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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 JUNE 30, 2001.
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _____________ TO _____________
COMMISSION FILE 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
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Former name, former address and former fiscal year,
if changed since last report.
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No .
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date. Common Stock, $.01 Par Value,
47,629,422 shares as of August 8, 2001.
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INDEX
UICI AND SUBSIDIARIES
PAGE
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated condensed balance sheets-June 30, 2001 (unaudited) and
December 31, 2000.............................................................. 3
Consolidated condensed statements of income (unaudited) - Three
months ended June 30, 2001 and 2000 and six months ended June 30, 2001
and 2000....................................................................... 4
Consolidated statements of comprehensive income (unaudited) - Three months
ended June 30, 2001 and 2000 and six months ended June 30, 2001
and 2000 ...................................................................... 5
Consolidated condensed statements of cash flows (unaudited) - Six months
ended June 30, 2001 and 2000................................................... 6
Notes to consolidated condensed financial statements (unaudited) - June 30,
2001........................................................................... 7
Item 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations..................................................................... 22
Item 3. Quantitative and Qualitative Disclosures about Market Risk..................... 30
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.............................................................. 32
Item 4. Submission of Matters to a Vote of Security Holders............................ 32
Item 5. Market for Registrant's Common Stock and Related Matters....................... 32
Item 6. Exhibits and Reports on Form 8-K............................................... 32
SIGNATURES 33
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
UICI AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
JUNE 30, DECEMBER 31,
2001 2000
------------ ------------
(UNAUDITED)
ASSETS
Investments
Securities available for sale --
Fixed maturities, at fair value (cost:
2001--$867,185; 2000-- $827,905) ................................ $ 860,715 $ 814,433
Equity securities, at fair value (cost:
2001--$39,151; 2000-- $18,926) .................................. 78,257 16,916
Mortgage and collateral loans ...................................... 5,231 5,368
Policy loans ....................................................... 19,771 20,171
Investment in Healthaxis, Inc. ..................................... 10,876 18,442
Investment in other equity investees ............................... 23,145 43,196
Short-term investments ............................................. 109,461 149,525
------------ ------------
Total Investments ........................................... 1,107,456 1,068,051
Cash ................................................................. 9,066 83,058
Student loans ........................................................ 1,141,117 1,156,072
Restricted cash ...................................................... 267,795 222,660
Reinsurance receivables .............................................. 116,802 120,723
Due premiums, other receivables and assets ........................... 55,512 52,766
Investment income due and accrued .................................... 62,940 62,014
Refundable income taxes .............................................. -- 13,978
Deferred acquisition costs ........................................... 67,102 68,515
Goodwill ............................................................. 89,775 92,120
Deferred income tax .................................................. 24,894 32,949
Property and equipment, net .......................................... 77,115 75,128
------------ ------------
$ 3,019,574 $ 3,048,034
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Policy liabilities
Future policy and contract benefits ................................ $ 419,692 $ 429,167
Claims ............................................................. 364,381 358,108
Unearned premiums .................................................. 80,927 98,491
Other policy liabilities ........................................... 17,732 17,927
Other liabilities .................................................... 145,673 156,953
Collections payable .................................................. 118,588 111,787
Note payable to related party ........................................ -- 18,954
Debt ................................................................. 24,696 47,828
Student loan credit facilities ....................................... 1,341,164 1,358,056
------------ ------------
2,512,853 2,597,271
Commitments and Contingencies
Stockholders' Equity
Preferred stock, par value $0.01 per share ......................... -- --
Common stock, par value $0.01 per share ............................ 488 483
Additional paid-in capital ......................................... 194,678 186,820
Accumulated other comprehensive income ............................. 21,233 (10,068)
Retained earnings .................................................. 298,996 274,277
Treasury stock, at cost ............................................ (8,674) (749)
------------ ------------
506,721 450,763
------------ ------------
$ 3,019,574 $ 3,048,034
============ ============
NOTE: The balance sheet data as of December 31, 2000 have been derived from the
audited financial statements at that date.
See Notes to Consolidated Condensed Financial Statements.
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UICI AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF INCOME (UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
--------------------- ---------------------
2001 2000 2001 2000
--------- --------- --------- ---------
REVENUE
Premiums:
Health (includes amounts received from related parties of $1,608
and $571 for the three months ended June 30, 2001 and 2000,
respectively, and $3,160 and $1,173 for the six months ended June
30, 2001 and 2000, respectively) ...................................... $ 205,523 $ 165,471 $ 384,615 $ 330,802
Life premiums and other considerations .................................... 9,323 10,321 18,,979 21,185
--------- --------- --------- ---------
214,846 175,792 403,594 351,987
Investment income ............................................................ 21,376 21,543 42,226 45,811
Interest income (includes amounts received from related parties of $-0-
and $3 for the three months ended June 30, 2001 and 2000,
respectively, and $10 and $11 for the six months ended June 30,
2001 and 2000, respectively) .......................................... 25,596 31,917 52,615 59,940
Other fee income (includes amounts received from related parties of
$1,976 and $837 for the three months ended June 30, 2001
and 2000, respectively, and $3,823 and $1,552 for the six months
ended June 30, 2001 and 2000, respectively) ........................... 28,243 32,966 50,633 62,357
Other income ................................................................. 1,405 1,372 2,086 2,142
Gain on sale of HealthAxis.com shares ........................................ -- -- -- 26,300
Gains (losses) on sales of other investments ................................ 2,611 (395) 2,586 (1,358)
--------- --------- --------- ---------
294,077 263,195 553,740 547,179
BENEFITS AND EXPENSES
Benefits, claims, and settlement expenses .................................... 147,626 116,198 267,738 231,444
Underwriting, acquisition, and insurance expenses (includes amounts
paid to related parties of $6,945 and $8,042 for the three months
ended June 30, 2001 and 2000, respectively, and $15,160 and
$16,937 for the six months ended June 30, 2001 and 2000,
respectively) ......................................................... 68,593 59,515 135,584 120,801
Other expenses (includes amounts paid to related parties of $2,989 and
$2,021 for the three months ended June 30, 2001 and 2000,
respectively, and $5,310 $3,055 for the six months ended
June 30, 2001 and 2000, respectively) ................................. 28,976 34,648 51,836 64,657
Depreciation (includes expense on assets purchased from related parties
of $22 and $0 for each of the three and six months ended June 30,
2001 and 2000, respectively) .......................................... 3,969 3,239 7,199 6,565
Interest expense (includes expenses incurred with related parties of
$-0- and $1,612 for the three months ended June 30, 2001 and 2000,
respectively, and $98 and $1,902 for the six months ended June 30,
2001 and 2000, respectively) .......................................... 2,017 3,251 3,892 6,528
Interest expense--student loan credit facilities ............................. 19,264 24,876 42,219 49,858
Equity in losses of Healthaxis, Inc. investment .............................. 5,886 9,234 7,965 15,154
Goodwill amortization ........................................................ 1,173 1,602 2,345 3,237
--------- --------- --------- ---------
277,504 252,563 518,778 498,244
--------- --------- --------- ---------
INCOME FROM CONTINUING OPERATIONS BEFORE
FEDERAL INCOME TAXES ........................................................ 16,573 10,632 34,962 48,935
Federal income taxes ........................................................... 3,957 4,212 10,243 22,724
--------- --------- --------- ---------
INCOME FROM CONTINUING OPERATIONS .............................................. 12,616 6,420 24,719 26,211
DISCONTINUED OPERATIONS
(net of income tax benefit of $0 and $12,600, for the three months
ended June 30, 2001 and 2000, respectively, and $0 and $12,600,
respectively, for the six months ended June 30, 2001 and 2000) ........ -- (23,400) -- (23,400)
--------- --------- --------- ---------
NET INCOME (LOSS) .............................................................. $ 12,616 $ (16,980) $ 24,719 $ 2,811
========= ========= ========= =========
Earnings (loss) per share:
Basic earnings (loss)
Income from continuing operations ..................................... $ 0.27 $ 0.14 $ 0.53 $ 0.57
Loss from discontinued operations ..................................... 0.00 (0.50) 0.00 (0.50)
--------- --------- --------- ---------
Net income (loss) ..................................................... $ 0.27 $ (0.36) $ 0.53 $ 0.07
========= ========= ========= =========
Diluted earnings (loss)
Income from continuing operations ..................................... $ 0.27 $ 0.13 $ 0.52 $ 0.55
Loss from discontinued operations ..................................... 0.00 (0.49) 0.00 (0.49)
--------- --------- --------- ---------
Net income (loss) ..................................................... $ 0.27 $ (0.36) $ 0.52 $ 0.06
========= ========= ========= =========
See Notes to Consolidated Condensed Financial Statements.
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UICI AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(UNAUDITED) (DOLLARS IN THOUSANDS)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------ ------------------------
2001 2000 2001 2000
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Net income (loss) ............................................... $ 12,616 $ (16,980) $ 24,719 $ 2,811
Other comprehensive income (loss), before tax:
Unrealized gains on securities:
Unrealized holding gains (losses) arising during period .... 31,778 (1,483) 47,165 859
Reclassification adjustment for gains (losses)
included in net income (loss) ............................ 858 (1,410) 986 (1,190)
---------- ---------- ---------- ----------
Other comprehensive income (loss), before tax ........ 32,636 (2,893) 48,151 (331)
Income tax provision related to items of
other comprehensive income (loss) ........................ (11,422) 1,026 (16,850) 129
---------- ---------- ---------- ----------
Other comprehensive income (loss), net of
tax benefits ...................................... 21,214 (1,867) 31,301 (202)
---------- ---------- ---------- ----------
Comprehensive income (loss) ..................................... $ 33,830 $ (18,847) $ 56,020 $ 2,609
========== ========== ========== ==========
See Notes to Consolidated Condensed Financial Statements.
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UICI AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
(DOLLARS IN THOUSANDS)
SIX MONTHS ENDED
JUNE 30,
----------------------------
2001 2000
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OPERATING ACTIVITIES
Net income ................................................. $ 24,719 $ 2,811
Adjustments to reconcile net income to
cash provided by (used in) operating activities:
Decrease in policy liabilities ........................... (12,945) (11,087)
Decrease in other liabilities ............................ (9,022) (12,158)
Increase in income taxes ................................. 5,281 27,690
Decrease in deferred acquisition costs ................... 1,413 2,758
Increase in accrued investment income .................... (926) (19,089)
Decrease in reinsurance and other receivables ............ 6,077 11,759
Depreciation and amortization ............................ 9,544 9,802
Increase (decrease) in collections payable ............... 6,801 (16,205)
Equity in losses of Healthaxis, Inc. ..................... 7,965 15,154
Net gains on sale of investments ......................... (2,586) (24,942)
Amounts contributed to discontinued operations ........... -- (92,100)
Other items, net ......................................... 1,113 (1,990)
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Cash Provided by (Used in) Operating Activities ...... 37,434 (107,597)
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INVESTING ACTIVITIES
Decrease in student loans .................................. 14,955 148,874
Decrease in other investments .............................. 2,857 49,946
Proceeds from sale of HealthAxis.com shares ................ -- 30,000
(Increase) decrease in restricted cash ..................... (45,135) 279,846
Increase in agents' receivables ............................ (5,286) (5,089)
Purchase of subsidiary ..................................... -- (4,481)
Increase in property and equipment ......................... (9,186) (7,482)
------------ ------------
Cash Provided by (Used in) Investing Activities ...... (41,795) 491,614
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FINANCING ACTIVITIES
Deposits from investment products .......................... 7,531 8,425
Withdrawals from investment products ....................... (15,547) (24,022)
Proceeds from student loan borrowings ...................... 416,456 305,003
Repayment of student loan borrowings ....................... (433,348) (707,676)
Proceeds from issuance of debt ............................. -- 10,000
Proceeds from note payable to related party ................ -- 76,000
Repayment of debt .......................................... (23,132) (103,974)
Repayment of note payable to related party ................. (18,954) --
Purchase of treasury shares ................................ (8,880) --
Issuance of treasury shares ................................ 955 --
Other items, net ........................................... 5,288 889
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Cash Used in Financing Activities .................... (69,631) (435,355)
------------ ------------
Net Decrease in Cash ................................. (73,992) (51,338)
Cash at Beginning of Period .......................... 83,058 74,091
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Cash at End of Period ................................ $ 9,066 $ 22,753
============ ============
See Notes to Consolidated Condensed Financial Statements.
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UICI AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
June 30, 2001
NOTE A - BASIS OF PRESENTATION
The accompanying unaudited consolidated condensed financial statements for
UICI and its subsidiaries (the "Company" or "UICI") have been prepared in
accordance with generally accepted accounting principles ("GAAP") for interim
financial information and with the instructions to Form 10-Q and Rule 10-01 of
Regulation S-X. Accordingly, such financial statements do not include all of the
information and notes required by GAAP for complete financial statements. In the
opinion of management, all adjustments considered necessary for a fair
presentation have been included. All such adjustments, except as otherwise
described herein, consist of normal recurring accruals. Operating results for
the six-month period ended June 30, 2001 are not necessarily indicative of the
results that may be expected for the year ended December 31, 2001. 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, 2000. Certain amounts in the 2000 financial statements have been
reclassified to conform to the 2001 financial statement presentation.
