UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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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, 2002.
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 NO. 001-14953
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UICI
(Exact name of registrant as specified in its charter)
Delaware 75-2044750
------------------------------ ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
4001 McEwen, Suite 200, Dallas, Texas 75244
------------------------------------- -----
(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code (972) 392-6700
Not Applicable
--------------------------------------------------------------------------------
Former name, former address and former fiscal year,
if changed since last report.
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, $.01 Par Value,
47,918,365 shares as of April 30, 2002.
1
INDEX
UICI AND SUBSIDIARIES
PAGE
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated condensed balance sheets-March 31, 2002 (unaudited) and
December 31, 2001........................................................... 3
Consolidated condensed statements of income (unaudited) - Three
months ended March 31, 2002 and 2001........................................ 4
Consolidated statements of comprehensive income (unaudited) - Three months
ended March 31, 2002 and 2001............................................... 5
Consolidated condensed statements of cash flows (unaudited) - Three months
ended March 31, 2002 and 2001............................................... 6
Notes to consolidated condensed financial statements (unaudited) - March 31,
2002........................................................................ 7
Item 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations.................................................................. 23
Item 3. Quantitative and Qualitative Disclosures about Market Risk.................. 34
PART II. OTHER INFORMATION
Item 1. Legal Proceedings........................................................... 36
Item 5. Market for Registrant's Common Stock and Related Matters.................... 36
Item 6. Exhibit and Reports on Form 8-K............................................. 36
SIGNATURES 37
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
UICI AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
MARCH 31, DECEMBER 31,
2002 2001
----------- -----------
(UNAUDITED)
ASSETS
Investments
Securities available for sale --
Fixed maturities, at fair value (cost:
2002--$958,849; 2001--$924,709) ............................ $ 952,136 $ 929,291
Equity securities, at fair value (cost:
2002--$55,892; 2001--$42,419) .............................. 98,245 84,445
Mortgage and collateral loans ................................. 5,345 5,404
Policy loans .................................................. 19,959 20,127
Investment in Healthaxis, Inc. ................................ 8,121 8,278
Short-term investments ........................................ 130,599 171,173
----------- -----------
Total Investments ...................................... 1,214,405 1,218,718
Cash ............................................................ 25,815 50,777
Student loans ................................................... 1,417,161 1,278,427
Restricted cash ................................................. 290,973 295,182
Reinsurance receivables ......................................... 58,954 63,825
Due premiums, other receivables and assets ...................... 61,205 48,480
Investment income due and accrued ............................... 64,424 60,879
Deferred acquisition costs ...................................... 78,090 73,928
Goodwill and other intangible assets ............................ 119,179 86,010
Deferred income tax ............................................. 9,773 20,173
Property and equipment, net ..................................... 73,656 70,634
Other assets .................................................... 15,870 14,199
----------- -----------
$ 3,429,505 $ 3,281,232
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Policy liabilities
Future policy and contract benefits ........................... $ 421,135 $ 423,297
Claims ........................................................ 380,721 354,011
Unearned premiums ............................................. 103,213 95,399
Other policy liabilities ...................................... 18,918 18,654
Accounts payable ................................................ 32,296 32,371
Other liabilities ............................................... 108,918 116,147
Collections payable ............................................. 131,519 140,894
Debt ............................................................ 24,625 25,303
Student loan credit facilities .................................. 1,625,033 1,506,202
Net liabilities of discontinued operations, including reserve
for losses on disposal ....................................... 31,628 34,382
----------- -----------
2,878,006 2,746,660
Commitments and Contingencies
Stockholders' Equity
Preferred stock, par value $0.01 per share .................... -- --
Common stock, par value $0.01 per share ....................... 494 494
Additional paid-in capital .................................... 210,378 201,328
Accumulated other comprehensive income ........................ 23,176 30,294
Retained earnings ............................................. 329,292 317,169
Treasury stock, at cost ....................................... (11,841) (14,713)
----------- -----------
551,499 534,572
----------- -----------
$ 3,429,505 $ 3,281,232
=========== ===========
NOTE: The balance sheet data as of December 31, 2001 have been derived from the
audited financial statements at that date.
See Notes to Consolidated Condensed Financial Statements.
3
UICI AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF INCOME (UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
THREE MONTHS ENDED
MARCH 31,
--------------------------
2002 2001
--------- ---------
REVENUE
Premiums:
Health (includes amounts received from related parties of $2,015 and $1,552
for the three months ended March 31, 2002 and 2001, respectively) ...................... $ 247,537 $ 178,478
Life premiums and other considerations ................................................... 7,754 8,807
--------- ---------
255,291 187,285
Investment income ........................................................................... 19,829 20,293
Interest income (includes amounts received from related parties of $1 and
$10 for the three months ended March 31, 2002 and 2001, respectively) .................. 18,161 27,019
Other fee income (includes amounts received from related parties of
$1,198 and $1,845 for the three months ended March 31, 2002 and 2001, respectively) .... 15,031 15,952
Other income ................................................................................ 759 702
Losses on investments ....................................................................... (738) (25)
--------- ---------
308,333 251,226
BENEFITS AND EXPENSES
Benefits, claims, and settlement expenses ................................................... 160,818 118,395
Underwriting, acquisition, and insurance expenses (includes amounts
paid to related parties of $6,864 and $7,501 for the three months ended
March 31, 2002 and 2001, respectively) ................................................... 90,879 65,170
Stock appreciation expense (income) ......................................................... 4,511 (190)
Other expenses (includes amounts paid to related parties of $1,134 and
$1,043 for the three months ended March 31, 2002 and 2001, respectively) ................. 18,391 17,144
Depreciation (includes expense on assets purchased from related parties
of $386 and $104 for the three months ended March 31, 2002
and 2001, respectively) .................................................................. 4,659 2,971
Interest expense (includes expenses incurred with related parties of $0
and $98 for the three months ended March 31, 2002 and 2001, respectively) ................ 648 1,875
Interest expense--student loan credit facilities ............................................ 10,453 22,955
Equity in losses of Healthaxis, Inc. investment ............................................. 174 2,079
Goodwill amortization ....................................................................... -- 1,129
--------- ---------
290,533 231,528
--------- ---------
INCOME FROM CONTINUING OPERATIONS BEFORE
FEDERAL INCOME TAXES ........................................................................ 17,800 19,698
Federal income taxes .......................................................................... 5,744 6,698
--------- ---------
INCOME FROM CONTINUING OPERATIONS ............................................................. 12,056 13,000
DISCONTINUED OPERATIONS
(net of income tax benefit of $965 and $413 for the three months
ended March 31, 2002 and 2001, respectively) ............................................. 67 (897)
--------- ---------
NET INCOME .................................................................................... $ 12,123 $ 12,103
========= =========
Earnings (loss) per share:
Basic earnings (loss)
Income from continuing operations ........................................................ $ 0.26 $ 0.28
Income (loss) from discontinued operations ............................................... 0.00 (0.02)
--------- ---------
Net income ............................................................................... $ 0.26 $ 0.26
========= =========
Diluted earnings (loss)
Income from continuing operations ........................................................ $ 0.25 $ 0.27
Income (loss) from discontinued operations ............................................... 0.00 (0.02)
--------- ---------
Net income ............................................................................... $ 0.25 $ 0.25
========= =========
See Notes to Consolidated Condensed Financial Statements.
4
UICI AND SUBSIDIARIES CONSOLIDATED
STATEMENTS OF COMPREHENSIVE INCOME
(UNAUDITED) (DOLLARS IN THOUSANDS)
THREE MONTHS ENDED
MARCH 31,
--------------------------
2002 2001
--------- ---------
Net income ...................................................... $ 12,123 $ 12,103
Other comprehensive income (loss) before tax:
Unrealized gains on securities:
Unrealized holding gains (losses) arising during period .... (10,149) 15,388
Reclassification adjustment for gains (losses)
included in net income ................................... (802) 128
--------- ---------
Other comprehensive income (loss) before tax ........... (10,951) 15,516
Income tax benefit (provision) related to items of
other comprehensive income ............................... 3,833 (5,429)
--------- ---------
Other comprehensive income (loss) net of
tax benefit (provision) .............................. (7,118) 10,087
--------- ---------
Comprehensive income ............................................ $ 5,005 $ 22,190
========= =========
See Notes to Consolidated Condensed Financial Statements.
5
UICI AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
(DOLLARS IN THOUSANDS)
THREE MONTHS ENDED
MARCH 31,
----------------------------
2002 2001
---------- ----------
OPERATING ACTIVITIES
Net income ......................................................................... $ 12,123 $ 12,103
Adjustments to reconcile net income to
cash provided by (used in) operating activities:
Increase in policy liabilities ................................................... 26,989 2,445
Decrease in other liabilities .................................................... (9,219) (10,801)
Increase in income taxes ......................................................... 11,061 18,508
Increase in deferred acquisition costs ........................................... (4,032) (807)
(Increase) decrease in accrued investment income ................................. (3,545) 850
(Increase) decrease in reinsurance and other receivables ......................... 8,625 (2,973)
Stock appreciation expense (income) .............................................. 4,511 (190)
Depreciation and amortization .................................................... 4,958 4,402
Decrease in collections payable .................................................. (9,375) (44,587)
Equity in losses of Healthaxis, Inc. ............................................. 174 2,079
Losses on investments ............................................................ 738 25
Amounts recovered from (charged to) loss on disposal of discontinued operations .. 237 (2,854)
Other items, net ................................................................. (1,167) 279
---------- ----------
Cash Provided by (Used in) Operating Activities .............................. 42,078 (21,521)
---------- ----------
INVESTING ACTIVITIES
Increase in student loans .......................................................... (138,734) (158,041)
(Increase) decrease in other investments ........................................... (7,481) 28,514
Decrease in restricted cash ........................................................ 4,209 30,865
Increase in agents' receivables .................................................... (8,406) (3,275)
Proceeds from sale of subsidiary net of cash disposal of $145 ...................... 1,855 --
Purchase of subsidiaries net of cash acquired of $2,599 ............................ (30,833) --
Increase in property and equipment ................................................. (6,598) (5,615)
---------- ----------
Cash Used in Investing Activities ............................................ (185,988) (107,552)
---------- ----------
FINANCING ACTIVITIES
Deposits from investment products .................................................. 3,809 3,855
Withdrawals from investment products ............................................... (6,895) (11,075)
Proceeds from student loan borrowings .............................................. 508,100 227,657
Repayment of student loan borrowings ............................................... (389,269) (132,204)
Repayment of debt .................................................................. (678) (12,591)
Repayment of note payable to related party ......................................... -- (18,954)
Issue shares to Employee Stock Plan ................................................ 2,993 1,440
Exercise of stock options .......................................................... 1,000 --
Purchase of treasury shares ........................................................ (255) (7,961)
Issuance of treasury shares ........................................................ -- 955
Other items, net ................................................................... 143 2,188
---------- ----------
Cash Provided by Financing Activities ........................................ 118,948 53,310
---------- ----------
Net Decrease in Cash ......................................................... (24,962) (75,763)
Cash and cash equivalents at Beginning of Period ............................. 50,777 83,058
---------- ----------
Cash and cash equivalents at End of Period ................................... $ 25,815 $ 7,295
========== ==========
See Notes to Consolidated Condensed Financial Statements.
6
UICI AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
March 31, 2002
NOTE A - BASIS OF PRESENTATION
The accompanying unaudited consolidated condensed financial statements for
UICI and its subsidiaries (the "Company" or "UICI") have been prepared in
accordance with generally accepted accounting principles ("GAAP") for interim
financial information and with the instructions to Form 10-Q and Rule 10-01 of
Regulation S-X. Accordingly, such financial statements do not include all of the
information and notes required by GAAP for complete financial statements. In the
opinion of management, all adjustments considered necessary for a fair
presentation have been included. All such adjustments, except as otherwise
described herein, consist of normal recurring accruals. Operating results for
the three-month period ended March 31, 2002 are not necessarily indicative of
the results that may be expected for the year ending December 31, 2002. For
further information, refer to the consolidated financial statements and notes
thereto included in the Company's Annual Report on Form 10-K for the year ended
December 31, 2001. Certain amounts in the 2001 financial statements have been
reclassified to conform to the 2002 financial statement presentation.
Recently Issued Accounting Pronouncements
In August 2001, the Financial Accounting Standards Board ("FASB") issued
Statement No. 144, Accounting for the Impairment or Disposal of Long-Lived
Assets, superseding Statement No. 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of. Statement 144
provides guidance on differentiating between assets held and used, held for
sale, and held for disposal other than by sale. Statement 144 requires a
three-step approach for recognizing and measuring the impairment of assets to be
held and used and also superseded the accounting and reporting provisions of APB
Opinion No. 30, Reporting the Results of Operations -- Reporting the Effects of
Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently
Occurring Events and Transactions, regarding discontinued operations. Effective
January 1, 2002, the Company adopted this pronouncement.
In June 2001, FASB issued Statements No. 141, Business Combinations, and No.
142, Goodwill and Other Intangible Assets. Statement 141 requires that the
purchase method of accounting be used for all business combinations initiated
after June 30, 2001. Statement 141 also includes guidance on the initial
recognition and measurement of goodwill and other intangible assets arising from
business combinations completed after June 30, 2001. Statement 142 prohibits the
amortization of goodwill and intangible assets with indefinite useful lives.
Statement 142 requires that these assets be reviewed for impairment at least
annually, or more frequently if certain indicators arise. The review of goodwill
will be at the reporting unit level, which the Company has determined to be at
one level below its operating segments. Intangible assets with finite lives will
continue to be amortized over their estimated useful lives. Statement 142 also
requires that goodwill included in the carrying value of equity method
investments no longer be amortized.
The Company adopted Statements 141 and 142 on January 1, 2002. The Company
will test goodwill for impairment using the two-step process prescribed in
Statement 142. The first step is a screen for potential impairment, while the
second step measures the amount of the impairment, if any. Statement 142
requires the completion of the initial step of a transitional impairment test
within six months of adoption. Any impairment loss resulting from the
transitional impairment test will be recorded as a cumulative effect of a change
in accounting principle. The Company has not determined the impact, if any, the
change in impairment testing will have on its results of operations or financial
position, but expects to have such determination completed by June 30, 2002.
NOTE B - INVESTMENT IN HEALTHAXIS, INC.
At March 31, 2002, the Company held 24,697,469 shares of common stock of
Healthaxis, Inc. (HAXS: Nasdaq) ("HAI"), which at such date represented
approximately 46% of the issued and outstanding shares of HAI. Of such
24,697,469 shares held by the Company, 8,581,714 shares (representing 16.1% of
HAI's total issued and outstanding shares) were through November 7, 2001 subject
to the terms of a Voting Trust Agreement, pursuant to which trustees
unaffiliated with the Company have the right to vote such shares. In addition,
the Company holds (a) a
7
warrant to purchase 12,291 shares of HAI common stock at an exercise price of
$3.01 per HAI share; (b) a warrant to purchase 200,100 shares of HAI common
stock at an exercise price of $4.40 per HAI share; (c) a warrant to purchase
10,005 shares of HAI common stock at an exercise price of $12.00 per share; and
(d) $1.67 million aggregate principal amount of HAI 2% convertible debentures,
which are convertible into an aggregate of 185,185 shares of HAI common stock.
