-----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, EZPiYJqkXMxoMqn9HwgQaWY/GLDjrqIjgXq+ipvxwHVQQ9NZEsSrWXi5deQrPn8j O1p3pdtYrKDvGd98rqcefg== /in/edgar/work/0000878897-00-000031/0000878897-00-000031.txt : 20001114 0000878897-00-000031.hdr.sgml : 20001114 ACCESSION NUMBER: 0000878897-00-000031 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20000930 FILED AS OF DATE: 20001113 FILER: COMPANY DATA: COMPANY CONFORMED NAME: AMERICAN MEDICAL SECURITY GROUP INC CENTRAL INDEX KEY: 0000878897 STANDARD INDUSTRIAL CLASSIFICATION: [6324 ] IRS NUMBER: 391431799 STATE OF INCORPORATION: WI FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-13154 FILM NUMBER: 761764 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-Q 1 0001.txt 3RD QTR AMERICAN MEDICAL SECURITY GROUP SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q [X] Quarterly Report Pursuant To Section 13 Or 15(d) Of The Securities Exchange Act Of 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 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 October 31, 2000: 14,470,415 shares AMERICAN MEDICAL SECURITY GROUP, INC. INDEX PART I. FINANCIAL INFORMATION Item 1. Financial Statements (Unaudited) Condensed Consolidated Balance Sheets September 30, 2000 and December 31, 1999.................3 Condensed Consolidated Statements of Income Three months ended September 30, 2000 and 1999; Nine months ended September 30, 2000 and 1999............5 Condensed Consolidated Statements of Cash Flows Nine months ended September 30, 2000 and 1999............6 Notes to Condensed Consolidated Financial Statements September 30, 2000.......................................7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations...............................12 Item 3. Quantitative and Qualitative Disclosures About Market Risk..17 PART II. OTHER INFORMATION Item 1. Legal Proceedings...........................................18 Item 6. Exhibits and Reports on Form 8-K............................18 Signatures...............................................................19 Exhibit Index..........................................................EX-1 2 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS AMERICAN MEDICAL SECURITY GROUP, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)
September 30, December 31, 2000 1999 --------------------------------- (IN THOUSANDS) ASSETS Investments: Securities available for sale, at fair value: Fixed maturities $ 269,950 $ 270,800 Equity securities-preferred 2,315 2,198 Fixed maturity securities held to maturity, at amortized cost 4,328 3,275 Trading securities, at fair value 127 - --------------------------------- Total investments 276,720 276,273 Cash and cash equivalents (6) 17,266 Other assets: Property and equipment, net 32,607 32,624 Goodwill and other intangibles, net 108,508 111,347 Other assets 47,016 65,584 --------------------------------- Total other assets 188,131 209,555 --------------------------------- Total assets $ 464,845 $ 503,094 =================================
See Notes to Condensed Consolidated Financial Statements 3 AMERICAN MEDICAL SECURITY GROUP, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)
September 30, December 31, 2000 1999 --------------------------------- (IN THOUSANDS) LIABILITIES AND SHAREHOLDERS' EQUITY Liabilities: Medical and other benefits payable $ 137,019 $ 169,117 Advance premiums 20,780 17,277 Payables and accrued expenses 27,559 25,044 Notes payable 41,558 42,523 Other liabilities 19,300 28,853 --------------------------------- Total liabilities 246,216 282,814 Shareholders' equity: Common stock (no par value, $1 stated value, 50,000,000 shares authorized, 16,654,315 issued and 14,530,215 outstanding at September 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 36,169 33,626 Accumulated other comprehensive loss, net of tax benefit of $4,153,000 and $5,634,000 at September 30, 2000 and December 31, 1999, respectively (7,712) (10,464) Treasury stock (2,124,100 and 1,121,500 shares at cost at September 30, 2000 and December 31, 1999, respectively) (14,438) (7,488) --------------------------------- Total shareholders' equity 218,629 220,280 --------------------------------- Total liabilities and shareholders' equity $ 464,845 $ 503,094 =================================
See Notes to Condensed Consolidated Financial Statements 4 AMERICAN MEDICAL SECURITY GROUP, INC. CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
Three Months Ended Nine Months Ended September 30, September 30, --------------------------------- --------------------------------- 2000 1999 2000 1999 --------------------------------- --------------------------------- (IN THOUSANDS, EXCEPT PER SHARE DATA) Revenues: Insurance premiums $ 231,963 $ 266,146 $ 720,405 $ 793,236 Net investment income 4,530 4,897 14,187 14,572 Other revenue 5,263 5,058 15,167 16,742 --------------------------------- --------------------------------- Total revenues 241,756 276,101 749,759 824,550 Expenses: Medical and other benefits 180,141 245,509 550,216 654,674 Selling, general and administrative 61,060 68,356 188,682 204,146 Interest expense 890 889 2,669 2,655 Amortization of goodwill and intangibles 946 1,017 2,839 3,075 --------------------------------- --------------------------------- Total expenses 243,037 315,771 744,406 864,550 --------------------------------- --------------------------------- Income (loss) before income taxes (1,281) (39,670) 5,353 (40,000) Income tax expense (benefit) 95 (13,745) 2,810 (13,540) --------------------------------- --------------------------------- Net income (loss) $ (1,376) $ (25,925) $ 2,543 $ (26,460) ================================= ================================= Net income (loss) per common share: Basic $ (0.09) $ (1.57) $ 0.17 $ (1.59) Diluted $ (0.09) $ (1.57) $ 0.17 $ (1.59)
See Notes to Condensed Consolidated Financial Statements 5 AMERICAN MEDICAL SECURITY GROUP, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
Nine Months Ended September 30, --------------------------------- 2000 1999 --------------------------------- (IN THOUSANDS) OPERATING ACTIVITIES: Net income (loss) $ 2,543 $ (26,460) Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization 7,325 7,885 Net realized investment losses 202 276 Increase in trading securities (127) - Deferred income tax expense (benefit) 5,261 (3,597) Changes in operating accounts: Other assets 11,825 (19,214) Medical and other benefits payable (32,098) 48,443 Advance premiums 3,503 25 Payables and accrued expenses 2,515 7,013 Other liabilities (9,553) 2,145 --------------------------------- Net cash provided by (used in) operating activities (8,604) 16,516 INVESTING ACTIVITIES: Purchases of available for sale securities (13,838) (186,983) Proceeds from sale of available for sale securities 13,335 153,970 Proceeds from maturity of available for sale securities 2,645 18,425 Purchases of held to maturity securities - (456) Proceeds from maturity of held to maturity securities 630 540 Purchases of property and equipment (3,539) (2,037) Proceeds from sale of property and equipment 10 34 --------------------------------- Net cash used in investing activities (757) (16,507) FINANCING ACTIVITIES: Issuance of common stock 4 3 Purchase of treasury stock (6,950) (3,202) Borrowings under line of credit agreement 39,158 5,000 Repayment on line of credit agreement (39,158) (5,000) Repayment of notes payable (965) (2,201) --------------------------------- Net cash used in financing activities (7,911) (5,400) --------------------------------- Cash and cash equivalents: Net decrease (17,272) (5,391) Balance at beginning of year 17,266 10,648 --------------------------------- Balance at end of period $ (6) $ 5,257 =================================
See Notes to Condensed Consolidated Financial Statements 6 AMERICAN MEDICAL SECURITY GROUP, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) September 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 nine month periods ended September 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 Nine Months Ended September 30, September 30, -------------------------------- ---------------------------------- 2000 1999 2000 1999 -------------------------------- ---------------------------------- Weighted average common shares outstanding - basic 14,562,275 16,468,380 15,054,086 16,590,952 Effect of dilutive stock options - - 87,624 - -------------------------------- ---------------------------------- Weighted average common shares outstanding - diluted 14,562,275 16,468,380 15,141,710 16,590,952 ================================ ==================================
The effect of dilutive securities is excluded from the diluted earnings per common share computation for the three months ended September 30, 2000 and the three and nine months ended September 30, 1999 because the Company had a net loss in those periods, 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 Nine Months Ended September 30, September 30, -------------------------------- ------------------------------ 2000 1999 2000 1999 -------------------------------- ------------------------------ (IN THOUSANDS) Net income (loss) $ (1,376) $ (25,925) $ 2,543 $ (26,460) Unrealized gain (loss) on available for sale securities 2,634 (1,947) 2,752 (9,155) -------------------------------- ------------------------------- Comprehensive income (loss) $ 1,258 $ (27,872) $ 5,295 $ (35,615) ================================ ===============================
NOTE D. CREDIT AGREEMENT On November 10, 2000, the Company amended its revolving bank line of credit agreement to extend the maximum allowable limit on the Company's share repurchase program by $2.0 million from $16.0 to $18.0 million. To accommodate the increase, the Company was required to amend certain other debt covenants within the line of credit agreement. The amendment also reduces the Company's maximum available line of credit from $45.0 million to $40.0 million. Prior to this amendment, this credit facility reduction would have occurred during the first quarter of 2001. The outstanding balance of loans under the revolving bank line of credit agreement was $35.2 million at September 30, 2000. NOTE E. CONTINGENCIES On August 26, 1999, a $6.9 million verdict was entered against the Company in a lawsuit which principally alleged breach of contract involving the timing of claims payments. On April 17, 2000, the Company filed its notice of appeal of this decision with a Federal Appeals Court. Based on consultation with outside counsel, management expects the verdict to be reversed or substantially reduced following appeal. As a result, the Company's accrual related to this case is not material. On February 7, 2000, a $5.4 million verdict was entered against the Company in a lawsuit which alleged breach of contract involving commission amounts due to a former agent. On April 18, 2000, the Company filed a notice of appeal with an Ohio Appeals Court requesting reversal of the decision. The Appeals Court heard oral arguments on October 5, 2000, and the parties are awaiting a 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. 8 NOTE F. SEGMENT INFORMATION The Company has two reportable segments: 1) health insurance products, and 2) life insurance products. The Company's health insurance products consist of the following coverages related to small group preferred provider organization products: MedOne (for individuals and families) and small group medical, self funded medical, dental and short-term disability. Life products consist primarily of group term-life insurance. The "All Other" segment includes operations not directly related to the business segments and unallocated corporate items (i.e., corporate investment income, interest expense on corporate debt, amortization of goodwill and intangibles and unallocated overhead expenses). The Company's All Other segment also includes data for its health maintenance organization ("HMO") subsidiary. The reportable segments are managed separately because they differ in the nature of the products offered and in profit margins. The Company evaluates segment performance based on profit or loss before income taxes, not including gains and losses on the Company's investment portfolio. The accounting policies of the reportable segments are the same as those used to report the Company's consolidated financial statements. Intercompany transactions have been eliminated prior to reporting reportable segment information. A reconciliation of segment income (loss) before income taxes to consolidated income (loss) before income taxes is as follows:
Three Months Ended Nine Months Ended September 30, September 30, -------------------------------- --------------------------------- 2000 1999 2000 1999 -------------------------------- --------------------------------- (IN THOUSANDS) Health segment $ (3,956) $ (34,976) $ (2,692) $ (38,921) Life segment 2,006 2,447 7,036 7,023 All other 669 (7,141) 1,009 (8,102) -------------------------------- --------------------------------- Income (loss) before income taxes $ (1,281) $ (39,670) $ 5,353 $ (40,000) ================================ =================================
9 Operating results and statistics for each of the Company's segments are as follows:
Three Months Ended Nine Months Ended September 30, September 30, -------------------------------- -------------------------------- 2000 1999 2000 1999 -------------------------------- -------------------------------- (IN THOUSANDS) HEALTH SEGMENT OPERATING RESULTS Revenues: Insurance premiums $ 222,635 $ 247,602 $ 684,026 $ 741,006 Net investment income 2,243 2,201 7,141 6,766 Other revenue 4,220 4,140 12,203 14,048 -------------------------------- -------------------------------- Total revenues 229,098 253,943 703,370 761,820 Expenses: Medical and other benefits 175,529 226,730 529,603 613,624 Selling, general and administrative 57,525 62,189 176,459 187,117 -------------------------------- -------------------------------- Total expenses 233,054 288,919 706,062 800,741 -------------------------------- -------------------------------- Loss before income taxes $ (3,956) $ (34,976) $ (2,692) $ (38,921) ================================ ================================= FINANCIAL STATISTICS Loss ratio 78.8% 91.6% 77.4% 82.8% Expense ratio 23.9% 23.4% 24.0% 23.4% -------------------------------- -------------------------------- Combined ratio 102.7% 115.0% 101.4% 106.2% ================================ ================================ Membership at End of Period: Medical: Fully insured 475,706 576,354 Self funded 54,948 49,036 -------------------------------- Total medical 530,654 625,390 Dental 306,730 344,146
(a) Total medical membership for the Company of 537,664 and 654,768 at September 30, 2000 and 1999 includes HMO membership of 7,010 and 29,378, respectively. HMO operations are not included in health segment operating results. 10
Three Months Ended Nine Months Ended September 30, September 30, -------------------------------- -------------------------------- 2000 1999 2000 1999 -------------------------------- -------------------------------- (IN THOUSANDS) LIFE SEGMENT OPERATING RESULTS REVENUES: Insurance premiums $ 5,460 $ 6,641 $ 17,306 $ 19,751 Net investment income 157 48 473 147 Other revenue 57 64 171 202 -------------------------------- -------------------------------- Total revenues 5,674 6,753 17,950 20,100 Expenses: Medical and other benefits 2,102 2,436 5,939 7,287 Selling, general and administrative 1,566 1,870 4,975 5,790 -------------------------------- -------------------------------- Total expenses 3,668 4,306 10,914 13,077 -------------------------------- -------------------------------- Income before income taxes $ 2,006 $ 2,447 $ 7,036 $ 7,023 ================================ ================================ FINANCIAL STATISTICS Loss ratio 38.5% 36.7% 34.3% 36.9% Expense ratio 27.6% 27.2% 27.8% 28.3% -------------------------------- -------------------------------- Combined ratio 66.1% 63.9% 62.1% 65.2% ================================ ================================ Membership at End of Period 259,000 307,343
11 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 offerings are (1) health insurance for small employer groups and (2) health insurance for individuals and families ("MedOne"). The Company also offers life, dental, prescription drug, disability and accidental death insurance, and provides stop-loss reinsurance and benefit administration for self funded employer groups. 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 a net loss of $1.4 million or $0.09 per share for the third quarter of 2000. This compares to net loss of $25.9 million or $1.57 per share for the third quarter of 1999. For the nine months ended September 30, 2000, the Company reported net income of $2.5 million or $0.17 per share, compared to a net loss of $26.5 million or $1.59 per share for the same period in 1999. The loss for the third quarter of 2000 follows three consecutive quarters of positive earnings for the Company. The negative results for the third quarter of 2000 reflect an abrupt rise in small group medical claim costs attributed mainly to a sudden increase in the number of large claims and to an increase in the costs for outpatient facility services. In addition, the Company received a one-time assessment from the State of Minnesota related to the Company's exit from the MedOne health insurance market in that state in early 1999. The assessment was $1.2 million in excess of the Company's original provision for such assessment. Management expects no similar assessments from other exited markets. INSURANCE PREMIUMS Insurance premiums for the three months ended September 30, 2000 decreased 12.8% to $232.0 million from $266.1 million for the same period in 1999. For the nine months ended September 30, 2000, insurance premiums decreased 9.2% to $720.4 million from $793.2 million for the same period in 1999. Premiums have decreased primarily as a result of a decline in membership in the small group and exited markets, partially offset by rising premium rates and rising MedOne membership. Average premium per member for the third quarter increased by $3 to $137, compared to the second quarter, reflecting continuing rate actions taken by the Company. Insurance premiums for the Company's profitable MedOne product increased 28% from the third quarter of the prior year. Management considers the MedOne product to be a key strategic product and has recently taken steps to accelerate membership and premium growth in this market through an expanded agent force and additional regional and national distribution agreements. Total medical membership declined from 655,000 members at September 30, 1999 to 538,000 members at September 30, 2000. The membership decrease is a result of (1) the Company's success in terminating business in several unprofitable markets, including exited markets, (2) lower sales due to aggressive premium rate increases implemented beginning in late 1999 and (3) 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. 12 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 September 30, 2000 decreased slightly to $4.5 million from $4.9 million for the three months ended September 30, 1999. Net investment income was $14.2 million and $14.6 million for the nine month periods ended September 30, 2000 and 1999, respectively. The decrease in net investment income is due primarily to a decrease in average invested assets. Average invested assets at cost were $291.6 million and $290.5 million for the three and nine months ended September 30, 2000, respectively. In comparison, average invested assets were $316.7 million and $306.1 million for the same respective periods one year prior. OTHER REVENUE Other revenue, which primarily consists of administrative fee income from claims processing and other administrative services, remained relatively flat for the quarter at $5.3 million compared to $5.1 million for the third quarter of 1999. On a year-to-date basis, other revenue decreased to $15.2 million from $16.7 million in the prior year. The decrease from the prior year 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 September 30, 2000 was 78.8% compared to 91.6% for the three months ended September 30, 1999. The health loss ratio for the nine months ended September 30, 2000 was 77.4% compared to 82.8% for the nine months ended September 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 aggressive premium rate increases, better-than expected experience in exited states and product redesign. Also contributing to the improvement was the Company's increased sales in its MedOne product line which is designed for a somewhat lower loss ratio. The third quarter 2000 health loss ratio of 78.8% has increased from the health loss ratio of 76.9% reported for the second quarter of 2000. The increase from the prior quarter is attributed to an abrupt rise in small group medical claim costs, as mentioned above. Management has identified two key components contributing to the rise in small group medical claim costs which resulted in the Company's disappointing third quarter financial results. The first component was a significant increase in the number of large claims the Company experienced in the second and third quarters of this year. A significant portion were accident related or one-time medical events. The second component was a sudden increase in the costs associated with outpatient facility services. The life segment loss ratio for the three months ended September 30, 2000 was 38.5% compared to 36.7% for the three months ended September 30, 1999. The life segment loss ratio for the nine months ended September 30, 2000 improved to 34.3% compared with 36.9% for the nine months ended September 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 $3.2 million at September 30, 2000 which was 17% 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. 13 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. As reported, the SG&A expense ratio for health segment products for the three months ended September 30, 2000 was 23.9%. Excluding the impact of the one-time $1.2 million assessment from the State of Minnesota discussed previously, the third quarter health segment SG&A expense ratio was 23.5%. This compares to 23.4% reported for the three months ended September 30, 1999 and 23.9% reported for the second quarter of 2000. Cost containment efforts implemented by management earlier in the year have resulted in a favorable downward trend in general and administrative expenses. The SG&A expense ratio for health segment products for the nine months ended September 30, 2000, excluding the assessment, was 23.9% compared with 23.4% 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 SG&A expense ratio is expected to remain stable during the remainder of 2000 due to management's commitment to control expenses. FUTURE EXPECTATIONS Management continues to take actions to improve profitability through aggressive pricing, product redesign, new product introduction, and targeted focus on profitable markets and products. Management expects earnings to improve to break even in the fourth quarter of 2000 resulting in earnings between $0.16 and $0.18 for the full year of 2000. In addition, management believes that the results for 2001 will be an improvement over 2000. See "Cautionary Factors" below for a detailed discussion of risks and uncertainties that may cause actual results to differ materially from management's expectations. 