<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
/X/ Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
FOR THE QUARTER ENDED SEPTEMBER 30, 2000
/ / Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the Period From _________ to __________.
Commission File Number: 001-14593
THE MIIX GROUP, INCORPORATED
(Exact name of Registrant as specified in its charter)
DELAWARE 22-3586492
(State or other jurisdiction of incorporation or (I.R.S. employer
organization) identification number)
TWO PRINCESS ROAD, LAWRENCEVILLE, NEW JERSEY 08648
(Address of principal executive offices and zip code)
(609) 896-2404
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Common Stock, par value $.01 per share
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter periods as the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES X NO
As of November 10, 2000, the number of outstanding shares of the
Registrant's Common Stock was 13,615,029.
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TABLE OF CONTENTS
<TABLE>
<S> <C>
PART I FINANCIAL INFORMATION............................................................................. 4
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS................................................................. 4
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS............. 13
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK........................................ 18
PART II OTHER INFORMATION................................................................................. 20
ITEM 1. LEGAL PROCEEDINGS................................................................................. 20
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS......................................................... 20
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS............................................... 20
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.................................................................. 21
SIGNATURES ...................................................................................................... 22
</TABLE>
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The Private Securities Litigation Reform Act of 1995 provides a "safe harbor"
for forward-looking statements. This Form 10-Q, the Company's Annual Report to
Stockholders, any Form 10-K or any Form 8-K of the Company or any other written
or oral statements made by or on behalf of the Company may include
forward-looking statements which reflect the Company's current views with
respect to future events and financial performance. These forward-looking
statements are subject to uncertainties and other factors that could cause
actual results to differ materially from such statements. These uncertainties
and other factors include, but are not limited to: (i) the Company having
sufficient liquidity and working capital; (ii) the Company's strategy to seek
consistent profitable growth; (iii) the Company's ability to increase its market
share; (iv) the Company's ability to diversify its product lines; (v) the
Company's ability to expand into additional states; (vi) the Company's avoidance
of any material loss on collection of reinsurance recoverables; and (vii) the
continued adequacy of the Company's loss and LAE reserves. The words "believe,"
"expect," "anticipate," "project," and similar expressions identify
forward-looking statements. Readers are cautioned not to place undue reliance on
these forward-looking statements, which speak only as of their dates. The
Company undertakes no obligation to publicly update or revise any
forward-looking statements, whether as a result of new information, future
events or otherwise.
3
<PAGE> 4
PART I FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
REPORT OF INDEPENDENT ACCOUNTANTS
Board of Directors
The MIIX Group, Incorporated
We have reviewed the accompanying consolidated balance sheet of The MIIX Group,
Incorporated and subsidiaries as of September 30, 2000, and the related
consolidated statements of income for the three and nine month periods ended
September 30, 2000 and 1999, and the consolidated statements of cash flows for
the nine month periods ended September 30, 2000 and 1999 and the consolidated
statement of equity for the nine month period ended September 30, 2000. These
financial statements are the responsibility of the Company's management.
We conducted our reviews in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures to
financial data, and making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted in
accordance with auditing standards generally accepted in the United States,
which will be performed for the full year with the objective of expressing an
opinion regarding the financial statements taken as a whole. Accordingly, we do
not express such an opinion.
Based on our reviews, we are not aware of any material modifications that should
be made to the accompanying consolidated financial statements referred to above
for them to be in conformity with accounting principles generally accepted in
the United States.
We have previously audited, in accordance with auditing standards generally
accepted in the United States, the consolidated balance sheets of The MIIX
Group, Incorporated and subsidiaries as of December 31, 1999 and 1998, and the
related consolidated statements of income, stockholders' equity, and cash flows
for each of the three years in the period ended December 31, 1999, not presented
herein, and in our report dated March 22, 2000, we expressed an unqualified
opinion on those consolidated financial statements. In our opinion, the
information set forth in the accompanying consolidated balance sheet as of
December 31, 1999, is fairly stated, in all material respects, in relation to
the consolidated balance sheet from which it has been derived.
ERNST & YOUNG LLP
New York, New York
November 2, 2000
4
<PAGE> 5
THE MIIX GROUP, INCORPORATED
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
------------- -----------
2000 1999
------------ -----------
ASSETS (Unaudited)
<S> <C> <C>
Securities available-for-sale:
Fixed-maturity investments, at fair value (amortized cost: 2000 -
$1,178,381; 1999 - $1,131,931) .......................................... $ 1,135,277 $ 1,077,806
Equity investments, at fair value (cost: 2000 - $7,187; 1999 - $13,169) ... 5,324 12,394
Short-term investments, at cost which approximates fair value ............. 87,494 92,743
----------- -----------
Total investments ................................................... 1,228,095 1,182,943
----------- -----------
Cash ......................................................................... 3,483 2,574
Accrued investment income .................................................... 14,711 14,319
Premium receivable, net ...................................................... 18,292 17,920
Reinsurance recoverable on unpaid losses ..................................... 433,879 406,409
Prepaid reinsurance premiums ................................................. 3,659 27,646
Reinsurance recoverable on paid losses, net .................................. 7,399 236
Deferred policy acquisition costs ............................................ 5,194 3,165
Deferred income taxes ........................................................ 69,453 69,733
Receivable for securities .................................................... 14 0
Net investment in direct financing leases .................................... 26,249 25,522
Other assets ................................................................. 41,739 86,691
----------- -----------
Total assets ........................................................ $ 1,852,167 $ 1,837,158
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Unpaid losses and loss adjustment expenses ................................... $ 1,139,944 $ 1,053,597
Unearned premiums ............................................................ 97,260 75,433
Premium deposits ............................................................. 0 27,913
Funds held under reinsurance treaties ........................................ 300,687 271,637
Payable for securities ....................................................... 171 205
Notes payable and other borrowings ........................................... 15,415 16,461
Other liabilities ............................................................ 31,857 73,208
----------- -----------
Total liabilities ................................................... $ 1,585,334 $ 1,518,454
----------- -----------
STOCKHOLDERS' EQUITY
Preferred stock, $.01 par value, 50,000,000 shares authorized, no shares
issued and outstanding .................................................... $ 0 $ 0
Common stock, $.01 par value, 100,000,000 shares authorized, 16,538,005 shares
issued, (2000 - 13,756,220 shares outstanding; 1999 - 15,258,567 shares
outstanding) .............................................................. 166 165
Additional paid-in capital ................................................... 53,720 52,942
Retained earnings ............................................................ 288,607 328,897
