SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______________ to _____________
COMMISSION FILE NUMBER 1-13154
AMERICAN MEDICAL SECURITY GROUP, INC.
(Exact name of Registrant as specified in its charter)
WISCONSIN 39-1431799
(State of Incorporation) (I.R.S. Employer Identification No.)
3100 AMS BOULEVARD
GREEN BAY, WISCONSIN 54313
(Address of principal executive offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (920) 661-3075
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes __X__ No _____
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Common stock, no par value, outstanding as of October 31, 1999: 16,278,297
shares
<PAGE>
AMERICAN MEDICAL SECURITY GROUP, INC.
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets--September 30, 1999 and
December 31, 1998................................................3
Condensed Consolidated Statements of Income--Three months ended
September 30, 1999 and 1998; Nine months ended September 30, 1999
and 1998.........................................................5
Condensed Consolidated Statements of Cash Flows--Nine months ended
September 30, 1999 and 1998......................................6
Notes to Condensed Consolidated Financial Statements--
September 30, 1999...............................................7
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations...........................................12
Item 3. Quantitative and Qualitative Disclosures About Market Risk........17
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.................................................18
Item 2. Changes in Securities and Use of Proceeds.........................18
Item 5. Other Information.................................................18
Item 6. Exhibits and Reports on Form 8-K..................................18
Signatures...........................................................19
Exhibit Index......................................................EX-1
2
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
<TABLE>
AMERICAN MEDICAL SECURITY GROUP, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
<CAPTION>
<S> <C> <C>
September 30, December 31,
1999 1998
-----------------------------------
(000'S OMITTED)
ASSETS
Investments:
Securities available for sale, at fair value:
Fixed maturities $ 292,303 $ 293,096
Equity securities-preferred 2,198 2,457
Fixed maturity securities held to maturity, at amortized cost 3,278 3,361
-----------------------------------
Total investments 297,779 298,914
Cash and cash equivalents 5,257 10,648
Other assets:
Property and equipment, net 33,827 35,356
Goodwill and other intangibles, net 113,018 116,093
Other assets 66,964 37,711
-----------------------------------
Total other assets 213,809 189,160
-----------------------------------
Total assets $ 516,845 $ 498,722
===================================
See Notes to Condensed Consolidated Financial Statements
</TABLE>
3
<PAGE>
<TABLE>
AMERICAN MEDICAL SECURITY GROUP, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
<CAPTION>
<S> <C> <C>
September 30, December 31,
1999 1998
-----------------------------------
(000'S OMITTED)
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Medical and other benefits payable $ 161,576 $ 113,133
Advance premiums 18,182 18,157
Payables and accrued expenses 30,452 23,439
Notes payable 52,863 55,064
Other liabilities 27,168 22,478
-----------------------------------
Total liabilities 290,241 232,271
Redeemable preferred stock - Series A adjustable rate nonconvertible,
$1,000 stated value, 25,000 shares authorized - -
Shareholders' equity:
Preferred stock (no par value, 475,000 shares authorized) - -
Common stock (no par value, $1 stated value, 50,000,000 shares authorized,
16,653,435 issued and 16,278,235 outstanding at September 30, 1999,
16,653,179 issued and outstanding at December 31, 1998) 16,653 16,653
Paid-in capital 187,951 188,981
Retained earnings 33,113 59,572
Accumulated other comprehensive income (loss), net of taxes of $4,259,900
and $642,000 at September 30, 1999 and December 31, 1998, respectively (7,911) 1,245
Treasury stock (375,200 shares at September 30, 1999, at cost) (3,202) -
-----------------------------------
Total shareholders' equity 226,604 266,451
-----------------------------------
Total liabilities and shareholders' equity $ 516,845 $ 498,722
===================================
See Notes to Condensed Consolidated Financial Statements
</TABLE>
4
<PAGE>
<TABLE>
AMERICAN MEDICAL SECURITY GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
<CAPTION>
<S> <C> <C> <C> <C>
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------------------- ---------------------------------
1999 1998 1999 1998
--------------------------------- ---------------------------------
(000'S OMITTED, EXCEPT PER SHARE DATA)
Revenues:
Insurance premiums $ 266,146 $ 224,160 $ 793,236 $ 686,075
Net investment income 4,897 6,167 14,572 17,971
Other revenue 5,058 7,082 16,742 16,557
--------------------------------- ---------------------------------
Total revenues 276,101 237,409 824,550 720,603
Expenses:
Medical and other benefits 245,509 168,513 654,674 522,123
Selling, general and administrative 68,356 61,832 204,146 178,567
Interest expense 889 2,033 2,655 6,739
Amortization of goodwill and intangibles 1,017 2,186 3,075 6,621
--------------------------------- ---------------------------------
Total expenses 315,771 234,564 864,550 714,050
--------------------------------- ---------------------------------
Income (loss) from continuing operations,
before income taxes (39,670) 2,845 (40,000) 6,553
Income tax expense (benefit) (13,745) 1,208 (13,540) 2,973
--------------------------------- ---------------------------------
Income (loss) from continuing operations (25,925) 1,637 (26,460) 3,580
Income from discontinued operations,
less applicable income taxes - 4,289 - 10,003
--------------------------------- ---------------------------------
Net income (loss) $ (25,925) $ 5,926 $ (26,460) $ 13,583
================================= =================================
Earnings (loss) per common share - basic
Income (loss) from continuing operations $ (1.57) $ 0.10 $ (1.59) $ 0.22
Income from discontinued operations - 0.26 - 0.60
--------------------------------- ---------------------------------
Net income (loss) per common share $ (1.57) $ 0.36 $ (1.59) $ 0.82
================================= =================================
Earnings (loss) per common share - diluted
Income (loss) from continuing operations $ (1.57) $ 0.10 $ (1.59) $ 0.21
Income from discontinued operations - 0.26 - 0.60
--------------------------------- ---------------------------------
Net income (loss) per common share $ (1.57) $ 0.36 $ (1.59) $ 0.81
================================= =================================
See Notes to Condensed Consolidated Financial Statements
</TABLE>
5
<PAGE>
<TABLE>
AMERICAN MEDICAL SECURITY GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<CAPTION>
<S> <C> <C>
Nine Months Ended
September 30,
1999 1998
-----------------------------------
(000'S OMITTED)
OPERATING ACTIVITIES:
Income (loss) from continuing operations $ (26,460) $ 3,580
Adjustments to reconcile income (loss) from continuing
operations to net cash provided by (used in) operating activities:
Depreciation and amortization 7,885 11,569
Net realized investment (gains) losses 276 (2,352)
Deferred income tax (benefit) expense (3,597) (1,376)
Changes in operating accounts:
Other assets (19,214) (2,519)
Medical and other benefits payable 48,443 (10,918)
Advance premiums 25 (1,637)
Payables and accrued expenses 7,013 (8,110)
Other liabilities 2,145 5,726
-----------------------------------
Net cash provided by (used in) operating activities 16,516 (6,037)
INVESTING ACTIVITIES:
Acquisition of subsidiaries (net of cash and cash equivalents
acquired of $2,773,000) - 2,623
Purchases of available for sale securities (186,983) (252,382)
Proceeds from sale of available for sale securities 153,970 214,676
Proceeds from maturity of available for sale securities 18,425 9,700
Purchases of held to maturity securities (456) -
Proceeds from maturity of held to maturity securities 540 400
Purchases of property and equipment (2,037) (2,625)
Proceeds from sale of property and equipment 34 287
-----------------------------------
Net cash used in investing activities (16,507) (27,321)
FINANCING ACTIVITIES:
Cash dividends paid - (5,956)
Issuance of common stock 3 1,941
Purchase of treasury stock (3,202)
Borrowings under line of credit agreement 5,000 -
Repayment on line of credit agreement (5,000) -
Repayment of notes payable (2,201) (46,174)
Proceeds from notes payable borrowings - 45,158
-----------------------------------
Net cash used in financing activities (5,400) (5,031)
Net cash provided by discontinued operations - 1,630
-----------------------------------
Cash and cash equivalents:
Net decrease (5,391) (36,759)
Balance at beginning of year 10,648 45,291
-----------------------------------
Balance at end of period $ 5,257 $ 8,532
===================================
See Notes to Condensed Consolidated Financial Statements
</TABLE>
6
<PAGE>
AMERICAN MEDICAL SECURITY GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
September 30, 1999
NOTE A. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and Article
10 of Regulation S-X. Accordingly, they do not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of only normal recurring adjustments) considered necessary for a fair
presentation have been included. Operating results for the three and nine month
periods ended September 30, 1999 are not necessarily indicative of the results
that may be expected for the year ended December 31, 1999. These condensed
consolidated financial statements should be read in conjunction with the
consolidated financial statements and footnotes thereto included in the American
Medical Security Group, Inc. ("AMSG" or the "Company") annual report on Form
10-K for the year ended December 31, 1998.
