME(S) AND ADDRESS(ES) Name(s):________________________________________________________________________ ________________________________________________________________________ ________________________________________________________________________ Capacity:_______________________________________________________________________ Addresses(es):__________________________________________________________________ __________________________________________________________________ __________________________________________________________________ GUARANTEE The undersigned, an Eligible Guarantor Institution, hereby (a) represents that each holder of Subordinated Notes on whose behalf this tender is being made "own (s)" the Subordinated Notes covered hereby within the meaning of Rule 14e-4 under the Securities Exchange Act of 1934, as amended, (b) represents that such tender of Subordinated Notes complies with such Rule 14e-4, and (c) guarantees that, within three NYSE trading days from the date of this Notice of Guaranteed Delivery, a properly completed and duly executed Letter of Transmittal (or a facsimile thereof), together with certificates representing the Subordinated Notes covered hereby, in proper form for transfer (or confirmation of the book-entry transfer of such Subordinated Notes into the Exchange Agent's account at The Depository Trust Company, pursuant to the procedure for book-entry transfer set forth in the Offering Circular) and required documents will be deposited by the undersigned with the Exchange Agent. The undersigned acknowledges that it must deliver the Letter of Transmittal and Subordinated Notes tendered hereby to the Exchange Agent within the time period set forth above and that failure to do so could result in financial loss to the undersigned. Authorized Signature:___________________________________________________________ Name:___________________________________________________________________________ (PLEASE PRINT) Title:__________________________________________________________________________ Name of Firm:___________________________________________________________________ Address:________________________________________________________________________ (INCLUDE ZIP CODE) Area Code and Telephone Number:_________________________________________________ Dated:___________________________, 2002 - -------------------------------------------------------------------------------- EX-99.(A)(6) 8 a2088064zex-99_a6.txt EXHIBIT 99.(A)(6) Exhibit 99.(a)(6) GUIDELINES FOR CERTIFICATION OF TAXPAYER IDENTIFICATION NUMBER ON SUBSTITUTE FORM W-9 PAGE 1 GUIDELINES FOR DETERMINING WHAT NAME AND NUMBER TO GIVE THE PAYER. Social Security numbers have nine digits separated by two hyphens: i.e. 000-00-0000. Employer identification numbers have nine digits separated by only one hyphen: i.e. 00-0000000. The table below will help determine the number to give the payer.
- -------------------------------------------------------------------- GIVE THE NAME AND FOR THIS TYPE OF ACCOUNT: SOCIAL SECURITY NUMBER OF: - -------------------------------------------------------------------- 1. Individual The individual 2. Two or more individuals (joint The actual owner of the account) account or, if combined funds, the first individual on the account(1) 3. Custodian account of a minor The minor(2) (Uniform Gift to Minors Act) 4. a. The usual revocable The grantor-trustee(1) savings trust (grantor is also trustee) b. So-called trust account The actual owner(1) that is not a legal or valid trust under state law 5. Sole proprietorship The owner(3) 6. Sole proprietorship The owner(3) 7. A valid trust, estate or The legal entity(4) pension trust 8. Corporate The corporation 9. Association, club, religious, The organization charitable educational or other tax-exempt organization 10. Partnership The partnership 11. A broker or registered nominee The broker or nominee 12. Account with the Department of The public entity Agriculture in the name of a public entity (such as a state or local government, school district or prison) that receives agricultural program payments - --------------------------------------------------------------------
(1) List first and circle the name of the person whose number you furnish. (2) Circle the minor's name and furnish the minor's social security number. (3) Show the name of the owner. Either the social security number or the employer identification number may be furnished. (4) List first and circle the name of the legal trust, estate or pension trust. Do not furnish the taxpayer identification number of the personal representative or trustee unless the legal entity itself is not designated in the account title. NOTE: If no name is circled when more than one name is listed, the number will be considered to be that of the first name listed. GUIDELINES FOR CERTIFICATION OF TAXPAYER IDENTIFICATION NUMBER ON SUBSTITUTE FORM W-9 PAGE 2 OBTAINING A TAXPAYER IDENTIFICATION NUMBER If you do not have a taxpayer identification number or you do not know your number, obtain Form SS-5, Application for a Social Security Card (for resident individuals), Form SS-4, Application for Employer Identification Number (for businesses and all other entities), or Form W-7, Application for IRS Individual Taxpayer Identification Number (for alien individuals required to file U.S. tax returns), at an office of the Social Security Administration or the Internal Revenue Service. To complete the Substitute Form W-9, if you do not have a taxpayer identification number, write "Applied For" in the space for the taxpayer identification number in Box 2, sign and date the Substitute Form W-9, and give it to the requester. Generally, you will then have 60 days to obtain a taxpayer identification number and furnish it to the requester. If the requester does not receive your taxpayer identification number within 60 days, backup withholding, if applicable, will begin and will continue until you furnish your taxpayer identification number to the requester. PAYEES AND PAYMENTS EXEMPT FROM BACKUP WITHHOLDING Set forth below is a list of payees that are exempt from backup withholding with respect to all or certain types of payments. For interest and dividends, all listed payees are exempt except the payee in item (9). For broker transactions, all payees listed in items (1) through (13) and any person registered under the Investment Advisors Act of 1940 who regularly acts as a broker are exempt. For barter exchange transactions and patronage dividends, the payees listed in items (1) through (5) are exempt. For payments subject to reporting under Sections 6041 and 6041A, the payees listed in items (1) through (7) are generally exempt. (1) An organization exempt from tax under Section 501(a), any IRA or a custodial account under Section 403(b)(7) if the account satisfies the requirements of Section 401(f)(2). (2) The United States or any of its agencies or instrumentalities. (3) A state, the District of Columbia, a possession of the United States or any of their subdivisions or instrumentalities. (4) A foreign government or any of its political subdivisions, agencies or instrumentalities. (5) An international organization or any of its agencies or instrumentalities. (6) A corporation. (7) A foreign central bank of issue. (8) A dealer in securities or commodities registered in the United States, the District of Columbia or a possession of the United States. (9) A futures commission merchant registered with the Commodity Futures Trading Commission. (10) A real estate investment trust. (11) An entity registered at all times under the Investment Company Act of 1940. (12) A common trust fund operated by a bank under Section 584(a). (13) A financial institution. (14) A middleman known in the investment community as a nominee or custodian. (15) A trust exempt from tax under Section 664 or described in Section 4947. Payments of dividends and patronage dividends not generally subject to backup withholding include the following: o Payments to nonresident aliens subject to withholding under Section 1441. o Payments to partnerships not engaged in a trade or business in the United States and which have at least one nonresident alien partner. o Payments of patronage dividends not paid in money. o Payments made by certain foreign organizations. o Section 404(k) distributions made by an ESOP. Payments of interest not generally subject to backup withholding include the following: o Payments of interest on obligations issued by individuals. Note: You may be subject to backup withholding if this interest is $600 or more and is paid in the course of the payer's trade or business and you have not provided your correct taxpayer identification number to the payer. o Payments of tax-exempt interest (including exempt-interest dividends under Section 852). o Payments described in Section 6049(b)(5) to non-resident aliens. o Payments on tax-free covenant bonds under Section 1451. o Payments made by certain foreign organizations. o Mortgage or student loan interest paid to you. To avoid possible erroneous backup withholding, exempt payees described above should furnish their taxpayer identification number, check the Exempt Payee Box, and return the Substitute Form W-9 to the payer. Certain payments other than dividends, patronage dividends and interest that are not subject to information reporting are also not subject to backup withholding. For details, see Sections 6041, 6041A, 6042, 6044, 6045, 6049, 6050A and 6050N and the regulations promulgated thereunder. PRIVACY ACT NOTICE Section 6109 requires most recipients of dividend, interest or other payments to give taxpayer identification numbers to payers who must report the payments to the IRS. The IRS uses the numbers for identification purposes. Payers must be given the numbers whether or not recipients are required to file tax returns. Payers must generally withhold 30% of taxable dividend, interest and certain other payments to a payee who does not furnish a taxpayer identification number to a payer. Certain penalties may also apply. PENALTIES (1) PENALTY FOR FAILURE TO FURNISH TAXPAYER IDENTIFICATION NUMBER. If you fail to furnish your taxpayer identification number to a requester, you are subject to a penalty of $50 for each such failure unless your failure is due to reasonable cause and not to willful neglect. (2) CIVIL PENALTY FOR FALSE INFORMATION WITH RESPECT TO WITHHOLDING. If you make a false statement with no reasonable basis which results in no imposition of backup withholding, you are subject to a penalty of $500. (3) CRIMINAL PENALTY FOR FALSIFYING INFORMATION. Falsifying certifications or affirmations may subject you to criminal penalties. FOR ADDITIONAL INFORMATION CONSULT YOUR TAX ADVISER OR THE INTERNAL REVENUE SERVICE EX-99.(D)(1) 9 a2088064zex-99_d1.txt EXHIBIT 99.(D)(1) Exhibit 99.(d)(1) PENN TREATY AMERICAN CORPORATION Issuer AND WELLS FARGO BANK MINNESOTA, N.A. Trustee INDENTURE Dated as of September __, 2002 6-1/4% Convertible Subordinated Notes Due 2008 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- CROSS-REFERENCE TABLE*
Trust Indenture Act Section Indenture Section - --------------------------- ----------------- 310 (a)(1)..................................................................7.10 (a)(2)..................................................................7.10 (a)(3)..................................................................N.A. (a)(4)..................................................................N.A. (a)(5)..................................................................7.10 (b)......................................................................7.9 (c).....................................................................N.A. 311 (a).....................................................................7.14 (b).....................................................................7.14 (c).....................................................................N.A. 312 (a)..............................................................2.5(a); 5.1 (b).....................................................................16.5 (c).....................................................................16.5 313 (a)......................................................................7.2 (b)(1)..................................................................N.A. (b)(2)...................................................................7.2 (c)......................................................................7.2 (d)......................................................................7.2 314 (a)..............................................................4.7(a); 5.2 (b).....................................................................N.A. (c)(1)..................................................................16.7 (c)(2)..................................................................16.7 (c)(3)..................................................................N.A. (d).....................................................................N.A. (e).....................................................................16.7 (f).....................................................................N.A. 315 (a)...................................................................7.1(b) (b)......................................................................6.8 (c)...................................................................7.1(a) (d)...................................................................7.1(c) (e)......................................................................6.9 316 (a) (last sentence)......................................................8.4 (a)(1)(A)................................................................6.7 (a)(1)(B)................................................................6.7 (a)(2)..................................................................N.A. (b)......................................................................6.4 (c)......................................................................9.2 317 (a)......................................................................6.2 (b)......................................................................4.4 318 (a).............................................................16.10; 16.11
N.A. means "not applicable". - ---------------------- * This Cross-Reference Table is not part of the Indenture. i TABLE OF CONTENTS
PAGE ARTICLE I DEFINITIONS Section 1.1 DEFINITIONS.......................................................................2 Section 1.2 INCORPORATION BY REFERENCE OF TRUST INDENTURE ACT.................................8 Section 1.3 RULES OF CONSTRUCTION.............................................................8 ARTICLE II ISSUE, DESCRIPTION, EXECUTION, REGISTRATION AND EXCHANGE OF NOTES Section 2.1 DESIGNATION, AMOUNT AND ISSUE OF NOTES............................................8 Section 2.2 FORM OF NOTES.....................................................................9 Section 2.3 DATE AND DENOMINATION OF NOTES; PAYMENTS OF INTEREST..............................9 Section 2.4 EXECUTION OF NOTES...............................................................11 Section 2.5 EXCHANGE AND TRANSFER OF NOTES; RESTRICTIONS ON TRANSFER; DEPOSITORY.............11 Section 2.6 MUTILATED, DESTROYED, LOST OR STOLEN NOTES.......................................14 Section 2.7 TEMPORARY NOTES..................................................................15 Section 2.8 CANCELLATION OF NOTES PAID, ETC..................................................15 Section 2.9 CUSIP NO.........................................................................16 ARTICLE III REDEMPTION AND REPURCHASE OF NOTES Section 3.1 REDEMPTION PRICES................................................................16 Section 3.2 NOTICE OF REDEMPTION; SELECTION OF NOTES.........................................16 Section 3.3 PAYMENT OF NOTES CALLED FOR REDEMPTION...........................................17 Section 3.4 CONVERSION ARRANGEMENT ON CALL FOR REDEMPTION....................................18 Section 3.5 REPURCHASE OF NOTES UPON A CHANGE OF CONTROL.....................................19 ARTICLE IV PARTICULAR COVENANTS OF THE COMPANY Section 4.1 PAYMENT OF PRINCIPAL, PREMIUM AND INTEREST.......................................20 ii Section 4.2 MAINTENANCE OF OFFICE OR AGENCY..................................................21 Section 4.3 APPOINTMENTS TO FILL VACANCIES IN TRUSTEE'S OFFICE...............................21 Section 4.4 PROVISIONS AS TO PAYING AGENT....................................................21 Section 4.5 CORPORATE EXISTENCE..............................................................22 Section 4.6 STAY, EXTENSION AND USURY LAWS...................................................23 Section 4.7 COMPLIANCE STATEMENT; NOTICE OF DEFAULTS.........................................23 Section 4.8 LIMITATION ON DIVIDEND AND OTHER PAYMENT RESTRICTIONS AFFECTING SUBSIDIARIES.....23 Section 4.9 TAXES............................................................................23 Section 4.10 INSURANCE........................................................................23 ARTICLE V NOTEHOLDERS' LISTS AND REPORTS BY THE COMPANY Section 5.1 NOTEHOLDERS' LISTS...............................................................24 Section 5.2 REPORTS BY COMPANY...............................................................24 ARTICLE VI DEFAULTS AND REMEDIES Section 6.1 EVENTS OF DEFAULT................................................................25 Section 6.2 PAYMENTS OF NOTES ON DEFAULT; SUIT THEREFOR......................................27 Section 6.3 APPLICATION OF MONIES COLLECTED BY TRUSTEE.......................................28 Section 6.4 PROCEEDINGS BY NOTEHOLDER........................................................29 Section 6.5 PROCEEDINGS BY TRUSTEE...........................................................30 Section 6.6 REMEDIES CUMULATIVE AND CONTINUING...............................................30 Section 6.7 DIRECTION OF PROCEEDINGS AND WAIVER OF DEFAULTS BY MAJORITY OF NOTEHOLDERS.......30 Section 6.8 NOTICE OF DEFAULTS...............................................................31 Section 6.9 UNDERTAKING TO PAY COSTS.........................................................31 ARTICLE VII CONCERNING THE TRUSTEE Section 7.1 DUTIES AND RESPONSIBILITIES OF TRUSTEE...........................................31 Section 7.2 REPORTS BY TRUSTEE TO HOLDERS....................................................32 Section 7.3 RELIANCE ON DOCUMENTS, OPINIONS, ETC.............................................33 Section 7.4 NO RESPONSIBILITY FOR RECITALS, ETC..............................................34 Section 7.5 TRUSTEE, PAYING AGENTS, CONVERSION AGENTS OR REGISTRAR MAY OWN NOTES.............34 Section 7.6 MONIES TO BE HELD IN TRUST.......................................................34 Section 7.7 COMPENSATION AND EXPENSES OF TRUSTEE.............................................34 Section 7.8 OFFICERS' CERTIFICATE AS EVIDENCE................................................35 iii Section 7.9 CONFLICTING INTERESTS OF TRUSTEE.................................................35 Section 7.10 ELIGIBILITY OF TRUSTEE...........................................................35 Section 7.11 RESIGNATION OR REMOVAL OF TRUSTEE................................................35 Section 7.12 ACCEPTANCE BY SUCCESSOR TRUSTEE..................................................36 Section 7.13 SUCCESSOR, BY MERGER, ETC........................................................37 Section 7.14 LIMITATION ON RIGHTS OF TRUSTEE AS CREDITOR......................................37 ARTICLE VIII CONCERNING THE NOTEHOLDERS Section 8.1 ACTION BY NOTEHOLDERS............................................................37 Section 8.2 PROOF OF EXECUTION BY NOTEHOLDERS................................................38 Section 8.3 WHO ARE DEEMED ABSOLUTE OWNERS...................................................38 Section 8.4 COMPANY-OWNED NOTES DISREGARDED..................................................38 Section 8.5 REVOCATION OF CONSENTS, FUTURE HOLDERS BOUND.....................................39 ARTICLE IX NOTEHOLDERS' MEETINGS Section 9.1 PURPOSES FOR WHICH MEETINGS MAY BE CALLED........................................39 Section 9.2 MANNER OF CALLING MEETINGS; RECORD DATE..........................................40 Section 9.3 CALL OF MEETING BY COMPANY OR NOTEHOLDERS........................................40 Section 9.4 WHO MAY ATTEND AND VOTE AT MEETINGS..............................................40 Section 9.5 MANNER OF VOTING AT MEETINGS AND RECORD TO BE KEPT...............................40 Section 9.6 EXERCISE OF RIGHTS OF TRUSTEE AND NOTEHOLDERS NOT TO BE HINDERED OR DELAYED......41 ARTICLE X SUPPLEMENTAL INDENTURES Section 10.1 SUPPLEMENTAL INDENTURES WITHOUT CONSENT OF NOTEHOLDERS...........................41 Section 10.2 SUPPLEMENTAL INDENTURES WITH CONSENT OF NOTEHOLDERS..............................42 Section 10.3 EFFECT OF SUPPLEMENTAL INDENTURES................................................43 Section 10.4 NOTATION ON NOTES................................................................43 Section 10.5 EVIDENCE OF COMPLIANCE OF SUPPLEMENTAL INDENTURE TO BE FURNISHED TO THE TRUSTEE..43 iv ARTICLE XI CONSOLIDATION, MERGER, SALE, CONVEYANCE, TRANSFER AND LEASE Section 11.1 COMPANY MAY CONSOLIDATE, ETC. ON CERTAIN TERMS...................................44 Section 11.2 SUCCESSOR COMPANY TO BE SUBSTITUTED..............................................44 Section 11.3 OPINION OF COUNSEL TO BE GIVEN TO TRUSTEE........................................44 ARTICLE XII SATISFACTION AND DISCHARGE OF INDENTURE; UNCLAIMED MONEYS Section 12.1 LEGAL DEFEASANCE AND COVENANT DEFEASANCE OF THE NOTES............................44 Section 12.2 TERMINATION OF OBLIGATIONS UPON CANCELLATION OF THE NOTES........................47 Section 12.3 SURVIVAL OF CERTAIN OBLIGATIONS..................................................47 Section 12.4 ACKNOWLEDGMENT OF DISCHARGE BY TRUSTEE...........................................47 Section 12.5 APPLICATION OF TRUST ASSETS......................................................47 Section 12.6 REPAYMENT TO THE COMPANY; UNCLAIMED MONEY........................................48 Section 12.7 REINSTATEMENT....................................................................48 ARTICLE XIII IMMUNITY OF INCORPORATORS, SHAREHOLDERS, OFFICERS AND DIRECTORS Section 13.1 INDENTURE AND NOTES SOLELY CORPORATE OBLIGATIONS.................................48 ARTICLE XIV CONVERSION OF NOTES Section 14.1 RIGHT TO CONVERT.................................................................49 Section 14.2 EXERCISE OF CONVERSION PRIVILEGE; ISSUANCE OF COMMON STOCK ON CONVERSION; NO ADJUSTMENT FOR INTEREST OR DIVIDENDS.............................................50 Section 14.3 MANDATORY CONVERSION.............................................................52 Section 14.4 CASH PAYMENTS IN LIEU OF FRACTIONAL SHARES.......................................52 Section 14.5 CONVERSION PRICE.................................................................52 Section 14.6 ADJUSTMENT OF CONVERSION PRICE...................................................53 Section 14.7 EFFECT OF RECLASSIFICATION, CONSOLIDATION, MERGER OR SALE........................60 Section 14.8 TAXES ON SHARES ISSUED...........................................................61 Section 14.9 RESERVATION OF SHARES; SHARES TO BE FULLY PAID; LISTING OF COMMON STOCK..........61 v Section 14.10 RESPONSIBILITY OF TRUSTEE........................................................61 Section 14.11 NOTICE TO HOLDERS PRIOR TO CERTAIN ACTIONS.......................................62 Section 14.12 SUPPLEMENTAL INDENTURE PRIOR TO ISSUANCE OF NOTES IN DEFINITIVE FORM..................................................................62 ARTICLE XV SUBORDINATION Section 15.1 AGREEMENT TO SUBORDINATE.........................................................63 Section 15.2 CERTAIN DEFINITIONS..............................................................63 Section 15.3 LIQUIDATION; DISSOLUTION; BANKRUPTCY.............................................64 Section 15.4 DEFAULT ON SENIOR INDEBTEDNESS...................................................64 Section 15.5 WHEN DISTRIBUTION MUST BE PAID OVER..............................................65 Section 15.6 NOTICE BY COMPANY................................................................65 Section 15.7 SUBROGATION......................................................................65 Section 15.8 RELATIVE RIGHTS..................................................................66 Section 15.9 SUBORDINATION MAY NOT BE IMPAIRED BY COMPANY.....................................66 Section 15.10 DISTRIBUTION OR NOTICE TO REPRESENTATIVE.........................................66 Section 15.11 RIGHTS OF TRUSTEE AND PAYING AGENT...............................................66 Section 15.12 AUTHORIZATION TO EFFECT SUBORDINATION............................................67 Section 15.13 CONVERSIONS NOT DEEMED PAYMENT...................................................67 Section 15.14 AMENDMENTS.......................................................................67 ARTICLE XVI MISCELLANEOUS PROVISIONS Section 16.1 POOLING OF INTERESTS.............................................................68 Section 16.2 PROVISIONS BINDING ON COMPANY'S SUCCESSORS.......................................68 Section 16.3 OFFICIAL ACTS BY SUCCESSOR COMPANY...............................................68 Section 16.4 ADDRESSES FOR NOTICES, ETC.......................................................68 Section 16.5 COMMUNICATIONS BY HOLDERS WITH OTHER HOLDERS.....................................69 Section 16.6 GOVERNING LAW....................................................................69 Section 16.7 EVIDENCE OF COMPLIANCE WITH CONDITIONS PRECEDENT; CERTIFICATES TO TRUSTEE........69 Section 16.8 LEGAL HOLIDAYS...................................................................69 Section 16.9 NO SECURITY INTEREST CREATED.....................................................69 Section 16.10 TRUST INDENTURE ACT..............................................................70 Section 16.11 TRUST INDENTURE ACT CONTROLS.....................................................70 Section 16.12 BENEFITS OF INDENTURE............................................................70 Section 16.13 TABLE OF CONTENTS, HEADINGS ETC..................................................70 Section 16.14 AUTHENTICATING AGENT.............................................................70 Section 16.15 EXECUTION IN COUNTERPARTS........................................................71
vi INDENTURE, dated as of September __, 2002, by and between PENN TREATY AMERICAN CORPORATION, a Pennsylvania corporation (the "Company"), and WELLS FARGO BANK MINNESOTA, N.A., a national banking corporation (the "Trustee"). W I T N E S S E T H : ------------------- WHEREAS, for its lawful corporate purposes, the Company has duly authorized the issuance of its 6-1/4% Convertible Subordinated Notes Due 2008 (the "Notes"), in an aggregate principal amount not to exceed $74,750,000 and to provide the terms and conditions upon which the Notes are to be authenticated, issued and delivered, the Company has duly authorized the execution and delivery of this Indenture; and WHEREAS, the Notes will be originally issued solely in global form, and in the event that the Company issues Notes in definitive form, such issuance will be accompanied by a supplement to this Indenture including the form of definitive Notes and provisions for conversion of the Notes under Article XIV hereunder; and WHEREAS, the Notes, the certificate of authentication to be borne by the Notes, a form of assignment, a form of option to require repurchase by the Company upon a Change of Control (as hereinafter defined), and a certificate of transfer to be borne by the Notes are to be substantially in the forms hereinafter provided for; and WHEREAS, all acts and things necessary to make the Notes, when executed by the Company and authenticated and delivered by the Trustee or a duly authorized authenticating agent, as in this Indenture provided, the valid, binding and legal obligations of the Company, and to constitute these presents a valid agreement according to its terms, have been done and performed, and the execution of this Indenture and the issuance hereunder of the Notes have in all respects been duly authorized. NOW, THEREFORE, THIS INDENTURE WITNESSETH: That in order to declare the terms and conditions upon which the Notes are, and are to be, authenticated, issued and delivered, and in consideration of the premises and of the purchase and acceptance of the Notes by the holders thereof, the Company covenants and agrees with the Trustee for the equal and proportionate benefit of the respective holders from time to time of the Notes (except as otherwise provided below) as follows: ARTICLE I DEFINITIONS Section 1.1 DEFINITIONS. The terms defined in this Section 1.1 (except as herein otherwise expressly provided or unless the context otherwise requires) for all purposes of this Indenture and of any indenture supplemental hereto shall have the respective meanings specified in this Section 1.1. All other terms used in this Indenture that are defined in the Trust Indenture Act (as hereinafter defined) or that are by reference defined in the Securities Act (as hereinafter defined), except as herein otherwise expressly provided for or unless the context otherwise requires, shall have the meanings assigned to such terms in said Trust Indenture Act and in said Securities Act as in force on the date of this Indenture. The words "herein," "hereof," "hereunder" and words of similar import refer to this Indenture as a whole and not to any particular Article or Section. ACQUISITION PRICE: The term "Acquisition Price" shall mean the weighted average price paid by the person or group in acquiring the Voting Stock. AFFILIATE: An "Affiliate" of any specified person shall mean an "affiliate" as defined in Rule 144(a) as promulgated under the Securities Act. BOARD OF DIRECTORS: The term "Board of Directors" shall mean the Board of Directors of the Company or a committee of such Board of Directors duly authorized to act for it. BOARD RESOLUTION: The term "Board Resolution" shall mean a copy of a resolution certified by the Secretary or an Assistant Secretary of the Company to have been duly adopted by the Board of Directors and to be in full force and effect on the date of such certification. BUSINESS DAY: The term "Business Day" shall mean a day, other than a Saturday, a Sunday or a day on which the banking institutions in the State and City of New York are authorized or obligated by law or executive order to close or a day that is declared a national or New York state holiday. CAPITAL STOCK: The term "Capital Stock" of any person shall mean any and all shares, interests, participations or other equivalents (however designated) of such person's corporate stock or any and all equivalent ownership interests in a person (other than a corporation) whether now outstanding or issued after the date hereof. CASH EQUIVALENT NOTES: The term "Cash Equivalent Notes" shall have the meaning specified in Section 14.1(b). CEDE: The term "Cede" shall mean Cede & Co., a nominee of the Depository. 2 CHANGE OF CONTROL: The term "Change of Control" shall have the meaning specified in Section 3.5(d). CHANGE OF CONTROL PURCHASE PRICE: The term "Change of Control Purchase Price" shall have the meaning specified in Section 3.5(a). CHANGE OF CONTROL PURCHASE DATE: The term "Change of Control Purchase Date" shall have the meaning specified in Section 3.5(a). CHANGE OF CONTROL OFFER: The term "Change of Control Offer" shall have the meaning specified in Section 3.5(a). COMMISSION: The term "Commission" shall mean the United States Securities and Exchange Commission, as from time to time constituted, created under the Exchange Act or, if at any time after the execution of this instrument such Commission is not existing and performing the duties now assigned to it under the Trust Indenture Act, the body performing such duties at such time. COMMON STOCK: The term "Common Stock" shall mean any stock of any class of the Company that does not have a preference in respect of dividends or of amounts payable in the event of any voluntary or involuntary liquidation, dissolution or winding up of the Company and that is not subject to redemption by the Company. Subject to the provisions of Section 14.6, however, shares issuable on conversion of Notes shall include only shares of the class designated as common stock of the Company at the date of this Indenture or shares of any class or classes resulting from any reclassification or reclassifications thereof and that do not have a preference in respect of dividends or of amounts payable in the event of any voluntary or involuntary liquidation, dissolution or winding up of the Company and that are not subject to redemption by the Company; provided that if at any time there shall be more than one such resulting class, the shares of each such class then so issuable shall be substantially in the proportion that the total number of shares of such class resulting from all such reclassification bears to the total number of shares of all such classes resulting from all such reclassifications. COMPANY: The term "Company" shall mean Penn Treaty American Corporation, a Pennsylvania corporation, and subject to the provisions of Article XI, shall include its successors and assigns. CONVERSION PRICE: The term "Conversion Price" shall have the meaning specified in Section 14.5. CORPORATE TRUST OFFICE OF THE TRUSTEE: The term "Corporate Trust Office of the Trustee," or other similar term, shall mean the office of the Trustee at which at any particular time its corporate trust business shall be principally administered, from its office which is, located at 6th Street & Marquette Avenue, MAC N9303-110, Minneapolis, Minnesota 55479. The Trustee also maintains an office at 45 Broadway, 12th Floor, MAC N2666-120, New York, New York 10006, at which office it is authorized to receive notices hereunder. COVENANT DEFEASANCE: The term "covenant defeasance" shall have the meaning specified in Section 12.1(c). CUSTODIAN: The term "Custodian" shall mean the Trustee, as custodian for Cede pursuant to Section 2.5 with respect to the Notes in global form, or any successor entity thereto. 