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 JUNE 30, 2000
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) 661-1111
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 July 31, 2000: 14,566,515
shares
<PAGE>
AMERICAN MEDICAL SECURITY GROUP, INC.
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets
June 30, 2000 and December 31, 1999......................3
Condensed Consolidated Statements of Income
Three months ended June 30, 2000 and 1999; Six months
ended June 30, 2000 and 1999.............................5
Condensed Consolidated Statements of Cash Flows
Six months ended June 30, 2000 and 1999..................6
Notes to Condensed Consolidated Financial Statements
June 30, 2000............................................7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................11
Item 3. Quantitative and Qualitative Disclosures About Market Risk..15
PART II. OTHER INFORMATION
Item 1. Legal Proceedings...........................................16
Item 4. Submission of Matters to a Vote of Security Holders.........17
Item 6. Exhibits and Reports on Form 8-K............................17
Signatures...............................................................18
Exhibit Index..........................................................EX-1
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
AMERICAN MEDICAL SECURITY GROUP, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
---------------------------------
(IN THOUSANDS)
<S> <C> <C>
ASSETS
Investments:
Securities available for sale, at fair value:
Fixed maturities $ 272,192 $ 270,800
Equity securities-preferred 2,180 2,198
Fixed maturity securities held to maturity, at amortized cost 4,337 3,275
Trading securities, at fair value 49 -
---------------------------------
Total investments 278,758 276,273
Cash and cash equivalents (3,531) 17,266
Other assets:
Property and equipment, net 33,175 32,624
Goodwill and other intangibles, net 109,455 111,347
Other assets 47,150 65,584
---------------------------------
Total other assets 189,780 209,555
---------------------------------
Total assets $ 465,007 $ 503,094
=================================
</TABLE>
See Notes to Condensed Consolidated Financial Statements
3
<PAGE>
AMERICAN MEDICAL SECURITY GROUP, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
---------------------------------
(IN THOUSANDS)
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Medical and other benefits payable $ 140,173 $ 169,117
Advance premiums 21,449 17,277
Payables and accrued expenses 23,581 25,044
Notes payable 41,858 42,523
Other liabilities 20,204 28,853
---------------------------------
Total liabilities 247,265 282,814
Shareholders' equity:
Common stock (no par value, $1 stated value, 50,000,000 shares authorized,
16,654,315 issued and 14,578,515 outstanding at June 30, 2000,
16,653,646 issued and 15,532,146 outstanding at December 31, 1999) 16,654 16,654
Paid-in capital 187,956 187,952
Retained earnings 37,546 33,626
Accumulated other comprehensive loss, net of tax benefit of $5,571,000
and $5,634,000 at June 30, 2000 and December 31, 1999, respectively (10,346) (10,464)
Treasury stock (2,075,800 and 1,121,500 shares at cost
at June 30, 2000 and December 31, 1999, respectively) (14,068) (7,488)
---------------------------------
Total shareholders' equity 217,742 220,280
---------------------------------
Total liabilities and shareholders' equity $ 465,007 $ 503,094
=================================
</TABLE>
See Notes to Condensed Consolidated Financial Statements
4
<PAGE>
AMERICAN MEDICAL SECURITY GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
--------------------------------- --------------------------------
2000 1999 2000 1999
--------------------------------- --------------------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Revenues:
Insurance premiums $ 240,537 $ 264,198 $ 488,442 $ 527,090
Net investment income 4,774 4,700 9,657 9,675
Other revenue 5,015 5,498 9,904 11,684
--------------------------------- --------------------------------
Total revenues 250,326 274,396 508,003 548,449
Expenses:
Medical and other benefits 182,012 210,758 370,075 409,165
Selling, general and administrative 62,684 67,109 127,622 135,790
Interest expense 883 872 1,779 1,766
Amortization of goodwill and intangibles 947 1,010 1,893 2,058
--------------------------------- --------------------------------
Total expenses 246,526 279,749 501,369 548,779
--------------------------------- --------------------------------
Income (loss) before income taxes 3,800 (5,353) 6,634 (330)
Income tax expense (benefit) 1,540 (1,823) 2,715 205
--------------------------------- --------------------------------
Net income (loss) $ 2,260 $ (3,530) $ 3,919 $ (535)
================================= ================================