NOTE B. DISCONTINUED OPERATIONS
On May 27, 1998, the Board of Directors of the Company, then known as
United Wisconsin Services, Inc. ("UWS"), approved a plan to spin off its managed
care companies and specialty management business to its shareholders (the
"Spin-off"). In connection with the Spin-off, UWS changed its name to "American
Medical Security Group, Inc." On September 25, 1998, the distribution date,
shareholders of AMSG received one share of common stock of a newly formed
company, Newco/UWS, Inc. ("Newco/UWS"), for every share of AMSG owned as of
September 11, 1998, the record date. The net assets of Newco/UWS consisted of
assets and liabilities of the managed care and specialty business along with
$70.0 million in debt that was assumed by Newco/UWS in conjunction with the
Spin-off. Newco/UWS was renamed United Wisconsin Services, Inc. AMSG has
obtained a private ruling from the Internal Revenue Service to the effect that
the Spin-off qualifies as tax free to AMSG, Newco/UWS and AMSG shareholders. The
operations of Newco/UWS are reflected in discontinued operations through
September 25, 1998. All prior periods of the Company's financial statements have
been restated to reflect Newco/UWS operations as discontinued operations.
Interest expense on the $70.0 million in debt assumed by Newco/UWS is reflected
in continuing operations through September 11, 1998.
7
<PAGE>
NOTE C. EARNINGS PER SHARE
Basic earnings per common share are computed by dividing net income by the
weighted average number of common shares outstanding. Diluted earnings per
common share are computed by dividing net income by the weighted average number
of common shares outstanding, adjusted for the effect of dilutive employee stock
options.
The following table provides a reconciliation of the number of weighted
average basic and diluted shares outstanding:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------------- -------------------------------
1999 1998 1999 1998
------------------------------- -------------------------------
Weighted average common shares
outstanding - Basic 16,468,380 16,571,502 16,590,952 16,544,517
Effect of dilutive stock options - 48,816 - 126,173
------------------------------- -------------------------------
Weighted average common shares
outstanding - Diluted 16,468,380 16,620,318 16,590,952 16,670,690
=============================== ===============================
</TABLE>
The effect of dilutive securities is excluded from the diluted earnings per
common share computation for the three and nine months ended September 30, 1999
because employee stock options are antidilutive during such periods. Certain
options to purchase shares were not included in the computation of diluted
earnings per common share because the options' exercise prices were greater than
the average market price of the outstanding common shares for the three and nine
month periods ended September 30, 1998.
NOTE D. COMPREHENSIVE INCOME
Comprehensive income (loss) for the Company is defined as net income (loss)
plus or minus unrealized gains or losses, net of income tax effects, on certain
investments in debt and equity securities. Comprehensive income (loss) totaled
$(27.9) million and $7.1 million for the three months ended September 30, 1999
and 1998, respectively, and $(35.6) million and $12.2 million for the nine
months ended September 30, 1999 and 1998, respectively.
NOTE E. RECLASSIFICATIONS
Certain reclassifications have been made to the consolidated financial
statements for 1998 to conform with the 1999 presentation.
NOTE F. SUBSEQUENT EVENT
At September 30, 1999, the Company has $45.2 million in borrowings
outstanding related to a five year revolving bank line of credit. Effective
November 5, 1999, the Company entered into an agreement to amend the line of
credit to reduce the maximum commitment on the line of credit from $70.0 million
to $40.0 million. In conjunction with the commitment reduction, the Company paid
$10.0 million on the loan outstanding on November 5, 1999, reducing the
outstanding balance to $35.2 million. The amended line of credit agreement also
revises certain covenants which, among other matters, require the Company to
maintain a minimum tangible net worth and restrict the Company's ability to
incur additional debt, pay future cash dividends and transfer assets.
8
<PAGE>
NOTE G. CONTINGENCIES
During the third quarter of 1999, a $6.9 million verdict was entered
against the Company in a lawsuit which principally alleged breach of contract
involving the timing of claims payments. The Company intends to appeal this
decision to a Federal Appeals Court. Management expects the $6.9 million verdict
to be reversed or substantially reduced following appeal. As a result, the
Company's accrual related to this case is not material.
The Company is involved in various other legal actions occurring in the
normal course of its business. In the opinion of management, adequate provision
has been made for losses which may result from these legal actions and,
accordingly, the outcome of these matters is not expected to have a material
adverse effect on the consolidated financial statements.
NOTE H. SEGMENT INFORMATION
The Company has two reportable segments: 1) health benefit products and 2)
life insurance products. The Company's health benefit products consist of the
following coverages related to small group preferred provider organization
products: fully insured medical, stop-loss, dental and short-term disability, in
addition to self funded benefit administration. Life products consist primarily
of group term life insurance. Operations not directly related to the business
segments (i.e., corporate investment income, interest expense on corporate debt,
amortization of goodwill and intangibles, unallocated overhead expenses and
health maintenance organization ("HMO") operations) are included in "All Other".
The segments are reported separately because they differ in the nature of the
products offered and in profit margins.
The Company evaluates segment performance based on profit or loss from
operations before income taxes, not including gains and losses on the Company's
investment portfolio. The accounting policies of the reportable segments are the
same as those used to report the Company's consolidated financial statements.
Intercompany transactions have been eliminated prior to reporting reportable
segment information.
A reconciliation of segment income (loss) before income taxes to
consolidated income (loss) from continuing operations before income taxes is as
follows:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Three Months Ended Nine Months Ended
September 30, September 30,
1999 1998 1999 1998
------------------------------- ------------------------------
(000'S OMITTED)
Health segment $ (34,976) $ 1,391 $ (38,921)$ 1,419
Life segment 2,447 1,872 7,023 7,359
All other (7,141) (418) (8,102) (2,225)
------------------------------- ------------------------------
$ (39,670) $ 2,845 $ (40,000)$ 6,553
=============================== ==============================
</TABLE>
9
<PAGE>
Operating results and statistics for each of the Company's segments are as
follows:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------------- ------------------------------
1999 1998 1999 1998
------------------------------- ------------------------------
(000'S OMITTED, EXCEPT FINANCIAL STATISTICS)
HEALTH SEGMENT
OPERATING RESULTS
Revenues:
Insurance premiums $ 247,602 $ 212,159 $ 741,006 $ 650,680
Net investment income 2,201 2,162 6,766 6,450
Other revenue 4,140 5,663 14,048 12,570
------------------------------- ------------------------------
Total revenues 253,943 219,984 761,820 669,700
Expenses:
Medical and other benefits 226,730 160,906 613,624 502,938
Selling, general and administrative 62,189 57,687 187,117 165,343
------------------------------- ------------------------------
Total expenses 288,919 218,593 800,741 668,281
------------------------------- ------------------------------
Income (loss) before income taxes $ (34,976) $ 1,391 $ (38,921)$ 1,419
=============================== ==============================
FINANCIAL STATISTICS
Loss ratio 91.6% 75.8% 82.8% 77.3%
Expense ratio 23.4% 24.5% 23.4% 23.5%
------------------------------- ------------------------------
Combined ratio 115.0% 100.3% 106.2% 100.8%
=============================== ==============================
Membership at End of Period:
Medical:
Fully insured 605,732 533,552
Self funded 49,036 90,904
-------------------------------
Total medical* 654,768 624,456
Dental 344,146 385,706
* Total medical membership of the Company includes HMO membership of
29,378 and 18,166 at September 30, 1999 and 1998, respectively. HMO
operations are not included in health segment operating results.