3 DEFAULT: The term "default" shall mean any event that is, or after notice or passage of time, or both, would be, an Event of Default. DEFAULTED INTEREST: The term "Defaulted Interest" shall have the meaning specified in Section 2.3. DEFINITIVE NOTES; IN DEFINITIVE FORM: The term "definitive Notes" shall mean the Notes in definitive form. Any reference to Notes "in definitive form" shall mean definitive Notes, and any reference to securities "in definitive form" shall mean definitive Notes or Common Stock as the context requires. DEPOSITORY: The term "Depository" shall mean, with respect to the Notes issuable or issued in whole or in part in global form, the person specified in Section 2.5(b) as the Depository with respect to the Notes, until a successor shall have been appointed and become such pursuant to the applicable provisions of this Indenture, and thereafter, "Depository" shall mean or include such successor. DWAC: The term "DWAC" shall mean Deposit and Withdrawal at Custodian Service. EVENT OF DEFAULT: The term "Event of Default" shall mean any event specified in Section 6.1(a) through (g). EXCHANGE ACT: The term "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended, and the rules and regulations promulgated thereunder. EXPIRATION TIME: The term "Expiration Time" shall have the meaning specified in Section 14.6(f). GLOBAL NOTE: The term "Global Note" shall mean the note in global form as specified in Exhibit A. INDENTURE: The term "Indenture" shall mean this instrument as originally executed or, if amended or supplemented as herein provided, as so amended or supplemented. INTEREST PAYMENT DATE: The term "Interest Payment Date" shall mean each October 15 and April 15. LEGAL DEFEASANCE: The term "legal defeasance" shall have the meaning specified in Section 12.1(b). MANDATORY CONVERSION DATE: The term "Mandatory Conversion Date" shall have the meaning specified in Section 14.3. MARKET CASH CONVERSION PRICE: The term "Market Cash Conversion Price" means with respect to any exchange, the average of the closing prices of the Common Stock (or other securities, as the case may be) for the ten Trading Day period (appropriately adjusted to take into account the occurrence during such period of certain events that would 4 result in an adjustment of the Conversion Price with respect to the Common Stock or other consideration) commencing on the first Trading Day after delivery of written notice by the Company to the Trustee and holders that the Company has elected to pay cash in lieu of delivering shares of Common Stock or other securities. The period between the date of delivery by a holder to an office or agency maintained by the Company of a notice of conversion as required pursuant to Section 14.2 hereof, and the date of determination of the Market Cash Conversion Price may not exceed fifteen Trading Days. NONPAYMENT DEFAULT: The term "Nonpayment Default" shall have the meaning specified in Section 15.4(b). NOTE OR NOTES: The terms "Note" or "Notes" shall mean any one or more, as the case may be, of the 6-1/4% Convertible Subordinated Notes Due 2008 authenticated and delivered under this Indenture. NOTEHOLDER; HOLDER: The terms "Noteholder" or "holder" as applied to any Note, or other similar terms (but excluding the term "beneficial holder"), shall mean any person in whose name at the time a particular Note is registered on the Note registrar's books. NOTE REGISTER: The term "Note register" shall have the meaning specified in Section 2.5(a). NOTE REGISTRAR: The term "Note registrar" shall have the meaning specified in Section 2.5(a). OFFICERS' CERTIFICATE: The term "Officers' Certificate," when used with respect to the Company, shall mean a certificate signed by two authorized officers which shall include (a) any of the President, the Chief Executive Officer, the Chief Operating Officer or the Chief Financial Officer and (b) any Treasurer or Secretary or any Assistant Secretary of the Company, that is delivered to the Trustee. Each such certificate shall include the statements provided for in Section 16.7 if and to the extent required by the provisions of such Section. OPINION OF COUNSEL: The term "Opinion of Counsel" shall mean an opinion in writing signed by legal counsel, who may be an employee of or counsel to the Company or other counsel acceptable to the Trustee, that is delivered to the Trustee. Each such opinion shall include the statements provided for in Section 16.7 if and to the extent required by the provisions of such Section. OUTSTANDING: The term "outstanding" with reference to Notes as of any particular time shall mean, subject to the provisions of Section 8.4, all Notes authenticated and delivered by the Trustee under this Indenture, except (a) Notes theretofore canceled by the Trustee or delivered to the Trustee for cancellation; (b) Notes, or portions thereof, for which monies in the necessary amount shall have been deposited in trust with the Trustee for payment, redemption or repurchase; provided that if such Notes are to be redeemed prior to the maturity thereof, notice of such redemption 5 shall have been given pursuant to Article III or provision satisfactory to the Trustee shall have been made for giving such notice; (c) Notes paid or converted pursuant to Section 2.6 hereof or Notes in lieu of or in substitution for which other Notes shall have been authenticated and delivered pursuant to the terms of Section 2.6 unless proof satisfactory to the Trustee is presented that any such Notes are held by BONA FIDE holders in due course; and (d) Notes converted into Common Stock or cash pursuant to Article XIV and Notes not deemed outstanding pursuant to Section 3.2 and 3.5. PAYMENT BLOCKAGE NOTICE: The term "Payment Blockage Notice" shall have the meaning specified in Section 15.4(b). PAYMENT DEFAULT: The term "Payment Default" shall have the meaning specified in Section 6.1(d). PERSON: The term "person" shall mean a corporation, an association, a partnership, an individual, a joint venture, a joint stock company, a trust, an unincorporated organization or a government or an agency or a political subdivision thereof. PREDECESSOR NOTE: The term "Predecessor Note" of any particular Note shall mean every previous Note evidencing all or a portion of the same debt as that evidenced by such particular Note; and, for the purposes of this definition, any Note authenticated and delivered under Section 2.6 in lieu of a lost, destroyed or stolen Note shall be deemed to evidence the same debt as the lost, destroyed or stolen Note. PURCHASED SHARES: The term "Purchased Shares" shall have the meaning specified in Section 14.6(f). RECORD DATE: The term "record date" with respect to any interest payment date shall have the meaning set forth in Section 2.3 hereof. RESPONSIBLE OFFICER: The term "Responsible Officer" with respect to the Trustee, shall mean an officer of the Trustee assigned and duly authorized by the Trustee to administer its corporate trust matters. SECURITIES: The term "Securities" shall have the meaning specified in Section 14.6(d). SECURITIES ACT: The term "Securities Act" shall mean the Securities Act of 1933, as amended, and the rules and regulations promulgated thereunder. SUBSIDIARY: The term "Subsidiary" of any specified person shall mean (i) a corporation, a majority of whose Capital Stock with voting power under ordinary circumstances to elect directors is at the time directly or indirectly owned by such person or (ii) any other person (other than a corporation) in which such person or such person and a Subsidiary or 6 Subsidiaries of such person or a Subsidiary or Subsidiaries of such person directly or indirectly, at the date of determination thereof, has at least majority ownership. SUCCESSOR COMPANY: The term "Successor Company" shall have the meaning specified in Section 11.1. TRADING DAY: The term "Trading Day" shall mean (x) if the applicable security is listed or admitted for trading on the New York Stock Exchange or another national security exchange, a day on which the New York Stock Exchange or such other national security exchange is open for business or (y) if the applicable security is quoted on the Nasdaq National Market, a day on which trades may be made thereon or (z) if the applicable security is not so listed, admitted for trading or quoted, any day other than a Saturday or Sunday or a day on which banking institutions in the State of New York are authorized or obligated by law or executive order to close. TRIGGER EVENT: The term "Trigger Event" shall have the meaning specified in Section 14.6(d). TRUST INDENTURE ACT: The term "Trust Indenture Act" shall mean the Trust Indenture Act of 1939, as amended, as it was in force at the date of execution of this Indenture, except as provided in Sections 10.3 and 14.6; provided that in the event said Trust Indenture Act of 1939 is amended after the date hereof, the term "Trust Indenture Act" shall mean, to the extent required by such amendment, said Trust Indenture Act of 1939 as so amended. TRUSTEE: The term "Trustee" shall mean Wells Fargo Bank Minnesota, N.A., its successors and any corporation resulting from or surviving any consolidation or merger to which it or its successors may be a party and any successor trustee at the time serving as successor trustee hereunder. U.S. GOVERNMENT OBLIGATIONS: The term "U.S. Government Obligations" shall mean securities that are (i) direct obligations of the United States of America for the payment of which its full faith and credit is pledged or (ii) obligations of a person controlled or supervised by, and acting as an agency or instrumentality of, the United States of America the timely payment of which is unconditionally guaranteed as a full faith and credit obligation by the United States of America, which, in either case, are not callable or redeemable at the option of the issuer thereof, and shall also include a depository receipt issued by a bank (as defined in Section 3(a)(2) of the Securities Act) as custodian with respect to any such U.S. Government Obligation or a specific payment of principal or interest on any such U.S. Government Obligation held by such custodian for the account of the holder of such depository receipt; provided that (except as required by law) such custodian is not authorized to make any deduction from the amount payable to the holder of such depository receipt from any amount received by such custodian in respect of the U.S. Government Obligation or the specific payment of principal of or interest on the U.S. Government Obligation evidenced by such depository receipt. VOTING STOCK: The term "Voting Stock" shall have the meaning set forth in Section 3.5(e) hereof. 7 Section 1.2 INCORPORATION BY REFERENCE OF TRUST INDENTURE ACT. Whenever this Indenture refers to a provision of the Trust Indenture Act, the provision is incorporated by reference in and made a part of this Indenture. The following Trust Indenture Act terms used in this Indenture have the following meanings: "INDENTURE SECURITIES" means the Notes; "INDENTURE SECURITY HOLDER" means a holder of Notes; "INDENTURE TO BE QUALIFIED" means this Indenture; "INDENTURE TRUSTEE" or "INSTITUTIONAL TRUSTEE" means the Trustee; "OBLIGOR" on the Notes means the Company and any successor obligor under the Trust Indenture Act. All other terms used in this Indenture that are defined by the Trust Indenture Act, defined by Trust Indenture Act reference to another statute or defined by Commission rule under the Trust Indenture Act have the meanings so assigned to them. Section 1.3 RULES OF CONSTRUCTION. Unless the context otherwise requires: (1) a term has the meaning assigned to it; (2) an accounting term not otherwise defined has the meaning assigned to it in accordance with generally accepted accounting principles; (3) "or" is not exclusive; (4) words in the singular include the plural, and in the plural include the singular; and (5) provisions apply to successive events and transactions. ARTICLE II ISSUE, DESCRIPTION, EXECUTION, REGISTRATION AND EXCHANGE OF NOTES Section 2.1 DESIGNATION, AMOUNT AND ISSUE OF NOTES. The Notes shall be designated as "6-1/4% Convertible Subordinated Notes Due 2008." Notes not to exceed 8 the aggregate principal amount of $74,750,000 upon the execution of this Indenture, or from time to time thereafter, may be executed by the Company and delivered to the Trustee for authentication, and the Trustee shall thereupon authenticate and make available for delivery said Notes upon the written order of the Company, signed by its (a) Chief Executive Officer, President, Chief Operating Officer or Chief Financial Officer, and (b) any Treasurer or Secretary or any Assistant Secretary, without any further action by the Company hereunder. Section 2.2 FORM OF NOTES. The Global Note shall represent all of the outstanding Notes. Payment of principal of and interest and premium, if any, on the Global Note shall be made in accordance with the provisions of Section 2.3 hereof. The terms and provisions contained in the form of Global Note attached as Exhibit A hereto shall constitute, and are hereby expressly made, a part of this Indenture and to the extent applicable, the Company and the Trustee, by their execution and delivery of this Indenture, expressly agree to such terms and provisions and to be bound thereby. Section 2.3 DATE AND DENOMINATION OF NOTES; PAYMENTS OF INTEREST. The Notes shall be issuable in registered form only without coupons in denominations of $1,000 principal amount and integral multiples thereof. Every Note shall be dated the date of its authentication, shall bear interest from June 1, 2002 and shall be first payable on October 15, 2002 and then semiannually on each April 15, and October 15, commencing October 15, 2002, as specified on the face of the form of Global Note, attached as Exhibit A hereto. The person in whose name any Note (or its Predecessor Note) is registered at the close of business on any record date with respect to any interest payment date (including any Note that is converted after the record date and on or before the interest payment date) shall be entitled to receive the interest payable on such interest payment date notwithstanding the cancellation of such Note upon any transfer, exchange or conversion subsequent to the record date and prior to such interest payment date. Interest may, at the option of the Company, be paid by check mailed to the address of such person as it appears on the Note register; provided that, with respect to any holder of Notes with an aggregate principal amount equal to or in excess of 9 $5,000,000, at the request (such request to include appropriate wire instructions) of such holder in writing to the Trustee on or before the record date preceding any interest payment date, interest on such holder's Notes shall be paid by wire transfer in immediately available funds. The term "record date" with respect to any interest payment date shall mean the October 1 or April 1 preceding said October 15, or April 15. None of the Company, the Trustee or any paying agent shall have any responsibility or liability for any aspect of the records relating to or payment made on account of beneficial ownership interests in the Global Note or for maintaining, supervising or reviewing any records relating to such beneficial ownership interests. Interest on the Notes shall be computed on the basis of a 360-day year composed of twelve 30-day months. Any interest on any Note that is payable, but is not punctually paid or duly provided for, on any said October 15, or April 15, (herein called "Defaulted Interest") shall forthwith cease to be payable to the Noteholder on the relevant record date by virtue of his having been such Noteholder; and such Defaulted Interest shall be paid by the Company, at its election in each case, as provided in clause (1) or (2) below: (1) The Company may elect to make payment of any Defaulted Interest to the persons in whose names the Notes (or their respective Predecessor Notes) are registered at the close of business on a special record date for the payment of such Defaulted Interest, which shall be fixed in the following manner. The Company shall notify the Trustee in writing of the amount of Defaulted Interest to be paid on each Note and the date of the payment (which shall be not less than 25 days after the receipt by the Trustee of such notice, unless the Trustee shall consent to an earlier date), and at the same time, the Company shall deposit with the Trustee an amount of money equal to the aggregate amount to be paid in respect of such Defaulted Interest or shall make arrangements satisfactory to the Trustee for such deposit prior to the date of the proposed payment, such money when deposited to be held in trust for the benefit of the persons entitled to such Defaulted Interest as in this clause provided. Thereupon, the Trustee shall fix a special record date for the payment of such Defaulted Interest, which shall be not more than 15 days and not less than 10 days prior to the date of the payment and not less than 10 days after the receipt by the Trustee of the notice of the proposed payment. The Trustee shall promptly notify the Company of such special record date and, in the name and at the expense of the Company, shall cause notice of the payment of such Defaulted Interest and the special record date therefor to be mailed, first-class postage prepaid, to each Noteholder at his address as it appears in the Note register, not less than 10 days prior to such special record date. Notice of the proposed payment of such Defaulted Interest and the special record date therefor having been so mailed, such Defaulted Interest shall be paid to the persons in whose names the Notes (or their respective Predecessor Notes) were registered at the close of business on such special record date and shall no longer be payable pursuant to the following clause (2). (2) The Company may make payment of any Defaulted Interest in any other lawful manner not inconsistent with the requirements of any securities exchange on 10 which the Notes may be listed, and upon such notice as may be required by such exchange, if, after notice given by the Company to the Trustee of the proposed payment pursuant to this clause, such manner of payment shall be deemed practicable by the Trustee. Section 2.4 EXECUTION OF NOTES. The Notes shall be signed in the name and on behalf of the Company by the signature of its Chief Executive Officer, President, Chief Operating Officer or Chief Financial Officer and attested by the signature of its Treasurer, Secretary or any of its Assistant Secretaries (any of which signatures may be printed, engraved or otherwise reproduced thereon, by facsimile or otherwise). Only such Notes as shall bear thereon a certificate of authentication substantially in the form set forth on the form of Note attached as Exhibit A hereto, manually executed by the Trustee (or an authenticating agent appointed by the Trustee as provided by Section 16.14), shall be entitled to the benefits of this Indenture or be valid or obligatory for any purpose. Such certificate by the Trustee (or such an authenticating agent) upon any Note executed by the Company shall be conclusive evidence that the Note so authenticated has been duly authenticated and delivered hereunder and that the holder is entitled to the benefits of this Indenture. In case any officer of the Company who shall have signed any of the Notes shall cease to be such officer before the Notes so signed shall have been authenticated and delivered by the Trustee, or disposed of by the Company, such Notes nevertheless may be authenticated and delivered or disposed of as though the person who signed such Notes had not ceased to be such officer of the Company; and any Note may be signed on behalf of the Company by such persons as, at the actual date of the execution of such Note, shall be the proper officers of the Company, although at the date of the execution of this Indenture any such person was not such an officer. Section 2.5 EXCHANGE AND TRANSFER OF NOTES; RESTRICTIONS ON TRANSFER; DEPOSITORY. Any exchange or transfer of all or a part of the Global Note for definitive Notes pursuant to this Section 2.5 will be accompanied by a supplemental indenture that will include the form of such definitive Notes and provisions for conversion of the Notes under Article XIV. (a) The Company shall cause to be kept at the Corporate Trust Office of the Trustee a register (the register maintained in such office and in any other office or agency of the Company designated pursuant to Section 4.2 being herein sometimes collectively referred to as the "Note register") in which, subject to such reasonable regulations as it may prescribe, the Company shall provide for the transfers of Notes. Such Note register shall be in written form or in any form capable of being converted into written form within a reasonable period of time. The Trustee is hereby appointed "Note registrar" for the purpose of transfers of Notes as herein provided. The Company may appoint one or more co-registrars. Upon surrender for registration of transfer of any Note to the Note registrar or any co-registrar and satisfaction of the requirements for such transfer set forth in this Section 2.5, the Company shall execute, and the Trustee shall authenticate and make available for delivery, in the name of the designated transferee or transferees, one or more new Notes of any authorized denominations and of a like aggregate principal amount may be required by Sections 2.5(c) and (d). 11 Notes may be exchanged for other Notes of any authorized denominations and of a like aggregate principal amount, upon surrender of the Notes to be exchanged at any such office or agency. Whenever any Notes are so surrendered for exchange, the Company shall execute, and the Trustee shall authenticate and make available for delivery, the Notes that the Noteholder making the exchange is entitled to receive bearing certificate numbers not contemporaneously outstanding. All Notes presented or surrendered for registration of transfer or for exchange shall (if so required by the Company, the Trustee, the Note registrar or any co-registrar) be duly endorsed, or be accompanied by a written instrument of transfer in form satisfactory to the Company, executed by the Noteholder thereof or his attorney duly authorized in writing. No service charge shall be charged to the Noteholder for any exchange or registration of transfer of Notes, but the Company may require payment of a sum sufficient to cover any tax, assessments or other governmental charges that may be imposed in connection therewith. None of the Company, the Trustee, the Note registrar or any co-registrar shall be required to exchange or register a transfer of (a) any Notes for a period of 15 days next preceding the mailing of a notice of redemption, (b) any Notes called for redemption or, if a portion of any Note is selected or called for redemption, such portion thereof selected or called for redemption, (c) any Notes surrendered for conversion or, if a portion of any Note is surrendered for conversion, such portion thereof surrendered for conversion or (d) any Notes surrendered for repurchase pursuant to Section 3.5 or, if a portion of any Note is surrendered for repurchase pursuant to Section 3.5, such portion thereof surrendered for repurchase pursuant to Section 3.5. All Notes issued upon any transfer or exchange of Notes shall be the valid obligations of the Company, evidencing the same debt and entitled to the same benefits under this Indenture as the Notes surrendered upon such registration of transfer or exchange. All Notes, the transfer and/or exchange of which is effectuated by the Trustee pursuant to this Section 2.5, shall be accompanied by an Officers' Certificate of the Company certifying that such transfer, exchange and/or registration is authorized by the Company and permitted hereunder. Any transfer of a beneficial interest in the Global Note that cannot be effected through book-entry settlement must be effected by the delivery to the transferee (or its nominee) of a definitive Note or Notes registered in the name of the transferee (or its nominee) on the books maintained by the Trustee, in accordance with the transfer instructions set forth herein. With respect to any such transfer, the Trustee or the Custodian, at the direction of the Trustee, shall cause, in accordance with the standing instructions and procedures existing between the Depository and the Custodian, the aggregate principal amount of the Global Note to be reduced by the principal amount of the beneficial interest in the Note being transferred and, following such reduction, the Company shall execute and the Trustee shall authenticate and make available for delivery to the transferee (or such transferee's nominee, as the case may be), a definitive Note or Notes in the appropriate aggregate principal amount in the name of such transferee (or its nominee). 12 Any transfer of a definitive Note or Notes must be effected by the delivery to the transferee (or its nominee) of a definitive Note or Notes registered in the name of the transferee (or its nominee) on the books maintained by the Trustee. With respect to any such transfer, the Company shall execute and the Trustee shall authenticate and make available for delivery to the transferee (or such transferee's nominee, as the case may be), a definitive Note or Notes in the appropriate aggregate principal amount in the name of such transferee (or its nominee) and bearing such restrictive legends as may be required by this Indenture. (b) Notwithstanding any other provisions of this Indenture (other than the provisions set forth in this Section 2.5(b)), the Global Note may not be transferred as a whole except by the Depository to a nominee of the Depository or by a nominee of the Depository to the Depository or another nominee of the Depository or by the Depository or any such nominee to a successor Depository or a nominee of such successor Depository. The Depository shall be a clearing agency registered under the Exchange Act. The Company initially appoints The Depository Trust Company to act as Depository with respect to the Global Note. Initially, the Global Note shall be issued to the Depository, registered in the name of Cede, as the nominee of the Depository, and deposited with the Trustee as Custodian for Cede. Neither the Company nor the Trustee (or any registrar, paying agent or conversion agent under this Indenture) shall have responsibility for the performance by the Depository or its participants or indirect participants of its respective obligations under the rules and procedures governing its operations. The Depository will take any action permitted to be taken by a holder of Notes (including, without limitation, the presentation of Notes for exchange as described below) only at the direction of one or more participants to whose account with the Depository interests in the Global Note are credited, and only in respect of the principal amount of the Notes represented by the Global Note as to which such participant or participants has or have given such direction. If at any time the Depository for the Global Note notifies the Company that it is unwilling or unable to continue as Depository for such Notes, the Company may appoint a successor Depository with respect to such Notes. If a successor Depository for the Notes is not appointed by the Company within 90 days after the Company receives such notice, the Company shall execute, and the Trustee, upon receipt of an Officers' Certificate for the authentication and delivery of Notes, shall authenticate and make available for delivery, Notes in definitive form, in an aggregate principal amount equal to the principal amount of the Global Note in exchange for the Global Note. Definitive Notes issued in exchange for all or a part of the Global Note pursuant to this Section 2.5(b) shall be registered in such names and in such authorized denominations as the Depository, pursuant to instructions from its direct or indirect participants or otherwise, shall instruct the Trustee. Upon execution and authentication, the Trustee shall make available for delivery such definitive Notes to the persons in whose names such definitive Notes are so registered. 13 At such time as all interest in the Global Note has been redeemed, converted, repurchased or canceled, the Global Note shall be, upon receipt thereof, canceled by the Trustee in accordance with standing procedures and instructions existing between the Depository and the Custodian. At any time prior to such cancellation, if any interest in the Global Note is exchanged for definitive Notes, redeemed, repurchased, converted, canceled or transferred to a transferee who receives definitive Notes therefor or any definitive Note is exchanged or transferred for part of the Global Note, the principal amount of the Global Note shall, in accordance with the standing procedures and instructions existing between the Depository and the Custodian, be reduced or increased, as the case may be, and an endorsement shall be made on the Global Note by the Trustee or the Custodian, at the direction of the Trustee, to reflect such reduction or increase. The Company and the Trustee may for all purposes, including the making of payments due on the Notes, deal with the Depository as the authorized representative of the Noteholders for the purposes of exercising the rights of Noteholders hereunder. The rights of the owner of any beneficial interest in the Global Note shall be limited to those established by law and agreements between such owners and depository participants; provided that no such agreement shall give any rights to any person against the Company or the Trustee without the written consent of the parties so affected. Multiple requests directions from and votes of the Depository, as holder of notes in book-entry form with respect to any particular matter, shall not be deemed inconsistent to the extent they do not represent an amount of notes in excess of those held in the name of the Depository or its nominee. (c) Each holder or former holder of a Note agrees to indemnify the Company and the Trustee against any liability that may result from the transfer, exchange or assignment of such holder's or former holder's Note in violation of any provision of this Indenture and/or applicable U.S. federal or state securities law. Section 2.6 MUTILATED, DESTROYED, LOST OR STOLEN NOTES. In case any Note shall become mutilated or be destroyed, lost or stolen, the Company in its discretion may execute, and upon its request, the Trustee or an authenticating agent appointed by the Trustee shall authenticate and make available for delivery a new Note bearing a number not contemporaneously outstanding in exchange and substitution for the mutilated Note or in lieu of and in substitution for the Note so destroyed, lost or stolen. The Company may charge such applicant for the expenses of the Company in replacing a Note. In every case the applicant for a substituted Note shall furnish to the Company, to the Trustee and, if applicable, to such authenticating agent such security or indemnity as may be required by them to save each of them harmless from any loss, liability, cost or expense caused by or connected with such substitution, and in every case of destruction, loss or theft, the applicant shall also furnish to the Company, to the Trustee and, if applicable, to such authenticating agent evidence to their satisfaction of the destruction, loss or theft of such Note and of the ownership thereof. The Trustee or such authenticating agent may authenticate any such substituted Note and deliver the same upon the receipt of such security or indemnity as the Trustee, the Company and, if applicable, such authenticating agent may require. Upon the issuance of any substituted Note, the Company may require the payment of a sum sufficient to cover any tax or other governmental charge that may be imposed in relation thereto and any other expenses 14 connected therewith. In case any Note that has matured or is about to mature or has been called for redemption or is about to be repurchased or converted into Common Stock or cash shall become mutilated or be destroyed, lost or stolen, the Company may, instead of issuing a substitute Note, pay or authorize the payment of or convert or authorize the conversion of the same (without surrender thereof, except in the case of a mutilated Note), as the case may be, if the applicant for such payment or conversion shall furnish to the Company, to the Trustee and, if applicable, to such authenticating agent such security or indemnity as may be required by them to save each of them harmless from any loss, liability, cost or expense caused by or connected with such substitution, and in case of destruction, loss or theft, evidence satisfactory to the Company, the Trustee and, if applicable, any paying agent or conversion agent of the destruction, loss or theft of such Note and of the ownership thereof. Every substitute Note issued pursuant to the provisions of this Section 2.6 in lieu of any Note that is destroyed, lost or stolen shall constitute an additional contractual obligation of the Company, whether or not the destroyed, lost or stolen Note shall be enforceable by anyone, and shall be entitled to all the benefits of (but shall be subject to all the limitations set forth in) this Indenture equally and proportionately with any and all other Notes duly issued hereunder. To the extent permitted by law, all Notes shall be held and owned upon the express condition that the foregoing provisions are exclusive with respect to the replacement or payment or conversion of mutilated, destroyed, lost or stolen Notes and shall preclude any and all other rights or remedies notwithstanding any law or statute existing or hereafter enacted to the contrary with respect to the replacement or payment or conversion of negotiable instruments or other securities without their surrender. Section 2.7 TEMPORARY NOTES. Pending the preparation of definitive Notes, the Company may execute and the Trustee or an authenticating agent appointed by the Trustee shall, upon written request of the Company, authenticate and make available for delivery temporary Notes (printed or lithographed). Temporary Notes shall be issuable in any authorized denomination and shall be substantially in the form of the definitive Notes but with such omissions, insertions and variations as may be appropriate for temporary Notes, all as may be determined by the Company. Every such temporary Note shall be executed by the Company and authenticated by the Trustee or such authenticating agent upon the same conditions and in substantially the same manner, and with the same effect, as the definitive Notes. Without unreasonable delay the Company shall execute and deliver to the Trustee or such authenticating agent definitive Notes (other than in the case of Notes in global form) and thereupon any or all temporary Notes (other than the Global Note) may be surrendered in exchange therefor, at each office or agency maintained by the Company pursuant to Section 4.2 and the Trustee or such authenticating agent shall authenticate and make available for delivery in exchange for such temporary Notes an equal aggregate principal amount of definitive Notes. Such exchange shall be made by the Company at its own expense and without any charge therefor. Until so exchanged, the temporary Notes shall in all respects be entitled to the same benefits and subject to the same limitations under this Indenture as definitive Notes authenticated and delivered hereunder. Section 2.8 CANCELLATION OF NOTES PAID, ETC. All Notes surrendered for the purpose of payment, redemption, repurchase, conversion, exchange or registration of transfer shall, if surrendered to the Company or any paying agent or any Note 15 registrar or any conversion agent, be surrendered to the Trustee and promptly canceled by it or, if surrendered to the Trustee, shall be promptly canceled by it and no Notes shall be issued in lieu thereof except as expressly permitted by any of the provisions of this Indenture. If required by the Company, the Trustee shall return canceled Notes to the Company. If the Company shall acquire any of the Notes, such acquisition shall not operate as a redemption or satisfaction of the indebtedness represented by such Notes unless and until the same are delivered to the Trustee for cancellation. Section 2.9 CUSIP NUMBERS. The Company in issuing the Notes may use "CUSIP" numbers (if then generally in use), and, if so, the Trustee shall use CUSIP numbers in notices of redemption as a convenience to holders; provided that any such notice may state that no representation is made as to the correctness of such numbers either as printed on the Notes or as contained in any notice of a redemption and that reliance may be placed only on the other identification numbers printed on the Notes, and any such redemption shall