Effective November 7, 2001, (a) Gregory T. Mutz and Patrick J. McLaughlin
(the President and a director of UICI, respectively) resigned from the Board of
Directors of HAI; (b) the Voting Trust Agreement was terminated; and (c) for the
sole purpose of electing directors to the board of directors of HAI, UICI
appointed as its proxies the board of directors of HAI, with power to vote
33-1/3% of the number of HAI shares held of record from time to time by UICI,
with such proxies to vote such in favor of the nominees that a majority of the
directors of HAI shall have recommended stand for election. The authority
granted to such proxies will terminate at the earlier to occur of (i) November
7, 2011, (ii) such date as UICI beneficially holds less than 25% of the
outstanding shares of common stock of HAI on a fully diluted basis, (iii) such
date as any person or persons acting as a "group" beneficially holds a greater
percentage of the outstanding shares of HAI common stock on a fully diluted
basis than the percentage beneficially owned by UICI, or (iv) the filing by HAI
of a voluntary petition in bankruptcy or the filing by a third party of an
involuntary petition in bankruptcy with respect to HAI.
HAI is an emerging technology service firm that provides web-based
connectivity and applications solutions for health benefit distribution and
administration. These solutions, which consist primarily of software products
and related services, are designed to assist health insurance payers, third
party administrators, intermediaries and employers in providing enhanced
services to members, employees and providers through the application of HAI's
flexible technology to legacy systems, either on a fully integrated or on an
application service provider (ASP) basis.
The Company accounts for its investment in HAI utilizing the equity method
and, accordingly, recognizes its ratable share of HAI income and loss. At March
31, 2002, the Company's carrying value of its investment in HAI was $8.1
million. The Company's equity in the loss of HAI in the three months ended March
31, 2002 was $(174,000), compared to $(2.1) million for the three months ended
March 31, 2001.
Pursuant to the terms of an information technology services agreement,
amended and restated as of January 3, 2000 (the "Services Agreement"), HAI
provides information systems and software development services (including
administration of the Company's computer data center) to the Company and its
insurance company affiliates at HAI's cost of such services (including direct
costs of HAI personnel dedicated to providing services to the Company plus a
portion of HAI's overhead costs) plus a 10% mark-up. The Services Agreement has
an initial five-year term ending on January 3, 2005, which is subject to
extension by the Company. The Services Agreement is terminable by the Company or
HAI at any time upon not less than 180 days' notice to the other party. The
Services Agreement does not constitute a requirements contract, does not prevent
UICI from obtaining from other third parties (or providing to itself) any or all
of the services currently provided by HAI, and does not limit UICI's right or
ability to decrease the demand for services from HAI.
Pursuant to the terms of the Services Agreement, UICI paid to HAI $4.4
million and $3.8 million in the three months ended March 31, 2002 and 2001,
respectively. In addition, HAI has provided to the Company and its affiliates
certain other information technology services, including claims imaging and
software-related services, for which UICI paid to HAI $758,000 and $4.7 million
in the three months ended March 31, 2002 and 2001, respectively. The aggregate
amounts paid by UICI to HAI in the three months ended March 31, 2002 and 2001
represented 54.8% and 78.7% of HAI's total revenues of $9.8 million and $10.8
million in such three-month periods, respectively. With a strategic goal of
gaining greater control over its information technology resources and
development efforts and managing its own information technology staff, the
Company continues to seek to reduce its dependence upon HAI for information
systems and software development services under the Services Agreement by hiring
more of its technology work force directly and by outsourcing and contracting
with technology service and software providers other than HAI. Accordingly, the
Company believes that overall expenditures to HAI for services in 2002 will be
less than such expenditures in 2001 and will likely decline each year
thereafter. The Company does not currently intend to renew the Services
Agreement when it expires on January 3, 2005.
8
Set forth below is summary condensed balance sheet and income statement data
for HAI as of and for the three month period ended March 31, 2002. This
financial information has been adjusted to exclude the effects of push-down
accounting for the January 7, 2000 merger of Insurdata Incorporated with and
into HealthAxis.com (the subsidiary of HAI that was merged with and into HAI in
January 2001).
MARCH 31,
2002
--------------
(IN THOUSANDS)
Assets
Cash and current assets .......................... $ 18,885
Property and equipment ........................... 2,936
Other assets ..................................... 4,923
--------
Total assets ............................. $ 26,744
========
Liabilities
Accounts payable and accrued expenses ............ $ 3,664
Debt ............................................. 27,168
Other liabilities ................................ 2,330
--------
Total liabilities ................................ 33,162
Stockholders' deficit ............................ (6,418)
--------
Total liabilities and stockholders' deficit ........ $ 26,744
========
THREE MONTHS ENDED
MARCH 31, 2002
------------------
(IN THOUSANDS)
Revenue .......................................... $ 9,792
Expenses ......................................... (10,168)
--------
Net loss ............................... $ (376)
========
NOTE C - GOODWILL AND OTHER INTANGIBLE ASSETS
The Company adopted Statements 141 and 142 on January 1, 2002. The Company
will test goodwill for impairment using the two-step process prescribed in
Statement 142. The first step is a screen for potential impairment, while the
second step measures the amount of the impairment, if any. Statement 142
requires the completion of the initial step of a transitional impairment test
within six months of adoption. Any impairment loss resulting from the
transitional impairment test will be recorded as a cumulative effect of a change
in accounting principle. The Company has not determined the impact, if any, on
the results of operations or financial position for the change in impairment
testing, but expects to have such determination completed by June 30, 2002.
Set forth in the table below is a summary of the goodwill and other
intangible assets by operating segment as of March 31, 2002 and December 31,
2001:
MARCH 31, 2002
--------------------------------------------------------
(IN THOUSANDS)
OTHER
INTANGIBLE ACCUMULATED
GOODWILL ASSETS AMORTIZATION NET
-------- ---------- ------------ --------
Self Employed Agency Division .......... $ 9,405 $ -- $ (3,972) $ 5,433
Group Insurance Division ............... 17,513 8,858 (143) 26,228
Life Insurance Division ................ 552 -- (193) 359
Senior Market Division ................. 5,325 1,637 (21) 6,941
Academic Management Services Corp. ..... 90,360 -- (12,610) 77,750
Other Key Factors ...................... 4,423 -- (1,955) 2,468
-------- -------- --------- --------
$127,578 $ 10,495 $ (18,894) $119,179
======== ======== ========= ========
DECEMBER 31, 2001
--------------------------------------------------------
(IN THOUSANDS)
OTHER
INTANGIBLE ACCUMULATED
GOODWILL ASSETS AMORTIZATION NET
-------- ---------- ------------ --------
Self Employed Agency Division .......... $ 9,405 $ -- $ (3,972) $ 5,433
Group Insurance Division ............... -- -- -- --
Life Insurance Division ................ 552 -- (193) 359
Senior Market Division ................. -- -- -- --
Academic Management Services Corp. ..... 90,360 -- (12,610) 77,750
Other Key Factors ...................... 4,423 -- (1,955) 2,468
-------- -------- -------- --------
$104,740 $ -- $(18,730) $ 86,010
======== ======== ======== ========
9
Following is the impact to the Company's net income for the three months
ended March 31, 2002 and 2001 as a result of the non-amortization provisions of
Statement 142:
THREE MONTHS ENDED
MARCH 31,
---------------------------
2002 2001
---------- ----------
(IN THOUSANDS
EXCEPT PER SHARE AMOUNTS)
Reported net income .......................... $ 12,123 $ 12,103
Add: Goodwill amortization .................. -- 1,129
---------- ----------
Adjusted Net income .......................... $ 12,123 $ 13,232
========== ==========
Basic earnings per share
As reported ............................... $ 0.26 $ 0.26
Goodwill amortization ..................... -- 0.02
---------- ----------
Adjusted basic earnings per share ......... $ 0.26 $ 0.28
========== ==========
Diluted earnings per share
As reported ............................... $ 0.25 $ 0.25
Goodwill amortization ..................... -- 0.02
---------- ----------
Adjusted diluted earnings per share ....... $ 0.25 $ 0.27
========== ==========
Other intangible assets consist of present value of future commissions,
customer lists, trademark and non-compete agreements related to the acquisitions
of SeniorsFirst and STAR HRG completed in the three months ended March 31, 2002.
(See Note F).
Set forth in the table below is a summary of the estimated amortization
expense for the next five years and thereafter for intangible assets:
(IN
THOUSANDS)
----------
2002.................. $ 1,550
2003.................. 1,568
2004.................. 1,357
2005.................. 1,158
2006.................. 1,023
2007 and thereafter... 3,839
--------
$ 10,495
========
NOTE D - DEBT
At December 31, 2001 and March 31, 2002, the Company had outstanding
consolidated short and long-term indebtedness (exclusive of indebtedness secured
by student loans) in the amount of $25.3 million and $24.6 million,
respectively, of which $19.4 million and $18.9 million, respectively,
constituted indebtedness of the holding company.
On June 22, 1994, the Company authorized an issue of its 8.75% Senior Notes
due June 2004 in the aggregate amount of $27.7 million. In accordance with the
agreement governing the terms of the notes (the "Note Agreement"), commencing on
June 1, 1998 and on each June 1 thereafter to and including June 1, 2003, the
Company is required to repay approximately $4.0 million aggregate principal
together with accrued interest thereon to the date of such repayment. The
principal amount of the notes outstanding was $11.9 million at each of December
31, 2001 and March 31, 2002, respectively. The Company incurred $259,000 and
$346,000 of interest expense on the notes in the three months ended March 31,
2002 and 2001, respectively. The Note Agreement contains restrictive covenants
that include certain financial ratios, limitations on additional indebtedness as
a percentage of certain defined equity amounts and the disposal of certain
subsidiaries, including primarily the Company's regulated insurance
subsidiaries.
10
Effective June 29, 2000, UICI executed and delivered an unsecured promissory
note payable to a systems vendor in the amount of $10.0 million, which note bore
interest at LIBOR plus 150 basis points (1.5%) (3.38% at March 31, 2002), and
was payable as to principal in equal quarterly installments in the amount of
$500,000, commencing October 1, 2000, with a final maturity scheduled for June
30, 2005. The note was delivered to discharge an account payable by United
CreditServ ("UCS") in the amount of $10.0 million owing to the systems vendor,
which payable was reflected in the consolidated balance sheet of the Company. At
December 31, 2001 and March 31, 2002, the outstanding balance on the note was
$7.5 million and $7.0 million, respectively. The Company made its scheduled
quarterly $500,000 principal payment on April 1, 2002, and on April 29, 2002,
the Company paid in full all remaining outstanding principal in the amount of
$6.5 million and accrued interest on the note.
On January 25, 2002, the Company entered into a three-year bank credit
facility with Bank of America, NA and LaSalle Bank National Association. Under
the facility, the Company may borrow from time to time up to $30.0 million on a
revolving, unsecured basis. The Company intends to utilize the proceeds of the
facility for general working capital purposes. At March 31, 2002, the Company
had no borrowings outstanding under the facility.
NOTE E - STUDENT LOAN CREDIT FACILITIES
At December 31, 2001 and March 31, 2002, the Company, through its Academic
Management Services Corp ("AMS") subsidiary and the College Fund Life Insurance
Division, had outstanding an aggregate of $1,506.2 million and $1,625.0 million
of indebtedness, respectively, under secured student loan credit facilities, of
which $1,242.8 million and $1,542.6 million, respectively, were issued by
bankruptcy-remote special purpose entities (a "Special Purpose Entity") which
are included in the Company's Consolidated Financial Statements. At December 31,
2001 and March 31, 2002, indebtedness outstanding under secured student loan
credit facilities (including indebtedness issued by Special Purpose Entities)
was secured by federally guaranteed and alternative (i.e., non-federally
guaranteed) student loans in the carrying amount of $1,276.1 million and
$1,416.5 million, respectively, and by a pledge of cash, cash equivalents and
other qualified investments in the amount of $129.4 million and $133.4 million,
respectively. All such indebtedness issued under secured student loan credit
facilities is reflected as student loan indebtedness on the Company's
consolidated balance sheet; all such student loans pledged to secure such
facilities are reflected as student loan assets on the Company's consolidated
balance sheet; and all such cash, cash equivalents and qualified investments
specifically pledged under the student loan credit facilities are reflected as
restricted cash on the Company's consolidated balance sheet.
In January 2002, AMS completed the sale of $335.0 million principal amount
of auction rate notes issued by a Special Purpose Entity. The notes are secured
by a pledge of federally guaranteed student loans, are rated Aaa by Moody's
Investor Service and AAA by Fitch, Inc. and are insured by MBIA. As part of the
transaction, the Special Purpose Entity acquired a $269.1 million portfolio of
student loans from AMS and a loan acquisition fund in the amount of $50.0
million (consisting of cash and cash equivalents) was established to acquire in
the future additional student loans originated by AMS. The notes represent
obligations solely of the Special Purpose Entity and not of the Company, AMS or
any other subsidiary of the Company. However, for financial reporting and
accounting purposes the structured finance facility has been classified as a
financing. Accordingly, in connection with the financing neither AMS nor the
Company recorded any gain on sale of the assets transferred to the Special
Purpose Entity and, on a consolidated basis, the Company will continue to carry
on its consolidated balance sheet the student loans and cash and cash
equivalents held by the Special Purpose Entity and the associated indebtedness
arising from the transaction.
On April 10, 2002, the Company completed a $50.0 million securitization of
alternative (i.e., non-federally guaranteed) student loans originated by the
Company's College Fund Life Insurance Division ("CFLD") through its College
First Alternative Loan Program. The securitization consisted of a $50.0 million
series of Student Loan Asset Backed Notes issued by a Special Purpose Entity.
Interest rates on the series of notes reset monthly in a Dutch auction process,
with the initial rate set at 2.10%. The notes are secured by a pledge of
alternative student loans and cash and cash equivalents, are rated Aaa by
Moody's Investor Service and AAA by Fitch, Inc. and are insured by MBIA. As part
of the transaction, the Special Purpose Entity established a loan acquisition
fund in the amount of $49.8 million (consisting of cash and cash equivalents) to
acquire in the future additional student loans originated by the Company's
College Fund Life Insurance Division. The notes represent obligations solely of
the Special Purpose Entity and not of the Company or any other subsidiary of the
Company. For financial reporting and accounting purposes the CFLD structured
finance facility has been classified as a financing.