</TABLE>
10
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------------- ------------------------------
1999 1998 1999 1998
------------------------------- ------------------------------
(000'S OMITTED, EXCEPT FINANCIAL STATISTICS)
LIFE SEGMENT
OPERATING RESULTS
Revenues:
Insurance premiums $ 6,641 $ 6,328 $ 19,751 $ 18,880
Net investment income 48 54 147 168
Other revenue 64 107 202 185
------------------------------- ------------------------------
Total revenues 6,753 6,489 20,100 19,233
Expenses:
Medical and other benefits 2,436 2,597 7,287 5,982
Selling, general and administrative 1,870 2,020 5,790 5,892
------------------------------- ------------------------------
Total expenses 4,306 4,617 13,077 11,874
------------------------------- ------------------------------
Income before income taxes $ 2,447 $ 1,872 $ 7,023 $ 7,359
=============================== ==============================
FINANCIAL STATISTICS
Loss ratio 36.7% 41.0% 36.9% 31.7%
Expense ratio 27.2% 30.2% 28.3% 30.2%
------------------------------- ------------------------------
Combined ratio 63.9% 71.2% 65.2% 61.9%
=============================== ==============================
Membership at End of Period 307,343 261,625
</TABLE>
11
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
American Medical Security Group, Inc. ("AMSG" or the "Company"), formerly
known as United Wisconsin Services, Inc., together with its subsidiary
companies, is a provider of health and life insurance products for individuals
and employer groups. The Company's principal product offering is small group
health insurance. It also sells individual and large group health insurance,
group life, dental, prescription drug, disability and accidental death
insurance, and provides self funded benefit administration. The Company's
products are actively marketed in 33 states and the District of Columbia through
independent agents. The Company's products generally provide discounts to
insureds that utilize preferred provider organizations. The average group size
is six lives.
HISTORY
Prior to and for most of the year 1998, the business of the Company, then
known as "United Wisconsin Services, Inc.", consisted of two main components:
the small group business and the managed care and specialty business. On
September 11, 1998, the Company contributed all of its subsidiaries comprising
the managed care and specialty business to a newly created subsidiary named
"Newco/UWS, Inc.", a Wisconsin corporation ("Newco/UWS"). On September 25, 1998,
the Company spun off the managed care and specialty business through a
distribution of 100% of the issued and outstanding shares of common stock of
Newco/UWS to the Company's shareholders of record as of September 11, 1998. The
Company then adopted its current name of "American Medical Security Group, Inc."
and Newco/UWS changed its name to "United Wisconsin Services, Inc." The net
assets of Newco/UWS consisted of assets and liabilities of the managed care and
specialty management business along with $70.0 million in debt that was assumed
by Newco/UWS in conjunction with the distribution. The operations of Newco/UWS
are reflected in discontinued operations through September 25, 1998. Interest
expense on the $70.0 million in debt assumed by Newco/UWS is reflected in
continuing operations through September 11, 1998. After the Spin-off, the
business of the Company consisted solely of the Company's small group insurance
business. The continuing operations of the Company reflect the historical small
group insurance portion of the Company's business.
RESULTS OF CONTINUING OPERATIONS
The Company reported a net loss from continuing operations of $25.9 million
or $1.57 per share for the third quarter of 1999, compared to net income from
continuing operations of $1.6 million or $0.10 per share for the third quarter
of the prior year. For the nine months ended September 30, 1999, the Company
reported a net loss from continuing operations of $26.5 million or $1.59 per
share, compared to net income from continuing operations of $3.6 million or
$0.22 per share for the nine month period ended September 30, 1998. The third
quarter 1999 financial results include a special after-tax charge of $23.9
million or $1.45 per share resulting from the Company's plans to exit certain
small group markets and strengthen medical claims reserves. Excluding the $23.9
million charge, the third quarter 1999 after-tax loss was $2.0 million or $0.12
per share. Losses in exited markets during the quarter were $2.3 million or
$0.14 per share. Excluding both the $23.9 million charge and losses in exited
markets, the Company's after-tax income from continuing operations was $0.3
million or $0.02 per share.
On October 25, 1999, the Company announced plans to cease marketing its
small group business in Maryland, Minnesota and Florida. The Company will also
terminate existing small group business in these states over the next 18 months.
In addition, the Company will discontinue HMO operations in Florida. The Company
recorded a $13.7 million after-tax charge in the third quarter of 1999 related
to a premium deficiency reserve for markets with unfavorable regulatory
environments which includes the exited markets. The Company also recorded a
third quarter 1999 after-tax charge of $10.2 million to strengthen medical
claims reserves. The reserve strengthening charge became necessary when medical
cost trends in the first half of the year proved to be higher than anticipated
at the end of the second quarter 1999 when the Company also strengthened
reserves.
12
<PAGE>
INSURANCE PREMIUMS
Insurance premiums for the three months ended September 30, 1999 increased
18.7% to $266.1 million from $224.2 million for the same period in 1998.
Insurance premiums for the nine months ended September 30, 1999 increased 15.6%
to $793.2 million from $686.1 million for the same period in 1998. The premium
increase reflects both internal growth and business acquired from other
insurance carriers. The Company acquired the majority of the fully insured group
health business of Continental Assurance Company ("CNA") effective January 1,
1999. Insurance premiums related to the CNA acquired business were $19.4 for the
three months ended September 30, 1999 and $71.7 million for the nine months
ended September 30, 1999.
Average fully insured medical premium per member per month during the nine
month period ended September 30, 1999 increased 3.3% to $127 compared to $123
during the same period in 1998. Management expects average medical premium per
member per month to begin increasing at a faster rate as premium rate increases
are implemented. Medical membership inforce at September 30, 1999 increased 4.9%
to 654,768 from 624,456 at September 30, 1998, primarily due to new sales growth
and the addition of the CNA business.
NET INVESTMENT INCOME
Net investment income includes investment income and realized gains and
losses on investments. Net investment income for the three months ended
September 30, 1999 declined 20.6% to $4.9 million from $6.2 million for the
three months ended September 30, 1998. The decline is due to lower average
annual investment yields and a decrease in realized gains of $0.9 million. Net
investment income for the nine months ended September 30, 1999 decreased 18.9%
to $14.6 million from $18.0 million for the same period one year ago. Average
annual investment yields, excluding realized gains and losses were 6.2% and 6.5%
for the three months and nine months ended September 30, 1999, respectively,
compared to 7.1% and 7.4% for the same respective periods in the prior year.
Investment gains and losses are realized in the normal investment process in
response to market opportunities. Average invested assets at cost for the three
months ended September 30, 1999 were $309.8 million compared to $290.0 million
for the three months ended September 30, 1998.