not be affected by any defect in or omission of such numbers. The Company shall promptly notify the Trustee of any change in the CUSIP numbers. ARTICLE III REDEMPTION AND REPURCHASE OF NOTES Section 3.1 REDEMPTION PRICES. The Notes are not redeemable at the option of the Company prior to October 15, 2004. At any time on or after that date, the Notes may be redeemed at the Company's option, upon notice as set forth in Section 3.2, in whole at any time or in part from time to time, at the redemption price of 100% of principal amount of Notes plus accrued and unpaid interest. Section 3.2 NOTICE OF REDEMPTION; SELECTION OF NOTES. In case the Company shall desire to exercise the right to redeem all or, as the case may be, any part of the Notes pursuant to Section 3.1, it shall fix a date for redemption and, in the case of any redemption pursuant to Section 3.1, it or, at its written request accompanied by the proposed form of notice of redemption (which must be received by the Trustee at least 45 days prior to the date fixed for redemption, unless a shorter period is agreed to by the Trustee), the Trustee in the name of and at the expense of the Company, shall mail or cause to be mailed a notice of such redemption at least 30 and not more than 60 days prior to the date fixed for redemption to the holders of Notes so to be redeemed as a whole or in part at their last addresses as the same appear on the Note register, provided that subject to the approval of the form of notice by the Trustee if the Company shall give such notice, it shall also give such notice, and notice of the Notes to be redeemed, to the Trustee. Such mailing shall be by first class mail. The notice, if mailed in the manner herein provided, shall be conclusively presumed to have been duly given, whether or not the holder receives such notice. In any case, failure to give such notice by mail or any defect in the notice to the holder of any Note designated for redemption as a whole or in part shall not affect the validity of the proceedings for the redemption of any other Note. Each such notice of redemption shall identify the Notes to be redeemed (including CUSIP numbers), specify the aggregate principal amount of Notes to be redeemed, the date fixed 16 for redemption, the redemption price at which Notes are to be redeemed, the place or places of payment, that payment shall be made upon presentation and surrender of such Notes, that interest accrued to the date fixed for redemption shall be paid as specified in said notice and that on and after said date, interest thereon or on the portion thereof to be redeemed shall cease to accrue. Such notice shall also state the current Conversion Price and the date on which the right to convert such Notes or portions thereof into Common Stock shall expire. If fewer than all the Notes are to be redeemed, the notice of redemption shall identify the Notes to be redeemed. In case any Note is to be redeemed in part only, the notice of redemption shall state the portion of the principal amount thereof to be redeemed and shall state that on and after the date fixed for redemption, upon surrender of such Note, a new Note or Notes in principal amount equal to the unredeemed portion thereof shall be issued. On or prior to the Business Day prior to the redemption date specified in the notice of redemption given as provided in this Section 3.2, the Company shall deposit by 11:00 A.M. Eastern Time with the Trustee or with one or more paying agents (or, if the Company is acting as its own paying agent, set aside, segregate and hold in trust as provided in Section 4.4) an amount of money sufficient to redeem on the redemption date all the Notes so called for redemption (other than those theretofore surrendered for conversion into Common Stock or cash) at the appropriate redemption price, together with accrued interest to the date fixed for redemption. If any Note called for redemption is converted pursuant hereto, any money deposited with the Trustee or any paying agent or so segregated and held in trust for the redemption of such Note shall be paid to the Company upon its written request or, if then held by the Company, shall be discharged from such trust. If fewer than all the Notes are to be redeemed, the Company shall give the Trustee written notice in the form of an Officers' Certificate not fewer than 45 days (or such shorter period of time as may be acceptable to the Trustee) prior to the redemption date as to the aggregate principal amount of Notes to be redeemed. If fewer than all the Notes are to be redeemed, the Trustee shall select the Notes or portions thereof to be redeemed (in principal amounts of $1,000 or integral multiples thereof), by lot or, in its discretion, on a PRO RATA basis. If any Note selected for partial redemption is converted in part after such selection, the converted portion of such Note shall be deemed (so far as may be) to be the portion to be selected for redemption. The Notes (or portions thereof) so selected shall be deemed duly selected for redemption for all purposes hereof, notwithstanding that any such Note is converted as a whole or in part before the mailing of the notice of redemption. Upon any redemption of less than all Notes, the Company and the Trustee may treat as outstanding any Notes surrendered for conversion during the period of 15 days next preceding the mailing of a notice of redemption and need not treat as outstanding any Note authenticated and delivered during such period in exchange for the unconverted portion of any Note converted in part during such period. Section 3.3 PAYMENT OF NOTES CALLED FOR REDEMPTION. If notice of redemption has been given as above provided, the Notes or portion of Notes with respect to which such notice has been given shall, unless converted into Common Stock pursuant to the terms hereof, become due and payable on the date and at the place or places stated in such notice at the applicable redemption price, together with interest thereon accrued to the date fixed for 17 redemption, and on and after said date (unless the Company shall default in the payment of such Notes at the redemption price, together with interest thereon accrued to said date), interest on the Notes or portion of Notes so called for redemption shall cease to accrue, and such Notes shall cease after the close of business on the Business Day next preceding the date fixed for redemption to be convertible into Common Stock or cash and, except as provided in Sections 7.6 and 12.4, to be entitled to any benefit or security under this Indenture, and the holders thereof shall have no right in respect of such Notes except the right to receive the redemption price thereof and unpaid interest thereon to the date fixed for redemption. On presentation and surrender of such Notes at a place of payment in said notice specified, the said Notes or the specified portions thereof shall be paid and redeemed by the Company at the applicable redemption price, together with interest accrued thereon to the date fixed for redemption; provided that any semi-annual payment of interest becoming due on the date fixed for redemption shall be payable to the holders of such Notes registered as such on the relevant record date subject to the terms and provisions of Section 2.3 hereof. Upon presentation of any Note redeemed in part only, the Company shall execute and the Trustee shall authenticate and make available for delivery to the holder thereof, at the expense of the Company, a new Note or Notes, of authorized denominations, in principal amount equal to the unredeemed portion of the Notes so presented. If any Note called for redemption shall not be so paid upon surrender thereof for redemption, the principal and premium, if any, shall, until paid or duly provided for, bear interest from the date fixed for redemption at the rate borne by the Note and such Note shall remain convertible into Common Stock until the principal and premium, if any, shall have been paid or duly provided for. Section 3.4 CONVERSION ARRANGEMENT ON CALL FOR REDEMPTION. In connection with any redemption of Notes, with notice to the Trustee, the Company may arrange for the purchase and conversion of any Notes by an agreement with one or more investment bankers or other purchasers to purchase such Notes by paying to the Trustee in trust for the Noteholders, on or prior to the close of business one Business Day prior to the date fixed for redemption, an amount not less than the applicable redemption price, together with interest accrued to the date fixed for redemption, of such Notes. Notwithstanding anything to the contrary contained in this Article III, the obligation of the Company to pay the redemption price of such Notes, together with interest accrued to the date fixed for redemption, shall be deemed to be satisfied and discharged to the extent such amount is so paid by such purchasers. If such an agreement is entered into, a copy of which shall be filed with the Trustee prior to the date fixed for redemption, any Notes not duly surrendered for conversion by the holders thereof may, at the option of the Company, be deemed, to the fullest extent permitted by law, acquired by such purchasers from such holders and (notwithstanding anything to the contrary contained in Article XIV) surrendered by such purchasers for conversion, prior to the close of business on the date fixed for redemption (and the right to convert any such Notes shall be deemed to have been extended through such time), subject to payment of the above amount as aforesaid. At the direction of the Company, the Trustee shall hold and dispose of any such amount paid to it in the same manner as it would monies deposited with it by the Company for the redemption of Notes. Without the Trustee's prior written consent, no arrangement between the Company and such purchasers for the purchase and conversion of any Notes shall increase or otherwise affect any of 18 the powers, duties, responsibilities or obligations of the Trustee as set forth in this Indenture, and the Company agrees to indemnify the Trustee from, and hold it harmless against, any loss, liability or expense arising out of or in connection with any such arrangement for the purchase and conversion of any Notes between the Company and such purchasers including the costs and expenses incurred by the Trustee in the defense of any claim or liability arising out of or in connection with the exercise or performance of any of its powers, duties, responsibilities or obligations under this Indenture. Section 3.5 REPURCHASE OF NOTES UPON A CHANGE OF CONTROL. (a) If a Change of Control shall occur at any time, then each holder of Notes shall have the right to require that the Company repurchase such holder's Notes in whole or in part in integral multiples of $1,000 at a purchase price (the "Change of Control Purchase Price") in cash in an amount equal to 101% of the principal amount of such Notes, plus accrued and unpaid interest thereon, if any, to the purchase date (the "Change of Control Purchase Date") pursuant to the offer described below (the "Change of Control Offer") and in accordance with the other procedures set forth in this Indenture. (b) Within 30 days following any Change of Control, the Company shall publish a notice in the Wall Street Journal, notify the Trustee thereof and give written notice of such Change of Control to each holder of Notes, by first-class mail, postage prepaid, at the Noteholder's address appearing in the Note register, stating, among other things, (i) that a Change of Control has occurred, (ii) the Change of Control Purchase Price, (iii) the Change of Control Purchase Date (which shall be a Business Day no earlier than 30 days nor later than 60 days from the date such notice is mailed, or such later date as is necessary to comply with requirements under the Exchange Act), (iv) that any Note not tendered shall continue to accrue interest and to have all of the benefits of this Indenture, (v) that, unless the Company defaults in the payment of the Change of Control Purchase Price, any Notes accepted for payment pursuant to the Change of Control Offer shall cease to accrue interest after the Change of Control Purchase Date, (vi) that Noteholders electing to have any Notes purchased pursuant to a Change of Control Offer shall be required to surrender the Notes, with the form entitled "Option of Noteholder to Elect Purchase" on the reverse of the Notes completed, to the Company at the address specified in the notice prior to the close of business on the third Business Day preceding the Change of Control Purchase Date, (vii) that Noteholders shall be entitled to withdraw their election if the Company receives, not later than the close of business on the second Business Day preceding the Change of Control Purchase Date, a telegram, telex, facsimile transmission or letter setting forth the name of the Noteholder, the principal amount of Notes delivered for purchase, and a statement that such Noteholder is withdrawing his election to have such Notes purchased, and (viii) that Noteholders whose Notes are being purchased only in part shall be issued new Notes equal in principal amount to the unpurchased portion of the Notes surrendered, which unpurchased portion must be equal to $1,000 in principal amount or an integral multiple thereof. The Company shall comply with the requirements of Rule 13e-4 and 14e-1 under the Exchange Act and any other securities laws and regulations thereunder to the extent such laws and regulations are applicable in connection with the repurchase of the Notes in connection with a Change of Control. 19 (c) On the Change of Control Purchase Date, the Company shall, to the extent lawful, (i) accept for payment Notes or portions thereof tendered pursuant to the Change of Control Offer, (ii) deposit with the Trustee in immediately available funds by 11:00 A.M. Eastern Time an amount equal to the Change of Control Purchase Price in respect of all Notes or portions thereof so tendered and (iii) deliver or cause to be delivered to the Trustee the Notes so accepted together with an Officers' Certificate stating the Notes or portions thereof tendered to the Company. The Trustee shall promptly mail to each Noteholder of Notes so accepted payment in an amount equal to the purchase price of such Notes, and the Trustee shall promptly authenticate and mail to each Noteholder a new Note equal in principal amount to any unpurchased portion of the Notes surrendered, if any; provided that each such new Note shall be in a principal amount of $1,000 or an integral multiple thereof. The Company shall publicly announce the results of the Change of Control Offer on or as soon as practicable after the Change of Control Payment Date. (d) The term "Change in Control" shall mean an event or series of events in which (i) any "person" or "group" (as such terms are used in Sections 13(d) and 14(d) of the Exchange Act) acquires "beneficial ownership" (as determined in accordance with Rule 13d-3 under the Exchange Act), directly or indirectly, of more than 50% of the total Voting Stock of the Company at an Acquisition Price less than the conversion price then in effect with respect to the Notes and (ii) the holders of the Common Stock receive consideration which is not all or substantially all common stock that is (or upon consummation of or immediately following such event or events will be) listed on a United States national securities exchange or approved for quotation on the Nasdaq Stock Market or any similar United States system of automated dissemination of quotations of securities' prices; provided, however, that any such person or group shall not be deemed to be the beneficial owner of, or to beneficially own, any Voting Stock tendered in a tender offer until such tendered Voting Stock is accepted for purchase under the tender offer. (e) "Voting Stock" means stock of the class or classes pursuant to which the holders thereof have the general voting power under ordinary circumstances to elect at least a majority of the board of directors, managers or trustees of a corporation (irrespective whether or not at the time stock of any other class or classes shall have or might have voting power by reason of the happening of any contingency). ARTICLE IV PARTICULAR COVENANTS OF THE COMPANY Section 4.1 PAYMENT OF PRINCIPAL, PREMIUM AND INTEREST. The Company covenants and agrees that it shall duly and punctually pay or cause to be paid the principal of and premium, if any, and interest on each of the Notes at the places, at the respective times and in the manner provided herein and in the Notes. Any amounts of cash to be given to the Trustee or paying agent shall be deposited with the Trustee or paying agent in immediately available funds by 11:00 A.M. Eastern Time. Each installment of interest on the Notes due on any semi-annual interest payment date may be paid by mailing checks for the interest payable to or upon the written order of the holders of Notes entitled thereto as they shall appear on the Note register; provided that, with respect to any holder of Notes with an aggregate principal amount equal to or in excess of $5,000,000, at the request (such request to include appropriate wire instructions) of such holder in writing to the Trustee, interest on such holder's Notes shall be paid by wire transfer in immediately available funds. An installment of 20 principal or interest shall be considered paid on the date due if the Trustee or paying agent (other than the Company, a Subsidiary of the Company or any Affiliate of any of them) holds on that date money designated for and sufficient to pay the installment of principal or interest and is not prohibited from paying such money to the holders of the Notes pursuant to the terms of this Indenture. Section 4.2 MAINTENANCE OF OFFICE OR AGENCY. The Company shall maintain in the Borough of Manhattan, The City of New York, an office or agency where the Notes may be surrendered for registration of transfer or exchange or for presentation for payment or for conversion, redemption or repurchase and where notices and demands to or upon the Company in respect of the Notes and this Indenture may be served. The Company shall give prompt written notice to the Trustee of the location, and any change in the location, of such office or agency. If at any time the Company shall fail to maintain any such office or agency or shall fail to furnish the Trustee with the address thereof, such presentations, surrenders, notices and demands may be made or served at the Corporate Trust Office of the Trustee. The Company may also from time to time designate one or more other offices or agencies where the Notes may be presented or surrendered for any or all such purposes and may from time to time rescind such designations; provided that no such designation or rescission shall in any manner relieve the Company of its obligation to maintain an office or agency in the Borough of Manhattan, The City of New York, for such purposes. The Company shall give prompt written notice to the Trustee of any such designation or rescission and of any change in the location of any such other office or agency. The Company hereby initially designates the Trustee as paying agent, Note registrar and conversion agent and the Corporate Trust Office of the Trustee, as offices or agencies of the Company for the purposes set forth in the first paragraph of this Section 4.2. So long as the Trustee is the Note registrar, the Trustee agrees to mail, or cause to be mailed, the notices set forth in Section 7.11(a). Section 4.3 APPOINTMENTS TO FILL VACANCIES IN TRUSTEE'S OFFICE. The Company, whenever necessary to avoid or fill a vacancy in the office of Trustee, shall appoint, in the manner provided in Section 7.11, a Trustee, so that there shall at all times be a Trustee hereunder. Section 4.4 PROVISIONS AS TO PAYING AGENT. (a) If the Company shall appoint a paying agent other than the Trustee, or if the Trustee shall appoint such a paying agent, the Company or the Trustee, as the case may be, shall cause such paying agent to execute and deliver to the Trustee an instrument in which such agent shall agree with the Trustee, subject to the provisions of this Section 4.4: (1) that it shall hold all sums held by it as such agent for the payment of the principal of, premium, if any, or interest on the Notes (whether such sums have been paid 21 to it by the Company or by any other obligor on the Notes) in trust for the benefit of the holders of the Notes; (2) that it shall give the Trustee written notice of any failure by the Company (or by any other obligor on the Notes) to make any payment of the principal of, premium, if any, or interest on the Notes when the same shall be due and payable; and (3) that at any time during the continuance of an Event of Default, upon request of the Trustee, it shall forthwith pay to the Trustee all sums so held in trust. The Company shall, before each due date of the principal of, premium, if any, or interest on the Notes, deposit with the paying agent a sum sufficient to pay such principal, premium, if any, or interest, and (unless such paying agent is the Trustee) the Company shall promptly notify the Trustee of any failure to take such action. (b) If the Company shall act as its own paying agent, it shall, on or before each due date of the principal of, premium, if any, or interest on the Notes, set aside, segregate and hold in trust for the benefit of the holders of the Notes a sum sufficient to pay such principal, premium, if any, or interest so becoming due and shall notify the Trustee of any failure to take such action and of any failure by the Company (or any other obligor under the Notes) to make any payment of the principal of, premium, if any, or interest on the Notes when the same shall become due and payable. (c) Anything in this Section 4.4 to the contrary notwithstanding, the Company may, at any time, for the purpose of obtaining a satisfaction and discharge of this Indenture, or for any other reason, pay or cause to be paid to the Trustee all sums held in trust by the Company or any paying agent hereunder as required by this Section 4.4, such sums to be held by the Trustee upon the trusts herein contained and upon such payment by the Company or any paying agent to the Trustee, the Company or such paying agent shall be released from all further liability with respect to such sums. (d) Anything in this Section 4.4 to the contrary notwithstanding, the agreement to hold sums in trust as provided in this Section 4.4 is subject to Sections 12.3 and 12.4. Section 4.5 CORPORATE EXISTENCE. Subject to Article XI, the Company shall do or cause to be done all things necessary to preserve and keep in full force and effect (i) its corporate existence, and the corporate, partnership or other existence of any Subsidiary of the Company, in accordance with the respective organizational documents (as the same may be amended from time to time) of the Company or any such Subsidiary and (ii) the rights (charter and statutory), licenses and franchises of the Company and its Subsidiaries; provided that the Company shall not be required to preserve any such right, license or franchise, or the corporate, partnership or other existence of any of its Subsidiaries if the Board of Directors shall determine that the preservation thereof is no longer desirable in the conduct of the business of the Company and its Subsidiaries, taken as a whole, and that the loss thereof is not materially adverse to the holders of the Notes. 22 Section 4.6 STAY, EXTENSION AND USURY LAWS. The Company covenants (to the extent that it may lawfully do so) that it shall not at any time insist upon, plead or in any manner whatsoever claim or take the benefit or advantage of, any stay, extension or usury law or other law that would prohibit or forgive the Company from paying all or any portion of the principal of or interest on the Notes as contemplated herein, wherever enacted, now or at any time hereafter in force, or that may affect the covenants or the performance of this Indenture; and the Company (to the extent it may lawfully do so) hereby expressly waives all benefit or advantage of any such law, and covenants that it shall not, by resort to any such law, hinder, delay or impede the execution of any power herein granted to the Trustee, but shall suffer and permit the execution of every such power as though no such law has been enacted. Section 4.7 COMPLIANCE STATEMENT; NOTICE OF DEFAULTS (a) The Company shall deliver to the Trustee within 120 days after the end of each fiscal year of the Company an Officers' Certificate stating whether or not to the best knowledge of the signers thereof the Company is in compliance (without regard to periods of grace or notice requirements) with all conditions and covenants under this Indenture, and if the Company shall not be in compliance, specifying such non-compliance and the nature and status thereof of which such signer may have knowledge. (b) The Company shall file with the Trustee written notice of the occurrence of any default or Event of Default within ten days of its becoming aware of any such default or Event of Default. Section 4.8 LIMITATION ON DIVIDEND AND OTHER PAYMENT RESTRICTIONS AFFECTING SUBSIDIARIES. The Company shall not, and shall not permit any of its Subsidiaries to, directly or indirectly, create or otherwise cause or suffer to exist or become effective any consensual encumbrance or restriction on the ability of any Subsidiary to (i) pay dividends or make any other distribution on its Capital Stock or with respect to any other interest or participation in, or measured by, its profits, or pay any indebtedness owed to, the Company or a Subsidiary of the Company, (ii) make loans or advances to the Company or any Subsidiary of the Company, or (iii) transfer any of its properties or assets to the Company. Section 4.9 TAXES. The Company shall pay or discharge or cause to be paid or discharged, before the same shall become delinquent, (i) all taxes, assessments and governmental charges (including withholding taxes and any penalties, interest and additions to taxes) levied or imposed upon the Company or its Subsidiaries or upon the income, profits or property of the Company or any such Subsidiary and (ii) all lawful claims for labor, materials and supplies that, if unpaid, might by law become a lien upon the property of the Company or any such Subsidiary; provided that the Company shall not be required to pay or discharge or cause to be paid or discharged any such tax, assessment, charge or claim whose amount, applicability or validity is being contested in good faith by appropriate proceedings and for which disputed amounts adequate reserves have been made. Section 4.10 INSURANCE. The Company shall provide, or cause to be provided, for itself and its Subsidiaries, insurance (including appropriate self-insurance) against loss or damage of the kinds customarily insured against by corporations similarly situated and 23 owning like properties, including, but not limited to, products liability insurance and public liability insurance, with reputable insurers or with the government of the United States of America or an agency or instrumentality thereof, in such amounts with such deductibles and by such methods as shall be determined in good faith by the Board of Directors to be appropriate. ARTICLE V NOTEHOLDERS' LISTS AND REPORTS BY THE COMPANY Section 5.1 NOTEHOLDERS' LISTS. The Trustee shall preserve in as current a form as is reasonably practicable the most recent list available to it of the names and addresses of holders of Notes, the Company and the Trustee, and shall otherwise comply with Trust Indenture Act Section 312(a). If the Trustee is not the Notes registrar, the Company shall furnish to the Trustee on or before at least seven Business Days preceding each interest payment date and at such other times as the Trustee may request in writing a list in such form and as of such date as the Trustee reasonably may require of the names and addresses of holders of Notes, and the Company shall otherwise comply with Trust Indenture Act Section 312(a). Section 5.2 REPORTS BY COMPANY. The Company shall deliver to the Trustee within 15 days after it files the same with the Commission, copies of all reports and information (or copies of such portions of any of the foregoing as the Commission may by its rules and regulations prescribe), if any, which the Company is required to file with the Commission pursuant to Section 13 or 15(d) of the Exchange Act or pursuant to the immediately following sentence. So long as at least $5,000,000 aggregate principal amount of Notes remain outstanding, the Company shall file with the Commission such reports as may be required pursuant to Section 13 of the Exchange Act in respect of a security registered pursuant to Section 12 of the Exchange Act, regardless of whether the Company is otherwise required to file such reports. If the Company is not subject to the reporting requirements of Section 13 or 15(d) of the Exchange Act (or otherwise required to file reports pursuant to the immediately preceding sentence), the Company shall deliver to the Trustee, within 15 days after it would have been required to file such information with the Commission were it required to do so, annual and quarterly financial statements, including any notes thereto (and, in the case of a fiscal year end, an auditors' report by an independent certified public accounting firm of established national reputation), and a "Management's Discussion and Analysis of Financial Condition and Results of Operations," in each case substantially equivalent to that which it would have been required to include in such quarterly or annual reports, information, documents or other reports if it had been subject to the requirements of Section 13 or 15(d) of the Exchange Act. The Company shall provide copies of the foregoing materials to the Noteholders to the extent required by the Trust Indenture Act once this Indenture has been qualified. The Company shall also comply with the other provisions of the Trust Indenture Act Section 314(a). If the Company is not required to file the reports and information described above with the Commission, and the Company's Common Stock is still publicly held, the Company shall deliver an annual financial report for the Common Stock (as required by the Commission) to the Trustee no later than 120 days from the end of its fiscal year and quarterly financial reports for the Common Stock (as required by the Commission) no later than 30 days after the end of each quarter; provided, however, that if the Company's Common Stock is no longer publicly 24 held, the Company shall deliver annual and quarterly reports to the Trustee at the same times as described in this paragraph, but the Company shall not have to include management's discussion and analysis of financial conditions and results of operations or description of the business sections in such reports. Delivery of such reports, information and documents to the Trustee is for informational purposes only and the Trustee's receipt of such shall not constitute constructive notice of any information contained therein or determinable from information contained therein, including the Company's compliance with any of its covenants hereunder (as to which the Trustee is entitled to rely exclusively on Officers' Certificates). ARTICLE VI DEFAULTS AND REMEDIES Section 6.1 EVENTS OF DEFAULT. In case one or more of the following Events of Default (whatever the reason for such Event of Default and whether it shall be voluntary or involuntary or be effected by operation of law or pursuant to any judgment, decree or order of any court or any order, rule or regulation of any administrative or governmental body) shall have occurred and be continuing: (a) default in the payment of the principal of or premium, if any, on the Notes when due at maturity, upon redemption or otherwise, including failure by the Company to purchase the Notes when required under Section 3.5 (whether or not such payment shall be prohibited by Article XV of this Indenture); or (b) default in the payment of any installment of interest on the Notes as and when the same shall become due and payable (whether or not such payment shall be prohibited by Article XV of this Indenture), and continuance of such default for a period of 30 days; or (c) a failure on the part of the Company to duly observe or perform any other covenants or agreements on the part of the Company in this Indenture (other than a default in the performance or breach of a covenant or agreement that is specifically dealt with elsewhere in this Section 6.1) that continues for a period of 90 days after the date on which written notice of such failure, requiring the Company to remedy the same, shall have been given to the Company by the Trustee, or to the Company and a Responsible Officer of the Trustee, by the holders of at least 25% in aggregate principal amount of the Notes at the time outstanding determined in accordance with Section 8.4; or (d) an event of default occurs under any mortgage, indenture or instrument under which there may be issued or by which there may be secured or evidenced any indebtedness for money borrowed by the Company or any of its Subsidiaries (or the payment of which is guaranteed by the Company or any of its Subsidiaries), whether such indebtedness or guarantee now exists or shall be created after the date hereof, which default (i) is caused by a failure to pay principal or interest on such indebtedness prior to the expiration of the grace period provided in such indebtedness (a "Payment Default") or (ii) results in the acceleration of such indebtedness prior to its expressed maturity and, in each case, the principal amount of such 25 indebtedness, together with the principal amount of any other such indebtedness under which there has been a Payment Default or the maturity of which has been so accelerated, aggregates $10,000,000 or more; (e) final judgments or decrees shall be entered by a court of competent jurisdiction against the Company or any Subsidiary involving liabilities of $25,000,000 or more (singly or in the aggregate) (after deducting the portion of such liabilities accepted by a reputable insurance company) and such final judgments or decrees shall not have been vacated, discharged, satisfied or stayed pending appeal within 60 days from the entry thereof; (f) the Company shall commence a voluntary case or other proceeding seeking liquidation, reorganization or other relief with respect to itself or its debts under any bankruptcy, insolvency or other similar law now or hereafter in effect, or seeking the appointment of a trustee, receiver, liquidator, custodian or other similar official of it or any substantial part of its property, or shall consent to any such relief or to the appointment of or taking possession by any such official in an involuntary case or other proceeding commenced against it or shall make a general assignment for the benefit of creditors or shall fail generally to pay its debts as they become due; or (g) an involuntary case or other proceeding shall be commenced against the Company seeking liquidation, reorganization or other relief with respect to it or its debts under any bankruptcy, insolvency or other similar law now or hereafter in effect or seeking the appointment of a trustee, receiver, liquidator, custodian or other similar official of it or any substantial part of its property, and such involuntary case or other proceeding shall remain undismissed and unstayed for a period of 60 consecutive days; then, and in each and every such case (other than an Event of Default specified in Section 6.1(f) or (g)), unless the principal of all of the Notes shall have