SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] Quarterly Report Pursuant To Section 13 Or 15(d) Of The Securities Exchange
Act Of 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2001
OR
[ ] Transition Report Pursuant To Section 13 Or 15(d) Of The Securities Exchange
Act Of 1934
For the transition period from _________________ to ________________
COMMISSION FILE NUMBER 1-13154
AMERICAN MEDICAL SECURITY GROUP, INC.
(Exact name of Registrant as specified in its charter)
WISCONSIN 39-1431799
(State of Incorporation) (I.R.S. Employer Identification No.)
3100 AMS BOULEVARD
GREEN BAY, WISCONSIN 54313
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (920) 661-1111
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes __X__ No _____
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Common stock, no par value, outstanding as of April 30, 2001: 14,058,783 shares
AMERICAN MEDICAL SECURITY GROUP, INC.
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets
March 31, 2001 and December 31, 2000.....................3
Condensed Consolidated Statements of Operations
Three months ended March 31, 2001 and 2000...............5
Condensed Consolidated Statements of Cash Flows
Three months ended March 31, 2001 and 2000...............6
Notes to Condensed Consolidated Financial Statements
March 31, 2001...........................................7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations...............................12
Item 3. Quantitative and Qualitative Disclosures About Market Risk..16
PART II. OTHER INFORMATION
Item 1. Legal Proceedings...........................................17
Item 6. Exhibits and Reports on Form 8-K............................18
Signatures...............................................................19
Exhibit Index..........................................................EX-1
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
AMERICAN MEDICAL SECURITY GROUP, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
March 31, December 31,
2001 2000
---------------------------------
(IN THOUSANDS)
ASSETS
Investments:
Securities available for sale, at fair value:
Fixed maturities $ 261,136 $ 262,428
Equity securities-preferred 2,278 2,368
Fixed maturity securities held to maturity, at amortized cost 4,312 4,320
Trading securities, at fair value 244 260
---------------------------------
Total investments 267,970 269,376
Cash and cash equivalents 10,484 15,606
Other assets:
Property and equipment, net 33,143 32,451
Goodwill and other intangibles, net 106,655 107,562
Other assets 46,265 46,928
---------------------------------
Total other assets 186,063 186,941
---------------------------------
Total assets $ 464,517 $ 471,923
=================================
See Notes to Condensed Consolidated Financial Statements
3
AMERICAN MEDICAL SECURITY GROUP, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
March 31, December 31,
2001 2000
---------------------------------
(IN THOUSANDS)
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Medical and other benefits payable $ 133,285 $ 145,310
Advance premiums 18,013 17,568
Payables and accrued expenses 34,139 25,902
Notes payable 40,958 41,258
Other liabilities 19,828 20,708
---------------------------------
Total liabilities 246,223 250,746
Shareholders' equity:
Common stock (no par value, $1 stated value, 50,000,000 shares authorized,
16,654,315 issued and 14,084,683 outstanding at March 31, 2001,
16,654,315 issued and 14,270,945 outstanding at December 31, 2000) 16,654 16,654
Paid-in capital 187,956 187,956
Retained earnings 31,155 36,295
Accumulated other comprehensive loss (net of tax benefit of $301,000
at March 31, 2001 and $2,126,000 at December 31, 2000) (556) (3,948)
Treasury stock (2,569,632 shares at March 31, 2001
and 2,383,370 shares at December 31, 2000, at cost) (16,915) (15,780)
---------------------------------
Total shareholders' equity 218,294 221,177
---------------------------------
Total liabilities and shareholders' equity $ 464,517 $ 471,923
=================================
See Notes to Condensed Consolidated Financial Statements
4
AMERICAN MEDICAL SECURITY GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended
March 31,
---------------------------------
2001 2000
---------------------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Revenues:
Insurance premiums $ 222,470 $ 247,905
Net investment income 4,487 4,883
Other revenue 5,301 4,889
---------------------------------
Total revenues 232,258 257,677
Expenses:
Medical and other benefits 166,580 188,063
Selling, general and administrative 71,411 64,938
Interest expense 876 896
Amortization of goodwill and intangibles 907 946
---------------------------------
