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 MARCH 31, 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 April 30, 2000: 15,406,415 shares
AMERICAN MEDICAL SECURITY GROUP, INC.
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets
March 31, 2000 and December 31, 1999.....................3
Condensed Consolidated Statements of Income
Three months ended March 31, 2000 and 1999...............5
Condensed Consolidated Statements of Cash Flows
Three months ended March 31, 2000 and 1999...............6
Notes to Condensed Consolidated Financial Statements
March 31, 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 2. Changes in Securities and Use of Proceeds......................17
Item 5. Other Information..............................................17
Item 6. Exhibits and Reports on Form 8-K...............................17
Signatures...............................................................18
Exhibit Index..........................................................EX-1
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
AMERICAN MEDICAL SECURITY GROUP, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
March 31, December 31,
2000 1999
-----------------------------------
(IN THOUSANDS)
ASSETS
Investments:
Securities available for sale, at fair value:
Fixed maturities $ 281,044 $ 270,800
Equity securities-preferred 2,027 2,198
Fixed maturity securities held to maturity, at amortized cost 3,829 3,275
-----------------------------------
Total investments 286,900 276,273
Cash and cash equivalents (2,335) 17,266
Other assets:
Property and equipment, net 34,089 32,624
Goodwill and other intangibles, net 110,401 111,347
Other assets 54,772 65,584
-----------------------------------
Total other assets 199,262 209,555
-----------------------------------
Total assets $ 483,827 $ 503,094
===================================
See Notes to Condensed Consolidated Financial Statements
3
AMERICAN MEDICAL SECURITY GROUP, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
March 31, December 31,
2000 1999
-----------------------------------
(IN THOUSANDS)
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Medical and other benefits payable $ 150,512 $ 169,117
Advance premiums 22,835 17,277
Payables and accrued expenses 25,246 25,044
Notes payable 42,158 42,523
Other liabilities 21,516 28,853
-----------------------------------
Total liabilities 262,267 282,814
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,
16,654,315 issued and 15,431,515 outstanding at March 31, 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 35,286 33,626
Accumulated other comprehensive loss, net of tax benefit of $5,463,000
and $5,634,000 at March 31, 2000 and December 31, 1999, respectively (10,146) (10,464)
Treasury stock (1,222,800 and 1,121,500 shares at cost
at March 31, 2000 and December 31, 1999, respectively) (8,190) (7,488)
-----------------------------------
Total shareholders' equity 221,560 220,280
-----------------------------------
Total liabilities and shareholders' equity $ 483,827 $ 503,094
===================================
See Notes to Condensed Consolidated Financial Statements
4
AMERICAN MEDICAL SECURITY GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three Months Ended
March 31,
---------------------------------
2000 1999
---------------------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Revenues:
Insurance premiums $ 247,905 $ 262,892
Net investment income 4,883 4,975
Other revenue 4,889 6,186
---------------------------------
Total revenues 257,677 274,053
Expenses:
Medical and other benefits 188,063 198,407
Selling, general and administrative 64,938 68,681
Interest expense 896 894
Amortization of goodwill and intangibles 946 1,048
---------------------------------
Total expenses 254,843 269,030
---------------------------------
Income before income taxes 2,834 5,023
Income tax expense 1,175 2,028
---------------------------------
Net income $ 1,659 $ 2,995
=================================
Net income per common share:
Basic $ 0.11 $ 0.18
Diluted $ 0.11 $ 0.18
See Notes to Condensed Consolidated Financial Statements
5
AMERICAN MEDICAL SECURITY GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended
March 31,
-----------------------------------
2000 1999
-----------------------------------
(IN THOUSANDS)
OPERATING ACTIVITIES:
Net income $ 1,659 $ 2,995
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 2,371 2,590
Net realized investment gains - 61
Deferred income tax expense (benefit) 1,226 (430)
Changes in operating accounts:
Other assets 9,414 (8,347)
Medical and other benefits payable (18,605) 17,628
Advance premiums 5,558 3,293
Payables and accrued expenses 202 425
Other liabilities (7,337) 2,442
-----------------------------------
Net cash provided by (used in) operating activities (5,512) 20,657
INVESTING ACTIVITIES:
Purchases of available for sale securities (13,274) (147,926)
Proceeds from sale of available for sale securities 2,041 142,590