11
NOTE F - ACQUISITIONS AND DISPOSAL
On January 17, 2002, the Company completed the sale of UICI Administrators,
Inc., the major component of the Company's Third Party Administration ("TPA")
business unit. The results of operations of UICI Administrators, Inc. are
reflected in discontinued operations for all periods presented. In the three
months ended December 31, 2001, the Company recognized an impairment charge of
$2.3 million to its long-lived assets associated with the UICI Administrators,
Inc. unit, of which $700,000 represented a write-down of fixed assets (which was
reflected in depreciation for the full year and fourth quarter of 2001) and $1.6
million represented a write-down of goodwill (which was reflected in goodwill
amortization for the full year and fourth quarter of 2001). As a result of the
charge in the fourth quarter of 2001, the Company recognized no gain or loss on
the sale of UICI Administrators, Inc. Through January 17, 2002 (the date of
sale), the UICI Administrators, Inc. unit reported income in the amount of
$67,000 net of tax.
On January 17, 2002 the Company completed the purchase of a 50% interest in
SeniorsFirst, a Dallas-based career agency specializing in the sale of long-term
care and Medicare supplement insurance products for a cash purchase price of
$8.0 million. In connection with the acquisition, Company recorded
non-amortizable goodwill in the amount of $5.3 million and amortizable
intangible assets in the amount of $1.6 million.
Effective February 28, 2002, the Company acquired all of the outstanding
capital stock of STAR Human Resources Group, Inc. and STAR Administrative
Services, Inc. (collectively referred to by the Company as its "STAR HRG" unit),
a Phoenix, Arizona based business specializing in the marketing and
administration of limited benefit plans for entry level, high turnover, hourly
employees. Commencing March 1, 2002, health insurance policies offered under the
STAR HRG program have been issued by The MEGA Life and Health Insurance Company,
a wholly-owned subsidiary of UICI. UICI acquired STAR HRG for an initial cash
purchase price of $25.0 million, plus additional contingent consideration based
on the future performance of STAR HRG over the period ending May 31, 2003. The
contingent consideration will be in an amount not to exceed $15.0 million and is
payable, at the Company's option, by delivery of UICI's 6.0% convertible
subordinated notes due March 1, 2012 or in cash plus interest computed at a rate
of 6% from the initial closing. In connection with the acquisition, the Company
recorded non-amortizable goodwill in the amount of $17.5 million and amortizable
intangible assets in the amount of $8.9 million.
The Company's Consolidated Condensed Statement of Operations for the three
months ended March 31, 2002 includes the results of operations of each acquired
company from their respective dates of acquisition. The effect of these
acquisitions on the Company's results of operations was not material.
NOTE G - INCOME TAXES
The Company's effective tax rate on continuing operations for the three
month period ended March 31, 2002 was approximately 32.3% compared to 34.0% for
the same period in 2001. The decrease in the effective tax rate for the 2002
period can primarily be attributed to the reduction of the Company's deferred
tax liability following its assessment of potential additional tax obligations.
This decrease was partially offset by the non-deductible portion of the
variable stock-based compensation expense recorded in the three months ended
March 31, 2002.
NOTE H - EARNINGS (LOSS) PER SHARE
The following table sets forth the computation of basic and diluted earnings
(loss) per share:
THREE MONTHS ENDED
MARCH 31,
---------------------------
2002 2001
---------- ----------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Income (loss) available to common shareholders:
Income from continuing operations available
to common shareholders ...................... $ 12,056 $ 13,000
Income (loss) from discontinued operations ..... 67 (897)
---------- ----------
Net income ..................................... $ 12,123 $ 12,103
========== ==========
Weighted average shares outstanding
-- basic earnings (loss) per share ............. 46,901 46,997
Effect of dilutive securities:
Employee stock options and other shares .......... 1,213 1,164
---------- ----------
Weighted average shares outstanding--
dilutive earnings (loss) per share ............... 48,114 48,161
========== ==========
Basic earnings (loss) per share
From continuing operations ..................... $ 0.26 $ 0.28
From discontinued operations ................... 0.00 (0.02)
---------- ----------
Net income ..................................... $ 0.26 $ 0.26
========== ==========
Diluted earnings (loss) per share
From continuing operations ..................... $ 0.25 $ 0.27
From discontinued operations ................... 0.00 (0.02)
---------- ----------
Net income ..................................... $ 0.25 $ 0.25
========== ==========
12
NOTE I - LEGAL PROCEEDINGS
The Company is a party to the following material legal proceedings:
Securities Class Action Litigation
As previously disclosed, in December 1999 and February 2000, the Company and
certain of its executive officers were named as defendants in three securities
class action lawsuits alleging, among other things, that the Company's periodic
filings with the SEC contained untrue statements of material facts and/or failed
to disclose all material facts relating to the condition of the Company's credit
card business, in violation of Section 10(b) of the Securities Exchange Act of
1934 and Rule 10b-5 thereunder. The three cases have been subsequently
consolidated as Herbert R. Silver, et al. v. UICI et al, which is pending in
U.S. District Court for the Northern District of Texas. Plaintiffs purport to
represent a class of persons who purchased UICI common stock from February
10,1999 through December 9, 1999. On June 12, 2000, plaintiffs filed a
consolidated amended class action complaint, amending, consolidating and
supplementing the allegations made in the original cases.
On October 10, 2001, the Court denied defendants' motion to dismiss the
case, and on December 7, 2001 UICI filed its answer to the second amended
consolidated class action complaint. At a required scheduling meeting held in
November 2001, the parties agreed to voluntarily submit the dispute to early
mediation, and the parties designated a mediator and scheduled the mediation.
Discovery and other pretrial motions have been suspended pending the outcome of
the mediation. At the first mediation session held on April 23, 2002, the
parties reached no resolution in the case. The parties did agree to continue the
stay in the discovery phase of the proceeding until the second mediation date,
scheduled for May 23, 2002.
The Company believes that the allegations in the complaint are without
merit, and the Company intends to vigorously contest the allegations in the
case.
Sun Communications Litigation
As previously disclosed, UICI and Ronald L. Jensen (the Company's Chairman)
are parties to litigation (Sun Communications, Inc. v. SunTech Processing
Systems, LLC, UICI, Ronald L. Jensen, et al) (the "Sun Litigation") with a third
party concerning the distribution of the cash proceeds from the sale and
liquidation of SunTech Processing Systems, LLC ("STP") assets in February 1998.
Effective April 2, 2002, the Company and Mr. Jensen entered into an
Assignment and Release Agreement, which is intended to effectively transfer the
Company's 80% interest in STP to Mr. Jensen and to terminate the Company's
active participation in, and limit the Company's financial exposure associated
with, the Sun Litigation. In accordance with the terms of the Assignment and
Release Agreement, on April 2, 2002 Mr. Jensen made a total payment to UICI of
$15.6 million and granted to UICI various indemnities against possible losses
which UICI might incur resulting from the Sun Litigation, including (i) any
losses arising from the breach of fiduciary duty claim asserted by Sun
Communications, Inc. ("Sun") against the Company and Sun's related claim for
attorneys' fees, (ii) Sun's claim for attorneys' fees arising out of the
distribution issue in the Sun Litigation, and (iii) all other claims of any
nature asserted by Sun against the Company in the Sun Litigation arising out of
or relating directly to the March 1997 agreement governing the distribution of
cash proceeds from the sale and liquidation of STP. In exchange therefor, (i)
UICI assigned to Mr. Jensen all of UICI's right, title and interest to the funds
held in the registry of the Court in the Sun Litigation and released Mr. Jensen
from any and all obligations arising under the Jensen 1996 Guaranty and the
Assurance Agreement; (ii) UICI granted to Mr. Jensen an option, exercisable at a
nominal exercise price, to transfer to Mr. Jensen UICI's 80% interest in STP;
and (iii) UICI granted to Mr. Jensen an irrevocable proxy to vote UICI's
membership interest in STP all matters coming before the members of STP for a
vote.
13
Shareholder Derivative Litigation
As previously disclosed, on June 1, 1999, the Company was named as a nominal
defendant in a shareholder derivative action captioned Richard Schappel v. UICI,
Ronald Jensen, Richard Estell, Vernon Woelke, J. Michael Jaynes, Gary Friedman,
John Allen, Charles T. Prater, Richard Mockler and Robert B. Vlach, which was
filed in the District Court of Dallas County, Texas (the "Shareholder Derivative
Litigation").
On December 21, 2001, the District Court of Dallas County, Texas, approved
the terms of a Settlement Agreement and Mutual Release between UICI and each of
Richard J. Estell, Vernon Woelke, J. Michael Jaynes, Gary L. Friedman, John E.
Allen, Charles T. Prater, Richard T. Mockler, and Robert B. Vlach (collectively,
the "Individual Defendants"), on the one hand, and Richard Schappel and Mr.
Schappel's counsel, on the other hand. Pursuant to the Settlement Agreement, the
parties reached agreement with respect to the payment of attorneys' fees and
expenses on termination of the Shareholder Derivative Action, and the Court also
entered a Modified Final Judgment in the case, vacating certain findings of fact
that formed a part of an earlier ruling by the Court rendered on October 14,
2001. The Settlement Agreement and the Modified Final Judgment had the effect of
fully and finally resolving the matters in dispute in the Shareholder Derivative
Litigation between UICI and the Individual Defendants, on the one hand, and Mr.
Schappel, on the other hand. The terms of the settlement did not have a material
effect on the results of operations or financial condition of UICI.
In accordance with the terms of a Release Agreement, dated as of April 2,
2002, the Company has agreed to release Mr. Jensen from any and all claims that
the derivative plaintiff in the Shareholder Derivative Litigation brought or
could have brought against Mr. Jensen on behalf of UICI in the Shareholder
Derivative Litigation, and Mr. Jensen agreed to waive and release UICI from any
obligation to indemnify Mr. Jensen for any future costs and/or out-of-pocket
expenses associated with any claims that the derivative plaintiff brought or
could have brought against Mr. Jensen in the Shareholder Derivative Litigation.
ACE and AFCA Litigation
As previously disclosed, the Company is a party to a lawsuit (American
Credit Educators, LLC and American Fair Credit Association, Inc. v. UICI and
United Credit National Bank, pending in the United States District Court for the
District of Colorado), which was initially filed as separate lawsuits in
February 2000 by American Credit Educators, LLC ("ACE") and American Fair Credit
Association, Inc. ("AFCA"), organizations through which United CreditServ
formerly marketed its credit card programs. In the suit, plaintiffs initially
alleged, among other things, that UCNB breached its agreements with ACE and
AFCA, sought injunctive relief and a declaratory judgment and claimed money
damages in an indeterminate amount. ACE and AFCA are each controlled by Phillip
A. Gray, the former head of UICI's credit card operations.
On June 11, 2001, UICI and UCNB filed a motion for a preliminary and
permanent injunction against ACE to prevent ACE from further collection
activities with respect to certain UCNB cardholder accounts and to require ACE
to remove all negative credit bureau reports related to such collection
activities. A hearing on the injunction motion was held on November 2, 2001.
On July 26, 2001, the Court issued an order granting UICI's motion to
substitute UICI for UCNB as a party defendant and dismissing a significant
number of plaintiffs' claims. UICI's motion to dismiss was denied by the Court
as to AFCA's claims for breach of contract, declaratory judgment and
interference with contractual relations and ACE's claims for breach of contract
and for an accounting.
In its answer filed on August 15, 2001, the Company asserted numerous
defenses to the plaintiffs' remaining claims. UICI and United CreditServ also
asserted numerous counterclaims against ACE and AFCA, including, among other
things, breach of contract, breach of fiduciary duty, fraud and civil
conspiracy, and UICI and UCS have claimed damages in an indeterminate amount.
ACE and AFCA have filed a partial motion to dismiss the counterclaims, and
UICI's and United CreditServ's response to that motion was filed on October 29,
2001.
In a separate suit filed on March 26, 2001 (UICI, United Membership
Marketing Group, Inc., and UMMG-Colorado, LLC f/k/a United Membership Marketing
Group Ltd. Liability Co. v. Philip A. Gray and PAG Family Partners, LLC. pending
in the District Court of Dallas County, Texas), the Company sued Philip A. Gray
14
individually ("Gray") and a related limited liability company, alleging, among
other things, fraud, negligent misrepresentation, and breach of fiduciary duty
in connection with the Company's sub prime credit card business.
On April 30, 2001, Gray answered and removed the case to the United States
District Court for the Northern District of Texas. The Company subsequently
moved to remand the case back to Texas state court, which motion is pending
before the court.
The parties agreed to submit the entire dispute to mediation, which was held
on April 15, 2002. At that mediation, the parties were unable to reach agreement
on a resolution of the dispute. The Company intends to continue to vigorously
defend and pursue its counterclaims in the Colorado litigation and its claims in
the Texas litigation. The Company is not currently in a position to assess its
ultimate exposure, if any, in connection with the consolidated case.
Credit Card Marketing Litigation
As previously disclosed, the Company is a party to three disputes arising
out of the marketing of its American Fair Credit Association ("AFCA") credit
card program prior to the termination of the program in January 2000.
Mitchell Litigation
The Company is one of three named defendants in a class action suit filed in
1997 (Dadra Mitchell v. American Fair Credit Association, United Membership
Marketing Group, LLC and UICI) pending in California state court (the "Mitchell
case"), in which plaintiffs have alleged that defendants violated California law
regarding unfair and deceptive trade practices by making misleading
representations about, and falsely advertising the nature and quality of, the
benefits of membership in American Fair Credit Association ("AFCA").
In October 2000, the state court in the Mitchell case granted, in part, and
denied, in part the joint motions of UICI, AFCA and United Membership Marketing
Group ("UMMG") to compel arbitration and to narrow the scope of the plaintiff
class. The court severed from the class action the claims for recovery of money
by way of damages or restitution of class members who joined AFCA after January
1, 1998 and who executed signed arbitration agreements. However, the state court
denied UICI's motion to compel arbitration with respect to these class members'
claims for injunctive relief and, as a result, their claims for injunctive
relief remain part of the class action. With respect to class members who were
existing members of AFCA in January of 1998 and who received through the mail an
amendment adding arbitration of disputes to their AFCA membership agreement, the
state court denied UICI's motion to compel arbitration unless the member also
signed a separate arbitration agreement. In addition, the state court clarified
that its prior April 12, 1999 order certified a class with respect to all claims
pleaded in the complaint, not solely claims under the California Credit Services
Act of 1984.
On October 12, 2000, UICI, jointly with defendants AFCA and UMMG, filed a
Notice of Appeal from the state court's October 2000 orders and from its
original class certification order dated April 12, 1999. By letter dated October
12, 2000, defendants notified plaintiffs of the filing of their Notice of Appeal
and, consequently, all trial court proceedings in the Mitchell case were stayed.