Total expenses 239,774 254,843
---------------------------------
Income (loss) before income taxes (7,516) 2,834
Income tax expense (benefit) (2,376) 1,175
---------------------------------
Net income (loss) $ (5,140) $ 1,659
=================================
Net income (loss) per common share:
Basic $ (0.36) $ 0.11
Diluted $ (0.36) $ 0.11
See Notes to Condensed Consolidated Financial Statements
5
AMERICAN MEDICAL SECURITY GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended
March 31,
---------------------------------
2001 2000
---------------------------------
(IN THOUSANDS)
OPERATING ACTIVITIES:
Net income (loss) $ (5,140) $ 1,659
Adjustments to reconcile net income (loss) to net cash
used in operating activities:
Depreciation and amortization 2,427 2,371
Net realized investment losses 27 -
Decrease in trading securities 16 -
Deferred income tax expense (benefit) (2,571) 1,226
Changes in operating accounts:
Other assets 1,408 9,414
Medical and other benefits payable (12,025) (18,605)
Advance premiums 445 5,558
Payables and accrued expenses 8,237 202
Other liabilities (880) (7,337)
---------------------------------
Net cash used in operating activities (8,056) (5,512)
INVESTING ACTIVITIES:
Purchases of available for sale securities (40,470) (13,274)
Proceeds from sale of available for sale securities 43,679 2,041
Proceeds from maturity of available for sale securities 3,050 150
Proceeds from maturity of held to maturity securities - 630
Purchases of property and equipment (1,891) (2,580)
Proceeds from sale of property and equipment - 7
---------------------------------
Net cash provided by (used in) investing activities 4,368 (13,026)
FINANCING ACTIVITIES:
Issuance of common stock - 4
Purchase of treasury stock (1,134) (702)
Borrowings under line of credit agreement - 35,158
Repayment on line of credit agreement - (35,158)
Repayment of notes payable (300) (365)
---------------------------------
Net cash used in financing activities (1,434) (1,063)
---------------------------------
Cash and cash equivalents:
Net decrease (5,122) (19,601)
Balance at beginning of year 15,606 17,266
---------------------------------
Balance at end of period $ 10,484 $ (2,335)
=================================
See Notes to Condensed Consolidated Financial Statements
6
AMERICAN MEDICAL SECURITY GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
March 31, 2001
NOTE A. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with accounting principles generally accepted in the
United States for interim financial information and with the instructions to
Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all
of the information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of management, all
adjustments (consisting of normal recurring adjustments) considered necessary
for a fair presentation have been included. Operating results for the three
month periods ended March 31, 2001 are not necessarily indicative of the results
that may be expected for the year ending December 31, 2001. These condensed
consolidated financial statements should be read in conjunction with the
consolidated financial statements and footnotes thereto included in the American
Medical Security Group, Inc. ("AMSG" or the "Company") annual report on Form
10-K for the year ended December 31, 2000.
NOTE B. EARNINGS (LOSS) PER COMMON SHARE
Basic earnings (loss) per common share are computed by dividing net income
(loss) by the weighted average number of common shares outstanding. Diluted
earnings (loss) per common share are computed by dividing net income (loss) by
the weighted average number of common shares outstanding, adjusted for the
effect of dilutive employee stock options.
The following table provides a reconciliation of the number of weighted
average basic and diluted shares outstanding:
Three Months Ended
March 31,
---------------------------------
2001 2000
---------------------------------
Weighted average common shares outstanding - basic 14,210,643 15,504,879
Effect of dilutive stock options - 68,026
---------------------------------
Weighted average common shares outstanding - diluted 14,210,643 15,572,905
=================================
The effect of dilutive securities was excluded from the diluted earnings
(loss) per common share computation for the three months ended March 31, 2001
because the Company had a net loss in this period, therefore their inclusion
would have been antidilutive. Certain options to purchase shares were not
included in the computation of diluted earnings (loss) per common share because
the options' exercise prices were greater than the average market price of the
outstanding common shares for the period.