Treasury stock, at cost (2000 - 2,781,785 shares; 1999 - 1,236,809 shares) ... (37,363) (19,249)
Stock purchase loans and unearned stock compensation ......................... (5,853) (4,934)
Accumulated other comprehensive income/(loss) ................................ (32,444) (39,117)
----------- -----------
Total stockholders' equity .......................................... $ 266,833 $ 318,704
----------- -----------
Total liabilities and stockholders' equity .......................... $ 1,852,167 $ 1,837,158
=========== ===========
</TABLE>
See accompanying notes
5
<PAGE> 6
THE MIIX GROUP, INCORPORATED
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------- ---------------------------
2000 1999 2000 1999
---------- -------- ---------- ---------
<S> <C> <C> <C> <C>
REVENUES
Net premiums earned ................................. $ 51,814 $ 58,798 $ 131,740 $ 150,285
Net investment income ............................... 21,399 19,479 63,780 55,214
Realized investment losses .......................... (109) (1,668) (706) (5,100)
Other revenue ....................................... 462 2,838 5,588 3,111
-------- -------- --------- ---------
Total revenues ................................. 73,566 79,447 200,402 203,510
-------- -------- --------- ---------
EXPENSES
Losses and loss adjustment expenses ................. 52,038 54,318 217,961 140,537
Underwriting expenses ............................... 10,208 12,037 29,345 31,616
Funds held charges .................................. 5,524 3,342 9,286 10,003
Other expenses ...................................... 918 1,168 4,489 1,168
Restructuring charge ................................ 0 0 0 2,409
-------- -------- --------- ---------
Total expenses ................................. 68,688 70,865 261,081 185,733
-------- -------- --------- ---------
Income/(loss) before income taxes ................... 4,878 8,582 (60,679) 17,777
Income tax provision/(benefit) ...................... 1,948 2,140 (22,495) 3,835
-------- -------- --------- ---------
Net income/(loss) .............................. $ 2,930 $ 6,442 $ (38,184) $ 13,942
======== ======== ========= =========
Basic earnings/(loss) per share of common stock (1) . $ 0.21 $ 0.44 $ (2.68) $ 1.09
======== ======== ========= =========
Diluted earnings/(loss) per share of common stock (1) $ 0.21 $ 0.44 $ (2.67) $ 1.08
======== ======== ========= =========
Dividend per share of common stock .................. $ 0.05 $ 0.05 $ 0.15 $ 0.05
======== ======== ========= =========
</TABLE>
(1) 1999 figures pro forma; see Note 4
See accompanying notes
6
<PAGE> 7
THE MIIX GROUP, INCORPORATED
CONSOLIDATED STATEMENT OF EQUITY
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
STOCK
PURCHASE
LOANS AND ACCUMULATED TOTAL
NUMBER OF COMMON ADDITIONAL UNEARNED OTHER STOCK-
SHARES STOCK PAID-IN RETAINED TREASURY STOCK COMPREHENSIVE HOLDERS'
OUTSTANDING ISSUED CAPITAL EARNINGS STOCK COMPENSATION INCOME/(LOSS) EQUITY
------------ ------- ---------- ---------- ---------- ------------ -------------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at January 1, 2000 ..... 15,258,567 $ 165 $52,942 $ 328,897 $(19,249) $(4,934) $(39,117) $ 318,704
Net loss ..................... (38,184) (38,184)
Other comprehensive
income/(loss), net of tax:
Unrealized appreciation
on securities available-
for-sale, net of deferred
taxes ................... 6,673 6,673
Shares issued for execution
of stock purchase and loan
agreements .................. 68,066 1 769 (919) (149)
Stock compensation ........... 9 9
Purchase of treasury stock ... (1,570,413) (18,114) (18,114)
Cash dividends to
stockholders ................ (2,106) (2,106)
---------- ------ ------- --------- -------- ------- -------- ---------
Balance at September 30, 2000 .. 13,756,220 $ 166 $53,720 $ 288,607 $(37,363) $(5,853) $(32,444) $ 266,833
========== ====== ======= ========= ======== ======= ======== =========
</TABLE>
See accompanying notes
7
<PAGE> 8
THE MIIX GROUP, INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
---------------------------
2000 1999
--------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income/(loss) .............................................................. $ (38,184) $ 13,942
Adjustments to reconcile net income to net cash provided by operating activities
(net of balances acquired):
Unpaid losses and loss adjustment expenses ..................................... 86,347 30,044
Unearned premiums .............................................................. 21,827 49,088
Premium deposits ............................................................... (27,913) (28,392)
Premium receivable, net ........................................................ (372) 1,559
Reinsurance balances, net ...................................................... 18,404 (6,021)
Deferred policy acquisition costs .............................................. (2,029) (2,460)
Realized losses ................................................................ 706 5,100
Depreciation, accretion and amortization ....................................... (2,946) (1,092)
Deferred income tax provision .................................................. (2,982) (5,236)
Due from New Jersey State Medical Underwriters ................................. 0 (594)
Accrued investment income ...................................................... (392) 207
Net investment in direct financing leases ...................................... (727) 1,521
Other assets ................................................................... 44,952 26,573
Other liabilities .............................................................. (41,348) 6,704
--------- ---------
Net cash provided by operating activities ...................................... 55,343 90,943
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from fixed-maturity investment sales .................................. 65,684 839,573
Proceeds from fixed-maturity investments matured, called, or prepaid ........... 72,157 77,033
Proceeds from equity investment sales .......................................... 6,578 0
Cost of investments acquired ................................................... (182,645) (998,346)
Purchase of NJSMU (net of cash acquired) ....................................... 0 (198)
Change in short-term investments, net .......................................... 5,250 (4,693)
Net receivable/(payable) for securities ........................................ (48) (28,433)
--------- ---------
Net cash used in investing activities .......................................... (33,024) (115,064)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from initial public offering, net of offering and reorganization costs 0 37,350
Proceeds from notes payable and other borrowings ............................... 19,158 16,228
Repayment of notes payable and other borrowings ................................ (20,205) (15,965)
Purchase of treasury stock ..................................................... (18,114) (9,863)
Cash dividends to stockholders ................................................. (2,106) (797)
Cash in lieu of stock paid to distributees ..................................... 0 (1,886)
Interest on stock purchase loan ................................................ (218) 0
Investment in restricted stock ................................................. 69 0
Stock compensation ............................................................. 9 0
Subordinated loan certificates redeemed ........................................ (3) (8)
--------- ---------
Net cash provided/(used) by financing activities ............................... (21,410) 25,059
--------- ---------
Net change in cash ............................................................. 909 938
Cash at beginning of period .................................................... 2,574 1,408
--------- ---------
Cash at end of period .......................................................... $ 3,483 $ 2,346
========= =========
</TABLE>
See accompanying notes
8
<PAGE> 9
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying consolidated financial statements include the accounts and
operations of The MIIX Group, Incorporated (the "MIIX Group") and its
wholly-owned subsidiaries, MIIX Insurance Company ("MIIX"), which assumed all of
the residual assets and liabilities and ongoing business of the Medical
Inter-Insurance Exchange of New Jersey (the "Exchange") in the reorganization of
the Exchange, Lawrenceville Holdings, Inc. ("LHI"), Lawrenceville Property and
Casualty Company ("LP&C"), MIIX Insurance Company of New York ("MIIX New York")
and, from August 4, 1999, New Jersey State Medical Underwriters, Inc. and its
wholly-owned subsidiaries (the "Underwriter"), collectively (the "Company"). The
consolidated financial statements have been prepared in accordance with
accounting principles generally accepted in the United States for interim
financial information and in the opinion of management, reflect all adjustments
considered necessary for a fair presentation. Such adjustments are of a normal
recurring nature. Operating results for the interim period are not necessarily
indicative of the results to be expected for the full year.
