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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________________ to __________________
COMMISSION FILE NUMBER 1-13154
AMERICAN MEDICAL SECURITY GROUP, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
WISCONSIN 39-1431799
(State of incorporation) (I.R.S. Employer Identification No.)
3100 AMS BOULEVARD
GREEN BAY, WISCONSIN 54313
(Address of principal executive offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (920) 661-3075
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
Common Stock, no par value New York Stock Exchange
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes |X| No | |
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Registration S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. |_|
As of February 29, 2000, there were outstanding 15,474,446 shares of Common
Stock. The aggregate market value of the shares of such stock held by
non-affiliates of the registrant was $66,112,860 as of the same date, assuming
solely for purposes of this calculation that all directors and executive
officers of the Registrant are "affiliates." This determination of affiliate
status is not necessarily a conclusive determination for other purposes.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of American Medical Security Group, Inc. Proxy Statement dated
March 31, 2000 (Part III)
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AMERICAN MEDICAL SECURITY GROUP, INC.
INDEX TO
ANNUAL REPORT ON FORM 10-K
For the Year Ended December 31, 1999
PAGE
PART I
Item 1 Business...........................................................3
Item 2 Properties.........................................................9
Item 3 Legal Proceedings..................................................9
Item 4 Submission of Matters to a Vote of Security Holders...............10
Executive Officers of the Registrant..........................................10
PART II
Item 5 Market for Registrant's Common Equity and
Related Stockholder Matters.......................................12
Item 6 Selected Financial Data...........................................13
Item 7 Management's Discussion and Analysis of Financial Condition and
Results of Operations.............................................14
Item 7A Quantitative and Qualitative Disclosures About Market Risk .......22
Item 8 Financial Statements and Supplementary Data.......................23
Item 9 Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure..............................................44
PART III
Item 10 Directors and Executive Officers of the Registrant.................44
Item 11 Executive Compensation.............................................44
Item 12 Security Ownership of Certain Beneficial Owners and Management.....44
Item 13 Certain Relationships and Related Transactions.....................44
PART IV
Item 14 Exhibits, Financial Statement Schedules, and Reports on Form 8-K...44
Schedule II - Condensed Financial Information of Registrant.46
Schedule III - Supplementary Insurance Information...........49
Schedule IV - Reinsurance....................................50
Schedule V - Valuation and Qualifying Accounts...............51
Signatures....................................................................52
Exhibit Index...............................................................EX-1
2
PART I
ITEM 1. BUSINESS
FORWARD LOOKING STATEMENTS
A number of forward looking statements are included in this document. When
used, the terms "anticipate", "believe", "estimate", "expect", "objective",
"plan", "possible", "potential", "project" and similar expressions are intended
to identify forward looking statements. Forward looking statements are subject
to inherent risks, uncertainties and assumptions that may cause actual results
or events to differ materially from those that are described. In addition to the
assumptions and other factors referred to specifically in connection with such
statements, factors that may cause actual results or events to differ are
described in "Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations - Cautionary Factors."
GENERAL
American Medical Security Group, Inc. is a leading provider of individual
and small employer group health care benefits and insurance products. As used
herein, the terms "the Company" or "AMSG" include American Medical Security
Group, Inc. and its subsidiaries. The Company's principal product offering is
health insurance for small employer groups and individuals. The Company also
offers life, dental, prescription drug, disability and accidental death
insurance, and provides self funded benefit administration. See the Company's
Notes to Consolidated Financial Statements, Note 11 "Segments of the Business"
for information concerning the Company's two reportable segments: health
insurance products (which accounted for 92% of the Company's revenue for the
year ended December 31, 1999, compared to 93% at the end of 1998) and life
insurance products.
The Company's products are sold through independent licensed agents in 31
states and the District of Columbia. The Company specializes in providing health
care benefits and other insurance products designed to maximize choice and
control costs in a compassionate environment. The Company principally markets
health benefit products that provide discounts to insureds that utilize
preferred provider organizations ("PPOs"). PPO plans differ from health
maintenance organization ("HMO") plans in that they typically provide a wider
choice of health professionals, fewer benefit restrictions and increased access
to specialists at a somewhat higher premium cost.
American Medical Security Group, Inc. is a Wisconsin corporation organized
in 1983. The Company's principal executive offices are located at 3100 AMS
Boulevard, Green Bay, Wisconsin 54313 and its telephone number at that address
is (920) 661-3075.
Prior to and for most of the year 1998, the business of the Company, then
known as "United Wisconsin Services, Inc.", consisted of two main components:
the small group health business, and the managed care and specialty products
business, as described in the Form 10 of Newco/UWS, Inc. ("Newco/UWS") in
connection with the spin-off of Newco/UWS referred to below. Prior to December
1996, the small group health business consisted primarily of individual and
small group health insurance written through a joint venture with American
Medical Security Group, Inc., a Delaware corporation ("Old AMS"). During that
time, the Company owned approximately 12% of the issued and outstanding shares
of Old AMS. The Company underwrote all of the individual and small group health
insurance marketed, produced and administered by Old AMS and ceded back to Old
AMS approximately 50% of the individual and small group health insurance written
by the Company through the joint venture. On December 3, 1996, Old AMS merged
with and into the Company. The small group health insurance business of the
Company was then combined with that of Old AMS in a wholly owned subsidiary of
the Company.
On September 11, 1998, the Company contributed all of its subsidiaries
comprising the managed care and specialty products business to a newly created
subsidiary named "Newco/UWS, Inc." On September 25, 1998, the Company spun off
the managed care and specialty products business through a distribution of 100%
of the issued and outstanding shares of common stock of Newco/UWS to the
Company's shareholders of record as of September 11, 1998, (see "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations - Spin-Off"). The Company then adopted its current name of "American
Medical Security Group, Inc." and Newco/UWS changed its name to "United
Wisconsin Services, Inc." Since the spin-off, the business of the Company
consists solely of the Company's small group health insurance business.
3
ACQUISITIONS
In October 1997, the Company acquired most of the health insurance business
marketed to individuals and small groups that was previously underwritten by Pan
American Life Insurance Company ("Pan American"). The Company assumed most of
Pan American's remaining domestic health insurance business in July 1998.
Effective January 1999, the Company acquired the majority of Continental
Assurance Company's ("CNA") fully insured employer group health business.
PRODUCTS
The Company is a leading provider of health care benefits and insurance
products tailored to meet the varied health benefits needs of its primary
markets, including individuals and families, small employer groups, and
employers that choose to self fund their health benefits. In providing these
products and services, the Company specializes in designing products to maximize
choice and control costs.
The Company customizes employee benefit packages for businesses through
IT'S YOUR CHOICES(service mark), an option that allows businesses to offer
employees multiple health plan options in a single package. For example, this
strategy allows an employer with four employees to offer four different and
distinct health plans, one for each employee. Although the premium cost of the
plans may vary, the ability to offer different plans is without additional cost
to the employer.
Through its medical insurance products marketed to individuals and families
("MedOne" products), the Company provides coverage to fit the various health
care needs and budgets of consumers. In early 2000, the Company introduced a new
MedOne product, called AFFORDABLEONE(service mark), that is marketed as a health
care plan for cost-conscious individuals.
The Company augments its core business with a select line of complementary
products and services. Ancillary benefits available in conjunction with the
Company's plans include group dental, group short-term disability, group and
individual term life and accidental death, and dependent life insurance.
Voluntary dental and term life insurance products may be elected by employees
with no employer contribution requirements. Additionally, the Company offers
COBRA administration services to groups subject to regulations of the
Consolidated Omnibus Budget Reconciliation Act of 1985, as amended.
The Company provides insureds and plan participants with toll-free,
personal customer service 24 hours a day, 365 days a year. In addition, through
the Company's wholly-owned subsidiary, Nurse Healthline, Inc. ("Nurse
Healthline"), insureds and plan participants have access to a toll-free, 24-hour
medical information line staffed by registered nurses.
MARKETING
The Company currently markets its employer group products and individual
products in 31 states and the District of Columbia. The leading states with
respect to medical membership during 1999 were Florida, Illinois, Michigan,
Ohio, Texas and Missouri, which accounted for 48% of the Company's medical
membership. For the year ended December 31, 1999, the top ten insured employer
groups in the aggregate accounted for approximately 1% of the Company's medical
membership. As part of the Company's strategy to improve profitability, which
was announced in October 1999, the Company ceased marketing its small group
business in Maryland, Minnesota and Florida. The Company also decided to
terminate its existing small group business in these states.
Product sales are conducted through licensed independent agents. During
1999, the Company continued its initiative to streamline its sales force by
reducing the number of agents selling its products. As of December 31, 1999, the
Company marketed products through approximately 17,000 independent agents, a 47%
reduction in the number of agents from the prior year. Independent agents are
paid commissions on new and renewal sales. The Company offers an attractive
incentive and service package to agents, creating an environment as an "agent
friendly" company. In early 2000, the Company began marketing a MedOne medical
insurance product for individuals over the internet through online insurance
agencies.
4
The Company divides its sales territory into two regions, each of which is
the responsibility of a Regional Vice President ("RVP"). The RVPs work with a
total of approximately 100 sales managers in offices throughout the United
States in coordinating the Company's sales and marketing efforts. Additionally,
through an agreement with the Principal Life Insurance Company ("Principal"),
regional sales managers of Principal's Old Northwest Agent distribution network
have responsibility for product sales in Arkansas, Mississippi, Nebraska and
Utah.
COMPETITION
The market for the Company's health care products is highly competitive.
The major competition for the Company's products comes from national and
regional firms. Many of the Company's competitors have larger memberships in
local markets or greater financial resources. The small group, agency-controlled
market is price sensitive, and the business is put out for bid more frequently
than larger group business. In addition, because most of the Company's products
are marketed primarily through independent agencies, most of which represent
more than one company, the Company experiences competition within each agency.
The Company and other insurers in the small group health care product market
compete primarily on the basis of responsiveness to user demands, price,
diversity of product offerings, quality of service, strength of provider
networks, reputation, and quality of agency relations.
PROVIDERS
The Company uses more than 65 commercial provider networks in 31 states and
the District of Columbia. A master "payor" agreement is in place for each
provider network that allows the Company to access the provider contracts for
its PPO and exclusive provider organization products. These networks are made
available to fully insured products as well as the Company's self funded product
offerings.
The Company also owns and operates a commercial PPO network that includes
providers in Texas, Florida, Iowa, Nebraska, Wisconsin, Arizona, North Dakota
and South Dakota. Approximately 20% of the Company's business was conducted
through this network for the year ended December 31, 1999, as compared to 23% in
1998. This network services the Company's business and is also offered to other
insurers, third party administrators and self funded employers. This provides
additional revenue to the Company and increases the volume of business used to
leverage provider contract pricing concessions, which are largely volume
related.
The Company contracts with ProVantage Health Services, Inc., a prescription
drug benefit manager, for the administration of drug benefits offered with the
Company's products. This arrangement allows members to access their prescription
benefit at thousands of retail outlets nationwide or through a mail-order
service and is designed to provide cost and efficiency benefits to the Company.
COST CONTAINMENT
The Company provides substantially all of the medical management services
for its members. The Company's utilization review program, which is accredited
to meet national standards, is designed to ensure that services are being
provided at an appropriate level and meeting members' needs. Case management is
performed by Company staff with the assistance of a combination of internally
developed and commercially purchased software packages used to prompt, guide and
record medical management decisions. In addition, the Company has developed a
series of software programs that enhance its medical management effort.
The Company has developed a demand management telephonic service through
its Nurse Healthline subsidiary. Members can access Nurse Healthline registered
nurses 24 hours a day, seven days a week. By using a computerized algorithm
based system, the nurses are able to gauge the severity of the problem and
assist the insured in accessing appropriate health care.
5
INFORMATION TECHNOLOGY
The Company's medical, dental, life, and short-term disability products use
custom built, integrated management information systems for all administrative
processing tasks. These systems include underwriting, billing, enrollment,
claims processing, utilization management, sales reporting, network analysis,
and service and status reporting. The systems support all products and provider
arrangements for both fully insured and self funded administrative needs.
The Company regularly evaluates, upgrades, and enhances its management
information systems to further improve its operating efficiencies and services.
An artificial intelligence system assists in claims processing, eligibility and
enrollment tasks. The Company's data warehouse provides the capability to do
data analysis of the business; looking for trends in utilization, product mix,
claim costs, product pricing and other business factors. The Company uses
extensive personal computer based network and software solutions that are
integrated with its mainframe system, which allows for its continuous
enhancement with technology upgrades and other software solutions.
In 1999, the Company completed its initiative to test its computer systems
for Year 2000 compliance and developed detailed business continuity and
contingency plans to deal with identified worst case scenarios with the highest
chance of occurring. The Company experienced no known significant Year 2000
issues or disruptions during the beginning of 2000, and anticipates no future
significant problems. See "Item. 7 Management's Discussion and Analysis of
Financial Condition and Results of Operations - Year 2000" for a complete
discussion of Year 2000 matters.
REINSURANCE
The Company has entered into a variety of reinsurance arrangements under
which it (1) cedes business to other insurance companies to mitigate large claim
risk, and (2) accepts risk from other insurance carriers in connection with
certain acquisitions and other business.
The Company cedes, through excess of loss arrangements, certain of its
risks on the small group health business and life business. This reinsurance
allows for greater diversification of risk to control exposure to potential
losses arising from large claims. In addition, it permits the Company to enhance
its premium and asset growth while maintaining favorable risk-based capital
ratios. All excess of loss reinsurers with which the Company contracts are rated
"A- (Excellent)" or better by A.M. Best.
In addition, in connection with certain acquisitions and other business,
the Company assumes risk from other insurance carriers on both an assumption and
a quota share basis. Under assumption reinsurance, the Company becomes directly
responsible to insureds for business previously written by the ceding carrier.
Quota share reinsurance is a contractual arrangement whereby the reinsurer
assumes an agreed percentage of certain risks insured by the ceding insurer and
shares premium revenue and losses proportionately. Quota share reinsurance is
being used by the Company as part of a vehicle to acquire certain business from
other insurance carriers and allows the Company to assume insurance risk in
certain jurisdictions.
INVESTMENTS
The Company attempts to minimize its business risk through conservative
investment policies. Investment guidelines set quality, concentration and return
parameters. Individual fixed income issues must carry an investment grade rating
at the time of purchase, with an ongoing average portfolio rating of "A-" or
better, based on ratings of Standard & Poor's Corporation or another nationally
recognized securities rating organization. The Company invests in securities
authorized by applicable state laws and regulations and follows investment
policies designed to maximize yield, preserve principal and provide liquidity.
The Company's portfolio contains no investments in mortgage loans, non-publicly
traded securities (except for principal only strips of U.S. Government
securities), real estate held for investment or financial derivatives.
6
With the exception of short-term investments and securities on deposit with
various state regulators, investment responsibilities have been delegated to
external investment managers. Such investment responsibilities, however, must be
carried out within the investment parameters established by the Company, which
are amended from time to time. See "Item 7. Management's Discussion and Analysis
of Financial Condition and Results of Operations - Market Risk Exposure" and the
Company's Notes to Consolidated Financial Statements, Note 3, "Investments," for
additional information on the Company's investments.
REGULATION
Government regulation of employee benefit plans, including health care
coverage and health plans, is a changing area of law that varies from
jurisdiction to jurisdiction and generally gives responsible state and federal
administrative agencies broad discretion. The Company strives to maintain
compliance in all material respects with the various federal and state
regulations applicable to its current operations. To maintain such compliance,
it may be necessary for the Company or a subsidiary to make changes from time to
time in its services, products, structure or operations. Additional governmental
regulation or future interpretation of existing regulations could increase the
cost of the Company's compliance or otherwise affect the Company's operations,
products, profitability or business prospects.