OTHER REVENUE
Other revenue decreased to $5.1 million for the three months ended
September 30, 1999 from $7.1 million for the same period in 1998. The decrease
is primarily due to a decrease in fee revenue associated with the Pan American
Life Insurance Company business acquired in July 1998. Other revenue for the
nine month period was $16.7 million in 1999 compared to $16.6 million in 1998.
LOSS RATIO
The health segment loss ratio for the three months ended September 30,
1999, excluding the premium deficiency reserve was 85.9% compared with 75.8% for
the three months ended September 30, 1998. The unfavorable health loss ratio for
the quarter reflects the reserve strengthening charge in the third quarter of
1999 in the amount of $10.2 million after-tax. Excluding the effects of reserve
strengthening and the premium deficiency reserve, the health loss ratio for the
third quarter of 1999 would have been 79.5%. The health segment loss ratio for
the nine months ended September 30,1999 was 80.9% compared with 77.3% for the
nine months ended September 30, 1998. Contributing to the need for the reserve
strengthening charge were significant increases in medical inflation, pharmacy
costs and general utilization.
13
<PAGE>
To combat these identified adverse medical cost trends, management has
implemented aggressive action plans which include: significant price increases
on plan anniversaries and early rate action where appropriate; product line
redesign including the conversion of older products to new ones with higher
deductibles and copays; implementation of a two-tier drug program; and continued
aggressive negotiations for better provider network discounts. Management
expects the effects of the corrective actions to begin later in the fourth
quarter of 1999, and believes the rate increases will have a larger effect
beginning in the first quarter of 2000 with a growing impact through the rest of
next year. As a result, management expects the Company to report a small profit
in the fourth quarter of 1999.
The life segment loss ratio for the three months ended September 30, 1999
was 36.7% compared to 41.0% for the three months ended September 30, 1998. The
life segment loss ratio for the nine months ended September 30, 1999 was 36.9%
compared with 31.7% for the nine months ended September 30, 1998.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE RATIO
The selling, general and administrative ("SGA") expense ratio for health
segment products for the three months ended September 30, 1999, excluding the
third quarter 1999 special charges, was 23.0% compared with 24.5% for the three
months ended September 30, 1998. For the nine months ended September 30, 1999
and 1998, the SGA expense ratio for health segment products was 23.2% and 23.5%,
respectively. The decrease in the SGA expense ratio is the result of a lower
administrative expense ratio caused by a leveraging of the Company's operations
over increased revenues offset slightly by higher commissions on new policy
sales.
OTHER EXPENSES
Interest expense decreased to $0.9 million for the three months ended
September 30, 1999 from $2.0 million for the same period in the prior year. For
the nine months ended September 30, 1999, interest expense decreased to $2.7
million from $6.7 million for the nine months ended September 30, 1998. The
decrease in interest expense for the quarter and nine month period reflects the
assumption of $70.0 million in debt by Newco/UWS on September 11, 1998, as part
of the Spin-off transaction, as described in Note B of the Notes to Condensed
Consolidated Financial Statements.
Amortization of goodwill and other intangibles totaled $1.0 million for the
third quarter of 1999, compared with $2.2 million of amortization expense for
the third quarter of 1998. On a year-to-date basis, amortization of goodwill and
intangibles decreased to $3.1 million from $6.6 million for the nine months
ended September 30, 1998. The decline in amortization is principally due to the
write-off of the Company's distribution system intangible asset at December 31,
1998, as described in the Company's annual report on Form 10-K for the year
ended December 31, 1998. Management believes that no other material impairment
of goodwill and other intangible assets exists at September 30, 1999.
The effective tax rate was 34.6% for the three months ended September 30,
1999 compared with 42.5% for the three months ended September 30, 1998. The
effective tax rate for the nine months ended September 30, 1999 was 33.9%
compared with 45.4% for the nine months ended September 30, 1998. The effective
tax rate is impacted primarily by level amortization of non-deductible goodwill
in relation to varying pre-tax income.
LIQUIDITY AND CAPITAL RESOURCES
The Company's sources of cash flow consist primarily of insurance premiums,
administrative fee revenue and investment income. The primary uses of cash
include medical and other benefits and operating expense payments. Positive cash
flows are invested pending future payments of medical and other benefits and
other operating expenses. The Company's investment policies are designed to
maximize yield, preserve principal and provide liquidity to meet anticipated
payment obligations.
14
<PAGE>
The Company's cash flow from operations was positive at $16.5 million for
the nine months ended September 30, 1999. This compares to negative cash flow
from operations of $6.0 million for the nine months ended September 30, 1998.
The positive results are due to growth in membership and lower debt costs as a
result of the assumption of $70.0 million in debt by Newco/UWS in September
1998.
The Company's investment portfolio from continuing operations consists
primarily of investment grade bonds and has limited exposure to equity
securities. At September 30, 1999, $295.6 or 99.3% of the Company's investment
portfolio was invested in bonds. At December 31, 1998, $296.5 or 99.2% of the
Company's investment portfolio was invested in bonds. The bond portfolio had an
average quality rating of Aa3 at September 30, 1999, and A1 at December 31,
1998, as measured by Moody's Investor Service. The majority of the bond
portfolio was classified as available for sale. The Company has no investment in
mortgage loans, non-publicly traded securities (except for principal only strips
of U.S. Government securities), real estate held for investment or financial
derivatives.
The Company's insurance subsidiaries operate in states that require certain
levels of regulatory capital and surplus and may restrict dividends to their
parent companies. The National Association of Insurance Commissioners has
adopted risk-based capital ("RBC") standards for health and life insurers
designed to evaluate the adequacy of statutory capital and surplus in relation
to various business risks faced by such insurers. The RBC formula is used by
state insurance regulators as an early warning tool to identify insurance
companies that potentially are inadequately capitalized. At December 31, 1998,
the Company's principal insurance company subsidiaries had an RBC ratio that was
substantially above the levels which would require regulatory action.
At September 30, 1999, the Company has $45.2 in million borrowings
outstanding related to a five year revolving bank line of credit. Effective
November 5, 1999, the Company entered into an agreement to amend the line of
credit to reduce the maximum commitment on the line of credit from $70.0 million
to $40.0 million. In conjunction with the commitment reduction, the Company paid
$10.0 million on the loan outstanding on November 5, 1999, reducing the
outstanding balance to $35.2 million. The amended line of credit agreement also
revises certain covenants which, among other matters, require the Company to
maintain a minimum tangible net worth and restrict the Company's ability to
incur additional debt, pay future cash dividends and transfer assets.
In addition to internally generated funds and periodic borrowings on its
bank line of credit, the Company believes that additional financing to
facilitate long-term growth could be obtained through equity offerings, debt
offerings, or bank borrowings, as market conditions may permit or dictate.
YEAR 2000
The Year 2000 issue is the result of computer programs being written using
two digits rather than four to define the applicable year. Computer equipment
and software devices with embedded technology that are time-sensitive may
recognize a date using "00" as the year 1900 rather than the year 2000. This
could result in a system failure or miscalculations causing disruptions of
operations, including, among other things, a temporary inability to process
transactions or engage in similar normal business activities.
The Company has divided the Year 2000 issues facing the organization into
three major sections: 1) software applications developed in-house ("In-house
Applications"); 2) software applications acquired from a third party that have
been customized by the Company ("Customized Applications"); and 3) software
applications acquired from a third party that have not been customized by the
Company and those products and services provided to the Company by third parties
("Third Party Products").
In-house Applications represent the primary operating software of the
Company and include premium billing and cash posting, claims adjudication and
commission payment processing applications. The project to make all in-house
Applications Year 2000 compliant was completed in November 1998. The deletion of
temporary bridges and workfiles used to facilitate communication between
compliant and non-compliant computer codes during the course of the
implementation was completed in early March 1999.