Net income (loss) per common share:
Basic $ 0.15 $ (0.21) $ 0.26 $ (0.03)
Diluted $ 0.15 $ (0.21) $ 0.26 $ (0.03)
</TABLE>
See Notes to Condensed Consolidated Financial Statements
5
<PAGE>
AMERICAN MEDICAL SECURITY GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
---------------------------------
2000 1999
---------------------------------
(IN THOUSANDS)
<S> <C> <C>
OPERATING ACTIVITIES:
Net income (loss) $ 3,919 $ (535)
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 4,879 5,299
Net realized investment gains 112 282
Increase in trading securities (49) -
Deferred income tax expense (benefit) 3,442 (320)
Changes in operating accounts:
Other assets 14,928 (6,202)
Medical and other benefits payable (28,944) 6,231
Advance premiums 4,172 1,143
Payables and accrued expenses (1,463) 2,310
Other liabilities (8,649) 4,697
---------------------------------
Net cash provided by (used in) operating activities (7,653) 12,905
INVESTING ACTIVITIES:
Purchases of available for sale securities (13,838) (183,689)
Proceeds from sale of available for sale securities 9,487 143,046
Proceeds from maturity of available for sale securities 720 18,496
Purchases of held to maturity securities - (200)
Proceeds from maturity of held to maturity securities 630 -
Purchases of property and equipment (2,912) (1,589)
Proceeds from sale of property and equipment 10 31
---------------------------------
Net cash used in investing activities (5,903) (23,905)
FINANCING ACTIVITIES:
Issuance of common stock 4 2
Purchase of treasury stock (6,580) -
Borrowings under line of credit agreement 35,158 5,000
Repayment on line of credit agreement (35,158) (5,000)
Repayment of notes payable (665) (1,601)
---------------------------------
Net cash used in financing activities (7,241) (1,599)
---------------------------------
Cash and cash equivalents:
Net decrease (20,797) (12,599)
Balance at beginning of year 17,266 10,648
---------------------------------
Balance at end of period $ (3,531) $ (1,951)
=================================
</TABLE>
See Notes to Condensed Consolidated Financial Statements
6
<PAGE>
AMERICAN MEDICAL SECURITY GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
June 30, 2000
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 six
month periods ended June 30, 2000 are not necessarily indicative of the results
that may be expected for the year ending December 31, 2000. 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, 1999.
NOTE B. 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>
Three Months Ended Six Months Ended
June 30, June 30,
-------------------------------- --------------------------------
2000 1999 2000 1999>
-------------------------------- --------------------------------
<S> <C> <C> <C> <C>
Weighted average common
shares outstanding - basic 15,100,507 16,653,282 15,302,693 16,653,254
Effect of dilutive stock options 55,635 - 61,872 -
-------------------------------- --------------------------------
Weighted average common
shares outstanding - diluted 15,156,142 16,653,282 15,364,565 16,653,254
================================ ================================
</TABLE>
The effect of dilutive securities is excluded from the diluted earnings
per common share computation for the three and six months ended June 30, 1999
because the Company had a net loss, therefore their inclusion would have been
antidilutive. 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 period.
7
<PAGE>
NOTE C. COMPREHENSIVE INCOME (LOSS)
Comprehensive income (loss) is defined as net income (loss) plus or
minus other comprehensive income (loss), which for the Company, under existing
accounting standards, includes unrealized gains and losses, net of income tax
effects, on certain investments in debt and equity securities. Comprehensive
income (loss) for the Company is calculated as follows:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
-------------------------------- --------------------------------
2000 1999 2000 1999
-------------------------------- --------------------------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Net income (loss) $ 2,260 $ (3,530) $ 3,920 $ (525)
Unrealized gain (loss) on
available for sale securities (200) (3,715) 118 (7,208)
-------------------------------- --------------------------------
Comprehensive income (loss) $ 2,060 $ (7,245) $ 4,038 $ (7,743)
================================ ================================
</TABLE>
NOTE D. CONTINGENCIES
On August 26, 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. On April 17, 2000, the Company filed its notice of
appeal of this decision with a Federal Appeals Court. Based on consultation with
outside counsel, management expects the verdict to be reversed or substantially
reduced following appeal. As a result, the Company's accrual related to this
case is not material.
