-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, CbbS/Y081dahgIAY/2y3IahBGdKc40yWyb3vYmuevCRZaiafezQ0o4zKGN2exw+1 xJcqldPIjW/lgo0mxqd9yA== 0000878897-00-000002.txt : 20000316 0000878897-00-000002.hdr.sgml : 20000316 ACCESSION NUMBER: 0000878897-00-000002 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000315 FILER: COMPANY DATA: COMPANY CONFORMED NAME: AMERICAN MEDICAL SECURITY GROUP INC CENTRAL INDEX KEY: 0000878897 STANDARD INDUSTRIAL CLASSIFICATION: HOSPITAL & MEDICAL SERVICE PLANS [6324] IRS NUMBER: 391431799 STATE OF INCORPORATION: WI FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-13154 FILM NUMBER: 570231 BUSINESS ADDRESS: STREET 1: 3100 AMS BLVD CITY: GREEN BAY STATE: WI ZIP: 54313 BUSINESS PHONE: 9206611111 MAIL ADDRESS: STREET 1: 3100 AMS BLVD CITY: GREEN BAY STATE: WI ZIP: 54313 FORMER COMPANY: FORMER CONFORMED NAME: UNITED WISCONSIN SERVICES INC /WI DATE OF NAME CHANGE: 19930328 10-K 1 ================================================================================ SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ------------ FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 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 SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED Common Stock, no par value New York Stock Exchange SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: None Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter 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 by check mark if disclosure of delinquent filers pursuant to Item 405 of Registration S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. |_| As of February 29, 2000, there were outstanding 15,474,446 shares of Common Stock. The aggregate market value of the shares of such stock held by non-affiliates of the registrant was $66,112,860 as of the same date, assuming solely for purposes of this calculation that all directors and executive officers of the Registrant are "affiliates." This determination of affiliate status is not necessarily a conclusive determination for other purposes. DOCUMENTS INCORPORATED BY REFERENCE Portions of American Medical Security Group, Inc. Proxy Statement dated March 31, 2000 (Part III) ================================================================================ AMERICAN MEDICAL SECURITY GROUP, INC. INDEX TO ANNUAL REPORT ON FORM 10-K For the Year Ended December 31, 1999 PAGE PART I Item 1 Business...........................................................3 Item 2 Properties.........................................................9 Item 3 Legal Proceedings..................................................9 Item 4 Submission of Matters to a Vote of Security Holders...............10 Executive Officers of the Registrant..........................................10 PART II Item 5 Market for Registrant's Common Equity and Related Stockholder Matters.......................................12 Item 6 Selected Financial Data...........................................13 Item 7 Management's Discussion and Analysis of Financial Condition and Results of Operations.............................................14 Item 7A Quantitative and Qualitative Disclosures About Market Risk .......22 Item 8 Financial Statements and Supplementary Data.......................23 Item 9 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure..............................................44 PART III Item 10 Directors and Executive Officers of the Registrant.................44 Item 11 Executive Compensation.............................................44 Item 12 Security Ownership of Certain Beneficial Owners and Management.....44 Item 13 Certain Relationships and Related Transactions.....................44 PART IV Item 14 Exhibits, Financial Statement Schedules, and Reports on Form 8-K...44 Schedule II - Condensed Financial Information of Registrant.46 Schedule III - Supplementary Insurance Information...........49 Schedule IV - Reinsurance....................................50 Schedule V - Valuation and Qualifying Accounts...............51 Signatures....................................................................52 Exhibit Index...............................................................EX-1 2 PART I ITEM 1. BUSINESS FORWARD LOOKING STATEMENTS A number of forward looking statements are included in this document. When used, the terms "anticipate", "believe", "estimate", "expect", "objective", "plan", "possible", "potential", "project" and similar expressions are intended to identify forward looking statements. Forward looking statements are subject to inherent risks, uncertainties and assumptions that may cause actual results or events to differ materially from those that are described. 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 are described in "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations - Cautionary Factors." GENERAL American Medical Security Group, Inc. is a leading provider of individual and small employer group health care benefits and insurance products. As used herein, the terms "the Company" or "AMSG" include American Medical Security Group, Inc. and its subsidiaries. The Company's principal product offering is health insurance for small employer groups and individuals. The Company also offers life, dental, prescription drug, disability and accidental death insurance, and provides self funded benefit administration. See the Company's Notes to Consolidated Financial Statements, Note 11 "Segments of the Business" for information concerning the Company's two reportable segments: health insurance products (which accounted for 92% of the Company's revenue for the year ended December 31, 1999, compared to 93% at the end of 1998) and life insurance products. The Company's products are sold through independent licensed agents in 31 states and the District of Columbia. The Company specializes in providing health care benefits and other insurance products designed to maximize choice and control costs in a compassionate environment. The Company principally markets health benefit products that provide discounts to insureds that utilize preferred provider organizations ("PPOs"). PPO plans differ from health maintenance organization ("HMO") plans in that they typically provide a wider choice of health professionals, fewer benefit restrictions and increased access to specialists at a somewhat higher premium cost. American Medical Security Group, Inc. is a Wisconsin corporation organized in 1983. The Company's principal executive offices are located at 3100 AMS Boulevard, Green Bay, Wisconsin 54313 and its telephone number at that address is (920) 661-3075. 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 health business, and the managed care and specialty products business, as described in the Form 10 of Newco/UWS, Inc. ("Newco/UWS") in connection with the spin-off of Newco/UWS referred to below. Prior to December 1996, the small group health business consisted primarily of individual and small group health insurance written through a joint venture with American Medical Security Group, Inc., a Delaware corporation ("Old AMS"). During that time, the Company owned approximately 12% of the issued and outstanding shares of Old AMS. The Company underwrote all of the individual and small group health insurance marketed, produced and administered by Old AMS and ceded back to Old AMS approximately 50% of the individual and small group health insurance written by the Company through the joint venture. On December 3, 1996, Old AMS merged with and into the Company. The small group health insurance business of the Company was then combined with that of Old AMS in a wholly owned subsidiary of the Company. On September 11, 1998, the Company contributed all of its subsidiaries comprising the managed care and specialty products business to a newly created subsidiary named "Newco/UWS, Inc." On September 25, 1998, the Company spun off the managed care and specialty products 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, (see "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations - Spin-Off"). The Company then adopted its current name of "American Medical Security Group, Inc." and Newco/UWS changed its name to "United Wisconsin Services, Inc." Since the spin-off, the business of the Company consists solely of the Company's small group health insurance business. 3 ACQUISITIONS In October 1997, the Company acquired most of the health insurance business marketed to individuals and small groups that was previously underwritten by Pan American Life Insurance Company ("Pan American"). The Company assumed most of Pan American's remaining domestic health insurance business in July 1998. Effective January 1999, the Company acquired the majority of Continental Assurance Company's ("CNA") fully insured employer group health business. PRODUCTS The Company is a leading provider of health care benefits and insurance products tailored to meet the varied health benefits needs of its primary markets, including individuals and families, small employer groups, and employers that choose to self fund their health benefits. In providing these products and services, the Company specializes in designing products to maximize choice and control costs. The Company customizes employee benefit packages for businesses through IT'S YOUR CHOICES(service mark), an option that allows businesses to offer employees multiple health plan options in a single package. For example, this strategy allows an employer with four employees to offer four different and distinct health plans, one for each employee. Although the premium cost of the plans may vary, the ability to offer different plans is without additional cost to the employer. Through its medical insurance products marketed to individuals and families ("MedOne" products), the Company provides coverage to fit the various health care needs and budgets of consumers. In early 2000, the Company introduced a new MedOne product, called AFFORDABLEONE(service mark), that is marketed as a health care plan for cost-conscious individuals. The Company augments its core business with a select line of complementary products and services. Ancillary benefits available in conjunction with the Company's plans include group dental, group short-term disability, group and individual term life and accidental death, and dependent life insurance. Voluntary dental and term life insurance products may be elected by employees with no employer contribution requirements. Additionally, the Company offers COBRA administration services to groups subject to regulations of the Consolidated Omnibus Budget Reconciliation Act of 1985, as amended. The Company provides insureds and plan participants with toll-free, personal customer service 24 hours a day, 365 days a year. In addition, through the Company's wholly-owned subsidiary, Nurse Healthline, Inc. ("Nurse Healthline"), insureds and plan participants have access to a toll-free, 24-hour medical information line staffed by registered nurses. MARKETING The Company currently markets its employer group products and individual products in 31 states and the District of Columbia. The leading states with respect to medical membership during 1999 were Florida, Illinois, Michigan, Ohio, Texas and Missouri, which accounted for 48% of the Company's medical membership. For the year ended December 31, 1999, the top ten insured employer groups in the aggregate accounted for approximately 1% of the Company's medical membership. As part of the Company's strategy to improve profitability, which was announced in October 1999, the Company ceased marketing its small group business in Maryland, Minnesota and Florida. The Company also decided to terminate its existing small group business in these states. Product sales are conducted through licensed independent agents. During 1999, the Company continued its initiative to streamline its sales force by reducing the number of agents selling its products. As of December 31, 1999, the Company marketed products through approximately 17,000 independent agents, a 47% reduction in the number of agents from the prior year. Independent agents are paid commissions on new and renewal sales. The Company offers an attractive incentive and service package to agents, creating an environment as an "agent friendly" company. In early 2000, the Company began marketing a MedOne medical insurance product for individuals over the internet through online insurance agencies. 4 The Company divides its sales territory into two regions, each of which is the responsibility of a Regional Vice President ("RVP"). The RVPs work with a total of approximately 100 sales managers in offices throughout the United States in coordinating the Company's sales and marketing efforts. Additionally, through an agreement with the Principal Life Insurance Company ("Principal"), regional sales managers of Principal's Old Northwest Agent distribution network have responsibility for product sales in Arkansas, Mississippi, Nebraska and Utah. COMPETITION The market for the Company's health care products is highly competitive. The major competition for the Company's products comes from national and regional firms. Many of the Company's competitors have larger memberships in local markets or greater financial resources. The small group, agency-controlled market is price sensitive, and the business is put out for bid more frequently than larger group business. In addition, because most of the Company's products are marketed primarily through independent agencies, most of which represent more than one company, the Company experiences competition within each agency. The Company and other insurers in the small group health care product market compete primarily on the basis of responsiveness to user demands, price, diversity of product offerings, quality of service, strength of provider networks, reputation, and quality of agency relations. PROVIDERS The Company uses more than 65 commercial provider networks in 31 states and the District of Columbia. A master "payor" agreement is in place for each provider network that allows the Company to access the provider contracts for its PPO and exclusive provider organization products. These networks are made available to fully insured products as well as the Company's self funded product offerings. The Company also owns and operates a commercial PPO network that includes providers in Texas, Florida, Iowa, Nebraska, Wisconsin, Arizona, North Dakota and South Dakota. Approximately 20% of the Company's business was conducted through this network for the year ended December 31, 1999, as compared to 23% in 1998. This network services the Company's business and is also offered to other insurers, third party administrators and self funded employers. This provides additional revenue to the Company and increases the volume of business used to leverage provider contract pricing concessions, which are largely volume related. The Company contracts with ProVantage Health Services, Inc., a prescription drug benefit manager, for the administration of drug benefits offered with the Company's products. This arrangement allows members to access their prescription benefit at thousands of retail outlets nationwide or through a mail-order service and is designed to provide cost and efficiency benefits to the Company. COST CONTAINMENT The Company provides substantially all of the medical management services for its members. The Company's utilization review program, which is accredited to meet national standards, is designed to ensure that services are being provided at an appropriate level and meeting members' needs. Case management is performed by Company staff with the assistance of a combination of internally developed and commercially purchased software packages used to prompt, guide and record medical management decisions. In addition, the Company has developed a series of software programs that enhance its medical management effort. The Company has developed a demand management telephonic service through its Nurse Healthline subsidiary. Members can access Nurse Healthline registered nurses 24 hours a day, seven days a week. By using a computerized algorithm based system, the nurses are able to gauge the severity of the problem and assist the insured in accessing appropriate health care. 5 INFORMATION TECHNOLOGY The Company's medical, dental, life, and short-term disability products use custom built, integrated management information systems for all administrative processing tasks. These systems include underwriting, billing, enrollment, claims processing, utilization management, sales reporting, network analysis, and service and status reporting. The systems support all products and provider arrangements for both fully insured and self funded administrative needs. The Company regularly evaluates, upgrades, and enhances its management information systems to further improve its operating efficiencies and services. An artificial intelligence system assists in claims processing, eligibility and enrollment tasks. The Company's data warehouse provides the capability to do data analysis of the business; looking for trends in utilization, product mix, claim costs, product pricing and other business factors. The Company uses extensive personal computer based network and software solutions that are integrated with its mainframe system, which allows for its continuous enhancement with technology upgrades and other software solutions. In 1999, the Company completed its initiative to test its computer systems for Year 2000 compliance and developed detailed business continuity and contingency plans to deal with identified worst case scenarios with the highest chance of occurring. The Company experienced no known significant Year 2000 issues or disruptions during the beginning of 2000, and anticipates no future significant problems. See "Item. 7 Management's Discussion and Analysis of Financial Condition and Results of Operations - Year 2000" for a complete discussion of Year 2000 matters. REINSURANCE The Company has entered into a variety of reinsurance arrangements under which it (1) cedes business to other insurance companies to mitigate large claim risk, and (2) accepts risk from other insurance carriers in connection with certain acquisitions and other business. The Company cedes, through excess of loss arrangements, certain of its risks on the small group health business and life business. This reinsurance allows for greater diversification of risk to control exposure to potential losses arising from large claims. In addition, it permits the Company to enhance its premium and asset growth while maintaining favorable risk-based capital ratios. All excess of loss reinsurers with which the Company contracts are rated "A- (Excellent)" or better by A.M. Best. In addition, in connection with certain acquisitions and other business, the Company assumes risk from other insurance carriers on both an assumption and a quota share basis. Under assumption reinsurance, the Company becomes directly responsible to insureds for business previously written by the ceding carrier. Quota share reinsurance is a contractual arrangement whereby the reinsurer assumes an agreed percentage of certain risks insured by the ceding insurer and shares premium revenue and losses proportionately. Quota share reinsurance is being used by the Company as part of a vehicle to acquire certain business from other insurance carriers and allows the Company to assume insurance risk in certain jurisdictions. INVESTMENTS The Company attempts to minimize its business risk through conservative investment policies. Investment guidelines set quality, concentration and return parameters. Individual fixed income issues must carry an investment grade rating at the time of purchase, with an ongoing average portfolio rating of "A-" or better, based on ratings of Standard & Poor's Corporation or another nationally recognized securities rating organization. The Company invests in securities authorized by applicable state laws and regulations and follows investment policies designed to maximize yield, preserve principal and provide liquidity. The Company's portfolio contains no investments 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. 6 With the exception of short-term investments and securities on deposit with various state regulators, investment responsibilities have been delegated to external investment managers. Such investment responsibilities, however, must be carried out within the investment parameters established by the Company, which are amended from time to time. See "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations - Market Risk Exposure" and the Company's Notes to Consolidated Financial Statements, Note 3, "Investments," for additional information on the Company's investments. REGULATION Government regulation of employee benefit plans, including health care coverage and health plans, is a changing area of law that varies from jurisdiction to jurisdiction and generally gives responsible state and federal administrative agencies broad discretion. The Company strives to maintain compliance in all material respects with the various federal and state regulations applicable to its current operations. To maintain such compliance, it may be necessary for the Company or a subsidiary to make changes from time to time in its services, products, structure or operations. Additional governmental regulation or future interpretation of existing regulations could increase the cost of the Company's compliance or otherwise affect the Company's operations, products, profitability or business prospects. The Company is unable to predict what additional government regulations, if any, affecting its business may be enacted in the future or how existing or future regulations might be interpreted. Most jurisdictions have enacted small group insurance and rating reforms which generally limit the ability of insurers and health plans to use risk selection as a method of controlling costs for the small group business. These laws may generally limit or eliminate use of pre-existing condition exclusions, experience rating and industry class rating, and limit the amount of rate increases from year to year. Under these laws, cost control through provider contracting and managing care may become more important, and the Company believes its experience in these areas will allow it to compete effectively. The Company regularly monitors state and federal legislative and regulatory activity as it affects the Company's business. FEDERAL INSURANCE REGULATION In recent years, federal legislation significantly expanded federal regulation of small group health plans and health care coverage. The new laws placed restrictions on the use of pre-existing conditions and eligibility restrictions based upon health status, and prohibited cancellation of coverage due to claims experience or health status. Federal reform also prohibits insurance companies from declining coverage to small employers. Additional federal laws that took effect in 1998 include prohibitions against separate, lower dollar maximums for mental health benefits and requirements relating to minimum coverage for maternity inpatient hospitalization. Many requirements of the federal legislation are similar to small group reforms that have been in place for many years. The Company expects to be able to utilize and expand upon the cost control measures initiated as a result of small group reform. The Clinton Administration and members of Congress have also proposed numerous other health care reform measures in recent years. Congress is currently considering legislation called a "Patients Bill of Rights" which could affect various aspects of the Company's business. The Company is unable to predict when or whether such legislation or any additional federal proposals will be enacted or, if enacted, the likely impact on the Company's operations. STATE INSURANCE REGULATION The Company's insurance subsidiaries are subject to regulation by various insurance regulatory bodies in each state in which the respective entities are licensed. Regulatory authorities exercise extensive supervisory power over insurance companies in regard to (1) the licensing of insurance companies; (2) the approval of forms and insurance policies used; (3) the nature of, and limitation on, an insurance company's investments; (4) periodic examination of the operations of insurance companies; (5) the form and content of annual financial statements and other reports required to be filed on the financial condition of insurance companies; (6) capital adequacy; and (7) transactions with affiliates and changes in control. The Company's insurance company subsidiaries are required to file periodic statutory financial statements in each jurisdiction in which they are licensed. 7 On an ongoing basis, states consider various health care reform measures relating to network management, mandated benefits, underwriting, appeals and administrative procedures and other matters. The Company is unable to predict what reforms, if any, may be enacted or how these reforms would affect the Company's operations. The National Association of Insurance Commissioners ("NAIC") has adopted Risk-Based Capital ("RBC") requirements for life and health insurers to evaluate the adequacy of statutory capital and surplus in relation to investment and insurance risks associated with: (1) asset quality; (2) mortality and morbidity; (3) asset and liability matching; and (4) other business factors. 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. Dividends paid by the Company's insurance subsidiaries to the Company are limited by state insurance regulations. The insurance regulator in the insurer's state of domicile may disapprove any dividend which, together with other dividends paid by an insurance company in the prior 12 months, exceeds the regulatory maximum as computed for the insurance company based on its statutory surplus and net income. 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 without regulatory approval in 2000. INSURANCE HOLDING COMPANY SYSTEMS The Company is an insurance holding company system under applicable state laws. As such, the Company and its insurance subsidiaries are subject to regulation under state insurance holding company laws and regulations in the states in which the insurance subsidiaries are domiciled. The insurance holding company laws and regulations generally require annual registration with the state departments of insurance and the filing of reports describing capital structure, ownership, financial condition, certain intercompany transactions and general business operations. Various notice and reporting requirements often apply to transactions between an insurer and its affiliated companies, depending on the size and nature of the transactions. Certain state insurance holding company laws and regulations also require prior regulatory approval or notice of certain material intercompany transactions. Acquisition of control of an insurance company requires the prior approval of state regulators in the insurer's state of domicile and sometimes other jurisdictions as well. Acquisition of a controlling interest of the Company would constitute an acquisition of a controlling interest in each of its insurance subsidiaries. Under applicable state law, control is presumed to exist when greater than 10% of a company's shares are controlled by an entity. THIRD PARTY ADMINISTRATORS Certain subsidiaries of the Company are also licensed as third party administrators ("TPAs") in states where TPA licensing is required. TPA regulations, although differing greatly from state to state, generally contain certain required administrative procedures, periodic reporting obligations and minimum financial requirements. PREFERRED PROVIDER ORGANIZATIONS Certain of the operations of the Company's subsidiaries are subject to state PPO or managed care laws and regulations. PPO and managed care regulations generally contain requirements pertaining to provider networks, provider contracting, and reporting requirements that vary from state to state. In some cases, the regulated activities are delegated by the Company's subsidiaries to a third party. In cases where activities are delegated, the Company's subsidiaries monitor the activities of the third party for compliance with the laws and regulations. UTILIZATION REVIEW ACTIVITIES A number of states have enacted laws and/or adopted regulations governing utilization review activities. Generally, these laws and regulations require compliance with specific standards for the performance of utilization review services including confidentiality, staffing, appeals and reporting requirements. Some of these laws and regulations may affect certain operations of the Company's subsidiaries. In some cases the regulated activities are delegated by the Company's subsidiaries to a third party. In cases where activities are delegated, the Company's subsidiaries monitor the activities of the third party for compliance with the laws and regulations. 8 ERISA The provision of goods and services to or through certain types of employee health benefit plans is subject to the Employee Retirement Income Security Act of 1974, as amended ("ERISA"). ERISA is a complex set of laws and regulations that are subject to periodic interpretation by the United States Department of Labor and the Internal Revenue Service. ERISA governs how the Company's business units may do business with employers whose employee benefit plans are covered by ERISA, particularly employers that self fund benefit plans. There recently have been legislative attempts to limit ERISA's preemptive effect on state laws. If such limitations were to be enacted, they might increase the Company's liability exposure under state law-based suits relating to employee health benefits offered by the Company's health plans and may permit greater state regulation of other aspects of those businesses' operations. EMPLOYEES As of December 31, 1999, the Company had 2,030 employees, 1,730 of which are located at its home office facility in Green Bay, Wisconsin. None of its employees are represented by a union. The Company considers its relations with its employees to be good. TRADEMARKS The phrase ITS YOUR CHOICESM is a federally registered service mark of the Company. The Company has filed for and maintains various other service marks, trademarks and trade names at the federal level and in various states. Although the Company considers its registered service marks, trademarks and trade names important in the operation of its business, the business of the Company is not dependent on any individual service mark, trademark or trade name. ITEM 2. PROPERTIES The Company's headquarters are located in Green Bay, Wisconsin, in a 400,000 square foot office building owned by the Company and used by both of its business segments. The property is pledged as collateral to the Company's commercial lender pursuant to a mortgage that continues until January 1, 2004. The Company also leases property at approximately 50 locations throughout the United States for its field sales and provider network offices. ITEM 3. LEGAL PROCEEDINGS 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. On September 14, 1999, AMS Inc. filed a post-trial motion to set aside the jury's finding. If the court does not grant the motion, it is AMS Inc.'s intent to appeal the decision to the Eleventh Circuit Federal Appeals Court. Based on discussions with outside counsel, management expects the $6.9 million verdict to be reversed or substantially reduced following appeal. 9 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. If the court does not reverse the decision, it is AMS Inc. and UWLIC's intention to file an appeal to the Ohio Court of Appeals. Based on discussions with outside counsel, management expects the $5.4 million judgment to be reversed or substantially reduced following the decision on the objections or an 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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of security holders during the fourth quarter of 1999. EXECUTIVE OFFICERS OF THE REGISTRANT The executive officers of the Company, who are elected for one year terms, are as follows: Name Age Title Samuel V. Miller 54 Chairman of the Board, President and Chief Executive Officer Gary D. Guengerich 54 Executive Vice President and Chief Financial Officer James C. Modaff 42 Executive Vice President and Chief Actuary Thomas G. Zielinski 52 Executive Vice President of Operations Christopher N. Earl 46 Senior Vice President of Sales and Marketing Timothy J. Moore 48 Senior Vice President of Corporate Affairs, General Counsel and Secretary Clifford A. Bowers 48 Vice President, Corporate Communications John R. Wirch 46 Vice President, Human Resources
Samuel V. Miller has been Chairman of the Board, President and Chief Executive Officer of the Company since September 1998. Prior to that time, he was an Executive Vice President of the Company since December 1995. Mr. Miller has also served as President and Chief Executive Officer of American Medical Security Holdings, Inc. ("AMS Holdings") since October 1996. During 1994 and 1995, Mr. Miller was a member of the executive staff planning group with the Travelers Group, serving as Chairman and Group Chief Executive of National Benefit Insurance Company and Primerica Financial Services Ltd. of Canada. Prior to 1994, Mr. Miller spent 10 years as President and Chief Executive Officer of American Express Life Assurance Company. Gary D. Guengerich has been Executive Vice President and Chief Financial Officer of the Company since September 1998, having also served as Treasurer of the Company until November 1999. He also served in the same capacities with AMS Holdings since November 1997. Prior to that time, Mr. Guengerich was Senior Vice President and Comptroller of First Colony Life Insurance since 1981. James C. Modaff has been Executive Vice President and Chief Actuary of the Company since August 1999. Prior to joining the Company, he was a principal of Milliman & Robertson, Inc. (a national actuarial and consulting firm) for the majority of his 14-year career with the firm. 10 Thomas G. Zielinski has been Executive Vice President of Operations of the Company since August 1999. Prior to joining the Company, he was a Vice President of Humana, Inc. (a health services company) where he served as Executive Director of the Wisconsin Service Center of Humana, Inc. and in various other capacities since 1981 as a Vice President of a predecessor company of Humana, Inc. Christopher N. Earl has been Senior Vice President of Sales and Marketing since February 1999. Prior to joining the Company, he held various senior management positions, including Regional Vice President of Sales, with United Healthcare Corporation (a health services company) from 1993 to 1999. From 1989 to 1993, Mr. Earl held senior marketing positions with Prudential Insurance Company of America. Timothy J. Moore has been Senior Vice President of Corporate Affairs, General Counsel and Corporate Secretary of the Company since September 1998. He also served in that capacity with AMS Holdings since March 1997. Prior to that time, Mr. Moore was a partner with the national law firm of Katten Muchin & Zavis, practicing at the firm from 1987 to 1997. Clifford A. Bowers has been Vice President of Corporate Communications of the Company since September 1998. He also served in that capacity with AMS Inc. since October 1997. From 1988 to 1997, Mr. Bowers was Director of Communications with Fort Howard Corporation (a paper manufacturer that subsequently merged with James River Corporation to form Fort James Corporation). John R. Wirch has been Vice President of Human Resources of the Company since September 1998. He also served in that capacity with AMS Holdings and/or AMS Inc. since February 1996. Prior to that time, Mr. Wirch was Vice President of Human Resources for Little Rapids Corporation (a manufacturer of specialty papers) from 1993 to 1996, having served as Director of Human Resources of Little Rapids Corporation from 1980 to 1993. 11 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. The common stock of the Company is traded on the New York Stock Exchange ("NYSE") under the symbol "AMZ". Prior to September 14, 1998, the common stock was traded on the NYSE under the symbol "UWZ". The following table sets forth the per share high and low sales prices for the common stock as reported on the NYSE for the periods indicated and the cash dividends paid per share for those periods. Stock prices prior to September 25, 1998 are not adjusted to reflect the spin-off. Cash Market Price Dividends High Low Paid ------------------------- ------------ Year ended December 31, 1999 First Quarter $ 16.25 $ 12.06 $ - Second Quarter 15.50 7.81 - Third Quarter 11.25 6.50 - Fourth Quarter 6.75 4.00 - Year ended December 31, 1998 First Quarter $ 33.38 $ 25.50 $ 0.12 Second Quarter 33.19 28.38 0.12 Third Quarter 28.38 8.56 0.12 Fourth Quarter 15.06 6.38 -
During the fourth quarter of 1999, the Company entered into an agreement to amend the terms of its line of credit. The amendment contains a debt covenant restriction which prohibits the Company from declaring or paying any cash dividends. In addition, dividends paid by the insurance subsidiaries to the Company are limited by state insurance regulations. 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 such entities without prior regulatory approval in 2000. As of February 29, 2000, there were 287 shareholders of record of common stock. Based on information obtained from the Company's transfer agent and from participants in security position listings and otherwise, the Company has reason to believe there are approximately 3,000 beneficial owners of shares of common stock. 12 ITEM 6. SELECTED FINANCIAL DATA. The following selected financial data as of and for the years ended December 31, 1995 through 1999 has been derived from the Company's consolidated financial statements. The following data should be read in conjunction with the Company's consolidated financial statements, the related notes thereto, and "Management's Discussion and Analysis of Financial Condition and Results of Operations." As of and for the years ended December 31, 1999 1998(b) 1997 1996(a) 1995 -------------------------------------------------------------- (IN THOUSANDS, EXCEPT PER SHARE DATA) STATEMENT OF OPERATIONS DATA: Revenues: Premium revenue $ 1,056,107 $ 914,017 $ 957,204 $ 596,099 $ 506,349 Net investment income 18,912 24,220 24,071 24,570 31,186 Other revenue 22,361 22,632 24,249 2,935 - -------------------------------------------------------------- Total revenues 1,097,380 960,869 1,005,524 623,604 537,535 Expenses: Medical and other benefits 860,473 691,767 733,491 472,319 399,449 Selling, general and administrative 268,059 242,073 252,160 157,136 135,052 Interest 3,564 7,691 9,311 4,325 3,483 Amortization of goodwill and other intangibles 4,273 8,781 7,975 670 - Write-off of intangible assets and related charges - 15,453 - - - -------------------------------------------------------------- Total expenses 1,136,369 965,765 1,002,937 634,450 537,984 -------------------------------------------------------------- Income (loss) from continuing operations, before income taxes (38,989) (4,896) 2,587 (10,846) (449) Income tax expense (benefit) (13,043) (1,868) 1,032 (4,140) (728) -------------------------------------------------------------- Income (loss) from continuing operations (25,946) (3,028) 1,555 (6,706) 279 Income from discontinued operations, less applicable income taxes - 10,003 16,595 16,909 6,094 -------------------------------------------------------------- Net income (loss) $ (25,946) $ 6,975 $ 18,150 $ 10,203 $ 6,373 ============================================================== Earnings (loss) per common share - basic Continuing operations $ (1.58) $ (0.18) $ 0.10 $ (0.52) $ 0.02 Discontinued operations - 0.60 1.01 1.31 0.48 -------------------------------------------------------------- Net income (loss) per common share - basic $ (1.58) $ 0.42 $ 1.11 $ 0.79 $ 0.50 ============================================================== Earnings (loss) per common share - diluted Continuing operations $ (1.58) $ (0.18) $ 0.10 $ (0.52) $ 0.02 Discontinued operations - 0.60 1.00 1.31 0.48 -------------------------------------------------------------- Net income (loss) per common share - diluted $ (1.58) $ 0.42 $ 1.10 $ 0.79 $ 0.50 ============================================================== Weighted average common shares outstanding 16,470 16,559 16,423 12,892 12,551 Cash dividends per common share $ - $ 0.36 $ 0.48 $ 0.48 $ 0.48 BALANCE SHEET DATA: Cash and investments $ 293,539 $ 309,562 $ 316,858 $ 335,839 $ 402,711 Total assets 503,094 498,722 648,136 693,278 580,121 Notes payable 42,523 55,064 124,578 125,788 109,898 Total shareholders' equity 220,280 266,451 326,377 313,655 212,411 (a) Includes operations of Old AMS since December 3, 1996, the date of acquisition. (b) Discontinued operations includes the operations of Newco/UWS through September 25, 1998, the spin-off distribution date. Continuing operations includes interest on debt assumed by Newco/UWS through September 11, 1998, the spin-off effective date.