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 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 $8.6 million for the nine months ended September 30, 2000. This compares to cash provided by operations of $16.5 million for the nine months ended September 30, 1999. The decrease in cash flows is a result of membership termination from exited markets, faster claim submission and payment patterns, and lower 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 September 30, 2000, $274.3 million or 99.1% of the Company's investment portfolio was invested in bonds. At December 31, 1999, $274.1 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 September 30, 2000 and 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. 14 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. In accordance with the Company's previously reported stock repurchase program, the Company purchased 48,300 shares of its common stock during the third quarter of 2000 bringing the total purchased to 2.1 million shares at an aggregate purchase price of $14.4 million. In July 2000, the Board of Directors authorized an increase to the stock repurchase program to $16.0 million. In November 2000, the Board of Directors approved a further increase to the Company's stock repurchase program to $18.0 million. The Company's revolving bank line of credit agreement was amended to increase the maximum allowable limit on the stock repurchase program to $18.0 million. To accommodate the increase, the Company was required to amend certain other debt covenants within the line of credit agreement. The November amendment also reduces the Company's maximum available line of credit from $45.0 million to $40.0 million. Prior to this amendment, this credit facility reduction would have occurred during the first quarter of 2001. The outstanding balance of loans under the revolving bank line of credit agreement was $35.2 million at September 30, 2000. The line of credit agreement contains certain debt covenants which, among other matters, require the Company to maintain a minimum consolidated net worth and restrict the Company's ability to incur additional debt, pay future cash dividends, repurchase Company stock in the future beyond the allowable limit, and transfer assets outside the scope of normal operations. In determining when and whether to purchase future shares under the stock repurchase program, management considers 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 other relevant factors. Because of the unpredictability of these factors, no assurance can be given as to how many, if any, shares may be repurchased in the future. 15 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" within the meaning of the safe harbor provisions of the United States Private Securities Litigation Reform Act of 1995. 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. 16 - - 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 DISCLOSURES ABOUT MARKET RISK The Company's market risk has not substantially changed from the year ended December 31, 1999. 17 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. Oral arguments were heard on October 5, 2000 and the parties are awaiting a decision from the Court of Appeals. 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. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) EXHIBITS See the Exhibit Index following the Signature page of this report, which is incorporated herein by reference. (b) REPORTS ON FORM 8-K No reports on Form 8-K were filed by the Company during the third quarter of 2000. 18 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. DATE: NOVEMBER 13, 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) 19 AMERICAN MEDICAL SECURITY GROUP, INC. (COMMISSION FILE NO. 1-13154) EXHIBIT INDEX TO FORM 10-Q QUARTERLY REPORT for quarter ended September 30, 2000
INCORPORATED HEREIN FILED EXHIBIT NO. DESCRIPTION BY REFERENCE TO HEREWITH 4 Second Amendment dated as of November X 10, 2000 to Credit Agreement dated as of March 24, 2000 among the Registrant, LaSalle Bank National Association and other Lenders 10 Employment Agreement of Chief Executive Officer X dated September 28, 2000 27 Financial Data Schedule X
EX-1 EX-4 2 0002.txt SECOND AMENDMENT TO CREDIT AGREEMENT SECOND AMENDMENT TO CREDIT AGREEMENT This Second Amendment to Credit Agreement (the "Amendment") is made as of this 10th day of November, 2000 by and among AMERICAN MEDICAL SECURITY GROUP, INC. (the "Borrower"), the Lenders named in the Credit Agreement (the "Lenders") and LASALLE BANK NATIONAL ASSOCIATION, as Agent and Swing Line Lender (the "Agent"). W I T N E S S E T H WHEREAS, the Borrower, the Agent and the Lenders are parties to that certain Credit Agreement, dated as of March 24, 2000, as amended pursuant to that certain First Amendment to Credit Agreement, dated as of July 18, 2000, (collectively, the "Credit Agreement); and WHEREAS, the parties desire to further amend the Credit Agreement, as more fully set forth herein. NOW, THEREFORE, in consideration of the mutual agreements herein contained and other good and valuable consideration, the adequacy of which is hereby acknowledged, and subject to the terms and conditions hereof, the parties hereto agree as follows: SECTION 1. DEFINITIONS. Unless otherwise defined herein, all capitalized terms shall have the meaning given to them in the Credit Agreement. SECTION 2. AMENDMENTS TO CREDIT AGREEMENT. 2.1 Section 2.8(a) of the Credit Agreement is hereby deleted in its entirety and amended by inserting the following in its stead: "2.8. Mandatory Commitment Reductions. (a) The Aggregate Commitment shall be automatically and permanently reduced to the following amounts on the following dates: Date Availability Reduction Aggregate Commitment November 10, 2000 $ 5,000,000 $40,000,000 March 24, 2002 $ 5,000,000 $35,000,000 March 24, 2003 $10,000,000 $25,000,000 March 24, 2004 $10,000,000 $15,000,000 March 24, 2005 $15,000,000 $ 0" 2.2 Section 6.10(ii) of the Credit Agreement is hereby deleted in its entirety and amended by inserting the following in its stead: "(ii) AMS may repurchase its outstanding stock, provided that any such repurchases after the date hereof shall not exceed $10,200,000 in the aggregate." SECTION 3. CONDITIONS PRECEDENT. The effectiveness of this Amendment is expressly conditioned upon satisfaction of the following conditions precedent: 3.1 The Agent and the Lenders shall have received copies of this Amendment duly executed by the Borrower. 3.2 The Agent shall have received, for the benefit of the Agent and the Lenders, an amendment fee of $22,500 payable and fully earned on the date hereof. 3.3 The Agent and the Lenders shall have received copies of the Collateral Assignment and Pledge Agreement, dated as of November 10, 2000, duly executed by the Borrower, and Borrower shall have established the Account referred to therein with Agent and deposited the amount of $1,500,000 into the Account on or before the date hereof. 3.4 The Agent and the Lenders shall have received such other documents, certificates and assurances as they shall reasonably request. SECTION 4. REAFFIRMATION OF THE BORROWER. The Borrower hereby represents and warrants to the Agent and the Lenders that (i) the warranties set forth in Article 5 of the Credit Agreement are true and correct on and as of the date hereof, except to the extent (a) that any such warranties relate to a specific date, or (b) changes thereto are a result of transactions for which the Agent and the Lenders have granted their consent; (ii) the Borrower is on the date hereof in compliance with all of the terms and provisions set forth in the Credit Agreement as hereby amended; and (iii) upon execution hereof no Event of Default has occurred and is continuing or has not previously been waived. SECTION 5. FULL FORCE AND EFFECT. Except as herein amended, the Credit Agreement and all other Loan Documents shall remain in full force and effect. SECTION 6. COUNTERPARTS. This Amendment may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same document. [SIGNATURE PAGE FOLLOWS] IN WITNESS WHEREOF, the parties hereto have executed this Amendment on the day and year specified above. AMERICAN MEDICAL SECURITY GROUP, INC. By: /S/ CAROL P. SANDERS Name: Carol P. Sanders Title: Vice President and Treasurer LASALLE BANK NATIONAL ASSOCIATION By: /S/ JANET R. GATES Name: Janet R. Gates Title: Senior Vice President FIRST UNION NATIONAL BANK, NATIONAL ASSOCIATION By: /S/ THOMAS L. STITCHBERRY Name: Thomas L. Stitchberry Title: Senior Vice President ASSOCIATED BANK GREEN BAY, NATIONAL ASSOCIATION By: /S/ DENIS F. HOGAN Name: Denis F. Hogan Title: Vice President ACKNOWLEDGMENT AND AGREEMENT OF GUARANTOR The undersigned, AMERICAN MEDICAL SECURITY HOLDINGS, INC., hereby ratifies and reaffirms that certain Guaranty dated March 24, 2000 (the "Guaranty") made by the undersigned in favor of the Agent and the Lenders and each of the terms and provisions contained therein, and agrees that the Guaranty continues in full force and effect following the execution and delivery of the foregoing Amendment. The undersigned represents and warrants to the Agent and the Lenders that the Guaranty was, on the date of the execution and delivery thereof, and continues to be, the valid and binding obligation of the undersigned enforceable in accordance with its terms and that the undersigned has no claims or defenses to the enforcement of the rights and remedies of the Agent and the Lenders under the Guaranty. IN WITNESS WHEREOF, this Acknowledgment and Agreement of Guarantor has been duly authorized as of this 10th day of November, 2000. AMERICAN MEDICAL SECURITY HOLDINGS, INC. By: /S/ CAROL P. SANDERS Name: Carol P. Sanders Title: Vice President and Treasurer EX-10 3 0003.txt EMPLOYMENT CONTRACT EMPLOYMENT AGREEMENT This Employment Agreement (this "AGREEMENT") is executed and effective as of this 28TH day of SEPTEMBER , 2000 ("EFFECTIVE DATE") by and between American Medical Security Group, Inc., a Wisconsin corporation (the "COMPANY") and Samuel V. Miller, an individual ("EMPLOYEE"). RECITALS The Company, formerly known as United Wisconsin Services, Inc., a Wisconsin corporation ("AMSG") and Employee were parties to an employment and non-competition agreement dated as of October 30, 1995 (the "OLD AGREEMENT"). Since the date of the Old Agreement, AMSG acquired the American Medical Security Group, Inc., a Delaware corporation by merger (the "AMSG MERGER"), and transferred a substantial portion of the assets of that Delaware corporation to American Medical Security Holdings, Inc. ("AMSH"). The Old Agreement was superseded by a subsequent agreement dated as of April 7, 1998 among