On February 7, 2000, a $5.4 million verdict was entered against the
Company in a lawsuit which alleged breach of contract involving commission
amounts due to a former agent. On April 18, 2000, the Company filed a notice of
appeal with an Ohio Appeals Court requesting reversal of the decision. Based on
consultation with outside counsel, management expects the 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 legal and regulatory 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
above-mentioned and other legal and regulatory actions; accordingly, the outcome
of these matters is not expected to have a material adverse effect on the
consolidated financial statements.
NOTE E. SEGMENT INFORMATION
The Company has two reportable segments: 1) health insurance products,
and 2) life insurance products. The Company's health insurance products consist
of the following coverages related to small group preferred provider
organization products: MedOne (for individuals and families) and small group
medical, self funded medical, dental and short-term disability. Life products
consist primarily of group term-life insurance. The "All Other" segment includes
operations not directly related to the business segments and unallocated
corporate items (i.e., corporate investment income, interest expense on
corporate debt, amortization of goodwill and intangibles and unallocated
overhead expenses). The Company's All Other segment also includes data for its
health maintenance organization ("HMO") subsidiary. The reportable segments are
managed 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
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.
8
<PAGE>
A reconciliation of segment income (loss) before income taxes to
consolidated income (loss) before income taxes is as follows:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
-------------------------------- --------------------------------
2000 1999 2000 1999
-------------------------------- --------------------------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Health segment $ 548 $ (7,426) $ 1,264 $ (3,945)
Life segment 2,790 2,700 5,030 4,576
All other 462 (627) 340 (961)
-------------------------------- --------------------------------
Income (loss) before income taxes $ 3,800 $ (5,353) $ 6,634 $ (330)
================================ ================================
</TABLE>
Operating results and statistics for each of the Company's segments are
as follows:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
-------------------------------- --------------------------------
2000 1999 2000 1999
-------------------------------- --------------------------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
HEALTH SEGMENT
OPERATING RESULTS
Revenues:
Insurance premiums $ 228,437 $ 246,752 $ 461,391 $ 493,404
Net investment income 2,353 2,297 4,898 4,565
Other revenue 4,020 4,696 7,983 9,908
-------------------------------- --------------------------------
Total revenues 234,810 253,745 474,272 507,877
Expenses:
Medical and other benefits 175,569 199,474 354,074 386,894
Selling, general and administrative 58,693 61,697 118,934 124,928
-------------------------------- --------------------------------
Total expenses 234,262 261,171 473,008 511,822
-------------------------------- --------------------------------
Income (loss) before income taxes $ 548 $ (7,426) $ 1,264 $ (3,945)
================================ ================================
FINANCIAL STATISTICS
Loss ratio 76.9% 80.8% 76.7% 78.4%
Expense ratio 23.9% 23.1% 24.0% 23.3%
-------------------------------- --------------------------------
Combined ratio 100.8% 103.9% 100.7% 101.7%
================================ ================================
Membership at End of Period:
Medical:
Fully insured 498,415 615,729
Self funded 50,680 49,964
--------------------------------
Total medical(a) 549,095 665,693
Dental 311,976 350,806
</TABLE>
(a) Total medical membership for the Company of 560,575 and 665,693 at
June 30, 2000 and 1999, respectively includes HMO membership of
11,480 and 29,182, respectively. HMO operations are not included
in health segment operating results.