Recently Issued Accounting Pronouncements
In June 2000, FAS No. 133, Accounting for Derivative Instruments and Hedging
Activities, was issued, and as amended, is required to be adopted in years
beginning after June 15, 2000. This Statement requires all derivatives to be
recorded on the balance sheet at fair value. Changes in fair values of
derivatives not meeting the Statement's hedge criteria are included in income.
Because of the Company's minimal use of derivatives, the adoption of the new
Statement does not have a significant effect on the Company's results of
operations or financial position.
In September 2000, the FASB issued Statement No. 140, Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities, replacing Statement No. 125. Statement No. 140, which is
effective for transfers occurring after March 31, 2001, changes certain
provisions of Statement No. 125. The adoption of the new Statement does not
have a significant effect on the Company's results of operations or
financial position.
In June 2001, the Financial Accounting Standards Board issued Statements of
Financial Accounting Standards No. 141, Business Combinations, and No. 142,
Goodwill and Other Intangible Assets, effective for fiscal years beginning after
December 15, 2001. Under the new rules, goodwill (and intangible assets deemed
to have indefinite lives) will no longer be amortized but will be subject to
annual impairment tests in accordance with the Statements. Other intangible
assets will continue to be amortized over their useful lives.
The Company will apply the new rules on accounting for goodwill and other
intangible assets beginning in the first quarter of 2002. Application of the
nonamortization provisions of the Statement is expected to result in an increase
in net income of $4.6 million ($0.10 per share) per year. During 2002, the
Company will perform the first of the required impairment tests of goodwill and
indefinite lived intangible assets as of January 1, 2002 and has not yet
determined what the effect of these tests will be on the earnings and financial
position of the Company.
NOTE B - LIQUIDITY
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 June 30, 2001, UICI at the parent company level held cash and cash
equivalents in the amount of $16.3 million and had short and long-term
indebtedness outstanding in the amount of $6.2 million and $18.4 million,
respectively.
The Company currently estimates that, through December 31, 2001, the holding
company will have operating cash requirements in the amount of approximately
$31.9 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,
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dividends from domestic and offshore insurance companies and tax sharing
reimbursements from subsidiaries (which will be partially offset by holding
company operating expenses).
NOTE C - INVESTMENT IN HEALTHAXIS, INC. (FORMERLY HEALTHAXIS.COM, INC.)
At June 30, 2001, the Company beneficially held 24,298,874 shares of common
stock of Healthaxis, Inc. (HAXS: Nasdaq) ("HAI") (including 185,185 shares
issuable upon conversion of a $1.7 million principal amount 2% convertible
subordinated debenture maturing in September 2005 and 354,844 shares acquired on
May 23, 2001 from a former employee of Healthaxis, Inc. for a purchase price of
$400,000), representing approximately 46.0% of the issued and outstanding shares
of HAI. In addition, the Company holds a warrant to purchase 12,291 shares of
HAI common stock at an exercise price of $3.01 per HAI share. Of such 24,298,874
shares beneficially held by the Company, 8,581,714 shares (representing 16.2% of
HAI's total issued and outstanding shares) are subject to the terms of a Voting
Trust Agreement, pursuant to which trustees unaffiliated with the Company have
the right to vote such shares. Gregory T. Mutz and Patrick J. McLaughlin,
President and a director of UICI, respectively, serve on the Board of Directors
of 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). At June 30, 2001, the
Company's carrying value of its investment in HAI was $10.9 million. The
Company's equity in the loss of HAI in the three and six months ended June 30,
2001 was $(5.9) million and $(8.0) million, respectively, compared to $(9.2)
million and $(15.2) million, respectively for the three and six months ended
June 30, 2000.
Set forth below is summary condensed balance sheet and income statement data
for HAI as of and for the three and six-month periods ended June 30, 2001. This
financial information has been adjusted to exclude the effects of push-down
accounting for the January 7, 2000 merger of Insurdata Incorporated with and
into HealthAxis.com.
JUNE 30,
2001
------------
(IN THOUSANDS)
Assets
Cash and current assets ........................ $ 18,448
Property and equipment ......................... 8,523
Other assets ................................... 3,700
------------
Total assets ........................... $ 30,671
============
Liabilities
Accounts payable and accrued expenses .......... $ 5,051
Debt ........................................... 27,240
Other liabilities .............................. 3,630
------------
Total liabilities .............................. 35,921
Stockholders' equity ........................... (5,250)
------------
Total liabilities and stockholders' equity ....... $ 30,671
============
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, 2001 JUNE 30, 2001
------------------ ----------------
(IN THOUSANDS) (IN THOUSANDS)
Revenue .......................................... $ 11,122 $ 22,334
Expenses ......................................... (24,118) (39,918)
--------------- ---------------
Net loss ............................... $ (12,996) $ (17,584)
=============== ===============
Pursuant to the terms of an information technology services agreement,
amended and restated as of January 3, 2000 (the "Services Agreement"), HAI
provides information systems and software development services (including
administration of the Company's computer data center) to the Company and its
insurance company affiliates. The Services Agreement has an initial five-year
term ending on January 3, 2005, which is subject to extension by the Company.
The Services Agreement is non-exclusive and terminable by the Company or HAI at
any time upon not less than 180 days' notice to the other party.
Pursuant to the terms of the Services Agreement, UICI paid to HAI $8.2
million and $16.8 million, respectively in the three and six months ended June
30, 2001, compared to $7.0 million and $13.5 million, respectively, in the
comparable 2000 periods. HAI generated revenues of $12.3 million and $22.3
million in the three and six months ended June 30, 2001, respectively, of which
66.7% and 75.1%, respectively, were derived from information systems and
software development services provided to UICI and its affiliates.
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NOTE D - LONG TERM DEBT
Effective July 27, 2000, the Company and a limited liability company
controlled by the Company's Chairman ("Lender LLC") completed a restructuring of
the terms of a $70.0 million loan originally to a newly-formed subsidiary of the
Company in March 2000 (the "Lender LLC Loan"). As part of the restructuring, the
Company paid to Lender LLC principal owing on the Lender LLC Loan in the amount
of $6.0 million and amended the terms of the Lender LLC Loan to provide that the
aggregate principal amount of $70.0 million then owing by the Company would
consist of a $32.0 million unsecured tranche and a $38.0 million tranche secured
by a pledge of 100% of the capital stock of Mid-West National Life Insurance
Company of Tennessee ("Mid-West") (the "Amended Lender LLC Loan"). The Amended
Lender LLC Loan (a) matured on January 1, 2002, (b) continued to bear interest
at the prevailing prime rate from time to time, with interest accruing but not
payable until the earlier to occur of full prepayment of the Lender LLC Loan or
January 1, 2002, and (c) was mandatorily prepayable monthly to the extent of 1%
of the original outstanding principal balance of the Amended Lender LLC Loan.
The security interest in all remaining collateral previously pledged to secure
payment of the Lender LLC Loan and indebtedness outstanding under the bank
credit facility (including all investment securities and shares of the Company's
National Motor Club unit) was released in full.
In addition to scheduled principal payments totaling $3.5 million made
during the course of 2000, on October 20, 2000, the Company prepaid the
unsecured tranche of the Amended Lender LLC Loan in the amount of $12.5 million.
In addition, on November 2, 2000, the Company prepaid an additional $17.4
million of the unsecured tranche and $17.6 million of the secured tranche.
Accordingly, at December 31, 2000, the Company had no indebtedness outstanding
under the unsecured tranche and $19.0 million outstanding under the secured
tranche of the Amended Lender LLC Loan.
On January 30, 2001, the Company prepaid in full all principal and accrued
interest on the secured tranche of the Amended Lender LLC Loan in the amount of
$21.1 million, utilizing a portion of the proceeds received in the liquidation
of United Credit National Bank ("UCNB"). Lender LLC's security interest in 100%
of the capital stock of Mid-West National was released in full.
On July 19, 2000, the Company's offshore-domiciled insurance companies
incurred indebtedness with an institutional lender in the amount of $24.0
million. The indebtedness bore interest at the per annum rate of 11.0%, was
scheduled to mature on August 1, 2001, was secured by a pledge of all of the
assets of the offshore companies, and was guaranteed by the Company. The
proceeds of the borrowing were advanced to the parent company to fulfill the
liquidity needs at the parent company. On May 3, 2001, all then-outstanding
principal and accrued interest on the loan in the amount of $6.1 million was
paid in full.
In June 2001, Academic Management Services Corp. (formerly Educational
Finance Group, Inc.) ("AMS") paid off its remaining senior indebtedness in the
amount of $14.3 million, the proceeds of which were utilized in 1999 to fund a
portion of the purchase price for AMS' tuition installment business. At December
31, 2000, this senior indebtedness amounted to $21.3 million and was included in
student loan credit facilities on the Company's consolidated balance sheet.
During the six months ended June 30, 2001, AMS incurred $675,000 of interest
expense under this facility.
On June 30, 2001, the Company made its scheduled principal payment of $4.0
million on its $8.75% Senior Notes. Giving effect to such repayment, at June 30,
2001 the Company had $11.9 million principal amount of Senior Notes outstanding.
On April 27, 2001, the Company completed a $100.0 million securitization of
alternative (i.e., non-federally guaranteed) student loans originated by the
Company's College Fund Life Division. The securitization consisted of two $50.0
million series of Student Loan Asset Backed Notes issued by a bankruptcy-remote
special purpose corporation (the "SPC"). Interest rates on the notes reset
monthly in a Dutch auction process, with the initial rate set at 4.75% for each
of the Series A and Series B notes. At June 30, 2001, the interest rates on the
notes were 4.05% and 4.15% for Series A and Series B, respectively. The notes
are secured by a pledge of alternative student loans, are rated Aaa by Moody's
Investor Service and AAA by Fitch, Inc. and are insured by MBIA. As part of the
transaction, the SPC acquired a $70.1 million portfolio of alternative student
loans from various affiliates of the Company, including $11.0 million of loans
previously held by UICI Funding Corp. 2, $29.1 million of loans held by AMS,
$24.0 million of loans held by The MEGA Life and Health Insurance Company and
$6.0 million of loans held by Mid-West. As part of the securitization, a loan
acquisition fund was established to acquire in the future up to an additional
$19.1 million of student loans originated by the Company's College Fund Life
Division. On a
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consolidated basis, the Company continues to carry on its balance sheet the
alternative student loans and the associated $100.0 million of indebtedness
(which is included on the Company's consolidated balance sheet as student
loan credit facilities) arising from the transaction.
NOTE E - INCOME TAXES
The Company's effective tax rate on operations for the three and six-month
period ended June 30, 2001 was approximately 24% and 29%, respectively, compared
to 40% and 46%, respectively, for the same period in 2000. The decrease in
effective tax rate for the 2001 periods was primarily due to the fact that the
Company has not provided a tax expense for AMS' 2001 earnings or a tax benefit
on AMS' 2000 losses. As of June 30, 2001, AMS was 75%-owned by the Company and
filed a separate federal income tax return. On August 3, 2001, the Company
acquired the remaining 25% interest in AMS, (see Note L). For periods commencing
subsequent to the effective date upon which the Company became the 100% owner of
AMS, AMS will be included in the Company's consolidated return. The significant
operating tax loss carryover of AMS (approximately $39.5 million at December 31,
2000) arising before the acquisition of the remaining 25% ownership is not
eligible for utilization in the Company's consolidated income tax return except
to the extent of AMS' taxable income included therein. Therefore, no tax effect
will be provided on AMS' operations until the operating tax loss carryover
expires or is utilized to offset taxable income at AMS. For the three and six
months ended June 30, 2001, AMS generated earnings of $4.1 million and $3.4
million, respectively, (including amortization of goodwill and other expenses of
$1.1 million and $2.1 million, respectively), and for the three and six months
ended June 30, 2000, AMS incurred losses of $1.7 million and $11.2 million,
respectively (including amortization of goodwill and other expenses of $900,000
and $1.9 million, respectively).