These consolidated financial statements and notes should be read in conjunction
with the audited consolidated financial statements and notes of the Company for
the year ended December 31, 1999 which were filed with the Securities and
Exchange Commission on Form 10-K.
2. STOCK BASED COMPENSATION
The Company accounts for its stock-based compensation in accordance with APB
Opinion No. 25, Accounting for Stock Issued to Employees (APB 25) and related
interpretations. The Company's policy regarding stock options is to issue
options with an exercise price equal to the market price on the date of grant.
Under APB 25 no compensation expense is recognized given the Company's policy.
During the nine months ended September 30, 2000, certain executive officers and
employees were granted a total of 215,661 options to purchase shares of The MIIX
Group common stock with exercise prices ranging from $11.3125 to $13.9375, of
which 56,811 options were immediately exercisable, and 17,801 options were
subsequently cancelled. During 2000, no options were exercised. Pursuant to
stock purchase and loan agreements, The MIIX Group loaned certain officers of
the Company approximately $770,000 during the period ended September 30, 2000,
which the officers used to purchase unregistered shares of The MIIX Group common
stock at market price.
3. EARNINGS/(LOSS) PER SHARE
Earnings/(loss) per share are computed using the weighted-average number of
common shares outstanding for the three and nine month periods ended September
30, 2000 of 13,910,571 and 14,269,094, respectively, and for the three and nine
month periods ended September 30, 1999 of 14,483,000 and 12,844,000,
respectively. Earnings per share through August 4, 1999 gives effect to the
reorganization and allocation of approximately 12,025,000 shares of common stock
distributed to the Exchange's members on August 4, 1999.
9
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The following table sets forth the computation of basic and diluted
earnings/(loss) per share:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------ ------------------------
2000 1999 2000 1999
--------- -------- --------- --------
(in thousands) (in thousands)
<S> <C> <C> <C> <C>
Numerator for basic and diluted earnings/(loss) per
share of common stock:
Net income/(loss) ................................ $ 2,930 $ 6,442 $(38,184) $13,942
Denominator:
Denominator for basic earnings/(loss) per share of
common stock - weighted-average shares of
outstanding ...................................... 13,911 14,483 14,269 12,844
Effect of dilutive securities:
Stock options and nonvested restricted stock ..... 12 47 18 47
------- ------- -------- -------
Denominator for diluted earnings/(loss) per share
of common stock adjusted - weighted-average ...... 13,923 14,530 14,287 12,891
Basic earnings/(loss) per share of common stock ....... $ 0.21 $ 0.44 $ (2.68) $ 1.09
======= ======= ======== =======
Diluted earnings/(loss) per share of common stock ..... $ 0.21 $ 0.44 $ (2.67) $ 1.08
======= ======= ======== =======
</TABLE>
4. COMPREHENSIVE INCOME/(LOSS)
The Company has classified its entire investment portfolio as available-for-sale
and had unrealized gains/(losses) at September 30, 2000 and December 31, 1999
that are reflected as accumulated other comprehensive income/(loss) in the
Consolidated Statement of Equity and Consolidated Balance Sheets.
The components of comprehensive income/(loss), net of related tax, for the
periods ended September 30, 2000 and 1999 are as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------ --------------------------
2000 1999 2000 1999
--------- -------- -------- --------
(in thousands) (in thousands)
<S> <C> <C> <C> <C>
Net income/(loss) ............................... $ 2,930 $ 6,442 $(38,184) $ 13,942
Other comprehensive income/(loss):
Unrealized holding appreciation/(depreciation)
arising during period (net of tax of $4,302,
($4,742), $3,346 and ($20,319), respectively) ... 7,989 (8,806) 6,214 (37,737)
Reclassification adjustment for losses/(gains)
realized in net income/(loss) (net of tax of $38,
$584, $247 and $1,785, respectively) ............ 71 1,084 459 3,315
------- ------- -------- --------
Net unrealized appreciation/(depreciation)
arising during the period ended
September 30 (net of tax of $4,340, ($4,158),
$3,593 and ($18,534), respectively) ............. 8,060 (7,722) 6,673 (34,422)
------- ------- -------- --------
Comprehensive income/(loss) ..................... $10,990 $(1,280) $(31,511) $(20,480)
======= ======= ======== ========
</TABLE>
10
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5. DEFERRED POLICY ACQUISITION COSTS
The following represents the components of deferred policy acquisition costs and
the amounts that were charged to expense for the nine months ended September 30,
2000 and 1999.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
--------------------------------
2000 1999
------------- -----------
(in thousands)
<S> <C> <C>
Balance at beginning of period............................................ $ 3,165 $ 2,810
Cost deferred during the period........................................... 10,665 11,133
Amortization expense...................................................... (8,636) (8,673)
---------- ----------
Balance at end of period.................................................. $ 5,194 $ 5,270
========== ==========
</TABLE>
6. RESTRUCTURING CHARGE
The Company undertook a restructuring during the second quarter of 1999 and on
June 23 announced the reduction of regional and home office staff and the
closing of regional offices in Boston and Atlanta to centralize their functions
at the Company's home office. The Company recognized a pre-tax charge in the
second quarter of 1999 related to this restructuring of $2.4 million. No similar
event occurred during the period ended September 30, 2000.
