UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2002.
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
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COMMISSION FILE NO. 001-14953
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UICI
(Exact name of registrant as specified in its charter)
Delaware 75-2044750
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
4001 McEwen, Suite 200, Dallas, Texas 75244
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(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code (972) 392-6700
Not Applicable
--------------------------------------------------------------------------------
Former name, former address and former fiscal year,
if changed since last report.
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
----- ----
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes No X
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Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date. Common Stock, $.01 Par Value,
48,178,782 shares as of October 31, 2002.
1
INDEX
UICI AND SUBSIDIARIES
PAGE
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated condensed balance sheets-September 30, 2002 (unaudited) and
December 31, 2001................................................................... 3
Consolidated condensed statements of income (unaudited) - Three months ended
September 30, 2002 and 2001 and nine months ended September 30, 2002 and 2001....... 4
Consolidated statements of comprehensive income (unaudited) - Three months ended
September 30, 2002 and 2001 and nine months ended September 30, 2002 and 2001....... 5
Consolidated condensed statements of cash flows (unaudited) - Nine months
ended September 30, 2002 and 2001................................................... 6
Notes to consolidated condensed financial statements (unaudited) - September 30,
2002................................................................................ 7
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations....................................................................... 24
Item 3. Quantitative and Qualitative Disclosures about Market Risk.......................... 37
Item 4. Controls and Procedures............................................................. 37
PART II. OTHER INFORMATION
Item 1. Legal Proceedings................................................................... 38
Item 5. Market for Registrant's Common Stock and Related Matters............................ 38
Item 6. Exhibits and Reports on Form 8-K.................................................... 38
SIGNATURES........................................................................................ 39
Certification of Gregory T. Mutz, Chief Executive Officer of UICI, Pursuant to Rule 13a-14 under
the Securities Exchange Act of 1934 ............................................................. 40
Certification of Mark D. Hauptman, Chief Financial Officer of UICI, Pursuant to Rule 13a-14 under
the Securities Exchange Act of 1934 ............................................................. 41
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
UICI AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
SEPTEMBER 30, DECEMBER 31,
2002 2001
------------- ------------
(UNAUDITED)
ASSETS
Investments
Securities available for sale --
Fixed maturities, at fair value (cost:
2002--$1,004.5 million; 2001--$924,709) ....................... $ 1,037,189 $ 929,291
Equity securities, at fair value (cost:
2002--$53,373; 2001--$42,419) ................................. 81,007 84,445
Mortgage and collateral loans .................................... 9,022 5,404
Policy loans ..................................................... 19,540 20,127
Investment in Healthaxis, Inc .................................... 5,673 8,278
Short-term investments ........................................... 121,354 171,173
----------- -----------
Total Investments ......................................... 1,273,785 1,218,718
Cash ............................................................... 70,508 50,777
Student loans ...................................................... 1,445,690 1,278,427
Restricted cash .................................................... 503,669 295,182
Reinsurance receivables ............................................ 60,374 63,825
Due premiums, other receivables and assets ......................... 68,173 48,480
Investment income due and accrued .................................. 61,641 60,879
Deferred acquisition costs ......................................... 85,975 73,928
Goodwill and other intangible assets ............................... 110,619 86,010
Deferred income tax ................................................ 12,198 20,173
Property and equipment, net ........................................ 86,535 70,634
Other assets ....................................................... 18,796 14,199
----------- -----------
$ 3,797,963 $ 3,281,232
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Policy liabilities
Future policy and contract benefits .............................. $ 421,535 $ 423,297
Claims ........................................................... 433,566 354,011
Unearned premiums ................................................ 110,343 95,399
Other policy liabilities ......................................... 18,350 18,654
Accounts payable ................................................... 31,365 32,371
Other liabilities .................................................. 139,119 116,147
Collections payable ................................................ 264,815 140,894
Debt ............................................................... 9,568 25,303
Student loan credit facilities ..................................... 1,763,422 1,506,202
Net liabilities of discontinued operations, including reserve
for losses on disposal .......................................... 13,295 34,382
----------- -----------
3,205,378 2,746,660
Commitments and Contingencies
Stockholders' Equity
Preferred stock, par value $0.01 per share ....................... -- --
Common stock, par value $0.01 per share .......................... 508 494
Additional paid-in capital ....................................... 233,688 201,328
Accumulated other comprehensive income ........................... 39,192 30,294
Retained earnings ................................................ 346,056 317,169
Treasury stock, at cost .......................................... (26,859) (14,713)
----------- -----------
592,585 534,572
----------- -----------
$ 3,797,963 $ 3,281,232
=========== ===========
NOTE: The balance sheet data as of December 31, 2001 have been derived from the
audited financial statements at that date.
See Notes to Consolidated Condensed Financial Statements.
3
UICI AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF INCOME (UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------- --------------------------
2002 2001 2002 2001
----------- ----------- ----------- -----------
REVENUE
Premiums:
Health (includes amounts received from related parties of $2,436 and
$1,563 for the three months ended September 30, 2002 and 2001,
respectively, and $6,261 and $4,723 for the nine months ended
September 30, 2002 and 2001, respectively) ......................... $ 319,265 $ 195,455 $ 853,778 $ 566,543
Life premiums and other considerations .............................. 7,924 9,305 23,397 26,592
----------- ----------- ----------- -----------
327,189 204,760 877,175 593,135
Investment income ..................................................... 22,047 23,404 62,925 64,606
Interest income (includes amounts received from related parties of $2
and $8 for the three months ended September 20, 2002 and 2001,
respectively, and $3 and $18 for the nine months ended September 30,
2002 and 2001, respectively) ........................................ 14,829 17,701 51,510 70,316
Other fee income (includes amounts received from related parties of
$957 and $1,508 for the three months ended September 30, 2002 and
2001, respectively, and $3,822 and $5,329 for the nine months
ended September 30, 2002 and 2001, respectively) .................... 17,001 17,331 50,571 55,036
Other income .......................................................... 317 760 1,748 2,864
Gains (losses) on investments ......................................... (398) 3,214 (6,231) 5,861
----------- ----------- ----------- -----------
380,985 267,170 1,037,698 791,818
BENEFITS AND EXPENSES
Benefits, claims, and settlement expenses ............................. 200,891 125,231 547,021 378,838
Underwriting, acquisition, and insurance expenses (includes amounts
paid to related parties of $2,911 and $7,255 for the three months
ended September 30, 2002 and 2001, respectively and $17,285 and
$22,415 for the nine months ended September 30, 2002 and 2001,
respectively) ....................................................... 120,272 75,858 317,345 206,190
Stock appreciation expense ............................................ 4,496 2,638 15,812 4,362
Other expenses (includes amounts paid to related parties of $798 and
$1,430 for the three months ended September 30, 2002 and 2001,
respectively, and $2,929 and $3,752 for the nine months ended
September 30, 2002 and 2001, respectively) .......................... 20,013 20,360 57,474 59,138
Depreciation (includes expense on assets purchased from related parties
of $438 and $135 for the three months ended September 30, 2002
and 2001, respectively, and $1,260 and $365 for the nine months
ended September 30, 2002 and 2001, respectively) .................... 4,314 3,775 11,644 10,454
Interest expense (includes expenses incurred with related parties of
$-0- and $-0- for the three months ended September 30, 2002 and
2001, respectively, and $-0- and $98 for the nine months ended
September 30, 2002 and 2001, respectively) .......................... 289 577 1,416 4,469
Interest expense--student loan credit facilities ...................... 10,718 15,518 31,298 57,737
Losses in Healthaxis, Inc. investment ................................. 796 1,272 8,895 9,237
Goodwill amortization ................................................. -- 1,129 -- 3,387
----------- ----------- ----------- -----------
361,789 246,358 990,905 733,812
----------- ----------- ----------- -----------
INCOME FROM CONTINUING OPERATIONS BEFORE
FEDERAL INCOME TAXES ................................................. 19,196 20,812 46,793 58,006
Federal income taxes ................................................... 2,974 6,554 12,829 17,498
----------- ----------- ----------- -----------
INCOME FROM CONTINUING OPERATIONS ...................................... 16,222 14,258 33,964 40,508
DISCONTINUED OPERATIONS
(net of income tax benefit of $-0- and $1.2 million for the three
months ended September 30, 2002 and 2001, respectively, and $965,000
and $1.9 million for the nine months ended September 30, 2002 and
2001, respectively) .................................................. -- (2,383) 67 (3,914)
----------- ----------- ----------- -----------
INCOME BEFORE CUMULATIVE EFFECT OF ACCOUNTING CHANGE ................... 16,222 11,875 34,031 36,594
Cumulative effect of accounting change (net of income tax benefit of
$1,742) ................................................................ -- -- (5,144) --
----------- ----------- ----------- -----------
NET INCOME ............................................................. $ 16,222 $ 11,875 $ 28,887 $ 36,594
=========== =========== =========== ===========
Earnings (loss) per share:
Basic earnings (loss)
Income from continuing operations ................................... $ 0.34 $ 0.31 $ 0.72 $ 0.87
Income (loss) from discontinued operations .......................... -- (0.06) -- (0.09)
----------- ----------- ----------- -----------
Income before cumulative effect of accounting change ................ 0.34 0.25 0.72 0.78
Cumulative effect of accounting change .............................. -- -- (0.11) --
----------- ----------- ----------- -----------
Net income .......................................................... $ 0.34 $ 0.25 $ 0.61 $ 0.78
=========== =========== =========== ===========
Diluted earnings (loss)
Income from continuing operations ................................... $ 0.33 $ 0.30 $ 0.70 $ 0.85
Income (loss) from discontinued operations .......................... -- (0.05) -- (0.08)
----------- ----------- ----------- -----------
Income before cumulative effect of accounting change ................ 0.33 0.25 0.70 0.77
Cumulative effect of accounting change .............................. -- -- (0.11) --
----------- ----------- ----------- -----------
Net income .......................................................... $ 0.33 $ 0.25 $ 0.59 $ 0.77
=========== =========== =========== ===========
See Notes to Consolidated Condensed Financial Statements.
4
UICI AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(UNAUDITED) (DOLLARS IN THOUSANDS)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------- ----------------------
2002 2001 2002 2001
-------- -------- -------- --------
Net income ................................................. $ 16,222 $ 11,875 $ 28,887 $ 36,594
Other comprehensive income:
Unrealized gains on securities:
Unrealized holding gains arising during period .......... 9,699 19,451 23,176 66,616
Reclassification adjustment for gains (losses)
Included in net income ................................ (2,121) 1,687 (9,492) 2,673
-------- -------- -------- --------
Other comprehensive income before tax ............. 7,578 21,138 13,684 69,289
Income tax provision related to items of
other comprehensive income ............................ (2,652) (7,399) (4,786) (24,249)
-------- -------- -------- --------
Other comprehensive income net of tax provision ... 4,926 13,739 8,898 45,040
-------- -------- -------- --------
Comprehensive income ....................................... $ 21,148 $ 25,614 $ 37,785 $ 81,634
======== ======== ======== ========
See Notes to Consolidated Condensed Financial Statements.
5
UICI AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
(DOLLARS IN THOUSANDS)
NINE MONTHS ENDED
SEPTEMBER 30,
----------------------------
2002 2001
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OPERATING ACTIVITIES
Net income ............................................................... $ 28,887 $ 36,594
Adjustments to reconcile net income to
cash provided by operating activities:
Increase in policy liabilities .......................................... 64,453 19,507
Increase (decrease) in other liabilities ................................ 2,269 (742)
Increase in income taxes ................................................ 99 9,937
Increase in deferred acquisition costs .................................. (11,917) (2,383)
Increase in accrued investment income ................................... (762) (1,017)
Decrease in reinsurance and other receivables ........................... 17,451 21,994
Stock appreciation expense .............................................. 15,812 4,362
Depreciation and amortization ........................................... 20,188 14,765
Increase in collections payable ......................................... 123,921 110,984
Equity in losses of Healthaxis, Inc. .................................... 2,395 9,237
Losses (gains) on investments ........................................... 6,231 (5,800)
Amounts charged to loss on disposal of discontinued operations .......... (6,774) (5,778)
Other items, net ........................................................ (2,910) (2,119)
----------- -----------
Cash Provided by Operating Activities ................................. 259,343 209,541
----------- -----------
INVESTING ACTIVITIES
Increase in student loans ................................................ (167,263) (150,301)
Increase in other investments ............................................ (52,027) (32,104)
Increase in restricted cash .............................................. (208,487) (149,690)
Increase in agents' receivables .......................................... (9,969) (1,212)
Proceeds from sale of subsidiary net of cash disposal of $701 ............ 3,242 --
Proceeds from assignment to related party of interest in subsidiary ...... 15,600 --
Purchase of subsidiaries net of cash acquired of $2,649 .................. (30,783) --
Increase in property and equipment ....................................... (26,774) (11,200)
----------- -----------
Cash Used in Investing Activities .................................... (476,461) (344,507)
----------- -----------
FINANCING ACTIVITIES
Deposits from investment products ....................................... 10,133 11,125
Withdrawals from investment products .................................... (18,413) (25,099)
Proceeds from student loan borrowings ................................... 1,156,686 614,461
Repayment of student loan borrowings .................................... (899,466) (459,768)
Repayment of debt ....................................................... (15,735) (23,724)
Repayment of note payable to related party .............................. -- (18,954)
Issue shares to Employee Stock Plan ..................................... 3,292 2,944
Exercise of stock options ............................................... 10,773 --
Purchase of treasury shares ............................................. (1,336) (8,946)
Issuance of treasury shares ............................................. -- 1,039
Exercise of Onward and Upward option .................................... (10,129) --
Other items, net ........................................................ 1,044 2,435
----------- -----------
Cash Provided by Financing Activities ................................ 236,849 95,513
----------- -----------
Net Increase (Decrease) in Cash ...................................... 19,731 (39,453)
Cash and cash equivalents at Beginning of Period ..................... 50,777 83,058
----------- -----------
Cash and cash equivalents at End of Period ........................... $ 70,508 $ 43,605
=========== ===========
See Notes to Consolidated Condensed Financial Statements.
6
UICI AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
September 30, 2002
NOTE A -- BASIS OF PRESENTATION
The accompanying unaudited consolidated condensed financial statements for
UICI and its subsidiaries (the "Company" or "UICI") have been prepared in
accordance with generally accepted accounting principles ("GAAP") for interim
financial information and the instructions to Form 10-Q and Rule 10-01 of
Regulation S-X. Accordingly, such financial statements do not include all of the
information and notes required by GAAP for complete financial statements. In the
opinion of management, all adjustments considered necessary for a fair
presentation have been included. All such adjustments, except as otherwise
described herein, consist of normal recurring accruals. Operating results for
the nine-month period ended September 30, 2002 are not necessarily indicative of
the results that may be expected for the year ending December 31, 2002. For
further information, refer to the consolidated financial statements and notes
thereto included in the Company's Annual Report on Form 10-K for the year ended
December 31, 2001. Certain amounts in the 2001 financial statements have been
reclassified to conform to the 2002 financial statement presentation.
Recently Issued Accounting Pronouncements
In August 2001, the Financial Accounting Standards Board ("FASB") issued
Statement No. 144, Accounting for the Impairment or Disposal of Long-Lived
Assets, superseding Statement No. 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of. Statement 144
provides guidance on differentiating between assets held and used, held for
sale, and held for disposal other than by sale. Statement 144 requires a
three-step approach for recognizing and measuring the impairment of assets to be
held and used and also superseded the accounting and reporting provisions of APB
Opinion No. 30, Reporting the Results of Operations -- Reporting the Effects of
Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently
Occurring Events and Transactions, regarding discontinued operations. Effective
January 1, 2002, the Company adopted this pronouncement. Adoption of this
pronouncement had no impact on the financial position or results of operations
of the Company.
In June 2001, FASB issued Statements No. 141, Business Combinations, and No.
142, Goodwill and Other Intangible Assets. Statement 141 requires that the
purchase method of accounting be used for all business combinations initiated
after June 30, 2001. Statement 141 also includes guidance on the initial
recognition and measurement of goodwill and other intangible assets arising from
business combinations completed after June 30, 2001. Statement 142 prohibits the
amortization of goodwill and intangible assets with indefinite useful lives.
Statement 142 requires that these assets be reviewed for impairment at least
annually, or more frequently if certain indicators arise. The review of goodwill
will be at the reporting unit level, which the Company has determined to be at
one level below its operating segments. Intangible assets with finite lives will
continue to be amortized over their estimated useful lives. Statement 142 also
requires that goodwill included in the carrying value of equity method
investments no longer be amortized.
The Company adopted Statements 141 and 142 on January 1, 2002. In accordance
with Statement No. 142, the Company tested for goodwill impairment effective
January 1, 2002. As a result of the transitional impairment testing, completed
during the quarter ended June 30, 2002, the Company determined that goodwill
recorded in connection with the acquisition of Academic Management Services
Corp. ("AMS") and Barron Risk Management Services ("Barron") was impaired in the
aggregate amount of $6.9 million ($5.1 million net of tax). The Company has
reflected this impairment charge in its financial statements as a cumulative
effect of a change in accounting principle as of January 1, 2002 in accordance
with Statement No. 142. On September 30, 2002, the Company transferred to an
unaffiliated third party all of the capital stock of Barron, in connection with
which for financial reporting purposes the Company recognized a nominal gain.