Proceeds from maturity of available for sale securities 150 700
Purchases of held to maturity securities - (200)
Proceeds from maturity of held to maturity securities 630 -
Purchases of property and equipment (2,580) (993)
Proceeds from sale of property and equipment 7 85
-----------------------------------
Net cash used in investing activities (13,026) (5,744)
FINANCING ACTIVITIES:
Issuance of common stock 4 1
Purchase of treasury stock (702) -
Borrowings under line of credit agreement 35,158 5,000
Repayment on line of credit agreement (35,158) (5,000)
Repayment of notes payable (365) (1,300)
-----------------------------------
Net cash used in financing activities (1,063) (1,299)
-----------------------------------
Cash and cash equivalents:
Net increase (decrease) (19,601) 13,614
Balance at beginning of year 17,266 10,648
-----------------------------------
Balance at end of period $ (2,335) $ 24,262
===================================
See Notes to Condensed Consolidated Financial Statements
6
AMERICAN MEDICAL SECURITY GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
March 31, 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 month period
ended March 31, 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:
Three Months Ended
March 31,
---------------------------------
2000 1999
---------------------------------
Weighted average common shares outstanding - Basic 15,504,879 16,653,226
Effect of dilutive stock options 68,026 173,473
---------------------------------
Weighted average common shares outstanding - Diluted 15,572,905 16,826,699
=================================
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. In addition, 1,000,000 options, which were at exercise prices greater
than the average market price of the common stock, were surrendered in the first
quarter of 1999.
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 totaled $2.0 million for the three months ended March 31, 2000 and
comprehensive loss totaled $0.5 million for the three months ended March 31,
1999.
7
NOTE D. CREDIT AGREEMENT
During the first quarter of 2000, the Company refinanced its existing
revolving bank line of credit and entered into a new revolving bank line of
credit agreement increasing the maximum commitment from $40.0 million to $45.0
million. The maximum commitment will be reduced to $40.0 million on March 24,
2001. The outstanding balance of loans under the credit agreement is $35.2
million at March 31, 2000. The revised schedule of future annual principal
payments due on the outstanding loan balance is $0.2 million for 2002, $10.0
million for 2003, $10.0 million for 2004, and $15.0 million for 2005.
The Company's revolving bank line of credit agreement contains certain
covenants which, among other matters, require the Company to maintain a minimum
consolidated net worth and restrict the Company's ability to incur additional
debt, pay future cash dividends and transfer assets.
NOTE E. 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 and, accordingly, the outcome of these
matters is not expected to have a material adverse effect on the consolidated
financial statements.
NOTE F. 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
A reconciliation of segment income (loss) before income taxes to
consolidated income before income taxes is as follows:
Three Months Ended
March 31,
---------------------------------
2000 1999
---------------------------------
(IN THOUSANDS)
Health segment $ 716 $ 3,481
Life segment 2,240 1,876
All other (122) (334)
---------------------------------
Income before income taxes $ 2,834 $ 5,023
=================================
Operating results and statistics for each of the Company's segments are as
follows:
Three Months Ended
March 31,
---------------------------------
2000 1999
---------------------------------
(IN THOUSANDS)
HEALTH SEGMENT
OPERATING RESULTS
Revenues:
Insurance premiums $ 232,954 $ 246,652
Net investment income 2,545 2,268
Other revenue 3,963 5,212
---------------------------------
Total revenues 239,462 254,132
Expenses:
Medical and other benefits 178,505 187,420
Selling, general and administrative 60,241 63,231
---------------------------------
Total expenses 238,746 250,651
---------------------------------
Income before income taxes $ 716 $ 3,481
=================================
FINANCIAL STATISTICS
Loss ratio 76.6% 76.0%
Expense ratio 24.2% 23.5%
---------------------------------
Combined ratio 100.8% 99.5%
=================================
Membership at End of Period:
Medical:
Fully insured 520,710 586,042
Self funded 49,810 49,264
---------------------------------
Total medical(a) 570,520 635,306
Dental 326,420 357,860
(a) Total medical membership for the Company of 588,074 and 662,126 at
March 31, 2000 and 1999, respectively includes HMO membership of
17,554 and 26,820, respectively. HMO operations are not included in
health segment operating results.