13 ITEM 7. 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. Approximately 100 Company sales managers located in sales offices throughout the United States support the 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. SPIN-OFF 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 PPO 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 thereupon 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 spin-off. As a result of the spin-off, the revenues and expenses, assets and liabilities, and cash flows of the managed care and specialty business have been classified as discontinued operations in the consolidated financial statements. The continuing operations of the Company as reported herein reflect the small group PPO insurance portion of the Company's business. The Company obtained a private letter ruling from the Internal Revenue Service to the effect that the spin-off qualifies as tax-free to the Company, Newco/UWS and the Company's shareholders. ACQUISITIONS During 1997 and 1998, the Company acquired the following blocks of business: - - In the fourth quarter of 1997, the Company acquired from Pan American Life Insurance Company ("Pan American") most of the health insurance business which is marketed to individuals and small employer groups. - - Effective July 1, 1998, the Company assumed most of Pan American's remaining domestic health insurance business. - - Effective January 1, 1999, the Company acquired the majority of the fully insured group health business from Continental Assurance Company ("CNA"). The Company continues to actively seek opportunities for growth through acquisition. Management believes that as industry consolidation occurs, the Company is in a position to take advantage of its operational efficiencies. Management will continue to evaluate potential targets for acquisition. 14 SUMMARY OF 1999 RESULTS The Company experienced a difficult and challenging year with disappointing 1999 financial results. Reserve strengthening charges totaling $16.0 million after-tax were recorded primarily relating to adverse medical loss ratio trends in its small group health business. Factors which significantly contributed to the reserve strengthening charges include rapidly rising medical costs, higher than anticipated claims utilization in certain markets, and development of prior years' claim reserves. To combat the adverse trends recognized in 1999, management implemented various action plans including higher premium rate increases, accelerated repricing in certain targeted business segments, the exit from three underperforming markets, and the introduction of redesigned products with the conversion of older group health plans into these new benefit designs. In response to the increased pharmacy costs and utilization, the Company has introduced a two-tiered drug copay plan. 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 claim costs. The benefits expected from the implementation of these programs should begin to materialize in 2000 and reduce the health loss ratio. During the third quarter of 1999, the Company announced plans to cease marketing and terminate existing small group business in Florida and all remaining business in Maryland and Minnesota over a period of 18 months. This decision was made after it became clear to management that certain regulatory challenges existed which made it impossible to return these markets to profitability. Management of the Company made a considerable effort to work with state regulators on a reasonable resolution which entailed necessary rate increases. Upon notification from the state regulators that the Company was denied the rate increases considered necessary, management reevaluated the assumptions used for this grouping of markets and found it necessary to record a premium deficiency reserve. Insurance contracts are grouped as relating to highly regulated markets and all other markets. Highly regulated markets include exited and other markets. These markets are identified based on significant rating restrictions, states' general legislative and regulatory environments, and the Company's ability to effectively underwrite risk. The Company recorded a $13.7 million after-tax charge for a premium deficiency reserve to recognize expected losses related to highly regulated markets. Although management is disappointed with the turn of events in 1999, the combined effect of the unfavorable developments is considered a short-term setback for the Company principally affecting 1999. Management remains confident in the underlying earnings potential of the Company and has implemented action plans, described above, which should contribute to improved financial performance starting in early 2000. While the Company faced challenges with its small group health products, its ancillary products were profitable. The MedOne product, combined with the Company's group dental, group life, and self funded products combined to produce net income of $15.0 million in 1999. The expense ratio for the Company's health segment improved in 1999 compared to 1998 due mainly to management's commitment to increase operating efficiencies. The Company's low cost infrastructure and superior operating efficiencies provide flexibility and opportunities for targeted acquisitions and continued growth through new sales. The Company's balance sheet remains strong with a book value per share of $14.86 as of December 31, 1999 and a tangible book value per share of $7.69. In addition, the Company reported positive cash flows from operations for 1999 of $26.4 million. The Company's medical membership inforce of 630,217 at the end of 1999 was down slightly compared to 636,238 at the end of the prior year. Membership in the three states that the Company is exiting totaled 66,964 at December 31, 1999. The effect of the implemented premium rate increases and exited states is expected to result in decreased membership in 2000. 15 COMPARISON OF RESULTS OF CONTINUING OPERATIONS The Company experienced unrelated non-recurring items in each of the three years in the period ended December 31, 1999. Management believes that these non-recurring items are not reflective of the ongoing operations of the Company and has chosen to discuss their effects separately. The following table illustrates the effect of non-recurring items on the Company's results: Year ended December 31, 1999 1998 1997 ------------------------------------------ (IN THOUSANDS) Income (loss) from continuing operations before interest on debt assumed by Newco/UWS and non-recurring items $ (12,241) $ 8,439 $ 8,851 Interest on debt assumed by Newco/UWS, net of tax - (2,216) (3,180) Non-recurring items, net of tax (13,705) (9,251) (4,116) ------------------------------------------ Income (loss) from continuing operations $ (25,946) $ (3,028) $ 1,555 ==========================================
A summary description of each of the non-recurring items is as follows: In the fourth quarter of 1997, the Company acquired from Pan American most of the health insurance business which is marketed to individuals and small employer groups. The Company incurred an after-tax charge of $4.1 million directly related to this acquisition. The Company's intangible distribution system asset was acquired in 1996 as part of a merger. During 1997 and 1998, the Company experienced significant turnover of sales managers and began to reorganize sales offices. During that period, the Company replaced commissioned independent sales managers with salaried sales offices, while it evaluated the Company's distribution strategy. In the fourth quarter of 1998, management concluded that a salaried sales office structure was more consistent with current strategy and that the Company's intangible distribution system asset was impaired. As a result, the Company recorded an after-tax charge of $9.3 million to write-off the intangible asset and other related costs. As more fully described in "Summary of 1999 Results," the Company recorded a $13.7 million after-tax charge for a premium deficiency reserve in the third quarter of 1999 to recognize expected losses related to highly regulated markets. YEARS ENDED DECEMBER 31, 1999 AND 1998 The Company reported a net loss of $25.9 million or $1.58 per share for 1999, compared to an after-tax loss from continuing operations of $3.0 million or $0.18 per share for 1998. Excluding non-recurring charges and excluding interest on debt assumed by Newco/UWS, the Company reported a loss of $12.2 million or $0.74 per share for 1999, compared to income of $8.4 million or $0.51 per share for 1998. The decline in income from 1998 to 1999 is primarily the result of a higher loss ratio and lower investment gains, partially offset by a lower expense ratio and lower amortization of goodwill and other intangible assets. 16 Health insurance premium revenue increased 13.9% to $985.3 million from $865.2 million in 1998. The increase in premium revenue reflects both internal growth and business acquired from other insurance carriers. Premium revenue related to CNA acquired business for the year ended December 31, 1999 totaled $83.4 million. In addition, the Company's average fully insured medical premium per member per month was higher in 1999 at $127 compared to $123 for 1998. Life insurance premium revenues increased 6.9% in 1999 to $26.2 million from $24.5 million in 1998, which is the result of a 6.0% increase in life membership from 1998 to 1999. Management anticipates premium revenue to remain essentially flat in 2000 as a slight membership decline is offset by premium rate increases. The health loss ratio, excluding non-recurring items, was 80.4% for 1999, compared to 76.7% for 1998. The increase in the health loss ratio is due to reserve strengthening charges recorded in 1999 and adverse medical cost trends as discussed previously in greater detail. The Company reported a health loss ratio of 78.6% in the fourth quarter of 1999. Management believes the impact of its actions will continue to have a positive impact on the health loss ratio in 2000. The life loss ratio increased to 39.2% for the year ended December 31, 1999, compared to 31.5% for 1998. The life loss ratio tends to fluctuate from period to period. The Company experienced higher than usual life claims experience during certain months in 1999, which caused the year-end life loss ratio to be above historical trends. Management expects the life loss ratio to improve in 2000. Net investment income includes investment income and realized gains and losses on investments. Net investment income for 1999 decreased 21.9% to $18.9 million from $24.2 million for 1998. Investment gains and losses are realized in the normal investment process in response to market opportunities. During 1999, the Company had $0.8 million in realized investment losses compared to realized investment gains in 1998 totaling $3.7 million. Average annual investment yields, excluding realized gains and losses, were also down to 6.7% for the year ended December 31, 1999, compared to 7.3% for the same period in the prior year. Other revenues, which is primarily made up of administrative fee income from claim processing and other administrative services, remained relatively stable decreasing to $22.4 million in 1999 from $22.6 million in 1998. The expense ratio includes commissions, administrative expenses and premium taxes and assessments, but excludes non-recurring charges. The expense ratio for health products was 23.0% for 1999, an improvement from the prior year expense ratio of 23.9%. The administrative expense ratio decreased in 1999 as a result of successfully leveraging the Company's expenses over a larger premium base. Management believes the health expense ratio will increase slightly in 2000 due to the implementation of certain administrative initiatives. Management believes the cost of these initiatives will be more than offset by reduced claim costs. The health commission expense ratio increased slightly from 1998 as a result of growth in new business. Interest expense decreased to $3.6 million in 1999 from $4.3 million in 1998, excluding interest on the $70.0 million debt assumed by Newco/UWS in conjunction with the spin-off. In July 1998, the Company refinanced its debt replacing its subordinated notes with a bank line of credit at a lower interest rate, which accounts for the decrease in interest expense from 1998 to 1999. Amortization of goodwill and other intangible assets declined significantly in 1999 to $4.3 million from $8.8 million in 1998. The decrease was caused by the write-off of the Company's distribution system intangible asset as previously discussed. The effective tax rate for 1999 was 33.5% compared with 38.1% for 1998. The change in the effective tax rate relates to the amortization of non-deductible goodwill in relation to pre-tax income. YEARS ENDED DECEMBER 31, 1998 AND 1997 Results from continuing operations for 1998 was a loss of $3.0 million, which was a $4.6 million decrease from income of $1.6 million for 1997. Excluding non-recurring charges and excluding interest on debt assumed by Newco/UWS, income from continuing operations for 1998 was $8.4 million compared to $8.9 million for 1997. The modest decline in income from continuing operations reflected an improved loss ratio offset by increased selling, general and administrative expenses. 17 For 1998, health insurance premiums declined 5.8% to $865.2 million from $918.6 million in 1997. The decline in premium was primarily the result of a decline in average fully insured medical membership of 7.2% in 1998 compared to 1997 reflecting the Company's efforts to cull unprofitable business. Life insurance premiums declined 15.4% in 1998 to $24.5 million from $28.9 million in 1997 which was consistent with the decline in average life membership of 16.2% in 1998 compared to 1997. The health loss ratio for the year ended December 31, 1998 was 76.7%, an improvement from 77.5% for 1997. The improved loss ratio for 1998, as previously mentioned, reflected the cancellation of unprofitable business, including the stand-alone dental business effective June 1, 1998, increased higher margin new business and repricing of existing business. The life loss ratio for the year ended December 31, 1998, was 31.5%, which was an improvement from 35.3% for 1997. Net investment income includes investment income and realized gains. Net investment income for 1998 increased 0.6% to $24.2 million from $24.1 million in 1997. Average annual investment yields, excluding realized gains and losses, were 7.3% for the year ended December 31, 1998, compared to 8.3% for the same period in the prior year. Net investment income for 1997 included $1.4 million of mutual fund distributions which were favorably impacted by foreign financial markets in 1997. Investment gains and losses are realized in the normal investment process in response to market opportunities. During 1998, other revenue declined to $22.6 million from $24.2 million in 1997. The decrease was primarily due to lower administrative fee revenue from self funded business in 1998 offset by additional fees related to the Pan American business acquired beginning in the third quarter 1998. The expense ratio includes commissions, administrative expenses and premium taxes and assessments, but excludes non-recurring charges. For 1998, the expense ratio for health products was 23.9% compared to 23.0% for 1997. The increased health expense ratio for 1998 reflected higher commission costs related to growth in new business in 1998 over 1997 and an investment in the Company's distribution network. Also contributing to the increase in the expense ratio were expenses related to the Year 2000 initiative, and a one-time investment in re-engineering administrative work flow processes. For 1998, interest expense decreased to $7.7 million from $9.3 million for 1997. The decrease in interest expense for 1998 reflected the assumption of $70.0 million in debt by Newco/UWS on September 11, 1998, as part of the spin-off transaction, as further described in Note 2 to the Consolidated Financial Statements. Excluding the interest on debt assumed by Newco/UWS, interest expense for 1998 was approximately $4.3 million. Amortization of goodwill and intangibles for the year ended December 31, 1998, increased to $8.8 million from $8.0 million at December 31, 1997. The increase in amortization expense in 1998 was primarily due to recorded intangible assets related to the Pan American small group business acquired in October 1997. The effective tax rate for the year 1998 was 38.1% compared with 39.9% for the year 1997. The change in the effective tax rate relates to the amortization of non-deductible goodwill in relation to pre-tax income. DISCONTINUED OPERATIONS Income from discontinued operations reflects the operating results of Newco/UWS through September 25, 1998, the distribution date of the spin-off. Reported results of discontinued operations in 1998 included direct costs associated with the spin-off of $4.9 million. 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. 18 The Company's cash flows from operations were positive at $26.4 million for 1999, and negative at $3.7 million and $31.8 million for the years ended 1998, and 1997, respectively. Positive cash flows from operations in 1999 are principally the result of a leveling of the claims inventory, growth in membership and lower debt service costs as a result of the assumption of $70.0 million in debt by Newco/UWS in September 1998. Cash flows from operations were negative in 1998 and 1997, due mainly to a decline in business and a reduction in the inventory of claims pending adjudication. Management believes that cash flows for 2000 will be positive but may decline from 1999 due to an expected decline in business in force. 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 ("NAIC") has adopted risk-based capital ("RBC") standards for life and health 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. On July 31, 1998, the Company entered into a five-year revolving bank line of credit with a maximum commitment of $70.0 million. During 1998, the Company borrowed $45.2 million on the bank line of credit to retire its subordinated notes outstanding. Effective November 5, 1999, the Company entered into an agreement to amend the line of credit to reduce the maximum commitment 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 maximum commitment will be further reduced to $30.0 million on July 31, 2001. The stock of American Medical Security Holdings, Inc. and United Wisconsin Life Insurance Company, subsidiaries of the Company, has been pledged as collateral for the loan. The line of credit contains certain covenants which, among other matters, require the Company to maintain a minimum tangible net worth and restricts the Company's ability to incur additional debt, pay future cash dividends and transfer assets. The Company was in compliance with all such covenants at December 31, 1999. During 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 1.1 million shares of its outstanding common stock at an aggregate purchase price of $7.5 million. As the majority of the shares were purchased in the fourth quarter of 1999, the share repurchase program did not have a material impact on the earnings (loss) per share computation for the year ended December 31, 1999. In addition to internally generated funds and periodic borrowings on its existing bank line of credit, the Company believes that additional financing could be obtained as market conditions may permit or dictate. 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, financial condition and other factors considered relevant by the Board of Directors. MARKET RISK EXPOSURE The primary investment objective of the Company is to maximize investment income while controlling risks and preserving principal. The Company seeks to meet this investment objective through diversity of coupon rates, liquidity, investment type, industry, issuer and geographic location. The investment portfolio of the Company consists primarily of investment grade debt securities. The Company uses outside investment managers who seek to maximize return on the portfolio within the Company's investment guidelines. At December 31, 1999, $274.1 million or 99.2% of the Company's total investment portfolio was invested in debt securities. 19 The bond portfolio had an average quality rating of Aa3 at December 31, 1999, and A1 at December 31, 1998, as measured by Moody's Investor Service. Almost the entire portfolio was classified as available for sale. The Company had no investment 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 amortized cost of the total investment portfolio exceeded market value by $16.1 million at December 31, 1999. Management believes that cash flow from operations will be sufficient for its cash flow needs and that liquidation of its investment portfolio will not be necessary. The primary market risk affecting the Company is interest rate risk. Assuming an immediate increase of 100 basis points in interest rates, the net hypothetical decline in fair value of shareholders' equity is estimated to be $7.5 million after-tax at December 31, 1999. This amount represents approximately 3.4% of the Company's shareholders' equity. At December 31, 1999, the fair value of the Company's borrowings under the line of credit facility approximated the carrying value. Market risk was estimated as the potential increase in the fair value resulting from a hypothetical 1% decrease in the Company's weighted average short-term borrowing rate at December 31, 1999, and was not materially different from the year end carrying value. INFLATION Health care costs have been rising and are expected to continue to rise at a rate that exceeds the consumer price index. The Company's cost control measures and premium rate increases are designed to reduce the adverse effect of medical cost inflation on its operations. In addition, the Company uses its underwriting and medical management capabilities to help control inflation in health care costs. However, there can be no assurance that the Company's efforts will fully offset the impact of inflation or that premium revenue increases will equal or exceed increasing health care costs. YEAR 2000 During 1998 and 1999, the Company devoted significant time and resources in the effort to prepare for the Year 2000 initiative. The Year 2000 project focused on issues facing the Company in three major areas: 1) software applications developed internally, 2) software applications acquired from a third party that had been customized by the Company, and 3) software applications acquired from a third party that had not been customized by the Company and those products and services provided to the Company by third parties. The Company evaluated all of its major business processes and developed detailed business continuity and contingency plans designed to deal with identified worst case scenarios with the highest chance of occurring. By the end of 1999, the Company had reached a state of readiness such that all significant applications were Year 2000 compliant. The Company experienced no known significant Year 2000 issues or disruptions during the first part of 2000, and anticipates no future significant problems relating to the Year 2000 issue. While the Company currently believes that the Year 2000 project was a success and that future material operational problems are unlikely, there can be no guarantee that future Year 2000 related issues will not arise. Given the uncertainties surrounding unlikely possible future events relating to the Year 2000 issue, the Company will continue to monitor its applications and business processes. The cost of the Year 2000 project was funded through operating cash flows and did not have a material impact on the Company's financial position. The Company incurred total costs of $3.2 million ($1.2 million in 1999) relating to the Year 2000 project. In addition, the Company made total capital expenditures of $4.5 million ($2.7 million in 1999). The Company does not anticipate significant future operating and capital expenditures related to the Year 2000 project. 20 CAUTIONARY FACTORS This report and other documents or oral presentations prepared or delivered by and on behalf of the Company contain or may contain forward-looking statements. Such statements are based upon management's current expectations 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: - - Increasing 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, and the Company's ability to predict future health care cost trends and adequately price its 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 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 reserve and surplus requirements; and risk-based capital requirements. - - Factors related to the Company's plans to deal with adverse medical loss ratio trends in its small group health business (which include implementing significant rate increases, exiting three nonproductive markets, and introducing redesigned products), including the willingness of employers and individuals to accept rate increases, premium repricing and redesigned products. - - The development of and changes in claims reserves, particularly for exited markets where insured 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 having the verdicts in the Skilstaf litigation and the Health Administrators litigation reversed or substantially reduced. 21 - - 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 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 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. See "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations -- Market Risk Exposure" for information concerning potential market risks related to the Company's investment portfolio. 22 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. REPORT OF INDEPENDENT AUDITORS Board of Directors and Shareholders American Medical Security Group, Inc. We have audited the accompanying consolidated balance sheets of American Medical Security Group, Inc. and its subsidiaries, (the "Company") as of December 31, 1999 and 1998, and the related consolidated statements of operations, changes in shareholders' equity and comprehensive income (loss) and cash flows for each of the three years in the period ended December 31, 1999. Our audits also included the financial statement schedules listed in the Index at Item 14(a). These financial statements and schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedules based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of the Company as of December 31, 1999 and 1998, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 1999, in conformity with accounting principles generally accepted in the United States. Also, in our opinion, the related financial statement schedules, when considered in relation to the basic financial statements taken as a whole, present fairly in all material respects the information set forth therein. /s/ Ernst & Young LLP Milwaukee, Wisconsin February 7, 2000 23
AMERICAN MEDICAL SECURITY GROUP, INC. CONSOLIDATED BALANCE SHEETS December 31, 1999 1998 ---------------------------- (IN THOUSANDS) ASSETS: Investments: Securities available for sale, at fair value: Fixed maturities $ 270,800 $ 293,096 Equity securities - preferred 2,198 2,457 Fixed maturity securities held to maturity, at amortized cost 3,275 3,361 ---------------------------- Total investments 276,273 298,914 Cash and cash equivalents 17,266 10,648 Other assets: Property and equipment, net 32,624 35,356 Goodwill and other intangibles, net 111,347 116,093 Other assets 65,584 37,711 ---------------------------- Total other assets 209,555 189,160 ---------------------------- Total assets $ 503,094 $ 498,722 ============================ LIABILITIES AND SHAREHOLDERS' EQUITY: Liabilities: Medical and other benefits payable $ 169,117 $ 113,133 Advance premiums 17,277 18,157 Payables and accrued expenses 25,044 23,439 Notes payable 42,523 55,064 Other liabilities 28,853 22,478 ---------------------------- Total liabilities 282,814 232,271 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, 16,653,646 issued and 15,532,146 outstanding at December 31, 1999, 16,653,179 issued and outstanding at December 31, 1998) 16,654 16,653 Paid-in capital 187,952 188,981 Retained earnings 33,626 59,572 Accumulated other comprehensive income (loss) (net of tax benefit of $5,634,000 in 1999 and tax expense of $670,000 in 1998) (10,464) 1,245 Treasury stock (1,121,500 shares at December 31, 1999, at cost) (7,488) - ---------------------------- Total shareholders' equity 220,280 266,451 ---------------------------- Total liabilities and shareholders' equity $ 503,094 $ 498,722 ============================ SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
24
AMERICAN MEDICAL SECURITY GROUP, INC. CONSOLIDATED STATEMENTS OF OPERATIONS Year ended December 31, 1999 1998 1997 ------------------------------------------ (IN THOUSANDS, EXCEPT PER SHARE DATA) REVENUES: Insurance premiums $1,056,107 $ 914,017 $ 957,204 Net investment income 18,912 24,220 24,071 Other revenue 22,361 22,632 24,249 ------------------------------------------ Total revenues 1,097,380 960,869 1,005,524 EXPENSES: Medical and other benefits 860,473 691,767 733,491 Selling, general and administrative 268,059 242,073 252,160 Interest 3,564 7,691 9,311 Amortization of goodwill and other intangibles 4,273 8,781 7,975 Write-off of intangible assets and related charges - 15,453 - ------------------------------------------ Total expenses 1,136,369 965,765 1,002,937 ------------------------------------------ Income (loss) from continuing operations, before income taxes (38,989) (4,896) 2,587 Income tax expense (benefit) (13,043) (1,868) 1,032 ------------------------------------------ Income (loss) from continuing operations (25,946) (3,028) 1,555 Income from discontinued operations, less applicable income taxes - 10,003 16,595 ------------------------------------------ Net income (loss) $ (25,946) $ 6,975 $ 18,150 ========================================== Earnings (loss) per common share - basic Continuing operations $ (1.58) $ (0.18) $ 0.10 Discontinued operations - 0.60 1.01 ------------------------------------------ Net income (loss) per common share - basic $ (1.58) $ 0.42 $ 1.11 ========================================== Earnings (loss) per common share - diluted Continuing operations $ (1.58) $ (0.18) $ 0.10 Discontinued operations - 0.60 1.00 ------------------------------------------ Net income (loss) per common share - diluted $ (1.58) $ 0.42 $ 1.10 ========================================== SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
25
AMERICAN MEDICAL SECURITY GROUP, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS Year ended December 31, 1999 1998 1997 ------------------------------------------ (IN THOUSANDS) OPERATING ACTIVITIES: Income (loss) from continuing operations $ (25,946) $ (3,028) $ 1,555 Adjustments to reconcile income (loss) from continuing operations to net cash provided by (used in) operating activities: Depreciation and amortization 11,038 15,343 17,424 Write-off of intangible assets - 12,833 - Net realized investment losses (gains) 854 (3,670) (1,854) Deferred income tax benefit (7,112) (8,256) (1,722) Changes in operating accounts: Other assets (12,945) (4,869) 10,204 Medical and other benefits payable 55,984 (14,911) (32,181) Advance premiums (880) (2,004) (5,485) Payables and accrued expenses 1,605 (6,129) 2,122 Other liabilities 3,830 10,982 (21,882) ------------------------------------------ Net cash provided by (used in) operating activities 26,428 (3,709) (31,819) INVESTING ACTIVITIES: Acquisition of subsidiaries (net of cash and cash equivalents acquired of $2,773,000) - 2,623 - Purchases of available for sale securities (190,834) (347,931) (276,510) Proceeds from sale of available for sale securities 172,086 300,416 311,374 Proceeds from maturity of available for sale securities 20,805 20,225 400 Purchases of held to maturity securities (686) (540) (1,629) Proceeds from maturity of held to maturity securities 770 1,100 935 Purchases of property and equipment (2,976) (3,326) (1,839) Proceeds from sale of property and equipment 1,049 254 2,404 ------------------------------------------ Net cash provided by (used in) investing activities 214 (27,179) 35,135 FINANCING ACTIVITIES: Cash dividends paid - (5,956) (7,892) Issuance of common stock 5 2,356 2,965 Purchase of treasury stock (7,488) - - Proceeds from notes payable borrowings 5,000 45,158 - Repayment of notes payable (17,541) (46,944) (1,210) ------------------------------------------ Net cash used in financing activities (20,024) (5,386) (6,137) Net cash provided by discontinued operations - 1,631 16,113 ------------------------------------------ Cash and cash equivalents: Net increase (decrease) during year 6,618 (34,643) 13,292 Balance at beginning of year 10,648 45,291 31,999 ------------------------------------------ Balance at end of year $ 17,266 $ 10,648 $ 45,291 ========================================== SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