AMSG, AMSH, and Employee (the "PRIOR AGREEMENT"). After the date the Prior Agreement was executed, AMSG established a new subsidiary ("NEWCO") and transferred its managed care business to Newco. AMSG was renamed "American Medical Security Group, Inc." and Newco was renamed "United Wisconsin Services, Inc." and the stock of Newco was distributed to shareholders of AMSG. Amendment Number One to the Prior Agreement, effective September 25, 1998 ("AMENDMENT NUMBER One"), made AMSG a party to the Prior Agreement in connection with Employee's options to purchase stock of AMSG, and further made Newco a party to the Agreement in connection with Employee's options to purchase stock of Newco. The parties desire to supersede the Prior Agreement and Amendment Number One as hereinafter set forth. The Company desires to employ Employee on the terms and conditions hereinafter set forth. NOW, THEREFORE, THE PARTIES AGREE AS FOLLOWS: ARTICLE I EMPLOYMENT 1.1 TERM OF EMPLOYMENT. The Company agrees to continue to employ Employee, and Employee accepts employment by the Company, for the period commencing as of the Effective Date of this Agreement and ending on December 31, 2003, subject to earlier termination as hereinafter set forth in Article III (the "EMPLOYMENT TERM"). Commencing January 1, 2004, this Agreement shall be automatically renewed for successive one-year periods (collectively, the "RENEWAL TERMS"; individually, a "RENEWAL TERM") unless, at least thirty (30) calendar days prior to the expiration of the Employment Term or the then current Renewal Term, either the Company or Employee provides the other with a written notice of intention not to renew, in which case this Agreement shall terminate as of the end of the Employment Term or said Renewal Term, as applicable. If this Agreement is renewed, the terms of this Agreement during such Renewal Term shall be the same as the terms in effect immediately prior to such Renewal Term, subject to any such changes or modifications as mutually may be agreed amongst the parties as evidenced in a written instrument signed by the parties. 1.2 POSITIONS AND DUTIES. Employee shall be employed by the Company in the position of Chairman and Chief Executive Officer of the Company and shall be subject to the authority of, and shall report to, the Board of Directors of the Company. Employee's duties and responsibilities shall include all those customarily attendant to the position of Chairman and Chief Executive Officer. While Employee currently serves as President of the Company, the Board of Directors reserves the right to remove Employee as President and elect or appoint another person to the position of President of the Company who, in such a case, would report to Employee. 1.3 ENTIRE BUSINESS TIME. Employee shall devote Employee's entire business time, attention and energies exclusively to the business interests of the Company. ARTICLE II COMPENSATION AND OTHER BENEFITS 2.1 BASE SALARY. Effective January 1, 2001, Base Salary shall mean an annual salary of $700,000 paid by the Company to Employee, prorated for any portion of a full year that Employee is employed. From the Effective Date through December 31, 2000, Base Salary shall mean an annual salary of $500,000 paid by the Company to Employee, prorated for any portion of a full year that Employee is employed. Base Salary shall be payable in accordance with the normal payroll practices of the Company. 2.2 PERFORMANCE BONUS. (a) PERFORMANCE BONUS EFFECTIVE JANUARY 1, 2001. Effective January 1, 2001, the Company shall pay to Employee an annual performance bonus ("PERFORMANCE BONUS") ranging from zero (0) to a target bonus equal to sixty percent (60%) of Employee's Base Salary to a maximum of one hundred thirty-two percent (132%) of his Base Salary. Employee's receipt of a Performance Bonus shall be dependent upon the degree of achievement of target performance goals and his remaining employed by the Company through the last day of the applicable fiscal year. Target performance goals shall be determined by the Board of Directors of the Company or a designated committee thereof and the amount of any Performance Bonus shall be based sixty percent (60%) on the Company's performance criteria and forty percent (40%) on Employee's individual performance criteria. If Employee achieves both his target Company and individual performance goals as determined by the Board of Directors of the Company or a designated committee thereof on an annual basis, his Performance Bonus shall be sixty percent (60%) of his Base Salary. Minimum, target and maximum performance goals shall be determined and set by the Board of Directors of the Company or a designated committee thereof no later than ninety (90) calendar days after the first day of the applicable performance year on which the Company budget for such fiscal year has been delivered to and approved by the Board of Directors of the Company or a designated committee thereof. Payment of the Performance Bonus shall be at a time and in a manner in accordance with the Company's policies then in effect. Notwithstanding any provision in this Section 2.2(a), if any portion of the Performance Bonus paid in the ordinary course would not be deductible as a result of Section 162(m) of the Internal Revenue Code of 1986, as amended (the "CODE"), then such non-deductible portion shall be deferred. Any Performance Bonus deferred shall be deferred until Employee ceases to be a covered employee under Section 162(m) of the Code. Any amount deferred shall be held in a rabbi trust and shall be credited with interest at a rate equal to the Marshall Money Market Fund of M&I Trust & Investment Management (the "INTEREST RATE"). (b) PERFORMANCE BONUS PRIOR TO JANUARY 1, 2001. For the fiscal year ending December 31, 2000, the Company shall pay to Employee a Performance Bonus of not less than $500,000 or such greater amount as shall be determined by the Company under then existing performance bonus policies in an amount not more than $1,000,000. If any portion of the Performance Bonus paid in the ordinary course would not be deductible as a result of Section 162(m) of the Code, then such non-deductible portion shall be deferred. Any Performance Bonus deferred shall be deferred until Employee ceases to be a covered employee under Section 162(m) of the Code. Any Performance Bonus deferred by the Company for Employee prior to the Effective Date shall continue to earn interest at the rate of 60% of the prime rate as reported in the WALL STREET JOURNAL through December 31, 2000 and shall, effective January 1, 2001, be credited with interest at the Interest Rate. 2.3 CONTINUED DEFERRAL OF TRANSACTION BONUS. In connection with the AMSG Merger Employee earned a bonus of $1.0 million (the "TRANSACTION BONUS") which has been deferred and credited with interest. The Transaction Bonus shall continue to be deferred and shall continue to be held in a rabbi trust. From the Effective Date through December 31, 2000, the Transaction Bonus held in the rabbi trust shall continue to be credited with interest at the rate of sixty percent (60%) of the prime rate as reported in the WALL STREET JOURNAL. Effective January 1, 2001, the Transaction Bonus which continues to be held in the rabbi trust shall be credited with interest at the Interest Rate. 2.4 STOCK OPTIONS AND DEFERRED STOCK. Employee has been granted options to purchase common stock of the Company ("COMPANY COMMON STOCK") as set forth below. Additionally, Employee has been granted shares of deferred stock as set forth below. Such options and deferred stock shall continue in full force and effect in accordance with their terms and related agreements. Any prior grants of options in common stock of Newco (the "UWS COMMON STOCK") shall not be modified in any manner by this Agreement and, further, shall be continued to be governed in accordance with the terms of the UWS Common Stock option plans or arrangements, and related agreements currently in effect. (a) Effective September 28, 1998, the grant of an option on December 6, 1995 to Employee to purchase 198,019 shares of Company Common Stock was amended to adjust the grant price per share to $15.76. (b) Effective September 28, 1998, the grant of an option on December 3, 1996 to Employee was amended to adjust the number of shares of Company Common Stock Employee may purchase to 427,205 shares and further to adjust the grant price per share to $11.71. No such option shall be exercised to the extent that the gain realized by Employee would be nondeductible pursuant to Section 162(m) of the Code unless (i) exercise of the option occurs after a Change of Control as defined in Section 4.2 or (ii) the option would expire if not exercised. In consideration of Employee's agreement to the restriction set forth in the preceding sentence, such option shall not be forfeited in the event of a termination of employment for "Cause" as defined in Section 2(f) of the United Wisconsin Services, Inc. Equity Incentive Plan amended as of August 15, 1996, unless the termination of employment is also for "Cause" as defined in Section 3.1(b) or Section 4.7(a) of this Agreement, as applicable. (c) Effective September 28, 1998, the grant of an option on December 17, 1996 to Employee was amended to adjust the number of shares of Company Common Stock Employee may purchase to 245,838 shares and further to adjust the grant price per share to $16.27. (d) On September 28, 1998, Employee was granted an option to purchase 100,000 shares of Company Common Stock at a grant price of $10.25 per share. (e) On November 17, 1998, Employee was granted an option to purchase 101,113 shares of Company Common Stock at a grant price of $12.25 per share. (f) On November 17, 1999, Employee was granted an option to purchase 148,000 shares of Company Common Stock at a grant price of $5.8125 per share. (g) Effective November 17, 1998, the Company granted to Employee deferred stock in the amount of 73,506 shares of Company Common Stock. Employee shall participate in future grants of options, deferred stock, and other equity incentive awards as determined by the Board of Directors of the Company or its delegate. 2.5 BENEFIT PLANS. Employee will be eligible to participate in each of the Company's retirement, benefit and health plans that are generally applicable to comparable executive employees of the Company, in accordance with the terms and conditions thereof. The Company agrees to waive any waiting periods applicable to any health, disability or insurance plans, to the extent it may legally do so. 2.6 EXPENSES. The Company shall reimburse Employee for all reasonable expenses incurred in the course of the performance of Employee's duties and responsibilities with the Company pursuant to this Agreement and consistent with the Company's policies with respect to travel, entertainment and miscellaneous expenses, and the requirements with respect to the reporting of such expenses. Such reimbursement also shall include expenses incurred with having Employee's spouse travel with Employee and attend appropriate business-related functions and meetings up to four times per calendar year and reasonable attorneys' fees incurred in connection with negotiation and execution of this Agreement. 2.7 ANNUAL PHYSICAL EXAMINATION. Employee shall be reimbursed for the cost of an annual physical examination. 