NOTE F - EARNINGS (LOSS) PER SHARE
The following table sets forth the computation of basic and diluted earnings
(loss) per share:
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
--------------------------- ---------------------------
2001 2000 2001 2000
------------ ------------ ------------ ------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Income (loss) available to common shareholders:
Income from continuing operations available
to Common shareholders ........................... $ 12,616 $ 6,420 $ 24,719 $ 26,211
Loss from discontinued operations ................... -- (23,400) -- (23,400)
------------ ------------ ------------ ------------
Net income (loss) ................................... $ 12,616 $ (16,980) $ 24,719 $ 2,811
============ ============ ============ ============
Weighted average shares outstanding
-- basic earnings (loss) per share .................. 46,526 46,427 46,776 46,405
Effect of dilutive securities:
Employee stock options and other shares ............... 1,018 1,561 1,125 1,206
------------ ------------ ------------ ------------
Weighted average shares outstanding-- dilutive
Earnings (loss) per share ........................... 47,544 47,988 47,901 47,611
============ ============ ============ ============
Basic earnings (loss) per share
From continuing operations .......................... $ 0.27 $ 0.14 $ 0.53 $ 0.57
From discontinued operations ........................ 0.00 (0.50) 0.00 (0.50)
------------ ------------ ------------ ------------
Net income (loss) ................................... $ 0.27 $ (0.36) $ 0.53 $ 0.07
============ ============ ============ ============
Diluted earnings (loss) per share
From continuing operations .......................... $ 0.27 $ 0.13 $ 0.52 $ 0.55
From discontinued operations ........................ 0.00 (0.49) 0.00 (0.49)
------------ ------------ ------------ ------------
Net income (loss) ................................... $ 0.27 $ (0.36) $ 0.52 $ 0.06
============ ============ ============ ============
NOTE G - LEGAL PROCEEDINGS
The Company is a party to the following material legal proceedings:
Securities Class Action Litigation
As previously disclosed, in December 1999 and February 2000, the Company and
certain of its executive officers were named as defendants in three securities
class action lawsuits alleging, among other things, that the Company's periodic
filings with the SEC contained untrue statements of material facts and/or failed
to disclose all material facts relating to the condition of the Company's credit
card business, in violation of Section 10(b) of the Securities Exchange Act of
1934 and Rule 10b-5 thereunder. The three cases have been subsequently
consolidated as Herbert R. Silver, et al. v. UICI et al, which is pending in
U.S. District Court for the Northern District of Texas. Plaintiffs purport to
represent a class of persons who purchased UICI common stock from April 16, 1999
through December 9, 1999. On June 12, 2000, plaintiffs filed a consolidated
amended class action complaint, amending, consolidating and supplementing the
allegations made in the original cases.
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On August 4, 2000, UICI and the individual defendants filed a motion to
dismiss the case in its entirety, asserting that plaintiffs failed to properly
plead the elements of a Section 10(b) claim. On January 31, 2001, the Court
ordered plaintiffs to file a second amended complaint clarifying and curing
certain enumerated deficiencies in plaintiffs' pleadings, and plaintiffs
subsequently filed a second amended complaint on April 2, 2001.
UICI and the individual defendants filed a motion to dismiss the second
amended complaint on May 25, 2001, and on July 16, 2001 plaintiffs filed a brief
in opposition to defendants' motion to dismiss. Defendants reply brief is due
August 15, 2001, at which time the motion to dismiss will be fully briefed and
before the Court for ruling.
The Company intends to continue to vigorously contest the allegations in the
case.
Sun Communications Litigation
As previously disclosed, UICI and Ronald L. Jensen (the Company's Chairman)
are involved in litigation (Sun Communications, Inc. v. SunTech Processing
Systems, LLC, UICI, Ronald L. Jensen, et al) (the "Sun Litigation") with a third
party concerning the distribution of the cash proceeds from the sale and
liquidation of SunTech Processing Systems, LLC ("STP") assets in February 1998.
The Dallas County, Texas District Court ruled in December 1998 that, as a matter
of law, a March 1997 agreement governing the distribution of such cash proceeds
should be read in the manner urged by Sun Communications, Inc. ("Sun") and
consistent with a court-appointed liquidator's previous ruling. The District
Court entered a judgment directing distribution of the sales proceeds in the
manner urged by Sun. The District Court also entered a finding that UICI had
violated Texas securities disclosure laws and breached a fiduciary duty owed to
Sun, and the District Court awarded the plaintiff $1.7 million in attorneys'
fees, which amount could be increased to $2.1 million under certain
circumstances.
On August 1, 2000, the Court of Appeals for the Fifth District of Texas at
Dallas reversed the trial court's judgment as to UICI's liability for attorneys'
fees and its finding that UICI breached a fiduciary duty. The Appeals Court also
reversed the trial court's judgment that directed distribution of the STP sales
proceeds in the manner urged by Sun. On December 8, 2000, the Appeals Court
affirmed its earlier decision, further reversed the trial court's finding that
the Company had violated the Texas Securities Act and denied the Company's, Mr.
Jensen's and Sun's respective motions for rehearing. On May 10, 2001, the Texas
Supreme Court denied Sun's petition to review of the Court of Appeals opinion,
and the case has now been remanded to the District Court for trial on the issues
concerning the interpretation of the March 1997 agreement and the alleged breach
of fiduciary duty claim. No trial date has been set.
In the brief filed in his appeal of the District Court's December 1998
finding, Mr. Jensen reasserted that the March 1997 agreement requires that,
before STP can make a distribution to UICI and Sun, it must advance
approximately $10.0 million to Mr. Jensen in satisfaction of certain creditor
and preferred equity claims. If and to the extent that Mr. Jensen's
interpretation of the March 1997 agreement is ultimately adopted in the Sun
Litigation after all rights to appeal have been exhausted, the amount of such
proceeds which UICI may ultimately receive directly from STP may be reduced.
However, in such event and in accordance with an agreement reached with the
Company in June 1998 (the "Assurance Agreement"), Mr. Jensen has agreed that, if
UICI receives less than $15.1 million in the lawsuit, then Mr. Jensen will
advance funds to UICI sufficient to increase UICI's recovery to $15.1 million.
The Assurance Agreement also restricts the manner in which UICI can seek funds
in satisfaction of Mr. Jensen's previously unconditional agreement (the "Jensen
1996 Guaranty") to indemnify the Company for any loss or reduction in value of
the Company's Class A investment in Cash Delivery Systems, LLC.
By letter dated July 7, 2000, Mr. Jensen submitted a formal proposal to
purchase the Company's 80% interest in STP for $15.6 million ("Proposal A") or,
alternatively, to purchase for $15.1 million the Company's rights and claim of
rights to receive funds held in the registry of the Court in the Sun Litigation
("Proposal B"). As part of either proposal, the Company would agree to terminate
and release Mr. Jensen from any and all obligations arising under the Jensen
1996 Guaranty and the Assurance Agreement. As part of Mr. Jensen's proposals,
Mr. Jensen has offered to indemnify and hold the Company harmless from and
against, among other things, (a) the breach of fiduciary duty claim asserted by
Sun against the Company and Sun's related claim for attorneys' fees, (b) Sun's
claim for attorneys' fees arising out of the distribution issue in the Sun
Litigation, and (c) any and all other claims of any nature asserted by Sun
against the Company in the Sun Litigation arising out of or relating directly to
the March 1997 agreement governing the distribution of cash proceeds from the
sale and liquidation of STP.
Mr. Jensen's proposal to purchase UICI's 80% interest in STP contemplated by
Proposal A may be subject to the consent of Sun. The Company solicited the
consent of Sun to the transfer so that it might accept Proposal A, but
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Sun was unwilling to grant such consent and objected to Proposal B,
claiming that Sun's consent is required to consummate either Proposal.
Following approval of the disinterested outside directors of UICI in
accordance with the related party transactions policies and procedures
adopted by the UICI Board, on July 21, 2000, the Company formally accepted
Proposal A and, in the alternative, Proposal B. On November 22, 2000, the
Court in the Company's pending Shareholder Derivative Litigation (see
discussion below) approved the alternative settlements between Mr. Jensen
and the Company, subject to any alleged right on the part of Sun to consent
to Proposal A and/or Proposal B. The Company subsequently sued Sun
separately (UICI v. Sun Communications, Inc., pending in 134th Judicial
District Court of Dallas County, Texas, Cause No. 009353), seeking to
resolve the consent issue. Sun's motion to abate the separate suit pending
disposition of the Sun case was denied by the Court at a hearing held on
August 2, 2001, and UICI has filed a motion for summary judgment on the
consent issue.
The Company cannot at this time predict how, when or in what fashion the Sun
Litigation will ultimately be resolved. However, for financial reporting
purposes, any cash ultimately received by the Company from Mr. Jensen pursuant
to the Assurance Agreement may be treated as a capital contribution to the
Company, and the pre-tax gain recognized by UICI in 1998 from the STP sale would
be reduced by a corresponding amount. In such case, however, the Company's
consolidated stockholders' equity would not be adversely affected. In 1998, the
Company's results of operations reflected a pre-tax gain from the STP sale of
$9.7 million ($6.7 million after tax, or $0.15 per share).
Shareholder Derivative Litigation
As previously disclosed, on June 1, 1999, the Company was named as a nominal
defendant in a shareholder derivative action captioned Richard Schappel v. UICI,
Ronald Jensen, Richard Estell, Vernon Woelke, J. Michael Jaynes, Gary Friedman,
John Allen, Charles T. Prater, Richard Mockler and Robert B. Vlach, which was
filed and is pending in the District Court of Dallas County, Texas (the
"Shareholder Derivative Litigation"). The plaintiff has asserted on behalf of
UICI various derivative claims brought against the individual defendants,
alleging, among other things, breach of fiduciary duty, conversion, waste of
corporate assets, constructive fraud, negligent misrepresentation, conspiracy
and breach of contract. Plaintiff seeks to compel UICI to conduct a complete
accounting and audit relating to all related party transactions and to fully and
completely restate, report and disclose such transactions. Plaintiff further
seeks to recover for UICI's benefit all damages caused by such alleged breach of
the officers' and directors' duties to UICI. The plaintiff in the Shareholder
Derivative Litigation is also the president of Sun (the plaintiff in the Sun
Litigation), and substantially all of the initial claims made in the Shareholder
Derivative Litigation arose out of the same transactions that serve as the
factual underpinning to the Sun Communications Litigation referred to above.
At the regular quarterly meeting of the Company's Board of Directors held on
August 4, 1999, George Lane III and Stuart D. Bilton (non-employee directors of
the Company) were appointed, in accordance with Texas and Delaware law, to serve
as a special committee (the "Special Litigation Committee") to investigate and
assess on behalf of the Company the underlying claims made in the Shareholder
Derivative Litigation.
On January 18, 2000, plaintiff filed an amended petition and request for
injunctive relief. Plaintiff expanded his complaint to include a request for an
injunction against the Company prohibiting, among other things, any existing or
future transactions between UICI and any and all entities related to Ronald L.
Jensen unless each such transaction is fully and fairly disclosed to UICI
shareholders, together with an opinion from an independent public accounting
firm opining with particularity as to the fairness of each proposed transaction.
On February 4, 2000, the Court granted the Company's motion for a statutory
stay of all further proceedings in the case, in accordance with Texas law
(including action on plaintiff's request for injunctive relief), pending
completion of the review of the claims currently undertaken by the Special
Litigation Committee, and its determination as to what further action, if any,
should be taken with respect to those claims. Subsequent to imposition of the
statutory stay, plaintiff filed (a) a motion to lift the statutory stay for the
limited purpose of hearing a motion for summary judgement to enforce Mr.
Jensen's 1996 agreement (the "Jensen 1996 Guaranty") to indemnify the Company
for any loss or reduction in value of the Company's Class A investment in Cash
Delivery Systems, LLC, (b) a second amended complaint and (c) a motion to lift
the statutory stay for the limited purpose of hearing a motion for summary
judgment against certain individual defendants with respect to the breach of
fiduciary duty claim in the Sun Litigation. The second amended complaint added
reference to the consent order issued by the OCC; attempted to quantify damages
alleged to have resulted from numerous related party transactions previously
disclosed in the Company's public filings; added an allegation of usurpation of
corporate opportunities; and requested injunctive relief that would require the
Company to, among other things, freeze, review and where appropriate rescind all
related party transactions, and require detailed reporting of related party
transactions.
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On March 20, 2000, the Special Litigation Committee delivered to the Board
of Directors of UICI its findings with respect to the allegations in the
original complaint. Based on its review and assessment of the allegations in the
original complaint, the Special Litigation Committee recommended that the
Company (a) seek dismissal of claims raised in the original complaint in the
derivative lawsuit, including dismissal of claims relating to the Jensen 1996
Guaranty (see discussion below); (b) seek the release to UICI of approximately
$7.6 million of uncontested proceeds from the STP sale held in the District
Court's registry; (c) seek from Mr. Jensen and/or former management certain
legal fees incurred by UICI in connection with the Sun Litigation that it
believes were incurred without appropriate board approval (which fees were
reimbursed by Mr. Jensen on July 5, 2000); (d) seek reimbursement of certain
legal fees awarded to Sun if and only if certain ongoing appeals prove
unsuccessful; and (e) implement certain heightened related-party transaction
controls. The Special Litigation Committee also recommended that UICI ratify the
Assurance Agreement, which allows UICI to recover up to $15.1 million from the
STP sale and which also requires UICI to look to the proceeds from the STP sale
to satisfy the Jensen 1996 Guaranty of the value of UICI's initial investment in
a predecessor company to STP. The Company's Board of Directors affirmed the
Special Litigation Committee's findings and recommendations and directed
management to implement the specific recommendations as promptly as practicable.