7
NOTE C. COMPREHENSIVE INCOME (LOSS)
Comprehensive income (loss) is defined as net income (loss) plus or minus
other comprehensive income (loss), which for the Company, under existing
accounting standards, includes unrealized gains and losses, net of income tax
effects, on certain investments in debt and equity securities. Comprehensive
income (loss) for the Company is calculated as follows:
Three Months Ended
March 31,
--------------------------------
2001 2000
--------------------------------
(IN THOUSANDS
Net income (loss) $ (5,140) $ 1,659
Unrealized gain on available for sale securities 3,392 318
--------------------------------
Comprehensive income (loss) $ (1,748) $ 1,977
================================
NOTE D. CREDIT AGREEMENT
At March 31, 2001, the Company maintained a revolving bank line of credit
agreement ("Credit Agreement") with a maximum commitment of $40.0 million and a
$10.0 million sublimit for swingline loans. At March 31, 2001, the outstanding
balance of advances under the Credit Agreement was $35.2 million. The Credit
Agreement contains customary covenants which, among other matters, require the
Company to achieve minimum financial results and restrict the Company's ability
to incur additional debt, pay future cash dividends and dispose of assets
outside the ordinary course of business. The Credit Agreement was amended in
January 2001 and April 2001 to revise the minimum financial requirements of
certain covenants. The April 2001 amendment also revised the Company's
applicable interest rate on outstanding loans and revised the schedule of
mandatory future commitment reductions including a $4.8 million commitment
reduction on April 27, 2001. Revised future annual principal amounts due for all
of the Company's debt as of March 31, 2001 are $0.9 million for 2001, $6.2
million for 2002, $11.2 million for 2003, $12.5 million for 2004, and $10.2
million for 2005.
NOTE E. CONTINGENCIES
On August 26, 1999, a $6.9 million verdict was entered against the Company
in a lawsuit filed by Skilstaf, Inc. which principally alleged breach of
contract involving the timing of claims payments. On April 17, 2000, the Company
filed its notice of appeal of this decision with the Eleventh Circuit Federal
Appeals Court. Based upon the nature of the case and consultation with legal
counsel, management had expected the verdict to be reversed or substantially
reduced following appeal. Consequently, the Company initially established an
immaterial accrual for this case reflecting potential contractual damages only.
However, on March 12, 2001, the Company received an adverse decision affirming
the jury verdict. On May 4, 2001, the Eleventh Circuit Court denied the
Company's petition for a rehearing by the full court of appeals. The Company is
preparing its appeal to the United States Supreme Court. Management believes
strongly in its position, however, given the current status of the case, the
Company recognized an additional accrual during the first quarter of 2001
representing the full potential loss including punitive damages and other
expenses.
On February 7, 2000, a $5.4 million verdict was entered against the Company
in a lawsuit filed by Health Administrators, Inc., an insurance agency owned and
operated by a former agent of the Company, which alleged breach of contract
involving commission amounts due to such agent. On April 18, 2000, the Company
filed a notice of appeal with an Ohio Appeals Court requesting reversal of the
decision. On March 29, 2001, the Court of Appeals rendered a decision remanding
certain agent contract issues related to $2.4 million in damages back to the
lower court for further consideration. The Court of Appeals decision upheld $3.0
million awarded by the lower court in regard to a commission contract. On May 2,
2001, the Company filed an appeal with the Ohio
8
Supreme Court appealing the decision of the Appeals Court with respect to that
portion of the lower court's decision upheld by the Court of Appeals.