26
AMERICAN MEDICAL SECURITY GROUP, INC. CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY AND COMPREHENSIVE INCOME (LOSS) Accumulated Other Common Stock Paid-In Retained Comprehensive Treasury ------------------------- Shares Amount Capital Earnings Income (Loss) Stock Total -------------------------------------------------------------------------------------- (IN THOUSANDS, EXCEPT SHARE DATA) Balance at January 1, 1997 16,293,995 $ 16,294 $ 184,019 $ 107,073 $ 6,269 $ - $ 313,655 Comprehensive income: Net income 18,150 18,150 Change in net unrealized gain on securities, net of taxes of $123,000 (501) (501) ------------ Comprehensive income 17,649 ------------ Cash dividends paid on common stock ($0.48 per share) (7,892) (7,892) Issuance of common stock 215,583 216 2,749 2,965 -------------------------------------------------------------------------------------- Balance at December 31, 1997 16,509,578 16,510 186,768 117,331 5,768 - 326,377 Comprehensive income: Net income 6,975 6,975 Change in net unrealized gain on securities, net of taxes of $642,000 (4,613) (4,613) ------------ Comprehensive income 2,362 ------------ Cash dividends paid on common stock ($0.36 per share) (5,956) (5,956) Issuance of common stock 143,601 143 2,213 2,356 Distribution of Newco/UWS to shareholders (58,778) 90 (58,688) -------------------------------------------------------------------------------------- Balance at December 31, 1998 16,653,179 16,653 188,981 59,572 1,245 - 266,451 Comprehensive loss: Net loss (25,946) (25,946) Change in net unrealized gain on securities, net of taxes of $6,304,000 (11,709) (11,709) ------------ Comprehensive loss (37,655) ------------ Issuance of common stock 467 1 4 5 Stock option forfeiture (1,033) (1,033) Purchase of treasury stock (1,121,500 shares, at cost) (7,488) (7,488) -------------------------------------------------------------------------------------- Balance at December 31, 1999 16,653,646 $ 16,654 $ 187,952 $ 33,626 $ (10,464) $ (7,488) $220,280 ======================================================================================== SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
27 AMERICAN MEDICAL SECURITY GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES ORGANIZATION 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. Approximately 100 Company sales managers located in sales offices throughout the United States support the 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. BASIS OF PRESENTATION The consolidated financial statements include the accounts of the Company and all of its majority-owned subsidiaries. Significant intercompany accounts and transactions have been eliminated. The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States ("GAAP"). The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates. CASH AND CASH EQUIVALENTS Cash and cash equivalents include operating cash and short-term investments with original maturities of three months or less. These amounts are recorded at cost, which approximates market value. INVESTMENTS Investments are classified as either held-to-maturity or available-for-sale. Investments which the Company has the positive intent and ability to hold to maturity are designated as held-to-maturity and are stated at amortized cost. All other investments are classified as available-for-sale and are stated at fair value based on quoted market prices, with unrealized gains and losses excluded from earnings and reported as a separate component of shareholders' equity as accumulated other comprehensive income or loss, net of income tax effects. Realized gains and losses from the sale of available-for-sale debt securities and equity securities are calculated using the specific identification method. FAIR VALUE OF FINANCIAL INSTRUMENTS The fair values of investments are reported in Note 3. The fair values of other financial instruments, principally other assets, advanced premiums, payables and accrued expenses, notes payable and other liabilities approximate their December 31, 1999 and 1998 carrying values. GOODWILL AND OTHER INTANGIBLES Goodwill represents the excess of cost over the fair market value of net assets acquired. Goodwill and other intangible assets are being amortized on a straight-line basis over a period of 40 years or less. Accumulated amortization was $12,676,000 and $8,403,000 at December 31, 1999 and 1998, respectively. 28 The Company periodically evaluates whether events and circumstances have occurred which may affect the estimated useful life or the recoverability of the remaining balance of its intangibles. A study conducted during 1998 determined that the Company's sales distribution system intangible assets were impaired. The sales distribution system was acquired on December 3, 1996 in conjunction with the purchase of the Company's small group business. Since the acquisition, the Company has largely eliminated its commission-based sales distribution system, replacing it with salaried sales offices. This resulted in an after-tax charge to 1998 operations of $9,251,000 or $0.56 per share, including $7,683,000 of intangible distribution system assets and $1,568,000 of related costs. The Company's management believes that no impairment of goodwill or other intangible assets exists at December 31, 1999. REVENUE RECOGNITION Premiums for group health and life policies are recognized ratably over the period that insurance coverage is provided. Other revenue, including administrative fee income from claim processing and other administrative services, is recognized in the period the service is provided. MEDICAL AND OTHER BENEFITS The liabilities for medical and other benefits are determined using statistical analyses and represent estimates of the ultimate net cost of all reported and unreported claims that are unpaid at year end. The Company's year-end claim liabilities are substantially satisfied through claim payments in the subsequent year. Management believes that the liabilities for insurance claims are adequate. The liability for unpaid claims of $101,721,000 at December 31, 1998, developed deficient in the subsequent year by $10,398,000. At December 31, 1997, the liability for unpaid claims of $123,907,000, developed deficient by $1,228,000 in the subsequent year. The estimates are reviewed periodically and, as adjustments to the liabilities become necessary, the adjustments are reflected in current operations. PREMIUM DEFICIENCY RESERVES The Company recognizes premium deficiency reserves on an existing group of insurance contracts when the sum of expected future claim costs, claim adjustment expenses and related maintenance expenses exceeds the expected future premium revenue and investment income. Insurance contracts are grouped as relating to highly regulated markets or all other markets consistent with the Company's manner of acquiring, servicing and measuring the profitability of its business. Highly regulated markets are identified based on significant rating restrictions, states' general legislative and regulatory environments, and the Company's ability to effectively underwrite risk. The Company continues to evaluate assumptions and updates the premium deficiency reserve as necessary. During 1999, the Company established a premium deficiency reserve for its highly regulated markets. At December 31, 1999, the Company has remaining recorded premium deficiency reserves totaling $16,700,000, which is included in medical and other benefits payable in the accompanying balance sheet. No premium deficiency reserves were recorded prior to 1999. 29 REINSURANCE Reinsurance premiums, commissions and expense reimbursements on reinsured business are accounted for on a basis consistent with those used in accounting for the original policies issued and the terms of the reinsurance contracts. Premiums and benefits ceded to other companies have been reported as a reduction of premium revenue and benefits. Reinsurance receivables and prepaid reinsurance premium amounts are reported as assets. The Company limits the maximum net loss that can arise from certain lines of business by reinsuring (ceding) a portion of these risks with other insurance organizations (reinsurers) on an excess of loss or quota share basis. The Company's retention limit is $500,000 per policy year for medical claims and $50,000 for life claims. The Company is contingently liable on reinsurance ceded in the event that the reinsurers do not meet their contractual obligations. The Company has acquired certain business from other carriers through reinsurance transactions. A summary of reinsurance assumed and ceded related to acquired business is as follows: Year ended December 31, 1999 1998 1997 ------------------------------------------ (IN THOUSANDS) Reinsurance assumed: Insurance premiums $ 107,989 $ 99,645 $ 30,256 Medical and other benefits 95,764 80,786 23,270 Reinsurance ceded: Insurance premiums $ 2,793 $ 14,074 $ - Medical and other benefits 6,890 12,958 -
PROPERTY AND EQUIPMENT Property and equipment are recorded at cost. Depreciation and amortization are provided using the straight-line method over the estimated useful lives, which are 20 to 30 years for land improvements, 10 to 40 years for buildings and building improvements, three to five years for computer equipment and software and three to 10 years for furniture and other equipment. INCOME TAXES Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial statement purposes and the amounts used for income tax purposes. A valuation allowance is recorded on deferred tax assets that management believes more likely than not will not be realized. RELATED PARTIES The Company has deferred compensation payable to employees of $3,597,000 and $1,421,000 at December 31, 1999 and 1998, respectively. 30 EARNINGS PER COMMON SHARE A reconciliation of the numerator and denominator of the basic and diluted earnings per common share ("EPS") is as follows: Year ended December 31, 1999 1998 1997 ------------------------------------------ (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) Numerator: Income (loss) from continuing operations $ (25,946) $ (3,028) $ 1,555 ========================================== Denominator: Denominator for basic EPS - weighted average shares 16,470,096 16,558,887 16,423,270 Effect of dilutive securities - employee stock options - - 147,715 ------------------------------------------ Denominator for diluted EPS 16,470,096 16,558,887 16,570,985 ========================================== Income (loss) from continuing operations per common share: Basic $ (1.58) $ (0.18) $ 0.10 Diluted $ (1.58) $ (0.18) $ 0.10
There was no effect of dilutive securities for the years ended 1999 and 1998 because employee stock options were antidilutive during such periods. Options to purchase 1,908,449 shares of common stock were outstanding and exercisable at the end of 1997 and all but 147,715 were excluded from the computation of diluted earnings per share because the options' exercise price was greater than the average market price of common shares and, therefore, the effect would be antidilutive. 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) is reported by the Company in the consolidated statements of changes in shareholders' equity and comprehensive income (loss). 31 2. DISTRIBUTION OF NEWCO/UWS TO SHAREHOLDERS 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 "Distribution"). In connection with the spin-off, the Company 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. AMSG obtained a private ruling from the Internal Revenue Service to the effect that the spin-off qualified as tax free to AMSG, Newco/UWS and AMSG shareholders. The net assets of Newco/UWS consisted of assets and liabilities of the managed care and specialty management business along with $70,000,000 in debt that was assumed by Newco/UWS in conjunction with the Distribution. Newco/UWS was renamed United Wisconsin Services, Inc. The operations of Newco/UWS, along with direct costs of approximately $4,900,000 associated with the spin-off, are reflected in discontinued operations. All prior periods of the consolidated financial statements of AMSG have been restated to reflect Newco/UWS operations as discontinued operations in the accompanying consolidated financial statements of AMSG. Discontinued operations reported total revenues of $488,033,000 and $609,109,000 for 1998 and 1997, respectively. Interest expense on the $70,000,000 debt assumed by Newco/UWS is reflected in continuing operations only through September 11, 1998. 3. INVESTMENTS Net investment income from continuing operations includes the following: Year ended December 31, 1999 1998 1997 ------------------------------------------ (IN THOUSANDS) Interest on fixed maturities $ 18,731 $ 18,437 $ 19,037 Dividends on equity securities 134 716 2,369 Realized gains 1,351 5,078 2,219 Realized losses (2,205) (1,408) (365) Interest on cash equivalents and other investment income 1,581 2,112 1,720 ------------------------------------------ Gross investment income 19,592 24,935 24,980 Investment expenses (680) (715) (909) ------------------------------------------ Net investment income $ 18,912 $ 24,220 $ 24,071 ==========================================
Unrealized gains (losses) are computed as the difference between estimated fair value and amortized cost for fixed maturities and equity securities classified as available for sale. A summary of the net decrease in unrealized gains, which is included in accumulated other comprehensive income (loss), is as follows: Year ended December 31, 1999 1998 1997 ------------------------------------------ (IN THOUSANDS) Fixed maturities $ (17,753) $ (1,849) $ 7,669 Equity securities (260) (105) (7,545) Discontinued operations, net of deferred income taxes - (3,211) (748) ------------------------------------------ Net decrease in unrealized gains $ (18,013) $ (5,165) $ (624) ==========================================
32 Changes in accumulated other comprehensive income (loss) related to changes in unrealized gains and losses on securities are as follows: Year ended December 31, 1999 1998 1997 ------------------------------------------ (IN THOUSANDS) Change in net unrealized gains on securities, net of taxes $ (12,264) $ 1,074 $ 1,452 Less: reclassification adjustment for gains (losses) included in net income (loss), net of tax benefit of $299,000 in 1999, and tax expense of $1,284,000 and $649,000 in 1998, and 1997, respectively (555) 2,386 1,205 ------------------------------------------ Change in net unrealized gains from continuing operations, net of taxes (11,709) (1,312) 247 Change in net unrealized gains from discontinued operations, net of taxes - (3,211) (748) ------------------------------------------ Change in net unrealized gains on securities, net of taxes $ (11,709) $ (4,523) $ (501) ==========================================
The amortized cost and estimated fair values of investments are as follows: Gross Gross Amortized Unrealized Unrealized Estimated Cost Gains Losses Fair Value -------------------------------------------------------- (IN THOUSANDS) AT DECEMBER 31, 1999: Available for sale: Fixed maturities: U.S. Treasury securities $ 54,150 $ - $ (3,488) $ 50,662 Corporate debt securities 152,312 90 (9,067) 143,335 Foreign government securities 16,638 - (686) 15,952 Government agency mortgage-backed securities 44,102 12 (1,914) 42,200 Municipal securities 19,386 - (735) 18,651 -------------------------------------------------------- 286,588 102 (15,890) 270,800 Equity securities - preferred 2,508 - (310) 2,198 Held to maturity: U.S. Treasury securities 3,275 3 (54) 3,224 -------------------------------------------------------- $ 292,371 $ 105 $ (16,254) $ 276,222 ========================================================
Gross Gross Amortized Unrealized Unrealized Estimated Cost Gains Losses Fair Value -------------------------------------------------------- (IN THOUSANDS) AT DECEMBER 31, 1998: Available for sale: Fixed maturities: U.S. Treasury securities $ 35,932 $ 630 $ (31) $ 36,531 Corporate debt securities 168,853 3,201 (2,230) 169,824 Foreign government securities 18,055 371 (476) 17,950 Government agency mortgage-backed securities 68,291 536 (36) 68,791 -------------------------------------------------------- 291,131 4,738 (2,773) 293,096 Equity securities - preferred 2,507 - (50) 2,457 Held to maturity: U.S. Treasury securities 3,361 85 - 3,446 -------------------------------------------------------- $ 296,999 $ 4,823 $ (2,823) $ 298,999 ========================================================
33 The amortized cost and estimated fair values of debt securities at December 31, 1999 by contractual maturity are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations. Available-for-Sale Held-to-Maturity Amortized Estimated Amortized Estimated Cost Fair Value Cost Fair Value -------------------------------------------------------- (IN THOUSANDS) Due in one year or less $ 3,793 $ 3,774 $ 900 $ 903 Due after one through five years 134,304 126,036 2,375 2,321 Due after five through ten years 63,912 59,691 - - Due after ten years 40,478 39,099 - - -------------------------------------------------------- 242,487 228,600 3,275 3,224 Government agency mortgage-backed securities 44,101 42,200 - - -------------------------------------------------------- $ 286,588 $ 270,800 $ 3,275 $ 3,224 ========================================================
At December 31, 1999, the insurance subsidiaries had fixed securities and cash equivalents on deposit with various state insurance departments with carrying values of approximately $3,275,000. 4. PROPERTY AND EQUIPMENT Property and equipment are stated at cost and are summarized as follows: December 31, 1999 1998 ---------------------------- (IN THOUSANDS) Land and land improvements $ 3,882 $ 3,877 Building and building improvements 24,175 23,740 Computer equipment and software 9,668 13,052 Furniture and other equipment 13,476 13,137 ---------------------------- 51,201 53,806 Less accumulated depreciation (18,577) (18,450) ---------------------------- $ 32,624 $ 35,356 ============================
The Company recognized depreciation expense on property and equipment of $4,544,000, $5,450,000, and $8,625,000 in 1999, 1998 and 1997, respectively. 34 5. DEBT Notes payable consists of the following: December 31, 1999 1998 ---------------------------- (IN THOUSANDS) Line of credit, commercial banks, adjusted periodically, interest payments due quarterly through July 31, 2003 $ 35,158 $ 45,158 Mortgage payable, commercial bank, 9.05% interest, monthly principal payments of $100,000 plus interest through January 1, 2004 7,300 8,500 Notes payable, commercial bank, adjusted periodically, one year note due March 31, 1999, interest payments due monthly - 1,000 Promissory note, 8.00% interest, quarterly interest payments through October 1, 2001 65 406 ---------------------------- $ 42,523 $ 55,064 ============================
On July 31, 1998, the Company entered into a five year revolving bank line of credit with a maximum commitment of $70,000,000, and a $10,000,000 sublimit for swingline loans. Under the bank line of credit, the Company had the option to select an interest rate based on the Eurodollar rate or alternate base rate. The alternate base rate is the larger of the bank's corporate base rate of interest or the federal funds rate plus 1/2% per annum. The swingline loans may be used for short term borrowings and are required to be repaid no later than 30 days after they are made. Swingline loans are charged the bank's daily floating rate of interest. During 1998, the Company borrowed $45,158,000 on the bank line of credit to retire its subordinated notes outstanding. Effective November 5, 1999, the Company entered into an agreement to amend the line of credit to reduce the maximum commitment from $70,000,000 to $40,000,000. The maximum commitment will be further reduced to $30,000,000 on July 31, 2001. The stock of American Medical Security Holdings, Inc. and United Wisconsin Life Insurance Company, subsidiaries of the Company, has been pledged as collateral for the loan. In conjunction with the commitment reduction, the Company paid $10,000,000 on the loan outstanding on November 5, 1999, reducing the outstanding balance to $35,158,000. The amended line of credit agreement also revises pricing schedules and 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. The mortgage payable is collateralized by the Company's home office property located in Green Bay, Wisconsin. The Company believes the carrying value of all notes payable approximates fair value. Future annual principal amounts due for all notes are $1,265,000 for 2000, $6,358,000 for 2001, $1,200,000 for 2002, $31,200,000 for 2003, and $2,500,000 for 2004. During 1999, 1998 and 1997, interest paid totaled $3,547,000, $6,971,000 and $9,320,000, respectively. 35 6. INCOME TAXES The Company and most of its subsidiaries file a consolidated federal income tax return. The Company and its subsidiaries file separate state franchise, income and premium tax returns as applicable. The Company had a net federal income tax receivable of $6,377,000 and a net federal income tax payable of $620,000 at December 31, 1999 and 1998, respectively. The Company and its subsidiaries have state net business loss carryforwards totaling $59,858,000 at December 31, 1999, which expire in the year 2010. Federal and state income tax payments related to continuing operations, net of refunds, were $1,496,000 in 1999, $710,000 in 1998 and $3,534,000 in 1997. The components of income tax expense (benefit) are as follows: Year ended December 31, 1999 1998 1997 ------------------------------------------ (IN THOUSANDS) Current: Federal $ (5,965) $ 5,295 $ 1,965 State 34 1,091 292 ------------------------------------------ (5,931) 6,386 2,257 Deferred: Federal (6,244) (5,522) (137) State (868) (2,732) (1,088) ------------------------------------------ (7,112) (8,254) (1,225) ------------------------------------------ Income tax expense (benefit) from continuing operations (13,043) (1,868) 1,032 Income tax expense from discontinued operations - 9,028 9,918 ------------------------------------------ Total income tax expense (benefit) $ (13,043) $ 7,160 $ 10,950 ==========================================
The differences between taxes computed at the federal statutory rate and recorded income taxes attributable to continuing operations are as follows: Year ended December 31, 1999 1998 1997 ------------------------------------------ (IN THOUSANDS) Tax expense (benefit) at federal statutory rate $ (13,658) $ (1,714) $ 904 Goodwill amortization 879 878 844 State income and franchise taxes, net of federal benefit (565) (1,066) (559) Other, net 301 34 (157) ------------------------------------------ Tax expense (benefit) from continuing operations $ (13,043) $ (1,868) $ 1,032 ==========================================
36 Significant components of the Company's federal and state deferred tax liabilities and assets are as follows: > December 31, 1999 December 31, 1998 Federal State Federal State -------------------------------------------------------- (IN THOUSANDS) Deferred tax liabilities: Intangibles $ (6,389) $ 788 $ (6,685) $ 759 Unrealized gains on investments - - (669) - Prepaid assets (1,371) (158) (1,294) (112) Other taxable temporary differences (1,509) (26) (934) (35) -------------------------------------------------------- (9,269) 604 (9,582) 612 Deferred tax assets: Advance premium discounting 1,174 65 1,203 5 Basis in minority-owned subsidiaries 835 188 1,317 313 Unrealized losses on investments 5,635 - - - Insurance liabilities 7,704 711 1,415 51 Unearned income 1,514 291 1,172 226 Bad debt reserve and other non-deductible liabilities 2,495 524 1,756 371 Specified policy acquisition costs 910 47 802 - Depreciation and amortization - - 544 299 State net business loss carryforwards - 3,290 - 2,646 Other deductible temporary differences 880 177 286 38 -------------------------------------------------------- 21,147 5,293 8,495 3,949 Valuation allowance (379) (2,468) (519) (2,135) -------------------------------------------------------- 20,768 2,825 7,976 1,814 -------------------------------------------------------- Net deferred tax assets (liabilities) $ 11,499 $ 3,429 $ (1,606) $ 2,426 ========================================================
The federal deferred benefit arising from the deductibility of state deferred tax is included as a component of other federal deferred taxes. The net deferred tax assets and liabilities are included in other assets and liabilities, as applicable in the accompanying balance sheets. 7. COMMITMENTS AND CONTINGENCIES On August 26, 1999, a $6,900,000 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 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 $5,400,000 verdict was entered against the Company in a lawsuit which alleged breach of contract involving commission amounts due to a former agent. The Company has filed objections requesting reversal of the decision and intends to appeal if necessary. 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. 37 8. SHAREHOLDERS' EQUITY STATUTORY FINANCIAL INFORMATION Insurance companies are subject to state insurance regulations. These regulations require, among other matters, the filing of financial statements prepared in accordance with statutory accounting practices prescribed or permitted for insurance companies. The combined statutory surplus of the Company's insurance subsidiaries, United Wisconsin Life Insurance Company and American Medical Security Insurance Company of Georgia, at December 31, 1999 and 1998, was $155,937,000 and $183,288,000, respectively. State insurance regulations also require the maintenance of a minimum compulsory surplus based on a percentage of premiums written. At December 31, 1999, the Company's insurance subsidiaries were in compliance with these compulsory regulatory requirements. RESTRICTIONS ON DIVIDENDS FROM SUBSIDIARIES Dividends paid by the insurance subsidiaries to the Company are limited by state insurance regulations. The insurance regulator in the state of domicile may disapprove any dividend which, together with other dividends paid by an insurance company in the prior twelve months, exceeds the regulatory maximum as computed for the insurance company based on its statutory surplus and net income. 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 without prior regulatory approval in 2000. 9. EMPLOYEE BENEFIT PLANS STOCK BASED COMPENSATION PLANS The Company has a stock-based compensation plan, the Equity Incentive Plan (the "Plan"), for the benefit of eligible employees and directors of the Company. The Plan permits the grant of nonqualified stock options ("NQSO"), incentive stock options, stock appreciation rights, restricted stock awards and performance awards. Persons eligible to participate in the Plan include all full-time active employees and outside directors of the board of directors. The Plan allows for the granting of up to 4,000,000 shares of which 918,677 shares are available for grant as of December 31, 1999. No benefits other than NQSOs have been granted under the plan. The terms of incentive stock options and nonqualified stock options granted under the Plan cannot exceed more than 10 and 12 years, respectively, and the option exercise price generally cannot be less than the fair market value of the Company's common stock on the date of grant. Incentive stock options and NQSOs are not exercisable in any event prior to six months following the grant date. Stock appreciation rights generally have a grant price at least equal to 100% of the fair market value of the Company's common stock. The term of the stock appreciation rights cannot exceed 12 years. Stock appreciation rights are not exercisable prior to six months following the grant date. Restricted stock generally may not be sold or otherwise transferred for certain periods based on the passage of time, the achievement of performance goals or the occurrence of other events. However, participants may exercise full voting rights and are entitled to receive all dividends and other distributions with respect to restricted stock. Restricted stock does not vest prior to six months following the date of grant. On November 17, 1998, the Company and a key executive entered into a deferred stock agreement. Under the agreement the Company has an obligation to issue 73,506 shares of AMSG common stock provided the executive remains continuously employed with AMSG through November 17, 2002. The Company incurred expense of $225,000 in 1999 and $28,000 in 1998 related to this agreement. The Company also has a Director Stock Option Plan which permits the grant of NQSOs. As of December 31, 1999, 29,000 shares are available for grant. 38 Stock option activity for all plans is as follows: December 31, 1999 1998 1997 ----------------------------------------------------- TOTAL NUMBER OF NQSOS Outstanding at beginning of year 2,918,893 2,217,307 2,244,459 Granted 999,000 874,560 184,500 Exercised - (114,028) (204,152) Forfeited (1,108,750) (20,000) (7,500) Spin-off related: Conversion to UWS options(a) - (351,322) - AMSG modification(b) - 312,376 - ----------------------------------------------------- Outstanding at end of year 2,809,143 2,918,893 2,217,307 ===================================================== Exercisable at end of year 1,504,976 2,365,893 1,908,449 Available for grant at end of year 947,677 837,927 403,541 WEIGHTED AVERAGE EXERCISE PRICE OF NQSOS Outstanding at beginning of year $15.18 $27.02 $25.00 Granted - Exercise price equals market price on grant date 7.33 10.75 27.32 Granted - Exercise price is less than market price on grant date - - - Granted - Exercise price exceeds market price on grant date - 12.00 - Exercised - 4.15 4.95 Forfeited 18.45 18.44 32.67 Outstanding at end of year 11.10 15.18 27.02 Exercisable at end of year 13.68 16.23 27.16 NQSOS BY EXERCISE PRICE RANGE Range of exercise prices $ 3.01 - $8.88 $3.01 $4.66 Weighted average exercise price $6.07 $3.01 $4.66 Weighted average remaining contractual life (years) 11.34 3.93 4.93 Exercisable at end of year 47,960 47,960 104,044 Outstanding at end of year 856,960 47,960 104,044 Weighted average exercise price of options exercisable at end of year $3.01 $3.01 $4.66 Range of exercise prices $10.25 - $14.38 $10.25 - $14.38 $18.13 - $26.63 Weighted average exercise price $11.53 $11.38 $22.91 Weighted average remaining contractual life (years) 9.79 10.62 10.24 Exercisable at end of year 734,848 595,765 708,582 Outstanding at end of year 1,230,015 1,148,765 952,332 Weighted average exercise price of options exercisable at end of year $11.76 $12.01 $22.30 Range of exercise prices $15.76 - $22.74 $15.76 - $22.74 $28.00 - $37.13 Weighted average exercise price $16.33 $18.06 $32.39 Weighted average remaining contractual life (years) 8.50 5.69 4.64 Exercisable at end of year 722,168 1,722,168 1,095,823 Outstanding at end of year 722,168 1,722,168 1,160,931 Weighted average exercise price of options exercisable at end of year $16.33 $18.06 $32.44 (a) Effective on the date of Distribution, certain AMSG stock options held by Newco/UWS employees were converted to Newco/UWS stock options. (b) Immediately following the Distribution, the number of options was increased and exercise prices were decreased (the "modification") to preserve the economic value of those options that existed just prior to the Distribution for the holders of certain AMSG stock options.
