Exhibit 10.1
February 19, 2002
Penn Treaty American Corporation
Penn Treaty Network America Insurance Company
American Network Insurance Company
0000 Xxxxxx Xxxxxx
Xxxxxxxxx, XX 00000-0000
Xxxxxx Xxxxxx
Attention: Xxxxxxx X. Xxxx, Senior Vice President
Re: Penn Treaty American Corporation ("PTAC")
Dear Xx. Xxxx:
This letter agreement (the "Supplemental Letter Agreement") ratifies the
understanding of PTAC and its insurance subsidiaries Penn Treaty Network America
Insurance Company ("PTNAIC") and American Network Insurance Company ("ANIC")
(PTNAIC and ANIC may be referred collectively as the "Company"), on the one
hand, and Centre Solutions (Bermuda) Limited and/or certain of its affiliated or
related companies as designated by it (collectively, "Centre") on the other
hand, regarding those matters originally addressed in our letter to you of
December 14, 2001 (the "Original Letter Agreement") (which outlined the terms
upon which Centre was to offer reinsurance of the claims and active life
reserves for the long term care insurance business of the Company, and the terms
upon which PTAC had granted to Centre certain warrants and an option to reinsure
future writings of the Company's long term care insurance business (the
"Transaction")), as amended by those specific changes, modifications,
alterations, additions and edits set forth in this Supplemental Letter
Agreement. Other than as specified herein, the parties intend that the terms and
provisions contained in the Original Letter Agreement, countersigned by PTAC,
shall remain in full force and effect.
1. Under cover of this Supplemental Letter Agreement, Centre hereby transmits
the revised final form of the Reinsurance Slip ("the Slip"), Trust Agreements,
form of Warrant for PTAC's Series X-0, X-0, and A-3 Convertible Preferred Stock
and for PTAC's Series A-4 Convertible Preferred Stock, Investor Rights
Agreement, and the description of terms for such Convertible Preferred Stock,
all relating to the Transaction, as has been agreed to by the parties. The
parties agree that these documents replace the Reinsurance Slip and form of
Warrant agreed on by the parties as reflected in the Original Letter Agreement,
and add the form of Warrant for PTAC's Series A-4 Convertible Preferred Stock,
description of terms for all such Convertible Preferred Stock, and the Trust
Agreements.
2. With respect to the payment of the Initial Premium of $619,529,327 which the
Company is obligated to pay pursuant to paragraph 1(a) of the Slip, PTAC and the
Company on the one hand, and Centre on the other hand, agree that if the
Accepted Market Value of the assets transferred as Initial Premium by the
Company to Centre on the Closing Date is determined by Centre to be less than
the required amount of $619,529,327 plus interest specified in and required by
the Slip, then any such shortfall shall be deemed to have been paid by the
Company to Centre on the Closing Date and maintained by the Company on a "funds
withheld" basis as security in satisfaction of Centre's obligations under the
Slip. PTAC and the Company covenant and agree that within (2) business days of
such determination by Centre as to the Accepted Market Value of the assets
transferred, the Company shall, and PTAC shall cause the Company to, release
such security to Centre and transfer to Centre in cash or securities acceptable
to Centre, the total amount of such shortfall.
3. The Warrants contemplated by paragraph 1(c) of the Original Letter Agreement,
the grant of which was described in the Original Letter Agreement, shall be in
four tranches, and the terms of which are amended as follows:
(a) The Warrants shall be exercisable for PTAC's Series X-0, X-0, X-0 and
A-4 Convertible Preferred Stock, the terms of which are described in
the attached description of terms. Such terms provide, inter alia, for
the conversion of each share of such Convertible Preferred Stock into
three (3) shares of common stock (subject to the anti-dilution
adjustments set forth therein).
(b) For the first tranche, the exercise price of the Warrants for the
Series A-1 Convertible Preferred Stock shall be $12 (which is three
times the average closing price of PTAC common stock on the fifteen
(15) trading days immediately preceding the date of the Letter), and
the Preferred Stock issuable on exercise of the Warrants shall convert
into a number of whole shares closest to 8.69% of PTAC's then
outstanding common shares, on a fully diluted basis, as of the date of
exercise and the Warrants shall be exercisable at any time before
December 31, 2007;
(c) For the second tranche, the exercise price of the Warrants for the
Series A-2 Convertible Preferred Stock shall be $24, and the Preferred
Stock issuable on exercise of the Warrants shall convert into a number
of whole shares closest to 4.55% of PTAC's then outstanding common
shares, on a fully diluted basis, as of the date of exercise and the
Warrants shall be exercisable at any time before December 31, 2007;
(d) For the third tranche, the exercise price of the Warrants for the
Series A-3 Convertible Preferred Stock shall be $36, and the Preferred
Stock issuable on exercise of the Warrants shall convert into a number
of whole shares closest to 3.52% of PTAC's then outstanding common
shares, on a fully diluted basis, as of the date of exercise and the
Warrants shall be exercisable at any time before December 31, 2007;
(e) For the fourth tranche, the exercise price of the Warrants for the
Series A-4 Convertible Preferred Stock shall be $6, and the Warrants
shall, on exercise, convert into a number of whole shares closest to
30.78% of PTAC's then outstanding common shares, on a fully diluted
basis, as of the date of exercise and the Warrants shall be
exercisable at any time on or after January 1, 2008 and on or before
the earlier of (i) December 31, 2013, or (ii) the Commutation Date as
defined in the Reinsurance Agreement.