9
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
-------------------------------- --------------------------------
2000 1999 2000 1999
-------------------------------- --------------------------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
LIFE SEGMENT
OPERATING RESULTS
Revenues:
Insurance premiums $ 5,774 $ 6,450 $ 11,846 $ 13,110
Net investment income 157 48 316 99
Other revenue 58 66 114 138
-------------------------------- --------------------------------
Total revenues 5,989 6,564 12,276 13,347
Expenses:
Medical and other benefits 1,547 2,078 3,837 4,851
Selling, general and administrative 1,652 1,786 3,409 3,920
-------------------------------- --------------------------------
Total expenses 3,199 3,864 7,246 8,771
-------------------------------- --------------------------------
Income before income taxes $ 2,790 $ 2,700 $ 5,030 $ 4,576
================================ ================================
FINANCIAL STATISTICS
Loss ratio 26.8% 32.2% 32.4% 37.0%
Expense ratio 27.6% 26.7% 27.8% 28.8%
-------------------------------- --------------------------------
Combined ratio 54.4% 58.9% 60.2% 65.8%
================================ ================================
Membership at End of Period 270,600 309,173
</TABLE>
10
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
OVERVIEW
American Medical Security Group, Inc., together with its subsidiary
companies ("AMSG" or the "Company"), is a provider of health care benefits and
insurance products for individuals and small employer groups. The Company's
principal product offering is health insurance for small employer groups and
health insurance for individuals and families ("MedOne"). The Company also
offers life, dental, prescription drug, disability and accidental death
insurance, and provides self funded benefit administration. The Company's
products are actively marketed in 31 states and the District of Columbia through
independent agents. The Company's products generally provide discounts to
insureds that utilize preferred provider organizations ("PPOs"). AMSG owns a
preferred provider network and also contracts with several other networks to
ensure cost-effective health care choices to its customers.
RESULTS OF OPERATIONS
The Company reported net income of $2.3 million or $0.15 per share for
the second quarter of 2000. This compares to net loss of $3.5 million or $ 0.21
per share for the second quarter of 1999. For the six months ended June 30,
2000, the Company reported net income of $3.9 million or $0.26 per share,
compared to a net loss of $0.5 million or $0.03 per share for the same period in
1999. As previously reported, management implemented various strategic
initiatives late in 1999 focused on improving the performance of the Company's
small group business. The improvement in financial results which began late in
the fourth quarter of 1999 and has continued during the first half of 2000,
indicates that the impact of these initiatives has been beneficial.
INSURANCE PREMIUMS
Insurance premiums for the three months ended June 30, 2000 decreased
9.0% to $240.5 million from $264.2 million for the same period in 1999. For the
six months ended June 30, 2000, insurance premiums decreased 7.3% to $488.4
million from $527.1 million for the same period in 1999. Premiums have decreased
as a result of a decline in membership. Membership decreased from 666,000
members at June 30, 1999 to 630,000 members at December 31, 1999 to 561,000
members at June 30, 2000. The membership decrease is a result of the Company's
success in terminating business in several unprofitable markets, including
exited markets, lower sales due to aggressive premium rate increases implemented
beginning in late 1999 and the run-off of the block of group health business
acquired on January 1, 1999 from Continental Assurance Company ("CNA"). Based on
the rate of membership terminations from exited markets and future sales
projections, management anticipates membership will continue to decline during
the remainder of 2000 and then begin to grow again in 2001.
NET INVESTMENT INCOME
Net investment income includes investment income and realized gains and
losses on investments. Investment gains and losses are realized in the normal
investment process in response to market opportunities. Net investment income
for the three months ended June 30, 2000 increased slightly to $4.8 million from
$4.7 million for the three months ended June 30, 1999. The average annual
investment yield increased to 6.6% during the second quarter of 2000, compared
to 6.4% during the second quarter of the prior year. Net investment income was
$9.7 million for both of the six month periods ended June 30, 2000 and 1999.
Average invested assets at cost during the second quarter of 2000 were $298.6
million compared to $309.8 million during the second quarter of 1999.
11
<PAGE>
OTHER REVENUE
Other revenue, which primarily consists of administrative fee income
from claims processing and other administrative services, decreased to $5.0
million for the three months ended June 30, 2000 from $5.5 million for the same
period in 1999, and to $9.9 million for the six months ended June 30, 2000 from
$11.7 million for the same period in 1999. The decrease is primarily due to a
decline in administrative fee revenue received for payments of run-out claims
associated with acquired blocks of business.