already become due and payable, either the Trustee or the holders of not less than 25% in aggregate principal amount of the Notes then outstanding hereunder determined in accordance with Section 8.4, by notice in writing to the Company (and to the Trustee if given by Noteholders), may declare the principal of, premium, if any, on the Notes and the interest accrued thereon to be due and payable immediately, and upon any such declaration the same shall become and shall be immediately due and payable, anything in this Indenture or in the Notes contained to the contrary notwithstanding. If an Event of Default specified in Section 6.1(f) or (g) occurs and is continuing, the principal of all the Notes and the interest accrued thereon shall be immediately due and payable. The foregoing provision is subject to the conditions that if, at any time after the principal of the Notes shall have been so declared due and payable, and before any judgment or decree for the payment of the monies due shall have been obtained or entered as hereinafter provided, the Company shall pay or shall deposit with the Trustee a sum sufficient to pay all matured installments of interest upon all Notes and the principal of and premium, if any, on any and all Notes that shall have become due otherwise than by acceleration (with interest on overdue installments of interest (to the extent that payment of such interest is enforceable under applicable law) and on such principal and premium, if any, at the rate borne by the Notes, to the date of such payment or deposit) and amounts due to the Trustee pursuant to Section 7.7, and if any and all defaults under this Indenture, other than the nonpayment of principal of, premium, if any, and accrued interest on Notes that shall have become due by acceleration, shall have been cured or waived pursuant to 26 Section 6.7, then and in every such case the holders of a majority in aggregate principal amount of the Notes then outstanding, by written notice to the Company and to the Trustee, may waive all defaults or Events of Default and rescind and annul such declaration and its consequences; but no such waiver or rescission and annulment shall extend to or shall affect any subsequent default or Event of Default, or shall impair any right consequent thereto. The Company shall notify a Responsible Officer of the Trustee, promptly upon becoming aware thereof, of any Event of Default. In case the Trustee shall have proceeded to enforce any right under this Indenture and such proceedings shall have been discontinued or abandoned because of such waiver or rescission and annulment or for any other reason or shall have been determined adversely to the Trustee, then and in every such case the Company, the holders of Notes and the Trustee shall be restored respectively to their several positions and rights hereunder, and all rights, remedies and powers of the Company, the holders of Notes and the Trustee shall continue as though no such proceeding had been taken. Section 6.2 PAYMENTS OF NOTES ON DEFAULT; SUIT THEREFOR. The Company covenants that (a) in case a default shall be made in the payment of any installment of interest upon any of the Notes as and when the same shall become due and payable, and such default shall have continued for a period of 30 days, or (b) in case default shall be made in the payment of the principal of or premium, if any, on any of the Notes as and when the same shall have become due and payable, whether at maturity of the Notes or in connection with any redemption or repurchase, by declaration or otherwise, then, upon demand of the Trustee, the Company shall pay to the Trustee, for the benefit of the holders of the Notes, the whole amount that then shall have become due and payable on all such Notes for principal of, premium, if any, or interest, or both, as the case may be, with interest upon the overdue principal, premium, if any, and (to the extent that payment of such interest is enforceable under applicable law) upon the overdue installments of interest at the rate borne by the Notes; and, in addition thereto, such further amount as shall be sufficient to cover the costs and expenses of collection, including reasonable compensation to the Trustee, its agents, attorneys and counsel, and any expenses or liabilities incurred by the Trustee hereunder other than through its negligence or bad faith. Until such demand by the Trustee, the Company may pay the principal of and premium, if any, and interest on the Notes to the registered holders, whether or not the Notes are overdue. In case the Company shall fail forthwith to pay such amounts upon such demand, the Trustee, in its own name and as trustee of an express trust, shall be entitled and empowered to institute any actions or proceedings at law or in equity for the collection of the sums so due and unpaid and may prosecute any such action or proceeding to judgment or final decree, and may enforce any such judgment or final decree against the Company or any other obligor on the Notes and collect in the manner provided by law out of the property of the Company or any other obligor on the Notes wherever situated the monies adjudged or decreed to be payable. In case there shall be pending proceedings for the bankruptcy or for the reorganization of the Company or any other obligor on the Notes under Title 11 of the United States Code or any other applicable law, or in case a receiver, assignee or trustee in bankruptcy or reorganization, liquidator, sequestrator or similar official shall have been appointed for or taken possession of the Company or such other obligor, the property of the Company or such 27 other obligor, or in the case of any other judicial proceedings relative to the Company or such other obligor upon the Notes, or to the creditors or property of the Company or such other obligor, the Trustee, irrespective of whether the principal of the Notes shall then be due and payable as therein expressed or by declaration or otherwise and irrespective of whether the Trustee shall have made any demand pursuant to the provisions of this Section 6.2, shall be entitled and empowered, by intervention in such proceedings or otherwise, to file and prove a claim or claims for the whole amount of principal, premium, if any, and interest owing and unpaid in respect of the Notes and, in case of any judicial proceedings, to file such proofs of claim and other papers or documents as may be necessary or advisable in order to have the claims of the Trustee and of the Noteholders allowed in such judicial proceedings relative to the Company or any other obligor on the Notes, its or their creditors, or its or their property and to collect and receive any monies or other property payable or deliverable on any such claims and to distribute the same after the deduction of any amounts due the Trustee under Section 7.7; and any receiver, assignee or trustee in bankruptcy or reorganization, liquidator, custodian or similar official is hereby authorized by each of the Noteholders to make such payments to the Trustee and, in the event that the Trustee shall consent to the making of such payments directly to the Noteholders, to pay to the Trustee any amount due it for reasonable compensation, expenses, advances and disbursements, including counsel fees incurred by it up to the date of such distribution. To the extent that such payment of reasonable compensation, expenses, advances and disbursements out of the estate in any such proceedings shall be denied for any reason, payment of the same shall be secured by a lien on, and shall be paid out of, any and all distributions, dividends, monies, securities and other property that the holders of the Notes may be entitled to receive in such proceedings, whether in liquidation or under any plan of reorganization or arrangement or otherwise. Nothing herein contained shall be deemed to authorize the Trustee to authorize or consent to or adopt on behalf of any Noteholder any plan of reorganization or arrangement affecting the Notes or the rights of any Noteholder, or to authorize the Trustee to vote in respect of the claim of any Noteholder in any such proceeding. All rights of action and of asserting claims under this Indenture, or under any of the Notes, may be enforced by the Trustee without the possession of any of the Notes or the production thereof on any trial or other proceeding relative thereto, and any such suit or proceeding instituted by the Trustee shall be brought in its own name as trustee of an express trust, and any recovery of judgment shall, after provision for the payment of the reasonable compensation, expenses, disbursements and advances of the Trustee, its agents and counsel, be for the ratable benefit of the holders of the Notes. In any proceedings brought by the Trustee pursuant to this Indenture or any supplement hereto (and in any proceedings involving the interpretation of any provision of this Indenture to which the Trustee shall be a party), the Trustee shall be held to represent all the holders of the Notes, and it shall not be necessary to make any holders of the Notes parties to any such proceedings. Section 6.3 APPLICATION OF MONIES COLLECTED BY TRUSTEE. Any monies collected by the Trustee pursuant to this Article VI shall be applied in the order following, at the date or dates fixed by the Trustee for the distribution of such monies, upon 28 presentation of the several Notes and stamping thereon the payment, if only partially paid, and upon surrender thereof, if fully paid: First: To the payment of all amounts due the Trustee under Section 7.7; Second: Subject to the provisions of Article XV, in case the principal of the outstanding Notes shall not have become due and be unpaid, to the payment of interest on the Notes in default in the order of the maturity of the installments of such interest, with interest (to the extent that such interest has been collected by the Trustee) upon the overdue installments of interest at the rate borne by the Notes, such payments to be made ratably to the persons entitled thereto; and Third: Subject to the provisions of Article XV, in case the principal of the outstanding Notes shall have become due, by declaration or otherwise, and be unpaid, to the payment of the whole amount then holding and unpaid upon the Notes for principal, premium, if any, and interest, with interest on the overdue principal and premium, if any, and (to the extent that such interest has been collected by the Trustee) upon overdue installments of interest at the rate borne by the Notes; and in case such monies shall be insufficient to pay in full the whole amounts so due and unpaid upon the Notes, then to the payment of such principal, premium, if any, and interest without preference or priority of principal and premium, if any, over interest, or of interest over principal and premium, if any, or of any installment of interest over any other installment of interest, or of any Note over any other Note, ratably to the aggregate of such principal and premium, if any, and accrued and unpaid interest. Section 6.4 PROCEEDINGS BY NOTEHOLDER. No holder of any Note shall have any right by virtue of or by availing of any provision of this Indenture to institute any suit, action or proceeding in equity or at law upon or under or with respect to this Indenture, or for the appointment of a receiver, trustee, liquidator, custodian or other similar official, or for any other remedy hereunder, unless such holder previously shall have given to the Trustee written notice of an Event of Default and of the continuance thereof, as hereinbefore provided, and unless also the holders of not less than 25% in aggregate principal amount of the Notes then outstanding shall have made written request upon the Trustee to institute such action, suit or proceeding in its own name as Trustee hereunder and shall have offered to the Trustee such reasonable indemnity as it may require against the costs, expenses and liabilities to be incurred therein or thereby, and the Trustee for 60 days after its receipt of such notice, request and offer of indemnity, shall have neglected or refused to institute any such action, suit or proceeding, and no direction inconsistent with such written request shall have been given to the Trustee pursuant to Section 6.7; it being understood and intended, and being expressly covenanted by the taker and holder of every Note with every other taker and holder and the Trustee, that no one or more holders of Notes shall have any right in any manner whatever by virtue of or by availing of any provision of this Indenture to affect, disturb or prejudice the rights of any other holder of Notes, to obtain or seek to obtain priority over or preference to any other such holder or to enforce any right under this Indenture, except in the manner herein provided and for the equal, ratable and common benefit of all holders of Notes (except as otherwise provided herein). For the protection and enforcement of this Section 6.4, each and every Noteholder and the Trustee shall be entitled to such relief as can be given either at law or in equity. 29 Notwithstanding any other provision of this Indenture and any provision of any Note, the right of any holder of any Note to receive payment of the principal of, premium, if any, and interest on such Note, on or after the respective due dates expressed in such Note, or to institute suit for the enforcement of any such payment on or after such respective dates against the Company shall not be impaired or affected without the consent of such holder except as otherwise set forth herein. Anything in this Indenture or the Notes to the contrary notwithstanding, the holder of any Note, without the consent of either the Trustee or the holder of any other Note, in his own behalf and for his own benefit, may enforce, and may institute and maintain any proceeding suitable to enforce, his rights of conversion as provided herein. Section 6.5 PROCEEDINGS BY TRUSTEE. In case of an Event of Default and subject to the provisions of Section 7.7 hereof, the Trustee may in its discretion proceed to protect and enforce the rights vested in it by this Indenture by such appropriate judicial proceedings as the Trustee shall deem most effectual to protect and enforce any of such rights, either by suit in equity or by action at law or by proceeding in bankruptcy or otherwise, whether for the specific enforcement of any covenant or agreement contained in this Indenture or in aid of the exercise of any power granted in this Indenture or to enforce any other legal or equitable right vested in the Trustee by this Indenture or by law. Section 6.6 REMEDIES CUMULATIVE AND CONTINUING. Except as provided in Section 2.7, all powers and remedies given by this Article VI to the Trustee or to the Noteholders shall, to the extent permitted by law, be deemed cumulative and not exclusive of such powers and remedies or of any other powers and remedies available to the Trustee or the holders of the Notes, by judicial proceedings or otherwise, to enforce the performance or observance of the covenants and agreements contained in this Indenture, and no delay or omission of the Trustee or of any holder of any of the Notes to exercise any right or power accruing upon any default or Event of Default occurring and continuing as aforesaid shall impair any such right or power or shall be construed to be a waiver of any such default or any acquiescence therein; and, subject to the provisions of Section 6.4, every power and remedy given by this Article VI or by law to the Trustee or to the Noteholders may be exercised from time to time, and as often as shall be deemed expedient, by the Trustee or by the Noteholders. Section 6.7 DIRECTION OF PROCEEDINGS AND WAIVER OF DEFAULTS BY MAJORITY OF NOTEHOLDERS. The holders of a majority in aggregate principal amount of the Notes at the time outstanding (determined in accordance with Section 8.4) shall have the right to direct the time, method and place of conducting any proceeding for any remedy available to the Trustee or exercising any trust or power conferred on the Trustee; provided that (a) such direction shall not be in conflict with any rule of law or with this Indenture and (b) the Trustee may take any other action deemed proper by the Trustee that is not inconsistent with such direction. The holders of a majority in aggregate principal amount of the Notes at the time outstanding (determined in accordance with Section 8.4) may on behalf of the holders of all of the Notes waive any past default or Event of Default hereunder and its consequences except (i) a default in the payment of interest or premium, if any, on, or the principal of, the Notes, (ii) a failure by the Company to convert any Notes into Common Stock or cash, as the case may be, or (iii) a default in respect of a covenant or provisions hereof that 30 under Article X cannot be modified or amended without the consent of the holders of all Notes then outstanding. Whenever any default or Event of Default hereunder shall have been waived as permitted by this Section 6.7, said default or Event of Default shall for all purposes of the Notes and this Indenture be deemed to have been cured and to be not continuing and the Company, the Trustee and the holders of the Notes shall as reasonably possible be restored to their former positions and rights hereunder; but no such waiver shall extend to any subsequent or other default or Event of Default or impair any right consequent thereon. Section 6.8 NOTICE OF DEFAULTS. The Trustee shall, within 90 days after the occurrence of a default, mail to all Noteholders, as the names and addresses of such holders appear upon the Note register, notice of all defaults of which a Responsible Officer has actual knowledge, unless such defaults shall have been cured or waived before the giving of such notice; provided that, except in the case of default in the payment of the principal of, premium, if any, or interest on any of the Notes, the Trustee shall be protected in withholding such notice if and so long as a Responsible Officer of the Trustee in good faith determine that the withholding of such notice is in the interests of the Noteholders. Section 6.9 UNDERTAKING TO PAY COSTS. All parties to this Indenture agree, and each holder of any Note by his acceptance thereof shall be deemed to have agreed, that any court may, in its discretion, require, in any suit for the enforcement of any right or remedy under this Indenture, or in any suit against the Trustee for any action taken or omitted by it as Trustee, the filing by any party litigant in such suit of an undertaking to pay the costs of such suit and that such court may in its discretion assess reasonable costs, including reasonable attorneys' fees and expenses, against any party litigant in such suit, having due regard to the merits and good faith of the claims or defenses made by such party litigant; provided that the provisions of this Section 6.9 shall not apply to any suit instituted by the Trustee, to any suit instituted by any Noteholder or group of Noteholders holding in the aggregate more than 10% in principal amount of the Notes at the time outstanding determined in accordance with Section 8.4 or to any suit instituted by any Noteholder for the enforcement of the payment of the principal of, premium, if any, or interest on any Note on or after the due date expressed in such Note or to any suit for the enforcement of the right to convert any Note in accordance with the provisions of Article XIV. ARTICLE VII CONCERNING THE TRUSTEE Section 7.1 DUTIES AND RESPONSIBILITIES OF TRUSTEE. (a) If an Event of Default has occurred and is continuing, the Trustee shall exercise the rights and powers vested in it by this Indenture and use the same degree of care and skill in its exercise as a prudent person would exercise or use under the circumstances in the conduct of such person's own affairs. 31 (b) Except during the continuance of an Event of Default: (i) the Trustee need perform only those duties that are specifically set forth in this Indenture and no others; and (ii) in the absence of bad faith on its part, the Trustee may conclusively rely, as to the truth of the statements and the correctness of the opinions expressed therein, upon certificates or opinions furnished to the Trustee and conforming to the requirements of this Indenture; provided that in the case of any such certificates or opinions that by any provision hereof are specifically required to be furnished to the Trustee, the Trustee shall be under a duty to examine the same to determine whether or not they conform to the requirements of this Indenture (but need not confirm or investigate the accuracy of mathematical calculations or other facts stated therein). (c) The Trustee may not be relieved from liability for its own negligent action, its own negligent failure to act or its own willful misconduct, except that: (i)this paragraph (c) does not limit the effect of paragraph (b) of this Section 7.1; (ii) the Trustee shall not be liable for any error of judgment made in good faith by a Responsible Officer of the Trustee unless it is proved that the Trustee was negligent in ascertaining the pertinent facts reasonably available to the Trustee; and (iii) the Trustee shall not be liable with respect to any action it takes or omits to take in good faith in accordance with a direction received by it pursuant to Section 6.7. (d) Every provision of this Indenture that in any way relates to the Trustee is subject to paragraphs (a), (b), (c) and (e) of this Section 7.1. (e) The Trustee may refuse to perform any duty or exercise any right or power or extend or risk its own funds or otherwise incur any financial liability unless it receives indemnity satisfactory to it against any loss, liability or expense. Section 7.2 REPORTS BY TRUSTEE TO HOLDERS. Within 60 days after each April 1 commencing with the April 1 following the date of this Indenture, the Trustee shall, if required by the Trust Indenture Act, mail to each Noteholder a brief report dated as of such April 1 that complies with Trust Indenture Act Section 313(a). The Trustee also shall comply with Trust Indenture Act Sections 313(b) and 313(c). The Company shall promptly notify the Trustee in writing if the Notes become listed or delisted on any stock exchange or automatic quotation system. A copy of each report at the time of its mailing to Noteholders shall be mailed to the Company and, to the extent required by Section 5.2 hereof and of the Trust Indenture Act 32 Section 313(d), filed with the Commission and each stock exchange, if any, on which the Notes are listed. Section 7.3 RELIANCE ON DOCUMENTS, OPINIONS, ETC. Except as otherwise provided in Section 7.1: (a) The Trustee may rely and shall be protected in acting upon any resolution, certificate, statement, instrument, opinion, report, notice, request, consent, order, bond, debenture, coupon or other paper or document believed by it in good faith to be genuine and to have been signed or presented by the proper party or parties; (b) Any request, direction, order or demand of the Company mentioned herein shall be sufficiently evidenced by an Officers' Certificate (unless other evidence in respect thereof be herein specifically prescribed or required by the Trust Indenture Act); and any resolution of the Board of Directors may be evidenced to the Trustee by a copy thereof certified by the Secretary or an Assistant Secretary of the Company; (c) The Trustee may consult with counsel of its selection and any advice or opinion of counsel shall be full and complete authorization and protection in respect of any action taken or omitted by it hereunder in good faith and in accordance with such advice or opinion of counsel; (d) The Trustee may execute any of the trusts or powers hereunder or perform any duties hereunder either directly or by or through agents or attorneys, and the Trustee shall not be responsible for any misconduct or negligence on the part of any agent or attorney appointed by it with due care hereunder; no Depository, Custodian or paying agent who is not the Trustee shall be deemed an agent of the Trustee, and the Trustee (in its capacity as Trustee) shall not be responsible for any act or omission by any such Depository, Custodian or paying agent; (e) The Trustee shall be under no obligation to exercise any of the rights or powers vested in it by the Indenture at the request or direction of any of the holders pursuant to this Indenture unless such holders have offered the Trustee reasonable security or indemnity against the costs, expenses and liabilities that would be incurred by it in compliance with such request or direction. (f) Subject to the provisions of Section 7.1(c), the Trustee shall not be liable for any action it takes or omits to take in good faith that it believes to be authorized or within its rights or powers; (g) In connection with any request to transfer or exchange any Note, the Trustee may request a direction (in the form of an Officers' Certificate) from the Company and an Opinion of Counsel with respect to compliance with any restrictions on transfer or exchange imposed by this Indenture, the Securities Act, other applicable law or the rules and regulations of any exchange on which the Notes or the Common Stock may be traded, and the Trustee may rely and shall be protected in acting upon such direction and in accordance with such Officers' Certificate and Opinion of Counsel; 33 (h) The Trustee may rely and shall be fully protected in acting upon the determination and notice by the Company of the Conversion Price; and (i) The Trustee shall not be deemed to have knowledge of any Event of Default or other fact or event upon the occurrence of which it may be required to take action hereunder unless one of its Responsible Officers has actual knowledge thereof obtained by a written statement. Section 7.4 NO RESPONSIBILITY FOR RECITALS, ETC. The recitals contained herein and in the Notes (except in the Trustee's certificate of authentication) shall be taken as the statements of the Company, and the Trustee assumes no responsibility for the correctness of the same. The Trustee makes no representations as to the validity or sufficiency of this Indenture or of the Notes. The Trustee shall not be accountable for the use or application by the Company of any Notes or the proceeds of any Notes authenticated and delivered by the Trustee in conformity with the provisions of this Indenture. Section 7.5 TRUSTEE, PAYING AGENTS, CONVERSION AGENTS OR REGISTRAR MAY OWN NOTES. The Trustee, any paying agent, any conversion agent or any Note registrar, in its individual or any other capacity, may become the owner or pledgee of Notes with the same rights it would have if it were not Trustee, paying agent, conversion agent or Note registrar. Section 7.6 MONIES TO BE HELD IN TRUST. Subject to the provisions of Section 12.4, all monies received by the Trustee shall, until used or applied as herein provided, be held in trust for the purposes for which they were received. Money held by the Trustee in trust hereunder need not be segregated from other funds except to the extent required by law. The Trustee shall be under no liability for interest on any money received by it hereunder except as may be agreed to in writing from time to time by the Company and the Trustee. Section 7.7 COMPENSATION AND EXPENSES OF TRUSTEE. The Company covenants and agrees to pay to the Trustee from time to time, and the Trustee shall be entitled to, such compensation as the Company and the Trustee shall from time to time agree in writing, for all services rendered by it hereunder in any capacity (which shall not be limited by any provision of law in regard to the compensation of a trustee of an express trust), and the Company shall pay or reimburse the Trustee upon its request for all reasonable expenses, disbursements and advances incurred or made by the Trustee in accordance with any of the provisions of this Indenture (including the reasonable compensation and the expenses and disbursements of its counsel and of all persons not regularly in its employ) except any such expense, disbursement or advance as may arise from its negligence or bad faith. The Company also covenants to indemnify each of the Trustee or any predecessor Trustee in any capacity under this Indenture and its agents and any authenticating agent for, and to hold them harmless against, any and all loss, liability, damage, claim or expense, including taxes (other than taxes based on the income of the Trustee) incurred without negligence or bad faith on the part of the Trustee or such agent or authenticating agent, as the case may be, and arising out of or in connection with the acceptance or administration of this trust or in any other capacity hereunder, including the costs and expenses of defending themselves against any claim of liability in the premises. The obligations of the Company under this Section 7.7 to compensate or indemnify the Trustee and to 34 pay or reimburse the Trustee for expenses, disbursements and advances shall be secured by a lien prior to that of the Notes upon all property and funds held or collected by the Trustee as such, except funds held in trust for the benefit of the holders of particular Notes. The obligation of the Company under this Section shall survive the satisfaction and discharge of this Indenture. Section 7.8 OFFICERS' CERTIFICATE AS EVIDENCE. Except as otherwise provided in Section 7.1, whenever in the administration of the provisions of this Indenture the Trustee shall deem it necessary or desirable that a matter be proved or established prior to taking or omitting any action hereunder, such matter (unless other evidence in respect thereof be herein specifically prescribed) may, in the absence of negligence or bad faith on the part of the Trustee, be deemed to be conclusively proved and established by an Officers' Certificate delivered to the Trustee, and such Officers' Certificate, in the absence of negligence or bad faith on the part of the Trustee, shall be full warrant to the Trustee for any action taken or omitted by it under the provisions of this Indenture upon the faith thereof. Section 7.9 CONFLICTING INTERESTS OF TRUSTEE. In the event that the Trust Indenture Act is applicable hereto, and if the Trustee has or shall acquire a conflicting interest within the meaning of Trust Indenture Act Section 310(b) and there exists an Event of Default hereunder (exclusive of any period of grace or requirement of notice), the Trustee shall either eliminate such interest or resign, to the extent and in the manner provided by, and subject to the provisions of, the Trust Indenture Act and this Indenture. Section 7.10 ELIGIBILITY OF TRUSTEE. There shall at all times be a Trustee hereunder that shall be a person that satisfies the requirements of Trust Indenture Act Section 310(a)(1) and Section 310(a)(5) and that has a combined capital and surplus of at least $50,000,000. If such person publishes reports of condition at least annually, pursuant to law or to the requirements of any supervising or examining authority, then for the purposes of this Section, the combined capital and surplus of such person shall be deemed to be its combined capital and surplus as set forth in its most recent report of condition so published. If at any time the Trustee shall cease to be eligible in accordance with the provisions of this Section, it shall resign immediately in the manner and with the effect hereinafter specified in this Article VII. Section 7.11 RESIGNATION OR REMOVAL OF TRUSTEE. (a) The Trustee may at any time resign by giving written notice of such resignation to the Company; and the Company shall mail, or cause to be mailed, notice thereof to the holders of Notes at their addresses as they shall appear on the Note register. Upon receiving such notice of resignation, the Company shall promptly appoint a successor trustee by written instrument, in duplicate, executed by order of the Board of Directors, one copy of which instrument shall be delivered to the resigning Trustee and one copy to the successor trustee. (b) In case at any time any of the following shall occur: (i) the Trustee shall fail to comply with Section 7.9 after written request therefor by the Company or by any Noteholder who has been a BONA FIDE holder of a Note or Notes for at least six months; or 35 (ii) the Trustee shall cease to be eligible in accordance with the provisions of Section 7.10 and shall fail to resign after written request therefor by the Company or by any such Noteholder; or (iii) the Trustee shall become incapable of acting, or shall be adjudged a bankrupt or insolvent, or a receiver of the Trustee or of its property shall be appointed, or any public officer shall take charge or control of the Trustee or of its property or affairs for the purpose of rehabilitation, conservation or liquidation, then, in any such case, the Company may remove the Trustee and appoint a successor trustee by written instrument, in duplicate, executed by order of the Board of Directors, one copy of which instrument shall be delivered to the Trustee so removed and one copy to the successor trustee, or any Noteholder who has been a BONA FIDE holder of a Note or Notes for at least six months may, on behalf of himself and all others similarly situated, petition any court of competent jurisdiction for the removal of the Trustee and the appointment of a successor trustee. Such court may thereupon, after such notice, if any, as it may deem proper and prescribe, remove the Trustee and appoint a successor trustee. (c) The holders of a majority in aggregate principal amount of the Notes at the time outstanding may at any time remove the Trustee and nominate a successor trustee, which shall be deemed appointed as successor trustee unless within ten days after notice to the Company of such nomination the Company objects thereto, in which case the Trustee so removed or any Noteholder, upon the terms and conditions and otherwise as provided in the next paragraph, may petition any court of competent jurisdiction for an appointment of a successor trustee. If no successor trustee shall have been so appointed and have accepted appointment within 60 days after removal or the mailing of such notice of resignation to the Noteholders, the Trustee resigning or being removed may petition any court of competent jurisdiction for the appointment of a successor trustee, or, in the case of either resignation or removal, any Noteholder who has been a BONA FIDE holder of a Note or Notes for at least six months may, on behalf of himself and all others similarly situated, petition any such court for the appointment of a successor trustee. Such court may thereupon, after such notice, if any, as it may deem proper and prescribe, appoint a successor trustee. (d) Any resignation or removal of the Trustee and appointment of a successor trustee pursuant to any of the provisions of this Section 7.11 shall become effective upon acceptance of appointment by the successor trustee as provided in Section 7.12. Section 7.12 ACCEPTANCE BY SUCCESSOR TRUSTEE. Any successor trustee appointed as provided in Section 7.11 shall execute, acknowledge and deliver to the Company and to its predecessor trustee an instrument accepting such appointment hereunder, and thereupon, the resignation or removal of the predecessor trustee shall become effective and such successor trustee, without any further act, deed or conveyance, shall become vested with all the rights, powers, duties and obligations of its predecessor hereunder, with like effect as if originally named as trustee herein; but on the written request of the Company or of the successor trustee, the Trustee ceasing to act shall, upon payment of any amounts then due it pursuant