4. The grant of the option by PTAC, on its own behalf and on behalf of the
Company, to Centre to reinsure future writings of the Company's long term care
insurance business shall be as set forth in the Original Letter Agreement and as
amended by the following:
(a) Such option shall be exercisable at Centre's sole discretion until
June 30, 2002, to reinsure up to a 50% limited quota share, following
the fortunes and on original terms with a reasonable allowance for
reinsurance expenses payable by Centre to PTAC in an amount that
equates to PTAC's and the Company's actual acquisition and maintenance
expenses, of long term care insurance policies written by the Company,
after December 31, 2001 (the "Second Reinsurance Transaction") with
the Company retaining at least a net 50% quota share of the same
policies. The initial term of such agreement shall be for a period of
up to five (5) years. Commencing at December 31, 2002, Centre shall
have the right, upon one hundred twenty (120) days' prior written
notice, to cancel the Second Reinsurance Transaction for any reason in
respect of all business written after the effective date of such
cancellation notice. Said cancellation shall take effect no sooner
than at the expiration of this one-hundred twenty (120) day
cancellation notice period. The limit of such reinsurance shall be set
so that the probability of exceedance is remote.
(b) PTAC and the Company agree to take all commercially reasonable efforts
to cooperate with and assist Centre in the conduct and completion of
its due diligence to underwrite the Second Reinsurance Transaction as
detailed above, including but not limited to, providing timely
responses to all reasonable requests for information and analyses, and
making the directors, officers, key personnel and staff of PTAC and
the Company available to meet with and answer questions from Centre;
(c) In consideration of the time, expense and other expenditures of
resources by Centre in respect of the proposed Second Reinsurance
Transaction, PTAC agrees to reimburse Centre for all out-of-pocket
costs and expenses (including, without limitation, attorneys',
consultants and advisors fees and disbursements) incurred by or on
behalf of Centre ("Expenses"), in relation to reaching completion of
the proposed Second Reinsurance Transaction in an amount not to exceed
$500,000, in addition to costs and expenses contemplated in the
Letter. PTAC and the Company agree that the provisions of this
paragraph are binding on PTAC and the Company effective on the date
hereof and are expressly not subject to completion of the Second
Reinsurance Transaction or to any other condition.
(d) PTAC and the Company agree to fully indemnify and hold Centre and its
respective directors, officers, employees and agents (each an
"Indemnified Person") harmless against and from any loss, liability,
cost or expenses (collectively, "Losses") incurred in respect of the
proposed Second Reinsurance Transaction (including attorneys' fees and
disbursements), other than costs and expenses otherwise addressed in
the definitive documentation of the Second Reinsurance Transaction (if
and when executed) and except to the extent finally determined by a
court of competent jurisdiction to have resulted directly from the
gross negligence or willful misconduct of Centre. PTAC and the Company
agree that the provisions of this paragraph are binding on PTAC and
the Company on the date hereof and are expressly not subject to
completion of the Transaction, a Second Reinsurance Transaction, or
any other condition.
(e) In the event that Centre elects to enter into a Second Reinsurance
Transaction, completes its due diligence, and Centre and PTAC submit
(and PTAC hereby agrees to do so) the Second Reinsurance Transaction
to the Department of Insurance in the Company's state of domicile
("the Department") for approval and such approval is not granted, PTAC
shall owe Centre a break-up fee (the "Break-up Fee") of $1,000,000.
PTAC shall have the right to present the Second Reinsurance
Transaction to the Department two separate times in order to obtain
approval thereon, however the submission for the second attempt at an
approval must be filed with the Department within 30 days of receipt
of a disapproval on or withdrawal of the Second Reinsurance
Transaction's initial filing for approval.
5. The provisions of this letter, are confidential and may not be disclosed to
any other person or entity whatsoever, except with Centre's prior written
express approval with regard to each and every such disclosure, other than to
PTAC's advisors and the Department in connection with the Transaction and/or the
proposed Second Reinsurance Transaction (together, the "Transactions").
6. This letter shall be governed by, and construed and enforced in accordance
with, the laws of Bermuda applicable to contracts made and to be performed in
that jurisdiction. PTAC, the Company and Centre submit to the jurisdiction of
the Bermuda courts, and consent to venue there, for the resolution of any
dispute arising out of or relating to this letter or the breach hereof, whether
before or after the execution hereof.
7. PTAC and the Company agree that money damages would not be a sufficient
remedy for any breach of this Agreement by it or its Representatives and that,
in addition to all other remedies, Centre shall be entitled to specific
performance and injunctive or other equitable relief as a remedy for any such
breach.
8. By signing this letter, PTAC and the Company acknowledge their acceptance of
the terms and conditions hereof.
9. PTAC and the Company represent to Centre that their execution, delivery and
performance of this letter will not breach, violate or conflict with any
agreement, covenant, undertaking, law, statute, regulation or regulatory or
judicial determination by which PTAC, the Company, and their subsidiaries or
affiliates, or their respective property, is bound.
We are delighted and pleased to have this opportunity to finalize the
Transaction and to work with you on the proposed Second Reinsurance Transaction.
We intend to devote the necessary resources to consider the Second Reinsurance
Transaction in the most efficient and effective manner.
Please do not hesitate to call us if you have any questions or require
clarification of any issue. Otherwise, please sign and return a copy of this
letter to signify agreement to the provisions hereof.
Yours sincerely,
Centre Solutions (Bermuda) Limited
Name : Xxxxxxx Xxxx
Title: Vice President
Accepted and agreed for:
Penn Treaty American Corporation
Penn Treaty Network America Insurance Company
American Network Insurance Company
By:
Name:
Title:
Date:
