--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2001.
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NO. 001-14953
---------------------
UICI
(Exact name of registrant as specified in its charter)
DELAWARE 75-2044750
(State or other jurisdiction of (IRS Employer
Incorporation or organization) Identification No.)
4001 MCEWEN DRIVE, SUITE 200 75244
DALLAS, TEXAS (Zip Code)
(Address of principal executive offices)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE:
(972) 392-6700
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
------------------- -----------------------------------------
Common Stock, $0.01 par value New York Stock Exchange
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE
(TITLE OF CLASS)
---------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K [X]
The aggregate market value of the voting stock held by non-affiliates of
the registrant as of March 18, 2002 was $499.4 million.
The number of shares outstanding of $0.01 par value Common Stock, as of
March 18, 2002 was 48,416,769.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the annual proxy statement for the annual meeting of
stockholders are incorporated by reference into Part III.
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
PART I
ITEM 1. BUSINESS
GENERAL
UICI (together with its subsidiaries, "UICI" or the "Company") offers
insurance (primarily health and life) and selected financial services to niche
consumer and institutional markets. The Company issues health insurance
policies, covering individuals and families, to the self-employed, association
group and student markets. During 2001, 2000 and 1999, health insurance premiums
were approximately $797.4 million, $651.4 million and $649.5 million,
respectively, representing 72%, 64% and 68%, respectively, of UICI's total
revenues in such periods.
The Company offers a broad range of health insurance products for
self-employed individuals and individuals who work for small businesses. The
Company's basic hospital-medical and catastrophic hospital expense plans are
designed to accommodate individual needs and include both traditional
fee-for-service indemnity (choice of doctor) plans and managed care options,
such as a preferred provider organization ("PPO") plan as well as other
supplemental types of coverage. The Company markets these higher deductible
products through "dedicated" agency sales forces comprised of independent
contractor agents that primarily sell the Company's products.
For the student market, UICI offers tailored health insurance programs that
generally provide single school year coverage to individual students at colleges
and universities. The Company also provides an accident policy for students at
public and private schools in kindergarten through grade 12. In the student
market, the Company sells its products through in-house account executives that
focus on colleges and universities on a national basis. The Company believes
that it provides student insurance plans to more universities than any other
single insurer.
UICI also issues through its Life Insurance Division life insurance and
annuity products to selected niche markets. The life insurance policies and
annuity products issued by UICI are marketed through independent agents
affiliated with a third party agency. During 2001, 2000 and 1999, total revenues
(including premiums and allocated investment income) from the Company's life
insurance and annuity business were approximately $94.9 million, $92.4 million
and $94.1 million, respectively, representing approximately 9%, 9% and 10%,
respectively, of total revenue in each year.
In 2001 the Company began to develop long term care and Medicare supplement
insurance products for the senior market and to establish distribution channels
for products targeted toward the senior market. 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 senior market
products. Through December 31, 2001, the Company had realized nominal revenues
associated with this Division, and the Company has expensed developmental costs
as incurred.
The Company conducts the business of the Self-Employed Agency Division,
Student Insurance Division, the Senior Market Division and the Life Insurance
Division through its wholly owned insurance company subsidiaries, The MEGA Life
and Health Insurance Company ("MEGA"), Mid-West National Life Insurance Company
of Tennessee ("Mid-West"), and The Chesapeake Life Insurance Company
("Chesapeake"). MEGA is an insurance company domiciled in Oklahoma and is
licensed to issue health, life and annuity insurance policies in all states
except New York. Mid-West is an insurance company domiciled in Tennessee and is
licensed to issue health, life and annuity insurance policies in Puerto Rico and
all states except Maine, New Hampshire, New York, and Vermont. Chesapeake is an
insurance company domiciled in Oklahoma and is licensed to issue health and life
insurance policies in all states except New Jersey, New York and Vermont. MEGA
is currently rated "A- (Excellent)", Mid-West is currently rated "A-
(Excellent)," and Chesapeake is currently rated "B++ (Very Good)" by A.M. Best.
A.M. Best's ratings currently range from "A++ (Superior)" to "F (Liquidation)."
A.M. Best's ratings are based upon factors relevant to policyholders, agents,
insurance brokers and intermediaries and are not directed to the protection of
investors.
At December 31, 2001, Fitch, Inc. had assigned an insurer financial
strength rating of "A" (Strong) to each of MEGA and Mid-West. Fitch's ratings
provide an overall assessment of an insurance company's financial strength and
security, and the ratings are used to support insurance carrier selection and
placement decisions. Fitch's ratings range from "AAA" (Exceptionally Strong) to
"D" (Distressed).
Through its Third Party Administration ("TPA") Division, UICI also provides
underwriting, claims management and claims administrative services to third
party insurance carriers, third party administrators, Blue Cross/Blue Shield
organizations and self-administered employer health care plans. On January 17,
2002, the Company completed the sale of UICI Administrators, Inc., the major
component of the TPA unit.
The Company's wholly-owned subsidiary, Academic Management Services Corp.
(formerly Educational Finance Group, Inc.) ("AMS"), markets, originates, funds
and services primarily federally guaranteed student loans and is a leading
provider of student tuition installment plans. AMS seeks to provide solutions
for college and graduate school students, their parents and the educational
institutions they attend. At December 31, 2001, UICI through AMS held
approximately $1.2 billion aggregate principal amount of student loans, of which
approximately 87% were federally guaranteed.
UICI holds a significant equity interest (approximately 47% of the issued
and outstanding shares at February 12, 2002) in Healthaxis, Inc., a publicly
traded corporation (Nasdaq: HAXS) 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.
Until February 2000, UICI marketed credit support services to individuals
with no, or troubled, credit experience and assisted them in obtaining a
nationally recognized credit card. Effective December 31, 1999, the Company's
United CreditServ credit card operations were classified as a discontinued
operation for financial reporting purposes, and in September 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 receivable
portfolios and its Sioux Falls, South Dakota servicing operations, for a cash
sales price of approximately $124.0 million. On January 29, 2001, UICI completed
the voluntary liquidation of UCNB in accordance with the terms of a voluntary
plan of liquidation approved by the United States Office of the Comptroller of
the Currency (the "OCC"). See Note B of Notes to Consolidated Financial
Statements and Item 7 -- Management's Discussion and Analysis of Financial
Condition and Results of Operations.
The Company through its Special Risk Division has provided various niche
health insurance related products (including "stop loss," marine crew accident,
organ transplant and international travel accident products), various insurance
intermediary services and certain managed care services. 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. See Note B of Notes to Consolidated
Financial Statements and Item 7 -- Management's Discussion and Analysis of
Financial Condition and Results of Operations.
The Company's operating segments include (a) the Insurance segment, which
includes the businesses of the Company's Self-Employed Agency Division, the
Student Insurance Division, the Life Insurance Division (formerly the Company's
OKC Division), the Senior Market Division and the National Motor Club Division
(until sold on July 27, 2000); (b) the Financial Services segment, which
includes the businesses of Academic Management Services Corp., the business of
the Company's Third Party Administrators unit; the Company's investment in
Healthaxis, Inc., and (c) Other Key Factors, which include investment income not
otherwise allocated to the other segments, interest expense on corporate debt,
general expenses relating to corporate operations, variable stock compensation,
goodwill amortization and other unallocated items. As discussed above, the
businesses of United CreditServ, Inc. and the Company's Special Risk Division
have been separately classified as discontinued operations for financial
reporting purposes for all years presented.
2
The Company's principal executive offices are located at 4001 McEwen Drive,
Suite 200, Dallas, Texas 75244. The Company's telephone number is (972)
392-6700. The Company maintains a website at www.uici.net.
INSURANCE SEGMENT
SELF-EMPLOYED AGENCY DIVISION
Market. According to the Bureau of Labor Statistics, there were
approximately 12 million self-employed individuals in the United States at the
end of 2001. The Company has currently in force approximately 250,000 basic
health policies issued or coinsured by the Company. UICI believes that there is
significant opportunity to increase its penetration in this market.
Products. UICI's basic health insurance plan offerings include the
following:
- UICI's Group Basic Hospital-Medical Expense Plan has a $1.0 million
lifetime maximum benefit and $500,000 lifetime maximum benefit for each
injury or sickness. Covered expenses are subject to a deductible. Covered
hospital room and board charges are reimbursed at 100% up to a
pre-selected daily maximum. Covered expenses for inpatient hospital
miscellaneous charges, same-day surgery facility, surgery, assistant
surgeon, anesthesia, second surgical opinion, doctor visits, and
ambulance services are reimbursed at 80% to 100% up to a scheduled
maximum. This type of health insurance policy is of a "scheduled benefit"
nature, and as such, provides benefits equal to the lesser of the actual
cost incurred for covered expenses or the maximum benefit stated in the
policy. These limitations allow for more certainty in predicting future
claims experience and thus future premium increases for this policy are
expected to be less than on the catastrophic policy.
- UICI's Group Catastrophic Hospital Expense Plan provides a lifetime
maximum benefit for each injury or sickness ranging from $500,000 to
$1,000,000. Covered expenses are subject to a deductible and are then
reimbursed at a benefit payment rate ranging from 50% to 100% as
determined by the policy. After a pre-selected dollar amount of covered
expenses has been reached, the remaining expenses are reimbursed at 100%
for the remainder of the period of confinement. The benefits for this
plan tend to increase as hospital care expenses increase and therefore
the premiums for these policies are subject to increase as overall
hospital care expenses rise.
- UICI's Group Preferred Provider Plan incorporates managed care features
of a PPO, which are designed to control health care costs through
negotiating discounts with a PPO network. Benefits are structured to
encourage the use of providers with which the Company has negotiated
lower fees for the services to be provided. The savings from these
negotiated fees reduce the costs to the individual policyholders. The
policies that provide for the use of a PPO impose a higher deductible and
co-payment if the policyholder uses providers outside of the PPO network.
Each of the Company's basic insurance policies is available with a "menu"
of various options (including various deductible levels, coinsurance percentages
and limited riders that cover particular events such as outpatient accidents,
doctors' visits and prescription drugs), enabling the insurance product to be
tailored to meet the individual needs of the policyholder.
During 2001, the Company developed and began to offer new ancillary product
lines that provide protection against short-term disability, as well as a
combination product that provides benefits for life, disability and critical
illness. These products have been designed to further protect against risks to
which the Company's core self-employed customer is typically exposed.
The Self-Employed Agency Division generated revenues of $700.4 million,
$566.4 million and $566.8 million (63%, 56% and 59% of total revenue) in 2001,
2000 and 1999, respectively.
Marketing and Sales. The Company's marketing strategy in the self-employed
market is to remain closely aligned with dedicated agent sales forces.
Substantially all of the health insurance products issued by the Company are
sold through dedicated independent contractor agents associated with the
Company.
3
The Company's agents are independent contractors, and all compensation that
agents receive from the Company is based upon the agents' levels of sales
production. UGA -- Association Field Services ("UGA") and Cornerstone Marketing
of America ("Cornerstone") (the Company's principal marketing divisions) are
each organized into geographical regions, with each geographical region having a
regional director, two additional levels of field leaders and writing agents
(i.e., the agents that are not involved in management).
UGA and Cornerstone are each responsible for the recruitment and training
of their field leaders and writing agents. UGA and Cornerstone generally seek
persons with previous sales experience. The process of recruiting agents is
extremely competitive. The Company believes that the primary factors in
successfully recruiting and retaining effective agents and field leaders are the
policies regarding advances on commissions, the quality of the leads provided,
the availability and accessibility of equity ownership plans, the quality of the
products offered, proper training, and agent incentives and support. Classroom
and field training is made available to the agents under the direction of the
field leaders.
The health insurance products issued by the Company are primarily issued to
members of various independent membership associations that endorse the products
and act as the master policyholder for such products. Two principal membership
associations in the self-employed market for which the Company underwrites
insurance are the National Association for the Self-Employed ("NASE") and the
Alliance for Affordable Services ("AAS"). The associations provide their
membership with a number of endorsed products, including health insurance
underwritten by the Company. Individuals generally may not obtain insurance
under the associations' master policies unless they are members of the
associations. UGA agents and Cornerstone agents also act as enrollers of new
members for the associations. Although the Company has no formal agreements with
these associations requiring the associations to continue as the master
policyholder and endorse the Company's insurance products to their respective
members, the Company believes it is in good standing with these associations.
Leads for the agents of UGA and Cornerstone are generated by UICI
Marketing, Inc. (the Company's direct response marketing group), which
administers two call centers with a capacity of approximately 250 telephone
service representatives. From various sources of data, a pool of approximately
7.0 million names has been developed. Individuals in this pool and other
self-employed individuals with an interest in obtaining the benefits of an
association membership, including health insurance, may respond to lead
generation efforts via direct response channels, including telemarketing, direct
mail, radio and TV commercials, e-mail, and Internet websites maintained by the
Company. The names of persons expressing an interest are, in turn, provided as
leads to the Company's agents, which the Company believes results in a higher
"close" rate than would be the case if the agents made unsolicited calls on
prospective customers.
Policy Design and Claims Management. The Company's traditional indemnity
health insurance products are principally designed to limit coverages to the
occurrence of significant events that require hospitalization. This policy
design, which includes high deductibles, reduces the number of covered claims
requiring processing, thereby controlling administrative expenses. The Company
seeks to price its products in a manner that accurately reflects its
underwriting assumptions and targeted margins, and it relies on the marketing
capabilities of its dedicated agency sales forces to sell these products at
prices consistent with these objectives.
The Company maintains administrative centers with full underwriting, claims
management and administrative capabilities. The Company believes that by
processing its own claims it can better assure that claims are properly
processed and can utilize the claims information to periodically modify the
benefits and coverages afforded under its policies.
The Company has also developed an actuarial data warehouse, which is a
critical risk management tool that provides the Company's actuaries with rapid
access to detailed exposure, claim and premium data. This state-of-the-art
analysis tool enhances the actuaries' ability to design, monitor and adequately
price all of the Company's insurance products.
Preferred Provider Products. In order to further control health care
costs, in 1995 the Company incorporated into certain of its health plans managed
care features of a PPO. These health plans incorporate
4
managed care features of a PPO through negotiated discounts with a PPO network.
The health plans that provide the PPO option generally provide a greater level
of benefits for services performed within the PPO network in the form of lower
deductibles and co-payments compared to out-of-network services. The value of
the network discount is reflected in the form of lower rates and discounts on
covered charges.
Coinsurance Arrangements. Prior to 1996, a substantial portion of the
health insurance policies sold by UGA agents were issued by AEGON USA, Inc.
("AEGON") and coinsured by the Company. Effective April 1, 1996, the Company
acquired the underwriting, claims management and administrative capabilities of
AEGON related to products coinsured by the Company. Following this transaction,
the agents of UGA began to market health insurance products directly for the
Company rather than through the coinsurance arrangement. The Company retains
100% of the premiums and pays all of the costs of such new policies. Under the
terms of its coinsurance agreement, AEGON has agreed to cede (i.e., transfer),
and the Company has agreed to coinsure, 60% of the health insurance sold by UGA
agents and issued by AEGON. The Company receives 60% of premiums collected and
is liable for 60% of commission expenses, administrative costs, claims payments,
premium taxes, legal expenses, extra-contractual charges and other payments. The
Company and AEGON agreed to maintain the coinsurance agreement for policies
issued by AEGON prior to April 1, 1996 and during the transition period ended in
1997. Commencing in May 2001, and in accordance with Assumption Reinsurance
Agreements with AEGON, the Company began to assume all of the remaining policies
from AEGON as approvals were received from state regulatory authorities. As of
December 31, 2001, approximately 75% of the remaining policies have been assumed
by the Company from AEGON, and the Company currently anticipates that the
balance of the remaining policies will be assumed during 2002. On the policies
that have been assumed, the Company has coinsured 40% of the health insurance
business to AEGON. The Company has agreed to acquire on December 31, 2002 the
remaining 40% of the coinsured business from AEGON based upon a mutually
agreed-upon prescribed price.
Acquisition of Health Blocks. From time to time, the Company has acquired
and may continue to acquire blocks of health insurance policies or companies
that own such blocks. These opportunities are pursued on a case-by-case basis,
and revenues from such blocks have generally not represented a material portion
of Self-Employed Agency Division revenue.
STUDENT INSURANCE DIVISION
Market. The student market consists primarily of students attending
colleges and universities in the United States and Puerto Rico and, to a lesser
extent, those attending public and private schools in grades kindergarten
through grade 12. Generally, the marketing strategy of the Company has been to
focus on college students whose circumstances are such that health insurance may
not otherwise be available through their parents. In particular, older
undergraduates, graduate and international students often have a need to obtain
insurance as "first-time buyers." According to industry sources, there are
approximately 2,400 four-year universities and colleges in the United States,
which have a combined enrollment of approximately 11.0 million students.
Typically, a carrier must be approved and endorsed by the educational
institution as a preferred vendor of health insurance coverage to the
institution's students. The Company believes that it has been authorized to
provide student health insurance plans by more universities than any other
single insurer.
Products. The insurance programs sold in the student market are designed
to meet the requirements of each individual school. The programs generally
provide coverage for one school year and the maximum benefits available to any
individual student enrolled in the program range from $10,000 to $1,000,000,
depending on the coverage level desired by the school.
The Student Insurance Division had revenues of $126.1 million, $111.5
million and $108.0 million in 2001, 2000 and 1999, respectively, representing
approximately 11% of total revenues in each such year.
Marketing and Sales. The Company markets to colleges and universities on a
national basis through in-house account executives whose compensation is based
primarily on commissions. Account executives make presentations to the
appropriate school officials and the Company, if selected, is endorsed as the
provider of health insurance for students attending that school.
5
The kindergarten through grade 12 business is marketed primarily through
third party agents and brokers in Washington, Florida, Arizona, Louisiana,
Oklahoma, Texas, Colorado, Kansas, Oregon, and California.
LIFE INSURANCE DIVISION
Through the Company's Life Insurance Division (which is based in Oklahoma
City, Oklahoma), the Company offers life insurance and annuity products to
individuals through its dedicated field force. At December 31, 2001, the Life
Insurance Division had over $3.2 billion of life insurance in force and
approximately 312,000 individual policyholders. The Life Insurance Division grew
historically through acquisitions of closed blocks of life insurance and annuity
policies and, more recently, through its efforts to market and sell new life
insurance products. In 2001, 2000 and 1999, the Life Division generated revenues
of $94.9 million, $92.4 million and $94.1 million, respectively, representing
9%, 9% and 10%, respectively, of total Company revenue in each such year.
The Life Insurance Division has developed life insurance products to be
sold using its unique and proprietary needs analysis "Blueprint for Life." The
Life Insurance Division hopes to leverage the Company's significant health
insurance customer base by positioning itself to offer those customers a
universal life, term life and final expense product designed to fit their
changing needs.
Through its College Fund Life Insurance Division (based in Norcross,
Georgia), the Company's Life Insurance Division offers an interest-sensitive
whole life insurance product generally with an annuity rider and a child term
rider. The child term rider includes a special provision under which the Company
commits to provide private student loans to help fund the named child's higher
education if certain restrictions and qualifications are satisfied. Currently,
student loans are available in amounts up to $30,000 for students attending
undergraduate school and up to $30,000 for students attending graduate school.
Loans made under this rider are not funded or supported by the federal
government. Qualified loans with a Fair Isaac credit score of 570 and above are
guaranteed as to principal and interest by an independent guarantee agency. All
other loans made under the rider require additional guarantee fees to be paid by
the borrower. As a part of the program, MEGA and Mid-West are qualified lenders
under the applicable Department of Education regulations and make available,
outside of the Company's insurance subsidiaries' commitment under the rider,
student loans under Federal Family Education Loan Programs.
Marketing and Sales. Life insurance products are marketed and sold through
the Company's network of dedicated agents.
Acquired Blocks. Historically, the Company's Life Insurance Division grew
through opportunistic acquisitions of blocks of life insurance and annuities. In
an acquisition of a block of business, the Company assumes policy liabilities
and receives assets (net of the purchase price) sufficient, based on actuarial
assumptions, to cover such estimated future liabilities. The profitability of a
particular block of business depends on the amount of investment income from the
assets and the amount of premiums received less the amount of benefits and
expenses actually paid. The Company acquired its last block of life insurance
and annuities in 1994. Although the Company continues to analyze potential
transactions from time to time, the Company believes that the current climate
for acquisitions of blocks of life insurance and annuities has become very
competitive, making it more difficult to successfully complete acquisitions that
meet the Company's acquisition rate of return criteria.
In 1991, the Company entered into an agreement pursuant to which it
services a block of policies with life insurance and annuity reserves for an
unrelated company. At December 31, 2001, total life insurance and annuity
reserves for this block were $70.6 million, which reserves are not reflected on
the Company's consolidated balance sheet. The Company receives a fee for
servicing the policies and in 1997 also began to participate in 50% of the
profits or losses on this business. The Company's consolidated results of
operations reflect the servicing fee currently earned and the 50% profit
participation.
In August 1994, the Company entered into a similar transaction, pursuant to
which the Company acquired a block of life insurance and annuity policies. In
conjunction with this acquisition, the Company ceded through a coinsurance
agreement 100% of the policy liabilities to an unrelated reinsurer. The
acquisition
6
required no financial investment by the Company. In July 2001, the reinsurer
recovered its investment in this block, and the coinsurance agreement was
terminated and the company at no cost recaptured all remaining policies.
SENIOR MARKET DIVISION
In 2001 the Company began to develop long term care and Medicare supplement
insurance products for the senior market and to establish distribution channels
for products targeted toward the senior market. The Company intends to initially
offer products of third party insurers until such time as the Company's long
term care and Medicare supplement insurance products are fully approved by
applicable regulatory authorities for issuance to the senior market. Upon
receipt of requisite regulatory approvals, the Company intends to initially
reinsure on a coinsurance basis with other insurance companies 40% of the
Company's risk with respect to long term care coverage and 20% of its risk with
respect to Medicare supplement coverage.
The Company has entered into an agreement with an unaffiliated third party
to serve as administrator for the Company's senior age insurance products, in
which capacity the third party will underwrite, bill, provide customer service
and administer claims for all long-term care and Medicare supplement insurance
products to be sold by the Company's two principal insurance subsidiaries.
Senior market products will be distributed initially through independent
agents affiliated with Guaranty Senior Assurance (a newly-formed division of
MEGA) and through independent agents affiliated with SeniorsFirst LLC, an agency
in which the Company holds a 50% ownership interest.
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 senior market products. Through December 31, 2001, the
Company has realized nominal revenues associated with this Division, and the
Company has expensed developmental costs as incurred.
FINANCIAL SERVICES SEGMENT
ACADEMIC MANAGEMENT SERVICES CORP.
The Company holds a 100% equity interest in Academic Management Services
Corp. ("AMS"). AMS (formerly Educational Finance Group, Inc.) markets,
originates, funds and services primarily federally guaranteed student loans and
is the leading provider of student tuition installment plans. AMS (which is
based in Swansea, Massachusetts) seeks to provide financing solutions for
college and graduate school students, their parents, and the educational
institutions they attend. At December 31, 2001, UICI through AMS held
approximately $1.2 billion aggregate principal amount of student loans, of which
approximately 87% were federally guaranteed.
AMS primarily makes federally guaranteed loans to students and parents
under the Federal Family Education Loan Program (the "FFELP Loan Program"). Four
types of loans are currently available under the FFELP Loan Program: (i) loans
made to students for which the federal government makes interest payments during
periods of school enrollment in order to reduce student interest costs
("Stafford Loans"); (ii) loans made to students for which the federal government
does not make such interest payments ("Unsubsidized Stafford Loans"); (iii)
supplemental loans made to parents of dependent students ("PLUS Loans"); and
(iv) loans to fund consolidation of certain federally-insured obligations of the
borrower ("Consolidation Loans"). These loan types vary as to eligibility
requirements, interest rates, repayment periods, loan limits and eligibility for
interest subsidies.
Stafford Loans are the primary loans extended under the FFELP Loan Program.
Students who are not eligible for Stafford Loans based on their economic
circumstances may be able to obtain Unsubsidized Stafford Loans. Parents of
students are able to obtain PLUS Loans in accordance with their credit standing.
Consolidation Loans are available to borrowers holding loans made under the
FFELP Loan Program and/or certain other federal programs for the purpose of
extending the repayment of such loans -- a primary objective being the reduction
of monthly payment size.
7
In addition to the various federally guaranteed loan programs, AMS offers
alternative student loans guaranteed by private insurers (which during 2001
aggregated approximately 11% of AMS' loan originations) and uninsured
alternative loans (which during 2001 aggregated approximately 1% of loan
originations).
AMS has initially funded its lending business primarily with secured lines
of credit and commercial paper facilities extended or administered by various
financial institutions. After initial funding, AMS typically refinances groups
of loans on a more structured basis by transferring loans to bankruptcy remote,
special purpose entities, which in turn issue debt securities secured by the
loans. During 1999, AMS established approximately $1.3 billion of such
structured funding facilities in three separate transactions, and on January 30,
2002 the Company completed the issuance of $335.0 million principal amount of
auction rate notes secured by a pledge of federally- and privately-insured
student loans held in the AMS portfolio. For financial reporting and accounting
purposes the facilities are classified as financings, with the indebtedness
represented by the debt securities recorded as liabilities on the consolidated
balance sheet of the Company, and the student loan assets and cash and cash
equivalents securing payment of such debt securities recorded as assets on the
consolidated balance sheet of the Company. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources."
In addition, AMS may from time to time in the ordinary course of business
sell loans in its portfolio to various secondary market buyers. Decisions to
hold or sell loans at any point in time are based on a variety of strategic and
financial factors, one of the most prominent being the cash prices being offered
by buyers relative to the net present value of the loans if held in the
portfolio for duration. Sales of federally insured education loans have
typically produced gains on sale recognized in the periods in which the sales
occur. During 2001, AMS originated approximately $717.6 million in new loans and
sold $474.0 million principal amount of loans, and during 2000, AMS originated
approximately $776.1 million in new loans and sold approximately $765.0 million
principal amount of loans.
In July 1999, AMS acquired AMS Investment Group, Inc. (the parent of
Academic Management Services, Inc.) ("AMS Inc."), based in Swansea,
Massachusetts. At the time of acquisition, AMS Inc. was the largest provider of
tuition installment plans in the nation. Marketed on behalf of and with the
endorsement of colleges, universities, and private secondary schools, tuition
installment plans enable parents to pay tuition and related school costs in
interest-free monthly installments.
AMS provides loan servicing and administrative services on behalf of
participating colleges and universities for federal Perkins loans and privately
insured loans through EFG Technologies, Inc., a wholly owned subsidiary based in
Winston-Salem, North Carolina. The Perkins Loan program provides low-interest
loans to assist needy students in financing the costs of post-secondary
education. EFG Technologies services approximately one million loan accounts for
approximately 600 colleges, universities and private lenders. In May 2002, EFG
Technologies plans to change its name to AMS Servicing Group.
INVESTMENT IN HEALTHAXIS, INC.
At December 31, 2001, UICI held approximately 47% of the issued and
outstanding shares of common stock of Healthaxis, Inc. ("HAI") (Nasdaq: HAXS).
See Item 7 -- Management's Discussion and Analysis of Financial Condition and
Results of Operations and Note E of Notes to Consolidated Financial Statements.
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.
HAI generated revenues of $43.8 million, $43.7 million and $46.2 million in
2001, 2000 and 1999, respectively, of which 70%, 63% and 58% were derived from
services provided to the Company and its insurance company affiliates. See Note
E of Notes to Consolidated Financial Statements.
8
TPA Division
UICI also historically has provided underwriting, claims management and
claims administrative services to third party insurance carriers, third party
administrators, Blue Cross/Blue Shield organizations and self-administered
employer health care plans. The Company has 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. While revenues for the TPA Division increased to $24.3 million
in 2001 from $18.5 million in 2000, the TPA Division incurred an operating loss
of $(2.1) million in 2001 compared to an operating loss of $(1.7) million in
2000.
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, of which $700,000 represented a write-down of fixed
assets (which was included in depreciation in 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.
DISCONTINUED OPERATIONS
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 determined, after a thorough
assessment of the unit's prospects, that UICI would exit from its United
CreditServ sub-prime credit card business and, as a result, the United
CreditServ unit was reflected as a discontinued operation for financial
reporting purposes effective December 31, 1999. 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 of approximately $124.0 million, and 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.
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
deferred contingent portion of the purchase price in final settlement of the
September 2000 sale of substantially all of the non-cash assets associated with
its United CreditServ credit card unit. See Item 7 -- Management's Discussion
and Analysis of Financial Condition and Results of Operations.
SPECIAL RISK DIVISION
The Company has determined to exit the businesses of its Special Risk
Division by sale, abandonment 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
9
transplant and international travel accident products), various insurance
intermediary services and certain managed care services. For the year ended
December 31, 2001, the Special Risk Division reported a net loss of $(9.2)
million, compared to a net loss of $(2.9) million for the year ended December
31, 2000, which losses were reflected in results from discontinued operations.
REINSURANCE
The Company's insurance subsidiaries reinsure portions of the coverages
provided by their insurance products with other insurance companies on both an
excess of loss and coinsurance basis. The maximum retention by the Company on
one individual in the case of life insurance is $150,000. The Company uses
reinsurance for its health insurance business only for limited purposes. The
Company does not reinsure any health insurance issued in the self-employed
market.
Reinsurance agreements are intended to limit an insurer's maximum loss. The
ceding of reinsurance does not discharge the primary liability of the original
insurer to the insured. Although the Company, through coinsurance, assumes risks
under policies issued by AEGON, and has occasionally used assumption reinsurance
to acquire blocks of insurance from other insurers, it does not regularly assume
risks of other insurance companies. See "Business -- Health
Insurance-Coinsurance Arrangements."
COMPETITION
INSURANCE
The Company operates in highly competitive markets. The Company's insurance
subsidiaries compete with large national insurers, regional insurers and
specialty insurers, many of which are larger and have substantially greater
financial resources or greater claims paying ability ratings than the Company.
In addition to claims paying ability ratings, insurers compete on the basis of
price, breadth and flexibility of coverage, ability to attract and retain agents
and the quality and level of agent and policyholder services provided. In its
other lines of insurance-related business, the Company competes with financial
services companies, managed care consultants, and third party administrators,
among others. Many of the competitors may have greater financial resources,
broader product lines or greater experience in particular lines of business.
STUDENT LOANS
The student loan industry is highly competitive. The Company competes with
over 2,000 other lenders. Despite the large number of lenders, the top 100
lenders account for approximately 87% of new loan volume. The Company believes
that the volume of new loans originated in 2001 would make it one of the top 10
student loan lenders in 2001. The Company competes by designing and offering an
integrated package of government guaranteed and privately guaranteed loan
products.
REGULATORY AND LEGISLATIVE MATTERS
HEALTH CARE REFORM; PRIVACY INITIATIVES
The health care industry, as one of the largest industries in the United
States, continues to attract much legislative interest and public attention. In
recent years, an increasing number of legislative proposals have been introduced
or proposed in Congress and in some state legislatures that would effect major
changes in the health care system, either nationally or at the state level.
Proposals that have been considered include cost controls on hospitals,
insurance market reforms to increase the availability of group health insurance
to small businesses, patients' bills of rights and requirements that all
businesses offer health insurance coverage to their employees. There can be no
assurance that future health care legislation or other changes in the
administration or interpretation of governmental health care programs will not
have a material adverse effect on the business, financial condition or results
of operations of the Company.
Recently-adopted legislation and regulations governing the use and security
of individuals' nonpublic personal data by financial institutions, including
insurance companies, will have a significant impact on the
10
Company's business and future results of operations. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Privacy Initiatives."
INSURANCE REGULATION
The Company's insurance subsidiaries are subject to extensive regulation in
their states of domicile and the other states in which they do business under
statutes that typically delegate broad regulatory, supervisory and
administrative powers to insurance departments. The method of regulation varies,
but the subject matter of such regulation covers, among other things: the amount
of dividends and other distributions that can be paid by the Company's insurance
subsidiaries without prior approval or notification; the granting and revoking
of licenses to transact business; trade practices, including with respect to the
protection of consumers; disclosure requirements; privacy standards; minimum
loss ratios; premium rate regulation; underwriting standards; approval of policy
forms; claims payment; licensing of insurance agents and the regulation of their
conduct; the amount and type of investments that the Company's subsidiaries may
hold, minimum reserve and surplus requirements; risk-based capital requirements;
and compelled participation in, and assessments in connection with, risk sharing
pools and guaranty funds. Such regulation is intended to protect policyholders
rather than investors.
Many states have also enacted insurance holding company laws that require
registration and periodic reporting by insurance companies controlled by other
corporations. Such laws vary from state to state, but typically require periodic
disclosure concerning the corporation which controls the controlled insurer and
prior notice to, or approval by, the applicable regulator of inter-corporate
transfers of assets and other transactions (including payments of dividends in
excess of specified amounts by the controlled insurer) within the holding
company system. Such laws often also require the prior approval for the
acquisition of a significant ownership interest (e.g., 10% or more) in the
insurance holding company. The Company's insurance subsidiaries are subject to
such laws, and the Company believes that such subsidiaries are in compliance in
all material respects with all applicable insurance holding company laws and
regulations.
Under the risk-based capital initiatives adopted in 1992 by the National
Association of Insurance Commissioners ("NAIC"), insurance companies must
calculate and report information under a risk-based capital formula. Risk-based
capital formulas are intended to evaluate risks associated with: asset quality;
adverse insurance experience; loss from asset and liability mismatching; and
general business hazards. This information is intended to permit regulators to
identify and require remedial action for inadequately capitalized insurance
companies but is not designed to rank adequately capitalized companies. Based on
year-end 2001 calculations, the Company's insurance subsidiaries were
significantly above required capital levels.
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.
The states in which the Company is licensed have the authority to change
the minimum mandated statutory loss ratios to which the Company is subject, the
manner in which these ratios are computed and the
11
manner in which compliance with these ratios is measured and enforced. Loss
ratios are commonly defined as incurred claims divided by earned premiums. Most
states in which the Company writes insurance have adopted the loss ratios
recommended by the NAIC but frequently the loss ratio regulations do not apply
to the types of health insurance issued by the Company. The Company is unable to
predict the impact of (i) any changes in the mandatory statutory loss ratios for
individual or group policies to which the Company may become subject, or (ii)
any change in the manner in which these minimums are computed or enforced in the
future. Such changes could result in a narrowing of profit margins and have a
material adverse effect upon the Company. The Company has not been informed by
any state that it does not meet mandated minimum ratios, and the Company
believes that it is in compliance with all such minimum ratios. In the event the
Company is not in compliance with minimum statutory loss ratios mandated by
regulatory authorities with respect to certain policies, the Company may be
required to reduce or refund premiums, which could have a material adverse
effect upon the Company.
The NAIC and state insurance departments are continually reexamining
existing laws and regulations, including those related to reducing the risk of
insolvency and related accreditation standards. To date, the increase in
solvency-related oversight has not had a significant impact on the Company's
insurance business.
STUDENT LOAN OPERATIONS
A significant portion of the student loans originated by the Company are
made under the Federal Family Education Loan Program (the "FFELP Loan Program"),
which is subject to periodic legislative reauthorization and interim revision by
legislation and regulation. The Higher Education Act, which authorizes most
federal aid programs, went through its regular reauthorization process in 1998.
The loans made under the FFELP Loan Program include Federal Stafford loans for
students and PLUS Loans to parents.
Compliance with legal or regulatory restrictions may limit the ability of
the Company's subsidiaries to conduct their operations. A failure to comply may
subject the affected subsidiary to a loss or suspension of a right to engage in
certain businesses or business practices, criminal or civil fines, an obligation
to make restitution or pay refunds or other sanctions, which could adversely
affect the manner in which the Company's subsidiaries conduct their business and
the Company's results of operations.
State and federal regulation is continually changing and the Company is
unable to predict whether or when any such changes will be adopted. It is
possible, however, that the adoption of such changes could adversely affect the
manner in which the Company's subsidiaries conduct their business and the
Company's financial condition or results of operations.
EMPLOYEES
The Company had approximately 2,100 employees at February 19, 2002. The
Company considers its employee relations to be good. Agents associated with the
Company's UGA, Cornerstone, Guaranty Senior Assurance and SeniorsFirst field
forces constitute independent contractors and are not employees of the Company.
ITEM 2. PROPERTIES
The Company owns three office buildings in Tarrant County, Texas,
comprising in the aggregate approximately 200,000 square feet of office space.
The Company's United CreditServ subsidiary owns one building in Sioux Falls,
South Dakota, with approximately 106,000 square feet, which is leased to an
unaffiliated third party. AMS owns two office buildings in Swansea,
Massachusetts, comprising approximately 60,000 square feet of office space. In
addition, the Company and its subsidiaries lease office space at various
locations, including its principal executive office located at 4001 McEwen
Drive, Dallas, Texas.
ITEM 3. LEGAL PROCEEDINGS
See Note N of Notes to Consolidated Financial Statements, the terms of
which are incorporated by reference herein.
12
ITEM 4. SUBMISSIONS OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
EXECUTIVE OFFICERS OF THE COMPANY
The Chairman of the Company is elected, and all other executive officers
listed below are appointed by the Board of Directors of the Company at its
Annual Meeting each year or by the Executive Committee of the Board of Directors
to hold office until the next Annual Meeting or until their successors are
elected or appointed. None of these officers have family relationships with any
other executive officer or director.
NAME OF OFFICER PRINCIPAL POSITION AGE BUSINESS EXPERIENCE DURING PAST FIVE YEARS
--------------- ------------------ --- ------------------------------------------
Ronald L. Jensen......... Chairman of the Board 71 Mr. Jensen has served as Chairman since
December 1983. In the last five years, Mr.
Jensen also served as President of the
Company from October 1997 until January
1999.
Gregory T. Mutz.......... President and Chief 56 Mr. Mutz was elected President and Chief
Executive Officer Executive Officer in January 1999 and
served as Chief Financial Officer from
March 2000 to November 2000. Prior to
January 1999, Mr. Mutz served as Chairman
and Chief Executive Officer of AMLI Realty
Co. (a real estate investment management
firm), which the Company acquired in 1996.
Glenn W. Reed............ Executive Vice President 49 Mr. Reed has served in his current
and General Counsel position since July 1999. Prior to joining
UICI, Mr. Reed was a partner with the
Chicago, Illinois law firm of Gardner,
Carton & Douglas.
Phillip J. Myhra......... Executive Vice President 49 Mr. Myhra has served as an executive
-- Insurance Group officer of the Insurance Group since
December 1999 and as Executive Vice
President -- Insurance Group of the
Company since February 2001. He serves as
a Director, President and Chief Executive
Officer of the Company's insurance
subsidiaries. Prior to joining the
Company, Mr. Myhra served as Senior Vice
President of Mutual of Omaha.
13
NAME OF OFFICER PRINCIPAL POSITION AGE BUSINESS EXPERIENCE DURING PAST FIVE YEARS
--------------- ------------------ --- ------------------------------------------
Steven K. Arnold......... Executive Vice President 54 Mr. Arnold joined the Company in October
-- Insurance Group 1998 as a consultant. In March 1999, Mr.
Arnold became Chief Executive Officer of
the Student Insurance Division and Special
Risk Group of the Company. In August 1999,
Mr. Arnold was elected a Vice President of
the Company. For the five years prior to
joining the Company, Mr. Arnold held
various positions as a consultant and
officer in the health care and systems
industries.
Matthew R. Cassell....... Vice President and Chief 38 Mr. Cassell was elected Vice President and
Financial Officer Chief Financial Officer on November 1,
2000. He formerly served as the Company's
Vice President -- Strategic Planning
commencing in January 2000. Prior to
joining UICI, Mr. Cassell served as
Director-Finance of Insurdata Incorporated
(formerly a wholly owned subsidiary of the
Company) from 1997 to 1999.
James N. Plato........... President -- Life 53 Mr. Plato has served as an executive
Insurance Division officer and director of the Company's
insurance subsidiaries since June 2001.
During the five years prior to joining the
Company, Mr. Plato served as an executive
officer and/or director of Ilona Financial
Group, 1st Variable Life Insurance
Company, Interstate Assurance, Mutual of
Omaha, and United Presidential Life
Insurance Company.
14
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
The Company's shares are traded on the New York Stock Exchange ("NYSE")
under the symbol "UCI". The table below sets forth on a per share basis, for the
period indicated, the high and low closing sales prices of the Common Stock on
the NYSE.
HIGH LOW
-------- -------
FISCAL YEAR ENDED DECEMBER 31, 2000
1st Quarter............................................... $11.5625 $ 6.625
2nd Quarter............................................... 7.25 3.9375
3rd Quarter............................................... 8.5625 6.25
4th Quarter............................................... 7.5625 5.4375
FISCAL YEAR ENDED DECEMBER 31, 2001
1st Quarter............................................... $ 9.65 $5.9375
2nd Quarter............................................... 12.75 8.25
3rd Quarter............................................... 16.26 10.70
4th Quarter............................................... 15.74 11.40
As of March 1, 2002, there were approximately 10,900 holders of record of
Common Stock.
The Company has not paid cash dividends on its Common Stock to date. The
Company currently intends to retain all future earnings to finance continued
expansion and operation of its business and subsidiaries. Any decision as to the
payment of dividends to the stockholders of the Company will be made by the
Company's Board of Directors and will depend upon the Company's future results
of operations, financial condition, capital requirements and such other factors
as the Board of Directors considers appropriate.
In addition, dividends paid by the domestic insurance subsidiaries of the
Company to the Company out of earned surplus in any year without prior approval
of state regulatory authorities are limited by the laws and regulations of the
state of domicile. Prior approval by state regulatory authorities is required
for the payment of dividends by domestic insurance companies, which exceed the
limits set by the laws of the state of domicile. See Note L of the Notes to
Consolidated Financial Statements included herein.
During the year ended December 31, 2001, the Company issued 109,250 shares
of unregistered common stock pursuant to its 2001 Restricted Stock Plan.
15
ITEM 6. SELECTED FINANCIAL DATA
The following selected consolidated financial data as of and for each of
the five years in the period ended December 31, 2001 have been derived from the
audited Consolidated Financial Statements of the Company. The following data
should be read in conjunction with the Consolidated Financial Statements and the
notes thereto and Management's Discussion and Analysis of Financial Condition
and Results of Operations included herein. The following has been restated to
reflect the Company's Special Risk Division as a discontinued operation. See
Note B of the Notes to the Consolidated Financial Statements.
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------
2001 2000 1999 1998 1997
---------- ---------- ---------- ---------- ----------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS AND OPERATING RATIOS)
INCOME STATEMENT DATA:
Revenues from continuing
operations.................... $1,106,583 $1,019,655 $ 954,179 $ 989,932 $ 849,458
Income from continuing
operations before income
taxes......................... 66,223 67,138 54,797 42,368 104,295
Income from continuing
operations.................... 48,358 32,018 35,814 28,660 70,885
Income (loss) from discontinued
operations.................... (5,466) (26,285) (181,696) 30,109 15,619
Net income (loss)............... 42,892 5,733 (145,882) 58,769 86,504
Earnings per share from
continuing operations:
Basic earnings per Common
share...................... $ 1.04 $ 0.68 $ 0.77 $ 0.62 $ 1.57
Diluted earnings per Common
share...................... $ 1.01 $ 0.67 $ 0.75 $ 0.61 $ 1.57
Earnings (loss) per share from
discontinued operations:
Basic earnings (loss) per
Common share............... $ (0.12) $ (0.56) $ (3.92) $ 0.65 $ 0.34
Diluted earnings (loss) per
Common share............... $ (0.11) $ (0.55) $ (3.80) $ 0.65 $ 0.34
Earnings (loss) per share:
Basic earnings (loss) per
Common share............... $ 0.92 $ 0.12 $ (3.15) $ 1.27 $ 1.91
Diluted earnings (loss) per
Common share............... $ 0.90 $ 0.12 $ (3.05) $ 1.26 $ 1.91
OPERATING RATIOS:
Health Ratios:
Loss ratio(1)................. 62% 63% 68% 75% 63%
Expense ratio(2).............. 34% 33% 30% 30% 30%
---------- ---------- ---------- ---------- ----------
Combined health ratio......... 96% 96% 98% 105% 93%
========== ========== ========== ========== ==========
BALANCE SHEET DATA:
Total investments and cash(3)... $1,269,640 $1,148,568 $1,111,334 $1,142,694 $1,062,911
Total assets.................... 3,285,884 2,989,848 3,504,182 2,227,383 1,453,503
Total policy liabilities........ 891,361 824,632 841,398 883,425 843,199
Total debt...................... 25,303 89,991 152,220 50,328 50,270
Student loan credit
facilities.................... 1,506,202 1,334,847 1,698,765 669,026 --
Stockholders' equity............ 534,572 447,105 407,434 594,791 536,290
Stockholders' equity per
share(4)...................... $ 10.81 $ 9.74 $ 9.44 $ 12.52 $ 11.29
---------------
(1) The health loss ratio represents benefits, claims and settlement expenses
related to health insurance policies stated as a percentage of earned health
premiums.
16
(2) The health expense ratio represents underwriting, acquisition and insurance
expenses related to health insurance policies stated as a percentage of
earned health premiums. Expenses relating to providing administrative
services are not included.
(3) Does not include restricted cash. See Note A of Notes to Consolidated
Financial Statements.
(4) Excludes the unrealized gains (losses) on available for sale securities,
which are reported in accumulated other comprehensive income (loss) as a
separate component of stockholders' equity.
17
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion of the Company's historical results of operations
and of its liquidity and capital resources should be read in conjunction with
the Selected Financial Data and the Consolidated Financial Statements of the
Company and related notes thereto included herein.
The Company's operating segments include the following: (i) Insurance,
which includes the businesses of the Self-Employed Agency Division; the Student
Insurance Division; the Life Insurance Division (formerly the Company's OKC
Division); the Senior Market Division; and the National Motor Club Division
(until sold on July 27, 2000); (ii) Financial Services, which includes the
businesses of Academic Management Services Corp., the Company's investment in
Healthaxis, Inc., the business of the Company's Third Party Administration
("TPA") unit and (iii) Other Key Factors, which includes investment income not
allocated to the other segments, interest expense on corporate debt, general
expenses relating to corporate operations, realized gains or losses on sale of
investments, the AMLI operations, variable stock compensation and goodwill
amortization. Net investment income is allocated to the Insurance segment based
on policy liabilities. The interest rate for the allocation is based on a high
credit quality investment portfolio with a duration consistent with the duration
of the segment's policy liabilities.