7. INCOME TAXES
A reconciliation of income tax computed based on the expected annual effective
federal statutory tax rate to total income tax expense/(benefit) for the periods
ended September 30, 2000 and 1999 are as follows:
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
------------------------------------------------------------------
2000 1999
------------------------------- -------------------------------
% OF INCOME % OF INCOME
INCOME TAX BEFORE INCOME INCOME TAX BEFORE INCOME
EXPENSE TAXES EXPENSE TAXES
------------- ------------ ------------ -----------
(in thousands) (in thousands)
<S> <C> <C> <C> <C>
Expected annual effective federal
income tax (benefit)/expense
at 35% ........................... $(21,238) (35.0)% $ 6,222 35.0 %
Decrease in taxes resulting from:
Tax-exempt interest ............ (1,851) (3.1)% (1,817) (10.2)%
Other .......................... 594 1.0 % (570) (3.2)%
-------- -------- ------- --------
Total income tax (benefit)/expense $(22,495) (37.1)% $ 3,835 21.6 %
======== ======== ======= ========
</TABLE>
8. RELATED PARTY TRANSACTION
On May 26, 2000, the Company obtained a $20.0 million revolving credit facility
with Amboy National Bank to meet certain non-operating cash needs as they may
arise. The credit facility terminates April 7, 2002 and bears a fixed interest
rate of 8.0% per annum. The Company has pledged 100% of The MIIX Insurance
Company stock as collateral under the credit facility. As of September 30, 2000
the Company had borrowed approximately $6.3 million against the credit
facility. During the three and nine month periods ended September 30, 2000 the
company incurred interest expense on the loan of approximately $104,000. The
Company's CEO is a brother of the Senior Vice President and CFO of Amboy
National Bank. The Company believes that the related party transaction
described above was on terms as fair to the Company as could have been obtained
from an unaffiliated third party.
9. RECENT ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standard Board (FASB) issued SFAS No. 133, "Accounting
for Derivative Instruments and Hedging Activities," which is effective for
fiscal years beginning after June 15, 2000 (as amended by SFAS No. 137). SFAS
133 requires that all derivative instruments be recorded on the balance sheet at
fair value. Changes in the fair value are recorded each period in current
earnings or other comprehensive
11
<PAGE> 12
income. Adoption of SFAS No. 133 is not expected to have a significant impact on
the Company's financial position or results of operations.
In December 1999, the Securities and Exchange Commission (SEC) issued Staff
Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements ("SAB
101"). SAB 101, as amended, summarizes certain of the SEC's views in applying
generally accepted accounting principles to revenue recognition in financial
statements. Adoption of this statement is not expected to have a significant
impact on the Company's financial position or results of operations.
10. RECLASSIFICATION
Certain amounts have been reclassified for the prior years to be comparable to
the 2000 presentation.
12
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the financial
statements and the related notes thereto appearing elsewhere in this Form 10-Q.
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO THE THREE MONTHS ENDED
SEPTEMBER 30, 1999
Net premiums earned. Net premiums earned amounted to $51.8 million for the three
months ended September 30, 2000 compared to net earned premiums of $58.8 million
for the three months ended September 30, 1999, a decrease of approximately $7.0
million, or 11.9%. This decrease is mainly attributable to decreases in direct,
assumed, and ceded premiums earned of $2.4 million, $7.0 million, and $2.4
million, respectively in the three months ended September 30, 2000. The decline
in direct earned premiums reflects the decline in written premiums during the
nine months in 2000, somewhat offset by increased written premiums during the
fourth quarter ended December 31, 1999. The decrease in assumed premiums relates
to a large assumed excess of loss reinsurance contract on an institutional
account written and bound during the quarter ended September 30, 1999 with
effect from January 1, 1999 and continuing through 2000. The decrease in ceded
earned premiums was primarily attributable to an amendment to the aggregate
reinsurance contract, effective November 1, 1999, limiting reinsurance
principally to occurrence form physician business written in two states, and to
a reduction in that occurrence form physician business written during the nine
months ended September 30, 2000 as compared to nine months ended September 30,
1999.
Total premiums written were $52.1 million for the three months ended September
30, 2000, a decrease of $17.4 million, or 25.1% from total premiums written of
$69.5 million for the three months ended September 30, 1999. This decrease is
composed of net decreases in direct premiums written of $3.6 million and a
decrease in assumed premiums written of $13.8 million. The net decrease in
direct premiums written consisted of net increases in direct premiums written in
certain states of $7.7 million offset by net decreases in direct premiums
written in other states of $11.3 million. The net increases primarily resulted
from significant rate increases and focused marketing efforts; the net decreases
primarily resulted from continued re-underwriting efforts. The increase in
assumed premiums written resulted from a large excess of loss reinsurance
contract on an institutional account written and bound during the quarter ended
September 30, 1999 with effect from January 1, 1999 and renewed during the first
quarter of 2000.
Net investment income. Net investment income increased approximately $1.9
million or 9.9% to $21.4 million for the three months ended September 30, 2000
from $19.5 million for the same period in 1999. Average invested assets
increased to approximately $1.27 billion for the three months ended September
30, 2000 compared to approximately $1.20 billion for the same period last year.
The average annualized pre-tax yield on the investment portfolio increased to
6.73% for the three months ended September 30, 2000 from 6.49% for the same
period in 1999 primarily as a result of higher pre-tax yielding securities and a
larger asset base.
Realized investment gains (losses). Net realized investment losses were $0.1
million for the three months ended September 30, 2000 compared to net realized
investment losses of $1.7 million for the same period in 1999. In both periods
the losses were principally due to sales of fixed-maturity investments to
reposition the investment portfolio in a changing market yield environment.
Other revenue. Other revenue decreased approximately $2.3 million or 83.7% to
$0.5 million for the three months ended September 30, 2000 from $2.8 million for
the same period last year. Other revenue consists primarily of revenues
associated with the leasing, brokerage, and other businesses acquired by the
Company in the acquisition of New Jersey State Medical Underwriters, Inc. and
its subsidiaries on August 4, 1999. The decrease in other revenue is mainly
attributable to a $0.5 million loss on the sale of substantially all of the
assets of the Company's reinsurance intermediary, Pegasus Advisors, Inc.,
effective July 1, 2000, which resulted in write-off of $1.7 million of goodwill
and deferral of $1.2 million of gain in consideration of price adjustments
features contained in the sale agreement. In addition, in 1999 other revenue
included death benefit income of $1.0 million received on a corporate owned life
insurance policy.