39 The Black-Scholes option valuation model was used in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Since the Company's employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimates, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options. The Company follows Accounting Principles Board Opinion No. 25 under which no compensation expense is recorded when the exercise price of the Company's employee stock options equals the market price of the underlying stock on the date of grant. The Company's pro forma information regarding net income and net income per share has been determined as if these options had been accounted for since January 1, 1995, in accordance with the fair value method of Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based Compensation". For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the options' vesting period. The Company's pro forma information is as follows: Year ended December 31, 1999 1998 1997 ------------------------------------------ (IN THOUSANDS, EXCEPT PER SHARE DATA) Pro forma net income (loss) $ (26,429) $ 6,484 $ 17,719 Pro forma earnings (loss) per common share: Basic $ (1.60) $ 0.39 $ 1.08 Diluted $ (1.60) $ 0.39 $ 1.06
The pro forma disclosures only include the effect of options granted subsequent to January 1, 1995. Accordingly, the effects of applying the SFAS No. 123 pro forma disclosures to future periods may not be indicative of future effects. In determining compensation cost pursuant to SFAS No. 123, the fair value for these options was estimated at the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions: Year ended December 31, 1999 1998 1997 ------------------------------------------ Expected life of options 6.00 years 3.55 years 6.03 years Risk-free interest rate 6.13% 4.53% 5.71% Expected dividend yield 0.00% 0.00% 1.78% Expected volatility factor 45% 39% 38% Grant date fair value of options: Exercise price equals market price $ 3.84 $ 4.83 $ 10.66 Exercise price is less than market price $ - $ 7.37 $ - Exercise price exceeds market price $ - $ 1.77 $ -
40 RETIREMENT SAVINGS PLAN The Company's employees are included in a defined contribution plan (the "Retirement Savings Plan") with profit sharing and discretionary savings provisions covering all eligible salaried and hourly employees. Beginning in 1998, participant contributions up to 6% of the participants' compensation are matched 50% by the Company. Profit sharing contributions to the Retirement Savings Plan are determined annually by the Company. Participants vest in Company contributions over seven years. The Company recognized expense associated with the Retirement Savings Plan of $1,610,000 and $1,449,000 in 1999 and 1998, respectively. 10. QUARTERLY FINANCIAL INFORMATION (UNAUDITED) Selected continuing operations quarterly financial data for the years ended December 31, 1999 and 1998 are as follows: Quarter ---------------------------------------------------------------------- First Second Third Fourth Total ---------------------------------------------------------------------- (IN THOUSANDS, EXCEPT PER SHARE DATA) 1999 Total revenues $ 274,053 $ 274,396 $ 276,101 $ 272,830 $1,097,380 Net income (loss) 2,995 (3,530) (25,925) 514 (25,946) Net income (loss) per common share Basic 0.18 (0.21) (1.57) 0.03 (1.58) Diluted 0.18 (0.21) (1.57) 0.03 (1.58) 1998 Total revenues $ 245,840 $ 237,354 $ 237,409 $ 240,266 $ 960,869 Income (loss) from continuing operations 1,551 392 1,637 (6,608) (3,028) Net income (loss) 6,391 1,266 5,926 (6,608) 6,975 Earnings (loss) per common share - basic Continuing operations 0.09 0.03 0.10 (0.40) (0.18) Discontinued operations 0.29 0.05 0.26 - 0.60 Net income (loss) per common share 0.38 0.08 0.36 (0.40) 0.42 Earnings (loss) per common share - diluted Continuing operations 0.09 0.03 0.10 (0.40) (0.18) Discontinued operations 0.29 0.05 0.26 - 0.60 Net income (loss) per common share 0.38 0.08 0.36 (0.40) 0.42 Note: The sum of the four quarters may not equal the earnings (loss) per common share for the year due to the change in the number of shares outstanding during the year.
11. SEGMENTS OF THE BUSINESS 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 PPO products: MedOne 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 80% owned HMO subsidiary. The reportable segments are managed separately because they differ in the nature of the products offered and in profit margins. 41 The Company evaluates segment performance based on profit or loss from continuing 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 described in the summary of significant accounting policies. Intercompany transactions have been eliminated prior to reporting reportable segment information. YEAR ENDED DECEMBER 31, 1999: Health Life Total Insurance Insurance All Other Consolidated -------------------------------------------------------- (IN THOUSANDS) REVENUES: Insurance premiums $ 985,322 $ 26,183 $ 44,602 $1,056,107 Net investment income 9,254 202 9,456 18,912 Other revenue 17,857 258 4,246 22,361 -------------------------------------------------------- Total revenues 1,012,433 26,643 58,304 1,097,380 EXPENSES: Medical and other benefits 805,768 10,270 44,435 860,473 Selling, general and administrative 245,676 7,640 14,743 268,059 Interest - - 3,564 3,564 Amortization of goodwill and other intangibles - - 4,273 4,273 -------------------------------------------------------- Total expenses 1,051,444 17,910 67,015 1,136,369 -------------------------------------------------------- Income (loss) from continuing operations, before income taxes $ (39,011) $ 8,733 $ (8,711) $ (38,989) ======================================================== As of December 31, 1999: Segment assets $ 186,611 $ 4,229 $ 312,254 $ 503,094 ======================================================== YEAR ENDED DECEMBER 31, 1998: Health Life Total Insurance Insurance All Other Consolidated -------------------------------------------------------- (IN THOUSANDS) REVENUES: Insurance premiums $ 865,187 $ 24,488 $ 24,342 $ 914,017 Net investment income 8,463 214 15,543 24,220 Other revenue 17,317 268 5,047 22,632 -------------------------------------------------------- Total revenues 890,967 24,970 44,932 960,869 EXPENSES: Medical and other benefits 663,775 7,713 20,279 691,767 Selling, general and administrative 223,976 7,839 10,258 242,073 Interest - - 7,691 7,691 Amortization of goodwill and other intangibles - - 8,781 8,781 Write-off of intangible assets and related charges - - 15,453 15,453 -------------------------------------------------------- Total expenses 887,751 15,552 62,462 965,765 -------------------------------------------------------- Income (loss) from continuing operations, before income taxes $ 3,216 $ 9,418 $ (17,530) $ (4,896) ======================================================== As of December 31, 1998: Segment assets $ 153,965 $ 3,753 $ 341,004 $ 498,722 ========================================================
42 YEAR ENDED DECEMBER 31, 1997: Health Life Total Insurance Insurance All Other Consolidated -------------------------------------------------------- (IN THOUSANDS) REVENUES: Insurance premiums $ 918,566 $ 28,942 $ 9,696 $ 957,204 Net investment income 11,256 298 12,517 24,071 Other revenue 22,437 241 1,571 24,249 -------------------------------------------------------- Total revenues 952,259 29,481 23,784 1,005,524 EXPENSES: Medical and other benefits 712,059 10,226 11,206 733,491 Selling, general and administrative 233,613 8,907 9,640 252,160 Interest - - 9,311 9,311 Amortization of goodwill and other intangibles - - 7,975 7,975 -------------------------------------------------------- Total expenses 945,672 19,133 38,132 1,002,937 -------------------------------------------------------- Income (loss) from continuing operations, before income taxes $ 6,587 $ 10,348 $ (14,348) $ 2,587 ======================================================== As of December 31, 1997: Segment assets $ 158,008 $ 4,142 $ 362,370 $ 524,520 ========================================================
43 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. Information required by this item with respect to directors and executive officers is incorporated herein by reference to the information included under the headings "Election of Directors" and "Section 16(a) Beneficial Ownership Reporting Compliance" in the Company's definitive Proxy Statement, to be dated March 31, 2000, relating to the 2000 Annual Meeting of Shareholders currently scheduled for May 17, 2000 (the "2000 Proxy Statement") and the information under the heading "Executive Officers of the Registrant" in Part I of this report. The 2000 Proxy Statement will be filed with the Securities and Exchange Commission not later than 120 days after the end of the Company's fiscal year. ITEM 11. EXECUTIVE COMPENSATION. Information required by this item is incorporated herein by reference to the information included under the headings "Executive Compensation" and "Election of Directors -- Compensation of Directors" in the 2000 Proxy Statement. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. Information required by this item is included under the heading "Security Ownership of Certain Beneficial Owners and Management" in the 2000 Proxy Statement, which section is hereby incorporated by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. Information required by this item is included under the heading "Certain Transactions" in the 2000 Proxy Statement, which section is hereby incorporated by reference. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K. (a) 1 and 2. FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES PAGE IN FORM 10-K REPORT The following consolidated financial statements of American Medical Security Group, Inc. and subsidiaries are included in Item 8: Report of Independent Auditors.................................................................... 23 Consolidated Balance Sheets at December 31, 1999 and 1998......................................... 24 Consolidated Statements of Operations for the years ended December 31, 1999, 1998 and 1997........ 25 Consolidated Statements of Cash Flows for the years ended December 31, 1999, 1998 and 1997........ 26 Consolidated Statements of Changes in Shareholders' Equity and Comprehensive Income for the years ended December 31, 1999, 1998, and 1997.......................................... 27 Notes to Consolidated Financial Statements........................................................ 28
44 PAGE IN FORM 10-K REPORT The following financial statement schedules of American Medical Security Group, Inc. and subsidiaries are included in Item 14(d): Schedule II - Condensed Financial Information of Registrant................................. 46 Schedule III - Supplementary Insurance Information.......................................... 49 Schedule IV - Reinsurance................................................................... 50 Schedule V - Valuation and Qualifying Accounts.............................................. 51
All other schedules for which provision is made in applicable accounting regulations of the Securities and Exchange Commission are not required under the related instructions or are inapplicable, and therefore have been omitted. 3. EXHIBITS See the Exhibit Index following the Signature page of this report, which is incorporated herein by reference. Each management contract and compensatory plan or arrangement required to be filed as an exhibit to this report is identified in the Exhibit Index by an asterisk following its exhibit number. (b) REPORTS ON FORM 8-K No reports on Form 8-K were filed during the fourth quarter of 1999. (c) EXHIBITS See the Exhibit Index following the Signature page of this report. (d) FINANCIAL STATEMENT SCHEDULES The financial statement schedules referenced in Item 14(a) are as follows. 45
SCHEDULE II AMERICAN MEDICAL SECURITY GROUP, INC. (PARENT COMPANY ONLY) CONDENSED FINANCIAL INFORMATION OF REGISTRANT CONDENSED BALANCE SHEETS December 31, 1999 1998 ---------------------------- (IN THOUSANDS) ASSETS: Cash and cash equivalents $ 272 $ 128 Other assets: Investment in consolidated subsidiaries 248,157 300,262 Goodwill and other intangibles, net 20,792 21,355 Other assets 1,757 1,421 ---------------------------- Total other assets 270,706 323,038 ---------------------------- Total assets $ 270,978 $ 323,166 ============================ LIABILITIES AND SHAREHOLDERS' EQUITY: Liabilities: Notes payable $ 35,158 $ 45,158 Taxes payable 6,243 6,995 Payables and accrued expenses 460 532 Due to affiliates 5,433 710 Other liabilities 3,404 3,320 ---------------------------- Total liabilities 50,698 56,715 Shareholders' equity: Common stock 16,654 16,653 Paid-in capital 187,952 188,981 Retained earnings 33,626 59,572 Accumulated other comprehensive income (loss) (10,464) 1,245 Treasury stock (7,488) - ---------------------------- Total shareholders' equity 220,280 266,451 ---------------------------- Total liabilities and shareholders' equity $ 270,978 $ 323,166 ============================
46
SCHEDULE II AMERICAN MEDICAL SECURITY GROUP, INC. (PARENT COMPANY ONLY) CONDENSED FINANCIAL INFORMATION OF REGISTRANT CONDENSED STATEMENTS OF OPERATIONS Year ended December 31, 1999 1998 1997 ------------------------------------------ (IN THOUSANDS) REVENUES: Fees from consolidated subsidiaries $ 3,199 $ 2,013 $ 2,303 Other revenue 92 35 - ------------------------------------------ Total revenues 3,291 2,048 2,303 EXPENSES: General and administrative 1,071 888 1,620 Interest 2,802 5,960 8,371 Amortization of goodwill and other intangibles 563 563 278 ------------------------------------------ Total expenses 4,436 7,411 10,269 ------------------------------------------ Loss from continuing operations before income tax benefit and equity in net income (loss) of subsidiaries (1,145) (5,363) (7,966) Income tax benefit (347) (1,793) (3,031) ------------------------------------------ Loss from continuing operations before equity in net income (loss) of subsidiaries (798) (3,570) (4,935) Equity in net income (loss) of subsidiaries (25,148) 542 6,490 ------------------------------------------ Income (loss) from continuing operations (25,946) (3,028) 1,555 Income from discontinued operations, less applicable income taxes - 10,003 16,595 ------------------------------------------ Net income (loss) $ (25,946) $ 6,975 $ 18,150 ==========================================
47
SCHEDULE II AMERICAN MEDICAL SECURITY GROUP, INC. (PARENT COMPANY ONLY) CONDENSED FINANCIAL INFORMATION OF REGISTRANT CONDENSED STATEMENTS OF CASH FLOWS Year ended December 31, 1999 1998 1997 ------------------------------------------ (IN THOUSANDS) OPERATING ACTIVITIES: Income (loss) from continuing operations $ (25,946) $ (3,028) $ 1,555 Adjustments to reconcile income (loss) from continuing operations to net cash provided by (used in) operating activities: Equity in net (income) loss of subsidiaries 25,148 (542) (6,490) Dividends received from (contributed to) subsidiaries 15,250 5,000 (10,330) Amortization of intangibles 563 563 278 Deferred income tax benefit (399) (772) (407) Changes in operating accounts: Net other assets and liabilities 3,011 596 5,718 ------------------------------------------ Net cash provided by (used in) operating activities 17,627 1,817 (9,676) INVESTING ACTIVITIES: Investment in subsidiaries - - (1,500) ------------------------------------------ Net cash used in investing activities - - (1,500) FINANCING ACTIVITIES: Cash dividends paid - (5,956) (7,892) Issuance of common stock 5 2,356 2,965 Purchase of treasury stock (7,488) - - Proceeds from notes payable borrowings 5,000 45,158 - Repayment of notes payable (15,000) (44,878) (10) ------------------------------------------ Net cash used in financing activities (17,483) (3,320) (4,937) Net cash provided by discontinued operations - 1,631 16,113 ------------------------------------------ Cash and cash equivalents: Net increase during year 144 128 - Balance at beginning of year 128 - - ------------------------------------------ Balance at end of year $ 272 $ 128 $ - ==========================================
48
SCHEDULE III AMERICAN MEDICAL SECURITY GROUP, INC. SUPPLEMENTARY INSURANCE INFORMATION Deferred Medical and Policy Other Other Acquisition Benefits Advance Policyholder SEGMENT Costs Payable Premiums Funds - --------------------------------------------------------------------------------------- (IN THOUSANDS) DECEMBER 31, 1999: Health $ - $ 147,626 $ 16,171 $ - Life - 9,328 530 - All Other - 12,163 576 - -------------------------------------------------------- Total $ - $ 169,117 $ 17,277 $ - ======================================================== DECEMBER 31, 1998: Health $ - $ 100,323 $ 16,778 $ - Life - 7,669 927 - All Other - 5,141 452 - -------------------------------------------------------- Total $ - $ 113,133 $ 18,157 $ - ======================================================== DECEMBER 31, 1997: Health $ - $ 118,133 $ 19,350 $ - Life - 3,632 636 - All Other - 5,117 - - -------------------------------------------------------- Total $ - $ 126,882 $ 19,986 $ - ========================================================
Amortization of Medical and Deferred Net Other Policy Other Premium Investment Benefit Acquisition Operating Premiums SEGMENT Revenue Income Expenses Costs Expenses Written - ------------------------------------------------------------------------------------------------------------------- (IN THOUSANDS) DECEMBER 31, 1999: Health $ 985,322 $ 9,254 $ 805,768 $ - $ 245,676 $ 984,715 Life 26,183 202 10,270 - 7,640 All Other 44,602 9,456 44,435 - 14,743 44,726 ---------------------------------------------------------------------- Total $ 1,056,107 $ 18,912 $ 860,473 $ - $ 268,059 ====================================================================== DECEMBER 31, 1998: Health $ 865,187 $ 8,463 $ 663,775 $ - $ 223,976 $ 862,615 Life 24,488 214 7,713 - 7,839 All Other 24,342 15,543 20,279 - 10,258 24,794 ---------------------------------------------------------------------- Total $ 914,017 $ 24,220 $ 691,767 $ - $ 242,073 ====================================================================== DECEMBER 31, 1997: Health $ 918,566 $ 11,256 $ 712,059 $ - $ 233,613 $ 913,388 Life 28,942 298 10,226 - 8,907 All Other 9,696 12,517 11,206 - 9,640 9,696 ---------------------------------------------------------------------- Total $ 957,204 $ 24,071 $ 733,491 $ - $ 252,160 ======================================================================
49
SCHEDULE IV AMERICAN MEDICAL SECURITY GROUP, INC. REINSURANCE Percentage Ceded to Assumed of Amount Direct Other from Other Net Assumed Business Companies Companies Amount to Net -------------------------------------------------------------------------- (IN THOUSANDS) YEAR ENDED DECEMBER 31, 1999: Life insurance in force $ 14,355,089 $ 12,731,969 $ 9,455 $ 1,632,575 0.6% Premiums: Accident and Health 976,457 4,309 57,776 1,029,924 5.6% Life 25,642 607 1,148 26,183 4.4% ------------------------------------------------------------ Total Premiums 1,002,099 4,916 58,924 1,056,107 5.6% YEAR ENDED DECEMBER 31, 1998: Life insurance in force $ 13,467,780 $ 9,670,800 $ - $ 3,796,980 - Premiums: Accident and Health 859,560 14,680 44,649 889,529 5.0% Life 26,337 2,256 407 24,488 1.7% ------------------------------------------------------------ Total Premiums 885,897 16,936 45,056 914,017 4.9% YEAR ENDED DECEMBER 31, 1997: Life insurance in force $ 11,750,841 $ 9,320,314 $ 2,033,624 $ 4,464,151 45.6% Premiums: Accident and Health 878,369 3,097 52,990 928,262 5.7% Life 29,527 585 - 28,942 - ------------------------------------------------------------ Total Premiums 907,896 3,682 52,990 957,204 5.5%
50
SCHEDULE V AMERICAN MEDICAL SECURITY GROUP, INC. VALUATION AND QUALIFYING ACCOUNTS Additions Balance at Charged to Beginning Cost and Balance at of Period Expenses Deductions End of Period -------------------------------------------------------- (IN THOUSANDS) YEAR ENDED DECEMBER 31, 1999: Allowance for bad debts $ 1,118 $ 14 $ 481 $ 651 Valuation allowance for deferred taxes 2,654 327 134 2,847 -------------------------------------------------------- Total $ 3,772 $ 341 $ 615 $ 3,498 ======================================================== YEAR ENDED DECEMBER 31, 1998: Write-down of intangible asset $ - $ 12,833 $ 12,833 $ - Allowance for bad debts 1,061 84 27 1,118 Valuation allowance for deferred taxes (a) 1,277 1,555 178 2,654 -------------------------------------------------------- Total $ 2,338 $ 14,472 $ 13,038 $ 3,772 ======================================================== YEAR ENDED DECEMBER 31, 1997: Allowance for bad debts $ 1,439 $ 140 $ 518 $ 1,061 Valuation allowance for deferred taxes 636 641 - 1,277 -------------------------------------------------------- Total $ 2,075 $ 781 $ 518 $ 2,338 ======================================================== (a) Valuation allowance for deferred taxes of approximately $1.5 million was established in the first quarter of 1998 upon the consolidation of a subsidiary previously accounted for under the equity method.
51 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) 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. AMERICAN MEDICAL SECURITY GROUP, INC. By: /s/ SAMUEL V. MILLER --------------------------------- Samuel V. Miller, Chairman, President, and Chief Executive Officer Date: March 9, 2000 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.* SIGNATURE TITLE /s/ SAMUEL V. MILLER Chairman of the Board, President and Chief Samuel V. Miller Executive Officer; Director /s/ GARY D. GUENGERICH Executive Vice President and Chief Gary D. Guengerich Financial Officer (Principal Financial Officer and Principal Accounting Officer) /s/ ROGER H. BALLOU Director Roger H. Ballou /s/ W. FRANCIS BRENNAN Director W. Francis Brennan /s/ JAMES C. HICKMAN Director James C. Hickman /s/ WILLIAM R. JOHNSON Director William R. Johnson /s/ EUGENE A. MENDEN Director Eugene A. Menden /s/ MICHAEL T. RIORDAN Director Michael T. Riordan /s/ FRANK L. SKILLERN Director Frank L. Skillern /s/ J. GUS SWOBODA Director J. Gus Swoboda - --------------- *Each of the above signatures is affixed as of March 9, 2000. 52
AMERICAN MEDICAL SECURITY GROUP, INC. (COMMISSION FILE NO. 1-13154) EXHIBIT INDEX TO FORM 10-K ANNUAL REPORT FOR THE YEAR ENDED DECEMBER 31, 1999 EXHIBIT NUMBER INCORPORATED HEREIN FILED DOCUMENT DESCRIPTION BY REFERENCE TO HEREWITH 2.1 Distribution and Indemnity Agreement Exhibit 2.1 to Newco/UWS' between the United Wisconsin Registration Statement on Form 10, Services, Inc., now known as as amended (File No. 1-14177) American Medical Security Group, Inc. ("AMSG f/k/a UWS or Registrant") and Newco/UWS, Inc. ("Newco/UWS") dated as of September 11, 1998 2.2 Employee Benefits Agreement dated as Exhibit 10.1 to Newco/UWS' of September 11, 1998, by and Registration Statement on Form 10, between AMSG f/k/a UWS and Newco/UWS as amended (File No. 1-14177) 2.3 Tax Allocation Agreement, entered Exhibit 10.2 to Newco/UWS' into as of September 11, 1998, by Registration Statement on Form 10, and between AMSG f/k/a UWS and as amended (File No. 1-14177) Newco/UWS 3.1 Restated Articles of Incorporation Exhibit 3.1 to the Registrants Form of Registrant dated as February 17, 10-K for the year ended 1999 December 31, 1998 (the "1998 10-K") 3.2 Bylaws of Registrant as amended and X restated November 17, 1999 4.1 Amended and Restated Credit Exhibit 4 to the Registrant's Form Agreement dated as of October 15, 10-Q for the quarter ended 1998 (the "Credit Agreement") among September 30, 1998 (the "9/30/98 the Registrant, United Wisconsin 10-Q") Life Insurance Company and the First National Bank of Chicago (n/k/a Bank One, NA) and other Lenders 4.2 Amendment No. 1 dated as of November Exhibit 4.1 to the Registrant's 5, 1999 to the Credit Agreement Form 10-Q for the quarter ended September 30, 1999 4.2 Dividend Reinvestment and Direct Exhibit 4.1 to AMSG f/k/a UWS' Form Stock Purchase Plan S-3 Registration Statement (No. 333-29425) EX-1 10.1* Equity Incentive Plan as amended and Exhibit 10.1 to 1998 10-K restated March 15, 1999 10.2* Form of Nonqualified Stock Option Exhibit 10.2 to 1998 10-K Award Agreement for Officers 10.3* Form of Nonqualified Stock Option X Award Agreement for Directors 10.4* Deferred Stock Agreement between the Exhibit 10.3 to 1998 10-K Registrant and Samuel V. Miller 10.5* 1995 Director Stock Option Plan as Exhibit 10.2 to 9/30/98 10-Q amended and restated September 25, 1998 10.6* Directors Deferred Compensation Plan X adopted November 17, 1999 10.7* Voluntary Deferred Compensation Plan X as Amended and Restated effective September 25, 1998 10.8* Deferred Compensation Trust Exhibit 10.48 to the Registrant's Form 10-K for the year ended December 31, 1997 10.9* First Amendment to the Deferred X Compensation Trust 10.10* Executive Reimbursement Group Exhibit 10.8 to 1998 10-K Insurance Policy 10.11* Change of Control Severance Benefit Exhibit 10.4 to the 9/30/98 10-Q Plan 10.12* Severance Benefit for Certain Exhibit 10.10 to 1998 10-K Executive Officers 10.13* Executive Management Incentive Plan Exhibit 10.11 to 1998 10-K 10.14* Employment and Noncompetition Exhibit 10.1 to the AMSG f/k/a UWS' Agreement of Samuel V. Miller dated Form 10-Q for the quarter ended April 7, 1998 March 31, 1998 10.15* Amendment No. 1 to Employment and Exhibit 10.13 to 1998 10-K Noncompetition Agreement of Samuel V. Miller dated as of September 25, 1998 EX-2 10.16 Employment and Noncompetition Exhibit 4.1 to the AMSG f/k/a UWS' Agreement between American Medical Form 10-K for the year ended Security Holdings, Inc. and Wallace December 31, 1996 (the "1996 10-K") J. Hilliard ("Hilliard Agreement") 10.17 Option Surrender Agreement dated Exhibit 10.3 to 3/31/99 10-Q March 30, 1999 between American Medical Security Holdings, Inc. and Wallace J. Hilliard 10.18 Settlement Agreement between AMSG Exhibit 10.3 to Newco/UWS' f/k/a UWS, Wallace J. Hilliard and Registration Statement on Form 10, Ronald A. Weyers dated April 1, 1998 as amended (File No. 1-14177) 10.19 Registration Rights and Stock Exhibit 2.1 to AMSG f/k/a UWS' Restriction Agreement between AMSG Registration Statement on Form S-4, f/k/a UWS, Wallace J. Hilliard and as amended (No. 333-10935) Ronald A. Weyers dated December 3, 1996 10.20 Registration Rights Agreement Exhibit 10.19 to 1998 10-K between the Registrant and Blue Cross Blue Shield United of Wisconsin ("BCBSUW") dated as of September 1, 1998 10.21 Various service agreements between Exhibits 10.13 to 10.25 and Exhibit BCBSUW and AMSG f/k/a UWS and/or its 10.27 to the 1997 10-K subsidiaries (assigned to Newco/UWS) 21 Subsidiaries of the Registrant X 23 Consent of Ernst & Young LLP X 27.1 Financial Data Schedule X * Indicates compensatory plan or arrangement.