UICI has not received notice from plaintiff Mitchell of a motion for any
relief from the stay, and there have been no further proceedings in the state
court. Accordingly, at this time, it is unclear whether or not plaintiffs will
move for relief from the stay of proceedings, and, if so, what relief from the
stay, if any, will be granted to plaintiffs pending the outcome of UICI's
appeal. On April 16, 2002, the Court of Appeals heard oral argument on the
appeal but has not yet rendered a decision.
BankFirst Case
Plaintiffs in the Mitchell case also filed a companion case in federal
district court in San Francisco captioned Dadra Mitchell v. BankFirst, N.A. (the
"BankFirst case"), which alleges violations of the federal Truth in Lending Act
and Regulation Z. on the theory that the 90-day notice period required for
termination of AFCA membership was not properly disclosed. The sole defendant in
BankFirst case is BankFirst, N.A., a bank that issued a VISA credit card made
available through the AFCA program.
15
On May 4, 2000, the court in the BankFirst case granted BankFirst's motion
for summary judgment and entered a judgment terminating the case in favor of
BankFirst and against plaintiff Mitchell. Plaintiff Mitchell subsequently filed
a notice of appeal to the United States Court of Appeals for the Ninth Circuit.
Oral argument on the appeal was held on November 6, 2001.
By Memorandum dated November 21, 2001, the Ninth Circuit affirmed, in part,
and vacated, in part, the judgment entered by the district court, and remanded
the Bankfirst case to the district court for further proceedings. Among other
things, the Ninth Circuit held that the district court erred in failing to grant
Mitchell's motion for additional discovery pursuant to Rule 56(f) of the Federal
Rules of Civil Procedure.
On December 28, 2001, plaintiff Mitchell moved for class certification. By
order entered February 20, 2002, the district court deferred ruling on
Mitchell's motion for class certification pending completion of discovery and
the filing of cross motions for summary judgment. The parties expect to file
their cross-motions for summary judgment in late 2002.
Roe Litigation
On March 8, 2001, UICI and UCNB were named as defendants in a case (Timothy
M. Roe v. Phillip A. Gray, American Fair Credit Association, Inc., UICI, UCNB,
et al) filed in the U.S. District Court for the District of Colorado. On his own
behalf and on behalf of a purported class of similarly situated individuals,
plaintiff in connection with the AFCA credit card program has alleged breach of
contract and violations of the federal Credit Repair Organizations Act and the
Truth-In-Lending Act and seeks certain declaratory relief.
On October 10, 2001, the Court granted the motion of UICI, UCNB and each of
the other named defendants to stay the litigation (the "Colorado action")
pending arbitration pursuant to the Federal Arbitration Act. Accordingly, the
court in the Colorado action entered an order administratively retiring the
Colorado action from its docket subject to reactivation for good cause shown.
The defendants had previously filed a petition to compel arbitration against the
individual named plaintiff in the United States District Court for the Eastern
District of North Carolina, the judicial district wherein the named plaintiff
resides. The petitions to compel arbitration are pending.
Two defendants unaffiliated with UICI timely appealed from the Colorado
District Court's order, arguing that the Colorado court should have decided the
merits of the arbitration controversy rather than defer to the Eastern District
of North Carolina. On April 22, 2002, UICI and the remaining defendants timely
filed their opposition briefs to the unaffiliated defendants' appeal.
On April 8, 2002, a hearing was held in the Eastern District of North
Carolina regarding plaintiff's request for discovery in connection with
plaintiff's contention that the arbitration agreements are unenforceable because
they impose prohibitive costs on plaintiff. By order entered April 9, 2002, the
Eastern District of North Carolina held that cost is not a viable issue to
oppose arbitration in light of UICI's offer to bear the forum-imposed costs
arising from any arbitration between UICI and plaintiff. Further, the Eastern
District of North Carolina ordered the parties to file cross-motions for summary
judgment on or before May 10, 2002. The Eastern District of North Carolina held
in reserve plaintiff's request for discovery on other issues pending its
decision on the contemplated summary judgment motions.
The Company intends to pursue arbitration in North Carolina of the
individual plaintiff's claims (as set forth in the complaint in the Colorado
action). The Company believes that it has meritorious defenses to these
allegations and intends to vigorously contest these allegations in the proper
forum.
State of Connecticut Investigation
As previously disclosed, on April 19, 2000, the Connecticut Attorney
General's Office served upon UCNB a Civil Investigative Demand, seeking
information regarding UCNB's credit card fees, disclosures, marketing practices,
affinity relationships and the handling of payments from consumers to UCNB. On
May 26, 2000, UCNB submitted a timely response to the information request.
16
Comptroller of the Currency Consent Order
As previously disclosed, the Company is subject to a Consent Order,
initially issued by the United States Office of the Comptroller of the Currency
(the "OCC") on June 29, 2000 and as modified on January 29, 2001, confirming the
obligations of the Company to assume all obligations of UCNB. Until January 29,
2001, UCNB was a special purpose national bank headquartered in Sioux Falls,
South Dakota, and an indirect wholly owned (except for directors' qualifying
shares) subsidiary of the Company. On January 29, 2001, the Company completed
the voluntary liquidation of UCNB, in accordance with the terms of a plan of
voluntary liquidation approved by the OCC.
In the event that UICI fails to comply with the terms of the Consent Order,
as modified, such failure could result in sanctions brought against the Company
and its officers and directors, including the assessment of civil money
penalties and enforcement of the Consent Order in Federal District Court.
New Mexico Class Action Litigation
As previously disclosed, on June 1, 2001, UICI and MEGA were served as
parties defendant in a purported class action (Frances C. Chandler, Individually
and as a Representative of a Class of Similarly Situated Persons, vs. PFL Life
Insurance Company, UICI, The MEGA Life and Health Insurance Company, et al.)
initially filed on January 12, 2001 and pending in United States District Court
for the District of New Mexico (Albuquerque). On her own behalf and on behalf of
an alleged class of similarly situated individuals, plaintiff has alleged that
sales materials associated with a group hospital benefit health insurance plan
sponsored, marketed, underwritten, reinsured and/or administered by defendants
contained incomplete, inaccurate, misleading and/or false statements, and that
benefits and treatment were denied plaintiffs with attendant credit damage, pain
and suffering and loss of enjoyment. Plaintiffs have alleged, among other
things, breach of contract, misrepresentation, breach of fiduciary duties,
unjust enrichment, and the violation of the duty of good faith and fair dealing.
Plaintiffs initially brought the case in New Mexico state court, and the
case was subsequently removed to federal court on the basis of diversity and
amount in controversy. Defendants filed an answer denying all claims on July 6,
2001, and the Court subsequently granted plaintiffs' motion to remand the case
back to state court. Since this class action suit is in a preliminary stage, no
discovery has been conducted and the Company is unable at this time to assess
its ultimate exposure, if any, in the case.
United Credit National Bank Shareholder Derivative Litigation
As previously disclosed, various former directors and officers of United
Credit National Bank have been named as defendants in a shareholder derivative
action (William K. Lester, on behalf of United Credit National Bank, v. Ronald
L. Jensen, Gregory T. Mutz, et al), which was filed on June 29, 2001 and is
pending in the District Court of Harris County, Texas. The plaintiff has
asserted on behalf of UCNB various derivative claims brought against the
individual defendants, alleging, among other things, negligence in connection
with the operations of UCNB. In December 2000, plaintiff made a demand on the
Board of Directors of United Credit National Bank to investigate and assess
certain alleged derivative claims. The Board of Directors constituted a special
committee to investigate and assess the asserted derivative claims, and the
special committee determined that the claims were wholly without merit.
A number of defendants have filed special appearances challenging the
Court's personal jurisdiction, and the remaining defendants who have been served
in the case have filed a motion to transfer the case to Texas state court in
Dallas. Several individual defendants have not yet been personally served in the
case. In January 2002, the derivative plaintiff consented to the entry of an
order granting defendants' motion to transfer the case to Texas state court in
Dallas and the case has been formally transferred to the state court in Dallas.
UICI has agreed to advance the expenses of the individual defendants
incurred in connection with the defense of the case, subject to the defendants'
undertaking to repay such advances unless it is ultimately determined that they
are or would have been entitled to indemnification by UICI under the terms of
the Company's bylaws.
17
Academic Management Services Corp. Class Action Litigation
As previously disclosed, Academic Management Services Corp. (formerly
Education Finance Group, Inc.) has been named as a party defendant in a
purported class action suit (Timothy A. McCulloch, et al. v. Educational Finance
Group Inc. et al) filed on June 20, 2001 in the United States District Court for
the Southern District of Florida (Miami). On his own behalf and on behalf of an
alleged class of similarly situated individuals, plaintiff has alleged, among
other things, that, in connection with the marketing and origination of
federally-insured Parent Plus student loans, AMS and other defendants violated
certain provisions of the federal Higher Education Act, were negligent,
committed mail and wire fraud, breached a fiduciary duty owed to plaintiffs and
made negligent misrepresentations.
On October 19, 2001, the Court granted defendants' motion to dismiss the
case in its entirety, dismissing with prejudice plaintiffs' claims under the
Higher Education Act and dismissing without prejudice plaintiffs' state law
claims. The District Court subsequently denied plaintiffs' motion for
reconsideration/rehearing. On December 27, 2001, plaintiffs appealed the
District Court's ruling and filed an appeal with the United States Court of
Appeals for the Eleventh Circuit in Atlanta, Georgia. Plaintiffs also filed a
parallel state class action complaint in the Eleventh Judicial Circuit, Dade
County, Florida. The state class action complaint asserts essentially the same
tort causes of action previously dismissed by the federal District Court and
adds a claim alleging violations of the Florida state deceptive trade practices
statute. On April 9, 2002, the court in the Florida state action granted AMS'
petition for a stay in the state court proceedings pending resolution of the
federal action.
The Company believes that the claims are wholly without merit, and AMS
intends to vigorously contest the case.
Other Matters
The Company and its subsidiaries are parties to various other pending legal
proceedings arising in the ordinary course of business, including some asserting
significant damages arising from claims under insurance policies, disputes with
agents and other matters. Based in part upon the opinion of counsel as to the
ultimate disposition of such lawsuits and claims, management believes that the
liability, if any, resulting from the disposition of such proceedings will not
be material to the Company's financial condition or results of operations.
NOTE J - SEGMENT INFORMATION
The Company's operating segments included in operations are: (i) Insurance,
which includes the businesses of the Self Employed Agency Division, the Group
Insurance Division (formerly the Company's Student Insurance Division, which
includes the operations of the Company's recently-acquired STAR HRG business
unit effective February 28, 2002), the Life Insurance Division (formerly the
Company's OKC Division) and the Senior Market Division, (ii) Financial Services,
which includes the businesses of Academic Management Services Corp. ("AMS") and
the Company's investment in Healthaxis, Inc., and (iii) Other Key Factors.
Other Key Factors includes (a) investment income not allocated to other
business segments, (b) interest expense on non-student loan indebtedness, (c)
general expenses relating to corporate operations, (d) realized gains or losses
on sale of investments (e) the operations of the Company's AMLI Realty Co.
subsidiary (including AMLI Realty Co.'s 20% equity interest in AMLI Commercial
Properties Trust, a private real estate investment trust), (f) minority
interest, (g) variable stock-based compensation, (h) operations that do not
constitute reportable operating segments (consisting primarily of the remaining
portion of the Company's former TPA Division) and (i) amortization of goodwill
(with respect to periods ended prior to January 1, 2002). Allocations of
investment income and certain general expenses are based on a number of
assumptions and estimates, and the business segments reported operating results
would change if different methods were applied. Certain assets are not
individually identifiable by segment and, accordingly, have been allocated by
formulas. Segment revenues include premiums and other policy charges and
considerations, net investment income, fees and other income. Depreciation
expense and capital expenditures are not considered material. Management does
not allocate income taxes to segments. Transactions between reportable operating
segments are accounted for under respective agreements, which provide for such
transactions generally at cost.
18
Revenues from continuing operations, income from continuing operations
before federal income taxes, and assets by operating segment are set forth in
the tables below:
THREE MONTHS ENDED
MARCH 31,
--------------------------
2002 2001
--------- ---------
(IN THOUSANDS)
Revenues
Insurance:
Self Employed Agency Division ........... $ 215,776 $ 156,521
Group Insurance Division ................ 41,645 27,993
Life Insurance Division ................. 19,920 23,365
Senior Market Division .................. 437 --
--------- ---------
277,778 207,879
--------- ---------
Financial Services:
Academic Management Services Corp. ...... 26,475 37,397
--------- ---------
Other Key Factors ......................... 4,217 6,980
Intersegment Eliminations ................. (137) (1,030)
--------- ---------
Total revenues from continuing operations .... $ 308,333 $ 251,226
========= =========
THREE MONTHS ENDED
MARCH 31,
--------------------------
2002 2001
--------- ---------
(IN THOUSANDS)
Income (loss) from continuing operations before federal income taxes:
Insurance:
Self Employed Agency Division ........................................ $ 18,333 $ 17,572
Group Insurance Division ............................................. 2,060 459
Life Insurance Division .............................................. 2,761 3,796
Senior Market Division ............................................... (1,385) --
--------- ---------
21,769 21,827
--------- ---------
Financial Services:
Academic Management Services Corp. .................................. 4,183 269
Equity in Healthaxis, Inc. operating loss ............................ (174) (2,079)
--------- ---------
4,009 (1,810)
--------- ---------
Other Key Factors:
Investment income on equity, realized gains and losses,
general corporate expenses and other (including
interest expense on non-student loan indebtedness).................. (3,467) 620
Variable stock-based compensation .................................... (4,511) 190
Goodwill amortization ................................................ -- (1,129)
--------- ---------
(7,978) (319)
--------- ---------
Total income from continuing operations before federal income taxes ....... $ 17,800 $ 19,698
========= =========
19
MARCH 31, DECEMBER 31,
2002 2001
---------- ------------
(IN THOUSANDS)
Assets
Insurance:
Self Employed Agency Division .............. $ 656,993 $ 613,884
Group Insurance Division ................... 128,095 100,978
Life Insurance Division .................... 735,872 771,143
Senior Market Division ..................... 9,563 --
---------- ----------
1,530,523 1,486,005
---------- ----------
Financial Services:
Academic Management Services Corp. ......... 1,665,099 1,557,434
Investment in Healthaxis, Inc. ............. 8,121 8,278
---------- ----------
1,673,220 1,565,712
---------- ----------
Other Key Factors:
General corporate and other ................ 106,583 143,505
Goodwill and other intangible assets ....... 119,179 86,010
---------- ----------
225,762 229,515
---------- ----------
Total assets ..................................... $3,429,505 $3,281,232
========== ==========
NOTE K - RELATED PARTY TRANSACTIONS
Historically, the Company and its subsidiaries have engaged from time to
time in transactions and joint investments with executive officers and entities
controlled by executive officers, particularly Ronald L. Jensen (the Company's
Chairman) and entities in which Mr. Jensen and his adult children have an
interest.