2.8 AUTOMOBILE ALLOWANCE. Employee shall be provided with an automobile and insurance and shall be reimbursed for normal and ordinary costs and expenses in maintaining such automobile in connection with the performance of his duties. 2.9 VACATION. Employee shall be entitled to a maximum of four weeks of vacation in any calendar year in accordance with the Company's vacation policies. Holidays and attendance at seminars and professional meetings shall not be applied against vacation time. 2.10 CLUB MEMBERSHIPS. Employee shall be reimbursed for initiation fees and reasonable dues and assessments in connection with membership in a business club and/or a country club chosen by Employee. 2.11 TAX MATTERS. Employee acknowledges and agrees that reimbursement of some or all of the expenses referred to in this Article II may be considered or treated as income to Employee, and Employee shall be responsible for any applicable taxes thereon. ARTICLE III TERMINATION 3.1 RIGHT TO TERMINATE; AUTOMATIC TERMINATION. (a) TERMINATION WITHOUT CAUSE OR FOR GOOD REASON ABSENT A CHANGE OF CONTROL. Subject to Section 3.2, the Company may terminate Employee's employment, and all of the Company's obligations under this Agreement at any time and for any reason, provided that in no event shall a termination for Cause under Section 3.1(b) be regarded as a termination under this Section 3.1(a), and further provided that in no event shall a termination for death or Disability under Section 3.1(c) be regarded as a termination under this Section 3.1(a). Except as otherwise provided in this Section 3.1(a) in the case of a termination for "Good Reason" as defined in this Section 3.1(a), in no event shall a termination by Employee be regarded as a termination under this Section 3.1(a). For purposes of this Agreement absent a Change of Control as provided in Article IV below, Good Reason shall mean Employee's resignation from the Company's employment on account of any material breach of this Agreement by the Company, including: (i) the failure of the Board of Directors of the Company to reelect or reappoint Employee to the positions with the Company specified in the first sentence of Section 1.2 hereof, and Employee then elects to leave the Company's employment within six (6) months after such failure to so reelect or reappoint Employee; (ii) a material modification by the Board of Directors of the Company of the duties, functions and responsibilities of Employee without his consent, except as specifically permitted under Section 1.2 hereof; (iii) the failure of the Company to permit Employee to exercise such responsibilities as are consistent with his position and of such a nature as are usually associated with such offices of a corporation engaged in substantially the same business as the Company, except as specifically permitted under Section 1.2 hereof; (iv) the Company causes Employee to relocate his employment more than fifty (50) miles from Green Bay, Wisconsin, without the consent of Employee; (v) the Company's failure to make a payment when due to Employee; or (vi) the Company's reduction of Employee's Base Salary below Employee's Base Salary under Section 2.1 hereof, or the Company's reduction of the amount of Performance Bonus payable with respect to minimum, target, or maximum (as applicable) achievement of performance goals; PROVIDED however, that no act or omission described in clauses (i), (ii), (iii), (iv), (v), or (vi) of this Section 3.1(a) shall constitute Good Reason unless Employee gives the Company written notice of such act or omission as soon as practicable after Employee first learns of such act or omission and the Company fails to cure such act or omission within thirty (30) calendar days after receipt of such notice. (b) TERMINATION FOR CAUSE. Subject to Section 3.2, the Company may terminate Employee's employment at any time for "CAUSE." For all purposes of this Agreement, except for Article IV, "Cause" shall mean any one or more of the following: (i) Gross negligence in the performance of duties, (ii) Willful misconduct in the performance of duties, (iii) Violation of law in the performance of duties where Employee is aware that he is violating the law at the time of said conduct and such violation of law jeopardizes the operations of the Company, (iv) Dishonesty, fraud, deliberate misrepresentation to the officers or members of the Board of Directors of the Company, (v) Conviction of a felony which substantially impairs Employee's ability to perform his duties or which by law disqualifies him from continued service with the Company, (vi) Insubordination with respect to the Board of Directors of the Company, or (vii) Obtaining personal profit from any transaction in which the Company has an interest and which constitutes a corporate opportunity of the Company or is adverse to the interests of the Company, unless such transaction was approved in advance of such transaction, in writing, by the Board of Directors of the Company. Prior to any termination for Cause, Employee shall be provided with reasonable advance notice of the specific grounds for termination, and Employee shall be provided an opportunity to address the Board of Directors of the Company or a designated committee thereof, on the merits of termination. The termination of Employee for Cause shall be based upon a good faith determination of the Board of Directors of the Company or a designated committee thereof, and such good faith determination shall be conclusive and binding on both the Company and Employee. (c) TERMINATION BY DEATH OR DISABILITY. Subject to Section 3.2, Employee's employment and the obligations of the Company under this Agreement shall terminate automatically, effective immediately and without any notice being necessary, upon Employee's death or a determination of Disability of Employee. For purposes of this Agreement, "DISABILITY" means the inability of Employee, due to a physical or mental impairment, for ninety (90) calendar days (whether or not consecutive) during any period of three hundred sixty (360) calendar days to perform the duties and functions contemplated by this Agreement. "DISABILITY" does not include any conditions, physical or mental, where Employee is able to perform the essential functions of the job with or without reasonable accommodation as provided in the Americans With Disabilities Act, 42 U.S.C.ss. 12101 ET SEQ. A determination of Disability shall be made by the Board of Directors of the Company or a designated committee thereof, in consultation with a physician satisfactory to the Board of Directors of the Company or a designated committee thereof, and Employee shall cooperate with the efforts to make such determination. Any such determination shall be conclusive and binding on the parties subject to Employee's rights under law or the arbitration provision of Section 6.7 of this Agreement. Any determination of Disability under this Section 3.1(c) is not intended to alter any benefits any party may be entitled to receive under any long-term disability insurance policy carried by the Company or Employee with respect to Employee, which benefits shall be governed solely by the terms of any such insurance policy. 3.2 RIGHTS UPON TERMINATION. (a) SECTION 3.1(A) TERMINATION DURING EMPLOYMENT TERM OR RENEWAL TERM. If Employee's employment is terminated by the Company pursuant to Section 3.1(a) hereof during the Employment Term or a Renewal Term, Employee resigns for Good Reason under Section 3.1(a), or if the Company does not renew the Agreement in accordance with Section 1.1 hereof, Employee shall have no further rights against the Company hereunder, except for the right after Employee's date of termination to receive the following severance payments and benefits: (i) three (3) times Base Salary, payable in equal monthly installments over a period of thirty-six (36) months; (ii) three (3) times the average of the Performance Bonus earned for the two (2) most recent fiscal years preceding the fiscal year in which the date of termination occurs, payable in equal monthly installments over a period of thirty-six (36) months; (iii) payment of any accrued but unpaid vacation time; (iv) the rights if any in respect of stock options and deferred stock pursuant to Section 2.4 hereof to which Employee is entitled under the terms of such plans and related agreements; (v) reimbursement of expenses to which Employee is entitled under Section 2.6 hereof; and (vi) continuation of medical and dental coverages in place at the time of Employee's date of termination for a period of three (3) years commencing immediately after Employee's date of termination, in accordance with the Company's welfare plans in effect at the time, only to the extent and for such period of time that any such coverage is not available under the welfare plans of any subsequent employer of Employee. During such three (3) year period commencing immediately after Employee's date of termination, to the extent that the Company shall not be able to provide any such medical or dental coverage to Employee under its welfare plans and further, to the extent that any such medical or dental coverage is not available to Employee under the welfare plans of any subsequent employer of Employee, the Company shall reimburse Employee for the cost of any such medical or dental coverage last available to Employee under the Company's welfare plans; provided, however, that any such reimbursement in the aggregate shall not exceed 150% of the Company's cost of such coverage. If Employee is terminated in accordance with Section 3.1(a) and thereafter within six (6) months there occurs a Control Change Date as defined in Section 4.3, and if Employee would have had a Qualifying Separation as defined in Section 4.7, then any payments and benefits under this Section 3.2(a) shall cease immediately, and payments and benefits under Section 4.5 shall commence; provided that the payments and benefits under Section 4.5 shall be reduced by any and all payments and benefits received by Employee under this Section 3.2(a). (b) SECTIONS 3.1(B) AND 3.1(C) TERMINATIONS. If Employee's employment is terminated pursuant to Sections 3.1(b) or 3.1(c) hereof, or if Employee resigns from employment with the Company (other than as provided in Section 3.1(a) hereof) notwithstanding the terms of this Agreement, Employee or Employee's estate shall have no further rights against the Company hereunder, except for the right to receive: (i) any unpaid Base Salary with respect to the period prior to the effective date of termination; (ii) payment of any accrued but unpaid vacation time; (iii) the rights if any in respect of stock options and deferred stock pursuant to Section 2.4 hereof to which Employee is entitled under the terms of such plans and related agreements; (iv) any death or disability insurance payable as contemplated in Section 2.5 hereof; and (v) reimbursement of expenses to which Employee is entitled under Section 2.6 hereof. Notwithstanding any other provision in this Agreement to the contrary, if Employee is terminated or terminates employment under Section 3.1(b) or Section 3.1(c) of this Agreement, even if thereafter within six (6) months there occurs a Control Change Date as defined in Section 4.3, Employee shall not be entitled to any payments or benefits in lieu of or in addition to the payments and benefits provided in this Section 3.2(b). ARTICLE IV CHANGE OF CONTROL 4.1 In lieu of the payments and benefits that may be available to Employee under the American Medical Security Group, Inc. Change of Control Severance Benefit Plan effective September 25, 1998, or any successor or similar plan or program of the Company, any and all of which Employee hereby agrees shall be cancelled and shall not be payable with respect to Employee, the payments and benefits of this Article IV subject to the restrictions and conditions described herein shall be available to Employee. This Article IV shall be effective as of the Effective Date of this Agreement. 