EX-3 EX-3.2 2 EXHIBIT 3.2 BYLAWS OF AMERICAN MEDICAL SECURITY GROUP, INC. (AS AMENDED AND RESTATED NOVEMBER 17, 1999) ARTICLE I. OFFICES 1.01. PRINCIPAL AND BUSINESS OFFICES. The Corporation may have such principal and other business offices, either within or without the State of Wisconsin, as the Board of Directors may designate or as the business of the Corporation may require from time to time. 1.02. REGISTERED OFFICE. The registered office of the Corporation required by the Wisconsin Business Corporation Law to be maintained in the State of Wisconsin may be, but need not be, identical to the principal office in the state of Wisconsin; and the address of the registered office may be changed from time to time by any officer or by the registered agent. The business office of the registered agent of the Corporation shall be identical to the registered office. ARTICLE II. SHAREHOLDERS 2.01. ANNUAL MEETING. The Annual Meeting of the Shareholders shall be held at the principal office of the Corporation in the City of Green Bay, Brown County, Wisconsin, unless the Board of Directors shall designate another location either within or without the State of Wisconsin. The Annual Meeting shall take place on the last Thursday of May each year or at such other time and date as may be fixed by or under the authority of the Board of Directors. If the day fixed for the Annual Meeting shall be a legal holiday in the State of Wisconsin, such meeting shall be held on the next succeeding business day. At such meeting the Shareholders shall elect directors and transact such other business as shall lawfully come before them. A. ELECTIONS AND OTHER BUSINESS. Nominations of persons for election to the Board of Directors of the Corporation and the proposal of business to be considered by the Shareholders may be made at the Annual Meeting: 1. Pursuant to the Corporation's notice of meeting; 2. By or at the direction of the Board of Directors; or 3. By any Shareholder of the Corporation who is a Shareholder of record at the time of the giving of the notice provided for in these Bylaws and who is entitled to vote at the meeting and complies with the notice procedures set forth below. B. NOMINATIONS AND SUBMISSION OF BUSINESS MATTERS. For nominations or other business to be properly brought before an Annual Meeting by a Shareholder, the Shareholder must have given timely notice thereof in writing to the Secretary of the Corporation. Timely notice is that notice which is received by the Secretary at the Corporation's principal office not less than sixty (60) days nor more than ninety (90) days prior to the date on which the Corporation first mailed its proxy materials for the prior year's Annual Meeting, provided, however, that in the event the date of the Annual Meeting is advanced by more than thirty (30) days or delayed by more than sixty (60) days from the last Thursday in May, notice by the Shareholder, to be timely, must be received, as provided above, not earlier than the ninetieth (90th) day prior to the date of such Annual Meeting and not later than the close of business on the later of (x) the sixtieth (60) day prior to such Annual Meeting, or (y) the tenth (10th) day on which public announcement of the date of such a meeting is first made. Such Shareholder's notice shall be signed by the Shareholder of record who intends to make the nomination or introduce the other business (or his or her duly authorized proxy or other representative), shall bear the date of signature of such Shareholder or representative, and shall set forth: 1. The name and address, as they appear on the Corporation's books, of such Shareholder and the beneficial owner(s), if any, on whose behalf the nomination or proposal is made; 2. The class and number of shares of the Corporation which are beneficially owned by such Shareholder or beneficial owner(s); 3. A representation that such Shareholder is a holder of record of shares entitled to vote at such meeting and intends to appear in person or by proxy at the meeting to make the nomination or introduce the other business specified in the notice; 4. In the case of any proposed nomination for election or reelection as a director: (a) The name and residence address of the nominee; (b) A description of all arrangements or understandings between such Shareholder or beneficial owner(s) and each nominee and any other person(s) (naming such person(s)) pursuant to which the nomination is to be made by the Shareholder; (c) Such other information regarding each nominee proposed by such Shareholder as would be required to be disclosed in solicitations of proxies for elections of directors, or would be otherwise required to be disclosed, in each case pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended, including any information that would be required to be included in a proxy statement filed pursuant to Regulation 14A had the nominee been nominated by the Board of Directors; and (d) The written consent of each nominee to be named in a proxy statement and to serve as a director of the Corporation if so elected; and 5. In the case of any other business that such Shareholder proposes to bring before the meeting, (a) A brief description of the business desired to be brought before the meeting, and, if the business includes a proposal to amend these Bylaws, the language of the proposed amendment; (b) Such Shareholder's and beneficial owner's(s') reasons for conducting such business at such time; and (c) Any material interest in such business of such Shareholder or beneficial owners(s). Notwithstanding anything in the above paragraph to the contrary, in the event that the number of directors to be elected to the Board of Directors of this Corporation is increased and there is no public announcement naming all of the nominees for director or specifying the size of the increased Board of Directors made by the Corporation at least seventy (70) days prior to the last Thursday in May, a Shareholder's notice required by this Section shall also be considered timely, but only with respect to nominees for new positions created by such increase, if it is received by the Secretary at the Corporation's principal office not later than the close of business on the tenth (10th) day following the day on which such public announcement is first made by the Corporation. 2.02. SPECIAL MEETINGS. Special meetings of the Shareholders may be called by the Chairman of the Board, and shall be called by the Secretary on written request of a majority of members of the Board of Directors, or on written request of the holders of at least ten (10%) percent of the Corporation's shares entitled to vote on a matter. The request shall be signed, dated and delivered to the Secretary describing one (1) or more purposes for which the meeting is to be held. The Board of Directors shall set the place of the meeting. If no such designation is made, the place of the meeting shall be the principal business office of the Corporation in the State of Wisconsin, but any meeting may be adjourned to reconvene at any place designated by a vote of a majority of the shares represented thereat. A. ELECTIONS AND OTHER BUSINESS. Nominations of persons for election to the Board of Directors may be made at a Special Meeting at which directors are to be elected pursuant to such notice of meeting: 1. By or at the direction of the Board of Directors; or 2. By any Shareholder of the Corporation who: (a) Is a Shareholder of record at the time of giving notice of the meeting, (b) Is entitled to vote at the meeting, and (c) Complies with the notice procedures set forth below. B. NOMINATIONS AND SUBMISSION OF BUSINESS MATTERS. Only such business as shall have been described in such notice shall be conducted at the Special Meeting. Any Shareholder desiring to nominate persons for election to the Board of Directors at a Special Meeting shall cause written notice to be received by the Secretary of the Corporation at its principal office not earlier than ninety (90) days prior to such Special Meeting and not later than the close of business on the later of (x) the sixtieth (60th) day prior to such Special Meeting or (y) the tenth (10th) day following the day on which public announcement is first made of the date of such Special Meeting and of the nominees proposed by the Board of Directors to be elected at such meeting. Such written notice shall be signed by the Shareholder of record who intends to make the nomination (or his or her duly authorized proxy or other representative), shall bear the date of signature of such Shareholder or other representative, and shall set forth: 1. The name and address, as they appear on the Corporation's books, of such Shareholder and the beneficial owner(s), if any, on whose behalf the nomination is made; 2. The class and number of shares of the Corporation which are beneficially owned by such Shareholder or beneficial owner(s); 3. A representation that such Shareholder is a holder of record of shares of the Corporation entitled to vote at such meeting and intends to appear in person or by proxy at the meeting to make the nomination specified in the notice; 4. The name and residence address of the person(s) to be nominated; 5. A description of all arrangements or understandings between such Shareholder or beneficial owner(s) and each nominee and any other person(s) (naming such person(s)) pursuant to which the nomination is to be made by such Shareholder; 6. Such other information regarding each nominee proposed by such Shareholder as would be required to be disclosed in solicitations of proxies for elections of directors, or would be otherwise required to be disclosed, in each case pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended, including any information that would be required to be included in a proxy statement filed pursuant to Regulation 14A had the nominee been nominated by the Board of Directors; and 7. The written consent of each nominee to be named in a proxy statement and to serve as a director of the Corporation if so elected. 2.03. NOTICE OF ANNUAL OR SPECIAL MEETING. Notice may be communicated by telegraph, teletype, facsimile or other form of wire or wireless communication, or by mail or private carrier, and, if these forms of personal notice are impracticable, notice may be communicated by public announcement. Such notice stating the place, day and hour of the meeting and, in case of a special meeting, a description of each purpose for which the meeting is called, shall be communicated or sent not less than ten days nor more than sixty (60) days before the date of the meeting, by or at the direction of the Chairman of the Board or the Secretary, or other officer or persons calling the meeting, to each Shareholder of record entitled to vote at such meeting. Written notice by the Corporation to its Shareholders is effective when mailed and may be addressed to the Shareholder's address shown in the Corporation's current record of Shareholders. 2.04. UNANIMOUS CONSENT WITHOUT MEETING. Any action that may be taken at a meeting of the Shareholders may be taken without a meeting if a consent in writing setting forth the action so taken shall be signed by all of the Shareholders entitled to vote with respect to the subject matter thereof. 2.05. FIXING OF RECORD DATE. A "Shareholder" of the Corporation shall mean the person in whose name shares are registered in the stock transfer books of the Corporation or the beneficial owner of shares to the extent of the rights granted by a nominee certificate on file with the Corporation. Such nominee certificates, if any, shall be reflected in the stock transfer books of the Corporation. The Board of Directors may fix, in advance, a date as the record date for one or more voting groups for any determination of Shareholders entitled to notice of a Shareholder's meeting, to demand a special meeting, to vote, or to take any other action, such date in any case to be not more than seventy (70) days prior to the meeting or action requiring such determination of Shareholders, and may fix the record date for determining Shareholder entitled to share a dividend or distribution. If no record date is fixed for the determination of Shareholders entitled to demand a Shareholder meeting, to notice of or to vote at a meeting of Shareholders, or to consent to action without a meeting, (a) the close of business on the day before the Corporation received the first written demand for a Shareholder meeting, (b) the close of business on the day before the first notice of the meeting is mailed or otherwise delivered to Shareholders, or (c) the close of business on the day before the first written consent to Shareholder action without a meeting is received by the Corporation, as the case may be, shall be the record date for the determination of Shareholders. If no record date is fixed for the determination of Shareholders entitled to receive a share dividend or distribution (other than a distribution involving a purchase, redemption or other acquisition of the Corporation's shares), the close of business on the day on which the resolution of the Board of Directors is adopted declaring the dividend or distribution shall be the record date. When a determination of Shareholders entitled to vote at any meeting of Shareholders has been made as provided in this Section, such determination shall be applied to any adjournment thereof unless the Board of Directors fixes a new record date and except as otherwise required by law. A new record date must be set if a meeting is adjourned to a date more than one-hundred twenty (120) days after the date fixed for the original meeting. 2.06. VOTING RECORD. The Secretary shall, before each meeting of Shareholders, make a complete list of the Shareholders entitled to vote at such meeting, or any adjournment thereof, with the address of and the number of shares held by each. Such record shall be produced and kept open at the time and place of the meeting and shall be subject to the inspection of any Shareholder during the whole time of the meeting for the purposes of the meeting. The original stock transfer books shall be prima facie evidence as to who are the Shareholders entitled to examine such record or transfer books or to vote at any meeting of Shareholders. Failure to comply with the requirements of this Section shall not affect the validity of any action taken at such meeting. 2.07. QUORUM. Shares entitled to vote as a separate voting group as defined in the Wisconsin Business Corporation Law may take action on a matter at a meeting only if a quorum of those shares exists with respect to that matter. Unless the Articles of Incorporation or the Wisconsin Business Corporation Law provide otherwise, a majority of the votes entitled to be cast on the matter by a voting group constitutes a quorum of that voting group for action on that matter. Once a share is represented for any purposes at a meeting, other than for the purpose of objecting to holding the meeting or transacting business at the meeting, it is considered present for purposes of determining whether a quorum exists for the remainder of the meeting and for any adjournment of that meeting unless a new record date is or must be set for that adjourned meeting. If a quorum exists, action on a matter by a voting group is approved if the votes cast within the voting group favoring the action exceed the votes cast opposing the action, unless the Articles of Incorporation or the Wisconsin Business Corporation Law require a greater number of affirmative votes. "Voting group" means any of the following: A. All shares of one or more classes or series that under the Articles of Incorporation or the Wisconsin Business Corporation Law are entitled to vote and be counted together collectively on a matter at a meeting of Shareholders. B. All shares that under the Articles of Incorporation or the Wisconsin Business Corporation Law are entitled to vote generally on a matter. Though less than a quorum of the outstanding shares are represented at a meeting, a majority of the shares so represented may adjourn the meeting from time to time without further notice. At such adjourned meeting at which a quorum shall be present or represented, any business may be transacted which might have been transacted at the meeting as originally notified. 2.08. PROXIES. At all meetings of Shareholders, a Shareholder entitled to vote may vote in person or by proxy. A Shareholder may appoint a proxy to vote or otherwise act for the Shareholder by signing an appointment form, either personally, by his or her attorney-in-fact, or in any other manner authorized by the Wisconsin Business Corporation Law. Such proxy appointment is effective when received by the Secretary or other officer or agent of the Corporation authorized to tabulate votes. Unless otherwise provided in the appointment form of proxy, a proxy appointment may be revoked at any time before it is voted, by written notice filed with the Secretary or the acting Secretary of the meeting, by oral notice given by the Shareholder to the presiding officer during the meeting, or in any other manner authorized by the Wisconsin Business Corporation Law. The presence of a Shareholder who has filed his or her proxy appointment shall not of itself constitute a revocation. No proxy appointment shall be valid after eleven months from the date of its execution, unless otherwise provided in the appointment form of proxy. The Board of Directors shall have the power and authority to make rules establishing presumptions as to the validity and sufficiency of proxy appointments. 2.09. VOTING OF SHARES. Each outstanding share shall be entitled to one vote upon each matter submitted to a vote at a meeting of Shareholders, except to the extent that the voting rights of the shares of any voting group or groups are enlarged, limited or denied by the Articles of Incorporation. 2.10. VOTING OF SHARES BY CERTAIN HOLDERS. A. OTHER CORPORATIONS. Shares standing in the name of another corporation may be voted either in person or by proxy, by the president of such corporation or any other officer appointed by such president. An appointment form of proxy executed by any principal officer of such other corporation or assistant thereto shall be conclusive evidence of the signer's authority to act, in the absence of express notice to this Corporation, given in writing to the Secretary of this Corporation, or the designation of some other person by the Board of Directors or by the Bylaws of such other corporation. B. LEGAL REPRESENTATIVES AND FIDUCIARIES. Shares held by an administrator, executor, guardian, conservator, trustee in bankruptcy, receiver or assignee for creditors may be voted by him or her, either in person or by proxy, without a transfer of such shares into his or her name, provided that there is filed with the Secretary before or at the time of meeting proper evidence of his or her incumbency and the number of shares held by him or her, either in person or by proxy. An appointment form of proxy executed by a fiduciary shall be conclusive evidence of the signer's authority to act, in the absence of express notice to this Corporation, given in writing to the Secretary, that such manner of voting is expressly prohibited or otherwise directed by the document creating the fiduciary relationship. C. PLEDGEES. A Shareholder whose shares are pledged shall be entitled to vote such shares until the shares have been transferred into the name of the pledgee, and thereafter the pledgee shall be entitled to vote the shares so transferred; provided, however, a pledgee shall be entitled to vote shares held of record by the pledgor if the Corporation receives acceptable evidence of the pledgee's authority to sign. D. TREASURY STOCK AND SUBSIDIARIES. Neither treasury shares, nor shares held by another corporation if a majority of the shares entitled to vote for the election of directors of such other corporation is held by this Corporation, shall be voted at any meeting or counted in determining the total number of outstanding shares entitled to vote, but shares of its own issue held by this Corporation in a fiduciary capacity, or held by such other corporation in a fiduciary capacity, may be voted and shall be counted in determining the total number of outstanding shares entitled to vote. E. MINORS. Shares held by a minor may be voted by such minor in person or by proxy and no such vote shall be subject to disaffirmance or avoidance, unless prior to such vote the Secretary of the Corporation has received written notice or has actual knowledge that such Shareholder is a minor. Shares held by a minor may be voted by a personal representative, administrator, executor, guardian or conservator representing the minor if evidence of such fiduciary status, acceptable to the Corporation, is presented. F. INCOMPETENTS AND SPENDTHRIFTS. Shares held by an incompetent or spendthrift may be voted by such incompetent or spendthrift in person or by proxy and no such vote shall be subject to disaffirmance or avoidance, unless prior to such vote the Secretary of the Corporation has actual knowledge that such Shareholder has been adjudicated an incompetent or spendthrift or actual knowledge of judicial proceedings for appointment of a guardian. Shares held by an incompetent or spendthrift may be voted by a personal representative, administrator, executor, guardian or conservator representing the minor if evidence of such fiduciary status, acceptable to the Corporation, is presented. G. JOINT TENANTS. Shares registered in the names of two (2) or more individuals who are named in the registration as joint tenants may be voted in person or by proxy signed by any one (1) or more of such individuals if either (i) no other such individual or his or her legal representative is present and claims the right to participate in the voting of such shares or prior to the vote files with the Secretary of the Corporation a contrary written voting authorization or direction or written denial of authority of the individual present or signing the appointment form of proxy proposed to be voted, or (ii) all such other individuals are deceased and the Secretary of the Corporation has no actual knowledge that the survivor has been adjudicated not to be the successor to the interests of those deceased. 2.11. CONDUCT OF MEETINGS. The Chairman of the Board, or in the Chairman's absence, the President, or, in their absence such Vice President as is designated by the Board of Directors, shall call the meeting to order and act as Chairman of the meeting. Only persons nominated in accordance with the procedures set forth in Sections 2.01 and 2.02, shall be eligible to serve as directors. Only such business as shall have been brought before a meeting in accordance with the procedures set forth in Section 2.01 and 2.02, shall be eligible to be conducted. The Chairman of the meeting shall have the power and duty to determine whether any nomination or any business proposed to be brought before the meeting was made in accordance with the procedures set forth in Sections 2.01 and 2.02, and, if any proposed nomination or business is not in compliance therewith, to declare that such defective proposal shall be disregarded. 2.12. PUBLIC ANNOUNCEMENT. For purposes of Sections 2.01 and 2.02, "public announcement" shall mean disclosure in a press release reported by the Dow Jones News Service, Associated Press, or comparable national news service or in a document publicly filed by the Corporation with the Securities and Exchange Commission pursuant to Section 13, 14, or 15(d) of the Securities Exchange Act of 1934, as amended. 2.13. INVALIDITY. The Chairman, upon recommendation of the Secretary, may reject a vote, consent, waiver, or proxy appointment, if the Secretary or other officer or agent of the Corporation who is authorized to tabulate votes, acting in good faith, has reasonable doubt about the validity of the signature on it or about the signatory's authority to sign for the Shareholder. The Corporation and its officer or agent who accepts or rejects a vote, consent, waiver or proxy appointment in good faith and in accordance with the Wisconsin Business Corporation Law shall not be liable for damages to the Shareholders for consequences of the acceptance or rejection. 2.14. WAIVER OF NOTICE. A Shareholder may waive any notice required by the Wisconsin Business Corporation Law, the Articles of Incorporation, or these Bylaws before or after the date and time stated in the notice. The waiver shall be in writing and signed by the Shareholder entitled to the notice, contain the same information that would have been required in the notice under the Wisconsin Business Corporation Law (except that the time and place of meeting need not be stated), and be delivered to the Corporation for inclusion in the corporate records. A Shareholder's attendance at any Annual Meeting or Special Meeting, in person or by proxy, waives objection to all of the following: (a) lack of notice or defective notice of the meeting, unless the Shareholder promptly upon arrival or at the beginning of the meeting objects to holding, or transacting business at, the meeting; and (b) consideration of a particular matter at the meeting that is not within the purpose described in the meeting notice, unless the Shareholder objects to considering the matter when it is presented. ARTICLE III. BOARD OF DIRECTORS 3.01. NUMBER OF DIRECTORS. Within the limits established in the Articles of Incorporation, the number of directors of the Corporation shall be such number as shall be determined by the Board of Directors from time to time. 3.02. TERM OF OFFICE. Elected directors shall hold office for a term of three (3) years and until their successors are elected and qualified, except as otherwise provided in this Section or until their death, resignation or removal. The Board of Directors shall be divided into three (3) classes of three (3) or more directors each, with, as nearly as possible, an equal number of directors in each class. The term of office of the first class of directors shall expire at the first annual meeting after their initial election and when their successors are elected and qualified, the term of office of the second class shall expire at the second annual meeting after their initial election and when their successors are elected and qualified, and the terms of office of the third class shall expire at the third annual meeting after their initial election and when their successors are elected and qualified. At each annual meeting after the initial classification of the Board of Directors, the class of directors whose term expires at the time of such election shall be elected to hold office until the third succeeding annual meeting and until their successors are elected and qualified. 3.03. NOMINATIONS. Nominations for the election of directors shall be made in accordance with the provisions of Sections 2.01 and 2.02 hereof, which requirements are hereby incorporated by reference in this Section 3.03. 3.04. REGULAR MEETINGS. A regular meeting of the Board of Directors shall be held without other notice than this Bylaw immediately after, and at the same place as, the Annual Meeting of Shareholders, for election of corporate officers and transaction of other business. The Board of Directors may provide by resolution the time and place for holding additional meetings without other notice than such resolution. 3.05. SPECIAL MEETINGS. Special Meetings of the Board of Directors shall be held whenever called by the Chairman of the Board or the Secretary upon written request of any three (3) directors. The Secretary shall give sufficient notice of such meeting, to be not less than two (2) days, in person or by mail or by telephone, telegraph, teletype, facsimile or other form of wire or wireless communication as to enable the directors so notified to attend such meeting. The Chairman or Secretary who calls the meeting may fix any place, within or without the State of Wisconsin, as the place for holding any Special Meeting of the Board of Directors. 3.06. WAIVER OF NOTICE. Whenever any notice whatsoever is required to be given to any director of the Corporation under the Articles of Incorporation or Bylaws or any provisions of law, a waiver thereof in writing, signed at any time, whether before or after the time of meeting, by the director entitled to such notice, shall be deemed equivalent to the giving of such notice, and the Corporation shall retain copies of such waivers in its corporate records. A director's attendance at or participation in a meeting waives any required notice to him or her of the meeting unless the director at the beginning of the meeting or promptly upon his or her arrival objects to holding the meeting and does not thereafter vote for or assent to action taken at the meeting. Neither the business to be transacted at, nor the purpose of, any regular or special meeting of the Board of Directors need be specified in the notice or waiver of notice of such meeting. 3.07. QUORUM. Except as otherwise provided by the Wisconsin Business Corporation Law, a majority of the number of directors (determined as provided in Section 3.01) shall constitute a quorum of the Board of Directors. Except as otherwise provided by the Wisconsin Business Corporation Law, a majority of the number of directors appointed to service on a committee shall constitute a quorum of the committee. 3.08. VACANCIES. Vacancies, including those created by an increase in the number of directors in the Board of Directors, may be filled by the remaining directors. A director elected to fill a vacancy shall serve for the unexpired term of his or her predecessor. In the absence of action by the remaining directors, the Shareholders may fill such vacancy at a Special Meeting in accordance with the Articles of Incorporation, or by unanimous consent according to these Bylaws. 3.09. REMOVAL. The Shareholders may remove one (1) or more directors, with or without cause, at a meeting called for that purpose, the notice of which reflects that purpose, in accordance with the Articles of Incorporation of this Corporation. 3.10. COMPENSATION. A director may receive such compensation for services as is determined by resolution of the Board irrespective of any personal interest of its members. A director also may serve the Corporation in any other capacity and receive compensation therefore. The Board of Directors also shall have authority to provide for or to delegate authority to an appropriate committee to provide for reasonable pensions, disability or death benefits and other benefits or payments, to directors, officers and employees and to their estates, families, dependents or beneficiaries on account of prior services rendered to the Corporation by such directors, officers and employees. 3.11. GENERAL POWERS. All corporate powers shall be exercised by or under the authority of, and the business and affairs of the Corporation shall be managed under the direction of, the Board of Directors, subject to any limitation set forth in these Bylaws or the Articles of Incorporation. 3.12. CONDUCT OF MEETINGS. The Chairman of the Board, or in the Chairman's absence the President, or in their absence such Vice President as is designated by the Board of Directors, shall call meetings of the Board of Directors to order and shall act as Chairman of the meeting. The Secretary of the Corporation shall act as Secretary of all meetings of the Board of Directors, but in the absence of the Secretary, the presiding officer may appoint an Assistant Secretary or any director or other person present or participating to act as Secretary of the meeting. 3.13. MANNER OF ACTING. If a quorum is present or participating when a vote is taken, the affirmative vote of a majority of directors present or participating is the act of the Board of Directors or a committee of the Board of Directors, unless the Wisconsin Business Corporation Law or the Articles of Incorporation or these Bylaws require the vote of a greater number of directors. 3.14. PRESUMPTION OF ASSENT. A director of the Corporation who is present at or participates in a meeting of the Board of Directors or a committee thereof which he or she is a member, at which action on any corporate matter is taken, shall be presumed to have assented to the action taken unless his or her dissent shall be entered in the minutes of the meeting or unless he or she shall file his or her written dissent to such action with the person acting as the Secretary of the meeting before the adjournment thereof or shall forward such dissent by registered mail to the Secretary of the Corporation immediately after the adjournment of the meeting. Such right to dissent shall not apply to a director who voted in favor of such action. 3.15. UNANIMOUS CONSENT WITHOUT MEETING. Any action required or permitted by the Articles of Incorporation or Bylaws or any provision of law to be taken by the Board of Directors at a meeting or by resolution may be taken without a meeting if a consent in writing, setting forth the action so taken, shall be signed by all of the directors then in office. 3.16. MEETING BY TELEPHONE OR BY OTHER COMMUNICATION TECHNOLOGY. Meetings of the Board of Directors or committees may be conducted by telephone or by other communication technology in accordance with Section 180.0820 of the Wisconsin Business Corporation Law. 3.17. COMMITTEES. A. REGULAR COMMITTEES. 1. GENERAL DESCRIPTION. In order to facilitate the work of the Board of Directors of this Corporation, the following regular committees shall be elected from the membership of the Board of Directors at the regular meeting held in May of each year (or at such other time as the Board of Directors may determine): Executive Committee Finance Committee Compensation Committee Audit Committee Each committee shall consist of such number of members, not less than three (3), as shall be determined by the Board of Directors. The Chairman of the Board of Directors, and in the Chairman's absence the President, and in their absence, such Vice President as is designated by the Board of Directors, shall submit nominations for such committee memberships. Committee members shall hold office until the next board meeting at which committee elections are conducted in accordance with these Bylaws, and until their successors are elected and qualified. Each Regular Committee of the Board of Directors may exercise the authority of the full Board within the scope of the duties and powers delegated to it in these Bylaws, except that no committee of this Board shall do any of the following: (a) Authorize distributions; (b) Approve or propose to Shareholders action that the Wisconsin Business Corporation Law requires to be approved by Shareholders; (c) Fill vacancies on the Board of Directors or, except as provided herein, on any of its committees; (d) Amend the Articles of Incorporation; (e) Adopt, amend or repeal the Bylaws; (f) Approve a plan of merger not requiring Shareholder approval; (g) Authorize or approve reacquisition of shares, except according to a formula or method prescribed by the full Board; or (h) Authorize or approve the issuance or sale or contract for sale of shares or determine the designation and relative rights, preferences and limitations of a class or series of shares, except that the Board of Directors may authorize a committee or a senior executive officer of the Corporation to do so within limits prescribed by the Board of Directors. 