LOSS RATIO
The health loss ratio for the three months ended June 30, 2000 was
76.9% compared to 80.8% for the three months ended June 30, 1999. The health
loss ratio for the six months ended June 30, 2000 was 76.7% compared to 78.4%
for the six months ended June 30, 1999. The improvement in the health loss ratio
from the prior year reflects an improvement in the small group medical market as
a result of premium rate increases and better than expected experience in exited
states. Also contributing to the improvement is the Company's increased sales in
its MedOne product line which is designed for a somewhat lower loss ratio. The
second quarter 2000 health loss ratio has increased slightly from the health
loss ratio of 76.6% reported for the first quarter of 2000. The slight increase
from the prior quarter is attributed to a fluctuation in claims experience on
the stop loss portion of the Company's self funded line of business. The loss
ratio for the core small group and MedOne business continued to improve during
the quarter as a result of management's strategic initiatives implemented late
in 1999.
The life segment loss ratio for the three months ended June 30, 2000
has improved to 26.8% compared to 32.2% for the three months ended June, 1999.
The life segment loss ratio for the six months ended June 30, 2000 was 32.4%
compared with 37.0% for the six months ended June 30, 1999.
In the third quarter of 1999, the Company established a premium
deficiency reserve for expected losses related to highly regulated markets. The
amortized premium deficiency reserve balance was $7.9 million at June 30, 2000
and is 41% of the initial established reserve. The amortization of the premium
deficiency reserve is generally consistent with original assumptions. Management
believes that the current premium deficiency reserve remains adequate to cover
future losses for those defined markets.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE RATIO
The selling, general and administrative ("SG&A") expense ratio includes
commissions and selling expenses, administrative expenses and premium taxes and
assessments. The SG&A expense ratio for health segment products for the three
months ended June 30, 2000 was 23.9% compared with 23.1% for the three months
ended June 30, 1999. The SG&A expense ratio for health segment products for the
six months ended June 30, 2000 was 24.0% compared with 23.3% for the same period
in 1999. The slight increase in the SG&A expense ratio from the prior year is in
part a result of decreased revenues, growth in new sales of the Company's MedOne
product, which is more costly to administer, and investment in systems to
enhance medical management. The second quarter 2000 SG&A expense ratio is down
compared to the first quarter 2000 reported SG&A expense ratio of 24.2% This
sequential improvement is the result of cost containment efforts implemented by
management at the beginning of the second quarter. The SG&A expense ratio is
expected to remain stable during the remainder of 2000 due to management's
commitment to control expenses.
12
<PAGE>
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 payment of medical and other benefits, SG&A expenses and debt
service costs. 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.
The Company's cash used in operations was $7.7 million for the six
months ended June 30, 2000. This compares to cash provided by operations of
$12.9 million for the six months ended June 30, 1999. The decrease in cash flows
is a result of membership termination from exited markets and slower new sales
volume. Management expects cash flow from operations to remain negative for the
remainder of the year due to the continued terminations of unprofitable
business.
The Company's investment portfolio consists primarily of investment
grade bonds and has limited exposure to equity securities. At June 30, 2000,
$276.5 million or 99.2% of the Company's investment portfolio was invested in
bonds. At December 31, 1999, $274.0 million or 99.2% of the Company's investment
portfolio was invested in bonds. The bond portfolio had an average quality
rating of Aa3 at June 30, 2000, and Aa3 at December 31, 1999, 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. Based upon the financial statements of the Company's
insurance subsidiaries as of December 31, 1999, as filed with the insurance
regulators, no dividends may be paid by these subsidiaries without prior
regulatory approval. 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, 1999,
the Company's principal insurance company subsidiaries had an RBC ratio that was
substantially above the levels which would require regulatory action.
The Company does not expect to pay any cash dividends in the
foreseeable future and intends to employ its earnings in the continued
development of its business. The Company's future dividend policy will depend on
its earnings, capital requirements and financial condition, any contractual or
regulatory restrictions affecting the payment of dividends, and other factors
considered relevant by the Board of Directors.