15
<PAGE>
Customized Applications software products include electronic data
interchange applications, publishing systems, fax capabilities, accounting
packages and other special application software as well as utility software
packages that serve as links between different packages. Each of these software
packages was upgraded or replaced. All Customized Applications were compliant at
the end of the third quarter of 1999.
With respect to Third Party Products, the Company has reviewed its business
processes that may have Year 2000 concerns performed by, with or through
external business associates. This includes computer hardware, telephone
systems, security systems and other numerous products as well as third party
applications that have not been customized by the Company. The Company has
evaluated various third parties that provide products or services, such as
printing companies, power and utility companies and other vendors. Where
appropriate, agreements with third party vendors have been amended and Year 2000
compliance certifications have been obtained. Significant business partners and
vendors were required to provide the Company with Year 2000 certified products
or services. Such products and services were tested by the Company to validate
the compliance certification. This portion of the plan is complete.
<TABLE>
<CAPTION>
<S> <C> <C>
YEAR 2000 PLAN PERCENT COMPLETE COMPLETION DATE
In-house Applications 100% March 1999
Customized Applications 100% September 1999
Third Party Products 100% September 1999
</TABLE>
The cost of the Year 2000 project is being funded through operating cash
flows and is not expected to be material to the Company's financial position.
For the nine months ended September 30, 1999, the Company has incurred costs of
$3.0 million relating to the Year 2000 project. The Company has made capital
expenditures of $4.5 million for the nine months ended September 30, 1999. The
Company does not anticipate significant future operating and capital
expenditures related to the Year 2000 project.
The Company has completed a comprehensive analysis of the operational
problems and costs (including loss of revenues) that could result from the
unlikely failure by the Company and certain third parties to complete efforts
necessary to achieve Year 2000 compliance. While the Company currently believes
that the timely completion of its Year 2000 project has limited exposure so that
the Year 2000 issue will not pose material operational problems, the Company
cannot control third party systems and services. Detailed business continuity
and contingency plans have been developed and documented for dealing with
identified worst case scenarios with the highest chance of occurring. The
continuity and contingency plans have been tested in an effort to mitigate the
risk of failure and provide for quick recovery from possible failures associated
with the century change. The Company identified 43 major business processes that
required contingency plan development and required each functional department to
develop alternative means to address all identifiable types of Year 2000
disruptions. The contingency plans detail strategies to implement in 1999 to
prepare for the century rollover, and actions to execute if problems arise.
These plans involve, among other actions, manual workarounds, reducing claims
inventories, expediting the business process cycle to finish processing before
year end, and adjusting staffing strategies. Contingency plans were reviewed for
consistency and completeness. These plans are being incorporated into the year
end plans and will be retained for reference in the Year 2000 command center.
The ultimate success and cost of the project is based on management's best
estimates, which is based using numerous assumptions of future events including
the continued availability of certain resources, third party remediation plans
and other factors. There can be no guarantee that these estimates will be
achieved. Actual results could differ materially from those planned. Specific
factors that might cause such material differences to occur include, but are not
limited to, the availability and cost of personnel trained in this area should
future issues arise; the ability to locate and correct undetected relevant
computer codes; and the ability of the Company's significant suppliers,
customers and others with which it conducts business, including federal, state
and local governmental agencies, to identify and resolve their own Year 2000
issues and similar uncertainties. Due to these uncertainties, the Company may
face certain claims, the impact of which is not currently estimable. No
assurance can be given that the cost of defending and resolving such claims, if
any, will not significantly affect the Company's results of operations. Although
the Company has some agreements with third party vendors and suppliers that
contain indemnification provisions that protect the Company under certain
circumstances relating to Year 2000 issues, there can be no assurances that such
indemnification provisions will cover all of the Company's liabilities and costs
related to Year 2000 claims by third parties.
16
<PAGE>
FORWARD LOOKING STATEMENTS
Statements contained in this report that are not historical facts are
forward looking statements subject to inherent risks and uncertainties that may
cause actual results or events to differ materially from those contemplated by
such forward looking statements. The terms "anticipate", "believe", "estimate",
"expect", "objective", "plan", "project" and similar expressions are intended to
identify forward looking statements. In addition to the assumptions and other
factors referred to specifically in connection with such statements, factors
that may cause actual results or events to differ materially from those
contemplated by such forward looking statements, include, among others, (1) the
Company's ability to successfully implement the action plans to improve loss
ratios; (2) the effects of either federal or state health care reform or other
legislation; (3) the Company's ability to predict rising health care costs and
adequately price its products; (4) the Company's ability to estimate accurately
expected losses related to exited markets; (5) changes in membership utilization
and risk; (6) government regulations, including changes in insurance, health
care and other regulatory conditions; (7) delays in regulatory approvals, and
regulatory action resulting from market conduct activity and general
administrative compliance with state and federal laws; (8) general business
conditions, including competitive practices and demand for the Company's
products; (9) development of and changes in claims reserves; (10) rating agency
policies and practices; (11) general economic conditions, including changes in
interest rates and the effect of such changes on the Company's investment
portfolio; (12) unforeseen costs or consequences of Year 2000 issues; (13) the
outcome of commercial or other litigation, and (14) other factors that may be
referred to in the Company's reports filed with the Securities and Exchange
Commission from time to time.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The Company's market risk has not substantially changed from the year ended
December 31, 1998.
17
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On August 26, 1999, a $6.9 million verdict was entered against American
Medical Security, Inc. ("AMS"), the Company's third party administrator ("TPA")
subsidiary, in the United States District Court for the Middle District of
Alabama. The decision was made in a lawsuit brought against AMS by Skilstaf,
Inc. ("Skilstaf"), an Alabama employee leasing company, in January 1998 alleging
that AMS delayed claims payments under a contract with Skilstaf to avoid
liability under a stop-loss policy issued by its affiliate, United Wisconsin
Life Insurance Company ("UWLIC"). Skilstaf sought unspecified damages. The
contract, which was entered into in 1992 and terminated by Skilstaf in 1996, was
a TPA contract for Skilstaf's self-funded employee benefit plan. AMS has argued
that this case was governed by the Employee Retirement Income Security Act of
1974, as amended, which preempts all state law causes of action and limits
damages to contract damages. On September 14, 1999, AMS filed a post-trial
motion to set aside the jury's finding. If the court does not grant the motion,
it is AMS' intent to appeal the decision to the Eleventh Circuit Federal Appeals
Court. Management expects the $6.9 million verdict to be reversed or
substantially reduced following appeal.
The Company is involved in various other legal actions occurring in the
normal course of its business. In the opinion of management, adequate provision
has been made for losses which may result from the Skilstaf litigation and other
legal actions and, accordingly, the outcome of these matters is not expected to
have a material adverse effect on the consolidated financial statements.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
At September 30, 1999, the Company had $45.2 million in loans outstanding
under a five year revolving bank line of credit with a maximum commitment of
$70.0 million. On November 5, 1999, the Company paid down $10.0 million on the
outstanding indebtedness and entered into an amendment to reduce the maximum
commitment on the line of credit to $40.0 million. The line of credit commitment
will be further reduced to $30.0 million on July 31, 2001. The stock of American
Medical Security Holdings, Inc. and UWLIC has been pledged as collateral for the
loan. The amended line of credit agreement also revises certain covenants which,
among other matters, require the Company to maintain minimum tangible net worth
and restrict the Company's ability to incur additional debt, pay future cash
dividends and transfer assets.