The Company is unable to predict what additional government regulations, if
any, affecting its business may be enacted in the future or how existing or
future regulations might be interpreted. Most jurisdictions have enacted small
group insurance and rating reforms which generally limit the ability of insurers
and health plans to use risk selection as a method of controlling costs for the
small group business. These laws may generally limit or eliminate use of
pre-existing condition exclusions, experience rating and industry class rating,
and limit the amount of rate increases from year to year. Under these laws, cost
control through provider contracting and managing care may become more
important, and the Company believes its experience in these areas will allow it
to compete effectively. The Company regularly monitors state and federal
legislative and regulatory activity as it affects the Company's business.
FEDERAL INSURANCE REGULATION
In recent years, federal legislation significantly expanded federal
regulation of small group health plans and health care coverage. The new laws
placed restrictions on the use of pre-existing conditions and eligibility
restrictions based upon health status, and prohibited cancellation of coverage
due to claims experience or health status. Federal reform also prohibits
insurance companies from declining coverage to small employers. Additional
federal laws that took effect in 1998 include prohibitions against separate,
lower dollar maximums for mental health benefits and requirements relating to
minimum coverage for maternity inpatient hospitalization. Many requirements of
the federal legislation are similar to small group reforms that have been in
place for many years. The Company expects to be able to utilize and expand upon
the cost control measures initiated as a result of small group reform.
The Clinton Administration and members of Congress have also proposed
numerous other health care reform measures in recent years. Congress is
currently considering legislation called a "Patients Bill of Rights" which could
affect various aspects of the Company's business. The Company is unable to
predict when or whether such legislation or any additional federal proposals
will be enacted or, if enacted, the likely impact on the Company's operations.
STATE INSURANCE REGULATION
The Company's insurance subsidiaries are subject to regulation by various
insurance regulatory bodies in each state in which the respective entities are
licensed. Regulatory authorities exercise extensive supervisory power over
insurance companies in regard to (1) the licensing of insurance companies; (2)
the approval of forms and insurance policies used; (3) the nature of, and
limitation on, an insurance company's investments; (4) periodic examination of
the operations of insurance companies; (5) the form and content of annual
financial statements and other reports required to be filed on the financial
condition of insurance companies; (6) capital adequacy; and (7) transactions
with affiliates and changes in control. The Company's insurance company
subsidiaries are required to file periodic statutory financial statements in
each jurisdiction in which they are licensed.
7
On an ongoing basis, states consider various health care reform measures
relating to network management, mandated benefits, underwriting, appeals and
administrative procedures and other matters. The Company is unable to predict
what reforms, if any, may be enacted or how these reforms would affect the
Company's operations.
The National Association of Insurance Commissioners ("NAIC") has adopted
Risk-Based Capital ("RBC") requirements for life and health insurers to evaluate
the adequacy of statutory capital and surplus in relation to investment and
insurance risks associated with: (1) asset quality; (2) mortality and morbidity;
(3) asset and liability matching; and (4) other business factors. The RBC
formula is used by state insurance regulators as an early warning tool to
identify insurance companies that potentially are inadequately capitalized. At
December 31, 1999, the Company's principal insurance company subsidiaries had an
RBC ratio that was substantially above the levels which would require regulatory
action.
Dividends paid by the Company's insurance subsidiaries to the Company are
limited by state insurance regulations. The insurance regulator in the insurer's
state of domicile may disapprove any dividend which, together with other
dividends paid by an insurance company in the prior 12 months, exceeds the
regulatory maximum as computed for the insurance company based on its statutory
surplus and net income. Based upon the financial statements of the Company's
insurance subsidiaries as of December 31, 1999, as filed with the insurance
regulators, no dividends may be paid without regulatory approval in 2000.
INSURANCE HOLDING COMPANY SYSTEMS
The Company is an insurance holding company system under applicable state
laws. As such, the Company and its insurance subsidiaries are subject to
regulation under state insurance holding company laws and regulations in the
states in which the insurance subsidiaries are domiciled. The insurance holding
company laws and regulations generally require annual registration with the
state departments of insurance and the filing of reports describing capital
structure, ownership, financial condition, certain intercompany transactions and
general business operations. Various notice and reporting requirements often
apply to transactions between an insurer and its affiliated companies, depending
on the size and nature of the transactions. Certain state insurance holding
company laws and regulations also require prior regulatory approval or notice of
certain material intercompany transactions. Acquisition of control of an
insurance company requires the prior approval of state regulators in the
insurer's state of domicile and sometimes other jurisdictions as well.
Acquisition of a controlling interest of the Company would constitute an
acquisition of a controlling interest in each of its insurance subsidiaries.
Under applicable state law, control is presumed to exist when greater than 10%
of a company's shares are controlled by an entity.
THIRD PARTY ADMINISTRATORS
Certain subsidiaries of the Company are also licensed as third party
administrators ("TPAs") in states where TPA licensing is required. TPA
regulations, although differing greatly from state to state, generally contain
certain required administrative procedures, periodic reporting obligations and
minimum financial requirements.
PREFERRED PROVIDER ORGANIZATIONS
Certain of the operations of the Company's subsidiaries are subject to
state PPO or managed care laws and regulations. PPO and managed care regulations
generally contain requirements pertaining to provider networks, provider
contracting, and reporting requirements that vary from state to state. In some
cases, the regulated activities are delegated by the Company's subsidiaries to a
third party. In cases where activities are delegated, the Company's subsidiaries
monitor the activities of the third party for compliance with the laws and
regulations.
UTILIZATION REVIEW ACTIVITIES
A number of states have enacted laws and/or adopted regulations governing
utilization review activities. Generally, these laws and regulations require
compliance with specific standards for the performance of utilization review
services including confidentiality, staffing, appeals and reporting
requirements. Some of these laws and regulations may affect certain operations
of the Company's subsidiaries. In some cases the regulated activities are
delegated by the Company's subsidiaries to a third party. In cases where
activities are delegated, the Company's subsidiaries monitor the activities of
the third party for compliance with the laws and regulations.
8
ERISA
The provision of goods and services to or through certain types of employee
health benefit plans is subject to the Employee Retirement Income Security Act
of 1974, as amended ("ERISA"). ERISA is a complex set of laws and regulations
that are subject to periodic interpretation by the United States Department of
Labor and the Internal Revenue Service. ERISA governs how the Company's business
units may do business with employers whose employee benefit plans are covered by
ERISA, particularly employers that self fund benefit plans. There recently have
been legislative attempts to limit ERISA's preemptive effect on state laws. If
such limitations were to be enacted, they might increase the Company's liability
exposure under state law-based suits relating to employee health benefits
offered by the Company's health plans and may permit greater state regulation of
other aspects of those businesses' operations.
EMPLOYEES
As of December 31, 1999, the Company had 2,030 employees, 1,730 of which
are located at its home office facility in Green Bay, Wisconsin. None of its
employees are represented by a union. The Company considers its relations with
its employees to be good.
TRADEMARKS
The phrase ITS YOUR CHOICESM is a federally registered service mark of the
Company. The Company has filed for and maintains various other service marks,
trademarks and trade names at the federal level and in various states. Although
the Company considers its registered service marks, trademarks and trade names
important in the operation of its business, the business of the Company is not
dependent on any individual service mark, trademark or trade name.
ITEM 2. PROPERTIES
The Company's headquarters are located in Green Bay, Wisconsin, in a
400,000 square foot office building owned by the Company and used by both of its
business segments. The property is pledged as collateral to the Company's
commercial lender pursuant to a mortgage that continues until January 1, 2004.
The Company also leases property at approximately 50 locations throughout the
United States for its field sales and provider network offices.
ITEM 3. LEGAL PROCEEDINGS
On August 26, 1999, a $6.9 million verdict was entered against American
Medical Security, Inc. ("AMS Inc."), the Company's third party administrator
("TPA") subsidiary, in the United States District Court for the Middle District
of Alabama. The decision was made in a lawsuit brought against AMS Inc. by
Skilstaf, Inc. ("Skilstaf"), an Alabama employee leasing company, in January
1998 alleging that AMS Inc. delayed claims payments under a contract with
Skilstaf to avoid liability under a stop-loss policy issued by its affiliate,
United Wisconsin Life Insurance Company ("UWLIC"). Skilstaf sought unspecified
damages. The contract, which was entered into in 1992 and terminated by Skilstaf
in 1996, was a TPA contract for Skilstaf's self funded employee benefit plan.
AMS Inc. has argued that this case was governed by the Employee Retirement
Income Security Act of 1974, as amended, which preempts all state law causes of
action and limits damages to contract damages. On September 14, 1999, AMS Inc.
filed a post-trial motion to set aside the jury's finding. If the court does not
grant the motion, it is AMS Inc.'s intent to appeal the decision to the Eleventh
Circuit Federal Appeals Court. Based on discussions with outside counsel,
management expects the $6.9 million verdict to be reversed or substantially
reduced following appeal.
9
On February 7, 2000, a $5.4 million verdict was entered against AMS Inc.
and UWLIC in the Common Pleas Court of Delaware County, Ohio, Civil Division, in
a lawsuit brought against AMS Inc. and UWLIC in 1996 by Health Administrators of
America, Inc. ("Health Administrators"), an insurance agency owned and operated
by a former agent of AMS Inc. The lawsuit alleges breach of written and oral
contracts involving commission amounts and fraud. The case was heard and decided
by a magistrate who awarded damages to Health Administrators, based on breach of
written contracts and ruled in favor of AMS Inc. and UWLIC on breach of oral
contracts and fraud. On February 22, 2000, AMS Inc. and UWLIC filed objections
with the Common Pleas Court requesting that the magistrate's decision against
AMS Inc. and UWLIC be reversed. If the court does not reverse the decision, it
is AMS Inc. and UWLIC's intention to file an appeal to the Ohio Court of
Appeals. Based on discussions with outside counsel, management expects the $5.4
million judgment to be reversed or substantially reduced following the decision
on the objections or an appeal.
The Company is involved in various legal and regulatory actions occurring
in the normal course of its business. In the opinion of management, adequate
provision has been made for losses which may result from the Skilstaf
litigation, the Health Administrators litigation and other legal and regulatory
actions and, accordingly, the outcome of these matters is not expected to have a
material adverse effect on the consolidated financial statements.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of 1999.
EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers of the Company, who are elected for one year terms,
are as follows:
Name Age Title
Samuel V. Miller 54 Chairman of the Board, President and Chief Executive Officer
Gary D. Guengerich 54 Executive Vice President and Chief Financial Officer
James C. Modaff 42 Executive Vice President and Chief Actuary
Thomas G. Zielinski 52 Executive Vice President of Operations
Christopher N. Earl 46 Senior Vice President of Sales and Marketing
Timothy J. Moore 48 Senior Vice President of Corporate Affairs, General Counsel and
Secretary
Clifford A. Bowers 48 Vice President, Corporate Communications
John R. Wirch 46 Vice President, Human Resources
Samuel V. Miller has been Chairman of the Board, President and Chief
Executive Officer of the Company since September 1998. Prior to that time, he
was an Executive Vice President of the Company since December 1995. Mr. Miller
has also served as President and Chief Executive Officer of American Medical
Security Holdings, Inc. ("AMS Holdings") since October 1996. During 1994 and
1995, Mr. Miller was a member of the executive staff planning group with the
Travelers Group, serving as Chairman and Group Chief Executive of National
Benefit Insurance Company and Primerica Financial Services Ltd. of Canada. Prior
to 1994, Mr. Miller spent 10 years as President and Chief Executive Officer of
American Express Life Assurance Company.
Gary D. Guengerich has been Executive Vice President and Chief Financial
Officer of the Company since September 1998, having also served as Treasurer of
the Company until November 1999. He also served in the same capacities with AMS
Holdings since November 1997. Prior to that time, Mr. Guengerich was Senior Vice
President and Comptroller of First Colony Life Insurance since 1981.
James C. Modaff has been Executive Vice President and Chief Actuary of the
Company since August 1999. Prior to joining the Company, he was a principal of
Milliman & Robertson, Inc. (a national actuarial and consulting firm) for the
majority of his 14-year career with the firm.
10
Thomas G. Zielinski has been Executive Vice President of Operations of the
Company since August 1999. Prior to joining the Company, he was a Vice President
of Humana, Inc. (a health services company) where he served as Executive
Director of the Wisconsin Service Center of Humana, Inc. and in various other
capacities since 1981 as a Vice President of a predecessor company of Humana,
Inc.
Christopher N. Earl has been Senior Vice President of Sales and Marketing
since February 1999. Prior to joining the Company, he held various senior
management positions, including Regional Vice President of Sales, with United
Healthcare Corporation (a health services company) from 1993 to 1999. From 1989
to 1993, Mr. Earl held senior marketing positions with Prudential Insurance
Company of America.
Timothy J. Moore has been Senior Vice President of Corporate Affairs,
General Counsel and Corporate Secretary of the Company since September 1998. He
also served in that capacity with AMS Holdings since March 1997. Prior to that
time, Mr. Moore was a partner with the national law firm of Katten Muchin &
Zavis, practicing at the firm from 1987 to 1997.
Clifford A. Bowers has been Vice President of Corporate Communications of
the Company since September 1998. He also served in that capacity with AMS Inc.
since October 1997. From 1988 to 1997, Mr. Bowers was Director of Communications
with Fort Howard Corporation (a paper manufacturer that subsequently merged with
James River Corporation to form Fort James Corporation).
John R. Wirch has been Vice President of Human Resources of the Company
since September 1998. He also served in that capacity with AMS Holdings and/or
AMS Inc. since February 1996. Prior to that time, Mr. Wirch was Vice President
of Human Resources for Little Rapids Corporation (a manufacturer of specialty
papers) from 1993 to 1996, having served as Director of Human Resources of
Little Rapids Corporation from 1980 to 1993.
11
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS.
The common stock of the Company is traded on the New York Stock Exchange
("NYSE") under the symbol "AMZ". Prior to September 14, 1998, the common stock
was traded on the NYSE under the symbol "UWZ". The following table sets forth
the per share high and low sales prices for the common stock as reported on the
NYSE for the periods indicated and the cash dividends paid per share for those
periods. Stock prices prior to September 25, 1998 are not adjusted to reflect
the spin-off.
Cash
Market Price Dividends
High Low Paid
------------------------- ------------
Year ended December 31, 1999
First Quarter $ 16.25 $ 12.06 $ -
Second Quarter 15.50 7.81 -
Third Quarter 11.25 6.50 -
Fourth Quarter 6.75 4.00 -
Year ended December 31, 1998
First Quarter $ 33.38 $ 25.50 $ 0.12
Second Quarter 33.19 28.38 0.12
Third Quarter 28.38 8.56 0.12
Fourth Quarter 15.06 6.38 -
During the fourth quarter of 1999, the Company entered into an agreement to
amend the terms of its line of credit. The amendment contains a debt covenant
restriction which prohibits the Company from declaring or paying any cash
dividends. In addition, dividends paid by the insurance subsidiaries to the
Company are limited by state insurance regulations. Based upon the financial
statements of the Company's insurance subsidiaries as of December 31, 1999, as
filed with the insurance regulators, no dividends may be paid by such entities
without prior regulatory approval in 2000.
As of February 29, 2000, there were 287 shareholders of record of common
stock. Based on information obtained from the Company's transfer agent and from
participants in security position listings and otherwise, the Company has reason
to believe there are approximately 3,000 beneficial owners of shares of common
stock.
12
ITEM 6. SELECTED FINANCIAL DATA.