Loss and loss adjustment expense (LAE). The provision for losses and LAE
decreased $2.3 million, or 4.2%, to $52.0 million for the three months ended
September 30, 2000 from $54.3 million for the three months ended September 30,
1999. The provision for losses and LAE is net of ceded losses and LAE of $10.5
million and
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<PAGE> 14
$12.5 million for the three months ended September 30, 2000 and 1999,
respectively. The ratio of net losses and LAE to net premiums earned increased
to 100.4% for the three months ended September 30, 2000 from 92.4% for the same
period in 1999. This is principally attributable to a reduction in earned
premiums and anticipated higher ultimate and LAE losses associated with current
accident year results. There were no adjustments made to loss and LAE reserves
held on prior accident years for the three months ended September 30, 2000.
Changes in loss and LAE reserves held on prior accident years for the three
months ended September 30, 1999 were as follows: gross loss and LAE reserves
were reduced by $3.2 million and ceded loss and LAE reserves were reduced by
$3.7 million.
Underwriting expenses. Underwriting expenses decreased $1.8 million or 15.2% to
$10.2 million for the three months ended September 30, 2000, from $12.0 million
for the three months ended September 30, 1999. The ratio of underwriting
expenses to net premiums earned improved to 19.7% for the three months ended
September 30, 2000 from 20.5% for the same period in 1999. This improvement was
primarily the result of the Company's continuing focus on expense controls.
Funds held charges. Funds held charges relate to the Company's aggregate
reinsurance contracts and increased $2.2 million or 65.3% to $5.5 million for
the three months ended September 30, 2000, from $3.3 million for the three
months ended September 30, 1999. The increase in funds held charges was
principally the result of an increase in ceded loss and LAE reserves, and an
associated increase in ceded premiums and in the funds held balance, resulting
from the loss reserve strengthening at June 30, 2000. Funds held charges are
calculated based upon beginning of quarter funds held balances.
Other expenses. Other expenses decreased to $0.3 million or 21.4% to $0.9
million for the three months ended September 30, 2000 from $1.2 million for the
three months ended September 30, 1999 and primarily consist of the costs
associated with the leasing, brokerage and other businesses acquired by the
Company in the acquisition of New Jersey State Medical Underwriters, Inc. and
its subsidiaries on August 4, 1999. The decrease largely resulted from the sale
of substantially all of the assets of the Company's reinsurance intermediary,
Pegasus Advisors, Inc., effective July 1, 2000.
Income taxes. Income taxes were $1.9 million for the three months ended
September 30, 2000, resulting in an effective tax rate of 39.9%, compared to
$2.1 million and an effective tax rate of 24.9% for the same period in 1999.
This decrease of $0.2 million was primarily attributable to a decrease in
pre-tax income in 2000 of $3.7 million resulting in reduced tax of $1.3 million
at a 35% rate, a decrease in taxes of $0.1 million associated with an increase
in tax exempt interest, and a net increase in taxes of $1.2 million associated
with other items in 2000 including write-off of $1.7 million of non-deductible
goodwill expense associated with the sale of substantially all of the assets of
the Company's reinsurance intermediary as of July 1, 2000.
Net income. Net income decreased by $3.5 million to $2.9 million for the three
months ended September 30, 2000, from a net income of $6.4 million for the three
months ended September 30, 1999.
NINE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO THE NINE MONTHS ENDED SEPTEMBER
30, 1999
Net premiums earned. Net premiums earned were $131.7 million for the nine months
ended September 30, 2000 compared to $150.3 million for the nine months ended
September 30, 1999, a decrease of approximately $18.6 million or 12.3%. This
decrease consisted of increased direct and ceded earned premiums of $0.3
million, and $18.6 million, respectively, and a decrease in assumed premiums
earned of $0.3 million. The decrease in direct earned premiums reflect the
decrease in written premiums during the nine months of 2000, offset in part by
the increase in written premiums in the fourth quarter of 1999 which are earned
in 2000. The increase in ceded direct premiums was primarily due to the
following: the loss and loss adjustment expense reserve strengthening recorded
at June 30, 2000; the effects of an amendment to the Company's ceded aggregate
reinsurance contract, effective November 1, 1999, limiting the aggregate
reinsurance contract to principally occurrence form physician business written
in two states; and to a reduction in that occurrence form physician business
written during the nine months ended September 30, 2000 compared to the same
period in 1999. The decrease in assumed earned premiums relates to a reduction
of exposures assumed under a large assumed excess of loss reinsurance contract
written on an institutional account.
Total premiums written were $196.5 million for the nine months ended September
30, 2000, a decrease of $27.2 million or 12.2% from total premiums written of
$223.7 million for the nine months ended September 30, 1999. This decrease
resulted from a net decline in direct premiums written of $27.2 million,
composed of net increases in direct premiums written in certain states of $8.8
million offset by net decreases in direct premiums written in
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other states of $36.0 million. The net increases resulted from significant rate
increases and focused marketing efforts; the net decreases primarily resulted
from re-underwriting efforts and the effects of increased competition in certain
markets.
Net investment income. Net investment income increased $8.6 million or 15.5% to
$63.8 million for the nine months ended September 30, 2000 from $55.2 million
for the same period in 1999. The increase in investment income resulted from an
increase in invested assets during the first nine months of 2000 and an increase
in available market yields. Average invested assets increased to approximately
$1.27 billion during the nine months ended September 30, 2000 compared to
approximately $1.21 billion for the same period last year. The average
annualized pre-tax yield on the investment portfolio increased to 6.68% for the
nine months ended September 30, 2000 from 6.25% for the same period in 1999
primarily as a result of changes in asset allocation with an increased
concentration in higher pre-tax yielding securities in an increasing market
yield environment and a larger asset base.
Realized investment gains (losses). Net realized investment losses decreased
approximately $4.4 million to net realized losses of $0.7 million for the nine
months ended September 30, 2000 compared to net realized losses of $5.1 million
for the same period in 1999. In 2000 and in 1999, substantially all of the
losses are due to sales of fixed-maturity investments to reposition the
investment portfolio in a changing market yield environment.
Other revenue. Other revenue increased approximately $2.5 million or 79.6% to
$5.6 million for the nine months ended September 30, 2000 from $3.1 million for
the same period last year. The increase in 2000 consisted primarily of $3.0
million of revenues associated with the leasing, brokerage and other businesses
acquired by the Company in the acquisition of New Jersey State Medical
Underwriters, Inc. and its subsidiaries on August 4, 1999, offset by a $0.5
million loss on the sale of substantially all of the assets of the Company's
reinsurance intermediary, Pegasus Advisors, Inc., effective July 1, 2000, which
resulted in write-off of $1.7 million of goodwill and deferral of $1.2 million
of gain in consideration of price adjustments features contained in the sale
agreement. In 1999 other revenue included death benefit income of $1.0 million
received on a corporate owned life insurance policy.