ITEM 5. OTHER INFORMATION
On August 3, 1999, the Company announced that its Board of Directors has
authorized the Company to repurchase up to $10 million of the Company's
outstanding common stock. During the quarter ended September 30, 1999, the
Company purchased 375,200 shares of its outstanding common stock at an aggregate
purchase price of $3.2 million. In determining when and whether to purchase
future shares, management considers, among other factors, market price, the
number of shares actively traded in the market, indications of seller interest,
the number of shares held by large shareholders, the effect of purchases on
shareholder value, and covenant restrictions in the Company's revolving credit
facility. Because of the unpredictability of these factors, no assurance can be
given as to how many shares may be repurchased.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
See the Exhibit Index following the Signature page of this report, which is
incorporated herein by reference.
(b) REPORTS ON FORM 8-K
No reports on Form 8-K were filed by the Company during the third quarter
of 1999.
18
<PAGE>
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.
DATE: November 12, 1999
----------------------
AMERICAN MEDICAL SECURITY GROUP, INC.
/s/ Gary D. Guengerich
---------------------------------------------------------
Gary D. Guengerich
Executive Vice President and Chief Financial Officer
(Principal Financial Officer and Chief Accounting Officer
and duly authorized to sign on behalf of the Registrant)
19
<PAGE>
<TABLE>
EX-1
AMERICAN MEDICAL SECURITY GROUP, INC.
(COMMISSION FILE NO. 1-13154)
EXHIBIT INDEX
TO
FORM 10-Q QUARTERLY REPORT
for quarter ended September 30, 1999
<CAPTION>
<S> <C> <C> <C>
INCORPORATED HEREIN FILED
EXHIBIT NO. DESCRIPTION BY REFERENCE TO HEREWITH
4.1 Amendment No. 1 dated as of November 5, X
1999 to the Amended and Restated Credit
Agreement dated as of October 15, 1998,
among the Registrant, United Wisconsin
Life Insurance Company and Bank One, NA
(f/k/a The First National Bank of Chicago
and other Lenders
27.1 Financial Data Schedule X
</TABLE>
EX-1
EXHIBIT 4.1
AMENDMENT NO. 1 TO AMENDED AND RESTATED CREDIT AGREEMENT
This Amendment No. 1 to Amended and Restated Credit Agreement (this
"Amendment Agreement") is entered into as of November 5, 1999 by and among
American Medical Security Group, Inc. and United Wisconsin Life Insurance
Company (collectively, the "Borrowers"), the undersigned lenders (the "Lenders")
and Bank One, NA (f/k/a The First National Bank of Chicago), as agent (the
"Agent") and swing line lender.
W I T N E S S E T H :
WHEREAS, the Borrowers, the Lenders and the Agent entered into that certain
Amended and Restated Credit Agreement dated as of October 15, 1998 (the "Credit
Agreement"); and
WHEREAS, the Borrowers, the Lenders and the Agent have agreed to amend the
Credit Agreement on the terms and conditions herein set forth.
NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereto hereby agree as
follows:
1. DEFINED TERMS. Capitalized terms used herein and not otherwise defined herein
shall have the meanings attributed to such terms in the Credit Agreement, as
amended hereby.
2. AMENDMENTS TO CREDIT AGREEMENT.
2.1 Article I of the Credit Agreement is hereby amended by (a) deleting
clause (d) of the definition of "Cash Equivalent Investments" in its entirety
and replacing it with the following:
(d) certificates of deposit issued by and overnight repurchase agreements
and time deposits with commercial banks (whether domestic or foreign)
having capital and surplus in excess of $100,000,000;
(b) adding the words ", the Pledge Agreements" to the definition of "Loan
Documents" following the reference to "the Guaranty", (c) adding the definitions
of "Asset Disposition", "EBITDA" and "Pledge Agreements" as follows:
"Asset Disposition" means any sale, transfer or other disposition of
any asset of Group or any Subsidiary in a single transaction or in a series
of related transactions, other than the sale of Investments in the ordinary
course of business by Insurance Subsidiaries.
"EBITDA" means, for any period, for Group on a stand alone basis,
determined in accordance with GAAP, the sum of (a) the net income (or net
loss) for such period, PLUS (b) all amounts treated as expenses for
depreciation and interest and the amortization of intangibles of any kind
to the extent included in the determination of such net income (or loss),
PLUS (c) all accrued taxes on or measured by income to the extent included
in the determination of such net income (or loss).
"Pledge Agreements" means, collectively, (a) that certain Stock Pledge
Agreement dated as of the date hereof between Group and the Agent, as it
may be amended, supplemented or modified from time to time, and (b) that
certain Stock Pledge Agreement dated as of the date hereof between Holdings
and the Agent, as it may be amended, supplemented or modified from time to
time.
and (d) deleting the definitions of "Interest Coverage Ratio" and "Net Available
Proceeds" in their entirety and replacing them with the following:
"Interest Coverage Ratio" means, as of any date of determination, the
ratio of (a) the sum of (i) the lesser of (A) 10% of UWLIC's Statutory
Surplus as of such date and (B) UWLIC's aggregate Statutory Net Income for
the period of four Fiscal Quarters ending on such date, without regard to
realized capital gains in such period (determined on a pre-tax basis) and
determined without double counting, plus (ii) Group's EBITDA for the period
of four Fiscal Quarters ending on such date, to (b) Consolidated Interest
Expense for the period of four Fiscal Quarters ending on such date;
PROVIDED, that for determinations made through September 30, 2000, the
amount determined pursuant to clause (b) above shall be equal to the
Consolidated Interest Expense for the period beginning on October 1, 1999
and ending on the date of determination, divided by the number of quarters
in such period and multiplied by 4.
"Net Available Proceeds" means (a) with respect to any Asset
Disposition, the sum of cash or readily marketable cash equivalents
received (including by way of a cash generating sale or discounting of a
note or account receivable) therefrom, whether at the time of such
disposition or subsequent thereto, or (b) with respect to any sale or
issuance of equity securities of Group or any Subsidiary, cash or readily
marketable cash equivalents received therefrom, whether at the time of
disposition or subsequent thereto, net, in either case, of all legal, tax
and recording expenses, commissions and other fees and all costs and
expenses incurred and, in the case of an Asset Disposition, net of all
payments made by Group or any Subsidiary on any Indebtedness which is
secured by such assets pursuant to a permitted Lien upon or with respect to
such assets or which must, by the terms of such Lien, in order to obtain a
necessary consent to such Asset Disposition, or by applicable law, be
repaid out of the proceeds from such Asset Disposition.
2.2 Article II of the Credit Agreement is hereby amended by (a) deleting
the table in clause (a) of Section 2.8 and replacing it with the following:
DATE AGGREGATE COMMITMENT
November 5, 1999 $40,000,000
July 31, 2001 $30,000,000 (or such lesser amount
as shall then be in effect)
(b) adding a new paragraph (b) to Section 2.8 as follows:
(b) The Borrowers shall make permanent reductions in the Aggregate
Commitment in amounts equal to the following:
(i) within 30 days after the receipt thereof by Group or any
Subsidiary, an amount equal to 100% of the aggregate Net Available
Proceeds realized upon all Asset Dispositions in any Fiscal Year of
Group; PROVIDED, that no such prepayment or commitment reduction shall
be required (A) if such amount is less than $1,000,000 in any Fiscal
Year, or (B) as a result of any Asset Disposition permitted pursuant
to SECTION 6.13(A), (B) or (C); and
(ii) within 30 days after the receipt thereof by Group or any of
its Subsidiaries an amount equal to 100% of the Net Available Proceeds
realized upon the sale by Group or such Subsidiary of any of its
equity securities.