The following selected financial data as of and for the years ended
December 31, 1995 through 1999 has been derived from the Company's consolidated
financial statements. The following data should be read in conjunction with the
Company's consolidated financial statements, the related notes thereto, and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
As of and for the years ended December 31,
1999 1998(b) 1997 1996(a) 1995
--------------------------------------------------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENT OF OPERATIONS DATA:
Revenues:
Premium revenue $ 1,056,107 $ 914,017 $ 957,204 $ 596,099 $ 506,349
Net investment income 18,912 24,220 24,071 24,570 31,186
Other revenue 22,361 22,632 24,249 2,935 -
--------------------------------------------------------------
Total revenues 1,097,380 960,869 1,005,524 623,604 537,535
Expenses:
Medical and other benefits 860,473 691,767 733,491 472,319 399,449
Selling, general and administrative 268,059 242,073 252,160 157,136 135,052
Interest 3,564 7,691 9,311 4,325 3,483
Amortization of goodwill and other intangibles 4,273 8,781 7,975 670 -
Write-off of intangible assets and related charges - 15,453 - - -
--------------------------------------------------------------
Total expenses 1,136,369 965,765 1,002,937 634,450 537,984
--------------------------------------------------------------
Income (loss) from continuing operations,
before income taxes (38,989) (4,896) 2,587 (10,846) (449)
Income tax expense (benefit) (13,043) (1,868) 1,032 (4,140) (728)
--------------------------------------------------------------
Income (loss) from continuing operations (25,946) (3,028) 1,555 (6,706) 279
Income from discontinued operations,
less applicable income taxes - 10,003 16,595 16,909 6,094
--------------------------------------------------------------
Net income (loss) $ (25,946) $ 6,975 $ 18,150 $ 10,203 $ 6,373
==============================================================
Earnings (loss) per common share - basic
Continuing operations $ (1.58) $ (0.18) $ 0.10 $ (0.52) $ 0.02
Discontinued operations - 0.60 1.01 1.31 0.48
--------------------------------------------------------------
Net income (loss) per common share - basic $ (1.58) $ 0.42 $ 1.11 $ 0.79 $ 0.50
==============================================================
Earnings (loss) per common share - diluted
Continuing operations $ (1.58) $ (0.18) $ 0.10 $ (0.52) $ 0.02
Discontinued operations - 0.60 1.00 1.31 0.48
--------------------------------------------------------------
Net income (loss) per common share - diluted $ (1.58) $ 0.42 $ 1.10 $ 0.79 $ 0.50
==============================================================
Weighted average common shares outstanding 16,470 16,559 16,423 12,892 12,551
Cash dividends per common share $ - $ 0.36 $ 0.48 $ 0.48 $ 0.48
BALANCE SHEET DATA:
Cash and investments $ 293,539 $ 309,562 $ 316,858 $ 335,839 $ 402,711
Total assets 503,094 498,722 648,136 693,278 580,121
Notes payable 42,523 55,064 124,578 125,788 109,898
Total shareholders' equity 220,280 266,451 326,377 313,655 212,411
(a) Includes operations of Old AMS since December 3, 1996, the date of
acquisition.
(b) Discontinued operations includes the operations of Newco/UWS through
September 25, 1998, the spin-off distribution date. Continuing operations
includes interest on debt assumed by Newco/UWS through September 11, 1998,
the spin-off effective date.
13
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
OVERVIEW
American Medical Security Group, Inc., together with its subsidiary
companies ("AMSG" or the "Company"), is a provider of health care benefits and
insurance products for individuals and small employer groups. The Company's
principal product offering is health insurance for small employer groups and
health insurance for individuals and families ("MedOne"). The Company also
offers life, dental, prescription drug, disability and accidental death
insurance, and provides self funded benefit administration. The Company's
products are actively marketed in 31 states and the District of Columbia through
independent agents. Approximately 100 Company sales managers located in sales
offices throughout the United States support the independent agents. The
Company's products generally provide discounts to insureds that utilize
preferred provider organizations ("PPOs"). AMSG owns a preferred provider
network and also contracts with several other networks to ensure cost-effective
health care choices to its customers.
SPIN-OFF
Prior to and for most of the year 1998, the business of the Company, then
known as "United Wisconsin Services, Inc.", consisted of two main components:
the small group PPO business and the managed care and specialty business. On
September 11, 1998, the Company contributed all of its subsidiaries comprising
the managed care and specialty business to a newly created subsidiary named
"Newco/UWS, Inc.", a Wisconsin corporation ("Newco/UWS"). On September 25, 1998,
the Company spun off the managed care and specialty business through a
distribution of 100% of the issued and outstanding shares of common stock of
Newco/UWS to the Company's shareholders of record as of September 11, 1998. The
Company thereupon adopted its current name of "American Medical Security Group,
Inc." and Newco/UWS changed its name to "United Wisconsin Services, Inc."
The net assets of Newco/UWS consisted of assets and liabilities of the
managed care and specialty management business along with $70.0 million in debt
that was assumed by Newco/UWS in conjunction with the spin-off. As a result of
the spin-off, the revenues and expenses, assets and liabilities, and cash flows
of the managed care and specialty business have been classified as discontinued
operations in the consolidated financial statements. The continuing operations
of the Company as reported herein reflect the small group PPO insurance portion
of the Company's business. The Company obtained a private letter ruling from the
Internal Revenue Service to the effect that the spin-off qualifies as tax-free
to the Company, Newco/UWS and the Company's shareholders.
ACQUISITIONS
During 1997 and 1998, the Company acquired the following blocks of
business:
- - In the fourth quarter of 1997, the Company acquired from Pan American Life
Insurance Company ("Pan American") most of the health insurance business
which is marketed to individuals and small employer groups.
- - Effective July 1, 1998, the Company assumed most of Pan American's
remaining domestic health insurance business.
- - Effective January 1, 1999, the Company acquired the majority of the fully
insured group health business from Continental Assurance Company ("CNA").
The Company continues to actively seek opportunities for growth through
acquisition. Management believes that as industry consolidation occurs, the
Company is in a position to take advantage of its operational efficiencies.
Management will continue to evaluate potential targets for acquisition.
14
SUMMARY OF 1999 RESULTS
The Company experienced a difficult and challenging year with disappointing
1999 financial results. Reserve strengthening charges totaling $16.0 million
after-tax were recorded primarily relating to adverse medical loss ratio trends
in its small group health business. Factors which significantly contributed to
the reserve strengthening charges include rapidly rising medical costs, higher
than anticipated claims utilization in certain markets, and development of prior
years' claim reserves.
To combat the adverse trends recognized in 1999, management implemented
various action plans including higher premium rate increases, accelerated
repricing in certain targeted business segments, the exit from three
underperforming markets, and the introduction of redesigned products with the
conversion of older group health plans into these new benefit designs. In
response to the increased pharmacy costs and utilization, the Company has
introduced a two-tiered drug copay plan. Also, in late December 1999, the
Company entered into a new agreement with its prescription benefit manager which
is expected to provide cost and efficiency benefits. Management has also
initiated new administrative programs designed to reduce claim costs. The
benefits expected from the implementation of these programs should begin to
materialize in 2000 and reduce the health loss ratio.
During the third quarter of 1999, the Company announced plans to cease
marketing and terminate existing small group business in Florida and all
remaining business in Maryland and Minnesota over a period of 18 months. This
decision was made after it became clear to management that certain regulatory
challenges existed which made it impossible to return these markets to
profitability. Management of the Company made a considerable effort to work with
state regulators on a reasonable resolution which entailed necessary rate
increases. Upon notification from the state regulators that the Company was
denied the rate increases considered necessary, management reevaluated the
assumptions used for this grouping of markets and found it necessary to record a
premium deficiency reserve. Insurance contracts are grouped as relating to
highly regulated markets and all other markets. Highly regulated markets include
exited and other markets. These markets are identified based on significant
rating restrictions, states' general legislative and regulatory environments,
and the Company's ability to effectively underwrite risk. The Company recorded a
$13.7 million after-tax charge for a premium deficiency reserve to recognize
expected losses related to highly regulated markets.
Although management is disappointed with the turn of events in 1999, the
combined effect of the unfavorable developments is considered a short-term
setback for the Company principally affecting 1999. Management remains confident
in the underlying earnings potential of the Company and has implemented action
plans, described above, which should contribute to improved financial
performance starting in early 2000.
While the Company faced challenges with its small group health products,
its ancillary products were profitable. The MedOne product, combined with the
Company's group dental, group life, and self funded products combined to produce
net income of $15.0 million in 1999.
The expense ratio for the Company's health segment improved in 1999
compared to 1998 due mainly to management's commitment to increase operating
efficiencies. The Company's low cost infrastructure and superior operating
efficiencies provide flexibility and opportunities for targeted acquisitions and
continued growth through new sales.
The Company's balance sheet remains strong with a book value per share of
$14.86 as of December 31, 1999 and a tangible book value per share of $7.69. In
addition, the Company reported positive cash flows from operations for 1999 of
$26.4 million.
The Company's medical membership inforce of 630,217 at the end of 1999 was
down slightly compared to 636,238 at the end of the prior year. Membership in
the three states that the Company is exiting totaled 66,964 at December 31,
1999. The effect of the implemented premium rate increases and exited states is
expected to result in decreased membership in 2000.
15
COMPARISON OF RESULTS OF CONTINUING OPERATIONS
The Company experienced unrelated non-recurring items in each of the three
years in the period ended December 31, 1999. Management believes that these
non-recurring items are not reflective of the ongoing operations of the Company
and has chosen to discuss their effects separately. The following table
illustrates the effect of non-recurring items on the Company's results:
Year ended December 31,
1999 1998 1997
------------------------------------------
(IN THOUSANDS)
Income (loss) from continuing operations before interest on
debt assumed by Newco/UWS and non-recurring items $ (12,241) $ 8,439 $ 8,851
Interest on debt assumed by Newco/UWS, net of tax - (2,216) (3,180)
Non-recurring items, net of tax (13,705) (9,251) (4,116)
------------------------------------------
Income (loss) from continuing operations $ (25,946) $ (3,028) $ 1,555
==========================================
A summary description of each of the non-recurring items is as follows:
In the fourth quarter of 1997, the Company acquired from Pan American most
of the health insurance business which is marketed to individuals and small
employer groups. The Company incurred an after-tax charge of $4.1 million
directly related to this acquisition.
The Company's intangible distribution system asset was acquired in 1996 as
part of a merger. During 1997 and 1998, the Company experienced significant
turnover of sales managers and began to reorganize sales offices. During that
period, the Company replaced commissioned independent sales managers with
salaried sales offices, while it evaluated the Company's distribution strategy.
In the fourth quarter of 1998, management concluded that a salaried sales office
structure was more consistent with current strategy and that the Company's
intangible distribution system asset was impaired. As a result, the Company
recorded an after-tax charge of $9.3 million to write-off the intangible asset
and other related costs.
As more fully described in "Summary of 1999 Results," the Company recorded
a $13.7 million after-tax charge for a premium deficiency reserve in the third
quarter of 1999 to recognize expected losses related to highly regulated
markets.
YEARS ENDED DECEMBER 31, 1999 AND 1998
The Company reported a net loss of $25.9 million or $1.58 per share for
1999, compared to an after-tax loss from continuing operations of $3.0 million
or $0.18 per share for 1998. Excluding non-recurring charges and excluding
interest on debt assumed by Newco/UWS, the Company reported a loss of $12.2
million or $0.74 per share for 1999, compared to income of $8.4 million or $0.51
per share for 1998. The decline in income from 1998 to 1999 is primarily the
result of a higher loss ratio and lower investment gains, partially offset by a
lower expense ratio and lower amortization of goodwill and other intangible
assets.
16
Health insurance premium revenue increased 13.9% to $985.3 million from
$865.2 million in 1998. The increase in premium revenue reflects both internal
growth and business acquired from other insurance carriers. Premium revenue
related to CNA acquired business for the year ended December 31, 1999 totaled
$83.4 million. In addition, the Company's average fully insured medical premium
per member per month was higher in 1999 at $127 compared to $123 for 1998. Life
insurance premium revenues increased 6.9% in 1999 to $26.2 million from $24.5
million in 1998, which is the result of a 6.0% increase in life membership from
1998 to 1999. Management anticipates premium revenue to remain essentially flat
in 2000 as a slight membership decline is offset by premium rate increases.
The health loss ratio, excluding non-recurring items, was 80.4% for 1999,
compared to 76.7% for 1998. The increase in the health loss ratio is due to
reserve strengthening charges recorded in 1999 and adverse medical cost trends
as discussed previously in greater detail. The Company reported a health loss
ratio of 78.6% in the fourth quarter of 1999. Management believes the impact of
its actions will continue to have a positive impact on the health loss ratio in
2000. The life loss ratio increased to 39.2% for the year ended December 31,
1999, compared to 31.5% for 1998. The life loss ratio tends to fluctuate from
period to period. The Company experienced higher than usual life claims
experience during certain months in 1999, which caused the year-end life loss
ratio to be above historical trends. Management expects the life loss ratio to
improve in 2000.
Net investment income includes investment income and realized gains and
losses on investments. Net investment income for 1999 decreased 21.9% to $18.9
million from $24.2 million for 1998. Investment gains and losses are realized in
the normal investment process in response to market opportunities. During 1999,
the Company had $0.8 million in realized investment losses compared to realized
investment gains in 1998 totaling $3.7 million. Average annual investment
yields, excluding realized gains and losses, were also down to 6.7% for the year
ended December 31, 1999, compared to 7.3% for the same period in the prior year.
Other revenues, which is primarily made up of administrative fee income
from claim processing and other administrative services, remained relatively
stable decreasing to $22.4 million in 1999 from $22.6 million in 1998.
The expense ratio includes commissions, administrative expenses and premium
taxes and assessments, but excludes non-recurring charges. The expense ratio for
health products was 23.0% for 1999, an improvement from the prior year expense
ratio of 23.9%. The administrative expense ratio decreased in 1999 as a result
of successfully leveraging the Company's expenses over a larger premium base.
Management believes the health expense ratio will increase slightly in 2000 due
to the implementation of certain administrative initiatives. Management believes
the cost of these initiatives will be more than offset by reduced claim costs.
The health commission expense ratio increased slightly from 1998 as a result of
growth in new business.
Interest expense decreased to $3.6 million in 1999 from $4.3 million in
1998, excluding interest on the $70.0 million debt assumed by Newco/UWS in
conjunction with the spin-off. In July 1998, the Company refinanced its debt
replacing its subordinated notes with a bank line of credit at a lower interest
rate, which accounts for the decrease in interest expense from 1998 to 1999.
Amortization of goodwill and other intangible assets declined significantly
in 1999 to $4.3 million from $8.8 million in 1998. The decrease was caused by
the write-off of the Company's distribution system intangible asset as
previously discussed.
The effective tax rate for 1999 was 33.5% compared with 38.1% for 1998. The
change in the effective tax rate relates to the amortization of non-deductible
goodwill in relation to pre-tax income.
YEARS ENDED DECEMBER 31, 1998 AND 1997
Results from continuing operations for 1998 was a loss of $3.0 million,
which was a $4.6 million decrease from income of $1.6 million for 1997.
Excluding non-recurring charges and excluding interest on debt assumed by
Newco/UWS, income from continuing operations for 1998 was $8.4 million compared
to $8.9 million for 1997. The modest decline in income from continuing
operations reflected an improved loss ratio offset by increased selling, general
and administrative expenses.
17
For 1998, health insurance premiums declined 5.8% to $865.2 million from
$918.6 million in 1997. The decline in premium was primarily the result of a
decline in average fully insured medical membership of 7.2% in 1998 compared to
1997 reflecting the Company's efforts to cull unprofitable business. Life
insurance premiums declined 15.4% in 1998 to $24.5 million from $28.9 million in
1997 which was consistent with the decline in average life membership of 16.2%
in 1998 compared to 1997.