Loss and loss adjustment expenses (LAE). The provision for losses and LAE
increased $77.5 million or 55.1% to $218.0 million for the nine months ended
September 30, 2000 from $140.5 million for the nine months ended September 30,
1999. The provision for losses and LAE is net of ceded losses and LAE of $39.4
million and $37.5 million for the nine months ended September 30, 2000 and 1999
respectively. The ratio of net losses and LAE to net premiums earned increased
to 165.4% for the nine months ended September 30, 2000 from 93.5% for the same
period in 1999. This significant increase in loss and loss adjustment expense
for the nine months ended September 30, 2000 was principally attributable to the
loss reserve strengthening at June 30, 2000 which resulted from a loss and LAE
study conducted as of June 30, 2000. The reserve study was undertaken as a
result of management's concern with changes in emerging loss and LAE data in a
very difficult market environment, and with the recent conversion of the
Company's claims information system and reassignment of claims department
responsibilities.
As the result of the reserve study at June 30, 2000, loss and LAE reserves were
adjusted as follows: gross loss and LAE reserves were increased by $96.4
million, including $81.4 million for 1999 and prior accident years, and $15.0
million for accident year 2000. Ceded loss and LAE reserves were increased by
$25.3 million, including $23.3 million for 1999 and prior accident years and
$2.0 million for accident year 2000 and ceded premiums earned were increased by
$21.3 million. Net loss and LAE reserves were increased by $71.1 million,
including $58.1 million for 1999 and prior accident years and $13.0 million for
accident year 2000. The adjustments at June 30, 2000 followed increases to prior
accident year gross and ceded loss and LAE reserves of $3.0 million recorded for
the three months ended March 31, 2000. These increases in loss and loss
adjustment expense reserves were primarily attributable to three primary
factors: increased loss severity combined with a lengthened loss development
period on the New Jersey physician book; greater than expected loss frequency
and severity on the Pennsylvania physician and institution book; and, more
significantly, higher than anticipated loss frequency and, particularly,
severity in the Company's book of business outside of the state of New Jersey.
Changes in loss and LAE reserves held on prior accident years were also recorded
in the nine months ended September 30, 1999. The changes in loss and LAE
reserves were as follows: gross loss and LAE reserves were reduced by $6.0
million and ceded loss and LAE reserves were reduced by $7.3 million.
Underwriting expenses. Underwriting expenses decreased $2.3 million or 7.2% to
$29.3 million for the nine months ended September 30, 2000 from $31.6 million
for the nine months ended September 30, 1999. This
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improvement was primarily the result of the Company's continuing focus on
expense controls. The ratio of underwriting expense to net premiums earned
increased, however, to 22.3% for the nine months ended September 30, 2000 from
21.0% for the nine months ended September 30, 1999. This increase is primarily
the result of additional ceded premiums associated with the reserve
strengthening actions taken at June 30, 2000. The expense ratio excluding the
impact of ceded premiums associated with the June 30, 2000 loss reserve
strengthening improved to 19.4% from 21.0% for the nine months ended September
30, 2000 and 1999, respectively.
Funds held charges. Funds held charges decreased $0.7 million or 7.2% to $9.3
million for the nine months ended September 30, 2000 from $10.0 million for the
nine months ended September 30, 1999. The reduction in the funds held charges
primarily reflected the adjustments to the components of the ceded loss and loss
adjustment expense reserves resulting from the loss reserve strengthening at
June 30, 2000, and associated adjustments to ceded premiums and to the
components of the funds held balance. Funds held charges are calculated based
upon beginning of quarter funds held balances.
Other expenses. Other expenses increased $3.3 million or 284.3% to $4.5 million
for the nine months ended September 30, 2000 from $1.2 million for the nine
months ended September 30, 1999. The increase primarily resulted from the
operating costs associated with the leasing, brokerage and other businesses
acquired by the Company in the acquisition of New Jersey State Medical
Underwriters, Inc. and its subsidiaries on August 4, 1999.
Restructuring charge. The Company undertook a restructuring during the second
quarter of 1999 and on June 23, 1999 announced the reduction of regional and
home office staff and the closing of regional offices in Boston and Atlanta to
centralize their functions at the Company's home office. The Company recognized
a pre-tax charge of $2.4 million related to this restructuring for the nine
months ended September 30, 1999. No such event occurred during the nine months
ended September 30, 2000.
Income taxes. An income tax benefit of $22.5 million was recorded for the nine
months ended September 30, 2000, resulting in an effective tax benefit rate of
37.1%, compared to income tax expense of $3.8 million and an effective tax rate
of 21.6% for the same period in 1999. This decrease of $26.3 million was
primarily attributable to a decrease in pre-tax income in 2000 of $78.5 million
resulting in reduced tax of $27.5 million at a 35% rate, and a net increase in
taxes of $1.2 million associated with other items in 2000 including write-off of
$1.7 million of non-deductible goodwill expense associated with the sale of
substantially all of the assets of the Company's reinsurance subsidiary as of
July 1, 2000.
Net income/(loss). Net loss was $38.2 million for the nine months ended
September 30, 2000, a decrease of $52.1 million from a net income of $13.9
million for the nine months ended September 30, 1999.
FINANCIAL CONDITION
Cash and invested assets. Aggregate invested assets at fair value, including
cash and short term investments, were $1,231.6 million at September 30, 2000 and
$1,185.5 million at December 31, 1999. The net increase of $46.1 million largely
resulted from the net effect of positive cash flows from operations, including
receipt of $34.1 million on surrender of company-owned life insurance policies,
somewhat offset by a reduction in federal income taxes payable of $28.4 million,
and cash outflows to purchase treasury stock and pay cash dividends to
stockholders during the period.
Fixed maturity investments available for sale at fair value, including
short-term investments, were $1,222.8 million, or 99.6% of the investment
portfolio of the Company as of September 30, 2000. At that date, the average
credit quality of the fixed income portfolio was AA as defined by Standard &
Poor's, while the total portfolio effective duration (excluding short-term
investments) was 5.02 years.
Unpaid losses and LAE, reinsurance recoverable on unpaid losses and LAE and
funds held under reinsurance treaties. Gross unpaid losses and LAE were $1,139.9
million at September 30, 2000 and $1,053.6 million at December 31, 1999.
Reinsurance recoverable on unpaid losses and LAE was $433.9 million at September
30, 2000 and $406.4 million at December 31, 1999. Funds held under reinsurance
treaties, which are unrestricted, collateralize a significant portion of
reinsurance recoverable on unpaid losses and LAE and were $300.7 million at
September 30, 2000, and $271.6 million at December 31, 1999. The increases in
these amounts were primarily the result of the loss and LAE reserve
strengthening at June 30, 2000.