to the 36 provisions of Section 7.7, execute and deliver an instrument transferring to such successor trustee all the rights and powers of the Trustee so ceasing to act. Upon request of any such successor trustee, the Company shall execute any and all instruments in writing for more fully and certainly vesting in and confirming to such successor trustee all such rights and powers. Any Trustee ceasing to act shall, nevertheless, retain a lien upon all property and funds held or collected by such trustee as such, except for funds held in trust for the benefit of holders of particular Notes, to secure any amounts then due it pursuant to the provisions of Section 7.7. No successor trustee shall accept appointment as provided in this Section 7.12 unless at the time of such acceptance such successor trustee shall be qualified under the provisions of Section 7.9 and eligible under the provisions of Section 7.10. Upon acceptance of appointment by a successor trustee as provided in this Section 7.12, the Company shall mail or cause to be mailed notice of the succession of such Trustee hereunder to the holders of Notes at their addresses as they shall appear on the Note register. If the Company fails to mail such notice within ten days after acceptance of appointment by the successor trustee, the successor trustee shall cause such notice to be mailed at the expense of the Company. Section 7.13 SUCCESSOR, BY MERGER, ETC. Any corporation into which the Trustee may be merged or converted or with which it may be consolidated, or any corporation resulting from any merger, conversion or consolidation to which the Trustee shall be a party, or any corporation succeeding to all or substantially all of the corporate trust business of the Trustee, shall be the successor to the Trustee hereunder, provided such corporation shall be qualified under the provisions of Section 7.9 and eligible under the provisions of Section 7.10 without the execution or filing of any paper or any further act on the part of any of the parties hereto. Section 7.14 LIMITATION ON RIGHTS OF TRUSTEE AS CREDITOR. If and when the Trustee shall be or become a creditor of the Company (or any other obligor upon the Notes) and the Trust Indenture Act is applicable hereto, the Trustee shall be subject to the provisions of Trust Indenture Act Section 311(a) or, if applicable, Trust Indenture Act Section 311(b) regarding the collection of the claims against the Company (or any such other obligor). ARTICLE VIII CONCERNING THE NOTEHOLDERS Section 8.1 ACTION BY NOTEHOLDERS. Whenever in this Indenture it is provided that the holders of a specified percentage in aggregate principal amount of the Notes may take any action (including the making of any demand or request, the giving of any notice, consent or waiver or the taking of any other action), the fact that at the time of taking any such action, the holders of such specified percentage have joined therein may be evidenced (a) by any instrument or any number of instruments of similar tenor executed by Noteholders in person or by agent or proxy appointed in writing, (b) by the record of the holders of Notes voting in favor thereof at any meeting of Noteholders duly called and held in accordance with the provisions of 37 Article IX or (c) by a combination of such instrument or instruments and any such record of such a meeting of Noteholders. Whenever the Company or the Trustee solicits the taking of any action by the holders of the Notes, the Company or the Trustee may fix in advance of such solicitation, a date as the record date for determining holders entitled to take such action. The record date shall be not more than 15 days prior to the date of commencement of solicitation of such action. Section 8.2 PROOF OF EXECUTION BY NOTEHOLDERS. Subject to the provisions of Sections 7.1, 7.2 and 9.5, proof of the execution of any instrument by a Noteholder or by agent or proxy shall be sufficient if made in accordance with Section 7.3 hereof. The holding of Notes shall be proved by the Note register or by a certificate of the Note registrar. The record of any Noteholders' meeting shall be proved in the manner provided in Section 9.5. Section 8.3 WHO ARE DEEMED ABSOLUTE OWNERS. The Company, the Trustee, any paying agent, any conversion agent and any Note registrar may deem the person in whose name such Note shall be registered upon the books of the Company to be, and may treat such person as, the absolute owner of such Note (whether or not such Note shall be overdue and notwithstanding any notation of ownership or other writing thereon) for the purpose of receiving payment of or on account of the principal of, premium, if any, and interest on such Note, for conversion of such Note and for all other purposes; and neither the Company nor the Trustee nor any paying agent nor any conversion agent nor any Note registrar shall be affected by any notice to the contrary. All such payments so made to any holder for the time being, or upon order of such holder, shall be valid and, to the extent of the sum or sums so paid, effectual to satisfy and discharge the liability for monies payable upon any such Note. The Depository shall be deemed to be the owner of the Global Note for all purposes, including receipt of notices to Noteholders and payment of principal of, premium, if any, and interest on the Notes. None of the Company, the Trustee (in its capacity as Trustee), any paying agent or the Note registrar (or co-registrar) shall have any responsibility for any aspect of the records relating to or payments made on account of beneficial interests of the Global Note or for maintaining, supervising or reviewing any records relating to such beneficial ownership interests. Section 8.4 COMPANY-OWNED NOTES DISREGARDED. In determining whether the holders of the requisite aggregate principal amount of Notes have concurred in any direction, consent, waiver or other action under this Indenture, Notes that are owned by the Company or any other obligor on the Notes or by any person directly or indirectly controlling or controlled by or under direct or indirect common control with the Company or any other obligor on the Notes shall be disregarded and deemed not to be outstanding for the purpose of any such determination; provided that for the purposes of determining whether the Trustee shall be protected in relying on any such direction, consent, waiver or other action, only Notes that a Responsible Officer of the Trustee actually knows are so owned shall be so disregarded. Notes so owned that have been pledged in good faith may be regarded as outstanding for the purposes of this Section 8.4 if the pledgee shall establish to the satisfaction of the Trustee the pledger's right to vote such Notes and that the pledgee is not the Company, any other obligor on 38 the Notes or a person directly or indirectly controlling or controlled by or under direct or indirect common control with the Company or any such other obligor. In the case of a dispute as to such right, any decision by the Trustee taken upon the advice of counsel shall be full protection to the Trustee. Upon request of the Trustee, the Company shall furnish to the Trustee promptly an Officers' Certificate listing and identifying all Notes, if any, known by the Company to be owned or held by or for the account of any of the above described persons; and subject to Section 7.1, the Trustee shall be entitled to accept such Officers' Certificate as conclusive evidence of the facts therein set forth and of the fact that all Notes not listed therein are outstanding for the purpose of any such determination. Section 8.5 REVOCATION OF CONSENTS, FUTURE HOLDERS BOUND. At any time prior to (but not after) the evidencing to the Trustee, as provided in Section 8.1, of the taking of any action by the holders of the percentage in aggregate principal amount of the Notes specified in this Indenture in connection with such action, any holder of a Note that is shown by the evidence to be included in the Notes the holders of which have consented to such action may, by filing written notice with the Trustee at its Corporate Trust Office and upon proof of holding as provided in Section 8.2, revoke such action so far as concerns such Note. Except as aforesaid, any such action taken by the holder of any Note shall be conclusive and binding upon such holder and upon all future holders and owners of such Note and of any Notes issued in exchange or substitution therefor, irrespective of whether any notation in regard thereto is made upon such Note or any Note issued in exchange or substitution therefor. ARTICLE IX NOTEHOLDERS' MEETINGS Section 9.1 PURPOSES FOR WHICH MEETINGS MAY BE CALLED. A meeting of Noteholders may be called at any time and from time to time pursuant to the provisions of this Article IX for any of the following purposes: (i) to give any notice to the Company or to the Trustee, or to give any directions to the Trustee, or to consent to the waiving of any default hereunder and its consequences, or to take any other action authorized to be taken by Noteholders pursuant to any of the provisions of Article VI; (ii) to remove the Trustee and appoint a successor trustee pursuant to the provisions of Article VII; (iii) to consent to the execution of an indenture or indentures supplemental hereto pursuant to the provisions of Section 10.2; or (iv) to take any other action authorized to be taken by or on behalf of the holders of any specified aggregate principal amount of the Notes under any other provisions of this Indenture or under applicable law. 39 Section 9.2 MANNER OF CALLING MEETINGS; RECORD DATE. The Trustee may at any time call a meeting of Noteholders to take any action specified in Section 9.1, to be held at such time and at such place in Minneapolis, Minnesota, as the Trustee shall determine. Notice of every meeting of the Noteholders, setting forth the time and the place of such meeting and in general terms the action proposed to be taken at such meeting, shall be mailed not less than 30 nor more than 60 days prior to the date fixed for the meeting to such Noteholders at their addresses as such addresses appear in the Note register. For the purpose of determining Noteholders entitled to notice of any meeting of Noteholders, the Company, upon written notice to the Trustee, shall fix in advance a date as the record date for such determination, such date to be a business day not more than ten days prior to the date of the mailing of such notice as hereinabove provided. Only persons in whose name any Note shall be registered in the Note register at the close of business on a record date fixed by the Trustee as aforesaid, or by the Company or the Noteholders as provided in Section 9.3, shall be entitled to notice of the meeting of Noteholders with respect to which such record date was so fixed. Section 9.3 CALL OF MEETING BY COMPANY OR NOTEHOLDERS. In case at any time the Company, pursuant to a resolution of its Board of Directors or the holders of at least 10% in aggregate principal amount of the Notes then outstanding shall have requested the Trustee to call a meeting of Noteholders to take any action authorized in Section 9.1 by written request setting forth in reasonable detail the action proposed to be taken at the meeting, and the Trustee shall not have mailed notice of such meeting within 20 days after receipt of such request, then the Company or the holders of Notes in the amount above specified, as the case may be, may fix the record date with respect to, and determine the time and the place for, such meeting and may call such meeting to take any action authorized in Section 9.1, by mailing notice thereof as provided in Section 9.2. The record date fixed as provided in the preceding sentence shall be set forth in a written notice to the Trustee and shall be a business day not less than 15 nor more than 20 days after the date on which the original request is sent to the Trustee. Section 9.4 WHO MAY ATTEND AND VOTE AT MEETINGS. Only persons entitled to receive notice of a meeting of Noteholders and their respective proxies duly appointed by an instrument in writing shall be entitled to vote at such meeting. The only persons who shall be entitled to be present or to speak at any meeting of Noteholders shall be the persons entitled to vote at such meeting and their counsel and any representatives of the Trustee and its counsel and any representatives of the Company and its counsel. When a determination of Noteholders entitled to vote at any meeting of Noteholders has been made as provided in this Section, such determination shall apply to any adjournments thereof. Section 9.5 MANNER OF VOTING AT MEETINGS AND RECORD TO BE KEPT. The vote upon any resolution submitted to any meeting of Noteholders shall be by written ballots on each of which shall be subscribed the signature of the Noteholder or proxy casting such ballot and the identifying number or numbers of the Notes held or represented in respect of which such ballot is cast. The chairman of the meeting shall appoint two inspectors of votes who shall count all votes cast at the meeting for or against any resolution and who shall make and file with the secretary of the meeting their verified written reports in duplicate of all votes cast at the meeting. A record in duplicate of the proceedings of each meeting of Noteholders shall be prepared by the secretary of the meeting and there shall be attached to said record the original reports of the inspectors of votes on any vote by ballot taken thereat and affidavits by one or 40 more persons having knowledge of the facts setting forth a copy of the notice of the meeting and showing that said notice was mailed as provided in Section 9.2. The record shall show the identifying numbers of the Notes voting in favor of or against any resolution. Each counterpart of such record shall be signed and verified by the affidavits of the chairman and secretary of the meeting and one of the counterparts shall be delivered to the Company and the other to the Trustee to be preserved by the Trustee. Any counterpart record so signed and verified shall be conclusive evidence of the matters therein stated and shall be the record referred to in clause (b) of Section 8.1. Section 9.6 EXERCISE OF RIGHTS OF TRUSTEE AND NOTEHOLDERS NOT TO BE HINDERED OR DELAYED. Nothing in this Article IX contained shall be deemed or construed to authorize or permit, by reason of any call of a meeting of Noteholders or any rights expressly or impliedly conferred hereunder to make such call, any hindrance or delay in the exercise of any right or rights conferred upon or reserved to the Trustee or to the Noteholders under any of the provisions of this Indenture or of the Notes. ARTICLE X SUPPLEMENTAL INDENTURES Section 10.1 SUPPLEMENTAL INDENTURES WITHOUT CONSENT OF NOTEHOLDERS. The Company, when authorized by a Board Resolution, and the Trustee may from time to time and at any time enter into an indenture or indentures supplemental hereto for one or more of the following purposes: (a) to make provision with respect to the conversion rights of the holders of Notes pursuant to the requirements of Article XIV (b) subject to Article XV, to convey, transfer, assign, mortgage or pledge to the Trustee as security for the Notes, any property or assets; (c) to evidence the succession of another person to the Company, or successive successions, and the assumption by the Successor Company of the covenants, agreements and obligations of the Company pursuant to Article XI; (d) to add to the covenants of the Company such further covenants, restrictions or conditions as the Board of Directors and the Trustee shall consider to be for the benefit of the holders of Notes and to make the occurrence, or the occurrence and continuance, of a default in any such additional covenants, restrictions or conditions a default or an Event of Default permitting the enforcement of all or any of the several remedies provided in this Indenture as herein set forth; provided that in respect of any such additional covenant, restriction or condition, such supplemental indenture may provide for a particular period of grace after default (which period may be shorter or longer than that allowed in the case of other defaults) or may provide for an immediate enforcement upon such default or may limit the remedies available to the Trustee upon such default; 41 (e) to provide for the issuance under this Indenture of Notes in coupon form (including Notes registrable as to principal only) and to provide for exchangeability of such Notes with the Notes issued hereunder in fully registered form and to make all appropriate changes for such purpose; (f) to cure any ambiguity or to correct or supplement any provision contained herein or in any supplemental indenture that may be defective or inconsistent with any other provision contained herein or in any supplemental indenture, or to make such other provisions in regard to matters or questions arising under this Indenture that shall not adversely affect the interests of the holders of the Notes; (g) to evidence and provide for the acceptance of appointment hereunder by a successor Trustee with respect to the Notes; or (h) to modify, eliminate or add to the provisions of this Indenture to such extent necessary to effect the qualification of this Indenture under the Trust Indenture Act (if applicable), or under any similar federal statute hereafter enacted (if applicable). The Trustee is hereby authorized to join with the Company in the execution of any such supplemental indenture, to make any further appropriate agreements and stipulations that may be therein contained and to accept the conveyance, transfer and assignment of any property thereunder, but the Trustee shall not be obligated to, but may in its discretion, enter into any supplemental indenture that affects the Trustee's own rights, duties or immunities under this Indenture or otherwise. Any supplemental indenture authorized by the provisions of this Section 10.1 may be executed by the Company and the Trustee without the consent of the holders of any of the Notes at the time outstanding, notwithstanding any of the provisions of Section 10.2. Section 10.2 SUPPLEMENTAL INDENTURES WITH CONSENT OF NOTEHOLDERS. With the consent (evidenced as provided in Article VIII) of the holders of not less than a majority in aggregate principal amount of the Notes at the time outstanding, the Company, when authorized by a Board Resolution and the Trustee, may from time to time and at any time enter into an indenture or indentures supplemental hereto for the purpose of adding any provisions to or changing in any manner or eliminating any of the provisions of this Indenture or any supplemental indenture or of modifying in any manner the rights of the holders of the Notes; provided that no such supplemental indenture shall (i) without the consent of the holders of each Note so affected, extend the fixed maturity of any Note, or reduce the rate or extend the time of payment of interest thereon, or reduce the principal amount thereof or premium, if any, thereon or reduce any amount payable on redemption or repurchase thereof, alter the obligation of the Company to repurchase the Notes at the option of the holder upon the occurrence of a Change of Control or impair or affect the right of any Noteholder to institute suit for the payment thereof or make the principal thereof or interest or premium, if any, thereon payable in any coin or currency other than that provided in the Notes, modify the subordination provisions in a manner adverse to the holders of the Notes, or impair the right to convert the Notes into Common Stock or cash subject to the terms set forth herein or (ii) without the consent of the holders of all the Notes then 42 outstanding, reduce the aforesaid percentage of Notes, the holders of which are required to consent to any such supplemental indenture. Upon the request of the Company, accompanied by a copy of a Board Resolution certified by its Secretary or Assistant Secretary authorizing the execution of any such supplemental indenture, and upon the filing with the Trustee of evidence of the consent of Noteholders as aforesaid, the Trustee shall join with the Company in the execution of such supplemental indenture unless such supplemental indenture affects the Trustee's own rights, duties or immunities under this Indenture or otherwise, in which case the Trustee may in its discretion, but shall not be obligated to, enter into such supplemental indenture. It shall not be necessary for the consent of the Noteholders under this Section 10.2 to approve the particular form of any proposed supplemental indenture, but it shall be sufficient if such consent shall approve the substance thereof. Section 10.3 EFFECT OF SUPPLEMENTAL INDENTURES. Any supplemental indenture executed pursuant to the provisions of this Article X shall comply with the Trust Indenture Act, as then in effect, if such supplemental indenture is then required to so comply. Upon the execution of any supplemental indenture pursuant to the provisions of this Article X, this Indenture shall be and be deemed to be modified and amended in accordance therewith and the respective rights, limitation of rights, obligations, duties and immunities under this Indenture of the Trustee, the Company and the holders of Notes shall thereafter be determined, exercised and enforced hereunder subject in all respects to such modifications and amendments and all the terms and conditions of any such supplemental indenture shall be and be deemed to be part of the terms and conditions of this Indenture for any and all purposes. Section 10.4 NOTATION ON NOTES. Notes authenticated and delivered after the execution of any supplemental indenture pursuant to the provisions of this Article X may bear a notation in form approved by the Company as to any matter provided for in such supplemental indenture, but they need not do so. After notice to the Trustee, if the Company shall determine to add such a notation, new Notes so modified as to conform, in the opinion of the Board of Directors, to any modification of this Indenture contained in any such supplemental indenture may, at the Company's expense, be prepared and executed by the Company, authenticated by the Trustee (or an authenticating agent duly appointed by the Trustee pursuant to Section 16.14) and delivered in exchange for the Notes then outstanding, upon surrender of such Notes then outstanding. Section 10.5 EVIDENCE OF COMPLIANCE OF SUPPLEMENTAL INDENTURE TO BE FURNISHED TO THE TRUSTEE. The Trustee shall be furnished with and, subject to the provisions of Sections 7.1 and 7.2, may rely conclusively upon an Officers' Certificate and an Opinion of Counsel as conclusive evidence that any supplemental indenture executed pursuant hereto complies with the requirements of this Article X. 43 ARTICLE XI CONSOLIDATION, MERGER, SALE, CONVEYANCE, TRANSFER AND LEASE Section 11.1 COMPANY MAY CONSOLIDATE, ETC. ON CERTAIN TERMS. The Company shall not consolidate with or merge with or into, or convey, transfer or lease all or substantially all of its assets (determined on a consolidated basis) to any person unless: (i) either the Company is the resulting, surviving or transferee person (the "Successor Company") or the Successor Company is a person organized and existing under the laws of the United States or any State thereof or the District of Columbia, and the Successor Company (if not the Company) expressly assumes by a supplemental indenture, executed and delivered to the Trustee, in form satisfactory to the Trustee, all the obligations of the Company under this Indenture and the Notes, including the rights pursuant to Article XIV hereof, (ii) immediately after giving effect to such transaction, no Event of Default has happened and is continuing and (iii) the Company delivers to the Trustee an Officers' Certificate and an Opinion of Counsel, each stating that such consolidation, merger or transfer and such supplemental indenture (if any) comply with this Indenture. Section 11.2 SUCCESSOR COMPANY TO BE SUBSTITUTED. In case of any such consolidation, merger, sale, conveyance, transfer or lease and upon the assumption by the Successor Company, by supplemental indenture, executed and delivered to the Trustee and satisfactory in form to the Trustee, of the due and punctual payment of the principal of, premium, if any, and interest on all of the Notes and the due and punctual performance of all of the covenants and conditions of this Indenture to be performed by the Company, such Successor Company shall succeed to and be substituted for the Company, with the same effect as if it had been named herein as the party hereto. When a Successor Company duly assumes all the obligations of the Company pursuant to this Indenture and the Notes, the predecessor shall be released from all such obligations. Section 11.3 OPINION OF COUNSEL TO BE GIVEN TO TRUSTEE. The Trustee, subject to Sections 7.1 and 7.2, shall receive an Officers' Certificate and an Opinion of Counsel as conclusive evidence that any such consolidation, merger, sale, conveyance, transfer or lease and any such assumption complies with the provisions of this Article XI. ARTICLE XII SATISFACTION AND DISCHARGE OF INDENTURE; UNCLAIMED MONEYS Section 12.1 LEGAL DEFEASANCE AND COVENANT DEFEASANCE OF THE NOTES. (a) The Company may, at its option by Board Resolution, at any time, with respect to the Notes, elect to have either paragraph (b) or paragraph (c) below be applied to the outstanding Notes upon compliance with the conditions set forth in paragraph (d). (b) Upon the Company's exercise under paragraph (a) of the option applicable to this paragraph (b), the Company shall be deemed to have been released and discharged from 44 its obligations with respect to the outstanding Notes on the date the conditions set forth in paragraph (d) below are satisfied (hereinafter, "legal defeasance"). For this purpose, such legal defeasance means that the Company shall be deemed to have paid and discharged the entire indebtedness represented by the outstanding Notes, which shall thereafter be deemed to be "outstanding" only for the purposes of the Sections of and matters under this Indenture referred to in clauses (i) and (ii) below and to have satisfied all its other obligations under such Notes and this Indenture insofar as such Notes are concerned, except for the following, which shall survive until otherwise terminated or discharged hereunder: (i) the rights of holders of outstanding Notes to receive solely from the trust fund described in paragraph (d) below and as more fully set forth in such paragraph, payments in respect of the principal of, premium, if any, and interest on such Notes when such payments are due and (ii) obligations listed in Section 12.3. (c) Upon the Company's exercise under paragraph (a) of the option applicable to this paragraph (c), the Company shall be released and discharged from its obligations under any covenant contained in Article XI and Section 3.5 with respect to the outstanding Notes on and after the date the conditions set forth in paragraph (d) are satisfied (hereinafter, "covenant defeasance"), and the Notes shall thereafter be deemed to be not "outstanding" for the purpose of any direction, waiver, consent or declaration or act of holders (and the consequences of any thereof) in connection with such covenants, but shall continue to be deemed "outstanding" for all other purposes hereunder. For this purpose, such covenant defeasance means that, with respect to the outstanding Notes, the Company may omit to comply with and shall have no liability in respect of any term, condition or limitation set forth in any such covenant, whether directly or indirectly, by reason of any reference elsewhere herein to any such covenant or by reason of any reference in any such covenant to any other provision herein or in any other document, and such omission to comply shall not constitute a Default or an Event of Default under Section 6.1, but, except as specified above, the remainder of this Indenture and such Notes shall be unaffected thereby. (d) The following shall be the conditions to application of either paragraph (b) or paragraph (c) above to the outstanding Notes: (i) The Company shall have irrevocably deposited in trust with the Trustee, pursuant to an irrevocable trust and security agreement in form and substance satisfactory to the Trustee, cash or non-callable U.S. Government Obligations maturing as to principal and interest at such times, or a combination thereof, in such amounts as are sufficient, without consideration of the reinvestment of such interest and after payment of all federal, state and local taxes or other charges or assessments in respect thereof payable by the Trustee, in the opinion of a nationally recognized firm of independent public accountants expressed in a written certification thereof (in form and substance reasonably satisfactory to the Trustee) delivered to the Trustee, to pay the principal of, premium, if any, and interest on the outstanding Notes on the dates on which any such payments are due and payable in accordance with the terms of this Indenture and of the Notes as well as all other sums payable hereunder by the Company; (ii) (A) No Event of Default shall have occurred or be continuing on the date of such deposit, and (B) no Default or Event of Default under 45 Section 6.1(f) or 6.1(g) shall occur on or before the 123rd day after the date of such deposit; (iii) Such deposit shall not result in a Default under this Indenture or a breach or violation of, or constitute a default under, any other instrument or agreement to which the Company is a party or by which it or its property is bound; (iv) In the case of a legal defeasance under paragraph (b) above, the Company shall have delivered to the Trustee an Opinion of Counsel in form and substance reasonably satisfactory to the Trustee stating that (A) the Company has received from, or there has been published by, the Internal Revenue Service a ruling applicable to such a defeasance or (B) since the date of this Indenture, there has been a change in the applicable federal income tax law, in either case to the effect that, and based thereon such opinion shall confirm that, the holders of the Notes shall not recognize income, gain or loss for federal income tax purposes as a result of such deposit, defeasance and discharge and shall be subject to federal income tax on the same amounts and in the same manner and at the same times as would have been the case if such deposit, defeasance and discharge had not occurred; and, in the case of a covenant defeasance under paragraph (c) above, the Company shall have delivered to the Trustee an Officers' Certificate and an Opinion of Counsel, in form and substance reasonably satisfactory to the Trustee, to the effect that holders of the Notes shall not recognize income, gain or loss for federal income tax purposes as a result of such deposit and defeasance and shall be subject to federal income tax on the same amounts and in the same manner and at the same times as would have been the case if such deposit and defeasance had not occurred; (v) The holders shall have a perfected security interest under applicable law in the cash or U.S. Government Obligations deposited pursuant to Section 12.1(d)(i) above; (vi) The Company shall have delivered to the Trustee an Opinion of Counsel, in form and substance reasonably satisfactory to the Trustee, to the effect that, after the passage of 123 days following the deposit, the trust funds shall not be subject to any applicable bankruptcy, insolvency, reorganization or similar law affecting creditors' rights generally; (vii) Such defeasance shall not cause the Trustee to have a conflicting interest with respect to any securities of the Company; and (viii) The Company shall have delivered to the Trustee an Officers' Certificate and an Opinion of Counsel in form and substance reasonably satisfactory to the Trustee, each stating that all conditions precedent specified herein relating to the defeasance contemplated by this Section 12.1 have been complied with; 46 provided, that no deposit under clause (i) shall be effective to terminate the obligations of the Company under the Notes or this Indenture prior to the passage of 123 days following such deposit. Section 12.2 TERMINATION OF OBLIGATIONS UPON CANCELLATION OF THE NOTES. In addition to the Company's rights under Section 12.1, the Company may terminate all of its obligations under this Indenture (subject to Section 12.3) when: (a) (i) all Notes theretofore authenticated and delivered (other than Notes that have been destroyed, lost or stolen and that have been replaced, converted or paid as provided in Section 2.6) have been delivered to the Trustee for cancellation; and (i) the Company has paid or caused to be paid all other sums payable hereunder and under the Notes by the Company; or (b) (i) the Notes not previously delivered to the Trustee for cancellation shall have become due and payable or are by their terms to become due and payable within one year or are to be called for redemption under arrangements satisfactory to the Trustee upon delivery of notice, (ii) the Company shall have irrevocably deposited with the Trustee, as trust funds, cash, in an amount sufficient to pay principal of premium, if any, and interest on the outstanding Notes, to maturity or redemption, as the case may be, (iii) such deposit shall not result in a breach or violation of, or constitute a default under, any agreement or instrument pursuant to which the Company is a party or by which it or its property is bound and (iv) the Company has delivered to the Trustee an Officers' Certificate and an Opinion of Counsel in form and substance reasonably satisfactory to the Trustee, each stating that all conditions related to such defeasance have been complied with. Section 12.3 SURVIVAL OF CERTAIN OBLIGATIONS. Notwithstanding the satisfaction and discharge of this Indenture and of the Notes referred to in Section 12.1 or 12.2, the respective obligations of the Company and the Trustee under Sections 2.3, 2.4, 2.5, 2.6, 3.1, 4.2, 5.1, 6.4, 6.9, 7.6, 7.11, 12.5, 12.6, 12.7, Articles XIV and XV shall survive until the Notes are no longer outstanding, and thereafter, the obligations of the Company and the Trustee under Sections 6.9, 7.6, 12.5, 12.6 and 12.7 shall survive. Nothing contained in this Article XII shall abrogate any of the rights, obligations or duties of the Trustee under this Indenture. Section 12.4 ACKNOWLEDGMENT OF DISCHARGE BY TRUSTEE. Subject to Section 12.7, after (i) the conditions of Section 12.1 or 12.2 have been satisfied, (ii) the Company has paid or caused to be paid all other sums payable hereunder by the Company and (iii) the Company has delivered to the Trustee an Officers' Certificate and an Opinion of Counsel, each stating that all conditions precedent referred to in clause (i) above relating to the satisfaction and discharge of this Indenture have been complied with, the Trustee upon written request shall acknowledge in writing the discharge of the Company's obligations under this Indenture except for those surviving obligations specified in Section 12.3. Section 12.5 APPLICATION OF TRUST ASSETS. The Trustee shall hold any cash or U.S. Government Obligations deposited with it in the irrevocable trust established pursuant to Section 12.1 or 12.2, as the case may be. The Trustee shall apply the deposited cash 47 or the U.S. Government Obligations, together with earnings thereon in accordance with this Indenture and the terms of the irrevocable trust agreement established pursuant to Section 12.1 or 12.2, as the case may be, to the payment of principal of, premium, if any, and interest on the