Transfer of Interest in Sun Litigation
As previously disclosed, UICI and Ronald L. Jensen (the Company's Chairman)
are parties to litigation (Sun Communications, Inc. v. SunTech Processing
Systems, LLC, UICI, Ronald L. Jensen, et al) (the "Sun Litigation") with a third
party concerning the distribution of the cash proceeds from the sale and
liquidation of SunTech Processing Systems, LLC ("STP") assets in February 1998.
Effective April 2, 2002, the Company and Mr. Jensen entered into an
Assignment and Release Agreement, which is intended to effectively transfer the
Company's 80% interest in STP to Mr. Jensen and to terminate the Company's
active participation in, and limit the Company's financial exposure associated
with, the Sun Litigation. In accordance with the terms of the Assignment and
Release Agreement, on April 2, 2002 Mr. Jensen made a total payment to UICI of
$15.6 million and granted to UICI various indemnities against possible losses
which UICI might incur resulting from the Sun Litigation, including (i) any
losses arising from the breach of fiduciary duty claim asserted by Sun
Communications, Inc. ("Sun") against the Company and Sun's related claim for
attorneys' fees, (ii) Sun's claim for attorneys' fees arising out of the
distribution issue in the Sun Litigation, and (iii) all other claims of any
nature asserted by Sun against the Company in the Sun Litigation arising out of
or relating directly to the March 1997 agreement governing the distribution of
cash proceeds from the sale and liquidation of STP. In exchange therefor, (i)
UICI assigned to Mr. Jensen all of UICI's right, title and interest to the funds
held in the registry of the Court in the Sun Litigation and released Mr. Jensen
from any and all obligations arising under the Jensen 1996 Guaranty and the
Assurance Agreement; (ii) UICI granted to Mr. Jensen an option, exercisable at a
nominal exercise price, to transfer to Mr. Jensen UICI's 80% interest in STP;
and (iii) UICI granted to Mr. Jensen an irrevocable proxy to vote UICI's
membership interest in STP all matters coming before the members of STP for a
vote.
For financial reporting purposes, the Company will record no gain or loss in
connection with this transaction.
Release of Ronald L. Jensen
As previously disclosed, on June 1, 1999, the Company was named as a nominal
defendant in a shareholder derivative action captioned Richard Schappel v. UICI,
Ronald Jensen, Richard Estell, Vernon Woelke, J. Michael Jaynes, Gary Friedman,
John Allen, Charles T. Prater, Richard Mockler and Robert B. Vlach, which was
filed in the District Court of Dallas County, Texas (the "Shareholder Derivative
Litigation").
20
On December 21, 2001, the District Court of Dallas County, Texas, approved
the terms of a Settlement Agreement and Mutual Release between UICI and each of
Richard J. Estell, Vernon Woelke, J. Michael Jaynes, Gary L. Friedman, John E.
Allen, Charles T. Prater, Richard T. Mockler, and Robert B. Vlach (collectively,
the "Individual Defendants"), on the one hand, and Richard Schappel and Mr.
Schappel's counsel, on the other hand. Pursuant to the Settlement Agreement, the
parties reached agreement with respect to the payment of attorneys' fees and
expenses on termination of the Shareholder Derivative Action, and the Court also
entered a Modified Final Judgment in the case, vacating certain findings of fact
that formed a part of an earlier ruling by the Court rendered on October 14,
2001. The Settlement Agreement and the Modified Final Judgment had the effect of
fully and finally resolving the matters in dispute in the Shareholder Derivative
Litigation between UICI and the Individual Defendants, on the one hand, and Mr.
Schappel, on the other hand. The terms of the settlement did not have a material
effect on the results of operations or financial condition of UICI.
In accordance with the terms of a Release Agreement, dated as of April 2,
2002, the Company agreed to release Mr. Jensen from any and all claims that the
derivative plaintiff in the Shareholder Derivative Litigation brought or could
have brought against Mr. Jensen on behalf of UICI in the Shareholder Derivative
Litigation, and Mr. Jensen agreed to waive and release UICI from any obligation
to indemnify Mr. Jensen for any future costs and/or out-of-pocket expenses
associated with any claims that the derivative plaintiff brought or could have
brought against Mr. Jensen in the Shareholder Derivative Litigation.
NOTE L - EMPLOYEE AND AGENT STOCK ACCUMULATION PLANS
UICI Employee Stock Ownership and Savings Plan
The Company maintains for the benefit of its and its subsidiaries' employees
the UICI Employee Stock Ownership and Savings Plan (the "Employee Plan"). The
Employee Plan through its 401(k) feature enables eligible employees to make
pre-tax contributions to the Employee Plan in an amount not in excess of 15% of
compensation (subject to overall limitations) and to direct the investment of
such contributions among several investment options, including UICI common
stock. A second feature of the Employee Plan constitutes an employee stock
ownership plan (the "ESOP"), contributions to which are invested primarily in
shares of UICI common stock. The ESOP feature allows participants to receive
from UICI and its subsidiaries discretionary matching contributions and to share
in certain supplemental contributions made by UICI and its subsidiaries.
Contributions by UICI and its subsidiaries to the Employee Plan under the ESOP
feature currently vest in prescribed increments over a seven-year period.
On August 11, 2000, the Company issued to the Employee Plan 1,610,000 shares
of UICI common stock at a purchase price of $5.25 per share or $8.5 million in
the aggregate. The purchase price for the shares was paid by delivery to UICI of
the Employee Plan's $8.5 million promissory note (the "Plan Note"), which
matures in three years and is secured by a pledge of the purchased shares. The
shares of UICI common stock purchased with the Plan Note (the "$5.25 ESOP
Shares") are held in a suspense account for allocation among participants as and
when the Company's matching and supplemental contributions to the ESOP are made.
It is expected that the Plan Note will be extinguished over a period of
approximately two years by crediting the Company's matching and supplemental
contribution obligations under the ESOP feature of the Employee Plan against
principal and interest due on the Plan Note.
During the three months ended March 31, 2002, the Company recorded
compensation expense associated with contributions to the Employee Plan in the
amount of $3.2 million, of which $2.0 million was recorded as non-cash variable
stock-based compensation expense. The amount classified as variable stock-based
compensation expense with respect to the Employee Plan represented the
incremental compensation expense associated with the allocation during the three
months ended March 31, 2002 of 217,102 $5.25 Shares to fund the Company's
matching and supplemental contributions to participants' accounts in the ESOP.
As and when the Company makes matching and supplemental contributions to the
ESOP by allocating to participants' accounts these $5.25 ESOP Shares, the
Company will continue to record additional non-cash compensation expense equal
to the excess, if any, between the fair value of the shares allocated and $5.25
per share. The allocated $5.25 ESOP Shares are considered outstanding for
purposes of the computation of earnings per share. The Company currently
estimates that all of the remaining 413,000 unallocated $5.25 ESOP Shares will
be allocated to participants' ESOP accounts during 2002. At March 31, 2002, the
excess between the fair value of the 413,000 unallocated $5.25 ESOP Shares and
such shares at $5.25 per share totaled $5.7 million.
21
Agent Stock Accumulation Plans
The Company sponsors a series of stock accumulation plans (the "Agent
Plans") established for the benefit of the independent insurance agents and
independent sales representatives associated with UGA - Association Field
Services, New United Agency, Cornerstone Marketing of America and CFLD
Association Field Services.
The Agent Plans generally combine an agent-contribution feature and a
Company-match feature. The agent-contribution feature generally provides that
eligible participants are permitted to allocate a portion (subject to prescribed
limits) of their commissions or other compensation earned on a monthly basis to
purchase shares of UICI common stock at the fair market value of such shares at
the time of purchase. Under the Company-match feature of the Agent Plans,
participants are eligible to have posted to their respective Agent Plan accounts
book credits in the form of equivalent shares based on the number of shares of
UICI common stock purchased by the participant under the agent-contribution
feature of the Agent Plans. The "matching credits" vest over time (generally in
prescribed increments over a ten-year period, commencing the plan year following
the plan year during which contributions are first made under the
agent-contribution feature), and vested matching credits in a participant's plan
account in January of each year are converted from book credits to an equivalent
number of shares of UICI common stock. Matching credits forfeited by
participants no longer eligible to participate in the Agent Plans are
reallocated each year among eligible participants and credited to eligible
participants' Agent Plan accounts.
The Agent Plans do not constitute qualified plans under Section 401(a) of
the Internal Revenue Code of 1986 or employee benefit plans under the Employee
Retirement Income Security Act of 1974 ("ERISA"), and the Agent Plans are not
subject to the vesting, funding, nondiscrimination and other requirements
imposed on such plans by the Internal Revenue Code and ERISA.
Prior to July 1, 2000, the Company granted matching credits in an amount
equal to the number of shares of UICI common stock purchased by the participant
under the agent-contribution feature of the Agent Plans. Effective July 1, 2000,
the Company modified the formula for calculating the number of matching credits
to be posted to participants' accounts. During the period beginning July 1, 2000
and ending on the earlier of June 30, 2002 or the date that an aggregate of
2,175,000 share equivalents have been granted under this revised formula, the
number of matching credits issued to an individual participant will be the
greater of (a) the number of matching credits determined each month by dividing
the dollar amount of the participant's contribution for that month by $5.25, or
(b) the actual number of shares acquired, at then-current fair market value, by
the participant's contribution amount.
Prior to July 1, 2000, the Company purchased UICI shares in the open market
from time to time to satisfy its commitment to issue its shares upon vesting of
matching credits under the Agent Plans. During the period beginning July 1, 2000
and ending June 30, 2002, the Company will utilize up to 2,175,000 newly-issued
shares to satisfy its commitment to deliver shares that will vest under the
Company-match feature of the Agent Plans. Under the arrangement effective July
1, 2000, the Company's subsidiaries will transfer to the Company $5.25 per share
for any newly issued shares utilized to fund vested matching credits under the
Plans.
For financial reporting purposes, the Company accounts for the Company-match
feature of its Agent Plans under EITF 96-18 "Accounting for Equity Instruments
that are issued to Other Than Employees for Acquiring or in Connection with
Selling Goods and Services," by recognizing commission expense over the vesting
period in an amount equal to the fair market value of vested shares at the date
of their vesting and distribution to the participants. At each quarter-end, the
Company estimates its current liability for unvested matching credits by
reference to the number of unvested credits, the current market price of the
Company's common stock, and the Company's estimate of the percentage of the
vesting period that has elapsed up to the current quarter end. Changes in the
liability from one quarter to the next are accounted for as an increase in, or
decrease to, commission expense, as the case may be. Upon vesting, the Company
releases the accrued liability (equal to the market value of the vested shares
at date of vesting) with a corresponding increase to paid-in capital. Unvested
matching credits are considered share equivalents outstanding for purposes of
the computation of earnings per share. For the three months ended March 31,
2002, the Company recorded total commission expense associated with these agent
plans in the amount of $3.3 million, of which $1.8 million represented the
non-cash stock based compensation expense associated with the adjustment to the
liability for future unvested benefits.
22
At December 31, 2001, the Company had recorded approximately 1.6 million
unvested matching credits associated with the Agent Plans of which 596,000
vested in January 2002. At March 31, 2002, the Company had recorded
approximately 1.4 million of unvested matching credits.
The accounting treatment of the Company's Agent Plans will result in
unpredictable stock-based commission expense charges, dependent upon
fluctuations in the quoted price of UICI common stock. These unpredictable
fluctuations in stock based commission charges may result in material non-cash
fluctuations in the Company's results of operations. In periods of general
decline in the quoted price of UICI common stock, if any, the Company will
recognize less stock based commission expense than in periods of general
appreciation in the quoted price of UICI common stock. In addition, in
circumstances where increases in the quoted price of UICI common stock are
followed by declines in the quoted price of UICI common stock, negative
commission expense may result as the Company adjusts the cumulative liability
for unvested stock-based commission expense.
Other Variable Stock-Based Compensation Plans
Effective August 15, 1998, the Company's Chairman agreed to contribute the
value of 100,000 shares of UICI stock to all agents and employees of UICI and
certain others as of August 15, 1998. The value of these shares vest at August
15, 2002. The value of these shares will be distributed in cash per capita at
the time of vesting to those employees and agents who were employed or engaged
by the Company on August 15, 1998 and remain employed or engaged on the vesting
date. At December 31, 2001 and March 31, 2002, the Company's liability for this
future compensation was $1.1 million and $1.6 million, respectively, and the
increase in the liability ($500,000) was recorded as non-cash stock based
compensation expense in the three months ended March 31, 2002.
In January 2000, the Company established a plan, pursuant to which 25% of
the cash equivalent value of 100,000 shares of UICI common stock will be
distributed to eligible employees in each of January 2001, 2002, 2003 and 2004.
At December 31, 2001 and March 31, 2002, the Company's liability for this
compensation was $731,000 and $622,000, respectively, and $213,000 was recorded
as non-cash stock based compensation expense in the three months ended March 31,
2002.
NOTE M - SUBSEQUENT EVENT
On April 25, 2002, the Company sold its 50% ownership interest in Resolution
Reinsurance Intermediaries, LLC ("Res Re"), a reinsurance intermediary formerly
constituting a part of the Company's Special Risk business unit. The purchaser
of the 50% interest constituted the remaining 50% equity holder in Res Re and
the unit's chief executive officer. The sale was structured as a liquidation by
Res Re of UICI's 50% ownership interest for a total liquidation price of
$650,000, payable at closing in cash in the amount of $150,000 and by delivery
of a promissory note issued by Res Re in the amount of $500,000. The note bears
interest, payable quarterly, at 5.00% per annum, is payable in annual principal
installments in the amount of $75,000 on each of March 31, 2003; March 31, 2004;
and March 31, 2005, with a final balloon payment of principal due on March 31,
2006, and is secured by a pledge of 100% of the membership interest in Res Re.
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The Company's business segments included in operations are: (i) Insurance,
which includes the businesses of the Self Employed Agency Division, the Group
Insurance Division (formerly the Company's Student Insurance Division, which
includes the operations of the Company's recently acquired STAR HRG business
unit effective February 28, 2002), the Life Insurance Division (formerly the
Company's OKC Division) and the Senior Market Division, (ii) Financial Services,
which includes the businesses of Academic Management Services Corp. ("AMS") and
the Company's investment in Healthaxis, Inc. , and (iii) Other Key Factors,
which includes (a) investment income not allocated to other business segments,
(b) interest expense on non-student loan indebtedness, (c) general expenses
relating to corporate operations, (d) realized gains or losses on sale of
investments, (e) the operations of the Company's AMLI Realty Co. subsidiary
(including AMLI Realty Co.'s 20% equity interest in AMLI Commercial Properties
Trust, a private real estate investment trust), (f) minority interest, (g)
variable stock-based compensation, (h) operations that do not constitute
reportable operating segments (consisting primarily of the remaining portion of
the Company's former TPA Division) and (i) amortization of goodwill (with
respect to periods ended prior to January 1, 2002). Allocation of investment
income is based on a number of assumptions and estimates and the
23
business segments reported operating results would change if different methods
were applied. Segment revenues include premiums and other policy charges and
considerations, net investment income, fees and other income.
On March 17, 2000 the Board of Directors of UICI determined, after a
thorough assessment of the unit's prospects, that the Company would exit from
its United CreditServ sub-prime credit card business. In September 2000, the
Company completed the sale of substantially all of United CreditServ's non-cash
assets, and in January 2001 the Company completed the voluntary liquidation of
UCNB, in accordance with the terms of a plan of voluntary liquidation approved
by the OCC. Accordingly, the United CreditServ unit has been reflected as a
discontinued operation for financial reporting purposes for all periods
presented.
The Company has determined to exit the businesses of its Special Risk
Division by sale, abandonment and/or wind-down and, accordingly, in December
2001 the Company designated and has classified its Special Risk Division as a
discontinued operation for financial reporting purposes for all periods
presented. The Company's Special Risk Division has specialized in certain niche
health-related products (including "stop loss", marine crew accident, organ
transplant and international travel accident products), various insurance
intermediary services and certain managed care services.
On January 17, 2002, the Company completed the sale of UICI Administrators,
Inc., the major component of the TPA Division. In the three months ended
December 31, 2001, the Company recognized an impairment charge of $2.3 million
to its long-lived assets associated with the UICI Administrators, Inc. unit, of
which $700,000 represented a write-down of fixed assets (which was reflected in
depreciation for the full year and fourth quarter of 2001) and $1.6 million
represented a write-down of goodwill (which was reflected in goodwill
amortization for the full year and fourth quarter of 2001). As a result of the
charge in the fourth quarter of 2001, the Company recognized no gain or loss on
the sale of UICI Administrators, Inc. Through January 17, 2002 (the date of
sale), the UICI Administrators, Inc. unit reported income in the amount of
$67,000 net of tax.
In accordance with FASB Statement 144, the results of operations of UICI
Administrators, Inc. have been reflected in discontinued operations for all
periods presented. The remaining portion of the former TPA Division (consisting
primarily of Barron Risk Management, Inc.) has been reclassified to the
Company's Other Key Factors segment for all periods presented.
Revenues and income from continuing operations before federal income taxes
("operating income") by business segment are summarized in the tables below:
THREE MONTHS ENDED
MARCH 31,
--------------------------
2002 2001
--------- ---------
(IN THOUSANDS)
Revenues
Insurance:
Self Employed Agency Division ........... $ 215,776 $ 156,521
Group Insurance Division ................ 41,645 27,993
Life Insurance Division ................. 19,920 23,365
Senior Market Division .................. 437 --
--------- ---------
277,778 207,879
--------- ---------
Financial Services:
Academic Management Services Corp. ...... 26,475 37,397
--------- ---------
Other Key Factors ......................... 4,217 6,980
Intersegment Eliminations ................. (137) (1,030)
--------- ---------
Total revenues from continuing operations .... $ 308,333 $ 251,226
========= =========
24
THREE MONTHS ENDED
MARCH 31,
------------------------
2002 2001
-------- --------
(IN THOUSANDS)
Income (loss) from continuing operations before federal income taxes:
Insurance:
Self Employed Agency Division ........................................ $ 18,333 $ 17,572
Group Insurance Division ............................................. 2,060 459
Life Insurance Division .............................................. 2,761 3,796
Senior Market Division ............................................... (1,385) --
-------- --------
21,769 21,827
-------- --------
Financial Services:
Academic Management Services Corp. ................................... 4,183 269
Equity in Healthaxis, Inc. operating loss ............................ (174) (2,079)
-------- --------
4,009 (1,810)
-------- --------
Other Key Factors:
Investment income on equity, realized gains and losses,
general corporate expenses and other (including
interest expense on non-student loan indebtedness).................. (3,467) 620
Variable stock-based compensation ................................... (4,511) 190
Goodwill amortization ................................................ -- (1,129)
-------- --------
(7,978) (319)
-------- --------
Total income from continuing operations before federal income taxes ....... $ 17,800 $ 19,698
======== ========
Three Months ended March 31, 2002 compared to Three Months ended March 31, 2001
For the three months ended March 31, 2002, the Company generated revenues
and net income in the amount of $308.3 million and $12.1 million ($0.25 per
diluted share), respectively, compared to revenues and net income of $251.2
million and $12.1 million ($0.25 per diluted share), respectively, in the
corresponding three-month period of 2001, including income or (loss) from
discontinued operations in the three months ended March 31, 2002 and 2001 in the
amount of $67,000 ($-0- per diluted share) and $(897,000) ($(0.02) per diluted
share), respectively. In the three months ended March 31, 2002, the Company
reported income from continuing operations of $12.1 million ($0.25 per diluted
share), compared to income from continuing operations of $13.0 million ($0.27
per diluted share) in the three months ended March 31, 2001.
In the three months ended March 31, 2002, the Company's Insurance Segment
reported moderate increases in operating income at the Company's Self Employed
Agency and Group Insurance Divisions, which increases were offset by a decrease
in operating income at the Company's Life Insurance Division and $1.4 million of
operating loss associated with the Senior Market Division initiative, in each
case compared to the corresponding period of the prior year. In the first
quarter of 2002, the Company also reported a significant quarter-over-quarter
increase in operating results at the Company's Academic Management Services
Corp. unit (which recorded $4.2 million of operating income in the first quarter
of 2002 compared to operating income of $269,000 in the comparable 2001 period).
Overall results in the first quarter of 2002 were adversely impacted by a
decrease in unallocated investment income and increase in corporate expense.
Results in the first quarter of 2002 were also negatively impacted by a
significant increase in non-cash stock-based compensation expense associated
with the Company's employee stock ownership plan, agent stock accumulation plans
and other stock based plans, which increase was attributable to the favorable
market performance of the Company's stock in the first quarter of 2002. In the
quarter ended March 31, 2002, the Company recorded non-cash stock-based
compensation expense in the amount of $(4.5) million ($(0.08) per diluted share,
net of tax), compared to non-cash stock-based compensation income of $190,000
($-0- per diluted share) in the quarter ended March 31, 2001.
Self-Employed Agency ("SEA") Division
Operating income at UICI's Self Employed Agency ("SEA") Division increased
to $18.3 million for the three months ended March 31, 2002 from $17.6 million
for the comparable 2001 period. In the 2002 period, SEA continued to experience
significant increases in submitted annualized premium volume ($227.2 million in
the first quarter of 2002 compared to $123.6 million in the first quarter of
2001), which in any period is the aggregate
25
annualized premium amount associated with health insurance applications
submitted by the Company's agents in such period for underwriting by the
Company. Earned premium revenue at SEA increased from $144.6 million in the
first quarter of 2001 to $203.2 million in the first quarter of 2002, a 40.1%
increase. Operating income as a percentage of earned premium revenue decreased
to 9.0% in the 2002 quarter from 12.2% in the comparable 2001 period. This
decrease in operating margin was attributable primarily to the higher commission
expense associated with the significant increase in first year earned premium
revenue, offset by a nominal decrease in loss ratio (60.6% for three months
ended March 31, 2001 compared to 59.8% for the three months ended March 31,
2002).
Group Insurance Division
The Company has classified the results of its Student Insurance Division and
its STAR HRG unit (which was acquired on February 28, 2002) as its Group
Insurance Division. For the three months ended March 31, 2002, the Group
Insurance Division reported operating income of $2.1 million compared to
operating income of $459,000 in 2001. The increase in operating income at the
Group Insurance Division for the three months ended March 31, 2002, compared to
the corresponding period in 2001, was primarily attributable to an increase in
earned premium revenue and decrease in administrative expenses as a percentage
of earned premium (offset by a nominal increase in the loss ratio) at the
Student Insurance Division. The Company also benefited from the incremental
operating income attributable to the recently acquired STAR HRG unit.
Life Insurance Division
For the three months ended March 31, 2002, the Company's Life Insurance
Division (which includes the results of the Company's OKC life insurance
operations and its College Fund Life Division) reported operating income of $2.8
million compared to operating income of $3.8 million in 2001. The decrease in
operating income for the three months ended March 31, 2002 was primarily
attributable to unfavorable experience in the group accident block of business,
increased administrative expenses associated with the OKC division and decreased
production from the College Fund Life Division.
Senior Market Division
For financial reporting purposes the Company has established a Senior Market
Division to segregate the reporting of expenses incurred in connection with the
development of insurance products for the senior market (including long term
care and Medicare supplement products), and the development of distribution
channels for the products. Through March 31, 2002, the Company has realized
nominal revenues associated with this Division, and the Company has expensed all
expenditures as they have been incurred.
Academic Management Services Corp. ("AMS")
For the three months ended March 31, 2002, UICI's Academic Management
Services Corp. subsidiary ("AMS") reported operating income of $4.2 million
compared to operating income of $269,000 for the comparable period in 2001. The
significant improvement in operating results for the three months ended March
31, 2002 resulted primarily from increased student loan spread income (i.e., the
difference between interest earned on outstanding student loans and interest
expense associated with indebtedness incurred to fund such loans) attributable
to a favorable interest rate environment and a reduction in interest expense on
corporate borrowings. These increases were offset by lower realized gains on
sale of loans and reduced yields on the trust balances associated with AMS'
tuition installment plan business, in each case as compared to gains realized in
the corresponding 2001 period.
During the latter half of 2001 and the period ending June 30, 2002, AMS
benefited and will continue to benefit significantly from a favorable prescribed
minimum rate earned on its student loan portfolio. The benchmark for yields on
federally guaranteed student loans is reset annually in accordance with
Department of Education regulations effective July 1 for the succeeding
twelve-month period. While yields on student loans are indexed to the 91-day
Treasury bill rate, the benchmark establishes a floor, below which a lender's
yield will not fall during the succeeding twelve-month period. On July 1, 2001,
the floor rates on FFELP loans for the period July 1, 2001 through June 30, 2002
reset 220 basis points lower than the floor rates for the period July 1, 2000
through June 30, 2001. Nevertheless, due to rapidly declining market interest
rates, shortly before September 30, 2001 the rate that AMS earned on its student
loan portfolio again fell to the statutorily prescribed minimum rate, and the
reduced level of prevailing market interest rates over the three months ended
March 31, 2002 had the effect of continuing to reduce AMS' overall borrowing
costs. As a result, AMS' spread income in the first quarter of 2002 in the
amount of
26
$7.9 million exceeded spread income in the fourth quarter of 2001 in the amount
of $6.9 million and spread income of $3.7 million earned in the first quarter of
2001.
On July 1, 2002, the floor rates on loans made under the federal FFELP
student loan program for the period July 1, 2002 through June 30, 2003 will
again be reset. Based on current prevailing market interest rates, the Company
currently expects a decrease in the prescribed floor rates on its student loan
portfolio, and, as a result, AMS believes that spread income in the second half
of 2002 will be significantly less than the level of spread income experienced
in the second half of 2001 and the level of spread income currently expected in
the first six months of 2002. In addition, results at AMS in the fourth quarter
of 2002 will be negatively impacted by the seasonality of its tuition
installment business, which historically has generated its highest levels of fee
income (and operating profits) in the second and third quarters of the calendar
year and an operating loss in the fourth quarter of the calendar year.
Income from AMS' tuition payment programs in the three months ended March
31, 2002 was $2.2 million compared to income in three months ended March 31,
2001 of $2.1 million. For the three months ended March 31, 2002, an increase in
fees attributable to additional tuition payment accounts and the imposition of
late fees on delinquent accounts were offset by a decline in investment income
from tuition payment program funds held in trust, as a result of lower
prevailing market interest rates. Investment income on funds held in connection
with tuition payment programs declined to $1.0 million in the three months ended
March 31, 2002 from $2.2 million in the year earlier period (despite a 43%
increase in the average trust fund balance). AMS' tuition payment program
business has historically generated its highest levels of fee income (and
operating profits) in the second and third quarters of the calendar year and an
operating loss in the fourth quarter of the calendar year.
Operating expenses at AMS in the three months ended March 31, 2002 and 2001
were $12.0 million and $14.7 million, respectively. This reduction in operating
expenses was primarily attributable to reduced interest expense associated with
non-student loan indebtedness and reduced administrative expenses. For the three
months ended March 31, 2002, interest expense on non-student loan indebtedness
was $20,000 compared to interest expense on non-student loan indebtedness of
$440,000 in the three months ended March 31, 2001. On June 28, 2001, AMS paid
off its remaining senior indebtedness in the amount of $14.3 million, the
proceeds of which were utilized in 1999 to fund a portion of the purchase price
for AMS' tuition installment business.
AMS sold $58.0 million and $135.4 million principal amount of student loans
during the three months ended March 31, 2002 and 2001, respectively, from which
AMS generated gains on net sales in the amount of $1.0 million and $1.8 million,
respectively. Due to the inherent uncertainty surrounding spread income and the
seasonality of its tuition installment business, in any given financial period
AMS may continue to rely on gains from timely sales of student loans to remain
profitable for such period.
Investment in Healthaxis, Inc.
At March 31, 2002, the Company held approximately 46% of the issued and
outstanding shares of Healthaxis, Inc. (HAXS: Nasdaq) ("HAI"). The Company
accounts for its investment in HAI utilizing the equity method and, accordingly,
recognizes its ratable share of HAI income and loss (computed prior to
amortization of goodwill recorded by HealthAxis.com in connection with the
January 7, 2000 merger of Insurdata Incorporated (formerly a wholly-owned
subsidiary of UICI) with and into HealthAxis.com). See Note B of Notes to
Consolidated Condensed Financial Statements.
During the three months ended March 31, 2002, the Company's share of HAI's
operating losses (computed prior to amortization of merger related goodwill) was
$(174,000), compared to its reported share of operating losses of $(2.1) million
in the three months ended March 31, 2001. The Company's carrying value of its
investment in HAI was $8.1 million and $8.3 million at March 31, 2002 and
December 31 2001, respectively.