The health loss ratio for the year ended December 31, 1998 was 76.7%, an
improvement from 77.5% for 1997. The improved loss ratio for 1998, as previously
mentioned, reflected the cancellation of unprofitable business, including the
stand-alone dental business effective June 1, 1998, increased higher margin new
business and repricing of existing business. The life loss ratio for the year
ended December 31, 1998, was 31.5%, which was an improvement from 35.3% for
1997.
Net investment income includes investment income and realized gains. Net
investment income for 1998 increased 0.6% to $24.2 million from $24.1 million in
1997. Average annual investment yields, excluding realized gains and losses,
were 7.3% for the year ended December 31, 1998, compared to 8.3% for the same
period in the prior year. Net investment income for 1997 included $1.4 million
of mutual fund distributions which were favorably impacted by foreign financial
markets in 1997. Investment gains and losses are realized in the normal
investment process in response to market opportunities.
During 1998, other revenue declined to $22.6 million from $24.2 million in
1997. The decrease was primarily due to lower administrative fee revenue from
self funded business in 1998 offset by additional fees related to the Pan
American business acquired beginning in the third quarter 1998.
The expense ratio includes commissions, administrative expenses and premium
taxes and assessments, but excludes non-recurring charges. For 1998, the expense
ratio for health products was 23.9% compared to 23.0% for 1997. The increased
health expense ratio for 1998 reflected higher commission costs related to
growth in new business in 1998 over 1997 and an investment in the Company's
distribution network. Also contributing to the increase in the expense ratio
were expenses related to the Year 2000 initiative, and a one-time investment in
re-engineering administrative work flow processes.
For 1998, interest expense decreased to $7.7 million from $9.3 million for
1997. The decrease in interest expense for 1998 reflected the assumption of
$70.0 million in debt by Newco/UWS on September 11, 1998, as part of the
spin-off transaction, as further described in Note 2 to the Consolidated
Financial Statements. Excluding the interest on debt assumed by Newco/UWS,
interest expense for 1998 was approximately $4.3 million.
Amortization of goodwill and intangibles for the year ended December 31,
1998, increased to $8.8 million from $8.0 million at December 31, 1997. The
increase in amortization expense in 1998 was primarily due to recorded
intangible assets related to the Pan American small group business acquired in
October 1997.
The effective tax rate for the year 1998 was 38.1% compared with 39.9% for
the year 1997. The change in the effective tax rate relates to the amortization
of non-deductible goodwill in relation to pre-tax income.
DISCONTINUED OPERATIONS
Income from discontinued operations reflects the operating results of
Newco/UWS through September 25, 1998, the distribution date of the spin-off.
Reported results of discontinued operations in 1998 included direct costs
associated with the spin-off of $4.9 million.
LIQUIDITY AND CAPITAL RESOURCES
The Company's sources of cash flow consist primarily of insurance premiums,
administrative fee revenue and investment income. The primary uses of cash
include payment of medical and other benefits, selling, general and
administrative expenses and debt service costs. Positive cash flows are invested
pending future payments of medical and other benefits and other operating
expenses. The Company's investment policies are designed to maximize yield,
preserve principal and provide liquidity to meet anticipated payment
obligations.
18
The Company's cash flows from operations were positive at $26.4 million for
1999, and negative at $3.7 million and $31.8 million for the years ended 1998,
and 1997, respectively. Positive cash flows from operations in 1999 are
principally the result of a leveling of the claims inventory, growth in
membership and lower debt service costs as a result of the assumption of $70.0
million in debt by Newco/UWS in September 1998. Cash flows from operations were
negative in 1998 and 1997, due mainly to a decline in business and a reduction
in the inventory of claims pending adjudication. Management believes that cash
flows for 2000 will be positive but may decline from 1999 due to an expected
decline in business in force.
The Company's insurance subsidiaries operate in states that require certain
levels of regulatory capital and surplus and may restrict dividends to their
parent companies. Based upon the financial statements of the Company's insurance
subsidiaries as of December 31, 1999, as filed with the insurance regulators, no
dividends may be paid by these subsidiaries without prior regulatory approval.
The National Association of Insurance Commissioners ("NAIC") has adopted
risk-based capital ("RBC") standards for life and health insurers designed to
evaluate the adequacy of statutory capital and surplus in relation to various
business risks faced by such insurers. The RBC formula is used by state
insurance regulators as an early warning tool to identify insurance companies
that potentially are inadequately capitalized. At December 31, 1999, the
Company's principal insurance company subsidiaries had an RBC ratio that was
substantially above the levels which would require regulatory action.
On July 31, 1998, the Company entered into a five-year revolving bank line
of credit with a maximum commitment of $70.0 million. During 1998, the Company
borrowed $45.2 million on the bank line of credit to retire its subordinated
notes outstanding. Effective November 5, 1999, the Company entered into an
agreement to amend the line of credit to reduce the maximum commitment from
$70.0 million to $40.0 million. In conjunction with the commitment reduction,
the Company paid $10.0 million on the loan outstanding on November 5, 1999,
reducing the outstanding balance to $35.2 million. The maximum commitment will
be further reduced to $30.0 million on July 31, 2001. The stock of American
Medical Security Holdings, Inc. and United Wisconsin Life Insurance Company,
subsidiaries of the Company, has been pledged as collateral for the loan. The
line of credit contains certain covenants which, among other matters, require
the Company to maintain a minimum tangible net worth and restricts the Company's
ability to incur additional debt, pay future cash dividends and transfer assets.
The Company was in compliance with all such covenants at December 31, 1999.
During 1999, the Company's Board of Directors authorized the Company to
repurchase up to $10.0 million of the Company's outstanding common stock. The
Company purchased 1.1 million shares of its outstanding common stock at an
aggregate purchase price of $7.5 million. As the majority of the shares were
purchased in the fourth quarter of 1999, the share repurchase program did not
have a material impact on the earnings (loss) per share computation for the year
ended December 31, 1999.
In addition to internally generated funds and periodic borrowings on its
existing bank line of credit, the Company believes that additional financing
could be obtained as market conditions may permit or dictate.
The Company does not expect to pay any cash dividends in the foreseeable
future and intends to employ its earnings in the continued development of its
business. The Company's future dividend policy will depend on its earnings,
capital requirements, financial condition and other factors considered relevant
by the Board of Directors.
MARKET RISK EXPOSURE
The primary investment objective of the Company is to maximize investment
income while controlling risks and preserving principal. The Company seeks to
meet this investment objective through diversity of coupon rates, liquidity,
investment type, industry, issuer and geographic location. The investment
portfolio of the Company consists primarily of investment grade debt securities.
The Company uses outside investment managers who seek to maximize return on the
portfolio within the Company's investment guidelines. At December 31, 1999,
$274.1 million or 99.2% of the Company's total investment portfolio was invested
in debt securities.
19
The bond portfolio had an average quality rating of Aa3 at December 31,
1999, and A1 at December 31, 1998, as measured by Moody's Investor Service.
Almost the entire portfolio was classified as available for sale. The Company
had no investment mortgage loans, non-publicly traded securities (except for
principal only strips of U.S. Government securities), real estate held for
investment or financial derivatives. The amortized cost of the total investment
portfolio exceeded market value by $16.1 million at December 31, 1999.
Management believes that cash flow from operations will be sufficient for its
cash flow needs and that liquidation of its investment portfolio will not be
necessary.
The primary market risk affecting the Company is interest rate risk.
Assuming an immediate increase of 100 basis points in interest rates, the net
hypothetical decline in fair value of shareholders' equity is estimated to be
$7.5 million after-tax at December 31, 1999. This amount represents
approximately 3.4% of the Company's shareholders' equity.
At December 31, 1999, the fair value of the Company's borrowings under the
line of credit facility approximated the carrying value. Market risk was
estimated as the potential increase in the fair value resulting from a
hypothetical 1% decrease in the Company's weighted average short-term borrowing
rate at December 31, 1999, and was not materially different from the year end
carrying value.
INFLATION
Health care costs have been rising and are expected to continue to rise at
a rate that exceeds the consumer price index. The Company's cost control
measures and premium rate increases are designed to reduce the adverse effect of
medical cost inflation on its operations. In addition, the Company uses its
underwriting and medical management capabilities to help control inflation in
health care costs. However, there can be no assurance that the Company's efforts
will fully offset the impact of inflation or that premium revenue increases will
equal or exceed increasing health care costs.
YEAR 2000
During 1998 and 1999, the Company devoted significant time and resources in
the effort to prepare for the Year 2000 initiative. The Year 2000 project
focused on issues facing the Company in three major areas: 1) software
applications developed internally, 2) software applications acquired from a
third party that had been customized by the Company, and 3) software
applications acquired from a third party that had not been customized by the
Company and those products and services provided to the Company by third
parties.
The Company evaluated all of its major business processes and developed
detailed business continuity and contingency plans designed to deal with
identified worst case scenarios with the highest chance of occurring. By the end
of 1999, the Company had reached a state of readiness such that all significant
applications were Year 2000 compliant.
The Company experienced no known significant Year 2000 issues or
disruptions during the first part of 2000, and anticipates no future significant
problems relating to the Year 2000 issue. While the Company currently believes
that the Year 2000 project was a success and that future material operational
problems are unlikely, there can be no guarantee that future Year 2000 related
issues will not arise. Given the uncertainties surrounding unlikely possible
future events relating to the Year 2000 issue, the Company will continue to
monitor its applications and business processes.
The cost of the Year 2000 project was funded through operating cash flows
and did not have a material impact on the Company's financial position. The
Company incurred total costs of $3.2 million ($1.2 million in 1999) relating to
the Year 2000 project. In addition, the Company made total capital expenditures
of $4.5 million ($2.7 million in 1999). The Company does not anticipate
significant future operating and capital expenditures related to the Year 2000
project.
20
CAUTIONARY FACTORS
This report and other documents or oral presentations prepared or delivered
by and on behalf of the Company contain or may contain forward-looking
statements. Such statements are based upon management's current expectations and
are subject to risks and uncertainties that could cause the Company's actual
results to differ materially from those contemplated in the statements. Readers
are cautioned not to place undue reliance on the forward-looking statements.
When used in written documents or oral presentations, the terms "anticipate",
"believe", "estimate", "expect", "objective", "plan", "possible", "potential",
"project" and similar expressions are intended to identify forward-looking
statements. In addition to the assumptions and other factors referred to
specifically in connection with such statements, factors that could cause the
Company's actual results to differ materially from those contemplated in any
forward-looking statements include, among others, the following:
- - Increasing health care costs resulting from the aging of the population,
advances in medical technology, increased utilization of medical services
and drugs, health care inflation (particularly pharmacy costs), possible
epidemics and natural disasters and other factors affecting the delivery
and cost of health care that are beyond the Company's control.
- - The Company's ability to profitably distribute and sell its products,
including changes in business relationships with independent agents who
sell the Company's products, competitive factors such as the entrance of
additional competitors into the Company's markets, competitive pricing
practices, demand for the Company's existing and new products, and the
Company's ability to predict future health care cost trends and adequately
price its products.
- - Federal and state health care reform laws adopted in recent years,
currently proposed or that may be proposed in the future which affect or
may affect the Company's operations, products, profitability or business
prospects. Reform laws adopted in recent years generally limit the ability
of insurers and health plans to use risk selection as a method of
controlling costs for small group business.
- - Regulatory factors, including delays in regulatory approvals of rate
increases and policy forms; regulatory action resulting from market conduct
activity and general administrative compliance with state and federal laws;
restrictions on the ability of the Company's subsidiaries to transfer funds
to the Company or its other subsidiaries in the form of cash dividends,
loans or advances without prior approval or notification; the granting and
revoking of licenses to transact business; the amount and type of
investments that the Company may hold; minimum reserve and surplus
requirements; and risk-based capital requirements.
- - Factors related to the Company's plans to deal with adverse medical loss
ratio trends in its small group health business (which include implementing
significant rate increases, exiting three nonproductive markets, and
introducing redesigned products), including the willingness of employers
and individuals to accept rate increases, premium repricing and redesigned
products.
- - The development of and changes in claims reserves, particularly for exited
markets where insured may be inclined to increase utilization prior to
termination of their policies.
- - The ability of the Company to continue the growth of its individual and
small group health business, and its ancillary group products, including
group life, dental and self funded business.
- - The cost and other effects of legal and administrative proceedings,
including the expense of investigating, litigating and settling any claims
against the Company, and the general increase in litigation involving
managed care and medical insurers.
- - Adverse outcomes of litigation against the Company, including the inability
of the Company to prevail in having the verdicts in the Skilstaf litigation
and the Health Administrators litigation reversed or substantially reduced.
21
- - Possible restrictions on cash flow resulting from a denial by state
regulators of the payment of dividends by the Company's insurance company
subsidiaries.
- - Restrictions imposed by financing arrangements that limit the Company's
ability to incur additional debt, pay future cash dividends and transfer
assets.
- - Changes in rating agency policies and practices and the ability of the
Company's insurance subsidiaries to maintain or exceed their A- (Excellent)
rating by A.M. Best.
- - General economic conditions, including changes in interest rates and
inflation that may impact the performance on the Company's investment
portfolio or decisions of individuals and employers to purchase the
Company's products.
- - The Company's ability to maintain attractive preferred provider networks
for its insureds.
- - The Company's ability to integrate effectively the operational, managerial
and financial aspects of future acquisitions.
- - Unanticipated developments related to Year 2000 issues, including those
affecting third parties with whom the Company does business.
- - Factors affecting the Company's ability to hire and retain key executive,
managerial and technical employees.
- - Other business or investment considerations that may be disclosed from time
to time in the Company's Securities & Exchange Commission filings or in
other publicly disseminated written documents.
The Company undertakes no obligation to publicly update or revise any
forward-looking statements, whether as a result of new information, future
events or otherwise.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
See "Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Market Risk Exposure" for information concerning
potential market risks related to the Company's investment portfolio.
22
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Shareholders
American Medical Security Group, Inc.
We have audited the accompanying consolidated balance sheets of American
Medical Security Group, Inc. and its subsidiaries, (the "Company") as of
December 31, 1999 and 1998, and the related consolidated statements of
operations, changes in shareholders' equity and comprehensive income (loss) and
cash flows for each of the three years in the period ended December 31, 1999.
Our audits also included the financial statement schedules listed in the Index
at Item 14(a). These financial statements and schedules are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements and schedules based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
the Company as of December 31, 1999 and 1998, and the consolidated results of
its operations and its cash flows for each of the three years in the period
ended December 31, 1999, in conformity with accounting principles generally
accepted in the United States. Also, in our opinion, the related financial
statement schedules, when considered in relation to the basic financial
statements taken as a whole, present fairly in all material respects the
information set forth therein.
/s/ Ernst & Young LLP
Milwaukee, Wisconsin
February 7, 2000
23
AMERICAN MEDICAL SECURITY GROUP, INC.
CONSOLIDATED BALANCE SHEETS
December 31,
1999 1998
----------------------------
(IN THOUSANDS)
ASSETS:
Investments:
Securities available for sale, at fair value:
Fixed maturities $ 270,800 $ 293,096
Equity securities - preferred 2,198 2,457
Fixed maturity securities held to maturity, at amortized cost 3,275 3,361
----------------------------
Total investments 276,273 298,914
Cash and cash equivalents 17,266 10,648
Other assets:
Property and equipment, net 32,624 35,356
Goodwill and other intangibles, net 111,347 116,093
Other assets 65,584 37,711
----------------------------
Total other assets 209,555 189,160
----------------------------
Total assets $ 503,094 $ 498,722
============================
LIABILITIES AND SHAREHOLDERS' EQUITY:
Liabilities:
Medical and other benefits payable $ 169,117 $ 113,133
Advance premiums 17,277 18,157
Payables and accrued expenses 25,044 23,439
Notes payable 42,523 55,064
Other liabilities 28,853 22,478
----------------------------
Total liabilities 282,814 232,271
Redeemable preferred stock - Series A adjustable rate
nonconvertible, $1,000 stated value, 25,000 shares authorized - -
Shareholders' equity:
Preferred stock (no par value, 475,000 shares authorized) - -
Common stock (no par value, $1 stated value, 50,000,000 shares authorized,
16,653,646 issued and 15,532,146 outstanding at December 31, 1999,
16,653,179 issued and outstanding at December 31, 1998) 16,654 16,653
Paid-in capital 187,952 188,981
Retained earnings 33,626 59,572
Accumulated other comprehensive income (loss) (net of tax
benefit of $5,634,000 in 1999 and tax expense of $670,000 in 1998) (10,464) 1,245
Treasury stock (1,121,500 shares at December 31, 1999, at cost) (7,488) -
----------------------------
Total shareholders' equity 220,280 266,451
----------------------------
Total liabilities and shareholders' equity $ 503,094 $ 498,722
============================
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
24
AMERICAN MEDICAL SECURITY GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
Year ended December 31,
1999 1998 1997
------------------------------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
REVENUES:
Insurance premiums $1,056,107 $ 914,017 $ 957,204
Net investment income 18,912 24,220 24,071
Other revenue 22,361 22,632 24,249
------------------------------------------
Total revenues 1,097,380 960,869 1,005,524
EXPENSES:
Medical and other benefits 860,473 691,767 733,491
Selling, general and administrative 268,059 242,073 252,160
Interest 3,564 7,691 9,311
Amortization of goodwill and other intangibles 4,273 8,781 7,975
Write-off of intangible assets and related charges - 15,453 -
------------------------------------------
Total expenses 1,136,369 965,765 1,002,937
------------------------------------------
Income (loss) from continuing operations,
before income taxes (38,989) (4,896) 2,587
Income tax expense (benefit) (13,043) (1,868) 1,032
------------------------------------------
Income (loss) from continuing operations (25,946) (3,028) 1,555
Income from discontinued operations,
less applicable income taxes - 10,003 16,595
------------------------------------------
Net income (loss) $ (25,946) $ 6,975 $ 18,150
==========================================
Earnings (loss) per common share - basic
Continuing operations $ (1.58) $ (0.18) $ 0.10
Discontinued operations - 0.60 1.01
------------------------------------------
Net income (loss) per common share - basic $ (1.58) $ 0.42 $ 1.11
==========================================
Earnings (loss) per common share - diluted
Continuing operations $ (1.58) $ (0.18) $ 0.10
Discontinued operations - 0.60 1.00
------------------------------------------
Net income (loss) per common share - diluted $ (1.58) $ 0.42 $ 1.10
==========================================
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
25
AMERICAN MEDICAL SECURITY GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year ended December 31,
1999 1998 1997
------------------------------------------
(IN THOUSANDS)
OPERATING ACTIVITIES:
Income (loss) from continuing operations $ (25,946) $ (3,028) $ 1,555
Adjustments to reconcile income (loss) from continuing
operations to net cash provided by (used in) operating activities:
Depreciation and amortization 11,038 15,343 17,424
Write-off of intangible assets - 12,833 -
Net realized investment losses (gains) 854 (3,670) (1,854)
Deferred income tax benefit (7,112) (8,256) (1,722)
Changes in operating accounts:
Other assets (12,945) (4,869) 10,204
Medical and other benefits payable 55,984 (14,911) (32,181)
Advance premiums (880) (2,004) (5,485)
Payables and accrued expenses 1,605 (6,129) 2,122
Other liabilities 3,830 10,982 (21,882)
------------------------------------------
Net cash provided by (used in) operating activities 26,428 (3,709) (31,819)
INVESTING ACTIVITIES:
Acquisition of subsidiaries (net of cash and cash
equivalents acquired of $2,773,000) - 2,623 -
Purchases of available for sale securities (190,834) (347,931) (276,510)
Proceeds from sale of available for sale securities 172,086 300,416 311,374
Proceeds from maturity of available for sale securities 20,805 20,225 400
Purchases of held to maturity securities (686) (540) (1,629)
Proceeds from maturity of held to maturity securities 770 1,100 935
Purchases of property and equipment (2,976) (3,326) (1,839)
Proceeds from sale of property and equipment 1,049 254 2,404
------------------------------------------
Net cash provided by (used in) investing activities 214 (27,179) 35,135
FINANCING ACTIVITIES:
Cash dividends paid - (5,956) (7,892)
Issuance of common stock 5 2,356 2,965
Purchase of treasury stock (7,488) - -
Proceeds from notes payable borrowings 5,000 45,158 -
Repayment of notes payable (17,541) (46,944) (1,210)
------------------------------------------
Net cash used in financing activities (20,024) (5,386) (6,137)
Net cash provided by discontinued operations - 1,631 16,113
------------------------------------------
Cash and cash equivalents:
Net increase (decrease) during year 6,618 (34,643) 13,292
Balance at beginning of year 10,648 45,291 31,999
------------------------------------------
Balance at end of year $ 17,266 $ 10,648 $ 45,291
==========================================
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
26
AMERICAN MEDICAL SECURITY GROUP, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY AND COMPREHENSIVE INCOME (LOSS)
Accumulated
Other
Common Stock Paid-In Retained Comprehensive Treasury
-------------------------
Shares Amount Capital Earnings Income (Loss) Stock Total
--------------------------------------------------------------------------------------
(IN THOUSANDS, EXCEPT SHARE DATA)
Balance at January 1, 1997 16,293,995 $ 16,294 $ 184,019 $ 107,073 $ 6,269 $ - $ 313,655
Comprehensive income:
Net income 18,150 18,150
Change in net unrealized gain on
securities, net of taxes of $123,000 (501) (501)
------------
Comprehensive income 17,649
------------
Cash dividends paid on common stock
($0.48 per share) (7,892) (7,892)
Issuance of common stock 215,583 216 2,749 2,965
--------------------------------------------------------------------------------------
Balance at December 31, 1997 16,509,578 16,510 186,768 117,331 5,768 - 326,377
Comprehensive income:
Net income 6,975 6,975
Change in net unrealized gain on
securities, net of taxes of $642,000 (4,613) (4,613)
------------
Comprehensive income 2,362
------------
Cash dividends paid on common stock
($0.36 per share) (5,956) (5,956)
Issuance of common stock 143,601 143 2,213 2,356
Distribution of Newco/UWS to
shareholders (58,778) 90 (58,688)
--------------------------------------------------------------------------------------
Balance at December 31, 1998 16,653,179 16,653 188,981 59,572 1,245 - 266,451
Comprehensive loss:
Net loss (25,946) (25,946)
Change in net unrealized gain on
securities, net of taxes of $6,304,000 (11,709) (11,709)
------------
Comprehensive loss (37,655)
------------
Issuance of common stock 467 1 4 5
Stock option forfeiture (1,033) (1,033)
Purchase of treasury stock
(1,121,500 shares, at cost) (7,488) (7,488)
--------------------------------------------------------------------------------------
Balance at December 31, 1999 16,653,646 $ 16,654 $ 187,952 $ 33,626 $ (10,464) $ (7,488) $220,280
========================================================================================
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
27
AMERICAN MEDICAL SECURITY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
American Medical Security Group, Inc., together with its subsidiary
companies ("AMSG" or the "Company"), is a provider of health care benefits and
insurance products for individuals and small employer groups. The Company's
principal product offering is health insurance for small employer groups and
health insurance for individuals and families ("MedOne"). The Company also
offers life, dental, prescription drug, disability and accidental death
insurance, and provides self funded benefit administration. The Company's
products are actively marketed in 31 states and the District of Columbia through
independent agents. Approximately 100 Company sales managers located in sales
offices throughout the United States support the independent agents. The
Company's products generally provide discounts to insureds that utilize
preferred provider organizations ("PPOs"). AMSG owns a preferred provider
network and also contracts with several other networks to ensure cost-effective
health care choices to its customers.
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of the Company
and all of its majority-owned subsidiaries. Significant intercompany accounts
and transactions have been eliminated. The accompanying consolidated financial
statements have been prepared in accordance with accounting principles generally
accepted in the United States ("GAAP"). The preparation of financial statements
in conformity with GAAP requires management to make estimates and assumptions
that affect the amounts reported in the consolidated financial statements and
accompanying notes. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include operating cash and short-term investments
with original maturities of three months or less. These amounts are recorded at
cost, which approximates market value.
INVESTMENTS
Investments are classified as either held-to-maturity or
available-for-sale. Investments which the Company has the positive intent and
ability to hold to maturity are designated as held-to-maturity and are stated at
amortized cost. All other investments are classified as available-for-sale and
are stated at fair value based on quoted market prices, with unrealized gains
and losses excluded from earnings and reported as a separate component of
shareholders' equity as accumulated other comprehensive income or loss, net of
income tax effects. Realized gains and losses from the sale of
available-for-sale debt securities and equity securities are calculated using
the specific identification method.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair values of investments are reported in Note 3. The fair values of
other financial instruments, principally other assets, advanced premiums,
payables and accrued expenses, notes payable and other liabilities approximate
their December 31, 1999 and 1998 carrying values.
GOODWILL AND OTHER INTANGIBLES
Goodwill represents the excess of cost over the fair market value of net
assets acquired. Goodwill and other intangible assets are being amortized on a
straight-line basis over a period of 40 years or less. Accumulated amortization
was $12,676,000 and $8,403,000 at December 31, 1999 and 1998, respectively.
28
The Company periodically evaluates whether events and circumstances have
occurred which may affect the estimated useful life or the recoverability of the
remaining balance of its intangibles. A study conducted during 1998 determined
that the Company's sales distribution system intangible assets were impaired.
The sales distribution system was acquired on December 3, 1996 in conjunction
with the purchase of the Company's small group business. Since the acquisition,
the Company has largely eliminated its commission-based sales distribution
system, replacing it with salaried sales offices. This resulted in an after-tax
charge to 1998 operations of $9,251,000 or $0.56 per share, including $7,683,000
of intangible distribution system assets and $1,568,000 of related costs. The
Company's management believes that no impairment of goodwill or other intangible
assets exists at December 31, 1999.
REVENUE RECOGNITION
Premiums for group health and life policies are recognized ratably over the
period that insurance coverage is provided. Other revenue, including
administrative fee income from claim processing and other administrative
services, is recognized in the period the service is provided.
MEDICAL AND OTHER BENEFITS
The liabilities for medical and other benefits are determined using
statistical analyses and represent estimates of the ultimate net cost of all
reported and unreported claims that are unpaid at year end. The Company's
year-end claim liabilities are substantially satisfied through claim payments in
the subsequent year. Management believes that the liabilities for insurance
claims are adequate. The liability for unpaid claims of $101,721,000 at December
31, 1998, developed deficient in the subsequent year by $10,398,000. At December
31, 1997, the liability for unpaid claims of $123,907,000, developed deficient
by $1,228,000 in the subsequent year. The estimates are reviewed periodically
and, as adjustments to the liabilities become necessary, the adjustments are
reflected in current operations.
PREMIUM DEFICIENCY RESERVES
The Company recognizes premium deficiency reserves on an existing group of
insurance contracts when the sum of expected future claim costs, claim
adjustment expenses and related maintenance expenses exceeds the expected future
premium revenue and investment income. Insurance contracts are grouped as
relating to highly regulated markets or all other markets consistent with the
Company's manner of acquiring, servicing and measuring the profitability of its
business. Highly regulated markets are identified based on significant rating
restrictions, states' general legislative and regulatory environments, and the
Company's ability to effectively underwrite risk. The Company continues to
evaluate assumptions and updates the premium deficiency reserve as necessary.
During 1999, the Company established a premium deficiency reserve for its
highly regulated markets. At December 31, 1999, the Company has remaining
recorded premium deficiency reserves totaling $16,700,000, which is included in
medical and other benefits payable in the accompanying balance sheet. No premium
deficiency reserves were recorded prior to 1999.
29
REINSURANCE
Reinsurance premiums, commissions and expense reimbursements on reinsured
business are accounted for on a basis consistent with those used in accounting
for the original policies issued and the terms of the reinsurance contracts.
Premiums and benefits ceded to other companies have been reported as a reduction
of premium revenue and benefits. Reinsurance receivables and prepaid reinsurance
premium amounts are reported as assets.
The Company limits the maximum net loss that can arise from certain lines
of business by reinsuring (ceding) a portion of these risks with other insurance
organizations (reinsurers) on an excess of loss or quota share basis. The
Company's retention limit is $500,000 per policy year for medical claims and
$50,000 for life claims. The Company is contingently liable on reinsurance ceded
in the event that the reinsurers do not meet their contractual obligations.
The Company has acquired certain business from other carriers through
reinsurance transactions. A summary of reinsurance assumed and ceded related to
acquired business is as follows:
Year ended December 31,
1999 1998 1997
------------------------------------------
(IN THOUSANDS)
Reinsurance assumed:
Insurance premiums $ 107,989 $ 99,645 $ 30,256
Medical and other benefits 95,764 80,786 23,270
Reinsurance ceded:
Insurance premiums $ 2,793 $ 14,074 $ -
Medical and other benefits 6,890 12,958 -
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost. Depreciation and amortization
are provided using the straight-line method over the estimated useful lives,
which are 20 to 30 years for land improvements, 10 to 40 years for buildings and
building improvements, three to five years for computer equipment and software
and three to 10 years for furniture and other equipment.
INCOME TAXES
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial statement
purposes and the amounts used for income tax purposes. A valuation allowance is
recorded on deferred tax assets that management believes more likely than not
will not be realized.
RELATED PARTIES
The Company has deferred compensation payable to employees of $3,597,000
and $1,421,000 at December 31, 1999 and 1998, respectively.
30
EARNINGS PER COMMON SHARE
A reconciliation of the numerator and denominator of the basic and diluted
earnings per common share ("EPS") is as follows:
Year ended December 31,
1999 1998 1997
------------------------------------------
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
Numerator:
Income (loss) from continuing operations $ (25,946) $ (3,028) $ 1,555
==========================================
Denominator:
Denominator for basic EPS - weighted average shares 16,470,096 16,558,887 16,423,270
Effect of dilutive securities - employee stock options - - 147,715
------------------------------------------
Denominator for diluted EPS 16,470,096 16,558,887 16,570,985
==========================================
Income (loss) from continuing operations per common share:
Basic $ (1.58) $ (0.18) $ 0.10
Diluted $ (1.58) $ (0.18) $ 0.10
There was no effect of dilutive securities for the years ended 1999 and
1998 because employee stock options were antidilutive during such periods.
Options to purchase 1,908,449 shares of common stock were outstanding and
exercisable at the end of 1997 and all but 147,715 were excluded from the
computation of diluted earnings per share because the options' exercise price
was greater than the average market price of common shares and, therefore, the
effect would be antidilutive.
COMPREHENSIVE INCOME (LOSS)
Comprehensive income (loss) is defined as net income (loss) plus or minus
other comprehensive income (loss), which for the Company, under existing
accounting standards, includes unrealized gains and losses, net of income tax
effects, on certain investments in debt and equity securities. Comprehensive
income (loss) is reported by the Company in the consolidated statements of
changes in shareholders' equity and comprehensive income (loss).
31
2. DISTRIBUTION OF NEWCO/UWS TO SHAREHOLDERS
On May 27, 1998, the Board of Directors of the Company, then known as
United Wisconsin Services, Inc., ("UWS") approved a plan to spin off its managed
care companies and specialty management business to its shareholders (the
"Distribution"). In connection with the spin-off, the Company changed its name
to "American Medical Security Group, Inc." On September 25, 1998, the
Distribution date, shareholders of AMSG received one share of common stock of a
newly formed company, Newco/UWS, Inc. ("Newco/UWS"), for every share of AMSG
owned as of September 11, 1998, the record date. AMSG obtained a private ruling
from the Internal Revenue Service to the effect that the spin-off qualified as
tax free to AMSG, Newco/UWS and AMSG shareholders.
The net assets of Newco/UWS consisted of assets and liabilities of the
managed care and specialty management business along with $70,000,000 in debt
that was assumed by Newco/UWS in conjunction with the Distribution. Newco/UWS
was renamed United Wisconsin Services, Inc. The operations of Newco/UWS, along
with direct costs of approximately $4,900,000 associated with the spin-off, are
reflected in discontinued operations. All prior periods of the consolidated
financial statements of AMSG have been restated to reflect Newco/UWS operations
as discontinued operations in the accompanying consolidated financial statements
of AMSG. Discontinued operations reported total revenues of $488,033,000 and
$609,109,000 for 1998 and 1997, respectively. Interest expense on the
$70,000,000 debt assumed by Newco/UWS is reflected in continuing operations only
through September 11, 1998.
3. INVESTMENTS
Net investment income from continuing operations includes the following:
Year ended December 31,
1999 1998 1997
------------------------------------------
(IN THOUSANDS)
Interest on fixed maturities $ 18,731 $ 18,437 $ 19,037
Dividends on equity securities 134 716 2,369
Realized gains 1,351 5,078 2,219
Realized losses (2,205) (1,408) (365)
Interest on cash equivalents and other investment income 1,581 2,112 1,720
------------------------------------------
Gross investment income 19,592 24,935 24,980
Investment expenses (680) (715) (909)
------------------------------------------
Net investment income $ 18,912 $ 24,220 $ 24,071
==========================================
Unrealized gains (losses) are computed as the difference between estimated
fair value and amortized cost for fixed maturities and equity securities
classified as available for sale. A summary of the net decrease in unrealized
gains, which is included in accumulated other comprehensive income (loss), is as
follows:
Year ended December 31,
1999 1998 1997
------------------------------------------
(IN THOUSANDS)
Fixed maturities $ (17,753) $ (1,849) $ 7,669
Equity securities (260) (105) (7,545)
Discontinued operations, net of deferred income taxes - (3,211) (748)
------------------------------------------
Net decrease in unrealized gains $ (18,013) $ (5,165) $ (624)
==========================================
32
Changes in accumulated other comprehensive income (loss) related to changes
in unrealized gains and losses on securities are as follows:
Year ended December 31,
1999 1998 1997
------------------------------------------
(IN THOUSANDS)
Change in net unrealized gains on securities, net of taxes $ (12,264) $ 1,074 $ 1,452
Less: reclassification adjustment for gains (losses) included in
net income (loss), net of tax benefit of $299,000 in 1999, and tax
expense of $1,284,000 and $649,000 in 1998, and 1997, respectively (555) 2,386 1,205
------------------------------------------
Change in net unrealized gains from continuing operations,
net of taxes (11,709) (1,312) 247
Change in net unrealized gains from discontinued operations,
net of taxes - (3,211) (748)
------------------------------------------
Change in net unrealized gains on securities, net of taxes $ (11,709) $ (4,523) $ (501)
==========================================
The amortized cost and estimated fair values of investments are as follows:
Gross Gross
Amortized Unrealized Unrealized Estimated
Cost Gains Losses Fair Value
--------------------------------------------------------
(IN THOUSANDS)
AT DECEMBER 31, 1999:
Available for sale:
Fixed maturities:
U.S. Treasury securities $ 54,150 $ - $ (3,488) $ 50,662
Corporate debt securities 152,312 90 (9,067) 143,335
Foreign government securities 16,638 - (686) 15,952
Government agency mortgage-backed securities 44,102 12 (1,914) 42,200
Municipal securities 19,386 - (735) 18,651
--------------------------------------------------------
286,588 102 (15,890) 270,800
Equity securities - preferred 2,508 - (310) 2,198
Held to maturity:
U.S. Treasury securities 3,275 3 (54) 3,224
--------------------------------------------------------
$ 292,371 $ 105 $ (16,254) $ 276,222
========================================================
Gross Gross
Amortized Unrealized Unrealized Estimated
Cost Gains Losses Fair Value
--------------------------------------------------------
(IN THOUSANDS)
AT DECEMBER 31, 1998:
Available for sale:
Fixed maturities:
U.S. Treasury securities $ 35,932 $ 630 $ (31) $ 36,531
Corporate debt securities 168,853 3,201 (2,230) 169,824
Foreign government securities 18,055 371 (476) 17,950
Government agency mortgage-backed securities 68,291 536 (36) 68,791
--------------------------------------------------------
291,131 4,738 (2,773) 293,096
Equity securities - preferred 2,507 - (50) 2,457
Held to maturity:
U.S. Treasury securities 3,361 85 - 3,446
--------------------------------------------------------
$ 296,999 $ 4,823 $ (2,823) $ 298,999
========================================================
33
The amortized cost and estimated fair values of debt securities at December
31, 1999 by contractual maturity are shown below. Expected maturities will
differ from contractual maturities because borrowers may have the right to call
or prepay obligations.
Available-for-Sale Held-to-Maturity
Amortized Estimated Amortized Estimated
Cost Fair Value Cost Fair Value
--------------------------------------------------------
(IN THOUSANDS)
Due in one year or less $ 3,793 $ 3,774 $ 900 $ 903
Due after one through five years 134,304 126,036 2,375 2,321
Due after five through ten years 63,912 59,691 - -
Due after ten years 40,478 39,099 - -
--------------------------------------------------------
242,487 228,600 3,275 3,224
Government agency mortgage-backed securities 44,101 42,200 - -
--------------------------------------------------------
$ 286,588 $ 270,800 $ 3,275 $ 3,224
========================================================
At December 31, 1999, the insurance subsidiaries had fixed securities and
cash equivalents on deposit with various state insurance departments with
carrying values of approximately $3,275,000.
4. PROPERTY AND EQUIPMENT
Property and equipment are stated at cost and are summarized as follows:
December 31,
1999 1998
----------------------------
(IN THOUSANDS)
Land and land improvements $ 3,882 $ 3,877
Building and building improvements 24,175 23,740
Computer equipment and software 9,668 13,052
Furniture and other equipment 13,476 13,137
----------------------------
51,201 53,806
Less accumulated depreciation (18,577) (18,450)
----------------------------
$ 32,624 $ 35,356
============================
The Company recognized depreciation expense on property and equipment of
$4,544,000, $5,450,000, and $8,625,000 in 1999, 1998 and 1997, respectively.
34
5. DEBT
Notes payable consists of the following:
December 31,
1999 1998
----------------------------
(IN THOUSANDS)
Line of credit, commercial banks, adjusted periodically,
interest payments due quarterly through July 31, 2003 $ 35,158 $ 45,158
Mortgage payable, commercial bank, 9.05% interest, monthly
principal payments of $100,000 plus interest through January 1, 2004 7,300 8,500
Notes payable, commercial bank, adjusted periodically, one
year note due March 31, 1999, interest payments due monthly - 1,000
Promissory note, 8.00% interest, quarterly interest payments
through October 1, 2001 65 406
----------------------------
$ 42,523 $ 55,064
============================
On July 31, 1998, the Company entered into a five year revolving bank line
of credit with a maximum commitment of $70,000,000, and a $10,000,000 sublimit
for swingline loans. Under the bank line of credit, the Company had the option
to select an interest rate based on the Eurodollar rate or alternate base rate.
The alternate base rate is the larger of the bank's corporate base rate of
interest or the federal funds rate plus 1/2% per annum. The swingline loans may
be used for short term borrowings and are required to be repaid no later than 30
days after they are made. Swingline loans are charged the bank's daily floating
rate of interest.
During 1998, the Company borrowed $45,158,000 on the bank line of credit to
retire its subordinated notes outstanding. Effective November 5, 1999, the
Company entered into an agreement to amend the line of credit to reduce the
maximum commitment from $70,000,000 to $40,000,000. The maximum commitment will
be further reduced to $30,000,000 on July 31, 2001. The stock of American
Medical Security Holdings, Inc. and United Wisconsin Life Insurance Company,
subsidiaries of the Company, has been pledged as collateral for the loan.
In conjunction with the commitment reduction, the Company paid $10,000,000
on the loan outstanding on November 5, 1999, reducing the outstanding balance to
$35,158,000. The amended line of credit agreement also revises pricing schedules
and certain covenants which, among other matters, require the Company to
maintain a minimum tangible net worth and restrict the Company's ability to
incur additional debt, pay future cash dividends and transfer assets.
The mortgage payable is collateralized by the Company's home office
property located in Green Bay, Wisconsin. The Company believes the carrying
value of all notes payable approximates fair value.
Future annual principal amounts due for all notes are $1,265,000 for 2000,
$6,358,000 for 2001, $1,200,000 for 2002, $31,200,000 for 2003, and $2,500,000
for 2004. During 1999, 1998 and 1997, interest paid totaled $3,547,000,
$6,971,000 and $9,320,000, respectively.
35
6. INCOME TAXES
The Company and most of its subsidiaries file a consolidated federal income
tax return. The Company and its subsidiaries file separate state franchise,
income and premium tax returns as applicable.
The Company had a net federal income tax receivable of $6,377,000 and a net
federal income tax payable of $620,000 at December 31, 1999 and 1998,
respectively. The Company and its subsidiaries have state net business loss
carryforwards totaling $59,858,000 at December 31, 1999, which expire in the
year 2010. Federal and state income tax payments related to continuing
operations, net of refunds, were $1,496,000 in 1999, $710,000 in 1998 and
$3,534,000 in 1997.
The components of income tax expense (benefit) are as follows:
Year ended December 31,
1999 1998 1997
------------------------------------------
(IN THOUSANDS)
Current:
Federal $ (5,965) $ 5,295 $ 1,965
State 34 1,091 292
------------------------------------------
(5,931) 6,386 2,257
Deferred:
Federal (6,244) (5,522) (137)
State (868) (2,732) (1,088)
------------------------------------------
(7,112) (8,254) (1,225)
------------------------------------------
Income tax expense (benefit) from continuing operations (13,043) (1,868) 1,032
Income tax expense from discontinued operations - 9,028 9,918
------------------------------------------
Total income tax expense (benefit) $ (13,043) $ 7,160 $ 10,950
==========================================
The differences between taxes computed at the federal statutory rate and
recorded income taxes attributable to continuing operations are as follows:
Year ended December 31,
1999 1998 1997
------------------------------------------
(IN THOUSANDS)
Tax expense (benefit) at federal statutory rate $ (13,658) $ (1,714) $ 904
Goodwill amortization 879 878 844
State income and franchise taxes, net of federal benefit (565) (1,066) (559)
Other, net 301 34 (157)
------------------------------------------
Tax expense (benefit) from continuing operations $ (13,043) $ (1,868) $ 1,032
==========================================
36
Significant components of the Company's federal and state deferred tax
liabilities and assets are as follows:
>
December 31, 1999 December 31, 1998
Federal State Federal State
--------------------------------------------------------
(IN THOUSANDS)
Deferred tax liabilities:
Intangibles $ (6,389) $ 788 $ (6,685) $ 759
Unrealized gains on investments - - (669) -
Prepaid assets (1,371) (158) (1,294) (112)
Other taxable temporary differences (1,509) (26) (934) (35)
--------------------------------------------------------
(9,269) 604 (9,582) 612
Deferred tax assets:
Advance premium discounting 1,174 65 1,203 5
Basis in minority-owned subsidiaries 835 188 1,317 313
Unrealized losses on investments 5,635 - - -
Insurance liabilities 7,704 711 1,415 51
Unearned income 1,514 291 1,172 226
Bad debt reserve and other non-deductible liabilities 2,495 524 1,756 371
Specified policy acquisition costs 910 47 802 -
Depreciation and amortization - - 544 299
State net business loss carryforwards - 3,290 - 2,646
Other deductible temporary differences 880 177 286 38
--------------------------------------------------------
21,147 5,293 8,495 3,949
Valuation allowance (379) (2,468) (519) (2,135)
--------------------------------------------------------
20,768 2,825 7,976 1,814
--------------------------------------------------------
Net deferred tax assets (liabilities) $ 11,499 $ 3,429 $ (1,606) $ 2,426
========================================================
The federal deferred benefit arising from the deductibility of state
deferred tax is included as a component of other federal deferred taxes. The net
deferred tax assets and liabilities are included in other assets and
liabilities, as applicable in the accompanying balance sheets.
7. COMMITMENTS AND CONTINGENCIES
On August 26, 1999, a $6,900,000 verdict was entered against the Company in
a lawsuit which principally alleged breach of contract involving the timing of
claims payments. The Company intends to appeal this decision to a Federal
Appeals Court. Management expects the verdict to be reversed or substantially
reduced following appeal. As a result, the Company's accrual related to this
case is not material.
On February 7, 2000, a $5,400,000 verdict was entered against the Company
in a lawsuit which alleged breach of contract involving commission amounts due
to a former agent. The Company has filed objections requesting reversal of the
decision and intends to appeal if necessary. Management expects the verdict to
be reversed or substantially reduced following appeal. As a result, the
Company's accrual related to this case is not material.
The Company is involved in various legal and regulatory actions occurring
in the normal course of its business. In the opinion of management, adequate
provision has been made for losses which may result from the above-mentioned and
other legal and regulatory actions and, accordingly, the outcome of these
matters is not expected to have a material adverse effect on the consolidated
financial statements.
37
8. SHAREHOLDERS' EQUITY
STATUTORY FINANCIAL INFORMATION
Insurance companies are subject to state insurance regulations. These
regulations require, among other matters, the filing of financial statements
prepared in accordance with statutory accounting practices prescribed or
permitted for insurance companies. The combined statutory surplus of the
Company's insurance subsidiaries, United Wisconsin Life Insurance Company and
American Medical Security Insurance Company of Georgia, at December 31, 1999 and
1998, was $155,937,000 and $183,288,000, respectively.
State insurance regulations also require the maintenance of a minimum
compulsory surplus based on a percentage of premiums written. At December 31,
1999, the Company's insurance subsidiaries were in compliance with these
compulsory regulatory requirements.
RESTRICTIONS ON DIVIDENDS FROM SUBSIDIARIES
Dividends paid by the insurance subsidiaries to the Company are limited by
state insurance regulations. The insurance regulator in the state of domicile
may disapprove any dividend which, together with other dividends paid by an
insurance company in the prior twelve months, exceeds the regulatory maximum as
computed for the insurance company based on its statutory surplus and net
income. Based upon the financial statements of the Company's insurance
subsidiaries as of December 31, 1999, as filed with the insurance regulators, no
dividends may be paid without prior regulatory approval in 2000.
9. EMPLOYEE BENEFIT PLANS
STOCK BASED COMPENSATION PLANS
The Company has a stock-based compensation plan, the Equity Incentive Plan
(the "Plan"), for the benefit of eligible employees and directors of the
Company. The Plan permits the grant of nonqualified stock options ("NQSO"),
incentive stock options, stock appreciation rights, restricted stock awards and
performance awards. Persons eligible to participate in the Plan include all
full-time active employees and outside directors of the board of directors. The
Plan allows for the granting of up to 4,000,000 shares of which 918,677 shares
are available for grant as of December 31, 1999. No benefits other than NQSOs
have been granted under the plan.
The terms of incentive stock options and nonqualified stock options granted
under the Plan cannot exceed more than 10 and 12 years, respectively, and the
option exercise price generally cannot be less than the fair market value of the
Company's common stock on the date of grant. Incentive stock options and NQSOs
are not exercisable in any event prior to six months following the grant date.
Stock appreciation rights generally have a grant price at least equal to
100% of the fair market value of the Company's common stock. The term of the
stock appreciation rights cannot exceed 12 years. Stock appreciation rights are
not exercisable prior to six months following the grant date.
Restricted stock generally may not be sold or otherwise transferred for
certain periods based on the passage of time, the achievement of performance
goals or the occurrence of other events. However, participants may exercise full
voting rights and are entitled to receive all dividends and other distributions
with respect to restricted stock. Restricted stock does not vest prior to six
months following the date of grant.
On November 17, 1998, the Company and a key executive entered into a
deferred stock agreement. Under the agreement the Company has an obligation to
issue 73,506 shares of AMSG common stock provided the executive remains
continuously employed with AMSG through November 17, 2002. The Company incurred
expense of $225,000 in 1999 and $28,000 in 1998 related to this agreement.
The Company also has a Director Stock Option Plan which permits the grant
of NQSOs. As of December 31, 1999, 29,000 shares are available for grant.
38
Stock option activity for all plans is as follows:
December 31,
1999 1998 1997
-----------------------------------------------------
TOTAL NUMBER OF NQSOS
Outstanding at beginning of year 2,918,893 2,217,307 2,244,459
Granted 999,000 874,560 184,500
Exercised - (114,028) (204,152)
Forfeited (1,108,750) (20,000) (7,500)
Spin-off related:
Conversion to UWS options(a) - (351,322) -
AMSG modification(b) - 312,376 -
-----------------------------------------------------
Outstanding at end of year 2,809,143 2,918,893 2,217,307
=====================================================
Exercisable at end of year 1,504,976 2,365,893 1,908,449
Available for grant at end of year 947,677 837,927 403,541
WEIGHTED AVERAGE EXERCISE PRICE OF NQSOS
Outstanding at beginning of year $15.18 $27.02 $25.00
Granted - Exercise price equals market price on grant date 7.33 10.75 27.32
Granted - Exercise price is less than market price on grant date - - -
Granted - Exercise price exceeds market price on grant date - 12.00 -
Exercised - 4.15 4.95
Forfeited 18.45 18.44 32.67
Outstanding at end of year 11.10 15.18 27.02
Exercisable at end of year 13.68 16.23 27.16
NQSOS BY EXERCISE PRICE RANGE
Range of exercise prices $ 3.01 - $8.88 $3.01 $4.66
Weighted average exercise price $6.07 $3.01 $4.66
Weighted average remaining contractual life (years) 11.34 3.93 4.93
Exercisable at end of year 47,960 47,960 104,044
Outstanding at end of year 856,960 47,960 104,044
Weighted average exercise price of options exercisable at end of year $3.01 $3.01 $4.66
Range of exercise prices $10.25 - $14.38 $10.25 - $14.38 $18.13 - $26.63
Weighted average exercise price $11.53 $11.38 $22.91
Weighted average remaining contractual life (years) 9.79 10.62 10.24
Exercisable at end of year 734,848 595,765 708,582
Outstanding at end of year 1,230,015 1,148,765 952,332
Weighted average exercise price of options exercisable at end of year $11.76 $12.01 $22.30
Range of exercise prices $15.76 - $22.74 $15.76 - $22.74 $28.00 - $37.13
Weighted average exercise price $16.33 $18.06 $32.39
Weighted average remaining contractual life (years) 8.50 5.69 4.64
Exercisable at end of year 722,168 1,722,168 1,095,823
Outstanding at end of year 722,168 1,722,168 1,160,931
Weighted average exercise price of options exercisable at end of year $16.33 $18.06 $32.44
(a) Effective on the date of Distribution, certain AMSG stock options held by
Newco/UWS employees were converted to Newco/UWS stock options.
(b) Immediately following the Distribution, the number of options was increased
and exercise prices were decreased (the "modification") to preserve the
economic value of those options that existed just prior to the Distribution
for the holders of certain AMSG stock options.
39
The Black-Scholes option valuation model was used in estimating the fair
value of traded options which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Since the
Company's employee stock options have characteristics significantly different
from those of traded options, and because changes in the subjective input
assumptions can materially affect the fair value estimates, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
The Company follows Accounting Principles Board Opinion No. 25 under which
no compensation expense is recorded when the exercise price of the Company's
employee stock options equals the market price of the underlying stock on the
date of grant. The Company's pro forma information regarding net income and net
income per share has been determined as if these options had been accounted for
since January 1, 1995, in accordance with the fair value method of Statement of
Financial Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based
Compensation".
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The Company's
pro forma information is as follows:
Year ended December 31,
1999 1998 1997
------------------------------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Pro forma net income (loss) $ (26,429) $ 6,484 $ 17,719
Pro forma earnings (loss) per common share:
Basic $ (1.60) $ 0.39 $ 1.08
Diluted $ (1.60) $ 0.39 $ 1.06
The pro forma disclosures only include the effect of options granted
subsequent to January 1, 1995. Accordingly, the effects of applying the SFAS No.
123 pro forma disclosures to future periods may not be indicative of future
effects.
In determining compensation cost pursuant to SFAS No. 123, the fair value
for these options was estimated at the date of grant using the Black-Scholes
option pricing model with the following weighted average assumptions:
Year ended December 31,
1999 1998 1997
------------------------------------------
Expected life of options 6.00 years 3.55 years 6.03 years
Risk-free interest rate 6.13% 4.53% 5.71%
Expected dividend yield 0.00% 0.00% 1.78%
Expected volatility factor 45% 39% 38%
Grant date fair value of options:
Exercise price equals market price $ 3.84 $ 4.83 $ 10.66
Exercise price is less than market price $ - $ 7.37 $ -
Exercise price exceeds market price $ - $ 1.77 $ -
40
RETIREMENT SAVINGS PLAN
The Company's employees are included in a defined contribution plan (the
"Retirement Savings Plan") with profit sharing and discretionary savings
provisions covering all eligible salaried and hourly employees. Beginning in
1998, participant contributions up to 6% of the participants' compensation are
matched 50% by the Company. Profit sharing contributions to the Retirement
Savings Plan are determined annually by the Company. Participants vest in
Company contributions over seven years. The Company recognized expense
associated with the Retirement Savings Plan of $1,610,000 and $1,449,000 in 1999
and 1998, respectively.
10. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
Selected continuing operations quarterly financial data for the years ended
December 31, 1999 and 1998 are as follows:
Quarter
----------------------------------------------------------------------
First Second Third Fourth Total
----------------------------------------------------------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
1999
Total revenues $ 274,053 $ 274,396 $ 276,101 $ 272,830 $1,097,380
Net income (loss) 2,995 (3,530) (25,925) 514 (25,946)
Net income (loss) per common share
Basic 0.18 (0.21) (1.57) 0.03 (1.58)
Diluted 0.18 (0.21) (1.57) 0.03 (1.58)
1998
Total revenues $ 245,840 $ 237,354 $ 237,409 $ 240,266 $ 960,869
Income (loss) from continuing operations 1,551 392 1,637 (6,608) (3,028)
Net income (loss) 6,391 1,266 5,926 (6,608) 6,975
Earnings (loss) per common share - basic
Continuing operations 0.09 0.03 0.10 (0.40) (0.18)
Discontinued operations 0.29 0.05 0.26 - 0.60
Net income (loss) per common share 0.38 0.08 0.36 (0.40) 0.42
Earnings (loss) per common share - diluted
Continuing operations 0.09 0.03 0.10 (0.40) (0.18)
Discontinued operations 0.29 0.05 0.26 - 0.60
Net income (loss) per common share 0.38 0.08 0.36 (0.40) 0.42
Note: The sum of the four quarters may not equal the earnings (loss) per
common share for the year due to the change in the number of shares
outstanding during the year.
11. SEGMENTS OF THE BUSINESS
The Company has two reportable segments: 1) health insurance products and
2) life insurance products. The Company's health insurance products consist of
the following coverages related to small group PPO products: MedOne and small
group medical, self funded medical, dental and short-term disability. Life
products consist primarily of group term-life insurance. The "All Other" segment
includes operations not directly related to the business segments and
unallocated corporate items (i.e., corporate investment income, interest expense
on corporate debt, amortization of goodwill and intangibles and unallocated
overhead expenses). The Company's All Other segment also includes data for its
80% owned HMO subsidiary. The reportable segments are managed separately because
they differ in the nature of the products offered and in profit margins.
41
The Company evaluates segment performance based on profit or loss from
continuing operations before income taxes, not including gains and losses on the
Company's investment portfolio. The accounting policies of the reportable
segments are the same as those described in the summary of significant
accounting policies. Intercompany transactions have been eliminated prior to
reporting reportable segment information.
YEAR ENDED DECEMBER 31, 1999: Health Life Total
Insurance Insurance All Other Consolidated
--------------------------------------------------------
(IN THOUSANDS)
REVENUES:
Insurance premiums $ 985,322 $ 26,183 $ 44,602 $1,056,107
Net investment income 9,254 202 9,456 18,912
Other revenue 17,857 258 4,246 22,361
--------------------------------------------------------
Total revenues 1,012,433 26,643 58,304 1,097,380
EXPENSES:
Medical and other benefits 805,768 10,270 44,435 860,473
Selling, general and administrative 245,676 7,640 14,743 268,059
Interest - - 3,564 3,564
Amortization of goodwill and other intangibles - - 4,273 4,273
--------------------------------------------------------
Total expenses 1,051,444 17,910 67,015 1,136,369
--------------------------------------------------------
Income (loss) from continuing operations,
before income taxes $ (39,011) $ 8,733 $ (8,711) $ (38,989)
========================================================
As of December 31, 1999:
Segment assets $ 186,611 $ 4,229 $ 312,254 $ 503,094
========================================================
YEAR ENDED DECEMBER 31, 1998: Health Life Total
Insurance Insurance All Other Consolidated
--------------------------------------------------------
(IN THOUSANDS)
REVENUES:
Insurance premiums $ 865,187 $ 24,488 $ 24,342 $ 914,017
Net investment income 8,463 214 15,543 24,220
Other revenue 17,317 268 5,047 22,632
--------------------------------------------------------
Total revenues 890,967 24,970 44,932 960,869
EXPENSES:
Medical and other benefits 663,775 7,713 20,279 691,767
Selling, general and administrative 223,976 7,839 10,258 242,073
Interest - - 7,691 7,691
Amortization of goodwill and other intangibles - - 8,781 8,781
Write-off of intangible assets and related charges - - 15,453 15,453
--------------------------------------------------------
Total expenses 887,751 15,552 62,462 965,765
--------------------------------------------------------
Income (loss) from continuing operations,
before income taxes $ 3,216 $ 9,418 $ (17,530) $ (4,896)
========================================================
As of December 31, 1998:
Segment assets $ 153,965 $ 3,753 $ 341,004 $ 498,722
========================================================
42
YEAR ENDED DECEMBER 31, 1997: Health Life Total
Insurance Insurance All Other Consolidated
--------------------------------------------------------
(IN THOUSANDS)
REVENUES:
Insurance premiums $ 918,566 $ 28,942 $ 9,696 $ 957,204
Net investment income 11,256 298 12,517 24,071
Other revenue 22,437 241 1,571 24,249
--------------------------------------------------------
Total revenues 952,259 29,481 23,784 1,005,524
EXPENSES:
Medical and other benefits 712,059 10,226 11,206 733,491
Selling, general and administrative 233,613 8,907 9,640 252,160
Interest - - 9,311 9,311
Amortization of goodwill and other intangibles - - 7,975 7,975
--------------------------------------------------------
Total expenses 945,672 19,133 38,132 1,002,937
--------------------------------------------------------
Income (loss) from continuing operations,
before income taxes $ 6,587 $ 10,348 $ (14,348) $ 2,587
========================================================
As of December 31, 1997:
Segment assets $ 158,008 $ 4,142 $ 362,370 $ 524,520
========================================================
43
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Information required by this item with respect to directors and executive
officers is incorporated herein by reference to the information included under
the headings "Election of Directors" and "Section 16(a) Beneficial Ownership
Reporting Compliance" in the Company's definitive Proxy Statement, to be dated
March 31, 2000, relating to the 2000 Annual Meeting of Shareholders currently
scheduled for May 17, 2000 (the "2000 Proxy Statement") and the information
under the heading "Executive Officers of the Registrant" in Part I of this
report. The 2000 Proxy Statement will be filed with the Securities and Exchange
Commission not later than 120 days after the end of the Company's fiscal year.
ITEM 11. EXECUTIVE COMPENSATION.
Information required by this item is incorporated herein by reference to
the information included under the headings "Executive Compensation" and
"Election of Directors -- Compensation of Directors" in the 2000 Proxy
Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
Information required by this item is included under the heading "Security
Ownership of Certain Beneficial Owners and Management" in the 2000 Proxy
Statement, which section is hereby incorporated by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Information required by this item is included under the heading "Certain
Transactions" in the 2000 Proxy Statement, which section is hereby incorporated
by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) 1 and 2. FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
PAGE IN
FORM 10-K
REPORT
The following consolidated financial statements of American Medical Security Group, Inc.
and subsidiaries are included in Item 8:
Report of Independent Auditors.................................................................... 23
Consolidated Balance Sheets at December 31, 1999 and 1998......................................... 24
Consolidated Statements of Operations for the years ended December 31, 1999, 1998 and 1997........ 25
Consolidated Statements of Cash Flows for the years ended December 31, 1999, 1998 and 1997........ 26
Consolidated Statements of Changes in Shareholders' Equity and Comprehensive Income
for the years ended December 31, 1999, 1998, and 1997.......................................... 27
Notes to Consolidated Financial Statements........................................................ 28
44
PAGE IN
FORM 10-K
REPORT
The following financial statement schedules of American Medical Security Group, Inc.
and subsidiaries are included in Item 14(d):
Schedule II - Condensed Financial Information of Registrant................................. 46
Schedule III - Supplementary Insurance Information.......................................... 49
Schedule IV - Reinsurance................................................................... 50
Schedule V - Valuation and Qualifying Accounts.............................................. 51
All other schedules for which provision is made in applicable accounting
regulations of the Securities and Exchange Commission are not required under the
related instructions or are inapplicable, and therefore have been omitted.
3. EXHIBITS
See the Exhibit Index following the Signature page of this report, which is
incorporated herein by reference. Each management contract and compensatory plan
or arrangement required to be filed as an exhibit to this report is identified
in the Exhibit Index by an asterisk following its exhibit number.
(b) REPORTS ON FORM 8-K
No reports on Form 8-K were filed during the fourth quarter of 1999.
(c) EXHIBITS
See the Exhibit Index following the Signature page of this report.
(d) FINANCIAL STATEMENT SCHEDULES
The financial statement schedules referenced in Item 14(a) are as follows.
45
SCHEDULE II
AMERICAN MEDICAL SECURITY GROUP, INC.
(PARENT COMPANY ONLY)
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CONDENSED BALANCE SHEETS
December 31,
1999 1998
----------------------------
(IN THOUSANDS)
ASSETS:
Cash and cash equivalents $ 272 $ 128
Other assets:
Investment in consolidated subsidiaries 248,157 300,262
Goodwill and other intangibles, net 20,792 21,355
Other assets 1,757 1,421
----------------------------
Total other assets 270,706 323,038
----------------------------
Total assets $ 270,978 $ 323,166
============================
LIABILITIES AND SHAREHOLDERS' EQUITY:
Liabilities:
Notes payable $ 35,158 $ 45,158
Taxes payable 6,243 6,995
Payables and accrued expenses 460 532
Due to affiliates 5,433 710
Other liabilities 3,404 3,320
----------------------------
Total liabilities 50,698 56,715
Shareholders' equity:
Common stock 16,654 16,653
Paid-in capital 187,952 188,981
Retained earnings 33,626 59,572
Accumulated other comprehensive income (loss) (10,464) 1,245
Treasury stock (7,488) -
----------------------------
Total shareholders' equity 220,280 266,451
----------------------------
Total liabilities and shareholders' equity $ 270,978 $ 323,166
============================
46
SCHEDULE II
AMERICAN MEDICAL SECURITY GROUP, INC.
