10-Q 1 0001.txt 2ND QUARTER AMERICAN MEDICAL SECURITY SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q [X] Quarterly Report Pursuant To Section 13 Or 15(d) Of The Securities Exchange Act Of 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2000 OR [ ] Transition Report Pursuant To Section 13 Or 15(d) Of The Securities Exchange Act Of 1934 For the transition period from __________ to __________ COMMISSION FILE NUMBER 1-13154 AMERICAN MEDICAL SECURITY GROUP, INC. (Exact name of Registrant as specified in its charter) WISCONSIN 39-1431799 (State of Incorporation) (I.R.S. Employer Identification No.) 3100 AMS BOULEVARD GREEN BAY, WISCONSIN 54313 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (920) 661-1111 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes __X__ No _____ Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Common stock, no par value, outstanding as of July 31, 2000: 14,566,515 shares AMERICAN MEDICAL SECURITY GROUP, INC. INDEX PART I. FINANCIAL INFORMATION Item 1. Financial Statements (Unaudited) Condensed Consolidated Balance Sheets June 30, 2000 and December 31, 1999......................3 Condensed Consolidated Statements of Income Three months ended June 30, 2000 and 1999; Six months ended June 30, 2000 and 1999.............................5 Condensed Consolidated Statements of Cash Flows Six months ended June 30, 2000 and 1999..................6 Notes to Condensed Consolidated Financial Statements June 30, 2000............................................7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations................................11 Item 3. Quantitative and Qualitative Disclosures About Market Risk..15 PART II. OTHER INFORMATION Item 1. Legal Proceedings...........................................16 Item 4. Submission of Matters to a Vote of Security Holders.........17 Item 6. Exhibits and Reports on Form 8-K............................17 Signatures...............................................................18 Exhibit Index..........................................................EX-1 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS AMERICAN MEDICAL SECURITY GROUP, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)
June 30, December 31, 2000 1999 --------------------------------- (IN THOUSANDS) ASSETS Investments: Securities available for sale, at fair value: Fixed maturities $ 272,192 $ 270,800 Equity securities-preferred 2,180 2,198 Fixed maturity securities held to maturity, at amortized cost 4,337 3,275 Trading securities, at fair value 49 - --------------------------------- Total investments 278,758 276,273 Cash and cash equivalents (3,531) 17,266 Other assets: Property and equipment, net 33,175 32,624 Goodwill and other intangibles, net 109,455 111,347 Other assets 47,150 65,584 --------------------------------- Total other assets 189,780 209,555 --------------------------------- Total assets $ 465,007 $ 503,094 =================================
See Notes to Condensed Consolidated Financial Statements 3 AMERICAN MEDICAL SECURITY GROUP, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)
June 30, December 31, 2000 1999 --------------------------------- (IN THOUSANDS) LIABILITIES AND SHAREHOLDERS' EQUITY Liabilities: Medical and other benefits payable $ 140,173 $ 169,117 Advance premiums 21,449 17,277 Payables and accrued expenses 23,581 25,044 Notes payable 41,858 42,523 Other liabilities 20,204 28,853 --------------------------------- Total liabilities 247,265 282,814 Shareholders' equity: Common stock (no par value, $1 stated value, 50,000,000 shares authorized, 16,654,315 issued and 14,578,515 outstanding at June 30, 2000, 16,653,646 issued and 15,532,146 outstanding at December 31, 1999) 16,654 16,654 Paid-in capital 187,956 187,952 Retained earnings 37,546 33,626 Accumulated other comprehensive loss, net of tax benefit of $5,571,000 and $5,634,000 at June 30, 2000 and December 31, 1999, respectively (10,346) (10,464) Treasury stock (2,075,800 and 1,121,500 shares at cost at June 30, 2000 and December 31, 1999, respectively) (14,068) (7,488) --------------------------------- Total shareholders' equity 217,742 220,280 --------------------------------- Total liabilities and shareholders' equity $ 465,007 $ 503,094 =================================
See Notes to Condensed Consolidated Financial Statements 4 AMERICAN MEDICAL SECURITY GROUP, INC. CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