The Company is involved in various other legal and regulatory matters
occurring in the normal course of its business. The Company's financial results
for the three months ended March 31, 2001 reflect a pre-tax charge of $9.0
million ($5.9 million after-tax) to cover estimated potential losses and related
expenses for legal related matters. In the opinion of management, adequate
provision has been made for losses which may result from legal and regulatory
actions; accordingly, the outcome of these matters is not expected to have a
material adverse effect on the consolidated financial statements.
NOTE F. SEGMENT INFORMATION
The Company has two reportable segments: 1) health insurance products, and
2) life insurance products. The Company's health insurance products consist of
the following coverages related to small group preferred provider organization
products: MedOne (for individuals and families) and small group medical, self
funded medical, dental and short-term disability. Life products consist
primarily of group term-life insurance. The "All Other" segment includes
operations not directly related to the business segments and unallocated
corporate items (i.e., corporate investment income, interest expense on
corporate debt, amortization of goodwill and intangibles and unallocated
overhead expenses). The Company's All Other segment also includes data for its
health maintenance organization ("HMO") subsidiary. The reportable segments are
managed separately because they differ in the nature of the products offered and
in profit margins.
The Company evaluates segment performance based on profit or loss before
income taxes, not including gains and losses on the Company's investment
portfolio. The accounting policies of the reportable segments are the same as
those used to report the Company's consolidated financial statements.
Intercompany transactions have been eliminated prior to reporting reportable
segment information.
A reconciliation of segment income (loss) before income taxes to
consolidated income (loss) before income taxes is as follows:
Three Months Ended
March 31,
--------------------------------
2001 2000
--------------------------------
(IN THOUSANDS)
Health segment $ (8,506) $ 716
Life segment 1,750 2,240
All other (760) (122)
--------------------------------
Income (loss) before income taxes $ (7,516) $ 2,834
================================
9
Operating results and statistics for each of the Company's segments are as
follows:
Three Months Ended
March 31,
--------------------------------
2001 2000
--------------------------------
(IN THOUSANDS)
HEALTH SEGMENT
OPERATING RESULTS
Revenues:
Insurance premiums $ 216,974 $ 232,954
Net investment income 2,450 2,545
Other revenue 4,230 3,963
--------------------------------
Total revenues 223,654 239,462
Expenses:
Medical and other benefits 164,197 178,505
Selling, general and administrative 67,963 60,241
--------------------------------
Total expenses 232,160 238,746
--------------------------------
Income (loss) before income taxes $ (8,506) $ 716
================================
FINANCIAL STATISTICS
Loss ratio 75.7% 76.6%
Expense ratio 29.4% 24.2%
--------------------------------
Combined ratio 105.1% 100.8%
================================
Membership at End of Period:
Health:
Fully insured medical 424,632 520,710
Self funded medical 49,260 49,810
Stand-alone dental 178,283 188,565
--------------------------------
Total health 652,175 759,085
(a) Total health membership for the Company of 652,683 and 776,639 at
March 31, 2001 and 2000 includes HMO membership of 508 and 17,554,
respectively. HMO operations are not included in health segment
operating results.
10
Three Months Ended
March 31,
--------------------------------
2001 2000
--------------------------------
(IN THOUSANDS)
LIFE SEGMENT
OPERATING RESULTS
REVENUES:
Insurance premiums $ 4,963 $ 6,072
Net investment income 174 159
Other revenue 42 56
--------------------------------
Total revenues 5,179 6,287
Expenses:
Medical and other benefits 1,992 2,290
Selling, general and administrative 1,437 1,757
--------------------------------
Total expenses 3,429 4,047
--------------------------------
Income before income taxes $ 1,750 $ 2,240
================================
FINANCIAL STATISTICS
Loss ratio 40.1% 37.7%
Expense ratio 28.1% 28.0%
--------------------------------
Combined ratio 68.2% 65.7%
================================
Membership at End of Period 230,426 280,893
11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
American Medical Security Group, Inc., together with its subsidiary
companies ("AMSG" or the "Company"), is a provider of health care benefits and
insurance products for individuals and small employer groups. The Company's
principal product offerings are (1) health insurance for small employer groups
and (2) health insurance for individuals and families ("MedOne"). The Company
also offers life, dental, prescription drug, disability and accidental death
insurance, and provides stop-loss reinsurance and benefit administration for
self funded employer groups. The Company's products are actively marketed in 32
states and the District of Columbia through independent agents. The Company's
products generally provide discounts to insureds that utilize preferred provider
organizations ("PPOs"). AMSG owns a preferred provider network and also
contracts with other networks to ensure cost-effective health care choices to
its customers.
RESULTS OF OPERATIONS
The Company reported a net loss of $5.1 million or $0.36 per share for the
first quarter of 2001. The first quarter results reflect an after-tax charge of
$5.9 million or $0.41 per share in response to an adverse decision rendered by
the Eleventh Circuit Federal Court of Appeals in a lawsuit brought against the
Company. See "Part II., Item 1. Legal Proceedings" for a detailed discussion of
the case.
Excluding the non-recurring charge, income for the first quarter of 2001
was $710,000 or $0.05 per share. This compares to net income of $1.7 million or
$0.11 per share reported for the first quarter of the prior year. The decrease
in income from the first quarter of the prior year primarily reflects a higher
selling, general and adminstrative expense ratio from higher agent commissions
and issue costs resulting from the company's change in product mix, lower
premium revenues, and lower investment income, partially offset by an
improvement in the health loss ratio.
INSURANCE PREMIUMS AND MEMBERSHIP
Insurance premiums for the three months ended March 31, 2001 decreased
10.2% to $222.5 million from $247.9 million for the same period in 2000
primarily as a result of a decline in membership in select unprofitable small
group and exited markets, partially offset by rising MedOne membership and
rising premium rates on the continuing block of business. Average fully insured
medical premium per member per month for the first quarter of 2001 increased by
11.5% to $146, compared to the first quarter of 2000, reflecting significant
rate actions taken by the Company. Insurance premiums for the Company's MedOne
product increased 30.0% from the first quarter of the prior year. Management
considers the MedOne product to be a key strategic product and continues to take
steps to accelerate membership and premium growth in this market through an
expanded agent force and additional regional and national distribution
agreements.
Total medical and dental membership declined from 776,639 members at March
31, 2000 to 652,683 members at March 31, 2001. The membership decrease is a
result of (1) the Company's success in terminating business in several
unprofitable markets, including exited markets, (2) lower sales due to
aggressive premium rate increases and (3) the run-off of the block of group
health business acquired on January 1, 1999 from Continental Assurance Company
("CNA"). Based on the most recent sales projections and the rate of membership
terminations, management anticipates membership to continue to decline
approximately 10% during the remainder of 2001 and insurance premiums to decline
by 5% to 10%.
12
NET INVESTMENT INCOME
Net investment income includes investment income and realized gains and
losses on investments. Investment gains and losses are realized in the normal
investment process in response to market opportunities. Net investment income
for the three months ended March 31, 2001 decreased to $4.5 million from $4.9
million for the three months ended March 31, 2000. The decrease in net
investment income is due primarily to a decrease in average invested assets.
Average invested assets at cost were $272.1 million for the three months ended
March 31, 2001. In comparison, average invested assets were $297.4 million for
the same period one year prior.
OTHER REVENUE
Other revenue, which primarily consists of administrative fee income from
claims processing and other administrative services, increased to $5.3 million
for the quarter compared to $4.9 million for the first quarter of 2000. The
increase from the prior year is primarily due to an increase in fees charged for
administrative services.
LOSS RATIO
The health loss ratio for the first quarter of 2001 was 75.7% compared to
76.6% for the first quarter of 2000. The significant improvement was due to
management's actions and strategies to increase premiums and manage medical
inflation. These actions included premium rate increases, claims cost control
initiatives and the exit from unprofitable small group markets. The improvement
also reflects increased sales of MedOne products, which are priced for a lower
loss ratio due to its increased deductibles and copayments. As anticipated,
claim costs have increased slightly, but were more than offset by increased
premiums. Management believes its pricing strategies will maintain premium
increases ahead of expected claim costs which should further improve the loss
ratio during 2001.
The life segment loss ratio for the three months ended March 31, 2001 was
40.1% compared to 37.7% for the three months ended March 31, 2000. The increase
in the life segment loss ratio was due to an unexpected increase in life claims
experience during the period.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE RATIO
The selling, general and administrative ("SG&A") expense ratio includes
commissions and selling expenses, administrative expenses, and premium taxes and
assessments. Excluding the non-recurring legal accrual, the SG&A expense ratio
for health segment products for the three months ended March 31, 2001 was 25.2%.
This compares to 24.2% reported for the three months ended March 31, 2000. The
increase is due to higher agent commissions and issue costs resulting from the
Company's change in product mix and the effects of lower premium volume.
FUTURE EXPECTATIONS
Management continues to take actions to improve profitability through
aggressive pricing, product redesign, new product introduction, and targeted
focus on profitable markets and products. Management expects the Company's
profitability to improve during 2001 as a result of the continued implementation
of management's strategic plan. Based on current revenue and cost projections,
management expects second quarter earnings to be approximately $0.06 to $0.08
per share. For the full year 2001, management anticipates earnings between $0.35
and $0.45 per share, excluding the non-recurring charge. See "Cautionary
Factors" below for a detailed discussion of risks and uncertainties that may
cause actual results to differ materially from management's expectations.
13
LIQUIDITY AND CAPITAL RESOURCES
The Company's sources of cash flow consist primarily of insurance premiums,
administrative fee revenue and investment income. The primary uses of cash
include payment of medical and other benefits, SG&A expenses and debt service
costs. Positive cash flows are invested pending future payments of benefits and
other operating expenses. The Company's investment policies are designed to
maximize yield, preserve principal and provide liquidity to meet anticipated
payment obligations.
The Company's cash used in operations was $8.1 million for the three months
ended March 31, 2001. This compares to cash used in operations of $5.5 million
for the three months ended March 31, 2000. The decrease in cash flows is
primarily the result of a reduction in the claims backlog during the quarter,
along with faster claim submission and payment patterns, and lower new sales
volume. Management expects cash flow from operations to be positive for the year
2001.
The Company's investment portfolio consists primarily of investment grade
bonds and has limited exposure to equity securities. At March 31, 2001, $265.4
million or 99.1% of the Company's investment portfolio was invested in bonds. At
December 31, 2000, $267.0 million or 99.1% of the Company's investment portfolio
was invested in bonds. The bond portfolio had an average quality rating of Aa3
at March 31, 2001 and December 31, 2000, as measured by Moody's Investor
Service. The majority of the bond portfolio was classified as available for
sale. The Company has no investment in mortgage loans, non-publicly traded
securities (except for principal only strips of U.S. Government securities),
real estate held for investment or financial derivatives.
The Company's insurance subsidiaries operate in states that require certain
levels of regulatory capital and surplus and may restrict dividends to their
parent companies. Based upon the financial statements of the Company's insurance
subsidiaries as of December 31, 2000, as filed with the insurance regulators, no
dividends may be paid by these subsidiaries without prior regulatory approval
prior to December 2001, at which time the aggregate amount available without
regulatory approval is $7.3 million.
The National Association of Insurance Commissioners has adopted risk-based
capital ("RBC") standards for health and life insurers designed to evaluate the
adequacy of statutory capital and surplus in relation to various business risks
faced by such insurers. The RBC formula is used by state insurance regulators as
an early warning tool to identify insurance companies that potentially are
inadequately capitalized. At December 31, 2000, the Company's principal
insurance company subsidiaries had RBC ratios that were substantially above the
levels which would require regulatory action.