On March 22, 2000, the Special Litigation Committee reported to the Court
its findings and recommendations with respect to the allegations in the original
complaint, and the Court granted plaintiff's motion to lift the statutory stay
in the proceedings for the purposes of evaluating the Special Litigation
Committee's decision on the Jensen 1996 Guaranty (and the derivative plaintiff's
motion for summary judgment on the Jensen 1996 Guaranty) and releasing the $7.6
million of uncontested funds from the sale of STP to the Company. The Company
filed a motion with the appeals court in the Sun Litigation seeking a
distribution to UICI of $7.6 million of uncontested funds. Following Sun's
demand that a portion of the remaining funds held in the court's registry in the
Sun Litigation be distributed to Sun, the court of appeals denied all requested
relief. On June 10, 2000, the Court dismissed plaintiff's claims arising from
the Jensen 1996 Guaranty.
On September 11, 2000, the Court lifted the statutory stay in the case at
the request of the Special Litigation Committee, in anticipation of the
Committee's report with respect to nine specific transactions that were the
subject of allegations made in plaintiff's first and second amended complaints.
On September 21, 2000, the Special Litigation Committee delivered to the Board
of Directors of UICI its findings with respect to these specific allegations.
Based on its review and assessment, the Special Litigation Committee recommended
that the Company (a) seek dismissal of the claims related to eight of the nine
transactions reviewed, (b) make certain supplemental disclosures with respect to
certain of the related party transactions that were the subject of the first and
second amended complaints, and (c), with respect to one of the nine
transactions, seek reimbursement of a portion of compensation paid to an
employee of the Company during the period 1995-1996. After plaintiff submitted
supplemental information to the Special Litigation Committee, the Special
Litigation Committee withdrew its recommendation that the Company seek
reimbursement of a portion of compensation paid to an employee, and conducted
further review. The Company's Board of Directors affirmed the Special Litigation
Committee's September 21, 2000 findings and recommendations and directed
management to implement the specific recommendations as promptly as practicable.
In October 2000, the Company and the Special Litigation Committee filed a
motion for final settlement and release of certain derivative claims related to
the reimbursement of certain legal fees from Mr. Jensen and for dismissal of all
derivative claims asserted by plaintiff relating to the Sun Litigation. The
Company also sought the court's approval to allow Mr. Jensen to purchase the
Company's 80% interest in STP for $15.6 million ("Proposal A") or,
alternatively, to purchase for $15.1 million the Company's rights and claim of
rights to receive funds held in the registry of the court in the Sun Litigation
("Proposal B") (see discussion above under the caption "Sun Communications
Litigation"). On November 22, 2000, the Court granted the motion for settlement
and release of the derivative claims related to the reimbursement of certain
legal fees from Mr. Jensen, granted the motion to dismiss the derivative claims
asserted by the plaintiff relating to the Sun Litigation and related
transactions, and approved the alternative settlements between Mr. Jensen and
the Company, subject to any alleged right on the part of Sun Communications,
Inc. ("Sun") to consent to Proposal A and/or Proposal B. The Company
subsequently sued Sun separately (UICI v. Sun Communications, Inc., pending in
134th Judicial District Court of Dallas County, Texas, Cause No. 009353),
seeking to resolve the consent issue. Sun subsequently moved to abate the
separate suit.
On January 25, 2001, the Special Litigation Committee delivered to the
Company its final findings, recommendations, and conclusions. The Special
Litigation Committee reinstated the prior recommendation that the Company seek a
portion of the compensation paid to an employee of the Company during the period
1995-1996, which compensation had previously been recovered by the Company in
December 2000. In addition, the Special
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Litigation Committee found that it "has uncovered absolutely no evidence of
any pattern of behavior that would suggest any motive to disadvantage the
Company on the part of any of UICI's present or former officers or
directors," and concluded that, in its opinion and except with respect to
the compensation previously recovered from the employee and the legal fees
previously recovered from Mr. Jensen (see discussion above), the "related
party transactions that were undertaken accrued to the significant benefit
of UICI." Finally, the Special Litigation Committee recommended dismissal
of plaintiff's lawsuit in its entirety. At a meeting held on February 28,
2001, the UICI Board of Directors accepted the final recommendations and
conclusions of the Special Litigation Committee. The Company has been
reimbursed by the employee for such portion of the compensation paid during
the period 1995-1996.
On June 20, 2001, the Court granted UICI's motion to dismiss the case in its
entirety, reserving the issue of attorneys' fees and expenses which, under Texas
law, the Court has the discretion to award. Plaintiff has filed an application
for attorneys' fees and reimbursement of expenses alleging that he is entitled
to approximately $2.7 million in legal fees and approximately $34,000 in
expenses. Alleging that the case was brought for an improper purpose, the
Company has filed a corresponding application for its attorneys' fees and
reimbursement of expenses in the aggregate amount of approximately $2,000,000. A
trial date of September 5, 2001 has been set to hear evidence on the issue of
attorneys' fees and a motion filed by Mr. Jensen for sanctions against plaintiff
for posting on the Internet statements allegedly defamatory to Mr. Jensen and
damaging to UICI.
ACE and AFCA Litigation
As previously disclosed, the Company and UCNB were initially parties to
separate lawsuits filed 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
(American Credit Educators, LLC v. United Credit National Bank and UICI and
American Fair Credit Association, Inc. v. United Credit National Bank and UICI,
each pending in the United States District Court for the District of Colorado).
In the suits, plaintiffs alleged, among other things, that UCNB has breached its
agreements with ACE and AFCA and have claimed 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 January 12, 2001, AFCA filed a second amended complaint seeking, among
other things, a declaratory judgement and injunctive relief and alleging breach
of contract and other causes of action. ACE filed a first amended complaint on
November 6, 2000.
On September 28, 2000, ACE and AFCA filed motions for preliminary
injunctions to compel UICI to, among other things, deposit a significant portion
of the proceeds of the sale of UICI's credit card business in escrow under court
supervision. AFCA filed a supplement to its motion on February 2, 2001, alleging
the liquidation of UCNB as an additional ground for relief. On October 16, 2000,
the Company and UCNB filed motions to dismiss both cases. On January 12, 2001,
the court granted UCNB's motion to dismiss UCNB from the case as to claims for
monetary relief and denied the remainder of UICI's motion to dismiss.
Following the voluntary liquidation of UCNB completed on January 29, 2001,
the legal existence of UCNB terminated and, in accordance with the terms of the
June 2000 Consent Order issued by the OCC against UICI, UICI expressly assumed
all liabilities of UCNB, including contingent liabilities associated with
pending and future litigation. Accordingly, on February 5, 2001, UICI moved to
substitute UICI for UCNB as a party defendant and to substitute United
CreditServ for UCNB for purposes of asserting and prosecuting counterclaims,
cross-claims, third party complaints and other offensive pleadings. On March 9,
2001, the court granted UICI's motion to consolidate the ACE and AFCA lawsuits
and ordered the plaintiffs to file an amended complaint on or before March 23,
2001. The Court denied ACE's motion for a preliminary injunction without
prejudice, and AFCA subsequently withdrew its motion for a preliminary
injunction. ACE and AFCA filed a consolidated complaint against the Company and
UCNB on April 4, 2001. UICI filed its motion to dismiss plaintiffs' consolidated
complaint on April 30, 2001. The court denied ACE's motion for preliminary
injunction without prejudice, and AFCA subsequently withdrew its motion for a
preliminary injunction. UICI filed its motion to dismiss plaintiffs'
consolidated complaint on April 30, 2001.
On June 11, 2001, UICI and UCNB filed a motion for a preliminary and
permanent injunction against ACE to prevent ACE from further collection
activities with respect to certain UCNB cardholder accounts and to require ACE
to remove all negative credit bureau reports related to such collection
activities. The Court has yet to rule on such motion.
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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 plaintiff's claims. UICI's motion to dismiss was denied as to AFCA's
breach of contract claim as it relates to administration of cardholder accounts,
AFCA's breach of contract claim as it relates to indemnification, AFCA's
interference with contractual relations claims, and ACE's breach of contract
claims.
Mitchell Litigation
As previously disclosed, the Company is one of three named defendants in a
class action suit filed in 1997 (Dadra Mitchell v. American Fair Credit
Association, United Membership Marketing Group, LLC and UICI) pending in
California state court (the "Mitchell case"), in which plaintiffs have alleged
that defendants violated California law regarding unfair and deceptive trade
practices by making misleading representations about, and falsely advertising
the nature and quality of, the benefits of membership in American Fair Credit
Association ("AFCA"). Plaintiffs also filed a companion case in federal district
court in San Francisco captioned Dadra Mitchell v. BankFirst, N.A., which
alleges violations of the federal Truth in Lending Act and Regulation Z. on the
theory that the 90-day notice period required for termination of AFCA membership
was not properly disclosed. The only defendant in the federal case (the
"BankFirst case") is BankFirst, N.A., a bank that issued a VISA credit card made
available through the AFCA program.
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.
In October 2000, the state court in the Mitchell case granted, in part, and
denied, in part the joint motions of UICI, AFCA and UMMG to compel arbitration
and to narrow the scope of the plaintiff class. The court severed from the class
action the claims for recovery of money by way of damages or restitution of
class members who joined AFCA after January 1, 1998 and who executed signed
arbitration agreements. However, the state court denied UICI's motion to compel
arbitration with respect to these class members' claims for injunctive relief
and, as a result, their claims for injunctive relief remain part of the class
action. With respect to class members who were existing members of AFCA in
January of 1998 and who received through the mail an amendment adding
arbitration of disputes to their AFCA membership agreement, the state court
denied UICI's motion to compel arbitration unless the member also signed a
separate arbitration agreement. In addition, the state court clarified that its
prior April 12, 1999 order certified a class with respect to all claims pleaded
in the complaint, not solely claims under the California Credit Services Act of
1984.
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 that, consequently, all proceedings in the Mitchell case were stayed.
UICI has not received notice from plaintiff Mitchell of a motion for any
relief from the stay, and there have been no further proceedings in the state
court. Accordingly, at this time, it is unclear whether or not plaintiffs will
move for relief from the stay of proceedings, and, if so, what relief from the
stay, if any, will be granted to plaintiffs pending the outcome of UICI's
appeal.
Reinsurance Litigation
As previously disclosed, on November 3, 2000, The MEGA Life and Health
Insurance Company (a wholly-owned subsidiary of the Company) ("MEGA") was named
as a party defendant in a suit filed by General & Cologne Life Re of America
("Cologne Re") (General & Cologne Life Re of America vs. The MEGA Life and
Health Insurance Company), which is currently pending in the High Court of
Justice, Queen's Bench Division, Commercial Court, Royal Courts of Justice, in
London, England. Plaintiff has alleged that it is due the sum of L.1,592,358.54
(approximately US $2.3 million as of June 30, 2001) for losses incurred in a
health insurance program in the United Kingdom in which Cologne Re was a cedant
of reinsurance and MEGA was Cologne Re's retrocessionaire.
A defense has been filed by MEGA, and Cologne Re recently submitted a reply
pleading, which is presently under review by counsel. English law provides for
extensive document discovery, which is being undertaken by both parties.
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The Company believes that MEGA has meritorious defenses and
counterclaims against Cologne Re, which it intends to pursue vigorously.
Gottstein Litigation
As previously disclosed, UICI, Ronald L. Jensen, and UGA, Inc. are party
defendants in a purported class action lawsuit filed in November 1998
(Gottstein, et al. v. The National Association for the Self-Employed, et al.,
pending in the United States District Court for the District of Kansas). The
class representatives have alleged fraud, conspiracy to commit fraud, breach of
fiduciary duty, violation of the Kansas Consumer Protection Act, conspiracy to
commit RICO violations, and violation of RICO, all arising out of the concurrent
sales of individual health insurance policies underwritten and marketed by PFL
Life Insurance Company ("PFL") and memberships in The National Association for
the Self-Employed. On February 1, 2001, the court approved a settlement
including all potential class members in all states, including Kansas. Under the
terms of a cost sharing agreement with a unit of AEGON USA, UICI and/or MEGA
will be obligated to reimburse the AEGON USA unit for 50% of the cash cost of
the settlement.
Disposition of the case under the current terms of the settlement will not
have a material adverse effect upon the Company.
State of Connecticut Investigation
As previously disclosed, on April 19, 2000, the Connecticut Attorney
General's Office served upon UCNB a Civil Investigative Demand, seeking
information regarding UCNB's credit card fees, disclosures, marketing practices,
affinity relationships and the handling of payments from consumers to UCNB. On
May 26, 2000, UCNB submitted a timely response to the information request.
Comptroller of the Currency Consent Order
As previously disclosed, the Company is subject to a Consent Order,
initially issued by the United States Office of the Comptroller of the Currency
(the "OCC") on June 29, 2000 and as modified on January 29, 2001, confirming the
obligations of the Company to assume all obligations of UCNB. Until January 29,
2001, UCNB was a special purpose national bank headquartered in Sioux Falls,
South Dakota, and an indirect wholly owned (except for directors' qualifying
shares) subsidiary of the Company. On January 29, 2001, the Company completed
the voluntary liquidation of UCNB, in accordance with the terms of a plan of
voluntary liquidation approved by the OCC.