See Note F of Notes to Consolidated Condensed Financial Statements.
NOTE B -- INVESTMENT IN HEALTHAXIS, INC.
At September 30, 2002, the Company held 24,224,904 shares of common stock of
Healthaxis, Inc. (HAXS: Nasdaq) ("HAI"), which at such date represented
approximately 45% of the issued and outstanding shares of HAI. Of such
24,224,904 shares held by the Company, 8,581,714 shares (representing 16% 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,
at September 30, 2002,
7
the Company held (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; and (c)
a warrant to purchase 10,005 shares of HAI common stock at an exercise price of
$12.00 per share.
On July 31, 2002, UICI exchanged the $1.67 million principal amount of HAI
2% convertible debentures for cash in the amount of $243,000 and 1,424 shares of
a newly authorized series of HAI 2% convertible preferred stock, which preferred
stock has a stated liquidation value of $1,000 per share and is convertible into
542,476 shares of HAI common stock at a conversion price per common share of
$2.625.
Effective November 7, 2001, UICI appointed as its proxies the board of
directors of HAI, who may vote 33-1/3% of the number of HAI shares held of
record from time to time by UICI in favor of the nominees for director that a
majority of the directors of HAI shall have recommended stand for election. The
authority granted to such proxies will terminate at the earlier to occur of (i)
November 7, 2011, (ii) such date as UICI beneficially holds less than 25% of the
outstanding shares of common stock of HAI on a fully diluted basis, (iii) such
date as any person or persons acting as a "group" beneficially holds a greater
percentage of the outstanding shares of HAI common stock on a fully diluted
basis than the percentage beneficially owned by UICI, or (iv) the filing by HAI
of a voluntary petition in bankruptcy or the filing by a third party of an
involuntary petition in bankruptcy with respect to HAI.
HAI is an emerging technology service firm that provides web-based
connectivity and applications solutions for health benefit distribution and
administration. These solutions, which consist primarily of software products
and related services, are designed to assist health insurance payers, third
party administrators, intermediaries and employers in providing enhanced
services to members, employees and providers through the application of HAI's
flexible technology to legacy systems, either on a fully integrated or on an
application service provider (ASP) basis.
The Company accounts for its investment in HAI utilizing the equity method
and, accordingly, recognizes its ratable share of HAI income and loss. During
the three and nine months ended September 30, 2002, the Company's share of HAI's
operating losses (computed prior to amortization of merger related goodwill and
excluding gain on extinguishment of debt) was $796,000 and $2.4 million,
respectively, compared to its reported share of operating losses of $1.3 million
and $9.2 million, respectively, in the three and nine months ended September 30,
2001. For the nine months ended September 30, 2002, the total HAI segment loss
in the amount of $8.9 million reflected the Company's share of HAI's operating
losses ($2.4 million) plus a $6.5 million impairment charge related to the
adjustment made in the second quarter of 2002 to the carrying value of the
Company's investment in HAI.
Pursuant to the terms of an information technology services agreement,
amended and restated as of January 3, 2000 (the "Services Agreement"), through
June 15, 2002 HAI formerly provided 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 had an initial five-year term ending on January 3, 2005, which was
subject to extension by the Company. The Services Agreement was terminable by
the Company or HAI at any time upon not less than 180 days' notice to the other
party.
Effective June 15, 2002, UICI and HAI terminated the Services Agreement. As
part of the termination arrangement, UICI made a one-time payment to HAI in the
amount of $6.5 million and tendered 500,000 shares of HAI common stock to HAI.
Substantially all of HAI's technical personnel formerly supporting UICI under
the Services Agreement were hired by UICI on June 17, 2002. Following the
transaction, UICI continues to hold approximately 45% of the issued and
outstanding shares of HAI. Because UICI constitutes a significant shareholder of
HAI, the aggregate amount of consideration paid to HAI by UICI for the early
termination of the Services Agreement (approximately $6.5 million) was reflected
for financial reporting purposes as a contribution by UICI to the capital of
HAI, the effect of which was to increase the Company's carrying value of its
investment in HAI. Effective June 30, 2002, UICI determined the carrying value
in its investment in HAI was impaired in the amount of $6.5 million and
therefore the investment was written down to an estimated realizable value. In
determining the estimated realizable value of its investment in HAI at June 30,
2002, the Company gave due consideration, among other things, to HAI's
recognition of an extraordinary gain in July 2002 in the amount of $16.4 million
associated with the early extinguishment of indebtedness, which extraordinary
gain was recorded by HAI in connection with the exchange of $27.5 million
aggregate principal amount of HAI's convertible debentures for $4.0 million in
cash and shares of a newly authorized series of HAI 2% convertible preferred
stock. Giving effect to the capital contribution and subsequent write down
during the quarter ended June 30, 2002 and equity in losses at HAI in the nine
months ended September 30, 2002 in the amount of $8.9 million, the Company's
carrying value of its investment in HAI was $5.7 million at September 30, 2002.
8
Pursuant to the terms of the Services Agreement, UICI paid to HAI $-0- and
$8.1 million, respectively, in the three and nine months ended September 30,
2002, compared to $5.1 million and $15.6 million, respectively, in the three and
nine months ended September 30, 2001. 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 $71,000 and $2.5 million, respectively, in the three and nine months ended
September 30, 2002, compared to $1.7 million and $7.8 million, respectively, in
the three and nine months ended September 30, 2001. The aggregate amount paid by
UICI to HAI in the three months ended September 30, 2002 and 2001 represented
1.4% and 61.0%, respectively, of HAI's total revenues of $5.0 million and $11.2
million in such periods. The aggregate amount paid by UICI to HAI in the nine
months ended September 30, 2002 and 2001 represented 46.1% and 69.6%,
respectively, of HAI's total revenues of $23.0 million and $33.6 million,
respectively, in such periods.
Set forth below is a summary condensed balance sheet (unaudited) for HAI as
of September 30, 2002.
SEPTEMBER 30,
2002
--------------
(IN THOUSANDS)
(UNAUDITED)
Assets
Cash and current assets ........................................ $ 16,719
Goodwill and intangible assets ................................. 22,070
Other assets ................................................... 2,352
--------
Total assets ............................................... $ 41,141
========
Liabilities
Current liabilities ............................................ $ 3,406
Other liabilities .............................................. 2,057
--------
Total liabilities .............................................. 5,463
Preferred stock ................................................ 6,426
Other stockholders' equity ..................................... 29,252
--------
Total liabilities and stockholders' equity ................. $ 41,141
========
Set forth below is condensed income statement data for HAI (unaudited) as
reported by HAI for the three and nine-month periods ended September 30, 2002,
as adjusted to exclude (a) the effects of push-down accounting for the January
7, 2000 merger of Insurdata Incorporated with and into HealthAxis.com and (b)
the extraordinary gain of $16.4 million resulting from the exchange of HAI's
$27.5 million of long-term convertible debt for $4.0 million of cash and the
issuance of permanent equity in July 2002. The Company's reported share of
losses in HAI include the ratable share of HAI losses as adjusted and the
Company's write down of its investment in HAI in the quarter ended June 30, 2002
in the amount of $6.5 million:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, 2002 SEPTEMBER 30, 2002
------------------ ------------------
(IN THOUSANDS)
Revenue ......................................................... $ 4,850 $ 14,730
Expenses ........................................................ (7,139) (31,919)
Gain on extinguishment of debt .................................. 16,388 16,388
--------- ---------
Net income (loss) reported per HAI ........................ 14,099 (801)
Reconciliation to UICI equity in HAI losses:
Less: Gain on extinguishment of debt ........................... (16,388) (16,388)
Add: Asset impairment and amortization of
goodwill created in merger ..................................... 264 11,650
--------- ---------
HAI adjusted net loss ........................................... $ (2,025) $ (5,539)
========= =========
UICI's ratable share of HAI adjusted net loss .................. $ (796) $ (2,395)
Impairment of investment in HAI ................................ -- (6,500)
--------- ---------
UICI's reported share of losses in HAI ......................... $ (796) $ (8,895)
========= =========
NOTE C -- GOODWILL AND OTHER INTANGIBLE ASSETS
The Company adopted FASB Statements No. 141, Business Combinations, and No.
142, Goodwill and Other Intangible Assets on January 1, 2002. In accordance with
Statement No. 142, the Company tested for goodwill impairment as of January 1,
2002. As a result of the transitional impairment testing, completed during the
quarter ended June 30, 2002, the Company determined that goodwill recorded in
connection with the acquisitions of AMS and Barron was impaired in the aggregate
amount of $6.9 million ($5.1 million net of tax). The Company has reflected this
impairment charge in its financial statements as a cumulative effect of a change
in accounting principle as of January 1, 2002 in accordance with Statement No.
142.
Set forth in the table below is a summary of the goodwill and other
intangible assets by operating segment as of September 30, 2002 and December 31,
2001:
SEPTEMBER 30, 2002
-------------------------------------------------------------
(IN THOUSANDS)
OTHER
INTANGIBLE ACCUMULATED
GOODWILL ASSETS AMORTIZATION NET
-------- ---------- ------------ ---
Self Employed Agency Division............. $ 9,405 $ -- $ (3,972) $ 5,433
Group Insurance Division.................. 17,513 8,858 (1,000) 25,371
Life Insurance Division................... 552 -- (193) 359
Senior Market Division.................... 5,300 1,637 (253) 6,684
Academic Management Services Corp......... 85,382 -- (12,610) 72,772
-------- -------- -------- --------
$118,152 $ 10,495 $(18,028) $110,619
======== ======== ========= ========
9
DECEMBER 31, 2001
-------------------------------------------------------------
(IN THOUSANDS)
OTHER
INTANGIBLE ACCUMULATED
GOODWILL ASSETS AMORTIZATION NET
-------- ---------- ------------ --------
Self Employed Agency Division............. $ 9,405 $ -- $ (3,972) $ 5,433
Group Insurance Division.................. -- -- -- --
Life Insurance Division................... 552 -- (193) 359
Senior Market Division.................... -- -- -- --
Academic Management Services Corp......... 90,360 -- (12,610) 77,750
Other Key Factors......................... 4,423 -- (1,955) 2,468
-------- -------- --------- --------
$104,740 $ -- $(18,730) $ 86,010
======== ======== ======== ========
Following is the impact to the Company's net income for the three and nine
months ended September 30, 2002 and 2001 as a result of the non-amortization
provisions of Statement 142:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------------- --------------------------
2002 2001 2002 2001
--------- --------- --------- --------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Reported net income .................................. $ 16,222 $ 11,875 $ 28,887 $ 36,594
Add: Goodwill amortization, net of tax ............... -- 988 -- 2,963
-------- -------- -------- --------
Adjusted net income................................... $ 16,222 $ 12,863 $ 28,887 $ 39,557
======== ======== ======== ========
Basic earnings per share
As reported........................................ $ 0.34 $ 0.25 $ 0.61 $ 0.78
Goodwill amortization, net of tax.................. -- 0.02 -- 0.07
------- ------- ------- -------
Adjusted basic earnings per share.................. $ 0.34 $ 0.27 $ 0.61 $ 0.85
======= ======= ======= =======
Diluted earnings per share
As reported........................................ $ 0.33 $ 0.25 $ 0.59 $ 0.77
Goodwill amortization, net of tax.................. -- 0.02 -- 0.06
------- ------- ------- -------
Adjusted diluted earnings per share ............... $ 0.33 $ 0.27 $ 0.59 $ 0.83
======= ======= ======= =======
Other intangible assets consist of present value of future commissions,
customer lists, trademark and non-compete agreements related to the acquisitions
of SeniorsFirst and STAR HRG completed in the three months ended March 31, 2002.
(See Note F).
Set forth in the table below is a summary of the estimated amortization
expense for the next five years and thereafter for other intangible assets:
(IN THOUSANDS)
--------------
2002...................... $ 1,550
2003...................... 1,568
2004...................... 1,357
2005...................... 1,158
2006...................... 1,023
2007 and thereafter....... 3,839
--------
$ 10,495
========
NOTE D -- DEBT
At December 31, 2001 and September 30, 2002, the Company had outstanding
consolidated short and long-term indebtedness (exclusive of indebtedness secured
by student loans) in the amount of $25.3 million and $9.6 million, respectively,
of which $19.4 million and $7.9 million, respectively, constituted indebtedness
of the holding company.
On June 22, 1994, the Company authorized an issue of its 8.75% Senior Notes
due June 2004 in the aggregate amount of $27.7 million. In accordance with the
agreement governing the terms of the notes (the "Note Agreement"), commencing on
June 1, 1998 and on each June 1 thereafter to and including June 1, 2003, the
Company is required to pay 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 $7.9 million at
December 31, 2001 and September 30, 2002, respectively. The Company incurred
$663,000 and $922,000 of interest expense on the notes in the nine months ended
September 30, 2002 and 2001, respectively. The Note Agreement contains
restrictive covenants that include certain financial ratios, limitations on
additional indebtedness
10
as a percentage of certain defined equity amounts and the disposal of certain
subsidiaries, including primarily the Company's regulated insurance
subsidiaries.
AMS has a note payable to Fleet National Bank in the outstanding principal
amount of $1.6 million and $1.8 million at September 30, 2002 and December 31,
2001, respectively. The note bore interest at 3.6% at September 30, 2002,
matures on June 30, 2004, requires principal and interest payments quarterly and
is secured by a first mortgage on real estate held by AMS.
Effective June 29, 2000, UICI executed and delivered an unsecured promissory
note payable to a systems vendor in the amount of $10.0 million, which note bore
interest at LIBOR plus 150 basis points (1.5%) (3.38% at March 31, 2002), and
was payable as to principal in equal quarterly installments in the amount of
$500,000, commencing October 1, 2000, with a final maturity scheduled for June
30, 2005. The note was delivered to discharge an account payable by United
CreditServ ("UCS") in the amount of $10.0 million owing to the systems vendor,
which payable was reflected in the consolidated balance sheet of the Company.
The Company made its scheduled quarterly $500,000 principal payment on April 1,
2002, and on April 29, 2002, the Company paid in full all remaining outstanding
principal in the amount of $6.5 million and accrued interest on the note. At
December 31, 2001, the outstanding balance on the note was $7.5 million.
On January 25, 2002, the Company entered into a three-year bank credit
facility with Bank of America, NA and LaSalle Bank National Association. Under
the facility, the Company may borrow from time to time up to $30.0 million on a
revolving, unsecured basis. The Company intends to utilize the proceeds of the
facility for general working capital purposes. At September 30, 2002, the
Company had no borrowings outstanding under the facility.
On July 19, 2002, the Company prepaid in full all outstanding principal in
the amount of $3.9 million and accrued interest on indebtedness owing to the
South Dakota Board of Economic Development. At December 31, 2001, the
outstanding balance on the indebtedness was $4.1 million.
NOTE E -- STUDENT LOAN CREDIT FACILITIES
At December 31, 2001 and September 30, 2002, the Company, through its AMS
subsidiary and the College Fund Life Insurance Division, had outstanding an
aggregate of $1,506.2 million and $1,763.4 million of indebtedness,
respectively, under secured student loan credit facilities, of which $1,242.8
million and $1,754.4 million, respectively, were issued by bankruptcy-remote
special purpose entities (a "Special Purpose Entity"). The accounts of all of
the Company's Special Purpose Entities are included in the Company's
Consolidated Financial Statements. At December 31, 2001 and September 30, 2002,
indebtedness outstanding under secured student loan credit facilities (including
indebtedness issued by Special Purpose Entities) was secured by federally
guaranteed and alternative (i.e., non-federally guaranteed) student loans in the
carrying amount of $1,276.1 million and $1,436.1 million, respectively, and by a
pledge of cash, cash equivalents and other qualified investments in the amount
of $129.4 million and $213.3 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.
During the nine months ended September 30, 2002, AMS completed two
financings secured by federally guaranteed student loans:
o In January 2002, AMS completed the sale of $335.0 million principal
amount of auction rate notes issued by a Special Purpose Entity. The
notes are secured by a pledge of federally guaranteed student loans,
are rated Aaa by Moody's Investor Service and AAA by Fitch, Inc. and
are insured by MBIA. As part of the transaction, the Special Purpose
Entity acquired a $269.1 million portfolio of student loans from AMS
and a loan acquisition fund in the amount of $50.0 million (consisting
of cash and cash equivalents) was established to acquire in the future
additional student loans originated by AMS.
o In August 2002, AMS completed the sale to institutional investors of
$300.0 million principal amount of student loan asset- backed notes
issued by a Special Purpose Entity, consisting of a series of Class A
senior notes in the aggregate principal amount of $288.0 million and a
series of Class B subordinate notes in the aggregate principal amount
of $12.0 million. The notes are secured by a pledge of federally
guaranteed student loans. The Class A notes are rated AAA by Standard
& Poor's and Fitch, Inc. and Aaa by Moody's Investor Service, and the
Class B notes are rated A by Standard & Poor's, A2 by Moody's Investor
Service and A+ by Fitch, Inc. The final scheduled payment date of the
Class A Notes is January 2033, and the final
11
scheduled payment date to the Class B notes is April 2037. The notes
are prepayable by the issuer at any time and from time to time at 100%
of the principal amount thereof. Interest on the Class A senior notes
is payable and reset quarterly at a rate equal to LIBOR plus 0.30%,
and interest on the Class B subordinate notes is payable and reset
quarterly at a rate equal to at LIBOR plus 0.85%. As part of the
transaction, the Special Purpose Entity acquired a $192.9 million
portfolio of student loans from AMS and a loan acquisition fund in the
amount of $101.2 million (consisting of cash and cash equivalents) was
established to acquire in the future additional student loans
originated by AMS.
The securities issued in 2002 represent obligations solely of the Special
Purpose Entities and not of the Company, AMS or any other subsidiary of the
Company. However, for financial reporting and accounting purposes each of the
structured finance facilities has been classified as a financing. Accordingly,
in connection with the financings neither AMS nor the Company recorded any gain
on sale of the assets transferred to the Special Purpose Entities 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 Entities and the associated indebtedness arising from the
transactions.
On April 10, 2002, the Company completed a $50.0 million securitization of
alternative (i.e., non-federally guaranteed) student loans originated by the
Company's College Fund Life Insurance Division ("CFLD") through its College
First Alternative Loan Program. The securitization consisted of a $50.0 million
series of Student Loan Asset Backed Notes issued by a Special Purpose Entity.
Interest rates on the series of notes reset monthly in a Dutch auction process,
with the initial rate set at 2.10%. The notes are secured by a pledge of
alternative student loans and cash and cash equivalents, are rated Aaa by
Moody's Investor Service and AAA by Fitch, Inc. and are insured by MBIA. As part
of the transaction, the Special Purpose Entity established a loan acquisition
fund in the amount of $49.8 million (consisting of cash and cash equivalents) to
acquire in the future additional student loans originated by the Company's
College Fund Life Insurance Division. At September 30, 2002, the loan
acquisition fund balance was $46.4 million. 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.
NOTE F -- ACQUISITIONS AND DISPOSALS
On January 17, 2002, the Company completed the sale of UICI Administrators,
Inc., the major component of the Company's Third Party Administration ("TPA")
business unit. The results of operations of UICI Administrators, Inc. are
reflected in discontinued operations for all periods presented. In the three
months ended December 31, 2001, the Company recognized an impairment charge of
$2.3 million to its long-lived assets associated with the UICI Administrators,
Inc. unit, of which $700,000 represented a write-down of fixed assets (which was
reflected in depreciation for the full year and fourth quarter of 2001) and $1.6
million represented a write-down of goodwill (which was reflected in goodwill
amortization for the full year and fourth quarter of 2001). As a result of the
charge in the fourth quarter of 2001, the Company recognized no gain or loss on
the sale of UICI Administrators, Inc. Through January 17, 2002 (the date of
sale), the UICI Administrators, Inc. unit reported net income in the amount of
$67,000.
On January 17, 2002, the Company completed the purchase, for a cash purchase
price of $8.0 million, of a 50% interest in SeniorsFirst, a Dallas-based career
agency specializing in the sale of long-term care and Medicare supplement
insurance products. In connection with the acquisition, the Company recorded
non-amortizable goodwill in the amount of $5.3 million and amortizable
intangible assets in the amount of $1.6 million.
Effective February 28, 2002, the Company acquired all of the outstanding
capital stock of STAR Human Resources Group, Inc. and STAR Administrative
Services, Inc. (collectively referred to by the Company as its "STAR HRG" unit),
a Phoenix, Arizona based business specializing in the marketing and
administration of limited benefit plans for entry level, high turnover, hourly
employees. Commencing March 1, 2002, health insurance policies offered under the
STAR HRG program have been issued by The MEGA Life and Health Insurance Company,
a wholly-owned subsidiary of UICI. UICI acquired STAR HRG for an initial cash
purchase price of $25.0 million, plus additional contingent consideration based
on the future annualized performance of STAR HRG measured over the three-month
period ending May 31, 2003. The contingent consideration will be in an amount
not to exceed $15.0 million and is payable, at the Company's option, by delivery
of UICI's 6.0% convertible subordinated notes due March 1, 2012 or in cash plus
interest computed at a rate of 6% from the initial closing. In connection with
the acquisition, the Company recorded non-amortizable goodwill in the amount of
$17.5 million and amortizable intangible assets in the amount of $8.9 million.
12
On April 25, 2002, the Company sold its 50% ownership interest in Resolution
Reinsurance Intermediaries, LLC ("Res Re"), a reinsurance intermediary formerly
constituting a part of the Company's Special Risk business unit. The purchaser
of the 50% interest constituted the remaining 50% equity holder in Res Re and
the unit's chief executive officer. The sale was structured as a liquidation by
Res Re of UICI's 50% ownership interest for a total liquidation price of
$650,000, payable at closing in cash in the amount of $150,000 and by delivery
of a promissory note issued by Res Re in the amount of $500,000. The note bears
interest, payable quarterly, at 5.00% per annum, is payable in annual principal
installments in the amount of $75,000 on each of March 31, 2003; March 31, 2004;
and March 31, 2005, with a final balloon payment of principal due on March 31,
2006, and is secured by a pledge of 100% of the membership interest in Res Re.
On September 30, 2002, the Company transferred to an unaffiliated third
party all of the capital stock of Barron Risk Management Services, Inc., a
company engaged in the business of administration of workers' compensation and
non-subscriber plans and the sole remaining component of the Company's former
Third Party Administration unit. For financial reporting purposes the Company
recognized a nominal gain in connection with the transaction.
The Company's Consolidated Condensed Statement of Operations for the three
and nine months ended September 30, 2002 includes the results of operations of
each acquired company from their respective dates of acquisition. The effect of
these acquisitions on the Company's results of operations was not material.
NOTE G -- INCOME TAXES
The Company's effective tax rate on continuing operations for the three and
nine month periods ended September 30, 2002 was 15.5% and 27.4%, respectively,
compared to an effective tax rate of 31.5% and 30.2%, respectively, in the
corresponding periods of 2001. The lower effective tax rates in the 2002 periods
was attributable primarily to the release of a deferred tax asset valuation
allowance in the amount of $4.0 million, which valuation allowance had been
established with respect to a deferred tax asset associated with the net
operating loss carryforward of AMS. The valuation allowance was released
following management's determination that AMS will generate sufficient taxable
income in the carryforward period to utilize the net operating loss carryforward
and realize the related deferred tax asset.
NOTE H -- EARNINGS (LOSS) PER SHARE
The following table sets forth the computation of basic and diluted earnings
(loss) per share:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------------- ------------------------------
2002 2001 2002 2001
---------- ---------- ---------- ----------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Income (loss) available to common shareholders:
Income from continuing operations available
to common shareholders ............................. $ 16,222 $ 14,258 $ 33,964 $ 40,508
Income (loss) from discontinued operations ........... -- (2,383) 67 (3,914)
---------- ---------- ---------- ----------
Income before cumulative effect of accounting
change ............................................. 16,222 11,875 34,031 36,594
Cumulative effect of accounting change ............... -- -- (5,144) --
---------- ---------- ---------- ----------
Net income ........................................... $ 16,222 $ 11,875 $ 28,887 $ 36,594
========== ========== ========== ==========
Weighted average shares outstanding
-- basic earnings (loss) per share .................... 47,874 46,255 47,437 46,628
Effect of dilutive securities:
Employee stock options and other shares ............... 667 940 1,417 1,173
---------- ---------- ---------- ----------
Weighted average shares outstanding--dilutive
earnings (loss) per share ............................ 48,541 47,195 48,854 47,801
========== ========== ========== ==========
Basic earnings (loss) per share
From continuing operations ........................... $ 0.34 $ 0.31 $ 0.72 $ 0.87
From discontinued operations ......................... -- (0.06) -- (0.09)
---------- ---------- ---------- ----------
Income before cumulative effect of accounting
change .............................................. 0.34 0.25 0.72 0.78
Cumulative effect of accounting change ............... -- -- (0.11) --
---------- ---------- ---------- ----------
Net income ........................................... $ 0.34 $ 0.25 $ 0.61 $ 0.78
========== ========== ========== ==========
Diluted earnings (loss) per share
From continuing operations ........................... $ 0.33 $ 0.30 $ 0.70 $ 0.85
From discontinued operations ......................... -- (0.05) -- (0.08)
---------- ---------- ---------- ----------
Income before cumulative effect of accounting
change .............................................. 0.33 0.25 0.70 0.77
Cumulative effect of accounting change ............... -- -- (0.11) --
---------- ---------- ---------- ----------
Net income ........................................... $ 0.33 $ 0.25 $ 0.59 $ 0.77
========== ========== ========== ==========
13
NOTE I -- LEGAL PROCEEDINGS
The Company is a party to the following material legal proceedings:
Securities Class Action Litigation
As previously disclosed, in December 1999 and February 2000, the Company and
certain of its executive officers were named as defendants in three securities
class action lawsuits alleging, among other things, that the Company's periodic
filings with the SEC contained untrue statements of material facts and/or failed
to disclose all material facts relating to the condition of the Company's credit
card business, in violation of Section 10(b) of the Securities Exchange Act of
1934 and Rule 10b-5 thereunder. The three cases 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.
Following a mediation held on May 23, 2002, the parties to the litigation
entered into a memorandum of understanding, pursuant to which the parties have
agreed, without admitting or denying liability and provided that certain
conditions are satisfied, to fully and finally resolve the litigation. The
Company believes that the terms of the settlement as contemplated by the
memorandum of understanding will not have a material adverse effect upon the
financial condition or results of operations of the Company. Funding of the
settlement amount was completed on July 15, 2002 in accordance with the terms of
the memorandum of agreement. Final settlement is subject to execution and
delivery of definitive settlement and release documentation, preliminary
approval by the U.S. District Court of the terms of the settlement, notice of
settlement to the plaintiff class, and final approval of, and granting of a
final judgment by, the U.S. District Court. There can be no assurance that these
conditions will in fact be satisfied.
Sun Communications Litigation
As previously disclosed, UICI and Ronald L. Jensen (the Company's Chairman)
are parties to litigation (Sun Communications, Inc. v. SunTech Processing
Systems, LLC, UICI, Ronald L. Jensen, et al) (the "Sun Litigation") with a third
party concerning the distribution of the cash proceeds from the sale and
liquidation of SunTech Processing Systems, LLC ("STP") assets in February 1998.
Effective April 2, 2002, the Company and Mr. Jensen entered into an
Assignment and Release Agreement, which is intended to effectively transfer the
Company's 80% interest in STP to Mr. Jensen and to terminate the Company's
active participation in, and limit the Company's financial exposure associated
with, the Sun Litigation. In accordance with the terms of the Assignment and
Release Agreement, on April 2, 2002 Mr. Jensen made a total payment to UICI of
$15.6 million and granted to UICI various indemnities against possible losses
which UICI might incur resulting from the Sun Litigation, including (i) any
losses arising from the breach of fiduciary duty claim asserted by Sun
Communications, Inc. ("Sun") against the Company and Sun's related claim for
attorneys' fees, (ii) Sun's claim for attorneys' fees arising out of the
distribution issue in the Sun Litigation, and (iii) all other claims of any
nature asserted by Sun against the Company in the Sun Litigation arising out of
or relating directly to the March 1997 agreement governing the distribution of
cash proceeds from the sale and liquidation of STP. In exchange therefor, (i)
UICI assigned to Mr. Jensen all of UICI's right, title and interest to the funds
held in the registry of the Court in the Sun Litigation and released Mr. Jensen
from any and all obligations arising under the Jensen 1996 Guaranty and the
Assurance Agreement; (ii) UICI granted to Mr. Jensen an option, exercisable at a
nominal exercise price, to transfer to Mr. Jensen UICI's 80% interest in STP;
and (iii) UICI granted to Mr. Jensen an irrevocable proxy to vote UICI's
membership interest in STP all matters coming before the members of STP for a
vote.
ACE/AFCA and Philip A. Gray Litigation
As previously disclosed, the Company is a party to a lawsuit (the "ACE/AFCA"
Litigation) (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 two 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 ACE/AFCA Litigation, 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 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
14
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 filed a partial motion to dismiss the counterclaims. While such
motion was pending, UICI and UCS sought leave to amend their counterclaims and
asserted additional claims against ACE and AFCA. On September 12, 2002, the
Court granted UICI's and UCS' motion for leave and denied ACE's and AFCA's
partial motion to dismiss the counterclaims previously filed.
Written discovery has commenced in the case, and the parties will soon begin
to conduct depositions. No trial date has been set for the case.
In a separate suit filed on March 26, 2001 in the District Court of Dallas
County, Texas (the "Gray Litigation") (UICI, United Membership Marketing Group,
Inc., and UMMG-Colorado, LLC f/k/a United Membership Marketing Group Ltd.
Liability Co. v. Philip A. Gray and PAG Family Partners, LLC), the Company sued
Philip A. Gray individually ("Gray") and a related limited liability company
(the "LLC"), alleging, among other things, fraud, negligent misrepresentation,
and breach of fiduciary duty in connection with the Company's sub prime credit
card business. Gray removed the case to the United States District Court for the
Northern District of Texas, and UICI substituted PAG Family Partners Ltd.
("PAG") and the PAG Family Trust for the LLC as defendants. By order dated May
6, 2002, the Texas Federal Court denied PAG's motion to dismiss the fraud,
negligent misrepresentation and certain other claims, but dismissed certain of
the named defendants from the Gray Litigation. In addition, the Court ordered
the transfer of the Gray Litigation to the United States District Court for the
District of Colorado.
On May 31, 2002, in an answer and third-party complaint Gray denied all
allegations and asserted counterclaims against UICI and third-party claims
against certain individuals, including Ronald L. Jensen (the Company's Chairman)
and Gregory T. Mutz (the Company's President and Chief Executive Officer), in
which Gray has alleged, among other things, violations of Colorado securities
laws, fraudulent misrepresentations, breach of fiduciary duty, unjust enrichment
and negligent misrepresentations and has sought a declaratory judgment and an
accounting. Certain third-party defendants have not yet been served. At an
October 11, 2002 hearing, the Court ordered defendants Gray, the LLC, and
Marguerite Gray, as Trustee, to produce certain documents and Gray and others to
appear for depositions. A status conference is set for December 13, 2002.
The Company intends to continue to vigorously defend and pursue its
counterclaims in the ACE/AFCA Litigation and defend the counterclaims and pursue
its claims in the Gray Litigation.
Credit Card Marketing Litigation
As previously disclosed, the Company is involved in three disputes arising
out of the marketing of the American Fair Credit Association credit card program
prior to the termination of the Company's participation in the program in
January 2000.
Mitchell Litigation
The Company is one of three named defendants in a class action suit filed
in 1997 pending in California state court (Dadra Mitchell v. American Fair
Credit Association, United Membership Marketing Group, LLC and UICI) (the
"Mitchell case"). In the Mitchell case, plaintiffs have alleged that defendants
violated California law regarding unfair and deceptive trade practices by making
misleading representations about, and falsely advertising the nature and quality
of, the benefits of membership in American Fair Credit Association ("AFCA").
In October 2000, the state court in the Mitchell case granted, in part, and
denied, in part, the joint motions of UICI, AFCA and United Membership Marketing
Group ("UMMG") to compel arbitration and to narrow the scope of the plaintiff
class. The court severed from the class action the claims for recovery of money
by way of damages or restitution of class members who joined AFCA after January
1, 1998 and who executed signed arbitration agreements. However, the state court
denied UICI's motion to compel arbitration with respect to these class members'
claims for injunctive relief and, as a result, their claims for injunctive
relief remain part of the class action. With respect to class members who were
existing members of AFCA in January of 1998 and who received through the mail an
amendment adding arbitration of disputes to their AFCA membership agreement, the
state court denied UICI's motion to compel arbitration unless the member also
signed a separate arbitration agreement. In addition, the
15
state court clarified that its prior April 12, 1999 order certified a class with
respect to all claims pleaded in the complaint, not solely claims under the
California Credit Services Act of 1984.
On October 12, 2000, UICI, jointly with defendants AFCA and UMMG, filed a
Notice of Appeal from the state court's October 2000 orders and from its
original class certification order dated April 12, 1999. By letter dated October
12, 2000, defendants notified plaintiffs of the filing of their Notice of Appeal
and, consequently, all trial court proceedings in the Mitchell case were stayed.
On July 10, 2002, the Court of Appeal issued a decision affirming the order
entered by the trial court in October 2000 regarding defendants' motion to
compel arbitration. The Court of Appeal dismissed for want of appellate
jurisdiction the appeal respecting the orders certifying the class and defining
the scope of the class entered by the trial court in April 1999 and October
2000, respectively. On August 19, 2002, UICI, along with AFCA, timely filed a
petition for review of the Court of Appeal's decision with the California
Supreme Court. On October 23, 2002, the California Supreme Court denied UICI's
and AFCA's petition for review.
On August 6, 2002, Plaintiffs filed a motion in the trial court for limited
relief from the stay (to pursue injunctive relief against AFCA) pending appeal,
which stay has been in effect since October 12, 2000. On or about September 19,
2002, the trial court denied the motion for limited relief from the stay pending
the California Supreme Court's order denying UICI's petition for review (which
was issued on October 23, 2002).
The Company intends to continue to vigorously defend the Mitchell case.
BankFirst Case
Plaintiffs in the Mitchell case also filed a companion case in federal
district court in San Francisco (Dadra Mitchell v. BankFirst, N.A.) (the
"BankFirst case"), which alleges violations of the federal Truth in Lending Act
and Regulation Z. on the theory that the 90-day notice period required for
termination of AFCA membership was not properly disclosed. The sole defendant in
BankFirst case is BankFirst, N.A., a bank that issued a VISA credit card made
available through the AFCA program.
On May 4, 2000, the court in the BankFirst case granted BankFirst's motion
for summary judgment and entered a judgment terminating the case in favor of
BankFirst and against plaintiff Mitchell. Plaintiff Mitchell subsequently filed
a notice of appeal to the United States Court of Appeals for the Ninth Circuit.
Oral argument on the appeal was held on November 6, 2001.
By Memorandum dated November 21, 2001, the Ninth Circuit affirmed, in part,
and vacated, in part, the judgment entered by the district court, and remanded
the Bankfirst case to the district court for further proceedings. Among other
things, the Ninth Circuit held that the district court erred in failing to grant
Mitchell's motion for additional discovery pursuant to Rule 56(f) of the Federal
Rules of Civil Procedure.
On December 28, 2001, plaintiff Mitchell moved for class certification. By
order entered February 20, 2002, the district court deferred ruling on
Mitchell's motion for class certification pending completion of discovery and
the filing of cross motions for summary judgment. The parties expect to file
their cross-motions for summary judgment in late 2002.
The Company intends to continue to vigorously defend the Bankfirst case.
Roe Litigation
On March 8, 2001, UICI and UCNB were named as defendants in a case (Timothy
M. Roe v. Phillip A. Gray, American Fair Credit Association, Inc., UICI, UCNB,
et al) initially filed in the United States District Court for the District of
Colorado. Plaintiff, on his own behalf and on behalf of a purported class of
similarly situated individuals, in connection with the AFCA credit card program,
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.
16
Two defendants unaffiliated with UICI timely appealed from the Colorado
District Court's order, arguing that the Colorado court should have decided the
merits of the arbitration controversy rather than defer to the Eastern District
of North Carolina. On April 22, 2002, UICI and the remaining defendants timely
filed their opposition briefs to the unaffiliated defendants' appeal. The Tenth
Circuit has not yet rendered a decision on the unaffiliated defendants' appeal.
On April 8, 2002, a hearing was held in the Eastern District of North
Carolina regarding plaintiff's request for discovery in connection with
plaintiff's contention that the arbitration agreements are unenforceable because
they impose prohibitive costs on plaintiff. By order entered April 9, 2002, the
Eastern District of North Carolina held that cost is not a viable issue to
oppose arbitration in light of UICI's offer to bear the forum-imposed costs
arising from any arbitration between UICI and plaintiff. Further, the Eastern
District of North Carolina ordered the parties to file cross-motions for summary
judgment on or before May 10, 2002, and the Court held in reserve plaintiff's
request for discovery on other issues pending its decision on the contemplated
summary judgment motions.
On September 4, 2002, a hearing was held on the cross-motions for summary
judgment. At the conclusion of the hearing, the Court solicited additional
briefing. The parties filed their Supplemental Memoranda on summary judgment on
September 25, 2002. The District Court has not yet rendered any decision on
summary judgment.
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 intends to vigorously contest these allegations in the
proper forum.
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 United Credit National
Bank ("UCNB") (the Company's former credit card issuing bank). Until January 29,
2001, UCNB was a special purpose national bank headquartered in Sioux Falls,
South Dakota, and an indirect wholly owned (except for directors' qualifying
shares) subsidiary of the Company. On January 29, 2001, the Company completed
the voluntary liquidation of UCNB, in accordance with the terms of a plan of
voluntary liquidation approved by the OCC.
In the event that UICI fails to comply with the terms of the Consent Order,
as modified, such failure could result in sanctions brought against the Company
and its officers and directors, including the assessment of civil money
penalties and enforcement of the Consent Order in Federal District Court.
New Mexico Class Action Litigation
As previously disclosed, on June 1, 2001, UICI and MEGA were served as
parties defendant in a purported class action (Frances C. Chandler, Individually
and as a Representative of a Class of Similarly Situated Persons, vs. PFL Life
Insurance Company, UICI, The MEGA Life and Health Insurance Company, et al.)
initially filed on January 12, 2001 in First Judicial District Court (Santa Fe,
New Mexico). On her own behalf and on behalf of an alleged class of similarly
situated individuals, plaintiff 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 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.
On August 13, 2002, the parties agreed to fully and finally resolve the
litigation upon terms that will not have a material adverse effect upon the
financial condition or results of operations of the Company. The suit was
formally dismissed on August 23, 2002 by joint motion of the parties, who are
currently in the process of drafting final settlement documentation.
Academic Management Services Corp. Class Action Litigation
As previously disclosed, Academic Management Services Corp. (formerly
Education Finance Group, Inc.) has been named as a party defendant in a
purported class action suit (Timothy A. McCulloch, et al. v. Educational Finance
Group Inc. et al) filed on June 20, 2001 in the United States District Court for
the Southern District of Florida (Miami). On his own behalf and on behalf of an
alleged class of similarly situated individuals, plaintiff has
17
alleged, among other things, that, in connection with the marketing and
origination of federally-insured Parent Plus student loans, AMS and other
defendants violated certain provisions of the federal Higher Education Act, were
negligent, committed mail and wire fraud, breached a fiduciary duty owed to
plaintiffs and made negligent misrepresentations.
On October 19, 2001, the Court granted defendants' motion to dismiss the
case in its entirety, dismissing with prejudice plaintiffs' claims under the
Higher Education Act and federal mail and wire fraud claims and dismissing
without prejudice plaintiffs' state law claims. The District Court subsequently
denied plaintiffs' motion for reconsideration/rehearing. On December 27, 2001,
plaintiffs appealed the District Court's ruling and filed an appeal with the
United States Court of Appeals for the Eleventh Circuit in Atlanta, Georgia. On
July 17, 2002, the United States Court of Appeals for the Eleventh Circuit
affirmed the District Court's dismissal of the case in its entirety.
Plaintiffs have also filed a parallel state class action complaint in the
Eleventh Judicial Circuit, Dade County, Florida. The state class action
complaint asserts essentially the same tort causes of action previously
dismissed by the federal District Court and adds a claim alleging violations of
the Florida state deceptive trade practices statute. On April 9, 2002, the court
in the Florida state action granted AMS' petition for a stay in the state court
proceedings pending resolution of the federal action. In light of the United
States Court of Appeals' affirmation of the District Court's dismissal of the
federal case, a hearing has been set for December 16, 2002, in state court to
hear plaintiff's motion to lift the stay and to set scheduling for responses to
the state complaint and discovery requests. At that hearing AMS intends to renew
its previously filed motion to dismiss the case in its entirety.
Insurance Regulatory Matters
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 state insurance departments and agencies. 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; methods and timing of 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.
The Company's insurance subsidiaries are required to file detailed annual
statements with the state insurance regulatory departments, and state insurance
departments have also periodically conducted and continue to conduct periodic
financial and market conduct examinations of UICI's insurance subsidiaries. As
of September 30, 2002, either or both of The MEGA Life and Health Insurance
Company and Mid-West National Life Insurance Company of Tennessee were subject
to ongoing market conduct examinations in five states. State insurance
regulatory agencies have broad authority to levy monetary fines and penalties
resulting from findings made during the course of such financial and market
conduct examinations. Historically, the Company's insurance subsidiaries have
from time to time been assessed such fines and penalties, none of which
individually or in the aggregate have had a material adverse effect on the
results of operations or financial condition of the Company.
Other Matters
The Company and its subsidiaries are parties to various other pending legal
proceedings arising in the ordinary course of business, including some asserting
significant damages arising from claims under insurance policies, disputes with
agents and other matters. Based in part upon the opinion of counsel as to the
ultimate disposition of such lawsuits and claims, management believes that the
liability, if any, resulting from the disposition of such proceedings will not
be material to the Company's financial condition or results of operations.
NOTE J -- SEGMENT INFORMATION
The Company's operating segments included in operations are: (i) Insurance,
which includes the businesses of the Self Employed Agency Division, the Group
Insurance Division (formerly the Company's Student Insurance Division, which
includes the operations of the Company's recently-acquired STAR HRG business
unit effective February 28, 2002), the Life Insurance Division (formerly the
Company's OKC Division, which includes the Company's College Fund Life Division)
and the Senior Market Division, (ii) Financial Services, which includes the
18
businesses of Academic Management Services Corp. ("AMS") and the Company's
investment in Healthaxis, Inc., and (iii) Other Key Factors.
The Company's Other Key Factors segment includes (a) investment income not
allocated to other business segments, (b) interest expense on non-student loan
indebtedness, (c) general expenses relating to corporate operations, (d)
realized gains or losses on sale of investments, (e) the operations of the
Company's AMLI Realty Co. subsidiary, (f) minority interest, (g) variable
stock-based compensation, (h) operations that do not constitute reportable
operating segments (consisting primarily of the remaining portion of the
Company's former TPA Division) and (i) amortization of goodwill (with respect to
periods ended prior to January 1, 2002). On September 30, 2002, the Company
transferred to an unaffiliated third party all of the capital stock of Barron
Risk Management Services, Inc., the sole remaining component of the Company's
former Third Party Administration unit.
Allocations of investment income and certain general expenses are based on a
number of assumptions and estimates, and the business segments reported
operating results would change if different methods were applied. Certain assets
are not individually identifiable by segment and, accordingly, have been
allocated by formulas. Segment revenues include premiums and other policy
charges and considerations, net investment income, fees and other income.
Depreciation expense and capital expenditures are not considered material.
Management does not allocate income taxes to segments. Transactions between
reportable operating segments are accounted for under respective agreements,
which provide for such transactions generally at cost.
Revenues from continuing operations, income from continuing operations
before federal income taxes, and assets by operating segment are set forth in
the tables below:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------------- -----------------------------
2002 2001 2002 2001
----------- ----------- ----------- -----------
(IN THOUSANDS)
Revenues
Insurance:
Self Employed Agency Division ............. $ 269,009 $ 179,342 $ 727,938 $ 503,399
Group Insurance Division .................. 65,406 23,163 164,676 81,477
Life Insurance Division ................... 17,773 25,826 56,385 74,165
Senior Market Division .................... 520 2 1,630 2
----------- ----------- ----------- -----------
352,708 228,333 950,629 659,043
----------- ----------- ----------- -----------
Financial Services:
Academic Management Services Corp. ....... 23,074 28,475 77,789 106,161
----------- ----------- ----------- -----------
Other Key Factors .......................... 5,284 10,953 9,687 29,121
Intersegment Eliminations .................. (81) (591) (407) (2,507)
----------- ----------- ----------- -----------
Total revenues from continuing
operations .................................. $ 380,985 $ 267,170 $ 1,037,698 $ 791,818
=========== =========== =========== ===========
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------- -----------------------
2002 2001 2002 2001
-------- -------- -------- --------
(IN THOUSANDS)
Income (loss) from continuing operations before
federal income taxes:
Insurance:
Self Employed Agency Division ................................ $ 25,231 $ 19,219 $ 65,436 $ 55,421
Group Insurance Division ..................................... 3,563 1,235 9,280 2,549
Life Insurance Division ...................................... 1,405 3,025 7,079 6,585
Senior Market Division ....................................... (2,102) (537) (5,337) (1,321)
-------- -------- -------- --------
28,097 22,942 76,458 63,234
-------- -------- -------- --------
Financial Services:
Academic Management Services Corp. ........................... (1,611) (852) 7,008 4,657
Losses in Healthaxis, Inc. investment ........................ (796) (1,272) (8,895) (9,237)
-------- -------- -------- --------
(2,407) (2,124) (1,887) (4,580)
-------- -------- -------- --------
Other Key Factors:
Investment income on equity, realized gains and
losses, general corporate expenses and other
(including interest expense on non-student loan
indebtedness) .............................................. (1,998) 3,761 (11,966) 7,101
Variable stock-based compensation ............................ (4,496) (2,638) (15,812) (4,362)
Goodwill amortization ........................................ -- (1,129) -- (3,387)
-------- -------- -------- --------
(6,494) (6) (27,778) (648)
-------- -------- -------- --------
Total income from continuing operations before federal
income taxes .................................................... $ 19,196 $ 20,812 $ 46,793 $ 58,006
======== ======== ======== ========
19
SEPTEMBER 30, DECEMBER 31,
2002 2001
------------- ------------
(IN THOUSANDS)
Assets
Insurance:
Self Employed Agency Division ..................... $ 624,592 $ 485,664
Group Insurance Division .......................... 131,348 78,274
Life Insurance Division ........................... 640,262 625,205
Senior Market Division ............................ 1,782 --
----------- -----------
1,397,984 1,189,143
----------- -----------
Financial Services:
Academic Management Services Corp. ................ 1,887,685 1,557,434
Investment in Healthaxis, Inc. .................... 5,673 8,278
----------- -----------
1,893,358 1,565,712
----------- -----------
Other Key Factors:
General corporate and other ....................... 396,002 440,367
Goodwill and other intangible assets .............. 110,619 86,010
----------- -----------
506,621 526,377
----------- -----------
Total assets .......................................... $ 3,797,963 $ 3,281,232
=========== ===========
NOTE K -- RELATED PARTY TRANSACTIONS
Historically, the Company and its subsidiaries have engaged from time to
time in transactions and joint investments with executive officers and entities
controlled by executive officers, particularly Ronald L. Jensen (the Company's
Chairman) and entities in which Mr. Jensen and his adult children have an
interest.
Transfer of Interest in Sun Litigation
As previously disclosed, UICI and Ronald L. Jensen (the Company's Chairman)
are parties to litigation (Sun Communications, Inc. v. SunTech Processing
Systems, LLC, UICI, Ronald L. Jensen, et al) (the "Sun Litigation") with a third
party concerning the distribution of the cash proceeds from the sale and
liquidation of SunTech Processing Systems, LLC ("STP") assets in February 1998.
Effective April 2, 2002, the Company and Mr. Jensen entered into an
Assignment and Release Agreement, which is intended to effectively transfer the
Company's 80% interest in STP to Mr. Jensen and to terminate the Company's
active participation in, and limit the Company's financial exposure associated
with, the Sun Litigation. In accordance with the terms of the Assignment and
Release Agreement, on April 2, 2002 Mr. Jensen made a total payment to UICI of
$15.6 million and granted to UICI various indemnities against possible losses
which UICI might incur resulting from the Sun Litigation, including (i) any
losses arising from the breach of fiduciary duty claim asserted by Sun
Communications, Inc. ("Sun") against the Company and Sun's related claim for
attorneys' fees, (ii) Sun's claim for attorneys' fees arising out of the
distribution issue in the Sun Litigation, and (iii) all other claims of any
nature asserted by Sun against the Company in the Sun Litigation arising out of
or relating directly to the March 1997 agreement governing the distribution of
cash proceeds from the sale and liquidation of STP. In exchange therefor, (i)
UICI assigned to Mr. Jensen all of UICI's right, title and interest to the funds
held in the registry of the Court in the Sun Litigation and released Mr. Jensen
from any and all obligations arising under the Jensen 1996 Guaranty and the
Assurance Agreement; (ii) UICI granted to Mr. Jensen an option, exercisable at a
nominal exercise price, to transfer to Mr. Jensen UICI's 80% interest in STP;
and (iii) UICI granted to Mr. Jensen an irrevocable proxy to vote UICI's
membership interest in STP all matters coming before the members of STP for a
vote.
For financial reporting purposes, the Company recorded no gain or loss in
connection with this transaction and will continue to include the accounts of
STP in its consolidated financial statements until final distribution of cash
proceeds from the sale and liquidation of STP or such time as Mr. Jensen shall
exercise the option to acquire UICI's 80% membership interest in STP. Because
the Company has assigned all of its rights to any cash proceeds from the sale
and liquidation of STP, the Company has established and will continue to record
a liability equal to the total cash and cash equivalents on deposit in the
registry of the Court in the Sun Litigation (which amount was $22.5 million at
September 30, 2002 and is reflected as restricted cash on the Company's
consolidated balance sheet).
Release of Ronald L. Jensen
As previously disclosed, on June 1, 1999, the Company was named as a nominal
defendant in a shareholder derivative action captioned Richard Schappel v. UICI,
Ronald Jensen, Richard Estell, Vernon Woelke, J. Michael Jaynes, Gary Friedman,
John Allen, Charles T. Prater, Richard Mockler and Robert B. Vlach, which was
filed in the District Court of Dallas County, Texas (the "Shareholder Derivative
Litigation").
20
On December 21, 2001, the District Court of Dallas County, Texas, approved
the terms of a Settlement Agreement and Mutual Release between UICI and each of
Richard J. Estell, Vernon Woelke, J. Michael Jaynes, Gary L. Friedman, John E.
Allen, Charles T. Prater, Richard T. Mockler, and Robert B. Vlach (collectively,
the "Individual Defendants"), on the one hand, and Richard Schappel and Mr.
Schappel's counsel, on the other hand. Pursuant to the Settlement Agreement, the
parties reached agreement with respect to the payment of attorneys' fees and
expenses on termination of the Shareholder Derivative Action, and the Court also
entered a Modified Final Judgment in the case, vacating certain findings of fact
that formed a part of an earlier ruling by the Court rendered on October 14,
2001. The Settlement Agreement and the Modified Final Judgment had the effect of
fully and finally resolving the matters in dispute in the Shareholder Derivative
Litigation between UICI and the Individual Defendants, on the one hand, and Mr.
Schappel, on the other hand. The terms of the settlement did not have a material
effect on the results of operations or financial condition of UICI.
In accordance with the terms of a Release Agreement, dated as of April 2,
2002, the Company agreed to release Mr. Jensen from any and all claims that the
derivative plaintiff in the Shareholder Derivative Litigation brought or could
have brought against Mr. Jensen on behalf of UICI in the Shareholder Derivative
Litigation, and Mr. Jensen agreed to waive and release UICI from any obligation
to indemnify Mr. Jensen for any future costs and/or out-of-pocket expenses
associated with any claims that the derivative plaintiff brought or could have
brought against Mr. Jensen in the Shareholder Derivative Litigation.
Exercise of Onward and Upward Option
As previously disclosed, effective September 15, 1999, the Company and
Onward & Upward, Inc. ("OUI") entered into a Put/Call Agreement, pursuant to
which, for a thirty day period commencing on July 1 of each year, the Company
was granted an option to purchase from OUI, and OUI was granted 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. Mr.
Jensen's five adult children hold in the aggregate 100% of the equity interest
in OUI, which is the holder of approximately 6.5% of the Company's outstanding
Common Stock. On July 1, 2002, pursuant to the terms of the Put/Call Agreement,
the Company exercised its option to purchase from OUI 369,174 shares of Common
Stock at the then-effective call price of $32.25 per share, or $11.9 million in
the aggregate. For financial reporting purposes, the Company treated the
transaction as a repurchase of Company common stock in the amount of $10.1
million (which represented the fair market value of 369,174 shares of Common
Stock of the Company at September 15, 1999) and a discharge of a liability in
the amount of $1.8 million (which represented accrued interest expense
previously recorded over the term of the put/call arrangement), resulting in an
overall decrease in consolidated stockholders' equity in the amount of $11.9
million.
Termination of Healthaxis, Inc. Services Agreement
Effective June 15, 2002, UICI and HAI (of which UICI holds approximately 45%
of the issued and outstanding shares) terminated a Services Agreement. As part
of the termination arrangement, UICI made a one-time payment to HAI in the
amount of $6.5 million and tendered 500,000 shares of HAI common stock to HAI
See Note B of Notes to Consolidated Condensed Financial Statements. Because UICI
constitutes a significant shareholder of HAI, the aggregate amount of
consideration paid to HAI by UICI for the early termination of the Services
Agreement was reflected for financial reporting purposes as a contribution by
UICI to the capital of HAI, the effect of which was to increase the Company's
carrying value of its investment in HAI. Effective June 30, 2002, UICI
determined the carrying value in its investment in HAI was impaired in the
amount of $6.5 million and therefore the investment was written down to an
estimated realizable value. In determining the estimated realizable value of its
investment in HAI at June 30, 2002, the Company gave due consideration, among
other things, to HAI's recognition of an extraordinary gain in July 2002 in the
amount of $16.4 million associated with the early extinguishment of
indebtedness, which extraordinary gain was recorded by HAI in connection with
the exchange of $27.5 million aggregate principal amount of HAI's convertible
debentures for $4.0 million in cash and shares of a newly authorized series of
HAI 2% convertible preferred stock.
Funding of BOB Program
In August 1998, Ronald L. Jensen (the Company's Chairman) and his wife
established an incentive program (the "BOB Program"), pursuant to which they
agreed to distribute to "eligible participants" on August 15, 2002, in cash an
aggregate of the dollar equivalent value of 100,000 UICI shares. Eligible
participants in the BOB Program consisted of full-time employees of UICI and its
subsidiaries and independent agents associated with UICI's insurance
subsidiaries who were employed by or contracted with UICI, as the case may be,
at the close of business
21
on August 14, 1998, and who remain employed by or contracted with UICI at the
close of business on August 14, 2002. In accordance with the BOB Program, each
eligible participant was entitled to receive his or her portion of the aggregate
cash payment determined by reference to a formula based on, among other things,
such eligible participant's tenure with UICI and level of compensation.
For financial reporting purposes, UICI incurred non-cash variable
compensation expense associated with the BOB Program over the four-year vesting
period, which expense included adjustments due to periodic changes in the value
of UICI common stock. The Company established a corresponding liability
associated with the future benefits payable under the BOB Program. For the nine
months ended September 30, 2002, the Company recorded compensation expense
associated with the BOB Program in the amount of $751,000, compared to
compensation expense of $631,000 in the corresponding period of 2001. At
December 31, 2001 and August 15, 2002 (the date of vesting of benefits under the
BOB Program), UICI had recorded a liability for the benefits associated with the
BOB Program in the amount of $1.1 million and $1.8 million, respectively.
In a series of celebrations occurring in August 2002, Mr. and Mrs. Jensen
distributed cash in the aggregate amount of $1.8 million to the eligible
participants in the BOB Program. In connection with the funding of the BOB
Program, UICI extinguished the liability in the amount of $1.8 million at August
15, 2002 and credited an equivalent amount ($1.2 million net of tax) to the
Company's additional paid-in capital account.
NOTE L -- EMPLOYEE AND AGENT STOCK ACCUMULATION PLANS
UICI Employee Stock Ownership and Savings Plan
The Company maintains for the benefit of its and its subsidiaries' employees
the UICI Employee Stock Ownership and Savings Plan (the "Employee Plan"). The
Employee Plan through its 401(k) feature enables eligible employees to make
pre-tax contributions to the Employee Plan in an amount not in excess of 15% of
compensation (subject to overall limitations) and to direct the investment of
such contributions among several investment options, including UICI common
stock. A second feature of the Employee Plan constitutes an employee stock
ownership plan (the "ESOP"), contributions to which are invested primarily in
shares of UICI common stock. The ESOP feature allows participants to receive
from UICI and its subsidiaries discretionary matching contributions and to share
in certain supplemental contributions made by UICI and its subsidiaries.
Contributions by UICI and its subsidiaries to the Employee Plan under the ESOP
feature currently vest in prescribed increments over a six-year period.
On August 11, 2000, the Company issued to the Employee Plan 1,610,000 shares
of UICI common stock at a purchase price of $5.25 per share or $8.5 million in
the aggregate. The purchase price for the shares was paid by delivery to UICI of
the Employee Plan's $8.5 million promissory note (the "Plan Note"), which
matures in three years and is secured by a pledge of the purchased shares. The
shares of UICI common stock purchased with the Plan Note (the "$5.25 ESOP
Shares") are held in a suspense account for allocation among participants as and
when the Company's matching and supplemental contributions to the ESOP are made.
It is expected that the Plan Note will be extinguished over a period of
approximately two years ending in November 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.
During the three and nine months ended September 30, 2002, the Company
recorded compensation expense associated with contributions to the Employee Plan
in the amount of $4.4 million and $10.5 million, respectively, of which $3.1
million and $7.3 million, respectively, were recorded as non-cash variable
stock-based compensation expense. During the three and nine months ended
September 30, 2001, the Company recorded compensation expense associated with
contributions to the Employee Plan in the amount of $1.9 million and $4.4
million, respectively, of which $1.0 million and $1.9 million, respectively,
were recorded as non-cash variable stock-based compensation expense. The amount
classified as variable stock-based compensation expense with respect to the
Employee Plan in the 2002 periods represented the incremental compensation
expense associated with the allocation during the nine months ended September
30, 2002 of 626,000 $5.25 Shares to fund the Company's matching and supplemental
contributions to participants' accounts in the ESOP. As and when the Company
makes matching and supplemental contributions to the ESOP by allocating to
participants' accounts these $5.25 ESOP Shares, the Company has recorded
additional non-cash compensation expense equal to the excess, if any, between
the fair value of the shares allocated and $5.25 per share. As of September 30,
2002, the Company had allocated substantially all of the remaining $5.25 ESOP
Shares to participants' accounts. The Company expects that the remaining
unallocated shares will be allocated to participants' accounts during November
2002, after which the Company will recognize no additional variable stock based
compensation associated with the ESOP feature of the Employee Plan. The
allocated $5.25 ESOP Shares are considered outstanding for purposes of the
computation of earnings per share.
22
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 its field force agencies,
including UGA -- Association Field Services, New United Agency, Cornerstone
Marketing of America, Guaranty Senior Assurance, SeniorsFirst 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 ("ERISA"), and the Agent Plans are not
subject to the vesting, funding, nondiscrimination and other requirements
imposed on such plans by the Internal Revenue Code and ERISA.
Prior to July 1, 2000, the Company granted matching credits in an amount
equal to the number of shares of UICI common stock purchased by the participant
under the agent-contribution feature of the Agent Plans. Effective July 1, 2000,
the Company modified the formula for calculating the number of matching credits
to be posted to participants' accounts. During the period beginning July 1, 2000
and ending on the earlier of June 30, 2002 or the date that an aggregate of
2,175,000 share equivalents have been granted under this revised formula, the
number of matching credits issued to an individual participant will be the
greater of (a) the number of matching credits determined each month by dividing
the dollar amount of the participant's contribution for that month by $5.25, or
(b) the actual number of shares acquired, at then-current fair market value, by
the participant's contribution amount.
Prior to July 1, 2000, the Company purchased UICI shares in the open market
from time to time to satisfy its commitment to issue its shares upon vesting of
matching credits under the Agent Plans. During the period beginning July 1, 2000
and ending July 31, 2002, the Company agreed to 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 transferred to the holding
company $5.25 per share for any newly issued shares utilized to fund vested
matching credits under the plans. In accordance with such arrangement, during
the period commencing July 1, 2000 and ending on July 31, 2002, the Company
issued to the subsidiaries an aggregate of 1,765,251 shares, for which the
Company's subsidiaries transferred to the Company at the holding company level
cash in the aggregate amount of $9.3 million.
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 compensation expense over the
vesting period in an amount equal to the fair market value of vested shares at
the date of their vesting and distribution to the participants. At each
quarter-end, the Company estimates its current liability for unvested matching
credits by reference to the number of unvested credits, the current market price
of the Company's common stock, and the Company's estimate of the percentage of
the vesting period that has elapsed up to the current quarter end. Changes in
the liability from one quarter to the next are accounted for as an increase in,
or decrease to, compensation expense, as the case may be. Upon vesting, the
Company releases the accrued liability (equal to the market value of the vested
shares at date of vesting) with a corresponding increase to paid-in capital.
Unvested matching credits are considered share equivalents outstanding for
purposes of the computation of earnings per share. For the three and nine months
ended September 30, 2002, the Company recorded total compensation expense
associated with these agent plans in the amount of $3.0 million and $11.9
million, respectively, of which $1.3 million and $7.1 million, respectively,
represented the non-cash stock based compensation expense associated with the
adjustment to the liability for future unvested benefits. For the three and nine
months ended September 30, 2001, the Company recorded total compensation expense
associated with these agent plans in the amount of $2.3 million and $4.3
million,
23
respectively, of which $1.4 million and $1.5 million, respectively, represented
the non-cash stock based compensation expense associated with the adjustment to
the liability for future unvested benefits.
At December 31, 2001, the Company had recorded approximately 1.6 million
unvested matching credits associated with the Agent Plans, of which 596,000
vested in January 2002. At September 30, 2002, the Company had recorded
approximately 1.8 million unvested matching credits.
The accounting treatment of the Company's Agent Plans will result in
unpredictable stock-based compensation expense charges, dependent upon
fluctuations in the quoted price of UICI common stock. These unpredictable
fluctuations in stock based compensation charges may result in material non-cash
fluctuations in the Company's results of operations. In periods of general
decline in the quoted price of UICI common stock, if any, the Company will
recognize less stock based compensation 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
compensation expense may result as the Company adjusts the cumulative liability
for unvested stock-based compensation expense.
Other Variable Stock-Based Compensation Plans
In August 1998, Ronald L. Jensen (the Company's Chairman) and his wife
established an incentive program (the "BOB Program"), pursuant to which they
agreed to distribute to "eligible participants" on August 15, 2002, in cash an
aggregate of the dollar equivalent value of 100,000 UICI shares. Eligible
participants in the BOB Program consisted of full-time employees of UICI and its
subsidiaries and independent agents associated with UICI's insurance
subsidiaries who were employed by or contracted with UICI, as the case may be,
at the close of business on August 14, 1998 and who remain employed by or
contracted with UICI at the close of business on August 14, 2002. In accordance
with the BOB Program, each eligible participant was entitled to receive his or
her portion of the aggregate cash payment determined by reference to a formula
based on, among other things, such eligible participant's tenure with UICI and
level of compensation.
For financial reporting purposes, UICI incurred non-cash variable
compensation expense associated with the BOB Program over the four-year vesting
period, which expense included adjustments due to periodic changes in the value
of UICI common stock. The Company established a corresponding liability
associated with the future benefits payable under the BOB Program. For the nine
months ended September 30, 2002, the Company recorded non-cash compensation
expense associated with the BOB Program in the amount of $751,000, compared to
non-cash compensation expense of $631,000 in the corresponding period of 2001.
At December 31, 2001 and August 15, 2002 (the date of vesting of benefits under
the BOB Program), UICI had recorded a liability for the benefits associated with
the BOB Program in the amount of $1.1 million and $1.8 million, respectively.
In August 2002, Mr. and Mrs. Jensen distributed cash in the aggregate amount
of $1.8 million to the eligible participants in the BOB Program. In connection
with the funding of the BOB Program, UICI extinguished the liability in the
amount of $1.8 million at August 15, 2002 and credited an equivalent amount
($1.2 million net of tax) to the Company's additional paid-in capital account.
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 in cash to eligible employees in each of January 2001, 2002, 2003
and 2004. At December 31, 2001 and September 30, 2002, the Company's liability
for future benefits payable under this plan was $731,000 and $669,000,
respectively. For the nine months ended September 30, 2002 the Company recorded
stock based compensation expense associated with this plan in the amount of
$250,000. For the nine months ended September 30, 2001, the Company recorded
stock based compensation expense associated with this plan in the amount of
$294,000.
ITEM 2 -- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
INTRODUCTION
The Company's business segments included in operations are: (i) Insurance,
which includes the businesses of the Self Employed Agency Division, the Group
Insurance Division (formerly the Company's Student Insurance Division, which
includes the operations of the Company's recently acquired STAR HRG business
unit effective February 28, 2002), the Life Insurance Division (formerly the
Company's OKC Division, which includes the operations of the Company's College
Fund Life Division) and the Senior Market Division, (ii) Financial Services,
which includes the businesses of Academic Management Services Corp. ("AMS") and
the Company's investment in
24
Healthaxis, Inc., and (iii) Other Key Factors, which includes (a) investment
income not allocated to other business segments, (b) interest expense on
non-student loan indebtedness, (c) general expenses relating to corporate
operations, (d) realized gains or losses on sale of investments, (e) the
operations of the Company's AMLI Realty Co. subsidiary, (f) minority interest,
(g) variable stock-based compensation, (h) operations that do not constitute
reportable operating segments (consisting primarily of the remaining portion of
the Company's former TPA Division) and (i) amortization of goodwill (with
respect to periods ended prior to January 1, 2002). Allocation of investment
income is based on a number of assumptions and estimates and the business
segments reported operating results would change if different methods were
applied. Segment revenues include premiums and other policy charges and
considerations, net investment income, fees and other income.
In March 2000 the Board of Directors of UICI designated its former United
CreditServ sub-prime credit card business as a discontinued operation for
financial reporting purposes and the United CreditServ unit has been so
reflected for all periods presented. 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.
In December 2001 the Company determined to exit the businesses of its
Special Risk Division by sale, abandonment and/or wind-down and, accordingly,
the Company also designated and classified its Special Risk Division as a
discontinued operation for financial reporting purposes for all periods
presented. The Company's Special Risk Division has specialized in certain niche
health-related products (including "stop loss", marine crew accident, organ
transplant and international travel accident products), various insurance
intermediary services and certain managed care services.
On January 17, 2002, the Company completed the sale of UICI Administrators,
Inc., the major component of its former Third Party Administration (TPA)
Division. In the three months ended December 31, 2001, the Company recognized an
impairment charge of $2.3 million to its long-lived assets associated with the
UICI Administrators, Inc. unit, of which $700,000 represented a write-down of
fixed assets (which was reflected in depreciation for the full year and fourth
quarter of 2001) and $1.6 million represented a write-down of goodwill (which
was reflected in goodwill amortization for the full year and fourth quarter of
2001). As a result of the charge in the fourth quarter of 2001, the Company
recognized no gain or loss on the sale of UICI Administrators, Inc. Through
January 17, 2002 (the date of sale), the UICI Administrators, Inc. unit reported
net income in the amount of $67,000.
In accordance with FASB Statement 144, the results of operations of UICI
Administrators, Inc. have been reflected in discontinued operations for all
periods presented. The remaining portion of the former TPA Division (consisting
primarily of Barron Risk Management Services) have been reclassified to the
Company's Other Key Factors segment for all periods presented. Effective
September 30, 2002, Barron was sold for a nominal gain.
Sarbanes-Oxley Act of 2002
On July 30, 2002, President Bush signed into law the Public Accounting
Reform and Investor Protection Act of 2002 - - commonly referred to as the
Sarbanes-Oxley Act of 2002 (the "Act"). The stated purpose of the Act is to
improve the independence and oversight of public accounting firms engaged in
practice before the Securities and Exchange Commission, to expand the scope and
timeliness of certain public disclosures by reporting companies, to strengthen
corporate governance practices by reporting companies, their directors and
executive officers and to increase the accountability of directors and executive
officers for violations of the securities laws. The Act, together with recent
proposals to amend the listing standards imposed by the New York Stock Exchange,
will have a significant impact on the corporate governance obligations of public
companies, including UICI.
In accordance with Section 302(a) of the Act, the Securities and Exchange
Commission adopted rules effective August 29, 2002 requiring an issuer's
principal executive officer and financial officer to certify the financial and
other information contained in an issuer's quarterly and annual reports. The
newly-adopted rules also require these officers to certify that they are
responsible for establishing, maintaining and regularly evaluating the
effectiveness of the issuer's internal controls, that they have made certain
disclosures to the issuer's auditors and the audit committee of the board of
directors about the issuer's internal controls, and that they have included
information in the issuer's quarterly and annual reports about their evaluation
and whether there have been significant changes in the issuer's internal
controls or in other factors that could significantly affect internal controls
subsequent to the evaluation. The certifications required by Section 302(a) of
the Act and newly-adopted Rule 13a-14 under the Securities Exchange Act of 1934
of each of Gregory T. Mutz (President and Chief Executive Officer of UICI) and
Mark D. Hauptman (Vice President and Chief Financial Officer of UICI) are
included as part of this Quarterly Report on Form 10-Q and may be found
immediately following the signature page hereof.
25
In accordance with Section 906 of the Act, and in connection with the
filing of the Company's Quarterly Report on Form 10-Q for the quarter ended
September 30, 2002 (the "Report"), each of Gregory T. Mutz (President and Chief
Executive Officer of UICI) and Mark D. Hauptman (Vice President and Chief
Financial Officer of UICI) has also submitted to the SEC a statement certifying,
to his knowledge, that the Report fully complies with the requirements of
section 13(a) or 15(d) of the Securities Exchange Act of 1934; and the
information contained in the Report fairly presents, in all material respects,
the financial condition and results of operations of the Company.
RESULTS OF OPERATIONS
Revenues and income from continuing operations before federal income taxes
("operating income") by business segment are summarized in the tables below:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------------- -----------------------------
2002 2001 2002 2001
----------- ----------- ----------- -----------
(IN THOUSANDS)
Revenues
Insurance:
Self Employed Agency Division ...................... $ 269,009 $ 179,342 $ 727,938 $ 503,399
Group Insurance Division ........................... 65,406 23,163 164,676 81,477
Life Insurance Division ............................ 17,773 25,826 56,385 74,165
Senior Market Division ............................. 520 2 1,630 2
----------- ----------- ----------- -----------
352,708 228,333 950,629 659,043
----------- ----------- ----------- -----------
Financial Services:
Academic Management Services Corp. ................. 23,074 28,475 77,789 106,161
----------- ----------- ----------- -----------
Other Key Factors .................................... 5,284 10,953 9,687 29,121
Intersegment Eliminations ............................ (81) (591) (407) (2,507)
----------- ----------- ----------- -----------
Total revenues from continuing operations ............. $ 380,985 $ 267,170 $ 1,037,698 $ 791,818
=========== =========== =========== ===========
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------- -----------------------
2002 2001 2002 2001
-------- -------- -------- --------
(IN THOUSANDS)
Income (loss) from continuing operations before
federal income taxes:
Insurance:
Self Employed Agency Division ............................... $ 25,231 $ 19,219 $ 65,436 $ 55,421
Group Insurance Division .................................... 3,563 1,235 9,280 2,549
Life Insurance Division ..................................... 1,405 3,025 7,079 6,585
Senior Market Division ...................................... (2,102) (537) (5,337) (1,321)
-------- -------- -------- --------
28,097 22,942 76,458 63,234
-------- -------- -------- --------
Financial Services:
Academic Management Services Corp. .......................... (1,611) (852) 7,008 4,657
Losses in Healthaxis, Inc. investment ....................... (796) (1,272) (8,895) (9,237)
-------- -------- -------- --------
(2,407) (2,124) (1,887) (4,580)
-------- -------- -------- --------
Other Key Factors:
Investment income on equity, realized gains and losses,
general corporate expenses and other (including
interest expense on non-student loan indebtedness) ......... (1,998) 3,761 (11,966) 7,101
Variable stock-based compensation ........................... (4,496) (2,638) (15,812) (4,362)
Goodwill amortization ....................................... -- (1,129) -- (3,387)
-------- -------- -------- --------
(6,494) (6) (27,778) (648)
-------- -------- -------- --------
Total income from continuing operations before federal
income taxes .................................................... $ 19,196 $ 20,812 $ 46,793 $ 58,006
======== ======== ======== ========
Three and Nine Months ended September 30, 2002 compared to Three and Nine Months
ended September 30, 2001
The Company reported third quarter 2002 revenues and income from continuing
operations in the amount of $381.0 million and $16.2 million ($0.33 per diluted
share), respectively, compared to revenues and income from continuing operations
of $267.2 million and $14.3 million ($0.30 per diluted share), respectively, in
the third quarter of 2001. For the nine months ended September 30, 2002, the
Company generated revenues and income from continuing operations of $1,037.7
million and $34.0 million ($0.70 per diluted share), respectively, compared to
revenues and income from continuing operations of $791.8 million and $40.5
million ($0.85 per diluted share), respectively, in the nine months ended
September 30, 2001.
26
Overall, for the three and nine months ended September 30, 2002, the Company
reported net income in the amount of $16.2 million ($0.33 per diluted share) and
$28.9 million ($0.59 per diluted share), respectively, compared to net income of
$11.9 million ($0.25 per diluted share) and $36.6 million ($0.77 per diluted
share) in the corresponding 2001 periods. Overall results in the nine months
ended September 30, 2002 included a goodwill impairment charge in the amount of
$(5.1) million (net of tax) ($(0.11) per diluted share), which has been
reflected as a cumulative effect of a change in accounting principle in
accordance with recently adopted Financial Accounting Standards Board ("FASB")
Statement No. 142, Goodwill and Other Intangible Assets.
In the quarter ended September 30, 2002, the solid performance of the
Company's SEA and Group Insurance Divisions and benefit derived from release of
a deferred tax asset valuation allowance were offset by continued start-up
losses at its Senior Market Division, an operating loss at the Company's
Academic Management Services Corp. ("AMS") unit, a moderate decrease in
operating income generated by the Company's Life Insurance Division and a
significant increase in non-cash stock-based compensation expense associated
with the Company's employee stock ownership plan, agent stock accumulation plans
and other stock based plans attributable to the higher share price in the third
quarter of 2002 compared to the share price in the comparable quarter in 2001.
In the nine months ended September 30, 2002, the Company reported increases
in operating income at its Self Employed Agency, Group Insurance and Life
Insurance Divisions and at its AMS unit, in each case compared to results
reported in the corresponding 2001 nine-month period. These favorable results
were partially offset by start up losses at the Company's Senior Market
Division, $5.1 million in net realized losses in the second quarter of 2002
associated with the Company's investment portfolio (attributable primarily to a
write down in the amount of $6.1 million in the carrying value of WorldCom, Inc.
fixed income securities held in the portfolios of the Company's insurance
company subsidiaries, compared to a realized gain of $5.9 million in the
corresponding period in 2001), a $6.5 million write down in the second quarter
of 2002 of the Company's carrying value of its investment in Healthaxis, Inc.
(which amount corresponds to a capital contribution to Healthaxis, Inc. recorded
in the three months ended June 30, 2002 in the amount of $6.5 million in
connection with the previously announced early termination of a services
agreement), and a decrease in yield on invested assets.
Results in the third quarter and first nine months of 2002 were also
negatively impacted by a significant increase in non-cash stock-based
compensation expense associated with the Company's employee stock ownership
plan, agent stock accumulation plans and other stock-based plans, which increase
was attributable to the higher share price in the 2002 periods compared to the
share price in the comparable periods in 2001. In the three and nine months
ended September 30, 2002, the Company recorded non-cash stock-based compensation
expense in the amount of $4.5 million and $15.8 million, respectively, compared
to non-cash stock based compensation expense in the amount of $2.6 million and
$4.4 million, respectively, in the comparable periods of 2001.
Results in the three and nine months ended September 30, 2002 also reflect
the benefit derived from release of a deferred tax asset valuation allowance in
the amount of $4.0 million. The valuation allowance had been established with
respect to a deferred tax asset associated with the net operating loss
carryforward of AMS. The valuation allowance was released following management's
determination that AMS will generate sufficient taxable income in the
carryforward period to utilize the net operating loss carryforward and realize
the related deferred tax asset. See Note G of Notes to Consolidated Condensed
Financial Statements. The Company also realized tax benefits from the sale in
the third quarter of 2002 of Barron Risk Management Services (which generated a
nominal gain for financial reporting purposes but a loss for tax purposes) and a
reduction during the first quarter of 2002 of the Company's liability for future
taxes made following an assessment of potential tax obligations. These tax
benefits in the 2002 periods were partially offset by increases in the
non-deductible portion of variable stock compensation and in state income tax
expenses.
In accordance with Statement No. 142, the Company tested for goodwill
impairment as of January 1, 2002. As a result of the transitional impairment
testing, completed during the quarter ended June 30, 2002, the Company
determined that goodwill recorded in connection with the acquisitions of AMS and
Barron was impaired in the aggregate amount of $6.9 million ($5.1 million net of
tax). The Company reflected this impairment charge in the quarter ended June 30,
2002 in its financial statements as a cumulative effect of a change in
accounting principle as of January 1, 2002 in accordance with Statement No. 142.
27
Set forth below is a discussion of results by business segment in the three
and nine-month periods ended September 30, 2002:
Self-Employed Agency Division
Operating income at UICI's Self Employed Agency ("SEA") Division increased
to $25.2 million and $65.4 million in the three and nine months ended September
30, 2002, respectively, from $19.2 million and $55.4 million in the
corresponding periods of 2001. In the 2002 periods, SEA continued to experience
significant increases in submitted annualized premium volume ($250.7 million in
the third quarter of 2002 compared to $142.7 million in the third quarter of
2001, and $708.8 million in the first nine months of 2002 compared to $395.2
million in the first nine months of 2001). Submitted annualized premium volume
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. Earned premium revenue at SEA increased from $166.9
million in the third quarter of 2001 to $255.2 million in the third quarter of
2002 (a 53% increase) and from $466.9 million in the first nine months of 2001
to $688.6 million in the first nine months of 2002 (a 47% increase).
Operating income as a percentage of earned premium revenue in the three and
nine months ended September 30, 2002 was 9.9% and 9.5%, respectively, compared
to 11.5% and 11.9% in the corresponding periods of the prior year. The lower
operating margins during the 2002 periods were attributable to higher effective
commission rates due to the increase in first year premium (which carries a
higher commission rate compared to renewal commissions), and lower investment
and other income as a percentage of earned premiums. These factors were
partially offset by lower administrative expenses as a percentage of earned
premium and a slightly lower loss ratio.
During the three and nine-month periods ended September 30, 2002, the
average number of agents writing insurance for the SEA Division increased by 54%
and 58%, respectively, from the number of writing agents in the corresponding
periods of 2001. The number of policies in force at September 30, 2002 was
313,000, compared to 296,000 and 232,000 policies in force at June 30, 2002 and
September 30, 2001, respectively. The first year retention percentage (which the
Company defines as the current month's experience of policies in their first
year) at September 30, 2002 was 58.2%, compared to 57.2% at September 30, 2001.
The renewal percentage (which the Company defines as the current month's
experience of policies in force more than one year) at September 30, 2002 was
67.8%, compared to 66.9% at September 30, 2001.
Group Insurance Division
The Company has classified the results of its Student Insurance Division
and its STAR HRG unit (which was acquired on February 28, 2002) as its Group
Insurance Division. For the three and nine months ended September 30, 2002, the
Group Insurance Division reported operating income of $3.6 million and $9.3
million, respectively, compared to operating income of $1.2 million and $2.5
million in the comparable periods of 2001, which increases were primarily
attributable to the incremental operating income associated with the Company's
STAR HRG unit. At the Company's Student Insurance Division an increase in earned
premium revenue and decrease in administrative expenses as a percentage of
earned premium (offset by an increase in the loss ratio from 69.8% to 72.1% in
the nine months ended September 30, 2002 and 2001, respectively) also
contributed to the increases in operating income at the Group Insurance Division
in the 2002 periods.
Life Insurance Division
For the three and nine months ended September 30, 2002, the Company's Life
Insurance Division (which includes the results of the Company's OKC life
insurance operations and its College Fund Life Division) reported operating
income of $1.4 million and $7.1 million, respectively, compared to operating
income of $3.0 million and $6.6 million in the corresponding periods in 2001.
The decrease in operating income for the three months ended September 30, 2002
was primarily due to late-reported claims in the closed group accident block of
business, an increase in claims reserves on the closed block of workers'
compensation business (resulting from the reduction of the estimated amount of
reserve credit taken on reinsurance ceded related to an excess-of-loss
reinsurance treaty), and increased administrative expenses associated with the
OKC operations. The increase in operating income for the nine months ended
September 30, 2002 compared to the corresponding 2001 period reflects the close
down in May 2001 of the Company's workers compensation business, in connection
with which the Company incurred in the second quarter of 2001 a charge of $8.7
million associated with a strengthening of reserves. The charge in 2001 was
partially offset by a $5.2 million benefit resulting from an increase in the
carrying value of student loans generated by the College Fund Life Division.
Senior Market Division
For financial reporting purposes the Company has established a Senior Market
Division to segregate the reporting of operations associated with the
development and sale of insurance products for the senior market (including long
term care and Medicare supplement products). Through September 30, 2002, the
Senior Market Division has generated only nominal revenues ($520,000 and $1.6
million in the three and nine months ended September 30, 2002, respectively). In
the three and nine months ended September 30, 2002, the Company's Senior
28
Market Division reported operating losses of $(2.1) million and $(5.3) million,
respectively, compared to operating losses of $(537,000) and $(1.3) million in
the corresponding periods of the prior year.
Academic Management Services Corp. ("AMS")
In the nine months ended September 30, 2002, UICI's AMS unit reported
operating income of $7.0 million, compared to operating income of $4.7 million
in the comparable 2001 period. The significant improvement in operating results
for the nine months ended September 30, 2002 resulted primarily from increased
student loan spread income (i.e., the difference between interest earned on
outstanding student loans and interest expense associated with indebtedness
incurred to fund such loans) attributable to a favorable interest rate
environment and a reduction in interest expense on corporate borrowings. These
increases in the nine months ended September 30, 2002 were partially offset by
lower realized gains on sale of loans and reduced yields on the trust balances
associated with AMS' tuition installment plan business, in each case as compared
to results in the corresponding 2001 period.
In the three months ended September 30, 2002, UICI's AMS unit reported an
operating loss of $(1.6) million, compared to an operating loss of $(852,000) in
the year earlier quarter. In the third quarter of 2002, higher realized gains
from student loan sales and increased student loan spread income were more than
offset by disappointing results at AMS' student tuition installment business
(attributable primarily to a significant reduction in interest income earned on
installment plan trust balances) and a significant increase in corporate
overhead associated with the hiring of additional sales and marketing personnel.
Investment income on funds held in connection with tuition payment programs
declined to $2.9 million in the nine months ended September 30, 2002 from $5.1
million in the year earlier period (despite a 12% increase in the average trust
fund balance).
Student loan spread income in the three and nine months ended September 30,
2002 was $4.8 million and $21.9 million, respectively, compared to student loan
spread income of $3.2 million and $12.9 million in the corresponding periods of
the prior year. AMS' weighted average student loan assets for the nine-month
period ended September 30, 2002 were $1,482.0 million, compared to $1,350.7
million for the corresponding period of the prior year.
During the first six months of 2002, AMS benefited significantly from a
favorable prescribed minimum rate earned on its student loan portfolio. On July
1, 2002, the floor rates on loans made under the federal FFELP student loan
program for the period July 1, 2002 through June 30, 2003 reset 193 basis points
lower than the floor rates in effect for the period July 1, 2001 through June
30, 2002. Reflecting this downward adjustment on July 1, 2002 to the floor rate
on loans made under the federal FFELP student loan program, AMS' student loan
spread income declined from $9.0 million in the second quarter of 2002 to $4.8
million in the third quarter of 2002. As a result of this significant decrease
in the prescribed floor rates on its student loan portfolio, AMS believes that
spread income in the second half of 2002 will be significantly less than the
level of spread income experienced in the first half of 2002. Due to the
anticipated decrease in spread income, AMS may continue to rely on gains from
timely sales of student loans to remain profitable during the three months
ending December 31, 2002.
Operating expenses at AMS in the nine months ended September 30, 2002 were
$42.2 million, compared to operating expenses of $44.4 million in the
corresponding 2001 period. The decrease in operating expenses for the nine
months ended September 30, 2002 was primarily attributable to reduced interest
expense associated with non-student loan indebtedness and reduced administrative
expenses. For the nine months ended September 30, 2002, interest expense on
non-student loan indebtedness was $60,000, compared to interest expense on
non-student loan indebtedness of $785,000in the nine months ended September 30,
2001. On June 28, 2001, AMS paid off its remaining senior indebtedness in the
amount of $14.3 million, the proceeds of which were utilized in 1999 to fund a
portion of the purchase price for AMS' tuition installment business.
Operating expenses at AMS in the three months ended September 30, 2002 were
$15.2 million, compared to operating expenses of $14.8 million in the
corresponding 2001 period. This increase in operating expenses was primarily
attributable to the hiring of additional sales and marketing personnel.
AMS sold student loans in the principal amount of $71.7 million and $186.6
million, respectively, during the three and nine months ended September 30,
2002, compared to sales of student loans in the principal amount of $2.4 million
and $364.3 million during the corresponding 2001 periods. AMS generated net
gains on such student loan sales in the amount of $2.0 million and $3.9 million,
respectively, in the three and nine months ended September 30, 2002, compared to
net gains of $157,000 and $8.2 million in the corresponding 2001 periods. Due to
the inherent uncertainty surrounding spread income, in any given financial
period AMS may continue to rely on gains from timely sales of student loans to
remain profitable for such period.
29
Investment in Healthaxis, Inc.
At September 30, 2002, the Company held approximately 45% of the issued and
outstanding shares of Healthaxis, Inc. (HAXS: Nasdaq) ("HAI"). The Company
accounts for its investment in HAI utilizing the equity method and, accordingly,
recognizes its ratable share of HAI income and loss (computed prior to
amortization of goodwill recorded by HealthAxis.com in connection with the
January 7, 2000 merger of Insurdata Incorporated (formerly a wholly-owned
subsidiary of UICI) with and into HealthAxis.com). See Note B of Notes to
Consolidated Condensed Financial Statements.
During the three and nine months ended September 30, 2002, the Company's
share of HAI's operating losses (computed prior to amortization of merger
related goodwill and excluding gain on extinguishment of debt) was $796,000 and
$2.4 million, respectively, compared to its reported share of operating losses
of $1.3 million and $9.2 million, respectively, in the three and nine months
ended September 30, 2001. For the nine months ended September 30, 2002, the
total HAI segment loss in the amount of $8.9 million reflected the Company's
share of HAI's operating losses ($2.4 million) plus a $6.5 million impairment
charge related to the adjustment to the carrying value of the Company's
investment in HAI taken in the second quarter of 2002.
Effective June 15, 2002, UICI and HAI terminated an information technology
services agreement, amended and restated as of January 3, 2000 (the "Services
Agreement"), pursuant to which HAI formerly provided information systems and
software development services (including administration of the Company's
computer data center) to the Company and its insurance company affiliates. See
Note B of Notes to Consolidated Condensed Financial Statements. As part of the
termination arrangement, UICI made a one-time payment to HAI in the amount of
$6.5 million and tendered 500,000 shares of HAI common stock to HAI.
Substantially all of HAI's technical personnel formerly supporting UICI under
the Services Agreement were hired by UICI on June 17, 2002. Following the
transaction, UICI continues to hold approximately 45% of the issued and
outstanding shares of HAI. Because UICI constitutes a significant shareholder of
HAI, the aggregate amount of consideration paid to HAI by UICI for the early
termination of the Services Agreement (approximately $6.5 million) was reflected
for financial reporting purposes as a contribution by UICI to the capital of
HAI, the effect of which was to increase the Company's carrying value of its
investment in HAI. Effective June 30, 2002, UICI determined the carrying value
in its investment in HAI was impaired in the amount of $6.5 million and
therefore the investment was written down to an estimated realizable value. In
determining the estimated realizable value of its investment in HAI at June 30,
2002, the Company gave due consideration, among other things, to HAI's
recognition of an extraordinary gain in July 2002 in the amount of $16.4 million
associated with the early extinguishment of indebtedness, which extraordinary
gain was recorded by HAI in connection with the exchange of $27.5 million
aggregate principal amount of HAI's convertible debentures for $4.0 million in
cash and shares of a newly authorized series of HAI 2% convertible preferred
stock.
Giving effect to the capital contribution in the amount of $6.5 million,
subsequent write down in the amount of $6.5 million and equity in losses at HAI
in the nine months ended September 30, 2002 in the amount of $8.9 million,
respectively, the Company's carrying value of its investment in HAI was $5.7
million at September 30, 2002. The Company's carrying value of its investment in
HAI was $8.3 million at December 31, 2001.
Other Key Factors
The Other Key Factors category includes (a) investment income not allocated
to other business segments, (b) interest expense on non-student loan
indebtedness, (c) general expenses relating to corporate operations, (d)
realized gains or losses on investments, (e) the operations of the Company's
AMLI Realty Co. subsidiary, (f) minority interest, (g) variable stock-based
compensation, (h) operations that do not constitute reportable operating
segments (consisting primarily of the remaining portion of the Company's former
TPA Division) and (i), amortization of goodwill (with respect to periods ended
prior to January 1, 2002).
For the three months ended September 30, 2002, Other Key Factors reported an
operating loss of $(6.5) million, compared to an operating loss of $(6,000) in
the comparable 2001 period. The increase in operating loss for the 2002 quarter
was primarily attributable to a $2.0 million decrease in investment income not
allocated to other segments (which in turn resulted from a decrease in yield on
invested assets and a decrease in amount available for investment due to
acquisitions made in the first quarter of 2002), a $396,000 realized loss on
sale of investments (compared to a realized gain of $3.2 million in the
corresponding period in 2001), and an increase in variable stock-based
compensation expense of $1.9 million (see discussion below). These factors
contributing to the increase in Other Key Factors operating loss in the three
months ended September 30, 2002 were offset by the positive impact of the
non-amortization of goodwill as required by FASB Statement 142 for all periods
commencing after January 1,
30
2002. In the three months ended September 30, 2001, the Company recorded
amortization of goodwill in the amount of $1.1 million.
For the nine months ended September 30, 2002, Other Key Factors reported an
operating loss of $(27.8) million, compared to an operating loss of $(648,000)
in the comparable 2001 period. The increase in operating loss for the nine
months ended September 30, 2002 was attributable to various factors, including a
$6.7 million decrease in investment income not allocated to other segments
(which in turn resulted from a decrease in yield on invested assets and a
decrease in amount available for investment due to acquisitions made in the
first quarter of 2002), a $6.2 million realized loss on sale of investments
resulting primarily from a $6.1 million impairment charge taken in the second
quarter of 2002 associated with the Company's WorldCom, Inc. holdings (compared
to a realized gain of $5.9 million in the corresponding period in 2001), and an
increase in variable stock-based compensation expense of $11.5 million (see
discussion below). These factors contributing to the increase in Other Key
Factors operating loss in the nine months ended September 30, 2002 were offset
by the positive impact of the non-amortization of goodwill as required by FASB
Statement 142 for all periods commencing after January 1, 2002. In the nine
months ended September 30, 2001, the Company recorded amortization of goodwill
in the amount of $3.4 million.
At June 30, 2002, UICI's insurance company subsidiaries held an aggregate
of $7.525 million principal amount of WorldCom Inc. bonds, of which $4.0 million
principal amount matured in 2005 and $3.525 million principal amount matured in
2031. As a result of previously announced accounting irregularities at WorldCom,
Inc., in the second quarter of 2002 the Company recorded a $6.1 million
impairment charge associated with the Company's WorldCom, Inc. holdings, which
charge was partially offset by realized gains associated with other securities
in the portfolio. During the three months ended September 30, 2002, the
Company's insurance company subsidiaries sold all of their WorldCom Inc. bonds
for a nominal loss.
Variable Stock-Based Compensation
The Company maintains for the benefit of its employees and independent
agents various stock-based compensation plans, in connection with which it
records non-cash variable stock-based compensation expense in amounts that
depend and fluctuate based upon the market performance of the Company's common
stock. See Note L of Notes to Consolidated Condensed Financial Statements.
In the three and nine months ended September 30, 2002, the Company recorded
non-cash stock-based compensation expense in the aggregate amount of $4.5
million and $15.8 million, respectively, of which $3.1 million and $7.3 million,
respectively, was attributable to the ESOP feature of the Company's Employee
Stock Ownership and Savings Plan (the "Employee Plan"), $1.3 million and $7.0
million, respectively was attributable to the Company's stock accumulation plans
established for the benefit of its independent agents and $100,000 and $1.5
million, respectively, was attributable to other stock-based plans. In the three
and nine months ended September 30, 2001, the Company recorded non-cash
stock-based compensation expense in the aggregate amount of $2.6 million and
$4.4 million, respectively, of which $1.0 million and $1.9 million,
respectively, was attributable to the ESOP feature of the Employee Plan, $1.4
million and $1.5 million, respectively, was attributable to the Company's stock
accumulation plans established for the benefit of its independent agents, and
$200,000 and $1.0 million, respectively, was attributable to other stock-based
plans. The significant increases in non-cash variable stock-based compensation
expense in the 2002 periods compared to the 2001 periods was attributable to the
higher share price in the 2002 periods compared to the share price in the
comparable periods in 2001. See Note L of Notes to Consolidated Condensed
Financial Statements.
During the three and nine months ended September 30, 2002, the amount
classified as stock appreciation expense with respect to the Employee Plan
represented the incremental compensation expense associated with the allocation
during the three and nine months ended September 30, 2002 of 245,000 and 630,000
shares previously purchased in 2000 by the Employee Plan from the Company at
$5.25 per share ("$5.25 ESOP Shares") to fund the Company's matching and
supplemental contributions to the ESOP. As and when the Company makes matching
and supplemental contributions to the ESOP by allocating to participants'
accounts these $5.25 ESOP Shares, the Company will continue to record additional
non-cash compensation expense equal to the excess, if any, between the fair
value of the shares allocated and $5.25 per share. The allocated $5.25 ESOP
Shares are considered outstanding for purposes of the computation of earnings
per share.
The Employee Plan initially purchased in 2000 an aggregate of 1,610,000
$5.25 ESOP Shares, and as of September 30, 2002 substantially all such shares
had been allocated to participants' accounts. The Company expects that the
remaining unallocated shares will be allocated to participants' accounts during
November 2002, after which the Company will recognize no additional variable
stock based compensation associated with the ESOP feature of the Employee Plan.
31
The Company also sponsors a series of stock accumulation plans established
for the benefit of the independent insurance agents and independent sales
representatives associated with its independent agent field forces, including
UGA -- Association Field Services, New United Agency, Cornerstone Marketing of
America, Guaranty Senior Assurance, SeniorsFirst and CFL Agency. The agent plans
generally combine an agent-contribution feature and a Company-match feature.
Under EITF 96-18 "Accounting for Equity Instruments that are issued to Other
Than Employees for Acquiring or in Connection with Selling Goods and Services,"
the Company has established a liability for future unvested benefits under the
plans and adjusts the liability based on the market value of the Company's
common stock. For the three and nine months ended September 30, 2002, the
Company recorded total compensation expense associated with these agent plans in
the amount of $3.0 million and $11.9 million, respectively, of which $1.3
million and $7.1 million, respectively, represented the non-cash stock based
compensation expense associated with the adjustment to the liability for future
unvested benefits. For the three and nine months ended September 30, 2001, the
Company recorded total compensation expense associated with these agent plans in
the amount of $2.3 million and $4.3 million, respectively, of which $1.4 million
and $1.5 million, respectively, represented the non-cash stock based
compensation expense associated with the adjustment to the liability for future
unvested benefits.
The accounting treatment of the Company's agent plans will continue to
result in unpredictable stock-based compensation charges, primarily dependent
upon future fluctuations in the quoted price of UICI common stock. These
unpredictable fluctuations in stock based compensation charges may result in
material non-cash fluctuations in the Company's results of operations. Unvested
benefits under the agent plans vest in January of each year; accordingly, in
periods of general appreciation in the quoted price of UICI common stock, the
Company's cumulative liability, and corresponding charge to income, for unvested
stock-based compensation is expected to be greater in each successive quarter
during any given year.
DISCONTINUED OPERATIONS
The Company's reported results in the three and nine months ended September
30, 2002 reflected income from discontinued operations (consisting of the
Company's former sub-prime credit card unit, the Special Risk Division and the
Company's UICI Administrators Inc. unit) in the amount of $-0- and $67,000,
respectively, compared to a loss from discontinued operations in the three and
nine months ended September 30, 2001 in the amount of $2.4 million and $3.9
million, respectively.
In March 2000 the Board of Directors of UICI designated its former United
CreditServ sub-prime credit card business as a discontinued operation for
financial reporting purposes, and the United CreditServ unit has been so
reflected for all periods presented. 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 United Credit
National Bank (the Company's credit card issuing bank), in accordance with the
terms of a plan of voluntary liquidation approved by the Office of the
Comptroller of the Currency.
In December 2001 the Company determined to exit the businesses of its
Special Risk Division by sale, abandonment and/or wind-down and, accordingly,
the Company also designated and classified its Special Risk Division as a
discontinued operation for financial reporting purposes for all periods
presented. The Company's Special Risk Division 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 Company formerly classified the operations of its subsidiaries UICI
Administrators, Inc. (a company engaged in the business of providing third party
benefits administration, including eligibility and billing reconciliation),
Insurdata Marketing Services, LLC (a subsidiary of the Company engaged in the
business of marketing third party benefits administration services) and Barron
Risk Management Services as its Third Party Administration ("TPA") Division. On
January 17, 2002, the Company completed the sale of UICI Administrators, Inc.,
the major component of the TPA Division. In accordance with FASB Statement 144,
the results of operations of UICI Administrators, Inc. have been reflected in
discontinued operations for all periods presented. The remaining portion of the
former TPA Division (consisting primarily of Barron Risk Management Services)
was reclassified to the Company's Other Key Factors segment for all periods
presented. See Note F of Notes to Consolidated Condensed Financial Statements
32
LIQUIDITY AND CAPITAL RESOURCES
Historically, the Company's primary sources of cash on a consolidated basis
have been premium revenues from policies issued, investment income, fees and
other income, and borrowings to fund student loans. The primary uses of cash
have been payments for benefits, claims and commissions under those policies,
operating expenses and the funding of student loans. In the nine-month period
ended September 30, 2002, net cash provided by operations totaled approximately
$259.3 million. In the nine-month period ended September 30, 2001, net cash
provided by operations totaled approximately $209.5 million.
During the nine months ended September 30, 2002, the Company reduced its
consolidated short and long-term indebtedness (exclusive of indebtedness
incurred to fund student loans) from $25.3 million at December 31, 2001 to $9.6
million at September 30, 2002.
As previously disclosed, effective September 15, 1999, the Company and OUI
entered into a Put/Call Agreement, pursuant to which, for a thirty day period
commencing on July 1 of each year, the Company was granted an option to purchase
from OUI, and OUI was granted 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. Mr. Jensen's five adult children
hold in the aggregate 100% of the equity interest in OUI, which is the holder of
approximately 6.5% of the Company's outstanding Common Stock. On July 1, 2002,
pursuant to the terms of the Put/Call Agreement the Company exercised its option
to purchase from OUI 369,174 shares of Common Stock at the then-effective call
price of $32.25 per share, or $11.9 million in the aggregate.
Effective June 15, 2002, UICI and HAI terminated a Services Agreement. See
Note B of Notes to Consolidated Condensed Financial Statements. As part of the
termination arrangement, UICI made a one-time payment to HAI in the amount of
$6.5 million and tendered 500,000 shares of HAI common stock to HAI.
Effective April 2, 2002, the Company and Mr. Jensen entered into a
transaction designed to effectively transfer the Company's 80% interest in a
subsidiary to Mr. Jensen and to terminate the Company's active participation in,
and limit the Company's financial exposure associated with, the Sun Litigation.
See Note I of Notes to Consolidated Condensed Financial Statements - - Sun
Litigation. As part of the transaction, on April 2, 2002, Mr. Jensen made a
total payment to UICI of $15.6 million and granted to UICI various indemnities
against possible losses which UICI might incur resulting from the Sun
Litigation. For financial reporting purposes, the Company recorded no gain or
loss in connection with this transaction and will continue to include the
accounts of STP in its consolidated financial statements until final
distribution of cash proceeds from the sale and liquidation of STP or such time
as Mr. Jensen shall exercise the option to acquire UICI's 80% membership
interest in STP. Because the Company has assigned all of its rights to any cash
proceeds from the sale and liquidation of STP, the Company has established and
will continue to record a liability equal to the total cash and cash equivalents
on deposit in the registry of the Court in the Sun Litigation (which amount was
$22.5 million at September 30, 2002 and is reflected as restricted cash on the
Company's consolidated balance sheet).
UICI is a holding company, the principal assets of which are its investments
in its separate operating subsidiaries, including its regulated insurance
subsidiaries. The holding company's ability to fund its cash requirements is
largely dependent upon its ability to access cash, by means of dividends or
other means, from its subsidiaries. The laws governing the Company's insurance
subsidiaries restrict dividends paid by the Company's domestic insurance
subsidiaries in any year. Inability to access cash from its subsidiaries could
have a material adverse effect upon the Company's liquidity and capital
resources.
At September 30, 2002 and December 31, 2001, UICI at the holding company
level held cash and cash equivalents in the amount of $31.1 million and $57.3
million, respectively, and had short and long-term indebtedness outstanding in
the amount of $7.9 million and $19.4 million, respectively. The Company
currently estimates that, through December 31, 2002, the holding company will
have operating cash requirements in the amount of approximately $23.9 million.
The Company currently anticipates that these cash requirements at the holding
company level will be funded by cash on hand, cash received from interest
income, the balance of dividends to be paid from domestic and offshore insurance
companies and tax sharing reimbursements from subsidiaries (which will be
partially offset by holding company operating expenses).
At August 15, 2002, all remaining options initially granted to agents and
employees under the UICI 1998 employee and agent stock option plans vested and
became exercisable. During the three and nine months ended September 30, 2002,
the Company at the holding company level derived cash proceeds in the amount of
$6.4 million and $9.7 million, respectively, from the exercise of 426,000 and
646,000, respectively, of these stock options. At September 30, 2002, a total of
1.4 million options remained exercisable under the 1998 plans, all of which
options are exercisable at an option price of $15.00 per UICI share and remain
exercisable during the period ending on January 13, 2003.
33
On January 25, 2002, the Company entered into a three-year bank credit
facility with Bank of America, NA and LaSalle Bank National Association. Under
the facility, the Company may borrow from time to time up to $30.0 million on a
revolving, unsecured basis. The Company intends to utilize the proceeds of the
facility for general working capital purposes. At September 30, 2002, the
Company had no borrowings outstanding under the facility.
STOCK REPURCHASE PLAN
In November 1998, the Company's board of directors authorized the repurchase
of up to 4,500,000 shares of the Company's Common Stock. The shares were
authorized to be purchased from time to time on the open market or in private
transactions. As of December 31, 2000, the Company had repurchased 198,000
shares pursuant to such authorization, all of which were purchased in 1999. At
its regular meeting held on February 28, 2001, the Board of Directors of the
Company reconfirmed the Company's 1998 share repurchase program. Following
reconfirmation of the program, through 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). At its regular meeting held July 31, 2002,
the Board of Directors of the Company reconfirmed the Company's 1998 share
repurchase program. Following reconfirmation of the program, through November 1,
2002, the Company had purchased an additional 57,500 shares pursuant to the
program (with the last purchase made on August 9, 2002). 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.
ACCOUNTING FOR AGENT STOCK ACCUMULATION PLANS
The Company sponsors a series of stock accumulation plans (the "Agent
Plans") established for the benefit of the independent insurance agents and
independent sales representatives associated with UGA - Association Field
Services, New United Agency, Cornerstone Marketing of America and CFLD
Association Field Services. Under EITF 96-18 "Accounting for Equity Instruments
that are issued to Other Than Employees for Acquiring or in Connection with
Selling Goods and Services," the Company has established a liability for future
unvested benefits under the Agent Plans and adjusts the liability based on the
market value of the Company's Common Stock. The accounting treatment of the
Company's Agent Plans will result in unpredictable stock-based compensation
charges, dependent upon fluctuations in the quoted price of UICI common stock.
These unpredictable fluctuations in stock based compensation charges may result
in material non-cash fluctuations in the Company's results of operations. See
Note L of Notes to Consolidated Condensed Financial Statements.
CRITICAL ACCOUNTING PRINCIPLES AND ESTIMATES
The Company's discussion and analysis of its financial condition and results
of operations are based upon the Company's consolidated financial statements,
which have been prepared in accordance with accounting principles generally
accepted in the United States. The preparation of these financial statements
requires the Company to make estimates and judgments that affect the reported
amounts of assets, liabilities, revenues and expenses, and related disclosure of
contingent assets and liabilities. On an on-going basis, the Company evaluates
its estimates, including those related to health and life insurance claims and
reserves, deferred acquisition costs, bad debts, impairment of investments,
intangible assets, income taxes, financing operations and contingencies and
litigation. The Company bases its estimates on historical experience and on
various other assumptions that are believed to be reasonable under the
circumstances, the results of which form the basis for making judgments about
the carrying values of assets and liabilities that are not readily apparent from
other sources. Actual results may differ from these estimates under different
assumptions or conditions.
The Company believes the critical accounting policies related to claims
reserves, accounting for health policy acquisition costs, goodwill and other
identifiable intangible assets, accounting for agent stock accumulation plans,
investments, deferred taxes, and loss contingencies affect its more significant
judgments and estimates used in the preparation of its consolidated financial
statements.
For a more detailed discussion on the application of these and other
accounting policies, see the Company's Annual Report on Form 10-K for the year
ended December 31, 2001.
PRIVACY INITIATIVES
Recently-adopted legislation and regulations governing the use and security
of individuals' nonpublic personal data by financial institutions, including
insurance companies, may have a significant impact on the Company's business and
future results of operations.
34
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.
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.
35
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 its life and health insurance products and other information-based
products, and may reduce the amount of information the Company may disclose and
use if the Company's customers do not consent to such disclosure and use. There
can be no assurance that the restrictions and duties imposed by the recently
adopted final rules on the privacy of individually-identifiable health
information, or the proposed rule on security of individually-identifiable
health information, will not have a material adverse effect on UICI's business
and future results of operations.
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
Certain statements set forth herein or incorporated by reference herein from
the Company's filings that are not historical facts are forward-looking
statements within the meaning of the Private Securities Litigation Reform Act.
Actual results may differ materially from those included in the forward-looking
statements. These forward-looking statements involve risks and uncertainties
including, but not limited to, the following: changes in general economic
conditions, including the performance of financial markets, and interest rates;
competitive, regulatory or tax changes that affect the cost of or demand for the
Company's products; health care reform; the ability to predict and effectively
manage claims related to health care costs; and reliance on key management and
adequacy of claim liabilities.
The Company's future results will depend in large part on accurately
predicting health care costs incurred on existing business and upon the
Company's ability to control future health care costs through product and
benefit design, underwriting criteria, utilization management and negotiation of
favorable provider contracts. Changes in mandated benefits, utilization rates,
demographic characteristics, health care practices, provider consolidation,
inflation, new pharmaceuticals/technologies, clusters of high-cost cases, the
regulatory environment and numerous other factors are beyond the control of any
health plan provider and may adversely affect the Company's ability to predict
and control health care costs and claims, as well as the Company's financial
condition, results of operations or cash flows. Periodic renegotiations of
hospital and other provider contracts coupled with continued consolidation of
physician, hospital and other provider groups may result in increased health
care costs and limit the Company's ability to negotiate favorable rates.
Recently, large physician practice management companies have experienced extreme
financial difficulties, including bankruptcy, which may subject the Company to
increased credit risk related to provider groups and cause the Company to incur
duplicative claims expense. In addition, the Company faces competitive pressure
to contain premium prices. Fiscal concerns regarding the continued viability of
government-sponsored programs such as Medicare and Medicaid may cause decreasing
reimbursement rates for these programs. Any limitation on the Company's ability
to increase or maintain its premium levels, design products, and implement
underwriting criteria or negotiate competitive provider contracts may adversely
affect the Company's financial condition or results of operations.
The Company's Academic Management Services Corp. business could be adversely
affected by changes in the Higher Education Act or other relevant federal or
state laws, rules and regulations and the programs implemented thereunder may
adversely impact the education credit market. In addition, existing legislation
and future measures by the federal government may adversely affect the amount
and nature of federal financial assistance available with respect to loans made
through the U.S. Department of Education. Finally the level of competition
currently in
36
existence in the secondary market for loans made under the Federal Loan Programs
could be reduced, resulting in fewer potential buyers of the Federal Loans and
lower prices available in the secondary market for those loans.
ITEM 3 -- QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk is the risk of loss arising from adverse changes in market rates
and prices, such as interest rates, foreign currency exchange rates, and other
relevant market rate or price changes. Market risk is directly influenced by the
volatility and liquidity in the markets in which the related underlying assets
are traded.
The primary market risk to the Company's investment portfolio is interest
rate risk associated with investments and the amount of interest that
policyholders expect to have credited to their policies. The interest rate risk
taken in the investment portfolio is managed relative to the duration of the
policy liabilities. The Company's investment 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 $196.7 million principal amount of
PLUS loans outstanding at September 30, 2002. The fixed yield on PLUS loans was
8.99% and 6.79% for the twelve months ended June 30, 2001 and 2002,
respectively, and was reset to 4.86% for the twelve months beginning July 1,
2002. These loans are financed with borrowings whose rates are subject to reset,
generally monthly. During the twelve months beginning July 1, 2002, the cost of
borrowings to finance this portion of the student loan portfolio could rise or
fall while the rate earned on the student loans will remain fixed.
Item 4 -- Controls and Procedures
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
Within the 90 day period prior to the filing date of this Quarterly Report
on Form 10-Q, the Company, under the supervision and with the participation of
its management, including its principal executive officer and principal
financial officer, performed an evaluation of the Company's disclosure controls
and procedures, as contemplated by Securities Exchange Act Rule 13a-15. Based on
that evaluation, the Company's principal executive officer and principal
financial officer concluded that such disclosure controls and procedures are
effective to ensure that material information relating to the Company, including
its consolidated subsidiaries, is made known to them, particularly during the
period for which the periodic reports are being prepared.
CHANGES IN INTERNAL CONTROLS
No significant changes were made in the Company's internal controls or in
other factors that could significantly affect these controls subsequent to the
date of the evaluation performed pursuant to Securities Exchange Act Rule 13a-15
referred to above.
37
PART II. OTHER INFORMATION
ITEM 1 -- LEGAL PROCEEDINGS
The Company is a party to various material legal proceedings, all of which
are described in Note I of Notes to the Consolidated Condensed Financial
Statements included herein and in the Company's Annual Report on Form 10-K filed
for the year ended December 31, 2001 under the caption "Item 3 - Legal
Proceedings." The Company and its subsidiaries are parties to various other
pending legal proceedings arising in the ordinary course of business, including
some asserting significant damages arising from claims under insurance policies,
disputes with agents and other matters. Based in part upon the opinion of
counsel as to the ultimate disposition of such lawsuits and claims, management
believes that the liability, if any, resulting from the disposition of such
proceedings will not be material to the Company's financial condition or results
of operations.
ITEM 5 -- MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED MATTERS
During the nine months ended September 30, 2002, the Company issued 3,500
shares of unregistered common stock pursuant to its 2001 Restricted Stock Plan.
ITEM 6 -- EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
10.71 Indenture Agreement dated August 21, 2002 among AMS-2 2002,
LP, as Issuer, and BankOne, National Association, as Indenture
Trustee and Eligible Lenders Trustee
(b) Reports on Form 8-K.
1. Current Report on Form 8-K dated July 22, 2002
2. Current Report on Form 8-K dated July 31, 2002 filed August 1,
2002
3. Current Report on Form 8-K dated August 14, 2002
4. Current Report on Form 8-K dated August 26, 2002 filed September
4, 2002
5. Current Report on Form 8-K dated September 23, 2002
6. Current Report on Form 8-K/A dated August 26, 2002 filed
September 27, 2002
7. Current Report on Form 8-K dated October 30, 2002
38
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
UICI
---------------------------------------
(Registrant)
Date: November 13, 2002 /s/ Gregory T. Mutz
---------------------------------------
Gregory T. Mutz, President,
Chief Executive Officer and Director
Date: November 13, 2002 /s/ Mark D. Hauptman
---------------------------------------
Mark D. Hauptman, Vice President
and Chief Financial Officer
39
CERTIFICATION OF GREGORY T. MUTZ, CHIEF EXECUTIVE OFFICER OF UICI,
PURSUANT TO RULE 13A-14 UNDER THE SECURITIES EXCHANGE ACT OF 1934
I, Gregory T. Mutz, certify that:
1. I have reviewed this quarterly report on Form 10-Q of UICI;
2. Based on my knowledge, this quarterly report does not contain
any untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light
of the circumstances under which such statements were made,
not misleading with respect to the period covered by this
quarterly report;
3. Based on my knowledge, the financial statements, and other
financial information included in this quarterly report,
fairly present in all material respects the financial
condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officer and I are
responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules
13a-14 and 15d-14) for the registrant and we have:
(a) designed such disclosure controls and procedures to
ensure that material information relating to the
registrant, including its consolidated subsidiaries,
is made known to us by others within those entities,
particularly during the period in which this
quarterly report is being prepared;
(b) evaluated the effectiveness of the registrant's
disclosure controls and procedures as of a date
within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
(c) presented in this quarterly report our conclusions
about the effectiveness of the disclosure controls
and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officer and I have
disclosed, based on our most recent evaluation, to the
registrant's auditors and the audit committee of registrant's
board of directors (or persons performing the equivalent
function):
(a) all significant deficiencies in the design or
operation of internal controls which could adversely
affect the registrant's ability to record, process,
summarize and report financial data and have
identified for the registrant's auditors any material
weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves
management or other employees who have a significant
role in the registrant's internal controls; and
6. The registrant's other certifying officer and I have indicated
in this quarterly report whether or not there were significant
changes in internal controls or in other factors that could
significantly affect internal controls subsequent to the date
of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material
weaknesses.
Date: November 13, 2002
/s/ GREGORY T. MUTZ
-------------------------------------
Gregory T. Mutz
President and Chief Executive Officer
UICI
40
CERTIFICATION OF MARK D. HAUPTMAN, CHIEF FINANCIAL OFFICER OF UICI,
PURSUANT TO RULE 13A-14 UNDER THE SECURITIES EXCHANGE ACT OF 1934
I, Mark D. Hauptman, certify that:
1. I have reviewed this quarterly report on Form 10-Q of UICI;
2. Based on my knowledge, this quarterly report does not contain
any untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light
of the circumstances under which such statements were made,
not misleading with respect to the period covered by this
quarterly report;
3. Based on my knowledge, the financial statements, and other
financial information included in this quarterly report,
fairly present in all material respects the financial
condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officer and I are
responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules
13a-14 and 15d-14) for the registrant and we have:
(a) designed such disclosure controls and procedures to
ensure that material information relating to the
registrant, including its consolidated subsidiaries,
is made known to us by others within those entities,
particularly during the period in which this
quarterly report is being prepared;
(b) evaluated the effectiveness of the registrant's
disclosure controls and procedures as of a date
within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
(c) presented in this quarterly report our conclusions
about the effectiveness of the disclosure controls
and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officer and I have
disclosed, based on our most recent evaluation, to the
registrant's auditors and the audit committee of registrant's
board of directors (or persons performing the equivalent
function):
(a) all significant deficiencies in the design or
operation of internal controls which could adversely
affect the registrant's ability to record, process,
summarize and report financial data and have
identified for the registrant's auditors any material
weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves
management or other employees who have a significant
role in the registrant's internal controls; and
6. The registrant's other certifying officer and I have indicated
in this quarterly report whether or not there were significant
changes in internal controls or in other factors that could
significantly affect internal controls subsequent to the date
of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material
weaknesses.
Date: November 13, 2002
/s/ MARK D. HAUPTMAN
------------------------------------------
Mark D. Hauptman
Vice President and Chief Financial Officer
UICI
41
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
------- -----------
10.71 Indenture Agreement dated August 21, 2002 among AMS-2 2002, LP, as Issuer,
and BankOne, National Association, as Indenture Trustee and Eligible Lenders
Trustee