During 2000, the Company's Board of Directors authorized an increase to the
Company's share repurchase program to a maximum allowable repurchase of $18.0
million. The Company purchased 186,262 shares of its outstanding common stock
during the first quarter of 2001, bringing the total purchased to 2.6 million
shares at an aggregate purchase price of $16.9 million.
In determining when and whether to purchase future shares under the stock
repurchase program, management considers market price, the number of shares
actively traded in the market, indications of seller interest, the number of
shares held by large shareholders, the effect of purchases on shareholder value
and other relevant factors. Because of the unpredictability of these factors, no
assurance can be given as to how many, if any, shares may be repurchased in the
future.
At March 31, 2001, the Company maintained a revolving bank line of credit
agreement ("Credit Agreement") with a maximum commitment of $40.0 million and a
$10.0 million sublimit for swingline loans. At March 31, 2001, the outstanding
balance of advances under the Credit Agreement was $35.2 million. The Credit
Agreement contains customary covenants which, among other matters, require the
Company to achieve minimum financial results and restrict the Company's ability
to incur additional debt, pay future cash dividends and dispose of assets
outside the ordinary course of business. The Credit Agreement was amended in
January 2001 and April 2001 to revise the minimum financial requirements of
certain covenants. The April 2001 amendment also revised the Company's
applicable interest rate on outstanding loans and revised the schedule of
mandatory future
14
commitment reductions including a $4.8 million commitment reduction on April 27,
2001. Revised future annual principal amounts due for all of the Company's debt
as of March 31, 2001 are $0.9 million for 2001, $6.2 million for 2002, $11.2
million for 2003, $12.5 million for 2004, and $10.2 million for 2005.
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" within the meaning of the safe harbor provisions of the United
States Private Securities Litigation Reform Act of 1995. Forward-looking
statements are statements based upon management's expectations at the time such
statements are made and are subject to risks and uncertainties that could cause
the Company's actual results to differ materially from those contemplated in the
statements. Readers are cautioned not to place undue reliance on the
forward-looking statements. When used in written documents or oral
presentations, the terms "anticipate," "believe," "estimate," "expect,"
"objective," "plan," "possible," "potential," "project" and similar expressions
are intended to identify forward-looking statements. In addition to the
assumptions and other factors referred to specifically in connection with such
statements, factors that could cause the Company's actual results to differ
materially from those contemplated in any forward-looking statements include,
among others, the following:
- 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 technology-driven procedures
and 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, the Company's ability to retain key producing
sales agents, the Company's ability to expand its distribution network for
MedOne products, competitive factors such as the entrance of additional
competitors into the Company's markets, competitive pricing practices, the
Company's ability to sell new products and retain existing customers, 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 (such as the "Patients' Bill of Rights") 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 efforts to deal with adverse medical loss
ratio in its small group health business (which include implementing
significant rate increases, terminating business in unprofitable 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 highly
regulated markets and exited markets where insureds may be inclined to
increase utilization prior to termination of their policies.
- The effectiveness of the Company's strategy to expand sales of its MedOne
products for individuals and families, to focus its small group health
product sales in core markets and to grow its ancillary products, including
its life, dental and self-funded benefit administration business.
15
- 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.
- Possible restrictions on cash flow resulting from a denial by state
regulators of the payment of dividends by the Company's insurance company
subsidiaries.
- Restrictions imposed by financing arrangements that limit the Company's
ability to incur additional debt, pay future cash dividends and transfer
assets.
- Changes in rating agency policies and practices and the ability of the
Company's insurance subsidiaries to maintain or exceed their A- (Excellent)
rating by A.M. Best.
- General economic conditions, including changes in interest rates and
inflation that may impact the performance on the Company's investment
portfolio or decisions of individuals and employers to purchase the
Company's products.
- The Company's ability to maintain attractive preferred provider networks
for its insureds.
- The Company's ability to integrate effectively the operational, managerial
and financial aspects of future acquisitions.
- Factors affecting the Company's ability to hire and retain key executive,
managerial and technical employees.