Notes. The cash or U.S. Government Obligations so held in trust and deposited with the Trustee in compliance with Section 12.1 or 12.2, as the case may be, shall not be part of the trust estate under this Indenture, but shall constitute a separate trust fund for the benefit of all holders entitled thereto. Except as specifically provided herein, the Trustee shall not be requested to invest any amounts held by it for the benefit of the holders or pay interest on uninvested amounts to any holder. The Company shall pay and indemnify the Trustee against any tax, fee or other charge imposed on or assessed against the U.S. Government Obligations deposited pursuant to Section 12.1 hereof or Section 12.2 hereof or the principal and interest received in respect thereof other than any such tax, fee or other charge which by law is for the account of the holders of outstanding Notes. Section 12.6 REPAYMENT TO THE COMPANY; UNCLAIMED MONEY. Subject to applicable laws governing escheat of such property, and upon termination of the trust established pursuant to Section 12.1 hereof or 12.2 hereof, as the case may be, the Trustee shall promptly pay to the Company upon written request any excess cash or U.S. Government Obligations held by them. Additionally, if amounts for the payment of principal, premium, if any, or interest remains unclaimed for two years, the Trustee shall, upon written request, pay such amounts back to the Company forthwith. Thereafter, all liability of the Trustee with respect to such amounts shall cease. After payment to the Company, holders entitled to such payment must look to the Company for such payment as general creditors unless an applicable abandoned property law designates another person. Section 12.7 REINSTATEMENT. If the Trustee is unable to apply any cash or U.S. Government Obligations in accordance with Section 12.1 or 12.2 by reason of any legal proceeding or by reason of any order or judgment of any court or governmental authority enjoining, restraining or otherwise prohibiting such application, the Company's obligations under this Indenture and the Notes shall be revived and reinstated as though no deposit had occurred pursuant to Section 12.1 or 12.2 until such time as the Trustee is permitted to apply all such cash or U.S. Government Obligations in accordance with Section 12.1 or 12.2, as the case may be; provided that if the Company makes any payment of principal of, premium, if any, or interest on any Notes following the reinstatement of its obligations, the Company shall be subrogated to the rights of the holders of such Notes to receive such payment from the amounts held by the Trustee. ARTICLE XIII IMMUNITY OF INCORPORATORS, SHAREHOLDERS, OFFICERS AND DIRECTORS Section 13.1 INDENTURE AND NOTES SOLELY CORPORATE OBLIGATIONS. No recourse for the payment of the principal of, or premium, if any, or interest on any Note, or for any claim based thereon or otherwise in respect thereof, and no recourse under or upon any obligation, covenant or agreement of the Company in this Indenture or in any 48 supplemental indenture or in any Note, or because of the creation of any indebtedness represented thereby, shall be had against any incorporator, shareholder, officer or director, as such, past, present or future, of the Company or of any successor entity, either directly or through the Company or any successor entity, whether by virtue of any constitution, statute or rule of law, or by the enforcement of any assessment or penalty or otherwise; it being expressly understood that all such liability is hereby expressly waived and released as a condition of, and as a consideration for, the execution of this Indenture and the issuance of the Notes. ARTICLE XIV CONVERSION OF NOTES Section 14.1 RIGHT TO CONVERT. (a) Subject to and upon compliance with the provisions of this Indenture, the holder of any Note shall have the right, at the option of such holder, at any time prior to the close of business on October 14, 2008 (except that, with respect to any Note or portion of a Note that shall be called for redemption or delivered for repurchase, such right shall terminate at the close of business one Business Day immediately preceding the date fixed for redemption or repurchase of such Note or portion of a Note unless the Company shall default in payment due upon redemption or repurchase thereof) to convert the principal amount of any such Note, or any portion of such principal amount that is $1,000 or an integral multiple thereof, into that number of fully paid and nonassessable shares of Common Stock (as such shares shall then be constituted) obtained by dividing the aggregate principal amount of the Notes or portion thereof surrendered for conversion by the Conversion Price in effect at such time rounded to the nearest 1/100,000th of a share (with 0.000005 being rolled upward) as such amount shall be certified by the Company as provided in an Officers' Certificate, by following the procedures specified in Section 14.2. A Note (or portion thereof) in respect of which a holder is exercising its option to require repurchase upon a change of control pursuant to Section 3.5 of this Indenture, may only be converted if such holder withdraws its election to exercise said redemption option in accordance with the terms of this Indenture. A holder of Notes is not entitled to any rights of a holder of Common Stock until such holder has converted such holder's Notes to Common Stock and only to the extent such Notes are deemed to have been converted to Common Stock under this Article XIV. (b) In the event a Noteholder desires to convert all, or any portion, of its Notes into shares of Common Stock (or other securities into which the Notes are then convertible) and the Company does not have authorized a sufficient number of shares of Common Stock (or other securities into which the Notes are then convertible) for such conversion, then in lieu of delivering shares of Common Stock (or other securities into which the Notes are then convertible) upon conversion pursuant to 14.1(a) of that portion of such holder's Notes for which there is an insufficient number of shares of Common Stock (or other securities into which the Notes are then convertible) (the "Cash Equivalent Notes"), the Company shall pay to the holder converting the Cash Equivalent Notes who properly exercises the conversion privilege, as set forth in Section 14.2, an amount, as calculated by the Company and certified to the Trustee in an 49 Officers' Certificate of the Company, in cash equal to the Market Cash Conversion Price of the shares of Common Stock into which such Cash Equivalent Notes are then convertible. (c) In the event that the Company directs the Trustee to pay cash upon any conversion in lieu of delivering shares of Common Stock or any other securities, as the case may be, the Company shall deliver to the Trustee written notice of such direction not later than the close of business on the first Trading Day after the date of receipt by the Trustee of the notice of conversion delivered by such holder pursuant to Section 14.2, and the Trustee shall notify by facsimile the contact person specified in the holder's conversion notice of such election by the Company to such holder. In such event, notwithstanding any other provisions in this Article XIV, in lieu of delivering Common Stock upon conversion of such Notes surrendered in accordance with Section 14.2, the Company shall pay or direct the Trustee to pay the holder surrendering such securities an amount in cash equal to the Market Cash Conversion Price of the shares of Common Stock, plus any cash and other property theretofore apportioned to such shares of Common Stock in accordance with Section 14.2. Prior to or concurrently with such cash payment, the Company will provide the Trustee with an Officers' Certificate setting forth the Market Cash Conversion Price and will deposit with the paying agent the cash so payable. The Trustee shall have no obligation or liability with respect to the calculation of the Market Cash Conversion Price. Section 14.2 EXERCISE OF CONVERSION PRIVILEGE; ISSUANCE OF COMMON STOCK ON CONVERSION; NO ADJUSTMENT FOR INTEREST OR DIVIDENDS. In order to exercise the conversion privilege with respect to any interest in the Global Note, the beneficial holder must complete the appropriate instruction form for conversion pursuant to the Depository's book-entry conversion program and follow the other procedures set forth in such program. As promptly as practicable after satisfaction of the requirements for conversion set forth above, subject to Section 14.1(b) and in compliance with any restrictions on transfer if shares issuable on conversion are to be issued in a name other than that of the Noteholder (as if such transfer were a transfer of the Note or Notes (or portion thereof) so converted), the 50 Company shall issue in book-entry form the number of full shares issuable upon the conversion of such Note or portion thereof in the name of such holder in compliance with the Depository's book-entry conversion program and with the provisions of this Article XIV and shall issue a check or cash in respect of any fractional interest in respect of a share of Common Stock arising upon such conversion, as provided in Section 14.4. Each conversion shall be deemed to have been effected as to any such Note (or portion thereof) on the date on which the requirements set forth above in this Section 14.2 have been satisfied as to such Note (or portion thereof), and, subject to Section 14.1(b), the person in whose name any shares of Common Stock shall be issuable upon such conversion shall be deemed to have become on said date the holder of record of the shares represented thereby. Any unpaid interest on any Note or portion thereof as of the date such Note or portion thereof is surrendered for conversion shall (unless such Note or portion thereof being converted shall have been called for redemption on a redemption date during the period from the close of business on or after any record date for the payment of interest to the close of business on the business day following the corresponding interest payment date) be paid in cash to the former holder of such Note or portion thereof on the next succeeding interest payment date. 51 Upon the conversion of an interest in the Global Note, the Trustee, or the Custodian at the direction of the Trustee, shall make a notation on the Global Note as to the reduction in the principal amount represented thereby. Section 14.3 MANDATORY CONVERSION. The Notes shall be automatically converted into Common Stock on the first date (the "Mandatory Conversion Date") on or after the 15th Trading Day following October 15, 2004, on which: (i) the average of the Closing Price (as defined in Section 14.6(g)) of the Common Stock on 15 consecutive preceding Trading Days is equal to or greater than 110% of the Conversion Price and (ii) the Company has sufficient shares of Common Stock (or other securities into which the Notes are then convertible) authorized to execute the Mandatory Conversion (as defined below). The Notes shall be converted into that number of fully paid and nonassessable shares of Common Stock (or other securities into which the Notes are then convertible) obtained by dividing the aggregate principal amount of the Notes by the Conversion Price in effect at such time rounded to the nearest 1/100,000th of a share (with 0.000005 being rolled upward)(the "Mandatory Conversion"). The Company will monitor the Closing Price of the Common Stock. Upon the occurrence of Mandatory Conversion, the Company shall complete the appropriate instruction form for conversion pursuant to the Depository's book-entry conversion program and follow the other procedures set forth in such program. Any unpaid interest on the Notes accrued as of the Mandatory Conversion Date shall be paid in cash to the former holders of such Notes on the next succeeding interest payment date. After the Mandatory Conversion, the Notes will no longer represent Indebtedness of the Company, will no longer accrue interest or require the Company to make any payment of principal, and the Company's obligations to make any further payments with respect to the Notes will terminate (except for under this Section 14.3). The Company will cause to be issued in book-entry form shares of Common Stock sufficient to effect the Mandatory Conversion. The shares of Common Stock issued as a result of the Mandatory Conversion shall be credited through the Depository's book-entry conversion program to the respective account of each Noteholder as of the Mandatory Conversion Date. Section 14.4 CASH PAYMENTS IN LIEU OF FRACTIONAL SHARES. No fractional shares of Common Stock or scrip representing fractional shares shall be issued upon conversion of Notes. Subject to Section 14.1(b), (i) if more than one Note shall be surrendered for conversion at one time by the same holder, the number of fully paid and nonassessable shares of Common Stock issuable upon conversion of a Note shall be determined by dividing the aggregate principal amount of such Notes or portion thereof surrendered for conversion by the Conversion Price and (ii) the aggregate number of shares of Common Stock issuable upon conversion shall be rounded to the nearest 1/100,000th of a share (with .0000005 being rolled upward). If any fractional share of stock would be issuable upon the conversion of any Note or Notes, the Company shall make an adjustment therefor in cash at the current market value thereof. The current market value of a share of Common Stock shall be determined by multiplying the fractional share by the Closing Price on the Trading Day immediately preceding the Mandatory Conversion Date or the date on which the Notes pursuant to Section 14.2 (or specified portions thereof) are deemed to have been converted. Section 14.5 CONVERSION PRICE. The conversion price of the Notes (the "Conversion Price") shall be $5.31 per share of Common Stock, subject to adjustment as provided in this Article XIV. 52 Section 14.6 ADJUSTMENT OF CONVERSION PRICE. The Conversion Price shall be adjusted from time to time by the Company as follows: (a) In case the Company shall (i) pay a dividend or make a distribution on its outstanding Common Stock in shares of its Common Stock, (ii) subdivide or split its outstanding Common Stock into a greater number of shares, (iii) combine its outstanding Common Stock into a smaller number of shares or (iv) issue any shares of Capital Stock by reclassification of its Common Stock, the conversion price in effect immediately prior thereto shall be adjusted so that the holder of any Notes thereafter surrendered for conversion shall be entitled to receive the number of shares of Common Stock of the Company which such holder would have owned or have been entitled to receive after the occurrence of any of the events described above had such Notes been surrendered for conversion immediately prior to the occurrence of such event or the record date therefor, whichever is earlier. An adjustment made pursuant to this subsection (a) shall become effective immediately after the close of business on the record date for determination of shareholders entitled to receive such dividend or distribution in the case of a dividend or distribution (except as provided in Section 14.6(j)) and shall become effective immediately after the close of business on the effective date in the case of a subdivision, split, combination or reclassification. Any shares of Common Stock issuable in payment of a dividend shall be deemed to have been issued immediately prior to the close of business on the record date for such dividend for purposes of calculating the number of outstanding shares of Common Stock under Sections 14.6(b) and (c). (b) In case the Company shall issue rights, options or warrants to all holders of its outstanding shares of Common Stock entitling them to subscribe for or purchase shares of Common Stock at a price per share less than the Current Market Price (as defined in Section 14.6(g)) on the Record Date fixed for determination of shareholders entitled to receive such rights, options or warrants, the Conversion Price shall be adjusted so that the same shall equal the price determined by multiplying the Conversion Price in effect at the opening of business on the date after the Record Date by a fraction the numerator of which shall be the number of shares of Common Stock outstanding at the close of business on the Record Date plus the number of shares that the aggregate offering price of the total number of shares so offered would purchase at such Current Market Price, and the denominator of which shall be the number of shares of Common Stock outstanding on the close of business on the Record Date plus the total number of additional shares of Common Stock so offered for subscription or purchase. Such adjustment shall become effective immediately after the opening of business on the day following the Record Date fixed for determination of shareholders entitled to receive such rights, options or warrants. To the extent that shares of Common Stock are not delivered after the expiration or termination of such rights, options or warrants, the Conversion Price shall be readjusted to the Conversion Price that would then be in effect had the adjustments made upon the issuance of such rights, options or warrants been made on the basis of delivery of only the number of shares of Common Stock actually delivered. In the event that such rights, options or warrants are not so issued, the Conversion Price shall again be adjusted to be the Conversion Price that would then be in effect if such date fixed for the determination of shareholders entitled to receive such rights, options or warrants had not been fixed. In determining whether any rights, options or warrants entitle the holders to subscribe for or purchase shares of Common Stock at less than such Current Market Price, and in determining the aggregate offering price of such shares of Common Stock, there shall be taken into account any consideration received for such rights, 53 options or warrants, the value of such consideration, if other than cash, to be determined by the Board of Directors. (c) In case outstanding shares of Common Stock shall be subdivided into a greater number of shares of Common Stock, the Conversion Price in effect at the opening of business on the day following the day upon which such subdivision becomes effective shall be proportionately reduced, and conversely, in case outstanding shares of Common Stock shall be combined into a smaller number of shares of Common Stock, the Conversion Price in effect at the opening of business on the day following the day upon which such combination becomes effective shall be proportionately increased, such reduction or increase, as the case may be, to become effective immediately after the opening of business on the day following the day upon which such subdivision or combination becomes effective. (d) In case the Company shall, by dividend or otherwise, distribute to all holders of its Common Stock shares of any class of Capital Stock of the Company (other than any dividends or distributions to which Section 14.6(a) applies) or evidences of its indebtedness or assets (including securities, but excluding any rights, options or warrants referred to in Section 14.6(b), and excluding any dividend or distribution (x) in connection with the liquidation, dissolution or winding-up of the Company, whether voluntary or involuntary, (y) exclusively in cash or (z) referred to in Section 14.6(a) (any of the foregoing hereinafter in this Section 14.6(d) called the "Securities")), then, in each such case, the Conversion Price shall be reduced so that the same shall be equal to the price determined by multiplying the Conversion Price in effect immediately prior to the close of business on the Record Date (as defined in Section 14.6(g)) with respect to such distribution by a fraction of which the numerator shall be the Current Market Price (determined as provided in Section 14.6(g)) on such date less the fair market value (as determined by the Board of Directors, whose determination shall be conclusive and described in a Board Resolution) on such date of the portion of the Securities so distributed applicable to one share of Common Stock and the denominator shall be such Current Market Price, such reduction to become effective immediately prior to the opening of business on the day following the Record Date; provided that in the event the then fair market value (as so determined) of the portion of the Securities so distributed applicable to one share of Common Stock is equal to or greater than the Current Market Price on the Record Date, in lieu of the foregoing adjustment, adequate provision shall be made so that each Noteholder shall have the right to receive upon conversion the amount of Securities such holder would have received had such holder converted each Note on such date. In the event that such dividend or distribution is not so paid or made, the Conversion Price shall again be adjusted to be the Conversion Price that would then be in effect if such dividend or distribution had not been declared. If the Board of Directors determines the fair market value of any distribution for purposes of this Section 14.6(d) by reference to the actual or when issued trading market for any securities comprising all or part of such distribution, it must in doing so consider the prices in such market over the same period used in computing the Current Market Price pursuant to Section 14.6(g) to the extent possible. Notwithstanding the foregoing provisions of this Section 14.6(d), no adjustment shall be made hereunder for any distribution of Securities if the Company makes proper provision so that each Noteholder who converts a Note (or any portion thereof) after the date fixed for determination of shareholders entitled to receive such distribution shall be entitled to receive upon such conversion, in addition to the shares of Common Stock issuable upon such 54 conversion, the amount and kind of Securities that such holder would have been entitled to receive if such holder had, immediately prior to such determination date, converted such Note into Common Stock; provided that, with respect to any Securities that are convertible, exchangeable or exercisable, the foregoing provision shall only apply to the extent (and so long as) the Securities receivable upon conversion of such Note would be convertible, exchangeable or exercisable, as applicable, without any loss of rights or privileges for a period of at least 60 days following conversion of such Note. Rights, options or warrants distributed by the Company to all holders of Common Stock entitling the holders thereof to purchase shares of the Company's Capital Stock (either initially or under certain circumstances), which rights, options or warrants, until the occurrence of a specified event or events (the "Trigger Event") (i) are deemed to be transferred with such shares of Common Stock, (ii) are not exercisable and (iii) are also issued in respect of future issuances of Common Stock, shall not be deemed distributed for purposes of this Section 14.6(d) (and no adjustment to the Conversion Price under Section 14.6(d) shall be required) until the occurrence of the earliest Trigger Event. In addition, in the event of any distribution of rights, options or warrants, or any Trigger Event with respect thereto, that shall have resulted in an adjustment to the Conversion Price under this Section 14.6(d), (1) in the case of any such rights, options or warrants that shall all have been redeemed or repurchased without exercise by any holders thereof, the Conversion Price shall be readjusted upon such final redemption or repurchase to give effect to such distribution or Trigger Event, as the case may be, as though it were a cash distribution, equal to the per share redemption or repurchase price received by a holder of Common Stock with respect to such rights, options or warrants (assuming such holder had retained such rights, options or warrants), made to all holders of Common Stock as of the date of such redemption or repurchase, and (2) in the case of such rights, options or warrants all of which shall have expired or been terminated without exercise by any holder thereof, the Conversion Price shall be readjusted as if such issuance had not occurred. For purposes of this Section 14.6(d) and Sections 14.6(a) and (b), any dividend or distribution to which this Section 14.6(d) is applicable that also includes shares of Common Stock, or rights, options or warrants to subscribe for or purchase shares of Common Stock (or both), shall be deemed instead to be (1) a dividend or distribution of the evidences of indebtedness, assets or shares of Capital Stock other than such shares of Common Stock or rights, options or warrants (and any Conversion Price reduction required by this Section 14.6(d) with respect to such dividend or distribution shall then be made) immediately followed by (2) a dividend or distribution of such shares of Common Stock or such rights, options or warrants (and any further Conversion Price reduction required by Sections 14.6(a) and (b) with respect to such dividend or distribution shall then be made) except (A) the Record Date of such dividend or distribution shall be substituted as "the date fixed for the determination of shareholders entitled to receive such dividend or other distribution" and "the date fixed for such determination" within the meaning of Sections 14.6(a) and (b) and (B) any shares of Common Stock included in such dividend or distribution shall not be deemed "outstanding at the close of business on the date fixed for such determination" within the meaning of Section 14.6(a). (e) In case the Company shall, by dividend or otherwise, distribute to all holders of its Common Stock cash (excluding any cash that is distributed upon a merger or consolidation to which Section 14.7 applies or as part of a distribution referred to in Section 55 14.6(d) for which an adjustment to the Conversion Price is provided therein) in an aggregate amount that, combined together with (1) the aggregate amount of any other such distributions to all holders of its Common Stock made exclusively in cash within the 12 months preceding the date of payment of such distribution, and in respect of which no adjustment pursuant to this Section 14.6(e) has been made, and (2) the aggregate of any cash plus the fair market value (as determined by the Board of Directors, whose determination shall be conclusive and described in a Board Resolution) of consideration payable in respect of any tender offer, by the Company or any of its Subsidiaries for all or any portion of the Common Stock concluded within the 12 months preceding the date of payment of such distribution, and in respect of which no adjustment pursuant to Section 14.6(f) has been made, exceeds 20.0% of the product of the Current Market Price (determined as provided in Section 14.6(g)) on the Record Date with respect to such distribution times the number of shares of Common Stock outstanding on such date, then, and in each such case, immediately after the close of business on such date, unless the Company elects to reserve such cash for distribution to the holders of the Notes upon the conversion of the Notes so that any such holder converting Notes shall receive upon such conversion, in addition to the shares of Common Stock to that such holder is entitled, the amount of cash which such holder would have received if such holder had, immediately prior to the Record Date for such distribution of cash, converted its Notes into Common Stock, the Conversion Price shall be reduced so that the same shall equal the price determined by multiplying the Conversion Price in effect immediately prior to the close of business on such date by a fraction (i) the numerator of which shall be equal to the Current Market Price on the Record Date less an amount equal to the quotient of (x) the excess of such combined amount over such 20.0% and (y) the number of shares of Common Stock outstanding on the Record Date and (ii) the denominator of which shall be equal to the Current Market Price on such date; provided that in the event the portion of the cash so distributed applicable to one share of Common Stock is equal to or greater than the Current Market Price of the Common Stock on the Record Date, in lieu of the foregoing adjustment, adequate provision shall be made so that each Noteholder shall have the right to receive upon conversion the amount of cash such holder would have received had such holder converted each Note on the Record Date. In the event that such dividend or distribution is not so paid or made, the Conversion Price shall again be adjusted to be the Conversion Price that would then be in effect if such dividend or distribution had not been declared. (f) In case a tender offer made by the Company or any of its Subsidiaries for all or any portion of the Common Stock shall expire and such tender offer (as amended upon the expiration thereof) shall require the payment to shareholders (based on the acceptance (up to any maximum specified in the terms of the tender offer) of Purchased Shares (as defined below)) of an aggregate consideration having a fair market value (as determined by the Board of Directors, whose determination shall be conclusive and described in a Board Resolution) that combined together with (1) the aggregate of the cash plus the fair market value (as determined by the Board of Directors, whose determination shall be conclusive and described in a Board Resolution), as of the expiration of such tender offer, of consideration payable in respect of any other tender offer, by the Company or any of its Subsidiaries for all or any portion of the Common Stock expiring within the 12 months preceding the expiration of such tender offer, and in respect of which no adjustment pursuant to Section 14.6(f) has been made, and (2) the aggregate amount of any distributions to all holders of the Company's Common Stock made exclusively in cash within 12 months preceding the expiration of such tender offer, and in respect of which no 56 adjustment pursuant to Section 14.6(e) has been made, exceeds 20.0% of the product of the Current Market Price (determined as provided in Section 14.6(g)) as of the last time (the "Expiration Time") tenders could have been made pursuant to such tender offer (as it may be amended) times the number of shares of Common Stock outstanding (including any tendered shares) on the Expiration Time, then, and in each such case, immediately prior to the opening of business on the day after the date of the Expiration Time, the Conversion Price shall be adjusted so that the same shall equal the price determined by multiplying the Conversion Price in effect immediately prior to close of business on the date of the Expiration Time by a fraction of which the numerator shall be the number of shares of Common Stock outstanding (including any tendered shares) on the Expiration Time multiplied by the Current Market Price of the Common Stock on the Trading Day next succeeding the Expiration Time and the denominator shall be the sum of (x) the fair market value (determined as aforesaid) of the aggregate consideration payable to shareholders based on the acceptance (up to any maximum specified in the terms of the tender offer) of all shares validly tendered and not withdrawn as of the Expiration Time (the shares deemed so accepted, up to any such maximum, being referred to as the "Purchased Shares") and (y) the product of the number of shares of Common Stock outstanding (less any Purchased Shares) on the Expiration Time and the Current Market Price of the Common Stock on the Trading Day next succeeding the Expiration Time, such reduction to become effective immediately prior to the opening of business on the day following the Expiration Time. In the event that the Company is obligated to purchase shares pursuant to any such tender offer, but the Company is permanently prevented by applicable law from effecting any such purchases or all such purchases are rescinded, the Conversion Price shall again be adjusted to be the Conversion Price that would then be in effect if such tender offer had not been made. (g) For purposes of this Section 14.6, the following terms shall have the meaning indicated: (i) "Closing Price" with respect to any securities on any day shall mean the closing sale price regular way on such day or, in case no such sale takes place on such day, the average of the reported closing bid and asked prices, regular way, in each case on the New York Stock Exchange, or, if such security is not listed or admitted to trading on such exchange, on the principal national security exchange or quotation system on which such security is quoted or listed or admitted to trading, or, if not quoted or listed or admitted to trading on any national securities exchange or quotation system, the average of the closing bid and asked prices of such security on the over-the-counter market on the day in question as reported by the National Quotation Bureau Incorporated, or a similar generally accepted reporting service, or if not so available, in such manner as furnished by any New York Stock Exchange member firm selected from time to time by the Board of Directors for that purpose, or a price determined in good faith by the Board of Directors, whose determination shall be conclusive and described in a Board Resolution. (ii) "Current Market Price" shall mean the average of the daily Closing Prices per share of Common Stock for the ten consecutive Trading Days immediately prior to the date in question; provided that (1) if the "ex" date (as hereinafter defined) for any event (other than the issuance or distribution or 57 Change of Control requiring such computation) that requires an adjustment to the Conversion Price pursuant to Section 14.6(a), (b), (c), (d), (e) or (f) occurs during such ten consecutive Trading Days, the Closing Price for each Trading Day prior to the "ex" date for such other event shall be adjusted by multiplying such Closing Price by the same fraction by which the Conversion Price is so required to be adjusted as a result of such other event, (2) if the "ex" date for any event (other than the issuance, distribution or Change of Control requiring such computation) that requires an adjustment to the Conversion Price pursuant to Section 14.6(a), (b), (c), (d), (e) or (f) occurs on or after the "ex" date for the issuance or distribution requiring such computation and prior to the day in question, the Closing Price for each Trading Day on and after the "ex" date for such other event shall be adjusted by multiplying such Closing Price by the reciprocal of the fraction by which the Conversion Price is so required to be adjusted as a result of such other event and (3) if the "ex" date for the issuance, distribution or Change of Control requiring such computation is prior to the day in question, after taking into account any adjustment required pursuant to clause (1) or (2) of this proviso, the Closing Price for each Trading Day on or after such "ex" date shall be adjusted by adding thereto the amount of any cash and the fair market value (as determined by the Board of Directors in a manner consistent with any determination of such value for purposes of Section 14.6(d) or (f), whose determination shall be conclusive and described in a Board Resolution) of the evidences of indebtedness, shares of Capital Stock or assets being distributed applicable to one share of Common Stock as of the close of business on the day before such "ex" date. For purposes of any computation under Section 14.6(f), the Current Market Price of the Common Stock