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Equity. Total equity was $266.8 million at September 30, 2000 and $318.7 million
at December 31, 1999. The net decrease of $51.9 million was primarily
attributable to the net loss for the nine months ended September 30, 2000 of
$38.2 million, unrealized net appreciation of investments of $6.7 million,
purchase of $18.1 million of treasury stock, $0.2 million associated with stock
purchase and loan agreement activity, and $2.1 million of cash dividends paid to
stockholders.
LIQUIDITY AND CAPITAL RESOURCES
The MIIX Group, Incorporated. The MIIX Group is a holding company whose only
material assets are the capital stock of MIIX Insurance Company, a New Jersey
stock insurer ("MIIX Insurance"), and the New Jersey State Medical Underwriters,
Inc., a New Jersey corporation, and cash and investments resulting from the net
proceeds of a public offering conducted during 1999. The MIIX Group's ongoing
cash flow will consist primarily of investment income on its holdings and
dividends and other permissible payments from its subsidiaries. The MIIX Group
will depend upon such payments for funds for general corporate purposes and for
the payment of dividends on the Common Stock.
The payment of dividends to The MIIX Group by MIIX Insurance is subject to
limitations imposed by the New Jersey Holding Company Act. Based upon these
limitations, the maximum amount that will be available for payment of dividends
to The MIIX Group by MIIX Insurance in any year without the prior approval of
regulatory authorities is subject to restrictions related to surplus and net
income. MIIX Insurance's future cash flow available to The MIIX Group may be
influenced by a variety of factors, including cyclical changes in the medical
malpractice insurance market, MIIX Insurance's financial results, insurance
regulatory changes, including changes in the limitations imposed by the New
Jersey Holding Company Act on the payment of dividends by MIIX Insurance, and
changes in general economic conditions. The MIIX Group expects that the current
limitations that will be imposed on MIIX Insurance should not affect its ability
to declare and pay dividends sufficient to support The MIIX Group's current
dividend policy.
On May 26, 2000, the Company obtained a $20.0 million revolving credit facility
with Amboy National Bank to meet certain non-operating cash needs as they may
arise. The credit facility terminates April 7, 2002 and bears a fixed interest
rate of 8.0% per annum. The Company has pledged 100% of The MIIX Insurance
Company stock as collateral under the credit facility. As of September 30, 2000
the Company had borrowed approximately $6.3 million against the credit facility.
During the three and nine month periods ended September 30, 2000 the company
incurred interest expense on the loan of approximately $104,000. The Company CEO
is a brother of the Senior Vice President and CFO of Amboy National Bank. The
Company believes that the related party transaction described above was on terms
as fair to the Company as could have been obtained from an unaffiliated third
party.
The primary sources of the Company's liquidity, on both a short and long-term
basis, are funds provided by insurance premiums collected, net investment
income, recoveries from reinsurance and proceeds from the maturity or sale of
invested assets. Such funds are generally used to pay claims, LAE, operating
expenses, reinsurance premiums and taxes. The Company's net cash flows from
operating activities was approximately $55.3 million and $90.9 million for the
nine months ended September 30, 2000 and 1999, respectively, and $107.4 million
for the year ended 1999. Because of the inherent unpredictability related to the
timing of the payment of claims, it is not unusual for cash flows from
operations for a medical malpractice insurance company to vary, perhaps
substantially, from period to period.
The Company held collateral of $300.7 million at September 30, 2000 and $271.6
at December 31, 1999, in the form of funds withheld, for recoverable amounts on
ceded unpaid losses and loss adjustment expenses under certain reinsurance
agreements. Under the contracts, reinsurers may require that a trust fund be
established to hold the collateral should one or more triggering events occur,
such as a downgrade in the Company's A.M. Best rating to B+ or lower, or a
reduction in statutory capital and surplus to less than $60 million. Otherwise,
no restrictions are placed on investments held in support of the funds withheld.
In accordance with the provisions of the reinsurance contracts, the funds
withheld are credited with interest at contractual rates ranging from 7.5% to
8.6%, which is recorded as an expense in the year incurred.
The Company invests substantially all of its positive cash flow from operations
in fixed maturity securities. The current investment strategy seeks to maximize
after-tax income through a high quality, diversified, duration sensitive,
taxable bond and tax-preferenced municipal bond portfolio, while maintaining an
adequate level of liquidity.
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Based on historical trends, market conditions and its business plans, the
Company believes that its sources of funds will be sufficient to meet its
liquidity needs over the next 18 months and beyond. However, because economic,
market, and regulatory conditions may change, there can be no assurance that the
Company's funds will be sufficient to meet these liquidity needs.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk represents the potential for loss due to adverse changes in the fair
value of financial instruments. The market risk associated with the financial
instruments of the Company relates to the investment portfolio, which exposes
the Company to risks related to unforeseen changes in interest rates, credit
quality, prepayments and valuations. Analytical tools and monitoring systems are
in place to continually assess and react to each of these elements of market
risk.
Interest rate risk is considered by management to be the most significant market
risk element currently facing the Company. Interest rate risk is the price
sensitivity of a fixed-maturity security to changes in interest rates. The
Company views these potential changes in price within the overall context of
assets and liability management. To reduce the Company's interest rate risk,
duration targets are set for the fixed income portfolio after consideration of
the duration of associated liabilities, primarily losses and LAE reserves, and
other factors.
The Company's investment portfolio at September 30, 2000 is primarily composed
of fixed-maturity securities, consisting 92.4% of total investments at market
value. U.S. government and tax-exempt bonds represent 27%, corporate bonds
represent 37%, and mortgage backed and asset backed securities represent 36% of
fixed-maturity investments. Short term investments represent 7.1% and equity
investments, primarily common stock, accounts for the remaining 0.5% of total
investments at market value.
At September 30, 2000 the Company had net after-tax unrealized losses on its
fixed maturity investment portfolio of $31.2 million, which included a deferred
tax valuation allowance of $3.6 million. The net after-tax unrealized losses of
$31.2 million on the fixed maturity portfolio represented 10.4% of total
stockholders' equity gross of net after-tax unrealized losses on investments. At
December 31, 1999 the Company had net after-tax unrealized losses on its fixed
maturity investment portfolio of $38.8 million, which included a deferred tax
valuation allowance of $3.6 million. The net unrealized losses were the result
of the rise in market interest rates during 1999. The unrealized losses at
September 30, 2000 do not significantly impact the Company's ability to meet all
regulatory capital requirements.