4.2 A "CHANGE OF CONTROL" shall be deemed to have occurred if, after the Effective Date of this Agreement: (a) a majority of Directors of the Company ceases to continue to serve as Directors of the Company and/or the Chief Executive Officer of the Company ceases to serve as the Chief Executive Officer of the Company as the direct or indirect result of, or in connection with the occurrence of: (i) any person, including a "group" as defined in Section 13(d)(3) of the Securities Exchange Act of 1934, becoming, directly or indirectly, the beneficial owner of securities of the Company, or any other subsidiary, representing forty percent (40%) or more of the combined voting power of the then outstanding securities of the Company that may be cast for the election of Directors of the Company (other than as a result of an issuance of securities initiated by the Company or open market purchases approved by the Board of Directors of the Company as long as the majority of the Directors at the time of such approval are also Directors at the time the purchases are made); PROVIDED however that as of the Effective Date of this Agreement, this Section 4.2(a)(i) shall not apply to Blue Cross Blue Shield United of Wisconsin ("BCBSUW") which prior to the Effective Date became the beneficial owner of more than forty percent (40%) of the combined voting power of the outstanding securities of the Company; FURTHER PROVIDED that the immediately preceding proviso shall cease to apply and shall no longer have any force or effect under this Agreement if and when BCBSUW acquires additional Company securities as of and following the Effective Date without approval of at least 2/3 of the individuals who constitute the Board of Directors of the Company as of the Effective Date; (ii) a cash tender or exchange offer; (iii) a merger or other business combination; (iv) a sale of all or substantially all of the assets of the Company; (v) a contested election of directors; or (vi) any combination of the aforementioned events; or (b) consummation of a plan of liquidation or dissolution of the Company. 4.3 "CONTROL CHANGE DATE" means the date on which an event described in Section 4.2(a) or Section 4.2(b) occurs. If a Change of Control occurs on account of a series of events, the Control Change Date shall be the date of occurrence of the last of such events, required for such series of events to constitute a Change of Control. 4.4 "CONTROL CHANGE EMPLOYMENT PERIOD." If the Effective Date of this Agreement is the Control Change Date or if Employee remains employed by the Company on the Control Change Date, the Company shall continue to employ Employee and Employee may continue as an employee of the Company from the Control Change Date until the two (2) year anniversary of the Control Change Date ("CONTROL CHANGE EMPLOYMENT PERIOD"), or such later date as provided under Section 1.1 of this Agreement. 4.5 SEVERANCE RIGHTS IN THE EVENT OF A TERMINATION BECAUSE OF A QUALIFYING SEPARATION. If his employment with the Company terminates because of a Qualifying Separation as defined in Section 4.7, (i) during the six (6) month period immediately prior to the Control Change Date, or (ii) during the Control Change Employment Period, Employee shall receive from the Company the following payments and benefits (reduced by any payments or benefits received under Section 3.2(a) with respect to the same termination of employment) as soon as administratively feasible after a Qualifying Separation (or later Control Change Date causing a prior termination under Section 3.2(a) to become a Qualifying Separation) subject to Sections 4.7(a) and 4.8 of this Agreement (as applicable): (a) a single lump sum payment equal to three (3) times average Base Salary earned during the two (2) most recent fiscal years preceding the fiscal year in which the Qualifying Separation occurs; (b) a single lump sum payment equal to three (3) times average Performance Bonus earned for the two (2) most recent fiscal years preceding the fiscal year in which the Qualifying Separation occurs; (c) payment of any accrued but unpaid vacation time; (d) the rights if any in respect of stock options and deferred stock pursuant to Section 2.4 hereof to which Employee is entitled under the terms of such plans and related agreements; (e) reimbursement of expenses to which Employee is entitled under Section 2.6 hereof; (f) continuation of medical, dental, long-term disability, and life insurance coverages in place at the time of the Qualifying Separation for a period of three (3) years commencing immediately after Employee's Qualifying Separation, in accordance with the Company's welfare plans in effect at the time, only to the extent and for such period of time that any such coverage is not available under the welfare plans of any subsequent employer of Employee. During such three (3) year period commencing immediately after Employee's date of termination, to the extent that the Company shall not be able to provide any such medical, dental, long-term disability or life insurance coverage to Employee under its welfare plans and further, to the extent that any such medical, dental, long-term disability or life insurance coverage is not available to Employee under the welfare plans of any subsequent employer of Employee, the Company shall reimburse Employee for the cost of any such medical, dental, long-term disability or life insurance coverage last available to Employee under the Company's welfare plans; provided, however, that any such reimbursement in the aggregate shall not exceed 150% of the Company's cost of such coverage; and (g) if the excise tax imposed on "excess parachute payments" under Code Section 4999, as defined in Code Section 280G, is incurred on account of (A) any amount paid or payable to or for the benefit of Employee pursuant to this Article IV, (B) legal fees and expenses under Section 6.7 of this Agreement, or (C) any other amount paid or payable by the Company (the sum of all such amounts described in this Section 4.5(g) (A), (B), and (C) called the "CHANGE OF CONTROL BENEFITS"), the Company shall indemnify Employee and hold him harmless against all claims, losses, damages, penalties, expenses, and excise taxes. To effect this indemnification, the Company shall pay Employee the Additional Amount within fifteen (15) business days after Employee provides a copy of his tax return in accordance with subsection (1) below. For purposes of this Article IV, the "ADDITIONAL AMOUNT" shall mean the amount necessary to indemnify and hold Employee harmless from (i) the excise tax imposed on Employee under Section 4999 of the Code with respect to the Change of Control Benefits and (ii) the amount required to satisfy (x) the additional excise tax under Section 4999 of the Code and (y) the federal, state and local income taxes for which Employee is liable with respect to the Additional Amount (the sum of items (i) and (ii) of this Section 4.5(g) being hereunder referred to as the "ADDITIONAL TAX LIABILITY"). (1) For purposes of determining the amount and timing of the payments of the Additional Amount, the Company and Employee shall, as soon as practicable after the event or series of events has occurred giving rise to the imposition of the excise tax, seek the advice of independent tax counsel and shall cooperate in establishing at least tentatively the amount of Employee's excise tax liability for purposes of paying estimated tax. Employee shall thereafter furnish to the Company a copy of each tax return which reflects a liability for an excise tax payment under Section 4999 of the Code with respect to the Change of Control Benefits at least twenty (20) business days before the date on which such return is required to be filed with the Internal Revenue Service. Except as provided under subsection (2) below of this Section 4.5(g), the liability reflected on such return shall be dispositive for purposes of calculating the Additional Amount unless, within fifteen (15) business days after such notice is given, the Company furnishes to Employee an opinion from the Company's independent auditors or a tax advisor selected by the Company's independent auditors indicating that a different Additional Amount is payable or to the effect that the matter is not free from doubt under applicable laws and regulations and Employee may, in such auditor's or advisor's opinion, take a different position without risk of penalty, which shall be set forth in the opinion with respect to the payment in question. Such opinion shall be addressed to Employee and shall state that Employee is entitled to rely thereon. If the Company furnishes such opinion to Employee, the position reflected in such letter shall be dispositive for purposes of calculating the Additional Amount, except as provided under this subsection (1) of this Section 4.5(g). (2) If Employee's Additional Tax Liability is subsequently determined to be less than the amount of the Additional Amount paid to Employee, Employee shall repay to the Company that portion of the Additional Amount payment attributable to such reduction (plus interest on the amount of such repayment at the rate provided in Section 1274(b)(2)(B) of the Code). If Employee's Additional Tax Liability is subsequently determined to be more than the amount of the Additional Amount paid to Employee, the Company shall make an additional payment in respect of such excess, as well as the amount of any penalty or interest assessed with respect thereto at the time that the amount of such excess, penalty or interest is finally determined. Notwithstanding any other provision of this Section 4.5(g) to the contrary, if the aggregate "AFTER-TAX AMOUNT" (as defined below) of the Change of Control Benefits and Additional Amount that would be payable to Employee does not equal to or exceed 110% of the "AFTER-TAX FLOOR AMOUNT" (as defined below), then no Additional Amount shall be payable to Employee and the aggregate amount of Change of Control Benefits payable to Employee shall be reduced (but not below the "FLOOR AMOUNT" as defined below) to the largest amount that would both (i) not cause any Additional Tax Liability to be payable by Employee and (ii) not cause any Change of Control Benefits to become nondeductible by the Company by reason of Section 280G of the Code (or any successor provision). For purposes of the preceding sentence, Employee shall be deemed to be subject to the highest marginal rate of federal, state, and local taxes, excluding Social Security, Medicare, and alternative minimum taxes or similar tax consequences. "AFTER-TAX AMOUNT" means the portion of a specified amount that would remain after payment of all federal, state, and local taxes (excluding Social Security, Medicare, and alternative minimum taxes or similar tax consequences), and Additional Tax Liability paid or payable by Employee in respect of such specified amount. "AFTER-TAX FLOOR AMOUNT" means the After-Tax Amount of the Floor Amount. "FLOOR AMOUNT" means the greatest pre-tax amount of Change of Control Benefits that could be paid to Employee without causing Employee to become liable for any Additional Tax Liability in connection therewith. 