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.
RESULTS OF OPERATIONS -- OVERVIEW
Set forth below is a discussion of certain general matters affecting the
Company's historical and future results of operations.
INVESTMENT IN HEALTHAXIS, INC.
At December 31, 2001, UICI held beneficially approximately 47% of the
issued and outstanding shares of Healthaxis, Inc. ("HAI") (formerly Provident
American Corporation) (Nasdaq: HAXS). See Note E of Notes to Consolidated
Financial Statements.
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 has accounted for its investment in HAI utilizing the equity
method and has recognized its ratable share of HAI income and loss (computed
prior to amortization of goodwill recorded in connection with the January 7,
2000 merger of Insurdata Incorporated (formerly a wholly-owned subsidiary of
UICI) with and into HealthAxis.com, the sole operating subsidiary of HAI). The
Company's carrying value of its investment in HAI was $8.3 million and $18.4
million at December 31, 2001 and 2000, respectively. See Note E of Notes to
Consolidated Financial Statements.
18
The Company also constitutes a significant customer of HAI. 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. Pursuant to the terms of the Services Agreement, UICI paid
to HAI $20.4 million, $21.0 million and $23.3 million in 2001, 2000 and 1999,
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 $10.1 million, $6.4
million and $3.7 million in 2001, 2000 and 1999, respectively. The aggregate
amounts paid by UICI to HAI in 2001, 2000 and 1999, respectively, represented
70%, 63% and 58% of HAI's total revenues of $43.8 million, $43.7 million and
$46.2 million in such years, respectively. See Notes E and M of Notes to
Consolidated Financial Statements.
ACADEMIC MANAGEMENT SERVICES CORP.
For the year ended December 31, 2001, UICI's Academic Management Services
Corp. subsidiary ("AMS") reported operating income of $5.4 million compared to
an operating loss of $(24.6) million for the year ended December 31, 2000.
During 2001, AMS benefited 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, increased gains on sales of loans and
continued efforts to reduce operating expenses.
The amount of student loan spread income that AMS may earn in any period
depends in large part upon the level of prevailing market interest rates
relative to the prescribed minimum rate that can be earned on AMS' student loan
portfolio. During 2001, AMS benefited 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
continued decline in prevailing market interest rates over the three months
ended December 31, 2001 had the effect of continuing to reduce AMS' overall
borrowing costs. As a result, AMS' spread income in the fourth quarter of 2001
in the amount of $7.5 million exceeded spread income of $3.2 million earned in
the third quarter of 2001 and spread income of $696,000 earned in the fourth
quarter of 2000. Spread income for the year 2001 was $20.4 million, compared to
spread income of $6.7 million for the prior year.
On July 1, 2002, the floor rates on FFELP loans 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 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.
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. 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. AMS sold $474.0 million and $765.0 million principal
amount of student loans during the year ended December 31, 2001 and 2000,
respectively, from which AMS generated gains on sales in the amount of $11.3
million and $7.8 million, respectively.
19
On August 3, 2001, the Company completed the acquisition from AMS' former
chief executive officer of the remaining 25% common stock interest in AMS it did
not already own for a purchase price of $750,000. For additional consideration,
the former chief executive officer and certain former employees of AMS agreed,
for a three-year period ending in August 2004, not to engage in any business
competitive with AMS' tuition installment or student loan servicing businesses.
These former executives and their affiliates further agreed to pay to AMS fees
in prescribed amounts in connection with the origination and consolidation of
certain student loans over a three-year period ending in August 2004.
CLOSEDOWN OF WORKERS' COMPENSATION BUSINESS
In May 2001, the Company determined to exit its workers compensation
business, in connection with which the Company incurred a charge in the three
months ended June 30, 2001 of $8.7 million associated with a strengthening of
reserves. In the fourth quarter of 2001, the Company also recorded a charge of
$1.3 million, which represented the Company's share of an assessment to all
workers' compensation insurance carriers by the Oklahoma Workers' Compensation
Court Administrator.
ACCOUNTING FOR GOODWILL
In June 2001, the Financial Accounting Standards Board ("FASB") issued
Statement No. 142, which 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. 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 will apply Statement 142
beginning in the first quarter 2002. Application of the nonamortization
provisions of Statement 142 is expected to result in an increase in net income
of approximately $4.5 million ($0.09 per share) in 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. The Company expects to perform
the first of the required impairment tests of goodwill and indefinite lived
intangible assets as of January 1, 2002 in the first quarter of 2002. Any
impairment charge resulting from these transitional impairment tests will be
reflected as the cumulative effect of a change in accounting principle in the
first quarter of 2002. The Company has not yet determined what the effect, if
any, of these tests will be on the results of operations and financial position
of the Company.
At December 31, 2001, the Company had recorded on its consolidated balance
sheet net goodwill in the amount of $86.0 million, substantially all of which
was recorded in connection with the acquisition by the Company of AMS and
businesses forming a part of AMS.
ACCOUNTING FOR HEALTH POLICY ACQUISITION COSTS
The Company incurs various costs in connection with the origination and
initial issuance of its health insurance policies, including underwriting and
policy issuance costs, costs associated with lead generation activities and
distribution costs (i.e., sales commissions paid to agents). For financial
reporting purposes, underwriting and policy issuance costs with respect to
health policies issued through the Company's Self Employed Agency and Student
Insurance Divisions are expensed as incurred. Costs associated with generating
sales leads with respect to the health business issued through the Self Employed
Agency Division are capitalized and amortized over a two-year period. The
Company defers the portion of commissions paid to agents and premium taxes with
respect to the portion of health premium collected but not yet earned, and the
Company amortizes the deferred expense over the period as and when the premium
is earned. See Note A of Notes to Consolidated Financial Statements.
With respect to health policies sold through the Company's Self Employed
Agency Division, commissions paid to agents with respect to first year policies
are higher than commissions paid to agents with respect to policies in renewal
years. Accordingly, during periods of increasing first year premium revenue
(such as
20
occurred during 2001), the Self Employed Agency Division's overall operating
profit margin will be negatively impacted by the higher commission expense
associated with first year premium revenue.
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, Guaranty Senior
Assurance, SeniorsFirst 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 O of Notes to Consolidated Financial
Statements.
RECONFIRMATION OF 1998 SHARE REPURCHASE PROGRAM
At its regular meeting held on February 28, 2001, the Board of Directors of
the Company reconfirmed the Company's 1998 share repurchase program, in which it
initially authorized the repurchase of up to 4,500,000 shares of its common
stock from time to time in open market or private transactions. The Company had
previously purchased through early 1999 198,000 shares of common stock pursuant
to the program. Following reconfirmation of the program, through February 18,
2002, the Company had purchased an additional 980,400 shares pursuant to the
program (with the most recent purchase made on December 13, 2001) at an
aggregate cost of $8.8 million, or $9.03 per weighted average share. 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.
DISCONTINUED OPERATIONS
The Company's reported results in 2001 and 2000 reflected a loss from
discontinued operations (consisting of the Company's former sub-prime credit
card unit and the Special Risk Division) in the amount of $(5.5) million
($(0.11) per diluted share) and $(26.3) million ($(0.55) per diluted share),
respectively.
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.
21
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.
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.
The 1999 and 2000 operating losses at United CreditServ had a material
adverse effect upon the liquidity and cash flows of the Company. Since the
Company first announced losses at its United CreditServ unit in December 1999,
UICI through United CreditServ contributed to UCNB as capital an aggregate of
$176.6 million in cash. UICI at the holding company level funded these cash
contributions and other cash needs with the proceeds of sale of investment
securities; a borrowing from a third party in the amount of $24.0 million funded
in July 2000; approved sales of assets from the holding company to the Company's
regulated insurance company subsidiaries completed in June and July 2000
generating cash proceeds in the aggregate amount of approximately $26.2 million;
dividends in the amount of $19.0 million paid during the six months ended June
30, 2000 from The Chesapeake Life Insurance Company ("CLICO") (one of its
regulated insurance company subsidiaries); the sale to The MEGA Life and Health
Insurance Company of CLICO for $19.0 million in July 2000; cash proceeds in the
amount of $21.8 million from the disposition of its National Motor Club unit
completed in July 2000; and cash on hand.
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
22
intermediary services and certain managed care services. For the year ended
December 31, 2001, the Special Risk Division reported a net loss of $(9.2)
million, compared to a net loss of $(2.9) million for the year ended December
31, 2000, which losses were reflected in results from discontinued operations.
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.
MODIFICATION OF UICI EXECUTIVE STOCK PURCHASE PROGRAM -- SPECIAL 2000
COMPENSATION EXPENSE
In January 2001, the Board of Directors of the Company adopted certain
modifications to the UICI Executive Stock Purchase Program (the "ESPP"), which
was initially adopted and implemented in December 1998 to afford directors and
key UICI executives the opportunity to purchase UICI common stock. See Note O of
Notes to Consolidated Financial Statements. In connection with the January 2001
modifications to the ESPP, for financial reporting purposes UICI recorded in the
quarter ended December 31, 2000 compensation expense in the amount of $4.8
million pre-tax, or $4.1 million net of tax.
RESULTS OF OPERATIONS
2001 COMPARED TO 2000
General
UICI reported revenues and income from continuing operations in 2001 of
$1.1 billion and $48.4 million ($1.01 per diluted share), respectively, compared
to 2000 revenues and income from continuing operations of $1.0 billion and $32.0
million ($0.67 per diluted share), respectively.
The Company reported net income in 2001 in the amount of $42.9 million
($0.90 per diluted share), compared to net income of $5.7 million ($0.12 per
diluted share) in 2000, including losses from discontinued operations in 2001
and 2000 in the amount of $(5.5) million ($(0.11) per diluted share) and $(26.3)
million ($(0.55) per diluted share), respectively.
Continuing Operations
Revenues. UICI's revenues increased to $1,106.6 million in 2001 from
$1,019.7 million in 2000, an increase of $86.9 million, or 9%, primarily as a
result of a 22% increase in health premiums, from $651.4 million in 2000 to
$797.4 million in 2001. The increase in health premium revenue in 2001 was
offset by a 14% decrease in interest and investment income and a 9% decrease in
other fee income. Revenues in 2000 also were favorably impacted by a realized
gain of $26.3 million from a sale of HealthAxis.com shares completed in the
first quarter of 2000.
Health premiums. Health premium revenue increased to $797.4 million in
2001 from $651.4 million in 2000, an increase of $146 million, or 22%. The
increase in health premium revenue in 2001 was primarily attributable to a 67%
increase in the Self-Employed Agency Division's submitted annualized premium
volume for the year (which the Company defines in any period as the aggregate
annualized premium amount associated with health insurance applications
submitted by the Company's agents in such period for underwriting by the
Company) ($578.5 million in 2001 compared to $346.7 million in 2000) and an
increase in policy retention rates.
Life premiums and other considerations. Life premiums and other
considerations decreased to $34.7 million in 2001 from $36.8 million in 2000, a
decrease of $2.1 million, or 6%. This decrease resulted primarily from reduced
premiums and other considerations from closed blocks of life and annuity
business. The Company last acquired a closed block of life insurance and
annuities in 1994. Although the Company believes that it can continue to exploit
acquisition opportunities and continues to analyze potential transactions, the
Company believes that the current climate for acquisitions of blocks of life
insurance and annuities
23
has become very competitive, making it more difficult to successfully complete
acquisitions that meet the Company's acquisition rate of return criteria.
Investment income. Investment income decreased to $83.8 million in 2001
from $89.8 million in 2000, a decrease of $6.0 million, or 7%. The decrease was
due to reduced yield on the Company's investment portfolio and a reduction in
average outstanding short-term investments, due primarily to the use of cash to
reduce outstanding borrowings during the year.
Other interest income. Other interest income (consisting primarily of
interest earned on the Company's student loan portfolio) decreased to $88.4
million in 2001 from $111.4 million in 2000, a decrease of $23.0 million, or
21%. The decrease was due to declining market interest rates, resulting in a
reduced yield on funds held in connection with AMS' tuition payment programs and
a reduced yield on AMS' student loan portfolio.
Other fee income. Other fee income decreased to $94.0 million in 2001 from
$103.7 million in 2000, a decrease of $9.7 million or 9%. Other fee income
consists primarily of tuition installment program fees, loan-servicing fees and
gains on loan sales at AMS (in the aggregate $38.6 million and $35.6 million in
2001 and 2000, respectively), third party administration fees ($24.3 million and
$22.2 million in 2001 and 2000, respectively), and various Self-Employed
Division marketing-related fees ($28.0 million and $23.3 million in 2001 and
2000, respectively). The decrease in other fee income is associated with the
sale in July 2000 of National Motor Club ("NMC"), which generated $19.4 million
in other fee income (primarily membership fees) for the seven-month period ended
July 2000. Included in other fee income is the third party administration
revenue of UICI Administrators of $20.1 million in 2001 and $18.5 million in
2000. The Company completed the sale of UICI Administrators on January 17, 2002.
Other income. Other income (consisting primarily of commission and fee
income from the Company's AMLI Realty Co. subsidiary) increased to $3.1 million
in 2001 from $2.2 million in 2000, an increase of $900,000. The increase in
other income is due to commissions received by the Company's AMLI Realty Co.
subsidiary in connection with property sales.
Gain on sale of HealthAxis.com stock. On March 14, 2000, the Company sold
in a private sale to an institutional purchaser 2,000,000 shares of
HealthAxis.com common stock. In connection with the sale of such shares, the
Company recognized a pre-tax gain in the amount of $26.3 million.
Gains (losses) on sale of investments. The Company recognized gains on
sale of investments of $5.2 million in 2001 compared to losses of $(1.9) million
in 2000. Included in 2001 gains is a $5.3 million gain related to the Company's
investment in AMLI Commercial Properties Trust ("ACPT") and $3.4 million in
gains from the Company's investment portfolio, which were offset by an
impairment charge for certain investments in the amount of $3.5 million. During
2001, ACPT, an equity method investee, in which the Company held a 20% equity
interest, sold substantially all of its assets for an aggregate sale price of
approximately $226.3 million. In connection with such sale, the Company
recognized a gain in the amount of $5.3 million.
The amount of realized gains or losses on the sale of investments is
affected by changes in interest rates, market trends and the timing of sales.
Losses are more likely during periods of increasing long-term interest rates. In
addition, due to decreasing long-term interest rates in 2001, the net unrealized
investment gain on securities classified as "available for sale", reported in
accumulated other comprehensive income as a separate component of stockholders'
equity and net of applicable income taxes, increased to $30.3 million at
December 31, 2001, from a net unrealized investment loss of $(10.1) million at
December 31, 2000. The Company changed its method for accounting for its
investment in AMLI Residential effective June 30, 2001, from the equity method
to the investment method. The Company holds a 10% interest in AMLI Residential.
The effect of the accounting change was to increase the carrying value of AMLI
Residential on the consolidated balance sheet of the Company at June 30, 2001
from $22.6 million to $62.8 million; the accounting change had no effect on the
Company's results of operations for the year ended December 31, 2001. As a
result of the accounting change, the Company marks-to-market its investment in
AMLI Residential and accordingly, changes in the Company's carrying value of its
investment in AMLI Residential are recorded as unrealized gains (or losses) with
corresponding changes to the Company's stockholders' equity
24
(net of tax). At December 31,2001 and 2000, the Company's carrying value of its
investment in AMLI Residential was $64.3 million and $23.1 million,
respectively.
Benefits, claims, and settlement expenses. Benefits, claims and settlement
expenses increased to $531.0 million in 2001 from $439.7 million in 2000, an
increase of $91.3 million, or 21%. The increase in benefits, claims and
settlement expenses was primarily due to the increase in premium revenue from
the SEA and Student Divisions and the strengthening of reserves associated with
the Company's workers compensation business. In May 2001 the Company
discontinued its workers compensation business, in connection with which the
Company incurred a charge of $8.7 million associated with a strengthening of
reserves.
Underwriting, acquisition and insurance expenses. Underwriting,
acquisition and insurance expenses increased to $293.8 million in 2001 from
$239.4 million in 2000, an increase of $54.4 million, or 23%. The increase was
primarily due to increased commission expense attributable to the growth in
first year premium revenue in the SEA Division (with respect to which the
Company records a higher commission expense than with respect to premium revenue
in policy renewal years). In the fourth quarter of 2001, the Company also
recorded a charge of $1.3 million, which represented the Company's share of an
assessment to all workers' compensation insurance carriers by the Oklahoma
Workers' Compensation Court Administration.
Other expenses. Other expenses (consisting primarily of AMS operating
expenses and other non-insurance related expenses) decreased to $101.1 million
in 2001 from $117.1 million in 2000, a decrease of $16.0 million or 14%. The
decrease was due to the sale of National Motor Club ("NMC") in July 2000. NMC
incurred $17.2 million in other expenses for the seven month period ended July
2000.
Depreciation. Depreciation expense increased to $15.9 million in 2001 from
$14.0 million in 2000, an increase of $1.9 million or 14%. The increase was
primarily due to additional depreciation associated with the capitalized costs
of technology initiatives and upgrades.
Interest expense. Interest expense on corporate borrowings decreased to
$5.0 million in 2001 from $13.6 million in 2000, a decrease of $8.6 million. The
decrease was due primarily to the decreased level of borrowings outstanding
during 2001 compared to 2000. Interest expense on student loan obligations
decreased to $69.4 million in 2001 from $101.6 million in 2000, a decrease of
$32.2 million or 32%, primarily resulting from a decline in prevailing market
interest rates.
Operating Income. Income from continuing operations before federal income
taxes ("operating income") decreased to $66.2 million in 2001 from $67.1 million
in 2000. Operating income (loss) for each of the Company's segments and
divisions was as follows:
YEAR ENDED DECEMBER 31,
-----------------------
2001 2000
---------- ----------
Income (loss) from continuing operations before income
taxes:
Insurance:
Self Employed Agency................................... $ 74,849 $ 70,905
Student Insurance...................................... 4,022 (1,877)
Life Insurance Division................................ 7,363 13,132
Senior Market.......................................... (2,112) --
National Motor Club.................................... -- 2,471
-------- --------
Total Insurance................................... 84,122 84,631
-------- --------
Financial Services:
Academic Management Services.............................. 5,413 (24,640)
UICI Administrators....................................... (2,099) (1,668)
Gain on sale of HealthAxis.com shares..................... -- 26,300
25
YEAR ENDED DECEMBER 31,
-----------------------
2001 2000
---------- ----------
Equity interest in Healthaxis, Inc. operating loss........ (10,597) (15,623)
-------- --------
Total Financial Services.......................... (7,283) (15,631)
-------- --------
Other Key Factors:
Investment income on equity, realized gains and losses,
general corporate expenses and other (including
interest on non-student loan indebtedness)............. 2,940 9,631
Variable stock compensation............................... (7,293) (5,300)
Goodwill amortization..................................... (6,263) (6,193)
-------- --------
Total Other Key Factors........................... (10,616) (1,862)
-------- --------
Total income from continuing operations before
income taxes.................................... $ 66,223 $ 67,138
======== ========
Self-Employed Agency Division. Operating income at UICI's Self Employed
Agency ("SEA") Division increased by 6% to $74.8 million for the year ended
December 31, 2001, from $70.9 million in 2000.
The Company measures the volume of business activity at SEA by means of
"submitted annualized premium volume," which in any period is the aggregate
annualized premium amount associated with health insurance applications
submitted by the Company's agents in such period for underwriting by the
Company. SEA in 2001 experienced a 67% increase in submitted annualized premium
volume over 2000 levels ($578.5 million in 2001 compared to $346.7 million in
2000). The Company recognizes premium revenue in a period as and when it is
earned. Earned premium revenue at SEA increased from $521.1 million in 2000 to
$650.0 million in 2001, a 25% increase. Operating income as a percentage of
earned premium revenue decreased to 11.5% in 2001 from 13.6% in 2000. This
decrease in operating margin was attributable primarily to a significant
increase in first year earned premium revenue (with respect to which the Company
records a higher commission expense than with respect to earned premium revenue
in policy renewal years) and a nominal increase in loss ratio (59.9% for 2001
compared to 59.5% for 2000).
Student Insurance Division. For the year ended December 31, 2001, the
Student Insurance Division reported operating income of $4.0 million compared to
an operating loss of $(1.9) million in 2000. The increase in operating income
for the year ended December 31, 2001 was attributable to a 13% increase in
earned premium revenue, continued improvement in loss ratios, and improvement in
administrative efficiencies.
Life Insurance Division. For the year ended December 31, 2001, the
Company's Life Insurance Division reported operating income of $7.4 million
compared to operating income of $13.1 million in 2000. The decrease in operating
income for the year ended December 31, 2001 was primarily attributable to the
discontinuation in May 2001 of the Company's workers compensation business (in
connection with which the Company incurred a charge of $8.7 million in the
second quarter associated with a strengthening of reserves) increased
administration costs associated with investment in new life products and a
charge of $1.3 million in the fourth quarter representing the Company's share of
an assessment to all workers' compensation insurance carriers by the Oklahoma
Workers' Compensation Court Administrator. These charges in 2001 were partially
offset by a $5.2 million increase in the second quarter in the carrying value of
student loans generated by the Company's College Fund Life Insurance Division, a
unit of the Life Insurance Division.
Senior Market Division. 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. For the year ended December 31, 2001, the Company
realized nominal revenues associated with this Division, and the Company has
expensed developmental costs as incurred.
National Motor Club. On July 27, 2000, the Company completed the sale of
its 97% interest in NMC Holdings, Inc. (the parent of National Motor Club of
America, Inc.) to an investor group consisting of
26
members of the family of Ronald L. Jensen (including Mr. Jensen). See Notes C
and M of Notes to the Consolidated Financial Statements.
Academic Management Services Corp. For the year ended December 31, 2001,
UICI's Academic Management Services Corp. subsidiary ("AMS") reported operating
income of $5.4 million compared to an operating loss of $(24.6) million for the
comparable period in 2000. Set forth below is a summary comparative statement of
operations for AMS for the year ended December 31, 2001 and 2000:
YEAR ENDED DECEMBER 31,
-----------------------
2001 2000
---------- ----------
Interest income -- student loans............................ $ 88,398 $110,651
Gain on sale of student loans............................... 11,300 7,757
Other investment income..................................... 6,663 8,039
Fee income -- tuition payment programs...................... 14,085 11,898
Fee income -- loan servicing and other...................... 13,211 15,905
-------- --------
Total revenue............................................... 133,657 154,250
-------- --------
Interest expense -- student loans........................... 69,205 104,043
Provision for loan loss..................................... 292 1,810
Interest expense -- other indebtedness...................... 2,152 4,365
Depreciation................................................ 3,934 4,563
Amortization of goodwill.................................... 3,986 3,989
Other operating expenses.................................... 53,518 66,423
Less: operating costs deferred.............................. (34) (2,238)
-------- --------
133,053 182,955
-------- --------
Income (loss) from operations (including amortization of
goodwill and other expenses in Other Key Factors)......... 604 (28,705)
Amortization of goodwill and other expenses in Other Key
Factors................................................... 4,809 4,065
-------- --------
Income (loss) from operations............................... $ 5,413 $(24,640)
======== ========
The significant improvement in operating results for the year ended
December 31, 2001 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, increased gains on sales
of loans and continued efforts to reduce operating expenses
Declining market interest rates throughout 2001 resulted in an overall
decrease in revenue (due to decreased interest income on AMS' student loan
portfolio and decreased investment income from funds on deposit in AMS' tuition
installment plan trust account) during 2001 compared to revenue in 2000.
However, declining market interest rates throughout 2001 benefited AMS by
significantly lowering its costs of borrowing, resulting in improved spreads on
AMS' student loan portfolio. Spread income for the year 2001 was $20.4 million
compared to $6.7 million for the prior year.
During 2001, AMS benefited 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
continued decline in prevailing market
27
interest rates over the three months ended December 31, 2001 had the effect of
continuing to reduce AMS' overall borrowing costs. As a result, AMS' spread
income in the fourth quarter of 2001 in the amount of $7.5 million exceeded
spread income of $3.2 million earned in the third quarter of 2001 and spread
income of $696,000 earned in the fourth quarter of 2000.
AMS sold $474.0 million and $765.0 million principal amount of student
loans during the year ended December 31, 2001 and 2000, respectively, from which
AMS generated gains on net sales in the amount of $11.3 million and $7.8
million, respectively. While AMS sold a lesser principal amount of loans in 2001
than in 2000, the higher net gain in 2001 resulted from lower deferred loan
origination costs associated with sold loans in 2001 compared to 2000.
Income from AMS' tuition payment programs in the year ended December 31,
2001 was $14.1 million, compared to income in the year ended December 31, 2000
of $11.9 million. For the year ended December 31, 2001, 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 $6.6 million in 2001 from $8.0 million in
2000 (despite a 16% 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.
AMS also reduced operating expenses by $15.1 million in the year ended
December 31, 2001, over operating expenses in 2000. This reduction in operating
expenses was primarily attributable to the closing in September 2000 of AMS' San
Diego facility, reduced interest expense associated with non-student loan
indebtedness, and reduced administrative expenses. For the year ended December
31, 2001, interest expense on non-student loan indebtedness was $2.2 million,
compared to interest expense on non-student loans of $4.4 million in the year
ended December 31, 2000. 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.
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.
Third Party Administration Division. The Company has classified the
operations of UICI Administrators, Inc., Insurdata Marketing Services, LLC, and
Barron Risk Management Services, Inc. as its Third Party Administration ("TPA")
Division. For year ended December 31, 2001, the TPA Division incurred an
operating loss of $(2.1) million compared to an operating loss of $(1.7) million
in the comparable 2000 period. On January 17, 2002, the Company completed the
sale of UICI Administrators, Inc., the major component of its 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, of which $700,000 represented a
write-down of fixed assets (which was included in depreciation in 2001) and $1.6
million represented a write-down of goodwill (which was reflected in goodwill
amortization in 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.
Investment in Healthaxis, Inc. (formerly HealthAxis.com, Inc.) At December
31, 2001, the Company held approximately 47% 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 E of Notes to Consolidated Financial Statements.
During the year ended December 31, 2001, the Company's share of HAI's
operating losses (computed prior to amortization of merger related goodwill) was
$(10.6) million, compared to its share of operating
28
losses of $(15.6) million in 2000. At December 31, 2001, the Company's carrying
value of its investment in HAI was $8.3 million.
Other Key Factors. The Other Key Factors category includes investment
income not allocated to the other segments, interest expense on corporate debt,
general expenses relating to corporate operations, realized gains or losses on
sale of investments, minority interest expense, the AMLI operations, variable
stock compensation and amortization of goodwill. Operating losses for the year
ended December 31, 2001 attributable to this category were $(10.6) million
compared to $(1.9) million for the comparable period in 2000. The increase in
operating losses was primarily attributable to a $7.5 million increase in
corporate technology expenses, a $2.0 million increase in variable stock
compensation, a $3.7 million increase in minority interest expense attributable
to AMS' return to profitability in 2001, and a $3.5 million impairment charge
from the Company's investment portfolio. These increases were partially offset
by $3.4 million in realized gains from the Company's investment portfolio
(excluding the impairment charge) and a $5.3 million gain recognized in 2001 on
the sale of the Company's interest in AMLI Commercial Properties Trust. The
amount of realized gains or losses on the sale of investments is a function of
interest rates, market trends and the timing of sales.
During 2001, AMLI Commercial Properties Trust, an equity method investee in
which the Company held a 20% equity interest, sold substantially all of its
assets for an aggregate sale price of approximately $226.3 million. In
connection with such sales, the Company recognized a gain in the amount of $5.3
million.
The Company changed its method for accounting for its investment in AMLI
Residential Properties Trust (a publicly-traded (NYSE: AML) real estate
investment trust) ("AMLI Residential") from the equity method to the investment
method effective June 30, 2001 due to its decreased ownership interest to 10.3%.
The effect of the accounting change was to increase the carrying value of AMLI
Residential on the consolidated balance sheet of the Company at June 30, 2001
from $22.6 million to $62.8 million. As a result of the accounting change, the
Company no longer records its share of AMLI Residential's gains and losses but,
rather, marks-to-market its investment in AMLI Residential. Accordingly,
increases (or decreases) in the Company's carrying value of its investment in
AMLI Residential are now recorded as unrealized gains (or losses) with
corresponding increases (or decreases) to the Company's stockholders' equity
(net of tax). At December 31, 2001 and 2000, the Company's carrying value of its
investment in AMLI Residential was $64.3 million and $23.1 million,
respectively. The $23.1 million carrying value of the investment at December 3,
2000 is reflected on the Company's consolidated balance sheet under "Investment
in other equity investees."
2000 COMPARED TO 1999
General
UICI reported 2000 revenues and income from continuing operations of $1.020
billion and $32.0 million ($0.67 per share fully diluted), respectively,
compared to 1999 revenues and income from continuing operations of $954.2
million and $35.8 million ($0.75 per share fully diluted), respectively. The
Company generated total 2000 net income in the amount of $5.7 million ($0.12 per
share fully diluted), compared to a net loss of $(145.9) million ($(3.05) per
share fully diluted) in 1999, reflecting a loss in 2000 and 1999 from
discontinued operations in the amount of $(26.3) million ($(0.55) per share
fully diluted) and $(181.7) million ($(3.80) per share fully diluted),
respectively.
UICI's 2000 results include a pre-tax operating loss at the Company's
Academic Management Services Corp. student loan unit of $(24.6) million, the
Company's equity in losses of HealthAxis, Inc. of $(15.6) million, and a $26.3
million pre-tax gain from the sale of investment securities.
The Company's Self -- Employed Agency ("SEA") Division, which provides
health insurance to the self-employed market, reported operating income of $70.9
million in 2000, a 41% increase over operating income of $50.4 million in 1999.
The significant increase in operating income of the SEA division was primarily
attributable to improved loss ratios on the Company's managed care products,
continued success in directing a larger portion of new sales to more
traditional, higher margin, indemnity products, and increased
29
productivity of the Company's dedicated agent field force. The Company's
Insurance Segment as a whole reported operating income in 2000 of $84.6 million,
a 19% increase over operating income of $71.1 million generated in 1999.
As discussed further below, AMS' 2000 operating results reflected, in part,
a reduction in operating income as a result of reduced yields on AMS' student
loan portfolio, which resulted from the acquisition of higher cost student loans
in 1998 and 1999. AMS also incurred significant non-recurring expenses
associated with, among other things, the management transition effected in
January 2000, the relocation of AMS' headquarters, the write-off of facilities
development costs and previously capitalized costs incurred in connection with
AMS' Internet strategy, and the previously announced closure of the San Diego
loan origination center.
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 loss from discontinued operations in the amount of $40.3 million
pre-tax ($26.3 million net of tax). During the year ended December 31, 2000, the
credit card 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.
In December 2001, the Company designated its Special Risk Division as a
discontinued operation for financial reporting purposes for all years presented.
Continuing Operations
Revenues. UICI's revenues increased to $1,019.7 million in 2000 from
$954.2 million in 1999, an increase of $65.5 million, or 7%, primarily as a
result of an increase in other interest income and the gain on sale of the
HealthAxis.com shares in the amount of $26.3 million, offset by a $9.6 million
reduction in other fee income.
Health premiums. Health premiums increased to $651.4 million in 2000 from
$649.5 million in 1999, an increase of $1.9 million.
Life premiums and other considerations. Life premiums and other
considerations decreased to $36.8 million in 2000 from $40.3 million in 1999, a
decrease of $3.5 million, or 9%. This decrease resulted from reduced premiums
and other considerations from closed blocks of life and annuity business.
Investment income. Investment income increased to $89.8 million in 2000
from $82.9 million in 1999, an increase of $6.9 million, or 8%. The increase was
due to increased earnings from the Company's investment in AMLI Residential
Properties Trust, together with an increase in investment income from restricted
cash held at AMS for a full year in 2000. AMS Investment Group, Inc. was
acquired in July 1999.
Other interest income. Other interest income increased to $111.4 million
in 2000 from $65.1 million in 1999, an increase of $46.3 million. The increase
was due to the additional interest income earned on student loans at the
Company's AMS operations in 2000.
Other fee income. Other fee income decreased to $103.7 million in 2000
from $113.3 million in 1999, a decrease of $9.6 million. The decrease was due to
the sale of National Motor Club ("NMC") in July 2000. NMC generated $19.4
million and $24.6 million in other fee income (primarily membership fees) for
the seven month period ended July 2000 and for the full year in 1999,
respectively.
Other income. Other income decreased to $2.2 million in 2000 from $3.5
million in 1999, a decrease of $1.3 million. The decrease in other income is due
to a decrease in fee and commission income from the Company's AMLI Realty Co.
subsidiary.
Gain on sale of HealthAxis.com stock. On March 14, 2000, the Company sold
in a private sale to an institutional purchaser 2,000,000 shares of
HealthAxis.com common stock. In connection with the sale of such shares, the
Company recognized a pre-tax gain in the amount of $26.3 million.
30
Loss on sale of investments. The Company recognized losses on sale of
investments of $(1.9) million in 2000 compared to $(367,000) in 1999. The amount
of realized gains or losses on the sale of investments is a function of interest
rates, market trends and the timing of sales. Losses are more likely during
periods of increasing long-term interest rates. In addition, due to decreasing
long-term interest rates in 2000, the net unrealized investment loss on
securities classified as "available for sale", reported in accumulated other
comprehensive income as a separate component of stockholders' equity and net of
applicable income taxes, was $10.1 million at December 31, 2000, compared to
$30.4 million at December 31, 1999.
Benefits, claims, and settlement expenses. Benefits, claims and settlement
expenses decreased to $439.7 million in 2000 from $470.3 million in 1999, a
decrease of $30.6 million, or 7%. The decrease was primarily due to the
improvement in loss ratios on the Company's managed care products in the SEA
Division.
Underwriting, acquisition and insurance expenses. Underwriting,
acquisition and insurance expenses increased to $239.4 million in 2000 from
$225.1 million in 1999, an increase of $14.3 million or 6%. The increase was
primarily due to increased commission expense from directing sale of new
business to traditional indemnity products which generally incur higher first
year commission rates than managed care products and increased technology costs.
Other expenses. Other expenses increased to $117.1 million in 2000 from
$114.3 million in 1999, an increase of $2.8 million. The increase was primarily
due to increased administrative expenses incurred at the Company's AMS division
due to management transition relocation of AMS' headquarters and the write-off
of various development and capitalized costs.
Depreciation. Depreciation expense increased to $14.0 million in 2000 from
$13.6 million in 1999, an increase of $400,000.
Interest expense. Interest expense on corporate borrowings increased to
$13.6 million in 2000 from $7.4 million in 1999, an increase of $6.2 million.
The increase was due primarily to the increased level of borrowings outstanding
during 2000. Interest expense on student loan obligations increased to $101.6
million in 2000 from $57.5 million in 1999, an increase of $44.1 million. The
increase was due primarily to AMS' increased student loan origination volume.
Operating Income. Income from continuing operations before federal income
taxes ("operating income") increased to $67.1 million in 2000 from $54.8 million
in 1999. Operating income (loss) for each of the Company's segments and
divisions was as follows:
YEAR ENDED DECEMBER 31,
-----------------------
2000 1999
---------- ----------
Income (loss) from continuing operations before income
taxes:
Insurance:
Self Employed Agency................................... $ 70,905 $ 50,415
Student Insurance...................................... (1,877) 49
Life Insurance Division................................ 13,132 17,405
National Motor Club.................................... 2,471 3,200
-------- --------
Total Insurance................................... 84,631 71,069
-------- --------
Financial Services:
Academic Management Services.............................. (24,640) (19,938)
UICI Administrators....................................... (1,668) 2,322
Gain on sale of HealthAxis.com shares..................... 26,300 --
HealthAxis.com operating loss............................. (15,623) --
-------- --------
Total Financial Services.......................... (15,631) (17,616)
-------- --------
31
YEAR ENDED DECEMBER 31,
-----------------------
2000 1999
---------- ----------
Other Key Factors:
Investment income on equity, realized gains and losses,
general corporate expenses and other (including
interest on non-student loan indebtedness)............. 9,631 7,623
Variable stock compensation............................... (5,300) --
Goodwill amortization..................................... (6,193) (6,279)
-------- --------
Total Other Key Factors........................... (1,862) 1,344
-------- --------
Total income from continuing operations before
income taxes.................................... $ 67,138 $ 54,797
======== ========
Self Employed Agency Division ("SEA"). The SEA Division reported operating
income of $70.9 million in 2000 compared to $50.4 million in 1999. Revenue for
the SEA Division decreased to $566.4 million for the year ended in 2000 from
$566.8 million in 1999, a decrease of $400,000. The increase in operating income
was primarily attributable to improved loss ratios on the Company's managed care
products, continued success in directing a larger portion of new sales to more
traditional, higher margin, indemnity products, and increased productivity of
the Company's dedicated agent field force. The decrease in revenues was
attributable to the decrease in premiums from the coinsurance business, which
was offset by the continued success in new business sales from the Company's
Cornerstone and UGA dedicated agency field forces.
Student Insurance Division. The Student Insurance Division incurred an
operating loss of $(1.9) million in 2000 compared to operating income of $49,000
in 1999. The loss in 2000 reflected increased expenses associated with new
system implementations and lower margins resulting from increased loss ratios on
policies sold in the 1998-1999 policy year. Revenue for the Student Insurance
Division increased to $111.5 million in 2000 from $108.0 million in 1999, an
increase of $3.5 million, or 3%.
Life Insurance Division. Operating income for the Life Insurance Division
decreased to $13.1 million in 2000 from $17.4 million in 1999, a decrease of
25%. The decrease in operating income was attributable to several factors. The
Life Insurance Division's life insurance claim benefits increased over claim
benefits in the corresponding period of the prior year. The Company believes
that the higher level of claims in the life business was due to normal
variations in the business for the closed life blocks. An additional loan
reserve was established for the student loans made by the College Fund Life unit
on its life insurance product. Credit disability insurance claim reserves were
increased based on claims experience, and a reserve for bad debts on premium
receivables was established. Operating income for the workers compensation line
of business decreased as a result of lower premium rates, which has been
occurring in this product line in Oklahoma for the past two years. Revenue for
the Life Insurance Division decreased to $92.4 million in 2000 from $94.1
million in 1999, a decrease of $1.7 million, or 2%.
National Motor Club. On July 27, 2000, the Company completed the sale of
its 97% interest in NMC Holdings, Inc. (the parent of National Motor Club of
America, Inc.) to an investor group consisting of members of the family of
Ronald L. Jensen (including Mr. Jensen). See Note M of Notes to the Consolidated
Financial Statements.
Operating income for the National Motor Club decreased to $2.5 million in
2000 compared to $3.2 million in 1999. Revenues for National Motor Club
decreased to $21.7 million in 2000 from $27.8 million in 1999. The decrease in
operating income and revenues reflects the sale of National Motor Club in July
2000.
Third Party Administration Division. The Company has classified the
operations of 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 Services, Inc. as its Third Party
Administration ("TPA") business division. The TPA Division incurred an operating
loss of $(1.7) million in 2000 compared to operating income of $2.3 million in
1999. Revenues for the TPA Division decreased to $18.5 million in 2000 from
$46.2 million in 1999.
32
The decrease in operating income and revenues at the Company's TPA division
was primarily attributable to the timing of the contribution of substantially
all of the operations of Insurdata Incorporated (other than the operations of
Insurdata Marketing Services, LLC) to HealthAxis.com in connection with the
Insurdata-HealthAxis.com merger, which was completed in January 2000. The
results of operations of Insurdata Incorporated had previously been included in
the results of operations of the TPA division. Excluding the 1999 results of
operations of Insurdata Incorporated transferred to HealthAxis.com, for 2000 and
1999, revenues for the UICI Administrators division were $18.5 million and $4.8
million, respectively, and operating income (loss) for the division was $(1.7)
million and $414,000, respectively.
Investment in Healthaxis, Inc. The Company accounts for its investment in
Healthaxis, Inc. utilizing the equity method and, accordingly, recognizes its
ratable share of Healthaxis, Inc. income and loss (computed prior to
amortization of goodwill recorded by Healthaxis, Inc. in connection with the
Insurdata Merger). See Note E of Notes to Consolidated Financial Statements. The
Company's equity in the loss of HealthAxis.com for 2000 was $15.6 million.
Healthaxis, Inc. continues to incur operating losses attributable to significant
marketing, development and other start-up expenses. HealthAxis.com also incurred
losses in 2000 in connection with the sale of its retail web site and related
assets. The Company's share of such losses ($(2.5) million) is included in the
Company's equity in losses for 2000.
On March 14, 2000, the Company sold in a private sale to an institutional
purchaser 2,000,000 shares of HealthAxis.com common stock. In connection with
the sale of such shares, the Company recognized a pre-tax gain in the amount of
$26.3 million.
Other Key Factors. Other key factors include investment income not
allocated to the other segments, interest expense from corporate borrowings,
general expenses relating to corporate operations, realized gains or losses on
sale of investments, the AMLI operations, variable stock compensation and
amortization of goodwill. Other key factors reported an operating loss of $(1.9)
million in 2000 compared to operating income of $1.3 million in 1999, a $3.2
million decrease. The decrease is primarily due to decreased fees and
commissions at the Company's AMLI subsidiary and an increase in realized losses
in 2000.
Goodwill amortization decreased to $6.2 million in 2000 from $6.3 million
in 1999, a decrease of $100,000. This decrease in goodwill amortization was
attributable to the sale of NMC in July 2000, the assets of which included
approximately $36.1 million in goodwill. This decrease was offset by the
increase of goodwill amortization from the AMS acquisition in July 1999,
resulting in a full year of amortization in 2000, compared to five months of
amortization in 1999.
Academic Management Services Corp. ("AMS"). AMS incurred an operating loss
of $(24.6) million in 2000, compared to an operating loss of $(19.9) million in
1999 (in each case exclusive of goodwill amortization and other expenses at the
parent-company level). Revenue for AMS increased to $154.3 million
33
in 2000 from $104.6 million in 1999. Set forth below is a summary comparative
statement of operations for AMS:
YEAR ENDED DECEMBER 31,
-----------------------
2000 1999
---------- ----------
Interest income -- student loans............................ $110,651 $ 65,001
Gain on sale of student loans............................... 7,757 7,404
Other investment income..................................... 8,039 3,986
Fee income -- tuition payment programs...................... 11,898 7,404
Fee income -- loan servicing and other...................... 15,905 15,258
Insurance income............................................ -- 5,539
-------- --------
Total revenue............................................... 154,250 104,592
-------- --------
Interest expense -- student loans........................... 104,043 63,497
Provision for loan loss..................................... 1,810 950
Interest expense -- other indebtedness...................... 4,365 2,398
Depreciation................................................ 4,563 3,378
Amortization of goodwill.................................... 3,989 2,618
Other operating expenses.................................... 66,423 61,284
Less: operating costs deferred.............................. (2,238) (6,977)
-------- --------
182,955 127,148
-------- --------
Loss from operations (including amortization of goodwill and
other expenses in Other Key Factors)...................... (28,705) (22,556)
Amortization of goodwill and other expenses in Other Key
Factors................................................... 4,065 2,618
-------- --------
Loss from operations........................................ $(24,640) $(19,938)
======== ========
The increases in 2000 in interest income and interest expense associated
with student loans, as well as the increase in the provision for loan loss,
resulted primarily from higher average carrying amount of student loans held
during the year compared to 1999. In 2000, AMS originated approximately $776.1
million principal amount of new loans, purchased approximately $2.5 million
principal amount of student loans in the secondary market, and sold
approximately $779.8 million principal amount of loans. In 1999, AMS originated
approximately $671.2 million principal amount of new loans, purchased
approximately $401.0 million principal amount of student loans in the secondary
market, and sold approximately $391.0 million principal amount of loans.
Including principal payments and capitalization and amortization of deferred
loan origination costs, student loans decreased approximately $166.0 million in
2000, as compared to an increase of approximately $628.0 million during 1999.
During 2000, an increase in prevailing interest rates had a negative effect on
the cost of financing AMS' student loan portfolio.
Included in the interest rate spread on student loans are PLUS loans on
which the interest rate yield is set annually beginning July 1 by regulation at
a fixed rate. At March 31, June 30, September 30 and December 31, 2000, AMS held
PLUS loans in the aggregate principal amount of $371.0 million, $270.0 million,
$253.0 million and $273.0 million, respectively. The prescribed rate earned on
PLUS loans was 7.72% from January 1 to June 30, 2000 and was reset to 8.99%
beginning July 1, 2000. If the interest rate yield exceeds the maximum allowable
rate chargeable to the borrower, AMS, as the holder of PLUS loans, would be
eligible for government subsidized, special allowance payments for the year. The
fixed interest rate yield in 2000 was below the maximum rate. For the twelve
months beginning July 1, 2000, the fixed rate will be below the maximum rate and
AMS will not be entitled to special allowance payments on its PLUS loans. AMS
finances the cost of such loans at floating interest rates that are reset
monthly and quarterly through its structured finance facilities.
34
Gain on sale of student loans included gross gains of $22.5 million in 2000
and $16.0 million in 1999. Deferred loan origination costs associated with sold
loans were charged to gain on sale in the amount of $14.7 million and $8.6
million in 2000 and 1999, respectively. While more principal amount of loans was
sold in 2000 than in 1999, resulting in a higher gross gain, the lower net gain
results from higher deferred loan origination costs associated with sold loans
in 2000 compared to 1999. In addition, the sale of loans in the second and third
quarters of 2000 resulted in lower interest income in the second half of the
year, as the sold loans no longer generated interest income. The reduction in
interest earned in the second half of 2000 because of loan sales was offset by
gains on sale of $3.8 million in the first six months of 2000 and $3.1 million
in the second six months.
Other investment income increased to $8.0 million in 2000 from $4.0 million
in 1999. Fee income from tuition payment programs increased to $11.9 million in
2000 from $7.4 million in 1999. Increases in both of these categories resulted
primarily from the acquisition of the Academic Management Services Inc. tuition
payment program business, effective July 27, 1999. Results from this business
were included for a full year in 2000, compared to a period of five months in
1999. Income for the tuition payment program business is seasonal. In 2000,
income from tuition payment program fees earned plus investment income on
tuition payment program trust funds was $3.6 million in the first quarter, $5.5
million in the second quarter, $7.8 million in the third quarter and $3.8
million in the fourth quarter.
Insurance income of $5.5 million in 1999 relates to AMS' student insurance
business. In May 1999, the assets and liabilities associated with AMS' student
insurance business were transferred to UICI's Student Insurance Division.
Interest expense on other indebtedness increased to $4.4 million in 2000
from $2.4 million in 1999, reflecting primarily additional borrowings in the
amount of $30.0 million incurred to acquire Academic Management Services Inc. on
July 27, 1999. Interest expense on this acquisition indebtedness was $2.8
million in 2000.
The increases in depreciation expense and amortization of goodwill also
resulted primarily from the inclusion of AMS' tuition payment program business
and its acquisition cost for a full year in 2000, compared to five months in
1999. Amortization of goodwill associated with the acquisition of this business
was $2.4 million in 2000 compared to $1.0 million in 1999.
Other operating expenses increased to $66.4 million in 2000 from $61.3
million in 1999. Included in 2000 operating expenses were approximately $5.7
million associated with the management transition effected in January 2000, the
relocation of AMS' headquarters from South Yarmouth, Massachusetts to Swansea,
Massachusetts, the write-off of facilities development costs and the write-off
of previously capitalized costs incurred in connection with AMS' Internet
strategy and other business initiatives undertaken by prior management. AMS also
incurred $1.2 million in consulting expenses in connection with analysis of
operating strategies. Included in AMS' operating expenses for 2000 is $900,000
in expenses associated with the transfer in the fourth quarter of AMS'
non-campus based association marketing business to UICI's Student Insurance
Division. In addition, operating costs associated with the tuition payment
program business are included for a full year in 2000 compared to five months in
1999.
AMS markets loans to parents of dependent students ("PLUS loans") through
direct mail and telemarketing programs directly to prospective student and
parent borrowers. Until September 2000, these marketing activities were
conducted primarily through the Company's San Diego, California marketing unit.
On September 17, 2000, AMS announced that the California facility would be
closed and the PLUS loan marketing activities would be consolidated into AMS'
Swansea, Massachusetts headquarters. Management believes that these changes will
result in a more cost-effective marketing effort. In 2000, AMS recorded a charge
to income in the amount of $1.5 million, representing expenses incurred in
connection with the exit from its San Diego unit. These costs included
termination benefits for substantially all of the unit's 90 employees and the
cost of certain contractual obligations of the unit.
Certain costs of originating loans are capitalized in accordance with
Statement of Financial Accounting Standards No. 91, Nonrefundable Fees & Costs
Associated with Originating or Acquiring Loans and Initial
35
Direct Costs of Leases. Capitalized costs for PLUS loans incurred by the San
Diego unit were $2.2 million in 2000 as compared to $7.0 million in 1999. The
decrease in capitalized costs resulted from a decrease in total expenses
incurred ($7.5 million in 2000 compared to $17.0 million in 1999) and a decrease
in PLUS loan production ($50.0 million in 2000 compared to $192.0 million in
1999).
QUARTERLY RESULTS
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. For the year ended December 31, 2001, the Special Risk
Division reported a net loss of $(9.2) million, compared to a net loss of $(2.9)
million for the year ended December 31, 2000, which losses were reflected in
results from discontinued operations.
The following table presents the information for each of the Company's
fiscal quarters in 2001 and 2000 as restated to reflect classification of the
Special Risk Division as a discontinued operation. This information is unaudited
and has been prepared on the same basis as the audited Consolidated Financial
Statements of the Company included herein and, in management's opinion, reflects
all adjustments necessary for a fair presentation of the information for the
periods presented. The operating results for any quarter are not necessarily
indicative of results for any future period.
QUARTER ENDED
----------------------------------------------------
DECEMBER 31, SEPTEMBER 30, JUNE 30, MARCH 31,
2001 2001 2001 2001
------------- ------------- -------- ---------
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
Revenues from continuing
operations................. $299,209 $272,217 $278,718 $256,439
Income from continuing
operations before federal
income taxes............... 10,398 20,023 17,077 18,725
Income (loss) from continuing
operations................. 9,380 13,713 12,943 12,322
Income (loss) from
discontinued operations.... (3,082) (1,838) (327) (219)
Net income (loss)............ 6,298 11,875 12,616 12,103
Basic earnings (loss) for
common stockholders per
common share:
Income (loss) from continuing
operations................. 0.20 0.30 0.28 0.26
Income (loss) from
discontinued operations.... (0.06) (0.05) (0.01) --
Net income (loss)............ 0.14 0.25 0.27 0.26
Diluted earnings (loss) for
common stockholders per
common share:
Income (loss) from continuing
operations................. 0.19 0.29 0.27 0.26
Income (loss) from
discontinued operations.... (0.06) (0.04) -- (0.01)
Net income (loss)............ $ 0.13 $ 0.25 $ 0.27 $ 0.25
QUARTER ENDED
---------------------------------------------------
DECEMBER 31, SEPTEMBER 30, JUNE 30, MARCH 31,
2000 2000 2000 2000
------------ ------------- -------- ---------
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
Revenues from continuing
operations................. $252,772 $239,936 $253,631 $273,316
Income from continuing
operations before federal
income taxes............... 3,411 15,211 10,418 38,098
Income (loss) from continuing
operations................. (2,074) 8,157 6,277 19,658
Income (loss) from
discontinued operations.... (4,020) 859 (23,257) 133
Net income (loss)............ (6,094) 9,016 (16,980) 19,791
Basic earnings (loss) for
common stockholders per
common share:
Income (loss) from continuing
operations................. (0.05) 0.17 0.14 0.42
Income (loss) from
discontinued operations.... (0.09) 0.02 (0.50) 0.01
Net income (loss)............ (0.14) 0.19 (0.36) 0.43
Diluted earnings (loss) for
common stockholders per
common share:
Income (loss) from continuing
operations................. (0.05) 0.17 0.13 0.42
Income (loss) from
discontinued operations.... (0.08) 0.02 (0.49) --
Net income (loss)............ $ (0.13) $ 0.19 $ (0.36) $ 0.42
Computation of earnings (loss) per share for each quarter is made
independently of earnings (loss) per share for the year.
36
LIQUIDITY AND CAPITAL RESOURCES
GENERAL
The Company's primary sources of cash 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. During 2001, the Company generated net cash from operations on
a consolidated basis in the amount of $189.8 million. Net cash used in
operations totaled $21.3 million in 2000 and $58.3 million in 1999.
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.
During the year ended December 31, 2000, the losses at United CreditServ
had a material adverse effect upon the liquidity and cash flow of the Company.
During 2000, UICI contributed to United CreditServ an aggregate of $171.3
million in cash. In addition, on June 28, 2000, the Company funded an $8.0
million principal prepayment owing on its bank credit facility, on June 1, 2000
the Company made a mandatory principal payment on its senior notes outstanding
in the amount of $4.0 million, and effective July 27, 2000 the Company prepaid
$6.0 million owing to an affiliated lender. See Note M to Notes to Consolidated
Financial Statements. UICI at the holding company level funded these cash
contributions and other cash needs with the proceeds of the sale of investment
securities, a borrowing from a third party in the amount of $24.0 million funded
in July 2000, approved sales of assets from the holding company to the Company's
regulated insurance company subsidiaries completed in June and July 2000
generating cash proceeds in the aggregate amount of approximately $26.2 million,
dividends in the amount of $19.0 million paid during the six months ended June
30, 2000 from CLICO, the sale to The MEGA Life and Health Insurance Company of
CLICO for $19.0 million in July 2000, cash proceeds in the amount of $21.8
million from the disposition of its National Motor Club unit completed in July
2000, and cash on hand.
The Company completed its exit from the credit card business during 2001.
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. See Note B to Notes to Consolidated Financial Statements. UCNB surrendered
to the OCC its national bank charter and distributed to a wholly-owned
subsidiary of UICI the residual assets of UCNB in the amount of approximately
$26.0 million, substantially all of which consisted of cash and cash
equivalents. The Company utilized a substantial portion of the proceeds of the
liquidation to prepay indebtedness owing to a limited liability company
controlled by the Company's Chairman in the amount of $21.1 million and other
indebtedness in the amount of $5.0 million.
At December 31, 2001 and 2000, UICI at the holding company level held cash
and cash equivalents in the amount of $57.3 million and $16.4 million,
respectively. UICI currently estimates that, through December 31, 2002, the
holding company will have operating cash requirements in the amount of
approximately $78.4 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, dividends from domestic and offshore insurance
companies and tax sharing reimbursements from subsidiaries (which will be
partially offset by holding company operating expenses). There can be no
assurance that the cash requirements at the holding company level will not
exceed current estimates, or that the holding company will be able to raise
sufficient cash to fund cash requirements on a timely basis.
Prior approval by insurance regulatory authorities is required for the
payment of dividends by a domestic insurance company that exceed certain
statutory limitations based on surplus and net income.
The Company reduced its consolidated short and long-term indebtedness
(exclusive of indebtedness secured by student loans) from $90.0 million (which
included $19.0 million of indebtedness owing to a related party) at December 31,
2000 to $25.3 million (of which none was owed to a related party) at December
31,
37
2001, of which $19.4 million constituted indebtedness of the holding company at
December 31, 2001 (including $11.9 million outstanding principal amount of the
Company's 8.75% Senior Notes). See Note I of Notes to Consolidated Financial
Statements. In addition, during 2001 the Company utilized approximately $8.8
million to repurchase 980,400 shares of its common stock pursuant to its
previously announced stock repurchase program, which was reconfirmed by the
Board of Directors of the Company at its February 28, 2001 meeting.
In June 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. At December 31,
2000, this senior indebtedness was outstanding in the amount of $21.3 million
and was reflected as corporate debt (i.e., non-student loan indebtedness) on the
Company's consolidated balance sheet.
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. As of March 8, 2002, the Company
had no borrowings outstanding under the facility.
STUDENT LOAN CREDIT FACILITIES AND RESTRICTED CASH
The Company's consolidated balance sheet reflects significant assets
(consisting primarily of federally guaranteed and alternative (i.e.,
non-federally guaranteed) student loans and restricted cash) and liabilities
(consisting primarily of indebtedness under secured student loan credit
facilities) attributable to the student loan financing and origination
activities of the Company's AMS subsidiary and College Fund Life Insurance
Division.
At December 31, 2001 and 2000, the Company, through AMS and the College
Fund Life Insurance Division, had outstanding an aggregate of $1,506.2 million
and $1,334.8 million of indebtedness under secured student loan credit
facilities, of which $1,242.8 million and $1,221.5 million were issued by
bankruptcy-remote special purpose entities (each, an "SPE" or "Special Purpose
Entity") which are included in the Company's Consolidated Financial Statements.
At December 31, 2001 and 2000, 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 $1,125.5 million, respectively, and by a pledge of cash, cash
equivalents and other qualified investments in the amount of $129.4 million and
$86.2 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.
A trust created for the benefit of participants in AMS' tuition installment
program held invested assets in the amount of approximately $141.7 million and
$112.6 million at amortized cost (which approximated market) at December 31,
2001 and 2000, respectively, all of which assets are classified as restricted
cash on the Company's consolidated balance sheet. AMS is entitled to the
interest earned on the funds held in the trust as well as tuition budgeting
program fees deposited into the trust. The funds are invested in U.S. Treasury
securities, government agency securities, high-grade commercial paper, and money
market funds of insured depository institutions at December 31, 2001.
38
Set forth below is a summary pro forma December 31, 2001 balance sheet of
UICI, excluding certain assets (student loans and restricted cash) and certain
liabilities (student loan credit facilities) associated with the Company's AMS
and College Life Fund Division ("CFLD") operations:
AT DECEMBER 31, 2001
-------------------------------------------------------------------------------------------
OTHER AMS AMS TUITION OTHER CFLD
UICI CONSOLIDATED AMS AND CFLD FINANCING INSTALLMENT STUDENT UICI
AS REPORTED SPE FINANCINGS FACILITIES(1) PROGRAM(2) LOANS PRO FORMA
----------------- -------------- ------------- ----------- ---------- ----------
(IN THOUSANDS)
Assets:
Investments................ $1,218,718 $ -- $ -- $ -- $ -- $1,218,718
Student loans.............. 1,278,427 1,053,788 222,262 -- 2,377 --
Cash....................... 50,922 -- 36,059 -- 763 14,100
Restricted cash............ 295,182 127,272 -- 141,663 2,096(3) 24,151
Investment income due and
accrued.................. 60,879 35,840 11,314 -- 77 13,648
Other assets............... 381,756 5,181 116 1,428 177 374,854
---------- ---------- -------- -------- -------- ----------
Total assets........... $3,285,884 $1,222,081 $269,751 $143,091 $ 5,490 $1,645,471
========== ========== ======== ======== ======== ==========
Liabilities:
Policy liabilities......... $ 891,361 $ -- $ -- $ -- $ -- $ 891,361
Other liabilities.......... 187,552 3,172 668 -- 826 182,886
Collections payable........ 140,894 -- -- 140,894 -- --
Notes payable.............. 25,303 -- -- -- -- 25,303
Student loan credit
facilities............... 1,506,202 1,242,840 263,362 -- -- --
---------- ---------- -------- -------- -------- ----------
Total liabilities........ 2,751,312 1,246,012 264,030 140,894 826 1,099,550
---------- ---------- -------- -------- -------- ----------
Stockholders' equity
(deficit)........... 534,572 (23,931)(4) 5,721 2,197 4,664 545,921
---------- ---------- -------- -------- -------- ----------
Total liabilities
and stockholders'
equity............ $3,285,884 $1,222,081 $269,751 $143,091 $ 5,490 $1,645,471
========== ========== ======== ======== ======== ==========
---------------
(1) Obligations under AMS' master repurchase agreement and credit facility are
partially (approximately $13.0 million at December 31, 2001) guaranteed by
the Company. See discussion below.
(2) A trust created for the benefit of participants in AMS' tuition installment
program held invested assets in the amount of approximately $141.7 million
and $112.6 million at amortized cost (which approximated market) at December
31, 2001 and 2000, respectively, all of which assets are classified as
restricted cash on the Company's consolidated balance sheet. See Note A to
Notes to Consolidated Financial Statements.
(3) Represents cash and cash equivalents required to be held by CFLD to support
certain loan servicing obligations under CFLD's SPE financing.
(4) Includes negative equity in the AMS SPE financings, which is attributable to
permitted financing of student loans through AMS SPE financings in excess of
par value.
A more detailed summary of such student loan credit facilities is set forth
below:
ACADEMIC MANAGEMENT SERVICES CORP.
In March 1998, AMS entered into a master repurchase agreement and credit
facility with a financial institution, the obligations under which are partially
(approximately $13.0 million at December 31, 2001) guaranteed by the Company.
The proceeds of the facility are used from time to time to initially fund AMS'
student loan originations. The repurchase agreement provides for the purchase of
student loans by the financial
39
institution, and the financial institution may put the student loans back to AMS
on the last day of each month. AMS, in turn, has the right to require the
financial institution to repurchase the student loans on such date, with the
interest rate on the credit facility reset on such date. The credit facility
provides for up to $150.0 million of financing and may be increased subject to
monthly confirmations. The credit facility bears interest at a variable annual
rate of LIBOR plus 75 basis points (2.68% at December 31, 2001) and had an
outstanding balance of $263.4 million and $113.4 million at December 31, 2001
and 2000, respectively. The credit facility had an initial term of one year, has
been extended until March 2002 and is secured by student loans originated under
the Federal Family Education Loan Program, which are guaranteed by the federal
government or alternative loans guaranteed by private guarantors. The financial
institution may value the loans at any time and require AMS to repay any amount
by which the market value of the loans is less than the amount required by the
credit facility. At February 28, 2002, AMS had borrowings outstanding under the
credit facility in the amount of $40.7 million.
After initial funding, AMS typically refinances groups of loans on a more
structured basis by transferring loans to Special Purpose Entities, which in
turn issue debt securities secured by the student loans. During 1999, AMS
established approximately $1.3 billion of such structured funding facilities in
three separate transactions:
- On June 11, 1999, AMS sold, in a private placement transaction, $319.5
million principal amount of Auction Rate Student Loan-Backed Notes issued
by a Special Purpose Entity at an initial interest rate of 5.038%. The
notes were sold in two tranches and mature in November 2022. The notes
are insured by MBIA Insurance Corporation ("MBIA") and received a "AAA"
credit rating from Standard & Poor's and Fitch IBCA and an "Aaa" rating
from Moody's Investor Services. At December 31, 2001, the notes bore
interest at rates of 2.42% for Class A-1 and 2.44% for Class A-2, and the
outstanding balance of the notes at December 31, 2001 and 2000 was $254.6
million and $290.0 million, respectively.
- Effective August 6, 1999, AMS completed a closing and funding of $515.0
million of its $650.0 million single seller asset-backed commercial paper
conduit, pursuant to which commercial paper may be issued by a Special
Purpose Entity from time to time with maturities from one to 270 days.
Approximately $619.6 million of commercial paper bearing interest rate of
1.90% to 2.45% was issued and outstanding under the facility at December
31, 2001. Liquidity support is provided by a separate banking facility.
Under the terms of the program, in the event the support facility is
activated, borrowings under the bank facility would be repaid using
collections of underlying student loans, would bear interest at LIBOR
plus seventy-five (75) basis points and would mature in August 2034. The
commercial paper received ratings of A1/P1/F1 from Standard & Poor's,
Moody's, and Fitch, respectively, and is insured by MBIA.
- On October 7, 1999, AMS completed a $344.0 million financing of three
classes of notes issued by a Special Purpose Entity. The $229.0 million
Class A-1 notes were structured as three-month LIBOR floating rate notes
and were priced with a spread of 42 basis points with the interest rate
to be reset quarterly. The Class A-1 notes with an outstanding balance of
$153.7 million at December 31, 2001 have an expected average life of 3.5
years with legal final maturity in April 2009. The $57.5 million Class
A-2 and $57.5 million Class A-3 notes were structured as auction rate
notes with an initial interest rate of 6.38%. The interest rate on these
notes is reset quarterly. Legal final maturity of the A-2 and A-3 notes
is July 2027. At December 31, 2001, the outstanding balance of the notes
was $115.0 million, bearing interest rates of 2.55% and 2.42%,
respectively. All three classes of notes received AAA/Aaa/AAA ratings
from Standard & Poor's, Moody's and Fitch IBCA, respectively, and are
insured by MBIA.
In each case the obligations under such structured finance facilities
constitute obligations solely of the Special Purpose Entity that issued the
obligations and not of the Company, AMS or any other subsidiary of the Company.
However, for financial reporting and accounting purposes the AMS structured
finance facilities have been classified as financings. Accordingly, in
connection with the financings neither the Company nor AMS recorded gain on sale
of the student loan assets transferred to the Special Purpose Entity and, on a
40
consolidated basis, the Company continues to carry on its consolidated balance
sheet the student loans ($975.3 million at December 31, 2001) and cash and cash
equivalents held by the Special Purpose Entities ($113.4 million at December 31,
2001 classified as restricted cash) and the associated indebtedness ($1,142.8
million in the aggregate at December 31, 2001, which is included on the
Company's consolidated balance sheet as student loan credit facilities) arising
from the transactions.
In January 2002 the Company 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.
COLLEGE FUND LIFE INSURANCE DIVISION
On April 27, 2001, the Company completed a $100.0 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 two $50.0
million series of Student Loan Asset Backed Notes issued by a Special Purpose
Entity. Interest rates on the notes reset monthly in a Dutch auction process,
with the initial rate set at 4.75% for each of the Series A-1 and Series A-2
notes. At December 31, 2001, the interest rates on the Series A-1 and Series A-2
notes were 2.3% and 2.12%, respectively. The notes are secured by a pledge of
alternative 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 $70.1 million portfolio of alternative student loans
from various affiliates of the Company and established a loan acquisition fund
in the amount of $19.1 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. However, for
financial reporting and accounting purposes the CFLD structured finance facility
has been classified as a financing. Accordingly, in connection with the
financing the Company recorded no gain on sale of the assets transferred to the
Special Purpose Entity and, on a consolidated basis, the Company continues to
carry on its consolidated balance sheet the alternative student loans ($78.5
million principal amount at December 31, 2001) and cash and cash equivalents
held by the Special Purpose Entity ($13.9 million at December 31, 2001
classified as restricted cash) and the associated indebtedness ($100.0 million
at December 31, 2001, which is included on the Company's consolidated balance
sheet as student loan credit facilities) arising from the transaction.
INVESTMENTS
General. The Company has an Investment Committee that monitors the
investment portfolio of the Company and its subsidiaries. The Investment
Committee receives investment management services from external professionals.
Investments are selected based upon the parameters established in the
Company's investment policies. Emphasis is given to the selection of high
quality, liquid securities that provide current investment returns. Maturities
or liquidity characteristics of the securities are managed by continually
structuring the duration of the investment portfolio to be consistent with the
duration of the policy liabilities. Consistent with regulatory
41
requirements and internal guidelines, the Company invests in a range of assets,
but limits its investments in certain classes of assets, and limits its exposure
to certain industries and to single issuers.
Set forth below is a summary of the Company's investments by category at
December 31, 2001 and 2000:
DECEMBER 31, 2001 DECEMBER 31, 2000
----------------------- -----------------------
% OF TOTAL % OF TOTAL
CARRYING CARRYING CARRYING CARRYING
AMOUNT VALUE AMOUNT VALUE
---------- ---------- ---------- ----------
(IN THOUSANDS)
Securities available for sale --
Fixed maturities, at fair value (cost:
2001 -- $924,709;
2000 -- $827,905).................. $ 929,291 76.3 $ 814,433 76.3
Equity securities, at fair value
(cost: 2001 -- $42,419;
2000 -- $18,926)................... 84,445 6.9 16,916 1.6
Mortgage and collateral loans........... 5,404 0.4 5,368 0.5
Policy loans............................ 20,127 1.7 20,171 1.9
Investment in Healthaxis, Inc. ......... 8,278 0.7 18,442 1.7
Investment in other equity investees.... -- 43,196 4.0
Short-term investments.................. 171,173 14.0 149,173 14.0
---------- ----- ---------- -----
Total investments............. $1,218,718 100.0 $1,067,699 100.0
========== ===== ========== =====
The Company's investment at December 31, 2000 in AMLI Commercial Properties
Trust ("ACPT") and AMLI Residential Properties Trust ("AMLI Residential") in the
amount of $23.2 million and $20.1 million, respectively, is reflected under the
caption "Investment in other equity investees". During 2001, ACPT sold
substantially all of its assets for an aggregate sale price of approximately
$226.3 million. In connection with such sale, the Company recognized its
proportionate share of the gain in the amount of $5.3 million. See Note D to
Notes to Consolidated Financial Statements. Effective June 30, 2001, the Company
changed its method of accounting for its investment in AMLI Residential and the
investment is now reflected under the caption "Securities available for
sale -- equity securities" at December 31, 2001. See Note D of Notes to
Consolidated Financial Statements.
Investment accounting policies. The Company has classified its entire
fixed maturity portfolio as "available for sale." This classification requires
the portfolio to be carried at fair value with the resulting unrealized gains or
losses, net of applicable income taxes, reported in accumulated other
comprehensive income as a separate component of stockholders' equity. As a
result, fluctuations in fair value, which is effected by changes in interest
rates, will result in increases or decreases to the Company's stockholders'
equity.
During 2001, the Company recorded an impairment charge for certain fixed
and equity maturities in the amount of $3.0 million and $541,000, respectively.
42
Fixed maturity securities. Fixed maturity securities accounted for 76.1%
and 76.3% of the Company's total investments at December 31, 2001 and 2000,
respectively. Fixed maturity securities at December 31, 2001 consisted of the
following:
DECEMBER 31, 2001
---------------------
% OF TOTAL
CARRYING CARRYING
VALUE VALUE
-------- ----------
(IN THOUSANDS)
U.S. Treasury and U.S. Government agency obligations........ $ 47,666 5.1%
Corporate bonds............................................. 588,865 63.4
Mortgage-backed securities issued by U.S. Government
agencies and authorities.................................. 137,049 14.7
Other mortgage and asset backed securities.................. 155,711 16.8
-------- -----
$929,291 100.0%
======== =====
Included in the fixed maturity portfolio is a concentration of
mortgage-backed securities such as collateralized mortgage obligations and
mortgage-backed pass-throughs. To limit its credit risk, the Company invests in
mortgage-backed securities that are rated investment grade by the public rating
agencies. The Company's mortgage-backed securities portfolio is a conservatively
structured portfolio that is concentrated in the less volatile tranches, in the
form of planned amortization classes, sequential payment and commercial
mortgage-backed securities. The Company's objectives are to minimize prepayment
risk during periods of declining interest rates and minimize duration extension
risk during periods of rising interest rates. The Company has less than 1% of
its investment portfolio invested in the more volatile tranches.
As of December 31, 2001 and 2000, $883.3 million (or 95%) and $779.4
million (or 96%), respectively, of the fixed maturity securities portfolio was
rated BBB or better (investment grade) and $45.9 million (or 5%) and $35.0
million (or 4%), respectively, of the fixed maturity securities portfolio was
invested in below investment grade securities (rated less than BBB). A quality
distribution for fixed maturity securities at December 31, 2001 is set forth
below:
DECEMBER 31, 2001
---------------------
% OF TOTAL
CARRYING CARRYING
RATING VALUE VALUE
------ -------- ----------
(IN THOUSANDS)
U.S. Governments and AAA.................................... $298,510 32.1%
AA.......................................................... 87,316 9.4
A........................................................... 266,719 28.7
BBB......................................................... 230,800 24.8
Less than BBB............................................... 45,946 5.0
-------- -----
$929,291 100.0%
======== =====
The Company regularly monitors its investment portfolio to attempt to
minimize its concentration of credit risk in any single issuer. As of December
31, 2001, and other than the Company's investment in AMLI Residential Properties
Trust (which represented 1.6% of the Company's aggregate investment portfolio),
the Company's investment in no single issuer represented more than one percent
of the Company's aggregate investment portfolio.
With respect to its short-term investments, the Company invests in an
institutional money market fund that invests solely in the highest quality
United States dollar denominated money market securities of domestic and foreign
issuers. At December 31, 2001 and 2000, the Company had short-term investments
in this diversified fund in the amount of approximately $154.6 million and
$111.8 million, respectively.
43
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. For a more detailed
discussion on the application of these and other accounting policies, see Note A
of Notes to Consolidated Financial Statements in Item 14 of this Annual Report
on Form 10-K, beginning on page F-7.
The Company believes the following critical accounting policies affect its
more significant judgments and estimates used in the preparation of its
consolidated financial statements.
CLAIMS RESERVES
The Company establishes liabilities for benefit claims that have been
reported but not paid and claims that have been incurred but not reported under
health and life insurance contracts. These reserves are developed using
actuarial principles and assumptions that consider a number of factors,
including historical and current claim payment patterns, product variations, the
timely implementation of appropriate rate increases and seasonality.
The Company estimates the relevant factors, based primarily on historical
and current data, and uses this information to determine the assumptions
underlying its reserve calculations. An extensive degree of judgment is used in
this estimation process. For health care costs payable, the reserve balances and
the related benefit expenses are highly sensitive to changes in the assumptions
used in the reserve calculations. With respect to health claims, the factors
that have the greatest impact on the Company's financial results are the medical
cost trend, which is the rate of increase in health care costs and the
unpredictable variability in actual experience. Any adjustments to prior period
reserves are included in the benefit expense of the period in which the need for
the adjustment becomes known. Due to the considerable variability of health care
costs and actual experience, adjustments to health reserves occur each quarter
and are sometimes significant.
ACCOUNTING FOR HEALTH POLICY ACQUISITION COSTS
The Company incurs various costs in connection with the origination and
initial issuance of its health insurance policies, including underwriting and
policy issuance costs, costs associated with lead generation activities and
distribution costs (i.e., sales commissions paid to agents). For financial
reporting purposes, underwriting and policy issuance costs with respect to
health policies issued through the Company's Self Employed Agency and Student
Insurance Divisions are expensed as incurred. Costs associated with generating
sales leads with respect to the health business issued through the Self Employed
Agency Division are capitalized and amortized over a two-year period. The
Company defers the portion of commissions paid to agents and premium taxes with
respect to the portion of health premium collected but not yet earned, and the
Company amortizes the deferred expense over the period as and when the premium
is earned. See Note A of Notes to Consolidated Financial Statements.
With respect to health policies sold through the Company's Self Employed
Agency Division, commissions paid to agents with respect to first year policies
are higher than commissions paid to agents with respect to policies in renewal
years. Accordingly, during periods of increasing first year premium revenue
(such as occurred during 2001), the Self Employed Agency Division's overall
operating profit margin will be negatively impacted by the higher commission
expense associated with first year premium revenue.
44
GOODWILL AND OTHER IDENTIFIABLE INTANGIBLE ASSETS
Historically, the Company generally has amortized the excess of cost over
the underlying value of the net assets of companies acquired on a straight-line
basis over twenty to twenty-five years. The Company continually reevaluated the
propriety of the carrying amount of goodwill, as well as the amortization period
to determine whether current events and circumstances warrant adjustments to the
carrying value and/or revised estimates of useful life. The Company assessed the
recoverability of goodwill based upon several factors, including management's
intention with respect to the operations to which the goodwill relates and those
operations' projected future income and undiscounted cash flows. An impairment
loss would be recorded in the period such determination was made. At December
31, 2001 and 2000, the Company had goodwill in the amount of $104.7 million and
$105.9 million, respectively, and accumulated amortization of $18.7 million and
$14.4 million at December 31, 2001 and 2000, respectively, resulting in net
goodwill of $86.0 million and $91.5 million at December 31, 2001 and 2000,
respectively. Amortization expense recorded for continuing operations totaled
$6.3 million, $6.2 million, and $6.3 million in 2001, 2000, and 1999,
respectively.
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, Guaranty Senior
Assurance, SeniorsFirst 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 O of Notes to Consolidated Financial
Statements.
INVESTMENTS
The Company has classified its investments as available for sale and,
accordingly, investments have been recorded at fair value, and unrealized
investment gains and losses are reflected in stockholders' equity. Investment
income is recorded when earned, and capital gains and losses are recognized when
investments are sold. Investments are reviewed periodically to determine if they
have suffered an impairment of value that is considered other than temporary. If
investments are determined to be impaired, a capital loss is recognized at the
date of determination.
Testing for impairment of investments also requires significant management
judgment. The identification of potentially impaired investments, the
determination of their fair value and the assessment of whether any decline in
value is other than temporary are the key judgment elements. The discovery of
new information and the passage of time can significantly change these
judgments. Revisions of impairment judgments are made when new information
becomes known, and any resulting impairment adjustments are made at that time.
The current economic environment and recent volatility of securities markets
increase the difficulty of determining fair value and assessing investment
impairment. The same influences tend to increase the risk of potentially
impaired assets.
The Company seeks to match the maturities of invested assets with the
payment of expected liabilities. By doing this, the Company attempts to make
cash available as payments become due. If a significant mismatch of the
maturities of assets and liabilities were to occur, the impact on the Company's
results of operations could be significant.
DEFERRED TAXES
The Company has recorded a valuation allowance to reduce its deferred tax
assets to the amount that it believes is more likely than not to be realized.
While the Company has considered future taxable income and
45
ongoing prudent and feasible tax planning strategies in assessing the need for
the valuation allowance, in the event the Company were to determine that it
would be able to realize its deferred tax assets in the future in excess of its
net recorded amount, an adjustment to the deferred tax asset would increase
income in the period such determination was made. Likewise, in the event that
the Company were to determine that it would not be able to realize all or part
of its net deferred tax asset in the future, an adjustment to the deferred tax
asset would be charged to income in the period such determination was made.
LOSS CONTINGENCIES
The Company is subject to proceedings and lawsuits related to insurance
claims and other matters. See Note N of Notes to Consolidated Financial
Statements. The Company is required to assess the likelihood of any adverse
judgments or outcomes to these matters, as well as potential ranges of probable
losses. A determination of the amount of reserves required, if any, for these
contingencies is made after careful analysis of each individual issue. The
required reserves may change in the future due to new developments in each
matter or changes in approach, such as a change in settlement strategy in
dealing with these matters.
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 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.
46
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.
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-
47
identifiable health information, will not have a material adverse effect on
UICI's business and future results of operations.
INCOME TAXES
The Company's effective tax rate from continuing operations was 27.0% for
2001 compared to 52.3% for 2000 and 34.6% for 1999. The 2001 effective tax rate
varied from the federal tax rate of 35%, primarily due to the decrease in the
valuation allowance related to the partial utilization by AMS of its operating
loss carryover and a release of a reserve for taxes on undistributed earnings
from its subsidiaries that were previously less than 80% owned and are now
wholly owned. The 2000 effective tax rate varied from the federal tax rate of
35%, primarily due to the significant operating loss at AMS, from which the
Company was not able to recognize a tax benefit. AMS entered the Company's
consolidated group for tax purposes on August 3, 2001. Prior to that date AMS
filed a separate tax return. As of December 31, 2001, the Company has recognized
a net deferred tax asset of $14.9 million. Realization of the net deferred tax
asset is dependent on generating sufficient taxable income. Although realization
is not assured, management believes it is more likely than not that the net
deferred tax asset will be realized based on anticipated profits and available
tax planning strategies. See Note K of Notes to Consolidated Financial
Statements.
OTHER MATTERS
The state of domicile of each of the Company's domestic insurance
subsidiaries imposes minimum risk-based capital requirements that were developed
by the NAIC. The formulas for determining the amount of risk-based capital
specify various weighting factors that are applied to financial balances and
premium levels based on the perceived degree of risk. Regulatory compliance is
determined by a ratio of a company's regulatory total adjusted capital, as
defined, to its authorized control level risk-based capital, as defined.
Companies' specific trigger points or ratios are classified within certain
levels, each of which requires specified corrective action. At December 31,
2001, the risk-based capital ratio of each of the Company's domestic insurance
subsidiaries significantly exceeded the ratios for which regulatory corrective
action would be required.
Dividends paid by domestic insurance companies out of earned surplus in any
year are limited by the law of the state of domicile. See Item 5 -- Market for
Registrant's Common Stock and Related Stockholder Matters and Note L of Notes to
the Consolidated Financial Statements.
INFLATION
Inflation historically has had a significant impact on the health insurance
business. In recent years, inflation in the costs of medical care covered by
such insurance has exceeded the general rate of inflation. Under basic hospital
medical insurance coverage, established ceilings for covered expenses limit the
impact of inflation on the amount of claims paid. Under catastrophic hospital
expense plans and preferred provider contracts, covered expenses are generally
limited only by a maximum lifetime benefit and a maximum lifetime benefit per
accident or sickness. Thus, inflation may have a significantly greater impact on
the amount of claims paid under catastrophic hospital expense and preferred
provider plans as compared to claims under basic hospital medical coverage. As a
result, trends in health care costs must be monitored and rates adjusted
accordingly. Under the health insurance policies issued in the self-employed
market, the primary insurer generally has the right to increase rates upon 30-60
days written notice and subject to regulatory approval in some cases.
The annuity and universal life-type policies issued directly and assumed by
the Company are significantly impacted by inflation. Interest rates affect the
amount of interest that existing policyholders expect to have credited to their
policies. However, the Company believes that the annuity and universal life-type
policies are generally competitive with those offered by other insurance
companies of similar size, and the investment portfolio is managed to minimize
the effects of inflation.
48
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. Statement 144 is effective for financial statements issued for
fiscal years beginning after December 15, 2001. Early application is encouraged.
The provisions of the Statement are to be applied prospectively.
In June 2001, the Financial Accounting Standards Board ("FASB") 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.
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 will apply Statement 142 beginning in the first quarter 2002.
Application of the nonamortization provisions of Statement 142 is expected to
result in an increase in net income of approximately $4.5 million ($0.09 per
share) in 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.
The Company expects to perform the first of the required impairment tests of
goodwill and indefinite lived intangible assets as of January 1, 2002 in the
first quarter of 2002. Any impairment charge resulting from these transitional
impairment tests will be reflected as the cumulative effect of a change in
accounting principle in the first quarter of 2002. The Company has not yet
determined what the effect, if any, of these tests will be on the results of
operations and financial position of the Company.
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
49
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, 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 7A. 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
liabilities. The Company's investment 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 $207.8 million principal amount of
PLUS loans outstanding at December 31, 2001. 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, 2001, 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.
Sensitivity analysis is defined as the measurement of potential loss in
future earnings, fair values or cash flows of market sensitive instruments
resulting from one or more selected hypothetical changes in interest rates and
other market rates or prices over a selected time. In the Company's sensitivity
analysis model, a hypothetical change in market rates is selected that is
expected to reflect reasonably possible near-term changes in those rates. "Near
term" is defined as a period of time going forward up to one year from the date
of the consolidated financial statements.
50
In this sensitivity analysis model, the Company uses fair values to measure
its potential loss. The primary market risk to the Company's market sensitive
instruments is interest rate risk. The sensitivity analysis model uses a 100
basis point change in interest rates to measure the hypothetical change in fair
value of financial instruments included in the model. For invested assets,
duration modeling is used to calculate changes in fair values. Duration on
invested assets is adjusted to call, put and interest rate reset features.
The sensitivity analysis model produces a loss in fair value of market
sensitive instruments of $42.7 million based on a 100 basis point increase in
interest rates as of December 31, 2001. This loss value only reflects the impact
of an interest rate increase on the fair value of the Company's financial
instruments.
The Company has not used derivative financial instruments in managing its
market risk.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The audited consolidated financial statements of the Company and other
information required by this Item 8 are included in this Form 10-K beginning on
page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
See the Company's Proxy Statement to be filed in connection with the 2002
Annual Meeting of Shareholders, of which the section entitled "Election of
Directors" is incorporated herein by reference.
For information on executive officers of the Company, reference is made to
the item entitled "Executive Officers of the Company" in Part I of this report.
ITEM 11. EXECUTIVE COMPENSATION
See the Company's Proxy Statement to be filed in connection with the 2002
Annual Meeting of Stockholders, of which the subsection entitled "Executive
Compensation" is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
See the Company's Proxy Statement to be filed in connection with the 2002
Annual Meeting of Stockholders, of which the subsection entitled "Nominees" and
the subsection entitled "Beneficial Ownership of Common Stock" are incorporated
herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
See the Company's Proxy Statement to be filed in connection with the 2002
Annual Meeting of Stockholders, of which the subsection entitled "Certain
Relationships and Related Transactions" is incorporated herein by reference. See
Note M of Notes to Consolidated Financial Statements.
51
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) Financial Statements
The following consolidated financial statements of UICI and subsidiaries
are included in Item 8:
PAGE
----
Independent Auditors' Report on Financial Statements and
Financial Statement Schedules............................. F-2
Consolidated Balance Sheets -- December 31, 2001 and 2000... F-3
Consolidated Statements of Operations -- Years ended
December 31, 2001, 2000 and 1999.......................... F-4
Consolidated Statements of Stockholders' Equity -- Years
ended December 31, 2001, 2000 and 1999.................... F-5
Consolidated Statements of Cash Flows -- Years ended
December 31, 2001, 2000 and 1999.......................... F-6
Notes to Consolidated Financial Statements.................. F-8
Financial Statement Schedules
Schedule II -- Condensed Financial Information of Registrant December 31,
2001, 2000 and 1999:
UICI (Parent Company)..................................... F-80
Schedule -- Supplementary Insurance Information......................... F-83
III
Schedule IV -- Reinsurance................................................. F-85
Schedule V -- Valuation and Qualifying Accounts........................... F-86
All other schedules for which provision is made in the applicable
accounting regulations of the Securities and Exchange Commission are not
required under the related instructions or are not applicable and therefore have
been omitted.
(a) Exhibits
The response to this portion of Item 14 is submitted as a separate section
of this report beginning on page 55.
(b) Reports on Form 8-K
1. A current report on Form 8-K dated December 21, 2001 regarding a
settlement of shareholder derivative litigation 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.
2. A current report on Form 8-K dated February 8, 2002 regarding a
presentation by the Company's representatives at the Wall Street Analyst Forum's
Institutional Investor Conference in New York City.
3. A current report on Form 8-K dated March 4, 2002 regarding the
acquisition by the Company of STAR Human Resources Group, Inc. and STAR
Administrative Services, Inc.
52
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
UICI
By /s/ GREGORY T. MUTZ*
------------------------------------
Gregory T. Mutz,
President, Chief Executive Officer,
and Director
Date: March 21, 2002
Pursuant to the requirements of Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ RONALD L. JENSEN* Chairman of the Board and Director March 21, 2002
------------------------------------------------
Ronald L. Jensen
/s/ GREGORY T. MUTZ* President, Chief Executive March 21, 2002
------------------------------------------------ Officer,
Gregory T. Mutz and Director
/s/ MATTHEW R. CASSELL Vice President and March 21, 2002
------------------------------------------------ Chief Financial Officer
Matthew R. Cassell
/s/ GLENN W. REED Executive Vice President, General March 21, 2002
------------------------------------------------ Counsel, and Director
Glenn W. Reed
/s/ STUART D. BILTON* Director March 21, 2002
------------------------------------------------
Stuart D. Bilton
/s/ GEORGE H. LANE, III* Director March 21, 2002
------------------------------------------------
George H. Lane, III
/s/ WILLIAM J. GEDWED* Director March 21, 2002
------------------------------------------------
William J. Gedwed
/s/ PATRICK J. MCLAUGHLIN* Director March 21, 2002
------------------------------------------------
Patrick J. McLaughlin
/s/ RICHARD T. MOCKLER* Director March 21, 2002
------------------------------------------------
Richard T. Mockler
53
SIGNATURE TITLE DATE
--------- ----- ----
/s/ MARK D. HAUPTMAN Vice President and Chief March 21, 2002
------------------------------------------------ Accounting Officer
Mark D. Hauptman
*By: /s/ GLENN W. REED (Attorney-in-fact) March 21, 2002
-----------------------------------------
Glenn W. Reed
(Attorney-in-fact)
54
ANNUAL REPORT ON FORM 10-K
ITEM 8, ITEM 14(A)(1) AND (2), (C), AND (D)
FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA
FINANCIAL STATEMENT SCHEDULES
CERTAIN EXHIBITS
YEAR ENDED DECEMBER 31, 2001
UICI
AND
SUBSIDIARIES
DALLAS, TEXAS
F-1
REPORT OF INDEPENDENT AUDITORS
Board of Directors
UICI
We have audited the accompanying consolidated balance sheets of UICI and
subsidiaries (the "Company") as of December 31, 2001 and 2000, and the related
consolidated statements of operations, stockholders' equity and cash flows for
each of the three years in the period ended December 31, 2001. Our audits also
included the financial statement schedules listed in the Index at Item 14(a).
These financial statements and schedules are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and schedules based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
UICI and subsidiaries at December 31, 2001 and 2000, and the consolidated
results of their operations and their cash flows for each of the three years in
the period ended December 31, 2001, in conformity with accounting principles
generally accepted in the United States. Also, in our opinion, the related
financial statement schedules, when considered in relation to the basic
financial statements taken as a whole, present fairly in all material respects
the information set forth therein.
ERNST & YOUNG LLP
Dallas, Texas
February 6, 2002, except for Note T,
as to which the date is February 28, 2002
F-2
UICI AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31,
-----------------------
2001 2000
---------- ----------
(DOLLARS IN THOUSANDS,
EXCEPT SHARE AMOUNTS)
ASSETS
Investments
Securities available for sale --
Fixed maturities, at fair value (cost:
2001 -- $924,709; 2000 -- $827,905)................... $ 929,291 $ 814,433
Equity securities, at fair value (cost:
2001 -- $42,419; 2000 -- $18,926)..................... 84,445 16,916
Mortgage and collateral loans............................. 5,404 5,368
Policy loans.............................................. 20,127 20,171
Investment in Healthaxis, Inc. ........................... 8,278 18,442
Investment in other equity investees...................... -- 43,196
Short-term investments.................................... 171,173 149,173
---------- ----------
Total Investments.................................. 1,218,718 1,067,699
Cash and cash equivalents................................... 50,922 80,869
Student loans............................................... 1,278,427 1,156,072
Restricted cash............................................. 295,182 222,660
Reinsurance receivables..................................... 63,825 65,056
Due premiums and other receivables.......................... 50,793 44,364
Investment income due and accrued........................... 60,879 62,014
Refundable income taxes..................................... 5,317 10,320
Deferred acquisition costs.................................. 73,928 68,125
Goodwill.................................................... 86,010 91,523
Deferred income tax......................................... 14,856 32,949
Property and equipment, net................................. 72,548 75,020
Other assets................................................ 14,479 13,177
---------- ----------
$3,285,884 $2,989,848
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Policy liabilities:
Future policy and contract benefits....................... $ 423,297 $ 423,046
Claims.................................................... 354,011 288,532
Unearned premiums......................................... 95,399 95,127
Other policy liabilities.................................. 18,654 17,927
Accounts payable............................................ 52,577 40,804
Other liabilities........................................... 99,102 110,511
Collections payable......................................... 140,894 111,787
Note payable to related party............................... -- 18,954
Debt........................................................ 25,303 71,037
Student loan credit facilities.............................. 1,506,202 1,334,847
Net liabilities of discontinued operations, including
reserve for losses on disposal............................ 35,873 30,171
---------- ----------
2,751,312 2,542,743
Commitments and Contingencies
Stockholders' Equity
Preferred stock, par value $0.01 per share -- authorized
10,000,000 shares, no shares issued and outstanding in
2001 and 2000........................................... -- --
Common Stock, par value $0.01 per share -- authorized
100,000,000 shares in 2001 and 2000; 49,404,323 issued
and 46,669,237 outstanding in 2001; 48,292,580 issued
and 46,950,962 outstanding in 2000...................... 494 483
Additional paid-in capital................................ 201,328 183,162
Accumulated other comprehensive income (loss)............. 30,294 (10,068)
Retained earnings......................................... 317,169 274,277
Treasury stock, at cost (978,006 shares in 2001 and 87,456
shares in 2000)......................................... (14,713) (749)
---------- ----------
534,572 447,105
---------- ----------
$3,285,884 $2,989,848
========== ==========
See notes to consolidated financial statements.
F-3
UICI AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31,
-----------------------------------
2001 2000 1999
---------- ---------- ---------
(DOLLARS IN THOUSANDS,
EXCEPT PER SHARE AMOUNTS)
REVENUE
Premiums:
Health (includes amounts received from related parties
of $6,329, $3,835, and $-0- in 2001, 2000 and 1999,
respectively)........................................ $ 797,367 $ 651,411 $ 649,541
Life premiums and other considerations................ 34,679 36,814 40,291
---------- ---------- ---------
832,046 688,225 689,832
Investment income......................................... 83,829 89,775 82,869
Other interest income (includes amounts received from
related parties of $20, $911 and -0-in 2001, 2000 and
1999, respectively)..................................... 88,427 111,415 65,055
Other fee income (includes amounts received from related
parties of $7,753, $3,755, and $6,945 in 2001, 2000, and
1999, respectively)..................................... 94,022 103,718 113,309
Other income.............................................. 3,094 2,164 3,481
Gain on sale of HealthAxis.com shares..................... -- 26,300 --
Gains (losses) on sale of investments..................... 5,165 (1,942) (367)
---------- ---------- ---------
1,106,583 1,019,655 954,179
BENEFITS AND EXPENSES
Benefits, claims, and settlement expenses................. 530,969 439,704 470,273
Underwriting, acquisition, and insurance expenses
(includes amounts paid to related parties of $28,760,
$31,249, and $15,266 in 2001, 2000, and 1999,
respectively)........................................... 293,803 239,364 225,062
Stock appreciation expense................................ 7,293 5,300 5,000
Other expenses, (includes amounts paid to related parties
of $10,982, $7,967, and $2,002 in 2001, 2000, and 1999,
respectively)........................................... 101,084 117,061 114,264
Depreciation (includes expense on assets purchased from
related parties of $510, $688, and $-0- in 2001, 2000,
and 1999, respectively)................................. 15,885 14,037 13,612
Interest expense (includes amounts paid to related parties
of $98, $4,559, and $-0- in 2001, 2000, and 1999,
respectively)........................................... 5,018 13,639 7,430
Interest expense -- student loan credit facility.......... 69,448 101,596 57,462
Equity in operating loss from Healthaxis, Inc.
investment.............................................. 10,597 15,623 --
Goodwill amortization..................................... 6,263 6,193 6,279
---------- ---------- ---------
1,040,360 952,517 899,382
---------- ---------- ---------
INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES....... 66,223 67,138 54,797
Federal income taxes........................................ 17,865 35,120 18,983
---------- ---------- ---------
INCOME FROM CONTINUING OPERATIONS........................... 48,358 32,018 35,814
DISCONTINUED OPERATIONS:
Loss from operations, (net of income tax benefit $2,937,
$1,376, and $52,054 in 2001, 2000, and 1999,
respectively)............................................. (5,466) (2,885) (97,196)
Estimated loss on disposal (net of income tax benefit of
$-0-, $12,600, and $45,500 in 2001, 2000, and 1999,
respectively)............................................. -- (23,400) (84,500)
---------- ---------- ---------
(5,466) (26,285) (181,696)
---------- ---------- ---------
NET INCOME (LOSS)........................................... $ 42,892 $ 5,733 $(145,882)
========== ========== =========
Earnings (loss) per share:
Basic earnings (loss)
Income from continuing operations..................... $ 1.04 $ 0.68 $ 0.77
Loss from discontinued operations..................... (0.12) (0.56) (3.92)
---------- ---------- ---------
Net income (loss)..................................... $ 0.92 $ 0.12 $ (3.15)
========== ========== =========
Diluted earnings (loss)
Income from continuing operations..................... $ 1.01 $ 0.67 $ 0.75
Loss from discontinued operations..................... (0.11) (0.55) (3.80)
---------- ---------- ---------
Net income (loss)..................................... $ 0.90 $ 0.12 $ (3.05)
========== ========== =========
See notes to consolidated financial statements.
F-4
UICI AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
ACCUMULATED
ADDITIONAL OTHER
COMMON PAID-IN COMPREHENSIVE RETAINED TREASURY
STOCK CAPITAL INCOME (LOSS) EARNINGS STOCK TOTAL
------ ---------- ------------- -------- -------- --------
(DOLLARS IN THOUSANDS)
Balance at January 1, 1999.......................... $464 $166,489 $13,412 $414,426 $ -- $594,791
Comprehensive income:
Net loss.......................................... (145,882) (145,882)
--------
Other comprehensive loss, net of tax:
Change in unrealized gains (losses) on
securities.................................... (67,411) (67,411)
Deferred income tax benefit..................... 22,744 22,744
Other........................................... 823 823
--------
Other comprehensive loss...................... (43,844)
--------
Comprehensive loss.................................. (189,726)
--------
Exercise of stock options and warrants.............. 2 6,568 6,570
Purchase of treasury stock.......................... (11,681) (11,681)
Retirement of treasury stock........................ (6,952) 6,952 --
Capital contribution................................ 10,129 10,129
Notes receivable from shareholders.................. (2,649) (2,649)
---- -------- ------- -------- -------- --------
Balance at December 31, 1999........................ 466 173,585 (30,432) 268,544 (4,729) 407,434
Comprehensive income:
Net income........................................ 5,733 5,733
--------
Other comprehensive income, net of tax:
Change in unrealized gains (losses) on
securities.................................... 31,302 31,302
Deferred income tax expense..................... (10,391) (10,391)
Other........................................... (547) (547)
--------
Other comprehensive income.................... 20,364
--------
Comprehensive income................................ 26,097
--------
Common stock issued................................. 17 9,047 9,064
Common shares unearned.............................. (6,271) (6,271)
Retirement of treasury stock........................ (66) (66)
Sale of treasury stock.............................. (3,125) 4,046 921
Capital contribution................................ 8,905 8,905
Payments on notes receivable from shareholders...... 1,021 1,021
---- -------- ------- -------- -------- --------
Balance at December 31, 2000........................ 483 183,162 (10,068) 274,277 (749) 447,105
Comprehensive income:
Net income........................................ 42,892 42,892
Other comprehensive income, net of tax:
Change in unrealized gains (losses) on
securities.................................... 62,090 62,090
Deferred income tax expense..................... (21,608) (21,608)
Other........................................... (120) (120)
--------
Other comprehensive income.................... 40,362
--------
Comprehensive income................................ 83,254
--------
Common stock issued................................. 11 15,336 1,039 16,386
Exercise stock options.............................. 28 28
Purchase of treasury stock.......................... (15,003) (15,003)
Payments on notes receivable from shareholders...... 2,802 2,802
---- -------- ------- -------- -------- --------
Balance at December 31, 2001........................ $494 $201,328 $30,294 $317,169 $(14,713) $534,572
==== ======== ======= ======== ======== ========
See notes to consolidated financial statements.
F-5
UICI AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31,
-------------------------------------
2001 2000 1999
--------- ----------- -----------
(DOLLARS IN THOUSANDS)
OPERATING ACTIVITIES
Net income (loss)......................................... $ 42,892 $ 5,733 $ (145,882)
Loss on Disposal of Discontinued Operation.............. -- 36,000 130,000
Adjustments to reconcile net income (loss) to cash
provided by (used in) operating activities:
Amounts charged to loss on disposal of discontinued
operations............................................ (7,675) (131,898) --
Increase in policy liabilities.......................... 83,364 32,466 10,525
Decrease (increase) in accrued investment income........ 1,135 (7,466) (10,418)
Increase (decrease) in other liabilities and accrued
expenses.............................................. 8,154 (49,546) 26,346
Increase (decrease) in collections payable.............. 29,107 (1,270) --
Stock appreciation expense.............................. 7,351 5,308 --
Deferred income tax (benefit) change.................... (3,513) 45,325 (75,269)
Decrease in federal income taxes payable................ -- -- (36,111)
Refundable income taxes................................. 5,003 11,095 (21,415)
Decrease (increase) in reinsurance receivables and other
receivables........................................... 2,675 (5,693) 18,269
Acquisition costs deferred.............................. (43,198) (21,654) (19,146)
Amortization of deferred acquisition costs.............. 37,655 23,664 31,966
Depreciation and amortization........................... 25,393 25,671 26,491
Operating loss of Healthaxis, Inc. ..................... 10,597 15,623 --
(Gains) loss on sale of investments..................... (10,805) (25,889) 367
Other items, net........................................ 1,708 21,260 5,971
--------- ----------- -----------
Cash Provided by (Used in) Operating Activities....... 189,843 (21,271) (58,306)
--------- ----------- -----------
INVESTING ACTIVITIES
Securities available-for-sale
Purchases............................................... (397,085) (123,617) (207,274)
Sales................................................... 219,773 150,078 111,172
Maturities, calls and redemptions....................... 81,559 49,917 49,256
Credit card loans
Fundings................................................ -- (221,530) (411,537)
Repayments.............................................. -- 288,084 357,141
Sales................................................... -- 124,122 --
Student loans
Purchases and originations.............................. (757,062) (783,600) (1,144,122)
Maturities.............................................. 187,772 165,894 75,861
Sales................................................... 446,934 787,684 434,114
Other investments
Purchases............................................... (2,807) (2,173) (4,992)
Sales, repayments and maturities........................ 24,169 8,859 3,222
Decrease (increase) in restricted cash.................. (70,426) 267,060 (311,309)
Short-term investments -- net............................. (24,093) 21,709 (26,682)
Purchase of subsidiaries and life and health business net
of cash acquired of $-0-, $425, and $20, in 2001, 2000,
and 1999, respectively.................................. -- (4,481) (52,231)
Proceeds from subsidiaries sold, net of cash disposed of
$1 in 2001; $8,319 in 2000; and $-0- in 1999............ 140 36,854 --
Sale of two million shares of HealthAxis.com.............. -- 30,000 --
Additions to property and equipment....................... (16,536) (17,138) (29,487)
Decrease (increase) in agents' receivables................ (4,121) (2,870) 995
--------- ----------- -----------
Cash Provided by (Used in) Investing Activities....... (311,783) 774,852 (1,155,873)
--------- ----------- -----------
F-6
UICI AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS -- (CONTINUED)
YEAR ENDED DECEMBER 31,
-------------------------------------
2001 2000 1999
--------- ----------- -----------
(DOLLARS IN THOUSANDS)
FINANCING ACTIVITIES
Net cash provided by (used in) time deposits.............. -- (290,023) 191,110
Proceeds from notes payable............................... -- 104,000 127,499
Repayment of notes payable................................ (45,732) (189,015) (45,667)
Issuance of note receivable to related party.............. -- (35,000) --
Proceeds from note receivable from related party.......... -- 35,000 --
Proceeds from payable to related party.................... -- 76,000 --
Repayment of payable to related party..................... (18,954) (57,046) (497)
Proceeds from student loan credit facilities.............. 726,245 723,700 2,487,728
Repayment of student loan credit facilities............... (554,892) (1,095,992) (1,468,350)
Deposits from investment products......................... 14,576 15,965 15,954
Withdrawals from investment products...................... (30,888) (45,809) (38,776)
Capital Contributions..................................... -- 8,905 10,129
Net change in treasury shares............................. (13,964) -- --
Other..................................................... 15,602 2,512 (7,760)
--------- ----------- -----------
Cash Provided by (Used in) Financing Activities....... 91,993 (746,803) 1,271,370
--------- ----------- -----------
Net Increase (decrease) in Cash............................. (29,947) 6,778 57,191
Cash and cash equivalents at Beginning of Period............ 80,869 74,091 16,900
--------- ----------- -----------
Cash and cash equivalents at End of Period.................. $ 50,922 $ 80,869 $ 74,091
========= =========== ===========
See notes to consolidated financial statements.
F-7
UICI AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A -- SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of UICI and its
subsidiaries (the "Company"). All significant intercompany accounts and
transactions have been eliminated in consolidation.
NATURE OF OPERATIONS
The Company offers insurance (primarily health and life) and selected
financial services to niche consumer and institutional markets. Information on
the Company's operations by segment is included in Note Q.
The Company issues health insurance policies, including catastrophic
coverages, to niche markets, particularly to the self-employed and student
markets. Through its Life Insurance Division, the Company offers life insurance
and annuity products to individuals through its dedicated field force. Academic
Management Services Corp. ("AMS") provides financial solutions for college
students and the educational institutions they attend by offering an integrated
package of student loans and student loan servicing. UICI holds a significant
equity interest (approximately 47% of the issued and outstanding shares at
February 12, 2002) in Healthaxis Inc., a publicly traded corporation (Nasdaq:
HAXS) that provides web-based connectivity and applications solutions for health
benefit distribution and administration. Other Key Factors includes investment
income not allocated to the other segments, corporate interest expenses, general
expenses relating to corporate operations, variable stock compensation,
amortization of goodwill, realized gains or losses on sale of investments and
the AMLI operations.
DISCONTINUED OPERATIONS
On March 17, 2000, the Board of Directors of the Company determined, after
a thorough assessment of the unit's prospects, that it would exit from its
United CreditServ sub-prime credit card business. Accordingly, the United
CreditServ unit has been separately reflected as a discontinued operation for
financial reporting purposes for all periods presented. The Company completed
the sale of substantially all of United CreditServ's non-cash assets during the
year 2000. See Note B.
The Company has also 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 historically 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. The Special
Risk Division reported net losses of $(9.2) million, $(2.9) million and $(2.6)
million for the years ended December 31, 2001, 2000 and 1999, respectively,
which losses were reflected in results from discontinued operations.
USE OF ESTIMATES
The preparation of the consolidated financial statements in conformity with
accounting principles generally accepted in the United States requires
management to make estimates and assumptions that affect the amounts reported in
the consolidated financial statements and accompanying notes. Actual results
could differ from those estimates.
F-8
UICI AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
BASIS OF PRESENTATION
The consolidated financial statements have been prepared on the basis of
generally accepted accounting principles ("GAAP"). The more significant
variances between GAAP and statutory accounting practices prescribed or
permitted by regulatory authorities for insurance companies are: fixed
maturities are carried at fair value for investments classified as available for
sale for GAAP rather than generally at amortized cost; the deferral of new
business acquisition costs, rather than expensing them as incurred; the
determination of the liability for future policyholder benefits based on
realistic assumptions, rather than on statutory rates for mortality and
interest; the recording of reinsurance receivables as assets for GAAP rather
than as reductions of liabilities; and the exclusion of non-admitted assets for
statutory purposes. (See Note L for stockholders' equity and net income from
insurance subsidiaries as determined using statutory accounting practices.)
INVESTMENTS
Investments are valued as follows:
Fixed maturities consist of bonds and notes issued by governments,
businesses, or other entities, mortgage and asset backed securities and similar
securitized loans. All fixed maturity investments are classified as available
for sale and carried at fair value.
Equity securities consist of common and non-redeemable preferred stocks and
are carried at fair value.
Mortgage and collateral loans are carried at unpaid balances, less
allowance for losses.
Policy loans are carried at unpaid balances.
Short-term investments are carried at fair value, which approximates cost.
Investments in other equity investees, including the Company's investment
in Healthaxis, Inc., are principally stated at the Company's cost as adjusted
for contributions or distributions and the Company's share of the equity
investee's income or loss.
Realized gains and losses on sales of investments are recognized in net
income on the specific identification basis and include write downs on those
investments deemed to have an other than temporary decline in fair values.
Unrealized investment gains or losses on securities carried at fair value, net
of applicable deferred income tax, are reported in accumulated other
comprehensive income (loss) as a separate component of stockholders' equity and
accordingly have no effect on net income (loss).
Purchases and sales of short-term financial instruments are part of
investing activities and not necessarily a part of the cash management program.
Short-term financial instruments are classified as investments in the
Consolidated Balance Sheets and are included as investing activities in the
Consolidated Statements of Cash Flows.
CASH AND CASH EQUIVALENTS
The Company classifies as cash and cash equivalents unrestricted cash on
deposit in banks and invested temporarily in various instruments with maturities
of three months or less at the time of purchase.
STUDENT LOANS
Student loans (consisting of student loans originated and student loans
purchased), are carried at their unpaid principal balances plus capitalized loan
origination costs and unamortized premiums on loans purchased in the secondary
market.
During 2000, capitalized loan origination costs consisted of the
incremental direct costs associated with originating student loans, which were
principally salaries and related expenses. During 2001, capitalized loan
F-9
UICI AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
origination costs consisted of the incremental direct costs associated with
originating student loans, which were principally origination fees charged by
the U.S. Department of Education. Capitalized loan origination costs and
premiums on purchased loans are amortized over the life of the underlying loans
or included in the calculation of gain or loss if loans are sold in the
secondary market. The Company had deferred loan origination costs in the amount
of $12.1 million and $17.2 million at December 31, 2001 and 2000.
DEFERRED ACQUISITION COSTS
The Company incurs various costs in connection with the origination and
initial issuance of its health and life insurance policies and annuities,
including underwriting and policy issuance costs, costs associated with lead
generation activities and distribution costs (i.e., sales commissions paid to
agents).
With respect to health policies issued through the Company's Self Employed
Agency and Student Insurance Divisions, for financial reporting purposes
underwriting and policy issuance costs are expensed as incurred. Costs
associated with generating sales leads with respect to the health business
issued through the Self Employed Agency Division are capitalized and amortized
over a two-year period. The Company defers the portion of commissions paid to
agents and premium taxes with respect to the portion of health premium collected
but not yet earned, and the Company amortizes the deferred expense over the
period as and when the premium is earned.
Policy acquisition costs associated with traditional life business are
capitalized and amortized over the estimated premium-paying period of the
related policies, in proportion to the ratio of the annual premium revenue to
the total premium revenue anticipated. Such anticipated premium revenue, which
is modified to reflect actual lapse experience, is estimated using the same
assumptions as are used for computing policy benefits. For universal life-type
and annuity contracts, capitalized costs are amortized in proportion to the
ratio of a contract's annual gross profits to total anticipated gross profits.
The cost of business acquired through acquisition of subsidiaries or blocks
of business is determined based upon estimates of the future profits inherent in
the business acquired. Such costs are capitalized and amortized over the
estimated premium-paying period. Anticipated investment income is considered in
determining whether a premium deficiency exists. The amortization period is
adjusted when estimates of current or future gross profits to be realized from a
group of products are revised.
The following is an analysis of deferred acquisition costs:
DECEMBER 31,
---------------------------
2001 2000 1999
------- ------- -------
(IN THOUSANDS)
Costs of policies acquired:
Beginning of year..................................... $ 4,378 $16,786 $21,000
Additions.......................................... 900 -- 213
Amortization(a).................................... (1,052) (2,674) (4,427)
Sale of National Motor Club........................ -- (9,734) --
------- ------- -------
End of year........................................... 4,226 4,378 16,786
Deferred costs of policies issued....................... 69,702 63,747 62,753
------- ------- -------
Total Deferred Acquisition Costs................. $73,928 $68,125 $79,539
======= ======= =======
---------------
(a) The discount rate used in the amortization of the costs of policies
acquired ranges from 7% to 8%.
F-10
UICI AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The amortization for the next five years and thereafter of capitalized
costs of policies acquired at December 31, 2001 is estimated to be as follows:
(IN THOUSANDS)
2002........................................................ $ 965
2003........................................................ 900
2004........................................................ 741
2005........................................................ 530
2006........................................................ 402
2007 and thereafter......................................... 688
------
$4,226
======
RESTRICTED CASH
At December 31, 2001 and 2000, the Company held restricted cash in the
amount of $295.2 million and $222.7 million, respectively. Restricted cash
consisted primarily of funds held by AMS for the benefit of participants in AMS'
tuition budgeting program and funds securing AMS and College Fund Life Insurance
Division student loan credit facilities held in bankruptcy-remote, special
purpose entities in the amount of $113.4 million and $86.2 million as of
December 31, 2001 and 2000, respectively, which cash may be used only for
repayment of associated borrowings and/or acquisitions of additional student
loans. See Note J.
A subsidiary of AMS has entered into a trust agreement (the "Trust") with a
bank for the safekeeping of payments received from participants in AMS' tuition
budgeting program. All funds are held in trust for the benefit of the
participants. AMS is entitled to the interest earned on the funds held in the
Trust as well as tuition budgeting program fees deposited into the Trust. The
Trust held invested assets in the amount of approximately $141.7 million and
$112.6 million at amortized cost (which approximated market) at December 31,
2001 and 2000, respectively. The funds are invested in U.S. Treasury securities,
government agency securities, high-grade commercial paper, and money market
funds of insured depository institutions at December 31, 2001 and 2000.
At December 31, 2001 and 2000, the Company's 80%-owned subsidiary, Sun Tech
Processing Systems, LLC ("STP"), held funds in the amount of $21.8 million and
$20.8 million, respectively, in an account designated by a court registry, all
of which funds are reflected as restricted cash at such dates. The interest of
the 20% owner of STP in such cash held in the court registry is reflected in
other liabilities on the Company's consolidated balance sheet. The respective
interests of the Company and the 20% owner of STP in such funds, which represent
the proceeds of the 1998 sale of assets and liquidation of STP, are the subject
of pending litigation. See Notes M and N.
F-11
UICI AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Set forth below is a summary of restricted cash held by the Company at
December 31, 2001 and 2000:
DECEMBER 31,
-------------------
2001 2000
-------- --------
(IN THOUSANDS)
UICI:
STP Court registry........................................ $ 21,835 $ 20,839
Other..................................................... -- 601
AMS:
Student loan credit facilities............................ 113,421 86,156
Tuition installment plan trust............................ 141,663 112,638
Other..................................................... 2,316 2,426
CFLD:
Student loan credit facilities............................ 13,851 --
Other..................................................... 2,096 --
-------- --------
Total restricted cash.................................. $295,182 $222,660
======== ========
ALLOWANCE FOR DOUBTFUL ACCOUNTS
The Company establishes allowance for potential losses that could result
from defaults or write-downs on various assets. The reserves are maintained at a
level that the Company believes is adequate to absorb estimated losses.
The Company's allowance for losses is as follows:
DECEMBER 31,
----------------
2001 2000
------ -------
(IN THOUSANDS)
Agents' receivables......................................... $1,954 $ 1,383
Mortgage loans.............................................. 1,201 1,701
Student loans............................................... 3,585 7,473
Real estate................................................. 1,083 1,083
------ -------
$7,823 $11,640
====== =======
PROPERTY AND EQUIPMENT
Property and equipment includes buildings and leasehold improvements, land,
and furniture, software and equipment, all of which are reported at depreciated
cost that is computed using straight line and accelerated
F-12
UICI AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
methods based upon the estimated useful lives of the assets (generally 3 to 7
years for furniture, software and equipment and 30 to 39 years for buildings.)
DECEMBER 31,
-------------------
2001 2000
-------- --------
(IN THOUSANDS)
Land and improvements....................................... $ 2,884 $ 2,884
Buildings and leasehold improvements........................ 32,844 32,599
Furniture, software and equipment........................... 93,269 84,465
-------- --------
128,997 119,948
Less accumulated depreciation............................... 56,449 44,928
-------- --------
Property and equipment (net)................................ $ 72,548 $ 75,020
======== ========
GOODWILL
Historically, the Company generally has amortized the excess of cost over
the underlying value of the net assets of companies acquired on a straight-line
basis over twenty to twenty-five years. The Company continually reevaluated the
propriety of the carrying amount of goodwill, as well as the amortization period
to determine whether current events and circumstances warrant adjustments to the
carrying value and/or revised estimates of useful life. The Company assessed the
recoverability of goodwill based upon several factors, including management's
intention with respect to the operations to which the goodwill relates and those
operations' projected future income and undiscounted cash flows. An impairment
loss would be recorded in the period such determination was made. At December
31, 2001 and 2000, the Company had goodwill in the amount of $104.7 million and
$105.9 million, respectively, and accumulated amortization of $18.7 million and
$14.3 million at December 31, 2001 and 2000, respectively, resulting in net
goodwill of $86.0 million and $91.5 million at December 31, 2001 and 2000,
respectively. Amortization expense recorded for continuing operations totaled
$6.3 million, $6.2 million, and $6.3 million in 2001, 2000, and 1999,
respectively.
In June 2001, the Financial Accounting Standards Board ("FASB") issued
Statement No. 142, which 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. 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 will apply Statement 142
beginning in the first quarter 2002. Application of the nonamortization
provisions of Statement 142 is expected to result in an increase in net income
of approximately $4.5 million ($0.09 per share) in 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. The Company expects to perform
the first of the required impairment tests of goodwill and indefinite lived
intangible assets as of January 1, 2002 in the first quarter of 2002. Any
impairment charge resulting from these transitional impairment tests will be
reflected as the cumulative effect of a change in accounting principle in the
first quarter of 2002. The Company has not yet determined what the effect, if
any, of these tests will be on the results of operations and financial position
of the Company.
FUTURE POLICY AND CONTRACT BENEFITS AND CLAIMS
Traditional life insurance future policy benefit liabilities are computed
on a net level premium method using assumptions with respect to current
investment yield, mortality, withdrawal rates, and other assumptions determined
to be appropriate as of the date the business was issued or purchased by the
Company. Future contract benefits related to universal life-type and annuity
contracts are generally based on policy account values. Claims liabilities
represent the estimated liabilities for claims reported plus claims incurred but
not yet
F-13
UICI AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
reported. The liabilities are subject to the impact of actual payments and
future changes in claim factors; as adjustments become necessary they are
reflected in current operations.
RECOGNITION OF PREMIUM REVENUES AND COSTS
Premiums on traditional life insurance are recognized as revenue when due.
Benefits and expenses are matched with premiums so as to result in recognition
of income over the term of the contract. This matching is accomplished by means
of the provision for future policyholder benefits and expenses and the deferral
and amortization of acquisition costs. Revenues for universal life-type and
annuity contracts consist of charges for the cost of insurance, policy
administration and surrender charges assessed during the year. Contract benefits
that are charged to expense include benefit claims incurred in the period in
excess of related contract balances, and interest credited to contract balances.
STUDENT LOAN INCOME
The Company recognizes student loan income as earned, including adjustments
for the amortization of premiums. Marketing fees for student loans that are sold
to third parties are earned when received and are included in other fee income.
UNEARNED PREMIUMS
Premiums on health insurance contracts are recognized as earned over the
period of coverage on a pro rata basis.
Other fee income
Other fee income consists primarily of AMS tuition installment program
fees, third party administration fees and agency fees. These fees are recognized
as income as services are provided.
Other income
Other income consists primarily of commission and fee income from AMLI
Realty Co. subsidiary. Income is recognized as services are provided.
REINSURANCE
Insurance liabilities are reported before the effects of ceded reinsurance.
Reinsurance receivables and prepaid reinsurance premiums are reported as assets.
The cost of reinsurance is accounted for over the terms of the underlying
reinsured policies using assumptions consistent with those used to account for
the policies.
ADVERTISING EXPENSE
The cost of advertising is expensed as incurred. The Company incurred
$4.5 million, $2.2 million and $3.9 million in advertising costs in 2001,
2000 and 1999, respectively.
FEDERAL INCOME TAXES
Deferred income taxes are recorded to reflect the tax consequences of
differences between the tax bases of assets and liabilities and their financial
reporting amounts at each year-end. The Company has recorded a valuation
allowance to reduce its deferred tax assets to the amount that it believes is
more likely than not to be realized. While the Company has considered future
taxable income and ongoing prudent and feasible tax planning strategies in
assessing the need for the valuation allowance, in the event the Company were to
determine that it would be able to realize its deferred tax assets in the future
in excess of its net recorded
F-14
UICI AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
amount, an adjustment to the deferred tax asset would increase income in the
period such determination was made. Likewise, in the event that the Company were
to determine that it would not be able to realize all or part of its net
deferred tax asset in the future, an adjustment to the deferred tax asset would
be charged to income in the period such determination was made.
COMPREHENSIVE INCOME
Included in comprehensive income is the reclassification adjustments for
realized gains (losses) included in net income of $(213,000), $(2.6) million,
and $35,000 for the years ended December 31, 2001, 2000, and 1999, respectively.
GUARANTY FUNDS AND SIMILAR ASSESSMENTS
The Company is assessed amounts by state guaranty funds to cover losses of
policyholders of insolvent or rehabilitated insurance companies, by state
insurance oversight agencies to cover the operating expenses of such agencies
and by other similar legislative entities. These mandatory assessments may be
partially recovered through a reduction in future premium taxes in certain
states. At December 31, 2001 and 2000, the Company had accrued $3.8 million and
$1.9 million, respectively, to cover the cost of these assessments. The Company
expects to pay these assessments over a period of up to five years, and the
Company expects to realize the recorded premium tax offsets and/or policy
surcharges over a period of up to 10 years. The Company incurred expenses for
guaranty fund assessments in the amount of $2.4 million, $1.3 million, and
$587,000 in 2001, 2000, and 1999, respectively. In the fourth quarter of 2001,
the Company recorded a charge of $1.3 million, which represented the Company's
share of an assessment to all workers' compensation insurance carriers by the
Oklahoma Workers' Compensation Court Administrator.
NEW 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 FASB 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. Statement
144 is effective for the Company's fiscal year beginning January 1, 2002.
In June 2001, the 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. Intangible assets with finite lives will continue
to be amortized over their estimated useful lives. Additionally, Statement 142
requires that goodwill included in the carrying value of equity method
investments no longer be amortized.
The Company will apply Statement 142 beginning in the first quarter 2002.
Application of the nonamortization provisions of Statement 142 is expected to
result in an increase in net income of $4.5 million ($0.09 per share) in 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.
The Company expects to perform the first of the required
F-15
UICI AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
impairment tests of goodwill and indefinite lived intangible assets as of
January 1, 2002 in the first quarter of 2002. Any impairment charge resulting
from these transitional impairment tests will be reflected as the cumulative
effect of a change in accounting principle in the first quarter of 2002. The
Company has not yet determined what the effect of these tests will be on the
earnings and financial position of the Company.
Reclassification
Certain amounts in the 2000 and 1999 financial statements have been
reclassified to conform to the 2001 financial statement presentation associated
with discontinued operation treatment of the Special Risk Division.
NOTE B -- DISCONTINUED OPERATIONS
UNITED CREDITSERV
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.
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
F-16
UICI AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
The 1999 and 2000 operating losses at United CreditServ had a material
adverse effect upon the liquidity and cash flows of the Company. Since the
Company first announced losses at its United CreditServ unit in December 1999,
UICI through United CreditServ contributed to UCNB as capital an aggregate of
$176.6 million in cash. UICI at the holding company level funded these cash
contributions and other cash needs with the proceeds of sale of investment
securities; a borrowing from a third party in the amount of $24.0 million funded
in July 2000; approved sales of assets from the holding company to the Company's
regulated insurance company subsidiaries completed in June and July 2000
generating cash proceeds in the aggregate amount of approximately $26.2 million;
dividends in the amount of $19.0 million paid during the six months ended June
30, 2000 from CLICO (one of its regulated insurance company subsidiaries); the
sale to MEGA of CLICO for $19.0 million in July 2000; cash proceeds in the
amount of $21.8 million from the disposition of its National Motor Club unit
completed in July 2000; and cash on hand.
At December 31, 1999, UCNB had $290.0 million of certificates of deposits
outstanding, and UCNB held approximately $110.5 million in cash, cash
equivalents and short term U.S. Treasury securities. Following the sale of the
Company's United CreditServ unit, UCNB prepaid all of its remaining certificates
of deposit then-outstanding in the amount of approximately $79.0 million, and
all such deposit liabilities were discharged as of October 23, 2000. Following
the prepayment of all deposit liabilities of UCNB, at December 31, 2000 UCNB
held cash, cash equivalents and U.S. Treasury securities in the amount of $26.0
million.
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. As part
of the plan of liquidation, and in accordance with the terms of the June 2000
Consent Order issued by the OCC against UICI, UICI expressly assumed all
liabilities of UCNB, including contingent liabilities associated with pending
and future litigation. In addition, on January 29, 2001, the OCC vacated the
Consent Orders issued against UCNB in February 2000 and June 2000 and the June
2000 Consent Order issued against UICI's United CreditServ subsidiary. The OCC
substantially modified the June 2000 Consent Order issued with respect to UICI
to eliminate all restrictive provisions except a reconfirmation of UICI's
obligation to assume all liabilities of UCNB. Finally, the OCC formally
acknowledged the termination by UICI of the liquidity and capital assurances
agreement, which formerly provided that, upon demand by UCNB, UICI would assure
the liquidity and capital adequacy of UCNB. See Note N.
In addition to the cash sales price received at the September 2000 closing
of the sale of substantially all 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.
F-17
UICI AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Set forth below is a summary of the operating results of the United
CreditServ business for each of the years ended December 31, 2001, 2000 and
1999, respectively.
YEAR ENDED DECEMBER 31,
-------------------------------
2001 2000 1999
------- --------- ---------
(IN THOUSANDS)
Revenue:
Net interest income............................... $ 27 $ 15,922 $ 20,129
Credit card fees and other income................. 9,093 109,445 207,246
------- --------- ---------
Total revenues............................... 9,120 125,367 227,375
Expenses:
Provision for loan losses......................... -- 177,365 211,747
UMMG purchase..................................... -- -- 35,944
Operating expenses................................ 7,921 74,619 118,661
Depreciation and amortization..................... 3,173 5,281 6,328
------- --------- ---------
Total expenses............................... 11,094 257,265 372,680
Loss from operations before amounts charged to loss
on disposal....................................... (1,974) (131,898) (145,305)
Amounts charged to loss on disposal................. 7,675 131,898 --
------- --------- ---------
Income (loss) from operations.................. 5,701 -- (145,305)
Federal income taxes (benefit)...................... 1,995 -- (50,673)
------- --------- ---------
Income (loss) from operations.................. 3,706 -- (94,632)
Estimated loss on disposal, net of income tax
benefit........................................... -- (23,400) (84,500)
------- --------- ---------
Income (loss) from United CreditServ
discontinued operations................... $ 3,706 $ (23,400) $(179,132)
======= ========= =========
At December 31, 2000, the remaining assets of United CreditServ 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.
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 historically 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. The Special Risk Division reported net losses
of $(9.2) million, $(2.9) million and $(2.6) million for the years ended
December 31, 2001, 2000 and 1999, respectively, which losses were reflected in
results from discontinued operations.
F-18
UICI AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Set forth below is a summary of the operating results of the Special Risk
Division for each of the years ended December 31, 2001, 2000 and 1999,
respectively:
YEAR ENDED DECEMBER 31,
----------------------------
2001 2000 1999
-------- ------- -------
(IN THOUSANDS)
Revenue:
Premiums............................................. $ 20,661 $20,726 $46,755
Investment income.................................... 1,873 2,676 2,628
Other income......................................... 4,036 6,768 9,621
Gain (loss) on sale of investments................... (61) 1,531 --
-------- ------- -------
Total revenues.................................... 26,509 31,701 59,004
Expenses:
Benefits, claims and settlement expenses............. 31,056 24,753 44,301
Underwriting, acquisition and insurance expenses..... 8,615 10,724 18,294
Other expenses....................................... 870 325 82
Depreciation and amortization........................ 72 160 272
-------- ------- -------
Total expenses.................................... 40,613 35,962 62,949
-------- ------- -------
Loss from operations................................. (14,104) (4,261) (3,945)
Federal income taxes benefit......................... (4,932) (1,376) (1,381)
-------- ------- -------
Loss from Special Risk discontinued operations.... $ (9,172) $(2,885) $(2,564)
======== ======= =======
Set forth below is a summary of the financial condition of the Special Risk
Division as of December 31, 2001 and 2000:
YEAR ENDED DECEMBER 31,
-----------------------
2001 2000
---------- ----------
(IN THOUSANDS)
Assets:
Cash and short-term investments........................... $ 977 $ 2,541
Reinsurance, due premiums and other receivables........... 52,843 50,892
Other Assets.............................................. 714 1,095
-------- --------
Total assets........................................... 54,534 54,528
======== ========
Liabilities:
Policy liabilities........................................ 79,384 79,062
Other liabilities......................................... 11,023 5,638
-------- --------
Total liabilities...................................... 90,407 84,700
-------- --------
Net liabilities from Special Risk discontinued operations... $(35,873) $(30,172)
======== ========
NOTE C -- ACQUISITIONS AND DISPOSITIONS
On August 3, 2001, the Company completed the acquisition from AMS' former
chief executive officer of the remaining 25% common stock interest in AMS it did
not already own for a purchase price of $750,000. For additional consideration,
the former chief executive officer and certain former employees of AMS agreed,
for a three-year period ending in August 2004, not to engage in any business
competitive with AMS' tuition
F-19
UICI AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
installment or student loan servicing businesses. These former executives and
their affiliates further agreed to pay to AMS fees in prescribed amounts in
connection with the origination and consolidation of certain student loans over
a three-year period ending in August 2004.
Effective May 31, 2001, WinterBrook Holdings, Inc. (a wholly-owned
subsidiary of the Company) sold its 44% minority interest in Cassidy Employee
Benefit Services, LLC ("Cassidy") to Cassidy for $140,000 in cash. The remaining
equity holders of Cassidy constituted members of Cassidy management.
Effective April 1, 2001, Specialized Card Services, Inc. ("SCS"), an
indirect wholly-owned subsidiary of the Company, entered into an agreement with
an unaffiliated third party to form a new venture to engage in the business of
collecting charged off consumer debt. In exchange for 50% of the common stock in
the newly formed entity and $3.0 million liquidation value of preferred stock,
SCS contributed to the newly formed corporation the business operations of its
Harker Heights, Texas collection facility at net book value and certain
previously written-off credit card receivables.
On July 27, 2000, the Company sold to an investor group consisting of
members of the family of Ronald L. Jensen (the Company's Chairman) (including
Mr. Jensen) (the "NMC Buyer") its 97% interest in NMC Holdings, Inc. ("NMC"),
the parent company of its National Motor Club of America unit, for a purchase
price of $56.8 million, representing 97% of the value of NMC as determined by
independent appraisal. The purchase price was paid at closing in cash in the
amount of $21.8 million and by delivery of a promissory note (the "NMC Note")
issued by the NMC Buyer in the principal amount of $35.0 million. See Note M.
The $12.6 million, net of tax, received in excess of the net book value of NMC
was reflected as an increase to additional paid in capital.
Effective July 31, 2000, a wholly-owned subsidiary of the Company sold all
of its outstanding shares of UMMG for a purchase price in the amount of $25,000
in cash, with an additional amount of up to $2.0 million payable over the next
five years, contingent upon the performance of the business. The purchaser is an
entity controlled by the former President of UMMG. UMMG is a Lakewood,
Colorado-based provider of marketing, administrative and support services for
the Company's credit card programs. In addition, on July 31, 2000, UICI signed a
credit agreement with the purchaser, pursuant to which it has agreed to lend to
the purchaser up to $1.0 million on a revolving basis. As of December 31 2000,
the Company had advanced to the purchaser $1.0 million under the credit
agreement.
Effective July 1, 2000, the Company sold the assets of WinterBrook
HealthCare Management, LLC (a company engaged in repricing of insurance claims)
to an unrelated party for a sales price of $1.9 million. The Company recognized
a pre-tax gain of $1.5 million in the quarter ended September 30, 2000 in
connection with this sale.
In 1997, pursuant to the terms of a Sale and Administration Agreement, the
Company sold certain tangible assets associated with its third party
administrator business to Healthcare Management Administrators, Inc. ("HMA")
(which is owned by Mr. Jensen) and also agreed to assign associated rights and
benefits of licenses of third party administrator business. The purchase price
received by the Company was $641,000, which approximated book value of the net
assets sold.
In accordance with the terms of a Management and Option Agreement, dated as
of April 1, 1999, HMA and Mr. Jensen granted to the Company an option to
purchase certain assets, subject to certain corresponding liabilities,
associated with the third party administration business of HMA. The option was
exercisable on or before January 30, 2000 at an option price equal to the book
value of the net tangible assets of HMA to be purchased plus assumption of an
obligation to pay WinterBrook VSO, LLC (a company controlled by Mr. Jensen)
certain commissions payable over a five year term in an amount not to exceed
$4.2 million. The Company delivered notice of exercise of the option on January
25, 2000, and the Company completed the purchase of the assets associated with
HMA's third party administration business on February 3, 2000, at a renegotiated
purchase price equal to $4.0 million (representing the recorded net book value
of the assets
F-20
UICI AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
purchased) plus $500,000, representing repayment to Mr. Jensen of cash advances
made to HMA subsequent to December 31, 1999. The Company recorded $1.9 million
in goodwill in connection with this acquisition and is amortizing the goodwill
on a straight line basis over 15 years.
The assets of HMA comprised a part of the assets of UICI Administrators,
Inc., which was sold by the Company in January 2002. See Note T.
Effective July 26, 1999, the Company's AMS subsidiary acquired for $58.0
million 100% of the outstanding capital stock of AMS Investment Group, Inc., a
holding company whose principal operations consist of Academic Management
Services, Inc. The acquisition was financed with the proceeds of AMS borrowings
and the issuance to the Company of preferred stock. The Company recorded $49.8
million of goodwill in connection with this acquisition and is amortizing the
goodwill on a straight line basis over twenty years. Total fair value of assets
acquired was $255.1 million (including goodwill) and fair value of liabilities
assumed was $197.1 million at purchase date.
Effective September 30, 1999, the Company acquired from a partnership (the
partners of which consisted primarily of certain of the Company's agents) the
remaining 21% interest in National Managers Life Insurance Company, Ltd.
("National Managers") for cash in the amount of $794,000 increasing the
Company's ownership in National Managers to 100%. The purchase price was based
on a predetermined formula that approximated GAAP book value.
In November 1999, the Company's former National Motor Club subsidiary
acquired a 90% interest in Landen Bias Corporation (also known as Coachnet) for
cash in the amount of $4.6 million. The fair value of the assets (including
goodwill) was $6.4 million and the fair value of the liabilities assumed was
$1.8 million at the purchase date. Landen Bias Corporation was sold as part of
the NMC sale. See Note M.
For financial reporting purposes, the acquisitions described above were
accounted for using the purchase method of accounting, and, as a result, the
assets and liabilities acquired were recorded at fair value on the dates
acquired. The Consolidated Statement of Operations for the year of the
acquisition 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. Accordingly, pro forma
financial information has not been presented.
NOTE D -- INVESTMENTS
A summary of net investment income is set forth below:
YEAR ENDED DECEMBER 31,
---------------------------
2001 2000 1999
------- ------- -------
(IN THOUSANDS)
Fixed maturities........................................ $60,356 $60,385 $60,883
Equity securities....................................... 4,676 1,228 1,386
Mortgage and collateral loans........................... 503 627 816
Policy loans............................................ 1,336 1,333 1,353
Short-term investments.................................. 12,826 16,083 10,395
Investment in equity investees.......................... 740 9,158 5,801
Other investments....................................... 7,077 4,897 5,931
------- ------- -------
87,514 93,711 86,565
Less investment expenses................................ 3,685 3,936 3,696
------- ------- -------
$83,829 $89,775 $82,869
======= ======= =======
F-21
UICI AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Realized gains and (losses) and the change in unrealized investment gains
and (losses) on fixed maturity and equity security investments are summarized as
follows:
GAINS
FIXED EQUITY OTHER (LOSSES) ON
MATURITIES SECURITIES INVESTMENTS INVESTMENTS
---------- ---------- ----------- -----------
(IN THOUSANDS)
YEAR ENDED DECEMBER 31:
2001
Realized................................ $ (734) $ (420) $6,319 $ 5,165
Change in unrealized.................... 18,054 44,036 -- 62,090
-------- ------- ------ --------
Combined............................. $ 17,320 $43,616 $6,319 $ 67,255
======== ======= ====== ========
2000
Realized................................ $ (3,545) $26,440 $1,463 $ 24,358
Change in unrealized.................... 29,854 863 585 31,302
-------- ------- ------ --------
Combined............................. $ 26,309 $27,303 $2,048 $ 55,660
======== ======= ====== ========
1999
Realized................................ $ (802) $ 885 $ (450) $ (367)
Change in unrealized.................... (64,142) (3,116) (153) (67,411)
-------- ------- ------ --------
Combined............................. $(64,944) $(2,231) $ (603) $(67,778)
======== ======= ====== ========
Gross unrealized investment gains pertaining to equity securities were
$42.6 million, $639,000 and $500,000 at December 31, 2001, 2000 and 1999,
respectively. Gross unrealized investment losses pertaining to equity securities
were $599,000, $2.6 million and $3.4 million at December 31, 2001, 2000 and
1999, respectively.
The increase in gross unrealized investment gains to $42.6 million in 2001
from $639,000 in 2000 is principally due to the Company changing its method for
accounting for its investment in AMLI Residential, effective June 30, 2001, from
the equity method to the investment method. See further discussion on AMLI
Residential later in this footnote under equity securities.
The amortized cost and fair value of investments in fixed maturities are as
follows:
DECEMBER 31, 2001
------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED
COST GAINS LOSSES FAIR VALUE
--------- ---------- ---------- ----------
(IN THOUSANDS)
U.S. Treasury and U.S. Government agency
obligations.............................. $ 46,341 $ 1,423 $ (98) $ 47,666
Mortgage-backed securities issued by U.S.
Government agencies and authorities...... 135,706 1,772 (429) 137,049
Other mortgage and asset backed
securities............................... 154,362 3,164 (1,815) 155,711
Other corporate bonds...................... 588,300 12,854 (12,289) 588,865
-------- ------- -------- --------
Total fixed maturities........... $924,709 $19,213 $(14,631) $929,291
======== ======= ======== ========
F-22
UICI AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 2000
------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED
COST GAINS LOSSES FAIR VALUE
--------- ---------- ---------- ----------
(IN THOUSANDS)
U.S. Treasury and U.S. Government agency
obligations.............................. $ 62,620 $ 1,367 $ (215) $ 63,772
Mortgage-backed securities issued by U.S.
Government agencies and authorities...... 70,132 1,189 (346) 70,975
Other mortgage and asset backed
securities............................... 148,131 2,143 (2,678) 147,596
Other corporate bonds...................... 547,022 4,448 (19,380) 532,090
-------- ------- -------- --------
Total fixed maturities........... $827,905 $ 9,147 $(22,619) $814,433
======== ======= ======== ========
Fair values for fixed maturity securities are based on quoted market
prices, where available. For fixed maturity securities not actively traded, fair
values are estimated using values obtained from quotation services.
The amortized cost and fair value of fixed maturities at December 31, 2001,
by contractual maturity, are shown below. Fixed maturities subject to early or
unscheduled prepayments have been included based upon their contractual maturity
dates. Actual maturities will differ from contractual maturities because
borrowers may have the right to call or prepay obligations with or without call
or prepayment penalties.
AMORTIZED COST FAIR VALUE
-------------- ----------
(IN THOUSANDS)
MATURITY
One year or less............................................ $ 23,122 $ 23,534
Over 1 year through 5 years................................. 241,862 245,757
Over 5 years through 10 years............................... 234,096 232,700
Over 10 years............................................... 135,561 134,540
-------- --------
634,641 636,531
Mortgage and asset backed securities........................ 290,068 292,760
-------- --------
Total fixed maturities............................ $924,709 $929,291
======== ========
Proceeds from the sale and call of investments in fixed maturities were
$224.6 million, $148.0 million and $98.9 million for 2001, 2000 and 1999,
respectively. Gross gains of $5.0 million, $1.3 million and $2.1 million, and
gross losses of $2.8 million, $5.0 million and $2.9 million were realized on the
sale and call of fixed maturity investments during 2001, 2000 and 1999,
respectively. Proceeds from the sale of equity investments were $15.8 million,
$12.6 million and $12.2 million for 2001, 2000 and 1999, respectively. Gross
gains of $1.3 million, $1.1 million and $1.8 million and gross losses of $1.2
million, $867,000 and $935,000 were realized on sales of equity investments
during 2001, 2000 and 1999, respectively. Included in 2001 realized losses were
impairment charges in the amount of $3.0 million and $541,000 for fixed maturity
investments and equity investments, respectively.
F-23
UICI AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Following is a summary of the Company's equity securities:
DECEMBER 31, 2001 DECEMBER 31, 2000
----------------- -----------------
FAIR FAIR
COST VALUE COST VALUE
------- ------- ------- -------
(IN THOUSANDS)
Common Stocks.................................. $25,716 $67,207 $ 351 $ 412
Non-redeemable preferred stocks................ 16,703 17,238 18,575 16,504
------- ------- ------- -------
$42,419 $84,445 $18,926 $16,916
======= ======= ======= =======
The Company's investment at December 31, 2000 in AMLI Commercial Properties
Trust ("ACPT") and AMLI Residential Properties Trust ("AMLI Residential") in the
amount of $23.2 million and $20.1 million, respectively, is reflected under the
caption "Investment in other equity investees." In 2001, the Company's
investment in AMLI Residential in the amount of $62.8 million is included in
equity securities.
The Company changed its method for accounting for its investment in AMLI
Residential effective June 30, 2001, from the equity method to the investment
method due to its decreased ownership interest to 10.3%. The effect of the
accounting change was to increase the carrying value of AMLI Residential on the
consolidated balance sheet of the Company at June 30, 2001 from $22.6 million to
$62.8 million; the accounting change had no effect on the Company's results of
operations for the year ended December 31, 2001. As a result of the accounting
change, the Company marks-to-market its investment in AMLI Residential and
accordingly, changes in the Company's carrying value of its investment in AMLI
Residential are recorded as unrealized gains (or losses) with corresponding
changes to the Company's stockholders' equity (net of tax). At December 31,2001
and 2000, the Company's carrying value of its investment in AMLI Residential was
$64.3 million and $23.1 million, respectively.
During 2001, ACPT sold substantially all of its assets for an aggregate
sale price of approximately $226.3 million. In connection with such sale, the
Company recognized its proportionate share of the gain in the amount of $5.3
million.
The fair value, which represents carrying amounts, of equity securities are
based on quoted market prices. For equity securities not actively traded, market
values are estimated using values obtained from quotation services.
The carrying amounts of the Company's investments in mortgage, collateral
and policy loans approximate fair value which is estimated using a discounted
cash flow analysis, at a rate currently being offered for similar loans to
borrowers with similar credit ratings.
The carrying values for mortgage and collateral loans are net of allowance
of $1.2 million and $1.7 million for 2001 and 2000, respectively.
The Company minimizes its credit risk associated with its fixed maturities
portfolio by investing primarily in investment grade securities. Included in
fixed maturities is a concentration of mortgage and asset backed securities. At
December 31, 2001, the Company had a carrying amount of $292.8 million of
mortgage and asset backed securities, of which $137.0 million were government
backed, $97.5 million were rated AAA, $25.5 million were rated AA, $23.4 million
were rated A, $4.6 million were rated BBB, and $4.8 million were rated below
investment grade by external rating agencies. At December 31, 2000, the Company
had a carrying amount of $218.6 million of mortgage and asset backed securities,
of which $71.0 million were government backed, $75.1 million were rated AAA,
$42.0 million were rated AA, $23.4 million were rated A, and $7.1 million were
rated BBB by external rating agencies.
The Company regularly monitors its investment portfolio to attempt to
minimize its concentration of credit risk in any single issuer. As of December
31, 2001, and other than the Company's investment in AMLI
F-24
UICI AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Residential Properties Trust (which represented 1.6% of the Company's aggregate
investment portfolio), the Company's investment in no single issuer represented
more than one percent of the Company's aggregate investment portfolio.
With respect to its short-term investments, the Company invests in an
institutional money market fund that invests solely in the highest quality
United States dollar denominated money market securities of domestic and foreign
issuers. At December 31, 2001 and 2000, the Company had short-term investments
in this diversified fund in the amount of approximately $154.6 million and
$111.8 million, respectively.
Under the terms of various reinsurance agreements (see Note H), the Company
is required to maintain assets in escrow with a fair value equal to the
statutory reserves assumed under the reinsurance agreements. Under these
agreements, the Company had on deposit, securities with a fair value of
approximately $84.5 million and $157.7 million as of December 31, 2001 and 2000,
respectively. In addition, domestic insurance subsidiaries had securities with a
fair value of $17.7 million and $17.4 million on deposit with insurance
departments in various states at December 31, 2001 and 2000, respectively.
NOTE E -- INVESTMENT IN HEALTHAXIS, INC.
At December 31, 2001, UICI held beneficially 24,674,838 shares of common
stock of Healthaxis, Inc. (HAXS: Nasdaq) ("HAI") (including 354,844 shares
acquired on May 23, 2001 from a former employee of HAI for a purchase price of
$400,000), representing approximately 47% of the issued and outstanding shares
of HAI. Of such 24,674,838 shares held by the Company, 8,581,714 shares
(representing 16.2% 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 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) $1.7 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's interest in HAI was derived from the January 7, 2000 merger
(the "Insurdata Merger") of Insurdata Incorporated (formerly a wholly-owned
subsidiary of UICI) with and into HealthAxis.com, the
F-25
UICI AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
sole operating subsidiary of HAI. HealthAxis.com formerly was a web-based
retailer of health insurance products and related consumer services. During 1999
and in advance of the Insurdata Merger, Insurdata transferred to UICI the net
assets of Insurdata Administrators (a division of Insurdata engaged in the
business of providing third party benefits administration, including eligibility
and billing reconciliation) and its member interest in Insurdata Marketing
Services, LLC (a subsidiary of Insurdata engaged in the business of marketing
third party benefits administration services) for cash in the amount of
$858,000, representing the aggregate book value of the net assets and member
interest so transferred. The Company recognized no gain on the non-monetary
exchange of stock in the Insurdata Merger due to uncertainty of realization of
the gain.
Following the Insurdata Merger, the Company held approximately 43.6%, and
HAI held approximately 28.1%, of the issued and outstanding capital stock of
HealthAxis.com, the surviving corporation in the Insurdata Merger. On March 14,
2000, the Company sold in a private sale to an institutional purchaser 2,000,000
shares of HealthAxis.com common stock and, giving effect to such sale, the
Company held 39.2% of the issued and outstanding shares of common stock of
HealthAxis.com.
On September 29, 2000, UICI purchased from a third party $1.7 million
principal amount of HAI 2% convertible subordinated debentures and a warrant to
purchase 12,291 shares of HAI common stock at an exercise price of $3.01 per
share, for a total purchase price of $1.2 million. The debentures mature in
September 2005 and are convertible into 185,185 shares of HAI common stock.
On January 26, 2001, HAI acquired all of the outstanding shares of
HealthAxis.com that HAI did not then own in a stock-for-stock merger of
HealthAxis.com with a wholly-owned subsidiary of HAI (the "HAI Merger"). In the
HAI Merger, HealthAxis.com shareholders (including the Company) received 1.334
shares of HAI common stock for each share of HealthAxis.com common stock
outstanding.
The Company has accounted for its investment in HAI utilizing the equity
method and has recognized its ratable share of HAI income and loss (computed
prior to amortization of goodwill recorded in connection with the Insurdata
Merger). The Company's carrying value of its investment in HAI was $8.3 million
and $18.4 million at December 31, 2001 and 2000, respectively.
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 $20.4
million, $21.0 million and $23.3 million in 2001, 2000 and 1999, 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 $10.1 million, $6.4 million and $3.7
million in 2001, 2000 and 1999, respectively. The aggregate amounts paid by UICI
to HAI in 2001, 2000 and 1999, respectively, represented 70%, 63% and 58% of
HAI's total revenues of $43.8 million, $43.7 million and $46.2 million in such
years, respectively. Of total fees paid by the Company to HAI in 2001 and 2000,
approximately $5.4 million (or 18%) and $4.9 million (or 16%), respectively,
were attributable to services provided to the Company's UICI Administrators
unit, which was sold by the Company in January 2002. With a strategic goal of
gaining greater control over its information technology resources and
development efforts and managing its own information
F-26
UICI AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
Set forth below is summary condensed balance sheet and income statement
data for HAI as of and for the year ended December 31, 2001 and 2000. This
financial information has been adjusted to exclude the effects of push-down
accounting for the Insurdata Merger.
DECEMBER 31,
-----------------
2001 2000
------- -------
(IN THOUSANDS)
Assets
Cash and cash equivalents................................. $13,149 $16,840
Other current assets...................................... 6,950 10,597
Property and equipment.................................... 3,451 10,616
Other assets.............................................. 6,331 9,361
------- -------
Total assets...................................... $29,881 $47,414
======= =======
Liabilities
Accounts payable and accrued expenses..................... $ 5,182 $ 5,780
Debt...................................................... 27,147 2,804
Other liabilities......................................... 2,869 13
------- -------
Total liabilities......................................... 35,198 8,597
Stockholders' equity (deficit)............................ (5,317) 38,817
------- -------
Total liabilities and equity................................ $29,881 $47,414
======= =======
YEAR ENDED DECEMBER 31
-----------------------
2001 2000
---------- ----------
(IN THOUSANDS)
Revenue..................................................... $ 43,790 $ 43,671
Operating expenses.......................................... 66,034 82,272
-------- --------
Net loss.......................................... $(22,244) $(38,601)
======== ========
NOTE F -- STUDENT LOANS
Primarily through its AMS subsidiary and its College Fund Life Insurance
Division, the Company holds federally guaranteed and alternative
(i.e.non-federally guaranteed) student loans extended to students at selected
colleges and universities.
F-27
UICI AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Following is a summary of the student loans held by the Company at the
dates indicated:
DECEMBER 31, 2001 DECEMBER 31, 2000
----------------------- -----------------------
CARRYING CARRYING ESTIMATED
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
---------- ---------- ---------- ----------
(IN THOUSANDS)
FFELP loans.......................... $1,028,264 $1,068,166 $1,004,319 $1,044,492
Alternative loans -- guaranteed...... 196,185 196,185 109,700 109,700
Alternative
loans -- non-guaranteed............ 45,491 45,491 32,345 32,345
Deferred loan origination costs...... 12,072 -- 17,181 --
Allowance for losses................. (3,585) -- (7,473) --
---------- ---------- ---------- ----------
Total student loans.................. $1,278,427 $1,309,842 $1,156,072 $1,186,537
========== ========== ========== ==========
Of the aggregate $1,278.4 million and $1,156.1 million carrying amount of
student loans held by the Company at December 31, 2001 and 2000, respectively,
$1,276.1 million and $1,125.5 million, respectively, were pledged to secure
payment of secured student loan indebtedness. See Note J.
The fair value of student loans is estimated based on values of recent
sales of student loans by the Company.
FFELP loans are guaranteed as to 98% of principal and accrued interest by
the federal government or other private insurers. Certain alternative loans are
guaranteed (in an amount ranging from 95% to 100%) as to principal and accrued
interest by private insurers. The Company has established a reserve for
potential losses on the portion of principal and accrued interest not guaranteed
by the federal government or other private insurers and for potential losses on
uninsured student loans. The reserve is maintained at a level that the Company
believes is adequate to absorb estimated credit losses.
The Company's provision for losses on student loans is summarized as
follows:
DECEMBER 31,
-------------------------
2001 2000 1999
------- ------ ------
(IN THOUSANDS)
Balance at beginning of year.............................. $ 7,473 $2,252 $ 935
Change in provision for losses............................ (3,888) 5,221 1,317
------- ------ ------
Balance at end of year.................................... $ 3,585 $7,473 $2,252
======= ====== ======
The Company recognized interest income from the student loans of $94.4
million, $115.3 million and $66.4 million in 2001, 2000 and 1999, respectively.
During 2000, the Company acquired loans with principal and accrued interest
balances of $2.5 million. The Company purchased the loans at a discount of
$75,000 in accordance with the terms of purchase agreements. The discount is
being amortized over the life of the loans or included in the calculation of
gain or loss if loans are sold in the secondary market.
Included in other fees for the year ended December 31, 2001 and 2000 was
approximately $11.3 million and $7.8 million, respectively, in gain from the
sale of loans. The sold loans had a carrying value of $474.0 million and $765.0
million principal amount at the respective dates of sale in 2001 and 2000,
respectively. While AMS sold a lesser principal amount of loans in 2001 than in
2000, the higher net gain in 2001 resulted from lower deferred loan origination
costs associated with sold loans in 2001 compared to 2000.
F-28
UICI AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE G -- POLICY LIABILITIES
Liability for future policy and contract benefits consists of the
following:
DECEMBER 31,
-------------------
2001 2000
-------- --------
(IN THOUSANDS)
Accident & Health........................................... $ 49,302 $ 35,289
Life........................................................ 224,820 229,467
Annuity..................................................... 149,175 158,290
-------- --------
$423,297 $423,046
======== ========
With respect to traditional life insurance, future policy benefits are
computed on a net level premium method using assumptions with respect to current
investment yield, mortality and withdrawal rates determined to be appropriate as
of the date the business was acquired by the Company. Substantially all reserve
interest assumptions range from 7% to 8%. Such liabilities are graded to equal
statutory values or cash values prior to maturity.
Interest rates credited to future contract benefits related to universal
life-type contracts approximated 5.0%, 5.3% and 5.4% during 2001, 2000 and 1999,
respectively. Interest rates credited to the liability for future contract
benefits related to annuity contracts generally ranged from 4.0% to 5.5% during
2001, 3.0% to 7.3% during 2000 and 4.5% to 7.2% during 1999.
As described in Note H, the Company has assumed certain life and annuity
business from subsidiaries of AEGON USA, INC. ("AEGON"), utilizing the same
actuarial assumptions as the ceding company. The liability for future policy
benefits related to life business has been calculated using an interest rate of
9% graded to 5% over twenty years for life policies. Mortality and withdrawal
rates are based on published industry tables or experience of the ceding company
and include margins for adverse deviation. Interest rates credited to the
liability for future contract benefits related to these annuity contracts
generally ranged from 4.3% to 5.5% during 2001, and 4.8% to 5.5% during 2000 and
1999.
The carrying amounts and fair values of the Company's liabilities for
investment-type contracts (included in future policy and contract benefits and
other policy liabilities in the consolidated balance sheets) are as follows:
DECEMBER 31, 2001 DECEMBER 31, 2000
--------------------- ---------------------
CARRYING CARRYING
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
-------- ---------- -------- ----------
(IN THOUSANDS)
Direct annuities........................... $ 84,941 $ 79,165 $ 85,383 $ 79,577
Assumed annuities.......................... 64,234 63,977 72,907 72,494
Supplemental contracts without life
contingencies............................ 1,593 1,593 1,818 1,818
-------- -------- -------- --------
$150,768 $144,735 $160,108 $153,889
======== ======== ======== ========
Fair values under investment-type contracts consisting of direct annuities
and supplemental contracts without life contingencies are estimated using the
assumption-reinsurance pricing method, based on estimating the amount of profits
or losses an assuming company would realize, and then discounting those amounts
at a current market interest rate. Fair values for the Company's liabilities
under assumed annuity investment-type contracts are estimated using the cash
surrender value of the annuity.
F-29
UICI AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Activity in the claims liability is summarized as follows:
YEAR ENDED DECEMBER 31,
------------------------------
2001 2000 1999
-------- -------- --------
(IN THOUSANDS)
Claims liability at beginning of year, net of related
reinsurance recoverables........................... $278,211 $265,974 $270,396
Add:
Incurred losses, net of reinsurance, occurring
during:
Current year.................................... 551,427 468,278 471,763
Prior years..................................... (20,458) (28,574) (1,490)
-------- -------- --------
530,969 439,704 470,273
-------- -------- --------
Deduct payments for claims, net of reinsurance,
Occurring during:
Current year.................................... 287,424 249,575 269,608
Prior years..................................... 198,767 177,892 205,087
-------- -------- --------
486,191 427,467 474,695
-------- -------- --------
Claims liability at end of year, net of related
reinsurance recoverables (2001 -- $31,022;
2000 -- $10,321; and 1999 -- $11,577............ $322,989 $278,211 $265,974
======== ======== ========
The above reconciliation shows incurred losses developed in amounts less
than originally anticipated due to better than expected experience on the health
business in the Self Employed Agency Division in 2001 and 2000. The better than
expected experience in 2001 was partially offset by adverse experience on the
workers' compensation business. Claims liability reflects no accrual for
additional or return of premium.
NOTE H -- REINSURANCE
In 2001, 2000 and 1999, approximately 5%, 11% and 16%, respectively, of the
Company's premiums from continuing operations were assumed from AEGON. Prior to
1997, the health business assumed was marketed by UGA Inc. and issued through
AEGON's insurance subsidiaries. Under the terms of its coinsurance agreement,
AEGON's insurance subsidiaries have agreed to cede and the Company has agreed to
assume through coinsurance 60% of the health business previously sold by UGA
Inc. agents for business written on AEGON's insurance subsidiaries prior to
1998. In 2001, 2000 and 1999, the Company directly issued the health business
written by UGA Inc. agents and retained all of the business. Commencing in May
2001, and in accordance with Assumption Reinsurance Agreements with AEGON, the
Company began to assume all of the remaining policies from AEGON as approvals
were received from state regulatory authorities. As of December 31, 2001,
approximately 75% of the remaining policies have been assumed by the Company
from AEGON, and the Company currently anticipates that the balance of the
remaining policies will be assumed during 2002. On the policies that have been
assumed, the Company has coinsured 40% of the health insurance business back to
AEGON. On December 31, 2002, the Company has agreed to acquire the remaining 40%
of the coinsured business from AEGON based upon a mutually agreed-upon
prescribed price.
The Company's insurance subsidiaries, in the ordinary course of business,
reinsure certain risks with other insurance companies. These arrangements
provide greater diversification of risk and limit the maximum net loss potential
to the Company arising from large risks. To the extent that reinsurance
companies are unable to meet their obligations under the reinsurance agreements,
the Company remains liable.
F-30
UICI AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The reinsurance receivable included in the consolidated financial
statements at December 31, 2001 and 2000 is as follows:
DECEMBER 31,
-----------------
2001 2000
------- -------
(IN THOUSANDS)
Paid losses recoverable..................................... $ 3,147 $ 3,870
Unpaid losses recoverable................................... 60,559 57,208
------- -------
Total reinsurance receivable................................ $63,706 $61,078
======= =======
The effect of reinsurance transactions reflected in the consolidated
financial statements are as follows:
YEAR ENDED DECEMBER 31,
------------------------------
2001 2000 1999
-------- -------- --------
(IN THOUSANDS)
Premiums:
Premiums Written:
Direct............................................. $799,562 $610,316 $584,889
Assumed............................................ 79,865 99,014 130,475
Ceded.............................................. (47,109) (22,076) (33,578)
-------- -------- --------
Net Written........................................ $832,318 $687,254 $681,786
======== ======== ========
Premiums Earned:
Direct............................................. $802,274 $610,456 $584,038
Assumed............................................ 60,154 96,348 132,358
Ceded.............................................. (30,382) (18,579) (26,564)
-------- -------- --------
Net Earned......................................... $832,046 $688,225 $689,832
======== ======== ========
Ceded benefits and settlement expenses.......... $ 22,856 $ 17,683 $ 19,566
======== ======== ========
In August 1994, the Company entered into an agreement, pursuant to which
the Company acquired a block of life insurance and annuity policies. In
conjunction with this acquisition, the Company ceded through a coinsurance
agreement 100% of the policy liabilities to an unrelated reinsurer. The
acquisition required no financial investment by the Company. In July 2001, the
reinsurer recovered its investment in the amount of $22.0 million in this block,
and the coinsurance agreement was terminated and the company at no cost
recaptured all remaining policies.
F-31
UICI AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE I -- DEBT
Set forth below is a summary of the Company's short and long term
indebtedness outstanding at December 31, 2001 and 2000 (excluding outstanding
indebtedness that was incurred to originate and/or is secured by student loans)
(see Note J):
DECEMBER 31,
-----------------
2001 2000
------- -------
(IN THOUSANDS)
Short-term debt:
Note payable to related party............................. $ -- $18,954
Other Notes............................................... -- 18,000
Current portion of long-term debt......................... 6,498 27,734
------- -------
Total short-term debt............................. $ 6,498 $64,688
Long-term debt:
8.75% Senior Notes........................................ $11,852 $15,803
Other notes............................................... 13,451 37,234
------- -------
25,303 53,037
Less: current portion of long-term debt................... 6,498 27,734
------- -------
Total long-term debt.............................. 18,805 25,303
------- -------
Total short and long term debt.................... $25,303 $89,991
======= =======
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 and $15.8 million at
December 31, 2001 and 2000, respectively. The Company incurred $1.2 million,
$1.5 million and $1.9 million of interest expense on the notes in the years
ended December 31, 2001, 2000 and 1999, 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.
In May 1999, the Company entered into a $100 million unsecured credit
facility (the "Bank Credit Facility") with a group of commercial banks. Amounts
outstanding under the Bank Credit Facility initially bore interest at an annual
rate of LIBOR plus 75 basis points (0.75%). At December 31, 1999, the Company
had fully drawn on the Bank Credit Facility, of which $50.0 million was used to
repay $50.0 million of debt outstanding under the Company's prior bank facility
and $50.0 million was used to fund the UMMG and Academic Management Services
acquisitions (completed in May 1999 and July 1999, respectively) and current
operations. Effective December 31, 1999, the interest rate on amounts
outstanding under the Bank Credit Facility was increased to LIBOR plus 100 basis
points (1.00%).
On March 14, 2000, a limited liability company controlled by the Company's
Chairman ("Lender LLC") loaned $70.0 million to a newly-formed subsidiary of the
Company (the "Lender LLC Loan"). The proceeds of the Lender LLC Loan, together
with $5.0 million of cash on hand, were used to reduce indebtedness outstanding
under the Bank Credit Facility from $100.0 million to $25.0 million. The Lender
LLC Loan bore interest at the prevailing prime rate, was guaranteed by UICI, was
due and payable in July 2001 and was secured by a pledge of investment
securities and shares of the Company's National Motor Club unit.
F-32
UICI AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
As part of the March 2000 paydown of indebtedness under the Bank Credit
Facility, the Bank Credit Facility was amended to provide, among other things,
that the $25.0 million balance outstanding would be due and payable on July 10,
2000, amounts outstanding under the facility would be secured by a pledge of
investment securities and shares of Mid-West National Life Insurance Company of
Tennessee ("Mid-West"), and the restrictive covenants formerly applicable to
UICI and its restricted subsidiaries (primarily the Company's insurance
companies) were made applicable solely to Mid-West. Amounts outstanding under
the Bank Credit Facility continued to bear interest at LIBOR plus 100 basis
points per annum. On April 11, 2000 and June 28, 2000, the Company made
principal payments of $11.0 million and $8.0 million, respectively, under the
Bank Credit Facility, and on June 30, 2000, Lender LLC, against payment to the
banks of $6.0 million, assumed 100% of the banks' remaining $6.0 million
position in the Bank Credit Facility.
Effective July 27, 2000, the Company and the Lender LLC completed a further
restructuring of the terms of the Lender LLC Loan. As part of the restructuring,
the Company paid to Lender LLC principal owing on the Lender LLC Loan in the
amount of $6.0 million and amended the terms of the Lender LLC Loan to provide
that the aggregate principal amount of $70.0 million then owing by the Company
(the "Amended Lender LLC Loan") would consist of a $32.0 million unsecured
tranche and a $38.0 million tranche secured by a pledge of 100% of the capital
stock of Mid-West. The Amended Lender LLC Loan (a) matured on January 1, 2002,
(b) continued to bear interest at the prevailing prime rate from time to time,
with interest accruing but not payable until the earlier to occur of full
prepayment of the Lender LLC Loan or January 1, 2002, and (c) was mandatorily
prepayable monthly to the extent of 1% of the original outstanding principal
balance of the Amended Lender LLC Loan. The security interest in all remaining
collateral previously pledged to secure payment of the Lender LLC Loan and
indebtedness outstanding under the Bank Credit Facility (including all
investment securities and shares of the Company's National Motor Club unit) was
released in full, and the Bank Credit Facility was terminated.
In addition to scheduled principal payments totaling $3.5 million made
during the course of 2000, on October 20, 2000, the Company prepaid the
unsecured tranche of the Amended Lender LLC Loan in the amount of $12.5 million,
and on November 2, 2000, the Company prepaid an additional $17.4 million of the
unsecured tranche and $17.6 million of the secured tranche. Accordingly, at
December 31, 2000, the Company had no indebtedness outstanding under the
unsecured tranche and $19.0 million outstanding under the secured tranche of the
Amended Lender LLC Loan.
On January 30, 2001, the Company prepaid in full all principal in the
amount of $19.0 million, plus accrued interest of $2.1 million, on the secured
tranche of the Amended Lender LLC Loan, utilizing a portion of the proceeds
received in liquidation of UCNB, and the lender's security interest in 100% of
the capital stock of Mid-West was released in full.
On July 19, 2000, the Company's offshore-domiciled insurance companies
incurred indebtedness with an institutional lender in the amount of $24.0
million. The indebtedness bore interest at the per annum rate of 11.0%, was
scheduled to mature on August 1, 2001, was secured by a pledge of all of the
assets of the Company's offshore insurance subsidiaries, and was guaranteed by
the Company. The proceeds of the borrowing were advanced to the parent company
to fulfill liquidity needs at the parent company. At December 31, 2000, the
outstanding balance on the loan was $18.0 million. During 2001, all outstanding
principal in the amount of $18.0 million and accrued interest was paid in full.
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 bears interest at LIBOR plus 150 basis points (1.5%) (4.09% at
December 31, 2001), and is payable as to principal in equal quarterly
installments in the amount of $500,000, commencing October 1, 2000, with a final
maturity of June 30, 2005. The note was delivered to discharge an account
payable by 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 (included
in net liabilities of
F-33
UICI AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
discontinued operation). At December 31, 2001 and 2000, the outstanding balance
on the note was $7.5 million and $9.5 million, respectively.
Effective October 1, 2000, the Company's AMS subsidiary amended the terms
of its unsecured term loan facility (under which, at December 31, 2000, $21.3
million of indebtedness was outstanding) to eliminate all financial covenants.
In connection with the amendment of the facility, UICI (the parent company)
agreed to unconditionally guarantee the payment when due of such indebtedness.
In June 2001, AMS paid off the remaining outstanding indebtedness under this
facility.
SCS Specialized Card Services, Inc. (a wholly-owned subsidiary of the
Company) ("SCS") has various loans with the South Dakota Board of Economic
Development bearing interest at a rate of 3.00% per annum. The balance
outstanding under these loans was $4.1 million and $4.3 million at December 31,
2001 and 2000, respectively. The loans mature in 2003 and 2004. The proceeds
were used to purchase equipment and leasehold improvements.
AMS has a note payable to Fleet National Bank in the outstanding principal
amount of $1.8 million and $2.0 million at December 31, 2001 and 2000,
respectively, maturing June 30, 2004. The note bears interest at 5.57% at
December 31, 2001, requires principal and interest payments quarterly and is
secured by a first mortgage on real estate held by AMS.
Principal payments required in each of the next five years and thereafter
are as follows:
(IN THOUSANDS)
--------------
2002........................................................ $ 6,498
2003........................................................ 6,814
2004........................................................ 10,491
2005........................................................ 1,500
2006........................................................ --
2007 and thereafter......................................... --
-------
$25,303
=======
The fair value of the Company's short-term and long-term debt was $26.2
million and $90.8 million at December 31, 2001 and 2000, respectively. The fair
value of the Company's long-term debt is estimated using discounted cash flow
analysis, based on the Company's current incremental borrowing rates for similar
types of borrowing arrangements. The carrying amounts of the Company's
short-term debt approximate fair values. Total interest paid was $6.4 million,
$8.8 million and $8.1 million in the years ended December 31, 2001, 2000 and
1999, respectively.
The weighted-average interest rate on short-term borrowings outstanding at
December 31, 2001 and 2000 was 10.1% and 9.3%, respectively.
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 bank credit facility, the Company may borrow from time to time up to $30.0
million on a revolving, unsecured basis. Loans outstanding under the facility
will bear interest at the option of the Company at prime plus 1% or LIBOR plus
1%. The Company intends to utilize the proceeds of the facility for general
working capital purposes. As of March 8, 2002 the Company had no borrowings
outstanding under the facility.
NOTE J -- STUDENT LOAN CREDIT FACILITIES
At December 31, 2001 and 2000, the Company, through its Academic Management
Services Corp ("AMS") subsidiary and the College Fund Life Insurance Division,
had outstanding an aggregate of
F-34
UICI AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
$1,506.2 million and $1,334.8 million of indebtedness, respectfully, under
secured student loan credit facilities, of which $1,242.8 million and $1,221.5
million, respectfully, 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 2000, 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 $1,125.5 million, respectively, and by a pledge of cash,
cash equivalents and other qualified investments in the amount of $129.4 million
and $86.2 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.
Set forth below is a summary unaudited pro forma December 31, 2001 balance
sheet of UICI, adjusted to exclude certain assets (student loans and restricted
cash) and certain liabilities (student loan credit facilities) associated with
the Company's AMS and College Life Fund Division ("CFLD") operations:
AT DECEMBER 31, 2001
----------------------------------------------------------------------------------------
UICI OTHER AMS AMS TUITION OTHER CFLD
CONSOLIDATED AS AMS AND CFLD FINANCING INSTALLMENT STUDENT UICI
REPORTED SPE FINANCINGS FACILITIES(1) PROGRAM(2) LOANS PRO FORMA
--------------- -------------- ------------- ----------- ---------- ----------
(IN THOUSANDS)
(UNAUDITED)
Assets:
Investments................... $1,218,718 $ -- $ -- $ -- $ -- $1,218,718
Student loans................. 1,278,427 1,053,788 222,262 -- 2,377 --
Cash.......................... 50,922 -- 36,059 -- 763 14,100
Restricted cash............... 295,182 127,272 -- 141,663 2,096(3) 24,151
Investment income due and
accrued..................... 60,879 35,840 11,314 -- 77 13,648
Other assets.................. 381,756 5,181 116 1,428 177 374,854
---------- ---------- -------- -------- -------- ----------
Total assets.............. $3,285,884 $1,222,081 $269,751 $143,091 $ 5,490 $1,645,471
========== ========== ======== ======== ======== ==========
Liabilities:
Policy liabilities............ $ 891,361 $ -- $ -- $ -- $ -- $ 891,361
Other liabilities............. 187,552 3,172 668 -- 826 182,886
Collections payable........... 140,894 -- -- 140,894 -- --
Notes payable................. 25,303 -- -- -- -- 25,303
Student loan credit
facilities.................. 1,506,202 1,242,840 263,362 -- -- --
---------- ---------- -------- -------- -------- ----------
Total liabilities........... 2,751,312 1,246,012 264,030 140,894 826 1,099,550
---------- ---------- -------- -------- -------- ----------
Stockholders' equity
(deficit).............. 534,572 (23,931)(4) 5,721 2,197 4,664 545,921
---------- ---------- -------- -------- -------- ----------
Total liabilities and
stockholders'
equity............... $3,285,884 $1,222,081 $269,751 $143,091 $ 5,490 $1,645,471
========== ========== ======== ======== ======== ==========
---------------
(1) Obligations under AMS' master repurchase agreement and credit facility are
partially (approximately $13.0 million at December 31, 2001) guaranteed by
the Company.
(2) A trust created for the benefit of participants in AMS' tuition installment
program held invested assets in the amount of approximately $141.7 million
and $112.6 million at amortized cost (which approximated
F-35
UICI AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
market) at December 31, 2001 and 2000, respectively, all of which assets are
classified as restricted cash on the Company's consolidated balance sheet.
See Note A.
(3) Represents cash and cash equivalents required to be held by CFLD to support
certain loan servicing obligations under CFLD's SPE financing.
(4) Includes negative equity in the AMS SPE financings, which is attributable to
permitted financing of student loans through AMS SPE financings in excess of
par value.
A more detailed summary of such student loan credit facilities is set forth
below:
ACADEMIC MANAGEMENT SERVICES CORP.
Following is a summary of debt outstanding under student loan credit
facilities at AMS:
DECEMBER 31,
-------------------------
2001 2000
------------ ----------
(IN THOUSANDS)
Short-term debt:
Master repurchase agreement and credit facility........... $ 263,362 $ 113,389
Current portion of long-term debt......................... 619,564 618,374
---------- ----------
Total short-term debt.................................. $ 882,926 $ 731,763
Long-term debt:
Auction Rate notes........................................ $ 369,550 $ 404,990
Floating Rate notes....................................... 153,725 198,094
Commercial Paper.......................................... 619,565 618,374
---------- ----------
1,142,840 1,221,458
Less: current portion of long-term debt................... 619,564 618,374
---------- ----------
Total long-term debt................................... 523,276 603,084
---------- ----------
Total short and long-term debt.............................. $1,406,202 $1,334,847
========== ==========
In March 1998, AMS entered into a master repurchase agreement and credit
facility with a financial institution, the obligations under which are partially
(approximately $13.0 million at December 31, 2001) guaranteed by the Company.
The proceeds of the facility are used from time to time to initially fund AMS'
student loan originations. The repurchase agreement provides for the purchase of
student loans by the financial institution, and the financial institution may
put the student loans back to AMS on the last day of each month. AMS, in turn,
has the right to require the financial institution to repurchase the student
loans on such date, with the interest rate on the credit facility reset on such
date. The credit facility provides for up to $150.0 million of financing and may
be increased subject to monthly confirmations. The credit facility had an
outstanding balance of $263.4 million and $113.4 million at December 31, 2001
and 2000, respectively, and bears interest at a variable annual rate of LIBOR
plus 75 basis points (2.68% at December 31, 2001). The credit facility has a
term of one year and is secured by student loans originated under the Federal
Family Education Loan Program, which are guaranteed by the federal government or
alternative loans guaranteed by private guarantors. The financial institution
may value the loans at any time and require AMS to repay any amount by which the
market value of the loans is less than the amount required by the credit
facility.
After initial funding, AMS typically refinances groups of loans on a more
structured basis by transferring loans to Special Purpose Entities, which in
turn issue debt securities secured by the student loans. During
F-36
UICI AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
1999, AMS established approximately $1.3 billion of such structured funding
facilities in three separate transactions:
- On June 11, 1999, AMS sold, in a private placement transaction, $319.5
million principal amount of Auction Rate Student Loan-Backed Notes issued
by a Special Purpose Entity at an initial interest rate of 5.038%. The
notes were sold in two tranches and mature in November 2022. The notes
are insured by MBIA Insurance Corporation ("MBIA") and received a "AAA"
credit rating from Standard & Poor's and Fitch IBCA and an "Aaa" rating
from Moody's Investor Services.
- Effective August 6, 1999, AMS completed a closing and funding of $515.0
million of its $650.0 million single seller asset-backed commercial paper
conduit, pursuant to which commercial paper may be issued by a Special
Purpose Entity from time to time with maturities from one to 270 days.
Approximately $619.6 million of commercial paper bearing interest rates
of 1.90% to 2.45% was issued and outstanding under the facility at
December 31, 2001. Liquidity support is provided by a separate banking
facility. Under the terms of the program, in the event the support
facility is activated, borrowings under the bank facility would be repaid
using collections of underlying student loans, would bear interest at
LIBOR plus seventy-five (75) basis points and would mature in August
2034. The commercial paper received ratings of A1/P1/F1 from Standard &
Poor's, Moody's, and Fitch, respectively, and is insured by MBIA.
- On October 7, 1999, AMS completed a $344.0 million financing of three
classes of notes issued by a Special Purpose Entity. The $229.0 million
Class A-1 notes were structured as three-month LIBOR floating rate notes
and were priced with a spread of 42 basis points with the interest rate
reset quarterly. The Class A-1 notes with an outstanding balance of
$153.7 million at December 31, 2001, have an expected average life of 3.5
years with legal final maturity in April 2009. The $57.5 million Class
A-2 and $57.5 million Class A-3 notes were structured as auction rate
notes with an initial interest rate of 6.38%. The interest rate on these
notes is reset quarterly. Legal final maturity of the A-2 and A-3 notes
is July 2027. At December 31, 2001, the outstanding balance of the notes
was $115.0 million, bearing interest rates of 2.55% and 2.42%,
respectively. All three classes of notes received AAA/Aaa/AAA ratings
from Standard & Poor's, Moody's and Fitch IBCA, respectively, and are
insured by MBIA.
In each case the notes represent obligations solely of the Special Purpose
Entity that issued the obligations and not of the Company, AMS or any other
subsidiary of the Company. However, for financial reporting and accounting
purposes the AMS structured finance facilities have been classified as
financings. Accordingly, in connection with the financings neither the Company
nor AMS recorded gain on sale of the student loan assets transferred to the
Special Purpose Entity and, on a consolidated basis, the Company continues to
carry on its consolidated balance sheet the student loans ($975.3 million
principal amount at December 31, 2001) and cash and cash equivalents held by the
Special Purpose Entities ($113.4 million at December 31, 2001 classified as
restricted cash) and the associated indebtedness ($1,142.8 million in the
aggregate at December 31, 2001, which is included on the Company's consolidated
balance sheet as student loan credit facilities) arising from the transactions.
In January 2002 the Company 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 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,
F-37
UICI AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
Until July 2000, AMS had a line of credit outstanding with a commercial
bank, secured by the AMS student loan portfolio. The maximum amount outstanding
under this line during 2000 was approximately $97.0 million, with an average
monthly balance of approximately $37.5 million.
During the year ended December 31, 2001, 2000 and 1999, AMS paid total
interest on borrowings incurred to finance the funding of student loans in the
amount of $68.4 million, $98.5 million and $56.8 million, respectively.
COLLEGE FUND LIFE INSURANCE DIVISION
On April 27, 2001, the Company completed a $100.0 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 two $50.0
million series of Student Loan Asset Backed Notes issued by a bankruptcy-remote
special purpose entity (a "Special Purpose Entity"). Interest rates on the notes
reset monthly in a Dutch auction process, with the initial rate set at 4.75% for
each of the Series A-1 and Series A-2 notes. At December 31, 2001, the interest
rates on the Series A-1 and Series A-2 notes were 2.30% and 2.12%, respectively.
The notes are secured by a pledge of alternative 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 $70.1 million
portfolio of alternative student loans from various affiliates of the Company
and established a loan acquisition fund in the amount of $19.1 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. Accordingly, in connection with the financing the
Company recorded no gain on sale of the assets transferred to the Special
Purpose Entity and, on a consolidated basis, the Company continues to carry on
its consolidated balance sheet the alternative student loans ($78.5 million at
December 31, 2001) and cash and cash equivalents held by the Special Purpose
Entity ($13.9 million at December 31, 2001 classified as restricted cash) and
the associated indebtedness ($100.0 million at December 31, 2001, which is
classified on the Company's consolidated balance sheet as student loan credit
facilities) arising from the transaction.
During the year ended December 31, 2001 CFLD paid total interest on
borrowings associated with the securitization in the amount of $2.3 million.
The weighted-average interest rate on short-term borrowings outstanding at
December 31, 2001 and 2000 was 4.6% and 7.0%, respectively.
F-38
UICI AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Principal payments required by AMS and CFLD with respect to their
outstanding student loan indebtedness in each of the next five years and
thereafter are as follows:
AMS CFLD
---------- --------
(IN THOUSANDS)
2002........................................................ $ 882,927 $ --
2003........................................................ -- --
2004........................................................ -- 1,350
2005........................................................ -- 2,850
2006........................................................ -- 3,000
2007 and thereafter......................................... 523,275 92,800
---------- --------
Total....................................................... $1,406,202 $100,000
========== ========
NOTE K -- FEDERAL INCOME TAXES
Deferred income taxes for 2001 and 2000 reflect the impact of temporary
differences between the financial statement carrying amounts and tax bases of
assets and liabilities. Deferred tax liabilities and assets consist of the
following:
DECEMBER 31,
------------------
2001 2000
------- --------
(IN THOUSANDS)
Deferred tax liabilities:
Deferred policy acquisition and loan origination.......... $20,672 $ 23,192
Unrealized gain on securities............................. 16,357 --
Undistributed earnings of subsidiaries.................... 354 4,536
Other..................................................... 8,997 8,060
------- --------
Total gross deferred tax liabilities................... 46,380 35,788
------- --------
Deferred tax assets:
Loss on disposal of discontinued operation................ 10,502 11,936
Policy liabilities........................................ 25,770 27,733
Unrealized loss on securities............................. -- 5,250
Operating loss carryforwards.............................. 12,197 22,254
Capital loss carryforwards................................ -- 7
Investment in Healthaxis.................................. 9,165 5,468
Accrued expenses.......................................... 4,772 7,243
Tax credit carryovers..................................... -- 2,185
Other..................................................... 2,806 3,112
------- --------
Total gross deferred tax assets........................ 65,212 85,188
Less: valuation allowance................................... (3,976) (16,451)
------- --------
Deferred tax assets.................................... 61,236 68,737
------- --------
Net deferred tax asset...................................... $14,856 $ 32,949
======= ========
The Company establishes a valuation allowance when management believes,
based on the weight of the available evidence, that it is more likely than not
that some portion of the deferred tax asset will not be
F-39
UICI AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
realized. Realization of the net deferred tax asset is dependent on generating
sufficient future taxable income. The amount of the deferred tax asset
considered realizable, however, could be reduced in the near term if estimates
of future taxable income during the carryforward period are reduced. The net
change in the total valuation allowance was a decrease of approximately $12.5
million for 2001 and an increase of approximately $9.8 million for 2000. The
2001 and 2000 changes in the valuation allowance arise primarily from AMS. AMS
recognized taxable income for 2001 and realized a tax benefit from its operating
loss carryforward resulting in a decrease in the valuation allowance. Because
AMS was not part of the Company's consolidated group during 2000, the Company
increased the valuation allowance during 2000 and did not realize the tax
benefit associated with the significant operating losses of AMS for 2000. AMS
entered the Company's consolidated group on August 3, 2001 following the
Company's acquisition of the minority interest of AMS. The utilization of
operating loss carryovers of AMS generated before August 3, 2001 is limited to
future taxable income of AMS and is not available to offset the future taxable
income of the other members of the Company's consolidated group.
The deferred tax liability related to the undistributed earnings in
subsidiaries decreased $4.2 million. The deferred tax liability relates to taxes
on undistributed earnings from subsidiaries that were previously less than 80%
owned and are now wholly owned subsidiaries.
The provision for income tax expense (benefit) consisted of the following:
DECEMBER 31,
-----------------------------
2001 2000 1999
------- -------- --------
(IN THOUSANDS)
From operations:
Continuing operations:
Current tax expense................................. $24,882 $ 33,140 $ 19,118
Deferred tax expense (benefit)...................... (7,017) 1,980 (135)
------- -------- --------
Total from continuing operations............... 17,865 35,120 18,983
------- -------- --------
Discontinued operations:
Current tax expense (benefit)....................... (6,440) (56,282) (22,420)
Deferred tax expense (benefit)...................... 3,503 42,306 (75,134)
------- -------- --------
Total from discontinued operations............. (2,937) (13,976) (97,554)
------- -------- --------
Total................................................. $14,928 $ 21,144 $(78,571)
======= ======== ========
F-40
UICI AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company's effective income tax rates applicable to continuing
operations varied from the maximum statutory federal income tax rate as follows:
YEAR ENDED
DECEMBER 31,
-------------------
2001 2000 1999
----- ---- ----
Statutory federal income tax rate........................... 35.0% 35.0% 35.0%
State income taxes.......................................... 1.6 -- --
Small life insurance company deduction...................... (1.0) (1.3) 0.6
Operating loss.............................................. (8.6) 15.8 (2.2)
Release undistributed earnings reserve...................... (6.3) -- --
Amortization of goodwill.................................... 2.6 0.7 2.7
Nondeductible compensation expenses......................... 2.1 2.2 --
Other items, net............................................ 1.6 1.3 (1.5)
----- ---- ----
Effective income tax rate applicable to continuing
operations................................................ 27.0% 53.7% 34.6%
===== ==== ====
Under pre-1984 federal income tax laws, a portion of a life insurance
company's "gain from operations" was not subject to current income taxation but
was accumulated for tax purposes in a memorandum account designated as
"policyholders' surplus account." These amounts are not taxable unless (a) the
life insurance company fails to qualify as a life insurance company for federal
income tax purposes for two consecutive years, (b) these amounts are distributed
to the Company or (c) these amounts exceed certain statutory limitations. The
aggregate accumulation in this account for the Company's life insurance
subsidiaries was approximately $3.1 million at December 31, 2001. For the
taxable years ended December 31, 2001, 2000 and 1999, The MEGA Life and Health
Insurance Company ("MEGA") did not qualify as a life insurance company for
federal income tax purposes. Accordingly, MEGA provided for and paid taxes and
interest of approximately $3.2 million in 2001 and 2000 on MEGA's policyholders'
surplus account of $8.7 million.
At December 31, 2001, MEGA has an aggregate federal tax loss carryforward
from certain acquired subsidiaries of $3.6 million for use to offset future
taxable income, under certain circumstances, with expiration dates ranging
between 2002 and 2007. The maximum amounts of federal tax loss carryforwards
available are $657,000 per year from 2002 through 2006, and $338,000 in 2007. At
December 31, 2001 AMS has $31.2 million of federal tax loss carryforwards that
will begin to expire in 2019.
Total federal income taxes paid in prior years and recovered during 2001
total $18.6 million. Total federal income taxes paid were $26.9 million, $11.8
million and $40.2 million for 2001, 2000 and 1999, respectively.
UICI, MEGA, two other non-life insurance subsidiaries and all of the
Company's non-insurance subsidiaries file a consolidated federal income tax
return. The Company's life insurance subsidiaries all file separate federal
income tax returns.
The Company has interests in several limited liability corporations that
file separate tax returns. The Company's consolidated results of operations
reflect 100% of the income from these companies.
NOTE L -- STOCKHOLDERS' EQUITY
On August 11, 2000, the Company issued to the UICI Employee Stock Ownership
and Savings Plan ("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, which matures July 31, 2003 and is secured
by a pledge of the purchased shares. See Note O.
F-41
UICI AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 December 31, 2001, 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.
Effective September 15, 1999, the Company entered into an Assumption
Agreement with a related party (see Note M), pursuant to which UICI agreed to
assume and discharge an unfunded obligation to purchase and transfer to
independent sales agents, representatives and independent organizations, in
consideration of a cash payment made by the related party to the Company in the
amount of $10.1 million, representing the dollar value of 369,174 shares of UICI
Common Stock at $27.4375 per share (the closing price of UICI common stock at
September 15, 1999). On October 29, 1999, the Company received the cash payment.
In 1999, the Company entered into a put/call agreement on the Company's
common stock with a related party. See Note M.
Pursuant to the Company's Executive Stock Purchase Program, during 1998 and
1999 the Company extended loans to officers, directors and employees in the
amount of $3.3 million and $2.9 million, respectively, the proceeds of which
were used to purchase Company Common Stock. The six-year term loans bear
interest at 5.22%-5.37% per annum, and interest is payable quarterly. Loans are
full recourse to borrowers and are payable in full upon the occurrence of
certain events. The terms of the loans were significantly modified during the
year ended December 31, 2000. See Note O.
Generally, total stockholders' equity of domestic insurance subsidiaries,
as determined in accordance with statutory accounting practices, in excess of
minimum statutory capital requirements is available for transfer to the parent
company subject to the tax effects of distribution from the "policyholders'
surplus account" described in Note K on Federal Income Taxes. The minimum
statutory capital and surplus requirements of the Company's domestic insurance
subsidiaries was $28.2 million at both December 31, 2001 and 2000.
Prior approval by insurance regulatory authorities is required for the
payment of dividends by a domestic insurance company that exceed certain
limitations based on statutory surplus and net income. During the fourth quarter
of 2001, the Company's two principal domestic insurance subsidiaries paid $40.0
million in the aggregate to the holding company. During 2000 and 1999, the
domestic insurance companies paid dividends in the amount of $19.0 million and
$19.8 million, respectively. During 2002, the Company's domestic insurance
companies could pay aggregate dividends to the parent company of approximately
$37.0 million without prior approval by statutory authorities.
Combined net income and stockholders' equity for the Company's domestic
insurance subsidiaries determined in accordance with statutory accounting
practices and adjusted for percentage of ownership and pro rata share of net
income are as follows:
YEAR ENDED DECEMBER 31,
------------------------------
2001 2000 1999
-------- -------- --------
(IN THOUSANDS)
Net income........................................... $ 33,581 $ 45,688 $ 50,761
Statutory surplus.................................... $277,348 $286,275 $287,360
The National Association of Insurance Commissioners ("NAIC") revised the
Accounting Practices and Procedures Manual ("Manual") in a process referred to
as Codification. The revised Manual became effective
F-42
UICI AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 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.
NOTE M -- RELATED PARTY TRANSACTIONS
INTRODUCTION
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 ("Jensen Affiliates").
Under the Company's by-laws, any contract or other transaction between the
Company and any director (or company in which a director is interested) is valid
for all purposes if the interest of such director is disclosed or known and such
transaction is authorized by a majority of directors not interested in the
transaction. The Board of Directors has adopted a policy requiring the
prospective review and approval by a majority of the "Disinterested Outside
Directors" of any contract or transaction with a related party involving
payments of $250,000 or more in any twelve-month period or $1.0 million over the
life of the contract. For purposes of the policy, a "related-party" is a person
or entity that is an "affiliate" of the Company or any entity in which any
officer or director of the Company has a 5% or greater equity interest, and a
"Disinterested Outside Director" is any director of UICI who is an employee of
neither the Company nor any affiliate of the Company and otherwise holds no
interest in any person or entity with which the Company proposes to enter into a
transaction in question.
The Company believes that the terms of all such transactions with all
related parties, including all Jensen Affiliates, are and have been on terms no
less favorable to the Company than could have been obtained in arms' length
transactions with unrelated third parties. Mr. Jensen has never voted with
respect to any matter in which he or his children have or have had an interest.
TRANSACTIONS WITH MR. JENSEN AND JENSEN AFFILIATES
Special Investment Risks, Ltd.
From the Company's inception through 1996, Special Investment Risks, Ltd.
("SIR") (formerly United Group Association, Inc. ("UGA")) sold health insurance
policies that were issued by AEGON USA and coinsured by the Company or policies
issued directly by the Company. SIR is owned by Mr. Jensen. Effective January 1,
1997, the Company acquired the agency force of SIR and certain tangible assets
of SIR for a price equal to the net book value of the tangible assets acquired
and assumed certain agent commitments of $3.9 million. The tangible assets
acquired consisted primarily of agent debit balances, a building, and related
furniture and fixtures having a net book value of $13.1 million.
F-43
UICI AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In accordance with the terms of the asset sale to the Company, SIR retained
the right to receive all renewal commissions on policies written prior to
January 1, 1997, including the policies previously issued by AEGON and coinsured
by the Company and the policies previously issued directly by the Company. The
renewal commissions paid to SIR on the coinsured policies issued by AEGON are
based on commission rates negotiated and agreed to by AEGON and SIR at the time
the policies were issued prior to 1997, and the commission rates paid on
policies issued directly by the Company are commensurate with the AEGON renewal
commission rates. The Company expenses its proportionate share of renewal
commissions payable to SIR on co-insured policies issued by AEGON. During 2001,
2000 and 1999, SIR received insurance renewal commissions of $3.8 million, $7.7
million and $10.1 million, respectively, on the policies previously issued by
AEGON prior to January 1, 1997 and coinsured by the Company. During 2001, 2000
and 1999, SIR received renewal commissions of $3.1 million, $1.8 million and
$2.6 million, respectively, on policies issued prior to January 1, 1997 and
issued directly by the Company.
In accordance with the terms of an amendment, dated July 22, 1998, to the
terms of the sale of the UGA assets to the Company, SIR was granted the right to
retain 10% of net renewal commissions on any new business written by the UGA
agency force after January 1, 1997. During the years ended December 31, 2001,
2000 and 1999, the Company paid to SIR the amount of $1.2 million, $1.1 million
and $677,000, respectively, pursuant to this arrangement.
In 1986 and 1996, respectively, SIR established, for the benefit of its
independent insurance agents, independent sales representatives and independent
organizations associated with SIR, the Agency Matching Total Ownership Plan I
and the Agency Matching Total Ownership Plan II (collectively, the "Plans"),
entitling participants to purchase and receive Company Common Stock. In
connection with SIR's transfer to the Company of SIR's agency operations
effective January 1, 1997, SIR agreed to retain the liability to fund the Plans
to the extent of 922,587 shares of UICI Common Stock, representing the
corresponding number of unvested AMTOP Credits (as defined in the Plans) at
January 1, 1997. As of August 30, 1999, the liability of SIR to fund the Plans
remained undischarged to the extent of 369,174 shares of UICI Common Stock (the
"Unfunded Obligation").
Effective September 15, 1999, SIR and the Company entered into an
Assumption Agreement, pursuant to which UICI agreed to assume and discharge the
Unfunded Obligation, in consideration of a cash payment made by SIR to the
Company in the amount of $10.1 million representing the dollar value of 369,174
shares of UICI Common Stock at $27.4375 per share (the closing price of UICI
common stock at September 15, 1999). On October 29, 1999, SIR funded the cash
payment.
Mr. Jensen's five adult children hold in the aggregate 100% of the equity
interest in Onward & Upward, Inc. ("OUI"), which is the holder of approximately
6.5% of the Company's outstanding Common Stock. To ensure that the dollar value
of the Unfunded Obligation will not exceed the dollar proceeds received from SIR
plus a reasonable allowance for the cost of funds, effective September 15, 1999,
the Company and OUI entered into a Put/Call Agreement. Pursuant to the Put/Call
Agreement, for a thirty day period commencing on July 1 of each year, the
Company has an option to purchase from OUI, and OUI has a corresponding right to
require the Company to purchase, up to 369,174 shares of Common Stock at a
purchase price per share equal to $28.50 in 2000, $30.25 in 2001, $32.25 in
2002, $34.25 in 2003, $36.25 in 2004, $38.25 in 2005 and $40.25 in 2006. The
call/put price escalates over time in annual dollar increments designed to
recognize an increase in value of the underlying UICI stock based upon
historical past performance (an approximate 6.0% annual rate of appreciation).
In July 2000, the Company extended until October 31, 2000 the period during
which OUI may exercise its initial put right under the Put/Call Agreement. In
November 2000, the Company extended until March 31, 2001 the period during which
OUI may have exercised its initial put right under the Put/Call Agreement, and
in May 2001, the Company extended until June 30, 2001 the period during which
OUI may have exercised its initial put right under the Put/Call Agreement. OUI
may next exercise its put
F-44
UICI AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
right, and the Company may next exercise its corresponding call right, during
the period commencing July 1, 2002 and ending on July 31, 2002 for a purchase
price per share of $32.25.
During 2001, 2000 and 1999, the Company received $-0-, $2,000 and $163,000,
respectively, from SIR as reimbursement of office supply and occupancy expenses.
Richland State Bank
Richland State Bank ("RSB") is a state-chartered bank in which Mr. Jensen
holds a 100% equity interest. Prior to the chartering of United Credit National
Bank in February 1997, the Company's United CreditServ subsidiary (formerly the
Company's Credit Services division) utilized RSB to issue credit cards bearing
the name of RSB for the Company's ACE and AFCA credit card programs. The
agreement governing the terms of the issuance of such credit cards provided that
UICI paid to RSB a fee in the amount of $0.50 per card issued for each month a
credit card bearing the RSB name remained outstanding. In 2000 and 1999, the
Company paid fees in the amount of $33,000 and $108,000, respectively, pursuant
to this agreement. The agreement terminated on June 30, 2000.
Until September 30, 2000, the Company's United CreditServ unit processed
and serviced credit cards issued by RSB, at a monthly rate of $5.25 per account.
The Company received $856,000 and $1.5 million from RSB for services performed
in connection with processing and marketing of credit cards in 2000 and 1999,
respectively.
RSB has also originated student loans for AMS and resold originated loans
to AMS at par less an origination fee of 31 basis points (0.31%). During 1999,
RSB originated $59.8 million aggregate principal amount of student loans for
AMS, for which it received $176,000 in origination fees. During 2000, RSB
originated $80.9 million aggregate principal amount of student loans for AMS,
for which it received $245,000 in origination fees. During 2001, RSB originated
$88.2 million aggregate principal amount of student loans for AMS, for which it
received $275,000 in origination fees. The agreement governing the terms of
RSB's origination services for AMS expires on January 20, 2002.
Pursuant to the terms of an underwriting and processing agreement between
RSB and Specialized Card Services, Inc. (an indirect wholly owned subsidiary of
the Company) ("SCS"), SCS formerly provided to RSB certain underwriting and loan
processing services utilizing 17 SCS employees resident in Sioux Falls, South
Dakota, which enabled RSB to perform its obligations under the AMS origination
agreement. The fees and expenses paid to SCS by RSB pursuant to the processing
agreement were passed through to AMS in accordance with the terms of the
origination agreement. The student loan underwriting and loan processing
services constituted the sole remaining operation of SCS in Sioux Falls
following the sale of UICI's credit card portfolio in September 2000 and final
liquidation of United Credit National bank in January 2001.
The Company entered into an agreement, dated as of June 4, 2001, with AMS,
SCS and RSB, pursuant to which, among other things, SCS and the Company agreed
to permit RSB to make offers of employment to, and to hire, 17 SCS employees. In
connection with such offers, RSB agreed to assume all liabilities (including
accrued vacation and benefits) accruing on and after June 30, 2001 associated
with the employees actually hired by RSB. The Company agreed to retain all
liability for severance and/or termination costs associated with employees who
elected not to accept RSB's offer of employment. On June 30, 2001, SCS confirmed
that all employees had either elected to accept offers of employment from RSB or
had been terminated by SCS, and SCS closed its remaining operations in Sioux
Falls.
At December 31, 1998, the Company had loans outstanding owing to RSB in the
aggregate principal amount of $497,000, which bore interest at annual rates
ranging from 9% to 9.25%. The loans were paid in full in August 1999.
F-45
UICI AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
RSB also provides student loan origination services for the Company's
College Fund Life Insurance Division. Pursuant to a Loan Origination and
Purchase Agreement, dated June 12, 1999, RSB originated student loans and resold
such loans to UICI Funding Corp. 2 ("Funding") (a wholly owned subsidiary of
UICI) at par (plus accrued interest) less an origination fee of 31 basis points
(0.31%). Effective June 12, 2000, RSB and Funding amended the agreement to
provide that student loans originated by RSB would be resold to Funding at par
(plus accrued interest). During 2001, 2000 and 1999, RSB originated $20.7
million, $19.5 million and $15.3 million aggregate principal amount plus accrued
interest, respectively, of student loans for MEGA and Mid-West, for which it
received origination fees in the amounts of $-0-, $12,000 and $47,000,
respectively.
During 2001, 2000 and 1999, RSB collected on behalf of, and paid to,
Funding $1.9 million, $1.7 million and $1.3 million, respectively, in guarantee
fees paid by student borrowers in connection with the origination of student
loans.
In June 1999, RSB entered into a service agreement with the College Fund
Life Insurance Division of MEGA and Mid-West pursuant to which MEGA and Mid-West
provide underwriting services to permit RSB to approve prospective student
loans. During 2001, RSB collected on behalf of, and paid to MEGA and Mid-West
fees of $275,000 and $237,000, respectively, in origination fees paid by student
borrowers in connection with the origination of student loans. During 2000, RSB
collected on behalf of, and paid to MEGA and Mid-West fees of $149,000 and
$328,000, respectively. During 1999, RSB collected on behalf of, and paid to
MEGA and Mid-West fees of $165,000 and $300,000, respectively.
During 2001, 2000 and 1999, Funding received from RSB interest income in
the amount of $20,000, $37,000 and $5,000, respectively, on money market reserve
accounts maintained at RSB by the Company.
Specialized Association Services, Inc.
Pursuant to an agreement entered into in July 1998, Specialized Association
Services, Inc. ("SAS") (which is owned by Mr. Jensen's adult children) regularly
pays UICI Marketing for certain benefits provided to association members. UICI
Marketing, in turn, purchases such benefits from third parties (including NMC,
which was sold July 27, 2000 to an investor group consisting of Jensen family
members). The Company believes that the fees earned by UICI Marketing as a
percentage of UICI Marketing's cost of benefits during 2001, 2000 and 1999 were
approximately 30%, 29% and 23%, respectively, which is prior to any allocation
of overhead. During 2001, 2000 and 1999, SAS paid to UICI Marketing $15.0
million, $9.7 million and $6.0 million, respectively, pursuant to this
arrangement. During 2001 and 2000, UICI Marketing paid NMC $1.4 million and
$528,000, respectively, pursuant to this arrangement.
During 2001, 2000 and 1999, the Company paid to SAS $-0-, $-0-, and
$151,000, respectively, for telemarketing services. During 2001, 2000 and 1999,
the Company paid to SAS $347,000, $176,000 and $166,000, respectively, for
various services and reimbursement of expenses. The Company received from SAS
$178,000, $7,000 and $32,000 during 2001, 2000 and 1999, respectively, for
reimbursement of expenses. During 2001, 2000 and 1999, SAS paid to MEGA
$342,000, $325,000 and $325,000, respectively, for leased office facilities.
Healthcare Management Administrators, Inc.
During 1999 and a portion of 2000, the Company provided to Healthcare
Management Administrators, Inc. ("HMA") (which was owned by Mr. Jensen until
February 3, 2000) certain leased facilities and data processing, accounting,
management and administrative services. For such services, the Company received
fees of $34,000 and $3.5 million in 2000 and 1999, respectively, and the Company
paid HMA $-0- and $273,000 in 2000 and 1999, respectively, for certain claims
processing services performed by HMA.
F-46
UICI AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
During 2000 and 1999, Insurdata Marketing Services received commissions
from HMA in the amount of $38,000 and $630,000, respectively.
In accordance with the terms of a Management and Option Agreement, dated as
of April 1, 1999, HMA and Mr. Jensen granted to the Company an option to
purchase certain assets, subject to certain corresponding liabilities,
associated with the third party administration business of HMA. The option was
exercisable on or before January 30, 2000 at an option price equal to the book
value of the net tangible assets of HMA to be purchased plus assumption of an
obligation to pay WinterBrook VSO, LLC (a company controlled by Mr. Jensen)
certain commissions payable over a five year term in an amount not to exceed
$4.2 million. The Company delivered notice of exercise of the option on January
25, 2000, and the Company completed the purchase of the assets associated with
HMA's third party administration business on February 3, 2000, at a renegotiated
purchase price equal to approximately $4.0 million (representing the recorded
net book value of the assets purchased) plus $500,000, representing repayment to
Mr. Jensen of cash advances made to HMA subsequent to December 31, 1999. The
assets of HMA comprised a part of the assets of UICI Administrators, Inc., which
was sold by the Company in January 2002. See Note T.
NetLojix Communications, Inc. (formerly AvTel Communications, Inc.)
NetLojix Communications, Inc. ("NetLojix") provides long distance voice
telecommunications services to the Company and its subsidiaries, pursuant to a
series of agreements originally executed in 1998 and most recently renegotiated
and extended for a two-year period in November 2000. Mr. Jensen and his adult
children own beneficially in the aggregate approximately 59% of the issued
capital stock of NetLojix.
The Company's current agreement with NetLojix expires on October 31, 2002
and requires UICI to purchase a minimum of $86,000 in service per month at a
rate of $0.0299 per minute for interstate calls and $0.070 per minute, or $0.075
per minute, depending on the state, for intrastate calls. The Company's prior
agreement (which was effective August 1, 1999 and terminated on October 31,
2000) required UICI to purchase a minimum of $200,000 in service per month at a
rate of $0.035 per minute for interstate calls and $0.075 per minute for
intrastate calls. Effective August 1, 1998, UICI and NetLojix entered into a one
year long distance service agreement (the "1998 NetLojix Agreement"), which
required UICI to purchase a minimum of $120,000 in service per month at a rate
of $0.052 per minute for interstate calls and $0.088 per minute for intrastate
calls. Pursuant to the terms of a separate agreement, dated March 1, 1999,
NetLojix also provided UICI Marketing (a division of UICI) with long distance
service for a period of five months ended July 31, 1999, which agreement
required UICI Marketing to purchase a minimum of $4,209 in service per month at
rate of $0.048 per minute for interstate calls and either $0.081 per minute or
$0.084 per minute, depending on the state, for intrastate calls.
The Company (including UICI Marketing) paid NetLojix in the aggregate $2.3
million, $4.0 million and $4.4 million (including $254,936 paid pursuant to the
separate agreement with UICI Marketing) in 2001, 2000 and 1999, respectively,
for long distance telecommunications services.
Pursuant to the terms of an agreement, dated August 1, 1998, between the
Company and Special Investment Risks, Ltd. ("SIR") (which is wholly owned by Mr.
Jensen), SIR agreed to reimburse the Company to the extent that the rates
charged by NetLojix pursuant to the 1998 NetLojix Agreement exceeded the quoted
rates of a non-affiliated provider. In accordance with the terms of that
agreement, during the year ended December 31, 1999, the Company received from
SIR reimbursement payments of $192,000. The agreement expired in 1999.
F-47
UICI AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
At December 31, 2001, 2000 and 1999, the Company had accounts payable owing
to NetLojix under the services agreement in the amount of approximately $37,000,
$270,000 and $404,000, respectively.
Excell Global Services, Inc.
Excell Global Services, Inc. ("Excell Global") (in which Mr. Jensen, Mr.
Mutz, President and Chief Executive Officer of the Company, and an officer of
United CreditServ serve as directors and in which Mr. Jensen and Mr. Mutz are
beneficial holders of 57.4% and 14.5% as of December 31, 2001, respectively, of
the outstanding equity) is a holding company, the principal subsidiary of which
is Excell Agent Services, LLC ("Excell"). Excell Global and members of
management of Excell Global hold, in the aggregate, 99% of the equity interest
in Excell, and Mr. Jensen holds the remaining 1% equity interest. Excell
provides telephone directory assistance services. During 1999, Excell and MEGA
entered into a consulting arrangement which terminated in 1999, pursuant to
which Excell was engaged on a project basis to provide advisory and consulting
services to MEGA with regard to call center matters. During 1999, MEGA paid to
Excell the amount of $48,000 for such services.
In January 1999, the Company sold to Excell a stop loss policy issued by
MEGA. During 2001, 2000 and 1999, Excell paid to the Company total premiums on
such policy in the amount of $-0-, $-0- and $153,000, respectively. Excell paid
to the Company $53,000 in 2000 and $2,000 in 2001 for medical administration
fees under an arrangement entered into 2000.
Onward and Upward, Inc. and Other Entities Owned by the Jensen Adult Children
Mr. Jensen's five adult children hold in the aggregate 100% of the equity
interest in Onward & Upward, Inc. ("OUI"), the holder of approximately 6.5% of
the Company's outstanding Common Stock.
OUI holds a 21% equity interest in U.S. Managers Life Insurance Company,
Ltd., a subsidiary of the Company. The Company has a right-of-first-offer to
purchase from OUI, and OUI has a corresponding put right to sell to the Company,
OUI's 21% equity interest in U.S. Managers Life Insurance Company, Ltd. at a
price equal to 21% of the book value of U.S. Managers Life Insurance Company,
Ltd. (determined in accordance with generally accepted accounting principles) at
the date of purchase.
In 2001, 2000 and 1999, the Company paid $174,000, $144,000 and $147,000,
respectively, to Small Business Ink (a division of Specialized Association
Services, in which the adult children of Mr. Jensen own 99%) for printing
services.
Tesia Corporation (formerly Paperless Adjudication Ltd.)
During 1993, Mr. Jensen and the Company agreed to jointly invest in Tesia
Corporation ("Tesia"), which seeks to develop a paperless system for insurance
claims administration and adjudication. Mr. Jensen holds a 34.6% and Mr.
Jensen's five adult children hold in the aggregate a 7.9% equity interest in
Tesia. At December 31, 1999, the Company had written off its aggregate
investment in Tesia of $6.2 million. During 2000 and 2001, the Company made no
additional investment in Tesia.
At December 31, 2001, 2000 and 1999, the Company held a 16.1%, 16.1% and
23.0% equity interest, respectively, in Tesia. After recognizing its share
(16.1%, 16.1% and 23.0% in 2001, 2000 and 1999, respectively) of Tesia's
operating losses, at each of December 31, 2001, 2000 and 1999, the Company's
carrying value of its investment in Tesia was $-0-.
In August 2001, Tesia filed for bankruptcy protection under Chapter 11 of
the United States Bankruptcy Code. Tesia has subsequently filed a petition to
convert the bankruptcy case to a liquidation case under Chapter 7 of the
Bankruptcy Code.
F-48
UICI AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In the year ended December 31, 2001, 2000 and 1999, the Company received
$-0-, $-0- and $8,400, respectively, from Tesia for commissions and
reimbursement of expenses.
Impact Productions, Inc.
In 1998, the Company acquired a 90% interest in Impact Productions, Inc.
("Impact") from one of Mr. Jensen's adult children for a total price of
$236,000, which approximated the net book value of the assets as of the purchase
date. In May 2001, the Company acquired the remaining 10% interest from Mr.
Jensen's adult child for a total price of $26,275. During 2001, 2000 and 1999,
the Company paid to Impact $256,000, $-0- and, $111,000, respectively, for
promotional services.
During 2001, 2000 and 1999, Impact paid the Company $74,000, $79,000 and
$13,000, respectively, for reimbursement of expenses.
Interactive Media Works, Inc.
During 1999, United Membership Marketing Group, LLC (then an indirect
wholly-owned subsidiary of the Company) paid Interactive Media Works, LLC (in
which Mr. Jensen held a 72.5% equity interest) the amount of $1,435,000 for
voice activation services related to the Company's credit card operation.
Small Business Showcase, Inc. ("SBS")
Cornerstone Marketing of America (a division of Mid-West) paid to Small
Business Showcase, Inc. ("SBS") (which was owned by one of Mr. Jensen's adult
children until March 2000) $333 and $11,000 in 2000 and 1999, respectively, for
lead generation services.
In 2000 and 1999, SBS paid to subsidiaries of the Company $13,000 and
$659,000, respectively, for generating Internet leads.
WinterBrook VSO, LLC
During 1999, Insurdata Imaging Services, LLC (an indirect wholly-owned
subsidiary of the Company) paid WinterBrook VSO, LLC (in which Mr. Jensen holds
a controlling interest) $258,000 representing run-off commissions relating to
the marketing and sale of satellite imaging systems.
Purchase of Series B Certificates
On December 31, 1999, the Company sold to Mr. Jensen for an aggregate of
$10.0 million in cash (representing 100% of the principal amount thereof) (a) a
Class B 8.25% Asset Backed Certificate, Series 1998-1, in the outstanding
principal amount of $4.1 million; (b) a Class B 10.00% Asset Backed Certificate,
Series 1997-1, in the outstanding principal amount of $3.0 million; and (c) a
Class B 10.00% Asset Backed Certificate, Series 1996-1, in the outstanding
principal amount of $2.9 million (collectively the "Series B Certificates"). The
Series B Certificates were created as part of the Company's securitizations of
credit card receivables issued in 1996, 1997 and 1998 generated by the Company's
credit card operations. The Class B Certificates were liquidated and paid off at
par from a portion of the proceeds of the September 2000 sale of the non-cash
assets associated with the Company's credit card unit.
Sale of SunTech Processing Systems, LLC
In 1996, the Company invested $4.0 million in exchange for a 100% Class A
and a 40% Class B membership interest in Cash Delivery Systems, LLC ("CDS"),
formerly known as Sun Network Technologies. The remaining 60% Class B membership
interest was held by Sun Communications, Inc. ("Sun"). At the time of the
Company's investment, CDS was engaged in the business of owning and placing
automated
F-49
UICI AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
teller machines ("ATMs") and processing ATM transactions. In connection with the
Company's investment in CDS, Mr. Jensen executed an agreement pursuant to which
Mr. Jensen agreed to indemnify the Company for any loss or reduction in value of
the Company's Class A membership contribution and granted an option to the
Company to put the Class A membership interest to Mr. Jensen for $4.0 million.
CDS and Mr. Jensen then invested $80,000 and $20,000 in Sun Tech Processing
Systems, LLC ("STP") in exchange for an 80% and 20% membership interest,
respectively. In addition, Mr. Jensen agreed to loan up to $6.0 million to STP,
secured by all property acquired with the funds advanced. No funds were drawn
down on this commitment.
In accordance with an Agreement dated March 1997 and effective December 31,
1996 (the "March 1997 Agreement"), the Company, Mr. Jensen, Sun, CDS, and STP
restructured these investments as follows:
- CDS and Mr. Jensen withdrew their membership contributions from STP and
the agreement to advance up to $6.0 million to CDS was canceled.
- STP issued to the Company and Sun a new 80% and 20% Class B membership
interest for $800 and $200, respectively.
- The Company invested an additional $2.0 million in STP in exchange for a
100% Class A membership interest.
- The Company sold its entire Class A and Class B membership interests in
CDS to Mr. Jensen for $854,000, which represented the net book value of
the Company's interest in CDS before the transfer of the ATM transaction
processing business to STP. In addition, Sun transferred a 40% interest
in CDS to Mr. Jensen. Giving effect to these transactions, Mr. Jensen and
Sun owned 80% and 20% of the Class B membership interests of CDS,
respectively, and Mr. Jensen owned 100% of the Class A membership
interests of CDS.
- Mr. Jensen agreed to provide financing to CDS in the total amount of
approximately $12.0 million to pay off outstanding CDS indebtedness,
approximately $2.0 million of which was to be unsecured. As of March
1997, Mr. Jensen had paid on behalf of CDS approximately $10.3 million.
In connection with the sale of UICI's interests in CDS to Mr. Jensen, CDS
distributed processing assets with approximately $1.3 million in book value to
Mr. Jensen and Sun, which at the time owned 80% and 20% of the Class B
membership interests in CDS, respectively. Sun contributed its share of those
processing assets to STP, and Mr. Jensen contributed his $1.1 million share of
the book value of those processing assets to STP on behalf of UICI.
The March 1997 Agreement also provided, in part, that (i) there will be no
distributions to Class B members of STP or CDS until all Class A preferred
interests in both STP and CDS have been paid or redeemed in full and (ii) if
funds are available to any parties from either STP or CDS, such funds will be
loaned to the other company until the preferred interests are retired. The
agreements governing the organization and governance of STP and CDS both
require, upon liquidation, the payment of the respective outstanding debt of
each company before the equity holders of that company receive a distribution.
After the sale of CDS' ATMs and use of the proceeds to repay these loans in
part, approximately $6.2 million of Mr. Jensen's loans to CDS remained
outstanding as of December 31, 1999. These loans bear interest at an annual rate
of 2.5% plus the prime rate, payable monthly, and have a maturity date of July
1, 2001.
In February 1998, the assets of STP were sold to an unrelated party for
$17.5 million, and in 1998 the Company recognized a gain in the total amount of
$9.7 million on the sale. Consistent with its understanding of the March 1997
Agreement, in the first quarter of 1998 the Company recorded a gain of $2.3
million (representing the distribution due to its Class A and Class B interests
in STP, assuming funds were advanced to CDS to retire Mr. Jensen's debt and
redeem his Class A interest in CDS). In April 1998, Sun filed certain claims in
District Court in Dallas County, Texas concerning the distribution of the
proceeds from the sale of the STP assets. The core issue of the suit (the "Sun
Litigation") was whether the provisions of the March
F-50
UICI AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
1997 Agreement would require that STP make a loan or advance to CDS out of the
proceeds of the STP sale so that CDS could repay the loans made by Mr. Jensen to
CDS and redeem Mr. Jensen's Class A preferred membership interest in CDS. The
liquidator appointed to rule on the proper distribution ruled that the proceeds
should be distributed in a manner different than had previously been applied by
the Company in the first quarter of 1998.
While the net effect of any loan or advance to CDS would be to reduce the
funds available for STP to distribute to the Company and Sun, Mr. Jensen agreed,
pursuant to an agreement reached with the Company in June 1998 (the "Assurance
Agreement"), that, if UICI receives less than $15.1 million in the pending Sun
Litigation, then Mr. Jensen would advance funds to UICI sufficient to increase
UICI's recovery to $15.1 million. The Assurance Agreement also restricted the
manner in which UICI can seek funds in satisfaction of Mr. Jensen's previously
unconditional agreement (the "Jensen 1996 Guaranty") to indemnify the Company
for any loss or reduction in value of the Company's Class A investment in CDS.
The Dallas County, Texas District Court ruled in December 1998 in the Sun
Litigation that, as a matter of law, the March 1997 agreement governing the
distribution of the cash proceeds of the STP sale should be read in the manner
urged by Sun and consistent with the court-appointed liquidator's previous
ruling. The District Court entered a judgment directing distribution of the
sales proceeds in the manner urged by Sun. The District Court also entered a
finding that UICI violated Texas securities disclosure laws and breached a
fiduciary duty owed to Sun, and the District Court awarded the plaintiff $1.7
million in attorneys' fees, which amount could be increased to $2.1 million
under certain circumstances.
On August 1, 2000, the Court of Appeals for the Fifth District of Texas at
Dallas reversed the trial court's judgment as to UICI's liability for attorneys'
fees and its finding that UICI violated Texas securities laws and breached a
fiduciary duty. The Appeals Court also reversed the trial court's judgment that
directed distribution of the STP sales proceeds in the manner urged by Sun. On
December 8, 2000, the Appeals Court affirmed its earlier decision and denied the
Company's, Mr. Jensen's and Sun's respective motions for rehearing.
By letter dated July 7, 2000, Mr. Jensen submitted a formal proposal to
purchase the Company's 80% interest in STP for $15.6 million ("Proposal A") or,
alternatively, to purchase for $15.1 million the Company's rights and claim of
rights to receive funds held in the registry of the Court in the Sun Litigation
("Proposal B"). As part of either proposal, the Company proposed to terminate
and release Mr. Jensen from any and all obligations arising under the Jensen
1996 Guaranty and the Assurance Agreement. As part of Mr. Jensen's proposals,
Mr. Jensen offered to indemnify and hold the Company harmless from and against,
among other things, (a) the breach of fiduciary duty claim asserted by Sun
against the Company and Sun's related claim for attorneys' fees, (b) Sun's claim
for attorneys' fees arising out of the distribution issue in the Sun Litigation,
and (c) any and 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.
Mr. Jensen's proposal to purchase UICI's 80% interest in STP contemplated
by Proposal A may be subject to the consent of Sun. The Company solicited the
consent of Sun to the transfer so that it might accept Proposal A, but Sun was
unwilling to grant such consent and objected to Proposal B, claiming that Sun's
consent is required to consummate either Proposal. Following approval of the
disinterested outside directors of UICI in accordance with the related party
transactions policies and procedures adopted by the UICI Board, on July 21,
2000, the Company formally accepted Proposal A and, in the alternative, Proposal
B. On November 22, 2000, the Court in the Company's pending Shareholder
Derivative Litigation (see Note N of Notes to Consolidated Financial Statements)
approved the alternative settlements between Mr. Jensen and the Company, subject
to any alleged right on the part of Sun to consent to Proposal A and/or Proposal
B. The Company subsequently sued Sun separately (UICI v. Sun Communications,
Inc., pending in 134th Judicial District Court of Dallas County, Texas, Cause
No. 009353), seeking to resolve the consent issue. On
F-51
UICI AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
October 16, 2001, the Court granted UICI's motion for partial summary judgment
and ordered, among other things, that (a) Sun's consent to Proposal B is not
required, (b) no injunction or order previously issued by the Court precludes or
otherwise limits UICI from completing Proposal A and (c) Sun waived and is
estopped to assert any right to prevent UICI's assignment of its interest in STP
as contemplated by Proposal A.
March 2000 Loan
On March 14, 2000, a limited liability company controlled by Mr. Jensen
("Lender LLC") loaned $70.0 million (the "Lender LLC Loan") to a newly formed
subsidiary of the Company. The proceeds of the Lender LLC Loan, together with
$5.0 million of cash on hand, were used to reduce indebtedness outstanding under
the Company's Bank Credit Facility from $100.0 million to $25.0 million. The
Lender LLC Loan bore interest at the prevailing prime rate, was guaranteed by
UICI, was due and payable in July 2001 and was secured by a pledge of investment
securities and shares of the Company's National Motor Club unit.
In connection with the March 2000 paydown of indebtedness outstanding under
the Bank Credit Facility, the Bank Credit Facility was amended to provide, among
other things, that the $25.0 million balance outstanding would be due and
payable on July 10, 2000, amounts outstanding under the facility would be
secured by a pledge of investment securities and shares of Mid-West National
Life Insurance Company of Tennessee ("Mid-West"), and the restrictive covenants
formerly applicable to UICI and its restricted subsidiaries (primarily the
Company's insurance companies) were made applicable solely to Mid-West. Amounts
outstanding under the Bank Credit Facility continued to bear interest at LIBOR
plus 100 basis points per annum. On April 11, 2000 and June 28, 2000, the
Company made principal payments of $11.0 million and $8.0 million, respectively,
under the Bank Credit Facility, and on June 30, 2000, Lender LLC, against
payment to the banks of $6.0 million, assumed 100% of the banks' remaining $6.0
million position in the Bank Credit Facility.
June-July 2000 Transactions
In June and July 2000, the Company entered into a series of transactions
(the "July 2000 Transactions") with Mr. Jensen and affiliates of Mr. Jensen, the
proceeds of which were utilized, in part, to fund the Company's cash and other
obligations under the Consent Order, dated June 29, 2000, issued by the OCC to
memorialize the terms of the UCNB Capital Plan approved by the OCC. See Note B.
In accordance with the policies and procedures of the Board of Directors,
each of the July 2000 Transactions was approved by the disinterested outside
directors of the Company at a meeting of the Board of Directors held on July 21,
2000, as being fair to UICI and its shareholders. The Board's determination was
made, in part, in reliance upon the opinion of an independent financial advisor
that the July 2000 Transactions, in their totality, were fair to the public
shareholders of UICI (consisting of non-Jensen affiliated shareholders) from a
financial point of view.
Restructuring of Lender LLC Loan. Effective July 27, 2000, the Company and
the Lender LLC completed a restructuring of the terms of the Lender LLC Loan. As
part of the restructuring, the Company paid to Lender LLC principal owing on the
Lender LLC Loan in the amount of $6.0 million and amended the terms of the
Lender LLC Loan to provide that the aggregate principal amount of $70.0 million
then owing by the Company would consist of a $32.0 million unsecured tranche and
a $38.0 million tranche secured by a pledge of 100% of the capital stock of
Mid-West (the "Amended Lender LLC Loan"). The Amended Lender LLC Loan (a)
matured on January 1, 2002, (b) continued to bear interest at the prevailing
prime rate from time to time, with interest accruing but not payable until the
earlier to occur of full prepayment of the Lender LLC Loan or January 1, 2002,
and (c) was mandatorily prepayable monthly to the extent of 1% of the
outstanding principal balance of the Amended Lender LLC Loan. The security
interest in all remaining collateral previously pledged to secure payment of the
Lender LLC Loan and indebtedness outstanding under
F-52
UICI AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
the bank credit facility (including all investment securities and shares of the
Company's National Motor Club unit) was released in full.
In addition to scheduled payments of principal made during the course of
2000, on October 20, 2000, the Company prepaid the unsecured tranche of the
Amended Lender LLC Loan in the amount of $12.5 million, and on November 2, 2000,
the Company prepaid an additional $17.4 million of the unsecured tranche and
$17.6 million of the secured tranche. Accordingly, at December 31, 2000, the
Company had no indebtedness outstanding under the unsecured tranche and $19.0
million outstanding under the secured tranche of the Amended Lender LLC Loan.
On January 30, 2001, the Company prepaid in full principal and accrued
interest on the secured tranche of the Amended Lender LLC Loan in the amount of
$21.1 million, utilizing a portion of the proceeds received in liquidation of
UCNB, and Lender LLC's security interest in 100% of the capital stock of
Mid-West was released in full.
Sale of NMC Holdings, Inc. On July 27, 2000, the Company sold to an
investor group consisting of Jensen family members (including Mr. Jensen) (the
"NMC Buyer") its 97% interest in NMC Holdings, Inc. ("NMC"), the parent company
of its National Motor Club of America unit, for a purchase price of $56.8
million, representing 97% of the value of NMC as determined by independent
appraisal. The purchase price was paid at closing in cash in the amount of $21.8
million and by delivery of a promissory note (the "NMC Note") issued by the NMC
Buyer in the principal amount of $35.0 million. For financial reporting
purposes, the $12.6 million, net of tax, received by the Company in excess of
the net book value of NMC was reflected in additional paid in capital.
The NMC Note was an unsecured, full recourse obligation of the NMC Buyer
and was unconditionally guaranteed by Mr. Jensen. The NMC Note bore interest at
the per annum rate of prime fluctuating from time to time, and was initially
payable in three equal installments of principal in the amount of $11.7 million
due on each of October 1, November 1 and December 1, 2000, respectively.
Effective October 1, 2000, the NMC Note was amended to provide for three equal
installments of principal in the amount of $11.7 million due on each of November
1 and December 1, 2000 and January 1, 2001, respectively. In accordance with the
terms of the June Consent Orders, the Company pledged the NMC Note to UCNB to
secure, in part, the Company's obligations under the Capital Plan. On October
31, 2000, the OCC consented to the release by UCNB of its security interest in
the NMC Note. On November 2, 2000, the NMC Buyer prepaid the NMC Note in its
entirety. Under the terms of the NMC Note, the Company received $875,000 in
interest in 2000.
On July 27, 2000, UICI, NMC Buyer and NMC entered into a Management
Agreement, the terms of which governed the provision by UICI to NMC of
management and administrative services, information technology services,
telephone services and other services formerly provided to NMC by UICI. The
Management Agreement was terminable (a) by UICI at any time upon not less than
60 days' notice to NMC and the NMC Buyer, and (b) by NMC at any time following
the payment in full of the NMC Note upon not less than 30 days' notice to UICI.
Pursuant to the Management Agreement, UICI agreed to allow William Gedwed
(formerly an Executive Vice President of the Company and currently a Director of
the Company and the holder of approximately 3% of the equity interest in NMC) to
serve as a consultant to NMC for the term of the Management Agreement. As of
December 31, 2000, the Company was owed by NMC $50,000 pursuant to the terms of
the Management Agreement, which was paid in full in the first quarter of 2001.
Mr. Gedwed resigned as an executive officer of UICI effective December 31,
2000, and NMC terminated the Management Agreement effective January 31, 2001.
Jensen Indemnity Agreement. To secure in part the Company's obligations
under the Capital Plan, effective June 29, 2000 Mr. Jensen pledged to UCNB $7.1
million face amount of Series B Certificates created as part of the Company's
securitizations of credit card receivables issued in 1997 and 1998 generated by
UICI's credit card operations. As a condition to Mr. Jensen's pledge of the
Series B Certificates, on
F-53
UICI AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
June 29, 2000 the Company executed and delivered an Indemnity Agreement,
pursuant to which the Company agreed, among other things, to indemnify and hold
Mr. Jensen harmless from and against (A) loss, cost, expense, or liability
incurred by Mr. Jensen arising from, in respect of or in connection with, a
default by the Company of its obligations under the June Consent Orders, the
UCNB Capital Plan or the Liquidity and Capital Assurances Agreement, and (B) any
and all losses, costs and expenses (including reasonable attorneys' fees and
expenses) incurred by Mr. Jensen in enforcing any rights under the Indemnity
Agreement.
Sale of UICI Shares to NMC. Pursuant to the terms of an agreement, dated
July 13, 2000, between the Company and NMC, on July 24, 2000, the Company issued
to NMC 175,000 treasury shares of common stock at a purchase price of $5.25 per
share. It is anticipated that the 175,000 shares will be used to fund incentive
stock programs for the benefit of NMC employees.
National Motor Club
As discussed above, on July 27, 2000, the Company sold its 97% interest in
NMC Holdings, Inc., the parent company of its National Motor Club of America
("NMC") unit, to an investor group consisting of Jensen family members
(including Mr. Jensen) for a purchase price of $56.8 million, representing 97%
of the value of NMC as determined by independent appraisal. William J. Gedwed (a
director of the Company) holds 3% of the issued and outstanding common stock of
NMC Holdings, Inc. The Chesapeake Life Insurance Company ("CLICO") (formerly a
direct wholly owned subsidiary of the Company) and National Motor Club of
America ("NMCA") were previously parties to an administrative service agreement,
pursuant to which CLICO agreed to issue life, accident and health insurance
polices to NMCA for the benefit of NMCA members in selected states. NMCA, in
turn, agreed to provide to CLICO certain administrative and recordkeeping
services in connection with the NMCA members for whose benefit the policies have
been issued. Following the acquisition of CLICO by The MEGA Life and Health
Insurance Company ("MEGA") (a wholly-owned insurance subsidiary of the Company)
in July 2000, MEGA and NMCA entered into a similar administrative service
agreement for a two-year term ending in December 31, 2002. During the year ended
December 31, 2001, 2000 and 1999, NMCA paid to MEGA and CLICO insurance premiums
in the amount of $2.4 million, $2.6 million and $2.7 million, respectively,
pursuant to such arrangements.
In connection with the sale of NMC in July 2000, NMC entered into a
sublease agreement with MEGA, pursuant to which NMC subleased from MEGA
approximately 17,000 square feet of office space. During 2001 and 2000, NMC paid
to MEGA $287,000 and $144,000 pursuant to the sublease. NMC terminated the
sublease arrangement effective November 2001.
In 2001, NMC paid the Company $334,000 for various printing services.
Other Jensen Transactions
In 2001, 2000 and 1999, the Company paid $-0-, $-0- and $28,000,
respectively, to United Group Service Center, Inc. (in which Mr. Jensen holds a
100% equity interest) for reimbursement of expenses. In 2001, 2000 and 1999, the
Company received $335, $9,000 and $43,000, respectively, from United Group
Service Center, Inc., which amounts represent premiums on a stop loss policy
issued by MEGA and reimbursement of office expenses.
ACADEMIC MANAGEMENT SERVICES CORP.
A former president of Academic Management Services Corp. and the former
holder of 25% of the equity interest in AMS is a partner in a partnership from
which the Company's AMS subsidiary formerly leased office space. During 2000 and
1999, AMS paid $15,000 and $149,000, respectively, under the terms of the lease.
AMS terminated the lease on January 13, 2000. AMS also paid $3,000 in 1999,
respectively, for facilities services to a property management company, the sole
shareholders of which included members of the family of the former AMS officer.
F-54
UICI AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
AMS also utilized the services of a travel agency owned by the former AMS
officer and members of his family. During 1999, AMS incurred for the benefit of
the travel agency the cost of space and salary and benefits for one agency
employee in the amount of $28,000.
In his capacity as an employee of AMS, the former AMS officer received
compensation from AMS in the amount of $239,000 in 1999.
On August 3, 2001, the Company completed the acquisition from the former
AMS officer of the remaining 25% common stock interest in AMS it did not already
own for a purchase price of $750,000. For additional consideration, the former
AMS officer and certain former employees of AMS agreed, for a three-year period
ending in August 2004, not to engage in any business competitive with AMS'
tuition installment or student loan servicing businesses. These former
executives and their affiliates further agreed to pay to AMS fees in prescribed
amounts in connection with the origination and consolidation of certain student
loans over a three-year period ending in August 2004.
TRANSACTIONS WITH PHILLIP A. GRAY
Prior to April 23, 1999, Phillip A. Gray served as head of the Company's
Credit Services division and held a minority interest in United Membership
Marketing Group, Ltd. (a former majority owned subsidiary of the Company)
("UMMG"). During 1999 and a portion of 2000, the Company engaged in several
transactions with Mr. Gray and business entities controlled by Mr. Gray.
American Credit Educators, LLC
Mr. Gray is the controlling member of American Credit Educators, LLC
("ACE"), an independent membership association that provides credit education
programs and other benefits and through which United CreditServ has historically
marketed its credit support services and "ACE" credit cards. During 1999, UCNB
made payments to ACE totaling $79.6 million, pursuant to the terms of a Credit
Card Merchant Agreement. These payments were for educational materials that were
sold by ACE and charged to credit cards issued by UCNB. In addition, during
1999, UCNB paid to ACE cash in the amount of $6.0 million, in satisfaction of
certain merchant holdback liabilities, and in 1999 ACE purchased from UCNB
certain credit card receivables in the amount of $13.8 million, representing the
unpaid balance of the accounts purchased.
In 1999, ACE paid to UMMG the amount of $16.3 million for fulfillment
services and marketing materials.
American Fair Credit Association, LLC
Mr. Gray is the controlling member of American Fair Credit Association, LLC
("AFCA"), an independent membership association that provides credit education
programs and other benefits and through which United CreditServ has historically
marketed its credit support services and "AFCA" credit cards.
In 2000 and 1999, AFCA paid to UMMG cash in the amount of approximately
$4.7 million and $15.3 million, respectively, for fulfillment services and
marketing materials. In 1999, AFCA paid to United CreditServ $300,000 for
processing fees.
United Membership Marketing Group, LLC
UMMG was initially organized by the Company in 1993 to serve as the
marketing and fulfillment organization for the Company's Credit Services
division. At inception, the Company and Mr. Gray held an 80% and 20% equity
interest, respectively, in UMMG. In 1994, the Company increased its equity
interest in UMMG to 85%. During 1998 and 1999, the Company entered into two
transactions, pursuant to which the Company purchased from Mr. Gray and the
other minority owners additional equity interests in UMMG. On
F-55
UICI AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
January 1, 1998, the Company purchased from Mr. Gray a 3% equity interest in
UMMG (thereby increasing the Company's equity interest in UMMG from 85% to 88%),
for which Mr. Gray received $6.0 million. In April 1999, the Company purchased
from Mr. Gray an 8.25% interest in UMMG for $22.7 million, and the Company
purchased the remaining 3.75% equity interest in UMMG from another officer of
UMMG and the remaining minority owners for $7.5 million and $2.1 million,
respectively (the "April 1999 Buyout").
In connection with the Company's initial acquisition in 1992 of an 80%
interest in the predecessor of the Credit Services division, Mr. Jensen loaned
an aggregate of $2.0 million to the prior owners (the "Gray Group"), including
$1.6 million to Mr. Gray and $160,000 to another officer of UMMG. The loans from
Mr. Jensen were paid in full on April 23, 1999.
As the holders of equity interests in UMMG, in 1999 Mr. Gray received cash
dividend distributions in the amount of $6.5 million, another officer of UMMG
received $646,000 and the remaining minority holders of equity interests
received $537,000, respectively.
Mr. Gray received additional compensation from UMMG in the amount of
$291,000 in 1999.
In 1997, UMMG advanced to Mr. Gray a loan in the amount of $2.0 million, of
which $1.8 million was outstanding at December 31, 1998. The loan bore interest
at the annual rate of 7.97%. The loan was repaid in 1999.
Financial Services Reinsurance, Ltd.
The Company, Mr. Gray, another officer of UMMG and other individuals
(collectively Mr. Gray, the other officer and the other individuals constitute
the "Gray Group") hold a 79%, 16.8%, 1.68% and 2.52% equity interest,
respectively, in Financial Services Reinsurance Ltd., an offshore re-insurer
("FSR"). In 1992, the Gray Group acquired its collective 21% interest in FSR
from OUI for a purchase price of $21,000. As part of the initial acquisition of
the Gray Group's 21% interest in FSR, all shareholders of FSR, including the
Company and Mr. Gray, contributed additional capital to FSR in an aggregate
amount of $900,000, of which Mr. Gray contributed $151,200, the other officer
contributed $15,120 and the remaining individuals contributed $22,680. Mr.
Gray's and the other officer's capital contributions to FSR were funded by non-
recourse loans from the Company to Mr. Gray and the other officer in the amount
of $151,200 and $15,120, respectively (the "FSR Capital Loans"), which bore
interest at the rate of 6% per annum. Since 1992 and through December 31, 1999,
FSR has paid an aggregate of $1.3 million in dividends to the members of the
Gray Group, including $1.1 million to Mr. Gray and $106,000 to the other
officer. During 1999, FSR distributed cash dividends to Mr. Gray in the amount
of $286,000. During 1999, FSR distributed cash dividends to the other officer in
the amount of $29,000, respectively. During 1999, FSR distributed cash dividends
to the remaining members of the Gray Group in the amount of $14,000 and $25,000.
FSR paid no cash dividends to any shareholder (including UICI) in 2000 or 2001.
At the closing of the April 1999 Buyout, the Company loaned Mr. Gray and
the other officer the additional amounts of $859,000 and $251,000, respectively,
which loans were added to indebtedness owing to the Company under the FSR
Capital Loans. Accordingly, at each of December 31, 2001, 2000 and 1999, Mr.
Gray had total indebtedness owing to the Company in the amount of $1.0 million,
and the other officer had total indebtedness outstanding owing to the Company in
the amount of $267,000, which indebtedness in each case bears interest at 5%-6%
per annum, with principal and all accrued interest due and payable on January 1,
2002.
The Company has the right, which became exercisable on January 1, 2002, to
purchase from Mr. Gray and the other officer their respective interests in FSR
for a purchase price equal to the outstanding balance plus accrued interest on
the Gray Note and the Other Officer Note, respectively.
F-56
UICI AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
ACE/AFCA/Gray Litigation
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 ACE and 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. In a
separate suit filed on March 26, 2001 (UICI, United Marketing Membership 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
individually and related entities. Company's claims include, among other things,
fraud, negligent misrepresentation, and breach of fiduciary duty in connection
with the Company's sub prime credit card business. (See Note N).
TRANSACTIONS WITH HEALTHAXIS, INC.
At December 31, 2001, UICI held beneficially 24,674,838 shares of common
stock of Healthaxis, Inc. ("HAI") (Nasdaq: HAXS) (including 354,844 shares
acquired on May 23, 2001 from a former employee of HAI for a purchase price of
$400,000), representing approximately 47% of the issued and outstanding shares
of HAI. Of such 24,674,838 shares held by the Company, 8,581,714 shares
(representing 16.2% 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 had the right to vote such shares.
Pursuant to the terms of a Proxy Agreement effective November 7, 2001, the
Company has granted to the directors of HAI the right to vote thirty-three and
one-third percent (33 1/3%) shares of HAI held by the Company (representing
approximately 16.2% of HAI's total issued and outstanding shares) in all matters
coming before the Board of Directors for a vote. In addition, the Company holds
(a) a 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) $1.7 million aggregate principal amount of HAI 2% convertible debentures,
which are convertible into an aggregate of 185,185 shares of HAI common stock.
HAI is a provider of Internet-enabled, integrated proprietary software
applications that address the workflow and processing inefficiencies embedded in
the healthcare insurance industry. Until their resignations effective November
7, 2001, Gregory T. Mutz (the President and a director of the Company) and
Patrick J. McLaughlin (a director of the Company) served as directors of HAI.
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 $20.4
million, $21.0 million and $23.3 million in 2001, 2000 and 1999, respectively.
In addition, HAI has provided to the Company and its affiliates certain other
information technology services, including claims imaging and software-related
services,
F-57
UICI AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
for which UICI paid to HAI $10.1 million, $6.4 million and $3.7 million in 2001,
2000 and 1999, respectively. The aggregate amounts paid by UICI to HAI in 2001,
2000 and 1999, respectively, represented 70%, 63% and 58% of HAI's total
revenues of $43.8 million, $43.7 million and $46.2 million in such years. Of
total fees paid by the Company to HAI in 2001 and 2000, approximately $5.4
million (or 18%) and $4.9 million (or 16%), respectively, were attributable to
services provided to the Company's UICI Administrators unit, which was sold by
the Company in January 2002. 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.
At December 31, 2001, 2000 and 1999, UICI had accounts payable to HAI
relating to services provided under the Services Agreement in the amount of $3.0
million, $3.0 million and $2.7 million, respectively.
HAI leases certain facilities from the Company, for which it paid $287,000
in 2000. In 2001, rents of approximately $437,000 were offset against HAI
invoices for services HAI provided to the Company. In addition, in 2001 and 2000
HAI paid $-0- and $12,000, respectively, to the Company for medical
administration fees and $24,000 and $19,000, respectively, for other shared
expenses.
During the quarter ended December 31, 2000, the Company transferred to HAI
certain claims administration software and related proprietary rights for a sale
price of $1.6 million, which was the Company's book value of such software as of
the date of sale. Effective January 25, 2001, the Company also entered into a
license agreement with HAI, pursuant to which it has licensed from HAI the right
to use HAI's proprietary Insur-Web(TM) and Insur Enroll(TM) software for a
perpetual term for a one-time license fee of $1.8 million plus an annual
maintenance fee in the amount of $276,000, payable commencing on the date of the
first successful implementation of the system at UICI. UICI has the right for
two years to cease the use of the software and put the software back to HAI for
a refund of a prorated portion of the license fee.
OTHER TRANSACTIONS WITH CERTAIN MEMBERS OF MANAGEMENT
Transactions with Mr. Mutz
In January 1999, Gregory T. Mutz was elected President and Chief Executive
Officer of the Company. During 1999 Mr. Mutz continued to serve as Chairman of
the Board and Co-Chief Executive Officer of AMLI Residential Properties Trust, a
publicly-traded real estate investment trust ("AMLI"). At December 31, 2001,
2000 and 1999, the Company held a 10.2%, 10.4% and 14% fully diluted interest,
respectively, in AMLI. As Chairman of the Board of AMLI, Mr. Mutz received
certain compensation and participated in various option and deferred
compensation programs, all of which are described in the AMLI proxy statement.
In addition, as of December 31, 2001, 2000 and 1999, AMLI had outstanding
secured and unsecured loans owing from Mr. Mutz in the aggregate amount of $1.0
million, $2.1 million and $2.1 million, respectively, the proceeds of which had
been used to purchase 108,891 shares of AMLI beneficial interest.
Mr. Mutz also served as chairman of the board of AMLI Commercial Properties
Trust ("ACPT"), a private real estate investment trust in which the Company had
held a 20% equity interest. Mr. Mutz was the beneficial holder of less than one
percent of the issued and outstanding shares of beneficial interest of ACPT. At
December 31, 2000 and 1999, ACPT had an outstanding loan owing from Mr. Mutz (or
companies affiliated with Mr. Mutz) in the amount of $508,000 and $600,000,
respectively, the proceeds of which were used to purchase stock in ACPT. During
the year ended December 31, 2001, ACPT sold substantially all of its
F-58
UICI AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
assets for an aggregate sale price of approximately $226.3 million, distributed
the proceeds and was liquidated in October 2001. In connection with such sale,
the Company recognized a gain in the amount of $5.3 million.
On August 4, 1999, the Company entered into an indemnification agreement
with Mr. Mutz, pursuant to which the Company agreed to indemnify Mr. Mutz to the
fullest extent permitted by Delaware law from certain liabilities and expenses
incurred in his capacity as an officer of the Company and/or as an officer
and/or director of the Company's subsidiaries.
UICI Executive Stock Purchase Program. In accordance with the Company's
Executive Stock Purchase Program (the "ESPP") (see Note O), in December 1998 the
Company extended a loan to Mr. Mutz in the amount of $3.3 million, the proceeds
of which were used to purchase 200,000 shares of Common Stock of the Company at
a purchase price of $19.50 per share. The loan bears interest at the rate of 5%
per annum, payable quarterly, had a six-year term, and is full recourse to Mr.
Mutz. In June 1999, the Company extended an additional loan to Mr. Mutz pursuant
to the ESPP in the amount of $429,000, the proceeds of which were used to
purchase 20,000 shares of Company Common Stock at a purchase price of $24.45 per
share. The loan bears interest at 5.37%, payable quarterly, had a six-year term,
and was full recourse to Mr. Mutz.
As part of modifications to the ESPP adopted by the Company's Board of
Directors on January 2, 2001, the Company granted to Mr. Mutz 107,104 shares of
UICI common stock, discharged $1.5 million principal amount of the ESPP loan,
and paid to Mr. Mutz a one-time cash bonus in the amount of $1.1 million (which
was calculated to reimburse Mr. Mutz for income and other taxes payable upon
receipt of the UICI stock and discharge of the portion of the ESPP loan). The
terms of the ESPP loans were modified to extend the maturity date to January 1,
2007. See Note O.
The amount outstanding under Mr. Mutz ESPP loans at December 31, 2001, 2000
and 1999, was $1.3 million, $2.8 million and $3.3 million, respectively.
Other Loans to Management
In accordance with the Company's Executive Stock Purchase Program (the
"ESPP") (see Note O), during 1999 the Company extended loans to Glenn W. Reed
(the Company's Executive Vice President and General Counsel), William J. Gedwed
(a Director of the Company) and three other former executive officers of the
Company in the amounts of $417,000, $203,000 and $592,000, respectively, the
proceeds of which were used to purchase Company Common Stock. The loans to
Messrs. Reed and Gedwed bear interest at 5.37% per annum and the loans to the
former executive officers bear interest at rates ranging from 5.22% to 5.37%.
The six-year term loans require quarterly interest payments, had a six-year
term, are full recourse to the borrower and are payable in full upon the
occurrence of certain events, including the termination of employment. In
connection with a separation and consulting arrangement entered into between the
Company and one of the former executives in November 1999, the Company released
the former executive from liability under his note and the note balance was
written off.
At December 31, 2000, Messrs. Reed, Gedwed, and the former executive
officers had outstanding loans payable to the Company under the ESPP in the
amounts of $417,000, $203,000, and $362,000, respectively.
As part of modifications to the ESPP adopted by the Company's Board of
Directors on January 2, 2001, the Company discharged $297,000 and $113,000
principal amount of indebtedness under the ESPP owing by Mr. Reed and one of the
former executive officers, respectively, and paid to Mr. Reed and the former
executive officer a one-time cash bonus in the amount of $160,000 and $61,000,
respectively (which was calculated to reimburse Mr. Reed and the former
executive officer for income and other taxes payable upon discharge of the
portion of their ESPP loan). The terms of Mr. Reed's and the former executive
officer's ESPP loans were modified to extend the maturity date to January 1,
2007. On March 14, 2001, the Company subsequently entered into an agreement with
the former executive officer, pursuant to which the former officer resigned as
an executive officer of the Company and as an officer of various UICI affiliates
effective
F-59
UICI AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
February 1, 2001. In accordance with the agreement, the Company agreed to
forgive the indebtedness owing by the former officer under the ESPP in the
amount of $45,000.
At December 31, 2001, the amount outstanding under Mr. Reed's ESPP loan was
$120,000, the amount outstanding under Mr. Gedwed's ESPP loan was $139,000, and
the amount outstanding under the former officer's ESPP loan was $204,000.
Other Transactions
On September 1, 1999, the Company entered into separate indemnification
agreements with each of Messrs. Reed, Gedwed and a former executive officer
pursuant to which the Company agreed to indemnify such officers to the fullest
extent permitted by Delaware law from certain liabilities and expenses incurred
in their respective capacities as officers of the Company and/or officers and
directors of the Company's subsidiaries.
The Company receives investment management services from investment
advisory firms affiliated with two of its directors. During 2001, 2000 and 1999,
the Company paid advisory fees in the amount of $307,000, $231,000 and $366,000,
respectively, to Emerald Capital Group, Ltd., for which Patrick J. McLaughlin (a
director of the Company) serves as a managing director and owner. During 2001,
2000 and 1999, the Company paid investment advisory fees in the amount of
$206,000, $145,000 and $140,000, respectively, to The Chicago Trust Company, for
which Stuart Bilton (a director of the Company) serves as President and Chief
Executive Officer.
From time to time the Company has also retained Emerald Capital Group, Ltd.
to perform investment banking and insurance advisory services. In accordance
with the terms of a Consulting Agreement dated September 14, 1999, as amended,
the Company formally retained the services of Emerald Capital Group, Ltd. for an
annual fee of $400,000, payable in monthly installments. During 2001, 2000 and
1999, the Company paid an aggregate of $436,000, $237,000 and $188,000,
respectively, in fees and expenses to Emerald Capital Group, Ltd. for investment
banking and insurance advisory services. Effective March 10, 2000, Mr.
McLaughlin elected to forego $100,000 of cash payments otherwise due and owing
under the Consulting Agreement in exchange for options to purchase 50,000 shares
of Company Common Stock at $6.625 per share.
The Company and a former officer and director of the Company entered into
an agreement, dated as of November 2, 1999, pursuant to which the former officer
agreed (a) to resign as a director and as Executive Vice President of the
Company, effective November 2, 1999, and (b) to serve as a consultant to the
Company for the period ending May 2, 2002, for which the former officer is
entitled to a monthly consulting fee in the amount of $12,000 for the term of
the agreement. In accordance with the agreement, the former officer received a
one-time severance payment in the amount of $120,000 and the Company released
the former officer from liability under a promissory note in the principal
amount of $230,000, the proceeds of which were used to purchase shares of Common
Stock. The Company terminated the consulting arrangement with the former officer
effective March 1, 2001, at which time the Company made to the former officer a
one-time payment in the amount of $180,000 in accordance with the terms of the
agreement.
In accordance with the Company's Executive Stock Purchase Program (the
"ESPP") (see Note O), during 1999 the Company extended a loan to Mr. McLaughlin
in the amount of $44,000, the proceeds of which were used to purchase 2,094
shares of Company Common Stock. The loan bears interest at 5.22% per annum. The
loan has a six-year term, requires quarterly interest payments, is full recourse
to the borrower, and is payable in full upon the occurrence of certain events.
The outstanding balance under the loan, including accrued interest, at December
31, 2000 was $44,000. The loan was paid in full on December 28, 2001.
Effective December 31, 2000, the Company entered into an agreement with
William J. Gedwed (a director of the Company), pursuant to which Mr. Gedwed
resigned as an executive officer of the Company
F-60
UICI AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
effective December 31, 2000 and as an officer of various UICI affiliates
effective February 1, 2001. In accordance with the agreement, Mr. Gedwed has
also agreed to provide consulting services to MEGA for a two-year term ending
December 31, 2002 for an annual fee of $120,000.
In October 2000, the Company entered into an agreement with a former
executive officer, pursuant to which the former officer resigned as an executive
officer of the Company and various UICI affiliates effective October 27, 2000.
In accordance with the agreement, the former officer received a one-time
severance payment of $50,000, and the former officer agreed to provide
consulting services to UICI for a term ending January 15, 2003 for an aggregate
fee of $120,000.
On March 14, 2001, the Company entered into an agreement with a former
executive officer, pursuant to which the former officer resigned as an executive
officer of the Company and as an officer of various UICI affiliates effective
February 1, 2001. In accordance with the agreement, the Company agreed to
forgive indebtedness owing by the former officer in the amount of $45,000, and
the former officer agreed to provide consulting services to MEGA for a one-year
term ending March 31, 2002 for an annual fee of $135,000.
In accordance with the terms of the Company's ESPP, in May 1999 Messrs.
Bilton and Lane (directors of the Company) purchased 2,408 shares and 2,408
shares, respectively, of the Company's Common Stock, at a purchase price equal
to 85% of the then market value of such shares. In accordance with the terms of
the Company's ESPP, in June 2000 Mr. Mockler (a director of the Company),
purchased 2,408 shares of UICI common stock in exchange for cash in the amount
of $6,000 and a promissory note in the amount of $8,000. At each of December 31,
2001 and 2000, the amount outstanding on Mr. Mockler's note was $8,000.
In May 2000, Resolution Reinsurance Intermediaries, LLC ("Resolution Re"),
a 50%-owned subsidiary of the Company, loaned to the other 50% shareholder of
Resolution Re (who is also an employee of the Company) the amount of $69,300.
The loan bore interest at 8.5% and was repaid in full in October 2000.
Commencing in April 2000, Resolution Re leased space in a building owned by the
shareholder/employee at a rental rate of $4,000 per month. During 2000,
Resolution Re paid to the shareholder/employee the aggregate amount of $36,000
pursuant to this arrangement. The lease was terminated in February 2001.
Effective May 31, 2001, WinterBrook Holdings, Inc. (a wholly-owned
subsidiary of the Company) sold its 44% minority interest in Cassidy Employee
Benefit Services, LLC ("Cassidy") to Cassidy for $140,000 in cash. The remaining
equity holders of Cassidy constituted members of Cassidy management.
NOTE N -- COMMITMENTS AND CONTINGENCIES
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 were
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
F-61
UICI AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
meeting held in November 2001, the parties agreed to voluntarily submit the
dispute to early mediation, and the parties have designated a mediator and
scheduled the mediation for April 2002. Discovery and other pretrial motions
have been suspended pending the outcome of the mediation.
The Company believes that the allegations in the complaint are wholly
without merit and intends to continue to vigorously contest the allegations in
the case.
SUN COMMUNICATIONS LITIGATION
As previously disclosed, UICI and Ronald L. Jensen (the Company's Chairman)
are involved in 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.
The Dallas County, Texas District Court ruled in December 1998 that, as a matter
of law, a March 1997 agreement governing the distribution of such cash proceeds
should be read in the manner urged by Sun Communications, Inc. ("Sun") and
consistent with a court-appointed liquidator's previous ruling. The District
Court entered a judgment directing distribution of the sales proceeds in the
manner urged by Sun. The District Court also entered a finding that UICI had
violated Texas securities disclosure laws and breached a fiduciary duty owed to
Sun, and the District Court awarded the plaintiff $1.7 million in attorneys'
fees, which amount could be increased to $2.1 million under certain
circumstances.
On August 1, 2000, the Court of Appeals for the Fifth District of Texas at
Dallas reversed the trial court's judgment as to UICI's liability for attorneys'
fees and its finding that UICI breached a fiduciary duty. The Appeals Court also
reversed the trial court's judgment that directed distribution of the STP sales
proceeds in the manner urged by Sun. On December 8, 2000, the Appeals Court
affirmed its earlier decision, further reversed the trial court's finding that
the Company had violated the Texas Securities Act and denied the Company's, Mr.
Jensen's and Sun's respective motions for rehearing. On May 10, 2001, the Texas
Supreme Court denied Sun's petition to review of the Court of Appeals opinion,
and the case has now been remanded to the District Court for trial on the issues
concerning the interpretation of the March 1997 agreement and the alleged breach
of fiduciary duty claim. No trial date has been set.
In the brief filed in his appeal of the District Court's December 1998
finding, Mr. Jensen reasserted that the March 1997 agreement requires that,
before STP can make a distribution to UICI and Sun, it must advance
approximately $10.0 million to Mr. Jensen in satisfaction of certain creditor
and preferred equity claims. If and to the extent that Mr. Jensen's
interpretation of the March 1997 agreement is ultimately adopted in the Sun
Litigation after all rights to appeal have been exhausted, the amount of such
proceeds that UICI may ultimately receive directly from STP may be reduced.
However, in such event and in accordance with an agreement reached with the
Company in June 1998 (the "Assurance Agreement"), Mr. Jensen has agreed that, if
UICI receives less than $15.1 million in the lawsuit, then Mr. Jensen will
advance funds to UICI sufficient to increase UICI's recovery to $15.1 million.
The Assurance Agreement also restricts the manner in which UICI can seek funds
in satisfaction of Mr. Jensen's previously unconditional agreement (the "Jensen
1996 Guaranty") to indemnify the Company for any loss or reduction in value of
the Company's Class A investment in Cash Delivery Systems, LLC.
By letter dated July 7, 2000, Mr. Jensen submitted a formal proposal to
purchase the Company's 80% interest in STP for $15.6 million ("Proposal A") or,
alternatively, to purchase for $15.1 million the Company's rights and claim of
rights to receive funds held in the registry of the Court in the Sun Litigation
("Proposal B"). As part of either proposal, the Company proposed to terminate
and release Mr. Jensen from any and all obligations arising under the Jensen
1996 Guaranty and the Assurance Agreement. As part of Mr. Jensen's proposals,
Mr. Jensen offered to indemnify and hold the Company harmless from and against,
among other things, (a) the breach of fiduciary duty claim asserted by Sun
against the Company and Sun's related claim for attorneys' fees, (b) Sun's claim
for attorneys' fees arising out of the distribution issue in the
F-62
UICI AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Sun Litigation, and (c) any and 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.
The Company solicited the consent of Sun to the transfer so that it might
accept Proposal A, but Sun was unwilling to grant such consent and also objected
to Proposal B, claiming that Sun's consent is required to consummate either
Proposal. Following approval of the disinterested outside directors of UICI in
accordance with the related party transactions policies and procedures adopted
by the UICI Board, on July 21, 2000, the Company formally accepted Proposal A
and, in the alternative, Proposal B. On November 22, 2000, the Court in the
Company's pending Shareholder Derivative Litigation (see discussion below)
approved the alternative settlements between Mr. Jensen and the Company, subject
to any alleged right on the part of Sun to consent to Proposal A and/or Proposal
B.
The Company subsequently sued Sun separately (UICI v. Sun Communications,
Inc., pending in 134th Judicial District Court of Dallas County, Texas, Cause
No. 009353), seeking to resolve the consent issue. Sun's motion to abate the
separate suit pending disposition of the Sun case was denied by the Court at a
hearing held on August 2, 2001. On October 16, 2001, the Court granted UICI's
motion for partial summary judgment and ordered, among other things, that (a)
Sun's consent to Proposal B is not required, (b) no injunction or order
previously issued by the Court precludes or otherwise limits UICI from
completing Proposal A and (c) Sun waived and is estopped to assert any right to
prevent UICI's assignment of its interest in STP as contemplated by Proposal A.
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 have 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.
Ronald L. Jensen (the Chairman of the Company and a defendant in the
Shareholder Derivative Litigation) is not a party to the Settlement Agreement.
In its earlier judgment rendered on October 14, 2001, the Court found that
certain statements made by plaintiff in the pleadings in the case were
"groundless, false and brought for the purpose of harassment and with the intent
to cause harm to or injure" Mr. Jensen and UICI, for which the plaintiff was
ordered to pay to Mr. Jensen $5,000 as a judicial sanction in accordance with
Texas law. The plaintiff retains the right to appeal, and Mr. Jensen retains the
right to defend, that ruling in the Shareholder Derivative Litigation.
F-63
UICI AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 the
Court has not yet responded to that motion. On January 15, 2002, while the
motion to dismiss the counterclaims was pending, UICI and UCS move the Court to
amend their counterclaims, and that motion is also pending before the Court.
In a separate suit filed on March 26, 2001 (UICI, United Marketing
Membership 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 individually ("Gray") and related entities. Company's claims include,
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 have agreed to submit the matters of which the Colorado and
Texas litigation are the subject to a mediation scheduled for April 15 and 16,
2002. If that mediation proves unsuccessful, the Company intends to vigorously
defend and pursue its counterclaims in the Colorado litigation and its claims in
the Texas litigation.
AMERICAN FAIR CREDIT ASSOCIATION LITIGATION
As previously disclosed, 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"). Plaintiffs also filed a companion case in federal district
court in San Francisco
F-64
UICI AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
captioned Dadra Mitchell v. BankFirst, N.A., 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 the federal case (the "BankFirst case") is
BankFirst, N.A., a bank that issued a VISA credit card made available through
the AFCA program.
The Mitchell Case
On April 12, 1999, the California state court in the Mitchell case
certified a class of all California residents who entered into a membership
contract with AFCA through April 12, 1999.
In October 2000, the state court in the Mitchell case granted, in part, and
denied, in part the joint motions of UICI, AFCA and 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. The court also narrowed the scope of the class by applying the applicable
statutes of limitation.
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 trial
court. Accordingly, at this time, it is unclear whether or not plaintiff will
move for relief from the stay of proceedings, and, if so, what relief from the
stay, if any, will be granted to plaintiff pending the outcome of UICI's appeal.
On February 22, 2002, the California Court of Appeals heard oral argument
on the appeal.
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.
The BankFirst Case
On May 4, 2000, the district 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.
F-65
UICI AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
REINSURANCE LITIGATION
As previously disclosed, on November 3, 2000, The MEGA Life and Health
Insurance Company (a wholly-owned subsidiary of the Company) ("MEGA") was named
as a party defendant in a suit filed by General & Cologne Life Re of America
("Cologne Re") (General & Cologne Life Re of America vs. The MEGA Life and
Health Insurance Company), in the High Court of Justice, Queen's Bench Division,
Commercial Court, Royal Courts of Justice, in London, England. Plaintiff alleged
that it was due the sum of L1,592,358.54 (approximately US $2.3 million as of
December 31, 2001) for losses incurred in a health insurance program in the
United Kingdom in which Cologne Re was a cedent of reinsurance and MEGA was
Cologne Re's retrocessionaire.
On January 29, 2002, following mediation in London, MEGA and Cologne agreed
to a full settlement of the dispute, the terms of which will not have a material
adverse effect on the results of operations or financial condition of the
Company.
GOTTSTEIN LITIGATION
As previously disclosed, UICI, Ronald L. Jensen, and UGA, Inc. were named
as defendants in a purported class action lawsuit filed in November 1998
(Gottstein, et al. v. The National Association for the Self-Employed, et al., in
the United States District Court for the District of Kansas). The class
representatives alleged fraud, conspiracy to commit fraud, breach of fiduciary
duty, violation of the Kansas Consumer Protection Act, conspiracy to commit RICO
violations, and violation of RICO, all arising out of the concurrent sales of
individual health insurance policies underwritten and marketed by PFL Life
Insurance Company ("PFL") and memberships in The National Association for the
Self-Employed. On February 1, 2001, the court approved a settlement including
all potential class members in all states, including Kansas, and the court
dismissed the case without prejudice pending execution of the settlement. Final
settlement checks were distributed to the class plaintiffs on January 24, 2002.
Under the terms of a cost sharing agreement with a unit of AEGON USA, UICI
and/or MEGA will be obligated to reimburse the AEGON USA unit for 50% of the
cash cost of the settlement. Disposition of the case under the terms of the
settlement did not have a material adverse effect upon the results of operations
or financial condition of the Company.
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.
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.
F-66
UICI AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
ROE LITIGATION
As previously disclosed, 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.
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.
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 case has been subsequently remanded back to state court. Since
this class action suit is in a preliminary stage, no discovery has been
conducted with respect to the class issues 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.
F-67
UICI AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
A substantial number of defendants have been voluntarily dismissed from the
case, and several individual defendants have not yet been personally served in
the case. In January 2002, the derivative plaintiff agreed to consent to
defendants' motion to transfer the case to Texas state court in Dallas. The
Court has set a June 17, 2002 trial date.
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.
ACADEMIC MANAGEMENT SERVICES CORP. CLASS ACTION LITIGATION
As previously disclosed, Academic Management Services Corp. (formerly known
as Educational Finance Group, Inc.) ("AMS") has been named as a party-defendant
in a purported class action lawsuit (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, plaintiffs
have alleged, among other things, that, in connection with the marketing,
solicitation and origination of federally-guaranteed Parent Plus student loans,
AMS and other defendants purportedly violated the federal Higher Education Act
("HEA"), federal RICO by allegedly committing wire and mail fraud, and Florida
tort law by allegedly committing negligence, making negligent
misrepresentations, and breaching its fiduciary duty.
On October 19, 2001, the Court granted AMS' motion to dismiss the case in
its entirety. Specifically, the District Court dismissed, with prejudice,
plaintiffs' federal HEA and RICO claims and dismissed, 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 February 19, 2002, AMS petitioned the court in the state action for
a stay pending resolution of the federal action.
The Company believes that plaintiffs' claims are wholly without merit, and
AMS intends to vigorously contest plaintiffs' federal appeal and state class
action complaint.
OTHER LITIGATION 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.
OTHER COMMITMENTS AND CONTINGENCIES
The Company and its subsidiaries lease office space and data processing
equipment under various lease agreements with initial lease periods of three to
ten and one-half years. Minimum lease commitments, at December 31, 2001 were
$7.7 million in 2002, $6.6 million in 2003, $4.1 million in 2004, $2.1 million
in 2005, $609,000 in 2006 and none thereafter. Rent expense was $6.3 million,
$7.5 million and $9.6 million for the years ended December 31, 2001, 2000 and
1999, respectively.
F-68
UICI AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In conjunction with its College Fund Life Insurance Division life insurance
operations, the Company commits to assist in funding the higher education of its
insureds with student loans. As of December 31, 2001, the Company through its
College Fund Life Insurance Division had outstanding commitments to fund student
loans for the years 2002 through 2023. The interest rates on these commitments
vary as described below. Loans are limited to the cost of school or prescribed
maximums. These loans are generally guaranteed as to principal and interest by
an appropriate guarantee agency and are also collateralized by either the
related insurance policy or the co-signature of a parent or guardian. The total
commitment for the next five school years and thereafter as well as the amount
the Company expects to fund considering utilization rates and lapses are as
follows:
TOTAL EXPECTED
COMMITMENT FUNDING
---------- --------
(IN THOUSANDS)
2002........................................................ $ 194,983 $19,364
2003........................................................ 219,424 17,662
2004........................................................ 230,972 13,786
2005........................................................ 224,203 9,896
2006........................................................ 219,513 6,197
2007 and thereafter......................................... 556,640 8,201
---------- -------
Total....................................................... $1,645,735 $75,106
========== =======
Interest rates on the above commitments are principally variable (national
prime plus 2%).
At each of December 31, 2001 and 2000, the Company had $6.0 million of
letters of credit relating to its insurance operations.
NOTE O -- EMPLOYEE AND AGENT STOCK 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 and one-half years ending December 31, 2002 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.
F-69
UICI AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company recorded compensation expense associated with contributions to
the Employee Plan in the amount of $7.0 million, $5.0 million and $5.0 million
for the years ended December 31, 2001, 2000 and 1999, respectively. Included in
the compensation expense is stock appreciation of $3.3 million, $387,000 and $0
for the years ended December 31, 2001, 2000 and 1999, respectively, which is
reflected in stock appreciation expense on the Company's consolidated statement
of income. The amount classified as stock appreciation expense represents the
incremental compensation expense associated with the allocation during the year
of $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
the $5.25 ESOP Shares held in the suspense account, the Company will record
additional 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 the remaining 630,000 $5.25 ESOP
Shares will be allocated to participants' ESOP accounts during 2002. The fair
value of the 630,000 unallocated $5.25 ESOP Shares totaled $8.5 million at
December 31, 2001.
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, 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. 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, 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.
F-70
UICI AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 at $5.25 per
share 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. 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
reduces 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.
The Company recorded commission expense associated with the Agent Plans in
the amount of $6.6 million, $3.0 million and $3.7 million for years ended
December 31, 2001, 2000 and 1999, respectively.
At December 31, 2001, the Company had recorded approximately 1.6 million
unvested matching credits associated with the Agent Plans, of which the Company
estimates 470,000 will vest in January 2002.
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. 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.
Stock-based commission expense is non-cash and will accordingly have no impact
on the Company's cash flows or liquidity.
STOCK OPTION PLANS
In accordance with the terms of the Company's 1998 Employee Stock Option
Plan and the Company's 1998 Agent Stock Option Plan, each effective August 15,
1998, the Company granted agents and employees of the Company options to
purchase an aggregate of 8.1 million shares of Company common stock at an
exercise price of $15 per share. The options vest in 20% increments in each
year, commencing on August 15, 1999 and ending August 15, 2001, and the
remaining 40% vest on August 15, 2002. At December 31, 2001 and 2000, options to
purchase 2,156,766 shares and 2,429,875 shares, respectively, were outstanding
under the 1998 Plans. For years ended December 31, 2001 and 2000, the Company
recognized no compensation expense in connection with the 1998 Plans.
In accordance with the terms of the Company's 1987 Stock Option Plan, as
amended (the "1987 Plan"), 4,000,000 shares of common stock of the Company have
been reserved for issuance upon exercise of options that may be granted to
officers, key employees, and certain eligible non-employees at an exercise price
equal to the fair market value at the date of grant. The options generally vest
in 20% annual increments every twelve
F-71
UICI AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
months, subject to continuing employment, provided that an option will vest 100%
upon death, permanent disability, or change of control of the Company. All
options under the 1987 Plan are exercisable over a five-year period. During the
year ended December 31, 2001 and 2000, the Company granted to officers,
directors and employees under the 1987 Plan options to purchase an aggregate of
340,609 shares and 713,408 shares, respectively, at an average exercise price of
$10.54 and $6.63 per share, respectively, which was equal to the market price at
the date of grant.
In connection with the Company's acquisition of AMLI Realty Co. ("ARC") in
1996, options previously outstanding under the ARC employee stock option plan
were converted into the right to receive shares of the Company's common stock.
At each of December 31, 2001 and 2000, 60,591 options (at a weighted exercise
price per share of $12.72) and 60,591 options (at a weighted exercise price per
share of $12.72), respectively, were outstanding under the ARC plan. Options
issued under the ARC plan are fully vested.
Set forth below is a summary of stock option transactions:
NUMBER OF AVERAGE OPTION
SHARES PRICE PER SHARE($)
---------- ------------------
Outstanding options at January 1, 1999................... 6,187,550 15.12
Granted.................................................. 147,682 24.94
Canceled................................................. (1,644,316) 15.00
Exercised................................................ (438,009) 15.00
----------
Outstanding options at December 31, 1999................. 4,252,907 15.52
Granted.................................................. 713,408 6.63
Canceled................................................. (1,451,719) 15.03
----------
Outstanding options at December 31, 2000................. 3,514,596 13.92
Granted.................................................. 340,609 10.54
Canceled................................................. (579,763) 18.25
Exercised................................................ (500) 6.63
----------
Outstanding options at December 31, 2001................. 3,274,942 12.81
==========
Options exercisable at December 31,
1999..................................................... 615,034 15.07
2000..................................................... 969,166 15.51
2001..................................................... 1,497,233 13.96
The Company has elected to follow Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" ("APB 25") and related
Interpretations in accounting for its employee stock options because, as
discussed below, the alternative fair value accounting provided for under FASB
Statement No. 123, "Accounting for Stock-Based Compensation," requires use of
option valuation models that were not developed for use in valuing employee
stock options. Under APB 25, because the exercise price of the Company's
employee stock options equals the market price of underlying stock on the date
of grant, no compensation expense is recognized.
Pro forma information regarding net income and earnings per share is
required by Statement No. 123, and has been determined as if the Company had
accounted for its employee stock options under the fair value method of that
Statement. The fair value for these options was estimated at the date of grant
using a Black-Scholes option pricing model with the following weighted-average
assumptions for 2001, 2000 and 1999: risk-free interest rate of 4.43%, 6.58% and
5.68%, respectively; dividend yield of -0-% for each of the three years,
volatility factor of the expected market price of the Company's common stock of
0.56, 0.49 and 0.42, respectively; and a weighted-average expected life of the
option of 5 years for each of the three years. The
F-72
UICI AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
weighted average grant date fair value per share of stock options issued in
2001, 2000 and 1999 was $5.70, $3.45 and $11.07, respectively.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options that have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions, including the expected stock price
volatility. Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
management's opinion the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The effect on
net income (loss) of the stock compensation amortization for the years presented
above is not likely to be representative of the effects on reported net income
for future years. The Company's pro forma information follows (in thousands
except for earnings per share information):
2001 2000 1999
------- -------- ---------
(DOLLARS IN THOUSANDS
EXCEPT PER SHARE AMOUNTS)
Pro forma income (loss):
Income from continuing operations.................. $44,433 $ 30,312 $ 35,666
Loss from discontinued operations.................. (5,466) (26,285) (181,696)
------- -------- ---------
Net income (loss)............................... $38,967 $ 4,027 $(146,030)
======= ======== =========
Pro forma earnings (loss) per common share:
Basic earnings (loss):
From continuing operations......................... $ 0.96 $ 0.65 $ 0.76
Loss from discontinued operations.................. (0.12) (0.56) (3.92)
------- -------- ---------
Net income (loss)............................... $ 0.84 $ 0.09 $ (3.16)
======= ======== =========
Diluted earnings (loss):
From continuing operations......................... $ 0.92 $ 0.63 $ 0.74
Loss from discontinued operations.................. (0.11) (0.55) (3.80)
------- -------- ---------
Net income (loss)............................... $ 0.81 $ 0.08 $ (3.06)
======= ======== =========
RESTRICTED STOCK GRANTS
In 2001 and 2000, the Company issued an aggregate of 109,250 and 56,459
shares of restricted stock, respectively, to selected officers and key employees
with a weighted average price per share on the date of issuance of $6.63 and
$7.58, respectively. Until the lapse of certain restrictions generally extending
over a two year period, all of such shares are subject to forfeiture if a
grantee ceases to provide material services to the Company as an employee for
any reason other than death. Upon death or a Change in Control (as defined) of
the Company, the shares of restricted stock are no longer subject to forfeiture.
UICI EXECUTIVE STOCK PURCHASE PROGRAM
To encourage the ownership of UICI Common Stock among directors and key
executives, in December 1998 the Company adopted the UICI Executive Stock
Purchase Program (the "ESPP"). Pursuant to the ESPP, the directors and selected
executives of UICI were offered the opportunity, in the alternative, to either
purchase shares of UICI common stock at a purchase price equal to 85% of the
then-prevailing market price
F-73
UICI AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
per share (the "Discount Option"), or purchase shares of common stock at 100% of
the then fair market value, such purchase to be financed by the executive to the
extent of $3.00 per share and by UICI to the extent of the balance (the "Loan
Option").
In the case of the Loan Option, UICI agreed to finance the balance of the
purchase price by accepting delivery of a full recourse, five-year promissory
note bearing interest at the rate of the greater of the then-prevailing Fed
funds rate or 5% per annum to be paid quarterly in arrears. In addition to the
foregoing, with respect to each of Discount Option and the Loan Option, UICI
offered to issue to the executives on a one-for-one basis stock options to
purchase UICI common stock exercisable at the then-prevailing market price per
share. Options so issued were to be governed by the terms of UICI's Amended and
Restated 1987 Stock Option Plan.
A total of 24 current executives and outside directors elected pursuant to
the ESPP to purchase an aggregate of 308,422 shares of UICI common stock, of
which an aggregate of 9,878 shares were purchased pursuant to the Discount
Option at a weighted average purchase price of $22.67 per share and 298,544
shares were purchased pursuant to the Loan Option at a weighted average purchase
price of $21.26 per share. As part of the ESPP, the Company issued an aggregate
of 308,422 options to purchase UICI common stock at a weighted average exercise
price of $21.40 per share. Current executives and directors had indebtedness
outstanding owing to the Company under the Loan Option at December 31, 2000 in
the aggregate amount of $4.4 million (including $2.8 million payable by Gregory
T. Mutz, the Company's President and Chief Executive Officer).
Following the significant decline in the price of UICI common stock
following UICI's announcement of losses at its United CreditServ credit card
unit in December 1999, the Board of Directors sought means to revise the ESPP in
a manner that would better serve its intended objectives. The Board became
increasingly concerned that the ESPP had in fact contributed to negative morale
among a group of key UICI executives, none of whom had direct involvement with
the difficulties at United CreditServ.
Following a recommendation of the Board's Compensation Committee, the Board
of Directors of the Company (including all of the outside disinterested members
of the Board), at a meeting held on January 2, 2001, approved modifications to
the ESPP that were generally designed to restore executives economically to
where they would have been if the ESPP were implemented in January 2001
according to its original design and the stock price in January 2001 had been
$9.00 per share. The modifications were designed to assure that the ESPP serves
as reasonable incentive on a going-forward basis to those executives who
continue to serve the Company and who will, as a result, be relied upon to
assure the Company's future success. As originally applied to the Company's
outside directors and to executives no longer with the Company, the terms of the
ESPP remain unmodified.
In particular, in January 2001 UICI issued an aggregate of 11,054 shares of
UICI common stock to the five executives who purchased shares pursuant to the
Discount Option. Giving effect to such issuance, the executives have an average
cost in shares purchased pursuant to the Discount Option of $9.00 per share. In
addition, UICI discharged an aggregate of $997,000 of indebtedness owed by 13
current executives (other than Mr. Mutz) who elected to purchase shares pursuant
to the Loan Option, representing 73% of the indebtedness previously owing by
such persons. Giving effect to this debt discharge, these individuals will have
acquired pursuant to the ESPP an aggregate of 62,934 shares at a cost of
$566,000 ($378,000 of indebtedness plus $188,000 of cash invested), or $9.00 per
share.
Mr. Mutz initially purchased pursuant to the ESPP a total of 220,000 shares
of UICI stock at an aggregate purchase price of $4.4 million, or $19.95 per
share, which purchase was initially financed with $660,000 ($3.00 per share) in
cash and by indebtedness owing to UICI in the amount of $3.7 million. Mr. Mutz
subsequently paid down principal on his loan in the amount of $960,000.
Accordingly, through
F-74
UICI AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
December 31, 2000, Mr. Mutz had paid a total of $1.6 million in cash and had
outstanding against his 220,000 shares a total of $2.8 million in indebtedness.
In January 2001 UICI discharged indebtedness owing by Mr. Mutz in the
amount of $1.5 million. Giving effect to such forgiveness, Mr. Mutz currently
owes UICI $1.3 million, or $6.00 per share initially purchased. In addition,
UICI issued to Mr. Mutz 107,104 shares of UICI common stock. Giving effect to
the debt forgiveness and the issuance of the shares, Mr. Mutz pursuant to the
ESPP holds an aggregate of 327,104 shares of UICI common stock at a cost to Mr.
Mutz of $2.9 million ($1.3 million of indebtedness plus $1.6 million of cash
invested), or $9.00 per share.
UICI cancelled the 290,404 options that were issued to executives pursuant
to the ESPP at a weighted average option price of $21.17 per share. In addition,
the maturity of the promissory notes delivered in connection with the Loan
Option was extended to January 1, 2007. All other terms and conditions of the
original notes remain in effect.
Upon the issuance of the UICI shares and the discharge of indebtedness in
January 2001, executives/directors recognized immediate income for federal tax
purposes and UICI became entitled to an immediate deduction and tax benefit in a
corresponding amount. In order to afford participants a means to pay their tax,
UICI transferred to participants the benefit of UICI's tax savings by paying a
cash tax "gross-up" payment to affected participants in the aggregate amount of
$1.7 million.
Reflecting the modifications to the ESPP made in January 2001, current
executives and directors had indebtedness outstanding owing to the Company at
December 31, 2001 in the aggregate amount of $1.9 million (including $1.3
million payable by Gregory T. Mutz, the Company's President and Chief Executive
Officer).
In connection with the January 2001 modifications to the ESPP, for
financial reporting purposes UICI recorded in the quarter ended December 31,
2000 compensation expense in the amount of $4.8 million pre-tax, or $4.1 million
net of tax. The 118,158 shares of UICI common stock issued to participants were
issued from treasury shares.
OTHER 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, the Company's liability for this compensation was
$1.1 million.
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, the Company's liability for this compensation was
$731,000.
NOTE P -- INVESTMENT ANNUITY SEGREGATED ACCOUNTS
The Company had deferred investment annuity policies which have segregated
account assets and liabilities amounting to $234.5 million and $244.0 million at
December 31, 2001 and 2000, respectively, which are funded by specific assets
held in segregated custodian accounts for the purposes of providing policy
benefits and paying applicable premiums, taxes and other charges as due. Because
investment decisions with respect to these segregated accounts are made by the
policyholders, these assets and liabilities are not presented in these financial
statements. The assets are held in individual custodian accounts, from which the
Company has received hold harmless agreements and indemnification.
F-75
UICI AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE Q -- SEGMENT INFORMATION
The Company's operating segments include the following: (i) Insurance
Segment, which includes the businesses of the Self Employed Agency Division, the
Student Insurance Division, the Life Insurance Division (formerly the Company's
OKC Division), the Senior Market Division and the National Motor Club Division
(until sold on July 27, 2000); (ii) Financial Services Segment, which includes
the businesses of Academic Management Services Corp., the Company's investment
in Healthaxis, Inc., the business of the Company's Third Party Administration
("TPA") unit, and (iii) Other Key Factors.
Other Key Factors include investment income not allocated to the other
segments, interest expense on corporate debt, general expenses relating to
corporate operations, the AMLI operations, variable stock compensation, goodwill
amortization, and realized gains or losses on sale of investments. 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, and fees and other income. Operations
that do not constitute reportable operating segments have been combined with
Other Key Factors. 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 that are generally at cost. Financial information by
operating segment for revenues, income from continuing operations before federal
income taxes and assets is summarized as follows:
YEAR ENDED DECEMBER 31,
----------------------------------
2001 2000 1999
---------- ---------- --------
(IN THOUSANDS)
Revenues
Insurance:
Self Employed Agency............................ $ 700,407 $ 566,385 $566,847
Student Insurance............................... 126,139 111,476 107,975
Life Insurance Division......................... 94,898 92,425 94,135
Senior Market................................... 5 -- --
National Motor Club............................. -- 21,697 27,806
---------- ---------- --------
921,449 791,983 796,763
---------- ---------- --------
Financial Services:
Academic Management Services.................... 133,657 154,250 104,592
Third Party Administration...................... 24,250 18,548 46,184
Gain on HealthAxis.com shares................... -- 26,300 --
---------- ---------- --------
157,907 199,098 150,776
---------- ---------- --------
Other Key Factors................................. 29,895 33,035 37,914
Intersegment Eliminations......................... (2,668) (4,461) (31,274)
---------- ---------- --------
Total revenues.......................... $1,106,583 $1,019,655 $954,179
========== ========== ========
F-76
UICI AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEAR ENDED DECEMBER 31,
----------------------------------
2001 2000 1999
---------- ---------- --------
(IN THOUSANDS)
Income (loss) from continuing operations before
federal income taxes
Insurance:
Self Employed Agency............................ $ 74,849 $ 70,905 $ 50,415
Student Insurance............................... 4,022 (1,877) 49
Life Insurance Division......................... 7,363 13,132 17,405
Senior Market................................... (2,112) -- --
National Motor Club............................. -- 2,471 3,200
---------- ---------- --------
84,122 84,631 71,069
---------- ---------- --------
Financial Services:
Academic Management Services.................... 5,413 (24,640) (19,938)
Third Party Administration...................... (2,099) (1,668) 2,322
Gain on sale of HealthAxis.com shares........... -- 26,300 --
Equity in Healthaxis, Inc. operating loss....... (10,597) (15,623) --
---------- ---------- --------
(7,283) (15,631) (17,616)
---------- ---------- --------
Other Key Factors.................................
Investment income on equity, realized gains and
losses, general corporate expenses and other
including interest on non-student loan
indebtedness)................................ 2,940 9,631 7,623
Variable stock compensation..................... (7,293) (5,300) --
Goodwill amortization........................... (6,263) (6,193) (6,279)
---------- ---------- --------
(10,616) (1,862) 1,344
---------- ---------- --------
Total income from continuing operations
before federal income taxes........... $ 66,223 $ 67,138 $ 54,797
========== ========== ========
DECEMBER 31,
-----------------------
2001 2000
---------- ----------
(IN THOUSANDS)
-----------------------
Assets
Insurance:
Self Employed Agency...................................... $ 613,884 $ 465,112
Student Insurance......................................... 100,978 81,663
Life Insurance Division................................... 771,143 690,424
Senior Market............................................. -- --
---------- ----------
1,486,005 1,237,199
---------- ----------
F-77
UICI AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31,
-----------------------
2001 2000
---------- ----------
(IN THOUSANDS)
-----------------------
Financial Services:
Academic Management Services.............................. 1,557,434 1,479,217
Third Party Administration................................ 4,652 6,392
Investment in Healthaxis, Inc. ........................... 8,278 18,442
---------- ----------
1,570,364 1,504,051
---------- ----------
Other Key Factors:
General corporate and other............................... 143,505 87,865
Goodwill.................................................. 86,010 160,733
---------- ----------
229,515 248,598
---------- ----------
Total assets from continuing operations................ $3,285,884 $2,989,848
========== ==========
NOTE R -- EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted
earnings (loss) per share:
YEAR ENDED DECEMBER 31,
------------------------------
2001 2000 1999
------- -------- ---------
(IN THOUSANDS
EXCEPT PER SHARE AMOUNTS)
Income (loss) available to common shareholders:
Income from continuing operations available to
common shareholders............................. $48,358 $ 32,018 $ 35,814
Loss from discontinued operations.................. (5,466) (26,285) (181,696)
------- -------- ---------
Net income (loss).................................. $42,892 $ 5,733 $(145,882)
======= ======== =========
Weighted average shares outstanding
(thousands) -- basic earnings (loss) per share..... 46,628 46,573 46,326
Effect of dilutive securities:
Employee stock options and other shares (see Note
N)................................................. 1,289 1,193 1,504
------- -------- ---------
Weighted average shares outstanding -- dilutive
earnings (loss) per share.......................... 47,917 47,766 47,830
------- -------- ---------
Basic earnings (loss) per share
Income from continuing operations.................. $ 1.04 $ 0.68 $ 0.77
Loss from discontinued operations.................. (0.12) (0.56) (3.92)
------- -------- ---------
Net income (loss).................................. $ 0.92 $ 0.12 $ (3.15)
======= ======== =========
Diluted earnings (loss) per share Income from
continuing operations.............................. $ 1.01 $ 0.67 $ 0.75
Loss from discontinued operations.................. (0.11) (0.55) (3.80)
------- -------- ---------
Net income (loss).................................. $ 0.90 $ 0.12 $ (3.05)
======= ======== =========
F-78
UICI AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE S -- SUPPLEMENTAL FINANCIAL STATEMENT DATA
Set forth below is certain supplemental information concerning
underwriting, policy acquisition costs and insurance expenses for the years
ended December 31, 2001, 2000 and 1999:
YEAR ENDED DECEMBER 31,
------------------------------
2001 2000 1999
-------- -------- --------
(IN THOUSANDS)
Amortization of deferred policy acquisition costs.... $ 37,395 $ 22,325 $ 31,706
Commissions.......................................... 74,844 64,284 58,199
Administrative expenses.............................. 159,413 135,768 119,363
Premium taxes........................................ 22,151 16,987 15,794
-------- -------- --------
$293,803 $239,364 $225,062
======== ======== ========
NOTE T -- SUBSEQUENT EVENTS
On January 17, 2002, the Company completed the sale of UICI Administrators,
Inc., the major component of the TPA unit. In the three months ended December
31, 2001, the Company recognized an impairment charge of $2.3 million to its
long-lived assets, 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). The
Company recognized no gain or loss on the sale of UICI Administrators, Inc. in
2002.
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. The Company acquired
SeniorsFirst for a cash purchase price of $8.1 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. (the "STAR Companies"), 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 program will be issued by The MEGA
Life and Health Insurance Company, a wholly-owned subsidiary of UICI. UICI
acquired the STAR Companies for an initial cash purchase price of $25.0 million,
plus additional contingent consideration based on the future performance of the
STAR Companies over the period ending May 31, 2003. The contingent consideration
will be in an amount not to exceed $15.0 million and will be payable by delivery
of UICI's 6.0% convertible subordinated notes due March 1, 2012.
F-79
SCHEDULE II
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
UICI (PARENT COMPANY)
BALANCE SHEETS
DECEMBER 31,
-----------------------
2001 2000
---------- ----------
(DOLLARS IN THOUSANDS)
ASSETS
Investments:
Investments in and advances to subsidiaries*.............. $524,065 $474,368
Investment in Healthaxis, Inc. ........................... -- 10,112
-------- --------
Total Investments................................. 524,065 484,480
Cash and cash equivalents................................... 57,277 17,009
Refundable income taxes..................................... 6,663 17,704
Deferred income tax......................................... 2,705 20,333
Other....................................................... 4,970 3,126
-------- --------
$595,680 $542,652
======== ========
LIABILITIES
Accrued expenses and other liabilities...................... $ 5,883 $ 21,119
Short-term debt............................................. 5,951 5,951
Long-term debt.............................................. 13,401 19,352
Payable to Related Party-short term......................... -- 18,954
Net liabilities of discontinued operations.................. 35,873 30,171
-------- --------
61,108 95,547
STOCKHOLDERS' EQUITY
Common stock................................................ 494 483
Additional paid-in capital.................................. 201,328 183,162
Accumulated other comprehensive income (loss)............... 30,294 (10,068)
Retained earnings........................................... 317,169 274,277
Treasury stock.............................................. (14,713) (749)
-------- --------
534,572 447,105
-------- --------
$595,680 $542,652
======== ========
---------------
* Eliminated in consolidation.
The condensed financial statements should be read in conjunction with the
consolidated financial statements and notes thereto of UICI and Subsidiaries.
F-80
CONDENSED STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31,
-------------------------------
2001 2000 1999
-------- -------- ---------
(DOLLARS IN THOUSANDS)
Income:
Dividends from subsidiaries*.............................. $ 56,858 $ 37,982 $ 49,066
Interest income (includes amounts received from related
parties of $-0-, $875 and $-0-, in 2001, 2000 and 1999,
respectively).......................................... 1,001 3,893 3,174
Interest and other income from subsidiaries*.............. 1,156 1,499 6,515
Gain (loss) on sale of investments........................ 57 779 (403)
Gain on sale of HealthAxis.com shares..................... -- 26,300 --
Fees and other income (includes amounts received from
related parties of $-0-, $-0- and $33, in 2001, 2000
and 1999, respectively)................................ 77 354 1,423
-------- -------- ---------
59,149 70,807 59,775
-------- -------- ---------
Expenses:
General and administrative expenses (includes amounts paid
to related parties of $1,694, $348 and $317, in 2001,
2000 and 1999, respectively)........................... 13,803 15,430 21,658
Loss on unconsolidated subsidiary......................... 10,597 15,624 --
Interest expense (includes amounts paid to related parties
of $98, $4,559 and $-0-, in 2001, 2000 and 1999,
respectively).......................................... 2,474 5,902 7,067
-------- -------- ---------
26,874 36,956 28,725
-------- -------- ---------
Income before equity in undistributed earnings of
subsidiaries and federal income taxes (benefit)........... 32,275 33,851 31,050
Equity in undistributed earnings of continuing operations... 3,820 (2,579) (1,609)
-------- -------- ---------
Income before federal income taxes (benefit)................ 36,095 31,272 29,441
Federal income tax benefit.................................. (12,263) (746) (6,373)
-------- -------- ---------
Income from continuing operations........................... 48,358 32,018 35,814
Loss from discontinued operations........................... (5,466) (26,285) (181,696)
-------- -------- ---------
Net income (loss)........................................... $ 42,892 $ 5,733 $(145,882)
======== ======== =========
---------------
* Eliminated in consolidation.
The condensed financial statements should be read in conjunction with the
consolidated financial statements and notes thereto of UICI and Subsidiaries.
F-81
CONDENSED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31,
--------------------------------
2001 2000 1999
-------- --------- ---------
(DOLLARS IN THOUSANDS)
OPERATING ACTIVITIES
Net Income (loss)......................................... $ 42,892 $ 5,733 $(145,882)
Adjustments to reconcile net income to cash (used in)
provided by operating activities:
Equity in undistributed loss of subsidiaries of
discontinued operations.............................. 5,466 26,285 181,696
Equity in undistributed earnings of continuing
operations........................................... 389 8,445 5,523
(Gains) losses on sale of investments.................. (57) (27,079) 403
Decrease (increase) in other receivables............... 2,257 635 (2,649)
Increase (decrease) in accrued expenses and other
liabilities.......................................... (15,356) 5,956 16,625
Deferred income taxes (benefit)........................ (3,979) 33,728 (3,901)
Increase in federal income taxes payable............... 11,041 18,205 139
Operating loss of Healthaxis, Inc. .................... 10,597 15,623 --
Other items, net....................................... (1,242) 3,759 8,847
-------- --------- ---------
Cash provided by continuing operations................. 52,008 91,290 60,801
Amounts (contributed to) received from discontinued
operations........................................... 12,965 (176,393) (8,115)
-------- --------- ---------
Net cash Provided by (Used in) Operating
Activities...................................... 64,973 (85,103) 52,686
-------- --------- ---------
INVESTING ACTIVITIES
Purchase of subsidiaries.................................. -- (4,481) --
Sale of subsidiaries and assets........................... -- 45,939 --
Purchase of minority interest............................. (8) -- (878)
(Increase) decrease of investments in and advances to
subsidiaries........................................... (771) 39,973 (91,037)
Sale of two million shares of HealthAxis.com.............. 30,000 --
Net decrease (increase) in other investments.............. (433) 3,001 9,217
Decrease (increase) in agents' receivables................ -- 11,145 (676)
-------- --------- ---------
Net cash Provided by (Used in) Investing
Activities...................................... (1,212) 125,577 (83,374)
-------- --------- ---------
FINANCING ACTIVITIES
Proceeds of notes payable................................. -- 10,000 115,000
Repayment of notes payable................................ (5,951) (104,451) (43,950)
Proceeds of payable to related party...................... -- 146,000 --
Repayment of payable to related party..................... (18,954) (127,046) --
Proceeds from capital contribution........................ -- 8,556 10,129
Sale (purchase) of treasury stock......................... (13,963) 3,979 (4,729)
Other changes in equity................................... 15,375 17 (7,760)
-------- --------- ---------
Net cash Provided by (Used in) Financing
Activities...................................... (23,493) (62,945) 68,690
-------- --------- ---------
Increase (decrease) in Cash....................... 40,268 (22,471) 38,002
Cash and cash equivalents at Beginning of
Period.......................................... 17,009 39,480 1,478
-------- --------- ---------
Cash and cash equivalents at End of Period........ $ 57,277 $ 17,009 $ 39,480
======== ========= =========
The condensed financial statements should be read in conjunction with the
consolidated financial statements and notes thereto of UICI and Subsidiaries.
F-82
SCHEDULE III
UICI
AND SUBSIDIARIES
SUPPLEMENTARY INSURANCE INFORMATION
COL. A COL. B COL. C COL. D COL. E
------ ----------- --------------- -------- ------------
FUTURE POLICY
DEFERRED BENEFITS
POLICY LOSSES, CLAIMS,
ACQUISITION AND LOSS UNEARNED POLICYHOLDER
COSTS EXPENSES PREMIUMS FUNDS
----------- --------------- -------- ------------
(IN THOUSANDS)
December 31, 2001:
Self Employed Agency........................ $30,358 $391,453 $48,330 $10,479
Student Insurance........................... 3,880 34,623 32,883 --
Life Insurance Division..................... 39,690 351,232 14,186 8,175
Senior Market............................... -- -- -- --
------- -------- ------- -------
Total............................... $73,928 $777,308 $95,399 $18,654
======= ======== ======= =======
December 31, 2000:
Self Employed Agency........................ $20,628 $271,439 $35,538 $ 7,998
Student Insurance........................... 2,924 25,206 31,779 --
Life Insurance Division..................... 44,573 413,346 27,204 9,929
National Motor Club......................... -- 1,587 606 --
------- -------- ------- -------
Total............................... $68,125 $711,578 $95,127 $17,927
======= ======== ======= =======
December 31, 1999:
Self Employed Agency........................ $17,313 $256,434 $33,762 $ 8,016
Student Insurance........................... 2,862 24,543 27,954 --
Life Insurance Division..................... 48,550 443,575 30,278 11,074
National Motor Club......................... -- 1,658 4,104 --
------- -------- ------- -------
Total............................... $68,725 $726,210 $96,098 $19,090
======= ======== ======= =======
F-83
SCHEDULE III
UICI
AND SUBSIDIARIES
SUPPLEMENTARY INSURANCE INFORMATION
COL. F COL. G COL. H COL. I COL. J COL. K
-------- ---------- ----------- ------------ ---------- --------
BENEFITS, AMORTIZATION
CLAIMS OF DEFERRED
LOSSES, AND POLICY OTHER
PREMIUM INVESTMENT SETTLEMENT ACQUISITION OPERATING PREMIUMS
REVENUE INCOME* EXPENSES COSTS EXPENSES** WRITTEN
-------- ---------- ----------- ------------ ---------- --------
(IN THOUSANDS)
2001:
Self Employed Agency..... $649,996 $22,359 $387,801 $21,850 $187,855
Student Insurance........ 121,513 3,315 91,292 3,824 25,690
Life Insurance
Division.............. 60,537 32,176 51,876 11,721 21,753
Senior Market............ -- -- -- -- 2,112
-------- ------- -------- ------- --------
$832,046 $57,850 $530,969 $37,395 $237,410 $832,318
======== ======= ======== ======= ======== ========
2000:
Self Employed Agency..... $521,077 $20,899 $314,963 $ 8,573 $147,535
Student Insurance........ 107,367 2,870 83,272 25 28,817
Life Insurance
Division.............. 57,731 27,889 39,576 13,727 19,185
National Motor Club...... 2,050 115 1,893 -- 47
-------- ------- -------- ------- --------
$688,225 $51,773 $439,704 $22,325 $195,584 $687,254
======== ======= ======== ======= ======== ========
1999:
Self Employed Agency..... $526,225 $19,251 $349,472 $14,327 $131,262
Student Insurance........ 103,633 2,768 78,807 349 27,196
Life Insurance
Division.............. 57,283 29,579 39,623 13,496 16,338
National Motor Club...... 2,691 153 2,371 3,534 71
-------- ------- -------- ------- --------
$689,832 $51,751 $470,273 $31,706 $174,867 $681,786
======== ======= ======== ======= ======== ========
---------------
* Allocations of Net Investment Income and Other Operating Expenses are based
on a number of assumptions and estimates, and the results would change if
different methods were applied.
** Other operating expenses includes other income for the respective segment.
F-84
SCHEDULE IV
UICI
AND SUBSIDIARIES
REINSURANCE
PERCENTAGE
OF AMOUNT
GROSS ASSUMED
AMOUNT CEDED ASSUMED NET AMOUNT TO NET
---------- ---------- -------- ---------- ----------
(DOLLARS IN THOUSANDS)
Year Ended December 31, 2001
Life insurance in force........... $4,093,064 $ 634,591 $486,978 $3,945,451 12.3%
========== ========== ======== ========== ====
Premiums:
Life insurance.................... $ 33,887 $ 4,132 $ 4,924 $ 34,679 14.2%
Health insurance.................. 768,387 26,250 55,230 797,367 6.9%
---------- ---------- -------- ----------
$ 802,274 $ 30,382 $ 60,154 $ 832,046
========== ========== ======== ==========
Year Ended December 31, 2000
Life insurance in force........... $4,435,571 $ 863,540 $474,935 $4,046,966 11.7%
========== ========== ======== ========== ====
Premiums:
Life insurance.................... $ 38,476 $ 6,286 $ 4,624 $ 36,814 12.6%
Health insurance.................. 571,980 12,293 91,724 651,411 14.1%
---------- ---------- -------- ----------
$ 610,456 $ 18,579 $ 96,348 $ 688,225
========== ========== ======== ==========
Year Ended December 31, 1999
Life insurance in force........... $5,297,143 $1,077,048 $501,703 $4,721,798 10.6%
========== ========== ======== ========== ====
Premiums:
Life insurance.................... $ 44,053 $ 9,278 $ 5,516 $ 40,291 13.7%
Health insurance.................. 539,985 17,286 126,842 649,541 19.5%
---------- ---------- -------- ----------
$ 584,038 $ 26,564 $132,358 $ 689,832
========== ========== ======== ==========
F-85
SCHEDULE V
UICI
AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
INCREASE RECOVERIES/ DEDUCTIONS/
BALANCE AT ADDITIONS IN AMOUNTS BALANCE
BEGINNING COST AND CARRYING CHARGED AT END OF
OF PERIOD EXPENSES VALUE OFF PERIOD
---------- --------- -------- ----------- -----------
(DOLLARS IN THOUSANDS)
Allowance for losses:
Year ended December 31, 2001:
Agents' receivables.................... $1,383 $1,555 $ -- $ (984) $1,954
Mortgage and collateral loans.......... 1,701 -- (500) -- 1,201
Student loans.......................... 7,473 2,263 (5,235) (916) 3,585
Real estate............................ 1,083 -- -- -- 1,083
Year ended December 31, 2000:
Agents' receivables.................... $1,982 $1,264 $ -- $(1,863) $1,383
Mortgage and collateral loans.......... 1,701 -- -- -- 1,701
Student loans.......................... 2,252 5,388 -- (167) 7,473
Real estate............................ 1,083 -- -- -- 1,083
Year Ended December 31, 1999:
Agents' receivables.................... $ 483 $1,851 $ -- $ (352) $1,982
Mortgage and collateral loans.......... 1,701 -- -- -- 1,701
Student loans.......................... 935 1,317 -- -- 2,252
Real estate............................ 1,083 -- -- -- 1,083
F-86
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
------- ----------------------
2 -- Plan of Reorganization of United Group Insurance Company, as
subsidiary of United Group Companies, Inc. and Plan and
Agreement of Merger of United Group Companies, Inc. into
United Insurance Companies, Inc., filed as Exhibit 2-1 to
the Registration Statement on Form S-1, File No. 33-2998,
filed with the Securities and Exchange Commission on January
30, 1986 and incorporated by reference herein.
3.1(A) -- Certificate of Incorporation of UICI, as amended, filed as
Exhibit 4.1 (a) to Registration Statement on Form S-8, File
No. 333-85113, filed with the Securities and Exchange
Commission on August 13, 1999 and incorporated by reference
herein.
3.2(A) -- Restated By-Laws, as amended, of the Company, filed as
Exhibit 4.1(b) to Registration Statement on Form S-8 File
No. 333-85113, filed with the Securities and Exchange
Commission on August 13, 1999 and incorporated by reference
herein.
10.1(B) -- Reinsurance Agreement between AEGON USA Companies and UICI
Companies Effective January 1, 1995, as amended through
November 21, 1995 and incorporated by reference herein.
10.1(C) -- Amendment No. 3 to Reinsurance Agreement between AEGON USA
Companies and UICI Companies effective April 1, 1996, and
filed as Exhibit 10.1 to the Company's Current Report on
Form 8-K dated April 1, 1996 (File No. 0-14320), and
incorporated by reference herein. The Amendment No. 3 amends
the Reinsurance Agreement between AEGON USA Companies and
UICI Companies effective January 1, 1995, as amended through
November 21, 1995, filed as Exhibit 10.1(B) on Annual Report
on Form 10-K for year ended December 31, 1995, (File No.
0-14320), filed on March 29, 1996, and incorporated by
reference herein.
10.2 -- Agreements Relating to United Group Association Inc., filed
as Exhibit 10-2 to the Registration Statement on Form S-18,
File No. 2-99229, filed with the Securities and Exchange
Commission on July 26, 1985 and incorporated by reference
herein.
10.3 -- Agreement for acquisition of capital stock of Mark Twain
Life Insurance Corporation by Mr. Ronald L. Jensen, filed as
Exhibit 10-4 to the Registration Statement on Form S-1, File
No. 33-2998, filed with the Securities and Exchange
Commission on January 30, 1986 and incorporated by reference
herein.
10.3(A) -- Assignment Agreement among Mr. Ronald L. Jensen, the Company
and Onward and Upward, Inc. dated February 12, 1986 filed as
Exhibit 10-4(A) to Amendment No. 1 to Registration Statement
on Form S-1, File No. 33-2998, filed with the Securities and
Exchange Commission on February 13, 1986 and incorporated by
reference herein.
10.4 -- Agreement for acquisition of capital stock of Mid-West
National Life Insurance Company of Tennessee by the Company
filed as Exhibit 2 to the Report on Form 8-K of the Company,
File No. 0-14320, dated August 15, 1986 and incorporated by
reference herein.
10.5(A) -- Stock Purchase Agreement, dated July 1, 1986, among the
Company, Charles E. Stuart and Stuart Holding Company, as
amended July 7, 1986, filed as Exhibit 11(c)(1) to Statement
on Schedule 14D-1 and Amendment No. 1 to Schedule 13D, filed
with the Securities and Exchange Commission on July 14, 1986
and incorporated by reference herein.
10.5(B) -- Acquisition Agreement, dated July 7, 1986 between Associated
Companies, Inc. and the Company, together with exhibits
thereto, filed as Exhibit (c)(2) to Statement on Schedule
14D-1 and Amendment No. 1 to Schedule 13D, filed with the
Securities and Exchange Commission on July 14, 1986 and
incorporated by reference herein.
10.5(C) -- Offer to Purchase, filed as Exhibit (a)(1) to Statement on
Schedule 14D-1 and Amendment No. 1 to Schedule 13D, filed
with the Securities and Exchange Commission on July 14, 1986
and incorporated by reference herein.
55
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
------- ----------------------
10.6 -- Agreement for acquisition of capital stock of Life Insurance
Company of Kansas, filed as Exhibit 10.6 to the 1986 Annual
Report on Form 10-K, File No. 0-14320, filed with the
Securities and Exchange Commission on March 27, 1987 and
incorporated by reference herein.
10.7 -- Agreement Among Certain Stockholders of the Company, filed
as Exhibit 10-6 to the Registration Statement on Form S-18,
File No. 2-99229, filed with the Securities and Exchange
Commission on July 26, 1985 and incorporated by reference
herein.
10.8 -- Form of Subscription Agreement for 1985 Offering, filed as
Exhibit 10-7 to the Registration Statement on Form S-1, File
No. 33-2998, filed with the Securities and Exchange
Commission on January 30, 1986 and incorporated by reference
herein.
10.9 -- Repurchase Agreement between Life Investors Inc., UGIC,
Ronald Jensen and Keith Wood dated January 6, 1984, filed as
Exhibit 10-8 to Registration Statement on Form S-1, File No.
33-2998, filed with the Securities and Exchange Commission
on January 30, 1986 and incorporated by reference herein.
10.10 -- Treaty of Assumption and Bulk Reinsurance Agreement for
acquisition of certain assets and liabilities of Keystone
Life Insurance Company, filed as Exhibit 10.10 to the 1987
Annual Report on Form 10-K, File No. 0-14320, filed with the
Securities and Exchange Commission on March 28, 1988 and
incorporated by reference herein.
10.11 -- Acquisition and Sale-Purchase Agreements for the acquisition
of Orange State Life and Health Insurance Company and
certain other assets, filed as Exhibit 10.11 to the 1987
Annual Report on Form 10-K, File No. 0-14320, filed with the
Securities and Exchange Commission on March 28, 1988 and
incorporated by reference herein.
10.12 -- United Insurance Companies, Inc. 1987 Stock Option Plan,
included with the 1988 Proxy Statement filed with the
Securities and Exchange Commission on April 25, 1988 and
incorporated by reference herein, filed as Exhibit 10.12 to
the 1988 Annual Report on Form 10-K, File No. 0-14320, filed
with the Securities and Exchange Commission on March 30,
1989 and incorporated by reference herein.
10.13 -- Amendment to the United Insurance Companies, Inc. 1987 Stock
Option Plan, filed as Exhibit 10.13 to the 1988 Annual
Report on Form 10-K, File No. 0-14320, filed with the
Securities and Exchange Commission on March 30, 1989 and
incorporated by reference herein.
10.14 -- UICI Restated and Amended 1987 Stock Option Plan as amended
and restated March 16, 1999 filed as exhibit 10.1 to Form
10-Q dated March 31, 1999, (File No. 0-14320), and
incorporated by reference herein.
10.15 -- Amendment to Stock Purchase Agreement between American
Capital Insurance Company and United Insurance Companies,
Inc., filed as Exhibit 10.15 to the 1988 Annual Report on
Form 10-K, File No. 0-14320, filed with the Securities and
Exchange Commission on March 30, 1989 and incorporated by
reference herein.
10.16 -- Agreement of Substitution and Assumption Reinsurance dated
as of January 1, 1991 by and among Farm and Home Life
Insurance Company, the Arizona Life and Disability Insurance
Guaranty Fund and United Group Insurance Company, as
modified by a Modification Agreement dated August 26, 1991,
together with schedules and exhibits thereto, filed as
Exhibit 2 to Schedule 13D, filed with the Securities and
Exchange Commission on September 3, 1991 and incorporated by
reference herein.
10.17 -- Stock Purchase Agreement dated as of August 26, 1991 by and
among Farm and Home Life Insurance Company, First United,
Inc. and The MEGA Life and Health Insurance Company, filed
as Exhibit 3 to Schedule 13D, filed with the Securities and
Exchange Commission on September 3, 1991 and incorporated by
reference herein.
56
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
------- ----------------------
10.18 -- Stock Purchase Agreement dated as of August 26, 1991 by and
among Farm and Home Life Insurance Company, The Chesapeake
Life Insurance Company and Mid-West National Life Insurance
Company of Tennessee, filed as Exhibit 4 to Schedule 13D,
File No. 0-14320 filed with the Securities and Exchange
Commission on September 3, 1991 and incorporated by
reference herein.
10.19 -- Second Agreement of Modification to Agreement of
Substitution and Assumption Reinsurance dated as of November
15, 1991 among Farm and Home Life Insurance Company, United
Group Insurance Company, and the Arizona Life and Disability
Insurance Guaranty Fund, filed as Exhibit 1 to Amendment No.
1 to Schedule 13D, File No. 0-14320 filed with the
Securities and Exchange Commission on February 5, 1992 and
incorporated by reference herein. This agreement refers to a
Modification Agreement dated September 12, 1991. The
preliminary agreement included in the initial statement was
originally dated August 26, 1991.
10.20 -- Addendum to Agreement of Substitution and Assumption
Reinsurance dated as of November 22, 1991 among United Group
Insurance Company, Farm and Home Life Insurance Company, and
the Arizona Life and Disability Insurance Guaranty Fund,
filed as Exhibit 2 to Amendment No. 1 to Schedule 13D, File
No. 0-14320 filed with the Securities and Exchange
Commission on February 5, 1992 and incorporated by reference
herein.
10.21 -- Modification Agreement dated November 15, 1991 between First
United, Inc., Underwriters National Assurance Company, and
Farm and Home Life Insurance Company, The MEGA Life and
Health Insurance Company, and the Insurance Commissioner of
the State of Indiana, and filed as Exhibit 3 to Amendment
No. 1 to Schedule 13D, File No. 0-14320 filed with the
Securities and Exchange Commission on February 5, 1992 and
incorporated by reference herein.
10.22 -- Agreement of Reinsurance and Assumption dated December 14,
1992 by and among Mutual Security Life Insurance Company, in
Liquidation, National Organization of Life and Health
Insurance Guaranty Associations, and The MEGA Life and
Health Insurance Company, and filed as Exhibit 2 to the
Company's Report on Form 8-K dated March 29, 1993, (File No.
0-14320), and incorporated by reference herein.
10.23 -- Acquisition Agreement dated January 15, 1993 by and between
United Insurance Companies, Inc. and Southern Educators Life
Insurance Company, and filed as Exhibit 2 to the Company's
Report on Form 8-K dated March 29, 1993, (File No. 0-14320),
and incorporated by reference herein.
10.24 -- Stock Exchange Agreement effective January 1, 1993 by and
between Onward and Upward, Inc. and United Insurance
Companies, Inc. and filed as Exhibit 2 to the Company's
Report on Form 8-K dated March 29, 1993, (File No. 0-14320),
and incorporated by reference herein.
10.25 -- Stock Purchase Agreement by and among United Insurance
Companies, Inc. and United Group Insurance Company and
Landmark Land Company of Oklahoma, Inc. dated January 6,
1994, and filed as Exhibit 10.27 to Form 10-Q dated March
31, 1994, (File No. 0-14320), and incorporated by reference
herein.
10.26 -- Private Placement Agreement dated June 1, 1994 of 8.75%
Senior Notes Payable due June 2004 in the aggregate amount
of $27,655,000, and filed as Exhibit 28.1 to the Company's
Report on Form 8-K dated June 22, 1994, (File No. 0-14320),
and incorporated by reference herein.
10.27 -- Asset Purchase Agreement between UICI Companies and PFL Life
Insurance Company, Bankers United Life Assurance Company,
Life Investors Insurance Company of America and Monumental
Life Insurance Company and Money Services, Inc. effective
April 1, 1996, as filed as Exhibit 10.2 to the Company's
Report on Form 8-K dated April 1, 1996 (File No. 0-14320)
and incorporated by reference herein.
57
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
------- ----------------------
10.28 -- General Agent's Agreement between Mid-West National Life
Insurance Company of Tennessee and United Group Association,
Inc. effective April 1, 1996, and filed as Exhibit 10.3 to
the Company's Report on Form 8-K dated April 1, 1996 (File
No. 0-14320), and incorporated by reference herein.
10.29 -- General Agent's Agreement between The MEGA Life and Health
Insurance Company and United Group Association, Inc.
Effective April 1, 1996, and filed as Exhibit 10.4 to the
Company's Report on Form 8-K dated April 1, 1996 (File No.
0-14320) and incorporated by reference herein.
10.30 -- Agreement between United Group Association, Inc. and
Cornerstone Marketing of America effective April 1, 1996,
and filed as Exhibit 10.5 to the Company's Current Report on
Form 8-K dated April 1, 1996 (File No. 0-14320) and
incorporated by reference herein.
10.31 -- Stock exchange agreement dated October 1996 by and between
Amli Realty Co. and UICI, as amended by that first amendment
stock exchange agreement dated November 4, 1996 filed as
Exhibit 10.31 to the Registration Statement on Form S-3 File
No. 333-23899 filed with the Securities and Exchange
Commission on April 25, 1997 and incorporated by reference
herein.
10.32 -- Agreement dated December 6, 1997 by and between UICI, UICI
Acquisition Corp., ELA Corp., and Marcus A. Katz, Cary S.
Katz, Ryan D. Katz and RK Trust #2 filed as Exhibit 10.32 to
the Registration Statement on Form S-3 File No. 333-42937
filed with the Securities and Exchange Commission on
December 22, 1997 and incorporated by reference herein.
10.33 -- Repurchase Agreement dated as of March 27, 1998 as amended
between Lehman Commercial Paper, Inc. and Educational
Finance Group, Inc. filed as exhibit 10.1 to Form 10-Q dated
September 30, 1999, (File No. 0-14320), and incorporated by
reference herein.
10.34 -- Loan Agreement among UICI, Bank of America, as
administrative agent, The First National Bank of Chicago as
documentation agent, and Fleet National Bank as co-agent
dated May 17, 1999 filed as exhibit 10.2 to Form 10-Q dated
September 30, 1999, (File No. 0-14320), and incorporated by
reference herein.
10.35 -- Indenture Agreement dated as of August 5, 1999 between
EFG-III, LP, as Issuer and The First National Bank of
Chicago, as Indenture Trustee and Eligible Lender Trustee
filed as exhibit 10.3 to Form 10-Q dated September 30, 1999,
(File No. 0-14320), and incorporated by reference herein.
10.36 -- Indenture Agreement dated as of June 14, 1999 between
EFG-II, LP, as Issuer and The First National Bank of
Chicago, as Indenture Trustee and Eligible Lender Trustee
filed as exhibit 10.4 to Form 10-Q dated September 30, 1999,
(File No. 0-14320), and incorporated by reference herein.
10.37 -- Agreement and Plan of Merger by and among UICI, UICI
Acquisition Co., and HealthPlan Services Corporation dated
as of October 5, 1999 filed as exhibit 2 to Form 8K dated
October 5, 1999 and incorporated by reference herein.
10.38 -- Voting Agreements dated October 5, 1999 between UICI and
Automatic Data Processing, Inc., James K. Murray, Jr.,
Shinnston Enterprises, Ltd., Elm Grove Associates, William
Bennett, and Robert Parker filed as exhibits 99.1, 99.2,
99.3, 99.4, 99.5, 99.6 and 99.7, respectively to Form 8K
dated October 5, 1999 and incorporated herein
10.39 -- Amended and Restated Agreement and Plan of Merger, dated as
of February 18, 2000, by and among UICI, UICI Acquisition
Co., UICI Capital Trust I and HealthPlan Services
Corporation filed as exhibit 99.2 to Form 8K dated February
18, 2000 and incorporated by reference herein.
10.40 -- Amended and Restated Loan Agreement, dated as of March 10,
2000, between UICI, the Banks named therein and Bank of
America, NA, for itself and as agent, filed as exhibit 99.2
to Form 8K dated March 22, 2000 and incorporated by
reference herein.
58
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
------- ----------------------
10.41 -- Promissory Note, dated March 14, 2000, payable by UICI SUB
I, Inc. to LM Finance, LLC, filed as exhibit 99.3 to Form 8K
dated March 22, 2000 and incorporated by reference herein.
10.42 -- Guaranty, dated March 14, 2000, from UICI to LM Finance,
LLC, filed as exhibit 99.4 to Form 8K dated March 22, 2000
and incorporated by reference herein.
10.43 -- Second Amendment and Restated Loan Agreement, dated as of
July 27, 2000, between UICI and LM Finance LLC, filed as
exhibit 10.43 to Form 10-Q dated June 30, 2000, (File No.
0-14320), and incorporated by reference herein.
10.44 -- Stock Purchase Agreement dated, July 27,2000, between UICI
and C&J Investments, LLC filed as exhibit 10.44 to Form 10-Q
dated June 30, 2000, (File No. 0-14320), and incorporated by
reference herein.
10.45 -- Management Agreement, dated December 31, 2000 between UICI,
The Mega Life and Health Insurance Company and William J.
Gedwed, filed as Exhibit 10.45 to the Company's 2000 Annual
Report on Form 10-K, File No. 001-14953, filed with the
Securities and Exchange Commission on March 16, 2001 and
incorporated by reference herein.
10.46 -- UICI 2000 Restricted Stock Plan effective January 1, 2000,
filed as Exhibit 10.46 to the Company's 2000 Annual Report
on Form 10-K, File No. 001-14953, filed with the Securities
and Exchange Commission on March 16, 2001 and incorporated
by reference herein.
10.47 -- UICI 2001 Restricted Stock Plan effective January 1, 2001,
filed as Exhibit 10.47 to the Company's 2000 Annual Report
on Form 10-K, File No. 001-14953, filed with the Securities
and Exchange Commission on March 16, 2001 and incorporated
by reference herein.
10.48 -- Termination Agreement, dated April 13, 2000 between UICI,
UICI Acquisition Co., UICI Capital Trust I, and HealthPlan
Services Corporation, filed as Exhibit 10.48 to the
Company's 2000 Annual Report on Form 10-K, File No.
001-14953, filed with the Securities and Exchange Commission
on March 16, 2001 and incorporated by reference herein.
10.49 -- Management Agreement dated October 13, 2000 between UICI and
William P. Benac, filed as Exhibit 10.49 to the Company's
2000 Annual Report on Form 10-K, File No. 001-14953, filed
with the Securities and Exchange Commission on March 16,
2001 and incorporated by reference herein.
10.50 -- Information Technology Services Agreement by and between
UICI and Insurdata Incorporated (now HealthAxis.Inc.), dated
January 3, 2000, filed as Exhibit 10.50 to the Company's
2000 Annual Report on Form 10-K, File No. 001-14953, filed
with the Securities and Exchange Commission on March 16,
2001 and incorporated by reference herein.
10.51 -- Management Agreement between NMC Holdings, Inc. and UICI
dated July 27, 2000, filed as Exhibit 10.51 to the Company's
2000 Annual Report on Form 10-K, File No. 001-14953, filed
with the Securities and Exchange Commission on March 16,
2001 and incorporated by reference herein.
10.52 -- Administrative Service Agreement dated July 27,2000 between
The MEGA Life and Health Insurance Company and National
Motor Club of America, Inc, filed as Exhibit 10.52 to the
Company's 2000 Annual Report on Form 10-K, File No.
001-14953, filed with the Securities and Exchange Commission
on March 16, 2001 and incorporated by reference herein.
10.53 -- Stock Purchase Agreement dated May 12, 2000 between UICI and
The Mega Life and Health Insurance Company with respect to
all of the outstanding capital stock of The Chesapeake Life
Insurance Company, filed as Exhibit 10.53 to the Company's
2000 Annual Report on Form 10-K, File No. 001-14953, filed
with the Securities and Exchange Commission on March 16,
2001 and incorporated by reference herein.
59
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
------- ----------------------
10.54 -- Promissory Note dated June 29, 2000 between UICI and
Columbus Bank and Trust maturing June 30, 2005, filed as
Exhibit 10.54 to the Company's 2000 Annual Report on Form
10-K, File No. 001-14953, filed with the Securities and
Exchange Commission on March 16, 2001 and incorporated by
reference herein.
10.55 -- Stock Purchase Agreement dated June 20, 2000 between UICI
and The MEGA Life and Health Insurance Company with respect
to all of the Outstanding capital stock of Amli Realty Co.,
filed as Exhibit 10.55 to the Company's 2000 Annual Report
on Form 10-K, File No. 001-14953, filed with the Securities
and Exchange Commission on March 16, 2001 and incorporated
by reference herein.
10.56 -- Agreement dated September 15, 1999 between UICI and Onward
and Upward, Inc. ("Put/Call Agreement) with respect to the
TOP Plan Funding Obligation, together with extension
agreements dated August 15, 2000, October 16, 2000, and
February 7, 2001, filed as Exhibit 10.56 to the Company's
2000 Annual Report on Form 10-K, File No. 001-14953, filed
with the Securities and Exchange Commission on March 16,
2001 and incorporated by reference herein.
10.57 -- Promissory Note and Loan Agreement dated July 19, 2000
between United Group Reinsurance, Inc. and Money Services,
Inc., maturing August 1, 2001, filed as Exhibit 10.57 to the
Company's 2000 Annual Report on Form 10-K, File No.
001-14953, filed with the Securities and Exchange Commission
on March 16, 2001 and incorporated by reference herein.
10.58 -- Promissory Note and Loan Agreement dated July 19, 2000
between Financial Services Reinsurance Ltd. and Money
Services, Inc., maturing August 1, 2001, filed as Exhibit
10.58 to the Company's 2000 Annual Report on Form 10-K, File
No. 001-14953, filed with the Securities and Exchange
Commission on March 16, 2001 and incorporated by reference
herein.
10.59 -- Promissory Note and Loan Agreement dated July 19, 2000
between U.S. Managers Life Insurance Company Ltd. and Money
Services, Inc., maturing August 1, 2001, filed as Exhibit
10.59 to the Company's 2000 Annual Report on Form 10-K, File
No. 001-14953, filed with the Securities and Exchange
Commission on March 16, 2001 and incorporated by reference
herein.
10.60 -- Asset Purchase and Transfer Agreement dated August 4, 2000
between Specialized Card Services, Inc., United Credit
National Bank, UICI Receivables Funding Corporation, and
UICI and Household Bank (SB), N.A. and Household Credit
Services, Inc., together with Amendment No. 1, filed as
Exhibit 10.60 to the Company's 2000 Annual Report on Form
10-K, File No. 001-14953, filed with the Securities and
Exchange Commission on March 16, 2001 and incorporated by
reference herein.
10.61 -- Lease Agreement dated September 30, 2000 between Household
Credit Services, Inc. (tenant) and Specialized Card
Services, Inc. (Landlord), filed as Exhibit 10.61 to the
Company's 2000 Annual Report on Form 10-K, File No.
001-14953, filed with the Securities and Exchange Commission
on March 16, 2001 and incorporated by reference herein.
10.62 -- Sublease Agreement dated July 27, 2000 between The Mega Life
and Health Insurance and National Motor Club of America,
Inc., filed as Exhibit 10.62 to the Company's 2000 Annual
Report on Form 10-K, File No. 001-14953, filed with the
Securities and Exchange Commission on March 16, 2001 and
incorporated by reference herein.
10.63 -- Software License Agreement dated January 30, 2001 between
UICI and HealthAxis.com, filed as Exhibit 10.63 to the
Company's 2000 Annual Report on Form 10-K, File No.
001-14953, filed with the Securities and Exchange Commission
on March 16, 2001 and incorporated by reference herein.
60
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
------- ----------------------
10.64 -- Agreement, dated March 14, 2001, between UICI, MEGA and
Charles Prater, filed as Exhibit 10.64 to the Company's 2000
Annual Report on Form 10-K, File No. 001-14953, filed with
the Securities and Exchange Commission on March 16, 2001 and
incorporated by reference herein.
10.65 -- Loan agreement dated January 25, 2002 between UICI and Bank
of America, N. A. and La Salle Bank National Association
10.66 -- General and First Supplemental Indenture between CLFD-I,
Inc. and Zions First National Bank, as Trustee relating to
the Student Loan Asset Backed Notes dated as of April 1,
2001.
10.67 -- Indenture agreement dated January 30, 2002 between AMS-1
2002, LP as Issuer and Bank One, National Association, as
Indenture Trustee and Eligible Lender Trustee.
21 -- Subsidiaries of UICI
23 -- Consent of Independent Auditors
24 -- Power of Attorney
---------------
* Indicates a management contract and/or benefit plan as required by Item
14(a)(3) of Form 10-K.
61