2. THE EXECUTIVE COMMITTEE. When the Board of Directors is not in session, the Executive Committee shall have and may exercise all of the powers and authority of the full Board in the management of the business and affairs of the Corporation to the extent allowed by the Wisconsin Business Corporation Law. 3. THE FINANCE COMMITTEE. When the Board of Directors is not in session, the Finance Committee shall have and may exercise all of the powers of the full Board of Directors solely with regard to those matters which are within the scope of the Finance Committee's designated duties, as provided herein. The Chairman of the Board of Directors shall be a member of the Finance Committee. The Finance Committee shall: (a) Review and approve the Corporation's investment policies and guidelines: (b) Monitor performance of the Corporation's investment portfolio; (c) Consult with management regarding material transactions involving real estate, accounts receivable and other assets; (d) Monitor the amount and types of all insurance that should be carried by this Corporation; (e) Monitor the Corporation's relationship with its lenders and its compliance with financing agreements including debt covenants; (f) Consult with management concerning the capital structure of the Corporation; (g) Monitor investment options and performance offered in the Corporation's retirement plan; and (h) Carry out such special assignments as the Board of Directors may, from time to time, give to the Finance Committee. 4. THE COMPENSATION COMMITTEE. When the Board of Directors is not in session, the Compensation Committee shall have and may exercise all of the powers of the full Board solely with regard to those matters which are within the scope of the Compensation Committee's designated duties, as provided herein. The Compensation Committee shall: (a) Evaluate the performance of the Chief Executive Officer and other executive officers against objectives; (b) Review and approve the compensation (including salary, bonus, stock options and other appropriate equity or long-term incentives, and any severance benefits) of the Chairman of the Board, the Chief Executive Officer and other executive officers; (c) Administer compensation plans for executive officers and directors; and (d) Review, on a general policy level basis, the compensation and benefits of officers, managers and employees for appropriateness; (e) Act as the Nominating Committee for directors and make recommendations to the Board of Directors for types, methods and levels of directors' compensation; (f) Administer the Corporation's equity incentive plan or any other equity-based plans, including the review and approval of all grants hereunder; and (g) Carry out such special assignments as the Board of Directors may, from time to time, give to the Compensation Committee. 5. THE AUDIT COMMITTEE. The Audit Committee shall have and may exercise all of the powers of the full Board of Directors solely with regard to those matters which are within the scope of the Audit Committee's designated duties, as provided herein. The Audit Committee shall: (a) Select and engage the independent certified public accountants to audit the financial statements of the Corporation and its subsidiaries; (b) Meet with the independent auditors and financial management of the Corporation to review the scope of the proposed audit for the current year and the audit procedures to be utilized, and at the conclusion thereof, review such audit including any comments or recommendations of the independent auditors; (c) Review the internal audit function of the Corporation including the independence and authority of its reporting obligations, the proposed audit plans for the coming year, the coordination of such plans with the independent auditors, and summaries of findings of completed audits; (d) Review with the independent accountants and management the financial statements to determine that the independent auditors are satisfied with the disclosure and content of the financial statements; (e) Review with the independent auditors, the Corporation's internal auditor, and financial and accounting personnel, the adequacy and effectiveness of the accounting and financial controls of the Corporation; (f) Provide sufficient opportunity for the internal and independent auditors to meet with the members of the Audit Committee without members of management present; (g) Review related party transactions and conflict of interest statements for appropriateness; (h) Carry out such special assignments as the Board of Directors may, from time to time, give to the Audit Committee. B. SPECIAL COMMITTEES. In addition to the foregoing Regular Committees, the Board of Directors may, from time to time, establish Special Committees and specify the composition, functions and authority of any such Special Committee. C. VACANCIES; TEMPORARY APPOINTMENTS. When, for any cause, a vacancy occurs in any Regular Committee, the remaining committee members, by majority vote, may fill such vacancy by a temporary appointment of a director on the Board of Directors not on the subject committee to fill the vacancy until the next Board Meeting at which time the full Board of Directors shall fill the vacancy. D. ALTERNATE COMMITTEE MEMBERS. All members of the Board of Directors who are not members of a given committee shall be alternate members of such committee and may take the place of any absent member or members at any meeting of such committee, upon request by the Chairman of the Board of Directors, if there is one, the President or upon request by the chairman of such meeting. E. COMMITTEE MINUTES AND REPORTS. All of the foregoing committees shall keep minutes and records of all of their meetings and activities and shall report the same to the Board of Directors at its next regular meeting. Such minutes and records shall be available for inspection by the directors at all times. ARTICLE IV. OFFICERS 4.01. GENERALLY. The principal officers of the Corporation shall be a Chairman of the Board (Chief Executive Officer), a President, one (1) or more Vice Presidents designated as executive officers, a Chief Financial Officer, a Secretary, and a Treasurer. The Board of Directors shall elect the principal officers annually at the Annual Meeting. All such officers shall hold office for a period of one (1) year and until their successors are duly elected and qualified, or until their prior death, resignation or removal. Additionally, one or more Vice Presidents not designated as executive officers may be appointed by the President to serve at the will of the President. 4.02. REMOVAL. Any officer or agent may be removed by the Board of Directors with or without cause whenever in its judgment the best interests of the Corporation would be served thereby, but such removal shall be without prejudice to the contract rights, if any, of the person so removed. Election or appointment shall not of itself create contract rights. 4.03. VACANCIES. A vacancy in any principal office because of death, resignation, removal, or otherwise, shall be filled by the Board of Directors for the unexpired portion of the term. The Board of Directors may, from time to time, omit to elect one (1) or more officers, or may omit to fill a vacancy, and in such case, the designated duties of such officer, unless otherwise provided in these Bylaws, shall be discharged by the Chairman of the Board or such other officers as he or she may designate. 4.04. CHAIRMAN OF THE BOARD. The Chairman of the Board, who shall also be the Chief Executive Officer, shall preside at all meetings of the Shareholders and of the directors and shall do and perform such other duties as from time to time may be assigned to that office by the Board of Directors. 4.05. PRESIDENT. The President shall have general supervision of the business and affairs of the Corporation. The President may sign and execute all authorized bonds, notes, checks, contracts, or other obligations in the name of the Corporation. The President shall perform such other duties as from time to time may be assigned to him or her by the Board of Directors. 4.06. VICE PRESIDENTS. Should the Chairman of the Board or the President be absent or unable to act, the Board of Directors shall designate a Vice President or other officer to discharge the duties of the vacant office with the same power and authority as is vested in that office. The Vice Presidents shall perform such other duties as from time to time may be assigned to them by the President or the Board of Directors. Vice Presidents appointed by the President shall perform such duties as may be assigned to them from time to time by the President or these Bylaws and shall serve at the will of the President and may be removed by the President at any time without action of the Board of Directors. 4.07. SECRETARY. The Secretary shall keep a record of the minutes of the meetings of the Shareholders, the Board of Directors and any committees of the Board of Directors. He or she shall countersign all instruments and documents executed by the Corporation; affix to instruments and documents the seal of the Corporation; keep in books therefore the transactions of the Corporation; see that all notices are duly given in accordance with the provisions of these Bylaws or as required by law; and perform such other duties as usually are incident to such office or as may be assigned by the Chairman of the Board, the President or the Board of Directors. 4.08. CHIEF FINANCIAL OFFICER. The Chief Financial Officer shall have overall charge of all of the financial affairs of the Corporation, including charge and custody of and responsibility for the Corporation's books of account. The Chief Financial Officer shall perform such duties as usually are incident to such office or as may be assigned by the Chairman of the Board, the President or the Board of Directors. 4.09. TREASURER. The Treasurer, subject to the control of the Board of Directors, shall collect, receive, and safely keep all monies, funds and securities of the Corporation, and attend to all its pecuniary affairs, and perform such other duties as usually are incident to such office or as may be assigned by the Chairman of the Board, the President, the Chief Financial Officer or the Board of Directors. 4.10. ASSISTANTS AND ACTING OFFICERS. The Chairman of the Board, the President and the Board of Directors shall each have the power to appoint any person to act as assistant to any officer, or as agent for the Corporation in the officer's stead, or to perform the duties of such officer whenever for any reason it is impracticable for the officer to act personally, and the assistant or acting officer or other agent so appointed by the Chairman of the Board, the President or the Board of Directors shall have the power to perform all the duties of the office to which he or she is so appointed to be assistant, or as to which he or she is so appointed to act, except as such power otherwise may be defined or restricted by the Chairman of the Board, the President or the Board of Directors. Any person appointed to act as assistant to any officer, or as agent for the Corporation in the officer's stead, or to perform the duties of such officer whenever for any reason it is impracticable for the officer to act personally, shall serve at the will of the President and may be removed at any time by the President without action of the Board of Directors. ARTICLE V. FUNDS OF THE CORPORATION 5.01. FUNDS. All funds of the Corporation shall be deposited or invested in such depositories or in such securities as may be authorized from time to time by the Board of Directors or appropriate committee under authorization of the Board of Directors. 5.02. NAME. All investments and deposits of funds of the Corporation shall be made and held in its corporate name, except that securities kept under a custodial agreement or trust arrangement with a bank or banking and trust company may be issued in the name of a nominee of such bank or banking and trust company and except that securities may be acquired and held in bearer form. 5.03. LOANS. All loans contracted on behalf of the Corporation and all evidences of indebtedness that are issued in the name of the Corporation shall be under the authority of a resolution of the Board of Directors. Such authorization may be general or specific. 5.04. CONTRACTS. The Board of Directors may authorize one (1) or more officers, or agents, to enter into any contract or execute and deliver any instrument in the name of and on behalf of the Corporation. Such authorization may be general or specific. In the absence of other designation, all deeds, mortgages and instruments of assignment or pledge made by the Corporation shall be executed in the name of the Corporation by the Chairman of the Board, the President or one of the Vice Presidents and by the Secretary or Treasurer; the Secretary, when necessary or required, shall affix the corporate seal thereto; and when so executed no other party to such instrument or any third party shall be required to make any inquiry into the authority of the signing officer or officers. 5.05. DISBURSEMENTS. All monies of the Corporation shall be disbursed by check, draft, or written order only, and all checks and orders for the payment of money shall be signed by such officer or officers as may be designated by the Board of Directors. The officers and employees of the Corporation handling funds and securities of the Corporation shall give surety bonds in such sums as the Board of Directors or appropriate committee may require. 5.06. PROHIBITED TRANSACTIONS. No directors or officer of the Corporation shall borrow money from the Corporation, or receive any compensation for selling, aiding in the sale, or negotiating for the sale of any property belonging to the Corporation, or for negotiating any loan for or by the Corporation. 5.07. VOTING OF SECURITIES OWNED BY THIS CORPORATION. Subject always to the specific directions of the Board of Directors: A. Any shares or other securities issued by any other corporation and owned or controlled by this Corporation may be voted at any meeting of security holders of such other corporation by the Chairman of the Board, the President or in their absence any Vice President of this Corporation who may be present and designated by the Board of Directors; and B. Whenever, in the judgment of the Chairman of the Board, the President, or in their absence, a designated Vice President, it is desirable for this Corporation to execute a proxy or written consent in respect to any shares or other securities issued by any other corporation and owned by this Corporation, such proxy or consent shall be executed in the name of this Corporation by the Chairman of the Board, the President, or a designated Vice President of this Corporation in the order as provided in Subsection A, without necessity of any authorization by the Board of Directors, affixation of corporate seal or countersignature or attestation by another officer. Any person or persons designated in the manner above stated as the proxy or proxies of this Corporation shall have full right, power and authority to vote the shares or other securities issued by such other corporation and owned by this Corporation the same as such shares or other securities might be voted by this Corporation. ARTICLE VI. CERTIFICATES FOR SHARES AND THEIR TRANSFER 6.01. CERTIFICATES FOR SHARES. Certificates representing shares of the Corporation shall be in such form, consistent with law, as shall be determined by the Board of Directors. Such Certificates shall be signed by the Chairman of the Board, the President, or a Vice President, and the Secretary, or by another officer designated by the Chairman of the Board, the President or the Board of Directors. All certificates for shares shall be consecutively numbered or otherwise identified. The name and address of the person to whom the shares represented thereby are issued, with the number of shares and date of issue, shall be entered on the stock transfer books of the Corporation. All certificates surrendered to the Corporation for transfer shall be canceled and no new certificate shall be issued until the former certificate for a like number of shares shall have been surrendered and canceled, except as provided in Section 6.06. 6.02. FACSIMILE SIGNATURES AND SEAL. The seal of the Corporation on any certificates for shares may be a facsimile. The signature of the Chairman of the Board, the President or other authorized officer upon a certificate may be a facsimile if the certificate is manually signed on behalf of a transfer agent, or a registrar, other than the Corporation itself or an employee of the Corporation. 6.03. SIGNATURE BY FORMER OFFICER. In case any officer who has signed or whose facsimile signature has been placed upon any certificate for shares shall have ceased to be such officer before such certificate is issued, it may be issued by the Corporation with the same effect as if he or she were such officer at the date of its issue. 6.04. TRANSFER OF SHARES. Prior to due presentment of a certificate for shares for registration of transfer, the Corporation may treat the Shareholder of such shares as the person exclusively entitled to vote, to receive notifications and otherwise to have and exercise all the rights and powers of an owner. Where a certificate for shares is presented to the Corporation with a request to register for transfer, the Corporation shall not be liable to the owner or any other person suffering loss as a result of such registration of transfer if: A. There were on or with the certificate the necessary endorsements; and B. The Corporation had no duty to inquire into adverse claims or has discharged any such duty. The Corporation may require reasonable assurance that said endorsements are genuine and effective and in compliance with such other regulations as may be prescribed by or under the authority of the Board of Directors: 6.05. RESTRICTIONS ON TRANSFER. The face or reverse side of each certificate representing shares shall bear a conspicuous notation of any restriction imposed by the Corporation upon the transfer of such shares. 6.06. LOST, DESTROYED OR STOLEN CERTIFICATES. Where the owner claims that his or her certificate for shares has been lost, destroyed or wrongfully taken, a new certificate shall be issued in place thereof if the owner: A. So requests before the Corporation has notice that such shares have been acquired by a bona fide purchaser; B. If required by the Corporation, files with the Corporation a sufficient indemnity bond; and C. Satisfies such other reasonable requirements as may be prescribed by or under the authority of the Board of Directors. 6.07. CONSIDERATION FOR SHARES. The shares of the Corporation may be issued for such consideration as shall be fixed from time to time by the Board of Directors, provided that any shares having a par value shall not be issued for a consideration less than the par value thereof. The consideration to be received for shares may consist of any tangible or intangible property or benefit to the Corporation, including cash, promissory notes, services performed, contracts for services to be performed or other securities of the Corporation. When the Corporation receives the consideration for which the Board of Directors authorized the issuance of shares, the shares issued for that consideration are fully paid and nonassessable, except as provided by Section 180.0622 of the Wisconsin Business Corporation Law which may require further assessment for unpaid wages to employees under certain circumstances. The Corporation may place in escrow shares issued for a contract for future services or benefits or a promissory note, or make other arrangements to restrict the transfer of the shares, and may credit distributions in respect of the shares against their purchase price, until the services are performed, the benefits are received or the note is paid. If the services are not performed, the benefits are not received or the note is not paid, the Corporation may cancel, in whole or in part, the shares escrowed or restricted and the distributions credited. 6.08. UNCERTIFICATED SHARES. In accordance with Section 180.0626 of the Wisconsin Business Corporation Law, the Board of Directors may issue any shares of any of its classes or series without certificates. The authorization does not affect shares already represented by certificates until the certificates are surrendered to the Corporation. Within a reasonable time after the issuance or transfer of shares without certificates, the Corporation shall send the Shareholder a written statement of the information required on share certificates by Sections 180.0625 and 180.0627, if applicable, of the Wisconsin Business Corporation Law, and by the Bylaws of the Corporation. The Corporation shall maintain at its offices, or at the office of its transfer agent, an original or duplicate stock transfer book containing the names and addresses of all Shareholders and the number of shares held by each Shareholder. If the shares are uncertificated, the Corporation shall be entitled to recognize the exclusive right of a person registered on its books as such, as the owner of shares for all purposes, and shall not be bound to recognize any equitable or other claim to or interest in such shares on the part of any other person, whether or not it shall have express or other notice thereof, except as otherwise provided by the laws of the State of Wisconsin. 6.09. TRANSFER AGENT AND REGISTRAR. The Corporation may maintain one (1) or more transfer offices or agencies, each in charge of a transfer agent designated by the Board of Directors, where the shares of stock of the Corporation shall be transferable. The Corporation also may maintain one (1) or more registry offices, each in charge of a registrar designated by the Board of Directors, where such shares of stock shall be registered. The same person or entity may be both a transfer agent and registrar. 6.10. STOCK REGULATIONS. The Board of Directors shall have the power and authority to make all such further rules and regulations not inconsistent with the laws of the State of Wisconsin as it may deem expedient concerning the issue, transfer and registration of certificates representing shares of the Corporation. ARTICLE VII. INDEMNIFICATION 7.01. INDEMNIFICATION FOR SPECIAL DEFENSE. Within twenty (20) days after receipt of a written request pursuant to Section 7.03, the Corporation shall indemnify a director or officer, to the extent he or she has been successful on the merits or otherwise in the defense of a proceeding, for all reasonable expenses incurred in the proceeding if the director or officer was a party because he or she is a director or officer of the Corporation. 7.02. OTHER INDEMNIFICATION. A. In cases not included under Section 7.01, the Corporation shall indemnify a director or officer against all liabilities and expenses incurred by the director or officer in a proceeding to which the director or officer was a party because he or she is a director or officer of the Corporation, unless liability was incurred because the director or officer breached or failed to perform a duty he or she owes to the Corporation and the breach or failure to perform constitutes any of the following: 1. A willful failure to deal fairly with the Corporation or its Shareholders in connection with a matter in which the director or officer has a material conflict of interest. 2. A violation of criminal law, unless the director or officer had reasonable cause to believe that his or her conduct was lawful or no reasonable cause to believe that his or her conduct was unlawful. 3. A transaction from which the director or officer derived an improper personal profit. 4. Willful conduct. B. Determination of whether indemnification is required under the Section shall be made pursuant to Section 7.05. C. The termination of a proceeding by judgment, order, settlement or conviction, or upon a plea of no contest or an equivalent plea, does not, by itself, create a presumption that indemnification of the director or officer is not required under this Section. 7.03. WRITTEN REQUEST. A director or officer who seeks indemnification under Section 7.01 or 7.02 ---------------- shall make a written request to the Corporation. 7.04. NONDUPLICATION. The Corporation shall not indemnify a director or officer under Sections 7.01 or 7.02 to the extent the director or officer has previously received indemnification or allowances of expenses from any person, including the Corporation, in connection with the same proceeding. However, the director or officer has no duty to look to any other person for indemnification. 7.05. DETERMINATION OF RIGHT TO INDEMNIFICATION. A. Unless otherwise provided by the Articles of Incorporation or by written agreement between the director or officer and the Corporation, the director or officer seeking indemnification under Section 7.02 shall select one (1) of the following means for determining his or her right to indemnification: 1. By a majority vote of a quorum of the Board of Directors consisting of directors not at the time parties to the same or related proceedings. If a quorum of disinterested directors cannot be obtained, by majority vote of a committee duly appointed by the Board of Directors and consisting of two (2) or more directors who are not at the time parties to the same or related proceedings. Directors who are parties to the same or related proceedings may participate in the designation of members of the committee. 2. By independent legal counsel selected by a quorum of the Board of Directors or its committee in the manner prescribed in 1 of Subsection A, if unable to obtain such a quorum or committee, by a majority vote of the full Board of Directors, including directors who are parties to the same or related proceedings. 3. By a panel of three (3) arbitrators consisting of one (1) arbitrator selected by those directors entitled under 2 of Subsection A to select independent legal counsel, one (1) arbitrator selected by the director or officer seeking indemnification and one (1) arbitrator selected by two (2) arbitrators previously selected. 4. By an affirmative vote of shares represented at a meeting of Shareholders at which a quorum of the voting group entitled to vote thereon is present. Shares owned by, or voted under the control of, persons who are at the time parties to the same or related proceedings, whether as plaintiffs or defendants or in any other capacity, may not be voted in making the determination. 5. By a court under Section 7.08. 6. By any other method provided for in any additional right to indemnification permitted under Section 7.07. B. In any determination under Subsection A, the burden of proof is on the Corporation to prove by clear and convincing evidence that indemnification under Section 7.02 should not be allowed. C. A written determination as to a director's or officer's indemnification under Section 7.02 shall be submitted to both the Corporation and the director or officer within sixty (60) days of the selection made under Subsection A. D. If it is determined that indemnification is required under Section 7.02, the Corporation shall pay all liabilities and expenses not prohibited by Section 7.04 within ten (10) days after receipt of the written determination under Subsection C. The Corporation shall also pay all expenses incurred by the director or officer in the determination of process under Subsection A. 7.06. ADVANCE OF EXPENSES. Within ten (10) days after receipt of a written request by a director or officer who is a party to a proceeding, the Corporation shall pay or reimburse his or her reasonable expenses incurred if the director or officer provides the Corporation with all of the following: A. A written affirmation of his or her good faith belief that he or she has not breached or failed to perform his or her duties to the Corporation. B. A written undertaking, executed personally or on his or her behalf, to repay the allowance to the extent that it is ultimately determined under Section 7.05 that indemnification under Section 7.02 is not required and that indemnification is not ordered by a court under Section 7.08(B)(2). The undertaking under this subsection shall be an unlimited general obligation of the director or officer and may be accepted without reference to his or her ability to repay the allowance. The undertaking may be secured or unsecured. 7.07. NONEXCLUSIVITY. A. Except as provided in Subsection B, Sections 7.01, 7.02 and 7.06 do not preclude any additional right to indemnification or allowance of expenses that a director or officer may have under any of the following: 1. The Articles of Incorporation. 2. A written agreement between the director or officer and the Corporation. 3. A resolution of the Board of Directors. 4. A resolution, after notice, adopted by a majority vote of all of the Corporation's voting shares then issued and outstanding. B. Regardless of the existence of an additional right under Subsection A, the Corporation shall not indemnify a director or officer, or permit a director or officer to retain any allowance of expenses unless it is determined by or on behalf of the Corporation that the director or officer did not breach or fail to perform a duty he or she owes to the Corporation which constitutes conduct under Section 7.02(A)(1), (2), (3) or (4). A director or officer who is a party to the same or related proceeding for which indemnification or an allowance of expenses is sought may not participate in a determination under this subsection. C. Sections 7.01 to 7.13 do not affect the Corporation's power to pay or reimburse expenses incurred by a director or officer in any of the following circumstances. 1. As a witness in a proceeding to which he or she is not a party. 2. As a plaintiff or petitioner in a proceeding because he or she is or was an employee, agent, director or officer of the Corporation. 7.08 COURT-ORDERED INDEMNIFICATION. A. Except as provided otherwise by written agreement between the director or officer and the Corporation, a director or officer who is a party to a proceeding may apply for indemnification to the court conducting the proceeding or to another court of competent jurisdiction. Application shall be made for an initial determination by the court under Section 7.05(a)(5) or for review by the court of an adverse determination under Section 7.05(A)(1), (2), (3), (4), or (6). After receipt of an application, the court shall give any notice it considers necessary. B. The court shall order indemnification if it determines any of the following: 1. That the director or officer is entitled to indemnification under Sections 7.01 or 7.02. 2. That the director or officer is fairly and reasonably entitled to indemnification in view of all the relevant circumstances, regardless of whether indemnification is required under Section 7.02. C. If the court determines under Subsection B that the director or officer is entitled to indemnification, the Corporation shall pay the director's or officer's expenses incurred to obtain the court-ordered indemnification. 7.09. INDEMNIFICATION AND ALLOWANCE OF EXPENSES OF EMPLOYEES AND AGENTS. The Corporation shall indemnify an employee of the Corporation who is not a director or officer of the Corporation, to the extent that he or she has been successful on the merits or otherwise in defense of a proceeding, for all reasonable expenses incurred in the proceeding if the employee was a party because he or she was an employee of the Corporation. In addition, the Corporation may indemnify and allow reasonable expenses of an employee or agent who is not a director or officer of the Corporation to the extent provided by (i) the Articles of Incorporation, (ii) these Bylaws, (iii) general or specific action of the Board of Directors, or (iv) by contract; provided however, that the Corporation may not provide such indemnification to the extent prohibited by law. 7.10. INSURANCE. The Corporation may purchase and maintain insurance on behalf of an individual who is an employee, agent, director or officer of the Corporation against liability asserted against or incurred by the individual in his or her capacity as an employee, agent, director or officer, regardless of whether the Corporation is required or authorized to indemnify or allow expenses to the individual against the same liability. 7.11. SECURITIES LAW CLAIMS. A. Pursuant to the public policy of the State of Wisconsin, the Corporation shall provide indemnification and allowance of expenses and may insure for any liability incurred in connection with a proceeding involving securities regulation described under Subsection B to the extent required or permitted under Sections 7.01 to 7.10. B. Sections 7.01 to 7.10 apply, to the extent applicable to any other proceeding, to any proceeding involving federal or state statute, rule or regulation regulating the offer, sale or purchase of securities, securities brokers or dealers, or investment companies or investment advisers. 7.12. LIBERAL CONSTRUCTION. In order for the Corporation to obtain and retain qualified directors, officers and employees, the foregoing provisions shall be liberally administered in order to afford maximum indemnification of directors, officers and, where Section 7.09 of these Bylaws applies, employees. The indemnification above provided for shall be granted in all applicable cases unless to do so would clearly contravene law, controlling precedent or public policy. 7.13. DEFINITIONS APPLICABLE TO THIS ARTICLE. For purposes of the Article: A. "Affiliate" shall include, without limitation, any corporation, partnership, joint venture, employee benefit plan, trust or other enterprise that directly or indirectly through one or more intermediaries, controls or is controlled by, or is under common control with, the Corporation. B. "Corporation" means this Corporation and any domestic or foreign predecessor of this Corporation where the predecessor corporation's existence ceased upon the consummation of a merger or other transaction. C. "Director or Officer" means any of the following: 1. An individual who is or was a director or officer of this Corporation. 