Three Months Ended Six Months Ended June 30, June 30, --------------------------------- -------------------------------- 2000 1999 2000 1999 --------------------------------- -------------------------------- (IN THOUSANDS, EXCEPT PER SHARE DATA) Revenues: Insurance premiums $ 240,537 $ 264,198 $ 488,442 $ 527,090 Net investment income 4,774 4,700 9,657 9,675 Other revenue 5,015 5,498 9,904 11,684 --------------------------------- -------------------------------- Total revenues 250,326 274,396 508,003 548,449 Expenses: Medical and other benefits 182,012 210,758 370,075 409,165 Selling, general and administrative 62,684 67,109 127,622 135,790 Interest expense 883 872 1,779 1,766 Amortization of goodwill and intangibles 947 1,010 1,893 2,058 --------------------------------- -------------------------------- Total expenses 246,526 279,749 501,369 548,779 --------------------------------- -------------------------------- Income (loss) before income taxes 3,800 (5,353) 6,634 (330) Income tax expense (benefit) 1,540 (1,823) 2,715 205 --------------------------------- -------------------------------- Net income (loss) $ 2,260 $ (3,530) $ 3,919 $ (535) ================================= ================================ Net income (loss) per common share: Basic $ 0.15 $ (0.21) $ 0.26 $ (0.03) Diluted $ 0.15 $ (0.21) $ 0.26 $ (0.03)
See Notes to Condensed Consolidated Financial Statements 5 AMERICAN MEDICAL SECURITY GROUP, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
Six Months Ended June 30, --------------------------------- 2000 1999 --------------------------------- (IN THOUSANDS) OPERATING ACTIVITIES: Net income (loss) $ 3,919 $ (535) Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization 4,879 5,299 Net realized investment gains 112 282 Increase in trading securities (49) - Deferred income tax expense (benefit) 3,442 (320) Changes in operating accounts: Other assets 14,928 (6,202) Medical and other benefits payable (28,944) 6,231 Advance premiums 4,172 1,143 Payables and accrued expenses (1,463) 2,310 Other liabilities (8,649) 4,697 --------------------------------- Net cash provided by (used in) operating activities (7,653) 12,905 INVESTING ACTIVITIES: Purchases of available for sale securities (13,838) (183,689) Proceeds from sale of available for sale securities 9,487 143,046 Proceeds from maturity of available for sale securities 720 18,496 Purchases of held to maturity securities - (200) Proceeds from maturity of held to maturity securities 630 - Purchases of property and equipment (2,912) (1,589) Proceeds from sale of property and equipment 10 31 --------------------------------- Net cash used in investing activities (5,903) (23,905) FINANCING ACTIVITIES: Issuance of common stock 4 2 Purchase of treasury stock (6,580) - Borrowings under line of credit agreement 35,158 5,000 Repayment on line of credit agreement (35,158) (5,000) Repayment of notes payable (665) (1,601) --------------------------------- Net cash used in financing activities (7,241) (1,599) --------------------------------- Cash and cash equivalents: Net decrease (20,797) (12,599) Balance at beginning of year 17,266 10,648 --------------------------------- Balance at end of period $ (3,531) $ (1,951) =================================
See Notes to Condensed Consolidated Financial Statements 6 AMERICAN MEDICAL SECURITY GROUP, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) June 30, 2000 NOTE A. BASIS OF PRESENTATION The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of only normal recurring adjustments) considered necessary for a fair presentation have been included. Operating results for the three and six month periods ended June 30, 2000 are not necessarily indicative of the results that may be expected for the year ending December 31, 2000. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and footnotes thereto included in the American Medical Security Group, Inc. ("AMSG" or the "Company") annual report on Form 10-K for the year ended December 31, 1999. NOTE B. EARNINGS PER SHARE Basic earnings per common share are computed by dividing net income by the weighted average number of common shares outstanding. Diluted earnings per common share are computed by dividing net income by the weighted average number of common shares outstanding, adjusted for the effect of dilutive employee stock options. The following table provides a reconciliation of the number of weighted average basic and diluted shares outstanding:
Three Months Ended Six Months Ended June 30, June 30, -------------------------------- -------------------------------- 2000 1999 2000 1999> -------------------------------- -------------------------------- Weighted average common shares outstanding - basic 15,100,507 16,653,282 15,302,693 16,653,254 Effect of dilutive stock options 55,635 - 61,872 - -------------------------------- -------------------------------- Weighted average common shares outstanding - diluted 15,156,142 16,653,282 15,364,565 16,653,254 ================================ ================================