(PARENT COMPANY ONLY)
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CONDENSED STATEMENTS OF OPERATIONS
Year ended December 31,
1999 1998 1997
------------------------------------------
(IN THOUSANDS)
REVENUES:
Fees from consolidated subsidiaries $ 3,199 $ 2,013 $ 2,303
Other revenue 92 35 -
------------------------------------------
Total revenues 3,291 2,048 2,303
EXPENSES:
General and administrative 1,071 888 1,620
Interest 2,802 5,960 8,371
Amortization of goodwill and other intangibles 563 563 278
------------------------------------------
Total expenses 4,436 7,411 10,269
------------------------------------------
Loss from continuing operations before income tax
benefit and equity in net income (loss) of subsidiaries (1,145) (5,363) (7,966)
Income tax benefit (347) (1,793) (3,031)
------------------------------------------
Loss from continuing operations before
equity in net income (loss) of subsidiaries (798) (3,570) (4,935)
Equity in net income (loss) of subsidiaries (25,148) 542 6,490
------------------------------------------
Income (loss) from continuing operations (25,946) (3,028) 1,555
Income from discontinued operations, less
applicable income taxes - 10,003 16,595
------------------------------------------
Net income (loss) $ (25,946) $ 6,975 $ 18,150
==========================================
47
SCHEDULE II
AMERICAN MEDICAL SECURITY GROUP, INC.
(PARENT COMPANY ONLY)
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CONDENSED STATEMENTS OF CASH FLOWS
Year ended December 31,
1999 1998 1997
------------------------------------------
(IN THOUSANDS)
OPERATING ACTIVITIES:
Income (loss) from continuing operations $ (25,946) $ (3,028) $ 1,555
Adjustments to reconcile income (loss) from continuing
operations to net cash provided by (used in) operating activities:
Equity in net (income) loss of subsidiaries 25,148 (542) (6,490)
Dividends received from (contributed to) subsidiaries 15,250 5,000 (10,330)
Amortization of intangibles 563 563 278
Deferred income tax benefit (399) (772) (407)
Changes in operating accounts:
Net other assets and liabilities 3,011 596 5,718
------------------------------------------
Net cash provided by (used in) operating activities 17,627 1,817 (9,676)
INVESTING ACTIVITIES:
Investment in subsidiaries - - (1,500)
------------------------------------------
Net cash used in investing activities - - (1,500)
FINANCING ACTIVITIES:
Cash dividends paid - (5,956) (7,892)
Issuance of common stock 5 2,356 2,965
Purchase of treasury stock (7,488) - -
Proceeds from notes payable borrowings 5,000 45,158 -
Repayment of notes payable (15,000) (44,878) (10)
------------------------------------------
Net cash used in financing activities (17,483) (3,320) (4,937)
Net cash provided by discontinued operations - 1,631 16,113
------------------------------------------
Cash and cash equivalents:
Net increase during year 144 128 -
Balance at beginning of year 128 - -
------------------------------------------
Balance at end of year $ 272 $ 128 $ -
==========================================
48
SCHEDULE III
AMERICAN MEDICAL SECURITY GROUP, INC.
SUPPLEMENTARY INSURANCE INFORMATION
Deferred Medical and
Policy Other Other
Acquisition Benefits Advance Policyholder
SEGMENT Costs Payable Premiums Funds
- ---------------------------------------------------------------------------------------
(IN THOUSANDS)
DECEMBER 31, 1999:
Health $ - $ 147,626 $ 16,171 $ -
Life - 9,328 530 -
All Other - 12,163 576 -
--------------------------------------------------------
Total $ - $ 169,117 $ 17,277 $ -
========================================================
DECEMBER 31, 1998:
Health $ - $ 100,323 $ 16,778 $ -
Life - 7,669 927 -
All Other - 5,141 452 -
--------------------------------------------------------
Total $ - $ 113,133 $ 18,157 $ -
========================================================
DECEMBER 31, 1997:
Health $ - $ 118,133 $ 19,350 $ -
Life - 3,632 636 -
All Other - 5,117 - -
--------------------------------------------------------
Total $ - $ 126,882 $ 19,986 $ -
========================================================
Amortization of
Medical and Deferred
Net Other Policy Other
Premium Investment Benefit Acquisition Operating Premiums
SEGMENT Revenue Income Expenses Costs Expenses Written
- -------------------------------------------------------------------------------------------------------------------
(IN THOUSANDS)
DECEMBER 31, 1999:
Health $ 985,322 $ 9,254 $ 805,768 $ - $ 245,676 $ 984,715
Life 26,183 202 10,270 - 7,640
All Other 44,602 9,456 44,435 - 14,743 44,726
----------------------------------------------------------------------
Total $ 1,056,107 $ 18,912 $ 860,473 $ - $ 268,059
======================================================================
DECEMBER 31, 1998:
Health $ 865,187 $ 8,463 $ 663,775 $ - $ 223,976 $ 862,615
Life 24,488 214 7,713 - 7,839
All Other 24,342 15,543 20,279 - 10,258 24,794
----------------------------------------------------------------------
Total $ 914,017 $ 24,220 $ 691,767 $ - $ 242,073
======================================================================
DECEMBER 31, 1997:
Health $ 918,566 $ 11,256 $ 712,059 $ - $ 233,613 $ 913,388
Life 28,942 298 10,226 - 8,907
All Other 9,696 12,517 11,206 - 9,640 9,696
----------------------------------------------------------------------
Total $ 957,204 $ 24,071 $ 733,491 $ - $ 252,160
======================================================================
49
SCHEDULE IV
AMERICAN MEDICAL SECURITY GROUP, INC.
REINSURANCE
Percentage
Ceded to Assumed of Amount
Direct Other from Other Net Assumed
Business Companies Companies Amount to Net
--------------------------------------------------------------------------
(IN THOUSANDS)
YEAR ENDED DECEMBER 31, 1999:
Life insurance in force $ 14,355,089 $ 12,731,969 $ 9,455 $ 1,632,575 0.6%
Premiums:
Accident and Health 976,457 4,309 57,776 1,029,924 5.6%
Life 25,642 607 1,148 26,183 4.4%
------------------------------------------------------------
Total Premiums 1,002,099 4,916 58,924 1,056,107 5.6%
YEAR ENDED DECEMBER 31, 1998:
Life insurance in force $ 13,467,780 $ 9,670,800 $ - $ 3,796,980 -
Premiums:
Accident and Health 859,560 14,680 44,649 889,529 5.0%
Life 26,337 2,256 407 24,488 1.7%
------------------------------------------------------------
Total Premiums 885,897 16,936 45,056 914,017 4.9%
YEAR ENDED DECEMBER 31, 1997:
Life insurance in force $ 11,750,841 $ 9,320,314 $ 2,033,624 $ 4,464,151 45.6%
Premiums:
Accident and Health 878,369 3,097 52,990 928,262 5.7%
Life 29,527 585 - 28,942 -
------------------------------------------------------------
Total Premiums 907,896 3,682 52,990 957,204 5.5%
50
SCHEDULE V
AMERICAN MEDICAL SECURITY GROUP, INC.
VALUATION AND QUALIFYING ACCOUNTS
Additions
Balance at Charged to
Beginning Cost and Balance at
of Period Expenses Deductions End of Period
--------------------------------------------------------
(IN THOUSANDS)
YEAR ENDED DECEMBER 31, 1999:
Allowance for bad debts $ 1,118 $ 14 $ 481 $ 651
Valuation allowance for deferred taxes 2,654 327 134 2,847
--------------------------------------------------------
Total $ 3,772 $ 341 $ 615 $ 3,498
========================================================
YEAR ENDED DECEMBER 31, 1998:
Write-down of intangible asset $ - $ 12,833 $ 12,833 $ -
Allowance for bad debts 1,061 84 27 1,118
Valuation allowance for deferred taxes (a) 1,277 1,555 178 2,654
--------------------------------------------------------
Total $ 2,338 $ 14,472 $ 13,038 $ 3,772
========================================================
YEAR ENDED DECEMBER 31, 1997:
Allowance for bad debts $ 1,439 $ 140 $ 518 $ 1,061
Valuation allowance for deferred taxes 636 641 - 1,277
--------------------------------------------------------
Total $ 2,075 $ 781 $ 518 $ 2,338
========================================================
(a) Valuation allowance for deferred taxes of approximately $1.5 million was
established in the first quarter of 1998 upon the consolidation of a
subsidiary previously accounted for under the equity method.
51
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
AMERICAN MEDICAL SECURITY GROUP, INC.
By: /s/ SAMUEL V. MILLER
---------------------------------
Samuel V. Miller, Chairman, President,
and Chief Executive Officer
Date: March 9, 2000
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.*
SIGNATURE TITLE
/s/ SAMUEL V. MILLER Chairman of the Board, President and Chief
Samuel V. Miller Executive Officer; Director
/s/ GARY D. GUENGERICH Executive Vice President and Chief
Gary D. Guengerich Financial Officer
(Principal Financial Officer and Principal
Accounting Officer)
/s/ ROGER H. BALLOU Director
Roger H. Ballou
/s/ W. FRANCIS BRENNAN Director
W. Francis Brennan
/s/ JAMES C. HICKMAN Director
James C. Hickman
/s/ WILLIAM R. JOHNSON Director
William R. Johnson
/s/ EUGENE A. MENDEN Director
Eugene A. Menden
/s/ MICHAEL T. RIORDAN Director
Michael T. Riordan
/s/ FRANK L. SKILLERN Director
Frank L. Skillern
/s/ J. GUS SWOBODA Director
J. Gus Swoboda
- ---------------
*Each of the above signatures is affixed as of March 9, 2000.
52
AMERICAN MEDICAL SECURITY GROUP, INC.
(COMMISSION FILE NO. 1-13154)
EXHIBIT INDEX
TO
FORM 10-K ANNUAL REPORT
FOR THE YEAR ENDED DECEMBER 31, 1999
EXHIBIT NUMBER INCORPORATED HEREIN FILED
DOCUMENT DESCRIPTION BY REFERENCE TO HEREWITH
2.1 Distribution and Indemnity Agreement Exhibit 2.1 to Newco/UWS'
between the United Wisconsin Registration Statement on Form 10,
Services, Inc., now known as as amended (File No. 1-14177)
American Medical Security Group,
Inc. ("AMSG f/k/a UWS or
Registrant") and Newco/UWS, Inc.
("Newco/UWS") dated as of September
11, 1998
2.2 Employee Benefits Agreement dated as Exhibit 10.1 to Newco/UWS'
of September 11, 1998, by and Registration Statement on Form 10,
between AMSG f/k/a UWS and Newco/UWS as amended (File No. 1-14177)
2.3 Tax Allocation Agreement, entered Exhibit 10.2 to Newco/UWS'
into as of September 11, 1998, by Registration Statement on Form 10,
and between AMSG f/k/a UWS and as amended (File No. 1-14177)
Newco/UWS
3.1 Restated Articles of Incorporation Exhibit 3.1 to the Registrants Form
of Registrant dated as February 17, 10-K for the year ended
1999 December 31, 1998 (the "1998 10-K")
3.2 Bylaws of Registrant as amended and X
restated November 17, 1999
4.1 Amended and Restated Credit Exhibit 4 to the Registrant's Form
Agreement dated as of October 15, 10-Q for the quarter ended
1998 (the "Credit Agreement") among September 30, 1998 (the "9/30/98
the Registrant, United Wisconsin 10-Q")
Life Insurance Company and the First
National Bank of Chicago (n/k/a Bank
One, NA) and other Lenders
4.2 Amendment No. 1 dated as of November Exhibit 4.1 to the Registrant's
5, 1999 to the Credit Agreement Form 10-Q for the quarter ended
September 30, 1999
4.2 Dividend Reinvestment and Direct Exhibit 4.1 to AMSG f/k/a UWS' Form
Stock Purchase Plan S-3 Registration Statement
(No. 333-29425)
EX-1
10.1* Equity Incentive Plan as amended and Exhibit 10.1 to 1998 10-K
restated March 15, 1999
10.2* Form of Nonqualified Stock Option Exhibit 10.2 to 1998 10-K
Award Agreement for Officers
10.3* Form of Nonqualified Stock Option X
Award Agreement for Directors
10.4* Deferred Stock Agreement between the Exhibit 10.3 to 1998 10-K
Registrant and Samuel V. Miller
10.5* 1995 Director Stock Option Plan as Exhibit 10.2 to 9/30/98 10-Q
amended and restated September 25,
1998
10.6* Directors Deferred Compensation Plan X
adopted November 17, 1999
10.7* Voluntary Deferred Compensation Plan X
as Amended and Restated effective
September 25, 1998
10.8* Deferred Compensation Trust Exhibit 10.48 to the Registrant's
Form 10-K for the year ended
December 31, 1997
10.9* First Amendment to the Deferred X
Compensation Trust
10.10* Executive Reimbursement Group Exhibit 10.8 to 1998 10-K
Insurance Policy
10.11* Change of Control Severance Benefit Exhibit 10.4 to the 9/30/98 10-Q
Plan
10.12* Severance Benefit for Certain Exhibit 10.10 to 1998 10-K
Executive Officers
10.13* Executive Management Incentive Plan Exhibit 10.11 to 1998 10-K
10.14* Employment and Noncompetition Exhibit 10.1 to the AMSG f/k/a UWS'
Agreement of Samuel V. Miller dated Form 10-Q for the quarter ended
April 7, 1998 March 31, 1998
10.15* Amendment No. 1 to Employment and Exhibit 10.13 to 1998 10-K
Noncompetition Agreement of Samuel
V. Miller dated as of September 25,
1998
EX-2
10.16 Employment and Noncompetition Exhibit 4.1 to the AMSG f/k/a UWS'
Agreement between American Medical Form 10-K for the year ended
Security Holdings, Inc. and Wallace December 31, 1996 (the "1996 10-K")
J. Hilliard ("Hilliard Agreement")
10.17 Option Surrender Agreement dated Exhibit 10.3 to 3/31/99 10-Q
March 30, 1999 between American
Medical Security Holdings, Inc. and
Wallace J. Hilliard
10.18 Settlement Agreement between AMSG Exhibit 10.3 to Newco/UWS'
f/k/a UWS, Wallace J. Hilliard and Registration Statement on Form 10,
Ronald A. Weyers dated April 1, 1998 as amended (File No. 1-14177)
10.19 Registration Rights and Stock Exhibit 2.1 to AMSG f/k/a UWS'
Restriction Agreement between AMSG Registration Statement on Form S-4,
f/k/a UWS, Wallace J. Hilliard and as amended (No. 333-10935)
Ronald A. Weyers dated December 3,
1996
10.20 Registration Rights Agreement Exhibit 10.19 to 1998 10-K
between the Registrant and Blue
Cross Blue Shield United of
Wisconsin ("BCBSUW") dated as of
September 1, 1998
10.21 Various service agreements between Exhibits 10.13 to 10.25 and Exhibit
BCBSUW and AMSG f/k/a UWS and/or its 10.27 to the 1997 10-K
subsidiaries (assigned to Newco/UWS)
21 Subsidiaries of the Registrant X
23 Consent of Ernst & Young LLP X
27.1 Financial Data Schedule X
* Indicates compensatory plan or arrangement.
EX-3