In the event that UICI fails to comply with the terms of the Consent Order,
as modified, such failure could result in sanctions brought against the Company
and its officers and directors, including the assessment of civil money
penalties and enforcement of the Consent Order in Federal District Court.
Roe Litigation
As previously disclosed, on March 8, 2001, UICI and UCNB were named as
defendants in a case (Timothy M. Roe v. Phillip A. Gray, American Fair Credit
Association, Inc., UICI, UCNB, et al) filed in the U.S. District Court for the
District of Colorado. On his own behalf and on behalf of a purported class of
similarly situated individuals, plaintiff in connection with the AFCA credit
card program has alleged breach of contract and violations of the federal Credit
Repair Organizations Act and the Truth-In-Lending Act and seeks certain
declaratory relief.
In May 2001, UICI, UCNB and each of the other named defendants filed a
motion to stay the litigation (the "Denver action") pending arbitration pursuant
to the Federal Arbitration Act and 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 motion to stay the Denver litigation and the petitions to
compel arbitration are pending.
The Company believes that it has meritorious defenses to the allegations
and intends to vigorously contest the Denver action and to pursue arbitration of
the individual plaintiff's claim in North Carolina.
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New Mexico Class Action Litigation
On June 1, 2001, UICI and MEGA were served as parties defendant in a
purported class action (Frances C. Chandler, Individually and as a
Representative of a Class of Similarly Situated Persons, vs. PFL Life Insurance
Company, UICI, The MEGA Life and Health Insurance Company, et al.) initially
filed on January 12, 2001 and pending in United States District Court for the
District of New Mexico (Albuquerque). On his own behalf and on behalf of an
alleged class of similarly situated individuals, plaintiff has alleged that
sales materials associated with a group hospital benefit health insurance plan
sponsored, marketed, underwritten, reinsured and/or administered by defendants
contained incomplete, inaccurate, misleading and/or false statements, and that
benefits and treatment were denied plaintiffs with attendant credit damage, pain
and suffering and loss of enjoyment. Plaintiffs have alleged, among other
things, breach of contract, misrepresentation, breach of fiduciary duties,
unjust enrichment, and the violation of the duty of good faith and fair dealing.
Plaintiffs initially brought the case in New Mexico state court, and the
case was subsequently removed to federal court on the basis of diversity and
amount in controversy. Defendants filed an answer denying all claims on July 6,
2001. No motion to remand to state court has been filed at this time. Since this
class action suit is in a preliminary stage, no discovery has been conducted and
the Company is unable at this time to assess its ultimate exposure in the case.
United Credit National Bank Shareholder Derivative Litigation
Various former directors and officers of United Credit National Bank have
been named as defendants in a shareholder derivative action (William K. Lester,
on behalf of United Credit National Bank, v. Ronald L. Jensen, Gregory T. Mutz,
et al), which was filed on June 29, 2001 and is pending in the District Court of
Harris County, Texas. The plaintiff has asserted on behalf of UCNB various
derivative claims brought against the individual defendants, alleging, among
other things, negligence in connection with the operations of UCNB. In December
2000, plaintiff made a demand on the Board of Directors of United Credit
National Bank to investigate and assess certain alleged derivative claims. The
Board of Directors constituted a special committee to investigate and assess the
asserted derivative claims, and the special committee determined that the claims
were wholly without merit.
UICI has agreed to advance the expenses of the individual defendants
incurred in connection with the defense of the case, subject to the defendants'
undertaking to repay such advances unless it is ultimately determined that they
are entitled to indemnification by UICI under the terms of the Company's bylaws.
Academic Management Services Corp. Class Action Litigation
Academic Management Services Corp. has been named as a party defendant
in a purported class action suit (Timothy A. McCulloch, et al. v.
Educational Finance Group Inc. et al) filed on June 20, 2001 in the United
States District Court for the Southern District of Florida (Miami). On his
own behalf and on behalf of an alleged class of similarly situated
individuals, plaintiff has alleged, among other things, that, in connection
with the marketing and origination of federally-insured Parent Plus student
loans, AMS and other defendants violated certain provisions of the federal
Higher Education Act, were negligent, committed mail and wire fraud,
breached a fiduciary duty owed to plaintiffs and made negligent
misrepresentations.
The Company believes that the claims are wholly without merit, and AMS
intends to vigorously contest the case.
Other Matters
The Company and its subsidiaries are parties to various other pending legal
proceedings arising in the ordinary course of business, including some asserting
significant damages arising from claims under insurance policies, disputes with
agents and other matters. Based in part upon the opinion of counsel as to the
ultimate disposition of such lawsuits and claims, management believes that the
liability, if any, resulting from the disposition of such proceedings will not
be material to the Company's financial condition or results of operations.
NOTE H - SEGMENT INFORMATION
The Company's operating segments included in operations are: (i) Insurance,
which includes the businesses of the Self Employed Agency Division, the Student
Insurance Division, the OKC Division, the Special Risk Division, the Senior
Markets Division, and the National Motor Club Division (which the Company sold
on July 27, 2000); (ii) Financial Services, which includes the businesses of
Academic Management Services Corp. ("AMS"), the Company's investment in
Healthaxis, Inc. (formerly HealthAxis.com, Inc.) and Third Party Administration
17
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(formerly UICI Administrators), and (iii) Other Key Factors.
Other Key Factors includes (a) investment income not allocated to other
business segments, (b) interest on non-student loan indebtedness, (c) general
expenses relating to corporate operations, (d) realized gains or losses on sale
of investments (e) the operations of the Company's AMLI Realty Co. subsidiary
(including AMLI Realty Co.'s 20% equity interest in AMLI Commercial Properties
Trust, a private real estate investment trust), (f) minority interest, (g)
variable stock compensation and (h) amortization of goodwill. 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. Operations that do
not constitute reportable operating segments have been combined with Other Key
Factors. Depreciation expense and capital expenditures are not considered
material. Management does not allocate income taxes to segments. Transactions
between reportable operating segments are accounted for under respective
agreements, which provide for such transactions generally at cost.
Revenues, income from continuing operations before federal income taxes, and
assets by operating segment are set forth in the tables below:
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
---------------------------- ----------------------------
2001 2000 2001 2000
------------ ------------ ------------ ------------
(IN THOUSANDS)
Revenues
Insurance:
Self Employed Agency ........................ $ 167,536 $ 137,811 $ 324,057 $ 275,502
Student Insurance ........................... 30,321 28,430 58,314 55,704
OKC Division ................................ 24,974 22,885 48,339 46,581
Special Risk ................................ 15,420 9,564 18,644 20,232
Senior Markets .............................. -- -- -- --
National Motor Club ......................... -- 9,120 -- 18,357
------------ ------------ ------------ ------------
238,251 207,810 449,354 416,376
Financial Services:
Academic Management Services ................ 40,289 44,754 77,686 80,988
Third Party Administration .................. 6,374 5,635 12,578 9,357
Gain on sale of HealthAxis.com shares ....... -- -- -- 26,300
------------ ------------ ------------ ------------
46,663 50,389 90,264 116,645
Other Key Factors ............................. 10,049 7,386 16,038 16,683
Intersegment Eliminations ..................... (886) (2,390) (1,916) (2,525)
------------ ------------ ------------ ------------
Total revenues ................................... $ 294,077 $ 263,195 $ 553,740 $ 547,179
============ ============ ============ ============
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THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------ ------------------------
2001 2000 2001 2000
---------- ---------- ---------- ----------
(IN THOUSANDS)
Income (loss) from continuing operations
before federal income taxes:
Insurance:
Self Employed Agency .................................. $ 18,629 $ 17,683 $ 36,201 $ 35,817
Student Insurance ..................................... 855 7 1,314 91
OKC Division .......................................... (236) 2,272 3,560 6,405
Special Risk .......................................... (257) 297 (405) 543
Senior Markets ........................................ (784) -- (784) --
National Motor Club ................................... -- 1,319 -- 2,408
---------- ---------- ---------- ----------
18,207 21,578 39,886 45,264
Financial Services:
Academic Management Services .......................... 5,240 (791) 5,509 (9,252)
Third Party Administration ............................ (216) 126 (1,059) (140)
Gain on sale of HealthAxis.com shares ................. -- -- -- 26,300
Equity in Healthaxis, Inc. operating loss ............. (5,886) (9,234) (7,965) (15,154)
---------- ---------- ---------- ----------
(862) (9,899) (3,515) 1,754
Other Key Factors:
General corporate expenses and other (including
interest on non-student loan indebtedness) .......... 2,379 501 2,755 5,154
Variable stock compensation ........................... (1,979) -- (1,820) --
Goodwill amortization ................................. (1,172) (1,548) (2,344) (3,237)
---------- ---------- ---------- ----------
(772) (1,047) (1,409) 1,917
Total income from continuing operations before federal
income taxes ............................................ $ 16,573 $ 10,632 $ 34,962 $ 48,935
========== ========== ========== ==========
JUNE 30, DECEMBER 31,
2001 2000
------------ ------------
(IN THOUSANDS)
Assets
Insurance:
Self Employed Agency ............................ $ 528,091 $ 446,106
Student Insurance ............................... 59,206 78,197
OKC Division .................................... 759,957 666,552
Special Risk .................................... 93,566 97,647
------------ ------------
1,440,820 1,288,502
Financial Services:
Academic Management Services .................... 1,371,640 1,479,217
Third Party Administration ...................... 5,770 6,392
Investment in Healthaxis, Inc. .................. 10,876 18,442
------------ ------------
1,388,286 1,504,051
Other Key Factors:
General corporate and other ..................... 100,693 163,361
Goodwill ........................................ 89,775 92,120
------------ ------------
190,468 255,481
Total assets .......................................... $ 3,019,574 $ 3,048,034
============ ============
NOTE I - 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 Specialized Card Services, Inc. Employees to Richland State Bank
Richland State Bank ("RSB") is a state-chartered bank in which Ronald L.
Jensen holds a 100% equity interest.
In accordance with the terms of a loan origination agreement between RSB
and Academic Management Services Corp. ("AMS"), RSB provides to AMS certain loan
origination and underwriting services with respect to AMS' Platinum Alternative
Loan Program, through which AMS arranges for private student loans to students
in post-secondary education (primarily graduate health curricula). In accordance
with the origination agreement, RSB originates the student loans and resells
such loans to AMS at par less an origination fee of 31 basis points (0.31%).
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In addition, the agreement provides that RSB may pass through to AMS all of
its costs and expenses associated with its origination and underwriting
obligations under the agreement.
Pursuant to the terms of an underwriting and processing agreement between
RSB and Specialized Card Services, Inc. (an indirect wholly owned subsidiary of
the Company) ("SCS"), SCS formerly provided to RSB certain underwriting and loan
processing services, utilizing seventeen SCS employees resident in Sioux Falls,
which enabled RSB to perform its obligations under the AMS origination
agreement. The fees and expenses paid to SCS by RSB pursuant to the processing
agreement were passed through to AMS in accordance with the terms of the
origination agreement. The student loan underwriting and loan processing
services constituted the sole remaining operation of SCS in Sioux Falls
following the sale of UICI's credit card portfolio in September 2000 and final
liquidation of United Credit National bank in January 2001.
The Company entered into an agreement, dated as of June 4, 2001, with
Academic Management Services Corp., SCS and RSB, pursuant to which among other
things SCS and the Company agreed to permit RSB to make offers of employment to,
and to hire, seventeen SCS employees. In connection with such offers, RSB agreed
to assume all liabilities (including accrued vacation and benefits) accruing on
and after June 30, 2001 associated with the employees actually hired by RSB. The
Company agreed to retain all liability for severance and/or termination costs
associated with employees who elected not to accept RSB's offer of employment.
On June 30, 2001, SCS confirmed that all employees had either elected to accept
offers of employment from RSB or had been terminated by SCS, and SCS closed its
remaining operations in Sioux Falls.
Sale of Minority Interest in Cassidy Employee Benefit Services, LLC
Effective May 31, 2001, WinterBrook Holdings, Inc. (a wholly-owned
subsidiary of the Company) sold its 44% minority interest in Cassidy Employee
Benefit Services, LLC ("Cassidy") to Cassidy for $140,000 in cash. The remaining
equity holders of Cassidy constituted the former principals of the Company.
NOTE J - EMPLOYEE AND AGENT STOCK ACCUMULATION PLANS
UICI Employee Stock Ownership and Savings Plan
The Company maintains for the benefit of its and its subsidiaries' employees
the UICI Employee Stock Ownership and Savings Plan (the "Employee Plan"). The
Employee Plan through its 401(k) feature enables eligible employees to make
pre-tax contributions to the Employee Plan in an amount not in excess of 15% of
compensation (subject to overall limitations) and to direct the investment of
such contributions among several investment options, including UICI common
stock. A second feature of the Employee Plan constitutes an employee stock
ownership plan (the "ESOP"), contributions to which are invested primarily in
shares of UICI common stock. The ESOP feature allows participants to receive
from UICI and its subsidiaries discretionary matching contributions and to share
in certain supplemental contributions made by UICI and its subsidiaries.