2. An individual who, while a director or officer of this Corporation, is or was serving at the Corporation's request as a director, officer, partner, trustee, member of any governing or decision-making committee, employee or agent of another corporation or foreign corporation, partnership, joint venture, trust or other enterprise. 3. An individual who, while a director or officer of this Corporation, is or was serving an employee benefit plan because his or her duties to the Corporation also impose duties on, or otherwise involve service by, the person to the plan or to participants in or beneficiaries of the plan. 4. Unless the context requires otherwise, the estate or personal representative of a director or officer. For purposes of this Article, it shall be conclusively presumed that any director or officer serving as a director, officer, partner, trustee, member of any governing or decision-making committee, employee or agent of an Affiliate shall be so serving at the request of the Corporation. D. "Expenses" include fees, costs, charges, disbursements, attorney fees and other expenses incurred in connection with a proceeding. E. "Liability" includes the obligation to pay a judgment, settlement, penalty, assessment, forfeiture or fine, including an excise tax assessed with respect to an employee benefit plan, and reasonable expenses. F. "Party" includes an individual who was or it, or who is threatened to be made, a named defendant or respondent in a proceeding. G. "Proceeding" means any threatened, pending or completed civil, criminal, administrative or investigative action, suit, arbitration or other proceeding, whether formal or informal, which involves foreign, federal, state or local law and which is brought by or in the right of the Corporation or by any other person. ARTICLE VIII. CORPORATE DIVIDENDS The Board of Directors may from time to time declare dividends on its outstanding shares in the manner and upon the terms and conditions provided by law and its Articles of Incorporation. ARTICLE IX. CORPORATE SEAL The Board of Directors may provide a corporate seal which may be circular in form and may have inscribed thereon the name of the Corporation and the state of incorporation and the words "Corporate Seal." ARTICLE X. FISCAL YEAR The fiscal year shall be set by the Board of Directors. ARTICLE XI. AMENDMENTS 11.01. BY SHAREHOLDERS. These Bylaws may be altered, amended or repealed and new Bylaws may be adopted by the Shareholders by affirmative vote of not less than a majority of the shares present or represented at an annual or special meeting of the Shareholders at which a quorum is in attendance. 11.02. BY DIRECTORS. These Bylaws may also be altered, amended or repealed and new Bylaws may be adopted by the Board of Directors by affirmative vote of a majority of the number of directors present at or participating in any meeting at which a quorum is in attendance; but no bylaw adopted by the Shareholders shall be amended or repealed by the Board of Directors if the bylaw so adopted so provides. 11.03. IMPLIED AMENDMENTS. Any action taken or authorized by the Shareholders or by the Board of Directors, which would be inconsistent with the Bylaws then in effect but is taken or authorized by affirmative vote of not less than the number of shares or the number of directors required to amend the Bylaws so that the Bylaws would be consistent with such action, shall be given the same effect as though the Bylaws had been temporarily amended or suspended so far, but only so far, as is necessary to permit the specific action so taken or authorized. EX-10.3 3 EXHIBIT 10.3 AMERICAN MEDICAL SECURITY GROUP, INC. EQUITY INCENTIVE PLAN NONQUALIFIED STOCK OPTION AWARD AGREEMENT You have been selected to be a Participant in the American Medical Security Group, Inc. Equity Incentive Plan (the "Plan"), as specified below: PARTICIPANT: _________________________ DATE OF GRANT: _______________________ DATE OF EXPIRATION: __________________ NUMBER OF SHARES COVERED BY THIS OPTION: _____________ Shares OPTION PRICE: _________________ per Share THIS AGREEMENT, effective as of the Date of Grant set forth above, is between American Medical Security Group, Inc., a Wisconsin corporation (the "Company") and the Participant named above pursuant to the provisions of the Plan. Unless otherwise indicated, capitalized terms used herein shall have the meanings assigned to such terms under the Plan, a copy of which is attached hereto and incorporated herein. In consideration of the foregoing, the parties hereto agree as follows: 1. GRANT OF STOCK OPTION. The Company hereby grants to Participant the option (the "Option(s)") to purchase the number of Shares of common stock of the Company set forth above at the above-stated Option Price, which is one hundred percent (100%) of the Fair Market Value on the Date of Grant, subject to the terms and conditions of the Plan and this Agreement. This award is intended to be a Nonqualified Stock Option, and therefore is not subject to Section 422 of the Code. 2. VESTING OF STOCK OPTION.Except as hereinafter provided, with respect to the Options granted hereunder, vesting shall occur at a rate of thirty-three and one third percent (33-1/3%) per year beginning on the first anniversary of the Date of Grant and each subsequent anniversary date thereafter, provided the Participant remains a Director of the Company. 3. EXERCISABILITY OF OPTION. The Options are exercisable at any time after six months following the Date of Grant, in whole or in part, but only if all of the following conditions are met at the time of exercise: (a) The Options to be exercised are vested as described in Section 2 above; (b) The date of exercise is on or before the Date of Expiration set forth above; (c) The Options to be exercised are exercised only in compliance with the Company's then current Insider Trading Policy; and (d) Participant is a Director of the Company or any present or future parent, subsidiary or Affiliate of the Company; or, if he or she is no longer a Director, the date of exercise is in accordance with the provisions of this Agreement and the Plan. 4. TERMINATION OF DIRECTORSHIP BY DEATH. In the event the Participant's tenure as a Director is terminated by reason of death, all outstanding Options granted pursuant to this Agreement shall immediately vest one hundred percent (100%), and shall remain exercisable for a period ending on the earlier of (i) the Date of Expiration identified above, or (ii) one (1) year after the date of the Participant's death. 5. TERMINATION OF DIRECTORSHIP BY DISABILITY. In the event the Participant's tenure as a Director is terminated by reason of Disability, all outstanding Options granted pursuant to this Agreement shall immediately vest one hundred percent (100%) as of the date the Compensation Committee (the "Committee") determines the definition of Disability to have been satisfied, and shall remain exercisable for a period ending on the earlier of (i) the Date of Expiration identified above, or (ii) one (1) year after the date the Committee determines the definition of Disability to have been satisfied. 6. TERMINATION OF DIRECTORSHIP BY RETIREMENT. In the event the Participant's tenure as a Director is terminated by reason of Retirement (as hereinafter defined), all outstanding Options granted pursuant to this Agreement shall immediately vest one hundred percent (100%), and shall remain exercisable for a period ending on the earlier of (i) the Date of Expiration identified above, or (ii) the end of the third (3rd) year following the date of termination of the Participant's tenure as a Director by reason of Retirement. Retirement shall mean (a) a Director's determination after serving a full three-year term not to stand for reelection to the Board of Directors at the next annual meeting of the Board, (b) the inability of the Director to stand for reelection to the Board due to age guidelines adopted by the Board, or (c) a Director's resignation from the Board after reaching seventy (70) years of age. 7. DIRECTORSHIP TERMINATION FOLLOWED BY DEATH. In the event the Participant's tenure as a Director terminates by reason of Disability or Retirement, and within the exercise period allowed by the Committee following such termination the Participant dies, then the remaining exercise period under outstanding Options shall equal the longer of: (i) one (1) year following death; or (ii) the remaining portion of the exercise period which was triggered by the termination as a Director. 8. TERMINATION OF DIRECTORSHIP FOR OTHER REASONS. If the Participant's tenure as a Director shall terminate for any reason other than death, Disability, or Retirement (and other than for Cause), all Options held by the Participant which are not vested as of the effective date of termination as a Director immediately shall be forfeited to the Company. However, the Committee, in its sole discretion, shall have the right to immediately vest all or any portion of such Options subject to such terms as the Committee, in its sole discretion, deems appropriate. Options which are vested as of the effective date of termination as a Director may be exercised by the Participant within the period beginning on the effective date of termination as a Director, and ending on the earlier of (i) the Date of Expiration identified above, or (ii) six (6) months after the date of termination as a Director. If the Participant's tenure as a Director shall be terminated by the Company for Cause, all outstanding Options held by the Participant immediately shall be forfeited to the Company and no additional exercise period shall be allowed, regardless of the vested status of the Options. 9. CHANGE IN CONTROL. In the event of a Change in Control (as defined in the Plan) which occurs prior to the Participant's termination as a Director, Participant's right to exercise the Options shall vest fully as of the first date that the definition of Change in Control has been fulfilled, and shall become immediately exercisable in accordance with the terms of this Agreement and the Plan, without regard to the six month wait under Section 3 hereof. 10. RESTRICTIONS ON TRANSFER. The Options may not be sold, transferred, pledged, assigned, or otherwise alienated or hypothecated, other than by will or by the laws of descent and distribution and shall be exercisable during Participant's lifetime only by Participant or Participant's legal representative, except that the Options may be transferred by the Participant to the Participant's spouse, children or grandchildren or a trust for the benefit of such spouse, children or grandchildren. In the event the Options are transferred, they shall remain subject to this Agreement and the Plan. 11. RECAPITALIZATION. In the event there is any change in the Shares of the Company through the declaration of stock dividends or through recapitalization resulting in stock split-ups or through merger, consolidation, exchange of shares, or otherwise, the number and class of Shares subject to the Options, and/or the Option Price, shall be adjusted as may be determined to be appropriate and equitable by the Committee, in its sole discretion, to prevent dilution or enlargement of rights. 12. PROCEDURE FOR EXERCISE OF OPTIONS. The Options may be exercised by giving written notice to the Company at its executive offices, addressed to the attention of its Secretary. Such notice is to be received by the Secretary on or before the date on which the Options are to be exercised. Such notice (a) shall be signed by the Participant or his or her legal representative; (b) shall specify the number of full Shares then elected to be purchased with respect to the Option and the total purchase price; and (c) shall be accompanied by payment in full of the Option Price of the Shares to be purchased. The Option Price upon exercise of the Options shall be payable to the Company in full either (a) in cash or its equivalent (acceptable cash equivalents shall be determined at the sole discretion of the Committee); (b) by tendering previously acquired Shares (held at least six months) having an aggregate Fair Market Value at the time of exercise equal to the total price of the Shares for which the Option is being exercised; (c) unless otherwise determined by the Committee, through a "cashless exercise" procedure under which there is delivery to a securities broker of an irrevocable direction to sell Shares and to deliver all or part of the sales proceeds to the Company, pursuant to the terms and conditions specified in the Plan; or (d) by a combination of (a), (b) and (c). As promptly as practicable after receipt of such notice and payment, the Company shall cause to be issued and delivered to the Participant or his or her legal representative, as the case may be, certificates for the Shares so purchased, which may, if appropriate, be endorsed with appropriate restrictive legends. The Company shall maintain a record of all information pertaining to Participant's rights under this Agreement, including the number of Shares for which the Option is exercisable. If the Option shall have been exercised in full, this Agreement shall be returned to the Company and canceled. Notwithstanding the foregoing, the Company need not issue or deliver such Shares unless and until, in the opinion of the Company's counsel, all applicable requirements of law, including registration of such Shares under the Securities Act of 1933 pertaining to the sale and issuance of such Shares and all applicable listing requirements of any national securities exchange on which the Shares are listed, have been complied with. 13. RIGHTS AS A STOCKHOLDER. Participant shall have no rights as a stockholder of the Company with respect to the Shares subject to this Option Agreement until such time as the purchase price has been paid and the Shares have been issued and delivered to him or her. 14. TENURE AS A DIRECTOR. This Agreement shall not confer upon Participant any right to continuance of tenure as a Director of the Company, nor shall this Agreement interfere in any way with the Company's right to terminate his or her tenure at any time. 15. MISCELLANEOUS. (a) This Agreement and the rights of Participant hereunder are subject to all the terms and conditions of the Plan, as the same may be amended from time to time, as well as to such rules and regulations as the Compensation Committee may adopt for administration of the Plan. The Committee shall have the right to impose such restrictions on any Share acquired pursuant to the exercise of the Options, as it may deem advisable, including, without limitation, restrictions under applicable federal securities laws, under the requirements of any stock exchange or market upon which such Shares are then listed and/or traded, and under any blue sky or state securities laws applicable to such Shares. It is expressly understood that the Committee is authorized to administer, construe, and make all determinations necessary or appropriate to the administration of the Plan and this Agreement, all of which shall be binding upon Participant. Any inconsistency between this Agreement and the Plan shall be resolved in favor of the Plan. (b) With the approval of the Board of Directors of the Company, the Committee may terminate, amend, or modify the Plan; provided, however, that no such termination, amendment, or modification of the Plan may in any material way adversely affect Participant's vested rights with respect to Options granted under this Agreement. (c) This Agreement may be amended by written agreement of the Participant and the Company at any time. (d) In the event federal, state, or local taxes become required by law to be withheld with respect to any exercise of Participant's rights under this Agreement, the Company shall have the authority, without the Participant's written consent, to deduct or withhold, or require the Participant to remit to the Company, an amount sufficient to satisfy such taxes. Participant may elect, unless otherwise determined by the Committee in its sole discretion, to satisfy the withholding requirement, in whole or in part, by having the Company withhold Shares having an aggregate Fair Market Value, on the date the tax is to be determined, equal to the minimum amount required to be withheld. All elections shall be irrevocable and in writing, and shall be signed by Participant, and shall be made in accordance with rules set forth in Section 15.2 of the Plan. (e) Participant agrees to take all steps necessary to comply with all applicable provisions of federal and state securities law in exercising Participant's rights under this Agreement. (f) The Plan and this Agreement are not intended to qualify for treatment under the provisions of the Employee Retirement Income Security Act of 1974, as amended, ("ERISA"). (g) This Agreement shall be subject to all applicable laws, rules and regulations, and to such approvals by any governmental agencies or national securities exchanges as may be required. (h) To the extent not preempted by federal law, this Agreement shall be governed by, and construed in accordance with the laws of the State of Wisconsin without regard to principles of conflicts of law. IN WITNESS WHEREOF, the parties have caused this Option Agreement to be executed as of the Date of Grant. AMERICAN MEDICAL SECURITY GROUP, INC. By:__________________________________ John R. Wirch Vice President, Human Resources _____________________________________ Participant EX-10.6 4 EXHIBIT 10.6 AMERICAN MEDICAL SECURITY GROUP, INC. DIRECTORS DEFERRED COMPENSATION PLAN SECTION I - PURPOSES OF PLAN American Medical Security Group, Inc. (the "Company") has adopted this Directors Deferred Compensation Plan (the "Plan") for the benefit of certain outside directors of the Company who wish to defer the receipt of eligible compensation which they may otherwise be entitled to receive from the Company. The Plan is intended to enable the Company to attract, retain and motivate qualified Directors and to enhance the long-term mutuality of interest between Directors and shareholders of the Company. SECTION II - DEFINITIONS When used in this Plan, the following terms shall have the definitions set forth in this Section: 2.1 "ACCOUNT(S)" shall mean a Participant's fully vested Stock Unit Account and/or Interest Account. 2.2 "BENEFICIARY" shall mean the person, persons, or entity designated by the Participant to receive any benefits payable under this Plan on or after the Participant's death. Each Participant shall be permitted to name, change or revoke the Participant's designation of a Beneficiary in writing on a form and in the manner prescribed by the Administrator, provided, however, that the designation on file with the Administrator at the time of the Participant's death shall be controlling. Should a Participant fail to make a valid Beneficiary designation or leave no named Beneficiary surviving, any benefits due shall be paid to such Participant's spouse, if living; or if not living, then any benefits due shall be paid to such Participant's estate. 2.3 "BOARD" or "BOARD OF DIRECTORS" shall mean the Board of Directors of the Company. 2.4 "CHANGE IN CONTROL" shall have the same meaning as set forth in the American Medical Security Group, Inc. Equity Incentive Plan, as may be amended from time to time. 2.5 "COMMITTEE" shall mean the Compensation Committee of the Board of Directors. 2.6 "COMPANY" shall mean American Medical Security Group, Inc. 2.7 "COMPENSATION" shall mean the annual retainer fees earned by a Director for service as a Director, any retainer fee earned by a Director for service as a member of a committee of the Board, and any fees earned by a Director for attendance at meetings of the Board of Directors and any of its committees, but excluding any expense reimbursements made to a Director. 2.8 "DIRECTOR" shall mean an elected member of the Board of Directors of the Company who is not an employee of the Company. A Director who is an officer or assistant officer of the Company and who receives no compensation for service in such capacity is a Director for purposes of this Plan. 2.9 "EFFECTIVE DATE" shall mean January 1, 2000. 2.10 "EXCHANGE ACT" shall mean the Securities Exchange Act of 1934, as amended. 2.11 "FAIR MARKET VALUE" shall mean the closing price for Shares on the relevant date, or (if there were no sales on such date) the average of the closing prices on the nearest day before and the nearest day after the relevant date, on a stock exchange or over the counter, as determined by the Administrator. 2.12 "INTEREST ACCOUNT" shall mean the bookkeeping account established to record the interests of a Participant with respect to deferred Compensation that is not deemed invested in Units. 2.13 "PARTICIPANT" shall mean a Director who commences participation in the Plan under Plan Section 4.1 and any Director or former Director who previously participated in the Plan and is entitled to benefits hereunder. 2.14 "PLAN" shall mean this American Medical Security Group, Inc. Directors Deferred Compensation Plan, as may be amended from time to time. 2.15 "SHARES" shall mean the shares of common stock of the Company. 2.16 "STOCK UNIT ACCOUNT" shall mean, with respect to a Participant who has elected to have deferred amounts deemed invested in Units, a bookkeeping account established to record such Participant's interest under the Plan related to such Units. 2.17 "UNIT" shall mean a contractual obligation of the Company to deliver a Share to a Participant or Beneficiary as provided herein. SECTION III - ADMINISTRATION 3.1 ADMINISTRATION. The Plan shall be administered by the Committee (the "Administrator"). The Administrator shall have all authority that may be appropriate for administering the Plan, including the discretion and authority to interpret the Plan and to adopt rules and regulations for implementing, amending and carrying out the Plan. All determinations and decisions of the Administrator shall be final, conclusive, and binding on all parties. 3.2 ADJUSTMENT FOR CORPORATE TRANSACTIONS. In the event of any stock dividend, extraordinary cash dividend, liquidation, recapitalization, reorganization, merger, consolidation, split-up, spin-off, combination, exchange of shares, or other corporate transaction affecting the capital structure of the Company, the Administrator shall make such adjustments to the number of Units credited to each Director's Stock Unit Account as determined to be appropriate and equitable by the Administrator, in its sole discretion, to preserve, or to prevent enlargement of Participant rights and the benefits available under the Plan. SECTION IV - PARTICIPATION AND PARTICIPANT DEFERRALS 4.1 ELECTION TO DEFER. On or before December 31, 1999 or any subsequent December 31, a Director who chooses to become a Participant in the Plan may irrevocably elect to defer some or all of such Director's Compensation payable with respect to the calendar year following the year in which such election is made, and to have such deferred Compensation credited, in whole or in part, to a Stock Unit Account or an Interest Account established on behalf of such Director. Any person who shall become a Director during any calendar year may elect, not later than the 30th day after his or her term as a Director begins, to defer payment of all or any part of his or her Compensation payable for the portion of such calendar year following such election. 4.2 METHOD OF ELECTION. A deferral election shall be made by written notice filed with the Corporate Secretary of the Company. Such election shall continue in effect with respect to Compensation payable for subsequent calendar years unless and until the Participant revokes or modifies such election by written notice filed with the Company. Any such revocation or modification of a deferral election shall become effective as of the first day of the calendar year following the year in which such notice is given and applies only to Compensation payable for services rendered thereafter. A Participant who has revoked an election to defer Compensation under the Plan may at any time file a new election to defer Compensation payable for services to be rendered in the calendar year following the year in which such election is filed. SECTION V - CREDITS TO ACCOUNTS. 5.1 INVESTMENT ELECTION. At the time a Participant elects to defer receipt of Compensation pursuant to Section 4.1, the Participant shall irrevocably designate in writing the portion of such Compensation to be credited to the Interest Account (or such other account as may be established from time to time by the Administrator) and the portion to be credited to the Stock Unit Account. If a Participant fails to notify the Corporate Secretary as to how to allocate any Compensation between the Interest and Stock Unit Accounts, 100% of such deferred Compensation shall be credited to the Interest Account. By written notice filed with the Corporate Secretary of the Company prior to the end of a calendar year, a Director may change the manner in which the Compensation payable with respect to services rendered after the end of such calendar year are allocated among the Accounts. However, amounts credited to the Participant's Interest Account or Stock Unit Account prior to the effective date of any election change shall not be affected by such change and shall continue to be credited to the Account to which such amounts were credited pursuant to the Participant's prior election. In no event may any previously deferred amounts be transferred between the Interest and Stock Unit Accounts, except as may be provided otherwise by Section 5.4. 5.2 INTEREST ACCOUNT. Any Compensation allocated to the Interest Account shall be credited to the Interest Account as of the last day of each calendar year quarter (after the crediting of interest for such quarter). Amounts credited to the Interest Account as of the last day of each calendar quarter shall be credited with interest based on the performance of the Lehman Brothers Intermediate Government/Corporate Bond Index, unless another index or rate is determined by the Administrator. Interest shall be credited to a Participant's Interest Account through the end of the quarter preceding the date that the Participant's entire benefit under the Plan is paid to such Participant, consistent with Section VI. 5.3 STOCK UNIT ACCOUNT. Any Compensation allocated to the Stock Unit Account shall be deemed to be invested in a number of Units equal to the quotient of (i) the amount of such Compensation divided by (ii) the Fair Market Value on the last trading day of the calendar year quarter during which the Compensation being allocated to the Stock Unit Account would otherwise have been paid. Fractional Units shall be credited, but shall be rounded to the nearest hundredth percentile, with amounts equal to or greater than .005 rounded up and amounts less than .005 rounded down. Whenever a dividend other than a dividend payable in the form of Shares is declared with respect to the Shares, the number of Units in the Director's Stock Unit Account shall be increased by a number of Units determined by dividing (i) the product of (A) the number of Units in the Director's Stock Unit Account on the related dividend record date, and (B) the amount of any cash dividend declared by the Company on a Share (or, in the case of any dividend distributable in property other than Shares, the per share value of such dividend, as determined by the Company for purposes of income tax reporting), by (ii) the Fair Market Value on the related dividend payment date. In the case of any dividend declared on Shares which is payable in Shares, the Director's Stock Unit Account shall be increased by the number of Units equal to the product of (i) the number of Units credited to the Director's Stock Unit Account on the related dividend record date, and (ii) the number of Shares (including any fraction thereof) distributable as a dividend on a Share. 5.4 INVESTMENT TRANSFERS. A Participant may, by written notice filed with the Corporate Secretary of the Company, elect to transfer some or all of the amounts credited to the Participant's Interest Account, determined as of the quarterly date coincident with or immediately preceding the date the notice is received by the Corporate Secretary, to the Participant's Stock Unit Account. Such bookkeeping transfer shall be effected as soon as practicable after such written notice is received by the Corporate Secretary and such transferred amounts shall be deemed to be invested in a number of Units equal to the quotient of (i) the transferred amount divided by (ii) the Fair Market Value on the trading day coincident with or immediately preceding the date the transfer is effected. No more than one transfer under this Section 5.4 may be made in any calendar year. 5.5 STATEMENTS. The Administrator shall provide each Participant with a statement detailing the amounts credited to the Participant's bookkeeping Accounts under the Plan. Such statement shall be provided annually or more frequently as determined by the Administrator. SECTION VI - DISTRIBUTIONS 6.1 DISTRIBUTION. Subject to the provisions of Section 6.3 and 6.4 below, after a Participant's termination of service as a Director of the Company for any reason (including retirement, death, disability or other termination), the Participant's interest in his Accounts will be determined and paid to the Participant (or in the event of the Participant's death, to the Participant's Beneficiary) at the time and in the manner as specified in the Participant's payment election made pursuant to Section 6.2. Payment shall be made either in the form of a single sum or substantially equal annual installment payments not to exceed ten (10) years. Absent an election under Section 6.2, payment of a Participant's interest in the Participant's Accounts shall be made in a lump sum payment and shall commence as soon as practicable after the first business day of the calendar year quarter immediately following the date on which the Participant ceases to be a Director. In the case of any distribution being made in annual installments, each installment after the first installment shall be paid on the anniversary date of the first installment, or as soon as practical thereafter, until the entire amount credited to the Participant's Accounts has been paid. The dollar amount involved in any installment payment shall be determined by multiplying the amount credited to the Participant's Interest Account immediately prior to the distribution by a fraction, the numerator of which is one and the denominator of which is the number of installments (including the current installment) remaining to be paid. The number of Shares involved in any installment payment shall be determined by multiplying the number of Units credited to the Participant's Stock Unit Account immediately prior to the distribution by a fraction, the numerator of which is one and the denominator of which is the number of installments (including the current installment) remaining to be paid, and rounded up to the next whole Unit. Notwithstanding any of the foregoing, a Participant's distribution from his Interest Account shall be made solely in cash and distribution from the Participant's Stock Unit Account shall be made solely in Shares (except that any fractional Unit shall be paid in cash). Neither the Participant nor the Administrator shall have any authority to alter such cash or Shares mode of distribution. 6.2 DISTRIBUTION ELECTION. At the time a Participant first makes a deferral election pursuant to Section 4.1, the Participant shall also file with the Corporate Secretary of the Company a written election regarding the time and form of the Participant's distribution. Unless the total value of the Participant's Accounts is less than $25,000 and payment is made in a single sum under Section 6.3, the Participant's payment election shall address: (i) whether distribution of such Participant's Accounts shall commence as soon as practicable following the first business day of the calendar year quarter following the date the Participant ceases to be a Director or on the first business day of any calendar year following the calendar year in which the Participant ceases to be a Director; and (ii) whether such distribution shall be in one lump sum payment or in such number of annual installments (not to exceed ten) as the Participant may designate. 6.3 PAYMENT OF SMALL AMOUNTS. Notwithstanding the provisions of Section 6.1 and Section 6.2 above, if the combined value of a Participant's Interest Account and Stock Unit Account is less than $25,000 as of the date the Participant's service as a Director terminates, the entirety of the Participant's Accounts shall be paid to the Participant (in cash from the Participant's Interest Account and in Shares from the Stock Unit Account) in a lump sum distribution as soon as practicable after the first business day of the calendar year quarter immediately following the date on which the Participant ceases to be a Director. 6.4 ADMINISTRATOR DISCRETION. Notwithstanding any other provision in this Section VI to the contrary, the Administrator reserves the right, in its sole discretion, to override or modify any Participant's election as to the timing and/or form of payment of such Participant's Account under this Plan at any time and for any reason, even as to future installments payable under a previously-elected method of payment; provided, however, that the Administrator may not modify payments accelerated after a Change in Control under Section 6.6, and provided further that in no event may the Administrator modify the mode of distribution (i.e., cash or Shares), and in all events, cash will be distributed to reflect amounts credited to the Participant's Interest Account and Shares will be distributed from the Participant's Stock Unit Account. 6.5 LIMITATIONS ON PAYMENT. Unless determined otherwise by the Administrator under Section 6.4, under no circumstances will a Participant be eligible to receive payment of the Participant's interest in the Participant's Accounts prior to the Participant's termination of service as a Director. Further, payment of a Participant's Accounts shall commence no later than the calendar year following the later of (i) the Participant's termination of service as a director or (ii) the Participant's attainment or age 70. 