In accordance with the Company's previously reported stock repurchase
program, the Company purchased 853,000 shares of its common stock during the
second quarter of 2000 bringing the total purchased to 2,075,800 shares at an
aggregate purchase price of $14.1 million. On July 19, 2000, the Board of
Directors approved a $1.0 million increase in the stock repurchase program,
bringing the total authorized to $16.0 million. In addition, the Company amended
its bank line of credit agreement to accommodate the increase in the stock
repurchase program. 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 in the future.
13
<PAGE>
CAUTIONARY FACTORS
This report and other documents or oral presentations prepared or
delivered by or on behalf of the Company contain or may contain forward-looking
statements. Such statements are based upon management's expectations at the time
such statements are made and are subject to risks and uncertainties that could
cause the Company's actual results to differ materially from those contemplated
in the statements. Readers are cautioned not to place undue reliance on the
forward-looking statements. When used in written documents or oral
presentations, the terms "anticipate", "believe", "estimate", "expect",
"objective", "plan", "possible", "potential", "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 could cause the Company's actual results to differ
materially from those contemplated in any forward-looking statements include,
among others, the following:
- Increases in health care costs resulting from the aging of the population,
advances in medical technology, increased utilization of medical services
and drugs, health care inflation (particularly pharmacy costs), possible
epidemics and natural disasters and other factors affecting the delivery
and cost of health care that are beyond the Company's control.
- The Company's ability to profitably distribute and sell its products,
including its ability to predict future health care cost trends and
adequately price its products, its ability to control costs, changes in
business relationships with independent agents who sell the Company's
products, competitive factors such as the entrance of additional
competitors into the Company's markets, competitive pricing practices, and
demand for the Company's existing and new products.
- Federal and state health care reform laws adopted in recent years,
currently proposed or that may be proposed in the future which affect or
may affect the Company's operations, products, profitability or business
prospects. Reform laws adopted in recent years generally limit the ability
of insurers and health plans to use risk selection as a method of
controlling costs for the small group business.
- Regulatory factors, including delays in regulatory approvals of rate
increases and policy forms; regulatory action resulting from market conduct
activity and general administrative compliance with state and federal laws;
restrictions on the ability of the Company's subsidiaries to transfer funds
to the Company or its other subsidiaries in the form of cash dividends,
loans or advances without prior approval or notification; the granting and
revoking of licenses to transact business; the amount and type of
investments that the Company may hold; minimum capital and surplus
requirements; and risk-based capital requirements.
- The willingness of employers and individuals to accept rate increases,
premium repricing and redesigned products implemented beginning in the
second half of 1999 by the Company to improve loss ratios in its small
group health business and the ability of the Company to control expenses.
- The development of and changes in claims reserves, particularly for exited
markets where insureds may be inclined to increase utilization prior to
termination of their policies.
- The ability of the Company to continue the growth of its individual and
small group health business, and its ancillary group products, including
group life, dental and self funded business.
- The cost and other effects of legal and administrative proceedings,
including the expense of investigating, litigating and settling any claims
against the Company, and the general increase in litigation involving
managed care and medical insurers.
- Adverse outcomes of litigation against the Company, including the inability
of the Company to prevail in its appeal of the verdicts in the Skilstaf
litigation and the Health Administrators litigation.
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- Possible restrictions on cash flow resulting from a denial by state
regulators of the payment of dividends by the Company's insurance company
subsidiaries.
- Restrictions imposed by financing arrangements that limit the Company's
ability to incur additional debt, pay future cash dividends and transfer
assets.
- Changes in rating agency policies and practices and the ability of the
Company's insurance subsidiaries to maintain or exceed their
A-(Excellent) rating by A.M. Best.
- General economic conditions, including changes in interest rates and
inflation that may impact the performance on the Company's investment
portfolio or decisions of individuals and employers to purchase the
Company's products.
- The Company's ability to maintain attractive preferred provider networks
for its insureds.
- The Company's ability to integrate effectively the operational, managerial
and financial aspects of future acquisitions.
- Factors affecting the Company's ability to hire and retain key executive,
managerial and technical employees.
- Other business or investment considerations that may be disclosed from time
to time in the Company's Securities & Exchange Commission filings or in
other publicly disseminated written documents.