The effect of dilutive securities is excluded from the diluted earnings per common share computation for the three and six months ended June 30, 1999 because the Company had a net loss, therefore their inclusion would have been antidilutive. Certain options to purchase shares were not included in the computation of diluted earnings per common share because the options' exercise prices were greater than the average market price of the outstanding common shares for the period. 7 NOTE C. COMPREHENSIVE INCOME (LOSS) Comprehensive income (loss) is defined as net income (loss) plus or minus other comprehensive income (loss), which for the Company, under existing accounting standards, includes unrealized gains and losses, net of income tax effects, on certain investments in debt and equity securities. Comprehensive income (loss) for the Company is calculated as follows:
Three Months Ended Six Months Ended June 30, June 30, -------------------------------- -------------------------------- 2000 1999 2000 1999 -------------------------------- -------------------------------- (IN THOUSANDS) Net income (loss) $ 2,260 $ (3,530) $ 3,920 $ (525) Unrealized gain (loss) on available for sale securities (200) (3,715) 118 (7,208) -------------------------------- -------------------------------- Comprehensive income (loss) $ 2,060 $ (7,245) $ 4,038 $ (7,743) ================================ ================================
NOTE D. CONTINGENCIES On August 26, 1999, a $6.9 million verdict was entered against the Company in a lawsuit which principally alleged breach of contract involving the timing of claims payments. On April 17, 2000, the Company filed its notice of appeal of this decision with a Federal Appeals Court. Based on consultation with outside counsel, management expects the verdict to be reversed or substantially reduced following appeal. As a result, the Company's accrual related to this case is not material. On February 7, 2000, a $5.4 million verdict was entered against the Company in a lawsuit which alleged breach of contract involving commission amounts due to a former agent. On April 18, 2000, the Company filed a notice of appeal with an Ohio Appeals Court requesting reversal of the decision. Based on consultation with outside counsel, management expects the verdict to be reversed or substantially reduced following appeal. As a result, the Company's accrual related to this case is not material. The Company is involved in various legal and regulatory actions occurring in the normal course of its business. In the opinion of management, adequate provision has been made for losses which may result from the above-mentioned and other legal and regulatory actions; accordingly, the outcome of these matters is not expected to have a material adverse effect on the consolidated financial statements. NOTE E. SEGMENT INFORMATION The Company has two reportable segments: 1) health insurance products, and 2) life insurance products. The Company's health insurance products consist of the following coverages related to small group preferred provider organization products: MedOne (for individuals and families) and small group medical, self funded medical, dental and short-term disability. Life products consist primarily of group term-life insurance. The "All Other" segment includes operations not directly related to the business segments and unallocated corporate items (i.e., corporate investment income, interest expense on corporate debt, amortization of goodwill and intangibles and unallocated overhead expenses). The Company's All Other segment also includes data for its health maintenance organization ("HMO") subsidiary. The reportable segments are managed separately because they differ in the nature of the products offered and in profit margins. The Company evaluates segment performance based on profit or loss before income taxes, not including gains and losses on the Company's investment portfolio. The accounting policies of the reportable segments are the same as those used to report the Company's consolidated financial statements. Intercompany transactions have been eliminated prior to reporting reportable segment information. 8 A reconciliation of segment income (loss) before income taxes to consolidated income (loss) before income taxes is as follows:
Three Months Ended Six Months Ended June 30, June 30, -------------------------------- -------------------------------- 2000 1999 2000 1999 -------------------------------- -------------------------------- (IN THOUSANDS) Health segment $ 548 $ (7,426) $ 1,264 $ (3,945) Life segment 2,790 2,700 5,030 4,576 All other 462 (627) 340 (961) -------------------------------- -------------------------------- Income (loss) before income taxes $ 3,800 $ (5,353) $ 6,634 $ (330) ================================ ================================
Operating results and statistics for each of the Company's segments are as follows:
Three Months Ended Six Months Ended June 30, June 30, -------------------------------- -------------------------------- 2000 1999 2000 1999 -------------------------------- -------------------------------- (IN THOUSANDS) HEALTH SEGMENT OPERATING RESULTS Revenues: Insurance premiums $ 228,437 $ 246,752 $ 461,391 $ 493,404 Net investment income 2,353 2,297 4,898 4,565 Other revenue 4,020 4,696 7,983 9,908 -------------------------------- -------------------------------- Total revenues 234,810 253,745 474,272 507,877 Expenses: Medical and other benefits 175,569 199,474 354,074 386,894 Selling, general and administrative 58,693 61,697 118,934 124,928 -------------------------------- -------------------------------- Total expenses 234,262 261,171 473,008 511,822 -------------------------------- -------------------------------- Income (loss) before income taxes $ 548 $ (7,426) $ 1,264 $ (3,945) ================================ ================================ FINANCIAL STATISTICS Loss ratio 76.9% 80.8% 76.7% 78.4% Expense ratio 23.9% 23.1% 24.0% 23.3% -------------------------------- -------------------------------- Combined ratio 100.8% 103.9% 100.7% 101.7% ================================ ================================ Membership at End of Period: Medical: Fully insured 498,415 615,729 Self funded 50,680 49,964 -------------------------------- Total medical(a) 549,095 665,693 Dental 311,976 350,806
(a) Total medical membership for the Company of 560,575 and 665,693 at June 30, 2000 and 1999, respectively includes HMO membership of 11,480 and 29,182, respectively. HMO operations are not included in health segment operating results. 9
Three Months Ended Six Months Ended June 30, June 30, -------------------------------- -------------------------------- 2000 1999 2000 1999 -------------------------------- -------------------------------- (IN THOUSANDS) LIFE SEGMENT OPERATING RESULTS Revenues: Insurance premiums $ 5,774 $ 6,450 $ 11,846 $ 13,110 Net investment income 157 48 316 99 Other revenue 58 66 114 138 -------------------------------- -------------------------------- Total revenues 5,989 6,564 12,276 13,347 Expenses: Medical and other benefits 1,547 2,078 3,837 4,851 Selling, general and administrative 1,652 1,786 3,409 3,920 -------------------------------- -------------------------------- Total expenses 3,199 3,864 7,246 8,771 -------------------------------- -------------------------------- Income before income taxes $ 2,790 $ 2,700 $ 5,030 $ 4,576 ================================ ================================ FINANCIAL STATISTICS Loss ratio 26.8% 32.2% 32.4% 37.0% Expense ratio 27.6% 26.7% 27.8% 28.8% -------------------------------- -------------------------------- Combined ratio 54.4% 58.9% 60.2% 65.8% ================================ ================================ Membership at End of Period 270,600 309,173
10 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW American Medical Security Group, Inc., together with its subsidiary companies ("AMSG" or the "Company"), is a provider of health care benefits and insurance products for individuals and small employer groups. The Company's principal product offering is health insurance for small employer groups and health insurance for individuals and families ("MedOne"). The Company also offers life, dental, prescription drug, disability and accidental death insurance, and provides self funded benefit administration. The Company's products are actively marketed in 31 states and the District of Columbia through independent agents. The Company's products generally provide discounts to insureds that utilize preferred provider organizations ("PPOs"). AMSG owns a preferred provider network and also contracts with several other networks to ensure cost-effective health care choices to its customers. RESULTS OF OPERATIONS The Company reported net income of $2.3 million or $0.15 per share for the second quarter of 2000. This compares to net loss of $3.5 million or $ 0.21 per share for the second quarter of 1999. For the six months ended June 30, 2000, the Company reported net income of $3.9 million or $0.26 per share, compared to a net loss of $0.5 million or $0.03 per share for the same period in 1999. As previously reported, management implemented various strategic initiatives late in 1999 focused on improving the performance of the Company's small group business. The improvement in financial results which began late in the fourth quarter of 1999 and has continued during the first half of 2000, indicates that the impact of these initiatives has been beneficial. INSURANCE PREMIUMS Insurance premiums for the three months ended June 30, 2000 decreased 9.0% to $240.5 million from $264.2 million for the same period in 1999. For the six months ended June 30, 2000, insurance premiums decreased 7.3% to $488.4 million from $527.1 million for the same period in 1999. Premiums have decreased as a result of a decline in membership. Membership decreased from 666,000 members at June 30, 1999 to 630,000 members at December 31, 1999 to 561,000 members at June 30, 2000. The membership decrease is a result of the Company's success in terminating business in several unprofitable markets, including exited markets, lower sales due to aggressive premium rate increases implemented beginning in late 1999 and the