9
Three Months Ended
March 31,
--------------------------------
2000 1999
--------------------------------
(IN THOUSANDS)
LIFE SEGMENT
OPERATING RESULTS
Revenues:
Insurance premiums $ 6,072 $ 6,660
Net investment income 159 51
Other revenue 56 72
---------------------------------
Total revenues 6,287 6,783
Expenses:
Medical and other benefits 2,290 2,773
Selling, general and administrative 1,757 2,134
---------------------------------
Total expenses 4,047 4,907
---------------------------------
Income before income taxes $ 2,240 $ 1,876
=================================
FINANCIAL STATISTICS
Loss ratio 37.7% 41.6%
Expense ratio 28.0% 31.0%
---------------------------------
Combined ratio 65.7% 72.6%
=================================
Membership at End of Period 280,893 307,674
10
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 $1.7 million or $0.11 per share for the
first quarter of 2000. This compares to net income of $3.0 million or $0.18 per
share for the first quarter of 1999. As previously reported, the Company
identified adverse medical claims cost trends in its small group medical market
during the second and third quarters of 1999 which required reserves to be
strengthened and the recognition of a premium deficiency reserve. These actions
resulted in a loss for the year 1999. To combat the adverse trends recognized in
1999, management implemented various action plans including higher premium rate
increases, accelerated re-pricing in certain targeted business segments, the
exit from three under-performing markets, and the introduction of redesigned
products with the conversion of older group health plans into these new benefit
designs. Also, in late December 1999, the Company entered into a new agreement
with its prescription benefit manager which is expected to provide cost and
efficiency benefits. Management has also initiated new administrative programs
designed to reduce claims costs.
The improvement in financial results which began late in the fourth quarter
of 1999 and has continued during the first quarter of 2000, indicates that the
initiatives implemented by management have been beneficial. The impact of these
initiatives is expected to continue to positively affect financial results for
the remainder of 2000. Management is also seeing evidence that claims cost
trends have leveled.
INSURANCE PREMIUMS
Insurance premiums for the three months ended March 31, 2000 decreased 5.7%
to $247.9 million from $262.9 million for the same period in 1999. The premium
decrease is a result of the run-off of the block of group health business
acquired on January 1, 1999 from Continental Assurance Company ("CNA"), lower
sales due to aggressive premium rate increases implemented late in 1999, and
declining membership in exited states. Insurance premiums for the CNA block of
business totaled $28.5 million for the first quarter of 1999, compared to just
$5.2 million for the first quarter of 2000. Management anticipates premium
revenue to decline slightly during the remainder of 2000.
Average fully insured medical premium per member per month for the first
quarter of 2000 increased 4.0% to $131 compared to $126 for the same period in
1999. Medical membership inforce at March 31, 2000 decreased 11.2% to 588,074
from 662,126 at March 31, 1999. The decrease in inforce membership is due to the
run-off of the CNA business, the decline in membership in exited states, and the
reduction in new business as a result of premium rate increases.
11
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 March 31, 2000 declined slightly to $4.9 million from
$5.0 million for the three months ended March 31, 1999. The slight decline is
due to a lower average annual investment yield of 6.6% for the first quarter of
2000 compared to 6.7% for the first quarter of the prior year. Average invested
assets at cost for the three months ended March 31, 2000 were $297.4 million
compared to $299.2 million for the three months ended March 31, 1999.
OTHER REVENUE
Other revenue, which primarily consists of administrative fee income from
claims processing and other administrative services, decreased to $4.9 million
for the three months ended March 31, 2000 from $6.2 million for the same period
in 1999. The decrease is primarily due to a decrease in administrative fee
revenue associated with acquired blocks of business which declined throughout
1999.
LOSS RATIO
The health segment loss ratio for the three months ended March 31, 2000 was
76.6% compared to 76.0% for the three months ended March 31, 1999 and 78.6% for
the fourth quarter of 1999. The improvement in the health loss ratio from the
fourth quarter of 1999 reflects an improvement in the small group medical market
as a result of premium rate increases and better experience in exited states.
The Company has also increased sales in its MedOne market, which is designed for
a somewhat lower loss ratio and a correspondingly higher expense ratio. MedOne
membership increased 4.8% from the end of 1999 and 21.5% from March 31, 1999 to
154,000.