4.6 TAXES. To the extent required by applicable law, the Company shall deduct and withhold all necessary Social Security taxes and all necessary federal and state withholding taxes and any other similar sums required by law to be withheld from any payments made pursuant to the terms of this Article IV. 4.7 "QUALIFYING SEPARATION" means: (a) Employee's employment is terminated by the Company within six (6) months prior to a Change of Control or during the Control Change Employment Period except for Cause as defined in this Section 4.7(a), or death or Disability as defined in Section 3.1(c). Solely for purposes of this Article IV, Cause shall mean: (i) the willful and continued failure by Employee to substantially perform his duties as established by the Board of Directors of the Company; (ii) material breach by Employee of his fiduciary duties of loyalty or care to the Company; (iii) a conviction of a felony which, in the reasonable judgment of the Board of Directors of the Company, is likely to have a material adverse effect on the business reputation of Employee or the Company, or which substantially impairs Employees abilities to perform his duties for the Company; (iv) the use of alcohol or non-prescription drugs in such a manner as to interfere substantially with Employee's duties with respect to the Company; or (v) the willful, flagrant, deliberate and repeated infractions of material published policies and regulations of the Company of which Employee has actual knowledge. Only if it desires to discharge Employee for Cause under subsection (v) (the "CAUSE EXCEPTION") of this Section 4.7(a), the Board of Directors of the Company shall give notice to Employee as provided in Section 4.8 and Employee shall have thirty (30) calendar days after notice has been given to him in which to cure the reason for the Company's Board's exercise of the Cause Exception. If the reason for the exercise of the Cause Exception is timely cured by Employee (as determined by a majority of the members of the Board of Directors of the Company, following a hearing), the notice shall become null and void; or (b) Employee voluntarily terminates employment for "GOOD REASON." Solely for purposes of this Article IV, Good Reason shall mean Employee's resignation from the Company's employment within six (6) months prior to a Change of Control or during the Control Change Employment Period on account of: (i) the failure of the Board of Directors of the Company to reelect or reappoint Employee to the positions with the Company specified in the first sentence of Section 1.2 hereof, and Employee then elects to leave the Company's employment within six (6) months after such failure to so reelect or reappoint Employee; (ii) a material modification by the Board of Directors of the Company of the duties, functions and responsibilities of Employee without his consent, except as specifically permitted under Section 1.2 hereof; (iii) the failure of the Company to permit Employee to exercise such responsibilities as are consistent with his position and of such a nature as are usually associated with such offices of a corporation engaged in substantially the same business as the Company, except as specifically permitted under Section 1.2 hereof; (iv) the Company causes Employee to relocate his employment more than fifty (50) miles from Green Bay, Wisconsin, without the consent of Employee; (v) the Company's failure to make a payment when due to Employee; or (vi) the Company's reduction of Employee's Base Salary below Employee's Base Salary under Section 2.1 hereof, or the Company's reduction of the amount of Performance Bonus payable with respect to minimum, target, or maximum (as applicable) achievement of performance goals. 4.8 "NOTICE OF TERMINATION" means a written notice which (i) indicates the specific termination provision in this Agreement relied upon, (ii) sets forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of Employee's employment under the provision so indicated and (iii) if the termination date specifies the effective date of termination, which date may be the date of receipt of such notice. Qualifying Separation for Cause under Section 4.7(a) shall be communicated by Notice of Termination from the Board of Directors of the Company to Employee. Qualifying Separation for Good Reason under Section 4.7(b) shall be communicated by Notice of Termination from Employee to the Board of Directors of the Company. ARTICLE V RESTRICTIVE COVENANTS 5.1 CONFIDENTIAL INFORMATION; INTELLECTUAL PROPERTY. (a) CONFIDENTIAL INFORMATION. Employee acknowledges that Employee will be required to use his personal intellectual skills on behalf of the Company and that it is reasonable and fair that the fruits of such skills should inure to the sole benefit of the Company. Employee further acknowledges that Employee may already have and will acquire information of a confidential nature relating to the operation, finances, business relationships and trade secrets of the Company. During Employee's employment with the Company, Employee will not use (except for use in the course of Employee's regular authorized duties on behalf of the Company), publish, disclose or authorize anyone else to use, publish or disclose without the prior written consent of the Company, any confidential information pertaining to the Company, including, without limitation, any information relating to existing or potential business, customers, trade or industrial practices, plans, costs, processes, or technical or engineering data. Following termination of Employee's employment hereof for any reason or no reason under any circumstances or conditions, Employee shall be prohibited from ever using, publishing, disclosing or authorizing anyone else to use, publish or disclose, any confidential information which constitutes a trade secret under applicable law. Employee's obligations under this Section 5.1(a) apply to, and are intended to prevent, the direct or indirect disclosure of confidential information to others. Employee shall not remove or retain any figures, calculations, formulae, letters, papers, software, abstracts, summaries, drawings, blueprints, diskettes or any other material, or copies thereof, which contain or embody any confidential information or trade secrets of the Company, except for use in the course of Employee's regular authorized duties on behalf of the Company. The foregoing notwithstanding, Employee has no obligation to refrain from using, publishing or disclosing any such confidential information which is or hereafter shall become available to the public otherwise than by use, publication or disclosure by Employee. This prohibition also does not prohibit Employee's use of general skills and know-how acquired during and prior to employment, as long as such use does not involve the use, publication or disclosure of the Company's confidential information or trade secrets. (b) AGREEMENT TO TRANSFER. Employee shall without further payment assign, transfer and set over, and does hereby assign, transfer and set over, to the Company all of Employee's right, title and interest in and to all trade secrets, secret processes, inventions, improvements, patents, patent applications, trademarks, trademark applications, copyrights and any and all intellectual property rights which Employee may, either solely or jointly with others, conceive or develop, make or suggest at any time during his employment by the Company and which relate to the existing or potential products, processes, work, research or other activities of the Company. 5.2 NON-SOLICITATION OF CUSTOMERS WITHIN A CERTAIN REGION FOR ONE YEAR. Employee covenants and agrees that he shall not at any time during his employment by the Company, and for a period of one (1) year following termination of his employment, directly or indirectly solicit any business regarding services of the kind that the Company either offered or was planning to offer and of which Employee was aware at or before the date of Employee's termination, from any person or entity that (i) has, on the date of termination, its principal place of business in the Restricted Area as defined in Section 5.9 below, (ii) was a customer or prospective customer of the Company's on the date of termination, and (iii) was a customer or prospective customer with which Employee had personal contact or knowledge of such a customer or prospective customer through confidential information, in regard to such services within two (2) years prior to said termination. 5.3 NON-SOLICITATION OF CUSTOMERS OUTSIDE A CERTAIN REGION FOR ONE YEAR. Employee covenants and agrees that he shall not at any time during his employment by the Company, and for a period of one (1) year following termination of his employment, directly or indirectly solicit any business regarding services of the kind that the Company either offered or was planning to offer and of which Employee was aware at or before the date of Employee's termination, from any person or entity that (i) has, on the date of termination, its principal place of business in OTHER THAN the Restricted Area but conducts business in the Restricted Area, (ii) was a customer or prospective customer of the Company's on the date of termination, and (iii) was a customer or prospective customer with which Employee had personal contact or knowledge of such a customer or prospective customer through confidential information, in regard to such services within two (2) years prior to said termination. 5.4 NON-SOLICITATION OF EMPLOYEES. Employee covenants and agrees that he shall not at any time during his employment by the Company, and for a period of one (1) year following termination of his employment, directly or indirectly employ or seek to employ (other than for employment with the Company or its subsidiaries) any person employed at that time by the Company or otherwise encourage any such person to leave such employment. 5.5 NON-SOLICITATION OF VENDORS AND OTHERS. Employee covenants and agrees that he shall not at any time during his employment by the Company, and for a period of one (1) year following termination of his employment, solicit any vendors, suppliers, or service providers of the Company on behalf of or for the benefit of a Competitor. 5.6 SERVICES FOR COMPETITOR. Employee covenants and agrees that he shall not at any time during his employment by the Company, and for a period of one (1) year following termination of his employment, become employed by, enter into a consulting arrangement with or otherwise agree to perform personal services for any Competitor (as defined in Section 5.8 below). 