run-off of the block of group health business acquired on January 1, 1999 from Continental Assurance Company ("CNA"). Based on the rate of membership terminations from exited markets and future sales projections, management anticipates membership will continue to decline during the remainder of 2000 and then begin to grow again in 2001. NET INVESTMENT INCOME Net investment income includes investment income and realized gains and losses on investments. Investment gains and losses are realized in the normal investment process in response to market opportunities. Net investment income for the three months ended June 30, 2000 increased slightly to $4.8 million from $4.7 million for the three months ended June 30, 1999. The average annual investment yield increased to 6.6% during the second quarter of 2000, compared to 6.4% during the second quarter of the prior year. Net investment income was $9.7 million for both of the six month periods ended June 30, 2000 and 1999. Average invested assets at cost during the second quarter of 2000 were $298.6 million compared to $309.8 million during the second quarter of 1999. 11 OTHER REVENUE Other revenue, which primarily consists of administrative fee income from claims processing and other administrative services, decreased to $5.0 million for the three months ended June 30, 2000 from $5.5 million for the same period in 1999, and to $9.9 million for the six months ended June 30, 2000 from $11.7 million for the same period in 1999. The decrease is primarily due to a decline in administrative fee revenue received for payments of run-out claims associated with acquired blocks of business. LOSS RATIO The health loss ratio for the three months ended June 30, 2000 was 76.9% compared to 80.8% for the three months ended June 30, 1999. The health loss ratio for the six months ended June 30, 2000 was 76.7% compared to 78.4% for the six months ended June 30, 1999. The improvement in the health loss ratio from the prior year reflects an improvement in the small group medical market as a result of premium rate increases and better than expected experience in exited states. Also contributing to the improvement is the Company's increased sales in its MedOne product line which is designed for a somewhat lower loss ratio. The second quarter 2000 health loss ratio has increased slightly from the health loss ratio of 76.6% reported for the first quarter of 2000. The slight increase from the prior quarter is attributed to a fluctuation in claims experience on the stop loss portion of the Company's self funded line of business. The loss ratio for the core small group and MedOne business continued to improve during the quarter as a result of management's strategic initiatives implemented late in 1999. The life segment loss ratio for the three months ended June 30, 2000 has improved to 26.8% compared to 32.2% for the three months ended June, 1999. The life segment loss ratio for the six months ended June 30, 2000 was 32.4% compared with 37.0% for the six months ended June 30, 1999. In the third quarter of 1999, the Company established a premium deficiency reserve for expected losses related to highly regulated markets. The amortized premium deficiency reserve balance was $7.9 million at June 30, 2000 and is 41% of the initial established reserve. The amortization of the premium deficiency reserve is generally consistent with original assumptions. Management believes that the current premium deficiency reserve remains adequate to cover future losses for those defined markets. SELLING, GENERAL AND ADMINISTRATIVE EXPENSE RATIO The selling, general and administrative ("SG&A") expense ratio includes commissions and selling expenses, administrative expenses and premium taxes and assessments. The SG&A expense ratio for health segment products for the three months ended June 30, 2000 was 23.9% compared with 23.1% for the three months ended June 30, 1999. The SG&A expense ratio for health segment products for the six months ended June 30, 2000 was 24.0% compared with 23.3% for the same period in 1999. The slight increase in the SG&A expense ratio from the prior year is in part a result of decreased revenues, growth in new sales of the Company's MedOne product, which is more costly to administer, and investment in systems to enhance medical management. The second quarter 2000 SG&A expense ratio is down compared to the first quarter 2000 reported SG&A expense ratio of 24.2% This sequential improvement is the result of cost containment efforts implemented by management at the beginning of the second quarter. The SG&A expense ratio is expected to remain stable during the remainder of 2000 due to management's commitment to control expenses. 