Contemporaneously with any automatic reductions in the Aggregate Commitment
pursuant to this SECTION 2.8(B), Group shall prepay the Revolving Loans in
an amount equal to the lesser of (A) the outstanding principal amount of
the Revolving Loans and (B) the amount of such reduction; PROVIDED, that no
such prepayment shall be required if, at such time, Group could satisfy the
conditions set forth in SECTION 4.2(B) for the reborrowing thereof. The
preceding sentence shall not affect the obligations of the Borrowers under
SECTION 2.1(B).
and (c) relabelling existing paragraphs (b) and (c) of Section 2.8 as paragraphs
(c) and (d).
2.3 Article V of the Credit Agreement is hereby amended by adding Section
5.31 as follows:
5.31 SECURITY. Each Pledge Agreement is effective to create and give
the Agent, for the benefit of the Lenders, as security for the repayment of
the obligations secured thereby, a legal, valid, perfected and enforceable
first priority Lien upon and security interest in the capital stock pledged
thereunder.
2.4 Article VI of the Credit Agreement is hereby amended as follows:
(a) Section 6.10 is hereby deleted in its entirety and replaced with
the following:
6.10 DIVIDENDS. Neither Borrower will, nor will it permit any
Subsidiary to, declare or pay any dividends or make any distributions
on its capital stock (other than dividends payable in its own capital
stock) or redeem, repurchase or otherwise acquire or retire any of its
capital stock at any time outstanding, except that any Subsidiary may
declare and pay dividends to a Wholly-Owned Subsidiary or to Group.
(b) Section 6.11(g) is hereby amended by deleting the references
therein to "$10,000,000" and "$5,000,000" and replacing them with
references to "$5,000,000" and "$1,000,000", respectively.
(c) Section 6.14 is hereby amended by (i) deleting clause (a)(iv) in
its entirety and replacing it with the following:
(iv) Acquisitions of businesses or entities engaged in the life,
accident and health insurance business (other than assets or stock of
any member of the UWS Group) which do not constitute hostile takeovers
(and Investments in Subsidiaries formed to Acquire such businesses or
Acquired after the date of this Agreement) made for consideration
consisting of Group's capital stock not to exceed $75,000,000 in the
aggregate after the Initial Closing Date (measured by reference to the
market value of such stock as of the consummation of such
Acquisition); and
(ii) deleting clause (b)(v) in its entirety and replacing it with the
following:
(v) Acquisitions of blocks of insurance business, from Persons
other than any member of the UWS Group, through assumptive
reinsurance, co-insurance or indemnity reinsurance, so long as the
only consideration paid in connection therewith consists of (A)
premium sharing and (B) payments of up to $5,000,000 in the aggregate
after the date hereof for the processing or administration of such
insurance business or in reimbursement of expenses of the cedent of
such insurance business.
and (iii) deleting clause (b)(vi) in its entirety and replacing it with a
reference to "Intentionally Omitted".
(d) Section 6.19.1 is hereby amended by deleting clauses (a), (b) and
(c) in their entirety and replacing them with the following:
(a) 3.25 to 1.0 from November 5, 1999 through December 31, 1999, (b)
3.5 to 1.0 from January 1, 2000 through March 31, 2000, (c) 4.5 to 1.0
from April 1, 2000 through June 30, 2000, (d) 5.0 to 1.0 from July 1,
2000 through September 30, 2000, (e) 5.5 to 1.0 from October 1, 2000
through December 31, 2000 and (f) 6.0 to 1.0 thereafter.
(e) Section 6.19.3 is hereby deleted in its entirety and replaced with
the following:
6.19.3. TANGIBLE NET WORTH. Group will at all times maintain a
Consolidated Tangible Net Worth of not less than the sum of (a)
$119,000,000, plus (b) 50% of the positive Consolidated Net Income
earned by Group in each Fiscal Quarter ending after September 30, 1999
and on or prior to the date of determination, plus (c) 50% of the Net
Available Proceeds received by Group or any Subsidiary from the
issuance of equity securities after September 30, 1999.
2.5 Article VII of the Credit Agreement is hereby amended by adding Section
7.17 as follows:
7.17 Any Pledge Agreement shall for any reason fail to create a valid
and perfected, first priority security interest in any collateral purported
to be covered thereby, except as permitted by the terms of such Pledge
Agreement, or any Pledge Agreement shall fail to remain in full force or
effect or any action shall be taken by any Person to discontinue such
Pledge Agreement or by Group or any of its Subsidiaries to assert the
invalidity or unenforceability of such Pledge Agreement, or a default shall
occur under such Pledge Agreement.
2.6 The Pricing Schedule to the Credit Agreement is hereby amended by (a)
deleting the tables set forth therein in their entirety and replacing them with
the following:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
- ---------------------- ------------------ ------------------- ----------------- ----------------- ------------------
APPLICABLE LEVEL I LEVEL II LEVEL III LEVEL IV LEVEL V
MARGIN STATUS STATUS STATUS STATUS STATUS
- ---------------------- ------------------ ------------------- ----------------- ----------------- ------------------
- ---------------------- ------------------ ------------------- ----------------- ----------------- ------------------
<50% Usage 0.60% 0.675% 0.75% 1.00% 1.25%
- ---------------------- ------------------ ------------------- ----------------- ----------------- ------------------
- ---------------------- ------------------ ------------------- ----------------- ----------------- ------------------
>50% Usage 0.725% 0.80% 0.875% 1.25% 1.50%
-
- ---------------------- ------------------ ------------------- ----------------- ----------------- ------------------
- ---------------------- ------------------ ------------------- ----------------- ----------------- ------------------
APPLICABLE LEVEL I LEVEL II LEVEL III LEVEL IV LEVEL V
FEE RATE STATUS STATUS STATUS STATUS STATUS
- ---------------------- ------------------ ------------------- ----------------- ----------------- ------------------
- ---------------------- ------------------ ------------------- ----------------- ----------------- ------------------
Facility Fee 0.15% 0.20% 0.25% 0.25% 0.30%
- ---------------------- ------------------ ------------------- ----------------- ----------------- ------------------
</TABLE>
(b) deleting the reference to "1.5" in the definition of "Level I Status" and
replacing it with a reference to "1.0", (c) deleting the reference to "2.5" in
the definition of "Level II Status" and replacing it with a reference to "2.0",
(d) deleting the reference to "3.5" in the definition of "Level III Status" and
replacing it with a reference to "3.0", (e) deleting the definitions of "Debt
Coverage Ratio" and "Level IV Status" in their entirety and replacing them with
the following:
"Debt Coverage Ratio" means, as of any date of determination, the
ratio of (a) Consolidated Indebtedness of Group as of such date, to (b) the
sum of (i) the lesser of (A) ten percent of UWLIC's Statutory Surplus as of
such date and (B) UWLIC's aggregate Statutory Net Income for the period of
four Fiscal Quarters ending on the date of determination, without regard to
realized capital gains in such period (determined on a pre-tax basis) and
determined without double counting, plus (ii) Group's EBITDA for the Fiscal
Quarter ending on such date.
"Level IV Status" exists at any date if, as of the last day of the
Fiscal Quarter of Group referred to in the most recent Financials, (a)
Group has not qualified for Level I, Level II or Level III status and (b)
the Debt Coverage Ratio is less than 4.0 to 1.0.
and (f) adding a definition of "Level V Status" as follows:
"Level V Status" exists at any date if Group has not qualified for
Level I Status, Level II Status, Level III Status or Level IV Status.
and (g) deleting the last sentence of the last paragraph of the Pricing Schedule
and replacing it with the following:
Notwithstanding the foregoing, until the last day of any Fiscal Quarter as
to which UWLIC has provided the Agent a written certificate demonstrating
that for the period of four Fiscal Quarters ending on such date, UWLIC had
Statutory Net Income of at least $14,000,000, the Applicable Margin shall
be equal to 2.125% and the Applicable Fee Rate shall be equal to .375%.