As expected, the life segment loss ratio for the three months ended March
31, 2000 has improved to 37.7% compared to 41.6% for the three months ended
March 31, 1999. The Company experienced higher that usual life claims experience
during certain months in 1999. Management expects the life loss ratio to remain
approximately at first quarter 2000 levels during the remainder of 2000.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE RATIO
The selling, general and administrative ("SGA") expense ratio includes
commissions and selling expenses, administrative expenses and premium taxes and
assessments. The SGA expense ratio for health segment products for the three
months ended March 31, 2000 was 24.2% compared with 23.5% for the three months
ended March 31, 1999. The increase in the SGA expense ratio is in part a result
of growth in new sales of the Company's MedOne product, which is more costly to
administer, investment in systems to enhance medical management and decreased
revenues. Management expected the SGA expense ratio to increase slightly in the
first quarter of 2000 due to the change in the mix of business and to the
investment in medical management initiatives designed to reduce claims costs.
Management believes the cost of these initiatives will be more than offset by
reduced claims costs.
12
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, selling, general and
administrative 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 flow from operations was negative at $5.5 million for
the three months ended March 31, 2000. This compares to positive cash flow from
operations of $20.7 million for the three months ended March 31, 1999. The
negative results are due to a decline in membership and a significant decrease
in the claims inventory.
The Company's investment portfolio consists primarily of investment grade
bonds and has limited exposure to equity securities. At March 31, 2000, $284.9
or 99.3% of the Company's investment portfolio was invested in bonds. At
December 31, 1999, $274.1 or 99.2% of the Company's investment portfolio was
invested in bonds. The bond portfolio had an average quality rating of Aa3 at
March 31, 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.
During the first quarter of 2000, the Company refinanced its existing
revolving bank line of credit and entered into a new revolving bank line of
credit agreement increasing the maximum commitment from $40.0 million to $45.0
million. The maximum commitment will be reduced to $40.0 million on March 24,
2001. The outstanding balance of loans under the credit agreement is $35.2
million at March 31, 2000. The revised schedule of future annual principal
payments due on the outstanding loan balance is $0.2 million for 2002, $10.0
million for 2003, $10.0 million for 2004, and $15.0 million for 2005.
The Company's revolving bank line of credit agreement contains certain
covenants which, among other matters, require the Company to maintain a minimum
consolidated net worth and restrict the Company's ability to incur additional
debt, pay future cash dividends and transfer assets.
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.
On August 3, 1999, the Company's Board of Directors authorized the Company
to repurchase up to $10.0 million of the Company's outstanding common stock. The
Company purchased 101,300 shares of its common stock during the first quarter of
2000 bringing the total purchased to 1,222,800 shares at an aggregate purchase
price of $8.2 million. On May 2, 2000, the Board of Directors increased the
common share repurchase program by authorizing repurchases up to $15.0.
13
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 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, demand for the Company's existing and new products, the
Company's ability to predict future health care cost trends and adequately
price its products and the ability of the Company to control costs.
- - 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.
14
- - 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.
- - Unanticipated developments related to Year 2000 or other technology issues,
including those affecting third parties with whom the Company does
business.
- - 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.
15
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. 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. 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 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
The Company's revolving bank line of credit agreement contains certain
covenants which, among other matters, require the Company to maintain minimum
consolidated net worth and restrict the Company's ability to incur additional
debt, pay future cash dividends and transfer assets. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."
16
ITEM 5. OTHER INFORMATION
On August 3, 1999, the Company's Board of Directors authorized the Company
to repurchase up to $10.0 million of the Company's outstanding common stock. The
Company purchased 101,300 shares of its common stock during the first quarter of
2000 bringing the total purchased to 1,222,800 shares at an aggregate purchase
price of $8.2 million. On May 2, 2000, the Board of Directors increased the
common share repurchase program by authorizing repurchases up to $15.0. 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 first quarter
of 2000.
17
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: MAY 12, 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)
18
AMERICAN MEDICAL SECURITY GROUP, INC.
(COMMISSION FILE NO. 1-13154)
EXHIBIT INDEX
TO
FORM 10-Q QUARTERLY REPORT
for quarter ended March 31, 2000
INCORPORATED HEREIN FILED
EXHIBIT NO. DESCRIPTION BY REFERENCE TO HEREWITH
4 Credit Agreement dated as of March 24, X
2000, among the Registrant, LaSalle Bank
National Association and other Lenders
(replacing prior credit agreement with
Bank One, NA)
10 Nonqualified Executive Retirement Plan X
27 Financial Data Schedule X
EX-1