on any date shall be deemed to be the average of the daily Closing Prices per share of Common Stock for such day and the next two succeeding Trading Days; provided that if the "ex" date for any event (other than the tender or exchange offer requiring such computation) that requires an adjustment to the Conversion Price pursuant to Section 14.6(a), (b), (c), (d), (e) or (f) occurs on or after the Expiration Time for the tender or exchange offer requiring such computation and prior to the day in question, the Closing Price for each Trading Day on and after the "ex" date for such other event shall be adjusted by multiplying such Closing Price by the reciprocal of the fraction by which the Conversion Price is so required to be adjusted as a result of such other event. For purposes of this paragraph, the term "ex" date, (1) when used with respect to any issuance or distribution, means the first date on which the Common Stock trades regular way on the relevant exchange or in the relevant market from which the Closing Price was obtained without the right to receive such issuance or distribution, (2) when used with respect to any subdivision or combination of shares of Common Stock, means the first date on which the Common Stock trades regular way on such exchange or in such market after the time at which such subdivision or combination becomes effective and (3) when used with respect to any tender or exchange offer means the first date on which the Common Stock trades regular way on such exchange or in such market after the expiration of such offer. Notwithstanding the foregoing, whenever successive adjustments to the Conversion Price are called for pursuant to this Section 14.6, 58 such adjustments shall be made to the Current Market Price as may be necessary or appropriate to effectuate the intent of this Section 14.6 and to avoid unjust or inequitable results as determined in good faith by the Board of Directors. (iii) "fair market value" shall mean the amount that a willing buyer would pay a willing seller in an arm's-length transaction. (iv) "Record Date" shall mean, with respect to any dividend, distribution or other transaction or event in which the holders of Common Stock have the right to receive any cash, securities or other property or in which the Common Stock (or other applicable security) is exchanged for or converted into any combination of cash, securities or other property, the date fixed for determination of shareholders entitled to receive such cash, securities or other property (whether such date is fixed by the Board of Directors or by statute, contract or otherwise). (h) The Company may make such reductions in the Conversion Price, in addition to those required by Sections 14.6(a), (b), (c), (d), (e) and (f), as the Board of Directors considers to be advisable to avoid or diminish any income tax to holders of Common Stock or rights to purchase Common Stock resulting from any dividend or distribution of stock (or rights to acquire stock) or from any event treated as such for income tax purposes. To the extent permitted by applicable law, the Company from time to time may reduce the Conversion Price by any amount for any period of time if the period is at least 20 days, the reduction is irrevocable during the period and the Board of Directors shall have made a determination that such reduction would be in the best interests of the Company, which determination shall be conclusive and described in a Board Resolution. Whenever the Conversion Price is reduced pursuant to the preceding sentence, the Company shall mail to all holders of record of the Notes a notice of the reduction at least 15 days prior to the date the reduced Conversion Price takes effect, and such notice shall state the reduced Conversion Price and the period it shall be in effect. (i) No adjustment in the Conversion Price shall be required unless such adjustment would require an increase or decrease of at least 1% in such price; provided that any adjustments that by reason of this Section 14.6(i) are not required to be made shall be carried forward and taken into account in any subsequent adjustment. All calculations under this Article XIV shall be made by the Company and shall be made to the nearest 1/100,000 (with 0.0000005 being rolled upward). No adjustment need be made for rights to purchase Common Stock pursuant to a Company plan for reinvestment of dividends or interest. No adjustment need be made for a change in the par value, or to or from no par value, of the Common Stock. To the extent the Notes become convertible into cash, assets, property or securities (other than Common Stock of the Company), no adjustment need be made thereafter as to the cash, assets, property or such securities (except as such securities may otherwise by their terms provide), and interest shall not accrue on such cash. 59 (j) Whenever the Conversion Price is adjusted as herein provided, the Company shall promptly file with the Trustee and any conversion agent other than the Trustee an Officers' Certificate setting forth the Conversion Price after such adjustment and setting forth a brief statement of the facts requiring such adjustment. Promptly after delivery of such certificate, the Company shall prepare a notice of such adjustment of the Conversion Price setting forth the adjusted Conversion Price and the date on which each adjustment becomes effective and shall mail such notice of such adjustment of the Conversion Price to the holder of each Note at his last address appearing on the Note register provided for in Section 2.5, within 20 days after execution thereof. Failure to deliver such notice shall not effect the legality or validity of any such adjustment. (k) In any case in which this Section 14.6 provides that an adjustment shall become effective immediately after a Record Date for an event, the Company may defer until the occurrence of such event (i) issuing to the holder of any Note converted after such Record Date and before the occurrence of such event the additional shares of Common Stock issuable upon such conversion by reason of the adjustment required by such event over and above the Common Stock issuable upon such conversion before giving effect to such adjustment and (ii) paying to such holder any amount in cash in lieu of any fraction pursuant to Section 14.4. Section 14.7 EFFECT OF RECLASSIFICATION, CONSOLIDATION, MERGER OR SALE. If any of the following events occur, namely (i) any reclassification or change of outstanding shares of Common Stock (other than a change in par value, or to or from no par value, as a result of a subdivision or combination), (ii) any consolidation, merger or combination of the Company with another corporation as a result of which holders of Common Stock shall be entitled to receive stock, securities or other property or assets (including cash) with respect to or in exchange for such Common Stock or (iii) any sale or conveyance of the properties and assets of the Company as, or substantially as, an entirety (determined on a consolidated basis) to any other corporation as a result of which holders of Common Stock shall be entitled to receive stock, securities or other property or assets (including cash) with respect to or in exchange for such Common Stock, then the Company or the successor or purchasing corporation, as the case may be, shall execute with the Trustee a supplemental indenture (which shall comply with the Trust Indenture Act as in force at the date of execution of such supplemental indenture if such supplemental indenture is then required to so comply) providing that the Notes shall be convertible into the kind and amount of shares of stock and other securities or property or assets (including cash) receivable upon such reclassification, change, consolidation, merger, combination, sale or conveyance by a holder of a number of shares of Common Stock issuable upon conversion of such Notes (assuming, for such purposes, a sufficient number of authorized shares of Common Stock available to convert all such Notes) immediately prior to such reclassification, change, consolidation, merger, combination, sale or conveyance, assuming such holder of Common Stock did not exercise his rights of election, if any, as to the kind or amount of securities, cash or other property receivable upon such reclassification, change, consolidation, merger, combination, sale or conveyance (provided that, if the kind or amount of securities, cash or other property receivable upon such reclassification, change, consolidation, merger, combination, sale or conveyance is not the same for each share of Common Stock in respect of which such rights of election shall not have been exercised ("non-electing share"), then for the purposes of this Section 14.7 the kind and amount of securities, cash or other property receivable upon such reclassification, change, consolidation, merger, 60 combination, sale or conveyance for each non-electing share shall be deemed to be the kind and amount so receivable per share by a plurality of the non-electing shares). Such supplemental indenture shall provide for adjustments that shall be as nearly equivalent as may be practicable to the adjustments provided for in this Article XIV. The Company shall cause notice of the execution of such supplemental indenture to be mailed to each holder of Notes, at his address appearing on the Note register provided for in Section 2.5, within 20 days after execution thereof. Failure to deliver such notice shall not affect the legality or validity of such supplemental indenture. The above provisions of this Section 14.7 shall similarly apply to successive reclassifications, changes, consolidations, mergers, combinations, sales and conveyances. Section 14.8 TAXES ON SHARES ISSUED. The issuance of stock certificates on conversions of Notes shall be made without charge to the converting Noteholder for any transfer or similar tax in respect of the issue thereof. The Company shall not, however, be required to pay any tax that may be payable in respect of any transfer involved in the issue and delivery of stock in any name other than that of the holder of any Note converted, and the Company shall not be required to issue or deliver any such stock certificate unless and until the person or persons requesting the issuance thereof shall have paid to the Company the amount of such tax or shall have established to the satisfaction of the Company that such tax has been paid. Section 14.9 RESERVATION OF SHARES; SHARES TO BE FULLY PAID; LISTING OF COMMON STOCK. Subject to Section 14.1(b) the Company shall provide, free from preemptive rights, out of its authorized but unissued shares or shares held in treasury, sufficient shares to provide for the conversion of the Notes from time to time as such Notes are presented for conversion. Before taking any action that would cause an adjustment reducing the Conversion Price below the then par value, if any, of the shares of Common Stock issuable upon conversion of the Notes, the Company shall take all corporate action that may, in the opinion of its counsel, be necessary in order that the Company may validly and legally issue shares of such Common Stock at such adjusted Conversion Price. The Company covenants that all shares of Common Stock that may be issued upon conversion of Notes shall, upon issuance, be fully paid and nonassessable by the Company and free from all taxes, liens and charges with respect to the issuance thereof. Section 14.10 RESPONSIBILITY OF TRUSTEE. The Trustee and any other conversion agent shall not at any time be under any duty or responsibility to any holder of Notes to determine whether any facts exist that may require any adjustment of the Conversion Price or notice thereof, or with respect to the nature, accuracy or extent or calculation of any such adjustment when made, or with respect to the method employed, or herein or in any supplemental indenture provided to be employed, in making the same. The Trustee and any other conversion agent shall not be accountable with respect to the validity or value (or the kind or amount) of any shares of Common Stock, or of any securities or property, that may at any time be issued or delivered upon the conversion of any Note; and the Trustee and any other 61 conversion agent make no representations with respect thereto or actions or omissions by the Company in connection with this Article XIV. Subject to the provisions of Section 7.1, neither the Trustee nor any conversion agent shall be responsible for any failure of the Company to issue, transfer or deliver any shares of Common Stock or stock certificates or other securities or property or cash upon the surrender of any Note for the purpose of conversion or to comply with any of the duties, responsibilities or covenants of the Company contained in this Article XIV. Without limiting the generality of the foregoing, neither the Trustee nor any conversion agent shall be under any responsibility to determine whether a supplemental indenture under Section 14.7 hereof need to be entered into or the correctness of any provisions contained in any supplemental indenture entered into pursuant to Section 14.7 relating either to the kind or amount of shares of stock or securities or property (including cash) receivable by Noteholders upon the conversion of their Notes after any event referred to in such Section 14.7 or to any adjustment to be made with respect thereto, and may accept as conclusive evidence of the correctness of any such provisions, and shall be protected in relying upon, the Officers' Certificate (which the Company shall be obligated to file with the Trustee prior to the execution of any such supplemental indenture) with respect thereto. Section 14.11 NOTICE TO HOLDERS PRIOR TO CERTAIN ACTIONS. In case: (a) the Company makes any distribution or dividend that would require an adjustment in the Conversion Price pursuant to Section 14.6; or (b) the Company takes any action that would require a supplemental indenture pursuant to Section 14.7; or (c) of the voluntary or involuntary dissolution, liquidation or winding-up of the Company, the Company shall cause to be filed with the Trustee and to be mailed to each holder of Notes at his address appearing on the Note register, as promptly as possible but in any event at least 15 days prior to the applicable date hereinafter specified, a notice stating (x) the date on which a record date is to be taken for the purpose of such dividend, distribution, rights, options or warrants, or, if a record is not to be taken, the date as of which the holders of Common Stock of record to be entitled to such dividend, distribution, rights, options or warrants are to be determined or (y) the date on which such reclassification, change, consolidation, merger, sale, conveyance, transfer, dissolution, liquidation or winding-up is expected to become effective or occur and the date as of which it is expected that holders of record of Common Stock shall be entitled to exchange their Common Stock for securities or other property deliverable upon such reclassification, change, consolidation, merger, sale, conveyance, transfer, dissolution, liquidation or winding-up. Neither the failure to give such notice nor any defect therein shall affect the legality or validity of the proceedings referenced in clauses (a) through (c) of this Section 14.11. Section 14.12 SUPPLEMENTAL INDENTURE PRIOR TO ISSUANCE OF NOTES IN DEFINITIVE FORM. If the Company is required by this Indenture or chooses to issue Notes in definitive form, then the Company shall execute with the Trustee a supplemental indenture (which shall comply with the Trust Indenture Act as in force at the date of execution of such supplemental indenture if such supplemental indenture is then required to so comply) stating procedures under this Article XIV for the mandatory and optional conversion of definitive Notes into Common Stock. 62 ARTICLE XV SUBORDINATION Section 15.1 AGREEMENT TO SUBORDINATE. The Company agrees, and each Noteholder by accepting a Note agrees, that the indebtedness evidenced by the Notes is subordinated in right of payment, to the extent and in the manner provided in this Article XV, to the prior payment in full of all Senior Indebtedness and that the subordination is for the benefit of the holders of Senior Indebtedness. Section 15.2 CERTAIN DEFINITIONS. For purposes of this Article XV, the following terms shall have the meaning indicated: (1) "Representative" shall mean a duly authorized indenture trustee or other trustee, agent or representative for any Senior Indebtedness. (2) "Senior Indebtedness" with respect to the Notes means the principal of, premium, if any, and interest on, and any fees, costs, expenses and any other amounts (including indemnity payments) related to the following, whether outstanding on the date hereof or hereafter incurred or created: (a) indebtedness, matured or unmatured, whether or not contingent, of the Company for money borrowed evidenced by notes or other written obligations, (b) any interest rate contract, interest rate swap agreement or other similar agreement or arrangement designed to protect the Company or any of its Subsidiaries against fluctuations in interest rates, (c) indebtedness, matured or unmatured, whether or not contingent, of the Company evidenced by notes, debentures, bonds or similar instruments or letters of credit (or reimbursement agreements in respect thereof), (d) obligations of the Company as lessee under capitalized leases and under leases of property made as part of any sale and leaseback transactions, (e) indebtedness of others of any of the kinds described in the preceding clauses (a) through (d) assumed or guaranteed by the Company and (f) renewals, extensions, modifications, amendments, and refundings of, and indebtedness and obligations of a successor person issued in exchange for or in replacement of, indebtedness or obligations of the kinds described in the preceding clauses (a) through (f), unless the agreement pursuant to which any such indebtedness described in clauses (a) through (f) is created, issued, assumed or guaranteed expressly provides that such indebtedness is not senior or superior in right of payment to the Notes; provided that the following shall not constitute Senior Indebtedness: (i) any indebtedness or obligation of the Company in respect of the Notes, (ii) any indebtedness of the Company to any of its Subsidiaries or other Affiliates; (iii) any indebtedness that is subordinated or junior in any respect to any other indebtedness of the Company other than Senior Indebtedness; (iv) any indebtedness incurred for the purchase of goods or materials in the ordinary course of business and (v) any indebtedness or obligation of the Company in respect of the 6-1/4% Convertible Subordinated Notes Due 2003. For the purposes of this Indenture, Senior Indebtedness shall not be deemed to have been paid in full until the holders of the Senior Indebtedness shall have indefeasibly received payment in full in cash of all Senior Indebtedness; provided that if any holder of Senior 63 Indebtedness agrees to accept payment in full of such Senior Indebtedness for consideration other than cash, such holder shall be deemed to have indefeasibly received payment in full of such Senior Indebtedness. The provisions of this Article XV shall continue to be effective or be reinstated, as the case may be, if at any time any payment of any of the Senior Indebtedness is rescinded or must otherwise be returned by any holder of Senior Indebtedness upon the insolvency, bankruptcy or organization of the Company or otherwise, all as though such payment had not been made. A distribution may consist of cash, securities or other property, by set-off or otherwise. Section 15.3 LIQUIDATION; DISSOLUTION; BANKRUPTCY. Upon any distribution to creditors of the Company in a liquidation or dissolution of the Company or in a bankruptcy, reorganization, insolvency, receivership or similar proceeding relating to the Company or its property, in an assignment for the benefit of creditors or any marshalling of the Company's assets and liabilities, (a) holders of all Senior Indebtedness shall first be entitled to receive payment in full of all amounts due or to become due thereon before Noteholders shall be entitled to receive any payment with respect to the principal of, premium, if any, or interest on the Notes (except that Noteholders may receive securities that are subordinated to at least the same extent as the Notes to Senior Indebtedness and any securities issued in exchange for Senior Indebtedness) and (b) until all Senior Indebtedness (as provided in clause (a) above) is paid in full, any distribution to which Noteholders would be entitled but for this Article shall be made to holders of Senior Indebtedness (except that Noteholders may receive securities that are subordinated to at least the same extent as the Notes to (x) Senior Indebtedness and (y) any securities issued in exchange for Senior Indebtedness), as their interests may appear. Section 15.4 DEFAULT ON SENIOR INDEBTEDNESS. The Company may not make any payment upon or in respect of the Notes (except in such subordinated securities) and may not acquire from the Trustee or any Noteholder any Note for cash or property (other than securities that are subordinated to at least the same extent as the Note to (i) Senior Indebtedness and (ii) any securities issued in exchange for Senior Indebtedness) until all Senior Indebtedness has been paid in full if: (a) a default in the payment of the principal of, premium, if any, or interest on Senior Indebtedness occurs and is continuing beyond any applicable period of grace (a "Payment Default"); or (b) a default, other than a Payment Default on Senior Indebtedness occurs and is continuing that permits holders of the Senior Indebtedness as to which such default relates to accelerate its maturity (a "Nonpayment Default") and the Trustee receives a notice of the default (a "Payment Blockage Notice") from the Representative or Representatives of holders of at least a majority in principal amount of Senior Indebtedness then outstanding. No Nonpayment Default that existed or was continuing on the date of delivery of any such Payment Blockage Notice to the Trustee shall be, or be made, the basis for a subsequent Payment Blockage Notice unless such default shall have been cured or waived for a period of not less than 180 days. No new period of payment blockage may be commenced within 360 days after the receipt by the Trustee of any prior Payment Blockage Notice. 64 The Company, with notice and evidence of the occurrence of (c) or (d) provided to the Trustee, may and shall resume payments on and distributions in respect of the Notes and may acquire them upon the earlier of: (c) in the case of a Payment Default, upon the date on which the default is cured or waived, or (d) in the case of a default other than a NonPayment Default: 179 days after the date on which the applicable Payment Blockage Notice is received, unless the maturity of such Senior Indebtedness has been accelerated, if this Article XV otherwise permits the payment, distribution or acquisition at the time of such payment or acquisition. Section 15.5 WHEN DISTRIBUTION MUST BE PAID OVER. In the event that the Trustee (or paying agent if other than the Trustee) or any Noteholder receives any payment of principal or interest with respect to the Notes at a time when such payment is prohibited by Section 15.3 or 15.4 hereof, such payment shall be held by the Trustee (or paying agent if other than the Trustee) or such Noteholder, in trust for the benefit of, and immediately shall be paid over and delivered, upon written request, to, the holders of Senior Indebtedness as their interests may appear or their Representative under the indenture or other agreement (if any) pursuant to which Senior Indebtedness may have been issued, as their respective interests may appear, for application to the payment of all Senior Indebtedness remaining unpaid to the extent necessary to pay all Senior Indebtedness in full in accordance with its terms, after giving effect to any concurrent payment or distribution to or for the holders of Senior Indebtedness. With respect to the holders of Senior Indebtedness, the Trustee undertakes to perform only such obligations on the part of the Trustee as are specifically set forth in this Article XV, and no implied covenants or obligations with respect to the holders of Senior Indebtedness shall be read into this Indenture against the Trustee. The Trustee shall not be deemed to owe any fiduciary duty to the holders of Senior Indebtedness and shall not be liable to any such holders if the Trustee shall pay over or distribute to or on behalf of Noteholders or the Company or any other person money or assets to which any holders of Senior Indebtedness shall be entitled by virtue of this Article XV, except if such payment is made as a result of the willful misconduct or gross negligence of the Trustee. Section 15.6 NOTICE BY COMPANY. The Company shall promptly notify the Trustee and the paying agent in writing of any facts known to the Company that would cause a payment of any principal or interest with respect to the Notes to violate this Article XV, but failure to give such notice shall not affect the subordination of the Notes to the Senior Indebtedness as provided in this Article XV. Section 15.7 SUBROGATION. Until all Senior Indebtedness is paid in full and until the Notes are paid in full, Noteholders shall be subrogated (equally and ratably with all other indebtedness pari passu with the Notes) to the rights of holders of Senior Indebtedness to receive distributions applicable to Senior Indebtedness to the extent that distributions otherwise payable to the Noteholders have been applied to the payment of Senior Indebtedness. A distribution made under this Article XV to holders of Senior Indebtedness that otherwise would 65 have been made to Noteholders is not, as between the Company and Noteholders, a payment by the Company on the Notes. Section 15.8 RELATIVE RIGHTS. This Article XV defines the relative rights of Noteholders and holders of Senior Indebtedness. Nothing in this Indenture shall: (a) impair, as between the Company and the Noteholders, the obligation of the Company, which is absolute and unconditional, to pay principal of, premium, if any, and interest on the Notes in accordance with their terms; (b) affect the relative rights of Noteholders and creditors of the Company other than their rights in relation to holders of Senior Indebtedness; or (c) prevent the Trustee or any Noteholder from exercising its available remedies upon a default or Event of Default, subject to the rights of holders and owners of Senior Indebtedness to receive distributions and payments otherwise payable to Noteholders. If the Company fails because of this Article XV to pay principal of, premium, if any, or interest on a Note on the due date, the failure is still a default or Event of Default. Section 15.9 SUBORDINATION MAY NOT BE IMPAIRED BY COMPANY. No right of any holder of Senior Indebtedness to enforce the subordination of the indebtedness evidenced by the Notes shall be impaired by any act or failure to act by the Company or any holder of Notes or by the failure of the Company or any holder of Notes to comply with this Indenture. Section 15.10 DISTRIBUTION OR NOTICE TO REPRESENTATIVE. Whenever a distribution is to be made or a notice given to holders of Senior Indebtedness, the distribution may be made and the notice given to their Representative. Upon any payment or distribution of assets of the Company referred to in this Article XV, the Trustee and the Noteholders shall be entitled to rely upon any order or decree made by any court of competent jurisdiction or upon any certificate of such Representative or of the liquidating trustee or agent or other person making any distribution to the Trustee or to the Noteholders for the purpose of ascertaining the persons entitled to participate in such distribution, the holders of the Senior Indebtedness and other indebtedness of the Company, the amount thereof or payable thereon, the amount or amounts paid or distributed thereon and all other facts pertinent thereto or to this Article XV. Section 15.11 RIGHTS OF TRUSTEE AND PAYING AGENT. Notwithstanding the provisions of this Article XV or any other provision of this Indenture, the Trustee shall not be charged with knowledge of the existence of any facts that would prohibit the making of any payment or distribution by the Trustee, and the Trustee and the paying agent may continue to make payments on the Notes, unless the Trustee shall have received at its Corporate Trust Office at least three Business Days prior to the date of such payment written notice of facts that would cause the payment of any principal, premium, if any, and interest with respect to the Notes to violate this Article XV. Only the Company or a Representative may give the notice. 66 Nothing in this Article XV shall impair the claims of, or payments to, the Trustee under or pursuant to Section 7.6 hereof. The Trustee shall be entitled to rely on the delivery to it of a written notice by a person representing such person to be a holder of Senior Indebtedness (or a trustee or agent on behalf of such holder) to establish that such notice has been given by a holder of Senior Indebtedness (or a trustee or agent on behalf of any such holder). In the event that the Trustee determines in good faith that further evidence is required with respect to the right of any person as a holder of Senior Indebtedness to participate in any payment or distribution pursuant to this Article XV, the Trustee may request such person to furnish evidence to the reasonable satisfaction of the Trustee as to the amount of Senior Indebtedness held by such person, the extent to which such person is entitled to participate in such payment or distribution and any other facts pertinent to the rights of such person under this Article XV, and if such evidence is not furnished, the Trustee may defer any payment which it may be required to make for the benefit of such person pursuant to the terms of this Indenture pending judicial determination as to the rights of such person to receive such payment. The Trustee in its individual or any other capacity may hold Senior Indebtedness with the same rights it would have if it were not Trustee. Any paying agent, any authenticating agent, any conversion agent, any Note registrar and their successors may do the same with like rights. Section 15.12 AUTHORIZATION TO EFFECT SUBORDINATION. Each holder of a Note by the holder's acceptance thereof authorizes and directs the Trustee on the holder's behalf to take such action as may be necessary or appropriate to effectuate the subordination as provided in this Article XV and appoints the Trustee to act as the holder's attorney-in-fact for any and all such purposes. Without limiting the foregoing, each Representative is hereby irrevocably authorized and empowered (in its own name or in the name of the Noteholders or the Trustee or otherwise), but shall have no obligation, to demand, sue for, collect and receive every payment or distribution referred to in Section 15.3 above and give acquittance therefor and to file claims and proofs of claim and take such other action as it may deem necessary or advisable for the exercise or enforcement of any of the rights or interests of the holders or owners of the Senior Indebtedness hereunder; provided that for purposes of this Section 15.12 holders or owners of Senior Indebtedness may act only through such Representative. Section 15.13 CONVERSIONS NOT DEEMED PAYMENT. For the purposes of this Article XV only, the issuance and delivery of Common Stock upon conversion of the Notes in accordance with Article XIV shall not be deemed to constitute a payment or distribution on account of the principal of or interest on the Notes or on account of the purchase or other acquisition of Notes. Nothing contained in this Article or elsewhere in this Indenture or in the Notes is intended to or shall impair, as among the Company, its creditors other than holders of Senior Indebtedness and the holders, the right, which is absolute and unconditional, of the holder of any Note to convert such Note in accordance with Article XIV. Section 15.14 AMENDMENTS. The provisions of this Article XV shall not be amended or modified without the written consent of the holders of Senior Indebtedness. 67 ARTICLE XVI MISCELLANEOUS PROVISIONS Section 16.1 POOLING OF INTERESTS. The Company desires to preserve its ability to account for acquisition and other business combination transactions using the pooling-of-interests method where appropriate, and the provisions of this Indenture shall be interpreted accordingly. Section 16.2 PROVISIONS BINDING ON COMPANY'S SUCCESSORS. All the covenants, stipulations, promises and agreements in this Indenture made by the Company shall bind its successors and assigns whether so expressed or not. Section 16.3 OFFICIAL ACTS BY SUCCESSOR COMPANY. Any act or proceeding by any provision of this Indenture authorized or required to be done or performed by any board (including the Board of Directors), committee or officer of the Company shall and may be done and performed with like force and effect by the like board, committee or officer of any corporation that shall at the time be the lawful sole successor of the Company. Section 16.4 ADDRESSES FOR NOTICES, ETC. Any notice or demand that by any provision of this Indenture is required or permitted to be given or served by the Trustee or by the holders of Notes on the Company shall be deemed to have been sufficiently given or made, for all purposes if given or served by being sent by prepaid overnight delivery or being deposited postage prepaid by registered or certified mail in a post office letter box addressed (until another address is filed by the Company with the Trustee) to Penn Treaty American Corporation, 5440 Lehigh Street, Allentown, Pennsylvania 18103, Attention: General Counsel with a copy to Justin P. Klein, Ballard Spahr Andrews & Ingersoll, 1735 Market Street, Philadelphia, Pennsylvania 19103. Any notice, direction, request or demand hereunder to or upon the Trustee shall be deemed to have been sufficiently given or made, for all purposes, if given or served by being sent by prepaid overnight delivery or being deposited postage prepaid by registered or certified mail in a post office letter box addressed to the Trustee, which office is, at the date as of which this Indenture is dated, located at 6th Street & Marquette Avenue, MAC N9303-110, Minneapolis, Minnesota 55479. Attention: _____________. The Trustee, by notice to the Company, may designate additional or different addresses for subsequent notices or communications. Any notice or communication mailed to a Noteholder shall be mailed to him by first class mail, postage prepaid, at the address of such Noteholder as it appears on the Note register and shall be sufficiently given to such Noteholder if so mailed within the time prescribed. Failure to mail a notice or communication to a Noteholder or any defect in it shall not affect its sufficiency with respect to other Noteholders. If a notice or communication is mailed in the manner provided above, it is duly given, whether or not the addressee receives it. 68 Section 16.5 COMMUNICATIONS BY HOLDERS WITH OTHER HOLDERS. Noteholders may communicate pursuant to Trust Indenture Act Section 312(b) with other Noteholders with respect to their rights under this Indenture or the Notes. The Company, the Trustee, the Note registrar and any other person shall have the protection of Trust Indenture Act Section 312(c). Section 16.6 GOVERNING LAW. This Indenture shall be deemed to be a contract made under the substantive laws of New York and for all purposes shall be construed in accordance with the substantive laws of New York without regard to conflicts of laws principles thereof. Section 16.7 EVIDENCE OF COMPLIANCE WITH CONDITIONS PRECEDENT; CERTIFICATES TO TRUSTEE. Upon any application or demand by the Company to the Trustee to take any action under any of the provisions of this Indenture, including those actions set forth in Trust Indenture Act Section 314(c), the Company shall furnish to the Trustee an Officers' Certificate stating that all conditions precedent, if any, provided for in this Indenture relating to the proposed action have been complied with, and an Opinion of Counsel stating that, in the opinion of such counsel, all such conditions precedent have been complied with. Each certificate or opinion provided for in this Indenture and delivered to the Trustee with respect to compliance with a condition or covenant provided for in this Indenture shall include: (1) a statement that the person making such certificate or opinion has read such covenant or condition, (2) a brief statement as to the nature and scope of the examination or investigation upon which the statement or opinion contained in such certificate or opinion is based, (3) a statement that, in the opinion of such person, he has made such examination or investigation as is necessary to enable him to express an informed opinion as to whether or not such covenant or condition has been complied with and (4) a statement as to whether or not, in the opinion of such person, such condition or covenant has been complied with. Section 16.8 LEGAL HOLIDAYS. In any case where any interest payment date, date fixed for redemption, stated maturity or Change of Control Purchase Date of any Note or the last date on which a holder has the right to convert his Notes shall not be a Business Day, then (notwithstanding any other provision of this Indenture or of the Notes) payment of interest or principal (and premium, if any) or conversion of the Notes need not be made on such date, but may be made on the next succeeding Business Day with the same force and effect as if made on the Interest Payment Date, date fixed for redemption, Change of Control Purchase Date, or at the stated maturity, or on such last day for conversion, provided that no interest shall accrue for the period from and after such interest payment date, date fixed for redemption, Change of Control Purchase Date or stated maturity, as the case may be. Section 16.9 NO SECURITY INTEREST CREATED. Nothing in this Indenture or in the Notes, expressed or implied, shall be construed to constitute a security interest under the Uniform Commercial Code or similar legislation, as now or hereafter enacted and in effect, in any jurisdiction where property of the Company or its Subsidiaries is located. 