12 LIQUIDITY AND CAPITAL RESOURCES The Company's sources of cash flow consist primarily of insurance premiums, administrative fee revenue and investment income. The primary uses of cash include payment of medical and other benefits, SG&A expenses and debt service costs. Positive cash flows are invested pending future payments of medical and other benefits and other operating expenses. The Company's investment policies are designed to maximize yield, preserve principal and provide liquidity to meet anticipated payment obligations. The Company's cash used in operations was $7.7 million for the six months ended June 30, 2000. This compares to cash provided by operations of $12.9 million for the six months ended June 30, 1999. The decrease in cash flows is a result of membership termination from exited markets and slower new sales volume. Management expects cash flow from operations to remain negative for the remainder of the year due to the continued terminations of unprofitable business. The Company's investment portfolio consists primarily of investment grade bonds and has limited exposure to equity securities. At June 30, 2000, $276.5 million or 99.2% of the Company's investment portfolio was invested in bonds. At December 31, 1999, $274.0 million or 99.2% of the Company's investment portfolio was invested in bonds. The bond portfolio had an average quality rating of Aa3 at June 30, 2000, and Aa3 at December 31, 1999, as measured by Moody's Investor Service. The majority of the bond portfolio was classified as available for sale. The Company has no investment in mortgage loans, non-publicly traded securities (except for principal only strips of U.S. Government securities), real estate held for investment or financial derivatives. The Company's insurance subsidiaries operate in states that require certain levels of regulatory capital and surplus and may restrict dividends to their parent companies. Based upon the financial statements of the Company's insurance subsidiaries as of December 31, 1999, as filed with the insurance regulators, no dividends may be paid by these subsidiaries without prior regulatory approval. The National Association of Insurance Commissioners has adopted risk-based capital ("RBC") standards for health and life insurers designed to evaluate the adequacy of statutory capital and surplus in relation to various business risks faced by such insurers. The RBC formula is used by state insurance regulators as an early warning tool to identify insurance companies that potentially are inadequately capitalized. At December 31, 1999, the Company's principal insurance company subsidiaries had an RBC ratio that was substantially above the levels which would require regulatory action. The Company does not expect to pay any cash dividends in the foreseeable future and intends to employ its earnings in the continued development of its business. The Company's future dividend policy will depend on its earnings, capital requirements and financial condition, any contractual or regulatory restrictions affecting the payment of dividends, and other factors considered relevant by the Board of Directors. In accordance with the Company's previously reported stock repurchase program, the Company purchased 853,000 shares of its common stock during the second quarter of 2000 bringing the total purchased to 2,075,800 shares at an aggregate purchase price of $14.1 million. On July 19, 2000, the Board of Directors approved a $1.0 million increase in the stock repurchase program, bringing the total authorized to $16.0 million. In addition, the Company amended its bank line of credit agreement to accommodate the increase in the stock repurchase program. In determining when and whether to purchase future shares, management considers, among other factors, market price, the number of shares actively traded in the market, indications of seller interest, the number of shares held by large shareholders, the effect of purchases on shareholder value, and covenant restrictions in the Company's revolving credit facility. Because of the unpredictability of these factors, no assurance can be given as to how many shares may be repurchased in the future. 13 CAUTIONARY FACTORS This report and other documents or oral presentations prepared or delivered by or on behalf of the Company contain or may contain forward-looking statements. Such statements are based upon management's expectations at the time such statements are made and are subject to risks and uncertainties that could cause the Company's actual results to differ materially from those contemplated in the statements. Readers are cautioned not to place undue reliance on the forward-looking statements. When used in written documents or oral presentations, the terms "anticipate", "believe", "estimate", "expect", "objective", "plan", "possible", "potential", "project" and similar expressions are intended to identify forward-looking statements. In addition to the assumptions and other factors referred to specifically in connection with such statements, factors that could cause the Company's actual results to differ materially from those contemplated