5.7 OWNERSHIP INTEREST IN COMPETITOR. Employee covenants and agrees that he shall not at any time during his employment by the Company, and for a period of one (1) year following termination of his employment, acquire an ownership interest in a Competitor, unless such an ownership interest (1) is in a company whose stock is publicly traded on a national exchange, and (2) is a de minimis investment of less than 1% of the outstanding securities of such a company; provided however, that nothing herein shall prohibit Employee's ownership of securities in United Wisconsin Services, Inc. acquired prior to the Effective Date, and nothing herein shall prohibit Employee from exercising options granted to him prior to the Effective Date to acquire stock in United Wisconsin Services, Inc. 5.8 COMPETITOR. For purposes of this Agreement, "COMPETITOR" shall mean any provider of individual and small employer group health care benefits and insurance products within the Restricted Area as defined in Section 5.9 below. 5.9 RESTRICTED AREA. For purposes of this Agreement, "RESTRICTED AREA" shall mean anywhere in the United States where the Company sells individual and small employer group health care benefits and insurance products. 5.10 NOTIFICATION OF EXISTENCE OF AGREEMENT. Employee agrees that in the event that Employee is offered employment with another employer at any time during the existence of this Agreement, or such other period in which post-termination obligations of this Agreement apply, the business of which is in any manner competitive with the Company's business, Employee shall immediately advise such employer of the existence of this Agreement and shall immediately provide such employer with a copy of this Agreement. 5.11 RETURN OF DOCUMENTS. Immediately upon termination of employment with the Company, Employee shall return to the Company, and so certify in writing to the Company, all of the Company's papers, documents and items, including information stored for use in or with computers and software applicable to the Company's business (and all copies thereof), which are in Employee's possession or under Employee's control, regardless whether such papers, documents or items contain confidential information or trade secrets. 5.12 NO CONFLICTS. To the extent that they exist, Employee will not disclose to the Company any of Employee's previous employer's confidential information or trade secrets. Further, Employee represents and warrants that Employee has not previously assumed any obligations inconsistent with those of this Agreement and that employment by the Company does not conflict with any prior obligations to third parties. 5.13 AGREEMENT ON FAIRNESS. Employee acknowledges that: (i) this Agreement has been specifically bargained between the parties and reviewed by Employee, (ii) Employee has had an opportunity to obtain legal counsel to review this Agreement, and (iii) Employee voluntarily enters into this Agreement. 5.14 EQUITABLE RELIEF. Employee acknowledges that any breach of this Agreement will cause substantial and irreparable harm to the Company for which money damages would be an inadequate remedy. Accordingly, the Company shall in any such event be entitled to obtain injunctive and other forms of equitable relief to prevent such breach in addition to any other rights or remedies available at law, in equity or by statute. ARTICLE VI GENERAL PROVISIONS 6.1 NOTICES. Any and all notices, consents, documents or communications provided for in this Agreement shall be given in writing and shall be personally delivered, mailed by registered or certified mail (return receipt requested) or sent by courier, confirmed by receipt, and addressed as follows (or to such other address as the addressed party may have substituted by notice pursuant to this Section 6.1): (a) If to the Company: American Medical Security Group, Inc. 3100 AMS Boulevard Green Bay, WI 54313 or P.O. Box 19032 Green Bay, Wisconsin 54307-9032 Attn.: General Counsel (b) If to Employee: Samuel V. Miller 3100 AMS Boulevard Green Bay, Wisconsin 54313 or P.O. Box 19032 Green Bay, Wisconsin 54307-9032 With a copy to: David S. Foster Thelen Reid & Priest LLP 101 Second Street Suite 1800 San Francisco, California 94105-3601 Such notice, consent, document or communication shall be deemed given upon personal delivery or receipt at the address of the party stated above or at any other address specified by such party to the other party in writing, except that if delivery is refused or cannot be made for any reason, then such notice shall be deemed given on the third day after it is sent. 6.2 ENTIRE AGREEMENT. This Agreement contains the entire understanding and the full and complete agreement of the parties and supersedes and replaces the Prior Agreement and Amendment Number One, and the American Medical Security Group, Inc. Change of Control Severance Benefit Plan effective September 25, 1998, and any other prior understandings and agreements among the parties, with respect to the subject matter hereof. 6.3 AMENDMENT; HEADINGS; SECTION REFERENCES. This Agreement may be altered, amended or modified only in a writing, signed by the parties hereto. Headings included in this Agreement are for convenience only and are not intended to limit or expand the rights of the parties hereto. References to Sections herein shall mean sections of the text of this Agreement, unless otherwise indicated. 6.4 ASSIGNABILITY. This Agreement and the rights and duties set forth herein may not be assigned by Employee, but may be assigned by the Company, in whole or in part to any entity controlled by the Company. This Agreement shall be binding on and inure to the benefit of each party and such party's respective heirs, legal representatives, successors and assigns. 6.5 SEVERABILITY. If any court of competent jurisdiction determines that any provision of this Agreement is invalid or unenforceable, then such invalidity or unenforceability shall have no effect on the other provisions hereof, which shall remain valid, binding and enforceable and in full force and effect. If any court of competent jurisdiction determines that any provision of this Agreement is invalid or unenforceable, then such invalid or unenforceable provision shall be construed in a manner so as to give the maximum valid and enforceable effect to the intent of the parties expressed therein. 6.6 MITIGATION. Employee shall not be required to mitigate damages or the amount of any payment provided for in Sections 3.2(a) or 4.5 of this Agreement by seeking or accepting other employment or otherwise, and compensation earned from such employment or otherwise shall not reduce the amounts otherwise payable under Sections 3.2(a) or 4.5; provided, however, that the Company's obligations under Sections 3.2(a)(vi) or 4.5(f) hereof shall cease with respect to each applicable type of insurance coverage as of the date on which Employee obtains other coverage substantially equivalent to coverage in place at the time of his date of termination or Qualifying Separation, as applicable. 6.7 ARBITRATION. Any controversy or claim arising out of or relating to this Agreement, or the breach hereof, shall be settled by a single arbitrator in arbitration conducted in Green Bay, Wisconsin, in accordance with the Employment Dispute Resolution Rules of the American Arbitration Association. Judgment upon the award rendered by the arbitrator may be entered in any court having jurisdiction thereof. The parties shall select an arbitrator, but if they are unable to agree on one, the parties shall jointly request the American Arbitration Association to designate five (5) arbitrator names. The parties, beginning with Employee, shall alternately strike names until one is left. The arbitrator's decision shall be final and binding. Each party shall be entitled to discovery exclusively by the following means: (i) requests for admission, (ii) request for production of documents, and (iii) depositions of no more than four (4) individuals, provided that either party may apply to the arbitrator upon a showing of good cause that more or less discovery is warranted. All discovery shall be completed, and the arbitration hearing shall commence, within sixty (60) calendar days, after the appointment of the arbitrator. Unless the arbitrator finds that exceptional circumstances justify the delay, the hearing will be completed, and an award will be rendered within sixty (60) calendar days of the commencement of the hearing. The arbitrator shall have the authority to settle such controversy or claims by finding that a party should be enjoined from certain actions or be compelled to undertake certain actions, and in such event such court may enter an order enjoining and/or compelling such actions as found by the arbitrator. However, notwithstanding the foregoing, the parties expressly agree that a court of competent jurisdiction may enter a temporary restraining order or an order enjoining a breach of this Agreement pending a final award or further order by the arbitrator. Such remedy, however, shall be cumulative and nonexclusive, and shall be in addition to any other remedy to which the parties may be entitled. The Company shall pay the arbitrator's fees and expenses without regard to which party prevails in the dispute. The arbitrator may award reasonable attorneys' fees and costs to the prevailing party, but the arbitrator shall consider financial ability to pay such fees and costs and undue hardship on the party ordered to pay said fees and costs. Solely for purposes of protecting or enforcing his rights under Article IV of this Agreement, to the extent Employee incurs legal fees, the Company shall reimburse Employee for such reasonable legal fees and for any other reasonable expenses related thereto. Such reimbursement shall be made within thirty (30) calendar days following final resolution of the dispute or occurrence giving rise to such legal fees and related expenses. Notwithstanding any provision in this Agreement to the contrary, pending arbitration of any dispute between the parties, the Company may seek injunctive relief or other appropriate equitable relief in a court of competent jurisdiction for any alleged breach of the restrictive covenants of Article V of this Agreement. 6.8 WAIVER OF BREACH. The waiver by any party of the breach of any provision of this Agreement shall not operate or be construed as a waiver of any subsequent breach by any party. 6.9 GOVERNING LAW. This Agreement shall be governed by the internal laws of the State of Wisconsin, without regard to its choice of law principles. 6.10 CONSTRUCTION. The Company and Employee have each been represented by legal counsel with respect to this Agreement. The parties acknowledge that each party and such party's counsel have reviewed and revised, or have had an opportunity to review and revise, this Agreement. Therefore, any rule of construction to the effect that any ambiguities or inconsistencies in the Agreement are to be resolved against the drafting party shall not be applied in the interpretation of this Agreement. IN WITNESS WHEREOF, the parties have executed this Agreement as of the Effective Date written above. AMERICAN MEDICAL SECURITY GROUP, INC. By: /S/ TIMOTHY J. MOORE /S/ SAMUEL V. MILLER Samuel V. Miller EX-27 4 0004.txt EXHIBIT 27
7 THIS FINANCIAL DATA SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS OF AMERICAN MEDICAL SECURITY GROUP, INC. FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 9-MOS DEC-31-2000 JAN-01-2000 SEP-30-2000 272,265 4,328 127 0 0 0 276,720 (6) 0 0 464,845 0 20,780 137,019 0 41,558 0 0 16,654 201,975 464,845 720,405 14,187 0 15,167 550,216 0 188,682 5,353 2,810 2,543 0 0 0 2,543 0.17 0.17 0 0 0 0 0 0 0
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