Contributions by UICI and its subsidiaries to the Employee Plan under the ESOP
feature currently vest in prescribed increments over a seven-year period.
On August 11, 2000, the Company issued to the Employee Plan 1,610,000 shares
of UICI common stock at a purchase price of $5.25 per share or $8.5 million in
the aggregate. The purchase price for the shares was paid by delivery to UICI of
the Employee Plan's $8.5 million promissory note (the "Plan Note"), which
matures in three years and is secured by a pledge of the purchased shares. The
shares of UICI common stock purchased with the Plan Note (the "$5.25 ESOP
Shares") are held in a suspense account for allocation among participants as and
when the Company's matching and supplemental contributions to the ESOP are made.
It is expected that the Plan Note will be extinguished over a period of
approximately two years by crediting the Company's matching and supplemental
contribution obligations under the ESOP feature of the Employee Plan against
principal and interest due on the Plan Note.
During the six months ended June 30, 2001, the Company recorded compensation
expense associated with contributions to the Employee Plan in the amount of $2.9
million. Included in the $2.9 million expense is $970,000 of stock appreciation,
which is reflected in other expenses on the Company's consolidated statement of
income. The amount classified as stock appreciation expense represents the
incremental compensation expense associated with the allocation during the six
months ended June 30, 2001 of 331,000 $5.25 ESOP Shares to fund the Company's
matching and supplemental contributions to the ESOP. As and when the Company
makes matching and supplemental contributions to the ESOP by allocating to
participants' accounts the $5.25 ESOP Shares held in the suspense account, the
Company will record additional compensation expense equal to the excess, if any,
between the
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fair value of the shares allocated and $5.25 per share. The allocated $5.25
ESOP Shares are considered outstanding for purposes of the computation of
earnings per share.
The Company currently estimates that approximately 600,000 $5.25 ESOP Shares
will be allocated to participants' ESOP accounts during 2001. The fair value of
the 924,000 unallocated $5.25 ESOP Shares totaled $11.8 million at June 30,
2001.
Agent Stock Accumulation Plans
The Company sponsors a series of stock accumulation plans (the "Agent
Plans") established for the benefit of the independent insurance agents and
independent sales representatives associated with UGA - Association Field
Services, New United Agency, Cornerstone Marketing of America and CFLD
Association Field Services.
The Agent Plans generally combine an agent-contribution feature and a
Company-match feature. The agent-contribution feature generally provides that
eligible participants are permitted to allocate a portion (subject to prescribed
limits) of their commissions or other compensation earned on a monthly basis to
purchase shares of UICI common stock at the fair market value of such shares at
the time of purchase. Under the Company-match feature of the Agent Plans,
participants are eligible to have posted to their respective Agent Plan accounts
book credits in the form of equivalent shares based on the number of shares of
UICI common stock purchased by the participant under the agent-contribution
feature of the Agent Plans. The "matching credits" vest over time (generally in
prescribed increments over a ten-year period, commencing the plan year following
the plan year during which contributions are first made under the
agent-contribution feature), and vested matching credits in a participant's plan
account in January of each year are converted from book credits to an equivalent
number of shares of UICI common stock. Matching credits forfeited by
participants no longer eligible to participate in the Agent Plans are
reallocated each year among eligible participants and credited to eligible
participants' Agent Plan accounts.
The Agent Plans do not constitute qualified plans under Section 401(a) of
the Internal Revenue Code of 1986 or employee benefit plans under the Employee
Retirement Income Security Act of 1974, and the Agent Plans are not subject to
the vesting, funding, nondiscrimination and other requirements imposed on such
plans by the Internal Revenue Code and ERISA.
Prior to July 1, 2000, the Company granted matching credits in an amount
equal to the number of shares of UICI common stock purchased by the participant
under the agent-contribution feature of the Agent Plans. Effective July 1, 2000,
the Company modified the formula for calculating the number of matching credits
to be posted to participants' accounts. During the period beginning July 1, 2000
and ending on the earlier of June 30, 2002 or the date that an aggregate of
2,175,000 share equivalents have been granted under this revised formula, the
number of matching credits issued to an individual participant will be the
greater of (a) the number of matching credits determined each month by dividing
the dollar amount of the participant's contribution for that month by $5.25, or
(b) the actual number of shares acquired, at then-current fair market value, by
the participant's contribution amount.
Prior to July 1, 2000, the Company purchased UICI shares in the open market
from time to time to satisfy its commitment to issue its shares upon vesting of
matching credits under the Agent Plans. During the period beginning July 1, 2000
and ending June 30, 2002, the Company will utilize up to 2,175,000 newly-issued
shares to satisfy its commitment to deliver shares that will vest under the
Company-match feature of the Agent Plans. Under the arrangement effective July
1, 2000, the Company's subsidiaries will transfer to the Company $5.25 per share
for any newly issued shares utilized to fund vested matching credits under the
Plans.
For financial reporting purposes, the Company accounts for the Company-match
feature of its Agent Plans under EITF 96-18 "Accounting for Equity Instruments
that are issued to Other Than Employees for Acquiring or in Connection with
Selling Goods and Services," by recognizing commission expense over the vesting
period in an amount equal to the fair market value of vested shares at the date
of their vesting and distribution to the participants. At each quarter-end, the
Company estimates its current liability for unvested matching credits by
reference to the number of unvested credits, the current market price of the
Company's common stock, and the Company's estimate of the percentage of the
vesting period that has elapsed up to the current quarter end. Changes in the
liability from one quarter to the next are accounted for as an increase in, or
decrease to, commission expense, as the case may be. Upon vesting, the Company
releases the accrued liability (equal to the market value of the vested shares
at date of vesting) with a corresponding increase to paid-in capital. Unvested
matching credits are considered share equivalents outstanding for purposes of
the computation of earnings per share.
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For the six months ended June 30, 2001 and 2000, the Company recorded
commission expense associated with the Agent Plans in the amount of $1.9 million
and $1.4 million, respectively.
At June 30, 2001, the Company had recorded approximately 1.3 million
unvested matching credits associated with the Agent Plans, of which the Company
estimates 387,000 will vest at January 1, 2002.
The accounting treatment of the Company's Agent Plans will result in
unpredictable stock-based commission expense charges, dependent upon
fluctuations in the quoted price of UICI common stock. These unpredictable
fluctuations in stock based commission charges may result in material non-cash
fluctuations in the Company's results of operations. In periods of general
decline in the quoted price of UICI common stock, if any, the Company will
recognize less stock based commission expense than in periods of general
appreciation in the quoted price of UICI common stock. In addition, in
circumstances where increases in the quoted price of UICI common stock are
followed by declines in the quoted price of UICI common stock, negative
commission expense may result as the Company adjusts the cumulative liability
for unvested stock-based commission expense. Stock- based commission expense is
non-cash and will accordingly have no impact on the Company's cash flows or
liquidity.
NOTE K - NEW VENTURE
Effective April 1, 2001, Specialized Card Services, Inc. ("SCS"), an
indirect wholly-owned subsidiary of the Company, entered into an agreement with
an unaffiliated third party to form a new venture to engage in the business of
collecting charged off consumer debt. In exchange for 50% of the common stock in
the newly formed entity and $3.0 million liquidation value of preferred stock,
SCS contributed to the newly formed corporation the business operations of its
Harker Heights, Texas collection facility at net book value and certain
previously written-off credit card receivables.
NOTE L - SUBSEQUENT EVENT
On August 3, 2001, the Company completed the acquisition of the remaining
25% equity interest in Academic Management Services Corp. ("AMS") it did not own
from AMS' former chief executive officer for a purchase price of $750,000. In
addition, the former chief executive officer and certain former employees of AMS
have agreed, for a three-year period, not to engage in any business competitive
with AMS' tuition installment or student loan servicing businesses. These former
executives and their affiliates further agreed to pay to AMS fees in prescribed
amounts in connection with the origination and consolidation of certain student
loans over a three-year period ending in August 2004.
ITEM 2 -- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
The Company's business segments included in operations are: (i) Insurance,
which includes the businesses of the Self Employed Agency Division, the Student
Insurance Division, the OKC Division, the Special Risk Division, the Senior
Markets Division and the National Motor Club Division (which the Company sold
July 27, 2000); (ii) Financial Services, which includes the businesses of
Academic Management Services Corp., the Company's investment in Healthaxis,
Inc., (formerly Insurdata Incorporated), and Third Party Administration
(formerly UICI Administrators) and (iii) Other Key Factors, which includes (a)
investment income not allocated to other business segments, (b) interest on
non-student loan indebtedness, (c) general expenses relating to corporate
operations, (d) realized gains or losses on sale of investments (e) the
operations of the Company's AMLI Realty Co. subsidiary (including AMLI Realty
Co.'s 20% equity interest in AMLI Commercial Properties Trust, a private real
estate investment trust), (f) minority interest, (g) variable stock compensation
and (h) amortization of goodwill. 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.
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Revenues and income from continuing operations before federal income taxes
("operating income") by business segment are summarized in the tables below:
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
---------------------------- ----------------------------
2001 2000 2001 2000
------------ ------------ ------------ ------------
(IN THOUSANDS)
Revenues
Insurance:
Self Employed Agency ............................. $ 167,536 $ 137,811 $ 324,057 $ 275,502
Student Insurance ................................ 30,321 28,430 58,314 55,704
OKC Division ..................................... 24,974 22,885 48,339 46,581
Special Risk ..................................... 15,420 9,564 18,644 20,232
Senior Markets ................................... -- -- -- --
National Motor Club .............................. -- 9,120 -- 18,357
------------ ------------ ------------ ------------
238,251 207,810 449,354 416,376
Financial Services:
Academic Management Services ..................... 40,289 44,754 77,686 80,988
Third Party Administration ....................... 6,374 5,635 12,578 9,357
Gain on sale of HealthAxis.com shares ............ -- -- -- 26,300
------------ ------------ ------------ ------------
46,663 50,389 90,264 116,645
Other Key Factors .................................. 10,049 7,386 16,038 16,683
Intersegment Eliminations .......................... (886) (2,390) (1,916) (2,525)
------------ ------------ ------------ ------------
Total revenues ........................................ $ 294,077 $ 263,195 $ 553,740 $ 547,179
============ ============ ============ ============
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------ ------------------------
2001 2000 2001 2000
---------- ---------- ---------- ----------
(IN THOUSANDS)
Income (loss) from continuing operations
before federal income taxes:
Insurance:
Self Employed Agency .................................. $ 18,629 $ 17,683 $ 36,201 $ 35,817
Student Insurance ..................................... 855 7 1,314 91
OKC Division .......................................... (236) 2,272 3,560 6,405
Special Risk .......................................... (257) 297 (405) 543
Senior Markets ........................................ (784) -- (784) --
National Motor Club ................................... -- 1,319 -- 2,408
---------- ---------- ---------- ----------
18,207 21,578 39,886 45,264
Financial Services:
Academic Management Services .......................... 5,240 (791) 5,509 (9,252)
Third Party Administration ............................ (216) 126 (1,059) (140)
Gain on sale of HealthAxis.com shares ................. -- -- -- 26,300
Equity in Healthaxis, Inc. operating loss ............. (5,886) (9,234) (7,965) (15,154)
---------- ---------- ---------- ----------
(862) (9,899) (3,515) 1,754
Other Key Factors:
General corporate expenses and other (including
interest on non-student loan indebtedness) .......... 2,379 501 2,755 5,154
Variable stock compensation ........................... (1,979) -- (1,820) --
Goodwill amortization ................................. (1,172) (1,548) (2,344) (3,237)
---------- ---------- ---------- ----------
(772) (1,047) (1,409) 1,917
Total income from continuing operations before federal
income taxes ............................................ $ 16,573 $ 10,632 $ 34,962 $ 48,935
========== ========== ========== ==========
Three and Six Months ended June 30, 2001 compared to Three and Six Months ended
June 30, 2000
For the three months ended June 30, 2001, the Company generated revenues and
net income of $294.1 million and $12.6 million ($0.27 per diluted share),
respectively, compared to revenues and a net loss of $263.2 million and $(17.0)
million ($(0.36) per diluted share), respectively, for the three months ended
June 30, 2000. For the six months ended June 30, 2001, the Company generated
revenues and net income of $553.7 million and $24.7 million ($0.52 per diluted
share), respectively, compared to revenues and net income of $547.2 million and
$2.8 million ($0.06 per diluted share), respectively, for the six months ended
June 30, 2000.
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Self-Employed Agency ("SEA") Division
Operating income for the SEA Division increased to $18.6 million and $36.2
million for the three and six months ended June 30, 2001, from $17.7 million and
$35.8 million for the comparable three and six-month periods ended June 30,
2000. Revenues for the SEA Division increased to $167.5 million and $324.1
million for the three and six months ended June 30, 2001, from $137.8 million
and $275.5 million for the comparable periods in 2000. During the six months
ended June 30, 2001, the SEA Division experienced substantial growth in
submitted annualized premium volume ($252.5 million for the first six months of
2001 compared to $157.0 million for the first six months of 2000), continued to
successfully direct newer sales to the more traditional, higher margin,
indemnity products (sales of indemnity products represented 83.4% of new
production in the first six months of 2001 compared to 59.8% of new production
in the first six months of 2000), and maintained loss ratios consistent with its
favorable experience during 2000 (60.2% for the first six months of 2001
compared to 60.5% for the first six months of 2000).