in any forward-looking statements include, among others, the following: - Increases in health care costs resulting from the aging of the population, advances in medical technology, increased utilization of medical services and drugs, health care inflation (particularly pharmacy costs), possible epidemics and natural disasters and other factors affecting the delivery and cost of health care that are beyond the Company's control. - The Company's ability to profitably distribute and sell its products, including its ability to predict future health care cost trends and adequately price its products, its ability to control costs, changes in business relationships with independent agents who sell the Company's products, competitive factors such as the entrance of additional competitors into the Company's markets, competitive pricing practices, and demand for the Company's existing and new products. - Federal and state health care reform laws adopted in recent years, currently proposed or that may be proposed in the future which affect or may affect the Company's operations, products, profitability or business prospects. Reform laws adopted in recent years generally limit the ability of insurers and health plans to use risk selection as a method of controlling costs for the small group business. - Regulatory factors, including delays in regulatory approvals of rate increases and policy forms; regulatory action resulting from market conduct activity and general administrative compliance with state and federal laws; restrictions on the ability of the Company's subsidiaries to transfer funds to the Company or its other subsidiaries in the form of cash dividends, loans or advances without prior approval or notification; the granting and revoking of licenses to transact business; the amount and type of investments that the Company may hold; minimum capital and surplus requirements; and risk-based capital requirements. - The willingness of employers and individuals to accept rate increases, premium repricing and redesigned products implemented beginning in the second half of 1999 by the Company to improve loss ratios in its small group health business and the ability of the Company to control expenses. - The development of and changes in claims reserves, particularly for exited markets where insureds may be inclined to increase utilization prior to termination of their policies. - The ability of the Company to continue the growth of its individual and small group health business, and its ancillary group products, including group life, dental and self funded business. - The cost and other effects of legal and administrative proceedings, including the expense of investigating, litigating and settling any claims against the Company, and the general increase in litigation involving managed care and medical insurers. - Adverse outcomes of litigation against the Company, including the inability of the Company to prevail in its appeal of the verdicts in the Skilstaf litigation and the Health Administrators litigation. 14 - Possible restrictions on cash flow resulting from a denial by state regulators of the payment of dividends by the Company's insurance company subsidiaries. - Restrictions imposed by financing arrangements that limit the Company's ability to incur additional debt, pay future cash dividends and transfer assets. - Changes in rating agency policies and practices and the ability of the Company's insurance subsidiaries to maintain or exceed their A-(Excellent) rating by A.M. Best. - General economic conditions, including changes in interest rates and inflation that may impact the performance on the Company's investment portfolio or decisions of individuals and employers to purchase the Company's products. - The Company's ability to maintain attractive preferred provider networks for its insureds. - The Company's ability to integrate effectively the operational, managerial and financial aspects of future acquisitions. - Factors affecting the Company's ability to hire and retain key executive, managerial and technical employees. - Other business or investment considerations that may be disclosed from time to time in the Company's Securities & Exchange Commission filings or in other publicly disseminated written documents. The Company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK The Company's market risk has not substantially changed from the year ended December 31, 1999. 