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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The Company's market risk has not substantially changed from the year
ended December 31, 1999.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
As previously reported, on August 26, 1999, a $6.9 million verdict was
entered against American Medical Security, Inc. ("AMS Inc."), 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 Inc. by Skilstaf, Inc. ("Skilstaf"), an Alabama employee
leasing company, in January 1998 alleging that AMS Inc. 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 Inc. 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. AMS
Inc.'s post-trial motion to set aside the jury's finding was denied by the court
on March 20, 2000. As a result, AMS Inc. filed a notice of appeal with the
Eleventh Circuit Federal Appeals Court on April 17, 2000. The case is currently
in the briefing stage. Although the outcome of the appeal cannot be predicted
with certainty, based on consultation with outside counsel and the merits of the
appeal, management expects the $6.9 million verdict to be reversed or
substantially reduced following appeal.
As previously reported, on February 7, 2000, a $5.4 million verdict was
entered against AMS Inc. and UWLIC in the Common Pleas Court of Delaware County,
Ohio, Civil Division, in a lawsuit brought against AMS Inc. and UWLIC in 1996 by
Health Administrators of America, Inc. ("Health Administrators"), an insurance
agency owned and operated by a former agent of AMS Inc. The lawsuit alleges
breach of written and oral contracts involving commission amounts and fraud. The
case was heard and decided by a magistrate who awarded damages to Health
Administrators, based on breach of written contracts and ruled in favor of AMS
Inc. and UWLIC on breach of oral contracts and fraud. On February 22, 2000, AMS
Inc. and UWLIC filed objections with the Common Pleas Court requesting that the
magistrate's decision against AMS Inc. and UWLIC be reversed. The Common Pleas
Court approved the magistrate's decision on April 10, 2000. As a result, AMS
Inc. and UWLIC filed a notice of appeal with the Court of Appeals, Delaware
County, Ohio, Fifth Appellate District on April 18, 2000. Health Administrators
filed a cross-appeal on July 10, 2000. The case is currently in the briefing
stage. Although the outcome of the appeal cannot be predicted with certainty,
based on consultation with outside counsel and the merits of the appeal,
management expects the $5.4 million judgment to be reversed or substantially
reduced following appeal.
The Company is involved in various legal and regulatory 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, the Health Administrators litigation and other legal and regulatory
actions; accordingly, the outcome of these matters is not expected to have a
material adverse effect on the consolidated financial statements.
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Annual Meeting of Shareholders of the Company was held on May 17,
2000 for the purpose of electing three directors for terms expiring at the 2003
Annual Meeting of Shareholders. All three of the Company's nominees were
elected. The voting results for the election were as follows:
ELECTION OF DIRECTORS FOR TERMS EXPIRING IN 2003:
James C. Hickman:
For 15,178,716 shares
Withheld 97,389 shares
Abstained 0
Broker Non-Votes 0
William R. Johnson:
For 15,178,905 shares
Withheld 97,200 shares
Abstained 0
Broker Non-Votes 0
Frank L. Skillern:
For 15,196,861 shares
Withheld 79,244 shares
Abstained 0
Broker Non-Votes 0
Further information concerning these matters, including the names of
the directors whose terms continued after the meeting, is contained in the
Company's Proxy Statement dated March 31, 2000 with respect to the 2000 Annual
Meeting of Shareholders.
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 second
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.
DATE: AUGUST 11, 2000
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)
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AMERICAN MEDICAL SECURITY GROUP, INC.
(COMMISSION FILE NO. 1-13154)
EXHIBIT INDEX
TO
FORM 10-Q QUARTERLY REPORT
for quarter ended June 30, 2000
<TABLE>
<CAPTION>
INCORPORATED HEREIN FILED
EXHIBIT NO. DESCRIPTION BY REFERENCE TO HEREWITH
<S> <C> <C>
4 First Amendment dated as of X
July 18, 2000 to Credit Agreement
dated as of March 24, 2000, among
the Registrant, LaSalle Bank
National Association and other
Lenders
27 Financial Data Schedule X
</TABLE>
EX-1