3. REPRESENTATIONS AND WARRANTIES OF THE BORROWERS.
3.1 Each Borrower represents and warrants that the execution, delivery and
performance by such Borrower of this Amendment Agreement have been duly
authorized by all necessary corporate action and that this Amendment Agreement
is a legal, valid and binding obligation of such Borrower, enforceable against
such Borrower in accordance with its terms, except as the enforcement thereof
may be subject to (a) the effect of any applicable bankruptcy, insolvency,
reorganization, moratorium or similar law affecting creditors' rights generally
and (b) general principles of equity (regardless of whether such enforcement is
sought in a proceeding in equity or at law).
3.2 Each Borrower hereby certifies that each of the representations and
warranties contained in the Credit Agreement is true and correct in all material
respects on and as of the date hereof as if made on the date hereof.
4. ADDITIONAL RESTRICTIONS.
(a) Each Borrower hereby agrees that, until the last day of any Fiscal
Quarter as to which UWLIC has provided the Agent a written certificate
demonstrating that for the period of four Fiscal Quarters ending on such
date, UWLIC had Statutory Net Income of at least $14,000,000, Group shall
not request the Lenders to make any Revolving Loans; PROVIDED, that such
limitation shall not restrict (i) UWLIC's ability to request the Swing Line
Lender to make Swing Line Loans to the extent otherwise permitted under the
terms of the Credit Agreement or (ii) the making of any Revolving Loan
pursuant to Section 2.12(b) of the Credit Agreement.
(b) Notwithstanding any provision of the Waiver dated August 3, 1999
to the contrary, neither Group nor any Subsidiary may purchase, redeem or
retire any shares of Group's capital stock unless it has previously
provided evidence to the Agent that, after giving effect thereto, the
restriction set forth in Section 6.19.3 of the Credit Agreement would
continue to be satisfied.
5. WAIVER. The undersigned Lenders hereby waive any Default to the extent that
such Default arises solely from a breach by the Borrowers of (a) Section 6.19.1
of the Credit Agreement as of September 30, 1999 and (b) Section 6.19.3 of the
Credit Agreement for the period from September 30, 1999 through November 4,
1999.
6. CONDITIONS TO EFFECTIVENESS. This Amendment Agreement shall become effective
as of the date first above written; PROVIDED, that the Agent has received:
(a) counterparts of (i) this Amendment Agreement duly executed by each
Borrower and each Lender, (ii) the Reaffirmation of Guaranty duly executed
by Holdings, and (iii) the Pledge Agreements executed by Group and
Holdings, together with the stock certificates pledged thereunder and stock
powers with respect thereto executed in blank;
(b) payment of the fees payable upon the execution and delivery of
this Amendment Agreement in the amounts which have been separately agreed
to;
(c) copies of a certificate of existence (or its equivalent) for each
of Group, Holdings and UWLIC, each certified by the appropriate
governmental officer in its jurisdiction of incorporation;
(d) copies of a secretary's certificate for each of Group, Holdings
and UWLIC as to charter, by-laws, resolutions and incumbency;
(e) a written opinion of Quarles & Brady LLP, counsel to Group,
Holdings and UWLIC, addressed to the Agent and the Lenders and in form and
substance acceptable to the Agent and its counsel;
(f) receipt of any required regulatory approvals from any Governmental
Authority with respect to the transactions contemplated by this Amendment
Agreement;
(g) evidence that Group is concurrently repaying the outstanding
balance of the Revolving Loans in an amount of at least $10,000,000;
(h) evidence that the consent of M&I Marshall & Ilsley Bank to the
execution and delivery of the Pledge Agreements has been obtained; and
(i) such other documents as the Agent or any Lender may have
reasonably requested.
7. REFERENCE TO AND EFFECT ON THE CREDIT AGREEMENT.
7.1 Upon the effectiveness of this Amendment Agreement, each reference in
the Credit Agreement to "this Agreement," "hereunder," "hereof," "herein" or
words of like import and each reference to the Credit Agreement in each Loan
Document shall mean and be a reference to the Credit Agreement as amended
hereby.
7.2 Except as specifically set forth above, all of the terms, conditions
and covenants of the Credit Agreement and the other Loan Documents shall remain
unaltered and in full force and effect and shall be binding upon each Borrower
in all respects and are hereby ratified and confirmed.
7.3 The execution, delivery and effectiveness of this Amendment Agreement
shall not operate as a waiver of (a) any right, power or remedy of any Lender or
the Agent under the Credit Agreement or any of the Loan Documents, or (b) any
Default or Unmatured Default under the Credit Agreement.
8. COSTS AND EXPENSES. The Borrowers agree, jointly and severally, to pay on
demand all costs and expenses of the Agent in connection with the preparation,
execution and delivery of this Amendment Agreement, including the reasonable
fees and out-of-pocket expenses of counsel for the Agent with respect thereto.
9. CHOICE OF LAW. THIS AMENDMENT AGREEMENT SHALL BE CONSTRUED IN ACCORDANCE WITH
THE INTERNAL LAWS (AND NOT THE LAW OF CONFLICTS) OF THE STATE OF ILLINOIS, BUT
GIVING EFFECT TO FEDERAL LAWS APPLICABLE TO NATIONAL BANKS.
10. EXECUTION IN COUNTERPARTS. This Amendment Agreement may be executed in any
number of counterparts and by different parties hereto in separate counterparts,
each of which when so executed shall be deemed to be an original and all of
which taken together shall constitute one and the same agreement.
[signature pages to follow]
IN WITNESS WHEREOF, the Borrowers, the Agent and the Lenders have executed
this Amendment Agreement as of the date first above written.
AMERICAN MEDICAL SECURITY GROUP, INC.
BY:____________________________________
TITLE:_________________________________
UNITED WISCONSIN LIFE INSURANCE COMPANY
BY:____________________________________
TITLE:_________________________________
BANK ONE, NA,
Individually and as Agent
BY:____________________________________
TITLE:_________________________________
FIRST UNION NATIONAL BANK
BY:____________________________________
TITLE:_________________________________
FLEET NATIONAL BANK
BY:____________________________________
TITLE:_________________________________
M&I MARSHALL AND ILSLEY BANK
BY:____________________________________
TITLE:_________________________________
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
THIS FINANCIAL DATA SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS OF AMERICAN MEDICAL
SECURITY GROUP, INC. FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999, AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<DEBT-HELD-FOR-SALE> 294,501
<DEBT-CARRYING-VALUE> 3,278
<DEBT-MARKET-VALUE> 0
<EQUITIES> 0
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 297,779
<CASH> 5,257
<RECOVER-REINSURE> 0
<DEFERRED-ACQUISITION> 0
<TOTAL-ASSETS> 516,845
<POLICY-LOSSES> 0
<UNEARNED-PREMIUMS> 18,182
<POLICY-OTHER> 161,576
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 52,863
0
0
<COMMON> 16,653
<OTHER-SE> 209,951
<TOTAL-LIABILITY-AND-EQUITY> 516,845
793,236
<INVESTMENT-INCOME> 14,572
<INVESTMENT-GAINS> 0
<OTHER-INCOME> 16,742
<BENEFITS> 654,674
<UNDERWRITING-AMORTIZATION> 0
<UNDERWRITING-OTHER> 204,146
<INCOME-PRETAX> (40,000)
<INCOME-TAX> (13,540)
<INCOME-CONTINUING> (26,460)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (26,460)
<EPS-BASIC> (1.59)
<EPS-DILUTED> (1.59)
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
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</TABLE>