Other Key Factors
The Other Key Factors category includes (a) investment income not allocated
to other business segments, (b) interest expense on non-student loan
indebtedness, (c) general expenses relating to corporate operations, (d)
realized gains or losses on investments, (e) the operations of the Company's
AMLI Realty Co. subsidiary (including AMLI Realty Co.'s 20% equity interest in
AMLI Commercial Properties Trust, a private real estate investment trust), (f)
minority interest, (g) variable stock-based compensation, (h) operations that do
not constitute reportable operating segments (consisting primarily of the
remaining portion of the Company's former TPA Division) and (i),
27
amortization of goodwill (with respect to periods ended prior to January 1,
2002). For the three months ended March 31, 2002, Other Key Factors reported an
operating loss of $(8.0) million, compared to an operating loss of $(319,000) in
2001. This increase in operating loss was attributable to various factors,
including a $1.8 million decrease in investment income not allocated to other
segments (which in turn resulted from a decrease in yield on invested assets and
a decrease in amount available for investment due to acquisitions made in the
first quarter of 2002), a $1.9 million increase in corporate expenses, a
$856,000 impairment charge on the Company's investment portfolio, and an
increase in variable stock-based compensation of $4.7 million (see discussion
below). These factors contributing to the increase in Other Key Factors
operating loss in the three months ended March 31, 2002 were offset by the
positive impact of the non-amortization of goodwill as required by FASB
Statement 142 for all periods after January 1, 2002. In the three months ended
March 31, 2001, the Company recorded amortization of goodwill in the amount of
$1.1 million.
Variable Stock-Based Compensation
The Company maintains for the benefit of its employees and independent
agents various stock-based compensation plans, in connection with which it
records non-cash variable stock-based compensation expense in amounts that
depend and fluctuate based upon the market performance of the Company's common
stock. See Note L of Notes to Consolidated Condensed Financial Statements.
In the quarter ended March 31, 2002, the Company recorded non-cash
stock-based compensation expense in the aggregate amount of $4.5 million
($(0.08) per diluted share, net of tax), of which $2.0 million was attributable
to the ESOP feature of the Company's Employee Stock Ownership and Savings Plan
(the "Employee Plan"), $1.8 million was attributable to the Company's stock
accumulation plans established for the benefit of its independent agents and
$721,000 was attributable to other stock-based plans.
During the quarter ended March 31, 2002, the amount classified as stock
appreciation expense with respect to the Employee Plan represented the
incremental compensation expense associated with the allocation during the
quarter of 217,102 shares previously purchased in 2000 by the Employee Plan from
the Company at $5.25 per share ("$5.25 ESOP Shares") to fund the Company's
matching and supplemental contributions to the ESOP. As and when the Company
makes matching and supplemental contributions to the ESOP by allocating to
participants' accounts these $5.25 ESOP Shares, the Company will continue to
record additional non-cash compensation expense equal to the excess, if any,
between the fair value of the shares allocated and $5.25 per share. The
allocated $5.25 ESOP Shares are considered outstanding for purposes of the
computation of earnings per share. The Employee Plan initially purchased in 2000
an aggregate of 1,610,000 $5.25 ESOP Shares, and the Company currently estimates
that all of the remaining 413,000 unallocated $5.25 ESOP Shares will be
allocated to participants' ESOP accounts during 2002. At March 31, 2002, the
excess between the fair value of the 413,000 unallocated $5.25 ESOP Shares and
such shares at $5.25 per share totaled $5.7 million.
The Company sponsors a series of stock accumulation plans established for
the benefit of the independent insurance agents and independent sales
representatives associated with UGA -- Association Field Services, New United
Agency, Cornerstone Marketing of America, Guaranty Senior Assurance,
SeniorsFirst, CFLD Association Field Services and CFL Agency. The agent plans
generally combine an agent-contribution feature and a Company-match feature.
Under EITF 96-18 "Accounting for Equity Instruments that are issued to Other
Than Employees for Acquiring or in Connection with Selling Goods and Services,"
the Company has established a liability for future unvested benefits under the
plans and adjusts the liability based on the market value of the Company's
common stock. For the three months ended March 31, 2002, the Company recorded
total commission expense associated with these agent plans in the amount of $3.3
million, of which $1.8 million represented the non-cash stock based compensation
expense associated with the adjustment to the liability for future unvested
benefits.
The accounting treatment of the Company's agent plans will continue to
result in unpredictable stock-based compensation charges, primarily dependent
upon future fluctuations in the quoted price of UICI common stock. These
unpredictable fluctuations in stock based compensation charges may result in
material non-cash fluctuations in the Company's results of operations. Unvested
benefits under the agent plans vest in January of each year; accordingly, in
periods of general appreciation in the quoted price of UICI common stock, the
Company's cumulative liability, and corresponding charge to income, for unvested
stock-based compensation is expected to be greater in each successive quarter
during any given year.
28
DISCONTINUED OPERATIONS
The Company's reported results in the three months ended March 31, 2002
reflected income from discontinued operations (consisting of the Company's
former sub-prime credit card unit, the Special Risk Division and the Company's'
UICI Administrators Inc. unit) in the amount of $67,000, compared to a loss from
discontinued operations in the three months ended March 31, 2001 in the amount
of $(897,000).
United CreditServ, Inc.
Through the Company's United CreditServ, Inc. subsidiary ("United
CreditServ"), prior to 2000 the Company marketed credit support services to
individuals with no, or troubled, credit experience and assisted such
individuals in obtaining a nationally recognized credit card. The activities of
United CreditServ were conducted primarily through its wholly-owned subsidiaries
United Credit National Bank ("UCNB") (a special purpose national bank, based in
Sioux Falls, South Dakota, chartered solely to hold credit card receivables);
Specialized Card Services, Inc. (provider of account management and collections
services for all of the Company's credit card programs); United Membership
Marketing Group, Inc. ("UMMG") (a Lakewood, Colorado-based provider of
marketing, administrative and support services for the Company's credit card
programs); and UICI Receivables Funding Corporation ("RFC"), a single-purpose,
bankruptcy-remote entity through which certain credit card receivables were
securitized.
In March 2000, the Board of Directors of UICI, after a thorough assessment
of the unit's prospects, determined that UICI would exit from its United
CreditServ sub-prime credit card business and, as a result, the United
CreditServ unit is reflected as a discontinued operation for financial reporting
purposes for all periods presented effective December 31, 1999. At December 31,
1999, the Company established a liability for loss on the disposal of the
discontinued operation in the amount of $130.0 million (pre-tax), which
liability was included in net liabilities of discontinued operations. The
liability for loss on disposal established by the Company at December 31, 1999
represented the Company's then-current estimate of all additional losses
(including asset write-downs, the estimated loss on the sale of the business
and/or the assets and continuing operating losses through the date of sale) that
it then believed it would incur as part of any sale of the United CreditServ
unit.
Reflecting the terms of the Company's then-pending sale of its United
CreditServ business, during the quarter ended June 30, 2000 the Company recorded
an additional pre-tax loss, and correspondingly increased the liability for loss
on the disposal of the discontinued operation, in the amount of $36.0 million
($23.4 million net of tax). Accordingly, for the full year 2000, the Company
reported a pre-tax loss from discontinued operations in the amount of $36.0
million ($23.4 million net of tax).
During the year ended December 31, 2000, the discontinued operation incurred
a loss from operations in the amount of approximately $131.9 million, which loss
was charged to the liability for loss on disposal. At December 31, 2000, the
remaining assets of the discontinued operations in the amount of $54.3 million
(consisting of cash and short-term investments in the amount of $27.8 million
and other assets in the amount of $26.5 million) were reclassified to cash and
other assets, respectively, on the Company's consolidated balance sheet, and the
remaining liabilities of the discontinued operations in the amount of $53.0
million (consisting of notes payable in the amount of $4.3 million and other
liabilities in the amount of $48.7 million) were reclassified to notes payable
and other liabilities, respectively, on the Company's consolidated balance
sheet.
On September 29, 2000, the Company completed the sale of substantially all
of the non-cash assets associated with its United CreditServ credit card unit,
including its credit card receivables portfolios and its Sioux Falls, South
Dakota servicing operations, for a cash sales price at closing of approximately
$124.0 million. The Company retained United CreditServ's Texas collections
facility, and UICI continues to hold United CreditServ's building and real
estate in Sioux Falls, South Dakota. The Company has leased the Sioux Falls
facilities to the purchaser of the credit card assets pursuant to a long-term
lease. UICI also retained the right to collect approximately $250.0 million face
amount of previously written off credit card receivables. In connection with the
sale, UICI or certain of its subsidiaries retained substantially all liabilities
and contingencies associated with its credit card business, including liability
for payment of all certificates of deposit issued by UCNB, loans payable and
liabilities associated with pending litigation and other claims.
29
On January 29, 2001, UCNB completed its voluntary liquidation in accordance
with the terms of a plan of voluntary liquidation approved by the OCC by
surrendering to the OCC its national bank charter and distributing to a
wholly-owned subsidiary of UICI the residual assets of UCNB, including available
cash and cash equivalents in the amount of approximately $26.0 million.
In addition to the cash sales price received at the September 2000 closing
of the sale of the non-cash assets associated with its United CreditServ credit
card unit, the sale transaction contemplated an incentive cash payment
contingent upon the post-closing performance of the ACE credit card portfolio
over a one-year period. The Company's results from discontinued operations in
2001 and the fourth quarter of 2001 included net income after tax in the amount
of $3.7 million, associated with the receipt of a $5.7 million cash payment,
representing the final settlement of the deferred contingent portion of the
purchase price.
Special Risk Division
The Company has determined to exit the businesses of its Special Risk
Division by sale, abandonment and/or wind-down and, accordingly, in December
2001 the Company designated and has classified its Special Risk Division as a
discontinued operation for financial reporting purposes. The Company's Special
Risk Division has specialized in certain niche health-related products
(including "stop loss", marine crew accident, organ transplant and international
travel accident products), various insurance intermediary services and certain
managed care services.
Effective January 1, 2000, the Company entered into reinsurance and specific
retrocession agreements with an unaffiliated insurance carrier with respect to a
block of special risk business formerly managed by Excess, Inc. ("Excess"), a
managing general underwriter of special health-related coverages acquired by the
Company in 1997. These agreements effectively permitted the Company to transfer
to the unaffiliated insurance carrier the insurance revenue and risk portion of
that business as the business renews over the life of the policies.
UICI Administrators, Inc.
The Company formerly classified the operations of its subsidiaries UICI
Administrators, Inc. (a company engaged in the business of providing third party
benefits administration, including eligibility and billing reconciliation),
Insurdata Marketing Services, LLC (a subsidiary of the Company engaged in the
business of marketing third party benefits administration services) and Barron
Risk Management, Inc. as its Third Party Administration ("TPA") Division.
On January 17, 2002, the Company completed the sale of UICI Administrators,
Inc., the major component of the TPA Division. In the three months ended
December 31, 2001, the Company recognized an impairment charge of $2.3 million
to its long-lived assets associated with the UICI Administrators, Inc. unit, of
which $700,000 represented a write-down of fixed assets (which was reflected in
depreciation for the full year and fourth quarter of 2001) and $1.6 million
represented a write-down of goodwill (which was reflected in goodwill
amortization for the full year and fourth quarter of 2001). As a result of the
charge in the fourth quarter of 2001, the Company recognized no gain or loss on
the sale of UICI Administrators, Inc. Through January 17, 2002 (the date of
sale), the UICI Administrators, Inc. unit reported income in the amount of
$67,000 net of tax.
In accordance with FASB Statement 144, the results of operations of UICI
Administrators, Inc. have been reflected in discontinued operations for all
periods presented. The remaining portion of the former TPA Division (consisting
primarily of Barron Risk Management, Inc.) has been reclassified to the
Company's Other Key Factors segment for all periods presented.
LIQUIDITY AND CAPITAL RESOURCES
Historically, the Company's primary sources of cash on a consolidated basis
have been premium revenues from policies issued, investment income, fees and
other income, and borrowings to fund student loans. The primary uses of cash
have been payments for benefits, claims and commissions under those policies,
operating expenses and the funding of student loans. In the three-month period
ended March 31, 2002, net cash provided by operations totaled approximately
$42.1 million. In the three-month period ended March 31, 2001, net cash used in
operations totaled approximately $21.5 million.
30
During the three months ended March 31, 2002, the Company reduced its
consolidated short and long-term indebtedness (exclusive of indebtedness
incurred to fund student loans) from $25.3 million at December 31, 2001 to $24.6
million at March 31, 2002.
UICI is a holding company, the principal assets of which are its investments
in its separate operating subsidiaries, including its regulated insurance
subsidiaries. The holding company's ability to fund its cash requirements is
largely dependent upon its ability to access cash, by means of dividends or
other means, from its subsidiaries. The laws governing the Company's insurance
subsidiaries restrict dividends paid by the Company's domestic insurance
subsidiaries in any year. Inability to access cash from its subsidiaries could
have a material adverse effect upon the Company's liquidity and capital
resources.
At March 31, 2002 and December 31, 2001, UICI at the holding company level
held cash and cash equivalents in the amount of $44.6 million and $57.3 million,
respectively, and had short and long-term indebtedness outstanding in the amount
of $24.6 million and $25.3 million, respectively. The Company currently
estimates that, through December 31, 2002, the holding company will have
operating cash requirements in the amount of approximately $39.9 million. The
Company currently anticipates that these cash requirements at the holding
company level will be funded by cash on hand, cash received from interest
income, the balance of dividends to be paid from domestic and offshore insurance
companies and tax sharing reimbursements from subsidiaries (which will be
partially offset by holding company operating expenses).
On January 25, 2002, the Company entered into a three-year bank credit
facility with Bank of America, NA and LaSalle Bank National Association. Under
the facility, the Company may borrow from time to time up to $30.0 million on a
revolving, unsecured basis. The Company intends to utilize the proceeds of the
facility for general working capital purposes. At March 31, 2002, the Company
had no borrowings outstanding under the facility.
STATUTORY ACCOUNTING
The NAIC revised the Accounting Practices and Procedures Manual ("Manual")
in a process referred to as Codification. The revised Manual became effective
January 1, 2001. The domiciled states of the Company's domestic insurance
subsidiaries (Oklahoma, Tennessee and Texas) adopted the provisions of the
Manual. The Manual changed, to some extent, prescribed statutory accounting
practices and resulted in changes to the accounting practices that the Company's
domestic insurance subsidiaries use to prepare its statutory-basis financial
statements.
Statutory accounting changes adopted to conform to the provisions of the
Manual are reported as changes in accounting principles in the Company's
statutory-based financial statements. The cumulative effect of changes in
accounting principles is reported as an adjustment to unassigned funds (surplus)
in the period of the change in accounting principle. The cumulative effect is
the difference between the amount of statutory capital and surplus at the
beginning of the year and the amount of statutory capital and surplus that would
have been reported at that date if the new accounting principles had been
applied retroactively for all prior periods. As a result of these changes, the
Company's domestic insurance subsidiaries reported a change in accounting
principle, as an adjustment that increased statutory capital and surplus, of
$18.6 million as of January 1, 2001. Included in this total adjustment is an
increase in statutory capital and surplus of $23.4 million related to deferred
tax assets.