Student Insurance Division
The Student Insurance Division operating income increased to $855,000 and
$1.3 million for the three and six months ended June 30, 2001, from $7,000 and
$91,000 for the comparable 2000 periods, respectively. The increase in operating
income for the three and six months ended June 30, 2001 was attributable
primarily to a 6.4% and 4.5% increase in earned premium, respectively, and the
continued improvement in administrative efficiencies. Revenue for the three and
six months ended June 30, 2001 from the Student Insurance Division increased to
$30.3 million and $58.3 million, respectively, from $28.4 million and $55.7
million in the corresponding 2000 periods.
Senior Markets Division
For financial reporting purposes the Company has established a Senior
Markets Division to segregate the reporting of expenses incurred in connection
with the development of insurance products for the senior market (including long
term care and Medicare supplement products), and the development of distribution
channels for the products. Through June 30, 2001, the Company has realized no
revenues associated with this Division, and the Company has expensed all
expenditures as they have been incurred.
OKC Division
The Company's OKC Division reported an operating loss of $(236,000) for the
three months ended June 30, 2001, compared to operating income of $2.3 million
for the comparable period in 2000. For the six months ended June 30, 2001, the
OKC Division reported operating income of $3.6 million compared to operating
income of $6.4 million for the comparable period in 2000. Revenues for the three
months ended June 30, 2001 for the OKC Division increased to $25.0 million from
$22.9 million in the comparable 2000 period and for the six months ended June
30, 2001 revenues increased to $48.3 million from $46.6 million in the
comparable period in 2000. The decrease in operating income for the three and
six months ended June 30, 2001 was attributable to the discontinuation in May
2001 of the Company's workers compensation business, in connection with which
the Company incurred a charge of $8.7 million associated with a strengthening of
reserves. This charge 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. As part of a $100.0 million financing completed in April
2001, the Company transferred approximately $63.1 million of such student loans
at par to a special purpose corporation. See Note D of Notes to Consolidated
Condensed Financial Statements.
Special Risk Division
Operating income for the three months ended June 30, 2001 for the Special
Risk Division (consisting of certain niche health-related products, including
"stop loss," marine crew accident, organ transplant and international travel
accident products) decreased to a loss of $(257,000) from operating income of
$297,000 in the comparable 2000 period. For the six month period ended June 30,
2001 operating income decreased to a loss of $(405,000) from operating income of
$543,000 for the same period in 2000. Revenue for the six-month period ended
June 30, 2001 decreased to $18.6 million from $20.2 million from the comparable
period in 2000. The decrease in revenue is a result of the implementation of
reinsurance and specific retrocession agreements that effectively permitted the
Company to transfer insurance revenue and the associated risk to a new insurance
carrier. This transfer was effective January 1, 2000, and will occur monthly as
the business renews over the life of the policies.
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Academic Management Services Corp. ("AMS")
AMS reported operating income of $5.2 million and an operating loss of
$(791,000) for the three months ended June 30, 2001 and 2000, respectively, and
operating income of $5.5 million and an operating loss of $(9.3) million for the
six months ended June 30, 2001 and 2000, respectively. AMS' revenues for the
three and six months ended June 30, 2001 were $40.3 million and $77.7 million,
respectively, compared to revenues of $44.8 million and $81.0 million for the
comparable periods in the prior year. For the reasons set forth below, the
Company does not believe that AMS' favorable results for the three and six-month
periods ended June 30, 2001 are predictive of results to be expected during the
third and fourth quarters of 2001 and the full fiscal year.
The significant improvement in operations for the three and six months
ended June 30, 2001 compared to the three and six months ended June 30, 2000
resulted primarily from a favorable interest rate environment and increased
gains on sales of loans. Declining market interest rates throughout the first
six months of 2001 resulted in improved spreads on AMS' student loan portfolio,
despite a modest reduction in portfolio size in the second quarter of 2001
compared to the second quarter of 2000. Spread income (i.e., the difference
between interest earned on outstanding student loans and interest expense
associated with indebtedness incurred to fund such loans) was $6.3 million and
$9.7 million for the three months and six months ended June 30, 2001,
respectively, compared to spread income of $3.2 million and $5.4 million for the
comparable periods of the prior year. AMS also realized net gains on the sale of
student loans of $6.2 million and $8.0 million in the three months and six
months ended June 30, 2001, respectively, compared to gains of $4.7 million and
$4.6 million for the comparable periods of the prior year.
Fee income from AMS' tuition payment programs increased to $4.6 million and
$7.3 million for the three and six months ended June 30, 2001, respectively,
compared to fee income of $4.4 million and $6.3 million for the comparable
periods of the prior year. The increases were due primarily to an increase in
tuition installment plan accounts and the imposition of late fees on delinquent
accounts. Loan servicing fee income declined to $3.0 million and $6.4 million
for the three and six months ended June 30, 2001, respectively, from $3.4
million and $7.1 million for the comparable periods of the prior year, primarily
as a result of the loss of a single significant servicing account.
During the three and six month periods ended June 30, 2001, AMS benefited
from a favorable prescribed minimum rate earned on its student loan portfolio.
The benchmark for yields on federally guaranteed student loans is reset annually
in accordance with Department of Education regulations effective July 1 for the
succeeding twelve-month period. While yields on student loans are indexed to the
91-day Treasury bill rate, the benchmark establishes a floor below which a
lender's yield will not fall during the succeeding twelve-month period. AMS
earned a blended rate of approximately 7.9% on its FFELP loans during
substantially the entire three-month period ended June 30, 2001. On July 1,
2001, the floor rates on FFELP loans for the period July 1, 2001 through June
30, 2002 reset 220 basis points lower than the floor rates for the period July
1, 2000 through June 30, 2001. As a result of this significant decrease in the
prescribed floor rates on its student loan portfolio, AMS believes that spread
income will decrease significantly over the balance of the 2001 fiscal year. In
addition, results at AMS in the fourth quarter of 2001 will be negatively
impacted by the seasonality of its tuition installment business, which
historically has generated its highest levels of fee income (and operating
profits) in the second and third quarters of the calendar year and an operating
loss in the fourth quarter of the calendar year. Due to the anticipated decrease
in spread income and the seasonality of its tuition installment business, AMS
will continue to rely on gains from timely sales of student loans to remain
profitable for the full 2001 fiscal year.
Third Party Administration Division (formerly UICI Administrators)
The Company has classified the operations of UICI Administrators, Inc.,
Insurdata Marketing Services, LLC, Healthcare Management Administrators, Inc.
and Barron Risk Management Services, Inc. (previously included in the OKC
Division) as its Third Party Administration Division ("TPA") division. Operating
income for the three months ended June 30, 2001 for the TPA Division decreased
to a loss of $(216,000) from operating income of $126,000 in the comparable 2000
period, and for the six months ended June 30, 2001, the TPA Division incurred an
operating loss of $(1.1) million compared to an operating loss of $(140,000) in
the corresponding 2000 period. Revenues for the three months ended June 30, 2001
increased to $6.4 million from $5.6 million in the corresponding 2000 period,
and for the six month period ended June 30, 2001 revenue increased to $12.6
million from $9.4 million in the corresponding period of the prior year.
Investment in Healthaxis, Inc. (formerly HealthAxis.com, Inc.)
At June 30, 2001, the Company beneficially held 24,298,874 shares of common
stock of Healthaxis, Inc. (HAXS: Nasdaq) ("HAI") (including 185,185 shares
issuable upon conversion of a $1.7 million principal amount
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2% convertible subordinated debenture maturing in September 2005 and 354,844
shares acquired on May 23, 2001 from a former employee of Healthaxis, Inc. for a
purchase price of $400,000), representing approximately 46.0% of the issued and
outstanding shares of HAI. In addition, the Company holds a warrant to purchase
12,291 shares of HAI common stock at an exercise price of $3.01 per HAI share.
Of such 24,298,874 shares beneficially held by the Company, 8,581,714 shares
(representing 16.2% of HAI's total issued and outstanding shares) are subject to
the terms of a Voting Trust Agreement, pursuant to which trustees unaffiliated
with the Company have the right to vote such shares. Gregory T. Mutz and Patrick
J. McLaughlin, President and a director of UICI, respectively, serve on the
Board of Directors of 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). At June 30, 2001, the
Company's carrying value of its investment in HAI was $10.9 million. The
Company's equity in the loss of HAI in the three and six months ended June 30,
2001 was $(5.9) million and $(8.0) million, respectively, compared to $(9.2)
million and $(15.2) million, respectively for the three and six months ended
June 30, 2000.
Other Key Factors
The Other Key Factors category includes investment income not allocated to
the other segments, interest expense on corporate debt, general expenses
relating to corporate operations, realized gains or losses on sale of
investments, minority interest expense, variable stock compensation, the
Company's share of income and loss from AMLI Residential Properties Trust and
amortization of goodwill. Operating losses for the three months ended June 30,
2001 attributable to this category decreased to $(772,000) from $(1.0) million
for the comparable period in 2000, and operating income for the six months ended
June 30, 2001 decreased to a loss of $(1.4) million from income of $1.9 million
for the comparable period in 2000. The decrease in operating income for the six
months ended June 30, 2001 was primarily attributable to a $3.4 million increase
in minority interest expense, a decrease in the investment income from AMLI
Residential Properties Trust of $3.2 million, an increase in variable stock
compensation of $1.8 million, an increase in other expenses of $3.5 million,
partially offset by a decrease in realized losses of $4.0 million, a decrease in
interest expense of $3.6 million and a decrease in goodwill amortization of $1.0
million.
During the three months ended June 30, 2001, AMLI Commercial Properties
Trust (in which the Company holds a 20% equity interest) agreed to sell
substantially all of its assets for an aggregate sale price of approximately
$226.0 million. In connection with such sale, during the three months ended June
30, 2001 the Company realized cash proceeds of $20.0 million and recognized a
gain in the amount of $3.0 million. The Company anticipates recognizing an
additional gain in connection with the sale in the three months ended September
30, 2001 in the amount of $2.7 million.
LIQUIDITY AND CAPITAL RESOURCES
Historically, the Company's primary sources of cash have been premium
revenues from policies issued, investment income, fees and other income, and
borrowings to fund student loans. The primary uses of cash have been payments
for benefits, claims and commissions under those policies, operating expenses
and the funding of student loans. In the six-month period ended June 30, 2001,
net cash provided by operations totaled approximately $37.4 million. In the
six-month period ended June 30, 2000, net cash used in operations totaled
approximately $107.6 million.
During the six months ended June 30, 2001, the Company reduced its
consolidated short and long-term indebtedness (exclusive of indebtedness
incurred to fund student loans) from $66.8 million at December 31, 2000 to $24.7
million at June 30, 2001. In addition, the Company utilized approximately $8.6
million to repurchase 964,800 shares of its common stock pursuant to its
previously announced stock repurchase program, which was reconfirmed by the
Board of Directors of the Company at its February 28, 2001 meeting.
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.
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At June 30, 2001, UICI at the parent company level held cash and cash
equivalents in the amount of $16.3 million and had short and long-term
indebtedness outstanding in the amount of $6.2 million and $18.4 million,
respectively.
The Company currently estimates that, through December 31, 2001, the holding
company will have operating cash requirements in the amount of approximately
$31.9 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, dividends from domestic and offshore insurance companies and
tax sharing reimbursements from subsidiaries (which will be partially offset by
holding company operating expenses).
In June 2001, AMS paid off its remaining senior indebtedness in the amount
of $14.3 million, the proceeds of which were utilized in 1999 to fund a portion
of the purchase price for AMS' tuition installment business. At December 31,
2000 this senior indebtedness amounted to $21.3 million and was included in
student loan credit facilities on the Company's balance sheet. During the six
months ended June 30, 2001, AMS incurred $675,000 of interest expense under this
facility.
Effective June 30, 2001, the Company changed its method for accounting for
its investment in AMLI Residential Properties Trust (a publicly-traded (NYSE:
AML) real estate investment trust) ("AMLI Residential") from the equity method
to the investment method. The effect of the accounting change was to increase
the carrying value of AMLI Residential on the consolidated balance sheet of the
Company at June 30, 2001 from $22.6 million to $62.8 million; the accounting
change had no effect on the Company's results of operations for the three or six
months ended June 30, 2001. As a result of the accounting change, in future
periods the Company will mark-to-market its investment in AMLI Residential and
will no longer record its ratable share of AMLI Residential's gains or losses.