15 PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS As previously reported, on August 26, 1999, a $6.9 million verdict was entered against American Medical Security, Inc. ("AMS Inc."), the Company's third party administrator ("TPA") subsidiary, in the United States District Court for the Middle District of Alabama. The decision was made in a lawsuit brought against AMS Inc. by Skilstaf, Inc. ("Skilstaf"), an Alabama employee leasing company, in January 1998 alleging that AMS Inc. delayed claims payments under a contract with Skilstaf to avoid liability under a stop-loss policy issued by its affiliate, United Wisconsin Life Insurance Company ("UWLIC"). Skilstaf sought unspecified damages. The contract, which was entered into in 1992 and terminated by Skilstaf in 1996, was a TPA contract for Skilstaf's self funded employee benefit plan. AMS Inc. has argued that this case was governed by the Employee Retirement Income Security Act of 1974, as amended, which preempts all state law causes of action and limits damages to contract damages. AMS Inc.'s post-trial motion to set aside the jury's finding was denied by the court on March 20, 2000. As a result, AMS Inc. filed a notice of appeal with the Eleventh Circuit Federal Appeals Court on April 17, 2000. The case is currently in the briefing stage. Although the outcome of the appeal cannot be predicted with certainty, based on consultation with outside counsel and the merits of the appeal, management expects the $6.9 million verdict to be reversed or substantially reduced following appeal. As previously reported, on February 7, 2000, a $5.4 million verdict was entered against AMS Inc. and UWLIC in the Common Pleas Court of Delaware County, Ohio, Civil Division, in a lawsuit brought against AMS Inc. and UWLIC in 1996 by Health Administrators of America, Inc. ("Health Administrators"), an insurance agency owned and operated by a former agent of AMS Inc. The lawsuit alleges breach of written and oral contracts involving commission amounts and fraud. The case was heard and decided by a magistrate who awarded damages to Health Administrators, based on breach of written contracts and ruled in favor of AMS Inc. and UWLIC on breach of oral contracts and fraud. On February 22, 2000, AMS Inc. and UWLIC filed objections with the Common Pleas Court requesting that the magistrate's decision against AMS Inc. and UWLIC be reversed. The Common Pleas Court approved the magistrate's decision on April 10, 2000. As a result, AMS Inc. and UWLIC filed a notice of appeal with the Court of Appeals, Delaware County, Ohio, Fifth Appellate District on April 18, 2000. Health Administrators filed a cross-appeal on July 10, 2000. The case is currently in the briefing stage. Although the outcome of the appeal cannot be predicted with certainty, based on consultation with outside counsel and the merits of the appeal, management expects the $5.4 million judgment to be reversed or substantially reduced following appeal. The Company is involved in various legal and regulatory actions occurring in the normal course of its business. In the opinion of management, adequate provision has been made for losses which may result from the Skilstaf litigation, the Health Administrators litigation and other legal and regulatory actions; accordingly, the outcome of these matters is not expected to have a material adverse effect on the consolidated financial statements. 16 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS The Annual Meeting of Shareholders of the Company was held on May 17, 2000 for the purpose of electing three directors for terms expiring at the 2003 Annual Meeting of Shareholders. All three of the Company's nominees were elected. The voting results for the election were as follows: ELECTION OF DIRECTORS FOR TERMS EXPIRING IN 2003: James C. Hickman: For 15,178,716 shares Withheld 97,389 shares Abstained 0 Broker Non-Votes 0 William R. Johnson: For 15,178,905 shares Withheld 97,200 shares Abstained 0 Broker Non-Votes 0 Frank L. Skillern: For 15,196,861 shares Withheld 79,244 shares Abstained 0 Broker Non-Votes 0 Further information concerning these matters, including the names of the directors whose terms continued after the meeting, is contained in the Company's Proxy Statement dated March 31, 2000 with respect to the 2000 Annual Meeting of Shareholders. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) EXHIBITS See the Exhibit Index following the Signature page of this report, which is incorporated herein by reference. (b) REPORTS ON FORM 8-K No reports on Form 8-K were filed by the Company during the second quarter of 2000. 17 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. DATE: AUGUST 11, 2000 AMERICAN MEDICAL SECURITY GROUP, INC. /s/ Gary D. Guengerich Gary D. Guengerich Executive Vice President and Chief Financial Officer (Principal Financial Officer and Chief Accounting Officer and duly authorized to sign on behalf of the Registrant) 18 AMERICAN MEDICAL SECURITY GROUP, INC. (COMMISSION FILE NO. 1-13154) EXHIBIT INDEX TO FORM 10-Q QUARTERLY REPORT for quarter ended June 30, 2000
INCORPORATED HEREIN FILED EXHIBIT NO. DESCRIPTION BY REFERENCE TO HEREWITH 4 First Amendment dated as of X July 18, 2000 to Credit Agreement dated as of March 24, 2000, among the Registrant, LaSalle Bank National Association and other Lenders 27 Financial Data Schedule X
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