- Other business or investment considerations that may be disclosed from time
to time in the Company's Securities & Exchange Commission filings or in
other publicly disseminated written documents.
The Company undertakes no obligation to publicly update or revise any
forward-looking statements, whether as a result of new information, future
events or otherwise.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's market risk has not substantially changed from the year ended
December 31, 2000.
16
PART II. OTHER INFORMATION
ITEM 1. 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. 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
is governed by the Employee Retirement Income Security Act of 1974, as amended,
which preempts all state law causes of action and limits damages to contract
damages. AMS Inc.'s post-trial motion to set aside the jury's finding was denied
by the court on March 20, 2000. As a result, AMS Inc. filed a notice of appeal
with the Eleventh Circuit Federal Appeals Court on April 17, 2000. On March 12,
2001, the Company received the Court of Appeal's decision, rendered on March 9,
2001, affirming the decision of the District Court. On March 30, 2001, AMS Inc.
filed a petition with the Court of Appeals for a rehearing by the full Court of
Appeals, which was denied on May 4, 2001. The Company is preparing to petition
the United States Supreme Court for a writ of certiorari and intends to continue
its strenuous appeal of this decision.
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 commission and agent contracts and ruled in favor of AMS Inc. and UWLIC
on breach of oral contracts and fraud. On February 22, 2000, AMS Inc. and UWLIC
filed objections with the Common Pleas Court requesting that the magistrate's
decision against AMS Inc. and UWLIC be reversed. The Common Pleas Court approved
the magistrate's decision on April 10, 2000. As a result, AMS Inc. and UWLIC
filed a notice of appeal with the Court of Appeals, Delaware County, Ohio, Fifth
Appellate District on April 18, 2000. Health Administrators filed a cross-appeal
on July 10, 2000. Oral arguments were heard on October 5, 2000. On March 29,
2001, the Court of Appeals rendered a decision remanding certain agent contract
issues related to $2.4 million in damages back to the lower court for further
consideration. The Court of Appeals decision upheld $3.0 million awarded by the
lower court in regard to a commission contract. On May 2, 2001, AMS and UWLIC
filed an appeal with the Supreme Court for the State of Ohio appealing the
decision of the Court of Appeals with respect to that portion of the lower
court's decision upheld by the Court of Appeals.
The Company is involved in various legal and regulatory actions occurring
in the normal course of its business. In the opinion of management, adequate
provision has been made for losses which may result from the Skilstaf
litigation, the Health Administrators litigation and other legal and regulatory
actions; accordingly, the outcome of these matters is not expected to have a
material adverse effect on the consolidated financial statements.
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
See the Exhibit Index following the Signature page of this report, which is
incorporated herein by reference.
(b) REPORTS ON FORM 8-K
A Form 8-K dated February 21, 2001, was filed by the Company to disclose
under Item 9, Regulation FD Disclosure, a financial presentation included on the
Company's website.
The Company also filed a Form 8-K dated March 12, 2001, to report under Item 5,
Other Events, the Company's announcement to take a nonrecurring charge resulting
from an adverse decision in the Skilstaf litigation.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DATE: MAY 14, 2001
AMERICAN MEDICAL SECURITY GROUP, INC.
/s/ Gary D. Guengerich
Gary D. Guengerich
Executive Vice President and Chief Financial Officer
(Principal Financial Officer and Chief Accounting Officer
and duly authorized to sign on behalf of the Registrant)
19
AMERICAN MEDICAL SECURITY GROUP, INC.
(COMMISSION FILE NO. 1-13154)
EXHIBIT INDEX
TO
FORM 10-Q QUARTERLY REPORT
for quarter ended March 31, 2001
INCORPORATED HEREIN FILED
EXHIBIT NO. DESCRIPTION BY REFERENCE TO HEREWITH
4 Fourth Amendment dated as of April 27, X
2001 to Credit Agreement dated as of
March 24, 2000 among the Registrant,
LaSalle Bank National Association and
other Lenders
EX-1