Management does not expect that significant unrealized losses will be realized
on the fixed maturity portfolio given the credit quality of the portfolio at
September 30, 2000, the Company's positive operating cash flows and the
Company's policy of matching asset and liability maturities. Asset and liability
matching is an important part of the Company's portfolio management process. The
Company utilizes financial modeling and scenario analysis to closely monitor the
effective modified duration of both assets and liabilities in order to minimize
any mismatching. The goal of effective asset/liability management is to allow
payment of claims and operating expenses from operating funds without disrupting
the Company's long-term investment strategy.
In addition to interest rate risk, fixed-maturity securities like those
comprising the Company's investment portfolio involve other risks such as
default or credit risk. The Company manages this risk by limiting the amount of
higher risk corporate obligations (determined by credit rating assigned by
private rating agencies) in which it invests.
Mortgage-backed and asset-backed securities involve similar risks associated
with fixed-maturity investments: interest rate risk, reinvestment rate risk, and
default or credit risk. In addition, mortgage-backed and asset-backed securities
also possess prepayment risk, which is the risk that a security's originally
scheduled interest and principal payments will differ considerably due to
changes in the level of interest rates. The Company purchases mortgage-backed
and asset-backed securities structured to enhance credit quality and/or provide
prepayment stability.
Short term investments are composed of highly rated money market instruments.
The Company also holds a portfolio of equity investments. At September 30, 2000,
the cost and fair value of equity investments was $7.2 million and $5.3 million
respectively. The net after tax unrealized losses of $1.2
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million on the equity portfolio represented 0.4% of total stockholders' equity
gross of net after-tax unrealized losses on investments.
There have been no material changes to the Company's financial market risks
since December 31, 1999.
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PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
ACTIONS OPPOSING THE PLAN OF REORGANIZATION
Prior to the reorganization of the Company, three physician members of the
Exchange (the "appellants") filed an appeal in the New Jersey Superior Court,
Appellate Division, challenging the Commissioner of Banking and Insurance's
Order approving the Plan of Reorganization. The principal arguments raised by
the appellants were that: (1) the pro rata, three-year look-back allocation of
stock was unfair to long-time members; (2) the Commissioner lacked statutory
authority to approve the reorganization because there is no statute specifically
authorizing the conversion of a reciprocal exchange to a stock company; and (3)
there was insufficient advance notice of the public hearing on the Plan. During
the pendency of the appeal, the appellants made a total of six applications to
the New Jersey Department of Banking and Insurance, the New Jersey Superior
Court, Appellate Division and the New Jersey Supreme Court seeking to stay the
reorganization and/or the initial public offering of MIIX Group stock. All of
these applications were denied. On February 14, 2000, the New Jersey Superior
Court, Appellate Division issued an Opinion that rejected the appellants'
challenge to the Commissioner's Order approving the Plan of Reorganization. The
appellants' petition for review of the Appellate Division decision by the New
Jersey Supreme Court has been denied.
In January 1999, five physician members of the Exchange filed a putative class
action against the Exchange, Underwriter, MIIX Group, certain of their officers
and the board of the Exchange. Other parties were subsequently added as
defendants in the action. Among other things, plaintiffs sought to force the
Exchange to declare a dividend from surplus and reserves, challenge various
components of the reorganization including, but not limited to, the stock
allocation formula contained in the Plan of Reorganization and the valuation of
Underwriter, challenge the composition of the Board of Directors of MIIX Group
as excessive, challenge key executive compensation and benefit packages as
excessive, challenge the proposed IPO share price of MIIX Group stock as
inadequate, challenge the MIIX Prospectus as misleading and to recover
unspecified monetary damages. While the action was pending, the plaintiffs also
sought on numerous occasions to stay the members' vote on the Plan of
Reorganization and the IPO of MIIX Group stock. All of those applications were
denied. In August 1999, the trial court dismissed all of plaintiffs' claims on
the grounds that the court lacked jurisdiction to hear them because they were
part of the appeal of the Commissioner's Order and/or because they failed to
state a legal claim. Plaintiffs have filed a Notice of Appeal with the New
Jersey Superior Court, Appellate Division seeking review of the trial court's
orders dismissing the Complaint and denying plaintiffs' applications for
injunctive relief. The Company plans to vigorously oppose the appeal.
The Company may be a party to litigation from time to time in the ordinary
course of business. Management believes that the Company is not currently a
party to any litigation which may have a material adverse effect on the Company.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
From January 1, 2000, through August 4, 2000, approximately $16.1 million of the
net proceeds of the Company's initial public offering was used to purchase an
additional 1.3 million shares of treasury stock. The balance has been
incorporated into the Company's invested assets. None of the net proceeds of the
Offering were paid by the Company, directly or indirectly, to any director,
officer or general partner of the Company or any of their associates, or to any
persons owning 10% or more of any class of the Company's equity securities, or
any affiliates of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The MIIX Group's annual meeting of shareholders was held on May 5, 2000, at
which time the following directors were elected by the shareholders of The MIIX
Group, to serve as Class II directors for a term expiring at the Annual Meeting
of shareholders to be held in 2003: Harry M. Carnes, M.D., Vincent A. Maressa,
Esq. and Bessie M. Sullivan, M.D. The terms of the following directors continued
after such meeting: Angelo S. Agro, M.D., Paul J. Hirsch, M.D., Kenneth Koreyva,
A. Richard Miskoff, D.O., Eileen Marie Moynihan, M.D., Carl Restivo, Jr., M.D.,
Gabriel F. Sciallis, M.D. and Martin L. Sorger, M.D.
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits
Item 601
Regulation S-K
Exhibit Reference Exhibit
Number Description
3.1 Restated Certificate of Incorporation by
reference to the exhibit filed with the
registrant's registration statement on
Form S-1 (Reg. No. 333-59371)).
3.2 Bylaws of The MIIX Group, (incorporated by
reference to the exhibit filed with the
registrant's registration statement on
Form S-1 (Reg. No. 333-59371)).
11 No statement re: computation of per share
earnings is required to be filed because
the computations can be clearly determined
from the materials contained herein.
15* Acknowledgement of Independent Accountant
27.1* Financial Data schedule
* Filed herewith
b. Reports on Form 8-K
No reports on Form 8-K were filed during the third quarter of
2000.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned, thereunto duly authorized.
THE MIIX GROUP, INCORPORATED
By: /s/ Kenneth Koreyva
-----------------------------------------
President and Chief Executive Officer
(principal executive officer)
By: /s/ Thomas M. Redman
-----------------------------------------
Chief Financial Officer
(principal financial and accounting officer)
DATED: NOVEMBER 10, 2000
22