STATUTORY ACCOUNTING
The Company's insurance subsidiaries statutory-basis financial statements
are prepared in accordance with accounting practices prescribed or permitted by
the Oklahoma, Tennessee, or Texas Insurance Departments. Currently, "prescribed"
statutory accounting practices are interspersed throughout state insurance laws
and regulations, the NAIC's Accounting Practices and Procedures Manual and a
variety of other NAIC publications. "Permitted" statutory accounting practices
encompass all accounting practices that are not prescribed; such practices may
differ from state to state, may differ from company to company within a state,
and may change in the future.
The NAIC revised the Accounting Practices and Procedures Manual in a process
referred to as Codification. The revised manual became effective January 1,
2001. The domiciled states of the Company's insurance subsidiaries (Oklahoma,
Tennessee and Texas) have adopted the provisions of the revised manual. The
revised manual has changed, to some extent, prescribed statutory accounting
practices and will result in changes to the accounting practices that the
Company's insurance subsidiaries use to prepare its statutory-basis financial
statements. The cumulative effect of changes in accounting practices adopted to
conform to the revised Accounting Practices and Procedures Manual was reported
as an adjustment to surplus as of January 1, 2001 in the Company's statutory
statements. The impact of these changes did not result in a reduction in the
Company's statutory-basis capital and surplus as of adoption.
UNITED CREDITSERV - DISCONTINUED OPERATIONS
In March 2000 the Board of Directors of UICI determined, after a thorough
assessment of the unit's prospects, that the Company would exit from its United
CreditServ sub-prime credit card business. Accordingly, the United CreditServ
unit was reflected as a discontinued operation for financial reporting purposes
as of, and for the years ended, December 31, 2000, 1999 and 1998.
The Company's exit from the credit card business is now substantially
complete. On January 29, 2001, the Company completed the voluntary liquidation
of United Credit National Bank ("UCNB") (the Company's credit card issuing
bank), in accordance with the terms of a plan of voluntary liquidation approved
by the United States Office of the Comptroller of the Currency (the "OCC"). UCNB
surrendered to the OCC its national bank charter and distributed to a
wholly-owned subsidiary of UICI the residual assets of UCNB in the amount of
approximately $26.0 million, substantially all of which consisted of cash and
cash equivalents. The Company utilized a substantial portion of the proceeds of
the liquidation to prepay in full principal and accrued interest owing to Lender
LLC (see Note D of Notes to Consolidated Condensed Financial Statements) in the
amount of $21.1 million and other indebtedness in the amount of $5.0 million.
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For financial reporting purposes, at December 31, 2000, the remaining assets
of the discontinued operations in the amount of $54.3 million (consisting of
cash and short-term investments in the amount of $27.8 million and other assets
in the amount of $26.5 million) were reclassified to cash and other assets,
respectively, on the Company's consolidated balance sheet, and the remaining
liabilities of the discontinued operations in the amount of $53.0 million
(consisting of notes payable in the amount of $4.3 million and other liabilities
in the amount of $48.7 million) were reclassified to notes payable and other
liabilities, respectively, on the Company's consolidated balance sheet.
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 August 9, 2001, the Company had purchased
an additional 964,800 shares pursuant to the program (with the most recent
purchase made on April 10, 2001). The timing and extent of additional
repurchases, if any, will depend on market conditions and the Company's
evaluation of its financial resources at the time of purchase.
ACCOUNTING FOR AGENT STOCK ACCUMULATION PLANS
The Company sponsors a series of stock accumulation plans (the "Agent
Plans") established for the benefit of the independent insurance agents and
independent sales representatives associated with UGA - Association Field
Services, New United Agency, Cornerstone Marketing of America and CFLD
Association Field Services. Under EITF 96-18 "Accounting for Equity Instruments
that are issued to Other Than Employees for Acquiring or in Connection with
Selling Goods and Services," the Company has established a liability for future
unvested benefits under the Agent Plans and adjusts the liability based on the
market value of the Company's Common Stock. The accounting treatment of the
Company's Agent Plans will result in unpredictable stock-based commission
charges, dependent upon fluctuations in the quoted price of UICI common stock.
These unpredictable fluctuations in stock based commission charges may result in
material non-cash fluctuations in the Company's results of operations. See Note
J of Notes to Consolidated Condensed Financial Statements.
PRIVACY INITIATIVES
Recently-adopted legislation and regulations governing the use and security
of individuals' nonpublic personal data by financial institutions, including
insurance companies, may have a significant impact on the Company's business and
future results of operations.
Gramm-Leach-Bliley Act and State Insurance Laws and Regulations
The business of insurance is primarily regulated by the states and is also
affected by a range of legislative developments at the state and federal levels.
The recent Financial Services Modernization Act of 1999 (the so-called
Gramm-Leach-Bliley Act, or "GLBA") includes several privacy provisions and
introduces new controls over the transfer and use of individuals' nonpublic
personal data by financial institutions, including insurance companies,
insurance agents and brokers and certain other entities licensed by state
insurance regulatory authorities. Additional federal legislation aimed at
protecting the privacy of nonpublic personal financial and health information is
proposed and over 400 state privacy bills are pending. As required, the Company
has provided written notice of its privacy practices to all of the Company's
customers/insureds, the Company has given customers/insureds an opportunity to
state their preferences regarding the Company's use of their non-public personal
information, and the Company must honor those preferences.
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
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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 are expected to issue 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 the Company's Internet-based activities would be
hindered. It is not possible at this time to assess the impact of the privacy
provisions on the Company's financial condition or results of operations.
Health Insurance Portability and Accountability Act of 1996
The federal Health Insurance Portability and Accountability Act of 1996
("HIPAA") contains provisions requiring mandatory standardization of certain
communications between health plans (including health insurance companies),
electronic clearinghouses and health care providers who transmit certain health
information electronically. HIPAA requires health plans to use specific
data-content standards, mandates the use of specific identifiers (e.g., national
provider identifiers and national employer identifiers) and requires specific
privacy and security procedures. HIPAA authorized the Secretary of the federal
Department of Health and Human Services ("HHS") to issue standards for the
privacy and security of medical records and other individually identifiable
patient data.
In December 2000, HHS issued final regulations regarding the privacy of
individually-identifiable health information. This final rule on privacy applies
to both electronic and paper records and imposes extensive requirements on the
way in which health care providers, health plan sponsors, health insurance
companies and their business associates use and disclose protected information.
Under the new HIPAA privacy rules, the Company will now be required to (a)
comply with a variety of requirements concerning its use and disclosure of
individuals' protected health information, (b) establish rigorous internal
procedures to protect health information and (c) enter into business associate
contracts with other companies that use similar privacy protection procedures.
The final rules do not provide for complete federal preemption of state laws,
but, rather, preempt all contrary state laws unless the state law is more
stringent. These rules must be complied with by April 14, 2003.
Sanctions for failing to comply with standards issued pursuant to HIPAA
include criminal penalties of up to $250,000 per violation and civil sanctions
of up to $25,000 per violation. Due to the complex and controversial nature of
the privacy regulations, they may be subject to court challenge, as well as
further legislative and regulatory actions that could alter their effect.
In August 2000, HHS published for comment proposed rules related to the
security of electronic health data, including individual health information and
medical records, for health plans, health care providers, and health care
clearinghouses that maintain or transmit health information electronically. The
proposed rules would require these businesses to establish and maintain
responsible and appropriate safeguards to ensure the integrity and
confidentiality of this information. The standards embraced by these rules
include the implementation of technical and organization policies, practices and
procedures for security and confidentiality of health information and protecting
its integrity, education and training programs, authentication of individuals
who access this information, system controls, physical security and disaster
recovery systems, protection of external communications and use of electronic
signatures. These proposed rules have not yet become final.
The Company 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
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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 the Company's 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 the Company's business and future results of operations.
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
Certain statements set forth herein or incorporated by reference herein from
the Company's filings that are not historical facts are forward-looking
statements within the meaning of the Private Securities Litigation Reform Act.
Actual results may differ materially from those included in the forward-looking
statements. These forward-looking statements involve risks and uncertainties
including, but not limited to, the following: changes in general economic
conditions, including the performance of financial markets, and interest rates;
competitive, regulatory or tax changes that affect the cost of or demand for the
Company's products; health care reform; the ability to predict and effectively
manage claims related to health care costs; and reliance on key management and
adequacy of claim liabilities.
The Company's future results will depend in large part on accurately
predicting health care costs incurred on existing business and upon the
Company's ability to control future health care costs through product and
benefit design, underwriting criteria, utilization management and negotiation of
favorable provider contracts. Changes in mandated benefits, utilization rates,
demographic characteristics, health care practices, provider consolidation,
inflation, new pharmaceuticals/technologies, clusters of high-cost cases, the
regulatory environment and numerous other factors are beyond the control of any
health plan provider and may adversely affect the Company's ability to predict
and control health care costs and claims, as well as the Company's financial
condition, results of operations or cash flows. Periodic renegotiations of
hospital and other provider contracts coupled with continued consolidation of
physician, hospital and other provider groups may result in increased health
care costs and limit the Company's ability to negotiate favorable rates.
Recently, large physician practice management companies have experienced extreme
financial difficulties, including bankruptcy, which may subject the Company to
increased credit risk related to provider groups and cause the Company to incur
duplicative claims expense. In addition, the Company faces competitive pressure
to contain premium prices. Fiscal concerns regarding the continued viability of
government-sponsored programs such as Medicare and Medicaid may cause decreasing
reimbursement rates for these programs. Any limitation on the Company's ability
to increase or maintain its premium levels, design products, and implement
underwriting criteria or negotiate competitive provider contracts may adversely
affect the Company's financial condition or results of operations.
The Company's Academic Management Services Corp. business could be adversely
affected by changes in the Higher Education Act or other relevant federal or
state laws, rules and regulations and the programs implemented thereunder may
adversely impact the education credit market. In addition, existing legislation
and future measures by the federal government may adversely affect the amount
and nature of federal financial assistance available with respect to loans made
through the U.S. Department of Education. Finally the level of competition
currently in existence in the secondary market for loans made under the Federal
Loan Programs could be reduced, resulting in fewer potential buyers of the
Federal Loans and lower prices available in the secondary market for those
loans.
ITEM 3--QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk is the risk of loss arising from adverse changes in market rates
and prices, such as interest rates, foreign currency exchange rates, and other
relevant market rate or price changes. Market risk is directly influenced by the
volatility and liquidity in the markets in which the related underlying assets
are traded.
The primary market risk to the Company's investment portfolio is interest
rate risk associated with investments and the amount of interest that
policyholders expect to have credited to their policies. The interest rate risk
taken in the investment portfolio is managed relative to the duration of the
policy liabilities. The Company's investment 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.
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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 $240.1 million principal amount of
PLUS loans outstanding at June 30, 2001. The fixed yield on PLUS loans was 7.72%
and 8.99% for the twelve months ended June 30, 2000 and 2001 respectively, and
has been reset to 6.79% for the twelve months beginning July 1, 2001. These
loans are financed with borrowings whose rates are subject to reset, generally
monthly. During the twelve months beginning July 1, 2001, the cost of borrowings
to finance this portion of the student loan portfolio could rise or fall while
the rate earned on the student loans will remain fixed.
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PART II. OTHER INFORMATION
ITEM 1 -- LEGAL PROCEEDINGS
The Company is a party to various material legal proceedings, all of which
are described in Note G 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, 2000 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 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company's Annual Meeting of Stockholders was held on May 16, 2001. The
following members were elected to the Company's Board of Directors to hold
office for the ensuing year.
Nominee In Favor Withheld
------- -------- --------
Ronald L. Jensen 35,594,564 6,797,342
Gregory T. Mutz 41,657,588 734,318
William J. Gedwed 42,069,598 322,308
Richard T. Mockler 42,087,052 304,854
Stuart D. Bilton 41,727,888 664,018
Patrick J. McLaughlin 42,033,970 357,936
George H. Lane, III 41,727,988 663,918
Glenn W. Reed 42,063,229 328,677
The results of the voting on the approval of the UICI 2000 Restricted Stock
Plan were as follows:
In Favor Opposed Abstained
-------- ------- ---------
37,676,221 4,566,608 149,094
The results of the voting on the approval of the UICI 2001 Restricted Stock
Plan were as follows:
In Favor Opposed Abstained
-------- ------- ---------
37,322,794 4,921,405 147,694
The results of the voting on the appointment of auditors were as follows:
Ratification of Appointment of Ernst & Young, LLP as the Company's
independent auditors for the fiscal year ending December 31, 2001.
The voters of the stockholders on this item were as follows:
In Favor Opposed Abstained
-------- ------- ---------
41,814,924 520,452 56,548
ITEM 5 - MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED MATTERS
During the six months ended June 30, 2001, the Company issued 96,250 shares
of unregistered common stock pursuant to its 2001 Restricted Stock Plan.
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
None.
(b) Reports on Form 8-K.
None.
32
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
UICI
--------------------------------------------
(Registrant)
Date: August 9, 2001 /s/ Gregory T. Mutz
--------------------------------------------
Gregory T. Mutz, President,
Chief Executive Officer and Director
Date: August 9, 2001 /s/ Matthew R. Cassell
--------------------------------------------
Matthew R. Cassell, Vice President and
Chief Financial Officer
33