STOCK REPURCHASE PLAN
In November 1998, the Company's board of directors authorized the repurchase
of up to 4,500,000 shares of the Company's Common Stock. The shares were
authorized to be purchased from time to time on the open market or in private
transactions. As of December 31, 2000, the Company had repurchased 198,000
shares pursuant to such authorization, all of which were purchased in 1999. At
its regular meeting held on February 28, 2001, the Board of Directors of the
Company reconfirmed the Company's 1998 share repurchase program. Following
reconfirmation of the program, through May 3, 2002, the Company had purchased an
additional 980,400 shares pursuant to the program (with the last purchase made
on December 13, 2001). The timing and extent of additional repurchases, if any,
will depend on market conditions and the Company's evaluation of its financial
resources at the time of purchase.
31
ACCOUNTING FOR AGENT STOCK ACCUMULATION PLANS
The Company sponsors a series of stock accumulation plans (the "Agent
Plans") established for the benefit of the independent insurance agents and
independent sales representatives associated with UGA - Association Field
Services, New United Agency, Cornerstone Marketing of America and CFLD
Association Field Services. Under EITF 96-18 "Accounting for Equity Instruments
that are issued to Other Than Employees for Acquiring or in Connection with
Selling Goods and Services," the Company has established a liability for future
unvested benefits under the Agent Plans and adjusts the liability based on the
market value of the Company's Common Stock. The accounting treatment of the
Company's Agent Plans will result in unpredictable stock-based commission
charges, dependent upon fluctuations in the quoted price of UICI common stock.
These unpredictable fluctuations in stock based commission charges may result in
material non-cash fluctuations in the Company's results of operations. See Note
L of Notes to Consolidated Condensed Financial Statements.
CRITICAL ACCOUNTING PRINCIPLES AND ESTIMATES
The Company's discussion and analysis of its financial condition and results
of operations are based upon the Company's consolidated financial statements,
which have been prepared in accordance with accounting principles generally
accepted in the United States. The preparation of these financial statements
requires the Company to make estimates and judgments that affect the reported
amounts of assets, liabilities, revenues and expenses, and related disclosure of
contingent assets and liabilities. On an on-going basis, the Company evaluates
its estimates, including those related to health and life insurance claims and
reserves, bad debts, investments, intangible assets, income taxes, financing
operations and contingencies and litigation. The Company bases its estimates on
historical experience and on various other assumptions that are believed to be
reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying values of assets and liabilities that are
not readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions.
The Company believes the critical accounting policies related to claims
reserves, accounting for health policy acquisition costs, goodwill and other
identifiable intangible assets, accounting for agent stock accumulation plans,
investments, deferred taxes, and loss contingencies affect its more significant
judgments and estimates used in the preparation of its consolidated financial
statements.
For a more detailed discussion on the application of these and other
accounting policies, see the Company's Annual Report on Form 10-K for the year
ended December 31, 2001.
PRIVACY INITIATIVES
Recently-adopted legislation and regulations governing the use and security
of individuals' nonpublic personal data by financial institutions, including
insurance companies, may have a significant impact on the Company's business and
future results of operations.
Gramm-Leach-Bliley Act and State Insurance Laws and Regulations
The business of insurance is primarily regulated by the states and is also
affected by a range of legislative developments at the state and federal levels.
The recent Financial Services Modernization Act of 1999 (the so-called
Gramm-Leach-Bliley Act, or "GLBA") includes several privacy provisions and
introduces new controls over the transfer and use of individuals' nonpublic
personal data by financial institutions, including insurance companies,
insurance agents and brokers and certain other entities licensed by state
insurance regulatory authorities. Additional federal legislation aimed at
protecting the privacy of nonpublic personal financial and health information is
proposed and over 400 state privacy bills are pending.
GLBA provides that there is no federal preemption of a state's insurance
related privacy laws if the state law is more stringent than the privacy rules
imposed under GLBA. Accordingly, state insurance regulators or state
legislatures will likely adopt rules that will limit the ability of insurance
companies, insurance agents and brokers and certain other entities licensed by
state insurance regulatory authorities to disclose and use non-public
information about consumers to third parties. These limitations will require the
disclosure by these entities of their privacy policies to consumers and, in some
circumstances, will allow consumers to prevent the disclosure or use of certain
personal information to an unaffiliated third party. Pursuant to the authority
granted under GLBA to state insurance regulatory authorities to regulate the
privacy of nonpublic personal information provided to consumers
32
and customers of insurance companies, insurance agents and brokers and certain
other entities licensed by state insurance regulatory authorities, the National
Association of Insurance Commissioners has recently promulgated a new model
regulation called Privacy of Consumer Financial and Health Information
Regulation. Some states issued this model regulation before July 1, 2001, while
other states must pass certain legislative reforms to implement new state
privacy rules pursuant to GLBA. In addition, GLBA requires state insurance
regulators to establish standards for administrative, technical and physical
safeguards pertaining to customer records and information to (a) ensure their
security and confidentiality, (b) protect against anticipated threats and
hazards to their security and integrity, and (c) protect against unauthorized
access to and use of these records and information. However, no state insurance
regulators have yet issued any final regulations in response to such security
and confidentiality requirements. The privacy and security provisions of GLBA
will significantly affect how a consumer's nonpublic personal information is
transmitted through and used by diversified financial services companies and
conveyed to and used by outside vendors and other unaffiliated third parties.
Due to the increasing popularity of the Internet, laws and regulations may
be passed dealing with issues such as user privacy, pricing, content and quality
of products and services, and those regulations could adversely affect the
growth of the online financial services industry. If Internet use does not grow
as a result of privacy or security concerns, increasing regulation or for other
reasons, the growth of UICI's Internet-based business would be hindered. It is
not possible at this time to assess the impact of the privacy provisions on
UICI's financial condition or results of operations.
Health Insurance Portability and Accountability Act of 1996
The federal Health Insurance Portability and Accountability Act of 1996
("HIPAA") contains provisions requiring mandatory standardization of certain
communications between health plans (including health insurance companies),
electronic clearinghouses and health care providers who transmit certain health
information electronically. HIPAA requires health plans to use specific
data-content standards, mandates the use of specific identifiers (e.g., national
provider identifiers and national employer identifiers) and requires specific
privacy and security procedures. HIPAA authorized the Secretary of the federal
Department of Health and Human Services ("HHS") to issue standards for the
privacy and security of medical records and other individually identifiable
patient data.
In December 2000, HHS issued final regulations regarding the privacy of
individually-identifiable health information. This final rule on privacy applies
to both electronic and paper records and imposes extensive requirements on the
way in which health care providers, health plan sponsors, health insurance
companies and their business associates use and disclose protected information.
Under the new HIPAA privacy rules, the Company will now be required to (a)
comply with a variety of requirements concerning its use and disclosure of
individuals' protected health information, (b) establish rigorous internal
procedures to protect health information and (c) enter into business associate
contracts with other companies that use similar privacy protection procedures.
The final rules do not provide for complete federal preemption of state laws,
but, rather, preempt all contrary state laws unless the state law is more
stringent. These rules must be complied with by April 14, 2003.
Sanctions for failing to comply with standards issued pursuant to HIPAA
include criminal penalties of up to $250,000 per violation and civil sanctions
of up to $25,000 per violation. Due to the complex and controversial nature of
the privacy regulations, they may be subject to court challenge, as well as
further legislative and regulatory actions that could alter their effect.
In August 2000, HHS published for comment proposed rules related to the
security of electronic health data, including individual health information and
medical records, for health plans, health care providers, and health care
clearinghouses that maintain or transmit health information electronically. The
proposed rules would require these businesses to establish and maintain
responsible and appropriate safeguards to ensure the integrity and
confidentiality of this information. The standards embraced by these rules
include the implementation of technical and organization policies, practices and
procedures for security and confidentiality of health information and protecting
its integrity, education and training programs, authentication of individuals
who access this information, system controls, physical security and disaster
recovery systems, protection of external communications and use of electronic
signatures. These proposed rules have not yet become final.
33
UICI is currently reviewing the potential impact of the HIPAA privacy
regulations on its operations, including its information technology and security
systems. The Company cannot at this time predict with specificity what impact
(a) the recently adopted final HIPAA rules governing the privacy of
individually-identifiable health information and (b) the proposed HIPAA rules
for ensuring the security of individually-identifiable health information may
have on the business or results of operations of the Company. However, these new
rules will likely increase the Company's burden of regulatory compliance with
respect to our life and health insurance products and other information-based
products, and may reduce the amount of information the Company may disclose and
use if the Company's customers do not consent to such disclosure and use. There
can be no assurance that the restrictions and duties imposed by the recently
adopted final rules on the privacy of individually-identifiable health
information, or the proposed rule on security of individually-identifiable
health information, will not have a material adverse effect on UICI's business
and future results of operations.
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
Certain statements set forth herein or incorporated by reference herein from
the Company's filings that are not historical facts are forward-looking
statements within the meaning of the Private Securities Litigation Reform Act.
Actual results may differ materially from those included in the forward-looking
statements. These forward-looking statements involve risks and uncertainties
including, but not limited to, the following: changes in general economic
conditions, including the performance of financial markets, and interest rates;
competitive, regulatory or tax changes that affect the cost of or demand for the
Company's products; health care reform; the ability to predict and effectively
manage claims related to health care costs; and reliance on key management and
adequacy of claim liabilities.
The Company's future results will depend in large part on accurately
predicting health care costs incurred on existing business and upon the
Company's ability to control future health care costs through product and
benefit design, underwriting criteria, utilization management and negotiation of
favorable provider contracts. Changes in mandated benefits, utilization rates,
demographic characteristics, health care practices, provider consolidation,
inflation, new pharmaceuticals/technologies, clusters of high-cost cases, the
regulatory environment and numerous other factors are beyond the control of any
health plan provider and may adversely affect the Company's ability to predict
and control health care costs and claims, as well as the Company's financial
condition, results of operations or cash flows. Periodic renegotiations of
hospital and other provider contracts coupled with continued consolidation of
physician, hospital and other provider groups may result in increased health
care costs and limit the Company's ability to negotiate favorable rates.
Recently, large physician practice management companies have experienced extreme
financial difficulties, including bankruptcy, which may subject the Company to
increased credit risk related to provider groups and cause the Company to incur
duplicative claims expense. In addition, the Company faces competitive pressure
to contain premium prices. Fiscal concerns regarding the continued viability of
government-sponsored programs such as Medicare and Medicaid may cause decreasing
reimbursement rates for these programs. Any limitation on the Company's ability
to increase or maintain its premium levels, design products, and implement
underwriting criteria or negotiate competitive provider contracts may adversely
affect the Company's financial condition or results of operations.
The Company's Academic Management Services Corp. business could be adversely
affected by changes in the Higher Education Act or other relevant federal or
state laws, rules and regulations and the programs implemented thereunder may
adversely impact the education credit market. In addition, existing legislation
and future measures by the federal government may adversely affect the amount
and nature of federal financial assistance available with respect to loans made
through the U.S. Department of Education. Finally the level of competition
currently in existence in the secondary market for loans made under the Federal
Loan Programs could be reduced, resulting in fewer potential buyers of the
Federal Loans and lower prices available in the secondary market for those
loans.
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk is the risk of loss arising from adverse changes in market rates
and prices, such as interest rates, foreign currency exchange rates, and other
relevant market rate or price changes. Market risk is directly influenced by the
volatility and liquidity in the markets in which the related underlying assets
are traded.
The primary market risk to the Company's investment portfolio is interest
rate risk associated with investments and the amount of interest that
policyholders expect to have credited to their policies. The interest rate risk
taken in the investment portfolio is managed relative to the duration of the
policy liabilities. The Company's investment
34
portfolio consists mainly of high quality, liquid securities that provide
current investment returns. The Company believes that the annuity and universal
life-type policies are generally competitive with those offered by other
insurance companies of similar size. The Company does not anticipate significant
changes in the primary market risk exposures or in how those exposures are
managed in the future reporting periods based upon what is known or expected to
be in effect in future reporting periods.
Profitability of the student loans is affected by the spreads between the
interest yield on the student loans and the cost of the funds borrowed under the
various credit facilities. Although the interest rates on the student loans and
the interest rate on the credit facilities are variable, the gross interest
earned by lenders on Stafford student loans uses the results of 91-day T-bill
auctions as the base rate, while the base rate on the credit facilities is
LIBOR. The effect of rising interest rates on earnings on Stafford loans is
generally small, as both revenues and costs adjust to new market levels. In
addition to Stafford loans, the Company holds PLUS loans on which the interest
rate yield is set annually beginning July 1 through June 30 by regulation at a
fixed rate. The Company had approximately $215.2 million principal amount of
PLUS loans outstanding at March 31, 2002. The fixed yield on PLUS loans was
8.99% for the twelve months ended June 30, 2001 and was reset to 6.79% for the
twelve months beginning July 1, 2001. These loans are financed with borrowings
whose rates are subject to reset, generally monthly. During the twelve months
beginning July 1, 2002, the cost of borrowings to finance this portion of the
student loan portfolio could rise or fall while the rate earned on the student
loans will remain fixed.
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PART II. OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS
The Company is a party to various material legal proceedings, all of which
are described in Note I of Notes to the Consolidated Condensed Financial
Statements included herein and in the Company's Annual Report on Form 10-K filed
for the year ended December 31, 2001 under the caption "Item 3 - Legal
Proceedings." The Company and its subsidiaries are parties to various other
pending legal proceedings arising in the ordinary course of business, including
some asserting significant damages arising from claims under insurance policies,
disputes with agents and other matters. Based in part upon the opinion of
counsel as to the ultimate disposition of such lawsuits and claims, management
believes that the liability, if any, resulting from the disposition of such
proceedings will not be material to the Company's financial condition or results
of operations.
ITEM 5 - MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED MATTERS
During the three months ended March 31, 2002, the Company issued 3,500
shares of unregistered common stock pursuant to its 2001 Restricted Stock Plan.
ITEM 6 - EXHIBIT AND REPORTS ON FORM 8-K
(a) Exhibit.
10.68 - Stock purchase agreement dated February 28, 2002 among The
S.T.A.R. Human Resource Group, Inc., STAR Administrative Services, Inc. and
certain Shareholders and UICI.
(b) Reports on Form 8-K.
1. Current Report on Form 8-K dated February 8, 2002
2. Current Report on Form 8-K dated February 28, 2002
3. Current Report on Form 8-K dated April 2, 2002
36
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.
UICI
---------------------------------------
(Registrant)
Date: May 14, 2002 /s/ Gregory T. Mutz
---------------------------------------
Gregory T. Mutz, President,
Chief Executive Officer and Director
Date: May 14, 2002 /s/ Matthew R. Cassell
---------------------------------------
Matthew R. Cassell, Vice President and
Chief Financial Officer
37
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
------- -----------
10.68 - Stock purchase agreement dated February 28, 2002 among
The S.T.A.R. Human Resource Group, Inc., STAR Administrative
Services, Inc. and certain Shareholders and UICI.