69 Section 16.10 TRUST INDENTURE ACT. This Indenture is hereby made subject to, and shall be governed by, the provisions of the Trust Indenture Act required to be part of and to govern indentures qualified under the Trust Indenture Act. Section 16.11 TRUST INDENTURE ACT CONTROLS. If any provision of this Indenture limits, qualifies, or conflicts with the duties imposed by operation of the Trust Indenture Act, the imposed duties, upon qualification of this Indenture under the Trust Indenture Act, shall control. Section 16.12 BENEFITS OF INDENTURE. Nothing in this Indenture or in the Notes, expressed or implied, shall give to any person, other than the parties hereto, any paying agent, any authenticating agent, any conversion agent, any Note registrar and their successors hereunder and the holders of Notes, any benefit or any legal or equitable right, remedy or claim under this Indenture. Section 16.13 TABLE OF CONTENTS, HEADINGS ETC. The table of contents and the titles and headings of the articles and sections of this Indenture have been inserted for convenience of reference only, are not to be considered a part hereof, and shall in no way modify or restrict any of the terms or provisions hereof. Section 16.14 AUTHENTICATING AGENT. The Trustee may appoint an authenticating agent that shall be authorized to act on its behalf and subject to its direction in the authentication and delivery of Notes in connection with the original issuance thereof and transfers and exchanges of Notes hereunder, including under Sections 2.4, 2.5, 2.6, 2.7 and 3.3, as fully to all intents and purposes as though the authenticating agent had been expressly authorized by this Indenture and those Sections to authenticate and deliver Notes. For all purposes of this Indenture, the authentication and delivery of Notes by the authenticating agent shall be deemed to be authentication and delivery of such Notes "by the Trustee" and a certificate of authentication executed on behalf of the Trustee by an authenticating agent shall be deemed to satisfy any requirement hereunder or in the Notes for the Trustee's certificate of authentication. Such authenticating agent shall at all times be a person eligible to serve as Trustee hereunder pursuant to Section 7.10. Any corporation into which any authenticating agent may be merged or converted or with which it may be consolidated, or any corporation resulting from any merger, consolidation or conversion to which any authenticating agent shall be a party, or any corporation succeeding to the corporate trust business of any authenticating agent, shall be the successor of the authenticating agent hereunder, if such successor company is otherwise eligible under this Section, without the execution or filing of any paper or any further act on the part of the parties hereto or the authenticating agent or such successor company. Any authenticating agent may at any time resign by giving written notice of resignation to the Trustee and to the Company. The Trustee may at any time terminate the agency of any authenticating agent by giving written notice of termination to such authenticating agent and to the Company. Upon receiving such a notice of resignation or upon such a termination, or in case at any time any authenticating agent shall cease to be eligible under this Section, the Trustee shall promptly appoint a successor authenticating agent (which may be the 70 Trustee), shall give written notice of such appointment to the Company and shall mail notice of such appointment to all holders of Notes as the names and addresses of such holders appear on the Note register. The Company agrees to pay to the authenticating agent from time to time reasonable compensation for its services. The provisions of Sections 7.3, 7.4, 7.5, 8.3 and this Section 16.14 shall be applicable to any authenticating agent. Section 16.15 EXECUTION IN COUNTERPARTS. This Indenture may be executed in any number of counterparts, each of which shall be an original, but such counterparts shall together constitute but one and the same instrument. 71 Wells Fargo Bank Minnesota, N.A. hereby accepts the trusts in this Indenture declared and provided, upon the terms and conditions hereinabove set forth. IN WITNESS WHEREOF, the parties hereto have caused this Indenture to be duly signed and attested, all as of the date first written above. PENN TREATY AMERICAN CORPORATION By: -------------------------------------- Name: Irving Levit Title: President and Chief Executive Officer Attest: - ---------------------------------- WELLS FARGO BANK MINNESOTA, N.A., as Trustee By -------------------------------------- Name: Michael Lechner Title: Vice President Attest: - ---------------------------------- 72 EXHIBIT A - FORM OF GLOBAL NOTE [FORM OF FACE OF NOTE] No. A- $_________________ CUSIP PENN TREATY AMERICAN CORPORATION 6-1/4% Convertible Subordinated Notes Due 2008 PENN TREATY AMERICAN CORPORATION, a corporation duly organized and validly existing under the laws of the Commonwealth of Pennsylvania (the "Company"), which term includes any Successor Company under the Indenture referred to on the reverse hereof, for value received hereby promises to pay to _______________________________, or registered assigns, the principal sum of _________________________________Dollars (subject to adjustment as set forth in the next paragraph hereof) on ____________, 2008, at the office or agency of the Company maintained for that purpose in the ____________________________ _____________________, or, at the option of the holder of this Global Note, at the ________________ of the Trustee, in such coin or currency of the United States of America as at the time of payment shall be legal tender for the payment of public and private debts, and to pay interest, semi-annually on October 15 and April 15 of each year (each an "Interest Payment Date"), commencing October 15, on said principal sum at said office or agency, in like coin or currency, at the rate per annum specified in the title of this Global Note, from June 1, 2002 or the most recent Interest Payment Date, as the case may be, next preceding the date of this Global Note to which interest has been paid or duly provided for, unless the date hereof is a date to which interest has been paid or duly provided for, in which case from the date of this Global Note, or unless no interest has been paid or duly provided for on the Notes, in which case from June 1, 2002, until payment of said principal sum has been made or duly provided for. Any interest on any Note that is payable, but is not punctually paid or duly provided for on said October 15 or April 15 (herein called "Defaulted Interest") shall forthwith cease to be payable to the Noteholder on the relevant record date by virtue of his having been such Noteholder; and such Defaulted Interest shall be paid by the Company, at its election in each case, either (i) by notifying the Trustee of a special record date, the amount of interest to be paid on such special record date and the date of payment (not more than 25 days after receipt by the Trustee of such interest, unless the Trustee shall consent to an earlier date) and depositing with the Trustee an amount of money equal to the aggregate amount to be paid in respect of such Defaulted Interest on making arrangements satisfactory to the Trustee for such deposit or (ii) in any lawful manner not inconsistent with the requirements of any securities exchange on which the Notes may be listed and upon notice requested by such exchange, if, after notice to the Trustee, the Trustee deems such manner of payment to be practicable. The interest so payable on any October 15 or April 15 will be paid to the person in whose name this Global Note (or one or more Predecessor Notes) is registered at the close of business on the record date, which shall be the October 1 and April 1 (record date) (whether or not a Business Day) next preceding such October 15 and April 15, respectively; provided that any such interest not punctually paid or duly provided for shall be payable as provided in the Indenture. Interest shall be paid by check mailed to the A-1 registered holder at the registered address of such person unless other arrangements are made in accordance with the provisions of the Indenture. The aggregate principal amount of this Global Note represented hereby may from time to time be reduced or increased to reflect exchanges of a part of this Global Note for interests in the Global Note or definitive Notes or exchanges of interests in the Global Note or definitive Notes for a part of this Global Note or conversions, redemptions or repurchases of a part of this Global Note or cancellations of a part of this Global Note or transfers of interests in the Global Note or definitive Notes in return for a part of this Global Note or transfers of a part of this Global Note effected by delivery of interests in the Global Note or definitive Notes, in each case, and in any such case, by means of notations on the Schedule of Exchanges, Conversions, Redemptions, Repurchases, Cancellations and Transfers on the last page hereof. Notwithstanding any provision of this Global Note to the contrary, (i) exchanges of a part of this Global Note for interests in the Global Note or definitive Notes, (ii) exchanges of interests in the Global Note or definitive Notes for a part of this Global Note, (iii) conversions, redemptions or repurchases of a part of this Global Note, (iv) cancellations of a part of this Global Note, (v) transfers of interests in the Global Note or definitive Notes in return for a part of this Global Note and (vi) transfers of a part of this Global Note effected by delivery of interests in the Global Note or definitive Notes may be effected without the surrendering of this Global Note, provided that appropriate notations on the Schedule of Exchanges, Conversions, Redemptions, Repurchases, Cancellations and Transfers are made by the Trustee, or the Custodian at the direction of the Trustee, to reflect the appropriate reduction or increase, as the case may be, in the aggregate principal amount of this Global Note resulting therefrom or as a consequence thereof. Reference is made to the further provisions of this Global Note set forth on the reverse hereof, including, without limitation, provisions giving the holder of this Global Note the right to convert this Global Note into Common Stock of the Company (or, under certain circumstances specified in the Indenture, into an amount of cash as set forth in the Indenture) on the terms and subject to the limitations referred to on the reverse hereof and as more fully specified in the Indenture. Such further provisions shall for all purposes have the same effect as though fully set forth at this place. A-2 This Global Note shall not be valid or become obligatory for any purpose until the certificate of authentication hereon shall have been manually signed by the Trustee or a duly authorized authenticating agent under the Indenture. IN WITNESS WHEREOF, the Company has caused this Global Note to be duly executed under its corporate seal. PENN TREATY AMERICAN CORPORATION By: --------------------------------- Name: Title: Attest: - ----------------------------------- Secretary A-3 [FORM OF CERTIFICATE OF AUTHENTICATION] CERTIFICATE OF AUTHENTICATION Dated: This is one of the Notes described in the within-named Indenture. WELLS FARGO BANK MINNESOTA, N.A., as Trustee By: ---------------------------------------- Authorized Signatory A-4 [FORM OF REVERSE OF GLOBAL NOTE] PENN TREATY AMERICAN CORPORATION 6-1/4% Convertible Subordinated Notes Due 2008 This Global Note is one of a duly authorized issue of Notes of the Company, designated as its 6-1/4% Convertible Subordinated Notes Due 2008 (herein called the "Notes"), limited to the aggregate principal amount of $74,750,000 all issued or to be issued under and pursuant to an Indenture dated as of September __, 2002 (the "Indenture"), between the Company and Wells Fargo Bank Minnesota, N.A., as trustee (the "Trustee"), to which Indenture and all indentures supplemental thereto reference is hereby made for a complete description of the rights, limitations of rights, obligations, duties and immunities thereunder of the Trustee, the Company and the holders of the Notes. Each Note is subject to, and qualified by, all such terms as set forth in the Indenture certain of which are summarized hereon and each holder of a Note is referred to the corresponding provisions of the Indenture for a complete statement of such terms. To the extent that there is any inconsistency between the summary provisions set forth in the Notes and the Indenture, the provisions of the Indenture shall govern. Capitalized terms used but not defined in this Global Note shall have the meanings ascribed to them in the Indenture. In case an Event of Default, as defined in the Indenture, shall have occurred and be continuing, the principal of, premium, if any, and accrued interest on all Notes may be declared, and upon said declaration shall become, due and payable, in the manner, with the effect and subject to the conditions provided in the Indenture. The payment of principal of, premium, if any, and interest on the Notes will, to the extent set forth in the Indenture, be subordinated in right of payment to the prior payment in full of all Senior Indebtedness (as defined in the Indenture). Upon any distribution to creditors of the Company in a liquidation or dissolution of the Company or in a bankruptcy, reorganization, insolvency, receivership or similar proceeding related to the Company or its property, in an assignment for the benefit of creditors or any marshalling of the Company's assets and liabilities, the holders of all Senior Indebtedness will first be entitled to receive payment in full of all amounts due or to become due thereon before the holders of the Notes will be entitled to receive any payment in respect of the principal of, premium, if any, or interest on the Notes (except that holders of Notes may receive securities that are subordinated at least to the same extent as the Notes to Senior Indebtedness and any securities issued in exchange for Senior Indebtedness). The Company also may not make any payment upon or in respect of the Notes (except in such subordinated securities) and may not acquire from the Trustee or the holder of any Note for cash or property (other than securities subordinated to at least the same extent as the Note to (i) Senior Indebtedness and (ii) any securities issued in exchange for Senior Indebtedness) until all Senior Indebtedness has been paid in full if (a) a default in the payment of the principal of, premium, if any, or interest on Senior Indebtedness occurs and is continuing beyond any applicable period of grace or (b) any other default occurs and is continuing with respect to Senior Indebtedness that permits holders of the Senior Indebtedness as to which such default relates to accelerate its maturity and the Trustee receives a notice of such default (a "Payment Blockage Notice") from the representative or representatives of holders of at least a A-5 majority in principal amount of Senior Indebtedness then outstanding. Payments on the Notes may and shall be resumed (i) in the case of a Payment Default, upon the date on which such default is cured or waived, or (ii) in the case of a Nonpayment Default, 179 days after the date on which the applicable Payment Blockage Notice is received, unless the maturity of any Senior Indebtedness has been accelerated. No new period of payment blockage may be commenced within 360 days after the receipt by the Trustee of any prior Payment Blockage Notice. No default, other than a Nonpayment Default, that existed or was continuing on the date of delivery of any Payment Blockage Notice to the Trustee shall be, or be made, the basis for a subsequent Payment Blockage Notice unless such default shall have been cured or waived for a period of not less than 180 days. In the event that the Trustee (or paying agent if other than the Trustee) or any holder of the Notes receives any payment of principal or interest with respect to the Notes at a time when such payment is prohibited under the Indenture, such payment shall be held in trust for the benefit of, and immediately shall be paid over and delivered to, the holders of Senior Indebtedness or their representative as their respective interests may appear. After all Senior Indebtedness is paid in full and until the Notes are paid in full, the holders of the Notes shall be subrogated (equally and ratably with all other Indebtedness pari passu with the Notes) to the rights of holders of Senior Indebtedness to receive distributions applicable to Senior Indebtedness to the extent that distributions otherwise payable to the holders of the Notes have been applied to the payment of Senior Indebtedness. The Indenture contains provisions permitting the Company and the Trustee, with the consent of the holders of not less than a majority in aggregate principal amount of the Notes at the time outstanding, evidenced as in the Indenture provided, to execute supplemental indentures adding any provisions to or changing in any manner or eliminating any of the provisions of the Indenture or of any supplemental indenture or modifying in any manner the rights of the holders of the Notes; provided that no such supplemental indenture shall (i) extend the fixed maturity of any Note, or reduce the rate or extend the time of payment of interest thereon, or reduce the principal amount thereof or premium, if any, thereon, or reduce any amount payable on redemption thereof, alter the obligation of the Company to repurchase the Notes at the option of the holders upon the occurrence of a Change of Control, or impair or affect the right of any Noteholder to institute suit for the payment thereof, or make the principal thereof or interest or premium, if any, thereon payable in any coin or currency other than that provided in the Notes, modify the subordination provisions in a manner adverse to the holders of the Notes, or impair the right to convert the Notes into Common Stock subject to the terms set forth in the Indenture without the consent of the holder of each Note so affected or (ii) reduce the aforesaid percentage of Notes, the holders of which are required to consent to any such supplemental indenture, without the consent of the holders of all Notes then outstanding. The Company and the Trustee may amend or supplement the Indenture without notice to or consent of any holder of Notes in certain events specified in the Indenture. It is also provided in the Indenture that, prior to any declaration accelerating the maturity of the Notes, the holders of a majority in aggregate principal amount of the Notes at the time outstanding may on behalf of the holders of all of the Notes waive any past default or Event of Default under the Indenture and its consequences except a default in the payment of interest or any premium on or the principal of any of the Notes, a failure by the Company to convert any Notes into Common Stock of the Company, unless otherwise excused pursuant to the terms of the Indenture, or a default in respect A-6 of a covenant or provision of the Indenture that under Article X thereof cannot be modified or amended without the consent of the holders of all Notes then outstanding. Any such consent or waiver by the holder of this Global Note (unless revoked as provided in the Indenture) shall be conclusive and binding upon such holder and upon all future holders and owners of this Global Note and any Notes that may be issued in exchange or substitution hereof, irrespective of whether or not any notation thereof is made upon this Global Note or such other Notes. No reference herein to the Indenture and no provision of this Global Note or of the Indenture shall alter or impair the obligation of the Company, which is absolute and unconditional, to pay the principal of and any premium and interest on this Global Note at the place, at the respective times, at the rate and in the coin or currency herein prescribed. Interest on the Notes shall be computed on the basis of a 360-day year composed of twelve 30-day months. The Notes are issuable in registered form without coupons in denominations of $1,000 principal amount and integral multiples thereof. At the office or agency of the Company referred to on the face hereof, and in the manner and subject to the limitations provided in the Indenture, without payment of any service charge but with payment of a sum sufficient to cover any tax or other governmental charge that may be imposed in connection with any registration or exchange of Notes, Notes may be exchanged for a like aggregate principal amount of Notes of other authorized denominations. The Notes are not redeemable at the option of the Company prior to October 15, 2004. At any time on or after that date, the Notes may be redeemed at the Company's option, upon notice as set forth in the Indenture, in whole at any time or in part from time to time, at the price of 100% of the principal amount, together with accrued interest to the date fixed for redemption; provided that if the date fixed for redemption is a date on or after the record date and on or before the next following Interest Payment Date, then the interest payable on such date shall be paid to the holder of record on the next preceding October 1 or April 1, respectively. If a Change of Control (as defined in the Indenture) shall occur at any time, then each holder of Notes shall have the right to require that the Company repurchase such holder's Notes in whole or in part in integral multiples of $1,000, at a purchase price in cash in an amount equal to 101% of the principal amount of such Notes, plus accrued and unpaid interest, if any, to the repurchase date pursuant to an offer to be made by the Company and in accordance with the procedures set forth in the Indenture. Subject to the provisions of the Indenture, the holder hereof has the right, at its option, at any time after 90 days following the latest date of original issuance of the Notes and prior to the close of business on September __, 2008, subject to prior redemption or repurchase, or, as to all or any portion hereof called for redemption, prior to the close of business one business day before the date fixed for redemption (unless the Company shall default in payment due upon redemption thereof), to convert the principal hereof or any portion of such principal that is $1,000 or an integral multiple thereof, into that number of fully paid and non-assessable shares of the Company's Common Stock, as said shares shall be constituted at the date of conversion, obtained by dividing the principal amount of this Global Note or portion thereof to A-7 be converted by the conversion price of $5.31 per share or such conversion price as adjusted from time to time as provided in the Indenture, upon surrender of this Global Note to the Company at the office or agency of the Company maintained for that purpose in the ______________________________________, or at the option of such holder, the Corporate Trust Office of the Trustee, and, unless the shares issuable on conversion are to be issued in the same name as this Global Note, duly endorsed by, or accompanied by instruments of transfer in form satisfactory to the Company duly executed by, the holder or by his duly authorized attorney. Except as described in the Indenture, no adjustment will be made on conversion of any Notes for interest accrued thereon or for dividends paid on any Common Stock issued. A Holder of Notes at the close of business on a record date will be entitled to receive the interest payable on such Notes on the corresponding interest payment date. Any unpaid interest on any Note or portion thereof as of the date such Note or portion thereof is surrendered for conversion shall (unless such Note or portion thereof being converted is called for redemption on a redemption date during the period from the close of business on or after any record date to the close of business on the business day following the corresponding interest payment date) be paid in cash to the former holder of such Note or portion thereof on the next succeeding interest payment date. In the event a holder desires to convert all or any portion of its Notes into shares of Common Stock and the Company does not have authorized a sufficient number of shares of Common Stock for such conversion, in lieu of delivering shares of Common Stock (or other securities into which the Notes are then convertible) upon conversion of that portion of such holder's Notes for which there is an insufficient number of shares of Common Stock (the "Cash Equivalent Notes") pursuant to the provisions of the Indenture, the Company will pay to the holder converting the Cash Equivalent Notes who properly exercises the conversion privilege, as set forth in the Indenture, an amount in cash equal to the Market Cash Conversion Price (as defined in the Indenture) of the shares of Common Stock into which such Cash Equivalent Notes are then convertible. On any date on or after the 15th business day following October 15, 2004, if: (i) the average of the closing price of the Common Stock on 15 consecutive business days is equal to or greater than 110% of the conversion price (as it may be adjusted in the Indenture) and (ii) the Company has sufficient shares of Common Stock (or other securities into which the Notes are then convertible) authorized to execute the Mandatory Conversion (as defined below), then the Notes shall be converted into that number of fully paid and nonassessable shares of Common Stock (or other securities into which the Notes are then convertible) obtained by dividing the aggregate principal amount of the Notes by the conversion price in effect at such time rounded to the nearest 1/100,000th of a share (with 0.000005 being rolled upward)(the "Mandatory A-8 Conversion"). After the Mandatory Conversion, the Notes will no longer represent indebtedness of the Company and will no longer accrue interest or require the Company to make any payment of principal; and the Company's obligations to make any further payments with respect to the Notes will terminate. The Company is not required to issue fractional shares of Common Stock upon conversion of Notes and, in lieu thereof, will pay a cash adjustment based upon the closing price of the Common Stock on the last business day prior to the date of conversion. Upon due presentment for registration of transfer of this Global Note at the office or agency of the Company in the ____________________________________, or at the option of the holder of this Global Note, at the Corporate Trust Office of the Trustee, a new Note or Notes of authorized denominations for an equal aggregate principal amount will be issued to the transferee in exchange thereof, subject to the conditions and limitations provided in the Indenture, without charge except for any tax or other governmental charge imposed in connection therewith. The Company, the Trustee, any authenticating agent, any paying agent, any conversion agent and any Note registrar may deem and treat the registered holder hereof as the absolute owner of this Global Note (whether or not this Global Note shall be overdue and notwithstanding any notation of ownership or other writing hereon made by anyone other than the Company or any Note registrar), for the purpose of receiving payment hereof, or on account hereof, for the conversion hereof and for all other purposes, and neither the Company nor the Trustee nor any other authenticating agent nor any paying agent nor any other conversion agent nor any Note registrar shall be affected by any notice to the contrary. All payments made to or upon the order of such registered holder shall, to the extent of the sum or sums paid, satisfy and discharge liability for monies payable on this Global Note. No recourse for the payment of the principal of or any premium or interest on this Global Note, or for any claim based hereon or otherwise in respect hereof, and no recourse under or upon any obligation, covenant or agreement of the Company in the Indenture or any indenture supplemental thereto or in any Note, or because of the creation of any indebtedness represented thereby, shall be had against any incorporator, shareholder, officer or director, as such, past, present or future, of the Company or of any Successor Company, either directly or through the Company or any Successor Company, whether by virtue of any constitution, statute or rule of law or by the enforcement of any assessment or penalty or otherwise, all such liability being, by the acceptance hereof and as part of the consideration for the issue hereof, expressly waived and released. A-9 ABBREVIATIONS The following abbreviations, when used in the inscription of the face of this Global Note, shall be construed as though they were written out in full according to applicable laws or regulations: TEN COM - as tenants in common UNIF GIFT MIN ACT - Uniform Gifts to Minors Act _______________________________________ (State) TEN ENT - as tenants by the entireties ________________ Custodian (Cust) JT TEN - as joint tenants with right of survivorship ________________ under and not as tenants in (Minor) common Additional abbreviations may also be used though not in the above list. A-10 Fill in for registration of shares if to be issued, and Notes if to be delivered, other than to and in the name of the registered holder: - ----------------------------------- (Name) - ----------------------------------- (Street Address) - ----------------------------------- (City, State and Zip Code) Please print name and address Principal amount to be converted (if less than all) $_____________________________ ----------------------------------- Social Security or Other Taxpayer Identification Number A-11 [FORM OF OPTION TO ELECT REPAYMENT UPON A CHANGE OF CONTROL] To: Penn Treaty American Corporation The undersigned registered owner of this Global Note hereby irrevocably acknowledges receipt of a notice from Penn Treaty American Corporation (the "Company") as to the occurrence of a Change of Control with respect to the Company and requests and instructs the Company to repay the entire principal amount of this Global Note, or the portion thereof (which is $1,000 principal amount or an integral multiple thereof) below designated, in accordance with the terms of the Indenture referred to in this Global Note, together with accrued interest to such date, to the registered holder hereof. Dated: ----------------------------- ------------------------------------ Signature(s) ------------------------------------ Social Security or Other Taxpayer Identification Number Principal amount to be repaid (if less than all): $___________________ A-12 [FORM OF ASSIGNMENT] For value received _______________________________ hereby sell(s), assign(s) and transfer(s) unto _________________ (please insert social security or other identifying number of assignee) the within Note, and hereby irrevocably constitutes and appoints ____________________________ attorney to transfer the said Note on the books of the Company, with full power of substitution in the premises. Dated: ----------------------------- - ----------------------------------- - ----------------------------------- Signature(s) Signature(s) must be guaranteed by an eligible Guarantor Institution (banks, stock brokers, savings and loan associations and credit unions) with membership in an approved signature guarantee medallion program pursuant to Securities and Exchange Commission Rule 17Ad-15. - ----------------------------------- Signature Guarantee NOTICE: The option to elect payment upon a Change of Control or the assignment must correspond with the name as written upon the face of the Note in every particular without alteration or enlargement or any change whatever. A-13 SCHEDULE A SCHEDULE OF EXCHANGES, CONVERSIONS, REDEMPTIONS, REPURCHASES, CANCELLATIONS AND TRANSFERS The initial principal amount of this Global Note is U.S. $_____________. The following additions to principal, redemptions, repurchases, exchanges of a part of this Global Note for an interest in the Global Note, definitive Notes and conversions into Common Stock or cash have been made:
- ---------------------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------------------- Principal Amount Redeemed, Repurchased Principal Exchanged for Amount Added Interest in Date of Addi- on the Global Remaining tion to Prin- Exchange of Note or Principal cipal, Re- Interest in Definitive Amount Out- demption, the Global Notes or standing Notation Repurchase, Note or Converted into Following Made by or Exchange or Definitive Common Stock such Transac- on behalf of Conversion Notes or Cash tion the Trustee - --------------------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------------------
-----END PRIVACY-ENHANCED MESSAGE-----