6.6 CHANGE IN CONTROL. In the event of a Change in Control, any terminated Participant (including any Participant terminated in connection with the Change in Control) shall automatically receive distribution of the entirety of his Accounts (in cash from the Participant's Interest Account and in Shares from the Stock Unit Account) in a lump sum distribution as soon as practicable after such Change in Control occurs, unless such Participant waives such accelerated payment by written notice to the Corporate Secretary of the Corporation received prior to the occurrence of the Change in Control. If a terminated Participant waives acceleration under this Section 6.6, payment shall be made in accordance with the Participant's prior distribution election and shall be again subject to the Administrator's discretion under Section 6.4. 6.7 PAYMENT IN SHARES. To the extent that shareholder approval of the Plan would otherwise be required under applicable New York Stock Exchange shareholder approval policies, all Shares payable in accordance with this Section VI shall be in the form of Shares which are either treasury Shares or Shares purchased in the open market. SECTION VII - UNFUNDED STATUS Each Participant's Accounts shall be utilized solely as a device for the measurement and determination of the amounts to be paid to such Participant under the Plan. Participant Accounts shall be bookkeeping accounts only and no Participant or Beneficiary shall have any proprietary rights in any assets held by the Company, whether or not held for the purpose of funding the Company's obligation under this Plan. This Plan constitutes the mere promise of the Company to make benefit payments in the future. To the extent that any Participant or Beneficiary acquires a right to receive any payment from the Company pursuant to this Plan, such right shall be no greater than the right of an unsecured general creditor of the Company. Nothing contained in this Plan and no action taken pursuant to this Plan shall create or be construed to create a trust of any kind or any fiduciary relationship between the Company and any Participant or Beneficiary or any other person. Any reserves that may be established by the Company in connection with this Plan shall continue to be treated as the assets of the Company for federal income tax purposes and remain subject to the claims of the Company's creditors. The Company has not segregated or earmarked any Shares or any of the Company's assets for the benefit of a Participant or his/her Beneficiary and the Plan does not, and shall not be construed to, require the Company to do so. SECTION VIII - AMENDMENT AND TERMINATIONS 8.1 AMENDMENT OR TERMINATION. The Board of Directors or the Committee may amend or terminate this Plan at any time; provided, however, that no such amendment or termination shall deprive any Participant or Beneficiary of any amounts deferred under this Plan prior to the date of such amendment or termination. 8.2 EFFECT OF TERMINATION. If this Plan is terminated, amounts credited to Participant Accounts hereunder as of the date of termination shall continue to be held and paid in accordance with the terms of the Plan (subject to the Administrator's discretion as described in Section VI). However, no additional Compensation deferrals shall be made after the Plan's termination. SECTION IX - GENERAL PROVISIONS 9.1 NO RIGHT TO SERVE AS A DIRECTOR. This Plan shall not impose any obligations on the Company to retain any Participant as a Director, nor shall it impose any obligation on the part of any Participant to remain as a Director of the Company. 9.2 SECURITIES AND RELATED MATTERS. If at any time the Administrator determines in its discretion that action is necessary to comply with any requirement of the Exchange Act, any national securities exchange or any state or federal law, or the consent or approval of any governmental regulatory body is necessary or desirable as a condition of or in connection with the delivery of Shares under this Plan, no payment will be made and no Shares will be delivered unless and until such action, consent or approval shall have been effected or obtained, or otherwise provided for, free of any conditions not acceptable to the Administrator. The transactions under this Plan are intended to comply with Rule 16b-3 under Section 16(b) of the Exchange Act and the Administrator shall take any actions it deems necessary or desirable to ensure such compliance. 9.3 SEVERABILITY OF PROVISIONS. If any provision of this Plan shall be held invalid or unenforceable, this Plan shall be construed and enforced as if such provision had not been included; provided however, that such invalidity or unenforceability shall not affect any other provisions hereof. 9.4 INCAPACITY. If any Participant or Beneficiary entitled to receive a distribution under the Plan is a minor or incompetent person or is unable to attend to his or her own financial affairs, in the good faith judgment of the Administrator, then payment may be authorized by the Administrator to be made to the person or persons responsible for, caring for, or supporting such Participant or Beneficiary, in the discretion of the Administrator. Any such payment shall fully discharge any liability or obligation of the Board of Directors, the Company and all other parties with respect thereto. 9.5 ASSIGNMENT BY PARTICIPANT PROHIBITED. No right or interest of any Participant or Beneficiary in the Plan shall, prior to actual payment or distribution to such Participant or Beneficiary, be subject in any manner to anticipation, alienation, sale, transfer, assignment, pledge, encumbrance, attachment, or garnishment by creditors of the Participant or of the Beneficiary. 9.6 ASSIGNMENT BY COMPANY. The Company shall have the right to assign all of its rights, title and obligations in and under this Plan upon a merger or consolidation or upon the purchase of substantially its entire business or assets, provided such assignee agrees to perform after the effective date of such assignment all of the terms, conditions and provisions imposed by this Plan upon the Company. In the event of such an assignment, all of the rights and obligations of the Company under this Plan shall thereupon cease and terminate. 9.7 CONSTRUCTION OF THE PLAN. The validity, construction, interpretation, administration and effect of the Plan, and the rights relating to the Plan, shall be determined solely in accordance with the laws of the State of Wisconsin. EX-10.7 5 EXHIBIT 10.7 AMERICAN MEDICAL SECURITY GROUP, INC. VOLUNTARY DEFERRED COMPENSATION PLAN (AS AMENDED AND RESTATED EFFECTIVE SEPTEMBER 25, 1998) AMERICAN MEDICAL SECURITY GROUP, INC. VOLUNTARY DEFERRED COMPENSATION PLAN SECTION ARTICLE I. PURPOSE, DEFINITIONS AND CONSTRUCTION PAGE - ------- ------------------------------------------------ ---- 1.1 Purpose 4 1.2 Definitions 4 (a) Administration Committee 4 (b) Adoption Agreement 4 (c) Beneficiary 5 (d) Board 5 (e) Company 5 (f) Deferral Account 5 (g) Deferral Contributions 5 (h) Deferral Form 5 (i) Disability 5 (j) Effective Date 5 (k) Insolvency 6 (1) Participant 6 (m) Plan 6 (n) Plan Year 6 (o) Trust 6 (p) Trust Agreement 6 (q) Trustee 6 1.3 Gender and Number 6 1.4 Headings 7 1.5 Plan Provisions Controlling 7 1.6 Severability 7 1.7 Applicable Law 7 ARTICLE II. DEFERRAL ELECTIONS, CONTRIBUTIONS AND ACCOUNTING PROCEDURES ----------------------------------------------------------------------- 2.1 Availability of Deferral Election 7 2.2 Maintenance of Separate Deferral Accounts 8 2.3 Treatment of Amounts Deferred 8 2.4 Irrevocability and Nonassignability of Deferrals 8 2.5 Accounting Procedure 9 2.6 Earnings Allocation 9 ARTICLE III. DEFERRED COMPENSATION PAYMENTS ------------------------------------------- 3.1 Eligibility for Deferred Compensation 10 (a) Retirement or Termination 10 (b) Disability 10 (c) Death 10 3.2 Amount and Method of Payment of Deferred Compensation 10 ARTICLE IV. TRUST FUND ---------------------- 4.1 Establishment of Trust 12 ARTICLE V. ADMINISTRATION ------------------------- 5.1 Committee to Administer Agreement 12 5.2 Claims Procedure 13 ARTICLE VI. MISCELLANEOUS ------------------------- 6.1 Employment Rights 13 6.2 Absence of Liability 13 6.3 Amendment and Termination 14 6.4 Company Not an Advisor 14 AMERICAN MEDICAL SECURITY GROUP, INC. VOLUNTARY DEFERRED COMPENSATION PLAN ARTICLE I - PURPOSE, DEFINITIONS AND CONSTRUCTION SECTION 1.1 - PURPOSE. American Medical Security Group, Inc. (the "Company"), acting for itself and on behalf of its subsidiaries, hereby adopts this Voluntary Deferred Compensation Plan (the "Plan") and separate Trust to permit certain salaried employees selected by the Company to defer a portion of their anticipated salary and to have such deferred salary amounts held in the separate Trust. It is intended that the Plan and the Trust shall constitute, and shall be construed and administered as, an unfunded plan of deferred compensation within the meaning of the Employee Retirement Income Security Act of 1974 as amended ("ERISA") and the Internal Revenue Code of 1954, as amended (the "Code"). The Plan and Trust are not intended to be qualified under Section 401 (a) of the Code. SECTION 1.2 - DEFINITIONS. For purposes of this Plan, the following words and phrases shall have the meanings set forth below unless a different meaning is plainly required by the context. (a) ADMINISTRATION COMMITTEE (OR COMMITTEE) - means the persons from time to time designated and appointed by the Board to have general charge of the administration and interpretation of the Plan. In the absence of a specifically appointed Committee, the Board itself shall serve as the Committee. (b) ADOPTION AGREEMENT (OR AGREEMENT) - means the separate Adoption Agreement between a Participant and the Company, which forms a part of the Plan, under which the Company has agreed to allow the Participant to participate in the Plan and under which the Participant has agreed to his participation in the Plan on the terms set forth herein. (c) BENEFICIARY - means the person or persons designated by a Participant in his most recent Beneficiary Designation Form to receive payments under the Plan in the event of the Participant's death; provided that if the Participant has failed to designate a Beneficiary, or if all designated Beneficiaries predecease the Participant, any remaining distribution due under the Plan shall be payable to the Participant's surviving spouse or, if none, to his surviving issue PER STIRPES or, if none, then to his estate. (d) BOARD - means the Board of Directors of the Company. (e) COMPANY - means American Medical Security Group, Inc., a Wisconsin corporation, acting for itself and on behalf of its subsidiaries, and any successor thereto which assumes the rights and obligations of the Company under the Plan and Trust Agreement. (f) DEFERRAL ACCOUNT - means the account maintained for a Participant to record the total of his deferred compensation under the Plan and any adjustments relating thereto. (g) DEFERRAL CONTRIBUTIONS - means contributions to the Trust which are made by the Company pursuant to this Plan and the then current Deferral Form. (h) DEFERRAL FORM - means a Participant's then current Deferral Election Form, if any, to be executed by the Participant prior to the start of each Plan Year specifying the percentage or dollar amount of salary elected to be deferred during the upcoming Plan Year. The Deferral Form shall remain in effect until the end of the Plan Year for which it is executed unless earlier revoked or amended to reduce the percentage or dollar amount of the deferral for amounts not yet earned during such year. (i) DISABILITY - means such total and permanent physical or mental disability as, in the Committee's sole and absolute discretion, would prevent the Participant from engaging in substantially gainful employment. (j) EFFECTIVE DATE - means December 1, 1995, the date as of which, by resolution of the Board, the provisions of this Plan became effective and the date after which Participants were permitted to participate in the Plan by entering into an Adoption Agreement with the Company. (k) INSOLVENCY - means (i) the Company is unable to pay its debts as they become due, or (ii) the Company is subject to a pending proceeding as a debtor under the United Sates Bankruptcy Code, or (iii) the Company is determined to be insolvent by the Wisconsin Commissioner of Insurance. (l) PARTICIPANT - means a person who is one of the Company-selected salaried employees who, by having executed an Adoption Agreement with the Company, is participating in the Plan. Such person shall cease to be a Participant after his employment with the Company terminates, or the balance in his Deferral Account is reduced to zero ($0), whichever is later. (m) PLAN - means the American Medical Security Group, Inc. Voluntary Deferred Compensation Plan as set forth herein. (n) PLAN YEAR - means the twelve (12) month period adopted under this Plan for reporting purposes, which is the period commencing on January 1 and ending on December 31. (o) TRUST - means the American Medical Security Group, Inc. Voluntary Deferred Compensation Trust and the entire Trust estate as it may, from time to time, be constituted, including but not limited to Deferral Contributions, investments, income from any and all investments and any and all other assets, property or money received by or held by the Trustee for the uses and purposes of the Trust. (p) TRUST AGREEMENT - means the separate agreement between the Company and the Trustee under which the Trust is established and maintained. (q) TRUSTEE - means the individual or individuals or entity or entities appointed by the Board to administer the Trust; provided that an individual who is a Participant, a member of the Board of Directors of the Company or the Chief Executive Officer of the Company may not be a Trustee. SECTION 1.3 - GENDER AND NUMBER. Except when otherwise indicated by the context, any masculine terminology used herein shall also include the feminine and the definition of any term herein in the singular shall also include the plural. SECTION 1.4 - HEADINGS. The headings of the various Articles, Sections and Subsections are inserted for convenience of reference and are not to be regarded as part of this Plan or as indicating or controlling the meaning or construction of any provision. SECTION 1.5 - PLAN PROVISIONS CONTROLLING. In the event the terms or provisions of the Trust Agreement or of any summary or description of the Plan or of any other instrument, agreement, or document are in any construction interpreted as being in conflict with the provisions of the Plan as herein set forth, the provisions of the Plan shall be controlling. SECTION 1.6 - SEVERABILITY. In the event any provision of the Plan shall be held illegal or invalid for any reason, this illegality or invalidity shall not affect the remaining provisions of the Plan, and such remaining provisions shall be fully severable and the Plan shall, to the extent practicable, be construed and enforced as if the illegal or invalid provision had never been inserted therein. SECTION 1.7 - APPLICABLE LAW. Subject to the intent that the Plan and Trust be unfunded and non-qualified as provided in Section 1.1, the provisions of the Plan shall be construed in accordance with the laws of the State of Wisconsin, except to the extent, if any, preempted by federal law. ARTICLE II - DEFERRAL ELECTIONS, CONTRIBUTIONS AND ACCOUNTING PROCEDURES SECTION 2.1 - AVAILABILITY OF DEFERRAL ELECTION. The Company shall make available, in December of each Plan Year, to each Participant who is then an employee, a Deferral Form which may be used by the Participant to designate for deferral a portion of the salary he anticipates earning from the Company in the upcoming Plan Year. All amounts elected to be deferred by a Participant shall be subject to the terms and conditions of this Plan and shall be subject to FICA taxes. No requested deferral shall be effective for any Plan Year unless the appropriate Deferral Form is completed and filed with the Committee prior to January 1 of the Plan Year for which the deferral is elected. SECTION 2.2 - MAINTENANCE OF SEPARATE DEFERRAL ACCOUNTS. If not done by the Company, the Trustee shall create and maintain adequate records to disclose the interest in the Trust of all Participants. Such records shall be in the form of separate, individual Deferral Accounts, and credits and charges shall be made thereto in the manner described in this Plan. The maintenance of individual Deferral Accounts for Participants is only for accounting purposes and a segregation of the assets of the Trust Fund to each account shall not be required. Distribution made from an account shall be charged to that account as of the date paid. SECTION 2.3 - TREATMENT OF AMOUNTS DEFERRED. Upon execution and filing by the Participant of an effective Deferral Form, the Company shall make a Deferral Contribution to such Participant's Deferral Account to be deposited in the Trust no later than ten (10) days after the end of the payroll period(s) during which the Participant would have otherwise been entitled to receive the amount to be contributed by the Company except for the Participant's election pursuant to this Plan and the Deferral Form. SECTION 2.4 - IRREVOCABILITY AND NONASSIGNABILITY OF DEFERRALS. All amounts credited to a Participant's Deferral Account shall be treated as having been irrevocably deferred and no payment based on such amounts may be received except in accordance with the eligibility requirements, terms and conditions of this Plan. Neither the Participant nor any Beneficiary shall have any right or ability to alienate, sell, transfer, assign, pledge, encumber or submit to garnishment, execution or levy, either voluntarily or involuntarily, any amount due or expected to become due under this Plan. Amounts due under this Plan shall be paid, transferred, delivered or otherwise conveyed only to the Participant or his Beneficiary, subject to the limitations of Section 4.l. Notwithstanding the foregoing, a Deferral Form election may be cancelled, or amended not more than once annually to reduce the percentage or dollar amount of the Deferral during a Plan Year for amounts not yet earned during such year, provided that once the Deferral Form election is cancelled no further amounts may be deferred under this Plan for such year. SECTION 2.5 - ACCOUNTING PROCEDURE. As of the close of each quarter of a Plan Year after the Effective Date, the Committee shall: (a) First, charge to the proper accounts all payments or distributions made from the Deferral Accounts of Participants since the close of the last preceding quarter of a Plan Year that have not been charged previously; (b) Second, credit to the proper Deferral Accounts the Deferral Contributions that were made since the close of the last preceding quarter of a Plan Year that have not been credited previously; and (c) Third, adjust the net balances of the Deferral Accounts of Participants upward or downward by allocating net Trust earnings to such accounts in accordance with Section 2.6. SECTION 2.6 - EARNINGS ALLOCATION. Subject to the provisions hereof relative to separate accounts, the respective Deferral Accounts of Participants shall be adjusted as soon as is practicable after, but as of, the close of each quarter of a Plan Year (and as of any other date if the Committee determines it advisable for any reason) to reflect the net income or loss of the Trust for the period then completed, as follows: (a) The Committee shall at such times determine the value of the Trust as of that date which determination shall be final and not open to question by anyone; (b) For purposes of allocating Trust earnings under this Section 2.6, the balances of Participants' Deferral Accounts as of the close of such quarter of a Plan Year, reflecting any distributions made during such quarter, shall be adjusted downward by one-half (1/2) of any salary deferred during such quarter of a Plan Year by any Participant; and (c) The percentage that such adjusted value bears to the aggregate amount of such adjusted balances at that date of the accounts of all Participants shall be applied to the net Trust earnings for the quarter and credited or charged by appropriate entries to such accounts so that after such entries the aggregate amount of the actual Deferral Account balances (i.e., adding back in any adjustment described in this Section 2.6) shall equal the value of the Trust. In the administration of the accounts of Participants and the allocation of Trust income or loss, appropriate adjustment shall be made in the case of a Participant, any of whose account is invested in investments held for his separate benefit. ARTICLE III - DEFERRED COMPENSATION PAYMENTS SECTION 3.1 - ELIGIBILITY FOR DEFERRED COMPENSATION. Subject to any limiting conditions set forth in this Plan, the Participant, or in the event of Participant's death his Beneficiary, will become eligible for receipt of deferred compensation under this Plan as follows: (a) RETIREMENT OR TERMINATION - Upon retirement or other termination of regular employment with the Company, the Participant shall become eligible for deferred compensation payments under this Plan. (b) DISABILITY - Upon cessation of active employment with the Company as a result of Disability, Participant shall become eligible for deferred compensation payments under this Plan. (c) DEATH - In the event of Participant's death prior to the Participant's receipt of deferred compensation payments under the Plan reducing Participant's Deferral Account balance to zero ($O), the Participant's Beneficiary shall be eligible for deferred compensation payments under the Plan. SECTION 3.2 - AMOUNT AND METHOD OF PAYMENT OF DEFERRED COMPENSATION. The total deferred compensation to be paid to a Participant shall be distributed to the Participant and, upon the Participant's death, to his Beneficiary, in one of the following modes of distribution selected by the Participant: (a) Lump sum payment; or (b) Annual installments over a period not to exceed the life expectancy of the Participant (as determined by the Committee as of the date payment is to commence) or fifteen (15) years, whichever is greater. Each Participant shall notify the Company in writing of the mode of distribution he has selected prior to the commencement of the first Plan year for which such Participant has made a deferral election hereunder; provided, however, that if a Participant fails to notify the Company of a mode of distribution before the deadline prescribed by this section, he shall be deemed to have selected the installment mode of distribution described in (b) above. Once the mode of distribution is determined, it shall remain in force until the Participant's account balance is reduced to zero ($0), except that if the Participant has an unforeseeable emergency, as hereunder defined, or if the Participant has died and his Beneficiary has an unforeseeable emergency, the Committee may direct that any or all of the remaining account balance be distributed at any time as the Committee may deem advisable and proper, but only to the extent reasonably needed to satisfy the emergency need. "Unforeseeable emergency" means a severe financial hardship resulting from a sudden and unexpected illness or accident to the Participant, the Beneficiary or a dependent (as defined in Section 152(a) of the Code), loss of the Participant's or Beneficiary's property due to casualty, or other similar extraordinary and unforeseeable circumstances arising as a result of events beyond the control of the Participant or the Beneficiary. If a lump sum mode of distribution is used, the total deferred compensation to be paid to a Participant or Beneficiary shall be an amount equal to the Participant's Deferral Account balance as of the close of the Plan Year which coincides with or follows his retirement, termination, disability or death. A lump sum payment of deferred compensation under this Plan shall be made within sixty (60) days following the close of the Plan Year during which the Participant retired, died, terminated or became disabled, or, if later, within a reasonable time after the Participant's interest is determined pursuant to the preceding sentence. If an installment mode of distribution is used, the first installment payment of deferred compensation under the Plan shall be made within sixty (60) days following the close of the Plan Year during which the Participant retired, died, terminated or became disabled, and each annual installment payable thereafter shall be distributed within sixty (60) days after the close of subsequent Plan Years. The installment amount to be distributed within sixty (60) days after the close of any Plan Year shall equal the balance of the Participant's Deferral Account determined at the beginning of such Plan Year, divided by the number of years remaining in the payment period over which payment of benefits is being made. ARTICLE IV - TRUST FUND SECTION 4.1 - ESTABLISHMENT OF TRUST. All Deferral Contributions under this Plan shall be paid to the Trustee and deposited in the Trust Fund, and shall be subject to the provisions of the Trust Agreement. Participants and Beneficiaries have only an unsecured interest in the Trust assets in the event of the Company's Insolvency (as defined in Section 1.2). The company makes only an unsecured promise to pay any deferred amounts plus income thereon in the event of the Company's Insolvency. Subject to the foregoing limitations, all assets of the Trust Fund, including investment income, shall be retained for the exclusive benefit of Participants and Beneficiaries (but the Company's general creditors shall have access to Trust assets in the event of the Company's Insolvency and shall be used to pay benefits to such persons and to pay administrative expenses and taxes of the Trust Fund as provided in Section 8 of the Trust Agreement to the extent not paid by the Company and shall not revert to or accrue to the benefit of the Company, except to the extent that contributions made by the Company by a mistake of fact shall revert and be paid back to the Company provided the Company has made a timely demand therefor. The Trustee shall be required to hold the Trust assets and income for the benefit of the Company's general creditors in the event of the Company's Insolvency and in such case no Participant or Beneficiary shall have a preferred claim on the Trust assets. The Board of Directors and the Chief Executive Officer of the Company shall have the duty to inform the Trustee in writing of the Company's Insolvency within three (3) days of such event. When so informed, the Trustee shall suspend payments to all Participants and Beneficiaries, and shall hold Trust assets for the benefit of the Company's general creditors. In the case of the Trustee's actual knowledge of the Company's Insolvency, the Trustee will deliver Trust assets to satisfy claims of the Company's general creditors as directed by a court of competent jurisdiction. ARTICLE V - ADMINISTRATION SECTION 5.1 - COMMITTEE TO ADMINISTER AGREEMENT. The Board shall appoint a three (3) member Administration Committee whose responsibility it shall be to provide for administration of this Plan. The Committee shall have full authority to make decisions, issue directives, and take any and all actions reasonable or necessary to effectuate this Plan and the Trust, including the authority to prescribe the use of such forms as it may deem necessary and to interpret the Plan and Trust and to resolve ambiguities, inconsistencies and omissions in its interpretation. SECTION 5.2 - CLAIMS PROCEDURE. The Committee shall consider all claims by the Participant or any Beneficiary for payments under this Plan and shall promptly notify the claimant of its action on any such claim. In the event of any question regarding handling of the claim, the Committee shall meet with the claimant at the Company's offices to discuss such question and to attempt to resolve any areas of possible disagreement. If the claimant's concerns remain unresolved after such meeting with the Committee, the claimant may request the Board to review the matter in dispute. ARTICLE VI - MISCELLANEOUS SECTION 6.1 - EMPLOYMENT RIGHTS. Any payment under this Plan shall be independent of, and in addition to, payments made under any other agreement or under any qualified retirement plan which may be in force between the Company and any Participant or Beneficiary, or any other compensation payable to Participant or his Beneficiary by the Company. Neither this Plan nor any Deferral Form executed in connection herewith shall be construed as (a) Constituting or creating a contract of employment, (b) Restricting either the Company's right to discharge Participant with or without cause or Participant's right to terminate his employment, or (c) Creating any guarantee or representation as to the amount of compensation to be paid to Participant by the Company during any period of regular employment. SECTION 6.2 - ABSENCE OF LIABILITY. Any and all liability created to administer this Plan and the Trust or to provide any Participant or Beneficiary with benefits under this Plan shall be exclusively and solely that of the Company. No member of the Committee, officer, director or employee, past, present or future, of the Company shall have any liability to any Participant or Beneficiary, or to any other person or entity, to provide or pay such benefits, such liability hereby being expressly and unconditionally denied. SECTION 6.3 - AMENDMENT AND TERMINATION. This Plan may be altered, amended, or revoked by a written agreement signed by the Company and a Participant, provided that no such action shall be taken that is not allowed by Article XIII of the Trust Agreement, and provided further that if any amendment to the Plan or the adoption of the Plan by the Participant would constitute a subsequent Participant deferral election that would cause a Participant or Beneficiary to be in constructive receipt of past deferred amounts, then such amendment or adoption will only be applicable with respect to future deferrals. Notwithstanding the foregoing, the Company may unilaterally amend the Plan to provide that no future deferrals may be made by Participants and to conform the Plan to ERISA and Code requirements with respect to unfunded plans of deferred compensation. The Plan may not be amended or terminated during the period immediately preceding the Company's Insolvency if the intended result would be to accelerate the payment of benefits to Participants or Beneficiaries so that the Trust assets would be unavailable to the Company's general creditors. SECTION 6.4 - COMPANY NOT AN ADVISOR. The Company offers this Plan to Participants without assuming any responsibility or liability as an advisor or consultant relative to tax or other aspects of this Plan and the Trust or the payment of benefits hereunder. EX-10.9 6 EXHIBIT 10.9 FIRST AMENDMENT TO THE AMERICAN MEDICAL SECURITY GROUP, INC. DEFERRED COMPENSATION TRUST This Amendment, entered into by and between American Medical Security Group, Inc. and Marshall & Ilsley Trust Company effective the 25th day of September 1998. WITNESSETH: WHEREAS, United Wisconsin Services, Inc. and Marshall & Ilsley Trust Company entered into a Deferred Compensation Trust Agreement dated December 1, 1997 (the "Agreement'); WHEREAS, the parties acknowledge that United Wisconsin Services, Inc. changed its corporate name to American Medical Security Group, Inc. effective September 11, 1998; WHEREAS, on September 25, 1998, the Board of Directors of American Medical Security Group, Inc. authorized the officers of the Corporation to amend the Agreement to reflect the corporate name change; and WHEREAS, the parties desire to amend the Agreement to reflect United Wisconsin Services, Inc.'s corporate name change. NOW THEREFORE, in consideration of the foregoing premises and for other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties agree to amend the Agreement as follows: 1. CORPORATE NAME CHANGE. It is hereby agreed that anywhere United Wisconsin Services, Inc. or UWS appears in the Agreement it shall be deleted and replaced with American Medical Security Group, Inc. or AMSG, respectively. 2. OTHER TERMS AND CONDITIONS. Except as set forth in this Amendment, all other terms and conditions of the Agreement shall remain in full force and effect. IN WITNESS WHEREOF, the parties have caused their duly-authorized representatives to execute this Amendment on the date first set forth above. AMERICAN MEDICAL SECURITY MARSHALL & ILSLEY GROUP, INC. TRUST COMPANY By: /S/ JOHN R. WIRCH By: /S/ BRUCE H. LINDBERG ------------------------ ------------------------ Print: JOHN R. WIRCH Print: BRUCE H. LINDBERG ------------------------ ------------------------ Title: VICE PRESIDENT, HUMAN RESOURCES Title: PRESIDENT - GREEN BAY ------------------------------- ------------------------ Date: 1/15/00 Date: 2/16/00 ------------------------ ------------------------ EX-21 7 EXHIBIT 21 SUBSIDIARIES OF THE REGISTRANT American Medical Security Holdings, Inc., a Wisconsin corporation American Medical Security, Inc., a Delaware corporation American Medical Security Insurance Company of Georgia, a Georgia corporation U & C Real Estate Partnership, a Wisconsin general partnership United Wisconsin Life Insurance Company, a Wisconsin insurance corporation Continental Plan Services, Inc., a Wisconsin corporation Nurse Healthline, Inc., a Wisconsin corporation Accountable Health Plans of America, Inc., a Texas corporation AMS HMO Holdings, Inc., a Delaware corporation American Medical Security Health Plan, Inc., a Florida corporation d/b/a American Medical Healthcare Unity HMO of Illinois, Inc., an Illinois corporation EX-23 8 EXHIBIT 23 CONSENT OF INDEPENDENT AUDITORS We consent to the incorporation by reference in the Registration Statement (Form S-8 No. 333-75477) pertaining to the Retirement Savings Plan, the Registration Statement (Form S-8 No. 333-21857) pertaining to the Equity Incentive Plan, The Registration Statement (Form S-8 No. 333-22673) pertaining to the 1995 Director Stock Option Plan, and the Registration Statement (Form S-3 No. 333-29425) pertaining to the Dividend Reinvestment and Direct Stock Purchase Plan of American Medical Security Group, Inc. of our report dated February 7, 2000, with respect to the consolidated financial statements and schedules of American Medical Security Group, Inc. included in the Annual Report (Form 10-K) for the year ended December 31, 1999. /S/ ERNST & YOUNG LLP --------------------------- ERNST & YOUNG LLP Milwaukee, Wisconsin March 9, 2000 EX-27.1 9
7 THIS FINANCIAL DATA SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS OF AMERICAN MEDICAL SECURITY GROUP, INC. FOR THE TWELVE MONTHS ENDED DECEMBER 31, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 U.S. DOLLARS YEAR DEC-31-1999 JAN-01-1999 DEC-31-1999 1 270,800 3,275 0 2,198 0 0 276,273 17,266 0 0 503,094 0 17,277 169,117 0 42,523 0 0 16,654 203,626 503,094 1,056,107 18,912 0 22,361 860,473 0 268,049 (38,989) (13,043) (25,946) 0 0 0 (25,946) (1.58) (1.58) 0 0 0 0 0 0 0
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